Home | Welcome to Contract Pharma   
Last Updated Friday, September 19 2014
Print RSS Feed

The Next Market?



Are China and India unique or replicable?



By Derek B. Lowe



Published January 23, 2012
Related Searches: Development Outsourcing Pharma

China and India, China and India . . . I’m starting to wonder if there are any other places like them, or will be. What I mean is, the more you look at them, the more you can come to think that these two countries are special cases when it comes to scientific outsourcing. Will there be any others?


The reason I ask that question is, naturally, because both countries are gradually (and unsurprisingly) getting more expensive. That’s economics for you — run enough money through an arbitrage opportunity, and it closes up. None of these trades last forever. A commodities or currency opportunity can disappear right in front of your eyes, since those markets are so active and so liquid, but a skilled labor trade isn’t immune to the same forces.
They just take a bit longer to work.


It’s worth looking at some past parallels. In some cases, everyone moved up a notch, and the process continued. That’s what happened in the car industry. The U.S. and western Europe were the early leaders, of course. Then they saw low-cost competition from Japan in the 1960s — I’m just old enough to remember when the idea of a Japanese car seemed sort of quaint and funny. Then as Japan moved up the scale, they started seeing competition from Korea. Now you have, well, quite possibly India and China moving into that part of the market behind the Koreans. That makes a pretty coherent story, but I’m not sure how relevant it is to our own business. Autoworkers are still a different breed than pharma researchers — for one thing, you don’t need a degree to work on an assembly line. And this is one of the ways in which I think that India and China are unusual.


Let’s start with the obvious: they’re huge, of course. We’re talking some of the world’s great population densities here, so even if the percentage of highly educated workers isn’t all that high, it still means an awful lot of good people ready to be employed. But there are plenty of educated workers, anyway. Both countries — and their residents — are famous for valuing higher education and the opportunity it brings to get ahead, which is a cultural trait not to be discounted. That combination is what makes me think that these two countries are outliers (which is to their benefit).


Think about it: if you try to imagine the same progression that happened in the auto industry happening in science and technology, which countries, exactly, would move up next? I don’t know about you, but I’m having trouble thinking of obvious candidates. When I ask people this question, the same thing happens. I’ve heard Russia suggested, but their economy has been driven by oil and gas, and thus has a significant kink in it. The same goes for any country that lives off a huge resource bonanza — there’s less incentive to develop the other parts of your economy. And to be honest, Russia hasn’t exactly had the most business-friendly climate in the world the past few years. After that, there are the other Eastern European countries, but many of them, you’d think, are already priced higher than India and China were when they got into this business. There’s been some outsourcing activity there for years now already, and I think that they’re past the point where they can come in and compete on price as new players.


What about the rest of the world? Unfortunately (for them and for everyone else involved), I think we can rule out pretty much every country in Africa as a major near-term candidate for science outsourcing. Perhaps someone can move into the business after the post-India/China cohort moves up the ladder, and that would be good news. South and Central America? Mexico certainly has plenty of factory workers on the other end of the outsourcing business in other industries, but although they have some good people in their universities, it remains to be seen if they have a large enough scientific labor pool to go this route. Brazil is certainly big enough, and they have a pretty lively technology sector, but I’m not sure about their costs, either — in some places, they may already be past the development stage we’re talking about. And I can’t think of anyone else there with enough of a chemistry/biology base to be a candidate. I can hear some smart remarks in the distance about how there are a lot of experienced chemists working in, um, “natural products” in Colombia, Peru, and Bolivia, but that doesn’t count. I hope.


So that takes us back to Asia, and a bunch of candidates that all (for now) sound implausible for one reason or another. Indonesia? Very big, for sure, but not as technical. Malaysia? They’ve been trying to make a leap into the technology world for a while now, with mixed results. Vietnam? Not as big, for sure. The Philippines or Pakistan? Bangladesh? It’s hard to imagine some of those, but at one time, it was hard to imagine putting up glossy research palaces in Shanghai, too. The future is unwritten.


But that brings up another reason that India and China are unusual examples. Those big populations also make them big potential markets. If at some point a surplus of organic chemists develops in, say, Nepal, and it becomes reasonably cost-effective to outsource some chemistry there, I figure that someone will probably take them up it. But no one’s going to do a ribbon-cutting ceremony for the new NRS (Nepalese Research Site, naturally!) any time soon. Nothing against Nepal — fine people, and the last thing I want to do is get on the bad side of some Ghurkas. But the reason that companies are pouring their own employees and facilities into China (as opposed to buying contract work) has little to do with the cost of doing business there, and everything to do with potential future sales.


So the combination we’re seeing with these two countries might not be repeated again for some time: low labor costs, educated workforce, and huge potential markets in an expanding economy. These came along exactly when Big Pharma was looking for something, anything, that would help it to immediately cut its budgets, and the world as we see it now was born. This wouldn’t have happened when the industry was more flush with case (who’d have bothered?), and it wouldn’t have happened when the countries involved were less developed (who’d have even thought about it?)


So, back to the first question: Who will India and China outsource to when the time comes? If there’s no one ready to pick up the baton — and at the rate things are going, there may well not be — that situation will have some follow-on effects of its own. For one thing, drug companies will have to find some other way for a quick cost-accounting fix, under conditions that might not lead to the most rational decisions ever to come out of the executive suites. Maybe this will be part of the ongoing backs-to-the-wall process, where the industry finds that it’s forced to do things well outside what it would normally find safe, just because there are no alternatives left.
In that case, the outsourcing era, when we look back on it, might just seem like another one of the arrows that was pulled from the quiver and fired — in vain? 


 

Derek B. Lowe has been employed since 1989 in pharmaceutical drug discovery in several therapeutic areas. His blog, In the Pipeline, is located at http://www.corante.com/pipeline and is an awfully good read. He can be reached at derekb.lowe@gmail.com.



blog comments powered by Disqus
Receive free Contract Pharma Direct emails
Sign up now to receive the weekly newsletter, and more!

Enter your email address:
Follow Contract Pharma On