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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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« Columns Outside The Doors | Main | Outsource to China, Then Move There? »

September 7, 2010

China Outsourcing: Getting More Expensive, Fast?

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Posted by Derek

Back in May of this year, I wrote that:

. . .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. . .

I went on to wonder if some of the big investments in China might turn out to come on line about the time the cost advantages disappeared. Well, it's happening right on schedule. Via FiercePharma, we have this piece from Life Science Leader:

A 30% to 50% cost savings was the main driver for sourcing starting materials, intermediates, APIs, and (to some extent) finished drugs. Cheaper labor, tax advantages, undervalued currency and lower capital, and overhead costs all contributed to this. All of these advantages are expected to erode in the coming years as inflation in China rises, currency appreciates, and tax rebate structures start to evolve. . .

. . .With these changes China’s current gross cost advantage of 30% to 50% could easily go down to 13% to 25%. Factor in supply chain complexity (lead times and inventory implications), rising costs of quality assurance, and upcoming stringent environmental regulations, and Western pharmaceutical companies will start to rethink their China outsourcing strategies. Accommodating for these factors, the net cost advantage for some pharmaceutical firms could easily vanish.

This does not mean, of course, that pharma outsourcing is going away. It's just going to keep moving to the cheapest suppliers that can deliver the goods. India may well pick up some of this business (although their costs will be increasing as their wages rise), and other countries could well move into this space. (Thailand? The Philippines?) And then their costs will gradually grow, as they get richer, and someone else can move in. No, no one gets to sit back, set things on automatic pilot, and watch the money roll in, which is how it should be.

Comments (22) + TrackBacks (0) | Category: Business and Markets


1. anchor on September 7, 2010 11:40 AM writes...

"Greed, for lack of a better word, is good". If it is good in US, it must be so in other parts of the World, including, China. Except that in China they want to be overnight billionaires, while the outsourcing supplies last.

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2. quintus on September 7, 2010 12:00 PM writes...

What did the MBA's think. This was obvious to a blind man.
The China (far east) venture was (is) a mistake. But as usual the decision makers won't suffer it will be you and me. It has happened already to me.
I hope they all loose their jobs, these MBA's are killing the industry.

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3. Pamela on September 7, 2010 12:29 PM writes...

The US has its own burgeoning "drug" industry in medical marijuana. Small businesses-- dispensaries and growers-- are popping up in the 14 states that have legalized it. Instead of fostering these small businesses, Puritanical state legislatures and local governments are adding high fees and regulations aimed specifically at this one market segment.

Is seems disingenuous to lament the loss of big pharma jobs to China and elsewhere while at the same time local governments are trying to suppress an alternative drug market.

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4. processchemist on September 7, 2010 12:39 PM writes...

Some considerations about the manufacturing issues of our sector...

1) Currently, in the western world, we need low cost raw materials and intermediates. Without the asian sources , some complex products would not be available at a price sustainable by the market, and the economic crisis makes things worse, on this side.
2) about finished products, things are completely different. Talking about APIs, not only chemical quality matters - and when the good chinese suppliers I know say "99%" the checked value is usually between 95 and 98 . There's an enormous issue about bioequivalence of generics, and no one wants to talk about it.

On the R&D side, I remember something about significative results from the GSK Shangai CEDD/DPU that were scheduled for last april, and I heard no word about it.
Honestly, all you medicinal chemists think that all you need to generate good leads is some buchwald and suzuki chemistry, a microwave oven and a Biotage system? I don't think so.
IMHO trivial chemistry produces mostrly trivial results. And, as far as I can understand, our sector needs something more.

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5. hell to the chief on September 7, 2010 1:18 PM writes...

13-25% is still a significant saving to the bottom line. It will have to be balanced against the cost of managing from afar of course, but for cash poor biotechs and pharma, money still talks.

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6. Anonymous on September 7, 2010 2:04 PM writes...

It's about selling drugs in China.

The easiest way to do that is by creating jobs there.

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7. Chrispy on September 7, 2010 2:06 PM writes...

My experience with outsourcing has been that a lot of the costs are hidden. All the back-and-forth about protocols, figuring out milestones, QC of the material delivered, etc. all take resources but they are not counted. And everything takes longer, which is not what this industry needs.

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8. KB on September 7, 2010 2:11 PM writes...

And do you forget that some African countries are getting into shape and may take up some of this space.

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9. CMCguy on September 7, 2010 5:44 PM writes...

