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A STRATEGIC ANALYSIS FOR NEW PRODUCT ENTRY
INTO THE NUTRACUETICALS, FUNCTIONAL FOODS,

AND VITAMINS AND SUPPLEMENTS MARKETS
Katherine Ray
Bachelors of Science, University of Victoria, 1992
PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF
Business Administration
In the
Faculty
of
Business Administration
0Katherine Ray 2004
SIMON FRASER UNIVERSITY
August 2004
All rights reserved. This work may not be

reproduced in whole or in part, by photocopy
or other means, without permission of the author.
APPROVAL
Name: Katherine Ray
Degree: Master of Business Administration
Title of Project: A Strategic Analysis for New Product Entry into the
Nutraceuticals, Functional Foods, and Vitamins and
Supplements Markets
Examining Committee:
Jill S%epherd
Assistant Professor,
--, MO,T MBA
Elicia Maine
Assistant Professor, MOT MBA
Date Approved:
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I hereby grant to Simon Fraser University the right to lend my thesis, project or extended essay
(the title of which is shown below) to users of the Simon Fraser University Library, and to make
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financial gain shall not be allowed without my written permission.
Title of Project:
A Strategic Analysis for New Product Entry into the Nutraceuticals,

Functional Foods, and Vitamins and Supplements Markets
Author:
Katherine Ray
ABSTRACT
Forbes Medi-Tech operates a biopharmaceutical company which is involved in research
and development for the nutraceuticals and pharma industries. They have had some success in
the nutraceutical industry. A supplement has been formulated and they are considering entering
into the vitamins and supplements industry to target cardiovascular disease since it is vast.
Billions of dollars are spent every year combating this disease.
The nutraceutical and functional foods industry is growing and has evolved over the last
few decades. It is estimated to be over $70 billion. Distribution for functional foods is mainly
through grocery outlets. The competition is fierce with food, pharma, agriculture, and
nutraceutical companies involved in creating products such as Benecol and Nutrisoy. The market
is driven by an aging population which wants to live longer, consumers who want convenient
foods, and companies looking for new areas to pursue. Entrance barriers consist of legislation,
high cost of R&D, sceptical consumers, misunderstandings of scientific claims, and the increased
cost of adding these ingredients into foods.
Vitamins and supplements is a maturing market; however, supplements such as omega-3s
are experiencing growth. The over the counter (OTC) market was worth -$85 billion in 2002,
vitamins and dietary supplements (VDS) accounted for 40.2% of this market, and is occupied by
companies such as pharma, supplement, natural foods and agriculture companies. Distribution is
through chemists and pharmacies in most countries. The driving forces are consumers willing to
self-medicate, alternatives to prescription drugs, and the aging population around world. Barriers
to entry include the cost of R&D, quality control problems, and negative publicity with such
supplements as ephedra, and legislation.
Forbes' plant sterols are their core technology which has sustained them since the early
1990s. They have a number of experienced employees in pharma and nutraceuticals. Forbes'
strategy is to build both of these businesses in order to succeed using their core competencies in
R&D and discovery. Critical success factors have been being part of a biotech cluster, and
partnering with strong companies. It is recommended that Forbes enter the vitamins and
supplement market with the ReducoVomega-3 fatty acid combination and then move into
functional foods. However, they have a few barriers to overcome both externally and internally in
order to launch successfully.
ACKNOWLEDGEMENTS
I would like to thank everyone at Forbes for their time and patience as well as opening
their doors and providing an opportunity to complete this project. Jeff and Paul were
instrumental in allowing the flexibility and providing any information that was required. I would
also like to thank Jill for her guidance and direction during this process.
TABLE OF CONTENTS
Approval ................................................................................................................................... 11..
...
Abstract ..................................................................................................................................... ~ I I
Acknowledgements.......................................................................................................................iv
Table of Contents............................................................................................................................v
List of Figures .............................................................................................................................
...
vlii
List of Tables..............................................................................................................................ix
List of Abbreviations and Acronyms ............................................................................................ x
1 Introduction and Scope ..............................................................................................................1
1.1 Forbes MedGTech. Inc........................................................................................... 1
1.2 Reducol ................................................................................................................ -2
1.3 The New Product .................................................................................................. -3
1.4 Aim and Scope of Project ....................................................................................... 5
2 Nutraceuticals and Functional Foods .......................................................................................
7
Introduction .......................................................................................................... -7
What are Nutraceuticals and Functional Foods?...................................................... 7
The Market ............................................................................................................ 8
Canada's Role ..................................................................................................... 12
Areas of Interest for Nutraceuticals and Functional Foods .................................... 12
Cardiovascular Health and Cardiovascular Disease.............................................. 1 3
Cholesterol..........................................................................................................1 4
Distribution of Nutraceuticals and Functional Foods............................................. 15
Unsuccessful Functional Foods ........................................................................... 1 6
Successful Products............................................................................................. 1 6
Competition ...................................................................................................... 1 8
BenecolTM........................................................................................................... 18
Diminocol63........................................................................................................ -20
Cargill Health & Food Technologies ....................................................................20
NutriSo* and Novasoy@................................................................................... 21
Abacoa ..............................................................................................................21
Market Drivers.................................................................................................... -22
Youth Market ................................................................................................... 26
Over 35 ............................................................................................................ 26
Women ............................................................................................................ 26
Company Strategies ............................................................................................. 26
Barriers to Nutraceuticals ..................................................................................... 28
Legislation .......................................................................................................... -30
Codex .............................................................................................................. 30
The European Union ........................................................................................ 31
The United States............................................................................................. 33
Canada ............................................................................................................3 5
Japan............................................................................................................ 3 6
2.13.6 Product Life Cycle ...................................................................................... 3 8
2.14 Are Functional Foods Necessary?......................................................................... 39
2.15 Future of Nutraceuticals and Functional Foods ..................................................... 40
2.15.1 Overview of the Market ................................................................................... 40
2.15.2 Future Trends................................................................................................... 40
2.15.3 The Consumer.................................................................................................. 42
2.15.4 Company Strategies .................................................... 1.................................... 43
3 Vitamins and Dietary Supplements (VDS).............................................................................45
Introduction ......................................................................................................... 45
The Market .......................................................................................................... 45
Fish Oils .............................................................................................................. 49
Distribution.......................................................................................................... 49
Competition ........................................................................................................ 51
OmegaPureTM..................................................................................................... -52
CardioTabsTM ...................................................................................................... 5 2
Ocean Nutrition (ONC) ........................................................................................53
Omegacin' ........................................................................................................... 54
Spectrum Ingredients ........................................................................................... 54
DSM Nutritional Products .................................................................................... 55
Bioral Nutrient Delivery (BND) ........................................................................... 55
Market Drivers..................................................................................................... 56
The Big Players.................................................................................................... 59
Company Strategies .............................................................................................60
Barriers to Dietary Supplements ...........................................................................64
Legislation ........................................................................................................... 66
Codex .................................................................................................................. 66
Europe ................................................................................................................. 67
The United States ................................................................................................. 67
Canada ............................................................................................................... 6 9
Japan................................................................................................................... 70
Future of VDS................................................................................................... 7 1
Overview of the Market ................................................................................... 71
Future Trends................................................................................................... 71
The Consumer.................................................................................................. 72
Company Strategies ......................................................................................... 72
Comparison of Functional Foods and VDS ........................................................... 74
4 Internal Analysis .......................................................................................................................
79
Forbes Through the Years .................................................................................... 79
Technology Platform........................................................................................... 81
Management .......................................................................................................-82
Board of Directors (BOD) .................................................................................... 83
Senior Management Team .................................................................................... 83
Advisory Boards .................................................................................................. 85
Medical and Scientific Advisory Board ................................................................ 85
Functional Food & Nutraceuticals Advisory Board ............................................... 85
Core Competencies ............................................................................................. -85
Intellectual Property .............................................................................................86
Company Strategies ............................................................................................. 87
Critical Success Factors........................................................................................ 90
4.8 Competitive Advantage .......................................................................................9 1
4.9 Finances............................................................................................................. 9 2
5 Recommendations and Conclusion .........................................................................................
94
5.1 Recommendation ................................................................................................. 95
5.1.1 Suggestions for Successful Launch of Reducol/Omega -3 Supplement ................. 97
5.1.2 Barriers to a Successful Launch ........................................................................ 1 0 0
5.2 Conclusions ......................................................................................................1 0 3
Appendices ..................................................................................................................................107
Reference List .............................................................................................................................114
vii
LIST OF FIGURES
Figure 1: Omega-3 Product Innovation ...................................................................................... .5
Figure 2: The Expanding Realm of Nutraceuticals ...................................................................... 6
Figure 3: Product Trends Since the 1970s ................................................................................... 8
Figure 4: Global Sales in 200 1 by Percent ................................................................................... 9
Figure 5: Percentage of Functional and Fortified New Product Launches. 2000-01 ................... 17
Figure 6: Product Lifecycle ......................................................................................................
39
Figure 7: Value Chain for Nutraceuticals/Functional Foods ...................................................... 41
Figure 8: Breakdown of the Global OTC Market. 2001 ............................................................. 46
Figure 9: Distribution of Vitamins and Supplements ................................................................. 51
Figure 10: Increases in Self-medication in Consumers. 2002 ..................................................... 57
Figure 11: The Increasing Cost of Drug Development............................................................... 58
Figure 12: Timeline for Forbes Medi-Tech 1993-2000.............................................................. 79
Figure 13: Pharmaceutical Value Chain ................................................................................... 85
Figure 14: The Spread of Nutraceuticals ................................................................................... 88
Figure 15: Consumer Sales of Nutrition Products by Percent in 2001 ........................................94
...
Vlll
LIST OF TABLES
Table 1: Global Functional Food Market Value Sales 1998-2008.............................................. 10
Table 2: Functional Food Market By Region ............................................................................11
Table 3: Prevalence of Cardiovascular Disease 1998-2010 (in thousands) ................................. 14
Table 4: Global Sales of the four Key Cardiovascular Therapy Areas................................... 1 5
Table 5: Global Functional Foods Distribution. 2003 ................................................................ 15
Table 6: Per Capita Consumer Spending on Health Goods and Medical Services ...................... 23
Table 7: World Aging Population (in thousands) ...................................................................... 24
Table 8: Per Capita Government Expenditure on Public Heath Services.................................... 25
Table 9: Vitamin and Mineral Supplements Sales .....................................................................47
Table 10: Global Sales of Dietary Supplements by Type ........................................................... 48
Table 11: Forecasted Global Sales of VDS by Region..............................................................-48
Table 12: Global Distribution of OTC Healthcare Sales by Retail Channel ............................... 50
Table 13: Distribution of Global Vitamin and Dietary Supplements.......................................... 50
Table 14: Global Company Shares of Vitamins and Supplements ............................................. 60
Table 15 : Functional Foods Market in 200 1.............................................................................. 75
Table 16: Comparison of Nutraceuticals/FunctionalFoods and Vitamins and
Supplements ............................................................................................................ 77
Table 17: Global Anti-dyslipidemics Market by Drug Class...................................................... 82
Table 18: Omega-3 Supplements on the Market ................................................................... 1 01
Table 19: Principle Ingredients used in Nutraceuticals ............................................................107
Table 20: Consolidated Balance Sheets (Expressed in thousands of Canadian dollars)
from 1997-2004................................................................................................... 109
Table 21 : Consolidated Statements of Operations and Deficits (Expressed in thousands
of Canadian dollars) fi-om 1997-2004.....................................................................111
Table 22: Consolidated Statements of Cash Flow (Expressed in thousands of Canadian
dollars) from 1997-2004 ..................................................................................... 1 12
LIST OF ABBREVIATIONS AND ACRONYMS
AD Androstenedione
ADD androstadienedione
ADM Archer Daniels Midland
AHA American Heart Association
ALA alpha-linolenic acid
ANZFA Australia New Zealand Food Authority
B billion
BC British Columbia
BND Bioral Nutrient Delivery
BOD Board of Directors
CDC Centers for Disease Control
CEO Chief Executive Officer
CFIA Canadian Food Inspections Agency
CFO Chief Financial Officer
CFSAN Center for Food Safety and Applied Nutrition
CHD coronary heart disease
CRO contract research organization
CSM Committee on Safety of Medicines
CVD cardiovascular disease
DAG Diacylgycerol
DHA Docosahexaenoic
DIN Drug Identification Number
DSHEA Dietary Supplements Health and Education Act
EC European Commission
EFA essential fatty acids
EFSA European Food Safety Authority
EPA Eicosapentanenoic
EU European Union
FA0 Food and Agriculture Organization
FDA Food and Drug Administration
FDAMA FDA Modernization and Accountability
FNFC Foods with Nutrition Function Claims
FOSHU Food for Specific Health Use
FSDU Food for Special Dietary Uses
FTC Federal Trade Commission
GAIN Global Alliance for Improved Nutrition
GCP Good Clinical Practices
GI gastro-intestinal
GLA gamma-linolenic acid
GM genetically modified
GMP Good Manufacturing Practices
GNC General Nutrition Cos
GRAS generally recognized as safe
GSK GlaxcoSmithKline
HACCP Hazard Analysis Critical Control Point
HBP high blood pressure
HDL high-density lipoprotein
HMO Health Management Organizations
ICH International Conference on Harmonization
IP intellectual property
J&J Johnson and Johnson
JHFA Japan Health Food Authorisation
LDL low-density lipoprotein
LFI Leatherhead Food International
m million
MHW Ministry of Health and Welfare
MLM multi-level marketing
NAS National Academy of Sciences
NBJ Nutrition Business Journal
NFIF New Functional Ingredients and Foods
NFR Novel Foods Regulation
NHP natural health products
NHPD Natural Health Products Directorate
NHPR Natural Health Products Regulation
NM National Institutes of Health
NLEA Nutrition Labelling and Education Act
NPD new product development
ONC Ocean Nutrition Canada
OTC over-the-counter
PARNUTS PARticular NUTritional
P&G Procter & Gamble
PCT Patent Cooperation Treaty
PPO Preferred Provider Organizations
PUFA poly saturated fatty acids
R&D research and development
RDA recommended daily allowance
RDI recommended daily intake
S/F structure/function
SOP standard operating procedures
TPD Therapeutic Products Directorate
TSE Toronto Stock Exchange
mc University of British Columbia
UK United Kingdom
us United States
USL upper safety limits
VDS vitamins and dietary supplements
VP Vice President
WHO World Health Organisation
WTO World Trade Organization
INTRODUCTION AND SCOPE
Forbes Medi-Tech. Inc. is a biopharmaceutical company in Canada. Their scientific
platform is based on sterol technology which extracts plant sterols to be used in pharmaceuticals,
hnctional foods and dietary supplements. They have one branded product, ~ e d u c o P ' .Forbes
is currently working on a dietary supplement, a combination of Reducol and omega-3 fatty acids
as well as a pharmaceutical that will compete with cholesterol lowering drugs. "Let food be thy
medicine and medicine be thy food." Although spoken by Hippocrates almost 2,500 years ago,
the philosophy of "food as medicine" is gaining renewed interest among nutrition experts and
consumers. This chapter will discuss the company and provide the background for the analysis
with an explanation of phytosterols and omega-3s, concluding with the aim and scope of the
project.
1 . Forbes Medi-Tech. Inc.

Established in 1992, Forbes is a biopharmaceutical company involved in the research,
development and commercialization of pharmaceuticals, nutraceutical products and dietary
supplements located in Vancouver, British Columbia (BC). These markets involve multi-billion
dollars globally. Forbes7core technology is the extraction of plant sterols (phytosterols) from
wood pulping by-products. Using these sterols, Forbes develops cholesterol-loweringagents to
be used as pharma therapeutics and functional food ingredients, which in turn are used in the
battle against cardiovascular and related diseases.
Phytosterols are extracted from a by-product of the paper-pulping industry known as tall-
oil pitch. Forbes has developed and licensed this extraction technology, and commercialized
production. They have a number of patents on composition; methods for incorporation into foods,
beverages, pharmaceuticals and nutraceuticals; the process of purifying the phytosterol; and the
extraction of phytosterols in the United States (US) (pending in a numerous countries including
Canada, Japan, Brazil, Europe, Mexico, China, Australia, and New Zealand). Forbes is not the
pioneer of the technology. Eli Lilly (over 40 years ago) marketed a sterol preparation from tall
oil and later from soybean oil called cytellinTM2which was found to lower serum cholesterol by
about 9% but was pulled off the market.
I
Trademark of Forbes Medi-Tech. Inc.
Trademark of Eli Lilly
Through a joint venture, Forbes and Chusei (USA) Inc. operate a phytosterol
manufacturing plant, Phyto-Source LP, in Texas with annual production capacity of 1000 metric
tonnes to Good Manufacturing Practices (GMP) standards. Unlike vegetable sterols, wood
phytosterols have an advantage of being non-genetically modified (GM). In December 2003, it
was announced that the facility would be expanded to a capacity of 1500 tonnes to meet demands.
Forbes' lead product, Reducol, is sold as a functional food and dietary supplement
ingredient. TwinLab has incorporated it into "Cholesterol Success" while Pharmavite's Nature
Made has incorporated it into "Cholest-Off'. Forbes has succeeded in getting Reducol and its
non-branded phytosterols and phytostanols to market using delivery mechanisms such as
margarine. The company also has patents pending for other novel functional foods with
phytosterols, such as Vivola oilTM3,and is looking at ingredients that address health benefits
away from the cardiovascular area.
The revenues generated from these products have allowed Forbes to continue research in
other ingredients. They are currently developing FM-VP4, an analogue of phytostanol, which has
demonstrated lipid-lowering and anti-atheroscleroticproperties in animal studies as well as
possible anti-obesity indications. Forbes anticipates entering into a partnership with a large
pharma company to commercialize FM-VP4 after Phase I1 clinical trials.
Forbes' strategy is to use its core technologies to partner and obtain business associations
to provide functional foods, dietary supplements and pharma products for prevention and
treatment of disease, in particular cardiovascular disease (CVD). To date, they have successfully
generated revenue and customer loyalty through Reducol (see financials in the appendix, Tables
20-22). All revenue generated for Forbes is linked to phytosterols and phytostanols by selling or
licensing. They have a potential to increase revenue with the new product and a possible future
with a pharma product. The following sections will provide details of Reducol, which is already
commercially available, and the new product to be commercialized.
1.2 Reducol
Reducol is a clinically proven ingredient, which lowers cholesterol levels safely and
naturally by inhibiting the absorption of cholesterol in the small intestine. It is a unique blend of
compounds known as phytosterols and phytostanols. These compounds are found in plants such
as corn, soybeans, rice bran, wheat germ, nuts and spices. There are three different sources of
sterols, soybeans, canola and wood pulp. However, 90% of soybeans and canola are GM.
Soybean sterols are a by-product of vitamin E production.
Trademark of Forbes Medi-Tech Inc.

Reducol has been incorporated into a number of foods and clinical studies have been conducted.
Results of one study at McGill University were published in the American Journal of Clinical
Nutrition in June 1999. The finding was a 24.4% reduction in low-density lipoprotein (LDL)
cholesterol in the group with Reducol enriched margarine added to their diet compared to an
8.9% reduction in the group on a standardized diet alone. This study involved 32 mildly
hyperlipidernic individuals over 30 days. At the recommended dose, Reducol does not interfere
significantly with the absorption of vital, fat-soluble pro-vitamins such as carotenoids and is
calorie-free. Following these studies, Reducol received generally recognized as safe (GRAS)
clearance from the Food and Drug Administration (FDA). Furthermore, in February 2003,
Forbes received a letter from the FDA to allow the use of a heart health claim on their phytosterol
products.
Reducol's composition allows the incorporation into a wide variety of food products,
which is beneficial since most cholesterol-loweringproducts on the market use oil-based foods
such as margarine. Forbes has developed a number of standard operating procedure (SOPS)and
protocols for preparation of food products with Reducol which they distribute to manufacturers as
part of the negotiation phase when selling sterols ranging from incorporation into beverages,
baking and cereal products, fat based foods, confectionary, and dairy products.
In July 2003, Forbes reached a deal with South Korea's Iljin Pharmaceuticals to supply
Reducol for use in supplements and functional foods. Iljin is a leading health food manufacturer
with exclusive rights for the Herbalife line. Furthermore, in March 2004, Forbes signed a
licensing and distribution agreement with Macro Hi-Tech JV LLC of New York. Under the terms
of the co-exclusive 4-year contract, Forbes will supply Reducol to Macro for distribution to
dietary supplement manufacturers to incorporate the ingredient into supplements to be sold across
the US. Macro is an established supplier with marketing expertise and has access to global sales
distribution channels, and has been developing and supplying bulk raw materials to the nutritional
and dietary supplement market since 1996. With all of these agreements, it is encouraging Forbes
to consider marketing their latest ingredient as a supplement.
1.3 The New Product

Forbes is developing two dietary supplement products: a sterol formulation in a softgel
capsule and a combination sterol and omega-3. A recent report, Jan 2004, was published in
Current Medicinal-Chemistry-Cardiovascular & Hematological Agents on the virtues of
Forbes Medi-Tech Inc. 2004

combination of phytosterols and omega-3s5 Forbes has filed a patent on the combination and is
contemplating entering into the vitamin and dietary supplement (VDS) market; this is the focus of
this analysis.
Omega-3s were discovered in the early 1970s. Naturally occurring in fish, whale and seal
meat, they are the building blocks for fat in the blood and key structural components for cell
membranes. Because the body cannot synthesize them, they must be obtained through diet. Fatty
acids are found in most cell systems of the body and influence the cardiovascular system, the
joints, the brain and the immune system. Omega-3s contain two highly unsaturated fatty acids:
docosahexaenoic acid (DHA) and eicosapentaenoic acid (EPA). DHA is the principle fatty acid
of the brain and the eyes and is important for babies and young children. EPA is known to lower
tricylglycerols and improve cholesterol, which in turn reduces the risk of heart disease. Many
believe the increase in heart disease in western society is due to the imbalance of omega-3 and
omega-6 in the diet. Public authorities in Canada and some countries in Scandinavia have
established recommended daily levels ranging from 0.5 to 2 grams per day. This equates to 2-3
meals of fish per week6 which is what the American Heart Association (AHA) recommend^.^
However, the maximum dose of omega-3s is not to exceed 2 grams per day because of increased
risk of hemorrhagic stroke and bleeding at higher doses. Furthermore, omega-3s have been linked
to treating depression, bipolar disease and postpartum depression. It has been suggested that
omega-3s may improve memory, reduce the symptoms of rheumatoid arthritis and other
autoimmune diseases, and help reduce the risk of certain cancers and kidney disorders.
There are problems associated with omega-3s. Techniques used to extract fish oil leave
the molecule unstable and beneficial effects are reduced when exposed to oxygen. Also, it is hard
to disguise the fishy odour and mask the taste. Companies are inventing novel approaches.
Coromega Company developed and released a product that transforms fish oil into a creamy,
pudding-like emulsion. They have tried to make taking a fish oil supplement a better experience
by eliminating any fishy aftertaste and adding an orange flavour. Companies are looking for new
sources including cultivation and harvesting from marine sources like algae, and plankton, and
plant sources (see Figure 1). For instance, flax seed contains twice the amount of omega-3s than
salmon and is rich in phospholipids; so it is viable option for both companies and vegetarians.
Norman 1
Gladding 110
Whole Fitness 2004
Figure 1: Omega3 Product innovationa
-
(Used by permission of Reuters Business Insight)
Omega-3s are gaining in popularity due to their positive effects. Manufacturers are
adding omega-3s to a wide variety of foods. Launches in North America include Quebec-based
dairy Natrel's Omega-3 nutrient-enriched milk beverage in Canada and GFA Brands' Smart
Balance in the US, which is a sterol-enriched spread with omega-3 fish oils. Minute Maid
released an omega-3 enriched orange juice, Premium Heartwise, in the US.
The combination Reducol/omega-3s is potentially a new therapeutic approach for
prevention of CVD. Studies link increased omega-3s intake with reduced risk of coronary heart
disease ( 0 ) and stroke mortality due to decrease of triglyceride levels and improvement of
blood lipids. In addition, omega-3s have been shown to reduce risk factors associated with
obesity and type I1 diabetes by improving fat and glucose-insulin metabolism. Omega-3s have
been granted a health claim by FDA and can indicate, "may reduce the risk of CHD" on the label.
1.4 Aim and Scope of Project

Forbes has a revenue stream and investors that have been willing to back them; but they
have reported losses every year since inception (see Table 21 in the appendix). Thus, they are
looking to introduce new products in order to generate more revenue to make a profit. They
operate in a dynamic market, however. The line between nutraceuticals, functional foods, and
VDS is blurring as innovation emerges and customer trends develop. They all encroach on the
traditional markets held by pharma (see Figure 2) as companies investigate such things as
cholesterol-lowering ingredients, OTCs and foods for healthy living. The variety of companies
(pharma, food manufacturers, food ingredient, supplement, and agriculture) involved is changing
* Gladding 112
the landscape. So, companies find themselves competing all these areas in order to leverage their
products to the health conscious consumer.
Figure 2: The Expanding Realm of ~utraceuticals~
Positive enhancement Balance Remediallpreventiveaction
Companies entering the market must consider more than the product specifications. They
must look at regional and global markets, the consumer, distribution, barriers to entry, legislation,
competition, changing trends, innovation, products in their pipeline and their own competencies.
With this in mind, the following analysis will provide Forbes with the information needed to
decide whether to introduce the new supplement andlor in which market to introduce the product
in line with their strategy to be a nutraceutical and pharmaceutical company. It is a good time to
stop and reflect on the company's successes so far and how to maintain this in the evolving sector
and find ways of survival and profit.
Chapter 2 discusses and provides details of the functional foods market while Chapter 3
focuses on VDS since the new ingredient could be introduced as either a supplement or a
functional food ingredient. VDS could help Forbes generate revenue and allow the continuation
of research and development (R&D) in other ingredients and supplements as well as pharma.
Chapter 4 provides an internal analysis of Forbes and how they have endured in a competitive and
somewhat unpredictable industry. Recommendations and conclusions regarding the potential of
marketing the supplement and continuing sales in functional foods are given in Chapter 5.
Broome 46
2 NUTRACEUTICALS AND FUNCTIONAL FOODS
Forbes is considering launching the new ingredient to the supplement market. However,
they currently operate in the nutraceutical sector. So, in order to understand and provide
recommendations regarding launching the Reducol/omega-3 supplement, Forbes' current focus of
nutraceuticals must be analyzed. Forbes is focusing on CVD in particular and this supplement
fits in with this focus. Nutraceuticals have come a long way over the past few decades and are
now competing with pharma. Functional foods have successfullybeen introduced but there have
been many high profile failures. Also, competitors are numerous including traditional food
manufacturers, functional foods and nutraceutical companies, ingredient companies, and pharma
companies all with different strategies for survival. Market drivers such as consumer
expectations, innovations and suppliers are important factors, and barriers to entry are numerous.
2.1 Introduction
There is a lot of confusion surrounding nutraceuticals and functional foods. In the US,
these terms (considered marketing terms) are used interchangeably; however, in Canada, they are
defined separately. To add to the confusion, they are fast encroaching on what was strictly the
pharma market. Blurring the line even farther are VDS. Currently, individuals are more likely to
self-medicate through nutraceuticals, functional foods, organic foods and botanicals, VDS, and
over-the-counter (OTC) drugs than at any other time in history. There is a lot of scepticism
regarding big pharma and people are turning to more natural ways to heal and prevent disease.
2.2 What are Nutraceuticals and Functional Foods?

