Micro-encapsulation matters and this $5.5 million infant formula deal proves it

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Micro-encapsulation may sound like something that only matters for the highly scientifically-literate.

But in a competitive market like infant formula it could make a big difference.

Stockhead spoke with both sides of a deal completed last week over this trend. It involves venture capitalists BioScience Managers, which invested $5.5 million in Pharmamark Nutrition, and Pharmamark’s IntEncap technology which “micro-encapsules” the omega oils into food and beverages.

The oil in question is omega-3 which is usually only derivable from oily fish. Omega-3 is so beneficial for children, the EU are prescribing a minimum quantity of DHA (a type of omega-3) to go in infant formulas.

Phamamark CEO Guy Drummond admitted his company was not the first to do this, but he believes it did things better.

“We can say [to customers] you’re familiar with it, but it’s got incremental improvements and a higher oil loading,” he said. “It means you can put more active ingredients into a kilogram of powder than previously, and a large cost is the encapsulation.

“If you encapsule, you can put in more kilograms of protein.

“We see our strategy as being very competitive to existing products on the market and bring a benefit.”

Beyond infancy…

But infant formula is not the end of micro-encapsulation’s opportunity. While Drummond said he was focused on infant formula initially, there were markets for adults and the elderly and in the future Pharmamark could go after it.

He alluded to companies that promoted fish oil products as a source of DHA to fight dementia and elderly memory loss.

Stockhead also spoke with BioScience Managers advisor Bruce McHarrie about why the fund chose Pharmamark. McHarrie said it was because they stood out on the three factors BioScience always looked at when judging a potential investment: the technology, the market and the people.

Stockhead was particularly curious about their investments. Among BioScience’s other investments are burn treatment stock Avita Medical (ASX: AVH), which has gained over 400 per cent since Christmas.

On the technology he admitted others encapsulate but said, the significance of Pharmamark is “the degree to which it [oils] can be micro-encapsulated so it does not affect the flavour or the smell of the product”.

What else made Pharmamark stand out?

But when considering market opportunity, BioScience considered geographic opportunities as much as it did demographic. The population boom in South East Asia presents an opportunity, but Europe does too with its new content regulations.

The third and final factor was the people.

“We’ve been bioscience managers and investing for a long time, and one of the things which stands out are the quality of the people,” he said.

“In the case here we have three main principles; one being Guy. These people have been in this industry for a long time. Not only that but they’ve worked together in similar sorts of operations in the past.

“They have a good track record, [they] work well as a team, know the market, know the process and they’re well connected. So they have everything you want in a team.”

But venture deals are a two-way street. The consideration about who to partner with was important for Pharmamark. Drummond told Stockhead he wanted a strategic partner, not just an investor.

“From my point of view I didn’t only want one investor in the company, I wanted a venture capital fund that brings other advantages,” he said.

“[We wanted] access to capital which we hope is not required but could support us.

“But a company like Biosciences also brings about a network – potential complementary bioactives we could use or companies we could work with.

“I liked the team and their exposure to a wide network.”