Herbalife Cellular Nutrition Articles & Resources

Last year, in a $685 million sale prompted by the demands of Hughes' estate, an investor group looking to revitalize the brand took Herbalife private. The effort started with a housecleaning of expensive former Hughes cronies and the hiring of Johnson and a crew of executives from outside the supplement industry.

The new management team has cut the company's notoriously bloated overhead, hooked up with leading scientists at UCLA to improve the company's products and is getting ready for its biggest marketing push in years.

But there is no shortage of challenges--starting with the litigation facing the company.

Consumers who say that they ingested diet products containing the herb ephedra have sued Herbalife along with other supplement makers. The company also is the defendant of a purported class action lawsuit set to go to trial next year that charges its multi-level distribution model is nothing more than a pyramid scheme--an accusation that has dogged the company for 20 years.

Johnson would not comment on any of the litigation. But in one of his first interviews since taking over, he is quick to talk up the company's marketing plans next year that include TV infomercials and the release of a new diet product.

"There has to be a balance between retailing, selling the product to consumers, and not trying to turn every retail customer into a distributor," he said. "I can't do anything about yesterday, but I can certainly influence tomorrow."

Hiring 'smart people'

The new management team has cut back on operating expenses and the cost of revival-like extravaganzas staged for distributors, which will it help carry the burden of debt taken out to pay for the buyout.

The manufacturing process is more efficient, Johnson said, although he is not specific. "I have hired a lot of very smart people who are pragmatic about costs and pragmatic about spending. We are being smarter about everything," he said.

Nevertheless, the company's third quarter 10Q, filed with the Securities and Exchange Commission last week, shows a 28 percent sequential rise in marketing, distribution and administration expenses, to $111 million. In July the company launched its biggest product of the year, Niteworks, a dietary supplement developed by Dr. Louis Ignarro that is supposed to improve circulation. (Ignarro, a UCLA pharmacology professor who has won a Nobel prize, is being paid to endorse the product, but claims to be receiving very little.)

For the third quarter ended Sept. 30, Herbalife reported net income of $ million, compared with a net loss of $ million in the like year-ago quarter. Revenues rose 7 percent, to $ million. The year-ago quarter included $ million in transaction expenses related to the buyout.

The company also notes in a recent SEC filing that its reorganization plan involves "involuntary terminations" and it has so far spent $ million in severance payments to carry them out.

But Johnson, who recruited two other Walt Disney executives and a marketing manager from Nokia to join him, said cost cutting would only take the company so far. And he noted that the new ownership group, led by Whitney & Co. in Stamford, Conn., and Golden Gate Private Equity Inc. of San Francisco, is demanding big returns on its investment. (Peter Castleman, chairman of the ownership group, did not answer repeated requests for interviews.)

Success will only come through products that catch the public's fancy and overcoming growing skepticism about supplements and diet meals.

Toward that end, Herbalife recently spent $3 million to help establish the Mark Hughes Cellular & Molecular Nutrition Lab at UCLA, part of the university's Center for Human Nutrition.

Herbalife also convinced Dr. David Heber, director of the center and a medical school faculty member, to chair the company's scientific advisory board.

Heber said he was wary about doing so, given Herbalife's multi-level marketing model, but his fears were quashed after meeting the new ownership and management team.

"I am not going out there to sell a product. I am helping make sure the products out there are based on science," he said. "They have had a checkered reputation in the past, but so far I have seen a very strong commitment to injecting science in the product. The minute I think it's not legitimate I am out of here."

Heber is being paid to sit on the company's scientific advisory board, but he declined to specify the exact amount.

Edward Aaron, an analyst with RBC Capital Markets who follows the supplement industry, said many companies are trying to make their products more science-based in the wake of the ephedra lawsuits and other questions that have been raised about the efficacy of supplements.

"The blitz of negative media attention has really turned off a lot of consumers, but it's something of a paradox. You have a demographic base (of baby boomers) who are focused on health and wellness, but new products have not emerged yet to really drive growth."

Ephedra, a natural version of the stimulant ephedrine, raises a person's heart rate while constricting blood vessels. It was cited as a factor in the February heat stroke death of Baltimore Orioles pitcher Steve Bechler, and has been linked to heart attacks, strokes and other reactions.

Herbalife was among the first companies to pull ephedra out of its diet products. Among those who also have been sued are retailer Wal-Mart and Apollo Group, owner of mall-based supplement distributor General Nutrition Centers.

Herbalife has not disclosed how many product liability lawsuits it faces, but the company contends in SEC filings that the actions do not threaten it financially. Johnson also said no deaths have been traced back to its products.

More troubling may be a purported class action lawsuit that was filed last year against Herbalife in . District Court in Los Angeles, accusing the company of running a pyramid scheme. The company has sought to dismiss the suit but it is scheduled for trial on April 20, 2004. As yet it has not been certified for class status.

Similar accusations in the mid-1980s ultimately resulted in a permanent injunction obtained by the California Attorney General that sets out parameters for how Herbalife can operate its multi-level marketing model, in which distributors not only sell products to consumers but also receive royalties from sales by distributors they have recruited.

In order for sales to be considered legitimate, the product must ultimately be sold to a consumer, so there must not be an emphasis on recruiting distributors over consumer sales.

The company and some of its distributors are accused of doing just that during a period in the late 1990s when Hughes successfully jumpstarted stalled growth, according to the suit.

Johnson would not discuss the lawsuit, but he acknowledged that sometimes in the past the company lost its focus on the bottom line--selling products to consumers.

He said one key focus of the current management is to adjust the culture by giving Herbalife's distributors more realistic growth expectations.