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    Columns

    Pharmaceuticals & Dietary Supplements Converge

    It appears the relationship between these two markets may not be as adversarial as it was in years past.

    Pharmaceuticals & Dietary Supplements Converge
    Business Insights
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    Gregory Stephens, RD, Windrose Partners09.09.13
    I have heard more than a few comments lately about a convergence of the pharmaceutical and dietary supplement industries. The notion that, once again, “Big Pharma” and consumer packaged goods (CPG) companies are buying their way into the supplement space was echoed repeatedly at the recent NBJ Summit.

    Pharmaceutical Acquisitions in the 1990s
    Recent acquisition activity is reminiscent of the late 1990s, when both pharmaceutical and CPG companies began making a big run at the rapidly growing dietary supplement industry.

    Solgar’s acquisition by American Home Products (which was later purchased by Wyeth, which was subsequently bought by Pfizer) was a pivotal deal that seemed to set off a spending spree. During this period of acquisition activity, Warner-Lambert launched its line of supplements, Quanterra, which was followed by similar lines branded by Centrum and Bayer. CPG companies were not to be left behind. P&G launched OLAY supplements for women; Nestle bought PowerBar and in 2000 Kraft bought Balance Bar.

    The driving force for many of these companies was the decline of top-line sales in their core businesses. The strategy of moving into dietary supplements was intended to leverage the parent company’s core competencies to drive sales and improve margins. Primarily, these large companies offered increased distribution into FDMC (food/drug/mass market/club stores), brand marketing supported by hefty promotional budgets, product innovation through R&D muscle and the assurance of quality and safety that consumers entering the category were seeking.

    Following most of these acquisitions, the current management was left in place and provided the support needed for growth and increased profitability. Of course, this was the case until quarterly earnings were missed the first time. Then the supplement company received a wealth of “assistance” from the corporate team. After management changes and reduction of staffing redundancies were implemented, profits were back on track—for the short-term. In the end, the low hanging fruit proved to be just out of reach. Some suggested these companies were a little ahead of their time—a comment recently echoed by P&G regarding the OLAY supplement launch; many didn’t seem to understand the market and others appeared just arrogant in their approach.

    Ten years after acquiring Balance Bar, Kraft divested the business for one-fifth of what it paid originally. In the end, it seemed that the only beneficiary of these ventures were companies like NBTY, which was able to snap up some business opportunities it could leverage at slightly higher than liquidation prices.

    Renewed Interest in Supplements
    So here we are again, a generation of marketers later. Drug pipelines are running dry and Big Pharma is once again aggressively moving into the dietary supplement space. P&G acquired New Chapter and Pfizer acquired Alacer Corp., the maker of Emergen-C. The British consumer company Reckitt Benckiser topped Bayer in a bidding war for Schiff Nutrition.

    The major ingredient suppliers are not to be left behind. DSM and BASF acquired Ocean Nutrition and Pronova BioPharma, respectively. Looking beyond the U.S. dietary supplement market, Pfizer bought Ferrosan Consumer Health, a Danish company that markets supplements in the emerging markets of Russia and Eastern Europe.

    Today’s supplement market is considerably different than it was 10-15 years ago. The supplement consumer base has grown to reflect more mainstream behaviors and attitudes. For example, Baby Boomers represent a more mature consumer seeking products to defend against age-related health issues. Also, physicians and other health practitioners are more willing to recommend and even dispense supplements to their patients.

    Is the Shoe on the Other Foot?
    This brings us to another interesting dynamic in the pharmaceutical–supplement dance. Pharmaceutical companies are noticing the dietary supplement industry is encroaching on one of their sacred markets: Medical Foods.

    Medical food is not the small niche market many perceive it to be. Globally, it is estimated to be a $9 billion market; the U.S. has surpassed $2 billion. Traditionally a conservative, fairly slow-moving market, the pace of innovation is exploding. The global market is now seeing more than 100 new product launches annually, according to Innova Market Insights (2011). Driven by increasing consumer interest in personalized healthcare and the rapidly growing Boomer population, medical foods are expected to continue realizing double-digit growth for the foreseeable future.

