At first glance, the global active pharmaceutical ingredient segment looks gloomy for industry suppliers. After all, overcapacity and price pressures continue to impact sales for many companies, and the continued strength from India and, to a lesser degree, China, have some API producers scrambling.
Yet, several positive developments in terms of new legislation and changing attitudes about sourcing are expected to give the API market a lift in 2006. Furthermore, several companies are forecasting good growth in 2006. They point to strong product pipelines, innovative chemistry and a sound strategy to handle any challenges from India and Asia.
Overall, industry sources put the API market at about $17 billion worldwide. According to Enrico Polastro, vice president and senior industry specialist, Arthur D. Little Benelux N.V./S.A., generics account for $12 billion of that total, with custom APIs accounting for the rest. Polastro estimates that the volume growth rate for generics is about 10 percent, compared to eight percent for custom APIs. Unfortunately, the growth rate in value terms “is considerably less for both,” according to Polastro.
According to Mark Cassidy, director, small molecules, Dowpharma, the contract manufacturing area will continue to be a challenging one for many players. “Companies that stick to their areas of strength and provide differentiated offerings will have a bright future despite all the challenges the industry faces,” said Cassidy.
Chirality is one area where Dowpharma differentiates itself from other CMOs. Cassidy predicted that the need for chiral solutions will remain strong across many therapeutic classes for both large and small companies. But not every supplier will benefit from greater demand for chiral solutions, according to Cassidy.
“There is a very diverse range of chiral challenges. These require a correspondingly broad range of capabilities from a CMO,” he observed. “There aren’t too many CMOs that can offer the breadth and depth of Dowpharma. We have a chiral tool box that is able to provide the optimum solution to our customer’s needs, and very importantly, we are flexible in our approach to finding the best business model to support this.”
Dowpharma has a proven history of helping its customers through the entire product development process—from early phase development all the way through to commercialization. Cassidy noted that Dowpharma’s experience enables it to eliminate many of the unknowns that are common in pharmaceutical development.
In addition to providing a range of services to Big Pharma, Dowpharma has a proven history in supporting many virtual pharmaceutical companies who want take advantage of its experience and expertise from areas such as process development, regulatory support and analytical through to secure cGMP product supply.
Dowpharma has been collaborating with virtual Pharma companies since the mid-1990s, and over the years has supported a number of successful launches—and there’s more to come, if Cassidy’s predictions for 2006 ring true.
New Regulations Provide Hope
More and more API suppliers must help their customers overcome the regulatory minefield. But not all new regulations create headaches—some actually provide relief. According to Polastro, the passage of the Bolar Roche Provision in the Waxman-Hatch Patent Restoration Act enables an API supplier to produce and sell the API before the expiry of the marketing exclusivity period for purposes relating to experimentation and registration as set in the federal law.
“Such provisions did not exist in the EU Supplementary Protection Certificate adopted in 1992, preventing de-facto European-based API producers from being qualified as bulk sources before the effective marketing exclusivity date in their home country,” noted Polastro. “This provision is now included in the new EU pharmaceutical law adopted in 2005.”
The analyst also applauded the EU’s passage of new directives to ensure that good manufacturing practices are met by any and every company that supplies APIs to Europe. In addition to ensuring the health of the European consumer, the directives are expected to help level the playing field between European, Indian and Asian suppliers.
“Hopefully, the new directives will provide some protection against low-quality APIs manufactured outside of Europe,” said Polastro. “It looks good on paper, but actual enforcement of the directives may be problematic. Still, it is a step in the right direction.”
Supplier Turned Poacher
Aside from new regulations that could make it difficult for non-European API producers to supply products to Europe, some drug companies have become wary of purchasing APIs from suppliers who ultimately become direct competitors.
“Some western customers are starting to get aggravated by Indian suppliers who are increasingly offering final dosage forms,” noted Polastro.
Rather than purchase APIs from these companies, which include Ranbaxy and Matrix, more western pharmaceutical companies are turning to China or returning to western European and U.S. suppliers whose sole business is API manufacturing.
