"The U.S. dietary supplement sector is highly fragmented in terms of growth. Overall growth during the next year or so is probably in the 4.5% to 6% range, but there are some vast variations," said Loren Israelsen, executive director, United Natural Products Alliance (UNPA), Salt Lake City, UT. "The A-to-Z nutrients, like multivitamins, will stay in the big box stores as low-growth-rate commodities. And some botanicals are down in sales if not negative. But there is tremendous consumer interest in probiotics, certified organic cosmetics, home care and pet care; some of these are easily showing double-digit growth, and some are growing in the 20% to 40% range," he estimates.
These advances are taking place despite a confluence of market forces pressuring manufacturers, including consolidation, rising costs, new regulations and questions about the integrity of raw and manufactured materials from China and elsewhere.
Sales in the global nutraceuticals industry is projected to reach $187 billion by 2010, buoyed by rising sales in traditional markets like the U.S. and the European Union (EU), and by rising sales in emerging markets like China and India, according to Global Industry Analysts, San Jose, CA. Last year, the U.S. represented 32%-or about $21 billion-of total sales in the global market, the analysts indicated. Together, the U.S., the EU and Japan represented about 86% of the global market in 2007.
The companies that will survive the ongoing consolidation in the dietary supplement industry will be forced to become more global, suggests Jeremy Zhou, a senior analyst and director of healthcare at market research firm Revere Data, San Francisco, CA. "Sales for a successful company will have to be geographically diversified," he said. "Herbalife, as a good example of this, derives 27% of its sales from the EU and the Middle-East/North Africa markets, 18% from Mexico and Central America, 20% from North America, 14% from South America and 21% from Asia-Pacific."
As far as the keys to success and survival, a nutrition company not only has to be global, but it also has to have economy of scale and scope, according to Mr. Zhou. "By scale, I mean it has to have a cost advantage in sourcing ingredients and manufacturing the supplements; by scope it has to offer a wide range of product categories," he said. "On top of that, branding and marketing is the key because the actual ingredients offered by the various companies are the same."
Consumer Interest Grows, With Encouragement
Consumer focus on the use of supplements for healthcare is growing stronger in a host of segments, according to Nancy White, director of marketing for the Natural Marketing Institute (NMI), Harleysville, PA. According to NMI's 2007 Health & Wellness Trends Survey, the top health categories for supplements are weight loss, heart problems, digestion, arthritis or joint pain, seasonal allergies, vision and eye health, and diabetes.
The percentage of Americans using dietary supplements is up several percentage points, according to an annual survey conducted by Ipsos-Public Affairs for the Council for Responsible Nutrition (CRN), Washington, D.C."Consumers' use of dietary supplements remained fairly consistent in 2007, with 68% of American adults saying that they take dietary supplements compared to 66% the year before," the report indicates. "Interestingly, this year's survey showed that more adults than last year consider themselves to be 'regular' users of dietary supplement products, with 52% of Americans identifying themselves in that category, up from 46% in 2006," said Season Solario, director, Public Relations, CRN.
Consumers also have more reinforcement of their interest in dietary supplements. CRN's recent Healthcare Professionals Impact Study found that "more than three-quarters of U.S. physicians (79%) and nurses (82%) recommend dietary supplements to their patients." As the frequency of clinical trials of supplements rises, these figures are expected to rise as well.
Consumer concerns about health are driving double-digit sales increases for such hot products as noni juice, omega 3s, green tea, prebiotics and probiotics. According to the NMI survey, the top supplements used by consumers in 2007 were, in order of frequency, multivitamins, calcium, vitamin C, fish oil, vitamin E, antioxidants, vitamin B/B complex and omega 3s. The largest increases in 2007 consumer use came from fish oil and omega 3s, NMI's Ms. White observed. Similarly, the largest use decrease during the same period was for soy, Ms. White said.
Among factors that have influenced consumers over the past year was the scandal surrounding steroid use in Major League Baseball, which increased general attention to the safety and efficacy of sports-related supplement products, especially among children.
Another key area of consumer focus has been on counterfeit products, especially from China. "The story about melamine going into pet food produced in China was a wake-up call to the dietary supplement industry. It provided a template for the obvious things that can go wrong if you fail to vigorously inspect your supply chains and lines," said UNPA's Mr. Israelsen.
