Softgels and Liquid-Fill Capsules: Global Business Analysis and Opportunities

The drug delivery industry, known for its constant innovation, has found softgels and liquid-fill capsules to be effective in delivering difficult-to-formulate APIs that struggle with stability and bioavailability issues. Softgels and liquid-fill capsules offer formulations greater flexibility and stability, while also catering to the need for higher drug bioavailability. For drug producers, these capsules also often mean easier scalability. As the adoption of these capsules as effective dosage forms increases among pharmaceutical and nutraceutical formulators worldwide, it becomes crucial to understand their market dynamics to identify the right opportunities.

Report

Introduction

Executive Summary

Regional Analysis

For each capsule type:

Market size analysis by pharmaceuticals and nutraceuticals
- - Market assessment by volume (where applicable) and value
Competitive landscape
Value chain analysis
- - Insight on key businesses
- - Evolving role of CDMOs in the capsule value chain
- - Evolving role of equipment suppliers in the capsule value chain
Competition between types of capsules and from other dosage forms
Technology trends: Functionalities (instant release, modified release, etc.) and innovation
Analysis of industry and consumer trends
Opportunities and challenges
Outlook for five years

Contract Manufacturers in Pharmaceuticals: Interactive Directory and Analysis

This interactive tool serves as an excellent resource for identifying, locating, and profiling contract manufacturers, formulators, and research organizations in the pharmaceutical industry. Specifically, the tool provides:

Highly comprehensive coverage of the contract manufacturers in the pharmaceutical industry
A real-time map locator to identify the geographical presence of the contract manufacturing organizations
Details on the capabilities of the organizations with respect to services and dosage forms

Kline’s M&A Spotlight: OQ Chemicals

Commencing with this article, each month we will shine our spotlight on a confirmed or potential M&A candidate, sharing our point of view – and expertise – on the opportunities that we see. This month, in our inaugural offering, we focus on OQ Chemicals and its potential divestiture by parent company OQ.

Background

OQ, an integrated energy company that is wholly owned by the Government of Oman, is currently considering divesting OQ Chemicals (formerly known as Oxea), a German company that it acquired eight years ago from private-equity owner Advent International for slightly over USD 2 billion. At the time of purchase, Oman sought to tap into increasing demand for oxo-based chemicals.

Rationale

OQ is now looking to use its energy assets to raise money and reduce a budget deficit that skyrocketed during the COVID-19 pandemic, which severely impacted oil prices and tourism within Oman. To help offset the negative effects of the economic downturn, the company initiated a number of OpEx (operating expenditure) and CapEx (capital expenditure) optimization projects. In divesting OQ Chemicals, OQ, like Saudi Aramco and other Gulf oil producers, seeks to capitalize on a rebound in crude prices to attract foreign investors. Discussions about the potential divestiture of OQ Chemicals are ongoing, although there is no certainty that they will result in a sale.

Positioning and Performance

OQ Chemicals, a leading manufacturer of oxo-intermediates and oxo derivatives, is recognized for its integrated production platform of oxo aldehydes and oxo aldehyde derivatives such as oxo-alcohols, polyols, acids, esters, and amines. These products are used in the manufacturing of a wide range of products, including paints, coatings, adhesives, lubricant additives, cosmetics, pharmaceuticals, flavorings and fragrances, printing inks, plastics, and animal-feed products. Among OQ Chemicals’ downstream oxo derivative products, its amines and esters have the highest rolled margin.

OQ Chemicals’ business achieved net revenue of 1.056 billion euros in 2020. Earnings before interest, taxes, depreciation, and amortization (EBITDA) were in excess of 10% in each of the company’s segments, with an overall average of 12%.

Why We Consider OQ Chemicals an Attractive Purchase

“OQ Chemicals has a growing international footprint, with strategically positioned production sites in which it has made significant investments,” says Hardeep Parmar, Vice President of the firm’s global M&A and Corporate Development practice. The company serves attractive growth markets in attractive regions, making it quite nimble.” OQ Chemicals is also very technically astute, observes Parmar.

“Another factor very much working to OQ Chemicals’ advantage is that the field in which it competes is not very crowded,” says Dilip Chandwani, Head of Kline Management Consulting’s Process Industries and Manufacturing Competitiveness practices. The company is one of the four leading producers of oxo intermediates and oxo derivatives globally among top players like BASF, Eastman, and Grupa Azoty.

Potential Risks

It’s not yet clear what effect the Ukraine/Russia war will have on the industry. "Germany,” says Parmar, “where OQ Chemicals has two manufacturing plants, is vulnerable to Russia disrupting — or even completely halting — the country’s supply of natural gas due to Germany’s refusal to pay for its supply in rubles.” Germany currently obtains more than 50% of its natural gas from Russia and has stated that it will not achieve full independence from Russian supplies before mid-2024. As such, Parmar believes that oxo-alcohol prices will likely continue to rise, particularly in Europe.

Parmar also sees potential challenges stemming from the cyclical markets OQ Chemicals serves, in addition to the availability of raw materials, price sensitivities, and increasing competition in Asia.

Possible Suitors

Because it already has a presence and strong brand awareness in Asia, OQ Chemicals may appeal to a major feedstock producer looking to go downstream. Private-equity firms may also be interested in supporting OQ Chemicals’ growth into a global stand-alone player.

How We Can Help Potential Acquirers Vet This Opportunity

Kline has a strong appreciation of oxo-aldehyde and derivatives including alcohols, polyols, acids, esters, and amines through end-use application markets. We may be the only specialty chemicals consultancy worldwide that has access to experts across the entire value chain, from raw materials and products to end-consumer markets. Our technical and commercial capabilities across the value chain enable us to support clients in assessing opportunities for growth within this space, identifying risks, and mitigating against risks.

Our analysis capability includes assessing:

Competitive technical and market landscapes
End application markets and customers
Technology and operational benchmarking
Growth opportunities
R&D activities
Business models

About our M&A practice

Kline’s M&A practice provides advisory services for buy- and sell-side mandates, in addition to project finance support. Services are built around integrated competency platforms that include acquisition-led growth strategies, commercial and technical due diligence, manufacturing competitiveness, deal origination, and capital-raising support.

About this article

Kline’s M&A Spotlight: OQ Chemicals contains insights from Hardeep Parmar and Dilip Chandwani.

Parmar, Vice President of the firm’s global M&A and Corporate Development practice, has worked with Kline for approximately seven years and holds specific expertise in commercial engagements across the chemicals value chain. Her experience includes delivering buy- and sell-side due diligence support, in addition to independent market consulting services through to strategic growth assignments. Prior to Kline, Parmar spent more than 15 years in chemicals consulting, working with clients in Europe, the Middle East, and Asia.

Chandwani heads Kline Management Consulting’s Process Industries and Manufacturing Competitiveness practices. He has more than 40 years of experience in a variety of process and manufacturing industries and has assisted numerous clients with market analysis, technology and manufacturing competitiveness, performance improvement, and identifying/evaluating new business opportunities. During his 30 years with Kline, Chandwani has helped clients grow their business and improve profitability.

