Warner-Lambert Company

Background

Origin of the Company

[***Henry and Gustavus Pfeiffer acquired William Warner & Co. in 1908 and later on the name of the company changed through many acquisitions and mergers.]

WLs origins can be traced to 1856 when William Warner opened a drugstore in Philadelphia. After 30 years of experimenting with the formulation of pharmaceutical products, Warner closed his retail store and began a drug manufacturing business.

William Warner & Co. was acquired in 1908 by Henry and Gustavus Pfeiffer. Gustavus later wrote we changed thinking locally to thinking nationally. For the next 30 years the company made many acquisitions and by 1939, had 21 marketing affiliates outside the United States and several international manufacturing plants. The largest acquisition was Richard Hudnut Company, a cosmetics business, which was eventually sold in 1979.

Acquisitions & Mergers[***The company acquired and mergers many companies through many years and build a large transnational MNC with higher sales and growth throughout the world.]

During the 1950s and 1960s, the company continued to make acquisitions, both in the United States and overseas. In 1952, the company, now known as Warner-Hudnut, acquired Chilcott Laboratories, a pharmaceutical company founded in 1874. In 1955, with sales at $100 million, Warner-Hudnut merged with the Lambert Company to form the Warner-Lambert Pharmaceutical Company. The Lambert Companys largest-selling product was Listerine mouthwash, a product developed in 1879.

In 1962, American Chicle was acquired. American Chicle was formed in 1899 with the consolidation of three major chewing gum producers. The Halls cough tablets brand was acquired in 1964. In 1970, Schick wet-shave products were acquired. Also in 1970, WL merged with the pharmaceutical firm Parke, Davis, & Company (Parke-Davis). Parke- Davis was founded in 1866 in Detroit. In the 1870s, Parke-Davis collaborated with the inventor of a machine to make empty capsules for medications. This established the fore- runner of WLs Capsugel division, the worlds largest producer of gelatin capsules. In 1901, Parke-Davis introduced the first systematic method of clinical testing for new drugs. In 1938, Parke-Davis introduced the drug Dilantin for the treatment of epilepsy and in 1946, began marketing Benadryl, the first antihistamine in the United States. In 1949, Chloromycetin, the first broad-spectrum antibiotic was introduced.

Overall Sales & Growth[***In 1990, sales growth occurred in both the U.S. and international markets and in all worldwide business segments. About 52 percent of company sales were in the United States.]

The 1980s was a period of restructuring for WL. During the decade, the company divested more than 40 businesses, including medical instruments, eyeglasses, sunglasses, bakery products, specialty hospital products, and medical diagnostics. The divested businesses accounted for $1.5 billion in annual sales but almost no profit. In 1991, WL had operations in 130 countries and of its 34,000 employees (down from 45,000 in 1981), nearly 70 percent worked outside the United States. WL had 10 manufacturing plants in the United States and Puerto Rico and 70 international plants in 43 countries. Over the previous five years, WLs earnings grew 15 to 20 percent annually. In 1990, sales growth occurred in both the U.S. and international markets and in all worldwide business segments. About 52 percent of company sales were in the United States.

Warner-Lambert Business Segment[***Warner-Lambert Company had three core business segments.]

In 1990, WL had three core business segments: ethical pharmaceuticals, nonprescription health care products commonly referred to as over-the-counter (OTC), and confectionery products. Beyond these segments, WL had several other product sectors: empty gelatin capsules for the pharmaceutical and vitamin industries, wet shave products, and home aquarium products.

The Ethical Pharmaceutical Industry

The Market Share

[***Seven markets accounted for about 75 percent of the world market, with the largest single market, the United States, accounting for about 30 percent of the total.]

The ethical pharmaceutical industry involved the production and marketing of medicines that could be obtained only by prescription from a medical practitioner. Seven markets (United States, Japan, Canada, Germany, United Kingdom, France, and Italy) accounted for about 75 percent of the world market, with the largest single market, the United States, accounting for about 30 percent of the total. The pharmaceutical industry was very fragmented, with no single firm holding more than a four percent share of the market. The five largest firmsMerck (U.S.), Bristol-Myers Squibb (U.S.), Glaxo (U.K.), SmithKline Beecham (U.K.) and Hoechst (Germany)accounted for less than 15 percent of world market share.

