Nutraceutical International Corporation

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Nutraceutical International Corporation

1400 Kearns Boulevard, Second Floor
Park City, Utah 84060
U.S.A.
Telephone: (435) 655-6000
Fax: (435) 647-3802
Toll Free: (800) 669-8877
Web site: http://www.nutraceutical.com

Public Company
Incorporated: 1993
Employees: 550
Sales: $106.8 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: NUTR
NAIC: 325411 Medicinal and Botanical Manufacturing

Nutraceutical International Inc. develops, manufacturers, and markets a wide variety of vitamin, mineral, herbal, and nutritional supplements that are sold in the United States and many other nations. Over its short history, the company has acquired several other companies to fulfill its original goal of consolidating a fragmented industry. Unlike some supplement firms that sell their products in supermarkets and other mass and discount retail outlets, Nutraceutical sells its brand-name products to about 7,000 health food stores in the United States. It offers some 1,600 supplements sold under the brand names of Solaray, KAL, NaturalMax, VegLife, Premier One, Solar Green, Natural Sport, and Action Labs, and also sells ActiPet supplements for pets. The company also makes bulk nutritional products that are used in its own products, as well as being sold to other supplement companies under the trade names Monarch Nutritional Laboratories and Great Basin Botanicals. Nutraceutical International is one of the numerous natural products firms that make Utah the leader in an industry that grew dramatically in the 1990s.

The Early Years

Nutraceutical’s beginnings date to 1993, when Bain Capital, Inc.—a Boston-based private equity company—paired with senior management to organize Nutraceutical and consolidate what its leaders thought was a very divided nutritional supplements industry. Bain Capital’s leader was Mitt Romney, the Mormon Republican who tried in vain to defeat Democratic incumbent Senator Edward Kennedy of Massachusetts. Later, Romney became the head of the Salt Lake Organizing Committee preparing for the 2002 Winter Olympics.

Nutraceutical’s first acquisition in 1993 was Solaray, Inc. of Ogden, Utah. The company had begun making capsules of herbal products in 1973 under the company name Solar Products, Inc. The following year, the company was incorporated as a Utah entity known as Solaray.

According to the Nutraceutical Web site, Solaray was “a pioneer in formulating and marketing blended herbal products that contain two or more herbs with complementary effects.” By 1984, Solaray had added vitamins and minerals to its product lines. Later, in 1990, Solaray received funds from the Utah Department of Agriculture to work with Weber State College’s Department of Chemistry to develop new products made from whey—a byproduct of cheese making that normally was discarded.

When Nutraceutical was founded in the early 1990s, it joined a natural products industry in Utah that had a long and colorful history. For example, in a 1979 article, writer Elaine Jarvik said that six Utah herbal companies were not only “the first companies in the world to put herbs in capsules, but they now account for 85 percent of the nation’s herb business.” Other Utah herbal firms in the 1990s included Murdock Madaus Scwabe, Nature’s Herbs (part of Twin Labs), Nature’s Sun-shine, Enrich International, USANA, NuSkin, Weider Nutrition, E’Ola, Morinda, and Neways. In addition, Sunrider had started in Utah, but later relocated to Torrance, California. Unlike Nutraceutical, many Utah herbal products firms used multilevel marketing to distribute their products.

In 1998, the Los Angeles Times ran a four-part series on alternative health. The third article focused on how Utah be-came what writer David R. Olmos called the “Silicon Valley of herbs.” He pointed out that the state’s herbal and supplement industry was “bigger even than the skiing trade.” In addition to entrepreneurship, Olmos credited Utah’s Mormon culture. Although the LDS church had long accepted modern scientific medicine, many of its members used herbs and other forms of alternative healing, partly due to the church’s “Word of Wisdom” found in founder Joseph Smith’s Doctrine and Covenants. Thus, herbalism, capitalism, and religious factors all took part in creating the history of Utah’s herbal products industry.

