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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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« Time To Conduct Some Business | Main | Obvious Ain't Obvious No More »

April 30, 2007

Outsourcing Blues?

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Posted by Derek

Yesterday's post about an outsourcing business started by a couple of my former Wonder Drug Factory colleagues prompted a complaint in the comments section, which I thought I'd bring up to the front here (since I know that not everyone reads the comments). Says reader Flanders:

Yeah, Great Big D! You're plugging a chem outsourcing business? I've never seen someone so much in denial as you. You lose your job to outsourcing yet you sponsor a group looking to exacerbate the process? You'd make a great spokes-person for the American Chemical Society!

My reply was:

My site's closure had nothing to do with India or China, as far as I can see. It was a flat-out reduction in head count - and I might add the the reductions are continuing outside the US as well. The jobs didn't move - they disappeared.

My opinions on outsourcing are on the record: demand is going to push costs up in those countries, and in the long run we (and the rest of the world) are better off with the resulting educated higher-wage work forces there. After all, they have to be able to afford what we want to sell them, too.

But if you're doing a job that someone in Montana, Maine, Mexico, India or China really can do just as well for less money, then you'd better keep your CV updated. That's been true for a long time. Neither the world nor the ACS owes any of us a living.

And I'm sticking to that. Long-time readers will know that I'm one of those lunatics who believes in free trade. I deeply dislike tariffs and other protectionist barriers, and that applies to services as well as goods. As transport and communication have improved, companies have larger markets to sell to, and more places to get their work done. The industrialized nations went through this (internally) some time ago, and now it's happening between nations. I persist in thinking that it's for everyone's good.

Connecticut, where I live, used to have a reasonably thriving ironworking industry, but it didn't survive the discovery of cheaper ore deposits. These days, when a Connecticut company finds that it can do better by moving to a cheaper part of the country (and there are many), that's what they'll do unless the local environment changes. No one expects any different, and why should they? I can't see why I should tell a company to not use chemistry services in India or China, if they can really get the job done. That's equivalent to saying "No, keep that work here, even though we cost more and don't give you anything more for the money". All this means is that if we're going to cost more here, then we'd damn well better have a reason for it. Deliver something that can't be had so easily in Hyderabad, is my advice.

Besides, the expansion of such work in low-cost markets is the best way to make sure that they don't remain low-cost forever. The standard of living rises in the countries involved, and we start over again. You'll see Indian chemists complaining about being undercut by Pakistanis or Bangladeshis before all this is over, mark my words.

Comments (33) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. West Coast Chemist on April 30, 2007 10:50 PM writes...

Derek,

While Bayer may have had a "flat out reduction in head count", I sincerely doubt that some medicinal chemistry jobs were not lost to partnerships in India or China. In any case, I assure you that the job prospects that your co-workers have are strongly affected by outsourcing. The major pharmaceutical company that I work for just reduced the number of Ph.D. chemists that we will be hiring this fall as we signed up more than a dozen chemists in India.

As far as the concept of free trade goes, I think that it it just that- a concept. We work in a heavily subsidized and controlled industry and it would be disingenuous for a pharmaceutical company to argue that they should be allowed to move their research anywhere in the world that they can find low cost labor. After all, their research is based on NIH-funded work and a high percentage of their profits come from sales to Medicare.

That said, I agree with your advice and I think that our future job prospects hinge much more on industry productivity and innovation than outsourcing. Pharmaceutical companies are looking for sales growth in the Indian and Chinese markets, so they need to invest in research there.

Permalink to Comment

2. ss on April 30, 2007 11:59 PM writes...

As a synthetic chemist who until recently, worked on a FTE in India, I can say that Derek is right about wages in India increasing to US levels on the long term.The year on year wage level increase at present is about 20%.

But in the short term too, the kind of work being outsourced to India at present is the "grunt work", reproducing chemistry already done in the US. Companies are still not confident enough to outsource development of novel chemistries, molecules etc. due to various reasons.This sort of work will still be done in the US and will always require synthetic chemists there.

