Chinese Supplement & Nutrition Industry Report

1. Chinese Supplement & Nutrition Industry Report Patrick Rea, Publisher & Editorial Director Nutrition Business Journal

2. Market research firm focused exclusively on the nutrition industry - supplements, organic, functional foods, natural & organic personal care • Monthly print and electronic business newsletter: 24-48 pages • Weekly e-newsletter • Market research reports • Web seminars • Market data & leading company data sets • Consulting services • All based on an 11-year old proprietary research methodology Nutrition Business Journal

3. The following intelligence is excerpted from NBJ’s China Supplement & Nutrition Industry Report 2007. For more information, please go to www.nutritionbusiness.com • Any inquiry or question regarding Chinese RMIS, please contact Patrick Rea at prea@nutritionbusiness.com or email to Andrew Liu at flaciouschem@yahoo.com NBJ Chinese Supplement & Nutrition Industry Report 2007

4. 2007…a year to be done with

5. High Fuel & Transportation Costs • Oil prices hovering around $90/barrel, supply gap with OPEC • Many companies opting to source from geographically nearer suppliers • Customers requesting suppliers tie in shipping and freight costs to the product • “Ingredient Miles” and “Carbon Footprints” a developing trend • Global supply price inflation a concern • Erratic Weather Impacts Supply • 11-years of drought in Australia impacting dairy/whey supply • Flash floods in Thar Desert (India/Pakistan border) increased psyllium prices 50% • Planning for Regulatory Instability • Chinese food & drug safety workforce is charged to remedy problems and will act fast • FDA reactive nature can close markets – 3 month amino acid & melamine debacle • Lack of Geographical Diversification • China’s quality controls - ginseng • Wild collected herbs at risk by weather events • DEA Operation Raw Deal – DHEA (est. 90% comes from China) • GMPs Impacting Everyone • Though the testing burden is on manufacturers, suppliers can help by covering some testing costs • Marketers using contract manufacturers will face shorter deadlines than previously thought • Food Safety Politics Heating Up • H.R. 3610, Rep. John Dingell, D-Mich. • User fees, COOL provisions, reduced import ports provisions causing delays • Farm Bill – bolt on food safety provision by Sen. Tom Harkin, D-Iowa • Sen. Dick Durbin, D-Ill. amendment to Farm Bill – no new inspection or regulation changes for 2 years to “jumpstart debate” Conclusions from NBJ’s Dec. 4th RMIS Web Seminar

6. Chinese Herbal Extract Export Market

7. Herbal Extracts Export Value, $ mil

8. Chinese Herbal Extract Exports Value by Country, $ mil

9. Average Export Price is dropping • 1996 - $20,130/ton • 2001 - $14,352/ton • 2005 - $13,950/ton • Drivers • Surge in export volume • Increased competition between Chinese suppliers Pricing Trends

10. Leading herbal extract suppliers

11. China produces 300 tons of ginkgo biloba extract per year • 80% exported, 20% remains in China • Prices dropping • 1995 - $500/kg • 2006 - $25/kg • 50 kg of ginkgo leaf required to produce 1 kg of extract • Quality Concerns • Flavonoid “cutting” is widespread, difficult to test for • Pesticide residues can exist • Buyer beware - If a supplier is offering an extract below market rates – ask more questions and require advanced testing Ginkgo

12. Primary production • Mt. Changbaishan, Da Xing An Ling • Xiao Zing An Ling • Primary health claims • Overall health support • Immune system boost • Root vs. Leaf • Leaf – higher ginsenosides - $1.50/kg – higher pesticides • Root – lower ginsenosides - $20/kg – more research on efficacy Ginseng

13. Health Claims • Lowering cholesterol – LDL • Contains polydatin & resveratrol • Resveratrol • 80% selling for $750/kg • 96% & 98% selling for $1,250/kg • High price restricting widespread use • Demand from Rx, food & cosmetic industry should drive prices down and use up Giant Knolweed

14. China is the largest national source of kudzu root powder in the world • 100-200 Chinese kudzu root powder manufacturers • Small, traditional, low-tech processing facilities • Producing: • Pueraria root powder • Pueraria tablets • Pueraria flower tea • Pueraria root beverages • Health Claims • Puerarialohataethanol extract • Prevent Heart & blood disease • Absorption-crystal growth processing • New extraction method • Improves purity of puerariaflavone to 97% • Improves purity of puerarian to 98% Kudzu Root

15. Close relative to goji berry • Grown mainly in 3 provinces • Zhongning • Zhongwey • Ningxia • Health Claims • Immune system support • Improves eyesight • Protects the liver • Active ingredient is wolfberry polysaccharide • Mostly exported • Used domestically to produce nutritional foods and beverages (wine & juice) • Still a fast developing Chinese extract market Barbary Wolfberry Fruit

16. Health Claims • Treats inflammation • Calms fever • Treating Alzheimer's diseases in Chinese Rx market • Huperzine A (hupA) extract for use against myasthenia gravis and memory loss • Domestic opportunity for aging Chinese population HuperziaSerrata

