Strong Demand versus Strained Capacity - Pharmaceutical Technology

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Strong Demand versus Strained Capacity
A booming market may be stressing the service-delivery system.

Pharmaceutical Technology

How would you rate your service providers' customer service performance? (Figure 8)
The survey suggests that service providers don't fully appreciate the impact that their capacity issues are having on their customers. When asked how they think their clients would rate the quality of their customer service, 35% of suppliers say customers would rate them as "excellent" (see Figure 8). When customers are asked how they rate their service providers' customer service, however, only 6% rate them as "excellent." Vendor performance on project management and technical/operational dimensions got similar marks. Overall, customer ratings of their service providers are not dire: most rate their vendors as "good" or "satisfactory" and less than 20% rate them as "fair" or "poor"—but there is clearly a big gap between customer and service provider definitions of service excellence.

Robust outlook for 2008

The picture of market conditions presented in the 2007 edition of the PharmSource–Pharmaceutical Technology Outsourcing Survey is much more robust than the 2006 survey led us to expect. Last year's responses suggested that spending would continue to grow, but that the rate of growth would slow. Most biopharmaceutical and pharmaceutical company respondents were projecting spending growth in the single digits, and most contractors were expecting the pace of new contract signings to decelerate.

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Given that context, we are inclined to temper our enthusiasm over the indications from this year's survey that 2008 should be another strong year for the industry. Among biopharmaceutical and pharmaceutical company respondents, 43% expect spending for contract services to grow by 10% or more next year, versus 36% in the 2006 survey; only 7% expect spending to decrease. Service providers are very optimistic as well: 80% expect 2008 to be better or much better than 2007. In 2006, only 55% had such expectations for the following year.

The high expectations of service providers are further reflected in another way. Most service providers accept that the major biopharmaceutical and pharmaceutical companies are moving to shrink the number of service providers they work with, but they are surprisingly sanguine about their prospects: 42% expect to gain business as a result of consolidation efforts, and 25% expect to feel no impact (21% claim to have already benefited from consolidation efforts). Such optimism is a bit surprising given the large number of small service providers in our sample (an appropriate representation of the industry). It suggests either giddiness in the midst of the current favorable market conditions or naiveté about their relative competitive position as ever larger competitors emerge.

The optimistic growth outlook is consistent with other indicators of market conditions that PharmSource tracks, including the flow of funds into early-stage biopharmaceutical and pharmaceutical companies from venture capitalists and Big Pharma licensing deals, and the forecasts from preclinical and clinical contract research organizations. Still, just as Wall Street analysts view excessive investor optimism as a sign that stock prices may be ready for a correction, the unbridled enthusiasm makes us wonder whether demand for contract services may be approaching the end of a cycle. Clearly, many industry participants are unprepared for any kind of jolt that might slow development spending.

Barring any unforeseen decrease in demand for services, this year's PharmSource–Pharmaceutical Technology Outsourcing Survey suggests that the biggest risk for contract services providers lies in their continued ability to meet client needs and expectations. As we previously noted, many admit they are reaching the limits of their ability to manage growth, and many appear to be vulnerable to growing customer dissatisfaction. In part, this reflects the varying but intense expectations of the various customer segments: small biopharmaceutical and pharmaceutical companies expect to be walked through the drug development process but often don't appreciate technical and operational excellence, and major biopharmaceutical and pharmaceutical companies demand technical and operational excellence. And both customer groups demand favorable pricing, despite their protestations to the contrary.

The capacity crisis may also reflect the fact that the industry continues to be dominated by small companies whose technically inclined owner–operators may lack the executive skills necessary to manage a growing enterprise. The industry is undergoing a process of consolidation that promises increased scale and greater management sophistication, but for now even the largest players seem to be struggling to meet the mounting expectations of customers. In the face of rapidly growing demand, contract service providers may need to learn to say "no" until their capacity catches up to their opportunity.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905,


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