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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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In the Pipeline

« Always Read the Fine Print | Main | Five Technologies For the Scrap Heap? »

January 6, 2010

Lilly's R&D Outsourcing

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Posted by Derek

Yesterday's Wall Street Journal ran a story on Eli Lilly, all about how the company is outsourcing a lot of their drug development work. Since Lilly signed a big deal with Covance in 2008 to do just that sort of thing, the first thing you have to wonder is "Is this news?"

But some of the spin in this piece is interesting. Here, see what you think:

Not long ago, a big pharmaceutical company wouldn't have considered farming out the development of a compound found in-house. But expiring patents on top-selling drugs and high-profile failures in finding their replacements have pushed the biggest drug makers to "externalize" much of their R&D, said Peter Tollman, who advises drug makers at Boston Consulting Group. . .

. . .Lilly is relying on outside firms called contract research organizations to do the work. Company researchers, Mr. Tollman said, can get too attached to their own compounds to know when to let them go.

I'm not buying that last part at all. To me, the main reason that Lilly has been using CROs so much (through an R&D unit named Chorus) is that they feel that they can do the job more cheaply. The next most important reasons after that one are (1) that they can do the job for less money, (2) that they can do the job without Lilly spending so much cash, and (3) that they can do the job at lower cost. Have I left anything out?

As a correspondent put it, once you get into the clinic, "the data are the data", whether you're attached to the compound or not. The bigger danger is in how you set up the trials in the first place, whether you've done them in a realistic fashion, and a CRO can fall victim to that just as much as anyone else can. The same incentives are there to fool yourself. So I don't see any special magic in outsourcing clinical work, other than the fact that CROs tend to work their people harder and pay them less money.

To be fair, the rest of the article does show the flip side:

Skeptics say such results may cut R&D costs, but don't address big pharma's main problem of finding new therapies that pan out.

"You get more negative results faster and cheaper," said James Niedel, a former GlaxoSmithKline executive who is now a partner at New Leaf Venture Partners fund. "But the problem with the industry is they're not getting enough positive results and that depends on knowledge and insight about biology and disease" that might be lacking among CROs. . ."Neither the cost cuts nor the structural changes help R&D productivity," said Keyur Parekh, a UBS analyst who thinks Lilly might need to make acquisitions to replenish its pipeline.

Indeed. It's important not to spend money where you don't have to, but it's also important to have things to spend the money on in the first place.

Comments (31) + TrackBacks (0) | Category: Clinical Trials | Press Coverage


COMMENTS

1. David on January 6, 2010 9:42 AM writes...

I was pretty intrigued that this story received such prominant press coverage, especially in the Journal. There's absolutely nothing revolutionary about Lilly's "strategy". As a matter of fact, nothing has changed in their approach to drug discovery and development other than the names of the people executing the work, and their salaries. Discovery work is being performed by more-cheaply paid scientists in Asia (much cheaper), and development (including clinical development) will be performed by more-cheaply paid people at CROs (moderatly cheaper). The process is unchanged, but the labor cost is lower. The only way this will increase productivity (measured as approved drugs per research dollars spent) is if the quality of drug candidates doesn't decrease, and the lower labor costs gives Lilly the ability to put more candidates through the development pipeline for the same dollar amount. I wouldn't categorize this as revolutionary. It's smart business if it works out, but the problem still lies with a poor understanding of biological processes and how they contribute to disease and toxicity.

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2. Hap on January 6, 2010 10:02 AM writes...

The game of "musical chairs' with labor (outsourcing to lower labor costs until labor costs drop enough that hiring internally makes sense or until you can get the people you want to work for less, always with fewer jobs than people to fill them) works as long as China and India have lower wages for comparable workers (factoring in the costs of organizing them). That works for now, but probably not later - once China and India have the money to be a market for our drugs, their chemists (and biologists, and management) will want to be paid accordingly. At that point, Lilly will be able to get cheaper labor, but only by paying a productivity cost, and since productivity is what Lilly lacks, that would be a problem (paying something for nothing is always a losing strategy).

