A Closer Look at Small Molecule Drug Substance and Drug Product Manufacturing

Nice Insight’s April Stanley highlights the growth and complexities of outsourcing drug substance (DS) and drug product (DP) manufacturing for small molecule drugs and the continuing expansion of biopharma outsourcing, which has been driven by factors such as the need for specialized technologies, cost reduction, regulatory compliance, and risk management. Stanley examines current trends in glocalization, particularly the disconnect between the industry’s reliance on the Asia Pacific region for DS while DP shows a trend toward local manufacturing, likely reflecting the need to meet regulatory and quality standards. The article concludes with insights into biologic outsourcing, emphasizing the continued dominance of U.S. manufacturers in this area due to the specialized requirements of aseptic fill/finish activities.

The COVID-19 pandemic bought pharmaceutical manufacturing to the forefront of American attention. Discussions about how and where pharmaceuticals were made spilled out from the business conference rooms and government policy sessions into the daily news and social media. I, myself, was drawn into nearly daily discussions with family, friends, and acquaintances to answer questions about how and where therapeutics are made and how they are developed. The realization that most of the therapies Americans rely on daily are made offshore became a prominent theme in popular culture, as well as a prominent discussion in Congress. Recent efforts to onshore therapeutics manufacture are well-intentioned and stand to benefit the American people, but “onshoring” efforts are not so simple in practice. Let’s take a more nuanced look at the small molecule manufacturing market size and global distribution.

Steadily Growing Biopharma Outsourcing Market

Estimates of the value of the pharmaceutical outsourcing market vary greatly, as different market research organizations define the market in various ways. Some include all forms of outsourcing, including contract research, development, and manufacturing services, while others focus only on development and manufacturing. There are small molecule and biologic products and drug substance and final drug formulations. Compounding of final drug products for use by hospitals and clinics may be considered, but not in every case.

One estimate puts the contract development and manufacturing market at approximately $140 billion.¹ Another has the value of this market at $176.5 billion in 2023.² Overall, North America accounts for the largest share when considering both small and large molecule drug substance and drug product contract manufacturing.

Small molecules represent over half of the market for contract development and manufacturing services, which was valued at $83 billion in 2022. There are over 490 contract manufacturing and development organizations (CDMOs) providing these services and over $9 billion invested in expansion projects since 2017.³ For generics alone, the global generic pharmaceuticals contract manufacturing market, including both drug substances and drug products, is projected to reach $106.9 billion by 2030.⁴

Notably, all agree that outsourcing demand has been increasing and continues to do so, with healthy annual growth in the 6–8% range over the next 5–10 years. This expansion is attributed to many drivers, including the need to access specialized technologies, greater capacity, and wider geographic markets without significant upfront investment; the desire to reduce costs while ensuring regulatory compliance; the push to accelerate drug development; the increasing percentage of small and emerging pharma and biotech companies that operate completely or nearly virtually; and risk management.⁵

Drug Substance and Drug Product Outsourcing

It is interesting to look at the separate demand for outsourcing of drug substance and drug product development and manufacturing. Here again, the numbers vary significantly depending on the market research firm. One company, for instance, pegged the value of the global market for drug substances, including both small molecule and biologic drug substances, at $212.07 billion in 2022 and expanding at 6.67% through 2028.⁶ Another firm estimates the global value of the outsourced API market in 2022 was $77.25 billion and will grow to $113.36 billion by 2028.⁷ Unlike the overall outsourcing market, which is dominated by North America, the API market is dominated by the Asia Pacific (APAC) region, most notably India and China.

Outsourcing of final product (finished dosage form, or FDF) development and manufacturing involves many different technologies. FDFs include solid dosage forms, such as tablets, capsules, and sachets. There are liquid suspensions prepared under nonsterile conditions and liquids products delivered via injection that require sterile (aseptic) fill/finish operations.

Growth of FDF outsourcing has been accelerating in recent years in response to the growing number of different modalities, which is occurring as the complexity of many of those new FDFs increases.⁸ Indeed, the value of the global fill/finish outsourcing market was estimated to be $8.2 billion in 2021 and expanding to $14.3 billion by 2030, with most developers of both small molecule and biologic drugs relying to some extent on third-party service providers for this important activity.⁹ In contrast to the drug substance market, large molecule products account for more than half of the fill/finish market.

DS and DP Outsourcing Show a Striking Geographic Distribution

The increasing reliance on outsourcing in the biopharmaceutical industry has drawn attention in recent years, largely focused on the generics segment. This interest has been driven by growing incidences of drug shortages due to quality issues combined with the fact that the vast majority of APIs for generic drug products sold in the United States and Europe are manufactured in China and India. Indeed, from 2013 to 2017, nearly 90% of sites producing drug substances sold into the United States were located in other coutnries.¹⁰ In 2021, 70% of drug master files (which includes both generics and novel APIs) submitted to the U.S. Food and Drug Administration came from companies located in India and China (Figure 1).¹¹

Figure 1. DMFs submitted to the FDA.
The total Drug Master Files (DMFs) submitted to the U.S. FDA in 2021, broken down by the country of the firm submitting the file.11 Note the DMFs submitted include both novel APIs and generics that are manufactured by a new entity.

