Thread by @ValueEducator

#CRO vs #CDMO - Which business model is better? 🧬

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While both CROs and CDMOs work on novel drugs and help innovators reduce costs and time to market, there are some key differences between their business models.

1.Type of services provided
Contract Research Organizations (CRO) provide research services and clinical development support to innovative pharma companies to innovative pharma companies in the preclinical and clinical development stages of the drug development process.

They are usually not involved in the commercial manufacturing of the drug.

Contract Development and Manufacturing Organizations (CDMO) provide drug development, scale up and commercial manufacturing services to innovators.

They usually come in at the clinical trial stage and manufacture commercial quantities of the drug if the drug is approved.

2. Annuity vs campaign based revenues
CRO revenues are more annuity type, where they get contracts for at least 1 year. Syngene’s dedicated R&D centers

have contracts for 5 to 7 years. These revenues are earned evenly throughout the year. So the earnings are predictable and smooth.

CDMO revenues are more campaign type. They receive orders whenever the innovator needs the product and most of the revenues from

1 product are earned within 1 or 2 quarters of the year. This makes their revenues more lumpy and unpredictable.

3. Revenue visibility
CROs not only have predictability on the timing of revenues but also have better predictability on the amount of revenues.

The revenue that the CRO will receive throughout the year is fixed at the beginning of the contract and is revisited annually.

CDMOs revenues depend on the quantity supplied. Revenues and margins increase as a drug moves through clinical trials.

If the percentage of drugs moving to the next phase increases, their revenues and margins increase and vice versa. In commercial manufacturing, a particular campaign may require a higher quantity of the drug which will increase revenues and margins

or the innovator could order a smaller quantity, decreasing revenues and margins.

However, CDMOs can be fairly certain that they will continue to receive revenues from a commercialized product until patent expiration.

CRO contracts do not have that visibility and may not be renewed the following year.

4. Costs

The major costs for CROs are salaries paid to scientists. These are mostly fixed in nature and do not fluctuate during the year. It is an IT type model, where the hours worked by a

scientist are billed to the client. So to add more growth, the company needs to hire more scientists which leaves less opportunity for margin expansion.

Majority of the costs for CDMOs are to set up the manufacturing infrastructure and some raw material costs.

Raw material costs fluctuate during the year which can affect margins. However, as the drugs move through the phases and finally get commercialized, the manufacturing costs do not increase proportionately. So CDMOs can expand margins as a result of operating leverage

5. Growth expectations
CROs usually experience linear growth as the scope of services offered to clients expands and contracts are renewed annually.

CDMOs can have exponential growth in revenues as a drug moves from Phase 1 towards commercialization.

When a drug moves to the next phase the quantity supplied goes up manifold.

If the commercialized drug ends up being a blockbuster, the CDMO can experience many years of growth whereas a CRO does not benefit from a blockbuster drug after commercialization.

6. Competition - Can have many CDMO for 1 drug but only 1 CRO

The competition is usually less intense in the CRO industry as an innovator usually hires only 1 CRO for a particular drug.

An innovator usually has multiple CDMOs for a product during clinical trials and commercialization to secure their supply chain. This makes the competition more intense in the CDMO industry

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