While contract development and manufacturing organizations faced headwinds in 2024, the outlook next year for the CDMO space is cautiously optimistic based on some encouraging macroeconomic and industry-specific trends, according to analysts and stakeholders.
“It was a much better year than people were expecting for the CDMO space, at least going in,” Max Smock, equity research analyst at William Blair, told Pharma Manufacturing.
As 2024 progressed, Smock contends that the small biotech and early-stage clinical segments improved “albeit maybe not at a rate that some people were expecting earlier in the year — but certainly, across the board, we’re in a much better spot today than we were this time last year.”
Still, Gil Roth, president of the Pharma & Biopharma Outsourcing Association (PBOA), told Pharma Manufacturing that his trade group is “seeing a short-term problem for CDMOs that rely on early stage and smaller biotechs, and down the line we’re going to see how that cascade effect moves forward.”
Reduced research and development spending has led to “less money flowing to the smaller biotechs, which means fewer clinical trial starts and less funding of early R&D pipeline products,” Roth said. “It also means a lot of things aren’t getting originated now that would lead to business four, five, six years from now.”
However, the good news for CDMOs is that the demand for CDMO services for biological early-stage drugs is growing in the U.S, according to GlobalData, while Evaluate Pharma indicates that total R&D spend is forecast to increase by 4% in 2025.
And despite the industry’s product pipeline growth remaining below pre-pandemic levels as of the third quarter of 2024, the late-stage clinical pipeline seems to have “bottomed out after normalizing over the last 18 months,” William Blair analysts have observed.
Through the first half of 2024, total biopharma funding was improving. If the improved funding environment persists and interest rates by the Federal Reserve continue to decline, the analysts expect that pipeline growth will gradually improve toward historical norms in 2025.
On Wednesday, the Federal Reserve cut rates for a third time this year but projected only two more cuts in 2025. “We’ve had some rate cuts and, if anything, the funding environment’s gotten worse,” Smock noted.
Nonetheless, as the CDMO sector heads into 2025, Smock said he is encouraged by the “strong outlook for commercial drug sales” and an acceleration on the outsourcing front in 2024 that is expected to continue next year with “plenty of reasons for optimism moving forward.”
Signs of the times
After attending the CPHI Milan conference in October, William Blair analysts walked away convinced that “healthy commercial demand and early-stage improvement” supported an optimistic CDMO outlook next year. At CPHI Milan, the majority of CDMOs indicated they are “either not seeing soft early-stage demand or indicated that they have seen heightened interest for early-stage services more recently,” they wrote in a note to investors.
Based on conversations with CDMOs, the analysts concluded there is a “belief that the industry will continue to benefit from the trend of increasing outsourcing penetration as more innovation comes from smaller biotech firms with limited internal manufacturing capacity and as large pharma seeks to diversify and de-risk their supply chains and capital investment strategies by complementing internal capacity with external partnerships.”
High demand areas include antibody-drug conjugates (ADCs), biologics, and prefilled syringe fill/finish. William Blair analysts found that while drug substance manufacturing for these modalities are the fastest-growing areas, CDMOs they spoke with “pointed to resilient demand and a recent revival in biopharma small-molecule development interest as companies embrace the modality’s more established scientific and regulatory development pathways.”
Brian Scanlan, operating partner-life science at private equity firm Edgewater Capital Partners, told Pharma Manufacturing that he sees similar dynamics in the CDMO market. “Small molecules continue to do pretty good. They’re a ‘less risky’ modality that is known and tried and tested,” Scanlan said.
Growth rates for small and large molecules are currently about 5% and 12% CAGR, respectively, with slightly more than half of the compounds still favoring small molecule modalities, according to Scanlan.
Overall, Smock said that drug developers “are thinking about which CDMOs can work with them across their pipeline, modalities, drug substance and drug product.” He noted that ADCs are “going to be the fastest-growing, biggest opportunity for the CDMO space over the next five to 10 years.”
Smock highlights the fact that drug sales are expected to increase 6% year-over-year in 2024, with biologics projected to account for over half of all sales for the first time this year — providing a “key tailwind” for CDMOs such as Avid Bioservices, Catalent, and Lonza. His analysis also indicates that CDMOs focusing on small-molecule drugs “should continue to be well positioned given a greater propensity for drug developers to outsource production of these products once approved.”
Scanlan describes 2024 overall as a “mixed bag” for CDMOs. On the positive side of the ledger, Scanlan said “those companies that have been more focused in the clinical into commercial space have been seeing at least some form of stability, and in some areas companies that are involved in ADCs and peptides have probably seen a pretty good jump year-on-year — maybe not normal CAGRs but the big guys have done okay.”
For CPHI’s Annual Report, Scanlan authored an update on the CDMO sector in which he wrote that “while demand remains somewhat soft in 2024, there are meaningful signs of a recovery in the sector.” He noted that specialty CDMOs with capabilities in handling radiopharmaceuticals are seeing strong demand.
However, those CDMOs focused on cell and gene therapies should expect slow demand to continue well into 2025, according to Scanlan. “On the cell and gene side, there’s been a fair amount of excess capacity,” he said.
Lonza stands tall among large CDMOs
With Lonza’s sales growth outlook of nearly 20% for its CDMO business in 2025, William Blair analysts see the Swiss company as the “most compelling opportunity” in the pharma outsourcing and services space. The company’s announced restructuring last week as a “pure-play” CDMO business — a reorganization that will be operational starting in Q2 of 2025 — has only served to reinforce William Blair’s selection of Lonza as its top pick for next year in the sector.
