As the global market for active pharmaceutical ingredients (APIs) continues to grow, buyers and sellers are constantly seeking new ways to do transactional business. Up until now, the lion’s share of API procurement has been conducted by bilateral negotiations through traditional channels such as trade shows, face-to-face meetings, telephone and e-mails.
However, with the current coronavirus pandemic and the subsequent strain on supply chains, the market is reassessing how it facilitates trade of these vital raw materials. Amid price volatility spikes in certain APIs, traders are keen to see more transparency in the market to manage their risk.
Global Pharma Insights spoke to Stefan Schmidinger, Partner at Kemiex AG, on how its trade platform is bringing efficiency to a fragmented and regulated market and how traders of APIs are slowly embracing the digital revolution.
What is the overall market size for APIs in terms of volume? Does everything trade in US dollars?
Global annual turnover in chemicals is estimated at EUR 3.5 trillion, of which we attribute up to EUR 400 billion to APIs, excipients, food and feed additives. The US dollar is the leading trade currency against Renminbi or other producer country currencies; however, we are clearing a considerable share in Euros as well, especially goods exchanged within Europe.
How does the Kemiex platform function both from a buyer and seller perspective?
Switzerland-based Kemiex is a GDP-certified trade platform for professional buyers, distributors, and manufacturers of APIs, vitamins, food and feed additives globally. Pre-approved, high-quality companies efficiently exchange raw materials through a cloud-based software, either bilaterally between selected companies, or through open market offers.
Some clients are mainly interested in our market insights, or some buyers also use it as a workflow and communication tool to collect, negotiate and execute spot and long-term contracts with just their existing suppliers.
Less than 5% of companies in our sectors use software or their Enterprise Resource Planning system to manage Requests For Quotations/Requests For Proposals, compared to 85% in other industries. Such a convenient digital solution helps to improve market reach and diversification, documentary compliance, price analytics and communication. Direct connectivity to insurance, web shop and other services help to reduce friction across internal workflows.
Kemiex allows the users to apply full flexibility when agreeing on product specification, delivery, and payment terms. For APIs specifically, there are not only product and delivery specifications, but also documentary requirements and market authorisations that must be considered.
Do you have any competitors in the API/excipients space?
Without question, Kemiex is the leading and only transactional API marketplace for professionals worldwide that holds a Good Distribution Practice license. Our strategic cooperation with established sector leaders such as Atradius credit insurance and SGS is unrivalled. The approach to markets is unique, as it combines the best of an industry-specific procurement software, a global marketplace and network, as well as value-add services such as credit insurance, quality related offerings and market insights in one screen.
There are more than a dozen traditional e-commerce websites for APIs that are owned by distributors or marketing companies, mostly based in India and China. However, it is difficult to identify reliable counterparties and close compliant bulk transactions there so professional B2B buyers and traders would rarely transact on or consult such websites. Many producers host a company profile for marketing purposes, but sales figures are often quite disappointing as it is simply a different, less professional client profile than our users’.
For pharma excipients, there is a great knowledge platform operated by industry veteran Philippe Tschopp that also helps buyers to find samples and solutions for various applications. Finally, there is Google and more than a hundred “directories” or “yellow pages” to find contacts and product details of API companies, but not really helping buyers and sellers to structure and manage transactions.
Do you have a set of trading rules/methodology?
Every company must meet quality and financial criteria before being allowed to access the platform. During the lifetime and after closing a transaction, companies will rate their counterpart anonymously. Moreover, our trade and support team has a close relationship with companies and would react immediately to any breaches or bad behaviour. We reserve the right to exclude companies.
Financials of all members are monitored in real-time by our credit insurance partner and to avoid financial losses for sellers, every transaction can be insured against bankruptcy of the buyer with one click.
What are the benefits of trading APIs online?
Efficiency, convenience, and direct market access during all cycles. Several clients have even described it as “fun” to trade compared to sending faxes, emails and WeChats, a topic that shall become even more relevant as the millennials are taking over. Kemiex is not for marketing departments, it is an expert tool for lead buyers, category managers, traders, and salespeople to manage existing relationships but also to establish new trade relationships.
How are participants protected from a financing/quality perspective?
The big difference to traditional e-commerce is that Kemiex is not an open marketplace and hence one must be inside to enjoy all the benefits. To become a member, every company is assessed based on quality and financial criteria, a process that is endorsed by a regulator and supported by financial data providers. Sometimes, we even ask for a recommendation by a trusted member. There are thousands of companies in our sectors that do not meet our criteria but who are selling products on the other e-commerce marketplaces.
