“Screw the God damn thing!” was the advice John Risley kept hearing from the board of Clearwater Fine Foods, his holding company based in Bedford, N.S. This was the late '90s, when the entrepreneur's pet biotech project was burning through millions in R&D costs.
Founded in 1997, Ocean Nutrition Canada was based on Risley's belief that fish, algae and other marine organisms contain compounds with powerful health benefits. But in the company's early stages, isolating and commercializing these substances was taking more time and money than Risley had anticipated. Despite pleas from board members to invest in opportunities with shorter time horizons and more certain returns, Risley continued to plow Clearwater's cash into the struggling biotech startup. “We've always tried to do things on the basis of consensus — not dictatorial management practices,” says the 58-year-old, seated in a Clearwater boardroom. “But at the end of the day, somebody has to make decisions, and having 100% control of Clearwater shares has some advantages,” says the Maritime millionaire, who turned a small lobster shop in Nova Scotia into a global fisheries player with more than $300 million in annual revenues.
Thanks to Risley's stubbornness, Clearwater has now sunk more than $50 million into ONC and is on the hook for another $50 million in debt. Given the challenges the biotech has faced, many entrepreneurs would have cut bait long ago. But Risley's decision to hold on to his dream of “natural health from the sea” may be one of his savviest business moves so far.
Back in 1995, Risley stormed down to the federal cabinet offices in Halifax. The Chrétien government had just announced funding cuts to Nova Scotia's Bedford Institute of Oceanography, and the entrepreneur wanted to give two politicians a piece of his mind. As a spokesperson for the Atlantic fishing industry, Risley lectured Brian Tobin, the then-minister of fisheries and oceans, and David Dingwall, who held a number of government posts at the time, including minister of public works, on the importance of understanding the country's marine resources and the danger of losing top scientists to foreign research programs. The politicians shot back. If the scientists are so valuable, they asked, why wasn't the private sector offering them jobs? If the research is so crucial, what kinds of economic opportunities were companies exploiting? Risley didn't have any answers.
The university dropout took his dressing-down as a challenge. Noticing revenues from Canada's land-based resource industries dwarfed those of the country's marine ones, Risley concluded our waters had to have untapped commercial possibilities.
While fishing for marine-based business ideas, Risley caught a TV episode of 60 Minutes on the cancer-fighting properties of shark cartilage. Clearwater had a sizable business in the underwater predator at the time. “We said, jeepers, here we are selling shark meat for two bucks a pound and the cartilage is selling for several hundred dollars a pound,” recalls the entrepreneur. To learn more, Risley spoke to researchers at the Institute for Marine Biosciences in Halifax and the Route 128 complex, a high-tech area outside of Boston. “I came away from those talks convinced that the purported cancer-fighting abilities of shark cartilage was bullshit,” says Risley. The support behind the claim was anecdotal, he recalls. “We said, building a business based on that would be craziness.”
Risley's foray into shark cartilage convinced him that any health product from the ocean had to be backed up with science. Shortly after, Risley met “Mr. Fish Oil,” a researcher named Bob Ackman at the Technical University of Nova Scotia (since merged with Dalhousie University). Ackman had authored numerous papers on the health benefits of omega-3 fatty acid. Risley learned the natural substance boasted a wide range of clinically supported health benefits, from the normal childhood development of eyes and brains to the prevention of heart disease. What's more, he discovered people could only get omega-3 from their diet, many societies around the world didn't eat enough of it and the oil from fatty fish such as mackerel was a good source of it. And few companies had taken advantage of this niche. “We said, this is a no-brainer. We should build a business around this.”
Over a dinner meeting at a roadside restaurant in Bedford, N.S., Risley spent $250,000 on a 50% stake in Laer Products in 1996. Based in the small rural community of Mulgrave, N.S., Laer Products was a family-run business that sold omega-3 health products for pets. Annual sales were a couple hundred thousand. The company had been struggling to develop a technology to mask the product's unsavoury odour, by coating fish oil droplets.
In Laer Products, Risley saw the beginnings of a global life-sciences company that would sell marine-based health products for human consumption. He asked Robert Orr to create a business plan to make his vision a reality. The two met in the early '90s, when Orr revamped the look of IGA stores in the Atlantic region. Orr had experience with startup companies. But at the time, Orr was wrapping up an Atlantic assignment with supermarket operators the Oshawa Group. He took his time making a decision. Working for Risley meant passing up a VP position in Toronto with the supermarket company — with a pension and stock options. On the other hand, Orr savoured the opportunity to build an innovative global company based out of Nova Scotia, a place his family had grown to love. Collaborating with Risley also appealed. After long discussions with his family, he began working for Risley in the fall of 1996, in a small room in the Bedford, N.S., Clearwater office that used to store lobster boxes and smelled like seafood. In December 1996, Risley bought the remaining 50% stake in Laer Products. Three months later, the company was renamed Ocean Nutrition Canada and became a wholly owned subsidiary of Clearwater Fine Foods.
