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Derek Lowe The 2002 Model

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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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July 10, 2008

More on Outsourcing

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Posted by Derek

In the wake of continued expansion of medicinal chemistry efforts in China, a discussion between me and some of my colleagues at work had me sticking to my positions: (1) Scientific outsourcing is not going to go away, although it may move from country to country as costs change. (2) If you’re going to stay employed as a medicinal chemist in a high-wage area like the US, you have to bring something that can’t be purchased so easily overseas.

We got to discussing what that something is. One position was that it could be fast in-house turnaround time, but while true, that one makes me uneasy. It is easier to run a fast-moving project with in-house chemistry, because you can react more quickly to changes. The cycle time for stuff that’s being done in India and China is always going to be longer. But I expect that the outsourcing outfits are working on that problem, too, in order to bring in more business. So if you’re going to compete with them just on the basis of turnaround, you’re saying that you’ll always be able to make the compounds quickly enough to justify your higher salary. Not, I think, necessarily a safe bet.

I’d rather not try to outdo the low-margin people at their own game. I held out for the high-wage advantages being things like idea generation, the ability to take on harder chemistry that doesn’t lend itself as well to making libraries of compounds, and the advantages of real-time interaction with the biologists, PK, and formulations people. You’ll note that all of these are harder than cranking out methyl-ethyl-butyl-futile analog lists. That’s outsourcing in a nutshell: the easy stuff can be done more cheaply somewhere else, so the hard stuff is going to be left for us. We’d better get used to it, and fast. (Some of that hard stuff will eventually be done offshore as well, but it’ll be more expensive to do, intrinsically, and offshore wages in general will have risen by then. The big cost savings will be at the margin, for the routine work, and I expect other countries to rise up and take business away from India and China as their economies improve).

A few more points: I get a fairly constant stream of complaints about the whole business of outsourcing, but I have to say that I don’t see the point of many of them. I mean, I understand why people are upset, but I don’t see what complaining about it is supposed to lead to. What are we going to do, lobby for a law that forbids any aspect of drug discovery to take place outside our borders? Whether you think that’s a good idea or not, it’s not going to happen, any more than we’re going to do the same thing for clothing, cars, or candy bars. If it’s feasible and effective to do something more cheaply, companies will do it more cheaply. ‘Twas ever thus.

It’s true that there’s room to argue about how appropriate all the chemistry outsourcing is. Some of it is surely being misused, and there are surely some companies that are (or will try) outsourcing too much of their expertise, then ending up less effective than they would have been. Trends are taken to extremes, before things settle back. But things are never going to settle back to the pre-outsourcing employment situation for chemists. For better or worse – and I still think that overall, it’s for better – industrial science can now be found (and contracted for) around the globe.

Comments (38) + TrackBacks (0) | Category: Business and Markets


1. fred on July 10, 2008 8:32 AM writes...

Outsourcing to the 3rd world is almost exactly like "combi-chem"; it's a trend that will be around a long time, but the it will move programs forward only slightly faster, if at all.

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2. A-non-y-mous on July 10, 2008 9:38 AM writes...

"Think globally, act locally"

You've got the global part down, Derek, with regards to research, but you've missed on the local aspect of Western chemists wanting/needing jobs. Outsourcing can't possibly help.

I can't say I disagree with you though. If I can save money by having early hits made overseas, I will. The fact is, stuff I'm making can be done faster and cheaper than if I spend the same amount of money hiring chemists. And it's more than just salary, it's also insurance, overhead, etc. The downside is lack of control, and needing to stay on top of things.

Money is always the driver for research, and everyone will look for the Holy Grail of good, cheap and fast.

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3. Ty on July 10, 2008 9:46 AM writes...

I wouldn't so easily discount the turnaround factor. Based on what I've observed, the turnaround time between conception of a compound, working out the synthesis, and actually submitting the compound can be 2-4 times longer overseas. Most of it is not from a difference in productivity, but merely the shipping and communication complications (this is also why cross-site collaborations are often frustrating). This doesn't even count the delays involved when compounds and series are canceled (the message probably takes two weeks to reach the foreign bench chemist!). If it's taking 2-4 times longer for your compounds to be made, you can bet the project is going to take longer too. With all of the pressure and deadlines for research to produce a preclinical candidate, you can bet upper management would be willing to spend a few extra dollars to speed things up and keep doing a significant amount of the work in-house.

With that said, I'm with you on everything else. Outsourcing is here to stay.

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4. CMC guy on July 10, 2008 10:19 AM writes...

