#3 Sectors in Brief - The Pharma Packaging Sector

An attractive sector to search for overlooked opportunities

Having completed my analysis of Lonza Group AG's financials (article #3), I've shifted my research focus to the pharmaceutical packaging sector. Throughout 2024, I've been keenly interested in identifying potential investment opportunities within the pharma industry. While the post-COVID era has seen a decline in investor favor due to funding constraints and ongoing inventory adjustments, I believe enticing opportunities still exist.

Recognizing the inherent risks associated with drug discovery, I've adopted a "second-order thinking" approach to uncover potential investments. Here's the simplified breakdown of the pharmaceutical value chain: Pharmaceuticals are discovered, patented and marketed (by start-ups or traditional pharma companies). In between, someone has to manufacture the drugs (traditional pharma company or CDMO). To be manufactured, equipment and advanced technologies are put into use (pharmaceutical tools sector provides the machinery). Moreover, the manufactured drug needs to be packaged and transported to patients. Finally, tests to verify and ensure the quality will be performed along the whole value chain.

The pharmaceutical packaging sector is the only one of the list above which my portfolio has no direct exposure so I deemed necessary to dig into it and understand if there are attractive opportunities.

In this article I will share with you what I have found.

Executive Summary

  • Primary packaging generates the largest amount of value in the pharma packaging sector.

  • Double digit growth is expected for the coming years of the decade.

  • Strong sectoral trends add on the pharmaceutical industry macrotrends.

Packaging types

The pharmaceutical packaging market encompasses the segment of the packaging industry dedicated to the design, manufacture, and supply of packaging materials and solutions specifically targeted towards pharmaceutical products. This packaging plays a critical role by ensuring the protection of drugs from external factors, such as moisture, light, and contamination, thus preserving their stability and efficacy.

Depending on its function, packaging is divided in three different groups:

  1. Primary packaging

    It’s the direct container that comes into contact with the medication itself. It's designed to be sterile, tamper-evident, and provide a barrier against moisture, light and any form of contamination.

  2. Secondary packaging

    This layer surrounds the primary packaging and offers additional protection and information. It's not always sterile and provides physical protection against potential physical damage during handling and transport.

    It also displays the labeling, this is the crucial information about the medication in connection with its use and safety. Marketing information such as the name are also displayed in the secondary packaging.

  3. Tertiary Packaging

    This is the outermost layer used for bulk transportation and distribution. It is designed for efficient package shipping and additional protection.

Figure 1: Types of pharmaceutical packaging. Source: Amarji et al., 2018.

Market Outlook

The global pharma packaging sector value had an estimated value of USD 130 - 140 billion in 2023 and it is estimated to grow at a 10 - 15% CAGR during the present decade.

Figure 2: Global pharmaceutical packaging market forecast for the 2023- 2028 period. Source: Markets and Markets Analysis.

The market is fragmented and there is no company with an integral portfolio of solutions which can establish itself as a one-stop supplier for its customers. There are many players in the pharmaceutical packaging sector under intense competition dynamics. However, due to the technical complexity and expertise required in the sector, the competition is not an all against all type but it is clustered: a reduced number of players compete against each other in a specific area in which they offer an assortment of products and solutions.

The Sector by Product

If we look at the market distribution by product, approximately 75% of the market value is derived from primary packaging, while the remaining 25% is related to secondary (20%) and tertiary (5%). This suggests that primary packaging offers a greater contribution to the overall value proposition due to its critical role in ensuring product integrity.

The Sector by Geography

North America currently leads the global market for pharmaceutical packaging, holding a significant revenue share of 35.9% in 2023. This dominance is partly attributed to the region's robust pharmaceutical manufacturing base.

Looking ahead, the Asia Pacific region is poised for the fastest growth, projected to reach a CAGR exceeding 12% between 2024 and 2030. This growth is fueled by a confluence of factors: rising health awareness among consumers, particularly in developing nations like China and India, increasing disposable income leading to a booming pharmaceutical industry, and consequently, a growing need for pharmaceutical packaging.

Europe presents a promising market with considerable growth potential. This is driven by ongoing research and development efforts leading to the introduction of innovative medicines aimed at improving patient health and quality of life.

Figure 3: Global pharmaceutical packaging market trend visualization. Source: GVR.

The Sector by Material

The global pharmaceutical packaging market utilizes a diverse range of materials, each with specific advantages suited to different applications. Here's a breakdown of the key material segments and their characteristics:

  • Plastics & Polymers

This category dominates the market (36.8% market share in 2023), offering a versatile toolkit for various pharmaceutical packaging needs. From PE and PET to PP, PVC, PS, and even bioplastics.

  • Paper & Paperboard - Sustainable and Cost-Effective Secondary & Tertiary Packaging

For cost-conscious and environmentally responsible packaging, paper & paperboard reign supreme. Their key advantages include excellent printability, affordability, wide availability and sustainability. Paper-based materials often serve as lidding for blister packs due to their lower cost compared to aluminum.

