Outsourcing gets new emphasis: fine chemicals suppliers key.(includes related article on drug firms' use of combinatorial chemistry technology in new product development)(Cover Story)

To reduce cost and bolster profitability pharmaceutical makers are relying more on third-party chemical suppliers for intermediates and bulk actives. Such a shift in procurement strategy is consistent with related efforts to bolster manufacturing efficiency.

Higher demand for fine chemicals from third-party suppliers comes as drugmakers increasingly focus on what they believe are their core competencies: development, formulation, and marketing of high-value, high-margin products, says Burton Rein, senior v.p. Cambrex Industries (East Rutherford, NJ). Because Zeneca considers third-party fine chemical producers

a more cost-effective source than internal supply, it is increasing outsourcing, says David Barnes, CEO.

In general, drugmakers--whose operations were designed to produce high-margin, proprietary goods--are applying strategies more familiar to commodity goods producers, says Kurt Landgraf, DuPont Merck's president and CEO. "In the managed care environment, expenses must be significantly lower than in the past. The industry is making the transition into a real world, commodity-like business."

Pharmaceutical makers are increasing their reliance on independent fine

chemicals suppliers for complicated, low-volume batches of intermediates used

during product development, or ones that require specialized manufacturing hardware, says Hank Panning of Marketing Consultants (Thorndale, PA), which recently completed a related study. Drugmakers tend to keep in-house production of high-volume, proprietary recipes. Given the recent, severe cost

squeeze, however, pharmaceutical makers are open to all options. Eli Lilly (Indianapolis), for example, is considering toll manufacturing at its bulk intermediates facilities to make better use of assets, says Steve Mueller, manager/strategic facilities. "We would carefully pick and choose our opportunities," he says.

Fine chemicals makers' major selling point is their ability to leverage

in-house technical-production experience and ample, available capacity. "The expertise is there, the staffing is there, and the infrastructure is there," says Frank Jones, business development manager, Cytec Industries' Chemical Research Division (Stamford, CT). Much of Cytec's recent fine chemicals production is process development quantities and incremental volume required by small pharmaceutical startup companies as well as large established players, Jones says. …