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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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May 13, 2010

China's Future

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Posted by Derek

Some recent conversations about China and chemistry outsourcing prompt this morning's observations. Every major drug company is working with Chinese contractors and/or setting up their own operation there. This is partly (in some cases, almost entirely) driven by the low cost of scientific labor there compared to North America and Europe.

But that cost is going up. Everyone keeps mentioning that "China isn't as cheap as it used to be". And that's going to continue, I think - I'm not expecting them to reach US/EU cost levels any time soon, but the bottom-line advantages of doing contract work there, which a few years ago were immediately apparent, are starting to become more of a matter for thought. There are problems with doing things that way, you know - the time difference, the at-a-distance decision-making problems that any far-flung effort suffers from, the worries (sometimes founded, sometimes not) about intellectual property leakage. When the cost was so dramatically lower, these factors weren't enough to slow things down, but as time goes on, they could be.

As an aside, I'm happy to see costs going up in China (and in India, too). As a free-trade sort of guy, I think that's exactly what's supposed to happen. The high-cost country gets goods and services at a better price, and the low-cost country improves its economy and its standards of living. But then some other low-cost country has an opportunity to get into the game - and who's that going to be? Someone's going to give it a try within the next few years.

This also makes a person wonder about the big operations that Novartis and others have been setting up in China. Are these things going to really hit their stride just as the costs of doing business there come within range of the parent company's? One answer is that these branches aren't completely about cutting costs. They're an entry into the Chinese market. Everyone looks at the Chinese economy, and has the same thought that foreign businesses have always had: "If we could just sell one of our widgets to every tenth household here. . .every hundredth, every thousandth, then holy cow. . ." And there's a lot to that.

But the feeling is that the best way to get entry to that gigantic market is to show that you're a big, friendly business partner. China (the government and the population, who are not always completely on the same page of the sheet music) is worth taking seriously, and they most definitely want to be taken seriously as a world power. It's safe to assume that the regulatory authorities there will look more kindly on drugs developed with a lot of local participation, and that doesn't mean just shipping them in at the last minute for the last step or two. (A lot of that gets done in reverse in the US and Europe, by the way, if you didn't know that). The best treatment, I think, will be given those drugs that had the highest amount of value-added work done in China.

The logical extension of that is a local all-Chinese drug discovery company, which we haven't quite seen yet. A lot of people had WuXi picked as a good candidate for that, until the recent Charles River deal - I have to think that this announcement was probably a disappointment to many people inside China itself. But as a colleague of mine was pointing out to me recently, the people who founded WuXi are still around, and after a year or two helping to run the new company, they just might use their unmatched connections and local business sense to start up what they'll hope turns into Chinese equivalent of Novartis, Merck, Pfizer, or GSK. Worth watching for.

Comments (28) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. RandChemsit on May 13, 2010 10:25 AM writes...

Excellent post....my thoughts are in this direction as well.

Doing something, anything, to the exclusion of all others is extremely risky. There are always trade-offs.

It would seem to me that most major pharma players would want some presence in the largest emerging market in the world. It would be foolish not to do so.

Outsourcing or moving operations to a favorable environment has its place. It's a another tool or resource to use. Knowing the when, what, how and where is the challenge. Do it because it make sense and not simply for a short term gain. Spreading risk is crucial.

From my vantage point, Novartis has a plan and is sticking to it. They are investing their R&D. That is what is needed. Of course they cannot simply throw money at it, but with out R&D there will be nothing.

They are remaining profitable without having to purchase or engage in a mega-merger. They are not perfect, and they have made mistakes. But they seem to be in a better position than most of big pharma.

Not sure what to make of the new CEO though.

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2. processchemist on May 13, 2010 10:47 AM writes...

I think it's an error thinking about China in western terms. For sure "reciprocity" is an alien concept for their government. We source some basic intermediates from some chinese companies on a regular basis and I've seen some prices doubled over the last year, so the *current* trend is clear to me.
But:
1) some weeks ago IMF funded chinese operations to start up low cost manufacturing areas in african countries.
2) The true intentions of the chinese government (that owns or finances most of the exporting companies) are a mistery for western analysts (and the ones that say "I know that..." should better be quiet).

