June 1, 2009 (Vol. 29, No. 11)

Suppliers Need to Focus on the Future Even if It Means Temporarily Reducing Sales Volumes

Research and drug discovery always involve a compromise. Even in the best of times, a balancing of competing interests associated with cost, speed, accuracy, and relevance is required.

After a period of expansive opportunities and extensive growth, the life sciences are facing an economic landscape that has fundamentally changed compared to the boom time of the late 1990s and early years of this decade. With many institutions and corporations confronting sobering financial conditions due to devaluation of endowments, loss of capital, and decreases in revenue, administrators and executives alike are considering ways to reduce operating and research budgets.

BioInformatics’ recent report, “Prospering in a Down Market: Strategies for Life Science Suppliers,” examines how 500+ scientists in academia and industry are coping with the effects of the current recession.

With the signing of the American Recovery and Reinvestment Act (H.R. 1), several key agencies that support life science research will receive increased funding via an emergency supplemental appropriations mechanism. Life science suppliers may be in a position to benefit indirectly from this largesse as more labs, which are in need of capital equipment, instrumentation, and consumables, become funded or if existing labs increase their level of support with federal dollars. This influx of funding will mostly benefit academic labs, which are facing only a small decrease (an average of 1%) in their operational research budgets from FY2008 to FY2009 according to the report.

Research budgets for the typical industrial lab, which are usually quadruple the size of the average academic lab, are facing a greater decrease of 6% between FY2008 and FY2009.

While pharmaceutical and biotech labs will not receive a direct R&D boost from the stimulus package, the industry, as a whole, is poised to benefit indirectly from the government’s focus on promoting healthcare initiatives. According to the Pharmaceutical Research and Manufacturers of America (PhRMA), President Obama’s budget proposal lays a solid foundation for essential and comprehensive healthcare reform. This emphasis on healthcare reform, heralded by the recent reauthorization of the State Children’s Health Insurance Program, is “essential to economic recovery and imperative to making Americans healthier and more productive,” according to PhRMA.

Industry’s interest in such reform stems in large part from its efforts to ensure a future supply of consumers of its drugs and devices. Hence, PhRMA is championing efforts by the administration to provide high-quality, affordable health coverage to all Americans.

Scientists’ Reactions to the Economy

Despite the fact that the majority of scientists surveyed for this report indicated that their research has been affected to some degree by the recession, the worry about the economy seems to be more pervasive in academia than industry (Figure 1). Regardless of whether they work in industry or academia, many study respondents indicate that their organizations or institutions have enacted hiring freezes. Other common economic-driven changes include decreased resources being devoted to projects, reduction in the number of projects, and staff layoffs.

In pharmaceutical and biotech companies, there is an increased focus on outsourcing to contract resource organizations (CROs) to sustain capacity and growth. In aggregate, all of these changes may affect life science suppliers’ ability to sell products through traditional channels as there will likely be less need to outfit brand new labs with equipment and reagents and supply products and services to existing customers at the same level (at least until the federal stimulus funds kick in).

These changes also present opportunities for life science suppliers to secure new clients, however, such as those in the expanding CRO market.

Figure 1

Anticipated Changes in Laboratory Purchases

Notwithstanding the anticipated decreases in FY2009 operational research budgets and the estimated decrease in spending on instrumentation and capital equipment, life science suppliers should note that projected expenditures on consumables for FY2009 compared to FY2008 will likely increase by 5.9% for academic labs and 10.4% for industrial labs.

Industrial respondents, in particular, are anticipating a bigger decrease in spending for cell biology instruments—microscope-based (-16%) more so than flow cytometer-based (-7%)—than are academic respondents (-7% and -4%, respectively).

In contrast, academic respondents are expecting a larger decrease in spending for genomic analysis instrumentation (-14%) than are industrial respondents (-2%). High-throughput screening and analysis systems and image analysis systems will also experience spending decreases by both academic (-14% and -10%, respectively) and industrial respondents (-12% and
-6%, respectively).

During this period of economic uncertainty, life science suppliers may have opportunities to attract new customers through a combination of price reductions and product promotions. This scenario may be more likely for consumable product categories where there is no single dominant supplier, i.e., cell biology kits and reagents, gene-expression analysis products, protein purification and separation products, and RNAi products.

