P.O. Box 4000
Princeton, New Jersey 08540
Squibb Corporation, established in 1858, is one of the oldest drug manufacturers in the United States. The company’s nearly 130 years of business is a testimony to its consistency in producing quality drugs. While over one-half of its sales are generated by pharmaceuticals, the company also owns a very profitable cosmetic subsidiary whose brand names include Jean Nate and, until recently, Charles of the Ritz products.
Despite such a good product record, however, Squibb’s financial performance, until recently, was not a fair reflection of the company’s potential profits. With sales increasing for Capoten, a new antihypertensive drug initially greeted by limited FDA approval, and the sale of a long string of unprofitable mergers and subsidiaries, Squibb’s successes have only recently begun to reflect an impressive increase in profits. Yet with competition intensifying in the area of cardiavascular drugs and antibiotics, it will be difficult for Squibb to maintain these figures.
Edwin Robinson Squibb, founder of the company, began his career as a Navy doctor. After originating the process for making pure ether, Squibb left the Navy and established his business in Brooklyn. The young pharmaceutical company, whose products included the manufacturing of chloroform, performed well in the early years. Squibb’s two sons operated the company for some time before selling it in 1905. The new owners, Theodore Weicker, a German chemist, and Lowell M. Palmer, an industrialist, led the company through an era of unmatched prosperity. By 1951 annual sales had reached $100 million and Squibb represented one of the largest pharmaceutical concerns in the United States.
These glowing figures are what convinced Thomas S. Nichols, chairman-president of Mathieson Chemical Corporation, to propose the idea of a merger. Under Nichols’ leadership the chemical company’s assets had quadrupled in the four years between 1948 and 1952. By moving into the fields of agricultural chemicals, organic chemicals and ultimately drugs and cosmetics, Nichols hoped that a merger agreement arrived at between Weicker, Palmer and himself, would continue to support his company’s successful expansion.
The proposed merger ostensibly held benefits for Squibb as well. While Weicker and Palmer were relegated to advisory positions, Squibb as a whole was to remain a separate independent division maintaining its own name and policies. At another level, Squibb’s antibiotic production, representing a major area in the company’s pharmaceutical products, had been experiencing intensified competition in the postwar years. The support offered by merging with the fastest growing chemical company in the industry would compensate for some of the losses suffered by this competition. With Palmer controlling 30% of Squibb stock and the Weicker family also holding a sizeable interest, the merger was completed as proposed without stockholder dissent.
In 1956 the E.R. Squibb Division of the newly formed Olin Mathieson Company (born out of a merger with Olin, a munitions manufacturer), decided to move its production plant of 98 years from Brooklyn to New Brunswick, New Jersey. Representing the first and largest of all Squibb’s facilities, the Brooklyn plant was said to be outmoded and inefficient.
The late 1960’s launched an era of mixed blessings for Squibb. By 1966 sales had reached $233 million with 40% of it coming from overseas markets; on the other hand, profits had only amounted to $19 million. Beset by cost and quality control problems, an operational overhaul was in order. In order to facilitate such a massive reorganization, Richard M. Furlaud, an Olin lawyer, suggested spinning-off Squibb and merging it with Beech-Nut, a manufacturer of infant food, Life Savers, candy rolls and other confectionery goods.
The impetus behind Furlaud’s suggestion was the lackluster performance of Olin’s stock. At the time, company stock was selling at 13 times earnings, an unimpressive figure relative to competitors in the drug industry whose stock sold at over 20 times earnings. By allowing Squibb to become an independent company, Olin stockholders could benefit from the realization of Squibb’s true earnings potential. Future events would show that as an independent company Squibb stock rose to an earnings multiple of nearly 18.
In addition to spinning Squibb off from Olin, the merger of the independent drug company with Beech-Nut was suggested with the implication that it would create a well-balanced structure through product diversification and broad market strength. Squibb’s strong overseas operations could facilitate expansion of Beech-Nut products and the pharmaceutical company’s medical knowledge could contribute to the pediatric formula market. Beech-Nut, on the other hand, operated a highly developed distribution network that could expand the market for some of Squibb’s products.
Thus the spin-off and merger were completed and Furlaud became the president and chief executive officer of the newly formed Squibb Beech-Nut company. Furlaud believed that his company was now fit to compete with the likes of American Home Products, Bristol-Meyers, and Warner-Lambert, three large pharmaceutical companies also producing consumer goods. Although Furlaud’s company was a long way from establishing the financial security and reputation of his competitors, by 1969 Squibb Beech-Nut was showing strong signs of growth. Under tightened production controls, labor and inventory costs had been reduced. Sales for pharmaceuticals surpassed $240 million; another $241 million came from sales of foods and confections including Life Savers, baby foods, tea, and chewing gum.
