Cosmeceuticals Come of Age

July 7, 2006

Demand is soaring for sophisticated skin treatments that do more than camouflage imperfections. But before you start formulating, here are some ideas on what is selling and why.

Forget that face lift. More women are opting for less invasive
procedures to look younger.

Cosmeceuticals Come of Age

Demand is soaring for sophisticated skin treatments that do more than camouflage imperfections. But before you start formulating, here are some ideas on what is selling and why.

Tom Branna
Editorial Director

Call it the Age of Aging. Today, consumers are willing to follow just about any beauty regimen and they’re spending vast amounts of money to counteract the effects of time. The lengths that consumers will go to avoid that first—or 50th—wrinkle was evident at the 3rd Annual Cosmeceuticals New Science Trends, Patents Claims and Growth Opportunities, held June 8 and 9 in New York City. Speakers from industry, medicine and Wall Street shared their views on this dynamic segment of the market.

Cosmeceutical market sales reached $13.3 billion in 2005, according to industry consultant Wendy Lewis. Skin care accounted for $7 billion last year. Moreover, she predicted that cosmeceutical sales will top $17 billion by 2010. What’s propelling the market forward?  According to Ms. Lewis, there are several key drivers:

• Makeover mania in the media;

• American influence globally;

• Celebrity endorsements;

• More women in the workplace;

• More practitioners entering the market;

• Growth of the internet;

• Demedicalization of cosmetic treatments;

• Cosmetic surgery has become mainstream; and

• Increased acceptance breeds new categories of consumers.

Yet with all these new opportunities come higher expectations. Ms. Lewis insisted that with dramatic makeovers in the news nearly every day, the pressure is on the skin care market to deliver better results.

“Botox raised the bar for all beauty services,” said Ms. Lewis, who also predicted that customized DNA-based formulas will continue to gain share. And while “dermatologist-inspired” skin care has helped shape the cosmeceutical category, Ms. Lewis noted that the home care segment is soaring and stealing share from the medical community.

“Customers want to expand a clinical or salon experience at home,” she observed. “And they want topicals that mimic the effects of professional treatments.”

One fast-growing segment is light devices, which Ms. Lewis predicted will grow from $150 million to $1 billion by 2010.

She noted too that medispas are the fastest-growing segment within the rapidly expanding spa industry. Medispa sales now exceed $450 million and are growing 11-14% a year, according to Ms. Lewis.

“Customers want innovative treatments and combinations of services to maintain health and appearance,” she observed. “Medispas have become essential for every major hotel chain and now, hospitals have become a new target for this segment.”

A Novel Molecule from L’Oréal

More women—and quite a few men—are taking extra steps to ensure that they age more gracefully than previous generations of Americans.
Although physician-led and small, independent skin care companies are receiving much of the attention from the beauty press these days, large multinational corporations continue to dominate the global beauty industry. To maintain their edge, these companies spend millions of dollars every year on R&D. As the largest beauty company in the world, L’Oréal is at the forefront of cosmetic research. Just last month, the company unveiled a new anti-aging molecule called Pro-Xylane that is said to work at the epidermal-dermal junction, said Alan Meyers, senior vice president, research and development, L’Oréal.

The material is derived from xylose, a natural ingredient. In studies using both the Episkin model and female subjects ages 50-65, Pro-Xylane stimulated glycosaminoglycans (GAGs) production. According to Mr. Meyers, L’Oréal will launch Pro-Xylane-based skin care products later this year. He said the material will probably be formulated with a combination of alpha hydroxy acid or related exfoliant. But while L’Oréal researchers are quite pleased with initial studies of the material, Mr. Meyers warned that Pro-Xylane won’t perform miracles.

“In the cosmetic industry, we’re looking for perceptible results,” he explained. “We’re not making claims that are off the chart.”

Chemists looking for a quick-fix should incorporate mica into their skin care formulas to help camouflage wrinkles, Mr. Meyers suggested.

Skin Care for the Masses

L’Oréal has become the beauty industry leader by offering a variety of brands in a range of different channels—from prestige counters to mass market shelves. In contrast, most dermatologist-backed formulas are available only through a dermatologist’s office. The exception is Skin Effects by Dr. Jeffrey Dover; his line debuted in CVS nearly a year ago. The original nine SKU offering now includes 16 products ranging in price from $6.99 to $29.99.

