Trade war, generic competitors hurt NAI’s sales

27-Sep-2019 - Last updated on 27-Sep-2019 at 16:08 GMT

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Tariffs, tax charges and generic knockoffs hurt Natural Alternatives International in the fourth quarter, the company reported this week.

NAI manufactures private label dietary supplements and sells a patented form of beta-alanine branded as CarnoSyn. The ingredient was the winner of NutraIngredient-USA’s Sports Nutrition Ingredient of the Year award in June at a ceremony in New Orleans.

For the fourth quarter the company, which is based in Carlsbad, CA was buffeted by currency headwinds, an international market roiled by rising tariffs, a hefty income tax bill and by customers switching from CarnoSyn to generic forms of beta-alanine, said NAI CEO Mark LeDoux.

The CarnoSyn royalty has become a major line of business for NAI. The company has defended the brand with a number of patent lawsuits. In March the company prevailed in a federal appeals court ruling over a patent that protects the compound’s use in sports nutrition applications.

NAI followed that victory up with another patent infringement lawsuit filed in June over the CarnoSyn patents.

Rising tide of knockoffs

But the tide of knockoffs has proven hard to hold back. In the company’s fourth quarter, CarnoSyn royalty, licensing and raw material sales revenue decreased 42% to $3.2 million as compared to $5.4 million for the fourth quarter of fiscal 2018. The company attributed the decline to certain customers switching to generic beta-alanine.

For the full year, CarnoSyn royalty, licensing and raw material sales revenue decreased 22% to $16.7 million during fiscal year 2019 as compared to $21.4 million for fiscal year 2018.

LeDoux said he expects the appeals court victory earlier this year combined with the company’s recent successful New Dietary Ingredient Notification on CarnoSyn will help return customers to the fold.

On the international front, LeDoux said the waters have been muddied by ongoing trade wars that have become a policy of the Trump Administration.

“The industry is experiencing the deleterious impacts of international supply chain tariffs, regional regulatory demands, which are often arbitrary or capricious, and uncertainties about potentially arduous new standards for products,” LeDoux said.

One time tax charge

Another policy of the Trump White House—changes to the tax laws—have hurt NAI as well. While some businesses have benefited from the tax changes, NAI was hurt by a discrete $3 million charge in the fourth quarter.

The company said its contract manufacturing business also declined, hurt by a 50% drop in sales to a major customer, which was reported reduced international demand for its products. But LeDoux said NAI was able to cushion that to some degree with increased work done for other customers.

The combined results of the trade war, contract manufacturing and royalty problems depressed net sales in the fourth quarter by 23% to during the three months ended June 30, 2019, decreased $9.0 million, or 23%, from $39.2 million recorded in the comparable prior year period. The company reported a small loss on operations in the quarter. For the full year, NAI recorded net income was $6.5 million, or $0.92 per diluted share, on net sales of $138.3 million, compared to net income of $5.1 million, or $0.73 per diluted share, on net sales of $132.4 million for fiscal year 2018.

LeDoux noted that NAI has a solid balance sheet with no debt, which he believes will allow the company to weather the current uncertainties.