1. What, in your opinion, is currently the single largest trend with respect to active pharmaceutical ingredients outsourcing and manufacture?
MS: For this market, you have to consider trends for two distinct types of companies outsourcing API: multinational pharmaceutical companies (big pharma) and the smaller biotech/small emerging pharma/ virtual companies (referred to herein as small biotechs). The small biotechs have historically outsourced all of their API and drug product needs and this trend has not changed. What has changed in this segment is the size of the universe, which has shrunk, as the financial crisis of the past couple of years combined with a more aggressive FDA caused a number of companies to fail, merge with like companies, or be acquired by big pharma. Even those that stayed healthy did their best to conserve cash and we know of many examples where companies postponed activities till later in the process that they should have continued in order to meet aggressive timelines. Some of these types of decisions ultimately caused a delay or slow down for moving certain programs forward. It is easy to second guess looking backward, but the fear of having enough cash to survive for who knows how long was a powerful factor.
The biggest trend in API outsourcing and manufacturing has been the move by big pharma to increase the use of external providers at the expense of internal capacity and resources. The size of the universe of drugs in development in big pharmas has shrunk as well, resulting from mergers and resultant integration activities, pipeline rationalizations and therapeutic area focusing, and high profile drug class failures (cannabinoids and other weight loss and diabetes drugs, new cholesterol lowering agents, etc.). With consolidated pipelines, many big pharmas are or were sitting on a significant amount of excess capacity. The drive to cut costs both in terms of burn rate as well as depreciation has seen a number of API and drug product facilities come on the market. We suspect this trend will increase. There is currently significant excess capacity available in the West, while additional lower cost capacity continues to be added in the East.
The emphasis in vendor selection has moved away from value to cost. Cost is easily defined and measurable. It is hard to put a measure on value, but for APIs value is related to quality and this is tied to risk and regulatory exposure - that may or may not get one into big trouble at some point in the future. Big pharmas historically have been extremely risk averse. More often than not these days, however, the individuals making decisions are purchasing/procurement professionals, and they are measured versus budget targets and dollars saved, and the scientific professionals in these companies, who used to make the decisions (but not anymore), are tasked with making these decisions succeed and minimizing risk exposure for their employer.
On the one hand, it would appear that many in big pharma have finally reached a conclusion that API development and manufacture is not a core competency to their business that needs to be closely managed and conducted in-house. A number of small, midsize and large API developers and manufacturers exist with more than enough capacity to meet the needs of the industry. Unfortunately, as the pharmaceutical industry shifts its sights to more external sourcing of APIs, there will continue to be cost cutting and job dislocations for countless more employees to come.
MK&KS: More final APIs are being outsourced to Asia, particularly in support of clinical development. The previous strategy of outsourcing advanced intermediates has expanded to include more final APIs, due to a comfort with the increased level of CRO quality systems and the CRO’s adherence to cGMPs.
ML: From my perspective, finding sources of API where Quality and an environment that assures a reliable trustworthy source of contamination-free material is currently one of the most important API sourcing trends. While China has a strong history as a low cost supplier region, its history has been very poor from a quality perspective with a weak record of providing contamination-free materials.
There have been too many instances of contaminated products ranging from antifreeze in glycerin to melamine and lead in various materials and products. Its regulators have long been uncooperative in taking effective corrective actions and protecting the public health. This lack of commitment will ultimately open the door for new, more reliable suppliers from other regions of the world to get business agreements now held by Chinese firms.
BS: The poor return on R&D spending and impending patent cliff has driven big Pharma to cut costs and search outside of their own four walls for new drugs. The innovation engine has been fairly robust at the small, virtual Pharma companies, and as such big Pharma has invested billions to acquire these drugs, or in some cases, the entire small Pharma company. API outsourcing firms who are focused on meeting the needs of the emerging Pharma sector have been the beneficiaries of this robust innovation engine. Small to mid-sized API firms match up very well with the emerging Pharma sector in terms of speed and agility. The differentiators are technical proficiency and quality systems. Many of the small to mid-sized players lack one or both of these aspects. As such, those API suppliers will fall by the wayside.
As the API advances through clinical trials, big Pharma becomes more interested and ultimately acquires the compound. If acquisition of the compound is late enough in clinical development, and the API registration batches have been produced, the API supplier may retain commercial manufacturing rights, even if the API supplier has never done business with the big Pharma organization in the past!