In addition, I thought the point of startups, etc., was the committment to a single purpose - getting their drug to market if at all possible. I wouldn't think outsourcing groups would have the same motivation as internal groups to find a drug to market, unless enough of the profits are theirs for doing so. If that isn't the case (internal employees don't care, or not enough), well, then we're probably screwed. However, if that contention is true, and the philosophy applied doesn't work for upper management (why they get stock options based on the company's success, at least in theory), then I don't know why they think it would work for anyone else (well, assuming conscious thought rather than wish fulfillment, dishonesty, or mind-diminishing drugs).

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3. darwin on January 6, 2010 10:04 AM writes...

Tough and swift decision making/leadership is extinct from Rx R&D seems to underlie many pipeline problems, regardless of company. I dont quite understand the persistence of programs that proceed in spite of overwhelming data to suggest no probability of success. And it seems to get worse the larger the company. I dont know if it is a pipeline charade for the annual report and analysts, but outsourcing R&D will never fix this problem, despite Rx consulting firms insistence.

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4. Lucifer on January 6, 2010 10:10 AM writes...

R&D is a waste of money.. the management can manipulate share prices a few times before the death spiral begins in earnest. Then they move to another healthy company, like a virus.. till there are no hosts left.

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5. MonkeyNinja on January 6, 2010 10:12 AM writes...

Lilly also cites greater staffing flexibility as a reason to use CROs in development. The explanation went something like "it's easier to add and shed CRO resources than Lilly people if the pipeline doesn't deliver well".
Better them than me, right? I'm not sure that's all that logical or comforting but it's one of the reasons they give.

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6. Keith Robison on January 6, 2010 10:26 AM writes...

In your list of reasons, you left out the slightly variant "This gets R&D capital spending off the books" or something like that (I'm no accountant). Clayton Christensen makes the point in his books that Wall Street loves outsourcing in part because it makes a company look leaner.

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7. PharmaHeretic on January 6, 2010 10:33 AM writes...

Lilly (and Pfizer) require creativity consultants to make their R&D more productive..

http://www.dilbert.com/strips/comic/1993-02-10/

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8. RB Woodweird on January 6, 2010 10:41 AM writes...

If you went to the top execs at Lilly and suggested outsourcing their functions, they would harrumph and give you such an earful of 'special talents' and 'experience is key' and 'you get what you pay for'. But suggest that they boot out PhDs with a couple decades of bench savvy and replace him with some associate degreed kid in Indonesia and they will have that deal done so fast the human ear will not be able to make out the Doppler-shifted sound of them dialing their personal investment managers.

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9. Hap on January 6, 2010 10:46 AM writes...

Oh, and isn't outsourcing an implicit admission by management that they aren't capable of organizing research to get enough drugs to keep the company afloat? If there weren't enough candidates, then maybe some other research structure might help (to get more candidates), but that isn't the problem. Companies don't seem to be getting enough drugs out, some of which is caused by the uncertainty of drug development and the lack of complete knowledge, but the remainder of whose responsibility seems to rest more with those organizing the research (management) than with those actually doing it. Outsourcing means you can sustain companies with fewer successful drugs (in theory), but it doesn't address the failures that make it necessary. Since you haven't changed the people responsible for organizing the research, the expectation of different outcomes (more drugs) seems silly.

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10. bbooooooya on January 6, 2010 11:37 AM writes...

I do agree that often companies will doggedly continue to pursue clinical studies even after clinical data suggests this will not be frutiful (cf. certain Cambridge based HSP-90 shops). These people can always play the "retrospective analysis" game becuase, for certain, "this time will be different"!

Many smaller biotechs are "lifestyle companies", and it's a good gig. Execs can often continue to pull out $400K+ salaries for years.

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11. T on January 6, 2010 11:50 AM writes...

