Pfizer Inc. is one of the leading research-based healthcare companies in the world. Following its June 2000 takeover of Warner-Lambert Company, Pfizer was organized into four groups: Pfizer Pharmaceuticals Group, Warner-Lambert Consumer Group, Pfizer Animal Health Group, and Pfizer Global Research and Development. Among the prescription drugs marketed by Pfizer Pharmaceuticals with annual revenues exceeding $1 billion are Norvasc, for the treatment of hypertension and angina; Lipitor, a cholesterol reducer; Zoloft, an antidepressant; Zithromax, an oral antibiotic; Diflucan, an antifungal product; and Viagra, the famous treatment for erectile dysfunction. Warner-Lambert Consumer markets a number of leading consumer brands, including such over-the-counter healthcare mainstays as Benadryl, Sudafed, Listerine, Visine, Rolaids, and Ben Gay; in the confectionery area, Trident, Dentyne, Certs, and Halls; Schick and Wilkinson Sword shaving products; and Tetra fish food. Pfizer Animal Health is a world leader in medicines for pets and livestock. On the development side, Pfizer Global R & D spends $4.5 billion a year shepherding candidates through the product pipeline, which at any one time can include more than 130 possible new products. R & D efforts also are aided by the 250 alliances that Pfizer has formed with academia and industry.
Pfizer's Early History
In 1849 Charles Pfizer, a chemist, and Charles Erhart, a confectioner, began a partnership in Brooklyn to manufacture bulk chemicals, Charles Pfizer & Company. While producing iodine preparation and boric and tartaric acids, Pfizer pioneered the production of citric acid, a product Pfizer continues to market to soft drink companies, using large-scale fermentation technology. By the end of the 19th century, Pfizer was producing a wide range of industrial and pharmacological products and had offices in New York and Chicago. In 1900 the company was incorporated in New Jersey as Charles Pfizer & Company Inc.
While Pfizer technicians became experts in fermentation technology, across the ocean Sir Alexander Fleming made his historic discovery of penicillin in 1928. Recognizing penicillin's potential to revolutionize healthcare, scientists struggled for years to produce both a high quality and large quantity of the drug. Experimentation with production became an imperative during the Nazi air raids of London during World War II. In a desperate attempt to solicit help from the community of American scientists, Dr. Howard Florey of Oxford University traveled to the United States to ask the U.S. government to mobilize its scientific resources.
Because of its expertise in fermentation, the government approached Pfizer. Soon afterward, Dr. Jasper Kane from the company laboratory began his own experiments. Initially using large glass flasks, Dr. Kane's experimentation then led to deep-tank fermentation. Later, the company announced its entrance into large-scale production with the purchase of an old ice plant in Brooklyn. Refusing government money, the company paid the entire $3 million for the purchase and within four months John McKeen (future chairperson and president) had converted the ancient plant into the largest facility for manufacturing penicillin in the world.
Early production, however, was not without its difficulties. The first yields of penicillin required constant supervision, and yet quality and quantity remained low and inconsistent. In one of those inexplicable quirks of history, however, a government researcher browsing in a fruit market in Peoria, Illinois, discovered a variant of the 'Penicillium' mold on an overripe cantaloupe. Using this variant, production suddenly increased from ten units per millimeter to 2,000 units per millimeter. By 1942 Pfizer divided the first flask of penicillin into vials for the medical departments of the Army and Navy; this flask was valued at $150,000. Mass production began in 1944, when Pfizer penicillin arrived with the Allied forces on the beaches of Normandy on D-Day. Meantime, in June 1942, Pfizer reincorporated in Delaware and went public with an offering of 240,000 shares of common stock.
Even as the government controlled production of the drug for the sole use of the Armed Forces, the public, aroused by miraculous results of penicillin, asked Pfizer to release the drug domestically. In 1943 John L. Smith, Pfizer president, and John McKeen, against the explicit regulations of the federal government, supplied penicillin to a doctor at the Brooklyn Jewish Hospital. Dr. Leo Lowe administered what was thought of as massive dosages of penicillin to several patients and cured, among others, a child suffering from an acute bacterial infection and a paralyzed and comatose woman. Smith and McKeen, visiting the hospital on Saturdays and Sundays, were witness to penicillin's curative effects on the patients.
Postwar Expansion for Pfizer: Terramycin and Beyond
Nevertheless, it was not until the end of the war when the federal government realized its mistake in restricting production of the drug. In 1946 Pfizer purchased Groton Victory Yard, a World War II shipyard, in order to renovate it for mass production of the new publicly accessible medicine. This marked Pfizer's first official entrance into the manufacturing of pharmaceuticals. In a few years the five-story building, equipped with 10,000 gallon tanks, produced enough penicillin to supply 85 percent of the national market and 50 percent of the world market. In 1946 sales already had reached $43 million.
Competition from 20 other companies manufacturing penicillin soon resulted in severe price reductions. The price for 100,000 units dropped from $20 to less than two cents. Furthermore, although the company could boast ownership of fermentation tanks 'exceeded in size only by those in the beer industry,' Pfizer's bulk chemical business decreased as former customers began establishing production facilities of their own. Pfizer's instrumental role in developing antibiotics proved beneficial to society, but a poor business venture.
