The pharmaceutical manufacturing landscape is undergoing a profound shift, with contract development and manufacturing organizations (CDMOs) evolving from simple capacity providers to strategic partners. This transformation comes as pharmaceutical companies face intense pressure to reduce costs and accelerate time to market while navigating complex regulatory requirements and supply chain vulnerabilities exposed by the COVID-19 pandemic — and, more recently, the potential application of tariffs to the pharmaceutical industry.
Against a backdrop of shifting R&D priorities at major pharmaceutical companies and a sustained, challenging, and more concentrated fundraising environment at biotech startups, innovative CDMO-partnership models are emerging. Private equity firms have become dominant players in the CDMO sector, often enabling CDMOs to take on more risk in the hopes of better long-term returns. Simultaneously, CDMOs are making substantial capital investments to enhance manufacturing capabilities to meet growing demand, with particular emphasis on evolving modalities, specialized services like fill and finish operations, and end-to-end manufacturing.
This article examines five key trends reshaping these relationships and explores the legal frameworks needed to support them in a maturing ecosystem.
Emerging Trends in CDMO Partnerships
1. Onshoring and Friendshoring
The pharmaceutical manufacturing landscape is witnessing a significant shift toward onshoring and friendshoring as companies reconsider their global supply chain strategies. The prospect of the BIOSECURE Act is a major catalyst, pushing manufacturing away from certain Chinese CDMOs and toward facilities in the US and allied nations.
More recently, the potential application of tariffs to the pharmaceutical industry has led companies to also consider and seek ways to minimize the cross-border aspects of supply chains. While proposed tariff amounts on pharmaceutical products have not yet been disclosed, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce has initiated a national security investigation regarding imports of pharmaceuticals, pharmaceutical ingredients, and their derivative products. This includes both finished generic and nongeneric drug products, medical countermeasures, critical inputs such as active pharmaceutical ingredients and key starting materials, and derivative products of those items. The BIS is currently seeking comments relevant to the investigation.
COVID-19 exposed critical weaknesses in pharmaceutical supply chains, accelerating the push toward localized production as companies recognize that geographic concentration creates systemic risks. The industry is developing strategic sister manufacturing facilities across global regions, balancing localization needs with global reach while creating more resilient supply chains. The increased emphasis on localized production may also minimize the impact of any tariffs levied on the pharmaceutical industry, although the impact of tariffs may still be substantial for companies relying on a single source for production of the relevant active pharmaceutical ingredient.
Accordingly, global CDMO platforms with facilities strategically positioned across North America, Europe, and Asia are becoming increasingly attractive to sponsors seeking both regional compliance and manufacturing redundancy.
2. Lower Up-Front Costs With Contingent Success Payments
The CDMO-financing model is evolving significantly, with private equity-backed companies leading the way in adopting more flexible payment structures. By taking greater up-front risk for more favorable back-end economics, these partnerships provide pharmaceutical companies financial flexibility (of particular benefit to early-stage companies given the current fundraising environment) while CDMOs secure long-term commitment and potentially higher returns. Performance-based payments are typically tied to specific milestones or achievements related to batch volume, manufacturing speed, production efficiency, or scalability.
The market may see innovative royalty models emerge, with tiered product royalties tied to successfully developed and manufactured products. These royalty structures align priorities between pharmaceutical companies and CDMOs and create long-term value for CDMOs. Buyers acquiring these organizations gain not only secured customers but also established royalty streams, enhancing their overall valuation and investment appeal.
This will change the financial modeling involved in pricing acquisitions, given that buyers will need to value both the operating business (e.g., based on revenue or EBITDA multiples) and the value of potential future royalty streams (e.g., applying discounted cash flow methodologies taking into account regulatory and commercialization uncertainty), as well as the diligence involved in CDMO acquisitions.
3. Capital Expenditures for Dedicated Build-Outs
CDMOs are expanding their manufacturing capacity to meet surging industry demand but with an innovative twist to traditional facility investments. They are increasingly passing capital expenditure costs to customer partners, creating a shared investment model that reduces risks for CDMOs while ensuring dedicated capacity and bespoke manufacturing capabilities for clients.
This approach guarantees manufacturing priority and operational efficiency, particularly crucial to time-sensitive development programs. The capital sharing typically includes favorable economic terms like production credits or discounted pricing, representing deeper partnerships that align incentives, enhance customer retention, and create sustained value.
Finally, by retaining programs from early development through commercial manufacturing, CDMOs justify larger capital investments and avoid the cost and risk of transferring technology to a different manufacturer later in the process.
4. More Emphasis on Process Development
Big Pharma is trimming internal R&D budgets, and early-stage biotech funding is becoming more selective and concentrated. This is creating a vacuum that CDMOs are filling with well-understood outsourcing advantages. Given that CDMOs can provide established field-specific expertise and efficiency capabilities to customers, the outsourcing of R&D functions to CDMO partners offers Big Pharma lower-risk exposure than maintaining in-house capabilities or partnering these tasks with peers.
Forward-thinking CDMOs are capitalizing on this trend by offering proprietary technologies for product and process development, creating opportunities for additional revenue streams through royalties and contingent payments, and providing pharmaceutical partners with valuable innovation resources they no longer maintain internally.
This expanded role represents a significant evolution for the industry, with CDMOs moving beyond mere execution to become active participants in early-stage innovation and drug development strategy, which further reinforces the evolving payment structures described above.
5. Fast-Track Collaboration Models
The competitive CDMO landscape has made speed and efficiency in project initiation decisive advantages. While complex partnering arrangements can create negotiation delays, companies are implementing streamlined preliminary agreements — authorizations to proceed and limited master service agreements — that enable work to begin before finalizing comprehensive contracts as well as accelerate revenue.
These early-stage arrangements provide multiple strategic benefits; they establish the customer relationship early, create flexible payment timelines that benefit both parties, and open opportunities for alternative pricing models.
Additionally, these preliminary agreements allow both sponsors and CDMOs to test-drive their partnership, evaluating operational compatibility and communication effectiveness before committing to longer-term arrangements. The result is faster project initiation while still accommodating the complex partnering structures that characterize modern CDMO relationships.
Legal Frameworks for Evolving Partnerships
As CDMO partnerships grow more sophisticated, effective legal frameworks must address several key considerations. Ownership of intellectual property (IP) will need to be clearly delineated as CDMOs participate in critical product development work and, in many cases, contribute their own proprietary technology to product development.
Contractual agreements should include comprehensive provisions for contingent payments and capital sharing that address success metrics, equipment ownership rights, and capacity guarantees. Companies with geographically dispersed operations must develop compliance frameworks that account for multiple regulatory environments. In addition, contractual agreements including royalty-like payment models must address complex legal provisions more typically found in license and collaboration agreements.
Fast-track initiation processes demand balanced legal protections that maintain confidentiality and define precontract IP rights without impeding operational momentum. For pharmaceutical companies, early involvement of specialized legal expertise helps create frameworks that protect core assets while facilitating the flexibility necessary for successful collaboration.
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These CDMO trends suggest an evolution toward more collaborative business relationships in pharmaceutical manufacturing and the increasing importance of CDMOs in the pharmaceutical value creation effort. This gradual shift will create opportunities for each side to align incentives more effectively, potentially improving efficiency while distributing both challenges and opportunities more evenly throughout the drug development and manufacturing process.
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