IC: Outsourcing of API is a very broad term covering everything from external manufacture of phase 1 materials all the way through to external manufacture of established APIs for formulation as generic drugs. There are different trends in all areas of this continuum and so it is difficult to define the single largest trend amongst these.
However, if pressed to choose one, I would say that the sourcing of generics by large Pharma companies for sale in developing countries is an area which is increasing rapidly for a variety of reasons. Firstly, countries such as China, India, Brazil, South Africa, etc., have huge populations who have been generally deprived of medicines in the past. Secondly, these countries now have developing economies which has increased the numbers in their middle classes who are now more able to afford better health care. And thirdly, many top selling drugs are going off patent and not being replaced by new chemical entities, leading to a need by large Pharma to diversify into new areas and new markets.
This trend can already be seen in the move by GSK to buy into South Africa's Aspen Pharmacare Holdings to aid the selling branded generics drugs and a similar deal between AstraZeneca and Torrent Pharmaceuticals Ltd of India. Large Pharma has been divesting its API manufacturing capability for some years and so there must be a huge rise in outsourcing of API in order to formulate them as branded generics. However, as the intention is mainly to sell these in emerging markets they will undoubtedly also look to those same countries to manufacture the APIs at low cost.
References
- http://www.astrazeneca.com/Media/Press-releases/ Article/20100311--AstraZeneca-Extends-Branded-Generics- Capability-With-
- http://www.bnet.com/blog/drug-business/ ranbaxy-8217s-reign-of-error-continues-asfda- flunks-its-new-york-drug-factory/4255
2. How, in your mind, has the landscape of API outsourcing/manufacture shifted post-recession?
MS: As mentioned already, the size of the universe of new molecules in development has shrunk significantly across the big pharma and small biotech landscape. In addition to recessionary forces, the US FDA seems to be taking a more aggressive and conservative stance on the approval of new medicines, which has contributed to delays in launching of several new products and slammed the door on a number of new mechanistic approaches due to the risk of adverse side effects. The combination of these and other factors has led to the current glut of capacity for API outsourcing providers and a very competitive environment for business. At AMRI, we have approached the current environment with the strategic decision to discount pricing in an effort to fill capacity. We are not alone with this approach and the current pricing environment has to be very attractive for companies looking to outsource API development or manufacturing.
Companies that are outsourcing API development or manufacture can find extremely competitive pricing, which can help them manage their budget or available cash, but they also need to be extra diligent about long term risks in the decision making process. An important factor to consider is the staying power of the outsourcing provider, since many companies in our space are running on thin or negative margins and may not be a3round a year or two from now. This is important if the customer is dependent on the company in a regulatory filing for supply of API, because switching suppliers at late stage can add years of delay to product approval. Along those lines, another important factor to consider is regulatory compliance. In the US, our FDA has become much more aggressive about compliance and enforcement actions are being announced every week, or at least it seems that way. Today, these actions have largely (but not completely) been focused on domestic providers, but it is inevitable that non-US API producers will be coming more under the magnifying glass sooner rather than later. Again, if your supplier receives a Warning Letter or is prohibited from making product for the US market, your project could be delayed for a year or more.
All that being said, there are signs that the funding environment for small biotechs in recent months has begun to show a noticeable improvement, as determined by number of RFPs we are seeing and demand for API development or manufacturing of additional clinical batches. Another trend that may just be beginning is the move by venture capital backed companies or other entities to pick through the large number of potentially viable clinical candidates that have been ‘parked’ (discontinued because of pipeline consolidation decisions, exiting a therapeutic area, or other cost cutting initiatives) by big pharma. As a number of these compounds are acquired and development continues again, API sourcing, which largely may have been performed at big pharma in the past, will now need to be outsourced. We think this trend may be an important opportunity for business for AMRI and companies like us.
MK&KS: No significant changes in outsourcing from 2008 to the present. Research budgets (which drove clinical API outsourcing) retreated during the recession and have not fully rebounded to pre-recession levels.
