In previous submerged fermentation experiments mycelial suspensions of Streptomyces tendae were viscous and availability of oxygen limited the yield of nikkomycins (Nk), a complex of secondary metabolites which includes nucleoside-peptides with antibiotic activity. Increasing agitation improved oxygen transfer but consumed considerable power and shear-damaged cells. In this paper, cellular aggregates (pellets) were used to reduce viscosity and protect cells from shear. Under the conditions tested, specific productivity of S. tendae pellets increased with increasing size up to 1.4 mm diameter and then decreased. The maximal specific productivity of S. tendae pellets (44 mg Nk/g dry weight/h) occurred at a very low cell concentration. Pellet formation or high biomass concentration was required for the production of bioactive dipeptide and tripeptide Nks. It is speculated that accumulation of intermediates in large pellets activates the production of mature secondary metabolites.