Read nearly any market report for the actve pharmaceuticals ingredients (API) manufacturing sector in 2016 and it is hard not to feel positive about the industry. According to one of the most recent, published by Persistence Market Research and titled ‘Active Pharmaceutical Ingredient Market’, the global API market will reach $186 billion by 2020 at an annual growth rate of 6.6%.

The rise of APIs – arguably the most important part of any formulated end product – over the past few years has been well-documented. Patents expiring on global blockbuster drugs and an increase in the adoption of generics have allowed the API market to flourish. More recently, the high uptake of biologics (which is expected to outgrow synthetic chemicals around 2015–2020) has kept the market moving at a considerable pace.

“The worldwide API market is transforming as large pharmaceutical companies shift focus toward the biological APIs segment,” said Persistence’s report. “More than 100 different biologic therapeutic agents have been approved for use in the US, and several more are awaiting marketing approval. The companies that used to rely solely on small molecules (synthetic chemical API) for their revenue are now considering new avenues to maintain the revenue stream due to generic influx. Protein-based therapeutics (peptides, proteins, enzymes and antibodies) have emerged as a major growth engine in the biological API market.”

Captive market

Much of the industry’s wider growth is happening in the outsourcing market as captive or in-house API manufacturing becomes overshadowed by contract manufacturers. “The captive API manufacturing market was the dominant segment, but, at present, the market is losing ground owing to the high level of competition coupled with decreased profitability,” said another recent report by Transparency Market Research (TMR). “Correspondingly, the API contract manufacturing market is registering impressive growth.”

The worldwide API market is transforming as large pharmaceutical companies shift their focus toward the biological APIs segment.

Over the past few years, one of the major trends in API manufacturing has been the inexorable shift in production from Europe to the East, primarily India and China. The primary reason for this has been the desire to drive down costs, but more recently, other secondary emerging markets, including South Korea and Taiwan, have emerged as API hubs, while some have noted a shift back to Europe.

“These regions offer more API manufacturers with experience supplying regulated markets than others,” said Molly Bowman, manager, small molecule research at Thomson Reuters.

“South Korea has been an API-sourcing choice for Japanese companies for a number of years, which has prompted API manufacturers in the region to meet EMEA manufacturing standards while offering a lower cost base than other European markets. Over the past few years the government of Taiwan has invested over $2.5 billion into the local pharmaceutical market in addition to establishing a more stringent local Food and Drug Administration.”

According to Dr Gian Mario Baccalini, CEO of Euticals, the move back to Europe – including markets in the West – shows that priorities in the industry are beginning to change. “Big Pharma companies are returning to Europe for their APIs,” he said at last year’s CPhI conference. “That is my view based on Euticals enjoying 12% growth last year, for example, but many others agree and they are engaging in medium and long-term agreements with European pharma players.

“Six or seven years ago, the belief was that the European fine chemicals industry was close to decline, but the new philosophy of the customers gives us a big opportunity to reconsider our relationships with the Big Pharma companies who fell in over with the Asians five to seven years ago.”

Alongside the rising cost of manufacturing in the East, one of the key reasons behind this shift, is the issue of quality and regulatory compliance. The 2008 Heparin product scandal (caused by over-sulphated chondroitin sulphate that avoided detection in quality control tests) shocked the industry but problems still remain. In October last year, FDA banned Megafine, a major Indian API manufacturer, from exporting to the US after it was discovered to be manipulating lab tests. Many feel the European API market offers much better quality assurance.

“We have invested in quality and safety, and this was a very good choice,” Baccalini said of European API companies. “Customers’ concerns have shifted from price to compliance and continuity of supply, and we are seeing a return of clients, especially innovators, who previously left Europe to go shopping for their active ingredients and excipients elsewhere.”

Ian Muir, managing director of Aesica Pharmaceuticals, agrees with that analysis: “When introducing new products to the market, companies tend to favour Western suppliers in order to mitigate risk,” he said in a company press release earlier this year. “This trend differs in relation to compounds, which are more advanced in the product life cycle, such as generic compounds, where there is more evidence of healthy competition between the East and the West.”

European exit?

Of course, not everyone sees Europe as the way forward. In March this year, Lilly threatened to move its API production out of the EU altogether citing the negative impact of REACH, the EU regulation on the Registration, Evaluation, Authorisation and Restriction of Chemicals. “[It] is having a significant detrimental impact on the competitiveness of pharmaceutical manufacturing in the UK,” the company said in comments to a UK parliamentary inquiry into EU life sciences regulation.

