By the end of 2017, the worldwide demand for active pharmaceutical ingredients (APIs) is

estimated to reach $92 billion, according to the European Fine Chemicals Group
(EFCG). Other analyst reports estimate the API manufacturing market to be worth more than
$140 billion today and reach $186 billion by 2020. While details vary among analyst reports,
almost all cite similar breakdowns in captive vs. merchant market splits. EFCG estimates the
$92 billion demand to be split between $44 billion for captive production and $48 billion for the
merchant market. The merchant market of $48 billion is further divided into $35 billion for
generics and $13 billion for innovator custom synthesis. Much of the growth is happening in the
outsourced market for small molecules. In order to meet customers’ needs, many companies
are investing heavily in building up in-house capacity or acquiring facilities for specialized
manufacturing.

Manufacturing landscape
Currently, more than 3,000 API manufacturing groups are operating across the
globe. Clarivate Analytics assesses the capabilities and experience of API manufacturers
using a proprietary scheme based on objective regulatory data. According to
the Clarivate Analytics Newport database, the majority of API groups, 64% or 1,955
corporations, are classified as “local.” These companies are focused on or may only be
capable of supplying their domestic market or less regulated markets. Another 504
companies, or 17%, are classified as “potential future”; these companies are interested
in supplying to regulated markets but may have limited or no known experience. There
are currently 542 API manufacturers (18%) classified as “established” or “less
established” which means these companies are capable of supplying highly regulated
markets such as the U.S. and EU. Big Pharma only accounts for 1% of API
manufacturers.
API manufacturing facilities able to supply highly regulated markets are mainly based in
the U.S., Europe, Japan, India and China. Below, Figure 2 demonstrates the number of
API groups by country rated as “established” and “less established” that are able to
supply regulated markets. Several second wave emerging countries like Argentina,
Brazil, South Korea and Russia have some API industry due in part to governments
offering incentives to encourage domestic API manufacturing to decrease dependence
on foreign drug substance supply. However, despite predictions of API manufacturing
moving to emerging countries, there has been slow growth of manufacturers in these
regions. The majority of emerging countries depend on imported API for domestic
production of finished medicines.

Industry challenges
Competition is increasing for both API suppliers and customers. Generic companies are
finding that mergers, acquisitions and regulatory issues have taken some facilities out of
the running as supply partners. Generic API manufacturers are challenged with
developing syntheses that don’t infringe on patents while keeping costs low.
Companies interested in supplying APIs to regulated markets are coping with increasing
regulatory-related expenses, such as fees related to the Generic Drug User Fee Act in
the U.S.

Regulatory requirements are tightening and will likely continue to do so with a push for
more transparency in the supply chain. This could result in requiring certification for
good manufacturing practices for key intermediates and raw materials. Environmental
regulations, especially in China, are putting pressure on corporations to remedy
pollution problems. Some plants are being shut down or moved, causing capacity
issues and supply chain interruptions from raw materials to intermediates and APIs.

In an effort to circumvent supply issues, many companies are increasing oversight in

evaluation and management of supply chain

Market outlook and conclusions

According to the EFCG, the growth rate per year for APIs is anticipated to be 4.5% in
the generic sector and 4.8% in the custom sector. Newer APIs may not be simple small
molecules but, rather, more complex, highly potent APIs and biologics which require
more specialized equipment and even dedicated facilities.

In order to keep pace with the industry, many generics-focused companies will continue
to gain capabilities through acquisition, as Strides did when purchasing Perrigo’s API
plant. On the innovator side, a number of companies are building their own facilities to
pursue new therapeutic areas of interest. Still other innovators have been trending
toward outsourcing the development, scale-up and commercial production of API to
custom development and manufacturing organizations with diverse capabilities that can
offer a one-stop shop.

As the market grows and shifts, the future of the API industry likely holds more mergers,
acquisitions and investment as companies strategize in order to be competitive and
relevant in the industry.

