Looking Beyond Bioprocessing to China, eCommerce, New Tech, and Services

Analysts at Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, and MainFirst gave Merck KGaA mixed reviews on its third-quarter results, despite an 8.9% year-over-year (YOY) rise in net sales to €4.054 billion ($4.517 billion), and a 15.4% jump to €1.111 billion ($1.238 billion) in earnings before interest, taxes, depreciation, and amortization (EBITDA pre). A key reason was the YOY sales slump by the company’s underperforming Performance Materials business, down 6.9% from to €583 million (about $650 million).

That was compensated, however, by double-digit YOY net sales gains for Merck KGaA’s other two businesses, Healthcare (drugs and devices, up 10% to €1.756 billion [$1.957 billion]), and especially Life Sciences (tools and technologies). Life Sciences—which operates as MilliporeSigma in North America—enjoyed a 12.3% jump, to €1.715 billion ($1.911 billion). The business also enjoyed double-digit growth in China, where it opened Innovation Hubs in Shanghai and Guangdong, selling reagents on Alibaba’s 1688.com e-commerce site, opening China’s first Mobius® single-use manufacturing facility in WuXi, and launching a RMB 100 million ($14 million) seed fund for Chinese startups.

Udit Batra, PhD, CEO of MilliporeSigma, recently spoke with GEN Edge reporter Alex Philippidis about the growth of Life Sciences, and ongoing challenges in 2020. (The interview has been edited for length and clarity.)

PHILIPPIDIS: The third quarter results were promising in a few areas. The strongest driver of results was in process solutions, with little blowback from divesting the flow cytometry business. What’s driving process solutions to grow the fastest of MilliporeSigma’s three segments?

BATRA: It’s probably the eighth quarter or so running that process solutions is between 14–16% organic growth. I would say there are three drivers. The first—and this is from a professional portfolio perspective—is our bioprocessing business, where the market is very good. With our end-to-end portfolio of products, we have been gaining market share, and that business has been growing very nicely.

Here, you can think about products that are servicing the existing volume growth in monoclonal antibodies [mAbs]. This is out of our filtration portfolio, our chromatography portfolio, our cell culture media portfolio. So that’s the most important driver, the increasing consumption of mAbs.

The second driver is the introduction of new products like our Pellicon® capsules, our newer products in the BioContinuum™ Buffer Delivery Platform space, for continuous bioprocessing. We have a market-leading cell culture media and cell line. These products have been picking up very nicely.

New product introduction has really helped, as have newer services, including our contract manufacturing and services businesses. We’re a leading producer of viral vectors for cell and gene therapy. Our antibody drug conjugate contract manufacturing business is growing nicely. We produce high potency APIs [active pharmaceutical ingredients] for our antibody drug conjugates, and also the finished product for some clients. We have an end-to-end bioprocessing business out of Martillac, France; China; and the United States. That services business, including contract manufacturing, is growing nicely.

Finally, in the services business, there is also a biosafety testing business. This is the old BioReliance business that Sigma [Aldrich] used to have. That’s growing extremely well, in the low 20% [range].

The third driver is geographic. We’re seeing super growth across the different regions, and North America and APAC [Asia-Pacific] in double digits, and Western Europe in the high single digits. Process solutions in the third quarter grew over 40% organically versus the same time last year in China.

PHILIPPIDIS: To what extent is the China growth the result of opening the WuXi site and an expanding presence, as opposed to simple organic demand increasing?

BATRA: It’s a bit of both. I think the organic demand is somehow serviced by the opening of new sites, be it for WuXi or be it for other local producers.

The reason we are, and remain, optimistic is if you just look at the 13^th Five-Year Plan from the Chinese government: by 2025, the government wants to produce 45% of the locally needed biopharmaceuticals locally in the country. Today, that number is less than 20%. So, within the next five years, that number has to more than double. That is going to require people to put up new sites and buy new products. We are really there to benefit and help the local customers.

PHILIPPIDIS: Given drug demand and market dynamics, where does the partnership with Alibaba fit in?

BATRA: China is so much further ahead in digital connectivity. Western Europe and North

America? It’s not even close anymore. When we were thinking about the next-generation e-commerce platform for us globally, and about expansion in China, we said, ‘You know what? For local expansion in China, rather than rebuilding everything ourselves, why don’t we talk to the people who are already competent and understand the customer space here?’

Alibaba, of course, came to mind. Together we have built a B2B platform that services research customers. The experiment has just started. The deal has just started, and initial results are very, very promising. We would not have been able to do this ourselves at the pace at which we’re doing it with Alibaba. All indications are very good, much better than I had on paper as expectations.

