A Startup Wanted To Make A Better Baby Formula. It Took Five Long Years.
The high barriers to entry illustrate why there are so few new baby formula makers — and why the U.S. will continue to be vulnerable to shortages.
When Ron Belldegrun and his sister Mia Funt decided to start a new baby formula company, they knew it wouldn’t be easy. High barriers to entry had discouraged plenty of other entrepreneurs from trying. The process can be so discouraging that just two conglomerates maintain a decades-long grip on the industry.
“We knew full well what it would take,” said Belldegrun, CEO of formula startup ByHeart, who has a two-year-old daughter and is expecting a new baby with his wife next month. “It’s the most highly regulated food in the world.”
The country’s reliance on a handful of players has made life harder for new parents, who have been forced to scrounge for rare supplies of baby formula. All it took was the temporary closure of a single factory in Michigan to spark a nationwide shortage, with out-of-stock levels reaching 43% in the first week of May, according to Datasembly. The owner of that factory, Abbott, along with Reckitt, are responsible for about 80% of the nation’s baby formula.
“It’s a much more fragile supply chain than people realize,” said Belldegrun. “There needs to be more depth to manufacturing in this country.”
That’s easier said than done. It took the company five years to get its manufacturing facility opened, supply chain in place, clinical trial completed and regulatory approval secured. This year, ByHeart became the first new manufacturer of baby formula in the U.S. in 15 years. As further evidence of how tough it is to do, ByHeart is now one of just five manufacturers of baby formula in the U.S.
Most new entrants hire the same contract manufacturer, Perrigo, which makes formula for store labels like Walmart, Target and Amazon, as well as brands like Bobbie. ByHeart explored this route at first, which would have allowed it to launch in about a year. But it couldn’t have the control over the recipe or ingredients that it wanted.
“They say to you, you be a marketing company. Don’t worry about the regulatory or the quality or the required clinical trials. We’ll do all of that,” said Belldegrun.
That didn’t sit well with him or his team, who started the company because they believed that the legacy players weren’t doing enough to incorporate the latest academic research on breastmilk into their formulas. Belldegrun had spent his career as an investor in life sciences companies, becoming a self-described student of breastmilk. He thought he could do better, but only by starting from scratch and taking full control over the supply chain.
After a two-year search, the company bought a manufacturing facility in Reading, Pennsylvania, which had formerly made toddler nutritional products. It began sourcing all of its ingredients directly, including grass-fed organic whole milk, and says it has created the first clinically proven easy-to-digest infant formula with no corn syrup, maltodextrin, soy or palm oil. It came up with a small-batch manufacturing process that takes half as many steps and is faster.
To fund operations during the long, pre-revenue stretch, it raised $190 million from D1 Capital Partners, OCV, Polaris Partners, Bellco Capital and others. It set expectations with investors that it would be years before it could get its product into the hands of parents.
ByHeart finally launched in March, coincidentally right around the time that Abbott initiated a voluntary recall of its formula. Demand has been 15 times higher than even ByHeart’s most aggressive projections. In the last week, it has onboarded three months worth of customers. The company isn’t currently accepting orders from new customers while it assesses its ability to reliably serve its existing customer base.
It’s also scrambling to add manufacturing capacity, hiring workers for an entirely new shift, so that it can move production from 24/5 to 24/7. It has pledged to invest another $30 million in its manufacturing facility to accelerate output and improve other capabilities.
“We’re throwing everything we have at the situation,” Belldegrun said. “And we can do that because we’re in control.”