MILES LABORATORIES History

Company History:

Miles Laboratories is best known for Alka-Seltzer. Since the 1930's, and particularly in the last two decades, Alka-Seltzer has been the subject of some particularly innovative advertising, and there is now hardly a consumer in the Western world who hadn't heard of the product. Yet Miles is also a leading manufacturer of a number of other very successful pharmaceutical and consumer products. Since 1977 Miles Laboratories has been a subsidiary of Bayer, the huge West German manufacturer, Miles Laboratories is now the focal point of Bayer's growing operations in the United States.

Dr. Miles' Medical Company, incorporated by Dr. Franklin Miles of Elkhart, Indiana in 1885, was the predecessor of Miles Laboratories. Soon after the company was formed Dr. Miles was joined by two colleagues, George Compton and Albert Beardsley. These three men directed the early years of Miles Laboratories, and even today their descendants hold important executive positions within the company. Five years after its founding the company was operating at a profit, and it went on to produce a full line of medical preparations (as well as its own promotional literature) at the Elkhart plant. Until the mid-1930's a sedative called Dr. Miles Restorative Nervine accounted for a major portion of company sales.

Andrew "Hub" Beardsley, the nephew of Albert Beardsley, spent 35 years with the company, rising from bottlewasher to first chairman of the board in 1925, and it was he who provided the impetus for the company's movement away from sedatives to new and innovative drugs. During the mid-1920's pharmaceutical companies became increasingly interested in the possibilities of effervescence and in producing medicines in tablet form. "Hub" encouraged one of his research scientists to work on transforming Nervine into an innovative combination, an effervescent tablet. Before development of the product had gone very far, "Hub" suggested a change of direction. He had observed that reporters on the Elkhart Truth successfully resisted colds by daily drinking a mixture of aspirin and bicarbonate of soda; he decided that it was an effervescent aspirin/bicarbonate of soda tablet that he wanted his chemists to create. After years of experimentation, Miles Laboratories achieved Hub's vision, and Alka-Seltzer was introduced to the marketplace in 1931.

Its immediate and increasing success had much to do with the repeal of prohibition. Alka-Seltzer relieved headaches and upset stomachs, and as the incidence of hangovers increased, so did consumption of Alka-Seltzer. Even today Alka-Seltzer remains the world's number one cure for the hangover: it is now sold in more than 100 countries and generates $90 million in sales each year.

From its founding to the present time, Miles Laboratories has also been notable for its concentration on advertising and for the skill with which some of that advertising has been presented. Between 1902 and 1942 the company issued more than one billion publications--not only advertising leaflets but also almanacs, calendars and a popular series called the "Little Books." In 1933, Charles Beardsley (a future president of Miles) initiated a radio campaign for Alka-Seltzer, sponsoring the popular Saturday Night Barn Dance; and in 1949, with its sponsorship of The Quiz Kids, Miles was one of the first companies to support the new medium of television. The common denominator of both the company's radio and subsequent television commercials has been humor--memorable and amusing jingles for radio, exaggerated and often hilarious depictions of the "before and after" Alka-Seltzer patient for television. By 1971 total sales of Miles Laboratories products amounted to $322 million, but the company entered that decade confronting a number of difficulties. Costly promotional outlays--the Alka-Seltzer commercials were obviously the best that money could buy--were diminishing profit margins. And a decrease in consumer spending was reducing sales of the company's limited range of products. To solve these problems, the company's management decided to diversify into a greater range of products. Dr. Walter Ames Compton, president of Miles from 1964 to 1973, initiated a development program emphasizing nutrition and diagnostics. He was an advocate of diet and preventive therapy, and he made it company strategy to develop products for compensive health care.

With this goal in mind, Miles acquired the Worthington Foods Company, a pioneer in the development of vegetable protein substitutes--particularly soybeans. An efficient source of nutrition, soybeans are easy to grow, are an abundant source of protein, and have none of the disadvantages of meat, which is costly to produce and is high in cholesterol. With meat prices on the rise and consumers increasingly concerned about their intake of fat, Miles hoped to take advantage of a growing market for alternative protein sources. Morningstar meat substitutes seemed likely to be able to capture a sizable portion of that market.

Additional new products introduced in the late 1960's and early 1970's as part of Miles' modern health care agenda included a full range of supplementary vitamins, from children's vitamins (Chocks, Flinstones, and Bugs Bunny brands) to the popular One-a-Day vitamins, first marketed in 1943 but now improved to include minerals and iron.

Miles' Professional Product Group demonstrated fast growth: this group produced a broad range of health care products, from diagnostic agents and ethical drugs for the treatment of allergies and skin conditions, to laboratory supplies, to electronic instruments. The group soon accounted for one-fifth of total sales and an even higher percentage of earnings.

Yet, even though the company did achieve its objective of diversification, the years between 1972 and 1977 seemed to involve a kind of lull in its fortunes. Reliance on consumer products had diminished: they now accounted for less than one-half of sales (as opposed to three-quarters in 1961), and Alka-Seltzer generated only 13% of total sales volume. But a program of capital spending to bolster Miles' facilities for effective manufacturing in the future had cut significantly into the company's limited funds. Each year $4 to $5 million of a total of $15 to $17 million in net sales was consumed by interest. By 1974 research and development and promotional spending for Morningstar products had reached $33.4 million. Although these products generated $20 million in sales by 1976, it would be some time before the meat substitutes were profitable enough to begin repaying their developmental costs.

