State of the Industry Review & Forecast

December 5, 2012

Industry thought leaders offer their take on 2012 and the road ahead.

“Global sales of health and wellness products are on track to reach a record high $1 trillion by 2017, fueled by functional/fortified products designed to offer specific health benefits, according to recent analysis from Euromonitor International. Emerging markets offer ripe opportunities, as China and Brazil alone added $15 billion in new sales for 2011.

“Alongside continued sales growth has come increased oversight from federal agencies, as quality has always been a critical factor in the development of the nutraceuticals industry. In the U.S., FDA has ramped up enforcement of Good Manufacturing Practices (GMPs) through product seizures and injunctions while also clamping down on outlandish health claims and developing a New Dietary Ingredients Notification guidance. In Europe, the European Health Claim (HC) Regulation is set to take effect, restricting the number of claims most food products, including dietary supplements, can make.

“On a global scale, mergers and acquisitions grabbed headlines in 2012 and many experts anticipate more business deals to come. Large companies—like Procter & Gamble, Church & Dwight and Reckitt Benckiser to name a few—have recognized the potential of this business and strategically positioned themselves accordingly. With expansive resources and established quality protocols in place, these companies are well suited to serve the varying needs of increasingly knowledgeable consumers.

“From Baby Boomers to Millennials to moms, most consumers are looking to improve or sustain their health in one way or another. With growing emphasis on so-called ‘clean labels’ and non-GMO products, ultimately, product users will have significant say in the industry’s evolution. Companies will need to adapt and deliver, or get left behind.”  —Sean Moloughney, Editor

“2013 promises many opportunities and a resurgence of product development advances, rather than an emphasis on product messages. The Obama administration’s re-election also promises continued attention to mitigating childhood obesity and, therefore, healthier food choices for all of us. Smart multi-nationals have been reading the handwriting on the wall for some time now, both in the U.S. and in Europe. They are adapting their product formulations to reduce sodium, saturated fat and sugars and to simplify their ingredient lists. Food retailers, QSR (quick-service restaurant) chains and restaurateurs, likewise, are providing healthier food choices on the menu and smaller portions with smaller tickets. Everyone is examining their product line, menu and point of sale to fulfill snacking occasion better as consumers move toward multiple eating occasions.” —Nancy Childs, Professor of Food Marketing and Peck Fellow, Saint Joseph’s University

“After a prolonged period of economic and political uncertainty, 2013 may be the year of bold action, particularly in the M&A area. I expect to see significant deals announced throughout the year and the gap between large companies and everyone else growing. I also expect FDA’s impatience with the dietary supplement industry to manifest with more aggressive enforcement actions. This also indicates a growing gap between companies with a quality and compliance mindset and the rest that either don’t understand or won’t conform their business to best practices. In short, 2013 and beyond will reveal the divides and gaps within our industry, for better or worse.” —Loren Israelsen, Executive Director, United Natural Products Alliance

“Industry demand continues to grow: 68% of adults take supplements; 79% are trying to eat healthier; and 61% are managing a condition. Millennial interest in health is skyrocketing as one-third of the U.S. population—now over age 55—faces never experienced health issues. It’s time to rejuvenate core industry markets (e.g., vitamins) with new research findings. Companies must focus on effectiveness, ensuring bioavailability, and select forms that are best suited for the application (not the trendiest) and tout cleaner labels. Muscle health, lower GI and medical foods will move into the spotlight.” —Dr. A. Elizabeth Sloan, President, Sloan Trends, Inc.

