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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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« Smell The Vibrations? Fruit Flies Might Be Able To. . . | Main | Science and Revolution »

February 21, 2011

Cutting The Cuts to Save Money on the Money-Saving

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Posted by Derek

Here's something that not everyone may have considered: there have, of course, been plenty of mergers and takeovers in the drug business over the last few years. These are driven by the need to fill pipelines and cut costs, and one of the biggest cost-cutting moves has been the outsourcing trend. (There are so many links to past discussions around here on these topics that I'm not even going to bother putting them up!)

But think the process through: if drug firms in the US and Europe consolidate, what does that do to the outsourcing suppliers? Well, it hits them, too. That's an article from India's Economic Times (via FiercePharma), and its quotes will sound eerily familiar:

"When global drugmakers cut cost, the pre-clinical and early phase drug development outsourced to Indian firms are among the easy targets," said a Mumbai-based pharma analyst with a global brokerage firm. . .

Yep, it's come to the point that we're cost-cutting the cost-cutting measures. In a way, it's sort of comforting to know that everyone's in the same boat. But what a boat it is.

Comments (29) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. You're Pfizered on February 21, 2011 11:15 AM writes...

The Titanic?

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2. anon1 on February 21, 2011 11:17 AM writes...

yeah, well dahhhhhh.....

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3. processchemist on February 21, 2011 11:23 AM writes...

I bet that cuts to contracts in India will be followed by a rise of contracts in China. The trend for the cheapest option is relentless. Indian CRO/CRAMS in the last years bought several western assests (Dishman owns Solvias, the first example that comes to mind). Now their western structures are at risk?

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4. Jonadab the Unsightly One on February 21, 2011 11:39 AM writes...

The stores all sent me fliers in the mail saying they're having sales for President's Day, but I'm not going, because I can't afford to save any money today.

Outsourced labor is cheaper than domestic, sure, but it's not free. So yeah, taking what has been outsourced and giving it the ax altogether does indeed save money, at least in the short term. (What effect is might have in the long term on assets and therefore on sales is harder to quantify precisely.)

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5. Anonymous on February 21, 2011 11:57 AM writes...

Pharma is just fighting the rip tide harder and harder instead of letting it it take them out and swimming to shore. It's vast resources are starting to dwindle and soon it will drown.

It cannot bring itself to face its real problem.

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6. The Beagle on February 21, 2011 12:15 PM writes...

The best will be when China becomes to costly that subcontracting to Africa will be their solution. By that point, U.S. will be post-apocolyptic RoadWarrior nation and will compete viciously with Africa for China's buisness...and lose.

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7. Hap on February 21, 2011 1:09 PM writes...

Um, to outsource to Africa, don't you have to have a body of educated people who can do your work (most of whom left Africa and are probably not coming back), an infrastructure to get products in and out (um, not so much), and governments that won't rob you blind (um, not quite)?

Unless China invests a lot of money and political muscle in Africa, I don't think it's an outsourcing destination. Central Asia might have a better shot, if outsourcing to it doesn't require a pitched battle with Russia.

How do you expect to make money with no products and no jobs in your profitable markets (if you thought Obamacare was good, how much worse would it have been if pharma had not profitable jobs and their associated taxes to use as leverage?) Even without the political dimension, no products seems to mean no money. It's like pharma is disassembling its car in the middle of an accident, moving their front end backwards piece by piece to avoid damaging it, and not realizing that once their front end is gone, they're the next thing to hit the other car. That'll work well.

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8. Mark on February 21, 2011 1:55 PM writes...

As the big pharma R&D budgets get scaled back, the CROs won't be the only ones hurting. Think of all the VC backed start-ups that are counting on an acquisition. They sure can't market a drug all by themselves.

I felt this way 5 years ago, but it's even more pronounced today: the worst is yet to come. I can't see a turn around in the industry for at least another 5-10 years.

Mark

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9. Rick on February 21, 2011 2:43 PM writes...

I'm left with the question, "so what?" From a market dynamics perspective, this is as it should be. Although one can question the reasoning behind M&As as a mechanism of boosting productivity (as I do), it seems like well-accepted economics that the manifold blessings of increased competition will ensue from shrunken demand for CRO services. I realize that people have reason to fear for their jobs - believe me, I'm sympathetic - but isn't this just a logical, foreseeable continuation of a process that has enjoyed wide support for quite a while?

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10. CMCguy on February 21, 2011 3:14 PM writes...

