Thursday, March 3, 2011


There is a transformation going on in the API industry. Smaller players are moving out, while big players will survive. Due to growing regulatory standards – the overheads are substantially increasing and it is getting difficult for smaller capacities to absorb this.  Pricing pressures are there, but Demand Supply dynamics play out and weed out the weaker players and pricing is maintained at healthy levels in the longer run. It is essential to have business strength, so that it does not fall to these near term pressures.

It is important for companies to diversify their geography presence and to an extent their product portfolio . Ideally, the plant should be efficient enough to cater to both the regulated and domestic markets competitively.  There are two models in the API business and both these models have their own pros and cons.

1.      One or two Product focused – Scale driven
It is difficult for an established player – having substantial scale to fall to price competition. But if there is path breaking process innovation, which  does happens, then these players get in a trap. This model is cost driven and management focus and attitude is very important.

2.      R&D Driven – Opportunistic (Timing Patent Expiries, forming alliances )
Soon after a product patent expires and market is open for generic players, there are very limited API suppliers and prices are driven by these companies, but gradually if these companies are not able to create enough scale and process improvements they fall to competition.   These companies tend to be market leaders in a couple of products, while they constantly evolve the rest of their product portfolio, to suit the market needs. 

This business model, require very different management skills

The “China Devil” is here to stay in the API market. The China cost advantage is there, but limited.. China is cheaper than India in molecules where capabilities exist and regulatories compliance is not required. China continues to lowest cost suppliers of some intermediates, which India is leveraging to produce low cost API’s and supply to regulated markets.

However, if we look at the overall API market, it is not a mere cost game.  Beyond cost, it is essential for API suppliers to be consistent in supplying the desired quality and quantity without too much of fluctuation in supply prices.  Chinese companies have not yet matured on these parameters

Constant innovation is required to address the growing/changing market needs (Patent expired molecules, addressing new pharmacopeias standards)

The API players just need to be dynamic and have a close look at the changing environment and rightly play their strategy.
Chinese cost advantage in the longer run will be offset to some extent because of increasing regulatory/quality bars in domestic market and hopefully appreciation of Yuan.  

1.      Constant Process Innovation to Reduce Cost
2.      Consistency in Quality and Supplies
3.      R&D Strength
o      Ability to innovate API’s  with “High Entry Barriers”
o      Access to unique chemistries
4.      Right Product Selection
5.      Creating Right Alliances
6.      Regulatory Expertise
7.      Compliant Lab Scale Facilities
8.      Spotting the API much before expiry of data exclusivity

“Companies with high cost cannot compete but companies with low cost cannot compete on Cost alone”
A strong R&D team, together with an equally strong business development team is essential for creating a strong API business that can grow beyond cost competition.

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