The Growth of the Pharmaceutical Industry

[***The company had a rapid growth during the year of 1987.]

The pharmaceutical industry was also highly profitable. Between 1986 and 1989, the industry ranked first in the United States on both ROS and ROI. With new medical advances on the horizon and an aging population in the developed countries, the industry was expected to continue growing steadily. However, significant challenges were facing the drug companies. The cost and time to develop new drugs had grown substantially. The drug development cycle from synthesis to regulatory approval in the United States was 10 to 12 years. The average development cost per drug was $230 million (up from $125 million in 1987), with various phases of testing and clinical trials accounting for about 75 percent of the cost.

Risk in the Pharmaceutical R&D with Solutions[***Though the company faced several risks regarding product renewal, they have overcome with it by creative strategies.]

There was significant risk associated with pharmaceutical R&D. It was estimated that for every 10,000 compounds discovered, 10 entered clinical trials and only one was developed into a marketable product. Of those brought to market, only about 20 percent generated the necessary sales to earn a positive return on R&D expenditures. In 1990, the FDA approved just 23 new drugs, 15 of which were already approved in Europe. Nevertheless, R&D was the lifeblood of the industry, as explained by a senior WL manager:

Product renewal is critical. Firms must continue to generate a stream of new products. These need not be blockbusters. The key is new products. Eventually, each of these products will become a generic [unbranded] product so in any given year, there must be a certain percentage of new products.

If a firm did come up with a blockbuster drug, the rewards were enormous. New drugs sold at wholesale prices for three to six times their cost. ZantacTM, an ulcer drug sold by Glaxo, had worldwide sales of $2.4 billion in 1990. This was Glaxos only product in the top 200 best-selling prescription drugs. TagametTM, a competing ulcer drug produced by SmithKline Beecham, had 1990 sales of $1.2 billion.

Pressures to loosen down the price[***The growing use of price controls and restricted reimbursement schemes in international markets was reducing the flexibility of the drug companies to recoup R&D investments.]

Two other challenges faced the drug companies. Spiraling health care costs in the major markets were putting increased pressure on the drug companies to hold down their prices. The growing use of price controls and restricted reimbursement schemes in international markets was reducing the flexibility of the drug companies to recoup R&D investments. Finally, there was competition from generic drugs once a patent expired. Legislation passed in the United States in 1984 made it very easy for generic drugs to enter the market after the patent on the original drug expired. In the United States, 50 percent decreases in sales were not uncommon in the first year after a patent expired. In Europe, the degree of generic erosion was not as dramatic because once a branded drug was on a list of officially sanctioned drugs eligible for state reimbursement, a long lifespan for the drug was reason- ably certain.

Different Structure in Different Countries[***Consumers in France and Spain paid about 72 percent of the EC average and in Ireland and the Netherlands, prices were about 130 percent of the average.]

Although the chemical compounds of the major drugs were the same around the world, the pharmaceutical industry structure varied tremendously from country to country. In Europe, each of the 12 EC member states had different regulations for registering, pricing, and marketing drugs. Government health care systems paid for a majority of the consumer cost of drugs and the prices of drugs were fixed in negotiations between the drug companies and the government. The result was different prices in different countries and a growing problem with parallel imports. Consumers in France and Spain paid about 72 percent of the EC average and in Ireland and the Netherlands, prices were about 130 percent of the average. Most European governments had the legal authority to force the transfer of a drug patent from one firm to another, in the event that the firm with the patent was unwilling to manufacture the drug.

Consumption of Drugs[***There were also national differences in the type and amount of drugs consumed.]

There were also national differences in the type and amount of drugs consumed. In France, the consumption of drugs was the highest per capita in the world. In Japan, physicians made most of their income by dispensing drugs. Moreover, the Japanese government allowed high prices for breakthrough drugs in order to stimulate medical innovation. As well, many of the drugs used in Japan were unique to that market. For example, several best selling Japanese drugs dilated blood vessels in the brain, on the unproven theory that this reversed senility. In other parts of the world, the lack of controls over intellectual property made it very difficult for drug companies to operate.

Warner-Lamberts Pharmaceuticals Business[***The companys Pharmaceuticals business was expanded based on the selling of drugs, increase in the drug shares, increase in the R&D business.]

