Pharmaceutical Outsourcing Market: Current and Future Strategic Trends

Pharma Tech Outlook: Pharma Tech Magazine

Pharmaceutical Outsourcing Market: Current and Future Strategic Trends

Pharma Tech Outlook | Friday, December 31, 2021

With the increasing prevalence of outsourcing in the pharmaceutical industry, Contract Development Manufacturing Organizations have a bright future.

FREMONT, CA: Contract Development Manufacturing Organizations (CDMOs) currently have excellent growth potential in a pharmaceutical industry climate where outsourcing is becoming the new norm. Indeed, the outlook for outsourcing is brighter than ever, as an increasing number of pharmaceutical and biotechnology companies continue to rely extensively on external service providers for research, development, and manufacturing of their R&D pipeline and product portfolio. According to Grand View Research, the current outsourced manufacturing market is worth approximately $90 billion. It is expected to grow at a healthy CAGR (Compound Annual Growth Rate) of approximately 7 percent to approximately $117.3 billion by 2023, accounting for approximately 30 percent of total manufacturing requirements. The downsizing of Big Pharma and the emergence of ever-newer small- and medium-sized virtual biotech enterprises in the pharmaceutical market lead to an increase in outsourcing penetration, opening up new growth opportunities in the CDMO area.

To meet the growing demand for outsourced Drug Substances (DSs) / Drug Product (DPs) manufacturing services, CDMOs have continued to spend extensively in capacity expansion to support growth, particularly in market sectors with capacity constraints. CDMOs seeking to expand generally have two strategic options: vertical integration through new services for existing Dosage Forms (DFs) or Active Pharmaceutical Ingredients (APIs) production, or horizontal integration through existing services for new dosage forms. This is beginning to change as more mergers and acquisitions (M&A) occur across the CDMO sector, with further consolidation projected in the coming years. This aligns with the interests of many pharmaceutical companies; an increasing number of customers are opting to outsource to a single full-service CDMO rather than many specialist providers, simplifying the supply chain and perhaps reducing time to market.

Although the decision of M&A is strongly related to the CDMO's financial capabilities, as the funds required frequently exceed the CDMO's available equity capital, the M&A approach typically proves to be the most win-win strategy. A merger and acquisition enable a CDMO to develop relatively quickly, given the target's manufacturing facilities, know-how, human resources, and organizational structures are already in place. Organically developing these qualities can be pretty tricky. Additionally, a purchase can broaden the CDMO's technology portfolio and provide access to new customer segments, creating chances for cross-selling. Another factor contributing to the consolidation of the CDMO M&A strategy is that big pharma divests manufacturing assets to shrink their manufacturing footprint. Many CDMOs view pharma asset divestments as an appealing acquisition opportunity, as ex-pharma production facilities are often of high quality and employ an experienced crew.

The CDMO industry concurs that the current pharmaceutical outsourcing market trend fosters corporate growth potential. However, there is also concern that increased market consolidation poses a significant risk to many CDMOs. Smaller CDMOs, in particular, may find it difficult to compete on pricing, technology, or service range with the growing number of large CDMOs, which are constantly expanding their service and technological capabilities through acquisitions. Additionally, they risk being unable to compete for skilled staff. Due to the increasing demand for qualified scientists and experienced project managers across the sector, CDMOs must compete for talent, not just with their immediate competitors and giant, worldwide pharmaceutical corporations. Pharmaceutical companies are increasingly outsourcing low-volume formulations, such as niche and orphan medications, which carry significant risks and generate very little money. Due to the market's present high level of fragmentation, some CDMOs must rely on a single or a few customers for a significant portion of their revenue. This reliance is dangerous since it empowers the customer to pressure low prices.

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