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Getting prepared for the evolution of US Environmental, Pharma & Food testing demand

Friday 17 September 2021

Article

Over the last 18 months, it has been easy (understandably) to focus on just getting through the “now”. Evolution in testing markets, however, does not stop, and testing providers need to be prepared for further change: from evolving customer demands and new regulation to under-pressure supply chains. All of this makes for an exciting and rewarding time to provide testing services.

With change, however, comes opportunity and risk. The winners in testing over the next few years will be the ones who are quick to act and capitalize on this evolution: they will be the ones who are increasingly focused on the range of services that their customers want, and are smart about pricing.

Those who are not proactively focused on addressing changing customer demand, and how to meet it, will struggle.

In this article, we share perspectives on what is driving market growth, and what the key trends are for testing providers to be aware of and to respond to.

We have purposefully focused on some of the most resilient testing markets through COVID – Pharma, Food & Environmental. While these are resilient markets, we see significant market evolution that presents opportunities to differentiate and outperform: whether getting closer to customers as regulatory burdens change, or stimulating new partnerships and delivery models.

Environmental

~3-5pa growth expected over the next ~3 years, driven by:

• Accelerating underlying testing sample volumes
  • ~1-3%pa from underlying site and project growth, driving both remediation demand and growth in routine monitoring work. Industrial and construction sites accelerating post-COVID, benefitting from federal and state infrastructure investment.
  • ~1-3%pa from increased testing intensity per site, spurred by both increasing regulation under the Biden administration (eg tightening of the Clean Air Act, hazardous waste from industrial sites (CCR)), increasing enforcement at both an EPA and state level, and new contaminants needing testing – PFAS, PCPPs, Legionella
    • There will of course be variation by media type: water and air samples are both likely to be subject to more stringent regulation
• A price environment more benign than in the last decade supporting value per test
  • ~1-2% pa in revenue per test driven by low growth in like-for-like test prices, and increased use of rush fees. A more benign pricing environment vs that historically seen reflects a balancing of supply and demand in the industry and increasing test criticality and complexity due to new tests for emerging contaminants.

Key questions for testing vendors to consider:

• Are you sufficiently prepared to help your customers understand the requirements that a changing regulatory environment places on them?
• Do you have the capabilities to address new regulation and new testing requirements?
• What other services can you offer your customers to help them navigate change, and enhance your relationship with them? Are you close enough to them to understand this?
• Are you capitalizing on pricing opportunities?

Food

~4-6%pa growth expected over the next ~3 years, driven by:

• Steady growth in underlying testing sample volumes
  • ~1-2%pa in underlying food production volumes
  • ~2%pa in required testing intensity, as both ingredients and food products evolve, and retailers / distributors require a higher testing threshold of their supply chain (eg Amazon requiring Nutraceuticals manufacturers to have a Certificate of Authenticity)
  • ~1%pa growth in outsourcing rates, driven both by increasing burden of proof placed on producers by, for example, retailers further down the value chain, and an increasing need to meet international standards driving higher complexity testing requirements
• Steady value per test growth
  • Stable ~1% pa pricing growth, with some mix shift towards more expensive and complex tests

Key questions for testing vendors to consider:

• Do you understand how safety standards are evolving across the food value chain? What are the customers of your customers (e.g retailers, distributors) worried about, and how is this impacting the behavior of your customers (e.g. standards they require)?
• What is the impact of changing international food standards likely to be on your customers?
• How are food NPD trends in your category (and adjacent categories) evolving?

Pharma

~9-10%pa growth expected over the next ~3 years, driven by:

• Rapid growth in testing sample volumes – but with significant differences between segments
  • Underlying volume of drugs in development: wide variation from ~2-5%pa in small molecule to ~6-12%pa in large molecule. Growth is fastest amongst smaller biopharma companies, who are the driving force behind early stage drug development, fuelled by investment in innovative technologies
  • Supported by steady 1-2%pa growth in required testing intensity, driven by the increasing complexity of both drugs in development (eg biologics) and combination devices
  • Steady ~2%pa growth in outsourcing: driven by relative growth in smaller biopharma companies, and increasing need for specialist expertise given increasing product complexity driving outsourcing from large pharma
• Value per test
  • 2-3%pa pricing increases – a benign environment reflecting ever-growing testing needs, despite high levels of fragmentation

Key questions for testing vendors to consider:

• Does your customer mix sufficiently expose you to the fastest growing segments of the market? Are there opportunities to participate or increase exposure
• How well prepared are you to serve different customer sizes, as small biopharma grows rapidly, and as large Pharma increasingly outsource where specialist expertise is required?
• How can you build a reputation halo around expertise and service in a fragmented market?

This is just a high-level snapshot – there is of course significant nuance in segments within each industry. And indeed, these markets are not unique in seeing rapid evolution – all testing markets are going through a period of rapid upheaval.

We are a leading global strategy consulting firm that brings clear thinking to the most complex issues facing today's management teams. Our client roster includes some of the world's most respected companies throughout TIC (across client types from global TIC majors, to individual labs and private equity investors) – helping them develop growth strategies (e.g. service, sector and footprint expansion) and assess M&A opportunities. As well as more broadly across the retail, leisure, consumer goods, B2B products & services, and technology and media sectors.

Interested in discussing your market, and where your opportunities lie? Please don’t hesitate to get in touch – we would love to discuss with you.