Asia: The API hub
The merchant market for generic APIs continues to grow as the competition increases in Asia-Pacific, says Ankur Kalra of GBI Research
APIs may be defined as substances or mixtures of substances intended to be used in the manufacture of a drug or any medicinal product that, when used in the production of a drug, becomes an active ingredient of that drug or medicinal product. APIs can either be classified as synthetic or biotech, based on the raw materials used in their production, and as innovator or generic, depending upon the customer requirement.
The global APIs market was estimated to be worth around $85-90 billion in 2010. More than half of the global APIs market is dominated by North America and Europe, with Asia-Pacific forming the third largest but fastest growing API market in the world. The Asia-Pacific API market is highly fragmented, with a very large number of players competing for market shares. This market is characterised by an eclectic mix of companies, which range from large, vertically integrated manufacturers to distributors and importers.
In 2010, API revenues from the Asia-Pacific region were close to $21.9 billion, representing a compound annual growth rate (CAGR) of 6.7% during the period from 2005 2010. Driven by the Chinese and Indian API markets, regional revenues from APIs are expected to grow at a CAGR of 9.6% in the years to 2016 (Figure 1). Most (71%) of the APIs manufactured in the region are generic rather than innovator.
The Asia-Pacific API industry is dominated by the merchant market, through which the traders sell APIs to drug formulating companies. Over 90% of sales take place within the merchant market. The formulating companies may be domestic companies or international drug manufacturers. Low labour costs in the region are attracting many foreign drug manufacturers to outsource their API manufacturing here.
Japan is the second largest pharmaceuticals market in the world after the US and the largest pharmaceuticals market in Asia-Pacific. Japan is also the most advanced market in the region in terms of scientific research, technology and medical equipment. The intellectual property rights (IPR) protection system of Japan is also much stronger than that of other Asian countries, giving patent protection for the new APIs and drug formulations. Japan therefore leads the innovator API market in the Asia-Pacific region.
Source: GBI Research, Chemical Pharmaceutical Association
Figure 1 - Asia Pacific API market ($ billion), 2005-2016
Japan is both the most mature and the slowest growing market in the region. The impact of the global economic crisis was strongest here, especially on the innovator sector. Growth here will be sustained by higher growth in generic sector APIs. The earthquake of March 2011 caused a slight increase in demand for over-the-counter drugs due to consumer stockpiling, but no major long-term impact is expected.
China is the world's most populous country and also has its fastest growing economy. This is the second biggest market for APIs in the Asia-Pacific region, after Japan. The Chinese pharmaceuticals market is growing very rapidly, due to the rise in demand for generic drugs.
China is becoming an attractive market to many multinational pharmaceuticals companies for several reasons, including its large market size, tax incentives, increased government spending on healthcare, government plans to restructure the fragmented industry, encouraging innovation and improved IPR systems.
India is the third largest API market in the region. Like China, India has also become a favoured destination for offshore contract manufacturing operations thanks to its cost advantage. The cost of operations in India is estimated to be 40% lower than in North American and Western European countries.
Manufacturing standards in India are compliant with many international regulations. In addition, improvements in the technological capabilities of the country have enabled many Indian manufacturers to venture into the highly regulated markets of the US and Europe.
Leveraging market potential
APIs manufacturing is shifting from Western countries to China and India. Low costs in these countries are the prime reason for this shift and they have attracted huge investments from international companies. The rapidly growing economies, increasing healthcare standards, several health insurance schemes and rising disposable incomes, supported by large populations, are meanwhile boosting demand for APIs in these countries.
The regulatory environments of these Asian countries are also supportive. They will continue to witness important developments in the field of contract manufacturing of APIs. Apart from China and India, Japanese generic manufacturing companies are expected to flourish in terms of revenues in the coming years, due to many branded drugs losing their patents and offering huge opportunities for generic drug makers.
Recognising the strong growth potential in the Asia-Pacific market, a number of companies are preparing themselves for the long-term. Some are considering investing in new API production facilities, while others are planning expansion of their existing production capacities for APIs to meet the rapidly growing demand.
Source: GBI Research, Chemical Pharmaceutical Association
Figure 2 - Asia Pacific API market by country, 2010
Transition to biotech APIs
At present, around 85% of the APIs in the Asia-Pacific region are manufactured synthetically using non-biological substances as raw materials, the remaining 15% biotechnologically. However, the transition of API manufacturing from the synthetic to the biotech route is forming a prominent trend in the region.
Several factors are driving the growth of biological drug manufacturing. Domestic demand for biotech drugs has been increasing rapidly over the past decade, and will increase even more rapidly in future. Moreover, since becoming the outsourcing hub for North America and Western Europe, the increasing demand for biotech drugs in these regions is also driving the biotech APIs market in the Asia-Pacific region.
The governments of China and India are offering several incentives and support programs in order to boost the growth of their biotechnology industries. In addition to offering tax incentives, biotechnology parks and Special Economic Zones are also being established to enable the development of this industry.
The highly fragmented API market in Asia-Pacific is facing intense competition from players trying to acquire market share. The current scenario of many drugs going off-patent, thereby leading to price erosion, is also a serious concern to many of the manufacturers in the pharmaceuticals industry.
Diversification to increase profit margins has become imperative. Biopharmaceuticals are seen as a good diversification option as biotechnology is an emerging field and is not dominated by many players. Also, the general complex structure of a biological drug does not favour easy replication of the drug, unlike synthetic chemical APIs, therefore offering easier IP protection.
On the other hand, there are many forces, like the hefty capital investment needed, stringent regulations and scale-up glitches which are inhibiting the potential growth in the biotech APIs market. The biotechnology process is very sensitive and has to be controlled efficiently in order to produce drugs with the desired therapeutic effects. The need for sophisticated controls and process equipment increases the capital investment for manufacturers.
Apart from this, the therapeutic effect of the drugs depends highly on the purity levels, and will differ vastly for a small variation in the process parameters and purity levels. This has led to the development of stringent regulations for manufacturers
The Asia-Pacific region forms the third largest market of the global APIs industry, with Japan dominating the market in terms of revenues as well as innovator drugs. China and India are driving the market growth through their cost advantages and have emerged as manufacturing hubs for the Western pharma majors. With government support, improving IP systems and manufacturing standards in China and India, the generic as well as innovator APIs market in Asia-Pacific is expected to grow steadily in the coming years.
From Online Issue: October 2012