Specialty API Manufacturers Invest for Growth

Ravitaliy/LAGUNA DESIGN/Getty Images; Dan Ward

For decades, APIs, the foundation of the pharmaceutical industry, have been a staid, solid, if somewhat invisible market. Some drug product manufacturers make APIs inhouse, while others outsource their manufacturing to contract development and manufacturing partners.

Recently, however, as drug approvals have approached levels last seen in the early 2000s, APIs have become a dynamic focal point for mergers and acquisitions, investments in innovation, lab and plant expansions, outsourcing growth, and the development of new chemistry platforms.

The past few months have seen significant merger and acquisition activity.  In July 2015, The Siegfried Group bought BASF’s API facilities in France, Germany, and Switzerland for $300 million (1).  In October 2015, Merck KGaA bought Sigma-Aldrich Corp., a supplier of APIs and fine and laboratory chemicals, for $17 billion (2). The acquisition solidifies its biopharmaceuticals business and emphasizes chemical manufacturing in its product portfolio.

At around the same time, Johnson Matthey bought Pharmorphix, a specialist in solid dosage form chemistry, from Sigma-Aldrich (3). The company brings expertise in understanding polymorphism and cocrystallization, and helps to bridge the gap between toxicity testing through Phase I.

Drug product innovation challenges are driving new developments in APIs. “Our customers must find new ways to bring new therapies to market,” says Nick Johnson, strategic marketing director at Johnson Matthey. The company, once synonymous with chemical catalysis, has rebranded its fine chemicals business to focus on custom API development, manufacturing, and life cycle management; chiral chemistry and catalysts; and controlled substance manufacturing. “From a contract manufacturing perspective, [our customers’ innovation challenge] affects how we structure our business and services. Our goal must be speed to market, and we must structure on areas of R&D and around technologies,” Johnson says.

Currently, market estimates peg the global API market at $121 billion, and expect it to reach nearly $199 billion by 2022 (4). Generic pharma firms such as Teva and Mylan produce many of their own APIs inhouse, but also sell to other companies, a practice that is becoming more common.  

More than 10% of the business is made up of specialty APIs outsourced by pharma innovator companies for clinical research (5). Contract companies that focus on API development and manufacturing include Cambrex, Hovione, Siegfried, Johnson-Matthey, and Lonza, are seeing business growth.

Roughly 99% of API volumes (when measured in kilograms) are based on small molecules and 1% from biologics, says Matthew Moorcroft, global marketing director for Cambrex, a contract development and manufacturing organization (CDMO) that specializes in small-molecule APIs.  

However, prices for small-molecule, and even some generic drugs, have been increasing, he notes. Market value share, historically reported between 80-85% small molecules and 25-20% biologics, might tip temporarily even further in favor of small-molecule APIs, Moorcroft adds.

Quality has displaced cost as the top requirement, even in commodity businesses.  As a result, the API business is “no longer a race to the bottom,” according to Peter Werth, CEO of the generic API supplier, Chemworth, in an interview with CPhI for CPhI’s 2016 US Pharmaceutical Industry Outlook, which was released at the Informex show in February, 2016 (6).

“Four years ago, the main consideration that finished formulation companies would take when sourcing an API was cost. These past four years have seen a rapid rise in quality concerns, which are now at the forefront of everyone’s minds,” he said.

API outsourcing on the rise
“Worldwide, large innovator companies are increasing outsourcing requirements,” says Moorcroft. “Coupled with the increasing use of generics, and additional opportunities for increased penetration in developing markets, the industry will continue to experience strong growth,” he adds.

Currently, API manufacturing is the largest business for pharmaceutical CDMOs, the operation most frequently outsourced by small-molecule manufacturers, and the fifth most frequently outsourced operation for biopharmaceutical manufacturers, according to Kate Hammeke, research director with Industry Standard Research (ISR), who shared recent market research findings with Pharmaceutical Technology.

