Finding the Right Partner: Are the lines blurring between contract manufacturing and private label?

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The more you give, the more is expected of you. That’s what contract manufacturers and private-label manufacturers (and white-label manufacturers) are experiencing these days. These companies aren’t complaining, however. Instead, they’re focusing on how to flexibly adapt to their customers’ increasing expectations as well as how to differentiate themselves from their competitors. In fact, the traditional business models—contract manufacturing, private-label manufacturing, and white-label manufacturing—are morphing.

Google the terms. You’ll see varied definitions. Some focus on how many brands a product is sold to, while others focus on the product or service itself. “This is a conversation we’ve had many times with various parties,” says Matevž Ambrožič, marketing and PR director at private-label food supplement developer PharmaLinea (Ljubljana, Slovenia), “and we see that the understanding is quite varied across different markets across different industries across different countries.”

Then there’s the level of product customization that’s historically been associated mainly with traditional contract manufacturing. Is that changing as well?

Of contract manufacturing, private-label manufacturing, and white-label manufacturing today, “we’ve really kind of given up focusing on trying to define which one is which, as we see that people’s understanding is so different that it makes no sense,” Ambrožič says. “For us, the conversation with a brand usually starts with them stating what they need and asking if we provide that. This happens at trade shows, with inquiries that we get through our website, and so forth. In the beginning, there’s always a bit of debate…about what kind of service we exactly provide.”

Definitions Be Damned

Definitions don’t matter as much if the customer knows what they’re looking for—and the manufacturer knows what they’re best at providing.

Take Soft Gel Technologies Inc. (STI; Los Angeles), for example. STI has “an established reputation as the contract manufacturer of choice for making softgels containing difficult-to-encapsulate or fragile-to-work-with ingredients,” says Roy Bouskila, STI’s international sales director. It’s a niche that serves the company well. STI manufactures softgel supplements to customers worldwide.

Softgel manufacturing is more complicated than making two-piece hard-shell capsules or tablets, Bouskila contends, the latter two something he considers more of a straightforward process. The reason? “Softgels are more complex to manufacture in that they require a production facility which includes gelatin preparation, material (formula fill) preparation and mixing, gelatin preparation, encapsulation machines, drying tunnels, inspection and polishing, and finishing and packaging. The investment and technical knowledge required is enormous,” he says.

What STI offers today is “what we’ve always offered as a contract manufacturing organization,” Bouskila says. STI’s website references “turnkey custom softgel formulations.” Bouskila explains this is because STI’s “private-label products are what we refer to as ‘turnkey formulas’ in that these products are custom made for a specific customer/marketer/brand. We manufacture these products exclusively for that customer. We offer the option of selling our softgels in bulk or packaged in bottles or blister packs.” On other hand, Bouskila says, “our standard stock products could also be called ‘white label’ in that they are manufactured in bulk and are sold to multiple companies using their own brand names and labels.”

If customers are unsure about which model will work best for them, that’s when communication becomes vital. “What a customer is seeking will determine if they want something that has a lower minimum quantity order and shorter lead time (for certain stock items) or a custom formula that requires higher minimums and longer lead times and that tends to be more expensive, depending on the ingredients,” Bouskila says.

Flexibility and Science Matter

PharmaLinea, too, isn’t hung up on whether its services fit neatly into a defined model. The company positions itself as a private labeler “because we found it to be more recognized within the industry of food supplements and pharmaceuticals [and] nutraceuticals,” Ambrožič explains. The company views private label to mean that “the product is already made or the formulation is ready to go, and there are studies on it as well. A product is then sold exclusively to one brand within a single market. By most definitions, this brings us closer to private label, we believe. However, we get inquiries for white-label services daily, and it turns out to be the exact same product and service,” he says.

From Ambrožič’s perspective, what matters most is what a company can bring to a customer’s table. That includes the flexibility to meet the customer’s needs.

And science. “Our chairman and founder was, let’s say, visionary enough to see that this business model will be something that brand owners will need more and more of in the coming years, and therefore we haven’t really shifted in recent years,” Ambrožič explains. “He believed in the fact that clinical substantiation will become increasingly important in food supplements, not just pharmaceuticals, and that more companies will benefit from the fact that they are able to launch a product under their brand that is already tested in multiple ways—a product that is already scientifically validated and can be launched in a matter of months instead of years.”

