Albany Molecular Gets Out-Outsourced

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It was a dark day yesterday for Albany Molecular Research (Nasdaq: AMRI). The chemistry services provider's first-quarter revenue declined 9.2% to $40.8 million, while earnings fell to $0.09 per share, off 30% versus first-quarter 2003. Shares reacted by taking a dive of their own, dropping 11% yesterday. They're off another 9% today to around $13 a share.

According to the company, which is in the pharmaceutical outsourcing business, the main culprit behind these alarming declines was, ironically, outsourcing. Unfortunately, Albany Molecular isn't the one receiving the benefits. Instead, most of the low-end chemistry work it used to do is now being sent off to India and other markets with cheaper labor.

It's puzzling that the company didn't see this coming, given that its business is to provide cost-effective solutions to biotech and pharmaceutical clients. After a painful period, it is belatedly catching on and now exploring the possibility of taking advantage of cut-rate labor. Still, the transition will take time, and during that period competitors will solidify their positions.

To be fair, Albany Molecular is also seeing a somewhat puzzling weakness in its higher-end discovery chemistry business, which has traditionally been a growth driver. This trend comes even as biotech outfits are having more success raising cash. In the company's estimation, biotech customers are concentrating on development of existing drugs in their pipelines rather than seeking to discover new compounds. In addition, major pharmaceutical companies, particularly Pfizer (NYSE: PFE), are keeping more high-end work in-house.

Over the long haul, Albany Molecular believes that discovery chemistry will pick up again. Indeed, if biotech financing trends remain strong, this seems likely. The company also continues to hold its own in chemistry services that support clinical development. However, the firm's tribulations highlight an important maxim: Ignore outsourcing at your own risk -- especially if you're an outsourcing company.

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Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.