The same is not true for FDF manufacturing sites. Between 2013 and 2017, approximately 60% of FDF facilities supplying final drug products to the United States were located in other countries.¹⁰ In the United States in 2017, there were about 2.5 times as many FDF sites as API sites,¹⁰ and there are many more FDF sites in the United States than in India and China (Figure 2).¹¹ This has significant impact on how we should think about onshoring incentives: while drug substance is most often made abroad, therapies intended for the U.S. market are still most often reshored for the final dosage formulations.

Figure 2. Distribution of API Manufacturing and Fill/Finish (F/F) Facilities

Data summarizing the percentage of the total facilities present in each region are given. Note “U.S.” is a subset of “Total Americas;” total Americas includes the United States, Canada, Mexico, and South America. The Total Americas, Europe, India, and China account for 90% of all facilities globally. Other notable countries containing the remaining 10% of facilities include Israel, South Korea, and Taiwan.

Drivers for Glocalization of Drug Product Outsourcing

There are several possible reasons why drug makers are less likely to outsource final drug product manufacturing to lower-cost service providers in other countries. The primary reason is most likely the desire of Western manufacturers to retain control of quality and ensure compliance with U.S. regulations for the final product. In addition, APIs brought into a U.S. GMP drug product facility must meet specifications, allowing any issues with the drug substance to be caught. Furthermore, final labeling in the United States also gives credibility to the manufacturer, regardless of the end-use market, including China and India. Cost may also not be as much of a differentiator with FDF manufacturing, at least for more straightforward processes, such as tableting and capsule production.

Cost certainly plays a part in this answer. It is widely reported that labor is less expensive abroad, and Nice Insight has case studies in which European full-time equivalents (FTEs) can be nearly double that of an Indian firm. If drug substance manufacturing requires much more labor than drug product, it would follow that the large cost-savings for manufacturing would be most prominent with the drug substance actives and less so for the drug product. The combination of lower cost drivers for abroad DP manufacturing with the increased regulatory incentives for onshoring provide a reasonable explanation for the surprising trend.

While there is a concentration of DP manufacturers within the United States, there are still many such facilities distributed globally. It therefore may be a surprise to the reader that DP manufacturing represents a classic example of glocalization.¹² Many governments are placing in-country manufacturing as a priority, ranging from very large nations like Russia to small countries, such as Kenya, Argentina, and Bangladesh. Local pharmaceutical production (LPP) is emphasized by the United Nations Industrial Development Organization, UNIDO) because it can increase access to medicines, ensure medicines meet local needs, help to limit introduction of fraudulent drugs, and reduce dependency on international aid. Outsourcing to CDMOs is a way for pharmaceutical companies to establish in-country FDF capabilities while also realizing greater security of supply with multiple production site.

An additional reason for high levels of DP outsourcing outside of the United States may be that many drug companies are seeking to rationalize their outsourcing partners and consolidate third-party production CDMOs that can provide both drug substance and drug product manufacturing.¹³ Such integrated services can reduce the cost and time of both drug development and commercial manufacturing.

Indeed, for future-oriented pharmaceutical companies, it has been suggested that an outsourcing strategy that leverages CDMO parts for in-country, near-shore, and offshore development and production depending on the specific needs of each drug substance and drug product will realize the most efficient manufacturing solutions for their pipelines.¹⁴

Biologics Outsourcing Trends Differ from Small Molecules

Outsourcing partnerships for drug product manufacturing of biologic drugs, which largely involves aseptic fill/finish activities, continue to overwhelmingly be with domestic U.S. manufacturers. Outsourcing of fill/finish activates is common, because of the high cost of the equipment and specialized expertise required to ensure sterility throughout the process.¹⁵ For small and emerging biotechs, and even for many medium and large biopharma companies, investment in such equipment and personnel is not warranted. CDMOs can realize economies of scale by meeting the fill/finish needs of multiple clients.

It is worth noting, however, that as the technological capabilities of CDMOs in the APAC region have increased, they have made inroads into biologic contract manufacturing, including provision of both drug substance and drug product services. The change from 2012 to 2022 is represented in Figure 3 in the form of bioreactor capacities in Asia, Europe, and North America.¹⁶ It is worth noting that Samsung Biologics, which has grown extremely rapidly in the last decade, accounts for a good deal of the additional Asian capacity all on its own.

Figure 3. Bioreactor Capacity by Geographical Region

Learn more about the complex dynamics of the API market in Nice Insight’s Active Pharmaceutical Ingredients, API: 2024 Market Insight, CDMO Pricing and Competitor Benchmarking report.

References

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