That model is working, judging by the recent success of PharmaLinea’s line of iron supplements, which the company calls the >Your< Iron Line. The >Your< Iron Line recently hit a new milestone, with products from the line now being sold in over 30 markets. With many potential reasons for this successful case study, Ambrožič highlights three especially: the supplement’s taste, its significantly diminished chance of side effects, and its clinically proven efficacy supported by no less than its own published human clinical trial.¹ Not only that, the product comes in a variety of on-the-go, user-friendly formats that cater to the fast-paced lifestyle of modern consumers.

Although the scientific research, which also includes an animal study published the same year as the human clinical trial², was conducted on the supplement’s liquid version for children, Ambrožič explains that “our clients are able to utilize the data also on various other dosage formats due to the same liquid product matrix being used in other formulations in the >Your< Iron Line.” He adds that “we currently also have an ongoing clinical trial on multiple other formulations, including for adults.”

Ambrožič further explains that “what this [private-label] model also enables is that we collect the best marketing practices from different launches of the very same product. So, when a company decides on one of our products, they’re not just getting the physical product; they’re also getting lots of intelligence on how different brands launch this very same product in different markets. They can utilize the lessons learned and therefore minimize the investment of doing the guesswork of which kinds of campaigns would work or not. Of course, markets are different, but all this intelligence helps minimize risks and helps shorten the time to get a successful campaign put together.”

Soft Gel Technologies’ Bouskila likewise believes that STI’s ability to offer several branded formulas helps it stand out in a crowded outsourcing marketplace. “These products have an ingredient in which we have exclusivity in softgels with a key supplier, or we have our own clinical research or intellectual property/patents,” he says.

Further, neither company is abandoning its relationship with the customer once the product is produced. “We provide customers with our own marketing collateral and scientific data for these branded products,” Bouskila says. “Customers are able to utilize our trademarked product name under their own-label brand. For example, Injuv is a skin- and joint-health product that we offer that contains a low-molecular-weight hyaluronic acid complex. Many customers purchase this product from us, and some even use the name Injuv, with a trademark agreement in place.” What’s more, he says, STI has “extensive product literature and studies which customers can use for their own marketing purposes.” And, he adds, “We don’t advertise to consumers so that we aren’t competing with our customer base.”

Meanwhile, the customer/contractor relationship doesn’t have to end after the launch. In fact, a successful partnership may very well lead to another.

For his part, Ambrožič says that “we stay in touch with companies that launch our products. We try to support them through the full process.” PharmaLinea also analyzes the marketing campaigns, the messaging, the channels used, the budget, etc., for the benefit of future launches. “When you launch one of our products, you’re not just trying to solve all the questions and do the marketing completely by yourself,” Ambrožič notes. PharmaLinea not only supports clients with scientific data but also, Ambrožič says, “We collect the best practices of these launches and then provide them to new companies that launch our products so you’re not just left alone in the dark. You’re supported all the way with scientific data, best marketing practices data—all the things that private-label manufacturers can collect but unfortunately in most cases don’t.”

Blurred Lines

Shorter lead times and lower costs are primary reasons some select ready-to-go private- or white-label services. But traditionally, one disadvantage of these services was thought to be a lack of flexibility. In other words, if a brand selected to go to market with a formula from a private-label or white-label company, the formula was provided as-is, end of story. Today, however, private- and white-labelers are flexing to offer customization when and where it makes sense. But are they going so far as to move into traditional contract manufacturing territory?

Ambrožič declares that “we indeed do certain little tweaks and customizations for small matters, like changing the level of a certain vitamin or mineral based on local regulations. For example, if we have a product based on vitamins K2, D3, and C, and zinc, with certain levels of each micronutrient, and we have a client from Saudi Arabia who wants to launch it and their specific market regulation doesn’t allow the same level of vitamin C that we have used, we will, of course, decrease it to the required level.”

However, he advises that larger tweaks would require very complicated development and increase the time required, increase investment, and remove all the previously mentioned benefits of ready-to-market catalogue formulations.

More Transparency

It’s not just blurred lines that are driving changes in the contract manufacturing, private-label, and white-label industries. There are outside forces at play, too.

Anurag Pande, PhD, vice president of scientific affairs for Sabinsa (East Windsor, NJ), says that “contract manufacturing for dietary supplements has seen some significant shifts in recent times.” Sabinsa is known as a raw material supplier and ingredient manufacturer, all of which the company brings to its contract manufacturing services. And if Pande’s worried that private- and white-labelers are encroaching on the territory of contract manufacturers, he’s not saying.

