Issued: 27 January 2013
The Sunday Times, published 27 January 2013

When Zef Eisenberg started experimenting with powders to help him and his bodybuilding friends bulk up, he thought it could become a multimillion-pound business.

"I wanted the best products. We couldn't find them so we decided to make our own," said Eisenberg, 39, who spent many hours researching the science of nutrition in medical libraries.

Maximuscle, the Watford-based business he created, has since passed through the hands of two private equity firms, Piper and Darwin. It was sold again for £162m in 2010 to Glaxo Smith Kline, Britain's biggest drug company and owner of such brands as Lucozade.

It was a sign of things to come. Since the Maximuscle deal, big drug developers and consumer goods groups have been tripping over themselves to snap up nutrition, vitamin and supplements businesses.

So many deals are being done that this mishmash of companies that make everything from diet pills to gym supplements has developed its own name: the "nutraceuticals" sector.

Is this really a new industry or just a fad?

Eisenberg is adamant there has been a fundamental shift in consumer trends. The notion that a brand such as Maximuscle is aimed only at readers of Muscle & Fitness magazine is long outdated.

"The days of beer bellies are old school," he said. "These good, moisturizing, having a six-pack, people going to the gym. The market has really opened up."
In the past year or so, the floodgates have opened. Procter & Gamble, the consumer goods giant Fairy Liquid and Gillette, acquired New Chapter, a vitamin supplements company. In December 2011, Pfizer, the world's biggest drug maker, completed the acquisition of Ferrosan, which sells dietary supplements in central Europe, and followed up two months later by buying Alacer, the American company behind the Emergen-C brand of vitamin C tablets.

Pronova, a Norwegian maker of products derived from omega 3 oils, was bought by BASF, the German conglomerate. And perharps the most notable deal of all saw Reckitt Benckiser - maker of Nurofen, Mr Sheen polish and Durex condoms - slug it out with the German pharmaceuticals group Bayer to buy Schiff, an American vitamin producer, for $1.4bn (£886m) at the end of last year.

City dealmakers expect the trend will only continue. "There is a lot of potential for further acquisitions in this industry - there are a lot of independent  players out there," said an investment banker who has worked on some of the transactions.

The appetite for deals may surprise those who question the benefit of nutritional supplements. An NHS report in 2011 concluded that "the widely perceived benefits of certain supplements simply do not have enough robust evidence to support them".

Yet the bigger consumer goods and drugs companies see a chance to expand the market. They believe they can provide better distribution, using their scale to secure valuable shelf space to secure valuable shelf space in supermarkets.

It's a logical step for the big drug companies, which are seeing their over-the-counter medicine businesses growing faster than their traditional prescription drug offerings.

"Over-the-counter medicine is one area that really seems to be holding its own," said Kasim Kutay, head of healthcare at Moelis, the boutique investment bank.

"The market is seeing growth of 5% or 6%, faster than the prescription market."

Drug companies have been struggling for years to come up with blockbuster medicines to replace those that are losing patent protection and, by extension, their premium pricing. Companies with strong consumer healthcare franchises, such as Glaxo and Pfizer, have been looking to expand those divisions to offset the problems they face in developing prescription drugs.

The drug companies also need to wean themselves off over dependency on America and Europe. Procter & Gamble said, for example, that it will be "exploring the potential" to take New Chapter into new territories.

"There is a lot of growth in emerging markets such as Russia, Brazil and China," said Nina Stimson, executive vice-president at Nicholas Hall, a healthcare research firm.

She said the global vitamins and nutritional supplements market, estimated to be worth more than $30bn to manufacturers in 2011, is forecast to grow to $38bn over the next five years and reach $48.5bn by 2021.

Companies that want a share of this will have to pay. "These businesses are changing hands for high valuations," said one investment banker." Although the market fragmented, there is a scarcity of really good assets."

Reckitt paid 16.5 times this year's expected ebitda (earnings before interest, tax, depreciation and amortization) to acquire Schiff. Most companies in the FTSE 100 trade at about 10 times future earnings. Critics cite this as evidence that companies are willing to push out the boat to secure these deals.

Reckitt described the acquisition as a "powerful entryway" into the "large and growing" VMS market, where it previously had no presence. "As such, it is a platform for future growth," said the company.

Martin Deboo, a consumer goods industry analyst at Investec, said Reckitt would probably be able to deliver significant cost savings from integrating the vitamin maker, which would help bring down its outlay to an "acceptable" level.

For executives in search of growth, taking the ills is likely to be the solution for some time to come.