(FORTUNE Magazine) – In a procedure that takes just minutes in the office, a physician makes a small incision on the inside of the patient's upper arm. Using a simple plastic-and-stainless-steel device, the doctor slips a titanium tube, thinner and a bit shorter than a kitchen match, into the flesh just below the skin. There it remains, continuously dispensing a precise dose of a drug that will be taken up by the capillaries and distributed through the body to cut the production of testosterone, slowing if not stilling the growth of cancer in the prostate. For years the drug, leuprolide acetate, could be administered only by injection. The patient needed that injection as frequently as every several days, week after week, an unpleasant adjunct to a more than unpleasant affliction. The titanium tube will stay embedded for 12 months. Then the doctor will easily pop it out and replace it with another tube--another year's supply of the drug.

This implanted bit of wizardry, brand-named Duros, was developed by Alza Corp., a Mountain View, Calif., company that turns old drugs into new products by devising ingenious and sophisticated ways to get past the body's defenses. Taking a new approach to an old molecule is far cheaper and quicker than starting from scratch. While costs vary widely, it might take ten years and $800 million to get a drug from test tube to market. Devising a delivery device and winning FDA approval to sell it might take only a third of the time and a tenth of the money.

Nobody is more experienced in developing drug-delivery methods, or better at it, than Alza. That's why Johnson & Johnson bought the company two years ago for $13.7 billion, more than three times what it paid for any of the 50 or so other companies it acquired over the past decade. That goodly sum was also 23 times Alza's sales in 2000, a lot of money for a company that had teetered on the edge of oblivion more than once since it was founded in 1968.

Alza didn't bring much in the way of new drugs, one of the usual justifications for a big pharmaceutical deal; the cancer drug in the Duros implant, for instance, belongs to Bayer. What J&J did get was command of many ways to deliver drugs into the bloodstream. Alza pioneered the sustained-release tablet that keeps your hypertension medicine working all day. It invented the skin patches that ward off motion sickness and help smokers kick the habit. And it is working on a lengthy list of inventive devices, including electronically controlled patches, reservoirs of medicine-bearing goo for subcutaneous injection, and a way to camouflage drugs so that they can evade the immune system until they reach a targeted area in the body.

Among the current bestsellers developed by Alza are a couple of products it marketed with J&J before the acquisition. One is Concerta, a tablet used to treat ADHD, or attention-deficit hyperactivity disorder. It not only works all day but also releases more drug at lunchtime than at breakfast. The other is Duragesic, a skin patch that delivers an opiate for people suffering from chronic pain. Last year J&J sold $400 million worth of Concerta and $1.2 billion worth of Duragesic. Soon to be released: a button-bearing patch that lets postoperative patients self-administer a dose of the opiate whenever they're in pain.

J&J is counting on Alza to make its products more efficacious and easier to use, not to mention repatentable. Alza is working on a controlled-release version of an anti-epileptic drug to reduce side effects such as double vision and to make it usable for other ailments, such as binge eating. It is also looking at ways to deliver drugs for patients who are forgetful or unwilling to pop a pill when they need it most. Among the J&J candidates: Reminyl, prescribed for moderately afflicted Alzheimer's patients, and Risperdal, widely used in the treatment of schizophrenia.

The Alza approach is never easy. The company not only has to show that the drug will work in the new delivery package but also must figure out how to produce it economically. Since the time from idea to market can be less than three years, warp speed for the drug business, Janne Wissel, the company's senior vice president of operations, says her job is "manufacturing development on the run."

Alza can run into manufacturing challenges even in realms where it has decades of experience. The company has been making extended-release tablets since 1983 and now turns them out by the millions in its main plant in Vacaville, Calif. All are replacements for conventional pills that usually release their contents very quickly. Gulp down an ordinary tablet, and at first you're likely to get more of the drug than you need, which can cause side effects. Then the level of the drug in your system drops off sharply, so by the time you take the next pill, you may not have enough of the active ingredient floating around to do any good. The plasma profile, a chart of drug concentration in the bloodstream, will be a sine wave whose highs are too high and lows are too low.

Sustained-release tablets flatten the curve. One of the simplest of these pills is Sudafed 24 Hour, which Alza makes for Pfizer. The factory combines a nasal decongestant with inactive ingredients, presses the mixture into tablet shape, and then coats the pill with a cellulose compound that forms a rigid, semipermeable shell. A tiny hole is then laser-blasted through the top. Next the pill is coated with more decongestant and finished off with a layer of white protective material.