17. Chinese Vitamin Export Market

18. Vitamin Export Volume 02-06

19. Chinese Vitamin Exports

20. Chinese Vitamin C importers

21. Vitamin E Prices 1999-2006

22. Vitamin A Prices 2003-2006

23. 2006 Price Fluctuations

24. DNP (former Roche Shanghai) • BASF (Shenyang City) • Northeast Pharmaceutical (Shenyang City) • North China Pharmaceutical (Shijiazhuang City) • Shijiazhuang Pharmaceutical (Shijiazhuang City) • ZMC Xinchang Pharmaceutical (Xinchang, Zhejiang) • Zhejiang NHU (Xinchang and Shangyu, Zhejiang) • Guangji Pharmaceutical (Wuxue, Hubei) Leading Chinese vitamin suppliers

25. Emerging Chinese CoQ10 Supply

26. China is an important supplier of solanesol (raw material for CoQ10 synthesis) to Japan. • Behind Japan, China is now actively engaged in CoQ10 production and supply. Some big facilities are now under construction or planning. • China is not a big CoQ10 consumer country. Most of Chinese CoQ10 targets the American and European markets. • Chinese CoQ10 price highly depends on international supply and demand. • In 2006 the quotation of Chinese CoQ10 tumbled from US $2,700 per kilo to US $700 per kilo. Some suppliers even accepted US $600 per kilo. CoQ10 - Overview

27. Yunda Tongfa Pharmaceutical • Xi’an Haotian Bio-engineering • Chuxiong Sun Pharmaceutical • ZMC Xinchang Pharmaceutical • Hangzhou Zhongmeihuadong Leading Chinese CoQ10 Suppliers

28. Chinese Domestic Market

29. Historical Growth

30. Chinese Nutrition Industry

31. Beauty • Weight loss • Mental acuity • Children’s intellectual development • Anything from North America • Chinese consumers will pay 4-10x for N.Am. supplements Popular consumer categories

32. Sales ballooned in the early 1990s • 1996-2002 decline in consumer confidence and sales • Lack of strict regs & advertising fraud • 2003 to present – rapid growth • SARS & avian flu public health scares • Tighter advertising regulations • Driving Forces • High growth economy • Poor health & nutrition • Foods perceived to supply all required nutrition Short history

33. Duties – 35-50% depending on cool • Reformulation – less than 10% of U.S. nutrient levels • Wyeth and Jamieson have excelled here • Price – 90-count bottle $10-$250+ • Amway priced 10-30% less than imports • Consumers focus on food for nutrition • Rural consumers have few choices Challenges to foreign firms

34. Large Cities • Beijing, Shanghai, Guangzhou, Xhenzhen • Secondary Cities • Qingdao, Ningbo, Wuxi, Dongguan • Chinese market growing and maturing in different areas • Vitamin market in it’s infancy • Herbal extracts mature • Marketing approaches are evolving • Government cracking down • Manufacturers now focusing on R&D • In-person marketing picking up • New sales structure/flow driving competition/innovation Consumer Trends

35. Thank You

36. Primary Drivers • Western acceptance of Chinese medicine • Growing awareness of functional nutrition • Key Facts • Consumption of herbal extracts has doubled 3 times in the last 10 years • China exported 300,000 tons of herbal extracts in 2005 – valued at $300 mil - $425 mil in 2006 • China has 300 herbal extract manufacturers • Located primarily in Hunan, Shaanxi and Sichuan provinces • Herbal extracts exported to 88 countries • Top 10 destinations account for 80% of export value • Including U.S., Japan, India, South Korea & France Chinese Extracts Overview

37. Southwest China: approximately 4,500 species, typically Ligusticum chuanxiong, Panax notogineng, Radix Notoginseng, etc. • Northwest China: approximately 2,000 species, typically Goji, etc. • Qinghai-Xizang Tableland: approximately 2,000 species, typically Dongcongxiacao, etc. • Northeast China: approximately 4,000 species, typically Ginseng, etc. Herbal resource and geographical distribution

38. China has become the largest vitamin raw material supplier in the world. • Chinese vitamins have been exported to over 130 countries or regions around the world. • The United States imports the greatest amount of Chinese vitamins Vitamins

39. The export volume’s leap in 2003 was due to the production capacity expansion across the board. • In 2005 the export volume maintained an growth rate of over 25% even though the Chinese suppliers encountered anti-monopoly litigation regarding price-fixing and from the United States. • In 2006 the export volume grew slightly caused by the drop of vitamin C supply. Comments on historic export

40. China can almost produce and supply every typical products in vitamin family, e.g. C, E, B1, B6, A, B2, D and H. • Annually C accounts for over 60% and E accounts for over 20% of total Chinese vitamin export. • May 2007 the four big Chinese Vitamin C suppliers all raised the price to US $9 per kilo (or even higher), nearly 190% to that in 2006. • The situation is now a shortage of supply in China. Vitamin Supply

41. Inflation across the board in China, which was led by agricultural products (up 6.2% 1Q2007). Corn consumed by alcohol fuel projects is increasing in China. • Chinese government had tightened environmental policies, which added the cost of vitamin manufacturers. • Increasing labor cost in vitamin companies. Inflation make the government decide to make law to improve workers salary. • Increasing transportation cost, from vitamin plants to ports then to overseas destinations Price Drivers