How CDMOs are leading innovation for pharmaceutical partners

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

In brief

• CDMOs play a central role in the production of medicines today. 
• In response to changing customer demands, CDMOs are adjusting their business model, both through internal investments and by strategic M&A initiatives.
• CDMOs are setting a clear course toward technology leadership, and thus are expected to become even more important over the next decade. 

As flexible third-party service providers, CDMOs support pharmaceutical companies at all stages of the process of making medicines: by providing services in the research and development stages, by offering support in manufacturing, and by providing formulating and finishing processes. CDMOs have been on the rise in the last decade, with an increasingly dynamic mergers and acquisition (M&A) landscape driven by consolidation.

As indicated by EY research, in the period from 2017 to 2021, 244 publicly announced M&A transactions involved CDMOs. EY teams analyzed these transactions, and also reviewed 92 publicly announced internal investments of 15 selected global CDMOs, to create an integrated perspective on the CDMOs M&A landscape. In line with our previous analysis focusing on the period from 2012 to 2016^I, this latest assessment reveals ongoing consolidation in the market. However, new developments are likely to continually change the position of CDMOs.

CDMOs are shifting their business model in response to a changing environment

Historically, CDMOs operated on a business model which predominantly focused on serving as external service providers for manufacturing mature pharmaceuticals. This model included the addition of capacity by the acquisition of manufacturing facilities from pharmaceutical companies. However, CDMOs have increasingly become leaders of innovation and are covering more areas of the pharmaceutical business, not only manufacturing; adding additional revenue streams. Through acquisitions, CDMOs can rapidly expand their capabilities and, thus, are able to deliver technically advanced services at scale.

This change of focus has been accompanied by a change in the M&A landscape in the market. For example, the rise of novel modalities (such as cell therapies, gene therapies or mRNA therapies) and innovative vaccines in the last decade has required a significant investment in new additional manufacturing capabilities for viral vectors, cell manipulation, as well as nucleic acids and lipid-based formulations. Well-positioned CDMOs have been able to flexibly alter their production lines to meet the increasing demand of smaller, more diverse projects. New partnerships have arisen that further enable CDMO players to fuel the rapid growth of capacities and capabilities, helping the industry to succeed in ramping up in areas such as vaccine production. 

CDMO M&A is on the rise, trailblazing with new manufacturing capabilities

A key finding from the analysis by EY-Parthenon is regarding the requirement for mastering technology. It is not only important for CDMOs to be trusted partners for mature pharmaceuticals, but it is also essential for them to contribute specialty technical knowledge to maintain a competitive capability edge in manufacturing innovative products. This holds especially true in view of novel modalities (Figure 1). Of the 244 M&A transactions analyzed by EY-Parthenon, one-third were related to novel modalities such as cell and gene therapies, and novel nucleic acid therapies. More specifically, while deals including capabilities in the novel modalities space contributed to only 29% of the M&A transactions in 2017, this share of deals has been steadily increasing since then — up to 40% in 2021. 

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,^I 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.