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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: Twitter: Dereklowe

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In the Pipeline

« Why Now, And Not Before? | Main | No Problem At All »

October 3, 2007

More Layoffs, And What They Might Mean

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Posted by Derek

Unfortunately, it appears that Johnson & Johnson is continuing to trim their chemistry staff. I’ve heard from people there that another round of layoffs have hit, most of them to take effect later this year. And as usual, the company doesn’t seem to be making any public announcement about this. Readers with more details are welcome to add them in the comments. . .

This has clearly not been a good year to be a drug researcher here in the US, what with the Bayer and Pfizer upheavals earlier and now this. There seem to be several reasons for this, some of which are specific to the companies involved. Pfizer, for example, was faced with some hard choices after taking some grievous hits in their advanced clinical pipeline, with the torcetrapib disaster being the intolerable last torpedo. Bayer ended up paying a lot more for their merger with Schering AG than they expected to (a merger that was surely going to involve some job losses even before the price went up). J&J, for their part, seems by their actions to believe that their future lies more in running fewer in-house programs and inlicensing more from other people.

And there are trends that affect everyone, on top of these local troubles. Low clinical research productivity at many big firms is proverbial, which is why some of these mergers and re-orgs are happening in the first place. In the preclinical world, a lot of routine (and some less routine) work is going overseas, which is no news to anyone. The changes in the industry are catching even really good scientists, so it’s definitely not safe to be doing an OK job on things that pretty much everyone else is doing. There aren’t any safe jobs in the business, and there haven’t been any for quite some time now, when you look back on it.

My belief is that we’re witnessing a broad shift in this country to a larger fraction of researchers being employed at the smaller companies. One thing that the US has which not many other places have imitated is our venture-capital culture. Our mechanisms for funding ideas are second to none in their speed and scope. Given that, I think that we may be heading into a world where drug research is broken down into smaller independent units – startups. These shops open up (and close down) with greater speed, and their successes and failures are likewise magnified.

Instead of Huge Company X moving along with some projects working really well and some dragging along, imagine each therapeutic area (or in extreme cases, each project) split out into a separate company. Some will work, some won’t, and some will move up and some will disappear. This affects the way these projects are run, naturally. In a smaller company, there’s more pressure to get something to the clinic (and the market), and at the same time there’s an increased willingness to take chances and try out new approaches to get there.

If this idea of mine is true, it means that we’re all, on the average, probably going to end up working for a longer list of companies than we might have planned on. (I already have!) It also means that the locations that have the best small-company culture will have a leg up, since they have access to a larger (and more easily accessed) pool of equipment, facilities, and potential employees. Keep in mind that this is the voice of someone who’s worked for larger companies, and is now working for a smaller one in Cambridge – but think about it.

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


1. Anonymous on October 3, 2007 8:33 PM writes...

Isn't the splitting of therapeutic areas already done by GSK in the CEDD model?

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2. molecularArchitect on October 3, 2007 9:29 PM writes...

I agree with your general premise about the shift to smaller companies. The problem for chemists though is compounded by a real change in what VCs are willing to fund. In the past 3 years, there has been a distinct shift away from discovery phase companies to development phase companies. VCs are becoming increasingly unwilling to invest unless a start-up already has Phase I or later candidates. Small companies are adjusting to this by outsourcing as much preclinical and process work as possible. I believe that there will be a continuing contraction of chemistry and other early stage jobs, at least until prices for this work increase enough that the economics of outsourcing change or VCs realize that integrated discovery teams are inherently more efficient and a better investment value.

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3. BioSci on October 3, 2007 10:48 PM writes...

I agree that the industry trend is moving to smaller companies. I believe that the main driver in this phenomenon is the offloading of risk. In larger public companies, most stock is by definition owned by non-insiders. In most small companies, employees not only own a larger percentage of outstanding stock, they usually take lower salaries in exchange for the equity.