Polastro noted that when Citapram’s patent protection expired in October 2004, a number of bulk suppliers from India began offering their own generic versions of the drug at very low prices. That prompted a price war and led to the collapse of the Citapram market.
“As a consequence, several U.S. generic companies elected not to launch their own generic versions of Citapram,” he recalled.
With Zocor set to come off patent soon, Polastro foresees a similar scenario.
“Competition for large or high profile products is unbelievable,” he observed. “The supply capacity for generic symvastatin is five-times demand, which could lead to a collapse in prices. Large volume or large value drugs will all face this kind of pressure in the future.”
Pfizer and Merck Shutter Facilities
While generic players face a battery of issues in 2006, innovators must deal with some challenging issues of their own. Polastro noted that with the number of new projects on the decline, demand for custom synthesis has been on the decline as well. In fact, according to the analyst, several pharmaceutical companies have actually in-sourced, rather than outsourced, their API production.
The good news for API producers is that both Pfizer and Merck both recently announced major restructuring projects that include plant closures. Polastro expects that these restructurings should create more demand for APIs.
And there have been a number of other bright spots for Big Pharma. The Avian flu scare has helped turn Roche’s Tamiflu into a star performer during the past year. With government authorities stockpiling the drug, Roche has actually had to outsource production to keep up with demand.
“This illustrates just how volatile the market can be,” said Polastro. “Tamiflu was, at best, a marginal product, with demand having largely failed to keep up with expectations.”
Now industry observers are wondering if the surge in demand for Tamiflu is a one-time event or if there will be recurring demand for the drug in years to come. Polastro, for one, said it is too difficult to predict what the future holds for Tamiflu.
Finally, the analyst noted the API market could be affected as more Indian companies enter the custom-synthesis market. Companies are acquiring western API producers to boost credibility, gain access to customers’ portfolios and ultimately transfer production to India in an effort to leverage lower production costs.
But Polastro speculated that not every pharmaceutical company would welcome the move, as the lower costs could ultimately hurt the market in the long run.
While the overall API market remains difficult to forecast, several producers told Pharma & Bio Ingredients that 2006 is already shaping up to be a very good year. ACIC, Brantford, Ontario, Canada, posted strong results in 2005 due to a number of patent-challenge victories, according to Chris Rayfield, the company’s vice president of sales and marketing.
“We’ve seen a lot of growth on the generic side, especially in anti-virals and antidepressants,” Rayfield said.
The new year is shaping up to be a good one too for the company. ACIC has projects already in the filing stage, as well as in various stages of R&D.
“We expect a couple of significant approvals this year,” he predicted. “Overall, we expect growth to at least match the double-digit gains made in 2005.”
In North America, ACIC has solidified its sales presence in the U.S. and opened a new corporate headquarters in Brantford that houses the majority of the sales and customer service team. To keep pace with demand for APIs from Asia, ACIC has formed new strategic alliances with a number of Asian companies.
Pfizer CentreSource also has developed a new strategy to compete with suppliers from all over the world. For more than 40 years, the company (originally Upjohn) has sold steroids to third parties. Over the years, the company has seen competitors come and go, but the recent rise of new suppliers from Asia has created some unique challenges.
Doris Scheffel Symonds, vice president, global marketing, fine chemicals, Pfizer CentreSource, noted that the company has used unique manufacturing processes for decades. In fact, Pfizer CentreSource’s current use of sterol-based chemistry requires just a single step to manufacture steroids. That’s a sharp contrast to current Chinese production methods that are based on wild ginger plants and involve several chemical conversions.
Still, Scheffel Symonds acknowledged that the Chinese are here to stay.
“The Chinese are formidable competitors. To sustain our position, we have a new manufacturing strategy that combines bio-conversion tools in Kalamazoo, MI and later-stage chemical conversions which will take place in Asia.”
Early next year, steroids from one of Pfizer CentreSource’s partner will be available. Pfizer will oversee all quality issues and will file all DMFs, as well as maintain all distribution and marketing functions.
“We’re combining all the guarantees that come from working with Pfizer with Asia’s lower costs,” said Scheffel Symonds. “It’s a large project, so we’re shrinking our portfolio and moving it out in stages over the next three to four years.”
