Pharma Contract Outsourcing Research

To be used in conjunction with XXs’ due diligence document

Types of Contract Outsourcing in Pharmaceutical Industry

There are three primary types of contract outsourcing commonly utilized by pharmaceutical companies
worldwide: Contract Research Organizations (CROs), Contract Manufacturing Organizations (CMOs),
and Contract Development and Manufacturing Organizations (CDMOs). These organizations provide
specialized expertise and operational infrastructure in drug development and manufacturing. While their
services often overlap, each type of organization has distinct roles and capabilities, as outlined below:

Contract Research Organizations, or CROs, support biotechnology and pharmaceutical companies by

offering a comprehensive range of early-stage research and development (R&D) services. Specifically,
CROs facilitate clinical trial processes, including clinical research, regulatory affairs, trial planning, site
selection and initiation, recruitment support, clinical monitoring, data management, logistics,
biostatistics, medical writing, and project management. By outsourcing these extensive clinical trial
services to a high-quality CRO, pharmaceutical, biotechnology, and medical device companies can
leverage the organization's expertise, infrastructure, and resources while focusing on other critical tasks.

Contract Manufacturing Organizations, or CMOs, specialize in assisting pharmaceutical and

biotechnology companies with the manufacturing of innovative drug substances. Their services
encompass commercial production, drug development, stability studies, formulation development,
method development, pre-formulation, and registration batches. CMOs enable pharmaceutical and
biotechnology companies to reduce costs by providing state-of-the-art equipment and highly skilled
personnel essential for the production of new drugs, whether from small or large molecules. Moreover,
reputable CMOs help these companies remain compliant with quality standards and regulatory
requirements, thereby mitigating potential obstacles in the drug development and manufacturing process.

Contract Development and Manufacturing Organizations, or CDMOs, offer end-to-end, fully integrated
drug development and manufacturing solutions to biotechnology and pharmaceutical companies. Their
extensive range of services includes formulation development, regulatory support, clinical trial
management, product packaging, supply chain management, quality assurance, and technology transfer
solutions. In recent years, some CDMOs have expanded to provide clinical research services through
mergers, acquisitions, or by enhancing their in-house capabilities. By outsourcing various aspects of drug
development and manufacturing to CDMOs, companies can reduce costs, expedite time to market, and
ensure compliance with regulatory standards.

Traditionally, CDMOs operated under a business model primarily focused on serving as external
manufacturing service providers for mature pharmaceuticals. This approach often involved expanding
capacity through the acquisition of manufacturing facilities from pharmaceutical companies. However,
CDMOs have increasingly emerged as leaders of innovation, extending their scope beyond manufacturing
to encompass broader aspects of the pharmaceutical business, thereby creating additional revenue
streams. This shift is further underscored by a change in the customer base, from predominantly large
pharmaceutical companies ("big pharma") to a growing number of smaller biotech firms. These smaller
entities typically concentrate solely on developing their drug pipelines and often lack manufacturing
expertise or facilities. A notable example of CDMOs’ expansion along the value chain is the integration of
clinical trial services with their existing manufacturing services for clinical-stage products—a domain
previously exclusive to traditional CROs.

Reasons for Using Contract Outsourcing

In Drug Development Phase

The escalating costs of drug development have reached unprecedented levels. In 2018, the estimated
average cost of developing a new drug was approximately USD 172.7 million, with a range spanning from
USD 72.5 million for genitourinary drugs to USD 297.2 million for pain and anesthesia treatments,
inclusive of postmarketing studies. When accounting for the costs of failures, this figure increased to USD
515.8 million. Furthermore, the mean expected capitalized cost, which includes both the costs of failures
and capital, surged to USD 879.3 million, with variations ranging from USD 378.7 million for anti-
infectives to USD 1.8 billion for pain and anesthesia. These rising costs are compounded by a decline in
overall pharmaceutical industry sales, which saw a 15.6% decrease from 2008 to 2019. This trend
underscores the necessity for pharmaceutical companies to enhance profitability through cost-cutting
measures, such as outsourcing various aspects of their operations to Contract Research Organizations
(CROs), Contract Manufacturing Organizations (CMOs), and Contract Development and Manufacturing
Organizations (CDMOs) globally.

One significant factor contributing to the soaring costs of drug development is the lengthy clinical trial
process. On average, for every product that eventually reaches the market, approximately 10,000
compounds are screened during the discovery stage. During this phase, drugs are examined in vitro and,
if feasible, in animal models of disease. Only about 250 compounds progress to the second stage of drug
development, known as preclinical research, where pharmacology and toxicology studies are conducted.
If the outcomes of preclinical research are promising, the manufacturer submits an Investigational New
Drug (IND) application to the FDA for review. Upon approval, the manufacturer may proceed with
clinical testing (stage three) in humans. However, only around five compounds are approved for stage
three clinical trials, during which they undergo testing on volunteer participants across three phases—a
process that can take up to seven years to complete.

