Nestle and Diversification - Investing in Healthcare

An interesting example of further diversificationby global food giant Nestle here.

Nestle is rumoured to have paid around £500m (the deal value was not formally disclosed) to acquire Prometheus Laboratories Inc., a maker of treatments for cancer and gastrointestinal illnesses. This is not Nestle first acquisition into consumer healthcare. The Swiss company has said it aims to become the world leader in health-science nutrition in 10 years, extending its dominance beyond coffee, powdered milk and baby food.

Why the change in strategic direction? The answer, simply stated, is growth. Healthcare markets are expected to grow significantly faster than mature food product markets in the medium and long-term. Developing economies are having to handle ageing populations, with consumers increasingly prepared to spend on healthcare and nutrition.

Another reason is profit margins. Net profit margins in pharmaceuticals are generally much higher than those earned in food products, though there is often a long lead time between new product development and product profitability.