CDMO Stocks: The Picks-and-Shovels Play on Biotech Innovation

The Picks-and-Shovels Thesis: Why CDMOs Win Regardless of Which Drug Succeeds

Biotech investing is brutal. Roughly 90% of drugs that enter clinical trials never reach patients. A single Phase III failure can erase billions in market capitalization overnight. Even when drugs succeed, commercial outcomes depend on pricing negotiations, payer coverage, physician adoption, and competitive dynamics that are nearly impossible to predict with confidence. The expected value of any individual biotech bet is, for most investors, negative.

CDMOs offer a fundamentally different risk profile. A contract manufacturer does not bear the risk of whether a drug works. It gets paid to make the drug — for Phase I trials, Phase II trials, Phase III trials, and commercial production. If the drug fails, the CDMO keeps the development and manufacturing revenue already earned and moves on to the next program. If the drug succeeds, the CDMO captures recurring commercial manufacturing revenue for years or decades. The economics are asymmetric in the CDMO's favor: downside is limited to normal business cyclicality, while upside scales with the aggregate success of the pharmaceutical industry.

This is not a new model. The California Gold Rush made its most reliable fortunes for Levi Strauss and the suppliers of picks and shovels, not for the miners themselves. In semiconductors, we have written about how equipment makers like ASML and Lam Research profit regardless of which chip design wins. The CDMO model is the pharmaceutical equivalent — and the structural tailwinds are, if anything, stronger.

The global CDMO market exceeded $250 billion in 2025, growing at a compound annual rate of 7–9%. That growth rate understates the opportunity in specific subsegments. Biologics CDMO is growing at 10–12%. ADC manufacturing is growing at 15–20%. Cell and gene therapy CDMO is growing at 25%+. The common thread is complexity: as drug modalities become more sophisticated, the manufacturing know-how required to produce them at scale becomes the bottleneck, and CDMOs are the companies that have spent decades building that know-how.

The Biologics Manufacturing Boom

Biologics — large-molecule drugs produced in living cells rather than synthesized chemically — now represent over 40% of global pharmaceutical revenue and are growing roughly 2x faster than small molecules. The top 10 drugs by global sales in 2025 include six biologics. Every major therapeutic area, from oncology to immunology to endocrinology, is shifting toward biologic and biosimilar therapies.

Manufacturing a biologic is profoundly different from manufacturing a small molecule pill. A monoclonal antibody, for example, is produced by genetically engineered Chinese hamster ovary (CHO) cells grown in stainless steel or single-use bioreactors, then purified through a multi-step process involving chromatography, filtration, and formulation. The manufacturing process itself is essentially the product — changing any parameter, no matter how minor, can alter the drug's structure, potency, and safety. This is why the FDA treats manufacturing process changes for biologics with extraordinary scrutiny.

The capital intensity is staggering. A large-scale mammalian biologics facility costs $500 million to $2 billion to build and takes 3–5 years from groundbreaking to GMP-ready production. The specialized workforce — process scientists, quality engineers, regulatory specialists — takes years to train and is in chronically short supply. For a mid-cap pharma company with one or two biologic assets, the economics of building a dedicated manufacturing facility simply do not work. Outsourcing to a CDMO is not a preference — it is a necessity.

The GLP-1 Capacity Crunch

The GLP-1 receptor agonist class has become the single largest demand driver for pharmaceutical manufacturing capacity in 2025–2026. Novo Nordisk's semaglutide (Ozempic, Wegovy) and Eli Lilly's tirzepatide (Mounjaro, Zepbound) are generating combined annual revenue approaching $60 billion, with analyst projections of $100 billion+ by 2030 as obesity and diabetes indications expand. The manufacturing challenge is immense: both companies have announced over $30 billion in cumulative manufacturing capex, yet supply still cannot meet demand. Patients face multi-month wait times. Compounding pharmacies have stepped in to fill the gap — a legally contested workaround that underscores just how severe the shortage has become.

This is where CDMOs benefit directly. Novo Holdings' $16.5 billion acquisition of Catalent in 2024 was fundamentally a capacity play — Novo Nordisk needed Catalent's fill-finish capabilities to supplement its own manufacturing network. Samsung Biologics has signed multiple large-scale contracts with GLP-1 developers. The ripple effects extend beyond peptide manufacturing: GLP-1 production competes for the same sterile fill-finish lines, lyophilization capacity, and quality control laboratory time that other biologics need, tightening capacity across the entire CDMO industry.