All this was to change drastically under the new direction of President John McKeen. In 1949 McKeen, whose career at Pfizer began the day after he graduated from the Brooklyn Polytechnic Institute in 1926, was elevated to president and, later, chair of the company. Already responsible for increasing sales by an impressive 800 percent between 1939 and 1950, McKeen's business acumen became even more evident during the marketing campaign for Terramycin, which was launched in 1950. In the postwar years, pharmaceutical companies searched for new broad-spectrum antibiotics useful in the treatment of a wide number of bacterial infections. Penicillin and streptomycin, while helping to expand the frontier of medical knowledge, actually offered a cure for only a limited number of infections. Pfizer's breakthrough came with the discovery of oxytetracycline, a broad-range antibiotic that soon would prove effective against some 100 diseases.
The drug's remarkable capture of a sizable portion of the market was not due entirely to its inherent curative powers. Rather, it was McKeen's ability to promote the new drug that actually propelled Pfizer into the ranks of top industry competitors. McKeen's first accomplishment was the timely decision to market the antibiotic under a Pfizer trademark. Thus Terramycin, the drug's chosen name, launched Pfizer into its first ethical drug campaign. Lacking the resources other pharmaceutical companies had to promote their drugs, McKeen announced the 'Pfizer blitz,' whereby the company's small sales force used an unusual array of marketing strategies.
For the first time, the company circumvented traditional drug distributing companies and began selling Terramycin directly to hospitals and retailers. Pfizer's minuscule detail force (pharmaceutical salespeople) would target one small region at a time and promote their product to every accessible healthcare professional. The sales force left generous samples of the drug at every sales call, sponsored golf tournaments, and ran noisy hospitality suites at conventions. Surprised at the success of this tiny band of salespeople, which eventually would grow into a 4,000-person army, industry competitors reluctantly increased their own sales forces and, similarly, began promoting their products directly to physicians.
Taking the calculated risks of insulting the entire medical community, Pfizer ran lavish advertisements in the conservative Journal of the American Medical Association. The ad was greeted with a large degree of reservation and threatened the drug industry's abhorrence of 'hard sell' marketing. In an unprecedented move, the company had paid a prohibitive $500,000 to run the multipage ad. In two years the entire Terramycin campaign cost $7.5 million, and Pfizer became the largest advertiser in the American Medical Association's journal.
After 12 months on the market, Terramycin's sales accounted for one-fourth of Pfizer's total $60 million in sales. Yet problems with the company's advertising strategy were to surface soon. In 1957, while promoting a new antibiotic called Sigmamycin, a Pfizer advertisement used the professional cards of eight physicians to endorse the drug. John Lear, science editor of the Saturday Review, denounced this advertisement in a scathing attack. Not only were the names of the eight physicians fictitious, Lear claimed, but the code of Pharmaceutical Manufacturers Association prohibited soliciting endorsements from physicians. Moreover, Lear used the Pfizer ad to underscore and criticize what he saw as a trend toward the overprescription of antibiotics, exaggerated claims on drug effects, and concealment of possible side effects.
Pfizer was quick to defend their advertisement. The company upheld the reputability of the ad agency, William Douglas McAdams Inc., a highly respected firm responsible for the Sigmamycin campaign. While defending the drug and the clinical reports supporting the drug's efficacy, Pfizer admitted that the business cards were purely symbolic and, therefore, fictitious and, as a result, may have been misleading. The company accordingly changed the campaign.
John Lear's final attack on Pfizer expressed an unspoken industry complaint. Not only was it disturbing that such 'hard sell' tactics should actually prove successful, but so was Pfizer's status in the industry; as the company's recent past was in bulk chemical production, it was a relative newcomer to the industry of ethical drugs. Lear argued that the young company should have shown respect for the industry's formal and restrained method of conducting business. Pfizer, however, was not intimidated by the industry's attitude toward its advertising campaign; it was interested in claiming and maintaining a share of the market. If it meant breaking tradition, it was clear Pfizer was not going to hesitate.
Aside from its modern marketing campaigns, Pfizer was very successful at developing a diversified line of pharmaceuticals. Whereas many companies concentrated their efforts on developing innovative drugs, Pfizer generously borrowed research from its competitors and released variants of these drugs. Although all companies participated in this process of 'molecular manipulation,' whereby a slight variance is produced in a given molecule to develop greater potency and decreased side effects in a drug, Pfizer was particularly adept at developing these drugs and aggressively seizing a share of the market. Thus the company was able to reduce its dependence on sales of antibiotics by releasing a variety of other pharmaceuticals.
At the same time Pfizer's domestic sales increased dramatically, the company was quietly improving its presence on the foreign market. Under the methodical directive of John J. Powers, head of international operations and future president and chief executive officer, Pfizer's foreign market expanded into 100 countries and accounted for $175 million in sales by 1965. It would be years before any competitor came close to commanding a similar share of the foreign market. Pfizer's 1965 worldwide sales figures of $220 million indicated that the company might possibly be the largest pharmaceutical manufacturer in the United States. By 1980 Pfizer was one of only two U.S. companies among the top ten pharmaceutical companies in Europe, and the largest foreign healthcare and agricultural product manufacturer in Asia.
