Category report: Active pharmaceutical ingredients · 2020. 7. 17. · Procurement Leaders Categor...

Category report: Active pharmaceutical ingredients www.procurementleaders.com

Procurement Leaders | Category report: Active pharmaceutical ingredients

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Value chain 3Process 4Cost drivers 7Pricing and indexing 10Demand 12Porter’s five forces 13Future 14Corporate social responsibility 15Checklist 16Market regionalisation 18

Contents


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Vertical integration is common, with distributors both manufacturing and distributing laboratory supplies, enabling buyers to use a single supplier

Value chainAPI MANUFACTURERSRAW MATERIALS SUPPLIERS PHARMACEUTICAL COMPANIES

ROLE• Flexible contract-based manufacturing of

specific active pharmaceutical ingredient (API) products.

• Provide efficient scalability of API production volumes for customers.

BUSINESS OBJECTIVES• API manufacturers benefit from

maximising economies of scale in product research, manufacturing and marketing.

• Maximise capacity utilisation.• Source good-quality raw materials from

reputable suppliers.• Onboard and retain a highly skilled and

technical workforce.

PROFITABILITY46.9%**Source: Mean average profitability taken from Aurobindo,

Cipla, Dr Reddy’s, Sun Pharmaceuticals and Teva

Pharmaceuticals annual reports, 2015.

ROLE• Obtain raw materials from natural or

synthetic sources.• Ensure raw materials meet required

specifications: chemical identity; impurity; and assay testing to determine ingredients and quality.

• Provide statements and certificates for responsibly sourced raw materials.

BUSINESS OBJECTIVES• Develop knowledge of key raw materials

and their characteristics, including chemical stability, impurities and biology.

• Improve overall reputation by obtaining raw materials through safe and sustainable processes.

PROFITABILITY7.1%**Source: Yahoo Finance, 2016.

ROLE• Use APIs as inputs in the formulation

of generics, biosimilars and other areas of therapeutics.

BUSINESS OBJECTIVES• Gain market share and maximise profits

by discovering and promoting new drugs.

PROFITABILITY21.4%** Source: Yahoo Finance, 2016.


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Process, part one

STAGE ONE• Starting materials for API production

are introduced.

STAGE TWO• At this stage, intermediates are produced

and used in the formulation of APIs.• Pharmaceutical APIs are composed of

a number of mixtures of intermediates and excipients.

STAGE THREE• After the integration of raw materials and

intermediates, the active substances are isolated, purified and converted into APIs.

STAGE FOUR• Products are processed and packaged to

be transported to customers.

• APIs can be produced by different methods, including:

• chemical synthesis;• fermentation;• recombinant (DNA or other forms

of biotechnology processes);• isolation (recovered from various

natural sources); and• methods that use a combination of

the previously mentioned processes.

API MANUFACTURING PROCESS

• An API is an organic (speciality/fine) chemical that can be used to cure a particular disease because it is toxic to specific bacteria. API substances are typically produced in the form of powder and used in a number of formulations, including:

• tablets;• creams and ointments;• injections (sterile);• capsules;• patches;• infusions (sterile);• solutions and suspensions; and• eye drops (sterile).

MANUFACTURING DOSAGE FORMS MANUFACTURING PROCESSES


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Process, part two

ChemaicalManufacturing

Production of APIstarting material

Collection of organ,fluid, tissue or plants

Establishment of masterand working cell bank

Establishment ofcell bank

Maintenance of thecell bank

Maintenance of thecell bank

Cell culture and/orfermentation

Production ofintermediate(s)

Introduction of thecell into fermentation

Isolation and pufification




Futherextraction

Collectionof plants

Cutting andinitial extraction

Physical processingand packaging





API derived fromplant or animal sources

Herbal extactsused as APIs

Biotechnology:fermentations/cell culture

Cutting, mixing, and/orinitial processing/

extractions

Introduction of APIstrating material

into process

Introduction of APIstrating material

into process

‘Classical’fermentation toproduce an API

TYPE OFMANUFACTURING

API MANUFACTURING PROCESSAPI MANUFACTURING PROCESS

Source: Health, Nutrition and Population (HNP) discussion paper

There are five main processes by which APIs are produced


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Process, part three

Yes

Yes

No

No

Manufacture API

Reject APIbatch

Release APIbatch

Send API to warehouse andAPI sample to analytical function

StoreAPI

Recieve samplefor testing

MANUFACTURING

WAREHOUSING

ANALYTICAL

QUALITY ASSURANCE

To process map forbatch record reviewand manufacturing

deviations (not shown)

Perform testing asper specification

and issue CoA

All results meetspecification?