he spending on healthcare has grown at a rapid pace in recent years worldwide and this has
directly benefited the Active Pharmaceutical Ingredients (API) market. According to Stratistics
MRC, the Global Active Pharmaceutical Ingredients market is expected to grow from $129.12
billion in 2015 to reach $198.8 billion by 2022 with a CAGR of 6.4%.
Growth in healthcare adoption has benefited the API market immensely. There is greater focus on
accessibility to affordable healthcare and this has led to increased surge for access to medicines, in
turn driving the growth of the market as a whole. Sanjeev Kumar, Industry Manager, Transformational
Health, Frost & Sullivan, Asia Pacific comments, “Innovator APIs which were traditionally the largest
segment are continuing to grow much more slowly in comparison with generic APIs, which constitute
the fastest growing segment. With several key brands going off-patent, and as and consolidation in
the pharmaceutical Industry, the demand for branded APIs has gone down significantly over the years.
Consequently, generic APIs have witnessed a boom, and are expected to continue growing steadily,
with further expected patent expiries and a subsequent increase in generic production capacities
globally.”
Trends in API market
Patent expiration of prominent drugs, government initiatives, regional penetration and increasing aged
population are some of the factors that are driving the market growth. Strict validation and safety
guidelines stated by WHO and fragmented market are the factors that are hampering the API market
growth. “The trend is shifting toward outsourcing the manufacturing of advanced APIs, such as
biotech-based APIs, biopharmaceuticals, and advanced bulk drugs required for the production of
dosage forms of new chemical entities in high-end therapy areas, such as oncology”, says Mr Kumar.
Over the next five years, the global market for active pharmaceutical ingredients (APIs) will be driven
by increased demand for pharmaceutical products such as generics and biological drugs.