'...Company researchers, Mr. Tollman said, can get too attached to their own compounds to know when to let them go'

That statement makes me mad. Darwin (#3) is bang on - pretty much all big companies seem to be lacking in strong, decisive decision makes (ie senior management). That has little to do with 'researchers'

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12. Cloud on January 6, 2010 12:18 PM writes...

MonkeyNinja- it probably IS easier for the CRO to move resources of off a Lilly project that for Lilly to lay people off. The CRO may have other work for those people, so they can just redeploy them and not pay the cost of a layoff. Also, CROs can probably assign fractional head count- i.e., split one person across more than one account.

I worked as a contractor (in informatics) for several years, and this is why we had some long term contracts. The contract would need a database architect (for instance), but not a full time database architect. So that person would also work hours on another contract. We also had short term contracts, where we were just brought in to do a particular project. We could do the project and then move on to the next thing pretty easily. If the company hired for the project they would then have surplus headcount at the end.

That's the theory anyway. It doesn't always work that way, but it is a reasonable approach. Personally, I think it is going to get more and more common and that we all might as well just get used to it.

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13. Jim on January 6, 2010 12:52 PM writes...

I left pharma to work for a CRO about 5 years ago. We're relatively small, and have a niche expertise in terms of therapeutic area. However, we have been able to assemble a group of highly skilled (and thanks to the extensive layoffsacross the industry) highly experienced staff. In our view of the pharma landscape (which has been quite dynamic over the past 2-3 years) the benefits of outsourcing go well beyond the financial. Finding the right CRO can offer a broad range of expertise that can truly complement that which exists in-house. From our standpoint, we are increasingly viewed as colleagues rather than an extra pair of hands, which makes this line of work that much more rewarding. However, the difficulties are that we're asked for opinions in the absence of all of the data (like you have when the whole process is done internally).

It seems clear to me that this trend is not going to go away for a while. Careful CRO selection and the willingness to share information are key to maximizing the benefits of outsourcing. I hope to God we all figure out how to make that work.

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14. Jason on January 6, 2010 1:29 PM writes...

You forgot the main reason: They can expend less capital to get the job done.

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15. Hap on January 6, 2010 2:03 PM writes...

Put another way: If your drunk-driving neighbor trades in his sports car for a cheaper (safer?) model, but doesn't stop drinking and driving, he still isn't going to be a good driver, and it probably won't do all that much for the people he hits, either.

CROs are likely useful for particular tasks or skill sets, but expecting someone else to make your drugs for you and hand you the money seems unlikely. (If they can do your job better than you, then eventually they will have it.) Ultimately, whether Lilly uses its own people or someone else's, it still has to make the decisions on where to spend its time and money - and the people that make those decisions haven't changed. You can throw the stewards off the plane, but if the pilot and copilot don't know how to fly, the plane's probably going to crash, anyway.

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16. S Silverstein on January 6, 2010 7:17 PM writes...

Darwin writes:

'I don't know if [the sure to fail R&D effort] is a pipeline charade for the annual report and analysts"

Bingo. As a former colleague wrote, what we today call pharmaceutical R&D is in reality busywork disguised to look like R&D, in effect a well engineered, well managed, massively expensive failure.

He opined that a small fraction of prime scientist intellectual horsepower and time is actually spent on true R&D, the rest wasted on feeding the bureaucratic corpulence that is the modern pharma research lab.

See http://hcrenewal.blogspot.com/2009/01/pfizerwyeth-merger-and-sacrificing.html , I've referenced it before.

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17. okemist on January 6, 2010 7:25 PM writes...

A productive R&D team in Big Pharma always has pressure to produce new candidates. True you get attached to further devloped ones, but the different teams carry on the development (do you have med chemists running phase II supplies in the plant?). Corprate, Team and Personal pride drive my motivation to produce results; I believe some of that is lost with the CRO. They carry the process through to the extent of thier capabilities and then move on to the next customers project. The last big pharma I worked for contracted 1 FTE from an upstate NY CRO to supplement my groups activities and they never delivered comparable quality or met timelines.
Pharma used to throw money and people at every problem, now cheapest way is the new chic.