WLs ethical pharmaceutical line was marketed primarily under the Parke-Davis name. Included in the pharmaceutical sector was Warner-Chilcott, a manufacturer of generic prescription drugs primarily for the United States. Sales of WL ethical products were $1.6 billion in 1990, a 17 percent increase over the previous year. WL ranked 17th among the worlds leading drug firms by turnover.

WLs largest selling drug was Lopid, a cholesterol-reducing drug. In 1991, projected sales for Lopid were more than $480 million. Dilantin, an antiepileptic drug, had sales of $145 million and was a worldwide leader in its category. Other leading drugs were Loestrin, a contraceptive, and Accupril, a cardiovascular drug. Although the FDA postponed approval of Cognex by asking for more data, WL continued to have high expectations for the product and clinical testing continued.

The firms drug discovery program was focused on two areas: cardiovascular diseases, such as hypertension and congestive heart failure, and disorders of the central nervous system. In recent years, WL had made a major effort to strengthen its pharmaceutical R&D. Over the past five years, the number of scientists had increased 60 percent to 2,600 and 1991 R&D spending for pharmaceuticals was expected to be close to $350 million, an increase of 12 percent over 1990. These efforts were beginning to pay off: WL had several new pharmaceutical products awaiting U.S. FDA approval.

OTC Industry-An Overview[***The consumer made the buying decision, although often based on physician or pharmacist advice regarding OTC products.]

The OTC health care industry was structured very differently than the ethical drugs industry. With ethical drugs, there was a unique relationship between consumer and decision maker: consumers paid for the drugs but physicians made the buying decisions. As a result, the marketing of ethical pharmaceuticals was directed at prescribing physicians, who were not particularly concerned about prices. With OTC products, the consumer made the buying decision, although often based on physician or pharmacist advice. To compete successfully with OTC products, significant investments in consumer marketing and distribution were required. Some of the largest drug companies, such as Glaxo, had a corporate policy of staying out of the OTC market on the grounds that selling directly to consumers was very different than the medically oriented marketing of ethical drugs.

There were two broad classes of OTC health care products: 1) drugs that were formerly prescription drugs and 2) health care products developed for the nonprescription market, such as toothpaste, mouthwash, and skin care products. Moving a prescription drug to the OTC market required regulatory approval in most countries. The shift also required marketing expenditures of as much as $30 million a year and extensive consultation with physicians and pharmacists. Even though a prescription was not required, many OTC drugs would not succeed without continued physician recommendations, particularly in highly controlled retail environments like Germany and Japan. Pharmacists recommendations were also important. When WL switched the antihistamine, Benadryl, to the OTC market in 1985 after 40 years as a prescription drug, the company devised an extensive program for pharmacists based on product samples and promotional literature.

Why OTC is Popular?[***In the developing nations, shortages of more expensive prescription products made OTC drugs very popular.]

Between 1982 and 1990, global demand for OTC drugs grew at about seven percent annually and was expected to remain strong, particularly with increased pressure to reduce health care costs. In the developing nations, shortages of more expensive prescription products made OTC drugs very popular. Among the major types of OTC products were analgesics, antacids, cough, cold, and sinus medicines, skin preparations, and vitamins.

OTC in Different Countries[***The OTC products used differently in different countries. Considering the Example of Vicks, it had been used differently in different countries.]

The OTC drug industry was even more fragmented than the ethical pharmaceutical industry, particularly in Europe. According to one report, there were 15,000 registered brands in the European OTC market but only 10 could be purchased in seven or more countries. For example, the Vicks-Sinex cold remedy could be purchased in British supermarkets; in Germany it was available OTC but only in pharmacies; and in France it was available only by prescription. In Latin American countries where the state paid for drugs, there was little distinction between ethical pharmaceuticals and OTC drugs. In the United States, nonprescription products could be sold in any retail channel. In Canada, the United Kingdom, and Germany, some nonprescription drugs could be sold only in pharmacies.

Warner-Lamberts OTC Business[***During 1991, WL planned more than 20 new OTC product introductions in non- U.S. markets.]

Reflecting the increasing global acceptance of nonprescription health care products, WLs OTC sales increased 11 percent in 1990 to $1.5 billion. The largest product lines were Halls cough tablets with sales of $320 million and Listerine mouth- wash with sales of $280 million. Other leading brands included Rolaids antacid (number one brand in the United States), Benadryl antihistamine (the number one OTC allergy product in the United States), Lubriderm skin lotion (number three brand in the United States), and Efferdent dental products.

