Over half of Balchem's $60 million in annual revenues are now derived from nutritional products for humans and animals. (ARC Specialty Products, the other half of Balchem's business, bottles gasses for medical sterilization.) Strongest growth has occurred in the nutrition segment, however, through generic growth as well as through acquisition.
Growth in nutritional products has also spurred a healthy rise in the company's stock price. "In the 2001 timeframe, our stock was about $4 to $5 a share," Hernandez recalled. "Now it's $22 or $23, so you're looking at a stock price that's quadrupled when the market overall has slumped. There are a lot of people out there who have confidence in what we are doing."
A major portion of Balchem's nutritional business segment is in microencapsulation, a technology to control, protect and deliver bioactive substances including liquids and powders in a precisely defined way. "If it's a liquid, we plate it onto a substrate like an absorbent and enrobe that particle with a protective barrier material, typically some form of lipid," Hernandez explained. "What we have then is a very small microsphere of an active substrate with a protective outer coating. It can be as small as 10 microns."
Microencapsulation originated in the pharmaceutical industry but is a relatively new concept in the food and supplement businesses, Hernandez said. "We've been in the business for over 30 years," he said. "We are, if not the first, certainly among the first to use the microencapsulation technology in foods." Today, the company applies its microencapsulation technology to produce products for the supplement industry as well as for foods and animal feed.
"One of the primary advantages in foods and supplements is stability," Hernandez said of the microencapsulation process. "Many bioactive substances, such as vitamin C, are unstable and will quickly deteriorate in a tablet, capsule, nutrient bar or other food system. " Without microencapsulation, some manufacturers resort to extreme measures to meet labeling claims, he noted. "Some will put five or ten times the amount claimed on the label to allow for attrition, but they are keeping their promise by overdosing tremendously. "
With microencapsulation, by contrast, "Marketers now can be confident that they will achieve labeling claims," Hernandez said. "They won't have ConsumerLab coming in and saying there's no vitamin C in there. That's a key issue." Acquisition targets might include a manufacturer or distributor, he added.
Stabilizing fortified foods or supplements through microencapsulation isn't the only reason why an increasing number of companies choose the microencapsulation process. "Other key benefits include taste masking and odor masking," Hernandez said. "In the supplement industry, there are ingredients that taste terrible, but we can make fish oil an innocuous tasting product so that a marketer can make the flavor anything he or she wishes."
Balchem also sells technical food ingredients, such as microencapsulated sodium bicarbonate used to control leavening systems in breads. For example, the ingredient can enable self-rising pizza dough to be activated by heat above 160 degrees Fahrenheit, avoiding problems if pizza thaws out between the store and the consumer's home.
Microencapsulation may include various levels of technology, such as spray driving, spray chilling, granulating and other processes all aimed at changing how an active ingredient performs in a specific delivery system. "We are at the extreme end of this spectrum of technology. We don't deal with a lot of these basic things," Hernandez said. "In terms of the high end of the business, we are adding a lot of value."
Only a handful of major players compete at the high end of the food and supplement microencapsulation business. Others include Loders Croklaan and Particle Dynamics (a division of KV Pharmaceuticals). In addition, some companies, such as DSM, do microencapsulation for their proprietary blends.
Leading microencapsulated products for Balchem include vitamin C, potassium and choline. "Then we have a number of things we are playing with," Hernandez said, citing omega fatty acids as an example. "We have a very active program in product development and some very interesting results in being able to stabilize the omega-3s, all of the fish oils. We also have an active program in probiotics, where we can stabilize live organisms so that they can survive in different delivery systems tablets, capsules, powdered drinks, et cetera." He added, "We are talking to all the big players. "
In addition to microencapsulation, Balchem is also a basic manufacturer of choline and claims to be the dominant player worldwide. "Worldwide, we have more than 50% share of the market," said Hernandez, adding that the U.S. accounts for a whopping 79% of the global choline market.
In 2001, Balchem acquired DCV Inc., formerly a joint venture of DuPont and ConAgra. "Choline was one of their businesses, some of which I managed," Hernandez recalled. Today, choline is a major product in the Balchem portfolio. "That is a big business for us," said Hernandez.
The animal side of the choline business currently dwarfs demand in human nutrition. "The animal business is probably 20 to 30 times the size of the human market, and it could be even greater than that," said Hernandez.
Choline is an essential nutrient for poultry, since it prevents bone disease. Raw choline is also sold for use in swine feed. In addition, Balchem produces microencapsulated choline for use in dairy cattle feed.
Now, however, focus is increasing on the role of choline in the human diet. "It's only in the past 10 to 15 years, that scientists have come to the understanding that choline is also essential for human nutrition," Hernandez said.
In 1998, the Institute of Medicine published dietary references for choline. "We finally started to get official regulatory acknowledgement that choline is essential," said Hernandez, adding that previously, the scientific community had believed that the body could produce adequate amounts of choline from foods in the diet. "In terms of science, it's only fairly recently that everyone is starting to say choline is essential, and that's good news. The future for choline in human nutrition is bright." Although choline sales for human nutrition, have risen only modestly each year since 1998, Hernandez believes demand will likely increase in the future as consumer awareness grows.
Balchem's primary market for choline is in infant formulas and medical foods, including intravaneous foods. Noting that choline is also used in medical foods such as Ensure and Mead Johnson's Boost, Hernandez pointed out, "These people have known about choline for a long time, and they are on the leading edge scientifically in terms of nutrition. That will ultimately filter down to consumer products."
Research continues into choline's benefits. "If you would do a Medline search on choline, hundreds of papers would pop up." Many of those studies were authored by Dr. Steven Zeiso, a leading choline researcher at the University of North Carolina. "Other researchers at Duke University have done fantastic work on memory, especially age-related memory." Hernandez observed. "They've been able to demonstrate in animal models that choline administered at an early stage in life, both prenatally and when animals are very young, has a lifelong effect. It will influence neurological development for life." If validated in human studies, that finding could have significant ramifications for America's aging population.
For the future, Balchem plans to fuel generic growth by adding new products to its portfolio, including innovative versions of fish oils and probiotics targeted for introduction in the next year or so.
"We are also very much interested in acquisition, " Hernandez revealed. "We probably are not interested in integrating backwards into raw materials. We would be looking to ingrate forwards on the value chain." Potential acquisition targets might include a manufacturer or distributor, he added.
Asked to name challenges facing the industry, Hernandez cited new federal regulations. "All of our customers are now extremely sensitive to regulatory compliance with the Bioterrorism Act, the downstream traceability of raw materials," he said. "They are really now getting more and more into a classical pharmaceutical mentality. That's a key issue, and it's a good one."
Pointing out past criticism linking the supplement industry to snake oil practices, Hernandez observes that the Bioterrorism Act may ultimately help the supplement industry clean house. "For us, we've always done the right thing, so it's now just a matter of codifying everything properly. But it's a major issue for some. I think this will help with the shakeout of some players that we don't want in the business."
Balchem believes that providing quality and adding value to products are keys to success in today's marketplace. "We'll never be high on the visibility screen because we're not selling finished products," he concluded, "But we are behind the scenesÑand the kind of value that we bring to our customers is often quite tremendous."