Supplement Space Exits: Bankruptcy Traffic Could Accelerate

Gaspari Nutrition, acquired by Allegro Nutrition, sought Chapter 11 protection after its debt load outstripped its revenue outlook. Natrol threw in the towel and filed after federal judges consolidated multiple class action claims accusing the firm of false advertising for its joint relief products.

Bankruptcy sales could be growing as an exit strategy in the dietary supplement space with business and regulatory costs outstripping some firms’ revenues and with false claims litigation scaring off others.

Gaspari Nutrition and Natrol LLC were sold recently in Chapter 11 bankruptcy auctions: Irish firm Allegro Nutrition LLC on Dec. 5 acquired Gaspari for $10.1 million, and Indian firm Aurobindo Pharma Ltd. on Dec. 9 closed its acquisition of Natrol for $132.5 million plus assumed liabilities. [See Deal]

Lakewood, N.J.-based Gaspari, which markets sports nutrition products, filed its Chapter 11 in October owing creditors $18 million and with little chance to sustain its brand on its own. Dublin-based Allegro Nutrition at that time made an initial investment in Gaspari and later outbid three other firms to acquire the firm in the bankruptcy auction.

“Chapter 11 is a necessary step to create a solid foundation for future growth and success,” company founder and President Rich Gaspari said. Following the sale, “we intend to introduce new products to provide our customers with the most innovative product offering in the industry,” added Gaspari, who will continue running the brand.

Chatsworth, Calif.-based Natrol, which had been owned by Plethico Pharmaceuticals Ltd.of India since 2007, filed for bankruptcy protection in June after federal judges consolidated multiple class action claims accusing the firm of false advertising for its joint relief products. Natrol’s largest creditor, Cerberus Business Finance LLC, was guaranteed to receive $68.8 million in a settlement that allowed the auction to proceed.

The Gaspari and Natrol sales are recent examples of firms in the supplement space turning to Chapter 11 protection to stay afloat, or nearing bankruptcy before finding investors (see box, below).

Potential Clear, Burdens Overlooked

Investment banker Heritage Equity Partners began working with Gaspari in July to explore a sale of its assets and gained an agreement from Gaspari’s lender, Crestmark Bank, to continue to finance operations and later to provide debtor in possession financing when Gaspari filed for Chapter 11 protection.

Heritage Equity Managing Director Fred Cross said the firm works with businesses in financial distress to determine their best options. Gaspari was the Easton, Md.-based firm’s first client that is a supplement manufacturer or marketer, but likely not the last.

“It seems to me that we’ll have more clients from this market,” Cross said in an interview.

With a low barrier to entry into supplement marketing and with growing demand for products, some businesses get started with expectations for soaring revenues from an always growing variety of products. But many also start unprepared for keeping their operations solvent as their costs grow, as their compliance burden expands and, in some cases, as their losses in consumer litigation mount.

“It’s a bit of a wild west out there,” Cross said.

However, when Gaspari, Natrol and other supplement manufacturers and marketers are forced into bankruptcy or to arrange for other exits from their debts, firms like Allegro Nutrition, Aurobindo Pharma and other businesses are ready to get into or expand their footprint in the supplement space.

Cross pointed out Allegro Nutrition initially planned to pay $5 million for Gaspari, but bidding by three other firms in the bankruptcy auction drove up the price.

Allegro Nutrition parent firm Allegro Group, a subsidiary of Total Produce, is a European and North American pharma, food, personal care and household product marketer and distributor and recently entered the supplement space by acquiring U.K. nutritional products marketer Body Temple.

“I believe the Gaspari name is really what they bought,” Cross said of Allegro’s U.S. investment. “This will work with Body Temple very well for them.”

Allegro says it has access to operations in 20 countries and corporate global infrastructure across over 100 distribution hubs spanning Europe and North America.

Avoiding Class-Action Litigation

Natrol launched 34 years ago marketing supplement lines under its company brand and over the years added NuHair and Shen Min hair loss treatments, MRI and Prolab sports nutrition products and Laci Le Beau weight loss teas. Plethico Pharmaceuticals acquired all shares of Natrol for $80.8 million to take the firm private and add it to its business holdings in Africa, Eastern Europe, Latin America, the Middle East and Southeast Asia (Also see "Plethico’s Natrol Acquisition Reflects Growing Indian Supplement Investment" - Pink Sheet, 26 Nov, 2007.).

However, Plethico’s commitment to its U.S. business waned after Natrol was targeted in litigation seeking class action status, alleging its glucosamine-containing products make unsubstantiated claims for providing joint comfort and regenerating cartilage.

