SCALING TOGETHER A WINNING RECIPE FOR FUTURE CDMOS

In addition to consistent high performance on the critical factors above, we see some other common threads underlying the success of leading co-manufacturers:

Focus: Leaders within specific sub-segments that focus on depth and excellence within a narrower field rather than a thinner, broader base have experienced high, profitable growth.

Flexibility: Co-manufacturers being able to manage peaks in demand and working closely with their clients to smooth out variations in business activity are performing well. This facilitates not only efficiency, but also their focus on excellence within niche areas.

IP: Another winning recipe has been those co-manufacturers developing their own IP with high product complexity. This has allowed successful co-manufacturers to create a solid differentiating factor and demonstrate their previous success.

Having said this, not all is rosy in the CDMO market. Supply chains have been disrupted, first by COVID-19 and then by Russia’s fullscale invasion of Ukraine, causing production inefficiencies and raw material price spikes. Furthermore, cost inflation and volatile energy prices have put further pressure on margins, especially for the players unable to transfer such cost increases to their customers.

Looking Ahead

We see more and more challenges of being an independent, smaller co-manufacturer and believe their role will be challenged going forward (especially if you are not IP-protected as presented above). Why is this so? Smaller actors will always be disadvantaged by lack of scale, whilst larger co-manufacturers have a unique position to affect purchasing prices and reinforce their scale advantage. Moreover, when outsourcing continues to grow, regulatory investment requirements will likely increase, leading to sub-optimal use of existing capital. It is also riskier to make necessary investments in physical infrastructure to improve scale, and returns on digital investments are lower. Add to this the inherent customer concentration risk of smaller co-manufacturers and the challenges ahead are clear to see.

Having said that, many of these companies have amazing people and capabilities, with a strong entrepreneurial mindset, flexibility and niche offering that is much harder – if not impossible - for larger companies to attain. Therefore, we believe a new winning model will grow out of this segment in the coming years, and that it will combine the benefits of being a large co-manufacturer (and thus eliminating the small company risks above) with the entrepreneurial power of a smaller co-manufacturer.

HOW CAN THIS BE ACHIEVED?

A strategy we believe will succeed in the future European CDMO market will combine several of these smaller comanufacturers with unique capabilities to a synergetic complementing team, maintaining their deep expertise and entrepreneurial flexibility, whilst also exploiting scale advantages.

Moreover, commitment to high regulatory standards and quality controls, along with investments in digital infrastructure to simplify collaborations and interactions between the entrepreneurs, are all essential to enable this model to reach its full potential. The group that can find this deep expertise and flexibility, and bring it together in a scalable and collaborative way, will have a formula for success at the front of the European comanufacturing market.

We certainly think this is a winning model of the future, and those that succeed will be difficult to compete with.

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