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Nutraceuticals and the future of intelligent food

The convergence of food and pharmaceuticals is set to create a huge growth market
Intelligent food

With lifestyle related illness having the potential to cost the NHS over £10bn annually in the UK, the incentive for governments to focus on preventative care and for consumers to become more health-conscious is immense. Food and pharmaceutical companies are perfectly placed to capitalise.

The term nutraceuticals was coined in the 1980s to describe food products that have a medicinal benefit, and the sector has exploded in recent years to include functional foods such as vitamin-enriched products, nutritional supplements, sports drinks and medically formulated foods. It is estimated that the demand for 'intelligent' food that promises to deliver health benefits beyond traditional nutrients could create a sector worth US$250bn globally by 2018.

This convergence of medicine, food and technology is likely to create a battleground in which food and pharma companies compete for dominance.

Food companies have a greater understanding than pharmaceuticals of nutrition and food formulation, plus decades of consumer research and relationships with mass-market distributors, but their research expertise does not go as deep as that of the pharmaceuticals industry. Product cycles are also much longer in nutraceuticals than in food, which should play to the strengths of pharma. Pharmaceuticals companies, however, face a different set of challenges. They have strong research departments, stakeholder relationships and regulatory structures that enable them to generate new compounds, plus wider ties to the scientific community. Yet, despite their large sales and marketing resources, most of their efforts are aimed at medical professionals and pharmacists rather than consumers. Only a small number of pharmaceutical companies have a consumer arm.

By complementing each other's strengths (and weaknesses), a merger of the nutraceuticals portfolios of a big food company and a big pharmaceutical company might make sense, but there hasn't been a significant one yet. Instead, there has been a blurring of the line demarcating the two industries and an active market for corporate transactions involving relatively small acquisitions and sell-offs: preliminary skirmishes in a longer term battle.

At some point, a nutraceuticals powerhouse will emerge - but what will it take to build one? 

At some point, a nutraceuticals powerhouse will emerge - but what will it take to build one?

Characteristics of success: Daring to win

1. Technology
Technology is going to be crucial. The nutraceuticals market is likely to benefit from the trend of personalised medicine, and developing technology which aids this movement is key, including taking advantage of the huge amount of data that will be created by an increasingly connected healthcare system. Consumer companies have the intelligence available to personalise dietary advice, and with prudent partnerships, pharmaceutical companies may be able to personalise over-the-counter nutraceuticals products to supplement consumer lifestyles.

2. Compliant Marketing
The market for nutraceuticals is not globally uniform: countries vary in the way their regulatory systems recognise nutraceuticals - as pharmaceuticals versus food, while consumers themselves cannot agree which category these products fit into best. Successful companies will have to develop a highly nuanced global marketing campaign that can exploit economies of scale while adapting to national preferences. 

3. Regulation
Regulations around nutraceuticals vary from one country to another and are changing all the time. In the EU, products that claim to be a nutraceutical have to be certified by the European Food Standards Authority, and a similar system operates in Canada. However, this contrasts with the US and Japan, two markets that currently account for over half the world's demand for nutraceuticals, where products do not have to pass stringent government tests as long as they do not claim to treat or prevent a specific disease. Manufacturers will have to work closely with governments to anticipate market opportunities that can arise when rules are altered.

4. Supply chain
With increasing consumer concerns about food safety, the quality of raw materials used to create nutraceutical products have come under intense scrutiny, so companies must consider carefully how to access and assure supplies of essential ingredients or flavourings. A number of recent acquisitions of food and beverage companies are aimed at securing stable, high quality supplies of raw materials. Vertical integration of supply chains, for example, gives greater certainty of supply, and lays a foundation for developing new uses of existing materials, or to produce new, related ingredients.

5. Product strategy
Blockbusters in this industry may be few and far between. Recently some companies have been rebalancing their product portfolio, abandoning product lines that do not fit their strategy. Competitive advantage will be gained by those companies with a superior product strategy: juggling ingredients, technology and labelling to optimise the product portfolio in each country.

6. Dealmaking
Companies can make up for their weaknesses in certain areas by being quick and decisive corporate dealmakers. It will only take one sizable acquisition to change the dynamics of the industry, and other big companies in the field will be forced to respond. Big pharma and big good companies are not known for being nimbly entrepreneurial, so they will have to do a number of things that go against their corporate cultures: be bold, supple and patient, all at the same time. 

Food companies and pharmaceutical companies will have their own respective competitive advantages in battle for the nutraceutical market. The winners are likely to be those players who can take a long view while adeptly and decisively seizing short-term opportunities as they arise. 

Chris Stirling is global head of life scienes at KPMG

25th September 2015

From: Sales



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