  • Glass - Liquid & Semisolid Medications

Glass offers exceptional barrier properties, effectively shielding medications from external threats. Its resistance to gases, moisture, odors, and microorganisms. Moreover, amber-colored glass is favored for its ability to absorb harmful UV light, protecting sensitive medications from degradation.makes. Hence, glass is ideal for packaging such as injectable vials, syrup bottles and cartridges & syringes.

  • Aluminum - Liddings, Strip Packs & Seals

Aluminum's strength, barrier properties, and ease of tearing make it a valuable material in pharmaceutical packaging.

  • Other Materials: Rubber and Cotton for Specialized Needs:

Natural and synthetic rubbers like neoprene, nitrile, butyl, and silicone play a crucial role in creating: closures and cap liners (ensure a tight seal and tamper-evident protection), bulbs for dropper assemblies (enable controlled and precise medication delivery).

Figure 4: Pharmaceutical packaging sector dynamics overview. Source: GVR.

Apart from the macrotrends common to the pharma industry as a whole (aging population, personalized medicine, etc.), there are specific tailwind trends for the pharma packaging sector.

Sustainable and eco-friendly packaging solutions

The main driver of this trend is customers growing environmental awareness and stricter regulations regarding plastic waste, which are driving the demand for sustainable packaging. Customers are actively seeking out brands that prioritize eco-friendly practices, and pharmaceutical companies are responding by exploring alternative materials and production methods.

Simultaneously, life cycle assessment (LCA) is wide-spreading. This is a holistic approach which goes beyond just the materials used. Companies will need to consider the entire life cycle of the packaging, including energy consumption during production, transportation efficiency, and end-of-life disposal options.

Transition towards ready-to-use (RTU) packaging items

The trend towards RTU packaging in pharmaceuticals signifies a shift towards packaging solutions designed for user convenience and improved medication adherence. RTU packaging eliminates the need for patients to measure or mix medication doses themselves, reducing the risk of errors and improving convenience, especially for busy individuals or those managing multiple medications.

Technological advancement and new packaging solutions design and development

New packaging solutions not only are being developed to address some of the challenges already mentioned, such as sustainable packaging solutions or smart designs to improve adherence, but also to improve safety.

Two issues packaging manufacturers are trying to develop solutions for are packaging anti-counterfeiting and child-resistant designs.

The Opportunity

Primary packaging is the largest pond where to fish for opportunities. 75% of the pharmaceutical packaging sector value in 2023 as generated by primary packaging solutions.

As mentioned above, primary packaging is the one in direct contact with the product, meaning regulatory locks on it are the strongest. Moreover, packaging will still represent a small fraction of the total drug manufacturing cost, which removes any potential incentive to optimize the packaging due to cost optimization or even switch the supplier, a process considerably expensive and that will take years. Long-term deals in the form of multi year contracts with customers only reinforce the competitive positioning of existing players in the form of switching costs.

Within primary packaging a find especially interesting glass packaging. The glass packaging market was valued at $20.0 billion and it is projected to grow at 9.5% CAGR during the coming 10-year period. Glass is an inert material which constitutes a perfect barrier to protect and isolate a drug from its environment. It is versatile (as it can be shaped as required) and eco-friendly.

Figure 5: Pharmaceutical glass packaging market forecast for the 2023-2033 period. Source: market.us

Pharmaceutical glass manufacturing is not different from traditional glass manufacturing processes, meaning a high capital intensive process: specialized equipment for the manufacturing and high temperatures are required. On top of that, the use of premium materials is required to manufacture pharmaceutical glass products.

This sector cost structure combined with the existing regulatory locks makes it extremely difficult for new competitors to enter the market. As a consequence, there are a handful of important players in the sector: Gerresheimer AG, Stevanato Group, Schott Pharma AG and Stölzle Glass Group.

The cost structure also limits existing players’ growth. However, there are certain pharmaceutical industry developments which are accelerating the growth:

  1. RTU packaging adoption. RTU packaging adds higher value to customers making it possible to sell it at a premium.

  2. Increasing amount of biologics drugs approved for commercialization. Biologics have a heavy reliance on glass containers because many biologics are caustic to plastic containers and sensitive to light and metals.

  3. GLP-1 growth. Many of the pharma packaging players such as Gerresheimer AG and Schott Pharma AG are known partners of GLP-1 manufacturers.

DISCLAIMER: This article is not a recommendation to buy or sell any financial instrument, the content is educational and my personal opinion. Each person has to make his own analysis. Any action or decision you take as a result of viewing this article is your sole responsibility.

From this point, I will keep investigating the main pharma glass packaging solutions suppliers to evaluate if there is any actually good investment opportunity.

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