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Dutch-based DSM N.V. is seeking innovatinve ways to partner through bolstering manufacturing
For today's C-suite, "revolution" is the driving sentiment that will set the future of Big Pharma. However, the basis for strategy has changed, from maximizing prices among a stable network of passive customers to one built on continuous, disruptive innovation against all manner of competition worldwide. Navigating this transition in an industry as conservative as Big Pharma is difficult.
(GETTY IMAGES / MADS ABILDGAARD)
In evaluating the prospects, one issue that has garnered little attention is the quality of Big Pharma's service partnerships, particularly among that second tier of providers who bestow a critical layer of support to the C-suite through their expertise in the specialized skills required to execute strategy and fill gaps in a fast-moving competitive environment. Can this key link in the industry's value chain keep pace with the restructuring going on around them, generating a continuous cycle of innovation adapted to serve Big Pharma's evolving business model?
It's a central question, and Pharm Exec went looking for some answers from a major player in a largely unexamined segment of the biopharmaceuticals business: manufacturing excellence via contract manufacturing organizations (CMOs). DSM N.V. is our target, a Dutch-based company with over $10 billion in revenues and a large but little-noticed global footprint as a key supplier of technologies that support the processing and manufacture of compounds ranging from traditional small molecules to the most complex next-generation biologics.
The DSM franchise is highly technical—but the very future of biopharma depends on it, because without complementary advances in materials management and manufacture, a novel treatment cannot successfully navigate the passage from bench to the bedside. It falls to organizations like DSM to help Big Pharma match the science of discovery and development to the mechanics of ensuring a new compound is formulated, manufactured, and dispatched to the patient for its intended use—safely and expeditiously, across functions and geographies, and at the lowest possible cost.
As many of these compounds contain active biologic material with a minimal shelf life, there is little room for improvisation. Extensive new investments are required to customize the manufacturing process, and the consequences of a false start or high error rates in batch production can be devastating. "Supply chain complications are an increasing challenge for an industry that depends heavily on reliability against a drug or vaccine's clinical profile," Karen King, president of DSM's Biologics division, tells Pharm Exec. "Product lifecycles are shorter, and payer uncertainties mean that manufacturing has to adapt to more fluctuations in demand. Failure to address these can hurt the bottom line through waste, or, in the case of a product shortage, force companies to take a huge reputational hit." Product shortages due to flaws in the processing stage have been defined in recent surveys as a $200 million problem, just in the US.
Precisely because of the high risk of failure, the strategies and tools applied to manage production often need to be more innovative than the pill itself. What DSM provides is expertise that delivers certainty against everything from drugs not being properly absorbed in the patient's bloodstream to the uncontrolled release of toxic chemicals and other hazards at the manufacturing stage.
Paul Sidhu, vice president, marketing and strategy; Karen King, president, Biologics; and Patrick Weinberg, chief financial officer at DSM.
DSM has a very simple description of its mission: selling solutions that nourish, protect, and improve performance. To do that, it has built an internal culture focused on innovation as the platform for what it calls "focused growth." All five divisions of the company—covering, in addition to pharmaceuticals, nutrition, performance materials, polymers, and emerging businesses—are required to set annual targets for revenues derived from new innovations, which management defines as products and applications introduced within the past five years. Twenty percent of revenues from innovation is the company-wide goal, to be achieved by 2015.
And the drive to connect with change continues. The emphasis is on the Emerging Business cluster, which is itself segmented into three areas, covering: 1) bio-based products and services, such as enzyme crop boosters and wellness/nutritionals that carry a health application; 2) advanced surfaces, to promote greater energy efficiency for durables such as automotive coatings and to lower the cost of establishing tolerability for personal care products [including drugs]; and 3) biomedical technologies and materials, involving capabilities ranging from polymers for joint replacements, implants, and medical devices, to the testing and manufacture of biosimilar drugs. Also on the docket in this segment is regenerative medicine and tissue engineering.
