Issue Date: July 21, 2008
A Technology Bet
DSM'S PHARMACEUTICAL products business has weathered many ups and downs in its decades of serving the pharmaceutical and biotech industries. Now it's in an environment where drug approvals are at a longtime low, competition in the custom manufacturing industry is tough, and the pressure to lower the cost of health care is acute. The business is banking on its technology base to survive, and even thrive.
Last fall, DSM revisited the five-year growth strategy it laid out in 2005 and vowed to accelerate its transition into a life and materials sciences company. A major component of that strategy is to exploit its biotechnology platform across the markets it serves. For example, DSM's expertise in enzymatic conversions can be used to generate biofuels, synthesize complex active pharmaceutical ingredients (APIs), or develop functional food ingredients.
One beneficiary of that biotechnology platform is, of course, the company's pharmaceutical products business. With roughly $780 million in sales last year, the business includes small-molecule intermediates and APIs, cell-line technology for biologic drugs, and manufacturing of finished-dose drugs.
The pharma products business has undergone a transformation of its own in recent years as DSM adjusted to a changing drug market, a leaner drug pipeline, and the influx of low-cost competition from manufacturers in China and India. Like others, the company bought into the "bigger is better" mantra that ran through the custom manufacturing industry in the late 1990s, and it was active in the era's rash of mergers and acquisitions. But DSM has since refined its pharmaceutical strategy to narrow its focus on markets where it can win with technology.
Feike Sijbesma, DSM's chairman, concedes that contract manufacturing has taken its lumps in recent years and that DSM has not been immune to the challenges of serving a faltering drug industry.
On the small-molecule side of the business, low-cost manufacturers in China and India have swiftly taken over markets where regulatory oversight is not required, such as early-stage intermediates, or where the chemistry is not that complex, says Bob Hartmayer, president of DSM Pharmaceutical Products.
The situation has caused many Western firms to rethink their approach. Although DSM maintains a wide range of equipment to serve customers from development through commercialization, the company is now focusing its three European plants on segments of the small-molecule drug market that low-cost competitors have yet to penetrate. For example, drug companies simply aren't outsourcing their manufacturing of sterile finished-dose drugs to China or India, Hartmayer says. "It's too critical a component," he says. "And it's not just an intellectual property concern but a liability concern."
ALTHOUGH DSM has tweaked its small-molecules business, it has put its biologics business through a more dramatic transformation. DSM maintains microbial fermentation capacity in Delft, the Netherlands, and Capua, Italy, but it abandoned plans to build large-scale mammalian cell capacity at its site in Montreal.
DSM eventually mothballed the Montreal site, making the company one more victim of the fad for biologics that swept the custom manufacturing industry. Dowpharma also jettisoned plans for commercial-scale biologics manufacturing, and Cambrex sold its biopharma subsidiary to Lonza. Today in fact, Lonza and Boehringer Ingelheim are the only players able to make both small and large molecules at a commercial scale.
Sijbesma admits that the biopharmaceutical market is "developing slightly differently" than most suppliers had anticipated. The problem, he says, was that manufacturers saw an open opportunity and thought they could "play the same game we played in small molecules." In other words, if they build facilities, companies thought, customers will come.
But big biotech companies prefer to run their own capacity rather than outsource. Furthermore, contract manufacturers underestimated the level of complexity and regulatory control involved with making large molecules, Sijbesma says.
Given these factors, DSM decided to serve the biopharmaceutical industry under a different guise: as a technology provider. In 2002, the company linked up with the Dutch biotech firm Crucell to optimize and market the PER.C6 cell line, the only commercially available human cell line for the production of antibodies and recombinant proteins.
The companies license PER.C6 technology as a production platform to customers, then they provide cell-line development and optimization support through their joint venture, Percivia. Whereas in the contract manufacturing world companies offer a service for a fee, DSM and Crucell share a small percentage of the royalties on any drugs that use their technology to reach the market.
Customers are willing to sign on because of the advantages of the PER.C6 technology over Chinese hamster ovary (CHO) cells, which are the most common and best-characterized lines. CHO lines, however, generally yield only 1–2 g of protein per L. That inefficiency translates into a need for gigantic fermenters, extensive processing, and, in the end, extremely expensive drugs.
In the industry's early days, biopharmaceutical developers and manufacturers simply wanted to have enough capacity to meet demand, notes Karen King, president of DSM Biologics. Today, she says, the focus has shifted to increasing yields and lowering costs.
DSM and Crucell say PER.C6 can significantly improve biopharmaceutical output. Last month, the companies announced achieving a yield of more than 27 g/L, a dramatic improvement from the 15 g/L they had reported just three months earlier. Putting the achievement in perspective, King notes that it took researchers about 15 years to attain even 1.5 g/L in CHO.
By taking advantage of the vastly higher yields offered by PER.C6, DSM says, biotech companies could shift from stainless steel vessels to smaller, disposable reactors that don't run the risk of contamination. The resulting lower production prices would allow more patients access to biologic medicines. "This is a winning concept which I think—without exaggerating—is a breakthrough in the biopharma world," Sijbesma says.
DRUG COMPANIES and patients wouldn't be the only beneficiaries of the technology. Analysts estimate that the global market for biologic drugs will grow from roughly $60 billion today to $200 billion by 2018. Even if less than 20% of that market is based on PER.C6, the 2 to 3% royalty stream DSM shares with Crucell on those projects will make it an exciting opportunity, Sijbesma says.
Although DSM is confident in its pharma products strategy, some observers are skeptical about the company's structure. The pharmaceutical products business represented only about 6% of DSM's sales last year, and the company is considered primarily a specialty or performance chemical company rather than a life sciences firm, industry consultant Peter Pollak says.
"If fine chemicals account only for a small percentage of the sales of a diversified chemical company, the business usually is not successful," Pollak says. He points to Dow Chemical, Eastman Chemical, Honeywell, Rhodia, and Solutia, which all built up drug manufacturing units only to later cut back or exit that market.
Indeed, sales at the pharmaceutical products business have fallen over the past two years. DSM attributes the decline largely to the sale of an API manufacturing facility in South Haven, Mich., the Montreal closure, and the completion last year of a pharmaceutical supply contract with Roche.
Despite the failures of other large, diversified companies, Sijbesma believes that size does matter when it comes to surviving in the rocky world of pharmaceutical chemical manufacturing. Not only does size enable a company to weather a downturn, he says, it can also fund hefty investment in technologies such as genomics, where the payoff may not come for several years.
DSM's overall goal is to increase sales by 5% per year through organic means and then complement that growth with acquisitions. For the pharmaceutical products business, that could mean buying new assets that help make more complex molecules or pushing further into pharmaceutical markets that have high barriers to entry. Whatever they do, Sijbesma and his colleagues say, technology will be the driver.
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