Press inquiries

Lance Debler
Content Marketing Manager
Kline & Company
+1-973-435-3425 

Asian Women in Business: How a Kline Consultant is Breaking Barriers

Breaking barriers, challenging tradition, and exceeding expectations – Kline Consultant Liya Zeng talked about all that, and much more, as a panelist at the ICBS Asia Business Club's discussion on "Women in Business" last week. 

The group, which provides resources and networking opportunities for students interested in business topics and career opportunities in Asia, exists under the umbrella of Imperial College Business School (ICBS) in London, from which Zeng received an M.S. in Management. And, as she detailed during the panel discussion, her road to higher education – and the life she wanted to lead – wasn’t exactly a smooth one.

“I'm from a very small town – like a Tier-6 town – in Guangdong Province in Mainland China, and my family is quite traditional,” recounted Zeng, who now lives in London. “In traditional Asian families, girls are told what they can do and what they cannot do.” The “can’t do’s” included things as benign as whistling in public (it wasn’t “ladylike”), while the “can do’s” included learning to cook (after all, a girl would someday have to take care of a husband and children).

With such limited plans for Zeng’s future, it may come as a surprise that her family had little issue with her desire to attend college (but just wait – there’s a catch). At first, Zeng enrolled at a pharmaceutical university as a nursing major before swiftly realizing her interests lay in business. But in China, a change in studies isn’t easy.

“I couldn’t transfer to any other program except one – it was an exchange program focusing on international marketing,” she recalled. Her first three years of college would take place in China, and the last would occur in the United Kingdom – a prospect that brought its own set of challenges.

A WHOLE NEW WORLD

“I had been in a small town for the first 20 years of my life,” Zeng said. “I hadn’t been to any other country – I hadn’t even been to any other province. I’d never traveled anywhere. And, of course, my parents didn’t believe it was okay for a girl to travel alone.”

But travel alone she did. During her studies in Leicester, Zeng followed the path of management consulting after being inspired by a professor; after graduation, she stayed in the U.K. for an accounting internship, then went back to China for another internship at Deloitte Consulting. Along the way, she decided that a master’s degree would be imperative to obtaining work as a consultant, so she began “secretly” applying to programs.

Why the covertness? Zeng said she knew her parents would oppose her intentions because a master’s would be overkill; while they supported her endeavors to obtain an undergraduate degree – remember that catch? – they didn’t think she’d actually use it.

“My dad was fine with an education, but he said that a career isn’t important,” Zeng recalled. “He said, ‘You should just get a guy and get married – that's the most important thing.’ And I said, ‘Even if I get married, I still need my career, right?’ And he said, ‘You don’t have to. If you marry a man who is rich enough, you can just be a housewife.’ That’s the kind of environment a lot of Asian females grew up in.”

Before long, though, Zeng’s father came around and endorsed her pursuit of a master’s in the U.K.; her mother, not so much.

“She told me, ‘If you were a boy, I would support you – but you are a girl,” Zeng remembered.

Tough words, but they caused no acrimony. “In China – or maybe South China – parents are more willing to invest in boys rather than girls,” Zeng said. “It’s very hard to blame my parents for how they felt, because they grew up in that environment. I understand them, and I know where their beliefs come from.”

WOMEN SUPPORTING WOMEN

Despite her mother’s objections, Zeng headed for Imperial College. She got her master’s degree and, in July 2019, was hired as a consultant in the Energy practice of Kline & Company. Immediately, Zeng knew she was at the right place.

“I’ve got two bosses who are female. Kline is very good on that end – or I’m just lucky with Yana and Annie,” Zeng said, referring to Vice President of Energy Yana Wilkinson and Vice President of Energy Management Consulting Annie Jarquin.

Probably a little of both: As we proudly touted on International Women’s Day earlier this month, 54% of Kline's top leadership is female, and a full 100% of Kline's industry verticals are led by women.

Liya, second from right, at the “Women in Business” panel discussion

It was Wilkinson, in fact, who once helped Zeng over a major hurdle in her life – a story she recounted at the "Women in Business" discussion when asked how she balances her career with family.

“My mom was not well last year – she needed a major operation – so I was struggling a bit,” Zeng recalled. “I wanted to go back to China to take care of her. Yana supported me. She said, ‘Yes, you should go.’ So in the end, I managed to get to China for five months to stay with my mom, and I continued working, remotely, until she recuperated.”

With such strong female support, Zeng told the ICBS audience, she felt immediately welcomed as a female professional. And despite initial trepidations about being a newcomer in London, Zeng said the capital of the U.K. turned out to be “a very diverse city where there’s a lot of inclusion, and people respect each other.” Instead, perhaps surprisingly, she said her biggest challenges come from the person you might least expect: herself.

‘WE NEED TO CHANGE THAT MENTALITY’

“It was not easy for me to change my mindset, personally, to go from a girl to a businesswoman,” Zeng said. “In Asian culture, we were taught that you should not be too aggressive, and that influenced me. At first, I was relatively quiet – I thought that I had to observe what other people were saying, what other people were thinking, instead of talking myself. Even now, I sometimes have trouble when I want to speak up; I’m still learning to overcome this mental barrier. And I want to encourage everyone who has had similar experiences to be brave, to challenge traditions and challenge that mentality.”

“Women are never alone in this mental dilemma – a lot of us deal with it,” she continued, before noting that even her Kline contemporaries have had challenges working in the Energy sector, which is predominantly male. “Yana and Annie are my role models – they’ve shared their own stories with me. They had to make a lot of effort to achieve what they have today.”

Zeng has help other than that from Wilkinson and Jarquin.

“I'm reading a book called Nice Girls Don’t Get the Corner Office. In it, the writer gives a model,” she said, before laughing at her use of the word “model” and noting that it comes from her consultant’s mindset. “There are four main steps in the writer’s model, and the first step is being aware. The first step for change is always awareness. And now I’m aware of my own behavior and thinking, so I can gradually make more changes. I look forward to implementing all of them – making myself an experiment and seeing many more changes in me and my career.”

And with that evolution, the girl who was once forbidden to even whistle is singing a happy tune – all while ensuring that she shares everything she’s learned with other women. In fact, she’s on the executive committee for Chinese Women in the City (CWIC), a non-profit organization of 500+ members that empowers female professionals of Chinese heritage. She also established a club called Chinese Consultants in the U.K., which has 100+ members of Chinese consultants working in the management/strategy consulting area.

“Our events focus on the challenges women face in the business world, how to empower women, and how to fit in despite cultural differences and gender issues,” Zeng said. “And most of all, we talk about how, someday, we’ll finally break the glass ceiling.”

How Will the White Oils Market Evolve in the Post-COVID-19 World

Global white oils demand is expected to grow at a CAGR of 3.1% to reach almost 2.0 million tonnes by 2025, mainly due to the global economy recovering from the impact of COVID-19.

White oils ― comprised of highly refined paraffinic or naphthenic baseoils with extremely low aromatic content ― are colorless, tasteless, odorless, and hydrophobic and do not change color over time. They’re also known as light mineral oils, light liquid paraffin, and light paraffin oils in different parts of the world.

White oils are used in various industries and their functionality varies from one industry to another. Key white oil applications are described in the table below:

The Changes in White Oils Grades Uses

White oils are produced in two quality grades: pharmaceutical and technical (or industrial) grade. Pharmaceutical grade is the most refined white oil, consisting of only branched alkanes and cycloalkanes and free from aromatic or unsaturated compounds. Quality standards for pharmaceutical-grade white oils in a country are usually set by the national pharmacopeia. However, standards set by the United States Pharmacopeia and the U.S. FDA for use in the food, pharmaceuticals, and personal care industries are followed globally.