It is difficult to narrow down a strict definition that can be used globally. Health Canada
provides the following definitions:
"A nutraceutical is a product isolated or purified from foods that is generally
sold in medicinal forms not usually associated with food. A nutraceutical is
demonstrated to have a physiological benefit or provide protection against
chronic disease."
"Afunctional food is similar in appearance to, or may be, a conventional food, is
consumed as part of a usual diet, and is demonstrated to have physiological
benefits andlor reduce the risk of chronic disease beyond basic nutritional
functions." l o
Japan only has a definition for functional foods:
'O Health Canada 2002

"food derived from naturally occurring substances (not a capsule or powder) that
can be consumed as part of the daily diet and that regulates a particular body
process when eaten"."
Functional foods are not new. They have been available in grocery stores for years. Milk
has been fortified with vitamin D to combat rickets since the early 1930s, and breakfast cereals
have been fortified with vitamins and minerals since the 1940s. Key ingredients that are used in
nutraceuticals and functional foods range from antioxidants like ascorbic acid added to soft drinks
to phytochemicals such as herbal extracts added to fruit juices. Table 19 in the appendix provides
a detailed list. Some emerging ingredients and areas of research include carotenoids which are
naturally occurring in tomatoes and red grapefruit, amino acids some of whlch are already in
foods such as arginine and glutamine, natural source vitamin E, and glucosamine and chondroitin.
There are a few whole foods that in themselves are functional foods. For example, Quaker's
Porridge Oats was repositioned as a functional food even though the product had not changed;
rather, it was based on the soluble fibre and cholesterol-lowering benefits of oats.
2.3 The Market

Nutraceuticals are the latest stage in the health food market. The market has evolved.
Consumers were concerned with dieting and weight loss in the 1970s so new products were low
calorie, and meal replacements (see Figure 3). In the 1980s, VDS appeared important in the form
of plants and herbs, such as ginseng and garlic capsules, that would help with chronic disease and
other aliments. During the 1990s, consumers moved to low and light products in order to target
specific aliments such as CVD and were concerned with the high sugar content of many foods.
Currently, changes due to technology and innovation allow manufacturers to target both specific
and general health issues and thus the birth of nutraceuticals and functional foods.
Figure 3: Product Trends Since the 1970s12

I I I I I
I Weight Loss I Vitamin and Mineral I Low and Light I Nutraceuticals I
(Adapted by permission of Reuters Business Insight)
Global sales of natural health products (NHP), nutraceuticals, and hnctional foods are
estimated to be between $70 and $250 billion (b) annually depending upon the food categories
" Food Science Bureau 2000

l2 Broome 35
included.13 In 2001, Nutrition Business Journal (NBJ) estimated the industry at $140 b. Figure 4
breaks down global sales by region and percent. According to NBJ in 2002, the US food industry
was worth $538 b, functional food was $20.6 b, dietary supplements were $18.5 b, and
pharma/drugs was $240 b. l4
Figure 4: Global Sales in 2001 by percent"
The global market for nutraceuticals was estimated to be worth about $65 b in 2003.16
Forecasting to 2010 predicts the growth of the market at 9%. Markets in less developed countries
are prime targets. In 2003, the World Health Organization (WHO) launched its Global Alliance
for Improved Nutrition (GAIN) program, an initiative to bring the benefits of fortified foods to
the developing world such as China, Morocco, South Africa and Vietnam. But, the US is
forecasted to become a key area for development by 2005. They have highly developed
processed food, ingredients and pharmaceuticals as well as a large consumer base. In addition,
US-based multinational companies such as Kellogg, RJB Nabisco, Campbell Soups, Quaker,
Monsanto and DuPont have invested heavily in creating specialist nutritional divisions.
The market for global functional foods was estimated at $55.5 b in 2001 by NBJ. In the
US, functional foods sales accounted for 3.7% of total food sales. Functional foods grew 7.3%
while non-functional food sales grew 1.4% and total food sales grew 1.6%. By 2010, functional
food sales are expected to represent 5.2% of total food sales in the US ($3 1.2 b)." To put new
fknctional food products into the context of the food industry, in 2002 more than 20,000 new food
and beverage products were launched worldwide. Of these, over 5% were categorized as
l3 Note all dollar values in US$ unless specified

l4 Rea 2003
l5 Saskatchewan Nutraceutical Network 2004
l 6 Research and Markets 2004
l7 Saskatchewan Nutraceutical Network 2004
functional andlor fortified. l 8 Over this same period, there were almost as many "low and light"
products launched. The top five functional food companies are PepsiCo (18%), General Mills
(6%), Kellogg (5%), Krafi (4%) and Coca Cola (4%).19
The preceding paragraphs have demonstrated that values for market size for functional
foods vary depending on the source, categories and criteria used. Euromonitor uses a more
restrictive definition. Table 1 illustrates the market size from 1998-2008. What is becoming
apparent is that the functional foods market will take some time to develop to maturity. Whereas
original claims for fast growth were abundant, it is now believed that the market will take
between 5-10 years, possibly 15, to mature.
Table 1: Global Functional Food Market Value Sales 1998-2008~'

Market Size ($m) Annual Growth (%) $ Per Capita
1998 27,650.2 4.7
2008 61,788.0 4.9 9.3

(Used by permission of Euromonitor International)
Another issue regarding market values is which country is the leader. Some reports claim
the US is the biggest consumer and others feel it is Japan. According to Euromonitor, Japan is
the largest market for functional foods, with sales of $1 1.7 b in 2003. This compares to sales of
$10.5 b in the Table 2 shows international sales by region. It must be noted that many
nutrition products which are fairly new to most of the world, such as probiotics and isotonic
drinks, have a long history in Japan (nutraceuticals were originally pioneered in Japan) and are
accepted as mainstream products. Japan's market continues to develop due to regulations
allowing market entry, consumers relatively open to innovation, and the long-standing history of
development. As a result, the market is well established, diverse and innovative. Approximately
80% of h c t i o n a l foods available on the market are now standard, and not marketed for their
functional benefits which make it difficult to track. Among all industries in Japan, only the
l8 Heasman 2003
l9 Rea 2003
20 Euromonitor International 2004
nutraceutical industry showed an annual growth rate in the double-digits, average rate of 15%, for
the last 15 years. Health Industry News, a leading Japanese health food newspaper, predicts that
the annual growth of the industry will continue at 7 %. By 2010, this will mean a market
capitalization of $35 b.22 In 1987, according to a Nutraceuticals Japan 2003 report, the industry
was just over $2 b in size; today, it is $2 1.1 b. Since the Japanese population is 126 million (m),
this means that each person spends $166 per year on nutraceutical products. This compares with
American spending $136 and European spending $92 a year.23
Table 2: Functional Food Market By ~ e ~ i o n * ~

1998 (%) 2003 3A) 2008 (%)
Asia-Pacific and Australasia 46.1 40.8 35.9
Americas 30.2 30.2 32.3
Western Europe 20.9 25.3 26.9
Eastern Europe 1.5 2.2 2.4
Africa and Middle East 1.3 1.5 2.5
The European Union (EU) has not been as accepting of functional foods but is still a
considerable market. The UK represented the largest market for fimctional food in Western
Europe, with sales of $2,625 m.25Growth has been held back by a growing cynicism towards
overly manufactured foods and concerns regarding GM foods. Health conscious consumers are
attracted to natural and organic foods, and are becoming increasingly distrustful of foods
perceived as scientific.
Nutraceuticals and fimctional foods are divided into the categories of breakfast cereals,
diary, fats and spreads, and confectionary (baked goods). Fortified breakfast cereals market had
reached some maturity by 1999. Growth is slowing and even declining in some countries;
however, products are coming out with more functionality. Functional dairy products have
shown strong growth, except in Japan where a decline represents a developed market. Fats and
spreads have grown in Europe and Japan. In the US, this growth is over 22% per The
confectionery category has shown little growth in Europe with an overall rate of 0.8% per m u m ,
but stronger growth of 5% in the US and a rapid decline of -6.8% in Japan. Sports and energy
drinks continue to show growth in Europe of 7.5% and US of 7.0%.~'
22 Yamaguchi 2003
23 Yamaguchi 2003
25 Yamaguchi 2003
26 Broomel 9
27 Broome20
NBJ has stated that global growth in nutritional products will range from 5% to 10% with
the greatest growth potential in the Latin American countries, followed by Europe, Canada, Asia,
Australia and New Zealand, and ~fi-ica.*'Europe is predicted to have a rapid rate of development
due to anticipated legislative changes. Within Europe, countries such as the United Kingdom
(UK), Netherlands and Scandinavia are more receptive than Italy or Spain, where natural
ingredients are widely consumed. Germany is also expected to start accepting more ingredients.
The US and Canada are considered to be the most open to new ingredients, followed by Japan.
It must be kept in mind that different countries mature are at different levels of maturity,
with Japan, of course, being the most mature. Key factors for maturity in functional foods
include, level of government support and compatibility of legislation with market growth,
presence of a mature market for processed foods, level of consumer demand for supplementary
nutrition, consumer confidence in products, health awareness, and threats to fimctional food.
2.4 Canada's Role

Canada is in a position to be a world supplier of nutraceuticals and functional foods. The
US is currently the largest importer of Canadian nutraceuticals and functional foods. Canada has
a strong research capability due to collaborations among governments, universities, health and
research institutions and industry. Government supports innovation and development of new
technologies in agriculture, agri-food and marine resources through groups such as the Canadian
Institute of Health Research, National Centres of Excellence and Canadian Foundation for
Innovation. More than 200 food companies, nutraceutical companies, and pharma companies
contribute to the industry.
Canada's business climate promotes investment in areas of biotech and functional foods
by forming clusters or geographic concentrations with Ontario, BC and Quebec having the
highest number of companies. Government market and export development programs exist and
are attempting to improve trade promotion activities in areas of biotech, environmental and
information technology, and health. Work is ongoing to establish a national network that will
connect regional areas of R&D, the healthcare community and consumers dedicated to improving
health and the economy by developing a profitable functional food and nutraceutical industry.
2.5 Areas of Interest for Nutraceuticals and Functional Foods

Cholesterol reduction, CVD and osteoporosis are the most attractive targets for
nutraceuticals, followed by child development, high blood pressure (HBP), diabetes, gastro-
28 Saskatchewan Nutraceutical Network 2004

intestinal (GI) disorders, menopause and lactose intolerance. It is projected that CVD, HBP, high
cholesterol and obesity will see significant growth in the years to come. Also, women's
awareness is increasing since CVD claims more lives than breast cancer. The AHA reports that
50 m US adults have HBP, 60.8 m have some form of heart disease, 100.8 m have cholesterol
above 200 mg/dL, and type I1 diabetes has increased 33% since 1991.29Also, there is the newest
disease Syndrome X, characterized by abdominal obesity, high triglycerides, low high-density
lipoproteins (HDLs), hypertension and insulin resistance. In the US, the top ten concerns for the
public are as follows (1) weight management; (2) heart/cardiovascular health; (3) prevention and
general wellness; (4) bone and joint health; (5) immune system health; (6) mental health; (7)
osteoporosis; (8) digestive system; (9) vision and eye-related; and (10) diabetes. 30
WHO statistics for global levels of obesity and its related diseases are cause for concern.
Currently, more than 300 m adults and 17.6 m children under the age of five are obese, and these
numbers are rising. Of the 10.3 m cases of diet-related cancer reported per year, diet and exercise
could have prevented 3 to 4 m. Globally, close to 150 m people have type I1 diabetes which is
expected to double by 2025. Many of these cases are due to aging, unhealthy diets, obesity and
sedentary lifestyle. Also, various population segments are more prone to diet-related risk. It is
estimated that 540 m elderly people, more than half of that population, experience malnutrition
and its diet-related degenerative diseases, including cardiovascular and cerebrovascular disease,
diabetes, osteoporosis and cancer.31
2.5.1 Cardiovascular Health and Cardiovascular Disease

In the US, the direct and indirect costs of CVD and stroke in 2003 were estimated at
almost $352 b.32Looking at Table 3, the prevalence of CVD is rising especially in the US where
it is estimated that 198 m individuals will be affected by 2010. So, a major focus for the pharma
industry and healthcare payors is to lower these costs by treating.
29 Sloan, Nutraceuticals World 200 1

30 Global Information Inc. 2003
31 Benkouider 2003
32 Reuters Business Insight 10
Table 3: Prevalence of Cardiovascular Disease 1998-2010 (in thousands)"
Country 1998 1999 2005 2010 CAGR
1998-2010
France 42,194 43,130 44,276 45,423 0.6%
Germany 711831 741410 771489 801877 1.O%
Japan 44,932 47,841 51,447 54,796 1.7%
UK 46,507 46,816 47,259 47,959 0.3%
US 188,544 187,397 192,079 197,863 0.4%
Overall 394,008 399,584 412,550 426,918 0.7%
2.5.2 Cholesterol
A key risk to CVD is increased cholesterol. Cholesterol is synthesized by the liver and
consumed through diet. It is essential since it is a building block for steroid hormones, like
testosterone and estrogen, and for cell walls. It has been established that cholesterol, particularly
LDLs (bad cholesterol), needs to be controlled to minimize the risk of CHD. Excess LDLs can be
oxidized which form plaques that can build up on artery walls restricting blood flow and
elevating blood pressure leading to a heart attack or stroke. To lower cholesterol, patients are
advised to exercise and change their diet to include more fibre, and lower intake of saturated fats
and cholesterol. Products containing rolled oats and oat bran were the first to receive approval
from the FDA to have on their labels that they may reduce the risk of heart disease when
combined with a diet low in saturated fat and cholesterol. However, to obtain all cholesterol-
lowering benefits of oats, about 314 of a cup of raw oatmeal must be eaten daily. Soy is another
ingredient that aids in lowering cholesterol. Scientists made the connection after discovering
Asian countries, where soy is part of the diet, had significantly lower levels of heart disease than
Americans. Isoflavones, natural soy compounds, are believed to act like hormones that regulate
cholesterol levels. A 1998 study concluded that regular consumption of soy isoflavones might
reduce total cholesterol levels by up to 10 %.34 However, a minimum of 25 grams of soy protein
must be consumed daily in order to reap the benefits. A 1% reduction in cholesterol has been
shown to give a 1% reduction of risk of C H D . ~Controlling
~ diet is not sufficient for all patients
and they must take medication or add plant sterolhtanol esters to their diet.
Hypercholesterolemia is one of the most prevalent conditions in the western world. The
global anti-dyslipidemic market was worth -$22 b in 2002 up from -$1 1 b in 1997 with statins
33 Ehrnreich 23
34 Whole Fitness 2004
35 Broome 24 1
being the most popular pharma for treatment, accounting for over 90% of the market. 36 Table 4
shows the four key CVD drugs and the expenditures during 1998 to 2002.
Table 4: Global Sales of the four Key Cardiovascular Therapy keas3'

Cardiac Therapy 1998 ($m) 1999 ($m) 2000 ($m) 2001 ($m) 2002 ($m) Growth 2001-02
Anti-hypertensives 28,465 31,459 33,007 34,195 35,565 4.0%
Anti-dyslipidernics 14,508 15,989 18,553 20,370 21,862 7.3%
Anti-thrornbotics 6,082 7,021 7,845 8,887 9,961 12.1%
Cardiac therapies 5,752 6,142 6,326 6,455 6,324 -2.0%
Total 56,805 62,610 67,731 71,908 73,712 2.5%
2.6 Distribution of Nutraceuticals and Functional Foods

There are four main distribution channels for NHP, nutraceuticals and functional foods.
These include the pharmacy; natural food, health food, health care and specialty stores;
supermarket and mass merchandisers; and direct to consumer through mail order, Internet and
practitioners. The dominant distribution channels in the U.S. are health food and specialty stores.
The dominant channel in Europe is pharmacies and for Japan, it is the direct sales channel. In
Canada, health food and specialty stores dominate but are followed closely by sales in pharmacies
and through direct purchase (mail, multi-level marketing or practitioners). Canadians use direct
mail purchases for products, principally from the U.S., since they are unavailable in Canada due
to restrictive legislation. Worldwide distribution of functional foods is shown in Table 5.
Multiple groceries are the top distributor of all categories capturing more than 50% with the
independent food stores (including health food stores) falling into far second place.
Table 5: Global Functional Foods Distribution, 2003~'

Bakery Products Dairy (%) Beverages (%)
and Snacks (Oh)
Multiple grocers 51.4 63.1 62.3
Independent food stores 18.1 13.5 5.7
Discount stores 4.1 4.0 11.7
Convenience stores 10.1 11.9 8.8
Confectionary stores 3.7 0.0 0.7
Internet sales 0.5 0.1 0.0
-
Pharrnacies/Drunstores 1.6 0.6 0.7
Others 10.4 6.8 10.1

37 Reuters 63
2.7 Unsuccessful Functional Foods
There have been a number of failures in nutraceuticals and functional foods. Products
that have been unsuccessful are those that were in a small, niche market, resembled medicine
more than food, were launched by pharma companies, were overly scientific, or were too
innovative.
Kellogg launched a line which they felt was going to be revolutionary. Cereals are a
maturing market and they were looking to expand. The Ensemble line of 22 functional foods,
which included cereals, pastas, frozen entrees, and breads, were made with natural fibre from
psyllium husk, known to help lower cholesterol and has an approved health claim. It failed to get
past test markets even after all the money spend in developing and marketing.
Nestle's LCl, a probiotic yogurt, was withdrawn 3 years after it was launched. It was
marketed in Europe where it experienced a lack of sales and was re-launched and reworked
numerous times. They tried to focus marketing on the health values of protecting against harmful
bacteria, strengthening natural defences and regulating bowel movements. The product was
removed from most markets except Japan where it is still available. LC1 was under-marketed in
comparison to the competition and did not have enough distribution.
Novartis' launched Aviva in the UK and Switzerland in 1999. It was a range of products
including drinks, cereals and bars over three areas (cholesterol reduction, osteoporosis prevention,
and diarrhoea and constipation prevention). The product line was positioned as a family of
products to be distributed in supermarkets. Novartis' expertise in medical and pharma industries
was used as leverage in marketing so it was merchandised separately from standard food. Aviva
was withdrawn within a year from the UK and within two years from Switzerland. It failed in
part due to high medical focus, high price (3-5 times more than traditional foods), the difficulty
for consumers to obtain it, and unpleasant taste.
2.8 Successful Products

Many nutraceuticals and functional foods have been launched successfully. Figure 5
shows the percent of foods launched from 2000 to 2001. Beverages were most popular in the
Asia Pacific while cereals were led by North America. Western Europe saw the most
confectionaries launched and in the lead with diary and fats and spreads was the rest of the world.
Figure 5: Percentage of Functional and Fortified New Product Launches, 2 0 0 0 - 0 1 ~ ~
Fats and Spreads
Confectionary
0 10 20 30 40 50
North America fil Asia Pacific EJ Western Europe El Rest of World
Successful products have been mainstream in that they have been marketed through mass
distribution such as supermarkets. They are generally produced by a well-known brand and have
been positioned as contributing to the overall well-being rather than a specific medical need or
illness. Producers have considered taste, price and convenience and compete against standard
and traditional foods.
Danone's fermented dairy drink Actimel is one example of a successful hnctional food
launch. It was f ~ slaunched
t in Belgium in 1994. By 2003, it was available in 21 markets
including Mexico and the US (where it is marketed as DanActive). They have created a whole
new market segment since it was unlike anything on the market. So, they did have to market
aggressively, including a website devoted to Actimel, advertising claims that it restores the
balance of intestinal flora and helps strengthen the immune system along with being a delicious
yogurt drink. Estimates by New Nutrition Business suggest global marketing cost were -$I10 m
in 2002, compared to total company advertising of $930 m.40 The science is also a factor but not
key. Danone Vitapole, the company's R&D centre, is building an increasing amount of clinical
evidence on the benefits of the product.
Unilever is one of the world's leading suppliers of consumer goods in foods, household
and personal care products. Unilever has been successful with Becel and Flora pro.active (added
sterols), their heart healthy margarines. Becel was launched in the 1960s as a medicine and was
sold only in pharmacies. It's now a leading healthy heart brand in Western Europe and sold in
Turkey, Canada and Brazil. Flora was launched in the UK in 1964 as a sister brand and is now
sold in Australasia, South Africa, Arabia, Ireland, Spain and Central and Eastern Europe. A vital
39 MOOS^ 85
part of its success is the active support of health professionals and other key opinion leaders, as
well as marketing that does not involve stories of heart disease rather focusing on a healthy heart
leading to a better life. These same cholesterol-lowering ingredients are being included into
products such as yogurt and milk. Also, they have begun to refocus their strategy. Since 2000,
they have reduced the number of brands from 1600 to -400 leading brands and just fewer than
250 tail brands.
2.9 Competition
Concerns about health have contributed to the development and success of foods that are
considered "better for you", meaning removing sugar, fat, or salt. These are complementary to
functional foods and not competition since they do not impart extra value but rather are not as bad
as they could be. However, many products not considered functional foods in themselves are
healthy and high in specific nutrients andlor able to impart improvement in some medical
conditions. These include soy protein, whole wheat, and green tea found in products fiom such
companies as General Mills, DuPont and Ocean Spray who promote their functionality. This
impacts functional foods, since they offer many of the same benefits, but at a lower price and
without the scientific evidence that can be confusing.
The focus of this analysis is direct competitors for Forbes' ingredient, sterols and stanols
and cholesterol-lowering ingredients. In 2003, the vast majority of cholesterol-loweringproducts
were in spread format. However, there has been considerable innovation, with Benecol
launching a little bottle and snack bar format in some markets and Minute Maid launching a
sterol-based orange juice, indicating the beginning of sterols moving into the mainstream. The
functional ingredients industry has a number of players from different disciplines including
pharma companies, life science companies, major food companies, and ingredients companies.
Key functional ingredients companies besides Forbes include Raisio, Valio and Archer Daniels
Midland (ADM). The remainder of this section will illustrate a few of the competitors and some
of their strengths and weaknesses. Also, it must kept in mind that Forbes is manufacturing the
sterols and licensing its use for food companies; so it is difficult to narrow down true competitors.
Many of the other ingredient companies create and market their own products.
2.9.1 ~ e n e c o l ~ ~ ~ '
Raisio Group's key functional ingredient Benecol, plant stanol esters extracted from pine
tree pulp, is used to lower cholesterol (particularly LDLs). In 1995, the first Benecol margarine
4' Trademark of Raisio

was launched in Finland. In partnership with McNeil Consumer Nutritionals, a division of
Johnson & Johnson (J&J), it was launched in the UK, Ireland and the US in 1999. Benecol was
designed to deliver -3 grams of phytosterols per day with 3 servings. In 1999, yogurts and a
range of cereal-based snack bars were launched. 42 The brand has expanded and is available in
many food applications from Finland to the Middle East.
Benecol products back up their health claims with clinical trials which are important to
their success due to the high cost of the added functional ingredients. Benecol margarines can
cost up to seven times more than standard brands. J&J cancelled their television ads in the US
after consumers were concerned with the high price. They changed their strategy to a more direct
campaign by using a helpline, free literature, its website and contacting doctors and other
healthcare professionals; thus, they choose to educate the consumer on the benefits, and the
scientific evidence to support the premium price.
Marketing tactics differ in each country in order to target the consumer. In the UK, they
market the medical claims. The website goes through explaining cholesterol, how Benecol works
and why, and provides information on studies in Finland. The US website focuses on taste
(current banner states that Benecol spread has a new and improved taste) and lifestyle (can join
Club Benecol) with testimonials from satisfied customers with limited medical information.
The strengths of Benecol are the clinical trials supporting health claims, global
distribution and integrated product range. Also, if consumers comply with the 2-3 servings
recommended, they will see a 14% reduction of LDL chole~terol.~~
Raisio has a number of
patents for their sterols and Benecol is licensed to a number of organizations including McNeil,
Valio Oy, Raisio Nutrition, Iparlat SA, and Carlsharnn Mejeri AB which distribute in countries
such as Argentina, Belgium, France, Poland, Spain, UK, and US. Weaknesses include price,
degree of effectiveness (a study conducted did not further lower cholesterol in a group of men
already on cholesterol-restricted diets), and concern about potential estrogenic and endocrine
effects on growing children because sitostanols are powerful plant sterols. Opportunities for
Benecol are the increasing awareness of consumers regarding health risks for those with high
cholesterol, and consumers having a higher disposable income. They are also actively pursuing
research into the use of the Camelina sativa oilseed plant for its omega-3 properties, in addition to
considering new ingredients suitable for diabetes, allergies and weight control. Threats include
competitors such as Unilever, more effective cholesterol reducing drugs, and cheaper alternatives.
42 Broome 24 1
43 Broome 245
2.9.2 ~ i m i n o c o l @ ~ ~
Teriaka develops and markets ingredients and methods for functional foods. Diminicol is
their cholesterol-lowering ingredient containing phytosterols. It contains food fatloil, free plant
sterols or stanols and water. Diminicol's study consisted of 155 people in a 6-month trial. It
lowered total cholesterol by 9% and LDLs by 12%, with a daily dose of 1.5 grams.45 They also
have a patent on the actual method of production for Diminocol.
The competitive advantages of Diminicol include that it has all natural ingredients, does
not require any additives, is simple and inexpensive to produce, lowers cholesterol with small
amounts, has no side effects, has a natural taste and is a stable product, is supported by clinical
research, is patented and has a marketable ingredient name. In the US, it is GRAS for use as an
ingredient in many products such as margarine and vegetable-based spreads, yogurt and yogurt-
like products, cream cheese, snack bars, salad dressings, mayonnaise, and white breads. In
Mexico, it is approved as an ingredient in foods and non-alcoholic beverages. Diminicol was
authorised in April 2004 as a novel food ingredient in yellow fat spreads, cheeses, yogurts and
milk based fruit drinks in Europe. Teriaka also has Oxidant which is an anti-oxidant ingredient
that can be added to a number of foods.
2.9.3 Cargill Health & Food Technologies

Cargill is a developer and marketer of ingredients for food and dietary supplement
industries worldwide and have a number of branded ingredients. One lead product is
~ o r o ~ i sa phytosterol
e ~ ~ ~ ~spread.
, They also supply CoroWise to Hain Celestial Group's Rice
Dream Heartwise drink in the US. They are working on a soft cheese brand that will carry the
ingredient in the near future. Other brands include ~ d v a n t a ~which
o ~ ~is~health-promoting
~ '
soy isoflavones. AdvantaSoy Clear is ideal for beverage applications and attractive food
products, and is GRAS for a number of products applications with clinical trial evidence.
AdvantaSoy Compress is suited for the dietary supplement industry. AdvantaSoy Complete is a
combination of soy protein and isoflavones which is marketed to be perfect for breads, cereals
and other functional foods. Clinical trial evidence for Cargill's ingredients is not currently
available on the website. Ascend, Oliggo Fibre and Opta Flex as well as many other ingredients
for the food industry are produced by Cargill. It's all part of Cargill's strategy to broaden
functionality platforms which they distribute globally.
44 Registered trademark of Teriaka

45 Teriaka 2004
46
Trademark of Cargill, Inc.
47
Trademark of Cargill, Inc.
2.9.4 NutriSoy@ and ~ o v a ~ o ~ @ ~ ~
ADM is a producer of genetically engineered soybeans. Soy protein has been recognized
by the FDA for its health benefits and it contains almost all the essential amino acids that
individuals need. Two of ADM's leading brands are Novasoy and Nutrisoy. Novasoy is a
powdered compound extracted from soybeans and is rich in isoflavones. Certain isoflavones are
believed to maintain healthy bones, healthy cholesterol levels, good cardiovascular health, and
good health during and after menopause. Novasoy is sold to leading VDS manufacturers who
incorporate it into their own branded products and it has GRAS status. While the product is
licensed in the US, it is not available in Europe due to their concerns about GM ingredients.
NutriSoy can be found in a variety of foods and beverages which include Omega last@^^, Soy
7TM"pasta, and Raspberry Soy-A-Krunch Cereal. Besides having a number of ingredients,
ADM's other areas of strength include being a natural source of vitamin E, soy proteins,
phytosterols (believed to be Unilever's supplier) and diacylgycerol (DAG) oil. DAG oil is
popular in Japan and has food for specific health use (FOSHU) status. The company also
produces CardioAid line, a heart healthy line using soy, phytosterols and lecithin, which can be
incorporated into foods.
2.9.5 ~bacor@'*
Abacor is a cholesterol-lowering product, based on a patented composition of isolated
soy protein, soy isoflavones, cotyledon soy fibre, and phospholipids created by Nutri Pharma. It
is incorporated into various non and low fat products. In April 2003, they presented evidence of a
significant additional cholesterol lowering effect in patients treated with statins. Normally, in
order to experience a 6% LDL reduction, statin dosages would need to be doubled (statins are the
drug of choice for patients with hypercholesterolemia but they do not lower cholesterol in all
patients andlor cause side effects). The study with Abacor showed an additional 12% lowering
which would be equal to quadrupling the dose of statin5*
Nutri Pharma's has scientific and intellectual property (IP) on their techniques, processes,
compositions, methods of use and the products which places them in a good position as the field
expands. They have more than 1000 patents. Nutri Pharma has conducted more than 40 clinical
and pre-clinical trials and many to the same standards as pharma. In February 2004, Abacor was
48 Registered trademark of ADM

49 Registered trademark of ADM
50 Trademark of ADM
'' Registered trademark of Nutri Pharma
s2 Soy Club Daily 2003
included in the newly launched Burgen "Cholessterol" bread from Allied Bakeries, which will be
sold in UK supermarkets.
The number of companies involved in the phytosterols market is vast. This section has
provided a few examples of how companies are competing and the products that they produce.
Many of them are large multi-national corporations, food manufacturers, and have large coffers'to
allow for R&D and innovation. The functional food market is fairly fragmented, with little
crossover between sectors. Leading companies tend to be specialists in wide product area such as
confectionery, dairy or beverages rather than specialists in functional food. They have extended
into functional products in order to increase margins and profits. This crossover principally comes
from broad-based food companies with interest in multiple areas, although few have been
successful in more than a couple of functional food categories.
2.10 Market Drivers

Consumer concern for well-being is one of the most important drivers in the market. It
includes physical health, appearance and mental health. Baby boomers are aging and their health
is fast becoming significant. Individuals are increasingly concerned with receiving optimal
nutrition by getting the recommended daily allowance (RDA) of vitamins and minerals. Labels
on food have more details for consumers to read. Consumers are turning to healthier and more
natural foods. Many cultures already use foods, herbals and other natural products to assist health
and treatments. World travel and cultural diversity is allowing increased acceptance of
alternative ways as well as the rising side effects of drugs and therapies, and cost of traditional
healthcare. Table 6 provides global consumer spending on health goods and medical services
from 1997 to 2002 by country. The US is the highest spending county with Switzerland and
Taiwan following. Expenditures in the US on pharma products, medical appliances and medical
services have increased steadily in recent years, an increase of nearly 29% between 1998 and
2002, to $1.26 trilli~n.'~
This growth was mainly a result of rising prices of healthcare, including
prescription (Rx) medicines. Unlike many other Western nations, pricing of Rx medications is
largely unregulated in the US. As a result, Americans tend to pay more for Rx than in more
regulated markets like Canada where large numbers of US seniors have turned through mail order
and Internet services to purchase cheaper Rx drugs.
53 Euromonitor International Apr.2003

Table 6: Per Capita Consumer Spending on Health Goods and Medical servicess4
Switzerland
Taiwan
Japan
Singapore
Australia
Canada
Germany
Hong Kong, China
Norway
Belgium
Austria
Netherlands
Finland
France
Greece
South Korea
Denmark
Italy
Ireland 297.9 305.7 317.6
Consumers are taking on more responsibility for their health and focusing on disease
prevention in that healthy living now will prevent disease later. This contributes to consumers
accepting that some foods have medicinal value, and bringing functional foods into their diets.
However, this awareness of disease prevention has not made significant impact on unhealthy
foods. Consumers like convenient, fast and ready to eat foods as well as foods which are
inexpensive and tasty. They are turning to more convenient foods due to the increasing number
of women in the work force, changing family structure, faster paced lifestyle (people are more
rushed, stressed but sedentary), and willingness to pay premium prices for convenience. Most
organic and healthier foods are not so convenient and generally cost significantly more but they
should not be ignored. Many multinational companies such as Heinz, Unilever and Nest16 have
interests in organics and other health foods. Also, consumers do look for healthier alternatives.
This trend affects ingredient categories such as sweeteners, hydrocolloids, fat replacers, and VDS.
Furthermore, environmental concerns have increased demand for organic products. Individuals
are seeing the relationship between physical health and the health of the environment. The
demand and higher price point for natural and organic products means that processed food
manufacturers may have a higher budget for functional ingredients. It creates an opportunity for
branding. There is also the growing fear of foods causing harm such as GM food, mad cow
disease, and E. coli.
54 Euromonitor International Nov.2003

Consumer awareness of the link between diet and health has increased due to campaigns
sponsored by governments and medical associations as well as media and general education. For
instance, in Spain, the government has invested in osteoporosis awareness to such an extent that
foods command a premium price if they are fortified with calcium.55With longer life
expectancies, it is important to stay healthy and keep healthcare costs down. The life expectancy
for Japanese women is 85.2 years and 78.3 years for men, so Japan is fast becoming a country of
seniors with 1 in 5 people over 65.56Table 7 illustrates the world's growing aging population and
by 2025, it is predicted that -825 m people will be over 65. In 1900, the elderly accounted for
4.1% of the total population. By 2000, this proportion had risen to 12.4%. The average life
expectancy increased by an additional 17.9 years during the 2 0 century
~ and this, coupled with a
decline in birth rates, has been the main cause of the rise in the proportion of elderly population.57
Table 7: World Aging ~ o ~ u l a t i o(inn thousands)

~~
Population above 65 1950 1975 2000 2025e
More developed regions 64,119.7 112,644.7 170,329.7 259,653,2
Less developed regions 66,829.7 118,620.4 248,090.3 565,006.0
World 130,949.4 231,265.1 418,420.0 824,659.2
This aging population will in turn lead to even greater healthcare spending. Government
spending on healthcare has decreased and forces individuals to seek help through alternative
sources (see Table 8). This includes functional foods, VDS, organic and healthier versions of the
foods they currently consume.
Another important driver is taste. A key challenge facing food manufacturers is
incorporating functional ingredients without affecting the taste. Many ingredients are found to be
bland or the texture changes once the ingredient is added. This is a particularly problem for
omega-3s. Also, some nutrients are incompatible with base products. For example, vitamin E is
not water-soluble and is difficult to mix into existing products. Stability and shelf life are
important factors as well since many nutrients are unstable and sensitive to light, and can react
with other ingredients causing degradation of nutrients.
55 Broome 65
56 Yamaguchi 2003
57 Padhi 28
58 Padhi 27
Table 8: Per Capita Government Expenditure on Public Heath
1996 ($) 1997 ($) 1998 (9) 1999 ($) 2000 ($)
France 3,037.5 3,225.9 3,060.3 3,140.7 2,598.9
Germany
US
Canada
UK
Australia
Spain
Brazil
Poland
South Korea
Turkey
Japan
Russia
China
Innovation continues to drive the market. The industry is looking at new ingredients,
new packaging, new formulas, and new functionalities. Areas that are showing strong growth
include probiotic yogurts, plant sterol spreads, energy bars, functional waters and juices.
Therapeutic areas include cholesterol-lowering, gut health and bone health products.60 Also, the
discovery of the human genome has opened up possibilities for functional food at the extreme
medical end. This has given birth to nutrigenomy, a scientific discipline that analyses the
relationship between food and genomes, which could mean creating foods to suit different
genotypes. Thus, food can be specifically designed to suit the needs of the individual, and may
lead consumers to select food accordingly. It is still in its infancy.
For food industry companies, stagnating markets have been their primary driving force
towards nutraceuticals. Food and drink companies have seen low levels of growth. By adding
value to products, ordinary food items attain higher value. Pharma companies are looking for
alternatives since many patents on blockbuster drugs are ready to expire. The media through
magazines, TV and the Internet has been a powerful push factor; since, they provide information
to the public regarding preventative nutrition, and holistic and alternative therapies. Retailers are
marketing the idea of living better with many supermarkets now having vitamins and holistic
areas as well as organic foods along side processed foods. Companies are starting to look at
consumer markets and how they are driven. The youth market, women and elderly all have to be
approached differently since their wants and needs are different.

