Demands from customers and growing pressures from global competitors, have amplified the role of active pharmaceutical ingredient (API) manufacturers in the pharmaceutical industry supply chain. Today, generic companies are looking to India and China for bulk actives, while specialty pharma companies have generated new demands for more specialized capabilities than those required by traditional generics. In many cases, the opportunity to leverage existing European/American relationships with Indian and more recently Chinese process chemistry, create a more complex, but in the end more responsive and cost-effective supply chain.

The above chart shows the cost structure differential between European-US manufacturers and manufacturers in India and China. Key to numerical superscripts: (1) includes cost of goods sold without cost for raw material; (2) assessment of direct personnel cost reduction from approximately 60 to 6 € total salary dollars (tsd)/FTE (1€=$1.25), indirect personnel cost reduction factor of 2; (3) assessment of direct personnel cost reduction from approximately 6 to 3 € tsd/FTE (A.T. Kearney, Pharmaceutical Technology Electronic Edition, August 2005-“China and India: Outsourcing Beyond the Comfort Zone,” by Chris Paddison, Chris White, and Carol Cruickshank)

Typically, traditional generic companies focus on blockbuster products and then compete with each other on price until only the companies with the very lowest cost survive. For this reason, generic companies source often from India, and are starting to explore China as a viable, alternative supplier of bulk actives and intermediates.

Indian and Chinese firms are now the least-expensive producers of generic medicines. With health care costs rising, the world's most efficient generics producers, with the required regulatory approvals on hand, are entering into an attractive corner of the market. In the near future, several Indian and Chinese companies employing aggressive strategies will emerge as global players.

A number of the fast-growing “second wave” of Indian generic companies and API manufacturers has continued to forge alliances with generics firms in the U.S. An increasing number of the Indians are focused on supplying the finished dosage form as opposed to just the active ingredient (i.e., in 2005 Strides Arcolab joined forces with both KV Pharmaceutical and Akorn).

The success of a generic firm can be summarized into the understanding, execution and completion of three main objectives:

• To be the first to introduce new high value generic drugs. The availability of a particular API determines whether a new product development program starts. The company that is first to create or qualify a source for this specific API is best positioned to bring the new generic product to market first.


• To manufacture products with a bench mark COGS. Typically, for oral solid dosage products the API cost contributes 45-50% or more of COGS. In order to produce a cost effective finished product and to keep drug development and manufacturing expenses low, strict control of the API cost is required. 


• To deliver an exceptional level of customer service. The production of API is the most technically complex element in the pharmaceutical supply chain. The time delay from purchasing of basic chemicals to the delivery of finished API can range from months to over a year while the generic firm must deliver finished product to customers with lead-times measured in days. Hence, the API supply chain strategy is critical to fulfilling the finished dosage manufacturers’ demands since any delay in the delivery of finished products results in lost revenues and customers.

(Effective API sourcing in Generic Pharmaceuticals, Ambrose Stafford, Sandoz GmbH, Pharma & Bio Ingredients January/February 2005)

Only the firms that consistently develop and execute sound strategies to achieve these important goals will survive and thrive in the generic business.

Overall, industry sources put the global API market at about $17 billion. According to Enrico Polastro, Vice President and Senior Industry Specialist, Arthur D. Little, Benelux N.V. /S.A., generics account for $12 billion of that total, with custom APIs accounting for the rest. Polastro estimates that the volume growth rate for generics is about ten percent, compared to eight percent for custom APIs. Unfortunately, according to Polastro, the growth rate in value terms “is considerably less for both”. (Pharma & Bio Ingredients, API Update by Tom Branna, Jan, 2006)

APIs make up a large part of China’s imports and exports in the medical sector. Outsourcing in “CHINA Today” (Supplement to Chimica Oggi/Chemistry Today, Jan 2006) reported that China, the largest API manufacturer, will maintain double-digit growth and will see APIs sales increase to $9.9 billion in 2010 from $4.4 billion in 2005. In 2004, China exported 1,506,000 tons of APIs, worth $4.1 billion. In the first half of 2005, the export volume had already risen to 858,000 tons globally on sales of approximately $2.95 billion. In 2005, it is estimated that the export volume of Chinese APIs will reach 1,600,000 tons, with sales close to $6 billion. China has one of the largest API production and sales in the world and makes up one of the largest markets for API demand. The Chinese drug industry is expected to improve its standing in the world market in terms of profits, advanced technology applications and generics, as well as retain the existing advantage of having low cost and large scale production.

According to a study conducted by Italy's Chemical Pharmaceutical Generic Association the Indian API manufacturing industry is currently the third largest in the world and is expected to generate sales of $4.8 billion by 2010 from $2 billion in 2005, at an average yearly growth rate of 19.3%.

