Nutraceuticals: a tongue twisting term that in its simplest definition describes food products that have a medicinal benefit. This industry has piqued major interest in recent years and while it is set to pave the way for a rush of deals, the jury is still out as to whether it will culminate in a battle of corporate takeover wars.
A report co-authored by Chris Stirling and Willy Kruh, KPMG International global chairs of life sciences and consumer markets respectively, delves into this industry and explores future implications for the main players.
Pharma and food companies are likely to compete fiercely for dominance in a market estimated to be worth $250 billion in 2018. This figure lends credence to the potential growth of the industry, which is five times 1999 figures. It’s also comparatively substantial with the $900 billion pharmaceutical markets but is small in relation to the $5 trillion worldwide food industry.
This fast growing industry, which is projected to play a crucial role in preventive healthcare in the near future, supplies functional foods or vitamin-enriched products, nutritional supplements, sports drinks and medically formulated foods.
In an era subjugated by a conspicuous rising trend to eat smart and live healthy coupled with a surge in fitness-focused technology that tracks exercise and calorie intake, the odds are stacked in favour of nutraceuticals which are geared towards incentivising people to make wiser dietary choices to minimise lifestyle-related diseases.
This perspective gives rise to an alluring convergence of medicine, food and technology that the authors surmise could possibly evolve into a battleground in which food and pharma companies embark on cut-throat competition for market dominance. However, if companies adopt a strategic mind-set, nutraceuticals could represent an exciting new opportunity for food and pharma companies to diversify their value offering and gain competitive advantage.
Strategy is about winning. In a modern business context winning includes adjusting the sails to navigate a company’s direction though periods of change and securing its competitive wellbeing over time. That includes the identification and exploitation of business opportunities.
With this strategic mind-set, the authors deduce that nutraceuticals could witness food and pharma companies collaborating for an advantageous position in the marketplace. Securing a unique competing space for mergers and acquisitions (M&As) in this industry however, is not plain sailing.
Nutraceuticals affords opportunities for pharma companies to make their products more consumer-oriented
While its growth potential is propitious, global blockbuster products will necessitate top-notch regulatory compliance reinforced by product strategists and robust marketing to navigate the vagaries of national tastes. Regulations governing nutraceuticals vary from country to country and are constantly changing.
All this needs to be sustained by the assurance of a steady supply of ingredients such as plant extracts, dairy products, whey proteins and omega-3 fish oils. Supply chains will eventually become vertically aligned to ensure stability and sustainability.
The report highlights that the major challenge for a merger of the nutraceuticals portfolios of a big food company and a big pharmaceutical company is aligning and complementing each other’s strengths and weaknesses.
Food companies have strong expertise in large-scale manufacturing and global logistics and have a greater understanding than pharma of nutrition and food formulations that reach into mass markets of consumers. However, their research expertise does not go as deep as that of the pharma industries, lacking some of the in-depth scientific resources needed for major breakthroughs.
On the other hand, pharma have strong R&D departments, stakeholder relationships, regulatory structures and a strong presence in the scientific community. Pharma companies have already marked their territory in the nutraceuticals industries with Abbott, Pfizer and Johnson & Johnson.
Yet, despite their large sales and marketing resources, most of their efforts are aimed at medical professionals and pharmacists rather than consumers, divesting them of the power to influence behavioural change on a wider scale.
To date, no big food company has made any significant inroads to blend food and medicine as much as Nestlé has. It set up a venture capital with the aim to invest in early-stage nutraceuticals businesses. Its Health Science Unit produces drinks for people with metabolic disorders and medical food as part of a diet management regime for Alzheimer’s disease.
On the pharma side, Alliance Boots launched a specialised investment fund – B&B Investment Partners – which focuses on SME consumer brand businesses within health, wellness, beauty and personal care.
There is an existing market for nutraceuticals and the fragmented structure creates a window of opportunity for M&As.
Nutraceuticals affords opportunities for pharma companies to make their products more consumer-oriented and for food companies to create brands with a medical image.
Report findings indicate that the sales of product lines creates new opportunities for the acquirer, suggesting a potential uptake of M&As in the future. In April 2014, Integrity Nutraceuticals and Cornerstone Research & Development merged and in June 2014, Laboratorio Reig Jofre merged with nutritional supplements specialist Natraceutical.
Any venture of this magnitude requires an effective strategy.
In the not so distant future, a nutraceuticals powerhouse will emerge – whether it grows organically or through M&As is irrelevant. The field is open for battle.
http://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Pages/nutraceuticals-the-future-of-intelligent-food.aspx
davidpace@kpmg.com.mt
David Pace is a partner for advisory services at KPMG.