2. White Paper on Global API Market
Background
The global Active Pharmaceutical Ingredients (API) market is in
turmoil. Austerity measures in Europe are putting pressures on
margins for drug manufacturers. For instance, in the past, Germany
enjoyed a free price setting mechanism which had led the pharma
companies enjoy high prices of patented pharmaceuticals.
But, since the economic downfall in region, Germany started seeking
chances to curb its expenses and in order to control increasing
pharmaceutical spending, passed the Act for Restructuring the
Pharmaceutical Market in Statutory Health Insurance (AMNOG)
which came into effect on 1st January 2011.
According to the new regulation, pharmaceutical manufacturers have
to demonstrate the additional therapeutic benefit of the newly
approved pharmaceutical compared to its appropriate comparator.
According to the level of additional benefit, pharmaceuticals will be
subject to price negotiations between the Federal Association of
Statutory Health Insurance Funds and the pharmaceutical company
concerned (or assigned to a reference price group in case of no
additional benefit).
Furthermore, German drug prices are frequently used as a reference
point by healthcare providers in other European countries. This has
put a severe pricing pressure on drug manufacturers which has led to
many look for alternative ways to decrease their cost of
manufacturing in order to survive in the harsh market.
In the US, though the rising housing market and energy sector
suggest that the economy is rebounding, sequester cuts and austerity
measures continue to hamper the growth of the pharmaceutical
industry. It has been observed that players are now actively focusing
on developing APIs that offer premium returns and are less prone to
generic competition and outsourcing their high-volume, low-margin
APIs to low cost manufacturers in third world countries.
Since the last decade, India and China have been the destination of
choice for manufacturing of APIs due to their ability to provide labor
at lower wages than that available in developed nations.
But, of late, wages in India and China are rising. This has led a few
western players to popularize the opinion that they might re-think of
bringing their API manufacturing back to their bases.
All these speculations and activities in the industry prompted
RNCOS in writing this paper, which reflects the latest status of an
industry that is a multi-billion dollar enterprise, affecting the very
essence of human life.
In 2012, the global market for Active Pharmaceutical Ingredients
stood at US$ 113 Billion. In the next 5 years, it is expected to witness
good growth, with highly variable growth rates across geographies.
While it is expected to grow at high double-digit growth rates in India
and China, EU is expected to register a CAGR of around 6.3% during
the forecast period. Growth in the US API industry will also be
moderate and propelled more by the rise in revenue from specialty
drugs.
The global API market which
stood at US$ 113 Billion in
2012, is slated to growth at a
CAGR of 7.6% during 2012-
2017.
3. White Paper on Global API Market
Trends
Initially, when the western economies dominated the global API market, the scenario was
completely different. APIs were relatively much simpler in structure and were produced in
large quantities. Most pharma companies thus met all their API requirements through in-
house production only. With time, as scientists furthered their knowledge of the human
biology, technology advanced, resulting in complex molecules with multiple chiral centers.
For instance, Zantac is a relatively simple and easy-to-make achiral molecule, whereas Lipitor's
active ingredient, which has two chiral centres, poses much more significant challenges during
synthesis. Rise in effectiveness of the API has also reduced its dosage, reducing its overall
volume consumption, a trend which s expected to continue.
Table 1: Comparison of Normal Daily Dosage of Top-Ten Small
Molecule Drugs (1985 and 2012)
1985
Drug mg/day
Tagamet 800
Zantac 150
Adalat 60
Feldene 20
Inderal 160
Tenormin 100
Naprosyn 750
Voltaren 100
Aldomet 1000
Claforan 2000
2012
Drug mg/day
Advair Diskus 0.5/0.1 (fluticasone/salmeterol)
Crestor 10
Nexium 40
Abilify 10
Cymbalta 60
Plavix 75
Spiriva 0.018
Lipitor 20
Singulair 10
Glivec 400
Source: IMS Health; RNCOS
While it is expected to
grow at high double-
digit growth rates in
India and China, EU is
expected to register a
CAGR of around 6.3%
during the forecast
period. Growth in the US
API industry will also be
moderate and propelled
more by the rise in
revenue from specialty
drugs.
4. White Paper on Global API Market
As the drug dosage gradually reduced, it
became difficult for pharma firms to
maintain their in-house manufacturing
units, which now were underutilized due to
their overcapacity. Thus, began the trend of
disinvesting own manufacturing units and
outsourcing the production of intermediates
and APIs to cost effective custom
manufacturing firms in regions of India and
China.
Also, when it comes to manufacturing,
pharmaceutical companies must make a
decision whether to invest significant
amounts in developing new capabilities with
the right capacity available the right time, or
to work with partners who already have the
required capabilities and capacity available.
Due to financial pressures, investing in new
capabilities is difficult. Additionally, an
increasingly complex regulatory
environment, associated with rising costs of
maintaining compliance, is frequently cited
as another reason for outsourcing.
Today, companies in the pharmaceutical
industry are frequently turning to Contract
Research Organizations (CROs), Contract
Manufacturing Organizations (CMOs), and
Contract Research and Manufacturing
Services Organizations (CRAMs) to fill
knowledge and technology gaps and realize
cost-savings. The extent varies from
company to company where some, like
GlaxoSmithKline, keep just the final step, or
a couple of late key steps, of the synthesis in
house and outsources everything else,
others, such as Merck, outsource just the
very early steps. AstraZeneca is another
instance of a large pharma company that has
outsourced much of its manufacturing,
although it retains manufacturing sites in
key territories.