Pfizer's crowning success to its unorthodox business procedures involved McKeen's quest for diversification through acquisition. While competing companies within the industry preferred to keep $50--$70 million in savings, Pfizer not only kept a meager $25 million in cash, but was the only major pharmaceutical to use common equity to borrow capital. 'Not to have your cash working is a sort of economic sin,' McKeen candidly stated. Between 1961 and 1965 the company paid $130 million in stock or cash and acquired 14 companies, including manufacturers of vitamins, antibiotics for animals, chemicals, and Coty cosmetics.
McKeen defended this diversification strategy by claiming that prodigious growth had decreased overall profits while competitors, on the other hand, had neither grown nor profited from their conservative investments. Furthermore, Pfizer's largest selling drug, Terramycin, generated only $15--$20 million a year and thus freed the company from a dependence on one product for all its profits.
In 1962 Pfizer allotted $17 million for research and that same year McKeen announced plans for his 'five by five' program, which included $500 million in sales by 1965. Obviously, sales would not come from new pharmaceuticals, but from the company's accelerated rate of acquisitions.
McKeen never actually saw the company reach this goal during his presidency. In 1964 sales did surpass $480 million, but the following year Powers replaced McKeen as chief executive officer and president and inherited a company with almost half its sales generated from foreign markets and wide product diversification from 38 subsidiaries.
For the next seven years Powers continued to preside over the company's comfortable profits and sizable growth. In the absence of McKeen's style of conducting business, Powers directed Pfizer toward the more conservative and methodical approach of manufacturing and marketing pharmaceuticals.
Powers also guided the company in a new direction with an increased emphasis on research and development. With increased funds allocated for research in the laboratories, Pfizer joined the ranks of other pharmaceutical companies searching for the innovative and, therefore, profit making, drugs. Vibramycin, an antibiotic developed in the 1960s, was very profitable; by 1981 it generated sales of $250 million.
Emphasizing R & D at Pfizer in the 1970s and 1980s
In 1970 the company changed its name to the more modern-sounding Pfizer Inc. In the early 1970s Edmund Pratt, Jr., stepped in as company chairman and Gerald Laubach took over as Pfizer president. Although company assets reached $1.5 billion and sales generated $2 billion by 1977, Pfizer's overall growth was much slower through the period of the late 1970s and early 1980s. Increased oil prices caused comparable increases in prices for raw materials; low incidents of respiratory infections slowed sales for antibiotics; and even a cool summer in Europe reduced demands for soft drinks and, consequently, the need for Pfizer citric acids. All of these factors contributed to the company's slow rate of growth.
In light of this, the two new top executives significantly changed company strategy. First, funds for research and development reached $190 million by 1981; this marked a 100 percent increase in funding from 1977. Second, Pfizer began a comprehensive licensing program with foreign pharmaceutical companies to pay royalties in exchange for marketing rights on newly developed drugs. This represented a noticeable change from the years Powers supervised international operations. Under his directive, Pfizer chose to market its own drugs on the foreign market and establish joint ventures or partnerships only if no other option was available.
The two new drugs--one called Procardia, a treatment for angina licensed from Bayer AG in Germany for its exclusive sale in the United States, and the other called Cefobid, an antibiotic licensed from a Japanese pharmaceutical company—′omised to be highly profitable items. Furthermore, drugs discovered from Pfizer's own research resulted in large profits. Sales for Minipress, an antihypertensive, reached $80 million in three years, and Feldene, an anti-inflammatory, generated $314 million by 1982.
By 1983 sales reached $3.5 billion and Pfizer was spending one of the largest amounts of money in the industry on research ($197 million in 1983). Pratt, in a final move to shed Pfizer of its former idiosyncracies, began selling some of its more unprofitable acquisitions.
Interestingly, one Pfizer product acquired through a company acquisition in the 1960s experienced a market rediscovery during the 1980s. Ben Gay, a well established liniment marketed for relief of arthritis pains through the late 1970s, found new patrons in the health-conscious 1980s. Discovering that sales for Ben Gay were increasing when marketed as a fitness aid, Pfizer began an advertising campaign by employing athletic superstars to endorse the drug. This campaign cost the company $6.3 million in 1982.
By 1989, Pfizer operated businesses in more than 140 countries. Net sales that year were $5.7 billion, but net income declined. Research and development expenditures had quadrupled during the 1980s, and Pfizer planned to continue investing heavily in research and development. Procardia XL was launched in 1989, and Diflucan, an antifungal agent, received Food and Drug Administration (FDA) approval. Globally, Pfizer chalked up $150 million in sales--in 14 countries--of its Plax dental rinse.
Blockbuster Introductions Marking the 1990s for Pfizer
Pfizer headed into the 1990s with numerous drugs in development, including preparations in the areas of anti-infectives, cardiovasculars, anti-inflammatories, and central nervous system medications. Net sales in 1990 reached $6.4 billion. Procardia rapidly became the most widely prescribed cardiovascular drug in the United States. Research and development costs rose 20 percent, in keeping with Pfizer's determination to invest heavily in new drugs.