As one result of the industry's increased focus on quality stewardship, the nature of the supply chain will change in the U.S. market, Mr. Israelsen suggests. "There is a widespread feeling that the day of the laptop broker is coming to an end. As more American companies become more sophisticated in the way they do business with the Chinese and other suppliers, they have replaced brokers," he says. "When prices are going up, you would be unwise, if not foolish, to trust someone with whom you have no ongoing business relationship who wants to sell you a product at a really good price. This trend to 'know your suppliers' will drive out substandard producers, too."
Sales Rise Unevenly
Several of the analysts for the dietary supplement industry estimate the size of the U.S. market at around $22 billion. But that figure may be low, according to UNPA's Mr. Israelsen. "The number I use-$30 billion-is based on the best guess of the largest insurance underwriter of dietary supplements. There may be a lot of companies doing $20-40 million a year in business that are well below the radar, and people just don't know about them," he says.
According to Cleveland, OH-based Freedonia Group, U.S. demand for vitamin and mineral nutraceutical ingredients has had annual gains of 3.5% since 2001, suggests Corinne Gangloff, a spokeswoman for the company. During the 2001-2006 period, however, vitamin and mineral demand accounted for an increasingly smaller share of the total nutraceutical demand, falling from 49% in 2001 to 45% in 2006. Over the same time period, three other nutraceutical ingredient groups-nutrients, herbal extracts and non-herbal extracts-gained ground, the analysts indicate.
Demand for vitamin ingredients showed annual gains of 3% in the 2001-2006 period, Freedonia reports. Within these sales, the most widely purchased vitamins were A, C and E, among other key vitamins including the B group, biotin, K and D. As far as nutraceutical demand goes, fortified foods and beverages are hogging the spotlight along with nutritionals, followed by dietary supplements.
Total sales for vitamins increased to $7.4 billion in 2007, according to Nutrition Business Journal (NBJ) statistics. Within these sales, the top six vitamins purchased, in descending order, were: multivitamins, B vitamins, vitamin C, vitamins D and H (biotin), vitamin E and vitamin A/carotenoids.
Similarly, demand for mineral ingredients has demonstrated growth of 4% per year from 2001 to 2006, according to Freedonia's calculations. Part of this growth comes from essential minerals like calcium and magnesium.
Mineral sales in 2007 were up slightly to $1.8 billion in 2007, according to NBJ stats. Top mineral sales in 2006 were, in descending order: calcium, magnesium, iron, chromium, potassium, zinc and selenium.
Herb and botanical sales also were up slightly during 2007 to $4.5 billion, according to NBJ. Among these, the top herbal supplements included, in descending order: noni juice, garlic, mangosteen juice, green tea, saw palmetto, echinacea, ginkgo biloba, ginseng, milk thistle and psyllium, NBJ indicates.
While specialty supplement sales in 2007 rose to $3.7 billion, meal replacement supplements climbed to $2.4 billion, and sports nutrition sales hopped to $2.3 billion, NBJ reports. Some of the top specialties, in descending order, were: glucosamine and/or chondroitin, homeopathics, fish or animal oils, CoQ10, probiotics, plant oils, digestive enzymes, MSM and SAMe, NBJ reports.
Intellectual Property Protection Increasingly Important
A nutraceutical company's ability to protect its products using intellectual property will be a growing measure of competitiveness and survivability. One standout in the industry is Columbia, MD-based Martek Biosciences, suggests Revere's Mr. Zhou. Martek, which is a life sciences developer and marketer of naturally produced products derived from microalgae, fungi and other microbes, focuses its research on identifying and creating commercially viable products for the nutraceutical, pharmaceutical and functional food markets.
"Martek is unusual among the publicly-traded companies in the industry in that its processes are proprietary and thus they have a bit of a monopoly, which means they can charge high prices and maintain a sustainable competitive advantage," Mr. Zhou explained. "Martek has sold its ingredients into all of the major baby food formulas now, so their profit margins are good as well."
Not surprisingly, the expenditures by nutraceutical companies on research and development is one indicator of the amount of intellectual property protection a company has or may have, observes Denise Lai, director of corporate sales at Revere Data. Within the Revere analytic universe of 84 publicly traded dietary supplement companies, only 27 are focused, or have more than 50% of sales coming from nutritional health. Among those 27 companies, eight are pure play competitors, or have 100% of their sales derived from nutritional health.