In the stomach the outer coatings dissolve quickly, releasing the first dose of decongestant to stop a runny nose. That exposes the semipermeable membrane and its tiny laser-made hole. Osmosis takes over. Water from the body seeps into the core of the tablet, dissolving the drug. But the resulting solution can't flow out through the tablet walls because the drug molecules can't penetrate the membrane. Instead the solution is slowly pushed through the hole. As the hours pass, the membrane becomes more permeable. More water enters the core, diluting the solution, but more liquid squirts out. So the level of drug released into the body remains relatively constant. That's called zero-rate delivery--a long way from the "tiny time pills" of Contac, the earliest extended-release capsule, which delivers its medication at a declining rate.

For Concerta, the attention-deficit drug, J&J wanted an even more sophisticated pill--one that would vary the dose over the course of a day. For many years the chief medicine for ADHD has been methylphenidate, a central-nervous-system stimulant of which the best-known version is Ciba-Geigy's Ritalin. The drug has a short half-life in the body, so patients, most of whom are children, must take Ritalin two or three times a day, with the resulting up-and-down pattern in the drug's blood level and the probability of mood swings. Since Ritalin is subject to abuse as an upper, parents of school-age kids usually must arrange for the school nurse to dispense the midday dose, an embarrassment for the child. Ciba-Geigy and generic-drug makers sell sustained-release versions, but their flat delivery pattern isn't very effective. Tolerance for the drug rises during the day, so for the same effect more is needed at noon than in the morning.

Alza's solution is a capsule-shaped pill that offsets the increased tolerance for the drug by slipping it into the bloodstream at an ascending rate. The pill's exterior is similar to Sudafed's: a semipermeable shell covered with a layer of drug and then with color and protective coatings. The difference is what lies inside the shell: a three-layer stack of granulated, compacted material. Visualized standing on one end, the bottom layer is the engine, consisting of salt and a polymer that absorb water as it seeps in. The resulting mixture pushes upward as it expands. The next layer consists of methylphenidate, the active ingredient, and some inert material. Above that, just below the exit port, is more drug but in a much less concentrated mixture.

When the pill is taken in the morning, Concerta's outer coatings dissolve in the stomach, delivering a kick-start dose. As the tablet moves into the intestine, the first solution pushed from the pill comes from the low-concentration upper level. Over the next few hours, high-concentration material from the middle layer begins to blend with the first, steadily increasing the amount of drug in the solution. After lunch, as water continues to enter the tablet, the solution becomes increasingly dilute until the supply in the core is exhausted. The result is a plasma profile that first spikes, then slowly ascends to a peak before beginning to decline, mostly clearing the system by bedtime.

A dandy concept. But how to make it at speed in economical lots? The toughest challenge for Wissel and her engineers was stacking and tamping the three layers. Conventional pharmaceutical tableting machines can press together a couple of layers of material in a die, but they can't pack them down vertically to make the elongated tri-part Concerta. A search for equipment that could do the job led to Korsch A.G., a privately held German machine builder in Berlin. Korsch makes conventional pharmaceutical tableting machines and machines that fill and tamp vertical layers of material to form AA and AAA batteries. A heavily modified version of the battery machine now turns out the world's supply of Concerta--about two million pills a day. First sold in 2000, Concerta has become the leading ADHD product, prescribed since then for more than 2.2 million patients.

Alza is working on pills even more complex than Concerta. At a cost of more than $1 million each, it has two new Korsch machines that can fill and tamp tablets with as many as five layers. Says Larry Hamel, who heads development for Alza's oral products: "We don't have a product yet, but we've got lots of concepts." One of those: a tablet that could deliver different concentrations of two drugs by putting the pusher material in the middle layer. Another: alternating layers of drug and inactive material to deliver medication in a stop-and-go pattern.

Alza's other big product line is also an old standard in nonconventional drug delivery: transdermal devices, more commonly known as skin patches. These typically come in two forms. The simplest is the kind used for NicoDerm CQ, the smoker's crutch for quitting that Alza makes for GlaxoSmithKline. Alza mixes nicotine with polymers and extrudes the material in narrow plastic sheets like the pasta used to make lasagna. Then they are die-cut to form the patches. The machines Alza uses were, in fact, adapted from food industry extruders.

The other sort of patch, used for pain-killing Duragesic and other products, is more like ravioli. Machines encase a blob of active and inert ingredients between two strips of flexible polymer. The bottom layer is permeable: The drug can pass through it when a nurse removes the backing sheet and sticks the patch onto the patient's skin.

