Overcoming the Structural Challenges of Japanese CDMOs Through the Use of AI—Quick-Win Reforms Without Relying on Massive Investments | Insights

As the CDMO (Contract Development and Manufacturing Organization) market for pharmaceuticals continues to expand, many Japanese CDMOs face challenges in improving profit-generating capability and capital efficiency relative to revenue growth. In our previous insight, we demonstrated that data utilization grounded in industry structure is essential for Japanese CDMOs to achieve sustainable business growth. In this article, we further develop this perspective by structurally reexamining the growth process of the CDMO business itself. As business scales, why do operations become increasingly complex, and why does profit generation lag behind revenue growth? We clarify the distortions rooted in the unique business structure of CDMOs that underlie these issues.

As the global CDMO market expands, Japanese CDMOs continue to show a high dependence on the domestic market and on low- and mid-molecule segments, while expansion into overseas markets and high-growth segments such as biologics and advanced modalities has been relatively slow. Behind this are structural challenges unique to the CDMO business, including compliance with GMP (regulations that strictly define pharmaceutical manufacturing and quality control), constraints inherent to contract manufacturing, and the increasing sophistication of manufacturing and quality management, which make CDMO operations prone to being run as a “separate world (business silo)” within organizations. As a result, management assets that could otherwise be leveraged—such as purchasing power, DX platforms, and know-how in operational standardization—are not fully utilized, and complexity and inefficiency accumulate as the business grows.

In this article, after organizing these structural challenges that arise during the growth process of the CDMO business, we present low-investment, quick-win improvement approaches that leverage technologies such as generative AI. Even without relying on large-scale investments or organizational restructuring, it is possible to balance growth with improvements in capital efficiency and productivity by enhancing the decision-making foundation. This is precisely where the next source of competitiveness for CDMO businesses lies.

About the Author

Shingo Nakamura

Principal
Hiromu Yoshiura

Manager

The Expanding CDMO Market and the Current Position of Japanese Companies

In our previous insight, we organized the structural changes and competitive environment surrounding the CDMO market and emphasized that management sophistication through data utilization is indispensable for Japanese CDMOs to realize sustainable growth.

Reference Insight: Growth Strategies for CMO/CDMO Businesses of Materials and Chemical Manufacturers: The Key to Sustainable Growth

In this chapter, we once again take an overview of the underlying market environment and provide a more detailed organization of growth potential by market segment and modality.

In recent years, the pharmaceutical CDMO market has been expanding rapidly on a global scale. In addition to low- and mid-molecule pharmaceuticals, the rise of advanced modalities such as antibody drugs, nucleic acids and peptides, as well as mRNA and gene and cell therapies, has steadily increased the importance of outsourcing for pharmaceutical companies. Particularly in Europe and the United States, a model in which research and development through commercial manufacturing is divided among external partners has become established, and CDMOs are increasingly becoming a core presence supporting the competitiveness of the pharmaceutical industry.

In response to these environmental changes, Japanese chemical and materials companies are also increasingly positioning the CDMO business as a medium- to long-term growth domain. In fact, many companies have announced investment plans looking toward 2030, including facility expansion, construction of new buildings, investments in human resources, and initiatives to address biologics and new modalities. The CDMO business is no longer viewed as merely complementary, but is recognized as one of the pillars supporting future business portfolios.

On the other hand, when taking a bird’s-eye view of the business portfolios of Japanese CDMOs, it is undeniable that dependence on the domestic market—particularly the low- and mid-molecule segments—remains high (Figure 1). Looking at market growth forecasts, much of the expansion toward 2030 is expected to be concentrated in overseas markets, biologics, and advanced modality segments, while the domestic market is expected to remain relatively low growth (Figure 2). This indicates that expansion into growth markets will be a key theme for Japanese CDMOs to achieve significant growth going forward.

Nevertheless, this situation is not merely a superficial issue of “not having sufficiently entered the markets they should.” More importantly, beyond market selection itself, the critical question is what kinds of structural challenges arise in the process of growing the CDMO business, and to what extent companies are able to factor these into their strategies when making their next moves.

In the next chapter, based on this perspective, we organize the general growth process of the CDMO business and examine the structural challenges that Japanese companies are particularly prone to facing during this process.

Source: Created based on Yano Research Institute, “Outlook and Strategy for the Pharmaceutical Contract Manufacturing Market, 2025 Edition” (2025), and information from company IR reports

Source: Created based on market research reports from Yano Research Institute, Grand View Research, and others

Growth Process of the CDMO Business and Structural Challenges Commonly Faced by Japanese Companies

Many CMO/CDMO companies that have expanded into overseas markets or biologics yet have not achieved the expected results are confronting structural distortions inherent in the business growth process.

The CDMO business is not one that can grow simply by expanding facilities and acquiring new customers or modalities. Rather, throughout the stages from launch to expansion and maturity, the success or failure of growth depends heavily on what kinds of common foundations are established and at what timing companies shift from individual optimization to overall optimization.

The CDMO business generally develops through the stages of “(1) Launch,” “(2) Expansion,” “(3) Maturity,” and “(4) Entry into New Domains” (Figure 3). In the launch stage, the most critical issues are establishing GMP (Good Manufacturing Practice) operational frameworks, regulatory compliance capabilities, and acquiring the first customers. At this stage, the ability to respond to individual projects and on-site flexibility become the source of competitiveness.

