The Pharma cluster comprises the business groups DSM Pharmaceutical Products and DSM Anti-Infectives.

DSM is one of the world’s leading independent suppliers to the pharmaceutical industry. Many of today’s medicines around the world contain ingredients produced by DSM. DSM Anti-Infectives is one of the few penicillin producers outside of China.

DSM Pharmaceutical Products is a leading provider of high-quality custom contract manufacturing and development services to the pharmaceutical, biopharmaceutical and agrochemical industries. Customers around the world are serviced from six manufacturing sites in the United States and Europe. Among these customers are seventeen of the top twenty pharmaceutical companies and the top three agrochemical companies as well as a large number of biotech, specialty and emerging companies across the globe.

DSM Pharmaceutical Products consists of four business units. DSM Pharma Chemicals is a provider of custom chemical manufacturing services for complex registered intermediates and active pharmaceutical ingredients (APIs). DSM Biologics provides biopharmaceutical manufacturing technology and services. DSM Pharmaceuticals, Inc. is a provider of high-quality finished-dose-form manufacturing services. DSM Exclusive Synthesis is a global provider of custom manufacturing services for the crop protection industry.

DSM Pharma Chemicals saw its project pipeline improve in 2008 in both clinical and launch material, and the business unit has broadened its customer base. The successful development of micro reaction technology for continuous processes was a highlight of the year and will offer good opportunities in the future for the production of small molecule APIs.

DSM Biologics continues to make progress with the development of PER.C6^® with joint-venture partner Crucell N.V. DSM Biologics and Crucell have co-exclusive rights to license the high-producing PER.C6^® technology platform to the biopharmaceutical industry as a production platform for recombinant proteins and monoclonal antibodies. With the help of DSM’s innovative XD™ technology much higher yields in manufacturing were achieved during the year.

DSM Pharmaceuticals, Inc. is a service provider to the pharmaceutical and biotech industries. Services include oral, topical and sterile finished-dose forms and the related formulation and process development. The business unit recently added sterile cytotoxic and sterile clinical trial manufacturing facilities to its capabilities.

DSM Exclusive Synthesis is a service provider to the crop protection industry. This market has been growing at a high pace since the end of 2007 and DSM Exclusive Synthesis has been able to capture the growth in the market resulting in increased sales and increased profitability. The main focus for the years to come is on filling the pipeline to secure the future growth of the business.

Overall, DSM Pharmaceutical Products saw its profitability levels affected in 2008, as a result of the phasing-out of the contracts related to the Roche Vitamins acquisition, insourcing by large pharma houses to address cost pressures and delays in commercial development of products. Operating profit declined. Sales declined by 6%.

During 2009 some large-volume products will not be manufactured by DSM Pharmaceutical Products due to customer insourcing, while other product volumes will be diminished until inventory is reduced. This will result in cost pressure for DSM Pharmaceutical Products.

The business group has set up a program to take corrective action. Cost restructuring measures, such as reorganization of the Greenville, North Carolina (United States) site announced in October, are designed to deliver results in the short term.

Improved account management should lead to stronger customer intimacy and closer involvement with various players across the value chain and an improved innovation pipeline. More efficient processes will be implemented to ensure low cost levels while maintaining the high quality and compliance for which DSM Pharmaceutical Products is known. The business group will also expand its offering by building on value-added technologies, expertise and customer relations within the business units. This should reinforce the business group’s offering and contribute to a stronger market position. However, 2009 will be a difficult year for the business group.

DSM Anti-Infectives holds global leadership positions in penicillin G, penicillin intermediates (6-APA and 7-ADCA), in active pharmaceutical ingredients (APIs) such as semi-synthetic penicillins and semi-synthetic cefalosporins (beta-lactams) and in other active ingredients such as nystatin.

Penicillin-based anti-infectives are among the most important pharmaceutical products in the world in terms of volume. The products in DSM Anti-Infectives’ current portfolio are very effective in combating a broad spectrum of bacterial and fungal infections in both humans and animals and as such are of vital importance for people’s well-being and healthier economics in farming.

As a relatively cheap treatment against infectious diseases, penicillin-derived pharmaceuticals can be afforded by a large and growing part of mankind, with pronounced growth in China, India and other countries in Asia, Africa and Latin America. Consumption in the Western world with its highly regulated markets is more or less stable. Within the Western world, DSM is one of the few remaining independent (merchant) beta-lactam producers, serving the needs of patients suffering from infectious diseases.

Growth of the market for penicillin derivatives is estimated to be between 4-7% per year, the greater part of which comes from the emerging economies. In 2008, penicillin prices recovered quickly from a relatively weak start but declined again in the second half of the year. Overall prices were below the peak seen in the third quarter of 2007, but remained on average at a good but lower level.

Based on this, and on the continued implementation of the announced restructuring measures, the results of DSM Anti-Infectives in 2008 stayed at a healthy level. Sales declined 3% in 2008.

DSM Anti-Infectives – as the leading supplier of bulk active ingredients and important intermediates – defined a strategy in 2007 that is aimed at actively maintaining this leadership position via customer intimacy in the different markets and technological innovations leading to both further improved production and a strengthened product portfolio in generic active ingredients. This will be achieved by actively seeking partnerships and where necessary rationalizing parts of the portfolio.

In 2008 the business group made further progress with its actions to structurally improve profitability. In addition to restructuring measures, mainly related to lower fixed costs, a further strengthening is taking place through the introduction of new products and the implementation of enzymatic technologies for the production of APIs in its global asset base. At the same time the business group stepped up its efforts to broaden the portfolio to include active pharmaceutical ingredients that will become generic in the coming years.

In relation to the rationalization of the portfolio, during the year the decision was taken to close the clavulanic acid manufacturing site in Sweden at the end of 2009. Also, DSM Deretil, active in side chains, was sold in a management buy-out with effect from 1 October 2008. In view of these decisions the value of the remaining business was reviewed and it was determined that a partial reversal of the 2007 impairment of the assets of the cash generating unit DSM Anti-Infectives was required, resulting in a €15 million reversal leading to an increase in the carrying amount of assets. The intended partnership with North China Pharmaceutical Group Corporation to create a joint venture for the production and marketing of anti-infectives in China is in the stage of approval by the Chinese authorities.

In 2008 DSM Anti-Infectives announced a partnership with Arch Pharmalabs from India to accelerate the introduction of new products. DSM will contribute its innovative fermentative technologies and market access to the partnership, whereas Arch will utilize its asset base and its competences in chemical conversion.

In addition, DSM Anti-Infectives is currently investing to upgrade activities in India, Mexico, Europe and China towards enzymatic processes. DSM’s enzymatic technology provides not only substantial environmental advantages – such as a strong reduction in emissions and energy consumption – but also superior quality and is more cost-effective throughout the value chain.

Looking ahead, DSM Anti-Infectives expects its profitability to be sustainable in the years to come.