ML: This current recession has certainly added to the pressures associated with lowering costs and maximizing profitability. Care must be exercised when selecting suppliers since economic pressures could seriously undermine the product quality and reliability of supplies. This financial environment adds to the risk of unethical firms or suppliers trying to take shortcuts and risks to maximize its own profits while increasing health risks for the public. Companies need to focus on supplier reliability and confirmed compliance with established standards to assure that their suppliers will not deviate from quality and ethical practices.
DH: The global financial market crisis of 2008 and subsequent worldwide recession certainly exacerbated existing pressure in the drug development sector. Already facing pressures associated with patent expirations and competition from generic drug equivalents, multinational innovators add weakened consumer demand and restrictive price controls to the list of factors that dampened revenue and profitability. The result was a host of cost containment and process improvement strategies designed to control R&D spend and accelerate drug development cycle time. The last few years have witnessed substantial overhead reduction, clinical project delay, and considerable merger and acquisition activity as a mechanism for portfolio diversification.
Weak sponsor demand and slowdown in global clinical trial volume resulted in decreased annual revenue growth, declining operating profitability and diminished backlog for a great majority of contract research organizations (CROs). The result is a hypercompetitive, volatile market with considerable consolidation. And yet, the outlook for the contract manufacturing organization (CMO) sub-segment remains favorable. The future outlook for API outsourcing and manufacturing predicts significant growth based on published forecasts for outsourced production volume. There is tremendous opportunity for a well differentiated player within this highly fragmented landscape.
IC: Well I am now quite sure that we are yet “post recession”. However, overall commercial API manufacture/outsourcing has not been affected too much by the recession. People are still getting ill and profits by major pharma companies remain relatively high. Well documented forces are at work in Big Pharma which have driven them to change through reduction in their internal manufacturing capacity and outsource more, but this was happening before the recession and has not really been affected by it.
Where there has been a bigger impact is in the small pharma arena where it has been much more difficult for small companies to obtain funding for R&D. This in turn has lead to less outsourcing of development scale API manufacture by emerging pharma companies. Many small CROs operating in this area have had a tough time in recent years. This trend seems to have started to reverse but I don’t think we are yet out of the recession.
3. What country/region, in your opinion, is currently leading the way in active pharmaceutical ingredients and why?
MS: Clearly Asia, led by China and India, has made the biggest leap forward in the last few years, primarily due to its lower cost structure. In China, government control of the economic infrastructure makes it easier to make and efficiently implement decisions. In the West, companies are burdened with myriad regulatory, environmental and social regulations and policies; not to mention local, state and federal taxation that makes the US in particular have some of the highest corporate tax rates in the world. In China, companies may be given grants for equipment, buildings, rebates of salaries, etc. as the nation implements its long term economic policy. China and India have also done a good job of attracting their US-trained scientists back home. Scientific education is given a higher priority in this region than in the West, and scientific and technology manufacturing industries are actively courted and deemed important to the region’s economic strategic plan. Many countries in the West appear to be struggling economically, while many Asian economies are strongly growing and the capital markets are quite active.
That being said, Western companies don’t need to throw in the towel so to speak and surrender, because we believe there is an opportunity to take advantage of this environment as part of a global strategic plan. In addition to our facilities in the West, AMRI has labs in Hyderabad, India and Singapore, and additional API and intermediates manufacturing facilities in Aurangabad, India. As stated previously, there are significant risks from the regulatory and other angles that companies need to consider when making decisions to outsource API or drug product manufacture. AMRI, with its US base of operations and control of quality decision making, presents an attractive alternative to a str3ictly Indian or strictly Chinese manufacturer. It is inevitable that the quality and performance of API manufacturers will level out around the globe, but that time is still some years away. In the meantime, with the costs, time and probability of success to develop new drugs already prohibitive, it is inexcusable to take additional risk to save a few dollars by having API or drug product produced at a manufacturer that does not have a proven track record of multiple and recent US FDA regulatory inspections, or that doesn’t manufacture APIs currently sold into the US market.
MK&KS: Asia, due to low costs (FTE rates) and the number of CROs that have built up significant scientific staff and infrastructure.
ML: While I believe China and Asia in general has shown a strong presence in this market, I believe serious deficiencies in the reliability of the quality and purity of some materials has undermined its reputation as a quality supply source. As I have already mentioned, these deficiencies have left the door wide open for other countries and regions to prove their worth as responsible and reliable API suppliers. Smart firms and countries located in regions that are currently minor players in the API arena, will take an aggressive position in building a stronger client base as a trustworthy and reliable API supply source. One you can trust that will not supply poor quality or contaminated API due to inferior practices or even potentially intentional acts as has been the experience out of China over the years.
