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Is the Roller Coaster Ride Over?

The laboratory industry enjoyed several years of robust growth from the late 1990s until 2003. Record research and development (R&D) investments by the biopharmaceutical industry, in combination with the doubling of the U.S. National Institutes budget, allowed for continual double-digit growth rates.

by Jonathan Witonsky

Fourth Annual Investment Confidence Report Reveals a Slightly Positive Outlook for 2012

The laboratory industry enjoyed several years of robust growth from the late 1990s until 2003. Record research and development (R&D) investments by the biopharmaceutical industry, in combination with the doubling of the U.S. National Institutes of Health (NIH) budget, allowed for continual double-digit growth rates. While laboratory investments were dampened from 2003 through 2008, growth rates remained relatively stable in the mid- to high-single-digit range. Then, during the latter half of 2008, the laboratory industry embarked on a roller coaster ride with multiple ups and downs. The economic downturn had a tremendous impact on the laboratory industry with across-the-board budget cuts. Facing impending doom after the downfall in the fourth quarter of 2008, the industry was revived with the U.S. American Recovery and Reinvestment Act of 2009 (ARRA), which dedicated $10.4 billion to the NIH to be spent immediately in 2009 and 2010. However, because distribution of the funds to laboratories was slow, the industry saw little benefit until the fourth quarter of 2009, resulting in the first market contraction in more than a decade.

The year 2010 was marked by a huge bounce-back: Academic researchers were flush with ARRA funds, and the industrial sector rebounded from its 2009 purchasing freezes. The combination of stimulus dollars and pent-up demand resulted in an exceptionally strong year for the laboratory industry. While consolidation among biopharmaceutical companies remained a major obstacle to growth, by the end of 2010 the general industry consensus was that the market had returned to a state of normalcy. Accordingly, 2011 started off strong with residual impact from stimulus dollars and the general economic recovery. Beginning in the fall, however, the market began to soften with laboratory hiring freezes and deterioration across most purchasing budgets. Despite the drastic changes throughout, the overall market remained relatively flat compared to what it was in 2010. If there was any growth, it was low—around four percent globally. In more mature regional markets—such as the United States, Europe, and Japan—growth rates were certainly lower. Despite a recovery, industry growth did not return to pre-recessionary levels.

The year 2011 was tumultuous for the laboratory industry. In comparison, the outlook for 2012 looks only slightly positive. Laboratory decision makers generally expect their funding conditions either to remain the same or to minimally improve. Nonetheless, with this year still just kicking off, there are reasons to believe that 2012 has some good things in store for the laboratory industry. In order to assess potential market changes, in December 2011 and January 2012 the editors of Lab Manager and Frost & Sullivan surveyed 219 Lab Manager readers who were qualified as decision makers able to evaluate their laboratories’ general business conditions. Survey respondents were asked about their investment confidence surrounding laboratoryrelated purchases and other budgetary plans based on past spending trends and future financial expectations.

Survey results, presented below, aim to assess present and future business conditions, evaluate levels of confidence with regard to possible business scenarios, and gauge current and future budget changes. Survey respondents primarily included laboratory supervisors, managers, and directors; scientists and chemists; and QA/QC managers and directors. Most respondents’ job functions are either in R&D; quality control, assurance, and validation; technical services; or operations. The top types of research organizations or markets/industries in which the respondents currently work include university and college research laboratories, industry research laboratories, and hospital laboratories.

Geographic Region and Market/Industry

Job Title and Function

Field of Work

Modest Optimism for 2012

The modest optimism for 2012 is rooted largely in the belief of 35 percent of survey respondents that business conditions during the fourth quarter (Q4) of 2012 will be better than they were in Q4 2011. This number is slightly, yet significantly, larger than the 31 percent of respondents who believe that business conditions were better in Q4 2011 than they were during Q4 2010. While 42 percent of respondents believe that from Q4 2010 through Q4 2012 there will be absolutely no change in business conditions, the percentage of respondents who believe conditions will be worse dramatically decreased—from 21 percent of respondents who believed business conditions were worse in Q4 2011 compared to Q4 2010, to only 15 percent of respondents who believe business conditions will be worse in Q4 2012 compared to Q4 2011. Laboratory decision makers certainly don’t expect 2012 to be a vast improvement over 2011, but they do have a somewhat positive outlook for the future.

