This highly profitable industry is booming as the population ages

Published Sun, Oct 15 20237:56 AM EDT

People around the world are living longer. Yet that doesn't necessarily mean they're enjoying good health through their golden years. In fact, as the elderly population explodes , medical advancements have allowed them to survive chronic diseases longer. Those illnesses require medical care and patients often need specialized treatments to meet their nutrition needs. "We live longer than previous generations, but we also get sick earlier with various cancers, cardiovascular issues, neurodegenerative issues, diabetes or a combination of these lethal chronic diseases," Stefano Natella, head of equities at Guggenheim, wrote in a research note on longevity and healthspan earlier this year. "For most of us, the end of our life is now marked by a longer period of living with one or more chronic diseases and being incapable of carrying on a normal life," he added. Global life expectancy was 73.4 in 2019, up from 66.8 years in 2000, according to the World Health Organization . Yet the growth of healthy life expectancy — the amount of time someone will live in good health — hasn't kept pace, per WHO. The global healthy life expectancy was 63.7 in 2019. While health-care stocks may be a clear beneficiary from the trend, Barclays believes there is one area that is particularly underappreciated: clinical nutrition. The market focuses on patients who need specific supplemental nutrients due to a number of factors, such as chronic illness and the inability to eat. "We believe it is underpinned by the strong growth divers you see in traditional health care: the aging population, pressure on health-care spending and the post-Covid structural drivers around improved self-care trends," said Barclays analyst Hassan Al-Wakeel. The firm is predicting the global clinical nutrition market will reach a market size of $28 billion by 2030, up from the current $19 billion, based on a compound annual growth rate (CAGR) of approximately 5%. The companies best positioned to capture that upside are Nestlé , Danone and Fresenius , according to Barclays, which put out two notes on the topic in April and August. Each has divisions that make medical nutrition products used around the globe. Fresenius, a German-based health-care company, is a key winner for a number of reasons, including the fact that it offers both enteral and parenteral products, Al-Wakeel said. Enteral nutrition is administered through a feeding tube or it can be taken orally. Parenteral nutrition is administered intravenously. Multinational food company Danone, based in Paris, is the clear leader in the European enteral market and is also well positioned to benefit from the easing of regulatory restrictions in China, said analyst Warren Ackerman, who co-wrote the notes with Al-Wakeel. Meanwhile, Nestlé, a Swiss multinational food and beverage company, has had consistent outperformance versus its peers in the data Barclays tracks on clinical nutrition companies, Ackerman wrote. It also has the ability to charge premium pricing and has been building a presence in the "very promising" enteral market in China, he added. All have American depository receipts (ADRs) that trade in the United States. Malnutrition costs millions each year Certainly, getting the right nutrients matters. Otherwise, patients with chronic illnesses like cancer, diabetes and Alzheimer's can develop malnutrition, which is a huge problem affecting older adults. "Older adults have a higher likelihood of chronic diseases," said Lindsay Clarke, senior vice president of health education and advocacy for the Alliance for Aging Research. "Those diseases can cause a decline in hunger appetite. They might require medications … that impacts the body's ability to absorb nutrients." In fact, the organization has long called malnutrition a "hidden epidemic" in older Americans, who may also be dealing with a change in appetite or a lack of access to healthy food. It comes at a cost not only to people's health, but to the economy. The increased health-care costs to the U.S. for disease-associated malnutrition in older adults is more than $51 million each year, according to the Alliance for Aging Research. Aging at home with personalized care Medical nutrition also plays into two other big trends happening right now: The desire for people to stay in their homes as they get older and their preference for personalized treatments. "As the market is developing, with health-care costs spiraling and a lot of people self-diagnosing, there is a lot more interest in long-term solutions for people that want to treat their issues at home," Ackerman told CNBC. "Once it goes into a home-care setting, it becomes much more interesting for the consumer companies." That's