Irwin Naturals, one of the nation’s leading suppliers of natural dietary and herbal supplements, announces that it has reached a settlement with a California task force that named seven of its hundreds of products as being mislabeled or falsely advertised according to California law. The company has resolved all issues raised in the investigation.

The task force alleged that several Irwin products did not carry the proper lead warning label as required by California’s unique Proposition 65 law, but not that any of them contained an unsafe amount of lead. No product recall was or will be instituted as a result of the settlement, and no products were reformulated in response.

Proposition 65 requires a warning label for any product that contains an identifiable amount of a chemical or heavy metal on a daily dose basis. However, according to Prop. 65, the level of lead at which a product is considered unsafe is about 28 times greater than the level at which a warning on a label is required. As a result, Prop. 65 warnings have become ubiquitous throughout California on everything from wine bottles to Disneyland.

“We stand by our products, as we have for 15 years, and this settlement acknowledges that our products are safe and that we are in compliance with California laws,” said company spokesperson Rebecca Pearman. “As a trusted name in the nutritional supplement business, we are committed to best industry practices in manufacturing, quality assurance and labeling to ensure the quality and safety of our products and our continued leadership position in the industry.”

The task force also alleged that their tests failed to find Hoodia in some of the company’s products labeled as containing the herb. However, the company could not confirm these findings because no validated test method exists for identifying Hoodia in the softgel product form used by the company. The company relied instead on the industry standard method of confirming the input of Hoodia, and all manufacturing records confirmed that Hoodia had been put in to the products. The investigation did not result in either a product recall or reformulation.

Pearman said that while the company does not agree that it intentionally mislabeled or falsely advertised its products, it has no dispute with the task force’s fundamental objective to bring greater oversight to the nutritional supplement industry.

“For more than 15 years, we have staunchly supported the evolving standards under which our industry operates,” said Pearman. “California has some of the most stringent labeling laws in the nation, and in complying with those, we will continue to strive to meet or exceed all national requirements for our industry.”

Unrelated to the labeling claims was an allegation that the company failed to refund consumers who met the company’s refund policy. The task force did not identify specific complaints or consumers, but the company has set up a limited restitution fund. Consumers with questions about eligibility for refunds under the settlement can call the company at (800) 941-9098.

For the official announcement and more contact info on Irwin Naturals please visit 24-7 press release.

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The purpose of the letter is stated as to “address the significant public health problems posed by products that are marketed as dietary supplements but that contain the same active ingredients as FDA-approved drugs, analogs of the active ingredients in FDA-approved drugs, or other compounds, such as novel synthetic steroids, that do not qualify as dietary ingredients.”

The letter states that the FDA has received numerous reports of serious adverse events associated with consumer use of those FDA-approved ingredients, which are generally undeclared in the labeling, that are being included in dietary supplements without warning to consumers. These adverse events include strokes, acute liver injury, kidney failure, pulmonary embolisms and death.

The FDA has been investigating supplements in order to discover whether or not they include ingredients that are deemed to be FDA-approved drugs. The areas in which the FDA found the highest rate of products marketed as dietary supplements but containing hidden ingredients include products for weight loss, sexual enhancement and body building. This includes a recall of more than 70 products marketed for sexual enhancement, 40 products marketed for weight loss and more than 80 products marketed for body building.

Although warning letters and recalls have been the primary source of action by the FDA, the letter states that the government may initiate criminal investigations to hold accountable those who violate the Federal Food, Drug, and Cosmetic Act and endanger the public. The letter makes sure to point out that individuals, not just companies, can also be brought up on charges when it states “Responsible individuals, even if the individual did not participate in, encourage, or have personal knowledge of the violation, can be criminally prosecuted under the Act.”

The FDA’s recommendation in this letter is that all firms that manufacture, import, distribute, or sell dietary supplements understand and investigate their full supply chain and review their manufacturing and quality assurance activities to ensure the lawfulness, quality and safety of their products. The FDA also encourages the industry to report any suspected tainted supplements and has offered an anonymous reporting method.

The FDA is hoping that this letter is spread widely throughout the industry in order to eradicate the use of chemicals regulated as drugs in nutritional supplements. It is also seeking continued input from people within the industry to help strategize a way to combat this problem.

To read the letter, click here.

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Schiff Nutrition International (NYSE: WNI) is reportedly “on the prowl” for new acquisitions after a sale of approximately 25 percent of its shares to TPG Growth, a private equity firm affiliated with TPG Capital of Forth Worth and led by William McGlashan Jr.  