“Data from Human Microbiome Project, which quantified the type and quantity of microbes in healthy humans, was published in the June 2012 issue of Nature, and several journals in the Public Library of Science (PLoS). This is a tremendous milestone because these biomarkers of health are essential for measuring and understanding microbial conditions that are not healthy. We have already seen the negative consequences of not having clear biomarkers for fermentation with the wide-scale rejection of EFSA (European Food Safety Authority) probiotic and prebiotic claims. It is also becoming increasingly obvious that the health and balance of microbes in the large intestine significantly contributes to health, not only because they assist in digesting food, but also because they can significantly change the expression of hundreds of genes, controlling not only digestion, but also metabolism and weight. However, different ingredients have different effects, because fermentation varies tremendously. This is going to become a wellspring for new products over the next decades. If you are not already investigating the health consequences of microbial fermentation, this will be your opportunity to chase.” —Rhonda Witwer, Senior Business Development Manager, Nutrition, Ingredion Incorporated

“Having lived in Texas my entire life I have grown to know the occurrence of riding out a hurricane. The nutrition industry landscape in 2012 is reminiscent of this experience. The year began with the continuation of the fury caused by FDA concluding its New Dietary Ingredient (NDI) guidance and the subsequent high degree of angst. Our long time industry friend and Senate advocate, Orrin Hatch (R-Utah), was in serious peril of losing his reelection bid. FDA backed down from some of its positions on NDI and gave some breathing room. Senator Hatch prevailed through his travails and the industry drew a sigh. It seemed the eye of the storm was over us. As we conclude 2012, the industry is reacting to the churning waters of Prop 37 and demand for non-GMO products. FDA is ramping up its number of inspections and Warning Letters to unprecedented levels, forcing us to realize the next part of the storm is approaching. Caution is an imperative as we enter 2013.” —Scott Steinford, President, Doctor’s Best, Inc.

“The Presidential election was the most important event influencing the future of our industry. The political divide brings uncertainty and that is bad for business, including nutrition. The defeat of Proposition 37 in California was a surprise. Perhaps the food industry will adopt voluntary labeling, but it will be a non-event. Well-off ‘foodies’ will continue to buy organic at upscale markets. Consumers trying to control food costs will choose private label products. GMO technology has had a positive impact especially in combating malnutrition in developing countries. It’s sad when scientific progress is sacrificed to politics; the losers are the poor who have neither enough to eat nor a voice in the debate.” —Steve Allen, Chairman, Screening Committee, Nutrition Capital Network

“In the omega 3 world, 2012 had its ups and downs. The market for EPA and DHA ingredients grew to $1.8 billion in 2011 revenues and the forecast for the next five years is strong, with China and Asia-Pacific leading geographic growth and krill topping the charts in terms of omega 3 oil sources. Yet September’s negative (and flawed) JAMA article on omega 3s fueled a mainstream media furor that proves the story on omega 3s is not clear-cut in consumers’ eyes and further education is definitely needed.

“For the future, look for new pharmaceutical entries, beginning with Amarin’s Vascepa introduction in 2013, to drive growth in the category and challenge supply dynamics. In addition, higher concentrate products will be a bigger force in the market of the future, and a variety of new algae companies poised to start commercial production also promises to add interesting new product offerings. Finally, expect additional supply of omega 3s from marine and non-marine sources to fill supply gaps.” —Ellen Schutt, Communications Director, Global Organization for EPA and DHA Omega-3 (GOED)

“I believe the supplement industry is as strong as it has been since I entered it in the early 1990s. I’m seeing corporate growth at all levels; investments in scientific studies and brand marketing. Furthermore, the future of supplement manufacturing in China is very bright. China is already the largest supplier of raw materials in the supplement industry and the quality standard of Chinese manufacturers has improved significantly in recent years. China is going to become a major supplement market and foremost global brands will expand there, bringing quality and a new world culture with it.” —Sheldon Baker, Partner, Baker Dillon Group

“China’s dietary supplement industry continues its forward momentum, slowly gaining steam as it works its way toward becoming the largest market for dietary supplements in the world. A variety of trusted international sources have estimated the industry’s current size. However, the numbers differ greatly, so the association has taken an average of these figures to place it around $20 billion, which puts it in second place, trailing the U.S. by approximately $10 billion.

“Oddly enough, this fast pace growth is happening under an extremely restrictive regulatory system. As a result of industry and association advocacy, consumer demand and increased investment, regulations seem to be moving their rusted wheels. Those in the industry are hopeful that new regulations will be coming by the end of this year, or more likely next year, that will show the beginnings of a notification system. This is a positive sign and a step in the right direction.