Thirdly, the time necessary for the quality of the average Indian synthetic chemist to reach US levels, if at all it happens, will be 20-30 years. Hence outsourcing of critical original chemical development is impossible for the forseeable future. Also due to the same reason, Indian companies eating away the US market share by innovative development is also out of question.The chemists of Indian origin in the US are the cream of the crop and are not representative samples of the average Indian synthetic organic chemist.

Fourthly, looking at the last ten years of chemistry outsourcing, even after such a long period of time, the total no. of FTEs in the Indian market is not above 1500-2000, which I am sure is a miniscule amount of the US job market.

Hence the fears that India eating away the US synthetic chemistry job market is overblown, IMHO.

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3. anon on May 1, 2007 4:56 AM writes...

China is the bigger competitor, both for positions within the US as well as for outsourcing. Chemistry is going to become even less attractive to American-born citizens, given that the questionable job stability. Depending on luck (and the number of re-orgs that your company does, or how stable the biotech you work for is), you may be out looking for a new job every few years. My current colleagues are stressing about a potential re-org (management changes) which may affect our positions, and I basically just got here.

Good luck to my former colleague Uday.

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4. tom bartlett on May 1, 2007 7:14 AM writes...

Your religious devotion to free trade leaves me scratching my head. The USA still has some power in the world; we should use it to structure trade to help US, American workers. Funny how they just outsource the actual WORK-- not the executive positions. Clearly the top brass just give lip service to the free trade thing.

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5. MolecModeler on May 1, 2007 8:46 AM writes...

There is no such thing as free trade between countries with disparate standards of living. You should heed the words of Shane McMahon (son of WWE owner Vince): every day someone's got to pay.

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6. MTK on May 1, 2007 9:03 AM writes...

Hear, hear, Derek.

As a firm believer in free trade, capitalism, and Adam Smith, I'm with you all the way on this one. I'm not going to spell out all the arguments, but IMO it's pretty clear that it is in our best interest, both nationally and globally, to support free trade, rising standards of living, and equal opportunities for all populations.

For a great tome on this I would suggest Michael Mandelbaum's book "The Ideas That Conquered the World: Peace, Democracy, and Free Markets in the Twenty-First Century".

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7. eugene on May 1, 2007 10:48 AM writes...

I'm more with 'ss' on this one. The German auto industry suffered heavily when they outsourced to China when their intellectual property and know how was stolen and their former workers were hired in newly founded Chinese firms that paid them a lot more than what a European company could justify if it was doing 'outsourcing'. All complaints went unheeded by the government. It's one way for developing countries to catch up very quickly. I'm sure all the other industries took lessons away from that. Hopefully Pharma as well. If a company who built a research center in India or China was smart, they'd pay the best Indian chemists just as much as a Westerner makes here to prevent competition from stuff developed in their own pipeline five years down the road.

At least, that's what I take away from reading German papers once in a while. Anyone care to back me up or shoot me down on this one?

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8. Hap on May 1, 2007 10:49 AM writes...

Outsourcing and its variants aren't going away - we want the best people in the world doing what we do and buying into the rules of the system we play by. Telling the rest of the world that you can't have our jobs only risks making us irrelevant - if they can't get rich playing by our rules, they'll get rich by someone else's or their own (likely to involve force and war, because that's how it has worked for much of history).

My complaint would be that outsourcing at the moment seems based on short-term logic - that the same low costs of which companies want to take advantage won't be used against them in the future, when companies overseas realize that they're smart enough to do what we do and have the money to do so, and that people (at the same rate) will continue to spend ten years of their lives investing in a future in which they will make far less money and have far less respect than many other jobs with far less investment by their practitioners. At least a part of this seems predicated on the concept that the logic which applies to CEO and companies doesn't apply to their subordinates (or will be completely ignored by them) and that not planning for the future will not have adverse consequences.

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9. Sigivald on May 1, 2007 12:42 PM writes...

After all, their research is based on NIH-funded work and a high percentage of their profits come from sales to Medicare.

From reading the archives here (when they weren't archives!) I'm pretty damn sure that "NIH-funded work" is insignificant to actual drug discovery work.

