Despite the generally rosy contract services environment, risks to CROs and CMOs remain. One is the continuing wide gap between
clients and services providers in the perception of CRO/CMO performance (see Figure 8). Clients still give service providers substantially lower grades for technical and operational capabilities, project management
and customer service than service providers give themselves, and the gap really has not narrowed in all of the years we have
asked that question.
Figure 8 Client and contractor views on contractor performance
Although we have no doubt that clients often have unrealistic expectations of their service providers, especially in areas
such as the time it takes to respond to technical problems and schedule changes, we also believe that service providers have
not been as mindful of the need to invest in their "soft" capabilities like project management and customer service as they
have been of investing in their manufacturing equipment and instrumentation.
Service providers are very conscious of the risk posed by the tenuous nature of funding for R&D spending at both large and
small pharma companies (see Figure 9). When asked about what they perceive as the biggest risks to their businesses in the next two to three years, 40% of CRO/CMO
respondents indicated that the potential for R&D and funding cuts is their biggest concern. This is not a surprise given that
the surge in R&D spending in recent years has been the big driver in industry performance of late, more so than an increase
in the rate of outsourcing.
Figure 9 What is the single biggest risk to your business in the next two to three years?
One risk that has become much more prominent on service provider's radar has been the threat of supplier consolidation at
the global bio/pharma companies. Fully 20% of CRO/CMO respondents indicated they were concerned about that trend, the same
share as was concerned about the spending cuts. Although CMC services have not yet experienced the wave of preferred provider
deals that have swept the clinical research services sector, providers of manufacturing, process/formulation development,
and analytical services have certainly taken notice of that trend and are girding for it to take hold in the CMC sector as
well. In the meantime, concern over competition from India and China has declined markedly.
Looking ahead to 2013, the PharmSource–Pharmaceutical Technology survey suggests that the impact of these risk factors is not likely to be felt in the near future (see
). Overall, 71% of bio/pharma respondents expect contract services spending to grow in 2013, with 47% expecting spending to
jump by 10% or more. That is a similar response to results received from the 2010 and 2011 surveys, and suggests that 2013
could be a good year for the industry. As a cautionary note, however, it should be pointed out that 14% of bio/pharma respondents
are predicting a spending decrease, which is up sharply from last year's 6% although still in line with 2009 and 2010.
Figure 10 How will your contract servicesspend change next year?
What it means
Most contract services vendors went into 2012 with muted expectations: nearly 50% of CRO/CMO survey respondents have found
the year to be better than expected, and only 14% have found it worse. With bio/pharma respondents indicating continued spending
growth in 2013, they should look forward to next year with greater confidence than they did 2012.
Still, there are reasons to remain cautious. For one, funding of R&D for early stage companies remains somewhat tenuous, especially
in a difficult global financial environment. And while reported spending by global bio/pharma companies continues to grow,
we suspect more of it is going into licensing and partnering deals rather than directly into new development candidates.
Service provider concerns regarding supplier consolidation are also warranted. The vendor base for CMC services is difficult
to consolidate because of the breadth of technologies involved and concerns over lengthy supply chains. By contrast, clinical
services have been easy to consolidate because they involve mostly staffing and enterprise-level information technology. However,
as bio/pharma companies get comfortable with the outsourcing models they are developing on the clinical side, we expect they
will adapt those models to CMC as well; certain services like clinical packaging and analytical services are already in that
Economic and financial imperatives in the bio/pharma industry still favor outsourcing, especially in R&D. Still, as the PharmSource–Pharmaceutical Technology Outsourcing Survey has shown over the years, contract service providers are continually challenged to demonstrate that they
can out-perform internal capabilities and deliver on promises of cost and time savings. They can't do this alone, of course.
Outsourcing exposes the complexities of managing the bio/pharmaceutical development process, and bio/pharma companies themselves
must be willing to continuously examine and improve the process if they are going to meet their cost and delivery targets.
However, CROs and CMOs must lead the way in that process improvement effort. After all, it is their ability to improve R&D
outcomes that is the very reason for their existence.