Encouraging Integration: Fostering Relationships Between Formulators, Specialty Chemical Producers, and Excipient Suppliers Creates a Stronger Supply Chain

Pick up the annual report of any generic pharma company like Teva, Sandoz, Aurobindo Pharma, etc. and it will likely include claims about being an integrated pharma company. But really, what does “integration” mean, to what extent do they do so, and how do they accomplish it? First, the definition: for our purposes, integration means communication between suppliers of specialty chemicals, active pharmaceutical ingredients (APIs), and excipients. The “why” involves equalizing asymmetric relationships between suppliers and formulators—because these create issues in the supply chain. Here are some more detailed “whys”: 

1. On average, every $1 API revenue creates a $5-10 formulation product 
2. Few players are present in more than 2-3 segments 
3. Top 10 generic players control 70% market share while top 10 API players have < 5% market share 
4. All Intermediate excipient suppliers and API sources are highly dependent on India or China – a big cause of concern for global generic players 
5. Many formulations players are backward integrated but increasingly, they have to turn to outside suppliers for risk mitigation 

The real question is that with this high level of asymmetry between the API and excipient suppliers or perhaps formulations players – is this situation sustainable? The answer, of course, is self-evident. 

So, what’s the solution? Here’s a look forward: formulations divisions of several companies now rely on internal API supply, which in turn depend on excipients. The new paradigm for these companies should be to integrate backward through strategic partnerships, which creates the possibility of a ‘win-win’ relationship between the specialty chemical players and bulk drug and/or excipients intermediate suppliers. 

Globally self-sustained API manufacturing is steadily becoming more prevalent, with advancements in technology and market stabilization. As the generic pharmaceutical industry continues to grow and mature, there is a need for specialized, high-quality manufacturing capabilities. This is essential for both strategic and business reasons. This gives the companies a chance to capitalize on opportunities offered by the global market, including increasing demand for value-added products. 

The generic API industry is now at a critical juncture, with several country governments focusing on promoting self-sustained API manufacturing within their borders. To meet the demand for a robust and resilient API production, there can be certain proactive steps that can be taken to truly integrate the value chain.

So how can integrated business strategy narrow the gap? How do integrated pharma companies sustain access to APIs and de-risk themselves at the same time? Here are four options: 

1. Build capacity and technology to support new product launches. Risk in-house failures. 
2. Rely on other integrated API suppliers. Risk competition in formulation from your API supplier (who may have a formulations business). 
3. Rely on other pure play API companies. Risk product development capability. 
4. Collaborate and create new partnerships with specialty chemical and excipient players that currently do not have a strong API business. Risk – Will the new partners be able to deliver high quality, on time and cost-effective products and manage the complex regulatory framework?

Historically, players have relied on options 1 through 3. Given that the pure play API players are diminishing in market presence, option 3 will increasingly become less relevant. Option 4 offers a new model that needs to be explored in greater detail. By creating a partnership-based model with ‘specialty chemical’ and ‘pure play API’ players will ensure API access and de-risk the enterprise at the same time. Following are a few key steps that ensure success using option 4. Explore partnership with specialty chemicals 

• “Specialty chemical” companies are already present in the intermediates business. BASF, FMC and Albermarle already have a significant API business (caters primarily to OTC products like omega acids, pain relievers etc.). 
• Partnership with an integrated pharma player allows them to move up the value chain – “API is to intermediate players what formulations is to API players”. 
• Operational efficiencies in manufacturing and supply chain are part of the DNA for the “specialty chemical” players. 
• It is unlikely that these companies will compete in the formulations segments.

Embrace Strategy and Technology

In order to create a cost-effective and reliable supply chain for API producers, the generic pharmaceutical industry should consider investmenting in infrastructure, advanced technology, and quality control processes. This includes obtaining high-end equipment for product formulation, testing, and packaging. To improve supply chain operations, the industry must establish clear and automated processes for tracking and monitoring inventory, production planning, delivery schedules, and cost control measures. Furthermore, collaboration between producers and distribution networks is necessary in order to ensure that APIs are delivered to customers in a timely, efficient, and standardized manner.Recycling and Upcycling 

In order to ensure robust and reliable delivery of APIs, companies should employ methods to reduce waste, optimize production, and reuse by-products. A modernized infrastructure will enable companies to scale up production quickly and easily. Companies should also invest in multiple sources of APIs and adopt working capital management practices that allow them to effectively manage stock and acquire necessary materials at a lower cost. Additionally, proper sourcing and pricing of raw materials is essential in order to produce high-quality APIs efficiently. Strategies such as long-term negotiations with vendors and bulk purchasing can help to reduce costs significantly. Forecasting and business integration is the key to success, and generic pharma has a long way to learn from the “innovator” firms. 

Apart from these strategies, companies should carefully study their supply chain and production process to identify potential improvements. For example, data automation and lean principles could streamline and optimize production. Forecasting and analytics might help identify trends and detect areas to reduce production costs. Companies should also analyze their production cycles to understand the impact of certain variables on the quality and consistency of their APIs. Finally, companies should ensure that they have a reliable system in place to detect potential issues within the production process. 

Conclusion 

All generic pharmaceutical companies must create viable backward integration through self and a combination of other API suppliers and intermediate players. This will not only de-risk the high value formulations business, but it will also provide an asset light model for API supply. If specialty chemicals, API and excipient manufacturers can forge meaningful partnerships and create true value chains, it will not only improve margins but also benefit the burdened healthcare systems and patients at large. 

Disclaimer: All the views, and opinions expressed do not represent the views or opinions of the author’s employer or any present or past organization.