CDMO sector to remain largely unaffected by US tariffs, finds Morningstar DBRS
Contract development and manufacturing organizations are facing some potential macroeconomic and industry-specific headwinds. However, the outlook for CDMOs is generally optimistic, according to a report released last week by credit ratings agency Morningstar DBRS.
In the near term, the credit ratings agency expects the CDMO sector to “remain largely unaffected” by U.S. tariffs, as credit quality is supported by good visibility from contractual income with price and volume protections, and the sector is “generally resilient to macroeconomic vagaries.”
Overall, Morningstar DBRS said CDMOs with significant geographical presence in the U.S. “could be in an advantageous position to obtain new contracts.”
At the same time, Morningstar DBRS warned that “idiosyncratic factors relating to size and scale, specialty of service offerings, and geographic diversification could leave some issuers more exposed than others if U.S. tariffs remain elevated for a longer period without relief.”
The report concluded that “if tariffs persist against ‘outside’ products, the capacity of U.S. companies to cope with all U.S. demand and to increase their own capabilities may begin to suffer.”
The good news for CDMOs is the “essentiality” of services CDMOs provide to the biopharma industry, according to Morningstar DBRS, which notes that while the active pharmaceutical ingredient (API) segment has been the largest historically and together with finished dosage form (FDF) generates the highest growth, the biologics market has grown in importance in recent years.
The report said there is “mounting interest” in biologics and advance therapies as biopharma companies show a “growing preference to outsource certain services so they can improve resources, timing, and cost management.”
CDMO challenges
The CDMO sector is not without its own challenges, including the need for highly skilled labor such as qualified scientists and specialized project managers, as well “staff churn” and increasing labor costs which can impact operating efficiency, according to Morningstar DBRS.
In its report, the credit ratings agency called out margin pressure in the current CDMO market — particularly the API market— which is contributing to a shift towards higher-value services and procedures such as highly potent APIs (HPAPI) and antibody-drug conjugates (ADC), which ultimately entails a higher degree of specialization.
“CDMOs may follow organic or inorganic growth strategies when considering to either enhance their services on specific products, with the aim of becoming a ‘one-stop shop’ for a specific dosage form, or to diversify their lines of business and potentially reach more customers,” the report said.
Ultimately, CDMO growth is reliant on expansion in biopharma research and development investment, with most growth for CDMOs coming from new drugs, Morningstar DBRS concluded.
“If the pharmaceutical sector experiences a slowdown phase, pipeline figures might shrink, driving a slowdown in revenue growth for outsourcing firms,” the credit ratings agency said. “In such circumstances, we believe Asia Pacific CDMOs may become more attractive because of their cost efficiencies, which could also create credit headwinds for non-APAC competitors.”
