Contract Manufacturing and APIs
Onshore: Italy’s competitiveness
The emergence of contract (development) and manufacturing organizations (CDMO/CMOs) is an indication of the globalization of the pharmaceutical industry. Drug companies outsource their production to third-parties, often offshore CDMOs, in the pursuit of greater profitability; this way, they also outsource the many challenges that come with drug manufacturing, which is capital intensive, highly regulated, as well as requiring specialized customizations. On the back of these factors and accentuated by the higher demand for acute therapies in 2020, the global CDMO sector is expected to grow at 6.5% CAGR over the next five years, according to Reportlinker. Driven by a strong export vocation, but also helped by a mix of lower production costs combined with highly skilled professionals, Italy’s CDMO industry has been growing uninterruptedly since 2005, making the country a European leader in toll production. The market is composed of about 150 players, half of which are API producers, while the other half is represented by pure CMOs, excess capacity CMOs (pharmaceutical companies with their own proprietary molecules who also offer toll production), as well as packaging and other support service companies supplying to third parties. Well-known local players include Olon Spa, BSP Pharmaceuticals, or Fabbrica Italiana Sintetici (FIS). These are joined by foreign names such as Recipharm, Patheon, Teva, Cambrex and Corden Pharma. The majority of Italy’s CMDOs are based in Milan and the broader Lombardy region.
While finished dosage forms (FDFs) producers experienced demand imbalances in their portfolios, most CDMOs were able to grow in 2020 because they had the flexibility to switch to essential Covid-related therapies. To channel their resources to acute, in-demand therapies, CDMOs and API producers collaborated with their customers. Olon, one of the largest European API producers, re-prioritized production at its Rodano facility in response to the emergency: “When one partner asked us to ramp up production for an innovative antiviral API drug, our other customers showed tremendous understanding and supported us, knowing they can trust us for recouping the volumes when the emergency had passed,” said Paolo Tubertini, the CEO. If demand wasn’t the biggest problem, API producers came face to face with another issue that had been preoccupying the industry for a long time, namely the country’s reliance on imported raw materials and excipients used in the production of APIs. While Italy produces about 9% of the world’s APIs by value share, India and China are the de facto leaders in both APIs and component materials globally. Paolo Russolo, the president of Aschimfarma – the association representing the API and intermediates producers in the country – told GBR that 74% of the country’s raw materials and intermediates come from Asia. This exposes a much bigger global issue. Dictated by the same principles of profitability and globalized production, most pharmaceutical companies have outsourced their ingredients supply to low-cost countries, which has led to very intricate supply chains and dependencies. Concerns over the quality and sustainability of these materials have been smoldered over the years, but the pandemic brought the issue into close focus. “The CMO business has been challenged due to national border and movement restrictions since we depend on other countries to source raw materials used in injectables. To manage this scenario, it’s very important to have a really flexible manufacturing and technical organization,” said Giovanni Mariani, the CEO of Lisapharma, an Italian company dating back to 1925 and specialized in injectable products, for both direct sales and as a contractor for domestic and MNC pharma players.
Background image courtesy of Pexels, Alena Shekhovtcova
“The pandemic has encouraged the debate regarding the reshoring of pharmaceutical production, which could accelerate the sector’s growth significantly in Italy, as well as in the rest of Europe and in the US. However, this depends greatly on the policies of each country. Large-scale investments surely need the encouragement of political action and political clarity.”
Pierfrancesco Morosini, CEO, Icrom
At the European level, there is a clear argument for building resilience against external shocks, but there are no actual relocation policies debated. In EU phrasing, the term “health sovereignty” has started to appear alongside the more benign "resilience,” but the bloc is careful to make the difference between autonomy and protectionism, the first being justified by a need to protect European values, including quality and sustainability, and the second directly contradicting other core values, such as market openness and free trade. It would be naïve to think that entire supply chains can be recreated, and papers like the EU Action Plan on Critical Raw Materials rather suggest the diversification of supply chains as well as investing in European-based strategic production assets. Italy is conducting these EU discussions locally. The national Advanced Life Science Cluster (ALISEI) is driving a project called “Reshoring of pharmaceuticals and APIs in Italy” as a continuation of the “EU Pharmaceutical Structured Dialogue” launched in February 2021. The dialogue initiative has four workstreams in sight, including creating a more robust supply chain, identifying vulnerabilities and critical products, as well as innovation and modernization. Italy together with other European producers could cover 90% of the continent’s API needs, believes Paolo Russolo, the president of Aschimfarma, but this would require big policy changes: “If the policy does not change in the coming years to support this de-globalization trend, we will be seeing a return of the typical industrial organization that relies on foreign imports,” he said.
