The R&D Tax Credit Aspects of Cosmetics
The United States is one of the biggest
cosmetic markets in the world. In 2012, it registered revenue
of more than $54 billion and a work force of around 53,600
people. In the same year, the value of the global cosmetics
industry reached an all-time high of more than $195 billion.
In addition to being more valuable than it
has ever been in the past, the cosmetics industry is certainly
more dynamic and innovative than ever. This highly competitive
sector is driven by constantly evolving needs and ever-rising
standards and, therefore, must be built on innovation.
The present article will discuss the role
of innovation in the cosmetics industry and present the
federal tax credit opportunity available for companies
investing in cosmetics R&D.
The Research &
Development Tax Credit
Enacted in 1981, the federal Research and
Development (R&D) Tax Credit allows a credit of up to 13%
of eligible spending for new and improved products and
processes. Qualified research must meet the following four
criteria:
- New or improved products,
processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include employee wages, cost
of supplies, cost of testing, contract research expenses, and
costs associated with developing a patent. On December 18,
2015, President Obama signed the bill making the R&D Tax
Credit permanent. Beginning in 2016, the R&D credit can be
used to offset Alternative Minimum tax and startup businesses
can utilize the credit against up to $250,000 per year in
payroll taxes.
The Role of Innovation
in Cosmetics
Innovation is key for the cosmetics
industry. The beauty market is driven by the constant
challenge of offering the best products for consumers. In the
fast-moving world of cosmetics, success is dependent on how
well a company can innovate.
This highly competitive segment is
characterized by a combination of increasingly resourceful and
demanding consumers and a multitude of available products. For
this reason, innovation has the ultimate mission of
understanding consumers' desires and developing competitive
products targeted at unmet market needs.
In a context of shifting trends and fickle
wants, cosmetics innovation and marketing are deeply
intertwined. Innovation must ally technical advances with the
consumer perception of relevance, resonating with consumer
insight. It must be quick and timely, demonstrating the
ability to identify burgeoning trends. And, lastly, it must
satisfy consumer expectations, living up to its promise.
Recent Trends in
Cosmetics R&D
The positive performance of the cosmetics
industry has been corroborated by the expansion of thriving
technologies, such as bio- and nano-tech, and the increasing
demand for certain segments of products, including organics,
anti-aging, and male grooming. The following paragraphs will
present recent breakthroughs and outstanding challenges in
some of the most promising fields for cosmetics R&D.
- Organic and Bio-based Cosmetics
The growing demand for bio-ingredients has played an
important role in the cosmetics market. Fueled by
increasing health concerns and ever more discerning
consumers, natural and bio-based technology is expected to
be major drivers of future growth.
The innovative use of bio-ingredients is an important area
for cosmetics R&D activities. Products of the hive,
such as honey, pollen, venom, and royal jelly, for
instance, are increasingly used in face cream and serums.
These substances allegedly possess salubrious properties
that favor increased blood circulation and skin hydration.
Tamanu, oil derived from nuts found in the South East Asia
and the Polynesian Islands, is also an example of novel
bio-ingredient being used in cosmetics. The oil is
supposed to heal scars, assist skin reparation, and soften
lines and wrinkles.
Organic and natural products are increasingly popular and
many companies are taking advantage of the pro-natural
trend. For now, however, they remain a small percentage of
the market. Improved R&D will be necessary before
these products achieve cost-effectiveness while complying
with safety regulations. One of the major challenges is
replacing artificial preservatives without compromising
efficacy and safety.
- Nanotechnology Advancements in
Cosmetics
Nanotechnology is increasingly used to enhance the power
of cosmetics, specially sun care and anti-aging products.
Nanotechnology is the science of manipulating matters on a
molecular or atomic scale. In other words, what
characterizes this branch of technology is its focus on
extremely small dimensions and tolerances - less than 100
nanometers (billionths of a meter).
Nanostructured materials present unique properties, which
are not present in their bulk form. Therefore,
nanotechnology opens a world of opportunities to different
industries and particularly to the cosmetics one. While
nano-enhanced products become ever more common, their
safety is still subject of controversy and their
regulation remains unclear.
