What are key issues shaping the market for bio/pharmaceutical outsourcing in the coming year? DCAT Value Chain Insights takes an inside look into the market drivers, trends, and key activity shaping the CDMO/CMO market.

Overall improved business optimism
In evaluating the prospects of the CDMO/CMO market, one measure is to evaluate the overall business climate and related impacts on the bio/pharma industry as a whole and to the CDMO/CMO sector specifically. One barometer of business health is the Business Roundtable CEO Economic Outlook Survey, which provides a forward-looking view of the economy by Business Roundtable member chief executive officers (CEOs), and the outlook is trending upward in 2025. The association is composed of more than 200 CEOs of US-based companies and is designed to provide a picture of the future direction of the economy by asking CEOs to report their company’s expectations for sales and plans for capital spending and hiring over the next six months. The data are used to create the Business Roundtable CEO Economic Outlook Index and sub-indices for sales, capital expenditures, and hiring. These indices are diffusion indices that range between -50 and 150 — where readings at 50 or above indicate economic expansion, and readings below 50 indicate economic contraction. In the fourth quarter 2024, the Business Roundtable CEO Economic Outlook Index rose 12 points from the third quarter 2024 to 91, the highest level in over two years and well above its historic average of 83. The increase is the result of CEOs reporting higher numbers across all three sub-indices—sales, capital expenditures, and hiring. The survey’s three sub-indices were as follows: plans for hiring increased 12 points to a value of 67; plans for capital investment increased 10 points to a value of 83; and expectations for sales increased 13 points to a value of 123.

Bio/pharma industry variables
For the bio/pharmaceutical industry as a whole, key variables for 2025 relate to a shifting policy environment in the US with a new Administration coming into play when President-elect Donald Trump officially takes office later this month (January 20, 2025) and a new Congress takes the helm. Key policy moves that may be on the table are a lowering of corporate tax rates under certain conditions and a potential rollback of the drug-pricing provisions in the Inflation Reduction Act, which would support growth, as well as potential changes in trade policy, in the forms of tariffs, which would cause potential cost implications depending on the type and degree of tariffs. Although specifics for tariffs under a new Administration are still to be determined, some proposals that have been discussed are to implement a universal minimum tariff rate of 10% to 20% on all US imports, a separate tariff of up to 60% on imports from China, as well as potential additional country-specific tariffs. These potential inbound import tariffs would impact costs for products coming into the US, including active pharmaceutical ingredients, intermediates, other pharma ingredients and inputs, and finished pharmaceuticals and could have further implications for supply chain and manufacturing operations.

Outlook for deal-making and financing into bio/pharma
Other variables to watch for in 2025 is how the overall business environment will evolve and the impact it will have on deal-making, capital markets, and private financing overall and in the bio/pharma industry specifically. How a confluence of factors—interest rates, inflation, and policy moves by a new Administration in the US—will play out will be important in determining the business environment for mergers and acquisitions and financing, depending on how interest rates, inflationary pressures, and other business policies evolve in 2025.

Early indications on how interest rates will fare in 2025 has a mixed outlook. At  its meeting in mid-December (December 2024), the Federal Open Market Committee (FOMC)—the US Federal Reserve Board’s policymaking committee—voted to lower the federal funds rate — the interest rate banks charge each other for short-term loans — to a range of 4.25% to 4.5%, its third consecutive rate cut in 2024. However, the FOMC at its December meeting signaled fewer rate cuts in 2025 with a median estimate for the federal-funds rate target range at the end of this year (2025) to 3.75% to 4% due to some continued inflationary pressures, moderate economic growth, and other policy variables.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” said Federal Reserve Board Chairman Jerome Powell, in a December 18, 2024, press conference following the meeting of the FOMC. GDP (gross domestic product) rose at an annual rate of 2.8% in the third quarter of 2024, about the same pace as in the second quarter of 2024, he said. “Inflation has eased significantly over the past two years but remains somewhat elevated relative to our [the Federal Reserve Board’s] 2 percent longer-run goal,.” he said. The Fed estimates for the consumer price index and other data indicate that prices for total personal consumption expenditures (PCE) rose 2.5% over the 12 months ending in November 2024 and that, excluding food and energy categories, core PCE prices rose 2.8%. The median projection in the Fed’s Summary of Economic Projections for total PCE inflation is 2.4% in 2024 and 2.5% in 2025.  

Interest rates and access to capital is an important consideration for the bio/pharma industry as a whole, particularly for emerging bio/pharma companies, an important customer base for CDMOs/CMOs. One of the key variables for the CDMO/CMO sector is to what extent will the biotech sector recover in 2025 after showing some signs of improvement in 2024. Though venture capital funding improved in 2024, it was marked by several high-profile financing deals, with smaller biotech companies still facing a financing crunch and initial public offerings showing some improvement and modestly increasing in 2024 but below recent levels in 2018-2022. Key to watch for 2025 will be whether the biotech sector, particularly smaller companies, will be able to secure needed funding to advance their drug candidates and products.