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Maturation of fish oil sales leaves supplements seeking next growth driver

By Hank Schultz , 18-Mar-2013
Last updated on 18-Mar-2013 at 09:16 GMT

Maturation of fish oil sales leaves supplements seeking next growth driver

The explosive growth of fish oil omega 3s sales has buoyed the dietary supplement sector in recent years.  With the fish oil market trending toward maturity, the industry needs a new standard bearer and there is no obvious candidate, said John Barrymore, an investment banker active in the sector.

“I don’t think the industry overall is going to see the same kind of growth that we’ve seen for the last few years. When you break this down, the industry has really been driven by fish oil.  More consumers take fish oil more than any other supplement,” Barrymore told NutraIngredients-USA.

“We need the next fish oil and it’s not out there yet. Until that happens, I don’t think the industry will see the kind of growth we’ve become accustomed to in the in the last few years,” he said.

Fish oil floats all boats

Fish oil, Barrymore said, served as an entry point for many consumers into the world of dietary supplementation.  There has been a lot of positive science results and press about the ingredient, and it has entered the pharmaceutical realm, which is a key point of differentiation for many health practitioners, Barrymore said. Many doctors recommend fish oil supplementation for their patients, which might not have been the case without the data from the drug trials, he said.

Global omega-3s sales remain strong, with the market forecast to hit $34 billion by 2016, according to a recent Packaged Facts report , but the North American slice of that pie isn’t projected to grow as robustly as it has in the past.

“The shift that is happening is that the North American market has to a degree started to plateau,” said David Sprinkle, publisher of Packaged Facts.

Without a driver like fish oil, Barrymore, managing partner in the investment banking firm 6Pacific Group, said he sees the supplements market subsiding to growth rate that trends more with the overall picture of the economy.

“You’ll start to see it regress to something like the 4% level. I will say that the probiotic category has the potential to be what we are talking about, but it hasn’t found its way yet,” Barrymore said.

Nutrition business still offers opportunity

With that hefty caveat, Barrymore said there is still plenty of opportunity in the dietary supplement market.  Case in point, the deal his firm recently had a hand in:  The acquisition of Botanical Laboratories, the leading producer of liquid supplements in North America under the Wellesse brand, by Schwabe North America.

“We’ve always felt that liquids were an overlooked category,” Barrymore said.

“When you hear people talk about trends in the industry, you hear people talking about aging population and people having trouble swallowing pills. We’ve always felt that liquids were the ultimate delivery system to address that need, and they don’t have their fair share of shelf space,” he said.

“Stability of product has always been a manufacturing obstacle in liquids. Botanical has the best manufacturing in the industry,” Barrymore said.

6Pacific Group has a variety of capabilities beyond investment banking functions, Barrymore said. The group has 12 partners, 10 of whom have run companies in the natural products business, he said.

“We’re what’s called a merchant banking firm.  We have a flexible platform that allows us to invest in companies or advise companies or license technologies form companies. We are trying to find good companies that have the potential to be much larger companies and are resilient from a production standpoint in an every increasingly tight regulatory framework,” Barrymore said.

“For our investment business. we’re looking for companies between $5 and $20 million in revenue. I think we are the only ones that do what we do in our $5 to $20 million sweet spot.  Once you get above that it is much harder to compete,”
 he said.

M&A will remain strong

Some observers of the M&A picture in the nutrition business have opined that a spate of recent acquisitions has left the pipeline somewhat dry of companies in the realm ripe for the picking.  Barrymore doesn’t necessarily agree.

“There are a number of companies that are owned by private equity companies that will need to be sold as part of the private equity churn,” Barrymore said.  And, he said, recent big deals will create subsidiary opportunities of their own.

“Because of a lot of the consolidation that has occurred there are a number of larger companies that are going to have parts of their companies that no longer fit with their overall strategy,” Barrymore said.

And, Barrymore said, there will be continued pressure on CFOs at big companies to find places to put spare cash to work, a task made more difficult by current ultra-low interest rates.  And the nutrition business, even with the slower growth rates that he foresees, is still a very attractive place to send that capital.

“A lot of the big deals we saw get done last year, those acquisitions were made by companies from outside the nutritional products business, including the deal we were involved with, New Chapter . As more and more large consumer products companies come into our space, that drives values up,” Barrymore said.

“As those long term entrepreneurs who have been in the business for 20 or 30 years see those values spiking, that will be begin to create the stimulus for them potentially exiting. I think the pipeline at least from the fundamental side is still very strong and there will be a lot of activity for the next 12 to 18 months,” he said.

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