McGlashan is familiar to the nutritional supplements industry as a co-founder of Pharmanex Inc. McGlashan will become a member of Schiff’s board along with TPG managing partner Matthew T. Hobart.

Based in Salt Lake City, Utah, Schiff develops, manufactures, markets and distributes branded and private label vitamins, nutritional supplements and nutrition bars in the United States and throughout the world, including recognized brands marketed through mass markets (including club stores) and, to a lesser extent, health food stores. 

TPG acquired its shares from Weider Health & Fitness, which before the deal controlled approximately 93% of the company’s voting shares and approximately 53% of all Schiff shares outstanding.  Weider Health’s Eric Weider will continue to serve as chairman of the board.

The deal signals a renewed strategy of growth through acquisitions of other companies in the supplements industry.  According to recent reports, Schiff has already looked at a number of deals in the market.  And their timing seems right, as activity in the industry remains strong, including reported acquisitions by The Carlyle Group of its rival NBTY and ramped-up efforts by strategic buyers such as Nestle, which in September launched Nestle Health Science, committing significant resources to its efforts in this segment.

For more information about the deal and Schiff, click here.

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Greg Doherty of Poms & Associates

Guest Post: Greg Doherty of Poms & Associates Insurance 

Deals in the supplement space are heating up.  That’s why it’s important to remember to pay attention to details like Extended Reporting Provision (“ERP”) or “tail” coverage options available in insurance policies that can protect the business going forward in the event of claims.

Liability insurance for supplement raw materials suppliers, contract manufacturers and retailers is offered on a “claims made” basis almost exclusively. When a dietary supplement company is acquired, the Seller–and the Buyer– need to be aware of the uniqueness of how the claims made coverage must be structured around the transaction, so as to protect both of them after the deal closes.

Central to understanding this subject is the coverage trigger for claims made insurance. A policy has to be in effect when the claim is made against the supplement company, not necessarily when the claim actually occurred. Often there is a long delay between when a claim happens and when a lawsuit is filed. With claims made coverage if no claims made policy is in force when the claim comes in, there is no coverage, regardless of when it occurred.

 Many M&A deals are “assets only” acquisitions these days, reinforcing the importance of covering the Seller, who is left with past liabilities as part of the transaction.. That means the Seller retains the liabilities—including future claims that come in from something that happened when he DID own the company, This is usually backed up by an indemnity agreement from Seller to Buyer in the agreement of sale.

The first inclination of the Seller is to cancel his liability policy on the closing date because ostensibly he doesn’t need it anymore. Not so with a claims made policy. If Seller does that and does not exercise the Extended Reporting Provision (“ERP”) or “tail” coverage option in his policy, he will have no policy if a claim comes in, and thus no coverage.

Let’s use an example an injury that happened pre-close but is not made until six months after close. Remembering that it is the making of the claim that triggers the coverage, NOT when the injury occurred, at if the ERP coverage is NOT purchased by Seller:

 -At the time the claim is made, the Seller will have no insurance coverage , and

-Neither will Buyer as their policy is going to effectively bar any claims that happened before the acquisition.

So in the absence of ERP coverage, neither party will have any insurance coverage for the claim. This is also why savvy Buyers will often require the Seller to purchase ERP coverage as part of the overall transaction, the fear being that if Seller is long gone and without coverage, the courts will assign him liability anyhow, in spite of the contractual agreement in the sale document that the claim should be paid by Seller.

ERP coverage for Sellers in a M&A deal should not be overlooked by either Seller or Buyer.

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To understand why Sen. John McCain introduced a bill on dietary supplements, read the press releases. The legislation announced Feb. 3  addresses public safety, but mostly it’s about the reputation and revenue of professional and Olympic sports.

The evidence: McCain says in the release that “a little over a year ago the NFL suspended six players, including two players from one of the teams competing this Sunday, for violating the league’s anti-doping policy.  Several of the players were surprised that they tested positive for a banned substance because they used a dietary supplement they believed to be safe and legal.”

McCain ends the release, “It is my hope that this legislation will ensure that all Americans, including athletes, have all the information necessary to make informed decision when choosing whether to use a dietary supplement, and that the FDA has the ability to remove any harmful dietary supplements from the market.”

What organization was first to endorse the legislation? Major League Baseball. Commissioner Bud Selig issued a statement supporting the bill and MLB.com reported on McCain’s announcement of the legislation.