Alka-Seltzer, still the company's biggest single product, did not perform as well as expected. Sales of the product declined 14% in the first nine months of 1974, almost certainly the result of publicity surrounding a Food and Drug Administration review of over-the -counter products. Calling the drug an "irrational" mixture of aspirin (a stomach irritant) and antacid ingredients, the FDA as well as one of Ralph Nader's consumer groups questioned Alka-Seltzer's ability to settle upset stomachs. In response, Miles introduced a new non-aspirin tablet and emphasized Alka-Seltzer's ability to provide relief from headaches as well as indigestion. But total sales of the product continued to slip.

The company's bankers, increasingly critical of family management, used their infuence to install Rowland G. Rose as new company president in 1977. Descendants of the founders continued to serve on the board, but from 1977 outsiders took an increasingly greater role in company management. Rose came to the company just as its prospects were improving. Dome Laboratories, the ethical drug division, introduced new products for the treatment of allergies, skin conditions, and mental illness. Miles' production of specialty enzymes experienced a 15% increase in one year. With the building program completed, capital spending began to decrease. Rose was himself committed to a "profit consciousness" for the company that would guide Miles into a decade of growth.

Rose was barely given a chance to initiate his new program, however, before the company suddenly found itself the object of a takeover bid. In October 1977 Bayer AG of West Germany, the world's fourth largest chemical producer, offered $40 cash for each of the company's 5.4 million shares. Share prices had risen from $24 to $41 a share once rumors of a takeover had begun circulating, and in the end Bayer paid $47 a share, or a total of $253 million, the most expensive acquisition by a foreign chemical or pharmaceutical company ever made in the United States.

Analysts now agree that the Bayer takeover was simply the most dramatic occurrence in a growing industry trend of established European companies entering the U.S. market by acquiring medium-sized American companies. Rather than build their own distribution systems, foreign companies save a great deal of trouble and money by buying American firms in the same business that have already developed successful operations. While maintaining its identity, Miles Laboratories in Elkhart effectively became Bayer's headquarters for its U.S. pharmaceutical operations (in 1986 Bayer headquarters was established in Pittsburgh).

Miles' distribution facilities were not the only attraction. At the time of the takeover, production of hospital products in three of Miles' divisions were generating a growing percentage of company earnings. Diagnostic equipment accounted for 32% of sales and 50% of earnings.

It is in this area of diagnostics, as well as pharmaceuticals and biotechnology, that Bayer has directed its subsidiary. First under T.H. Heinrichs, the new chief executive officer in 1979, and then under Dr. Klaus H. Risse from 1985, Miles' health care products gained precedence over the company's other products. In 1984 Bayer arranged a contract between Miles and Genetic System Corporation, a biotech firm, that will allow Miles to manufacture and market monoclonal antibodies, products of genetic engineering.

The years of heavy debt for Bayer, the result of its expansion in the American market, are now past; the company is presently enjoying the benefits of its effective planning. In 1985 some seven American companies, now all subsidiaries of Bayer, reported a total of $203 million in pre-tax profits, an increase of 6.8% over the previous year. Of all its investments, however, Miles Laboratories remains the most prized of Bayer's acquisitions. Its sales have grown impressively since the takeover, and it now generates one third of its income from overseas markets.

Miles is now also in a position to market all of the extensive Bayer product list. Formerly, Bayer would license its best-selling drugs to its own competitors, to take advantage of their superior sales and marketing organizations. Dr. Risse says it is unlikely they will ever do so again. Miles is now financially stable, its reorganized sales force is effective, and Miles has become highly competitive in the pharmaceutical marketplace.

Miles Laboratories' access to Bayer drugs is obviously important to the company's development. As well, the company can be expected to produce its own innovative drugs. Bayer's global research budget in 1986 amounted to an astronomical $750 million, and each of its American subsidiaries had access to this fund. Miles' research budget for 1985 alone was $100 million (it amounted to $25 million per annum before the takeover). By investing heavily in research, Bayer hopes to encourage innovation and to maintain its edge in the pharmaceutical market. Breakthrough technologies and drugs have historically created huge profits for the industry: Bayer is acutely aware, then, of the importance of research and development, and wishes its constituent companies actively to participate in the process.

The future of Miles Laboratories is therefore closely linked with that of its parent company in West Germany. Just how successful the marriage between Elkhart and West Germany ultimately proves will serve as a model for other companies contemplating a move into the American market using the same formula. For now, at least, neither management nor investors can quarrel with Miles' impressive performance and Bayer's very satisfying profit margins.

Principal Subsidiaries: Cutter Laboratories Overseas Corp.; Miles Export Sales Co., Inc.; Miles International Inc.; Miles International Management Co., Inc. The company also has subsidiaries in the following countries: Argentina, Australia, Brazil, Canada, France, Japan, England, Mexico, Italy, Spain, Switzerland and West Germany.

Further Reading:

Serving Needs in Health and Nutrition: The Story of Miles Laboratories by Walter Ames Compton, New York, Newcomen Society, 1973.

Source: International Directory of Company Histories, Vol. 1. St. James Press, 1988.

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