API Companies Look for Solutions to Problems of Overcapacity
Lack of Capability Differentiation and Competition from Low-cost Manufacturers
30-Nov-2004
Manufacturers in the crowded and highly fragmented European
active pharmaceutical ingredients (API) market are struggling to overcome a variety of
challenges. One of the most pressing of these is the problem of overcapacity. Additionally,
constant price erosions and the large number of participants present in the market combine
to create other challenges such as a lack of capability differentiation.
New analysis from Frost & Sullivan reveals that the total
European API market generated revenues of about USD 4.50 billion in 2003. This is projected
to increase at a compound annual growth rate (CAGR) of 3.8 per cent to reach USD 5.85 billion
in 2010.
While the innovative segment is forecast to experience slow growth, the market for API
in generics is on the upswing, driven by a combination of factors such as the ageing population,
growth of chronic therapies, cost constraints on social security systems, patent expiries
and a thinning pharmaceutical drug pipeline.
The reduced outsourcing of API manufacturing - due to a lack of new drugs and the unforeseen
failures of several late-stage drugs - has created a huge overcapacity in the market. This
overcapacity is also due to the fact that many current Good Manufacturing Practice (cGMP)
manufacturers had made extensive investments in anticipation of strong growth in the custom
manufacturing business.
In the absence of steady business from pharmaceutical customers, companies are now exploring
fresh opportunities in niche segments and in biopharmaceuticals. Good growth opportunities
are especially anticipated for smaller suppliers that are technologically sound in niche
areas such as high potency APIs.
"Growing demand for new APIs by biopharmaceutical companies with innovative drug mechanisms
provide opportunities for API manufacturers," remarks Frost & Sullivan Research Analyst
Himanshu Parmar. "Encouraging growth in the biotechnology sector indicates a promising
future for APIs."
Biopharmaceuticals, which currently constitute around eight per cent of the world drug
market, are gaining increasing importance and experiencing double-digit growth rates. This
can only spell good news for the API market. Again, the ongoing development of novel drugs
and a rapidly ageing population will ensure continued demand for innovative APIs and positively
impact market growth.
Despite these encouraging factors, problems such as capability differentiation continue
to challenge manufacturers to find ways to achieve some kind of distinction in the highly
competitive API market. Production capabilities and technology portfolios that are on par
with each other creates a difficult situation for manufacturers in Europe.
Manufacturers will therefore have to maintain strong customer relationships to ensure a
steady stream of business from them. Enhancing production capabilities as well as improving
service portfolios is essential for sustainable competitive advantage. Given the growing
number of mergers and acquisitions in the API market, this is also likely to strengthen
manufacturers' relationships with the newly consolidated companies and encourage more outsourcing
by them.
"Suppliers need to perform a comprehensive revaluation of their technology and service
portfolios to gain market presence," notes Mr. Parmar. "An integrated approach with speedy
delivery and cost competitiveness needs to be implemented for efficient API manufacturing
and considerable profit margins."
One of the biggest challenges facing manufacturers, however, is the growing competition
posed by low-cost manufacturers in Asia. Asian manufacturers are able to offer cost-effectiveness
as well as meet regulatory standards. In particular, India is emerging as an attractive
choice for API outsourcing due to low development costs, complex synthesis capabilities,
cGMP compliance and a large domestic market.
"Although current capabilities allow Asian manufacturers to target only the generic sector,
they are expected to win pharmaceutical customers in the Western world as they develop
greater manufacturing capacity," says Mr. Parmar. "This trend is already being seen in
large pharmaceutical companies sourcing an increasing number of advanced intermediates
from Asia."
In Europe, the United Kingdom, Germany, France and Switzerland are the major bases for
API manufacturers for the innovative sector. Italy and Spain are showing growth potential
in the generic sector; in fact, Italy has become one of the major bases for generic API
manufacturers due to its advantageous patent regime.
Other news from the department business & finance
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