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Pharmaceutical ingredients: Demand rises as industry evolves with new regulations in EU, US

8:54 AM MDT | October 14, 2013 | —Deepti Ramesh

Prasad: Exploring additional API capacity.
Edwards: Growth in outsourcing continues.
Schmitz: Focusing on late-stage projects.

Pharmaceutical ingredients makers are seeing a rise in demand particularly due to the growing emerging markets, experts say. Regulatory changes in the European Union and the United States, however, are changing the operating landscape significantly. There are also continued consolidations, and the competitiveness of Chinese and Indian manufacturers is waning, experts say. Producers around the world, however, remain optimistic and expect the emerging markets to play a key role in the future.

Demand for pharmaceutical ingredients continues to grow steadily largely because of emerging markets, experts say. “The demand for pharmaceutical ingredients, in volume terms, is growing at about 4%/year, driven by consumption in emerging markets such as China, India, and Latin America. Overall demand in the West, however, is stagnant and even slowing down in some countries, reflecting the impact of cuts in health-care budgets,” says Enrico Polastro, v.p. and senior industry specialist at Arthur D. Little (Brussels). “Demand, in value terms, is expected to grow at 2%/year. This is lower because of price erosion reflecting both competition from various producers and the leverage applied by their customers—pharmaceutical companies,” Polastro says.

Executives with Lanxess’s Saltigo subsidiary note the pharmaceutical industry’s continuing changes and challenges. “On the one hand, there are global economic uncertainties, increasing health-care costs, and health-care reforms as well as expiring patents,” says Wolfgang Schmitz, managing director of Saltigo. “On the other hand, markets are diversifying, and new fields of growth are opening up. The rapid development of the emerging markets, the rise in generics, and innovations in the fields of drug development and manufacturing processes will influence the pharmaceutical landscape.” Cost-efficiency is becoming more important for active pharmaceutical ingredients (APIs), he adds. “This is a challenge for custom manufacturers but also an opportunity for suppliers who strive for maximum efficiency and reliability.”

The outsourcing of pharma ingredients’ manufacturing continues to increase, and high-quality pharma ingredient manufacturing assets in the United States are seeing growing demand, says Cambrex (East Rutherford, NJ). “The global API market remains highly fragmented, but the number of novel new chemical entities [(NCEs)] is showing some recovery. Generic volumes [also] continue to grow. We are seeing worldwide demand for APIs continue to increase,” says Simon Edwards, v.p./global sales and business development at Cambrex. “Large pharma continues to announce the sale or closure of many plants as [it] rationalize[s] cost structures and focus[es] on R&D and sales and marketing, which, we believe, will continue to contribute to the overall growth in outsourcing.” For companies with the right quality, technology, portfolio, and market approach, there is an opportunity to expand, Edwards adds. “We see particularly strong demand for high-quality assets in the United States,” he says.

Frazier: Nanotechnology will become more important.

Pfizer CentreSource (PCS; Kalamazoo, MI), a separate operating unit within Pfizer, says that the pharmaceutical ingredients landscape is evolving with the implementation of FDA’s Generic Drug User Fee Amendments of 2012 (GDUFA); the European Union’s Falsified Medicines Directive; more stringent environmental, health, and safety (EHS) guidelines; and increased regulatory scrutiny in developed nations.

“More and more nations are updating their regulations to more closely mirror those of the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use [(ICH; Geneva)] consortium,” says Jeffery Frazier, v.p./global marketing, fine chemicals at PCS. “What [were] once termed nonregulated markets are rapidly disappearing. Gone are the days when a pharmaceutical ingredient could be looked at like any other fine chemical. We see, more and more, the extension of pharmaceutical-product-type regulations to raw materials. This is in the long-term good for the industry and the patient, but many firms will struggle with the complexity.”

The current size of the global API industry is about $60 billion, and about 50% of that is captive demand, Polastro says. The market remains very highly segmented, with each API often corresponding to a distinct segment, he says. The global supply structure is increasingly consolidating, and major capacity additions in the industry have been very limited in the United States and globally, Polastro says. “The only major capacity addition in the United States recently was carried out by Cambridge Major Laboratories [(CML; Germantown, WI)],” Polastro says.

CML, a producer of pharmaceutical intermediates and APIs, expanded its large-volume API manufacturing facility at Germantown earlier this year because of a significant increase in its late-stage and commercial API pipeline. On 2 October, CML and AAIPharma Services (Wilmington, NC), a provider of pharmaceutical analytical testing, product development, and manufacturing services, announced they would merge in a deal expected to close by the end of October.