For now, the most frequent uses of nanotechnology in
personal care products are UV filtering and the delivery
of active ingredients to the skin cells. The number of
nanoformulated products is rising and beginning to include
nanoemulsions and nanocrystals. Cosmetic giant L'Oreal is
devoting around $600 million to nano patents and has
already patented dozens of "nanosome particles".
Although highly efficient, nanomaterials can have negative
effects. Their physical and chemical properties have not
yet been fully understood and, therefore, can present
unforeseen toxicity. This is particularly problematic in
the case of cosmetics, which have direct contact with
human skin. Impacts on the environment are also cause of
concern, as nanomaterials can be released into the water,
air, and soil during the production, use, or disposal of
nano-enhanced cosmetics.
R&D efforts aimed at taking advantage of
nanotechnology to develop new and improved cosmetics are
bound to intensify in the near future. Clarifying the
effects of nano-enhanced cosmetics and the potential
health risks involved are also important areas of
research.
- Biotechnology Innovations
Biotechnology can be defined as technology based on
biology. It leverages cellular and biomolecular processes
in the development of products and technologies. Modern
biotechnology has enable major breakthroughs in the fight
against rare diseases, the development of more efficient
industrial manufacturing processes as well as in the
reduction of the environmental footprint.
In the world of cosmetics, biotechnology has played an
important role in the creation of innovative products and
processes. The development of alternatives to oil-sourced
ingredients is a promising field for biotech cosmetics
innovation. Cosmetic manufacturing increasingly
incorporates the notion of "biorefinaries", in other
words, they rely on renewable resources such as farmed,
marine, and forestry biomass, and follow the principles of
green chemistry.
Marine biotechnology is a particularly fruitful area of
research. From microorganisms to krill, all marine life
can potentially be used in developing personal care
solutions. A recent report by Technavio demonstrated that
marine-based cosmetics have significant appeal in the US
and Western Europe, which concentrate 50 percent of
demand. Promising research efforts include the use of
microalgae that could promote cell restoration and
cohesion. The scalability and economics of algae
exploitation, however, remain challenging. Arizona-based
Heliae is engaged in producing "high-value algae" for the
personal care industry through its innovative Volaris
platform, which combines phototrophic and heterotrophic
models.
Biotechnology can also contribute to expanding the
availability of bio-resources. Increasing plants'
productivity, growing wild species in bioreactors, and
reproducing naturally rare molecules are a few examples of
potential biotech applications. The creation of more
effective and environmentally friendly extraction
processes is also a vibrating area of research,
particularly through the use of enzymatic procedures.
- Anti-aging
The use of stem cells is a vibrating field for anti-aging
research. Stem cells are responsible for renewing and
repairing the epidermis, dermis, hair, and nails. They are
rare cells, which possess impressive capacity for
proliferation. Due to their very nature, stem cells can
revolutionize anti-aging treatments. Research has focused
on protecting the environment of stem cells in order to
counter their natural loss of regenerative potential that
happens with age. Similarly, researchers have aimed at
preserving the stem melanocytes and keratinocytes present
in the hair, which diminish with time causing graying and
hair loss.
Other innovative efforts include the development of
personalized face creams with one's own stem cells
(isolated from abdomen fat tissue), and the use of stem
cells from plants, bovine embryonic fluid, and even
unfertilized human eggs. Located in New Jersey, Personal
Cell Sciences Corp., was listed on Forbes' top 10 fashion
and beauty startups for 2012. The company's U Autologous
Skin Care products use stem cells from each patient's own
fat tissues.
Significant R&D will be necessary before the full
potential of stem cells in anti-aging treatments is
realized. Still experimental and controversial, the use of
stem cells seems, however, to be an unavoidable piece of
cosmetics innovation.
Genomic technology is also an important field for
anti-aging innovation. There are differences in gene
expression between young and old skins. With time, the
presence of certain proteins in the skin decreases. The
objective of genomic research is to identify the genes
responsible for their production and formulate ingredients
that can stimulate them. In other words, the challenge is
to mobilize cosmetic compounds that can affect gene
expression. Major cosmetic companies, such as Estee
Lauder, Lancome, and Olay have already incorporated the
genomic approach to some of their anti-aging solutions.
