Beauty Meets Big Pharma: the Emerging Cosmeceuticals Business.

Baby-boomer fears over aging have fueled product sales in the so-called cosmeceuticals market, which includes skin-care products designed to reverse or slow down the ravages of time.

But the success of cosmeceuticals — which are positioned as cosmetics that have the benefits of prescription drugs — could result in unwanted regulation. As the market grows, the Food and Drug Administration (FDA) is likely to establish clinical standards and requirements for cosmeuticals, whether sold by prescription or over the counter.

While this won’t be a big change for many of the consumer product and cosmetic companies already experienced in the practice, many small companies can’t afford clinical trials. However, clinical trials would enable companies to tout health claims, allowing them to sell products at higher prices.

In fact, some players in the market are pushing for regulations. That will force companies that make claims without scientific evidence to get out of the market, says Sergio Martines, CEO of NSP Pharma in Toronto, a pharmaceutical and cosmeceuticals company.

The FDA doesn’t recognize the cosmeceutical category or have a definition for it, Martines says. Cosmeceuticals have been defined as cosmetics that offer health benefits, or cosmetics with pharmaceutical ingredients that enhance appearance.

Bill Martineau, industry analyst at research firm Freedonia Group, defines cosmeceuticals as “a product that has a direct anti-aging benefit or enhances appearance.” Products in the cosmeceutical category often include skincare products, makeup and hair care products. This ambiguity has resulted in estimated annual sales of cosmeceuticals ranging from $7 billion to $12 billon.

Research firm Packaged Facts estimates the market grew 22 percent from 2000 to 2004, and by 2010, total cosmeceuticals sales will reach $17 billion. Despite the fuzzy math, cosmetics, biotech firms and pharmaceutical companies are eagerly entering the market. Many companies are increasing R&D into discovering new ingredients that prevent aging, Martineau says.

Compared to discovering a new drug — which can cost $1 billion and take years in getting FDA approval — the cost of creating cosmeceuticals is far less, in part because they do not need to undergo clinical trials, although the cosmecuetical maker must ensure product safety.

But with the influx of new cosmeceutical products, ranging from wrinkle creams to products that reduce skin discoloration, the FDA is watching closely. The regulator has issued warnings to companies making anti-aging claims without scientific evidence to back them up. Cosmeceutical companies also have to be careful about making claims that can’t be substantiated, which could incur the wrath of the Federal Trade Commission.

Would regulation help or hurt this emerging industry? Martines says it could be a benefit because it would force companies to do clinical studies and back up claims. Regulations would shake out players that can’t prove claims. It’s also likely to result in mergers as companies strive to gain scale and scientific expertise.

It may also portend the entry of big pharmaceutical companies that already have the R&D capabilities to compete. “You have the consumer product companies and [small] pharmaceutical companies in this market, but in the next few years the big pharmaceutical companies will get into this market,” Martines says. “This is an emerging market and there is room for more players.”

In the past few years, cosmeceutical product sales have gone from selling at high-end department stores to drug stores such as CVS. For a few hundred dollars, customers at department stores such as Nordstrom’s can purchase anti-aging remedies, which come with endorsements from well-known dermatologists.

Prescriptives, a high-end skin care and cosmetics company, sells its cosmeceutical products — which retail at $95 and higher — at department stores. Other skin care doctors are making exclusive skin care lines for drug stores such as CVS, including Dr. Jeffrey Dover, an associate clinical professor of dermatology at Yale University School of Medicine. His wrinkle-relaxing cream retails for $29.99.

The cosmeceutical niche is priced higher than CVS’s other skin-care products, but the company hopes this exclusive deal will distinguish it from competitors. Industry observers note that consumers will pay for higher-priced anti-aging products.

“If ‘going under the knife’ to look more beautiful or handsome is now so widely embraced….it is logical to assume [consumers] are also seeking safer, efficient preparations that both maintain youthfulness and help prevent wrinkles,” according to a MarketResearch.com report.

Compared to the thousands needed for plastic surgery, many consumers won’t scoff at spending $145 for L’Oreal’s Paris Refinish Micro-Dermabrasion Kit, or dropping a similar sum at best-selling author and dermatologist Nicholas Perricone’s new Madison Avenue skincare boutique.

Thanks to consumer fixation on staying young, companies are seeing increases in beauty product sales. L’Oreal reported its high-end skin-care sales increased 30 percent in 2004, to $1.5 billion. Kiehl’s, a chain of skin-care boutiques owned by L’Oreal, reported global sales rose 40 percent in 2004 from 2003, fueled by the opening of boutiques and the introduction of anti-aging skin care products.

Other companies are selling directly to doctors. One is Allergan, a specialty pharmaceutical company based in Irvine, Calif., which developed Prevage, a non-prescription antioxidant cream that claims to reduce the appearance of fine lines and wrinkles. The product also provides protection against sun damage, air pollution and cigarette smoke.

Observers, including Martines, thinks it’s only two to three years before the pharmaceutical companies break into the cosmeceutical market. “It’s a natural step for the big drug companies,” he says.

Although some drug companies such as Schering-Plough don’t consider themselves cosmeceutical producers, they have a stake in the skincare market through their sunscreen products.

Schering-Plough has come out with what it refers to as a “bridge” product that takes sunscreen and adds Vitamins A, C and E, as well as collagen and other antioxidants, according to Steve Neumann, vice president of marketing services for Schering-Plough Consumer Healthcare in Kenilworth, N.J.

This new product is an entry into the skin care market that has anti-aging ingredients, Neumann says.

By Kathleen Kiley, Managing Editor, Consumer Markets Insider

For more information at http://www.kpmg.com