CDMO Concept Stock Mining Guide | Investment Opportunities You Must Watch in 2023

The biopharmaceutical industry in 2023 has ushered in a critical turning point, with CDMO stocks performing remarkably. Taiwan’s leading company, Bao Rui, has surged over 118% in the first half of the year, far outperforming the market, sparking market attention to the entire CDMO industry. What exactly is driving this rally? What is the logic behind the recent rise of CDMO stocks? This article will delve into the investment logic of the CDMO industry.

Understanding CDMO: The Next Hotspot in Global Pharmaceutical Contract Manufacturing

Definition and Industry Ecosystem of CDMO

CDMO stands for Contract Development and Manufacturing Organization, which simply means providing outsourcing services for drug development and manufacturing for pharmaceutical and biotech companies. These services cover the entire process from drug formulation development, process optimization, pilot production to commercial manufacturing.

In terms of industry chain structure, upstream supplies pharmaceutical raw materials to fine chemical companies, CDMO companies are responsible for quality verification and further processing, and downstream connects with pharmaceutical and biotech companies. Listed companies involved in CDMO business are collectively referred to as CDMO concept stocks.

Strong Growth Drivers of the Industry

The global CDMO market size is expanding rapidly. According to industry research data, from 2017 to 2021, the global CDMO market grew from USD 39.4 billion to USD 63.2 billion, with a compound annual growth rate (CAGR) of 12.5%. More notably, future projections estimate that by 2025, the market size will reach USD 124.3 billion, and by 2030, it will surpass USD 231 billion, with a CAGR of 18.5%.

This growth is driven by three core factors: first, the increasing R&D activity for innovative drugs, boosting demand for outsourcing services; second, the pandemic has heightened global focus on healthcare capacity; third, aging populations worldwide are steadily increasing investment in pharmaceutical R&D, expected to reach USD 306.8 billion by 2025 and USD 417.7 billion by 2030.

Why Are CDMO Stocks Worth Watching?

Clear Advantages in Business Model

CDMO companies have high industry barriers. Once they sign long-term contracts with major pharmaceutical companies, customer stickiness is strong, and switching costs are high. This characteristic results in relatively stable revenue and strong resistance to economic cycles, unlike other traditional manufacturing industries that are more volatile.

Policy Support in Taiwan

The Taiwanese government has designated CDMO as a strategic industry. Last year, the Vice Premier announced at the biotech industry strategy meeting that the government would lead investments in CDMO companies, aiming for them to become the new “National Pillar” after the electronics industry. This policy tilt has created a favorable environment for the development of Taiwanese CDMO companies.

Taiwan has a solid foundation in manufacturing outsourcing, with concentrated talent, complete technical systems, and rich management experience—advantages that are equally applicable in the CDMO field. Compared to international competitors, Taiwanese CDMO companies are still in early growth stages, with greater growth potential.

High Profit Stability Compared to Peers

The pharmaceutical nature of the industry determines the uniqueness of CDMO—stable customer relationships, high switching costs, and strong bargaining power. This means that profit fluctuations for CDMO companies are relatively small, making them more resilient during economic fluctuations.

Leading Global CDMO Companies

The global CDMO market is dominated by a few leading companies. According to the latest financial data, the top 10 pharmaceutical CDMO companies are Lonza (annual revenue USD 5.8 billion), WuXi AppTec (including biotech subsidiaries), Catalent, Thermo Fisher, and others.

Lonza: Swiss Veteran Giant

Lonza was founded in 1897 and is one of the earliest companies to enter the CDMO field globally. In 2022, revenue was USD 6.523 billion, up 15% year-over-year. Over half of its revenue comes from its top ten clients. The company has a vast global production network, serving over 790 clients, with 115 new CDMO clients added.

Lonza is listed on the Swiss stock market under the ticker LZAGY. Its stock price has shown an overall upward trend since listing, with a slight correction in 2022 due to rate hike pressures, but rebounded over 14% in 2023. As its leading position consolidates, there is further upside potential.

WuXi AppTec and WuXi Biologics: Rise of Chinese Manufacturing

WuXi AppTec was established in 2000, and through business expansion and acquisitions, has become a comprehensive platform offering CRO, CDMO, and other services. WuXi Biologics was founded in 2011, became independent in 2015, and is now a listed company.

