STERLING DRUG, INC. History

Company History:

It is only in recent years that Sterling Drug, Inc. has developed innovative ethical drugs through its own research. For a company that manufactures Bayer aspirin, the leading American aspirin brand, this seems like an unusual occurrence. Yet the company's success has always relied more heavily on growth through acquisition and advertising rather than on research and development. While this approach to business has made the company vulnerable to anti-trust suits and the scrutiny of the Federal Trade Commission, Sterling Drug has nonetheless managed to forge a comfortable niche in the pharmaceutical industry.

William Erhard Weiss began his career in pharmaceuticals as a clerk in a drugstore. Initially selling products on horseback, Weiss later decided to begin his own company. In 1901, with Albert H. Diebold, he established the Neuralgyline Company (the forerunner of Sterling Drug) in West Virginia. The two men immediately laid the foundation for a style of aggressive marketing that would distinguish the company for years to come. The partners posted signs on fences and trees along the West Virginia roadways in order to advertise the merits of their pain reliever Neuralgine. After one year of business, the company sold $10,000 worth of the product. Instead of saving it, however, Weiss and Diebold reinvested total profits, along with additional funds from outside investors, for advertising promotions in Pittsburgh newspapers. By 1907 they had accumulated enough profits to purchase the Sterling Remedy Company, and changed the company name accordingly.

During the same period of time a West German chemical company accomplished a scientific breakthrough by inventing aspirin. In 1893 Felix Hoffman, of Friedrich Bayer and Company, synthesized salicylates, which are naturally occurring chemicals in willows and other plants, and created an effective pain reliever. By the turn of the century the drug was launched on the world market. However, scientific discoveries sometimes become the objects of twists in history. At the end of World War I the Sterling product line consisted of Neuralgyline, Danderine, Casaets, and California Syrup of Figs. This sparse product line was soon strengthened when Francis P. Garvan, the Alien Property Custodian, decided to auction the American Bayer company. Since Bayer was German-owned the U.S. government had seized it and other properties during the war. Sterling offered a prohibitive $5.3 million to acquire Bayer's holdings in the U.S. and became the owner of the Bayer aspirin patent.

In a 1921 ruling that had far reaching consequences for the pharmaceutical industry Judge Learned Hand approved generic use for the word "aspirin." As a result, Sterling resorted to using "Bayer" in their product name in order to maintain a trademark for their product. Thus, at the beginning of the decade Sterling held a major portion of the worldwide aspirin market.

It was not long before the company began competing with its German counterpart. In Latin America, representing at the time a vast untapped market for the Western pharmaceutical industry, the two companies competed for the same market with a confusing tangle of trademarks. To avoid litigation, and to gain access to expensive ethical drug research as well, Sterling signed an agreement with I.G. Farben, Bayer's new parent company. In the 1923 agreement Sterling gave Bayer 50% of its stock in Winthrop Laboratories, a Sterling subsidiary, in exchange for Bayer's manufacturing information and the transfer of Bayer patent and technical data for future discoveries. The Latin American market had been carefully divided in order to create a balance of power between the two pharmaceutical companies.

The cartel represented a huge profit potential for Sterling Drug. Management estimated the value of the agreement in the range of $50 to $100 million. In the 1920's cartels with German companies were condoned as a means of helping Germany's beleaguered post-war economy. Yet, as argued in 1942 Fortune magazine article, it was at this early stage that the German government laid the foundation for a policy of economic fascism. At the roots of the struggle over "a simple glassine envelope containing two aspirin-compound tablets" was "Germany's attempt to reduce a continent to the economic and political status of a colony."

Whatever real or imagined designs Germany had in regard to its Latin American market, however, it soon became apparent that it was neither economically nor politically viable for Sterling to continue conducting business with Farben. Coming within a hairsbreadth of suffering U.S. government action, two Sterling subsidiaries in Latin America, Winthrop Products, Inc. and the Sydney Ross Co., suddenly became the advanced guard for a U.S. trade-war policy against Germany. In other words, an all out economic war to gain hegemony over the Latin American market was waged against Farben; as far as Sterling was concerned the cartel ceased to exist.

This sudden turnaround seemed inconsistent in light of the previous intimate business dealings between the two companies. The initial agreement of 1923 called for Sterling to supply aspirin to the Latin American market only if Farben were at any time unable to do so. Yet as late as 1941, during the British blockade of Nazi occupied Europe, Farben asked Sterling to violate the agreement between the two companies and send Winthrop ethical drugs to Latin America. After two and a half days of debate William Erhard Weiss (at that time chairman of the board) ordered the shipment sent.