Under a restructured research program $22 million was relegated for the study of steroids, anti-infectives, and central nervous system drugs. Recently introduced on the market were a number of promising new pharmaceuticals such as a cancer treatment agent, an injectable antidepressant, and a semi-synthetic pencillin.
Despite such gains in sales and earnings, however, some industry observers remained skeptical about Furlaud’s company ever producing the figures initially projected. By 1970 Squibb Beech-Nut stock was selling at around 24 times earnings, a highly respectable price in the drug industry. The problems lay in the profitability spread between Squibb and Beech-Nut products. While Beech-Nut contributed to 40% of total sales, its earnings remained negligible. Industry analysts attributed this discrepancy to outmoded marketing techniques, and Furlaud’s appointment of several new Beech-Nut managers confirmed this.
By 1973 Squibb had sold several of its operations. Setting high quotes for profits and earnings, management decided to terminate its coffee, tea and baby food operations. The only remaining divisions of Beech-Nut not sold were the Life Savers candy operation and Dobbs House, an airport catering facility. These subsidiaries, combined with a 1971 acquisition of the cosmetic company Lanvin-Charles of the Ritz, represented, according to Executive Vice President George Maginness, the “right profile.” Squibb management felt they had finally reached the long sought-after balance between profit yield and diversification.
Investors held the company in high regard as earnings increased between 11 and 14% from 1969 to 1973. The price/earnings multiple reached a high of 30. By 1975 sales had passed the one billion dollar mark with pharmaceuticals accounting for $546 million. Two new drugs on the market received an impressive response. Velosef, a cephalosporin antibiotic, recorded $9 million in sales on a $200 million market. Halog, an anti-inflammatory used to treat skin disorders, also did exceedingly well, and helped to strengthen Squibb’s position as the leading manufacturer of topical steroids. The company’s preeminent position in the diagnostic field evolved from the development and acquisition of a broad range of radiopharmaceuticals and contrast agents. Sales for these diagnostics were expected to pass $40 million.
The Squibb Institute of Medical Research, the company’s most important department for research, received a $50 million budget to support the continuing study of a successful line of pharmaceuticals that included cardiovasculars, antidepressants, antibiotics and proprietary items. By 1975, 12% of the total drug sales resulted from products under five years old; this marked the most substantial product flow in the industry. Overseas operations had been established in 36 countries and continued to contribute to a large portion of sales.
The Life Savers division benefited from a nationwide advertising campaign to introduce a new generation to the candy enjoyed by their grandparents. Between 1970 and 1973 Lifesavers sales jumped 40% and the subsidiary controlled over 50% of the domestic market for those types of products. Furthermore, Squibb gained a stronghold in the chewing gum market through the sales of Care Free products. Dobbs House and Lanvin-Charles of the Ritz appeared to be the only major areas of disappointment for Squibb; the poor economic condition of the air travel industry adversely affected the performance of Dobbs, and the cosmetic subsidiary experienced intense competition from the growing presence of Revlon, Norell and Estée Lauder.
The company was now poised on the edge of a new era in pharmaceutical development that would revolutionize the entire industry. By capitalizing on research into the foundation of biological processes, company scientists conducted drug research using more precise methodological techniques. Prior to this research experimental technique amounted to a random testing of only partially understood processes. The first and most dramatic result of molecular manipulation was SmithKline Beckman’s development of Tagamet, an anti-ulcer drug that attacked the disease by intercepting a chemical messenger at a cell’s “receptor site.”
Squibb, along with many industry competitors, began conducting its research of new pharmaceuticals within this theoretical framework. Miguel A. Ondetti, director of a newly created department of biological chemistry at the Squibb Institute for Medical Research in 1976, first started working on an antihypertensive in 1968. The Argentinian chemist who joined Squibb in 1960 derived an enzyme potentially useful in controlling high blood pressure; this nonapeptide was extracted from the venom of an extremely poisonous Brazilian pit viper. Using a nearly abandoned theory that proposed an intricate relationship between kidney functioning and high-blood pressure, Squibb scientists attempted to capitalize on the venom discovery. Unfortunately, only a millionth of a gram of the precious substance could be extracted from a gram of venom and even then it could only be absorbed in an injected form.
The entire project was almost abandoned before the scientists thought of a way to circumvent the problem. Since the chemical they were working with broke down in the digestive tract, they knew any variant of it would do the same. The problem was identifying and intercepting the messenger enzyme produced by the lungs that causes high blood pressure when it modifies another protein. After guessing the shape of the enzyme, the scientists then constructed a new substance to fit into it and inactivate the “message.” That new substance was called Capoten and its success gave rise to the description of it as the “Eureka compound.”