Forgive me if I only shed a few crocodile tears about the CROs losing work. While I have no doubt there are real impacts to CROs I would wager that such cuts are disproportionally small relative to what befalls the internal groups (I almost said especially those in "A" but trend in recent purges looks to be more widely implemented). None of this halts the overall tide to outsourcing and is likely only temporary redistribution of which CRO has continuing support.

The sad part to me is that what this reflects is likely cancellation or severe reduction in active projects, likely before getting to a stage that can legitimately evaluate potential to a new drug. Innovation is not all about numbers however fewer projects generally means fewer opportunities for success. Most troubling is more often than not when observing M&As there are projects which had good promise that get culled by certain arbitrary "New Company" assessment of their real potential not aligning with new direction chosen. This has always been a hidden factor for the decline in new products over the past few decades with Merger Mania being promoted as quick fix to a long term question.

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11. Hap on February 21, 2011 3:27 PM writes...

9: I think the problem is that cutting CROs mean that product development have been cut. Cutting CROs and cutting research means you'll have fewer products in your pipeline. Since you already don't have enough to sustain your existence, the only problem that this sort of cutting solves is your fear of continued existence.

Where's this enhanced productivity thing that mergers were supposed to create?

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12. Rick on February 21, 2011 3:56 PM writes...

11: On an industry-wide basis, it is believed that M&As can raise productivity by increasing the numerator (effective drugs) and decreasing the denominator (cost to develop the drug) of the productivity formula, resulting in large increase in the overall quotient. The increase in the numerator is achieved as a result from the dominant party in the M or A being able to focus on the most viable drug candidates. The decrease in the denominator arises from eliminating the cost associated with pursuing less viable drug candidates plus the expected cost-efficiencies of cutting resources.

With respect to the effect on CROs, I agree with the cause-and-effect relationship you lay out and I also deeply appreciate the personal anxiety that goes with it. I have felt it many times myself. But, unless there's something wrong with the economic arguments for M&A, the anxiety and lost jobs are a relatively small price to pay for what is expected to be a better-functioning drug discovery and development machinery with greater benefits to society. Or is there something wrong with the economic arguments?

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13. Anonymous on February 21, 2011 4:06 PM writes...

Are academic labs the new CRO

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14. Hap on February 21, 2011 4:32 PM writes...

It just seems that mergers have killed the most viable candidates and purged the people who have been most likely to help the merged company find new drugs. In theory, there should be matters of scale (easier to create a set of specialized development people so that drugs are easier and cheaper to develop because there are enough people and drugs to justify the cost of specializing), but the purges have removed lots of those. That removes lots of the lowered drug production costs of merging.

There isn't anything wrong with the economic arguments, but the tactics they imply should work don't seem to be working. There aren't more drugs, nor a lowered rate of attrition, nor a lowered cost of putting them through trials. The only source of saving for companies seems to be cutting employment, which at some point, decreases your ability to generate a new pipeline. Maybe this is just the short term, and it will turn out better later, but the mergers have been going on for some time, and I imagine people are wondering when the benefits of M+A for drug companies hit.

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15. Roger on February 21, 2011 5:29 PM writes...

"In a way, it's sort of comforting to know that everyone's in the same boat. But what a boat it is."

What a fatalistic perspective. Unionize, organize, and strike. Chemists seriously need to grow a pair.

Since the prevailing wisdom on this site is that 'organization for people is bad' while 'organization and outsourcing for companies is good', it's no wonder you're all no more than a few months from the unemployment line.

Many professional organizations form real power structures that benefit their members. You need to take a hint from Egypt and Libya and gather together to discuss your future.

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16. Rick on February 21, 2011 5:32 PM writes...

14: I'm right with you Hap... waiting. By my own reckoning, the M&A advocated by this financial/economic theory really took off in the mid-90s. Assuming the standard 12-year development timeline for drug candidates involved in the M/A, and throwing in a generous 2-year period for "integration" activities, then we are reaping the fruits of this business strategy right now. If the escalating concern over weak pipelines is any indication, then the signs are not good. One might therefore reasonably ask: why are we trying to address the concern with what looks a lot like more of the same thing?

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17. bbooooooya on February 21, 2011 6:38 PM writes...

"Unionize, organize, and strike. Chemists seriously need to grow a pair"

Good luck with that. Most chemists get beaten down in grad school only to graduate to the "privilege" of working for maybe $40K/year for a few more years. If chemists aren't willing to stand up for themselves at the stat of their careers (can you imagine engineers of business students, who have less schooling that PhDs taking this crap?) why would they after further beatings.

Sad thing it, its chemists exploiting other chemists and perpetuating the system,

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18. lynn on February 21, 2011 7:54 PM writes...

