That said, the European market for APIs will rise from a value of around $4.5 billion in 2003 to $5.85 billion in 2010, a compound annual growth rate of 3.8 per cent, according to a new report from Frost & Sullivan.
Constant price erosions and the large number of participants present in the market are behind the lack of capability differentiation, according to the report, but support for the sector is coming from the generics industry.
The market for APIs destined for generic drugs is on the upswing, driven by a combination of factors such as the ageing population, growth of chronic therapies, cost constraints on social security systems, patent expiries and a thinning pharmaceutical drug pipeline.
"The reduced outsourcing of API manufacturing - due to a lack of new drugs and the unforeseen failures of several late-stage drugs - has created a huge overcapacity in the market," notes the report, entitled The European Active Pharmaceutical Ingredients Market and Outsourcing Trends (Code: B425).
But this overcapacity is also due to the fact that many current Good Manufacturing Practice (cGMP) manufacturers had made extensive investments in anticipation of strong growth in the custom manufacturing business, it says.
Go niche
In the absence of steady business from pharmaceutical customers, companies are now exploring fresh opportunities in niche segments and in biopharmaceuticals. Good growth opportunities are especially anticipated for smaller suppliers that are technologically sound in niche areas such as high potency APIs.
"Growing demand for new APIs by biopharmaceutical companies with innovative drug mechanisms provide opportunities for API manufacturers," according to F&S research analyst Himanshu Parmar.
Biopharmaceuticals, which currently constitute around 8 per cent of the world drug market, are gaining increasing importance and experiencing double-digit growth rates. This can only spell good news for the API market. Again, the ongoing development of novel drugs and a rapidly ageing population will ensure continued demand for innovative APIs and positively impact market growth.
Despite these encouraging factors, problems such as capability differentiation continue to challenge manufacturers to find ways to achieve some kind of distinction in the highly competitive API market. Production capabilities and technology portfolios that are on par with each other creates a difficult situation for manufacturers in Europe.
Manufacturers will therefore have to maintain strong customer relationships to ensure a steady stream of business from them, says Parmar.
"Enhancing production capabilities as well as improving service portfolios is essential for sustainable competitive advantage," he notes.
And given the growing number of mergers and acquisitions in the API market, this is also likely to strengthen manufacturers' relationships with the newly consolidated companies and encourage more outsourcing by them.
"Suppliers need to perform a comprehensive revaluation of their technology and service portfolios to gain market presence," according to Parmar. "An integrated approach with speedy delivery and cost competitiveness needs to be implemented for efficient API manufacturing and considerable profit margins."
One of the biggest challenges facing manufacturers, however, is the growing competition posed by low-cost manufacturers in Asia. Asian manufacturers are able to offer cost-effectiveness as well as meet regulatory standards. In particular, India is emerging as an attractive choice for API outsourcing due to low development costs, complex synthesis capabilities, cGMP compliance and a large domestic market.
At present, current capabilities allow Asian manufacturers to target only the generic sector, but they are expected to win branded pharmaceutical customers in the Western world as they develop greater manufacturing capacity, says the report. This trend is already being seen in large pharmaceutical companies sourcing an increasing number of advanced intermediates from Asia.
In Europe, the UK, Germany, France and Switzerland are the major bases for API manufacturers for the innovative sector. Italy and Spain are showing growth potential in the generic sector; in fact, Italy has become one of the major bases for generic API manufacturers due to its advantageous patent regime.