E SPAÑA Y A RGENTINA U N ANÁLISIS DE LA DIFERENCIA

partnerships

for growth

Net sales

€ 739 m

At the same time pharmaceutical companies are also pursuing the opposite: high volume, lower value opportunities in high growth economies. In response, many Western pharmaceutical companies have sought partnerships with low-cost country producers, with whom they can manufacture and market branded generic options, and focus on outsourcing. Also, the general importance of manufacturing and supply chain costs as a source of margin improvement for pharmaceutical companies has become much more prominent.

These changes in the industry present attractive growth opportunities for DSM. The intensity of cost pressure and openness to review business models across the industry is likely to mean above-GDP growth in the pharmaceutical outsourcing market. There is an increasing trend towards outsourced manufacturing; particularly for drugs nearing the end of their (patented) life cycle. The imperative to rationalize assets will lead to a greater focus on finding experienced and highly qualified partners to optimize the value chain.

Anti-infectives are a fast growing class of drugs in the high growth economies, with the beta-lactams class – DSM’s area of leadership – accounting for more than half of the current USD 36 billion market. As healthcare coverage and quality expands in these countries, DSM sees attractive growth – around 5-7% per year – coupled with an increasing focus on quality. DSM is seen as an industry leader with clear market advantages,

communicated via the DSMPureActives™ brand.

DSM’s Pharma revenue is already significant in Asia – giving the company a clear head start in the world’s fastest growing markets for pharmaceuticals in general, and anti-infectives in particular. This market currently represents only about 6-7% of total global pharmaceutical spend, but is estimated to rise to 20% by 2020 (Source: Credit Suisse/IMS). DSM is well positioned to take advantage of this.

DSM has already established a significant footprint in Asia, with its anti-infectives business having two production sites in China and one in India, supported by a network of sales offices.

Strategic context

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 five manufacturing sites in the United States and Europe. Among these customers are nine of the top ten pharmaceutical companies and the top three agrochemical companies as well as a large number of biotech, specialty and emerging companies across the globe. For reporting purposes

the business unit DSM BioSolutions is part of DPP. In 2010 DPP’s sales remained relatively stable.

The business group focuses on the innovative biopharmaceutical market as well as the merchant

pharmaceutical fine chemicals markets. DSM Pharmaceutical Products consists of three business units: DSM Pharma Chemicals (custom chemical manufacturing services for complex registered intermediates and active pharmaceutical ingredients (APIs), including DSM Exclusive Synthesis (custom manufacturing services for the crop protection industry), DSM Biologics (biopharmaceutical manufacturing technology and services) and DSM Pharmaceuticals, Inc. (finished-dose-form manufacturing services). DSM BioSolutions focuses on custom manufacturing services based on microbial fermentation. DSM Pharmaceutical Products’ facilities have been approved by the US Food and Drug Administration (FDA), similar agencies in Europe, the Middle East, Africa and Japan and many other regulatory agencies. DSM Pharmaceuticals, Inc. is licensed by the US Drug Enforcement Administration to manufacture scheduled drugs.

DAI is the global market leader in active pharmaceutical ingredients (APIs) such as semi-synthetic penicillins and semi- synthetic cefalosporins (beta-lactams), and other active ingredients such as nystatin, which represent the biggest class of APIs in anti-infectives. DSM Anti-Infectives is also one of the few API manufacturers that continuously invest in R&D for generic antibiotics. Consequently, DSM manufactures nearly all its beta-lactam APIs and the related intermediates using proprietary biotechnology, which gives DSM leadership in terms of both cost and sustainability as it reduces energy use and minimizes the need for solvents. Consequently emissions and costs are considerably lower than with conventional technology. The opening of the new 6-APA plant in China will mark the completion of this technology rollout across the entire global production footprint.

The APIs produced via these proprietary biotechnology routes also offer advantages in terms of increased patient safety based on the higher purity of the products, and lower spillage in the processing step from API to finished dosage form. To complete DSM's enhanced eco-footprint, DSM Anti-Infectives is cutting down on the use of scarce resources where possible and is actively implementing the use of renewable energy sources in its operations.

DSM Anti-Infectives increased its sales in 2010 from € 326 million to € 347 million.

