Pharmacia & Upjohn Inc.

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Pharmacia & Upjohn Inc.

95 Corporate Drive
Bridgewater, New Jersey 08807
U.S.A.
(908) 306-4400
(888) 768-5501
Web site: http://www.pnu.com

Public Company
Incorporated: 1995
Employees: 30,000
Sales: $6.71 billion (1997)
Stock Exchanges: New York
Ticker Symbol: PNU
SICs: 2834 Pharmaceutical Preparations; 2836 Biological Products, Excluding Diagnostics; 2833 Medicinal Chemicals, Botanical Products; 2835 In Vitro, In Vivo Diagnostics; 8731 Commercial Physical, Biological Research

An international manufacturer of pharmaceuticals formed through the 1995 merger of the Pharmacia A.B. and the Upjohn Company, Pharmacia & Upjohn Inc. researches, develops, manufactures, and markets a variety of pharmaceutical and health-related products, including those for infectious and metabolic diseases, central nervous system disorders, cancer, and women’s health concerns. The company also develops and sells vaccines and pharmaceuticals for pets, livestock, and other food animals. Pharmacia & Upjohn manufactures pharmaceutical chemicals and intermediates, as well as selling specialty products for hospitals, as diagnostics, and as nutritional supplements.

The Origins of Upjohn

It is not inaccurate to describe Upjohn’s Victorian beginnings as marking the origin of modern pharmaceuticals in general. In 1885 Dr. William Upjohn revolutionized the drug industry when he patented a tedious process for the making of a “friable” pill capable of crumbling under the pressure of an individual’s thumb. The image of Dr. Upjohn’s thumb crushing a pill eventually became a trademark of the Upjohn Pill and Granule Co., founded in Kalamazoo in 1886 by Upjohn and his brother Henry. A talent for promoting its products ensured the company’s steady growth through the turn of the century. By 1893 Upjohn could be seen at the Chicago World’s Fair distributing souvenirs of its exhibit—an enormous bottle filled with colored pills. In 1903 the company shortened its name to The Upjohn Company. Quinine pills and “Phenolax Wafers” (the first candy laxative) were two of the early and successful products made by Upjohn. By 1924 the extremely popular wafers were bringing in $795,000 a year or 21 percent of Upjohn’s sales revenue.

From the very beginning, however, Upjohn not only emphasized the marketing of drugs, but also the research and development of new compounds. In 1913 the company hired its first research scientist, a chemistry professor named Dr. Frederick W. Heyl. The doctor proved to be a sound investment for Upjohn. One of his developments, Citro-carbonate, an effervescent antacid, reached sales of one million dollars in 1926. Heyl was also responsible for patenting a digitalis tablet called Digitora, used in the treatment of heart disease and still sold by Upjohn into the 1990s.

William Upjohn was largely responsible for the firm’s early research orientation as well as its entrepreneurial spirit. When William Upjohn died in 1932, the job of running the company fell to his nephew, Dr. Lawrence N. Upjohn, who served in that post for 12 years. In 1944 Lawrence Upjohn retired and Donald S. Gilmore became president. Gilmore brought to the company valuable experience as a corporate executive from the business world, but even he was by no means an outsider. In fact, he was both the stepson and the son-in-law of William Upjohn. Ray T. Parfet, president of the company beginning in 1961, also married into the family. The company had been so tightly held that until 1968 no one who was not a family member or employee of Upjohn was permitted to sit on its board of directors.

Major Developments at Upjohn Through the 1980s

During the 1930s and 1940s, under the guidance of Lawrence Upjohn and later under Gilmore, the company expanded its research and manufacturing facilities and added 12 more research scientists. This expansion paid off when Upjohn became the first to market an adreno-cortical hormone product in 1935. The actual impetus for the company’s success occurred during World War II when Upjohn, like many other drug companies, developed a broad line of antibiotics, including penicillin and streptomycin. Upjohn was fortunate enough to be selected by the armed forces to process human serum albumin and penicillin. By 1958 Upjohn was the sixth largest manufacturer of antibiotics.

