Back in early 2009, Bristol-Myers spun off Mead Johnson. At the time the stock market was in the doldrums and the IPO was the largest for about a year. Similarly, Novartis sold its baby food business, Gerber, and a medical nutrition business.
Today, the only remaining major U.S. pharmaceutical players with nutrition products are Abbott Labs, which itself has announced plans to split into two companies, and Perrigo.
So the question is why are drug companies looking to divest their nutrition businesses? Are they focusing on their core Rx products and divesting lower margin divisions? It does not appear that nutrition is an inferior business to own from a financial perspective.
Since early 2009 when Mead-Johnson (MJN) debuted as a public company the shares have gone up 300%. During the same period, shares of Bristol-Myers (BMY) have only advanced about 50%. If you are a shareholder of BMY, you can gain some comfort from knowing that the parent retained a significant stake in Mead-Johnson after the IPO, so it has benefited to some degree from the share price increase.
The global market for infant formulas has been expanding rapidly as countries like China and India industrialize and mothers join the workforce and eschew breastfeeding in favor of formula. Likewise, in developed markets, the adult nutritionals segment has been growing nicely as the population ages. Given these trends, one would think nutritionals would make an interesting business to own.
Analysts suggest the nutritional division of Pfizer could sell for 16 to 20 times EBITDA and there is likely to be strong interest from Nestlé and Danone, both of which will be seeking to strengthen their position in the fast-growing Asian and Latin American markets. Recent reports suggest Danone is mulling a sale of their water business (which includes the Evian brand) in order to raise the cash needed to successfully acquire the former Wyeth business.
Nutritionals are consumer products that require a deep understanding of consumer behavior and a direct relationship with the consumer, whereas drug companies specialize in building relationships with doctors and hospitals. Moreover nutritional products require food formulation know-how that is difficult to master and is of no value for the rest of a drug portfolio.
Finally, nutritional products are made from commodities that, as we’ve seen in the last few years, can fluctuate widely in price. Again, this calls for a different skill set in managing the supply chain. And finally it seems the market, at least in the U.S., rewards focus in the pharmaceutical industry.
Outside the U.S., pharmaceutical companies seem content to own nutrition businesses. For example, U.K.-based GlaxoSmithKline, which owns the Horlicks and Lucozade brands, recently acquired a U.K. sports nutrition business called Maxinutrition, and Japan’s Otsuka Pharmaceuticals has long owned Pharmavite, one of the leading U.S. supplement companies.