**London**: The pharmaceutical sector is witnessing a shift as contract development and manufacturing organisations (CDMOs) evolve into strategic partners, driven by onshoring trends, innovative financing, shared capital investments, enhanced process development, and fast-track collaborations amid regulatory changes.
The pharmaceutical manufacturing sector is experiencing a significant transformation as contract development and manufacturing organizations (CDMOs) move beyond their traditional role as simple capacity providers to become strategic partners. This shift is driven by pharmaceutical companies facing mounting pressures to reduce costs, accelerate time to market, and manage complex regulatory and supply chain challenges that have been highlighted by the COVID-19 pandemic, along with the recent potential imposition of tariffs on pharmaceutical products.
One of the critical developments in this evolving landscape is the emergence of innovative partnership models between pharmaceutical companies and CDMOs, influenced by changing R&D priorities and a more challenging fundraising climate for biotech startups. Private equity firms have become influential players in the CDMO space, enabling these organizations to assume greater risks with the prospect of long-term financial rewards. Concurrently, CDMOs are making substantial capital investments to expand their manufacturing capabilities, focusing particularly on evolving drug modalities, specialised fill and finish services, and end-to-end manufacturing solutions.
Five key trends have been identified as pivotal in reshaping CDMO partnerships:
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Onshoring and Friendshoring
The shift towards onshoring and friendshoring is reshaping pharmaceutical supply chains. Legislative initiatives like the BIOSECURE Act are propelling manufacturing activities away from Chinese CDMOs toward facilities located in the United States and allied countries. Additionally, investigations by the U.S. Bureau of Industry and Security (BIS) into pharmaceutical imports, including finished drug products, active pharmaceutical ingredients, and related materials, are influencing companies to reduce cross-border supply chain dependencies. The COVID-19 pandemic exposed vulnerabilities in globally concentrated supply chains, encouraging the establishment of geographically diversified sister manufacturing sites. This diversification strategy aims to balance local production requirements with global distribution capabilities, enhancing supply chain resilience and mitigating tariff impacts. -
Lower Up-Front Costs with Contingent Success Payments
Financing models within CDMO partnerships are evolving, particularly within private equity-backed firms that offer more flexible payment structures. These arrangements often involve CDMOs accepting greater upfront risks in exchange for performance-based payments linked to production milestones such as batch volume, speed, or efficiency. Emerging royalty models involving tiered royalties based on the successful development and manufacture of pharmaceutical products are aligning incentives between pharmaceutical companies and CDMOs, fostering long-term value creation. These arrangements also impact acquisition valuations of CDMOs, requiring buyers to consider both current operating metrics and future royalty income streams underpinned by regulatory and commercial uncertainties. -
Capital Expenditures for Dedicated Build-Outs
To address rising demand, CDMOs are expanding manufacturing capacities but are increasingly adopting a shared investment model where capital expenditures for facility expansions or dedicated build-outs are co-financed with their pharmaceutical clients. This approach ensures clients receive priority access and custom manufacturing capabilities while CDMOs mitigate financial risk. Capital-sharing agreements frequently include incentives such as production credits or discounted pricing, fostering deeper partnerships that enhance customer retention. Retaining manufacturing programs from early development phases through commercial production provides CDMOs with certainty that justifies larger infrastructure investments and avoids technology transfer costs. -
More Emphasis on Process Development
With major pharmaceutical companies reducing internal R&D budgets and biotech funding becoming more selective, CDMOs are filling a critical gap by offering specialised technologies and expertise in product and process development. This outsourcing trend allows pharmaceutical companies to access innovation resources and reduce risk compared to maintaining these functions in-house or partnering with peers. Forward-thinking CDMOs are also generating new revenue through proprietary technologies and royalty-based arrangements, marking a significant shift where CDMOs take on active roles in early-stage innovation and drug development strategy. -
Fast-Track Collaboration Models
Speed and efficiency have become key differentiators in the competitive CDMO market. Streamlined preliminary agreements—such as authorisations to proceed and limited master service agreements—are increasingly used to commence work prior to the finalisation of comprehensive contracts. These arrangements help establish early customer relationships, facilitate flexible payment structures, and enable alternative pricing models. They also allow both pharmaceutical sponsors and CDMOs to assess operational compatibility before committing to more extensive partnerships, accelerating project initiation while maintaining the flexibility needed for complex contractual relationships.
Legal and regulatory frameworks are adapting alongside these trends. Clear definitions of intellectual property ownership are essential, especially as CDMOs contribute proprietary technology to product development. Contractual provisions must comprehensively address contingent payments, capital sharing, capacity guarantees, and equipment ownership. Compliance frameworks must be robust to manage multi-jurisdictional regulatory requirements. Additionally, emerging royalty-like payment models necessitate complex legal agreements often resembling licensing or collaboration contracts. Fast-track agreements must also balance confidentiality and IP protections with operational agility to support swift project launches.
These developments reflect a fundamental evolution towards more collaborative and integrated relationships between pharmaceutical companies and CDMOs. As CDMOs assume greater roles in innovation, manufacturing, and financial risk-sharing, these partnerships have the potential to improve efficiency and more evenly distribute both challenges and opportunities across drug development and production processes. The pharmaceutical industry is thus witnessing the rise of CDMOs as key contributors to value creation within the sector.
The JD Supra is reporting on these transformative trends shaping the future of pharmaceutical manufacturing collaborations.
Source: Noah Wire Services
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