It’s a scene from the blogosphere that’s become all too familiar. A skeptic challenges a natural health product for the lack of an evidentiary base. A proponent of that product responds that the skeptic has made a logical error – an absence of evidence is not evidence of absence, and in such a scenario it’s not unreasonable to rely on patient reporting and traditional uses as a guide. The skeptic chimes back with a dissertation on the limits of anecdotal evidence and arguments from antiquity — especially when the corresponding pharma products have a data trail supporting their safety and efficacy. The proponent responds that it’s unfair to hold natural health products to the same evidentiary standard, because only pharma has the money to fund proper research, and they only do so for products they can patent. You can’t patent nature, so no research into natural health products gets done.
OK, so maybe this isn’t a scene from an actual blog. The participants are way too civil, the arguments too coherent, and no one has been compared to Hitler. But it’s not a straw man either (look here, here, and here for recent examples), merely a distillation of an argument I’ve seen made repeatedly – that the deck has been stacked by Big Pharma, which has set a research bar that the much poorer natural health industry can’t possibly meet given the costs and lack of financial upside.
In my observation, skeptics don’t often have a good response to this argument beyond their basic scientific disposition toward only making assertions based on positive evidence. Typically, that’s not a disposition shared by the proponent, and thus they simply agree to disagree (read: trade barbs until the thread peters out from fatigue). Yet this need not be a purely philosophical debate. After all, there’s a testable premise embedded in this disagreement – that the natural health industry isn’t rich enough to sustain proper research. Is that true?
On the surface, it certainly wouldn’t appear so. While the industry can be difficult to get a bead on – due both to differing definitions of what it includes (organic foods? natural toothpaste?), and the fact that many of the key players are private companies that don’t report revenues – by any measure it’s sizable. A survey by the University of Guelph references KPMG estimates that the Natural Health Products sector in Canada grew from $1.24B in 2000 to $1.82B in 2006 – a growth rate that would bring the market to about $2.5B today. Figures from the Nutrition Business Journal quoted in the same survey seem to agree, suggesting Canada is 3% of a global “supplements” (herbal, homeopathy, vitamins) market that was $68B globally in 2006 and growing at 5% a year – bringing it to perhaps $85B today. Figures from various sources quoted in a recent Health Canada report support these estimates.
While certainly not as big as the ($820B) pharmaceutical industry, $85B is still an awful lot of money, and it’s hard to imagine it not being enough to carve out a research budget from. Yet research isn’t done by entire industries, but by one tier of the value chain — the companies that manufacture and distribute the products. If they’re not big enough to fund the type of research skeptics are looking for, it won’t be done, so let’s consider some of the bigger players before we make that call.
French giant Boiron (EPA:BOI) is by far the largest distributor of natural health products in Canada – they’re responsible for nearly 4000 (15%) of the 26,000 products approved by Health Canada’s Natural Health Products Directorate. They’re also one of largest natural health products companies globally, with 2010 revenues of €520M ($700M CAD) – a size achieved not just through the success of killer products like Oscillococcinum, but also through acquisitions. In recent years, the company has acquired both its main French rival Dolisos (giving them 90% of the French homeopathy market) and the largest homeopathy company in Belgium, Unda.
So this is a big company that’s prepared to spend money to get even bigger. What about spending some of that money on research? Well ostensibly it’s a priority: “Since 2005, we have devoted a growing level of resources to develop research,” they proclaim in the opening pages of their latest annual report, citing 70 in-progress research projects. Yet the numbers tell a different story – €4.2M in R&D expenditures in 2009, just 0.8% of revenues.
But if Boiron’s not spending like pharma on research, there’s one line item where they do go toe to toe: Marketing. The company spent €114M – a full 21% of revenues on marketing in 2009. By contrast, GSK, Pfizer and Merck reported 33%, 29%, and 30% of revenues respectively on their “Selling, General, and Administrative” (SG&A) line – which includes not just sales & marketing expenses, but also executive salaries, support staff, legal, rent, utilities, and other overhead costs. Once those are subtracted out, it’s likely that Boiron spends at least as much of its revenues on marketing as Big Pharma.
To sum up: Boiron is an industry giant. They’re not afraid to spend on acquisitions. They’re not afraid to spend on marketing. But research gets short shrift.
