Feb. 12 (Bloomberg) -- Nestle SA paid $3.6 billion yesterday to take full control of Galderma, the dermatology business that revives skin. Nestle Chief Executive Officer Paul Bulcke will need to do the same at the unit to spur growth.
The maker of treatments for acne and psoriasis, Galderma will become part of a new division known as Nestle Skin Health SA, with a brand stable ranging from prescription drugs to over-the-counter soaps and sunscreens for skin, hair and nails. It’s the latest push by Nestle into health care, a sector that promises faster growth and wider profit margins than the Swiss company’s main food business.
“From Nestle’s point of view, there are benefits to diversifying and skin care has high margins and strong growth potential,” said Oru Mohiuddin, an analyst at Euromonitor International in London. “But 2013 was not an easy year for Galderma and they’re preparing for the challenges ahead.”
Nestle, which bought the half of the venture it didn’t own from partner L’Oreal SA, is banking on full control to help the unit revive its performance. Galderma sales growth slowed last year to 3.9 percent, trailing the pace of more than 10 percent in previous years, as increased competition from generic products in the U.S. squeezed margins. Galderma has hired new managers, reorganized its business units, and will now rely more on Nestle’s global research, distribution and marketing muscle.
A standalone Galderma “gives us greater freedom because from time to time, it was rather restrictive,” to be joint owners, Nestle Chairman Peter Brabeck-Letmathe said yesterday.
Expanding beyond food mirrors the strategy pursued by consumer-product companies like Procter & Gamble Co. and Unilever, which have both jettisoned food assets over the past decade to focus on personal-care brands like Dove and Gillette. The packaged-food space has been “plagued” by “anemic growth trends” for more than two years, according to a Jan. 30 report from BB&T Capital Markets, as families eat more natural foods. Nestle is scheduled to report full-year earnings tomorrow.
Created in 1981, Galderma had sales of 2 billion francs ($2.2 billion) last year and controls 6.9 percent of the global dermatology market, according to IMS Health data cited in the skincare company’s most recent annual report.
About half its sales come from prescription drugs such as Epiduo, a topical treatment for acne. The rest comes from over-the-counter treatments like Loceryl, for fungal nail infections, and what the company calls “aesthetic” products including Restylane, which is injected into the skin like Allergan Inc.’s Botox.
Galderma has sought to decrease its reliance on prescription drugs in the U.S., which must undergo rounds of clinical trials and regulatory approvals and are susceptible to competition from less-expensive generic copycats.
“Keeping ahead of generics is key,” said Andrew Wood, an analyst at Sanford C. Bernstein in New York. “They have a strong pipeline, and that should keep them ahead.”
Galderma had seven products in late-stage clinical trials last year, according to the annual report, and in 2013 debuted Mirvaso, a drug to treat rosacea, a facial condition that causes inflammation. A spokeswoman declined to comment on the company’s new products.
Nestle will likely accelerate Galderma’s shift away from prescription-based products toward medical skincare items that can be sold a few aisles down from its coffee and chocolate in retailers around the globe, according to Mohiuddin.
“Food is quite tough right now,” said Lawrence Hutter, head of corporate advisory at consultant Alvarez & Marsal. “Nestle is looking at high-margin growth business to maintain real differentiation for a variety of health issues.”
Nestle’s push into health care has had fits and starts. A joint venture with Baxter International Inc. to sell medical foods was disbanded in 1996. The 2006 acquisition of Jenny Craig diet centers backfired, and most of the business was sold in November. In 2011, the company created Nestle Health Science to combine existing medical nutrition brands such as Boost shakes with smaller investments.
With 2 billion Swiss francs of sales inside a 90-billion-franc company, Galderma will not make or break Nestle. Still, the skin-health subsidiary adds another plank to the company’s expanding health and wellness platform, which ranges from baby formula to Alzheimer’s drinks.
The enterprise value of 3.1 billion euros for L’Oreal’s half of Galderma puts it at 26.5 times operating profit, which “feels rather punchy,” RBC analyst James Edwardes Jones said. The unit’s operating profit declined about 20 percent last year.
In skin health, one of Nestle’s competitors will be L’Oreal itself, as the Paris-based company’s Active line of medicinal cosmetics such as Vichy and La Roche-Posay will run up against some of Galderma’s products, according to Euromonitor’s Mohiuddin. Galderma’s brands and L’Oreal’s brands “don’t converge” but “are not very far removed from each other,” L’Oreal Chief Executive Officer Jean-Paul Agon said yesterday in Paris.
“Nestle is still in investigative and experimental mode, so skin health makes sense in that context,” said James Amoroso, an independent consumer-goods industry consultant in Walchwil, Switzerland. “What’s the potential? Not even Nestlé knows.”
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