The employee has traditionally been willing to take the salary hit on the premise that the equity will one day be worth many multiples of their foregone payment. Given the colossal failure rate in the pipeline, this bet is usually undervalued.

So, at the extreme of this trend, large 'virtual' drug companies simply purchase all of their new products after the risk to market entry approaches zero. In an efficient market, they'll end up paying handsomely for this privilege. But what about the products that don't make it to market? In yesterday's world, the large corporation paid for those losses too. In tomorrow's world, the small company developing it goes bust. Yes, the venture fund that provided the startup for the small company loses the most money in this scenario. But they can still diversify across projects and earn on the total. This would basically place the VC in the role currently held by many large organizations. But the difference is that they have a lower cost structure due to the equity payments to employees. (Note that this does ignore the trend of VC away from early stage projects.)

So it's the employees doing the research that lose under the small company scenario. They're essentially gambling a significant portion of their salary that their project will succeed. The problem in all of this is that individuals tend to over value their chances of becoming rich beforehand and groups undervalue their risk assumed after the fact.

(I freely admit that there are a number of assumptions in all of this. Feel free to pick them apart.)

Lastly, if one were to look at this scenario from society's perspective, the question would be this: are the lower costs in drug development and higher motivations for researchers in small organizations offset by the forgone organizational learning opportunities? In theory, every failure should teach a lesson or two. If every project group that has a failure is immediately disbanded, it would seem that we'd be missing many of these opportunities. Overall, research productivity could fall further. Or perhaps the gains in motivation are enough to offset this. Either way, it certainly makes the environment for researchers even more uncertain. Which I personally do not eagerly await...

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4. Jack Friday on October 3, 2007 11:30 PM writes...

What about "offshoring" research to China and India?

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5. SP on October 3, 2007 11:43 PM writes...

The people who make a killing in that model are the used equipment dealers. Company A closes, buy their stuff at 10 cents on the dollar, sell it to company B (sometimes the same researchers) for 50 cents on the dollar. There are quite a few hanging around Cambridge.

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6. Petros on October 4, 2007 2:10 AM writes...

GSK is already starting to move offshore with a CEDD being established in Shanghai and consequent reorganisation within its current CEDDs

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7. DrSnowboard on October 4, 2007 2:54 AM writes...

The GSK CEDD model won't really show a change in approach until they shut one down completely. In terms of being nimble and accountable, they're only just disentangling the hub-satellite hangover of their creation, only just dismantling the global discovery apparatus. In the same time frame, some small companies have gone from 10 employees to 60 and put 2 compounds into man and been through their investors exit.. And many more have folded and disappeared without a trace.
Until large companies realise it's the people and hungry project teams that hunt drugs and not the Process then they're doomed.

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8. Al on October 4, 2007 4:04 AM writes...

I thought the GSK Neuroscience CEDD was in Singapore? Has it been closed and moved to Shanghai, or is there some division of the research? (prevention/symptomatic relief???)

Any thoughts on tying this is with the recent thread "If not this, What?" - if these projections come into being, where will the opportunities be?

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9. Chris Morrison on October 4, 2007 6:39 AM writes...

re biosci (3), i have to disagree that the smaller co's will wind up with a disproportionate share of the discovery/development risk, or that VCs will bear the burden.

Because even as smaller companies do more of this early work compared with big pharma, the value of these early projects continues to increase, and the stage at which those projects are licensed (or their creators are bought) continues to move backwards in the value chain--from phase III to phase II proof of concept to IND stage, etc.

a lot of the projects will fail (and sure, some small companies do go bust and will continue to do so when that happens), but overall VCs won't be the losers--they'll have made their money on the licensing deals and (increasingly) M&A deals before those failures. for instance, not a single Adnectin may ever make it to market, but still, Bristol bought vc-backed Adnexus for $500 million.

i certainly don't claim that there aren't employees who lose out thanks to this trend, but overall i think the small companies are benefitting from pharma's structural shift.

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10. John Spevacek on October 4, 2007 8:12 AM writes...