 Specialty medicines driving the market

A higher generic adoption rate in developed countries that ranges from 27% to 32% is driving global
medicine spending and aiding greater access to improved, lifesaving healthcare services. The
adoption of branded generic drugs is predicted to be higher in emerging economies such as China
and India and generic drugs accounted for nearly 80% of the total drugs sold by value in these fast-
growing nations in 2016. Rising use of specialty medicines is anticipated to grow the pharmaceutical
spending worldwide with quicker growth in richer, developed nations as compared to their emerging
counterparts. This is primarily because the former have adequate manufacturing units, a higher
spending power, and greater emphasis on transparent pricing by assessing measuring effects on the
population. Karen Wai, Chief Operating Officer, Biofourmis says, “In general in developed markets the
regulations are clearly defined or there are ample resources to keep regulations relevant to
technological advances. In developed markets due to the reduced ability to spend on healthcare in
general you are looking at places that are playing on the ability to manufacture at a cost effective price
point versus a market that will drive revenue from the sales of the product.” Mr Sanjeev adds, “Due to
the current restructuring of the pharmaceutical industry, API CMOs are expected to witness a strong
upsurge in demand, particularly in the generics sector. However, in the innovator drugs segment, a
major portion of the manufacturing process is still controlled by big pharma and the role of CMOs is
limited.”
API Market in Asia-Pacific
Asia-Pacific is an important geographical region and has a number of emerging countries in terms of
API manufacturing. Even though the proportion of healthcare spending in the APAC region is
comparatively low, the growth rate in this strategic region has outpaced that of mature markets in
North America and Europe. Rising healthcare spending has led to quality healthcare becoming
accessible along with a higher demand for pharmaceutical products across APAC. The
pharmaceuticals consumed here are mostly produced in onshore manufacturing units. Furthermore,
contract manufacturing organizations are key outsourcing allies for pharmaceutical companies that
supply their wares to North America and Europe. With increased competition, pricing pressures and
regulatory changes, drug manufacturers are resorting to outsourcing raw material procurement and
manufacturing activities. Asia-Pacific and RoW are the fastest-growing markets for APIs (8.0% and
7.2% CAGRs, respectively) due to increases in consumption, healthcare expenditures and access to
medicines. In the global API and intermediates industry, Asia-Pacific accounted for 27.9% of the
market share by revenue in 2015, and this is expected to grow to more than 33.2% by 2020. Sanjeev
Kumar says, “Although the overall cases of poor quality and unsafe APIs are relatively low, an
increase in the number of cases is likely to have a negative impact on the entire region. However, with
generics accounting for over 50.0 per cent of the overall API production, contract manufacturers in
Asia are estimated to account for over 80.0 per cent of the overall small molecule API production
globally. In addition, India features the highest number of FDA-approved units next only to the United
States, and several hundreds of companies are involved in the production and supply of APIs,
formulations and finished dosage forms to the regulated markets. The challenge for regulatory
authorities from advanced markets is the continuous physical inspection of hundreds of these units to
ensure product quality and safety.”
The vast majority of anti-inflammatory and antibiotic drugs are manufactured in Asian nations such as
China and India. The lower labor cost and abundant raw material availability needed to make API are
the critical factors responsible for the massive growth in the APAC API market. In addition to this,
regulatory support and government encouragement to establish API manufacturing hubs by way of
favorable tax policies are helping drive the APAC API market. The large patient population base that
consumes non-controlled drugs over the counter is also a key factor leading to the boom in APAC in-
house API consumption.
Patent cliff and API
Apart from increased healthcare expenditure by the urban populations across the world and rapid
increment people aged over 60 years, the global API market stands to gain addition traction from the
increase in drug master file (DMF) filing from Pharma companies. That being said, patent expiry of
lucrative biological drugs is expected to open new opportunities in this market during the forecast
period of 2017 to 2023 (business intelligence study).
There has been an increasing emphasis on biopharmaceuticals API. Manufacturing of
biopharmaceuticals is a capital-intensive, complex and highly technical process in comparison to that
of small molecules. The outsourcing of biopharmaceuticals manufacturing is becoming increasingly
attractive, driven by the lack of captive manufacturing capacity with mid and small biotechnology
companies that drive the research and development pipeline. Talking about the business strategy for
pharma companies to respond to API industry landscape given the patent cliff and opportunities it has
opened up for generics, Ms Wai says, “Some have gone the way of developing biosimilars (e.g.
Novartis through Sandoz) to combat the erosion by generics. Some have built generic arms (with
varied success) Merck, Sanofi. Others have increase the value proposition for their drugs by chasing
patient related outcomes on top of the standard clinical trial safety and efficacy. Another new value
differentiation is incorporating digital technologies that are tied to the demonstration of outcomes for
the pharma brand and aid in medication adherence and monitoring – e.g. through digital biomarkers.”
Mr Kumar adds, “ The business model of contract manufacturing organisations (CMOs) is rapidly
evolving to suit the changing demands of biopharmaceutical innovation, with over 50.0 per cent of
biopharmaceutical companies outsourcing some form of their biopharmaceutical production. CMOs
have also adapted well to the change by offering value-added services such as packaging, logistics
and anti-counterfeiting in addition to traditional manufacturing, making outsourcing increasingly
attractive option.”
Quality Control and API
The ICH guidelines and FDA recommendations about how to effectively manage quality risk in drug
manufacturing are clear and plentiful. However, the amount of qualification and validation that take
place is really left to the discretion of drug manufacturers and their CMOs. Mr Kumar believes in the
process. “In 2016, warning letters were issued by the US FDA to several Chinese pharmaceutical
manufacturers for GMP non-compliance, resulting in a denial of entry of the latter's products into the
United States. Following this, the US FDA has opened affiliate offices in Chinese cities such as Beijing,
Shanghai and Guangzhou to conduct periodical inspections to ensure that standards are met. Recent
efforts have been made by the CFDA to address issues of IP protection and development of innovative
drugs which will have a positive impact on innovative API manufacturing”, he notes.
Similarly, during 2015-2016 Indian manufacturers have faced quality issues, which have raised
regulatory concerns from importers. The issues are being addressed by both the Indian governing
bodies and FDA. The governments in APAC are implementing favourable funding regulations that
promote the development of high-quality pharmaceutical products.
Product-Offering Expansion and Cost Reduction
For the manufacturers of drugs, active pharmaceutical ingredients (APIs) are of great essence as their
quality defines the effectiveness of the products. However, not all pharmaceutical companies possess
in-house API manufacturing capabilities and it is not feasible for a single company to produce all the
APIs required for their formulation offerings. An intense focus on commercializing drugs and reducing
operating costs by outsourcing R&D activities can improve the organizational efficiency substantially.
Outsourcing at later stages of development through the appointment of strategic partners can
potentially improve operational efficiencies throughout the value chain. A balanced portfolio approach
goes a long way in expanding sales and simultaneously reducing risk. Karen Wai notes, “Cost
effectiveness might not be the only key sales & marketing points with the tightening of regulations,
higher cost for compliance. Now they must look at differentiation through potentially niche
specialization due to the changes in the healthcare environment where due to increased knowledge
of diseases there are better molecular targets and we can now get into the subtype of a disease and
make an impact there.”
This could be by possessing branded generic drugs, branded drugs, and unbranded drugs within the
same portfolio. In addition, clearly defined forward linkages in the supply chain can garner greater
market share in different regions. Mr Kumar, looks at the potential, “As the API manufacturing industry
becomes more competitive, there is an increasing onus on technologies that enhance manufacturing
efficiencies. Several leading API participants, particularly those in the Asia-Pacific region, are taking
measures to improve equipment utilisation and product yield, as well as to reduce process time and
harmful emissions and increase reuse and recycling. From a geographical perspective, Europe-based
participants cater to the innovator sector in the US and Western European markets because of their
proven capabilities. On the other hand, Asian companies are major suppliers to the generics industry
in the Western markets.”
Looking into the future
In order to keep pace with the industry, many generics-focused companies will continue to gain
capabilities through acquisition. Innovator companies are building their own facilities to pursue new
therapeutic areas of interest while others are trending toward outsourcing the development, scale-up
and commercial production of API to custom development and manufacturing organizations with
diverse capabilities that can offer a one-stop shop.
With the continuous growth and shift in the market, we can expect more mergers, acquisitions and
investment as companies strategize in order to be competitive and relevant in the industry.