The role of active pharmaceutical ingredient (API) manufacturers in the pharmaceutical industry supply chain is evolving in response to newfound demands from customers and growing pressures from global competitors. Increasingly, innovators (marketers of brand drugs, as opposed to generic drug companies) are looking beyond their usual group of closely-knit European suppliers. Meanwhile, traditional generic companies are looking to India and China for bulk actives, while specialty pharma companies have generated new demands for more specialized capabilities than those required by traditional generics. In order to remain competitive, API manufacturers will need to attune themselves to this evolving landscape.
Historically, innovators have relied on a small number of suppliers with which they work confidentially. Innovators frequently opt to perform the final stages of API synthesis themselves, outsourcing (at most) the production of late stage intermediates. While this pattern continues to predominate, innovators have begun to look beyond their current European suppliers to realize benefits from partnerships with Indian and Chinese API manufacturers. In many cases the opportunity to leverage existing European relationships with Indian process chemistry can create a more complex, but ultimately more responsive and cost-effective supply chain. A recent example, cited in the March 18, 2002 issue of Chemical &Engineering News, is Solvay's sourcing of eprosartan mesylate, an antihypertensive marketed under the brand name Teveten in the U.S.
Solvay's first source for eprosartan is Lonza, a Swiss company known for high quality custom synthesis, and one that has long been known for supplying innovators. However, Solvay also performed process development work in India with a relatively obscure API manufacturer known as Dishman Pharmaceuticals and Chemicals, which ultimately ended up serving as a second source for Solvay. Solvay executives claimed that working in India helped the company achieve significant cost savings and, as a result, Dishman, a company that had one drug master file (DMF) as of 2001, is now a second source of an important new product.
Several factors make India an attractive alternative for sourcing active ingredients. India has low development costs, complex synthesis capabilities, growing experience with cGMP compliance, and a large local dose market in which to gain experience. India is also known for having a large number of strong chemists, many with Ph.D.s from the U.S. and Europe, providing rapid, and creative, process development. With these resources, Indian companies can tackle complex syntheses in relatively short periods of time. Such responsive and well-staffed development teams have prompted Reddy-Cheminor, for example, to claim a development speed twice that of any U.S. or European company. Further, India's lax patent laws have resulted in strong domestic demand for many finished dose products, giving API and dose form manufacturers more experience with a product over a longer period of time than manufacturers in regulated countries. In fact, new drugs are often launched early, if not first, in India. Thus, India has established itself as a source for both complex synthetic active ingredients and finished dose form products in regulated and unregulated markets.
China is also rapidly evolving into a viable source for key intermediates and actives. In the late 1980s and early 1990s, most Chinese factories were communist-controlled, and made large volumes of low cost drugs, with many focusing on fermentation products or simple synthetic compounds. Today, the climate in China is very different. This is a result of China's overall economic evolution and entrance into the World Trade Organization, which is expected to expose domestic manufacturers to significantly more competition. As a result, custom manufacturing, which was once illegal in China, is now seen as the most effective way to accelerate the learning curve to producing high quality pharmaceuticals for regulated markets. Both public and private factories are eager to work with western partners and gain the expertise necessary to meet their exact specifications and achieve goals of greater technical skill and increased profitability. Thus, factories are modernizing rapidly, purchasing both technology and expertise in the form of western consultants. However, it is worth noting that the Chinese tend to see custom manufacturing as a step towards achieving their own goals, and western companies are therefore advised to be extremely cautious regarding the transfer of intellectual property to China.
As India and China have begun to offer higher quality APIs and intermediates for regulated markets, innovators have started to look to these countries for late stage intermediates, and in some cases have formed joint ventures with local manufacturers. More frequently, innovators use their traditional European custom manufacturers for the finished API or key intermediate, while these manufacturers rely on Indian and Chinese partners in turn for earlier stage intermediates. The especially risk-averse profile of innovator companies with regard to outsourcing suggests that high quality European bulk manufacturers are likely to continue supporting innovator companies for the foreseeable future, but they may increasingly partner with late stage intermediate suppliers in countries with lower development and production costs. DSM, for example, has a subsidiary in China, as do several other high quality custom manufacturers. Thus, China and India are playing a role in innovator outsourcing, both directly and indirectly.