ADCs and Cell Therapy: The Complexity Premium

Antibody-Drug Conjugates

Antibody-drug conjugates represent the fastest-growing segment in oncology drug development, and they are a manufacturing nightmare. An ADC consists of three components: a monoclonal antibody (the targeting vehicle), a cytotoxic payload (the cell-killing agent), and a chemical linker connecting the two. Manufacturing an ADC requires producing the antibody in a biologics facility, synthesizing the payload in a potent compound handling facility (often at nanogram toxicity levels), and conjugating them together in a specialized suite — three distinct, highly regulated manufacturing processes combined into a single product.

The ADC pipeline has exploded. Over 200 ADCs are currently in clinical development, up from roughly 60 in 2020. AstraZeneca's Enhertu, Pfizer's Padcev, and Gilead's Trodelvy have demonstrated that ADCs can be blockbuster drugs. But the number of CDMOs capable of end-to-end ADC manufacturing is remarkably small. Lonza, through its acquisition of Synaffix linker-payload technology, is one of the few CDMOs offering integrated antibody, payload, and conjugation capabilities. This scarcity gives qualified ADC CDMOs extraordinary pricing power.

Cell and Gene Therapy CDMO Shortage

Cell and gene therapy manufacturing is arguably the most capacity-constrained subsegment in the entire CDMO industry. Approved therapies like Novartis's Kymriah and Bristol-Myers Squibb's Breyanzi (CAR-T therapies) require patient-specific manufacturing — each batch is made from a single patient's cells, processed in an isolated cleanroom, and shipped back to the treatment center within days. The vein-to-vein time, manufacturing yield, and quality consistency challenges are immense.

Over 3,000 cell and gene therapy clinical trials are active globally, and fewer than 20 CDMOs worldwide have the validated capabilities and regulatory track record to manufacture these products at clinical or commercial scale. Lonza, Thermo Fisher (through its viral vector and cell therapy services division), and a handful of specialized players like Oxford Biomedica and Catalent (now under Novo Holdings) represent the bulk of available capacity. The shortage is so acute that many cell and gene therapy developers cite manufacturing access — not clinical data — as the primary constraint on their development timelines.

The Major Players: Who Owns the Manufacturing Bottleneck

Lonza (LONN) — The Quality Standard

Lonza, headquartered in Basel, Switzerland, is widely regarded as the gold standard in biologics CDMO. The company's mammalian cell culture manufacturing network spans facilities in Visp (Switzerland), Portsmouth (New Hampshire), Slough (UK), Guangzhou (China), and Vacaville (California, acquired from Roche). Lonza's total installed bioreactor capacity exceeds 300,000 liters, and the company has invested heavily in ADC manufacturing, capsid and viral vector production for gene therapies, and mRNA capabilities.

Lonza's competitive advantage is depth, not just scale. The company has manufactured commercial biologics for decades — its client list includes some of the most commercially successful monoclonal antibodies in history. This track record matters enormously in an industry where regulatory trust and manufacturing reliability are existential. Pharma companies choosing a CDMO for a late-stage biologic are not price-shopping — they are selecting a partner they trust to not disrupt supply to patients. Lonza commands a premium because its reliability is proven.

Lonza trades at approximately 28–32x forward EBITDA, a premium to the CDMO peer group that reflects its asset quality and visibility. Revenue is guided toward mid-single-digit growth in the near term as the company digests capacity additions, with acceleration expected in 2027–2028 as new facilities ramp. For investors who understand that CDMO value compounds over long cycles, Lonza is the highest-conviction hold in the space.

Samsung Biologics (207940.KS) — The Scale Disruptor

Samsung Biologics has executed one of the most aggressive capacity buildouts in CDMO history. The company's Songdo campus in South Korea houses four operational plants with a combined capacity of 604,000 liters, and Plant 5 is under construction to bring total capacity to 784,000 liters by late 2026. When completed, Songdo will be the largest single-site biologics manufacturing campus on the planet.

Samsung's strategy is straightforward: win on scale, speed, and capital efficiency. Backed by the Samsung Group's balance sheet, the company can build new capacity faster and at lower cost per liter than Western competitors. Samsung's client roster has expanded from primarily biosimilar manufacturers to include major innovator pharma companies seeking large-scale commercial manufacturing capacity. The GLP-1 capacity crunch has been a tailwind, as drugmakers seek any available large-scale biologics capacity.

The risk with Samsung Biologics is margin sustainability. Aggressive capacity additions create utilization risk during buildout phases, and Samsung's willingness to compete on price has pressured industry-wide CDMO pricing in large-scale mammalian manufacturing. Samsung trades at roughly 35–40x forward earnings, pricing in significant growth but also assuming sustained high utilization of its expanding capacity base.