Reliance on these technologies of the future means that DSM is expanding into virtually every aspect of the "performance culture," from human and animal nutrition and wellness/personal care, to diagnostics, medical devices, and implants; small molecule drugs as well as biologics, and their generic equivalents; machinery coatings and paint; electric/electronic measurements; public safety and individual security monitoring; and housing materials.
"What we are doing is applying new biotech technologies to improve the materials structure of basic consumer staples. We are helping our customers move from a production model built around petroleum and hydrocarbons to one based on what we call "white biotech"—lightweight, stress-resistant composites derived from a 'clean/green' organic base," says DSM's vice president, marketing and strategy, Paul Sidhu. "In pharma, we are very active in innovation as a CMO as well, so creating new platforms for cost-effective manufacture of complex biologic medicines is a key part of that value proposition."
Another element in the link between innovation and future growth is a commitment to seek out new ideas from non-traditional sources. DSM has opened two new Innovation Centers, in China and India, to supplement an existing facility in Europe. Both Centers will examine opportunities for development of innovative technologies in the five business segments based on the distinctive market characteristics of the two countries. Together, the three Centers have a broad remit, with freedom to take on a concept regardless of source and run with it. Among other things, they manage their own venture capital units that can invest in promising startups.
DSM is also a believer in "reverse innovation;" that is, how ideas that resonate in the resource-constrained countries of the developing world can be applied to help lower costs or generate new demand in the more affluent markets of Europe and North America. The Centers are integral to the achievement of another set of ambitious revenue targets: By 2015, DSM is committed to doubling its annual sales in China, to $3 billion, while growing the business in emerging "high-growth economies" to half of total sales. The intent is to position DSM as the leader in helping these markets upgrade their performance culture, through use of clean technologies as well as new product offerings geared to the interest of a more affluent consumer base in quality of life, health, and wellness.
It follows that DSM's innovation strategy is rooted in an awareness of larger social trends, led by factors such as the lean production movement and growing consumer interest in products that do least harm to the environment. DSM management interprets these public expectations less as an obligation than as a huge business opportunity. "Sustainability is a competitive differentiator for us," Sidhu says. "Our goal is to help customers perform and function more efficiently, with a smaller footprint on the external environment." Sidhu notes that DSM was early to predict that the "naturals" trend among consumers would eventually create pressures to insert the same ethos into the manufacturing and supply chain.
Some of the company's best work on innovation is driven from within the pharmaceuticals cluster, which accounts for about 10 percent of DSM's overall revenue and incorporates four businesses: biologics, small molecules, finished dosage forms, and anti-infectives. The group has a history as a CMO and also as a supplier in producing the active ingredients for key essential medicines, including penicillins, cephalosporins, and other anti-infectives. The strategy now is to move beyond the CMO role to secure lead status as an integrated supply chain service partner in emerging high-growth markets, with a particular emphasis on Asia.
The group is also developing new technologies to boost the cost-efficient production of complex biologics—and biosimilars. "In the high-growth economies of China and India, there are already 200 to 300 local companies committed to producing biosimilar drugs; some are already marketing them," King says. "The opportunity for us is that their process technologies are quite old. We can license our advanced capabilities to them or come in as a CMO. Either way, we help them lower their manufacturing costs, which is key to gaining the advantage in biosimilars."
The value proposition here is actually very global, and has been crafted in close approximation to the changing needs of Big Pharma. The patent cliff and accompanying pressures on the traditional blockbuster model—in which manufacturing was an afterthought, in terms of cost exposure—have forced companies to devote more attention to proactive management of the entire supply chain.
Sidhu says: "The questions we now get from the industry are not about how fast we can build that specialized production facility in time for a registration decision by the FDA. The dialogue is far more strategic: How can we do manufacturing differently, using process technologies to reduce time to market or prevent product shortages? How do we increase security of supply through multisourcing? Or lower the risk of steep financial investments in new facilities as well as hedge the political complications that stem from employing large numbers of workers in different areas? There is an awareness that costs can be taken out of the old system of production and that this is a new source of competitive advantage in a market divided between commodity products and advanced therapies. For either, how well you manage manufacturing will determine a big chunk of your ROI over time."
