NBJ tackles the complex topic of finance & investment in the nutrition industry with our next issue, now on its way to the printer. As we digest all of the research and trending that surfaced in the reporting of that issue, expect some discussion in the coming weeks on the blog about such topics as holistic investing, moving upstream through the murky waters of deal flow, and the modern challenges of being a nutrition entrepreneur. Today, though, let’s talk about the equity markets.

I spoke to Scott Van Winkle of Canaccord Genuity and, on a separate call, Andy Wolf of BB&T Capital Markets to gain some visibility into smart money’s opinion of the road ahead for nutrition stocks. Excerpts from those conversations follow below.

NBJ: Let’s look at the major industry categories in nutrition and talk about year-to-date performance. How about natural & organic foods?

Scott Van Winkle: In general, healthy-living stocks have outperformed the market this year. Natural & organic has the best sector performance, up about 12%. These stocks didn’t start to come back until later in the cycle, but now they are beginning to reflect improved growth in the category.

Andy Wolf: Natural & organic is about 80-90% recovered, in terms of underlying growth trends. It’s really come back as a category. You can see it in the industry numbers and in the company numbers. There’s been a little bit of channel play, and you can still see some slack in demand at conventional stores, but that too is starting to show a rebound. The demand never went away for natural & organic, but in the recession, even dedicated users were worried about finances. Now most of them have made the budget allocation and returned to the category.

NBJ: And supplements?

SVW: Supplements are down about 12%, but the 40% move in NBTY improves that number dramatically. Supplements performed well last year with strong industry trends, and those trends persist, but investors lack faith. Strong category growth brings increased competition, and as we anniversary the jump in sales from swine flu, people expect a slow down. Vitamins were up 18% in October/November 2009. That kind of growth was obviously driven by the cold and flu season, in turn driven by swine flu.

AW: Supplements have had a multi-year run as consumers adopt these healthy lifestyle choices. People want to live better and feel better. Supplements also enjoy a countercyclical demand. As unemployment goes up and consumers lose more health-care benefits, more people use supplements as a substitute for doctor visits—which are down, by the way. It’s a prophylactic approach. Demand looks robust to me across all sales channels for supplements.

NBJ: What are you seeing for multi-level marketers (MLM) and ingredient suppliers?

SVW: Ingredients are up about 3% through the end of July. Last year, the farther down the supply chain you were from the consumer, the likelier you were to see your customers deload or reduce inventory. Ingredient suppliers had a tough time in 2009. There weren’t a lot of new product launches, and customers were cleaning out their inventories. There are signs of more aggressive ordering now, so the fundamental businesses are stronger than they were coming out of last year.

As for MLMs, they’re up about 5%. These stocks outperformed early, because their business was stronger on a relative basis. With weak economics, everybody buys less, but there’s more unemployment and more people looking for part-time work. In a weak economic cycle, more new distributors come online, even though their average sales level drops. Net-net, MLMs were less impacted by global economic issues.

NBJ: What about functional foods?

AW: Functional foods have really lagged. Why? Mix. Most functional products are sold through conventional stores, and demand hasn’t picked up as well in the mass market. I don’t see a real recovery for functional foods until the broader economic recovery is more firmly entrenched sometime in 2011.

NBJ: Looking ahead, where do you see the best performance and the biggest challenges?

AW: The big issue for 2011 is converts. For 20 years now, consumers have been moving, in one way or another, from conventional to organic. The demand curve is still there, but all of the core customers have already come back. Whole Foods Market and other retailers are seeing new customers come into the channel, but for that to continue, well, the economy will have something to say about that as well.

SVW: Retailers are in a very good position in general. They are demanding price concessions from suppliers, and suppliers are giving them. Whole Foods Market and Vitamin Shoppe are in good position, thanks to this competitive advantage over suppliers. Over the next six to 12 months, I think the MLM sector is going to perform quite well. Natural foods will perform well. Supplements will tread water due to Wall Street’s impression of decelerating growth.

Related links:

Quick Take on NBTY Acquisition

2010 Healthy Foods Report

2010 Direct-to-Consumer Selling in the Nutrition Industry Report

A wide range of nutricosmetics products can be found in the United States—and, although America lags behind Japan and Europe in its embrace of “beauty from within” supplements and beverages, the concept has become mainstream enough for The New York Times to take a swipe at it. “Beauty from within, achieved with a pill, sounds so easy, so short cut, so bold, like those T-shirts that say ‘Spiritual Gangster’ on the front,” wrote Alex Kuczynski in a May 6, 2010, article for NYT’s Style Magazine. “If you can just announce to the world that you are a really cool spiritual person with an open heart chakra, why not just take a pill and believe you are gorgeous?”

