Slow Climb Back

The health of the contract-services industry is improving but the market is signaling tougher competition ahead. This article is part of the 2010 Outsourcing Resources special issue.
Aug 01, 2010

This article is part of PharmTech's supplement "2010 Outsourcing Resources."

The contract services industry entered 2010 with hope that the worst was behind it, even if the market didn't return to the robustness of the 2003–2008 period. The industry was happy to bid good riddance to 2009, a year in which funding shortages, mega-mergers, and a loss of confidence in the future led to a sharp drop in research and development spending. The resultant drop in demand for development and manufacturing services brought to a halt an unprecedented period of growth, and pushed several firms to the brink of insolvency (and in some cases, over it).

Data from the 2010 edition of the PharmSource-Pharmaceutical Technology Outsourcing Survey indicate that, indeed, the worst may be over for contract research, development, and manufacturing organizations (CROs, CDMOs and CMOs). Respondents to this year's survey from both bio/pharmaceutical companies and service providers are more upbeat than they were a year ago, although their optimism remains constrained. Still, the survey suggests that as bio/pharmaceutical companies continue to respond to a harsher and more complex external environment, service providers are likely to face much more competitive market dynamics.

2010 somewhat better

Figure 1: How will your contract services spending change this year?
The good news from this year's survey is that spending on contract services has stopped declining (see Figure 1). Among bio/pharmaceutical company respondents, 37% said their expenditures would be the same this year as last year and only 8% expected spending to decline. In the 2009 survey, 16% indicated that spending would decline and only 28% expected it to stay even. That leaves more than 50% of respondents expecting some level of spending growth in 2010, but that percentage is down from the 60+% experienced in the 2007 and 2008 surveys.

Figure 2: What is the trend in your company regarding outsourcing in your service area?
While spending has stabilized, demand for contract services has yet to move into high gear. In fact, spending on contract services appears to be growing at or below the rate of overall research and development (R&D) spending (see Figure 2).

Although 46% of bio/pharmaceutical company respondents indicated that external spending is growing at the same rate of total R&D spending, 39% indicated that it is growing more slowly than overall spending. In 2009, only 28% indicated that outsourced spending was growing more slowly than total spending. The slowing of outsourced spending is not surprising, however, considering that the first reaction of most company executives is to preserve existing positions and avoid layoffs. Large staff reductions and wholesale changes in spending patterns tend to come with a radical restructuring or change in corporate strategy.

Figure 3: What will business be like for your company this year?
Service providers' outlook on 2010 is similar to their outlook in 2009—cautious (see Figure 3). Among CRO and CMO respondents to this year's survey, 75% expect business to be "good" or "very good" throughout 2010, which is about the same percentage reported last year. The share of service providers expecting 2010 to be "not very good" is 23%, which is also the same as last year. This market perspective seems to be more sober than in past years: in 2008, 33% of service-provider respondents expected the year to be "very good" and only 6% expected the year to be "not very good."

Still, service providers' guarded view of 2010 is more upbeat at mid-year than it was when the year started. Among, CRO and CMO respondents, 32% said this year's performance is already better than expected, and 47% said performance is as expected. After the difficulties of 2009, service providers went into 2010 with low expectations.