Some companies have recently announced plans to close production plants. Boehringer Ingelheim (Ingelheim, Germany) announced in August that it will close its Petersburg, VA, API plant by the end of 2014, which will result in 240 job losses. The company had tried to sell the plant but failed to find a buyer. “This is a sign that competition is high and that profitability was inadequate to maintain the site,” Polastro says. Capacity reduction is starting to happen everywhere, he says. Saltigo closed its US pharma operations last year.

One positive development is the emergence of new products. “Several new products are emerging, like anticancer products or high-potency derivatives, pain control drugs, and opiates. And, manufacturers are also getting very excited about antibody-drug conjugates [(ADCs)],” Polastro says. ADCs offer a new treatment method for cancer in which cancer cells are destroyed in a more targeted way, and healthy cells are less affected.

“There is excitement around the development of ADCs, because they would greatly increase the selectivity of cancer treatment while decreasing side effects,” Polastro says. “There are several companies, including Lonza, Piramal [(Mumbai)], and Novasep [(Pompey, France)], that are interested. ADCs are attracting increasing interest, and there are various products in the development pipeline. Whether they will all make it to the market and if there will be major value associated with the supply of the drug-substance remains to be seen,” Polastro says.

China, India competitiveness wanes

A significant development in global pharmaceutical ingredients’ manufacturing is that the competitiveness of Chinese and Indian manufacturers is now being questioned, Polastro says. “In China, costs are increasing rapidly for labor, energy, and operating variables. Costs are also increasing in India, but this problem may have been alleviated to a certain extent with sharp depreciation of the Indian currency in recent months,” Polastro says. “If costs continue to rise in China, it could potentially lead to the revival of the competitiveness of Western manufacturers. This may eventually happen, and some customers in the West do prefer to buy domestically because of logistics, reliability, and security of supply. And, Western manufacturers have a perceived advantage when it comes to reliability and security of supply.”

Granules India (Hyderabad), a producer of APIs, intermediates, and formulations, says that Indian pharmaceutical ingredients manufacturers, on a macro level, are still competitive, but only a handful of companies will be able to profitably grow market share. “Companies can be competitive by focusing on improving manufacturing efficiencies through process innovation. This will require a paradigm shift because, historically, Indian pharma ingredient manufacturers have prioritized having a broad product portfolio,” says Krishna Prasad, managing director of Granules India. “Going forward, companies will need to optimize costs by focusing on a select product portfolio and understanding how to squeeze efficiencies out of those products. Indian pharmaceutical ingredients manufacturers must avoid being complacent and cannot rely only on a favorable exchange rate; they must build advantages in other ways.”

Granules India recorded total sales of 7.64 billion Indian rupees ($123 million), and the company’s API business recorded sales of Rs2.52 billion in the fiscal year ended 31 March, increases of 17% and 40%, respectively, over the previous fiscal year. Granules India expects further growth in the current fiscal year. “We expect total revenue to increase by more than 30%, with profits increasing at a substantially higher rate in the current fiscal year. We completed an expansion of our new formulation facility at Gagillapur, India, and we will be scaling up capacity throughout the fiscal year,” Prasad says.

The API business, accounting for 37% of the Granules India’s total sales, is currently the company’s largest business. The pharmaceutical formulation intermediates business accounted for 32%, and the finished dosage business accounted for 31%. The company, however, aims to focus more on formulations in the future and use APIs largely for captive consumption.

“The company is focusing more on formulation sales, which add more to the top and bottom lines compared with APIs. While APIs are important to us, we will be using our APIs more for captive consumption. Going forward, we expect our pharmaceutical formulation intermediates and finished-dosage business units to constitute 80% of total sales. We will service our key API customers but will use our APIs more for captive consumption,” Prasad says.

Granules India formed a 50-50 joint venture in 2011 with Ajinomoto OmniChem (Louvain-la-Neuve, Belgium)—a wholly owned subsidiary of Ajinomoto (Tokyo)—called Granules OmniChem, which is set to manufacture pharma intermediates and APIs at Vishakhapatnam, India. “The jv facility is expected to start validation batches by the end of 2013. The jv will be a big growth driver, and we expect it to add substantial revenue once US FDA approval is in place. The jv has a strong customer base, consisting of multinational pharma companies, and has selected the molecules it will manufacture. The jv will let Granules India enter the contract research and manufacturing services business with a partner who has an established track record,” Prasad says.