Initiate root-causeanalysis in QA system

Deviationduring tesing?

API QUALITY CONTROL PROCESSAPI QUALITY CONTROL PROCESS

Source: SAP Press, 2016

• APIs go through rigorous testing and quality control processes to ensure end-use safety.

• After initial production, APIs are sent to warehousing facilities for storage.• A sample is sent for testing according to regulatory good manufacturing

processes (GMPs) and Certificate of Authenticity (CoA).• If samples meet the necessary requirements, the batch is released for

distribution. If the sample fails to meet regulatory requirements, however,

suppliers must go back to find, analyse and resolve the root cause of quality noncompliance along each stage of the production process.

• After assessing the root causes of non-compliance, if samples meet all specifications then the batch is released for distribution.

• If samples still fail to meet specifications after analysis and resolution processes, the batch is rejected.

Each batch of APIs must go through extensive quality control testing prior to release


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Production costs can be split into two main segments: overall production and conversion costs

Cost drivers, part one

API production• Equipment costs are the largest expense for API suppliers.• Specialist equipment is required to conduct API manufacturing

processes, using methods such as biotechnology production or in ensuring regulatory quality measures, such as in-process controls.

• When producing a single API, factory costs can account for as much as 50% of supplier expenses in terms of API conversion as a separate cost segment. This segment also includes utilities expenses, such as energy.

• Raw materials are typically the second largest supplier expense, accounting for up to 30% of costs.

• Consumable materials comprise up to 20% of suppliers’ overall production costs. These are key materials used in support of manufacturing, or that come into contact with APIs during the production process but may not necessarily become part of the final product. These may include, for example, biological indicators or chemical indicators.

API conversion• Conversion processes account for an estimated 20% of suppliers’

expenditure in terms of API conversion as a separate cost segment.

• It is estimated that building/infrastructure costs comprises up to 19% of overall supplier expenditure.

• APIs are produced in chemical plants through multiple processes: isolation; fermentation; and chemical synthesis. Each stage requires specialised on-site storage facilities.

• Labour and other overheads are estimated to account for up to 17% of supplier expense. Suppliers onboard personnel with specialist expertise and technical abilities. Expertise includes operating sophisticated equipment, conducting chemical reactions and maintaining quality control.

• Research and development (R&D) costs are identified as the smallest cost for suppliers, comprising an estimated 9% of expenditure. R&D activitiy is primarily focused on three central areas:

• process development (pre-/clinical, yield improvement, and so on).

• analytical (method validation and transfer, testing raw materials, testing APIs, third-party sample analysis, etc).

• additional services, including sample preparation for toxicity studies.

Cost components

Source: Procurement Leaders analysis based on estimated figures from Astra Zeneca annual report, 2015; Merck annual report, 2015; and Sun Pharma annual report, 2015

0

20

40

60

80

100 Equipment

Consumable materials

Building/Infrastucture

Labour

Research anddevelopment

Note: Percentages have been subject to rounding

35

20

19

17

9

API PRODUCTION COSTS BREAKDOWN (%)API PRODUCTION COST BREAKDOWN


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Cost drivers, part two

• The sophistication of equipment used will vary depending on the complexity of API formulations.

• Procedures such as preparing equipment for chemical reactions and subsequent cleaning can negatively affect production efficiency by increasing changeover costs.

• Factory costs are relatively easy to calculate through stoichiometry, which measures quantitative relationships between products or reactants necessary for a chemical reaction. This allows suppliers to accurately estimate costs.

• Global fluctuations in oil prices will affect supplier utility expenses. For example, greater input energy costs may cause suppliers to increase API prices.

• The limited availability of raw materials can negatively impact company profitability. For example:

• Political instability in developing countries rich in natural resources.

• Unpredictable environmental conditions and sustainability efforts can reduce the use of chemical plants in obtaining key raw materials.

• If consumable materials such as biochemical indicators are introduced to the environment, they can penetrate and contaminate ecosystems, causing changes in the functions of certain organisms in the biosphere. The use of consumable materials, therefore, presents crucial corporate social responsibility (CSR) cost considerations for suppliers.

• Investment costs vary considerably, depending on factors such as site location, the availability of infrastructure, plant sophistication in terms of automation, and the quality of equipment.

