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The Highest Common DenominatorThe Highest Common Denominator

Global supplement sales reach $96 billion as regulatory outlook tightens

August 1, 2013

24 Min Read
The Highest Common Denominator

Nutrition is a global industry with local challenges. That local challenge may be as small as a patchwork of chia gardens downstream from a Big Ag plantation or as big as the super typhoon that slammed into the Phillipines last month. The local challenge may be one commissioner on one board in a constellation of small countries seeking approximation of supplement regulations. Water scarcity is a global issue but a dry well in an Africa village is a very local problem for the villagers who might gather devil’s claw for processors thousands of miles away.
So while the global supplement market grew at 7.0% in 2012, poised for 7.2% in 2013, with emerging middle classes driving much of that growth, the manufacturers, suppliers and finished product companies chasing those growing numbers must navigate a complicated landscape of cultural niches, “non-tariff trade barriers” and varying levels of enforcement in trade zones where harmonization of regulation is spotty. When the game can change at a border crossing, the players have to carry multiple playbooks. They need the resources to get into those markets. They need the smarts to stay there. That dynamic would seem to favor the larger players but with emerging middle classes in exploding markets like the ASEAN countries, smarts may be the most important element in the equation.

Page1_20Chart.JPGChina’s FDA bares teeth
The market on everybody’s to-do list is China. The middle class is growing both in numbers and in appetite for organics and manufactured wellness products like supplements. They also have a growing appetite for foreign produced goods as the adulteration scandals that rock one domestic nutrition category after another make “from somewhere else” the most important claim on any label. “Middle-class China is not so enamored of buying products made in China that you eat,” says Mark LeDoux, CEO at Natural Alternatives International (NAI), a contract manufacturer with global reach. “They’d just as soon buy it from another country where the perception of quality and oversight is higher. Perception is becoming reality in a lot of these emerging markets.”
The perception that China is a difficult market to get into, particularly at retail, has always been the reality. Would-be importers know that coming in. Supplements are growing by 11.4% in China with herbs & botanicals climbing 9.6%. The draw is the sheer volume inherent to a population of more than a billion. Companies see those numbers and every hurdle starts looking surmountable, but perhaps only because they don’t see the height of the hurdle. Peter Zambetti, Global Business Director for Capsugel, says his company can’t put market intelligence into its capsules but supplies it none the same. That advice often ends in a pull back.

“There’s a lot of interest and then when people recognize what it takes to get into China, a lot of them don’t end up going for it,” says Zambetti, who also chairs the International Association of Dietary Supplement Associations (IADSA). Those hurdles look taller up close. “There’s a big carrot at the end of the stick but getting to that carrot is pretty tough.”
The stick could be getting longer as the carrot gets sliced thinner. What happens in 2014 could prove pivotal. Jeff Crowther, executive director at the U.S.-China Health Products Association says companies bringing supplements into China as a “food” may find that back door closing as the China Food & Drug Administration (CFDA) steps in. The Chinese Administration of Quality, Supervision & Quarantine (AQSIQ) governs food imports and the “food” classification was a “gray area” route for supplements to reach the market, but the CFDA has taken steps to stop the practice, Crowther explains. “There are a lot of companies that have been calling me and saying they can’t get their products in the country,” Crowther says. There had long been a “tug of war” between the customs authorities and the CFDA, but CFDA won. “CFDA has grown a lot larger in size and is flexing its muscles. And it’s putting an end to that process.”
To be sold as a “health food” overseen by CFDA, a product needs registration, a process that can cost $50,000 per product and take two to three years. Companies with dozens of products selling via the food designation would face huge costs. “If you have 60 products, $50,000 times 60 is a lot of money,” Crowther says. MLMs, with their much smaller supplement catalogs, have gone through the registration process and are doing good business. Fewer SKUs becomes an advantage. Crowther estimates MLMs garner 50% of the market. LeDoux has seen that. “If you are an MLM in China, life is cake for you right now,” he observes.