Pfizer International launched 37 new products worldwide in 1990. The company's antifungal drug, Diflucan, became the world's leading drug of its kind during this time. Sales of Pfizer's newest products accounted for 30 percent of all pharmaceutical sales, up from 13 percent in 1989.
Pfizer entered the decade facing controversy about heart valves produced by Shiley, Inc., a Pfizer subsidiary. In 1990, 38 fractures of implanted valves were reported. Pfizer instituted a policy of compensating those with fractured valves. Shiley was sold later in the decade to Sorin Biomedica S.p.A., a subsidiary of Fiat S.p.A., for $230 million.
In 1992, Pfizer received final FDA approval for Norvasc, used in treating angina and hypertension. Zithromax, an antibiotic developed to treat outpatient pneumonia, tonsillitis, and pharyngitis, also hit the market that year after FDA approval, as did the antidepressant Zoloft. By the late 1990s, all three of these drugs had reached blockbuster status&mdashhieving annual sales of more than $1 billion. Net sales in 1992 were $7.2 billion, with a net income of $811 million, and research and development expenses hit $863 million. Pfizer's chairperson and CEO of 19 years, Ed Pratt, retired and was succeeded by William C. Steere, Jr.
Although the early 1990s were marked by a wave of mergers and acquisitions in the global pharmaceuticals industry, Pfizer declined to join in, and was instead content to build its product pipeline organically rather than through acquisition. By 1995, in fact, the R & D budget hit $1.3 billion. The one major acquisition that the company did complete during this period came not in the area of human pharmaceuticals but in the animal health realm. In 1995, Pfizer spent $1.45 billion for the animal health unit of SmithKline Beecham plc, the largest acquisition in Pfizer history. The purchase transformed the company's Animal Health Group into one of the largest providers of medicines for both livestock and pets, with remedies for more than 30 species, including anti-infectives, antiparasitics, anti-inflammatories, and vaccines.
Not content with its own rich product pipeline, Pfizer entered into a series of partnerships whereby it comarketed drugs developed by smaller pharmaceutical firms, firms that were attracted by Pfizer's powerful sales force. In 1997 Pfizer helped Warner-Lambert bring Lipitor, a cholesterol-lowering pill, to market. Lipitor soared to the top of the anticholesterol niche in the United States, achieving sales of $865 million in 1997 and $2.2 billion in 1998. Another 1997 introduction of a comarketed drug was Aricept, which was developed by Japan's Eisai and quickly became the leading drug prescribed to treat the symptoms of Alzheimer's disease.
Focusing ever further on pharmaceuticals, Pfizer in 1998 sold its Medical Technology Group in four separate transactions: Valleylab was sold to U.S. Surgical Corporation for $425 million; AMS to E.M. Warburg, Pincus & Co., LLC for $130 million; Schneider to Boston Scientific Corporation for $2.1 billion; and Howmedica to Stryker Corporation for $1.65 billion. These transactions, however, were overshadowed that year by Pfizer's introduction of Viagra, a pill for treating male impotence, or what the company called 'erectile dysfunction.' By far the most famous of the new 'lifestyle drugs,' Viagra was an instant blockbuster: more than 350,000 prescriptions were written in the first three weeks, and sales for 1998 totaled $788 million; sales exceeded $1 billion in 1999. Less than a year after the launch of Viagra, Pfizer began comarketing Celebrex, which had been developed by G.D. Searle & Co., then a unit of Monsanto Company. Celebrex, the first of a new category of pain drugs called Cox-2 inhibitors, was approved for the treatment of arthritis pain and inflammation. The new drug became the most successful pharmaceutical launched in U.S. history, with 19 million prescriptions written in the first 12 months; sales during 1999 alone exceeded $1.4 billion.
Having participated in three record-setting launches in the late 1990s, Pfizer was one of the fastest growing drug companies in the world in revenue terms. Sales increased from $11.31 billion in 1996 to $16.2 billion in 1999. The overall growth for the 1990s was even more impressive as revenues increased 284 percent from the 1989 total of $4.2 billion. During this same period, Pfizer increased its R & D budget sixfold, reaching nearly $2.8 billion by 1999, or more than 17 percent of sales—¯ong the top levels in the industry.
The company was not without its problems, however, particularly as a series of setbacks beset its drug development efforts. Trovan, an antibiotic that Pfizer hoped would be a blockbuster, ran into trouble during clinical studies following reports that it killed some patients. Development stopped on an experimental drug for diabetic nerve damage. Zeldox, an antipsychotic drug, and Relpax, a migraine treatment, saw their development delayed. In addition, sales of Viagra suffered at least a temporary setback following reports that some users of the drug had died of heart attacks. It was with this somewhat shaky product pipeline as a backdrop that Pfizer entered into a battle for control of Warner-Lambert in late 1999, a battle that Pfizer won early the following year.