60 Heasman 2002
2.10.1 Youth Market
The young consumer is concerned with their health and is aware of the link between
health and diet but demand products for maintenance. They are lifestyle driven and engage in
sports and physical activity. Young consumers typically work long hours and have very active
social lives. They are highly trend driven and more inconsistent in the brands they choose.
Furthermore, they are more conscious of appearance. They have however embraced the benefits
of herbal remedies more readily than others, encouraging the use of herbal ingredients in
functional foods and drinks in the mainstream.
2.10.2 Over 35
The over 35 group is increasing. Life expectancy in the US has increased to 80.2 years
for women and 74.4 years for men in 2001.61 Even though there have been advancements in
medicine, the incidence of diseases such as heart disease and cancer (most having no cure)
increase which creates demand for prevention. Thus, their focus is preventing disease and living
longer, healthier lives. They also have more disposable income than younger consumers.
2.10.3 Women
Women represent a large target audience. They represent over 50% of all adult
consumers and they are the family decision maker when it comes to shopping. Social pressures
are felt more for women to maintain and keep their figures, and their physical appearance is very
important; for evidence, open any magazine or turn on the television. Pregnant women are
important too since they place more significance on health during this time and many studies
have shown the increased need for nutrients such as folic acid.
2.11 Company Strategies

To survive in any market, companies must have a strategy. The consumer wants more
than just the RDA of nutrients. They are looking for prevention of specific aliments in general
and performance enhancement. Therefore, companies must focus on innovation and R&D.
While medically accredited or acknowledged benefits remain highly important, taste and quality
are forecasted as the key success criteria for nutraceutical brands. Consumers are willing to
accept the health claims and benefits, but are predicted to become unwilling to pay a price
premium. The cost aspect is a key obstacle since consumers compare the price of functional
foods to standard and traditional foods; but, for producers, it costs money to add ingredients.
Euromonitor International Apr.2003

Manufacturers must consider the optimum quantity of every nutrient. Most consumers
are unaware of the negative effects of taking more than the RDA. People eat a range of foods
from different manufacturers. This could lead to an overdose of some nutrients and not enough
of others. Companies need to target their functionality to specific consumer needs by focusing on
branding and product lines. They will likely be expected to take on some of this responsibility.
Another problem with functional foods is competition with VDS; since, consumers may not be
willing to pay a premium price more than the cost of vitamins.
A challenge for functional foods is to find innovative ingredients. This has caused a
variety of strategic partnerships to develop between global food and drink companies and
technology focused pharma and healthcare companies. Galagen has a joint venture with Rhodia
Inc to develop nutraceutical products. Milli Brasilli is a brand fkom a partnership of Alpamare
and Milchewerke Meinfranken in Germany. McNeil Specialty Products working with Raisio
allows Benecol worldwide marketing. The Stolle Research teamed with DuPont and ConAgra to
develop a low cholesterol egg. These collaborations work since the large food company offers
global distribution, marketing and branding skills, and the specialist healthcare or pharma
company brings the ability to innovate. Food companies are learning to look to science and the
increased emphasis on safety, and efficacy testing as well as learning about new distribution
channels, for example, healthcare professionals. Pharma companies, on the other hand, need to
centre on their customers in that they need to be more mass market orientated, and have shorter
development cycles for functional products.
So, five marketing strategies are driving growth in functional foods. Firstly, the least
risky route is fortifying existing brands. Secondly, companies are entering entirely new markets
with new products, hoping that consumers will buy as a replacement for existing purchases.
Thirdly, a very small number of companies are creating new categories. Fourthly, companies are
finding ways of creating new brands to compete within existing sectors. Finally, there are players
using the health aspect of a rival product sector and branding to attract customers.
Looking at two companies in particular, Danone and PepsiCo have come up with
strategies for success. Danone's strategy centres on building a global presence in three areas,
dairy, beverages and biscuits. It has sold off a number of subsidiaries, and purchased other
companies in order to focus on their strategy. Danone's strength comes fkom its early entrance
into functional foods, along with large investments in marketing to strengthen its brands with
supermarket distribution and a focus on general well-being rather than on specific complaints.
They have also created an emphasis on taste for the Actimel brand and functional yogurts. The
company has expanded into the US with a share in Stonyfield Farm and Lifeway. Thus, Danone's
strategy is centred on growth of core products, and complemented by acquisitions and stakes in
small, specialist companies. This should assist them to gain a strong hold in new areas.
PepsiCo is a leading player in fimctional foods, and has achieved this through focusing
on mainstream, mass-market products. They do not work with research companies to develop
cutting edge functional products but instead use fortification to differentiate its products, boost
margins, offset declines in sodas and bring functional drinks to mainstream. Their portfolio
covers products such as Gatorade and Tropicana which are well established in the US and were
acquired for Pepsi's entrance into the market. Functional drinks have allowed them to grow in a
crowded and price-sensitive industry. They have also pursued a growth strategy through the
development of new brands such as Aquafina Essentials. They have invested in new formulations
for brands including Tropicana and SoBe. All products are distributed through normal beverage
channels, including convenience stores, vending machines, retail food stores, and sports arenas
and venues. By leveraging its extensive distribution network, production economies of scale,
marketing resources and global reach, Pepsi puts themselves in a leading position.
A race has started with a mix of food companies, pharma companies and life sciences
companies, with the food companies coming out ahead. Almost all the leading companies in the
b c t i o n a l food market are food manufacturers, and in most cases, are broad-based food
manufacturers with interests in standard food as well as functional food. As the functional food
market develops, it is clear that consumers are generally distrusting of pharma companies
producing food items, and are not enthusiastic on clinical positioning of functional foods. For
example, Novartis' Aviva range tended to underperform expectations of revenue generation and
acceptance by consumer test groups. As a result, the leading players are well-rounded food and
drinks manufacturers, such as PepsiCo, Coca-Cola Company, Danone and Cadbury Schweppes.
The smaller, more specialist companies have in many cases been acquired by larger companies.
Some still survive independently, such as Yakult and Red Bull, but for the most part, they are
struggling to compete despite entering the market first. Although it is a fast growing area, it
offers considerable risk, and companies are cautious, especially smaller companies. Regulations
which lack harmony provide a serious and often costly obstacle to global market success, and the
risk of product failure is perceived as high, following high-profile withdrawals of lines such as
Nestle's LC1, Pfizer's Bodysmarts and Campbell Soup's Intelligent Quisine.
2.12 Barriers to Nutraceuticals

There are a number of barriers for ingredients, products and manufacturers entering the
market. They include consumers who can be sceptical of manufacturer claims and motives,
concern with processed foods, unwillingness to sacrifice taste or convenience, sensitivity to high
price, desire to see short term gains rather than long term benefits, and confusion about or
misunderstanding of health benefits. Manufacturers have to be willing to conduct research and
spend monies on proving their product claims. Even though the average consumer is more aware
and knowledgeable, there are still often misunderstandings. Producers need to strike a happy
balance between enough scientific information to inform without overwhelming.
Other challenges in the new food industry include finding natural ingredients; are safe,
scientificallytested ingredients that give existing products function; are simple, have low cost
methods for production; are ingredients that adapt to existing product methods; are ingredients
which maintain good taste, colour or structure; and are ingredients that are easy to process. Also,
there are a number of patented ingredients and every one is trying to be one step ahead.
Taste, convenience and price are substantial barriers. To most consumers, nutraceuticals
are just food and drinks and are compared to their standard counterparts. While the level of
benefits may help to increase consumer uptake, poor taste, inconvenience or high price can
prevent optimum penetration and leave the manufacturer open to threat of substitution. However,
in the early stages of the product lifecycle, price is the least important as consumers are willing to
pay premiums for innovation and significant benefits.
Food and drink manufacturers are under pressure to expand profit margins in stagnating
markets; so they are entering into functional foods. They are being joined by pharma companies,
as the cost of drug development soars and they look to increase their return on investment in new
areas. These large players discourage smaller companies from venturing into the field who are ill
equipped to market or cannot afford the time and h d s for R&D.
Legislation and governing bodies cannot be ignored. For instance, manufacturers were
adding plant sterols to a wide product range such as snack bars, yogurts and cream cheese-style
spreads. A problem was encountered when the Australia New Zealand Food Authority (ANZFA)
banned all foods containing plant sterols other than margarine. ANZFA felt there was no
evidence showing plant sterols' safety at higher levels of intake, which could occur when
consumers purchase different foods from different ranges of foods. The spreads must carry an
advisory saying they were not appropriate for infants, children, pregnant and breastfeeding
women because they may reduce the absorption of beta carotene, which the body converts to the
antioxidant vitamin A. ANZFA advised people using cholesterol-reducing medication to get
medical advice before using the spreads.62 So, companies have to be prepared for health scares
62 BUPA 2004
that could reduce consumer trust and require greater regulation, as has been the case for
pharmaceuticals.
2.13 Legislation
There .are a number of legislative difficulties facing nutraceuticals, functional foods and
dietary supplements. The approval of novel or innovative ingredients can be lengthy and
complex. While technological and cultural advances and changes have led to a blurring between
the concept of food and drugs, legislation in most countries lags behind. Manufacturers must
choose between marketing as a food or a drug in most cases. Generally, food items are distinct
from drugs in that they cannot confer any kind of health benefits which makes it difficult to
inform the consumer. If a company wants to indicate a health benefit, the food must undergo
lengthy evaluation like a drug. Many manufacturers are petitioning for a third classification
which makes allowances for products that fall between foods and drugs. In other cases, legislation
is being introduced in order to allow claims on products classified as foods. Legislation
differences between countries are making international sales complicated.
The Codex system is an international system created to develop food standards.
Countries are not obligated to comply with the regulations. In the EU, regulation is mostly in the
hands of each individual country so approval can be uncertain. The US has a more developed
system but there is still ambiguity over whether functional foods are foods or dietary
supplements. Canada has very strict regulations, making it a difficult market. Japan is more
advanced, and regulation permits established and accepted ingredients to be used in food but
discourages development of new ones. In general, government regulation is likely the greatest
obstacle to innovative products or those that push nutraceuticals toward pharma.
2.13.1 Codex
Codex Alimentarius Commission was created in 1963 by Food and Agriculture
Organization (FAO) and WHO to develop food standards, guidelines, and related text such as
codes of practice under the Joint FAOIWHO Food Standards Programme. The main purpose of
the Programme is protecting health of the consumers, ensuring fair trade practices in the food
trade, and promoting coordination of all food standards work undertaken by international
governmental and non-governmental organizations.63However, there are no specific regulations
pertaining to nutraceuticals or functional foods.
63 Codex Alimentarius Commission 2004

Guidelines and advisory texts on food safety and labelling provide a global reference
point for international food trade. The general guidelines on claims state that no food should be
described or presented in a manner that is false, misleading or deceptive or is likely to create an
erroneous impression regarding its character. Health claims are forbidden if they cannot be
justified. Codex proposed health claims include nutrient function claims, enhanced function
claims, and reduction of disease risk claims. Many countries are compliant with Codex standards
and incorporate them into their legislation. Codex is recognised in the World Trade Organisation
(WTO) agreements on Technical Barriers to Trade and Sanitary and Phytosanitary Measures, and
member countries are obliged to align their domestic standards with international standards
wherever possible. The problem, of course, is that these rules are not mandatory but rather up to
individual countries; so they are hard to enforce.
Legislation is open to change and November 2003 saw proposed recommendations on the
scientific basis of health claims. Some of these include, but are not limited to, the claim linking
the consumption of the food, the substance or the ingredient and the enhancement of a function,
the maintenance or the improvement of a state related to health or the reduction of a disease risk
must be supported by scientific evidence along one or several of the following approaches:
experimental in vitro andlor in vivo studies,
epidemiological or clinical studies on humans; clinical interventional studies should
comply with the requirements established by ethical committees and should substantiate
the change in a relevant indicator@
Codex also recommend re-evaluations of such foods having stated health claims for expected
effects or adverse effects, which may appear after a long-term consumption of the food.
2.13.2 The European Union

The current EU regulation has few provisions for nutraceuticals. It is more concerned
with protecting consumers from unsafe products than encouraging those that promote health.
PARticular NUTritional (PARNUTS) provides the framework for current dietetic regulation.
Functional foods that are to be accepted must produce evidence which supports the statements
claiming special properties of the food and guarantee it to fulfill the purpose that is intended and
that the consumer expects. In addition, there are general labelling restrictions that affect products
associated with slimming, protein, vitamins, minerals, polyunsaturated fatty acids, cholesterol and
energy. Medical claims are subject to additional regulation and these products must hold a
medical license.
64 National Centre of Excellence in Functional Foods 2004
31
In May 1997, the EU introduced new regulation governing novel foods. The Novel Food
Regulations (NFR) requires that new functional products must be submitted to each member state
in which the product will be launched. Each state then has 3 months to decide to accept, reject or
defer the de~ision.~'The EU discourages descriptive or comparative health claims and prohibits
any direct comparison of health related qualities with a competing product. The NFR covers
foods whose active ingredients have been derived from genetic engineering or deemed novel due
to the process used in creating the ingredient. Novel foods are defined as the following:
Food and food ingredients containi~gor consisting of generically-modified organism
Foods and food ingredients produced from, but not containing, genetically modified
organisms.
Foods and food ingredients with a new or intentionally modified primary molecular
structure
Foods and food ingredients consisting of or isolated from micro-organisms, fungi or
algae
Foods and food ingredients consisting of or isolated from plants and food ingredients
isolated from animals, except for food and food ingredients obtained by traditional
propagating or breeding practices and having a history of safe food use.
Foods and food ingredients to which has been applied a production process not currently
used, where that process gives rise to sigmficant changes in the composition or structure
of the foods or food ingredients which affect their nutritional value, metabolism or level
of undesirable substance^.^^
Foods which have not been consumed for a significant time before the introduction of
NFR must either submit an application with the science information and safety record or follow a
simplified procedure. The simplified procedure requires a notification to the European
Commission (EC) from the company when the food or ingredient is considered, after an
assessment, as "substantially equivalent" to existing foods or ingredients regarding their
composition, nutritional value, metabolism, intended use and level of undesirable substance^.^^
The Regulations do not allow claims that a food can prevent, treat or cure a disease, but will
allow some "risk-reduction claims" (e.g. calcium helps to reduce the risk of osteoporosis), as long
as they are proven by clinical tests and receive pre-marketing approval from the European Food
Safety Authority (EFSA). Foods bearing such claims must bear a statement that diseases have
multiple risk factors and that "altering one of these risk factors may or may not have a beneficial
effect". 68 This all creates additional costs of around EUR$250,000 to $1 m for manufacturers
above and beyond the cost of applying for and waiting for approval.69
65 Broome 164
66 Eurornonitor International 2004
Eurornonitor International 2004
In July 2003, the EC proposed new measures that would establish more rigorous
guidelines for functional foods. It plans to publish a list of permitted claims and forbidding all
others. This legislation would also set out strict guidelines for the use of such terms as "fat free"
and "low fat", "low calorie" and "no added sugary7which could potentially be in force by 2005.
In countries where fortification is allowed, there is no agreement among member states regarding
limits for vitamins (in relation to RDA) and which foods may be fortified or which vitamins used.
The EU has launched a proposal on the regulation of the addition of vitamins and minerals to
food in February 2003 which aims to make the rules more liberal, looking not only at using
fortification to address deficiencies but also to achieve optimum nutrition. The proposal includes:
Prohibits the addition of vitamins and minerals to fresh produce and to drinks containing
more than 1.2% ABV
Proposes criteria for setting maximum levels of vitamins and minerals.
Provides for the regulation of "substances under Community scrutiny" - namely guarana,
taurine and glucuronolactone.
Provides for restricting the use of certain substances, specifically caffeine and quinine in
soft drinks.
Proposes Community-wide prohibition of the addition of some substances to foods, such
as kava kava, ephedra and St John's wort.
Provides for a future review of the effects of the regulation of the evolution of the market
for the foods concerned, their consumption, nutrient intakes for the population and
changes in dietary habits."
With respect to labelling, the proposal includes mandatory nutrition labelling for all foods to
which vitamins and minerals have been added, including full information on energy, protein,
carbohydrate, sugars, fats, saturates, fibre and sodium content as well as the amount of vitamins
and minerals added, the consumer must not be misled as to the nutritional merit of the food, and
labelling must not imply that a balanced diet can not provide adequate quantities of nutrients.
The process of approval tends to be complex and lengthy and parts of the regulations are
not always clear so disagreements arise. For small companies, the legislation deters launching
innovative products and may be cost prohibitive especially if the active ingredients in their
functional products are herbal due to the difficulties in prove them scientifically.
2.13.3 The United States

Two systems of regulation affecting functional foods are the Nutrition Labelling and
Education Act (NLEA) of 1990 and Dietary Supplements Health and Education Act (DSHEA).
NLEA requires that food carry nutritional labelling. In the ACT, a health claim is a "statement
that characterizes the relationship of a substance to a disease or a health-related condition,
O' Euromonitor International 2004

typically in the context that the regular consumption of a substance 'may reduce the risk of a
specific disease or health c~ndition"'.~'There are four ingredients for which the health effects
are clearly established, dietary fibre, fats, sodium and calcium. Under the NLEA, most health
claims are considered disease claims which are easier to prove than wellness claims.
Manufacturers of hnctional foods choose to submit their product as a supplement or food. For
products filed as supplements, the FDA must prove that the product is unsafe if it is to be
rejected. For products filed as food, the manufacturer must prove a link between an ingredient
and the physiological condition if it is to be accepted. Also, any research papers submitted to the
FDA are disclosed to the public. Once an ingredient has been approved, other companies may
use the same claims if including the ingredient in their product. Many active ingredients are
difficult to patent. Claims permitted on food include the main categories of generic claims and
cornmoditylingredient claims after prior approval by the FDA, structurelfunction (SF) claims are
permitted and do not require prior approval, and nutrient content claims. Under the DSHEA,
claiming the following relationships are pre-approved by the FDA:
Calcium and osteoporosis.
Sodium and hypertension (high blood pressure).
Dietary fat and cancer.
Dietary saturated fat and cholesterol and risk of coronary heart disease.
Fibre-containing grain products, fruits and vegetables and cancer.
Fruits, vegetables and grain products that contain fibre, particularly soluble fibre and risk
of coronary heart disease.
Fruits and vegetables and cancer.
Folate and neural tube birth defects.
Dietary sugar alcohol and dental caries (cavities).
Dietary soluble fibre, such as that found in whole oats and psyllium seed husk, and
coronary heart disease.
Plant sterolslsterol esters and heart health.72
The FDA Modernization and Accountability Act (FDAMA) became law in November
1997. It contains provisions to reduce the hurdles in the health claim approval process. It allows
the FDA to authorize health claims based on published statements from agencies such as the
Centers for Disease Control (CDC), the National Academy of Sciences (NAS), or the National
Institutes of Health (NM). Health claims can be made without going through the FDA review
process, if they have already been published by these agencies. But, pre-market notification to the
FDA of 120 days is required.73
-- - -

In 2003, the FDA introduced two new sets of guidance procedures relating to health
claims and product labelling. Health claims will be rated on a scale from A-D. Products with an A
rating, as proven by "well designed studies in a manner consistent with generally recognised
procedures and principles" will require no disclaimer, and are referred to as an "unqualified
health claim". Examples include products that are fortified with calcium, where health benefits
can be claimed for osteoporosis. Any product below an A rating are referred to as "qualified
health claims" and require disclaimers stated in such a way that the consumer can understand, so
they are not misled. An example would be omega 3-fortified products, which FDA standards do
not provide conclusive evidence of healthhenefit claims. This system was created, according to
FDA, to give consumers more and better information regarding dietary choices.
The FDA has two different types of authority, pre- and post-market. Pre-market involves
the approval of all food additives that are not GRAS by the FDA. GRAS ingredients are exempt
and include substances such as flour, sugar, spices and some flavours and enzymes. Substances
intentionally added to food must have prior approval from the FDA unless they are GRAS. Post-
market allows the FDA to take legal action against any product that is found to be unsafe or
unwholesome and remove it from market. However, a duty is placed on food developers and
producers to guarantee that the foods they provide to consumers are safe and comply with all
legal requirements. The FDA monitors the market to ensure that food is safe for consumption and
that labelling claims are not fraudulent or misleading. But, they do not scrutinise every new food
product entering the market. In general, whole foods, such as fruits, vegetables and grains
developed using gene technology are not subject to pre-market authority or mandatory labelling.
2.13.4 Canada
There are no regulations dealing specifically with nutraceuticals or functional foods. All
foods and drugs fall under the provisions of the Food and Drugs Act and Regulations. However,
Health Canada has established a new Natural Health Products Directorate (NHPD) to develop a
new regulatory framework for NHP (including nutraceuticals). The goal is to protect the health of
consumers while giving them choice and access to products.
In September 2001, the NHPD proposed NHP to include products manufactured, sold or
represented for use in: (i) the diagnosis, treatment, mitigation or prevention or prevention of a
disease, disorder, or abnormal physical state or its symptoms in humans; (ii) resorting or
correcting organic functions in humans, or (iii) maintaining or promoting health or otherwise
modifying organic functions in humans. Specifically these products will include homeopathic
preparations, substances used in traditional medicine, a mineral or trace element, a vitamin, an
amino acid, an essential fatty acid or other botanical, animal or microorganism derived substance.
Most NHPs, nutraceuticals and medicinal herb products marketed in Canada make no
claims and are regulated as foods. When regulated as a food, there are no provisions in the
legislation to make claims of a "health" or "therapeutic" nature regarding the use of, or possible
side effects of, the product. 74 NHPs, nutraceutical or functional foods that carry a health claim
are treated as drugs. A Drug Identification Number (DIN) is required which is issued by the
Therapeutic Products Directorate (TPD). The current regulations permit: positioning food as part
of healthy eating and claiming a nutrient or nutritive substance (listed in the Regulations) is
generally recognized as an aid or factor in maintaining the functions of the body, or necessary for
the maintenance of good health and normal growth and development (also known as "biological
role claims" and nutrient function claims).'' Nutraceuticals have been included in the framework
for NHP. It will be similar to the DSHEA but one key difference is that the proposed changes
could allow product specific claims whereby a company with supporting R&D for its product
would be allowed an exclusive claim. Another food with the same ingredient would not be able to
make the claim unless supported by research. To protect consumers, Health Canada has banned or
restricted some NHPs because they were unsure of the product's safety.
The current regulatory environment is discouraging to innovation and marketing for
nutraceuticals/functionalfoods. Many feel that the standards and regulations applied to NHPs in
Canada are inappropriate, and lead to restricted entry of many safe and effective products.
2.13.5 Japan
Japan's nutraceutical regulation is based on FOSHU introduced by the Ministry of Health
and Welfare (MHW) in 1991. FOSHU are defined as those that are consumed in a normal way
(as opposed to pills and capsules) and which support the improvement of the diet and help
maintain or improve health. Products are licensed so they may make limited health claims. To
be considered, products must demonstrate specific health effect due to the product's composition,
and the effect has to be scientifically evaluated, and non-toxic and not pose a health or hygiene
risk. Before a license is issued, there has to be proof that product contributes to the improvement
of dietary habits and enhance health, the health benefits of the food or ingredient should have a
clear medical basis, foodhgredient must have definable dosage level, based on medical
knowledge, safe, relevant information should be defined in terms of physiochemical properties,
74 Health Canada 2002

nutritional composition should not differ greatly from ordinary foods, product must be consumed
regularly not occasionally, and the product must be in the form of ordinary food not a pill or
capsule. 76 Approval is a 3-stage process and is not easily obtained. To date, about 85 products
have been given approval since 1993.77
The Japanese system is based on a list of approved foods and ingredients that the
Department of Health feel have enough scientific evidence to support health claims. The MHW
has approved 12 health claims. FOSHU foods are classified into five categories.
1. Foods that enhance the body's immune system by boosting defence mechanisms
2. Foods that help prevent or control disease like diabetes or heart disease
3. Foods that aid recover from disease such as lowering high cholesterol levels
4. Foods that regulate body rhythms by aiding digestion or enhancing absorption of
vitamins and minerals
5. Foods that help to suppress aging78
If a manufacturer can show that its food product contains one of the approved foods/ingredients,
it can carry the FOSHU label. Such ingredients include but are not limited to maltitol, wheat bran,
soy protein, phosphorus, and rice globulin.
Until 1997, regulations were strict and time consuming, 4-year approval process. In an
effort to update the system, the government introduced some revisions. Approvals are no longer
time-limited, and the supporting documentation for the claim has been reduced and the process
shortened. Also, licensing of individual ingredients occurs rather than individual products. This
allows companies to use a pre-approved functional ingredient and display a FOSHU symbol
without the approval process. This change has helped, while only 25% of functional foods had the
FOSHU symbol in 1997, more than 50% bore the symbol by 2002.'~
The FOSHU system is authorized by the Nutrition Improvement Law and the Nutritional
Improvement Law Enforcement Regulations. In 2001, a new regulatory system divided health
claims into two categories, FOSHU and Foods with Nutrient Function Claims (FNFC)(similarto
S/F claims in the US), 12 vitamins and 2 minerals are standardized. FOSHU applications are
submitted to local authorities and to the MHW. The application process takes about 1 year.
Further regulations include Foods for Special Dietary Uses (FSDU) that covers foods for medical
purposes and foods for pregnant and lactating women, infants and the elderly, and Health
Promotion Law which aims to improve long-lasting health and counter lifestyle-related diseases
76 Broome 172
77
Broome 173
78 National Centre of Excellence in Functional Foods 2004
through better dietary habits. Lastly, there is also the Japan Health Food Authorisation (JHFA)
with some authority.
2.13.6 Product Life Cycle
The level of uptake of a product will determine how it will fair against those already on
the market and whether the whole market size will increase. Products go through four stages (see
Figure 6). During stage 1, the product is launched into the market. This stage is relatively short
unless uptake of the product is low. This is where the product is considered most innovative and
premium prices will be paid. Also, organizations must consider distribution channels, which are
complex. Stage 2 involves competitors entering the market. Marketing and distribution of the
brand is very important at this stage. This is likely the stage Forbes will enter with the
combination. A combination of sterols and omega-3s has already been introduced to the market
by CardioTabs and Smart Balance who entered in stage 1. Then, there is adaptation and
improvements occurring in stage 3 as companies try to keep their market share. Improvements
include the introduction of new benefits such as additional fortification, new flavours, and low fat
variants. Also, companies look at addressing new distribution channels, packaging and format,
and promotion. This stage will not be too far away as omega-3s gain in popularity and become
mainstream (omega-3 fortified orange juice). Omega-3s and sterols find themselves in the midst
of finding other functionalities. Finally, they enter the sales decline phase in stage 4 where there
is integration and rejection. An example is functional breakfast cereals, which are a mature
market where consumers want more for their money. Also, fats and spreads are coming up into a
maturation part of their lifecycle which is where sterols are currently most popular. Companies
must become more innovative and find themselves moving into stage 1 again which essentially
completes a circle or the lifecycle. Thus, companies adding omega-3s to sterols to produce a
more functional product complete the lifecycle and move products back into stage one. As new
brands emerge in the earlier stages, pressure is brought on older products. The position of
products is not fixed and is entirely dependent on competing products. Also, stage 4 splits into
two opposing pathways, rejection and integration. Nutraceutical development is heavily
dependent on R&D. This innovation effects how long a group of products or brands spend in a
particular stage. So, it is important to consider the function, type of usage and target consumers
of potential or competing products.
Figure 6: Product ~ i f e c ~ c l e ~ ~
Stage 1: Infancy Stage 2: Early Growth Stage 3: Late Growth/ Stage 4: Maturity/
Maturity Replacement
Totals
lndusG
Total Profit
Time try
L
r , b
2.14 Are Functional Foods Necessary?

