How To Play The Cosmeceutical Market

by: Equitable Research

Fixation on youth and vitality is time tested and broad based

Our obsession with beauty and youth is as old as human history. We have always been wary of the relentless march of time and the scars that it inflicts on our bodies as we age. Our cultures abound with ancient myths about legendary fountains of youth and magical salves that restore one's youth and beauty and bestow eternal life. Ancient civilizations all had their own recipes and formulas to slow down or stall the aging process, especially that of our skin. These were usually prepared from plant extracts and natural oils and were used to heal or restore nutrients to the skin. At the same time, there were other cosmetic substances and paints which were used to change or modify our appearance, as in the case with ancient Egyptian and Roman cultures. These ancient versions of lipsticks and rouge were often made from crushed minerals and rocks.

The long-neglected aspect of skin care

But as time went by, one of these two different strands of beauty products seemed to become largely neglected. The modern cosmetics industry in the 20th century largely rested on products that had little to do with healing or enriching the skin from within. Our focus was largely on the external aspect: that of protecting the skin and hiding the ravages of aging. Anti-aging skin products meant heavy makeup designed to hide, not reduce, wrinkles. The emphasis on hiding the effects of aging when combined with modern technology, gave us the phenomenon of botox and laser skin treatments. But exciting new breakthroughs in the field of dermatology and biotechnology have led to a paradigm shift in our perspective on beauty care. Now it is not about patching over those wrinkles, it is all about healing and revitalizing your skin from the inside. Enter cosmeceuticals.

Rekindled interest in therapeutic skin care products

Cosmeceuticals was a term coined by famed American dermatologist Albert Kligman in the '70s, who rekindled our interest in the therapeutic cosmetic preparations of antiquity in the process. Using retinoid acid as an active ingredient to reduce skin damaged wrinkles by encouraging collagen formation, he opened the doors to a world full of unlimited opportunities. The natural world is full of active ingredients which are beneficial to the skin, ranging from vitamins, anti-oxidants and anti-inflammatory treatments, peptides, to hormones and even stem cells. The possibilities are staggering. All that is required is dedicated scientific research into ways to effectively incorporate these biologically active ingredients into skin care formulations. And this is precisely what the progressive players in the cosmeceutical industry like Obagi (NASDAQ:OMPI), Allergan's (NYSE:AGN) SkinMedica, Estee Lauder (NYSE:EL) and SkinPro are looking into these days.

Winning over the consumers is what matters

At the end of the day, what counts in the beauty care business, as in any other business, is customer satisfaction. If the people are happy and satisfied with a product, then it has a future. Think about the phenomenon of botox. Why would anybody go to get their faces injected with a substance that is derived from a bacterial toxin? Yet millions of women and men went for it, and that too on a regular basis. Because it worked. It delivered on what it promised. And in a world were beauty is held in such high esteem and brings with it such obvious benefits, people were willing to endure such procedures. This is why cosmeceuticals are the next big thing. They are easy to use, and many of them have proven to be more effective at combating wrinkles and aging than actual cosmetic procedures.

Cosmeceuticals: a market that even the recession can't keep down

Cosmeceuticals are the rage in the market today. Take a cursory look at the product range of any cosmetic company of note, like the Regenerist range from Olay, Revitalift from L'Oreal (OTCPK:LRLCY), Re-Nutriv from Estee Lauder, Elite Serum from SkinPro, they all have biologically active ingredients in them. And you cannot turn on your TV without seeing an ad promising miracle results from these products. Now such a response from the consumers is next to impossible if these cosmeceuticals were just advertising gimmicks and hokum as some sources claim them to be.

The numbers speak for themselves. This emergent industry is pegged at over $6 billion and growing at a rate of over 15%, double that of the rest of the cosmetic industry. While they started out as pricey products that only the affluent could afford, the constant innovation and research into newer ingredients is bringing down the costs and making cosmeceuticals within the reach of the average customer. The sector is expected to touch $10 billion by 2015 and beyond.

Everyone seems to be hooked, but how do we play it as investors?

And we are not just talking about the customers. Rave reviews aside, cosmeceuticals are attracting attention from all directions. Established cosmetic giants like Olay, Avon (NYSE:AVP) and Revlon (NYSE:REV) are gearing up to get more medical with their products. Even more intriguingly, all the major pharmaceutical giants and multinational corporations like Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG) are showing a devoted interest in the sector, and are starting their own range or acquiring successful cosmeceutical firms. And keep in mind that all this is happening despite controversies regarding the efficacy of these products and scrutiny of regulatory agencies like the U.S. FDA. Accordingly, if there ever was a good time to get into a new investment opportunity, start right now with the cosmeceutical industry which by all accounts is still in its infancy.

I continue to recommend Estee Lauder as they continue their shift towards higher priced and higher margin cosmeceutical products. It has also weathered the worst of the worst recessions and came out shining. This is a very versatile business model. However, valuation is steep at a P/E hovering near 30. So with that in mind, I would be a buyer, but only on a significant pullback.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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