If CFDA successfully shuts down the “food” path to market and moves all supplements into the exacting and expensive registration process, many multinationals will have to walk away from one billion potential consumers. “Bigger companies will have to reevaluate their strategies and smaller companies will just leave the market or never attempt to get in,” Crowther says. “They won’t be able to import.t’s just too expensive.”
US-China HPA lobbies CFDA to ease the registration requirements. The notification system Crowther has seen would be limited to the letter vitamins and single ingredient products. “Companies will be forced to sell C and D and E and a few B products, and that’s about it,” he says.
David Pineda Ereño, directory of regulatory affairs at IADSA, is more optimistic about Chinese regulators seeking “more efficiency” and contends that the efficiency is coming soon enough that operators who have been eyeing the market but not committing will want to sharpen their focus even tighter on the East. Just weeks ago, CFDA proposed a transition from the expensive, cumbersome registration system to a notification system and CFDA authorities asked for a memo of understanding from IADSA regarding training and additional cooperation. The IADSA GMP guide was translated into Chinese at CFDA request. All of those moves suggest significant progress. “We think things are going to be happening and we will see very positive results in the medium time frame,” Pineda Ereño says. Crowther counters that it is far too early to envision a positive outcome. “There is going to be a registration system,” Crowther says. “I don’t think China will ever get rid of that.”
For manufacturers, the prize is getting products into China. The headache is getting good ingredients out of China. The raw ingredients industry in China has a shady reputation for a reason. Scandals going back long before the reports of melamine in infant formula in 2008 make every link in the supply chain suspect. If it’s cheaper in China, the reason isn’t always lower labor costs. BI Nutraceuticals' CEO George Pontiakos puts it bluntly: “There are a lot of unemployed chemists in China.” Still everybody we talked to for this article, including Pontiakos, said good ingredients and reliable suppliers are plentiful in China. Pontiakos believes the China challenges increasingly include supply. Fresh water is becoming a problem and more urbanization and conversion of land to Big Ag crops means less room for the wild crafted herbs that have given Chinese medicine its global reach. That’s when challenges of a global market become local. One valley may be flooded for a hydropower project. Another might be choked with soot. The market for a particular botanical sourced in one or both of those valleys tightens.
The ginseng market is buffeted by demand for clean product in China where pesticide-free batches of the rooty plant can be hard to find. Flooding hit milk thistle growers and shoved the price up. “China is very volatile in terms of good crop,” Pontiakos says. There are few markets that couldn’t be called volatile in some way. Pontiakos observes that “there is not a commodity we deal in that has gone down.” He’s not complaining about that. What he complains about is currency.
Antibiotics in India
Herbs and ingredients are rarely a problem on par with currency. Pontiakos bemoans an unstable dollar, but it is the plummeting rupee that people are talking about. Last month the rupee was trading at 63.5 to the US dollar with an Economic Times headline predicting the Indian currency depreciating to 70-1 after floating in the middle 40s for most of the 2000s. But those are just numbers, like the billion-plus population that makes the market attractive even while inflationary uncertainty makes growth difficult to quantify. NBJ sees $2.6 billion sales for supplements in India in 2013, growing at 8.3%.
But again, just numbers. The story of the nutrition industry in India can’t be told in numbers. The biggest challenges are rootedin culture and manifest in regulation and enforcement. Companies cannot approach India as a single market or even a single regulatory rubric. Importers face a patchwork of provincialism as different regions and cultures within India might apply different visions of the same law. Regulations on supplements were consolidated by the Food Safety & Standards Act of 2006, piecing together and modifying regulations from eight different ministries, but implementation has been staggered and a coherent rule book doesn’t mean those rules are evenly applied. Insiders say the regulatory path in India is more maze-like than in China. A global industry can’t navigate that maze without local knowledge. “India is a fast-growing market but you really need feet on the street there as well,” Zambetti says, adding that no smart company can anticipate a steep growth curve. “You really have to have a long-term growth plan.”
Striving to bring clarity to the system, IADSA hosted two India workshops in 2013 with regulators, the second revealing a seeming willingness to push the codes beyond the current RDA limits. One of the regulators at the workshops also serves on a regulatory board at CODEX and Pineda Ereño expects the international relationships to bear fruit soon. “I would say next year we will have some news on India,” he says.
