DSM Reaches First Milestone on the Way to Meeting 2005 Plans

20 May 2002 00:00  [Source: ICB Americas]

By selling its petrochemicals division in March for  2.25 billion ($2.05 billion) to Saudi Arabian Basic Industry Corp., DSM successfully completed the first step of a major change in direction, its Vision 2005.

Initially unveiled in 2000, the new business strategy promises to morph the roughly  8 billion industrial chemicals giant into a pure multi-specialty player by 2005. Part of the plan is to push company sales to the  10 billion mark, with roughly 80 percent derived from sales in the specialty chemicals arena.

While generally received positively, especially in terms of the price DSM NV's was able to realize from the sale of its petrochemicals business, market observers characterize the next steps in the planned transformation as decidedly harder. "It will be a kind of balancing act," concedes Feike Sijbesma, member of DSM's managing board of directors. "We will be divesting, using the money also for reinvesting into other areas and in the process transform DSM into a specialty company."

Upon completion, the petrochemicals divestment could temporarily trim DSM from the roughly $8 billion sales level to roughly $5.5 billion, derived from remaining business clusters consisting of performance chemicals, industrial chemicals and life sciences. The company has identified performance chemicals and life sciences as the two pillars destined to carry the company's growth to the $10 billion level.

To accomplish the next phase, DSM will be investigating opportunities in the life sciences or performance chemicals sectors. Specifically, Mr. Sijbesma identifies food and pharma businesses as potential targets. "Our last acquisition was in the pharmaceutical areas, if we could do an acquisition in the food area, that would fit very well," he says. In the performance materials area, Mr. Sijbesma singles out engineering plastics and certain resins as a potential fit with DSM's ambitions. He does not rule out further-afield possibilities where synergies are not as obvious.

However, the significant growth levels announced in Vision 2005 cannot be accomplished by acquisitions alone, Mr. Sijbesma stresses. About half of the projected growth will be derived from autonomous volume growth, roughly 6 percent. "You cannot grow a company such as we are only by acquisitions. We have to maintain and continue organic growth in order to add value," he says.

The company has said it expects to invest a total of roughly $600 million this year, primarily for its existing life sciences and performances chemicals activities.

For its planned shopping sprees, DSM is in no hurry. "Acquisitions should be done in the right field and at the right prices," Mr. Sijbesma says. Timing and maintaining a Single-'A' debt rating are of equal importance. "We should not irresponsibly speed up the process. We won't acquire something overnight, just because we have a good amount of money. We need to wait for the right investment for the right price. And if it takes us to 2005, so be it."

Judging from DSM's most recent acquisitions, shopping can bring on major headaches. DSM's efforts to bring Catalytica Pharmaceuticals into the company fold in 2000 are a case in point. The $800 million acquisition was hailed a major strategic step toward catapulting the company to market leader position in specialties for pharmaceuticals. The share of the pharmaceutical sector in DSM's sales portfolio was to increase from 15 percent to 20 percent, transforming the business into DSM's biggest end market by far.

The purchase also netted a significant foothold in the US: Catalytica's dowry included sites in Greenville, N.C., South Haven, Mich., and Mountain View, Calif. DSM's US sales, as a percentage of overall sales, were to increase by 3 to 18 percent, based on 1999 figures.

Reality claimed its toll during the first few months of Catalytica ownership in the form of an unexpected FDA warning letter related to cGMP compliance issues. The letter delayed existing production contracts for pharmaceuticals and blocked the introduction of new drug products into the Greenville site.

Among the affected products were Zevalin, an anticancer product, which the company was manufacturing for IDEC Pharmaceuticals, and Xigris, a sepsis treatment, under contract for Eli Lilly and Company.

DSM sprang into action. It hired a cGMP consultant, implemented drastic management changes, and hired a GlaxoSmithKline veteran as its new CEO for DSM Pharmaceuticals. In February of this year, the site was re-inspected and garnered a status change, opening the doors again for the introduction of new products. DSM Cata-lytical Pharmaceuticals (DCP) has been renamed, it is now called DSM Pharmaceuticals Inc. (DPI).

