Uncertain outlook
Figure 9
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Perhaps the biggest sign of the changing times revealed by the 2009 PharmSource–Pharmaceutical Technology Outsourcing Survey is the change in which market factors worry service providers the most. In past years, service providers
were most concerned about competition from CROs and CMOs in India and China, and about too much capacity in the industry.
In 2009, their concerns are more fundamental: they worry about whether the biopharmaceutical and pharmaceutical industries
will be able to maintain their historic levels of research and development (R&D) expenditures (see Figure 9). In light of
the business-model changes occurring among major companies and the pullback of venture capital, these are very valid and real
concerns.
Figure 10
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Despite that uncertainty, respondents to this year's survey are signaling that 2010 could still be a good year. Spending growth
is likely to be slower than in past years, but half of biopharmaceutical and pharmaceutical respondents expect increases in
their outsourcing expenditures in 2010 (see Figure 10). Among the ever-optimistic contractor respondents, more than half
expect 2010 to be somewhat better, and relatively few are expecting a bad year.
A maturing industry
Although the 2009 survey paints a picture of an overall healthy industry, contract services providers are right to be concerned
about future levels of R&D spending. These concerns reflect fundamental changes taking place in the biopharmaceutical and
pharmaceutical industry as the increasing challenges of commercial success are reflected in the level and nature of new drug
development.
Respondent profile
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For providers of formulation and manufacturing services, the silver lining is that there is still plenty of opportunity for
growth—outsourcing has not penetrated as deeply into physical product development as it has into clinical research. Clinical
CROs have already grabbed as much as 70% of the clinical research spend available to be outsourced, and that segment's growth
curve is likely to flatten. Formulation and manufacturing service providers have achieved about half of that level of penetration,
so there appears to be additional opportunity to grab more of that spend.
The opportunity will not be an equal one for all participants in the business, however. CDMOs can no longer depend on a rising
tide to lift industry participants. The increase in outsourcing penetration in the clinical segment has been accompanied by
a sharp consolidation of business among a relative few CROs that offer global scope, economies of scale, financial stability,
and management maturity. The same is likely to be true for formulation and manufacturing services. The highly fragmented nature
of the industry will change, and many smaller CDMOs will fall by the wayside as larger participants consolidate their market
shares.
The key to capturing the opportunity will be performance—that is, the ability to deliver products and services dependably
and at lower costs. The gap between how buyers and sellers view CDMO performance continues to be one of the more striking
findings of the PharmSource–Pharmaceutical Technology Outsourcing Survey.
Service providers must improve their understanding of client needs and expectations and figure out how to provide the levels
of service clients expect. The 2009 survey suggests they aren't doing a terrible job now, but the CDMOs that can close the
gap will capture the lion's share of the business in coming years.
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