Cosmeceuticals: Bridging The Gap Between Cosmetics And Pharmaceuticals

by: Equitable Research

It can be safely said that people have been obsessing over beauty and youth since the beginning of time. Ancient civilizations and cultures had their own concoctions and herbal potions to ward off the ravages of aging. Then there were those mixtures and compounds to enhance the appearance by cleansing, beautifying or altering the appearance. The modern cosmetic industry is largely based on the latter, with products like skin care creams, lotions, dyes, powders and perfumes, facial make-up products, cleaners and a plethora of other types of products designed to enhance one's look.

The Rise of Cosmeceuticals

With an annual global turnover in excess of $170 billion, cosmetics is a well established industry in its own right. However, the recent strides in the R&D of cosmetic products is now changing the nature of the industry as a whole. According to the United States FDA definition, cosmetic products function without "affecting the body's structure of functions." Cosmeceuticals are an emerging field in the industry which has blurred the line between traditional cosmetic products and pharmaceutical drugs. These are hybrid products which purportedly enhance beauty by utilizing ingredients by beneficially interacting with our body's biological functions. A term which came into industry parlance in the 1970s, it has gradually gained mainstream credence, and is now the single fastest growing segment within the beauty care industry. It may be time that investors start to pay attention, Warren Buffett certainly has.

Gaining credence and market recognition

As non-drugs, cosmeceuticals do not come under any definition of the FDA, and as such are not regulated under medical or pharmacological regulations. Over the years, this had been the single most vocal criticism regarding this industry segment. Companies have been accused of making unsubstantiated and exaggerated claims regarding the efficacy of such products and the claimed use of natural ingredients like herbal extracts and minerals. Industry watchdogs and researchers have been quite vocal in their skepticism regarding a lot of such products which are on the market. But sustained consumer interest and increasing sales seems to tell a different story, at least with regard to some products.

When something new piques the interest of the market, many companies try to jump in on the bandwagon for quick bucks. While a lot of purported "cosmeceuticals" might fall in to this category, enough products and ingredients have passed muster to deserve serious consideration. While any cursory look into the world of ingredients that go into cosmeceuticals throw up a bewildering array of exotic and scientific sounding names, one ingredient that has caught the eye in a big way are Peptides.

What is so special about peptides?

Considering the fact that most anti-aging skin products worth their salt nowadays claim the inclusion of one peptide or another as an active ingredient, there has to be something special with these tiny strains of protein. Basically, aging of the skin and appearance of wrinkles are caused by the breakdown of collagen. Peptides are tiny strands of protein molecules that actively counter this by stimulating collagen production. You can hardly turn on your television to the Dr. Oz show or walk into your local mall's Ulta Beauty (NASDAQ:ULTA) store these days without being pitched one of the "latest and greatest" anti-aging cosmeceutical inventions like the Elite Serum syringe from SkinPro, Age Perfect from L'Oreal (OTCPK:LRLCY), Olay's Regenerist range, Obagi Medical's Professional Series (NASDAQ:OMPI) and Estee Lauder's (NYSE:EL) aptly named Perfectionist. All of these product lines contain cosmeceuticals and are marketed in a way that suggests that their use will offer the consumer an "age-defying" benefit beyond what a traditional cosmetic product would generally would be capable of providing. Despite some highly publicized recent FDA enforcement action, the fact that all these reputed companies continue to focus on cosmeceuticals combined with the overwhelming popularity of these products says a lot about the market potential of this sector. A series of recent developments have only increased the profile of cosmeceuticals, especially in the eyes of the pharmaceutical giants.

The curious (yet contrasting) cases of Allergan and Warren Buffett

Allergan (NYSE:AGN) may not be that much of a household name, but their golden child Botox certainly is. So, when Klein-Becker LLC started marketing their cosmeceutical anti-wrinkle product Strivectin as "better than Botox", garnering blockbuster sales, it riled the pharmaceutical giant so much so that the company immediately filed suit. The ensuing legal battle garnered a lot of public attention and probably benefited Klein-Becker more than Allergan. While opinion is still divided as to the veracity of the actual claims made regarding the efficacy of Strivectin SD, annual sales in excess of $100 million tells its own tale. Botox with all its needles may be in for a rocky ride as its non-pharmaceutical competition continues to grow rapidly.

While the Allergan story shows a pharmaceutical company's rude awakening to the rise of cosmeceuticals, Warren Buffett's Berkshire Hathaway's (NYSE:BRK.A) recent acquisitions show how big business is looking to handle the potential opportunities at stake. Lubrizol Corp (LZ), a BRK subsidiary recently acquired Lipotec SA and its subsidiaries. Lipotec is a Spanish firm specializing in peptide-based cosmetic ingredients. This shows the level of interest that the conglomerates are showing in a field that is truly coming into its own.

A win-win situation all around?

For consumers, this can only augur well. With Berkshire Hathaway and other conglomerates now on the scene making significant investments in this emerging industry, R&D departments will get a real boost. With the FDA closely monitoring, stringent testing protocols mean that these new peptide ingredients will go through rigorous trials before being put into the market, thereby yielding a more robust range of products with a better risk to efficacy profile. Cosmeceuticals in general will undoubtedly gain a rise. With increasing demand and assurance of better products, the sky is the limit for the cosmeceutical industry. I am personally quite bullish on the sector as a whole as the gap continues to bridge between the efficacy of true pharmaceutical products and their OTC cosmeceutical counterparts.

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.