That Queasy Feeling At Bristol Myers

Richard L. Gelb, chief executive officer of Bristol-Myers Squibb Co., hates surprises, especially when he has to deliver them. But in June, Gelb left investors' mouths hanging open when Bristol announced an unheard-of goof in sales projections--for the second quarter in a row. Instead of climbing 13%, it reported second-quarter earnings would grow in the single digits. Apparently, Bristol's shareholders don't care much for surprises, either: In the week after the announcement, the drug giant's stock slid 11%, from 73 3/4 to 65 3/4.

No wonder they were disappointed. People who follow Bristol have come to expect steady helmsmanship and boringly consistent 15% earnings increases. After Bristol-Myers merged with Squibb in 1989, analysts were preparing to sing hosannas to the nation's No. 2 drug company. Says Neil B. Sweig, an analyst with brokerage Capital Institutional Services Inc.: "We expected it would start delivering earnings growth in the 19% to 20% range and become a serious contender to Merck."

CAPOTEN CRUNCH. But now, many who were smitten with Bristol's rosy future wonder if it can ever get its earnings growth back up to 15%. Three years after the merger, it seems to have taken little advantage of its surge in scale. Instead, it is struggling with a host of problems that threaten to put a full nelson on growth. Bristol faces intense price pressure, just as R&D and marketing costs are on the upswing. Growth of its best-selling drug, the antihypertensive Capoten, is slowing. And its sizable consumer-goods units, which include brands such as Clairol and Drano, continue to hold back profit growth.

It's not that the company is sitting still. It is pushing into Japan, the world's No. 2 drug market, where it has little presence. As part of a drive to consolidate some of Squibb's operations, it will close or shrink 15 drug plants between now and 1994. On July 29, it announced plans to sell its Drackett Co., which makes Drano, Windex, and other household products. But critics complain Bristol isn't doing enough. "They are taking a business-as-usual approach in a non-business-as-usual environment," says Marc O. Mayer, an analyst with Sanford C. Bernstein & Co. Partly because of shareholder lawsuits over this year's sales-projection errors, Gelb declined to be interviewed.

Bristol blames the sales-projection problem on "inventory fluctuations" at its wholesalers. In a memo to employees, it explained that wholesalers had built inventories to "unusually high levels" in late 1991. Then in January, it said, they began sharply reducing inventories.

The shareholders suing Bristol in U.S. District Court in New York claim the company deliberately misled investors. They allege that by announcing a price hike at the end of 1991, Bristol knew wholesalers would stock up before the increase, pumping up 1991's numbers--but at the expense of 1992's. Yet in April, CFO Michael E. Autera said second-quarter earnings were on track. Bristol has no comment.

The idea that Bristol's forecasting error came from inventory shifts perplexes some big wholesalers, who say their buying patterns haven't been unusual. "I think they're looking for a scapegoat," says John T. Fay Jr., a vice-president at Bergen Brunswig Corp., one of the largest U.S. wholesalers. Either way, earnings rose 17.6% in 1991, to $2.1 billion, on sales of $11.2 billion.

PRESSURE. Many of Bristol's problems aren't unique to the company. Even market leader Merck & Co.'s profit growth is being put to the test these days. Lower-priced generic drugs are taking a hefty 30% to 35% chunk of the U.S. drug market. Product life cycles are shrinking as rivals speed new products to market. Customers such as drug chains are consolidating, improving their purchasing power. With possible government regulation on the horizon, Merck is limiting future price hikes to increases in the consumer price index. Bristol is selling some of its new drugs for less than rival products, and is giving big discounts to many government agencies as well.

Price pressures may hit Bristol especially hard. Over the past three years, it has boosted earnings with average price hikes of 12.5% for its top five products, double the rate for Merck's top five, according to Booz, Allen & Hamilton Inc. Last year, Bristol was one of a few major pharmaceutical companies to raise prices twice on some of its drugs. In a written response to questions from BUSINESS WEEK, Bristol says price hikes accounted for only 4% of its $860 million in sales growth in 1991. Still, "they've relied on price increases more than others," observes Charley Beever, a consultant for Booz Allen. "That has made price constraints more severe for them."

Before the merger, most people in the industry viewed Squibb as the better half when it came to R&D. It was known as entrepreneurial and risk-taking, with a strong team spirit. The Bristol side was more formal and hierarchical. Several former and current executives say that merging these disparate cultures hasn't been easy, leading to some turnover in R&D. These executives say researchers are still grumbling about programs that were scrapped or handed to Bristol's R&D people, whom they consider risk-averse. Bristol insists its turnover is lower than most companies'.

A FULL PLATE. At the moment, the company's R&D work looks even more important than usual. Bristol's biggest seller, Capoten, is going off patent in the U.S. in 1995. In the meantime, the groundbreaking hypertension drug, launched by Squibb in 1981, is coming under serious competitive pressure from Merck's aggressively marketed Vasotec. Last year, Capoten's sales climbed only 8%, to $1.6 billion--a far cry from the 19% increase the drug chalked up in 1990.

The company insists it is well-positioned for the future. It points to recent drug approvals and a full plate of up-and-coming products, including anticancer compound Taxol and anticholesterol drug Pravachol. Thanks partly to Squibb's R&D pipeline, Bristol had a bumper crop of five new drugs approved last year. But at least one of its new drugs, the antihypertensive Monopril, is off to a slower-than-expected start. Critics say Monopril's marketing should have focused on its lower cost.

Bristol's consumer units are supposed to be a hedge against disappointing drugs. Yet the high relative cost of marketing and lower profitability of some consumer goods have depressed earnings for several years. Bristol's units outside of health care have operating margins of 17%, while the rest of the company boasts 28% margins. Pfizer Inc. and American Home Products Corp., among others, have dumped consumer divisions over the past few years. Despite selling Drackett, Gelb, whose parents founded Clairol, remains committed to personal care products.

Evidently, that's the way it will stay, at least until Gelb hands over the reins. Now 68, he has made no announcements about his succession. But then, he has plenty of other things to worry about--chief among them, the company's numbers. On July 20, Bristol announced its second-quarter results: 5% sales growth and flat earnings after a $46 million charge. By then, it came as no surprise.

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