Вы находитесь на странице: 1из 69

GOTHAM CITY RESEARCH LLC

Medifast (NASDAQ: MED): Like Lumber Liquidators, But With Undisclosed Toxic Metals, and A Supply Chain
Medifast (NASDAQ: MED): Like Lumber Liquidators,
But With Undisclosed Toxic Metals,
and A Supply Chain Twist
PART I

Optavia products are priced and perceived to be safe, high quality, and a premium brand.

Optavia powders are so expensive, Herbalife* powders can be purchased for 38%-49% less! *Herbalife has been accused of ripping off customers and selling overpriced goods.

Competing meal replacement powders cost as much as 85% less per calorie compared to Optavia Select powders

Product Name

Price/Calorie ($)

% Discount to Optavia Essential

% Discount to Optavia Select

SlimFast Original Meal Replacement Shake Mix - Rich Chocolate Royale SlimFast Advanced Nutrition Meal Replacement - Creamy Chocolate Herbalife Formula 1 Dutch Chocolate Herbalife Non-GM Formula 1 Vanilla

0.005

-83%

-85%

0.009

-69%

-71%

0.015

-44%

-49%

0.017

-38%

-43%

Optavia Essential Creamy Vanilla Shake Optavia Select Dark Chocolate Covered Cherry Shake

0.027

0%

-9%

0.030

10%

0%

Question #1: Are Optavia products safe and high quality as their premium pricing signals?

“Facing an increasing number of personal injury lawsuits, coupled with the fraud claims brought by the FTC, Jason [now known as Medifast/Optavia] filed for bankruptcy in 1994.” –

from Deception about the History of Medifast and Take Shape for Life (now called Optavia)

Question #2 : 24 years later, is history about to rhyme?

Disclaimer:

By reading this report, you agree that use of GOTHAM CITY RESEARCH LLC’s research for any investment decisions is at your own risk. You agree that you will not hold GOTHAM or any affiliated party liable for any direct or indirect financial losses arising from your decision to rely on information in this report. This report is not investment advice or a recommendation or solicitation to buy any securities. GOTHAM is not registered as an investment advisor in any jurisdiction. GOTHAM is not affiliated or associated with Gotham Asset Management, LLC or any of its affiliates.

GOTHAM recommends that you do your own research and due diligence before making any investment decision with respect to securities discussed in this report, including consulting with professionals about any investment decisions you may make.

By opening and reading this report, you agree that you will not communicate the contents of this report to any other person. If you believe that others may be interested in this report, you may only refer them to this website so that they will review and agree to this Disclaimer. You agree to hold GOTHAM harmless for any damages caused to any person with whom you share the information in this report without GOTHAM’s consent.

You should assume that as of the publication date of this report, GOTHAM stands to profit in the event the issuers stock declines. GOTHAM may buy, sell, cover or otherwise change the form or substance of its position in the issuer. GOTHAM may, or may not, issue follow up reports regarding the subject of this report and may, or may not, disclose changes in GOTHAM’s or its affiliates’ investment decisions.

Our research and report includes estimates, projections, and opinions prepared with respect to, among other things, accounting, legal, and regulatory issues the issuer faces and the potential impact of those issues on its future business, financial condition and results of operations, as well as more generally, the issuers anticipated operating performance, access to capital markets, market conditions, assets and liabilities. GOTHAM’s statements, estimates, projections and opinions may prove to be substantially inaccurate because GOTHAM is not an insider nor is it privy to insider information of the issuer. There are, therefore, significant risks and uncertainties beyond GOTHAMs control.

Our research and report expresses our opinions, which we have based upon generally available information, field research, inferences and deductions through our due diligence and analytical process. GOTHAM believes all information contained in this report is accurate and reliable, and has been obtained from reliable and knowledgeable sources.

However, information presented by GOTHAM is presented “as is,” without warranty of any kind, whether express or implied. GOTHAM makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and GOTHAM not obligated to update or supplement any reports or any of the information, analysis and opinion contained in them.

You should assume that this report, as well as additional material not included in this report, has and/or will be submitted to government regulatory agencies such as the Securities and Exchange Commission, Federal Trade Commission, and/or the Food and Drug Administration.

the Securities and Exchange Commission, Federal Trade Commission, and/or the Food and Drug Administration. Page 2

Gotham and Independent Laboratory Methodology:

Background Gotham City Research submitted Optavia and Medifast product samples to a leading laboratory in August of 2018. Two rounds of testing were conducted. Given that Medifast’s products have contained concerning levels of contaminants in the past, we believed that testing for heavy metals was merited. The analytical test reports from the lab indicate that Optavia products contain concerning levels of lead and cadmium. We have submitted the original analytical test reports to the FDA and/or other regulatory bodies. Gotham City Research intends to publicly release these original reports in the future. In the interim and for the purposes of this report, we provide summaries of the data originating from the lab reports, and we use pseudonyms when referring to products, flavors, sachets, and/or lot numbers.

Why All Optavia Fuelings Should Be Tested for Contaminants Gotham City Research believes all “Optavia Fuelings” marketed by the company should be independently tested for contaminants, as (I) The average Optavia fueling tested contain concerning levels of contaminants (II) “Optavia Fuelings” are represented as being “nutritionally equivalent and substitutable” by the company, and (II) these Fuelings are marketed by the company as part of its flagship Optavia 5 in 1 plan diet, (where its customers are required to consume 5 of Optavia fuelings every day).

Product Selection We selected 5 products for testing. These 5 products include flavors that are prominently marketed. We believe them to be representative of consumer taste and spending patterns.

About The Laboratory The lab we selected to conduct product testing is described as the “world leader in food, environment and pharmaceutical products testing.” The specific unit conducting the testing specializes in “Food, Specialty/Investigative, and Environmental Analyses.”

Testing Methodology The testing method used by the lab: AOAC 2013.06. The method is applicable to the determination of As, Cd, Hg, and Pb in a variety of foods by pressure digestion and Inductively Coupled Plasma/ Mass Spectrometry. The AOAC method is developed by AOAC International, a globally recognized 501(c)(3), independent, third party, not-for-profit association and voluntary consensus standards developing organization founded in 1884.

Representations and Certifications All quality control samples and checks were within acceptance limits unless otherwise indicated. Test results pertain only to those items tested. All samples were in good condition when received by the laboratory unless otherwise noted. All LOD/LOQs are adjusted to reflect dilutions.

The lab is ISO/IEC-17025:2005 accredited by the American Associate For Laboratory Accreditation. ISO stands for: International Organization for Standardization. The specific standard being referenced:

ISO/IEC 17025 enables laboratories to demonstrate that they operate competently and generate valid results, thereby promoting confidence in their work both nationally and around the world.

Table of Contents

I.

Disclaimer

II.

Gotham and Independent Laboratory Methodology

III.

Summary

IV.

We Believe MED Cuts Corners to Inflate Revenue By 21%-66%

V.

Undisclosed Toxic Metals and Why Optavia Is Worse Than Peers

VI.

Possible Causes Part I: Suspect Supply Chain

VII.

Possible Causes Part II: Underinvestment

VIII.

Allergens, Cadmium, And Other Safety Concerns

IX.

Valuation: Shares Are Worth No More Than $79 Per Share

X.

Appendix A: We Believe the Prop 65 Exemptions Do Not Apply

XI.

Appendix B: Optavia is “Healthy”, “Safe”, and “High Quality”?

XII.

Appendix C: Made in the USA?

XIII.

ppendix D: Lead in Everyday Foods as Tested by the FDA

XIV.

Appendix E: Lead in Protein Powders - Clean Label Study Data

XV.

Appendix F: Allergies and Medifast/Optavia Products

XVI.

Appendix G: Sourcing from China

GOTHAM CITY RESEARCH LLC

a GOTHAM CITY RESEARCH’S OPINIONS:

21% to 74% of Optavia products contain contaminants.

Optavia prices will decline, as prices are 2x-4x more expensive than peers’ products & programs.

Nearly all Optavia products are not manufactured by the company, contradicting claims otherwise.

MED will be required to add warning labels to its products.

MED’s Optavia products (its “Fuelings”) will require recalls and/or third-party testing.

Shares will decline 62%-86% the current prices.

GOTHAM CITY RESEARCH’S OBSERVATIONS

85% of Optavia samples tested by a leading lab exceeded the maximum allowable dose level for lead, per Prop. 65.

23% of the Optavia samples tested exceeded FDA maximum daily intake levels for lead.

The Optavia products we had tested contained higher levels of toxic metals than 93% of 133 best-selling protein powder products tested by the Clean Label Project.

The average Optavia products tested contain higher lead levels than all 283 everyday foods tested by the FDA.

A 2008 Lab test detected similar levels of lead in MED products, implying the problem has remained for 10 years.

Medifast R&D + capex spend as % of revenue is less than half of its peers, suggesting underinvestment.

A former FDA official informed us that toxic metals in foods is an issue of interest to the FDA, especially when the agency has specific cause for concern.

MED claims all its powders are made by the company, yet Optavia labels state “manufactured for Optavia”

Optavia products claim “Made in the USA”, yet we have evidence that the unqualified claim is false.

The # of FDA citations for Nellson LLC & Hearthside Food solution is very concerning. Both are believed to be among MED’s largest contract manufacturers.

