Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report.

Jim Miller

How big is the market for contract- manufacturing services? PharmSource gets that question more than any other. Published estimates of market size vary widely and often seem to be exaggerated or inflated. 

Determining the size of the contract-manufacturing market is a methodological challenge. The biggest obstacle is the fact that most CMOs are either privately owned and do not report their financial results or are part of larger corporations that usually do not  break out their CMO revenues in their financial reports. Although good research can overcome some of these problems, determining market size ends up requiring some amount of "guesstimation." 

Another methodological problem is defining what is included as "contract manufacturing." Many published reports are unclear about what they are measuring, which can lead to widely divergent market-size estimates. Understanding a given market size estimate requires that the reader and user fully appreciate what is being measured. Some of the dimensions that must be considered are discussed below:  

Which products are included in the market? 

The definition can include prescription products, over-the-counter (OTC), and nutritional products. Although prescription and OTC products are both governed by drug GMPs, nutritional products often are not, so the market dynamics and participants tend to be different, albeit with some overlap.

Is the product being manufactured proprietary to the client or is it generic?

 Some estimates of the contract-manufacturing market appear to include generic APIs, which are really commodities that can be bought by any company looking to manufacture a generic or OTC drug. There also are generic or OTC drug products that the manufacturer licenses to a customer to be packaged under the customer's name, the so-called "private label" business. By contrast, pure contract manufacturing involves a CMO manufacturing an API or drug product using the client's proprietary process or proprietary formulation.

 Many manufacturers in emerging markets offer contract manufacturing, but they do not operate under North American, Western European, or Japanese regulatory standards. These companies are competing in a different market and under a different set of terms than manufacturers that meet higher regulatory requirements.

Given the potentially broad dimensions of the CMO industry, users of market-size data must be clear about the applicability of the data they are using. PharmSource recently published its own estimate of the size of the dose CMO market, 

. We measured the market for contract manufacturing of a client's formulation under FDA, Western European, or Japanese GMP standards and built our estimate based on extensive research of company revenues and revenue modeling. 

We (PharmSource) arrived at a contract-dose manufacturing market size of $13.7 billion in 2011. That was up 7% from 2010, but that growth rate includes revenue from facilities that became contract-manufacturing sites during the year after they were acquired by CMOs from biopharmaceutical/pharmaceutical companies. The organic growth rate (i.e., the growth of revenues at facilities that were in CMO networks in 2010) was 6%. We estimate that overall, dose CMOs accounted for 22% of the biopharmaceutical/pharmaceutical industry's dose-related cost-of-goods in 2011. 

Of course, size and growth are not the only dimensions that matter for the health of the industry. Contract-dose manufacturing suffers from overcapacity, especially for solid-dose forms, and the intense competition to sell capacity means that only a minority of dose CMOs make reasonable profits. Further, global biopharmaceutical/pharmaceutical companies continue to show a strong preference for building captive manufacturing, shutting CMOs out from some of the most attractive segments of the market. 

We continue to believe that a consolidation of the industry will happen sooner rather than later, driven by developments in the broader economic and financial environment. When that happens, the industry may not be so big or growing at the same rate, but it will be getting healthier.  

A recent analysis of working capital management practices ofbiopharmaceutical/pharmaceutical companies has some mixed implications for the contract-services industry. The report from financial services giant Citi claims that the global biopharmaceutical/pharmaceutical companies could release $33 billion in cash by managing their working capital better. Working capital is the difference between current assets (which include accounts receivable and inventories) and current liabilities (which include accounts payable and short-term debt). Companies use cash when they build up inventories and receivables and pay their bills; they increase their cash when they run down their inventories, slow payments to suppliers, or collect receivables more aggressively. 

Companies could free up that cash by reducing inventories and taking longer to pay their bills, according to the Citi report. The additional cash resources could be used for licensing and acquisition deals or could be returned to shareholders as dividends and stock buybacks. 