Recent anti-aging research breakthroughs include the
discovery of powerful anti-oxidants, such as acai berry,
and other stimulators of collagen production, such as the
protein activin. Skingenecell 1P, a synthetic amino acid
that suppresses the production of serpin B3, a protein
that causes dryness and roughness after UV exposure, is
yet another example of innovation.
- Men's Grooming
The increasing demand for male grooming products is an
important driver of growth in the cosmetics industry. The
fast-growing market of men's grooming experienced a 7
percent growth in 2012, with sales adding up to $34bn last
year. From anti-aging creams to energy-boosting serums and
body lotions, men are beginning to incorporate the use of
cosmetics in their everyday routine. They have shown a
rising interest in personal appearance and have grown
comfortable using beauty products. For the first time in
history, sales of men's toiletries were expected to
surpass those of men's shaving in 2013.
Promising innovation fields include deodorants, the second
biggest category for male grooming. Hair care products
have also gained increased relevance, as market leaders,
such as Procter & Gamble and Unilever, begin to offer
a wider range of such products. Multi-functional solutions
also promise significant growth, particularly due to the
convenience of combining a number of benefits in one
product.
Men tend to spend limited time in grooming, therefore the
importance of simplicity and multi-functionality. Recent
R&D efforts have focused on blurring the boundaries
between categories. Examples include aftershave and
shaving products that offer hydration and anti-aging
properties. While demand for makeup for men is still
restricted to Asia, innovative efforts have edged into
this area in the Western world. Estee Lauder, for
instance, has developed a BB Tinted Moisturizer with solar
protection, a multifunctional corrective and restorative
product.
Technologically advanced products and innovative packaging
also play an important role in appealing to the male
public. According a recent research from Mintel, serums
are a particularly promising field for men's cosmetics.
Offering concentrated formulas for maximum results as well
as lighter textures, these products are highly attractive
to male consumers.
- Innovative Packaging in
Cosmetics
In the cosmetics packaging segment, the ability to meet
consumers' needs of convenience and performance must be
associated with affordability and sustainability. To that
end, packaging manufacturers are developing creative
solutions and innovative technologies specially targeted
at cosmetics.
Recent trends include the move towards smaller sizes that
can be carried on flights and the development of more
functional, user-friendly applicators that respond to
"time-poor" consumers. Style and design are also essential
for this very trend-oriented industry. Rising
environmental and health concerns, which explain the
multiplication of organic and bio-based cosmetics, have
also affected packaging. The preference for recyclable
materials and the use of refill packaging, for instance,
are increasingly common.
R&D efforts are underway to incorporate organic and
biopackaging into the cosmetics market. New materials,
such as plant-based biopolymers, are a promising field for
innovation. While most available alternatives are made
from corn, research is taking place to enhance potato
starch for bioplastic production and to foster the use
polymer-producing bacteria.
Headquartered in Minnetonka, MN, biopolymer company
NatureWorks is the creator of Ingeo, a low-carbon
footprint polymer made from plant sugars. The material is
already used in cosmetics, such as lipsticks. The company
also produces a bioresin, resistant to high temperatures
of up to 248˚ F. This innovative product is particularly
interesting for cosmetics, as it eliminates the risk of
deformation because of heat.
Although biomaterials may be the future of cosmetic
packaging, significant R&D efforts will be necessary
to overcome outstanding challenges, such as the issues of
solubility and product visual identity.
Challenges Ahead for
Cosmetics
The cosmetics industry must face
significant challenges, which are expected to intensify in the
near future. Growing health concerns and regulatory barriers
are among them. The establishment of animal testing bans will
also affect the industry, particularly in Europe, where the
ban became effective on March 2013.
R&D efforts are already underway to
develop alternatives to animal testing. Promising areas for
innovation include 3D printing, which can potentially be used
to print micro-tissues and micro-organs for testing; the use
of fabricated cornea made of human corneal cells cultivated in
collagen; and the organs-on-chips technology.
Conclusion
The cosmetics industry is in constant
evolution. Innovation plays a central role in this
fast-moving, highly competitive market. Recent trends in
cosmetics research include the shift towards organic and
bio-based products, the use of nano and biotechnology, the
development of innovative men's grooming and anti-aging
solutions, and the use of sustainable packaging. Companies
engaged in R&D activities related to any of these fields
may be entitled to significant federal tax credits.