During its first few years as a company, ONC seemed like a ship lost at sea. In 1997, it launched a line of blended omega-3 and glucosamine (a natural substance for healthy joints and cartilage) products under the Ocean Nutrition Canada brand. Two years later, the company pulled its branded offering from store shelves. Although the line had generated roughly $3 million in sales — and landed distribution in American supplement retailer GNC — Orr's team believed ONC couldn't afford the $100 million marketing budget needed to build a globally recognized brand. They decided ONC should instead be an ingredient supplier to dietary supplement and food manufacturers and invest in R&D to give them an edge over competitors.
In 2000, ONC opened a $10 million state-of-the-art plant in Mulgrave, N.S., that converted Clearwater shrimp-shell waste into glucosamine, to cash in on booming demand for that natural compound. But after the plant began operations, Chinese manufacturers drove the price of glucosamine from $25 per kilo to $4.50 per kilo in less than a year. ONC's cost for transporting and partially processing the shrimp shells (which ONC got for free) was $7.50 per kilogram. In 2001, ONC closed its glucosamine plant. It was able to use the facility to produce ONC's premium concentrated omega-3 fish oil, a product whose demand was growing among dietary supplement manufacturers. Nevertheless, the company had to write off $5 million. “In a startup, more things go wrong than right,” says Orr. “They're just things you go through to get where you're going.”
Around the time of the glucosamine plant closure, ONC was busy working on technology to put omega-3 fish oil into food products. The idea was to coat tiny fish oil particles to prevent them from affecting the taste and smell of food. This micro-encapsulation work had begun in 1999 through a partnership with the Southwest Research Institute, a non-profit R&D organization in San Antonio, Texas. (Laer Products' micro-encapsulation technology turned out to be useless.) But to accelerate the pace of research, ONC established an in-house micro-encapsulation team in 2001, hiring scientists from the local universities.
A breakthrough came in 2002, and like many scientific discoveries, this one was unintentional. Michael Yang, one of ONC's lead scientists, was experimenting with clumping together the micro-encapsulated fish-oil particles to make the overall structure stronger. The approach did just that but it also produced micro-capsules with much less fish oil on their surface than competing micro-encapsulation technologies. (Fish oil on the surface of micro-capsules degrades and smells). The scientists added a second coating around the clumps and the first generation of ONC's “Powder-loc” micro-encapsulation technology was born. “I never underestimate the value of luck,” says Risley.
As ONC continued to improve its Powder-loc technology in 2004, it tackled the marketing challenges of its micro-encapsulated product. “People think that when you put a fish product into a food product, it's going to taste fishy,” says Lori Covert, ONC's vice-president of marketing and communication. But you can't taste or smell ONC's omega-3 ingredient in many foods, such as orange juice, pasta and frozen pizzas, she insists. ONC decided it would help pay for in-store sampling of its customers' products. ONC also came up with consumer-tested tag lines for grocery store point-of-sale materials, such as “the goodness of fish without the taste of fish.”
Glen Foster, who spent many years in the advertising industry before telling jokes for a living, was hired by Vantage Communications, ONC's advertising agency at the time, to work as a freelance creative director on its marketing strategy. Foster was asked to come up with a brand for ONC's omega-3 fish oil that communicated the health benefits of the ingredient in a friendly and engaging way.
“He created a cute little fish called Meg, with a tail in the shape of a heart,” says Covert. When ONC added Foster's “Meg-3” brand to advertising copy for a food product containing its omega-3 fish oil, purchase intent among consumers increased to 87% from 56%.
At the beginning of 2005, ONC launched its Powder-loc technology featuring Meg-3 fish oil into the market. The company enticed manufacturers with a full-service strategy, offering marketing, regulatory and manufacturing expertise. To prove its technology worked, ONC often approached potential customers with a version of the customer's food product — containing its micro-encapsulated fish oil.
Today, ONC's omega-3 product can be found in food products around the world, including OMU, a drinkable yogurt in China; and President's Choice Oh Mega J. “Right now we're doing more omega-3 food launches than anyone else worldwide,” says Orr.
Now a company of 300 employees headquartered on Dartmouth, N.S.'s Research Drive, ONC will likely net more than $60 million in 2006. About 75% of those sales come from ONC's sale of its premium fish oil to dietary supplement manufacturers. Although management believes that segment of their business will continue to grow, it sees its “healthy food ingredient” business as the bigger opportunity. And ONC is currently in discussions with multinational food companies to launch products with them. “This is a huge opportunity and it's ours to blow,” says Risley. To ensure the company can deliver on its supply commitments, it's building a $40-million plant in Dartmouth, N.S. If ONC can manage its growth, Risley thinks the upside is huge. “There's no doubt in my mind that ONC could be worth more than the seafood business.”
Risley no longer takes heat from Clearwater board members on the biotech idea he proposed almost 10 years ago. One possible reason? Other companies have shown interest in buying ONC. “When people get the smell of money,” says Risley, with a small smile, “they go from being critical to being very complimentary.”