Based on the firm's trip to Bangalore and feedback from its consultant, Goldman Sachs believes that PM's current sucralose manufacturing process is not fundamentally novel in the sense of being completely different in concept from previously disclosed processes.
However, it appears to have novelty of important detail in its key stages - though it warns that "legal challenge cannot in our opinion be ruled out".
"We recently visited Pharmed Medicare (PM) in India, one of the increasing number of companies that claims it can supply sucralose in commercial quantities and challenge Tate & Lyle's monopoly," said the firm in an update on sucralose competition dated 2 April 2006.
"Based on our trip and feedback from our consultant chemist on PM's capabilities, we believe Tate & Lyle could face competition sooner than the market expects."
The sweeteners market is very attractive. Sectoral growth is pitched at about 8.3 per cent year on year until 2008, far out-pacing food industry growth currently pegged at around three to four per cent. And with consumers increasingly turning towards sugar-free and low-calorie products, food makers are increasingly on the lookout for cheap sugar alternatives.
Such demand has been highly lucrative for Tate & Lyle. Sales of sucralose, a sugar-derivative that is 600 times sweeter, helped the company to record a first-half profit increase of 59 per cent. Tate & Lyle has enjoyed a virtual monopoly of the sucralose market withits patented Splenda product.
PM's ambition is ultimately to match Tate & Lyle's global sucralose capacity through the development of a process that does not infringe upon patents.
"Tate & Lyle has always said that to replicate the process on a large scale is very difficult, and they are absolutely right," Pharmed president Sundeep Aurora told FoodNavigator in January.
"Making sucralose is not something that it is easily transferable from the lab."
PM claims that it has around 80 chemistry and engineering staff and approximately 40 manufacturing staff working on producing commercial amounts of sucralose, upscaling and process development. Goldman Sachs has estimated that PM's current production is in the region of 500-1,000kg per month.
Pharmed claims that it is aiming to expand capacity to 1000 MT of sucralose pa.
"In our view, this may be overly ambitious in the near-term," said Goldman Sachs. "We believe that there is more to scaling up production than just putting in place bigger equipment.
"That said, we believe the research and development carried out by PM to date is thorough and highly professional and PM looks set to scale up production substantially over the next 12-15 months."
PM has also filed over 30 patents that are likely to start to come into the public domain over the next 12-18 months.
"In summary, we believe PM has what it takes for it to become a serious competitor to Tate & Lyle eventually and offer an alternative supply of sucralose," said the investment firm.
Goldman Sachs also said that it noted that the number of other suppliers especially in China claiming to offer commercial quantities of sucralose has been steadily increasing.
As a result, Goldman Sachs has retained an Underperform rating on Tate & Lyle, in the context of a Cautious coverage view.