Anyway, complex systems have a low grade of control, also by a non democratic oligarchy, so there's the margin for a bit of hope.

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3. bbooooooya on May 13, 2010 11:00 AM writes...

"I'm happy to see costs going up in China (and in India, too). As a free-trade sort of guy, I think that's exactly what's supposed to happen."

Economically this is exactly what is supposed to happen. The unfortunate side effect, though, is that in a contrained system (the gloabl economy) as this equilibrium shifts it requires a decrease in costs in formerly high wage countries.

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4. Calvin on May 13, 2010 11:44 AM writes...

For once I find myself disagreeing with you Derek. The move to China (and to a lesser extent India) is driven by a large number of fundamental errors.

Probably the big one is whether you believe that China is a big market or not. Sounds silly, I know, but there is still considerable resistance from the general population towards Western medicine. I'm not sure it's clear yet how or if this can be overcome. So actually, the Chinese market might not be that big afterall.

From the perspective of R&D I think it's worthwhile setting up sites in China, but I wouldn't expect to see any drug come out of these sites for decades. Why? Well, I fundamentally disagree that what we do can be reduced to an industrial process where if you throw enough resource at it, you will succeed. It doesn't matter how cheap it is, you still have to actually succeed in the end. All you might be doing is lengthing the time it takes to run out of money. My experience of Wuxi was pretty enlightening. As soon as the chemistry we were doing went outside of the normal range, or a problem appeared, there was simply nobody there who could problem solve. They simply dumped the target when they couldn't make it with some trivial chemistry.

When I was over there I was hugely impressed by the ambition of the Chinese but then discovered that it's the Westerners who are expected to come up with the ideas. It was pretty shocking. There is a big worker bee mentality there where they sit there and wait to get told what to do.

I don't feel this is about cost. Fundamentally, the Chinese don't have the expertise and that will take some time (25 years) to aquire. Big pharma is entitled to set up shop there, but I wouldn't expect to get much out of it in the short or medium term. India might be different largely because they have a different culture but I notice that AZ's Bangalore unit haven't set the world on fire (granted they do work in a ferociously difficult area).

Drug discovery is hard. Spending cash on Chinese sites isn't going to make it easier and I don't the benefit of spending less money to fail.

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5. okemist on May 13, 2010 11:47 AM writes...

Derek I believe the company we worked for only set up research shop in the US so that they could sell their drugs in the largest market in the world without taking all the cash out of the country that bought them.
As far as the low cost attraction of China and India, I feel you can't compete with the commodity chemicals unless you have a clear purity advantage i.e. Clariant and HMDS. As far as custom chemicals there is still a high loss of qualtity control over the distance and I still get about a 25% failure, which if you kg project depends on a key intermediate you just got burned on, the cost savings isn't worth you reputation!

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6. SteveM on May 13, 2010 12:06 PM writes...

China is still a relatively poor country per capita. I'd be surprised if new product development which is very expensive really interests them for domestic consumption.

As acceptance of Western medicine increases, I'd forcast Chinese manufacturing of generics, plus opportunistic theft of IP for drugs still under patent. They aren't going to pay for cheap molecules they can make themselves.

They'll stay away from biologics all together because they are too expensive. Even if manufactured domestically.

And the rest, they'll cherry pick unique therapeutics as imports. Or rich Chinese will travel abroad for therapy.

So in the end, I think Discovery investment in China is still based on cost of labor (and regulation) versus Western facilities. With little actual targeting of the Chinese market expected for new Discovery for anything but genuine blockbusters.

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7. noname on May 13, 2010 12:33 PM writes...

Great post.

The cost argument will continue to wane in importance as the cost gap narrows (until Africa steps up). So we can assume that "access to the market" is indeed a big part of the R&D-to-China movement. But how exactly does doing the basic R&D in one location consquently open up that location to sales and marketing? That's not how it works in the West. When asked, pharma execs talk about "building trust" and "understanding the culture" and "forming local partnerships." I've realized this all code-talk for corruption. Greasing the local pols, sweetheart deals, quid pro quos. We can see that globalization entails among other things the adoption of corrupt business practices by multi-nationals as a price of doing business.