Drug Discovery takes a certain Critical Mass of med chemists and other areas (biologist, PK, form, etc.) and at present those pieces are in place mainly in US, EU and Japan. I don't think outsourcing is a passing fad as India and China are building up the other areas besides "analog syntheses". Buildup of Clinical Trials that is occuring in these locations will also spur shift as creates atmosphere to support earlier parts.

Process/Manufacturing already is heavily outsourced although generally still have in-house technical expertise that either does initial internal labwork or supervises projects. I see likely that will eventually be outsourced too with just Project Management Departments running everything, most of which have very little understanding of R&D.

Ultimately R&D is Outsourcable and with only Bottomline thinkers in charge any value that experience and connectivity brings will be ignored.

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5. Still Scared of Dinosaurs on July 10, 2008 10:20 AM writes...

We, on the clinical side, are often asked how we can incorporate more information from chemistry & pre-clinical into our development programs.

"Dude, I'm a statistician. Why don't you ask them?" is somehow not considered helpful...but that's where the greatest value could be created. Reduce the dev time from 12 years to 10.5.

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6. Scott on July 10, 2008 11:42 AM writes...

Not every culture values the individual as we do here in the Anglosphere. There are compounds which never make it to human trials because of righteous (though perhaps unfounded in the end) concerns regarding the health of the test subject. There is advantage to be gained by having the ability to test these compounds in places where concience need not be heeded. That advantage will be leveraged by someone.

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7. Hap on July 10, 2008 11:49 AM writes...

I can't see outsourcing going away - anything we could do to stop it would be counterproductive. The rules of the game apply to everyone, not just everyone but us (we made money doing things better and cheaper and shifted business from other places - now it's our turn). Outsourcing in scientific R+D is always going to be painful, because the long lead time in developing scientists (PhD/postdoc time) means a large opportunity cost lost if you can't get a job, and because the need for particular knowledge reduces flexibility in jobs substantially.

In the long term, though, outsourcing might not help us (to do what is most valuable) - if you lower the financial incentives to scientific employment, you will likely decrease the number of people who will do those jobs, raising the costs of those who remain, and making them more attractive targets for outsourcing. Also, by decreasing the number of people trained as scientists, you probably decrease the amount of research that can be done in their training and thus the likelihood of developing tools that enable you to do something that cheaper scientists elsewhere can't do.

If we aren't a manufacturing economy, and we shift our knowledge base elsewhere, what kind of economy do we become? Innovation usually requires enough knowledge to know what's been done and what will and won't work. Removing that capacity doesn't improve our ability to innovate.

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8. burt on July 10, 2008 11:52 AM writes...

"If we aren't a manufacturing economy, and we shift our knowledge base elsewhere, what kind of economy do we become?"

There's always "American Idol".

Seriously, though, it's like they want every one of us to be an MBA. Yechh!

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9. Karen on July 10, 2008 12:21 PM writes...

Hap mentioned this, but if we end up outsourcing all but the highest level chemistry jobs, what happens to university research? Right now, we solve the problem of American students looking at science and saying "I'm better off going to law school" by importing students from overseas. But if these students are looking at few job prospects in the US, why would they come here to study?

The funding of basic research depends on having cheap labor (i.e. grad students) who are willing to do the lab work. If there are no jobs waiting at the end of the road, it will be difficult to recruit the cheap labor.

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10. calhoosier on July 10, 2008 12:28 PM writes...

to fred - if i were you, i would hesitate calling india and china "3rd world"'s evident in the amount of work they've already seized from the states....and to your other argument, about it not being worth the trouble if the research programs "move slightly faster, if at all"....i guess if i was running a business, and i could get even 1% extra efficiency out of my R&D...for LESS cost...why is this NOT a good idea?

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11. calhoosier on July 10, 2008 12:34 PM writes...

and to karen...losing scientists from the U.S. is the natural evolution of the global economy...maybe being scientists isn't really the optimal profession for us to focus on...

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12. fred on July 10, 2008 12:35 PM writes...

".i guess if i was running a business, and i could get even 1% extra efficiency out of my R&D...for LESS cost...why is this NOT a good idea?"

You miss my point, by a little. I think outsourcing library prep for hit generation has its place, though I'd favor quality domestic firms for a number of reasons (Time zone issues; IP protection; Buying American, to take a long view over a short view).

as for the term "3rd world"-- it is traditionally applied to certain countries, as "2nd world" was applied to the Former Soviet Union. I did not mean to imply anything about standard of living.

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13. Joe on July 10, 2008 12:58 PM writes...

Interesting thread, what worries me is when are the CRO's going to figure out how to do the design too? GSK and Novartis are spending money to set up R&D sites in China. Are we going to teach them how to do our jobs? How much of US and EU R&D could be done there cheaper than here?

