Perspectives2012 01 Business-Perspective Jung BCG

>> PERSPECTIVES_2012
THE FUTURE OF CHEMICAL AND PHARMACEUTICAL

PRODUCTION IN GERMANY
CMF JUNE 19, 2012 FACILITATED BY DR. MICHAEL REUBOLD, CHEMANAGER
>> A BUSINESS
PERSPECTIVE.
THE FUTURE OF VALUE CREATION IN THE GERMAN CHEMICAL & PHARMACEUTICAL INDUSTRY
Dr. Udo Jung
The Boston Consulting Group
ACHEMA PERSPECTIVES 2012
The future of value creation in the German

chemical and pharmaceutical industry
Frankfurt , June 19, 2012
Dr. Udo Jung
Profitable growth: Key lever for sustained value

creation in the past and in the future
Sources of value creation of top-quartile performers in S&P 500
Change in annual
TSR (%)1
40
32
22
19
20
16
10
30%
49%
62%
77%
1 year
3 years
5 years
10 years
Free cash flow
Multiple
Margin
Profitable revenue growth
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 100th percentile to illustrate approximate for the
top quartile companies (which would be equivalent to the 88th percentile); analysis excludes financial institutions
Source: Compustat; BCG Value Science Center
145420-34-18-AchemaPrsentation-June18-JF-FRA-RBHS.pptx
Draftfor discussion only
Copyright 2011 by The Boston Consulting Group, Inc. All rights reserved.
30
However: Growth alone does not automatically create value

Low correlation of growth and TSR1
Why?
(S&P 500, 19922011)
Growth through value-eroding acquisitions

Growth that degrades margins and ROI
Average annual TSR (%)

40
Growth that requires too much capital
Growth with
value creation
Growth that increases risk
20
R2=0,23
Growth that reduces the P/E
Growth without
value creation
-20
-20
20
40
Average annual revenue growth (%)

1. TSR: Total return of a stock to an investor (capital gain plus dividends)
Source: Compustat; BCG Value Science Center
We are in a two speed world: Asia expected to contribute

45% 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
20102025, GDP growth (%)
20102025, GDP growth (Trillion US$)
50
5.2
4.6
40
4.0 3.9
3.7
3.5 3.4
3.1
5.4
2.0
1.6
2.9 47.9
7.7
30
2.8
2.4
Asia
2.7
1.2
1.4 1.3
7.8
2.0
5.5
20
4.6
10
9.3
0
India
China
Rest
of
Asia
Middle
World
Brazil
EUEast
15
C.E.
Russia
USA
Japan
Rest
Europe
of
Latam
China
Rest
EUMiddle
Japan
Brazil
World
of
15
East
India Asia USA
Rest
Russia
C.E.
RoW
of
Europe
Latam
World GDP
(K US$)
2010
70.6
Capturing profitable growth in Asia drives business model changes

of German chemical and pharmaceutical companies
Note: GDP as $ in Purchasing Power Parity (PPP)
Source: EIU; BCG analysis
2025
118.5
3.5%
x%
CAGR
Backup
More than 60% of the total global demand growth in

chemicals until 2030 contributed by Asia Pacific
Annual
growth rate
Growth contribution
9% Rest of World
6% South America
61%
Asia Pacific
14% North America
4,504
3.3%
55%
4.1%
16%
1.9%
17%
2.6%
6%
7%
3.6%
4.4%
10% Western Europe
+1,310
Global chemical
demand (B)
2,353
49%
Asia Pacific
Western Europe
+224
+305
21%
North America
+132
19%
South America
Rest of World
+2,151
5%
6%
+180
2010
Source: CEFIC Fact and Figures 2011; various analyst reports; company presentations; BCG analysis
2030
Backup
"Pharmerging": Huge growth differential vs.

established markets starting from a low base
Growth contribution
10% Japan
12% Rest of World
Global pharmaceuticals
demand (B)
13% North America
Annual
growth rate
65% Pharmerging
1,080
4.8%
28%
14.4%
11%
4.8%
13%
- 0.7%
33%
1.8%
15%
3.6%
856
Pharmerging
18%
+148
Japan
11%
+25
EU5
17%
-5
+30
North America
38%
Rest of World
16%
2010
+26
+224
2015
Pharmerging countries: China, India, Brazil, Russia, Mexico, Turkey, Poland, Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan and Vietnam
EU5 countries: Germany, France, Italy, Spain, UK
North America: USA, Canada
Source: IMS; analyst reports; BCG analysis
Divergence in demographics: In mature markets 55+

segment drives consumer spending growth until 2030
Japan1
Germany2
Consumer spending ($K)
15
4.0
10
10.1
2.0
2.0
1.3
2.0
0.4
0.2
1.0
0.7
0.8
0.6
Growth
200830
1.2
55+
0.6
1.6
0.3
0.1
0.9
55+
0.7
< 55
< 55
6.1
4.1
2008
1.8
0.4
55+
4.0
6.1
0.6
US
2030
< 55
0.7
0
2008
Growth
200830
2030
2008
Growth
200830
2030
What is the implication for German chemical and

pharmaceutical companies?
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 issues
Note: spending power evolution forecasted based on historic correlation with GDP, not corrected with potential higher relative savings
Source: Consumer Expenditure Survey Commissioned by AARP, 2008; Consumer Expenditure Survey, 2008; Japan Statistics Bureau & Statistics Center; Statistische Bundesamt
5 Year value creation by industry sector

