Vitamins & Supplements Market Update – September 2023

Sector Participants Eye an M&A Market Recovery in Near Future

The resilience of the U.S. consumer has continued to be tested approaching the close of Q3 as an elevated price environment has challenged discretionary spending across Consumer Products segments. Consumer spending has remained healthy, despite persistent macroeconomic headwinds, with personal consumption expenditures rising 0.8% in July month-over-month, marking the largest monthly increase since January, according to the U.S. Bureau of Economic Analysis.¹ Robust spending activity has been seemingly dislocated from consumer disposable income, which recorded flat month-over-month growth in July, with savings depleting by 17.2%. While consumer wealth has shown signs of erosion, several product categories have continued to capture wallet share—with many vitamins & supplements solutions remaining top of mind.

Vitamins & Supplements market demand has remained robust; however, spending has narrowed to brands operating in high-growth product categories, often with an effective omnichannel presence. The drastic post-pandemic surge in sector spending has moderated to more normalized levels, particularly as input costs have risen and sector players have combated persistent inventory challenges. Immunity, Women’s Health and Personal Care, and Science-backed Products have emerged as categories with strong sales growth and significant customer stickiness. Notably, the Immune Supplements segment recorded 1.4% year-over-year (YOY) sales growth in 2022, one of only four Condition Specific categories to experience an improvement in revenue, according to SPINS.² In addition, the Women’s Health market has continued to gain greater adoption as Health & Wellness sector players have increasingly launched supplement products catering to segments including Reproductive Health, Digestive Health, and General Wellness. Reproductive supplements have led sales growth within the Women’s Health segment, evidenced by the 39.4% YOY sales increase in 2022. Digestive health and hair, skin & nails supplements followed, with YOY sales increases of 19.1% and 16%, respectively. While the Menopause segment recorded a YOY sales decline of 19.7%, market participants have remained optimistic for space’s long term growth prospects, reflected by persistent investor and buyer interest. Moving through the final months of 2023 and into 2024, Vitamins & Supplements market demand is expected to remain steady, particularly for product offerings in less discretionary categories. While transaction markets across the broader Consumer space have been strained, merger and acquisition (M&A) activity is likely to stage a recovery towards Q1 2024.

The M&A market for Vitamins & Supplements companies remains active despite the current economic climate. Corporate strategics and private equity are actively seeking to invest in quality brands in addition to contract manufacturers in this segment.

Lisa TolliverManaging Director, Capstone Partners

M&A Volume Moderates Year-over-Year, Transaction Markets Show Early Signs of Recovery

M&A activity in the Vitamins & Supplements market has slowed through year-to-date (YTD) with total transaction volume falling 38% YOY to 31 deals announced or completed. Profitability, recurring revenue, and customer loyalty have been highly sought after target company traits as the M&A market has experienced a significant flight-to-quality. Short term periods of substantial revenue growth have been intensely scrutinized as buyers have increasingly preferred a robust track record of steady sales growth at competitive gross margins. Strategic buyers have led acquisition activity, accounting for 74.2% of YTD transaction activity. While strategics have been more selective in the current market, successful acquisitions have been shown to provide significant benefits to revenue growth—a valuable consideration as consumer spending is forecast to continue to face headwinds. Notably, leading supplements provider Jamieson Wellness (TSX:JWEL) grew its Jamieson Brands revenue 51.5% YOY to $132.9 million in Q2, according to its earnings release.³ Youtheory, a brand Jamieson acquired in June 2022 ($400 million ~1.8x EV/Revenue, ~10.0x EV/EBITDA), contributed $42.1 million in revenue driven by e-commerce strength, product innovation, and distribution gains.

Financial buyers have been cautious in their acquisition pursuits amid an elevated cost of capital and lingering inflationary pressures to the broader Consumer space. Through YTD, financial buyers have comprised 25.8% of total transactions, largely acting through add-ons (16.1%) rather than platform investments (9.7%). However, recently there have been signs of an acceleration in sponsor activity in transaction markets. Notably, L Catterton announced its acquisition of Thorne HealthTech (Nasdaq:THRN) in August for an enterprise value of $729.5 million, equivalent to 2.8x EV/Revenue and 30.3x EV/EBITDA (more details below). The transaction demonstrates the significant interest in sector participants offering science-backed products with demonstrated efficacy. Financial buyer activity is expected to increase in the coming quarters as the Federal Reserve's rapid monetary tightening campaign is likely approaching its conclusion. Private equity firms have the luxury of vast reserves of dry powder that can be readily deployed towards attractive investment opportunities.

Private Equity Remains Selective but Continues to Target the Sector

Sponsors have been more selective in their acquisition pursuits in the current market as debt financing has become more expensive. However, many sponsors have opportunistically acquired strong brands and manufacturers, with the intent to scale through acquisitions to realize additional value upon an eventual exit. Several notable sponsor transactions are outlined below.

