There are several general principles of life that keep on getting demonstrated. (It’s as if someone thinks that you disagree, and is determined to convince you). A favorite of mine is that almost any question that starts out with “I wonder how come they . . .” can be answered with the word, “money.” Another one is, “Anything Can Be Overdone.” A story has appeared recently with a bearing on both of those principles at once.

Boeing is, as economists and financial analysts would put it, a humongous company, one of the important industrial forces of the world. They’ve been working for some time now on their next-generation plane, the 787 Dreamliner, and it’s been a rather complicated and expensive process. Actually, it seems to have been even more complicated and expensive than the company was planning on, and the current CEO is giving warning speeches about how that happened: Boeing over-outsourced.

The plane is years late and billions of dollars over budget; something certainly went wrong. It looks like Boeing spent an awful lot of money while trying to save money by having other outfits do the work on various components. As it turned out, not all of them were up to the job. Parts and systems came in behind schedule and not up to spec, partly because some of their contractors and subcontractors wound up subcontracting things out themselves. Boeing ended up having to do more of the work than its managers had ever planned. In some cases, the company ended up outright buying some of the contractors in order to fix their problems, which has to be the last thing you’d want.

We have to ask ourselves if we’re capable of making similar mistakes in our own industry. If we’re going to be honest about it, we’d better ask ourselves if we haven’t been making some of them already. There’s little doubt that outsourcing and contract work, when used wisely, can save money and resources. But putting it that way is a bit of a circular definition, isn’t it? How do you know if your strategy wasn’t wise? Why, if it didn’t save you money. And when do you find that out? After you’re already in trouble, and after the money’s been spent. No, we need something better than the “Well, that didn’t work out, did it?” school of analysis, given the amount of outsourcing that’s going on at all levels of drug development.

Boeing, in their case, was warned quite early by one of its own employees, L. J. Hart-Smith. He pointed out that final assembly of an airplane is one of the least profitable parts of the business, but that this was the one that Boeing was proposing to hold on to. Instead of outsourcing the grunt work, the company was outsourcing its profits. (And then things got even worse when those plans didn’t work out the right way.) Now, outsourcing the grunt work is how things started out in the drug discovery business, too, and it makes sense, but we’re going to have to look out that we don’t go down the same chute into the dumpster as Boeing’s project did.

We’re walking close to that line in some places. Pfizer’s strategy these days – insofar as I can understand what’s going on at Pfizer – seems to be to have “drug designers” back at HQ telling outside chemistry shops what to make. This isn’t a new idea – it’s actually one that goes back to F. W. Taylor and his attempts to streamline industrial production in the late 19th century. Mr. Taylor’s remembered for his time-and-motion studies of assembly-line work, but one of his other principles was that the productivity of manual laborers would be decreased if they had to think about the strategic aspects of their jobs. Similarly, managers should, he believed, spend their time managing, and not out getting their hands dirty. There’s Pfizer’s new strategy for you right there; it dates from about 1905.

And it’s not completely wrong-headed, either. The problem with it, when applied to medicinal chemistry, is that many people who are good at the mechanics of organic synthesis are also good at thinking about the issues behind it. Only the lowliest reactions are real assembly-line work – everything past that requires some craftsmanship and higher-level thinking. And once you start on that, where do you stop? Pfizer’s drug designers might come to seem more replaceable than they’d like.

Here’s another problem: one of the points made by people at Boeing was that a heavily outsourced project should be designed with that in mind from the start. How would that work in drug discovery, though? You could always bias your synthetic plans towards lots of methyl-ethyl-butyl-futile reactions, but honestly, I think we’ve been doing too much of that already. Taking advantage of it when it occurs is one thing, but deliberately optimizing for it is quite another.

There’s at least one more Boeing lesson that we should keep in mind. Their CEO has been quoted as saying that they learned that they needed to know all the major systems of their airplanes better than their suppliers did. I think that’s an excellent principle for Boeing, it could be hard to apply in drug discovery. There are a lot of important things in our business that no one understands very well at all, as opposed to the engineering principles behind aircraft design. How do you maintain an edge in knowledge under those conditions, when knowledge can only take you so far?