Pharmaceutical-grade white oils are mainly used in industries such as personal care, pharmaceuticals, and food, as the end products of these industries are either ingested or come in contact with human skin. Earlier, pharmaceutical-grade white oils were used in equipment, where incidental contact with food, medicines, or personal care products was possible. For all other equipment, technical-grade white oils were used. However, lately, for all equipment, only pharmaceutical-grade white oils is used irrespective of whether the lubricant can come in contact with end products or not. This approach is followed in most markets. Pharmaceutical-grade white oils are also used in industrial applications such as adhesives and sealants, and plastics, as they are used in packaging food, medicines, and personal care products.

Technical-grade white oils are mainly used in non-food-contact industrial applications such as textile, plastics, and adhesives and sealants, paper, and agriculture. However, technical-grade white oils can be used in food, pharmaceutical, and personal care industries, where white oils do not come in contact with end products in some markets, such as China.

Why Pharmaceutical Grades Dominate

Pharmaceutical-grade white oils lead demand with more than 50% share due to a preference for pharmaceutical-grade white oils in the food, pharmaceuticals, and personal care industries. They also have significant usage in the plastics and adhesives and sealants industries used for food, medicine, and personal care products packaging, as previously noted.

However, there are regional variations. For example, in Europe and North America, pharmaceutical-grade white oil dominates the market, with more than three-fourths of market share. As a result, in these regions, end users in industrial applications such as adhesives and sealants or plastics (not meant for food packaging) also use pharmaceutical-grade white oils. The end users were already using pharmaceutical-grade white oils and have shifted to only using pharmaceutical-grade white oils. It also helps end users project an image of being more health- and safety-conscious. And while pharmaceutical-grade white oils are more expensive than technical-grade of white oils, the price difference is within the 5% to 10% range, which is not cost-prohibitive.

Global White Oil Demand

Global white oil demand was estimated at 1.7 million tonnes in 2020. Asia leads consumption, as it is the leading producer of plastics, textiles, pharmaceuticals, and adhesives and sealants (the industries that are the largest consumers of white oils). Asia is also one of the biggest producers of personal care products globally. China and India are the two biggest markets for white oils in Asia. Asia is followed by North America and Europe, with plastics and personal care being two leading consumers of white oils in both regions. The United States is the largest market in North America, accounting for almost 95% of white oils demand in the region. In Europe, Germany is the leading consumer of white oils.

GLOBAL DEMAND OF WHITE OILS BY REGION, 2020

Impact of COVID-19

The COVID-19 pandemic had an adverse impact on global white oils demand, causing an estimated 5% drop in 2020. The scale of decline varied from one country to another. The decreases, between 5% and 10%, were higher in developed markets such as Germany, the United States, France, and the United Kingdom because these countries were among the most impacted during the first wave of COVID-19, experiencing temporary closures or reduction in production activities in various factories.

China and India also witnessed lessened demand of around 3% in 2020. However, in other Asian countries, such as South Korea, Japan, and Indonesia, drops in demand were not significant for several reasons. For one, decreased demand in industries such as agriculture, textile, and personal care in South Korea and Japan in 2020 was offset by increased demand in the food, pharmaceuticals, and plastics industries. As a result, the decline in demand was less than 1% in both South Korea and Japan. Other countries, such as Brazil and South Africa, also witnessed minor decline in white oils demand in 2020.

The impact of COVID-19 on various industries differed. As consumers observed quarantine orders and purchased less makeup and clothes, demand for white oils decreased in the personal care and textile industries. Meanwhile, the closure of restaurants and bars led to a decline in white oils demand in the food industry, and the temporary closure of plastics and adhesives and sealants production facilities also led to declines. But the pharmaceuticals industry saw an increase in white oils demand. The reason: Pharmaceuticals production rose, with consumers purchasing more than their average number of medications during the pandemic.

Base Oils

White oils are among the purest lubricants. Group I base oils need to undergo an extensive purification process before they can be used to produce white oils. This increases the cost of producing white oils from Group I base oils. Further, the supply of Group II base oils has increased while the supply of Group I base oils has decreased. As a result, white oil suppliers prefer Group II base oils over Group I due to the higher processing cost associated with the latter. Group II base oils are also preferred over Group III base oils, as the latter are more expensive than the former.

The choice of base oils to produce white oils also depends upon the availability. For example, the United States is the biggest producer of naphthenic base oils. Therefore, the usage of naphthenic base oils to produce white oils is higher than Group I and III base oils in the country. The demand for white oils in Indonesia and South Africa is met through imports; the base oils used to produce them depend upon their availability in countries such as India and South Korea, from where white oils are imported.

White Oil Suppliers

China, the United States, and India, together, accounted for around two-thirds of global white oils demand in 2020. Consequently, the leading white oils suppliers in these countries also lead the global market. For example, Sinopec leads the market in China and is the leading supplier globally. Similarly, HollyFrontier and Calumet, together, account for 90% of sales in the United States. Savita Oil, Gandhar Oil, Raj Petro, and Apar are top leading suppliers on India’s white oils market.

Apart from Indian white oil suppliers, most other white oil suppliers are focusing on their domestic markets. For example, Sinopec is the biggest white oil supplier, but all its white oil sales are in China; Indian suppliers such as Gandhar Oil and Savita Oil, export white oils to such countries as Brazil, Indonesia, and South Africa. Panama Petrochem, an Indian supplier, is mainly focusing on the exports market for white oils.

Where Will White Oils Grow the Most?

Lithium-ion battery separators is expected to be the fastest-growing application for white oils from 2020 to 2025, driven by increased interest in electric vehicles. The pharmaceuticals industry is expected to be the second fastest-growing application for white oils, driven by an aging population in Europe and countries such as Japan, as well as increasing healthcare coverage in countries such as India and South Africa.

Africa and the Middle East, and Europe are expected to be the fastest-growing regions for white oils demand globally. Europe was the region most affected by COVID-19 and is thus expected to have faster growth rates as its economy recovers. Growth in Africa is expected to be faster due to income growth, leading to quicker growth in packaged food items and pharmaceuticals. This, in turn, will lead to higher growth in white oils demand. Asia will remain the biggest white oils-consuming region due to economic growth and the continued shift of the industrial production of plastics, paper, and more to Asia.

In terms of grades, demand for pharmaceutical-grade white oils is expected to grow faster than technical-grade white oils. This will occur as white oils demand in the pharmaceuticals, food, and personal care industries — which mainly use pharmaceutical-grade white oils — grows faster than white oils demand in industries such as adhesives and sealants, along with plastics, which uses technical-grade white oils in large quantities.

In terms of base oils, demand for Group III and II base oils for manufacturing white oils is expected to grow faster than demand for Group I and naphthenic base oils. This is mainly due to purity requirements and growth in the supply of Group II and III base oils.

About the study:

Global White Oils: Market Analysis and Opportunities assists white oil marketers in identifying opportunities within the global white oil industry. It also serves as an invaluable tool in the strategic planning process. To learn more about the study REQUEST more information.

