The last several years have been tumultuous for the CDMO sector. Some companies benefited from a surge in demand for COVID vaccine and therapeutic manufacturing capacity, while others struggled to maintain supplies of key components and materials, and the drop in COVID-vaccine demand and therapeutic obsolescence due to virus variants have caused further disruption. The decade-plus of low interest rates gave way to inflationary pressures that impacted biopharma pipeline funding and workforce hiring and retention. Trade issues and generic market erosion have created opportunities for some while shutting out others. And the promise of new modalities has been tempered by slow regulatory reviews, manufacturing hurdles, and other obstacles. And then there’s AI.

These and other factors affect the CDMO sector just as they do the larger biopharma industry. Let’s look at some of them and see what they may portend for the next several years ahead. Please note that when it comes to predictions, there’s an awful lot that can derail them, like a pandemic, a natural disaster, or an unexpected election result. There are also surprise boons, like a potential $50 billion market for weight-loss drugs springing up virtually overnight! (see the Catalent, Novo Deal Update sidebar at the end of this article). Also of note: my role as President of PBOA means I spend most of my time involved in policy advocacy—both regulatory and legislative—rather than market-driver-watching; between that and my vast overlapping network of NDAs, there are some trends I can allude to without naming names, as it were.

No matter how much we act like the pandemic is behind us, COVID and Operation Warp Speed (OWS) continue to reshape the world. Lockdown and export bans created an instant stress-test of global supply chains. CDMOs had to adjust to delays in critical materials while also protecting their workforce. As the months progressed and OWS led to unprecedented acceleration in vaccine development and production, CDMOs who were not part of that effort had to contend with government reallocations of resources via the Defense Production Act to prioritize vaccine manufacturing. This (semi-)artificial supply chain constraint further tested production timelines at CDMOs and the viability of global manufacturing networks.

What came from this was a heightened awareness of supply chains, which will have a major impact on the CDMO sector in the years ahead. (The OWS initiative and the role of CDMOs like Catalent, Grand River Aseptic Manufacturing and Lonza in the pandemic response also created a heightened awareness of CDMOs among the public, which I generally consider a good thing.)

The desire to restructure supply chains through onshoring, nearshoring, friendshoring, etc. will only gain steam in the U.S. and elsewhere—repeat after me: everybody has a shore—though it’s unclear how extensive those changes can be. The 2020 publication by the U.S. Department of Health & Human Services (HHS) of a Critical Medicines list has become a jumping-off point for initiatives aimed at refashioning the U.S. pharma supply chain. At the same time, the WHO and the EMA both have their own versions of this list, so it may be a challenge to see which regions prioritize which drugs.

Some parties are trying to determine which medicines are really critical, and how can their supply chains be better protected from system shocks and trade wars. This has led to the realization that, even if APIs and dosage sites are located in “friendly” nations, key starting materials and excipients are likely sourced from “not friendly” nations and can’t readily be made elsewhere.

So, even though globalization has put hard limits on it, various nations and regions are developing similar priorities for “domesticating” their supply chains to a greater or lesser extent. Canada, for example, realized it had no scalable vaccine manufacturing capacity during COVID, and has made significant investment in building it domestically, albeit without changes in some of the regulations and policies that contributed to the decline of domestic manufacturing in the first place. The EU and India both have initiatives to boost local API production. But as we’ve pointed out to legislators, regulators and other stakeholders, manufacturing on smaller, local scales can actually lead to greater fragility.

At the same time, one can’t reimagine a supply chain without understanding that supply chain. In the U.S., we saw the Congress empower FDA in 2020 to require all API and Finished Dosage Form (FDF) facilities to report the amounts of product they make annually. As I write this, more FDA reporting authorities are being debated in the House and Senate, potentially requiring dosage facilities (including CDMOs) to report the source of each API they use and the amount of each drug product manufactured from that particular API. This has been framed as a means to battle drug shortages, but it’s no stretch to see this as a mechanism to better understand dependence on certain countries for API supply. With trade tensions high between the U.S. and China, a clearer idea of “what comes from where” will create a map of what’s at stake. (Again, don’t sleep on excipients and KSMs; recent U.S. legislation proposes mapping out those suppliers, too.)

When it comes to China, CDMOs, and the larger pharma sector, my Magic 8-Ball is murky. The most recent U.S. rhetoric has moved away from talk of “decoupling,” but there are still trade barriers that both countries are exercising. Combined with China’s recent economic slowdown and corruption crackdowns on some business sectors, it’s unclear if the CDMO market in China will primarily be for in-China drugs and biologics, rather than global supply.