During 1991, WL planned more than 20 new OTC product introductions in non- U.S. markets. It was often necessary to adapt products to local markets to account for differences in product usage and government regulations. For example, there were more than 50 different formulations of Halls around the world. Halls was considered a cough tablet in temperate climate areas and a confection in tropical areas. In Thailand, Halls had a much higher amount of menthol than in most countries because Halls was sold as a cooling sweet. In some of the Asian and Latin American countries, the individual tablet, as opposed to the package, sold a large volume of Halls. Benylin cough medicine also had more than 50 different formulations, leading to the question raised by a WL manager: There are not 50 different kinds of coughs, why do we need 50 different formulations?

The Confectionary Industry

Four Segments

The confectionery industry consisted of four main segments: chocolate products (approximately 53 percent of the industry), non-chocolate products such as chewing gum (23 per- cent), hard candy (18 percent), and breath mints (6 percent). WL competed primarily in the chewing gum and breath mint segments.

Chewing Gum market[***With the introduction of Wrigleys chewing gum, the companys chewing gum market plunges and the sales goes high.]

The confectionery industry was highly concentrated on a global basis with the chewing gum segment the most concentrated. Although WLs American Chicle Group had once been the leading firm, the largest chewing gum company in 1991 was William Wrigley Jr. Co. (Wrigley) with $1.1 billion in annual sales in more than 100 countries. Wrigleys strategy had been focused and consistent for many yearssticks of gum sold at low prices. Wrigleys three main brands, Spearmint, Doublemint, and Juiceyfruit, were ubiquitous around the world. In the United States, Wrigley had the largest market share (48 percent), followed by WL (25 percent) and RJR/Nabiscos Beechnut brands. Canada was the only English-speaking country in the world where Wrigley products did not have a leading market share. WL had about 55 percent of the Canadian gum market, compared with Wrigleys 38 percent. A major trend in the food market in recent years had been toward healthy eating. This trend was reflected in the shift toward sugarless gum. In the United States, sugarless accounted for 35 percent of the chewing gum market and in Canada, it was 55 percent, the highest percentage in the world.

Breath Mints[***The breath mint category was referred to as candy plus because the mints contained additional breathe freshening ingredients.]

Although most breath mints were sugared confections, the breath mint category was referred to as candy plus because the mints contained additional breathe freshening ingredients. In this segment, RJR/Nabisco was the largest firm, with brands sold by the Lifesavers division holding about 40 percent of U.S. market share. WL brands held about 36 percent of the market. Tic Tac, a brand produced by the Italian company Ferrero, had a 12 percent share of the U.S. market. Several other brands with minimal U.S. sales were strong in international markets, such as Fishermans Friend, a U.K. product. In other countries such as Germany, Argentina, and Colombia, there were strong local competitors.

Strong Retail Sales Force[***There were several factors critical to success in this type of market: display and distribution, superb value, and excellent advertising.]

Confectionery companies operated on the premise that the majority of sales were by impulse. There were several factors critical to success in this type of market: display and distribution, superb value, and excellent advertising. The most important factor, according to WL confectionery managers, was display and distribution. Thus, there was a strong emphasis on packaging, on developing a wide distribution base, and on in-store display. In the United States, Germany and France, confectionery distribution to the consumer was dominated by large, efficient retailers (such as Wal-Mart in the United States). In contrast, in Italy, Spain, and Greece, South and Southeast Asia, and Latin America, the retail environment was very fragmented with many kiosks and mom-and-pop stores. A strong retail sales force was essential in these areas.

The major challenge faced by firms producing gums and mints was the threat of new market entrants. Traditionally, gums and mints generated higher profit margins than other confectionery segments. As a result, other firms in the candy industry, as well as snack food companies such as PepsiCo were making an effort to penetrate the gum and mint markets. In many of the developing countries and in particular Latin America, the imitation of best- selling brands by local firms was a regular occurrence.

The Market Share of Chewing Gum[***WL had begun seeking niche opportunities in other confectionery segments in recent years. Sales of WL confectionery products increased five percent to $1.1 billion in 1990.]

