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Volume 87 Issue 41 | pp. 16-23
Issue Date: October 12, 2009

Cover Story

Shipping Drug R&D Abroad

Rise of foreign drug discovery services providers coincides with restructuring of R&D at major pharmaceutical firms
Department: Business
Keywords: outsourcing, layoffs, China, India
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COMPETENT
Foreign drug discovery services firms handle increasingly complex projects for big drug companies based in the U.S.
Credit: Piramal Healthcare
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COMPETENT
Foreign drug discovery services firms handle increasingly complex projects for big drug companies based in the U.S.
Credit: Piramal Healthcare

In recent years, major U.S. drug companies have been laying off people by the thousands while, at the same time, headcounts at contract pharmaceutical research firms in India, China, and Russia have surged. It would seem the two phenomena are linked. But, as with much involving the pharmaceutical industry, things aren’t that straightforward.

In the U.S., it’s common to drive a foreign-made car. Nearly everyone wears foreign-made clothes. And in realms such as technical support, law, and accounting, it’s increasingly common to get service from a person based overseas.

Drug R&D would seem to be a field that should not be entrusted to foreign firms. R&D is the engine of any innovative pharmaceutical company, and common sense says it should remain firmly in-house. By exporting drug R&D, the U.S. pharmaceutical industry appears to be shipping out the very heart of its operations.

Yet, unable to maintain a well-stocked pipeline of drugs under development, executives in charge of R&D at major companies are reviewing how they conduct their drug discovery operations. They and their international partners contend that outsourcing is not a means of cutting expensive U.S. jobs but rather an element in a much-needed rethink of how innovative drugs should be developed.

They make their case, however, against the backdrop of some sobering figures. U.S. drug companies have been cutting disturbing numbers of jobs in recent years. They laid off at least 21,000 employees in 2008, many of them in R&D (C&EN, Feb. 23, page 41). The cutbacks continued into 2009. In February, Pfizer said it would cut 8,000 jobs following its acquisition of Wyeth. Merck & Co.’s acquisition of Schering-Plough will result in up to 15,000 lost jobs. Last month, Eli Lilly & Co. announced it would eliminate 5,500 positions.

Meanwhile, headcounts at foreign-based drug discovery services firms keep rising rapidly. In its seventh year of operation, Shanghai-based ChemPartner employs close to 2,000 people, two-thirds of them scientists. BioDuro, a four-year-old firm with labs in Beijing that provides integrated services extending from discovery biology to preclinical candidates, already employs 675 and expects headcount to grow to 800 within six months. “We’ve been having our best year ever,” says John Oyler, the firm’s president and chief executive officer.

As their headcounts grow, drug discovery services firms in China, India, and Russia are steadily improving their capabilities. Nowadays, the range of services they offer comes close to what’s available at drug discovery labs in the U.S. The most sophisticated contract research firms in the East no longer define themselves by the particular types of services they offer.

“We’re focused on oncology and the central nervous system,” says Xiaochuan Wang, CEO of the Shanghai-based contract research firm Sundia MediTech, when asked about her company’s core competencies. Sundia still offers “chemistry” services on a piecemeal basis. Increasingly, however, Sundia offers “integrated drug development services” that include all the steps in the creation of a drug from lead optimization to process development and formulation. ChemDiv, a 20-year-old company with labs in San Diego, Russia, and Ukraine, is another firm that offers a full range of services from biology to clinical-trial management.

The growth of contract research overseas is drawing talented people away from the U.S. Hundreds of scientists at contract research organizations (CROs) in India, China, and Eastern Europe previously worked at drug firms in Western countries, for decades sometimes. Many of these scientists are returning to the country of their birth, but not always.

U.S. and European natives are an increasingly common sight at leading CROs, where they and other foreign scientists are hired when suitable local candidates cannot be found. Typically, the uprooted scientists whom C&EN talked with say that working for a foreign CRO provides them with fulfilling challenges and the chance to experience life in a foreign country.

That a migration of drug R&D from the U.S. to emerging countries is under way is “irrefutable,” says Kenneth A. Getz, a senior research fellow at Tufts Center for the Study of Drug Development. He says the shift is particularly pronounced with clinical trials, a part of drug R&D that absorbs about half the cost of bringing a new drug to market.

Getz points out, however, that the goal of conducting trials abroad is not to reduce headcount in the U.S. “Drug companies think of an available pool of qualified professionals in clinical research who can be involved in large-scale clinical studies,” he says. Often those people are in developing countries, he adds.

“There is a movement to the East,” echoes Swati A. Piramal, director of strategic alliances and communications at Mumbai-based Piramal Healthcare. “But it’s not because people in the West are being cut and their jobs transferred East.” Asian companies, she reasons, “are able to put a lot of people behind a project and make it move faster.”

