Evaluating Competitive Forces in Contract Manufacturing

A multitude of contract service providers compete in the outsourcing segments for API manufacturing and finished drug product manufacturinga. Added to this mix are the contract manufacturing activities of large innovator-drug companies and generic-drug companies. The author examines the opportunities and positioning of such players.

Contract manufacturing of APIs and finished drug products is an important sector in the pharmaceutical outsourcing market. Although these contract services generally are provided by pure-play third-party providers, such as CDMOs and CMOs, pharmaceutical companies themselves can be a part of the supply base for contract-manufacturing activities. Seeking to monetize internal manufacturing capacity through external manufacturing activities, third-party manufacturing can be an attractive proposition for pharmaceutical companies.

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Crunching the numbers

Recent analysis shows moderate to strong growth for contract pharmaceutical manufacturing, depending on the specific sector involved. Global pharmaceutical contracting revenues totaled nearly $218 billion in 2011, and are expected to reach nearly $361 billion in 2016, increasing at a compound annual growth rate (CAGR) of 10.6%, according to recent research by the market research firm Business Communications Company (BCC). BCC divides pharmaceutical contracting into four segments: contract manufacture of over-the-counter (OTC) drugs and nutraceuticals; contract manufacture of bulk drugs and dosage-forms; contract research; and contract packaging.

The OTC drug and nutraceutical segment accounted for nearly $128 billion in 2011, and is expected to grow at a CAGR of 10.9% to reach nearly $215 billion in 2016, according to BCC. Global revenues for contract manufacturing of bulk drugs and dosage forms were valued at $53.4 billion in 2011, and are expected to increase at a CAGR of 10.1% to reach $86.3 billion in 2016. The contract-research segment was worth $30.2 billion in 2011, and is expected to increase to $50.5 billion in 2016, a CAGR of 10.8%, according to BCC. The packaging segment, worth $6.4 billion in 2011, and is expected to grow to $9.3 billion in 2016, a CAGR of 7.8%.

Drilling down specifically to APIs, moderate growth is expected for contract manufacturing of APIs. The global market for APIs for human use was valued at $101 billion in 2010, according to data from the Italian Chemical Pharmaceutical Generic Association (CPA) in its recent report, "Competition in the World API Market." Of the total market value, the captive market (i.e., APIs produced within pharmaceutical companies themselves for their own needs) accounted for 61.4% of the total API market, or $62 billion in 2010. The merchant market for APIs (i.e., APIs sold by third parties) accounted for the remaining 38.6%, or $39 billion, according to CPA. For purposes of this market, "API" refers to the active ingredient and advanced intermediates (i.e., intermediates requiring GMP compliance). The global API merchant market is almost evenly divided between APIs supplied to the generic-drug market and APIs supplied to the innovator-drug market. Of the global merchant market for APIs, generic APIs accounted for approximately 48.7%, or $19 billion, in 2010, and branded (i.e., innovator) APIs accounted for the remaining 51.3%, or $20 billion, according to CPA (1).

The world merchant API market (i.e., APIs sold by third parties) for both generic and branded/innovator APIs is projected to increase at an average rate of 5.1% during the next five years to reach $50 billion by 2015, up from $39 billion in 2010, according to CPA. The demand for generic APIs, however, will outpace growth for branded/innovator APIs. The merchant market for generic APIs is projected to increase at an annual rate of 7.3% to reach $27 billion by 2015. The merchant market for branded/innovator APIs is forecast to increase at the annual rate of only 2.8% to reach $23 billion by 2015, according to CPA. This differential in growth rates will cause the share of generic APIs in the merchant market to increase from 49.7% in 2010 to 54% by 2015 and for the share of innovator APIs in the merchant market to decrease from 51.3% in 2010 to 46% by 2015, according to CPA (1).