Although historically focused on chewing gum and breath mints, WL had begun seeking niche opportunities in other confectionery segments in recent years. Sales of WL confectionery products increased five percent to $1.1 billion in 1990. The leading brands were Trident (sales of $225 million and the worlds leading brand of sugarless gum) and Clorets gums and breath mints ($130 million). Other major brands were Adams brand Chiclets (candy coated chewing gum), Certs (breath mints), and Bubblicious (chewing gum). Trident was the product WL would likely lead with as a new market entry. Other brands had regional strengths. Chiclets was a major brand in Latin America and French Canada but a minor U.S. brand. The strongest market for Clorets was Southeast Asia.

Overall, WLs confectionery business had its largest market shares in the United States, Canada, Mexico, and other countries of Latin America. In Europe, the confectionery business was strongest in Greece, Portugal, Spain, and Italy. The company also had a strong presence in Japan and Southeast Asia. WLs customer mix varied from region to region. In the United States and Canada, customers tended to be adults using products with functional uses, such as breath mints and sugarless gum. In Latin America, where the emphasis was on fun products marketed mainly to young people, Chiclets, Bubblicious, and Bubbaloo were leading brands.

Aggressive Marketing[***Over the previous several years, an aggressive marketing effort in Japan had established a solid market position in chewing gum.]

Global product expansion had been a key objective of recent years. Outside the United States, the Clorets brand had become the largest selling confection product. Clorets was introduced in the United Kingdom and Portugal in 1990 and in France in 1991. The company had high expectations that Trident sugarless gum could be built into a major global brand by capitalizing on concerns for health and fitness. In China, where WL introduced its first three confectionery products in 1991, a new confectionery plant was under construction. Over the previous several years, an aggressive marketing effort in Japan had established a solid market position in chewing gum. To increase penetration into the Italian market, a joint venture was formed in 1990. Alivar, the new company, became Italys second largest non-chocolate confectionery company.

Organizational Structure

[***WL was organized into four major divisions reporting to the president and COO, Lodewijk de Vink: Parke-Davis Group, American Chicle Group, Consumer Health Products Group, and International Operations. All four groups had their headquarters in Morris Plains, New Jersey.]

The Parke-Davis Group included the U.S. pharmaceuticals operations, the Warner- Chilcott generics business, and the Pharmaceutical Research Division. The Research Division, based in Ann Arbor, Michigan, operated facilities in Michigan, Canada, the United Kingdom, and Germany. Parke-Davis manufactured in three plants in the United States, one in Canada, and two in Puerto Rico. Warner-Chilcott production came from a plant in the United States. Parke-Davis was responsible for U.S. pharmaceutical regulatory affairs.

The American Chicle Group was responsible for the U.S. confectionery business. American Chicle manufactured in two U.S. plants and sourced from plants in Canada, Mexico, Puerto Rico, and the United Kingdom.

The Consumer Health Products Group was responsible for U.S. consumer health care and shaving products. Consumer health care included the OTC pharmaceuticals marketed under the Parke-Davis name plus other OTC products such as Listerine and Lubriderm. Products were manufactured in two U.S. locations, Canada, and Puerto Rico. This group managed a research and development division that performed research for both the Consumer Health Products and American Chicle Groups. The division also performed a significant amount of research for WLs international affiliates.

International Operations was responsible for the manufacture and marketing of WLs pharmaceutical and consumer products outside the United States. Capsugel and Tetra, WLs two businesses that were run on a global basis, reported to the International Operations Group.

International Operations

Superior & Subordinates

[***The general manager, or country manager, for each affiliate reported directly to one of the geographic group presidents, who in turn reported to the head of International Operations.]

International Operations was divided into three operating groups responsible for 45 operating affiliates: Asia/Australia/Capsugel Group, Canada/Latin America Group, and Europe/ Middle East/Africa Group. The general manager, or country manager, for each affiliate reported directly to one of the geographic group presidents, who in turn reported to the head of International Operations. Below the geographic group presidents were staff managers responsible for the lines of business, such as the Europe/Middle East/Africa head of pharmaceuticals. Geographic group presidents also had staff functions, like sales and human resources, reporting to them. In some of the regions, multiple affiliates were grouped together for management and reporting purposes less than one general manager. For example, the German general manager was responsible for the Germany, Austria, and Switzerland affiliates. Other grouped affiliates included the United Kingdom and Ireland; France, Belgium, and Netherlands; Spain and Portugal; and Italy and Greece.

