Wednesday, November 26, 2008

Are Pharma Companies Headed Down the Same Path as Automotive? Part 2

Last week, I blogged about what may happen to Big Pharma after the dust settles from Big Auto and the rest of the financial crisis. I think that I made a pretty good case for revenues being off in the future. (I never said that I was humble.) In this blog and the next, I’ll write about what might happen to Big Pharma’s partners, the outsourcers and consultants.

This week’s blog will focus on the outsourcers. The whole idea behind outsourcing is to lower costs through economies of scale and price differentials (arbitrage). With either a stable revenue base requiring efficiencies or growing revenues that could be managed better, drug companies have used outsourcing, in particular, offshoring, to reduce their costs. But, what happens if those revenues decline dramatically? An article published this week (Sports Business Journal, November 17, 2008) suggested that drug companies’ revenues could decline by as much as $10 billion (10-20% we think) next year because of expiring patents and perhaps significantly more if the Universal Health Care promise from the Obama campaign platform occurs. Research and development spending could be greatly reduced as well.

For example, recently, Mike Huckman in his CNBC blog, ( ), noted that Charles River Labs’s pre-clinical laboratory business is off because small biotech firms aren’t spending there now. He implies that this problem with early stage testing could indicate more trouble further out. Mike also talks about how the credit crunch is curtailing these firms ability to finance drug development. My point is that as the business is shrinking, expenditures will fall, and fast, to preserve profitability. If there is no business activity then there’s nothing to outsource, right? Not to mention that outsourcing requires a financial outlay up front to start off which probably won’t be happening in 2009. If we are correct in our presumption that revenues and expenditures decrease next year, big Pharma is sure to revisit its outsourcing strategy. Deloitte’s decision earlier decision to close its outsourcing operations in the Asia/Pacific seems to indicate that the salad days of outsourcing may be drawing near.

I think that the train has already left the station for many outsourcers. Rates have been rising and companies have been becoming less enamored about the limitations of working with outsourcers. The traditional outsourcing meccas of India and China are being challenged by other emerging locations such as the Philippines, other Southeast Asia countries, Central and South America, Eastern Europe and even some areas of the US. This adds to the challenges these suppliers are confronting. While I’m not suggesting that the outsourcing industry will crater anytime soon, I believe that the rapid growth is over and there may be some consolidation to come.

The global recession and changes in public healthcare will affect the pharmaceutical industry adversely and probably for some years to come. The ripples will go beyond the industry itself. The outsourcing companies, whether they supply clinical trials, payroll, or other backroom functions, and who have profited from the drug companies’ growth in the latter part of the twentieth century are going to have to recede with them.

Next week, I’ll finish this series with my blog on how consulting companies will deal with Big Pharma’s coming downturn.

As always, we welcome your feedback. Please contact us at We look forward to hearing from you.

Contributed by Guy de Lastin

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