DSM Pharmaceutical Products

Key drivers of profitability

• Focus on end-of-lifecycle drugs and new products pipeline in pharma industry

• Innovative technologies for the future of pharma manufacturing

• Increased outsourcing by pharma, including technology transfers

Key success factors

Strong pipeline of service contracts based on: • Large strategic customer partnerships

• Delivery to the DSM Quality for Life™ standards for quality, reliability and traceability

• Continued commitment to sustainability and innovative solutions for customer success

DSM Anti-Infectives

Key drivers of profitability • Basic penicillin (PEN) price • Access to regulated markets • Currency exchange rate • PEN production cost

• Conversion margins from PEN to SSPs and SSCs Key success factors

• Market access through global presence/alliances • New technologies

• Access to China

• Product differentiation / brand value • Operational excellence

• Access to quality-oriented customers

The cluster in 2010

The same global trends as outlined earlier are also impacting DSM Pharmaceutical Products, bringing rapid change to the pharmaceutical outsourcing market. Whilst outsourcing is becoming increasingly common, the business remains inherently volatile. Customer demand fluctuates, sometimes quite violently, as customers take manufacturing back in house seeking to fill their own capacity, or see planned production phases delayed by the FDA or because of other business challenges. The rise of competitors from Asia is particularly keenly felt.

There has been a sharp increase in outsourced manufacturing to the high growth economies, although this has tended to remain at the level of ingredients (now moving towards regulated active ingredients) rather than final dosage products. As a result, a number of new entrants have come into the industry over the past few years.

The changing nature of global regulations is creating increased opportunities for bio-similar and bio-better production. DSM Biologics is well equipped to capture these opportunities. The market context has fundamental implications for DSM Pharmaceutical Products. The biggest opportunities now lie where DSM’s pharmaceutical customers expect the greatest cost pressure, that is, innovative drugs nearing the end of their patent protection and support in rationalizing supply chains. DSM is recognized as a trusted and high quality provider, with an excellent track record in regulatory affairs and with

outstanding R&D and manufacturing capabilities. More than this, customers see DSM as a company that understands the intricacies of technology transfer and asset optimization well. All of these strengths mark DSM out as a leading player in the outsourcing market able to successfully manage and deliver complex manufacturing solutions – in other words DSM is now a quality leader in a market that is increasingly driven by cost. Over the past few years, DSM has decisively tackled the challenging issues that were hampering the anti-infectives business. The tough but necessary decisions to rationalize the site portfolio have been taken, and by 2012 DSM will have completed its asset base turnaround with the opening of a new 6-APA plant in China. Not only will this significantly increase DSM Anti-Infectives’ exposure to high growth economies in line with the DSM corporate strategy, it will also make the business less dependent on external penicillin sources.

Organic sales development in 2010 of the Pharma cluster was -1%. The much lower operating result of the cluster compared to 2009 was mainly due to DSM Pharmaceutical Products as it continued to face challenges as a result of low demand from pharmaceutical companies, delay in approvals and the loss of some large contracts. DSM Anti-Infectives' improved

performance in its continuing business could not completely offset the loss of margin as a result of the termination of clavulanic acid production in 2009.

Looking ahead

DSM will further optimize DPP’s current assets and re-focus them towards new customer requirements. This essentially means re-balancing towards lower cost assets in the high growth economies. The inherent volatility of the custom manufacturing business model makes optimizing asset utilization very challenging. In order to address this, DSM intends to significantly expand its range of own products. DSM believes it will drive positive results most rapidly if DPP partners with another company which has strengths complementary to its own.

DSM reached an agreement with Sinochem Group to form a 50/50 global joint venture for DSM Anti-Infectives. The

transaction is subject to receipt of regulatory approvals (including approvals from regulatory authorities in China) and customary clearances from competition authorities in the European Union and elsewhere. In addition, DSM's works councils will be requested to render advice in relation to the proposed transaction. The parties anticipate closing to take place in Q2 2011. Upon closing, the effective date of the transaction will be 1 January 2011.

As part of the joint venture agreement, Sinochem Group will take a 50% equity interest in DSM Anti-Infectives for a total cash consideration of € 210 million on a cash and debt free basis. The joint venture will be headquartered in Hong Kong. Current DSM Anti-Infectives employees, in total around 2,000 people globally, will be part of the new entity. The joint venture will include all of the current DSM Anti-Infectives activities across the world. The joint venture with Sinochem is fully in line with DSM’s stated strategy for its Pharma cluster: creating value via partnerships. The combination of DSM's strong global market position in anti- infectives and Sinochem's significant sales infrastructure presents exciting future growth opportunities through combined technologies and access to the fast growing Asian economies. DSM Anti-Infectives, the global leader in beta-lactam antibiotics, has successfully applied its highly innovative biotechnology knowledge to improve and transform its business.

Both companies are convinced that together they will be better able to capture the growth opportunities in China and other high growth economies, combining DSM’s proprietary technology position and global production footprint and Sinochem’s distribution and sales capabilities and global growth ambition in biopharmaceuticals.

DSM's Materials Sciences businesses comprise the

Performance Materials and Polymer Intermediates clusters. In 2010 the two clusters represented 48% of DSM’s total net sales from continuing operations.

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