CDMO market compound average growth rate (CAGR) of 9%

A 2024 forecast by Harris Williams projected around a 9% compound average growth rate (CAGR) for the CDMO market between 2023 and 2029. According to Harris Williams, and to our own findings, this growth is not only attributable to an increased overall need for pharmaceuticals against the backdrop of an aging population in industrialized countries, better insurance coverage in developing countries, or an increasing global population. We also need to include the mounting interest in Biologics and advance therapies and pharmaceutical companies’ growing preference to outsource certain services so they can improve resources, timing, and cost management.

Contract Development and Manufacturing Organizations (CDMOs) provide outsourcing services to pharmaceutical companies and play a key role in the industry. In this commentary, we look at CDMOs’ partnership with pharmaceutical companies; their main regional markets in the world; their growth strategies; and their strengths and challenges, including the potential impact from U.S. tariffs.

Although we would be cautious in terms of company-specific risks when assessing CDMOs, we believe that the essentiality of CDMOs to the pharmaceutical industry, combined with contract-based income with price and volume protections, provides credit support to these companies. In the near term, we expect the CDMO sector to remain largely unaffected by U.S. tariffs, as credit quality is supported by good visibility from contractual income with price and volume protections, and the sector is generally resilient to macroeconomic vagaries. However, idiosyncratic factors relating to size and scale, specialty of service offerings, and geographic diversification could leave some issuers more exposed than others if U.S. tariffs remain elevated for a longer period without relief.

CDMOs Provide Invaluable Support to Pharmaceutical Companies

CDMOs serve as a conduit for pharmaceutical companies to outsource some drug development and manufacturing and may also develop and industrialize drug production. Other activities include formulation, blending, and analytical services along with packaging and handling/logistics. CDMOs may be active in several activities throughout the lifecycle of a drug or specialized in a single activity for many drugs, the latter of which typically focuses on improving process efficiency. Depending on the specific CDMO specialty, the scope of services may include aspects of formulation or packaging design, with production flexibility from laboratory scale-up to full commercial production. The CDMO market is divided into three general sectors: Active Pharmaceutical Ingredient (API), Finished Dosage Form (FDF), and Biologics.

Although the API segment has been the biggest historically and, together with FDF, generates the highest growth, Biologics has grown in importance in recent years. In fact, the CDMO industry is constantly evolving. In the early 2020s, the focus was largely on increasing plant sizes, and physical infrastructure for advanced therapy generated strong capacity demand. In recent years, however, the market has begun to shift toward investments in expanding efficiency and execution capability.

Many CDMOs now view their key to success as filling the capacity previously built with viable projects, being able to adapt successfully to evolving regulatory hurdles, attracting highly skilled talent, and managing supply chain constraints. Margin pressure in the current market— particularly the API market—is also contributing to the shift towards higher-value services and procedures such as highly potent active pharmaceutical ingredients (HPAPI) and antibody-drug conjugates (ADC), which ultimately entails a higher degree of specialization.