Decarbonizing API manufacturing: Unpacking the cost and regulatory requirements

As vital as the life sciences and healthcare ecosystem is to human health, so too is its decarbonization to the health of both humans and the entire planet. Accounting for 4 to 5 percent of total global emissions,¹“Healthcare’s climate footprint,” ARUP, September 2019. this sector is aware of the need to address its environmental footprint and accelerate its transition to net-zero emissions.

Roughly one-fourth of emissions from pharmaceutical companies can be attributed to the manufacture of active pharmaceutical ingredients (APIs)—the biologically active component of drugs.²The 25 percent estimate is based on the data estimates described in Exhibit 1. Indeed, APIs account for nearly half of the emissions in the purchased goods and services category³“Technical guidance for calculating Scope 3 emissions, Category 1: Purchased goods and services,” Greenhouse Gas Protocol, accessed July 2024. for pharmaceutical companies (Exhibit 1). The majority of APIs on the market (roughly 70 percent)⁴Based on McKinsey Chemical Insights and Market.US data. are small molecules chemically synthesized from crude oil and natural gas, and thus contribute a much higher share of carbon emissions relative to biologic APIs grown from cell cultures or small organisms.⁵Manufacturing of biologic APIs is usually associated with lower emissions because they are derived from biomass, and the transformation is less energy intense due to lower process temperature, fewer steps, and smaller quantities of lower-carbon-intensity raw materials.

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In 2023, we surveyed more than 20 API manufacturers about their organizations’ sustainability goals and discovered that while 50 to 70 percent have decarbonization targets, less than 20 percent have detailed implementation plans that consider abatement costs, feasibility trade-offs, and potential impact.⁶McKinsey survey of more than 20 sustainability/procurement executives from leading API manufacturers, July 2023. Among the biggest hurdles these manufacturers face is the lack of transparency regarding decarbonization solutions and their impacts, coupled with limited visibility into their products’ carbon footprints.

API manufacturing also generates significant liquid and solid waste, including solvents, water, and contaminated materials. Treatment and disposal of these wastes release end-of-life emissions, particularly from solvent incineration, which emits 2 to 4 kilograms (kg) of carbon dioxide (CO₂) per kg of solvent.⁷Based on European Solvent Recycler Group data. Due to the high material input, low process yields, and heavy solvent waste, API manufacturing also has a material utilization efficiency and waste problem (see sidebar “How solvent use and disposal contributes to API manufacturing’s carbon emissions”).

How solvent use and disposal contributes to API manufacturing’s carbon emissions

The process material intensity (PMI) for API manufacturing varies widely, from 70 to 433 kilograms (kg) of materials per kg of API produced, depending on the development phase,¹David K. Leahy, “Seven important elements for an effective green chemistry program: An IQ Consortium perspective,” Organic Process Research & Development, September 20, 2013, Volume 17, Issue 9. with solvents accounting for 50 to 60 percent of the total mass.²Richard K. Henderson, “Expanding GSK’s solvent selection guide – embedding sustainability into solvent selection starting at medicinal chemistry,” Green Chemistry, July 10, 2024, Volume 26. The high PMI associated with solvents translates to 40 to 50 percent emissions of API’s carbon footprint.³Conceptión Jiménez-González, “Cradle-to-gate life cycle inventory and assessment of pharmaceutical compounds,” The International Journal of Life Cycle Assessment, Volume 9, March 2004.

Life cycle emissions analysis reveals that 50 to 60 percent of these emissions originate from solvent production (“cradle to gate”); the remainder stem from downstream waste disposal, including recycling and incineration.

Cradle to gate. Solvent production involves significant emissions from petrochemical feedstock production and solvent synthesis, with the latter accounting for approximately 80 percent of cradle-to-gate emissions (exhibit).

Gate to grave. Despite the availability of on-site distillation units for solvent recycling, only about 35 percent of solvent waste is currently recycled for internal use or external reclamation.⁴Recycled solvents will be used at different specifications and delivered to third parties (painting, coating, or printing industries) that can use them as replacement for virgin solvents. The rest is incinerated, releasing 2 to 4 kg of CO₂ per kg of solvent, significantly higher than the emissions from recycled solvents.⁵Based on data from the European Solvent Recycler Group, in which emission factors for distillation-recycled solvents range from 0.1 to 0.5 kg CO₂ of kg solvents.

