Slow Climb Back - Pharmaceutical Technology

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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.

Pharmaceutical Technology
Volume 34, pp. s10-s20

Responding to market realities

This year's edition of the PharmSource-Pharmaceutical Technology Outsourcing Survey indicates that service providers have learned to adjust to the new market realities.

Figure 4: How badly do vendors want your business?
When asked, "How badly do vendors want your business?" 50% of bio/pharmaceutical company respondents said that service providers were anxious for the business and were willing to cut price (see Figure 4). This response is similar to that reported in last year's survey, but substantially higher than the 2006 and 2007 surveys, when only 35% indicated that service providers were willing to cut price.

Price competition has always been anathema to CROs and CMOs, but reduced funding for smaller bio/pharmaceutical companies and the increased willingness of global companies to exercise their bargaining power, have forced contract organizations to accept a new reality.

Figure 5: Which client segment has been the best performing in your company this year?
Current funding challenges among smaller bio/pharmaceutical companies has also forced service providers to refocus their efforts according to client type (see Figure 5). In this year's survey, only 21% of CRO and CMO respondents identified small bio/pharmaceutical companies as their best performing customer segment. That percentage is down from 30% in 2009 and 43% in 2008.

The number orf respondents citing specialty pharmaceutical companies as their best performing segment was down as well, while those citing global bio/pharmaceutical companies were about the same. Interestingly, the significance of generic-drug companies jumped significantly, from 7% in 2009 to 17% in 2010. This increase may reflect some change in the outsourcing practices of generic manufacturerss, but also could be a reflection of the reduced activity in other customer segments.

Risks to the business

Perhaps more than ever, CRO and CMO respondents are keenly aware of the long-term risks and challenges to their business. The challenges of 2009 and 2010 seem to have forced service providers to take a more global view and to pay more attention to market trends.

Figure 6: What is the single biggest risk to your business in the next two to three years?
This change in view is particularly apparent when it comes to competition from offshore service providers (see Figure 6). When asked, "What is the biggest single risk to your business in the next two-to-three years?" 25% of CRO and CMO respondents identified competition from India and China as the biggest risk. That percentage is up from 11% in 2009, and 15% in 2008, and represents the biggest single risk identified by CRO and CMO respondents.

Figure 7: Plans for sourcing in India and China
Contract organizations' concern is valid. The share of bio/pharmaceutical company respondents indicating that they are actively sourcing service from India and China today grew to 31% in the 2010 survey, up from 26% (see Figure 7). Further, the number of respondents indicating that they had no plans to source from India and China dropped from 51% in 2009 to 41% in 2010, which represents an all-time low for that response in the years we have been asking that question.

Another risk area identified by service providers was overcapacity. In 2010, 17% of survey respondents to the question, "What is the biggest single risk to your business in the next two-to-three years?" indicated that "too much capacity for our services" was the biggest risk. The overcapacity problem really came to the fore in 2009 when demand for services dropped and price-based competition intensified. As major bio/pharmaceutical companies plan to divest more facilities, and many investors still eyeing the contract services industry as a major opportunity, CROs and CMOs are right to place this issue on their radar.

One area of risk that is of less concern to service providers in 2010 is the threat of declines in R&D spending. The share of CRO and CMO respondents indicating that "reduced funding for early stage companies" is a major threat to their business dropped in half, from 35% in 2009 to 17% in 2010; while those citing "cuts in Big Pharma R&D spending" dropped from 22% in 2009 to 15% in 2010. The stabilization in outsourced R&D spending discussed above supports that reduced concern, at least for the near term.


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