global api market - july'13

White Paper on Global API Market

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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 whichstood at US$ 113 Billion in2012, is slated to growth at aCAGR of 7.6% during 2012-2017.


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 SmallMolecule 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 togrow at high double-digit growth rates inIndia and China, EU isexpected to register aCAGR of around 6.3%during the forecastperiod. Growth in the USAPI industry will also bemoderate and propelledmore by the rise inrevenue from specialtydrugs.


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 PharmaceuticalFine Chemicals in US, India and China (%)


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.


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

global api market - july'13

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