Warner-Lambert

201 Tabor Road,
Morris Plains, New Jersey 07950
U.S.A.
(201) 540-2000

Public Company
Incorporated: November 8, 1920 as William R. Warner &
Co.
Employees: 45,000
Sales: $3.103 billion
Market Value: $5.583 billion
Stock Index: New York Zurich Paris London Frankfurt
Brussels

Warner-Lambert is the product of a long history of mergers and acquisitions. The company name reflects the combined assets of two businesses, including the William R. Warner Company, a pharmaceutical and cosmetic concern with a history that dates back to 1856, and Lambert-Pharmacal, the manufacturers of Listerine oral antiseptic. There is only one person, however, who can be credited with transforming the small company into a large multi-national corporation. His name is Elmer Holmes Bobst.

Bobst arrived at William R. Warner & Company in 1945, already a veteran executive of the pharmaceutical industry. His talent as president of Hoffmann-La Roche’s U.S. office was instrumental in acquiring for the Swiss company a large share of the U.S. drug market. In addition to making a name for himself as a brilliant business strategist, Bobst earned 5% of the company profits which made him a multimillionaire. For a man that was fond of entertaining Vice President Nixon on his private yacht, Bobst’s move to the ailing Warner Company seemed highly unusual.

At the time Bobst was 61 years old and could easily have settled into a comfortable retirement. Instead, when Gustave A. Pfeiffer, chairman of Warner and the only surviving member of the original founding family, approached Bobst with an offer of employment, he accepted the position. As it happened, Pfeiffer had initially asked Bobst to join the company as the head of Warner’s pharmaceutical division in 1918. However, because the family refused to sell Bobst any of the company stock (the family held all the common stock), he declined the offer. Twenty-seven years later, after Bobst had proven his ability at Hoffmann-La Roche, Pfeiffer readily offered the job on Bobst’s terms; Bobst was hired and allowed to purchase 11% of the common stock. By 1955 Bobst’s holdings were worth over three million dollars.

What Bobst inherited with his new position, however, was a family operated company suffering from an aging product line and decaying physical properties. Pfeiffer’s 1916 acquisition of the Hudnut cosmetic line accounted for most of the $25 million sales; yet that same product line barely turned a profit. In an effort to improve the image of the cosmetics production, Bobst renamed the firm Warner-Hudnut in 1950.

Renaming the company was just the first in a series of moves to reorganize the business. Bobst’s previous experience with high-level industry and political affairs enabled him to hire accomplished executives and public figures. By hiring such recognized professionals as successful investment bankers, business executives, and political officials (Anna Rosenberg, the company’s manager of industrial and public relations, was once the Assistant Secretary of Defense, and Alfred Driscoll, the company president, was the governor of New Jersey for seven years), the company management was filled with new talent.

Despite these developments, one aspect of the company remained the same. Pfeiffer’s business had not grown by the accomplishments of its own creativity, but rather by a steady series of acquisitions. In fact, the original Gustavus A. Pfeiffer & Company, a patent medicine company from St. Louis, acquired the Warner Company in 1908. William Warner, a Philadelphia pharmacist, earned a fortune by inventing sugar-coated pills before the Civil War. When Pfeiffer purchased the company he moved the headquarters to New York and kept the company name. Then, in addition to buying the Hudnut line, Pfeiffer also acquired the DuBarry cosmetic company. By the time Bobst assumed the presidency, some 50-odd companies had been acquired during the 99 years of the Warner company’s history.

Bobst’s managerial style was well suited to this company program. In 1952 he made his first major acquisition by purchasing the New Jersey Chilcott Laboratories, Inc. Chilcott earned its reputation as a manufacturer of ethical drugs largely through its development of Peritrate, a long-acting vasodilator. The drug enlarges constricted blood vessels, and by 1966 an estimated 56% of 3.1 million people afflicted by heart disease used it. While the sales of Peritrate became Warner-Hudnut’s mark of excellence in the pharmaceutical industry, its success was also cause for some controversy.