The rupee aside, the spread of Ayurvedic medicine around the globe would suggest opportunities for brokers and suppliers seeking ingredients sourced in India. Those opportunities could be shadowed however by the discovery of antibiotic contaminants in enzymes produced by Mumbai-based Advanced Enzyme. Tainted product has been found in the United States, Canada, the European Union and Japan. India doesn’t have a China-like  reputation yet but the scope of the problem is troubling. The resulting recalls trace a pinball trajectory around the globe as different companies formulate the enzyme into products with international distribution channels. LeDoux sees the recall as a test of the system and a preview of the reckoning he foresees across the trade landscape with more companies viewing risk in global terms. “We’ve never seen anything quite this enormous,” LeDoux says. “How companies are dealing with this is going to be a measure of what their internal CAPA (Corrective and Preventative Actions) programs look like. I think the FDA is going to spend the next year or two asking ‘Were you notified of the recall? What did you do with it?’”
The recall highlights the standards required to play in an arena where the risks are global. The supply chain can’t run an express route. There will always be local stops. More than almost any industry, what happens at those local stops has global repercussions.  “This is the kind of thing when the tide goes out and you figure out who is swimming without a bathing suit,” LeDoux says.
LeDoux hopes the repercussions include more companies contracting with clean-history manufacturers like NAI that can meet standards as stringent as Australia’s Therapeutic Goods Administration or gain a passing grade from Swissmedic. “A lot of clients are gravitating toward our Swiss facility,” he observes.

Still, there is no room for naïveté at the global level. Nobody, especially LeDoux, expects a clean industry tomorrow. “You can only imagine that in certain other areas of the world, there are still a lot of Wild West scenarios. It’s astonishing to me the level of non-compliance that’s still underway in the United States,” he says, citing observations that 30% of products in some categories don’t contain what’s on the label, not to mention those well-reported, daunting GMP audit results. “Would you get on an aircraft that had a 70% chance of non-compliance with standards of safety?”
Adulteration and contamination has always been a global issue local to incident but not to region. Bad players abound in a growth market. “Adulteration is not a function of geography. It’s a function of greed,” Pontiakos says. “There is still enough of a customer base out there to enable that kind of bad behavior.” A low barrier to entry doesn’t help. “Any grifter with a fax machine can go ahead and get into this business,” Pontiakos says of the botanicals trade.
Herbal crackdown in Europe
So while harmonization of regulations has happened in Europe and is on the horizon in ASEAN, country-by-country enforcement is always going to be a local issue. This is particularly true in Europe where the European Food Safety Administration (EFSA) was created to standardize regulations but enforcement and interpretation remain quasi-cultural concepts. “The same botanical that is a drug in Germany is a supplement in the UK and in the Netherlands,” says Joerg Gruenwald, founder and chief scientific advisor at Analyze & Realize, a Berlin-based consultancy. Traditional herbal medicines that have been on the market for at least 15 years can be a ticket around strict regulations on claims but the product has to meet high standards, Gruenwald explains, adding a quick caveat. “They have to be on the level of herbal drugs where the quality and documentation is much more complicated,” Gruenwald says. “A lot of those products don’t have any of those, especially in the UK, and the companies cannot afford it because it’s expensive to do.”
Gruenwald believes some products may “disappear” when UK regulators begin enforcing in earnest. “People just wait. They don’t do anything and hope these things go away but they will not go away. They will just happen later,” Gruenwald says. “Later” is now on the calendar, with teeth. The UK Medicines & Healthcare Products Regulatory Agency (MHRA) announced last month that enforcement will commence April 30 and botanical supplements must achieve herbal medicine status to stay on the shelves. A MHRA press release quoted licensing division chief Dr. Laura Anderson saying: “We know that people buy and use herbal medicines, so it’s only right that they have access to products that are safe and meet good quality standards. And that’s where we come in.”
