Healthy Outlook for Pharma Services - Pharmaceutical Technology

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Healthy Outlook for Pharma Services
Respondents to the 2011 PharmSource-Pharmaceutical Technology Outsourcing Survey paint a positive picture, but concerns linger under the surface. This article is part of a special issue on Outsourcing.

Pharmaceutical Technology
Volume 35, pp. s8-s17

Positive outlook

Figure 9 Outsourced spend versus total spend
Responses to the 2011 PharmSource–Pharmaceutical Technology Outsourcing Survey indicate that the positive momentum should continue into next year. Acceptance of outsourcing seems to be growing: 37% of respondents from bio/pharmaceutical companies indicated that their spend on outsourced services is growing faster than their total spend (see Figure 9). That's the highest percentage choosing that response since 2006.

Figure 10 How will your contract services spend change next year?
Among respondents from bio/pharmaceutical companies, 64% expect an increase in spending on services in 2012 versus 2011 (see Figure 10). This change is slightly less positive than the 2010 survey, when 70% expected growth in the following year. However, only 6% of 2011 respondents expect a decrease in next year's spending, which is down sharply from the 14% in the 2010 survey.

Figure 11 Client and contractor views on contractor performance
The "higher highs" and "lower lows" in the 2010 survey reflect the greater uncertainty of last year, when the industry was still buffeted by the difficulties of getting new financing and the restructuring of the R&D operations by global bio/pharmaceutical companies. The 2011 survey results reflect a more stable environment: among 2011 respondents, 30% expect 2012 spending to be about the same as 2011's.

Contract-service provider expectations for 2012 are similar to their clients'. More than 50% expect 2012 to be better while 33% expect next year to be about the same. The remaining respondents aren't sure what to expect.

What lies ahead

The results of 2011 PharmSource–Pharmaceutical Technology Outsourcing Survey certainly paint a positive picture for the acceptance of outsourcing as a business practice in the bio/pharmaceutical industry, and for the prospects of contract-services industry near-term. However, we would caution service providers about getting too enthused about their long-term prospects.

For one thing, looking at the survey results over the past five years, it is clear that the prospects of the pharmaceutical-services industry are tied less to the acceptance of outsourcing (which seems to us to be well-established) than it is to the overall industry business environment, and that business environment is still less than robust. Funding for early-stage companies is still fragile and is increasingly contingent on achievement of short-term milestones that provide little basis for long-term spending expectations. Furthermore, global bio/pharmaceutical companies must still undertake bouts of restructuring to fully face the ramifications of patent expiries.

The other major challenge facing the industry is the glut of capacity available for almost every conceivable service category and capability. The overcapacity problem is reflected in our survey by the willingness of service providers to cut prices in order to get more business, a finding that has been corroborated in recent years by the publicly owned contract research organizations in their quarterly financial results. Interestingly, service providers don't seem to be willing to address the problem: only 13% identified overcapacity as the biggest single risk to their company.

An overall rising tide of R&D activity can lift all the players in the contract-services industry for a short period and mask the overcapacity problem, as it did in the 2004–2008 period. However, that period was marked by an excessive amount of funding going into the bio/pharmaceutical industry, something we don't expect to see again for a long time.

Overall, contract nonclinical services providers should take heart while they can at the improved market conditions for the industry, but should be mindful that the overcapacity problem is likely to continue to eat away at their profitability and chances for long-term survival. We have already seen some high-profile failures, and others are not far behind.

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


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