Early Histories of Warner and Lambert
Warner-Lambert Company was the product of the 1955 merger of Warner-Hudnut, Inc. and the Lambert Pharmacal Company. Warner was founded in the late 19th century by William R. Warner, a Philadelphia pharmacist who had earned a fortune by inventing a sugar coating for pills. In 1886 he formed William R. Warner & Company and began making drugs. In 1908, several years after Warner's death, the company was acquired by Gustavus A. Pfeiffer & Company, a patent medicine company from St. Louis. Pfeiffer retained the Warner company name, moved its headquarters to New York, and began a series of acquisitions that included Richard Hudnut Company, a cosmetics firm acquired in 1916, and the DuBarry cosmetic company. By the 1940s, some 50 companies had been acquired during the Warner company's history.
Elmer Holmes Bobst arrived at Warner in 1945, already a veteran executive of the pharmaceutical industry and a multimillionaire. As president of Hoffmann-La Roche's U.S. office, he had proved instrumental in acquiring for the Swiss company a large share of the U.S. drug market. Many observers were surprised that Bobst accepted the position at Warner; he was then 61 years old, wealthy, and could have settled into a comfortable retirement.
Nevertheless, when Gustave A. Pfeiffer, Warner's chairperson and the only surviving member of the original founding family, approached Bobst with an offer of the presidency, he accepted. Nearly 30 years earlier, Bobst had been asked to join Warner as the head of its pharmaceutical division but declined when the Pfeiffer family refused to sell Bobst any of the company stock (the family held all the common stock). By the mid-1940s, however, Bobst had proved his abilities, and Pfeiffer readily offered the job on Bobst's terms; Bobst was hired and allowed to purchase 11 percent of the common stock. By 1955, Bobst's holdings were worth more than $3 million.
What Bobst inherited with his new position was a family-operated company suffering from an aging product line and antiquated facilities. Although the Hudnut cosmetic line accounted for most of the company's $25 million in sales, that product line was barely turning a profit. In an effort to improve the image of the cosmetics production, Bobst renamed the firm Warner-Hudnut in 1950.
Bobst's managerial style was well suited to the company's policy of growth through acquisition. Moreover, his experience with high-level industry and political affairs enabled him to hire a new management team of accomplished executives and public figures. Successful investment bankers, business executives, and political officials were brought in, notably Anna Rosenberg, the company's manager of industrial and public relations, who was once the U.S. assistant secretary of defense, and Alfred Driscoll, later Warner's president, who had served as governor of New Jersey for seven years.
In 1952, Bobst made his first major acquisition, purchasing New Jersey Chilcott Laboratories, Inc. Chilcott earned its reputation as a manufacturer of ethical drugs in large part through its development of Peritrate, a long-acting 'vasodilator,' which enlarged constricted blood vessels. Three years later Bobst arranged a merger between his company and Lambert Pharmacal.
Lambert Pharmacal's history is tied to that of the oral antiseptic Listerine. Dr. Joseph Lawrence developed the original formula for Listerine in the 1870s. Lawrence sold his formula in 1881 to Jordan Wheat Lambert, who founded the Lambert Pharmacal Company to make and sell Listerine. The product became widely popular, particularly under the advertising strategy of Gordon Seagrove, who joined Lambert in 1926 after leaving his job as a calliope player in the circus. Seagrove made Listerine a household staple by promoting its ability to cure halitosis, sore throats, and dandruff. The advertising copy for one magazine ad depicted a man encouraging a woman to continue massaging Listerine into his head, with the tagline 'Tear into it, Honey--It's Infectious Dandruff!'
Bobst had met the president of Lambert, Edward Williams, at a meeting of the American Foundation for Pharmaceutical Education, and the two decided that their operations, each producing different but reputable products, would complement one another. Bobst was particularly interested in gaining access to Lambert's well-organized distribution network, which incorporated modern marketing techniques previously unavailable at Warner-Hudnut's. Furthermore, Williams brought a strong background in the management of pharmaceutical companies, enhancing Bobst's accomplished executive team, which had little experience in the pharmaceutical industry. When Warner and Lambert merged in 1955 to form Warner-Lambert Company, former governor Alfred Driscoll was named president of the new company.
Growing Through Acquisition: Warner-Lambert in the 1960s and 1970s
The new company quickly outgrew its New York headquarters and so relocated to Morris Plains, New Jersey, a suburb of New York City, in 1956. Acquisitions were soon to follow. Warner-Lambert acquired Emerson Drug, maker of Bromo-Seltzer, in 1956. Six years later, the company acquired American Chicle, maker of Chiclets and other chewing gums, for about $200 million in stock. American Chicle had been formed in 1899 through the merger of several major U.S. gum producers. Many industry analysts criticized the high price paid for American Chicle; in 1962, the company's net income for the year was less than $10 million. By 1983, however, after expanding into foreign markets, Chiclet sales were reaching the $1 billion mark. Ward S. Hagan, chairperson of American Chicle, called its gum and mint business 'the largest in the world.'