Kuczynski’s comment—and the entire gist of her article—hits upon the key question plaguing the nutricosmetics market: Do these products really work?

While some beauty-from-within offerings are more efficacious than others, the inconvenient truth for the entire nutricosmetics industry is that many (but certainly not all) of its products and ingredients lack the science necessary to prove their benefits to consumers. This, of course, is hindering U.S. sales—particularly at a time when consumers are being forced to make more careful spending choices. “Americans are more skeptical of the beauty-from-within concept,” Carrie Mellage, director of consumer products at The Kline Group, told (NBJ’s sister publication) Functional Ingredients magazine. “There is a cultural emphasis on scientific investigation, and Americans also want instant results, which nutricosmetics don’t provide.”

According to Alda Brandao, product manager for PL Thomas’s Cosmeceuticals & Nutricosmetics division, the nutricosmetic ingredient Lipowheat is one exception. The product contains natural ceramides from vegetable origin that have been shown to restore skin barrier functions, thus ensuring healthy hydration and the softness and wellness of the skin.

Lipowheat’s efficacy has been demonstrated in three clinical studies, and the product received NDI (new dietary ingredient) notification without objection from the U.S. Food and Drug Administration (FDA) in April of this year—not an easy feat these days. “The NDI is going to bring a lot of attention to this product,” Brandao said.

Lipowheat is manufactured by Hitex, a subsidiary of Lavipharm Group in Paris; PL Thomas is the exclusive marketer of the ingredient, which won the French Association of Antioxidants’s 2007 prize for best health and beauty ingredient. The association’s prize committee gave Lipowheat the award based, in part, on the quality of its clinical studies. In October 2009, Lipowheat received the award for best innovation in dietary ingredients from Isogone Association in France.

“Lipowheat should set the science standard for the nutricosmetics industry,” Brandao said. “If all nutricosmetics products had such solid science and safety data behind them, the consumer would feel more comfortable embracing the beauty-from-within concept.” Lipowheat is available in oil and water-soluble powder formats and can be used in soft gel, capsule or stick pack products, Brandao said. “The beauty of this ingredient is the flexibility it offers for formulation.”

Genuine Health is the first manufacturer to use Lipowheat in a nutricosmetic product sold in the United States and Canada. The company’s dermalipid line, which features the natural ceramides ingredient, hit the market in April 2010.

Lipowheat and other promising nutricosmetic ingredients and finished products will be the focus of The NutriCosmetic Summit, which will be held Thursday, June 10, at the Renaissance hotel in Las Vegas. Kimberly Stewart, former editorial director of Functional Ingredients magazine, and I will open the event’s business & marketing track by first providing some sales context for the beauty-from-within market and then presenting case studies of five nutricosmetics products, including Nestlé’s Glowelle, Solazyme Health Sciences’ Altruest and Isocell North America’s GliSODin Skin Nutrients. Each case study will explore the consumer and ingredient trends being addressed by the product and discuss the brand’s strengths and weaknesses, as well as the opportunities and threats it faces in the market today.

NBJ’s 2010 Nutrition Industry Overview issue, which publishes in July, will also include an in-depth look at the U.S. nutricosmetics market. Subscribe to the journal at the NBJ website.

Related NBJ links:

Will Glowelle Break Open the Beauty From Within Market in the United States?

2009 Supplement Business Report

Baobab, Natural Preservatives and Other Hot N&OPC Ingredient Trends

Related Functional Ingredients magazine links:

NutriCosmetic Summit Offers Palette of Cutting-Edge Education

Both here and in Europe, dietary supplements and functional foods and beverages are feeling the health-claims heat. While the European Food Safety Authority continues its stringent evaluation of food and supplement health claims (rejecting the vast majority of claims it reviews), the Institute of Medicine (IOM) in the United States is calling for the U.S. Food and Drug Administration (FDA) to begin applying the same health-claims assessment methods for foods and supplements as it does for pharmaceutical drugs. In an IOM report released May 12, an IOM committee concluded “that there is neither rationale nor scientific grounds for basing regulatory decisions on different levels of scientific evidence for different substances—science is science.” The report also noted that Congress “may need to strengthen FDA authority to accomplish this goal.”

