Nestle Accelerates Health-Care Shift With $1.4 Billion Buy

Nestle SA agreed to pay Canada’s Valeant Pharmaceuticals International Inc. $1.4 billion for a handful of dermatology products, accelerating a shift by the world’s biggest foodmaker toward health-care.

The purchase of rights to sell products including Restylane anti-wrinkle treatment in North America expands the division formed when Nestle took full control of the Galderma joint venture from cosmetics giant L’Oreal SA in February.

Freed from its French partner, the Vevey, Switzerland-based company can now push further in the $28 billion dermatology market, which is growing twice as fast as food and delivers fatter profit margins.

Together with its health-science business, which is developing nutrition products for metabolic and gastrointestinal disorders, the skin-health unit “represents the future of Nestle,” Jean-Philippe Bertschy, an analyst at Bank Vontobel in Zurich, said in a note. “Dermatology has a key role to play in improving the quality of life.”

The Valeant deal, combined with yesterday’s move to reduce its presence in the Latin American chilled-milk industry and the earlier sale of brands like PowerBar, show how Nestle Chairman Peter Brabeck-Letmathe and Chief Executive Officer Paul Bulcke have shifted away from an increasingly commoditized food industry to fulfill their ambition of becoming “the world’s leading health, nutrition and wellness company.”

Slowing Sales

Today’s purchase includes corrective facial aesthetic treatments Restylane, Perlane and Emervel in the U.S. and Canada, as well as Dysport, a botulinum toxin that treats neck pain. Galderma, which already sells those medicines outside North America, will also gain global rights for Sculptra, an injectable anti-aging facial treatment.

Nestle rose 0.4 percent to 69.85 Swiss francs at 3 p.m. in Zurich trading.

Dermatology may improve the quality of Nestle’s sales growth, which hit a four-year low last year as consumers in North America and Europe turned away from its Lean Cuisine frozen meals and bottled waters. Operating profit margins in both Europe and the Americas contracted last year.

Food makers like Unilever, Kellogg Co. and Danone, along with Nestle, are struggling to cope with a shifting environment. Shoppers with higher incomes are buying fresher and less processed food, while those that earn less are eating more leftovers to cut their food outlay and, in the U.S., grappling with reduced government food-stamp benefits. Food sales growth in the U.S. will barely outpace inflation over the next five years, according to BB&T Capital Markets.

More Promising

The long-term shift in consumers’ food purchasing behavior is unfavorable for the packaged foods industry, Heather Jones, an analyst at BB&T, said in a Jan. 30 report.

Prospects for skin treatments are much more promising. Demographics play a role, as the number of people over the age of 60 will increase 75 percent by 2025 and have skin ailments that need addressing. Rising health-care costs in the U.S. are another factor: dermatologists account for only 1 percent of the U.S. physician population, but comprise nearly 4 percent of total Medicare expenditures, according to Bank Vontobel. Emerging markets will also fuel expansion, with revenue growing by as much as 17 percent a year through 2018.

The U.S. facial aesthetics market, which includes botulinum toxins such as Allergan Inc.’s Botox and injectable skin fillers like Galderma’s Restylane, will nearly double to $4.7 billion by 2018 from $2.5 billion last year, according to data tracker GlobalData. Worldwide, the dermatology market will grow as much as 6 percent annually through 2018, researcher Euromonitor estimates.

Missed Targets

Dealmaking in the space is heating up as companies grapple for market share. Valeant today boosted its unsolicited bid for Allergan to about $49.4 billion, adding cash to the bid in an effort to win over its target.

Galderma, which has about 8 percent of the market, missed out on some acquisition targets when it was run as a joint venture and now will be “much more aggressive,” Vontobel’s Bertschy said. Competitors include Valeant, Allergan, and Johnson & Johnson, which makes Neutrogena and last month decided to end development of a wrinkle cream to challenge Botox.

Nestle will also boost Galderma’s research budget, which currently stands at about 20 percent of its $2.2 billion in sales, as dermatology products demand “big investments,” Ildiko Szalai, an analyst at Euromonitor, said by phone. Across Nestle’s entire business, the company spends less than 2 percent of its $100 billion in sales on R&D.

That investment is likely to pay off as Galderma’s skin treatments could deliver operating profit margins of 19.5 percent by 2018, Bank Vontobel estimates, wider than any other Nestle product group except for coffee.

“Thanks to its critical mass and Nestle’s financial firepower, Galderma is today among the few companies capable of developing and bringing to market breakthrough dermatology solutions,” Vontobel’s Bertschy wrote.

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