In addition to antibiotics, Upjohn also developed a product called Gelfoam during World War II. A substance made from beef bone gelatin, Gelfoam was a porous, sponge-like material which, when used during surgery, absorbed many times its volume in fluid and was itself absorbed by body tissues. Gelfoam was also useful in the treatment of hemophiliacs, and when manufactured in a powder form that could be swallowed, Gelfoam was used to stop internal hemorrhaging that occurring in the digestive tract. Another successful product for the Upjohn Company during the postwar period was the injectable contraceptive Depo-Provera. This drug provided protection against pregnancy for about 90 days. Though the drug would not gain FDA approval in the United States until the 1990s, it was marketed in more than 80 foreign countries through subsidiaries located abroad.

Upjohn’s international expansion during the 1950s was critical not only in allowing it to compete with other large drug manufacturers in foreign markets, but also in enabling it to make genuine advances in the area of research. Challenged by Merck, which introduced cortisone into the market, Upjohn joined forces with S.B. Penick & Company on an expedition to Africa in 1949 and 1950 in search of a plant that could provide a cheaper source of the drug. This venture ended in failure, but the company was fortunate enough to discover accidently—growing on a petri dish—a mold capable of fermenting progesterone, the basic building block for cortisone, out of diosgenin. Upjohn was able to capitalize on its discovery by forming a partnership with a Mexican firm, Syntex, which isolated diosgenin from yams.

In 1957 the Upjohn Company introduced the first oral anti-diabetes agent called Orinase. Many physicians and patients considered Orinase to be the greatest advancement in the treatment of adult-onset diabetes since insulin. Studies conducted in the 1970s, however, linked the drug with heart disease, and its use was subsequently discouraged by the National Institutes of Health. Yet Upjohn continued to produce a line of oral anti-diabetes agents, including Tolinase and the more potent Micronase.

One of the more significant developments for the company during this time was its 1974 development of Motrin, an anti-inflammatory agent widely prescribed in the treatment of arthritis and menstrual cramps. Boots Company of Britain licensed Upjohn to sell ibuprofen (Motrin’s active ingredient), but in 1977 Boots entered the U.S. market itself, even while continuing to license Upjohn. A price war ensued in 1981 when Boots sold its version of the drug at 20 to 30 percent less than Upjohn. By 1984 both companies had extended the battle by producing over-the-counter ibuprofen pills Nuprin and Advil. As a result of this competition, Upjohn’s dominant market position was eroded; by mid-1984 Boots gained 25 percent of the market share of prescriptions for ibuprofen.

During the mid-1980s, Upjohn produced two prostaglandin products, one for cardiovascular disorders and the other a pregnancy termination product. The company also introduced its Monoxidil, a treatment for baldness. Originally intended as a drug for heart disease, Monoxidil produced unwanted hair growth in patients. When rumors of the drug’s restorative powers spread, Monoxidil’s sales doubled. Upjohn marketed Monoxidil as a baldness treatment under the name Rogaine.

In 1987, the grandson of Upjohn’s founder—Ray (“Ted”) Parfet—left the company’s presidency, and Theodore Cooper assumed control of Upjohn. Remarkably, at the time Cooper was one of the few medical doctors responsible for a U.S. Pharmaceuticals firm. Cooper had joined Upjohn in 1980 and became renowned for improving the company’s quality control and regulatory areas.

Challenges and Controversy in the Early 1990s

By 1989, the patents on many of Upjohn’s major products began to expire, and development of it most advantageous new products was far from immediate. Other products simply were not performing as expected. Rogaine, for example, did not achieve anticipated sales levels, despite the fact that it earned in excess of $100 million in worldwide sales. Some patients complained that the drug did not produce the results that they desired, while Rogaine’s position in general was compromised by a glut of inferior over-the-counter hair growth drugs that were eventually prohibited by the U.S. Food and Drug Administration.

Nevertheless, Upjohn remained competitive throughout the world. Much of its sales forced worked in non-U.S. markets, and the company established research centers abroad—in Japan and the United Kingdom, in particular. Upjohn also built a large lab near its Kalamazoo, Michigan, headquarters, increasing its research power by 50 percent.

Upjohn also emphasized growth and diversity at this time. William Parfet, great-grandson of Upjohn’s founder, hoped to develop the sales of the company’s over-the-counter drugs such as Motrin IB. He also looked to revitalize areas of the company that had stagnated over time. He sought to enhance the health service and animal health segments of the business; for example, the development of a pseudo-rabies vaccine for swine.