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18. cliffintokyo on January 6, 2010 8:41 PM writes...

I am wondering why everyone talks about *Research and Development* in the same breath; they are really two very different activities.
*Research* is mainly driven by discovery, creativity and innovation, whereas *Development* is mainly driven by *Regulatory Science*, if you will, with a significant amount of innovation needed at times.
Sure, there has to be a *continuum* and good *communication*, but the point is that the two activities need to be *managed* in fundamentally different ways.
*art* versus *technology* perhaps, or *passion* versus *commitment*?
Maybe we could pick up this topic on a new thread?


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19. Jose on January 6, 2010 9:26 PM writes...

Music chairs indeed with a rapidly shrinking circle of options....

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20. Rx consultant on January 7, 2010 3:53 AM writes...

I worked in industry for over three decades before retiring and setting up shop on my own a few years ago. About ten years of my industry time was spent in new product/portfolio planning (working on the commercial aspects of this for three different biotech and pharmaceutical companies). While I agree that money's clearly the motivator for decisions like this I also want to agree with point in the original piece.

It's axiomatic that there's nothing harder to kill than a development stage drug. I've seen numerous instances where a lead researcher develops what amounts to a "parent/child" relationship with a particular molecule and will go to extraordinary lengths to protect it from death, even when the clinical and marketing research data suggest its not going to be viable. The more senior and influential the sponsoring scientist, the more "immortal" these compounds get. This used to be a problem confined to smaller biotech firms with limited portfolios, but in recent years it's spread across more traditional pharma firms as well. I personally think its one of the factors contributing to the slowing productivity that seems to be plaguing all companies these days.

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21. Dingo on January 7, 2010 4:13 AM writes...

Wow, #16 that is a great piece. I suggest all those that haven't already click on the link and read it.

It pretty much sums up my experiences in the few short years I was a part of big pharma R&D. Don't get me wrong, I loved aspects of the job and learnt a huge amount but I just couldn't take the mindless bureaucracy, the swathes of useless robotic middle-management and the seemingly endless painfully bad decisions made by people who knew pretty much zip. What really made me laugh was my VPs utter incredulity when I announced I was going. How exactly did he think making me re-apply for my own job twice in 3 years would make me want to stay?

You long term veterans must have damn thick skin... I really hope things start looking up for you all soon.

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22. How ironic on January 7, 2010 6:27 AM writes...

There's an interesting article in the current issue of nature called 2020 visions, where leading researchers and policy makers have commented on outlook for their respective fields leading up to 2020.

'Drug Discovery' has a couple of hundred words. The author is as follows:

Gary P Pisano, Prof of Business Administration, Havard Business School.

Says it all doesn't it?

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23. sgcox on January 7, 2010 8:29 AM writes...

#22: Regardless of his position/occupation, he is spot on:

"The industry will bifurcate
into firms that pursue a longterm
commitment to creating
novel drugs and those that
focus on marketing. The latter
may do better in the short
term but are doomed to failure eventually. The
development of effective treatments is the only
sustainable source of value for the pharmaceutical
industry. Given the paucity of therapies for
many serious diseases and the mediocre efficacy
of many existing drugs, the opportunities
are huge. There are risks in trying to discover
new drugs, but the risks of backing away from
that commitment are higher."

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24. Tok on January 7, 2010 9:05 AM writes...

#23 sgcox, sure that sounds good, but I bet he went back to his MBA course the next day and taught his students the exact opposite.

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25. weirdo on January 7, 2010 10:56 AM writes...

Tok,

No, I bet he didn't. You can try to paint all "MBA-types" with the same brush, but there are many (more than you think) who actually try to understand the businesses they study rather than treat everything as widgets.

Pisano gets it.

