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 September 07 | Nutraceuticals World article by Ilya Nykin Healthy Growth
for Healthy Products Traditionally, “life science investing” has referred primarily to the pharmaceutical and medical technology fields, which focus on treating people who become seriously ill. Today, however, the space is expanding to include newer areas — such as functional foods, nutrition, and personal care — which focus on helping consumers prevent illness and maintain well-being through the use of healthy products. Consumers are catching on to the health benefits of these kinds of products, and they’re creating a growing demand for them. Venture capitalists are also paying attention to these new opportunities because they can generate superior returns, as well as help balance and diversify a more traditional life science portfolio. And other kinds of investors are taking note. Consumer packaged goods (CPG) companies in particular are actively investing both in individual emerging companies and in venture capital funds that find and finance them. The investment appeal Why the growing interest? While emerging health and wellness areas are grounded in life science, they have different investment characteristics and risk-reward trade-offs compared with traditional healthcare ventures in pharmaceuticals and medical technology. These traditional fields typically: These kinds of investments often require long development timelines — seven to 10 years and beyond — and tens of millions of dollars in investments. Nutraceuticals and related wellness products, on
the other hand, are almost the exact opposite. They typically: These kinds of products can take as little as one or two years to launch, at a cost of less than $10 million, and sometimes considerably less. Venture capital firms reap the rewards of their investments through an “exit,” usually an acquisition or an initial public offering (IPO), once new ventures are off the ground. The significant exit potential of traditional venture-backed life science companies has been amply demonstrated. But more recently, transactions involving entrepreneurial companies in the health and wellness space have also begun to garner attention. Examples of acquisitions over the past several
years include: The value of these acquisitions ranged from $160 million (Zone Perfect) to $4.1 billion (Glacéau). These numbers illustrate why health and wellness opportunities are now increasingly recognized as having potential for highly attractive exits. A different kind of risk Investments in emerging health and wellness companies still carry significant risks, of course, but of a very different nature than traditional life science investments. In most pharmaceutical and medical technology investments, the risk is largely absorbed by investors before launching the final product. Developing a novel drug or device and demonstrating its safety and efficacy in clinical trials is a complex undertaking in which success is hardly assured. Although the possibility of failure diminishes as the product moves along the development path, it remains very real to the very end. However, once such a product obtains regulatory approval, it has a strong likelihood of market success. Venture capitalists frequently exit their pharmaceutical or medical technology investments before market introduction — or at least not long thereafter — through an acquisition or an IPO, thus transferring post-launch execution risk to other parties. In contrast, investors in functional foods, nutrition, and other consumer-oriented wellness sectors encounter most of their investment risks post-launch. Few of these products face major development difficulties that place successful outcome in doubt. However, once launched, even innovative, well conceived, and successfully developed products are not assured consumer acceptance. To be successful, such products require highly competent post-launch execution in a number of critical areas, such as branding, marketing, and operations. In this space, exiting before or shortly after launch is typically not an option for venture investors. An IPO usually is not a viable choice, and an acquisition would rarely be possible before the brand shows revenues of at least $20 million, and perhaps significantly more. Further discussion of trade-offs between risks and returns of these two kinds of investment opportunities is outside of this article’s scope. But the fundamental difference between them makes investing in both types of opportunities a valuable portfolio diversification strategy for a venture capital fund. Growing attention from VC firms, large companies Venture capital investors specializing in life sciences are paying increasing attention to consumer wellness opportunities in nutraceuticals and personal care. When Prolog Ventures invested in its first such opportunity in 2002, only a small handful of other venture firms shared their interest. Prolog continued to invest in this space, which now accounts for a significant part of its portfolio. And they’ve noticed a steady growth in the number of VC firms active in health and wellness. Several new venture funds were created to focus on this area. Established mainline life science funds are also getting into the game — a good example is Aisling Capital, which invested alongside Prolog and other investors in the recent financing of the oral care company The Natural Dentist. Venture capital firms are investing in this emerging health and wellness space because of the potential for attractive returns and the opportunity to diversify traditional life science portfolios. But another category of new investors — major CPG companies — is attracted to this space for strategic reasons. These players recognize the ascending role of science-based wellness products in today’s marketplace. They want to gain broader exposure to these fast-growing categories, which have strong consumer appeal and attractive margins. More and more companies are augmenting their internal programs by investing in individual companies or in venture capital funds with experience and active practice in this space. Much of the innovation for wellness products happens within small, dynamic, entrepreneurial startups. By investing in such companies, major industry players gain a window into emerging market trends. For example, Dean Foods, Fonterra, and Nestlé recently participated in financing rounds of two companies in Prolog’s portfolio: Attune, which makes probiotic wellness bars, received funding from Fonterra and Nestlé in April; and Dreamerz, maker of a dessert beverage that promotes relaxation and sleep, received funding from Dean Foods and Fonterra in June. In addition to investing in individual companies, an increasing number of CPG companies invest in venture capital funds with relevant investment experience. This gives them efficient, one-stop access to multiple companies and broad deal flows. When venture capital firms and corporate players cooperate in this manner, both benefit significantly. CPG companies need an efficient way to stay on top of trends in this area. Venture capital firms — which look at numerous business plans for new products and have relationships with entrepreneurs, universities, incubators, and other sources of technology and ideas — offer an efficient way to accomplish this through a professionally managed, dedicated investment program. Conversely, venture capital firms must have access to specialized industry and market expertise. No one can offer such access more readily than CPG companies with their vast resources, experience, perspective, and depth of market understanding. What makes a good investment? Since Prolog began investing in the consumer health
and wellness space five years ago, it has identified several elements
that indicate a good opportunity: Ultimately, the healthy growth of healthy products benefits all parties involved. Venture capital firms gain new investment opportunities to balance and diversify their life science portfolios. CPG companies gain a new vehicle for staying on top of emerging market developments. Health and wellness entrepreneurs enjoy greater availability of focused investment capital. And consumers themselves enjoy more varieties of products that deliver meaningful health benefits grounded in science. About the author Ilya Nykin is managing director of Prolog Ventures, St. Louis. © 2007, Nutraceuticals
World. All
rights reserved. Reprinted with permission.
T O P I N T H E N E W S S E L E C T E D R E L E A S E S H O M E |