Not that he hasn’t seen changes in private-label business models. He has. For example, he says that the “advent of online sales on Amazon and other platforms definitely increased demands on private-label products to some extent.” However, he adds that “in the customer base we work with, we see the inclination to differ from that set of supplement providers, and we see more demands to innovate”—advantages that have long been associated with traditional contract manufacturing. In fact, Pande says that Sabinsa “offers the contract manufacturing option to customers as it brings innovative product lines from the facility.”

On the other hand, the shifts in the business that he wants to talk about are those challenges presented by forces outside the industry itself—challenges which Pande says Sabinsa has already taken steps to address.

According to Pande, an increase in transparency and traceability is one important change, a movement that can be attributed to multiple reasons, starting with FDA’s increased surveillance of the safety and compliance of products. But it can also be attributed to “consumers’ demand for greater transparency of what they’re ingesting,” he says. Consumers want to know the origin of products, if there are any excipients included, and what the company’s sustainability practices are. “Consumer awareness of ingredient brands is also increasing, including science on the ingredients,” Pande adds.

Sabinsa felt compelled to address this movement. “In order to meet several of these demands in a consistent manner for ingredients we source from external sources, we felt the shift necessitated revamping our processes and relationships related to the supply chain, labeling, and data management and monitoring,” Pande says. At its manufacturing facility in Utah, Sabinsa started “[a] qualification system for suppliers, whether it’s suppliers of dietary supplement ingredients, minerals, enzymes, or probiotics, but also for packing materials, bottles, and labeling.” He adds that “this is in some ways a similar process to qualifying raw herb material even before starting extraction.”

Sabinsa is so confident about the importance of transparency and traceability for its business (and for the industry) that “we increased capacity for testing the incoming material to a great extent,” Pande says. “Sabinsa Utah contract manufacturing has an on-site testing facility as well as another off-site testing lab in New Jersey that is used to test for material consistency or customer concerns.”

All of these checks serve the client well, whether that customer is buying ingredients or contract manufacturing services. “Since our scientific staff is onsite, we always engage the potential customer in a healthy discussion of various possibilities we can offer for launching new formulas. These discussions include testing, including whether we need to develop new testing methods to evaluate the ingredients in multi-ingredient formulations; label compliance; as well as [addressing] the robust supply chain of these ingredients we offer.”

Regulatory Experts

Another example of the outside challenges contract manufacturers and private-/white-label companies face is one of perception. And this one is not a new one. Bouskila starts with this welcome fact: “Gone are the days of people encapsulating supplements on a single machine in their garage.” Yet, he says, “even though the dietary supplement industry has to comply with FDA current Good Manufacturing Practices and is subject to federal audits,” it’s unfortunate that “we still have to overcome the generalized perception that our industry is not regulated.”

Bouskila points to FDA’s regulations for dietary supplements which he advises “ensures that the products available to consumers are safe, effective, and accurately labeled by a dietary supplement manufacturer.” Moreover, “These regulations help serious manufacturers distinguish themselves from smaller would-be manufacturers,” he advises, noting that “Soft Gel has always been in compliance with these requirements.”

Sabinsa, too, prioritizes its regulatory prowess for its contract manufacturing customers. “We have an internal team to assess the label claims and advise the customers accordingly,” Pande says. “In order to satisfy the regulatory demands for compliance and quality assurance, we have third-party certification of GMP compliance as well as the facility qualified to manufacture and export products to countries like Australia and Canada, which have stricter regulations related to supplements.”

New Business Models

Anne Manubens, sales and marketing manager at Herbarom (France), points to another reason why the game may be changing for contract manufacturers and private-/white-label manufacturers: new players in the dietary supplement field. Manubens says that “from our point of view, yes, particularly with the arrival of new entrants to this market, such as the digitally native vertical brands (DNVB) or players in the food, wellness, health/sports sectors in general who have sniffed out the appeal of the food supplement industry and wish to broaden their offering with nutraceutical products,” lines may be blurred even further for outsourcing.

New players learning the business rely on the expertise of manufacturers. “As non-historical experts in this market,” Manubens says, “[these new-to-the-market companies] are not necessarily familiar with [the industry’s] specific features, such as how a food supplement is developed, regulatory aspects, and how the product matches market expectations.” These companies “therefore need experts to support them—experts who not only have expertise in industrialization but who also understand their issues and can provide them insights on the market while offering them finished products adapted to the market that are effective and rapidly available.”

