Food and pharma prove a rich mix

By Louise Lucas and Andrew Jack

Published: October 12 2010 20:10

Food and drug industries have little in common: one is fast-moving and prolific in its output while the other toils for years to produce a handful of blockbusters.

Both sectors are now converging on the same turf. Nestlé’s push, announced late last month, into the field of clinical nutrition or nutraceuticals – which cover foodstuffs aimed at slowing or even preventing illnesses and doctor-recommended non-prescription products – pits it firmly against the pharmaceuticals industry.

This more established market, which ballooned with the advent of energy drinks about five years ago and, shortly after, probiotic yoghurts, has also been attracting attention from food multinationals.

Last week, Pepsi said it was setting up a global nutrition unit run by Dr Mehmood Khan, its chief scientist.

Nestlé is aware what lies ahead as it pushes into a relatively new area, as Peter Brabeck, the Switzerland-based company’s chairman, acknowledges: “Our competitors are today and will increasingly be in the pharma industry. Most of the pharma companies are moving into this area from a different angle ... It will be a different business which needs the understanding of people who are not necessarily experts of FMCG [fast-moving consumer goods] companies.”

That business covers everything from highly specialised research and development of products to combat diabetes, heart problems and Alzheimer’s disease, to distribution that is more dependant on doctors’ recommendation than bagging space on supermarket shelves.

As a new market segment, size and forecasts are thin on the ground; Nestlé itself simply says it foresees sales of billions rather than millions of Swiss francs.

But there are some indicators: Nestlé derives SFr1.6bn ($1.7bn) of sales from areas such as tube feeding and foods for the sick and convalescent. Danone of France is building on its health foods such as probiotic yoghurt.

Demographic and health trends have encouraged the companies to believe demand will increase. The developed world is seeing a rise in heart disease, diabetes and obesity at the same time as life expectancy increases, while governments rein in spending on healthcare.

Nestlé believes this phenomenon will spread to emerging markets too, where governments are also seeking to clamp down on spending.

Nutraceuticals also hold out the promise of better profit margins, at about 20 to 25 per cent – reflecting the elimination of costly ad campaigns and more pricing power. Dealing with hospitals rather than aggressive retailers means less margin erosion, and the fact insurers reimburse many of these products means consumers are less worried about bloated price tags.

Food companies should be able to make inroads into clinical healthcare, in part because they understand consumers and their needs better, says Warren Ackerman, analyst at Evolution Securities.

Charles Mills of Credit Suisse agrees: “The drug industry has very strong R&D but the food companies have the marketing skills.”

He points out that the pharma industry has already tripped up on the middle ground, in the area of over-the-counter medicines. Some drugmakers began leaving the business in the 1990s, viewing it as low-growth and generating relatively low margins. “Whereas it was an extremely dependable long-term earnings stream and they probably will now rather regret it,” he says.

But the drugmakers now have good reason to move back in. Expiring patents and difficulties in finding replacement prescription drugs are pushing executives to diversify. A shift into consumer healthcare is one response, a strategy championed by companies including Abbott.

One reason behind this February’s surprise promotion of Joe Jimenez to chief executive of Novartis, the Swiss drugs group, was his years of experience in the foods sector.

Mr Jimenez, an American who spent a large part of his career at Heinz, has said one of his aims at Novartis is to improve marketing, streamline distribution and squeeze costs – all based on techniques he picked up in his consumer goods career.

While the pharmaceuticals industry learns lessons from consumer food groups, it has a distinct advantage when it comes to designing rigorous clinical trials. These can be very costly, long term and uncertain. Drug companies spend an aggregate 17 per cent of sales on R&D, according to Bernstein Research, 10 times the proportion the European food industry spends.

Pharma companies would also claim the upper hand when it comes to distribution and working through the regulatory process. GSK, for example, has 250 employees dedicated to securing regulatory approvals and almost half of its sales are made through pharmacies.

The strategy is similar too, says John Clarke, president of GSK Consumer Healthcare: “We are working off macro trends. Smoking remains the biggest preventable killer and obesity is number two,” he says.

The risk for drugmakers, which shy away from corporate marketing, is reputational: they could see their image further burnished if poor quality health studies come under attack.

Mike Dennis, analyst at MF Global, says the use of scientific analysis to support the claims used for marketing products could prove the biggest hurdle for food manufacturers as they will have to secure approvals from the European Food Safety Authority and the Food and Drug Administration.

Food companies have already come unstuck over the ability to substantiate claims in a smaller way. Some were forced pre-emptively to withdraw ads claiming health benefits on fortified foods, such as probiotic yoghurts, ahead of the EFSA’s protracted deliberations.

“Food companies have to get the highest recognition for a human study which is extremely expensive to do and food companies just don’t have pharma companies’ operating margins or scale,” says Mr Dennis.

“So it is catch 22. It is difficult for them to go out and spend millions of dollars on a four-year trial to get an end product that’s absolutely nailed it to allow them to say ‘this product works’.”