On the commodity API side, an aging population and government spending caps are driving global demand for generic drugs and the APIs used to make them. Recently, Japan has been an area of high generics demand, according to a report by Nikkei Asian Review, as the Japanese government moves to boost use of generics from 50% to 80% of all prescription drugs by 2020 (7).

In Japan, a number of commodity APIs are in short supply, Nikkei Asian Review reported in February, and the pharmaceutical manufacturer, Eisai, plans to start selling APIs for allergy, high-cholesterol and other therapies to generic drug manufacturers in Japan. The company plans to double API production capacity at its plant in Andhra Pradesh, southern India (7), which had been previously used as a captive source. Eisai will use revenues to expand its R&D pipeline, the report says.

Specialty API manufacturing moving back to the US and Europe
In specialty areas, API outsourcing demand that had moved offshore is now coming back to the United States and Europe. “Ten to 15 years ago, its perceived economic benefits made offshoring very attractive. Now, companies are focusing more on quality, and regulations are becoming more stringent,” says Johnson.  

While tax incentives have played some role in stimulating API capacity expansion in the US, insiders say that the onshoring trend has been fueled by concerns about ongoing compliance and data integrity issues at some offshore API manufacturing facilities (Sidebar). The Generic Drug User Fee Act (GDUFA), which charges a fee for manufacturers who want to sell their APIs in the US, is also said to be having an impact.

“Quality and regulatory concerns pertaining to China and India make the US market look increasingly attractive … We are in a renaissance for European and US manufacturing,” said David Hoffman, president of US operations for the API manufacturer, Hovione, in an interview in the CPhI report previously cited (6).

US and European expansions
Hovione plans to expand its facility in East Windsor, NJ, by the end of 2017 (8).The company will more than double API manufacturing capacity at the site, and will also add a new commercial spray dryer, as well as highly potent API capacity.

Meanwhile, Cambrex is expanding its Charles City, IA, facility. “In 2013, we added an additional 40,000 gallons of reactor capacity,” says Moorcroft, “and during the first quarter of 2016, we will see the completion of a new manufacturing facility, which will initially add a total of 70 cubic meters of glass-lined and Hastelloy reactors, significantly increasing the site’s current good manufacturing practices (cGMP) manufacturing capabilities,” he says.  Cambrex also plans to invest in its API site in Sweden to support new late-stage clinical projects, and in its Italian plant, to improve generic API development capacities, Moorcroft says.

As pharma’s drug products evolve, so are the drug substances that make them possible. Specialty actives are becoming more complex and structurally larger, reflecting the increased sophistication of today’s therapies, says Johnson.  

Oncology drug growth drives investment in containment systems
On the small-molecule side, Johnson notes, demand for oncology drugs, the fastest growing segment of the API market, is driving increased investment in high containment capacity. Because fewer of today’s complex new API therapeutics can be separated by crystallization, Johnson Matthey is emphasizing work in advanced separations based on chromatography, Johnson says.  

R&D hubs
Johnson Matthey is focusing some of its API research work and investments in Cambridge, UK, a research hub for many Big Pharma companies, including AstraZeneca, GlaxoSmithKline, and Takeda. The company has expanded its facilities there to bring additional process R&D services and kilo-scale manufacture to the growing site, and to integrate assets that it gained when it bought Pharmorphix.

The project has increased Johnson Matthey’s capacity to perform chemistry and biocatalysis process R&D, route scouting, process development, optimization and scale-up of heterogeneous, homogeneous and biocatalytic processes, as well as the non-GMP kilo-scale manufacture of APIs and intermediates. “We will now be able to scale up processes to the 100-L level,” says Johnson.

Developers have ambitious product-introduction goals
Given robust drug product approval rates and pipelines, individual API suppliers are setting ambitious goals. Cambrex reportedly targets 10 new product introductions a year (9). For Neuland Labs, a specialized API supplier in India, the figure is 10 to 15, says Davaluri Suharsh Rao, director and president of contract research.

Neuland focuses on developing custom manufacturing solutions for innovator companies in the US, Europe, and Japan. The company, which currently produces more than 75 APIs, has spent more than $2 million to expand its API R&D lab in Hyderabad, adding process engineering and parallel processing capabilities, as well as such tools as reaction calorimeters, software and data mining capabilities. The expansion should be completed by the end of 2016, says Rao.