#7 Chrispy is dead on in that hidden costs with the associated accounting practices (e.g. shell game) already makes the Outsourcing model of less real benefit that the advocates have loudly proclaimed and typically comes with significant shift in the time frame requirements. On the other hand #6 Anon is correct that it is now more switched to establishing a foothold in new/expanding markets (so companies know better who to bribe?).

#8 KB Chindia was spawned and greatly accelerated by people returning there after education and/or working in the West. I have encountered only a hand full of other nationalities in Chemistry from less developed sectors of the world, such as Africa (excluding White South Africans that fled), South American and wider parts of Asia, that might be able support a pending gap of demand for low costs verses technical infrstructure. I know there there was a surge of old East Bloc countries and even Russia in 80s and 90s that had potential with strong foundations for good work/lower cost basis however not sure if such was sustained since they were in a competition with Chindia as suppliers.

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10. Jose on September 7, 2010 5:58 PM writes...

Anything near the 13% mark gets vapourized in time zone snafus, lab notebook scanning or procedure detailing, dodgy HPLC traces, and the weeks that disappear trying to follow things up; of this I am quite certain.

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11. Skeptic on September 7, 2010 8:15 PM writes...

The only thing nations with high population densities do is EXPORT UNEMPLOYMENT. They are essentially ruined and dysfunctional. So whats the point of OUTSOURCING? Expand one market at the expense of another. And for this you lose control and breed greater competition. So who really benefits?


Is it any wonder that the most frequent strategy employed in Hedge Funds includes the word 'arbitrage'. So you suckers are just cattle in a pen to the VIP's.

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12. anom6 on September 7, 2010 11:15 PM writes...

Envision dollar signs in the CEO’s eyes when Morgan Stanley tells him about the projected sales figures in the largest, fastest growing, unregulated, and highly corrupt market.

#11 is right, they all go to the banks for business advice, and it’s all follow the other guy.

#9 hits the nail on the head re: the bribe/kickback schemes.

I wouldn’t worry about outsourcing now. The real elephant in the room is the aggressive organic (pun intended) growth by big Pharma that is quietly going on in these countries. That is going to be the real job killer.

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13. srp on September 8, 2010 2:52 AM writes...

Today's WSJ had an article about how FoxConn, the giant contract manufacturer that makes iPads among many other familiar products, is moving production inland from coastal China. Wages and labor costs in the traditional coastal manufacturing zones are going up very fast.

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14. processchemist on September 8, 2010 4:27 AM writes...


about bribes, the Sciclone case can be only the top of the iceberg...

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15. Evorich on September 8, 2010 7:12 AM writes...

Interesting point srp - yes China is actually starting to outsource to China too! This has been happening for a few years actually. Parity with the west is being reached in Shanghai & Shenzen (coastal) areas. But the fastest growing city in the world (and has been for the last 5 years) is Chongqing - bang in the middle of China - it's the new China, if you like!

Which reminds me - if you want a really nice discussion of the history (and future) of "Chimerica" - one of the episodes of Niall Fergusen's "Ascent of Money" show is a really good place to start.

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16. Hap on September 8, 2010 9:01 AM writes...

I have to figure that they're hoping not only to get cheaper help but also to make a brand so that they can reliably sell drugs in China when enough people can afford them (as #6 above).

The problems with that, though are that 1) moving to China hasn't helped the companies develop drugs (yet) and has perhaps made them less able to do so by stripping their previous capacities, and if you have nothing to sell, the brand isn't valuable, and 2) you're training the people who will likely displace you (with or without gov't assistance). The same intelligence you're counting on to use to make drugs is likely to be used against you eventually. The hope of the market is that competition will drive everyone to be better at making drugs, but that seems to have been displaced by the "sell the hell out of what you have" model, which won't last long in the face of actual competitors.

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17. anon on September 9, 2010 5:57 AM writes...

I remember the 90's when "Combo" was "The Way". Management did not understand the drawbacks and considerable compromises involved then, either. Except many of the combo folks, at least, were fine chemists and spoke clear English and lived in the same time zone.

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18. xchemist on September 10, 2010 10:12 AM writes...

Pharma outsourcing IS GOING AWAY, because of the fact that pharma R+D activities are going away.

Outsourcing is like a virus that kills it's host. Destruction of the middle class through outsourcing, has eliminated the demand for the goods that are manufactured by the outsourcing countries.

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19. Karen Cayamanda on September 13, 2010 8:57 PM writes...

Taking Pharma outsourcing to the Philippines is not such a far-fetched idea, given the number of kids graduating from medical-related courses there every year. Pharma outsourcing might even get them to stay in the country (for as