Optavia diet ranked poorly in the 2018 US NEWS Best Diets Rankings (ranked only 29th of 40).

General information:

Company: Medifast

Business: Weight loss and Multi-level marketing

Ticker: MED

CEO: Daniel Chard (based in Utah)

HQ: Baltimore, MD

Share price information:

Price as of 9/19/18: $208

Price target: $79

52-week high: $260.98

52-week low: $55.96

Shares outstanding: 12M

Market cap: $2.49B

YTD Performance:

197.94%

5-year Performance:

697.51%

5-year CAGR: 697.51%

Financial information:

PE Ratio: 46x

5-year Revenue CAGR: 8%

PEG Ratio: 5.78

Auditor: RSM US LLP

Optavia revenue: 89%

Introduction

Gotham City Research began investigating mult-level marketing & weight loss companies in May 2018. In the past, there have been low-quality companies engaged in dubious practices in these industries. Shares of companies in these spaces including Medifast (“MED”) – have fared very well in recent years:

950% 850% 750% 650% 550% 450% 350% 250% 150% 50% -50% -150% Medifast, Inc. (NYSE:MED)
950%
850%
750%
650%
550%
450%
350%
250%
150%
50%
-50%
-150%
Medifast, Inc. (NYSE:MED) - Share Pricing
Herbalife Nutrition Ltd. (NYSE:HLF) - Share Pricing
Weight Watchers International, Inc. (NYSE:WTW) - Share Pricing
Nu Skin Enterprises, Inc. (NYSE:NUS) - Share Pricing
Nutrisystem, Inc. (NasdaqGS:NTRI) - Share Pricing
950% 850% 750% 650% 550% 450% 350% 250% 150% 50% -50% Medifast, Inc. (NYSE:MED) -
950%
850%
750%
650%
550%
450%
350%
250%
150%
50%
-50%
Medifast, Inc. (NYSE:MED) - Share Pricing
Alphabet Inc. (NasdaqGS:GOOG.L) - Share Pricing
Amazon.com, Inc. (NasdaqGS:AMZN) - Share Pricing
Microsoft Corporation (NasdaqGS:MSFT) - Share Pricing
salesforce.com, inc. (NYSE:CRM) - Share Pricing
Domino's Pizza, Inc. (NYSE:DPZ) - Share Pricing
Apple Inc. (NasdaqGS:AAPL) - Share Pricing

We wondered about MED: is Medifast a quality business, even better than the likes of Facebook/Google/Amazon/Microsoft etc which the MED stock price performance would suggest or is it something else? Our interest in MED increased recently, after we found a few smoking guns suggesting that Medifast was something else perhaps a Tile Shop or Lumber Liquidators, in their heydays.

Medifast’s Optavia line of products, as a segment accounts for +89% of MED revenue. Significantly, we found that items in the Optavia product line contain undisclosed contaminants, some in excess of FDA & California Prop 65 levels if consumed as directed by the company, based on a leading laboratory’s testing.

We also found that MED’s products had been tested for toxic metals ten years ago, and that the company succeeded in having these analytical reports removed from the website where they had been originally posted. The recent lab results lead us to believe MED has not fixed the problem in the last ten years.

The recent lab test results suggests that Medifast’s Optavia-driven sales growth since 2016 has come at the cost of product safety and/or product quality. We see some significant similarities between Medifast, Lumber Liquidators (“LL”) and Tile Shop (“TTS”). For example:

Lead levels in the Optavia samples that were tested not only exceed FDA and Prop 65 levels if consumed as directed, they contain more lead than 93% of similar protein products, & 100% of everyday foods that the FDA has tested.

MED’s Core R&D + infrastructure spend is low relative to its peers and has been slashed in recent years. For example, net PP&E has declined by over 50%, and capex + R&D spend (as % of sales) is only half that of its peers.

MED claims that all its powder based products (42% of sales) are manufactured by the company, yet our investigation reveals Optavia powders are manufactured FOR Optavia, not BY Optavia.

Lumber Liquidators and Tile Shop faced similar product safety and/or quality and sourcing concerns as described above for MED, some of which Gotham City Research exposed. We believe that these companies’ actions violated the trust of its customers, causing damage to their brands and reputations. Based on our research and analysis, we see similar concerns for MED. We believe its shares will decline 62%-86% once the company accounts for the problems revealed in this report and elsewhere.

We Believe MED Cuts Corners to Inflate Revenue by 21%-66%

Medifast/Optavia: a bona fide turnaround story or a repeat offender?

On September 10, 2012, Medifast paid a $3.7 million civil penalty (23% of 2012 net income) to settle Federal Trade Commission charges that it made unsupported claims about its weight-loss program. The FTC barred MED from making any additional unsupported claims about users’ success in achieving or maintaining weight loss/control. Perhaps due to the negative publicity resulting from the company’s FTC violations, as well as being under closer scrutiny, revenue declined in subsequent years:

USD, in MMs 2012 2013 2014 2015 2016 2017 Revenue $318.6 $324.1 $285.3 $272.8 $274.5
USD, in MMs 2012 2013 2014 2015 2016 2017 Revenue $318.6 $324.1 $285.3 $272.8 $274.5

USD, in MMs

2012

2013

2014

2015

2016

2017

Revenue

$318.6

$324.1

$285.3

$272.8

$274.5

$301.6

Net income

$15.9

$24.0

$13.2

$20.1

$17.8

$27.7

% change in Revenue

1.72%

(11.96%)

(4.39%)

0.65%

9.85%

% change in Net income

51.0%

(45.0%)

52.2%

(11.1%)

55.4%

An activist investor entered the scene in May 14, 2014. Soon after, the Company modified the composition of its Board of Directors, replacing its long-time CEO Michael Macdonald with Daniel Chard (formerly a senior sale executive of Nu Skin). MED rebranded to Optavia, focusing fully on the Multilevel marketing unit. Full year revenues bottomed in 2015, and MED’s revenues fully recovered to its 2013 highs by early this year. Perhaps seeing that the heavy lifting had been already completed, the activist investor began unloading its stake as revenues recovered, and fully exited their MED position by March of this year.

New Brand, Same old tricks? Our Preliminary Suspicions

While a bona fide turnaround appeared plausible, we began to question the prevailing narrative that Medifast was no longer the repeat offender it was widely believed to be, for the following reasons:

Price increases seemed to better explain the post 2015 revenue recovery vs volume growth:

MED Price Increases vs. Revenue Growth

 

% change YoY

2015

2016

2017

Revenue Price of MED Products

-4.4%

0.6%

9.8%

10.6%

4.0%

8.4%

We did not see corresponding increases in product quality or R&D/capex spend. Instead, we saw signs MED was shifting away from science/R&D and towards marketing/self-promotion.

Despite price increases and a marketing push emphasizing Optavia as a premium brand, the Optavia diet ranked poorly in the 2018 US NEWS Best Diets Rankings (ranked only 29 th of 40).

We have not observed honest & consumer friendly practices, despite its rebranding to Optavia

Consumers have filed more complaints against Optavia just within the last 4 months, than they did against Medifast in over 24 months, according to the Better Business Bureau (“BBB”).

Suspecting that the turnaround narrative might be off, we dug deeper. We discovered a few interesting nuggets buried in a 2010 defamation filing, where MED sued several of its critics. In it, MED vigorously denied the most central allegation that MED was a pyramid scheme made by the controversial Barry Minkow. Notably, however, the Company (I) did NOT dispute the accuracy of lab results indicating Medifast powders contained undisclosed toxic metals, and (II) did not claim that its products do not claim toxic metals. Given they did not dismiss the results, we interpret that to mean they were accurate.

Did MED fix the toxic metals issue? Why we believe the company is cutting corners to inflate revenue

Although Minkow was subsequently convicted for crimes unrelated to Medifast (we think deservedly), the MED critics from 2010 were not entirely wrong about everything: allegations regarding improper accounting and false/deceptive marketing have been validated by the SEC and FTC, respectively:

Allegation

Outcome

Improper accounting

SEC validated these claims.

False/deceptive marketing

FTC validated these claims.

Illegal Pyramid Scheme

Unknown.

Products contain toxic metals

Please read the remainder of this report.

But what of the toxic metals issue? We engaged an independent, well known lab described as the “world leader in food, environment and pharmaceutical products testing” to test Medifast and Optavia products for toxic metals. Should MED’s turnaround be genuine, the lab test results would be favorable. A completely safe product would justify aggressive price increases and price premiums relative to peer products. The lab results, as well our subsequent due diligence as to possible causes, lead us to believe:

Optavia products contain undisclosed toxic metals: The Optavia product samples the lab tested contain lead exceeding regulatory standards. The samples also contain more lead than 93% of protein products tested by the Clean Label Project, and more lead than all 283 everyday foods that the FDA had tested for lead.

Aggressive price increases and significant premiums to peer products are not justified: Optavia products contain more toxic metals than peers’ products or everyday foods, MED underinvests relative to peers, yet their products are far more expensive. We expect Optavia prices to drop.

Supply chain is suspect and could explain the toxic metals: The company claims it manufactures all its powders and that its products are “Made in USA”, yet we uncovered evidence to the contrary, which might explain the presence of toxic metals.