In 1959, because the drug proved to be useful in a wider application of treatments than originally allowed, the Food & Drug Administration approved of Peritrate’s “new drug” usages. By 1966, however, the government, under the directive of the FDA, seized a shipment of the drug. Due to a controversial Peritrate advertising campaign, the FDA brought charges against the company’s unapproved advocacy of an even wider usage for the drug.

Appearing in several medical journals, including the Journal of the American Medical Association, the 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.

Only a few years after the acquisition of Chilcott, Bobst arranged a merger between his company and Lambert. The merger was the result of an encounter between the two company presidents at a meeting of the American Foundation for Pharmaceutical Education. The two companies complemented each other well. Their two ethical drug laboratories produced different but reputable products, and Lambert’s Listerine sales, which accounted for over 50% of the company’s total sales, guaranteed a large share of the oral antiseptic market.

However, Bobst had a larger interest in ensuring the outcome of the proposed merger. Lambert’s well-organized distribution network reflected modern marketing techniques which were never incorporated into Warner-Hudnut’s antiquated sales approach. Furthermore, Lambert company president Edward Williams’s strong background in the management of pharmaceutical companies complemented Bobst’s accomplished but inexperienced (within the industry, at least) executives. Thus when the merger became a reality, Williams new position in the company led to ex-Governor Driscoll’s entrance into the pharmaceutical business as president of the new merger.

One of the most attractive aspects of the merger, however, was the success of Listerine. With publicly accessible information on its formula available since 1879 (it has no patent), and its virtually unchanged brown-paper packaging, Listerine’s popularity nevertheless continued to grow. Much of its success is traceable to the advertising strategy of Gordon Seagrove. Recruited by Lambert in 1926, and taken away from 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 shows a man encouraging a woman to continue massaging Listerine into his head, “Tear into it, Honey— It’s Infectious Dandruff!”

Listerine continued to increase in popularity over the next decades; by 1975 the oral antiseptic held a sizeable portion of the $300 million market. Similarly, the Listerine producers continued to pay large amounts of money for advertisements. Yet Warner-Lambert’s promotional investments in Listerine were not without their difficulties. For years the company advertised the mouthwash’s ability to prevent colds and sore throats. During the Asian flu epidemic in 1957 Bobst placed an ad in Life magazine promoting Listerine’s ability to resist the sickness; Warner-Lambert’s own advertising agency had earlier balked at using the ad. However, sales for the mouthwash that year increased to $26 million.

By 1975 the Federal Trade Commission began to investigate the Listerine advertisements. Using its untested powers to order corrective advertisements, the FTC disputed the cold prevention claims of Listerine as unsupportable and ordered the company to embark on a $10 million disclaimer campaign. This figure was based on the amount equal to the company’s average annual advertising expenditure between 1962 and 1972. Attacking the decades-long cold remedy advertisements, the FTC argued that only corrective disclaimers could educate the consumer. In 1978 the Supreme Court upheld the FTC’s order.

The merger between the makers of Listerine and the Warner company was followed by a series of additional acquisitions. Emerson Drug (makers of Bromo-Seltzer), Smith Brothers (makers of cough-drops), American Optical, Schick Shaving, Parke Davis, and American Chicle (makers of Chiclets) were all purchased. To acquire Chicle, Warner-Lambert used 7.8 million of its own shares, worth about $200 million. Many industry analysts criticized the high price paid for the gum manufacturer; in 1962 its net income for the year was under $10 million. By 1983, however, after expanding into foreign markets, the Chicle sales were reaching the one billion dollar mark. Ward S. Hagan, chairman of the company, called the gum and mint business “the largest in the world”.

The merger of Parke, Davis & Company with Warner-Lambert in 1970 was not subject to the same criticism. It was, however, investigated by the Antitrust Division of the Justice Department. The merger, according to the chairman of the House Judiciary Committee, raised “serious problems” because it had the potential to limit competition and create a monopoly. Upon approval the merger would result in a combined revenue of $1.7 billion and would rank the new company among the 100 largest industrial companies in the U.S.

On November 12, 1970 the Justice Department announced it would not challenge the merger despite the Antitrust Division’s recommendation to the contrary. The department referred the matter to the Federal Trade Commission which holds 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 immune globulin would have to be sold in order to restore competition in those product lines.