Having to wait longer for their money is not something that CMOs and CROs want to hear. Service providers are already getting squeezed on prices and profit margins, and a slowdown in payments will eat further into their profits by forcing them to borrow more against their lines of credit or to forego discounts they might get from paying their own suppliers. In the worst cases, CROs and CMOs could be forced to delay hiring or purchasing materials and equipment, which would hurt the quality and reliability of the services they provide. 

On the other hand, helping their biopharmaceutical/pharmaceutical clients to reduce their inventories could be a big opportunity for CMOs. Managing inventories is about managing production schedules, cycle times, and supply chains. These are skill sets at which CMOs are supposed to excel because  they are at the core of modern manufacturing practice. CMOs that are able to reduce schedule lock-in times from the traditional three months for dose forms and six to twelve months for APIs could increase their share of business from key customers and probably earn somewhat higher margins. 

The working-capital challenge raised by the Citi report is further proof that success for CMOs will go beyond traditional measures of quality and cost of goods.  

 is president of PharmSource Information Services, Inc., and publisher of 

, tel. 703.383.4903, Twitter@JimPharmSource, 

Articles

Measuring the size of the market for contract manufacturing services requires a careful hand.

Sizing the Market for Contract Manufacturing

The global economy and financial system is not in great shape. The European debt crisis rolls on and on, driving European economies into recession. China's growth has slowed to "only" 7%, but that slowdown is enough to reduce growth prospects of countries that export to China. India's economy is feeling the effects of institutional problems, such as corruption and poor infrastructure. The US economy is growing, but at a rate too slow to bring down unemployment.  

The apparent incompetence of political leaders has not improved the mood. The inability of the US Congress to address the nation's debt and economic issues and the uncertainty surrounding the upcoming national elections have created great uncertainty and caused business executives to scale back investment and employment plans. The failure of European political leaders to resolve their problems has undermined investor confidence and created volatility in financial markets. Even in China, where the Communist party maintains a strong grip, the impending change in leadership has added an element of uncertainty. 

In the not-so-distant past, such macroeconomic developments would have had little impact on the bio/pharmaceutical industry. Global bio/pharmaceutical  companies were generating large profits from patented blockbuster medications and pouring them back into expansive R&D programs and investments in new laboratory and manufacturing facilities.  People had to take their medicine and the effectiveness of drugs, such as Lipitor and Plavix, ensured that governments and private insurers would continue to pay for them regardless of price. Attracted by the returns on successful new pipeline candidates and flush with cash, investors poured record amounts of capital into early- and mid-stage companies. 

Today, having fallen over the patent cliff, the bio/pharmaceutical industry finds itself fully exposed to the vagaries of the macro-economy at a very inopportune time. Not only have companies lost the big profits from blockbuster drugs, they also face increased pressure from governments and private payers that are desperate to reduce healthcare expenditures. Drug prices are being forced down, generic substitution is accelerating, and it is increasingly difficult to get coverage for expensive new drugs.  

Smaller companies are being buffeted by the uncertainty in financial markets. Venture-capital funds have less money to invest as their traditional investors have become more risk-averse, and venture capitalists themselves have focused on less-risky investments with faster payoffs, such as social-media companies. In instances where they are still investing in bio/pharmaceutical start-ups, they are favoring companies with later-phase candidates with strong near-term prospects for out-licensing. Funding by way of initial public offerings is scarce. The number of bio/pharmaceutical initial public offerings is way down, and most have lost value since they were launched. 

These pressures could not come at a worse time for an industry desperately trying to maintain profitability in order to fund new product development. Pipelines at many bio/pharmaceutical companies are sparse, and R&D operations have been notably unproductive despite significant cost-cutting. High profile drugs continue to fail at Phase III despite the "kill-it-early" philosophy that guides decision-making at most bio/pharmaceutical companies. 

