The Bayer-Schiff Deal is Just the Start

Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Pharmaceutical companies are finding that the old model of researching, developing and marketing drugs is no longer working. The competition from generic drug makers (after patent expirations) is just too tough. So the pharmaceutical companies in recent years have gone on a diversification spree, in search of more stable sources of income. This has led the firms to buying companies in diverse areas such as animal health and consumer health products. This trend looks like one that is sure to continue. 

Bayer-Schiff Deal 

The latest evidence of that is the $1.2 billion offer made for the vitamins and nutritional supplement company Schiff Nutrition International (NYSE: SHF) by the German pharmaceutical and chemical firm Bayer AG ADR (NASDAQOTH: BAYRY.PK). Schiff is well known for its brands including MegaRed, Move Free, Airborne and Tiger's Milk nutrition bars. These brands cover three of the largest health supplements: cardiovascular health, joint care and immune support respectively. 

This deal bulks up Bayer's consumer healthcare division, which accounts for roughly a fifth of the company's annual revenues. And it does so by adding a growing company in a growth market. Schiff has forecast that its sales will climb by nearly half in fiscal 2013. Not really surprising considering that the United States is the world's biggest market for vitamins and supplements. That growth rate is why Wall Street firms, such as Jeffries, said that the price paid for Schiff was justified. 

Wide Pharma Diversification 

Bayer is hardly alone in its move away from pharmaceuticals and toward nutraceuticals. 

Earlier this year, for example, the world's biggest drugmaker Pfizer (NYSE: PFE) agreed to buy privately-held Alacer Corporation, which makes dietary supplements including the popular vitamin C product Emergen-C. Alacer makes about 500 million packets of the vitamin powder annually.  

This purchase was a nice addition to Pfizer's consumer healthcare business, which made up 4.5% of its revenues in 2011. Pfizer's dietary supplements line (before the purchase) had more than $1 billion in sales, led by its multivitamin brand Centrum. 

Another instance of diversifying away from conventional drugs was made by French pharmaceutical company Sanofi ADR (NYSE: SNY). This company is teaming up with beverage giant Coca-Cola (NYSE: KO) to release a new beauty-enhancing drink line to be sold in France (for now) and known as “Beautific Oenobiol.” This 50/50 partnership is also a part of Coke's strategy to move away from producing mainly soft drinks as obesity rates rise and consumers search for healthier alternatives to carbonated soda. 

This is the start of a partnership between the two firms to break into the supplement market with new beverages that will contain a blend of mineral water, fruit juices and certain nutritional additives. It is believed the two will introduce products targeted at segments including weight loss, skincare, hair and nail care and energy drinks. 

The Takeaway 

What does all this mean for investors? The trend toward nutraceuticals by both pharmaceutical and food companies will continue and only accelerate in the months and years ahead. 

Investors could try to gain exposure to this fast-growing sector through stocks like Coke. But the better play may be to position themselves into companies solely focused on this sector. Now that Schiff will be acquired, some other names that come to mind immediately include the likes of GNC Holdings and USANA Health Sciences. 

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