Weiss' decision soon proved disastrous; the U.S. Government Interdepartmental Committee, composed of members of the Departments of State, Justice, and Treasury, ordered the resignation of Sterling management. In spite of Sterling Drug being placed on a British blacklist for Weiss' compliance with Farben's requested shipment, the company continued the process of establishing new companies in Latin America to protect both itself and Farben from the possibility of expropriation during the war. These activities of the company, in addition to German ownership of portions of Sterling subsidiaries and stock, severely compromised its position during a mounting U.S. war effort.

U.S. government action against Sterling could have taken the form of antitrust litigation or the severing of all Sterling subsidiaries with any connection to Farben. Yet before any such action was initiated a young group of Sterling executives reached an agreement with the government to use the Sterling-Farben relationship as a newly declared battleground for Allied economic policy. Tom and David Corcoran, two executives at the Sterling Ross subsidiary in Latin America, enthusiastically enlisted government support for the offensive against Farben. A short time later Sterling emerged from its near brush with government sanctions as one of the bastions of free trade enterprise.

After the forced resignation of Weiss, Diebold and 48 former employees, the newly installed executives devised a successful company strategy and emerged from the war with unprecedented profit margins. Sterling's victory in this battle of trade-war territory can be attributed to its advertising technique which had been perfected during its forty year period of existence. By distributing 80 million copies of hand material and 27 million samples of products, Sterling's 1000-man sales force canvassed the smallest towns. The Sydney Ross subsidiary purchased the largest amount of radio airtime up to that time and, as a result, in 1942 Latin Americans were exposed to 5 million advertisements for Sterling products. Besides the radio ads, use of sound trucks, soap operas and religious calendars were just a few examples of the variety of marketing approaches. Moreover, these approaches were by no means futile; after one year Sydney Ross subsidiary sold more aspirin than Farben did in either 1940 or 1941.

Sterling's victory over Farben was viewed as a microcosm of the Allied victory over Germany. In 1945 when all German properties were again seized by the U.S. government, Sterling paid $9.5 million to buy out the one-half German interest in its Winthrop subsidiary. Yet the animosity between the two companies did not end. In 1952 the West German company, through its American subsidiaries Shenley Laboratories and Norex Laboratories, filed an antitrust suit against Sterling demanding that the company either pay royalties on the now illegal 1923 and 1926 agreements or allow the American subsidiaries to manufacture and sell Bayer products in the U.S. based on a previous 1949 agreement.

Sterling was not financially harmed by this litigation. By the early 1970's sales for Bayer aspirin were more than $50 million a year. Today, Sterling Drug retains exclusive rights to the use of the Bayer trademark for its aspirin product in the U.S., while the German company and its U.S. subsidiaries manufacture an assortment of industrial items under the same name. Outside the U.S. and its territories and Canada, use of the Bayer trademark belongs solely to the German company.

In addition to the sale of proprietary drugs that included a new arsenal of pain relievers (Cope, Vanquish, Measurin, and Midol), Sterling had entered the consumer product market and had become the most diversified member of the pharmaceutical industry. The product line for consumer items ranged from cosmetics and Beacon Wax to fragrances and d-Con insecticides. Sterling also manufactured chemicals and animal health products.

In the early 1970's Sterling began researching and developing their own ethical drugs. As well as marketing Neo-Synephrine nasal decongestant, NeGram, an antibiotic used to treat urinary tract infections, Sulfamylon, a cream used on severe burns, and pHisoHex, an antibacterial skin cleanser, Sterling also released pentazocine, a prescription analgesic (trademarked under the name Talwin) potentially regarded as highly profitable in the future. During this period total sales for Sterling products reached over $500 million a year.

While the early 1970's initiated an era of comfortable growth for Sterling, the company was not expanding without its share of setbacks. Arguing that control of health care, beauty and home products lay in the hands of a small number of companies, Federal Trade Commission attorneys (in an appeal on a previously failed anti-trust suit) brought suit against the 1969 Sterling Drug-Lehn & Fink merger. According to the FTC, the combinations of Lehn & Fink, the manufacturers of Lysol products, and Sterling Drug represented a reduction in competition among packaged goods advertisers. With the companies spending a disproportionately large amount of money on advertising (compared to the amount of money generated from sales) the attorneys claimed consumers were denied a fair review of products.

While Lehn & Fink continues today to be a Sterling subsidiary, this encounter with the FTC was not the only problem facing Sterling. In late 1971 the Food and Drug Administration, concerned about possible adverse effects of hexachlorophene, ordered all products containing this chemical to be sold on a prescription basis only. This sharply reduced the sales of Sterling's pHisoHex which had become the largest-selling anti-bacterial cleanser.

