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New Nutrition Business: Probiotic profitability turns the corner

This article was published in the October 2008 edition of New Nutrition Business.

A question that new, science-based health ingredient companies and their would-be investors often ask is, “How long will it be before the company is making profits?” Two-three years is usually what they guess and what write in their business plan. And just as often, the backers and managements of new companies are focused on getting a “business-transforming” deal with a giant multinational (such as Nestlé – the name that’s mentioned most often in their meetings) within the two or three years.

The reality, of course, is very different, and plans like those above that actually come to fruition are as rare as hens teeth. Anyone who wants to know how to truly succeed with a science-based ingredients business – and how long that can take – would be well-advised to first look at and learn from the experience of BioGaia.

Nestlé already markets probiotic infant formula, based on Bifidobacterium lactis, in the US, Mexico, Indonesia and the Philippines. However these brands sell in small volumes and the company has so far focused on prebiotics and DHA. Could it be now planning to make probiotics a key plank in its strategy?

BioGaia made its first profits in 2006 – ten years after its stock was floated – and in September 2008 Nestlé Nutrition and BioGaia signed an agreement that gives Nestlé worldwide rights to use BioGaia’s Lactobacillus reuteri in infant formula. The first products are planned for 2009. It’s a development that could transform this already successful company.

BioGaia, based in Stockholm, Sweden, owns worldwide patents on L. reuteri, which is a probiotic bacteria found occurring naturally in human breast milk (the particular strain used by BioGaia was derived from the breast milk of a woman in Peru).

The company was founded in 1990 by Peter Rothschild and his business partner, Jan Annwall, who were already successful entrepreneurs. Since then the company has invested over $30 million in research into L. reuteri, secured worldwide patents on its discoveries and in 1996 it listed its stock on the Swedish stock market.

Nestlé already markets probiotic infant formula, based on Bifidobacterium lactis, in the US, Mexico, Indonesia and the Philippines. However these brands sell in small volumes and the company has so far focused on prebiotics and DHA. Could it be now planning to make probiotics a key plank in its strategy?.

This large, fifteen-year investment is the price that needs to be paid by any company that wants to establish a strong and unique position based on clinically demonstrated effects that will satisfy the world’s increasingly demanding regulators – a position of the kind that a company of Nestlé type might take seriously.

The scientific status of L. reuteri is very strong, and, with LGG and L. plantarum 299V it is described as being among the probiotics with the deepest scientific foundations. Since 1965, when Dr G Reuter of the University of Berlin published his first study of the bacteria which now bears his name, over 100 scientific studies on L. reuteri have appeared. Reuteri’s benefits, according to research carried out thus far, include a proven ability to colonise the gastrointestinal tract and the secretion of reuterin, a natural antimicrobial against bacteria such as E. coli.

The evidence for L. reuteri’s benefits is particularly strong in relation to infant health with 39 published, peer-reviewed, placebo-controlled studies supporting benefits in relation to immune health in young children and neo-nates.

“This agreement with Nestlé is further proof that major organizations appreciate the value of our products, particularly in the area of child health. The safety demands are naturally very high for this type of product and our safety data has been a strong factor in giving Nestlé the confidence to make this agreement,” Peter Rothschild, managing director, BioGaia AB, told New Nutrition Business in an interview.

Hitherto BioGaia has concentrated on supplying the dietary supplement and dairy markets. Its child-specific supplements have been successful worldwide and can be found in 37 countries. The company is particularly strong in Asia and although BioGaia does not provide a sales breakdown Asia is thought to generate 30%-40% of the company’s annual sales.

BioGaia is a fast-growing and increasingly profitable company. In the six months ended June 30th 2008 BioGaia reported sales of SEK72.4 million ($10.7 million/€7.4 million), up 40% on the previous year, with an operating profit of SEK12.6 million ($1.9 million/€1.3 million), an operating profit margin of 17%.

As a profitable company BioGaia is actually a rarity in the world of health ingredients. What BioGaia has on its side is an ingredient technology whose benefits have been clearly established, and which, by focusing on child health, has a clear point of difference in the eyes of potential business partners in consumer goods.

But to get where it is today has been a long, slow and expensive journey – a journey which most science-based ingredient companies are still making. As our Case Study on another Swedish company, beta-glucan supplier NutriTech, makes clear, most companies have found that working with brand owners to develop new consumer products is a slow route since the large companies are risk-averse and smaller ones lack resources.

NutriTech’s response to this problem has been to cut out the middleman and create its own branded consumer products, so far with promising results. It’s a strategy which BioGaia also adopted, distributing its dietary supplements throughout the world.

As the world gets tougher, ingredient companies may find branded goods companies ever-more reluctant to experiment with new ingredient concepts – and increasingly they will find themselves turning to the same strategy model as BioGaia and NutriTech.

About New Nutrition Business

New Nutrition Business is a London-based research, publishing and consulting company which specialises in researching, analysing and forecasting developments in the business of food, nutrition and health around the world.

The strategies and success factors it  has identified in the 1990s have become the benchmarks for strategy development and brand positioning in the worldwide nutrition business.

It works with companies all around the world, from the United States to Australia and from Sweden to South Africa.

New Nutrition Business is headed by executive director Julian Mellentin, one of the world’s very few global specialists in the business of food, nutrition and health.

He is the editor-in-chief of New Nutrition Business and Kids Nutrition Report , the only industry journal in the world on the rapidly developing kids’ nutritional marketplace.

Julian is co-author of both The Functional Foods Revolution: Healthy people, healthy profits?, the first-ever book on the business of functional foods, now translated into Japanese, and Commercialising Innovation: The Food & Health Marketing Handbook.

www.new-nutrition.com


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