Not only did the scientific community marvel in awe of Capoten’s potential uses, but Wall Street analysts responded to the discovery of the drug in the same way. With estimates reporting that one in every six Americans suffer from hypertension, analysts like David Paisley of Merrill Lynch predicted Capoten’s annual sales could reach $500 million. As a result, Squibb’s stock increased 60% between 1978 and 1979.
Such a promising product, Furlaud began to think, would make Squibb one of the pre-eminent health-care companies in the world. His company’s future, however, would not simply depend on the promise of Capoten; the Charles of Ritz fragrance business now recorded $243 million in sales with Enjoli and Jean Nate ranked in the top four U.S. fragrances. (In 1986, however, Yves Saint Laurent purchased Squibb’s Charles of the Ritz product line.) Similarly, Opium, an expensive perfume, had become the fastest-growing product of its kind in the world. Furthermore, between 1978 and 1980 four companies in the diagnostics field had been acquired.
However, some industry analysts remained skeptical about Squibb’s future. Recent efforts to improve profitability and upgrade plant operations had cost the company $75 million. To support the newly acquired subsidiaries a large amount of cash was required. The selling of the unprofitable Dobbs House offered some relief, but analysts suggested this was not enough. Capoten was seen by some analysts as not only a scientific achievement but also an essential product for the company’s viability. Without all the speculation surrounding Capoten, one analyst claimed, Squibb’s stock would drop by 20%.
To the surprise of company management this is exactly what happened. Until the middle of 1980 Capoten was still being tested and as results were monitored a number of side effects appeared. Some patients developed a mild rash or a temporary loss of taste. Several seriously ill patients receiving the drug exhibited an increased risk of kidney damage or injury to bone marrow. By August 1980 the Federal Drug Administration advisory committee had considered Capoten’s application and recommended its administration only to those patients who had failed to respond to other medications. Squibb officials had hoped the FDA would note that the severe side effects appeared only in the most seriously ill patients and that those side effects were “dramatically” reduced when the drug was taken in smaller doses. Nevertheless, the FDA panel was not convinced; two days later Squibb stock dropped 20%.
By April the FDA issued a formal pronouncement approving Capoten’s use as a drug “of last resort.” Its healthy market reception, however, has renewed hope that Squibb may be able to convince the FDA of Capoten’s safety not only for conjestive heart failure but also for the treatment of moderate hypertension. Should Squibb gain FDA approval for the drug, analysts project annual sales could reach as high as $300 million. By the end of 1982 Squibb submitted a supplement to the original application in an effort to gain such approval.
Squibb’s performance over the next years was erratic. By 1983 sales of Capoten had doubled. Similarly, Corgard, a beta-blocker used to treat hypertension, had also increased its volume by 52%. Yet, despite such impressive figures, the area of cardiovasculars had become increasingly competitive. Moreover, aztreonam, a highly acclaimed Squibb antibiotic, promised sales of $100 million, yet this market also experienced increased competition. A new project involved the marketing of human insulin through a joint venture with Denmark’s Novo Industri.
Squibb has been named defendant in a number of DES cases alleging the company’s involvement in the manufacturing of an anti-miscarriage drug prescribed between the 1940’s and the 1960’s said to cause cancer in offspring of women who ingested the drug during pregnancy. In 1979 a case was settled out of court involving a child born with severe abnormalities. Squibb has successfully defended itself in three lawsuits, but has lost a $2.1 million case in 1982 to a woman who developed vaginal cancer. During a recent case in February 1986 the California State Supreme Court ruled in favor of Squibb by stating that the company’s 10% control of the DES market did not constitute a “substantial share.”
Squibb remains a consistent and reliable manufacturer of pharmaceuticals both in the United States and abroad. However, its long history of unprofitable partners and subsidiaries, as well as the more recent struggle over Capoten, has forced company management to review its long and short-term strategy. Even its recent additions in obstetrical diagnostics have raised doubts among several industry analysts concerned about Squibb’s lack of expertise in the area. Many of these analysts maintain that the future growth of Squibb is dependent upon whether or not the company concentrates on what it knows best, namely, the manufacture of pharmaceuticals.
E.R. Squibb & Sons, Inc.; Advanced Technology Laboratories, Inc.; Spacelabs, Inc.
Doctor Squibb: The Life and Times of a Rugged Idealist by Lawrence Goldfree Blochman, New York, Simon and Schuster, 1958.