Company activity

Providing contract-manufacturing services is not in of itself new for pharmaceutical companies, and several large pharmaceutical companies have well-established contract activities. As the underlying fundamentals for cost-effectively managing a manufacturing and supply network evolve, however, these third-party services provide another way to monetize capacity and fixed assets. The interest of Big Pharma companies in highlighting their contract-manufacturing activities was evident by the participation of pharmaceutical companies at recent trade shows. A case in point is CPhI Worldwide, the large trade show of contract API manufacturers and fine-chemical producers, which is colocated with the International Contract Service Expo (ICSE), which includes contract manufacturers of finished drug products. At the recent CPhI/ICSE event held in Frankfurt, Germany, in October 2011, the contract-manufacturing arms of several large pharmaceutical companies, both innovator-drug companies and generic drug companies, were on display.

On the innovator-drug company side, these companies included the contract services of Pfizer (Pfizer CentreSource), Sanofi (Commercial and External Partnership, Industrial Affairs [CePiA]), GlaxoSmithKline, Mitsubishi Tanabe Pharma (API Corporation), Bayer (Bayer Healthcare Pharmaceuticals), Boehringer Ingelheim, Abbott, and Merck & Co. (MSD API). Generic-drug companies at CPhI/ICSE offering contract services included Sandoz (the generic-drug business of Novartis), Teva Pharmaceutical Industries (Teva Active Pharmaceutical Ingredients [TAPI]), Activas, and Mylan. A review of these companies' activities shows capabilities in both API and finished product manufacturing.

For example, Pfizer CentreSource, headquartered in Kalamazoo, Michigan, is a provider of APIs and dosage-form manufacturing. It is a supplier of fine chemicals, steroid APIs (e.g., corticosteroids and hormonal steroids), and steroid intermediates. It also provides custom fermentation services as well as sterile manufacturing (blow/fill/seal/services) and solid dosage manufacturing, including high-containment services.

The CMO division of Sanofi, CEPiA, provides corticosteroids, steroid diuretics, vitamin B12, cardiovasculars, analgesics, anti-inflammatories, antihistamines, antibiotics, prostaglandins, and opiods (morphine and codeine salts). The company has expertise is multistep custom synthesis, steroid chemistry, prostaglandins chemistry, enzymatic conversions, synthesis of high-potency compounds, peptide and protein chemistry, micronization, and large-scale chromatography. The contract arm uses Sanofi's chemical, fermentation, and biotechnological facilities in France, Germany, Italy, Hungary, Eastern Europe, Singapore, and India

On the API side, Bayer Healthcare Pharmaceuticals uses several plants for its contract activities. Its supply center in Bergkamen, Germany, is Bayer Pharma's major facility for the production of intermediates, active ingredients, and bulk pharmaceutical chemicals for steroid hormones through chemical and microbiological synthesis. It also has a micronization plant in Berlin-Charlottenburg, another API plant in Elberfeld, Germany, and a second major chemical facility for hormone and steroid production in Orizaba, Mexico.

On the API side, the contract-services arm of Boehringer Ingelheim provides contract manufacturing of biologic-based APIs, chemical APIs, and fine chemicals. On the biologics side, a key offering is its BI Hex high-expression system for monoclonal antibody production. The company recently launched a new program, "Lean-to-Clinic," which consists of streamlined work packages and which speeds up cell-line development, Phase I process development, and preclinical and clinical supplies from mammalian cell cultures.

Although small relative to the revenues generated by drug sales, the contract-manufacturing activities of pharmaceutical companies can contribute positively to a company's bottom line. For example, TAPI, the contract manufacturing arm of Teva Pharmaceutical Industries, the largest generic-drug company, generates approximately $640 million in annual third-party sales, according to company information. The contract-services arm operates through 21 production plants, which includes the company's major manufacturing facility in Israel.

Through its acquisition of a controlling interest in Matrix Laboratories in 2007, the generic-drug and specialty pharmaceutical company Mylan gained a position in API manufacturing. Based in Hyderabad, India, Mylan Laboratories (the former Matrix Laboratories) has several operating units, including a network of API and intermediate manufacturing facilities in India and China.

Reference

1. P. Van Arnum, "API Outlook," Pharm. Technol. Sourcing and Management 8 (1), online, www.PharmTech.com/PTSM, Jan. 12, 2012.