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14. Jose on July 10, 2008 1:34 PM writes...

"Hard" chemistry in grad school is usually really damn difficult, by design. Hard chemistry in a med chem setting is usually not all that challenging, although reagent ordering times in developing industrial superpowers can be slow. And analogue design? Bah. If SAR was not the black box that it is, there would be say, 10 geniuses, who could name their price at any firm.

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15. Hap on July 10, 2008 1:34 PM writes...

If companies can do R+D elsewhere, and there's money in it, they probably will. In addition to attempting to lay claim to a portion of the future Chinese market for drugs, the idea of outsourcing R+D has probably occurred to Novartis, et al.

MBAs have to have something to sell, don't they? If it takes less ability to sell something then to make it (or that ability is culture-dependent), then the MBAs are preparing the way for their own demise, too. (Why would Chinese companies sell to Pfizer if they can sell it themselves and reap all of the profits?)

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16. CMC guy on July 10, 2008 2:09 PM writes...

#10 calhoosier outsourcing is not, possibly never, more efficient mode although base costs are generally much less so overriding concern. Likewise I think karen's point is valid but your extension is probably true also.

#13 Joe this is already happening (US/EU trained people returning, Global Pharma R&D Centers) and has occurred when look at Generics. Most of China & India Pharma Industry was set by Pharma as cheap suppliers or otherwise "borrowed" technology due to loose Patent enforcement.

#15 hap probably true but MBAs are usually short term thinkers plus will build their piles of money or make sure they profit from sell off of assests when doors close.

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17. Bench on July 10, 2008 3:23 PM writes...

Looking around, you will find Chinese chemists occupy 20 to 30% of chemistry positions, and Indian chemists occupy ~10%. Why companies have to hire Chinese chemists here with 5 to 10 times salay than in China? Moreover, China and India are potentially two bbbbbig market. I guess that if the productivity of R&D (in terms of finding new drug) is same in both Westen countries and "3rd world countries" the cost of R&D in "3rd world countries" will be for sure much lower.

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18. Is on July 10, 2008 4:34 PM writes...

Outsourcing I agree does increase the turnaround time to some extent, but the generous amount it adds to the efficiency and productivity more than offsets the former.

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19. lynx on July 10, 2008 6:56 PM writes...

As a biologist (ret-Big Pharma drug dicovery), the trend toward outsourcing chemistry is disturbing to me since, as Derek mentions, the face-to-face interactions of biologists and chemists is important. Discussing the relative importance of various biological assays in the development of SAR was always a big part of any project (or perhaps I should say, arguing the importance...). Unless the biological insight is outsourced, along with the chemistry, I fear for the results. Seem a false economy if, while FTEs are cheaper, there is a dearth of clinical candidates.

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20. Bruce Hamilton on July 10, 2008 11:58 PM writes...

Presumably, the largest pharmaceutical market growth in the next few decades will be in/near the asian region.

The USA may not remain the primary target market, and profits may be easier to obtain elsewhere in a few years. Perhaps the drugs / health problems will also be different, requiring different treatments. The US market may be left to existing companies.

The global companies targetting the new markets could outsource some hard chemistry to the USA, however they may choose to perform it locally for the same reasons that are expressed here.

I suspect we are about to see the rise of new global companies, originating in Asia, who will be led by the same imperatives driving recent US large company behaviour. They will be growing, and have the resources to heavily invest in the latest and greatest technology.

Several decades ago, the jump hoops to get a US patent were more numerous and smaller for foreign companies, compared to US companies, and I expect the Asian nations to use similar strategies to defend their young markets/industries.

The next 10 years will be very interesting for us all, regardless of where we live an work.

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21. anon on July 11, 2008 12:20 AM writes...

I can't believe that noone has shot down 6. Scott!! Surely you can't be advocating taking advantage of "ethical" and "cultural" differences for profit?! I mean the pharma industry is already recieving plenty of bad PR for just this reason and anglosphere ethics (where I assume you are based) can't change based on region of doing business!

In terms of outsourcing. I agree that it is here to stay. But I still think that there will be room for both. Especially if there are any major breaches of IP. How long after major pharma outsources key leads will those same compounds be bought by another pharma co? unethical yes, unforseeable no

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22. processchemist on July 11, 2008 2:25 AM writes...


"I guess that if the productivity of R&D (in terms of finding new drug) is same in both Westen countries and "3rd world countries" the cost of R&D in "3rd world countries" will be for sure much lower"

Not exactly. Why some indian companies buyed R&D structures in Europe (two examples: Glenmark and Dishman)?
On the other side Ranbaxy is known for their HUGE research center and sterted patenting molecules of his own.
So the indian situation is quite composite. China is a totally different matter.

