Kate Kuhrt

				From the perspective of active ingredient- and finished-dose manufacturers based in the United States and Europe, players from emerging markets, especially India and China, often seem to pose threats. The availability of low-cost active pharmaceutical ingredients (APIs) from India and China has had a big impact on the Italian and Spanish API manufacturers. Today, 29 India-based groups and 16 China-based groups are considered "established" by Thomson Reuters, meaning that they have many years of experience with supplying a number of APIs to regulated markets such as the US and European Union (see Figure 1). Meanwhile, the emergence of a new crop of backward integrated Indian generic-drug manufacturers has changed the market dynamics in Europe and the US. Both the number of abbreviated new drug application (ANDA) filers and filings from India have increased dramatically over the past 10 years (see Figure 2).  

With double-digit growth rates and a lower cost base, emerging markets also provide regulated market players with several opportunities. For instance, these markets can serve as bases for conducting clinical trials, research and development (R&D), and manufacturing activities, in addition to providing regulated market players with opportunities to sell finished-dose products and APIs into those markets. 

Each emerging market comes with a unique set of opportunities and challenges. This article focuses on some of the opportunities and challenges in the four BRIC (Brazil, Russia, India, and China) countries faced by API and finished-dose manufacturers based in regulated markets. 

Brazil is the second largest pharmaceutical market in Latin America after Mexico. Its $11 billion pharmaceutical market has been growing at double-digit rates (1). It is no surprise that this rapidly growing market would be of interest to big pharmaceutical manufacturers, despite the country's price controls, frequent changes in rules, and willingness to issue compulsory licenses, as seen in the case of Merck's (Whitehouse Station, NJ) "Stocrin" (efavirenz). In May 2007, the Brazilian Ministry of Health issued a compulsory license for efavirenz after Merck refused to lower the price of this antiretroviral treatment to levels acceptable to the Brazilian government.  

Major pharmaceutical companies such as Eli Lilly (Indianapolis) and Novo Nordisk (Bagsværd, Denmark), have also set up manufacturing facilities in Brazil, both for local sale and export purposes. Five years ago, Eli Lilly refurbished its oral-solids plant in Saõ Paulo and today, several of its brands are produced locally. Last year, Novo Nordisk announced that it had invested $200 million into an insulin- production facility in Montes Claros. Meanwhile, it is speculated that Novartis (Basel, Switzerland) will be setting up an antimeningitis vaccine plant in Singapore rather than in Brazil due to latter country's lax attitudes toward patent protection. 

Despite these moves, the Brazilian generics market has proven difficult to enter and succeed in for most foreign companies. Four local generics companies—EMS (Hortolândia), Medley (Campina), Eurofarma (Saõ Paulo), and Ache/Biosintetica (Guarulhos)—control 80% of the generics market in terms of sales. Of foreign generics companies, only Sandoz (Holzkirchen, Germany) has so far succeeded in working its way into the top. Meanwhile, Apotex (Ontario) is looking to sell its facility in Saõ Paulo and will no longer market products directly in the Brazilian market, citing fierce competition as the main reason for these moves. Other regulated market players, among them Germany's Ratiopharm and Stada Arzneimittel AG, also have so far had limited success in Brazil. 

We at Thomson Reuters anticipate that as "similars" (products that have not gone through bioavailability and bioequivalency testing) are gradually being phased out in Brazil, the market share of generics will increase, and additional foreign generics companies, among them Teva (Petah Tiqva, Israel), will try their luck in the Brazilian market. We also speculate that Teva will attempt to enter the Brazilian generics market by acquiring one of the local players, possibly Medley, which was put up for sale this summer. This would allow Teva to take advantage of a local manufacturing base and established relationships, both of which have proven to be extremely valuable in the Brazilian market. 

The Russian pharmaceutical sales market, estimated at $7 billion and growing at double-digit rates, is dominated by foreign pharmaceutical companies such as Johnson & Johnson (Raritan, NJ), Novo Nordisk, Roche (Basel, Switzerland), Sanofi-Aventis (Paris), Nycomed (Zurich, Switzerland), and Menarini (Florence), as well as by foreign generic-drug companies such as Gedeon Richter (Budapest) and Lek (Ljubljana, Slovenia) (2).  

The main attractions of the Russian market are its large population, growing middle class with access to private insurance, willingness to pay out-of-pocket for many high-cost drugs, and large demand for drugs to treat chronic conditions. Among the challenges facing any drugmaker are the sheer size of the country and poor infrastructure outside of the most populated areas. In addition, intellectual property enforcement in Russia continues to be lax and counterfeiting of pharmaceuticals is a major problem, while corruption, lack of transparency, and red tape often cause delays in market approval. There are also questions about the sustainability of the state drug program, DLO (Dopolnitelnoe Lekarstvennoe Obespechenie, which translates into the Provision of Supplemental Medicines), launched in 2005 to make medicines more accessible to veterans, retirees, and low-income individuals. 