Unfortunately for Big Pharma, I agree with the commenters that the market potential is over-rated. And I agree with Derek that the price gap will narrow considerably. This will all be just another busted fad in 5 years.

Let's think about the PRC government. I believe they do indeed want an indigenous global biopharma industry. And I do believe WuXi's acquisition was a blow to this vision. I predict an industrial conglomerate (maybe a cement company?) will use an extra few billion to buy the next smallish Western pharma that's on the road to oblivion. Maybe BMS or AZ in 5 years or so? Or mabe a Gilead or a Genzyme? Who knows? In the meantime they roll out the red carpet to Western R&D for the purpose of building up a native R&D expertise that can be turned to this taks when the time comes.


Whether this will work or not is anybody's guess. Several commenters have made the point and I'll say it too. Innovation and creativity are the key to success in this game, and I think the PRC lacks in this area.

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8. Hap on May 13, 2010 12:52 PM writes...

The problem with the reality of the wage equilibration argument (not that it isn't happening) is that wages will likely stabilize well below current, because there are so many potential employees (though the eventual market expansion may raise wages eventually, in the short term and for us, it's a zero-sum game, but in the long run it probably is not). Since chemists and drug people make up a small fraction of their respective workforces, changes in labor costs are unlikely to change the cost of goods in their respective economies, so the fall in wages is probably catastrophic for employees in the old world. You can't live on Chinese wages in the US, and you can't live on them in China (paying foreign prices, even if you could go there).

The other part of the equation is productivity - if they produce similarly to US workers, then even at increasing wages, Chinese workers are still a bargain. If not, or if they require knowledge that you can't give them or don't have to develop new drugs, then you are simply failing more cheaply, which is either a delaying tactic (to hold stock value while you figure out what to do) or an exit strategy (or a road to bankruptcy). Without a knowledge of what needs to be done, and without added productivity per unit of money spent, outsourcing to China can't solve your problems.

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9. anchor on May 13, 2010 1:23 PM writes...

When you add the cost overruns, quality control and failures in $$$ terms, I always held the view that outsourcing is not worth it. But then I am a foot soldier, who got things done (while the going was good) and not those overpaid do nothing managers who claim to know both chemistry/modern economics. When it comes to outsourcing it is not the $$$ saved, but too many failures at a place not near you and knowing it from far off. As the English said...”penny wise pound foolish". Enough said, I guess.

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10. Nick K on May 13, 2010 1:38 PM writes...

Outsourced drug discovery in India and China has been going for a few years now. How many drug candidates have emerged from these countries?

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11. John on May 13, 2010 2:51 PM writes...

Anyone who's done business in China is well aware that it's essentially a large criminal enterprise masquerading as a country, and they will do exactly as much as they think they can get away with in terms of outright theft. The saving grace for pharma is key markets with high barriers to entry and fairly rigorous supply chain regs; they can't just run the factory an extra shift and dump into the gray market. Presumably any theft of good candidates from a multinational program would be easy to detect and block from licensure.

Highly educated Chinese returnees I've known generally did so because they were speeding up their professional development by a decade, but either left their children abroad or sent them overseas as soon as practical.

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12. anonymous on May 13, 2010 7:29 PM writes...

Maybe when they develop their own drugs, they can make an impotence drug that works better than all the gorilla hands, shark fins, elephant tusks, turtle shells, etc. from animals that are currently being driven to extinction, just so an old chinese guy can get a stiffy.

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13. China Bonding on May 13, 2010 9:06 PM writes...

Having come to China from Big US pharma a year ago, I can say with some degree of confidence stemming from first hand experience that China is an exciting place to be right now.

The med chem projects are getting better and better, the quality of the people is improving and infrastrucutre developing at a phenominal rate. One really needs to revisit the 'China situation' every 6mos to keep up with the changes.

Costs are rising, but slowly, and still no where near US/Europe costs. Just think, a VC can now fund a good idea for two years for as little as US$3M. Think how many more ideas can be investigated! Much higher potential for a new Genentech etc...to come along and create demand for more chemists/biologists, fingers crossed.

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14. processchemist on May 14, 2010 2:33 AM writes...