Leveraging premium quality, technology and sustainability
Even without an explicit regionalization policy, the competition criteria between Italian and international CDMOs have changed since the pandemic, evolving from a mere price comparison to more avid considerations of quality, safety and sustainability. Russolo hinted at the lack of regulatory standardization, given that Italian APIs adhere to strict European requirements whereas products made outside of Europe are GMP certified by their respective licensing country. Even though Italian API and CMDO producers remain dependent on raw material imports, they can leverage quality, green production, and high-tech to differentiate in the competitive market. According to Aschimfarma, the API industry invests on average 3% of its turnover in applied research and 10% in plant optimization. These investments keep up with a fast-moving pharma market and its ever-more complex, more personalized, higher-potency, lower-dosage, and varied formulations. For example, Cambrex (NYSE: CBM), a CDMO producing generic APIs, comes up with three to four new APIs, including controlled substances like benzodiazepine, each year. Every year the company invests about 8 million euros in the Italian site.
To support the development of complex chemistry, CDMOs also invest in equipment and production processes. Olon, for example, is investing in flow chemistry and enzymatic production, in anticipation of higher demand for personalized and precision medicine. The company allocated a capital investment of US$65 million in FY2021; 12% of its total sales. Companies are also paying attention to automation and digitalization. “Automation and digitalization will allow workers to transit into higher-value positions rather than doing repetitive tasks, which are better served by a machine. Based on variability studies, batches produced in an automated fashion yield more standardized results,” said Maurizio Sartorato, the CEO of Bidachem. Bidachem belongs to the top 20 global pharma company Boehringer Ingelheim Group and produces APIs in five therapeutic areas for the Group. Every year, Bidachem invests about 15 million euros in Italy; in recent years, it added a new empagliflozin production line, as well as opening a high containment micronization plant and a new quality control lab.
“Dominating the Italian CDMO sector, medium-sized companies have superior flexibility and are able to constantly innovate and introduce new technologies. However, reducing bureaucratic procedures and adding incentives through fiscal benefits will help CDMOs to invest more in new technologies, drug development and digitalization.”
Rocco Pavese, CEO, Genetic
These unusually high levels of investment have allowed Italian players to become very specialized. As an example, Valpharma, an Italian CDMO which is also putting about 10% of its revenue into R&D every year, offers niche, modified-release technologies applied to pharmaceuticals, nutraceuticals, medical devices, hand sanitizers and, most recently, complementary feeds in the veterinary space. By continuing to improve its technology the company has grown by expanding horizontally into different segments and is preparing for the next challenge, in biologics. “Monoclonal antibodies and vaccines are now taking the place of classic solid oral products that have dominated the market over the past years. Our main objective is to remain at the forefront of innovation, always putting our R&D at the center whilst collaborating with external specialized companies all over the world,” said Alessia Valducci, CEO. Other players specialize by therapy. In the pure CMDO space, Genetic Spa, an Italian company founded in 2007, is looking to increase its R&D investment from 6% to 10% this year, dedicating mostly to its two therapeutic areas, ophthalmology and respiratory: “In the respiratory field, we invested in nasal sprays, nebulizers, Dry-Powder Inhalers (DPI) and Metered-Dose Inhalers (MDI). In ophthalmology, we invested in a Blow Fill Seal single-dose technology and the multi-dose technology with preservatives or preservative-free,” said Rocco Pavese, the CEO. Unlike the CRO sector, CMDOs have resisted consolidations and the market remains broadly fragmented, mostly because each technology is very different and pharmaceutical companies are used to having multiple suppliers. Nevertheless, CDMOs coming to the market with an integrated offer have a stronger competitive advantage. As part of its strategy to transition from a pure generic API manufacturer into an integrated CMDO, Icrom, an Italian CMO producing APIs and GMP intermediates, is looking to acquire a manufacturing site dedicated to clinical APIs in the US: “Over the last 10 years, we have made important investments to sustain this transition. In 2018 we opened a new R&D center and, in 2020, we completed the construction of a new and larger warehouse with QC ancillary buildings. Earlier this year, we started building a GMP clinical-scale-API manufacturing facility, which will be fully dedicated to CDMO activity,” said Pierfrancesco Morosini, CEO. Reversely, Italian manufacturing companies also present good investment opportunities to international buyers. In 2019, Lisapharma was bought from the Italian fund Arcadia by the Chinese API producer Sito Bio, a change of ownership that should help Lisapharma register its products in China. Another Italian company, Diaco Biofarmaceutici, an IV producer born in 1967, was acquired by a family of Ukrainian investors who put about 50 million euros into the plant over the past six years. Following the long period of restoration, Diaco re-entered the market in 2018, supplying IV solutions to hospitals. Besides having its own product line focused on orthopaedics, urology, gynaecology and respirator, Diaco also operates as a CMO for glass-based parenteral solutions.
