No Safety Net | January 19, 2004 Issue - Vol. 82 Issue 3 | Chemical & Engineering News
Volume 82 Issue 3 | p. 5 | Editor's Page
Issue Date: January 19, 2004

No Safety Net

Department: Editor's Page
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This week's issue of C&EN contains our annual special report on custom chemicals. The four stories that compose the feature paint a picture of an important segment of the chemical industry that is being buffeted by pricing pressures from its pharmaceutical industry customers, significant overcapacity, and fierce competition, among both the traditional players and new ones that are springing up, especially in Asia.

The special report was written by Senior Correspondent A. Maureen Rouhi, who has been covering custom and fine chemicals for C&EN for the past three years.

"All four stories elaborate on the same message," Rouhi says. "Commercial custom chemicals manufacturers are caught between a rock and a hard place. Short term, the fundamentals of the business are unfavorable. Longer term, the challenges may be more formidable: How to offer a unique selling proposition, and what to do about competition from India and China. This last problem, I think, is the most worrisome, because the barriers to outsourcing are steadily crumbling."

In the overview story that begins on page 25, Rouhi makes clear the extent of the overcapacity problem. Of the 79,000 m3 of total capacity owned by pharmaceutical companies and custom chemicals manufacturers in 2002, fully 37% was idle. Because drug companies are launching fewer new chemical entities, custom manufacturers are turning their attention to producing active pharmaceutical ingredients for generic drugs. But generics are no panacea. Manufacturing generic APIs is a fundamentally different business than exclusive synthesis, Rouhi points out, often involving complex patent issues and touchy relations with brand-name drug companies.

If you want a quick sketch of the pressures customers are placing on custom manufacturers, just take a look at the box on page 36. Before 2000, many features of custom manufacturing contracts wove together a sturdy safety net for the custom suppliers. No more. Contracts are for much shorter times, numerous companies are invited to bid, and most of the risks have been shifted to the suppliers.

Despite all that, "The good news is that supplying the pharmaceutical industry is fundamentally a sound business," Rouhi writes. "Drug companies still provide one of the highest returns on investment, and they can be expected to outsource chemistry, manufacturing, and other activities to further improve their financial positions."

But the fact that it is a sound business means that other, lower cost competitors are being attracted to custom manufacturing. "As Asian manufacturers pile on quality, credibility, and reliability over their unbeatable cost structure, some observers predict that pharmaceutical custom manufacturing ... will move to Asia," Rouhi writes.

C&EN has already written about the increasing globalization of R&D functions, most recently in an article on drug discovery R&D shifting to India, China, and Russia by Assistant Managing Editor for Business Michael McCoy and Hong Kong Bureau Head Jean-François Tremblay (Dec. 1, 2003, page 15). McCoy and Tremblay point out that drug discovery companies in these countries "are enjoying a stunning rise."

McCoy and Tremblay write: "The U.S. economy has historically generated wealth by concentrating on activities with high economic value. R&D, particularly in the pharmaceutical area, is precisely one of these activities, and it's unclear how the U.S. can remain prosperous if R&D follows manufacturing on the trek to low-cost locations abroad."

The effects of globalization on the chemical enterprise, including the impact on chemical employment in the U.S., is a topic I intend to return to occasionally on this page. Globalization is often portrayed as an inexorable force, the effects of which we simply have to adapt to. I agree that globalization is a powerful force, and that its effects are often, on balance, positive. But globalization appears also to have the potential to shred the employment safety net that many chemical professionals believed their education and skills had created for them. I invite readers to share with me their thoughts on and their experiences with a globalizing chemical enterprise.

Thanks for reading.

 
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