In general, only a small percentage of study respondents indicated that they would never switch their primary supplier. For the right price savings, most scientists could probably be convinced to buy products from a different supplier in this recession. However, the cost may be too high to really be practical for most life science companies.

As a general rule of thumb, a minimum of a 10% savings would be required for scientists to switch suppliers. In a market where switching suppliers rarely occurs, this may prove to be a once-in-a-lifetime opportunity to capture share through price leadership, provided it can be sustained.

This intense interest in saving money has implications for life science suppliers hoping to interest scientists in products that they may consider nonessential or luxury items, such as kits (when they are making do with do-it-yourself reagents) or high-ticket purchases like new instrumentation.

Instead, life science suppliers may want to concentrate on emphasizing the value of essential items such as critical, must-have  consumables and replacement parts for existing instrumentation or extension-to-service contracts that are still deemed lab vital. Except for cell culture media and reagents and lab plasticware where ordering in bulk is the most common cost-saving measure, buying fewer kits is the most popular choice for all other consumable product categories, especially for cell biology kits and reagents.

Despite the antikit mentality espoused by many labs, life science suppliers with persuasive sales and marketing teams may still be able to make a case for the economic value of kits, if they can effectively position their kits as tools to decrease a lab’s labor costs and maximize its productivity.

Adoption of Cost-Saving Lab Practices

Buying fewer kits also seems to be a more widely adopted thrifty practice than conserving reagents. While participating in institution-wide purchasing contracts is a relatively uncommon means of saving research dollars, it is more regularly practiced for cell culture media and reagents and lab plasticware than for other consumable products.

As many of these cost-cutting measures in the lab are relatively new for at least one-half of the labs surveyed (i.e., within the last year), scientists, in general, seem to be quite receptive to advice from suppliers on how to conserve reagents and preserve the operational shelf-life of their instrumentation.

It is no surprise that most scientists would prefer that life science suppliers offer them discounted prices on commonly used items. However, no handling or shipping fees and “buy one, get one free” offers would also be a welcome relief, especially to academic labs.

While such promotions are unlikely to attract many new customers on their own, they may, when combined with strategic price reductions, resonate with scientists taking a hard look at how to reduce their budgetary expenditures. Scientists may perceive that no shipping fees and discounts on commonly purchased products, even though they may be small per individual order, could add up to significant savings over time.

Scientists are also more concerned with saving money now rather than the prospect of saving money in the future, i.e., special offers on new products, reduced prices for soon-to-expire products, or reward points—so these more intangible types of savings will likely not be as well received.

While there is some degree of overlap between academic and industrial labs in their adoption of cost-saving lab practices—with delaying or canceling nonessential purchases and deferring capital equipment purchases being the most common—there are differences in approach that may impact their purchasing behaviors (Figure 2).

For example, a greater percentage of academic than industrial labs share instrumentation and other resources with other labs. More industrial labs than academic labs engage in staff downsizing and outsourcing. Furthermore, industrial labs also try to increase their energy efficiency, purchase used instrumentation and, when necessary, postpone or suspend projects.

Although not yet widely embraced, scientists indicated that they would consider reagent rental programs, instrumentation rentals and leases, and, for academic labs, used instrumentation purchases (currently, used instrumentation appears to be more common in industrial labs). These areas may be poised for increased growth over the next year or so. As a result, they present opportunities for some life science suppliers to reposition or promote their product offerings to customers via unique purchasing channels.

Figure 2

Looking Forward

Life science suppliers who approach this recession by balancing their short-term focus on ensuring sustainability with a long-term focus on building capability will fare better than their competitors focused solely on the bottom line. In tough economic times it may be in the best interest of suppliers to manage their customer relations in such a way as to ensure the future health and survival of research labs.

And if this approach means temporarily reducing sales volumes—by aiding customers in stretching their budgets—it could ultimately help not only retain current customers, but also attract new customers when the economic upturn begins.

Tamara Zemlo, Ph.D. (t.zemlo@ gene2drug.com), is the vp of advisory services for BioInformatics (www. gene2drug.com). For information on obtaining the full report, contact Mary Follin at [email protected].

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