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Healthy Outlook for Pharma Services
This article is part of a special issue on Outsourcing Resources
PharmSource's analysis has shown that research and development (R&D) spending by the mid-size bio/pharma companies has continued to grow during the past three years even as spending by small and global bio/pharma companies has dropped. This change is not surprising considering that the mid-size companies have been able to fund their R&D activities out of revenues rather than depending on outside investors.
Also, mid-size companies have not gone through the painful restructuring experienced by larger global bio/pharmaceutical companies. Nevertheless, the overall opportunity of the mid-size pharma segment is not great: there are far fewer mid-size companies than small companies, and the spending per company is a small fraction of what global bio/pharma companies spend.
Although the overall level of outsourced development and manufacturing activity may be growing, competition for available business is increasingly intense. Service providers therefore must work harder for new business opportunities. Bio/pharmaceutical company sourcing practices and the rise of service providers in emerging markets, especially in India and China, are key challenges for contract-service providers.
Even when service providers can get their foot in a new client's door, competition for the new business remains intense. Bio/pharmaceutical companies are not reluctant to pit service providers against each other: more than half of respondents from bio/pharmaceutical companies reported that they get three or more bids for each project they advertise.
However, as new funding dwindled during the global financial crisis, price competition increased, and the number of respondents indicating contractors' willingness to cut prices jumped above 50% in 2009, where it remains today.
Funding for early-stage companies remains a top concern for service providers, with 16% citing it as the biggest single risk facing their companies in 2011, versus 12% in 2011. The increase in concern over funding is a bit surprising because industry data show that investments into early-stage companies have improved this year, but the experience of the 2008–2010 period has made service providers aware that the funding environment can change quickly.
Service-provider concerns over cuts in R&D spending at global bio/pharmaceutical companies declined in 2011 compared with 2010. This change is somewhat surprising because global bio/pharmaceutical companies continue to trim their spending and portfolios. The decline probably reflects the fact that fewer service providers have exposure to the global bio/pharmaceutical companies because those companies are reducing the number of vendors they work with.
Contract-service provider expectations for 2012 are similar to their clients'. More than 50% expect 2012 to be better while 33% expect next year to be about the same. The remaining respondents aren't sure what to expect.
What lies ahead
The results of 2011 PharmSource–Pharmaceutical Technology Outsourcing Survey certainly paint a positive picture for the acceptance of outsourcing as a business practice in the bio/pharmaceutical industry, and for the prospects of contract-services industry near-term. However, we would caution service providers about getting too enthused about their long-term prospects.
For one thing, looking at the survey results over the past five years, it is clear that the prospects of the pharmaceutical-services industry are tied less to the acceptance of outsourcing (which seems to us to be well-established) than it is to the overall industry business environment, and that business environment is still less than robust. Funding for early-stage companies is still fragile and is increasingly contingent on achievement of short-term milestones that provide little basis for long-term spending expectations. Furthermore, global bio/pharmaceutical companies must still undertake bouts of restructuring to fully face the ramifications of patent expiries.
The other major challenge facing the industry is the glut of capacity available for almost every conceivable service category and capability. The overcapacity problem is reflected in our survey by the willingness of service providers to cut prices in order to get more business, a finding that has been corroborated in recent years by the publicly owned contract research organizations in their quarterly financial results. Interestingly, service providers don't seem to be willing to address the problem: only 13% identified overcapacity as the biggest single risk to their company.
An overall rising tide of R&D activity can lift all the players in the contract-services industry for a short period and mask the overcapacity problem, as it did in the 2004–2008 period. However, that period was marked by an excessive amount of funding going into the bio/pharmaceutical industry, something we don't expect to see again for a long time.
Overall, contract nonclinical services providers should take heart while they can at the improved market conditions for the industry, but should be mindful that the overcapacity problem is likely to continue to eat away at their profitability and chances for long-term survival. We have already seen some high-profile failures, and others are not far behind.
Jim Miller is president of PharmSource Information Services and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, firstname.lastname@example.org