While Natrol contested the allegations in its responses to the lawsuits and maintained its products’ claims were supported, its management looked for a way out of the market. After Aurobindo emerged as a buyer, Natrol filed for Chapter 11 protection, a move that halted proceedings in the consumer complaints.

Following Aurobindo Pharma’s auction win, Natrol CEO Mesrop Khoudagoulian pointed out the firm has had “its most profitable year to date.”

“We said at the outset of the restructuring that we would have the right answers within six months, and we have met that timetable to the day,” Khoudagoulian said.

Bankruptcy Bumps Along Supplement Industry History
Bankrupt Firm / Buyer	Price / Date: Details
[Vitacost.com Inc.] / Kroger Co. (Also see "Kroger Dives Into Online Supplement Sales, Vitacost Stays Afloat With Merger" - Pink Sheet, 3 Jul, 2014.)	$280 million / July 2014: The grocery retailer reached for a bigger slice of the nutritional products pie, particularly through e-commerce, as Vitacost.com after four years of losses and near bankruptcy, bowed to shareholder demands to sell. Vitacost hired investment bank Jefferies Inc. in December 2013 to review and consider a sale of the firm, a merger or continuing to operate independently. The firm disclosed the initiative in February, after major shareholder Consac LLC complained publicly about operating losses and urged a sale. Vitacost conducted an initial public offering of shares in 2009, but a near bankruptcy in 2010 caused by errors in the IPO prompted the largest shareholder, Great Hill Partners LLC with 18.99%, into a proxy fight that led to the ouster of CEO Ira Kerker and the appointment of Jeffrey Horowitz as chief.
Nutrition 21 LLC / investors led by Michael and Phillip Satow (Also see "In Brief" - Pink Sheet, 5 Dec, 2011.)	$7.4 million / November 2011: Ingredient developer Nutrition 21, which makes Chromax chromium picolinate, sought bankruptcy protection after unsuccessful venturing into finished supplement products and failing to redeem $17.75 million in convertible preferred stock.
Leiner Health Products / [NBTY Inc.] (Also see "NBTY Leiner Buy Intensifies Supplement Ingredient Competition" - Pink Sheet, 16 Jun, 2008.)	$371 million / June 2008: Quality control problems forced Leiner to shut down its manufacturing of private label supplements and OTC drugs a year before the firm filed for Chapter 11 protection. Leiner also had reorganized under Chapter 11 in 2002. NBTY, since acquired by Carlyle Group, substantially expanded its private label supplement business with the $371 million acquisition but has not re-started Leiner’s OTC operations
Atkins Nutritionals Inc. / NA (Also see "Atkins reborn" - Pink Sheet, 16 Jan, 2006.)	NA / January 2006: Atkins emerged from bankruptcy after completing its Chapter 11 reorganization in five months with a business strategy focused on "convenient, portable and nutritious food products" for "healthy, active men and women." The firm planned to spend $40 million promoting the Advantage line of bars and shakes with an ad campaign that launched with its bankruptcy closing.
Berkeley Premium Nutraceuticals Inc. / NA	NA / September 2008: The often-maligned marketer of Enzyte "natural male enhancement" supplement filed for Chapter 11 protection with about $500 million in unsecured claims owed to its 20 largest creditors. The debts included a $459.5 million forfeiture to the federal government following an FTC investigation into its marketing activities that also led to criminal convictions of the firm's founder after convictions of money laundering, conspiracy and fraud. Despite the widely recognized Enzyte brand, Berkeley Premium did not attract investors and a bankruptcy court in March 2013 approved the firm’s motion to shift to a Chapter 7 liquidation bankruptcy, which has yet to close.
Metabolife Inc. / IdeaSphere Inc. (Also see "Metabolife purchased" - Pink Sheet, 14 Nov, 2005.)	NA / November 2005: IdeaSphere added to its nutrition brand lineup including Twinlab and Nature's Herbs and gained a lab facility with its acquisition of supplement maker Metabolife. The deal got started when Metabolife declared bankruptcy in July 2005, but was renegotiated after some discrepancies in Metabolife’s filing came to light and the bankruptcy proceeding was halted. IdeaSphere entered the branded nutrition space with its 2003 acquisition of Twinlab for $65 million (Also see "Twinlab Sells Assets To IdeaSphere, Files For Protection From Creditors" - Pink Sheet, 8 Sep, 2003.). Twinlab executives, working with Capstone Financial Group, in August 2014 acquired the firm from IdeaSphere before merging with a holding firm established to own Twinlab as a publicly traded firm.