Rick and HAP: Yes, the M&A economics make sense - but this may not be applicable to the pharma industry (as opposed to, say, Rubbermaid-type industries) because "being able to focus on the most viable drug candidates" is the problem. The attrition rate is so high for most therapeutic areas that "viability" is largely impossible to define. Yes - there are obvious losers that could be cut - but the erstwhile benefit of Big Pharma was the ability to move forward, at the pre-clinical level, many programs at once. Leads have to come from somewhere (internal or biotech or academe) and then have to be rigorously evaluated and moved forward. This requires real expertise in the pre-clinical end of things. Getting rid of people lowers this potential.

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19. Rick on February 21, 2011 10:08 PM writes...

Lynn 18:
" the M&A economics make sense - but this may not be applicable to the pharma industry..."

I am inclined to agree with you, Lynn. And yet, it seems to me that B-schools and McKinsey have cranked out thick studies and smart alumni who have told us otherwise; pharma companies took that advice and replaced people in the corner office who were familiar with drug development with people from marketing; and PhRMA cheered (at least until recently) that it was all so marvelously innovative. If that was all wrong and pharmaceutical discovery and development really is that different from making Maytags and mops as you suggest, then there's a whole lot of industry management and strategy that may have to be scrapped and rebuilt from scratch. Is it possible?

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20. Sean on February 22, 2011 1:05 AM writes...

@8: Mark,

I think 5-10 years for a turnaround in pharma is way optimistic.

I am afraid it will be on the order of 20-30 years. I wonder if the outsourcing will continue to the point where no R&D is performed in the US by pharma. Our drugs will come from India and China. Even then things won't turn around until some of those drugs, due to poor policing, kill large numbers of people. (cuz heck they can't even get dog food right).

Then and only then will everyone go "Oops!" Then we will see all sorts of policies, tax breaks, etc to bring back pharma R&D. It will be too late for most of us on this blog. We will be approaching retirement or already retired. Others will have long since left pharma for a different sector like energy. Levels of students going into chemistry and related fields will be so low it will take some time to recover. So yeah, 20-30 years seems right.

It really is depressing to see an entire field mutilate itself this way.

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21. Rick on February 22, 2011 8:17 AM writes...

@ Sean, Mark 20, 8:

Even splitting the difference between your time frames, say 15 years for the turnaround, there's attrition that's even more troubling than the retirement of those on this blog: 1, deaths of researchers and research managers who led the industry when it routinely cost a small fraction of the alleged $1 B (in Y2K dollars) to discover and develop a new drug (i.e. every year from the 1940s-early 1980s); 2, deaths of those who need those drugs now, not after we've tried out more new business models. We'll be bereft of leadership with demonstrated drug discovery competency and awash in people highly competent in moving money around for profit, with a highly skeptical public looking on in dismay.

But there may be a tenuous ray of hope. Countries outside the U.S. and E.U. (ironically, countries hosting firms to which we look for cheap outsourcing), are starting their own home-grown drug discovery and development organizations. Maybe they'll come up with their own business models, rather than mimic ours.

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22. anon on February 22, 2011 9:49 AM writes...

@20

"Then and only then will everyone go "Oops!" Then we will see all sorts of policies, tax breaks, etc to bring back pharma R&D."

They already exist, but it doesan't seem to be helping.

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23. Hap on February 22, 2011 10:03 AM writes...

Unions haven't been able to persist well in any aspect of the US economy - other than gov't, which is now under siege, as well. The ability to move chemistry is a problem, becuase it disables unions' ability to strike effectively, and thus their leverage - laws could inhibit that, but at sonme level you probably want to be able to get help from elsewhere.

The bigger problem with unions and employers in general is that labor relations have been a zero-sum game - either unions win (and generally prevent businesses from doing things in useful ways and support the least able of the union members) or employers win (and screw their employees silly, when they are shipping jobs away to screw another set of employees with fewer options even sillier), with no in-between, when you want employees who can make your business work better (and the ability to get rid of useless people) and employers who actually value their employees and their contributions and don't see them as expendable quantities. I don't think unions are a credible or powerful threat to induce employers to think about their employees.

For pharma, I think the only hope is that startups with a more cooperative model succeed and displace big pharma, although that's painful. A problem with that, in addition, is that once funders buy in, their drive for return trumps all, and generally means (or has been taken to mean that) employers have to screw their employees to generate the necessary returns.

Lots of people chant "Union! Union!" as if it were a magic potion to make employers and companies remember their employees, but it doesn't appear to have worked that way for a very long time, if at all.

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24. NoDrugsNoJobs on February 22, 2011 11:59 AM writes...