Despite those challenges, our analysis demonstrates that API manufacturers have the potential to reduce approximately 90 percent of their total emissions by 2040. Notably, from the cost–benefit standpoint, around 35 percent of this reduction can be achieved with positive net present value (NPV) levers; from the regulatory perspective, 30 to 50 percent of this reduction would require minimal regulatory approvals.

In this article, we focus on synthetic small-molecule APIs, presenting the challenges to decarbonization and offering four types of levers that API manufacturers can pull to lower their emissions:

• process efficiency improvements that are low cost and regulatory friendly: potential for a 5 to 10 percent reduction in emissions
• implementation of green-chemistry principles that require some regulatory approval: potential for about a 30 percent reduction in emissions
• renewable-energy transitions that are slightly costlier: potential for a 5 to 10 percent reduction in emissions
• sustainable-feedstock and solvent procurement that would require supply chain collaboration: potential for about a 50 percent reduction in emissions

API manufacturing is critical to the life science industry’s decarbonization goals

API manufacturing is a complex, multistep process involving numerous chemicals, solvents, and other materials. The average process material intensity (PMI⁸PMI is a method used to calculate mass data on the amounts of materials, such as water, raw materials, consumables, packaging, et cetera, required to produce 1 kilogram of drug substance.) ranges from 70 to 433 kg of materials per kg of API produced.⁹David K. Leadhy, et al., “Seven important elements for an effective green chemistry program: An IQ Consortium perspective,” Organic Process Research & Development, September 2013, Volume 17, Issue 9. Also, typical yields are between 30 and 60 percent for small-molecule synthesis from raw materials and as low as 5 to 10 percent for more intricate syntheses. These intensive material inputs lead to a substantial environmental footprint: API emission factors (EFs) range from 50 to 1,000 kg of CO₂ per kg of API—two to 50 times greater than that of the feedstock specialty and fine chemicals upstream.¹⁰Kung Cheng et al., “Methodology for carbon footprint calculation in crop and livestock production,” Carbon Footprint Handbook, December 2017.

API manufacturers are facing increasing pressure from their downstream stakeholders—including biopharma companies, wholesalers, distributors, and healthcare facilities—to decarbonize. Indeed, many stakeholders across the healthcare value chain have made commitments to aggressive Scope 1, 2, and 3 emissions reductions. For example, eight of the ten leading pharma companies,¹¹Target Dashboard, Science Based Target Initiative, accessed April 14, 2024. and even major healthcare agencies and systems, like the US Department of Health and Human Services¹²“Health sector commitments to emissions reduction and resilience,” US Department of Health and Human Services, April 2022. and the United Kingdom’s National Health Services,¹³“Delivering a ‘net zero’ National Health Service,” NHS England, updated July 4, 2022. have pledged to achieve net zero across their respective supply chains by as soon as 2040 and no later than 2050.

Already, collaborations among global pharmaceutical companies and API suppliers are accelerating the decarbonization of the life sciences industry. For instance, initiatives like the Activate program, launched by six of the world’s leading pharmaceutical companies, are actively engaging API suppliers across 20 countries.¹⁴“Activate program launched to accelerate decarbonization in active pharmaceutical ingredient (API) supply chains,” Manufacture 2030, November 9, 2022. This program aims to help suppliers measure, report, and reduce their emissions through capability building and facilitating access to green-financing options.

A challenging path to decarbonization

Despite the urgent need for decarbonization, API manufacturers face two primary obstacles in their path to net zero: lack of visibility into a given product’s emissions and limited transparency into solutions and their implications.

Lack of product-level carbon visibility

The complex and resource-intensive nature of the API synthesis process makes it difficult to accurately convert material usage and energy consumption data into carbon emissions. This conversion involves applying knowledge of life cycle assessment/carbon footprint (LCA/CF) tools and carefully selecting EFs, which can vary significantly based on manufacturing methods, process efficiency, and regional energy sources. For instance, the EF for acetonitrile, a commonly used solvent in API synthesis, ranges from 1.5 to 12.5 kg of CO₂ per kg of solvent globally (Exhibit 2). That wide range poses a major challenge for API manufacturers to pinpoint the EF source of incoming materials and accurately calculate their Scope 3 emissions. Also, the sector lacks standardized measurement and reporting protocols for product carbon footprints (PCFs), which hinders transparency between API suppliers and their pharmaceutical customers.

