Research and Development: The Know-How Pinch
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Research and development efforts have been the lifeblood of the chemical industry almost since its creation. the intellectual capital underpinning new technology and products has provided a competitive edge for companies. Now, however, many firms are rethinking the emphasis of their R&D programs and how they can capitalize on their know-how.
the resulting review often winds up with intellectual capital as a revenue-generating business unit in its own right. More and more chemical companies are looking at licenses and royalties coming from intellectual capital as a significant source of funding for their R&D. &ldquoCompanies used to look at their patent portfolio as a highly competitive, very proprietary part of their business,” says Ben DuPont, president of a technology licensing business, yet2.com, Cambridge, Mass. &ldquoBut now they are more comfortable with looking at intellectual property as a way to keep close to customers and build markets.”
Nothing more dramatically demonstrates how this new view has emerged than the current scramble to get manufacturing assets and business ventures in place in China, a country whose protection of intellectual property (IP) is mixed, at best. Even though many business managers are aware of the IP risks of doing business with China, they are steaming ahead with an ambitious slate of projects, joint ventures and alliances. A similar picture emerges in India, the Middle East and other parts of the world with spotty IP protection. the American chemical industry is fighting for markets and profits globally and will do whatever it can to keep its businesses healthy today.
Meanwhile, new ways of doing chemical R&D hold the promise of a faster pace of discoveries. the maturation of combinatorial chemistry, which combines benchtop test tubes with high-powered computation of molecular features, has resulted in some significant breakthroughs, and many more are expected.
Getting technology to market also is becoming easier thanks to the Internet. Technology licensing services like yet2.com make IP a more saleable asset by allowing prospective sellers of know-how to broadcast their offerings to a much wider market.
Sustaining R&D
Data from the American Chemistry Council (ACC), Alexandria, Va., show the important role that companies continue to see for R&D (Table 1.) Even during the severe downturn in the early years of this decade, R&D fared reasonably well. Investment shrank only slightly in 2002 and quickly began rising again. Since then, it has climbed by $1 billion or more per year. ACC projects that it will reach $24.3 billion this year and $25.7 billion in 2006. these figures include pharmaceutical R&D, which dominates chemical-sector R&D by more than twofold. In the current year, pharmaceutical R&D will amount to $17.6 billion; other chemical R&D will total $6.7 billion, about a 4% gain from 2004&rsquos estimate of $6.445 billion, according to ACC&rsquos Annual Situation and Economic Outlook.
the ACC data also show that in the past few years R&D spending for product development has increased while funding for basic research has declined. In 2004, 60% of spending went to development and only 7% for basic research (Table 2.) Broadly speaking, basic research provides the strongest measure of new IP, but it is not really possible to neatly separate it from applied research and development. &ldquothe engine of innovation is still humming. Analysis of preliminary survey results suggests that nearly 14% of basic and specialty chemical company revenues are from new products and services, those developed within the last five years,” ACC reports.
&ldquoIntellectual property is an asset that we manage,” says Bruce Story, intellectual capital director for Dow Plastics, Midland, Mich. &ldquoWe look at our patents versus our investment in them, and we look at their return on investment.” Story notes that the trend in recent years has been to focus more on efforts to support customers rather than on inventing new products, although he is quick to say that Dow does both.
Customer support was part of the reason behind Dow&rsquos late January announcement of a new R&D center in China. Although the announcement was made in Shanghai, the actual location of the center has yet to be decided. the center will be operational within three years and will also handle certain internal information technology (IT) functions for the corporation. &ldquoThis center will bring us even closer to our customers and enable us to more effectively respond and deliver on their current and future business needs, both in China and the broader Asia Pacific region,” says Rich Myers, chair of Dow&rsquos internal R&D council.
Dow, of course, is not the only one investing in R&D in China. In November, Honeywell announced the establishment of a new plastics additives R&D center in Shanghai. Dow Corning, a 50-50 joint venture between Dow and Corning, says it will expand its Songjiang Application Center near its Shanghai manufacturing plant.
DuPont is about to open a corporate R&D facility in Shanghai built to accommodate 200 scientists; the project was announced in late 2003. the company calls the facility the third of its &ldquomajor” research facilities outside the United States; the others are in Switzerland and Japan. (DuPont has a total of 75 facilities conducting research and product development around the world.)
GE Plastics opened a &ldquoglobal research center” in Shanghai in 2003 and later incorporated a divisional Technology Center at the site. Numerous other American companies are working to build R&D capabilities in China.
Risky business
However, many firms worry about the IP situation in China. A study among leading chemical companies in the United States and Europe performed by Accenture, a Chicago-based business and IT consulting firm, found that intellectual property theft was the No. 1 concern, as noted by 51% of respondents. Interestingly, there was a significant difference between North American and European executives&rsquo responses: IP theft was the No. 1 concern of 59% of U.S. respondents; only 29% of European respondents called it the top concern &mdash many more, 41%, voted for &ldquoachieving profitability” and &ldquomanaging inventory.”
