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Annual survey shows strong growth for service providers and promises to continue into 2013.
The 2012 edition of the PharmSource–Pharmaceutical Technology Outsourcing Survey found a contract services industry that is enjoying better-than-expected business performance in 2012, fueled by increases in R&D spending at all levels of the bio/pharmaceutical industry. However, the survey, administered in June 2012, indicates that industry remains aggressive in seeking new business and is keenly aware of the risks that could change its fortunes.
Bio/pharma respondents reported strong growth in their spending on contract services, with 62% reporting that spending in 2012 has increased over 2011, including 43% who said that spending has increased by 10% or more this year (see Figure 1). One-quarter of bio/pharma respondents indicated that spending on contract services has been flat for the year, while only 12% said their spending has been down.
Figure 1 How will your contract services spending change this year?
Contract service providers clearly have been enjoying the 2012 spending boom. Among CRO and CMO respondents to the survey, 39% reported that business in 2012 will be "extremely good" or "very good," which is double the share of respondents reporting such robust performance in past years' surveys (see Figure 2). Only 5% indicated that business will be "not be very good," which is well below the 20%-plus who gave that answer in each of the previous three years.
Figure 2 What will business be like for your company this year?
All segments of the bio/pharma industry appear to be contributing to the strong performance (see Figure 3). Mid-size and specialty pharma, which has typically been the best performing of the major customer segments, have again been leading the way, with 25% of service provider respondents putting them first. However, the other major segments are close behind, with global and small bio/pharma companies each getting 20% of responses and generic-drug companies getting 18%.
Figure 3 Which client segment has been the best performing in your company this year?
Rising expenditures drive outsourcing
The overall strength in the services market appears to be due to growth in total spending more so than to growth in the level of outsourcing. Among bio/pharma respondents to the survey, 39% said that spending on contract services is growing at the same pace as all spending, while 27% indicated that outsourced spend is growing faster than total spending (see Figure 4). However, that 27% is down from 37% in the 2011 survey and more in line with the years previous to 2011. An even higher share, 34%, indicated that spending on contract services is actually growing more slowly than total R&D and manufacturing budgets.
Figure 4 What is the trend in your company regarding outsourcing in your service area?
Despite the improved market conditions, most CROs and CMOs aren't taking anything for granted and remain aggressive in seeking new business. Over half of bio/pharma company respondents reported that service providers are willing to cut price, the same as in the past 3 years (see Figure 5). However, 33% indicated that service providers were insisting on firmer pricing, which is up slightly from last year. We would expect to see firmer pricing in a strong market.
Figure 5 What is vendor competition like for your business?
We did not see any major changes in the way that bio/pharma companies are managing their portfolios of service providers. Among bio/pharma company respondents, one-quarter indicated they have reduced the number of vendors they work with, while the same number indicated that they plan to work with even more vendors (see Figure 6). One-third (33%) plan no changes in the number of vendors, and only a small percentage are making plans for further supplier reductions.
Figure 6 How have you managed the number of contractors you work with?
One area where bio/pharma companies continue to look for new supplier options is in emerging markets, especially India and China. Among bio/pharma company respondents, 46% indicated they are either actively sourcing services from India or China, or are actively looking for vendors from those countries (see Figure 7). That is up only slightly from 2011, but it continues a slow-but-steady trend toward getting Asian companies into their vendor mix. Only one-third of respondents indicated that they have no plans to source from emerging market vendors, but that is down from 50% just three years ago.
Figure 7 Plans for sourcing in India and China
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 Figure 10). 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 process.
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.