The Novartis Tidal Wave

How will the functional food industry change?

By Adam Ismail

Daniel Vasella, chairman of Novartis, Nyon, Switzerland, shocked the food world last month when he refused to comment on a question that asked if the global mega-company would divest the Nutritional Foods portion of its Consumer Healthcare division, which includes its “Aviva” line of products. Rumors immediately began to fly, be­cause, after all, that is usually CEO-speak for saying we will sell the division.
The news follows a major strategic decision in which Novartis recently launched a program to devote almost all of its promotions budget to aggressively growing its new medicines. In fact, the company identified eight medicines that it feels offer the highest potential and put 80% of its promotional budget behind them. The nutritional foods business doesn’t play a big role in new medicines.

Does this mean food companies are going to pull back on their functional food investments? Probably not. Novartis, being a very large pharmaceutical business, is not hampered by food industry growth rates of 2-3%; instead its overall corporate sales grew over 11% last year. Nutrition Business Journal says functional foods are expected to grow 6-10%, which means that if the division grows as fast as the rest of the market, it would pull down the company’s sales growth rate. No company likes that to happen, so it may be attractive to spin it off and get it off its financial statements.

The possibility of a spin-off does not necessarily mean the division has performed poorly, but only that it doesn’t fit the company’s plan to focus on core areas. In fact, in referring to nutritional foods and its CIBA Vision business, Mr. Vasella said, “These businesses do well currently. But at the same time one has to think proactively.” In businesses that are not part of core operations, he said, “There are only two things you can do—either you become stronger or you get out.”

That begs the question, “What about Altus?” Novartis recently made waves in the U.S. by forming Altus, a functional food joint venture with Quaker Oats. It actually might play a larger role in Novartis’ strategy, given that it was supposed to be the marriage of a manufacturing and marketing driven food company and a research and innovation driven pharmaceutical company. No­vartis views research as a core activity, and if the marriage with Quaker is to be successful, it will require significant “value-added” research from the pharmaceutical giant. The off-balance sheet Altus may be the way for the company to both get stronger and get out of the non-core food business. Some analysts have even speculated that Aviva may get dropped into the Altus venture.

Regardless of what happens, food companies in particular will be watching the events that transpire closely, because they have made very large investments in this space. Much of the Wall Street speculation has been that the companies paid too much for their stakes and it could be a wake-up call for them to see what their investments are worth at this stage, even though it is still early. Aviva is one of the most touted international nutraceutical brands in the world and in many geographic areas has more brand equity than any other functional food company, making it a very hot property. On top of that, it is an established global business—even though it really isn’t in the U.S.—that has grown much faster than Novartis’ traditional food businesses.

Despite the negative intonation about the nutritional foods business that much of the market expressed, Novartis may find that there are alternative solutions to still provide research and innovation to the functional food industry. In all likelihood, the partner it chooses, if it does actually spin the company off, could create a very powerful player in the space.

NW

Adam Ismail is a financial analyst with Health Business Partners (HBP),Warwick, RI) a boutique investment bank that works exclusively with companies in the natural products and complementary health services industries. HBP also provides capital to businesses in these industries as well as tracking financial data in the natural products industry and providing M&A and strategic advice, in addition to direct investments. HBP can be reached at 5784 Post Road, Warwick, RI 02818; 401-885-4670, Fax: 401-885-4686; E-mail: [email protected]; Website: www.healthbusiness.com.