Generic pharmaceutical companies, on the other hand, have been far more eager to work directly with China and India, as the strategic sourcing of active ingredients is a necessity for profitability, while intellectual property protection is less of a concern than it is for the patent holders. Manufacturers of generic oral solids, on average, have between 40 and 50% of their cost of goods sold tied up in raw material costs. In a highly contested market where the ability to offer a low price is critical, generic manufacturers seek competitive advantages by finding reliable bulk manufacturers who can deliver at a low cost.
Historically, generic companies (and innovators) have sourced active ingredients from European manufacturers. However, European manufacturers have found themselves constrained by Supplementary Protection Certificates (SPCs) and other regulatory limitations, and have significantly higher R&D and production costs than those of India or China. Although European bulk manufacturers offer complex synthesis capabilities, strong process chemistry, creativity and expertise on par with (or superior to) those of Indian manufacturers, traditional generic companies are more likely to identify the lowest cost provider that meets their needs. Such "traditional" generic companies focus on blockbuster products and then compete with each other on price until only the companies with the very lowest cost basis can survive. For this reason, generic companies source from India fairly frequently, and are beginning to explore China as a source of bulk actives and intermediates as well.
Indian companies have become quite proficient at manufacturing to FDA cGMPs, meeting the regulatory needs of U.S. generic companies, and marketing their bulk actives to a worldwide audience. Several of the leading Indian companies have extremely capable dose form manufacturers, with Reddy-Cheminor and Ranbaxy successfully competing in the U.S. generic market (on traditional generics as well as patent challenges and branded generics). Indian manufacturers have therefore proven their ability to take a product from API to finished dose form at a level of quality suitable for use in regulated markets. In the future, if this ability is combined with the low manufacturing costs available in China, there is the potential to create an extremely competitive force in the generic market of the future. An API manufacturer that combines the low R&D costs of India with the low manufacturing costs of China would produce active ingredients at an exceptional price. Further, if this API manufacturer were to vertically integrate with a dose form manufacturer, it would be able to supply generic products at a price unbeatable by competitors working in a more standardized way.
While the traditional generic and API industry is likely to be strained significantly by these changes, the generic industry is evolving and generating unique opportunities for API manufacturers willing to offer specialized services. The best generic companies are developing expertise in patent challenges, unique formulations, and developing strengths in specific therapeutic categories—becoming specialty pharma companies rather than traditional generics. These strategically focused generics require far more innovative, dynamic and responsive bulk suppliers.
The Waxman-Hatch Act's promise of 180 days of exclusivity for first successful generic patent challenges has resulted in specialty pharma companies investing heavily in being first to file and in circumventing patents. The need to be first to file requires specialty pharma companies look at developing products earlier than ever, and requires a great deal of confidential development work from API manufacturers supporting this development. For example, paragraph IV (patent challenge) Abbreviated New Drug Applications (ANDAs) for olanzapine were filed by Ivax, as well as Reddy-Cheminor and Par Pharmaceuticals, approximately 10 years prior to the expected 2011 patent expiry. The API manufacturers supporting these challenges were working to synthesize the active well before the patent challenges were filed, and long before demand for the active existed in regulated markets. The great expense that goes into a patent challenge means that API suppliers working in support of such challenges must be extremely reliable, sophisticated and capable of working on a highly confidential and exclusive basis.