The global demand for white oils has been increasing slowly over the past few years. Despite the slow growth, the market remains dynamic due to the increasing use of Group II baseoils, intensifying competition from small suppliers, substitution by other products, and increasing regulatory control.

Learn more >>

Global Lubricants: Market Analysis and Assessment

This continuous publication since 2003, provides a comprehensive, in-depth analysis of automotive and industrial finished lubricant products, end-use industries, trade classes, major suppliers, and market trends in leading country markets and regions.

The customized report covers your choice of 10 country market and/or supplier profiles and offers a comprehensive Year in Review summarizing the overall global lubricants industry.

Learn More >>

Is Lonza’s Specialty Ingredients Divestment the Chemicals Deal of the Decade?

Trade tensions, geopolitical events, and slowing economies caused by the COVID-19 pandemic have had little effect on merger and acquisition (M&A) activities in the chemicals industry this year. The industry experienced a slowdown in organic sales growth across most segments in all regions, yet many companies have taken this time to consider transactions for business transformation. This includes acquisitions to secure growth, generate cash resources, maintain market competitivity, build IP, or restructure their business. This year alone has witnessed divestment announcements such as Lonza’s Specialty Ingredients business and deals closing across the specialty chemicals sector, particularly in the ingredients value chain. Deals have ranged from EQT Partners acquisition of Schuelke and IFF’s acquisition of DuPont’s Nutrition and Biosciences to Cargill’s acquisition of Floratech. Deal multipliers continue to rise, showing no indication of a decline. The current situation has had a mixed impact on the global biocides market. Many markets for biocides such as household, industrial and institutional hygiene (HI&I), personal care, and agriculture are either positively or less impacted, whereas industrial markets such as paints and coatings, marine antifoulant coatings, plastics, and oilfield applications experienced the strongest decline in demand.

Over the last decade, the global biocides industry underwent several M&A activities, including some major ones shown below.

This month, Lonza is set to start the sale process of its specialty ingredients business (LSI) unit. With a reported EBITDA of CHF 300 million (US 323 million) in 2019, LSI is comprised of two business units: Microbial Control Solutions (MCS) and Specialty Chemicals Services (SCS). MCS serves end-use markets including paints and coatings, HI&I, personal care, and wood treatment. SCS mostly offers agricultural and pharmaceutical contract manufacturing, nutritional supplements, and composites.

Lonza decided to divest its LSI division to focus more on its Pharma, Biotech & Nutrition business. UBS investment bank is leading the sale and claims to have issued information packages on LSI to peers such as LANXESS and Clariant, plus private equity groups. LANXESS and Clariant have been working on strengthening their businesses, having divested Arlanxeo, chrome chemicals, and masterbatches. LANXESS CEO Matthias Zachert stated on an investor call that the firm’s M&A firepower is somewhere between 1 to 2 billion Euros, while a big 4 strategy consultancy claimed it has been approached by 25 private equity firms interested in this deal.

Lonza has a wide portfolio of active biocidal ingredients encompassing several key chemistries across most applications. A market leader in wood preservation, antidandruff agents, biocides for soft foulants in marine coatings, crop protection molluscicides, and HI&I markets, it maintains a strong presence in paints and coatings, metalworking fluids, and oil & gas application segments.

Changes in regulatory frameworks in key regions have been the main driver for the shift in the global biocides market. A rich portfolio of products makes larger players, such as Lonza, more resilient to regulatory changes. Lonza has distinct competitive advantages in a world of increasing requirements for biocides registration, labeling, and packaging.

As biocides is a regulation-dependent business, some of the key actives in LSI’s portfolio are currently under regulatory scrutiny. High exposure to mature markets, along with expiration of key patents such as ZnPT (zinc pyrithione), could pose potential risks for LSI’s business. Wood protection is gradually shifting toward new, alternative, less toxic, more environmentally friendly wood preservatives. This shift has implications on existing products from large players including Lonza, Viance, and Koppers. These products are banned in Europe and being phased out in North American residential applications. ZnPT is an effective and durable fungicide and algicide for many different applications. It is also the most common antidandruff agent worldwide. ZnPT remains under regulatory review for various applications and faces a high risk of a ban in Europe. A complete ban on ZnPT could have repercussions along the entire value chain, starting from raw material guar supply from Solvay to its key end use in antidandruff shampoos for the personal care majors such as P&G and Unilever. Nevertheless, Lonza’s extensive portfolio, as well as actives under development, mitigates against many regulatory concerns.

Kline believes LSI could take advantage of the robust growth expected from industrial applications in the longer term, leveraging preservation know-how, knowledge of formulated biocidal products, and its strong position in HI&I, especially with the increased demand for disinfection due to COVID-19.

Potential strategics interested in LSI

Reuters speculated that the LSI deal could be worth CHF 3.3 to 3.5 billion, which implies that private equity firms are most likely to secure this deal unless a partnership between a sponsor and strategic is struck—or unless LANXESS considers this portfolio of products a transformational acquisition.

UBS, the sell-side bank, suggested that Clariant, LANXESS, BASF, and Nouryon have synergies with this opportunity. It is of Kline’s opinion that, based on the recent multipliers of specialty chemicals and ingredients, deals may cause strategics to miss out on this opportunity). The LSI acquisition offers a route to a synergistic product/market/capability addition to their existing business portfolio industrial buyers purchase with the goal of ongoing or maintained ownership. Hence, the acquisition decision is based on the fit with their industrial logic and corporate renewal strategy.

Private equity owners are short- to medium-term business developers and transformers, enhancing firm’s value over a given timeframe in order to secure a financially sound exit. Bloomberg reported that several private equity partners active in the chemical industry, such as Bain Capital, Cinven, Advent International, Lonestar, Carlyle, EQT, Blackstone Group, KKR & Co., and Partners Group, could participate in the bidding process.

Given the centrality of the right investment decisions, pre-deal due diligence analyses are to be performed meticulously.

LSI business attractiveness and outlook

Overall, Kline sees Lonza’s HI&I, personal care, and industrial biocide business as a differentiator in the deal due to its value and potential. A handful of products in the LSI portfolio represents a large part of Lonza’s sales, despite its dense portfolio.

Unsurprisingly, hygiene and disinfection products have become a key driver of the biocidal industry during COVID-19. This has significantly increased the demand for biocides in HI&I and personal care applications, where end products include hand sanitizers, surface disinfectants, and antimicrobial soaps. Lonza is a key player in HI&I and other hygiene applications and will take advantage of the opportunities created in this area.

Further growth of LSI could be positively shaped with solution-driven innovations, open innovation programs, and licensing or acquisition of chemistries and technologies.

Kline has been reporting on specialty biocides market activities for more than 50 years. Our experienced international consultants closely follow the ever-evolving market landscape. We are well-positioned to provide comprehensive assessments in the areas of strategy and business development, manufacturing and supply chain, technology and innovation, customer relationships, and M&A support, among others. Our unrivaled market intelligence and competitive intelligence across the chemicals and materials industry was developed over 60 years and helped our customers better position their business growth.

