Bad publicity pall stalls M&A activity in supplements even as transactions soar in organic & natural foods, beverages

NCN, which matches investors with high-potential growth companies in the nutrition and health & wellness industry, announced a continuing surge of investments and merger and acquisition activity in branded natural and organic food & beverage companies in 2015, in addition to rapid growth in financings in the emerging world of foodtech. 

But in the supplements space activity was down significantly in 2015 from what NCN recorded in 2014. The group recorded 10 M&A transactions in supplements in 2015; the figure for 2014 was 22. In financings in the supplements category, the number of transactions were 4 and 6 respectively.  

Bad publicity hangover​

NCN founder and CEO Grant Ferrier told NutraIngredients-USA that the cascade of events started by the initial investigation by New York Attorney General Eric Schneiderman into four major supplement retailers that he announced a little more than a year ago has had a chilling effect on investment in the space. The initial investigation received ample coverage in the mainstream media, and a number of other state AGs signed on to Schneiderman’s coalition.

“It definitely had some effect. I think from the standpoint of the industry is hasn’t sent all of the investors running to the hills, but it has given them pause about the supplements industry,”​ Ferrier said.

The first months after Schneideman’s announcement in early February of last year were spent in trying to understand the scope of the challenge. The industry spent most of the past year on the back foot, and momentum only started to build around proactive steps to regain the quality narrative in the last quarter of 2015. The United Natural Products Alliance sponsored two meetings on supply chain management, the first of which in November focused on the state of DNA barcode testing and its potential application to raw material testing for supplements. The second meeting, which took place last week in Salt Lake City, was highlighted by the announcement by GNC (one of the initial four retailers targeted by Schneiderman) of a raw materials GMP program it intends to put into force immediately for its own supply chain. The company has said it hopes the program, based in large part on earlier work done by the American Herbal Products Association and the American Herbal Pharmacopoeia, will become a blueprint for the industry. 

Ferrier said that there is a cohort of investors who understand the industry and its challenges, and this group is unlikely to be unduly influenced by the publicity swirling around the NYAG affair. But there is a penumbra of potential investors who are more easily put off, he said. Ferrier said the GNC announcement is welcome news, but he added that a significant amount of damage has already been done that will take time to undo.

“I think there is a core of the industry that understands the complexity of making a seemingly medical claim in a legal way. The GNC announcement swings momentum the right way, but there is still a long way to go. Buying instant credibility is pretty tough given a suspicious mindset,” ​Ferrier said.

Overall healthy & wellness activity booming​

But outside of the tepid picture for supplements, investment activity in the health and wellness space is booming, Ferrier said. If the supplement industry can address its currently difficulties in a timely and credible manner, there is no reason it can’t participate in this growing trend, he said.

“2015 was a record year for equity investments and acquisitions in the nutrition and health & wellness industry, and by no small margin,”​ Ferrier said. “Venture investments more than doubled in agtech, branded food & beverages, and food delivery; in the latter two categories, more than one deal a week was announced.” ​

Interest from big food companies, venture and private equity funds, and “cross-over” investors from technology and biotech all helped drive activity, but Ferrier also noted an increase in earlier stage investments by high net worth individuals, angel investors, former industry executives, crowdfunding, incubators, accelerators and other alternative financing models. Ferrier said that  smaller investments have proliferated, with 2015 seeing 40 equity investments of less than $2 million in branded products, more than the previous two years combined.

Equity financings rise 61%, M&As increase 29%​

Overall transactions (i.e., acquisitions plus​ equity financings) in the nutrition and health & wellness industry totaled 558 in 2015, compared to annual totals of 382 in 2014 and 253 in 2013, according to the NCN Transaction Database.

Equity financings accounted for 331 of total industry transactions in 2015, up 61% over the prior year, and more than $7 billion invested in deals for which the amount invested was available. Technology accounted for 207 or 63% of those equity financings but 69% of total value invested with 41 technology investments falling in the $50 million+ range. 

Mergers & acquisitions accounted for 224 of total industry transactions in 2015 compared to 168 in 2014, a 29% increase. Total transaction value of the top 10 listed deals in the food & beverage category was $7 billion.