Interview: Health & Wellness Investment Bank PCGA Prioritizes Supplement Innovation, Quality

Investment capital has followed the flood of consumer interest in the natural health and wellness market. Partnership Capital Growth Advisors was founded as an investment bank and financial advisor in 2005 to focus precisely on the "healthy, active and sustainable living" segment.

In 2010, the San Francisco-based firm facilitated multiple dietary supplement company deals, including Atrium Innovations' acquisition of Trophic Canada and the purchase of Bariatric Advantage by Metagenics ("Atrium integrates Trophic Canada," "The Tan Sheet" Aug. 23, 2010, In Brief).

In addition to helping companies raise equity capital, attract debt investments or be acquired, PCGA's secondary investment arm allows it to co-invest in firms it advises. The current portfolio includes acai product marketers MonaVie and Sambazon, Muscle Milk maker CytoSport and Promax nutrition bars.

Janica Lane, director at Partnership Capital Growth Advisors

"It's been a really nice model," said Janica Lane, a PCGA director specializing in vitamins and supplements. She explained that opportunities for co-investment develop organically as PCGA becomes familiar with the companies it advises.

"We tend to be the people who know the company the best coming out of a transaction," Lane said. "So I think that it can be useful and value-added to play a continuing role."

In an interview with "The Tan Sheet," Lane discussed what qualities PCGA looks for in a firm and why she's bullish on premium supplement brands and the direct-seller model.

Excerpts from the March 25 interview follow.

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"The Tan Sheet": What do you look for in a supplement or nutritionals company?

Janica Lane: I don't want to get into the "My-vitamin- C-is-better-than-your-vitamin-C" niche. So we really are looking for companies that have some sort of unique products or have been highly innovative, and that are really offering something different to the consumer. I do think that there have been trends these days toward quality, so having a very high-quality, respected product and a longstanding reputation out there in the market is very important.

There's a lot to be done on the science side. You'll hear a lot of this stuff about, "Should we be doing clinical trials on vitamins and supplements?" And I don't know that most consumers are to the point of fully getting that, but I do think that the trend has been more toward science-backed supplements.

Natural and organic is still a very niche-y category but has been growing quickly. Some of the companies there that have come onto the scene fairly recently, like a New Chapter or a Sequel Naturals, are very interesting. And I think what remains to be seen … is how do these companies establish a base in natural and then can they cross over into more conventional [channels]? Or what is the distribution methodology that works for those products? If it's not retail, is it direct-to-consumer or is it something else?

"I don't want to get into the 'My-vitamin- C-is-better-than-your-vitamin-C' niche. So we really are looking for companies that have some sort of unique products or have been highly innovative."

We're definitely very interested in the direct-to-consumer model, and in companies that are selling really great products through e-commerce essentially, or catalog or any sort of direct business. Along that same vein, we find the health care practitioner channel very interesting. … A lot of the innovation starts there, and a lot of the quality and reputation and science has to be there when you're selling [supplements] to a health care practitioner. I think that's a pretty big growth area in the market.

Tan: What do you believe makes direct-sellers such as Herbalife , USANA Life Sciences and MonaVie – part of PCGA's portfolio – appealing and successful?

Lane: The power of a personal story works very well for vitamin and supplement products. … It was interesting to watch some of those companies through the downturn, because the expectation was that people would flee to that category, hoping that they could make extra income. And I don't think that that was really proven out. But as the economy has picked up here and people have had the discretionary spend available again to buy USANA and other products, that the industry has seen some recovery or at least a rebound versus 2009.

International is a big opportunity. You get some of these companies that have entered tougher markets like China, and that can very quickly become just a gigantic revenue stream if it can be managed appropriately (Also see "China Market Veteran Crowther Lobbies For Nutritional Product Regs" - Pink Sheet, 21 Mar, 2011.). There are big challenges with going international but also big opportunities because a lot of those markets are maybe more keen on this business model. I feel like it's somewhat stigmatized in the U.S., and the U.S. market is a little bit tapped out.

Tan: Do you have any concerns about premium-priced, organic, non-GMO supplement products, with the economy still struggling in many respects and commodity costs rising?

Lane: The premium-priced products work in the natural channel and have been very successful there. … I do also think that natural and organic vitamins and supplements are just lagging natural and organic food, to some extent. So you are seeing consumer awareness increase; there's much more of a demand for these products. … While they're starting from a small base, those categories are just growing so significantly. So I do think that there's demand and there's willingness to pay a higher price point.