Re: Biosci (#3) comments: Most of what you said is on the mark, but I don't like this: "...are the lower costs in drug development and higher motivations for researchers in small organizations offset by the forgone organizational learning opportunities? In theory, every failure should teach a lesson or two. If every project group that has a failure is immediately disbanded, it would seem that we'd be missing many of these opportunities."

While a corporation is legally considered an entity, the physical reality is that it is made up of people. They are the ones who do the learning (and fail to learn as well), not the "corporation". The future proposed by Derek will still have individuals who can or cannot learn from failures. And since these individuals will be floating around more readily, the cross-fertilization of ideas should be greater.

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11. Clark Kent on October 4, 2007 8:45 AM writes...

The GSK Shanghai site is more than a CEDD. Its going to be a full R&D organization from discovery to clinical (eventually rivaling the size of the RTP and Philly sites). Its focus is on neurodegenitive diseases, partly because stem cell research is less controversial in China. I think the CEEDD concept (external CEDDs) where GSK bankrolls external projects is close to the model Derek is talking about. The small companies either deliver POC compounds or the funding stops. GSK then does not have to deal with the mass layoffs that result (as they have been slowly laying off internal personnel and replacing them with external personnel).

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12. Derek H on October 4, 2007 9:09 AM writes...

Don't forget that there is a big effort by academic institutions to bridge the "wow" discovery gap by adding early discovery & pre-clinical efforts. (> 25 academic screening centers on the SBS website) Spin outs to the University Enterprise labs at many places. Big Pharma realizing this e.g. Scripps/Pfizer deal not only to fund the research but to provide the incubators with first option rights

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13. tyrosine on October 4, 2007 10:22 AM writes...

To the posters that are concerned about the nature of VC and shifting fads... Small companies are increasingly being funded by big pharma which tends to have more of a long-term outlook on their investments and this can only be beneficial to the industry.

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14. Cirrus on October 4, 2007 10:41 AM writes...

If you have not read NNT's book "The Black Swan", please give it try. Also, try to learn some economics.
Good luck.

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15. Hap on October 4, 2007 10:49 AM writes...

This seems to essentially be funding research by lowering salaries and benefits to researchers (and replacing them with equity) while increasing job uncertainty. At this point, the calculations by large pharmaceutical companies that smaller companies will do the discovery work more effectively than they can might be valid, but I guess I wonder what will induce people to be willing to spend 6-12 years of their life in grad school/post-doc only to continue (at a somewhat higher rate, but not enough to make up for opportunity cost) to do the same as a career, particularly in the presence of other careers for people of similar intelligence and talent.

Yes, I am a broken record. I still don't have a good answer, though.

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16. CMC guy on October 4, 2007 10:59 AM writes...

Long gone are the days of a one company career that were once prevalent in the Pharma industry. This post topic expresses that Med chemists are not protected from lay offs anymore with the greater out-scouring and in-licensing of research (Manufacturing and other groups have dwindled for years). Smaller companies can benefit from acquiring experienced research personnel however I wonder if they can achieve the critical mass/collective mindset that sustainable discovery efforts can frequently require (It was always great to have someone in lab down the hall who studied the reaction in grad school that you couldnt get to work right).

There seems to be lack of balance with Big Pharma getting bigger so chasing fewer large market targets (and now run by business MBAs/legal not scientist/engineers/MDs). Biotechs one idea or one compound focus limits scope of research (with contradiction that often run by science people with no business acumen) and funding is indeed getting harder as VCs and Pharma want “proven” entities for development (plus VCs consider it a loss when profit is 10x and not 20x). I don’t see many mid-sized places around that have enough stability, defined direction/targets and sufficient people to carry out programs and build new ones. Unfortunately the recent suggestions in this Blog on alternate careers for PhD Chemists didn’t offer many temping options IMO (with apologies to those have made transitions to areas they like) at a lesser pay scale (except Patent lawyers).

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17. Curious Wavefunction on October 4, 2007 11:15 AM writes...