because enteral nutrition can be done at home. In fact, there has been a shift towards enteral nutrition and away from parenteral because it capitalizes on the home treatments since it is safe and easier to administer, according to Barclays. Enteral also faces lower regulatory burdens. Both Danone and Nestle are solely in that side of the clinical nutrition business. Danone's Nutrison offers a range of products meant for disease-related malnutrition in critically ill patients. Meanwhile, Nestle's highest profile offering is Peptamen, which is given through a feeding tube to patients with gastrointestinal impairment. The consumer names also have omnichannel route-to-market capabilities, as well as consumer-led innovation and online strength, which differentiate them from competitors, Ackerman said in Barclays' April report. Companies in the space are also continuing to do research and innovation in order to provide more personalization. "[People] want quality of life," Ackerman said. "They don't want products where it is one-size-fits-all. They want products specifically tailored to their conditions. That is where more bespoke clinical nutrition options come into play." Strong first-half performance The clinical nutrition market had a strong performance in the first half of the year, with the average growth of the five key players — Nestle, Danone, Fresenius, Baxter and Abbott — seeing average organic growth of about 8.3%, according to Barclays' calculations. That's the highest growth in over a decade, the firm said. On Fresenius' latest conference call in August, chief financial officer Sara Hennicken pointed to the success the firm had in its second quarter. "Nutrition saw excellent growth of 13%, driven by good business development in Latin America and normalization of hospital operations in China," she said. The business sits within its Fresenius Kabi segment, which the company will be focusing more of its efforts on now that it is deconsolidating its kidney treatment business, Fresenius Medical Center , into its own legal company. Fresenius owns 32% of Fresenius Medical Center, which saw shares drop on recent news that Ozempic's kidney disease treatment trial showed signs of success. Barclays estimates that clinical nutrition will account for approximately 25% of Fresenius' earnings before interest and taxes post-deconsolidation. There is also the potential for outsized growth in China as the country's regulations on enteral nutrition loosen, Al-Wakeel said. "We see significant expansion in the China market as regulation becomes more favorable, with product registration times coming down substantially and the potential for reimbursement outside of the hospital setting," he said. He estimates this market will expand at a CAGR of 8.2% out to 2030, reaching about $7 billion, versus the current $3.7 billion. Clinical nutrition sits within Danone's larger specialized nutrition unit, which saw net sales growth of 4.9% for its second quarter. Clinical nutrition is about 20% of group profits and an important subset of its larger specialized nutrition unit, Ackerman said. "Many investors only focus only on their infant formula unit and don't know how big or how profitable clinical nutrition is," he said. "Clinical nutrition is the jewel in Danone's crown and probably the most attractive part of Danone's portfolio, yet is hidden from investors." Meanwhile, Nestlé is best positioned to capitalize on the further shift to enteral medicine given its leadership in innovation, Ackerman said. Medical nutrition reported double-digit growth for its second quarter, with strong sales developments for acute medical care, pediatric, and allergy products, the company reported in July. CEO Mark Schneider told Barclays in May the segment accounts for one-third of its health sciences revenue. "Nestlé believes that the point of differentiation is its expertise in nutrition and health with a specific skillset in metabolism and metabolic disorders. In terms of specific diseases, Nestle is focused on malnutrition, surgery, and cancer-supportive care," Ackerman wrote in the August note. Barclays believes Abbott and Baxter will also benefit from the growing clinical nutrition business. Baxter is concentrated in the parenteral market so it won't participate in the enteral growth opportunity. However, it can benefit from innovation and expanded adoption in parenteral, the firm said. Abbott is rebuilding supply of its baby formula after shutting down production last year when infants became sick. Barclays believes Abbott, which produces the nutrition drink Ensure, will hold onto its leading position in the enteral market. It expects the company's nutrition sales to reach $8.8 billion by 2025, implying a three-year CAGR of 6%, the firm said. — CNBC's Michael Bloom contributed reporting.