In the subsequent expansion stage, companies are required to increase contract manufacturing capacity through capital investment and workforce expansion, and to increase the number of customers and manufactured products. Many Japanese CDMOs have achieved relatively steady growth up to this stage. This is because the quality management capabilities and on-site improvement strengths that Japanese companies have traditionally possessed have been highly valued by customers.

However, once expansion progresses and companies enter STEP-3 (Maturity), the situation changes dramatically. As sites and customers increase during STEP-2 (Expansion), procedures, quality standards, and procurement routes begin to differ by project, rapidly increasing operational complexity. In many Japanese CDMOs, systemization and standardization at STEP-3 do not function sufficiently, and even with additional investments in facilities and personnel, profits do not grow in proportion to revenue scale. As a result, many companies fall into a situation often described as “growing but not profitable.”

This is not so much a failure of individual management decisions or on-site responses as it is a structural issue in which the development of a common business foundation is easily postponed in favor of prioritizing expansion. The speed required during the expansion phase and the standardization and efficiency required during the maturity phase are inherently in a trade-off relationship. Failure to make this transition appropriately leads to growth in “quantity” while significantly undermining “quality.”

The “Separate World” of the CMO/CDMO Business—Unused Management Assets and Structural Disconnection

These structural challenges tend to become particularly apparent in companies that have entered the CDMO business from different industries (Figure 4). The majority of Japanese CDMOs consist of companies that have entered from other industries, such as diversified chemical companies. The CDMO business operates under strict regulatory requirements such as GMP and is premised on high business specificity, including customer-specific specifications and contract terms, as well as small-lot, high-mix production. As a result, even within the same corporate group, the CDMO business is often operated under rules and decision-making criteria different from those of existing businesses, and is treated as a “separate world” isolated from other internal businesses.

Originally, corporate groups possess a wide variety of management assets accumulated over many years. These include know-how in utilizing external resources, negotiation and contracting capabilities to advance transaction terms favorably, DX platforms for cross-functional visualization and optimization of operations, and expertise in operational standards and process design. However, in the CDMO business, these management assets are often treated as “unusable” due to reasons such as “different regulations” or “stringent customer requirements,” and are not sufficiently repurposed.

As a result, individual project-level optimization accumulates within the CDMO business, making it difficult to realize efficiency and scale advantages across the organization as a whole. This structural disconnection between businesses can be described as the fundamental reason why Japanese CDMOs tend to lose competitiveness in the latter half of their growth trajectory.

Why Raw Material Procurement Cost Reduction Does Not Progress—A Realistic Improvement Approach for CDMOs

One area where the impact of this “separate world” phenomenon is particularly easy to understand is raw material procurement (Figure 4). In the CDMO business, changing raw materials often entails changes to DMFs (Drug Master Files) and revalidation, and there are also customer-designated materials and contractual constraints. As a result, procurement reform is often postponed as a “high-risk and difficult theme to address.”

In addition, because the business is premised on small-lot, high-mix production, the structure does not involve using large volumes of the same raw materials, making it difficult to realize scale merits. These circumstances make maintaining the status quo in procurement an easy default, and distortions in the cost structure are often left unaddressed over the long term.

However, the background to the lack of progress in improvement in these areas also includes a practical constraint: data is scattered across sites, departments, and systems, making it difficult in itself to make decisions with a grasp of the overall picture. For example, there are many areas with room for improvement that have relatively limited regulatory impact and do not require raw material changes, such as solvents, acids and alkalis, reagents, and consumables for QA and laboratory use. In addition, even without changing the raw materials themselves, it is entirely possible to achieve a certain level of cost reduction by reviewing decision factors such as purchase unit prices, order lot sizes, and purchasing frequency. According to our research, while some Japanese CDMOs have successfully reduced raw material procurement costs and are already achieving significant effects, many companies are unable to visualize these improvement opportunities and are consequently missing them.

Toward Realizing AI-Driven Growth of the CDMO Business

One of the factors that has hindered such improvements is the difficulty of data preparation. In many CDMOs, purchase histories and usage data are dispersed across sites and departments and are often managed as unstructured data such as paper forms, PDFs, and Excel files. Traditionally, integrating and analyzing such data was assumed to require large-scale system investments and long-term projects.

However, advances in technologies such as generative AI are significantly changing these assumptions. It is becoming possible, within relatively short timeframes and at low cost, to extract and organize necessary information across paper forms, PDFs, and Excel files, and to visualize it for use in decision-making (Figure 5).

As a result, initiatives such as identifying over-specified products, selecting optimal suppliers, and calculating appropriate purchasing quantities can be undertaken as quick-hit measures—initiatives that are expected to be effective in a short period and with low investment. While procurement reform is only one example, such approaches represent a first step toward enhancing the decision-making foundation across the entire CDMO business.

For Japanese CDMOs to advance to the next stage of growth, it is essential not only to pursue discontinuous leaps through massive investments, but also to steadily accumulate low-investment, quick-win structural reforms of this kind. A shift toward management that balances growth with improvements in capital efficiency and productivity will determine future competitiveness.

Source: Created based on ABeam Consulting survey results regarding challenges faced by CMO/CDMO operations and on-site conditions

ABeam Consulting has extensive experience providing hands-on, client-centered support in projects related to the CDMO business. Going forward, by leveraging both domain knowledge encompassing strategy, operations, and technology in the CDMO industry, as well as expertise in AI utilization, ABeam Consulting will continue to provide end-to-end support—from concept development through operation and establishment—for industry-specific challenges.

Insights TOP