Originally, independent API suppliers developed, manufactured and sold APIs to supply local generics houses in essentially national markets. Now that the larger generics houses such as Sandoz and Teva are vertically integrated into API manufacture and carrying out synthesis and/or fermentation, suppliers are being forced to adapt.
There are two strategies emerging in the supply of off-patent APIs, with some low-cost players opting to slug it out in the commodity arena while other niche players - strong in technical know-how - rule over small sectors of higher profitability, according to executives at Portuguese API manufacturer Hovione.
Hovione's business development manager for generics, Carla Vozone, and marketing & sales director Manuel Lourenco, note that there is a growing trend in Europe - already well established in the US - to adopt the strategy of rapidly rolling out generics as soon as possible after the branded product loses its patent protection.
"The key differentiators of the players in this field, like Synthon and Substipharm, are know-how in regulatory affairs, careful monitoring of patent situations and an early start,"according to Vozone and Lourenco.
They note that the Summary of Product Characteristics (SPC) legislation and patent legislation in Europe, requires these 'registration houses' to produce their validation lots with the help of Far Eastern API sources and/or formulators in patent-free locations (Iceland, Malta and Turkey have all been used) and sell their registration dossiers all over Europe, thereby gaining control over the supply chain.
Undoubtedly, this type of business brings short-term gains to the generics houses, because it accelerates market access; companies can enter the market with a generic product one day after patent expiry with minimum resources and avoid the patent constraints and validation and start-up delays that Europe-based producers face.
However, Vozone and Lourenco maintain that the long-term gains for these companies are less certain, as multiple registrations lead to price erosion and margins are squeezed.
"There are cases, like simvastatin, glucophage or paroxetine, where formulation prices dropped by over 60 per cent in only a few months," they note, raising questions about the API supplier's sustainability in that product.
Meanwhile, traditional suppliers whose core business is the manufacture and supply of APIs, like Dipharma, Esteve, Hovione or Cambrex Profarmaco are not involved in the drug product business and focus on long-term relationships with customers, offering added value based on reliable service and technical expertise.
These companies look for partnerships with pharmaceutical manufacturers rather than aiming to extend their control over the supply chain or 'making a quick buck'.
A case study on simvastatin
Using the case of the simvastatin patent expiry as an example, the Hovione executives note that the entry of generics affected the entire cholesterol-lowering drug market.
The original patent on simvastatin, the API of Merck & Co's Zocor, expired in May 2003 in most European countries. As one of the top cholesterol lowering agents with worldwide sales of $5.58 billion (€4.68bn) in 2002, it naturally attracted the interest of several API producers.
The generic versions of Zocor were launched in Germany and the UK last May. They rapidly achieved sales of about €30 million in Germany in the first month alone, according to IMS Health. But their performance in the first quarter after launch suggest that the impact of the generic entry may not remain confined to this molecule but might affect the overall statin market.
Indeed recent price pressures have led to growth in generic forms of the older drug lovastatin, and generic simvastatin may well cannibalise some of the sales of Pfizer's in-patent drug Lipitor (atorvastatin), the biggest-selling drug in the world last year with turnover of $10.3 billion, and could even affect Merck and Schering-Plough's just-launched Zetia (ezetimibe), the first in a new class of cholesterol absorption inhibitors.
"We are currently two years away from generic simvastatin's entry in the US, where some 45 tonnes of API were sold in 2002. Traditionally, the volume of scripts more than doubles and the price more than halves after a generic market entry, so simvastatin might well grow into a product of more than 100 tonnes/year," note Vozone and Lourenco.
And capacity is very likely to be an enduring issue, because simvastatin is technically difficult to make and lovastatin supplies are limited. In a case such as this, reliable API supply is the key, they suggest.
Friend or foe?
The evolution of the generics market has meant that a supplier can be viewed either as a partner or a competitor, and this is a very sensitive issue. It is addressed earlier in the US than in Europe, as most generics firms usually develop their dossiers themselves and source in bulk.
"However, given the high probability of a simvastatin shortage, it is very likely that an integrated player that both produces APIs and sells formulations will give preference to its own needs, to the detriment of supplying other generic firms," according to Vozone and Lourenco.
They also foresee a period of consolidation in the API supply sector as the polarisation of the market into the low-cost players and those companies adding value by offering process development expertise and reliable quality and supply.