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Fortune 500 Pharma Giant Looking For Innovation Collaborates With DS Healthcare

|About:DS Healthcare Group, Inc. (DSKX) Includes:Bayer A.G. ADR (BAYRY), JNJ, MRK, PFE, PG, UL

In a key move toward its future and as a testament to its growing presence in personal care, DS Healthcare (NASDAQ:DSKX) made public last month an agreement with a leading international healthcare company positioned within the top 200 of the Fortune Global 500 for 2013. The arrangement calls for DS Healthcare to make available its technology, including ingredients and their preparation, for use in developing a topical product to be marketed and distributed by the yet-unnamed firm under its own label. Success of the formulation and eventual commercialization of the product would allow them to exclusively supply materials for five years with automatic renewals if specific conditions are met. Financial terms were not disclosed.

A simple inspection of the top 200 of the Global 500 with an eye toward healthcare players reveals only four potentials. Johnson & Johnson (NYSE:JNJ), number 132, appears to be a strong candidate, especially given its loss of franchise in Brazil when sales of Rogaine were suspended several years ago through notification to ANVISA, the country's regulators. At the time, there were no plans for Johnson & Johnson to reenter the Brazilian market for hair loss. In the meantime, DS Healthcare's Spectral line of hair growth products received ANVISA approval and have been selling as an OTC product -not a drug - allowing wider access to consumers.

Perhaps Johnson & Johnson views its potential reintroduction of a topical product to a population obsessed with hair as a smart marketing move and because it will be private-labeled, DS Healthcare can avoid the problem of increased competition by virtue of any financial arrangement it may have with the healthcare giant. Johnson & Johnson may recognize Spectral's superiority that eliminates mens' fears that discontinuing treatment would cause new hair growth to fall out, as is the conventional wisdom surrounding Rogaine. A new topical for Johnson & Johnson not categorized as a drug could help recapture lost revenue in the large Brazilian market.

Bayer AG (OTCPK:BAYRY), number 194, might have an interesting stake as partner in a new hair loss product as it only sells Priorin, a hair growth supplement to treat male pattern baldness that has been on the market for 40 years with little innovation and in direct competition with Propecia, another oral formulation made by Merck & Co. (NYSE:MRK). Despite its unassuming ingredients - millet, lipids, vitamins B1 and B12, and an amino acid known to support keratin protein in the hair follicle - Priorin has been lauded as highly effective. The problem is that it's only available in limited territories in Europe and the Mid-East and must be purchased at a pharmacy, although a couple of online merchants offer it. Introduction of a topical hair loss offering by Bayer might result in a gain in market share over Merck and create a new stream of revenue through expansion to more countries.

In 2010, Bayer Vital GmbH, a subsidiary of Bayer started talks with DS Healthcare about hair care products although, until possibly now, no formal agreement had been formed. A future partnership with Bayer Vital would be highly beneficial to DS Healthcare; Bayer Vital has a wide reach with a sales staff of roughly 700 people. Also, a good relationship with Bayer still exists. In November 2012, Bernhard Opitz joined DS Healthcare's board of directors. In addition to creating pharmaceutical and FDA-approved biotechnology products throughout his career, Mr. Opitz spent 20 years at Bayer in positions that include product development, operations, manufacturing and engineering.

Recent news discloses that Bayer may be one of several suitors for Merck's consumer healthcare business to complement its already hefty portfolio, clearly demonstrating an interest in gaining a stronger foothold in the fragmented but lucrative personal products business, and supporting my thesis that Bayer could be DS Healthcare's global partner.

Next is Unilever plc (NYSE:UL), number 135. A company operating over four broad segments, the closest fit to DS Healthcare would be Unilever's Personal Care segment with brands like TRESemme salon-quality hair care products or CLEAR Scalp and Hair Beauty Therapy that uses a combination of 10 vitamins and minerals to nourish the scalp, with customization for men or women. Topical administration, however, tends to pertain to a medicinal effect on a smaller skin surface area with typical uses for inflammation and itching caused by eczema, psoriasis, or allergic reactions. In other words, cortisone creams are topical medications. Shampoos are not topicals.