Not surprisingly, the report triggered an onslaught of news stories, many of them highly critical of dietary supplements and functional foods and beverages. In its June 7, 2010, issue, Forbes Magazine takes on the $37 billion U.S. functional food and beverage industry in a story titled “Snake Oil in Your Snacks.” The piece argues that food and ingredient companies are getting rich by trying to pass their products off as pharmaceutical-like drugs without backing the health claims made for those products with pharmaceutical-grade research. To support this argument, the article analyzes the studies linked to a handful of functional products, including Lifeway’s ProBugs kefir beverage for kids, POM Wonderful’s pomegranate juice and Danone’s DanActive yogurt.

“[Most of the claims] are completely unsubstantiated,” Steven Nissen, head of cardiology at the Cleveland Clinic, told Forbes. “Medical attention does not come from a Cheerios box.”

My biggest issue with both the IOM report and articles like the Forbes “snake oil” piece is that dietary supplements and functional foods and beverages are NOT drugs and consumers typically use these products to support their health over the long haul. A person isn’t likely to replace his cholesterol-lowering medications with Cheerios but might choose this cereal over another for its heart-healthy soluble fiber content. Similarly, I don’t give my sons ProBugs thinking that the fun kefir drinks will strengthen their immune systems so much that we no longer need to worry about eating fresh fruits and vegetables or regularly washing our hands. I do, however, appreciate that ProBugs are organic, contain no artificial colors or flavors, and are rich in calcium, vitamin D and, yes, probiotics.

As Stephen Daniells, the science editor for NutraIngredients, eloquently argued in an editorial published last week, “The regulation of food and drugs may come under the auspice of one agency in the U.S.—FDA—but foods and drugs are different. Just because Hippocrates said food should be our medicine, doesn’t mean we should regulate them as the same thing.”

That said, the dietary supplement and functional food and beverage industries have been home to companies that borrow science, use less-than-efficacious amounts of functional ingredients and/or make outrageous, unsubstantiated claims for their products. These are the companies drawing the ire of practitioners, lawmakers, regulators and the media and bringing about the very real possibility of tougher regulations for both the supplement and functional product industries.

Furthermore, even though supplements and functional foods are not drugs, companies would be wise to take a conservative approach to their product claims and invest in quality research to support the claims they choose to make for their products. This is already the reality in Europe, but the tougher stance on claims substantiation is obviously crossing over the pond to the United States. In the end, raising the level of scientific investment in both the supplement and functional industries will benefit responsible companies and consumers alike.

Nutrition Business Journal’s 2010 Healthy Foods Report, which publishes later this month, provides an in-depth look at the U.S. functional food market. NBJ subscribers receive a 10% discount when they use the code nbjsub10 to purchase this report.

Related NBJ links:

February 2010: Functional Foods and Beverages

European Union’s Health Claims Legislation Sets Nutrition Industry on Edge

2009 Supplement Business Report

UPDATE: According to a press release issued April 27 by The Cornucopia Institute, the USDA’s National Organic Program released a memo today (after the original publication of this blog post) saying that it would ban synthetic “accessory nutrients” from use in organic infant formula or baby food. An April 28 Washington Post article reported that the USDA will provide guidelines for how companies must phase out the additives in their organic products. The process could take more than a year.

Kathleen Merrigan, deputy secretary of the U.S. Department of Agriculture (USDA), is living up to promises that her agency, under the Obama Administration, will get tough on abuses involving the USDA organic seal. According to an April 26 Wall Street Journal article, Merrigan’s latest crackdown involves moving to ban synthetic versions of the fatty acids DHA and ARA from organic baby formula. Martek Biosciences Corp. is the largest supplier of synthetic fatty acids, and its DHA and ARA—sold under the life’sDHA and life’sARA brands—are found in more than 95% of all U.S. infant formulas, including organic formula sold under Abbott Lab’s Similac and The Hain Celestial Group’s Earth’s Best brands.

The USDA’s actions are in response to a legal complaint filed by the organic watchdog group The Cornucopia Institute to enforce federal organic standards prohibiting the use of certain unapproved synthetic substances in organic infant formula and other organic products. “Consumers rightfully expect organic foods to be purer and safer than conventional foods—in part because federal regulations require that they be free from potentially harmful synthetic additives,” said Charlotte Vallaeys, farm and food policy analyst with The Cornucopia Institute. “But in the case of the synthetic, chemically extracted additives DHA and ARA, the system of federal regulations ensuring organic integrity was undermined by corporate lobbying and backroom deals during the Bush Administration.”

