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GNC Holdings: Stock Sees Extreme Volatility on DOJ Action

Zacks Equity Research

Through the entire trading session yesterday, shares of health and wellness retailer GNC Holdings Inc. GNC witnessed intense volatility. The stock initially tanked more than 20% during mid-day trading in response to the imminent announcement of the U.S. Department of Justice’s (DOJ) criminal and civil actions against unlawful advertising and sale of dietary supplements. However, later in the day, the loss moderated to a large extent when the DOJ, in its press conference (at 3:30 p.m. ET), did not take the name of GNC Holdings while revealing the results of the investigation. Finally, the stock closed at $29.07 yesterday, down 6.38%.

The issue had originated on Oct 22, 2015 when Oregon's Attorney General filed a lawsuit against GNC Holdings, the parent company of nutrition retailer GNC, concerning some of its products. The lawsuit alleged that GNC had been spiking some of its herbal supplements with two illegal ingredients. This led to a massive fall in the stock’s value that forced the market to stop trading the company’s shares.

According to an immediate report in NBC News, these two undeclared ingredients in the company’s nutritional supplements are BMPEA (beta-methylphenylethylamine)and picamilon, which are often known as “Hidden Speed” and are not approved in the U.S. These non-natural and unsafe components had been allegedly included in the supplements with names such as "JetFuelSuperburn" and "Phenyl Core Weight Management".

Following this, GNC Holdings immediately filed a motion to remove the lawsuit, claiming that the allegation was without merit. According to the company, picamilon was an ingredient in dietary supplements widely sold by major retailers, up to the time of the filing of Oregon's lawsuit on Oct 22. Additionally, products containing BMPEA had also been extensively available until the FDA issued a warning letter in Apr 2015. The company asserted the Oregon Attorney General's claim, that GNC knew or should have known these ingredients to be illegal for use in dietary supplements, is absolutely baseless.

Although the company stopped selling products with BMPEA and picamilon with immediate effect, the market has been extremely sensitive to the entire issue since then. Naturally, fears were triggered further when the news of the DOJ about to release its investigation results came to the fore. Market volatility reached its peak, dragging GNC Holdings’ share price to a three-year low during mid-day trading.

The DOJ announcement revealed the name of USPlabs LLC, the maker of workout supplement Jack3d. As per the investigation, USPlabs LLC used a China-made synthetic stimulant in its Jack3d and OxyElite Pro but claimed the supplements were manufactured from plant extracts. As per the indictment, six executives with USPlabs LLC and a related company, S.K. Laboratories, will now face criminal charges related to the sale of unlawful dietary supplements.

However, the fact that the DOJ did not hold GNC Holdings guilty came as a major breather for the company, helping it recover its lost face value to a great extent. We also believe the company’s commitment to stop selling products containing BMPEA and picamilon has reinforced investors’ confidence in the stock.

GNC Holdings currently carries a Zacks Rank #4 (Sell). Some of the better-ranked stocks in the broader medical space are Hill-Rom Holdings, Inc. HRC, ICU Medical, Inc. ICUI and Nxstage Medical, Inc. NXTM. All the three stocks carry a Zacks Rank #1 (Strong Buy).

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