The State of Pharma Contract Development and Manufacturing Organizations

When we talk about contract drug and manufacturing organizations (CDMOs), we are really talking about a diverse group of companies that serve pharma/biotech/academia in a variety of ways, from discovery through to commercialization opportunities. These companies constitute a very broad and quite fragmented ecosystem, which continues to grow because (ultimately) Big Pharma intends to continue outsourcing.

CDMO Challenges

The outsourcing takes place across various industry segments and geographies, and because demand for the service continues to grow, the need for talent might constitute the greatest threat/challenge that the CDMO space faces today. Attracting and retaining great talent, particularly in today’s areas of hot demand — such as cell gene therapy — is expensive. Any churn is not good for the gross margins and profits these larger CDMOs have historically enjoyed.

Another challenge involves payer reimbursement mechanism changes and how research is funded and, ultimately, rewarded in terms of drug reimbursement. For cell gene therapy projects, the question boils down to which of the solutions will be scalable and available to a mass patient market(s) as opposed to which will be more personalized in approach over time. The latter area was seen as quite exciting five years ago but now perhaps is riskier due to terms of reimbursement. However, we are seeing a lot of progress in workflow automation and software improvements to maximize efficiencies in CDMOs.

In whatever go-to-market solution CDMOs choose, however, efficiency will be key. Efficiency encompasses not just managing costs but also having clean, quality audits and the ability to make a quick change from pilot runs to clinical production.

CDMO Growth Areas

In addition to gene cell therapy, another area of CDMO growth is in food nutraceuticals, or food health ingredients that involve fermentation. Parts of this business may tend to become commoditized, with margins probably lower than CDMOs are accustomed to. But this will be a volume play. There will be products developed that could extend the shelf life, quality, or taste of food. There also are likely to be products linked to gut or brain health. Efforts in central nervous system and cardiovascular issues are an offshoot of the work in nutraceuticals. For the former, that involves work targeted to address Alzheimer’s, Parkinson’s, and dementia. The wider CNS therapeutic market is notably the one to watch and expect stronger R&D growth with.

As they work on these projects in a time of inflation and rising interest costs, CDMOs will be looking at several ways to economize. They will be carefully examining the cost of labor, especially full-time equivalent (FTE) costs, and looking to expand the use of automated processes and newer equipment to increase production and lower unit costs. This is likely to involve greater use of artificial intelligence. They also may be looking at entering deals with Big Pharma companies that are seeking to transfer production capacity, in exchange for which the CDMO would receive long-term sales contracts. For many CDMOs, this will be a low-risk way to expand.

Outlook for the CDMO Industry

As far as the outlook for the CDMO industry is concerned, it is likely we will see more consolidation. We certainly will see many more deals involving shifts in ownership as private equity firms rearrange their portfolios. But, overall, the industry will do well. Technology is empowering smaller players in ways that were inconceivable five or 10 years ago, and nothing will change the need for Big Pharma to have manufacturing partners that are compliant with the Current Good Manufacturing Practice (CGMP) regulations enforced by the Food and Drug Administration.

Over the last several years, Big Pharma has continued to be happy to outsource more to service providers. As a result, CDMOs that have more integrated service offerings have fared much better than those able to do just one thing. CDMOs that offer packaging, labeling, distribution, ground chain logistics support, or warehousing, for instance, are in a much better place strategically going forward as Big Pharma seeks to reduce its number of vendors.

As long as CDMOs remain relevant in early discovery and there’s still a large ecosystem of small CDMOs that continue to be efficient and price sensitive, the sector will thrive.

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About Matthew Jones

Currently an independent advisor to the life sciences sector, Matthew Jones spent more than 28 years in senior positions in the industry. Most recently, he served as Vice President, Global Head of Sales & Business Development, at Lonza Group, where he was responsible for leading global commercial contract development and CDMO services, global business development, and sales.

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This pharmaceutical industry article is adapted from the GLG Teleconference “Lonza and the CDMO Industry.” If you would like access to this event or would like to speak with pharmaceutical industry experts like Matthew Jones or any of our approximately 1 million industry experts, please contact us.