Full speed ahead

With health high up the agenda, the appetite for functional and nutritional foods is creating a growing and highly profitable category that is fuelling ever-increasing innovation in the food sector.

Dr Ralf Zink, technical director and global head of research and development (R&D) at Dusseldorf-based Cognis, says: "It's an exciting time as customers are now willing to do something about their health, with food. Prevention is now on their minds so where people previously only bought on texture and taste it's now also for health."

This demand is, in turn, leading to the emergence of specialist venture capitalists who are seeking to fund companies involved in developing new ingredients that have a healthy and nutritional focus.

David Atkinson, managing partner at Tate & Lyle Ventures, says the £25M Tate & Lyle venture fund is one of the first of its kind that is run by external specialists and is investing purely for the parent company to enable it to tap into areas that it would previously have shied away from as being too risky.

It is looking to invest between £1M and £3M in each of up to 10 companies in Europe and North America that are focusing on 'next generation' ingredients (such as nutritional and functional foods), biofuels and developing manufacturing innovations.

Having seen 50 potential homes for its cash so far, Atkinson says the fund has just invested in its first business. It is involved in food diagnostics and "takes time out of the system of testing new foods"

He says Tate & Lyle's fund differs from those set up by other large food companies - such as Unilever, Nestlé and Danisco - as it actively seeks out innovative companies rather than "waiting for them to knock on the door"

As such a fund, focused specifically on food, is a new phenomenon, Atkinson can understand why it has so far been very difficult for small companies to access funds. Dirk Carrez, policy director at EuropaBio, says venture capitalists tend, typically, to be involved in the technology industry and need educating about the food sector.

Investing in early-stage developments in the food industry, he says, requires a new type of thinking as many companies in these areas work collaboratively with other organisations and institutions. They also tend to be more project-oriented as they are frequently involved in only some of the steps in the creation of a new product or ingredient.

Collaboration is integral to innovation in the food sector and can involve large consumer food companies, specialist chemicals companies and universities (looking to commercialise their research).

Katinka Abbenbroek, chief executive of European functional ingredients firm Lipid Nutrition - which has ingredients in the areas of weight management, heart health, immune health and infant nutrition, says: "Our novel food ingredients team looks all over the world for inspiration. But we also look at start-up companies and universities that are researching and patenting ingredients but don't have the resources to develop them. Sometimes they will approach us and say: 'would you like a licence?'"

One of the company's weight management ingredients - Clarinol CLA (conjugated linoleic acid) - was developed by a research institution and Lipid Nutrition obtained a licence to develop it. "They had only done the research on cells, whereas we did all the animal testing, toxicological testing, human testing and regulatory work," she explains.

Much research of this kind is undertaken in universities but it can be difficult for them to obtain funding to commercialise their ideas. Professor Terry Cosgrove, of Bristol University (UK) - who has formed spin-off company Revolymer that has developed a non-stick chewing gum - says that although most food companies want to expand their product portfolios and can pick up ideas from universities, this does not make it easy to gain funding from venture capitalists or make alliances with large food companies.

"To go into the food market [with new developments] is unusual, as spin-outs are usually into the high-tech area and computers," he suggests.

Abbenbroek says that she understands why the appeal for many food companies to set up a venture capital-type fund is limited - "it's like throwing your money down a black hole: you don't always know if anything will come out" - but adds that Lipid Nutrition does support research in universities and uses professors to do basic research.

This is also the case with Cognis, says Zink. It uses a variety of approaches to developing new ingredients, including funding academic work in universities: "We 'steer' research by external funding, as you need to be in the loop and steer," he says.

However, you have to be careful as industrial food research is very different to academic research, since the latter will typically raise new questions compared with the former, which will seek to solve a problem that ultimately helps to develop a new product, he adds.

Care, therefore, has to be taken with when R&D spending is committed. This is especially important as Atkinson describes the current levels of R&D spending in the food industry in Europe as "pitifully low". Dr Zink says the likes of Nestlé would typically be spending 2.5% of sales on R&D. But even this level of spend is very unusual, with the average across Europe less than 0.5% (see p6).

And most of R&D activity is performed by the large firms, as Dr Zink says small companies' R&D spend represents a larger proportion of sales: "The cost of a professor is the same, regardless of what size the company is."

Larger companies will also endeavour to skew their R&D spend in favour of funding external activities so, for the likes of Cognis, two-thirds of any increase in its R&D spending will be directed externally. And Dr Zink says he has no problem whatsoever finding projects in which to invest.

Despite this, Jeff Pearson, professor of molecular physiology at Newcastle University, believes the food sector is an especially tough nut to crack with innovation as it is driven so heavily by cost, whereas other sectors are not so price-sensitive.

He has developed seaweed extract as a functional food ingredient alginate with high-fibre qualities and has been trying to persuade large food companies to incorporate it into products such as bread. However, talks with the bakery company Greggs, and Northern Foods, have failed, so far, to develop into anything concrete.

"I've been negotiating for three years to get alginate into bread but they have concerns on price, as it will make each loaf 4p or 5p more expensive. Food companies are penny-pinching and there is still inertia in the sector that makes it difficult to get companies to do anything different. They won't respond to situations and look at making money in the future by investing now," he argues.

However, Dr Zink can understand firms' price concerns because the first step consumer food companies take is to determine a product's selling price. And only 10-to-20% can be added to the 'regular' price for new, healthier variants, he says.

The price of functional ingredients is, therefore, paramount and much research will end at this point if sufficient amounts of the ingredient cannot be added to the food within an acceptable price range.

Another issue with innovation in the sector is the necessity to deal with a variety of bodies such as, in the UK, the Food Standards Agency and the Department for Environment, Food and Rural Affairs. This, says professor Pearson, can be "obstructive to the development process"

If the food falls into the 'novel' category a new set of tests and clinical trials is required that can be far too onerous for universities and small companies to undertake. And as the definition of 'novel' differs around the world, the type of trials undertaken varies from country to country.

However, the funding requirements of many small operators can be kept in check by generally operating at the early stages of the innovation food chain and, therefore, avoiding the expense of clinical trials, which would usually be taken on by a larger development company as part of the next stage in the development of a new product or ingredient.

Cognis is sufficiently large to undertake such time-consuming and costly trials and generally has 10 to 20 running at any one time. It employs independent external experts to run the trials because it wants to obtain clinical evidence that supports any claims it makes for the new foods.

Although this can be costly and time-consuming, the food industry recognises that it puts a stop to bad work and protects good innovations being undertaken in the food and health sectors. "If you could create these ingredients without needing any proof that they work, anybody could do it," suggests Dr Zink.

Zef Eisenberg, founder of Maximuscle - which creates formulas for the sports nutrition market, where many unregulated products can be freely bought on the internet - agrees. He says: "These products were mainly in health food shops but now they [nutritional and functional foods] have gone mainstream the regulators are getting stuck in. It can be very frustrating and slows things down, but we know that what goes on the shelf is good stuff."

With this move into the mainstream, combined with developments in the venture capital market and huge interest in healthy food, it seems be a good time to be involved in innovation in the food sector.