As mentioned, pharma-neighbor India is trying to jump-start its domestic API market—again, everybody has a shore—to reduce its reliance on China. Other high-tech industries are expanding investment in India as a hedge, so it’s possible the Indian pharma industry—and especially CDMOs—will shift toward high-value biopharma manufacturing, while managing its reputation as the hub of low-cost generic drugs.

Those aforementioned FDA reporting regulations contain confidentiality rules so that the public will not have access to sensitive manufacturing information, but they will still require CDMOs to report out customer data in new ways. In some cases, this may require mass rewrites of quality agreements, and likely will also require added staffing at CDMOs to handle these new reporting duties. Some CDMOs may have to alter or install IT systems to better manage manufacturing data; with increased technology and workforce investment comes increased operating costs. Areas that are extremely cost-sensitive—such as commodity generic oral solid doses—could face new price pressures as these reporting requirements proliferate.

All of which is to say: Supply chain issues—whether they involve onshoring, transparency requirements, rated orders and export controls, or rerouting production due to drug shortages—will be critically important to the CDMO sector and its customers in the years ahead. For our part, the PBOA and its members have engaged with stakeholders to find ways to streamline the process of moving products to new sites or lines in order to mitigate against supply disruptions, and to incentivize investment in new facilities in key dosage forms and areas.

Another aspect of COVID-hangover has been the impact on R&D. The lockdowns and uncertainty in 2020 led to slowdowns and shutdowns in clinical trials in many regions. The immediate result was a reduction in demand for development services but, cascading from that, this will result in “lost” commercial projects that were scuttled due to clinical delays from 2020-21.

This phenomenon may also occur as a result of the U.S. Congress’ 2022 Inflation Reduction Act (IRA), which permitted drug price negotiations by Medicare for the first time. Pharma companies large and small have made statements about canceling pipeline projects out of fear that, if successful, those drugs will be caught up in “price controls” and fail to recoup their R&D investment. In theory, such cancellations will trickle down to CDMOs losing out on associated projects, and even the loss of generics of such products years down the line
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(I’ll note that some drug companies cited the IRA as the reason for pipeline-culls within days of its being signed into law, long before there was much clarity on how negotiations would be handled, which makes one (me) think those announcements were less a response to IRA and more an excuse to cancel projects while blaming outside forces.)

Related to this, the PBOA member companies I surveyed agree that the top CDMO business challenge is the slowdown in biotech funding, largely a result of higher interest rates that make investment less appealing than, say, buying a CD at 5%. Hesitation and yet more pipeline-trimming by virtual, emerging, and small biopharmas can translate very quickly into reduced opportunities for CDMOs. No one has hazarded a guess as to when the finance-floodgates may reopen, but this has cast a pall over many CDMOs, both public and private.

One could argue that this slowdown is also tied into COVID, as inflation and interest rates were affected by government spending to keep economies afloat amid mass lockdowns/shutdowns. One could also argue that it’s a bill-come-due function of artificially low interest rates following the 2008 financial crash. There are a multitude of other factors/stories to tell, but I’m no economist so I can’t gauge the validity of them beyond my own confirmation bias. The upshot is that as funding becomes tighter, companies and investors have to make tough decisions about pipelines, and that trickles down (or floods) the CDMO sector, which must make capital-allocation decisions of its own.

Which brings us to another aspect of the “post-”COVID environment for CDMOs: the rationalizing of manufacturing capacity. CDMOs did a phenomenal job of keeping up with COVID vaccine and therapeutic manufacturing demands, helping save the world in the process. As a thank-you, once the demand shrank/fell off a cliff, some were left to their own devices to fill their expanded capacity.

In the early 2021 days of the vaccine rollout, I took part in a forum about vaccine production and future-pandemic preparedness where several participants noted that, without significant government investment, long-term contracts, and infrastructure/workforce commitments, the manufacturing capacity that was collectively marshaled to respond to COVID was not sustainable going forward, neither for CDMOs nor in-house pharma. The non-pharma industry participants declared that we were in a new world where many governments now had political will to support and sustain such capacity through public-private partnerships. I was skeptical at the time, and my predictions were accurate: governments have gone back to bickering over healthcare spending and pay lip service to “preparing for the next pandemic”, while pharma manufacturing overall has been compelled to rationalize capacity. In the U.S., congressional dysfunction has left authorization for the Pandemic & All Hazards Preparedness Act (PAHPA) unrenewed since October 2023.

