Perspectives2012 01 Business-Perspective Jung BCG

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>>PERSPECTIVES_2012THE FUTURE OF CHEMICAL AND PHARMACEUTICALPRODUCTION IN GERMANY

CMF JUNE 19, 2012 FACILITATED BY DR. MICHAEL REUBOLD, CHEMANAGER


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>>A BUSINESSPERSPECTIVE.

THE FUTURE OF VALUE CREATION IN THE GERMAN CHEMICAL & PHARMACEUTICAL INDUSTRY

Dr. Udo Jung

The Boston Consulting Group

ACHEMA PERSPECTIVES 2012


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The future of value creation in the Germanchemical and pharmaceutical industry

Frankfurt , June 19, 2012

Dr. Udo Jung


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145420-34-18-AchemaPrsentation-June18-JF-FRA-RBHS.pptx 3

Draftfor discussion only

40

30

20

10

0

1 year

32

30%

Change in annualTSR (%)1

Profitable growth: Key lever for sustained valuecreation in the past and in the future

Sources of value creation of top-quartile performers in S&P 500

Profitable revenue growthMarginMultipleFree cash flow

1. TSR= Total return of a stock to an investor (capital gain plus dividends); TSR for top-quartile performers (S&P 500, 19922011)Note: The rolling analysis covers one-, three-, five-, and 10-year time frames from 1992 through 2011. Shows the average of performers in the 75th to 100thpercentile to illustrate approximate for thetop quartile companies (which would be equivalent to the 88 thpercentile); analysis excludes financial institutionsSource: Compustat; BCG Value Science Center

10 years

16

5 years

19

3 years

22

77%62%49%


5/21145420-34-18-AchemaPrsentation-June18-JF-FRA-RBHS.pptx 4


However: Growth alone does not automatically create value

Low correlation of growth and TSR1

(S&P 500, 19922011)

Why?

Growth through value-eroding acquisitions

Growth that degrades margins and ROI

Growth that requires too much capital

Growth that increases risk

Growth that reduces the P/E

Average annual TSR (%)

40

20

0

-20

Average annual revenue growth (%)

40200-20

Growth withoutvalue creation

Growth withvalue creationR2=0,23

1. TSR: Total return of a stock to an investor (capital gain plus dividends)Source: Compustat; BCG Value Science Center




Note: GDP as $ in Purchasing Power Parity (PPP)Source: EIU; BCG analysis

Capturing profitable growth in Asia drives business model changesof German chemical and pharmaceutical companies

3.1

Rest

ofLatam

3.4

World

3.5

Russia

3.7

MiddleEast

3.9

C.E.Europe

4.0

China

20102025, GDP growth (%)

6

4

2

0

Japan

2.0

EU-15

2.4

USA

2.8

Brazil

4.6

Restof

Asia

5.2

India

5.5

MiddleEast

2.7

Restof

Latam

2.0

EU-15

5.4

USA

9.3

0

World

4.6

RoW

2.9

Brazil

1.2

C.E.Europe

1.3

Japan

Russia

1.61.4

7.7

China

7.8

India

20102025, GDP growth (Trillion US$)

50 47.9

40

20

10

30

Restof

Asia

World GDP(K US$)

201070.6

2025118.5

3.5%

x% CAGR

Asia

We are in a two speed world: Asia expected to contribute45% of global GDP growth until 2025

Asian economies growth compensate for

OECD countries underperformance

Asia (ex-Japan) accounts for 45%

of overall GDP growth until 2025




16%

55%

6%

2010

Asia Pacific

Western Europe

North America

South America

Rest of World

17%

6%

7%

2030

5%

19%

21%

49%

More than 60% of the total global demand growth inchemicals until 2030 contributed by Asia Pacific

Source: CEFIC Fact and Figures 2011; various analyst reports; company presentations; BCG analysis

