Lower margins and strong-arm direct-to-consumer campaigns are two of the primary barriers to selling nutraceuticals, according to a business school ‘war game’ conducted with the participation of Abbott, Danone (Dannon in the US), GSK and Nestlé. But the global nutraceuticals market – worth $80 billion in 2010, according to Frost & Sullivan – is expected to grow substantially in the next few years, unlike prescription drug spending.
The companies listed above – Abbott and GSK, on the one hand, and Danone and Nestlé, on the other – represent two distinctly different industries that are beginning to step on each other’s toes. Consumer packaging goods (CPG) companies are skilled at developing and marketing consumer products, while pharma’s expertise is more science-oriented, in terms of product development and marketing requirements. Both industries have taken notice of a snowballing consumer interest in so-called nutraceuticals and functional foods, or products that don’t necessarily involve active pharmaceutical agents, but have marketable, science-based ingredients.
While Abbott, GSK, Sanofi and other pharmas have shown an interest in building a nutraceuticals or science-tempered nutritionals business around areas like heart disease, Alzheimer’s, diabetes and gastrointestinal disorders, others have shied away from the prospect of low margin consumer products, and the marketing efforts they require. Pfizer, for example, put Wyeth’s baby formula business up for sale in July; Nestlé and Danone are reportedly the leading bidders.
Given the pipeline gap, pharma can’t afford to cede the nutraceuticals market to CPGs like Nestlé, a company that is actively climbing over the fence into pharmaceuticals. Pharma companies are “gun shy” about aggressive consumer marketing, and less willing to take risks, says Leonard Fuld, CEO of Fuld & Company, a competitive intelligence firm, and host to the aforementioned war games. Pharma’s FDA regulatory funambulism is the source of its reticence, whereas CPGs are willing to risk obtrusiveness (and legal grey areas) in the attempt to dominate a market. You won’t see embedded video advertising for a pharma brand placed against pirated television shows hosted offshore, for example.
Fuld says the war game discussions also revealed that pharma companies are nervous about partnerships with CPGs, believing that brand identity or intellectual property could be usurped after handing over a product. While Nestlé in particular could “break the mold” – the company has walled off its high-science division, separating disciplines like genomics, biochemistry and human cell biology, from say, innovations in foam-boosted cappuccinos – Fuld says pharma companies need to make a public health case for nutraceuticals, since they don’t know how to educate consumers the CPG way: by creating and exploiting a broad, populist market need. CPGs like Nestlé and Danone are pushing into new, science-based products that don’t require a prescription. Fuld says pharma should be more willing to collaborate, and recognize the nutraceuticals and “designer foods” market for what it is: an opportunity for new revenue that bypasses a decade-long testing phase and an increasingly hostile payer environment.
Participants representing the four companies in the war game were culled from Dartmouth’s Tuck School, MIT Sloan, Northwestern’s Kellogg School, and the Yale School of Management. Actual company representatives observed and made comments.