Feature

Good Times and Expanding Horizons in Pharmaceutical Manufacturing

Jim Miller is the president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.com, www.pharmsource.com

2005 has been a good year for the contract services industry, and 2006 promises to be nearly as successful, according to the 2005 PharmSource–Pharmaceutical Technology outsourcing survey. But as pharmaceutical outsourcing activity grows, companies are looking for more sophisticated ways to manage and control their contract services expenditures. Outsourcing spending Nearly 50% of the 193 pharmaceutical company survey respondents expect that their 2005 outsourcing spending will increase by 10% or more, compared with 2004 expenditures. Sixteen percent of respondents anticipate their spending will increase by 20% or more. The expected growth in spending is especially high among small pharmaceutical and biopharmaceutical companies. Overall, 56% of respondents from those companies expect to see their spending grow by 10% or more, while less than 45% of respondents from other segments anticipate that kind of increase. Expectations of spending increases are largely the same for buyers of development services and of commercial manufacturing services. The increased spending by pharmaceutical companies is translating into even faster revenue growth for contract services providers. Overall, 62% of contractor respondents expect their revenues to grow by 10% or more in 2005, including nearly 70% of commercial manufacturing contractors. Contractors cite small pharmaceutical companies as their fastest-growing segment, especially for development services, but contract manufacturers are getting a bigger boost from Big Pharma. Respondents from pharmaceutical companies indicate that the 2006 spending growth should rival that of 2005, with 48% expecting increases of 10% or more next year. Certainly, there seems to be plenty of opportunity for pharmaceutical companies to expand their use of contract services: Only small companies are outsourcing a substantial portion of their development and manufacturing activity. Among Big Pharma and Mid-size Pharma companies, which account for nearly 80% of industry R&D expenditures, only a few companies are outsourcing more than 50% of their chemistry and manufacturing (CMC) activities. Preferred-provider status critical This year’s survey again underscores the importance of contractors achieving “preferred-provider” status with major clients. Among pharmaceutical company respondents, 45% report that half or more of their 2005 services spending will go to formally designated preferred providers, and only 18% say preferred providers receive less than 10% of their business. Overall, 33% of contractor respondents report that half or more of their revenues will come from formal preferred-provider relationships. Interestingly, the responses indicate that the preferred-provider trend may be leveling off. In fact, the responses for expected preferred-provider share for 2007 are largely the same as for 2005. Other procurement innovations also are working their way into sourcing practices. Sixty percent of pharmaceutical company respondents report using electronic procurement technology for sending and processing at least some of their requests for proposal (RFPs), including 90% of Big Pharma respondents. Among contractor respondents, 85% respond to at least some RFPs electronically, although electronic procurement represents less than a quarter of RFP activity at most contractors. Online reverse auctions, in which vendors bid against each other in real time, are used in less than two-thirds of cases, and are especially uncommon in Small Pharma companies. Still, 46% of Big Pharma respondents say that at least some bids are awarded using reverse auctions. Less than 50% of contractor respondents have participated in reverse auctions. The growing role of procurement has been an often talked-about trend in sourcing, and this year’s survey partially validates that trend. Only 15% of pharmaceutical company respondents say that procurement groups control the sourcing process today, but another 13% say procurement groups are likely to control the process in the future. Nearly half of respondents characterize the procurement group as influential in the sourcing process but not controlling. As one might expect, the effect of procurement groups is greater in large pharmaceutical companies and cost-sensitive generic pharmaceutical companies. But, the effect is less in small companies that have smaller bureaucracies. (continued)