Although the USDA is not challenging the safety of synthetic fatty acids, the agency has decided that the organic regulators in 2006 should have sought public comment when they decided to include synthetic versions of DHA and ARA on a list of nonorganic ingredients that can be used in products carrying the USDA organic seal. “We don’t want an industry that acted in good faith to be harmed,” Merrigan told the Wall Street Journal. “On the other hand, we have a rule to uphold.”

Merrigan said the USDA will issue a draft guidance on the issue later this year that would provide food manufacturers a grace period to reformulate their organic food products. Once the draft guidance is issued, public comment will be collected for 60 days and then the USDA will issue a final ruling, the Wall Street Journal reports.

Martek’s life’sDHA is also found in other organic products, including WhiteWave’s Horizon Organic Milk Plus DHA. The company’s synthetic fatty acids, which have been on the market since 2002, are extracted from microorganisms using hexane, a non-organic chemical that is frequently used in the production of cooking oils but that has been banned from use in organic food products.

In its complaint to the USDA, the Cornucopia Institute cited reports of babies being sickened by the synthetic fatty acids added to infant formula. Martek spokeswoman Cassie France-Kelly told Nutraingredients-usa.com earlier this month that “there has been no statistical rise in the number of adverse events” since Martek’s ingredients were introduced into infant formulas in 2002. “The fact is babies get sick, some react to infant formula yes, but that could be milk proteins or other ingredients,” France-Kelly said. “To link these ailments with the presence of omega-3s and omega-6s is spurious at best.”

Numerous studies have demonstrated the health benefits of omega-3s and omega-6s for infants, although The Cornucopia Institute said it rejects such findings. “Two recently published comprehensive scientific review studies on the topic both substantiate Cornucopia’s findings that challenge these claims,” the watchdog group wrote in a April 21 press release. “These two meta-analysis studies collectively consider the results of 18 clinical trials, and conclude there are no proven benefits to DHA/ARA supplementation in infant formula.”

In 2009, U.S. consumer sales of organic formula totaled $64 million, according to Nutrition Business Journal estimates. France-Kelly told the Wall Street Journal that a ban of its synthetic ARA and DHA from organic products “wouldn’t have a material impact” on Martek’s financial results because the company primarily sells its ingredients for use in conventional products.

NBJ is interested in your thoughts on this issue. Should synthetic fatty acids be banned from organic baby formula? Does such a move strengthen the integrity of the USDA organic seal, or does it hurt consumers by forcing them to choose between buying organic formula and formula that has been supplemented with the fatty acids that many parents believe are important to their babies’ health?

Related NBJ links:

2010 Organic Foods, Beverages and Personal Care

Martek Strengthens its Hold on Baby Formula Supply Market

2009 Raw Material & Ingredient Supply Report

Eight dietary supplement manufacturers and marketers were named in a California lawsuit filed on March 2 that alleges some fish oil supplements have been sold containing illegally undisclosed and unnecessarily high levels of contamination with polychlorinated biphenyl (PCB) compounds. The eight companies named in the lawsuit are: CVS Pharmacy Inc., General Nutrition Corp. (GNC), Now Health Group Inc., Omega Protein Inc., Pharmavite LLC, Rite Aid Corp., Solgar Inc., and TwinLab Corp. The lawsuit alleges that the companies sold fish oil, shark oil, fish liver oil and shark liver oil supplements that have PCB contamination above the so-called “safe harbor” limits set for human PCB consumption under California’s Proposition 65. That law requires companies to warn consumers about contaminant exposures. Proposition 65, passed as a ballot initiative in 1986, was passed to force consumer products to eliminate toxic chemical ingredients or reduce them below published safe harbor limits in the past.

U.S. consumers spent $739 million on fish and animal oil supplements in 2008, making it the eighth most popular dietary supplement on Nutrition Business Journal’s list of the top 100 selling supplements in the United States. Many within the industry are wondering what the potential implications this lawsuit could have on the fish oil supplement market. NBJ reached out to two industry trade associations, as well as to legal experts with the Goodwin Procter law firm to determine what effect this might have on the industry; their responses are included below along with a statement from one of the defendants, TwinLab Corp.

• Forrest Hainline, attorney at the San Francisco office of Goodwin Procter: This threatened lawsuit highlights an essential problem in applying Proposition 65 to foods or supplements. The evidence is uncontroverted that omega-3 fatty acids are not only beneficial but essential for health. The evidence is overwhelming that Americans in general do not eat enough fish to obtain the appropriate amounts of omega-3 fatty acids. This might be due in part to the campaign to frighten people away from eating fish for fear of methyl mercury.