[pardot-form id="15031" title="ACTION REQUIRED Energy COVID-19 Impact on Lube Markets INQUIRY"]

Walking a Tight Rope to Recovery: U.S. Industrial Oils and Fluids Demand

The manufacturing sector in the United States accounts for a shrinking share of the U.S. economy, a fact that is much rued by observers. The upheaval caused by COVID-19 has been a bitter pill to swallow for many manufacturers, who are now evaluating questions such as: How has U.S. manufacturing been impacted in 2020, and what will be the implications of the current situation in the short-term future? How will this impact the market for lubricants, base oils, and additives? Kline & Company recently completed an in-depth report on the industrial sector of the United States, deep-diving into the top 16 end-use industries in the country that consume lubricating industrial oils and fluids. The study unveils interesting trends that different industrial segments are undergoing in 2020 and the extent of their impact on demand for industrial oils and fluids in the future leading to 2024.

The Great Lockdown crisis of 2020 has impacted different segments of the U.S. industry disproportionately, with some industries experiencing sharper declines than others. The industries that cater to the market with “essential” goods and services continued to operate without much interruption during the lockdown period and performed relatively better than other industries that had hard stops. In all, industrial activity in the United States experienced a profound drop during the first half of 2020, with the average industrial capacity utilization rate plunging to 64%-65% in the months of April and March, from 75% in February. Manufacturing segment capacity utilization rates experienced the most significant decline, dropping to 60%-62% in April and May, dipping even lower than the levels of the year 2009, when the U.S. economy was hit by a severe recession. The consumption of industrial oils and fluids, which typically tracks the level of activity in key industrial segments, is also expected to follow suit.

Drop in Average U.S. Industrial Capacity Utilization Rates in 2020

Source: U.S. Federal Reserve Database

2020: An uphill battle for manufacturing industries

Leading oils- and fluids-consuming manufacturing industries in the United States, such as rubber and plastic products, transportation equipment, primary metals, and machinery, experienced a drastic drop in operating rates during the first half of 2020 due to the lockdown directives, social distancing measures, and a contraction in demand. Rubber and plastic products, plus the transportation equipment manufacturing industries, are largely dependent on growth in the automotive market. Growing sales of light trucks, utility vehicles, and commercial trucks have been driving demand for tires, plastic parts, and automotive components in the United States. Some 70%-80% of U.S. styrene-butadiene rubber (SBR) demand, which is the largest commodity elastomer consumed in the country, originates from automotive tire manufacturing. The demand for thermoplastic fabricated products and automotive equipment, such as engine parts, electronics, suspension components, and transmissions, has also remained stable, driven by the transportation equipment manufacturing industry in the country.

However, this changed in 2020, as the COVID-19 outbreak put production facilities on complete or partial halts. Production facilities of the top automotive OEMs in the United States, such as General Motors Co., Ford Motor Co., and Fiat Chrysler Automobiles, remained temporarily closed in March/April 2020 and began operations only by May 2020. Foreseeing reduced consumer demand, some OEMs even switched their production facilities to making medical equipment and devices such as ventilators and face shields. Although the path to recovery is still not visible, industry experts believe that full automotive production will be resumed toward the end of 2020 or early 2021 as the pandemic comes under control. Even as operations are resumed, automotive OEMs will have a full plate of market complexities to manage, such as financial weakness, supply-chain constraints, and reduced consumer demand.

Weakness in U.S. automotive manufacturing is likely to spill over into related industries, such as tire/plastics, thereby translating into a decline in demand for industrial oils and fluids that are used in these industries. Rubber process oils, used in SBR tire formulations, are anticipated to experience a significant decline in demand in 2020 due to a slowdown in tire manufacturing. Beyond 2020, the tire manufacturing industry is forecast to experience growth due to improvement in automotive production rates. Another important trend that will act in favor of tire production growth in the United States is reduced imports of Chinese tires due to intensifying U.S.-China trade restrictions. In the wake of decreasing Chinese tire imports, domestic tire manufacturers have planned capacity expansions, which are expected to bring new production capacities onstream. Continental AG and Nokian Tyres have already completed the construction of their new production facilities in Mississippi and Tennessee, respectively, and have announced plans to start the production of bus, truck, and passenger car tires at these facilities by the end of 2020. Another tire manufacturer, Toyo Tires, has also announced plans to increase its light truck tire production. Growth in tire production capacity, driven by recovery in tire usage in various segments, is expected to foster growth in demand for rubber process oils in the United States in the near future.

The transportation equipment manufacturing industry in the United States, which was already experiencing declining demand from the passenger car segment during pre-COVID months, is now also experiencing a sharp decline in demand from the commercial vehicles segment. The transportation equipment manufacturing industry is viewed as a forerunner for best industry practices for lubricant handling such as fluid conservation and disposal, improved/innovative maintenance of fluids, and chemical management services (CMS). Fast adoption of top-quality synthetic and semi-synthetic fluids to run sophisticated machinery and precision equipment in this industry necessitate the employment of best fluid management practices. This trend is particularly noticeable for metalworking fluids, which account for more than half of the total oils and fluids demand in transportation equipment manufacturing. The demand for synthetic hydroforming lubricants and semi-synthetic cutting fluids is on the rise in this industry, and these high-value fluids are best managed via chemical management systems offered by metalworking fluid suppliers.

Metalworking fluid consumers in the primary metals and machinery manufacturing industries are exhibiting similar trends toward synthetic fluids, albeit at a slower rate. In addition to cost optimization and efficiency enhancement, these industries are driven by the environment, health, and safety considerations, where synthetic and semi-synthetic metalworking fluids win over conventional fluids. The penetration of synthetic general industrial oils, such as water glycol, phosphate ester, and invert emulsion-based hydraulic fluids, is lower in comparison to metalworking fluids due to cost. Gradually increasing penetration of synthetic fluids and better fluid management systems in metals and machinery manufacturing industries have resulted in the scaling back of lubricant demand, even before the COVID-19 outbreak. The deep recession in 2020 and sharp cuts in manufacturing output during the year are anticipated to further cut back the appetite for industrial oils and fluids by these industries.

In fact, demand for industrial oils and fluids in nearly all of these top industries in the United States has remained flat or has been decreasing in the wake of better fluid management and the use of sturdy products with longer service lives. The Great Lockdown recession in 2020 is anticipated to steepen the declines in most of the end-use industries. The economic slowdown in the country is anticipated to impact production output, disrupt supply chains and markets, and have a depreciative impact on firms and financial markets. Another factor that may potentially have a negative impact on industrial productivity in the United States is the ongoing U.S.-China trade war. Unfavorable trade tariffs may reduce exports of goods from the United States as well as imports of raw material from China, thus affecting manufacturing industries.

The year 2020 also saw a drastic decline in global crude oil prices, which dropped by nearly 30% in April. Due to the lockdowns in the United States and other key economies, demand for crude oil dried up in an already existing oversupply situation, rendering global crude oil prices low. Low crude oil prices will negatively affect the oil and gas industry in the United States, particularly by making shale gas extraction economically unviable. This will have a negative impact on demand for lubricants that are used in oil and gas extraction and petroleum refining. Lower crude oil prices are also poised to reduce oil production activity globally, affecting the demand for export-targeted oil field equipment from the United States.

