09 December 2002 00:00 [Source: ICB Americas]Western European companies dominate the global market for antibiotic intermediates and bulk actives, but they have met stiff competition from Chinese, Indian and other low-cost Asian producers over the last few years. By reducing costs, raising productivity and introducing new technologies, however, the Europeans have fought back and either improved their profitability or at least defended existing margins.
Nonetheless they face in the short- and medium-term continued low prices that are well below those they enjoyed in the mid to late 1990s, when they were an even more powerful force in the global market. "The need to keep down costs is a challenge we are having to meet all the time," says an official at Biochemie, the antibiotics subsidiary of Novartis. Biochemie, DSM and Antibioticos are the main European players in the worldwide market for antibiotics materials.
As a result the European producers must continually find new ways to raise yields and improve process efficiencies.
"Prices are likely to remain weak," says Leo Hepner of the London-based consultancy L. Hepner & Associates. "The Asian producers will continue to increase their market share, particular in first generation antibiotics like penicillins, tetracyclines and streptomycins. They tend to trade their products like straight commodities without trying to add value through technical services."
After recovering early last year from a rock-bottom level of around $8 per BOU ( billion Oxford units), the price of crude penicillin GK has crept up to $10.50 to $11 per BOU, still only half that of the mid-1990s. Prices for 7-amino cephalosporanic acid (7-ACA), the major intermediate for bulk cephalosporin antibiotics, have gone up to $125 per kilogram from $105 to $110 per kilo a year and half ago. But that is still well below the peak of around $200 per kilo in mid-1999.
"The European producers have recently been putting up their 7-ACA prices, quoted in dollars, in response to the weakening US dollar against the euro," explains Michael Barber of Michael Barber & Associates, an antibiotics consultancy in Caterham, England.
In addition to the big inroads into the global market by Asian operators, another factor behind the softness of intermediate and bulk active prices has been overcapacity. With the exception of DSM, the leading Western European producers have tended to be unwilling to close down production plants.
"Overcapacity has been the beginning and the end of the prices problem," says Mr. Hepner. "If one or two major producers were to withdraw from the market, there would be a remarkable effect on prices-almost immediately."
However, a relatively large number of smaller penicillin producers have been pulling out of the market. In Eastern Europe, several pharmaceutical companies, including four in Russia, recently closed down their capacity for crude penicillin. At the same time, Chinese producers who entered the sector during a surge in sales 8 to10 years ago have left the business.
Many of these departures were triggered by the inability to keep pace with new technology, particularly enzymatic processes, which have been driving production costs down. A gradual slowdown in demand since the Chinese authorities started purchasing large quantities of penicillin in the 1990s has also played a role.
"During the last two years growth in global demand for penicillin was around 3 to 4 percent, but now it has slipped to 2 to 3 percent," says Marcel Velterop, strategy manager for penicillin derivatives at DSM.
Trends in China now have a massive influence on the world market not only for pencillin-derived products, for which China accounts for over a third of global consumption, but also for cephalosporins as well. A recent move to cephalosporins in China (due to signs of microbial resistance to penicillin products) has consequently help to boost total global sales of cephalosporins and their intermediates.
"Demand for bulk active cephalosporins in volume terms is now growing at around 12 to 15 percent annually, although it may not stay at this high a level for long," says Mr. Barber. "This follows the decision by the Chinese government to make injectable cephalosporins a priority area for development."
Among the cephalosporin drugs that have benefited the most are cephradine, cephalexin and cephra-droxyl, all of which are based on the key intermediate 7-amino deacetoxy cephalosporanic acid (7-ADCA).
In China the biggest surge in demand among cephalosporins is for cephradine, which has the advantage of being capable of being administered orally or by injection.
"The Chinese healthcare system in the rural areas, which make up around two thirds of the population, relies a lot on clinics manned by paramedical staff with less training than fully qualified doctors," explains Mr. Barber. "Relatively potent, longer acting injectables tend to be more efficacious than the shorter acting products and ensure greater compliance by the patients. However, cephradine is extremely cheap, since the bulk non-sterile product costs less than $100 per kilo, because 7-ADCA is based on penicillin," he adds.
The growth in demand for cephalosporins derived from 7-ACA is currently slower than that for 7-ADCA-based bulk actives, because the price of 7-ACA bulk actives is twice as high at around $200 to 220 per kilo.
While manufacturers of antibiotic intermediates and bulk actives are carefully watching China to gauge trends in the global market, they are also paying close attention to prospects for Augmentin, GlaxoSmithKline's blockbuster antibiotic, which is facing tough generic competition, particularly in the US, its main market.
GSK has taken court action in the US over alleged patent infringements in an effort to limit the damage to the drug's sales in the short term. Augmentin, which is a combination of amoxycillin and clavulanic acid, had worldwide sales last year of £1.4 billion ($2.2 billion).
It is anticipated that large demand for generic amoxycillin/clavulanate potassium will take sales away from non-penicillin antibiotics and bolster sales of penicillin intermediates.
More significantly, a sharp drop in sales for Augmentin would pressure GSK to channel more excess penicillin materials onto the global merchant market. The company has a marketing partnership with DSM, stemming from an alliance set up in the 1990s between SmithKline Beecham and Gist-brocades, which DSM has since taken over. This enables DSM to market GSK's surplus intermediates and bulk actives, which are thought to account for as much as 10 percent of DSM's 35 percent share of the world market for penicillin materials.
"GSK is highly unlikely to abandon the Augmentin market whatever happens to its legal actions in the US," says one pharmaceuticals analyst. "It has been broadening its range of Augmentin products and in Augmentin has a strong brand name, which makes GSK well positioned to continue to retain a large share of what will be a large global market."
