Smithkline Beckman Corporation

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Smithkline Beckman Corporation

One Franklin Plaza
Philadelphia, Pennsylvannia 19101
U.S.A.
(215) 751-4000

Public Company
Incorporated: June 29, 1929
Employees: 30,500
Sales: $3.257 billion
Market Value: $6.854 billion
Stock Index: New York Geneva Basle Zurich Paris

SmithKline Beckman, a pharmaceutical company that rose from relative obscurity to become a manufacturer of one of the largest selling drugs in the history of the industry, has entered the 1980’s confronting such problems as falling stock prices and decreased earnings estimates. Wall Street analysts have presently become critical of the company that once generated “Tagamania,” a phrase coined from the unprecedented performance of the company’s ulcer-curing drug called Tagamet.

Long before Tagamet had been developed John K. Smith, along with his partner John Gilbert, opened an apothecary in Philadelphia in 1830. Aside from manufacturing extracts, elixirs, syrups, tablets and pills, the company sold a variety of consumer products, including paint, varnish oil, chemicals, window glass and vials. John K. Smith was later joined by his brother George K. Smith who became one of the earliest advocates of product purity and treatment reliability. He was also one of the first pharmacists to market drugs directly to doctors.

In 1846, during the U.S. war against Mexico, George K. Smith & Company supplied quinine and other pharmaceuticals to U.S. troops. During the Civil War the company’s drugs found their way to Bull Run, Antietam and Gettysburg. With the promotion of Mahlon Kline, an employee who moved from bookkeeper to eventual partner in the firm, the company name changed to Smith, Kline & Company. Mahlon Kline’s influence in both the company and the industry at large led him to become president of the Philadephia Drug Exchange. By 1887 company sales reached $700,000.

Several years later Smith, Kline & Company merged with French and Richards & Company to become Smith, Kline & French Company. During World War I the newly formed company supplied, among other drugs, 50,000 bottles of aromatic spirits of ammonia to U.S. troops. Smith, Kline & Company pharmaceuticals were also indispensable in the war against the influenza epidemic on the home front. Even as one-third of their own employees suffered from the epidemic, the company efficiently distributed the medication.

By the early 1930’s Smith Kline & French (a new name inadvertently adopted when, in the process of reorganization, a comma was accidentally dropped) was on the verge of releasing a new line of pharmaceuticals. In 1932 Benzedine Inhaler, a nasal inhaler, was introduced to the market, and by 1936 company sales were between $8 and $9 million. Then in 1944 Dexedrine, a modified amphetamine, was released.

However, Smith Kline & French’s greatest contribution at the time was the development of Thorazine. Using research from Rhone-Poulenc, a French pharmaceutical manufacturer, Smith Kline & French released this drug for use in neuropsychiatry. After an initial display of skepticsm from the psychoanalytic community, Thorazine proved an actual corrective of mental malfunctioning. From 1954 onward, the year the drug was released, the number of institutionalized mental patients decreased significantly.

Despite pioneering psychoactive drugs, and even despite record company sales and earning figures, Smith Kline & French did not fare well in the 1950’s and 1960’s. No new discoveries promised to replace Thorazine once its patent ran out in 1970. Furthermore, company management seemed divided about the future of the firm while overseas operations remained weak and largely ineffectual. During this period of time hundreds of employees were fired.

By the 1970’s a young group of executives emerged to lead the company out of its decline and into a decade of achievement yet to be matched by an industry competitor. Henry Wendt, eventual chief executive officer of the now renamed SmithKline Corporation, joined the company in 1955 with a B.A. in diplomatic history. With overseas responsibilities carrying him to such faraway places as Hawaii, Montreal, Thailand, Hong Kong, what is now called Malaysia, and Japan, Wendt worked his way up through the ranks to become president and chief operating officer in 1976.

The same year, Robert F. Dee, former vice president of the company, was promoted to chairman and chief executive officer. Under the leadership of these two men SmithKline was transformed from a struggling firm into the envy of every industry competitor. Dee’s first move was to provide millions of dollars for SmithKline’s research and development facilities. Secondly, he increased the overseas sales force from 400 to almost 1500 men. Moreover, Dee reorganized the structure of the company along product lines to facilitate easier marketability.