High
Average annual TSR, 2006-2010 (%)
Industry weighted average
120
Low
100
69
56
54
51
60
45
16
10
10
0
-20
-5
-10
-5
-15
-13
-18
57
48
36
-14
4
-7
-15
35
31
29
-15
-21
-27
-40
-60
54
35
40
20
54
51
-19
-21
35
33
2
-14
-16
Mining
Constr. &
Build Mat.
Chemicals
Machinery
Technology
Non-Durables
Sources: Thomson Reuters Datastream; BCG analysis
Retail
Durables &
Apparels
Components
Telecommunication
Automotive
Media &
Publishing
Utilities
Travel &
Tourism
Transport.
&
Logistics
Multibusiness
Medical
Technology
1
-8
-12
-49
80
93
83
Pharmaceuticals
Pulp and
Paper
Value creation of German chemical companies

in the global context
5 years (20062010)
(20072011)
Rank (n=318)
10 years (20022011)
Quartile TSR (p.a. in %)
Rank (n=269)
20 years (19922011)
Rank (n=164)
LG Chem
Honam Petrochemical
Fuchs Petrolub
K+S
BASF
Linde
Fuchs Petrolub
BASF
Linde
EMS-Chemie
Bayer
Givaudan
Fuchs Petrolub
18.9%
H&R
Linde
Syngenta
K+S
BASF
14.1%
Bayer
H&R
EMS-Chemie
6.6%
Syngenta
Symrise
Lanxess
K+S
17.9%
Honam Petrochemical
LG Chem
IFF
8.7%
Givaudan
6.8%
Kuraray
-4.6%
2.5%
1.9%
Asahi Kasei
Wacker Chemie
H&R
-40
-20
Clariant
0%
Mitsui Chemicals
Clariant
20
40
annual TSR1
60
-40
-20
0%
20
annual TSR1
40
60
-40
-20
0%
20
40
60
annual TSR1
1. TSR derived from calendar year data in local currency

Note: Worldwide industry sample based on Thomson Reuters DataStream supersector segment excluding firms not continually listed within the respective timeframe
Source: Thomson Reuters DataStream; BCG analysis
11
Honam Petrochemical
Observations in value creation patterns in the

global chemical industry in the past 5 years
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 specialty
chemicals business modelsdriven by the ability to manage differentiated business models
Observation
13
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 their
own 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 have
to "localize" their global business models
Regulatory pressure on the chemical and adjacent sectors (e.g., power) will lead to increased costs in
Europe and a potential reduction of European industry competitiveness
Larger and integrated new "megasites" in the Middle East and in Asia copy successful European
examples
Are there unique advantages for European based value add

in production, innovation and business management?
14
Global energy and geopolitical trends create challenges for

the European and German based chemical industry
Asian and Middle East chemical companies gain importance

Global top 10 chemical companies 19802011
1980
Chemical
sales (B$)
1995
Chemical
sales (B$)
2011
Chemical
sales (B$)
14.1
24.2
79.6
14.1
22.1
60.0
13.8
21.2
58.1
13.7
18.0
57.9
13.7
17.9
50.6
10.6
15.9
50.6
10.0
15.3
38.0
8.4
15.1
37.3
7,6
14.5
33.0
10
7.0
13.3
26
PetroChina
Rank
29.6
6.3
Several new leader are part of national economic agendas

"decision making beyond IIR and quarterly reporting"
Note: Asian and Middle East companies in orange boxes
Source: Chemical and Engineering News, ICIS Top 100, Chemical Week; Company websites; BCG analysis
16
Many factors influencing the future of the