DPI landed approval for the manufacture of Xigris and Zevalin, also for Shire's Adderall, an ADHD drug for hyperactive children. Approval for a fourth drug is imminent. Additionally, DPI secured a three-year renewal of its contract with GlaxoSmithKline involving APIs, dosage form and steriles. At this point, DPI sports a pipeline of over 100 projects in various development stages, representing roughly  200 to  300 million in revenue.

DSM took the opportunity to implement cost-cutting in its life sciences cluster, involving closure of its Bay View, Calif., and Maarsen, the Netherlands, sites and divesting its Regensburg, Germany, facility.

At the same time, DSM invested  50 million to expand its fine chemicals production sites at Linz, Austria, and Venlo, the Netherlands.

Although there is "a clear improvement" according to DSM board member, Henk van Dalen, Catalytica did not contribute to the company's profit line for DSM's first quarter results.

Overall, during the first quarter of 2002, DSM's life sciences cluster products declined by 8 percent, compared to the corresponding 2001 quarter. DPI's problems and subsequent drug delays were exacerbated by declining sales volumes and margins in the company's aspartame business. However, the other business units in the life sciences cluster-anti-infectives, bakery ingredients and food specialties-benefited from better margins and higher sales volumes, coming in slightly ahead of 2001 performance. DSM expects to resume profit growth for its life sciences cluster during the second quarter, according to its managing board chairman, Peter Elverding.

Effective July of this year, DSM will split its fine chemicals business group into two groups: pharmaceutical products and DSM fine chemicals, representing a roughly 55/45 split based on 2001 sales. The pharmaceutical products group will incorporate DSM pharmaceuticals and custom manufacturing North America and DSM Europe, whereas the fine chemicals part will consist of Holland Sweetener Company, DSM special products, general intermediates/agro and DSM Minera.

With most of the production head-aches successfully cured, the Catalytica acquisition "is an extremely good fit to our strategy," Mr. Sijbesma insists, "and we will continue to invest in Catalytica. We now have a complete toolbox of capabilities. There is almost nothing the pharma industry would like to see from us that we can not do," he adds, citing manufacturing capabilities spanning the US, Canada and Europe, including chemical as well as biological synthesis, mammalian cell and microbial capabilities, and availability of small and large scale quantities.

Purchase of the Catalytica Green-ville site includes state-of-the-art dosage and sterile facilities. DSM is in the process of transforming the site's sterile manufacturing capabilities into a significant growth and profit center. DPI's competencies include sterile solutions, involving small molecules, which are stable in solution form, and freeze-drying, involving most biopharmaceuticals, which are unstable as solutions and therefore need to be freeze-dried. Mr. Sijbesma notes that roughly 35 to 40 percent of all pharma products in the world's pipeline are biologics and potential candidates for freeze-drying services.

The total pharma market was valued at $390 billion in 2001. Of that total, parenteral products claim an estimated at $42 billion, with the US market estimated at $23 billion, according to DSM estimates. By 2005, the company expects 50 to 70 percent of new parenterals to be biopharmaceuticals.

Demand for sterile formulations is projected to grow by about 8 percent over the next five years, while growth for freeze-dried products is estimated at 12 percent within the same time frame, DSM projects. The company estimates the total merchant market for merchant sterile suppliers at $500 million.

In particular, smaller developers of biopharmaceuticals need to outsource their freeze-drying needs, Mr. Sijbesma notes. "This is a growing market and we see demand growing quite favorably," he says. The company plans additional investment in freeze-drying capacity for the 2003/2004 time frame. Aside from DSM, the largest market participants in this area are Abbott and Pharmacia.

Dosage formulation and primary and secondary packaging of finished pharmaceutical have also been identified as a potential growth target but are seen as more embryonic.

In the high-growth, capacity-strapped biopharmaceutical arena, DSM has announced its intentions to build mammalian cell capacity in North America to the tune of $90 million. The site's specific location is expected to be announced next month. Last year, DSM Biologics, slated to become part of the DSM pharmaceutical products group, brought on stream a $Can 9 million, 2,000 liter fermentation unit at its Montreal, Canada, site. (DSM Biologics was founded in 1998 on the existing site of Gist-brocades/BioIntermediair, following the DSM and Gist-brocades merger during the same year.)

While DSM may take its time for the next round of acquisitions, its integration philosophy is clearly developed and well practiced from past purchases. The company uses a high-speed timetable: the integration process must be complete within 360 days.

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