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Limited transparency of decarbonization solutions and their implications

Some API manufacturers are based in regions where environmental regulations are generally less stringent and there is limited awareness of available decarbonization technologies and their implications. Most API companies also typically operate with smaller profit margins compared with pharmaceutical companies,¹⁵Based on median EBITDA margin for the top ten pharmaceutical companies. often leading them to prioritize short-term financial returns over the up-front investments required for decarbonization. The adoption of green feedstocks and solvents, which is crucial for achieving net-zero emissions, presents significant procurement and supply chain challenges, particularly for smaller API manufacturers. Finally, regulatory requirements arise when modifications to existing production lines and processes necessitate additional filings and approvals.

A decarbonization pathway for API manufacturers

Based on our comprehensive assessment of available and emerging decarbonization technologies, we estimate that API manufacturers can reduce approximately 90 percent of their total emissions by 2040 (the most ambitious net-zero target year set by large pharma and healthcare organizations) by leveraging a combination of decarbonization levers (Exhibit 3). These levers are listed below in order of abatement cost (Exhibit 4) and consist of varying levels of regulatory requirements and supplier dependence. Some of them offer immediate opportunities for emission reductions, while others will likely require more time, investment, and supplier collaboration to become viable.

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API manufacturers can achieve 5 to 10 percent emissions reductions by implementing cost-effective and regulation-compliant process efficiency improvements, such as heat integration solutions that reduce energy waste.

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API manufacturers can achieve an emissions reduction of about 30 percent by implementing green-chemistry principles, such as solvent recovery and process redesign, though these may require regulatory approval to ensure the continued safety and efficacy of the drug products.

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API manufacturers can achieve an emissions reduction of 5 to 10 percent by transitioning to renewable-power and -fuel sources, though this shift may incur slightly higher costs than the previously mentioned levers.

4.

API manufacturers can potentially achieve a substantial emissions reduction, around 50 percent, by collaborating with suppliers to reduce their carbon-emitting energy use and adopt sustainable feedstocks and solvents, though this lever comes at a high cost and faces supply chain challenges.

Exhibit 3

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Process efficiency improvements that are cost and regulatory friendly

API manufacturers can reduce emissions by increasing process efficiencies in materials and energy usage. This group of efficiencies can start to pay for themselves immediately; all are NPV positive. One notable way to improve energy efficiency is through the use of “heat integration” solutions that reduce or recycle the large amounts of residual heat generated by industrial processes. For example, heat pumps can be used to capture waste heat using a refrigerant and lift the captured heat to higher temperatures for useful heating applications, such as steam generation. Another option to recycle waste heat is to increase its temperature via a chemical reaction with low or even no electricity input.

These measures can significantly boost overall plant efficiency and reduce the demand for primary carbon-emitting energy sources, like natural gas. Some companies have already implemented these measures. For example, Takeda has implemented a high-temperature heat pump system to recover excess heat from cold supply and generate steam at its Vienna, Austria, manufacturing facilities, which alone has reduced that plant’s emissions by 90 percent.¹⁶“Takeda unveils first industrial application of natural gas-free steam generation in pharmaceutical industry in partnership with Austrian government and Institute of Technology,” Takeda press release, January 25, 2023.

Implementation of green-chemistry principles that require regulatory approval

API manufacturers can further reduce emissions by adopting process improvements and alternative greener routes based on green-chemistry principles. These principles,¹⁷“12 principals of green chemistry,” American Chemical Society, accessed July 2024. initially developed in 1998, aim to find creative and innovative ways to reduce waste, conserve energy, and discover replacements for hazardous materials during the chemical synthesis process. They can be applied across the life cycle of a chemical product, resulting in pollution prevention, lower or eliminated hazardous waste, efficiency increases, and lower raw material usage. Today, green-chemistry principles can also help to reduce carbon emissions and operational costs from chemical synthesis through better solvent recovery, process redesign, and continuous manufacturing.