• Labour costs are affected by geopolitical and economic conditions. More expensive labour costs in the west can negatively impact supplier profitability, compared to typically lower labour costs in the east (which can assist supplier profits).

• Additionally, complex API formulations will require a specialist workforce which may incur higher salary costs.

• API R&D processes are currently dedicated to optimising and redesigning production routes to ensure safety and quality.

• Failure to do so can incur significant product recall and audit costs, which would affect providers’ profitability.

Implications

Source: Individual API conversion cost based on estimates from Pharmaceutical Processing, 2010

0

20

40

60

80

100 Factory costsof conversion

Raw materials

Conversion of raw materials

Note: Percentages have been subject to rounding

50

30

20

INDIVIDUAL API CONVERSION COSTS (%)INDIVIDUAL API CONVERSION COSTS


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Suppliers should focus on improving operational functions to maximise cost savings

In 2007, Tykal, Gronauer and Friedli published a study entitled Improving Operational Excellence API in Pharmaceutical Technology Sourcing and Management Volume 3, Issue 3.• The study benchmarked 21 API production plants. An average

of the three highest- and three lowest-performing sites in each category were compared to evaluate areas for improved efficiency and subsequent potential cost savings opportunities. The study found that:

• All API sites struggled with maintenance and asset utilisation, with low-performing sites having required further unplanned maintenance, requiring additional maintenance employees on site (see Productive maintenance, above).

• As a result low-performing sites incurred additional costs €86.7m (see Productive maintenance, above).

• API sites face a trade-off between minimising customer complaints and minimising the number of rejected batches, revealing the importance of understanding processes that facilitate sustainable improvements (see

Quality assurance and quality control costs, above).• Low-performing sites were found to have quality

assurance and control costs/total costs twice those of high-performing sites.

• Lastly, the study found a large discrepancy between the three top-performing and the three lowest-performing sites in average changeover time.

Overall, the study revealed key areas that suppliers operating with both high- and low-performing API sites should focus on improving to maximise potential cost savings.

• Invest in high-tech equipment to reduce the financial risks associated with outdated and underperforming equipment, such as unplanned maintenance, operational delays and increased staff costs.

• Implement and embed comprehensive quality processes at every stage of production.

• Improve volume flexibility to efficiently meet demand and maximise economies of scale.

• The study found plants lacked clearly defined key performance indicators (KPIs). As such, buyers should work with suppliers to establish operational excellence initiatives, controlling these through KPIs.

• Buyers can also help to manage costs in a number of ways:• negotiate freight methods to protect APIs from

contamination and adulteration;• conduct independent audits of manufacturing sites

to confirm GMP standards and reduce financial risks associated with quality non-compliance; and

• ensure consistent, clear and accurate communication to avoid costs associated with logistics errors.

What can the supplier do to manage costs? What can the buyer do to help the supplier manage costs?

Cost drivers, part three

Source: Pharma Tech, 2007 and 2015

71.67%

88.67%

38.33%

12.67%

86,670€

9,430€

2.08

10.25

Low3 – Performer

High3 – Performer

Overall Equipment Effectiveness rate (in %)

Unplanned maintenance(in %)

Maintenance cost (planed and un-planed) / volume dependent employ-

ees (in €)

Volume dependent employees / No. of maintenance employees

PRODUCTIVE MAINTENANCEPRODUCTIVE MAINTENANCE


Low3 – Performer

High3 – Performer

6.00%0.67%

1.33%2.2%

10.5%4.5%

8.7%18.9%

2.545.53

Rejected batches

Customer complaint rate

Quality assurance/control costs/Total costs

Number of deviations/Number of batches released

Volume-dependant employees/QA/QC employees (total)

QUALITY ASSURANCE AND QUALITY CONTROL COSTSQUALITY ASSURANCE AND QUALITY CONTROL COSTS


Low3 – Performer

High3 – Performer

29.333.43

5.05.4

3.527.02

12030

9796.5

Average changeover time (days)

Raw material turns

Finished goods turns

Volume flexibility (days)

Service level (%)

JUST IN TIME INVENTORIESJUST IN TIME INVENTORIES


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Pricing and indexes, part one

• APIs can be purchased at an indexed unit cost, generally based on an agreed annual capacity.

• The pricing mechanism takes account of changes in suppliers’ costs of raw materials.

• Essential pricing inputs include: volume; complexity; and the chemical type.