Tan: Generating patent protection on nutritional innovations can be a challenge. How can nutritional firms overcome that?

Lane: I think that when the economy cratered, innovation also fell off in the nutritional supplement industry. … For these companies, especially in an environment like this – which was really an unprecedented time in the lives of most of these companies – there is an adversity to the risk that comes with innovation. And I think part of that is just, with a new product in that market, does the consumer even want to try something new? And even before you get there, can you get your retail buyer to try anything new?

The last couple of years have seen less innovation than previously. That said, there's an incredible amount of room to innovate, and there are more and more opportunities today to have some sort of intellectual property around products.

There are also opportunities to use ingredients that have been really well-researched by the ingredient supplier. So you can get an ingredient like an Indena product, they do a really nice Meriva Curcumin product. They have another interesting ingredient called Siliphos [derived from Silybum marianum]. Some of those ingredients have been fairly well-researched. Sabinsa has been great about using its curcumin product for some of these clinical trials that have been going on at MD Anderson [Cancer Center]. So there are opportunities for the end supplement users to leverage this ingredient work and incorporate that in their products.

Tan: In evaluating supplement companies, how much do you look at intangibles like a solid management team or appealing marketing?

Lane: For us what's almost always number one, and for an investor, is the management team. We really want to understand that there's a team that believes in quality and that is very well-rounded, has experience in the industry and has a real growth story to tell that's totally credible and executable, based on internal resources and capital, both human and otherwise.

"There are big challenges with going international but also big opportunities because a lot of those markets are maybe more keen on [direct-selling]. … The U.S. market is a little bit tapped out."

A maniacal focus on quality is so beneficial – so any company that really has a culture of quality and a culture of uncompromising standards in creating their products, and very careful sourcing and production and distribution. That's really important and it matters more and more.

Tan: 2010 witnessed some big nutritional business deals, including The Carlyle Group 's acquisition of NBTY and DSM buying Martek Biosciences ( (Also see "DSM's $1.1B Martek Acquisition Comes With Potential IP Expirations" - Pink Sheet, 3 Jan, 2011.) ). How do you view the significance of these moves?

Lane: It's been so interesting in the last 18 months just watching all of the transactions that have happened in the industry, after a period that was relatively quiet. And I do think that there's been a growing awareness just of the category generally and the trends going on that has propelled a lot of this action.

You've also seen, on the strategic side, a number of companies that are very intelligently filling gaps in their portfolio. Some of that started with Martek, an ingredients company, purchasing Amerifit [Brands], which is really a finished goods company selling to retailers (Also see "Amerifit Shoulders More Responsibility As DSM's "Conduit To The Consumer"" - Pink Sheet, 21 Mar, 2011.). So you started to have this crossover between the ingredient side of the business and the finished products side of the business. That may happen on a larger scale, now that DSM has acquired Martek.

Despite some fears around FDA enforcement of the sports nutrition category, there's been a ton of activity – again, as some of these companies look to fill their portfolios but also just as the sector grows generally. So you saw Glanbia buy BSN, which fits in very well with their Optimum Nutrition platform. … And then [GlaxoSmithKline] purchasing Maxinutrition at a relatively rich valuation, at the same time they announced that they'll be divesting a number of their OTC brands (Also see "Glaxo Beefs Up Nutritionals Business With Maxinutrition Buy" - Pink Sheet, 20 Dec, 2010.).

On the strategic side, it's generally a recognition that everybody needs to have a nutrition asset of some sort, just given consumer trends and given how important they've become. And on the financial side, it's been very similar. You have these groups that have been watching long-term trends and watching some of these companies come out of a downturn pretty successfully. But in the case of someone like an NBTY, maybe not with the market multiple that was fully reflective of the value of the company. So it's quite an insightful move here to take that company private; the Carlyle deal was pretty impressive.

It was followed by a whole string of other activity, and it really validated vitamins and supplements as an investment strategy and platform for a lot of groups out there. I think that will change the playing field pretty dramatically. You start getting some of these companies with private equity investors that turn into – I don't want to over-exaggerate, but – super-companies. They're well capitalized and really have a mission to grow. So I do think that it'll increase the competitiveness and hopefully also stimulate innovation.

By Dan Schiff