"We are observing a significant divergence in the speed of adoption of digital solutions on a company level: some are moving fast while others struggle with inertia, hierarchies or generally a missing business and digital strategy"
API sourcing/procurement is a very opaque and traditional practice that has depended on developing relationships with suppliers and buyers. How do you address the challenge of convincing counterparties to change their mindset and trade via an online platform?
First, we experience a great openness through all age groups, probably as we have all become very familiar with new technologies. Second, a platform like Kemiex does not replace relationships but streamlines communication, workflows, and reach. It is a tool like a company car, mobile phone or e-mail software that helps to stay connected and trade with existing partners but also new ones. There are different use cases by company: for market intelligence only, for tactical market or stock situations or selected product categories, or for more integrated use.
We are observing a significant divergence in the speed of adoption of digital solutions on a company level: some are moving fast while others struggle with inertia, hierarchies or generally a missing business and digital strategy. Interestingly, it does not correlate with the size of a company but rather the corporate culture.
How many companies do you have signed up for the Pharma/API portfolio?
Our total user base has almost reached one thousand, and YTD our sellers have offered almost an annualized USD 400 million worth of raw materials to buyers, a multiple of last year. We do not disclose detailed business splits for human and animal health and nutrition, as many companies are active in more two or more verticals. Market turmoil related to COVID-19 and a sudden hype for digital communication solutions have certainly helped Kemiex to accelerate growth during 2020. For our pharma portfolio, receipt of the GDP licence in 2019 was a big game changer.
Do you take a commission on a per trade or a subscription basis?
As a Software-as-a-Service (SaaS) provider we charge license fees depending on use but no commissions. An affordable entry option for handlers of few products is possible from USD 220 per month. Custom packages are available depending on the corporate setup, number of users, market insights and connectivity modules. We believe it’s quite affordable compared to travel and other marketing expenditures; some clients recovered a professional license by closing only one transaction. As a comparison, a traditional voice broker in the industry would charge 2-12% commission for matchmaking.
Are all counterparties anonymized on the platform?
Indeed, Kemiex offers several identity protection features you cannot have through desktop email or other channels. This helps to access markets without disclosing your positions or prices, as a buyer and as a seller. In general, it is always at our clients’ discretion to show or hide their identity, and who can see their inquiries and offers. For more than 95% of transactions, the counterparties are disclosed and known to each other.
Do you have any committed market makers?
Our observation is that some mid-sized traders are very active and professional, and it was already a great opportunity for them to grow market shares and business volumes. Kemiex levels the playing field for such ambitious, agile companies. Their speed and expertise create liquidity in Kemiex through all cycles, and our network has helped each of them to close several million dollars of deals in new markets and with new clients. Some of our clients support the development of new features as we are helping them to build the perfect software for their business activities.
Kemiex provides indexed prices for certain APIs such as antibiotics (amoxicillin, doxycycline, and oxytetracyclines) and fenbendazole (veterinary gastrointestinal). What methodology do you use for these prices?
Our proprietary data model normalizes trade activity for a given product for different grades, incoterms etc. Every two weeks, we consolidate our data and retrospectively show the price trend movement for currently more than 23 raw materials. We also provide additional deep insights from our trading floor to our clients frequently.
If there is one pharmaceutical API that could become a global benchmark because of higher liquidity, what would it be?
There are several factors next to volumes such as the concentration of supply and demand. Potentially a basket of antibiotics or analgesics.
"Transparency has brought professionalisation to other markets in the past: a great opportunity for agile companies to shine and a risk for some old-fashioned ones to lose market share"
Have you met with any resistance from market participants who don’t want increased API price transparency?
In fact, transparency and data availability have become a reality in all areas of life, therefore burying one’s head in the sand and hope it is not happening does not really work. Today one can access customs databases and other services. At Kemiex, we help clients look strategically at price developments, helping them to identify trends and navigate volatile markets but not dictating market prices for one specific transaction. As a platform operator, we are obliged to buyers and sellers alike. Transparency has brought professionalisation to other markets in the past: a great opportunity for agile companies to shine and a risk for some old-fashioned ones to lose market share.
What type of job titles are using your platform?
The users are the people who are responsible for buying and selling a given raw material. Kemiex is a helpful tool to complement their daily activity. Some companies are newcomers to digitalisation and may have a dedicated project team, such as tech-savvy team members or even the bosses using it first. Centralized marketing teams who typically maintain e-commerce shops and product catalogues for companies will find very quickly that Kemiex requires a deep understanding of markets, products and logistics to arrange the deals, and therefore should be used by the commercial experts.
