Rather than using in-house expertise, large companies increasingly rely on outside organisations to develop new ingredients and processes for them. Shane Starling reports on the benefits of licensing
It is no secret that when it comes to ingredients development and processing technology, it is smaller companies that often lead the way. Indeed, many of these companies are established for the sole purpose of developing a particular innovation. The problem they then encounter is raising the funds to foster that development and finding markets for what may well be a hitherto unheard of product or application. It's a daunting prospect and one that defeats many before they develop the necessary momentum to succeed.
On the other hand, the large players and multinationals often toe a conservative line due to the size of their operations and because they have so much brand equity at stake. Any major company looking to add to its suite of ingredients or employ new technology wants to ensure that any expansion won't damage the image of its existing portfolio.
Unfortunately, this kind of approach can put the brakes on innovation. As Paul Allen, group vice president of Cognis Nutrition & Health, says: "If I'm a Nestlé, a Kraft or a Unilever, I'm not going to risk my brand on a bunch of untried ingredients in the hope I can get 10 to 20 per cent growth when I could screw the whole thing up."
Counting On Clout
What the big companies do have in abundance though is clout. They have marketing clout, they have distribution clout, they have processing and manufacturing clout and they can make things happen. This is, of course, exactly what smaller companies lack. Maybe they can gain contracts in their own countries, maybe enough to keep their heads above water, but would they be able to cut it at the next level? And would they want to? Maybe innovation is where they draw the line; after that they need partners simply because marketing and sales may not be on their agenda — two areas where multinationals tend to thrive. Technology transfers, licensing agreements, business partnerships — call them what you will — can result in a 'win-win' arrangement that can boost both parties' businesses.
Take a recent deal between multinational Cognis and Norwegian research and development company Natural ASA. Cognis paid Natural a fee to gain the worldwide licensing rights to its Tonalin CLA body-shaping ingredient and has begun aggressively marketing it in Europe. BASF has signed a similar agreement with Natural in the animal feed area.
As part of the deal with Cognis, Oslo-based Natural, which specialises in developing patent-protected lipid products, transferred the intellectual property, technology and marketing rights of Tonalin. The arrangement also gave Cognis an exclusive license to use the Tonalin trademark. Natural had already established Tonalin as the leading CLA brand name in the US, where most of the initial research was done at an American university, but its presence was minimal in Europe. Now, Cognis' Nutrition and Health Division can set about fulfilling its end of the bargain by expanding Tonalin's European market share in its primary marketing channel of dietary supplements, as well as foods, cosmetics and pharmaceuticals.
A Natural spokesperson said the deal suited them because the product had outgrown the company. Releasing it to Cognis freed up valuable resources that can be channelled into fresh projects that better fit the company's research and development profile. "We are developing a fermented soybean extract. Maybe this time we will keep it in-house," he notes. "Who knows? It depends on how successful it is and where we are at the time."
This is another licensing plus-point: it fosters specialisation and therefore productivity and flexibility. And from Natural's point of view, there are few in the game who market science as well as Cognis. "We are trying to take it to the next level with promotion and strengthening it by attaching it to the Cognis name," says Allen. "We can market the science of the product by having our logo on end products."
But Natural is not completely out of the picture. It will add input to the ongoing development of the ingredient. "We will continue to pay a licence fee to Natural and they will work with us in ongoing research in the field," says Allen. "They have capabilities to do some things and we will use them as a research provider and take their input. Other than that, the programme is ours to manage."
For Cognis, these types of arrangements are major drivers of its business and, more philosophically, define the kind of operation it seeks to be. Allen: "I think we can, as a company, bring new technologies and concepts to the table and help smaller companies because of the kind of company we are. We have a global reach and we are science-based yet marketing-oriented."
It's a sentiment that is increasingly echoed by larger companies working in this area, which have grown to value the role of entrepreneurial companies like Natural and the concept of outsourcing in general.
Scouting For Innovation
ADM's vice president of marketing and external affairs, Tony DeLio, says his company is constantly scouting for new opportunities that may enhance ADM's portfolio. "It's all about outsourcing those aspects of your business you aren't so good at and diving deep into your core competencies. We participate in a venture capital fund and sometimes will make investments in a smaller company that either has an idea that needs market validation or a technology has potential but requires additional research to prove the principle," he says. "This kind of 'seed money' allows the risk to be shared, minimising ADM's exposure, while providing vital capital for further developing the business model."
