A Hard Fall to Bankruptcy for Once High-Flying Extract Firm

By LAURENCE DARMIENTO

Staff Reporter

A decade ago Hauser Inc. was on top of the world.

The young company’s pioneering work in extracting paclitaxel from tree bark the key ingredient in the blockbuster cancer drug Taxol was garnering it big sales, fat profits and brisk trading on Nasdaq.

Today, El Segundo-based Hauser is barely a shadow of its former self.

Its contract supplying paclitaxel to Bristol-Myers Squibb is long gone, and a foray into supplying Echinacea and other botanical extracts to the nutritional supplement industry backed by the wealthy Zuellig family of Switzerland has fallen apart.

The company declared Chapter 11 bankruptcy protection last month, owing $24.2 million to creditors after it failed to reach a deal to have the Swiss family buy back its botanical operations.

“It’s real disappointing,” said co-founder Dean Stull, who no longer runs Hauser. “It has not ended the way we would have liked it.”

There are still hopes of working out a deal with the Zuelligs, whose vast holdings in Asia and elsewhere generate billions in annual revenues. If that happens, the company would be remade into a smaller manufacturer of specialty nutritional products that is if it accepts what management considers a low-ball offer from the Zuelligs, rather than liquidate.

“At the end of the day, Hauser is in the driver’s seat,” said Peter Hafermann, chief operating officer of Zuellig Botanicals Inc., the privately held U.S. firm that is seeking to acquire the Hauser operations.

Brief but glorious history

Hauser, known as Hauser Chemical Research Inc. until five years ago, was formed in 1983, and one of its first products was an anti-bacterial toothpaste additive from natural sources. Relying on that expertise, the company won a federal contract in 1987 to develop a method for extracting paclitaxel, a substance in the bark of the Pacific yew tree that showed promise as a cancer drug.

When the government approved the drug for use in humans, the company teamed up to supply bulk quantities of it to Bristol Myers, which had been chosen to develop a marketable drug.

Taxol, as it was branded, became a blockbuster, treating women’s breast and ovarian cancers. By 1994, the company reported net income of $10.3 million on $60.6 million in revenue.

But concern began growing among environmentalists over the harvesting of the tree. Meanwhile, Bristol Myers developed its own in-house production method. In 1995, Hauser lost $2.7 million and sales cratered to $22.9 million.

Hauser tried to supply paclitaxel to Bristol Myers competitors but those efforts never paid off. Instead, the focus shifted to the food and supplement industry. The timing seemed good, given the heightened consumer interest in vitamins and supplements. It also coincided with the growth of the Internet, which spawned a host of on-line consumer retail sites.

That’s when the Zuelligs came knocking.

The family runs a multi-billion dollar business that includes operations as diverse as trading, insurance brokerage and contract pharmaceutical manufacturing. In the United States, it was the leading supplier of raw agricultural products to the nutritional supplement industry.

In 1999, seeing an opportunity to make it big in the domestic extraction business, it folded much of its U.S. botanical operations into Hauser in a $66 million deal that left it with close to a 50 percent stake in the company.

But favorable publicity about supplements was replaced with more critical media coverage. As the Internet boom busted, on-line retail sites began folding. “The companies in the middle had started increasing their capacity, and suddenly all of those orders were canceled,” said Rob McCaleb, a president of the Herb Research Foundation.

Hauser, which had been losing money all along, began bleeding red ink: $29.7 million in 1999, $28.4 million in 2000 and $33.3 million in 2001.

In mid-2000, the Zuelligs, who controlled three seats on the eight-member board, brought in turnaround specialist Kenneth Cleveland, replacing Stull and another executive. Cleveland also was hired to run Zuellig Botanicals, the family’s private U.S. operation.

Bad decision

In retrospect, Cleveland said, the Zuelligs made a bad decision settling on Hauser. “They bought a company that was losing money and was out of control.”

Cleveland resigned last year from his post overseeing the Zuellig’s private U.S. operations to only run Hauser.

He began unloading assets, but continued to run the supplement business, which last year still accounted for over half of the $57.6 million in revenue.

That operation is also intertwined with Zuellig Botanicals, which under a formal agreement not only supplies Hauser with raw agricultural product but also does its sales, marketing and distribution.

Company losses were cut to $5.7 million in the 2002 fiscal year, and are down to $2.6 million this year. Cleveland said the nutritional supplement operations are now even making an operating profit. Along the way, Hauser cut its debt to Wells Fargo to $8.6 million.

But last year it violated its loan covenants and had to negotiate extensions to pay off the remaining debt. It was also falling behind on receivables.

The decision was finally made to sell the nutritional supplement business back to the Zuelligs. Cleveland said that should go a long way to pay off all debt and restart the company as a smaller operation.

The sale, along with the potential purchase of other extract manufacturers, would help the family realize its dream of becoming a major manufacturer of extracts. But the sale is critical for the Zuelligs for another reason. The 1999 merger prohibits the private company from directly competing against Hauser until next year, Cleveland said.

Hauser was hoping to consummate the deal last year, but Cleveland charges that the Zuelligs wanted the nutritional operations on the cheap, though he and others won’t be specific. “They really ground down on us,” he said.

Hauser filed bankruptcy on April 1, declaring $24.1 million in assets and $24.2 million in debt, including the $8.7 million still owed to Wells Fargo and $12.6 million owned to various suppliers. It also owes the Zuelligs’ $2.9 million stemming from a 2000 loan.

Wells Fargo, citing its privacy obligations, declined to talk about the company, but issued a statement that the bank is “hopeful” Hauser will be able to reorganize. To that end, the bank is allowing the company to operate, using cash the bank could claim as collateral during the bankruptcy.

A reorganization plan must be presented within 120 days of the April 1 filing. Cleveland said he is still hopeful he can work out a deal, but acknowledged liquidation may be in the cards.