During the past few years, a number of foreign generics companies, including Stada Arzneimittel AG (Bad Vilbel, Germany), Polpharma (Warsaw, Poland), and Actavis (Hafnarfjordur, Iceland), have acquired Russian dose-manufacturing sites and, together with them, instant market share. Stada, through its subsidiaray Nizhpharm in Nizhny Novgorod, which it acquired in 2004, last year purchsased three companies belonging to the Makiz group with facilities in Moscow and Ryazan. Polpharma acquired a stake in Akrihin in Staraya Kuparna near Moscow, and Actavis purchased a majority stake in Zio Zdorovje in Podolsk, near Moscow. Others, among them Slovenia's Krka, have built their own manufacturing sites in Russia from scratch. Krka opened a facility near Moscow for manufacturing solid-dose forms. It has been reported that Teva is considering building or buying a plant in Russia by May 2009. 

Generics are not the only ones looking to acquire or build manufacturing facilities in Russia. Among pharma companies that have already built a facility in Russia is Servier (Paris); Servier's manufacturing facility is located in Sofyino, near Moscow. Nycomed and Pfizer (New York) are speculated to be looking for construction sites or existing facilities that they can upgrade. Setting up a manufacturing base in Russia helps foreign companies take advantage of the country's lower cost base and provide insulation against potential protectionist measures by the Russian government.  

India, the fourth largest pharmaceutical market by volume and 13th largest by value, is experiencing an economic boom, and the size of its middle class is growing, giving more people access to medicines (3). Together with the growth in incomes, the rates of certain diseases, among them diabetes and cardiovascular problems, also have been increasing. 

Figure 1: The number of established, less established, and potential future active pharmaceutical ingredient (API) manufacturing groups headquartered in India and China.  Established groups have several years of experience supplying APIs to regulated markets. Less established groups have regulated market experience with fewer products or fewer years of experience than established groups. Potential future companies would like to start supplying to regulated markets.			

Major pharmaceutical companies have been selling their older brand products in India for many years. During the past decade, they also have launched some products in India that still enjoy patent protection in the rest of the world, among them AstraZeneca's (London) "Nexium" (esomeprazole) and Pfizer's "Viagra" (sildenafil). Taking things a step further, Pfizer is planning to develop several products specifically for the Indian market. Novo Nordisk also has announced growth plans for India's market and is expanding its collaboration with Torrent Pharma (Ahmedabad), which is running a dedicated insulin manufacturing facility for Novo Nordisk. 

However, many pharmaceutical companies have remained very cautious about the Indian market, primarily because of problems surrounding intellectual property protection. For example, Novartis was denied a product patent for "Gleevec" (imatnib mesylate) and, in March 2008, the Delhi High Court rejected an injunction plea by Roche to prevent Cipla (Mumbai) from selling generic copies of Roche's "Tarceva" (erlotinib). 

Figure 2: The number of final abbreviated new drug application (ANDA) approvals belonging to groups headquartered in India and the number of Indian groups holding final ANDAs, 1998â2007. 			

Several North American and European generics companies, among them Watson (Corona, CA) and Sandoz, have established a dose-manufacturing presence in India. Sandoz's Indian dose-manufacturing facilities include three sites in Maharashtra: an antituberculosis drug plant in Kolshet, a cephalosporin plant in Turbhe, and an oral solid-dosage plant in Kalwe. In 2005, Watson acquired from Dr. Reddy's (Hyderabad) an oral solid-dose manufacturing facility in Goa. To date, only a few foreign generics companies seem to be eyeing the Indian drug market. Although Mylan (Canonsburg, PA) gained presence in the Indian dose market through the acquisition of Matrix (Secunderabad), we believe the main impetus behind the acquisition was to access to Matrix's API and finished-dose manufacturing capabilities.  

There are a number of reasons why generics players have shied away from entering the Indian market with their dose products. Major challenges include the large number of local generic-drug manufacturers with access to inexpensive APIs, intense price competition, and the need for considerable marketing presence. 

The Chinese pharmaceutical market is currently estimated at $12 billion and growing at double-digit rates (4). By 2010, China is expected to be the fifth largest pharmaceutical market after the US, Japan, Germany, and France. As the world's most populous country is getting wealthier, the awareness of diseases and treatments is improving and more people have access to medicines. Together with improving living standards, the rates of Western diseases such as heart disease and cancer, also have been increasing, contributing to increased demand for pharmaceuticals. 