That’s not to say that the CDMO sector is shrinking. There’s been plenty of non-COVID growth in the sector, and the various forms of -shoring have created opportunities for companies with capacity in strategic geographies. In addition, there’s the promise of new/growing modalities: CGT, CAR-T, ADCs, mRNA (duh) and more. Of course, these new areas are not without risk. FDA is still racing to keep up with reviewing these new modalities, hiring staff and developing guidance to better treat CGT applications. Meanwhile, reimbursement for some of these drugs has proven difficult for insurers and national health systems. But CDMOs are positioning themselves in these areas, with some spending billions to build out capacity. As the agency staffs up and fulfills some of the commitments it made to innovator companies under the newest iteration of the Prescription Drug User Fee Act, we could see significant growth in new areas of drug manufacturing for CDMOs. But the lack of progress has some companies to pare back expectations in this space.

All of that said, there are realities of the CDMO sector that predate COVID and remain in place. It’s still largely a world governed by private equity investment, notwithstanding several notable publicly-held CDMOs. PE funds have limited lifespans and that results in sales of CDMOs to other funds or mergers with other CDMOs or larger healthcare concerns. In the years leading up to the pandemic, we saw large valuations of CDMO assets, seemingly driven by the notion that CDMOs would provide some of the steady revenue of pharma with little of the R&D pipeline risk (a Ph. II/III failure that leads to a startup shutting down). Those acquisitions continued into the COVID era, although they’ve slowed in the last two years, again due to this new world of real interest rates.

The industry saw a major and fascinating development when Thermo Fisher, which had acquired Patheon in 2017 to add CDMO offerings, bought PPD, a major Contract Research Organization. As someone who’s seen a variety of combinations over a near-quarter-century in this field, I’m quite interested to see how they integrate CRO offerings into their CDMO portfolio and their larger healthcare services and equipment arsenal.

Even in a challenging economic environment, the CDMO sector will continue to play a vital role in supplying their customers with new and long-standing treatments for patients around the world. A supply chain reckoning may be coming, but there are limits to the changes that can be made and the very notion opens doors to CDMOs who are in the right place with the right capabilities. Governments will continue to explore ways to bolster manufacturing infrastructure, and at some point, that aforementioned political will may come to bear in a way that makes manufacturing more sustainable and enables this sector along with larger pharma to be prepared for what comes next.

Oh, you want my predictions on AI and how it’ll affect manufacturing (as opposed to R&D/discovery)? You’re on your own with that one. 

2024 Update

So, about that potential $50 billion market for weight-loss drugs I mentioned at the beginning: by now the news has made the rounds that Novo Holdings (NH) plans to acquire Catalent and then sell three of Catalent’s sterile fill/finish facilities to Novo Nordisk (NN), presumably to enhance NN’s captive capacity to manufacture prefilled syringes of Ozempic/Wegovy and its next-gen treatments (as well as other products that may fit some of Catalent’s non-PFS lines).

That’s a) certainly a reversal of the decades-long trend of in-house Pharma capacity being spun out to operate as CDMOs, and b) a sign that I may have been too conservative with that $50 billion estimate. Provided the transaction passes regulatory muster and closes as expected, NH has stated it plans to continue operating the remainder of Catalent’s CDMO operations, while NN has said it will honor existing contracts in the three facilities it plans to acquire.

The transactions promise to change the CDMO landscape. As with Operation Warp Speed, when Pharma companies and CDMOs had to handle a global manufacturing surge for COVID vaccines while continuing to produce other needed vaccines, the explosion of the GLP-1 & GIP market has created a scramble for manufacturing capacity not just for the Ozempics and Zepbounds of the world, but all the other sterile injectables.

In the weeks since the announcement, other CDMOs in the sterile fill/finish space—including PBOA members Alcami, GRAM, INCOG, JHS, Selkirk, and Vetter—have made announcements about capacity coming on line, expansion plans, and achievements with past customers. Days before the Catalent news, Afton Scientific announced a majority investment by Arlington Capital that will help fund expansion, and Kindeva Drug Delivery announced last spring its $100 million investment in a new facility dedicated to sterile fill/finish and drug-device combination products. It’ll be “interesting” to see how customers approach the new market and take advantage of these investments by leading CDMOs. 

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Gil Roth is the President of the Pharma & Biopharma Outsourcing Association (PBOA), a nonprofit trade association advocating for the regulatory, legislative, and general business interests of the CMO/CDMO sector. He was the Founding Editor of Contract Pharma. He can be reached at gil.roth@pharma-bio.org. For more information about PBOA, visit www.pharma-bio.org