So, instead of a stable macro-environment in which to transition to the next generation of products, bio/pharmaceutical companies must fight fierce headwinds  to make progress. They have been forced to remake their business models not just to address the new scientific and clinical realities but also to reflect their closer connection to a world that cannot afford to maintain the rapid growth in healthcare expenditures.   

The business model changes thus far have been dramatic. Global bio/pharmaceutical companies now pursue growth opportunities in niche products, generic drugs, and emerging markets instead of traditional blockbusters. They are downsizing their remote R&D campuses while building their presence in urban centers of medical research where their researchers can be continuously exposed to new ideas and technologies (a model that other knowledge-based industries have long subscribed to). They are rebuilding R&D processes to more thoroughly assess new candidates before graduating them to expensive clinical development stages. They are re-engineering supply chains to reduce costs and increase security. Although still dependent on physicians to prescribe their medications, they are looking for ways to interact more directly with patients. 

If the fortunes of bio/pharmaceutical  companies are now closely tied to the macro-environment, then too are the fortunes of CROs and CMOs. CMO revenues and margins are directly impacted by the declining unit volumes and growing customer demands in that they help absorb the lower prices being paid by governments and insurers. Providers of preclinical toxicology and API process-development services have seen their revenues stagnate as more rigorous graduation criteria and decreasing venture-capital support have reduced the level of early-development activity. In these changing times, CROs and CMOs have two choices: they can continue their traditional strategies of passively bobbing up and down on the rising and ebbing tides of the industry or they can seize the opportunity to help bio/pharmaceutical companies deal with their increased exposure to the macro-environment.  

Clinical CROs have shown the way on how service providers can help bio/pharmaceutical companies adapt to their new realities. Although originally just a source of supplemental labor, they have come to set the standards for quality and innovation in the running of clinical trials. In particular, they have led the way in the use of information technology to revolutionize the way in which clinical data are collected and analyzed. CRO-driven technology innovation has enabled faster review and analysis of clinical data, flexible trials designs, and patient-reported data using mobile devices.  

Similarly, clinical packagers have been in the forefront of adopting sophisticated packaging and printing and logistics technologies and practices to reduce the costs of clinical-trial materials while ensuring supplies get to patients in a timely manner. All of this has enabled clinical research to be conducted faster and more cost-effectively. 

CMOs have lagged behind other service segments in identifying technologies and practices that can help bio/pharmaceutical companies respond to the changing macro environment. In particular, they need to find more flexible and lower cost manufacturing solutions to address a medical marketplace that is more focused than ever before on managing total expenditures. 

The ability and willingness of CROs and CMOs to contribute to the remaking of the bio/pharmaceutical business model, and especially to the ability of bio/pharmaceutical companies to respond to the macro-environment, is likely to determine their long-term success. 

The weak global economy adds to the challenges of bio/pharma companies and their suppliers.

The Macro View

The apparent incompetence of political leaders has not improved the mood. The inability of the US Congress to address the nation's debt and economic issues and uncertainty surrounding the upcoming national elections have created great uncertainty and caused business executives to scale back investment and employment plans. The failure of European political leaders to resolve their problems has undermined investor confidence and created volatility in financial markets. Even in China, where the Communist party maintains a strong grip, the impending change in leadership has added an element of uncertainty. 

In the not-so-distant past, such macroeconomic developments would have had little impact on the bio/pharmaceutical industry. Global bio/pharmaceutical companies were generating large profits from patented blockbuster medications and pouring them back into expansive R&D programmes and investments in new laboratory and manufacturing facilities. People had to take their medicine and the effectiveness of drugs, such as Lipitor and Plavix, ensured that governments and private insurers would continue to pay for them regardless of price. Attracted by the returns on successful new pipeline candidates and flush with cash, investors poured record amounts of capital into early- and mid-stage companies.  