European chemical production base
Overview of most relevant system dynamics
Self-sufficiency
policies in growth
regions
European
chemical demand
Cluster
competitiveness
Changes in
trade balances
Relocation of
networks
towards
growth regions
Asset
invests
Share of new
invest into
growth regions
Innovation
invests
Relocation
of decision
centers
Investment
decisions of the
chemical industry/
companies
Invest focus
on competitive
clusters
Exit hurdles
non-competitive clusters
Changes in the
European chemical
production base
End-industry
production and
innovation
networks
European
competitiveness
in specific
segments
Raw
material
differentials
New advantaged
capacities in
growth regions
Industry
structure
Public and
political sentiment
Share of
SMEs
GDPdriven
Growth of
segment
"55+"
Share of
foreign asset
ownership
Global market position

of European-based
ChemCos in spec.
segments
Perception shaping
18
Size
(employees)
Region
Rheinland-Pfalz (Mainz), DE
40,075
Dsseldorf, DE
25,284
Vlaams Gewest (Antwerpen), BE
21,937
Rhne-Alpes (Lyon), FR
20,361
Istanbul, TR
18,133
Darmstadt (Frankfurt am Main), DE
16,250
Kln, DE
15,928
Ege (izmir), TR
10,587
Mnster, DE
9,590
Cheshire (Chester), UK
9,108
Nordwestschweiz (Basel), CH
8,549
Large
Small to medium size
Value added provided by industrial

parks and industry cluster
Better access to raw materials
(for chemical industries)
Easier movement of final outputs as
inputs to other downstream sectors
Reduction in energy footprint and
increased efficiency
Common investment in required
infrastructures (rail, ports, pipelines, ) reduce investment
requirements and minimizes
environmental footprint
Opportunities to coordinate and
cooperate in key fields (distribution,
R&D, purchasing, )
Option to leverage larger scale
projects though associations
.......
A unique "German advantage": cross-industry production, innovation

and supply chain clustersdriven by the "Mittelstand champions"
Source: The role of clusters in the chemical industry; BCG analysis
19
European Advantage (I): The competiveness of chemical sites

and clusters in Europe will become even more decisive
European Advantage (II): Innovation and

orchestration of chemical value chains
Selected key topics
Technologies
Organic/inorganic feedstock
Energy efficiency
Energy
Proven technologies
Chemical
reactions
Energy efficiency
New process technologies
Products
Low carbon intense products
Energy efficiency
Enabling precursors/products
New feed1 stocks based

on gas/coal
Boosted by direct public

funding on global level
Several technologies with
limited yield established
White bio1 technology
Bio-processing unlikely
to substantially match
traditional chemical processes in terms of volume
Energy
1 storages
Boosted by new energy

initiative
Multiple systems, but no
proven technology available
New feed2 stocks based

on biomass
Biomass may become

more important, but still
unlikely to match 'traditional'
capacities by 2020
Biomimetric
2 catalysts
Resource efficiency driven

Selected systems in differ.
development stages
Limited commercializ. yet
Leight
2 weighted
materials
Driven by enhanced energy

efficiency in transportation
New high efficient polymers
to be commercialized
Organo3 electronics
Boosted by CE trends and

PV thinfilm application
First conducting polymers
commerz.in selected applic.
Water scarcity Global key challenge, driven

and means of
by climate change/regulation
3 alternative
Proven technology avail.
energy input
Next gener. to be developed
Improving bio- Boosted by demographics

Broad R&D topic landscape
3 processing
Different maturity of multiple
with GMO
applications in food and feed
CO2 as new
4 building
block
Key issue thermodynamics

CO2 utilization only with
limited potential to solve
climate challenge
Methane
4 coupling
Key driver abundant global

gas resources
Still unmatured topic, due to
thermodynamic challenge
Chemicals for
4 enhanced oil
recovery
HC availabilty pattern shift

New gen. of perf. chemicals
beyond classical surfactants
about to be commercialized
Noble earth
substitution in
5 industrial
application
Rapidly taken up, since key

threat across all industries
No alternative solutions
developed yet
Process
5 intensification
Energy and raw material

efficiency major driver
Continuous focus resulting
in new process technologies
Active agro
5 ingredients
Driven by demographics
Multiple existing substances
Crop industry leaders foster
R&D to sustain AI-pipelines
Key R&D topic

Driver and maturity
Source:
Germany has a unique value proposition

in cross industry innovation
20
Feedstock
Value creation of German pharmaceutical

companies in the global context
Rank (n=306)
10 years (20022011)
Rank (n=248)
Novo Nordisk
18.5%
Merck KGaA
Pfizer
Morphosys
Novartis
Bayer
Biogen Idec
5.9%
Merck KGaA
Sanofi
Qiagen
Evotec
-20
0%
20
40
annual TSR1
Novo Nordisk
13.2%
Biotest
Biogen Idec
14.1%
Sanofi
Novartis
Bayer
4.2%
Roche
Bayer
Pfizer
6.8%
AstraZeneca
Novartis
Morphosys
Pfizer
Qiagen
Evotec
-4.0%
Stada
-40
Rank (n=90)
Novo Nordisk
Biogen Idec
Biotest
AstraZeneca
20 years (19922011)
60
-40
-20
Stada
Biotest
Sanofi
Astellas
-2.4%
1.9%
Kyowa Hakko
Immunogen
0%
20
annual TSR1
40
60
-40
-20
0%
20
40
60
annual TSR1
1. TSR derived from calendar year data in local currency

