Pharma & CDMO — Sector Research — Silvercoin Asset Management

01 — Market Map

Four positions, and the patent line that divides CDMOs.

— 01

CDMO

Contract development and manufacturing. Sticky by nature: revalidating a molecule at a new site is slow and costly.

— 02

Formulations

Branded generics and finished drugs — the customer-facing, brand-led layer.

— 03

API

Salt manufacturing. Upstream, more commoditised, and cost-curve driven.

— 04

Innovators

Discovery through approval, on a 10–15 year horizon. An entirely different risk profile.

The CDMO split that changes everything. Some contract manufacturers serve generics — off-patent molecules, where competition is broad and pricing is contested. Others serve innovators — on-patent molecules, where the customer relationship is deeper, volumes are smaller but stickier, and margins are structurally better. When someone says "CDMO", the first question is always: which side of the patent line, and what proportion of the book sits on each?

The outsourcing tailwind is policy-driven. The US Inflation Reduction Act and the Biosecure Act are accelerating supply-chain diversification away from concentrated sourcing — a structural demand pull for Indian CDMOs that has little to do with their own cost position.

02 — Structure & Economics

Capacity, mix, and the credit cycle.

Utilisation is not what it looks like. Because output depends on batch manufacturing and product mix, optimal utilisation of a pharma plant is around 60% — not 90%+. A plant "only" at 60% may be running perfectly; one pushed far above it may be sacrificing changeover flexibility. Ask what revenue looks like at full operational utilisation, and treat that as the ceiling.

Capacity is measured by dosage form. Oral liquid, ointment (sterile and non-sterile), tablet, capsule, OST, ampoules, and formulations each have their own line and constraint. A capacity number without the form-wise split is not usable.

Credit terms differ sharply by product type. Distributors get roughly 21 days on ethical products. For generics the cycle runs 60–120 days, because that segment depends far more on the distributor. A shift in mix toward generics therefore stretches working capital mechanically, regardless of how well the business is run.

CDMO revenue by service

Innovative projects
Work for innovator pharma — the highest-value relationships.
Discovery
Early-stage; small revenue, long optionality.
Development services
The bridge to commercial supply, and the point at which stickiness is created.
On-patent commercial manufacturing
The prize: scale volumes on a protected molecule.

Returns policy

Manufacturers take back unsold or expired inventory on ethical products; there is generally no return on OTC. That obligation is a real liability and should be provisioned — ask over what period returns are accepted.

Where advanced formulation earns its premium. Platforms such as oral film technology, micro-emulsion coating, pellet cold forming, rapid gel forming and matrix pore forming are what separate a commodity formulator from a differentiated one. Where OTF products reach a meaningful share of the book and the facility holds EU GMP approval, the company has genuine access to regulated-market pricing rather than tender-driven volumes.

03 — What Drives a Winner

Stickiness, approvals, and mix.

— 01

Validated stickiness

Once a molecule is validated at a site, moving it means requalification and regulatory filing. That switching cost is the CDMO moat — and it is strongest on the innovator side.

— 02

Regulated-market approvals

EU GMP and equivalent approvals convert a manufacturing asset into access to premium pricing. Registrations for complex and value-added generics take around 1.5 years — a real barrier.

— 03

Differentiated formulation

Advanced delivery platforms and novel innovative products earn margins that plain generic formulation cannot. The share of revenue from differentiated product is the quality metric.

04 — Diligence Checklist

What to answer before underwriting.

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Where on the chain? CDMO, formulations, API or innovator — and if CDMO, doing formulation work or API work?
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Patent split of the book. Of commercialised molecules and the pipeline, how many are off-patent generics versus on-patent innovator work?
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Generic or specialty portfolio? The single question that most changes the appropriate multiple.
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Therapy concentration. Pain, urology, supplements, antibiotics, cardiac — how much do the top five or ten products contribute?
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Capacity by dosage form. Oral liquid, ointment, tablet, capsule, OST, ampoules — and revenue at full operational utilisation.
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Utilisation reality. Against the ~60% optimal for batch manufacturing, where does the plant actually run, and why?
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Export versus domestic. Split by geography — MENA, South East Asia, Africa — and PFI revenue. Which markets are targeted next, and is domestic growing or declining?
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Regulated versus semi-regulated. What share of revenue comes from each, and which approvals underpin it?
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Vertical split. In-licensing, out-licensing and dossier filings — three different revenue qualities.
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NIP pipeline. Novel innovative products and complex value-added generics take ~1.5 years to register. What is the filing plan and expected margin uplift?
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Contract structure. Supply-chain agreement, profit share or revenue share? Each allocates risk very differently.
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Credit and returns. Distributor credit by product type (21 days ethical, 60–120 generics), and the return-acceptance window on ethical products.
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Repeat orders. Across the portfolio, what proportion of revenue is repeat business from existing customers?
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Registered brands. How many, and what share of revenue do they carry?