Today, having fallen over the patent cliff, the bio/pharmaceutical industry finds itself fully exposed to the vagaries of the macro-economy at a very inopportune time. Not only have companies lost the big profits from blockbuster drugs, but they also face increased pressure from governments and private payers who are desperate to reduce healthcare expenditures. Drug prices are being forced down, generic substitution is accelerating and it is increasingly difficult to get coverage for expensive new drugs.  

Smaller companies are being buffeted by the uncertainty in financial markets. Venture-capital funds have less money to invest as their traditional investors have become more risk-averse, and venture capitalists themselves have focused on less-risky investments with faster payoffs, such as social-media companies. In instances where they are still investing in bio/pharmaceutical start-ups, they are favouring companies with later-phase candidates with strong near-term prospects for out-licensing. Funding by way of initial public offerings is scarce. The number of bio/pharmaceutical initial public offerings is way down, and most have lost value since they were launched. 

These pressures could not come at a worse time for an industry desperately trying to maintain profitability in order to fund new product development. Pipelines at many bio/pharmaceutical companies are sparse and R&D operations have been notably unproductive despite significant cost-cutting. High profile drugs continue to fail at Phase III despite the "kill-it-early" philosophy that guides decision-making at most bio/pharmaceutical companies. 

So, instead of a stable macro-environment in which to transition to the next generation of products, bio/pharmaceutical companies must fight fierce headwinds to make progress. They have been forced to remake their business models not just to address the new scientific and clinical realities, but also to reflect their closer connection to a world that cannot afford to maintain the rapid growth in healthcare expenditures.  

The business model changes thus far have been dramatic. Global bio/pharmaceutical companies now pursue growth opportunities in niche products, generic drugs and emerging markets instead of traditional blockbusters. They are downsizing their remote R&D campuses while building their presence in urban centres of medical research where their researchers can be continuously exposed to new ideas and technologies (a model that other knowledge-based industries have long subscribed to). They are rebuilding R&D processes to more thoroughly assess new candidates before graduating them to expensive clinical development stages. They are re-engineering supply chains to reduce costs and increase security. Although still dependent on physicians to prescribe their medications, they are looking for ways to interact more directly with patients. 

If the fortunes of bio/pharmaceutical companies are now closely tied to the macro-environment, then so too are the fortunes of CROs and CMOs. CMO revenues and margins are directly impacted by the declining unit volumes and growing customer demands in that they help absorb the lower prices being paid by governments and insurers. Providers of preclinical toxicology and API process-development services have seen their revenues stagnate as more rigorous graduation criteria and decreasing venture-capital support have reduced the level of early-development activity. In these changing times, CROs and CMOs have two choices: they can continue their traditional strategies of passively bobbing up and down on the rising and ebbing tides of the industry or they can seize the opportunity to help bio/pharmaceutical companies deal with their increased exposure to the macro-environment.  

Clinical CROs have shown the way on how service providers can help bio/pharmaceutical companies adapt to their new realities. Although originally just a source of supplemental labour, they have come to set the standards for quality and innovation in the running of clinical trials. In particular, they have led the way in the use of information technology to revolutionise the way in which clinical data is collected and analysed. CRO-driven technology innovation has enabled faster review and analysis of clinical data, flexible trials designs and patient-reported data using mobile devices.  

Similarly, clinical packagers have been in the forefront of adopting sophisticated packaging and printing and logistics technologies and practices to reduce the costs of clinical-trial materials, while ensuring supplies get to patients in a timely manner. All of this has enabled clinical research to be conducted faster and more cost-effectively. 

is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report. Tel. +1 703 383 4903 Twitter@JinPharmSource 

Outsourcing Survey found a contract services industry that is enjoying better-than-expected business performance in 2012, fueled by increases in R&D spending at all levels of the bio/pharmaceutical industry. However, the survey, administered in June 2012, indicates that industry remains aggressive in seeking new business and is keenly aware of the risks that could change its fortunes.

Bio/pharma respondents reported strong growth in their spending on contract services, with 62% reporting that spending in 2012 has increased over 2011, including 43% who said that spending has increased by 10% or more this year (see 

). One-quarter of bio/pharma respondents indicated that spending on contract services has been flat for the year, while only 12% said their spending has been down. 

