Contract Services Spending: Who's Spending What, and Where?

The data from the first three quarters of 2011 in the Nice Insight Pharmaceutical & Biotechnology Outsourcing survey showed that annual expenditure among survey respondents remained consistent (see Table I). However, there were shifts in where resources were allocated and important differences between traditional, small-molecule pharmaceutical companies, and biotechnology companies. Understanding these shifts can help CRO and CMO providers position themselves for capturing business.

Table I: Expenditure on outsourcing by survey respondents, by quarter.

The data indicate that traditional pharmaceutical companies—from Big Pharma to specialty and niche businesses—will be cutting back on outsourcing. Big Pharma respondents planned reductions in 15 of the 20 services reviewed in the survey. Fill–finish; stability, storage, and testing; and product characterization were three service areas where Big Pharma outsourcing remained consistent. High-potency compound projects experienced the steepest drop in Big Pharma spending. However, this work appears to be shifting to specialty pharmaceutical companies, which increased high-potency compound and cytotoxic outsourcing. On the other hand, biopharmaceutical companies indicated that they would increase their numbers of outsourced projects across 14 services. Five remained constant, and one (lyophilization) experienced a modest drop after peaking in the second quarter.

Figure 1: Services with an increase in forecast market size for each quarter of 2011. (ALL FIGURES ARE COURTESY OF THE AUTHOR)

According to survey respondents, anticipated spending increased in 11 service sectors included in the Nice Insight survey. Six of these services experienced an increase in the forecast market size during each quarter of 2011 (see Figures 1 and 2). These services were bioanalytical testing, clinical research, drug-delivery systems, high-potency compounds, logistics and distribution, and pharmaceutical analytical testing. Of these services, bioanalytical testing had the greatest increase in projected spending. The level rose approximately 50% from $136.5 million to $200 million.

Figure 2: Services with an increase in forecast market size for each quarter of 2011.

Anticipated spending on consulting services, regulatory support, and custom manufacturing increased overall in the second quarter and dropped off slightly in the third quarter (see Figure 3). Projected spending on consultants increased roughly 20% over the first three quarters of 2011, and regulatory support spending increased by 30%. For two service sectors, chemical synthesis and fill–finish, anticipated spending increased between the first and third quarters (see Figure 4). However, the spending in the second quarter dipped lower than its level in the first quarter.

Figure 3: Services with an increase in forecast market size that peaked in Q2 2011.

Five of the service sectors covered in the pharmaceutical and biotechnology outsourcing survey remained steady throughout all three quarters. Projected spending stayed within the $5-million range from the first to third quarters. Product characterization, lyophilization, and cytotoxic projects received similar allocations of funds through all three quarters (see Figure 5). Interestingly, sterile compounds and stability, storage, and testing experienced a drop in second-quarter projected spending, though projected budget allocation stayed consistent from the first quarter to the third (see Figure 6).

Figure 4: Services with an increase in forecast market size that dipped in Q2 2011.

Respondents predicted a drop in spending on four of the 20 services reviewed. The services with a decrease in projected market size were packaging, formulation and preformulation, process optimization, and toxicology testing (see Figure 7).

Figure 5: Services with consistent forecast market size during each quarter of 2011.

After identifying the shifts in budget allocation for outsourced services, the survey authors looked for patterns among the different types of pharmaceutical and biotechnology companies that outsource: (e.g., Big Pharma, specialty pharmaceutical companies, emerging companies, niche or startup companies, Big Biotech, and emerging biotech). This knowledge can help CROs and CMOs target the businesses that are most likely to be seeking their services.

Figure 6: Services with consistent forecast market size despite a dip in projected spending during Q2.

Big Pharma survey respondents indicated the most change in allocated spending on outsourcing during the course of 2011. Anticipated spending on outsourcing projects decreased among Big Pharma respondents in almost every service sector. Projected spending by this customer base decreased in each of the service sectors that otherwise experienced an increase in overall market size. The one exception was fill–finish projects, which received a steady allocation of funds from Big Pharma during all three quarters of 2011.

Figure 7: Services with a decrease in forecast market size from Q1 to Q3 2011.

Service sectors with a consistent forecast market size also faced a decrease in outsourcing from Big Pharma, with the exception of stability, storage and testing, and product characterization. Allocation for each of these services remained consistent. Not surprisingly, allotted funds from Big Pharma also decreased among the service sectors that had an overall drop in spending. The services with the largest drop in Big Pharma funding were high-potency compounds (–17% from the second to the third quarter) and process optimization (–12%). Budget cuts and the goal of maintaining profitability have influenced where Big Pharma allocates its funds. It will pay off to prepare for this constriction by expanding partnerships to include alternative customer bases.

Specialty pharmaceutical companies exhibited similarities to Big Pharma, with respect to where this customer base expects to spend its outsourcing funds. As with Big Pharma, projected spending dropped for se-veral services that had an overall increase in forecast market size, such as pharmaceutical analysis, bioanalysis, and logistics and distribution. Unlike Big Pharma, however, specialty pharmaceutical companies showed an increase in planned spending for high-potency compounds, while drug delivery and clinical research received consistent fund allocation during the three quarters analyzed. In the service sectors where the forecast market size remained consistent, specialty pharmaceutical respondents indicated that spending on cytotoxic projects would rise. The increase in outsourcing spending for high-potency compounds and cytotoxic projects indicates specialty pharmaceutical companies' current focus on oncology. Decreases in other sectors reflect the same budget cuts currently affecting Big Pharma.

Respondents who classified their company as an emerging, niche, or startup pharmaceutical business showed the greatest potential for increasing their spending on specific services. As the year progressed, respondents indicated an increased need to outsource logistics and distribution, regulatory support, consulting, manufacturing, process optimization, and packaging. Other services covered in the survey received consistent allocation of funds from this respondent group, with the one exception being a diminishing need to outsource cytotoxic projects. The businesses that make up this customer base depend heavily on investment dollars to keep their company operating, yet they are also the best target for small-molecule CROs and CMOs looking to maintain or replenish their project pipeline.

While the three pharmaceutical customer bases' outsourcing funds have been constrained during the past year, it has been an exciting time for biotechnology companies, as pharmaceutical companies have turned to biopartnering to rejuvenate their prospective pipelines. Accordingly, respondents who work for biotech companies indicated an increase in outsourcing spending for pharmaceutical analytical testing, bioanalytical testing, clinical research, high-potency compounds, chemical synthesis, custom manufacturing, regulatory support, cytotoxic projects, stability, storage, testing, sterile compound research and development, product characterization, process optimization and formulation, and preformulation. Spending for drug-delivery systems, logistics and distribution, consulting, fill–finish, toxicology, and packaging remained consistent during the first three quarters of 2011. The only service sector for which the biotech customer base's projected spending decreased was lyophilization, which dropped modestly from the first quarter to the third after peaking in the second.

Emerging biotech showed much of the same outsourcing behavior as Big Biotech, with an increase in outsourcing bioanalytical testing, custom manufacturing, chemical synthesis, sterile compounds, product characterization, lyophilization, and cytotoxic projects. This customer base represents a small segment of the market, yet its consistent and increasing need for outsourcing partners makes it a good customer base to target for new projects. This conclusion is particularly true given that survey respondents from emerging biotech businesses indicated that their companies would outsource an average of five services in 2011 (see Figure 8).

Figure 8: The average number of services outsourced in 2011 by company type.

Kate Hammeke is a research manager at Nice Insight, 6 W. 20th St., Second floor, New York, NY 10011, tel. 212.366.4455, fax 212.366.4419, kate.h@thatsnice.com.