• APIs are a fine/speciality chemical; like any other chemical, factory costs can easily be estimated and used as a benchmark.

• By using a defined stoichiometry, suppliers can estimate factory costs. If the factory costs are greater than the cost estimates, this may suggest there is potential to improve manufacturing technologies, which will enable more accurate pricing estimates.

Pricing mechanism• Limitations in availability and increases in

specific costs will have a significant impact on the pricing of API products, examples include: commodities; transportation; and national and regional tax regimes.

• Experienced suppliers are aware of the risks involved when switching vendors, including quality conformance, contractual obligations and regulatory complexities.

• Suppliers can use their reputation and product portfolio to negotiate on price.

Pricing strategy• Buyers risk incurring significant costs if they

choose to switch suppliers.• Considerable regulatory costs are involved

when switching.• Additionally, the regional nature of the

market means that it can be quite difficult for buyers to switch to suppliers located in different regions. For example, the Brazilian health authority, Agência Nacional de Vigilância Sanitária (ANVISA), has strict API procurement policies for domestic pharmaceutical companies.

• Changes in transportation methods, due to potential differences in distance between production sites and buyer storage facilities.

Switching costs• When buyers outsource APIs, additional

costs include:• Supplier audits and qualification• Technology transfer, for instance, different

lab to plant processes, new unit operations, and different raw materials may be required.

• Legal costs (damaged products, contractual agreements or health and safety of end users).

• Port handling fees (import and export taxes).• The safe disposal of both hazardous and

toxic chemicals.

Additional costs

Stoichiometry is a calculation suppliers can use to estimate factory costs


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It is estimated that 36% of those involved in laboratory equipment buying decisions now have an annual budget of $50m-$100m

Pricing and indexes, part two

Speciality chemicals• Are significant component of API production, the segment

grew steadily between 2012 and 2014 before contracting by around 11% during 2015 (see Dow Jones US speciality chemicals index, above).

• Since the start of 2016, however, the market has recovered, with steady growth expected to continue into 2017. This can be partially attributed to increased demand from downstream markets, including industrial, pharmaceutical, and food and beverage buyers.

Raw materials• Raw materials can be identified as the second-largest expense

for API suppliers, accounting for up to 30% of total expenditure of the conversion process.

• In addition, consumables are estimated to account for up to 20% of overall production costs. Fluctuating prices and the availability of raw materials can significantly impact supplier profitability.

• Volatile energy prices make suppliers sensitive to changes in the oil and gas industry, .

• In terms of energy, The World Bank Energy Price Index rose 3% in the third quarter of 2016 from the previous quarter (source: The World Bank, 2016).

• Meanwhile, coal prices surged 30% on government-ordered production cuts in China, which raised import demand (source: The World Bank, 2016).

• Natural gas prices jumped 21%, largely due to developments in the US: strong cooling demand due to warm weather, falling production, and higher exports - both by pipeline to Mexico, and via liquid natural gas (LNG), mainly to South America (source: The World Bank, 2016).

IndexesDOW JONES US SPECIALITY CHEMICALS INDEX 2012-2016

900

800

700

600

500

4002012 2013 2014 2015 2016

DOW JONES US SPECIALITY CHEMICALS INDEX, 2012-2016

COMMODITY FUEL (ENERGY) INDEX 2011-2016 (2005=100, INCLUDES CRUDE OIL, NATURAL GAS AND COAL PRICE INDEXES

900

800

700

600

500

4002012 2013 2014 2015 2016

DOW JONES US SPECIALITY CHEMICALS INDEX, 2012-2016

• The global speciality chemical market is projected to grow in the near future, as demand for enhanced chemicals continues to increase. This demand is expected to stem from various industrial and pharmaceutical industries, as the need to enhance product performance in these sectors continues to increase.

• Growing environmental concern about the use of speciality chemicals, coupled with stringent regulatory frameworks, is likely to restrict the growth of the market.

• After a period of decline, World Bank forecasts now project energy prices to increase during 2017.

Outlook

NOMINAL PRICE INDEXES (ACTUAL AND FORECASTS) AND FORECAST REVISIONS

Price Indexes (2010 = 100) Change (%) Revision

2012 2013 2014 2015 2016 2017 2015-16 2016-17 2016 2017

Energy 128 127 118 65 55 68 -15.1 24.0 0.8 2.0

Source: Google Finance, 2016. Source: International Monetary Fund via Index Mundi, 2016.