Solvent recovery. Recycling solvents can mitigate both the production emissions associated with virgin solvent replacement and the end-of-life emissions from incineration. In 2022, approximately 35 percent of solvent waste generated in the US pharmaceutical industry was recycled, while the remaining 65 percent was incinerated (45 percent with energy recovery and 20 percent without energy recovery),¹⁸2022 TRI national analysis, US Environmental Protection Agency, March 2024. contributing significantly to greenhouse gas (GHG) emissions. Instead of resorting to incineration, API manufacturers can adopt a range of solvent purification technologies, such as stripping/distillation, pervaporation, and membrane separation, to further increase solvent recycling for chemical production and nonproduction use. A 2023 Cornell University report indicates that increasing the solvent recovery rate from 30 percent to 70 percent could reduce the API industry’s cradle-to-grave emissions by 26 percent, with an additional 17 percent emissions reduction possible by increasing the recycling rate to 97 percent¹⁹Yanqiu Tao, et al., “Environmental sustainability of the globalized pharmaceutical supply chains: The case of tenofovir disoproxil fumarate,” ACS Sustainable Chemistry & Engineering, March 23, 2023, Volume 11, Issue 17. (see sidebar “How API manufacturers can further increase their solvent recovery rates).

Process redesign. Redesigning chemical synthesis processes to focus on high yield and minimize waste reduces the PMI and environmental impact of APIs. Pharmaceutical company Lupin has demonstrated this by adopting green-chemistry principles: it streamlined the manufacturing of 14 APIs, cutting solvent and reagent consumption by 61 percent and reducing synthesis steps by 33 percent.²⁰“Intellectual capital,” Lupin, accessed April 2024.

Thanks to advancements in biotechnology, biologic synthesis (biocatalysis and fermentation) offers an alternative to traditional chemical synthesis for some small-molecule APIs (anti-infective agents). This shift decreases reliance on fossil fuels and energy during manufacturing. A 2024 literature review conducted by the Technical University of Denmark²¹Deniz Etit, et al., “Can biotechnology lead the way toward a sustainable pharmaceutical industry?,” Current Opinion in Biotechnology, June 2024, Volume 87. evaluated the sustainability of 34 APIs produced via chemical and fermentation routes and found out that fermentation routes had a 35 times lower carbon footprint.²²The life cycle analysis of these fermentation processes excluded the production emissions from monoclonal antibodies.

However, transitioning to biological routes requires careful assessment. Manufacturers must consider applicability, broader environmental impacts (like wastewater generation), and cost implications.

Continuous manufacturing. API manufacturers can enhance operational efficiency by transitioning from traditional batch production to continuous manufacturing. In continuous manufacturing, flow reactors steadily introduce raw materials into a process train while finished products are continuously extracted. This system has been explored for both small- and large-molecule APIs and has demonstrated operational cost savings of 10 to 40 percent.²³Spencer D. Schaber et al., “Economic analysis of integrated continuous and batch pharmaceutical manufacturing: A case study,” Industrial & Engineering Chemistry Research, July 27, 2011, Volume 50, Issue 17. These savings stem from the smaller physical footprint of continuous systems, more efficient use of materials, and greater utilization of production capacity, all of which could contribute to GHG emissions reductions.

Changes to existing commercial processes, however, will likely require regulatory approval. The approval process can indeed be time-consuming for API manufacturers, as it may take several months or years to prepare for the mandatory impact assessment of moderate or major production variations—and then implement them postapproval. To minimize delays and accelerate the decarbonization progress in the next decade, the life sciences industry could proactively plan and implement climate-positive manufacturing variations while aligning with the latest regulatory standards to ensure the quality, safety, and efficacy of APIs.

Renewable-energy transitions that are slightly costlier

API manufacturers can reduce emissions by roughly 5 to 10 percent by shifting toward renewable power and fuel during manufacturing at a cost of $25 to $75 per ton of CO₂, which is within the range of the projected global carbon price.²⁴Carbon price refers to both carbon taxes and emission trading systems; global carbon prices are expected to reach $40 to $200 per ton of CO₂ by 2030 and approximately $60 to $350 per ton of CO₂ by 2050 based on regional carbon pricing figures. See “Global carbon market outlook 2024,” Bloomberg NEF, February 21, 2024.