“So if you are not in the China market yet, or are on the fence about entering, don’t wait any longer. The time is now to get in while there are still opportunities. If you need some guidance, you can contact the U.S.-China Health Products Assocation at info@uschinahpa.org or visit www.uschinahpa.org. Another great source is your local Export Assistance Center, which is part of the U.S. Department of Commerce—Commercial Service. You can find an office near you by going to www.buyusa.gov or www.export.gov.” —Jeff Crowther, Executive Director, U.S.-China Health Products Association

“While a generally weak economy and continued regulatory issues have been a major influence in 2012, the industry has continued to show healthy growth. One major consumer trend is moving strongly toward wholesome, natural foods and supplements. Organic, sustainable, local, raw, slow and other key product features and values are influencing consumer preferences. A gradual shift will split ‘supplements’ from ‘wholesome and healthy foods.’ Basic wholesome food supplements are being delivered in convenient, tasty, organic and sustainable product forms. Meanwhile, traditional supplements are moving toward the route of OTCs with stronger regulatory and claim oversight.”—Paul Altaffer, Product and Business Development, RFI LLC

“The natural products industry has matured to the point where collaborations between government, non-government, academic and industry interests are the norm, not the exception. Nomenclature and botanical standardization issues continue to be important and GMP (Good Manufacturing Practice) failures have been highlighted by FDA activity. The beta launch of AHPA’s Botanical Authentication Wiki significantly expands the existing program by providing tools experts can use to meet botanical ingredient identification requirements. At the same time, there is an apparent lack of understanding of many herbal product basics in some quarters. I will address these fundamentals while breaking new ground in a series of Nutraceuticals World “Quality Focus” columns in the year to come.” —Steven Dentali, PhD, Chief Science Officer, American Herbal Products Association

“While it’s difficult to say the economy is improving at any significant pace, we see a measurable increase in new product launches and product development activities. This seems to be across channels and across price points, which is very encouraging. There is continued growth in gut health (especially probiotics) and omegas. Krill oil and higher concentration omega oils are enjoying strong consumer interest and growth. The emerging areas of bone health and blood sugar remain strong and are poised to be significant categories for years to come. On the ingredient side, price is still an issue, but quality and compliance are supporting more sustainable levels for manufacturers and suppliers. Let’s hope things remain positive. —Dan Murray, Vice President of Business Development, Xsto Solutions, LLC

“Krill oil has achieved a solid position in the market today, growing a phenomenal 70% in overall sales last year, and 43% in sales in the natural products channel alone this year. Studies show that 37% of consumers are looking for another source of omega 3s besides fish oil. These former fish oil consumers want a positive user experience in the form of smaller, more efficient pills and no fishy burps, and this is precisely what krill oil brings to the table. Further, the phospholipids in krill oil make it a superior form of omega 3s, with studies showing it is more efficiently utilized by the body than other omega 3 sources. Lastly, the cooperation Aker has with WWF-Norway and the Marine Stewardship Counsel (MSC) further secures Superba krill’s position for many years to come.” —Becky Wright, Communications & Marketing Manager, Aker BioMarine Antarctic US Inc.

“On the ingredient development side, we see a continued raising of the bar of the standards developers are adhering to in order to stay on track to either sell as a product to a food or supplement maker, or license a formula to a food or pharmaceutical company. A number of earlier stage developers are on a two-pronged approach to develop compounds or formulas for both the supplement/food ingredient market and the drug-track pharmaceutical or medical market.

“This means the scientific standards of the biotech world are seen more frequently in new supplement ingredients. Scientists and product developers want to see earlier adoption of their work in food, supplements or ‘consumer health products,’ and don’t always want to wait the 10 years or so it might take to get drug status. Lastly, an increasing number of health scientists are realizing that the search for the single, magic-bullet compound is often folly, and are discovering a blend of compounds working together, or as ‘co-actives,’ is much more promising than they thought.” —Grant Ferrier, CEO, Nutrition Capital Network

