Biotech is probably not the first, second, or third thing that comes to mind when you think of Nestlé, (OTC: NSRGY) the Swiss packaged foods juggernaut responsible for a smorgasbord of delectable treats ranging from Cheerios to KitKats and even San Pelligrino water.
So you may be surprised to hear that it also develops medicines for treating certain allergies, gastrointestinal disorders, and metabolic diseases. And you might be even more surprised to learn that the company is raking in billions from its health products and therapies.
But for a business as large as Nestlé, it's entirely possible that those billions are just drops in the bucket. So does its biotech work make this stock worth buying, or is it just an oddity created as a long shot attempt to drive growth? To answer this question, let's start by putting the issue into the proper context.
Nutraceutical sales could move the needle
In short, Nestlé's Health Science division is responsible for developing and marketing nutritional therapies (sometimes known as nutraceuticals) that are prescribed for all manner of disorders affecting patient's ability to process and absorb vitamins and food energy.
For example, its Novasource product is used for people with chronic kidney disease on dialysis who need a dense energy source with certain parameters. While Novasource and similar products are intended to be used under medical supervision, many are available over-the-counter (OTC), which implies their pricing and other economic characteristics are closer to those of the company's packaged foods than pharmaceutical drugs.
To give you an idea of the division's relevance to the company's top line of more than $106 billion in 2022, last year Health Sciences was the third-biggest segment, bringing in $17.5 billion in sales. That means health science sales trailed just behind its pet care business in the number-two spot, and of course its capstone powdered and liquid beverage segment, which makes the hot chocolate we all know and enjoy on a cold winter's day.
In terms of its growth, for the first half of 2023 the health segment grew by 7.4%, so it isn't exactly a major driver of revenue in comparison to pet care, which grew by 15%. In other words, that's one big strike against buying this stock specifically to capture the growth of its health products.
But could that change if it mints a top-earning medicine?
Aimmune is struggling to find its footing
Aimmune Therapeutics has performed the Health Science division's research and development (R&D) for drug products since its acquisition in fall 2020 for $2.6 billion in cash. Aimmune's immunotherapy Palforzia, which is indicated for reducing the severity of peanut allergies, was approved for sale at the time of the acquisition, and it has three other marketed products. It also has a pipeline of early-stage programs for multi-nut allergies and a pair of rare diseases. It'll be at least a handful of years before those candidates have a chance to make it to the market.
Nestlé also has a few collaborations with Seres Therapeutics, which include a pair of early-to-mid-stage candidates for treating ulcerative colitis. Still, if those programs get approved for sale, Nestle will need to split the commercialization costs and proceeds with Seres, so it might not make much money from this effort.
The biotech segment may just not be producing the growth that management had hoped for when it brought Aimmune on board. In fact, Nestlé recently announced the sale of its Palforzia rights and assets to pharmaceutical outfit Stallergenes Greer. Per Nestlé's CEO, Palforzia was proving a bit more cumbersome to administer to patients than anticipated. So the odds of its other nut allergy program being a big winner don't look so hot.
In short, it's hard to argue that Nestlé's health sciences operations are a valid reason to buy the stock whether or not you include the contribution of its biotech business. And given that it's a hulking behemoth that's unlikely to grow very quickly for the foreseeable future, it'd take a huge amount of additional revenue to push the top line higher by an appreciable amount, so it's probably worth passing on for now.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Nestlé. The Motley Fool has a disclosure policy.
