G.D. Searle & Company
G.D. Searle & Company
G.D. Searle & Company
P.O. Box 1045
Skokie, Illinois 60076
Wholly-owned subsidiary of Monsanto Company
Incorporated: April 10, 1908
Sales: $1.24 billion
Four generations of management at G.D. Searle, a pharmaceutical company based in Illinois, descended from the company founder. From 1888 until 1977 the company’s highest executive positions passed from father to son. In the intervening years Searle grew from a small Chicago company to an important industry contributor.
When John G. Searle became president and chief executive officer of the company in 1936 he inherited a business started by his grandfather, Gideon D. Searle, in 1889 on the corner of Ohio and Wells streets in Chicago. Initially the small firm sold a wide variety of products. Yet under the direction of Gideon Searle the company soon reduced its product line to highly specialized and profitable items. In order to develop these items, Searle’s laboratory research concentrated on innovating drugs for the treatment of cardiovascular diseases, central nervous system and mental disorders. In 1941 company headquarters moved to Skokie, a northern Chicago suburb. One of the most successful products to emerge from Searle laboratories was the 1949 discovery of Dramamine, the first motion sickness pill. In 1966 Dramamine remained a leader in motion sickness medications; today the drug has become a household staple.
By 1960 the company’s reputation as a manufacturer of quality drugs corresponded to its growing profits. Increasing sales by one to two million dollars annually, the company had sales in 1960 of $37 million. Searle’s former successes, however, offered no indication of the large profits to come with the introduction of one of the most revolutionary drugs of the decade—oral contraceptives. Under the direction of Dr. Albert L. Raymond, head of Searle’s research department since the 1930’s, pioneering work with synthetic hormones in 1951 led to Searle’s development of Enovid, the first contraceptive of its kind to reach the market. Just four years after “The Pill’s” 1960 introduction, the company’s sales figure increased 135% to $87 million with a 38% return on stockholder’s equity. Moreover, almost half of the $73 million in total assets existed in cash and marketable securities, long-term debts were virtually non-existent, and Searle stock traded at 34 times earnings.
Despite three stock offerings between the years 1950 and 1966, the Searle family held a 46% interest. Upon John G. Searle’s death in January of 1978, the family had become one of Chicago’s wealthiest with an estimated net worth of $250 million. John Searle’s descendents were not only destined to become wealthy men, but his two sons would eventually assume positions of company leadership. Interestingly enough, however, in early 1963 a proposed merger between G.D. Searle and Abbott Laboratories, arranged by the two company presidents, was said to be inspired by John Searle’s lack of confidence in his offspring’s business acumen. The golfing partners arrived at a tentative agreement over drinks in Chicago’s exclusive Old Elm golf club. According to the arrangement, no plans were made to include top management positions for John Searle’s sons.
The proposed merger never occurred. One explanation cited John Searle’s realization that the amount of bickering on the golf course between him and Abbott’s George Cain was an indication of how poorly they would get along as business partners. A more likely explanation pointed to the complications arising from the younger Searles’ sizeable holdings in the merged company. At any rate, John Searle went into semi-retirement during 1966 in the wake of the aborted merger; he assumed the title of chairman and his two sons moved into executive positions. William L. Searle became vice-president of marketing while his older brother, Daniel Searle, a Harvard Business School graduate, succeeded his father as president with the additional title of chief operating officer. Daniel now inherited the leadership of one of the most profitable pharmaceutical companies in the industry.
Yet even before the leadership had changed, a number of industry developments foreshadowed an era of growing problems. Competition from other manufacturers producing birth-control pills, including Upjohn and Johnson & Johnson, reduced Searle’s share of the market. Furthermore, a concern about side effects associated with oral contraceptives slowed management’s decision to increase production and prolonged the Food & Drug Administration’s market approval of Searle’s Ovulen, a second generation contraceptive. And finally, the increasing cost of research, coupled with its unpredictable results, meant that company scientists were unable to bring to fruition a new product line. By 1965 earnings decreased to $23.2 million, down from $24.2 million the previous year; while industry competitors posted net profit increases of 19.4%, Searle’s dropped 4.4%.