Is it truly necessary to incorporate additives and special ingredients into foods? There are
enough nutrients in natural foods to maintain good health. If a proper diet is followed with lots of
fruits and vegetables, the risk of chronic disease should be decreased. Functional foods may be
beneficial but individuals still need to have a healthy, balanced diet and lifestyle. Also,
successful products to date have competed with traditional foods. The science has not been well
received due to poor advertising or misunderstandings of benefits. Thus, pharma companies have
not flourished and have mainly dropped out for the time being. However, with the blurring of
nutraceuticals and pharma, there may still be a future for pharma if they learn some lessons from
food manufacturers. Consumers are drawn to innovation but they do not want products that are
too innovate so there is a fine line for companies.
Currently, the forces shaping the nutrition market include legalhegulatory, retailers,
consumers, and supply chain, access to capital, branded manufacturers, and technology.
Functional foods are still described as the future of food. The food industry is still characterized
by cost cutting, economies of scale, commodity brands and products. So, achieving double-digit
growth through nutrition marketing or new functional foods is a major success. When looking at
companies and functional foods, it is sometimes hard to see which ones will truly break through
and pioneer the next generation of functional foods. But, companies such as Abbott have the
potential to become one of the more important large global functional food and nutritional
companies. The company is already a global, broad-based healthcare company marketing
products in more than 130 countries. They acquired the Zoneperfect Nutrition Company to
expand its position and they have their ~nsureQ3~'brand as well as brands targeted to specific
groups such as Glucerna. Successful companies will not focus on one particular health or
so Shapiro 207
Registered trademark of Abbott Laboratories
wellness area, but combine a spectrum of product solutions, often from medicine to dietary
supplements to ingredients or nutritional interventions, including foods and beverages.
2.15 Future of Nutraceuticals and Functional Foods

2.15.1 Overview of the Market
The functional food industry is fairly young and has unexplored potential. So far, the
market has been unstable and difficult to predict. There have been many high profile
withdrawals. In general, most new food products are discontinued within a year of market entry.
Benecol sales have not been as high as expected despite being able to make clear cholesterol-
lowering health claims on labels and in advertising. Results fi-om Raisio for the first half of 2003
show that its Benecol business is still losing money. This comes eight years afier the birth of
Benecol and despite a presence in 20 markets around the world. Raisio's focus has been on the
product rather than the consumer. Successful products, like Yakult, do not base advertising on
health claims, but rather compete with traditional products. Premium prices are also a problem.
The price has to be justified and it seems many products do not appear to reduce health risks
enough to substantiatethe price. Furthermore, consumers have many food choices and are
empowered with a lot of information so well-defined heavily promoted products will survive.
Nutraceuticals will continue grow in the coming years but this fractured market can be
difficult to navigate since many products are doomed for failure. Growth will continue to be
dominated by partnering, joint ventures, and in-licensing. However, the nutraceutical and
functional foods industries are dynamic, evolving industries offering exciting opportunities to
combine scientific discovery with growing consumer interest in health-enhancing foods. As in
any developing industry, new supply chain relationships must be forged. This presents challenges
given the concentrated nature of downstream food processing and retailing and some sectors of
upstream raw material supply, the asset specificity of investments in technology or technology
delivery mechanisms, and the uncertain market and regulatory environment.
2.15.2 Future Trends

Future trends in b c t i o n a l foods will include more highly researched and efficacious
products that deliver high value, proprietary ingredients. At the moment, only a few products
introduced have been clinically researched and patented. Companies will begin to utilize pharma
research tools and methods. This will allow consumers to purchase products that can be
differentiated and build trust regarding the health evidence. Pharma companies will be lured back
into functional foods and nutraceuticals. Abbott Laboratories is still in the business with lines
such as Ensure that are considered functional foods but have not as yet relied on the health
benefits. They fill a niche market and have gone so far as market these products under the
company name of Ross Products. Figure 7 illustrates the value chain. Pharma companies have a
similar chain and would be able to utilize their competencies used for creating Rx drugs. They
have drylng pipelines and are looking for other ways to generate revenue. There is a great deal of
competition so there is a limit to supply chain functions that can be undertaken by the small scale
companies providing R&D, thus, encouraging alliances and joint ventures. These relationships
will allow manufacturers exclusive rights to new products in return for access to brand name
capital and market position of the established company. In the past, companies have tried to
integrate all the areas of the supply chain and bring all competencies in house. The future will
see f m s accessing core competencies of other companies through alliances and outsourcing.
So, pharma companies can access marketing competencies from food companies and they can
access the R&D competencies of pharma.
Figure 7: Value Chain for Nutraceuticals/Functional Foods

Basic R&D Technology Technology Transfer & Production1 Distribution1 Consumer
(Discovery) Development Commercialization Processing Retail
R&D plays a central role in nutraceuticals and functional foods. Their development is
resource intensive both financially and in time required for basic research, technology
development and commercialization. Also, interesting to note, there is a significant correlation
between the number of patents a company owns and its financial valuation in capital markets.
Companies having a higher market valuation will be in a better position to leverage additional
financial resources to invest in R&D. So, the roles of patents will increase however it can be
difficult to patent these types of ingredients. If companies have limited access to funds, they will
be forced to partner or merge much earlier and innovators often are not able to undertake supply
chain activities beyond technology transfer, leaving companies vulnerable for take over. Also,
large manufacturers will try to vertically integration back along the supply chain to secure access
to IP. This is where disputes will arise and companies need to be cautious since large companies
have funds to fight these legal battles whether they are ultimately right or wrong.
Diverse regulations in different markets increase transaction costs for firms. Product
development, approval and marketing costs are all increased if product standards, requirements
for scientific evidence and labelling regulations differ. Efforts to establish international guidelines
for the labelling of nutraceuticals and functional foods would facilitate international trade. Codex,
the body through which (non-binding) agreements are reached internationally on food
regulations, does not have a specific committee to examine either nutraceuticals or functional
foods. Addressing these issues is important and being considered but solutions are still in the
distant future. Globalized pharma regulations are still being worked out so functional foods and
nutraceuticals have an uphill battle. So, mergers and alliances will be encouraged so that
companies can access global markets. Harmonization is possible. Just look at the EU, after
many years of negotiation, they have passed laws to allow fair-trade between these countries.
Japan may have a well-developed market but it is still an area for growth. They are
expected to have a huge senior population. Developed countries should still be targeted since
legislation does change and consumers will continue to be concerned with health needs as well as
the increasing disposable income in countries such as Eastern Europe, and Asia.
2.15.3 The Consumer

Consumer trends include people willing to self-medicate and turning to functional foods
for their functionality. With the rising age of the population, consumers are concerned with their
health and living longer. They are incorporating healthy foods choices into their diets however
they do not want to give up taste, convenience or pay a lot. They do not often make the
distinction between foods with added benefits, those with reduced fadsugar and organically
produced items. To the consumer, there is little or no difference between these foods.
Consumers are more educated than ever on their health and preventing disease but there are still
misunderstandings of the science and health claims. Many consumers are not well educated
about specific benefits of foods and nutrients and they choose products that are appealing. Many
consumers also confuse issues of health and organics with issues of ethics. So, manufacturers
cannot rely on health issues alone, rather the product should be well rounded, taste good, fair
price, convenient and marketable. The focus needs to be on the consumer not the product.
Companies need to find out what the consumer wants and supply it. This is not always easy;
since, this can be ever changing and there are many alternatives. Consumers will eventually be
comfortable eating their medicine.
Consumers are becoming distrustful of health claims so companies need to develop
credible labelling claims based on clear and concise health benefits, as well as having supply
chain relationships that assure the integrity and consistency of the product. Third party
certifications will be important for certifying labelling claims. Also, quality assurance initiatives
will offer another means by which credibility can be communicated to consumers. This trend will
decrease once more pharma companies move into the arena. Pharma companies have a
reputation of providing trustworthy Rx drugs and consumers will eventually be comfortable
consuming foods that they produce. Currently, many pharma companies if still in functional
foods will market under another name so they are not associated with pharma.
The nutrition community is concerned that many functional food products created to date
can be misleading in that consumers switch to these products and leave behind a diverse, healthy
diet relying on the functional additives (i.e. chocolate bars, energy bars, and soft drinks).
Functional foods seem to be trending toward processed and convenient foods instead of
encouraging consumers to cook healthy meals at home. Companies will have to keep this in
mind as they move into developing countries and become responsible for nutritional claims.
They follow the trends for traditional foods. There is also the thought that functional foods will
eventually be just another food segment and a commodity.
2.15.4 Company Strategies

Branding is going to be important to set products apart from traditional foods and other
functional foods in the minds of consumers as more and more foods enter the market. Branding
will be important between suppliers and manufacturers. Suppliers provide the research and
possibly the advertising while the manufacturer provides a platform and distribution.
As the boundaries between food and medicine fade, one of the first target groups for the
producers of functional food and nutraceuticals is medically trained professionals. Currently, this
group is not targeted for promotions. Advertising should target health magazines and papers to
raise awareness of the product and its benefits similar to what occurs in pharma. However,
guidelines will be necessary for the number of clinical trials required which will introduce
legislation changes and involvement from regulatory bodies. At the moment, selling a product
through a food retail channel allows for large volumes and competition for shelf space.
Consumers are free to compare prices so it results in a low price margin but a larger volume. On
the other hand, if the distribution channel is a medical professional (e.g., a doctor or pharmacist),
the volumes are smaller, and the price margin is higher. The distribution channel also has an
effect on revenues through differentiated taxation and possible reimbursements (like pharma).
Demand patterns for functional foods vary between countries, depending on the needs
and the deficiencies caused by diet and lifestyle. In Europe and Japan, gut-health products, such
as probiotics, have a strong presence. US consumers are more concerned with cholesterol. Also,
regions will act differently due to maturity and development of the market, the AsidAustralasia
clearly dominate due to the massive Japanese market, while Eastern Europe and Africa remain
underdeveloped. As old categories mature and new categories emerge, companies will need to
align their strategy for aggressive marketing and looking to own segments of the market. Thus,
companies must be aware of the consumers needs in different countries and market to them in
particular and keep an eye on future trends in that particular region. They will not be able to have
one marketing campaign for global products.
While technological and cultural advances and changes have led to a blurring between
the concept of food and drugs, legislation in most countries lags behind. Generally, food products
are defined as distinct from drugs in that they cannot confer any kind of health benefits. If a
company wants to indicate a health benefit, the food must undergo lengthy evaluation as a drug.
But, the laws are in flux. The future sees many changes for legislation possibly moving toward
drug manufacturing.
Future strategies will be to back up health claims with clinical studies, targeting specific
aliments, marketing against traditional products so having the taste, convenience, and price,
partnerships between suppliers and manufacturers, more patenting to protect health claims and
technology, not forcing consumers to change their lifestyles but fitting in to their lives (new
packaging, formats, dosing), global marketing and distribution, large companies will continue to
acquire technology and companies, and small companies will partner and form alliances.
The healthy foods market will become more confusing and uncertain in the immediate
future. The next 10 years should see an unprecedented change in food supply based around
nutrition and health and will continue to diversify until the industry resembles traditional foods.
With all sorts of foods and beverages becoming functional through adding beneficial ingredients,
the industry may collapse and functional foods may not be distinctive anymore. Growth in the
functional food market also has to be seen in the context of an aging population and a slowdown
in the increase in population growth overall, both factors would affect overall food sales. An
aging population is usually associated with a decrease in food sales.
Manufacturers need to translate health claims into tangible consumer benefits, and to
explain how functional foods can replace or complement drugs. However, consumers are not just
seeking products but an experience. Starbucks offers consumers a complete experience, not just
an expensive cup of coffee. Lifestyle-related and diet-related diseases are now globally epidemic,
so they should be the focus for all those entering and within the industry.
3 VITAMINS AND DIETARY SUPPLEMENTS (VDS)
Chapter 3 focuses on VDS. This market is similar to nutraceuticals and functional foods
and consumers may use them in place of nutraceuticals andlor eating properly. It is simpler to
take a pill than sit down and eat a healthy meal. Forbes, who is currently involved in
nutraceuticals, has a product that could be marketed as a dietary supplement (combination of
Reducol and omega-3s). They have supplied manufacturers already with phytosterols to
incorporate into vitamins. The discussion that follows will highlight the market with particular
attention to fish oils, the major players involved, legislation, market drivers, barriers, company
strategies and competition especially in the realm of CVD.
3.1 Introduction
VDS are generally considered part of the OTC healthcare market so a number of large
companies are involved. The ReducoVomega-3 combination in a softgel capsule would be
marketed in this arena, which is the subject of this paper. Most manufacturers and retailers in
VDS have complete lines of vitamins and supplements including herbals and multi-vitamins.
Also, manufacturers have more than one product which they are supplying as well as being
involved in continuing R&D for new applications of their current products and innovative new
products. Leading drug companies participate in this industry and they have established R&D
capabilities as well as marketing means which allows them to compete.
3.2 The Market

The OTC healthcare market was estimated at -$85 b in 2002. The OTC market is led by
20 multinational producers, whose combined sales accounted for 41% of global value in 2 0 0 2 . ~ ~
Of these 20 companies, 8 were US-owned, 4 Japanese-owned, and 2 each based in Germany,
Switzerland and the UK. The 2 remaining companies were French and Dutch owned. Five major
companies in the industry include J&J, Pfizer, GSK, Wyeth, and Bayer. This market is expected
to grow 13% between 2002 and 2007, driven by the aging populations in developed markets and
increasing consumer self-medication. The fastest growth will occur in the less developed regions
of Eastern Europe, Afiica and the Middle East, and Asia-Pacific. The increased activity by
multinational OTC manufacturers, combined with wider distribution of OTC products through
non-pharmacy outlets, will also increase demand and cause growth. However, prices are
Euromonitor International Nov.2003

decreasing as discounters move in and take a share of the sales. As VDS information and
products become more available, regions like Eastern Europe are demonstrating potential growth
due to rising health awareness and increased consumer focus on preventative medicine.
Figure 8 illustrates the breakdown for the global OTC market per region. The continuing
trend towards deregulation is expected to benefit the market, particulafly in developing regions,
although pressure on governments to reduce expenditure on healthcare will allow fiu-ther
deregulation in developed markets. In well-developed countries, such as the US and the UK,
increasing private label activity is expected to put further pressure on prices. In addition,
increasing direct to consumer advertising of Rx drugs may offer a threat, leading to a need for
&her product development and promotion.
Figure 8: Breakdown of the Global OTC Market, 2001s3
Far East
6%
Europe
32%
The market for VDS is established and maturing. However, VDS accounted for 40.2% of
global OTC healthcare sales in 2002. Global sales of W S are shown in Table 9. Asia-Pacific
represented the most valuable regional market, with 43.5% of VDS global sales. The US
accounted for 36.6%, experiencing sales growth of 9.8% between 1997 and 2002 (it is estimated
that 70% of the US adult population use dietary supplements). Japan experienced the second
largest sales in 2002, accounting for 3 1.1%, which was an increase of 0.5% from 2001. South
Korea was a distant third with a share of 3.4% in 2002. s4. Between 2000 and 2001, the US
market grew by 2.4% followed by the UK with 0.9% and France with 0.6%? Recently, rulings
in the EU have made VDS part of standard EU regulation rather than national regulation which
will help the market in those countries that were once restrictive (i.e. France, Spain, and
Germany). The rapid growth of distribution channels such as mail order and the Internet provide
83 Padhi 46
85 Padhi 100
market increases. Moreover, in contrast to pharma drugs, it is relatively easy to manufacture and
obtain a sales licence for health supplements which leads to growth.
Table 9: Vitamin and Mineral Supplements salesg6

Country 1996 ($m) 1997 ($m) 1998 ($m) 1999 ($m) 2000 ($m) eCAGR 1996-?000
France 245 251 268 287 305 6%
Germany 1,129 976 953 93 1 912 -5%
Italy 176 176 175 174 173 0%
Netherlands 56 51 53 56 58 1%
Spain 124 126 126 127 127 1%
Sweden 26 26 26 26 26 0%
UK 224 237 241 245 249 3%
European total 1,804 1,667 1,668 1,672 1,851 1%
US 3,775 4,074 4,395 4,742 4,989 7%
The US VDS grew by 2.1% in 2002 to surpass $12.6 b.87Growth in the past has been
higher and the increasing declines are likely due to concerns of efficacy and safety. For example,
reports have been published implicating negative interactions of ginkgo biloba with some Rx
drugs as well as findings of little noticeable improvement in memory after 6 weeks of use. Thus,
herbal supplements such as ginkgo biloba, echinacea, and St John's wort, which had strong
growth in 1998, saw declines of 33.7%, 9.7% and 36.l%, respectively. In general, consumers
did not see the benefits promised and stopped buying the products.
Dietary supplements represent the largest VDS sector. In 2002, this amounted to sales in
the US of $6,614 m, an increase of 2.6% from 2001 slightly up from 1997 of $5,037 m. s9 Top
selling dietary supplement brands in 2002 were General Nutrition Cos (GNC), Nutrilite,
Herbalife, Rexall Sundown, and Nature Made. This market is large, relatively mature and is
highly fragmented with numerous herbals available. Table 10 illustrates global sales of dietary
supplements by type from 1997 to 2002. Calcium is the most popular supplement experiencing
sales of -$l,894 m in 2002 followed by mineral supplements with sales of -$l,3O7 m and fish
oils with sales of -$869 m.

Euromonitor International Apr.2003
Table 10: Global Sales of Dietary Supplements by ~~~e~
00 ($m) 2001 ($m) 2002 ($m)
Calcium supplements 1,494.5 1,512.0 1,660.7 1,786.0 1,808.5 1,894.1
Mineral supplements 1,223.7 1,242.6 1,307.1
Fish oils 804.6 817.1 869.4
Garlic 477.1 437.9 433.8
Ginseng 450.5 386.9 356.1
Ginkgo biloba 554.6 458.8 397.9
Evening primrose oil 127.8 127.3 134.3
Echinacea 414.5 411.6 411.0
St John's wort 307.7 201.9 156.3
Otherdietarysupplements
. .. 5,870.8 5,830.0 6,457.5 7,096.9 7,483.6 7,982.1
Dietary supplements 11,771.8 11,884.7 12,640.7 13,243.6 13,376.4 13,942.2
The VDS market is predicted to grow by 12.7% between 2002 and 2007, and reach sales
of -$l4.2 b. Table 11 demonstrates global sales for VDS in 2002 and the predicted sales for
2007 with the Asia-Pacific being the largest consumer followed by North America. As the baby
boomers age, their interest in age-specific products such as vitamin K and B, glucosamine,
probiotics, fish oils, black and cohosh root is expected to continue. Dietary supplements, used to
treat specific aliments, sales are expected to increase by 17.6% between 2002 and 2007, to
approach $7.8 b.91The dietary supplements market is known for its high but intermittent growth
as new deficiencies in consumers' diets are discovered. In the US, the primary reason for growth
has been the aging population. Consumers are expected to increase their use of health products in
order to maintain their quality of life and prevent disease. More importantly, with the increasing
criticism over the generally poor standard of dietary intake, North Americans are considered to
have much to gain from the use of supplements.
Table 11: Forecasted Global Sales of VDS by ~ e ~ i o n ~ ~

2002 ($m) 2007 ($m)
Western Europe 4,104.2 4,392.2
Eastern Europe 862.9 1,349.6
North America 12,960.8 14,563.6
Latin America 971.7 1,180.5
Asia Pacific 14,990.2 16,763.1
Australasia 289.8 336.0
Africa and Middle East 305.6 415.5
World 34,485.2 39,000.5

9' Euromonitor International Nov.2003
3.2.1 Fish Oils
Fish oils are a hot topic at the moment. Referring back to Table 10, fish oils have been
increasing since 1997, with a market worth $869 m in 2002. In the US, fish oils had gains in
2002, sales increased by 13.2% over 200 1, to reach $157 m (sales were $84 m in 1997).93 Fish
oils are divided into cod liver oil and other fish oils (blended products and alternatives such as
salmon oil). In 2002, cod liver oil held a value of -$75 m and other fish oils were valued at $83
m which is an increase from 2001 where cod liver was -$66 m and other fish oils was -$72 m.
Growth in fish oil supplements has been due to the rising awareness of the benefits of omega-3s
in maintaining circulatory health and reducing cholesterol levels. Further studies have also linked
them to maintaining nerve membrane, retina, and brain health. These oils can be taken in a
liquid, tablet or capsule form, or incorporated into foods and drinks.
3.3 Distribution
Global distribution of OTC is shown in Table 12. At the top of the list are chemists and
pharmacies followed by drugstores and parapharmacies and grocery outlets. As illustrated, there
has not been much change since 1997. The chemists have lost some ground with discount stores,
drugstores, and direct sales gaining. In 10 of the top 15 largest OTC markets, the
chemists/pharmacistschannel accounted for more than 50% of value sales in 2002. The US and
Canada are exceptions since OTC products see few distribution restrictions, and can be found in a
wide variety of outlets including supermarkets, drugstores, health food shops, mass
merchandisers, and convenience stores. Chemistslpharmacies accounted for 89% of OTC sales in
countries such as Turkey, France and Spain in 2002. In Mexico, 42.8% of OTC sales occurred in
grocery outlets.94Canada and the US saw major distribution through drugstoreslparapharmacies
as well as health food stores. Italy ranks high in health food stores as the main outlet for sales.
The US, Canada and Germany see consumers purchasing from discounters (retailers such as Wal-
Mart and Target). Direct sales are mainly used in countries like South Korea, Taiwan and Japan.
93 Eurornonitor International Apr.2003

94 Eurornonitor International Nov.2003
Table 12: Global Distribution of OTC Healthcare Sales by Retail channel9'
~ru~stores/~ara~harmacies 14.9 15.6

Grocery outlets 15.3 15.3
Health food shops 7.5 8.3
Discount stores 5.0 7.1
Direct sales 7.5 8.6
Others 3.4 3.3
Table 13 shows the distribution of VDS globally. This distribution is very similar to OTC
with chernists/pharmacists leading distribution. However, health food stores come in second
whereas drugstores are second for OTC. This differs slightly from the US market where more
sales are made through health food outlets. But as illustrated in the Table, drugstores and grocery
outlets are becoming popular in global markets.
Table 13: Distribution of Global Vitamin and Dietary ~upplernents%

1997 (%) 2002 (%)
Chemistslpharrnacies 31.5 25.8
~ru~stores/~ara~harmacies 11.0 10.4
Grocery 15.8 14.4
Health food stores 17.6 19.5
Discounters 2.9 4.9
Direct sales 18.3 21.2
Other 2.9 3.8
Though VDS in the US were once exclusively found in health food stores and direct
sellers, sales growth in recent years has led to a presence in mainstream channels. Figure 9
illustrates the sectors of distribution by percent in the US. Health food stores remain the leader in
distribution, despite a decline of 3.3 % between 1997 and 2002, with 39.2% of the sector value in
2002.~'The advantage health food stores have is their large product selections and knowledgeable
staff. Direct sellers come second for

97 Euromonitor International, Apr.2003
Figure 9: Distribution of Vitamins and ~ u ~ ~ l e r n e n t s ~ ~
Chemists1
Pharmacies Other
1% 9%
Health Food
Stores
39%
L ~ i r e cSellers
t
23%
3.4 Competition
The US VDS market saw hundreds of new products introduced in 2001 and 2002. In line
with sales trends, many of these products were condition-specific and several were linked to age-
related issues targeting the large, aging baby boomer population. Many of the products launched
claimed to promote circulation and the cardiovascular system as well as lowering cholesterol.
August 2001 saw the introduction of CardioPC, which claimed to offer protection for arterial
walls and to promote healthy circulation and heart function. Tenshin Essentials Elastese Dietary
Supplement from Japan's Taiko Healthcare Inc, released in January 2002, claimed to help
consumers maintain healthy cholesterol levels through a naturally occurring enzyme. May 2002
saw the US debut of Heart Formula Pioneer Supplement Capsules from Pioneer Nutritional
Formulas Inc. This vegetarian capsule is designed to strengthen and support cardiovascular
function through its blend of co-enzyme Q10, hawthorn extract, B vitamins, vitamin E,
magnesium, and chromium. Nature's Formulary LLC debuted Arjuna Ayurvedic Dietary
Supplement in October 2002. This vegetarian product is claimed to support cardiac function using
East Asian herbal tradition.
The following section discusses a few manufacturers and supplements already on the
market with omega-3s. There is a long list of companies so only a few have been used to
demonstrate the VDS market and how companies survive. Most of the large VDS companies
have some kind of omega-3 or fish oil supplement. However, there are not a lot of competitors
that have a combination sterollomega-3. All omega-3 manufacturers have some kind of oil or
capsule with they sell and most are involved in on-going research. Forbes does not manufacturer
--
98 Emomonitor International Apr.2003
51
nor do they have expertise in omega-3s so they will be looking for this expertise and need to be
aware of all the suppliers and manufacturers in the marketplace.
3.4.1 ~ r n e ~ a ~ u r e ~ ~ ~ ~
The Omega Protein Corporation is one of the largest US producers of fish oil and protein
products from menhaden (type of fish). OmegaPure, their functional ingredient, has GRAS
status. It is non-GM or genetically enhanced and claims to leave no aftertaste. In addition to
being stable, OmegaPure is kosher and organic and can be formulated into many products.
Additional categories for omega-3 are now being considered for approval by the FDA and they
are expected to broaden the food applications to include breads, beverages, chewing gum,
confections and frostings, dairy products, gelatins & puddings, pasta, candy, and jams and jellies.
Omega-3s can be tricky to incorporate into foods; so Omega Protein provides tips for
customers via their website. Some guidelines include the equipment must be free from metals, it
can't be used in products with skim milk powders, storage containers must be closed and kept
frozen or refrigerated to prevent oxidation, and it must be incorporated as part of the fat system
late in the production process. Omega Protein also provide oils in different forms including
liquid, powders and capsules so that they can be incorporated into a number of foods.
In April 2003, Omega Protein expanded their operations in Virginia so they could have a
fully equipped lipids laboratory to assist in R&D of omega-3 oils and food products. Omega
Protein announced, in Nov.2003, that GFA Brands, Inc. was introducing ~ m a r t ~ a l a n c e @ ' ~ ~
OmegaPlus, a buttery spread fortified with omega-3s to be available in stores in the US. It
contains OmegaPure and natural plant sterols with no hydrogenated oils or trans-fats as well as
both EPA and DHA from marine sources and alpha-linolenic acid (ALA) omega-3s from plant
sources. H&H Foods announced that they would be launching the first line of omega-3-fortified
foods with OmegaPure developed to make school meals healthier for Texas schoolchildren in
January 2004. Food products will include breakfast tacos, tamales and cheese sauces and will be
available in February 2004.
3.4.2 ~ a r d i o ~ a b s ~ ~ ' ~ '

CardioTabs is a company founded by the cardiology specialists at Cardiovascular
Consultants, PC. They formed the company to provide high quality nutraceuticals that are safe
and effective in maintaining cardiovascular health for their patients.
99 Trademark of Omega Protein

loo Registered trademark of GFA Brands, Inc
101
Trademark of CardioTabs Inc.
They have a few products on the market but two are of concern, CardioTabs Omega-3
and CardioSterol. CardioTabs Omega-3 is a concentrated fish oil product, consisting of 50%
DHA and 25% EPA by weight. The labelling guarantees at least 70% of the oil is omega-3s.
This is approximately the strength of the omega-3 product used in the GISSI Prevention Trial
performed in Europe. The randomized trial involved over 11,000 post-myocardial infarction
patients and showed a 20% reduction in all-cause mortality and a 45% decrease in sudden death
in those who received the omega-3 supplements. lo* CardioSterol combines both sterols and
omega-3s. One serving of CardioSterol(2 softgels) contains 1.3 grams of phytosterol esters and
128 milligrams of fish oil.
3.4.3 Ocean Nutrition (ONC)

ONC manufactures and distributes omega-3 fish oils for North American, Asian and
European dietary supplement markets. It is a wholly owned subsidiary of Cleanvater Fine Foods
which is a large seafood harvester, processor and exporter. ONC has science based research and
innovation along with manufacturing expertise in their plant in Nova Scotia. ONC is able to
provide the product in the form of bulk oil, soft-gel capsules, and microencapsulated powder.
They assist customers in designing formulation levels of concentrated EPA and DHA to meet
their specific health claim and positioning objectives.
ONC's business is to discover, manufacture and market marine based ingredients, to
improve health. Their plant is licensed to commercially refine and concentrate omega-3 fish oil.
The plant is also certified to a pharmaceutical-level, cGMP standards, by the Canadian Food
Inspection Agency (CFIA). ONC selects the species and grade of raw material that will yield the
optimal level of EPA & DHA in the finished products, they remove saturated fats present in the
raw oil which leaves a clear-coloured oil with long-chain fatty acids, and they remove heavy
metals, PCBs and other unwanted elements.
Some of competitive advantages they have are global markets accessed through the
parent company as well as they are a leader in the concentrated omega-3 category, they have
three patented compounds, they have a large privately owned marine research facility, they are
recognized as a Leader in Innovation at Canada's National Research Council's 2003 Outstanding
Achievements Awards, they are the first 50% omega-3 concentrate to achieve self
affirmation GRAS status (April 2004), they have Canadian DIN certification for omega-3
concentrates, and they have cGMP and Hazard Analysis Critical Control Point (HACCP)
certification of manufacturing and packaging facilities. It is speculated that ONC is working with
'02 CardioTabs 2003

