Supplement Maker Seeks Healthy Boost in China

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Supplement Maker Seeks Healthy Boost in China
Herbalife nutrition club.

Herbalife Ltd. built its business through a network of multilevel marketers: independent distributors who peddle its diet and nutritional products to friends and neighbors, often recruiting them to sell the products themselves.

So entering the potentially huge China market five years ago presented a big challenge to the company’s business model: The Chinese government imposes strict controls on overseas companies, and initially forbade the downtown L.A.-based business from multilevel marketing.

Herbalife adapted by opening company-owned retail stores in several large Chinese cities. Over time, though, it hoped to convince government officials to allow it to better tap the entrepreneurial zeal of its citizens.

Herbalife last week logged another victory in that evolving effort. China’s Ministry of Commerce granted direct-selling licenses in five provinces that allow the company to recruit independent distributors. But unlike in other countries, these distributors are not allowed to build their own multilevel sales networks. Herbalife also said it has begun doing business in Shanghai using a license granted in 2009.

The company responded to these restrictions by taking a different approach to building its business in China, adapted from its nutrition club model pioneered in Mexico. There, independent distributors set up an area in their homes where customers buy single servings of a product and consume it while socializing.

In China, starting with a pilot project in 2009, distributors have banded together to rent commercial space, taking turns running the shop into the evening. Chinese customers may stop for a weight-loss shake and chat after work, but many take products home with them, which is less common in Mexico.

“What we are doing in China will help us grow more rapidly there, because distributors feel more comfortable inviting someone they just met to a commercial location rather than their home,” said Chief Financial Officer John DeSimone. “Nutrition clubs are clearly in (their) infancy in China, but (they’ve) become our top growth strategy there, and in other countries.”

The company still operates 75 retail stores in China, but now has 800 independent nutrition clubs around the country – a number that could grow well into the thousands.

Herbalife, which logged $2.3 billion in revenue in 2009, still has only 6 percent of its sales coming from China, compared with 24 percent from the United States and 11 percent from Mexico. Company officials see that mix shifting over time.

MannKind Moves Ahead

MannKind Inc. surprised Wall Street last week by completing a revised submission for its inhaled insulin product Afrezza to the U.S. Food and Drug Administration quicker than expected.

MannKind’s shares fell 50 percent after the FDA in March delayed a decision on whether to approve Afrezza for sale and asked the company for more data. Investors worried that regulators would require more safety studies. But the Valencia biotech’s quick turnaround suggests that the issues were less serious than feared. MannKind said the FDA is now scheduled to make a decision by the end of the year.

The announcement perked up shares, which closed at $6.39 on July 21. That’s up one-third from a May low of $4.76, but still down almost 40 percent from its 52-week high.

Analysts said the quick turnaround bodes well for MannKind’s prospects for getting Afrezza quickly approved, and also signing a distribution and marketing agreement with a larger drug maker.

The FDA still might require one of its advisory panels to hold a hearing on Afrezza’s safety and effectiveness, but at least one analyst thinks the company could turn that into a positive.

“I think MannKind would welcome the opportunity to make their argument and present their data in public in a formal scientific manner,” said Douglas Dieter, who covers the company for Century City’s Imperial Capital Inc.

Afrezza is designed to deliver a rapid-acting insulin that is more effective than traditional injectable insulin. But after Pfizer Inc. pulled its Exubera inhaled insulin from the market in 2007 due to lung-safety concerns that slowed sales, interest in Afrezza cooled significantly. MannKind’s billionaire founder and chief executive, Al Mann, responded by pouring millions more of his personal fortune into the product.

Dieter, who has an “outperform” rating on company shares, said MannKind management has indicated that discussions with potential partners will soon accelerate. The company would like to have an agreement signed before the FDA’s decision so it can launch Afrezza early next year.

Staff reporter Deborah Crowe can be reached at [email protected] or at (323) 549-5225, ext. 232.

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