The generics industry is once again on the upswing after a period of destructive price wars, driven by consolidation amongst drug distributors. In the run up for the multi billion generic opportunities, companies from India and China, while competing with each other, are also fostering ties between themselves to take on the world market.
Several factors make India an attractive alternative for sourcing active ingredients. India has low development costs, complex synthesis capabilities, growing experience with camp 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 PhDs from the US and Europe, providing rapid, and creative, process development. With these resources.
Innovators have begun to look beyond their current suppliers to realize benefits from partnerships with Indian and Chinese API manufacturers. In many cases the opportunity to leverage existing relationships with Indian process chemistry can create a more complex, but ultimately more responsive and cost-effective supply chain. A recent example, is Solvay's sourcing of eprosartan mesylate, an antihypertensive marketed under the brand name Teveten in the US.
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.
Solvay 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 and working on several DMF's.
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. While these manufacturers rely on Indian and Chinese partners in turn for earlier stage intermediates. The 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.
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 produce 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.
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 per cent 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.
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.
Collaboration between Indian process chemists and Chinese manufacturers is already beginning. For example, Enmark of India has partnered with Zhejiang Hisun Pharmaceutical in China, providing process chemists to work with Hisun's R&D group on the synthesis of a key intermediate for a high-value API. The Enmark team has delivered advanced chemical synthesis capabilities, while Hisun (an FDA-inspected facility) is expected to deliver the intermediate at a cost that the two companies expect will allow them to be an attractive worldwide supplier.
This is significant because previously, the intermediate was available only from a single, high-priced, Japanese source. Both Indian and Chinese companies expect this first project to set the stage for future collaborations. This example demonstrates that new, highly efficient, and extremely low cost API manufacturers may begin to surface as a result of partnerships between Indian and Chinese companies.
For API manufacturers, these partnerships create a newfound need to either try to compete with such companies on cost or, in contrast, provide an extremely high level of custom synthesis capabilities.
Further, should such an API manufacturer combine with a traditional generic company supplying the U.S. market (perhaps one based in India), other generic companies will be hard pressed to compete. Thus, large pharmaceutical concerns that capitalize on Indian and Chinese strengths may be in the best position to serve the global, traditional generic pharmaceutical market in the future by churning out high volumes at low cost based on Indian chemistry and Chinese production.
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.
India has evolved into a viable source for active ingredients and dose forms 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. The important role of active ingredient manufacturers in the pharmaceutical industry is rapidly changing and can be expected to evolve even more in the future.. 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.
- (Compiled by Firstcall India Equity Advisors Pvt.Ltd)