Granules India says it plans to grow its API business further. “We are exploring adding additional API capacity to support growth of our pharmaceutical formulation intermediates and finished-dosage business units. However, we do not want to expand with existing technologies and are actively working on new processes that will provide a competitive edge. The Granules OmniChem jv will further boost the API business. The jv facility is currently under construction, and we will add additional API capacity in the second phase. We are also looking at adding new APIs to our portfolio that will fit our business model. We will forward-integrate those APIs into finished dosages,” Prasad says.

Expanding Cambrex facility: The expansion of the Charles City API site finished in May.

Pfizer’s PCS recorded total revenue of about $261 million in 2012 compared with about $300 million in 2011. The fine chemicals business accounts for more than 50% of PCS’s annual sales. PCS says demand for pharma ingredients is increasing. “We clearly see a demand increase for many of our products, but it really depends on the individual market for the API. As populations in developing countries gain greater access to medicines, often the first to enter the market are older, more established molecules, and this bolsters the demand for these APIs. Thus, we see overall growth across our portfolio,” Frazier says.

The major challenges in the global pharma ingredients manufacturing industry are the “diametrically opposed pressures on cost and quality,” Frazier says. “We have seen increasing cost from our Chinese competitors as a result of their improvements in EHS and quality along with wage escalation. Drug substance costs are increasing, but many drug product marketers put continuous pressure on cost in the supply chain. The key to overcome these challenges is to innovate and bring down cost while maintaining the focus on quality,” Frazier says.

The majority of the products PCS markets in the fine chemicals business are manufactured at Pfizer Global Supply’s Kalamazoo facility, PCS says. “Kalamazoo, historically, has been a center for corticosteroid and hormonal steroid manufacture, which make up the bulk of our fine chemicals portfolio,” Frazier says. “The site is also Pfizer’s center of excellence for bioprocess development, which plays a key role in supporting our products,” he says.

PCS says that through continuous improvement efforts at Kalamazoo, the company continues to gain capacity by debottlenecking operations. “Outside of Kalamazoo, PCS continues to explore the use of other assets in the Pfizer Global Supply API network where the opportunity, technology, and asset make a good strategic fit,” Frazier says.

PCS says that it had explored the possibility of having some of its fine chemicals manufacturing done in other regions such as in Asia, but has decided to focus activities at Kalamazoo. “We had looked at partnering with other firms in the past, and, frankly, got quite a long way with that model. However, in the end, we were able to meet the goals of that project by leveraging our technological and scale advantages in Kalamazoo,” Frazier says.

Populations—and the need for medicines— continue to grow, driving growth. Additionally, the development of the emerging markets and increasing accessibility to medicines in these markets are also growth drivers, Frazier says. “On the other hand, the days of the multibillion-dollar blockbuster drug product, and thus the multi-ton API requirement, seem to be waning. With the ascendency of biotechnology-derived medicines and personalized medicines, the pharma ingredient business is changing. We see smaller, more flexible manufacturing as the future of the innovative pharmaceutical business,” Frazier says. “While, in contrast, the generic business may still require very large-scale manufacture for some APIs, more and more of the innovative business is going to smaller-volume, more-sophisticated manufacturing scenarios. As these products mature and move to the generic market, it will be interesting to see if the generic API business follows suit.”

Nanotechnology will become increasingly important as producers develop more innovative drug delivery vehicles that take advantage of that technology, he adds. “So, smaller volume, more innovative, [and] more targeted therapies, we believe, will become more of the rule rather than the exception,” Frazier says.

For Cambrex, the first half was challenging, but the company expects favorable conditions in the second half. Net sales in the first half decreased by 7.1%, to $135.9 million. “We are expecting a stronger second half of 2013,” Edwards says. “Cambrex continues to expect that full-year 2013 sales excluding the impact of foreign currency will increase between 8% and 12% over 2012 and that full-year 2013 Ebitda will be between $62 million and $68 million, an increase of 8–18% over 2012,” he says.

In May 2013, the company completed the expansion of its manufacturing facility at Charles City, IA, and has created over 60 new jobs at the site. The expanded facility is a large-scale, multipurpose API facility that is capable of handling potent products. The expansion increases cGMP API manufacturing capabilities for both existing products and a new product currently going through the later stages of FDA clinical review that is expected to be commercialized in the near term. The facility “will meet the increased demand for new products that we are seeing in our custom manufacturing business for both existing and new customers,” Edwards says.