A key factor determining the growth rate of generic Augmentin will be the availability of clavulanic acid, which is difficult to manufacture. It currently has a limited number of producers worldwide.
"The fermentation process for making clavulanic acid and its recovery in good yield is tricky, to say the least, because if you do not get it right you will not achieve pharmacopeal standards of purity and product stability," says Mr. Barber. "It can also be a dangerous process as well."
In addition to GSK, the leading producers of clavulanic acid are DSM and Novartis' Biochemie, followed by Fermic of Mexico, Depa of Turkey and Lek of Slovenia. A number of Chinese producers are reportedly entering the sector, too.
A major reason for the support by Lek's management of Novartis' recent takeover bid for the Slovenian pharmaceuticals company is thought to have been Biochemie's ability to provide additional clavulanic acid capacity. Lek has been preparing to launch a generic version of Augmentin in the US that has so far avoided legal action by GSK.
"Lek has limited capacity for clavulanic acid, while Biochemie would have sufficient capacity available at a plant in Italy," says one source. Geneva Pharmaceuticals, Novartis' main generics marketing subsidiary, is however subject to a legal suit by GSK over its own planned launch of amoxycillin/clavulanate potassium in the US.
A successful takeover of Lek by Novartis would merge one of Western Europe's leading players in the generic antibiotics sector with one of Eastern Europe's largest antiobiotics producers. It would also reinforce Biochemie's position as a producer with a presence throughout the antibiotics value chain. Biochemie not only makes intermediates, bulk actives and finished products but also has its own marketing outlets, as well as access to the marketing networks of Novartis's other generic companies, such as Geneva. Lek would give it an entry into countries in South Eastern Europe, Central Eastern Europe and the former Soviet Union.
Dosage form antibiotics now accounts for 25 percent of Biochemie sales of around $900 million a year, against 10 percent a few years ago. The company has been able to gain contracts for the making of finished antibiotics because of demands by licensing authorities that pharmaceutical companies separate dosage-form manufacture from the rest of antibiotics production. Biochemie has also been investing heavily in fermentation and enzymatic processes to cut costs and raise margins at its main plants at Kundl, Austria; Les Franqueses, Spain; Rovereto, Italy; and Frankfurt, Germany.
In its efforts to reduce costs and restore profitability, DSM has probably taken the most drastic measures of the major European antibiotics intermediates and bulk actives producers. Not only has it been striving to improve financial returns but also to defend its strong presence in key segments. In addition to having over a third of the global market for penicillins, it has around half of worldwide sales of side chains for semi-synthetic penicillins and cephalosporins.
DSM has completed a restructuring program in its anti-infectives operation that involved reducing its workforce by around a third to 2,200. The biggest cuts have been at Delft, its Dutch production center, where over 400 jobs were lost. The objective has been to restrict production to fewer sites worldwide and benefit from economies of scale. Following the slimming of its overheads, Delft has been given the task of achieving low-cost volume growth in manufacturing of 6-amino penicillanic acid (6-APA) and 7-ADCA. Three existing penicillin G fermentation plants are being expanded to compensate for the closure of several small sites around the world. Side-chain production is being concentrated at Almeria, Spain.
DSM has also stepped up its attack on the Chinese market. It has set up or expanded joint ventures at Zhang Jia Kou Pharmaceutical Factory, near Beijing, Harbin Pharmaceutical Factory, Harbin, and Einhua-Chemferm, Zibo-Shandong. "It is important for us to be well positioned in China, and the best way to do this is through joint ventures," says a DSM official.
To achieve higher margins, the company has also relied heavily on new technologies, particularly in enzymatic and fermentation processes. A new 7-ADCA plant at Delft, which uses fermentation and enzymatic routes to make the cephalosporin intermediate, is due to reach full capacity next year after being officially opened in October of last year. It replaces three other plants which have been closed.
"It has taken longer than expected to bring fully on stream," says Mr. Velterop. "With a new technology like this you need to have a steep learning curve."
The new Delft unit gives DSM cost leadership in 7-ADCA production. While cutting manufacturing costs of the intermediate by half, other enzymatic innovations by the company can reduce the manufacturing expense of semi-synthetic cephalosporin bulk actives by around a third. With side chains, new processes, mostly based on biotechnologies, slash costs by as much as 70 percent.
Last year DSM reported a considerable improvement in its operating profit in anti-infectives compared with 2000, bringing it closer to its aim of a 15 percent return on investment in the sector. The rise in profitability has continued this year. Despite the disadvantage of a weakening US dollar, the anti-infectives operation recorded higher profitability in the third quarter stemming from better margins combined with bigger volume sales.
While DSM claims to be the lowest-cost producer of 7-ADCA, Anbics AG, a new company headquartered at Zug, Switzerland, is poised to take a similar position with 7-ACA. It has developed technologies to enable fermentation and enzymatic processes to be used throughout the production of 7-ACA, including the purification stage, increasing yields while decreasing costs.
The company, whose management includes former executives from Biochemie, Lonza, Roche and Pfizer, is due to bring on stream next summer a 28,000 cubic-metro plant at Alhama de Murcia, Spain.
"The pressure on costs is going to change the structure of the global market for antibiotic intermediates and bulk actives," says Mr. Barber. "With injectable cephalosporins, based mainly on 7-ACA, except for cefradine, I can see no more than 7 to 8 producers worldwide. Perhaps four of these will be European, while 2-3 will be big Chinese producers."
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