The early years of the herbal and supplement industry were tough, but times had improved by the time Nutraceutical was founded. “It wasn’t always easy to be in this business,” said Grace Rich, marketing director for Nature’s Herbs in the August 16, 1998 Salt Lake Tribune, noting “There were plenty of people out there who thought we were all quacks trying to take their money.” Ken Murdock, chairman of Utah’s Nature’s Way, said the growing emphasis on preventive care and individuals taking responsibility for their own health had helped to end what he called “the Dark Ages of health care when doctors had all the answers.” A new federal law helped the vitamin and herbal industry, however. Sponsored by Utah’s Republican Senator Orrin Hatch, the 1994 Dietary Supplement Health and Education Act prevented what the industry considered to be over regulation by the U.S. Food and Drug Administration (FDA). Following the passage of the new law, the nutritional supplement industry rapidly expanded. According to the Marketing Intelligence Service as reported in the September 1998 Utah Business, in 1993 the industry added 633 new items, but in 1996 that had increased to over 800 new products.

Acquisitions and Other Developments in the Mid-1990s

In October 1994, Nutraceutical acquired Premier One Products, Inc., a Nebraska corporation. Premier One had been founded in July 1984 in Omaha, Nebraska, as one of the first companies to sell items made completely from bee products. Nutraceutical stated in its 1998 Stock Prospectus that it believed “by 1995 the Premier One Royal Jelly products had become the best-selling royal jelly products” sold in health food stores.

Nutraceutical’s third acquisition came in January 1995, when the company acquired the California-based Makers of KAL, Inc. Nutraceutical also acquired Healthway Corporation, a company that had been founded in 1958, as part of its KAL acquisition.

KAL’s beginnings dated to 1932, when the company was formed in Southern California as a pioneering firm providing supplements. Soon after its start, it switched from selling powdered products to tablets. According to Nutraceutical’s Web site, one of KAL’s “innovative product introductions was ‘Beyond Garlic,’ which remains a popular garlic product in health food stores and was the first ‘enteric coated softgel’ garlic product.” It also claimed that KAL was “the first nutritional supplement marketer in health food stores to introduce pycnogenol and melatonin,” two popular items.

In early 1995, Nutraceutical’s subsidiary Solaray announced its plan to purchase 12 acres of land in Mountain Green—a bedroom community ten miles from Ogden—and to move its most of its operations there by the end of the year. Also in 1995, Nutraceutical started VegLife as a separate brand, following its previous origin in 1992 as a line of products marketed under the Solaray brand. VegLife was comprised of strictly vegetarian products, including encapsulated items and two beverages: Peaceful Planet—a soy protein drink, and Peaceful Kava, which contained Kava—used originally by Pacific islanders.

To sell its products overseas, Nutraceutical in fiscal year 1995 organized a wholly owned subsidiary called Au Naturel, Inc. Operating as a separate business, Au Naturel reformulated some Nutraceutical products and labels to meet the regulatory demands of the foreign nations where it operated.

A couple years later, in April 1997, Nutraceutical introduced a new line of supplements called Solar Green. The product line included tablets containing different kinds of algae and cereal grasses, and also a drink mix used to prepare a beverage supplement.

By early 1998, Nutraceutical products were being sold through Au Naturel in about 30 foreign countries. Foreign sales accounted for just 6.3 percent and 6.5 percent of Nutraceutical’s total net sales in 1996 and 1997 respectively, however. Nutraceutical saw this area as a great opportunity for future growth, due to the fact that its foreign sales had increased 21.4 percent in 1997.

A 1997 survey sponsored by Health Supplement Retailer found that Solaray ranked as the top selling brand of nutritional supplements, and the second best selling line of herbal products. The survey also found that Solaray’s St. John’s Wort was the best selling herbal product, and Nutraceutical had the best customer service. By 1998, Nutraceutical employed 450 individuals, including 70 at its Park City, Utah headquarters.

Company Additions and Innovations in the Late 1990s

In the summer of 1998, Nutraceutical acquired Action Labs Inc. for about $13.7 million cash. Started in 1988, Action Labs marketed and distributed some 65 brand name nutritional supplements sold mainly in health food stores, so it fit well with Nutraceutical’s general distribution strategy. The acquisition of the Long Island, New York company gave Nutraceutical “additional market penetration in the eastern United States,” said Nutraceutical Chairman and CEO Bill Gay in the August 3, 1998 edition of The Enterprise, a Salt Lake City business newspaper. Within a year, Nutraceutical was making its own Action Labs products instead of buying them from other manufacturers.