BS: No other place in the world today matches the number of new and exciting therapies being developed in the United States. They definitely lead the way in terms of API. China is leading the way in terms of growth of API manufacturing, though there is still a gap where the United States continues to lead the way for Quality, innovation, and productivity.
DH: Outsourced pharmaceutical development definitely mirrors the global landscape seen with API sourcing. For well characterized APIs, formulation development and clinical supplies manufacturing work can be sourced to providers in emerging markets, but for novel molecules with challenging physical and chemical properties, the need to access expertise and the frequency of site visits tend to drive innovators to select an outsourcing partner that is closer to home.
IC: Of course Asia is always talked about when it comes to API manufacture. India is at the forefront when it comes to manufacture of generics, which as I mentioned above is a growing area. They have several advantages over China relating to their history of API manufacturing and to the ability to meet quality demands. Since the changes to the Indian patent law in 2005 major Pharma companies are more willing to work with Indian suppliers. However, India has had its problems with quality too; for example the problems Ranbaxy have had well documented with the FDA.
References
- http://www.bnet.com/blog/drug-business/ranbaxy-8217s-reign-of-error-continues-asfda-flunks-its-new-york-drug-factory/4255
So European and North American suppliers should not yet be written off. The cost advantage of going to India is not as large as might be expected since western factories have increased their productivity and are often able to come close to competing on price, with the added safeguard of unquestionable quality.
4. If things progress as they have the past five years, what can we expect in the next five years, with respect to API outsourcing/manufacture?
MS: It would appear that many in big pharma have dropped the notion that API development and manufacture are core competencies that need to be maintained in house. Astra Zeneca, for example, has moved all of its API production to outsourcing, and other large pharma companies will likely follow. We believe there will be a lot more outsourcing opportunities in the future, and that capabilities and capacity within the industry will continue to increase.
MK&KS: More and more GMP qualified vendors will emerge onto the global scene while the established ones will continue to expand their competencies and capabilities. These companies will not only provide Phase 1 manufacturing of GMP batches, but will develop their process research and development skills in support of Phase 2 and 3 needs. However, as Asian FTE rates increase, there will be a leveling of the outsourcing playing field and other geographic regions will become cost competitive. At the same time, innovator companies will place greater scrutiny on the total costs associated with outsourcing (e.g. the internal resources required to manage the external activities, time delays, ease of communication, etc.) which may shift focus away from the lowest [dollar] cost provider.
ML: I would look to manufacturers in the eastern European region to become more active and aggressive in seeking to capture API supply prospects as their economies expand. Frankly, the opportunities to replace unreliable and untrustworthy supply firms from countries with poor regulatory practices will be a great motivator to purchasers of API to consider shifting supply companies in the future. Given enough time, even some African countries may be able to develop industrial and technical capability that could offer the world low cost, yet reliable API supplies.
BS: The Pharma industry understanding of the strengths and weakness associated with partnering in the “East versus the West” are now fully understood. Consequently, we are beginning to see an established balance between West and East. Western suppliers have cut costs, while Asian cost structures are increasing such that over the next five years, the situation will have reached equilibrium.
As long as the innovative pharmaceutical market (big Pharma and emerging Pharma) continues in the US, there will be a real need for high quality API development and launch facilities in North America. Long term manufacturing (post launch) cost pressures will put pressure on API suppliers in the US and Western Europe, and there will be continued competitive forces for large volume, lower cost manufacture of mature API’s.
IC: The need for supply of development materials will remain close to the companies performing the R&D. The main reasons for this are speed and technical competence to work at this early stage with ill defined chemistry. So I believe western development scale CROs will still prosper as long as there are pharma companies doing drug discovery in the west. However, the demand for their services will increasingly come from small Pharma companies. Large Pharma seems to be hell bent on destroying their internal capabilities in drug discovery, through site closures and/or reductions in numbers, in order to pursue drug candidate buying in strategies.
Most R&D activities are today still performed in the west. But we will see a growing drug discovery effort in Asia as this develops so will the need for “local”, high quality, CROs to meet their needs for development materials.