Asian countries are more enthusiastic about training scientists than Western countries are, Piramal contends. She notes that chemistry education is being strengthened in India, whereas some universities in the West are closing their departments. One of India’s largest manufacturers and distributors of generic drugs, Piramal Healthcare also conducts R&D on new drugs, both on its own and in association with international companies such as Lilly.

Pharmaceutical Research & Manufacturers of America (PhRMA), the trade group that represents U.S.-based drug companies, is unconcerned by the apparent exodus of R&D from the U.S. Even if the current trend of outsourcing R&D work continues, the U.S. will retain formidable capabilities, says Alan Goldhammer, vice president of scientific and regulatory affairs at PhRMA.

“We don’t really have a concern or a position concerning R&D capabilities leaving the U.S.,” Goldhammer says. “It’s up to each company to decide what’s best for them.” He adds that even though there may appear to be a very large number of experienced drug R&D scientists who have relocated from the U.S. to China or India, it has on the whole little impact on R&D capabilities in the U.S. “We have a very deep pool of talent in this country,” he says.

International outsourcing is an add-on, rather than a substitute, to drug R&D activities taking place in the U.S., Goldhammer contends. Dollar figures support that view. According to PhRMA statistics, although the amount of money spent on drug R&D outside the U.S. is growing at a brisk pace, R&D spending in the U.S. keeps rising, too, albeit more slowly.

Large pharmaceutical companies face a gap between the type of R&D that they need to get done and the number of people in the U.S. who are qualified to do it, says Barath Shankar, a life sciences industry analyst at consultants Frost & Sullivan. “CROs help drug companies to improve the productivity of their R&D,” he says.

Talented scientists and research managers will always be sought, if not by big drug companies, then by CROs, ChemDiv CEO Nikolay Savchuk says. “Whatever the model followed for conducting drug R&D, research people will adapt to it.” To be competitive, he says, CROs need to employ the best talent available. “Under the CRO paradigm, [drug companies] can reduce costs, but it’s not worth it if the CRO people are far less well trained,” he says. ChemDiv hires the best people it can get, no matter their nationality, Savchuk claims.

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In Shanghai, an executive at a major international drug company whose responsibilities include overseeing R&D projects outsourced to Chinese firms, dismisses the idea that China, India, and Russia will displace the U.S. in terms of R&D capabilities anytime soon. “China accounting for a major chunk of R&D spending? No, I don’t think so,” he says, asking not to be identified because he is speaking without the consent of his company. This manager reasons that the global pharmaceutical and biotech industry spent nearly $100 billion in R&D last year, of which, at most, $500 million went to China.

EQUIPPED
Labs of contract research organizations in the East look as modern as their counterparts in the West.
Credit: Sundia MediTech (both)
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EQUIPPED
Labs of contract research organizations in the East look as modern as their counterparts in the West.
Credit: Sundia MediTech (both)

Outsourcing, the manager argues, makes U.S. drug companies stronger. “Our firm may not be growing the number of R&D jobs in the U.S. significantly, but the jobs in the U.S. are not easily displaceable,” he says. He predicts that his company will maintain a considerable R&D presence stateside because that is where the compound libraries reside and because the biology part of the drug discovery process cannot be easily described to outsiders.

“When something cannot be easily defined, measured, and quality controlled, then it’s hard to outsource,” he says. In the U.S. pharmaceutical industry, he concedes, chemistry jobs are more at risk than those in biology.

Michael A. Santoro, an associate professor of accounting, business ethics, and information systems at Rutgers Business School, sees nothing wrong with the overseas outsourcing of drug R&D, even if he has qualms about the outsourcing of drug manufacturing.

“When it comes to pure R&D, world-class research, you can’t have too much of it,” he says. “In R&D, wherever in the world there is strength, there will be research taking place.” Santoro isn’t concerned that by outsourcing work abroad big drug companies are creating their future competition. “If China’s capabilities can be improved for the benefit of the entire world, what’s wrong with that?” he asks.

It would be both futile and counterproductive to try to artificially retain R&D work in the U.S., says Paul A. Wender, a chemistry professor at Stanford University. “You cannot bolt the doors to try to preserve what you have; you would stagnate,” he says. “There are people who need the final product that comes out of this endeavor, and they want lower and lower prices,” he adds. “So we have to be innovative with R&D management.”

The internationalization of R&D, Wender concedes, can lead to job losses in the U.S. But it works both ways. Several decades ago, large European drugmakers built major R&D facilities in the U.S. “European companies did not want to limit their expertise to the U.K. and the rest of Europe, and the additional talent back then was found in the U.S.,” Wender points out.