Optavia’s $200 million of sales growth since 2016 is suspect, as MED has violated the trust of customers

By cutting corners, as described above, Gotham City Research believes that:

MED has violated its customers and coaches’ trust.

The turnaround narrative promoted since 2016, as well as the corresponding Optavia-fueled revenue growth ($200 million of Optavia-fueled revenue growth), are suspect.

Consequently we believe 21%-66% of revenues are at risk. We derive the impact using two different methods. Our first method:

Optavia has been the primary driver of revenue growth since its launch in 2016, even as MED’s other reported segments have crumbled to oblivion.

Revenue growth since 2016 works out to $200 million (as revenue for 2016 was 274.5 million and revenue for 2018 is expected to be $475 million, the difference is $200 million).

The $200 million of revenue may not have occurred had Optavia customers and coaches known about the undisclosed toxic metals issue as shown in this report.

$200 million works out to 42% of 2018E revenue, right in the middle of the 21%-66% range.

21%-66% of revenues are at risk, derived using our second method:

The company claims that 42% of product sales as of 2017, originate from selling powders:

Powder Based Products 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 % of
Powder Based Products 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 % of
Powder Based Products 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Powder Based Products
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
% of Medifast Sales 80% 65% 55% 55% 46% 44% 43% 42% 43% 42%
% of Medifast Sales
80%
65%
55%
55%
46%
44%
43%
42%
43%
42%

A company source said 40% of sales come from selling bars, so 82% of sales = powders + bar.

Optavia products are supposed to be all nutritionally equivalent & substitutable. We interpret this to mean that if one kind of fueling say in the form of a bar were to contain concernings levels of contaminants, then other types of fuelings e.g. powder-based, soups, shakes, and puddings could contain equal amounts of said contaminants.

– could contain equal amounts of said contaminants. • 66% exposure - Out of the Optavia

66% exposure - Out of the Optavia products tested for toxic metals, 85% tested as suspect. Given that Optavia fuelings are supposed to be “nutritionally equivalent and substituble”, let’s assume that most, but not all, fuelings (7 out 8) contain the same ingredients as the tested ones. Seeing that Optavia represents 89% of revenue (on TTM basis), 66% of revenue is at risk, in this scenario.

21% exposure - MED claims that 42% of unit sales are from powders (we assume unit sales and $ sales are proportional). For this lower end estimate, we conservatively assume that only powders contain toxic metal levels of significance AND that only some flavors are risky (so we generously allow only 50% of powders to be of concern). This would imply that the other products are NOT nutritionally equivalent nor substitutable. So 50% of 42% powder sales, equals 21%.

Our estimated Optavia revenues at risk factor in no price reductions Our above estimates assume constant pricing, i.e. no price reductions. Given that Optavia products have been priced at meaningful premiums to peers’ products - Herbalife, Slimfast, and just about all protein shake powders are less expensive the risk of price reductions is very high.

Mechanisms that would facilitate a dramatic decline in sales There are two important features of Optavia’s business model that would catalyze a precipitous and sudden decline in sales:

o

Multilevel marketing An MLM, like leverage, amplifies financial results. In good times, this is great; but in bad times, an MLM collapses far faster and deeper than an equivalent non-MLM company’s sales would. The MLM feature would ampiify declines.

o

Pressure from other channels, such as Ebay Optavia goods are sold in direct non-MLM online channels. Pricing in these channels, such as Ebay, could downwardly adjust prices faster than the other channels.

Operating leverage, margin pressures, and increased uses of cash The Company spends less on R&D and capex as % of sales relative to its peers. We would expect their spending on these expenditures to converge to their peers’ levels, leading to a reduction in cash flow. In order to ensure lower levels of toxic metals in their products, we expect their contract manufacturers to raise prices. We cover these considerations in the Valuation section in this report.

Cutting Corners to Inflate Financial Results: We Have Seen This Movie Before

Tile Shop & Lumber Liquidators had once been the flavor du jour with the stock market, as MED is today. But once quality/safety + supply chain related concerns were raised, and the quality of growth of these companies had come into question – Both companies’ share prices declined. Neither have recovered since. Perhaps what worsened the underlying problems is that both companies denied the claims and/or attacked the messengers. In our opinion, MED is like Tile Shop and Lumber Liquidators, and its share price will suffer a similar fate for the reasons found in this report. We summarize the similarities we see:

 

Tile Shop

Lumber Liquidators

Medifast

Product Quality/Safety Concerns

YES

YES

YES

Supply Chain Concerns

YES

YES

YES

Inflated Financial Results*

YES

YES

YES

Critics concerns validated

YES

YES

We think over time

*resulting from growth at the possible expense of product quality and safety

While we believe that the facts and analyses presented in this report sufficiently support our opinions, we have additional evidence (covered in our Part II) that further reinforce our opinions. The content contained in Part II will present topics not covered in this report.

Gotham City Research believes that Medifast might be worse than TTS and LL for the following reasons:

While TTS and LL were alleged to sell goods containing toxic materials, their customers did not consume the products. On the other hand, Optavia’s main offering is a “5 in 1 plan” diet, where customers are expected to consume 5 of these toxic metal-laden servings per day!

MED’s customers overweight and obese people are particularly vulnerable to adverse health health consequences from overexposure to contaminants.

Optavia products are priced to perfection, selling at a 30%-400% premium to competitors’ goods.

Optavia products are sold through a multi-level marketing program (“MLM”). An MLM, like financial leverage, amplifies financial results. In good times, this is great; but in bad times, an MLM collapses far faster and deeper than an equivalent non-MLM company would.

Gotham City Research believes third parties should and will independently test Optavia products

Just as it happened with Tile Shop and Lumber Liquidators we expect third parties i.e., parties with no ties to Gotham City Research or Medifast to conduct and/or commission their own tests. As they should. We believe their findings will corroborate and possibly further the findings in our report.

Undisclosed Toxic Metals and Why Optavia Is Worse Than Peers

Medifast/Optavia: safe, effective, and helping customers incorporate healthy habits in their lives?

Medifast/Optavia claim that their products are “safe and effective”, “contain all of the good stuff and none of the bad stuff”, and that the company “incorporates healthy habits in everything we do”:

“incorporates healthy habits in everything we do”: Gotham City Research believes that products containing
“incorporates healthy habits in everything we do”: Gotham City Research believes that products containing
“incorporates healthy habits in everything we do”: Gotham City Research believes that products containing
“incorporates healthy habits in everything we do”: Gotham City Research believes that products containing

Gotham City Research believes that products containing undisclosed toxic metals such as lead and cadmium are not “safe and effective” and are what scientists would call “bad stuff” for the human body.

Toxic metals such as Lead and Cadmium are dangerous for human consumption

Lead and cadmium are dangerous, believed by scientists to cause serious health problems. Regarding lead:

"There is no known level of lead exposure that is considered safe. Lead is a cumulative toxicant that affects multiple body systems " – World Health Organization (“WHO”)

Lead is associated with premature death. It is estimated that in 2016 lead exposure accounted for 540 000 deaths and 13.9 million years of healthy life lost worldwide"

"In 2016 lead exposure accounted for 540,000 deaths and 13.9 million years of healthy life lost worldwide due to long-term effects on health." Institute for Health Metrics & Evaluation (IHME)

"During pregnancy, current or past exposure to lead by the mother could present a risk to the fetus." Environmental Protection Agency (“EPA”)

In children, “Even low levels of lead in blood have been shown to affect IQ” and “these effects of lead exposure cannot be corrected.” - Center for Disease Control (CDC)

Lead presents dangers particularly relevant to the overweight and obese, Optavia’s target customer

Overweight and obese people – Optavia’s target customer – are a high-risk population that tend to suffer from other physical conditions, such as high blood pressure, heart disease, and other heart-related conditions. These problems may be caused or worsened by consuming products high in lead:

“People with prolonged exposure to lead may also be at risk for high blood pressure, heart disease, kidney disease, and reduced fertility.” – Center for Disease Control

The study found that crash diets in the early phase caused fat to accumulate within the heart muscle.” – Radcliffe Department of Medicine

85% Optavia-branded product samples tested last month contain undisclosed toxic metals

Last month, we purchased Medifast and Optavia branded products and had them sent to a laboratory for testing. Gotham City Research believes (I) Medifast/Optavia-branded products are unsafe and low quality relative to peer products and everyday foods, and (II) Optavia Fuelings require a recall and/or independent testing for the reasons mentioned below and in the remainder of this report:

Nearly all the Optavia samples tested contain lead exceeding the Proposition 65 maximum allowable dosage level by 10x on average. 22% of the samples exceeded the FDA maximum daily intake level for lead (a level the FDA is considering lowering).

Just one serving of an Optavia Fueling exceeds the Prop 65 lead limit by over 100%, based on the samples tested. These Optavia Fuelings are meant to be consumed 5 times per day.

The Optavia samples tested contain more lead on average than 93% of other high protein powders suggesting that Optavia products are of worse quality than peer products.

The Optavia samples tested contained more lead on average than all everyday foods tested by the FDA for lead (a basket of 283 everyday foods were tested for lead).

The Optavia samples contain similar levels of lead on average as Medifast samples that were tested in 2008, suggesting that the company has known about lead as a risk factor, and that it has failed to reduce lead to the lowest levels currently feasible.

