Shares of GNC and Vitamin Shoppe fell more than 30 percent last year
after allegations of impure and dangerous ingredients in dietary
supplements hurt already sluggish demand for their products. They
and other companies are still under scrutiny, with pressure building
to tighten regulation on dietary supplements, which are not covered
by U.S. rules governing pharmaceuticals.
Last year, a challenge from New York's attorney general led to an
agreement by GNC to adopt new testing standards for ingredients used
in its products. On Nov. 17, shares of GNC briefly plummeted 27
percent and rivals Vitamin Shoppe, Herbalife and Natural Health
Trends Corp also sank on concern that the U.S. Department of Justice
was about to name them in criminal and civil actions.
The Justice Department action turned out to be against another
company, but the $37 billion industry faces more scrutiny this year
including a lawsuit and investigation by the Oregon attorney
general.
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"This is something investors have to contemplate." Jefferies analyst
Mark Wiltamuth said. "These waves of media and regulatory attacks
have impacted consumer sales trends and valuations."
Oregon Attorney General Ellen Rosenblum has ongoing litigation with
GNC for selling products with illegal ingredients. She is also
conducting a separate investigation related to dietary supplements
that has yet to be announced, a spokeswoman said.
"I do believe you will see more activity in 2016," said Kevin Bell,
a lawyer at Porzio Bromberg & Newman who represents dietary
supplement companies. "There has been no real indication as to how
much more aggressive they could get but it has certainly spread
beyond just New York."
Even after the beating the companies' shares took last year, prices
may not fully reflect the potential for future lawsuits and
regulatory crackdowns.
"It's not a factor we look at. There's no real way to quantify an
unknown variable like that. Regulation may never happen," said
Tigress Financial Partners analyst Ivan Feinseth, who has a
"neutral" rating on Vitamin Shoppe and does not cover GNC.
Five analysts tracked by Thomson Reuters recommend buying GNC's
stock while none recommend selling. Eight have hold ratings. The
split for Vitamin Shoppe is similar. Wiltamuth has hold ratings on
both companies.
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Dietary supplements including powders and pills aimed at weight
loss, sexual enhancement and sports performance are regulated in the
United States more like food than pharmaceuticals. Manufacturers do
not have to demonstrate a product's effectiveness or safety before
introducing it.
But some of the products contain potent substances that have led to
kidney failure, cardiac arrest and even death in some cases.
Attorneys general in states beyond New York and Oregon have taken
notice, and some legislators have also been pushing for stricter
oversight of dietary supplements.
New York Attorney General Attorney General Eric Schneiderman said in
a statement to Reuters he will keep sharing information and best
practices with other states to improve oversight.
The U.S. Senate's special committee on aging will likely take
additional steps this year. Senator Claire McCaskill, the panel's
ranking Democrat, in 2015 sent letters to retailers asking them to
explain how they prevent the sale of harmful and fraudulent
products, said Drew Pusateri, a spokesman for McCaskill.
Asked about the risk of increased scrutiny, GNC said in an email
that 2016 will be pivotal in an effort with over 40 companies to
improve safety standards and consumer perceptions in the dietary
supplement industry.
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The Center for Science in the Public Interest has spoken with
federal lawmakers keen to close regulatory loopholes allowing the
use of dangerous ingredients, said Laura MacCleery, the advocacy
group's director of regulatory affairs.
(Reporting by Noel Randewich; Editing by David Gregorio)
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