Lilly’s view tracks a wider concern about balancing stringent new quality demands with profitability. In 2013, the European Commission introduced mandatory regulations for APIs imported from outside the EU forcing all companies that want access to the single market to comply with good manufacturing practice standards.

Since then, the regulations have kept on coming. Last year the European Commission published revised guidelines stipulating that both the makers and distributors of APIs must track their products across the entire supply chain ensuring full traceability.

Among the changes companies are now required to meticulously document every one of their purchases and sales, written contracts are needed for all outsourcing partners and a CAPA (corrective and preventive action) system is required to avoid and correct deviations.

“Not unlike the GDP guidelines 2013/C 343/01 this is a game changer,” a spokesperson for PLS Pharma told in-Pharmatechnologist after it was announced.

“Although they will initially pose opportunities to address, there is no doubt that the pharmaceutical industry will embrace these new requirements and do everything possible to implement them in a timely fashion.”

While few disagree that the increased adoption of quality standards in API manufacturing from FMP and cGMP to the International Conference on Harmonisation guidelines, have helped improve safety standards, the desire to see a strongly regulated market can often be a burden for manufacturers, particularly when the regulations only apply in certain places.

“Differences in regulatory requirements for different markets have made this global market an extremely complex one to operate in,” said Dr Chris Oldenhof in an article for Innovations in Pharmaceutical Technology.

“Fierce competition within the market, on the one hand, and the very strict limitations imposed by regulatory requirements in only some parts of the market, on the other, have been the source of numerous dilemmas, for the API industry.”

As pharmaceutical companies continue to outsource, the level of competition in API manufacturing is likely to increase even further. “The API manufacturing industry is currently highly fragmented with the presence of several hundred companies that produce APIs for both innovator medicines and generics,” Cynthia Tso and Jansen Jacob told PharmaDeals Review in a recent article. “There is a high degree of redundancy, because a vast number of service providers have very limited differences between their technology platform and manufacturing capabilities.”

Stay flexible

How can companies achieve differentiation in such a competitive marketplace? For the top industry players expanding their market presence through mergers and acquisitions and business consolidation is proving particularly popular at the moment. For others, flexibility and timely decisions are vital.

The demand for drugs to treat the ageing population will definitely boost the sale of active pharmaceutical ingredients.

“Successful, profitable API businesses are founded on strong, but flexible, development portfolios generated by multi-dimensional targeting strategies,” said a recent report by Thomson Reuters.

“The ability to search worldwide API demand, patent, exclusivity, therapeutic area, sales, regulatory and competitive data allows the product selection team to rapidly test a huge variety of approaches and potential product opportunities based on harnessing your unique capabilities, experience and strategic ambitions wherever in the world you wish to operate.”

“Knowing when generic manufacturers will target launches in all your target markets, the constraint dates, is the key to unlocking forward planning and anticipating your prospective customers’ needs before they do,” the report added. “In the US, early market entry possibilities and lucrative 180-day exclusivities through the ‘Paragraph IV’ patent challenge process are a key business strategy.”

Another option is building new capabilities in biosimilars, Antibody Drug Conjugate (ADCs) and Highly Potent Active Pharmaceutical Ingredients (HPAPIs). As the quickest growing segment in the global API market, that latter segment is particular promising at the moment.

“The most positive achievement [within the high-potency API sector in the last 12 months] continues to be sustained innovation in the sector,” Duncan Morgan, business development manager at SAFC, recently told Total Bio Pharma. “This is obviously not only in the highly active sector, but the number of new drug approvals over the past 18 months is almost unprecedented in recent history. That success is driving funding for new materials and the result is an increase in new highly active candidates.”

In the end, whatever strategy API manufacturers choose to take in the coming years they can draw comfort from the fact that, while short-term challenges do exist, the fundamentals look strong around the world.

“The demand for drugs to treat the ageing population will definitely boost the sale of active pharmaceutical ingredients that are popularly used for manufacturing drug products,” said the TMR report. ”Due to a growing pool of geriatrics in Europe and North America, these regions are primarily driving the active pharmaceutical ingredient market. Improving access to healthcare and the growing demand for pharmaceuticals in Asia- Pacific and the rest of the world are likely to create lucrative growth opportunities for the overall market.”