PROVO -- A Nu Skin Enterprises subsidiary will pull its entire dietary supplements line, including a controversial cholesterol-reducing capsule, from stores nationwide in favor of its new parent company's multilevel marketing approach to sales.
The 38 products of Pharmanex, based in Simi Valley, Calif., will not be available on shelves at some 35,000 retail outlets like American Stores and Wal-Mart after mid-January, perhaps marking the first time a successful company has abandoned the traditional retail market for direct selling."This has never been done before," said Bill McGlashan, Pharmanex president. "(Retailers) can't quite fathom why we would do this."
Nu Skin spokeswoman Kara Schneck predicted the move will "turn a lot of heads."
McGlashan says the 4-year-old company's natural health-care products are better suited for one-on-one marketing, where Nu Skin's 500,000-member sales force can distinguish them among scores of competitors. He estimates conventional advertising to make Pharmanex a household name would cost $50 million per product.
"We could do that or I can have an army of distributors whom we can educate and train," he said from Boston where he met with industry analysts. "If I had 10 minutes to sit down and talk to you about Tegreen (a potent anti-oxidant Pharmanex sells), you'd be using Tegreen for life."
The 34-year-old Pharmanex founder sees Nu Skin as a vehicle to even more than the $20 million in sales the company anticipates this year. McGlashan figures it will earn as much in several months with network marketing as it would during a year in stores.
Privately held Generation Health Holdings, Pharmanex's parent company, spurned offers from several pharmaceutical giants to hook up with Nu Skin in a multimillion dollar deal completed last month. Stock in publicly traded Nu Skin has doubled to more than $20 per share since the buyout.
Removing Pharmanex products from stores, with the exception of independently owned pharmacies and health-food stores, was not a condition of the deal, McGlashan said.
"This is a logical next step since our acquisition of Pharmanex," said Steven J. Lund, Nu Skin chief executive officer. In addition to health and beauty products, Nu Skin distributors sell telecommunication services through a subsidiary called Big Planet.
American Stores vice chairman and chief executive officer Dave Maher questions Pharmanex's decision to give up "far and away" the best avenue -- mass marketing -- for its dietary supplements.
"Their product is going to be successful no matter what channel they choose to put it into. But in my view, they haven't selected the best channel," he said.
Some 1,750 food and drug stores in the Salt Lake-based chain sell four or five Pharmanex products, meaning it won't be much of a financial impact for American stores to lose them. "It's more a principle thing," Maher said.
Maher does, however, recognize that buying habits are changing. "In today's world, we're looking at direct marketing as a wave of the future," he said.
More than half of all Americans have bought goods or services via direct selling, which totaled $22 billion in sales last year in the United States.
In buying Pharmanex, Nu Skin picked up a popular dietary supplement for reducing cholesterol that the U.S. Food and Drug Administration contends is an unapproved drug. Cholestin, which is advertised "to lower your cholesterol without drugs," is derived from an extract of Chinese red rice yeast.
"It is clearly a food. It has been a food for centuries. We haven't done anything to change that," McGlashan said.
The FDA attempted to block imports of milled red rice yeast and ban the sale of Cholestin, but a federal judge in Salt Lake City issued an injunction against the agency last June. A final ruling is expected in January, though McGlashan expects an appeal regardless of the decision.
Meantime, Pharmanex can continue making the supplement, which is encapsulated in a plant in Farmington.
Dietary supplement sales have doubled the past four years, triggering rapid expansion of the industry and the entry of pharmaceutical companies into an already crowded marketplace.
There is little overlap between Pharmanex's dietary supplements and Nu Skin's own line known as Interior Design Nutritionals, Schneck said. McGlashan said prices will remain "competitive."
Pharmanex products are sold locally at Smith's Food and Drug, ShopKo and Fred Meyer as well as pharmacies and health-food stores.