Major pharmaceutical companies such as Abbott (Abbott Park, IL), AstraZeneca, and Boehringer Ingelheim (Ingelheim, Germany) have been marketing their products in China for several years, however, even the largest companies have not penetrated all the corners of this vast country. Earlier this year, for example, Pfizer announced that it will be increasing the number of Chinese cities that it serves from 110 to more than 650. To reach the smaller cities and rural areas, pharmaceutical companies must expand their distribution networks and hire hundreds or even thousands of sales people.  

Several foreign generics companies, among them Stada, Actavis, and Teva, also have been marketing their finished-dose products in the Chinese market for a number of years. For example, Teva inherited a presence in the Chinese generics market through the acquisition of Sicor (Irvine, CA) and Ivax (Miami). Both Sicor and Ivax had established joint ventures with Chinese partners, Tianjin Pharmaceutical Holdings and Kunming Pharmaceutical Factory, respectively. Meanwhile, Sandoz acquired a generic-drug manufacturing facility in the Guangdong Province at the end of 2007. The facility used to belong to Grünenthal and is reportedly already supplying products to major Chinese cities. This is Sandoz's second facility in China. As a result of acquiring Hexal (Holzkirchen, Germany) in 2005, Sandoz inherited Hexal's facility in Tianjin. 

In addition to competition from local generics players, accessing distribution channels and reaching different corners of China are only a few of the major challenges facing generics companies interested in the Chinese market. In China, many companies focus only on one province, so partnering with those companies would not necessarily help a foreign company penetrate this fragmented market. Generics companies also must keep in mind that not all drugs have been approved in China, so clinical trials may be required before a particular generic drug can be introduced in the Chinese market. 

Brazil is not known globally for its API manufacturing industry. The facilities there tend to be relatively small and most of them belong to Brazilian companies. However, a handful of regulated market players have set up API- manufacturing facilities in Brazil to take advantage of the country's low-cost manufacturing base, proximity to vast patient populations in North and South America, and its patent regime, which is more favorable to API manufacturers than that of Europe (see Figure 3). 

Figure 3: Total number of foreign-owned active pharmaceutical ingredient (API) manufacturing sites and number of API manufacturing sites belonging to major multinational pharmaceutical companies in Brazil, Russia, India, and China.			

It is worth noting that several multinational pharmaceutical companies have an API-manufacturing presence in Brazil, among them Novartis, which has an API- manufacturing site in Resende, Riõ de Janeiro, where it manufactures valsartan for its global supply chain.  

At least two Italian API manufacturers based in Milan, Italfarmaco and ACS Dobfar, have set up a manufacturing presence in Brazil. When announcing the acquisition of the Brazilian manufacturing site from GlaxoSmithKline (London) in 2000, Italfarmaco explained that it set up the facility to more effectively service the North American generics market, something that had been challenging to do from Italy because of the restrictive supplementary protection certifications (SPC) regime. In most EU countries, SPCs have provided innovators with up to five years of additional market exclusivity after the expiry of relevant patents. However, in Italy, Certificato Complementare di Protezione could offer up to 18 years of additional protection. 

Given the relatively small number of local API manufacturers, a considerable finished-dose manufacturing base (both for domestic use and export), and low import taxes, it is no surprise that Brazilian finished-dose manufacturers import a significant amount of APIs. Despite the fact that the rules in Brazil have become more stringent over time, many Brazilian finished-dose manufacturers still focus more on cost than quality. As a result, most API imports come from India and China and other low-cost countries. However, as the Brazilian generics environment becomes increasingly quality minded, opportunities for players from countries such as Italy and Spain should improve.  

These days, there is very little API manufacturing taking place in Russia, and there is little local expertise available in the area of manufacturing APIs. Most API facilities based in Russia are locally owned, and we do not foresee major foreign investment in API manufacturing occurring in the near future. 

As the number of local finished-dose manufacturers is increasing, so is the demand for APIs. Unfortunately for regulated-market API manufacturers, as in Brazil, the focus in Russia is on cost rather than quality, and many local dose companies are relying on offshore distributors. In cases where material comes directly from manufacturers, the material tends to come from low-cost countries such as India and China.  

At this point, we do not see many opportunities for regulated-market API manufacturers to sell their APIs to Russia, unless they already own finished-dose manufacturers in the country and sell the APIs to their own subsidiaries. 

India is a major hot spot for API manufacturing but the large number of Indian Import Registrations (IIRs) for APIs (more than 1200 have been filed since 2003) confirms that India also imports a significant amount of APIs. Chinese companies hold one-third of IIRs, which is not surprising given India's market focus on cost (see Figure 4). Nevertheless, a significant number of registrations are held by companies based in regulated markets such as Germany, the US, Italy, and France. Among the top US and EU players in terms of the number of IIRs are major manufacturers such as DSM (Heerlen, The Netherlands), BASF (Ludwigshafen, Germany), and Schering-Plough (Kenilworth, NJ).       

