Dutch ingredients firm DSM has announced plans to carve out its anti-infectives business and boost its presence in Asian markets following a review of the active ingredient unit.
The company's plans were announced last week, and focus on carving out the anti-infectives unit and initiating a partnering strategy with firms in low cost areas, seen as the best route for generating maximum value from the unit.
Although the company also stated that it would consider divesting certain parts of the business, vice chairman Jan Zuidam was cagey regarding the possibility of selling off the entire unit, merely reiterating the firm's strategy to carve out the anti-infectives business and pursue partnership opportunities.
DSM's anti-infectives business supplies the pharmaceutical industry with active pharmaceutical ingredients (APIs) such as amoxicillin, ampicillin, cephalexin and cefadroxil, as well as penicillin, clavulanic acid and industrial enzymes.
The cost-cutting options available in Asia have proved too tempting for DSM to pass up, and the firm is now actively pursuing partnering strategies in China and India to add to the manufacturing facility it already operates in low-cost Mexico.
Side-chain production currently carried out at the company's Spanish plant will now also be shifted to its Chinese operations, resulting in the loss of around 100 jobs in Spain. The unit operates other manufacturing facilities in Egypt, Italy, the Netherlands, and Sweden, which thus far appear unaffected by the latest news.
However, the carve-out decision is seen by some as a precursor to a potential sale of the unit, a possibility that was under consideration when the company announced it was "reviewing all strategic options" for the group back at the end of 2006.
Zuidam, however, was careful not be drawn on any selling plans, simply saying that carving out the anti-infectives unit and possibly divesting parts of the business represented the clearest path to improved profitability; "You can't go into a good partnership without having a good carve-out," he said.
Nevertheless, when pushed Zuidam did admit that "if selling creates more value in our own plans then we are always prepared to discuss that".
DSM has also landed on its feet thanks to the current situation in China where several manufacturing facilities have been forced to close down due to environmental issues at the sites. Despite this situation, and the recent publicity regarding Chinese production standards falling short of those in the West, DSM insists that its plans far pre-dated these revelations.
"We will be putting the same quality system in place in China as we do in other areas and upgrading the Chinese facilities we've acquired to Western standards," said Zuidam.
The drive to increase activities in China and India follows DSM's current corporate strategy - dubbed Vision 2010 - which outlines plans to improve quality, growth and profitability over the coming years.
Part of scheme (carried over from the previous programme, Vision 2005) aims to promote an increased presence in emerging economies, building on DSM's long-standing activities in China where the company anticipates sales to double to $1bn (€0.75bn) by 2010.
The anti-infectives unit makes up around 5 per cent of the company, but has been struggling a little over recent years due to high raw material costs and unfavourable exchange rates. This kicked off the strategic review of the entire business, concluding that partnering and heading to low-cost destinations was the way to go.
A "drastic package of measures" to rescue the ailing anti-infectives business was implemented back at the end of 2004 to try and counteract the impact of a sharp fall in prices on the penicillin market and the weakening of the US dollar.
In a drive to reduce costs and up profitability, DSM shut down two manufacturing sites in Delft and Geleen in the Netherlands and ended a joint venture with GlaxoSmithKline whilst also kicking off additional restructuring measures. The focus on emerging markets exhibiting strong growth in antibiotics, such as China and India, was further stepped up as part of this profitability initiative, and DSM is increasing its presence in these regions through partnerships, acquisitions and expansions.
With the penicillin market now stabilising and the unexpected bonus of potential Chinese competitors having been taken out of the equation, DSM could hope to build on its improving financial results for the anti-infectives unit and fight its way to sustained profitability.
Or, having nicely sliced out the unit into a separate entity, a sale could always prove a more attractive option for the company, despite Zuidam's protestations.