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For pharma, volatility and value are two sides of the same coin

The Business Times by ANNABETH LEOW

Singapore

FOR the four months to July, Singapore's export-oriented drug industry notched up double-digit yearly growth, while July exports surged a stunning 109 per cent - yet industry players are hard put to forecast a consistent trajectory.

Rather, the prognosis for the notoriously volatile sector is for it to hold "steady".

Given the growing regional demand, and the resources pumped in amid strong regulatory support, why is the sector so volatile? The answer lies in the dynamics of the business.

Pharmaceuticals are highly vulnerable to base-effect blips, no thanks to issues such as inventory stockpiling or changes in drugmaker portfolios.

"It's just a very volatile sector, due to changes in product mixes and maintenance shutdowns that are hard for outsiders to know," said Merrill Lynch economist Mohamed Faiz Nagutha in an e-mail.

Ong Ai Hua, Asia-Pacific group chair of Johnson & Johnson's Janssen pharmaceuticals arm, said the sector's capricious reputation is likely due to how manufacturing makes up "a small proportion of a large pie" here. Janssen houses its regional headquarters in Singapore, but no factories.

DBS senior economist Irvin Seah also noted that production depends on how much volume pharmaceutical factories can handle, as investments on that front can lead to "a supply-driven bump" in factory and export growth.

For instance, Amgen's vice-president of Singapore manufacturing site operations Arleen Paulino told BT that the company's S$200 million biologics plant, opened in Tuas in 2014, is set to hit full capacity this year.

Forecasting too is hampered by the difficulty in capturing the full picture. Ho Weng Si, the Economic Development Board's (EDB) director of biomedical sciences, told BT that the projection is for a "robust base of activities" in the next three to five years - reiterating what she said in an interview in March. But this may not translate to an increase in factory output as such activities could involve, for instance, testing and validation of products in development - which would not register as output.

"Output is a good measure for us to have a broad sense of industry health. But when it gets down to what is actually clocked... it's hard to be very precise about forecasting or explaining the specific month-to-month or year-on-year variations," said Ms Ho.

Adding to the fluctuating output are the current headwinds of pricing pressures, with governments worldwide working to keep healthcare costs down, as well as competition in the off-patent generics space. But there is a bigger picture beyond output consistency. The EDB, Ms Ho said, does not promote industries based on just production consistency.

"What we try to do is ensure that there is a diversified manufacturing sector," she said, adding that the state is committed to keeping manufacturing at about one-fifth of the economy.

"We want to ensure that the types of manufacturing that you attract to Singapore are suited to the cost structure, as well as the labour profile, in Singapore. Biopharma manufacturing actually suits this very well, because it is fairly highly automated and the profile of the workforce required is very highly skilled and well trained.

Pharmaceuticals' volatility takes on added significance given its 3.7% share of the economy in 2017.

Last year, output here reached just under S$16.9 billion - down from a peak of S$25.1 billion in 2012 - even as the biomedical sector clocked S$29.6 billion overall, supported by a steady rise in medical technology production.

Initially, the sector was courted in the hope that it could be a stabilising counter to electronics. "When we first promoted the growth of the pharma industry back in the 2000s, the idea was to mitigate against the supposedly volatile electronics cluster because of the dot-com burst," DBS' Mr Seah told The Business Times. "Ironically, the industry has its own cycle, and can be quite volatile as well."

Meanwhile, there is no let-up in expansion for those invested here.

Singapore already has 60-odd factories for pharmaceuticals and medical devices, according to EDB, and four of the world's top 10 drugs are made here.

Merck vice-president Benoit Opsomer, head of process solutions for the Asia-Pacific, said industry players that used to concentrate manufacturing capacity in the West are expanding to meet the growing consumer demand in this region, as well as to serve drugmaker clients locally.

Jose Sanchez, site head of biotechnology for Novartis Singapore Pharmaceutical Manufacturing, said the Swiss giant expects higher output across all four sites here, on the back of rising global demand for its products. It opened the first phase of a US$700 million biopharmaceutical facility here last year - its first such plant in Asia - with the second, final phase expected to be done by year-end.

"Our aseptic site budgeted volume is expected to double in the second half of 2018, compared with the targets set earlier this year," he added.

Besides a vaccine facility in Tuas, GlaxoSmithKline (GSK) has two other supply sites here - one for the antibiotic amoxicillin, and the other making active pharmaceutical ingredients for a slew of medicines such as HIV/Aids drugs.

Amgen's Ms Paulino said firms are not only starting up new facilities, but are also putting money in technology to boost production at older ones.

"Our team is challenged with how we can create more capacity to free up some headspace for more products or additional runs," she added. "Based on the forecast, we don't think the increase this year will change in subsequent years. We see a steady output."

As for Singapore's continued draw for pharmaceutical companies, DBS' Mr Seah said: "We have an edge over regional peers, given our strong intellectual property regime and the fact that the industry is very capital-intensive."

To EDB's Ms Ho, the global competition comes mainly from Ireland as well as manufacturing sites in multinationals' home markets.

For example, Amgen wants to replicate its next-generation biomanufacturing site - now found only in Singapore - in Rhode Island, to raise capacity and mitigate supply-chain risks.

Still, the Republic plays a "vital role in our supply chain", said Ms Paulino, and products begun here may be sent to sister sites for completion. "While we may not produce certain products here, our job may be to take on certain other products to free up capacity elsewhere," she said.

But Mr Sanchez from Novartis said that "our continued success here is not guaranteed" - strong government support notwithstanding - and emphasised the need to lift productivity and innovation with help from technology.

GSK site director Lim Hock Heng, too, said GSK will tap tech tools to make production "more efficient and more flexible", rather than just ramping up site capacity.

An industry development scheme, dubbed Pips, was introduced last year by the Agency for Science, Technology and Research, with funding commitments of S$34 million announced in mid-October. Firms taking part pledged to join forces on tech development and productivity.

Ms Paulino told BT that Amgen would not rule out taking part if the programme expands its scope. "We've already been having conversations on how to expand from small molecules to biologics," she said.