Next on board: The U.S. Anti-Doping Agency, which issued a press release with an affiliated group, Supplement Safety Now. Its members include Major League Baseball, NFL, NBA, NHL, PGA, NCAA and other national sports organizations. All are powerful organizations inside and outside Washington. And they share a complaint: Their athletes have been unwitting victims of mislabeled supplements that caused disqualifications and suspensions.

In other words, the products were bad for business. The groups want to arm the FDA with the data to monitor supplements and the power to yank immediately the detrimental ones off the shelf. They found an ally in McCain, whose 2008 presidential campaign received substantial financial support from athletes and others in pro sports, ESPN reports.

The initial response from groups representing supplement makers and marketers was tepid. “Though we have not yet examined this bill completely, it places new burdens on dietary supplements that are not required for any other class of food,” Michael McGuffin, president of the American Herbal Products Association said the third paragraph of a press release.

The last sentence of the third paragraph of a press release from the Council for Responsible Nutrition quotes CEO Steve Mister as saying, “The best way to help consumers is through collaborative efforts with industry, government and other stakeholders, such as USADA, to implement the current laws, to provide more resources and funding to FDA, and to pass the food safety bill, which already includes many of these provisions.”

As the bill moves from the headlines to the sidelines, look for an intense lobbying effort by sports organizations. Supplement-related scandals have hurt their reputations and wallets. They see a solution in increased federal action and will push hard for that.

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Marketers of nutritional supplements often complain that they do not know what the FDA wants. Even after the agency sends a warning letter about misleading claims and advertising, its staff does not explain what would fall within the rules. That’s the reality; the FDA will tell you what’s wrong, not what’s right.

Through warning letters, the agency provides insight into how a marketer can fall afoul of the rules. Companies that examine why their competitors get chastised can apply the lessons to their Web sites, catalogs, labels and the like.  Washington attorney Ivan Wasserman looked at the 73 letters issued in 2009 (way, way up from 44 in 2008) and found that 72 related to claims on Web sites. Six involved claims made in metatags.

Lesson #1: The FDA is surfing the Web, checking not just product descriptions and benefits, but Googling for questionable SEO/SEM.

Wasserman’s list would rank the letters by claim problems in this order:

• Drug and disease claims: 72
• H1N1 virus claims: 37
• Other drug and disease claims: 20
• Heart disease and cardiovascular claims: 11
• Diabetes claims: 8
• Cold and flu claims (not H1N1): 8
• Cancer claims: 8

Lesson #2: The medical emergency that makes the most headlines gets the greatest scrutiny. In 2009, that was H1N1.

The FDA also sent 12 warnings letters related to claims made on labels and product labeling. Some of these may have echoed what was published on Web sites as manufacturers compounded their marketing errors.

Lesson#3: The FDA reads labels in the stores and on packages sent by mail. Adding an asterisked disclaimer to language on a label is no protection.

The FDA lived up to its announced commitment of greater enforcement and more scrutiny of the supplement industry. The agency could top the century mark in warning letters this year. Companies that have not recently reviewed their sites and labels would be wise to do so now before the mail carrier brings bad news.

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In a year when initial public offerings and acquisitions were almost unheard of, the supplement business saw many go public and get bought.  Only iPhone apps fared better, and not by much.

Meanwhile, the regulatory landscape tightened, but not as much as expected under a Democratic administration.  While both foods and drugs had their shares of scandals, supplement makers passed their early cGMP inspections and emerged unscathed.

Looking ahead to 2010 we envision many new challenges and opportunities for the supplement business.  In no particular order, here’s what to look for in the year ahead:

Sports supplements face stiffer regulation. Under several proposals currently being circulated in Congress, the Drug Enforcement Administration would be given increased powers to schedule substances that are chemically similar to or precursors of human growth hormone effectively banning them from use without a prescription.  Some sports supplement makers will need to reformulate their products or face enforcement action from DEA, an agency far more aggressive than the FDA supplement companies are used to.

CGMP regulations impact small supplement businesses. In June companies with 20 and fewer employees become subject to the FDA’s dietary supplement CGMP regulations.  Companies that rely on contract manufacturing will receive a rude awakening as they are subject to regulatory scrutiny they have never previously experienced.  Small supplement makers should begin to prepare themselves by implementing standard operating procedures to comply with the new cGMP rules.  Many will fail to do so and by year’s end fewer small supplement companies will be around to see 2011 as a result.

Investors get serious about supplements. Expect more merger and acquisition activity in 2010 with special emphasis on venture capital firms seeking new opportunities for profit in the supplement space.  Ingredient suppliers, contract manufacturers, marketers and retailers are all in play.