Company Perspectives:

Our goal is to revitalize our company so that we enter the twenty-first century with growing competitive strength. We are developing the people, products, and programs that will lead us to that position. To do all this requires change. Our company is determined to become one that sees opportunities in change, that makes change an ally.

Introduced in 1983, the benzodiazepine Halcion achieved the level of the most widely prescribed sleep medication with 17 million prescriptions written annually in the United States by 1992. The drug, however, drew some negative attention towards Upjohn, since a controversy arose owing to patients experiencing psychiatric side effects such as memory loss or depression from Halcion. In fact, Halcion supposedly caused 8 to 45 times the adverse side effects as other frequently prescribed sleep aids. Some European countries, notably Great Britain, even barred the drug’s sale around 1991. Yet psychiatrists such as Stuart Yudofsky, chief of psychiatry at Methodist Hospital in Houston, Texas, found value in the drug. “I don’t believe that medications such as Halcion, which have such potential to help people, should be removed from the market without clear, specific scientific data,” he told People Weekly. “So far, the evidence against Halcion is not sufficiently convincing to justify denying it to the many people who benefit from it now. We should not blame medication that has value because it has been misapplied.”

Like Halcion, Xanax had been well received then met with controversy during the early 1990s. Introduced in 1981, Upjohn’s Xanax became more widely prescribed than Valium as a tranquilizer by 1987. Also called Alprazolam, Xanax became the only FDA-approved drug for treating panic attacks in 1991. A minor tranquilizer classified as a benzodiazepine, Xanax worked quickly for patients and resulted in few side effects—except for one: drug dependence. Still, many—such as the Medical University of South Carolina’s Dr. James Ballenger—felt that the benefits of Xanax were more worthwhile than any risk of drug dependency, which he attributed more to a mediacreated furor than to scientific data. As Ballenger told The Nation: “Patients hear things that unnecessarily scare them, and they feel guilty about becoming dependent. But dependence is not a weakness. It’s a physiological condition.”

The year 1992 proved difficult for Upjohn as well. Halcion, one of its product mainstays, lost 45 percent of its sales due to concerns about its side effects. Patent expirations on other important products, including Xanax, loomed—paving the way for competition among lower-priced generic brands. The company’s new products—Vantin, for example, a treatment for skin and respiratory infections—were not expected to offset the revenue losses of the patent expirations in the long term. By November 1992, Upjohn showed the lowest multiple of all pharmaceutical stocks. Rumors of a merger with German company Hoechst AG to increase the value of Upjohn’s stock circulated again as they had in 1991.

The Origins of Pharmacia

Pharmacia began in 1911 in Stockholm with one product, the phospho-energon energy pills made from animal products. The recipe for the energy pills was created by C. Më Kunwald and was patented in 1910. Phospho-energon sold so well that the turnover during Pharmacia’s first year was above SKr 20,000. From 1912 to 1962 phospho-energon, in various forms, was sold in Finland, Russia, the United States, Denmark, Norway, and England, and remained throughout that time a strong 30 percent of Pharmacia’s total production.

While Pharmacia began with one product, it had never been the intention of the company to rely on a single item. From the outset, the 21 people who invested SKr 32,100 in initial shares were told that the new company would produce medicines on a commercial scale. In 1912 Pharmacia took on the production of cedar oil, from cedar wood from Lebanon, to produce Cedrolinol, an ointment used for rheumatic complaints. In 1913 another product, Sodamint, to be used against “throatache” and stomach complaints, was launched. Paraform, which contained formaldehyde, was another product Pharmacia made to fight throat infections.

Major Developments at Pharmacia Through the 1980s

By 1922 Pharmacia was still expanding, with ever larger orders, but the profits were so low that all employees had to take a cut in wages. The next year the company began producing laxatives, a product with a proven market. Then came the 1926 launch of Kreosan Simplex, used in the treatment of bronchitis and tuberculosis, and in 1927 Pharmacia started to produce vitamins.