Peter Wennström, speaking from the United Kingdom where he is the expert consultant and president of Healthy Marketing Team, says all of this still makes it unwise for any companies to approach the European Union as a unified nutrition market like the United States, or even harmonized in any practical way. “Imagine if every state in the U.S. spoke a different language and had its own little Tea Party movement, its own set of rules, its own cultural understanding.”
As expensive as herbal testing and documentation are, it does not approach the cost of introducing a new functional food product or supplement with a specific health claim. The number of claims that can be made is higher than in the United States, but getting that claim on the label is complicated. The humans in the human studies have to be healthy. They can’t be suffering the targeted ailment. Proving efficacy becomes a task of staggering complexity. Industry experts talk about the regulations as an “automatic rejection program” stifling innovation, but more people are saying the system has slowly become more formula friendly. Insiders say both the manufacturers submitting new products and the regulators examining those products now tackle their respective roles more professionally, perhaps even cooperatively. A new chairman on the health claims panel, Ambroise Martin, is seen as a source of easing in industry relations but the overall view is that people are just getting better at it. “It’s learning by doing but we are learning quickly and things are becoming clear,” Gruenwald says. “It’s a learning process from both sides.”
The result is that the commodity supplements keep the big brands healthy while slowed innovation may keep newcomers from entering the market in a big way. “You have big companies which just go by branding,” Gruenwald says. “Their brands are so strong that they can survive well on the letter vitamins.”
Still, even the big brands can’t control the economy. The news out of the EU is rarely hopeful. Pierre Fitzgibbon, CEO at Atrium Innovations—sale now pending to Permira, a European private-equity firm, for C$751 million—says Atrium’s target EU markets are slow. Germany is currently stagnant, Fitzgibbon says, while the Netherlands market is shrinking. “The Dutch market is a small market for us, but it’s been a difficult market for the food supplement industry because the Dutch economy isprobably one of the weaker economies in the Euro community,” he says.
There are no real bright spots in Europe, according to Fitzgibbon—“There’s basically no growth in the market right now in our industry.” But there may be cause for hope. “Everything we see and hear about Europe is moving in the right direction. It’s not going to be a huge catch-up to where we were several years ago, but it looks like there is actual growth on the horizon.”
Russia rises
Companies looking for growth are casting their gaze several time zones east. Russia, the former Soviet republics and Eastern Europe are a market focus for many companies. Nutritional supplement sales in Eastern Europe and Russia should hit $4.9 billion in 2013. In 2012, the region saw 9.6% growth with vitamins and minerals the fastest growing product category at 10.3%. Russia’s Pharma 2020 goal of producing half of its nutritional supplements in country by 2020 has companies with long-planned expansion plans salivating and companies new to the area scrambling for strategies. Capsugel recently opened a Russian office with Russian Capsugel employees. “I’ve been there five times this year,” Zambetti says. “There’s not a lot of press around growth in those areas but we are expecting an explosion in the next five to ten years.”
Russia’s chief sanitary inspector, Gennadiy Onishchenko, long seen as a hindrance to the nutritional supplement industry, was removed from his post in October. Business operations are being described as more professional than the back-alley nutrition-noir scenarios whispered across the industry for decades. That said, given cultural questions and even the hint of corruption, Pharma2020’s mandate makes local manufacture plain common sense.
ASEAN harmonizes, almost
Common sense in the emerging ASEAN markets requires a crystal ball and crossed fingers. Harmonization has been in the works for 10 years and seems to be inching toward the finish line in 2014. The market is exploding—half a billion people with a rapidly growing middle class—but it’s difficult to manufacture in 10 different countries. It might be even harder to predict what will happen as harmonization drifts into details. Countries may move to protect traditional medicines. The last laps will reveal how national interests shape regional regulations with global repercussions. LeDoux predicts regional trade will trump nationalist sentiment.
The devil may be in the details, but the money is in the market and the market is big. “If you look at what’s going on, there is some element of parochialism but because there is growing demand and a middle class coming out of nowhere, they are faced with the effect of an emerging, growing market,” LeDoux says. “Sometimes it’s better to play along on a regional basis.” LeDoux likes energy products for ASEAN populations. “These are markets that are generally populated by people who want to maximize their entrepreneurial capacity. They are looking at supplements as being an integral part of their lifestyle.”
