Surging sales, more transparency pressure driving contract manufacturing transformation

Contract manufacturers report that business is humming at a higher pace than ever.  One major firm has said that it is getting so many more inquiries for new business that it is hard to even respond, much less schedule meetings to see if new contracts can be signed.

Demand is soaring, but can you trust it?

“Solicitations are way up,”​ Mike Finamore, CEO of Gemini Pharmaceuticals told NutraIngredients-USA​. Gemini, based in Long Island, manufactures dietary supplements, OTC drugs and pet and veterinary products.

A ago Finamore told NutraIngredients-USA​ that manufacturing demand was up strongly as a result of the surge in sales during the early stages of the pandemic​​.  Brands were scrambling to get immune support products on the market as quickly as possible.  Finamore said that demand has only increased from that already fevered pitch.

 But while he was cautious about future demand projections then, he’s even more so now. Gemini finds itself in the situation of many companies in the industry.  How much should you invest now, if at all, in extra capacity to meet the current demand?

“Do you trust the trailing 12 months?  Going forward do you trust that the business the client says will be there will be there later on?” ​ Finamore said.

“We have seen floor space given over to vaccinations,  That has meant less physical space available to sell products and that will have an impact.  And the innovation side of the industry has slowed down because we were all focusing on other things,” ​he said.

UK manufacturer rolled up into acquisition

Some companies are making that bet, and that has driven some consolidation in the industry.  At the end of March investment firm Cornell Capital LLC acquired INW (International Nutrition and Wellness), a firm that has contract manufacturing facilities in four states.  Under the prior ownership of Rosewood Private Investments, INW had acquired contract manufacturers ProTec Laboratory and Healthy Natural Inc.  The company now advertises manufacturing capabilities in multiple delivery forms including powders, liquids, capsules, tablets, food bars, and topical products. 

Coinciding with that announcement, INW said it had acquired Bee Health, a leading developer and manufacturer of nutritional supplements in the UK.  

"INW is an exciting and compelling opportunity that aligns with Cornell Capital's strategy and investment experience in building leading global scaled businesses in attractive industries,"​ said Justine Cheng, Partner at Cornell Capital. "We are impressed by INW's differentiated, value-added offering of high-touch innovation, operational excellence and speed-to-market for both well-known and emerging brands. The transaction with Bee Health represents another value-additive acquisition for INW and will significantly expand INW's total addressable market to establish a strong foothold in the fast-growing UK and European market.”​

Pressure for more transparency

Finamore said that both the growth in demand for contract manufacturing services and the trend toward consolidation have been driven in part by more pressure for transparency in manufacturing.  Brick and mortar retailers and online marketplaces like Amazon are calling for more proof of GMP compliance and other certifications.  

It had been postulated when the GMP requirements fully rolled out for every level of the dietary supplement industry in 2010 that many smaller companies doing their own manufacturing would find it more cost effective to go to contract manufacturers.  That trend never seemed to take hold in as thoroughgoing a way as had been expected.  But now, with the increasing adoption of standards put into place by the Global Manufacturers and Retailers Alliance (GRMA), that trend is becoming more firmly established, Finamore said.  Finamore has been one of prime movers behind the development and implementation of the standard. 

“With the adoption of that by a number of major certification bodies you as seeing a lot folks seeing that as transformative on the manufacturing level,”​ Finamore said.

Scott Steinford, CEO at Oregon-based contract manufacturer Health Wright Products, agreed that the pandemic-induced demand coupled with more pressure on transparency has created a watershed moment in the industry.

“The contract manufacturing space is going through a transformation unlike this segment of the industry has ever seen. A conspicuous absence of transparency from contract manufacturers has been allowed to continue while the entire rest of the world is clamoring for openness. Surprisingly, Amazon has been a driving force behind what little progress has been made in this regard. When Amazon launched its Amazon Elements brand, it became the first brand to state its contract manufacturer's name and location publicly. More recently, Amazon has begun to inquire more specifically about the manufacturing practices of the brands they carry on their platform,”​ Steinford said.

ABH debacle provided wakeup call

Steinford said the recent ABH debacle, in which more than 1,200 lines of products manufactured over a six-year period were recalled​​, was a wake up call for the industry.  While FDA has consistently said that individual brand holders, not the contract manufacturers, are ultimately responsible for the safety and quality compliance of their products, nothing drives that message home more effectively than a big hit to the pocketbook.

“Consolidation of contract manufacturers will likely occur, not because of M&A activity but because of the increasing awareness of dietary supplement manufacturing requirements. The barrier of entry into dietary supplement contract manufacturing has never been higher than it is today. Customers and consumers are learning the differences between the right way to manufacture and the ‘cheap’ way to manufacture. Cutting costs today exposes enormous risks to brands of all sizes,” ​Steinford said.

“The reality is that the brand holders historically in their own minds have shifted some of that responsibility to the contract manufacturer.  If your manufacturer is taking shortcuts that means you are, too.  And you are responsible for any corners that have been cut on your behalf,” ​he added.