Neuland is investing in lab improvements and employee training to allow it to build skill sets around pharmaceutical quality by design (QbD) and cGMPs. “We’ve realized that QbD results in final product quality and reliability, so we are investing in the infrastructure required,” Rao says. “Companies getting ready to file investigational new drug (IND) and new drug (NDA) applications with FDA will need QbD data for these filings,” he adds.

QbD has also become important for Johnson-Matthey, says Johnson, particularly the use of design-of-experiments techniques. The company has also used modeling and rapid screening to evaluate the effectiveness of APIs for solid-dosage forms, he says.

Neuland’s strategy has been to avoid crowded areas where there is a lot of competition. “We prefer to focus on areas such as complex formulations where there is insufficient expertise, (e.g., metered dose inhalers for respiratory therapies),” says Rao. “These materials are hard to synthesize and have very complex particle size distribution requirements,” he says.

The company has also invested in micronization capacity, and in niches such as deuterated molecules for repurposing approved APIs for new indications. Deuteration is one of many drug repurposing strategies that are being explored today. The idea of repurposing mature APIs in novel formulations may not be new, but Moorcroft says that it has been gaining more attention, as companies develop drugs for rare diseases and unmet medical needs, or new dosage forms that would offer enhanced benefit in a new dosage form or application.

Repurposing challenges API developers, both on the specialty and the commodity side. Deuteration, for instance, which replaces hydrogen atoms with deuterium, requires the use of special process and storage equipment, because deuterium is flammable. On the commodity side, repurposing challenges supplier agility, Moorcroft says. “It requires that generic API manufacturers respond more quickly to customer demands for material, and that they supply targeted volumes that address a smaller patient subset. Cambrex has successfully supported many drug manufacturers working in the repurposing space,” he says.

Recently, Neuland has moved into peptides, an area where Rao sees great potential, because close to 1000 commercial drugs today are peptide-based. “We started this business in 2010 in a very muted way, making building blocks,” he says, noting that the company recently partnered with a US client, using solution-phase technology to synthesize a fairly long-chain peptide at 30 kilograms/year.  

Another new area of interest is carbohydrate chemistry, which Neuland is exploring through a partnership with a local university. Rao says the company started working on synthetic Vitamin D analogs about a year ago, challenging compounds that are highly potent and require highly specialized synthesis and analysis.

Clearly, the market is becoming more competitive, and more consolidation can be expected as regulatory requirements become more stringent and demands for complex APIs increase. For suppliers that have invested in the knowledge and infrastructure required, however, a stronger drug product pipeline promises to yield more opportunities in the future.

References
1. J. Miller, “CMO Consolidation Pace May Slow Down, “PharmTech.com, January 6, 2016, accessed February 5, 2016,.
2. C. Hroncich, “Merck KGA, Darmstadt Germany, Announces Completion of Sigma-Aldrich Acquisition,” PharmTech.com, November 18, 2015, accessed February 5, 2016.
3. Johnson Matthey Acquires Pharmorphix, Press Release.
4. Active Pharmaceutical Ingredients Global Market Outlook -Trends, Forecast, and Opportunity, 2014-2022, Reportlinker Preview, Press Release, Accessed February 4, 2016.
5. Cambrex Sell Off A Golden Opportunity, Seeking Alpha, p. 4, analyst report,accessed February 5, 2016, Site registration required for access.
6. CPhI Worldwide Pharma Insights 2016, FiercePharma.com,    
7. “Eisai to Supply Generic Drug Makers With Bulk Ingredients,” Nikkei Asian Review, Feb. 9, 2016, accessed Feb. 19, 2016.
8. Hovione Announces the Expansion of its New Jersey Facility, Press Release, accessed February 20, 2016.
9. Cambrex Sell Off A Golden Opportunity, Seeking Alpha, p. 2, analyst report,accessed February 5, 2016, Site registration required for access,