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23. John Spevacek on July 11, 2008 7:48 AM writes...

Even if development times are slower overseas and the costs aren't really all that much cheaper by the time you add in the necessary oversight, if management PERCEIVES an OUS option as better, they can still go for it and hype it up on Wall Street and collect year-end bonuses and we will still lose our jobs. There is no RESET button where the company will say "Opps, that was a mistake. Let's go back to the way things were. You all get your old jobs back".

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24. Ali G on July 11, 2008 8:17 AM writes...

First of all, the cost difference for a Chinese chemist is not 5 to 10 times cheaper. At a particular big pharma china research facility they get ~50-75% of what the same person doing the same job would get in the states. That is still enough of a cost advantage to warrant the move to china. Second, sometimes the atomsphere for particular types of research can be better elsewhere. At this same chinese research facility they are focuing on neurodegenrative diseases. Being located in china allows them to do stem cell research which could not be done without controversy in the US.

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25. fred on July 11, 2008 8:41 AM writes...

"Being located in china allows them to do stem cell research which could not be done without controversy in the US."

Another example of how collossal stupidity in the White House costs America opportunities.

"At a particular big pharma china research facility they get ~50-75% of what the same person doing the same job would get in the states."

That's encouraging. It means outsourcing could be a minor annoyance, after all, like combi-chem (see #1) rather than a wholesale decimator of the US drug industry. At 50-75%, frankly, I'd say MOST Chinese chemists would be overpaid. The good ones still live in the US; though, the weak US economy could obviously change that.

Long term, the US could benefit by intangibles-- keep the US a place people REALLY WANT to live in. Desirability, and great Universities, will keep people coming here rather than staying where they are, or even, going back. Of course, arguably, the EU does better on livability, but that argument could stretch on for pages......

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26. Scott on July 11, 2008 9:08 AM writes...

@#21 anon.

No,I think if you read carefully you will find that I am not advocating that WE should violate our ethics in order to profit.

I am merely stating that not everyone in the world shares our ethics. I believe that there are some companies/societies in the world which don't share our ethical concerns and will manage to profit from that lack of constraint. In fact, I believe that teaching advanced techniques to those who don't share our moral constraints may be immoral in and of itself.

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27. Toluene on July 11, 2008 9:52 AM writes...

Don't panic--the crumbling dollar will soon eradicate any advantage of outsourcing to China/India. In the last two years FTE costs have risen from $60K to $90K and will rise further as the US grinds the dollar into the dust.

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28. Anonymous on July 11, 2008 11:58 AM writes...

To #24. Pharma can do stem cell research in the US. It just cannot be payed for by the US government.

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29. Paul F. Dietz on July 11, 2008 1:22 PM writes...

If we can't find things that we really do better than overseas, then wage levels here will eventually equalize with overseas, through some combination of appreciation of wages there and depreciation here. One way this can happen is by continuing decline in the value of the dollar.

I have a lot of my investments in overseas investment vehicles, btw.

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30. anonnychem on July 11, 2008 5:59 PM writes...

Fact is that we (in the established pharma industry) don't make successful drugs very often so it makes sense to shift the R&D to where it's cheapest as even if it doesn't bear fruit it won't make much difference. It's a real pain in the ass having to change jobs every few years or find some other career path to pursue but that seems to be the way things are these days so we might as well get used to it!

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31. chemD on July 12, 2008 11:53 AM writes...

#17 bench "Looking around, you will find Chinese chemists occupy 20 to 30% of chemistry positions, and Indian chemists occupy ~10%."

I think this reflects the ratio of PhD students typically found in universities. 30% chinese 20% indians, 20% rest of the world, 30% from here.

Naturally US dont want to leave 5 years of investment made on them here.

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32. Morten on July 13, 2008 9:23 AM writes...

The yuan is tied to the dollar so the crumbling dollar won't mean much.
The greatest problem with outsourcing in the past was that the countries where the work was performed weren't prospering. The people making money were the factory owners and they invested it in the West. Factories were placed in special zones to control the workers better and union busting was/is horribly brutal. It was the unions that ended the western sweat shops a hundred years ago and paved the way for a large middle class and social stability. That never happened in the manufacturing outsourcing from the west.
I don't think it will be possible to implement the same horror for outsourced chem (though safety standards are probably still comparatively relaxed). Outsourcing isn't bad but it should be implemented in companies that are doing well rather than as a life raft because it is going to take a while to figure out how to *actually* benefit from it (rather than "we made x compounds abroad that cost a and x other compounds in house that cost b - a Why am I even writing this? No MBA is ever going to read it.