Background image courtesy of DariaRen
Packaging and sustainability
The most recent UN report by the Intergovernmental Panel on Climate Change (IPCC) warned that the current industry and national pledges to cut emissions are nowhere near enough to start reducing the level of CO2 in the atmosphere; meanwhile, extreme weather conditions are becoming more severe and more frequent, ringing the alarm on climate change. These mounting environmental pressures raise the bar higher for the manufacturing industries. Thankfully, the Italian pharma industry has already made important progress in reducing its environmental footprint, having almost halved both its energy consumption and greenhouse gas emissions (GHG) in the last 10 years, according to Farmindustria. The pharmaceuticals sector has invested in sustainability more than any other manufacturing industry in the country, and continues to do so. Sustainable drug production has two broad conditions: The first is that drugs are produced with as little energy consumption and CO2 release; this has been a prime focus for manufacturers who broadly adopted green production standards. The second one is to ensure product circularity. Because the drug itself ends up being consumed, this second aspect concerns the packaging or drug recipients (such as foiled tablets, syringes, IV bags, blisters, and others). Due to contamination risks or other hazards, drug packaging has been traditionally difficult to recycle. However, the industry is working together across the drug’s life cycle. “Starting from our glass suppliers, the bottles reach hospitals, where they are passed on to waste management companies; this is where the waste company intervenes to sell the glass back again to our glass providers,” said Alan Zettin, the CEO of Diaco Biofarmaceutici, an IV producer. Diaco sources its glass from Bormioli Pharma, one of the largest packaging companies. Bormioli produces containers, accessories and closures used in different drug applications in 100 countries and to reputed customers like GSK, Merck, Roche, as well as to CDMOs. Out of its seven billion pieces produced, half are made of glass, and the other half are of plastic. Some of its customers, like Diaco, choose only glass, attentive to the introduction of plastic taxes. In January this year, the EU introduced new national contributions based on non-recycled plastics as a source of revenue for the EU budget. Catering to these regulatory changes as well as demand trends, Bormioli offers alternative polymers or recyclable plastics. “Sustainable solutions are becoming increasingly more demanded by the pharma industry, many players have declared their goals to become carbon neutral in the next decade. We are ready to offer bioplastics and compostable plastic for the dosing system, as well as different types of mechanically or chemically recycled plast,ics,” said Bormioli’s CEO, Andrea Lodetti. Other materials come with different sustainability profiles. Carcano, another large packaging company with over 150 years of history in the market, offers aluminium solutions, in the form of aluminium foil used to create blisters and cold forming. Aluminium is generally considered a very environmentally friendly and easily recyclable metal; in fact, recycling the material saves 95% of the energy used to produce it from scratch. Italy has a functional recycling ecosystem in place, handled by different associations under the umbrella of CONAI consortium (Consorzio Nazionale Imballaggi), which operates a system of recovery and vaporization of different materials, including aluminium, paper, plastic and glass. Carcano is part of the aluminium association: “We are very active in promoting the collection and recycling of aluminium and we are the first Italian company that has successfully achieved the ASI Performance Full Standard certification for our 3 facilities,” said Alberto de Matthaeis, general manager at Carcano.
“With three multiple production processes in motion, we can meet both long-run and short-run production targets, as well as dedicating production lines to specialty products, and the remaining ones to standardized products. Our optimized production schedules and processes will drive organic growth over the next few years.”
Alberto de Matthaeis, General Manager, Carcano
Finally, replacing plastic-based pharmaceutical packaging with alternative, more sustainable materials can be particularly challenging if the new materials do not have the same protective properties. For instance, bioplastics may not secure the same shelf life or compliance standards as usual plastics. Encaplast, a smaller packaging company with about 100 employees, offers post-consumer materials and 100% recyclable materials after years of R&D to find the perfect combinations: “We are bringing to the market eco-packaging solutions made of biodegradable materials using cellulose as a raw source, for instance. Also, we have a range of materials suitable for E-BEAM serialization, which is eco-compatible because it does not release any chemical residues, being safe for both the environment and for human health,” said Mario Neri, CEO of Encaplast.
“We are committed to reducing our environmental impact, but we must also make sure we secure adequate shelf life; a balancing act which requires a lot of innovation. Our goal moving forward is to find the right balance between safety, protection and sustainability in designing the best packaging solutions in the market.”
Valentina Bianchini, General Director, Encaplast
The challenges around offering both protection and a sustainable solution have opened the door for innovative, new players. Nanomnia is an Italian start-up that offers fully organic, bio-degradable, microplastic-free encapsulation services for the pharma, agrochemicals, nutraceuticals, cosmetics, and smart material compounds industries. Marta Bonaconsa, the CEO and co-founder of Nanomnia, explained the principles of encapsulation, a process inspired by how living cells captivate their compounds in capsules: “We copied this mechanism and exploited how cells and organisms communicate between and among themselves. For pharma, we can formulate tailor-made encapsulation solutions for selected delivery of the active compound in a target biological tissue. This technology allows us to plan a lower dosage and therefore a reduced risk of side effects, but also higher stability because we expand the time-window that the active principle exerts its effect by.”