Figure 1 How will your contract services spending change this year? 			

Contract service providers clearly have been enjoying the 2012 spending boom. Among CRO and CMO respondents to the survey, 39% reported that business in 2012 will be "extremely good" or "very good," which is double the share of respondents reporting such robust performance in past years' surveys (see 

). Only 5% indicated that business will be "not be very good," which is well below the 20%-plus who gave that answer in each of the previous three years. 

Figure 2 What will business be like for your company this year? 			

All segments of the bio/pharma industry appear to be contributing to the strong performance (see 

). Mid-size and specialty pharma, which has typically been the best performing of the major customer segments, have again been leading the way, with 25% of service provider respondents putting them first. However, the other major segments are close behind, with global and small bio/pharma companies each getting 20% of responses and generic-drug companies getting 18%.  

Figure 3 Which client segment has been the best performing in your company this year? 			

The overall strength in the services market appears to be due to growth in total spending more so than to growth in the level of outsourcing. Among bio/pharma respondents to the survey, 39% said that spending on contract services is growing at the same pace as all spending, while 27% indicated that outsourced spend is growing faster than total spending (see 

). However, that 27% is down from 37% in the 2011 survey and more in line with the years previous to 2011. An even higher share, 34%, indicated that spending on contract services is actually growing more slowly than total R&D and manufacturing budgets. 

Figure 4 What is the trend in your company regarding outsourcing in your service area? 			

Despite the improved market conditions, most CROs and CMOs aren't taking anything for granted and remain aggressive in seeking new business. Over half of bio/pharma company respondents reported that service providers are willing to cut price, the same as in the past 3 years (see 

). However, 33% indicated that service providers were insisting on firmer pricing, which is up slightly from last year. We would expect to see firmer pricing in a strong market. 

Figure 5 What is vendor competition like for your business? 			

We did not see any major changes in the way that bio/pharma companies are managing their portfolios of service providers. Among bio/pharma company respondents, one-quarter indicated they have reduced the number of vendors they work with, while the same number indicated that they plan to work with even more vendors (see 

). One-third (33%) plan no changes in the number of vendors, and only a small percentage are making plans for further supplier reductions.  

Figure 6 How have you managed the number of contractors you work with? 			

One area where bio/pharma companies continue to look for new supplier options is in emerging markets, especially India and China. Among bio/pharma company respondents, 46% indicated they are either actively sourcing services from India or China, or are actively looking for vendors from those countries (see 

). That is up only slightly from 2011, but it continues a slow-but-steady trend toward getting Asian companies into their vendor mix. Only one-third of respondents indicated that they have no plans to source from emerging market vendors, but that is down from 50% just three years ago. 

Figure 7 Plans for sourcing in India and China 			

Despite the generally rosy contract services environment, risks to CROs and CMOs remain. One is the continuing wide gap between clients and services providers in the perception of CRO/CMO performance (see 

). Clients still give service providers substantially lower grades for technical and operational capabilities, project management and customer service than service providers give themselves, and the gap really has not narrowed in all of the years we have asked that question. 

Figure 8 Client and contractor views on contractor performance 			

Although we have no doubt that clients often have unrealistic expectations of their service providers, especially in areas such as the time it takes to respond to technical problems and schedule changes, we also believe that service providers have not been as mindful of the need to invest in their "soft" capabilities like project management and customer service as they have been of investing in their manufacturing equipment and instrumentation.  

Service providers are very conscious of the risk posed by the tenuous nature of funding for R&D spending at both large and small pharma companies (see 

). When asked about what they perceive as the biggest risks to their businesses in the next two to three years, 40% of CRO/CMO respondents indicated that the potential for R&D and funding cuts is their biggest concern. This is not a surprise given that the surge in R&D spending in recent years has been the big driver in industry performance of late, more so than an increase in the rate of outsourcing.  

