custom manufacturing the products and services offered by the fine chemical industry fall into two broad categories: (1) "exclusives", a.k.a. custom manufacturing (cm) and (2) "standard" or "catalogue" products. "exclusives", provided mostly under contract research or custom manufacturing arrangements, prevail in business with life science companies; "standards" prevail in other target markets. service-intense custom manufacturing (cm) constitutes the most prominent activity of the fine chemical industry. cm is the antonym of outsourcing. in custom manufacturing, a specialty-chemicals company outsources the process development, pilot plant, and, finally, industrial-scale production of an active ingredient, or a predecessor thereof, to one, or a few, fine chemical companies. the intellectual property of the product, and generally also the manufacturing process, stay with the customer. the customer-supplier relationship is governed by an exclusive supply agreement. at the beginning of cooperation, the customer provides a "tech package", which in its simplest version, includes a laboratory synthesis description and she recommendations. in this case, the whole scale up, which comprises a factor of about one million (10 gram → 10 ton quantities), is done by the fine chemical company. standard products non-exclusives, "standard" or "catalogue products" constitute the second most important outlet for fine chemicals after custom manufacturing. api-for-generics are the most important sub-category. because of patent expiries, over 60 of the top 200 drugs alone, representing aggregated sales of over $150 billion, have fallen into the public domain within the past decade. this, along with government-backed incentives, are causing global sales of generics to rapidly increase. asian companies currently dominate the api-for-generics business. they have multiple advantages of their low cost basis, their large home markets, and significant previous manufacturing experience compared to western manufacturers in producing for their domestic and other non-regulated markets. financials investment costs investment costs for multipurpose plants are high in comparison with product output. however, they vary considerably, depending on the location, size of equipment and degree of sophistication (e.g., automation, containment, quality of equipment, complexity of infrastructure). an example for a cgmp multipurpose plant built in the us is shown in table 9. the investment cost of $21 million comprises just the equipment and installation. the building, property and external services are excluded. for comparison purposes, the investment cost per m3 reactor volume is used. in this case, it is $0.9 million. the amount includes the cost of the reaction vessel itself plus an equitable part of the ancillary equipment, like feeding tanks, piping, pumps & process control. if larger or smaller reactors were installed, the unit cost per m3 would decrease or decrease with the exponent 0.5, respectively. hence, by increasing the equipment size manufacturing costs on a per kilogram (kg−1) basis typically decrease substantially. also, costs for a plant that is used for the production of non regulated intermediates only would be substantially lower. pharma companies tend to spend up to ten times more for a plant with the same capacity. in contrast, investment costs in developing countries, particularly in india or china, are considerably lower. table 9: investment cost for a cgmp multipurpose plant equipment / investment numbers description of main equipment production trains reactor vessels (volume = 4 m3) .... total reactor volume filtration units dryers 2 6 .... 24 m3 2 2 capital investment total capital investment investment per production train investment per piece of main equipment investment per m3 reactor volume $21 million $ 11.5 million $ 2.1 million $ 0.9 million manufacturing costs the raw material consumption and the conversion cost are the two elements that establish the manufacturing cost for a particular fine chemical. the former is determined primarily by the unit consumption and the purchasing cost of the materials used; the latter, by the throughput in kilograms per day in a given production bay. a precise calculation of the conversion cost is a demanding task. different products with widely differing throughputs are produced in campaigns in multipurpose plants, occupying the equipment to different extents. therefore, both the production capacity and the equipment utilization for a specific fine chemical are difficult to determine. moreover, cost elements such as labor, capital, utilities, maintenance, waste disposal, and quality control cannot be allocated unambiguously. an approximative calculation can be done by an experienced process development or pilot plant chemist on the basis of (1) the laboratory synthesis procedure and (2) by breaking down the process into unit operations, the standard costs of which have been determined previously controlling has to be involved for a more in-depth costing.. the problems it has to address are how to fairly allocate costs for production capacity, which is not used. this can be due to the fact that part of a production bay is idle, because of lack of demand or because e.g., a reactor is not required for a particular process. manufacturing costs usually are reported on a per kilogram product basis. for the purpose of benchmarking (both internal and external), the volume x time / output (vto), as mentioned above, is a useful aid. table 10: indicative cost structure of a fine chemical company cost elements details share raw materialsinclusive solvents30 % conversion costplant specificutilities and energyelectric power, steam, brine4-5 % plant laborshift and daytime work10-15 % capital costdepreciation and interest on capital15 % plant overheadqc, maintenance, waste disposal, etc.10 % research & developmentinclusive pilot plant8 % marketing & salesinclusive promotion5 % general overheadadministrative services15 % an indicative cost structure for a fine chemical company is shown in table 10. nowadays, a full 7-day/week operation, consisting of four or five