The entire timeline from drug discovery to FDA approval can extend up to 15 years. Despite the prolonged
and costly process, the rate of drug approvals has declined over the years, with only 1 out of 10 drug
candidates successfully passing clinical trials and obtaining regulatory approval. A 2016 analysis identified
several factors contributing to this low success rate. The analysis revealed that 40% to 50% of failures
were due to a lack of clinical efficacy, meaning the drug failed to produce its intended effect in humans.
Around 30% of failures were attributed to unmanageable toxicity or side effects, while 10% to 15% were
due to poor pharmacokinetic properties, which pertain to how well a drug is absorbed and excreted by
the body. Additionally, 10% of failures were linked to a lack of commercial interest and inadequate
strategic planning.

In response to these challenges, large pharmaceutical companies are increasingly adopting downsizing
strategies to focus their resources on core competencies and specialties. Outsourcing elements of drug
development, manufacturing, and marketing processes has become a key strategy to alleviate the cost
pressures eroding profit margins. As these financial pressures are likely to intensify in the future, CROs
are emerging as critical strategic partners for pharmaceutical companies.
To date, precise data or research quantifying the potential time and cost savings for pharmaceutical
companies associated with outsourcing clinical trials to CROs is lacking. However, the cost savings may
be inferred from the specialization of CROs. For instance, a CRO focused on cancer research can aggregate
knowledge—including multi-project datasets, past research documentation, and human capital
expertise—more effectively than pharmaceutical companies, as they typically handle a specific set of
projects with higher volumes. Additionally, CROs generally operate with lower overhead costs due to
their specialized and lean structure.

In terms of time savings, outsourcing clinical trials to CROs offers significant advantages. Outsourcing
strategies have consistently been linked to faster cycle times. Research conducted by the Tufts Center for
the Study of Drug Development (Tufts CSDD) between 2005 and 2010 consistently demonstrated that
projects with high levels of CRO involvement across various functions and tasks tend to be completed
closer to their planned timelines compared to projects with relatively low CRO involvement. Moreover,
no significant differences in performance quality—such as case report form errors, site 483s, and
regulatory cycle times—were observed between the low and high CRO usage groups. On average, clinical
trials managed by CROs are completed 30 days faster than those conducted by sponsor companies. This
time-saving advantage can be attributed to the specialized services offered by CROs, which provide them
with superior in-house knowledge of specific tasks throughout the clinical trial process compared to large
pharmaceutical companies.

In Drug Manufacturing Phase

Drug manufacturing process is considered to be one of the most essential parts in the pharmaceutical
industry’s supply chain, since it’s not only capital intensive but also requires tremendous labor count to
get this process run smoothly. According to some estimates, these costs can be as high as 27–30% of sales
for manufacturers of brand-name pharmaceuticals, more than double the share of costs for research and
development. In 2008, it is estimated that (in absolute terms) the total COGS for all pharmaceutical
products could be as much as USD 200 billion (estimated using 27% of estimated global pharmaceutical
sales of USD 735 billion in 2008). In comparison, the total spending in absolute terms on R&D by the
Pharmaceutical Research and Manufacturers of America companies was USD 55 billion in 2007.

Outsourcing drug manufacturing to CDMOs in developing countries may be beneficial for pharma
companies in terms of cost savings. Some estimates prove that the cost of manufacturing drugs with
comparable quality standards in India is ~35–40% lower than in the United States or Europe. This is
primarily attributable to two factors: Lower capital and equipment expenses lead to lower depreciation
and interest costs and lower talent-pool costs by about 50–60% compared with Western counterparts,
including both skilled professionals and senior management. With the 2009–2013 economic downturn,
both large and mid-sized biotechnology companies are recognizing the impact of such cost savings to their
bottom line. Moreover, outsourcing in general can lower the total cost of product ownership by helping
sponsor companies achieve process efficiencies and streamline their supply chains. When companies use
a combination of captive and outsourced facilities, such capacity optimization provides overall savings to
the organization. The increased margins that competitive pricing delivers is a big influencing factor in
most companies’ decisions about outsourcing to developing countries.
Pharma Contract Outsourcing Market Trends

Market Size & Growth Drivers

Based on a report by Alimentiv that aggregates data from multiple sources, the global Contract Research
Organization (CRO) market is estimated to be valued between USD 48.19 billion and USD 82.55 billion
in 2023. This market is projected to grow to a range of USD 70.15 billion to USD 148.76 billion by 2028.
The estimated growth rate for the market from 2023 to 2028 varies across different reports, with
predictions ranging from 6.2% to 12.5%. On average, the global CRO market is expected to be valued at
USD 64.42 billion in 2023, reaching over USD 102.57 billion by 2028, with an average annual growth rate
of 9.75%. Across all research reports, North America is identified as holding a significant portion of the
CRO market, with estimates ranging from 43% to 52%. However, other regions such as Europe and the
Asia-Pacific are experiencing rapid growth, driven by increased clinical research activities, favorable
government initiatives, and the availability of skilled personnel.