It’s naïve to equate the outsourcing of R&D to foreign countries with layoffs at U.S. drug companies, says David Stout, director of external resources at Merck. The firm started to outsource a considerable proportion of its R&D work only about 18 months ago, he points out, but job cutbacks at Merck have been ongoing for seven years. Researchers, he adds, have been less likely to be let go than workers in other job categories.

The increased outsourcing of drug R&D to foreign companies should be seen in the context of attempts by major pharmaceutical companies to rearrange the way they discover and develop new drugs, Stout argues. The success rate of the research programs they undertake on their own has become unacceptably low. In addition, he says, there is a shortage both of promising targets that researchers can go after and of researchers to pursue the targets that have been already identified.

In an attempt to fix these fundamental problems, Merck and its peers have become more open to collaborating with other firms in all sorts of ways, Stout says. The company now listens to representatives of small biotech firms that have projects that are still at the very early stages of development. In the past, “when a biotech came to big pharma, it had to be well down the pipeline in Phase II [clinical trials] before we would look at it,” he recalls.

One of the main benefits of working in Asia, Stout says, is that the better companies in those countries are able to develop drug candidates for about one-third the cost of doing so in the U.S. By going after three times the number of targets for the same amount of money, Stout says, the probability of coming up with successful drugs becomes much higher.

There is no proof as yet that developing drugs with third parties will be any more effective than developing them in-house, Stout acknowledges. For example, the productivity of research partners in China, India, and Russia is likely to be low because they typically have managed complex programs for just a few years. Merck scientists, many of whom have decades of R&D experience, work closely with their foreign partners, he says. “We won’t spend as much time on the projects as if we were doing them ourselves, but there’s no way that we’re going to stand back and say, ‘Here’s the target, give us the drug.’ ”

Despite the unproven nature of partnering with outsiders, expectations at major drug firms have been set high. Merck, Stout says, envisions that research done externally will eventually generate one-fourth of the drugs in its pipeline. The responsibility for achieving that target has been given to a new unit called External Basic Research. “Twenty-five percent is a huge challenge for something that is brand new and unproven,” Stout says. He says it’s not clear what Merck will do if external research proves more effective than expected.

The way drug R&D is conducted is fundamentally changing, ChemDiv’s Savchuck confirms. “It’s a new model that makes CROs, pharmaceutical companies, and, often enough, financial companies work in a very close partnership, on a global basis,” he says. To best meet the needs of its customers, ChemDiv has become a multinational company. Its labs and clinics in Russia and Ukraine are staffed by Germans, Americans, Chinese, Indians, and, of course, Russians and Ukranians. The firm’s labs in San Diego provide project management and technology transfer support. Meanwhile, ChemDiv teams in India and China source biology and chemistry reagents and work with producers of active pharmaceutical ingredients.

It’s not only big drug companies that are changing the way they conduct R&D, Sundia’s Wang notes. Increasingly, small biotech firms also outsource research. She points out that whereas companies like Sundia can start working on projects almost instantly, it would take at least six months and perhaps $10 million for a new U.S.-based biotech firm to build the lab capabilities it requires to pursue its research goals.

INTEGRATED
More and more contract research firms in Eastern Europe, China, and India offer services ranging from discovery biology to clinical trials.
Credit: ChemDiv
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INTEGRATED
More and more contract research firms in Eastern Europe, China, and India offer services ranging from discovery biology to clinical trials.
Credit: ChemDiv

With Sundia’s help, Wang says, Florida-based XCovery was able to come up with four promising preclinical drug candidates, despite its limited funds. “Working with a CRO, all the money goes to the problem, not to the buildup of internal capabilities,” she says.

The growth of outsourcing does not contribute to fewer research job opportunities in the U.S., Wang believes. “Most people eventually find the job that is right for them,” she says. The real beauty of outsourcing, she says, is that it puts more scientists to work solving global medical problems. “Science knows no border,” she adds. “It’s our obligation to do this research, in our own way.”

Many research projects do not lend themselves to foreign outsourcing, Stanford’s Wender notes. He has found from personal experience that, in some cases, the outside contractor’s work needs to be monitored so closely that it’s not worth outsourcing. Generally speaking, however, Wender says outsourcing puts scientists from around the world to work on problems that need solving.

“There are millions of people who have serious medical problems, and we need more help to address these problems,” Wender says. He is now conducting medical research with three nonprofit organizations. “If you suffer some terminal disease, you really don’t care how the problem is solved,” he adds. “We need to recognize that we desperately need people who can do R&D.”

Along with his enthusiasm for foreign outsourcing, Wender is optimistic about opportunities for scientists within the U.S. He says breakthroughs are taking place in cognitive research and stem cells. “In stem cells, there’s a lot of investment taking place, right here in California,” he says. “Most people in education accept the evolution of science. It creates opportunities.”

 
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