Estimated Demand for Industrial Oils and Fluids by Key U.S. End-Use Industries in 2019 and 2024

Source: Kline & Company

All is not ill-fated

All, however, is not ill-fated. Some select end-use industries in the United States have been able to keep their heads above the water during the 2020 turmoil. These include food processing, electricity generation and transmission, and chemicals and allied products. These industries are seeing less-severe repercussions of the pandemic since the nature of products/services supplied by them are considered “essential.” Over the next five years, demand for industrial oils and fluids in these end-use industries is forecast to remain flat or decline at slower rates relative to other end-use industries in the country.

The food processing industry is least impacted by the current turmoil, as food is a necessity. In fact, certain food products may even see growth in the short term. For example, nutrient-fortified products and plant-based meat and milk are two areas that are expected to grow over the nextfive years. Demand for lubricants from this industry is thus expected to remain flat, despite the growing penetration of synthetic oils that offset volumetric gains. Major factors that will have a positive impact on the lubricants demand in the food processing sector include population growth, the growing trend of single households, and the growth of new fortified food and beverages products with immunity-boosting characteristics.

The electrical equipment and energy transmission industries, which continued to operate during the lockdown period, experienced less severe declines. This industry closely follows the overall industrial and commercial segments in the United States and is expected to recover at the pace of these segments. The chemicals and allied products manufacturing industry is forecast to experience only a marginal decline in 2020, supported by the spike in demand for packaging, pharmaceuticals, medical equipment, and personal care products and cleaning compounds such as hand sanitizers, antibacterial hand gels, and liquid soaps. Despite a marginal decline in 2020 and a recovery in 2021 and 2022, overall demand for industrial oils and fluids by these industries may not achieve 2019 levels due to the depth of the recession in 2020.

What will be lost while walking a tight rope to recovery?

The U.S. economy, which experienced GDP growth in the range of 2.0% to 2.9% between 2014 and 2019, is destined to experience its steepest recession in almost a century, plunging by 8.0% in 2020 as per International Monetary Fund’s (IMF) latest report. The year saw a near halt of industrial activity, a severe drop in demand, and resulting financial weakness.

The massive downturn that the U.S. industrial segment is experiencing in 2020 will have significant repercussions on the lubricants industry. The first half of the year 2020 saw abrupt and large-scale halting or curtailing of industrial activity, resulting in the total industrial productivity (IP index) plunging by 12.8% in April and manufacturing productivity plunging by a whopping 16% over 2019’s average. This resulted in a sudden drop in demand for lubricating oils and fluids in the U.S. industrial sector, and it is estimated that this market will drop by nearly 12%of the demand volume in 2019.

Source: Kline & Company, U.S. Federal Reserve Database, and International Monetary Fund (IMF)

The U.S. industrial sector is beginning to show signs of recovery, with the industrial production index growing month-on-month by 5.7% and 3% during June and July 2020. Industry participants are still likely to face several impediments in recovery, such as weak demand and financial issues. As the end-use industries walk the tight rope to recovery, Kline estimates that volumetric demand for industrial oils and fluids in the United States will bounce back to a partial recovery in 2021 and will then show growing signs of recovery in the coming years. This is based on the assumption that the development of a vaccine or treatment for COVID-19 will invigorate businesses back to normalcy. This recovery, nonetheless, will be dampened by other incidental trends such as better fluid management and housekeeping practices, coupled with gradually growing penetration of higher quality synthetic fluids. These trends will be strong enough to dampen volumetric growth in industrial oils and fluids during the next five years, keeping demand in 2024 well below 2019 levels.

This article draws insights from Kline's recently published study: Opportunities in Lubricants: North American Market Analysis (Industrial Oils & Fluids edition), which includes an analysis of Impact of COVID-19 on general industrial oils, metalworking, process oils, and industrial engine oils markets.

Also, check out our recently published related studies:

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PE Wax Market Amid the COVID-19 Turmoil, and Beyond

The COVID-19 pandemic and low oil prices create new opportunities and challenges for polyethylene wax producers.

With the growth in supply in the last two decades, polyethylene (PE) waxes have carved out a unique market space in the global wax market. PE waxes, which were first introduced with the intention of making up for the shrinking supply of specialty petroleum waxes, such as microcrystalline and high-melt paraffin, soon became the preferred additives in several applications, due to their superior performance.

PE waxes in the spotlight

Figure 1: PE Wax Demand in Traditional, as Well as Newer Rheological and Surface Applications, 2019

PE waxes have low molecular weight, high melting points, a highly linear structure, chemical resistance, lubrication, and anti-blocking properties, which makes them top-of-the-line additives in applications that either require lubrication or physical modification in their formulation. Top application areas where PE waxes are used as additives include plastic processing, masterbatches, hot-melt adhesives, coatings, paints, inks, packaging, and tire/rubber.

Plastic processing aids, where PE waxes are used for improving the rheological properties during the processing of rigid polyvinyl chloride (PVC) and other polymers, account for almost one-third of the global PE wax demand. In masterbatches, PE waxes are preferred, as they are excellent dispersants and carriers for the masterbatch-plastic mixture. PE waxes are also desirable in applications demanding strong adhesion and compatibility, due to their high melting points and fast setting time. This is highly favorable in hot-melt adhesives that are used in a multitude of end uses such as corrugated-container or folding-carton sealants, as binding adhesives; in furniture and shoe manufacturing; and for other packaging, tapes, labels, textile products, and product-assembly applications.

Coatings, paints, and inks are some of the applications where PE waxes offer modification of surface properties such as improving the hardness, scuffability, gloss, waterproofing, and durability. PE waxes are also used in non-food flexible packaging and single-use food-based packaging applications, as they provide a strong moisture and grease barrier and also improve the appearance of packaging material.

All of the above-mentioned applications are well positioned for significant growth globally. Asia is the highest consumer of PE waxes, with most of the demand coming from China. Plastic processing (primarily PVC), masterbatches, hot-melt adhesives, as well as paints, coatings, and tire/rubber production account for a large share of Asian polymer wax consumption. Rapidly industrializing Asian economies, such as China and India, are fueling the demand for PVC, masterbatches, and hot-melt adhesives in the region. Developed Asian markets, such as South Korea and Japan, are major exporters of electronic devices and automotive parts that require plastic components and color concentrates and, thus, consume PE waxes.

Increased urbanization, a widening middle-class population, and employment growth in developing Asian countries are some factors that are propelling construction and commercial activities in the region. This, in turn, is driving up the demand for paints, inks, and coatings, which are used in residential, commercial, and industrial applications. The growing appetite of Asian households for home appliances and other consumer goods is contributing to the increase in demand for color masterbatch and packaging materials. A large portion of the wax demand by these applications is met by regional suppliers in China and India. These suppliers either process PE waxes that are produced as a by-product of plastic processing, or they produce low-grade PE wax via thermal degradation of used plastics. Marcus Oil, a large Indian producer, as well as Qingdao Bouni and Qingdao Sainuo, two producers in China, are top suppliers of PE waxes produced in this fashion.

