Warner-Lambert Co. History

Company History:

The Warner-Lambert Co. manufactures and markets pharmaceutical, consumer health care, and confectionery products, including such popular brands as Listerine antiseptic mouthwash, Chiclets gum, Halls lozenges, Certs mints, Rolaids antacids, and Schick razors.

The product of a long history of mergers and acquisitions, the Warner-Lambert name reflects the combined assets of two businesses: the William R. Warner Company, a pharmaceutical and cosmetic concern, and Lambert-Pharmacal, manufacturers of Listerine oral antiseptic, which merged in the 1950s. Thereafter, Warner-Lambert became a large multinational corporation under the leadership of Elmer Holmes Bobst.

Bobst arrived at William R. Warner & Company in 1945, already a veteran executive of the pharmaceutical industry and a multimillionaire. As president of Hoffmann-La Roche's U.S. office, he had proved instrumental in acquiring for the Swiss company a large share of the U.S. drug market. Many observers were surprised that Bobst accepted the position at Warner; he was then 61 years old, wealthy, and could have settled into a comfortable retirement.

However, when Gustave A. Pfeiffer, Warner's chairperson and the only surviving member of the original founding family, approached Bobst with an offer of the presidency, he accepted. Nearly 30 years earlier, Bobst had been asked to join Warner as the head of its pharmaceutical division but declined when the Pfeiffer family refused to sell Bobst any of the company stock (the family held all the common stock). By the mid-1940s, however, Bobst had proved his abilities, and Pfeiffer readily offered the job on Bobst's terms; Bobst was hired and allowed to purchase 11 percent of the common stock. By 1955, Bobst's holdings were worth over $3 million.

What Bobst inherited with his new position was a family operated company suffering from an aging product line and antiquated facilities. Although Pfeiffer's 1916 acquisition of the Hudnut cosmetic line accounted for most of the company's $25 million sales, that product line was barely turning a profit. In an effort to improve the image of the cosmetics production, Bobst renamed the firm Warner-Hudnut in 1950.

Warner had a long history of growth through acquisition. Warner was founded in the mid-nineteenth century by William Warner, a Philadelphia pharmacist who had earned a fortune by inventing a sugar-coating for pills. In 1908, the company was acquired by the Gustavus A. Pfeiffer & Company, a patent medicine company from St. Louis. Pfeiffer retained the Warner company name, moved its headquarters to New York, and began a series of acquisitions that included the Hudnut line and the DuBarry cosmetic company. By the time Bobst assumed the presidency, some 50 companies had been acquired during the 99 years of the Warner company's history.

Bobst's managerial style was well suited to this company acquisition policy. Moreover, his experience with high-level industry and political affairs enabled him to hire a new management team of accomplished executives and public figures. Successful investment bankers, business executives, and political officials were brought in, notably Anna Rosenberg, the company's manager of industrial and public relations, who was once the U.S. Assistant Secretary of Defense, and Alfred Driscoll, later Warner's president, who had served as governor of New Jersey for seven years.

In 1952, Bobst made his first major acquisition, purchasing 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," which enlarged constricted blood vessels. By 1966, an estimated 56 percent of 3.1 million people afflicted by heart disease used Peritrate. While the sales of the drug became Warner-Hudnut's mark of excellence in the pharmaceutical industry, its success was also cause for some controversy.

Peritrate proved useful in a wider application of treatments than originally allowed, and the Food & Drug Administration (FDA) approved of Peritrate's "new drug" usages in 1959. Over the next several years, however, Warner embarked on a controversial Peritrate advertising campaign. Appearing in several medical journals, including the Journal of the American Medical Association, 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. However, by 1966, the government, under the directive of the FDA, seized a shipment of the drug, bringing charges against the company's unapproved advocacy of an even wider usage for the drug.

Also during this time, Bobst arranged a merger between his company and Lambert-Pharmacal. Bobst had met the president of Lambert, Edward Williams, at a meeting of the American Foundation for Pharmaceutical Education, and the two decided that their operations, each producing different but reputable products, would complement one another. Bobst was particularly interested in gaining access to Lambert's well-organized distribution network, which incorporated modern marketing techniques previously unavailable at Warner-Hudnut's. Furthermore, Williams brought a strong background in the management of pharmaceutical companies, enhancing Bobst's accomplished executive team, which had little experience in the pharmaceutical industry. When Warner and Lambert merged, former governor Alfred Driscoll was named president of the new company.