@China Bonding

Currently with 3 millions dollars a VC in Europe can buy up to 6 micro biotechs with their IP assets and so on. Some swiss and german VC are already offering financial packages of 250.000-400.000 euros. This is all but exciting (very depressing, I would say).
How things change at light speed, these days...

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15. You're Pfizered on May 14, 2010 8:21 AM writes...

Why do we assume that entrepreneurs in China want to form the next Lilly, Pfizer or Genentech?

Perhaps they simply want to get a good idea rolling with some VC money, or cash from large pharma projects, then sell the company/compound/technology/resources to larger, non-Chinese based firm and reap the profits, much like the folks at WuXi did.

Isn't it similar to the startup biotech industry here?

I can't believe I'm saying this, but big pharma could actually benefit from a thriving biotech community abroad. More sources of potential clinical candidates, viable drug targets and technology to purchase.

I'll probably still be unemployed, being a medicinal chemist, but the overall benefit to people who need medicines may be quite positive.

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16. David on May 14, 2010 9:44 AM writes...

As someone who's actually sourced chemistry to China, the stereotype rings true in that it's generally a good deal for raw materials or semi-finished product, i.e. common intermediates. If you want to do anything fancy or make actual API, do it in the USA. Or Canada. Or Europe. Don't do it in China, it's not really much cheaper, and after our contractor blew it twice, we stopped trying to make any fancy or final product there. It's not like there aren't any unemployed medicinal chemists in America, many of them have set up custom chem shops in low-cost areas where drugmakers used to be (southern Michigan, St. Louis, near Big 10 schools like Wisconsin or Minnesota). The quality difference between 1 US ex-pfizer PhD with 20 years experience and 4-5 Chinese guys is astounding in time, quality and success rate, and needless to say, it favors the US guy.

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17. Matt on May 14, 2010 11:49 AM writes...

Independent of costs, having an R&D office in another place gets you access to a talent pool you couldn't otherwise tap. And China is a big pool.

Eventually, their top talent will be about as good as ours, and they'll probably have three times more of it (just based on relative population size).

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18. Yossarian on May 14, 2010 4:34 PM writes...

We have planty of talent here in US. What we need are jobs!

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19. Don Corleone on May 14, 2010 5:08 PM writes...

#16, Agreed. As a former chemist now runs a software company. Software outsourcing (to India in our case) faces similar dilemma. It is actually more challenging for software outsourcing because of business knowledge involved. Indian programmer is way much cheaper (1/4 - 1/5 of the cost here). But you have to supervise very closely and constantly. It is sometimes very hard to get them fully understand the business aspect of what we need to do. But you can't beat the cost. So you have to strike a balance. After several years working with this Indian firm, we are generally happy (though get frustrated sometimes for their lack of in-depth business knowledge - pharma related).
That is my 2-cents.

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20. MedChem123 on May 14, 2010 10:56 PM writes...

US/Europe's today will be China's tomorrow!!

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21. MedChem123 on May 14, 2010 10:57 PM writes...

US/Europe's today will be China's tomorrow!!

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22. dick on May 15, 2010 12:06 AM writes...