Figure 9 What is the single biggest risk to your business in the next two to three years? 			

One risk that has become much more prominent on service provider's radar has been the threat of supplier consolidation at the global bio/pharma companies. Fully 20% of CRO/CMO respondents indicated they were concerned about that trend, the same share as was concerned about the spending cuts. Although CMC services have not yet experienced the wave of preferred provider deals that have swept the clinical research services sector, providers of manufacturing, process/formulation development, and analytical services have certainly taken notice of that trend and are girding for it to take hold in the CMC sector as well. In the meantime, concern over competition from India and China has declined markedly. 

Looking ahead to 2013, the PharmSource–

survey suggests that the impact of these risk factors is not likely to be felt in the near future (see 

). Overall, 71% of bio/pharma respondents expect contract services spending to grow in 2013, with 47% expecting spending to jump by 10% or more. That is a similar response to results received from the 2010 and 2011 surveys, and suggests that 2013 could be a good year for the industry. As a cautionary note, however, it should be pointed out that 14% of bio/pharma respondents are predicting a spending decrease, which is up sharply from last year's 6% although still in line with 2009 and 2010. 

Figure 10 How will your contract servicesspend change next year? 			

Most contract services vendors went into 2012 with muted expectations: nearly 50% of CRO/CMO survey respondents have found the year to be better than expected, and only 14% have found it worse. With bio/pharma respondents indicating continued spending growth in 2013, they should look forward to next year with greater confidence than they did 2012. 

Still, there are reasons to remain cautious. For one, funding of R&D for early stage companies remains somewhat tenuous, especially in a difficult global financial environment. And while reported spending by global bio/pharma companies continues to grow, we suspect more of it is going into licensing and partnering deals rather than directly into new development candidates.  

Service provider concerns regarding supplier consolidation are also warranted. The vendor base for CMC services is difficult to consolidate because of the breadth of technologies involved and concerns over lengthy supply chains. By contrast, clinical services have been easy to consolidate because they involve mostly staffing and enterprise-level information technology. However, as bio/pharma companies get comfortable with the outsourcing models they are developing on the clinical side, we expect they will adapt those models to CMC as well; certain services like clinical packaging and analytical services are already in that process. 

Economic and financial imperatives in the bio/pharma industry still favor outsourcing, especially in R&D. Still, as the PharmSource–

 Outsourcing Survey has shown over the years, contract service providers are continually challenged to demonstrate that they can out-perform internal capabilities and deliver on promises of cost and time savings. They can't do this alone, of course. Outsourcing exposes the complexities of managing the bio/pharmaceutical development process, and bio/pharma companies themselves must be willing to continuously examine and improve the process if they are going to meet their cost and delivery targets.  

However, CROs and CMOs must lead the way in that process improvement effort. After all, it is their ability to improve R&D outcomes that is the very reason for their existence. 

Annual survey shows strong growth for service providers and promises to continue into 2013.

CROs and CMOs Have Cause to Celebrate

I recently finished reading Walter Isaacson's biography of Steve Jobs, the co-founder and visionary leader of Apple. As I read the book, I sought to glean insights on what it was that made Jobs and Apple so fabulously successful over the past 10 years. The answer, the book makes clear, is Job's fanatical and obsessive focus on the user experience: ensuring that Apple products had a broad range of features, were fun and easy to use, and made a statement about the person using them. The superior customer experience that Apple products deliver has enabled the company to grow rapidly while commanding higher prices than its competitors and earning the best profit margins in the consumer-electronics industry.  

For Jobs, one of the fundamental principles for maximizing the user experience was maintaining Apple products as closed systems. Apple products are designed as an integrated system such that only hardware and software developed or approved by Apple will work with them, thus ensuring that all elements will work well together. This is in sharp contrast to the PC world, in which computers running the Microsoft Windows operating system can accept peripheral equipment and run software programs from thousands of suppliers. The open system environment of the PC world gives the customer far more choices than Apple's closed system, but is more likely to lead to problems, such as system crashes and the inability to print documents because of compatibility problems between the various pieces of hardware and software. The open environment also has led to the commoditization of the products themselves, driving down prices and making the PC world marginally profitable at best. 