Zambetti sees commodity supplements as the first wave in most emerging markets, ASEAN included. “In the developing areas, typically multivitamins are the first thing people take,” he says. Wennström, who has written a book on emerging markets, The FourFactors for Growth Market Success, says different countries will have different niches and premium products could also  be a strong play, describing some developing markets as pyramids with wide low-income bases and the money concentratedat  top. Whatever sells, ASEAN and the rest of Asia is the future. “It’s a bit of a redefinition of who’s leading and who’s following,” Wennström says. “Big companies are moving their innovation centers to Asian countries, to Singapore  and China.”
In certain aspects, Wennström says Europe has “become a second thought.” The problem is that US and European companies see the money, but miss the peculiarity of the markets. It’s true in Asia, where traditional medicine remedies were often made at home and mass migration to urban areas tore whole cultures from those roots, but it’s also true in Mexico where a fat baby is a healthy baby, or in African nations where the worst parts of the American diet may be seen as “aspirational foods.” “We are working right now with one of the Arabian markets and the problem is that the consumers will not accept the idea of dieting and healthy eating,” Wennström says.  The $521 million vitamins and minerals market may be growing at 7.6% in the Middle East, but culture doesn’t turn on a label claim. “They know they should lose weight but they still believe they are healthy being fat.”
Latin America ‘approximates’
The result is obesity epidemics in places like Mexico. Supplement sales grew at 4.8% last year and NBJ pegs the total nutrition market at $1.8 billion, but the country is famously fat. The regulatory environment may not be the best fit for the needs, at least in supplements. “In Mexico supplements do not need to be registered,” Pineda Ereño says. “You basically put your product on the market and you notify the regulators.” How you notify the consumer is the hard part. Nutritional supplements cannot make label claims in Mexico. “If you cannot do that, how are you going to be able to reach consumers?” Pineda Ereño asks. Unfortunately, advertising became the answer and so-called “miracle products” made wild claims for herbal remedies and supplements. “Crazy claims,” Pineda Ereño says, just not on the label. Solutions are evolving, most recently with advertising oversight. “The advertisement has to be approved before you can put it on TV or the newspaper or wherever. That is the way they are controlling it. They say this is working. I think this is very important for the industry to encourage.”Page6_20Chart.JPG
Moving south of Mexico, regulation could be described as hyper-nationalist with regional aspirations. El Savador, Guatemala, Costa Rica, Panama, Honduras, Nicaragua and Belize are approaching regional harmonization through SICA (Sistema de la Intagracion Centroamericana) but that could be called an exception in South America. For now, all eyes are on developments in Brazil. With a market of 200 million potential consumers, nearly two thirds the size of the United States, Brazil is a huge market and the culture has embraced western wellness ideals, particularly the “beauty from within” concept. The biggest player in the region, Brazil has a huge impact on Latin America's $1.3 billion natural personal care market where sales across the region are growing at 12.5%. “Every international company, when they think about Latin America, they think about Brazil,” Pineda Ereño says. He describes the market as “huge” but he describes the market entry challenges as “huge” as well. “When we look at Brazil, we look at the need to develop and shape the regulation,” Pineda Ereño says. Progress is tangible, he says, describing “a draft of regulations specifically for food” that would cover supplements and be open for comments by the end of the year. Every country in the World Trade Organization has the opportunity to weigh in. “I think 2014 could be an interesting year.”
It will be no gold rush, Zambetti cautions. Registration in Brazil for Capsugel’s Ache Prolive took 18 months. Newcomers can’t expect a regulatory fast track. “Regulations changed dramatically a couple of years ago and it didn’t flood the country with new entries. Even when the regulations change, the market doesn’t double over night. The companies that saw this growing over the last six or seven years are already there,” he says.
Savvy executives, primarily in U.S. corporate suites where interest is especially high, are watching Brazil closely while keeping additional sets of eyes focused on the ripple effects if changes come. Regulators across Latin America wait to see what Brazil does, according to Pineda Ereño. “It is important to talk about Brazil within the whole framework of Latin America.” That doesn’t mean the rest of Latin America is planning a lock step march to harmonization. The SICA countries are the exception but the word “harmonization” has not resonated across borders. “They are more comfortable with the words ‘approximation of regulation,’ ” Pineda Ereño says.
