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Cascadia Cucumber 1.2: The significance of properly marketing & labeling dietary supplements

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Cascadia Cucumber 1.2: The significance of properly marketing & labeling dietary supplements

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The Cascadia Cucumber is a quarterly newsletter written by Cascadia Capital’s Health and Wellness group that outlines interesting subjects and up-and-coming products in the sector. Our goal is to provide the reader with insightful information regarding trending topics and recent transactions within the Health and Wellness space.

The Cascadia Cucumber is a quarterly newsletter written by Cascadia Capital’s Health and Wellness group that outlines interesting subjects and up-and-coming products in the sector. Our goal is to provide the reader with insightful information regarding trending topics and recent transactions within the Health and Wellness space.

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Cascadia Cucumber 1.2: The significance of properly marketing & labeling dietary supplements

  1. 1. 1 | P a g e The Cascadia Cucumber is a quarterly newsletter written and researched by Cascadia Capital’s Health and Wellness Group highlighting interesting and relevant industry topics, as well as up-and-coming products and services in the sector. Our goal is to provide the reader with insightful information regarding business trends and recent transactions within the Health and Wellness space. WHAT’S HOT: THE SIGNIFICANCE OF PROPERLY MARKETING AND LABELING DIETARY SUPPLEMENTS Introduction Did you know that more than half of American adults take at least one dietary supplement a day? The use of vitamins and supplements is no longer centered around athletes and enhanced athletic performance. Each year, their use becomes more mainstream, with the available number of products growing from about 4,000 in 1994 to about 80,000 today, a 23-year CAGR of 14%.(1) According to the Dietary Supplement Health and Education Act (DSHEA) of 1994, a dietary supplement: contains one or more vitamins, minerals, herbs or other botanicals, amino acids, or other dietary ingredients; is intended to be taken by mouth as a pill, capsule, tablet, powder, or liquid; and is identified as such on the label. As dietary supplements have become more popular among the everyday consumer, so has the demand for visible and accurate labels. There has been, and will continue to be, a crackdown for companies not in compliance with claims and labeling regulations. FDA REGULATION OVERVIEW The DSHEA established that dietary supplements are a category of food and therefore are regulated as such—not as drugs. This means that manufacturers do not need to prove dietary supplements are safe and effective before they can market them. Supplement manufacturers also do not need to notify the Food and Drug Administration (FDA) that a new product is on the market unless they intend to make a structure/function claim about it, or unless the product contains a new dietary ingredient (NDI), such as a vitamin, mineral, or herb that was not on the U.S. market before Oct. 15, 1994. Dietary supplements are considered misbranded foods if the labeling is false or misleading. Specific misbranding provisions apply if the label fails to list each ingredient’s name and quantity, identify the product as a dietary supplement, or, if the dietary ingredient is an herb or botanical, state from which plant an ingredient is derived. The Cascadia Cucumber Your Quarterly Dose of Mindful Greens Contents: I. What’s Hot: Proper Labeling II. Transactions of Interest III. What to Look Out for in 2018 IV. Cascadia Consumer Transactions V. About Cascadia Capital What’s Hot: The significance of properly marketing and labeling dietary supplements Importance: Comply with FDA standards, increase consumer visibility regarding ingredients New Requirements Announced: 05/27/2016 New Requirements Effective: 07/26/2018 & 07/26/2019 Volume 1, Issue 2 (1) www.gao.gov/assets/690/684620.pdf