In 2022, the combined revenue of WuXi’s CDMO segment reached USD 5.643 billion, up 94.7%. WuXi AppTec contributed RMB 22.945 billion, and WuXi Biologics RMB 15.008 billion. Currently, WuXi’s CDMO revenue is less than USD 1 billion, but it is expected to surpass Lonza in the coming years. Since their IPOs in 2018, both companies’ stock prices have risen steadily, with some pullback after 2021 due to policy and sanctions, but they have begun to stabilize and rebound in 2023.

Catalent: Pioneer in CGT Field

Catalent has a history of 90 years and operates over 40 factories across five continents. It is a leader in the global CGT CDMO sector and was the first to receive FDA approval for commercial gene therapy.

In fiscal year 2022, revenue was USD 4.83 billion, up 21%. The company is listed on the NYSE under the ticker CTLT. Its stock price was rising until September 2021, then adjusted due to performance factors, but showed signs of stabilization and rebound in 2023.

Thermo Fisher: Biotech Giant

Thermo Fisher was formed in 2006 through the merger of Fisher Scientific and Thermo Electron. It is a global leader in life sciences. In 2022, total revenue was USD 44.92 billion, up 15%, with CDMO revenue around USD 5.236 billion.

It is listed on the NYSE under the ticker TMO. Its stock price has increased more than fivefold over the past decade. Although it experienced some volatility after 2022, improved performance is expected to push it to new highs.

Growth Stories of Taiwanese CDMO Stocks

Taiwanese CDMO companies are still in the early stages of industry development, with greater growth potential compared to established international giants. Notable Taiwanese CDMO stocks include:

Bao Rui (Code 6472): Up 118% so far in 2023, with a 267% increase over the past year, making it the most outstanding performer and a market focus.

Yongxin (Code 4726): Up 6% this year, roughly flat over the past year, with relatively stable stock price.

Handa (Code 6620): Up 31% year-to-date, with a 187.5% increase over the past year, driven by performance.

Taikang Biotech (Code 6589): Down 22% this year, but up 1% over the past year, with long-term support.

Taiwanese CDMO companies are still expanding, with accelerating commercialization, strong policy support, and greater growth flexibility compared to global leaders.

Investment Approaches for CDMO Stocks

Direct Purchase of Stocks

Investing through stocks allows for capital appreciation and dividend income. For overseas CDMO stocks, investors can use domestic brokers’ cross-border trust or directly open accounts with foreign brokers.

Funds and ETFs

Besides individual stocks, investing in funds or ETFs that include CDMO concept stocks is also effective. For example, some gene editing technology ETFs allocate over 10% to CDMO companies, enabling industry exposure while diversifying risks.

Portfolio Investment Strategies

It is recommended that investors allocate core holdings to leading CDMO companies, participating in industry growth while reducing individual stock risk. Taiwanese CDMO stocks can serve as growth-oriented allocations, while international giants can provide stable income.

Outlook and Risk Warning

Bright Industry Prospects

Against the backdrop of increasing global aging and rising healthcare awareness, the pharmaceutical market size is expected to grow steadily. By 2025, the global pharmaceutical market is projected to reach USD 1.7188 trillion, and by 2030, USD 2.1148 trillion, with a CAGR of 5.2%.

Based on this, the CDMO industry is expected to accelerate over the next three years, with related companies’ performance driving stock prices higher.

Risks of Intensified Competition

As industry capacity expands, competition will inevitably intensify. Traditional contract manufacturing will face price pressures, and the CDMO industry will not be immune. Therefore, leading companies with scale advantages will be better equipped to resist, while small and medium-sized firms may see profit margins squeezed.

Summary

CDMO concept stocks represent a significant investment opportunity in global biopharmaceutical outsourcing services. With increasing demand for new drug R&D and pharmaceutical cost reduction, the industry is entering a rapid expansion phase. Globally, established companies like Lonza and Catalent maintain stable operations; in Taiwan, emerging players like Bao Rui are growing rapidly.

Looking ahead, aging populations and expanding pharmaceutical markets will continue to benefit the CDMO industry. Investors should prioritize industry leaders with scale advantages and strong customer loyalty to mitigate risks and maximize returns amid intensifying industry competition.