As for Medicare... so? Are you saying that because the State taxes me to buy drugs for old people that therefore a drug company must develop their drugs in the US? (Even if that makes the drugs more expensive?)

Please explain the non-sequitur between "Medicare buys drugs" and "therefore drug discovery work must be done in the US"?

(Should Medicare refuse to buy drugs developed by foreign companies?

If so, how will that sell to the AARP, and how is it justified as the best use of funds?

If not, where's the requirement you want come from and what justifies it?)

And let's not even talk about comparative advantage, I guess...

Permalink to Comment

10. MTK on May 1, 2007 12:44 PM writes...

Eugene,

I do not know the particulars of the German auto industry, but I do know that the two European economies hurting the most are France and Germany, in large part due to antiquated labor laws designed to "protect" domestic jobs. If there is ever a country which is an example of how not to do it, it's Germany.

As for IP, Hap is spot on. We encourage economies to play by our rules and to have a chance to prosper playing by our rules. Without respect for the law, including IP, you cannot have sustained economic growth. I have no doubt that China will eventually have to transform itself with respect to copyright and IP protection or else jobs will eventually be outsourced to Burma, Latin America or Africa or whatever the next China is.

Permalink to Comment

11. Demosthenes By Day on May 1, 2007 1:00 PM writes...

After my experience with using two different CRO's in India and China I learned a couple of important things. First even though the companies offer you 3 FTE's for the price of one US chemist I've found that in reality the conversion is 2-2.5 Chinese or Indian FTE's = 1 US FTE not only in output but in price. The drawack to chemistry in both of those countries is if there are problems it can take days to sort it out via e-mail and teleconference. This kind of problem is much more easily solved by working with a local company where you can actually show up and see what is going on. When I am pricing future work I use the above conversions.

Permalink to Comment

12. SMIP on May 1, 2007 3:41 PM writes...

Hi. Derek: Great reply and I am glad to see your position on trade/economics. If all your readers (I would guess most are chemists in training) had learnt some basic economics, they, their companies and the country will be much better off. I have a Ph.D in chemistry and worked in pharma for 14 yrs. I am now learning economics/finance and having a lots of fun. A good intro-econ book for your readers: "Naked Economics" by Charles Wheelan.
Good luck to you and all your readers.

Permalink to Comment

13. Chemist of Sorts on May 1, 2007 4:22 PM writes...

Derek,
What do you think the future of Pharma will be for Connecticut? Do you think places like BI (Ridgefield), Pfizer (Groton), BMS (Wallingford) will last considering Connecticut is an expensive location? Just curious for a Connecticut perspective...

Permalink to Comment

14. anonymous on May 1, 2007 9:48 PM writes...

"Neither the world nor the ACS owes any of us a living."

Nor does chemistry.

The invisible hand has led many scientists into more lucrative endeavors.

Permalink to Comment

15. Sigma147 on May 1, 2007 11:03 PM writes...

SS and Demosthenes are right on the mark with regard to India. I spent two years living there, managing a project (my job had literally been outsourced - I just happened to go along with it personally). There are significant drawbacks to sending work overseas, including IP, responsiveness and speed, supply chain problems, efficiency both in work and in communication, risk exposure, etc.

At the same time, turnover for personnel on my project was approaching 60%. They were all leaving for better paying jobs at other Indian CRO's - wages increased dramatically in those 2 years, and they continue to do so.

Will the US remain competitive? I think that we will, because wages will gradually equallize and the drawbacks won't all be overcome in that time. Besides, globalization of the pharma research will lead to globalization of the pharma markets as more populous countries skip-step into the 21st century (China and India represent roughly 1/2 of the world's population).

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16. West Coast Chemist on May 1, 2007 11:26 PM writes...

The blogosphere is a dangerous place!

Labs in this country are full of people on NIH-training grants, and most chemists today will run a reaction discovered in NIH funded research. Government dollars have, in fact, dictated the geography of the modern pharmaceutical industry. Please do not confuse this with the argument that drug companies only market government inventions, but I believe that some of the NIH budget can be considered to be a subsidy of our industry.