Cambrex and Dow Chemical, earlier this year, executed an agreement for Cambrex to contract manufacture Dow’s hydroxypropyl methylcellulose acetate succinate for drug solubility enhancement. As part of this agreement, a new plant is being constructed in Karlskoga, Sweden, with commercial product availability expected by year-end. “The construction and validation timelines are on plan,” Edwards says.

Cambrex plans to grow its custom manufacturing, generic API, and formulation businesses globally. “Currently, we believe that we are well positioned to grow our custom manufacturing business. We talked about our new facility [at Charles City], which, along with concurrent improvements to increase our capacity for [Drug Enforcement Administration] Schedule II controlled substances in an adjacent facility and investments specific to Dow and one other large customer at our Swedish site are part of the highest level of internal investment in capacity that Cambrex has made in many years,” Edwards says. “The United States and the EU continue to lead the way in NCE launches, and that is where our R&D staff and manufacturing facilities are located. We’ve had two products graduate from clinical phase to approved commercial products so far this year, and have 12 phase-three products within our portfolio of clinical phase projects, including a few that have the potential to add significant revenues in the future.”

Cambrex manufactures and sells over 65 generic APIs, most of which fall into the niche category and have a long life cycle. “Our key growth initiatives within generics include aggressive development of new products, with 15 currently in development, and increasing sales in emerging markets where there is high growth potential. This gives us good geographic and customer diversity to go alongside our strong position in the EU and the United States,” Edwards says. “We have also added formulation capabilities and will look to forward integrate into finished dosage in order to capture additional value and geographic expansion,” Edwards says.

Saltigo, in July, signed an agreement with Daiichi Sankyo (Tokyo), one of the world’s leading pharmaceutical companies, to provide contract manufacturing services. The agreement is associated with preparations for the commercialization of one of Daiichi Sankyo’s novel drug pipeline projects, Saltigo says.

Saltigo recently announced plans to invest up to €100 million in its agricultural active ingredients business at Leverkusen until 2015. “For our pharmaceutical business, we continue to assess new growth opportunities, which may require project-specific investments,” Schmitz says.

Saltigo closed its US operations last year, discontinuing production at its Redmond, WA, site in July 2012. The company also abandoned a plan to produce potent APIs at that site. “The pharmaceutical industry continues to follow a trend towards fewer new, small-molecule drugs, and there is a corresponding change in focus to low-cost production and generic APIs. As a result of overcapacity and dwindling opportunities, the small-volume, early-stage clinical supply market has become less attractive,” Schmitz says.

“In mid-2012, Saltigo decided to concentrate more on large-volume, phase-three clinical trial stage products and products that are already approved. Concentrating on phase-three products and large-scale projects also improves the overall risk profile by avoiding projects that may never make it past phase one or two. We are therefore reducing our footprint in the early-stage developmental pharma business and will focus more on late-stage projects,” Schmitz says. The production plants at Redmond were oriented to requirements during phases one and two. Saltigo now carries out pharmaceutical production at its FDA-approved facility at Leverkusen.

Regulatory shifts

Regulatory changes in the European Union and the United States are increasing cost and quality pressures on manufacturers.

GDUFA became effective on 1 October 2012. GDUFA requires industry to pay user fees to supplement the costs of reviewing generic-drug applications and inspecting facilities. The program also ups the number of inspections of US and overseas manufacturers of generic APIs and finished pharmaceuticals. Facilities that manufacture or intend to manufacture generic-drug APIs, finished-dosage forms (FDFs), or both were required, under GDUFA, to self-identify with FDA through an online system. The total number of API facilities identified through self-identification is 903. Of the total facilities identified as API-production facilities, there are 128 facilities in the United States and 775 foreign facilities, FDA says.

Under GDUFA, an annual API facility fee is owed by each person that owns a facility that produces or which is pending review to produce APIs for a generic drug. FDA announced in August 2013 the rate for the generic-drug API and FDF facility user fees for fiscal-year 2014. The global API-facility fee revenue will be about $42.8 million in fiscal-year 2014, FDA says. The domestic API-facility fee is $34,515, and the foreign API-facility fee is $49,515. These fees are for 1 October 2013 to 30 September 2014.