A single serving of an Optavia fueling would exceeds the maximum allowable daily limit levels by 2x

California’s Prop 65 requires companies to provide a warning label regarding the reproductive risks of consuming lead, when daily intake exceeds 0.5 µg/day. In 6 out of 7 cases, as shown below, just one serving (for example, just one pouch of powder) of the tested Optavia products exceeds the Prop 65 levels yet there are no warning labels on the boxes or the pouches:

 

Lead

Lead per

Lead per

Concentration

Serving

Day

Sample

#

(µg/kg)

(in µg)

(in µg)

Sample: 1

22

0.70

3.52

Sample: 2

43

1.38

6.88

Sample: 3

22

0.70

3.52

Sample: 4

17

0.54

2.72

Sample: 5

19

0.61

3.04

Sample: 6

77

2.31

11.55

AVERAGE:

33

1.04

5.21

These Optavia products are meant to be consumed 5x per day, according to their flagship diet plan

The flagship Optavia 5 in 1 diet plan (Optavia’s only diet plan we’re aware of that makes specific claims about possible average weight loss), requires its customers to consume 5 Optavia “fuelings” per day (a fueling is a serving of “nutritionally equivalent and substitutableproducts, including powders and bar). If its customers were to adhere to the plan, they would consume enough lead to exceed the Prop 65 Maximum Allowable Dose Level by over 10x! Seeing that the company represents all its Optavia Fuelings as “nutritionally equivalent and substitutable”, we believe that the lead levels per the tests we had conducted are a fair proxy for the risk that the untested Optavia products may present. We do not know how often Medifast tests its own products, but our results suggest that it does not do so sufficiently, or, if it does, that it has chosen not to disclose those results.

23% of samples exceed FDA maximum daily intake level 6 µg per day

Samples 2 & 6 contain enough lead such that consuming them as required by the 5 in 1 plan would exceed the FDA’s maximum daily intake level for lead, of 6 µg/day. Notably the FDA’s maximum level may be revised lower, just as other organizations, such as WHO, have already done. The table below shows how the FDA remains the only entity among those listed who has yet to lower maximum lead levels:

Organization World Health Organization European Food Safety Authority US Food and Drug Administration Lead Limit

Organization

World Health Organization

European Food Safety Authority

US Food and Drug Administration

Lead Limit Guidance

Provisional Tolerable Weekly Intake

Provisional Tolerable Weekly Intake

Provisional Tolerable Total Dietary Intake

Year

Lead

Units

1972

0.050

mg/kg bw

1999

0.025

mg/kg bw

2011

0.000

mg/kg bw

1992

0.025

mg/kg bw

2010

0.000

mg/kg bw

1993

0.006

mg/day

Under Review*

According to a former FDA official, toxic metals in foods is an issue of interest to the FDA. He said that the FDA acts when the agency has specific cause for concern, and the levels of lead in the tested Optavia samples would raise questions for the FDA.

Background: The FDA may lower the maximum daily intake level of 6 µg/day

In 1993, the FDA established a maximum daily intake level (6 µg/day), known as the Provisional Tolerable Total Dietary Intake level (PTTDI) based on the Centers for Disease Control and Prevention (CDC)’s Level of Concern of 10 micrograms of lead per deciliter of blood (µg/dL). The PTTDI helps the FDA in assessing the risk of lead in food in various aspects of its regulatory mission such as in supporting enforcement actions, rulemaking and guidance development. At the time the FDA set the 6 µg/day level, the agency stated that its Provisional Level “may be reduced if additional research shows that even lower levels of lead cause adverse health effects.” In the last decade, new scientific information has become available with respect to neurotoxic effects of low levels of exposure to lead. This prompted the EPA to lower its air quality standard, the CDC to replace its Level of Concern with a reduced reference value level, and the Joint WHO and FAO Committee on Food Additives (JECFA) to withdraw its Provisional Tolerable Level for lead. In the meantime, the FDA has been reviewing its provisional level.

Medifast/Optavia samples tested contain more lead than over 93% of peers tested, on average

Among the Optavia products tested that contain lead (nearly all did), the Optavia samples contain more lead than 93% of 133 of America’s best-selling protein powders tested by the Clean Label Project in March 2018. The Clean Label Project pulled over 130 of America’s best-selling protein powders in accordance with Nielson data, the Amazon.com best seller list, and supplemented that list with top sellers in the natural/organic retail channel and consumer favorites mentioned on fitness blogs and websites.

The worst Optavia sample contained more lead than nearly all 133 peer products:

130 125 120 115 110 105 100 95 90 85 Optavia Sample #6 80 75
130
125
120
115
110
105
100
95
90
85
Optavia Sample #6
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
58
61
64
67
70
73
76
79
82
85
88
91
94
97 100 103 106 109 112 115 118 121 124 127 130 133
Clean Label Project Protein Powders
Optavia
Lead level in ug/kg

Why the comparison between Optavia fuelings and 133 protein shakes is appropriate and concerning

So why are we comparing Optavia fuelings to protein shakes? Earlier this year, The Clean Project completed a study of 134 protein powder products. Clean Label Project had the top-selling protein powder products animal-based, whey, and plant-based tested and reviewed by a third party analytical chemistry laboratory for industrial and environmental contaminants and nutritional superiority elements like antioxidant activity. The study showed that many of the top-selling powders and drinks may contain concerning levels of heavy metals.

The following reasons lead us to believe the comparison is appropriate:

Many Optavia fuelings are high enough in protein (as far as % of calories for protein is concerned) to be deemed what the FDA calls “protein products”.

Protein powders have been known to contain high levels of toxic metals (even before the results of the Clean Label Study were released in March 2018), particularly those containing plant-based proteins. Some Optavia products also contain plant-based proteins.

The following reasons lead us to believe the comparison is concerning:

Optavia samples tested contain more lead than most of these already at-risk products.

Many Optavia customers are required to consume 5 servings per day; we suspect that the average consumers of the protein products tested under the Clean Label Project do not consumer anywhere near 5 servings of those products per day.

The Optavia samples contain less % of calories from protein than the protein powders tested by the Clean Label Study, on average, raising concerns as to where the lead is originating from.

Optavia is represented as a high-quality product and is priced far higher on a per serving and per calorie basis, than protein powders (and even all diet shakes we could find).

Optavia samples contain more lead on average than all 283 everyday foods tested by the FDA

The Optavia products that were tested contain more lead on average than all 283 everyday foods that were tested by the FDA in its 2013 study (updated 2017), titled FDA Total Diet Study Element Results Summary Statistics. The below table shows the top 10 foods that tested highest for average lead (see column Mean (mg/kg)):

 

TDS

 

N of

N of Non-

N of

Mean

Std Dev

Median

Min

Max

LOD

LOQ

Element

Food

TDS Food Name

Analyses

detects

Trace

(mg/kg)

(mg/kg)

(mg/kg)

(mg/kg)

(mg/kg)

(mg/kg)

(mg/kg)

No.

LEAD

295

Syrup, chocolate

32

1

31

0.016

0.005

0.016

0

0.027

0.007

0.030

LEAD

221

BF, sweet potatoes

32

5

26

0.013

0.008

0.014

0

0.034

0.007

0.030

LEAD

254

Peach, canned in light syrup

32

4

26

0.012

0.008

0.011

0

0.038

0.007

0.030

LEAD

348

Apricots, canned in heavy/light syrup

32

6

25

0.012

0.008

0.013

0

0.036

0.007

0.030

LEAD

723

BF, arrowroot cookies

32

11

21

0.012

0.010

0.014

0

0.031

0.010

0.040

LEAD

358

Sweet potatoes, canned

32

2

30

0.012

0.005

0.012

0

0.023

0.007

0.030

LEAD

187

Candy bar, milk chocolate, plain

32

10

22

0.011

0.008

0.014

0

0.027

0.010

0.040

LEAD

291

Brownie

32

7

24

0.010

0.007

0.010

0

0.032

0.007

0.030

LEAD

87

Fruit cocktail, canned in light syrup

32

7

25

0.010

0.007

0.011

0

0.025

0.007

0.030

LEAD

244

Shrimp, boiled

32

25

5

0.009

0.033

0

0

0.180

0.010

0.040

Shrimp was the only everyday food sample that tested higher than the Optavia samples for lead, but only when comparing the worst shrimp sample (the “max” sample) against the worst Optavia sample; when comparing the Optavia sample average lead content against average and median results for all 283 foods, Optavia is by far the worst.

MED failure to reduce lead levels from a 2008 tests suggests disregard for food quality + safety

Every company makes mistakes. The question is: why are these lab results eerily similar to lab results from over 10 years ago? The below table shows the results from that lab test from 10 years ago:

Medifast Product Name Medifast 70 Dutch Chocolate Shake Medifast 70 French Vanilla Shake Lab Report

Medifast Product Name

Medifast 70 Dutch Chocolate Shake

Medifast 70 French Vanilla Shake

Lab Report

Serving Size

Lead per

Date

Lead (µg/g)

(g)

Serving (µg/g)

9/12/2008

0.0458

32.4

1.5

9/16/2008

0.0449

32.4

1.5

9/19/2008

0.0282

32.4

0.9

9/12/2008

0.0312

31.2

1.0

9/16/2008

0.0400

31.2

1.2

9/19/2008

0.0167

31.2

0.5

the average lead levels per serving, ~1 ug per day, are approximately equal to the average lead levels per serving found in the Optavia products we had tested for lead.