The promise of Africa
While Latin America has been a focus for IADSA, the Association’s reach in Africa and the Middle East remains thin but engagement in Africa, particularly South Africa, could be crucial. Last year, SouthAfrica’s Department of Health released guidelines for CAMs (complimentary and alternative medicines), including supplements, in pharmaceutical regulations
but in their own category. Consultant Bruce Dennison, writing from his Cape Town office, contends the regulations are bad news for the supplements industry: “The major problem with the document as it stands is that the normal format for drug registration has been applied to CAMs. This would make achieving registration for many CAMs compounds almost impossible.” The guidelines are similar to those regulating allopathic medicines and cannot be practically applied to supplements. Meanwhile, harmonization across the continent has not moved past the conceptual stage. “The first Vitafoods conference was held in
Johannesburg at the end of October,” Dennison writes. “Harmonized regulations in sub-Saharan Africa is a major objective.”
Across Africa, product development of African botanicals remains a complicated issue. Identification and standards must be rigorous to avoid hoodia-like debacles and companies exporting from South Africa must now prove the indigenous cultures benefit from the deals. HG&H Pharmaceuticals worked with the South African Minster of Environmental Affairs to establish a benefit-sharing plan in the production of Zembrin, a cognitive product derived from sceletium. Ethnobotanist and botanicals industry consultant Thomas Brendler at Plantaphile believes this should be key to any business plan involving African products. “Namibia exports tons and tons of raw material every year and then the stuff gets processed and refined and extracted and put into pills and eventually winds up in the marketplace as a fully licensed clinical drug,” Brendler says, describing a scenario common across Africa. “All Namibia gets is whatever money can be made with a container of dried devil’s claw root.” The next step, Brendler says, is to “help the local people to establish relationships with industries outside their home country that would come in and invest and build a processing facility or a manufacturing plant so in the long run it’s a value-added proposition.”

Brendler, who co-founded the Association of African Medicinal Plants Standards and occasionally works in the bush searching for new therapeutic candidates, says getting additional botanicals out of Africa and into international markets for natural wellness product can be difficult, but EFSA regulations loom  particularly steep, possibly stifling the development of promising discoveries. “There are big companies, big manufacturers out there who could afford to spend that money but the way it goes now they will rarely touch something that they can’t first and foremost patent. The question is how truly new your idea is, how much is public domain and how much of a barrier can you build around your IP to make it worth someone’s while to invest millions in clinical trials.”
Highest common denominators
Financial and regulatory pinch points like that illustrate how the global nutrition industry may be poised to enter the realm of the highest common denominator. As EFSA regulations are enforced in more countries, more manufactures have to meet those standards. GMP enforcement by FDA and demands for transparency in the U.S. raise the standards across hemispheres. In the realm of the highest common denominator, players either have to step up or step back within their own borders or cultural niches. In Canada, a registration system that passed in 2004 will reach full implementation next year. The transition period is over. Each product in a company’s portfolio will be registered and licensed for quality and safety standards. Companies already in Canada have met the test but a virtual border fence has gone up around a $1.8 billion supplements market—companies without the budget and the documentation are going to have a hard time finding the gate.  Peter Wojewnik, a regulatory consultant with Dicentra in Toronto, recalls a woman he met at Natural Products Expo West who had a 60-product catalog. “She told me ‘I want to expand into Canada’ and when I got into the details, she walked away immediately.” The more established companies "aren’t as turned off,” he adds.
In a world of highest common denominators, the standards in one country influence the industry in another. Argentina looks to Brazil. India looks to China. Everybody looks to the United States as the biggest market in the game. A local challenge can shift a global industry but the biggest markets can leave the smallest companies trapped outside the gates, unable to enter the realm, stuck in their cramped corners of the world. Harmonization cranks the lock tighter. Nutrition is a global industry with local challenges. But the biggest challenge local industries face could be global.

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