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Asia-Pacific is considered the most lucrative market for APIs

DemandWhere• Asia-Pacific has become the largest API

market. A number of factors have driven growth in the region, including: regional growth in the pharmaceutical industry; an increasing governmental focus on generic drugs; rising demand for biological and speciality drugs; and technological advances.

• The European market is the second-largest market, with growth attributed to the development of the pharmaceutical industry and advances in technology. North America, meanwhile, is the third-largest market.

• Asia-Pacific is considered the fastest-growing market due to new drug applications in the region; availability of low-cost production facilities; cheaper labour costs; and the wide availability of raw materials.

• India and China currently lead API production in the region, exporting to Europe, North America and the rest of the world (ROW).

• According to the European Fine Chemicals Group, Asian suppliers currently hold an estimated 63% of the API market in Europe (source: EFCG, 2016). By contrast, European API suppliers typically dominate US and Japanese markets (Source: EFCG, 2016)

• Demand for generic and other therapeutic drugs is rapidly increasing in South America, Africa and the Middle East.

• Factors boosting API demand in these regions include: improvements enabling cost-efficient manufacturing; a large patient pool; an ageing population; increasing demand for generics; and improving healthcare infrastructures.

• Demand growth for APIs is driven by various factors, including:

• increasing prevalence of chronic diseases;• technological advancements in API

manufacturing processes;• growing incidence of age-related

diseases; and• complicated cardiovascular diseases.

• Trends suggest growing demand for APIs spans numerous medical disciplines, including: cardiology; oncology; anti-inflammatory treatments; gastrointestinal;

metabolic disorders; neurology; and musculoskeletal disorders.

• In the period to 2021, the prevalence of complicated cardiovascular conditions is estimated to propel therapeutics by a compiund annual growth rate of 6.6%.

• According to the World Health Organization (WHO), cancer is one of the major causes of global mortality. The oncology segment is therefore projected to be the fastest-growing segment of the global API market (source: Medgadget, 2016).

Who


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Buyers have limited power when purchasing capital equipment as many supplier’s products are patented, making it difficult to switch between providers

Porter’s five forces

POWER OF BUYERS: MEDIUM THREAT OF NEW SUBSTITUTES: LOW/MEDIUM

• The complex nature of APIs requires buyers to ensure they are sourcing from reputable and reliable producers.

• Buyers cannot get drugs approved without key inputs such as correct active substances, which therefore means APIs are a fundamentall component in the generics approval process.

• Growing demand for specialised HPAPIs in

creating drugs for critical illnesses such as cancer means buyers must find suppliers with the capacity and portfolio necessary to obtain desired products. If such products are only produced by a handful of suppliers, buyers’ bargaining power is likely to be reduced.

POWER OF SUPPLIERS: MEDIUM/HIGH

RIVALRY: LOW

THREAT OF NEW ENTRANTS: LOW/MEDIUM

• For drug innovators, generics may prove to be an extremely cost-effective alternative, offering significant savings to customers.

• Raw materials are key components in chemicals synthesis and API production.

• Bargaining power will depend on the availability, concentration and supply of chemicals, consumables and raw materials.

• Companies are expanding to compete with suppliers from across the globe, with many companies growing as a result of mergers and acquisitions to pursue R&D projects (source: EFCG, 2016). For example, current trends suggest that key providers such as Teva Pharmaceuticals, Zhejiang Medicine and Dr Reddy’s are adopting this strategy. In October 2016, Cambrex acquired PharmaCore, a small molecule API specialist, for clinical phase projects for a $25m.

• Rivalry among suppliers is also influenced by significant fixed and exit costs, reducing competition in the API market, (source: Transparency Market Research, 2016).Drug price control policies across various countries are becoming a crucial restraint for market rivalry in terms of limitations implemented by the governments to foster competition.

• Generally, strict regulatory requirements make it extremely difficult for new providers to enter the market.

• Developing countries typically have fewer entry barriers, however, allowing

companies to operate on smaller margins while still achieving significant revenues through scale.

• Instead of substitutes threatening API products, the market tends to focus on using the most innovative processes through state-of-the-art technology, equipment and new synthesis procedures.

• However, the growing prevalence of cancer, coupled with the rising need for target-specific cytotoxic therapeutics, is expected to boost demand for specific types of APIs

in the near future (source: Grand View Research, 2016).

• Additionally, increased cancer rates are expected to drive the high-potency API (HPAPI) market This is due to the side effects associated with chemotherapy, which also affects noncancerous cells. Targeted therapy that includes the use of HPAPIs is becoming more popular.


