How CDMOs are leading innovation for pharmaceutical partners

Contract development and manufacturing organizations (CDMOs) are using M&A to invest in technology and capabilities.

The CDMO value chain is moving toward a “one-stop-shop” service portfolio

The analysis by EY-Parthenon revealed another trend: customers increasingly expect CDMOs to provide expertise along and beyond the entire manufacturing process, including commercial launch^II. This trend is strengthened by the fact that the customer base for CDMOs has experienced a shift from primarily big pharmaceutical companies toward including smaller biotech companies. The latter have a sole focus on developing their drug pipelines without having experience in manufacturing. They also require an early integration of their operations with partnering CDMOs in the drug development and manufacturing process.

The CDMO value chain is becoming broader

Developments in the market indicate the need for an adjustment of the current value chain model. From the EY-Parthenon assessment of M&A activities, it is expected that an extended service value chain could better reflect the changing CDMO business landscape (Figure 2) including for example: cell manipulation as an additional active pharmaceutical ingredient production step, which is gaining importance in pharmaceutical manufacturing. Furthermore, the analysis by EY-Parthenon reveals several examples of CDMOs expanding at the edges of the value chain, becoming active in clinical trial services as well as increasing their focus on the preclinical research stage by selected acquisitions.

Players at scale, extenders and complementors as emerging CDMO business models

Based on the analysis by EY-Parthenon, we differentiate three major CDMO archetypes (see Figure 3): players at scale, extenders, and complementors.

• Players at scale have the purchasing power to move into new areas quickly, to broadly extend their business model, and are typically already vastly integrated.
• Extenders invest heavily in selected segments along adjacent growth trajectories; for example, to increase their manufacturing service capabilities by adding fill and finish capabilities.
• Lastly, complementors are careful expanders that are typically small and highly specialized and invest in complementing areas. 

Conclusion and outlook

We see an expansion of the capability of CDMOs is occurring along three main axes:

• The first axis is an expansion of capabilities along value chains within a modality.
• The second axis is an expansion toward new modalities previously not covered.
• The third axis is, in selected cases, an expansion from a focus of product offerings toward offering additional complementing service categories (such as clinical trial services).

Compared to the CDMO M&A activities analyzed in 2012 to 2016, investment firms appear to have gained appetite to become more active players in the field, and it is likely that this trend will continue. CDMOs offer an option to enter life sciences and pharmaceutical markets by investing in continuous service revenues, while still benefitting from high growth rates in new therapy areas.

In novel modalities, there is likely to be an increasing shift toward capacity expansion by existing players. Key requirements for CDMOs active in this space are: 1) to be able to swiftly allot manufacturing capacity to enable higher speed to market and 2) to secure long-term capacities for assets. Both requirements are also driven by having sufficient reserves in capacity.

CDMOs are likely to further foster their new role as technology innovators. Major companies increasingly incorporate smaller startups and technology leaders. Product-focused companies are likely to continue to move toward the CDMO service market, while CDMOs will increasingly move toward extended product offering. In addition, integration of clinical trial services could be a new trend for CDMOs to enter high value, low volume segments — for example, personalized medicine. However, a respective business model would be quite different from a more traditional volume first business model.

Distilling the findings of the analysis by EY-Parthenon on the CDMO market over the past five years, CDMOs are likely to become strong contributors to innovation in the pharmaceutical industry. Overall, CDMOs will likely remain key partners for pharmaceutical companies and are expected to gain further relevance through their increasing technological expertise and know-how along the value chain.