The business world is a dynamic and fluid environment where nothing is consistent but change itself. Firms have to remain constantly on the alert about potential pitfalls and opportunities that arise in an often capricious arena governed by the dynamics of profit and loss. Take the case of Allergan (AGN), for instance. We have already seen how until recently the makers of Botox were locked in a bitter legal battle with the cosmeceutical firm Klein-Becker in the StriVectin case. When StriVectin started coming up as a potential threat to the sales of its popular Botox, the pharma giant took a hostile stance that in retrospect did them no good. Sales of StriVectin are still going strong, and Allergan is now playing a game of catch up. Additionally, more promising cosmeceutical products are constantly being introducted by the well-known players like Estee Lauder (EL), Obagi Medical (OMPI), Avon (AVP), SkinPro, Physicians Formula (FACE), L'Oreal (LRLCY.PK), and others.
Allergan Acquisition of SkinMedica
At times like these, the maxim "if you can't beat 'em, join 'em" would be a sound strategy. Clearly the pharmaceutical industry seems to have finally woken up to this fact. They are certainly looking at the potential benefits that a foothold in the nascent cosmeceuticals industry would afford them. The recent acquisition of SkinMedica's "topical aesthetics skin care business" by Allergan is illustrious of the shifting winds, beset with a certain tinge of irony and pragmatism. The latter is a strong player in the cosmeceuticals market with popular products like Vaniqa, TNS Essential Serum, and TNS Recovery Complex.
Founded over a decade ago, by renowned dermatologist Dr. Richard Fitzpatrick, the Carlsbad, Calif.-based SkinMedica has been a leader in the rapidly expanding cosmeceuticals industry. It has consistently maintained industry leading growth rates in recent years with its popular line of anti-aging and high-performance cosmetic products.
Why Dispensing Strategies Make Cosmeceuticals Attractive Assets for Pharma Majors
As a pharmaceutical giant, Allergan has all the more reasons to take over SkinMedica's operations to gain a foothold in the cosmeceuticals market. You see, there are two main strategies adopted by cosmeceutical companies to reach their customers. Born out of a marriage between cosmetic and pharmaceutical companies, cosmeceuticals can adopt either of their parent's marketing strategies. Some of the larger participants in the cosmeceutical sector, like Estee Lauder, L'Oreal, and SkinPro with their popular Elite Serum syringe, mix direct to consumer marketing and distribution along with traditional retail distribution through vendors like Sephora, Ulta Beauty (ULTA), and Macy's (M). This can be an effective strategy, as the strong market performance of these above mentioned companies illustrates.
But other firms like Obagi Medical Products, Physicians Formula, and SkinMedica go for an altogether different distribution tactic that is a strategy that is more in line with the one adopted by a mainstream pharmaceutical company. They dispense products through a network of participating physicians. Healthcare specialists have a special relationship with the people they treat. It is one based on trust. Physicians can effectively sell a product to their patients based on this trust. Pharmaceutical companies have historically been involved in a mutually beneficial arrangement with physicians in marketing their products. Since cosmeceutical companies share some similarity with pharmaceutical companies, it makes sound business sense to follow this model of product marketing.
Controversial or Mutually Beneficial?
But such a strategy is not without its critics. Many have pointed out that the physician dispensed model is fraught with problems. One of the most vocal criticisms has been that the whole model is based on the violation of the sacred trust that people place in their physicians, for profit. And this argument has only gained strength in the context of physicians marketing cosmeceuticals. There are still skeptics out there who consider cosmeceuticals as something akin to snake oil -- i.e., not based on serious medical science. This is where a pharmaceutical company can do a world of good. As we have already pointed out earlier, the strong R&D capabilities and grounding in medical research that pharmaceuticals companies bring to the equation can effectively negate any accusations of lack of scientific and medical basis behind cosmeceuticals. Furthermore, pharmaceutical giants get to diversify their portfolio of products, while consumers can buy effective products based on the advice of their own trusted physicians.
Pharmaceuticals Are in the Game for Good
The acquisition of SkinMedica's cosmeceutical business by Allergan comes as no surprise in this context. It is quite apparent that the decision makers at Allergan have quickly changed their tune and now understand that the cosmeceutical industry is one to be seen as a potential asset, not as a hostile threat. While it has taken them a while to get there, it is better late than never. With consistent high growth and margins, the market performance of the cosmeceutical industry has proven that it is no fluke or a fad with a short shelf-life. Coming off the heels of blockbuster recent deals like the Allergan-SkinMedica and Valeant (VRX) acquiring numerous smaller cosmeceutical firms, the big players have clearly telegraphed their intentions of jumping in to the proverbial skin care pool with both feet. For these reasons I remain quite bullish on the industry as a whole. Whether you are an investor or a beauty conscious consumer, you would do well to watch the cosmeceuticals sector with a keen eye.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.