Medifast sued those critics for defamation.

In the complaint filing, the Company did not dispute the accuracy of the lab’s lead results, though it vigorously disputed the accuracy of most allegations found in the critics’ reports. It is a fair inference that MED believed the 2009 lead tests were correct.

Michael MacDonald, MED’s current non-executive Chairman of the Board of Directors, was previously CEO of MED. He + family members have been involved with MED for many years.

Given Macdonald’s involvement with MED, we believe the company has known about lead issues for a long time and have failed to disclose or correct the problem. There is no shame in making mistakes…only in not correcting them.

Optavia is a very bad deal compared to other products, given these quality and safety concerns

Given the issues we’ve discussed thus far in this report, one might expect Optavia to be a low-cost product line, meant to appeal to budget-conscious consumers. Based on our examination of prices of similar goods and diet programs, Optavia actually looks like a very bad deal: competing meal replacement powders cost between 40%-80% less than Optavia’s:

Competing meal replacement powders cost as much as 85% less per calorie compared to Optavia Select powders

Product Name

Price/Calorie ($)

% Discount to Optavia Essential

% Discount to Optavia Select

SlimFast Original Meal Replacement Shake Mix - Rich Chocolate Royale SlimFast Advanced Nutrition Meal Replacement - Creamy Chocolate Herbalife Formula 1 Dutch Chocolate Herbalife Non-GM Formula 1 Vanilla

0.005

-83%

-85%

0.009

-69%

-71%

0.015

-44%

-49%

0.017

-38%

-43%

Optavia Essential Creamy Vanilla Shake Optavia Select Dark Chocolate Covered Cherry Shake

0.027

0%

-9%

0.030

10%

0%

Optavia powder s are notably more expensive than even Herbalife’s, a company that has been

Optavia powders are notably more expensive than even Herbalife’s, a company that has been accused of ripping off customers and selling overpriced goods. Based on our pricing studies, Herbalife is between 38%-49% less expensive than Optavia! The pricing differences are even more dramatic when compared

against SlimFast products, as shown in the table above.

The pricing differences are even more dramatic when compared against SlimFast products, as shown in the

Even when comparing Optavia to a slightly different program, Nutrisystem, Optavia is more expensive:

MED is more expensive per day than Nutrisystem's Core Plan. (Core Plan includes Nutrisystem support)

Company

Name of Kit

Price

Servings

Days of Food

Price Per Day

Optavia

Essential Optimal Kit (5&1 Plan®)

$356.15

119

24

$14.96

Nutrisystem

Core Plan with Auto-Delivery: Women

$317.98

112

28

$11.36

Nutrisystem

Core Plan with Auto-Delivery: Men

$357.98

140

28

$12.79

Optavia Price Premium vs. Nutrisystem for Women

 

32%

Optavia Price Premium vs. Nutrisystem for Men

17%

Days of food for MED is assuming user is on the 5 and 1 plan, 5 servings of MED per day

Women have 4 NTRI meals a day while Men have 5 - this is why the price differs on the two NTRI plans

Each company's 1st month promotional meals are not included in the comparison

Shipping is free for both companies when you buy a kit

Shipping is free for both companies when you buy a kit While the protein powders tested

While the protein powders tested by the Clean Label Project may not be used by its customers primarily for weight loss purposes, these powders contain as many (if not more) calories from protein as Optavia products do. Therefore, these protein powders could be just as effective at helping its users lose weight via ketosis, as Optavia claims its diets do. And these products are notably less expensive between 50%- 84% less expensive – than Optavia’s:

The top 5 protein powders tested by Clean Label Project cost 50-84% less per calorie compared to Optavia Select powders

Product Name

Price/Calorie ($)

% Discount to Optavia Essential

% Discount to Optavia Select

Body Fortress Super Advanced Vanilla Whey Protein PERFORMIX Pro WHEY+ Protein Powder with Time Release Amino Beads Pure Protein 100% Whey Powder - Vanilla Cream Biochem Vanilla 100% Whey Protein Puori PW1 Vanilla Pure Whey Protein

0.005

-83%

-84%

0.005

-82%

-84%

0.005

-80%

-82%

0.010

-63%

-66%

0.015

-45%

-50%

Optavia Essential Creamy Vanilla Shake Optavia Select Dark Chocolate Covered Cherry Shake

0.027

0%

-9%

0.030

10%

0%

MED does not provide a warning label about lead or its dangers as we believe is required per Prop 65

We have not seen, nor are aware of, any of Medifast or Optavia-branded products containing a warning label regarding the dangers of lead, as is required for companies selling products in California containing lead exceeding the maximum allowable dosage levels. These products’ labels should say something like:

levels. These products’ labels should say something like: Not only does MED not provide a warning

Not only does MED not provide a warning label about lead on its packaging, we also see no mention of lead in the Optavia/Medifast websites. MED makes no representations or assurances about its lead products’ content.

Unlike Herbalife, one of Medifast’s Competitors, MED provides no assurances about lead levels

On the other hand, Herbalife makes the following representations about lead in its products:

the following representations about lead in its products: Why we believe MED is in violation of

Why we believe MED is in violation of Prop 65, Faces Liability, & its Products will Require Warning Labels

Proposition 65, a.k.a. Safe Drinking Water and Toxic Enforcement Act of 1986

a.k.a. Safe Drinking Water and Toxic Enforcement Act of 1986 Gotham City Research believes Medifast/Optavia is

Gotham City Research believes Medifast/Optavia is in violation of Proposition 65, and will face consumer and legal scrutiny for the following reasons:

Lab test results for lead in 2018 exceed the maximum allowable dosage levels (on a per serving, as well as on per day consumed basis), per Prop 65, as discussed earlier in this section.

Optavia/Medifast products do not carry the required warning label.

This is not a first time offense for MED, as Lab test results from 2008 detected lead.

Gotham City Research believes Optavia/Medifast do not qualify for any of the exemptions that would relieve the company from carrying the warning labels.

In the appendix, we explain why Gotham City Research believes Optavia does not qualify for the exemptions.

Possible Causes Part I: Supply Chain Is Suspect

Suspect supply chains can compromise product safety and quality

Why do the tested Optavia fuelings contain undisclosed toxic metals? Particularly, why do they contain higher levels of toxic metals than nearly all similar high product products, everyday foods, and against regulatory standards? And how is this all possible when Optavia powder prices are 2x-5x more expensive? These are significant anomalies, in our view.

The answer may lie in a suspect supply chain. Companies do not always disclose their products’ origins (or are deceptive about their origins), especially if there are known quality concerns. This was exactly the case with Tile Shop, where one of its main suppliers was an undisclosed related party based in China.

In other cases, underinvestment or insufficient spending on quality control leads to problems. We saw this problem with a web hosting company called Endurance International Group. Endurance had spent far less on core intrastructure spending versus its primary competitor, Godaddy. Consequently, its customers experienced an unusually frequent number of service outages versus Godaddy customers.

In the case of MED, we have reason to believe that both underinvestment AND insufficient spending on quality control may have contributed to the problems with MED products. In this section, we focus on why we believe the supply chain is suspect.

The Company claims that 100% of powders are made in the Owings Mills, MD Facility

According to the most recent 10K filing, MED manufactures all powder-based products at its manufacturing facility located in Owings Mills, MD and subcontract the production of all other products:

MD and subcontract the production of all other products: This claim (as well as the claim

This claim (as well as the claim powders = 42%-44% of sales) has been remarkably consistent over time:

2013 The Company’s facility in Owings Mills, Maryland manufactures all powder based products and the

2013

The Company’s facility in Owings Mills, Maryland manufactures all powder based products and the Company subcontracts the production of all other products.

2014 2015

The Company’s facility in Owings Mills, Maryland manufactures all powder-based products and the Company subcontracts the production of all other products.

2016 2017

The Company’s facility in Owings Mills, Maryland manufactures all powder-based products and the Company subcontracts the production of all other products.

We manufacture all powder- based products at our manufacturing facility located in Owings Mills, Maryland and subcontract the production of all other products.

The Company’s facility in Owings Mills, Maryland manufactures all powder based products and the Company subcontracts the production of all other products.

