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Long term trends will continue to drive M&A interest in supplement space, expert says

09-Apr-2013 - By Hank Schultz
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When Reckitt Benser group outbid Bayer to buy Schiff Nutrition International, members of the investment community sat up and took notice.  Did this signal a fundamental shift in how financiers were approaching deals in the dietary supplement space?

A recent Wall Street Journal article noted that Procter & Gamble, Pfizer and the parent company of Arm & Hammer all acquired dietary supplement companies last year.  Is this a signal that more pharmaceutical giants and big CPG companies were looking at the nutrition space?

When assessing the potential, it’s wise to keep some fundamentals in mind, said Tom Aarts, founder of Nutritional Capital Network, a company that matches early state growth companies with investors.

“If we go back to the basics in economics in supply and demand, there are going to be deals done in the dietary supplement space with big pharma companies if the deals themselves are big,” Aarts told NutraIngredients-USA

“The pharma companies need scale because of the scale of their own businesses. The big entities that they could go after are in short supply now because they have been bought. 

Not many from which to choose

Two of those entities that have been snapped up were Schiff, which fetched $1.2 billion in the sweeter deal offered by Reckitt Benser, and New Chapter fetched an undisclosed sum from P&G.  But the dietary supplement business only offers so many targest of that scale, Aarts said.

“The big entities that they would go after they are short supply right now. If you look at the supplement companies there are only about 15 that are bigger than $100 million,” he said.

The dietary supplement space has returned reliable growth throughout the recession, providing one reason why a big consumer products company might want to put their money to work there. But these companies also have vast distribution networks, and observers have commented that they could use those networks to help grow the supplement brands they acquire.

“That’s the theory. I think it’s a little simpler as to why those companies are interested in purchases.  They are very interested in large brands that they can leverage,” Aarts said.

 “They are large multinational companies with international distributions.  Another reason these guys are interested is they can take the brands overseas.  A smaller company has a little bit more challenge to that,” he said.

Many of the supplement brands of a size that would perk up the M&A attennas of the big CPG and pharma companies  probably already have wide domestic distribution, Aarts said, limiting the amount of growth possible there.

“I think the real drivers are buying a brand that they can manage better. Most of the synergies at the revenue level are going to come from international distribution,” he said.

Supplement brands bolstered with patents are attractive to these large players, Aarts said.  But what really gets attention is a strong package of scientific evidence.

“Everybody is always interested in IP.  But at the end of the day the power is in the brand.  These big companies are interested brands that have science that can support claims,” he said.

Long term trends drive M&A activity

Long term, Aarts said, the trend of big companies, especially in the pharma space, moving into dietary supplements will continue.  Drug makers have been under financial pressure for 15 years or more, he noted.  They are still making money, but they are not growing as fast as they feel they need to, and the costs of bringing drugs to market (and the attendant risks) continue to spiral upward.

“Fifteen years ago it used to be around $400 million not it’s more about $800 million (to bring a drug to market),” Aarts said. “And consumers are a little less interested. They are moving away from drugs.”

Another long term trend that bodes well for the supplement space (and its attractiveness as an M&A target) has to do with the costs of health care, Aarts said.  If, as some observers believe, the new comprehensive health care law causes health insurance costs to rise, employers and individual consumers will be looking at ways to ameliorate those costs.

“How is that going to affect supplements?  I think it’s going to be good for supplements,” Aarts said. “You are going to be more concerned about prevention.  Where are you going to turn?”

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