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Weakening fundamentals in 2008 and projected for 2009 dampen the outlook for pharmaceutical chemical outsourcing, but near-term growth and investments levels in R&D and capital spending remain fairly robust.
The market for custom manufacturing weakened in 2008, and this downward trend is expected to continue in 2009, according to a recent business outlook survey by the Synthetic Organic Chemical Manufacturers Association (SOCMA). SOCMA is the US-based trade association representing custom and batch manufacturers, including contract manufacturers of active pharmaceutical ingredients (APIs) and intermediates. Despite these negative signs, however, underlying fundamentals such as near-term growth in outsourcing and investment levels in research and development (R&D) and capital spending remain on par with the past two years. The survey was conducted in November and December 2008.
The state of the global and US economy was cited as a major concern among survey respondents. Sixty-five percent of the respondents said that the state of the US economy was a high-impact factor affecting the industry, and 58% said the state of the world economy was an impact factor. These levels are up from the 2007 survey, when only 40% of respondents cited the performance of the US economy as a high impact factor, and 33% cited the global economy.
As the economy takes center stage in shaping business conditions, other factors such as energy prices and competition from emerging markets have decreased in relative importance. In 2007, 40% of respondents said that the price of natural gas and oil was a high-impact factor, but only 25% said so in 2008. Also, in 2007, 36% of respondents said that competition from emerging markets was a high-impact factor, but only 28% said so in the 2008 survey.
The level of new chemical entities (NCEs), an important fundamental for outsourcing, was also considered. Only 18% of respondents said that the number of NCEs was a high-impact factor compared with 24% in 2007 and 25% in 2006.
The survey showed that declining economic conditions had an impact on companies' performance in 2008 and on their outlook for 2009. Sixty-two percent of respondents said they experienced an increase in company sales in 2008, compared with 76% in 2007 and 79% in 2006. And more respondents reported a decline in sales in 2008. Twenty-seven percent of respondents reported a decrease in their companies' sales in 2008, compared with 18% in 2007 and 13% in 2006.
Expectations are also lower for 2009. Sixty-one percent of respondents expect an increase in sales in 2009, and 27% anticipate a decline in sales. In contrast, when projecting on performance for 2008, 88% of respondents in 2007 felt their sales would increase, and only 7% anticipated a decrease.
Despite this downward trend, capacity utilization was only slightly down in 2008 compared with 2007. In the 2008 survey, the mean capacity utilization among respondents was 72.7% compared with 76.2% in 2007 and 75.7% in 2006.
Although respondents cited concerns with the economy and company performance in 2008 and 2009, investment levels in 2008 remained on par with previous years. Forty-four percent of respondents said that they have actual plans to increase capital investment in 2009, and 23% said that they are very likely to make capital investment in 2009. Although this is slightly down from the levels reported in the 2007 survey, this level is consistent with survey results from 2006. The 2007 survey showed that 52% of respondents had actual plans for spending in 2008, and 21% said they were likely to make capital investments. In 2006, 44% of respondents said that they planned to increase capital expenditures, and 19% said they were very likely.
Also, planned mean capital expenditures as a percentage of overall sales in 2008 is compatible with 2007 levels and up from 2006 levels. The 2008 survey showed that mean capital spending as a percentage of sales planned for 2009 was 10.5%, which compares with 10.8% planned for 2008 among respondents in the 2007 survey, and 8.8% planned for 2007 by respondents in the 2006 survey.
Spending on R&D for 2009 is on par with previous years as well. The mean spending as a percentage of sales that respondents anticipate spending in 2009 was 8.6%, which is the same level reported in the 2007 survey, and slightly up from the 8.0% reported in the 2006 survey.
Another positive sign from the survey is that respondents anticipate a fairly healthy level of outsourcing during the next three years. Seventy-five percent of respondents expect that more projects will be outsourced during the next three years, 11% say less projects will be outsourced, and 14% anticipate no change in outsourcing. These levels are slightly down from levels anticipated by respondents in the 2007 survey, but slightly better than what was expected by respondents in the 2006 survey results. In 2007, 80% of respondents felt that more projects would be outsourced during the next three years, 3% felt that less projects would be outsourced, and 18% anticipated no change in outsourcing levels. In 2006, 70% of respondents expected that outsourcing would increase during the next three years, 5% thought it would decline, and 25% said it would stay the same.
Strategies for growth
Consistent with previous surveys, the top three strategies for improving profitability cited by respondents were new product introductions, process improvements, and offering broader process technologies. Although these approaches were ranked as the top three ways to increase profitability in the 2008, 2007, and 2006 surveys, in 2008, more respondents identified offering broader process technologies as a strategy for improving profitability than in earlier years.
In 2008, 45% of respondents identified broader process technologies as a growth strategy for their companies compared with 28% in 2007 and 34% in 2006. Fewer respondents also thought that process improvements would be used to improve profitability. In 2008, fifty-eight percent of respondents said that process improvements would an approach to improve their bottom lines compared with 68% in 2007 and 59% in 2006.
New product introductions, the top-ranking strategy in all three years, were comparatively ranked each year. In the 2008 survey, 76% of respondents ranked this as an important strategy, 80% did so in 2007, and 73% did so in 2006.
Perhaps reflecting current market conditions and financing, fewer companies anticipate using acquisitions as a means for growth. In 2008, only 17% of respondents said that growth through acquisition was a top strategic goal, compared with 24% who said so in 2007, and 25% in 2006.
Competition from emerging markets
Competition from suppliers in emerging markets is expected to continue, according to the survey, with increased penetration by offshore suppliers. For 2009, the mean market share of suppliers from emerging markets is expected to be 30.8%, which is up from the 26.5% in 2008, 26.3% in 2007, and 22.2% in 2006. For purposes of the survey, emerging markets refer to India, China, Eastern Europe, and Latin America.
Although the overall outlook for the chemical industry, inclusive of the fine-chemicals industry, weakened in the 2008 cycle and is expected to continue in 2009, there are still positive signs for the custom and batch manufacturing sector. Planned investment in R&D and capital spending remains comparable to previous years. Competition from emerging-market suppliers is still prevalent, and is likely to continue. And companies' strategies to encourage growth center on new product introductions, process improvement, as well as a broadening of process technologies.