| By Grace Zhang, Asia Manufacturing journalist |
| Friday, 09 May 2008 |
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Vertical integration, the tradiitional strategy for generic drug makers worldwide, has now spurred controversy in the Chinese generics industry as it runs counter to the currently popular manufacturing outsourcing model.
A securities firm recently published a research report, saying that China’s active pharmaceutical ingredient (API) manufacturers are striving to transform themselves into vertically integrated ones, in a move to stave off volatility in profitability.
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Vertical integration has regained popularity in the pharmaceutical sector, especially among API producers that are looking forward to gaining competitive advantages by expanding their business. However, as the global production value chain led by manufacturing outsourcing becomes the mainstream, can vertical integration find its way in the dog-eat-dog pharmaceutical market?
Generally speaking, a company’ decision on which model to deploy must keep in line with its growth strategy.
Dawnrays Pharmaceutical (Holdings) Limited, a large Chinese antibiotics |
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producer, has gradually formed a vertically integrated industry chain covering intermediates, APIs and preparations. A spokesperson for the drug maker said, “We chose vertical integration because it fits into our strategy”.
“In addition to the cost factor, we are giving more consideration to quality”, the spokesperson added. For Dawnrays Pharmaceutical, vertical integration can not only help lower costs but also bring the quality of the products under control, improving the likelihood of higher utilization of equipment and economies of scale.
Dawnrays Pharmaceutical, with a competitive edge in cephalosporin-type antibiotics, offers nearly 14 categories of cephalosporin-type products. In addition, the company has succeeded in using the solvent-crystallization technique to produce cefoperazone, laying the technology foundation for the successful execution of vertical integration.
Leveraging opportunities brought by the expanding generics market worldwide and the transfer of the generic API segment, such developing countries as China and India have become the world’s main API suppliers, with a mastery of sophisticated technologies and ability |
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to produce a wide variety of preparations.
As the market matures, API manufacturers have begun to expand their business from distinctive APIs to downstream preparations, while preparation makers are eyeing acquisition of API producers and downstream sellers, as a way to strengthen their competitiveness.
It is not difficult to find that vertical integration has become increasingly important for generics producers. Michael E. Porter said in his book Competitive Strategy that a vertically integrated company would gain more strategic advantages such as increased profits and lower costs. Generics producers from around the world are implementing the strategy of vertical integration, in an effort to stabilize their earnings through sale of preparations while making profits from APIs.
Nevertheless, vertically integrated generics manufacturers will likely face unexpected risks due to the ever-changing market demand. As a result, it is important for these companies to focus more on technology innovation and new product development, so as to expand their presence both in China and abroad. |
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