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