Outsource or Die? How CDMOs Will Shape Pharma in 2025 and Beyond

Overall, 2024 was a good year to be working in the CDMO industry, but will the outlook stay positive for 2025?

Forecasts predict a steady rise in continuing growth trends from 2024, with estimates indicating the global pharmaceutical CDMO market is set to grow from USD 184.90 bn in 2024 to USD 197.40 bn in 2025, and looking further ahead, predicted to reach USD 368.70 bn by 2034. This isn’t too much of a surprise when you consider why biopharma companies typically outsource to CDMOs: to accelerate drug development; contain or reduce costs; and navigate complex regulatory landscapes.

So, as we look ahead to 2025, the question is no longer whether CDMOs are necessary, but how integral they will become to the biopharma ecosystem.

What’s The Outlook for Continued Growth?

One of the continuing drivers of CDMO growth is the biopharma industry's growing dependence on outsourcing. Facing investor pressures to innovate quickly and efficiently and to reach the next milestone, companies are choosing to focus their internal resources on core activities such as R&D and market strategy, outsourcing manufacturing to CDMOs for short-term cost savings and greater operational flexibility.

This is particularly evident in the biologics sector, where manufacturing processes are intricate, costly, and highly specialized, and for all but the largest firms, building in-house capabilities for such production is financially prohibitive. The injectable drugs market, for instance, is projected to expand significantly due to the proliferation of biologics, vaccines, and prefilled syringe solutions, but without access to CDMOs, many smaller firms would struggle to even be able to compete.

Technological advancements are another catalyst behind CDMO growth. Many CDMOs are aggressively investing in innovations like continuous manufacturing, automation, and digital transformation to stay ahead of industry needs and provide clients with faster production cycles, fewer quality issues, and enhanced scalability versus what they could build for themselves. For biopharma companies navigating increasingly stringent regulatory standards, CDMOs that provide cutting-edge manufacturing capabilities and robust quality control processes are indispensable partners.

Industry Consolidation and Strategic Moves

2024 proved to be a pivotal year for CDMO mergers and acquisitions, and the trend is likely to continue into 2025 and beyond.

Rather than investing time and resources into building new infrastructure, larger CDMOs are strategically acquiring smaller firms to rapidly expand their capabilities and service - creating integrated, end-to-end solutions for pharmaceutical clients and enhancing their appeal as "one-stop-shops" for everything from drug development to commercial manufacturing.

Despite the wave of recent M&A activity, the top five CDMOs currently control only 15% of the market, leaving substantial room for further consolidation. This landscape bears a striking resemblance to the CRO sector, where aggressive consolidation has led the top players to dominate over 70% of the market. If a similar trend happens with the CDMOs industry, there are likely to be fewer, but far more versatile, entities capable of handling the increasingly complex needs of pharmaceutical and biotech companies.

Private equity firms are also recognizing the potential in this fragmented market. Investors are pouring capital to fuel consolidation, to streamline operations and build robust, vertically integrated service providers. By reducing fragmentation, private equity-backed CDMOs are likely to provide greater efficiency, scalability, and convenience to their clients.

Challenges on the Horizon

Despite the promising prospects, several challenges threaten to hinder the CDMO sector’s upward trajectory.

Manufacturing processes for biologics, cell and gene therapies, and other complex pharmaceuticals are becoming more sophisticated, thus increasing the demand for highly specialized talent. CDMOs face intense competition for a limited pool of qualified personnel, which is likely to result in higher wages and more attractive benefits to employees. The escalating cost of labor could place considerable strain on smaller CDMOs, which often operate on tighter margins and lack the financial flexibility of their larger competitors. While investing in workforce development programs, apprenticeships, and ongoing training might help to cultivate in-house expertise, the rapid pace of innovation means that skill gaps will remain an ongoing challenge.

Adding to these pressures are rising operational costs - raw materials, energy, and regulatory compliance - that are squeezing margins across the industry. Smaller CDMOs may struggle to keep pace with larger, more diversified firms that can absorb these costs, which may threaten to widen the gap between industry giants and niche players.

Supply chain disruptions continue to represent an ongoing challenge too. Geopolitical tensions, trade restrictions, and raw material shortages continue to impact global supply chains, causing delays and increased costs for essential components. CDMOs that can become more resilient to challenges outside of their control are likely to see continual and sustained growth.

A Promising Future for CDMOs

Undoubtedly, the CDMO industry's trajectory through 2025 points to continued growth, driven by outsourcing trends, demand for specialized services, and technological advancements. The consolidation of the industry, coupled with strategic investments in capabilities and infrastructure, will likely create a more robust and versatile CDMO landscape. Challenges such as labor shortages and supply chain issues will persist, but the industry's adaptability and strategic importance position it well for the future.

CDMOs that continue to evolve with the market's needs and maintain high standards of quality and efficiency will be indispensable partners for pharmaceutical and biotech companies. The sector's role in enabling the production of next-generation therapies, particularly in biologics and personalized medicine remains undeniable.