It was under these circumstances that Daniel Searle initiated an ill-fated policy of acquisition. Purchasing a dozen small companies with a wide variety of products, including nuclear instrumentation, medical electronics, and veterinary and agricultural products, Searle operations diversified into unfamiliar waters. While industry competitors made similar purchases outside the business of ethical drugs, few companies were less fortunate in their choices. By 1977 the company reported a $95 million write-off; sales had increased to $844 million yet the return on equity dropped from 50% to 11%. The acquisitions outside the area of pharmaceuticals accounted for 57% of sales but only 13% of profits. G.D. Searle’s profitability decreased sharply.
In addition to a new generation of family executives, the year 1966 brought Dr. Raymond’s tenure as director of the research department to an end. Dr. Thomas P. Carney, former director of research at Eli Lilly, succeeded Raymond as head of the Searle laboratories. Carney’s background in both chemical engineering and organic chemistry, as well as his success in developing profitable agricultural chemicals for Lilly, promised to facilitate the development of new innovative drugs for Searle. Aldactone and Aldactazide, two diuretics used in the treatment of hypertension, and Flagyl, a drug to cure reproductive tract infections, awaited and received FDA approval.
By 1971 an estimated 80% of company profits resulted from sales of pharmaceuticals other than oral contraceptives. The previous year profits had actually risen 12%, but only on the company’s ability to use its Puerto Rican operations as a tax shelter; while profits before taxes actually fell $5 million, Searle’s tax bill was reduced by $9 million. Long-term debt was now reported at $49 million.
By 1973 sales of Aldactone and Aldactazide alone contributed to 18% of revenues, surpassing revenues generated from the birth control pill for the first time. Research at Searle laboratories, with expenditures increased 33%, led to the development of a new artificial sweetener. Discovered seven years earlier, aspartame’s unique structure resulted from the combination of two naturally occurring amino acids. While the company awaited approval to market the product as a food additive, production was planned using the expertise of Ajinomoto, a Japanese company experienced in the manufacture of amino acids. With cyclamates removed from the market and questions circulating about the safety of saccharin, Searle’s new product represented the possibility of a large market share. In addition to developing the sweetener, the company moved into new areas of birth control. A copper intrauterine contraceptive was introduced in England and awaited market approval in the United States.
The FDA approval of Aspartame’s use as a table top sweetner, as well as a food additive in a number of items, resulted in a minor victory for Searle. Sugar prices had recently tripled and the market for low calorie products began expanding significantly. Furthermore, aspartame lacked the bitter after taste of saccharin with only about .5% of the calories of sugar. Yet several disadvantages in the new product caused industry analysts to remain cautious in their assessment of aspartame’s future. The projected cost for the new sweetener was many times greater than that of saccharin, and its short shelf life—it loses its sweetness after several months—precluded any speedy acceptance in the profitable soft drink market. Bottlers would resort to a more stable, less expensive product before they would turn to aspartame. Nevertheless, Searle persevered in the test marketing of Equa, the consumer brand name for its new product.
Despite such hopeful products emerging from Searle laboratories, many industry analysts remained skeptical about the company’s future. Diluted earnings, resulting in part from the company’s numerous acquisitions, aspartame’s unclear future, and the expiration of a number of important patents all contributed to this attitude. Yet, apart from these problems, Searle management could never have been prepared for the series of blows dealt them in a televised hearing involving an FDA challenge to their reputation. A Senate subcommittee on health, headed by Edward Kennedy, sought to investigate allegations about questionable research surrounding the safety of both Aldactone and Flagyl. A 1972 article in the Journal of the National Cancer Institute, with the support of numerous subsequent independent studies, cited an increased incidence of lung tumors in mice treated with Flagyl. Similar cancer risks, not evident in Searle’s research data, appeared in tests of Aldactone.
