Dispatches from DCAT Week
'Chindia' drug substance market not to be discounted
“Without the drug substance there would be no drug,” began Dr. Enrico T. Polastro’s at his session during DCAT Week 16’, “Pharma fine chemicals outsourcing: Back to the West?”
While the value of a drug is known, and fiercely debated, the value of drug substances are far more ethereal. According to Polastro, there no easy way to determine their value, for one because hardly any data exist on sales or value at the drug sub API level, due to extreme fragmentation in the industry.
He explained that the impact of the drug substance as percent of dosage form sales has decreased over the years; dropping from about 15% in the mid-90s to now, around 9%. The drivers behind such erosion are multiple, he said, and include inflation and an increasing amount of drugs with low dosages.
Sourcing drug substances
Two are extreme approaches to accessing drug substances: full/extensive upstream integration, where drug substance requirements are produced in-house; and virtual molecule building operations, where most, if not all, requirements are supplied form third party vendors.
In the middle is a combination of both approaches, “embracing what is commonly referred to as a strategic drug substance supply chain management,” explained Polastro, who added that the industry is increasingly moving towards this model, if not further in the direction of virtual operations. “However a complete shift to virtual is unlikely,” he said.
Currently, about 25% of the merchant pharmaceuticals fine chemicals market is for custom made products, reaching about $13bn. However, the supply structure is “very fragmented,” added Polastro. “This is reflected in the limited market share of the largest players.”
Specifically, the top ten vendors combined have a market share not exceeding 12%, which Polastro described as “quite modest.”
Demand by region
North America has a demand of $13bn, a production of $2.5bn, and around 40 merchant producers, focusing on large volume analgesic API and niche APIs. However, it relays on imports from China and custom products from Europe.
Japan, on the other hand, is substantially self-sufficient, with 50 vendors, a demand for $2.5bn, and a production of $3bn.
The combined markets of China and India, which Polastro dubbed “Chindia,” has the highest output at $27bn, and a demand of $10bn. This output is driven by 1,500 merchants in China and 2,300 merchants in India.
According to Polastro, over the years China has become “the center of gravity for several kinds of APIs,” forcing many Western producers out of the market.
Additionally, Europe’s position over the last 20 years has “sharply eroded,” due to this competition, which, as Polastro explained, has nearly led to their complete exit from some product groups.
This “Chindia tsunami,” as Polastro dubbed it, is due in part to capacity build up and the increasing hurdles imposed in the west on local producers, which are driving up costs. “No comparable such hurdles face Chinese and Indian players,” he added.
However, Polastro said that there are some “rays of hope” for Western producers. These include, the strength of the US dollar, questions surrounding the reliability of “Chindia” as a supply source, and the realization that “penny wise may be dollar stupid” – as potential damage associated with supply disruptions more than offsets cost savings.
Ultimately, though, Polastro explained that it would be short sighted to discount vendors in these two countries, regardless of the uncertainties.