shift teams, each working 8h per day, has become the standard. in terms of production costs, this is the most advantageous scheme. higher salaries for night work are more than offset by better fixed cost absorption. as part of the budgeting process, standard costs for a production campaign of a particular fine chemical are determined on the basis of past experience. the actual results of the campaign are then compared with the standard. the capability of a fine chemical company to make dependable manufacturing cost forecasts is a distinct competitive advantage. profitability the fine chemical industry has undergone several boom and bust phases during its almost 30 years of existence. the biggest boom took place in the late 1990s, when high-dosage, high volume anti-aids drugs and cox-2 inhibitors gave a big boost to custom manufacturing. after the end of the "irrational exuberance" in 2000, the industry suffered a first bust in 2003, as a result of capacity expansions, the advent of asian competitors and a ruinous m&a activity, several billion dollars of shareholder value were destroyed. the most recent –minor- boom is associated with stockpiling of glaxosmithkline's relenza (zanamivir) and roche's tamiflu (oseltamivir phosphate) by many countries in order to prepare for a possible avian flu epidemic. surprisingly, the main cause for the 2009 slump had not been the general recession, but slow-downs of the growth and, even more so, inventory adjustments by the pharma industry. they resulted in postponements or cancellations of orders. the unfavorable development was in sharp contrast to the very optimistic growth forecasts, which many fine chemical companies, had announced. they had been based on equally promising sector reports from investment banks, which in turn had evolved from forward projections of the preceding boom period. in most cases, these projections have been missed by a large margin. at the end of the "irrational exuberance" at the turn of the millennium and again in 2009 almost half of the industry achieved a return on sales (ros) of more than 10%, and less than 10% an ros below 5%. in the worst years, 2003 and 2009, almost half of the companies suffered from an ros of less than 5%. whereas during the period under review, 2000–2009. the average ebitda / sales and ebit / sales ratios of representative companies, resp. divisions were 15% and 71⁄2%, respectively, in the period 2000–2009, the numbers were 20% and 10–13% in the boom, and 10% and 5% in the bust phases. the factor 2 between the high and low numbers reflects the volatility of the industry's profitability. all in all, the average western fine-chemical firms have been making a return below the cost of capital, i.e. they are not reinvestment grade. outlook two main trends impinge on the industry. on the supply side, biotechnology is rapidly gaining importance. in the synthesis of small molecule fine chemicals, the use of biocatalysts and microbial fermentation enable both a more sustainable and economic production than conventional organic chemistry. in the synthesis of big molecules, such as biopharmaceuticals, it is the method of choice. biopharmaceuticals are expected to grow 15% per year, three times as fast as small molecule drugs. five of the top ten drugs were biopharmaceuticals in 2010 (see table 6), and this is expected to grow to eight by 2016 (see table 2). on the demand side, the main customer base for fine chemicals, the pharmaceutical industry, is faced with slower growth of demand, patent expirations of many lucrative blockbuster drugs and stalling new product launches. in order to restrain these challenges, the leading companies are implementing restructuring programs. they comprise a reduction of in-house chemical manufacturing and plant eliminations. outsourcing is moving up from a purely opportunistic to a strategic approach. it is difficult to make a judgment, whether the positive or negative effects of these initiatives will prevail. in a worst-case scenario, a condition could develop, whereby even top-tier mid-sized, family-owned fine-chemical companies with state-of-the-art plants and processes could be relegated to producing small quantities of fine chemicals for new life-science products in late stage of development. in agro fine chemicals, the active ingredients become more sophisticated and performing. therefore, they require multipurpose instead of dedicated plants prevailing in the industry so far. at the same token, outsourcing is gaining ground. globalization results in a shift of fine chemical production from the industrialized to developing countries. the latter benefit not only from a "low cost / high skill" advantage, but also from a rapidly rising domestic demand for western medicine. despite the mantras of western industry leaders, the cost advantage of the asian producers is going to persist. as the pharmemerging countries mainly use generics, their market share continues to grow to the detriment of originator pharmaceuticals and agrochemicals. this is also the case for biosimilars, the generic versions of biopharmaceuticals. as a consequence of the harsh business climate, many western fine chemical companies or divisions created during the "irrational exuberance" at the end of the 20th century already have exited from the sector. others will follow suit or will be acquired by private equity firms. survival strategies include implementation of lean production principles originally developed by the automotive industry and extending the business model to include also contract research at the beginning and active drug formulation towards the end of the added value chain. this latter strategy, however, is not finding unanimous approval by industry experts. although the demand for fine chemicals on the merchant market has not grown to the extent originally anticipated, fine chemicals still provide attractive opportunities for well-run companies, which are fostering the critical success factors, namely running fine chemicals as a core business, pursuing niche technologies—primarily biotechnology—and taking advantage of the opportunities offered by the asian market.