Contract manufacturers: the workhorses of the nutraceuticals industry; A look at the issues and trends faced by contract manufacturers.

WRITING AN ARTICLE ON contract manufacturing of nutraceuticals presents a unique challenge in that it is difficult to be sufficiently specific in order to provide some valuable insight, while at the same time remaining vague enough to protect some of the more novel and proprietary ideas that have facilitated growth during a time when the industry has been widely viewed as flat. This is no small task, since one of the keys to being a successful contract manufacturer is the ability to provide one's customers with accurate information about the current and future state of the market before those "new" trends are reported in the industry press. So without giving away a step-by-step blueprint for growth, what follows are a few thoughts on the issues that are likely to shape this segment of the nutraceuticals industry in the months to come.

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One minor point of clarification: It is a common misconception among people new to the industry that the terms "contract manufacturer" and "private labeler" are synonymous. Nothing could be further from the truth. A private labeler typically produces large lots of nondescript bulk products (vitamin C tablets, for example), then warehouses those products until such time as multiple customers order them--usually a few bottles at a time. The products are traditionally labeled with the customer's private brand, hence the name private labeler. This system is good for small volume organizations interested in providing a generic dietary supplement line without a large initial capital investment. Since these products are by definition non-proprietary, there is little incentive for innovation.

A contract manufacturer, on the other hand, only manufactures products to fulfill the terms of a given contract. Frequently there is an understanding of formulation propriety between the customer and the manufacturer. Some companies work almost exclusively on proprietary formulations, and consequently, are typically referred to as custom contract manufacturers. By necessity, this type of arrangement drives innovation because the ongoing goal of the manufacturer is to provide consistently unique formulations that allow multiple customers to differentiate themselves in sometimes overlapping markets.

The most productive contract manufacturer-customer relationships are marked by a mutual trust that allows the creative and scientific teams on both sides to share their thoughts and develop their ideas with the benefit of multiple perspectives that neither could achieve alone. This level of comfort obviously can't occur overnight, but it should be the highest goal of all contract manufacturers. Relationships of this type build successful products, and those successes are talked about. This industry--although large in financial terms--is still quite small in personal terms. As a result, simple word of mouth is the most valuable form of advertising for contract manufacturers.

The Evolution of Contract Manufacturing

The past decade has witnessed great progress in an industry that seemed more like the Wild West than a vital component of Western medicine. This progress is particularly evident in the contract manufacturing sector.

In the years before the Dietary Supplement Health and Education Act (DSHEA), contract manufacturing didn't appear to be too different from private labeling. Contract manufacturers did substantial business with "compare and save" types of products. Tablets and capsules were just about the only common delivery platform, and standardized extracts were the exception. Many of the most interesting--and consequently, best-selling-formulas weren't developed by contract manufacturers, but rather by their customers or by outside consultants. Even so, change was in the air. During these early stages of the nutraceutical boom, marketers began to realize how products that were both novel and efficacious were a lot easier to sell!

DSHEA changed everything. Besides finally being able to design products that were actually allowed to do something (on a label, anyway), the industry also inherited an assortment of new responsibilities in the Quality Control/Quality Assurance and Regulatory arenas. Just as important, over the years the "Education" part of DSHEA began to take hold as consumers started demanding products that were more sophisticated than C-500 with Rose Hips. The writing was on the wall: Manufacturers that wanted to continue to attract and maintain high-profile customers had to start making large investments in testing equipment, qualified scientific staff, regulatory specialists and trained product development experts. A wave of consolidations, bankruptcies and takeovers ensued and continue through today as the specter of codified and enforced dietary supplement GMPs looms large. The wheat continues to be separated from the chaff.

Contract manufacturers that recognized the growth potential of functional foods and alternative delivery systems early in the game are reaping the rewards of their insight, as these products represent the current phase in the evolution of nutraceuticals. The past few years have witnessed the explosion of mixable powders, ready-to-drink liquids, effervescent products, bars, cosmeceuticals and other novel nutritional vehicles, which have fueled more industry growth than traditional tablets and capsules. There is a growing expectation that quality contract manufacturers will be able to help incorporate these unique products into more traditional nutraceutical lines.

Current Issues Facing Contract Manufacturers

Many of the major issues confronting nutraceutical manufacturers can be grouped into one overriding theme: The industry is in a state of regulatory uncertainty. Right now, contract manufacturers are forced to look at product development as one part science and one part crystal ball--and that's just for products destined for the U.S. marketplace. If a particular project has export potential, the rules sometimes appear to be reinterpreted or rewritten on a weekly basis. Some of the leading causes of current uncertainty include the pending Supplement GMPs, the Codex project, competing DSHEA-themed Senate bills, and the Bioterrorism Act.

