I am here in Charlotte, North Carolina, this week for Informex 2011, the trade show of custom and batch manufacturers, which raises a fundamental question. What is the future for outsourcing of chemically synthesized active pharmaceutical ingredients (APIs) and pharma intermediates?
The competitive forces at play for contract API manufacturers are steep and come from many directions. Although many of the pharmaceutical majors have publicly articulated their interest in increasing their level of external manufacturing as part a strategy of manufacturing rationalization, reduction of fixed costs, and achieving greater flexibility in managing production economics and the supply chain, that does not spell good news for all suppliers. Many pharma companies are consolidatiing their vendor base and are working with fewer suppliers. Earning and keeping a place at the much coveted table of preferred suppliers to Big Pharma is increasingly competitive. Combine those dynamics with the decreased opportunities resulting from weaker pipelines, fewer approvals of new molecular entities, generic-drug incursion, and a still recovering emerging pharmaceutical sector, and fine-chemical suppliers and contract API manufacturers face a challenging environment.
There are other longer-term issues at play as well. Western contract API manufacturers and fine-chemical producers face an additional hurdle when competing with offshore suppliers in addition to the well-established cost pressures, namely the strategic interest of pharmaceutical companies to increase their presence in emerging markets. Domestic contract manufacturers in India and China can provide something Western contract manufacturers cannot: access to local markets, something particularly true when a contract API manufacturer may be a unit of a domestic pharmaceutical company.
Finally, fine-chemical suppliers also face a shifting drug-development paradigm. Although small-molecules still dominate the global pharmaceutical market, their strength is lessening as biopharmaceuticals gain market share. According to a recent Datamontior analysis, the value of the small-molecules market from the top 50 pharmaceutical companies was $411 billion in 2009, and the biologics market from these companies was only valued at $124 billion. By 2014, however, Datamonitor projects that the small-molecule market will contract by $17 billion as a direct result of the 2011 patent cliff and heavy erosion of branded-drug sales caused by generics. Monoclonal antibodies are expected to generate an additional $23 billion between 2009 and 2014, and 36 of the top 50 pharmaceutical companies (excluding generic-drug companies companies) will have a presence in biologics (monoclonal antibodies, therapeutic protein, or vaccines) sector by 2014.
In sum, none of these forces is new to contract API manufacturers and fine-chemical producers, but what will continue to evolve is how these suppliers will face these challenges and adopt their business models in terms of their geographic scope, technology offerings, and service differentiation.