• L Catterton to Acquire Thorne HealthTech (August, $729.5 Million, 2.8x EV/Revenue, 30.3x EV/EBITDA) - Leading consumer-focused investment firm, L Catterton, has agreed to acquire Thorne HealthTech for an enterprise value of $729.5 million, equivalent to 2.8x EV/Revenue and 30.3x EV/EBITDA (August). The transaction value represents a 94% premium to the unaffected closing share price on July 20, 2023, according to a press release.⁴ Thorne HealthTech delivers personalized supplements in categories including Bone & Joint, Gut Health, Healthy Aging, Immune, Sports Performance, and Women's Health. The transaction marks one of the largest disclosed buyouts in the sector through YTD. In addition, the healthy valuation multiple bodes well for prospective sellers waiting on opportune market timing.

• WM Partners Acquires Allergy Research Group (June, Undisclosed) - WM Partners has acquired leading hypoallergenic supplements provider Allergy Research Group (ARG) from Kikkoman Corporation for an undisclosed sum (June). The acquisition marks the first transaction for WM's HPH III fund, which is focused on purchasing middle market brands in the Natural Consumer Health sector, leveraging a buy and build strategy, according to a press release.⁵ ARG sells a range of hypoallergenic supplements targeting condition-specific issues through the healthcare practitioner channel. Target companies that focus on the healthcare practitioner channel have continued to attract buyer interest in the current market, particularly from private equity groups. Brands operating in this segment often have a high degree of sophistication and scientific-backing supporting product efficacy.

• Lion Equity Partners Acquires Country Life (April, Undisclosed) - Lion Equity Partners has acquired Country Life, a supplement manufacturer offering a portfolio of brands in the Natural, Supplements, Sports Nutrition, and Personal Care segments (April). Terms of the transaction were not disclosed. The transaction marks another divestiture from Kikkoman's subsidiary KI NutriCare, preceding its sale of Allergy Research Group. Headquartered in New York, Country Life sells through three brands: Country Life Vitamins, Desert Essence Personal Care, and Biochem Protein. The backing by Lion Equity is expected to fuel the next chapter of growth for Country Life, both organically and through add-on acquisitions.

Outsourced Manufacturers Draw Steady Demand and Acquisition Appetite

Amid elevated prices, sector participants have actively sought cost-saving initiatives which have often manifested in outsourcing production and development. Contract manufacturers have provided an efficient means to scale production and bring formulations to market, particularly for smaller brands without internal manufacturing resources. Recent notable outsourcing transactions are highlighted below.

• Spray-Tek Acquires TRuCapSol (August, Undisclosed) - Aurora Capital-backed Spray-Tek has acquired leading provider of biodegradable encapsulation technologies, TRuCapSol. Terms of the transaction were not disclosed. TRuCapSol offers biodegradable capsules for consumer and nutritional products, leveraging patented technology to improve the effectiveness of product formulations. The addition of TRuCapSol bolsters Spray-Tek's market presence and complements its existing ingredient processing capabilities.

• Sibannac Acquires Immersive Brand Concepts (June, Undisclosed) - Sibannac (OTCPK:SNNC) has acquired Immersive Brand Concepts, a product development and manufacturing provider in the Next-Generation Wellness space. Terms of the transaction were not disclosed. Immersive's experience in manufacturing and automation efficiencies is expected to bring immediate intrinsic value to Sibannac, according to a press release.⁶ In addition, Immersive's manufacturing and quality controls will be integrated with Sibannac's marketing capabilities which is anticipated to bolster the suite of services and capabilities of the combined company.

To discuss the Vitamins & Supplements space, provide an update on your business, or learn about Capstone's wide range of advisory services and Vitamins & Supplements market knowledge, please contact us.

Connor McLeod, Vice President, was the lead Market Intelligence contributor to this article.

Endnotes

1. U.S. Bureau of Economic Analysis, "Consumer Spending," https://www.bea.gov/data/consumer-spending/main, accessed September 5, 2023.

2. SPINS, "The State of Supplements in 2023," https://www.spins.com/the-state-of-supplements-in-2023/, accessed September 5, 2023.

3. Jamieson Wellness, "Jamieson Wellness Inc. Reports Second Quarter 2023 Results And Raises Second Quarter Dividend," https://www.jamiesonwellness.com/English/investors/home/default.aspx, accessed September 5, 2023.

4. Cision, "Thorne HealthTech, Inc. Enters into Definitive Agreement to be Acquired by L Catterton for $10.20 Per Share in Cash," https://www.prnewswire.com/news-releases/thorne-healthtech-inc-enters-into-definitive-agreement-to-be-acquired-by-l-catterton-for-10-20-per-share-in-cash-301911103.html, accessed September 5, 2023.

5. Cision, "WM Partners Announces Acquisition of Allergy Research Group," https://www.prnewswire.com/news-releases/wm-partners-announces-acquisition-of-allergy-research-group-301869120.html, accessed September 5, 2023.

6. Newsfile, "Sibannac, Inc. Acquires Immersive Brand Concepts, LLC and Hangover Beverage - NOHO," https://www.newsfilecorp.com/release/169643/Sibannac-Inc.-Acquires-Immersive-Brand-Concepts-LLC-and-Hangover-Beverage-NOHO, accessed September 5, 2023.