  2. 2. 2 | P a g e RECENT CHANGES IN LABELING REQUIREMENTS On the 27th of May 2016, the FDA published in the Federal Register its final rule on Food Labeling: Revision of the Nutrition and Supplement Facts Labels and its final rule on Serving Sizes of Foods That Can Reasonably Be Consumed at One Eating Occasion. These new rules represent the first time the FDA has engaged in rulemaking on nutrition labeling in more than 20 years. The FDA believes the new label will make it easier for consumers to make better informed food choices. The updated label has a fresh new design and reflects current scientific information, including the link between diet and chronic diseases. The impact of the new and revised provisions in these two rules on the food and dietary supplement industries in the U.S. will be significant. While it can be argued that most of the changes introduced by both rules have a greater impact on conventional food products, the changes, especially those in the labeling rule, present a unique set of challenges for dietary supplement products and dietary supplement companies. On the 1st of March 2018, the FDA issued an update on its Nutritional Facts label changes, with Commissioner Scott Gottlieb noting that the agency would embark on an educational campaign for consumers when the changes go into effect in 2020 and 2021. The earlier compliance date is for large manufacturers with annual sales of more than $10 million; the later one is for those with annual sales below that amount. Notable Changes to the FDA’s new requirements that effect Vitamins, Minerals, and Supplements (VMS) include the following: • Changes to Sugars and Dietary Fiber in Supplements – In reference to number three and number four above, the FDA set a Daily Value (DV) for "added sugars" (not for Total Sugars) of 50g per day, which amount to 10 percent of calories based on a caloric intake of 2,000 calories a day. Added sugars must be declared when present at or more than 1g per serving of a product or when claims are made about the product related to sugars, sweeteners, or sugar alcohols; • Revisions to Daily Reference Values and Reference Daily Intakes and Potential Implications – Referring to number six above, the DV for dietary fiber was increased to 28g and a new DV of 50g for added sugars was established. Additionally, the vitamins and minerals for which the Recommended Dietary Intake (RDI) was reduced include 13 primary vitamins or minerals, such as Biotin; • Nutrients – In reference to number five above, the lists of nutrients that are required or permitted on the label have been updated. Vitamin D and potassium are now required on the label because Americans do not always get the recommended amounts. Vitamins A and C are no longer required since deficiencies of these vitamins are rare today; • Folate and Folic Acid – When a mixture of folate and folic acid is present in a food or dietary supplement; and
  3. 3. 3 | P a g e • Transitioning to New Label – Manufacturers still have time to begin using the new and improved Nutrition Facts label, so you will see both label versions for a while. However, the new label is already starting to appear on products nationwide. RECORD KEEPING REQUIREMENTS Because the FDA is requiring manufacturers to establish and maintain written records to support the label declarations of several nutrients, dietary supplement companies and companies supplying raw materials for these products will need to devise effective ways to gather and maintain the records. These records are the basis for determining the label claims for those nutrients for which there is no suitable testing method for distinguishing between different types or forms of nutrients. This recordkeeping requirement is new for dietary supplement companies and one for which the FDA did not provide much detail regarding the type of suitable documentation to be kept. Recordkeeping will be required for the following scenarios: • Added Sugars – Where the product contains both naturally occurring and added sugars and where the added sugars are subject to fermentation and/or non-enzymatic browning; • Dietary Fiber – When a non-digestible carbohydrate that meets the definition of dietary fiber and other non-digestible carbohydrates are both present in the finished product; • Vitamin E – When vitamin E is present in a food as a mixture of all rac-alpha-tocopherol acetate and RRR- alpha-tocopherol; and • Folate and Folic Acid – When a mixture of folate and folic acid is present in a food or dietary supplement. SUPPLEMENTS CLAIMS AND IMPACTS FROM RECENT REGULATION Dietary supplement advertising and labeling may include statements or claims about the product’s ingredients and their benefits. Manufacturers are responsible for ensuring that any dietary supplement claims are truthful and not misleading, and the FDA and the Federal Trade Commission (in the case of advertising) have authority to review those claims to determine