Industry Outlook: Down But Not Out

The contract services industry may not be as robust in 2009 as it has been in previous years, but it's not as bad as many people think.
Aug 01, 2009
Volume 2009 Supplement, Issue 4

There has been an atmosphere of doom and gloom over much of the contract services industry this year. Early development outsourcing has been hit hard by funding cuts to small biopharmaceutical and pharmaceutical companies and restructuring at the major companies. Late-stage development has maintained some momentum, but a feeling of uncertainty has overtaken the confident swagger of contract services providers.

Figure 1
The 2009 PharmSource–Pharmaceutical Technology Outsourcing Survey suggests that the sense of gloom is overblown. Although the positive responses are somewhat fewer and the negative responses somewhat greater compared with previous surveys, the overall picture is still one of a healthy level of activity at contract manufacturing, contract development and manufacturing, and contract research organizations (CMOs, CDMOs, and CROs). Competition has intensified at the margins, but there is a core level of activity sustaining the industry.

Current level of activity

Figure 2
The healthy image of the industry is reflected in the spending patterns reported by respondents from biopharmaceutical and pharmaceutical companies (i.e., the "buy side" of the outsourcing equation). The number of respondents reporting double-digit increases in outsourcing spend dropped sharply, while the number reporting an absolute decrease in spending more than doubled (see Figure 1). Responses from contractors mirrored these results, with a sharp drop in those expecting 2009 to be "very good" and a quadrupling of those expecting the year to be "not very good" (see Figure 2).

Still, more than 50% of biopharmaceutical and pharmaceutical respondents expect at least some growth in their spending this year, and another 28% expect it to remain level. Among contractors, nearly 75% expect business to be "good" or "very good" in 2009. These responses indicate a slow growth year, but certainly not a disaster.

Figure 3
Other survey questions illustrated just how different the current market is from the recent past. The number of contractors pointing to large biopharmaceutical and pharmaceutical companies as their best-performing customer segment has jumped sharply, while the number singling out small firms fell sharply (see Figure 3). This change reflects the reduced means of early-stage companies that depend on the crippled financial markets for capital to fund their development activities. It suggests that companies that have been disproportionately dependent on small biopharmaceutical and pharmaceutical companies have been disproportionately hurt by the downturn.

Figure 4
Another big difference in this year's survey is that, for the first time in three years, more respondents report that outsourced spending is growing more slowly than total spending (see Figure 4). Con-tractor respondents also noticed this development. This may reflect efforts by major pharmaceutical companies to use internal capacity freed by the cancellation of many development programs, as well as the reduced funding available at many small companies.

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