Alza is now producing trial lots of a new type of patch that looks more like an MP3 player for joggers than something your doctor might prescribe. The size of a jumbo Band-Aid, it's the company's first E-Trans product, a patch that uses electric current to push a drug through the skin, employing a principle known as iontophoresis.

In Alza's miniature version, a gel containing the opiate fentanyl is loaded at one end of the strip while salts are placed an inch away at the other. When a patient pushes a tiny button on the top of the patch, a weak current flows down through the gel into the skin. It then completes the circuit by flowing up through the salt, carrying the opiate through the skin's tough top layer and leaving it behind in the epidermis. A tiny chip controls the device, keeping track of how often the patient pushes the button in order to prevent an overdose. Alza hopes to use E-Trans to deliver biotech drugs, whose molecules are typically too large to get through the skin with a standard patch and break down in the GI tract when taken orally.

A lower-tech way to get large molecules through the skin painlessly could be called a rough patch. Brand-named Macroflux, it's about the size of a half-dollar. The bottom is covered with an array of tiny titanium points that can be coated with a drug or a vaccine. When the patch is popped onto the skin with a special spring-loaded device, the sharp teeth bite through to the epidermis but don't penetrate far enough to cause pain. Theratechnologies, a Quebec specialist in therapeutic peptides, expects to use Macroflux to deliver one drug for the treatment of osteoporosis and another for diabetes therapy.

Duros, the surgically implanted tube, combines elements of a patch and a sustained-release pill in an exotic package. Like a patch, it slowly feeds a drug into the bloodstream. But it stays inside the body for an extraordinarily long time, so it is made of titanium, which doesn't react with living tissue and blocks out moisture that would degrade the drug. Like a sustained-release pill, Duros is powered by osmosis. One end of the tube is plugged by a small cylinder of semipermeable plastic that will let water in but not out. Next comes a chamber containing two ant-sized salt tablets sealed on the far side by a tiny plastic piston. Beyond that is a chamber holding 150 microliters of the drug--about one two-hundredth of an ounce. A plastic plug penetrated by a molded spiral pathway caps the far end of the tube. Together, the two plugs and the piston wouldn't cover the nail on your little finger. Once the tube is implanted in the patient, water from the body enters the salt chamber, creating a solution that expands and presses on the piston. Sliding more slowly than the eye could see along the silicon-coated walls of the tube, the piston continuously pushes minuscule amounts of the drug out through the long spiral path.

Two projects in Alza's labs hold a ton of promise and a truckload of risk. Both use novel techniques to protect a drug while it's in the body. One, called Alzamer, is an example of "depot delivery." A nurse or tech will inject a glob of biodegradable polymer containing an active ingredient into a patient's flesh. The goo will be too thick for a standard syringe, so it will come preloaded in a six-inch-long injector powered by a small cylinder of compressed gas. Once in place, the drug will leak from the depot over a fixed number of days or even months as the polymer breaks down. High tech, but still a jab in your arm or some more sensitive part of your body.

Alza's other new technology uses liposomes--micron-sized droplets of artificial fat--as taxis to transport a drug through the bloodstream to a specific site in the body. Ordinarily the immune system would treat liposomes as foreign objects to be destroyed. So Alza camouflages the taxis with a polyethylene glycol coating in a patented process called Stealth, acquired when the company bought Sequus Pharmaceuticals in 1999.

The only Stealth product to win FDA approval so far is Doxil, for treating ovarian cancer and AIDS-related Kaposi's sarcoma. Carried by the liposomes, the active ingredient, doxorubicin, circulates in the blood for up to several days until it encounters a tumor. The drug is then released from its protective carrier in a way that is still not completely understood. Either the liposomal membrane starts to leak of its own accord or enzymes in the tumor break it down. Alza scientists foresee using Stealth to transport a variety of compounds to their targets, especially anti-inflammatories and cancer drugs.

Development at Alza is never without risk. Howard Rosen, Alza's president since January, says, "Part of anything innovative, especially in the pharmaceutical industry, is that a lot of what you do fails. What you want to do is fail fast and cheaply." Stealth, though, takes Alza deep into biochemistry--a realm where failure can cost a lot. But the potential rewards are great, and for deep-pocketed J&J, worth the risk. The next time Alza comes up with something like a titanium tube that turns an old drug into a new bestseller, J&J gets first dibs.