Lambert's Listerine product, which had accounted for over 50 percent of Lambert's total sales, guaranteed Warner a large share of the oral antiseptic market.Listerine was developed in the nineteenth century and became widely popular, particularly under the advertising strategy of Gordon Seagrove, who joined Lambert in 1926 after leaving 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 ad depicted a man encouraging a woman to continue massaging Listerine into his head, with the tagline "Tear into it, Honey--It's Infectious Dandruff!"

Listerine continued to increase in popularity under its new ownership; by 1975, the oral antiseptic held a sizeable portion of the $300 million market. Warner-Lambert continued to invest heavily in advertising for Listerine. For years, Listerine had been advertised as a preventative measure against colds and sore throats, and, during the Asian flu epidemic of 1957, Bobst personally placed an ad in Life magazine promoting Listerine's ability to resist the sickness. The company's advertising agency had earlier rejected the ad, since its claims were unsubstantiated, but the promotion resulted in sales increases of $26 million for the year.

By 1975, the Federal Trade Commission (FTC) had begun to investigate the Listerine advertisements. The FTC disputed the cold prevention claims of Listerine as insupportable and ordered the company to embark on a disclaimer ad campaign amounting to $10 million, a figure equal to the company's average annual advertising expenditure between 1962 and 1972. The FTC argued that only corrective disclaimers could educate the consumer, and, in 1978, the Supreme Court upheld the FTC's order.

During the 1970s and 1980s, Warner-Lambert made several acquisitions, including Emerson Drug, which made Bromo-Seltzer, cough drop manufacturer Smith Brothers, American Optical, and Schick Shaving. To acquire American Chicle, makers of Chiclets chewing gum, Warner-Lambert used 7.8 million of its own stock, which was then worth about $200 million. Many industry analysts criticized the high price paid for American Chicle; in 1962, the company's net income for the year was under $10 million. By 1983, however, after expanding into foreign markets, Chiclet sales were reaching the $1 billion mark. Ward S. Hagan, chairperson of American Chicle, called its gum and mint business "the largest in the world."

Another merger during this time involved Parke, Davis & Co. However, Warner-Lambert's proposal to merge with Parke, Davis was investigated by the Antitrust Division of the Justice Department. According to the chair of the House Judiciary Committee, the merger would raise "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 United States.

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 FTC, which held 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.

Satisfied with the FTC's actions, S. Burke Giblin, chair and chief executive officer of Warner-Lambert at the time of the ruling, nevertheless faced several other challenges in the ensuing years. In 1976, Warner-Lambert disclosed figures to the Securities and Exchange Commission (SEC) concerning illegal payments abroad, announcing that more than $2.2 million "in questionable payments" had been uncovered in 14 of the 140 countries in which Warner-Lambert conducted business.

Only months later an explosion at an American Chicle plant in Queens, New York, killed six people and injured 55. After a year of investigation, 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. Contending that the charges were "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. The following year, however, the New York State court's appellate division voted to restore the indictments. Finally, in 1980, the state's highest court once again dismissed all charges in connection with the explosion.

Another controversy involved Warner-Lambert's Benylin cough syrup product, which was made available without a prescription in 1975. In response to questions regarding the cough syrup's effectiveness, the FDA ordered the drug back on a prescription-only status, and, after seven years of deliberation, a settlement was finally reached in which the FDA approved the reinstated over-the-counter sale of the drug.

In 1978, Warner-Lambert purchased Entenmann's Bakery for $243 million in cash. By 1982, Entenmann's had become Warner-Lambert's most profitable consumer division, with sales reaching $333 million and an annual growth rate of 19 percent. However, during this time, a rumor was started that Entenmann's profits were supporting Reverend Sun Myung Moon's Unification Church. Since the source of the rumor was said to come from Westchester county in New York, Warner-Lambert took 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 Entenmann's delivery and sales staff were being harassed, and one Rhode Island church urged a boycott of the baked goods. 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. As Entenmann's profits continued to slip, Warner-Lambert sold the bakery to General Foods for $315 million in 1982.

The late 1970s had proved financially unstable for Warner-Lambert. Profit margins were off by 40 percent in 1979, the majority of revenues came from the sale of consumer goods, and the company was considered a potential takeover candidate. One critic characterized it a "floundering giant." That year, Ward S. Hagan replaced Bobst as chairperson, while Joseph D. Williams assumed the chief executive office. Hagan and Williams then embarked on a restructuring program with the goal of revitalizing the pharmaceutical operations and trimming unprofitable and non-core businesses.