The story at Montreal-based Atrium Innovations (TSE:ATB) isn’t much different. Though a bit smaller than Boiron (2010 revenues of $320M), they’ve taken an even more M&A focused approach to growth. Most recent was their $110M acquisition of Seroyal on December 31st, giving them the #3 spot in the NHPD database, with over 1100 approved products. Over the prior 3 years, the company spent another $130M to acquire seven more companies all over the world – Minami (Belgium), Trophic (Canada), Garden of Life (US), Nutri-Health Supplements (US), EAB (Germany), Orthos (Netherlands), and Multicare (Netherlands).
All those acquisitions require cash, which is why it’s fortunate that their executive team is so connected in the financial community. CEO Pierre Fitzgibbon was Vice Chairman of National Bank, where he underwrote Atrium’s IPO prior to joining the company in 2007. Additionally, Atrium’s VP Legal and VP Mergers & Acquisitions both hail from SGF, the investment arm of the Quebec government, which was an early investor in Atrium. Clearly a strong management team for the type of acquisition-driven business Atrium does.
But the similarities with Boiron don’t end there, unfortunately. R&D expenditures in 2009 amounted to $2.3M – just 0.7% of revenues. SG&A paced Big Pharma at 30% of revenues. Another successful business clearly able to spend on research, but choosing not to.
We’ve covered several of Heel’s products here on Skeptic North, including Traumeel, Nervoheel N, Neurexan, and the melodius Vomitusheel. The company boasts over 150 products in the NHPD database, so it’s no surprise a few have caught our eye.
Based in Germany, Heel is owned by Delton Group, the holding company of Stefan Quandt, a billionaire entrepreneur with the good fortune of being born into a 17% ownership of BMW. Heel was also part of his birthright, and while the Delton group is private, its annual report does provide sufficient detail to determine whether any of Quandt’s billions are going into research.
In a word: no. For the year 2008, a mere €3.3M of Heel’s €180M in revenues went into R&D. Granted, at 1.8%, that’s more than double either Boiron or Atrium – but still pales in comparison to pharma.
Hyland’s, Nature’s Sunshine, and Waleda
Hyland’s is a division of Standard Homeopathic, which claims to be the “largest full-service homeopathic firm in the United States in terms of sales and operating results.” The company is private, however, and doesn’t provide any financial information, so it’s hard to verify that claim. I’ve seen some revenue estimates online of $50-100M which, if true, would make it significantly smaller than its compatriot, Nature’s Sunshine (NASDAQ:NATR). Hopefully it spends more on research than they do – with $343M in 2009 revenues, Nature’s Sunshine spent only $2M on R&D — less than half a percent.
That may or may not be better than Switzerland’s Weleda, whose annual report itemizes 399M swiss francs ($420M CAD) in revenues but fails to break out R&D expenditures. Selling expenses are broken out however, and eat up 19% of revenues.
With €575M in revenues, Schwabe is the largest natural health products company in our survey. Known in Canada through the 135 Nature’s Way and Alive Vitamin branded products in the NHPD database, Schwabe is an international powerhouse with 27 subsidiaries operating in 17 countries. And here’s the kicker – they actually do a decent amount of research, racking up €29M in R&D expenditures in 2009, about 5% of revenues. Granted, it’s still less than a third of what the typical pharma company spends, but at least it shows that it is indeed possible for natural health product companies to step up to the plate. After looking at their competitors, I was beginning to have my doubts.
Big Herba is clearly big business, and on a purely financial level, it’s hard not to be impressed by what they’ve achieved. But that success — $2.5B in revenues concentrated in the seven companies above — makes it equally difficult to give them a pass on their research deficit. Simply put, the leading natural health products companies have the coin for research, they just choose to spend it on marketing products and buying their competitors instead. The result: while pharma typically spends upwards of 15-20% of revenues on research, Big Herba contributes less than a tenth of that.
To the question of why, I’d like to propose simply that they don’t need to. The products are clearly selling well already, and without the regulatory approvals pharmaceuticals require, spending money on research presents more risk than reward. After all, if you don’t conduct research, you can’t find out that your product doesn’t work.
In other words, Big Herba is behaving exactly as Big Pharma might if it had no government oversight. And if that doesn’t give you reason for pause before you pop that next Ginko tablet, I don’t know what will.
Photos courtesy of epSos.de, netzerling, and Laura Iniesta – via Twitter under Creative Commons.