Raisio to innovate products with omega-3s and sterols/stanols. Also, they have four business
lines; concentrated omega-3 fish oil ingredients, powdered omega-3 fish oil, ~ e s ~ o n d i n ~ ~ ' ~ ~
(supplement ingredient for balanced immune support), and ONC-103 (supplement for pre-
hypertension support) to help move the company forward.
ONC Clinical and Regulatory Affairs department works closely with Innovation &
Research to conduct clinical trials on new and existing products, according to Good Clinical
Practice (GCP), and International Conference on Harmonization (ICH) guidelines. ONC partners
with independent researchers to conduct pre-clinical and GCP compliant clinical studies.
3.4.4 Omegacin+
Vaxa has a line of proactive cardiac care products which include Omegacin. Since 1987,
Vaxa has been formulating homeopathic medicinals. They combine homeopathy with vitamins,
minerals, amino acids and herbal medicines to provide natural alternatives for health concerns.
They offer an extensive line of herbs, and vitamins and supplements through their website.
Omegacin is a combination supplement that contains 38-bioavailableomegas 3-6-9 and
essential lipids, plus phytosterols and antioxidants. They claim that the ingredients in this formula
have been shown to naturally help strengthen cell membrane integrity, help repair cellular and
tissue damage, help optimize neurological transmission and brain function, help improve heart
and circulatory function, and help produce supple, moist skin for a mere $32.95.Io4 They provide
a description of lipids and why they are important, and they provide information on cholesterol
and essential fatty acids (EFAs) as well as providing references.
3.4.5 Spectrum Ingredients

Spectrum Ingredients is a division of Spectrum Organic Products, a corporation founded
in 1981, and claims to be the largest natural and organic oil company in North America. In
addition to culinary oils, Spectrum markets nutritional oils, vinegars, condiments and dressings
under the ~ ~ e c t r u m @
label.
' ~ ~Their products include an omega-3 mayonnaise, an omega-3
spread, a soy protein spread, and fish oils in capsule and liquid form. Spectrum offers many
organic oils, and they have guidelines in place to ensure that their products are free of GM
ingredients as well as free from hexane extraction or harmful preservatives.
Spectrum is a producer of many functional food ingredients including EFA oils such as
borage oil, evening primrose oil, flax oil, and wheat germ oil. Flaxseed oil is valued for its health
- - - - - -
'03 Trademark of Ocean Nutrition Canada

Io4 V k a 2004
' 0 5 Registered trademark of Spectrum Organic Products
benefits, since it has the highest content of omega-3s from a plant source. They provide their oils
in liquid and capsule forms as well as manufacturing for private label. Evening Primrose Oil
contains high levels of gamma-linolenic acid (GLA), an EFA involved in metabolic pathways of
hormone balancing, brain functions, blood pressure, inflammation and healthy skin. It typically
contains 10% GLA, and over 70% omega-6s. Spectrum has a patented processing technology,
SpectraVac (which eliminates damaging oxygen and light) to make their oils.lo6 They also have
edible oils, vinegars, shortenings, and tocopherols available for sale. All the ingredients can be
supplied and purchased in bulk. They promote the organic nature of their products.
3.4.6 DSM Nutritional Products

Formerly known as Roche Vitamins, DSM produces a broad range of omega-3 products
(both vegetable and marine oils) in powder form for baked goods and baby food under the name
ROPUFA@.'~'They are considered to be stable and highly dispersible in cold water, and they
have a neutral taste and smell. Roche started in 1935 with the first industrial production of
vitamin C. DSM now claims to be the world's leading suppler of vitamins, carotenoids and UV
filters. They have numerous functional ingredients including their latest TEAVIGOTM'~~
from
green tea leaves. Green tea is traditionally used for detoxification, improvement of blood flow
and overall improvement of resistance to disease. They continue to innovate in order to secure
hture survival. In 2003, they invested $125 m CHF in R&D.
3.4.7 Bioral Nutrient Delivery (BND)

BND is a subsidiary of BioDelivery Sciences International, Inc. BioDelivery is a
biotechnology company that is developing and seeking to commercialize a patented delivery
technology designed for a broad base of pharmaceuticals, vaccines, OTCs, and nutraceuticals and,
through its subsidiary, BND, micronutrients in processed foods and beverages. BND has utilized
the licensed and patented technology, ~ i o r a lDelivery,
~ ~ ' ~ to
~ formulate omega-3 oil in a stable,
dry powder known as Bioral Omega-3. Bioral has demonstrated shelf stability, and it can be
added to goods that are baked or cooked, such as cakes, muffms, pasta noodles, soups and
cookies. It looks and feels like flour, and has no fishy odour or taste. It has been tested in food
products subjected to baking and stove-top heating and has demonstrated no degradation of
omega-3s. The Bioral delivery system is made from all natural ingredients: calcium and
106
Spectrum Ingredients 2004
lo7 Registered trademark of Roche
log Trademark of DSM Nutritional Products
'09 Trademark of BioDelivery Sciences International, Inc
phosphatidylserine, a naturally occurring soy lipid that may reduce the risk of senile dementia or
age-related cognitive decline. Other potential applications may include cereals, chips, candy bars,
and beverages. However, all the testing to date has been performed on a small scale, and they do
not assure that it will scale and perform as well in a larger production setting.
This arena is full of supplement suppliers, food ingredient suppliers, food manufacturers,
and agri-food companies. Those supplying omega-3s could be potential suppliers for Forbes or
competitors. All companies in omega-3s are large and have global reach with many other
ingredients and products in their profile and in their pipelines.
3.5 Market Drivers

The key market drivers for VDS are consumers looking to resolve a health specific
problem and their increased awareness of their health, manufacturers and developers creating
innovate products and ingredients, the rising cost of healthcare, Rx drugs switching to OTC (in
particular, the possibility of cholesterol drugs switching to OTC), and the increasing need to
protect IP and patents. In general, most consumers take dietary supplements to resolve a specific
health issue. Several supplements related to issues of aging, including glucosamine and co-
enzymes saw increased sales. Although some of these supplements have achieved considerable
sales due to the strong initial trial phase by consumers (stage 1 and 2 of the lifecycle), many are
still penetrating the market. Calcium and mineral supplements, though relatively mature in
comparison, also experienced limited sales growth in 2002 because of their condition-specific
nature. It is found that consumers, despite concerns regarding safety and efficacy, are still
satisfied with results of taking dietary supplements. In general, consumers discontinue use of
some vitamins and herbs, and move onto others. Also, the development of the concept of
wellness drives consumers to buy VDS. This trend has benefited from a high media profile given
to health issues recently and health education through government sponsored campaigns. The
aim is ultimately to increase self-medication and reduce public healthcare costs.
VDS sales have not increased as rapidly as in the past. The price competitive nature of
mass-market distribution has driven down prices, leading to a lower growth rate as each
supplement type reaches maturity. Dietary supplement consumption depends on rapid product
innovation and new supplement specific claims to maintain consumer interest and expenditure.
The increases that did occur in 2002 were attributed to the aging population, limited access to
physicians, increased healthcare costs, and greater awareness of personal health and nutritional
issues. The healthcare system in the US and organizations such as the Health Management
Organisations (HMOs) and Preferred Provider Organizations (PPOs) can make it difficult to get
medical attention or visit a doctor. Also, like nutraceuticals and functional foods, supplements
are on the rise due to the increased knowledge of the consumer, increased awareness of health,
the aging population, and the relation between disease and health. Figure 10 is based upon data
from the Consumer Healthcare Products Association that illustrates consumers' willingness to
take certain forms of self-medication. Individuals have started self-medicatingminor illnesses
and chronic or recurring illnesses.
Figure 10: Increases in Self-medication in Consumers, 2002"~
80%
60%
40%
20%
0%
I Take an I Wait to I Consult
Another factor that drives this market is products switching from Rx to OTC status. This
offers manufacturers the opportunity to prolong the life of Rx drugs, and obtain further returns
from the investment already made in R&D of the original drug. Figure 11 illustrates the rising
drug costs which have opened the door for not only pharma companies trying to prolong drug
lives but for the switch to functional foods, nutraceuticals and VDS. The transfer to OTC status
may offer the opportunity to develop OTC sectors, by offering a technologically advanced
formulation. Also, switching enables healthcare funders to save on public funding of treatments,
through extending the availability of OTC alternatives. OTC products enable consumers to self-
medicate without the time and expense of consulting a doctor. The changes in legislation in
different markets generally tend towards a more liberal classification, with many national
governments supporting self-medication. Between 2001-2002, approximately 52 products were
switched from Rx to OTC status in the 15 most valuable OTC markets."' However, the
switching process can be reversed, given that regulatory authorities have a duty to safeguard
patients/consumers against abuse of non-Rx medication. For example, in 1997, the Committee on
"O padhi 119

"I Euromonitor International Nov.2003
Safety of Medicines (CSM) in the UK recommended that terfenadine should be switched back to
Rx status, after being available as an OTC drug for over 12 years. This followed reports of
serious adverse cardiac effects, highlighting the risk of a negative interaction with other drugs and
with grapefruit juice.
Figure 11: The Increasing Cost of Drug ~ e v e l o ~ r n e n t ~ ' ~
1985. Coiiiinpf Ihs term nutraceutical;

1990: Entr, int.3 LfSand develme3 European
nainstreani narkots 3f functi3naI products
1995: lntrojuctioli ~f Benecol
Market drivers for companies in the industry include the increasing concern regarding the
preservation and protection of ingredient patents as well as other IP. Branding activity has
increased over the past few years behind proprietary, patented, or in some cases even commodity
ingredients due to a stagnating marketplace and the increased use of borrowed science.
Furthermore, eroding consumer confidence and faltering brand loyalty has created some urgency
with IP violations helping to fuel the fire. The result is that manufacturers are looking for
categories or segments they can own and that pressure has been transferred to their suppliers and
partners, who are trying to meet demand with patented, proprietary or unique raw ingredients of
their own (also branded). By partnering in the promotion of a branded ingredient, a manufacturer
and supplier can share the cost of developing and introducing products. The supplier gains a
customer that will purchase raw material exclusively from them as long as the branded ingredient
or logo is in the product and on the label. The manufacturer gains a value-added product, which
can be sold at a premium price. Also, there is the additive effect of the marketing dollars that each
is willing to spend to build brand awareness and to encourage consumers to try the products.
112
Broome 43
There is the possibility that a new sector in the OTC market will be created with the
anticipated switch of Rx cholesterol-loweringdrugs to OTC. However, the FDA has yet to
approve any of the products submitted. One incident that may be slowing the process was the
voluntary recall of Bayer's Baycol, Rx-based cholesterol reducer, after reports of severe muscle
weakne~s."~
If CVD medications do receive OTC distinction, consumers will have a choice, a
cholesterol-lowering spread from the grocery section or a pill from the pharmacy section. This
could cause problems for functional food brands that are already having trouble. Benecol can
cost up to 50 cents a serving whereas Pravachol I 0 (a statin drug) would cost 30 cents a
So, this threat creates packaging innovations such as the advent of Benecol daily dose dairy
drinks. This type of format offers a single bottle dosage, instead of 3 servings of spread a day,
coupled with the lower unit cost, that could enable sterol foods to better compete on both
convenience and price with OTC statins. On the other hand, if statins are on sale in pharmacies
and find their position being threatened by sterol products, it won't be long before pharma points
out the contradiction of having two ingredients in the supermarket, one in the food section, and
the other in the pharmacy section. Both products offer the same health benefit but one is
regulated as an OTC and the other as a food. It might be tempting for pharma companies to lobby
for OTC regulations for sterol products. This could open the door to more regulation for all
functional foods, ingredients and VDS.
3.6 The Big Players

There are a number of big players in the OTC market with the top five leaders being large
pharma or healthcare companies. Bayer's Consumer Care & Diagnostics had sales of OTC
medications totalling $1.9 b in 2001. The Wyeth Consumer Healthcare segment provides a broad
range of product categories such as analgesics, cough and cold, allergy, and vitamin and
nutritional supplements which saw sales of $2.4 b in 2001, accounting for 17% of worldwide
sales. J&J's, the leader in the global OTC pharma market, worldwide consumer segment sales
were $7 b, with the majority of sales generated within the US. Pfizer had total sales of $32.3 b in
2001, making it the world's largest pharma company involved in discovery, development, and
delivery of innovative medicines for both humans and animals. Pfizer Consumer Healthcare,
which includes many of the world's best-known consumer health brands within its portfolio,
accounted for around 50% ($2.4 b) of Pfizer's Consumer Products segment sales in 2001. GSK's
sales of OTC medicines amounted to $2.3 b in 2001, representing around 50% of total Consumer
Hilton 2003
'I4 Hilton 2003
Healthcare sales. These companies have large coffers from which to market OTCs and
provide for R&D. There are also many large supplement companies that include Taisho
Pharmaceutical, a global leader of VDS with the bulk of revenues from its brands of tonics and
nutritive drinks. Otsuka Pharmaceutical focuses on global VDS and sells to western markets
through is US-based subsidiary, Pharmavite LLC. According to Euromonitor in 2002, Taisho
Pharmaceutical had the largest share of the global market followed by Otsuka Pharmaceutical
(both are Japanese companies). In April 2003, Procter & Gamble (P&G) licensed the use of the
Olay trademark to Pharmavite to manufacture and market Olay Vitamins, designed for women's
health and beauty needs. Olay Vitamins will consist of two lines, Beauty Nutrients and Wellness
Nutrients, and will be launched in late 2003 in the US. During 2002, GNC, Nutrilite, Herbalife,
Rexall Sundown, and Nature Made maintained their lead among branded US dietary supplements
by offering a wide range of supplements and multi-supplements. Table 14 illustrates the top VDS
companies according to their share of the market. Each companies share seems small but it is a
multi-billion dollar industry, and there are a lot of players that the market supports.
Table 14: Global Company Shares of Vitamins and ~upplements"~

Company 2002 Company 2002
Taisho Pharmaceutical Co Ltd 4.0 Nu Skin Enter~risesInc 1.O
Otsuka Pharmaceutical Co Ltd 3.8 Merck KgaA
Alticor Inc 3.2 Suntory Ltd
Wyeth 3.0 Fancl Corp
Roche Holding AG 2.8 GlaxoSmithKline PIC
Royal Numico NV 2.8 Coca-Cola Co
Takeda Chemical Industries Ltd 2.6 Novartis AG
Miki Corp 2.3 American Home Products Corp
NBTY Inc 2.1 Chugai Pharmaceutical Co Ltd
Herbalife International Inc 2.0 Private Label
Boehringer Sohn, CH 1.9 Others
DHC Corp 1.5 Total
Sato ~harmaceuticalCo Ltd 1.3

Companies have initiated a number of strategies in order to compete in the VDS market.
Some companies expand either through acquisitions and mergers or internal growth nationally
and globally while other companies add an OTC department or division. Other strategies adopted
by organizations include selling brands in a number of market segments, changing their
'I5 Padhi 58-70

'I6 Euromonitor International Nov.2003
marketing (Internet or education) and branding tactics, lobbying governments for OTC switches,
and alliances with other successful companies.
Many companies choose to grow as large as possible in order to enjoy economies of scale
and add products to their pipelines. As R&D costs continue to rise and the cost of bringing a new
product to market escalates, the need to have a wide range of products under development in
order to maintain shareholder value has meant that major manufacturers have entered into
mergers and strategic alliances to keep up with competition. Consolidation has been widespread
in the OTC industry, with a number of major acquisitions/mergers by the leading companies. In
2000 and 2001, Pfizer acquired Warner-Lambert, GlaxoWellcome merged with SmithKline
Beecham, and Pharmacia & Upjohn merged with Monsanto to form Pharmacia Corp. Pfizer had
an agreement to acquire Pharmacia Corp (completed in April 2003). The motivations for
consolidation include increasing economies of scale and raising productivity, and acquiring an
enhanced pipeline of future OTC products. Furthermore, once a company reaches a certain level
of corporate maturity, growth becomes increasingly difficult to achieve. So, consolidation
represents the best solution for continued corporate and sales growth. Another push for alliances
is due to the notorious disculty of penetrating the Japanese OTC market, a number of strategic
alliances have been made with the intention of gaining distribution of non-Japanese products. In
2001, Bristol-Myers Squibb formed a joint venture agreement with Lion Corporation to market
Bristol-Myers Squibb's OTC products in Japan.
A key advantage to having supplements/OTC as part of a larger company is the financial
support. For OTC products, customers have many choices and huge investments are needed for
marketing and advertising. Another benefit of being part of a company that offers diverse
products is that the skills, resources and experience from other divisions can be harnessed. The
established, experienced marketing teams from pharma can be used for marketing OTCs and
pharmas may have generics manufacturing capabilities, which can be utilised. Moreover, retail
pharmacies that are operated by some large companies provide increased exposure for products
from the OTC business. A strong geographical presence is desirable for OTC companies and it is
often achieved when the business is part of a larger, fully integrated healthcare organization.
These companies can offer cost savings and economies of scale in terms of production costs and
the relatively low development costs of OTCs. Furthermore, a wider global presence makes a
company less vulnerable to any political or social changes that may occur in one particular
market and it provides greater opportunities for growth compared to a company restricted to just
one market.
Companies need to have a few important brands, spread across a number of therapeutic
markets. Thus, the company is less vulnerable to changes or fluctuations within any particular
market. When a company is over-reliant on one major brand, it is vulnerable to new innovation in
that market and fluctuations in market size. Also, in a number of therapeutic categories, the
market size can rise and fall according to seasonal changes; for instance, allergy medications tend
to be purchased more in the summer months. Companies maintaining a number of small brands is
a non-competitive position. Each brand requires a significant marketing expense, which to some
extent is fixed; as a result, the margins on small brands are reduced and are spread too thin.
However, this is difficult for smaller companies since they cannot afford to spread themselves out
too much by keeping a lot of brands a float. Thus, it is important for smaller companies to have
indications or market segments that will not fluctuate and are on the rise which indicates the
importance of knowing the consumer and the market.
Marketing is an important strategy. A major marketing strategy in 2002 for OTC
manufacturers was to support Rx to OTC switches with heavy advertising and promotions. For
instance, a direct to consumer advertising campaign was utilized for Schering-Plough's Claritin. It
was launched in the US market and backed by a major television advertising campaign. P&G
signed a cross-platform marketing agreement with the media company Viacom in March 2001,
giving P&G access to several TV channels such as MTV and Nickelodeon. A number of OTC
manufacturers have adopted the strategy of associating their products with sporting
events/personalitiesand health providers, in order to benefit from a public image of health. The
marketing of GSK Niquitin CQ has been backed up with sponsorship of BMW Williams Fl
motor racing team in April 2003. OTC manufacturers have used the Internet in marketing their
products which has been effective in communicating with a vast number of consumers globally,
up to 30% of P&G's marketing efforts were Internet-based. Pfizer, GSK and Pharmacia were also
major online marketers in 2002. Taisho Pharmaceutical attracts customers in drugstores through a
health magazine, and in-store speciality displays giving advice on appropriate OTC treatments for
different ailments.
Companies are striving for further Rx to OTC switches, developing new products and
introducing value added product extensions. They will start emphasizing the scientific research
and manufacturing quality, and target advertising to older consumers. Education of consumers is
important as well as keeping prices in check. The goal of manufacturers and retailers involved in
OTCs is to develop the concept of preventative medicine in both developed and developing
markets and to increase the confidence of consumers to self-medicate. Demographic shifts and
environmental factors shape demand in the OTC market and force manufacturers to develop
products to meet the needs of new and changing consumer groups. Governments tread a fine line
between maintaining tight regulation of the OTC market and creating too liberal an environment
for products that have the potential to do harm if abused or misused. Global pharma
manufacturers must balance investment in their Rx drug pipelines with development of
competitively priced OTC products.
The idea of launching foods and supplements using patented heart health ingredients with
clinically established health benefits is underpinning the business plans of many companies.
Companies like Novartis have moved into VDS with an alliance with Bionutrics, a Phoenix,
Arizona-based company, to launch a cholesterol-lowering supplement, based on a patented niacin
and soluble fibre formulation, under the brand name "Cardiocin". The company has also
introduced a tocotrienol-based cardiovascular health product called Vitenol E 20120 which is a
rice bran extract containing vitamin E (including tocotrienols) together with phytosterols.
AlphaRX, a Canadian company, launched two supplements that use plant sterols for the
management of high blood cholesterol, Phystrol E and LipoBloc. The company feels that the
supplements are significantly more soluble and bioavailable than other phytosterol products,
enhancing their attachment to cholesterol absorption sites in the small intestine and further
reducing serum total and LDL cholesterol levels as a result. Phystrol is being sold in Canada and
LipoBloc is sold internationally. But, plant sterols are a good example of how ingredients and
health propositions which were thought to be a way of differentiation are becoming
commoditised. This is a concern for companies; since, it will be years before companies such as
Raisio and marketing partner McNeil recover their original investment in Benecol. This could
detract other entrants into the market of plant sterols and potentially other health ingredients that
may become mainstream.
Branding is going to assume greater importance and will force manufacturers to increase
marketing efforts. Significant regional and cultural differences in attitudes to healthcare and self-
medication will drive strategies and advertising. By establishing a brand name, such as Bayer's
Aspirin, manufacturers are able to leverage brand equity and develop common or parallel
advertising campaigns on a global basis, thereby saving costs. However, in recent years, major
players have recognised the need to adapt products to local and regional needs, and to build
customer loyalty.
There are a number of companies in the business that have been successful. A couple of
examples include Nature's Way Inc and NBTY Inc. Nature's Way is a privately held
manufacturer of NHP. Based in Utah, the company focuses on naturally produced herbal and
mineral supplements, vitamins, and homoeopathic products. In total, Nature's Way sells more
than 350 products, including single herbs and herbal formulas, herbal extracts, vitamins,
phytomedicines, minerals, probiotics, and homoeopathic remedies. In 2002, Nature's Way
products were primarily sold through independent health food stores and pharmacies, independent
specialists in natural and spiritual products, and organic grocers such as Whole Foods and Wild
Oats, and GNC stores. Without doing business with larger mass-market retailers, they are able to
position themselves as a leading manufacturer of natural medicines and homoeopathic remedies
in the US. Nature's Way products are some of the most expensive on the market, and are targeted
to consumers placing high value on the efficacy of VDS, and to consumers that shun mass-market
brands. Nature's Way multivitamins are generally priced three times higher than brands like
Centrum Complete. A 2002 survey of American consumers conducted by Hartman Interactive
found that the most important factor in satisfaction with a dietary supplement was perceived
quality of ingredients. The survey found Nature's Way to be the "top-rated" brand."'
NBTY is a leading vertically integrated manufacturer, marketer and retailer of a broad
line of quality, value-priced nutritional supplements in the US, the UK and internationally. NBTY
targets the value-conscious consumer segment by offering high quality products at prices in the
lower range. The company manufactures approximately 90% of the nutritional supplements it
sells. Growth has occurred due to its many acquisitions starting with the purchase of GNC's mail
order business in 1989, and vitamin distributor Prime Natural Health Laboratories in 1993. In
1997, NBTY bought Holland & Barrett, a leading UK health food retailer. Nutrition Warehouse,
an Internet and mail order retailer, and Dynamic Essentials, a network marketer, were purchased
in 1999. In 200 1, they acquired Kraft7sKnox Nutritional Supplements business and Global
Health Sciences, a smaller nutritional supplement and diet aid manufacturer in the US. NBTY
produces, wholesales, and retails more than 1,500 products, including minerals, vitamins, amino
acids, herbs, homoeopathic remedies, and other preventative healthcare products.
3.8 Barriers to Dietary Supplements

Despite the condition-specificnature of many supplements, they often suffer from rapidly
shifting consumer interest. A prime example of this is the performance of St John's wort. It had a
strong start in 1997 and 1998 (positioned as an alternative to Prozac); but sales began to fall in
1999. In 2002, sales dropped more than 36% to less than $82 m. A number of major
supplement types, including garlic, ginseng, ginkgo biloba and echinacea underwent the same
problems. Echinacea has faced increasing competition from therapeutic herbal teas featuring the

supplement type, to the detriment of sales. Consumers may be shifting their interests due to their
lack of understanding of what they are purchasing and listening to manufacturers and the media
for the next best thing.
Quality has been a problem as well since VDS are not as regulated as pharmaceuticals.
Negative media coverage began to occur in 1999, and continued into 2002. In 2000, "20/20" ran
a story about the efficacy of supplements, focusing on chondroitin, Sam-E and ginseng. The
report included results of tests from an independent laboratory. The results varied, but showed
that some products were contaminated with pesticides and others contained much lower levels of
the supplement compounds than were claimed on the label. Media coverage has also highlighted
the poor quality of supplements, particularly single-herb products, which has eroded consumer
confidence in supplements, and caused consumers to question their real efficacy. Also, the
supplement industry consists of hundreds of manufacturers purchasing ingredients from
thousands of suppliers who, in turn, formulate the ingredients into tens of thousands of products.
Each package must list ingredients, but there's no guarantee that the product actually contains the
amounts of ingredients stated on the label.
Medical warnings have been issued and reported. In March 1999, an article entitled
"Herbal Remedies: Adverse Effects and Drug Interactions" appeared in the American Academy
of Family Physicians' journal American Family Physician. The article stated: "Herbal products
are not tested with the scientific rigour required of conventional drugs, and they are not subject to
the approval process of the FDA. Herbal products therefore cannot be marketed for the diagnosis,
treatment, cure, or prevention of di~ease.""~While consumers have grown sceptical of some
dietary supplements, they do continue to purchase them. This is largely because consumers
perceive supplements to be natural, and incapable of causing real harm. Many consumers do not
think of supplements as medicines; so per capita value consumption of dietary supplements
remains high, at more than $23 per person in 2002 in the US. This is largely because consumers,
often plagued with chronic illness, consume a large quantity of these products as a last effort.
Omega-3s in themselves have some challenges. There is no FDA-approved RDA to
provide guideline quantities for omega-3s, and international standards for omega-3 fortification
levels vary widely. For example, in Britain the recommended daily intake (RDI) is 800 mg of
omega-3 per day, in some Scandinavian countries the RDI is 3 grams, and in Canada 1.5 grams
has been suggested.120In addition, there is no formal FDA-approved health claim, although a
limited claim linking fish oil supplements (not omega-3's specifically) with a reduced risk of
- -

French 2004
CHD has been permitted. Technically, it can be complicated incorporating omega-3s into
products. The addition of omega-3s into foods with a liquid fat content is the easiest. Omega-3s
in an oil form can be incorporated into products just like any other fat; however, they must be
added close to the end of the manufacturing process because high temperatures create problems.
Another technique used to protect oils is microencapsulation, which can guard against damage
incurred during processing, and serve to render fish oil products tasteless and odourless (omega-
3s are notorious for their bad taste and odour). Omega-3 fortified products cannot be packed in
transparent or metalized packaging since light can cause them to oxidize. All of these things add
cost to manufacturing and ultimately the product.
There are so many players in this market with so many products that there may be some
over saturation of the market. Also, there may be too many products to choose from and thus
confusing for consumers. The shelves are lined with VDS and it is not always evident which is
the superior product. So, advertising and education are of the utmost importance in order to send
appropriate messages to the end user.
3.9 Legislation
Regulatory authorities are clear in that any product making a therapeutic claim is
considered a drug, and is subject to strict regulatory procedures before it can be sold. However,
there is variation from one country to another in terms of definitions of foods and drugs. Thus, in
some countries, vitamins are categorised as drugs, requiring government approval to make health
claims, while in other countries they are regarded as foods for which such claims are not allowed.
This distinction often depends on the dosage level of the product.
In the absence of uniform regulations, manufacturers must market their products
according to each individual market which creates added expense. For example, vitamin-enriched
nutrient drinks are popular in Japan, where they are allowed to promote specific health claims,
but must be sold as energy drinks, in markets such as the UK and Germany. Below, legislation
details are provided for Codex, Europe, US, Canada, and Japan.
3.9.1 Codex
In 2004, the Codex Commission endorsed draft guidelines on vitamins and supplements
that recommend basing maximum levels of nutrients on safety rather than RDA. Maximum levels
are of key importance to the supplement industry as they determine the amount of nutrients
allowed in supplements. Some countries such as Norway, Malaysia, Thailand, and much of Latin
America, still require that the vitamins or minerals contained in a supplement should not exceed
100% of the RDI determined by the FAO. However, many countries now base the maximum
levels on safety and upper safety limits (USL), rather than RDA. This allows for formulas to
contain significantlyhigher amounts of vitamins and minerals. The Codex guidelines are
important because they offer standards that are harmonized at an international level and facilitate
global trade which is after all one of the main reasons for the creation of Codex.
3.9.2 Europe
In Europe, a draft directive on food supplements, including VDS, was published by the
European Parliament in February 2000. The Food Supplements Directive was subsequently
passed by the European Parliament and will be legislated in all member states by 2005. The
Directive contains a list of 112 vitamins and minerals which can be used in the manufacture of
food supplements. It includes specifications on packaging and labelling of VDS and sets out
minimum and maximum ingredient levels. VDS that are not included within the directive cannot
be sold in member states without being supported by evidence of their health benefits. However,
manufacturers have up to seven years to provide that evidence, at the discretion of each member
state.'*' The overall goal of the directive is to offer a high level of protection and information to
the consumer while ensuring products the ability to move across national borders.
The EC will limit the number of allowable dietary ingredients used in supplements and
establish USLs for vitamins and minerals. Thus, 277 various nutrient forms could be disallowed.
It is felt that the USLs established will fall below accepted scientifically recognized levels. This
could stop many American made supplements from being sold abroad.
3.9.3 The United States