Five unprofitable subsidiaries, including American Optical and Entenmann's, were divested between 1982 and 1986, providing Warner-Lambert with capital of nearly $600 million. At the same time, such company programs as the "Total Production System" aimed to increase productivity by cutting downtime, reducing paperwork, and creating a more flexible work environment. Hagan and Williams closed or consolidated 24 plants in foreign and domestic locations, while reducing the company labor force by almost half, from 61,000 to 32,000. Research for new drugs at the Parke, Davis division was supported by a 20 percent increase in budgetary funds during 1983 to $180 million.

Despite its improved financial condition, Warner-Lambert came under criticism, particularly for its 1982 purchase of IMED Corp., a small hospital supply manufacturer. Many found Warner-Lambert's $468 million purchase, 23 times IMED's earnings, exorbitant. IMED was the market leader, with 35 percent of sales in the hospital supply field and continued annual sales growth of 50 percent. However, the company was 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. In 1986, Warner-Lambert sold IMED and some of its affiliates to The Henley Group, Inc. for $163.5 million.

Williams, who was given the additional duties of chairperson during Warner-Lambert's turnaround period, was able to report that return on equity had increased from nine to 32 percent from 1979 to 1986, as sales shrunk through divestments and profits held fairly steady. Investing in research and development, and luring industry talent from competing companies, Williams hoped to develop and increase sales of high-margin prescription drugs, such as Lopid, a cholesterol-reducing drug that received positive publicity in the late 1980s. However, a trend among consumers toward treatment without medication, as well as swelling support for reform of the health care industry--and the attendant possibility of price controls--caused uncertainty among ethical drug producers. Business was also threatened by a late 1980s recession and discounting in the consumer goods segment.

In anticipation of these potentially adverse market forces, a new chairperson and CEO, Melvin R. Goodes, announced yet another reorganization of Warner-Lambert late in 1991. The plan called for a 2,700-person layoff, reorganization of the global management scheme, and consolidation of operations into two groups: pharmaceuticals and consumer products. Goodes also began to concentrate the company's marketing efforts on three primary geographic markets: North America, Europe, and Japan. The company invested $1.3 billion in advertising and promotion and $473 million in research and development, apparently banking on its consumer goods, which still constituted 60 percent of annual sales in 1992.

That year, Warner-Lambert became the fourth company to enter the competitive and controversial market for transdermal nicotine patches. Its prescription smoking cessation device, branded Nicotrol, was strongly promoted through direct consumer advertising, and the product enjoyed early success. However, sales quickly declined in 1993; Warner-Lambert's late entry into the segment, chronic product shortages, a lower than expected success rate, side effects, and especially reports that some users had suffered heart attacks, all led to declines in sales.

In 1993, the company became the first to win approval from the FDA for a drug that retarded the progression of Alzheimer's disease. Warner-Lambert also formed joint ventures with Glaxo Holdings plc and Wellcome plc to orchestrate the movement of the companies' drugs from prescription to over-the-counter and generic markets.

Although still known for reporting some of the industry's lowest profit margins, Warner-Lambert enjoyed steadily increasing sales and profits from 1988 through 1992. Revenue grew from $3.91 billion to $5.6 billion, and profits nearly doubled from $340 million to $644 million during that period. While the consumer goods segment held out relatively low profits, it enjoyed strong international expansion in the late 1980s and early 1990s, helping Warner-Lambert offset some of the losses associated with its ethical drugs.

Principal Subsidiaries: Adams S. A.; American Chicle Co.; Chicle Adams, S. A.; Euronett, Inc.; Family Products Corp.; Keystone Cemurgic Corp.; Parke, Davis & Co.; Tabor Corp.; Warner-Chilcott Inc.

Further Reading:

• Baum, Laurie, "A Powerful Tonic for Warner-Lambert," Business Week, November 30, 1987, pp. 44, 146.
• Lubove, Seth, "Failure Focuses the Mind," Forbes, November 8, 1993, pp. 76-78.
• Starr, Cynthia, "First-Ever Alzheimer's Drug Brings Some Hope to Millions," Drug Topics, October 11, 1993, pp. 16-18.
• Weber, Joseph, "Curing Warner-Lambert--Before It Gets Sick," Business Week, December 9, 1991, pp. 91, 94.

Source: International Directory of Company Histories, Vol. 10. St. James Press, 1995.

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