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Future

• The evolution of personalised medicines – for patients who have been separated into different groups based on medical decisions, practices and interventions based on predicted responses to drugs or disease risk level – is projected to increase demand for advanced APIs (source: EFCG, 2016).

• In terms of product, APIs are segmented by drug types, including: branded, over-the-counter and generic.

• Of these, the generic segment is expected to grow most significantly over the next few years as as a result of limited costs (source: Medgadget, 2016).

• Biologics have become one of the top-selling drug in North America and the expected market entry of biosimilars with flexible regulatory processes is projected to have a downstream effect, resulting in the increased use of APIs.

• Key product trends in the API market identified at CPhI Worldwide, 2016:

• Pattern shifts from cost control to value-added services. Contract manufacturing organisations (CMOs) are starting to move away from fee-based services to integrate themselves with the value chain of pharmaceutical companies.

• Attractive opportunities in the disposables/single use of bioreactors highlights a growing focus on single-use technologies in the market of API production.

Future of the product• The global API market was worth $127bn in 2014 and is

estimated to reach a value of $186bn by 2020.• The API market is also forecast to grow at a CAGR of 6.3%

between 2015 and 2021 (source: Medgadget, 2016).• The generic and custom sectors are also project to grow by a

CAGR of 4.8% and 5.1%, respectively. This can be attributed to growing trends in new high-tech therapeutics, coupled with novel and innovative delivery systems (source: EFCG, 2016).

• Contract manufacturing is also expected to emerge as a major segment as a result of lower costs and better-quality production (source: Medgadget, 2016).

• Suppliers are expected to further invest in research into quality, building/infrastructure and safety in a bid to improve production processes. Such investments aim to encourage the creation of safer and environmentally friendlier technologies.

• The market is becoming more fragmented, driving consolidation among large providers such as Lonza, Patheon and AMRI (Source: CPhI, 2016).

• A considerable number of patents for blockbuster drugs expired between 2011 and 2015, opening the field for other companies to introduce drugs, thereby increasing competition; this trend is forecast to continue.

• The Chinese and Indian markets are expected to continue to grow as a resul to increasing production capacities; and a growing number of domestic and internation companies entering these markets.

Key market trends identified at CPhI Worldwide, 2016:• Growth in outsourced biopharma manufacturing will continue

to increase. The market is often characterised as east versus west. Past trends show manufacturing being reshored to developed countries as a result of quality and intellectual property concerns.

• However, more recent trends suggest manufacturing is swinging back to developing countries as quality control, technology and infrastructure improve.

• Increasing growth in flexible facilities in emerging business models. Larger CMOs such as Patheon Pharma are starting to provide a dual source of supply for leading pharmacuetical companies in API products and consumable materials.

• Growing need for unique/niche capabilities in HPAPIs, as emerging markets companies in India and China continue to develop specialist expertise.

Future of the market

The global API market is estimated to be worth $186bn by 2020


15

Under its ‘Go Ambient’ initiative, Thermo Fisher uses 2,444 fewer metric tonnes of refrigerant.

Corporate social responsibility

Situation:• The total volume of APIs that enter

the environment with the potential to negatively affect organisms is dependent on a number of factors, such as: the population consumption of generics; the ratio of APIs consumed in relation to total sales; pharmacokinetics study activities; and wastewater flows and treatment efficiency

• APIs used to treat human and animal diseases enter the natural environment via multiple avenues: during the manufacture of APIs; human and animal excretion; and by some forms of wastewater collection and treatment system.

• It is common for wastewater to undergo a degree of treatment, which will remove APIs, although success rates vary.

• Residues of APIs such as antibiotics have been measured in water at relatively high

concentrations near major populations around the world, most notably near coastal regions.

• It is estimated that about 20 million hectares (ha) of agricultural land worldwide is irrigated with both treated and untreated wastewater that may be subject to API residues, (source: Potential ecological footprints of active pharmaceutical ingredients: An examination of risk factors in low-, middle- and high-income countries, 2014). Additionally, API-contaminated water used for irrigation has led to industry-wide concerns regarding absorption by plants and soil organisms, as well as having the potential for development and transfer of resistant genes in soil-based pathogens.

Market response:• The market has responded to the

environmental challenges presented by

toxicity to organisms via contaminated wastewater, with key players taking a lead role in initiatives. Pfizer, for example, Pfizer works directly and in partnership with other member companies in trade associations to educate all necessary parties on the science behind wastewater and API residue.

