Offshoring of Biotech Research to China

From BioHealth Investor

by Andrew Vaino

Interesting article in yesterday’s San Diego Union Tribune bemoaning the offshoring of biotech research to cheaper labor markets. The article discusses the demise of Discovery Partners (formerly DPII), a San Diego company that focussed on preparing libraries of compounds for other, typically large pharmaceutical, companies. There is some irony here, in that companies like Discovery Partners owed their existence to bigger companies seeking to cut costs by outsourcing. This same outsourcing has been evident in manufacturing for years.

According to a 2005 report by the Pharmaceutical Research and Manufacturers of America (PHRMA), US drug companies spent $11B on drug discovery in 2003. To clarify, drug discovery encompasses activities that lead up to a clinical trial, that is, identification of biologically relevant targets, design and synthesis of molecules to interact with those targets, and evaluation of efficacy and safety. Drug development refers to efforts at getting potential drugs through clincal trials and to market. According to PHRMA, in 2003 US drug companies spent $22B on drug development.

The high value inputs in the drug discovery process are in the design phase. In many ways the intermediate steps in drug discovery (preparation and testing of compounds) are not "high value" labor. Once you’re figured out how to do chemistry and biology it becomes pretty rote: the US has no comparative advantage here. Chinese and Indian scientists are just as smart as American scientists, so moving this work to cheaper labor markets makes economic sense. While pharmaceutical companies enjoy substantial (25-30%) operating margins, they, like all companies, are constantly seeking to cut costs.

I’m not convinced offshoring of biotech labor will go as far as in other industries. I don’t believe that drug development (clinical trials) will move offshore as fast as drug discovery. Intellectual property may limit how much of even drug discovery is done offshore. China has recently taken steps to better protect patent rights, but counterfeiting remains a substantial issue.

In any case, until labor costs in China equilibrate with labor costs in this country—and, given the near-predatory mercantilist policy China is pursing this is unlikely to happen anytime soon—offshoring of biotech research will only increase in scope and scale.

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