All opinions are my own.

Wednesday, October 10, 2007

API (active pharmaceutical ingredient) and specialty chemical costs

Recently there have been write-ups about a significant percentage of API are coming from China and India. These beg a question: Are the Pharma companies importing APIs from non-cGMP complaint companies? The answer is NO.

In 2006, SOCMA (Society of Organic Chemical Manufacturers Association) and EFCG (European Fine Chemicals Group) issued a joint position saying that some countries are “not playing according to rules”. “Patient safety and national security compromise” was the theme of this position paper. This seems to be challenging the very foundations of the buying pharma companies. It is indirectly saying that the Pharma companies are not caring of patient safety and national security. I do not believe that the Pharma companies are going to put anyone in jeopardy intentionally. In addition, India has the highest number of FDA approved facilities outside US. China is striving to get there. If the imported API and the drugs being sold do not meet the regulatory standards, the reputation and credibility of the pharma companies will be lost in an instant. They cannot afford such en event. Unscrupulous business people are always going to be there. We have to stay away from them.

Since the Chinese and Indians are not going to go away, EFCG at the Milan CPhI October 2007 meeting reversed its position. “We are not anti-Asia.”

API are being imported as they meet the desired quality standards and their costs are lower than the comparable product being made in the developed countries. Combination of better technology, lower investment and lower labor cost influence cost and quality. We know this but we should review it again.

If the process technology used by the companies in India and China is simpler than the technology used by the API manufacturers in the industrialized world, then the companies in the developed countries have an opportunity to improve their technology. Simpler technology also means lower investment. Many a times the intermediate products in the synthesis of an API are analyzed before the next step. This is “analysis paralysis.” Technology should be such that the intermediate testing can be minimized. This will reduce cycle time i.e. improve productivity and lower costs. If testing has to be done, the test methods have to be the simplest. Exotic equipment needs high-powered personnel and that adds cost.

With respect to labor costs, they are lower in China and India when compared on a dollar to dollar (converting local currency to dollars) basis. However, this is not the correct comparison, as it does not give a realistic picture. Indian wages are lower but they have a higher buying power. A family of four in US earning poverty level wage is about $20,000 per year ($1666.67 per month). The same dollars converted to the Indian currency translates to about salary of Rupees 66,650 per month. This money could allow the family in India to have a full time house help and a chauffer. Very few can afford such a life style in the developed countries. Another case in point, in US, we pay about one dollar for five sticks of chewing gum. One would pay less than 15 cents for the same five sticks in India.

Since the playing field has changed, the only choice for the companies in the developed countries is to achieve and/or beat the costs from China and India. This can only be done through innovation of process development methods, technologies, and manufacturing practices. We have to simplify (Profitability through simplicity) and remove the redundancies. A new reality is there and we have no choice. It is a “do or die” situation.

Companies in India have to improve their technologies also as China is coming in with lower raw material and labor costs.


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