Date Published: 31 Jan 2011
DSM, a global life sciences and material sciences company, recently announced its intention to purchase Martek BioSciences in a Billion dollar deal. DSM recently divested its key synthetics businesses and is aggressively pursuing its aim to become a leader in the life sciences and Food & Beverage Ingredients space. DSM already holds a wide portfolio of natural and synthetic food & beverage ingredients including enzymes and vitamins. The Nutrition business unit of DSM covering food and feed ingredients has been a significant driver for growth of the company.
Figure 1-1 representing the performance of the nutrition business clearly reflects that this is becoming a star business unit for DSM.
Figure 1-1: Nutrition business of DSM - Percent of revenue contribution (2004-2009), Global
Martek, a global market leader in the algal omega-3 space, fit neatly into DSM's overall strategy of attaining leadership in segments that it is active in. DSM's existing vegetable and marine omega-3 range will now be extended to include algal oils. Martek and DSM have been collaborating for quite some time in the Omega-3 space, and this has evolved into the current acquisition, which works well for both companies.
The global Omega-3 Ingredients market
Omega-3 Ingredients have been growing at 10 to 18 per cent across different regions in the globe. Marine source Omega-3 ingredients contribute to 90% of the estimated revenues of $1.5 Billion globally in 2010. Europe is expected to show a greater acceptance of algal oils in the near future and grow faster than North America, where algal oils are well established.
Figure 1-2 shows snapshot of growth patterns of marine and algal omega-3 ingredients in different regions of the world in 2010.
Figure 1-2: Snapshot of global Omega-3 Ingredients market, 2010
Strength and Weakness of Algal Omega 3 Ingredients
Algal omega-3 Ingredients has the advantage of being vegetarian source which is a popular food trend in the west currently. In addition, algal source omega-3 application technologies are protected by a strong Intellectual Property portfolio and supported by research specifically in the infant nutrition space. The DHA/EPA ratio makes it ideal for pregnant and lactating women and infants. Despite the strength of the product, algal oils have a low share of the market for Omega-3 Ingredients. Manufacturing base for algal source is highly consolidated with only two main manufacturers controlling the total market. Of these Martek with its length & breadth of patents is the clear market leader. There are other companies which claim to be able to manufacture algal omega-3 ingredients from different parts of the world, but have failed to create an impact in the market. For algal source to garner a significant proportion of the market, manufacturers have to follow a multi pronged strategy including:
Cost competitiveness compared with other omega-3 sources, both established and upcoming.
Greater penetration, in application areas other than infant nutrition
Stronger IP protection
Our earlier analysis showed that combination of different sources of Omega-3 was necessary for maintaining concentrations of different fatty acids as well as for keeping costs under control. A mixture of algal and flax seed oil could give the low cost option for food manufacturers to include Omega-3 in their products at the recommended dosage of 650 mg/ person/ day.
Infant formula consumes nearly 57% of the total Omega -3 fatty acids entering the food industry in the USA, while functional foods consume only 10%. Functional foods include fortified milks, cheese, cookies, breads and nearly every other manufactured food which can be used as a carrier for omega -3 fatty acids.
The global scenario is not very different, where either infant formula or child nutrition products contain appreciable algal Omega -3 fortification with qualified leading to health claims. Fortified foods are still at infancy in most markets.
There is a lot of speculation in the market about expiry of specific portions of Martek's patent portfolio, which could allow entry of newer players into the algal Omega-3 Ingredient space. DSM's acquisition of Martek could be viewed in different perspectives - Their confidence in Martek's patent protection or Martek's requirement of a strong financial backup to retain its leadership position in the market when its patent protection expires. Martek's own disclosure is clear about the status of patent expiry on certain key products and processes, and their business plan is structured around the extended protection offered by their wide patent portfolio. DSM can and will offer a compelling case for customers to extend their sole source agreements with Martek. DSM's expertise in the field of nutritional ingredients, their positioning as a single stop supplier of key functional ingredients and greater ability to offer technical support are advantages that clients will consider when signing on.
Key questions for the market
Evaluation of the acquisition of Martek by DSM warrants a separate and in-depth study. The implications for the market though are partly independent of DSM's rationale in acquiring Martek. The key questions to ask in analysing implications for the market would be:
Does this mean Omega-3 is no more lucrative for small companies?
Are technological advancements going to slow down since there is a lot more marketing involved?
There are many players waiting to enter the market. How are they looking at this?
Omega-3 Ingredients contribute to approximately $175 million in revenue to Pronova Biopharma, the largest company in this space in North America. Martek derives only around $83 million as a Food & Beverage Ingredient from Omega-3 in NA. Most companies are pure play Omega-3 manufacturers, even though they operate across many application segments. Cognis and Martek are currently the only two companies which have the significant backing of global ingredient players, viz BASF and DSM respectively. While Cognis has only marine source Omega-3, Martek adds to DSM's existing vegetable and marine source Omega-3 Ingredients. With the acquisitions, Cognis & Martek have gained significant increase in access to markets and R&D focus that could push smaller players out of the market for Omega-3 Ingredients.
Technology has been the driving force that kept Martek competitive as an Omega-3 Ingredient manufacturer. Their strong contracts with key food manufacturers were based if now wholly, but at least significantly on their ability to provide quality technical backup in terms of validation data, formulation support and product improvement in terms of sensory properties and stability. DSM provides the strength to Martek to increase volume capacity, reduce cost, synergise with other functional ingredients and widen the geographic scope of operations. While DSM is a highly technology oriented and innovative company, to succeed in the Omega-3 space they need to focus on strengthening Martek's weak areas which revolves mainly around cash flow and marketing. When the main player in the market shifts from scientific and technological focus to a more marketing centred strategy, it will significantly affect the innovative output of the market.
Many players waiting to enter the market for Algal Omega-3 Ingredients, based their hopes on Martek's patent portfolio expiry. Prices were speculated to fall upon expiry of Martek's key patents. DSM offers key support to Martek in synergising with it's existing and rather substantial intellectual property portfolio in F&B Ingredients. This synergy could open up more lucrative arenas for Martek's Omega-3. In another scenario, Martek could become cost competitive even when other players enter the market due to an increase in capacity supported by DSM. Either way, this event should make companies think twice before entering this market.
The dynamics of the market is expected to be altered significantly based on this acquisition. Martek is now supported by a multi-billion dollar principal that can affect its competitive position positively. DSM brings synergy to Martek in areas such as access to technology and markets. Martek, and by implication algal omega-3 sources, become more competitive and increase their geographic and application coverage. The exact changes in the market are something to wait and watch.