Pharma is a big industry. However, the value chain can be broadly divided into two categories: API and finished formulation. 

API makes up a part of the drug that enables the latter to produce the desired effect. 

China is one of the leading suppliers of API. In 2020, when the pandemic started and severely disrupted the supply chain in China, the pharma industry was affected for the time being due to the shortage of raw materials.

What is API in Pharma?

API full form in pharma is Active Pharmaceutical Ingredient. A simple API meaning in pharma is that it's a raw material that is included in medicines. In reality, there's a subtle difference between API and raw materials.

But first, talking about what is API in pharma, it is a biologically active component used in drugs (capsules, tablets, injectables, more) to produce the intended outcome. It is one of the two main ingredients in medicine, the other one being excipients, a chemically inactive substance that delivers the effect of API. 

For instance, if Benadryl – a popular antihistamine medicine – works, that is because of the acetaminophen API it includes. Acetaminophen, an active ingredient, helps it manage allergy symptoms, producing the intended effects.

How Are APIs Manufactured?

API manufacturers first acquire relevant raw materials. Several chemical compounds go through the process called intermediate before becoming an API. There are many different kinds of intermediates in the production process that transforms raw materials into an API. After manufacturing, the API is taken through rigorous quality checks and analysis to confirm its ultra-pureness so as to map to the desired quality criteria.

API and Potency of Drugs

The amount of active ingredient included in medicine, aka its strength, defines the strength of the drug. You will find this detail on the packaging of the medicine. Different brands or manufacturers have their own methods and benchmarks that can affect the potency of their medicines even when they are producing the same drug. In any case, they are required to prove the potency of their medicines to the country’s regulatory body.

API and Raw Materials

Coming to the difference between API and raw materials, many people use these two phrases interchangeably. In reality, raw materials are the base chemical compounds that are used to make an API. So, API manufacturers procure raw materials to produce this active component. The API is then supplied to the pharmaceutical manufacturers who use it to create drugs.

How Drug Manufacturers Get API

Earlier, drug manufacturers would make their own APIs. However, in recent times, more and more companies are outsourcing APIs to save costs on expensive equipment, infrastructure, and employees. They procure active ingredients from API manufacturers and then make medicine by mixing API with pharmaceutical excipients. So, a lot of pharmaceutical companies that are located in the U.S. outsource their APIs from overseas. China and India dominate the market when it comes to API manufacturing.

Concerns of Outsourcing APIs Overseas

While there are benefits of sourcing active ingredients, there are also concerns on the flip side about the quality of the outsourced APIs, which impact the efficacy and safety of medicines. Poor quality APIs can result in illnesses and even fatalities. To counter this concern, governing bodies in countries have put stringent regulations and screening that ensure the quality of the shipped API adheres to the highest standards. 

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Change in the Pharma Industry

The pharmaceutical industry is changing fast. API in pharma has made a significant impact. Once when pharmaceutical companies managed everything of the production end-to-end, they now prefer to outsource APIs. This has made a big difference in their bottom line. This shift will deepen further, with more companies expected to follow suit.

What is the Difference Between API and Formulation in Pharma?

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

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.

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

Key Takeaways:

• The ‘Patent cliff’ phenomenon is constantly affecting big pharma firms as blockbuster drugs are coming close to their patent expiry date causing chaos.
• A big challenge for pharma companies is producing new patented drugs at a faster rate than ever before which is expected from them.
• Cost pressures and high competition are two of the biggest obstacles in the path of big pharma companies when they are expected to bring new drugs to the market.
• Consolidation between API and formulation companies can give some relief to big pharma firms as they won’t need to face the challenges anymore.
• What is API and formulation in pharma? API and Finished Formulations are two subcategories of pharma’s value chain and the difference between API and formulations is what they do.
• API stands for Active Pharmaceutical Ingredient and it specifies the active ingredients in the drug. Finished formulation is the method used to mix ingredients to make a particular drug.
• A big pharma company generally deals with about 200 to 250 suppliers of API formulation all over the globe. 
• Dealing with so many suppliers brings its own set of challenges for big pharma companies such as costs and business trail.
• Due to the difference between API and formulation each supplier used to only specialize in either API or formulation. This is what Spinoza believed too.
• Supplier markets continue to evolve at a rapid rate and there have been significant changes in the way formulation vs API suppliers work.
• Despite the difference between formulation and API, cross consolidation is well underway as some API companies are buying finished formulation companies and vice versa.
• API and finished formulation companies do not wish to continue to be best in only one task like before despite the API and formulation difference.
• AMRI purchased OsoBio Pharma in 2013 and Cedarburg Hauser so it can go forward and become a leader in injectable formulations.
• Patheon was a formulation company and in 2014 it merged with DSM Pharmaceutical Products to form DPx. DPx provides formulations and APIs now.
• The pharma market is highly fragmented and so the mergers between API companies and formulation companies aren’t as impactful at present in terms of the supply market.
• There aren’t many big players who dominate the market either so the consolidation won’t be as significant.
• The difference between API and formulation in pharma might stay as not all companies will turn to cross consolidations and will continue to do what they have always been doing. 
• If big pharma companies want to save on expenditure to curb overspending, then they might need to lessen the number of suppliers they work with. This might be a necessity in case of difficult times.
• Big pharma companies will benefit from consolidations between APIs and formulation companies from the perspective of supply management as they won’t have to deal with multiple suppliers like before. 
• Big pharma firms will always have a wide range of options to choose from whether other companies opt for cross consolidations or not.