DCAT Week '16: Pharmaceutical Outsourcing The Markets and Supply Strategies for Fine Chemicals, APIs, and Drug Products

CMO & Strategic Sourcing Outlook

The balance between internal manufacturing and development and external sourcing for APIs, fine chemicals, and drug products is a difficult task to manage. This is further complicated by the increasing M&A activity and complexities within the supply chain forcing each company to strongly evaluate their partners and what they choose to produce in house or source through 3rd party vendors. Enrico Polastro (Arthur D. Little) talked about the different geographical options along with factors to consider when picking your partnerships, such as the share of captive production as compared to the value of the drug substance that you are producing, which can be difficult to truly define. Overall there has been drastic fragmentation between products, suppliers, and customers. It was noted that the percentage of the total pharmaceutical sales of finished dosage (FD) of around 950B USD makes up the majority of the valuation of a drug whereas the value of drug substances have decreased over time from 15% to 9% of the total value of the end product. The pharmaceutical industry is adapting to different models of strategic sourcing, whether it is to be solely vertically integrated or to be completely virtual, partnering for external manufacturing, as is the case with many new biotech startups. Regardless of the model one chooses, the 3rd party API/intermediate market is transitioning modestly away from captive production as about a quarter of the market is for exclusive agreements/customers (13B USD) and the remaining three quarters are sold openly to the market (32B USD).

Looking at the market demand and the type of suppliers that make up each geographical region, North America’s focus seems to be niche type APIs along with large volume controlled substances (analgesics) with a small pool of merchant manufacturers; Latin America similarly has a small number of suppliers but is focused on local production only. Japan is starting to realize that they need to embrace and champion generics to get total spend down, but their offerings to partners seem to reside with custom synthesis with approximately 50 producers. When looking at China and India this equates to the largest region of suppliers, with 1,500 and 2,300 manufacturers respectively with a combined production value of 27B USD, offering mostly catalogue products. Exports for fine chemicals from China and India have drastically increased over the past 20 years, with a major uptick between 2006 and 2007 and totals topping approximately 8B USD for India and almost 2B USD for China. Europe which has been affected by the previous fact has around 200 merchant producers of APIs and fine chemicals with a leaning towards custom synthesis and complex APIs.

China and India have come to the forefront as integral parts of many pharmaceutical supply chains due to their internal investments into capacity. However, western companies still face talent migrations and domestic hurdles imposed on producers, limiting their ability to compete with these manufacturers. An example used was China’s increase in antibiotics fermentation, forcing many western suppliers completely out of this market space while at the same time supplying the majority of intermediates for all markets. The question was raised whether some sourcing needs would start to shift back west due to concerns of reliability with Indian and Chinese manufacturers and recent data integrity issues, which may certainly depend on the type of company and their sourcing needs.

Drug Product Trends and Highlights

Branching off of the recent updates in the fine chemical and active substance situation, Jim Miller (PharmSource) explained that the FD side of CMO organizations has been steadily growing, but there are still challenges ahead. Dose CMOs that manufacture the client’s formulation that are RX and OTC and simultaneously certified by a regulatory agency such as the FDA or EMA have marked a higher growth rate when compared to bio/pharma revenues. The dose CMO formulation segments is broken up from the highest share by the following formulations, solid (7B USD), injectable (4.5B USD), special (i.e. inhalation, patches, softgel) (3.5B USD), and finally semi liquid (1.8B USD). Many commodity generics that India and China produce threaten the EU’s market share of dose CMO distribution, where Europe leads in total number of CMOs, followed by North America. Unsurprisingly, the types of companies that utilize dose CMOs for their NDAs more frequently are small and mid-sized companies that might lack internal capacity or capital to produce FD in house. This percentage decreases to 20-30% for large pharma companies that would already have invested in this type of infrastructure. One area where big pharma might still rely on a specialty dose CMO is for high potency products including drugs that fall in the class of kinase inhibitors and cytotoxic/oncology medications.

Consolidation has greatly afflicted the landscape that dose CMOs operate in. This is being driven by M&A to acquire different technologies and also as a growth strategy. Larger companies like AstraZeneca, Sandoz, Roche, MSD, and BMS seem to have focused on injectable and inhalation expansions primarily, with some biologics capacity as well. These is juxtaposed by mid-sized bio and their capital expenditure on manufacturing, upgrades to existing facilities, and to some extent, a crossover on biologics API spend due to the opportunity in this market segment. The full service CMO that can provide clinical & R&D services through to API and FD production, all the way to commercialization expertise seems to be the direction as M&A is still the strongest growth driver.

Boehringer Ingelheim & Takeda Strategies

Considering the direction that CMOs are taking and how this affects companies with new molecular entities in their forefront, Peter Combs (Boehringer Ingelheim) discussed their company’s strategy for sourcing. For early life cycle products that are core to their business they would likely invest into competitive technologies and produce API in house close to their R&D. Following commercial launch localization of the product in the targeted geographical area can occur where partnering with a CMO for addressing market entry barriers can be tackled. The majority of sales seem to be driven by core products with non standard technologies (i.e. newer more complex technologies) while sales for large volume products that are not core to the business are of less importance than they once were. This is why BI focused on keeping two of their core product Spiriva® and Pradaxa® production close to home. Mr Combs also touched upon the importance of treating a CMO as a partner, where both parties need to set clear expectations, review the risks and benefits, and determine if the relationship will be exclusive, while ensuring competitive pricing in the future.

For biotech, Takeda’s Mike Boyson explained that they had to adapt to issues related to continuous manufacturing, including higher titers, single use bioreactors, and overall cost. CMOs can fill the needs of biotech companies by helping them with supply chain issues linked to capacity to meet drug substance demand along with fill/finish and analytical activities as well. Rapid expansion supports the need for CMO partnership, being flexible and responsive is crucial for Takeda. This translated to solutions like allocating lots between different major markets, getting protocols approved, being open and communicating with regulatory agencies, and improving dedicated laboratory space by increasing the analysts needed to fulfill project requirements. Examination of past decisions to determine the direction you are headed is also important and the measurement of key performance indicators can help ensure on time and on budget launches, while helping to forecast future demand with precision.

Read about how Thomson Reuters supports Pharma Fine Chemicals & API Manufacturers and Generic Finished Dose Manufacturers & Marketers.

To learn more about sourcing trends in the generic space, click on this report: CPHI WORLDWIDE 7TH PRE-CONNECT CONGRESS KEY THEMES & TRENDS