+1,310

+224

+305

+132

+180

9% Rest of World

6% South America

14% North America

10% Western Europe

61%Asia Pacific

+2,151

Global chemicaldemand (B) 2,353

4,504

Annualgrowth rate

4.1%

1.9%

2.6%

3.6%

4.4%

3.3%

Growth contribution

Backup




Rest of World

North America

EU5

Japan

Pharmerging

2015

1,080

15%

33%

13%

11%

28%

2010

856

16%

38%

17%

11%

18%

"Pharmerging": Huge growth differential vs.established markets starting from a low base

Pharmerging countries: China, India, Brazil, Russia, Mexico, Turkey, Poland, Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan and VietnamEU5 countries: Germany, France, Italy, Spain, UKNorth America: USA, CanadaSource: IMS; analyst reports; BCG analysis

+148

+25

-5

+30

+26

12% Rest of World

10% Japan

13% North America 65% Pharmerging

+224

Global pharmaceuticalsdemand (B)

Annualgrowth rate

14.4%

4.8%

- 0.7%

1.8%

3.6%

4.8%

Growth contribution

Backup




Divergence in demographics: In mature markets 55+segment drives consumer spending growth until 2030

1. Data of Japan excludes expenditure for households with a single person, due to data availability 2. Data of Germany refers to 2007 (instead of 2008) due to data availability issuesNote: spending power evolution forecasted based on historic correlation with GDP, not corrected with potential higher relative savingsSource: Consumer Expenditure Survey Commissioned by AARP, 2008; Consumer Expenditure Survey, 2008; Japan Statistics Bureau & Statistics Center; Statistische Bundesamt

US Japan1 Germany2

2030

10.1

6.1

4.0

Growth200830

4.0

2.0

2.0

2008

6.1

4.1

2.0

Consumer spending ($K)

15

10

5

0

< 55

55+


3

2

1

0

< 55

55+

2030

1.8

0.8

1.0

Growth200830

0.6

0.2

0.4

2008

1.3

0.6

0.70.1

0.3

2008

1.2

0.7

0.6

Growth200830

0.4

2

1

0

< 55

55+

2030

1.6

0.7

0.9

3


What is the implication for German chemical andpharmaceutical companies?




5 Year value creation by industry sector

69

51 54 56

35

4551

54

36

54

83

29

48

31

93

35

57

33 35

1610 10 8 7 6 6 5 5 5 5 4 4 3 3 2 2 1 1

-10 -5 -5

-15 -13 -14

-27

-15-21

-7

-15-19 -21

-14 -16 -12

-8

-18

-49

-60

-40

-20

0

20

40

60

80

100

120

Average annual TSR, 2006-2010 (%) High

Low

Industry weighted average

Chemicals

Machinery

Non-Durables

Mining

Media &Publishing

Travel &Tourism

Pharma-ceuticals

Telecom-munication

UtilitiesRetail Pulp andPaper

Multibusiness

Automotive

Sources: Thomson Reuters Datastream; BCG analysis

Technology Components

Durables &Apparels

MedicalTechnology

Transport.&

Logistics

Constr. &Build Mat.




annual TSR1

Rank (n=164) Quartile TSR (p.a. in %)

20 years (19922011)

Rank (n=318)

annual TSR1

5 years (20062010)

Quartile TSR (p.a. in %)

5 years (20072011)

annual TSR1

Rank (n=269)

10 years (20022011)


Fuchs Petrolub

K + S

Honam Petrochemical

LG Chem

6040200%-20-40

H & RClariant

Wacker Chemie

Givaudan

Lanxess Symrise

Syngenta

EMS-Chemie

Linde BASF

-40

Clariant

BayerGivaudan

EMS-Chemie

6040200%-20

Linde

BASF

Syngenta

H & R

K + S

Fuchs PetrolubLG Chem

Honam Petrochemical

1. TSR derived from calendar year data in local currencyNote: Worldwide industry sample based on Thomson Reuters DataStream supersector segment excluding firms not continually listed within the respective timeframeSource: Thomson Reuters DataStream; BCG analysis

Value creation of German chemical companiesin the global context

17.9%

6.6%

-4.6%

18.9%

8.7%

2.5%

14.1%

6.8%

1.9%

6040200%-20-40

Mitsui Chemicals

Asahi Kasei

Kuraray

IFF

H & R

Linde Bayer

Fuchs PetrolubBASF

Honam PetrochemicalK + S




Observations in value creation patterns in theglobal chemical industry in the past 5 years