What would make Unilever a possible candidate for partnership, however, is its competitive presence in Brazil where rivalry for consumers is especially fierce in a fast growing, multi-billion dollar beauty market. Industry watcher Euromonitor estimates that between 2008 and 2011, money spent on hair care by Brazilians jumped by $2.3 billion, accounting for more than 25% of the industry's global growth. Unilever fights for market share with Proctor & Gamble (NYSE:PG) and L'Oreal SA (OTCPK:LRLCY); together they account for 47%. Unilever has been trying to increase its stake with the TRESemme line of products in an effort to leverage their image as professional salon brands. However, company officials at Unilever have stated they do not believe growth in market share at past levels are sustainable. Overall industry feeling is that to remain competitive, new products must appeal to consumers as value-added with higher technology than has been seen in traditional offerings. The abundance of plant-life diversity of the Amazon region and a rich supply of raw materials that eases cost of production lends itself to a growing interest in products with natural ingredients from both consumer and manufacturer viewpoints.

Since 2005, the purchase of products in Brazil containing elements from nature, not the laboratory bench, has soared 20% at a compound average growth rate, making it one of the best performing markets in the world. The rising desire for personal care items with natural ingredients may be credited to strong marketing by Natura and O Boticário, two of the largest health and beauty companies in Brazil that together own 53% of the market.

Based on this, it's not unreasonable to view Unilever as DS Healthcare's new partner, attracted to the company's entrenched Brazilian presence and its high-tech materials blended from nature for optimal results. The closest Unilever gets to a cosmeceutical is its CLEAR product for scalp health, another area for which DS Healthcare has developed considerably expertise. To remain competitive and capture greater market share in Brazil (and possibly elsewhere), it seems to me that Unilever must continue to develop natural products and the easiest way is to tap into DS Healthcare's technological know-how.

Pfizer, Inc. (NYSE:PFE) number 148, would be, I feel, the least likely to partner with DS Healthcare. Pfizer is more heavily involved in drug-making and its Consumer Healthcare segment includes primarily dietary supplements and OTC analgesics. The only two products that come close to the category of topicals are Preparation H and ThermaCare Heatwraps.

DS Healthcare has been devoting resources to expand its hair loss franchise and I think industry is noticing. Last December the company announced plans to launch an OTC oral tablet containing antioxidants and complex peptides for premature thinning hair, beginning in Mexico and distributing the product afterwards into its other worldwide territories. In January 2014, another announcement affirmed that an Investigational New Drug (IND) application will be filed with the FDA for a prescription-grade topical hair loss treatment, following the filing of a patent in the US in October 2013. Progress has been quick: a late January announcement proclaimed the company has already chosen a contract research organization (CRO), Aptiv Solutions, has been chosento conduct human trials for the topical, and will prepare the IND. Aptiv has extensive experience - 2,600 clinical trials over 140 countries with an impressive record of regulatory approvals, a substantial benefit as Aptiv's experience helps navigate the tricky maze of FDA processes.

This kind of deal may also act to propel DS Healthcare to new consumer-rich markets that complement their line of popular hair and skin offerings. The company's inroads into OTC products could expand considerably from a relationship with a global healthcare partner and change the course of its future. All told, the arrangement speaks clearly to the depth and scale of the company's unique technology that fits perfectly with a growing desire for personal care products based on natural materials. Successful product development could eventually lead to similar types of arrangements, garnering even more attention from an industry crowded with deep-pocketed players but little innovation.

Disclosure: I am long DSKX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have been given products (Shampoo and hair treatment samples) by the company after I wrote a previous article. I have also purchased products at local retail store.

Stocks: BAYRY, JNJ, MRK, PFE, PG, UL, DSKX