Company Perspectives:

Because of our emphasis on quality, loyalty, education and customer service, Nutraceutical’s brands are widely recognized in health food stores and among health food store consumers.

In September 1998, Nutraceutical introduced a new brand of products called Natural Sport. Designed for athletes and avid exercisers, the Natural Sport line included two beverages called Pre-Burn and Post-Up, a soy protein beverage supplement called ProSoy, creatine monohydrate, and Phyto Sport multivitamins.

The following year, Nutraceutical purchased Woodland Publishing, Inc., a pioneering publisher of books and other literature for the natural products industry. Based in Lindon, Utah County, Utah near many large herbal products manufacturers, Woodland had been started in 1975 to publish the writing of some of Utah’s well-known herbalists, such as John Christopher. In 1985, Woodland published Today’s Herbal Health, of which over 750,000 copies had been sold by 1999. On August 20, 1986, Louise Lisonbee, David Lisonbee, and Josie Palmieri had incorporated Woodland Health Books under Utah law. The name was changed to Woodland Publishing, Inc. on August 30, 1993. In 1995, Woodland began publishing its popular specialized booklets for sale mostly in health food stores. By 2000, Woodland had published over 160 titles.

On May 26, 2000, Nutraceutical announced that it had purchased a division of Rexall Sundown, Inc., called Thompson Nutritional Products. For over 60 years, Thompson had been making nutritional supplements. Upon acquiring Thompson, Nutraceutical planned to expand the company’s brand name line of products. Nutraceutical had acquired numerous companies, folding most of them into the company and retaining their recognized names as brands.

Business in a New Millennium and Beyond

Meanwhile, the herbal and supplements business was evolving. For many years, consumers had been able to buy herbal products in health food stores, but not in grocery stores or other outlets. In the late 1990s, however, large supermarket chains and mass retailers like Wal-Mart realized the consumer demand, and thus opened new sections for supplements. “Paced by positive press,” wrote Renee M. Kruger in the January 1999 edition of Supermarket Business, “once strange-sounding herbal supplements such as St. John’s Wort, echinacea and gingko biloba have now moved into the mainstream as viable health enhancers, especially to aging baby boomers who are trying to maintain a higher quality of life.”

By the year 2000, a seven-member Board of Directors oversaw Nutraceutical International Corporation. Frank W. Gay II had served as board chairman since the company began, and had also been its CEO since 1994. Other directors were Robert C. Gay, Ph.D., a managing director of Bain Capital, Inc.; J. Steven Young, J.D., the former star quarterback of the San Francisco 49’ers; EOTT Energy Corporation President/CEO Michael D. Burke; James D. Stice, Ph.D, a Brigham Young University accounting professor; Matthew S. Levin, a Bain principal; and Jeffrey A. Hinrichs, a former Solaray executive who since 1994 had served as Nutraceutical’s executive vice-president and chief operating officer. Bruce R. Hough, former chair of the Utah State Republican Party, served as Nutraceutical’s president.

Under these leaders, Nutraceutical faced a challenging future. Although the demand for herbal products and nutritional supplements was increasing, an increasing number of corporations, including some much larger than Nutraceutical, competed for market share.

Principal Subsidiaries

Nutra-Force (Barbabdos) International, Inc.; Nutra Corp.

Principal Competitors

Twinlab Corporation; Solgar Vitamin and Herb Company; Rexall Sundown Inc.; NBTY, Inc.; Melaleuca, Inc.; Nature’s Sun-shine Products Inc; Murdock Madaus Scwabe; General Nutrition Companies, Inc.

Key Dates:

1993:: Nutraceutical International is founded.
1993:: The company purchases Solaray, Inc.
1994:: Acquisition of Premier One Products, Inc.; Nutraceutical Newco, Inc. is incorporated in Dela-ware, renamed Nutraceutical Corporation.
1995:: Acquisition of the Makers of KAL, Inc.; acquisition of Monarch Nutritional Laboratories, Inc.
1997:: The Solar Green brand is introduced in April.
1998:: Stock is first sold on the NASDAQ; July acquisition of Action Labs, Inc.; August acquisition of Nutraforce (Canada) International, Inc.
1999:: Nutraceutical acquires Woodland Publishing, Inc. and Summit Graphics, Inc.
2000:: The company buys Thompson Nutritional Products.