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Global API Market - July'13

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  • 1. White Paper on Global API Market Copyright © 2013 RNCOS. All rights reserved. Unless otherwise indicated, all materials on these pages are copyrighted by RNCOS. All rights reserved. No part of these pages, either text or image may be used for any purpose other than personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission.
  • 2. White Paper on Global API Market 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 which stood at US$ 113 Billion in 2012, is slated to growth at a CAGR of 7.6% during 2012- 2017.
  • 3. White Paper on Global API Market 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 Small Molecule 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 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.
  • 4. White Paper on Global API Market 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 Pharmaceutical Fine Chemicals in US, India and China (%)
  • 5. White Paper on Global API Market 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.
  • 6. White Paper on Global API Market 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

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