Applying Apple concepts to contract service providers

The closed-system idea struck a chord because of its potential relevance to the integrated service model taking hold in the contract services industry. Both large and small bio/pharmaceutical companies are embracing the idea of buying services as a bundle rather than on an individual basis, for example, having the same contractor develop and manufacture early clinical supplies of the drug substance and drug product. For small bio/pharmaceutical companies, the bundled model offers the opportunity to get their development candidates to the proof-of-concept decision point much faster while overcoming their deficiencies in project management and development expertise. For large bio/pharmaceutical companies, buying a package of services promises to reduce the costs of identifying, qualifying, and managing a network of service providers by reducing the total number of providers in the network. 

This trend from the "open system" world where bio/pharmaceutical companies themselves had to work out scheduling and compatibility issues among service providers to the "closed system" of integrated service providers (ISPs) can be transformational for drug development and for the service providers themselves. For the ISP model to really work, service providers must take ownership of the entire customer experience. So, executives of CROs and CMOs offering a one-stop-model must dedicate themselves to answering three key questions:   

How do customers define a superior experience?

: Now that we have all of the elements under our control, what can we do to make them work together to provide the best possible customer experience?

: How do we demonstrate the value of our integrated offering so as to convince the customer to pay a premium price for it?

Precisely defining a superior customer experience will probably require some market research, and the answer will differ across customer types and service offerings. We can be pretty sure, however, it will center around value, price, meeting deadlines, communication, and technical expertise. Once these have been defined, successful companies will develop metrics to measure them and to manage those metrics. 

The key to answering the second question is the ability to break down the functional silos that have characterized drug development. The different functional areas have traditionally "thrown the project over the wall" to the next sequential step in the development process, such as when the process chemists ship the API to the toxicologists for preclinical testing or to the formulators for drug-product development. An ISP focused on the customer experience will ensure that the different functional areas work closely together from the start in both technical matters and project management and scheduling. For instance, the ISP will have its medicinal chemists and formulators work together early in the process to identify and resolve potential solubility issues.  

Further, the ISP will use its cumulative experience to anticipate and plan for problems the minute a new project comes in the door, or, even better, during the request-for-proposal (RFP) process. While every project and compound is undoubtedly different, the breadth and depth of experience that most CROs and CMOs claim to have should enable them to know where to expect problems and how to account for them in the project schedule and commitment of resources, and to prepare the customer's expectations accordingly. 

No doubt the key to achieving these objectives is for ISPs to establish multi-discipline project teams to evaluate and manage projects as they come through the door. The multidiscipline approach truly leverages the advantages of having all elements of the projects in the hands of a single provider. ISPs that do  not use multidisciplinary teams are little more than loose confederations of independent service providers.  

If questions one and two are answered successfully, dealing with question three should be much easier. If the ISP delivers on its promise, it will have no problem getting repeat customers, and its reputation should spread around the industry. A positive scorecard of customer experience metrics should help convince new clients that they are choosing the right service provider for their projects. 

CMO and CRO executives who have not yet read the Jobs biography will be well-advised to do so. While you may not want to mimic his management style, understanding his focus on the customer experience and how to achieve it will serve you and your company well. 

Service providers must focus on delivering a superior customer experience.

Channeling Steve Jobs

I recently finished reading Walter Isaacson's biography of Steve Jobs, the co-founder and visionary leader of Apple. As I read the book, I sought to glean insights on what it was that made Jobs and Apple so fabulously successful over the past 10 years. The answer, the book makes clear, is Job's fanatical and obsessive focus on the user experience: ensuring that Apple products had a broad range of features, were fun and easy to use and made a statement about the person using them. The superior customer experience that Apple products deliver has enabled the company to grow rapidly while commanding higher prices than its competitors and earning the best profit margins in the consumer-electronics industry. 