While, the demand for PE waxes in North America and Europe is small in comparison to that in Asia, these regions are home to some of the most high-end PE wax-based applications. Currently, the demand for specialty PE waxes in high-end applications in these regions is driven by the developments in the automotive sector, new product innovations (for example, nonwoven fabrics), and a trend toward solvent-free chemistries due to regulatory concerns. These applications generate the demand for high-grade, better-performing plastic products, masterbatches, hot-melt adhesives, paints, coatings, and rubber/tires. Due to the specialty nature of these applications and higher levels of PE wax customization, the demand is met by higher-end, better-quality PE waxes. Such specialty waxes are produced “on purpose” which means that they are produced in a plant using processes designed to produce these waxes – they are not by-products. On-purpose waxes are produced via direct polymerization, which creates tailored waxes with narrow molecular weight distribution, with high uniformity at the molecular level – by manufacturers in the United States and Europe using ethylene feedstock. This includes suppliers such as Honeywell, Westlake, Clariant, BASF, and Baker Hughes.

On-purpose PE wax production from ethylene in the United States has historically been advantageous over other regions, due to plentiful supply of ethylene feedstock in the region. The availability of low-cost ethane derived from natural gas production in the region has driven an increase in new ethylene production capacities in the region. In contrast, in Europe, the ethylene feedstock for PE wax comes from crude oil-derived naphtha in refinery crackers, resulting in higher production costs. Thus, over the years, higher-cost European PE wax producers have operated at a disadvantage compared with their North American counterparts.

Figure 2: Specialty On-Purpose PE Wax Supply Chain

How have the rules of the game changed in 2020?

The market conditions in 2020 could change the rules of the game for PE wax suppliers. Factors such as reduced end-customer demand, strained United States-China trade relations, and low global crude oil and natural gas price spread will reduce the feedstock ethylene price differential between North America and Europe. In this environment, the long-time cost-competitiveness that the United States PE wax producers have enjoyed over the European producers will erode.

In 2019, the United States market had a surplus of ethylene supply due to existing production levels, as well as five new ethylene production capacities added during the year. A large share of ethylene produced in the United States is exported to China, either as feedstock or as polyethylene. However, trade tensions between the United States and China, which surfaced in the latter half of 2019 and continued into 2020, have negatively impacted trade between the two countries, leaving the United States stranded with large volumes of ethylene inventories. The situation has been further exacerbated by the slump in demand for consumer goods, due to COVID-19 lockdowns globally. COVID-triggered lockdowns have reduced Chinese industrial output, resulting in lower demand for feedstocks such as ethylene.

Surplus ethylene availability in the United States has pulled prices down. In April 2020, United States ethylene contracts settled at an 18-year low of 1.25 cents/lb. (USD 28/tonne). Lower ethylene prices translate into a lower cost of PE wax production; ideally, reaping better margins for suppliers of PE waxes in the United States. However, the recent crash in crude oil prices has also provided a considerable cost advantage to naphtha-derived ethylene producers in Europe. This is anticipated to narrow the price spread between the cost of PE wax production in Europe and the United States, thus bringing suppliers in both regions to nearly equal footing.

Where are the opportunities and challenges in this market?

Despite severe demand cutbacks for most of the wax-based applications in 2020, and grim global and regional GDP forecasts, positive outcomes have surfaced in certain application areas. Nearly all mainstream applications for PE waxes, such as plastic processing aids, masterbatches, hot-melt adhesives, paints, coatings, inks, and rubber/tires, are forecast to experience significant declines in 2020. In contrast, PE wax demand in applications related to packaging, pharmaceutical, medical rubber, and personal care products are anticipated to remain strong, supported by their growth through the COVID-19 crisis period.

Figure 3: Comparison of Pre-COVID-19 and Post-COVID-19 Growth in Key PE-Wax-Consuming Applications

Packaging material for food-contact applications and for consumer-goods deliveries continued to grow in the first half of 2020. In most countries, the food industry continued to operate through the lockdown period, as the industry was categorized as “essential.” Hence, the food-packaging industry has seen only limited impact on its demand. The shut-down of in-restaurant dining resulted in a higher volume of packaged take-aways, as well as a stronger demand for groceries and packaged food items. This trend remains strong even in the post-lockdown phase in many countries, as consumers continue to observe precautionary social-distancing measures.

Corrugated and flexible packaging for consumer-goods deliveries played an important role during the lockdown period by providing packaging for essential goods like medical products, pharmaceuticals, essential household goods, and groceries. Even post-lockdown, many regional markets are seeing a spike in online sales of consumer goods, which, in turn, is driving the demand for packaging material.

Some pharmaceutical applications have performed better than expected in 2020. The medical industry is experiencing a surge in demand for rubber-based equipment such as hand gloves, catheters, balloons, veils, knobs syringes, breathing packs, and implantation/transfusion sets. PE waxes are typically used as additives in manufacturing these rubber products, for providing softness, waterproofing, and improved finishing. Additionally, there has been a continuous demand for such wax-based products as medical ointments and petroleum jelly. Although PE wax is not the mainstream wax used in these applications, small quantities of PE waxes may occasionally be used as additives in a blend with other waxes in these products.

The personal-care industry has witnessed particularly strong growth in hygiene-based products in 2020 due to the COVID-19 pandemic. In the first half of 2020, a significant jump in demand was recorded globally for hand cleaners and sanitizers, as preventive measures against COVID-19. In the face of incremental demand, many personal-care product suppliers even switched their manufacturing capacities to produce hand sanitizers and cleaning agents. Although synthetic waxes have limited demand in these applications, PE waxes can partially make up for the shortfall of paraffin and vegetable waxes in cases of disrupted supply chains and logistics.

It is not all good news for PE wax producers. The year has witnessed a sharp contraction in demand from mainstream PE wax rheology and surface-based applications, such as PVC, masterbatches, hot-melt adhesives, paints, inks, coatings, and tires. Most of these applications are closely linked with the economic well-being of nations, driven by their industrial growth, residential and commercial construction activities, and the automotive industry. These sectors have been severely affected in 2020 due to the lockdowns and social-distancing measures being observed in key global economies.

Reduced consumer demand, disrupted supply chains, and volatility in energy markets are likely to result in reduced industrial activity, thereby impacting the demand for plastics, masterbatches, adhesives, and other related products. Business losses and financial turmoil in 2020 are anticipated to leave the residential and commercial construction sectors weakened, which will impact the demand for PVC products, paints, and coatings. The automotive industry, which is a significant consumer of masterbatches, coatings, inks, and tires, is likely to underperform over the next few years. This is due to reduced mobility, high unemployment levels, and lower consumer purchasing power over the near-term future.

In conclusion, amidst the ongoing economic adversity, a handful of select applications are prospering, while others have taken a hit. Applications such as packaging, pharmaceuticals, medical rubber products, and personal care are performing better than what was anticipated during the pre-COVID months and will provide support to PE wax demand over the near-term future. Estimated post-2020 recovery in GDP offers optimism for recovery in mainstream PE wax applications, which will experience slower growth rates in the short term compared to what was anticipated before the COVID-19 crisis.

Gain more data and insights on leading petroleum waxes, synthetic waxes, vegetable and plant waxes, while evaluating their global supply-demand scenarios from our recently published study Global Wax Industry: Market Analysis and Opportunities. Request more information or demo of the report HERE.

How COVID-19 Treatment Methods Could Change the Course of Biologics

The COVID-19 outbreak has resulted in the world trying to utilize as many technologies known and available to man in an effort to monitor and contain the disease.