Further evidence of the importance of government legislation comes from the army of PHARMA lobbyists in our capitols and the enormous percentage of drug industry profits that come from sales in this country.

Of course, drug discovery doesn't have to happen in the United States. However, I do think that the argument that research dollars are spent here might influence legislator opinion when they have to decide whether or not to continue these subsidies. I also think that the investment that companies are making in China and India will allow pharmaceutical companies to argue that it in these country's self-interest to draft and enforce legislation that is desirable to the pharmaceutical industry.

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17. jokerine on May 2, 2007 1:58 AM writes...

While free trade seems to be all nice and cosy, I am surprised that no one has mentioned environmental or personell safety issues.

One factor that makes outsourcing to china so lucrative is non-existent environmental laws. There are no restrictions on how things are produced and wastes are disposed of. The recent american petfood scandal is a good example of what can happen after outsourcing.

So even when wages go up to US level in China, it will still be cheaper to produce there. I hope no one here has any illusions about who has to deal with rampant chineses pollution. It will be the entire terrestrian comunity. It will not stay over there. The same goes for inferior products, the (american) consumer pays that price, unless the FDA manages to actually control importet drugs.

I thought I'd just throw that in.

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18. tom bartlett on May 2, 2007 7:32 AM writes...

"One factor that makes outsourcing to china so lucrative is non-existent environmental laws"

EXACTLY. Some common sense is written! Another factor-- companies don't pay social security on foreign labor.

Repeat after me: "tariffs are good". Not huge tariffs, that could destroy trade altogether, but just enough tariff that overseas outsourcing doesn't "appear" to be a bargain.

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19. Mark M on May 2, 2007 10:16 AM writes...

"Neither the world nor the ACS owes any of us a living."

Here, here!

I say wake up! to those feel entitled to a 100k salary merely b/c they have a PhD in Organic Chemistry. What do want? a Union?

These fellows who started this CRO have done the same thing that many others have done when given lemons--make lemonade! Look at the leaders of J-Star and Kalexsyn--both former Big Pharma PhD Chemists who have forged their own path.

Good luck to all who can shed the attitude and maximize their attributes to seize opportunity across job functions.

-Mark

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20. Robert on May 2, 2007 11:05 AM writes...

I'm glad Derek has finally come clean on his libertarian positions. He is clearly a man who does not believe in his 'country' and whether he believes in God is another matter. Your country was built on the backs of others, and much sincere and thoughtful discussion, not to mention suffering, was invested over the centuries. The New-Deal was an offshoot of the rising inequity and disparate working conditions between the classes. It recognized the free market is not free and has no soul. It is not be looked toward for compassion, justice or even a future. If allowed to come to rapid equilibrium, the global economy would instantly destroy the living standards of the US worker. Only governments that are DEDICATED to the livelihood of their workers can wrestle the avarice of global corporations and money flows to the ground. The government should be criticized and the ACS should be condemned for promoting policies that work to the detriment of their members. Environmental issues, safety standards and anti-exploitation standards should be incorporated into these so called ‘free trade’ agreements.

I Hope you’ll have a change of heart Derek.
You might one day realize that your own career was started in an era of minimal ‘free-trade’. Flash forward to now, and I see you’re a little worse off.


Permalink to Comment

21. Dana H. on May 2, 2007 11:10 AM writes...

"There is no such thing as free trade between countries with disparate standards of living."

This is an absurd statement. Free trade means the absence of tariffs, quotas, and restrictions on the movement of capital. It's a non-sequitur to say that this is somehow impossible if the trading countries have different standards of living.

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22. tom bartlett on May 2, 2007 11:18 AM writes...

"The government should be criticized and the ACS should be condemned for promoting policies that work to the detriment of their members. Environmental issues, safety standards and anti-exploitation standards should be incorporated into these so called ‘free trade’ agreements."

I wholeheartedly agree. And I think ACS should be more cognizant of supply/demand issues when encouraging people to enter the field. The AMA is.

Libertarian is all well and good on paper, but really only works well for the wealthy.

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23. MTK on May 2, 2007 11:49 AM writes...