For Jobs, one of the fundamental principles for maximising the user experience was maintaining Apple products as closed systems. Apple products are designed as an integrated system such that only hardware and software developed or approved by Apple will work with them, thus ensuring that all elements will work well together. This is in sharp contrast to the PC world, in which computers running the Microsoft Windows operating system can accept peripheral equipment and run software programs from thousands of suppliers. The open system environment of the PC world gives the customer far more choices than Apple's closed system, but is more likely to lead to problems, such as system crashes and the inability to print documents because of compatibility problems between the various pieces of hardware and software. The open environment has also led to the commoditisation of the products themselves, driving down prices and making the PC world marginally profitable at best. 

The closed-system idea struck a chord because of its potential relevance to the integrated service model taking hold in the contract services industry. Both large and small bio/pharmaceutical companies are embracing the idea of buying services as a bundle rather than on an individual basis; for example, having the same contractor develop and manufacture early clinical supplies of the drug substance and drug product. For small bio/pharmaceutical companies, the bundled model offers the opportunity to get their development candidates to the proof-of-concept decision point much faster while overcoming their deficiencies in project management and development expertise. For large bio/pharmaceutical companies, buying a package of services promises to reduce the costs of identifying, qualifying and managing a network of service providers by reducing the total number of providers in the network. 

This trend from the "open system" world where bio/pharmaceutical companies themselves had to work out scheduling and compatibility issues among service providers to the "closed system" of integrated service providers (ISPs) can be transformational for drug development and for the service providers themselves. For the ISP model to really work, service providers must take ownership of the entire customer experience. So, executives of CROs and CMOs offering a one-stop-model must dedicate themselves to answering three key questions:  			

Question 1: How do customers define a superior experience? 

Question 2: Now that we have all of the elements under our control, what can we do to make them work together to provide the best possible customer experience? 

Question 3: How do we demonstrate the value of our integrated offering so as to convince the customer to pay a premium price for it? 

Precisely defining a superior customer experience will probably require some market research, and the answer will differ across customer types and service offerings. We can be pretty sure, however, that it will centre around value, price, meeting deadlines, communication and technical expertise. Once these have been defined, successful companies will develop metrics to measure them and manage to those metrics. 

The key to answering the second question is the ability to break down the functional silos that have characterised drug development. The different functional areas have traditionally "thrown the project over the wall" to the next sequential step in the development process, such as when the process chemists ship the API to the toxicologists for preclinical testing or to the formulators for drug-product development. An ISP focused on the customer experience will ensure that the different functional areas work closely together from the start in both technical matters and project management and scheduling. For instance, the ISP will have its medicinal chemists and formulators work together early in the process to identify and resolve potential solubility issues.  

Further, the ISP will use its cumulative experience to anticipate and plan for problems the minute a new project comes in the door, or, even better, during the requestforproposal (RFP) process. While every project and compound is undoubtedly different, the breadth and depth of experience that most CROs and CMOs claim to have should enable them to know where to expect problems and how to account for them in the project schedule and commitment of resources, and to prepare the customer's expectations accordingly.   

No doubt the key to achieving these objectives is for ISPs to establish multidiscipline project teams to evaluate and manage projects as they come through the door. The multidiscipline approach truly leverages the advantages of having all elements of the projects in the hands of a single provider. ISPs that do not use multidisciplinary teams are little more than loose confederations of independent service providers.  

If questions one and two are answered successfully, dealing with question three should be much easier. If the ISP delivers on its promise, it will have no problem getting repeat customers and its reputation should spread around the industry. A positive scorecard of customer experience metrics should help convince new clients that they are choosing the right service provider for their projects. 

is president of PharmSource Information Services, Inc., and publisher of 