As of now, most research labs and pharmaceutical companies are collaborating, with China being the hub of most of the ongoing research. Current ways to treat COVID-19 include:

1. Using already existing drugs and therapies that were developed to treat other diseases and testing their efficacy against coronavirus, either one at a time or making a combination of two or more drugs

2. Developing new drugs and carrying out clinical trials, both in the testing phase as well as directly with infected patients
As history shows, developing a new drug usually takes a significant amount of time, and time is of the essence considering the high rate at which coronavirus is spreading. However, one benefit that researchers have is the fact that the genome of COVID-19 is already mapped and available for further study. The complexity in developing drugs to counter the coronavirus is thus simplified, as drugs to counteract RNA-based viruses are much easier to develop.

Most of the drugs being tested for coronavirus are already existing chemical entities like Kaletra (used to treat HIV) and Tamiflu (used to treat influenza); some are biologics like vaccines, monoclonal antibodies, recombinant enzymes, and interferons. However, new drugs that are being developed specifically to target COVID-19 mostly consist of biologics. Some examples include a protein-based vaccine by GlaxoSmithKline, the IFX-1 (anti-C5a monoclonal antibody) drug from one of the China-based clinical trials, and an encapsulated mRNA vaccine by Moderna.

Moreover, research articles being published thus far indicate that antiviral drugs used to treat previously “very deadly” diseases like Ebola (Remdesivir), malaria (Chloroquine), HIV (Lopinavir/ritonavir), SARS (APN01), and MERS (Remdesivir) may very well be “repurposed” to treat COVID-19, either by themselves or in combination with other drugs. All these drugs are being tested in labs.

All drugs, whether chemical entities or biologics, require excipients or inactive ingredients in the final formulation process of drug development and are a part of the final drug that is administered to patients. Examples of excipients or inactive ingredients include stabilizers and bulking agents, solubility enhancers, surfactants, and vaccine adjuvants.

As soon as a successful treatment method is discovered, the production of that particular drug/vaccine or the combination of drugs will increase exponentially, raising the demand for excipients required in their formulation. In the event of a biologic drug entity becoming successful, demand for bioprocessing ingredients will grow exponentially. For a small molecule formulated as an oral solid, excipients such as copovidone to help increase solubility may gain popularity.

Kline’s reports on biologics and solubility enhancement can provide the reader with both the technical and qualitative insights related to drug development, as well as the global market perspective of various “inactive ingredients” that are being used to manufacture a variety of OSDFs and biopharmaceuticals.

Excipients Demand Forecasts with the COVID-19 Impact on Pharmaceutical Production

Introduction

As the COVID-19 pandemic spreads worldwide, the number of reported cases has exceeded 4.4 million as of as of this writing and continues to increase. The magnitude of the economic downturn that will follow is still highly uncertain, but consequences are bound to be significant across the globe.

In response to the health crisis created by the virus, pharmaceuticals and med-tech companies have been serving patients and creating solutions to improve public health. Med-tech companies have been focused on creating ways to rapidly and accurately diagnose COVID-19 through the development of molecular tests. Pharmaceutical companies have been starting clinical trials to validate antiviral drugs for treating COVID-19 and working around the clock to develop a vaccine. While these steps have an immediate impact on the pharmaceutical industry worldwide, long-term impacts are also expected to be seen across regional pharmaceutical industries.

Governments worldwide implemented quarantine and travel restrictions to curb the spread of COVID-19; however, such measures jeopardize industrial operations, including those of pharmaceuticals. Along with temporary production shutdowns in some countries, the pharmaceutical industry also faces severe consequences of supply chain disruptions. The global supply chain of medicines is under pressure because of a deficit of raw materials such as Active Pharmaceutical Ingredients (APIs) and excipients.

The demand increase for antiviral medicines is predictable in the short term, but there is an expected reduction in demand for medicines for other ailments. Reasons include the reluctance of patients with other conditions to visit medical facilities and pharmacies for prescribed medicines, along with the postponement of non-urgent medical procedures.

Global supply chain disruption

The global pharmaceutical industry is dependent on China’s exports, as the country is the largest producer of pharmaceutical ingredients. With the COVID-19 outbreak in China and lockdown impositions, followed by international transportation restrictions, the raw material supply for pharmaceutical drug production from China slowed. This issue has the potential to disrupt pharmaceutical manufacturing in many countries, such as India, the United States, and Europe. A large share of the medicines sold in the United States is produced in China and India, while almost 80% of the United States’ API demand is met by these two countries. As one of the world's largest producers of generic medicines (producing 20% of global generics supply), India imports almost 70% of its APIs from China; therefore, disruption in its supply chain could result in drug supply shortages.

In anticipation of the shortages, governments and regulatory agencies have adopted temporary export restrictions, such as in the United Kingdom, where parallel exports of three drugs used for COVID-19 treatment were banned. India restricted the exports of 26 key drugs and APIs in the beginning of March 2020. This can have a significant impact, especially in the global supply of medicines such as paracetamol, antibiotics, and vitamins.

Global forecast for specialty excipients

According to our analysis, in the likely and best-case scenarios, the effects of disruptions on pharmaceutical production—and consequently on excipients demand caused by lockdowns and travel and transport bans across various countries—will be relatively short term. However, in the worst-case scenario, the supply disruptions due to extended lockdowns in various countries can have a more substantial impact on OSDF drug manufacturing and, in turn, significantly impact the demand growth of excipients globally.

Global Demand Specialty Excipients for OSDF Pharmaceuticals Forecast, 2019 - 2024

Regional forecasts vary widely depending on factors such as country level lockdown length, travel and transport bans, the extent of COVID-19’s economic impact, and dependence on imports. For example, in India, although imports of pharmaceutical raw material from China resumed in mid-March, the current lockdown situation in the country has disrupted pharmaceutical production, as the ban on public transportation is making it difficult for workers to reach manufacturing plants. This is also disrupting the supply of packaging materials, among other essentials supporting the pharmaceutical industry. It is essential to study each region’s market of pharmaceutical excipients individually to fully understand the repercussions and better equip the strategies for different excipient markets globally.

Kline’s report on Specialty Excipients for Oral Solid Doses: Impact of COVID-19 on the Global Market provides insights into market forecasts in different regional markets in different scenarios.

Future changes in the industry

While in the short term, the pharmaceutical industry is expected to recover as the supply chain resumes, there are bound to be some long-term lessons. Most pharmaceutical manufacturers in the past implemented the “just in time” methodology for their raw material supplies, rather than stockpiling, decreasing inventories but also increasing the possibility of shortages in the event of a supply disruption. This approach may change in favor of higher inventories across the industry, for not only pharmaceutical raw materials but also finished drugs.

Manufacturers may begin to diversify raw material sourcing or invest in spreading production across different markets rather than in concentrated geographic areas, such as China and India. Another longer-term effect is likely to be the reindustrialization of pharmaceuticals production in Europe and the United States to reduce dependency on drug imports. This will lead to an increase in the demand for excipients in these countries.

Shilpi Mehrotra is a project manager for Kline’s Excipients Market portfolio, and has just accomplished the new study Specialty Excipients for Oral Solid Dosage Forms: Impact of COVID-19 on the Global Market. Request more info.

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PE waxes in the spotlight

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