Figure 4: Share of Indian Import Registrations for active pharmaceutical ingredients filed between February 2003 and November 2007, broken down by the country of headquarters.			

The products that Indian companies import from Western Europe and the US tend to fall into two groups. The first group consists of products that require facilities or technology not widely available in India. Clavulanate potassium, a fermentation- based product, would fall into that category. The second group consists of products such as lactulose and beta carotene, for which a limited number of producers have developed efficiencies and market dominance sufficient to make successful competition unlikely. We also see opportunities for Western companies in India with steroids, peptides, and difficult-to-manufacture products such as prostaglandins. In addition, there are opportunities to sell APIs to export-focused Indian finished-dose companies, whether they are toll-manufacturing for overseas marketers or want to increase their chances of getting speedy approvals for their own marketing applications. 

Of course, there are a number of challenges that foreign API manufacturers face while competing with Indians in their backyard. Despite rising costs in India, local companies still frequently enjoy a cost advantage over their Western counterparts. And in cases where the API is locally not available, Indian finished-dose companies have been importinge the API from low-cost countries such as China, rather than from the West. Recently, however, the prices from China have been skyrocketing as a result of factory closures due to the Olympic games and enforcement of tougher environmental standards. This may provide additional openings for European API manufacturers in the Indian market. An additional barrier facing foreign API manufacturers in India is high import duties on active ingredients. It is worth noting that these duties can be waived if the importer can prove that the finished dose will be exported. 

Because of India's lower cost base, several API manufacturers from Europe and the US have set up manufacturing facilities in the country, among them Albany Molecular (Rensselear, NY) and Trifarma/Alchymars (Milan). According to Albany Molecular, the company's short-term goal is to use Indian facilities to make intermediates for products manufactured in their New York facility; in the longterm, the company plans to manufacture APIs in India. 

In addition to accessing a lower cost base and a large talent pool, setting up facilities in India helps European companies compete more aggressively with Indian companies for the chance to supply APIs to the US generics market, especially to those companies participating in patent challenges. Bolar-type provisions permit the development and small-scale manufacturing of a pharmaceutical product ahead of the patent expiry. These provisions have been implemented in most of Europe during the past few years and have helped to level the playing field somewhat, although it is our understanding that commercial quantities of APIs still cannot be made ahead of patent expiry in Italy. This means that it would not be possible for a generic finished-dose company to launch commercial quantities of a generic product on the day after patent expiry with an API that comes from Italy.  

At this time, we do not see China as a significant export opportunity for regulated-market API manufacturers. Some API manufacturers may find markets for products that are very difficult to manufacture or require dedicated facilities. However, in general, we find that China has the capability to manufacture most products locally. And in cases where Chinese companies do import APIs, because of the country's heavy focus on cost, they are more likely to import APIs from other lower-cost countries than from the EU or US. Also, unlike India, China does not export large quantities of finished-dose products into regulated markets and therefore does not need high-quality APIs from regulated markets.  

Although we do not expect regulated market API manufacturers to benefit greatly from the Chinese market, we certainly expect regulated market API manufacturers to take advantage of China's lower cost base and talent pool by setting up manufacturing and R&D facilities there. Although the costs, including salaries, are rising in China, the salaries for scientists are still considerably lower in China than in the EU or US. Also, having a low-cost manufacturing base in China makes it easier for western companies to sell into other emerging markets that tend to focus on price. Among the regulated market players that have set up facilities in China are such major API manufacturers as DSM, but also smaller API manufacturers such as Hovione (Loures, Portugal) and Esteve (Barcelona). Earlier this year, Hovione anounced it had acquired a majority stake in Hisyn Pharmaceutical (Zhejiang), giving Hovione acess to additonal manufacturing capacity for APIs and development laboratories as well as a lower cost base. Meanwhile, Esteve has had a joint venture in China since 2000.  

Emerging markets such as India and China have already left their footprints on the pharmaceutical world thanks to their lower-cost products and inexpensive scientific talent. As pharmaceutical market growth in the US and major European markets slows to low single digits, we expect that emerging markets, among them the BRIC countries, will continue to have a major impact on the pharmaceutical value chain both as suppliers of active ingredients and finished-dose products to regulated markets but also as consumers of pharmaceutical products manufactured by regulated market players. 

 is director of Generics and API Intelligence at Thomson Reuters, 215 Commercial St., Portland, ME 04101, tel. 207.871.9700 ext. 26, fax 207.871.9800, 

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Articles

The author outlines the opportunities and challenges for manufacturers aiming to enter the BRIC-country markets.