Mead Johnson Set Loose To Navigate Market, Shifting Economic Winds 

Mead Johnson Nutrition has launched as the first publicly traded company focused on pediatric nutritionals with the global lead in infant formula sales and a foot in the door to the market for products for mothers.

But the premium status of the firm's Enfamil formula products could be a liability in an economic climate that could drive consumers toward value brands - even in the traditionally resistant category of infant formula.

Mead leads infant formula sales globally, with sales of Enfamil growing 7 percent in 2008 to $1.6 billion. The former wholly owned Bristol-Myers Squibb subsidiary generated $2.88 billion in total net sales, up 12 percent.

In the branded pediatric nutritionals space, Mead competes with Nestle, Abbott, Groupe Danone and Wyeth.

MJN's growth could stumble over overlapping sales between its fortified food products and its vitamins and dietary supplements. And lower-priced products could take away market share, especially overseas, where prices are higher for imported goods.

30 Million Shares In IPO

BMS' initial public offering of Mead shares Feb. 11 raised $720 million. The IPO on the New York Stock Exchange marked the largest across all sectors in 10 months, and the first for the U.S. health care industry since 2007.

BMS sold 30 million shares priced at $24, above the underwriters' most optimistic projections. In the prospectus, underwriters Citibank and Morgan Stanley estimated pricing would be in the range of $21 to $24 per share, with 25 million shares issued, not including the over-allotment.

Mead's IPO was expected to sell strongly in part because pharma parent BMS' credentials bolster the reputation of MJN's nutritionals.

Expectations for the debut also were high because Mead has a diversified business with global sales, and the firm is ahead of the curve on pre- and post-natal women's products - a growing market, analysts say.

The positive IPO uptake is a testament to the firm's "proven performance record, strong top-line growth and strong cash flow generation," backed by Enfamilproducts, Peter Leemputte, MJN's chief financial officer and senior SVP, said in a same-day conference call.

While the launch timing is not optimal given the global economic downturn, analysts consider pediatric nutritionals fairly recession-resistant because parents rarely compromise on health choices for their children. Further, government programs that pay for women, infant and children's nutritionals products are an economic buffer.

However, Sam Snyder, an analyst with Greenwich, Conn.-based Renaissance Capital, considers it a definite risk that MJN could lose domestic market share if consumers opt to trade down rather than buy premium-priced brand nutritionals.

Safety Sells

MJN's success will have "a lot to do with consumer perception" - where BMS' reputation will score brownie points, said Daniel Latev, a London-based analyst at Euromonitor International.

Smaller companies that sell a variety of brands cannot always verify ingredients and track product development with the precision of a big pharma.

"Safety has been a major concern for consumers, especially in developing markets," Latev said, noting China's scare with melamine-contaminated formulas (¹ (Also see "Melamine In U.S. Could Pose More Risk To Food Safety Regime Than Infants" - Pink Sheet, 1 Dec, 2008.) p. 13).

"What we saw there was a massive flight in domestic Chinese consumers away from domestic brands to imported products," said Lee Linthicum, also a Euromonitor International analyst. However, prices are an obstacle for some consumers there since imported products can cost up to twice as much.

Emerging markets represent a larger growth opportunity than the U.S., where sales remained fairly flat in 2008.

For the first nine months of 2008, Asia and Latin America accounted for 52.4 percent of Mead Johnson's net sales in 2008, growing 27.3 percent - including a favorable 6.7 percent foreign exchange rate - to $1.14 billion, according to the Jan. 28 IPO prospectus.

North America and Europe markets grew at a slower rate of 2.3 percent for the same period - including a 1.9 percent favorable foreign exchange rate. Sales on those markets were $1.04 billion. MJN made some pricing increases in the U.S. to offset volume losses due to sales of private labels.

A sales force expansion sparked growth and pricing increases drove up revenues in China as MJN added prebiotics and increased docosahexaenoic levels in some children's nutrition products, the firm says.

Mead Johnson says it accounted for 56 percent of total children's nutrition sales in China, the Philippines, Thailand, Malaysia and Mexico in 2007.

If Mama's Happy, Everyone's Happy

Demand for nutritional products for expecting and nursing mothers is increasing and Mead already has a foothold with its current line of products.

Linthicum said sales of EnfaMama powders and tonics for mothers are growing strongly in those countries, in part because the products fit with cultural ideas of holistic remedies there.

In Vietnam, for example, MJN has a 43 percent market share of overall powdered milk sales, totaling about $20 million in sales. While this is not a large market, the numbers are significant when compared to other products from companies, which are significantly lower, Linthicum said.

"EnfaMama, with close ties to a pharmaceutical medical company, shows this is a good product; mothers should be drinking it," he added.

Consumer demand is especially high for pre- and post-natal products in Asian markets, where strict milk regulations for pediatric formulas allow few new products to enter the market. Building a reputation with products for mothers first, though, opens doors for infant and children's nutritionals.

"India is a huge potential market, given restrictions on how they market milk products," Linthicum said. "As firms build brand equity, they also indirectly build brand."

Nutritionals for mothers also present growth opportunities in Europe and the U.S., where a surge in breastfeeding has affected sales of infant formulas.

"Products for mothers allow companies to get around that: if you're not feeding infants formula, feed mothers," Linthicum observed.

The Functional Food/Supplement Split

Child-specific supplements and vitamins, however, already are a fragmented market, where Mead has about a 2 percent market share.

"This may not seem very big, but the biggest company there [Bayer] holds a 7 percent share," Latev said.

Sales of products for metabolic disorders diversify Mead's business, although they are not a high growth driver. "They are a good type of product to have in a downturn, since sales remain stable," he noted.

Latev suggests Mead Johnson should be cautious as it develops new products in the functional food and dietary supplement spaces. Firms can tread off-course by trying, for instance, to market a supplement that could compete with one of its own food products, he said.

"There is a certain level of cannibalism there - forecasting functional food to grow more quickly and sometimes at the expense of vitamins and dietary supplements," Latev said. While a supplement may contain more of a sought-after ingredient than a food product, it is often priced higher.

Mead Johnson will continue to count on contracts with wholesalers, such as Wal-Mart, which accounted for 14 percent of gross sales in 2007. The firm notes in the IPO prospectus that losing those contracts would hurt.

Mead Stands Alone

The IPO carries new challenges for Mead, which has $1.8 billion in debt to pay. The firm will use the proceeds to pay back inter-company notes, estimated at $597 million, related to the purchase of assets and shares in Indonesia ($32 million), Malaysia ($55 million), the Netherlands ($280 million) and the Philippines ($230 million).

BMS agreed to waive inter-company notes equal to $250 million - the decided opening cash balance for Mead Johnson, according to a prospectus filing.

From the IPO, Mead expects to pay a nonrecurring separation cost of $29 million to $35 million in 2009, weighted toward the first half of the year, on top of $32 million in the fourth quarter 2008.

"Bristol wants a war chest of cash to pursue the acquisition of new drugs and getting the deal done helps fortify the balance sheet," said Snyder.

- Carlene Olsen ([email protected])