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As Medifast expands, will it outgrow Maryland?

It's not a matter of "if" but "when."

Medifast Inc., the No. 3 manufacturer of weight-loss food products, is growing so quickly in that industry that there will soon come a time when it outgrows its sole production facility in Owings Mills and builds plants elsewhere.

To keep up with that rapid growth, Medifast plans on making $5 million in improvements to its headquarters and plant in Owings Mills over the next two years. But it's also considering other sites for the future, including a possible West Coast manufacturing site and one in Mexico to serve the growing Latin American market.

The question now: Will Medifast stick around in Maryland for the long term?

At a state-sponsored meeting earlier this year where corporate and government leaders discussed small-business issues in Maryland, Jason Groves, Medifast's general counsel, warned that the company might move its operations to another state that offered better tax incentives and wondered what incentives Maryland could offer, according to minutes of the meeting obtained by The Baltimore Sun.

But Michael C. MacDonald, Medifast's CEO, who years ago worked for Xerox Corp. and oversaw the move of its telecenters to Canada for tax incentives, played down Groves' statements. MacDonald said last week that moving the company out of Maryland was "not a serious consideration."

As a growing manufacturer, Medifast is a bright spot in the Maryland economy, where the manufacturing sector has been battered over the decades. The company makes and sells nutritional food products, such as bars and shakes, to people who want to adopt the Medifast diet for weight loss. It employs 570 of its 1,000 employees at its headquarters and production facility in Owings Mills and a distribution center on the Eastern Shore.

The company remains committed to Maryland "for the next few years," MacDonald said.

But he added: "You've got to look at every deal from a return perspective. Our first choice is to stay here, but you have to evaluate various options in the future.

"There's no question that Maryland could have more favorable incentives for manufacturing," he said. "States have to look at ways to attract businesses, and tax incentives are one way to do it."

Jayson Knott, a deputy director with the Maryland Department of Business and Economic Development, said he couldn't talk about the agency's discussions with Medifast, but he said generally that an existing state business wouldn't be eligible for tax incentives unless it created new jobs in Maryland.

The department has other options to offer existing employers to help keep them in Maryland, Knott said. One is "credit enhancement," a guarantee for a loan typically needed for capital expenditures; another is a conditional loan, for which the principal and interest get converted into a grant if the company hits certain economic development targets, such as a defined number of new jobs.

Knott said that he hoped the department and Medifast would talk before the company received an offer from another state to move its production or even its headquarters.

"It's certainly a conversation we want to have with them," he said. "We want to keep and grow every Maryland business, quite frankly."

Robert S. Chirinko, a finance professor at the University of Illinois at Chicago who has studied how states give tax incentives to companies, said political leaders often have to balance the prospect of costly tax breaks with the risk of losing a major employer.

"There's nothing illegal about it, but I do think government officials have to resist it," Chirinko said. "Just like the kids who come into my office and want a higher grade — they all can't get an A."

But the lure of keeping a fast-growing manufacturer could be hard to resist. Baltimore County officials have been working with the company for years to help it grow.

Dan Gundersen, executive director of the Baltimore County Department of Economic Development, said Medifast is one of the county's high-growth companies that his office keeps in regular touch with. Years ago, the county gave Medifast $250,000 to buy equipment, and the loan was paid back in full, he said.

"We have been there all along for their growth cycle," Gundersen said. "We want to make sure that they know we'd be happy to facilitate them to continue that growth."

Gundersen said the company hasn't raised the possibility of moving with his office. Instead, they talk about funding the expansion in Owings Mills.

Medifast sales have nearly tripled since 2008, rising to $298 million in 2011 from $110 million in 2008. It's gaining traction against larger competitors, such as NutriSystem Inc., which has annual sales of $401 million, and Weight Watchers International Inc., with $1.8 billion in sales.

The company is part of a worldwide market in sports nutrition and weight-loss products valued at $25.8 billion last year, according to the Nutrition Business Journal.

It reported a profit of $19 million last year, and its stock, publicly traded on the New York Stock Exchange, closed Friday at $19.39.

Despite the recent rapid growth, MacDonald has his sights set on reaching $1 billion in revenues in the next five years. To get there, he said, the company will have to continue to ramp up production to meet increasing demand. And that means possibly expanding to the West Coast with a production plant and pushing south into Latin America.

MacDonald struck a partnership this month with Medix S.A., a market leader in pharmaceutical obesity products in Mexico. Mexico has the second-largest obese population in the world, behind the United States, statistics show.

Getting Medifast products to Mexico involves some serious shipping logistics. The food bars, powdered shakes, puddings, drinks and soups are created in Owings Mills and shipped to an Eastern Shore distribution center. From there, they are moved around the country to Medifast's weight-loss centers or sold directly to consumers online.

A Texas distribution facility handles orders for the West Coast. That center will also be used to distribute Medifast products in Mexico, exclusively through Medix's network of physicians and 30 new Medifast weight-control centers scheduled to open over the next two years.

To reach the five-year revenue goal, Medifast would have to grow at a rate of 20 percent to 25 percent a year, said analyst Kurt Frederick of Wedbush Securities Inc. in San Francisco.

Frederick's own estimate has the company growing at about 15 percent a year, but his estimate will have to be recalculated to account for Medifast's push for international expansion into Mexico. Still, Frederick thinks the company will face growth challenges to reach the mark that MacDonald has set.

"It's definitely not going to be easy," Frederick said.

Eventually, MacDonald said, Medifast could open a production facility in Mexico that serves the Latin American market. But MacDonald said the Mexico facility likely wouldn't produce Medifast products to be shipped into the United States.

Those products, for at least the next few years, will still be made in Owings Mills, MacDonald said, a location to which Medifast is "committed."



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