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.
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.
Figure 4: How badly do vendors want your business?
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.
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.
Figure 5: Which client segment has been the best performing in your company this year?
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.
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 6: What is the single biggest risk to your business in the next two to three years?
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.
Figure 7: Plans for sourcing in India and China
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.