“Despite some regulatory challenges that lie ahead, the supplement industry is poised as never before for strong growth with consumers. The GMPs have presented some ‘growing pains,’ but ultimately will strengthen consumer confidence in our products; the discussions with FDA on the NDI (New Dietary Ingredient) guidance should lead to a more predictable and transparent process for bringing new ingredients to market; and the science behind supplements keeps getting stronger at a time when more consumers are looking for ways to take control of their health to stay well. CRN remains relentless in protecting the industry and its consumers, and our programs are positioning our members as leading providers of well-care.” —Steve Mister, President & CEO, Council for Responsible Nutrition (CRN)

“In reviewing my comments from last year, I realized that little has changed regarding the state of our industry. That’s both good and bad. Consumers are showing steady if not growing usage of dietary supplements, as more are practicing ‘self-care,’ according to the recent CRN survey. We have tremendous opportunities to use our innovative energies to create new products in new delivery forms, especially for younger consumers looking for alternatives to taking pills. Yet we still have economic and regulatory challenges that can slow the product development cycle. At BASF, we are approaching this dilemma by offering major supplement, food and beverage formulators new concepts, not just ingredients, so they can better understand how a potential new product can build their business in all aspects, including the bottom line. Industry colleagues recognize the need to create sustainability programs as transparency along the supply chain becomes increasingly important. That topic will continue to evolve and BASF is well positioned with our ‘SET’ systematic approach to help tackle what is often viewed as an overwhelming process.” —Samy Jandali, Vice President of Nutrition & Health, North America, BASF Corporation

“After multiple years of growth through the country’s economic downturn, it appears the supplement industry is recession-proof. At RFI, we have been fortunate to translate our continued growth into jobs and expansion as we’ve significantly enlarged our domestic manufacturing facilities and opened two new offices. However, the industry’s greatest foe right now is internal: the small minority of companies that continue to market adulterated products and make unsubstantiated claims, which ultimately could swing our tenuous regulatory environment in the wrong direction. As a whole, we all must continue to manufacture safe products and market them in a responsible manner.” —Jeff Wuagneux, President & CEO, RFI, LLC

“NPA would say the biggest issue the dietary supplement industry is facing now would be compliance with supplement GMPs. During the last three years, FDA has completed nearly double the number of GMP inspections as each previous year. At this point, FDA gives us an ‘F.’ Additionally, they aren’t stopping with just a warning letter. We are seeing consent decrees, product seizures and injunctions filed against companies due to non-compliance with GMPs. The GMP Rule is law and something we must take seriously. The industry needs to prepare itself, whether that be with quality education, certification or more.” —John Shaw, CEO, Natural Products Association

“The Food Safety Modernization Act is expected to have a major impact on the food industry and its entire supply chain in the coming year. The risk-based approaches it prescribes will demand new approaches with regard to assessing potential hazards and assuring food safety. USP has developed a food fraud database (www.foodfraud.org) that can help industry and regulators in the identification of hazards. It might become even more relevant to have such a public repository of potential hazards that can be easily accessed in light of the growing innovation and market for new functional ingredients, or nutraceuticals, and with a globalizing supply chain. These ‘high value’ ingredients are at particular risk of economically motivated adulteration given their normally higher price point. New and previously unexpected hazards may be encountered depending on the nature of the ingredient, the country of origin or the mode of production.” —Markus Lipp, PhD, Director of Food Standards, U.S. Pharmacopeial Convention (USP)

“The state of the industry is divergent. Some members are meeting the regulatory requirements and pricing accordingly; others are clearly not. The divergence is demonstrated through the tension of brand buyers to achieve margins while assuring compliance and assuring consumer confidence. With such a high and shocking degree of non-compliance, moves to create a pre-market approval system may gain traction. If that happens I predict far fewer producers will be left to service this demographically driven market for the next 10 to 20 years.” —Mark LeDoux, Chairman & CEO, Natural Alternatives International, Inc.