Regulators take aim at Internet supplement businesses. Armed with new rules and increased funding, regulators at the Federal Trade Commission, Food and Drug Administration and state attorneys general will step up their attack on supplements sold as drugs and deceptive and unfair sales practices.  The FTC endorsement rule will be used against bloggers and the companies that sponsor them.  Learn and follow the rules now or get caught violating them later.

By all accounts 2010 will be a great year to not just survive but thrive.  We hope to be there with you and look forward to your comments in the year ahead.

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David Frum

David Frum recently laid into the nutritional supplement industry with a guest commentary on CNN.com. The resident fellow at the American Enterprise Institute and one-time special assistant to President George W. Bush lashed out with the classic invectives against supplement makers and marketers. He wrote that any “snake oil flim-flam can be huckstered in the most truth-defying way” using that most evil of laws, the Dietary Supplement Health and Education Act of 1994.

Frum could have lowered his rhetorical blood pressure, without the help of a supplement, by reading the FTC regulations that go into effect on Tuesday. His column then would have begun: The party is over Dec. 1.

And the party — or at least marketing as it has been done for many years — does come to an end. Frum’s arguments against vague product claims no longer hold when the FTC — not the FDA — is watching what is said. The effects of the new rules are worth noting again: no more CYA disclaimers such as “results not typical” language; closer scrutiny of expert and celebrity endorsements; and careful review of consumer testimonials.

All the people who try a supplement and blog about it or are paid to write online reviews also have to disclose their relationships with those who supply them with products.

Frum can argue for repeal of the DHSEA, but he would be better off passing along tips of deceptive advertising to contacts he has at the FTC. That would produce more effective results than spouting off about his distaste for the supplement industry and its marketing practices.

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As we have written before, makers of nutritional supplements should pay close attention to comments submitted to the FDA before February 2010. There will likely be advocates for warnings on all products that make a claim to support good health. The agency’s rules on search-based advertising for health products could encompass non-prescription items such as vitamins and muscle-building powders.

The ruckus in Washington on Nov. 12 and 13 stemmed from FDA warnings in March to drug makers that their search-based ads did not contain proper product warnings. Drug makers backed off their advertising, and the search-engine companies saw revenues plunge. Everyone hurried to Washington to ask the FDA for clarification.

Google presented a solution. It told the agency that sponsored links are now less transparent and relevant. Google then proposed a standard for product-claim sponsored links:

1. A headline that links to a product landing or home page.
2. A first line with the Web address for that page, followed by an information message.
3. A second line containing a safety warning that cannot be altered, followed by a link to a Web page with more details on the warning.

You can see sample Web pages by Google at Scribd. Other companies and public advocacy groups will likely have ideas on how to balance sales messages and product warnings. There may be software solutions such as pop-ups or Flash that could be integrated in order to present more information in an ad, but an elegant solution seems unlikely. Thus, the FDA could write rules that force makers and marketers of nutritional supplements to alter their sponsored links in ways they never wanted.

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Ever since receiving FDA notices about their advertising generated from Google and similar searches, drugmakers have toned down their language and sought clarity on what is allowed. The discussion has ramifications for makers of nutritional supplements, because they could be next to face agency scrutiny for every ad created in response to a search for acai, reseveratrol and the like.

On Nov. 12, drugmakers and search-engine advertising agencies participated in about 30 presentations before the FDA. The hearing room was so crowded that most people seeking an audience seat were turned away. Here are two media takes:

(Yahoo’s David) Zinman testified that this shift to generic ads that don’t mention a brand name has created “a world where users have less transparency” because the ads deprive searchers of critical information about the landing pages. (MediaPost)

“We don’t think companies should be responsible for policing the entire Internet for information about their products,” said Johnson & Johnson executive Elizabeth Forminard.  (Reuters)

The key word is transparency, but Yahoo’s Zinman has it backwards. The FDA’s criticism was based on a lack of transparency in the form of who could take the drugs and what warnings should consumers receive before they clicked on the link. The FDA sent the warning letters because there was not enough information in the search-generated ads.

Forminard should walk down to FTC offices and read the new rules on Web marketing that take effect on Dec. 1; J&J will be responsible for a significant portion of what is posted on the Internet about its products.

There is more testimony today (Nov. 13) and the FDA will continue listening through February 2010. Nutritional supplement makers should watch for when they get dragged into the discussion. We all know that some vitamins are contraindicated for some people; will that fact have to be disclosed in your Google ad?

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