While S. Burke Giblin, the chairman and chief executive officer of Warner-Lambert at the time of the ruling, welcomed the decision because it permitted Parke, Davis to continue in the area of drug development, several other difficulties faced the company. In 1976 Warner-Lambert disclosed figures to the Securities and Exchange Commission concerning illegal payments abroad. Becoming the ninth company to admit bribe pay-offs, Warner-Lambert announced that more than $2.2 million “in questionable payments” had been uncovered in 14 of the 140 countries in which it conducted business.

Only months later an explosion at an American Chicle plant in Queens, New York killed six people and injured 55. One year later 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. Calling the charges “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. In 1979, however, the New York State court’s appellate division voted to restore the indictments. Finally, in 1980, the state’s highest court dismissed once again all charges in connection with the explosion.

In 1981 a settlement was finally reached on the sale of Warner-Lambert’s Benylin cough syrup. After seven years of deliberation, the Food and Drug Administration approved the reinstated over-the-counter sale of the drug. In 1975 the company had made the drug available without a prescription, but the FDA ordered the drug back on a prescription-only status after questions were raised about its effectiveness.

In 1978 Warner-Lambert purchased Entenmann’s Bakery, for $243 million in cash. The purchase soon proved fortuitous; by 1982 it had become Warner-Lambert’s most profitable consumer division with sales reaching $333 million and an annual growth rate of 19%. At some point in the late 1970’s, however, a rumor was started that Entenmann’s profits were supporting Reverend Sun Myung Moon’s Unification Church. The source of the rumor was said to come from Westchester county in New York; as a result, Warner-Lambert responded by taking 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 delivery and sales people were being harassed, and one Rhode Island church even urged a boycott. 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. Whether the information campaign was successful or not, Warner-Lambert sold the bakery in 1982 to General Foods for $315 million.

Damaging rumors and criminal indictments aside, Warner-Lambert went through the late 1970’s with a poor operating performance. Profit margins were off by 40% in 1979 and most of the company revenues came from the sale of consumer goods. Once Ward S. Hagan replaced Bobst as chairman, he embarked on a restructuring program to revitalize the pharmaceutical operations. American Optical, an unprofitable subsidiary, was sold and Hagan closed or consolidated 24 plants in foreign and domestic locations while reducing the company labor force by 29%. Research for new drugs at the Parke, Davis division was supported by a 20% increase in budgetary funds during 1983 to $180 million. Several newly approved drugs had brought $50 million in domestic sales.

Despite the improved operating performance and a predicted earnings growth of 10 to 15%, Warner-Lambert’s unexpected purchase of IMED, a small hospital supply manufacturer, caused Wall Street analysts to shake their heads in disbelief. While IMED’s 35% hold on sales in the hospital supply field made it the market leader and while sales continued to grow annually at an unmatchable 50%, a closer look revealed a company 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. Thus Warner-Lambert’s $468 million purchase, signifying a price at 23 times IMED’s earnings, was largely criticized. Yet Hagan defended the acquisition by arguing that the company is now competitively positioned to exploit the growing market.

Whether IMED’s purchase proves shortsighted or not, company sales increased 2% in 1985 to $3.2 billion with a return on equity at 16% (over an 11% five-year average). Interestingly enough, Capsugel, the Warner-Lambert division that is the world’s largest supplier of unfilled gelatin capsules, overhauled its production operation using Japanese batch manufacturing techniques. These revolutionary measures for streamlining production without risking safety are said to have saved the company $300 million a year. The company also saved $125 million in potential purchases of new machinery. By using Japanese techniques, the machines whose designs date back as far as 1916 were able to increase output by 90%.

Principal Subsidiaries

American Chicle Co.; American Food Industries, Inc.; Chicle Adams, Inc.; Euronett, Inc.; Family Products Corp.; IMED Corp.; Keystone Cemurgic Corp.; Parke, Davis & Co.; Tabor Corp.; Warner-Chilcott Inc. The company also lists subsidiaries in the following countries: Argentina, Austria, Belgium, Brazil, Canada, Chile, Costa Rica, France, Guatemala, Italy, Japan, Mexico, The Netherlands, Philippines, Spain, Switzerland, Thailand, United Kingdom, and Venezuela.