Formula market needs more producers, but new entrants face huge hurdles

New York
CNN Business

Industry insiders have long worried about the situation: American parents Desperately finding an adequate supply of formula Serving their babies during a nationwide shortage.

The formula shortage has exposed a sclerotic industry dominated by just three or four large corporations that own the bulk of U.S. formula production.When a factory shuts down suddenly, there is little room for manoeuvre because Abbott Nutrition’s Sturgis, Michigan facility, Made it in February after bacterial contamination.

By May, stores are reporting up to 40% of infant formula products are out of stock, exacerbated by continued supply chain slowdowns and recalls of formula products.

According to market research firm Euromonitor International, Abbott, Reckett Benkiser and Nestlé produce the top five U.S. formula brands — Enfamil, Similac, Gerber, PediaSure and Isomil.

Why are there no new company breakthroughs in such a critical industry? There are too many barriers to entry.

Siblings Ron Belldegrun and Mia Funt have spent more than five years trying to gain ground in the highly concentrated formula market.

They are the co-founders of New York-based ByHeart, a direct-to-consumer formula brand that uses organic grass-fed milk and is free of some of the ingredients used in brand-name formulas that are increasingly popular among health-conscious parents. Undesirable, such as corn syrup, maltodextrin (starch additive in food), soy or palm oil.

ByHeart co-founders Ron Belldegrun and Mia Funt.

Bringing their product to market is not easy. The formulation of Belldegrun and Funt had to meet all federal nutritional requirements, a long and arduous process. They spent two years looking for a manufacturing partner before deciding to buy a factory in the US to produce it themselves.

They then established a supply chain to directly source all ingredients to ensure quality and safety, and conducted a rigorous clinical trial on 300 infants over a six-month period to test the safety and efficacy of their formula.

Bringing new formulations to market is very expensive. Funt said the startup raised more than $190 million in pre-IPO capital from investors including Polaris Partners, D1 Capital Partners and Bellco Capital.

ByHeart is the first new infant formula manufacturer to register with the FDA in 15 years.

“Infant formula is – appropriately – the most regulated food product in the world. A single source of nutrition should be provided to infants in the strictest possible way,” Belldegrun said. “But new brands need more incentives to meet the challenge for the benefit of babies and their parents. We need more support at the state and federal level for infant formula manufacturing and product innovation.”

Belldegrun said ByHeart is the first new infant formula manufacturer to register with the FDA in 15 years. “We own our manufacturing, we source our ingredients directly, and we sell directly to consumers,” he said.

ByHeart launched its own brand in late March amid a growing shortage of formula across the country.

Just eight weeks after its launch, ByHeart’s number of new customers has soared to nearly 15 times the company’s annual forecast, Belldegrun said. ByHeart has temporarily halted new subscribers and ramped up production at its facilities to 24/7.

Shazi Visram started her Happy Family Organics baby food company at her dinner table in 2003.

It quickly grew into a leading organic baby food brand and was acquired by Danone 10 years later. Visram started developing organic infant formula for the brand in 2012. Happy Baby organic baby formula launched in 2017

Laura Katz, founder and CEO of Helaina.

“It’s very difficult to bring a new brand of formula to market,” said Visram, who continues to serve as the CEO of Danone Happy Family Organics, but left in 2017 to launch her second company, HealthyBaby, in 2020.

“The regulatory process to get a product on the shelf is very strict, very slow and capital intensive. If you are starting from scratch, the most aggressive time to market is three to five years, starting with formulation development, through supply chain development, then clinical trials, FDA review , and finally production.”

Happy Family uses an existing supplier to reformulate existing infant formula that is approved for sale in the US with probiotics and organic ingredients, so she does not need to conduct clinical trials on the new formula.

Helaina is a year or more away from making its formula and bringing it to market.

“Even so, it’s a multi-year process to make sure we get enough line time at the factory,” Visram said. “The barriers to innovation in this area are very high and the current shortage is a wake-up call that we need a regulatory framework to support innovation pathways while maintaining the highest quality and safety for our babies.”

Food scientist and entrepreneur Laura Katz’s is developing infant formula that uses precision fermentation to recreate human protein in breast milk.

Katz, who launched her formula startup Helaina in 2019, says the goal is to produce formula with healthful properties previously only available through breast milk.

She was 23 when she first started working on her ideas. Now 29, Katz is closer to the finish line, but he knows it could still take a year or more. To date, she has raised $25 million from Siam Capital, Spark Capital and others as she hopes to start manufacturing.

“Infant formula is a very sensitive and important product, which is why determining its safety through testing and clinical trials has been a long journey,” she said. “But with continued innovation, consumers have better options.”

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