Meanwhile, the success of Peritrate, the drug that had come to Warner-Hudnut through that company's purchase of Chilcott Laboratories, was the cause of some controversy. Peritrate proved useful in a wider application of treatments than originally allowed, and the FDA approved of Peritrate's 'new drug' usages in 1959. Over the next several years, however, Warner embarked on a controversial Peritrate advertising campaign. Appearing in several medical journals, including the Journal of the American Medical Association, ten-page ads advocated the use of Peritrate not only for the treatment of angina, but as a 'life-prolonging' prophylactic for all cardiac patients. The advertisement, based on the results of one study, was released at a time when the FDA had initiated an increasingly aggressive policy of evaluating claims for drug effectiveness. Even as the director of the study refuted the advertisement claims, Warner-Lambert executives stood by the claims for the effectiveness of their drug. By 1966, however, when an estimated 56 percent of the 3.1 million people afflicted by heart disease used Peritrate, the government, under the directive of the FDA, seized a shipment of the drug, bringing charges against the company's unapproved advocacy of an even wider usage for the drug.
Concurrently, Listerine continued to increase in popularity under its new ownership; by 1975, the oral antiseptic held a sizable portion of the $300 million market. Warner-Lambert continued to invest heavily in advertising for Listerine. For years, Listerine had been advertised as a preventative measure against colds and sore throats, and, during the Asian flu epidemic of 1957, Bobst personally placed an ad in Life magazine promoting Listerine's ability to resist the sickness. The company's advertising agency had rejected the ad earlier, since its claims were unsubstantiated, but the promotion resulted in sales increases of $26 million for the year.
By 1975, the Federal Trade Commission (FTC) had begun to investigate the Listerine advertisements. The FTC disputed the cold prevention claims of Listerine as insupportable and ordered the company to embark on a disclaimer ad campaign amounting to $10 million, a figure equal to the company's average annual advertising expenditure between 1962 and 1972. The FTC argued that only corrective disclaimers could educate the consumer, and, in 1978, the Supreme Court upheld the FTC's order.
During the 1970s and 1980s, Warner-Lambert made several acquisitions, including cough drop manufacturer Smith Brothers, American Optical, and Schick Shaving. The latter, which was acquired in 1970, traced its origins to the 1920s when Colonel Jacob Schick, inspired by the repeating rifle, invented the Magazine Repeating Razor, which eventually was redubbed the Schick Injector razor.
Warner-Lambert also acquired Parke, Davis & Co. in 1970. The company was founded in Detroit in 1866 as Parke-Davis by Hervey C. Parke and George S. Davis. Among the numerous medical innovations marking the history of Parke, Davis were the 1938 development of Dilantin, which became the drug of choice for the treatment of epilepsy; the 1946 introduction of the first antihistamine, Benadryl; and the 1949 discovery of chloromycetin, a broad-spectrum antibiotic.
The acquisition of Parke, Davis met with some resistance. The Antitrust Division of the Justice Department launched an investigation of the proposed merger. According to the chair of the House Judiciary Committee, the merger would raise 'serious problems' because it had the potential to limit competition and create a monopoly. Upon approval, the merger would result in combined revenue of $1.7 billion and would rank the new company among the 100 largest industrial companies in the United States.
On November 12, 1970, the Justice Department announced that it would not challenge the merger despite the Antitrust Division's recommendation to the contrary. The department referred the matter to the FTC, which held concurrent authority to enforce the Clayton Act. A day later, the merger was completed. By 1976, however, the FTC ordered the company to sell several units of its Parke, Davis subsidiary that produced specified drugs. Those units producing thyroid preparations, cough remedies, cough drops and lozenges, normal albumin serum, and tetanus immunoglobulin would have to be sold to restore competition in those product lines.
Satisfied with the FTC's actions, S. Burke Giblin, chair and CEO of Warner-Lambert at the time of the ruling, nevertheless faced several other challenges in the ensuing years. In 1976, Warner-Lambert disclosed figures to the Securities and Exchange Commission (SEC) concerning illegal payments abroad, announcing that more than $2.2 million 'in questionable payments' had been uncovered in 14 of the 140 countries in which Warner-Lambert conducted business.
Only months later an explosion at an American Chicle plant in Queens, New York, killed six people and injured 55. After a year of investigation, a grand jury indicted the company and four of its officials on charges of reckless manslaughter and criminally negligent homicide. The charges were based on reports that the fire department had warned the company about the explosive potential of magnesium stearate dust used as a gum-machine lubricant. Contending that the charges were 'outrageous' and unwarranted, company executives appealed the case. In 1978, a state judge dismissed the charges, citing 'crystal clear and voluminous evidence' that the company had tried to eliminate the danger of an explosion. The following year, however, the New York State court's appellate division voted to restore the indictments. Finally, in 1980, the state's highest court once again dismissed all charges in connection with the explosion.
Another controversy involved Warner-Lambert's Benylin cough syrup product, which was made available without a prescription in 1975. In response to questions regarding the cough syrup's effectiveness, the FDA ordered the drug back on a prescription-only status, and, after seven years of deliberation, a settlement finally was reached in which the FDA approved the reinstated over-the-counter sale of the drug.
