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AZ begins Far East outsourcing to slash costs

AstraZeneca begins outsourcing production of a number of its bestselling medicines to low-cost manufacturers in the Far East

AstraZeneca (AZ) has begun outsourcing production of a number of its bestselling medicines to low-cost manufacturers in the Far East.

The UK's second-largest company hopes that the outsourcing move will cut USD 900m (GBP 440m) of costs by 2010. AZ will purchase Lactam, an active pharmaceutical ingredient (API) used to manufacture schizophrenia drug Seroquel, from contract manufacturers in China.

Seroquel, which racked up FY06 sales of USD 3.4bn, is AZ's second best-selling product after proton pump inhibitor Nexium (esomeprazole), which brings in USD 5.2bn in sales.

The outsourcing move is part of a broader strategy to outsource key manufacturing activities, while concentrating on drug development and marketing. Lactam will be one of the first of many APIs for drugs produced by outsourced contract manufacturers.

As a result, AZ will stop production at manufacturing plants in Macclesfield and Cheshire in the UK, as well as some operations in Germany and Sweden. The company operates 27 sites in 19 countries, but will slash 11 per cent of its total workforce of 66,000, including 700 jobs at Macclesfield. Plants in Bristol, UK, and Dunkirk, France, should continue for now, but thousands more manufacturing jobs are likely to be shed over the next few years.

While the outsourcing strategy will save money, some industry watchers are concerned that quality control standards in China are not as high as in the EU or the US.

An AZ spokesperson said the company was only in the start-up phase of sourcing Lactam from China. There were still many stages to go, including internal assurances that standards were met, followed by submissions to appropriate regulatory agencies for approval.

To progress the outsourced production in China, AZ has opened a new sourcing centre near Shanghai to help identify low-cost producers and manage the transition. AZ already operates another sourcing office in Bangalore, India. Contract manufacturers in Eastern Europe could also play a growing role in the years ahead.

According to AZ, the outsourcing strategy will take several years to complete due to complex regulatory issues and the need to ensure quality control and reliability of supply.

The company said that it would consider further outsourcing opportunities as they arise where there was a sound business case. Some of AZ's more complex medicines need 32 separate, individual chemical processes to manufacture.

AZ is among a number of large pharmaceutical companies moving to outsourcing in other countries. Swiss-based Novartis and US-based Pfizer and Merck are also looking to save costs by targeting countries with cheaper workforce and manufacturing costs, as they face increased cost pressures and competition from generics.

30th September 2008

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