• The company also conducts research into understanding the most appropriate activities which do not pose risks to human health and the aquatic environment.

• Strict laws in most western developed nations require prospective Environmental Risk Assessments Guidelines (2006) (ERA) as part of drug registration processes. These cover global registration requirements for products registered in the US, the EU and Canada.

• After environmental issues caused by exposure to residues of diclofenac, the product was withdrawn from veterinary use in

India (source: Potential ecological footprints of active pharmaceutical ingredients: An examination of risk factors in low-, middle- and high-income countries, 2014).

• Since 2004, the EU has aimed to establish standardised waste disposal practices for all member states

Actions:• Like Pfizer, companies can invest developing

innovative methods to improve wastewater disposal processes and educate the public on appropriate disposal of outdated or unwanted drugs.

• Buyers can include suppliers’ KPIs in CSR and sustainability reports as a way to benchmark waste disposal objectives.

• In the absence of standardised wastewater disposal practices, buyers can include audits and KPI conditions in supplier contracts.

Issue: Toxicity to organisms

• The diffuse-source impact of APIs on organisms through routes such as groundwater is a significant challenge for API suppliers.

• Exposure to residues of the non-steroidal anti-inflammatory drug (NSAID) diclofenac have been found in the tissue of cattle in

Asia and this same drug has resulted in the massive decline of some species of vulture in the Asia-Pacific region, (source: Potential ecological footprints of active pharmaceutical ingredients: An examination of risk factors in low-, middle- and high-income countries, 2014).

CORPORATE SOCIAL RESPONSIBILITY PROFILECSR PROFILE

Human rights

LOW CRITICALMEDIUM

Labour processes

Environment

Fair operating processes

Community development

Comments


16

Checklist, part one

Decision factors:• Buyers should thoroughly investigate

potential suppliers to ensure that stakeholder needs are taken into consideration, based on a number of criteria, including:

• the reputation of a prospective supplierl;• prospective suppliers’ product portfolio

– as the API market is segmented by synthetic products, Biotech products and by biotech product type;

• capacity to maintain a steady and timely supply of GMP-approved products;

• suppliers’ manufacturing capabilities; and• the origin of raw materials.

• Buyers must have the financial capacity to purchase APIs according to demand.

• Due to the regional nature of the market, buyers should ensure they are aware of local regulations when purchasing API products from regions with complex pharmaceutical and healthcare regimes.

Supplier differentiators:• The proximity of production facilities.• Innovative packaging solutions in mitigating

the risk of contamination, adulteration, and mislabelling. Appropriate packaging materials that do not chemically react to API substances.

• Supplier reputation for achieving all required GMPs and GDPs.

• Optimising production capabilities.• Delivery and accuracy.• Suppliers with the most innovative

equipment and technological sophistication for producing complex API formulations. Additionally, the ability to create new specialised formulations that are becoming increasingly popular, such as HPAPIs.

• Under the EU guidelines, key decisive factors for selecting a supplier also include:

• Responsiveness and communication with buyers during unexpected occurrences, such as delays and audits.

• Hygiene practices employed by all parties, from production to transportation.

• Appropriate building infrastructure for API production and storage.

Decision factors and supplier differentiators Onboarding and exit planningOnboarding• Suppliers should meet all legal and regulatory

requirements prior to API production.• Onboard a technically skilled and trained

workforce with the capacity to operate highly sophisticated machinery and specialist expertise in both the chemistry and handling of APIs, as well as other chemical substances.

• Suppliers must have knowledge of and control over sourced raw materials.

Exit planning• Provide all test and assessment

documentation.• Maintain confidentiality of all contracts.• Complete all existing or pending orders.• Pay all outstanding fees.


17

Checklist, part two

• Each quality agreement should clearly outline which party is responsible for CGMP activities relevant to a particular service or operations covered under the agreement.

Laboratory control responsibilities• Agreements on how to describe sampling,

testing, approval or rejection of materials, as well as records and storage of laboratory data.

• Laboratory records should be maintained in accordance with designated facility requirements.

• Appropriate specifications that are consistent with the manufacturing process should be established in accordance with accepted standards.

Quality unit responsibilities• This section should cover compliance,

quality and quality responsibilities.• It should outline communication plans

between buyers and suppliers.

