Penicillin Market Plagued By Overcapacity and Pricing

06 March 2000 00:00  [Source: ICB Americas]

By Feliza Mirasol

Significant overcapacity has softened crude penicillin prices in recent years. With prices at an all-time low and no hope of recovery for the near future, producers face dangerously weak margins, which are driving major restructuring in the business.

Penicillin prices began spiraling downward in 1997, following the activation of more fermentation units, mainly in China and some in India. That year, prices plummeted to $12.50 per billion oxford units (BOU) from $19 per BOU in 1996.

Prices then decreased to $11.50 per BOU in 1998 and $9.50 per BOU in 1999. At present, penicillin sells for about $9 per BOU, according to a spokesperson for Netherlands-based DSM, the world's largest manufacturer of crude penicillin and key intermediates.

"To give a rough idea [of how the market has been], prices in the period from 1990 to 1997 varied from $14 per BOU to $22 per BOU, but now it's at the lowest it's ever been," says the DSM spokesperson.

Others have seen prices fall even lower. "I've noted current prices for penicillin G below the $8 per BOU mark--especially Chinese product selling at $6.50 per BOU in some European markets. That is so low that no producer can make any profit margin. Major producers today are not making any money," says Leo Hepner of the UK-based consultancy L. Hepner & Associates.

"For most producers, penicillin has become a commodity," notes Mr. Hepner. He cites this as another factor weakening the market. "The product is governed by the dynamics of a commodity, which implies that penicillin from one source is as good as any other, and buyers will generally go for the lowest price."

Because of the soft prices, DSM launched a major global restructuring of its anti-infectives business, which it announced late last year (CMR, 11/08/99, pg. 8). DSM will make a net investment of á102 million ($98.5 million) in that project. The company's goal is to recapture and maintain a level of 15 percent return on investments within two or three years.

DSM is closing close several plants, including the site of Gist-brocades Industrial Pharmaceuticals Mexicana in Mexico, which produced sterile penicillins. The Sintesis Quimica site in Peru, which produced semi-synthetic penicillins, and the 6-APA plant of Gist-brocades AB in Sweden are also being closed.

In addition, the company plans to close a plant for crude penicillin in Delft, the Netherlands (DSM Gist, Fermentatie Oost), and transfer the facility's production to another penicillin plant at that site (Fermentatie West). DSM also plans to close other sites in the near future.

DSM anticipates á40 million ($38.6 million) in net savings per year. It will lower its fixed costs through optimization measures and introduce productivity-enhancing programs and improved technologies to reduce its variable costs.

As part of its cost-cutting strategy, the company is building a new plant at its Delft site for the production of the antibiotic intermediate 7-ADCA. In addition, the business group is working on further improvements of the mold and bacterial strains used in DSM's production processes.

With a market share of roughly 35 percent, DSM is the global leader in penicillin ingredients. It has 17 sites throughout the world, the largest one being in Delft. The other sites are in Portugal, Sweden, Spain (two sites), the UK, Italy, Egypt, Mexico (three sites, including the one being closed), Peru (which is now being closed), India (three sites) and China (two sites).

DSM's anti-infectives division is mainly active in beta-lactam antibiotics, the most important family of antibiotics. They account for half of the antibiotics market, according to DSM.

In this category, the company's product portfolio includes penicillin G and penicillin V (on which penicillin prices are based), the 6-APA and 7-ADCA intermediates, semi-synthetic penicillins, semi-synthetic cephalosporins and sterile penicillins.

DSM's anti-infectives division also manufactures side chains for beta-lactam antibiotics. The DSM business group manufactures erythromycin, clavulanic acid, which is an additive that suppresses bacterial resistance, and the anti-mycotic ny-statin, an anti-fungal agent.

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