Customer Drivers Influencing Supplier Differentiation

Each company, whether a contract research organization (CRO), contract development and manufacturing organization (CDMO), contract manufacturing organization (CMO), or other type of contract-service provider faces a fundamental question on how to differentiate itself from its competitors and align its capabilities to the needs of its customers. Metrics that evaluate factors that are valued by customers overall or by specific customer segments, including how a particular company is perceived by prospective and current customers, are invaluable tools in strategy development and implementation.

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To gain a perspective on how these issues relate to pharmaceutical development and manufacturing, the Nice Insight Pharmaceutical and Biotechnology Survey evaluated levels of customer awareness and perception of contract-service providers and the factors that influence those views. The quarterly survey is deployed to 40,000 outsourcing-facing pharmaceutical and biotechnology executives. The survey is comprised of approximately 1200 questions and randomly presents approximately 30 questions to each respondent to collect baseline information with respect to customer-awareness and customer perceptions on 400 companies that service the drug-development and related commercialization cycle. A customer awareness score is derived based on assessing five levels of awareness, and the customer-perception score is based on six drivers in outsourcing: quality, accessibility, regulatory compliance, pricing, productivity, and reliability. These factors are ranked by respondents to determine the weighting applied to the overall customer-perception score, which can be calculated overall, in specific segments, and for a particular company. The most recent survey, released in June 2011, provides useful insight into the factors that influence outsourcing decision-making (1).

Factors influencing outsourcing

For purposes of the analysis for this article, customer perception was evaluated on an overall basis for all outsourcing activities and further analyzed by specific capabilities: custom manufacturing (i.e., drug substances and finished drug products), chemical synthesis (i.e., fine chemicals, intermediates, and active pharmaceutical ingredients), sterile manufacturing, lyophilization, and preformulation/formulation development. In looking at the ratings of all customer bases (i.e., Big Pharma, biotechnology/biologics companies, specialty pharmaceutical companies, emerging biotechnology/biologics companies, and emerging, niche, or start-up companies), a common finding was the importance of regulatory compliance. Across the board, regulatory compliance was the number one driver in influencing customer perception (see Table I). This finding was true for outsourcing overall and in five segments analyzed: custom manufacturing, chemical synthesis, sterile manufacturing, lyophilization, and preformulation/formulation development. Interestedly, price/affordability was ranked as the least important driver among the six factors in outsourcing overall and in the specific segments analyzed.

Table I: Drivers of customer perception in order of influence on overall outsourcing as rated by all companies.

Where there was some degree of difference was how the other factors—productivity, reliability, quality, and accessibility—ranked in order of importance. In evaluating companies engaged in sterile manufacturing or lyophilization, reliability ranked as the second most important factor influencing the perception of all types of biopharmaceutical/pharmaceutical companies and productivity ranked third. In offering their views on outsourcing companies overall as well as specifically for companies engaged in custom manufacturing, chemical synthesis, and preformulation/formulation, all types of pharmaceutical and biopharmaceutical companies ranked productivity second in importance and productivity third. Across all areas (i.e., overall outsourcing, custom manufacturing, chemical synthesis, sterilization, lyophilization, and preformulation/formulation development), quality was ranked as the fourth most important driver and accessibility fifth.

Specific customer bases

Further analyzing the drivers influencing customer perception among specific customer bases reveals interesting results. In examining the ratings offered by Big Pharma companies in outsourcing overall and in specific segments, regulatory compliance was most important and price/ affordability the least important. Similarly, biotechnology companies ranked regulatory compliance first and price/affordability last (see Tables II and III).

Again, where there was some degree of difference was how the other factors—productivity, reliability, quality, and accessibility—ranked in order of importance. In offering their views on outsourcing companies overall and specifically for companies engaged in custom manufacturing, sterile manufacturing, and lyophilization, Big Pharma companies ranked reliability second in importance and quality third (see Table II). In chemical synthesis and preformulation/formulation development, however, Big Pharma companies viewed productivity and reliability higher in importance, ranking productivity second, reliability third, and quality fourth. Accessibility was ranked fifth across all segments and in outsourcing overall (see Table II).

Table II: Drivers of customer perception in order of influence as rated by Big Pharma companies.