Most importantly, however, company dependence on sales of amphetamines was significantly lessened. In 1976 less than $10 million of the total $675 million in sales was generated from amphetamines. Several new drugs were introduced to increase sales figures. New entries included three diuretics which promised to capture a portion of the growing anti-hypertensive market, and a cephalosporin antibiotic introduced in 1973 which increased 31% in worldwide sales by 1975.

Product diversification similarly contributed to increasing sales figures. Subsidiaries in animal health, medical diagnostics, and consumer products showed promising returns in the early 1970’s. Contac cold tablets and A.R.M. allergy medicine were the most successful of the consumer products. Love cosmetics, an earlier attempt to capture some of Revlon’s market, did not perform as well. However, due to consistent profit loss the company finally abandoned its foray into cosmetics.

Despite such a promising turnaround, Wall Street analysts only began taking notice of the change with SmithKline’s introduction of Tagamet. Research on the drug started in 1964 at the SmithKline lab in Welwyn Garden City, England. The team of scientists, including Dr. James W. Black, revolutionized the process for discovering new drugs by conducting experiments under the premise that “receptor sites” existed on cells and that disease-causing agents could be blocked by preventing messages from reaching these sites. Previously, research for new drugs involved random testing of chemical compounds without a fundamental understanding of the biological process.

Due to the fact that the late 1960’s were not particularly lucrative years for the company, research on the new drug was almost abandoned. Fortunately, positive results filtered back to SmithKline executives before the project was cancelled. The histamine receptor anatagonist concept behind Tagamet promised to provide relief to thousands of ulcer patients. Owing to the revolutionary nature of the drug, the Food & Drug Administration shortened the approval process for new drugs.

The success of the new drug was as much a surprise to SmithKline executives as it was to outside observers. Initially, sales for the drug were conservatively estimated at $150 to $200 million by 1980. Comparing the “speed and magnitude of its acceptance” on the market to the Xerox 914 and the Ford Mustang, sales for Tagamet surpassed $580 million by 1980—nearly equaling the entire gross revenue in 1975. Profits for 1979 amounted to $234 million, or a 266% increase in four years, making Tagamet the second largest selling drug. By 1981 Tagamet replaced Valium as the largest selling drug when sales for the drug surpassed $600 million. Stock for the company selling from as low as $10.81 a share in 1975 rose to as high as $65.25 a share in 1980.

With an untapped market in Japan (the world’s largest ulcer-suffering population), overseas sales generated 60% of revenues. An estimated 15 million people sought relief from ulcers by taking Tagamet. The addition of new production facilities and a larger sales force, as well as being poised to enter the Japanese market, promised that sales for Tagamet were sure to increase.

Rather than rest on its laurels, SmithKline executives moved swiftly to ensure the company a healthy future. Large sums of money generated from sales of the drug were poured back into research and development. One drug developed in company laboratories, an anti-hypertensive called Selacryn, proved a disaster. A recall was issued when reports linked the drug to liver disorders and several deaths. By 1985 the product had been linked to 35 deaths and generated 373 claims for liability. Although most of these cases are now settled, nevertheless, the company was sentenced to two years probation.

A drug that SmithKline is presently promoting, hopefully with better results than Selacryn, is Ridaura. This rheumatoid arthritis pill has gold as an active ingredient. It appears that the new drug actually has the ability to halt the degenerative process of arthritis rather than merely treat the symptoms. Once introduced, Auranofin has the potential for capturing a large proportion of the arthritis market.

Aside from new drug research, SmithKline has invested a large amount of its profits into an ambitious acquisition program. Diversifying into the diagnostic equipment field, the company acquired Mediscan and Acoustic Emission Technology. Similarly, by adding two eye-care manufacturers, Humphrey Instruments and Allergan Pharmaceuticals, SmithKline created a competitive new division to enter a growing market.

By 1982 executives at SmithKline predicted that the $800 million in sales of Tagamet would reach the billion dollar mark by the end of that year. Ironically, it is the very success of Tagamet that now places the company in a precarious position. As late as 1984 Tagamet contributed more than half of SmithKline’s $489.5 million in profits. Upon closer inspection, however, this impressive figure reveals an “Achilles heel.” While SmithKline has wisely used profits generated from sales of the drug to fund research for new pharmaceuticals and to diversify through acquisition, nevertheless, the company continues to depend heavily on Tagamet’s performance for a sizeable portion of its income.