This is an interesting article to describe the future of China for the phar industry. I have to say I do agree many points mentioned above. China's technology has been catching up with the westerner's for nearly 30 years. Some areas like IT and Telecommunication are pretty close to US or some other west countries. There are quite a few world known and 1st class enterprises including Huawei, ZTE etc. There companies are entering into US market slowly but steadily. Lenova is another example. For the pharmaceutical industry, the situation is quite different. Many Chines are still used to the traditional chinese medicine which have been used for thousands of years. Because of these medicines, the urgency to develop a new medicine is not that high. Pharm industry is one of the most complicated sector and the status is directly related to the economic status of that country. Even if one country has good economy, it will still be difficult to develop the sector without a good starting point. The starting point I am mentioning here include the talents and the money. If there are not enough people knowing how, then there is no way to develop a new drug even if there are lots of money there. For example the anti-malaria drug Coartem was invented by Chinese, but China had to dependent on Novartis to develop and commercialize this product. I agree that there is still a long way to go develop a enviroment which is helpful for drug discovery. In recent years, lots of the work have been outsourced to China under the pressure to cut the cost. Medicinal chemistry is a perfect example. Wuxi Pharma (now Charles River) employs 3000 chemists. Let's do the simple math. If all the chemist are all working in US, then every chemist will have a job here. As a matter of fact, the situation isn't like that. I don't think outsouring to China is only for saving money. I think the R&D will eventually moved to China. The productivity there is extremely hihg ( much higher than europe). And the demand for new medicines is also high. With the improvement of living standards, more and more wealthy citizens can afford the western medicines and they prefer new medicines over traditional chinese medicine. The demands is there. Wherever the market is, the money will always flow there. China won't have a giant pharmaceuticals like Novartis, Merck etc. This won't happen. There is no need to duplicate a company. when the big blockboster expires one by one within the next few years, the only thing they need to do is to launch the generic version of these blockbuster. There will be a few generic companies like Teva,Waston. The Chinese government is trying to consolidate the industry by M&A. There are more than 6000 companies with different sizes. But none of them can be compared with Merch or other big pharms.To bevelop a company like Pfizer, it could hundreds of years. This won't happen. The true motivation for Wuxi isn't fully known. When Ge founded the company 10 years ago, he had lots of visions and thoughts. He might not think the company would grow that fast. Did he want to go to the generic business? Only he knows. He might have though about that.

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23. processchemist on May 15, 2010 1:32 AM writes...

@Matt

few buzzwords more and you'll start saying that western chemists need to "proritize their focus"...

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24. RandDChemist on May 17, 2010 8:00 AM writes...

If you haven't had an opportunity to do so yet, do read the article on Chinese companies coming here to the US in Fortune (latest issue, the one with Mao wearing Uncle Sam's hat).

These Chinese companies are setting up (or acquiring) here since the land is cheaper, the power is more affordable and the infrastructure and skilled workers are there. Sometimes due to trade requirements, they need to be here to make money. These companies are learning to adapt and work with the typical American (whatever that is!) in places like SC.

The article is mostly positive (too much so in my opinion), but it does show the pragmatism of those who are successful here.

It's not simply going to be a matter of cost. Look at German companies...it is not as if they have access to the cheapest labor pool in Europe. Keep in mind that productivity is not simply a numbers game.

It's a complex dynamic situation that is like nothing we've seen before. The closest would be the situation with the Japanese in the 80's, but that is a stretch based on what I have seen and read.

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25. medchem23 on May 26, 2010 5:03 AM writes...

Outsourcing to China/India is the latest craze in big pharma. Much like the combinatorial chemistry craze in the 90s. That wasn't a quick fix and neither will this be. The increased costs are part of the correction associated with any of these crazes. Unfortunately this particular craze is devastating the jobs of many western scientists in the interim so the long term effects may be more substantial but I'm hopeful that things will balance out again.

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26. hermit on June 10, 2011 12:25 AM writes...

I am very shy to write those words, in fact, I don't understand what he said.
In those days, I am crazy to collect some article about china's future, I want to know what is my future, I am confused

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27. hermit on June 10, 2011 12:34 AM writes...

manu foreigner see the great change in china, Yes, I aslo see this facts.
But there are more things hide in the dark: eviroment pollution, corruption, tyrannization and no human right.
More time i lived in this country, more i felt i was a pet raise by Communist Party of China. They blind my eyes, jam my ears and block my month. If i am a poppet, I can be live and stay in this society.

Permalink to Comment

28. Terry on June 12, 2011 1:44 PM writes...

some thing you dont know
Now china is such a unstable country, all the emerging middle classes are suffered form the suppression from the government, indeed this country is controlled by a few group of ppls, the normal civilians cant enjoy their life due to the increasing corruption and culture destroying by the so called modernization.

Among all the HIGH TECH industries, pharmaceutical industry is one of them, the government really wants to catch up the steps of developed country.Actually , there is almost no new drugs invented by Chinese, all the manufactures are trying to copy and sale the generic drugs to the 1.3 billion ppl.

Most professionals returned to china to do business there just because they are laid off in US or hard to find any professional jobs here. these chemists are trained in US and enjoy the life, environment and political system here, however, there is no job available here, chinese organic chemists have to accept the low paid job in China to support our family, and compete with all organic chemists in US , that's sad!

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