Commentary: P&G's Cold Feet May Have Averted A Misstep

Durk I. Jager, the Dutch-born exec who's trying to shake up stodgy Procter & Gamble Co., should be thankful that the 163-year-old packaged goods giant retains some of its knack for resisting change. When word leaked that the company was negotiating a merger with drugmakers American Home Products Corp. and Warner-Lambert Co., the chief executive quickly backtracked and scrubbed what he had said would be a "blockbuster combination of technology, marketing, and scale capabilities." His explanation: Secretive P&G didn't wish to negotiate its big plunge into the drug business in public.

Jager's Jan. 24 retreat may also have a lot to do with the 18.9% wallop that P&G shares took on the news. Whatever the reason, Jager did the right thing. True, P&G is a marketing powerhouse, albeit one that has lost a bit of its golden touch. And AHP and Warner-Lambert are certainly potent marketers in their own right. What's more, television, newspapers, and magazines are full of ads for prescription drugs--everything from Viagra to Zocor--enforcing the view that medicine has become just another consumer product to be sold like soap or diapers.

FLAWED PREMISE. That provided the basic premise of the combination--marrying two giant pharmaceutical makers to the marketing machine that brings the world Tide and Bounty to produce an unstoppable competitor. But the premise is flawed. The inherent differences between drugmakers and consumer-goods outfits are so striking that it's a wonder that P&G and its erstwhile paramours even bothered dating.

Start, for instance, with the science--how many versions of Pampers take 12 to 15 years and $500 million to develop? That's what it takes to move a drug from a lab-jockey's concept to the market nowadays. Not a lot of synergy there between the Cincinnati giant and the two New Jersey drugmakers.

And the skills that Procter has perfected to keep Crest a winner are not necessarily those that drugmakers lack. Indeed, in the few years during which they have been advertising prescription medicines, drugmakers have gotten pretty good at it. Just take a peek at those Claritin ads that have helped Schering-Plough keep its antihistamine on top. Says Ryan, Beck & Co. analyst Neil B. Sweig, "You'd be amazed at how much American Home and Warner-Lambert have learned about TV and media and advertising."

And once the message is put over to consumers, drugmakers still must sell doctors on their products. That requires a huge sales force of "detailers," many with pharmacology degrees or science backgrounds, who call on doctors and hospitals. Even the best P&G-trained marketers would need to be entirely reschooled to tote a bag into doctors' offices.

Jager's impulse to do something dramatic to bolster P&G's efforts in pharmaceuticals is understandable. After nearly two decades in the business, its stable of 40 drugs generates just $700 million in annual sales--while a single blockbuster brings in $1 billion a year. Says A.T. Kearney Inc. health-care consultant Stephen S. Tang: "They've kind of dabbled in [prescription] drugs, but have never made a commitment to market leadership." If P&G is serious about growing its drug line, however, it should start out with some smaller acquisitions to gain experience.

COMMON MISSION. Companies that have succeeded in pharmaceuticals have tended to be tightly focused. Merck and Pfizer, the purest plays, don't do a lot beyond drugs. And more consumer-minded firms such as Johnson & Johnson and Bristol-Myers Squibb Co. dominate their fields because their managers have one common mission: health, whether it's baby powder or medical devices. "At some point, P&G would have had to make a strategic choice between being a health-focused company or a consumer-goods company," says Boston Consulting Group Inc. vice-president Jay A. Istvan.

Now that Jager has rethought his plunge into drug megadealing, he should heed his investors They would much prefer the other leaked news--of a possible bid for Gillette Co., whose consumer-products business would mesh nicely. In retrospect, P&G's dalliance with pharmaceuticals looks like a close shave.