In 1978, Warner-Lambert purchased Entenmann's Bakery for $243 million in cash. By 1982, Entenmann's had become Warner-Lambert's most profitable consumer division, with sales reaching $333 million and an annual growth rate of 19 percent. During this time, however, a rumor was started that Entenmann's profits were supporting the Reverend Sun Myung Moon's Unification Church. Since the source of the rumor was said to have come from Westchester County in New York, Warner-Lambert took out an ad in the county newspaper denying the alleged connection. Nevertheless, the rumor continued to circulate and actually received a large amount of publicity in the Boston, Massachusetts area. It was reported in some places that Entenmann's delivery and sales staff were being harassed, and one Rhode Island church urged a boycott of the baked goods. When sales growth began to slip, Warner-Lambert mailed a letter to 1,600 churches in New England describing Entenmann's history as a family-owned business for 80 years before it was purchased. As Entenmann's profits continued to slip, Warner-Lambert sold the bakery to General Foods for $315 million in 1982.
The late 1970s had proved financially unstable for Warner-Lambert. Profit margins were off by 40 percent in 1979, the majority of revenues came from the sale of consumer goods, and the company was considered a potential takeover candidate. One critic characterized it a 'floundering giant.' That year, Ward S. Hagan replaced Bobst as chairperson, while Joseph D. Williams assumed the chief executive office. Hagan and Williams then embarked on a restructuring program with the goal of revitalizing the pharmaceutical operations and trimming unprofitable and noncore businesses.
Restructuring and Refocusing on Core Areas in the 1980s and 1990s
Five unprofitable subsidiaries, including American Optical and Entenmann's, were divested between 1982 and 1986, providing Warner-Lambert with capital of nearly $600 million. At the same time, such company programs as the 'Total Production System' aimed to increase productivity by cutting downtime, reducing paperwork, and creating a more flexible work environment. Hagan and Williams closed or consolidated 24 plants in foreign and domestic locations, while reducing the company labor force by almost half, from 61,000 to 32,000. Research for new drugs at the Parke, Davis division was supported by a 20 percent increase in budgetary funds during 1983 to $180 million.
Despite its improved financial condition, Warner-Lambert came under criticism, particularly for its 1982 purchase of IMED Corp., a small hospital supply manufacturer. Many found Warner-Lambert's $468 million purchase, 23 times IMED's earnings, exorbitant. IMED was the market leader, with 35 percent of sales in the hospital supply field and continued annual sales growth of 50 percent. The company, however, was beset with problems. IMED's executives apparently concentrated on short-term sales goals, at the expense of new product development. In fact, a management conflict between IMED's manufacturing and research and development executives caused many important employees to resign in frustration. In 1986, Warner-Lambert sold IMED and some of its affiliates to the Henley Group, Inc. for $163.5 million.
Williams, who was given the additional duties of chairperson during Warner-Lambert's turnaround period, was able to report that return on equity had increased from nine to 32 percent from 1979 to 1986, as sales diminished through divestments and profits held fairly steady. Investing in research and development and luring industry talent from competing companies, Williams hoped to develop and increase sales of high-margin prescription drugs, such as Lopid, a cholesterol-reducing drug that received positive publicity in the late 1980s. A trend among consumers toward treatment without medication, however, as well as swelling support for reform of the healthcare industry--and the attendant possibility of price controls--caused uncertainty among ethical drug producers. Business also was threatened by a late 1980s recession and discounting in the consumer goods segment.
In anticipation of these potentially adverse market forces, a new chairperson and CEO, Melvin R. Goodes, announced yet another reorganization of Warner-Lambert late in 1991. The plan called for a 2,700-person layoff, reorganization of the global management scheme, and consolidation of operations into two groups: pharmaceuticals and consumer products. Goodes also began to concentrate the company's marketing efforts on three primary geographic markets: North America, Europe, and Japan. The company invested $1.3 billion in advertising and promotion and $473 million in research and development, apparently banking on its consumer goods, which still constituted 60 percent of annual sales in 1992.
That year, Warner-Lambert became the fourth company to enter the competitive and controversial market for transdermal nicotine patches. Its prescription smoking cessation device, branded Nicotrol, was strongly promoted through direct consumer advertising, and the product enjoyed early success. Sales, however, quickly declined in 1993; Warner-Lambert's late entry into the segment, chronic product shortages, a lower than expected success rate, side effects, and, especially, reports that some users had suffered heart attacks, all led to declines in sales.
In 1993, the company became the first to win approval from the FDA for a drug (Cognex) that retarded the progression of Alzheimer's disease. Warner-Lambert also formed joint ventures with Glaxo Holdings plc and Wellcome plc to orchestrate the movement of the companies' drugs from prescription to over-the-counter and generic markets. Another development in 1993 was the acquisition of Wilkinson Sword, a maker of shaving products and toiletries and a business that fit well alongside Schick. Wilkinson Sword traced its origins back to 18th-century London, where in 1772 Henry Nock began making guns and bayonets. James Wilkinson, a son-in-law of Nock, soon became a partner in the enterprise and then inherited the company in 1805. Wilkinson's son Henry joined the firm and expanded the business into sword making. The manufacturing of straight razors began in 1877.
