3

The Active Pharmaceutical Ingredients (API)

Market

Introduction

Scope and Segmentation

This study provides an overview of the global active pharmaceutical ingredients (APIs)
market. The API market can be broadly segmented into two segments depending on the
customer base:

■ Branded or innovator APIs

■ Generic APIs

For the purpose of this study, both branded as well as generic APIs have been included in the
assessment of all the qualitative and quantitative aspects.

Regulatory Processes: Issues and Concerns

The efficiency and expertise of Asian contract manufacturers have positioned them in a very
strategic space in the global pharmaceutical supply chain, with a vast majority of the APIs
and intermediates being sourced from markets such as India and China. However, over the
years, there have been several instances of non-compliance of APIs with the specified quality
standards, leading to an overall negative perception on other companies from the same
region.

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India and China produce a large percentage of a majority of the APIs and intermediates
produced in the world currently. While countries such as Japan and Singapore are signatories
to the ICH Q7 regulation, India and China follow their national GMP guidelines. This has
led to cases where there have been deviations with respect to critical aspects of the APIs such
as physico-chemical properties, stability or the impurity profile. A significant case in point is
Baxter's Heparin, which was withdrawn from the market after xx patients lost their lives and
several others fell ill after its consumption in early 2008. A delayed inspection by the FDA
indicated objectionable conditions in the Chinese manufacturing plant and contaminants
mixed in one particular batch. More recently, Ranbaxy was also banned from supplying a
particular drug in the US market, because of non-compliance.

While regulatory bodies such as the FDA and the EMEA have not directly established subsid-
iary offices in the Asian markets, they have published various guidelines for API
manufacturing 'Process Validation: General Principles and Practices', Annex 18—EU Good
Manufacturing Practices Active Pharmaceutical Ingredients (APIs), Pharmaceutical GMPs for
the 21st Century—A Risk-Based Approach Final Report, and Quality Systems Approaches to
Pharmaceutical Current Good Manufacturing Practice (GMP) Regulations. While companies
that export to regulated markets are expected to follow these guidelines, several of them do
not to cut costs and also because the degree of physical checks by the concerned regulatory
authorities is relatively lower.

Ta c k l i n g Q u a l i t y a n d S a f e t y I s s u e s

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 xx.x per cent of the overall API production, contract manufac-
turers in Asia are estimated to account for over xx.x 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.

In 2007, warning letters were issued by the US FDA to two Chinese pharmaceutical manufac-
turers 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 stand-
ards are met.

Suppliers of finished formulations, especially those based out of the United States and
Europe, express a certain degree of concern over APIs exported from emerging markets. The
only way of addressing this problem is the further harmonization between regulatory author-
ities and finished formulations suppliers with regard to the supervision and guidelines on
imported APIs. In addition, auditing guidelines should also be brought on par with global
standards with an increased frequency of inspections to ensure that there is greater consist-
ency in quality and product safety.

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Increasing Emphasis on Biopharmaceuticals: A Perspective

Biopharmaceuticals are pharmaceutical drugs based on protein, therapeutic serum, virus,

vaccine, blood component or derivative or gene transfer product. The active ingredients in
biopharmaceuticals are the proteins derived from living organisms or cells, whereas the
conventional small molecule drugs have chemical compounds as their active ingredients. As
they are complex macromolecules, biopharmaceuticals have a higher molecular weight and
lower manufacturing productivity than small molecules. In general, biopharmaceuticals are
directly administered into the blood stream by injection, as they are fragile molecules that
can degenerate easily in the human digestive system and are difficult to absorb into the
bloodstream by the walls of the intestinal tract.

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 manufac-
turing capacity with mid and small biotechnology companies that drive the research and
development pipeline. The business model of contract manufacturing organisations (CMOs)
is rapidly evolving to suit the changing demands of biopharmaceutical innovation, with over
xx.x per cent of biopharmaceutical companies outsourcing some form of their biopharmaceu-
tical 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 manu-
facturing, making outsourcing increasingly attractive option.