As the California Supreme Court recognized in Dowhal v. SmithKline Beecham Consumer Healthcare, 32 Cal.4th 910 (2004), “even if scientific evidence supports the existence of a risk, a warning is not necessarily appropriate: The problems of over warning are exacerbated if warnings must be given even as to very remote risks.” This is particularly true where the benefit of the product folks would be warned against outweigh the potential harm. This was true in the Tuna Case, which I tried and won. The benefits of eating fish (because of omega-3 fatty acids, among other benefits) far outweighed the remote and even theoretical risk of exposure to the minute amounts of methyl mercury.

The Food and Drug Administration (FDA), not a bounty hunter law firm under Proposition 65, should determine whether warnings on foods or supplements are appropriate, and what form they should take.

Note: Hainline also obtained a judgment for restaurants that Proposition 65 warnings concerning grilled chicken were preempted by federal law.

Joanne Gray, attorney at the New York City office of Goodwin Procter: I have provided legal advice to a number of dietary supplement companies over the years and have been continually disappointed at the number of frivolous lawsuits that have been filed against the industry, including Proposition 65 claims, consumer class actions claims and products liability lawsuits. It is important to mount a strong defense to these actions right from the start.

It is unfortunate that dietary supplement companies and retailers have faced Proposition 65 lawsuits, even when minute amount of substances hold no real risk of harm to the consumer. These lawsuits are a real threat to the survival of the smaller companies in the industry, and they also increase costs to consumers.

• Council for Responsible Nutrition (CRN): CRN believes the suit was filed in California in order to take advantage of a state law, Prop 65, which has conservative standards that are not law in the rest of the nation. Further, the information disclosed during the press conference danced around the details, offering a lack of specificity to the general public about the levels of polychlorinated biphenyl (PCB) compounds found in the fish oil products that were tested. Though the lawyers suggest that the levels of PCBs found in these products far exceed what is acceptable by Prop 65 standards, the actual levels of PCBs found in the majority of these products do not appear to exceed the Prop 65 limit (90 ng/day). Furthermore, they fail to mention that the Food and Drug Administration’s (FDA) tolerance level for PCBs in fish (2,000 parts per billion) far exceeds the levels of PCBs found in fish oil…

The bottom line is that consumers, whether they live in California or elsewhere, should continue to feel confident in the safety and efficacy of their fish oil supplements. This lawsuit does nothing to change the strong science supporting the many health benefits of fish oil, which range from cardiovascular health to cognitive development of infants and young children, and the very low thresholds of PCBs which apparently trigger a labeling requirement in California cannot be extrapolated to demonstrate any actual risks at those levels. The health benefits for fish oil far outweigh any suggested, and unsupported, risks.” Read the entire statement here.

• Global Organization for EPA and DHA Omega-3 (GOED): In response to a lawsuit being filed against eight dietary supplement brands and retailers, the Global Organization for EPA and DHA Omega-3s (GOED) is reassuring the industry and consumers that fish oils manufactured by its members, and the market in general, meet the highest quality standards available. “We have complete confidence in the safety of the fish oil supplement market, which has been validated through multiple third-party reviews by industry watchdogs on thousands of products,” said Adam Ismail, Executive Director of GOED. “In fact, this industry is among the highest quality and most transparent of all consumer products,” he added.

There are multiple resources in the public domain where consumers can get more information on the quality of their products, including the International Fish Oil Standards program (www.ifosprogram.com). Furthermore, a recent report by Frost & Sullivan found that 93% of the refined fish oils on the market in the United States are produced from anchovy and sardine oils. However, the plaintiffs unfortunately only tested one of these types of oils, which actually had PCB content well within the Safe Harbor provisions of Proposition 65. “While the plaintiffs raise an important issue,” said Ismail, “it is unfortunate that they are implying that most fish oils are unsafe and that the industry is hiding information on such vital nutrients.” Read the entire statement here.

• Greg Grochoski, Twinlab’s chief science officer: “Twinlab’s fish oil products are all molecularly distilled and quality tested for purity. These processes are especially effective for reducing impurities such as PCBs found in oceans, lakes, rivers and streams and common to fish and fish-­‐based products.” Twinlab’s statement went on to say that the company cannot comment on the validity or accuracy of the tests referenced by the plantiffs, though its products were reported as having among the lowest level of impurities.

Related NBJ Links:

Tuna’s Prop 65 Win Could Help Supplement Firms in Their Own Lawsuits

Elite Athletes Eschew Dietary Supplements Over Fears of Contamination

Vitamin D and Omega-3 Fish Oil to be the Focus of New $20 Million Study