The high cost of drug development poses a significant challenge for pharmaceutical and biotechnology
companies, which are under increasing pressure to achieve returns on their investments swiftly. To
mitigate these costs, many companies are outsourcing clinical research activities to CROs. Outsourcing
offers several advantages, including access to skilled professionals, reduced time to market, and cost
savings. Furthermore, the global prevalence of chronic diseases is rising. According to the United Nations'
Food and Agriculture Organization, chronic diseases accounted for approximately 60% of the world’s 56.5
million documented deaths and 46% of the global disease burden. This figure is expected to rise to 70%,
representing 56% of all deaths worldwide by 2030. The increasing prevalence of chronic diseases, along
with heightened awareness of these conditions, has intensified pressure on market players to develop
effective medications. Consequently, these factors are anticipated to significantly drive growth in the
CRO market over the coming years.

CDMO Market Size, Global (2023–2033)

According to a report published by Statista, the Contract Development and Manufacturing Organization
(CDMO) market is expected to reach approximately USD 172.6 billion in 2024, representing a growth rate
of about 7.2% compared to 2023. This upward trend is anticipated to continue, with the market size
projected to reach around USD 322.7 billion by 2033. Other estimates present a more optimistic outlook.
For instance, a public report by Fortune Business Insights estimates that the global CDMO market, valued
at USD 130.8 billion in 2018, is expected to grow to USD 518.0 billion by 2032, exhibiting a compound
annual growth rate (CAGR) of 10.4% during the forecast period. Despite varying projections, all analyses
concur that the North American market remains the most advanced, largely due to the concentration of
major pharmaceutical companies in the region compared to other markets.

The healthcare CDMO market is undergoing rapid expansion, propelled by significant advancements in
the biopharmaceutical sector since the turn of the millennium. The continuous development of
innovative biopharmaceuticals and blockbuster drugs has led to a surge in demand, thereby fueling the
growth of the CDMO business model. CDMOs are tasked with developing and manufacturing production
processes for pharmaceutical companies, a role that mirrors the foundry model in the semiconductor
industry. This market expansion is also driven by the increasing prevalence of chronic and non-
communicable diseases, paralleling the robust growth observed in the CRO market. Additionally, the
ability of CDMOs to streamline the pharmaceutical supply chain and the implementation of a "one-stop-
shop" model for efficient drug development and distribution are expected to further drive the growth of
the CDMO market throughout the forecast period.
How Indian Pharma Contract Outsourcing Market Grows Rapidly

India has experienced significant growth in its pharmaceutical contract outsourcing market in recent
years. According to an estimate by Business Today India, the country’s CDMO market is projected to
reach approximately USD 2.26 billion in 2024 and is expected to grow to USD 4.48 billion by 2029,
reflecting a compound annual growth rate (CAGR) of 14.67% over the next five years. This optimistic
outlook for India's pharmaceutical outsourcing market is largely driven by the new legislation passed by
the US House Select Committee earlier this year, known as the US Biosecure Act. This legislation aims to
prevent Chinese biotechnology firms and manufacturers from accessing US funding and collaborating
with US pharmaceutical companies, thereby safeguarding national security and reducing the risk of
potential threats to the US. Prior to the enactment of this law, China was poised to lead the global CRO
and CDMO industries. It was projected that by the end of 2024, China would capture 13.7% of the global
CRO market share and 8% of the global CDMO market share. However, the passing of the US Biosecure
Act has created a more pessimistic outlook for China’s pharmaceutical industry, exemplified by a 61.5%
decline in the stock value of WuXi Biologics, China's largest CDMO player, year-to-date. This regulatory
shift is expected to drive US CRO and CDMO partnerships toward more US-friendly nations with
affordable yet highly skilled labor forces, such as India and Singapore.

Another key factor contributing to the substantial growth of India’s pharmaceutical contract outsourcing
market is the financial advantage it offers to major pharmaceutical companies partnering with Indian
firms. The cost of conducting clinical trials in India is estimated to be 50–60% lower than in the US or the
European Union. These cost savings are primarily driven by the availability of a large pool of affordable,
knowledgeable local clinical trial professionals. Historically, India faced challenges in cultivating a critical
mass of skilled physician-researchers due to the significant investment required in education and training.
However, during the US recession, one Indian CRO executive capitalized on the opportunity to attract
and hire Indian-born, US-educated physicians and scientists. These professionals, educated in the US,
adhere to the same high standards of care and quality of service as their Western counterparts but are
willing to work for lower compensation. This influx of US-trained experts has established a robust
foundation of expertise in the region, which continues to benefit India's pharmaceutical industry.

Moreover, India’s distinctive demographic characteristics make it an appealing location for Western
pharmaceutical companies to conduct clinical trials. With a genetically diverse population of over 1.4
billion, India offers a large pool of patients with unmet medical needs. This diversity allows for more
efficient patient recruitment, potentially reducing turnover rates and shortening trial durations.
Furthermore, this genetic variability is advantageous for clinical trials aimed at understanding disease
patterns and treatment outcomes across different demographic groups. This is particularly valuable as
pharmaceutical companies increasingly focus on the development of biologics, which tend to have more
varied efficacy and side-effects compared to chemically-derived small molecule drugs that have been on
the market for decades.

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