Thermo Fisher Scientific (TMO) — The Diversified Pharma Services Giant

Thermo Fisher is not a pure-play CDMO, but its Pharma Services segment — bolstered by the $17 billion acquisition of Patheon in 2017 and subsequent capacity investments — generates approximately $8–9 billion in annual CDMO-related revenue. The portfolio spans sterile and oral solid dose manufacturing, biologics drug substance, viral vectors for gene therapy, and clinical trial supply services.

The investment case for TMO as a CDMO play is about risk-adjusted exposure. Thermo Fisher's CDMO business is embedded within a $45 billion revenue company that also sells lab instruments, reagents, diagnostics, and life science research tools. The CDMO segment benefits from Thermo Fisher's installed base of 400,000+ customer relationships, its global logistics network, and its balance sheet capacity for bolt-on acquisitions. At roughly 25x forward earnings, TMO offers CDMO growth exposure with meaningfully lower volatility than pure-play peers.

The WuXi Question: Regulatory Risk Meets Pricing Disruption

WuXi AppTec and WuXi Biologics, both headquartered in China, have been among the fastest-growing CDMOs globally, offering integrated drug development and manufacturing services at price points significantly below Western competitors. WuXi Biologics, in particular, built over 260,000 liters of mammalian bioreactor capacity and captured market share aggressively from 2018 to 2023.

The US BIOSECURE Act, introduced in 2024 and advancing through Congress, threatens to restrict US government-funded entities from contracting with designated Chinese biotechnology companies. While the act's final scope remains uncertain, WuXi AppTec and WuXi Biologics are explicitly named in current legislative drafts. The impact is already visible: multiple US and European pharma companies have publicly stated they are diversifying manufacturing away from WuXi to mitigate regulatory risk, even before the legislation is finalized.

For non-Chinese CDMOs, the BIOSECURE Act is a double-edged tailwind. On one hand, it accelerates client migration from WuXi to Lonza, Samsung Biologics, Thermo Fisher, and other Western or allied-nation CDMOs. On the other, WuXi's pricing pressure had compressed industry margins in certain segments, and the reduction of WuXi's market access could allow Western CDMOs to reprice contracts at higher margins. We estimate that WuXi's potential exit from the US-adjacent market could redirect $3–5 billion in annual CDMO revenue toward non-Chinese competitors over a 3–5 year period.

The Structural Moat: Recurring Revenue and High Switching Costs

What makes CDMOs attractive as long-term investments — beyond the growth tailwinds — is the quality of the revenue. CDMO contracts are not one-time transactions. They are multi-year, often multi-decade relationships that generate recurring manufacturing revenue with built-in price escalators and volume commitments.

The switching cost dynamic deserves emphasis. In most industries, customers can change suppliers with moderate friction. In biologics manufacturing, changing your CDMO for a commercial product is akin to rebuilding the product from scratch. The manufacturing process — the specific cell line, media composition, bioreactor operating parameters, purification sequence, and formulation conditions — is filed with regulators as part of the drug's marketing authorization. Changing any of these parameters requires a supplemental filing (a prior approval supplement with the FDA), new comparability studies demonstrating that the drug produced at the new site is equivalent to the original, and typically 18–36 months of technology transfer and validation work. During this entire period, the existing CDMO continues manufacturing and generating revenue.

This creates a powerful flywheel. As a CDMO accumulates more commercial manufacturing programs, its recurring revenue base grows, its capacity utilization stabilizes, and its bargaining position strengthens. Lonza, for example, has disclosed that approximately 70% of its biologics revenue comes from late-stage clinical and commercial manufacturing programs — the stickiest, highest-margin work in the CDMO business. This revenue visibility is qualitatively different from early-stage biotech services, which are inherently project-based and dependent on funding cycles.

The Bear Case: Overcapacity, Funding Cycles, and Pricing Pressure

We hold a constructive view on the CDMO sector, but intellectual honesty requires addressing the material risks head-on.

Overcapacity Risk

The CDMO industry has a history of building too much capacity during boom periods, then suffering through years of underutilization and margin compression. The COVID-era mRNA and vaccine manufacturing surge prompted massive capacity additions across the industry. As vaccine demand normalized in 2023–2024, several CDMOs found themselves with empty production suites and fixed costs that could not be cut quickly enough. Samsung Biologics' aggressive expansion plan and Lonza's Vacaville acquisition add meaningful capacity that must be absorbed by demand growth. If the biologics pipeline disappoints or drug approvals slow, utilization rates could fall below the 75–80% threshold needed to support current margins.