How many pure back-to-back traders are involved in the market?
There are many distributors and traders due to a vast universe of chemicals and complexities in global supply chains. Even large companies frequently use traders for specific product categories and market situations. Typically, they offer more than just back-to-back arrangements, such as transformation of quantities, combined shipments, quality services, packaging, special logistics or financing – as many factories in Asia would only accept prepayment or deliver ex-works or free-on-board. If a transaction turns sour, it is also much easier to settle with a local distributor than a factory overseas.
Such traders must comply with GDP and similar rules as they touch the raw materials. The business model of a pure voice or introducing broker seems to have become a niche service compared to pre -2000s. Most of the former brokers have become professional trading firms or specialized consultants.
"In Europe and the US we see a certain willingness of clients to pay a premium for local or branded products, in cases where their end-customers are willing to pay a premium for the finished product too"
Is there any differentiation in price between an API produced in Asia and ones produced in Europe or the US? Do customers tend to pay a premium for ‘locally’ produced ingredients?
It depends and cannot be answered with a simple yes or no. The quality, production process and market authorisation of one product and manufacturer is very important and isn’t always directly comparable to another product, or solely attributable to the country of production. Even within China we see products of one factory always trading at a premium to another factory. On average, one could say that for generic APIs, and their starting materials, there is a concentration of production and price advantage in China and India.
Especially in Europe and the US we see a certain willingness of clients to pay a premium for local or branded products, in cases where their end-customers are willing to pay a premium for the finished product too. For APIs and different to most of the food and feed additives, switching a manufacturer entails a cumbersome process which is a big difference to other raw material markets, where suppliers can be changed freely.
There are also many products where no or only a few local sources exist today. One of the key drivers for decades of offshoring production was increased price pressure imposed by governments and health insurance schemes, as well as elimination of energy and resource-intense industries. Politicians in many countries are currently discussing the future strategy.
Will the coronavirus pandemic mean the API market will have to adapt to a more digital environment?
Many of us have seen this meme “Who led the digital transformation of your company: (a) CEO (b) CTO (c) CIO (d) COVID-19”. Our observation is that COVID-19 has accelerated digitalisation in those traditional sectors very significantly and within weeks. There are great digital solutions that could become critical to the success of a business, from software solutions in production, procurement, and sales, but also big data analytics, artificial intelligence, or communication. Kemiex is only one of those.
Could you give us an example of how COVID-19 has caused volatility in the prices of certain APIs?
One very high-profile example is that of hydroxychloroquine. Prior to the pandemic, the API used against Malaria and Lupus was trading at around USD 120-140/kg globally, with the European-quality CEP product at USD170-190/kg. However, once US President Trump began to endorse the drug during a time of disrupted supply chains in China, and the Indian government issued a temporary export ban on the ingredient, its transactable value shot up to USD 600-1,200/kg, and we even saw offers as high as $1,600/kg.
On May 22, medical journal The Lancet published a study by MR Mehra et al based on a retrospective analysis of medical records, finding that the use of the drug is not safe. It caused the WHO and several countries to temporarily suspend ongoing clinical trials and put more scrutiny on the use and demand for the medicine. One week later in an open letter to Mehra and The Lancet, a group of more than 100 scientist raised serious concerns about the validity and integrity of the analysis.
It is a perfect example where “animal spirits” control the markets, as drug efficacy and demand remain unclear, and as the supply situation is affected by lockdowns in India, price volatility with starting materials, high air cargo prices and new capacity entering the market.
Overall, we are seeing hydroxychloroquine prices relax from previous highs but trading at very wide spreads of USD 190 to 1,250/kg, the lower reflecting larger volume and longer-term contracts, and the latter spot prices.
What is your vision for the future both in terms of your company and the market?
Our core vision is to enable safe and efficient raw material trade between reliable buyers, traders and manufacturers through an industry-leading electronic platform: comparable to successful platforms in financial or agricultural industries.
An important ambition of ours is to make critical supply chains more robust and transparent by connecting the dots and integrating value-add services at a fingertip. Today even regulators with access to the most confidential manufacturing data are struggling to understand flows and vulnerabilities from starting materials to finished pharmaceutical products.
We are in early projects with several industry associations and quality schemes to integrate certification data, compliance, as well as track and trace features.
Financial derivatives or benchmarks could also be a possibility for certain ingredients, helping industry participants to manage price and P&L fluctuation risks contractually.