There are solutions but the will to execute those solutions need to be there politically. The number one thing that the federal government could do to help American Pharma industry is to revisit exclusivity provisions and increase them for small molecules. Folks, biotech inventions have no generic competitors and even under the new biosimilars legislation, they get 12 years of exclusivity as well as a much more difficult path for generics to enter the market. In fact, most views on the biosimilars legislation indicate that producing a "generic" type biological will be damn near impossible and any company willing to make the investment will not even go the biosimilar route.

What has occurred as a result of the regularity disparity is that big pharma is switching its focus more and more to biologicals because the revenue stream is more predicatble, not subject to generic litigation and will run a much longer time. There is no logical reason for this disparity because as a policy matter, encouraging biologics at the expesnse of small molecules will not bring down the cost nor convenience nor accessability of medicines to the public but rather, is likely to have the opposite effect. The sad thing is that our ignorant congress and executive branch folk have no idea that when they encourage generic competition for US small molecule drugs that they also encourage job loss in the US and importation of generic drugs from overseas. Who benefits? The insurance companies and other payors benefit, pharmacys like it because they can mark the generics up more but to the person taking the generic drug....I don't know about you but to me, the idea of taking generic drugs imported from somewhere in Asia from a plant that has never been inspected just doesn't appeal to me. We in effect are trading the future of drug research and innovation (and yes, jobs) for cheaper drugs for payors now.

The crazy thing is that in the process, we also encourage biologicals which are way more expensive and much less convenient (usually injectables, often refrigerated). This is what bad federal legislation does...

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25. DCRogers on February 22, 2011 12:26 PM writes...

#12: "M&As can raise productivity by increasing the numerator (effective drugs) and decreasing the denominator (cost to develop the drug) of the productivity formula."

Well said -- but then, how to explain that productivity has not been increased by nearly all past mergers?

It's a beautiful-sounding theory that has failed again and again when applied (but not that that's stopping anyone from trying again...).

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26. lynn on February 22, 2011 12:55 PM writes...

Why small molecule pharma is different from 1) other manufacturing industries and 2)biologicals - is that small molecule drug discovery is not an engineering problem. There is no stepwise path from idea to registered product - there are always big gaps that require leaps into the unknown. Like the famous S. Harris cartoon (http://www.sciencecartoonsplus.com/pages/gallery.php). Making insulin, interferon, mAbs, plastics ... the process is doable. Yes there may be problems with toxicity, delivery, melting... But the move to make drug discovery a technological rather than a scientific pursuit lowers the emphasis on small molecules (IMHO). Managing science - which is an open ended process, is different from managing an assembly line.

to Rick at #19 - I realized there was a management problem in Big Pharma back in the late 80s when the concept of "managing by objectives" became part of the evaluation process in the laboratories. It had been pushed down from corporate. At first the heads of groups in the labs laughed at it - how can we know how many widgets we'll make?; what problems will arise? But those managers faded away eventually, HR rose in power and we got focus groups and flattening and then silos and pyramids. So, either the output changes (i.e., biologicals) or somehow, the MBA types try to figure out how to actually manage an open-ended process.

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27. Bruce Hamilton on February 22, 2011 2:23 PM writes...

Historical chemical industrial cycles have been protracted because the US drug and health care markets have grown for decades, making room for all players, regardless of management and product innovation.

The transfer of chemistry innovation from Germany and Britain to the USA in the early 20th century, will be repeated.

Over the next decade, Big Pharma will follow many other chemical industries of the second half of the 20th century, and new firms with more effective management located in exotic and dynamic countries seeking to build industries ( Asia? ) will out-compete the big Pharma companies in US and Europe.

Those companies will become simple acquisitions to obtain market access. R&D will revert to the parent countries, and the chemists from those countries will have more resources to innovate and develop.

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28. Anonymous on February 22, 2011 10:54 PM writes...

The bottom line is small companies should be (and may well be) doing all the research activities under the big pharma umbrella in the near future. Good for both parties: biotech gets cash and big pharma gets stuff done. Big pharma can then have a "fall guy" if anything goes wrong. Based on the current US debt, soon China will be the big pharma and the US will be the CRO. Watch out! Look into Rosetta stone: Chinese...could save your life!!!

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29. NotThatAnonymous on February 23, 2011 2:17 AM writes...

One company learning that outsourcing doesn't always save money is Boeing. Outsourcing has been an abysmal failure for Boeing when it comes to the 787. However, until there is some way for executives to learn when outsourcing is appropriate and when it is not, corporations will continue to end up paying for expensive on-the-job training for executives.

http://www.latimes.com/business/la-fi-hiltzik-20110215,0,442445.column

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