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26. David Christopher Rogers on January 7, 2010 11:46 AM writes...

Let me get this right -- one of the main benefits of CROs is they manange people better -- cheaper and more flexible deployment. So, outsourcing to CROs sounds like an admission that executives haven't been able to create and drive an in-house management team that performs well at the fundamental roles of management.

Rather than admit this failure, they turn it into opportunity -- let someone else manage the people, it's not our "core competency". The "virtual company" is born!

As a shareholder, I would question how much inherent value there is left in the hollowed-out financial/marketing shell that is the "virtual company" -- more and more a bet on executive lucky guesses and external dealmaking, and less and less on whether a great generator of scientific value has been assembled.

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27. Ten Years After on January 7, 2010 10:49 PM writes...

They have a history of starting projects and then abandoning them when the management turns over:

http://www.forbes.com/forbes/1998/0126/6102076a.html

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28. srp on January 9, 2010 10:23 PM writes...

So many misconceptions, so little time...

1) Lots of companies have been outsourcing everything in sight over the last 30 years, even getting rid of (gasp!) managers. The very first things to get shipped out were things like payroll processing that used to be nice internal empires for executives. As time has gone on, more sophisticated things have been outsourced. Ever hear of semiconductor foundries and fabless chip companies? IDEO? The data center business?

2) The motivations for vertical disintegration are various. Sometimes they are stupid or based on managers' convenience. Long run equilibrium for specialized supplier groups to exist, however, requires some economic forces running in favor of outsourcing. Differential optimal scale at different stages of production, better utilization of fixed-cost resources (less idle time), avoiding in-house solidarity-based or union wage premiums, better discipline on poor supplier performance, openness to ideas from more places, etc. are all possible reasons for preferring external sourcing.

3) MBA behavior and business school curriculum are not naturally aligned. A huge percentage of what faculty do in business schools is try to discourage exactly the kind of superficial and short-sighted analysis that is often criticized here. We do this because managers--including those with science and engineering backgrounds--have a tendency to get confused or use bad metaphors or fall for specious rationales.

Strategy professors typically spend a fair amount of time debunking bogus rationales for mergers--but note that many of these bogus mergers are vertical ones, just the opposite of the outsourcing behavior commenters are attacking here. Remember when Merck bought Medco? I don't know any strategy professors who thought that made sense at the time; there was a pretty good case study written about it after the fact.

I wish we were as effective at indoctrinating our students as the commenters on this blog imagine.

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29. Dracul on January 16, 2010 11:46 PM writes...

#28 "Lots of companies have been outsourcing everything in sight over the last 30 years, even getting rid of (gasp!) managers."

Old Transylvanian proverb. Well, maybe it's from there.

"It's absurd to believe someone else can know your business better than you do ... but it's even more absurd to believe it's OK for someone else to know your business better than you do."

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30. Cellbio on January 17, 2010 10:07 PM writes...

Thanks #16 for the link and then Dingo for the advice to read it. I also suggest everyone take a look.

Also found the link within the link citing a metacognition paper to be a great read. Here is the summary, which highlights much of what we write about "MBA" type flaws, and shows the author's great writing style:

"In sum, we present this article as an exploration into why people tend to hold overly optimistic and miscalibrated views about themselves. We propose that those with limited knowledge in a domain suffer a dual burden: Not only do they reach mistaken conclusions and make regrettable errors, but their incompetence robs them of the ability to realize it. Although we feel we have done a competent job in making a strong case for this analysis, studying it empirically, and drawing out relevant implications, our thesis leaves us with one haunting worry that we cannot vanquish. That worry is that this article may contain faulty logic, methodological errors, or poor communication. Let us assure our readers that to the extent this article is imperfect, it is not a sin we have committed knowingly.

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31. milkshake on January 18, 2010 2:27 AM writes...

There is old Romanian proverb “A change of leaders is the joy of fools”. It helps me every time we have a reorganization

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