While conceding that “clerical errors” had occurred, Searle categorically denied any surpression of lab tests. The company did embark on a public relations campaign to improve its image of social responsibility. The price of company stock, however, dropped from around $25 to $15 per share as analysts estimated that sales of Flagyl, Aldactone, and Aldactazide would be reduced by half its previous volume. With a new strategy of public relations, Searle’s problems were hardly over. Only several months later in December of 1975, in an unprecedented move, the FDA suspended permission to market aspartame based on an audit of Searle’s new drug applications filed since 1968.
The FDA actions resulted in more delays than actual damage. While labels warning about cancer risks appeared on the investigated products, sales for Aldactone and Aldactazide actually rose 24% on the last quarter of 1975; Flagyl’s increased 12%. Aspartame remained under investigation only to receive market approval seven years later. The $29 million already invested in its production was left in abeyance.
While the assault on Searle’s corporate integrity marred the company’s public image, internal problems threatened to disrupt its very operations. By 1977 money borrowed in the U.S. against the $420 million saved in the Puerto Rican tax shelter, translated into an interest payment of $24 million; earnings from this same tax haven amounted to only $17 million. This, in turn, had some affect on overall company earnings so that shares gaining $1.56 in 1975 gained only $.57 in 1977.
To remedy the situation, an outsider was called in to assume control of the company. Donald H. Rumsfeld, a former congressman, presidential aide and defense secretary, agreed to step in as president and chief executive officer ending the four generations of family management. Daniel Searle, moving up to chairman, had met Rumsfeld 15 years earlier and had actually supported him in his congressional election bid. Their friendship gave impetus to Rumsfeld’s mid-life career change. While refusing to state he had given up public life for good, the accomplished politician rose to the challenge of correcting the company’s numerous problems.
Searle’s turnabout was almost immediate. By repatriating Puerto Rican dollars, bringing in new staff, selling unprofitable divisons, and announcing a massive write-off, Rumsfeld cleared the way for major changes in the company. An optical retailing business, under the name Vision Centers, represented a profitable new acquisition. In 1978 this retailer of eyeware contributed $91 million; a five year estimate placed contibutions at $400 million. While long-term debt now stood at $350 million, Vision Center’s profits were necessary to improve the company’s performance.
By 1981 Searle reported the second-highest profit margin among 30 leading U.S. drug firms. Furthermore, an FDA announcement ended aspartame’s years-old struggle to win market approval. Rumsfeld’s revitalization of the research department through the infusion of $100 million promised a new line of pharmaceuticals from anti-ulcer medication to treatments for herpes. An aggressive policy of licensing and joint ventures generated income to supplement the research costs. Long term debt was reduced to $89 million as Pearle Vision Centers moved to the top of the optical retailing business.
In 1983 a 39% drop in earnings during the first quarter resulted in a decision to sell the eyecare subsidiary. Ostensibly, the generated income would help improve pharmaceutical research which had yet to produce an extremely lucrative drug. Drug research, however, did not produce the sought after profits; instead, industry analysts were surprised as sales of aspartame reached record breaking figures. As a tabletop sweetener and a food additive in cold cereals and dry drink mixes, sales between 1981 and 1982 increased from $13 million to $74 million. As the product was ready to enter into the immensely profitable soft drink market, Searle invested $25 million to expand production in the U.S. Once Searle received the expanded FDA approval, carbonated drink companies lined up to secure contracts. By the end of 1983 virtually all major bottlers became Searle customers, and with the marketing plan to print the consumer name on all products using the sweetener, NutraSweet became a household name.
Despite this expansion after 17 years of testing, fears of aspartame’s side effects were not completely dispelled. One study cited changes in behavior after large quantities of carbohydrates and aspartame had been ingested. Woodrow Monte, director of the Food Sciences & Nutrition Laboratory at Arizona State University, along with several consumer groups challenged NutraSweet’s safety by pointing to its production at high temperatures of methanol, a compound associated with poisoning. The FDA reasserted aspartame’s safety by pointing to the existence of methanol in fruit juices.
