Italian API manufacturers grapple with regulator

Tutto e bene

12 November 2009 15:06  [Source: ICB]

Italy's API manufacturers are in it for the long haul, having weathered ups and downs for decades

ONCE CONSIDERED "pirates" by big pharma, Italy's manufacturers of active pharmaceutical ingredients (APIs) are today more often called partners.

Chris Eyles

Changes in Italian patent law have resulted in this more amicable relationship. They have also made business more difficult, at times overcompensating for prior liberality rather than harmonizing with European practice. Despite these and other challenges, however, Italian API manufacturing continues to thrive. Italy remains the leading producer of APIs in Western Europe, holding 10.4% of the combined 2008 global merchant market for innovative and generic products, according to The World API Market, a new study by the Chemical Pharmaceutical Generic Association (CPA), an Italian trade association based in Milan.

Italy's share of the generics market is even higher - 16.7%. Revenues from generic APIs accounted for $2.84bn (€1.94bn), or 76% of the sector's 2008 total of $3.75bn.

Most Italian API production - 87% by revenues - goes to export, according to the CPA study. The US is the primary destination, followed by Western Europe, Japan, Eastern Europe and the rest of the world.

All is not rosy, however, and the number of API producers in Italy has steadily fallen for the past two decades. In 1991, there were 108 API producers and 108 manufacturing plants, says Marcello Fumagalli, general manager of the CPA. In 2000, there were 95 producers and 104 plants. Today, there are 88 producers and about 100 plants.

Some firms have merged, while others have been acquired by multinationals, developments that are in part only consequences of the same difficult business environment that has eliminated firms throughout the West. But another important factor has been the unique business conditions imposed by Italy's evolving patent laws.

Until the late 1970s, Fumagalli explains, pharmaceuticals could not be patented in Italy, neither APIs nor finished products. There was consequently little innovation. Of the 900 new chemical entities introduced to the US market between 1940 and 1975, Italian firms originated only five, according to a 1995 study by Harvard University academics F. M. Scherer and Sandy Weisburst. The Italian drug market was nonetheless large and profitable, supporting 464 domestic drug firms in 1976, according to one source. In 1978, however, Italy's Supreme Court threw out the 1939 law that had excluded pharmaceutical products from patent protection, turning the market upside down. Domestic drug companies turned to licensing agreements with originators, Fumagalli says, while the API industry faced a different choice.

INNOVATE OR DIE
"For producers of APIs, there were two solutions," he continues. "Close the company or find a new market; and this new market was generics."

A great boon soon followed with the passage of the Drug Price Competition and Patent Term Restoration Act of 1984 in the US. Often called the Hatch-Waxman Act, this legislation set in motion the dramatic growth of US generics consumption.

Italian producers quickly became the leading supplier of APIs to the burgeoning generics market, and they still hold the largest share, 28.9%. In 2008, despite Asian competition, they were able to increase sales to the US from 2005's $800m to $1.125bn, says the CPA.

Thirteen years later, however, the situation took a dramatic shift. In 1991, just as a slew of lucrative drugs were about to lose patent protection, the Italian Parliament enacted Law 349/1991, which provided for supplementary protection certificates (SPCs) extending patent protection up to an extraordinary 18 years. In the rest of Western Europe, regulations allowed extensions up to only five years. Italy became essentially the only country in the world where numerous drugs would still have patent protection for many years to come.

In January 1993, Law 349 was superseded by Regulation 1768/92 of the European Economic Community, but by that point, about 400 products had been granted SPCs. Nearly half reportedly remain in force, the last of them expected to expire in 2011. Italian producers were thus excluded from supplying these APIs long after their competitors in the rest of the world, a development that led many to reevaluate their strategies.

"AIFA has been much more difficult on regulatory issues than even the FDA" Gary Conte, executive vice president of business development US operations, Angelini Pharmaceuticals

"Obviously, when this happened, [API manufacturers] had to change something, and many tried to get more into contract manufacturing," says Roger Laforce, general manager at Vicenza-based FIS (Fabbrica Italiana Sintetici). "Some were successful, others less so. We succeeded because we already had all the assets we needed: regulatory systems, FDA track record and strong production capabilities. We just needed to turn to a new customer segment."

Like many other Italian API manufacturers, FIS had been founded as a family-owned business in the decade following the Second World War, but whereas the great majority - perhaps 90% - still focus mainly on generics, FIS dove into its new vocation. Today FIS, the largest API maker in Italy, derives most of its income from contract manufacturing.

"In the early 1990s, we probably had 15% contract manufacturing and 85% generics," Laforce says. "By 2000, it was 75%, and it's floated between 50% and 75% ever since."

FIS grew in the 1990s and revamped its Montecchio manufacturing facility in 2000. Since the mid-1990s, Laforce says, FIS has invested €100m ($150m) in upgrades and additions, a record he credits to the company's family ownership, which sets long-term viability above short-term profitability.

The company's strategy seems to have paid off: revenues grew by 20% in 2007 and 2008, when they reached €167m.

Regulation 1768 harmonized Italy's API market with Europe's and put producers in Italy on a more level playing field with their competitors in Western Europe. However, differences persisted in the practices of national regulatory agencies, and in recent years the disparities have become especially pronounced, according to Italian companies. They complain that Italy's drug regulation authority, the Agenzia Italiana del Farmaco (AIFA), has made an unreasonably onerous interpretation of recent European regulations.

"These procedures [for approval by AIFA] take a long time and are very complicated, and, in my personal opinion, they do not take into consideration the requirements of the pharmaceutical supply chain to develop and bring drugs to the market within the time necessary," says Laforce. "This creates additional barriers for Italian companies to access new products and markets, and can even generate economic damage or loss to Italian companies," he continues. "It's much more restrictive than any other country in the European Union."

Gary Conte, executive vice president of business development US operations for Rome-based Angelini Pharmaceuticals, agrees. "AIFA has been, in some ways, much more difficult on regulatory issues than even the FDA," he says.

Although AIFA inspections are also particularly rigorous, the greater challenge is a stipulation that, for any API that goes into humans - even for Phase II clinical trials - manufacturers must submit a document roughly equivalent to an abbreviated drug master file and must obtain AIFA approval prior to shipment. Worse still, AIFA cannot say precisely how long approval will take, and Italian manufacturers therefore cannot give potential customers a solid delivery date - often a deal breaker. Depending on the lead time, the approval process can add three to six months or more, says Conte.

"It's creating a bit of a difficult time for us," he adds. "We have enough problems competing with the rest of the world without additional hurdles specific to Italy."

Conte and Laforce are optimistic, however, that industry lobbying and a more settled situation at AIFA will see the rules relaxed in the near future.

FINDING THE RIGHT NICHE
Meanwhile, Italian API makers will continue with what they do best - competing on quality and service.

Labor costs are somewhat lower in Italy than many other nations in Europe, but not low enough to go head to head with firms in India and China over more commoditized products, and, of course, the strength of the euro does not help. Angelini's solution has been to focus on niches that play to its strengths, says Conte.

"We still look at the generics space, but we look at more of what you might call 'opportunistic' situations, where maybe a company is not happy with the supply chain that's out there, maybe they require some unique technology, or they want a very close relationship with the supplier, or maybe the volumes are not large enough to interest the larger players," he says. "At the same time, we've developed a good rapport with a number of biotech or emerging pharma companies."

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