Observation

Overall Asian chemical companies lead in value creationespecially in base chemicals

Agro related chemical businesses with superior value creation

Japan with specific challenges in value creation

German & European chemical companies with a good track record in diversified and specialtychemicals business modelsdriven by the ability to manage differentiated business models

1

2

3

4


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Global energy and geopolitical trends create challenges forthe European and German based chemical industry

Feedstock advantaged countries will continue investing in a scenario of lower gas prices vs. higher

naphtha prices No great expectations for cheap unconventional gas in Europe

Shale gas revolution in the US reduces European competitiveness in Chemicals

Countries will growing Chemicals demand and advantaged feedstock will increasingly drive theirown economic development agenda, which includes localization of chemicals supply sources

Increase value added to local economies

Reduce imports and increase self sustainability

For specialty chemicals customer proximity (in emerging markets) provides competitive advantage,thus favoring new capacity in demand centerssuccessful European chemical companies will haveto "localize" their global business models

Regulatory pressure on the chemical and adjacent sectors (e.g., power) will lead to increased costs inEurope and a potential reduction of European industry competitiveness

Larger and integrated new "megasites" in the Middle East and in Asia copy successful Europeanexamples

Are there unique advantages for European based value addin production, innovation and business management?

1

2

3

4

5


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Asian and Middle East chemical companies gain importanceGlobal top 10 chemical companies 19802011

Note: Asian and Middle East companies in orange boxesSource: Chemical and Engineering News, ICIS Top 100, Chemical Week; Company websites; BCG analysis

Several new leader are part of national economic agendas"decision making beyond IIR and quarterly reporting"

Rank 1980Chemicalsales (B$) 1995

Chemicalsales (B$) 2011

Chemicalsales (B$)

79.6

60.0

58.1

57.9

50.6

50.6

38.0

37.3

33.0

29.6

14.1

14.1

13.8

13.7

13.7

10.6

10.0

8.4

7,6

7.0

24.2

22.1

21.2

18.0

17.9

15.9

15.3

15.1

14.5

13.3

6.3

PetroChina

1

2

3

4

5

6

7

8

9

10

26


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Many factors influencing the future of theEuropean chemical production base

Overview of most relevant system dynamics

Changes in theEuropean chemical

production base

Assetinvests

Innovationinvests

Relocationof decision

centers

Investmentdecisions of the

chemical industry/companies

Public andpolitical sentiment

Industrystructure

End-industryproduction and

innovationnetworks

Relocation ofnetworkstowardsgrowth regions

Share of newinvest intogrowth regions

Europeanchemical demand

GDP-driven

Growth ofsegment

"55+"

Self-sufficiencypolicies in growth

regions

Perception shaping

Share ofSMEs

Global market positionof European-basedChemCos in spec.segments

Share offoreign assetownership

Clustercompetitiveness

New advantagedcapacities in

growth regions

Rawmaterial

differentials

Europeancompetitiveness

in specificsegments

Invest focuson competitiveclusters

Exit hurdles

non-compe-titive clusters

Changes intrade balances


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European Advantage (I): The competiveness of chemical sitesand clusters in Europe will become even more decisive

Large

Small to medium size

Region

Rheinland-Pfalz (Mainz), DE

Dsseldorf, DE

Vlaams Gewest (Antwerpen), BE

Rhne-Alpes (Lyon), FR

Istanbul, TR

Darmstadt (Frankfurt am Main), DE

Kln, DE

Ege (izmir), TR

Mnster, DE

Cheshire (Chester), UK

Nordwestschweiz (Basel), CH

Size(employees)

40,075

25,284

21,937

20,361

18,133

16,250

15,928

10,587

9,590

9,108

8,549

Source: The role of clusters in the chemical industry; BCG analysis

Value added provided by industrial

parks and industry cluster

Better access to raw materials(for chemical industries)

Easier movement of final outputsasinputs to other downstream sectors

Reduction in energy footprintandincreased efficiency

Common investment in required

infrastructures(rail, ports, pipe-lines, ) reduce investmentrequirements and minimizesenvironmental footprint

Opportunities to coordinate andcooperatein key fields (distribution,R&D, purchasing, )

Option to leverage larger scaleprojectsthough associations

.......