Inconsistent Mix Market Penetration

[***Across all three of WLs main business segments, acquisitions of confectionery or pharmaceutical firms had accounted for much of WLs international growth. As a result, most of the international affiliates were dominated by either a pharmaceutical or confectionery business. The result was an inconsistent mix of market penetration around the world.]

For example, the German affiliate had 95 percent of its sales in ethical pharmaceuticals, five percent in OTC products, and no confectionery business. In Switzerland, WL was a market leader in several confectionery lines. In the affiliates in France, Italy, and the United Kingdom, pharmaceuticals were dominant but there was also a reasonably strong confectionery presence. In Spain, Portugal and Greece, confectionery was the primary sector. In Japan, the largest business was Schick, with about 65 percent of the wet shave market, by far the highest share in the various countries where Schick was marketed. The affiliate in Canada was unique in that the pharmaceutical, confectionery, and consumer health care businesses were all mature, viable businesses with strong managers in each sector. In that sense, the Canadian unit was very similar to WLs operations in the United States.

Problems of Country manager[***The country manager focus more on countries profit rather than companys growth, but the management had overcome with it by maintaining an international operational staff officer which will play an advisory role between the Head Quarters and the country managers.]The country managers managed a full functional organization (marketing, finance, human resources, etc.) and were responsible for all WL products marketed in their country. In most of the affiliates, the country managers background corresponded with the dominant business sector of the affiliate. According to a senior WL manager:

In our affiliates we have only a handful of country managers capable of managing a diverse business. Very few managers can move from pharmaceuticals to consumer products or vice versa. In one Latin American affiliate, we had a business dominated by confection products. We put in a manager with a pharmaceutical background and the business failed. In Germany, we have tried several times to expand the consumer bus ness and failed each time. In Australia, we have problems with confectionery. Japan is one of the few exceptions. We had a country manager with a pharmaceutical back- ground who successfully grew a confectionery business.

Because the affiliates tended to be dominated by managers from either the confectionery or pharmaceutical side of the business, managers involved in the non-dominant businesses struggled to get resources. As a WL manager commented:

If, for example, you are a confectionery manager in a country with a small confectionery business, youre treated like the poor stepchild. Because these managers are not given the resources to grow their businesses, there is a tremendous amount of frustration. It is very hard to retain good managers because they are not given the opportunity or the resources to do the things you have to do to be successful.

To illustrate international operations, brief descriptions of the Germany and Brazil affiliates are provided.

Germanys Market

[***WLs operations in Germany, Austria and Switzerland were managed from Gdecke, A.G., WLs German affiliate. WL acquired Gdecke, a pharmaceutical firm founded in 1866, in 1928. In 1977, Parke-Davis German affiliate was merged with Gdecke. Prior to this, Parke-Davis and Gdecke were run as separate organizations.]

Within Germany, the Gdecke name was far better known than WL. Employees considered themselves Gdecke employees and the Gdecke name, along with Parke-Davis, was prominent in promotional literature and corporate communications. In 1991, Gdecke had about 1,400 employees, with 230 working in pharmaceutical R&D. Gdeckes business was primarily in ethical pharmaceuticals. There was one sales force for OTC and ethical products because in Germany, the OTC market was very small. Because prescription drugs were reimbursable, Germans tended to use drugs that were prescribed by their doctors, even if the drug was available as an OTC product.

Brazilian Market[***A strong pharmaceutical business based on Parke-Davis products was also established in Brazil.]

American Chicle entered the Brazilian market in the 1940s. When WL acquired American Chicle in 1962, the confectionery business in Brazil was well established under the Adams brand. A strong pharmaceutical business based on Parke-Davis products was also established in Brazil. However, the hyperinflation in the 1970s and the governments attempts to control inflation through price controls resulted in significant losses in the pharmaceutical business. WL decided to discontinue manufacturing and marketing pharmaceutical products in Brazil and licensed the Parke-Davis line of drugs to another Brazilian company. Since the products were marketed under the Parke-Davis name, WL maintained a close relationship with the licensing company for quality assurance purposes. The licensee, how- ever, had complete control over which products to produce and how to manage production, marketing, and distribution.