Pharma ingredients: Western manufacturers prepare for further expansion

18:48 PM | February 18, 2013 | —Deepti Ramesh

The active pharmaceutical ingredient (API) industry will see further growth in the near term, and Western manufacturers are making additional investments as they prepare to take advantage of the upturn. Meanwhile, recent regulatory changes in the United States are likely to alter the industry over the next few years, experts say.

The current size of the global API industry is about $60 billion in terms of annual sales—and it is poised for further growth, analysts say. “Demand for APIs continues to grow, and the global API industry is expected to grow 2–3% in value terms and 4–5% in volume terms in the near term,” Enrico Polastro, v.p. and senior industry specialist at Arthur D. Little (Brussels), tells CW.

Stoffel: Outsourcing trend continues to rise.
Scanlan: Looking for acquisition opportunities.
Hoeprich: Remains bullish on 2013.
Malik: Expand Rancho Cordova production site.
DiLoreto: Aim to ensure FDA follows goals of GDUFA.

API manufacturers continue to invest to build capacity and are looking to grow via acquisition, reflecting the sector’s largely positive outlook. Cambridge Major Laboratories (CML; Germantown, WI), a producer of pharmaceutical intermediates and APIs, says it plans acquisitions to strengthen the company’s API business. “CML is looking for acquisition opportunities to further strengthen our core API business, as well as expand horizontally across formulation and other aspects of the drug development process,” Brian Scanlan, president and CEO of CML, tells CW. “The company is mainly looking at the United States and Europe for acquisition targets. We have identified a number of targets at this time and continue to keep active in the market to stay on top of any opportunities,” Scanlan says. He did not disclose details of acquisition targets or say when a deal is likely to close. CML’s potential targets are in the United States and Europe because “we are focusing our strategy on securing Western-based assets to meet the needs of emerging pharma clients and big pharma here in the United States and Europe,” Scanlan says. “Our strategy has worked very well thus far, as essentially all of the capacity we have invested in in the United States and Europe has been filled very rapidly. There continues to be a need for high-quality assets in the United States and Europe,” he says. CML has FDA-approved facilities at Germantown and at Weert, Netherlands.

Private equity firm American Capital (Bethesda, MD) reached a deal in December 2012 to acquire CML for $212 million. CML was previously a portfolio company of private equity firm Arlington Capital Partners (Washington). “American Capital’s financial and operational resources will allow us to expand our market presence in the United States and internationally,” Scanlan says. The acquisition by American Capital will also allow CML to “continue investing in the current API core business and make new investment in areas outside our core such as formulation, analytical sciences, and other services relative to the drug development process,” he says.

CML has annual sales of over $100 million and is expecting significant growth during the next few years, Scanlan says.

CML is also expanding its large-volume API manufacturing facility at Germantown because of a significant increase in its late-stage and commercial API pipeline. “We are currently adding nearly 30% additional capacity in our large-volume facility in the United States to support strong demand in our late-phase and commercial business. The capacity expansion started in August of 2012 and will be complete in April 2013,” Scanlan says.

Demand for APIs is growing, but there are certain challenges in the global API industry. Nevertheless, the outlook remains very positive, Scanlan says. “Demand continues to grow in the outsourcing arena, but there is pricing pressure—and it is greatest at large-volume manufacture, where competition is greatest from offshore manufacturers. Development pricing pressures have been fairly stable during the past few years. There is overcapacity in large-volume manufacture, particularly in Europe and Asia, and to a lesser extent in the United States and in the earlier-development space,” Scanlan says. “I believe the outlook [for the global API industry] is positive for those developers/manufacturers who have assets to support late-phase clinical development and commercialization. A large number of molecules have progressed into the later phases of clinical development, and we are expecting very robust late phase–to-commercialization activities over the next few years. Those with only earlier-stage—preclinical/phase one—assets have seen a lot of pressure, as these stages of the drug development cycle have been quite anemic the past several years. Funding has been focused on the later-stage molecules. Likely in the next few years, there will be a resurgence in early-stage spend, as the late-phase molecules work their way through the pipelines,” Scanlan says. The challenge facing US-based API manufacturers is “the need to be differentiated, either by technology or reliability; good reliability is hard to find, and is in fact a strong differentiator since time is money in this business,” he says.

