Paris-based Sanofi SA, responding to increasing medicine shortages and drugmakers' heavy reliance on active pharmaceutical ingredients (APIs) sourced from Asia, said it plans to create a major new API manufacturer headquartered in France. The new venture, which Sanofi projects would rank as the world's second largest API company with about €1 billion (US$1.08 billion) in sales by 2022, could host an IPO on Euronext Paris that same year, subject to market conditions.
Sanofi intends to retain about a third of the yet-to-be named newco's shares. But Philippe Luscan, Sanofi's head of global industrial affairs said he expects it would still be "agile as a standalone company, and able to unlock its growth potential, especially in capturing new third-party sales and all the opportunities of a market growing at a pace of 6% per year."
The new company would also be "uniquely positioned" to benefit from "a broad portfolio of both volume and niche products, high standards of quality, competitive pricing, state-of-the-art industrial capabilities and technologies across Europe," Sanofi said. Sites of the operation would span France, Italy, Germany, Hungary and the U.K. and would leverage an extensive commercial network, the company said. Representatives of Sanofi did not respond to a request for further information Monday.
European shares of Sanofi (Euronext Paris:SASY) fell 1.9% to €91.57 following the news, while shares of Switzerland-based Lonza Group AG (LONN), Europe's leading API manufacturer by sales, fell by 2.7% to €408.50. Both stocks were buffeted by a deeply negative trading day, sparked by concerns about global economic impacts of COVID-19.
The move speaks to an increasing awareness among stakeholders across a broad sector of the health care ecosystem of the vulnerability of supply chains to ongoing threats from contamination, environmental factors and global health crises, among other factors, that can curtail the availability of dearly needed medicines. The global "nature of pharmaceutical supply chains that are designed to optimize cost efficiencies may have significant and widespread international effects," a task force of the EU-based Heads of Medicines Agencies wrote in an August 2018 report on availability of authorized medicinal products in the EU.
Like many of its peers, Sanofi's most recent annual filing with the SEC cited the operating risks posed by its reliance on third parties for an unspecified portion of its APIs, exposing it to potential shortages and disruptions in its supply of medicines to global markets. Furthermore, some raw materials essential to the manufacture of its products are not widely available from sources the company considers reliable, it said, citing the limited number of suppliers of heparins it has approved for use in the manufacture of Lovenox (enoxaparin).
One specific advantage Sanofi sees in creating the new API-maker is that it "is expected to help in balancing the industry’s heavy reliance on API sourced from the Asian region." It wasn't clear what percentage of Sanofi's APIs depends on Asian manufacturers. According to the FDA, as of August 2019, an estimated 72% of API manufacturers supplying the U.S. market were overseas, with a 26% share in the EU, 18% in India and 13% in China. While those figures may hint at a similar mix for the EU, where the off-shoring of pharmaceutical production has presumably been similar to the dynamic in the U.S., no reliable statistics of the actual volume of APIs flowing into North America or Europe is known.
Reliance on Asian manufacturers has come under particularly close scrutiny of late in light of the COVID-19 outbreak and associated facility closures across China as 77,362 cases of the infection have led to 2,618 deaths at latest count.
Zurich, Switzerland-based trade network Kemiex AG released a survey on Jan. 28 showing that 85% of professional life sciences buyers, traders and producers expected at least some impact on API supply chains from COVID-19. Though, according to Moody’s Investor Service, of New York, there was no immediate indication that supply chains for APIs shipped from China were in immediate danger, since many APIs there are manufactured some distance from Wuhan’s home province of Hubei. Still, rapid proliferation of the virus could still eventually affect operations at those sites and thus disrupt shipments of APIs to drug manufacturing sites, it said.
Other Asia-centered concerns have revolved around quality and contamination issues, such as those behind recent recalls of angiotensin II receptor blockers and ranitidine-containing drugs due to concerns about N-nitrosodimethylamine impurities. The manufacturer of both the ingredients that caused the problem and the final product were located in China, Energy and Commerce Chair Frank Pallone (D-N.J.) said in a memo last year.
Another potential driver of Sanofi's move may have been the desire to gain greater control over streamlining its water use and minimizing the impact of drug residues from its manufacturing processes. Both are elements of Sanofi North America's Corporate Social Responsibility strategy. Environmental damage from pharmaceutical residues has become a higher-profile concern in recent years, as highlighted in a 2019 OECD report that found that the majority of around 2,000 active pharmaceutical ingredients and their metabolites remain unmonitored and without environmental toxicity data. One way for drugmakers to more strictly control their impacts, the report noted, is to go beyond the legal requirements when cleaning waste water before it is discharged from manufacturing plants.
During recent years, extreme weather has also threatened pharmaceutical supply chains, as was the case with Hurricane Maria in 2017, a deadly storm that lashed the major pharmaceutical manufacturing hub in Puerto Rico. Though damage to manufacturing plants on the island was minimal, it took months for biopharma production there to return to normal.
Further details of Sanofi’s plans are likely to emerge in late March, when the company is scheduled to report its first-quarter earnings.