While sales of aspartame reached $336 million in 1983, the continuing question of its safety was not the only issue to concern Searle management. The sweetener’s patent was scheduled to expire in 1987; forthcoming competition threatened the sales figure. Even more disturbing was the lack of new pharmaceuticals. One observer facetiously predicted that the company, like its new campaign to sweeten sodas exclusively with NutraSweet as opposed to a combination with saccharin, was in danger of itself becoming 100% NutraSweet.
As sales of NutraSweet edged towards its maximum market potential the Searle family, still holding a 34% interest, announced its decision to diversify its holdings. Industry analysts, noting the timing of this announcement, predicted that the family could collect as much as $75 per share. Four months after the announcement, not one company had tendered an offer. The financial burden of running NutraSweet’s huge operations, as well as an Internal Revenue Service investigation into allegedly deficient taxes paid by the Puerto Rican subsidiary, deterred potential suitors. Liability for the contested taxes was estimated at $381 million.
Only two months later, the announcement to withdraw the offer to sell Searle seemed to indicate a new effort to remain independent. The company purchased 7.5 million of the Searle family shares, reducing their holdings to 21%. Rumsfeld succeeded Daniel as chairman, which further solidified independent management. No sooner had these events taken place when Monsanto chemical company announced it planned to purchase Searle for an agreed $2.7 billion. For Monsanto the acquisition represented an end to its long search for an ethical drug company, but also included the added advantage of generating income to aid its maturing agricultural chemical products. Searle’s experienced marketing and sales staff, its experience in biotechnology, and the attractive market potential of its new antiulcer, called Cytotec, would be highly beneficial to Monsanto.
Along with Searle’s attractive qualitites, Monsanto also accepted the drug company’s tax dispute liabilities. What the new parent company did not expect, however, was to become embroiled in another controversy. Searle’s Copper 7, the most widely used intrauterine contraceptive, was suddenly accused of causing pelvic infections and infertility. Even more disturbing was a major business magazine’s disclosure that the company distorted information surrounding the IUD’s safety. The final version of the company’s lab results did not state that some cells in the test monkeys developed “premalignant transformations,” but only referred to cell modification. Similarly, Searle’s human test results may not have accurately reported the rate of pelvic inflammatory disease developed by users. On January 3, 1986, facing 305 pending lawsuits out of a total 775 claims, Searle withdrew the Copper 7. While continuing to defend the product’s safety, the company stated it acted to preempt growing litigation costs; Searle’s defense already cost $1.5 million. While the company claims it won eight of the ten trials, the specter of events surrounding the Dalkon Shield, an IUD manufactured by A.H. Robins, expedited Searle’s removal of the device from the market. Litigation costs surrounding alleged infections and ailments suffered by users of the Dalkon Shield eventually caused the company to reorganize under the Chapter 11 bankruptcy clause.
Hundreds of new claims are now being filed against Searle, including shareholders charging the company with failing to inform them of the IUD suits. The cost to the company could run into the millions. While NutraSweet’s patent has been extended until 1992, the potential outcome of Copper 7 litigation can hardly be reassuring to its new parent company. The earlier hope of employing Searle’s pharmaceutical experience to develop profitable new drugs is sure to be postponed as company management concentrates on the ensuing court battles.
Akwell Industries, Inc.; Dental Health Services of Tampa, Inc.; G.D. Searle Inter-American Co.; LARO, Inc.; SCI Corp.; Searle Cardio-Pulmonary Systems, Inc.; Searle Chemicals, Inc.; Searle Food Resources, Inc.; Searle Optical Inc.; Texas State Optical, Inc.; Pearle Vision Center, Ltd. (United Kingdom). The company also lists subsidiaries in the following countries: Argentina, Australia, Bangladesh, Belgium, Bermuda, Brazil, Canada, Denmark, Finland, France, Greece, Hong Kong, India, Ireland, Japan, Korea, Malaysia, Mexico, The Netherlands, New Zealand, Norway, Pakistan, Panama, Philippines, Portugal, Puerto Rico, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Kingdom, Venezuela, and Zambia.