Suppliers’ Fates Rest in Proprietary Product Development
Published: Sunday, October 01, 2000
An extremely soft supplements market has contributed to dismal sales among raw materials suppliers. Hauser (HAUS), based here, reported a net loss of $1.9 million for 3Q00. South Hackensack, NJ-based Pure World (PURW) posted a net loss of $239,000 for the quarter ending June 30.
Also, two privately held companies, American Ingredients and MW, are widely rumored to be facing serious financial problems. “I think there are a lot of companies in trouble,” says Stephen LeFebvre, senior partner with Brattleboro, VT-based TradeWorks Intl., a product development company.
“Valuation of companies in this industry has declined dramatically,” adds Scott Van Winkle, analyst at Adams, Harkness & Hill.
In late 1996, raw materials suppliers were trading at 30x their forward earnings, Van Winkle says. Currently, they’re trading at 8x to 10x their forward earnings.
A contributing factor is that, while reacting to skyrocketing supplements sales, raw materials suppliers got caught with warehouses full of inventory when the market fell in mid-1998.
According to Hauser’s last 10-K, the company had $30 million—a year’s supply—in inventory. Peter Hafermann, VP of sales and marketing, says a good inventory supply is about two-and-a-half to five months worth of product, or for Hauser, $3 million to $5 million.
Pure World is carrying about 90 days of inventory, says Natalie Koether, president. “We have no inventory,” she says. “We’re probably the only company that can say that.”
LeFebvre offers a blunt assessment of what it will take for raw materials suppliers to rebound from plummeting sales. “This industry has got to get its s--- together,” he says. “The only small companies that are going to survive are the ones that focus on a specific material.” The generalists will be the big boys—pharmaceutical companies, for instance—he says.
TradeWorks, formerly a consultant to the raw materials industry, has now moved into product development. Its showcase material is Maitake Mdefraction, an immune-system enhancer made from Japanese mushrooms.
Raw materials suppliers can still continue to sell herbal standards, such as St. John’s wort or saw palmetto, LeFebvre says, but they’ll need to come up with different extract formulas or unique uses for the product that they can make proprietary.
Hafermann agrees with the theory that science will be important. Hauser formed a New Products and Innovation Team in April to create “efficacious, medicinal therapies from sustainable sources,” says Senior Executive VP of Technology Dean Stull.
“Really, the issue for us is innovate or die,” Hafermann says. Hauser will continue to concentrate on its key markets—supplements and pharmaceuticals—but Hafermann says the company has room for expansion in the food and cosmetics sectors.
Hauser will manufacture some of its proprietary products, selling them in partnership with other companies, says Investor Relations Manager Suzanne Brink.
But for many raw materials suppliers, the problem with R&D is that it takes money, and most companies aren’t like Hauser, which, despite its substantial losses, had $1.1 million cash and cash equivalents on hand as of June 30.
Van Winkle says that in the last 12 months, venture capital funds have become much less abundant for raw materials suppliers.
“This business in general has not been capital intensive,” he says, pointing out that to attract money for R&D, raw materials suppliers have to show that they have “management execution” and leaner operations.
Pure World is one supplier that is investing money for improvements. According to PURW’s last quarterly report, the company spent $1.2 million in net cash for the first six months of 2000 for construction of a new powdering facility and purchases of machinery and computer equipment.
Koether believes it’s worth it because, she says, “[the market] is going to turn any minute now. We’ve got only a couple more months before we expect to see an upturn.”
She predicts that when the market comes back “you’ll see a lot of different players and a much more sophisticated industry. Consumers are demanding it.”