The European Union has reformed rules for importing APIs for medicinal products for human use, and the new EU rules became effective on 2 July. According to the requirements, APIs manufactured outside of the European Union and imported into the union must have been manufactured in compliance with GMP standards equivalent to those of the union. These requirements constitute one of the main areas of change of the new European Falsified Medicines Directive, which came into force in January. This directive aims to prevent falsified medicines entering the supply chain and reaching patients. Falsified medicines, by definition, may contain ingredients of low quality or in the wrong doses; be deliberately and fraudulently mislabeled with respect to their identity or source; or have fake packaging, the wrong ingredients, and low levels of the active ingredients.

As a result, effective 2 July, the compliance of APIs manufactured outside the European Union and imported in must be confirmed in writing by a competent authority of the exporting country. This document must also confirm that the plant where the API was manufactured is subject to control and enforcement of GMP at least equivalent to that in the European Union. Exporting countries with an EU-equivalent regulatory framework do not need to issue written confirmations. The European Commission has listed four countries—Australia, Japan, Switzerland, and the United States—that do not need to provide written confirmation.

GDUFA and the new EU laws that became effective in July increase barriers and promote industry consolidation, Polastro says. These regulations impact both small and big players in the pharmaceutical ingredients’ manufacturing industry, he says.

“There are increasing regulatory requirements that cost a lot of money, and, as a result, smaller players are unable to compete or their survival becomes more difficult. This could mean that such players in the West may be acquired by bigger companies, and, in countries like China and India, such players may exit the market,” Polastro says. “For bigger players, these regulations add new cost to the business, and the question is whether they will be able to pass this on to the customer, or will they have to absorb the cost. And, this affects profitability. Manufacturers are trying to pass the cost on to the customer, but I am not sure if they will succeed in doing that,” Polastro says.

GDUFA will largely benefit the pharmaceutical ingredients manufacturing industry, Granules India says. “The fees will put pressure on most pharmaceutical ingredient manufacturers, but we believe there is a net benefit from the regulation because it will squeeze out low-quality manufacturers. The increasing frequency of audits will mean that manufacturers that don’t prioritize quality will lose business opportunities. There will be consolidation, and quality-conscious manufacturers will gain market share at the expense of others,” Prasad says. “We have already seen an impact of the GDUFA in the first year of its implementation, as the FDA has stepped up audits. Over the past several months, we have seen several Indian pharma companies in the news for compliance reasons. We expect scrutiny to increase in the future, particularly in India, where the FDA has increased its staff presence,” Prasad says.

This year, FDA issued separate warning letters for the violation of cGMP to the API manufacturing facility of Posh Chemicals (Hyderabad, India) at Hyderabad; the Kalyani, India, API facility of Fresenius (Bad Homburg, Germany); the Navi Mumbai, India, API facility of RPG Life Sciences (Mumbai); and the Tarapur, India, API facility of Aarti Drugs (Mumbai).

“Particularly with GDUFA, it will take time for FDA to spin up staffing before we see reduced approval times and increased inspections,” Frazier says. “The activity will always lag the legislation. We are aware that the new fee requirements have had a short-term impact as firms take decisions if their business can support the new fees and if they should pass those fees on to customers or simply absorb them. We are aware that both approaches are being used. With the Falsified Medicines Directive, PCS saw increased interest from European customers on how the United States would be viewed and the potential impact of that decision on their sourcing strategies. Of course, with the FDA being declared to regulate at an equivalent level as compared to [the European Medicines Agency (London)], we saw little direct impact ourselves,” Frazier says.

Positive outlook, say many

Companies remain optimistic. Saltigo says that the outlook is positive and that, based on the global rise in spending on medicines, the demand for APIs is likely to increase. According to figures from IMS Institute for Healthcare Informatics (Parsippany, NJ), global annual spending on pharmaceuticals is expected to reach about $1.2 trillion in 2016 compared with about $1 trillion in 2013, and the pharmerging markets, most importantly China, Brazil, Russia, and India, along with 13 other countries, will double their spending on pharmaceuticals by 2016, Saltigo says. “Emerging markets offer the biggest growth opportunity for the pharmaceutical industry but with smaller margins and a focus on generics,” Schmitz says.

Other experts say the outlook for the industry is mixed. “Opportunities are continuing to emerge because there are new products being developed and demand is growing. But, on the other hand, competition is intensifying, and a lot also depends on the product and the customer you are supplying. The product portfolio is very important because this industry has several hundreds of products, and each represents a different situation,” Polastro says.

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