Outsourcing: Robust Market Testing CROs' Ability to Deliver

If there really can be "too much of a good thing," providers of contract development services may be experiencing it. Contractors are having to admit that the robust demand for services arising from the surging new drug pipeline may be pushing them to the limits of their ability to deliver.

Jim Miller

That's a key insight gleaned from the 2007 survey of market conditions conducted by PharmSource in conjunction with BioPharm International and its sister publications Pharmaceutical Technology and Pharmaceutical Technology Europe. The survey was conducted in May and received 544 responses, including 432 from biopharmaceutical companies and 112 from service providers. All respondents were involved in buying or providing chemistry, manufacturing, and controls (CMC) services, including analytical chemistry and microbiology, formulation, process development, packaging, and API and dose manufacturing

Service providers themselves report that rapid growth is causing strains. Nearly 55% of CROs admit that lack of capacity is constraining their ability to take on new business; that's up from 43% in 2006. Customers have noticed how busy their suppliers are: in this year's survey, 30% say that contractors appear to have all the work they can handle; up from just 13% in 2006.

Interestingly, staffing is not the biggest problem facing service providers; rather, it's their ability to manage the growth. The biggest single constraint cited by service providers is organizational processes, with inadequate capital to fund growth a close second. When asked whether their management and systems were adequate to handle growth of 20% or more, only one-third indicated that their systems and management are up to the task (Figure 1). A quarter of contractor respondents admit that neither their systems nor management are adequate to handle current growth, while the rest concede that one or the other is lacking.

Figure 1

ROBUST DEMAND

The capacity problems reflect an unprecedented level of activity in the development services industry. More than a quarter of service providers expect revenues to grow by 20% or more this year; only 15% of contractor respondents expected such robust results in last year's survey. The growth is coming from all customer segments, with mid-size and generic bio/pharmaceutical companies showing particularly big jumps.

The contractors' success is mirrored in the responses from bio/pharmaceutical company professionals, 94% of whom report an increase in spending on outsourced activity for the year. The survey results indicate that the growth reflects a fundamental move in favor of outsourcing rather than doing things in-house. Among bio/pharmaceutical company respondents, 27% reported that their spending on contract services is growing faster than their overall spending, up from just 18% of respondents in last year's survey. Over 20% of respondents report that half or more of the spending in their particular area is outsourced; that's more than double the response from 2006.

The increase in spending is remarkably consistent across company size, and rates of growth for spending on commercial and development services are also about the same.

The growth in spending has created a more fluid contract services market that offers more opportunities for service providers. Among bio/pharmaceutical company respondents, 57% report that they are actively looking for new service providers, either to increase their vendor base or to replace current providers; that's up from 37% in 2006. Only 5% of respondents say they are sticking just with current vendors.

SERVICE QUALITY CONCERNS

That search for new vendors may also reflect growing dissatisfaction with current vendor relationships. The survey suggests that service providers do not fully appreciate how their growing pains are impacting their customers.

When asked how they think their clients would rate the quality of their customer service, 36% of suppliers say customers would rate them as "excellent" (Figure 2). However, when customers are asked how they rate their service providers' customer service, only 6% rate them as "excellent," and vendor performance on project management and technical/operational dimensions got similar marks. Although customer ratings of their service providers are not dire—most rate their vendors as "good" or "satisfactory" and less than 20% rate them as "fair or "poor"—the survey results suggest that there is a big gap between customer and service provider definitions of service excellence.

Figure 2

In fact, meeting service levels is a major challenge for pharmaceutical services providers because the requirements of their client base vary widely. While major bio/pharmaceutical companies will judge service providers on the basis of technical and operational performance, small bio/pharmaceutical companies expect help in navigating the drug development process and may not appreciate technical and operational excellence. Further, service providers have yet to find an effective way of demonstrating superior customer service and project management capabilities, and if they can't put a value on it, they can't justify a price premium for it.

ANOTHER BIG YEAR IN 2008?

Service quality issues might intensify next year if our respondents' expectations for 2008 come to pass. Among bio/pharmaceutical company respondents, 43% expect spending for contract services to grow by 10% or more next year (versus 36% in last year's survey), and only 7% expect spending to decrease. Service providers are very optimistic as well: 80% expect 2008 to be better or much better than 2007. In 2006, only 55% had such expectations for the following year.

Further growth threatens to intensify the pharmaceutical services industry's capacity and service challenges. The industry continues to be dominated by small companies whose technically inclined owner–operators may lack the inclination and executive skills to deal with the business issues of their rapidly growing enterprises. An accelerating process of consolidation promises increased scale and greater management sophistication, but for now even the largest players seem to be struggling to meet the mounting expectations of customers. Still, it's unlikely that anyone is going to say "no" to new business while they work out their capacity issues.

Of course, the market situation could change quickly. Venture capital—a major source of the funds that ultimately flow to CROs—can dry up quite suddenly and whole therapeutic classes can be discredited. With major pharmaceutical companies undergoing rounds of cost-cutting and unfavorable reimbursement and patent trends, a darkening outlook could alter the landscape for service providers in very short order.

Jim Miller is president of PharmSource Information Services, Inc., Springfield, VA , 703.383.4903, jim.milller@pharmsource.com