During the first week that the provisions of the Bioterrorism Act were enforced, cases of minor calamity erupted along the border. A typical example involved a U.S.-manufactured multivitamin product that was sold in Canada by a multi-national marketing company. As long as every bottle that was sent to Canada was consumed in Canada, everything was fine. But in mid-December the marketer determined that sales of the multivitamin were slower in Canada than in the U.S. and tried to bring the product back home to meet demand south of the border. Since this product was technically being imported into the U.S., the marketer was expected to meet all of the food importation guidelines laid in the Bioterrorism Act. A long and complicated (and as yet unresolved) FDA quarantine ensued. While this is an admittedly minor glitch, it demonstrates the type of growing pains that the industry will likely face with so many regulatory changes looming in the near future.

Perhaps more unsettling than the requisite changes themselves is the current state of uncertainty as to exactly what those changes will be. When the new Codex guidelines--the joint World Health Organization/UN Food and Agriculture Organization attempt at creating a uniform code to govern the food (and supplement) trade--are eventually adopted, which, if any, of those provisions will be relevant to U.S. manufacturers? Due to the complexities of international law, many experts believe that the U.S. will not be required to incorporate any part of the final Codex dietary supplement guideline, which contravenes existing Federal law. In this view, as long as DSHEA remains the law of the land, it is likely that Codex won't affect contract manufacturing in the U.S. too much. This is a good thing because some of the more unsettling Codex provisions--such as the bafflingly low Upper Limits for vitamins and minerals that would make all too many existing dietary supplements illegal for sale--could easily send the industry into a tailspin.

Right now even the future of DSHEA itself is in question. With S. 722--Sen. Richard Durbin's (D-IL) anti-nutraceutical bill--still in the mix, there is a (slight, we hope) chance that 2004 will bring onerous, potentially crippling new regulations to the industry. As has been well reported, these could include superdrug level adverse event reporting requirements, expanded pre-market approval provisions and other unnecessary burdens that will do nothing but drive up consumer costs for dietary supplements. Fortunately, the general buzz from people "in the know" has been that if any additional Congressional action is taken in the near future, it will more likely be aligned with the pro-DSHEA bill sponsored by industry friends, Sens. Tom Harkin (D-IA) and Orrin Hatch (R-UT), with the goal of giving FDA the funds and the mandate to enforce DSHEA as it exists right now. Fiscally-minded lawmakers need to continue to hear the message that enacting any legislation that will hurt growth in such a large industry is bad policy during a limping economic recovery.

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While the aforementioned issues make for a potentially cloudy outlook, there is still the strong possibility that none of them will develop into the industry-shaking monsters of our worst case analyses. But the impending adoption of the new Supplement GMPs isn't so remote--they will be here soon, and contract manufacturers in particular are already gearing up. As the industry groups continue to lobby for modifications during the current comment period, the ultimate terms of the final regulations are still questionable. However, contract manufacturers that have tended to be leaders in other areas have tended to stay well ahead of the game here, as well. For these quality organizations, the new GMPs should largely be a simple codification of the prudent steps they had already taken to meet the more sophisticated demands of a customer base that is growing more knowledgeable by the day.

Predictions for the Coming Year

The trend of the moment in the nutraceuticals industry is low-carb. The list of huge product introductions over the past several months hammers home this point all too clearly. One can now get a burger wrapped in lettuce at Burger King, munch on some low-carb Doritos and wash it all down with Tropicana's Light 'n Healthy low-carb orange juice. Earlier pronouncements about "the whole low-carb thing" being a fad that had already seen its prime were way off base. Even Slim Fast is offering a low-carb line as an alternative to the high-sugar line that had been the brand's hallmark for years.

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The most exciting new ingredients in the diet category speak to insulin management as a way to keep weight down and, oh yeah, protect consumers from joining the swelling ranks of Americans with the condition experts call either the Metabolic Syndrome or Syndrome X. Contract manufacturers will continue to work with their customers to develop dietary supplements and, more significantly, functional foods to accompany and augment the low-carb lifestyle that so many consumers have embraced. In much the same way that Elvis was dismissed as a flash in the pan in 1956 only to reign as The King for decades to come, the low-carb movement is here to stay.

Another trend that figures to continue in the coming year is the increasing number of food and pharmaceutical companies entering the nutraceutical industry. The explosive growth in functional foods, in particular, will continue to be a beacon for food companies who view these products as logical extensions of their core business. Continued growth in the more specialized category of medical foods--foods that address specific disease states--is likely to be another important area of focus for successful companies in the months ahead. Once again, contract manufacturers that had the foresight to expand their capacities to include alternative delivery vehicles are in a good position to partner with these new arrivals from the food and pharmaceutical industry.

Contract manufacturers are truly in a privileged position: They are sought after by every vendor of a novel ingredient, every owner of a new technology and every purveyor of timely industry information. The successful ones proactively deliver this information to the marketers who need it. As long as the well of good ideas doesn't run dry and the regulatory environment doesn't become too restrictive, look for contract manufacturers to continue to be the workhorses of the nutraceuticals industry for a long time to come.

By Terry Coyle

Garden State Nutritionals

Terry Coyle is director of marketing and corporate communications for Garden State Nutritionals, a West Caldwell, NJ-based provider of formulation, development and manufacturing services for custom dietary supplements.