A grudging acceptance of risk seems to be the pattern with companies that are setting up operations in China and other parts of the world with weak patent enforcement. &ldquoWe can see the value of conducting R&D in countries where the right laws are on the books,” says Dow&rsquos Story. &ldquoWhen China joined the World Trade Organization [WTO] in 2002, it was obliged to comply with WTO IP requirements. But the issue now seems to be enforcement, which seems to be spotty. We&rsquore constantly studying the situation.” Story adds that there are positive trends. Companies or individuals in China are being successfully sued for patent infringements or trademark violations, &ldquobut the penalties are so small that it&rsquos not much of a disincentive to them,” he says.
A similar view is held at UOP, Des Plaines, Ill., which receives the majority of its income from licensing process technology for refining or petrochemicals. &ldquoOur research is conducted primarily at our Des Plaines headquarters,” says Jennifer Holmgren, director of exploratory and fundamental research. &ldquoBut we license our technology all over the world; we have to do this [to serve customer needs].”
Speeding up the process
While patent attorneys and IP managers fret about the security of know-how in the global marketplace, a completely different driver is changing the shape of licensing and invention: the need for speed. Companies are looking for a faster payout on their IP, which is prompting a growing trend toward licensing and partnering. Meanwhile, the pace of invention itself is benefiting from improved laboratory techniques such as combinatorial chemistry and high-throughput experimentation (HTE).
&ldquoPatents have a short shelf life, and it is getting shorter all the time,” says Ben DuPont of yet2.com. In his view, a company should turn a new discovery in the laboratory into licensable technology as soon as possible and seek partners or customers.
the idea behind yet2.com, which was started in the heyday of the dot-com boom of the late 1990s and survived the meltdown that followed, is simple: A company with technology available for license can post information about it, allowing firms looking for know-how to check it out. In the past couple years, the site has added a &ldquoTechNeeds” service in which companies with technical problems can post a description and technology providers can offer solutions. Procter & Gamble, Cincinnati, for instance, recently licensed water-purification technology to Woogjin Coway, a South Korean manufacturer, and polymer know-how to Amcol International, Arlington Heights, Ill. P&G, which is one of the backers of the business, along with Bayer, Honeywell, Dupont, Siemens, and others, has also acquired technology via the site.
DuPont says that while his business has yet to meet its initial growth forecasts, it is growing nicely now. &ldquoWe are involved in about five conversations daily and we&rsquore closing two licensing deals a month with our clients,” he says. Depending upon the nature of the deal, we might get a royalty in addition to a commission,” he says. DuPont adds that roughly a quarter of the &ldquoFortune 500” are now members of the network of yet2.com users.
A similar pitch is made by another Web-based licensing service, innocentive.com, Andover, Mass., which matches up seekers with solvers. Chemical companies, which generally are the seekers, pay a fee and then post problems for which they are seeking solutions. Literally anyone could propose a solution; the seeker company then enters into a negotiation or development effort if it likes the idea.
Originally incubated at Eli Lilly & Co., Indianapolis, InnoCentive has since been spun off as an independent entity and has signed up Rohm and Haas and DuPont as corporate members within the past year. It also has agreements with research centers around the globe, such as the Indian Institute of Technology, Hyderabad, and member universities of the Russian Academy of Sciences, who are among its sources of solutions.
On the research-technology front, the combinatorial chemistry movement seems to be creating genuine excitement. the approach, which originated in the pharmaceutical sector almost two decades ago, now is gaining momentum throughout the chemical industry.
Combinatorial chemistry means different things to different researchers, but in most cases, the technology refers to a combination of molecular modeling and simulation on computers, used to set up experimental parameters or target molecules with an HTE machine that can test hundreds of small quantities of a reactant, catalyst or other material in a matter of minutes.
Symyx Inc., Santa Clara, Calif., for one, has been a major beneficiary of the increasing interest in the approach. During the past year alone, it has signed a $120-million, six-year collaboration with Dow Chemical, as well as pacts with UOP, JSR (a Tokyo-based rubber and elastomer producer), BP and Merck. It has a previously announced deal with ExxonMobil, covering five years and with a worth of $200 million.
With Dow, Symyx was able to expedite the discovery and commercialization of Versify catalysts for producing a new type of elastomer/plastomer. &ldquoWe went from an idea to a completed process technology in about a year and a half,” says Dow&rsquos Story. Now, a plant in Tarragona, Spain, is producing the material for clothing manufacturers.
A similar breakthrough occurred at UOP, which had developed a new catalyst, code-named PI-242, for paraffin isomerization. &ldquoWe went from a few hundred experiments per year with old technology to more than 100 per week with the Symyx instruments and software,” says UOP&rsquos Holmgren. &ldquoCombinatorial chemistry is going to be very big for us.”