Note: Worldwide industry sample based on Thomson Reuters DataStream supersector segment excluding firms not continually listed within the respective timeframe
Source: Thomson Reuters DataStream; BCG analysis
21
5 years (20062010)
(20072011)
Leading pharma companies emerged from M&A

1996
1997
1998
1999
Pfizer
Warner
Lambert
Pharmacia
& Upjohn
Upjohn
Pharmacia
Monsanto
Glaxo
Glaxo
Wellcome
SmithKline
Beecham
Wellcome
Zeneca
2000
J&J
Genentech
Centocor
Sandoz
Fisons
Rhone
Poulenc
Hoechst
Marion
Merrel
2002
2003
2004
Roussel
Uclaf
Synthlabo
Note: Only a selection is shown on this slide
Source: Company webpage; BCG analysis
2009
2010
2011
Pfizer
Pharmacia
Bayer
Wyeth
Bayer
Schering
AG
GSK
Inspire
Merck
&Co
Rosetta
AstraZeneca
MedImmune
Chugai
ScheringPlough
Guangdong
BeiKang
Merck &
Co
Astra
Zeneca
Anadys
Roche
Crucell
J&J
J&J
Alza
Novartis
Chiron
Aventis
HM
Roussel
Sanofi
2007 2008
KingPharma
Ciba
Rhone
Poulenc
2005 2006
Pfizer
Astra AB
Roche
2001
SanofiSynthlabo
Alcon
SanofiAventis
Zentiva
Legend:
Buyer
Target
Year when it happened
23
1995
Pharmaceutical market still dominated by US and EU players

Global top 10 pharmaceutical companies 19802011
1980
Pharma
sales (B$)
1995
Pharma
sales (B$)
2011
Pharma
sales (B$)
1.6
9.7
56.3
1.4
9.6
51.5
1.4
7.8
40.1
1.2
7.7
39.3
1.2
6.8
37.0
1.1
6.5
34.5
1.0
6.2
34.3
1.0
6.1
27.6
1.0
5.7
25.8
0.9
5.5
23.9
10
Smith Kline
Bristol-Myers
Source: IMS Health; BCG analysis

Rank
24
The future of value creation in the German chemical and

pharmaceutical industry
Obviously the global context matters
2-speed global economy, the rise of state owned enterprises in chemicals, self-sustainability
agenda in pharma and in chemicals in many growth regions
To grow profitably and to create value European and German based chemical and
pharmaceutical 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 with
differentiated 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 sites
and clusters
Cross-industry innovation and production cluster are largely a unique German advantage
driven by the unmatched density of "Mittelstand-champions"
25
Company perspective

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>> PERSPECTIVES_2012

THE FUTURE OF CHEMICAL AND PHARMACEUTICAL

The future of value creation in the German

Profitable growth: Key lever for sustained value

Free cash flow

Profitable revenue growth

Draftfor discussion only

However: Growth alone does not automatically create value

(S&P 500, 19922011)

Growth through value-eroding acquisitions

Average annual TSR (%)

Growth that requires too much capital

Growth that increases risk

Growth that reduces the P/E

Average annual revenue growth (%)

Draftfor discussion only

We are in a two speed world: Asia expected to contribute

Asia (ex-Japan) accounts for 45%

20102025, GDP growth (%)

20102025, GDP growth (Trillion US$)

Capturing profitable growth in Asia drives business model changes

Draftfor discussion only

More than 60% of the total global demand growth in

14% North America

10% Western Europe

"Pharmerging": Huge growth differential vs.

13% North America

Draftfor discussion only

Divergence in demographics: In mature markets 55+

Consumer spending ($K)

Consumer spending ($K)

Consumer spending ($K)

What is the implication for German chemical and

Draftfor discussion only

5 Year value creation by industry sector

Average annual TSR, 2006-2010 (%)

Industry weighted average

Draftfor discussion only

Value creation of German chemical companies

Quartile TSR (p.a. in %)

Quartile TSR (p.a. in %)

Quartile TSR (p.a. in %)

1. TSR derived from calendar year data in local currency

Draftfor discussion only

Observations in value creation patterns in the

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

Draftfor discussion only

Are there unique advantages for European based value add

Draftfor discussion only

Global energy and geopolitical trends create challenges for

Asian and Middle East chemical companies gain importance

Several new leader are part of national economic agendas

Draftfor discussion only

Many factors influencing the future of the

Global market position

Draftfor discussion only

Vlaams Gewest (Antwerpen), BE

Darmstadt (Frankfurt am Main), DE

Value added provided by industrial

A unique "German advantage": cross-industry production, innovation

Draftfor discussion only

European Advantage (I): The competiveness of chemical sites