The critical drug development front showed only mixed results for Warner-Lambert in the early 1990s. Lopid, whose sales had peaked at $556 million in 1992, went off patent in January 1993, resulting in significant and immediate generic competition and plummeting sales. Meantime, sales of Cognex were disappointing. Neurontin, which had been approved for the treatment of epilepsy, also got off to a slow start, although by 1998 sales had hit a solid $514 million. Sales of Accupril, a cardiovascular drug, were $175 million in 1994; by 1998 sales had increased to $454 million. In the OTC realm, Warner-Lambert helped the newly merged Glaxo Wellcome plc bring Zantec 75 heartburn treatment to market in 1996. The alliance ended in 1998, however, when Warner-Lambert bought the U.S. and Canadian rights to the product, which that year achieved sales of $168 million.
Two key pharmaceutical introductions marked 1997. Following its approval by the FDA in December 1996, Lipitor was launched in February of the following year. This drug was used to reduce cholesterol levels and proved to work faster and more effectively than other available remedies. As a result, Lipitor became the blockbuster pharmaceutical long sought by Warner-Lambert and was in fact the first prescription drug to achieve $1 billion in worldwide sales in its first year on the market. Sales in 1998 reached $2.19 billion.
The other 1997 launch, Rezulin, also got off to a fast start--posting $750 million in 1998 sales--but then ran aground. Launched in March 1997 as a breakthrough treatment for the most common kind of diabetes, type 2 diabetes, Rezulin was by March 1999 the subject of an FDA investigation into its safety, after 30 people in the United States who were taking the drug died after developing liver problems. The FDA at first allowed the drug to continue to be sold with a change in the labeling requiring strict monitoring of liver function. In 2000, however, Rezulin was pulled from the market.
The Rezulin setback and the lack of any blockbusters in the pipeline that were close to market provided the impetus for Warner-Lambert's acquisition of Agouron Pharmaceuticals, Inc. for about $2.1 billion in stock in May 1999. Agouron had been founded in 1984 by several University of California at San Diego scientists who pioneered in computer-aided drug design. The method employed by Agouron involved first understanding the structure of disease-causing proteins in the body and then using computers to design pharmaceuticals that can inhibit the proteins' activity. Agouron had been focusing its development efforts in the areas of oncology and virology, and its first product was Viracept, one of the so-called protease inhibitors being used to treat HIV/AIDS. Viracept was soon considered the top drug in its class because it was more convenient to use and had slightly fewer side effects; sales thereupon totaled $530 million in 1998. Agouron's product pipeline was filled with promising new drugs, including treatments for cancer, macular degeneration (which affects the eyesight), and the common cold, in addition to more AIDS therapies.
Pfizer's Takeover of Warner-Lambert in 2000
Goodes retired from his position as CEO and chairman of Warner-Lambert in May 1999, with the company's president, Lodewijk J.R. de Vink, taking on Goodes's titles as well. In early November of that year, as drug industry consolidation was continuing, Warner-Lambert agreed to a nearly $70 billion merger with American Home Products Corporation (AHP). Pfizer, not wanting to lose its 50 percent of the revenues from the sale of the blockbuster Lipitor--with sales nearing $4 billion per year--and seeking to bolster its product pipeline through the addition of Agouron, stepped in within hours with a hostile bid exceeding AHP's offer. Warner-Lambert attempted to fend Pfizer off, even bringing in a third party, the Procter & Gamble Company (P & G), to discuss a three-way deal with P & G and AHP. P & G soon dropped out of the picture when its stock price plummeted on news of the talks. Finally, in early February 2000, Pfizer and Warner-Lambert reached agreement on what was initially an $84 billion merger, ending the largest hostile takeover action in U.S. history. AHP received a breakup fee of $1.8 billion, which was believed to be the largest such payment ever made.
The merger was completed in June 2000 in what ended up being a $116 billion stock swap. The combined company retained the Pfizer Inc. name, with the consumer product lines of the two firms combined within a unit called Warner-Lambert Consumer Group. The FTC forced the firms to complete a number of relatively minor divestitures. The new Pfizer boasted pro forma 1999 revenues of $27.3 billion, making it the world's number two drug company, trailing only Aventis. The company had the industry's largest R & D budget, totaling $4.7 billion in 2000, as well as what was generally considered to be the industry's top sales and marketing operation. In terms of prescription drugs, Pfizer now marketed eight products with annual sales in excess of $1 billion. The Warner-Lambert Consumer Group was a leading marketer of OTC healthcare, confectionery, and shaving brands, with 1999 pro forma revenues of $5.5 billion. The Pfizer Animal Health Group was the world leader in medicines for pets and livestock, with 1999 sales of $1.3 billion. William C. Steere continued at the helm of Pfizer in the initial months following the merger, but was slated to retire in early 2001 and be replaced by the company's president and COO, Henry McKinnell. The company veteran, who joined Pfizer in 1971, was faced with the challenges of integrating the staffs and cultures of Pfizer and Warner-Lambert, healing whatever wounds might be left over from the bruising takeover battle, and restoring investor confidence in the company's product pipeline. McKinnell was aiming to achieve annual cost savings of $1.6 billion by 2002 through the elimination of redundant activities and the centralizing of such operations as the two companies' distribution systems. Two major product launches were anticipated to occur in 2001: Zeldox, an antipsychotic drug, and Relpax, a migraine treatment.
Source: www.fundinguniverse.com
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