Another factor that has tremendously
boosted the growth of CMO/CRO/CRAMS is
the rise of the generics. From the initiation
of the generics market in 1984, post the
passing of the Hatch/Waxman Act, to the
present multi-billion dollar industry,
generics have picked up quick pace in a short
span of time. Now, the situation is so
competitive that players in the generics
market have filed ANDA with the US FDA,
even before NDA approval. Generic players
utilize the available infrastructure of CROs
to research the molecule and if approved,
mass produce it from the CMO that offers
the most competitive price.
The competition is so intense, that a recent
study by Thomson Reuters reflected that
players are now targeting even drugs with
revenue of more than US$ 20 Million. This
figure is starkly lower than the previous
industry estimates that suggested that only
drugs with revenue of more than US$ 500
Million attract generic players. The global
generics market is expected to grow at a
CAGR of around 9.4% between 2012-2017
which will further fuel the rise of CMRs,
CMOs and CRAMs, especially in the regions
of India and China.
• Cost effective solution for Big Pharma.
• Advanced technological know-how and
infrastructure.
• Good regulatory compliance record.
• Growth in generics market.
Figure 1: Global - Price Structure for Pharmaceutical
Fine Chemicals in US, India and China (%)
5. White Paper on Global API Market
It is worth mentioning here that a few players have recently commented that rising wages in regions might prompt them to return work to
their bases in EU and US. However, our analysis reveals that this is not expected to happen for at-least another decade. Differences
between labor cost in US, EU and India, China are huge and negate the economics of manufacturing APIs in West.
For instance, while an operator charges around US$ 60,000 per year in US, the cost to maintain an operator in EU may reach over US$
70,000 per year. In a stark contrast, operator costs in India and China ranges from US$ 5,000 - US$ 8,000 per year. Besides, if we compare
the price structure for pharmaceutical fine chemicals in the US, India and China, India has a leading age with reference to all indicators
(profit margin, raw materials and conversion costs). The US has the highest conversion costs (at 50%), followed by India (at 33%) and
China (at 30%).
Biological drugs are witnessing increasing demand worldwide, mainly due to their
increased specificity and lower associated side-effects. In 2012, five of the top ten
selling prescription drugs were biologics.
Companies are thus strategically shifting their focus on biologics, which are expected
to grow at a CAGR of around 9.1% in the next 5 years, a growth rate much higher
than the one expected for small molecule drugs.
Biological drugs require initial high investment. They need separate infrastructure
with facilities for fermentation and other biotechnological processes. Also, a more
dedicated and stringent quality control system is required. Biological APIs present
high entry barriers, but equally good returns.
Cancer remains the area of focus for API manufacturers. Both branded and generic cancer drugs generated revenue worth around US$
61.6 Billion in 2012. By 2016, it is expected that the segment will receive increased focus from players and become an approximately US$
87 Billion market.
Currently, the more specialized molecules for cancer therapy require highly sophisticated infrastructure. Such molecules, which span
across indications, are called as High Potency APIs (HPAPI).
An API is classified as an HPAPI, if it has an occupational exposure limit at or below 10 micrograms per cubic meter of air, which requires
intensive investment. The HPAPI market is driving the API market growth globally at a fast rate. It was valued at US$ 10 Billion in 2012,
and is anticipated to grow at a CAGR of around 8.9% till 2017. To meet the increasing demand, some companies are considering investing
in new HPAPIs production facilities, while others are planning the expansion of their production capacity of HPAPIs to meet the fast
growing demand. These activities are more notable in the developed economies than the emerging markets.
6. White Paper on Global API Market
Opportunities
The industry is now well over the edge of the much-vaunted patent
cliff, where many of the world's biggest selling drugs lose their
exclusivity. While this means lower profits for the originator
companies, it is also indicative of increased opportunities for generics
companies and the API manufacturers who supply them. Reduced
prices of drugs have been observed to shoot up the volume
consumption of drug, as payers fund them readily, increasing
accessibility. The consequent increase in API volume required will
create immense opportunities for API manufacturers.
Besides, API manufacturers with capabilities for producing
biotechnological APIs will benefit from the boost the biosimilar market
will receive. Around twelve blockbuster biologic drugs are about to go
off-patent in the coming years. Epogen, Procrit, and Neupogen offer
immense opportunities for biosimilar companies to enter the US
market.
Table 2: Patent Expiries of Popular Small Molecule Drugs
S. No. Tear Drug
1 2013 Cymbalta
OxyContin
Aciphex
Xeloda
Zometa/Reclast
Lidoderm
Temodar
Asacol
Niaspan
2 2014 Nexium
Celebrex
Evista
3 2015 Abilify
4 2016 Crestor
Zetia
Source: Various Industry Sources
Figure 2: Expiry Dates for Patents on the 12 Major Biologics
* EU provides 10 years of data exclusivity, US BPCI Act provides 12 years exclusivity
** In the UK. Other major EU markets follow on 28 August 2015.
*** Aqueous formulation patent runs until 2023, but dry powder biosimilar possible.
Source: Bernstein Research
