Nestle Diversifies With Products Fighting Junk Food Ills
As the maker of KitKat bars, Hot Pockets microwaveable sandwiches and Haagen-Dazs ice-cream, Nestle SA (NESN) has long sold products associated with obesity and diabetes. Now, the company is aiming to build a business on foods that might help treat those conditions.
Nestle’s offerings include Boost shakes designed to help diabetics manage blood glucose levels and Peptamen Bariatric Formula, a tube-fed concoction for critically ill obese patients. Nestle aims to convince governments that it’s cheaper to deal with chronic diseases by preventing or treating them with food rather than medications.
“The biggest drug in your repertoire is the food you eat three times a day, every day of your life,” Luis Cantarell, chief executive officer of Nestle Health Science, said at the unit’s headquarters in the medieval Swiss village of Lutry.
The move is at least the third attempt by Nestle to get a foothold in health and wellness. A joint venture with Baxter International Inc. (BAX) to sell medical foods was disbanded in 1996. And six years ago, Cantarell helped create a division called Nestle Nutrition that failed to reach long-term sales and profitability targets. It was split up in 2011.
The renewed effort comes as European growth slows because of the debt crisis and governments worldwide place increasing emphasis on healthier foods and fighting obesity. The move pits Nestle against drugmakers such as Abbott Laboratories (ABT) as well as rival food producers like Danone (BN) in the $10 billion medical-food market.
To succeed this time around, Nestle will need to convince regulators that its products are based on sound science, persuade doctors to prescribe them, and show they can do something drugmakers’ offerings can’t. That may be costly, as pharmaceutical companies often spend as much as $1 billion to develop a new treatment.
“The link between diet and health is pretty well-developed and in the longer term this will certainly pay off, but it will take time because it’s a brave new world in terms of the science,” said Jon Cox, an analyst at Kepler Capital Markets in Zurich.
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Nestle isn’t disclosing how much it’s spending on the Health Science unit, set up in January 2011 to combine the company’s existing medical nutrition business with investments in start-ups. The foodmaker has money to spend, with 9.8 billion Swiss francs ($10 billion) in cash and short-term investments at the end of June.
Developing medical food is cheaper than bringing out new pharmaceuticals, Cantarell said, though he declined to give any estimate of the cost difference. While drugmakers must first prove their products are safe, that’s often not necessary for foods, he noted. Kepler’s Cox estimates that developing a “blockbuster” medical food could cost as much as $100 million.
Nestle Health Science has more than 20 products and is adding more through a slew of acquisitions. With its purchase of Accera Inc. in July, Nestle got Axona, a drink mix designed for people with mild to moderate Alzheimer’s disease.
Other purchases include Vitaflo International Ltd., a maker of nutritional products for genetically acquired metabolic disorders, and CM&D Pharma Ltd., which is working on a chewing gum aimed at kidney-disease patients. Nestle is conducting about 40 clinical trials to show that various gels and shakes can reduce hospital stays and help keep patients off of high-priced medicines.
“Given the pressure on health systems to reduce the length of stay, this creates a fertile environment for marketing and using these products,” said Alan Maynard, a professor of health economics at the University of York in England. Medical food makers, though, need to improve the quality of their trials and studies.
In June, Nestle opened a facility in Lausanne that can conduct clinical tests. The company says it spends more than 1 billion francs a year on research, more than any other food producer.
The Nestle Nutrition unit that Cantarell helped found in 2006 included acquired businesses such as a unit of Novartis AG, the Jenny Craig weight-loss service, Gerber baby food, and PowerBar food supplements for athletes.
After the company split the unit last year, parts of it became the foundation for Nestle Health Science. Cantarell, 60, left his position as head of Nestle’s biggest division, its business in the Americas, to lead Health Science.
The new unit doesn’t have specific goals for sales and profitability; instead, it has a longer-range target that’s less quantitative: becoming the leader in medical food products within 10 years.
“The biggest challenge is to be able to turn these ideas into reality and to convince through fact,” Cantarell said. “This is a marathon-running exercise.”
Nestle gets more than a tenth of its sales from chocolate and confectionery, and it’s one of the world’s largest makers of ice cream. Cantarell insists that doesn’t mean the company isn’t committed to health. In Nestle’s view, it’s a question of unhealthy diets rather than unhealthy products.
“What is the issue with ice cream?” Cantarell said. “If you’re telling me that ice cream is bad, then ban it.”
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