Health-care products manufacturer Perrigo (Allegan, MI) tells CW that it is building a new API manufacturing facility at Ambernath, India. “It will be a large-scale manufacturing facility, and Perrigo has made a significant dollar investment in the facility,” the company says. Perrigo did not disclose further details of the API plant being built at Ambernath. The company entered into API manufacturing through the 2005 acquisition of Israeli company Agis Industries. Perrigo currently manufactures APIs mainly at Ramat Hovav, Israel; it does not have any API manufacturing capacity in the United States. The company’s API business segment reported a 6.4% increase in sales in the fiscal year ended 30 June 2012 compared with the previous fiscal year, to $165.7 million. Perrigo, besides APIs, manufactures OTC and generic drugs, infant formulas, nutritional products, and dietary supplements. The company recorded total sales of $3.17 billion in the fiscal year ended 30 June 2012. Perrigo expects sales at its API business to grow 0–4% in the current fiscal year. The company says it will aim to grow the API business by increasing the number of products it offers. Perrigo will look to offer more “hard-to-manufacture compounds, such as API used in cancer treatments,” the company says.

Lonza, meanwhile, says that the trend to outsource pharmaceutical-ingredient manufacturing remains a feature of the industry and is helping contract-manufacturing organizations to grow their business further. “The trend in outsourcing continues to rise and there continue to be new clinical entities being developed to support new product launches,” Stefan Stoffel, head of chemical manufacturing at Lonza, tells CW.

Lonza has faced some challenges recently despite the more positive environment. Lonza fired former CEO Stefan Borgas in early 2012 following a series of weak financial results and appointed Richard Ridinger CEO, effective 1 May 2012. The weak results followed Lonza’s acquisition of biocides maker Arch Chemicals for $1.4 billion in October 2011.

Lonza’s financial performance improved in 2012, however, and the company recorded an 18.2% rise in net profits for 2012 compared with 2011, to 182 million Swiss francs ($198 million). Sales increased 45.8% in 2012, to SF3.92 billion. Lonza expects further sales and Ebit growth in 2013. “In 2013, we will take transformational steps to move from a product-oriented to a market-oriented organization,” Ridinger says. “In doing so, we will adjust our manufacturing footprint, streamline our administrative infrastructure, and review our go-to-market approaches. This will also require some structural changes to the company,” Ridinger says.

Lonza announced in October 2012 that it would cut 500 jobs worldwide, including 400 positions at its production site at Visp, Switzerland, to improve profitability. Lonza had also initiated a program, dubbed Visp Challenge, in 2011, including increased working hours without accompanying pay increases for all employees at the Visp site, also to improve profitability. “Although Visp has good capacity utilization and is the largest of Lonza’s sites, the profitability over the past few years has been unsatisfactory,” Stoffel says. The Visp Challenge program “aims to ensure Visp remains successful for the long term by reducing the complexity of the site, and improving the cost structure and flexibility. The program is on track to deliver productivity improvement of SF100 million by 2015,” Stoffel says.

The company continues to expand the Visp site. Lonza announced last month that it plans to invest SF14 million to expand antibody-drug conjugate manufacturing capacity at Visp. The capacity expansion is expected to be completed in the second quarter of 2014.

A separate investment of SF24 million, announced in May 2011, to expand cytotoxic manufacturing capabilities at the Visp site has been completed, Lonza says. Cytotoxic APIs are widely used in oncology therapeutics.

Lonza is planning further investments to grow its API business. The company announced in early 2012 that it was in discussions with the South African government to establish a joint venture, Ketlaphela, to build an API manufacturing facility for antiretroviral medicines in South Africa. Lonza tells CW that the jv may be located at the disused Pelindaba nuclear facility, but that no final decision has been made. The jv facility will require a total investment of about 1.6 billion rand ($182 million), which will include a R500-million investment by Lonza, local press reports say. Construction is expected to begin this year, and the plant is slated to become operational in 2016, reports say.

Lonza has also been strengthening its business in Asia. The company recently formed a jv at Shanghai with Fosun Pharma (Shanghai) to develop, manufacture, and sell generic pharmaceuticals mainly for the Chinese market. “Lonza and Fosun formed a joint venture focused on a portfolio of small-molecule generics for the China market,” Stoffel says. “Lonza will contribute to the partnership with API process development and its API-manufacturing network, development capabilities, and global quality standards. Fosun Pharma, a leader in China’s domestic pharmaceutical industry, will lead formulation and filling as well as local distribution, sales, and marketing. The partners have already selected a defined portfolio of generic pharmaceuticals, which show promising market potential and need Lonza’s technology know-how,” Stoffel says.