whether they meet statutory requirements. Marketing for dietary supplements cannot claim that the supplement will diagnose, treat, cure, or prevent any disease; products that include such “disease claims” are regulated as drugs. Supplement manufacturers can, however, make four types of claims: • Structure/Function Claims – Describe the effect of a dietary ingredient on the structure or function of the body or characterize the actions by which the ingredient maintains such structure or function. Examples include “calcium builds strong bones” or “fiber maintains bowel regularity.” The FDA does not need to preapprove or review the scientific basis of such claims, but manufacturers must have substantiation to support them and submit the claim to the FDA no later than 30 days after the product is first marketed; • Health Claims – Describe the relationship between a dietary ingredient and disease or other health-related condition. These claims require the FDA authorization and are contingent upon the agency’s review of the evidence and determination that there is “significant scientific agreement” to support the claim. An example of a codified health claim is “Adequate calcium and vitamin D throughout life, as part of a well-balanced diet, may reduce the risk of osteoporosis.”;
  4. 4. 4 | P a g e • Qualified Health Claims – Allow manufacturers to make health claims based on less evidence than the significant scientific agreement standard. Manufacturers must petition the FDA, which determines whether the claim misleads consumers. An example of a qualified health claim is “Supportive but not conclusive research shows that consumption of EPA and DHA omega-3 fatty acids may reduce the risk of coronary heart disease. One serving of [Name of the Food] provides a gram of EPA and DHA omega-3 fatty acids.”; and • Nutrient Content Claims – Characterize the level of a nutrient in a product and are limited to those authorized by the FDA regulation. Examples of such claims include “sugar free” or “high in vitamin C.” Additionally, the new labeling requirements have a potential impact to a number of product claims. Examples of potential impact to product claims for vitamin and supplements include: • ‘High’, ‘Rich In’, or ‘Excellent Source Of’ – These claims require 20% of more of DV of the referenced nutrient per Reference Amount Customarily Consumed (“RACC”); • ‘Provides’, ‘Good Source’, or ‘Contains’ – These require 10-19% of the DV per RACC; • ‘Added’, ‘Enriched’, ‘Extra’, ‘Plus’, or ‘Enriched’ – These claims require 10% or more of the DV per RACC than an appropriate reference food; and • ‘High Potency’ – This claim describes individual vitamins or minerals that are present at 100% or more of the RDI per RACC or are on a multi-ingredient food product that contains 100% or more of the RDI for at least 2/3 of the vitamins and minerals with RDIs and that are present in the product at 2% or more of the RDI. FEDERAL IDENTIFICATION Because the FDA generally does not have premarket review authority over dietary supplements, it must rely on post-market surveillance methods to identify potential safety problems. When a consumer is harmed by a supplement, manufacturers, consumers, and health care providers can report the case directly to the FDA through the Safety Reporting Portal. In addition, manufacturers are required to notify the FDA of serious adverse events related to use of their dietary supplement products. NOTABLE EXAMPLES Large Work-Out Supplement Company: A large workout supplement provider was sued in a California federal court in late January 2015 for misleading customers about the amount of protein their products contain. The company was charged by the SEC with infractions related to a number of accounting and disclosure violations. In 2016, a different protein supplement maker sued the company for artificially inflating the level of protein in its most popular product. Protein Powder Company: In 2015, a lawsuit was filed against one of the most popular protein powder drink manufacturers. According to the lawsuit, in order to increase sales figures, the company intentionally misrepresented the purported health benefits of its product, and actively drew consumer attention away from the significant amount of saturated fats in the products. The lawsuit alleged that its manufacturer profited significantly from its deceptive marketing of the product because the company’s depiction of the products as “healthy” played into consumers’ increasing interest in health-conscious foods.