At times, smaller companies will approach ADM with an idea or technology that is closely aligned or complementary to its existing products and business. A good example is Washington state-based SCOLR Inc, a nutraceuticals developer whose controlled release system technology ADM recently licensed for use in its soy isoflavone business. "They came up with technology that could deliver a dose over an extended period of time and is very flexible, uniform and cost-effective relative to other technologies. Their technology provided a nice addition to our existing product offering, so it was an easy decision for us to enter into a business agreement with SCOLR," says DeLio.
He adds that flexibility in drafting business agreements allows both parties to maximise returns. The level of engagement and partnership develops in stages. "You typically start with a non-disclosure agreement that allows both parties to freely exchange information and assess the value of the technology and potential business relationship. Then, if you hit upon something, you can create a specific agreement for that particular application that benefits all involved."
And licensing needn't be just between businesses. "Research today is being done in very different ways," continues DeLio. "Our customers, some of the biggest food producers in the world, are looking to partner with companies that not only have a basic knowledge of processing and raw materials, but can also provide new and innovative product ideas. It's not enough to only understand your customer — you need to understand your customers' customers."
Universities provide another source of innovation. As there is increasingly less government support for research, universities have turned to companies like ADM to form partnerships to commercialise technologies they are developing on campus. It is important to clearly identify early on how value creation will be shared. Finally, you have the entrepreneurs, the guys who come up with things in their back shed.
"We will listen to these entrepreneurs, too, because you never know when you are going to chance upon something that has genuine value to your business. Often, much work is needed to validate their concepts and the risk is substantial, so we sometimes refer these individuals to venture capital fund managers," DeLio said.
In addition, business-to-business arrangements are not always defined by small companies engineering new products for large players. Sometimes even the largest companies will share their innovations. Karen Todd, senior marketing manager at Roche Vitamins in New Jersey, cites a long-standing agreement her company has with Iowa-based Kemin as a perfect example. "Lutein is something we have worked on with Kemin since 1999 and that has been beneficial to us both. We had the process and they needed a stable beadlet to go into a multivitamin so we formed the arrangement. Kemin still sells its own form of lutein, but ours is a different form even though we both call it FloraGlo lutein. Ours has a disclaimer stating lutein is the property of Kemin Foods. In a way, we are subcontractors for Kemin. It's fine by us because as the FloraGlo brand grows, so does our business."
It's a deal that plays to the strength of both conglomerates, says Todd. "Our strength is developing raw ingredients and processing technology, but then it is also going out and being able to locate new opportunities. We have arrangements with companies from all over the world."
DeLio adds, "The old days of trying to do everything in-house are well and truly over. There are more people doing research these days in all sorts of places — at universities, development companies and internationally, facilitated by people with access to all kinds of equipment that 20 years ago only large companies possessed."
Swedish research firm Probi has signed several licensing agreements to market and develop its probiotic ingredient Lp299v. Its latest deal is with Danone, the world's largest dairy producer, which means Probi's ingredient has the potential to reach all 120 countries in which Danone operates (with the exception of the UK and Scandinavia where other agreements exist).
The Right Combination
According to Probi chairman Peter Zakrisson, the equation for smaller technology-driven companies is straightforward. "If you offer leading edge research together with a simple business model, then you have an attractive offer for global players."
In this case, Danone is looking to secure its position as one of the world's leading suppliers of food products that contain probiotics. Under the agreement, Probi will supply Danone with bacteria cultures, current research, development and consultation for the probiotic bacteria Lp299v. "Danone can focus on developing product concepts and marketing attractive beverages and foods containing probiotics," Zakrisson says. Danone-branded products containing Probi's ingredient are expected by the end of the year.
All these types of arrangements paint a clear picture — there's a lot to be gained by forming alliances with smaller companies, with universities and research institutes, even with your so-called competitors, if it is going to mean added-value to your core operations. As long as you can tolerate a perceived loss of control, the benefits could be manifold.