The Indian pharmaceutical industry is all set to overtake Italy as the world's second largest manufacturer of active pharmaceutical ingredients (API). Indian industry officials, however, are of the opinion that India would achieve this landmark in 2007, going by the number of DMF submissions. According to Mr. D.G. Shah, Secretary-General, Indian Pharmaceutical Alliance, if one takes into consideration the number of DMF submissions, exports of API from India are expected to reach $10 billion by 2010. (The Hindu Business Line, May 25, 2006)

"The API sales are expected to grow at a CAGR of 30 plus per cent in the current decade, particularly because of the breakthroughs Indian manufacturers have been able to make in highly regulated markets such as the U.S. and Europe," Mr. Shah said. (The Hindu Business Line, May 25, 2006)

Indian API makers made some 579 DMF submissions in 2004. Meanwhile, according to the CPA study, sales by Italian API manufacturers are expected to increase to $3.3 billion by 2010 from $3.2 billion in 2005. India also has the largest number of U.S. Food and Drug Administration approved plants on a worldwide scale.

The number of Indian and Chinese API manufacturers who have reached Newport’s “Established” category, reserved for companies that Newport believes have been able to supply API to regulated markets for some time, has increased. While India still has more “Established” companies than China, the latter saw a bigger increase. In 2005 Newport rated 19 Indian and 12 Chinese API manufacturers as “Established”, as compared to 18 in India and 8 in China in 2004. (“Where China and India fit in the global API supply chain”, Kate Kuhrt, Thompson Scientific, Knowledge Newsletter, June 2005)

Although current capabilities allow Asian manufacturers to target only the generic sector, as they develop greater manufacturing capacity they are expected to get involved with brand pharmaceutical customers in the U.S. and Europe. This trend is already seen in large companies who are sourcing an increasing number of advanced intermediates from Asia.

Measuring Competition: FDA Inspections

        Source: US FDA's Gary Buhler, presentation at GPhA API Conference, 3/2006

The fragmented and highly competitive European market presents many challenges to API manufacturers such as overcapacity, lack of capability differentiation and low cost competition from Asian manufacturers. According to some estimates, more than 80% of APIs used in European pharmaceuticals now originate from China and India. EFCG (European Fine Chemicals Group) estimates that there may be as many as 10,000 plants in these countries supplying APIs to Europe. Europe is reacting to the threat. In October, 2005 EU authorities passed new directives to make certain that good manufacturing practices (GMPs) are met by all companies that supply APIs to member countries. In addition to ensuring the health of the European consumer, the directives are expected to contribute to leveling the playing field between European, Indian, Chinese and other Asian API suppliers.

Terms of the new directives (2004/27 for human health and 2004/28 for animal health) call for inspections of API manufacturers, traders and brokers as well as “non-CEP (Certificates of Suitability issued by the European Directorate for the Quality of Medicines (EDQM)) European APIs.” Moreover, the directives are intended to focus on incoming API during inspections at dosage-form manufacturers and on checking for the possibility of fraud and counterfeiting. The directives also include API fingerprinting by the OMCL Network (The Official Medicines Control Laboratories support the regulatory authorities and the national Inspection Services in controlling the quality of medicinal products). Suppliers that fail in any of these measures could be subject to MAA (Marketing Authorization Application) withdrawals and rapid alert/recalls. More specifically, under the new directives:

• A qualified person must declare the API in compliance
• A GMP certificate from health authorities is not sufficient evidence that the GMP requirements are being met
• Guidelines require that an audit report be on file and available to regulators.

According to Guy Villax, President of Hovione and of the EFCG pharmaceutical business committee, as a result of these new directives, pharmaceutical suppliers will no longer be able to “just buy the API from a trader”. Now, manufacturers must obtain from the API producer a declaration and data to support directive compliance. Although the new directives are aimed at ensuring the health of European consumers, they are also intended to preserve the health of European API producers. According to the EFCG, GMP compliance increases a plant’s operating costs by 25%, reduces flexibility and lengthens time to market by as much as one year. While some may view the directives as direct attacks on the Indian and Chinese made API manufacturers, Villax noted that every company must abide by the same regulations, pointing out that “in Europe, some API company facilities are substandard and some in Asia are excellent. (“GMP compliance in Europe” Tom Branna, Pharma & Bio Ingredients Nov/Dec 2005)

                          Source: Italian Chemical Pharmaceutical Generic Association, 2005

In conclusion, there are several forces combining to change the role of API manufacturers in the pharmaceutical industry. India has evolved into a viable source of API (and dose form products) for regulated markets, and offers cost effective process chemistry. China has started the road to privatization, and has become a more viable low cost supplier of APIs. Cutting edge generic companies have evolved into a new specialty pharma industry that places demands on API manufacturers increasingly similar to those of innovators. Based on these trends, the API industry is likely to evolve into three segments in accordance with the evolution of the three primary customers for bulk actives.