Gut feeling: New CEO to steer Nestle down uncharted health path

London : Switzerland's Nestle, the world's largest food company, wants to tune up your guts.

Last weekend, it hosted global experts in Playa del Carmen, Mexico for a three day workshop on the intestinal microbiome to discuss how trillions of bacteria living in the digestive system can impact everything from obesity to depression.

One attendee was Emeran Mayer, a gastroenterologist at the University of California, Los Angeles, whose family ran a German confectionery business, giving him a unique perspective on Nestle's ambitions.

"Food companies have a real opportunity to continue to sell their products and at the same time be responsive to the emerging medical science in this area," he told Reuters, highlighting the role played by good bugs, especially in early life.

Using them to cure disease and boost wellness is one of several bets KitKat maker Nestle is making in the field of health and nutritional science, as it seeks to offset slowing sales of traditional processed foods.

Ulf Mark Schneider, a German medical industry veteran, is expected to speed the drive into health oriented products when he becomes the first Nestle outsider chief executive in nearly a century in January. He will assume direct oversight of the health science business, which currently operates as a standalone unit.

Schneider's hiring from healthcare firm Fresenius signals Nestle's commitment to pioneering the interface of food and medicine, in part by focusing on nascent areas like microbiome therapy, which has potential to boost human health and Nestle's margins.

The concept has already given the world faecal transplants that can cure patients with life-threatening C. difficile infections by replenishing their gut flora with bacteria from a healthy person's stool, delivered via a nasal or rectal tube.

Nestle famous for chocolate bars and ice cream is aiming for more appetising products. But some long-term investors are queasy about its bets on early, unproven science that is taking the company down a road that has already seen crashes.

The hazards were highlighted two months ago when U.S. biotech firm Seres Therapeutics, in which Nestle has invested $185 million, said its pill for C. difficile containing spores from good bacteria had failed in a clinical trial. Seres shares lost three quarters of their value, dealing a blow to Nestle, its second-biggest shareholder.

"It shows we still don't understand enough about how the microbial community really works," said Tim Spector, a professor of genetics at Kings College London. But he added that such trial failures were not unusual with experimental drugs and he remained optimistic about future research.

Seres, which at the time described the results as "unexpected" and said it was continuing research efforts, declined to comment further to Reuters.

WHERE'S THE RETURN

Nestle sees its investments as future-proofing its business and carving out a competitive edge with food and drinks fortified by medical technology. It is not becoming a pharmaceuticals company, said its chief financial officer, who spent more than 20 years at the predecessor companies of French pharma giant Sanofi.

"There is no clear line between what is food and beverage on one side and pharma on the other," CFO Francois-Xavier Roger told Reuters. "There are certain areas which are at the frontier of both."

Nestle has forecast its health science unit to reach annual sales of $10 billion, up from around $2 billion currently, though it has not said by when.

Roger declined to estimate what Nestle has spent building up its health science unit, which employs now some 3,000 people. But he described the approach as involving modest bets made with a long-term horizon.

"Not all of them will succeed, but most of them will," he said, noting such risks were no different than what the food giant did with Nespresso, the first single serve coffee, which took more than a decade to turn a profit.

Still, there is investor concern that its recent spate of deals, while small, are not yet paying off.

"While we would expect acquisitions to be dilutive in the first two to three years, we expect a recovery thereafter," analysts at Bernstein said earlier this month, when downgrading Nestle shares to "market perform" from "outperform".

"There is currently no sign of this at Nestle," they said.

Nestle's return on invested capital (ROIC) has fallen to 10.9 percent in 2015 from 15.5 percent in 2010.

"That's not what you're supposed to be doing," said fund manager Ali Miremadi of GAM Holding, a Nestle shareholder. If that decline continues, he said Nestle risks losing its position as the keystone consumer goods investment in Europe to Unilever.

Unilever, which has also been on an acquisition spree, had a ROIC of 18.9 percent last year.

Regardless of the financial returns, academic investment in the microbiome is booming, with 8,800 scientific papers published in leading journals since 2006, half of them in the last two years, according to the Web of Science, a Thomson Reuters database.

And the U.S. government endorsed the field in May by launching a National Microbiome Initiative with a combined federal agency investment of more than $121 million in 2016 and 2017.

"The microbiome is one of the hottest areas in medicine right now but we're only at the tip of the iceberg in terms of understanding host-microbe interactions and how diet can be such a modifying influence," said John Cryan of Ireland's University College Cork.

He and colleagues recently published a paper called "Transferring the blues," showing that feeding gut bacteria from humans with depression reproduced depressive behaviour in rats.

CORPORATE COMPETITION

Other corporations are looking on hungrily, too. French food firm Danone, the world's biggest yogurt maker, has long championed probiotics, live bacteria that can be added to food for their health benefits.

One of its biggest products, Activia yogurt, boasts a particular bacterial culture it says has a beneficial effect on digestion. Several years ago it faced class action lawsuits related to the accuracy of health claims it had been making on Activia and DanActive.

The case exposed a big challenge facing companies hoping to carve out a new business between food and medicine: regulation.

So far, Nestle and its rivals have concentrated mainly on dietary supplements, which can get to market far more quickly than pharmaceuticals requiring lengthy clinical trials.

But in future Nestle wants to invent products that are closer to scientifically proven medicines, while still potentially coming in the form of a tasty snack or drink.

Regulators are wary, however, having been criticised in the past for allowing unjustified claims for some fortified and functional foods, sales of which reached $258 billion in 2015, according to Euromonitor.

Another Nestle-backed company, U.S. biotech firm Accera, was issued a warning in 2013 by U.S. health regulators over claims related to its Axona drink for Alzheimer's patients.

Despite potential bumps in the road, long-time Nestle shareholder, Thomas Russo of Gardner Russo & Gardner, believes Nestle's move into health is a good one, as long as it doesn't stray too far from its core business.

"The benefit that comes from this is not just the revenues that come from Nestle Health Science, it's the work that's done through it to make the core products better for you," Russo said. "It really surfaces throughout the entire offering."