I want to come clean with my libertarianism also. I'll shout it from the rooftops. I'm a card-carrying member of the ACLU, too.

Good lord, if there is anything that the 20th century has taught us, it's that capitalism has taken on all-comers and given them a beatdown. The world has spoken. A system is not sustainable based on guarenteed equality or equal distribution of assests. The best and most sustainable system is based on equal opportunity for each individual to reach their full potential.

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24. Hap on May 2, 2007 12:45 PM writes...

I'm not a libertarian - I just don't really see that excluding others from our job market (or setting higher barriers for us to do likewise) will really help us in the long run. We aren't a resource economy - we are an idea and service economy. Our biggest export is our mindset, for good and ill. Our success depends on convincing others that our way can make everyone relatively happy - if we forcibly exclude others from that way, they will choose one that will make them happy. Since we have fewer people and our resources are useful but replaceable, another set of rules will likely make us worse off, not better.

I don't think chemical companies owe me a living, but they are deluding themselves if they think that people will continue to go into fields that require 6-10 years of specialized education and then be willing to accept uncertain jobs that pay less than people in other fields make with none of those requirements. Capitalism is imperfect, but when properly done it forces us to confront the costs of our desires. Much of my unhappiness with outsourcing originates from the concept that workers should be responsible for the costs of their desires (and for some costs external to them) while businesses and their executives are exempted from those costs.

MTK - I don't really think the world has spoken against economies based on equal distribution of assets or equality of outcomes, because such systems have not existed in practice. People have always wanted more than they could have, and systems that are allegedly based on equality have been either corrupted quickly or established with the intention of giving a privileged few things that they could not have earned. I think people would be likely to choose a system based on equality of assets and outcomes if it existed - since we are fallible and selfish, such a system doesn't exist in practice nor is likely to exist in the future. Capitalism is congruent with how people behave in practice - it doesn't espouse the hope of improvement in human character. If we need to be better to survive, capitalism will not be up to the task, but if there is enough for all (or there might be if we make it so) then it works OK.

Permalink to Comment

25. daen on May 2, 2007 8:54 PM writes...

This is perhaps overly flippant, Derek, but your line:

Deliver something / that can't be had / so easily / in Hyderabad

had me muttering:

Burma-Shave

in response.

I'm (relatively) young and English, so you must blame Bill Bryson for this (see his book "The Lost Continent" for details).

Permalink to Comment

26. ChemGrad on May 3, 2007 12:09 AM writes...

I believe that a lot of the problems could be solved if graduate education in the United States wasn't free for foreign students. There are way too many undergrad science classes that are taught by people who can barely speak english. What this does is prevent Americans from becoming interested in science and at the same time provides 1st rate training to thousands of foreigners who will then return to their home countries and undercut US scientists. Companies should be able to do whatever they please when it comes to hiring, but I think that Universities and the government should look out for the American workers and taxpayers.

Permalink to Comment

27. MTK on May 3, 2007 4:26 PM writes...

Hap, I guess we agree. At least partly. First I agree that capitalism doesn't espouse any human virtues. That's the beauty of it in my opinion. Second, I'll grant you that there has never been a system which is truly equitable and that there probably never will be. That is the rub isn't it. You may not like capitalism, but right now there just isn't any other viable alternatives.

Chemgrad - There may be a number of people in undergrad courses that would otherwise going in to the sciences if they had better TA's, but I think it's pretty small. The American disinterest in science, however, is forged way before undergrad days. Not to mention, a lot of these foreigners stay in the US. One study I found showed that not only due foreign Ph.D recipients stay in the US at around a 70% rate, but that rate has risen dramatically since 1989. That rate seems to be supported by the overall shortage of H1b visas. These folks are absolutely critical to America maintaining a technological edge. No, I think once again "protecting" American interests would do more long-term harm than short-term good.

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28. ddd on May 3, 2007 6:53 PM writes...

On H1-Bs...a lot of the comments here don't seem to be based in reality. Here are some facts that can put things into perspective (from a 2005 report):

The degree breakdown is this: 45% bachelor's, 37% master’s, 5% doctorate, and 12% professional degree.