05 — KPIs to Track

What to monitor, quarter by quarter.

KPI	Calculation / source	Benchmark or read-through
On-patent revenue share	Innovator work ÷ total CDMO revenue	The key quality split; on-patent is stickier and better-margin
Capacity utilisation	Output ÷ installed capacity, by form	~60% is optimal for batch manufacturing — not a shortfall
Revenue at full utilisation	Management guidance	The ceiling; tells you how much growth needs new capex
Top 5/10 product concentration	Revenue from top products ÷ total	Single-molecule dependence is the main idiosyncratic risk
Customer concentration	Revenue from top customers	CDMO books are inherently concentrated; check contract tenure
Repeat order share	Repeat ÷ total revenue	The practical measure of manufacturing stickiness
Export vs domestic mix	Revenue split by geography	Regulated markets carry better pricing than semi-regulated
Regulated market share	Regulated ÷ total revenue	Requires approvals — a genuine barrier and a margin driver
NIP / differentiated share	Novel and value-added ÷ total	The margin-mix metric; ~1.5 year registration lead
Pipeline filings	Dossiers filed and approved	Forward revenue visibility, with a multi-quarter lag
Gross margin by vertical	CDMO / formulations / API	Blended margin hides very different economics
Receivable days by product type	Debtors ÷ revenue × 365	21 days ethical vs 60–120 generics — mix moves this mechanically
Returns provision	Expected returns ÷ revenue	Ethical products can come back; OTC generally cannot
R&D ÷ revenue	P&L disclosure	Funds the formulation platforms that earn the premium
Capex vs contracted demand	Capex ÷ committed volumes	Capacity ahead of contracts is the sector's recurring value trap

06 — Risks & Red Flags

How the thesis breaks.

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Generic CDMO mistaken for innovator CDMO. They carry different margins, stickiness and multiples. Conflating them is the sector's most common valuation error.
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Molecule concentration. A book dependent on one or two commercialised molecules is exposed to a single customer decision or patent event.
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Regulatory action. A facility observation or import alert can remove regulated-market access — the entire premium — at short notice.
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Working capital via mix. Shifting toward generics stretches receivables from ~21 to 60–120 days without any deterioration in execution.
!
Unprovisioned returns. The obligation to take back unsold and expired ethical product is a real liability that is easy to under-recognise.
!
Speculative capacity. Building capacity ahead of contracted volumes ties up capital in a business where validation, not construction, sets the timeline.
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Policy-dependent demand. The IRA and Biosecure tailwind is legislative. It can be amended, delayed or reversed.

07 — Key Numbers

The figures, and where they stand.

Metric	Value	Note	Basis
Optimal plant utilisation	~60%	Batch manufacturing and product mix constrained	Research note
Distributor credit — ethical	21 days	Direct-to-prescriber products	Research note
Distributor credit — generics	60–120 days	Far more distributor-dependent	Research note
NIP registration lead	~1.5 years	Complex and value-added generics	Research note
Innovator development horizon	10–15 years	Discovery to approval	Structural
OTF market opportunity	~$8bn	Oral film technology; EU GMP approval is the access route	Research note
Returns policy	Ethical yes / OTC no	Manufacturer takes back unsold and expired ethical stock	Structural
Policy tailwind	IRA + Biosecure Act	US legislation accelerating outsourcing diversification	Policy

Basis. This framework leads on value-chain position, capacity and credit mechanics. Add India pharma and CDMO sizing alongside it as those estimates come in.