The DSHEA was passed in 1994 as an amendment to the Food, Drug and Cosmetic Act.
The purpose was to balance the consumer's ability to access products and to get truthful
information on products, and to allow the FDA to take action against products that are unsafe or
improperly labelled. Prior to the Act, VDS were regulated either as foods or drugs similar to the
situation that still exists in Canada. A dietary supplement is defrned as
"a product, other than tobacco, intended to supplement the diet that contains at
least one or more of the following ingredients: a vitamin, a mineral, a herb or
other botanical, an amino acid, or dietary substance for use to supplement the diet
by increasing the total dietary intake; or concentrate, metabolite, constituent or
extract or combination of any of the previously mentioned ingredient^."'^^
Dietary supplements are intended for ingestion in the form of a capsule, powder, softgel or gel
cap and should not be represented as a food or a sole item of a meal or diet.
12' Euromonitor International Nov.2003

12* SaskatchewanNutraceutical Network 2004
DSHEA allows supplements to have statements of S/F claims on their labels. These
types of claims "describe the role of a nutrient or dietary ingredient intended to affect the
structure or function in humans" or "characterize the documented mechanism by which a nutrient
or dietary ingredient acts to maintain such structure or function."123Manufacturers making S/F
claims are not required to obtain prior approval but must notify the FDA within 30 days aRer
marketing the supplement and have documents on file that prove such claims. The label must
also carry a disclaimer stating, "This product has not been evaluated by the Food and Drug
Administration. This product in not intended to diagnose, treat, prevent or cure any disease."124
The FDA issued more regulations in 2000 to clear up the confusion of acceptable and
unacceptable S/F claims. Some examples of acceptable claims include helps to maintain
cholesterol levels that are already within a normal range, supports the immune system, or relieves
stress. Some examples of unacceptable claims include lowers cholesterol, promotes general well-
being during the cold and flu season, or supports the body's antiviral capabilities.
Because supplements are regulated as food, the Center for Food Safety and Applied
Nutrition (CFSAN) is responsible for these products. The FDA's efforts to monitor the
marketplace for potentially unsafe products or those with false or misleading claims include
obtaining information from inspections of supplement manufacturers and distributors, the
Internet, consumer and trade complaints, occasional laboratory analyses of selected products, and
adverse events associated with the use of supplements that are reported to the agency. The
Federal Trade Commission (FTC) regulates advertising, including infomercials, for dietary
supplements and most other products sold to consumers. Also, manufacturers of supplements are
allowed to provide more extensive directions for use than were previously permitted but require
the inclusion of warnings and details of side effects.
Governmental regulation of supplements in the US remains limited as a result of the
DSHEA. The FDA is prevented from reviewing dietary supplements for safety and effectiveness
before they are marketed. If evidence exists that a supplement is unsafe, the law allows the FDA
to prohibit sales if it presents a significant or unreasonable risk of injury. The standard of risk
requires a risk-benefit calculation based on evaluation and the best available scientific evidence.
As a result of these regulatory constraints, the FDA has little power to limit or ban the sale of
potentially dangerous dietary supplements.
In April 2004, the acting FDA Commissioner Lester Crawford outlined a new Science-
based plan for dietary supplements enforcements, with the purpose of ensuring consumer
lZ3 Saskatchewan Nutraceutical Network 2004

lZ4 Saskatchewan Nutraceutical Network 2004
protection under DSHEA. During the last six months, the FDA inspected 180 US dietary
supplement manufacturers and sent out 1 18 warning letters for non-compliance with DSHEA.
The agency refused entry of 1171 foreign shipments of dietary supplements and ordered
destruction of products worth over $1 8 m (for mislabelling or for ad~lteration).'~~
3.9.4 Canada
NHPs are defined as vitamins and minerals, herbal remedies, homeopathic medicines,
traditional medicines such as Traditional Chinese Medicines, probiotics, amino acids and EFAs.
Under the new Regulations, the product must be as safe as an OTC since they do not require an
Rx to be sold. The consumer will benefit from having more information on the label to make
informed decisions. The Regulations aim to protect the health interests of consumers, but flexible
enough for the industry to develop useful, reasonably priced products. In the past, NHP were
sold as either drugs or foods because they did not have their own category. If classified as a drug,
NHPs had to adhere to the drug review process, which included proof of safety and efficacy
through clinical trials, and receive a DIN to be sold. If classified as a food, NHPs could make
very limited health claims and did not have much safety information on their labels. Natural
Health Products Regulations (NHPRs) have been developed in order to address the problems with
NHPs. The transition to these new regulations will be staggered over the next 6 years. Each of the
three phases will begin in January 2004, with completion of the transition over the following
schedule:
by the end of two years, all manufacturers, importers, packagers and labellers will
employ GMPs and have site licences;
by the end of six years, NHPs that currently have a product licence as a DIN, will have
transferred to have a NPN or a DIN-HM (homeopathic m e d i ~ i n e ) . ' ~ ~
The NPN on the label will inform consumers that the product has been reviewed by Health
Canada for safety, quality and health claims. For homeopathics, the label will bear the
designation DIN-HM. A site licence will be required for manufacturers, packagers, labellers, and
importers of NHPs. One of the prerequisites that must be met before a site licence is issued is that
GMP is employed.
Vitamins and minerals are regulated as a sub-set of drugs because they are considered to
be NHPs. Previously, vitamins and minerals, in dosage form, were regulated as drugs. However,
because they are intended to be used for health benefits, they have to have indications for use on
their label. As recommended by the Standing Committee on Health, regulating vitamins and
'25 iPhanna India Pvt. Ltd. 2004

minerals as a sub-set of drugs will bring the treatment of these products in line with other
products (such as homeopathic medicine and herbal remedies) that fall within NHPs.
3.9.5 Japan
Many countries have laws covering.supplements where the efficacy or preventive
properties of the foods themselves are concerned, whereas Japan does not. In Japan, substances
ingested orally are classified either as foods, pharmaceuticals or quasi-pharmaceuticals. Whether
a product is a pharmaceutical is determined based on the type of ingredients, the format
(formulation, package, wrapping, design), labelling, the effects and efficacy, the method of
dosage and sales, and decided according to whether it is usually perceived as a product intended
for the purposes described in the Pharmaceutical Affairs Law. Thus, even though a product may
be sold in other countries as a food, it may come under the pharmaceuticals classification in
Japan. The MHW has established the category of "quasi-drug", which refers to substances that
have a mild action on the human body and are allowed to claim a degree of preventative effect.
Included in this category are vitamin C, vitamin E, and combined vitamin E and C preparations
for oral administration; tonics and health supplements containing the vitamins B1, B2 and B6 for
oral administration; and calcium mineral supplements for oral admini~tration.'~~
The term dietary supplement means a product intended to supplement the diet that
contains of one or more of the following dietary ingredients: (a) a vitamin; (b) a mineral; (c) an
herb or other botanical; (d) an amino acid and a protein; (e) a fatty acid and its glyceride; ( f ) a
dietary fiber and a carbohydrate; (g) a dietary substance for use by man to supplement the diet;
(h) a concentrate, metabolite, constituent, extract, or combination of any ingredient described in
Foods including dietary supplements have to be safe and convenient for consumers and
appropriate for maintaining their quality. Health benefit claims of the structure or function in
humans are allowed for supplements if they have scientific proof. A vitamin including its various
chemical forms and compounds and a mineral compound in a vitamin or mineral dietary
supplement is considered a food stuff and not a food additive because it is the main ingredient of
a dietary supplement. Complex supplements, which contain multiple ingredients of vitamins,
minerals and/or herbs, are popular in Europe and the United States. But in Japan, all other
ingredients except for one, which is the main food stuff of a dietary supplement, could be
interpreted as food additives. Also, MHW has established RDAs for many nutrients recently.
Market Access Ombudsman Council 2000

'28 Market Access Ombudsman Council 2000
In order for supplements from other countries to be imported as foods, all their
ingredients, additives and such must be permitted for use in foods in Japan. Additives approved
for use during the pharma manufacturing process may not be allowed in products classified as
foods; since, they are not designated as additives under the Food Sanitation Law. Additionally,
vitamins and minerals, even if they are the principal ingredients in dietary supplements, may be
regulated as food additives.
3.10 Future of VDS

3.10.1 Overview of the Market
The future of VDS is that, due to the increase of large pharma companies entering the
market, there will be an increase in both quantity and quality of research, and marketing will take
on some of the ways of Rx drugs to include sales forces. With the rising costs of healthcare,
insurance companies will begin to consider reimbursements for supplements to encourage
consumers to purchase OTCs and supplements over Rx drugs. Like pharma, niche products that
address specific consumers' needs will dominate including those that target specific health
concerns. As dietary supplements evolve, successors will be proprietary, with data to back up
claims for products. The scientific tools used by pharma and biotech researchers will translate
over into VDS and OTC in order to create IF' around these products which will lead to more
regulation. In order to build consumer trust, the efficacy and safety of supplements will have to
be ensured. Health scares are helping this along; kava kava and ephedra are two recent examples.
The VDS market has provided a lot of promises on their labels, and many are not proving to be
true as well as the amount of active ingredients is not always stated truthfully. Before consumers
lose too much interest and move onto alternatives, R&D and clinical data needs to be provided,
consumers need to be educated, and companies should be held responsible for their products.
3.10.2 Future Trends

The trends and developments in the global OTC industry can largely be classified as issues
either of supply or demand. In terms of consumer demand, the major forecast trends stem from an
increased concern with wellness or preventative medicine. In terms of supply, the developments
expected are going to include ongoing medical reform, accelerated switching of products from Rx
to OTC, and further deregulation of OTC distribution which will allow sales in non-pharmacy
outlets. So, many drugs that are Rx at the moment will become OTC in the future. This shift will
allow pharma companies to continue generating revenue from blockbuster products going off
patents. Pharma companies do not have a lot of products in their pipelines and need to hold off
their competition and hold onto existing revenue.
Supplements in particular will continue to grow; since, they are generally condition
specific. Most consumers see them as a natural way toward healing and away from Rx drugs
which potentially have adverse side affects. Fish oils are still in a growth phase and will continue
for some time as more research is provided that shows all the benefits of these oils. However,
education needs to be conducted on the value of the omega-3s which are part of fish oils. Also,
the quality of some omega-3s is not up to standards as well as the problems with odour and taste.
Older people typically suffer a wider range of health-related ailments; so the industry needs to
focus considerable efforts on widening its self-medication. Faced with increasing social security
and healthcare demands, governments are expected to pressure doctors to prescribe less and
encourage consumers to self-medicate more. Increasing consumer health awareness and
confidence gained in self-diagnosis will drive a greater incidence of self-treatment, as consumers
take preventative measures instead of waiting for the illness to occur.
3.10.3 The Consumer

Self-medication will continue to grow as the high cost of visiting a doctor, the high
premiums for health insurance, the concern with health, the increased availability to alternative
therapies and the convenience offered. The ending of reimbursement programs for many pharma
products in a number of markets has made it more cost-effective for consumers to self-medicate
rather than obtain an Rx. Also, consumers have an increased interest and put greater emphasis on
personal self-care, in specific nutritional and health issues. Education and promotion help drive
the market by increasing health awareness worldwide. The aging population will have an impact
as well as the amount of money they are willing to spend. The problems associated with aging,
including arthritis and osteoporosis, are key factors supporting long-term demand for products
such as analgesics, digestive remedies and dietary supplements. Rising disposable income levels
of middle-aged consumers are also expected to lead to a greater emphasis on cosmetic OTC.
3.10.4 Company Strategies

Supplements are considered an alternative to some pharma drugs. However, healthcare
professions and physicians have not adopted nor endorsed them. Currently, physicians are
hesitant to give advice or recommend products unlike medicinals, and many people do turn to
their physicians for nutritional advice. Along with pharmacists, healthcare professionals will be
targeted to endorse such products. Once the pharmacy staff is trained to sell natural products and
make recommendations, they can be an effective resource and add credibility to the products.
Rx drugs are costly to create as is illustrated in Figure 11 which is convincing pharma
companies to enter OTC. It costs about $1 b to bring a new single drug onto the global pharma
market. Only 3 out of 100 newly developed substances are likely to reach the market, and about
$26 b will be spent over 10 years just to develop and test them. In addition, a further 3 years'
'
worth of market statistics is needed to support efficacy claims. This leaves only 10 years of
product patent life left by the time the developed substances reach the market; so OTC switches
will allow manufacturers to extend the product patent life of the substances on the market via
renewed consumer orientation.
Product lifecycles are shrinking, due to the availability of information as well as a wider
array of supplement products from which to choose. Change is happening at an ever-increasing
rate and consumers are fickle. Consumers are torn between conflicting messages and desires. At
the same time, consumers are also concerned that the foods they eat don't have the essential
nutrients needed due to modem production methods. This means more education should be
directed toward the consumer. Thus, manufacturers and suppliers have to have a number of
products and ingredients in their pipeline in order to stay competitive. Furthermore, many of the
ingredients that are currently in supplements will translate to foods.
Developing markets such as Indonesia, China and India should be targeted in the fbture
due to their increasing populations. Even though the population growth is slowing in most
western countries the population is aging, this segment must be targeted. Distribution will also
start occurring through non-pharmacy channels such as direct sales and mass marketers which
will lead to increasing sales.
VDS manufacturers are looking to hold on to future gains which include the aging and
overweight populations while targeting the affluent who are concerned with health and
appearance. Manufacturers must ensure fill vitamin and mineral RDA. Innovative products that
also have strong scientific evidence to support claims to consumers will survive best in the
premium VDS market, while staple supplements in strong brand portfolios will be the best way to
keep market share with the introduction of cheap, own brand alternatives.
Consumer education is vital in this arena of numerous choices, in particular omega-3s.
Companies such as Nutrinova, NuMega, Martek, Roche, ONC, and Denofa must promote and
prove that their products (i.e. DHA) is more effective and why. The average consumer does not
understand the difference between omega-3s so many brands currently use cheaper and less
effective forms. For example, Unilever, when fortifying its entire BecellFlora brand of spreads
with omega-3s, chose a cheaper vegetable-source omega-3.
Currently, VDS companies are struggling to survive. The typical values of vitamin
producers, such as customer focus and service, and production of value added products, are no
longer in place. The costs of production and low price offers dominate the industry. Margins are
becoming so small, that profits are only sufficient to cover production costs and overheads. R&D,
which was very intensive in the past, is now reduced to a minimum if conducted at all. If R&D is
carried out, it is mainly focused on streamlining production and on cutting costs. Vitamins are
still produced mostly by chemical synthesis, and the potential to cut costs are limited. Only the
production system for vitamin B2 has changed, from chemical synthesis to fermentation.
Fermentation might, in the future, become more important than it was in the past years, because it
offers a higher potential for low cost production. Manufacturers must come up with not only
innovative and novel products but the technology to produce them has to be cost effective and
innovative.
There is a lot of promise for the VDS market with consumers moving toward self-
medication and healthcare costs increasing. Consumers are looking for alternatives. However,
they are fickle and change supplements quickly if they do not see benefits in the immediate
future, especially markets like the US. Lifestyles are busy and people barely have enough time to
get through their day never mind prepare a healthy meal. The competition is fierce. There are a
number of multinational companies, especially drug companies, that are involved. Pharma is
looking at the OTC and supplement markets to continue their revenue streams while creating the
next blockbuster drug. The global VDS market is relatively mature but there is room for growth.
Fish oils are the latest hot topic and they have been on a steady increase since 1997. Also, VDS
competes with functional foods and nutraceuticals. There has been lots of consolidation
occurring with increased merger and acquisition activity, motivated by the need to develop
sufficient R&D resources to operate in a global marketplace. This is expected to increase the
level of foreign intervention in regional markets.
3.11 Comparison of Functional Foods and VDS

Table 16 at the end of this chapter provides a comparison of these two markets. They are
complex, and manufacturers, suppliers and retailers must be aware of all the advantages and
disadvantages of selling products or ingredients in these arenas. In order to be successful,
companies must consider many things including legislation, where they want to sell, the
consumer, innovation, the latest health issues, and positioning. In 2002, retail sales of fimctional
foods grew by an estimated 9.2%, while the retail sale of VDS products fell by 3.6%.12'
'29 Research and Markets 2003

VDS and functional foods are both multi-billion dollar industries even though there is a
lot of conflicting data for market sizes. According to NBJ in 2001, functional foods stood at $62
b and supplements at $50 b, with the US registering the highest sales ($36 b for NHP of which
$1 8.5 b were for functional foods), followed by Western Europe ($32 b) and Japan ($27 b).I3O In
contrast, UK-based Leatherhead Food International (LFI) estimates the world functional foods
market at $10 b for 2000-2001.I3' LFI does use strict criteria, considering only foods with health
claims. Table 15 illustrates a comparison between supplements and VDS as per Euromonitor in
2001. In 2002, NBJ stated that the European market grew 7.6% to $48 b in sales followed by
Japan with 9.5% growth and $27 b in sales. 132 Euromonitor puts the two markets almost even, in
2002, global VDS was $34 b and functional foods was $39 b. Regardless of the report used, the
market is considerable.
Table 15: Functional Foods Market in 2 0 0 1 ' ~ ~

Countrv S u ~ ~ l e m e n l$mJ
3
ts , .
Functional Foods ($m),
Africa 330 170
AustlNZ
Canada
EEurIRussia
Europe
Japan
Latin America
Mid East
Rest of Asia
US
Global
A number of factors and issues continue to impact the nutraceuticals market. Positive
drivers are increasing consumer interest in a healthy diet and lifestyle, and increasing
responsibility for their health as the aging population grows. Moreover, increasing legislation is
expected to slow market launches and growth in functional foods. Misunderstandings of
scientific benefits, and price and taste will exclude some products from success. Also, when
buying a drug, the label explains how much to take, for how long to take it and who shouldn't
take it. With functional foods and many supplements, the consumer is on their own. For example,
most echinacea supplement labels caution users not to take the herb for extended periods of time
and warn people that are immunocompromised or have autoimmune diseases not to take it. These
I3O Foodbiz 2003

13' Foodbiz 2003
'32 NPI Center 2003
'33 Foodbiz 2003
types of cautions are not found on foods with echinacea since functional foods do not require
such warnings (exceptions include sterols in EU countries and Australia). Nutraceuticals are
considered an alternative to medication and thus should have warnings to protect individuals.
As for VDS, reports have questioned the need for taking VDS products, except by special
needs groups. There is the possibility of adverse reactions from taking large doses of
supplements or vitamins. Also, there has been considerable negative publicity over the past few
years regarding safety and efficacy of VDS. Driving the market are consumers willing to self-
medicate, consumers with ailment specific conditions, and the aging population with specific
needs. Legislation could begin to discourage sales. The EU has recently proposed allowing only
certain VDS to be added to foods or sold as supplements. Japan already has some restrictions for
which VDS can be imported into the country. The VDS business will likely face some tough
challenges in the future such as proposed rules for GMP for dietary supplements in the US and
the USLs for vitamins and minerals in the E U . ' ~There
~ will be requirements of a great deal of
testing by the manufacturer. They will have to test in-process materials and finished goods as well
as raw materials. Companies will have to test every ingredient in a particular product. This
means that in the future, very complex formulas that companies manufacture will be hard to
continue to produce since all the testing of active and inactive ingredients will add cost and
logistics. As a result, companies will probably stick to simpler product formulas. However, they
are still a less expensive alternative for Rx drugs and could see reimbursements by insurance
companies to encourage switching to VDS or OTC.
As it is interesting to compare these markets, it must also be considered that there are
some connections in terms of lifecycles of ingredients and consumer trends. Both of these
markets are moving into the world that has been strictly occupied by pharma. The commonalities
include the aging population which is driving the markets, the importance of global marketing in
order to achieve revenue, they are both increasingly found in grocery stores along side traditional
foods and OTCs, the pharma companies are entering the arenas, short lifecycles, the consumers
are expecting a benefit immediately, and the increase of regulations.
'34 Madley-Wright 2003

Table 16: Comparison of Nutraceuticals/FunctionaI Foods and Vitamins and Supplements
Category Nutraceuticals and Functional Foods Vitamins and Supplements
Definition Difficult to define globally, can be either a food or a drug Classified as foods in some countries and drugs in others
Market in 2002 $39bn, Market still in growth phase $34bn, Market mature but room for growth of supplements
Development Japan, US, E.Europe, Asia, other developing countries Japan, US, developing countries
Growth
Areas of Cholesterol, CVD, osteoporosis, HBP, diabetes, obesity Speciality supplements, fish oils
Growth
Targeting General well being Specific ailment such as cholesterol
4 Maintenance of health Preventative
4
Distribution Multiple grocer Chemistslpharmacies

Independent food stores Parapharmacies
Convenience store Grocery outlets
Health food stores
Companies Food manufacturing, pharma, consumer goods, agriculture, nutraceutical, Pharma, medical, healthcare, food manufacturing, generic manufacturers,
generally multi-national supplement, generally multi-national
Examples of Cargill, Nestle, ADM, PepsiCo, Danone, Raisio Wyeth, Otsuka, Herbalife, GSK, Omega Protein, DSM Nutritionals
Companies
Market Drivers Alternative to pharma and VDS, consumers becoming responsible for their Alternative to pharma, aging population, increased self-medication, healthy
health (health and diet are related), in~reasedhealthcare costs, convenience, lifestyles, convenient, increased health costs, inability to see physicians, media
taste, price, health care costs, aging population, innovation, media and and education, alternative to eating properly, expect to cure, baby boomers
education, product ranges, rising awareness of health, awareness of dietary have disposable income, specific aliments, Rx to OTC switching, generation of
deficiencies, increasing competitive market, better compliance than drugs or IP, companies can utilize existing competencies in R&D and marketing, price
vitamins
Marketing Market as a traditional food Market as alternative to pharma

Category Nutraceuticals and Functional Foods Vitamins and Supplements
Company Innovation and research, compare to traditional food, alliances, global Multinational, alliances and acquisitions, branding, heavy advertising,
Strategy presence, health benefits alternative to pharma, big is better, direct to consumer advertising
Barriers Consumer scepticism, taste and texture problems, long term benefits, cost of Safety and efficacy issues, quality issues, rapid changing interests of
R&D, misunderstandings of science, unaware of the benefits, price, natural consumer, medical warnings, over saturation, not living up to claims, dosage
and safe ingredients, changing innovation size, technical challenges
Legislation Codex-international standards, not enforced Codex-max level of nutrients

EU-NFR, health claims disallowed Europe-limit number of vitamins and supplements that can be used
US-NLEA, DSHEA, allow some health claims US-DSHEA, S/F claims
NHPD in Canada-5 generic health claims, DIN for health claims Canada-DIN-HM or NPN
FOSHU in Japan-limited health claims, list of standard ingredients and foods Japan-regarded as food stuffs
Confusing, is it a food or a drug
Future Focusing marketing on the consumer not the product, more R&D focus, More regulation, IP important, marketing to healthcare professionals, self-
4 medication increasing, core competencies from pharma, branding, more
03 changing regulations
switching, alternative to Rx by PPO and HMOs, reimbursements, more pharma
4 INTERNAL ANALYSIS
Forbes has been working with a technology to combine Reducol with an omega-3 in
order to create a supplement. Both ingredients have clinically proven cholesterol-lowering
abilities. A patent has been filed for this combination; however, the synergistic effects of the two
have not been proven to date. They are planning on bringing it to market so an understanding of
the company and its internal processes is necessary. This chapter provides background on
Forbes' success to date, the technology on which they have relied, the management team, their
core competencies, their critical success factors, and company strategies. By considering the
market and their competencies so far as well as barriers to entry, recommendations and
conclusions will be made in Chapter 5.
4.1 Forbes Through the Years

Figure 12 illustrates some of the key elements that occurred between 1993 and 2000 for
Forbes starting with research to becoming a biopharma company involved in nutraceuticals and
pharma. They began with technology licensed from the University of British Columbia (UBC)
and have gone on to hll-scale production of sterols and creating other ingredients and
pharmaceuticals. From 1993 to 1998 the technology was perfected and studies conducted.
During 1998, Forbes purchased a manufacturing facility in Amqui, Quebec for use in the
upscaling and production of plant sterol compounds such as ~ h ~ t r o l ~ ~ ' ~ ~ ( name,
o r i ~ later
ina1
branded as Reducol). They also signed an agreement with Loewen Ondaatje McCutcheon
Limited to act as agent to obtain private placements, gross proceeds of up to CND$lO m. This
money was used for ongoing R&D, pre-clinical and clinical trials, production and general
corporate use.
Figure 12: Timeline for Forbes Medi-Tech 1993-2000'~~

I I
b
Research Animal Human Partnership Food Formulation/ Product Upscale1 Regulatory Process1
Studies Feeding Trials Discussions Clinical Trials Regulatory Process Commercialization
13' Trademark of Forbes Medi-Tech Inc.

136 Financial statements of Forbes Medi-Tech, 1998
In 1999, they entered into an exclusive master licence with Novartis Consumer Health
SA to use Phytrol in functional foods, dietary supplements and OTC products. Also, they
pursued a potential business collaboration with Cargill, Inc. to manufacture and distribute
androstenedione (AD) and androstadienedione(ADD), pharmaceutical steroids. The worldwide
market for pharmaceutical steroid products derived from AD and ADD was estimated at -$4 b
annually, and the worldwide market for AD and ADD was -$750 m annually. The strategy was
to become an independent supplier using the fermentation process of phytosterol compounds. A
small number of integrated phanna companies manufacture AD and ADD for their own use. The
FDA approved the beginning of Phase I1 clinical trials with ~ a r d i o ~ e x(potential
~ ~ ' ~ ' therapy for
the treatment and prevention of CVD by lowering cholesterol levels). Their application to list on
the Toronto Stock Exchange (TSE) was approved. They created a Functional Foods and
Nutraceuticals Advisory Board and obtained financings totalling CND$25 m.
In 2000, Phytrol was given GRAS, test products were launched in Australia and the US
through Novartis third party agreements, raw material supply manufacturing, sales and marketing
agreements signed in preparation of commercialization of AD and ADD with Fermic, S.A. de
C.V. in Mexico City (GMP manufacturer of antibiotics and bulk pharma products), initiated
Phase I1 of CardioRex and completed initial pre-clinical studies on FM-VP4, NASDAQ listing
obtained, and secured CND$25-75 m in equity financing. Forbes put together a Technology
Advisory Board and opened up a state of the art biotechnology research laboratory at UBC at a
cost of around CND$3 m. The facility employed 20 scientists, and research was focused on the
development of novel medications to treat CVD, and methods of developing steroid
pharmaceuticals as well as the development and evaluation of new nutraceutical ingredients.
They were granted a patent in June for technology developed for AD and ADD.
The highlights in 2001 included Twin Laboratories who introduced the first cholesterol-
lowering dietary supplement containing Reducol, and Pharmavite Corporation launched Cholest-
Off in the US. Forbes and Chusei (USA) built the sterol manufacturing facility in Texas. The
pre-clinical trials of FM-VP4 showed a decrease of cholesterol and triglyceride levels and a
combined Phase I/II began in Amsterdam.
The company was repositioned in 2002 from a diversified health sciences company to a
biopharma company. The European Phase I clinical trial of FM-VP4 was completed and
approval to initiate a Phase I1 trial in Europe was received. They secured sterol supply
agreements for up to $26 m over two years. Clinical studies with a designer cooking oil showed
potential weight loss and cholesterol-lowering properties. CND$1.2 m in equity financing was
'37 Trademark of Forbes Medi-Tech Inc.
80
raised while they settled the license agreement with Novartis and regained the rights to Reducol.
The Amqui pilot plant was sold for CND$1.6 m since they had Phyto-Source operating. The
investment into Amqui allowed them to develop and refine manufacturing.
In 2003, they secured CND$10.8 m financing with Great Point Partners and BioAsia as
lead investors.' The European Phase I1 trials were completed for FM-VP4 and they started pre-
clinical trials for FM-VPx library of compounds. The ADIADD technology was sold for
CDN$1.9 m. The FDA issued health claims letter allowing the advertisement of health benefits
of Reducol.
Forbes has entered into numerous partnerships. ACIC Fine Chemical was their exclusive
sales representative for AD and ADD. UBC and Forbes have a long-standing relationship since
the development of the original core sterol technology. This technology was licensed from UBC
and Forbes pays royalties when products are sold. McGill University has been involved in
pivotal clinical studies for Forbes. In addition, they partnered with Novartis for a time until
Novartis sold the Quaker Oats divisions and the Aviva line didn't move forward.
As external conditions have changed, so has Forbes. In 2002, they changed their focus to
being a biopharrna company rather than a diversified health sciences company dedicated to the
research, development and commercialization of innovative nutraceutical and pharma products
derived from nature. They purchased back the rights to use the Reducol name. They have
continued moving forward with their phytosterols to much success and have moved away from
technologies and products that were not part of their strategy and were using up revenue.
CardioRex was abandoned after clinical trials data did not deliver the expected results of a 20-
25% LDL reduction and findings were inconsistent with previous study results which had shown
reductions of 15%. The ADIADD technology was sold; since, it did not fit with the overall
company direction. Forbes has continued to look at pharma products with FM-VP4 which has
shown some promising results. They are continuing to focus on CVD and risks thereof with
future products.
4.2 Technology Platform

Forbes' core technology is sterols. Forbes purchased the technology to extract
phytosterols from tall oil pitch from B.C. Chemicals, a division of Canfor Corporation of
Vancouver. During the past 10 years, Forbes has developed this technology in order to create
ingredients and compounds for use in pharma, functional foods and dietary supplements. Their
latest creation, Vivola Oil, is an all purpose oil that is clinically proven to lower cholesterol, and
they are looking for licensing opportunities. Sterols are manufactured both under the Reducol
name and non-branded, Phyto-S-sterols. They have created a number of SOPSto assist food
manufacturers with incorporation of sterols into numerous products including margarine and oils.
Forbes7strategy in early 2001 was to be a global leader in phytosterol technology.
Based on this core technology, Forbes is investigating pharmaceuticals. The lead product
at the moment is FM-VP4. It has demonstrated cholesterol-lowering and anti-atherosclerotic
properties in pre-clinical trials, LDLs were reduced by 11%, with 33% of subjects at 400 mg
dosages achieving greater than 15%. A Phase I1 clinical trial is planned in the US for 2004. FM-
VP4 is targeting a $23 b anti-dyslipidernics market. Table 17 indicates the sales for these drugs
on a global scale. In 2002, statins, the most popular drug, saw sales of -$20 b. Also, Forbes is
looking at their FM-VPx library, to explore CVD and related indications. Patents have been filed
with the US and other jurisdictions for these compounds and methodologies. A second drug
candidate is in the pipeline, which is undergoing further development.
Table 17: Global Anti-dyslipidemics Market by Drug

