Curing Warner Lambert Before It Gets Sick

Melvin R. Goodes is one determined soul. Warner-Lambert Co.'s new chairman and chief executive officer is a golf nut with a 10 handicap, and even Arctic blasts don't keep him off the fairways. "I've teed off when it's 15 degrees out," he says. "It's nothing to me. I'm Canadian."

Goodes is proving to be a pretty tough customer off the links, too. Just three months after replacing retiring Chairman Joseph D. Williams, the 26-year company veteran stunned employees in early October by unveiling plans to eliminate 2,700 jobs, or 8% of his total work force. Goodes, 56, also announced a reorgani-zation of Warner-Lambert's worldwide managerial ranks along business lines. And he's folding its various businesses into two core groups--pharmaceuticals and consumer products--and refocusing marketing efforts primarily on North America, Europe, and Japan.

Strangely, Goodes's upheaval comes at a company that has delivered smart 15% to 20% annual earnings growth since 1985. And had it not been for the restructuring charges, Warner-Lambert would have posted a 15% earnings gain in 1991. But Goodes sees trouble looming. Recession and widespread discounting have begun slowing the growth of such powerhouse Warner-Lambert brands as Listerine mouthwash and Schick razors. Also, its blockbuster drug Lopid, a cholesterol reducer, goes off patent in early 1993. At that time, lower-priced generic offerings will cut into Lopid's $450 million in annual sales. More worrisome, though, is the future of Cognex, a drug that Warner-Lambert is developing to combat the effects of Alzheimer's disease. Cognex once looked like the company's next big cash-spinner. But in mid-March, the Food & Drug Administration turned down the company's application for approval of Cognex, requesting more testing. Now, the drug won't hit the market until late 1993--if ever. The ruling "was a real body blow," says independent industry analyst Hemant K. Shah.

PINK SLIPS. Goodes believes his belt-tightening, which should save $1 billion in all through 1998, will help the company get its drug-development efforts crackling. "He's taking these actions to regain focus and continue the momentum of profitability," says former Warner-Lambert executive David W. Johnson, chief executive officer at Campbell Soup Co. Perhaps. But in 1991, the downsizing will result in a $524 million aftertax charge that will drive down the company's profits 92.6%, to $36 million, on $5.14 billion in sales, says Shah.

But it will take more than pink slips and plant closings to get Warner-Lambert through the leaner times ahead. Goodes must figure out how to squeeze greater profits out of Warner-Lambert's powerful, though often mature, over-the-counter products such as Dentyne gum and Rolaids antacids. Many of these brands face fierce competition. In fact, Warner-Lambert's $1 billion chewing-gum business, which also includes Chiclets and Trident, lost its No. 1 spot to Wm. Wrigley Jr. Co. earlier this year.

Collectively, these nonprescription products contribute 67% of total revenues and about 70% of operating profits. But the margins on some of these businesses now run as low as 20%, vs. 36% or so in Warner-Lambert's drug business. Small wonder the company's overall gross profit margin is just 10%--vs. the 16% average at other drug companies.

To boost his fortunes, Goodes is hoping for healthier consumer-goods profits overseas. Indeed, the company virtually created the market for mouthwash in Japan when it introduced its Listerine brand in 1984. Today, it commands 31% of the Japanese market.

To make sure there are more such success stories, Goodes is putting worldwide management through a sweeping restructuring. Under the old system, managers were responsible for all brands in their country, from Certs to the epilepsy drug Dilantin. Now organized along product lines, managers will have the opportunity to learn in depth about their particular markets. So if their brand starts to flag, there will be nowhere to hide.

HEDGED BETS. Goodes also hopes to create more over-the-counter products from Warner-Lambert's vast array of prescription drugs. Consider that its reformulated antihistamine Benadryl has seen annual sales grow sixfold, to $115 million, since being introduced into the nonprescription market back in 1985.

Another challenge for Goodes will be reenergizing Warner-Lambert's pharmaceutical business, which accounts for 30% of operating profits. Trouble is, Cognex is on hold. So far, it's unclear whether the drug has much of an impact on Alzheimer's--and results from the new tests won't be ready until late 1992. What's more, many of Warner-Lambert's new drugs, such as the antihypertensive Accupril and the oral contraceptive Estrostep, are entering crowded markets. To hedge his bets, Goodes has boosted R&D spending on drug development this year by 12%, to $340 million. Of course, that's small compared with rival Merck & Co.'s $1 billion budget. And there's the rub: With the cost of new-drug development skyrocketing and the industry rapidly consolidating, can Warner-Lambert afford to go it alone? "Warner-Lambert is not going to be bought," Goodes says adamantly. Tough talk. But what would you expect from a guy who enjoys tooling around a golf course in January?

      A blockbuster is going off patent: The patent on Lopid, a $450 million
      cholesterol reducer, will expire in January, 1993
      A major new drug is held up: The Food & Drug Administration has asked for
      further testing of Cognex, an Alzheimer's treatment
      Consumer products are slowing: Worldwide sales of Warner-Lambert consumer
      products decreased 5% in the third quarter of 1991
      ...SO IT'S RESTRUCTURING TO CUT COSTSIn a $524 million (aftertax) overhaul,
      Warner-Lambert will:
      1. Cut 2,700 jobs, or 8% of the work force
      2. Fold several businesses into two -- pharmaceuticals and consumer products --
      and reorganize management ranks along product lines
      3. Consolidate overseas manufacturing into fewer plants
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