The hardest blow to strike Sterling was the growing competition in its virtual monopoly of the aspirin market. It was not until 1971 that scientists finally understood exactly how aspirin works in the body. At the same time, however, Johnson & Johnson released is nonaspirin Tylenol and marketed it as a superior product without the possible side effect of an upset stomach ordinarily associated with aspirin. Then came Bufferin, Excedrin Extra-Strength, and other analgesic compounds claiming faster relief, higher potency, and no upset stomach. By 1983 Bayer aspirin held only 10% of the $1.3 billion aspirin market.

Soon afterwards Sterling began its own series of aggressive advertisements to strengthen its entire product line. Spending some $153 million in 1973 alone, Sterling became one of the nation's largest advertisers. While Dr. Mark Hiebert, chairman and chief executive officer of Sterling until 1974, was trained as a physician, his real ability was in marketing. Under Hiebert's direction several Sterling household products performed exceedingly well. Yet at the end of his term the FTC began an investigation into misleading analgesic advertisements. The FTC, citing Sterling, Bristol-Meyers, and American Home Products, claimed the companies had made unqualified statements of comparative effectiveness and required further proof of clinical testing. Dr. Hiebert, however, stood by the Bayer aspirin advertisements claiming the product was promoted "in good conscience and with facts."

With the retirement of Dr. Hiebert, a new group of executives stood at the company helm. Clark Wescoe, new president and chief executive officer, Robert K. Pfister, vice chairman, and Glenn W. Johnston, president, directed a tightly controlled administration. Rearranging the three major Sterling divisions which included pharmaceuticals, over-the-counter proprietary drugs, and consumer goods, Wescoe made sure no product crossovers existed. Thoroughly scrutinizing costs and expenditures, Sterling executives directed the company into a period of new growth. By 1974 worldwide sales were estimated at $950 million with a return on equity at 22% and a consistent gain on earnings over the past 24 years.

Consumer products such as Lysol and Beacon Wax generated sales of $123 million and $30 million, respectively. Bayer aspirin continued to maintain the lead with 1973 sales at $70 million. Furthermore, Wescoe's medical background (he was dean of the medical school at the University of Kansas) prompted him to overhaul Sterling's research facilities. Due to Wescoe's influence several promising ethical drugs emerged from Sterling labs.

By 1978 the dispute over controversial advertisements reappeared. The Food and Drug Administration claimed Sterling had distorted one of their reports on the safety of pain-killers. Since Sterling had only partially revealed the report findings, the FDA accused the company of misrepresentation. The company agreed to remove the advertisements, but the dispute was not over. In 1981, based on the complaint filed in 1973, a FTC administrative law judge ordered Sterling to "refrain from making claims about its nonprescription drug products' efficacy or superiority unless those claims are based on competent and reliable scientific evidence."

Besides the FTC order Sterling was confronted with other difficulties. In 1982 when Tylenol was removed from the shelves due to the tragic cyanide poisoning of seven people, Panadol, a Sterling acetaminophen used outside the U.S., could successfully have captured a large portion of the vacated market. Yet Sterling had not planned on introducing the drug in the U.S. until the following year and by then Tylenol recaptured four-fifths of its former market. In addition, Sterling faced new competition from ibuprofen, a generic name for a former prescription pain-reliever. Receiving FDA approval to market the drug over-the-counter, American Home Products and Upjohn entered the ibuprofen market and threatened to take away sales from Sterling's Rufen and Motrin.

Under the new President John M. Pietruski several new products were launched on the market to regain earlier losses. A broadened line of pain-relievers including extra-strength Bayer and an arthritis Bayer, as well as new pharmaceuticals including a radiodiagnostic agent, an aerosol asthma treatment, and a gonorrhea treatment, all helped to increase Sterling sales.

Sterling's most promising drug awaiting approval is milrinone, a treatment for congestive heart failure. After abandoning an attempt to gain FDA approval for a similar drug, amrinone, when a decreased count of platelets or blood clotting mechanisms were found in test patients, Sterling subsequently developed milrinone. This new drug is being promoted as a drug which has the potential for capturing a large market share. Its capability of increasing the heart's ability to contract may have a beneficial effect on a patient's daily existence.

Yet despite milrinone's potential, Sterling's lackluster performance in the mid-1980's has disappointed investors. Overseas earnings were hurt by the strong U.S. dollar and ibuprofen continues to make inroads in Bayer's market. While milrinone's potential for huge profits may have caused Sterling stock to increase in 1985, one Wall Street analyst attributed the rise in price to a rumor of a company takeover.

Principal Subsidiaries: Sterling Pharmaceutical Group; Winthrop-Brown Laboratories; Glenbrook Laboratories; Cook-Waite Laboratories, Inc.; Lehn and Fink Products Group; Minwax Company, Inc.; The d-Con Company, Inc. Sterling Drug also has subsidiaries in the following countries: Australia, Canada, England, Japan, New Zealand, and Switzerland.

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

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