    What is spurring interest in medical foods among supplement companies? One reason is a fundamental regulatory difference between dietary supplements and medical foods. Basically, supplements are intended for healthy individuals and medical foods are for the dietary management of diseases. This translates to mean that the name of the disease being managed by medical foods must actually be included on the product label. This is significantly different from structure-function claims on which supplements often rely. With more FDA Warning Letters issued to companies making claims on what are considered disease biomarkers (e.g., inflammation), medical food claims offer a new avenue to communicate benefits to consumers and healthcare professionals.

    The opportunity is even more attractive when one considers that FDA requires no premarket approval for medical foods. This is not to suggest that the medical foods market is unregulated. Rather, as recently addressed by our esteemed panel of regulatory attorneys on our medical foods panel at the NBJ Summit, there are significant regulatory requirements for this class of foods (“Unraveling the Medical Foods and Clinical Nutrition Opportunity,” NBJ Summit, Jul. 25, 2013). Though many recent products appear to be “flying under the FDA radar,” aggressive action by the agency is expected for less responsible companies.

    Reflecting on the traditional dietary supplement channels, there is a significant opportunity for medical foods in the rapidly growing health practitioner segment. Supported by the regulatory requirements that medical foods be used under the supervision of a qualified health professional, this is a viable strategic approach. (For more information, refer to information on the 2014 Health Practitioner Marketing Forum at the end of this article.)

    Finding Common Ground
    Innovation in the U.S. medical food market has not come through organic growth from the major pharmaceutical companies. More so than in the past, these companies are looking outside for acquisitions and licensing opportunities to fuel growth. Nestle’s acquisition of Pamlab earlier this year is a representative example. Pamlab’s portfolio of medical food products targeting the nutritional management of patients with mild cognitive impairment, depression and diabetic peripheral neuropathy are ideal for the emerging trend of personalized healthcare and the aging population. Similarly, Nestle’s stake in Accera, maker of Axona, a medical food providing nutritional management for Alzheimer’s patients supports this strategy.

    Beyond the regulatory experts on the medical food panel I moderated at the NBJ Summit, our panel included executives from pharmaceutical and practitioner focused companies. Dr. Robert Miller, PhD, vice president of R&D and innovation for Abbott Nutrition shared his company’s interest in Open Innovation and partnering with smaller companies with novel nutritional technologies. Abbott is actively seeking partners that bring strong science and quality products addressing the nutritional needs of their targeted indications.

    It appears the convergence of the two markets, pharmaceuticals and dietary supplements, are not as adversarial as in years past. Many are seeing the interest in their markets by outside companies as more of an opportunity than a threat. Successful companies today see the need to partner and work together toward the common goal of nutrition to maintain health and wellness, as well as to help manage nutritional needs of people with diseases. After all, this is what brought most of us into the nutrition industry.

    Save the Date: The Second Annual Health Practitioner Market Forum, April 2-4, 2014, Hotel Maya – Long Beach, CA. Position your company for success in the health practitioner channel and the market for medical foods. Contact: Greg Stephens,  215-860-5186; E-mail: gregstephens@windrosepartners.com; Website: www.HPMForum.com.

    Greg Stephens, RD, is president of Windrose Partners, a company serving clients in the the dietary supplement, functional food and natural product industries. Formerly vice president of strategic consulting with The Natural Marketing Institute (NMI) and Vice President of Sales and Marketing for Nurture, Inc (OatVantage), he has 25 years of specialized expertise in the nutritional and pharmaceutical industries. His prior experience includes a progressive series of senior management positions with Abbott Nutrition (Ross Products Division of Abbott Laboratories), including development of global nutrition strategies for disease-specific growth platforms and business development for Abbott’s medical foods portfolio. He can be reached at 215-860-5186; E-mail: gregstephens@windrosepartners.com.
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