Albemarle is also investing consistently to expand its API and custom pharmaceutical services business, which forms part of the company’s Fine Chemistry Services (FCS) unit. FCS, which provides fine chemicals and services to companies in the agricultural chemical and pharmaceutical industries, recorded sales of about $300 million in 2012 compared with $290 million in 2011. Albemarle anticipates strong growth in the company’s API and custom pharmaceutical services business in 2013. “We are optimistically bullish on 2013 with both generic and custom pharmaceutical products continuing to increase along with process development and scale-up services,” Kurt Hoeprich, global business manager/pharmaceuticals at Albemarle, tells CW.

Albemarle announced earlier this month that FCS had begun construction work on an expansion of its Tyrone, PA, custom manufacturing facility. The company is investing $30 million to expand the Tyrone facility. “This expansion will add new capacity to the site for custom manufacturing projects but, more importantly, will improve the infrastructure to allow for future incremental and low-cost expansions as we gain new projects from customers,” Hoeprich says. The latest investment follows an expansion at the Tyrone site that began operation in November 2012. The new capacity at Tyrone will become operational late in the first quarter of 2014.

Albemarle announced last December that it would invest $65 million to expand its Orangeburg, SC, manufacturing operations to support growing demand for products in all of its businesses. The expansion will occur between 2012 and 2016, and will include the addition of facilities to manufacture two new products in the FCS unit. Albemarle also expanded and upgraded its multiproduct API manufacturing facility at South Haven, MI, and production at the expanded unit began in June 2012. “To fulfill increased API demand from our customers, we expanded and upgraded our solids-handling capabilities to better match reactor output at our South Haven facility,” Hoeprich says. The expansion is the latest in a series of projects at the South Haven site to increase capabilities and production throughput, meeting the increasing demand for generic API products and custom manufacturing service portfolios, Albemarle says. The number of custom API projects has more than doubled at the South Haven site in the past two years. Albemarle’s expansions at South Haven enable the company to advance its growing portfolio of custom API products, several of which have progressed to late-stage clinical development and preregistration status. Albemarle acquired the South Haven API site from DSM in 2006. Albemarle says it will continue to expand API capacity. “As we did in 2012 with increased solids handling, we plan to continue to invest as needed to fulfill increased demand from our customers. The capacity is yet to be determined and pending customer requirements,” Hoeprich says. Albemarle is optimistic about the future for its API business. “The outlook is very positive, as we see strong demand for our commercial-scale production capabilities and process development/scale-up expertise,” Hoeprich says.

Recent regulatory changes in the United States are likely to bring changes to the global API industry, experts say. FDA’s Generic Drug User Fee Amendments of 2012 (GDUFA) became effective on 1 October of that year. The worldwide generic drug industry will pay FDA a total of about $1.5 billion over 5 years in return for faster and more predictable reviews of generic-drug applications, according to the terms of GDUFA. The program will also result in an increase in the number of inspections of US and overseas manufacturers of APIs and finished pharmaceuticals. Facilities that manufacture or intend to manufacture generic-drug APIs, finished-dosage forms (FDF), or both were required, under GDUFA, to self identify through an online system with FDA. Of all the facilities identified as API-production facilities through the self-identification process, there were 122 facilities in the United States and 763 foreign facilities, FDA says.

FDA announced earlier this year the rate for the generic-drug API and FDF facility user fees for fiscal-year 2013. The total fee revenue for fiscal-year 2013 is $299 million. The fiscal-year 2013 fees are due on 4 March. The total global API-facility fee will be $34.86 million in fiscal-year 2013. The domestic API-facility fee is $26,458, and the foreign API-facility fee is $41,458—exactly $15,000 more than the domestic API facility’s fee. The differential for foreign facilities may be adjusted in future years, FDA says. The basis for the difference is the extra cost incurred in conducting an inspection outside the United States, FDA says.

The Bulk Pharmaceuticals Task Force (BPTF), an affiliate organization of Socma, was part of the group that held talks and worked with FDA to develop the GDUFA program. BPTF is an industry trade organization for US manufacturers of APIs, intermediates, and excipients. It was created in 2002 with the objective of establishing sound working relationships with regulators, allied industries, and the public and to serve as a source for the development and implementation of balanced regulations and industry guidance resources.

