Dietary supplement sellers could face fresh challenges in 2016

A GNC store is seen in Westminster, Colorado October 22, 2015. REUTERS/Rick Wilking (Copyright Reuters 2016)

SAN FRANCISCO – GNC Holdings, Vitamin Shoppe and other dietary supplement sellers could take a hit to their financial health in 2016 if safety concerns attract new action from U.S. federal and state officials.

Shares of GNC and Vitamin Shoppe fell more than 30 percent last year after allegations of impure and dangerous ingredients in dietary supplements hurt already sluggish demand for their products. They and other companies are still under scrutiny, with pressure building to tighten regulation on dietary supplements, which are not covered by U.S. rules governing pharmaceuticals.

Last year, a challenge from New York's attorney general led to an agreement by GNC to adopt new testing standards for ingredients used in its products. On Nov. 17, shares of GNC briefly plummeted 27 percent and rivals Vitamin Shoppe, Herbalife and Natural Health Trends Corp also sank on concern that the U.S. Department of Justice was about to name them in criminal and civil actions.

The Justice Department action turned out to be against another company, but the $37 billion industry faces more scrutiny this year including a lawsuit and investigation by the Oregon attorney general.

"This is something investors have to contemplate." Jefferies analyst Mark Wiltamuth said. "These waves of media and regulatory attacks have impacted consumer sales trends and valuations."

Oregon Attorney General Ellen Rosenblum has ongoing litigation with GNC for selling products with illegal ingredients. She is also conducting a separate investigation related to dietary supplements that has yet to be announced, a spokeswoman said.

"I do believe you will see more activity in 2016," said Kevin Bell, a lawyer at Porzio Bromberg & Newman who represents dietary supplement companies. "There has been no real indication as to how much more aggressive they could get but it has certainly spread beyond just New York."

Even after the beating the companies' shares took last year, prices may not fully reflect the potential for future lawsuits and regulatory crackdowns.

"It's not a factor we look at. There's no real way to quantify an unknown variable like that. Regulation may never happen," said Tigress Financial Partners analyst Ivan Feinseth, who has a "neutral" rating on Vitamin Shoppe and does not cover GNC.

Five analysts tracked by Thomson Reuters recommend buying GNC's stock while none recommend selling. Eight have hold ratings. The split for Vitamin Shoppe is similar. Wiltamuth has hold ratings on both companies.

Dietary supplements including powders and pills aimed at weight loss, sexual enhancement and sports performance are regulated in the United States more like food than pharmaceuticals. Manufacturers do not have to demonstrate a product's effectiveness or safety before introducing it.

But some of the products contain potent substances that have led to kidney failure, cardiac arrest and even death in some cases. Attorneys general in states beyond New York and Oregon have taken notice, and some legislators have also been pushing for stricter oversight of dietary supplements.

New York Attorney General Attorney General Eric Schneiderman said in a statement to Reuters he will keep sharing information and best practices with other states to improve oversight.

The U.S. Senate's special committee on aging will likely take additional steps this year. Senator Claire McCaskill, the panel's ranking Democrat, in 2015 sent letters to retailers asking them to explain how they prevent the sale of harmful and fraudulent products, said Drew Pusateri, a spokesman for McCaskill.

Asked about the risk of increased scrutiny, GNC said in an email that 2016 will be pivotal in an effort with over 40 companies to improve safety standards and consumer perceptions in the dietary supplement industry.

The Center for Science in the Public Interest has spoken with federal lawmakers keen to close regulatory loopholes allowing the use of dangerous ingredients, said Laura MacCleery, the advocacy group's director of regulatory affairs.