Contract Manufacturers Optimistic on Industry Outlook

PTSM: Pharmaceutical Technology Sourcing and Management

PTSM: Pharmaceutical Technology Sourcing and Management-02-08-2008, Volume 4, Issue 2

A recent business outlook survey conducted by the Synthetic Organic Chemical Manufacturers Association reveals a generally favorable view of current and future business conditions for contract manufacturing of active pharmaceutical ingredients and intermediates.

The outlook for contract manufacturing of active pharmaceutical ingredients (APIs) and pharmaceutical intermediates is fairly optimistic, according to a recent business survey conducted by the Synthetic Organic Chemical Manufacturers Association (SOCMA). SOCMA is the US-based trade association of batch and custom manufacturers, and the association released the results of its Fourth Annual Business Survey at Informex, the large trade show held Jan. 29–Feb. 1 in New Orleans (1). SOCMA conducted the survey from Nov. 13–Dec. 19, 2007, and 35% of its roughly 280 member companies responded. The survey was designed to evaluate the state of the market, capital investments, emerging markets, customer mix, and critical success factors.

Optimistic outlook

Survey respondents have a favorable outlook for the market with 92% characterizing current business conditions as "excellent/very good" (54%) or "good" (38%). This outlook is better than how respondents viewed the market in the 2006 survey, with only 82% ranking current business conditions as "excellent/very good" (53%) or "good" (29%).

Another positive indicator from the 2007 survey, although slightly down from 2006, was the number of companies that experienced an increase in sales. Seventy-six of the respondents said that their companies' sales increased in 2007 compared with 79% in 2006. From the 2007 survey, 6% experienced a sales increase of 30% or more, 18% an increase between 20–30%, 28% an increase between 10 and 20%, and 24% had a sales increase of between 5 and 10%.

The survey also examined what factors affected sales. Nearly half of the respondents (46%) said that a change in their business strategy influenced company sales in a positive way, and 39% said that new technology introductions did so.

Interestedly, two conditions, competitive pressure from China and India and customer layoffs, had less of an impact in 2007 than in 2006. In the 2007 survey, 34% said that competitive pressure from China and India caused a decrease in company sales compared with 44% in 2006. In fact, 27% of respondents in 2007 said that their sales increased as a result of competitive pressure from India and China compared with 15% in 2006.

Despite the ongoing restructuring in the pharmaceutical industry, survey respondents reported that customer layoffs largely did not have a negative impact on their businesses. Only 8% of respondents reported that customer layoffs contributed to sales declines at their companies compared with 19% in 2006. Eleven percent reported that customer layoffs increased sales, which was on par with 2006, when 12% of survey respondents reported a sales increase resulting from customer layoffs.

Investment levels

The level of investment in research and development (R&D) and capital spending are two important measures of the strength of the contract manufacturing sector. Respondents to SOCMA's 2007 annual business survey were fairly positive in both areas.

Survey participants were asked how much (as a percentage of sales) their companies will invest in R&D in 2008. The mean level was 8.6%, which was a slight increase from the 2006 survey when the mean level for R&D spending projected for 2007 was 8.0%. Forty-five percent of respondents in the 2007 survey said their companies plan to spend between 2 and 5% of their sales on R&D in 2008, 30% plan to spend between 6 and 10%, 9% plan to spend between 11 and 15%, and 9% plan to spend more than 15% in 2008.

A stronger indicator of the health of the market, however, is the number of respondents planning to make capital investments in 2008. Ninety percent of survey respondents said that they planned to make capital investments in 2008: 52% have actual plans, 21% said they are "very likely" to invest, and 17% are "somewhat likely" to make capital investments in 2008. In comparison, only 44% of survey respondents in 2006 had actual plans for capital spending in 2007.

The mean percentage (as a percentage of sales) for those companies planning to make capital investments in 2008 is 10.8%, up from the 8.8% projected for 2007.

Outsourcing on the rise

Contract manufacturers also are fairly optimistic that the level of outsourcing will increase over the next three years. Eighty percent of survey respondents said they anticipate that more projects will be outsourced over the next three years, compared with 70% offering that view in 2006. Nearly one-fifth (18%), however, think that their will be no change in outsourcing over the next three years, and only 3% think that there will less projects outsourced over the next three years.

Competition from emerging markets

Although contract manufacturers are fairly sanguine about current business conditions and the outlook for 2008, the survey revealed a potentially problematic trend–increased penetration by offshore suppliers. The survey asked participants to assess the market share held by emerging-market suppliers (defined as suppliers in India, China, Eastern Europe, and Latin America) currently and anticipated by the end of 2008.

Respondents said that slightly more than one quarter (26.3%) of the market is now held by offshore suppliers, up slightly from the 22.2% reported in 2006. Looking to the end of 2008, respondents anticipate increased penetration by offshore suppliers, and project that 30.3% of the market will be held by offshore suppliers.

Perhaps reflecting attention given to recent problems with imported products from areas such as China, survey respondents expressed concern over the quality of products from emerging-market suppliers. Three-quarters (75%) of respondents from the 2007 survey said that product quality from emerging-market suppliers is not as good as established market suppliers, compared with 60% who said so in the 2006 survey. Also, only 24% of respondents said that product quality from emerging-market suppliers was the same as from established market suppliers compared with 38% that responded as such in 2006 and 45% in 2005.

References

1. "Fourth Annual Business Outlook Survey," Synthetic Organical Chemical Manufacturers Association (Washington, DC, January 2008).