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Bloomberg News / August 11, 2000
Los Angeles, Aug. 11 (Bloomberg) -- Herbalife International
Inc.'s Web site still uses a video of Mark Hughes hawking
weight- loss pills and nutritional supplements two months
after the company's founder died of a prescription drug
overdose.
Focusing on the past is one way the 20-year-old company
is coping with a future that no longer includes its
charismatic leader. By the time of his death at 44,
the 6-foot tall, 190-pound high school dropout had attracted
one million distributors in 49 nations and generated
$1.79 billion in annual sales.
After sales grew at a compound annual rate of 18 percent
from 1996 to 1999, they were up just 7 percent in the
first quarter. Since the Class B stock hit a 52-week
high of 16 1/4 on Jan. 18, it has fallen 40 percent
after Hughes' failed effort to bring Herbalife private
in a leveraged buyout. The company's price-to- earnings
ratio -- one measure of earnings optimism -- touched
16 in early 1998; it is now at six.
There are also new problems: ephedrine, used in Herbalife
weight loss pills, has been linked to cardiac arrests,
strokes and deaths by the Food and Drug Administration.
The new chairman, identified as Mark Hughes' father,
is accused of being an imposter. Hughes' assertion his
mother died of an overdose of prescription diet pills
is contradicted by her autopsy. And Hughes' own image
of clean living has been tarnished by evidence he smoked
cigars and died after a four-day drinking binge.
"It's very much a cult of personality," said
David Stewart, professor of marketing at the Marshall
School of Business at the University of Southern California.
"When you begin to hear things that are inconsistent
with the image, that can cause all kinds of problems."
Still Pitching Herbalife
Hughes, who died May 21 in his $27 million Malibu mansion,
had led hundreds of sales rallies -- resembling religious
evangelical gatherings -- drawing people both to the
products and the prospect of getting rich selling them.
His pitches are still broadcast on Herbalife's Web site.
"Technology now provides an incredible avenue
for me to spread my dream of global health and wealth!"
says Hughes. A framed commemorative photograph of Hughes
was recently offered to distributors who met certain
sales milestones, "in dedication to Mark's dream."
But the herbal health entrepreneur, who began selling
diet products from the trunk of his car in 1980, may
not have led the life of health he had preached. Hughes
smoked six to eight cigars a day and died after a four-day
drinking binge, according to his autopsy. It found that
he suffered an accidental overdose of alcohol and doxepin,
an anti-depressant.
Chris Pair, 45, chief operating officer, was named
president and chief executive to replace Hughes. Pair
said he met Hughes 30 years ago while Pair worked at
CEDU, the residential California drug abuse treatment
program where Hughes was sent after a series of brushes
with the law.
The company's 14 most successful distributors will
now be leading major sales meetings. "They will
be stepping into his shoes," said Pair in an interview
at the company's annual shareholder meeting. "One
person cannot do that, but a team of people, I think,
can."
Hughes says he founded the company because his mother,
Jo Ann, was 30 pounds overweight, which ultimately led
to her death. "I lost her to an accidental overdose
of diet pills. She was only 36 years old," says
Hughes in the introduction to Herbalife's product catalogue.
"That's why I've dedicated my life to finding a
better way of helping people manage their weight."
Concern about the side effects of Herbalife weight
loss products has grown, however, after the Food and
Drug Administration attributed a 1998 cardiac arrest
suffered by a 28- year-old woman to an Herbalife ephedrine
product, Original Green.
Ephedrine, a chemical cousin of amphetamines that increases
blood pressure and heart rate, has been linked by the
FDA to hundreds of adverse reactions and dozens of deaths.
On Aug. 8 and 9, the U.S. Public Health Service held
public meetings in Washington about the safety of dietary
supplements containing ephedrine.
"It does not concern me, because no deaths have
been linked to our product," said Pair. He said
Herbalife's products comply with FDA regulations.
Herbalife, which a decade ago paid $850,000 to settle
California charges that it made false medical claims
about its products, doesn't say on its labels that some
products contain ephedrine. Instead, it lists Ma Huang,
the herb that contains the ephedrine.
The company has done no clinical studies to test the
safety of those products, said Robert Sandler, general
counsel. "Our ephedra product is a mild stimulant,"
he said. "It helps you withstand the pangs that
sometimes happen when you are dieting."
That claim is challenged by Raymond Woosley, chairman
of Georgetown University's pharmacology department,
who recently studied 140 reports of adverse reactions
to ephedrine products, including some sold by Herbalife,
at the request of the FDA.
"There's absolutely no study that's ever shown
ephedrine helps you withstand the pangs," he said.
"There's a short-term weight loss that's not sustained."
He said ephedrine is chemically "almost identical"
to amphetamines, and has been conclusively linked to
deaths, strokes and seizures.
Six U.S. states including Florida and Texas ban or
restrict sales of the products.
Herbalife's claim that Jo Ann Hartman was killed by
diet pills is contradicted by her autopsy. It indicates
she died of an overdose of Darvon, a narcotic. Although
5-foot-6-inches tall, she weighed just 105 pounds at
death.
CEO Pair said he was unaware of that information. Sandler,
the general counsel, said he'd never seen the autopsy.
"Whether she in fact died of an overdose of diet
pills is rather immaterial to the story of Herbalife,"
Sandler said. "It motivated him. It may have been
a false belief in his mind, but he believed it."
The company is also facing controversy because of a
dispute between two men who both claim to be Hughes'
father.
Mark's birth certificate lists his father as Stuard
Hartman, who was married to Jo Ann until their divorce
in 1970, when Mark was 14. The company insists that
John Reynolds, who was briefly married to Jo Ann before
she married Hartman, is his biological father.
Court documents show Mark and his brothers, Kirk and
Guy, were the children of Stuard and Jo Ann's marriage.
Kirk works for Herbalife and Guy is deceased. Hughes
is Jo Ann's maiden name.
The issue has come to the forefront now because Reynolds,
66, was elected as a director and chairman of Herbalife's
board, on June 27. Reynolds, who founded a plumbing
supply business, wasn't previously a company employee.
"I have friends and relatives calling me asking
what's going on," said Hartman, a retired businessman.
"It's very upsetting." He's offered to take
a DNA test to prove he is Mark's biological father.
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