The API manufacturer's role in product development is also increasingly significant. As the timing of paragraph IV filings is critical, so is the need to maintain a low profile until the ANDA is ready. During the period before an ANDA is filed, it is essential for a specialty pharma company to remain secretive about the products and patents it is challenging. Leaking such information can potentially provide competitors with information on the status of an ANDA filing, and the details of a patent challenge strategy. Historically, the filing of DMFs has been a signal to the industry that an ANDA can be, or is about to be, filed. While the filing of a DMF (with most products) is likely to be an indication that an API manufacturer is ready to supply regulated markets, with certain products the filing of an early DMF is likely to indicate that a paragraph IV challenge is on the way. The most sophisticated partnerships between API manufacturers and specialty pharma companies are able to file DMFs just as they are to be reviewed within the ANDA, providing little or no warning to competitors as to the existence of their challenge until it has been filed. These tactics require extreme confidence that regulatory filings will be completed appropriately and on time, resulting in specialty pharma companies relying increasingly on a small group of experienced API sources, in a fashion similar to innovators.
Further, the API manufacturer may play a critical role in the patent challenge process. Beyond the ability to creatively circumvent process patents, the creative development of active ingredients may become fundamental to the patent challenge itself. Anhydrous and mesylate versions of paroxetine are examples of patent challenges that are based on new syntheses and novel processes developed using the expertise of API manufacturers. As patent challenges become more frequent, the capabilities to support such challenges will increasingly be in demand. And, given the level of competition surrounding being first to file, insight into the products API manufacturers are developing can provide an extremely useful piece of competitive intelligence. On the other hand, identifying bulk manufacturers able to support product development in secrecy becomes even more critical to specialty pharma companies.
In addition to supporting patent challenges, API manufacturers are also supporting specialty pharma companies in a more traditional manner, by exclusively supplying difficult to source products. The role of active ingredients as a barrier to entry is well known, but more and more specialty pharma companies are looking to identify hard-to-source, niche products as a way to balance a portfolio subject to the volatility of patent challenges and branded generics.
There are several forces combining to change the role of API manufacturers in the pharmaceutical industry: India has evolved into a viable source of active ingredients (and dose form products) for regulated markets that can offer strong process chemistry at a very low cost. China has begun the process of privatization and has become a more viable low cost supplier of intermediates and several bulk actives. Cutting edge generic companies have evolved into a new specialty pharma industry that places demands on API manufacturers increasingly akin to those of innovators. Based on these trends, the API industry is likely to evolve into three segments in accordance with the evolution of three primary customers for bulk actives.
The first segment is the contract manufacturers who have historically worked closely with innovators and are likely to continue these close-knit relationships in the future. These manufacturers, who are largely European, are increasingly likely to look to India and China for intermediates, but are apt to manage final stages themselves. Innovators, while looking beyond traditional sources in some instances, are likely to maintain these relationships for the reliability and high quality service they provide. This is especially the case when products are pre-launch and/or early in their life cycles, as innovators are less likely to take any risks in API sourcing when production and quality control are most critical. As a product reaches the end of its life cycle, a greater number of sources for actives and/or intermediates may be evaluated, and innovators may look beyond their traditional suppliers.
The second segment is comprised of API manufacturers that align themselves with the specialty pharma industry. Manufacturers that can support the unique needs of these customers—supporting patent challenges, synthesizing rare active ingredients, and working under contract—are finding a new niche where high value services are necessary.
The third segment is the providers of more common, readily available bulk actives, who have historically looked to support the generic industry. This segment is likely to undergo a great deal of change in the future as Indian and Chinese collaboration builds. In fact, as such collaborations drive prices downward, it is difficult to imagine how European API manufacturers will survive if they are not engaged in higher value work with either innovators or specialty pharma companies. Competing in this segment will require producing high volumes at low costs, and may force many API manufacturers to focus on niche products for which demand is too low to interest Indian/Chinese manufacturers.
The role of active ingredient manufacturers in the pharmaceutical industry is rapidly changing and can be expected to evolve even more in the future. Biotechnology, for example, is still in its infancy, and may create fundamental changes both with finished products and the definition of an active ingredient. The pharmaceutical industry is constantly in flux: changes in the complexity of pharmaceuticals, competitive pressures from India and China, and new developments in the dose form markets due to new legislation all influence API manufacturers. As the pharmaceutical industry evolves, the most successful API manufacturers will be those that are able to quickly adapt to industry needs and global pressures.
How will changes in India and China affect API outsourcing?
By George Karris
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