MED 10K filings:

Claim re:

powder-based

products

Employees & “coaches” we spoke with echo this claim. Summarized below are some of their comments:

Employees and Coaches either echo or overstate this claim:

Optavia Coach Support Rep

The Optavia packets say "Manufactured for Optavia". Are you saying they are both made at the same facility? "yes, yes" Are all Optavia products made in-house or are any of them made by 3rd parties? "No, none of them are made by 3rd parties" So all of them are made at the Maryland, is it Owings Mills? "At the Owings Mills location, yes"

Optavia Coach #1

I'd like to know where the products are made, especially the Optavia chocolate and vanilla shake mixes. "all our products are made in the US! Baltimore, Maryland"

Optavia Coach #2

Who makes the shakes and other foods for this diet? "the products are made in our facility in Maryland"

Nutrition Support Supervisor

"all of our powdered products come from Medifast" "correct, we make none of the bars" "the crunchy stuff is made elsewhere"

Nutrition Support Rep #1

"all of the products are manufactured in our manufacturing facility in Owings Mills"

"the ingredients might not be

but

they are all brought to the manufacturing facility in Owings Mills to make the product, there"

Nutrition Support Rep #2

"we have a location in Owings Mills, they do that" "we make the majority of our dried products. Most of our bars are made through our 3rd party manufacturing company"

Medifast-branded powder box labels are consistent with the “100% of powders are made in the Owings Mills, MD Facilityclaim as well:

made in the Owings Mills, MD Facility ” claim as well: In case there’s any confusion:
made in the Owings Mills, MD Facility ” claim as well: In case there’s any confusion:
made in the Owings Mills, MD Facility ” claim as well: In case there’s any confusion:

In case there’s any confusion: Jason Pharmaceuticals is a fully owned subsidiary of Medifast. That entity name is often found in regulatory matters (see the FTC settlement from 2012, as an example). MED = Jason Pharmaceuticals, Jason Pharmaceuticals = MED.

More than 40% of Medifast/Optavia’s supply may not be as the company represents

Gotham City Research believes 40%-82% of the company’s supply chain is suspect, and that this explains in part the undisclosed toxic metals. We specifically believe that:

Optavia-branded powders are made in an undisclosed location and/or made by a third party, contrary to MED’s claim it manufacturers all its powders (42% of revenue) in Maryland.

“Made in China” may be more substantively correct for some (possibly all) Medifast and Optavia branded powders and bars, contrary to the unqualified “Made in USA” found on their labels.

Our investigation reveals the following:

MED’s raw materials warehouse contained and/or contains Optavia branded powders that appeared to be shipped from elsewhere.

The box labels on Optavia branded powders state “manufactured for Optavia”, which is the language that the FDA states should be used when the firm listed on the label is not the manufacturer.

Yet, Medifast branded powder labels state that MED is the manufacturer.

Jason Pharmaceuticals Inc (Texas) is listed as a foreign importer of foods according to the FDA, yet MED makes no mention of any manufacturing and warehousing activity outside of Maryland.

Nellson Nutraceuticals, believed to be one of MED’s largest contract manufacturers, may be manufacturing Optavia-branded powders for MED out of Utah.

Nellson is suspect because the FDA has cited it multiple times and because Nellson appears to source ingredients from China based on shipping records we reviewed.

The unqualified “Made in the USA” claim may require modification, even removal in at least some possibly all Optavia/Medifast products.

Optavia Powder Products in the Arbutus Warehouse Indicate They were Not Made in Owings Mills

In August, we commenced an investigation into all MED’s facilities, including the raw materials warehouse as described in the company’s 10K filing:

warehouse as described in the company’s 10K filing: Our investigation into the raw materials warehouse reveals:

Our investigation into the raw materials warehouse reveals:

The raw materials warehouse contains Optavia powder tubs that look like finished goods, in contrast with all the other goods that look like raw ingredients in the warehouse.

The Optavia tubs look like they were manufactured FOR the company…not BY the company.

The Optavia tubs look like they were shipped from elsewhere.

There are no manufacturing activities nor any manufacturing or packaging equipment in the warehouse that might explain why finished goods would otherwise be found in this facility.

The only other major equipment found in the facility are forklifts used to move boxes.

If the Company claims to manufacturer all its powdered products, why would it store finished good Optavia powdered products in its raw materials warehouse in Arbutus?

Optavia powder box labels indicate “Manufactured for Optavia” NOT Manufactured by Optavia

The simplest explanation might be the obvious one: the Optavia powder pouches & boxes claim ‘manufactured for Optavia’, NOT manufactured BY Optavia:

Optavia powder pouches & boxes claim ‘manufactured for Optavia’ , NOT manufactured BY Optavia: Page 20
Optavia powder pouches & boxes claim ‘manufactured for Optavia’ , NOT manufactured BY Optavia: Page 20

In contrast, the Medifast powder label does not contain similar “Manufactured for Medifast” language; instead, its label conforms to FDA standards for indicating that the company itself is the manufacturer:

for indicating that the company itself is the manufacturer: ‘ Manufactured for ’ Indicates the firm
for indicating that the company itself is the manufacturer: ‘ Manufactured for ’ Indicates the firm
for indicating that the company itself is the manufacturer: ‘ Manufactured for ’ Indicates the firm

Manufactured for’ Indicates the firm listed on label is not the manufacturer: the FDA

We checked that language – “manufactured for Optavia” – with the FDA and found that the FDA offers regulation and guidance on labeling, specifically regarding that ‘manufactured for’ phrase:

offers regulation and guidance on labeling, specifically regarding that ‘manufactured for’ phrase: Page 21 of 69
offers regulation and guidance on labeling, specifically regarding that ‘manufactured for’ phrase: Page 21 of 69
offers regulation and guidance on labeling, specifically regarding that ‘manufactured for’ phrase: Page 21 of 69

All other Optavia-branded products (non powders) contain that ‘manufactured for Optavia’ language found on the Optavia powder labels. This representation found on non powder Optavia product labels seem compliant with the FDA guidance and regulations, AND consistent with Medifast/Optavia’s representation that all products that are not powder-based are manufactured by third parties:

representation that all products that are not powder-based are manufactured by third parties: Page 22 of
representation that all products that are not powder-based are manufactured by third parties: Page 22 of
representation that all products that are not powder-based are manufactured by third parties: Page 22 of

Our due diligence reveals that Nellson LLC manufactures bars for MED, and possibly powders as well

Nellson LLC (also known as Nellson Nutraceuticals) describes itself as “the only full-service bar and powder nutrition provider.” Nellson has powder operations in Utah, and significantly expanded these operations on December 4, 2017, by acquiring Genysis (also based in Utah), a manufacturer of functional powders.

Here is what our investigation reveals about Nellson and its relationship with Medifast/Optavia:

Nellson Nutraceuticals made or makes bars for Medifast/Optavia. Bars account for 40% of MED revenue, making Nellson one of MED’s most important contract manufacturers.

Medifast/Optavia formulated plans to shift powder product manufacturing to Nellson, under certain situations.

Medifast under the Jason Pharmaceuticals entity, may be conducting undisclosed warehousing and/or manufacturing activities in Utah and Texas as discussed below.

If MED is secretly using Nellson to make bars, the following adverse facts would explain why the Medifast would hide this information from the public:

Nellson’s safety and quality control record is concerning, as evidenced by the total # of FDA citations shown in the below table (Genysis and NBTY are fully owned subsidiaries of Nellson).

Nellson products use a significant portion of its ingredients from China, per shipping records.

 

PIERS Country of Origin = China

Total PIERS

Country of Origin = China (% of total)

# of FDA Citations

Entity

Records

Nellson

85

97

87.6%

10

Genysis

268

269

99.6%

45

NBTY

282

382

73.8%

39

Nellson filed for chapter 11 bankruptcy in 2008.

Nellson is currently owned by a private equity firm and appears to be acquisitive (i.e. it’s engaging in a roll-up strategy). In our experience, private equity owned, acquisitive companies often face financial pressures that can compromise product quality and safety.

Nellson represents the ability to pack powdered products in bulk tubs, bags, and sachets. Given the parameters shown below, they would fit the specifications of Optavia sachets.

below, they would fit the specifications of Optavia sachets. • Senior executives of Genysis don’t seem

Senior executives of Genysis don’t seem to have supply chain or manufacturing backgrounds prior to their tenure at Genysis:

o

o

Vice President of Supply Chain at Genysis Brand Solutions, pet foods https://www.linkedin.com/in/scottdcrawford/?locale=de_DE

Unreported Manufacturing + Warehouse Activities – MED’s Utah Operations May be the Missing Link

if all powders are NOT manufactured by Medifast at its Owings Mills, MD manufacturing facility, where are they manufactured? Who manufactures them? Nellson? Utah may hold the answers. Here is what we know so far about the ties between MED + Utah:

Nellson makes bars for MED. Nellson may make powders for MED.

Nellson’s powder activities are based in Utah and were expanded with the Gensys Acquisition.

MED’s CEO Daniel Chard is from and (we believe) currently based in Utah.

Jason Pharmaceuticals Pursues Manufacturing Activities in Utah, according to Utah Corporate Filings

Jason Pharmaceuticals is a fully owned subsidiary of Medifast. That entity name is often found in regulatory matters (see the FTC settlement from 2012, as an example). So just to avoid any conclusion:

MED = Jason Pharmaceuticals, Jason Pharmaceuticals = MED. According to a search for ‘Jason Pharmaceuticals’ in Utah corporate filings, Jason Pharmaceuticals’ stated business purposes was “manufacturing and selling of weight loss and management products”, as of September 2013:

loss and management products”, as of September 2013: In a Utah filing dated 12/07/2016, Jason Pharmaceuticals

In a Utah filing dated 12/07/2016, Jason Pharmaceuticals appears to have changed its NAICS Business Purpose to “Other Food Manufacturing”:

appears to have changed its NAICS – Business Purpose to “Other Food Manufacturing”: Page 24 of

How MED’s activities in Utah and Texas might explain the supply chain irregularities

The following facts might explain how MED has either (I) secret and undisclosed manufacturing activities outside of Maryland, or (II) Nellson or another third party manufacturers powder based products for MED:

Utah records suggest MED is conducting manufacturing activities in Utah.

