Adam Ismail, Executive director of the Global Organization for EPA and DHA Omega-3s 07.01.12
This column usually focuses on high level issues in the financial markets affecting nutraceuticals companies, but it has generally avoided diving too deep into any one category. However, DSM Nutritional Products’ recent acquisitions in omega 3s—Martek and most recently Ocean Nutrition—are notable and worth exploring further.
Given these purchases, DSM now controls about one-third of the global volume of EPA and DHA oils being sold.
These deals are significant because there has been a slow wave of consolidation in the omega 3 space, and the strong position DSM now has will likely lead to further consolidation. So who will be the targets? One would think companies with well-established businesses are good targets, but the reality is technology and supply have been more important drivers of consolidation than growing businesses via acquisitions.
There are two major trends driving this. First is investment in the pharmaceutical market for EPA and DHA omega 3-based drugs. There are currently only two such pharmaceuticals marketed in the world, but there are at least 13 more in the pipeline and they will have unique technology requirements that need to be filled. The second trend relates to concerns surrounding adequate supplies of fish oil going forward because there are finite resources and there is high demand for the fish with the greatest omega 3 content. There are other sources available, including algae and genetically modified (GM) plants, but they also require new technologies and are thus in demand.
The attractive properties will likely either be companies with top-tier production capacity available, but which is not being fully utilized, particularly if they have pharmaceutical manufacturing licenses. In addition, companies that either have access to traditional sources of crude fish oil supply, or access to novel sources of fish oils, will also be in high demand. The next-generation algal and GM plant sources will likely be tied up in strategic partnerships while those markets develop, but this too could lead to acquisitions in a few years.
What About the Competition?
While DSM will control a third of the long-chain omega 3 market after the Ocean Nutrition Canada acquisition closes, the question on many omega 3 companies’ minds is how this will affect the intensity of competition in the market. DSM only had a small fish oil business two years ago and admitted at a recent conference that it knew it would have to acquire companies in order to be a leader in omega 3s. This led to the acquisition of Martek Biosciences, which at the time was the leader in algal omega 3 oils due to its intellectual property and dominant position in supplying infant formula companies with DHA. However, while Martek’s business was valuable, it was relatively low volume in the overall omega 3 business because algal oils are a high-cost, low-volume business.
In actuality, the level of competition between fish and algal oils is relatively low due to the vast differences in price, which is why DSM needed a more significant fish oil business to be a leader in omega 3s. This is what led to the Ocean Nutrition Canada acquisition, the largest fish oil ingredient business in the world by volume.
At the end of the day, the consolidation in the fish oil business is relatively small, and the algal space is unchanged. The DSM fish oil business combined with the Ocean Nutrition business is only slightly larger than Ocean Nutrition’s core business anyway. On the algae side, there is still only one dominant supplier, so competition for algal omega 3s will not be affected until the next-generation technologies make their way to market.
As for the buyers in this next wave of consolidation, they will probably include companies that are already in the omega 3 space.
While the level of competition will likely be unaffected for companies already making omega 3s, the DSM acquisition will make it much harder for an outsider to enter the space if they can only acquire companies with lower scales. This would generally rule out the large multinational food, agricultural and chemical companies that would typically be interested in ingredient companies. That is not to say that there will not be a time when they can enter omega 3s with a significant acquisition, but it probably won’t be until the next-generation sources of omega 3s have been developed and the level of competition has already evolved yet again.
Disclosure: As the executive director of the Global Organization for EPA and DHA Omega 3-s (GOED), Mr. Ismail maintains regular communications and relationships with these companies.
Adam Ismail is the executive director of the Global Organization for EPA and DHA Omega-3s (GOED), Salt Lake City, UT. He previously worked in business development, mergers and acquisitions, and business strategy at Cargill Health & Food Technologies, Health Strategy Consulting and Health Business Partners. He can be reached at adam@goedomega3.com.
Given these purchases, DSM now controls about one-third of the global volume of EPA and DHA oils being sold.
These deals are significant because there has been a slow wave of consolidation in the omega 3 space, and the strong position DSM now has will likely lead to further consolidation. So who will be the targets? One would think companies with well-established businesses are good targets, but the reality is technology and supply have been more important drivers of consolidation than growing businesses via acquisitions.
There are two major trends driving this. First is investment in the pharmaceutical market for EPA and DHA omega 3-based drugs. There are currently only two such pharmaceuticals marketed in the world, but there are at least 13 more in the pipeline and they will have unique technology requirements that need to be filled. The second trend relates to concerns surrounding adequate supplies of fish oil going forward because there are finite resources and there is high demand for the fish with the greatest omega 3 content. There are other sources available, including algae and genetically modified (GM) plants, but they also require new technologies and are thus in demand.
The attractive properties will likely either be companies with top-tier production capacity available, but which is not being fully utilized, particularly if they have pharmaceutical manufacturing licenses. In addition, companies that either have access to traditional sources of crude fish oil supply, or access to novel sources of fish oils, will also be in high demand. The next-generation algal and GM plant sources will likely be tied up in strategic partnerships while those markets develop, but this too could lead to acquisitions in a few years.
What About the Competition?
While DSM will control a third of the long-chain omega 3 market after the Ocean Nutrition Canada acquisition closes, the question on many omega 3 companies’ minds is how this will affect the intensity of competition in the market. DSM only had a small fish oil business two years ago and admitted at a recent conference that it knew it would have to acquire companies in order to be a leader in omega 3s. This led to the acquisition of Martek Biosciences, which at the time was the leader in algal omega 3 oils due to its intellectual property and dominant position in supplying infant formula companies with DHA. However, while Martek’s business was valuable, it was relatively low volume in the overall omega 3 business because algal oils are a high-cost, low-volume business.
In actuality, the level of competition between fish and algal oils is relatively low due to the vast differences in price, which is why DSM needed a more significant fish oil business to be a leader in omega 3s. This is what led to the Ocean Nutrition Canada acquisition, the largest fish oil ingredient business in the world by volume.
At the end of the day, the consolidation in the fish oil business is relatively small, and the algal space is unchanged. The DSM fish oil business combined with the Ocean Nutrition business is only slightly larger than Ocean Nutrition’s core business anyway. On the algae side, there is still only one dominant supplier, so competition for algal omega 3s will not be affected until the next-generation technologies make their way to market.
As for the buyers in this next wave of consolidation, they will probably include companies that are already in the omega 3 space.
While the level of competition will likely be unaffected for companies already making omega 3s, the DSM acquisition will make it much harder for an outsider to enter the space if they can only acquire companies with lower scales. This would generally rule out the large multinational food, agricultural and chemical companies that would typically be interested in ingredient companies. That is not to say that there will not be a time when they can enter omega 3s with a significant acquisition, but it probably won’t be until the next-generation sources of omega 3s have been developed and the level of competition has already evolved yet again.
Disclosure: As the executive director of the Global Organization for EPA and DHA Omega 3-s (GOED), Mr. Ismail maintains regular communications and relationships with these companies.
Adam Ismail is the executive director of the Global Organization for EPA and DHA Omega-3s (GOED), Salt Lake City, UT. He previously worked in business development, mergers and acquisitions, and business strategy at Cargill Health & Food Technologies, Health Strategy Consulting and Health Business Partners. He can be reached at adam@goedomega3.com.