“Facility inspections was the key goal for us going into the negotiations [with FDA],” John DiLoreto, executive director of BPTF, tells CW. “We want to make sure that all the foreign facilities that are shipping products into the United States are being inspected as frequently as the US facilities because it costs manufacturers money to operate a quality program.” US manufacturers are inspected about every two years. The challenge for BPTF is “making sure that the FDA follows the established goals of the GDUFA, making sure that they hire the necessary people, and that they are doing the expected number of facility inspections in order to make sure that the program gets implemented as it was designed to. The GDUFA will make sure that all manufacturers come to the same level of quality in terms of following GMP,” DiLoreto says.

A series of events has led regulatory bodies to increase their scrutiny of the worldwide API manufacturing industry. FDA was criticized for its failure to inspect a plant in China that manufactured a contaminated API for the blood-thinning drug heparin, which in 2008 was cited as a cause of death and harmful effects in some US patients. BPTF says that with the implementation of GDUFA, issues such as those related to the heparin case can be greatly minimized.

However, some industry experts say that if regulators are not careful, GDUFA could lead to drug shortages. But BPTF does not expect this to happen. “The FDA is not going to be able to do their facility inspections immediately,” DiLoreto says. “They are going to go through a period of time, which could be about two years, to hire enough people to do the additional reviews that are necessary for drug applications and to do the inspections that are necessary. So it is going to take the FDA quite some time to get to that point where they inspect facilities. That time will give all the facilities an opportunity to bring their standards up to the required GMP level. So we don’t expect facilities that are not meeting GMP standards to stop doing business immediately. What we expect is a transition period, during which facilities get the time to put in place whatever quality programs they need to, so that they won’t be forced to stop production, which could lead to drug shortages.”

BPTF hopes that, “at the end of the five years, the FDA will be inspecting facilities globally at the same frequency, making sure that GMP is being implemented in every facility that manufactures APIs that are sent to the United States; the biggest goal... is leveling that playing field and making sure that all manufacturers are producing APIs that are safe,” DiLoreto says.

Manufacturers such as Albemarle expect positive developments to emerge from GDUFA. “We are hopeful that GDUFA will enable faster and more predictable reviews for applications and supplements, and that this will ultimately benefit patients in terms of availability of needed medications that have been produced at facilities that are consistently inspected by the FDA,” Hoeprich says.

It could also potentially lead to a change in the landscape of the API industry, experts say. “As a result of the GDUFA, there will be more fixed cost imposed on manufacturers, and as their costs go up, profit margins will be squeezed,” Polastro says. “This may affect some manufacturers in China and India, and could lead to industry consolidation. In the next couple of years, some small players will continue to exit the market, particularly in China and India, and there could be a revival of Western manufacturers. This revival will be because of the GDUFA, but also because there are concerns about competitiveness as costs in both China and India are going up. There are also increasing concerns about reliability of suppliers,” Polastro says.

Ampac Fine Chemicals (AFC; Rancho Cordova, CA), a subsidiary of American Pacific (Las Vegas), says that US-based API manufacturers have already overcome many of the challenges faced by manufacturers operating in India, China, and other developing economies. “Some of the challenges include rapidly increasing wages—the [US] wage base is growing but at a much more controlled rate; higher energy costs—US natural gas supply is keeping energy costs down; increased regulatory and environmental compliance—[most US manufacturers] are already compliant; and increased FDA scrutiny—most US manufacturers already have an established track record with the FDA. Companies in developing nations will have to face these challenges in the near future,” Aslam Malik, president of AFC, tells CW.

AFC says that there is no overcapacity for small-molecule manufacturing in the United States. “I believe there is overcapacity for small-molecule commercial manufacturing in India and China. However, there certainly is not overcapacity for small-molecule manufacturing in the United States. This is why we continue to invest and expand there. We believe the markets in India and China will continue to absorb more of their internal capacity, and that the United States is currently underserved.” Malik says.

AFC recorded a 25% increase in sales in the fiscal year ended 30 September 2012 compared with the previous fiscal year, to $111.5 million. AFC has FDA-approved facilities at Rancho Cordova and La Porte, TX. “We feel optimistic about the current and future prospects for the global API market and continue to invest in cGMP capacity expansion,” Malik says. “AFC recently commissioned a second semi works facility to support production of schedules II–V controlled substances and high-potency materials. We are currently in the process of commissioning our third semi works facility, and a fourth semi works facility is in the planning stage.” All the semi works facilities are at the company’s Rancho Cordova production site.

AFC says that the API industry is going through a positive growth period in the United States and other markets. “There are many positive opportunities in the current global API market. We see increased demand from early-stage projects through commercial opportunities,” Malik says.