A unique "German advantage": cross-industry production, innovationand supply chain clustersdriven by the "Mittelstand champions"


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CO2as newbuilding block

Noble earthsubstitution inindustrialapplication

Key issue thermodynamics CO2utilization only with

limited potential to solveclimate challenge

Rapidly taken up, since keythreat across all industries

No alternative solutionsdeveloped yet

New feed-

stocks basedon biomass

New feed-stocks basedon gas/coal

Biomass may becomemore important, but stillunlikely to match 'traditional'capacities by 2020

Boosted by direct publicfunding on global level

Several technologies withlimited yield established

Water scarcityand means ofalternativeenergy input

Global key challenge, drivenby climate change/regulation

Proven technology avail. Next gener. to be developed

Processintensification

Methanecoupling

Energy and raw materialefficiency major driver

Continuous focus resultingin new process technologies

Key driver abundant globalgas resources

Still unmatured topic, due tothermodynamic challenge

3

Bio-processing unlikelyto substantially matchtraditional chemical pro-cesses in terms of volume

Resource efficiency driven Selected systems in differ.

development stages Limited commercializ. yet

1

2

5

4

Boosted by demographics Broad R&D topic landscape Different maturity of multiple

applications in food and feed

Driven by demographics Multiple existing substances Crop industry leaders foster

R&D to sustain AI-pipelines

HC availabilty pattern shift New gen. of perf. chemicals

beyond classical surfactantsabout to be commercialized

3

Boosted by new energyinitiative

Multiple systems, but noproven technology available

Driven by enhanced energyefficiency in transportation

New high efficient polymersto be commercialized

1

2

5

4

Boosted by CE trends andPV thinfilm application

First conducting polymerscommerz.in selected applic.

White bio-technology

Improving bio-processingwith GMO

Biomimetriccatalysts

Organo-electronics

Leight

weightedmaterials

Active agroingredients

Chemicals forenhanced oilrecovery

Source:

Energystorages

European Advantage (II): Innovation andorchestration of chemical value chains

ProductsFeedstock

Chemical reactionsEnergy efficiency

Organic/inorganic feedstock

Energy

Energy efficiencyLow carbon intense products

Enabling precursors/products

Energy efficiencyProven technologies

New process technologies

Technologies

3

1

2

5

4

Selected key topics

Key R&D topic

Driver and maturity

Germany has a unique value propositionin cross industry innovation


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6040200%-20-40

Immunogen

Kyowa Hakko

Astellas

Biotest

Pfizer

BayerNovartis

Roche

Sanofi

Novo NordiskBiogen Idec

6040200%-20-40

Evotec

Qiagen

PfizerMorphosys Sanofi

Novartis Stada

AstraZeneca

Biogen IdecBayer

Merck KGaABiotest

Novo Nordisk

6040200%-20-40

Stada

Evotec

Novartis Qiagen

MorphosysSanofi

PfizerMerck KGaA

AstraZeneca Bayer

Biotest

Biogen Idec

Novo Nordisk

Value creation of German pharmaceuticalcompanies in the global context

annual TSR1

Rank (n=90) Quartile TSR (p.a. in %)

20 years (19922011)

Rank (n=306)

annual TSR1

5 years (20062010)


5 years (20072011)

annual TSR1

Rank (n=248)

10 years (20022011)


1. TSR derived from calendar year data in local currencyNote: Worldwide industry sample based on Thomson Reuters DataStream supersector segment excluding firms not continually listed within the respective timeframeSource: Thomson Reuters DataStream; BCG analysis

18.5%

5.9%

-4.0%

13.2%

4.2%

-2.4%

14.1%

6.8%

1.9%


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Leading pharma companies emerged from M&A

Note: Only a selection is shown on this slideSource: Company webpage; BCG analysis

Legend:

Target

Buyer

Year when it happened

GSK

Merck &Co

NovartisSandoz

Ciba

Glaxo

Wellcome

MarionMerrel

Hoechst

RousselUclaf

Fisons

RhonePoulenc

Upjohn

Pharmacia

Pfizer

J&J

Sanofi-Aventis

Bayer

RocheRoche

Genentech

Pfizer

J&J

Aventis

Pfizer

WarnerLambert

GlaxoWellcomeSmithKlineBeecham

Zeneca

Astra AB

J&J

Centocor

Rhone

Poulenc

H MRoussel

Merck&Co

Rosetta

Pharmacia

Pharmacia& Upjohn

Monsanto

Alza

Sanofi

Synthlabo

Sanofi-Synthlabo

Astra-ZenecaMed-

Immune

Bayer

ScheringAG

Chugai

Chiron

AstraZeneca

Wyeth

Schering-

Plough

1995 1996 1997 2005 2006 2007 2008 20091998 1999 2000 2001 2002 2003 2004 2010 2011

KingPharma

Inspire

Guangdong

BeiKang

Anadys

Crucell

Alcon

Zentiva


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Pharmaceutical market still dominated by US and EU playersGlobal top 10 pharmaceutical companies 19802011

Source: IMS Health; BCG analysis

Rank 1980

Pharma

sales (B$) 1995

Pharma

sales (B$) 2011

Pharma

sales (B$)

56.3

51.5

40.1

39.3

37.0

34.5

34.3

27.6

25.8

23.9

1.6

1.4

1.4

1.2

1.2

1.1

1.0

1.0

1.0

0.9

9.7

9.6

7.8

7.7

6.8

6.5

6.2

6.1

5.7

5.5

1

2

3

4

5

6

7

8

9

10

Smith Kline

Bristol-Myers

Th f t f l ti i th G h i l d
http://de.wikipedia.org/w/index.php?title=Datei:Pfizer_Logo.svg&filetimestamp=20080319105413http://../Downloads///upload.wikimedia.org/wikipedia/de/4/43/Sanofi_2011_logo.svghttp://../Downloads///upload.wikimedia.org/wikipedia/de/4/43/Sanofi_2011_logo.svghttp://en.wikipedia.org/wiki/File:Merck_Logo.svghttp://de.wikipedia.org/w/index.php?title=Datei:Novartis-Logo.svg&filetimestamp=20061224154146http://de.wikipedia.org/w/index.php?title=Datei:Pfizer_Logo.svg&filetimestamp=20080319105413http://../Downloads///upload.wikimedia.org/wikipedia/de/8/8d/GlaxoSmithKline-Logo.svghttp://en.wikipedia.org/wiki/File:Merck_Logo.svghttp://de.wikipedia.org/w/index.php?title=Datei:Novartis-Logo.svg&filetimestamp=20061224154146http://en.wikipedia.org/wiki/File:Bilogo_new.jpghttp://../Downloads///upload.wikimedia.org/wikipedia/de/9/92/Abbott_A_Promise_For_Life_Logo.svghttp://../Downloads///upload.wikimedia.org/wikipedia/en/4/4f/AstraZeneca.svghttp://de.wikipedia.org/w/index.php?title=Datei:Pfizer_Logo.svg&filetimestamp=20080319105413


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The future of value creation in the German chemical andpharmaceutical industry

Obviously the global context matters

2-speed global economy, the rise of state owned enterprises in chemicals, self-sustainabilityagenda in pharma and in chemicals in many growth regions

Company perspective

To grow profitably and to create value European and German based chemical andpharmaceutical companies will continue to globalize their business modelsand invest in

"localization" in the growth regions (production, R&D, decision center relocation)

Location perspective

European chemical and pharmaceutical company have proven their ability to create value withdifferentiated and diverse business model (management of complexity)

The attractiveness of Europe and Germany as a location for innovation and production is

driven by the "integrated attractiveness" (infrastructure, logistics, resource efficiency) of sitesand clusters

Cross-industry innovation and production cluster are largely a unique German advantagedriven by the unmatched density of "Mittelstand-champions"

Perspectives2012 01 Business-Perspective Jung BCG

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