Class 2001 ($m) 2002 ($m) Growth 2001-02 (A) Mkt. Share 2002(A)
Statins 18,742 19,960 6.5 91.3
Fibrates 1.044 1,137 8.9 5.2
Others 584 765 30.9 3.5
Total 20,370 21,862 7.3 100.0
4.3 Management
Management has undergone some changes since Forbes7inception. Tazdin Esmail, Egon
Novak and James Kutney worked for the company in different capacities (all were instrumental in
Forbes' spinning off from UBC and forming into a company). Forbes has had some staff
turnover but this is not unusual with start up companies. As companies find their way, they hire
those that can help achieve the goals and strategies at the time. Management changes as the
research scientists who usually lead start up companies move aside as the business grows to be
replaced by experienced business managers. Also, individuals leave for other opportunities and
personal reasons. Jack Miller was the Chief Executive Officer (CEO) in 1998, became Senior
Vice President (VP), Corporate Development in 1999 in order to identify and develop strategic
associations with major pharma and life science companies, and resigned in 2000. Don
MacDonald, Chief Financial Officer (CFO), was with Forbes for just over a year, and left to go
back to the mining industry in 2003. Some individuals have stayed with the company from the
beginning including David Stewart and Haydn Pritchard from 1998, and Jerzy Zawistowski and
Reuters 8 1
Charles Butt from 1999. In May 2001, restructuring occurred with Tazdin Esmail giving CEO
responsibilities to Charles Butt to manage the day to day activities while Esmail (remaining
President) focused on development of more targeted and concentrated R&D programs, strategic
associations, and longer term vision. Forbes was making a transition fi-om purely R&D to one
focused on manufacturing and commercializing its products. In March 2002, Esmail stepped
down as President and was replaced with Charles Butt (taking on President and CEO of the
company) in order to prepare the company for its next stage of development and to focus on
pharma products. They restructured in late 2002 by moving all research programs out of its
laboratory facility and outsourcing to selected universities and contract research organizations
(CRO) in order to decrease the rate at which they were going through money. They reduced their
head count from 35 to 17 which was expected to save CDN$854,000. Three new appointments
were made that year as well. Tanya Lukic became VP, Scientific Affairs, Haydn Pritchard
became a consultant so as to pursue teaching (with Forbes since 1998), and Laura Wessman was
promoted to VP, Business Development.
4.3.1 Board of Directors (BOD)

The BOD currently has six members. Their expertise and experience range from biotech
and pharma companies to food companies both locally and internationally. They all bring their
unique perspective to Forbes. The members of the board include Tazdin Esmail with over 20
years of experience in biomedical and pharma, Percy Skuy with J&J for 34 years and a member
for many years, Joe Dunne with a career in the food ingredient industry, and Don Buxton with
international pharma experience. Dunne and Buxton have been with the board for numerous
years. Lastly, there were two new additions in 2003, Nitin Kaushal with his experience in the
financial world and Lily Yang with her experience founding a company and working in many
different capacities including marketing, sales, and acquisition. These individuals are picked
from the industry in order to assist the company, and provide them with some direction and
guidance based on their collective expertise and experience in both the biotech and pharma
industries.
4.3.2 Senior Management Team

The management team consists of a group of individuals with experience in pharma,
medical and biomedical industries. Forbes recruits individuals who have backgrounds in business
development, finance and marketing. The senior management team consists of seven members,
each of whom are described below.
Charles Butt (B.Comm), President and CEO, has experience in business management,
marketing and sales in healthcare both internationally and in North America and has been with
Forbes since 1999. He has held positions at The Charson Group Inc., Lederle Laboratories, and
Shulton Inc. Patricia E. Pracher (CMA) is the Acting CFO. Her experience includes 10 years at
a controllership level in various industries in Canada and the US. 'David Stewart (PhD), the VP,
Regulatory Affairs, has been with Forbes since 1998 and has over 25 years experience in pharma
research with 41 papers published. His previous organization affiliations include Biovail
Corporation International, University of Toronto, and QLT. Jerzy Zawistowski (PhD) has
provided management, consulting and research expertise in food and agricultural science in both
the private and public sectors for over 20 years. He holds the position of VP, Functional Foods &
Nutraceuticals. He is currently an Associate Professor at UBC with over 40 papers published.
His responsibilities include the formulation and development of Reducol and other ingredients.
Laura Wessman (MBA) has worked at Forbes in different capacities in both the nutraceutical and
pharma areas. She now holds the position of Senior VP, Corporate Development. Her previous
positions were held at North Aegean Petroleum and Cominco. She is responsible for in-house
development and managing manufacturing activities. Carol Jacqueline Lane (EMT, PhD) is the
VP, Pharmaceutical Development. Her previous positions include a post with J&J, involving
global clinical trials. She directed Clinical Planning at Cardiome and managed operations at
Xenon Genetics. She has also worked in Psychiatry, Acute Care and Emergency medicine
departments. Jeffrey Motley (BSc) is the VP, Marketing & Sales. He has over 20 years
experience in pharma sales, marketing and business management. He has gained this experience
through positions at Wyeth-Ayerst Canada and Lederle Pharmaceuticals.
The overall group comes with a vast amount of knowledge in the pharma industry as well
as medical and nutraceuticals, and some entrepreneurial experience. There is a lot of experience
in this group from which to draw. However, many of these individuals have responsibilities that
are not part of their title or job description. The company is quite small with only 20 employees
which means that individuals in the company regardless of title or position have to take on things
like human resources functions. That being said, each person in senior management has at least
one person reporting to him or her. They do not function as a large company; since, they do not
have the luxury of large divisions and infrastructure so the hierarchy is very flat. They rely on the
loyalty and flexibility of their employees when resolving management issues.
4.4 Advisory Boards
4.4.1 Medical and Scientific Advisory Board
The board is made up of nationally and internationally recognized physicians and
scientists providing research guidance, and they augment current research programs that are
underway. The individuals range from MDs to PhDs in such specialties as Cardiovascular
Medicine, lipid research, preventative medicine, and epidemiology.
4.4.2 Functional Food & Nutraceuticals Advisory Board

This board consists of recognized experts in all areas of nutrition and health. They
evaluate promising new nutraceuticals and create a product pipeline of new fhctional food
ingredients for commercialization. Their specialities range from research in cholesterol, fat and
energy metabolism, diet and chronic disease, chemistry of food systems, toxicology and nutrition,
processing and quality of hnctional foods, and food biotech.
4.5 Core Competencies

At the moment, Forbes finds they have been trying to establish competencies in a number
of areas of the value chain. Like most biotech companies, the thought is to become a hlly
integrated company so as to control the value chain. Figure 13 shows the areas that Forbes
occupies with their sterol business. This, however, is not as popular with companies as it once
was since there is not the abundance of money that available at one time.
Figure 13: Pharmaceutical Value Chain
g Areas of Forbes' competencies
Forbes' current core competencies involve their ability to discover novel technologies,
ingredients and pharmaceuticals that are concerned with lowering cholesterol in the fight against
CVD. They have a competency in manufacturing sterols, which they entered into in part due to
dealings with Novartis and have gained expertise over the years. In the hture, Forbes will
concentrate their efforts on R&D and discovery, leaving other areas to those with expertise
through outsourcing agreements. However, they will maintain the plant in Texas for
manufacturing sterols. Forbes will stay involved in clinical trials and product development but in
partnership with another organization rather than developing this as a competency. They need to
build on their competencies in order to add value to their company and make them desirable for a
potential partner or alliance.
Forbes needs to have successful R&D and build up a technology base. They have relied
'
on one key technology to date but this cannot sustain the company indefinitely. Sterols demand
is increasing (favourable clinical studies, new product launches with sterols, and combination of
sterols and other ingredients), and they still have ample time to see more revenue. However, new
ingredients are not far behind. Life cycles for nutraceuticals are getting shorter so products do
not remain new and innovative very long. Forbes needs to acquire another revenue stream in
order to become profitable and survive. They can do this with their current competencies in R&D
and in working with universities and researchers. Partnering is still an important part of the
business; since, they will be outsourcing. So, they need to obtain partners that fulfill the
competencies that Forbes lacks. There are two schools of thought with partnering. In the past
pharma companies and the like would partner later in the development stage. This is important in
that companies must produce compelling results in order to have an organization show interest.
However, pharma is running out of products in their pipelines (R&D is expensive so relying on
drugs on the market for revenue) so partnerships are starting to spring up closer to the
development part of the technology or product. Forbes cannot rely on either of these but must
find the best-suited partner for them. They need to be prepared to spend money to develop their
technology further than the patenting stage. The problem is that the funds they have from sales of
phytosterols may not cover all projects that are under way (FM-VP4, Viola Oil and softgel
supplements).
IP is an important factor for companies with an R&D focus. Forbes has successfully filed
and received patents on their discoveries which solidifies their competency in R&D. The
supplement technology is undergoing examination in many jursidictions. Patents will continue to
be important as companies file for ingredients and functional foods to provide some security in an
ever-increasing competitive market.
4.5.1 Intellectual Property

Forbes has a number of patents for their sterol technology however the patent for the new
combination ingredient is still under review. Even though clinical studies showed a lowering of
cholesterol, the synergistic or additive effect between the phytosteroVstano1component and the
omega-3s component on the absorption, catabolism and excretion of cholesterol and on the
catabolism of triglycerides was not sufficient enough for the US examiner. Thus, Forbes must
conduct another clinical trial in order to prove that there is a true benefit of having these two
ingredients together or rework the formulation in order for the patent process to carry forward.
They first filed the US application on July 20, 1998 with another patent filed on July 20, 1999 and
claiming priority back to the parent application as well as a continuation filed on April 2000. The
family of applications covers general compositions comprising phytosterols and omega-3s and
the use thereof in treating CVD and other disorders. A Patent Cooperation Treaty (PCT)
application was filed in Europe, Canada, Russian Federation and ~ u s t r a 1 i a .In
l ~Europe
~ the
patent is undergoing prosecution. Canada has not undergone any examination; since, they are
awaiting the outcome of the US. Australia has not completed the examination and the Russia
application is undergoing substantive examination. This technology will provide a composition
suitable for use alone or for incorporation into foods, beverages, pharma, and nutraceuticals. The
patent claims that the phytosterols and phytostanols may be procured from a variety of natural
sources. These include plant oils (corn oil, wheat germ oil, soy extract, rice extract, and sesame
oil) or tall oil pitch or soap. Omega-3 may be extracted from zooplankton, fish (salmon, tuna or
halibut) or other marine animals or synthesized using microalgae. Plant sources could be used and
have the advantage of reduced odour including hemp oil, flax seed oil and corn oil, soy.
It is still difficult to patent ingredients and some technologies, and there are no guarantees
of obtaining patents after filing. The infringements will be abundant once some of the pending
patents are allowed. Different patenting laws exist in the different countries so infiingement will
need to be worked out. Large companies can afford legal infiingement battles more than the
smaller companies. Forbes is aware that there are other patents pending for sterols, and there
could be patents coming in the future for combinations of sterols and omega-3s. They have a
patent lawyer on staff on a part time basis to ensure that patents are created, filed and researched
properly. They do have the advantage of filing in 1999. Also, companies can still make products
with sterols and omega-3s without having patented technology. Forbes still can produce the
supplement; they just would not be able to charge royalties and would have to monitor other
filings in the future.

Forbes' strategy is to continue to build the pharma and nutraceutical sides of the business
in the realm of CVD. Interesting to note, however, is that some individuals in senior management
envision that pharma will be the main focus, with phytosterols used just as revenue generation,
and the nutraceuticals will not be pursued. This could be a problem if everyone is not focused on
'39 Internal Memo 2003

the same strategic goal. This could cause issues when looking at management and allocation of
resources. Also, Forbes is relying on a few customers for their revenue. Any changes such as
decreased projected demands, or inability of customers to meet their obligations would negatively
impact Forbes.
There are many causes of CVD including high cholesterol, obesity, and diabetes. So,
current pipeline products are trying to address these other needs as well as cholesterol-lowering.
Forbes currently is using the nutraceutical business, in particular phytosterols, to fund the R&D
required for pharma and other nutraceutical products. However, nutraceuticals are moving into
pharma territory since they are nutritional and preventative (see Figure 14).
Figure 14: The Spread of ~utraceuticals'~~
BENEFITS
juices, etc
Therapeutic
,
Pharniaceuticsl DELl?iElY SYSTEMS Food 8 drink
(Used by permission from Reuters Business Insight)
Forbes is positioning themselves in two markets, nutraceuticals, and pharmaceuticals.

They do not have any pharmaceuticals on the market at the moment; however, FM-VP4 is in
Phase I1 clinical trials. Also, they are manipulating the molecule to see if there are other
indications besides its cholesterol-loweringabilities. They have taken their competencies in
R&D with sterols and other ingredients and moved it into pharmaceuticals which has the potential
to have a large payoff. Being positioned in two seemingly different areas can be problematic;
since, resources are pulled from one area at the detriment of another. It is sometimes a gamble to
know which area is going to pay off or drain resources completely and fail. Both areas are highly
competitive with numerous large companies involved. However, there can be some crossover
between the divisions since discovery in both areas is very similar as well as pre-clinical and
140 Ehrnreich 48
clinical trials. Also, core resources, such as human resources, can be used by all areas of the
company. The nutraceutical side has had only one ingredient make it out of the labs to
commercialization since 1993. But, companies like QLT have been successful to date with only
one product on the market.
Partnering has been a company strategy for many years. Forbes partnered with Novartis
to commercialize Reducol as well as conducting R&D and clinical trials with the help of
researchers at local and national universities. They have partnered with different departments at
UBC including Departments of Chemistry, Pathology and Laboratory medicine; Food, Nutrition
and Health; Food Science Program; Faculty of Agriculture Sciences; and Faculty of
Pharmaceutical Sciences. They have collaborated with UBC pharmacology, Dr. Kisher M
Wasor, to do preclinical and animal studies. They have conducted some studies with McGill and
Dr Peter Jones as well as studies at the University of Toronto. In 2003, Forbes' lab and
equipment at UBC were leased to Cavendish Analytical Laboratory Limited since Forbes holds
the lease on the facility until 2005. Cavendish signed a two-year lease agreement which included
conducting some chemistry related services for Forbes. Future potential partners need to
compliment Forbes for them to be successful. This includes a partner that understands the VDS
market because they do not have a huge marketing department (exists of two people at the
moment). This will allow sharing of costs to commercialize. By sharing, they can brand their
ingredients and have the backing of a company that has the financial means to market effectively
on a national and international basis. Forbes does not have the budgets to launch products on
their own at this time.
The branding strategy for Reducol has been successful. The partnership with Novartis
was beneficial in getting Reducol to market; however, they did have some non-compliance in
their licensing agreement so the partnership dissolved. Forbes originally was not going to
purchase the Reducol name and was going to return to the original name, Phytrol, or market
under another name, leaving Novartis rights to the Reducol name. However, they did purchase
the name which has been beneficial. Branding has been important in an arena where there are
numerous players with ingredients and like so many other products some ingredients are better,
safer and more effect than others. So, in order to have the consumer associate quality with an
ingredient, the brand is important.
They do not intend on becoming a fully integrated company but rather focus on R&D,
patent technology, and outsource to CROs and labs to continue development of the technology
and conduct clinical trials. Many companies in biotech have focused on achieving full
integration. This is not sustainable anymore and Forbes has taken this to heart. Instead, Forbes
will focus on outsourcing to competent organizations. So, IP is an important factor and can
provide security for Forbes for any technology they discover.
4.7 Critical Success Factors

A key factor in Forbes' success to date has been the employees. Forbes employees are
flexible, resourceful, focused, take pride in what they do, and enthusiastic about their jobs and the
vibrant industry. Such enthusiasm is important; since, most employees are expected to
accomplish multiple tasks as well as learning on the job. Originally, the management team were
scientists involved in the original research; as the company has matured, business minded and
experienced individuals have been put into management positions. They all work well together in
that people are willing to assist one another and not hung up on titles. Forbes is still small enough
to encourage employees to voice their thoughts and new product ideas as well as allowing
younger individuals to seek higher level positions. Forbes also encourages continued education;
for example, Laura Wessman has achieved her Master of Business Administration whle working
at Forbes.
Products and technology are important for Forbes' success. They have licensed the IP for
the technology from UBC so their core technology is protected and it is non-GM which puts them
at an advantage. Early marketing is important and Forbes entered the market for phytosterols
during the growth stage. They also have some other products in their pipeline including pharma
and nutraceutical ingredients. Networking has been important for Forbes as well. They have a
number of individuals on their boards and in the community that assist in generating good ideas
that then can be tested in the lab and good relationships in the academic community. Members of
their management team have contacts in different industries including pharma, nutraceuticals,
foods, and medical. Forbes is outsourcing much of their supply chain and focusing on core
competencies rather than spreading themselves thin and trying to allocate resources to too many
activities and projects.
Forbes finds themselves in one of the upcoming clusters. In Vancouver, they are close to
academia and universities, hospitals, skilled labour, near other biotech clusters (San Diego, San
Francisco, Washington, and Saskatchewan), community of like-minded businesses, and are in an
area known for a high quality of life. Also, Canada fosters the biotech companies through
research grants and funding. Companies tend to survive better when they have some connection
to like-minded companies and a supportive community.
4.8 Competitive Advantage
First and foremost, Forbes has a number of patents for phytosterols and methodologies
including Reducol (Phytrol), and they have patents under investigation for the combination
product. They have been in the business since the early 1990s (spinning out of UBC in order to
commercialize the sterol technology) and their sterols have been added to numerous products.
Reducol can claim health benefits on the labels and in advertising due to GRAS status as well as
being a non-GM and kosher ingredient. The non-GM status will prove to be important in Europe
where legislation is moving toward labelling to include GM status of ingredients. They are
continually working on R&D through their many partnerships and close relationships at UBC.
Forbes keeps the cost down of their sterols by being able to incorporate them into
products without esterification. Competitors like Take Control and Benecol add cost to their
product due to this process. Dosage has been important as well; Cytellin did not survive in part
due to the high doses that had to be taken. Forbes' phytosterols deliver their promises in 3
servings a day of only 3 grams. Margarine has been a successful product to incorporate sterols.
Many consumers use this type of product daily. They continue to create formulations for Reducol
and other phytosterols/stanols which they provide to manufacturers of foods and supplements.
The scientific staff is very knowledgeable in nutraceuticals. Dr. Zawistowski is a well-known
expert in the field of nutraceuticals, and they have numerous doctors and researchers on their
advisory boards. They have a number of employees with expertise in pharma which will allow a
cross over in nutraceuticals as the markets merge. VDS is also just a step away. Forbes has just
launched a website, www.reducolhealth.com, in order to provide information on the benefits of
Reducol for the average consumer and the risks of CVD. Thus, the website will educate
consumers and they will pull products such as theirs through to the market. Furthermore, their
marketing department travels all over the world to promote Reducol and phytosterols.
As for the combination product, they may have other advantages over companies that
have a collaboration or product on the market. There are rumours that Raisio and ONC are
working together. This may help Forbes since Raisio and ONC will be focusing on making
products rather than perfecting the ingredient. Forbes will be focusing on making ingredients that
can be incorporated into products. This would definitely give them an advantage since a number
of manufacturers would be able to purchase the ingredient. Also, by not being the first to enter
this new market, much of the aggressive advertising and marketing will be done by the lead
companies educating health professionals, nutrition community and consumers.
Forbes finds themselves in a country where R&D is supported both provincially and
federally putting companies that can receive these monies at an advantage. In 2000, Forbes
received research funding in the amount of CND$153,000 from the Technology BC Program
administered by the Science Council of BC, to explore new therapeutic targets in the prevention
and treatment of coronary artery disease. The emerging Canadian NHP, hnctional foods and
nutraceuticals industries are to be further boosted with the construction of a CDN$25 m research
centre in Western Canada. The Richardson Centre for Functional Foods and Nutraceuticals is
being backed by both government and industry and will be on the University of Manitoba's
campus (expected to open in 2005). It will work in conjunction with the Faculty of Agricultural
and Food Sciences, along with the Faculties of Human Ecology, Medicine and Pharmacy. They
will work to develop functional, health-enhancing foods and nutraceuticals, from agricultural
products of importance to the prairie region of Western Canada, including oats, wheat, barley,
buckwheat, canola, flax, hemp, and pulses, as well as animal-derived products.141It is estimated
by Agriculture Canada that functional foods and nutraceuticals could save CND$30 b in
healthcare costs.
4.9 Finances
All revenue generated to this point by Forbes has come from phytosterols. However,
Forbes has yet to make a profit and has filed losses every year to date (see Tables 20-22). With
all the projects that they have underway, Forbes will continue to operate at a loss for a time. All
the revenue has been put back into R&D as well as covering overhead costs. Over the years,
Forbes has had to make cutbacks. They have leased out their lab and equipment at UBC due to
some hard financial times and cut back on staff by more than 50%. Even thought they continue
to operate at a loss, they are able to obtain monies from private placements and investors. They
do have promising results with FM-VP4 and the library of compounds which could generate
revenue for the company. But, this is in the hture and most pharmaceuticals take a long time to
get to market if they even make it that far. Forbes has already scrapped one drug, CardioRex,
which seemed to have potential but it did not produce the expected results. In the meantime, they
are looking for revenue streams and thus the VDS market may be an option for the
ReducoWomega-3 combination. The problem is that they lack expertise in VDS. To date, they
have supplied a few top supplement manufacturers with phytosterols. They will have to build
that part of the business if they choose to enter the VDS market. This could mean stretching
resources even farther in a time when they are feeling the crunch. The last few years have seen
some dramatic losses and they need to generate some real profits soon. The boom of biotech
companies is unlikely to happen again, and investors may start to get anxious.
14' Starling January 2004

Forbes has successfully supplied Reducol and unbranded phytosterols to a number of
manufacturers for incorporation in supplements and functional foods. They have undergone
clinical trials proving the effectiveness of Reducol in lowering cholesterol in patients. Forbes has
translated the success of Reducol and phytosterols into a productive business, and they plan to
continue discovery and R&D in the worlds of nutraceuticals and pharmaceuticals. They have
some IP and investors willing to finance their endeavours. Even though they have had one
unsuccessful pharma product, they are working on a host of others with one showing promise,
FM-VP4, as well as looking at other functional ingredients, Vivola Oil. The management team
has changed over the years to incorporate individuals with expertise in pharma and nutraceuticals
as well as advisory boards with experience and expertise in these areas and in cholesterol and
risks for CVD. They have added some medical professionals which will help Forbes reach and
educate the medical community. Their current plan is not to become a fully integrated company
but, rather, to focus on their core competencies and to outsource in order to bring in competencies
they lack or license technology to other companies to move the product down the value chain to
the customer.
5 RECOMMENDATIONS AND CONCLUSION
The significant growth of NHPs has demonstrated the viability of and consumer demand
for products that provide health benefits. Figure 15 shows that functional foods and supplements
are experiencing the biggest sales. Herbal products and other nutritional supplements have
enjoyed tremendous growth. However, marketers must overcome several barriers to become
successful in functional foods and VDS. Currently, regulatory issues associated with product
claims present the most significant bamer to the entry as well as the threat of competition (other
NHPs or traditional foods and medicines). The competitive landscape will change for all
companies, and those that know their competition will have an advantage.
Figure 15: Consumer Sales of Nutrition Products by Percent in 2 0 0 1 ' ~ ~
Functional foods and VDS face some challenges. Formulation issues arise including
stability, taste, texture, bioavailability, and delivering an efficacious dose as well as how easily
the ingredient can be incorporated into a recipe or food. Formulation challenges for dietary
supplements include stability (especially in formulations with several ingredients), ease of
tableting or encapsulating, bioavailability, and keeping the dosage size as small as possible.
Then, there are the legislation hurdles, consumer wants and needs, markets intertwined with
pharma, and innovation for both industries.
Forbes is intending to bring their Reducol/omega-3 combination to the VDS market.
However, they are a nutraceutical and pharma company. They need to analyze whether or not to
introduce this new ingredient and if so, the best market and best way to accomplish the
14* Saskatchewan Nutraceutical Network 2004

introduction. This section provides a recommendation for Forbes for their potential supplement.
Also, suggestions for successful launching of the product will be provided, both in terms of
internal and external needs. Barriers for launch will also be discussed with an overall conclusion.
5.1 Recommendation .
It is recommended that Forbes move forward with their supplement combination
Reducol/omega-3. Another revenue stream is imperative for Forbes; since, they have been
operating at a loss for almost a decade. It is important that they start generating some profits so
they can keep R&D,activities for other ingredients and pharmaceuticals alive as well as affiliating
themselves with another product to show investors and consumers that viable research is still
taking place. Many investors look at the IP a company has in order to give it value. Furthermore,
they have only one branded product on the market (phytosterols are added to foods without
naming Forbes as the supplier), and companies can only survive on one product for a limited
time. For example, QLT has now purchased another company in order to expand their portfolio
past their one product, Visudyne. The combination supplement is close to commercialization.
Forbes has been working with it for over 3 years, first announced its existence in 2001. It also
fits into their strategy to be an R&D and discovery company for nutraceuticals and pharma, and
their intent to help prevent and treat CVD. VDS is compatible with pharma in that they need to
support health claims using clinical trials for both areas. They can use their competencies from
nutraceuticals and pharma to promote this supplement. Forbes has utilized their expertise in
R&D and taken an existing ingredient (Reducol) and made it more functional by incorporating it
into a combination supplement. Furthermore, omega-3s are a hot ingredient. They have been in
a growth phase since 1997 and are expected to continue due to the many benefits they possess.
Supplements are a cheaper alternative to Rx especially in countries like the US where Rx
drugs are expensive and elderly consumers have limited disposable income. Consumers buy
VDS because they are easy to swallow and relatively inexpensive and fit into a quick paced
lifestyle. Because consumers are price sensitive, the cost of a few vitamin pills may be cheaper
than a serving of certain functional foods. Consumers see VDS as a natural alternative as well as
having fewer adverse side effects than Rx drugs. Many consumers take VDS in order to
supplement an unhealthy diet or to prevent disease in the future. Baby boomers have disposable
income to spend on maintenance, and they are not aging gracefully rather they are trying to stay
young and healthy as long as possible. VDS fits into this lifestyle for them. There are only a few
supplements already on the market that incorporate both sterols and omega-3s. Furthermore, for
those people that dislike fish, supplements are a good alternative. So, the US is the best market to
enter with the supplement; since, they are open to new products and have a large consumer base.
Forbes has already conducted clinical trials showing that the supplement does decrease
cholesterol levels, in particular LDL and triglycerides, so this data could be incorporated into any
registering of the product (DIN numbers in Canada, or changing legislation in the US and EU)
and health claims. They would also have to ensure that manufacturing is done to GMP standards
because they are also a pharma company and want all products, including VDS, to be safe and up
to standards. Most of the big omega-3 suppliers have this capability. VDS are undergoing a lot
more scrutiny due to some safety and efficacy problems in the past. Forbes is pursing a patent on
the combination supplement in the US and other internationaljurisdictions. The US patent was
filed in 1998, and there have not been any competitor filings as yet. This will enable them to
licence the technology and collect royalties.
Forbes exists amongst one of the largest biotech clusters in Canada and is well known
globally. There are a number of universities, hospitals and biotech companies in the Vancouver
area. They have successfully obtained financial investors every year. They are a leading supplier
of sterols to food and VDS manufacturers especially in the US. Forbes currently has contracts
with TwinLab, Pharmavite, Iljin, and Macro to name a few. Forbes has been supplying TwinLab
and Phannavite with Reducol since 2001. Macro and Iljin are in the business of supplying
ingredients to the VDS market; so they could help supply the combination. So, Forbes could
potentially sign contracts with these existing customers.
Forbes has a marketing division with experience in pharma. They have successfully
signed agreements with partners, joint ventures and manufacturers for both supplements and
functional foods. They are actively involved in pursuing other avenues for Reducol and non-
branded sterols worldwide. They have launched a website for Reducol which will allow
educating consumers as well as health professionals and the virtues of the supplement can be
added to the site. In addition, Smart Balance and other current combination products will assist in
opening the market by educating the public and doing the initial aggressive marketing.
Phytosterols has maintained Forbes' business to this point by supplying them to
manufacturers for supplements and functional foods. The $75 m European plant sterols market is
ready following several ingredient approvals from the EC and an expansion of food categories
that can carry the cholesterol-lowering ingredient. However, Reducol is still awaiting approval
whereas ADM, Teriaka, and Pharmaconsult have ingredients approved under the NFR. But,
Forbes' sterols do have an advantage in that they are non-GM, which would put them in a key
position in Europe due to the increased fear of GM products. However, the EC has issued plant
sterol labelling requirements that will apply to new and existing products. Sterol-fortified foods
must carry the following; "with added plant stanols/sterols" in the same field of vision as the
product name and the quantity per 100 grams or per 100 millilitres must be in the ingredients
list.'43 The product must also carry a warning that stanols/sterols consumption should not exceed
3 grams per day and state, "This product is intended exclusively for people who want to lower
their blood cholesterol This could persuade those with medical conditions to purchase
the product but turn off the average consumer who is just looking for a product that is good for
them or a healthier alternative.
In order for Forbes to successfully launch this product, there are a few suggestions that
need to be considered. There will be some challenges they need to face including lack of profits,
a supply of omega-3s and the technology itself as well as conflicting strategy. Forbes needs to
consider the barriers to entry such as a maturing market, competition and product lifecycles.
5.1.1 Suggestions for Successful Launch of ReducoVOmega -3 Supplement