Renewable-power sources—solar, wind, hydroelectricity, and geothermal—are essential in reducing GHG emissions. API manufacturers have several options for renewable electricity, including on-site installations, renewable-energy certificates, and power purchase agreements (PPAs). The best option depends on regional availability and technological feasibility. Renewable electricity is especially important for API manufacturing as the industry adopts electrified boilers and heat pumps, which would need to be powered by renewable electricity if the industry’s decarbonization goals are to be achieved. Already, the Energize program (launched in 2021 through a collaboration among Schneider Electric and 20 sponsoring life sciences companies) has recruited over 500 life sciences suppliers and has increased their access to roughly 2 terawatt-hours (TWh) of renewable electricity via five PPA buyers’ cohorts across North America and Europe.²⁵“Energize announces program milestones, with formation of additional buyers cohorts bringing new renewable electricity to the grid for pharma,” Schneider Electric, December 4, 2023.

API manufacturers can also utilize renewable fuels for heat and steam production for the low- to medium-temperature processes essential for initiating chemical and biological reactions and sterilization. These fuels, derived from sustainable sources like biomass and biogas, currently face widespread adoption challenges due to feedstock availability (biomass, for example, relies on dedicated energy crops), regulatory requirements, and suitability for specific load profiles. API manufacturers should therefore consider a wide range of technical and economic factors, including available investment, government incentives, technology maturity, and accessibility to renewable sources, and chart a feasible and commercially viable route during the renewable-energy transition.

Sustainable feedstocks and solvent procurement that would require supply chain collaboration

API manufacturers have the potential to further reduce their emissions by an average of 50 percent if they work with suppliers, particularly oil and gas refineries and petrochemical companies, that reduce their own use of carbon-emitting energy sources (potential for a 10 to 20 percent reduction) and also adopt net-zero technologies and sustainable feedstocks in their production of low-carbon chemical reagents and solvents (potential for a 30 to 40 percent reduction). However, doing so would come at a relatively high cost to suppliers (up to $300 per ton of CO₂).

Raw material suppliers could reduce the emissions attributed to their energy source for a relatively lower cost (up to $100 per ton of CO₂). However, they will need to improve their operational efficiency while transitioning to renewable-energy sources. Options are available for API manufacturers to consciously procure raw materials from suppliers that are already making this transition via sustainable-sourcing practices, but doing so within a complex supply chain presents them with an operational challenge.

Reducing feedstock-embedded carbon emissions comes with a much higher abatement cost for raw material suppliers. This reduction can only be accomplished if suppliers switch to renewable or low-carbon feedstocks, some of which require technologies that are either not yet commercially viable (typically costing more than $250 per ton of CO₂) or that face supply constraints. These options include sustainable feedstocks (for example, bio-based and CO₂ to X²⁶Refers to CO₂ transformation, in which CO₂ removed from the atmosphere or recycled from industrial processes is used to make chemical-based products.) and net-zero technologies (like carbon capture and storage and electrification of crackers) that help produce low-carbon feedstocks.

Some raw materials suppliers are starting to use such sustainable feedstocks as vegetable oils, corn, sugar cane, and lignocellulosic biomass²⁷Cynthia A. Challener, “Green-by-design small-molecule API synthesis,” Pharmaceutical Technology, September 28, 2023, Volume 47, Issue 10. to produce a range of commodity chemical building blocks and solvents for downstream industrial application across such sectors as automotive, electronics, and personal care. However, high prices, supply shortages, competing demand, and cost sensitivity from downstream customers will limit widespread adoption over the next five to ten years.

Given the potential for significant decarbonization with this lever, API manufacturers should take proactive measures to prepare for and take advantage of these options when they become more feasible. In the meantime, they could become more familiar with the regulatory landscape around adoption of sustainable materials within existing synthesis processes and pursue green-financing instruments that could be used to secure sustainably produced materials through offtake agreements with their upstream suppliers.

Despite the challenges, API manufacturers should consider the full range of options offered by these decarbonization levers and incorporate them into their long-term implementation plans. Through proactive planning, investments, and collaboration with supply chain partners, API manufacturers can chart a path to a 90 percent emissions reduction by 2040. Taking bold action to minimize their carbon footprint allows API manufacturers to contribute to the fight against climate change while also ensuring their long-term sustainability and competitiveness—as well as that of their life sciences and healthcare stakeholders.