Anyway, it seems that going the specialist route in a company is the best way to get fired some day. Even if you are the best in the world managers might have trouble seeing that or your entire department could get cut. I will endeavour to not know too much about anything I think.

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33. Bob on July 13, 2008 6:34 PM writes...

In every population of cells, there is always the possibility of cancerous growth. IF anyone has noticed, the country is on the verge of bankruptcy due to a cancerous growth of overprivledged executives and snotty, childish MBAs.

The constitution provides a framework for laws which contribute to the public good. The protections of "corporate status" should not be given to companies which willfuly outsource or deny jobs to US citizens in preference to foreigners on visas. The FDA should provide preference to those drugs developed, tested and manufactured in the US. Period.

The non-stop,fatalistic mantra of 'there's nothing we can do', I read on this web-site is disturbing. When did Americans become such pathetic whiners? Fight back!

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34. fred on July 14, 2008 7:51 AM writes...

"The FDA should provide preference to those drugs developed, tested and manufactured in the US. Period."

Well, for certain the FDA should disallow API made in China. They have a history of tainted food / toys /drugs.I think we can all agree on this.

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35. Joe on July 14, 2008 1:54 PM writes...

Part of the problem is that Businnes school type of mentality has destroyed research. Tha real problem is that we have 5 managers who sit on their butt and a few associates actually doing the work. How the heck can companies survive doing business. Maybe this was fine during the glory days, but with less revenue being generated, there does not seem a need for folks who don't add value to the company.

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36. Anonymous on July 14, 2008 2:16 PM writes...

#34 fred not sure realistic option as over 80% of generic API comes from China and India. Plus although granted there are problems, mainly IMO due to lack of strong internal oversight (and perhaps attitude) by China "FDA", there are many fine suppliers who are, or attempting to comply with ICH and/or work closely with Western companies. Do we classify "All Evil" because of criminal or negligent acts of a few? Many people take that same view of Pharma Industry which is idiotic. FDA/EMEA/etc and the Companies who use suppliers in these regions need to do a better job of monitoring and forcing "c" in the cGMP.

#33 Bob may seem like whining but is from direct frustration as most R&D types have little power/influence in how overall company does things (since MBA types tend to run things)however often is by choice (rather focus on science). Please tell us how to "Fight back" as just like has already happened in many other industries and jobs the flow outwards seems unstoppable when only emphasis in on costs saving (real or imagined). I would suggest most people got into science professions because they enjoyed it yet there has long been "promise" of secure careers (with high demand/limited supply). Such change is hard for everyone but after devoting extra effort needed, particularly for MS/PhDs, there is difficultly accepting being replaced with less experienced "hands".

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37. Mike Butler on July 30, 2008 10:56 AM writes...

Answer #30 is my favorite. We don't make successful drugs often. I'd add that our rate of success is declining, we're taking longer to develop drugs and it's getting more expensive. We've all seen the data.

Outsourcing accross pharma R&D to US and European companies has been on the rise for decades and it's now getting more attention. I'd guess outsourcing is getting more attention now because pharma execs point to it as a partial answer to the dreadful financial state their companies are in. When that outsourcing results in work going to places like China, India, Brazil, etc. that news garners even more attention.

On top of outsourcing, we're now witnessing pharma companies setting up R&D facilities in China and India.

The interesting thing is that no one has yet been able to show that all of this outsourcing, domestic or overseas, fixes the root cause of our problem...a slow, expensive process that doesn't produce enough innovation. Same goes for pharma R&D facilities overseas.

Scientists in the US have a huge role to play. We should apply our scientific curiosity and process rigor to figuring out how to take wasted time out of the R&D process. From what I've seen, we can reduce development times (I'm willing to guess the same applies to the research processes) by 30% to 50% simply by applying what we know now to time-wasting handovers between functional groups (chemists, toxicologists, formulators, manufacturers, clinicians, etc.). That doesn't require MBAs, it requires applying what we already know about wasted time in an environment where there is a real will to change. A US company which can successfully tackle waste in the process is miles ahead of one who can't, with no difference in the innovative output of their scientists.

Given that, back to outsourcing or pharma doing R&D overseas, might another advantage be lack of precedent? New companies undertaking research or development can do so without the hassle of de-constructing decades of beuracracy and inefficient practices.

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38. Jose on July 31, 2008 12:32 AM writes...

Bob- fight back?? What the hell do you mean? A molotov isn't stop a pinkslip, no matter what the scenario!

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