Jun. 16, 2008
If there is one thing that the general manager of Rotam’s international agrochemical business feels strongly about, it is the fact that not all organisations operating in off-patent active ingredients should be clubbed together as “generic companies”.
James Bristow is quite emphatic about the fact that “a product’s being off-patent does not necessarily mean the end of its evolutionary cycle”. He believes that a wide scope for research and development opens once the original ai patent expires. This, he feels, leads to product improvement, which can bring about amazing results. With a background in biochemistry and environmental chemistry, he should know.
He prefers to describe Rotam as being in the business of “innovative off-patent proprietary products” as it does “much more than simply churn out off-patent molecules”. Commenting on the global agrochemical industry, Mr Bristow says that around 25% of the market consists of patented products, some 35% of generic products, and 40% of proprietary post-patent products. “We operate mainly in this third sector of the market,” he says. He explains that although the proprietary off-patent area is dominated by the originator companies, Rotam’s focus is to take market share in this area based on marketing and added value.
Mr Bristow reveals that Rotam has a large division operating in intellectual property and patents. “We globally track patents and then look at innovation around products that are due to come off-patent.” And he is not talking small numbers. Rotam’s market evaluation reveals that in the period 2006-2014, insecticides worth $2,000 million, herbicides worth $1,750 million, and fungicides worth $1,800 million will come off-patent.
Rotam adds innovation to an off-patent ai through various means. “We may have a different delivery system, or a new mix in products, or use newer anti-crystallisation agents, or innovate around the surfactant system. We may even look at stabilisation of structures through ai enhancement. If it’s a simple ‘me too’ product, it tends to be of less interest to us, unless it’s a very complex piece of chemistry.”
Mr Bristow gives the example of sulfonylurea herbicides as a group of products that cannot be labelled as a commodity because a lot of care is needed about isolation while handling them. In the case of the insecticide, abamectin, he says that Rotam had been working on it for a long time before Syngenta bought it from Merck. “We have over ten years of experience working with that product and have a significant market against Syngenta in it,” he says. In the 35 markets in which Rotam sells abamectin, it claims to have 20-35% market share. Mr Bristow says that Rotam’s background in pharmaceuticals provides it with technical expertise.
The company started in pharmaceuticals in China but moved base to Taiwan. During the 1980s, the realisation dawned that China held a lot of advantages as a manufacturing base. In agrochemicals, the company did not opt for the joint venture route that it had taken in pharmaceuticals. “We felt that globalised off-patent companies were not as advanced as pharma companies. We saw a door closing – but there was a chance for us to grow to be the last of the global off-patent companies.”
In 1990, Rotam set-up its first methomyl insecticide production unit in China. The production set-up has grown to five manufacturing plants in China, one in India and a formulation plant in Brazil. Rotam’s global agrochemical sales in 2007 were around $180 million.
the Chinese market
Mr Bristow believes that China as a manufacturing base is crucial for an agrochemical player because most of the raw materials are available locally. “Around 70% of the raw materials that we need are available in China. Even for our Indian plant, though there are a lot of chemistries that can be achieved there, but there will always be a need for some integration back to some intermediary steps in China.”
Rotam has strived for over a decade to entrench itself well in China. Mr Bristow feels that understanding the Chinese market can be quite challenging. He points to large variations in available statistics that arise due to the market rendered complex by small farm sizes, leading to huge number of data points. Estimates of market size can vary a lot but Rotam’s estimates place the 2007 market at $2,500 million at the distributor level. Insecticides account for 42% of the market (down from 45% in 2006), herbicides for 30% (same as in 2006), and fungicides for 27% (up from 23% in 2006). Rotam broadly splits the market into two:
1. International branded company sales worth $600 million, growing at a rate of 14% per annum.
2. Chinese company sales worth $1,900, growing at 13% per annum.
Rotam operates in the first part of the market and, with Chinese sales of $73 million in 2007, is the third-largest company in this sector after Syngenta and Bayer CropScience. In addition to its own brands, Rotam carries the brands of companies like BASF, Nippon Soda, Makhteshim-Agan Industries and Nihon Nohyaku.
Mr Bristow feels that due to a proliferation of small-time generic operators in the market, China is probably the world’s most difficult market in which to add value. This poses a challenge, as to make an acceptable margin in such a market, adding value becomes imperative.
The changes in regulations effected by the Chinese government towards the end of 2007 are expected to result in consolidation. “There was a flood of brands in the market creating a very confusing situation for farmers. The requirement for all companies to declare the generic name on the label is a step in the right direction as it will eliminate some confusion,” says Mr Bristow. He sees the market as now moving in a direction where corporate branding of the product will become increasingly important. “That is when the value-added by the larger players will act as more of a differentiator,” he says.