  5. 5. 5 | P a g e Diet Pill and Weight Loss Supplement: A $5 million lawsuit was filed in New York against the Kardashian sisters for endorsing an over-the-counter (OTC) diet pill. Four customers claimed the main ingredient of the weight-loss products’ formula is caffeine, which is not an effective or safe diet treatment, according to the FDA. The class action lawsuit was dismissed in New York because a separate settlement was reached in a similar case. Nutritional Food Bar and Snack Company: In March 2015, the FDA sent a manufacturer of popular nutritional snacks a warning letter informing it that four of its products did not meet the requirements for use of the nutrient content claim “healthy” on a food label. After much discussion, the FDA has permitted the company to use the term “healthy,” so long as the word was in relation to the company’s corporate philosophy and not as a nutrient claim. CONCLUSION Strong category growth is expected to continue amid both increased consumer interest in health, and retailers’ efforts to position themselves as a one-stop health and wellness destination. Manufacturers will need to closely watch regulatory shifts and adjust accordingly as to avoid consumer backlash or supply disruption due to product quality concerns. Moving forward, potential buyers and investors will place greater scrutiny on their compliance diligence analysis, so companies wishing to embark in an M&A process will be best served by proactively addressing the topic in their marketing material. This should include addressing the company’s philosophy with respect to managing regulatory risk, as well as how the company maintains awareness of relevant issues and reacts to changes. This will help sellers garner and maintain interest and better position them to receive a fair valuation. A lack of candidness or a perception that the company does not have a codified strategy, will diminish interest and create potential holes that can be exploited during valuation discussions, or at the very least result in a shifting of risk to the seller around indemnification on these issues during a sale or recapitalization process. These issues are faced by many consumer companies conducting business in today’s health and wellness industry and can be addressed and overcome with good planning and a proactive approach. The expansion of the dietary supplement space throughout the next decade offers a unique opportunity for retailers (including e-commerce) and manufacturers to capitalize on a sector poised for significant growth. RECENT TRANSACTIONS OF INTEREST On March 12th, 2018, The Clorox Company announced it has entered into a definitive agreement to acquire Nutranext for $700 million. Nutranext is a health and wellness company which manufactures and markets leading dietary supplement brands through retail and e-commerce sales channels. Clorox Chairman and CEO, Benno Dorer, noted that "Adding Nutranext to our portfolio is consistent with our strategy to accelerate growth through acquisitions of leading brands in fast-growing categories with attractive gross margins and a focus on health and wellness." On December 5th, 2017, Nestle Health Science announced its plan to acquire Atrium Innovations, Inc. for $2.3 billion. Is this a sign that big CPG companies recognize that times are changing and that having a brand in their portfolio in the health and wellness space is a must? It could be the start of some changing times. On September 26th, 2017, KKR completed the acquisition of a majority interest of Nature’s Bounty from The Carlyle Group for $3.3 billion. This transaction and the Atrium Innovations transaction, along with all the significant deal flow witnessed over the past twelve months, made 2017 the biggest year ever, in terms of acquisitions, for the vitamins and supplements sector.
  6. 6. 6 | P a g e UPCOMING 2018 EVENTS The 33rd Natural Product Expo East Trade Show will be held from September 13th to September 15th at the Baltimore Convention Center in Baltimore, Maryland. In 2017, the show hosted more than 1,500 brands including 451 first-time exhibitors and more than 29,000 community members. With gaining popularity, I expect this years’ show to outperform last years’ attendees by a significant amount. The FitExpo Philadelphia will be held on April 28th and 29th at the Pennsylvania Convention Center. The FitExpo Chicago will be held on June 9th and 10th at the Donald E. Stephens Convention Center. The next issue of the Cascadia Cucumber will focus on the rise in acceptance of and desire for plant-based foods. RECENT CASCADIA CONSUMER TRANSACTIONS Cascadia’s Consumer Team consists of eight professionals with more than 50 years of collective consumer investment banking experience having completed over 40 transactions since the beginning of 2010 with a combined enterprise value in excess of $1.5 billion, including ten capital markets transactions and 30 M&A advisory assignments. Cascadia Cucumber 1.1
  7. 7. 7 | P a g e ABOUT CASCADIA CAPITAL Cascadia Capital is an investment bank serving middle-market clients globally. Cascadia's business is diversified in terms of both the industries covered and the range of services provided. As a pure advisory firm, unlike other investment banks, Cascadia bankers are not conflicted by trading, lending, research or cross-selling businesses. For nearly two decades, the firm’s partners have strived to deliver the best outcomes for its clients through its transaction experience, domain expertise and development of long-term relationships. For more information, visit the firm's website at www.cascadiacapital.com. Contact: Phone: 323.486.8115 Email: ecoonrod@cascadiacapital.com www.cascadiacapital.com 707 Wilshire Boulevard Suite 4350 Los Angeles, CA 90017 Member FINRA/SIPC Eric Coonrod, Senior Vice President Jack White, Senior Analyst 707 Wilshire Boulevard Suite 4350 Los Angeles, CA 90017 Phone: 323.486.8119 Email: jwhite@cascadiacapital.com www.cascadiacapital.com

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