At the commercial scale the amount of outsourcing to Asia will continue to increase. However, there are too many companies in Asia who are selling APIs. The demand will not satisfy all of them and I think we will see a number of acquisitions and mergers to form larger manufacturing groups who can operate with greater economy and better quality control.
5. In your opinion, what research field currently benefits the most from API outsourcing/manufacture and why?
MS: We think the pharmaceutical industry benefits most, but other industries could certainly benefit as well. As examples, I would include ag chem, flavors and fragrances, material science, academia and research institutes.
MK&KS: API and intermediate manufacturing is still the best value proposition for outsourcing (over process research development), allowing for clearly-defined deliverables and easily tracked performance metrics.
DH: Because API sourcing and manufacturing occurs at the beginning of the drug development continuum, all subsequent functional steps stand to benefit from a job well done. Plenty of case studies from Chemistry Playbook™ support this hypothesis. Simply put, innovator companies outsourcing work to functional providers cannot afford compromised project execution. To minimize overall project risk, suppliers need to be talking, ideally at the API sourcing stage. In a recent example, Cambridge Major Laboratories and Xcelience created an expedited product development plan that spanned chemistry evaluation, API manufacturing, formulation development and clinical supplies manufacturing of an oral solid dosage form targeted for a phase I clinical trial. By talking together, our two firms were able to exploit functional synergies and de-risk subsequent drug product development by determining the optimal salt form and screening for polymorphs prior to the demonstration batch. Because of the high quality work at Cambridge Major Laboratories, Xcelience was able to initiate formulation development activities with GLP grade API. Close project coordination ensured that as soon as this material became available, Xcelience could proceed with excipient compatibility studies, formulation development and selection and prototype stability. In the end, the Chemistry Playbook™ model ensured that clinical trial material was available four months faster and with reduced drug product risk.
IC: I am not sure I understand the question. All areas of small molecule API R&D are broadly similar from a chemical perspective; it is the biology that changes things.
6. What recent improvements/methods have been implemented to make API outsourcing/manufacture a viable option?
MS: Capabilities and experience are stronger than they used to be as large pharma employees migrate to supply chain organizations. In AMRI’s case, we have benefited in hiring leaders from big pharma that might not have been willing to leave their existing jobs had it not been for the pharma company’s decision to downsize. We have been able to attract leaders from companies like Pfizer, AstraZeneca and others, and the quality of talent available in the marketplace is at a level never seen before. We have been able to build the strength of our analytical and quality support, with a goal to make it on par with the best large pharma organizations.
We have also been implementing a continuous improvement function with dedicated full time staff focused on lean and related practices to make our operations more efficient and decrease overhead. At AMRI, we continue to get better and better at what we do, and helping to prove that outsourcing can in fact be a successful alternate option in the discovery and development of chemistry solutions.
MK&KS:
- Adoption of a “partnering” philosophy over an “outsourcing” mentality. The concept of working together towards a set of common objectives (rather than just “providing material”) has made for more strategic and longer lasting relationships between clients and the outsourcing organizations. In turn, this increased communication and interaction between companies has led to improved vendor quality systems, which then drives additional outsourcing business, including final APIs (vide supra).
- IT and communication systems. That is, the use of shared servers between partnering companies offers easy and secure data transfer. Intercompany communication (teleconference, videoconference) has become easier, cheaper and more user-friendly.
BS: Chemistry continues to evolve and new methods are always being researched in academic institutions. These methods need to be put to industrial use, and many times significant advantages can result (i.e. cost savings, clean/green chemistry solutions). API outsourcing/ manufacture is really the only viable option, which is why Pharma is adopting the virtual model and shutting down plants at such a fast pace. The cost structure of a 50,000 person Pharma company simply cannot compete with that of a 50-500 person contract manufacturing facility. Fact is, the majority of contact API manufactures fall into this range.
IC: Again not sure I understand. Outsourcing has long been a viable option and no new methods or improvements are really required to the outsourcing process.
In terms of plant capabilities there is a move towards plants with higher containment and many CROs/CMOs are developing these. This, in theory at least, could lead to more opportunities to outsource highly active APIs, but personally I am skeptical and there seem to be a lot of people just jumping on a bandwagon in the hope of gaining orders.