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Pharmaceutical Manufacturing and Packing Sourcer

Capacity for Growth

The average capacity utilisation rate of the manufacturing industry worldwide is 75-80 per cent (1). However, the average for active pharmaceutical ingredient (API) manufacturing facilities specifically is estimated to be less than 60 per cent, and has been decreasing globally since 2000.

Indian API manufacturers have an even lower utilisation rate of around 40 per cent, although their exports are increasing. Indian contract management organisations (CMOs), on the other hand, have expanded their capacities by more than 30 per cent of expected demand in anticipation of future growth – and now look set to focus on increasing their utilisation rates.

Where Does India Stand?

As a whole, the manufacturing sector in India has an average utilisation rate of 75 per cent and above (2), so why do API production facilities have such a low rate? Most regions show a rate of less than 50 per cent. Lower capacity utilisation means low profit levels, and most of the plants in India which cater to local markets run at 30-40 per cent on average. China is about on par with India: the two countries are the highest generic API-producing locations by a long way, but the utilisation rates for both are lower than any other territory.

Contributing Factors

A region’s average utilisation rate does not depict its exact utility rate, as companies with more experience and higher capacity are often able to operate with greater efficiency. India and China, although running at a lower rate, compensate for this by producing in large volumes. Indian manufacturers mostly have multipurpose plants, which enable them to produce different APIs and attain a higher volume, whereas in the US or Europe, plants are often more specialised in particular APIs.

Three major factors can contribute to low average utilisation rates:

1. Capacity Additions
Indian API manufacturers have expanded their production capacity extensively in the past five years, in anticipation of demand. A capacity increase of 30 per cent over expected demand has taken place across the country. This excess has impacted upon utilisation rates hugely: despite being lower than many other regions, the volume produced is far higher. This factor has allowed the main Indian players to continue to compete in the global market.

2. Supplier Numbers
There are over 1,000 API manufacturers in India alone, and less than 100 of them are established exporters to regulated markets (3). These manufacturers control around 70 per cent of the utilisation rates. Other manufacturers which supply to non-regulated and local markets are running at lower rates. Less established manufacturing sites that supply to local and non-regulated markets need not make a huge investment in plants, so these facilities can run profitably at a lower utilisation rate.

3. Acquisitions and Mergers
Established API manufacturers will have expanded their production base through several acquisitions and mergers; however, some of these acquisitions will inevitably prove unfruitful. These acquired manufacturing sites are still scaling up their regulatory requirements to meet the export demand. Certain sites which are running at lower utilisation rates are even divested by companies.

Plant Expansion

Capacity additions in India have mostly taken place in multipurpose plants, biological API manufacturing facilities and highly potent API (HPAPI) segments (4). HPAPI and biological API production capacity has more than doubled – and utilisation rates are also higher – but these sectors are in their initial stages and are low-volume. The relatively mature generic API manufacturing plant capacities have increased by over 30 per cent more than expected demand.

This is the area which has seen the greatest impact. Capacity additions in multipurpose plants are looked on favourably by manufacturers, as this increases their chance to gain more contracts. The results of an expansion in niche API production only become obvious when there is an increased demand for a particular API. For certain categories – retroviral, for example – such capacity additions have taken place widely.

Capacity Additions

Several factors have influenced manufacturing capacity additions, including:
  • Demand for APIs in India is growing at over 15 per cent annually. Increasing interest from the local market has been one of the major reasons for local API manufacturers to increase their capacities, in order to meet demand (5)
  • A number of patent expirations are expected over the next five years. This has driven manufacturers to compete for the generic versions of these products
  • The growth of branded generics in India is expected to fuel the country’s pharmaceutical market. Big Pharma is concentrating on capturing the local market with these products, and requires capacity additions to do so (6)
Current Focus

Several top Indian companies have recently increased the capacities of their API manufacturing plants. However, they are still in the process of developing them to meet international standards. A recent amendment from Generic Drug User Fee Amendments and the European Falsified Medicines Directive will have a major impact on small and medium manufacturers which have expanded their capacities, in anticipation of demand from Western countries (7).

With these two major regulations in place, most API manufacturing units are investing more into increasing their plants’ compliance to move on par with international Good Manufacturing Practice. Their major focus has now shifted to increasing utilisation rates, rather than increasing their capacities. Capacity additions through mergers and acquisitions will continue to take place, but most of these will be Indian companies searching for opportunities to expand into other regulated countries, and other big pharma organisations looking to Indian API manufacturers to increase their presence.

Standard Operating Cost

Using a sample Indian plant with a capacity utilisation rate of 40 per cent, the variation in standard operating costs can be demonstrated. Plant cost and other expenses are calculated as per industry standards (3). Raw material costs are excluded, as this will depend on the product manufactured.

Here, the plant’s standard operating cost would be around $63. When the plant increases its utilisation rate to 50 per cent, its standard operating cost would come down by 19 per cent to $51. As market profi ts are reducing with increasing competition and price reductions, API manufacturers are targeting their capacity utilisation to decrease their standard operating cost and thus increase their profi t margins.

Impact on Procurement

An increase in capacity utilisation rates will reduce the price of production of APIs. But will Indian players bring down the price of their APIs? It is likely that prices will remain stable, but this depends on several factors. Increases in capacity utilisation rates should be seen over the next two to fi ve years, but the prices of raw material, labour rates and operating costs are expected to increase at a rate of over 10 per cent per annum, according to the forecast of the Indian Statistical Organization.

If an increase in these prices occurs along with an increase in capacity utilisation rates, the impact on profi t margins will not be affected and hence suppliers will not increase their selling price. On the other hand, Western API manufacturers are suffering from a loss of business due to the shift of generic API manufacturing to Eastern countries, and their capacity utilisation is consequently decreasing. This could lead to increased prices from Western API manufacturers. The situation will most likely increase the price gap between Western countries and Asian nations, thereby shifting the procurement of APIs to countries like India and China.

References
1. Federal Reserve – Industrial production and capacity utilization, 15th August 2013
2. Annual Report – First pharmaceutical census of India, 2010-2011
3. Bowman M, Will API manufacturing move out of India and China? CHEManager Europe, 2012
4. Tso C and Jacob J, Consolidation and differentiation, Pharma Ventures, 2012
5. PricewaterhouseCoopers, Global pharma looks to India: prospects for growth
6. Bera A and Mukherjee A, The importance of generic drugs in India, International Journal of Pharmaceutical, Chemical and Biological Sciences, 2012
7. Active Pharmaceutical Ingredients Committee, Preventing counterfeit/ falsifi ed APIs – the European API manufacturers’ view, October 2012
8. Pollak P, Badrot A and Dach R, Have costs of Chinese and Indian fine chemical producers closed in on European and US levels? Contract Pharma, 2012


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Pradeep Kasirajan is a Senior Research Analyst with Beroe’s Pharmaceutical Ingredients department. Beroe is a premier global provider of customised procurement services specialising in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organisations. As an analyst at Beroe, Pradeep tracks the entire pharmaceutical industry, and in particular company movements in supply agreements, supply chain, suppliers, mergers and technologies, with respect to pharmaceutical ingredients.
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Pradeep Kasirajan
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