Herbarom’s Phytéo Laboratoire division specializes in developing and custom manufacturing food-supplement products. At this year’s Vitafoods Europe trade show, Phytéo introduced Phyteasy, which it describes as a “turnkey solution” for the food supplement industry. It is available in two formats: Phyteasy Ready to Go and Phyteasy Dev’Up. The former, Phyteasy Ready to Go, relies on the “rigorous selection of ingredients thanks to Herbarom’s unique expertise in plants,” available “from the most classic tablets to liquid formula solutions.” In addition to the product, Phyteasy Ready to Go comes with what the company calls “a complete set of services, including scientific dossier, marketing file, technical and regulatory file, and packaging and design.”

Meanwhile, the second option, Phyteasy Dev’Up, comprises a range of optimized formulations coupled with a la carte services. “The selection of ingredients is already carried out, and the galenics are chosen for their efficiency—with the possibility of adaptation to customer specifications. A range of pick-and-choose services to accompany the launch includes marketing strategy, project-brief support, formulation, pilot, price-positioning strategy, regulatory and scientific services, as well as marketing and sales services,” according to a company press release.

“So, yes, we can easily go from custom-made to turnkey product to a formula ready to be industrialized or adapted, according to the customer’s expectations,” Manubens says.

Although Manubens is not bucketing these services specifically under private or white label, or classic contract manufacturing, it does appear that Phyteasy’s services are open to adapting to a client’s needs. In fact, Manubens summarizes the new introduction with this nod to customer expectations: “With Phyteasy, we want to offer flexibility to our customers, whatever their profile, size, or distribution channel, because their needs are different,” she says. The goal is to provide customers with “the perfect match” in terms of the finished product, one that will offer clients “the possibility of taking what interests them, with optional services, but also with adapting possibilities” that meet their challenges.

This is an example of how private- and white-label manufacturers are recognizing the benefits of traditional contract manufacturing, with many keen to create hybrid models to better compete.

But one thing that private- and white-label manufacturers are hoping not to lose is their advantage of quick-to-market delivery. As Manubens explains it, Phyteasy “is an approach that combines market relevance, business performance, compliance, and mastery of industrialization, while saving development time at every stage to seize opportunities quickly.”

More Opportunities

PharmaLinea sees additional possibilities now that pharmaceutical companies are seeking a new source of income. They’re doing so because, as Ambrožič says, those companies are “being squeezed on all ends. Costs are rising, OTC-to-Rx switches are limited, and Rx drug prices are regulated.”

Consequently, a nutraceutical or food supplement could be a very profitable product to add to a pharmaceutical company’s portfolio. A supplement that already has clinical substantiation is particularly appealing, Ambrožič says. And these pharmaceutical companies are typically under time pressure. They may have the preestablished relationships with doctors and pharmacists, and they have the established teams for medical promotion. What they don’t have, according to Ambrožič, is “the time to wait to decide on a new formulation and do the technical development, the stability testing, and then do the clinical research on this formulation.” This is one more situation in which a company like PharmaLinea could be of service.

The Future

If, indeed, classic contract manufacturing and private- and white-label manufacturing are coming closer to overlapping offerings, is that making it more complicated for brands to outsource their manufacturing needs to the right partner? It could initially. Finding the right partner is key.

Soft Gel Technologies’ Bouskila has a last piece of advice for potential clients. “When customers base their decision to work with a contract manufacturer based exclusively on price, [they could] end up paying more in opportunity costs because they don’t factor quality, service, and on-time delivery into the equation.” Specifically using softgel production as an example, he says that “customers need to verify their potential vendors so that they don’t end up with softgels that leak, longer lead times, and the inability to obtain much-needed documentation and regulatory paperwork.”

At the end of the day, it’s up to the brand to decide what it needs. “The lines between contract manufacturing and private label are up to each individual company on what they decide to do and which business model they decide to pursue,” says Ambrožič.

As both models have benefits and disadvantages, the importance of the relationship should not be discounted. Ultimately it will come down to what works for the individual companies making the outsourcing decisions. It’s likely that flexibility, innovation, communications, science, and transparency will all be important.

References

1. Zečkanović, A.; Kavčič, M., Prelog, T.; Šmid, A.; Jazbec, J. Micronized, microencapsulated ferric iron supplementation in the form of >Your< Iron Syrup improves hemoglobin and ferritin levels in iron-deficient children: double-blind, randomized clinical study of efficacy and safety. Nutrients. 2021, 13 (4), 1087. DOI: 10.3390/nu13041087
2. Pirman, T.; Lenardič, A.; Svete, A.N.; Horvat, S. Supplementation with >Your< Iron Syrup corrects iron status in a mouse model of diet-induced iron deficiency. Biology. 2021, 10 (5), 357. DOI: 10.3390/biology10050357