Second, we also believe the local talent there is much more facile in building connected ecosystems and e-commerce platform. The next generation of sigmaaldrich.com (or sigmaaldrich.cn in China), is being built there in China.

Our intention is to roll out that platform globally. We used to build our platforms in St. Louis and then roll it out to the rest of the world. This time we’ve decided to do it in China for obvious reasons—something I’m super excited about.

PHILIPPIDIS: Over time, how will parts or services be procured by your customers?

BATRA: In China, most transactions and payments are done on mobile. Delivery is within 24 to 48 hours for virtually every product in China. And that’s not necessarily true for all products and every product, even configurable products in the United States and Western Europe.

Mobile ordering, mobile payment, 24-to-48-hour delivery to the door of the customer is what Chinese customers expect. And that’s what we have done in China now, so now we are going to roll that idea out to the rest of the world. Exciting times!

PHILIPPIDIS: At this point, you’re not quantifying a specific percentage increase?

BATRA: No, no. It would be silly at this stage. I have expectations. I don’t want to put everyone under pressure to start going public with them. But if you just look at the last five years, we’ve outpaced the market quite substantially in terms of organic growth. This year is a case in point. Year-to-date, we’re growing 9.5% or so organically in sales, whereas our top competitors—Thermo Fisher or Danaher, who are also diversified—and some others are between 5% and 6%, so we’ve opened up a lead.

We didn’t announce it in the past. I never said that we will do it this way. But we believe we can sustain this momentum. And then the margins are pretty good.

Some analysts have called us the hottest player, because our margins are also 400 to 500 basis points higher than the next set of competitors. I don’t believe in putting targets out publicly. But you can be sure that our ambition is to continue to alter the market in a meaningful way and maintain a superior margin.

PHILIPPIDIS: In October, MilliporeSigma announced the acquisition of FloDesign Sonics and its acoustic cell processing platform. What attracted you to the company, and what part will that play in advancing cell and gene therapies?

BATRA: FloDesign Sonics has a unique technology to separate cells using sonic waves, and to entrain cells without creating a lot of stress on them.

Very often when you try to separate cells using sheer, different types of centrifuges, you put a lot of stress into the cells, and the cells don’t remain viable. In cell therapy, you want to maintain as many cells viable to the process as you can.

PHILIPPIDIS: What role does MilliporeSigma see itself playing in gene and cell therapy development?

BATRA We are technology developers and we have expertise from doing it for biologics in the past. Second, we also believe that, in the short term, having a contract manufacturing service can help us seed our products with customers, understand customer needs on a day-to-day basis, because these areas are moving very rapidly, and the therapies and the technologies are in the early stages. We plan to be active, not just in technology development, but also in services, meaning contract manufacturing, as well as service provision to the extent that they help us develop technology.

PHILIPPIDIS: Four investment firms have issued fairly positive reports about MilliporeSigma, though not Merck KGaA. Yet Merck cautioned against extrapolating its performance too far beyond Q3. What headwinds does the company see that the analysts are missing, looking at Q4 and 2020?

BATRA: Other scale players just like us, have been going between 5.5% and 6% organically. We’ve grown 9.5%. Our margins are 400 to 500 basis points higher than the next set of competitors. You cannot continue this forever. So that’s the first practical constraint.

Second, if you just look at quarter-on-quarter comparisons or YOY comparisons, as we do well this year, the next year we’ll definitely have a higher base. This is why we caution against extrapolating every quarter, because the fourth quarter last year was the highest quarter ever for our business in terms of absolute sales. If you use that as a denominator, then the next quarter should be a bit slower. It’s those reasons—the higher base and the fact that we have such a huge lead. Our competitors are not sitting idle. There’s a lot of consolidation in the market.

We’re also pretty active in certain areas that will keep us competitive, and probably ahead of the competition. But I don’t want to say that we will be 3-to-4% higher than the next set of competitors forever. That would be too arrogant.

If you say, well, are you worried that you don’t have enough ideas to sustain this momentum? Absolutely not. I would not have told you four or five years ago that this would be the trajectory. But we had ideas that we had already launched. We invested in viral vectors four-and-a-half years ago. We expanded our e-commerce platform four-and-a-half years ago. We invested in ADCs [antibody-drug conjugates]. We put up plants in China. We put the wheels in motion and the results are showing up now.

Now, what we are excited about is the changing paradigm in drug discovery and manufacturing. We’ve put up teams—11 such teams are looking at over 60 technologies that have the potential to change how drugs are discovered, how novel modalities are interrogated, how they’re produced. Stay tuned. As those teams finish their work, you will see them getting into the operations, and I feel very good about what I see for the future as well.