Industry Outlook: Mixed Signals Lead to a New Outsourcing Equation - Pharmaceutical Technology

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Industry Outlook: Mixed Signals Lead to a New Outsourcing Equation
Survey results indicate a healthy market, but increasing competition.


Pharmaceutical Technology


As shown in Figure 8, service providers give themselves much higher marks for performance on the three performance dimensions than do their customers. This is not to say that bio/pharma respondents think the service providers are poor performers: 75% or more rate service provider performance as good or satisfactory in all three categories. For project management and customer service, 15% see contractor performance as just fair or poor.


Figure 9
The survey results suggest that there is big gap between customer- and service-provider definitions of performance excellence. In fact, the requirements of different client types and their perceptions of contractors vary widely. Major bio/pharmaceutical companies have substantial in-house capabilities and experience and are less dependent on their service providers than small bio/pharmaceutical companies, which expect help in navigating the drug-development process and have a broad definition of what should be included in project management and customer service. Our survey results indicate that respondents from major bio/pharma companies have a higher regard for contractor performance than smaller companies, no doubt reflecting the latter's greater need for support.

Outlook

Although 2008 is shaping up to be another strong year, the outlook for 2009 is somewhat less clear. Certainly contract service providers are less optimistic: More than 30% expect next year's revenues to be similar to or less than this year's revenues. In the 2007 survey, only 20% expected 2008 revenue to be flat or down by comparison. On the other hand, bio/pharma company respondents expect continued healthy gains in their budgets in 2009, with 44% expecting budget increases of 10% or more.

The concerns of contractor respondents probably reflect broader market factors of the current industry environment. The survey identified four key concerns (see Figure 9).


Respondents
Competition from providers in India and China. Just over half of respondents are in some phase of sourcing from China and/or India, whether they are actively sourcing there now, looking for vendors, or developing plans. That's about the same percentage as in the 2007 survey, but still significant. As might be expected, major pharmaceutical companies are most actively sourcing from Asia, while small bio/pharma companies are the least interested. The impact is especially being felt in manufacturing of chemical intermediates and active ingredients.

Too much capacity. Capacity is a very legitimate concern for service providers. In our industry analyses, PharmSource has quantified significant overcapacity in commercial and clinical injectables manufacturing and biomanufacturing, and expects the problem exists throughout the industry. As described, contractors are typically competing against four other service providers for each contract, and the effort to establish new client relationships is intense.

Reduced early-stage funding. The difficult investment climate in the general economy is affecting the bio/pharma sector. Financing from initial public offerings has practically disappeared and while venture capital funding in aggregate has remained level, it seems to be benefitting fewer companies. Early-stage companies depend on CROs and CMOs for development activities but need funding to pay for them.

Reduced Big Pharma R&D spending. More major pharmaceutical companies are following the "proof of concept" development model long followed by early-stage companies. The model seeks to minimize expenditures on a drug candidate until basic safety and efficacy are established, usually by Phase IIA. As a result, companies are spending less on process, formulation, and analytical development services for early-phase candidates but more on the smaller number of candidates that make it to later development. Major pharmaceutical companies are also pushing on price as never before.

Conclusion

Overall, the survey responses reflect what PharmSource has been hearing from frequent conversations with service providers and bio/pharma companies. The 2008 PharmSource–Pharmaceutical Technology Outsourcing Survey draws a picture of an industry that is still growing robustly but could be facing a slowdown in the months ahead. Overall demand and market conditions will be the envy of other economic sectors, but service providers will to have work harder to achieve the kind of results they have become used to in recent years.


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