Mr Bristow says that the proliferation of small-time players in the market happened due to a laxity in the system in terms of regulatory as well as environmental norms. He had seen the current changes coming for some time and had readied his company in advance. “We’re already ahead of the curve in terms of re-zoning and all other capabilities,” he says.
Olympics as a catalyst
The upcoming Beijing Olympics have acted as a catalyst for a lot of changes. The government made many regulatory changes towards the end of 2007. New environmental norms were also put into place that led to a “re-zoning” of industry. Many companies were forced to move their production to new zones.
With the Olympics just around the corner, there is also a moratorium on new licences. Even the extension of capacity on existing manufacturing licences has been temporarily stalled. Mr Bristow says that this is one of the main reasons for the increase in the price of the world’s major herbicide, glyphosate . “The main trigger is that the normal cycle of expansion of capacity in Chinese glyphosate plants, to catch up with demand, has been stopped because they are not allowed to execute on their licences to expand capacity,” explains Mr Bristow. “You may have the licence, but it may be required to be delayed. So new licensing for anything related to chemicals has been delayed.” This has directly affected agrochemicals. He says that the increase in the price of glyphosate started in August of last year. He relates this to the Olympics as “it was only in the second half of 2007 that the catalyst of the Olympics started to really squeeze in China.”
Mr Bristow feels that it is an interesting time for being in China as the real cost of operating in the country is being felt. Quite a few manufacturers in China have not been following the correct environmental standards, quality controls and safety procedures. “All of this costs money. As enforcement comes, the true cost of chemicals is coming up”, says Mr Bristow.
the Rotam 3-D formula
Rotam’s three-dimensional formula for success in the Chinese market was the building of not just manufacturing facilities and a distribution network, but also what Mr Bristow calls a “light industrial complex”, which comprises packaging, surfactants, and delivery systems and equipment. “The formulation, the packaging and the surfactants systems can just as easily fail a product in terms of quality and costs as can the ai,” he states.
With this philosophy, the company went in not just for backward integration (synthesis of ais), but for horizontal integration as well (manufacturing of specialty barrier packaging, surfactants and industrial equipment). The packaging arm of the company achieved sales of $14 million last year and is expected to grow at 25% per year. “80% of all liquid pesticide exported from China uses our packaging,” says Mr Bristow.
the road ahead
Mr Bristow exudes a lot of confidence in the basic strength of Rotam’s growth strategy. “All companies have a different evolution cycle. Rotam’s has been a planned organic growth, and with a very large investment cycle.”
He sees a lot of promise in strobilurin fungicides, most of which will start coming off patent from 2009. Rotam estimates the 2009 sales value of azoxystrobin at some $630 million. He feels that due to significant disease resistance issues, it is a class of products that could pose problems if they became commodities. “A lot of R&D will be required in them post-patent to bring out correct mixture options with other fungicides,” he says.
The insecticides, thiamethoxam and fipronil, are also due to come off-patent in the period 2009-2013. Rotam estimates the 2009 sales of these ais to be $425 million and $365 million, respectively. Mr Bristow expects a lot of generic companies to be rushing into these ais without proper thought to some significant challenges that lie therein. “The easy entry generics, where companies could grow fast on a few large- volume pieces of chemistry, are a thing of the past,” he predicts. He warns that apart from resistance and safety issues, a spider web of subsidiary patents exists for all the ais. So while substantial ais are coming off patent, only companies with top class R&D, along with patent and legal expertise, will be able to profit.
The executive is upbeat about the company’s Latin American operations. He foresees the building of “3-D” structures in India and Brazil once the company achieves a certain critical mass there.
He is also upbeat about Rotam’s European operations that were launched last month. Rotam has been laying the registration groundwork in Europe for three years and has invested some €10 million ($ million) in the process. “In Europe, sometimes it is a 3-5 year cycle for obtaining [generic] registrations. So, we have been working there a lot longer,” explains Mr Bristow. He expects 45 country registrations in the EU over the next 18 months based on five main ais.
His confidence is not diminished at the prospect of the reduction in the number of ais as a result of the revision of the EU agrochemical registration Directive (91/414). He feels that this will result in an expansion in the ais that Rotam will bring in. “Even though the overall market may not be expanding significantly, the switch between molecules will mean there is a lot of opportunity for carefully selected chemistry,” he avers.
Mr Bristow’s confidence and exuberance are infectious. It may actually be that the future may be as bright as he expects.