Life sciences, health care, and chemical companies are the major end users of lab equipment. Cash flows of major companies within these sectors are increasingly subjected to higher scrutiny due to a rise in M&A activities and their increased investments in emerging markets. This is leading to a shift in procurement mind-sets across the lab equipment spectrum, where more and more managers are exploring whether leasing offers a better alternative to buying, which has been most managers’ traditional mode of procuring such equipment. However, leasing is not always a better option for all types of lab equipment, as other factors such as need for maintenance services, tenure of equipment usage, frequency of usage, and necessity to upgrade equipment are to be considered in addition to cost before making a procurement decision.
Lab equipment procurement models Buying, leasing, and renting are different models for procuring lab equipment. Both new and used/refurbished lab equipment is sold/auctioned, leased, or rented in the market. Pharmaceutical, life sciences, and chemical companies are major end users of lab equipment. Universities and government research institutes are also regular buyers of lab equipment.
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Considering the complex nature of lab equipment (analytical, life sciences/biotech, clinical, histology/pathology, etc.), a “one size fits all” strategy is not suggested for choosing the procurement model. Cost-effectiveness and return on equipment analyses need to be performed extensively when choosing the most appropriate procurement model.
Scenario Analysis
Choice of procurement models for lab equipment varies with different factors. Understanding these factors helps in deciding whether to own the equipment, which in turn helps in choosing the right procurement model. A preferred procurement model and the rationale behind it at different scenarios are given in Table 1 below.
| Procurement Models of Lab Equipment - Scenario Analysis | ||||
| Parameters | Buying | Leasing | Renting | |
| Capital | Operational | |||
| Need for maintenance services | High | High | Medium | Low |
| Provide both standard and customized services | Provide only standard services | Provide only basic maintenance services | ||
| Tenure of equipment usage | Long term | Long term | Short - Medium term | Short term |
| Equipment with usage for more than 3 years | Up to 3 years | Less than a year | ||
| Necessity to upgrade | Low - Medium | Low - Medium | High | Not Applicable* |
| Equipment with high need to upgrade are not procured through buying or capital leasing as the new buyer might end up owning the obsolete equipment | Short to Medium term nature provides choice to switch to upgraded equipment | Not applicable* | ||
| Frequency of usage | Medium to High | Medium to High | Medium to High | Less |
| Equipment which are used everyday or every week continuously in the research and development process | Occasional usage based on ad-hoc requirement e.g. gas chambers | |||
Lab Equipment Procurement Models
Buying, leasing, and renting are different models for procuring lab equipment. Both new and used/refurbished lab equipment is sold/auctioned, leased, or rented in the market. Pharmaceutical, life sciences, and chemical companies are major end users of lab equipment.
Parameter Analysis
A. Need for maintenance services:
- Customized services are necessary for end users who are into research and development in order to carry out their operations to the desired specifications.
- If the equipment needs a high degree of maintenance services, buying or capital leasing is preferred, as these options offer not only standard but also customized maintenance services. An operational lease doesn’t offer customized maintenance services, as the equipment will be returned to the lessor after the lease term.
- As the service contracts in renting are high-priced and the equipment is being used by many people, it is advisable to obtain equipment that requires less maintenance.
B. Tenure of equipment usage:
- If the expected usage of the equipment is more than three years and its frequency of usage is high, acquisition either by capital lease or buying is suggested, provided the need to upgrade the equipment is low.
- If the expected usage of the equipment is less than three years and ownership is not desired, acquisition through an operational lease is suggested.
- A rental option is preferred if the equipment will be used for a short term and its frequency of usage is low.
C. Need to upgrade:
- Regulations and technology developments will require upgrading lab equipment regularly. High-end equipment that involves high technology (e.g., clinical robotics, HPLC) is subjected to a high rate of change in technology, which results in regular upgrades.
- It is preferable to acquire equipment with a low to moderate need for upgrades through buying or capital lease, as acquiring equipment with high upgrade requirements could result in owning obsolete equipment.
- It is preferable to procure equipment associated with frequent technological changes and frequent upgrades under operational lease, as it avoids owning obsolete equipment.
- Operational leasing is suitable for all types of users irrespective of the industry or size of the company when the technology is changing frequently and there is a need for constant upgrading of the equipment.
D. Frequency of usage:
- It is preferable to acquire equipment for medium to high frequency of usage through buying or leasing, as return on equipment is high because the cost of the equipment is spread over the years of usage.
- Renting is preferred for equipment that is used less frequently or by ad-hoc requests. Acquiring equipment for temporary usage through buying or leasing incurs more cost and less return.
Buyers are focusing on achieving efficiency and saving cost when procuring lab equipment by selecting the right procurement model. Procurement models suitable for different types of equipment and the major industries using these procurement models are mentioned in Table 2.
| Preferred Procurement Models for Lab Equipment | |||
| Parameters | Buying | Leasing | Renting |
| Type of Equipment | Medium to low | High end equipment | Low to High |
| Predominant adopters | Major pharmaceutical and life science companies, contract research organizations and government research institutes | Companies with tight budgets, universities, R&D labs, companies from chemical, agricultural and other industries | Private and universities (academia) |
| Suppliers (both new and refurbished equipment) | Manufacturers and distributors | Few manufacturers, distributors and financing companies | Distributors |
End-user Industries
Figure 1.
End-User Definition
- Life sciences – includes both pharmaceutical and life sciences companies
- Health care – segment constituting hospitals and medical testing labs
- Chemical – chemical industry
- Government agencies – state and federal agencies
- Others – include food and beverages, energy, agriculture, polymer, and metals industries
Adoption trends in pharmaceutical industry
The pharmaceutical industry is the major end user of lab equipment in different stages such as research, drug development, and production. Pharmaceutical companies invest around 5 percent to 10 percent of R&D spend in sourcing lab equipment annually. Companies with healthy cash flows prefer buying and leasing over renting. Major pharmaceutical companies prefer buying lab equipment and selling it in the secondary market or redeploying it internally to another unit after its usage period. However, small and midsized companies prefer leasing or renting new or refurbished lab equipment.
Figure 2.
Conclusion
Recent analysis revealed that major end users traditionally used buying as a source of acquiring lab equipment. Cash flows of these companies in end-user industries were subjected to high pressure due to recent M&A activity and increased investment in emerging markets. Hence, companies are trying to leverage operational cost by reducing the fixed cost. Therefore, companies were opting for leasing recently as a credible alternative to buying in order to source certain lab equipment, especially in the high-end category.
As smaller companies and entities that are the major adopters of the renting option are being acquired by relatively larger firms that use buying or leasing for acquiring equipment, the adoption levels of renting were found to be decreasing in the past two or three years. Buying and capital leasing are the most suitable and preferred options for acquiring lab equipment for major companies, as they require both standard and customized maintenance and service contracts for smooth and efficient operation.