FDA records suggest MED is conducting dry goods warehousing activities in Texas.

FDA records also suggest that MED is specifically importing foreign-sourced ingredients.

MED has not disclosed either of these activities as occurring outside of Maryland, in its SEC filings.

MED has disclosed distribution center and call center activities in Texas.

Given Texas and Utah are in (relatively) proximity (especially relative to Maryland!), our hypotheses would be plausible.

Jason Pharmaceuticals, Texas is listed as an importer of foreign food

The FDA has released a list of importers that import food from foreign suppliers:

a list of importers that import food from foreign suppliers: Jason Pharmaceuticals, MD, and Jason Pharmaceuticals,
a list of importers that import food from foreign suppliers: Jason Pharmaceuticals, MD, and Jason Pharmaceuticals,

Jason Pharmaceuticals, MD, and Jason Pharmaceuticals, TX are both listed as importers:

and Jason Pharmaceuticals, TX are both listed as importers: Source:

The only Texas-based activities as described in the 10K, are related to a distribution center & call center:

10K, are related to a distribution center & call center: Jason’s stated purpose of doing business

Jason’s stated purpose of doing business in Texas: ‘to open a distribution center to handle product shipments to/from our customers across the country (mainly west coast)’, consistent with SEC filings:

shipments to/from our customers across the country (mainly west coast) ’, consistent with SEC filings :

Optavia and Medifast branded products claim “Made in the USA” Optavia and Medifast branded products sport unqualified “Made in the USA” on their labels:

US A” Optavia and Medifast branded products sport unqualified “Made in the USA” on their labels
US A” Optavia and Medifast branded products sport unqualified “Made in the USA” on their labels
US A” Optavia and Medifast branded products sport unqualified “Made in the USA” on their labels
US A” Optavia and Medifast branded products sport unqualified “Made in the USA” on their labels

Why Gotham City Research Believes MED Should Qualify its Made in the USA Claim (At Best)

The Federal Trade Commission, in its Enforcement Policy Statement on U.S. Origin Claims said:

IV. SUBSTANTIATING U.S. ORIGIN CLAIMS: THE "ALL OR VIRTUALLY ALL" STANDARD Based on its review of the traditional use of the term "Made in USA," and the record as a whole, the Commission concludes that consumers are likely to understand an unqualified U.S. origin claim to

mean that the advertised product is "all or virtually all" made in the United States. Therefore, when

a marketer makes an unqualified claim that a product is "Made in USA," it should, at the time the

representation is made, possess and rely upon a reasonable basis that the product is in fact all or virtually all made in the United States.(12), (13)

A

product that is all or virtually all made in the United States will ordinarily be one in which all

 

significant parts(14) and processing that go into the product are of U.S. origin. In other words, where

a

product is labeled or otherwise advertised with an unqualified "Made in USA" claim, it should

 

contain only a de minimis, or negligible, amount of foreign content.

 

Based on our review of some of the MED products, we believe the company will at the very least modify its labels. MED may have to labels the way Herbalife does ("Made in the USA with imported ingredients"):

does ("Made in the USA with imported ingredients"):

In addition to scrutiny from the FTC, MED may face scrutiny and liability from the following:

State-level requirements and restrictions against deceptive trade practices. It would not take much for an attorney general to probe the toxic metals issue.

Private party litigation and an active plaintiffs’ class-action bar.

Gotham City Research believes in the above stated opinions for the following reasons:

At least 7 Optavia fuelings we’ve documented contain calcium caseinate as a main ingredient.

Medifast imports calcium caseinate from Denmark-based Arla Foods, according to shipping records.

Yet all 7 of those fuelings containing calcium caseinate as a main ingredient unreservedly claim “Made In the USA” on their product labels.

Shipping Records Reveal that Medifast imports Calcium Caseinate from Denmark (Arla Foods)

Based on shipping records, Medifast imports calcium caseinate from Denmark’s Arla Foods…and in significant amounts, as gauged by the weight in Kilograms:

PIERS Import Records from ARLA FOODS to Jason Pharmaceuticals

Arrival Date

Country of Origin

Shipper

Consignee

Consignee Address 1

Consignee Address 2

Weight (in Kg)

Commodity Short Description

8/12/2018

DENMARK

ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA ARLA FOODS AMBA

JASON PHARMACEUTICALS

11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE 11445 CRONHILL DRIVE

OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES OWINGS MILLS MD 21117 UNITED STATES

12,516

CALCIUM CASEINATE

8/12/2018

DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

7/27/2018

DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

7/27/2018

DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

7/6/2018

DENMARK

JASON PHARMACEUTICALS

12,520

CALCIUM CASEINATE

5/27/2018

DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

4/7/2018

DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

1/11/2018

DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

11/9/2016

DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

11/9/2016

DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

10/26/2016 DENMARK

JASON PHARMACEUTICALS

12,516

CALCIUM CASEINATE

The following products contain calcium caseinate; their labels unreservedly claim “Made in the USA”:

Name

Ingredient

Label claim

Optavia Caramel Macchiato Shake

Calcium caseinate

Made in the USA

Optavia Calorie Burn Cappuccino:

Calcium caseinate

Made in the USA

Optavia Velvety Hot Chocolate

Calcium caseinate

Made in the USA

Medifast Calorie Burn Cappuccino

Calcium caseinate

Made in the USA

Chipotle mac and cheese

Calcium caseinate

Made in the USA

Essential Velvety Hot Chocolate

Calcium caseinate

Made in the USA

Optavia Chocolate Fudge Pudding

Calcium caseinate

Made in the USA

Optavia Caramel Macchiato Shake (Calcium Caseinate is #1 ingredient!):

The below pictures show an example of one of the products listed above (amusingly, the order of sugar and fructose are different between the actual product package and the ingredients listing on the Optavia website). See the appendix for the remaining 6 examples whose labels we believe are deceptive.

remaining 6 examples whose labels we believe are deceptive. Gotham City Research Believes Some MED Products

Gotham City Research Believes Some MED Products Have More Ingredients From China than USA

We believe some of Medifast/Optavia’s products – specifically its bars may be more Made in China than Made in the USA, as gauged by origin of ingredients, for the following reasons:

Nellson LLC is believed to manufacture bars for MED and may make powders for MED (as discussed previously).

Bars account for 40% of MED revenue, making Nellson one of MED’s most important contract manufacturers (we think top 2 largest among MED’s contract manufacturers).

Nellson products are mostly made in China, at least if the proportion of supplies from China is a fair proxy for the proportion of Chinese vs other origins.

 

PIERS Country of Origin = China

Total PIERS

Country of Origin = China (% of total)

# of FDA Citations

Entity

Records

Nellson

85

97

87.6%

10

Genysis

268

269

99.6%

45

NBTY

282

382

73.8%

39

We see two scenarios, both of which are concerning from a product safety + quality perspective, and both would explain a lot:

Nellson is a significant manufacturer of Medifast/Optavia’s powders and bars. Given the large number of FDA citations that Nellons and its subsidiaries have received, this is concerning.

Nellson-made goods are composed mostly of China sourced ingredients and then mixed in the USA.

Why Does Medifast Unreservedly Claim Made in the USA?

Here are the reasons Medifast might unreservedly claimed “Made in the USA” on its products:

US government officials may view the company more favorably, if they believe that MED’s “Made in the USA” representations are true.

Prospective customers, with a preference for American made goods, might be enticed to purchase their products; existing customers might remain more loyal than they otherwise would if they knew the products’ ingredients were largely sourced from the United States.

Consumers might perceive “Made in the USA” as a premium trait, and therefore be less skeptical about Optavia’s aggressive pricing premiums versus its peers.

Possible causes Part II: Underinvestment

Underinvestment may also explain product safety and quality concerns

Other than a suspect supply chain, which would largely explain product safety and quality issues at Medifast, why else would Optavia fuelings contain undisclosed toxic metals? Particularly, why would they contain undisclosed toxic metals in excess of most similar goods, everyday foods, and regulatory standards? These are significant anomalies, in our view.

We have observed that underinvestment or insufficient spending on quality control can lead to problems. We saw this problem with a web hosting company called Endurance International Group. Endurance had spent far less on core intrastructure spending versus its primary competitor, Godaddy. Consequently, its customers experienced an unusually frequent number of service outages versus Godaddy customers.

Gotham City Research believes that other than the supply chain issues discussed, underinvestment and a cultural shift away from R&D and towards marketing contribute to quality and safety concerns. The following support our opinions:

Property, plant and equipment have declined more than 50% over the last 5 years.

MED’s Capex + R&D spend as a percentage of revenue is less than half that of its peers.

Disclosed intellectual property assets on the balance sheet have declined to zero.

Concurrently, stock buy backs and dividends have increased 3x.

Mention of the word ‘patent’ has disappeared from MED 10K filings.

