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Business

    • America needs more baby formula. But it's an extremely tricky business

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    Industry insiders have long feared a situation just like this: American parents are for their infants during a nationwide shortage.

    The formula shortage has exposed an inflexible industry dominated by just three to four large players that own a majority of formula production in the United States. There's little wiggle room when one plant abruptly shuts down, as did in February after a bacterial contamination.

    By May, stores were reporting of baby formula products were out of stock, exacerbated by ongoing supply chain slowdowns and formula product recalls.

    Abbott, Reckett Benkiser and Nestle produce the United States' top five formula brands — Enfamil, Similac, Gerber, PediaSure and Isomil — according to market research firm Euromonitor International.

    Why haven't new companies broken through in such a critical industry? There are just too many barriers to entry.

    HIGH BARRIERS TO ENTRY

    Siblings Ron Belldegrun and Mia Funt have spent over five years trying to make headway in the highly concentrated formula market.

    They're cofounders of New York-based ByHeart, a direct-to-consumer formula brand that uses organic, grassfed cow's milk that is devoid of some ingredients used in name-brand formulas that have grown unpopular with health-conscious parents, such as corn syrup, maltodextrin (a starchy additive in food products), soy or palm oil.

    Getting their product on the market wasn't easy. Belldegrun and Funt's formula had to meet all federal nutrient requirements, a long and arduous process. They spent two years searching for a manufacturing partner before deciding to acquire a facility in the U.S. to produce it themselves.

    They then built up the supply chain to direct source all the ingredients to ensure quality and safety, and ran rigorous clinical trials over a six month period with 300 babies to test the safety and efficacy of their formula.

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

    "Infant formula is — appropriately — the most regulated food in the world. The road to providing babies with sole source nutrition should be met with the highest rigor," said Belldegrun. "But for the benefit of babies, and their parents, there need to be more incentives for new brands to rise to the challenge. We need more support for infant formula manufacturing and product innovation at the state and federal levels."

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

    ByHeart launched its brand in late March in the midst of a worsening national formula shortage.

    Just eight weeks into its launch, Belldegrun said the rate of new ByHeart customers spiked to nearly 15 times the company's yearly projections. ByHeart temporarily halted new subscribers and ramped up production to 24/7 at its facility.

    'A WAKEUP CALL'

    Shazi Visram founded her Happy Family Organics baby food company in 2003 at her kitchen table.

    It quickly grew to become a leading organic baby food brand and was acquired by Danone 10 years later. Visram had started working on creating an organic infant formula for the brand in 2012. Happy Baby Organic Infant Formula hit store shelves in 2017

    "It's extremely hard to bring a new brand of formula into the market," said Visram, who stayed on as CEO of Danone's Happy Family Organics but left in 2017 to start her second company, HealthyBaby, in 2020.

    "The regulatory process to get a product on shelves is extremely rigorous, very slow, and capital intensive. If you're starting from scratch, the most aggressive timeline to market is three to five years, starting with recipe development, to supply chain development, then clinical trials, FDA review and finally production."

    Happy Family used an existing supplier to reformulate with probiotic and organic ingredients an existing infant formula that was already approved for sale in the United States, so she wasn't required to conduct clinical trials for the new formula.

    "Even then, it was a multi-year process to ensure we secured enough line time at the facility," said Visram. "The hurdles to innovate in this category are so high and this current shortage is a wake-up call that we need a regulatory framework that supports pathways to innovation while maintaining the utmost quality and safety for our babies."

    Food scientist and entrepreneur Laura Katz's is developing infant formula utilizing precision fermentation to recreate human proteins found in breast milk.

    Katz, who launched her formula startup Helaina in 2019, said the objective is to produce formula with health properties previously available only through breast milk.

    She was 23 when she first started researching her idea. Now 29, Katz is closer to the finish line but knows it could still take over a year or more. She's raised $25 million to date from Siam Capital, Spark Capital and others as she looks to start manufacturing.

    "Baby formula is a very sensitive and vital product and it's why establishing its safety through testing and clinical trials is such a long journey," she said. "But with continued innovation comes better access to choice for consumers."

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