Present and Future General Business Conditions

Respondents were asked to rate on a scale of 1 to 7 their level of confidence with regard to multiple laboratory business condition scenarios, with 1 being not confident and 7 being very confident. Survey respondents are most confident that their laboratories will be sufficiently funded to maintain proper work environments. Roughly 20 percent selected either a 6 or 7 in response to the business scenario that “there will be sufficient funds to expand and maintain proper work space and a proper working environment in the lab.” Respondents are also relatively confident that “there will be sufficient funds to acquire the technology necessary to achieve research objectives,” with 19 percent selecting 6 or 7. Confidence is lowest in thinking that research objectives will be better off financially or properly staffed—in response to the business scenarios “your research organization will be better off financially to fund existing and new research projects” and “research initiatives will be properly staffed,” only 16 percent and 15 percent, respectively, of respondents selected 6 or 7.

Confidence Levels to Business Condition Scenarios

When asked to comment on their level of confidence in their organization’s ability to invest properly in research projects in 2012, respondents gave a wide variety of answers. A principal investigator in a materials testing laboratory expects fairly significant cutbacks, writing, “We are trimming back 15 percent.” An operations manager in an agricultural research laboratory provided an equally bleak response: “We are currently at a standstill waiting for the economy to improve.” Many other respondents gave feedback that is far more positive. For example, a molecular biologist in the biotechnology industry anticipates a “very promising year in 2012.” Similarly, a technician in the pharmaceutical industry wrote: “I anticipate that 2012 will be a banner year for increasing new project research.” The overall consensus, though, best aligns with the sentiments of a core facility director in the environmental industry, who wrote: “We confidently expect a small increase overall.”

In comparing 2010 and 2011 budgets, respondents indicated that they increased spending on supplies/consumables more than on any other category. In 2012, respondents expect to continue to increase spending in this category more than in most others. Supplies/consumables are absolutely essential to the day-to-day processes and overall progression of laboratory work. While a laboratory might be able to continue functioning with fewer full-time employees or without the latest technologies, a laboratory cannot advance without basic supplies. Likewise, laboratories’ spending on commodity/consumable products and raw materials increased from 2010 to 2011 and is expected to increase again in 2012. Despite these anticipated budget increases, the number of products purchased in these categories—the overall volume of supplies, consumables, commodities, and raw materials—is likely to remain flat. The reason for the increase in budget for these products is primarily due to rising manufacturing costs being passed on to consumers.

Past Research Budget Changes

Spending on chemicals, biochemicals, and specialty biomedical research kits (e.g., antibodies, RNA, microarrays, PCR, assays) was also a leading reason for budget increases from 2010 to 2011. In 2012, chemicals and biochemicals spending is expected to remain strong. The specialty biomedical research kits, on the other hand, are likely to decrease in budgeting priority. These highly optimized kits come with a substantial, and often unnecessary, cost. For example, laboratories can employ home-brew methods to develop these expensive research tools in-house. Although home-brew methods are often more time consuming and less standardized than the off-the-shelf kits, they allow laboratories to avoid paying the premium costs associated with buying directly from manufacturers.

Future Research Budget Changes

The final increased spending category, basic laboratory equipment, warranted larger budgets in 2011 compared to 2010, and the category is expected to grow again in 2012. Like general supplies, basic equipment is essential to day-today laboratory functions. Laboratories rely on equipment such as cold storage, mixers, shakers, and stirrers, and therefore anticipate periodic replacement of these tools. Conversely, budgets for high-end systems such as analytical instruments, separation technologies, laboratory automation, and other new or pre-owned lab technologies decreased in 2011 and are expected to decrease again in 2012. Unlike basic laboratory equipment, which generally costs hundreds or thousands of dollars, high-end systems often demand investments that are far more significant. By getting more mileage out of their older instruments and delaying new system purchases, laboratories can set aside precious funds for more dire needs such as consumables or staff.

Respondents reported that their budgets for laboratory furniture, construction, and hiring underwent the greatest decreases from 2010 to 2011. Budgets for infrastructure and staff are expected to undergo a similar decrease in 2012. Recent ARRA funding resulted in the development of multiple new laboratories. With the exhaustion of those funds, further investment in infrastructure was suppressed in 2011 and will remain suppressed in 2012.

Overall, research budgets for all surveyed areas did not change significantly from 2010 to 2011. Specifically, the mean budget changes for supplies and consumables increased most significantly, while the mean budget changes for additional and replacement staff experienced the most significant decrease. Future research budgets are not likely to change significantly. In particular, budgets for commodities and consumable products likely will see the most significant increases, while budgets for construction and the setup of new lab facilities are the most likely to decrease. While the roller coaster years of 2008 to 2011 were an incredibly unstable period for the laboratory industry, some may argue the survivors emerged leaner and more committed to progressing research and development. Moreover, the economic turmoil served as a learning experience on how to stay afloat when faced with limited funding. Given the current expectations for modest growth in 2012, laboratories will certainly need to put that education to good use.