In response to this need in the biologics field, DSM has built a number of proprietary process platforms that significantly reduce costs, reduce risks, and enhance the reliability of pharma production. The first is its XD technology, which is a process improvement that enhances the environment for cell growth and protein expression, thus allowing for gains in the productivity of batch production. DSM contends this technology can boost yields from five to 10 times against conventional applications. (In biologics production, use of smaller-liter reactors to synthesize materials is optimal; XD technology helps to facilitate it.) "The gains from this tool alone are enormous," says King. "We can produce enough active ingredient from a single batch to create product for a full Phase II clinical trial—safely, at lower cost to the sponsor."
Another is the Rhobust technology, which avoids the traditional large-scale cell harvesting approach with a tailored, targeted process for capturing/clarifying the proteins/antibodies required for biologics composed from living material. This results in less handling and a shorter processing time, which saves on costs.
The newest of these is what DSM calls the "Kremer Method," a purification measure that reduces the materials used and the number of steps in downstream production. DSM has applied for a patent on this method.
Taken together, the company says its technology platform is 40 percent more cost effective than currently available technologies.
Each of these tools are being licensed to partners and applied at the company's own biopharma production sites. DSM's new biologics production facility currently being built in Australia will employ these state-of-the-art technologies and is being supported through funding provided by the Commonwealth of Australia and Queensland governments.
Overall, the aim here is to strengthen DSM's CMO franchise by incorporating use of the company's own technologies rather than having to rely on externally derived assets. But there is a more practical element as well: DSM cannot easily compete on cost alone with nimble local CMOs in growth markets like China and India. Hence its ability to differentiate depends on providing something new around innovations that customers will pay that extra margin for.
Positioning the pharma business for success carries a specific metric: to achieve annual EBITDA (a key measure of earnings/profit against sales) in the 15- to 20-percent range by 2015. This will require innovation of a different sort, the most important of which is executing in the pharma space the business complementarities that management wants to extract through the broader DSM portfolio. "The goal is to soften our dependence on the traditional CMO model, which is inherently volatile, through a range of new offerings that will make our business more predictable through the transitions that pharma is now undergoing," Patrick Weinberg, DSM's chief financial officer, tells Pharm Exec.
No less than for any company engaged in the know-how business, success will depend on a cross-fertilization of links between an expanding opportunity set in life sciences and technological progress in materials performance. The company now has the diversity of capabilities to do it, assuming it can get the sum of its parts to work harmoniously.
As DSM grows, it will also be critical to stay close to its Big Pharma customers, many of whom are being buffeted by external forces to the extent that it is not always clear what they want. DSM is adhering to a basic strategy rule of thumb by concentrating in areas where it expects to see the greatest cost pressures on the industry. These include finding new ways to leverage efficiencies—and the returns—from innovative drugs nearing the end of their patented product lifecycles; supporting the move toward adjacent businesses such as biosimilars; fostering more innovation in the rationalization of company supply chains; and finding new customers in high-growth markets, where the performance culture is subpar.
Will it work? Time and the quality of DSM's management will tell. But if you care about that unnoticed concept of a superior performance culture—and every patient should, whether he takes a pill or a nutritional supplement, or hosts a medical device—then the answer to this question carries much more import than a simple business calculation. In an industry increasingly structured around partnerships at every stage of the healthcare continuum, from bench to bedside, this concept has to work.
It falls to organizations like DSM to help Big Pharma match the science of discovery to the mechanics of ensuring a new compound is formulated, manufactured, and dispatched for its intended use
The patent cliff and pressures on the traditional blockbuster model—in which manufacturing was an afterthought—have forced companies to devote more attention to proactive management of the entire supply chain