Although biotechnology companies ranked regulatory compliance first and price/and affordability last in order of importance in outsourcing overall and across all segments, there were greater differences in the other factors influencing their perceptions of contract service providers. For example, productivity, reliability, and accessibility were respectively ordered second, third, and fourth in importance by biotechnology companies in outsourcing overall, custom manufacturing and lyophilization (see Table III). In evaluating providers of chemical synthesis and preformulation/formulation development, however, biotechnology companies viewed productivity second in importance, accessibility third, and reliability fourth. In sterile manufacturing, biotechnology companies weighted reliability second, productivity third, and accessibility fourth. Surprisingly, in outsourcing overall and across all segments (i.e., custom manufacturing, chemical synthesis, sterile manufacturing, lyophilization, and preformulation/formulation development), biotechnology companies ranked quality as the fifth most important factor, higher only in importance than price/affordability, which ranked last in importance in outsourcing overall and in specific segments (see Table III).

Table III: Drivers of customer perception in order of influence as rated by biotechnology companies.

* See related figures on next page

Levels of outsourcing

The survey examined the level of all pharmaceutical outsourcing in terms of the average number of services outsourced and the amount spent. Emerging biotechnology/biologics companies outsourced the most number of services, an average of 5.79 services, and emerging, niche or start-up companies the least, with an average of 3.27 services. Big Pharma companies were the second largest purchaser of outsourced services, outsourcing an average of 4.82 services, followed by biotechnology companies with an average of 4.35 services and specialty pharmaceutical companies with 4.04 services.

As would be expected, Big Pharma companies spend the most on outsourced services. Fifty-six percent of Big Pharma companies spend $50 million or more on outsourced services on an annual basis, 23% spend between $10 million and $50 million, and 10% spend less than $10 million. Biotechnology/biologics companies' spending levels were fairly evenly distributed. Twenty-one percent spend more than $50 million per year, 27% spend between $10 million and $50 million, and 22% spend less than $10 million.

Although emerging biotechnology companies on average outsourced more services than other bio/pharmaceutical company types, they spend less. Only 4% of emerging biotechnology companies spend $50 million or more on outsourcing services per year, 10% spend between $10 million and $50 million, and 7% spend less than $10 million. Emerging, niche or start-up companies tend to spend less as well, with 42% of these type of companies spending less than $10 million per year on outsourced services, 17% spending between $10 million and $50 million, and 7% spending more than $50 million. The spending patterns of specialty pharmaceutical companies fall in between those of Big Pharma companies and smaller players. Only 12% of specialty pharma companies spend more than $50 million per year on outsourced services, 23% spend between $10 million and $50 million, and 18% spend less than $10 million.

Outsourcing areas

Understanding the drivers of customer perception, the spending levels, and volume of outsourced services are crucial determinants for a contract service provider in developing and implementing a business strategy. These factors provide an overall framework for which specific areas of outsourcing activity can be further accessed. The survey analyzed the distribution of outsourcing activities by bio/pharmaceutical company type to examine which type of company outsourced in a particular area. For example, for those companies outsourcing custom manufacturing, 37% were Big Pharma companies, 26% were biotechnology/biologics companies, 16% were specialty pharmaceutical companies, 14% were emerging, niche or start-up companies, and 8% were emerging biotechnology companies. In examining the other areas previously examined in terms of customer perception (i.e., chemical synthesis, sterile manufacturing, lyophilization, and preformulation/formulation development), the survey results showed the following distribution among companies in outsourcing those functions:

• Outsourcing chemical synthesis: Big Pharma (34%), biotechnology companies (28%), specialty pharmaceutical companies (14%), emerging biotechnology/biologics companies (10%), and emerging, niche or start-up companies (14%)

• Outsourcing sterile compound research and development projects: Big Pharma (39%), biotechnology companies (27%), specialty pharmaceutical companies (11%), emerging biotechnology/biologics companies (11%), and emerging, niche or start-up companies (13%)

• Outsourcing lyophilization: Big Pharma (34%), biotechnology companies (35%), specialty pharmaceutical companies (8%), emerging biotechnology/biologics companies (14%), and emerging, niche or start-up companies (10%)

• Outsourcing preformulation/formulation development: Big Pharma (38%), biotechnology companies (24%), specialty pharmaceutical companies (19%), emerging biotechnology/biologics companies (11%), and emerging, niche or start-up companies (8%).

Figure 1: Percent of chemical synthesis projects outsourced by company type and anticipated spend. All figures are courtesy of Nice Insight.

Figure 2: Percent of custom manufacturing projects outsourced by company type and anticipated spend.

Figure 3: Percent of lyophilization projects outsourced by company type and anticipated spend.

Figure 4: Percent of formulation/preformulation projects outsourced by company type and anticipated spend.

Figure 5: Percent of sterile compound R&D projects outsourced by company type and anticipated spend.

Reference

1. "Nice Insight Pharmaceutical and Biotechnology Survey, Quarterly Report" (Nice Insight, New York, June 2011), www.niceinsight.com.