The analysts say their positive outlook “is primarily based on record drug approvals, a robust outlook for drug sales, and healthy outsourcing trends, which we think Lonza is extremely well positioned to capitalize on given its available capacity and best-in-class offerings.” They also view Lonza’s recent $1.2 billion acquisition of the Roche facility in Vacaville, California, one of the world’s largest biologics manufacturing facilities, as a “home run” given that large-scale mammalian capacity remains in high demand.
While the BIOSECURE Act — which seeks to prevent U.S. federal funds from supporting certain Chinese contract manufacturers — has stalled in Congress, William Blair analysts contend that Lonza is best positioned to benefit should the bill be passed and signed into law as the company’s offerings overlap large segments of China’s WuXi AppTec and WuXi Biologics—two of the five Chinese biotechs named in the House version of the legislation.
“Given Lonza’s breadth of capabilities and available capacity, it sets them up really nicely to be a longer-term winner both from BIOSECURE and increased outsourcing,” Smock said.
Other non-China-based CDMOs
Regardless of the ultimate outcome of the BIOSECURE Act, Smock believes the bill is effectively achieving its intended goal as U.S. companies are likely to be hesitant to enter new long-term manufacturing contracts with Chinese CDMOs due to escalating geopolitical tensions between the two countries — as well as the anti-China sentiment of the incoming Trump administration and Republican-controlled House and Senate.
South Korea’s Samsung Biologics is “poised to see huge growth opportunities” if the BIOSECURE Act becomes law, according to GlobalData analyst Jithendra Kancharla, who notes that the company currently operates the world’s largest biologics CDMO plant in Incheon, South Korea, and is building another facility at the site which will be operational in 2025.
“Samsung Biologics aims to maintain a firm foothold in the biopharmaceutical CDMO market, with additional plants enabling the manufacturing of antibody-drug conjugates and gene therapies,” Kancharla said in a statement, while noting that the company has established sales offices in Boston and New Jersey for better access to U.S. clients.
PBOA’s Roth observed that the sector is seeing significant investment “from the Samsung Biologics of the world” — companies in the bulk biologic space that are investing in both “big stainless capacity as well as some single-use smaller systems.”
Indian CDMOs are also well-positioned and likely to benefit from the BIOSECURE Act, Smock said. Although the looming threat of the legislation hasn’t yet impacted bookings, he commented that companies “are definitely asking around, trying to put in place contingency plans.”
Scanlan said the ripple effect is already being felt by Chinese CDMOs, and not just those named in the BIOSECURE Act. “The damage has definitely been done,” he added. “The U.S. CDMO world will have some percentage of opportunities that come back. We’ve already seen some of it but more of that will happen.”
Novo-Catalent, Avid deals
With the completion this week of Novo Holdings’ $16.5 billion acquisition of Catalent, the industry has witnessed one of the largest CDMOs become a private company. However, Smock believes the Novo-Catalent deal is “an anomaly” and that the sector shouldn’t expect to see other Big Pharma companies buying major contract manufacturers.
“It was part of this unique opportunity with GLP-1s where demand is booming,” Smock, said, referring to the completion this week of a separate but related transaction in which Novo Nordisk bought three Catalent fill-finish sites from Novo Holdings for $11 billion to boost the production of the Danish drugmaker’s blockbuster GLP-1 medications.
Catalent CEO Alessandro Maselli continues to be at the helm of the CDMO under private ownership. In an October letter to customers regarding the Novo Holdings acquisition, Maselli said Catalent “will continue to operate as a leading global, independent, full-service CDMO” with its remaining network of nearly 50 sites worldwide.
In another recent go-private deal, Avid Bioservices in November announced that it has entered into a merger agreement to be acquired by funds managed by GHO Capital Partners and Ampersand Capital Partners in an all-cash transaction valued at about $1.1 billion. The transaction to take the biologics CDMO private is expected to close in the first quarter of 2025.
“With private equity, you see these three- to five- to seven-year windows that they have to turn the asset around, either sell it, merge it with something else, and — you know — find another owner, and that creates a lot of pressure on the CDMO space,” Roth said.
U.S.-based Avid is another CDMO that Smock believes is positioned to potentially benefit from the BIOSECURE Act. Last week, the company announced financial results for the second quarter and six months ended October 31. Revenues for Q2 increased 32% compared to the same period last year, while revenues for the first six months of fiscal 2025 were up 17%, thanks to boosts in manufacturing and process development.
Avid said that its backlog was $220 million, an increase of 11% compared to $199 million at the end of the same quarter last year, and that it expects a significant amount of that backlog will be recognized as revenue over the next five fiscal quarters.
However, some CDMOs are not entering 2025 on a high note. Earlier this month, National Resilience announced that it is laying off 105 employees at its biomanufacturing site in Alachua, Florida, which it acquired from Ology Bioservices for an undisclosed amount in 2021.
San Diego-based National Resilience is a newcomer to the sector, launching in 2020. New CEO William Marth, who took the helm this month and previously served as president and COO, said in a statement that the company “will continue to innovate as a science-driven CDMO, leveraging existing technologies.”
In February, National Resilience announced that it planned to invest $225 million in its Cincinnati facility to increase drug product capacity. At the site, a fourth pre-filled syringes (PFS) fill line is slated for 2025 as well as an expansion of assembly and packaging suites.