Scaling together a winning recipe for CDMOs of the future

Christian Merup, CEO of Wellma, explains the winning recipe for successful co-manufacturers in Europe, including the underlying threads and unique capabilities of the leaders in the current CDMO market.

Key insights:

• Focus, flexiblity and IP - combined with high performance - are themes underlying successful co-manufacturers.
• Smaller actors are disadvantaged by lack of scale, whilst larger co-manufacturers have a unique position to affect purchasing prices and reinforce their scale advantage.
• Being able to integrate entrepreneurial companies with deep expertise into a group structure will create a dynamic that combines the agility of a small company with the market positioning of an established player.
• Commitment to high regulatory standards and quality controls, along with investments in digital infrastructure, are all essential to enable this model to reach its full potential.

The current role of the CDMO (or co-manufacturer as we call it) is critical and we expect its importance will continue to grow over the coming decade. We see that there are several different drivers behind this trend, with different sub-sectors of course being affected in unique ways. Capacity constraints and capital expenditure are overall strong driving forces, whilst in some sectors technological advancements and new complex formats have increased the demand for outsourcing.

Shifts in the regulatory environment have also been a material contributing factor, with new requirements demanding deeper expertise from the internal organisation. These developments are not new; however, we believe they have become even more relevant over the past few years, offering an explanation as to why the overall percentage of development and manufacturing outsourced to co-manufacturers has increased.

What has then been the winning recipe for successful co-manufacturers? We believe strong regulatory and quality track records, sustained operational excellence, and leading R&D-capabilities have been critical foundational drivers of success. Price in and of itself has not been, and should not be, the key decision-making factor, and the traditional one-stop shop along with sub-scale manufacturing has been challenged in the last few years.

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, as many co-manufacturers have faced significant challenges over the last few years. Supply chains have been disrupted, first by Covid-19 and then by Russia's full-scale 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 according to the winning styles 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. Based on this, 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 co-manufacturers with unique capabilities to a synergetic complementing team, maintaining their deep expertise and entrepreneurial flexibility, whilst also exploiting scale advantages. We believe that combining deep expertise and entrepreneurial spirit within a collaborative and scalable model will lead to something truly powerful.

Being able to integrate entrepreneurial companies with deep expertise into a group structure, whilst allowing the entrepreneurs to autonomously run their businesses and continue to make key business decisions close to their customers, will create a dynamic that combines the agility of a small company with the market positioning of an established player. Such a group will be able to increase market share through a wider product offering and geographical reach, improve procurement through exploiting scale advantages, make larger investments to secure its future position, and de-risk operations through improved diversification.

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 co-manufacturing market.

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