“Price has nothing to do with quality in this industry,” Dr. Dover told the audience.

More Skin Effects products are on the way and some will be targeted to treat specific dermatological skin conditions. For example, this month CVS is rolling out a rosacea-control regimen. Also in the works is a sun care line. All of them revolve around a simple, three-step regimen—cleanse, treat and protect.

“A recent study by the American Academy of Dermatology found that 94% of  women are confused by anti-aging treatments on the market,” explained Dr. Dover.

Of course, Dr. Dover’s value-priced skin care line is still the exception, rather than the rule, when it comes to physicians and typical beauty treatments. For most physicians, the market remains decidedly upscale. How expensive? According to dermatologist Barry Cohen, who is also the founder of pH Advantage skin care, 11.9 million cosmetic procedures were performed in the U.S. in 2005, and the average procedure cost $5000. Women accounted for more than 91% of patients. The top five surgical and non-surgical procedures are shown in the box at right.

With costs running so high, it’s easy to make a connection between procedures and products. According to Dr. Cohen, there is higher patient trust in MD-recommended brands and patients want to trust their doctors.

As more doctors enter the skin care market, Dr. Cohen predicted that peptide-based skin care will make the biggest gains.

“Peptides is where skin care is going,” he insisted. “Retin-A causes dryness and redness, but specific peptides work without causing irritation,” he insisted.

Dr. Cohen’s skin care line, pH Advantage, is available online and at Nordstrom. With the population aging, demand for effective skin treatments soaring and the search for profitable companies intensifying, more investors are taking a closer look at the cosmeceutical market, advised Ken Wask, managing director, head of consumer products group at Houlihan Lokey Howard & Zukin, a New York investment banking firm.

“After the P&G-Gillette deal, everyone is asking, ‘how can I get that big?’” observed Mr. Wasik.

He noted that the current M&A market conditions are all good—transaction volume is up and multiples are increasing. In fact, the prices paid are some of the highest on Wall Street at 11 times EBITDA. At the same time, merger-and-acquisition specialists prefer the skin care segment to other personal care categories such as color, hair and cleansing.

What makes a cosmeceutical company such an attractive target for Wall Street? Mr. Wasik noted that the segment growth is outpacing the personal care industry, cosmeceuticals are a higher margin channel than traditional personal care and it is a highly fragmented sector with room to grow.

Formulation Ideas

But before dermatologists and their financial backers can put together a deal, they must put together a skin care formulation. To help get them started, Diane Berson, an assistant professor of dermatology and attending physician at New York-Presbyterian Hospital, provided an overview of the active ingredients found in cosmeceutical formulas including antioxidants, growth factors, peptides, anti-inflammatories and polysaccharides.

Once the chemist has developed the formulation, he or she often relies on a contract manufacturer to produce the finished product. To help select the right partner, Gus Bezas, senior vice president, Milbar Labs advised the audience to visit facilities, meet with personnel and, once a production partner has been selected, hold weekly meetings to establish trust. Scott Whittier, Milbar’s senior director of scientific marketing, urged the audience to clearly define their product position and know the competition thoroughly before trying to launch a product. To keep cost structure intact, John P. Owens, president of Vista Outsourcing, told the audience that they must be able to answer dozens of questions, before production begins.

“Know your costs—both direct and indirect,” he told the audience. “You will have to perform dozens of tasks before your product reaches store shelves, so you’ll need a roadmap to manage the process.”

Karen Young, president of The Young Group, provided a distribution overview of the $46 billion U.S. beauty industry. According to Ms. Young, prestige and mass each account for 17% of the market, followed by drug (14%), and direct and specialty (13% each). The distribution channel is so important to a product’s success that Ms. Young urged the audience to select their distribution channel before they make any other as packaging, design, pricing, formulating, and positioning are all impacted by this decision.

“More than 156,000 cosmetic and toiletry products were launched in 2005,” observed Ms. Young. “There is an 80% attrition rate—not counting the concepts that don’t even get to market.”

With sobering statistics like these, it takes a brave entrepreneur to launch her own cosmetics line.