• Agreements should also allow buyers to evaluate and audit partnered supplier facilities to ensure CGMP compliance for specific operations taking place at contract sites.

Time limit responsibilities• Buyers and suppliers should agree on

feasible time limits to ensure quality.• Deviations should be both documented

and evaluated.• In certain stages of production, time limits

vary and may even be inappropriate when processing to a target value (for instance, pH adjustment, hydrogenation, drying to predetermined specification), because the completion of such reactions or processing steps is determined by in-process sampling and testing.

Warehousing and equipment• This section identifies the specific site(s) where

manufacturing operations will be conducted.

• Facilities should be available to store all forms of API products and other chemical substances under appropriate conditions, such as controlled temperature and humidity where necessary.

• Records of environmental conditions should be accurately documented as they are fundamental for the maintenance of material characteristics.

• Parties should determine where responsibility lies for carrying out validation, qualification and maintenance activities for all relevant equipment and systems.

Materials management• The parties should designate responsibilities

for setting specifications of raw materials, audits and supplier monitoring.

• Agreements should also outline how parties will ensure appropriate inventory management with procedures, such as labelling, label printing, quarantine,

prevention of cross-contamination, water and septage waste disposal practices.

Distribution responsibilities• APIs should only be released for distribution

to third parties once they have been released by quality unit(s).

• The product should be transported in a manner that does not adversely affect quality, with special transport or storage conditions stated on the label.

• The manufacturer should ensure the logisitics contractor is aware of and follows appropriate transport and storage conditions.

• A system should be in place by which the distribution of each batch can be readily determined to permit its recall in the event of quality concerns.

Contractual and service level agreement

Setting specific timeframes may not always be appropriate during certain stages of the API production process as the completion of reactions or processing steps are largely determined by in-process sampling and testing


18

Although the API market can be characterised as regional it is becoming increasingly globalised as CMOs continue to integrate into pharmaceutical supply chains

Market regionalisation

REGIONAL VARIATIONSREGIONAL VARIATIONS

ALL LOCAL SAME SUPPLIER EVERYWHEREREGIONAL

LOCALISED GLOBAL PRODUCTREGIONAL

ALL LOCAL PRICING ONE PRICEREGIONAL

SUPPLIERS

PRODUCTS

PRICE

Factors determining regionalisation

• Along with classifications such as API type, drug type and therapeutic areas, the API market is also segmented by geography.

• However, the API market is becoming increasingly globalised (source: EFCG, 2016).

• Different levels of regulation worldwide make APIs a regional market.

• If APIs and final formulations are locally manufactured and financed, the local regulatory authority is the only regulatory body initially involved (see table, below). If the API is produced in the US, for example, the only applicable regulator would be the US

Food and Drugs Administration (USFDA).• If an international producer from India

manufactures an API and sells it to a final formulator in the US, the API would be subject to Indian regulations, however, the US could demand products meet USFDA standards before they are accepted into the country.

• Regulations are also key to the European API market. For example, EU law does not allow the development of generic APIs within member states until patents have expired.

• In Europe, pharmacists are typically offered incentives for substituting branded drugs for

generic versions, which has a downstream effect on the growth of the region’s API market (source: Persistence Market Research, 2016). However, governments in some EU countries have begun supporting the manufacture of generic drugs in the aftermath of the 2008 global financial crisis (source: Persistence Market Research, 2016).

• Europe is not the only region to strictly regulate. Brazil’s health authority, ANVISA, only permits APIs to be purchased or manufactured by organisations registered with the body (source: Persistence Market Research, 2016).

• Many international businesses find it difficult to enter the Brazillian generics market. Around 80% of the API market is shared between four main local providers: EMS; Medley; Eurofarma; and Aché/Biosinté.

• Additionally, many emerging markets are aiming to curtail rising healthcare costs by producing key drugs and APIs domestically. According to reports published by Mexico’s National Association of Drug Manufacturers (ANAFAM), 86% of drugs used in Mexico in 2013 were manufactured within the country.

SCOPE OF AUTHORITY FOR REGULATORY AGENCIES

Country in which API is produced

Country in which final formulation is produced

Financing source

Minimum required regulatory authority for API

Minimum required regulatory authority for final formulation

Local Local Local government

Local government Local government

International produce

Local Local International producing country and local government

Local government

International producer

International producer

Local International producing country and local government

International producing country and local government

Any Any WHO, PQ or SRA

WHO, PQ or SRA WHO, PQ or SRA

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