How do CDMOs work?

What exactly is a CDMO?

A CDMO – contract development and manufacturing organization – figures out how to make a drug at scale, then makes it.

The first part is development – design a repeatable process that makes the drug.

The second part is manufacturing – make the drug, from preclinical and clinical trials to commercial supply.

Exhibit 1Development (CDO) and manufacturing (CMO).

In the past, when most medicines were produced by relatively simple chemical processes, pharma companies typically used CMOs either as a temporary solution while they scaled up their own manufacturing, or as a way to shift the risk of investing in manufacturing infrastructure and preserve their resources.

However, as medicines and manufacturing processes have become much more complex (see Bioprocessing), the industry dynamics have changed.

Nowadays, biopharma companies engage CDMOs earlier in the product cycle. CDMOs are often involved in developing the processes to mass-manufacture the drugs, including cell-line development, formulation, and scale-up. Because CDMOs have the scale and experience of working with many customers, they are often at the cutting edge of manufacturing technology and know-how.

Exhibit 2A CDMO can make a drug at every stage of its life.

Why would a company hand off making its own product?

For three main reasons – capital risk, specialist capability, and strategic focus.

The capital risk. A drug factory costs hundreds of millions of dollars, sometimes billions, takes years to build, and requires investments long before anyone knows whether the drug will be approved. Outsourcing turns that up-front bet into a cost paid per batch. A CDMO works with many customers at once, which spreads product-specific risk and lets it keep building capacity that no single drug company could justify on its own.

The capability. A CDMO develops and makes products for many customers at once, so it sees more processes, more kinds of medicine, and more regulatory cycles than a typical biopharma company. The newest process technology and the deepest know-how therefore tend to sit with the specialist that is working with the top companies in the industry. It shows up as speed too: a plant that has run this kind of process before helps a drug launch sooner. In healthcare, a few months could be the difference between the first mover and being late to market.

The focus. Running a factory is not just capital intensive, but also time intensive. Instead of spending its money and attention on manufacturing, the company can focus on inventing new and better medicine.

Is a CDMO just cheaper outsourcing?

No – it is about specialization and scale economics.

When people hear "outsourcing," they often picture offshoring – shipping work to a cheaper country. This is not that. Renting computing power from Amazon AWS or Microsoft Azure is not offshoring; it is handing a specialist the heavy lifting to focus on creating better products in the future. A CDMO is the same – and many of the biggest sit in high-cost places like Switzerland, South Korea, and the United States.

Nor is it a race to the lowest bid. In other subsectors, a contract manufacturing job could go to the lowest cost provider, because the work can be moved or re-bid. Drug manufacturing is different. Once the manufacturing process (including key vendors and products) is written into the approval, switching can take years and require regulatory re-filing – so customers rarely chase the lowest quote. And if they do choose to switch manufacturing, it takes years of planning and work. A customer evaluates a CDMO partner based on capability and capacity, quality and regulatory record, reliability, and speed – with price being one factor among many. The cheapest CDMO is not a good deal, if it risks the quality, launch timing, and reputation.

Why are more drugs made by CDMOs now?

Medicines keep getting harder to make, and drug companies realized that manufacturing was never their real edge.

Contract manufacturing used to be a quiet corner of the industry – spare capacity a drug company rented when its own plants were full. But this changed as biotechnology evolved to be more complex.

A pill's active ingredient is a small molecule, built by chemical synthesis: follow the steps and you get the same molecule anywhere. A biologic is far larger, on the order of a thousand times the size, and too intricate to build by chemistry – it is grown by living cells in tanks called bioreactors. Read our Bioprocessing article to learn more.

Exhibit 3Medicines have grown far larger and more complex.

Manufacturing a biologic drug is much harder and more expensive than making a pill, and not many companies can do it at scale.

But it wasn’t just that medicine got harder to make. It was that biopharma companies realized that they were better off focusing on making better products and outsourcing manufacturing. Software and semiconductor industries reached the same conclusion.

Innovation and manufacturing are increasingly shifting to be two separate businesses.

So how does a CDMO make money?

Fees per batch, earned across many customers – and profitability driven by how well the manufacturing lines are utilized.

The CDMO charges a fee for each batch it makes. Industry estimates put manufacturing at roughly 5 to 20 percent of a drug's sales, depending on the medicine and how complex it is to make.

Manufacturing demand follows the same curve through a drug's timeline: small volumes through development and clinical trials; incrementally higher volume after each phase; and if the drug is approved, substantially higher and more predictable volume.

Exhibit 4Illustrative representation of CDMO economics through a drug's development.

Especially as drug manufacturing processes have become more complicated, CDMOs are often engaged earlier during development. The process a CDMO builds for early trials is the process validated at each stage that follows. So the CDMO’s business effectively grows along with the drug product.

The catch: most drugs fail. Only a few make it through testing. Additionally, a biologics factory is very expensive to operate, and most of its cost is fixed, so it costs nearly the same whether it is full or half-empty. Utilization, how full the plant runs, is a decisive factor of profitability. Fill it and margins are high; leave it half-idle and it loses money.

Exhibit 5Illustrative manufacturing economics.

This is why there has been a general trend toward consolidation in the CDMO industry. The more products a CDMO serves, the less dependent it is on one drug’s outcome. Because demand is much less predictable before commercial approval, and because biopharma companies are outsourcing earlier than before, it makes even more sense to focus on scale.

What is the impact on biopharma?

It is a symbiotic feedback loop: the drug company and the CDMO each work on what they are best at, reducing risks and increasing benefit for both sides.

Without CDMOs, a drug company runs the risk of sinking billions into a factory for a medicine that might never be approved. Even with multiple products, a manufacturing line is a risky, capital-intensive investment that is highly dependent on the demand and utilization of the plant.

A CDMO makes many companies' medicines at once, so product-specific risks are greatly reduced across a diversified portfolio. The advantage compounds with scale: the more drugs a CDMO makes, the sharper its process know-how gets, and the systems and people it builds carry over from one product to the next. Scale pays for itself too – more customers means more money for better technology and more capacity, which makes the CDMO a better partner for the next drug.

A CDMO diversifies product-specific risks and compounds its advantages with scale.

Takeaways

• A CDMO makes other companies' medicines. It designs the manufacturing process and runs the plant, so the company on the label does not have to.
• Outsourcing buys focus, not cheap labor. Companies partner with CDMOs so that they can focus on research & development and go-to-market.
• Drugs got harder to make. As biotechnology has advanced, so have the size and complexity of drug products, increasing the demand for specialized manufacturing partners.
• CDMOs enable more biopharma innovation. Partnering with CDMOs can vastly reduce product, capital, and operational risks for the industry – which incentivizes more investments in new drugs.
• Scale economics benefit both parties. Large CDMOs compound their expertise and technology edge as they scale – generally leading to better economics, higher quality, and faster time-to-market.

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