"For Roche, the vitamin division was a small piece of the corporation which had a primary focus on pharmaceuticals and diagnostics," said Joe LaPlaca, vice president of dietary supplements/business development at DNP. LaPlaca, a former Roche executive, added, "For DSM, we are a big piece of their business, so we are really core for them... The vision that DSM has is very good for bringing new opportunities to the marketplace."
DSM's vision includes investing in science, including clinicals, and introducing new products backed by solid scientific research. "That's good for us, good for our customers and good for the marketplace." The merger brought Roche's vitamin business into DSM's life science cluster, creating a global giant supplying vitamins, carotenoids and other fine chemicals to the feed, food, pharmaceutical and cosmetic industries. The two entities generated revenues totaling approximately ¤ 4.5 billion in 2002. "DSM is now the global market leader in terms of revenues," LaPlaca said.
For 2004, DSM predicted that DSM Nutritional Products will generate an EBIT (earnings before interest and taxes) of ¤ 150 million, resulting in an EPS (earnings per share) increase for DSM of around ¤ 0.70. By 2005 and 2006, a profitability of 18% EBITA (earnings before interest, taxes and amortization) on sales is projected for DNP. Robert Hartmeyer, chief operating officer of DNP, heads up a management team combining executives from both Roche and DSM. Corporate leaders have established an integration and restructuring program to reduce costs and improve production efficiency.
"In terms of key changes, right now there is a lot of work on trying to find synergies between the two organizations," LaPlaca noted. "Both companies were interested in the nutritional ingredient area and were working on that independently before the acquisition. We are now trying to understand what advances each company has made and how to take advantage of synergies from both to make sure that we work in an efficient manner, because this is a key category."
One example is Roche's research into probiotics, an area that DSM had not explored prior to the acquisition. "Absolutely, we will be coming out with probiotics," LaPlaca confirmed, "and we have other new ingredients on the drawing board for this year." Worldwide, 32% of DNP's business is in animal feed, 30% in pharmaceuticals (including supplements), 29% in food, with a small percentage in cosmetics and other areas. Asked to summarize the market for vitamins and other nutritional ingredients over the past year, LaPlaca replied, "Globally, the overall market is growing, but not by leaps and bounds."
Vitamins remain the largest category for DSM in the supplement category, followed by carotenoids. The biggest change in the category has been a surge in sales of new products introduced within the past few years. "That's what's helping us as prices over the last five years have come down in a number of categories," LaPlaca noted.
Pricing of some letter vitamins, such as vitamin E and the B vitamins, have stabilizedÑbut at lower levels than in the past. Vitamin C, by contrast, has had a double-digit price increase in the past two years as supply has been outpaced demand.
In contrast to letter vitamins, novel new ingredients have not been subjected to price pressures from Asian suppliers. "There hasn't been a price issue because it's a growth category, " LaPlaca noted, adding that DSM's customers are most concerned with factors other than price. "Right now, it's performance, quality and bioavailability." In the U.S., LaPlaca has seen shifts in the supplement category. "We continue to get good growth in the multivitamins, " he said. "Certain single letter vitamins have slowed a bit, but we have good growth in others."
The company's healthiest growth in North America, however, has come from new ingredients launched over the last few years, including lutein, lycopene, fish oil, the omega-3s and, most recently, omega-6 fatty acids. "Growth has easily been double digits in those," LaPlaca said of the new ingredients.
Big Launch for Teavigo
During the first quarter of 2004, DSM plans to introduce its newest product, Teavigo, into the U.S. marketplace. Teavigo is derived from a proprietary procedure developed by DSM to process raw green tea extract, which is purchased and processed in China. The product contains a purified form of EGCG (epigallocatechin gallate), a catechin found in green tea. The ingredient plays a key role in prevention of cardiovascular conditions, cancer, gastrointestinal disorders, periodontal disease and dental cavities.
Initially, DSM is focusing its marketing efforts on promoting Teavigo's role in cardiovascular healthÑspecifically, how the substance affects the endothelial layer of skin coating the insides of blood vessels. Hardening of this layer can adversely impact blood pressure; infection or inflammation of the endothelium is believed to be the first step toward atherosclerotic plaque formation. EGCG has anti-inflammatory effects which may prevent atherosclerotic plaque formation from oxidation of bad cholesterol.
DSM is promoting Teavigo for use in a variety of foods and beverages. Initially, Teavigo is offered in crystalline form, although DSM is working on a new form more suitable for supplement and pharmaceutical applications.
Teavigo has already been launched in Asia, Latin America and South Africa. Taiwanese and Vietnamese companies have included Teavigo in supplement pills, while a Japanese firm has incorporated Teavigo in a chewable tablet. In South Africa, Clover Danon Beverages Ltd. has launched an iced tea line with Teavigo cobranded on packaging and in advertising. Next, Clover hopes to persuade the South African government to approve a cancer-fighting health claim for Teavigo, bolstered by a study from a major South African university.
A Positive Spin on Crackdowns
Asked to identify key factors likely to impact the marketplace in the coming year, LaPlaca cited regulatory concerns, particularly for dietary supplements. "There is a lot of activity, and I think we might see change," he said. "The key question is, does it become dramatic? Is something happening that really restricts the market and cuts off opportunity for growth in the category?"
While some industry insiders have bemoaned the new federal ban on ephedra, LaPlaca believes the crackdown could be viewed as a positive for the dietary supplement business overall. "We within the industry have always felt that the FDA has the ability already with current DSHEA rules to do what they need to do when they feel there is an issue," he noted, suggesting that enforcement under current regulatory provisions may be preferable to new, more stringent federal laws.
One issue that DSM is not concerned about is the ongoing price fixing litigation against major vitamin suppliers. "DSM is not responsible for that," LaPlaca said, adding that Roche remains responsible for any future financial liability over price-fixing allegations.
Consolidation continues to impact the market. DSM's consolidation of Roche puts DNP at an advantage against its most formidable competitor, BASF, which recently acquired Takeda. "At the customer level, you've seen a lot of consolidation, right down to the retail level," LaPlaca added, citing the NBTY consolidation of Rexall as the most prominent recent example. Despite this, LaPlaca believes there is room for even more acquisitions to occur. "We don't want to see that," he said, "but the reality is it could happen."
To retain its leadership position, DSM will continue to invest in science and product development. DSM is "very serious about doing all the safety data necessary and putting money into clinicals," LaPlaca concluded. "DSM is a good companyÑand a company focused on trying to build this category."