43% are for computer-related jobs. 12% for engineering. 10% each for education and administration.

Computer-related companies hire over 1/3 the H1-Bs. Universities hire about 10%.

The feeling I get from these numbers is that unless you're a domestic IT guy, you don't have much to fear from H1-Bs.

Permalink to Comment

29. S Silverstein on May 4, 2007 3:10 PM writes...

This is stunning. Union members (largely clerical, administrative and skilled labor) have ensured job security for themselves, while science professionals with PhD's, MD's and other advanced degrees and expertise are subject to being laid off or outsourced.


Workers ratify pact at Merck's Montco plant

By Thomas Ginsberg
Inquirer Staff Writer
Wed, May. 02, 2007

Unionized workers at Merck & Co. Inc.'s Montgomery County plant, where the drug company is making its new cervical-cancer vaccine and other key products, have ratified a three-year contract containing a no-layoff clause.

In a statement yesterday, the United Steelworkers said 70 percent of the members of Local 10-86 had voted for the contract Monday. The steelworkers' union, which absorbed the former chemical workers' union at the plant, represents roughly 1,800 of the approximately 10,000 employees at Merck's huge West Point complex.

Merck did not comment on the new pact, which will replace one that expires today.

The union said Merck, under the contract, had pledged there would be "no layoffs" of union members at West Point. The company made the promise while it is slashing positions and outsourcing work worldwide

Permalink to Comment

30. eugene on May 4, 2007 3:14 PM writes...

Yes, it's important to remember the huge positive role that labor organizations have played in the history of this country and other Western industrial centers. There would be no weekends or a 40 hour week without them.

Permalink to Comment

31. tom bartlett on May 7, 2007 7:26 AM writes...

"This is stunning. Union members (largely clerical, administrative and skilled labor) have ensured job security for themselves, while science professionals with PhD's, MD's and other advanced degrees and expertise are subject to being laid off or outsourced."

Exactly.

I think some people in this forum are ideologues. In my mind, the ideal state is maybe halfway between the more socialist EU systems and unbridled American capitalism. I say-- again-- the Govt. should do SOMETHING to help preserve American jobs.

As for Unions-- I think they've been less successful in recent decades.

And work Visa's? I think our kids aren't dumbies; they see they can get twice the cash and job security for one tenth the work by doing B-school instead of science. It will be dull, to be sure, but, in life there are trade-offs.

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32. Retired Med. Chemist on May 11, 2007 9:46 PM writes...

Sigivald is seriously mistaken when he claimed public funding (NIH, NSF, NIST,.....) plays an
insignificant part in drug discovery. Most importantly, the discovery of nearly all biological receptors, drug targets/mechanisms has
been nurtured by NIH-funding in the form of grants
to academic and non-profit organizations. Without
these seeds, where do you begin ? Directly, NCI brought palitaxel, and more recently, Hsp90 inhibitors geldanamycins (17-AAG/17-DMAG) to cancer patients. If the pharma firms benefit
significantly from US taxpayers, there's no
reason to move the jobs elsewhere. Such moves
will decrease the tax basis and eventually starve the goose and the unemployed US chemists.

Permalink to Comment

33. Philoctates on June 7, 2007 12:40 PM writes...

SS wrote

"Thirdly, the time necessary for the quality of the average Indian synthetic chemist to reach US levels, if at all it happens, will be 20-30 years. Hence outsourcing of critical original chemical development is impossible for the forseeable future"

To SS:

Your comments are really wide of the mark. Your unimaginable future has already happened:

I direct you to a recent C&EN News (May 21st)

http://pubs.acs.org/cen/coverstory/85/8521cover.html

In Bangalore alone, over the next 3 years, there are vacancies for ca 900 synthetic organic chemists.

Most notably amongst these, BMS have launched a med chem collaboration with Syngene, and Astrazeneca has just opened its first Process R&D department outside of the UK or Sweden

I seriously doubt that this level of investment would be made if the "average Indian chemist" really was 30 years behind their US counterparts

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