Within Revere's subset of 27 focused companies, market capitalization for the majority ranges from $50 million to $2.8 billion. Yet R&D spending amounted to just $15.7 million during the third quarter of 2007, the latest period within which all companies reported data. Of these, Martek was the leading spender, with $6.9 million, followed by Simcere with $2.7 million, Quigley with $2 million, and Schiff with $1.3 million. All other focused companies spent under $1 million, if anything during the quarter.
The Upside of Regulation
Expectations are that the recent finalization of U.S. Good Manufacturing Practices (GMPs) rules and requirements for the manufacture of dietary supplements and the new Adverse Event Reporting (AER) law will positively impact the dietary supplement sector. "This year is critical in terms of gearing up for regulation, with GMPs going into effect for firms with over 500 employees, and then going into effect for mid-sized and small companies in the following years," said Daniel Fabricant, vice president of scientific affairs, Natural Products Association (NPA), Washington, D.C. "The burden of compliance is really key for consumer confidence," he says. As for the new AER law, Mr. Fabricant pointed out, "Adverse events occur only with a very small incidence rate in the dietary supplements industry, and this law will help bring this to light."
While the EU already has GMPs, which are more quality-oriented along ISO standards, the stewardship focus of the U.S. GMPs is bound to spread as the industry becomes more global. "I don't know if we will ever see global GMPs, but the U.S. GMPs require a great deal of traceability, so foreign firms that are involved in the U.S. market supply chain will in some way have to adopt it," Mr. Fabricant commented.
Trends in Future Growth
One future growth trend for nutraceutical companies is the formation of international joint ventures to harness the best country sources of supply, manufacturing and consumers, according to UNPA's Israelsen. One recent international joint venture was announced in September, when A.M. Todd Botanical Therapeutics, Logan, UT, became the exclusive North American agent for all products manufactured by Ningbo Green-Health Pharmaceutical Co., of Ningbo, Zhejiang province. Earlier in 2007, A.M. Todd's production was transferred to the NGHP facility.
"The A.M. Todd venture is a snapshot of the future nutraceutical business world," Mr. Israelsen says. "Their senior staff took 25 to 30 trips to China, boots on ground, trudging through scores of facilities and conducting lengthy due diligence to assure that their GMP standards would fully conform with what would be done in a superior U.S. facility."
More joint ventures with Chinese companies are expected. Among the top publicly traded Chinese nutraceutical companies are Qingdao Jiante Biological Investment Co., Stone Group Holdings, Maxx Bioscience Holdings, Vital BioTech Holdings and Shanghai Jiaoda Onlly Co., according to Revere's Mr. Zhou.
Another future trend in the industry will revolve around intellectual property protection, which will be the cornerstone of a company's revenue stream. "We don't enjoy the same intellectual property protection as in the pharmaceutical industry, so the copy-cat element is concerning, but at the same time, there are increasing partnerships between the industry and academia, so more and better studies will shine light on clinical trials," said NPA's Mr. Fabricant.
Venture capitalists also are watching-if not financing-the clinical trial pipeline closely. "Many companies come to us and say they have a wonderful extract product, but if everybody else can make it, it's not worth spending money on clinical trials," says Wolfgang Reichenberger, a general partner in the Nassau, Bahamas office of Inventages, a global venture capital firm. "This doesn't mean all products in a range have to be patented-the brand, the "aura" of some really unique patented products could help carry other unprotected products."
One example of Inventages' venture investment is Vital Foods, Auckland, New Zealand, which produces kiwi-derived digestive aids under the Phloe brand, which contains patented prebiotics, enzymes and fiber. Following clinical trials and successful initial marketing in New Zealand, the product will be introduced to the U.S. market this year.
Where there is intellectual property protection, there also will be more venture capital available, predicts Mr. Reichenberger, whose private $1.5 billion fund is investing a "substantial portion in dietary supplements." Financiers' focus on supplements and other areas between food and pharmaceuticals-such as medical foods and cosmeceuticals-will increase in part because of the amount of venture capital in the pharmaceutical industry. "There are many VCs today in therapeutic healthcare, but not so many in dietary supplements yet, in that space between food and pharmaceuticals. Sometimes it's difficult to say whether a product will be brought to market as a drug, a dietary supplement or food," he said. "But I would guess that venture capital in supplements will grow over the next couple of years, in part, because it's in the interest of the healthcare providers to prevent rather than heal.