Following other acquisitions that included Martek, Ocean Nutrition and Cargill’s cultures and enzymes unit, Dutch life and material sciences company Royal DSM has purchased Fortitech, a Schenectady, NY-based ingredient blend provider, for $634 million. The acquisition is the ninth in DSM’s Nutrition cluster since September 2010; the transaction is subject to customary conditions and is expected to close before the end of the year.
 
Prior to the announcement, I sat down with DSM Management Board Member Stephan Tanda, who discussed the company’s current business strategy, specifically as it relates to the human nutrition segment, as well as innovation and market dynamics.
 
What began 110 years ago as a state-owned coal mining company would eventually develop into a petrochemical-based company. “Over the last 10 years we completely changed the portfolio to a nutrition, biotechnology and materials company,” noted Mr. Tanda.
 
Today’s business is much more aligned with current trends, he added, which include a growing population that is living longer and continually seeking to stay active and healthy. In addition, there is much more demand for environmentally friendly solutions.
 
“We really believe that sustainability is a very strong part of the company. It’s in our genes. It also has to do with the Dutch heritage. Even within Europe the Dutch are almost on a different plane when it comes to sustainability. It’s a small country, threatened by the sea and densely populated, so sustainability is just part of the Dutch culture and a core of our company.”
 
He even noted that 50% of the management board’s personal incentive compensation is based on sustainability metrics. “What is the environmental impact of new product innovations? How much greenhouse gas are you reducing? We pay our people based on that, and that has an impact on the kind of activities we are in—the kind of portfolio we have. That’s why we invest in certain businesses; that’s why we buy certain businesses.”
 
Mr. Tanda also emphasized that DSM is active in multiple steps of the value chain, offering active ingredients (e.g., vitamins, enzymes, cultures, lipids), as well as custom blends and premixes.
 
“Acquisitions make sense in a couple different ways,” he said. “One is to add to the list of active ingredients. So if you look at Martek, Ocean Nutrition, those were classic additional ingredient platforms that we add to our other platforms. We also look at acquisitions based on how we can add to this global distribution footprint and the global blending and premix plants. How we can get closer to customers and do custom blending, custom solutions?”
 
Integrating all the acquired companies under one umbrella presents an interesting challenge for DSM. “You can read all the textbook recipes for integration in the business books, but the reality is each situation is unique,” said Mr. Tanda. For example, Martek was a publically traded company mainly based in the U.S. On the other hand, Ocean Nutrition was privately held, with private equity invested, so the company knew it would be sold for years. Fortitech has about 520 employees and six production sites located in New York, California, Brazil, Malaysia, Denmark and Poland, with sales offices in China and Mexico.
 
Integrating all of its acquisitions is DSM’s top priority, said Mr. Tanda. “We have promised a lot to our shareholders. We stand behind that, but we also need to deliver.”
 
Innovation at the Forefront
 
With a growing focus on science and innovation within the nutraceuticals industry at large, DSM is intent to identify needs of both its customers and end consumers. The company’s innovation expenditure is roughly 6% of revenue, according to Mr. Tanda. “So it’s quite significant. It’s much larger than our customers spend. Customers look to us for innovation.”
 
Innovation is a lot more than R&D, he added. “We have a very strong science base. Often we will come up with a new molecule or a new ingredient, but sometimes it’s just helping with the processing—reducing waste in the plant, allowing the customers to differentiate their products. Of course the answer is very different if you are in personal care, or animal feed or human nutrition.”
 
He continued by saying, “It’s been interesting to see the role of new nutritional ingredients and healthy innovation go back and forth from food minus (taking out the fat, the salt, the sugar) to food plus (single ingredient health claims) to a more holistic definition of health with a more natural component. It seems the food industry is continuously asking, ‘how can we tap into the consumer need for health and wellness, but in a way that also makes sense from a business model point of view?’”
 
It takes time for an ingredient, even with very strong science, to break its way into mainstream products, he added, pointing to omega 3s as an industry all-star, and resveratrol as an emerging hopeful.
 
For the Future
 
Thankfully for the nutrition industry, the economic pressures felt by other markets haven’t eaten away at profitability. “People get up every morning and they eat. They may not buy a television set, they may postpone their purchase of a car, but food is usually one of the least elastic purchases,” Mr. Tanda noted, saying DSM certainly want to have a larger impact on the food industry for the future.
 
A key challenge for the industry has been, and will continue to be, maintaining a high level of quality, he added. “Industry has struggled with doubts about efficacy of ingredients. It is really important to base claims on real science, to have strong quality in place. At the end of the day, the consumer is looking for a benefit, and if that benefit is not delivered or if there are quality issues, the whole industry suffers.”
 
As the company steps forward, Mr. Tanda said DSM, with its strong biotechnology presence, will work toward resolving some of the world’s biggest problems, particularly in terms of biomedical materials and energy—transitioning away from a petroleum-based economy. For example, the company has a partnership with BP (British Petroleum) to make diesel from carbohydrates.
 
Additionally, the company is making strides in using material science to fix biomechanical systems (the human body), through implants and regenerative medicine. “By combining material science and biotechnology you can do tremendous things that only 10 years ago you would not have been able to do.”
 
With broad-based capability, DSM would seem ready and able to deliver. DSM is certainly “in motion.”