In another major natural acquisition, Royal DSM announced a deal today to buy Ocean Nutrition Canada, the world’s largest supplier of omega-3s from fish oil. The deal makes DSM, already the biggest supplier of algal-source DHA after its acquisition of Martek, the largest player worldwide in the omega-3s market.
DSM agreed to pay $532 million for Ocean Nutrition, which is based in Halifax, Nova Scotia. Founded in 1997, Ocean Nutrition has grown to the point where 21 million servings of its MEG-3 product line are consumed daily worldwide in supplements, foods and beverages. ONC’s sales in 2012 are expected to post about $186 million.
The acquisition provides a lot of what analysts love to call "synergies." DSM has now 51 formulation and R&D centers worldwide, and OCN’s formulation and delivery platform expertise will fit right in, according to DSM officials. And DSM has worldwide sales contacts that will benefit ONC’s products.
“It opens up areas [for Ocean Nutrition] where DSM has a stronghold like South American and South Asia,” said Ian Newton, principal of Markham, Ontario-based Ceres Consulting.
But those synergies come with risks. DSM has been on an acquisition binge in recent years, buying up innovative companies like Martek and ONC. The trick is to keep those ponies frisky after they move to the big barn.
“When a big guy acquires a little guy you bring a lot of bureaucracy. Ocean Nutrition was fairly nimble,” Newton said.
ONC has long been a formulation leader. Its MEG-3 encapsulation technology has allowed fish oil to pop up in a variety of platforms, from beverages to baked goods to other functional foods. ONC has even managed to put its MEG-3 ingredient into a cooking oil, entering the Chinese market in this way in a deal with Wilmar, a leading Asian brand of cooking oils.
In addition to its refining capability in Nova Scotia and its secure supply relationships in the Peruvian anchovy fishery—still the lion’s share of the world’s supply of omega-3s—ONC also has significant on-shore bulk fish oil capacity in Peru. This further strengthens the supply chain picture, as some anchovy fisheries have trended toward their own bulk oil processing to capture additional value.
Is DSM fishing for generic pharma sales?
In addition to making DSM the No. 1 fish oil supplier for supplements, the deal gives DSM a secure source of fish oil for the upcoming pharmaceutical bonanza. Glaxo Smith-Kline’s prescription fish oil Lovaza posted $822 million in sales in 2010, and the patents on the drug are likely to expire at the earliest in late 2012, after which generic fish oil pharmaceuticals will start to appear.
DSM wanted this supply chain, said Newton. "ONC has a supply chain that goes all the way back to Peru. Anyone who is in this game with dwindling supplies of fish oil—they’re going to need a secure supply chain.”
And a generic omega-3s drug play will need a lot of raw material. Lovaza delivers almost 900 mg of omega-3s per one-gram capsule. Compare that to standard grade fish oil that delivers about 300 mg of omega-3s per gram.
DSM has pursued higher concentrations in recent years. A big push into the generic drug space could put further pressure on fish stocks, with ever higher amounts of raw material needed for each capsule, especially for the super-high pharmaceutical concentrations. It could open a wider market for DSM’s vegetarian-source, omega-3 finished product supplement Ovega-3.
No competition with algae
Ocean Nutrition will fold into DSM’s Nutritional Lipids division, which is where the former Martek operations are housed. Martek was long the leader in algal DHA oils and has the infant nutrition space sewn up. (Ovega-3 is based on Martek’s life’s DHA plus EPA ingredient.) DSM officials said the fish oil and algae omega-3s platforms serve different markets at different price points, so they don’t expect any anti-trust difficulties with the deal. For the same reason, they don’t expect the various parts of Nutritional Lipids to compete with one another.
“The other thing is that Ocean Nutrition has a number of patents including patents in algae technology. So DSM closes off a potential competitor,” Newton said.
Roche (which sold its vitamin and fine chemicals business to DSM in 2003) at one time was interested in buying ONC. Newton, who was involved with doing due diligence for that deal, said Roche was interested in ONC’s technology for concentrating fish oils. Newton wasn’t at liberty to reveal the price of that deal, but did say it was a fraction of what DSM has agreed to pay for ONC in the deal announced today.