M&A between API and Formulation firms could lead to profitable consolidation of supply base

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By: Sakthi Prasad --

16 July, 2014

M&A between API and Formulation firms could lead to profitable consolidation of supply base
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Big pharma companies are experiencing the so called "patent cliff" for sometime now.

As blockbuster drugs are going off patent protection, companies find it tough to push through new patented drugs in the market at a faster pace. This brings in cost as well as competitive pressures. And the latest wave of pharma consolidation acts as a counterpoint to these looming challenges.

Pharma value chain can be broadly divided into two categories: Active Pharmaceutical Ingredients (API) and Finished Formulation.

APIs denote the dosage in a drug, or in other words the key chemicals that make the drug work, while finished formulation is the process in which different chemicals, including the active ingredient, are mixed in specified ratios to produce a specific drug.

Typically, a pharma company engages with as many as 200-250 suppliers of APIs and formulations globally. This brings in associated overhead costs as well as extensive business trail.

For their part, the suppliers thus far have stayed true to their strength areas. For example, a supplier specializing in formulation will do only formulation. The one specializing in Active Pharmaceutical Ingredients (API) will not look anywhere beyond their core area.

Spinoza believed that all things wish to go on being what they are: a stone wishes eternally to be a stone while a tiger would always want to be a tiger.
However, in the rapidly evolving supplier markets, not all formulation and API firms can wish to forever continue doing what they have been doing. A few of them, if not all, would have to look to buy into other areas.

Of course, the suppliers have understood this conundrum very well and have started moving towards "cross consolidation". In other words, API firms have started buying up formulation companies and vice versa.

For example, in 2013, speciality API manufacturer AMRI bought OSO bio pharma and Cedarburg Hauser to expand its footprint in injectable formulations.
In 2014, Patheon, a leading formulation service provider, partnered with DSM Pharmaceutical Products to form a separate entity known as DPx, which is now a fully integrated provider of APIs and formulations.

How much of an impact do these mergers create in the supply market? Not much in reality as the market is very fragmented and no group of players have dominating market share.

Due to the fact that the incumbents were chiefly niche players and also because of the fragmented nature of the market, big pharma companies thus far have no choice but to deal with a plenitude of suppliers.

When times are tough, or even if it is anticipated to get tough in the future, category managers will be asked to trim the supply base so as to save on expenses. But is it easier said than done?

Also, from the point of view of supplier management, do such deals offer benefits for buyers i.e, pharma companies?

"Yes," says Owais Shah and Pradeep Kasirajan, Beroe's pharma industry experts.

During the webinar scheduled for July 23, Shah and Kasirajan will explain how consolidation between API and formulation companies can help big pharma companies in reducing their supplier base.

To take part in the discussion please click here to REGISTER

Below table lists out some of the major deals that had happened between API and formulation suppliers.

M&A between API and Formulation firms could lead to profitable consolidation of supply base




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