Biotech Funding Cyclicality

CDMO order books are directly linked to biotech funding. When venture capital flows freely and biotech IPO windows are open, early-stage companies fund clinical programs that generate CDMO orders. When funding contracts — as it did sharply in 2022–2023 — biotechs cut or delay manufacturing programs, and CDMO order intake declines. The 2022–2023 biotech funding downturn was the worst in a decade, and its effects rippled through CDMO order books with a 6–12 month lag. While funding conditions have improved in 2025–2026, the sector remains vulnerable to the next downturn.

WuXi Pricing Pressure and the Cost Arbitrage

WuXi Biologics' entry into the global CDMO market compressed pricing across large-scale mammalian manufacturing by an estimated 15–25% between 2018 and 2023. Even with BIOSECURE Act headwinds, WuXi remains a formidable competitor in markets outside the US — particularly in China, Southeast Asia, and parts of Europe where US regulatory restrictions do not apply. If WuXi retains its non-US client base while being shut out of US-adjacent contracts, the result could be a bifurcated market: premium pricing for Western CDMOs serving US-linked programs, and aggressive pricing from WuXi for everything else. This bifurcation benefits Western CDMOs in the near term but could limit the industry's ability to raise prices uniformly.

Quality and Regulatory Execution

A single FDA warning letter or manufacturing deviation can shutter a production line for months, destroy client trust, and take years to remediate. Emergent BioSolutions' Bayview facility — which was contracted for COVID vaccine manufacturing — experienced quality failures that led to the destruction of millions of vaccine doses and a cascade of regulatory, financial, and reputational consequences. CDMO investors are implicitly betting on sustained manufacturing quality across dozens of facilities and hundreds of products. This risk is impossible to model precisely but is ever-present.

Portfolio Construction: How to Position for the CDMO Supercycle

We recommend a tiered approach to CDMO exposure, calibrated to risk tolerance and portfolio construction objectives.

For investors seeking the highest-quality pure-play exposure, Lonza is the core holding. Its manufacturing asset base, regulatory track record, and exposure to the fastest-growing CDMO subsegments (ADCs, cell and gene therapy) justify a premium valuation. Position sizing of 2–4% of a growth-oriented portfolio is appropriate given the single-stock concentration and Swiss listing considerations.

For investors who prefer diversified exposure with lower volatility, Thermo Fisher offers CDMO growth embedded within a broader life sciences platform. TMO's CDMO segment benefits from the same structural tailwinds, but the stock's risk profile is moderated by its instrument, reagent, and diagnostics businesses. TMO is also the most liquid name in the space for US-based investors and is a component of the S&P 500.

Samsung Biologics is the highest-growth, highest-risk option. The scale buildout is impressive, but utilization risk during the ramp and Korean market access considerations make it more suitable for investors with direct emerging market exposure capabilities and higher risk tolerance. For those following the broader biotech and drug discovery investment landscape, Samsung provides a differentiated manufacturing angle.

We would avoid WuXi exposure until BIOSECURE Act clarity emerges. The discount to Western peers (15–18x forward P/E versus 25–35x) reflects real regulatory risk that could result in permanent value impairment if the legislation passes in its current form. The potential upside if BIOSECURE stalls is meaningful, but this is a binary political bet dressed up as a fundamental investment — and we prefer to let others take that gamble.

The Long View: CDMOs as Pharmaceutical Infrastructure

The secular trend toward outsourced manufacturing in pharma is not slowing down. The percentage of drug manufacturing outsourced to CDMOs has risen from approximately 25% in 2015 to an estimated 35% in 2025, and industry projections suggest 45–50% by 2030. The drivers are structural: biologics and advanced therapies are too complex for most companies to manufacture in-house, regulatory requirements are intensifying, and the capital efficiency argument for outsourcing is overwhelming for all but the largest pharma companies.

In many ways, the CDMO industry today resembles the semiconductor foundry industry 15 years ago. TSMC proved that outsourced chip manufacturing was not just viable but superior for most chip designers. Today, the vast majority of semiconductor companies are “fabless” — they design chips but outsource all manufacturing. We believe the pharmaceutical industry is on a similar trajectory, moving toward a “lab-less” model where drug companies focus on discovery and clinical development while CDMOs handle manufacturing. If this thesis plays out, today's leading CDMOs will be the TSMCs of pharma — essential infrastructure that captures a growing share of the industry's value chain.

The picks-and-shovels model has worked across industries and across centuries. CDMOs are the latest expression of a timeless investment principle: when you cannot predict which prospector will strike gold, sell them the tools.

Frequently Asked Questions