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.
False Medical Claims
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.
Banned or Restricted
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.