Pfizer CentreSource’s customers have been well-informed about the company’s new Asian strategy.
“In the past four or five years we’ve seen the urgency of the situation,” recalled Scheffel Symonds. “We’ve spent a lot of time and effort to find the right partner. Our customers understand the strategy and appreciate the approach.”
SAFC’s Steady Approach
While many API producers grapple with overcapacity issues, SAFC is actually searching for more capacity to meet its customers’ needs. Over a five-year period (2000 to 2004), the company invested more than $100 million to improve quality and capacity. With all those goals achieved and plenty of cash on-hand, the company established new goals going forward:
• Become a top 10 player in the fine chemical space it operates in;
• Achieve a 50:50 ratio of custom manufactured to semi-bulk (up from 20:80);
• Fill its 50% spare capacity;
• Make SAFC the first choice for pharmaceutical companies seeking custom manufacturing and development services; and
• Deliver 12% growth.
To achieve these loftier goals, in April 2004, the company acquired UltraFine in Manchester, UK. It added 50 PhDs in organic chemistry, doubling the number of organic chemists at SAFC. Two months later, the company acquired Tetrionics, a high-potency API expert based in Madison, WI.
With those two new businesses in place, the company unveiled its new SAFC business at CPhI in Brussels, Belgium. At the time of the announcement, the fine chemical arm of Sigma-Aldrich represented 20 percent of corporate sales, but company executives were eager to add more.
A year ago, the company announced the acquisition of JRH. It represented the biggest acquisition in company history and made SAFC the market leader in cell cultures. In fact, more than 40 percent of approved cell culture-based drugs use JRH media.
“With all these pieces in place, we delivered extremely strong growth through the third quarter of 2005,” said Ed Roullard, vice president of marketing and supply chain. “(2005) was easily the best year we’ve had since 2001.”
The new SAFC is focusing on high-growth sectors, investing in technology and developing its supply chain. At the same time, it is changing its customers’ perception of SAFC’s role as a pharmaceutical ingredient supplier. That’s because the company was probably best known for the Sigma-Aldrich catalog business that boasts more than 85,000 ingredients for a variety of industries. In contrast, SAFC was to be known as a provider of pharmaceutical solutions.
The campaign seems to be working. Through the third quarter of 2005, SAFC’s sales were up 65 percent. Excluding the gains made by the acquisition of JRH, sales rose 17 percent. At the same time, the company has achieved many of the goals it set in 2004.
“Our business is now 60% custom and 40% semi-bulk and capacity is between 70-80%,” said Roullard. “That’s ideal because we’re busy, but we can still have the flexibility to fill customers’ requests as they arise.”
In fact, SAFC is determined to expand to meet its customers’ needs as they move beyond Phase II into full-scale production.
“We have several projects in Phase III right now and our customers need extra capacity if we are to take them to the commercial phase,” said Roullard. “So we’re looking to add capacity, through either plant expansion or acquisition.”
“We can leverage global, robust scale-up processes,” added Amanda Halford, director of marketing. “Our aim is to help customers reduce their time to market.”
Moreover, Halford said the company’s portfolio of small- and large-molecule solutions make SAFC well-positioned to adapt to changes in the market, especially as biopharmaceuticals capture an increasing share of the overall market.
At the same time, David Feldker, vice president of SAFC, noted that by offering small and large molecules, customers can go to one source for their API needs.
“We offer a lot of combinations of small and large molecules,” he explained. “For example, some customers want to combine antibodies with small molecules to help deliver the effect.”
Particular areas of growth for SAFC could come from oncology, neurology and cardiovascular drugs.
“We’ve been very methodical on how we expanded our businesses while giving the customers what they need,” said Feldker. “Now we’re ready to move beyond Phase IIb, and we’re very interested in adding capacity through acquisition.”
Obviously, API producers are taking a variety of avenues toward success. With capacity still expected to outpace demand this year, it will be interesting to see which companies finish ahead of their competitors in the later part of 2006 and into 2007.