Property, plant and equipment declined over 50% from $40 million to $18-$19 million:

The company’s property, plant, and equipment (net) balance has declined by over 50%, from over $40 million as of 2012, to $18 million of June 2018:

 

MED's PP&E has declined every single year since 2012

 

USD, in MMs

Dec'12

Dec'13

Dec'14

Dec'15

Dec'16

Dec'17

Jun'18

Net PP&E % YoY Change

40.109

34.476

33.477

29.029

19.753

18.611

18.22

(14.0%)

(2.9%)

(13.3%)

(32.0%)

(5.8%)

(1.5%)

Herbalife and other peers spend over 2x more on capital expenditures and research & development:

Herbalife has been criticized for underspending on R&D and capex, but it spent twice as much on R&D and capex as % revenue than MED did, per our estimates. The same goes for the rest of the peers:

Net CapEx + R&D as % of revenue

2015

2016

2017

MED

1.69%

1.53%

1.55%

Peer Group

3.60%

4.07%

3.38%

Peer Investment Relative to MED

2.13x

2.66x

2.19x

Peer Group: Nu Skin, USANA, Herbalife, Weight Watchers, Nutrisystem

Underinvestment and stock buybacks compromise product quality and safety

Instead of significantly boosting capex or R&D spending, which might improve product safety and quality, MED has chosen instead to dramatically boost stock buybacks and dividends:

MED Share Repurchases and Cash Dividends

USD, in MMs

2015

2016

2017

2018 YTD

Share Repurchases Net Shares Repurchased for Employee Taxes Cash Dividends Paid to Stockholders

$10.5

$0.0

$0.0

$20.0

$1.3

$1.3

$2.5

$0.2

$0.0

$11.9

$15.4

$11.7

Total

$11.8

$13.2

$17.9

$31.9

Intellectual property assets have disappeared from the MED Balance Sheet

As of 2012, MED had intellectual property assets on its balance sheet:

MED had intellectual property assets on its balance sheet: The value declined to zero by 2013.

The value declined to zero by 2013. By 2016/2017 that asset category disappeared altogether:

By 2016/2017 that asset category disappeared altogether: Trademarks and Intangibles in 2002 used to provide higher

Trademarks and Intangibles in 2002 used to provide higher balances and disclosures:

in 2002 used to provide higher balances and disclosures: Mention of the word ‘patent’ has declined

Mention of the word ‘patent’ has declined from 10 mentions in the 2002 10K to zero recently:

10K Filing Year: 2002 2013 2017
10K Filing Year: 2002 2013 2017
10K Filing Year: 2002 2013 2017

10K Filing Year: 2002 2013 2017

Mentions of the word "patent":

10

5

0

Allergens, Cadmium, and Other Safety Concerns

Safety Concerns are Not Limited to Lead

Gotham City Research believes that the product quality and safety concerns are not limited to the lead related findings, covered earlier in this report. Here are other causes for concern:

Optavia products that were tested contain cadmium, in levels that exceed most other peer products and nearly all everyday foods tested by the FDA.

Optavia products may contain more exposure to allergens then disclosed in its labeling.

The FDA citation record for two companies believed to MED’s largest contract manufacturers is very concerning.

Optavia does not recommend eating fruit, as part of its 5 for 1 plan.

Cigarette smokers are exposed to toxic metals in cigarettes and may be more vulnerable to consuming Optavia products.

Optavia and Medifast Products and Allergens: the Coverup is Worse Than the Crime

Medifast/Optavia warned its top performing sales force (those who generate revenue) that the Company has all major allergens in its manufacturing facility in Owens Mills, Maryland:

in its manufacturing facility in Owens Mills, Maryland: Archived fibc-summit-august.html In fact, the GMP Agreement

Archived

In fact, the GMP Agreement the company asks guests to sign before allowing them to tour the manufacturing facility, states:

here:

we handle all major allergens (except shellfish)

IF YOU HAVE ANY TYPE OF FOOD ALLERGY DO NOT ENTER THE MANUFACTURING FACILITY

MED does not provide the same warnings to its customers as it does to its revenue generators

Medifast/Optavia’s allergen disclosures do not afford customers the same degree of caution as the company has to its top producers; the company makes no such representations that its products are manufactured in a facility that contains allergens, in either the product labels or its websites, based on our examination. The inconsistent disclosure is not consistent with industry norms.

For example, we found that the following companies provide advisory disclosures when there is a risk that allergens may be present during the manufacturing process:

Herbalife voluntarily discloses when a product it sells was produced in a facility that processes nuts or gluten or milk http://herbalife.custhelp.com/app/answers/detail/a_id/684/~/eight- major-allergens

Nutrisystem states that those with peanut allergies, mild or severe, cannot be on its program

Nutrisystem also lists peanut, soy, and latex allergies as reasons not to use its program https://www.nutrisystem.com/pdf/Information_for_your_doctor.pdf

If Optavia and Medifast branded products are manufactured in the same Owings Mills manufacturing facility where visiting salespeople are explicitly instructed not to enter (if they have any allergies) then:

Why doesn’t the company provide its customers with the same degree of courtesy as it does to its visiting salespeople?

Optavia’s allergen disclosure practices may be legally permissible, but these practices don’t seem consistent with the practices of a premium, safety-first brand.

Cadmium levels tested exceed the maximum allowable dosage level by 178%

If a customer were to adhere to the 5 in one 1 Plan, and consume Optavia products that contain the same amount of cadmium as those that were tested, their daily consumption would exceed the maximum allowable dosage level of 4.1 µg/day by 178%, on average:

 

Cadmium

Cadmium

Cadmium

Concentration

per Serving

per Day

Sample

#

(µg/kg)

(in µg)

(in µg)

Sample: 1

35

1.12

5.60

Sample: 2

96

3.07

15.36

Sample: 3

34

1.09

5.44

Sample: 4

23

0.74

3.68

Sample: 5

20

0.64

3.20

Sample: 6

70

2.10

10.50

AVERAGE

46

1.46

7.30

We believe Medifast should be providing a warning level regarding cadmium, particularly in this case because it sells the products as part of diet plan, and whose adherence would lead to consumption of cadmium exceeding the Prop 65 levels.

The Optavia product samples contained more Cadmium than most tested protein products

The Optavia samples that were tested contain more cadmium than 76% of comparable protein products as tested by the Clean Label Project. The below graph shows the worst Optavia sample, which contains more cadmium than 91% of its peers:

330 320 310 300 290 280 270 260 250 240 230 220 210 200 190
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
Optavia Sample #2
110
100
90
80
70
60
50
40
30
20
10
0
1 4
7
1 0
1 3
1 6
1 9
2 2
2 5
2 8
3 1
3 4
3 7
4 0
4 3
4 6
4 9
5 2
5 5
5 8
6 1
6 4
6 7
7 0
7 3
7 6
7 9
8 2
8 5
8 8
9 1
9 4
9 7 100 103 106 109 112 115 118 121 124 127 130 133
Clean Label Project Protein Powders
Optavia
Cadmium level in ug/kg

The Optavia samples contain more Cadmium than nearly all foods tested by the FDA for Cadmium

The Optavia products tested contain more cadmium than 97% of everyday foods that were tested by the FDA for cadmium. While the relative ranking is not as bad as it was for lead as the Optavia products contained more lead than ALL the everyday foods – Optavia’s ranking is still very poor:

 

TDS

 

N of

N of Non- detects

N of

Mean

Std Dev

Median

Min

Max

LOD

LOQ

Element

Food

TDS Food Name

Analyses

Trace

(mg/kg)

(mg/kg)

(mg/kg)

(mg/kg)

(mg/kg)

(mg/kg)

(mg/kg)

No.

 

CADMIUM

343

Sunflower seeds (shelled), roasted, salted

32

0

0

0.389

0.120

0.379

0.215

0.874

0.003

0.010

CADMIUM

107

Spinach, fresh/frozen, boiled

32

0

0

0.183

0.226

0.122

0.038

1.100

0.002

0.005

CADMIUM

357

Lettuce, leaf, raw

32

0

0

0.066

0.038

0.058

0.012

0.175

0.001

0.004

CADMIUM

27

Liver (beef/calf), pan-cooked with oil

32

0

0

0.056

0.036

0.045

0.021

0.171

0.003

0.010

CADMIUM

138

Potato chips

32

1

0

0.054

0.029

0.052

0

0.145

0.003

0.010

CADMIUM

73

Shredded wheat cereal

32

0

0

0.054

0.013

0.053

0.035

0.081

0.002

0.007

CADMIUM

109

Lettuce, iceberg, raw

32

0

0

0.051

0.035

0.039

0.010

0.157

0.001

0.004

CADMIUM

48

Peanuts, dry roasted, salted

32

0

0

0.044

0.018

0.038

0.020

0.084

0.003

0.010

CADMIUM

108

Collards, fresh/frozen, boiled

32

0

0

0.043

0.063

0.028

0.010

0.368

0.002

0.005

CADMIUM

258

French fries, fast-food

32

0

0

0.042

0.014

0.039

0.022

0.072

0.003

0.010

Hearthside Food Solutions and Nellson LLC very concerning FDA citation record

Standard Functional Foods Group (now known as Hearthside Food Solutions) and Nellson LLC are believed to be the two largest Medifast contract manufacturers. Both of their FDA citation histories are very concerning:

10 FDA citations for Nellson (far more under its subsidiaries’ names):

Inspection

End Date

Firm Name

City

State Act/CFR Number

Full Description

3/10/2014

Nellson Nutraceutical, Inc. (Powder Division)