Private label vs. out-licensing: The difference in perception and benefits

There’s an increasingly common conversation that the few providers of premium private label food supplements have with new contacts. As soon as private label is mentioned as the business model, the potential client concludes that the supplier’s portfolio consists of commodity-based me-too products. In our case, when we then reply that we actually provide clinically supported products, often for pharma clients, the conversation partner mostly tries to characterize our model as out-licensing.

Both perceptions are in fact incorrect and with the increasing number of pharmaceutical companies entering the food supplement space, the importance of clarified terms is rising. Even though we might not be experiencing the conversation live this year, new business developers and product managers from pharmaceutical companies are still sourcing for products and are running into the dilemma online.

A private label company in the food supplement industry usually performs the development of their own finished product formulations, manufactures the products, and sells them to a brand owner for them to market under their own band—without charging a licensing fee. Essentially, the quality or IP of private label product portfolios could be of any level and has nothing to do with the definition of the business model. In practice, however, private label products mostly represent cheap, simple and repetitive. This perception was propelled across all industries by retailers launching their lower cost alternative store brands to complement the more recognized brands on their shelves and dominate the price-sensitive segment. Consequently, we have even been told by pharmaceutical executives that they immediately skip private label food supplement companies, thinking their products are only suitable for price competition in retail stores and not promotion through medical detailing.

However, as time went on and several factors influenced the food supplement industry to gradually raise its standards, so did the development of the private label model into different variants. An important segment of brands still requires basic private label products, but a growing and very different segment of brands aims to convince more demanding consumers, health care professionals and pharmacists. For this, brands require clinically supported, premium quality products, but in many cases it does not make business sense for them to develop and produce supplements in-house. A natural progression of increasing bases of knowledge leading to increasing specialization started companies like PharmaLinea. We saw that there is a lack of clinically supported private label products, fit for medical detailing. We saw that many companies exist with science-based brands and highly developed B2C expertise, but perhaps lack manufacturing capacity for certain product forms, lack manufacturing capacity altogether, lack development expertise, and so on.

In recent years, it has become more common for pharmaceutical brands to start food supplement divisions. They require clinically substantiated, stability tested supplements and they require speed to market. Hence, they need a partner to have already developed the product and performed all the necessary studies. If exchange would have been done at this stage, the object of it would only be IP, sold through a license. The supplier company out-licenses only the know-how, the formulation and the accompanying studies to the client company, who then produces the product in-house or outsources production to a third party. Pharmaceutical companies are much more accustomed to the out-licensing model and often carry the keyword in mind when sourcing for new products. However, establishing food supplement production plants or sections can be a logistical nightmare for pharmaceutical environments. Thus, it is often more efficient for them to outsource manufacturing as well and that is where private label companies come in to provide a complete solution.

In our experience, companies are often surprised about the notion of a private label company performing clinical trials on their own products. Finished product food supplements are in fact lagging in clinical substantiation, and private label products even more so. Perhaps clinical trials performed on private label products will slowly become more common, overall quality and level of IP will rise, and the perception of the business model will change. We predict that increasing complexity of product delivery forms and increasing pressure on time-to-market will continue to drive private label business models and other models of specialized development and/or production.

In our most successful cases of business cooperation, our partners know exactly what they are doing in B2C communication and educating health care professionals and they trust us to cover our part. Symbiosis enabled by specialization is what all efficient business models should strive for and it all begins with agility—probably the most valuable characteristic for the coming times of economic crisis.

Blaž Gorjup is chairman and founder of PharmaLinea Ltd.