So there’s a basic principle that might be worth keeping in mind: your own company should be doing something valuable, something that’s all its own. Mr. Hart-Smith, when warning Boeing about its strategy, pointed out that by their standards, the perfect situation would have been to have other people build the whole plane, then fly it back to them so they could stick a Boeing decal on its nose. Now, I realize that there are a number of business plans that reduce to this, but they tend to be for things like importing cheap electronics or cotton shirts, not the products of R&D-intensive industries.

And I don’t think it’s sufficient to tell yourself that, yes indeed, you’re doing something key there at headquarters by lining up and arranging all these various partners and service providers to make the finished product. (Or, perhaps, by telling yourself that you’re a drug designer, not like those pairs of hands off in Shanghai or wherever.) It’s not that arranging and managing these things isn’t work – but it’s not like that isn’t work that couldn’t be done by anyone competent, either.

Find the most complex and/or profitable parts of your work and hold on to them. Otherwise, you’ll end up slapping decals on stuff and pretending that you’re adding value. And someone up above you, at some point, will figure that out.

In the Pipeline � Health Care Reform and the Drug Industry: How Goes It?

We haven’t had enough controversy and arguing around here lately, have we? Let’s talk politics for the morning, then. Here’s a piece from a former VP for public affairs at Pfizer, arguing that PhRMA got thoroughly snookered during the health care reform bill. He’s looking over the current budget proposal:

For biotech and pharmaceutical companies, the president’s budget repudiates one of the most important benefits of their “deal” with the White House: the ability to market biotech drugs without generic competition for 12 years. The president would reduce that period to seven years, precisely the position of the generics industry and a position that the pharmaceutical industry had fought aggressively before it decided to make a deal with the president. [See http://bit.ly/dI2YJp]

I worried about this sort of thing at the time, in the last post in which I had the nerve to bring up this issue. (In fact, if you go back and read some of the dissenting comments to that post, the 12-year exclusivity provision was listed as one of the main reasons the bill was a good idea for the industry – see http://bit.ly/hAKWcj). Even I didn’t think my last paragraph would start coming true quite this quickly, though. (I’ll note in passing that my worries about the “doc fix” were justified, too). And yes, it’s true that the President’s budget proposal is a political football, put onto this earth to be kicked around by all parties, and that nothing in it will necessarily turn into reality. But still – isn’t that a rather short time to be about-facing on this provision? Less than a year?

There’s an alternate explanation: that the 12-year provision was never really in there at all. We just thought it was! No, that wasn’t marketing exclusivity at all, but data exclusivity. Or not – was it a mix of the two? What sort of mix? All sorts of people are writing to the FDA these days, telling them what they think the law actually means. Not that the agency is legally bound to listen to a word of it.

Even without any backtracking on exclusivity, the article maintains that health care reform was a loser for the drug industry. The author goes on to detail the various other costs of the bill as it was passed, and then gets to the biggest structural problem:

While the healthy part of the pharmaceuticalmarket will be pounded, the government-run

segment of the market, Medicaid, will be expanded by 16 million patients. Medicaid has the worstpricing structure and the worst track record in paying for innovations of any sector in the U.S. market. Like government health-care systems around the world, Medicaid must be dragged to pay for medical advances. Unlike employers and seniors in Part D, Medicaid patients cannot vote with their feet if their health plan does not provide the new medicines they want. The incentives in Medicaid all run against paying for pharmaceutical innovations.

So, Obamacare significantly expands the worst sectors of the pharmaceutical market while degrading the best.

Well, fine, you may say, this are quotes from an opinion piece at National Review, and what else would you expect but that they’re opposed to the bill over there? But these issues would be worth thinking about even if they were squawked out by flocks of crows. I really do worry that the drug industry made a serious mistake by agreeing to the health care reform bill – not only agreeing to it, mind you, but committing large amounts of money to beating the drum for it and seeing that it got passed. And that means that PhRMA made a serious mistake by putting Billy Tauzin in charge of that effort. Perhaps a backslapping deal-maker wasn’t what was needed?

Okay, that gets politics out of my system for a bit. The whole health care reform bill is going to end up in the Supreme Court anyway, on commerce-clause grounds, so arguing about specific language may turn out to be a waste of time. But while I’m in the mood, though, I’ll close with (what else?) a quote from Barry Goldwater. A government that’s big enough to give you everything you want, he used to say, is big enough to take it all away . . .

from http://pipeline.corante.com/ on 2/7/2011
Copyright Derek Lowe, 2011

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.