The global biopharmaceuticals market is poised to grow from $xx.xx billion in 2007 at a
compound annual growth rate (CAGR) of xx.x per cent between 2007 and 2014. The
demand for biopharmaceuticals is expected to increase in the emerging markets, where the
penetration currently is minimal at present. Korea, India and China are witnessing an
upsurge of biopharmaceutical manufacturing capacity, a majority of which are likely to come
online by 2010. This capacity should enable the lowering of cost of biopharmaceuticals,
thereby making them more affordable. The commoditization of biogenerics in the future is a
key challenge for biopharmaceutical companies, which have been able to sustain and expand
their business through the high pricing of biopharmaceutical products. Countries such as
India and China have been competing based on pricing, and their impact on the small mole-
cule generics business has been significant.

Within biopharmaceuticals, monoclonal antibodies and therapeutic proteins are the rapidly
growing segments, with forecast compound annual growth rates of xx.x per cent and
xx.x per cent, through 2011.

The leading recombinant protein-based drug classes in 2007 were:

■ Erythropoietin (€x billion)

■ Recombinant human insulin (€x.x billion)

■ Granulocyte colony-stimulating factors (€x.x billion)

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Market Overview

APIs that form the basis for every formulated end product are primarily an off-shoot of the
specialty/fine chemicals industry. Depending on the customer base, APIs can be broadly clas-
sified into two key segments:

■ Innovator or branded drugs

■ Generics

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. Conse-
quently, 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 capac-
ities globally.

Furthermore, concerns of rising healthcare expenses have reduced the prescription volumes
of innovator drugs significantly. According to figures from IMS health, in 2008, prescription
drug spending at wholesale prices increased by x.x per cent, which was a huge decline
compared to the growth rate of x.x per cent in 2007. Over the period from 2002 to 2008, the
year-on-year prescription growth rate has been found to decrease by xx per cent. This was
due to the lower impact of certain new products that were launched in the past five to seven
years. The ongoing economic recession has also exacerbated this problem by prompting a
shift towards generics. Several patients who have lost their means to pay their health insur-
ance premiums have increased their generics consumption. Moreover, certain insurance plans
have lowered the co-payment on generics and increased the same on innovator drugs.

Internally, the pharmaceutical companies are restructuring their operations significantly

taking a very opportunistic stand on what drugs to manufacture in-house and what to
outsource. For instance, market participants such as Pfizer, GlaxoSmithKline, Sanofi-Aventis,
Bayer healthcare and Abbott have downsized manufacturing over the past two years, and are
in the process of identifying high-margin drugs and producing only those in-house.

In the pharmaceutical industry, API sourcing is increasingly being considered as a highly crit-
ical strategic decision. While most of the demand in value terms for APIs is still from the
United States and Europe, the role of the Asia Pacific region as a key location for API
sourcing is becoming more prominent. 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 manufac-
turing process is still controlled by big pharma and the role of CMOs is limited.

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Market Engineering Research

Market Engineering Measurements

Chart 3.1 illustrates the Market Engineering measurements for the Global active pharmaceu-
tical ingredients market in 2008.

Chart 3.1

Active Pharmaceutical Ingredients Market: Market Engineering Measurements (World), 2008

Challenge
Identification

Market
Engineering Market
System Research

Market Engineering Drives Market

Market
Engineer

Strategy and Planning Market

Implementation Strategy

Market
Planning

Measurement Name Measurement Trend

Market age Development stage ---

Price sensitivity xxxx

Number of products Greater than x,xxx Increasing

Degree of technical change xxxx

Competitors (active market competitors in base year) Greater than x,xxx Increasing

Market concentration (per cent of base year market controlled by Lesser than xx.x%
top three competitors)

Note: All figures are rounded; the base year is 2008. Source: Frost & Sullivan

Industry Challenges

Figure 3-1 illustrates the impact of top four industry challenges for the Global active phar-
maceutical ingredients market from 2009 to 2015.

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