The excipient distribution sector grew as a subcomponent of the wider chemicals distribution business, which itself emerged out of the need for small quantities of materials, often at short notice by users, as service that large manufacturers found uneconomical to service.
Today, excipients distributors have evolved into important partners in the pharmaceutical value chain, and now make an important contribution to the industry’s mission of developing and commercializing drug products.
In terms of size, estimates put it at between USD 1.8 and 2.6 billion. However, it is a mature industry and highly fragmented, with only a handful of truly global players and several regional and local distributors accounting for over 80% market share. The range of services provided by excipients distributors include:
- The provision of sourcing, logistics and material management services: As well as routine sourcing, transportation and storage of ingredients, excipients distributors provide one-stop shopping shop while also offering a range of complimentary solutions such as toll processing, inventory management and technical support.
- The management of customer quality and regulatory affairs: Majority of excipient distributors are vital partners in ensuring compliance with applicable safety, health, environmental and regulatory standards.
- Distributors offer support customers with sample stocks and minimum order quantities to facilitate smooth R&D, scale-up and pre-commercial volumes.
Trends shaping the excipients distribution sector
Beginning just over two decades ago, the pharmaceutical industry underwent a major expansion fuelled by globalization, technological advances and growth in demand of pharmaceutical products. Along with this came stricter regulatory oversight, which spilled over to excipients distributors, requiring them to comply with ever strict health, safety, environmental and quality standards. These developments have driven three main changes:
Consolidation and internationalization: changes in patterns of trade brought about by globalisation, and in particular, the emergency of Asia as an important user and producer of excipients, increased M&A activity as well as internationalisation, as distributors sought to capitalise on emerging opportunities brought about by globalisation.
Lean operations and outsourcing: increasing competition among manufacturers put pressure on distributors to not only seek growth through geographic expansion but also pursue operational efficiencies aimed at reducing costs and improving profitability. One result of this has been an increase in lean and outsourcing of non-core functions, such as logistics and warehousing.
Increased collaboration with suppliers and customers: globalisation has not only triggered consolidation and outsourcing but also led to an increase in cooperation between manufacturers of excipients, distributors and end-use customers. Starting initially with large multinational pharmaceutical companies, there was a drive to rationalise supply chains and reduce the total number of material suppliers. At the same time, excipient manufacturers increased minimum order quantities and sought to work exclusively with strategic partners.
An emerging landscape
The trends above as well several historical factors conspired to create a dynamic business landscape in which companies compete along multiple product and service dimensions including geography, product type, level of technical support, etc. The result is a highly complex sector, making analysis on the basis of simple strategic typology difficult. Nevertheless, it is still possible to look at the sector as broadly falling into four broad segments as follows:
- Globally-networked distributors, mainly competing on scale economies, and largely focussed on commoditized materials. Examples include Univar and Brenntag.
- Multinational, specialised distributors offering mainly specialty materials plus to a less extent, select commodity materials. Examples include Azelis and IMCD.
- Local/regional distributors offering a diversified portfolio of materials, and serving specific niches in a given region or country. Examples include Barentz Europe and Harke Group
- Ecosystem integrators, providing end-to-end solutions i.e, not just materials but also new product R&D and commercialization services. Examples include Midas Pharma and Helm AG.
Opportunities and strategic choices for value creation
The excipient distribution sector has continued to deliver above average returns for some time. This is attributed to a combination of judicious capital productivity initiatives and tactical product portfolio management rather than traditional strategic levers – scale, geography, market position, irrespective of business model or product focus.
However, as a mature industry it faces rapid commoditization, fanned by fronds of slow technical innovation, easy access to information and rapid brand dissipation. It is nolonger not uncommon for new vendors to copy established products and successfully undersell them, often below cost price of incumbents. The above-average returns hitherto delivered by the sector are not guaranteed going forward. But with traditional productivity levers now exhausted, where should companies look for their next step change in financial performance?
Of course, companies should still aim to have strong portfolios of products with strong growth and market shares, continue to identify profitable customer segments and carry on optimizing processes to wring out more efficiency. These are, however, no long term panacea and no quick fixes exist. That said, it is possible to propose at least some generic strategic choices that could be used to bring much needed differentiation, i.e: solution development, sales/marketing innovation, and digitization.
One way to respond to commoditization is for ambitious companies to seek value through either reconfiguring offerings to meet needs of specific customer segments, for instance by bundling products and services thereby creating differentiated value propositions for which customers will readily pay a premium for (blue ocean strategy).
Recently, one leading distributor of technical excipients successfully applied this strategy by reconfigured existing products to create new sources of value. While technical excipients are less exposed to commoditization, the truth is that many of the product segments where they used are mature. The company used its in-house technical and regulatory capabilities to extend into the topical medical device space. This program consisted of select materials and bundled them with regulatory and new product development support to create an end-to-end solution for virtual and start-up pharmaceutical companies that have limited R&D capabilities.
There are other opportunities for distributors to use their excipient applications know-how to assist customers reduce costs and improve supply chain performance. For instance, a company could offer to run a customer’s purchasing function: sourcing all their materials (including those from the competition), undertaking material qualification and audits as well as warehousing/logistics. Achieving this, however, requires an intimate understanding of customers value chains, including their end customers, in order to successfully pool products and services together and create a proposition that’s compelling to customers.
Market access innovation
Unfortunately, the vast majority of excipient distributors still find and serve customers through the traditional (analogue) sales force channel despite its high cost and inefficiencies. I am not saying that the old-school sales approach is now obsolete and should be henceforth consigned to the museum. On the contrary, for technically complex materials with strong margins, customers will still find value in direct technical sales contact. The same applies to materials where there is a requirement for customized products and/or support. Going forward, and especially, in the current era of mobile and digital natives, companies need to bring on board modern customer engagement, acquisition and management solutions. SKURA (//skura.com) is one such technology that’s being used by medical sales representatives to deliver personalised messages to physicians, which is reducing costs and improving efficiency. And digital sales can work with physicians, it can also work in the excipients distribution sector.
In order for understand and create the right solutions for each customer, it is necessary for companies to adopt technologies and tools that enable them gather information about customer needs, while also seamlessly implementing proposed end-to-end solutions. For example, companies should explore monitoring customers’ manufacturing processes in real-time or utilise advanced algorithms to gain a better understanding of customers’ buying patterns in order to adjust product and service portfolios or identify cross-selling opportunities. This can ultimately help reduce costs, both for vendors and customers, while improving efficiency and profitability.
Those in the excipient distribution sector must be willing to consider selling outcomes and results rather than products per se. Surviving commoditization requires reconfiguration of value propositions, for example, by bundling products with value-adding services, to grab new value. Achieving this necessitates that companies gain an intimate understanding of end-user needs and refinements they would like to have. Reliance on analogue sales processes should be reduced and digital tools adopted to capture latent growth through efficiencies.