I agree. It seems that it's a much better time right now to work for small companies (with all their problems) than the biggies.
Also, I heard somewhere that Pfizer also took a big hit when some antibody of theirs failed in advanced trials. Is anyone aware of the details?

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18. nameless on October 4, 2007 12:15 PM writes...

There's one thing I've never understood about compensation in biotech/pharma..

As we all know, its an incredibly risky business. You can work for years and years on a new platform or drug, only to see nothing come of it. Especially for new technology, the folks best positioned to tell whether its going to work are the people actually working on the problem. The funders (VC) and even management are not as well positioned to tell.

Suppose you have a failing project. Suppose that the people working on it suspect its going to fail. If they have a high salary and low equity, their motivation is to string it out as long as possible. If they have high equity/low salary, they want it to fail fast so they can go on to something better. If I were in VC or manager, I'd certainly want failing projects to fail fast.

So why in heaven's name are researches ever payed high salary/low equity?

(Of course, the thrust of this post is that this method of compensating is on its way out, to be replaced with high equity/low salary.)

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19. S Silverstein on October 4, 2007 1:16 PM writes...

Dimished research productivity? Could it be that mismanagement and failure of leadership to grasp basic principles are a major factor in this? Social re-engineering also does not help, if just by demoralization.

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20. LNT on October 4, 2007 1:27 PM writes...

I understand your arguement for high equity/low salary for researchers. That makes sense at a medium sized company (think Vertex, Arqule, Array). However, at a truely small company, the probability of failure is so high, that "high equity" is usually worth nothing more than the paper it is written on. At a large company, the success/failure of your individual contributions has a negligable effect on financial performance of the company -- meaning your "high equity" really isn't related to your job performance at all.

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21. JSinger on October 4, 2007 3:41 PM writes...

Also, try to learn some economics.

I think everyone here would welcome any useful corrections or clarifications you would like to make.

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22. nameless on October 4, 2007 3:48 PM writes...


Thanks for your comments. I don't think you've quite addressed my points though:

at a truely small company, the probability of failure is so high, that "high equity" is usually worth nothing more than the paper it is written on

Nope. The probability of hitting a homerun is very low, but the probability of singles or doubles (e.g., milestone payments, getting acquired) is not so bad. That's why even small companies can attract investors.

As for large companies, I agree its silly to pay people in the equity of the company as a whole. But shouldn't compensation be based largely on the payoff for the project(s) they're working on? That gives people incentives to kill off losers, attracts others to work on projects likely to succeed, etc.

Any time the people who work on a project have different incentives than the people who finance it, their interests will not be aligned. If the salary/equity ratio is higher for workers than financers (as is almost always the case) they will always be overly motivated to keep a failing project moving along

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23. Rob on October 4, 2007 3:53 PM writes...

Small companies funded by VC offshore a large percentage of their research to india and China.

Derek is way off base with this one.

The job market is horrible and pushing the 'virtual jobs' into the nomands land of almost invisible small companies that often don't even have web pages is avoiding the real issues.

No jobs, too many people...too many people being granted citizenship for, as Derek once noted 'jobs that don't exist!'.

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24. CMC guy on October 4, 2007 4:46 PM writes...

nameless- the statement “If they have a high salary and low equity, their motivation is to string it out as long as possible” does not fit with normal R&D situation as is rare there are conscious efforts to prolong projects but as scientists aim is to solve and overcome problems (regardless of compensation) so its can be hard to know when a project is a real failure and harder to let go of the pursuit. Projects/Compounds fail for various reasons and many different stages that are unpredictable (except occasionally with hindsight) which is why the high risk. Most places I have been did want things to fail fast before they start to consume big resources and bucks but again unless very obvious it takes either test of time or if lucky a good management (or wise consultants) to recognize when something is not going to work out.