“As 2012 draws near a close, it is clear that the nutrition industry has enjoyed another good year. So good has the string of the last several years been that our industry is drawing considerable attention from outside interests. Private equity and other strategic buyers are anxious to get in and take part in this growth industry. When we look ahead to 2013 and beyond, all the signs seem to point toward continued growth. The demographics and economic pressures on healthcare costs all bode well for an industry that continues to work on solutions for many health problems.” —Joseph LaPlaca, Vice President of Sales & Marketing, DSM Nutritional Products North America, Dietary Supplements and Health

“For Albion, and I am sure the other manufacturers of mineral ingredients, the magnesium segment of our product line has seen the largest growth. This has been seen across the board of our customer types: sports nutrition, general supplement lines and the health practitioner markets. When we study the published clinical trials on magnesium and its numerous applications, we can see why this growth in magnesium ingredients has grown so well. More new research on magnesium has come out over the last couple of years than for any other mineral. As the positive trials on magnesium continue to roll in, we anticipate that the growth in the magnesium segment of our product line will continue to reflect their impact. A major influence on magnesium research has come from the high incidence of metabolic syndrome and its related medical disorders.” —Max Motyka, Director of Sales & Marketing, Human Nutrition, Albion

“Our industry fearlessly continued to overcome macroeconomic and regulatory headwinds during 2012. There is a strong and emotionally charged consumer trend toward supplements derived from foodstuffs via the most benign processing. This is complemented by the supplement marketers’ desire for clean label ‘natural’ ingredients, but with rigorous scientific support by ingredient suppliers and more consumer education by the whole industry. Some ingredient manufacturers are rising to this challenge through the use of cleaner technology and more certifications. The 2013 weather outlook is mostly sunny; we will deal with the storm clouds.” —Paul Flowerman, President, P.L. Thomas

“During the past 12 months, we have noticed consumers seeking out more information about natural supplements. They take a closer look at product labels and want to make sure products they buy contain science-based, safe and efficacious ingredients. Consumer markets are more segmented than ever. Communication has to be adapted to various categories of people who have different needs and look at different natural health solutions. The women’s health category is one of our key priorities. Among others, menopause is a condition women will experience for one third of their lifetime. Pycnogenol was found to improve its signs and symptoms. Pycnogenol French maritime pine bark extract has also been shown to help with skin care, anti-aging, cognitive functions and other conditions women are dealing with.” —Sébastien Bornet, Director of Global Marketing, Horphag Research

“The nutraceutical industry continues to represent the health and wellness of the U.S. and global consumer base in an extremely caring and professional manner. Yes, there are often exceptions, but for the most part I am proud to be a positive contributor to this global industry. In particular, Nutra 3 Complex Strip Melts fast-melting oral strip proprietary technology delivery system features the most unique science-based ingredients as part of our nutraceutical product line. We are focused on creating relationships with the leading global ingredient companies that conduct human clinical studies in the scientific support of their ingredients that are presented to the global markets.

“We at Nutra 3 Complex continue to support the nutraceutical industry’s approach to encouraging the use of scientifically proven ingredients that offer potential consumers health and wellness support in their daily lives.” —John Tobin, President & CEO, NutraFood Science Delivery System, (NSDS)/NutraFood Nutrients, Inc. (NNI)

“Dr. Stuart Reeves heard in 2000 that, ‘In 10 years there will be more immunologists studying nutrition, and more nutritionists studying immunology,’ (Karen Burnett). In 2000, there were about 300 papers on the subject of ‘gut microbiota and immunity.’ In 2012, there have been nearly 3,000. This increased interest in digestion and immunity is having a major impact on our industry. Based on years of fermentation research with livestock digestion, Embria capitalized on this trend by researching EpiCor’s prebiotic-like benefits in humans. This research has led to more studies on EpiCor’s digestive health benefit and its link to immune health.” —Larry Robinson, Vice President of Scientific Affairs, Embria Health Sciences

“As we wrap up 2012 we are finding that probiotic consumers are becoming increasingly aware of the value of quality, well researched probiotic strains. Consumers are demanding that the probiotic products they purchase integrate directly into their lifestyle without the requirement of adding new foods or habits to their daily routine. In the coming year, we expect to see this trend continue and we expect to see GanedenBC30 in dozens of product launches.” —Mike Bush, Vice President of Business Development, Ganeden Biotech