This section provides suggestions for the successful launching of Forbes' combination
product into the VDS market. These suggestions are derived from the preceding analysis.
Specifically, Forbes must consider the source and supplier of the omega-3s, develop the
technology in order to obtain the IP,obtain expertise in VDS, consider incorporation into foods,
and marketing and branding options.
In order for Forbes to be competitive, they need to supply the supplement either through a
manufacturing agreement or licensing. If they license, the revenue generated is very low since
they will only be collecting royalties. However, at the moment, the patent is not in place so they
cannot collect any royalties until it has been granted. If they supply the ingredient, this will not
generate lots of money either since there is not a lot of ingredient needed for each capsule or
softgel. Forbes would obtain royalties because of the patent but these are usually not that large
and some money for the ingredient (sterols). If, however, they supplied the supplement, they
would receive payment for the entire product. But, they would need to market their product and
purchase the omega-3s from a supplier. Lastly, they could partner with an omega-3
supplier/manufacturer that would help in creating the supplement. It is recommended that due to
Forbes' lack of resources that they partner with a supplier/manufacturer to make the supplement
and help with marketing.
'43 Starling, Functional Foods & Nutraceuticals 2004

'44 Starling, Functional Foods & Nutraceuticals 2004
To launch their combination product successfully, Forbes needs to find a reputable
supplier. Some manufacturers/suppliersthat may be suitable are companies like ONC, or
Bioriginal who have international distribution channels and expertise in omega-3s. Forbes has
been in discussion with Bioriginal who claims to be the world's leading supplier of EFA oils,
including fish, flax, borage (starflower), evening primrose, black currant and perilla with their
main office in Saskatoon. They provide bulk oils and softgels as well as finished, packaged
products. In addition to the standard oil or seed formats, they supply custom formulations, highly
concentrated EFA oils, water-soluble EFA powders, and a line of flax-based functional food
products including BakOmegaTM,FibrOmegaTMand ~ r o ~ i o ~ l aThe
x ~entrance
~ . ' ~ fee
~ for
joining the industry has been raised. Many of the products in the past were put together with the
idea to increase sales. Future products need to be built with the customer in mind. The customer
needs to feel that they are getting value for the investment in the product. This means investment
by manufacturers in quality control, GMP, new equipment and better ways of doing business. So,
Forbes has to be prepared to be involved in on-going development and clinical trials (they have
hired Carol Lane who has experience in clinical trials).
Forbes will have to conduct a clinical trial to prove the synergistic effect of the
supplement to get the patent into place. There are already competitors on the market without IP.
They also need to gain some expertise in VDS. This would be best accomplished by bringing in
an expert either as a consultant, contract, adding a member to one of the advisory boards or
reliance on a partner. They really cannot afford to hire more staff at this time. Through a
contract or consultant, they can pay per hour or for a limited time. To date, all members of
advisory boards and employees are familiar with pharma or nutraceuticals not VDS. It is not
advised to set up a new division; since, this would only cause a draining of scarce resources. VDS
seems to float between pharma and nutraceuticals. Most of the competencies from these areas
can be translated to VDS. So, again, it will be important to find an appropriate partner who can
not only supply the omega-3s but assist in marketing and development as well as providing some
expertise. Forbes is developing ingredients that can be used in both nutraceuticals and VDS with
the focus on nutraceuticals.
Some research indicates that it is better to eat foods with nutrients than to take a
supplement. Many nutritionists are trying to convince consumers to start eating a healthy diet.
Also, supplements are similar to Rx drugs and compliance can be difficult and patients/consumers
do forget to take them. People rarely forget to eat. So, after entering the VDS market with their
supplement, Forbes should move into functional foods which would provide a larger revenue
'45 Bioriginal Food & Science Corp 2004

stream since more ingredients would be needed. The VDS market is maturing. Product
lifecycles are short, and this would extend the lifecycle of the combination as well as allow
development of many functional foods. By selling the combination as an ingredient, Forbes can
generate more revenue and complete the circle of the lifecycle by moving it back into stages 1
and 2 as the market matures for the supplement. Their core competencies will allow them to
continue innovating many products.
Marketing and branding in VDS will allow claims to be made, and these claims can
translate to functional foods. A capsule andlor a dietary supplement are a good entry point for
products, around which a brand name can be built up. As a supplement, a research-supported
claim can be made. Once there is awareness of the ingredient, Forbes can make it available in a
food such as yogurt, juice, or ice cream. A brand extension will allow for continued development
and thus, prolonging the lifecycle or actually completing the lifecycle. However, Forbes must
bear in mind that this will cost money in that they will have to investigate SOPSfor incorporating
the combination ingredient into different foods as well as providing data that the ingredient is still
effective in foods to support any health claims they food companies may want to use. Even
though the desire for science-based consumer products that deliver a functional health benefit is
growing, consumers are not ready for therapeutic foods, but rather they want convenient, good
tasting foods that do not interfere with their lifestyle. Companies need to provide a functional
benefit in a familiar and desired food for greater levels of success. It will still take time for
consumers to be willing to eat their medicine. So, Forbes has to consider for which foods they
choose to develop procedures, and market to a specific segment of the population or
manufacturers, beverages and convenient foods. But, the future is bright for consumers
eventually becoming ready to consume foods instead of taking medication.
Branding will continue to be important as competitors enter the market, and consumers
turn to alternatives. For sterols, all the big players have a branded ingredient, Reducol,
Diminicol, and Benecol. The combination needs a catchy and inspiring name that can be easily
identified. For Forbes, it is probably best to approach by co-branding because they will be
relying on an omega-3 supplier. The issue then becomes selecting the right co-branding
approach.
Forbes must look at the type of partnership they want. A channel-exclusive approach
involves partnering with one major manufacturer for each distribution channel and offering them
exclusivity in exchange for agreed-upon raw material purchases. On the other hand, a channel
saturation approach involves offering the ingredient to a broad range of manufacturers in a given
category to quickly ramp up distribution and awareness and make the ingredient widely available
to consumers on a national or international basis. Channel exclusivity is the best choice when the
potential manufacturer is large and has a strong and broad market presence, and can move enough
products to make it financially worthwhile. This is particularly appropriate in niche channels
such as Internet, multi-level marketing (MLM) or mail order. Negotiating one-year contracts
which are renewable upon mutual agreement for a second year is usually the best bet. Market
conditions change rapidly, and so might a company's perspective on a partner. Channel saturation
may make sense if an ingredient is not patented or proprietary and can be easily copied. It
becomes important to get into the market quickly and establish a foothold before the competition
arrives which it seems GFA Brands Inc and Omega Protein are doing with the SmartBalance
product. However, the most common model is something in between where a supplier partners
with a small number of moderate sized manufacturers in a large channel such as retail. For
Forbes, it is probably best to enter into an exclusive relationship in the beginning; since, they do
need to do some development and brand the ingredient in the near future.
5.1.2 Barriers to a Successful Launch

Forbes is on the brink of bringing the ReducoVomega-3 supplement to market. So, the
barriers to a successful launch must be considered. The VDS market is maturing, and there are
many companies in the market. For the most part, they are large multinational companies with
money. There have been issues of the sterols precipitating out of the combination mixture within
the capsule and thus not dissolving once ingested so monies still need to be spent on developing
the technology further. They may be able to do this with a partner. There are some discrepancies
regarding strategy. Some individuals feel that Forbes will build both the phanna and
nutraceutical divisions while others feel that the nutraceuticals are just funding pharma until it
becomes successful. This is a problem in that people are focusing on different goals and thus
there will be problems with allocating resources.
There are numerous companies selling and producing omega-3s. Forbes needs to find a
source of omega-3s that will work in their formulation. A number of omega-3 supplements are
already on the market (see Table 18) with prices ranging from $6 to over $30. Consumers may
not be able to differentiate between the combination, and an omega-3 supplement or fish oil on
their own. Competitors already on the market with a combination steroVomega-3 include
capsules such as CardioTabs and ~ h o l e s t e r ~ i tand
e ~ SmartBalance7s
~'~~ margarine. But, Forbes
would have the advantage if they were able to obtain a patent; since, there does not appear to be a
competing patent issued. If they cannot prove the synergy of their product, there is not much
14' Trademark of Cardio Essentials

point in moving forward because they will not possess a competitive advantage. They are not the
first movers, they would not have IP, they do not manufacturer or supply omega-3s, and they do
not have a complete working technology. They must consider if omega-3s is just the latest fad or
will be around for a while.
Table 18: Omega3 Supplements on the ~ a r k e t ' ~ '

Tvae Brand Price
Omega 3 Norwegian Fish Oil (60capsules) Spectrum Naturals 6.95
Omega-3, songels (150 softgels) Natrol lnc. 8.39
Max Epa Fish Oil (100softgels) Nature's Way Inc 9.44
Omega3 (fish OilNit-E)(120capsules) Zone Perfect 11.97
Mega Twin Epa (Fish Oil) (60 softgels) TwinLab 13.97
Epa-Dha Omega-3 Fish Oil (100 softgels) Vitamin Shoppe 14.97
EpalGla (100 softgels) Miller Pharrnacal Group 15.20
Superomega ~ish0iis (100 softgels) Carlson Laboratories 19.60
Omega 3 "700"(700mg)(120 softgels) Solgar 32.03
The patent process is quite involved and there are a number of players trying to obtain
sterol patents which could affect the status of the combination. Every company in the business
(Raisio, Hoffman La Roche, Henkel, Monsanto and P&G) has filed at least one patent covering
some aspect of phytosterol or stanol ester technology. Most patents were filed between 1997 and
2000 and are still pending. The number of applications covering overlapping technology makes it
difficult to determine who may eventually obtain the actual patent. All applications are published
and many jurisdictions allow a patent owner to sue for back damages from the date of
publication. So, if claims are issued and companies were infringing, they may be forced to pay
damages even if the company ceased the infringing once the patent was issued. It is difficult to
say if Forbes is safe making steroVstano1 esters. Forbes should look at all patents pending in this
areas including prior to 1997. Thus, they can argue there was no infringing; since, they are
practicing what was published before any filings. The esters that Forbes is proposing have been
made for many years. Forbes filed a patent for this combination supplement in 1998 but it is still
in review. They still have to provide more clinical testing in order to prove that the combination
has a sound synergistic effect. However, time is running out and other players are not far behind.
Forbes has been working with the supplement for many years already to get the technology up to
par. It is now or never to get it to market
Forbes needs to be aware of ever changing legislation brought on by safety and efficacy
issues in the VDS market. It costs money to bring the supplement to the different markets. Also,
product life cycles haven gotten shorter in recent years. During the introduction of a product a
14" Vitamin Shoppe 2004

premium price can be charged, as the product moves through the cycles, the price decreases.
Also, innovation must continue in order to keep sales alive such as packaging, format, and adding
to foods. Forbes will have to continue to innovate this product to keep it on the market.
They must consider whether they will supply the supplement. There is a cost involved in
actually making the supplement, and they will have to purchase the omega-3s. Forbes will need
to build, or purchase a facility or expand Phyto-Source in order to manufacture the supplement.
They have some expertise in manufacturing through their phytosterols. However, Forbes is
aware of the substantial cost of setting up manufacturing and becoming experts. Option two is to
outsource, partner or align for manufacturing services. This has its own costs involved, and
Forbes will not see all the profits in any of these kinds of deals.
Forbes is a small company with only 20 employees that has experienced some financial
difficulty recently (selling off assets and laying off employees); however, they have been able to
obtain some large financing each year from investors. They will probably operate at a loss for the
coming year. It will take time to market the supplement and they still have ongoing research with
FM-VP4 and the FM-VPx library as well as other functional ingredients. Thus, they must
allocate their resources amongst all these projects.
They are trying to operate both a pharma and nutraceutical divisions. The VDS market
has had lots of negative press due to safety and quality. So, Forbes needs to consider the
association consumers may make with their pharmaceuticals possibly not being up to standard.
There have also been issues in regards to supplements not living up to expectations and actually
hurting individuals, kava kava and ephedra. Two other incidents in 2003 to note are TwinLab
filed for bankruptcy and a number of vitamin and nutritional supplements manufactured by Pan
Pharmaceuticals have been recalled. These included a cholesterol-loweringdietary supplement
that incorporated Reducol. Pan ultimately filed bankruptcy and all assets have been sold.
There is huge potential for revenue to be generated if FM-VP4 or the library of
compounds is successful. So, Forbes needs revenue in order to keep this project alive. The
pharma industry that once only bought up or licensed products after Phase I1 and 111, since they
wanted proof that the product would work and be a benefit to carry forward, is more likely to start
looking at early stage products. They have been relying on their blockbuster drugs which will
come off patent soon and they don't have a lot of upcoming products in their pipelines. However,
the other school of thought is that Forbes will have to spend more money in the discovery stage to
entice pharma or smaller companies that could potentially partner. Forbes may have to go as far
as Phase I1 trials for their products before partnering. Forbes will not be successfid just coming
up with ideas. Most companies are not prepared to buy the IF' and then develop the product
themselves. They usually want some assurance that the ingredient will work or they do not have
the competencies for development. However, by staying in discovery, Forbes puts themselves in
a unique position of being attractive to big pharma and smaller companies that are looking for
products to add to their pipelines. Forbes must consider that pharma is risky since 1 in 100,000
drugs are lucky to make it to market. They also must be prepared for future losses and know
when to cut their losses with products that are not performing. So, they need to address other
products in their pipeline to move forward.
5.2 Conclusions
The increased consumer interest for nutrition and health will change the relationship
between the food and pharma industries. Innovative foods with health claims are brought to the
market in the form of novel foods, nutraceuticals and functional foods. Both the food and pharma
industries compete for new products, new forms of food and new technologies for new markets,
and new ways of serving customers. A principal challenge for firms entering any of these markets
is the formulation and implementation of a business strategy. This requires blending core
competencies and capabilities, specifically, the marketing knowledge and food technology skills
of the food industry, and the medical and screening capabilities of the phanna industry. This
means there are several forms of collaboration possible between these industries, from full
integration to supplier relationships.
Functional foods is a very dynamic market with their rise coming from the awareness of
deteriorating of health due to lifestyle choices, increased self-medication due to reduced
government spending for healthcare and increased responsibility for one's health, increased
education on the link between health and diet, competitive environment where companies are
looking for other areas to explore, and innovative R&D. Functional foods are still in a growth
phase, which is predicted to continue to at least 2008. Key areas of growth are new applications
for plant sterols, new applications for probiotics, cosmeceuticals (foods that claim to improve
skin, hair and nails), and the elderly.
Key markets for functional foods continue to be the US and Japan. Japan is a more
developed market with a well-defined regulatory system. Many products such as probiotics and
isotonic drinks are new to most of the world but are mainstream in Japan. In Asia, fortification
with omega-3s is more prevalent than the rest of the world since brain function is important in
this culture. The US' major health concerns are heart health, bone health and energylvitality. So,
cholesterol control and added calcium are important for older consumers while younger
consumers are concerned with sports functions and provision of energy. Functional foods
account for around 3% of total food sales in the US. Europe is most concerned with intestinal
health so probiotics and products with added fibre are strong.
As for the VDS market, there has been bad publicity and medical warnings impacting
firms and products. The market is mature but there is still room for growth, especially for
supplements. Furthermore, developing countries are starting to show interest in VDS because
they are an alternative to Rx drugs (which can be prone to many side effects and are expensive)
and enable consumers to get their RDA of nutrients. Consumers are driven toward self-
medication due to the increased costs of heaithcare, the link between health and disease
prevention, and the fit into current lifestyles. However, will consumers embrace a combination
supplement and see that it is better than taking sterols and omega-3s separately?
More than ever, it will be necessary for companies to differentiate themselves, not only
on the science that supports their products' health benefits, but also on technical characteristics,
such as ease of processing or taste benefits. Four years after the launch of Benecol and Unilever's
Take Control cholesterol-loweringspreads in the US, sales are far below what was once
forecasted. Success has come for many products but it raises many of the contradictions and
complexities associated with functional foods and nutraceuticals. How much science is enough
science, one human clinical study or many, and how many? For marketing purposes, one study
with positive results is all that has been needed for many successful functional food marketing
campaigns. Furthermore, for many functional foods, especially beverages, the science is little
more than circumstantial; since, they are lifestyle products and it is hard to equate these with
long-term health benefits. This then leads into another tricky area, should the concept of
functional foods be confined to ingredients and products that have proven health benefits related
to a specific disease condition or are they more lifestyle products that contribute to an idea and
consumer need of optimum health? At the moment, advertising generally focuses on taste,
convenience, and such rather than the health benefits.
The market continually fails to find consistent solutions to doselefficacy of the product as
consumed, the cost equation of new product development (NPD) and pricing of products,
addressing consumer understanding/awareness, and working out the regulatory environment.
Also, there is the question of the use and protection of IP around technologies and ingredients.
Many companies considering entry into or expansion within the nutraceuticals market
begin by developing an understanding of consumer needs and the corresponding benefits they
seek from nutraceutical products, whether foods or supplements. This often begins by prioritizing
and selecting consumer health conditions for development. Forbes has done this by focusing on
CVD. At this point in product development, a company looking to compete in a particular arena
should have a clear understanding of the market and technical attractiveness of various health
conditions. Forbes has functioned well in their market with phytosterols and their cholesterol-
lowering abilities. Their medical advisory board has many individuals that are experts in the
area. The next step is to determine how well a particular health condition area fits with the
company's current business or future ambitions. Forbes sold the ADIADD technology so all
current products, ReducoVomega-3s supplement and FM-VP4 are cholesterol-loweringproducts.
They are also investigating other indications that involve CVD with their current products and
products in their pipeline. They may move into areas such as obesity and type I1 diabetes which
can lead to CVD. These look to be the next diseases to tackle based on WHO statistics.
However, Forbes must monitor the horizon to ensure they are on track.
Time and energy spent on the front end of the development process will assist product
success. This is especially true for nutraceuticals that must offer a clear health benefit while
providing a satisfying food in terms of flavour, texture, refreshment, satiety, and convenience.
Forbes has spent a good deal of time and money creating SOPSand solid clinical research for
phytosterol incorporation into different foods. They will have to do this for all future ingredients
as well. Accurate decisions made early on in the product development process have far more
impact on product success. Forbes has successfully incorporated sterols into margarines and are
looking at Viola Oil (oils are considered the next break through product for sterols). They will
have to continue perfecting the combination technology in order to market it. Optimizing flavour
and textural properties is one of the greatest challenges in nutraceutical product development.
This is particularly a problem with omega-3s; so, Forbes needs to ensure that their source is a
viable ingredient that can be added to foods in the future if they choose to move in that direction.
There are signs that suppliers have forms that will not degrade even when exposed to heating.
Most suppliers of omega-3s have a powder form that can be incorporated into foods and
supplements.
Forbes must choose an appropriate partner either from the food or pharma industries.
Food companies are consumer focused. Food products tend to have short product-development
cycles, experience in branding, and sell on a low margin at high volume. Producers know how to
determine what the product needs to look like, feel like, taste like, and how it needs to be
packaged for a consumer. Pharma companies, on the other hand, are science based. They have
long product-development cycles that often involve proprietary technologies as well as large
R&D budgets and lots of regulatory experience. Nutraceuticals have allowed food companies to
meet increased revenue targets through increased market share, penetration into new markets, and
the potential for higher margins. For pharma companies, nutraceuticals provide penetration into
new consumer markets through licensing arrangements that enable them to obtain profits. Forbes
is focusing on discovery (using their pharma s l l l s and R&D skills), and outsourcing and
licensing their products to both food and pharma companies. Forbes seems to be living between
these types of companies.
'
Functional foods and VDS success depends on the following: a focus on general well-
being, health benefits linked to a common complaint, extension of existing brandlfood, mass
distribution through multiple channels, a focus on tastelease of use, convenience and price, a
mass marketing position, and effective comrrunication of health benefits. VDS focuses on self-
medication and specific aliments. The future sees the move to more specific aliments for both
foods and VDS as pharma gets more involved. Thus, it is recommended that Forbes move
forward into the VDS market with their combination and then into functional foods once they
have a successful launch. This will allow generation of more revenue; since, they will have
already gotten some customer loyalty. This will only happen if they find a reputable supplier of
omega-3s who is willing to manufacturer (or Forbes needs to manufacturer themselves). They
will also be focusing on their strategy of building both the pharma and nutraceutical parts of their
business in the world of CVD. They will not be able to survive on just one ingredient
indefinitely. By entering into VDS, Forbes will also promote their name and brand globally to
ensure that other products will be accepted in the future, thus, helping ensure Forbes' position in
nutraceuticals and potentially in pharma.
APPENDICES
Table 19: Principle Ingredients used in ~ u t r a c e u t i c a l s ' ~ ~
Ingredient Sources Claims relate to Typical applications
Antioxidants Ascorbic acid Cancer Soft drinks tea
Betacarotene Heart disease Tea
Plant extracts Lignans
Tea
Dietary fibres & Soluble fibre:
oligosaccharides Cereal Extracts Diabetes Soft drinks
Gum Digestion Yogurts
Pectin Heart disease
insoluble fibre:
Bran Cancer Bakery products
Cellulose Digestion Breakfast cereals
Pulses
Glucose replacers Fructose Energy Confectionary drinks
Glucose Fruit juices
lsomalt Soft drinks
Lactitol
Maltitol
Xylitol
Minerals Calcium chelates Dental health Diary products
Casein peptides Osteoporosis Fruit juices
Iron chelates Anaemia Breakfast cereals
Lactoferrin Bakery
Omega three polysaturated DHA Heart disease Bread
fatty acid Fish oils Cholesterol Fats and spreads
Flaxseed Cancer Eggs
lmmune function Soft drinks
Phytochemicals Garlic oil Cancer Fruit
Herbal extracts Heart disease Fruit juices
Plant sterol Vegetable oil Cholesterol Fats and spreads
Wood pulp
Prebiotics Fructo & Digestion Fruit juice
Glacto-oligosaccharides Soft drinks
Cereal fibre extracts Yogurt
Probiotics Bacteria eg. Digestion Dairy drinks
Lactobacillus Heart disease Yogurt
Bifido bacterium Immune system
Vitamins A:
Betacarotene Cancer Fats and spreads
Fish oils lmmune system
Meat Performance
Vegetables Vision
B 1 (thiamin): Digestion Bread
Cereals Nervous system
Cardiovascular svstem Bread
'48 Spevak 19-20
107
lngredient Sources Claims relate to Typical applications
Diary products Vision
Eggs
Meat
c:
Ascorbic acid Immune system Confectionary
Fruit Juices
Vegetables Soft drinks
D:
Diary products Dental health Fats and spreads
Eggs Digestion Yogurt
Fish oils Osteoporosis Milk
Meats Fruit juice
E:
Nuts Cardiovascular system Bakery products
Soya Fertility Breakfast cereals
Vegetables Immune system Fats and spreads
Wheat germ Impotence Dairy products
Menstruation Soft drinks
Skin problems
Others Aloe Skin Diary products
Soft drinks
Caffeine Concentration Soft drinks
Folic acid: Anaemia Fresh foods
Dairy products Pregnancy Breakfast cereals
Eggs
Meat
Vegetables
Ginseng Relaxation Confectionary
Soft drinks
Tea
Guarana Energy Soft drinks
Gymnema Weight loss Tea
Kefir Circulation Yogurt
Taurine Muscle Strength soft drinks
Table 20: Consolidated Balance Sheets (Expressed in thousands of Canadian dollars) from 1997-2004
Notes receivable 30 30
lnventory 60 1,852 4,892 3,415 952 508 585
Prepaids and deposits 28 173 142 412 1,107 1,190 537 326 663
2,703 9,190 23,616 55,911 25,614 14,523 6,092 9,945 23,458
1997 1998 1999 2000 2001 2001 2002 2003 2004
Deficit (4,416) (3,920) (10,844) (19,750) (44,798) (51,259) (55,379) (56,439) (59,659)
2,578 8,514 27,238 50,777 26,463 20,014 17,000 23,201 36,629
$2,758 $9,277 $29, I26 $64,402 $48,270 $39,984 $27,417 $28,434 $42,103
Note: Year-end until 2001 was July of each year, thereafter year-end was December
Table 21: Consolidated Statements of Operations and Deficits (Expressed in thousands of Canadian dollars) from 1997-2004
*Numbers rounded to nearest thousand

**Five months ended December 3 1,2001
Table 22: Consolidated Statements of Cash Flow (Expressed in thousands of Canadian dollars) from 1997-2004
1997 1998 1999 2000 2001 2001 2002 2003 2004
Cash provided by (used in): (Jul31) (Dec.31) (Dec.31) (Dec.31) (Mar.31)
Operations:
Loss for the period $(244) $252 $(6,924) $(8,906) $(I 9,722) $(6,641) $(4,120) $(1,060) $(I,736)
Adjustment to reconcile loss for the period to
cash flow in operations:
Depreciation and amortization 2 19 113 634 1,073 955 2,307 2,044 354
Amortization of deferred licence revenues - (828) (2,093) (903) (941) (141) (38)
Gain on settlement of licensing (6,044) -
arrangements
Gain on divestiture of technology (2,247) -
Gain on sale of investment in joint venture - (167)
Gain on disposal of fixed assets (32) (38) (2)
Write-down of leaseholds and assets 1,136 29
Write-down of pilot facility 2,715 1,302 -
Stock-based compensation expense 20 369 1,033
Foreign exchange translation 131 1
Changes in:
Accounts receivable (229) (373) (1,013) 5 (1,658) (106) 759 (119)
Inventories (60) (1,792) (3,040) 1,477 2,463 443 (77)
Prepaid expenses and deposits (133) 31 (490) (695) (86) 804 21 1 (299)
Accounts payable and accrued liabilities - 644 787 2,754 (3,061) (799) 837 (2,634) (192)
Royalties payable (3,155) -
Increase (decrease) in tenure allowance in - 338 358 78 104 (233) 114 (46)
Excess of amounts funded
Deferred revenues 9,296 - 442
Other 69 95
(173) 553 (6,088) 12,941 (24,740) (6,236) (3,814) (4,733) (1,117)
Investments:
Acquisition of property, plant and equipment (3) (53) (5,535) (3,394) (3,698) (2,142) (1,566) (1,087) (523)
Acquisition of intangible and other assets (3,999) (3,315) - (49)
Investment in joint venture (net of cash (0.2) - (2,850) - (1,222) -
Received)
1 1997 1 1998 1 1999 ) 2000 1 2001 ] 2001 ( 2002 ( 2003 1 2004
Collection of loan receivable from Phyto- 1 200 1 2,369 1 -
Source LP
Proceeds on disposal of pilot plant 26
Proceeds on disposal of fixed assets 185 407 763
Proceeds on divesture of technology 1,189 1,230
Short-term investments (7,987) (11,095) (23,434) 32,378 9,155 983 (1,285) (9,553)
(3) (8,040) (16,630) (26,828) 21,831 4,083 (1,398) 1,900 (8,820)
Financing:
Issuance of common shares 14 5,453 25,678 32,446 734 12 199 7,779 1,221
Issuance of preferred shares 12,910
Issuance of special warrants 633 887 (887)
Repayment of notes payable (96) (51) 422 (1,151) (37)
Repayment of capital lease obligations (3)
Repayment of demand loans 156 (12) 63 (1,693) (887) (162)
Increase in demand loans 2,078 664
25,678 32,602 1,259 24 (85) 6,932 14,593
Increase (decrease) in cash and cash (161) (2,034) 2,960 5,786 (1,650) (2,129) (5,297) 4,099 4,656
equivalents
Cash and cash equivalents, beginning of period 2,776 2,776 743 3,702 9,489 7,839 5,710 413 4,512
Cash and equivalents, end of period $2,615 $743 $3,702 $9,489 $7,839 $5,710 $413 $4,512 $9,168
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A STRATEGIC ANALYSIS FOR NEW PRODUCT ENTRY

INTO THE NUTRACUETICALS, FUNCTIONAL FOODS,

PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF

0Katherine Ray 2004

SIMON FRASER UNIVERSITY

All rights reserved. This work may not be

A Strategic Analysis for New Product Entry into the Nutraceuticals,

1 . Forbes Medi-Tech. Inc.

Trademark of Forbes Medi-Tech Inc.

1.3 The New Product

Forbes Medi-Tech Inc. 2004

(Used by permission of Reuters Business Insight)

1.4 Aim and Scope of Project

Figure 2: The Expanding Realm of ~utraceuticals~

Positive enhancement Balance Remediallpreventiveaction

(Used by permission of Reuters Business Insight)

2.2 What are Nutraceuticals and Functional Foods?

'O Health Canada 2002

2.3 The Market

Figure 3: Product Trends Since the 1970s12

I Weight Loss I Vitamin and Mineral I Low and Light I Nutraceuticals I

(Adapted by permission of Reuters Business Insight)

" Food Science Bureau 2000

Figure 4: Global Sales in 2001 by percent"

(Adapted by permission of Reuters Business Insight)

l3 Note all dollar values in US$ unless specified

Table 1: Global Functional Food Market Value Sales 1998-2008~'

2008 61,788.0 4.9 9.3

Table 2: Functional Food Market By ~ e ~ i o n * ~

2.4 Canada's Role

2.5 Areas of Interest for Nutraceuticals and Functional Foods

28 Saskatchewan Nutraceutical Network 2004

2.5.1 Cardiovascular Health and Cardiovascular Disease

29 Sloan, Nutraceuticals World 200 1

Table 4: Global Sales of the four Key Cardiovascular Therapy keas3'

2.6 Distribution of Nutraceuticals and Functional Foods

Table 5: Global Functional Foods Distribution, 2003~'

36 Reuters Business Insight 12

2.8 Successful Products

Fats and Spreads

4' Trademark of Raisio

2.9.3 Cargill Health & Food Technologies

44 Registered trademark of Teriaka

48 Registered trademark of ADM

2.10 Market Drivers

53 Euromonitor International Apr.2003

54 Euromonitor International Nov.2003

Table 7: World Aging ~ o ~ u l a t i o(inn thousands)

59 Euromonitor International Nov.2003

2.11 Company Strategies

Euromonitor International Apr.2003

2.12 Barriers to Nutraceuticals

63 Codex Alimentarius Commission 2004

2.13.2 The European Union

64 National Centre of Excellence in Functional Foods 2004

2.13.3 The United States

O' Euromonitor International 2004

71 Saskatchewan Nutraceutical Network 2004

74 Health Canada 2002