Competition for Tagamet’s market appeared sooner than company executives had hoped. While Tagamet’s patent will not expire until 1994, several new drugs, particularly one called Zantac developed by Glaxo Holdings, uses an original formula and claims fewer side effects, higher potency, and a convenient twice-a-day dosage. By emphasizing Tagamet’s potential to produce side effects such as gynecomastia (swollen breasts in men), impotence, and mental confusion in rare cases of higher than usual dosage, Glaxo (along with the addition of a Hoffmann-La Roche salesforce) planned to capture up to 30% of Tagamet’s U.S. market. Hoffman-La Roche, the Swiss pharmaceutical company responsible for Valium, is recognized for is aggressive marketing style, and its unique deal with Glaxo Holdings signaled a formidable challenge.

Already capturing well over 30% of the market in several European countries, Zantac was ready to enter the U.S. market. In preparation to meet the challenge this drug posed to their share of the markets, SmithKline increased its salesforce and trained them in more effective marketing skills. Furthermore, by using information that refuted the reported side effects of Tagamet, SmithKline stood by the effectiveness of its drug. And finally, although acknowledging the convenience of Zantac’s twice a day dosage over Tagamet’s four times a day dosage, SmithKline executives nonetheless hoped Zantac’s 20% price increase over Tagamet would mitigate the attractiveness of a smaller dosage.

Despite SmithKline’s concerted effort to meet the challenge of the new drug, Wall Street analysts did not believe the company would be successful. Stock prices dropped in 1983 from a high of $76.50 to $66 a share. Similarly, management’s conservative estimate of Zantac’s ability to capture between 10% and 25% of the market in the first year soon proved a miscalculation; the new drug easily commanded 25% of the new prescription market. More seriously, reports on the effectiveness of Zantac due to its higher potency represented shorter hospital stays and reduced medical costs over the long term. Henry Wendt, the chief executive officer of SmithKline, never saw his prediction of a one billion dollar sales of Tagamet materialize.

The recent acquisition of Beckman Instruments, a manufacturer of sophisticated diagnostic equipment, was made with the intention of entering into the emerging diagnostics market and reducing the company’s dependence on pharmaceuticals. By exchanging a hefty $1.01 billion worth of stock and by agreeing to include the newly acquired company in its name, SmithKline Beckman was positioning itself to remain competitive after Tagamet lost some of its momentum. Wendt stood by the decision and ignored criticism that the large dollar exchange would dilute earnings.

What SmithKline executives were not planning on, however, was a sudden cost-consciousness in hospital spending. The Reagan Administration’s order for stricter reimbursement procedures in regard to Medicare payments denied hospitals their former ability to earn cost plus profit from government funds. Instead Medicare paid preset fixed amounts of money for specific ailments. In response, hospitals reduced spending on expensive medical equipment. And as a result, cancellations on orders for Beckman chemical analytic systems increased at the company. SmithKline accordingly shifted its emphasis toward smaller, less expensive devices and the growing demand for diagnostics in private practice. In 1984, however, Beckman’s workforce was reduced by 400 and SmithKline instituted a wage freeze for five months.

Company management had hoped that the release of several new drugs would solve the problems of depressed earnings and falling stock prices. Ridaura, the arthritis drug with a gold compound, still required FDA approval in early 1984. The delay, to Wendt’s chagrin, was related to two recalls of anti-arthritic drugs manufactured by competing companies. Monocid, an even more lucrative antibiotic, is said to be so effective that patients can be treated on an outpatient basis. If this is the case, Monocid promises to be a financial success. SmithKline has also applied for a more potent version of Tagamet to reduce dosages to twice-a-day.

Notwithstanding these attempts to anticipate possible long term problems, SmithKline’s future remains a question mark. Wall Street analysts hesitate to recommend the company and management is now left to its own devices in order to proved SmithKline’s viability. In a public show of confidence the company announced in 1984 that it would purchase as many as three million of its own shares. However, the future appeal of SmithKline Beckman on Wall Street remains uncertain.