Outsourcing Outlook

Riding the Wave (continued)

Attitudes toward outsourcing The expanding pipeline is half the equation in deciding whether the contract services industry is experiencing a cyclical boost or a favorable structural development. The second half of the equation is the propensity to outsource. Evidence of a long-term shift in business practices in favor of more outsourcing is ambiguous. Demand for contract services has clearly increased, but so far, this need appears to be more a function of the growing volume of candidates than it is a shift toward a new business philosophy. Pharmaceutical companies continue to invest in new or replacement research and manufacturing capacity, even as their outsourcing expenditures grow. More importantly, we have seen few examples of truly innovative outsourcing business models that suggest that Big Pharma has embraced outsourcing in a new way (i.e., deals such as those that Wyeth has structured with Accenture for data management and Research Pharmaceutical Services for study monitoring). There is no question that executives at most major pharmaceutical companies are looking for ways to reduce costs, increase productivity, and avoid tying up resources in fixed assets. Outsourcing is one approach to achieving those objectives, but other popular strategic initiatives may have even greater effect. Those initiatives include increased in-licensing of early-stage candidates, more-aggressive procurement practices, and establishing operations in low-cost and tax-advantaged offshore locations. Mistaking a cyclical uptick for a structural change can have disastrous consequences for CRO and CMO executives. In the 1990s, pharmaceutical chemical executives got it wrong, and they are still paying for their mistake. They misread an increase in demand caused by a cyclical upswing in the pipeline as a structural change in business practices in favor of outsourcing. As a result, the industry made large investments in new manufacturing capacity, only to see the cycle turn down just as new facilities came online. The resulting overcapacity forced companies to cut prices and carry unabsorbed overheads, thereby sharply reducing profitability and forcing some companies out of the business. CRO and CMO executives will do well to read the tea leaves carefully before deciding that the current boom in demand for contract services is more than a cyclical upturn. References An analysis of this year's survey appears in Outsourcing Resources 2005, a supplement to the August issue of Pharmaceutical Technology. PT