Indian CMOs to seize branded generics market opportunities?

The structure of the pharmaceutical market has significantly changed over the last years. While large volume blockbuster guaranteed revenues of more than $ 1 billion per drug in the past, small volume, but high value drugs have gained increasing importance in the last decade.
 
As a result, especially custom manufacturer (CMO) of active pharmaceutical ingredients (APIs) have seen a lot of pressure in the last years. Improper fit of their assets to new requirements, ie lower volumes, as well as increasing competition from Asian - in particular Indian players - have threatened margins and volumes. However, big pharmaceutical player continue to increase their outsourcing share on a case-by-case basis offering additional business opportunities for API producer.
 
Branded APIs represent a larger market for CMOs
Pharmaceutical end-market is estimated at $ 860 billion in 2012. Thereof, pharmaceutical fine chemicals counted for $ 57 billion, roughly 7% of the overall market while APIs within this segment count for $ 40.1 billion and are almost equally separated into branded and generic applications. However, outsourcing share heavily differs within the branded and generic markets - almost half of the branded APIs are produced by custom manufacturing (CMO) while nearly 75% of the generic APIs are produced in-house. To a large extent Indian API producer are dominating this area with a low fixed cost base and ever increase quality standards.
 
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As a result, the accessible market for CMOs is much larger for branded APIs compared to the generic market. However, due to the increasing volume trend towards generic products, this might change in the future leading to more focus on generic APIs from CMOs. In addition, ongoing growth of the overall pharmaceutical market will allow additional business opportunities for CMOs.
 
Branded generics gaining marketshare in Asia
The pharmaceutical market shows a steady growth during the last decade, especially in the Asian countries. This growth is expected to continue with approximate 2% per annum resulting in an overall pharmaceutical fine chemical market size of $ 42.5 million in 2015.
 
The growth of the pharmaceutical market is supported by three major trends:

• The ageing population
• The increase of the per-capita pharmaceutical expenditures
• Increased usage of high-potency APIs

The major driver for the increasing pharmaceutical market is the growing ageing population, especially in Asia. With a yearly growth rate of 3%, the population 65+ will almost quadruple from 322 million in 2000 up to 1,227 million in 2050 within the Asian countries. Additionally, as a result of the ongoing increase of the per-capita income, pharmaceutical expenditures in Asia will grow by more than 6% heavily outperforming the OECD average. In addition, wealthy Chinese strongly prefer branded products over generic ones supporting branded market growth in Asia.
 
Regulatory frameworks are further internationalised such as in China and India, which become stricter to match the ones in developed markets, ie, Western Europe. In India the Central Drugs Standard Control Organization (CDSCO/DCGI) overlooks the legislation Schedule M of ‘Drugs and Cosmetic Rules’ with some GMP requirements.

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The growth in the pharmaceutical market especially in Asia offers new business opportunities for CMO players. However, CMO players have to be present with production facilities in Asia, ie China and India, to leverage the advantages, eg low production costs, and to ensure close proximity to the customer. Serving the Asian market from outside Asia represents a challenge that might not be won. High-potency APIs (HPAPIs) as a niche segment is only of interest for players already capable of the production of HPAPIs - extending production facilities in this area requires high investments with long pay-back times while serving a limited market.
 
Success mantra for Indian CMO: Keep quality standards high
The quality of Indian generic API producer is today comparable to Western European player, which adds to the comparative disadvantage of the Western European and US players. Furthermore, an increasing preference of branded drugs over generics combined with higher per capita incomes leads to increased pharmaceutical spending especially in China and Korea – India focused on cheaper generic products. This represents a potential opportunity for Indian CMOs.
 
HPAPIs – APIs with a therapeutic daily dose below 10 mg – have gained increasing importance over the last years in medicine, esp. in the oncologic area. As a result of the low therapeutic dose, side effects can be minimised which is especially important for highly effective cancer drugs. In 2012, HPAPIs count for $ 1.3 billion (about 3.2% of the overall API market) and are expected to grow by 6% p.a.
 
Despite the strong growth, HPAPI will remain a niche market and, therefore, offer only limited growth opportunities for CMO players. The production of HPAPIs is highly challenging and requires high investments for the set-up of production facilities while production volumes are considerable low. Furthermore, in contrast to standard APIs, there is an ongoing trend to produce HPAPIs in-house. 
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Dr Alexander Keller is Partner at Roland Berger Strategy Consultants GmbH - one of the world's leading strategy consultancies
 
Dr Wilfried Aulbur, Managing Partner, Roland Berger Strategy Consultants India Pvt Ltd