Also the “high equity/low salary” approach was common in early days of Biotech to attract employees however do not think is viable today as 1) Biotech IPOs are much harder to accomplish (with too many people burned waiting for the payoff-some more than once), 2) Biotech salaries are general more competitive (must be since COL in most Biotech hubs are high end) and therefore will lose candidates/employees. I don’t think this model will work but unfortunately as oft mentioned the off-shoring and over supply of people may result in less jobs and low pay.

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25. zt on October 4, 2007 5:26 PM writes...

Regarding high equity, low salary type comments: I believe that serendipity has too high a role to play in drug discovery for this idea to work. If you try to tie the majority of someone's salary to the success of his project, you will run into trouble (especially given the abysmal success rates in drug discovery). The most brilliant scientist can have a run of bad luck. He may do all the right things, but consistently fail to produce any valuable equity. Should this person be penalized, where someone less skilled/dedicated but more lucky gets rewarded? Most people want a consistent return for their investments of hard work and extensive education. If compensation in the pharmaceutical industry is inconsistent, these people will turn to other industries where they feel that they will be treated more fairly (most chemists I know already feel that they are not getting paid as much as they should be for the educational hardships they endured).

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26. Anonymous BMS Researcher on October 4, 2007 8:02 PM writes...

The last time BMS had major layoffs, my spouse heard rumors from people outside BMS long before I heard anything from inside the company -- apparently most of the industry had heard by the time we were told. And during the various debacles under our former CEO, my number one source of information about what was going on with my employers was The Wall Street Journal (which has sources a heck of a lot closer to the top of our food chain than I have). The NY Times also covered our tribulations, but the WSJ seemed to have better sources.

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27. DrSnowboard on October 5, 2007 3:20 AM writes...

"As for large companies, I agree its silly to pay people in the equity of the company as a whole. But shouldn't compensation be based largely on the payoff for the project(s) they're working on? That gives people incentives to kill off losers, attracts others to work on projects likely to succeed, etc."

It also leads to the feudal turf wars over resources and the bandwagon jumping that undermines the efforts of large companies. "This project has an overall chance of success of 7.2% which is a full 1% higher than that project. Hence I require 10 more headcount and a bigger office"...
I agree with CMC guy, most scientists don't want to prolong a project past all hope. I would suggest that resource manager careerists might not be so 'aligned'.

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28. Kay on October 5, 2007 7:58 AM writes...

The 'transfer risk to the small guy' model cannot work because there is no extant financing model for the early stuff. A transfer risk to the Chinese guy model may work, however.

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29. tom bartlett on October 5, 2007 10:45 AM writes...

IMHO: direct advertising to consumer of drugs has sucked money away from R&D and into Marketing. And, I don't think it serves the public interest. Derek: any thoughts?

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30. The Strider on October 5, 2007 3:24 PM writes...

If the software industry is any indication than start-up salaries should not be lower than in large companies. Before everything, one needs to attract strong researchers and then also to compensate for the higher risk. Supply and demand is of course a major issue here.

The main difference from the software industry is the much longer timescale of projects and the ability of investors to exit in the middle, say around phase II. This may lead to a conflict of interests between some investors (VCs ?) who would like promising results fast in order to make a quick gain and other investors (Pharma ?) who need drug candidates to actually get to the market.

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31. Anonymous on October 14, 2007 9:17 AM writes...

Suppose that the future of pharma is many small startups discovering drugs and a few big companies distributing them. If this is the world we're going to live in, how do we make it a success?

What kinds of tools are necessary to make small companies productive? In other words, what will be easier (or more difficult) at a small company? Which needs are specific to small companies?

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32. polly on October 25, 2007 12:13 AM writes...

GSK has started their layoffs...reorganization, or whatever you want to call it...once again, gone with incorrect decisions. They keep management who haven't proven themselves and dump productive people; what gives? Are they just throwing darts at a board and wherever it lands that person is in or out? Their criteria is flawed...seriously flawed!

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33. Anonymous on May 29, 2008 7:55 PM writes...

GSK Bio Hamilton started layoffs today and will announce more tomorrow.

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