Prior to World War II the research department of Pharmacia received the increased resources that came in from the dramatic new product created by Nanna Svartz of the Karolinska Institutet. Her interest in the treatment of rheumatic diseases and her brilliant research with sulpha led to the launch of Salazopyrin, a product which is still used, now in the treatment of ulcerative colitis. With the proceeds from this and other sulpha products, Pharmacia could afford to launch, with Uppsala University, another major product. Professor T. Svedberg and Arne Tiselius, both Nobel Prize-winners, had been asked by sugar manufacturers to do research on the sugar beet. Bjórn Ingelmann, a student working with them on the project in 1941, identified and separated dextrose. During World War II the team developed from this Dextran, a plasma substitute, which was in use by 1943.

Ingelmann began working on pectin as well as dextrin. In the 1950s he had developed a separation process, using a centrifuge, that had been unsatisfactory. Later, Jerker Porath and Per Flodin developed a new separation method using a cellulose powder which eventually was marketed as Sephardex. A success, this took Pharmacia into the new production area of research aids. In 1955, in conjunction with the Danish AS Pharmacia and the Dutch Organon, Pharmacia launched and marketed a line in hormones.

As Pharmacia expanded, it licensed the manufacture of its products in foreign countries, allowing for foreign expansion through subsidiaries. Pharmacia GB Ltd. was formed in Great Britain to produce Dextran, Macrodex, and Rheomacrodex, and for the sale of Sepharon. In 1960, Pharmacia cooperated with Green Cross KK in Japan, with Pharmacia KK forming in 1971 so that the Swedish company could work on its own. To control these and other licensing requirements, a separate company, Pharmacia International, was formed in 1967.

1980s Turnaround of Pharmacia

Part of the state-owned Kabi-Vitrum, Pharmacia performed poorly despite the Scandinavian company’s position as a leader in separation and purification technology, an integral component in biotechnology. The company was in such sorry financial straights in 1985 that it borrowed funds just to pay the staff. Pharmacia was privatized the following year, and its new chairman Jan Ekberg introduced the company to profitability. “When I look at Ekberg’s accomplishments, he is above average in this industry as a CEO,” remarked Arvind Desai, an analyst at New York City’s drug research Mehta & Isaly, remarked in Financial World. “Among pharmaceuticals CEOs you find two kinds of individuals. There is the kind with all the strategic vision and all the lofty ideas and dreams. He has that. But not everyone has that and also has their operating hat on at the same time. That is what distinguishes him.”

Foreign enterprises aggressively increased their shares of the biotechnology and pharmaceuticals markets in the United States in 1986, and Pharmacia was no different. In fact, Pharmacia considered the United States to be its primary market. Indeed the company captured 40 percent of its 1985 sales in the United States. The Swedish company also participated in joint ventures with American firms, some that it went on to acquire. Deltec Inc., of St. Paul, Minnesota, was one such medical device company in 1986—as was Pasadena, California-based Inter-medics Interocular Inc.

Under Ekberg’s direction, the company also reconfigured as a pan-European enterprise. By 1988, it acquired companies in Germany, Scandinavia, and Italy. Then in 1990 Pharmacia entered into a major merger with Procordia, a Swedish food-and-drug company, and Pro venda, also a food company. The new enterprise formed through the merger—Procordia by name—also had Volvo as a major shareholder, yet Pharmacia, the smallest company involved in the deal, took control of the new company’s pharmaceuticals business. Ekberg continued seeking out acquisition properties for Pharmacia, including Italy’s Farmitalia Carlo Erba in 1993, until the company ranked third among pharmaceutical companies worldwide.

Pharmacia sales in 1993 totaled more than $3 billion. Capitalizing on its niche sales, Pharmacia sold mostly to hospitals, thereby decreasing its marketing costs compared to other companies relying on large sales staffs to conduct visits at doctor’s offices. Also, after privatizing years earlier, the Swedish company lessened its staffing, closed some factories, and prepared to increase operating margins to 20 percent within two years.

Industry Consolidation: Pharmacia Joins Upjohn

Mergers of large operators in the pharmaceutical business throughout the 1990s changed the industry. The larger companies captured more resources than smaller ones. They engaged in global activities and were capable of greater research and development efforts. By 1995, Pharmacia’s position dropped to the ninth largest pharmaceutical company in the world.

Pharmacia prepared to introduce a new drug for the treatment of glaucoma at this time, but the company realized that it needed a partner with the capabilities for mass marketing in the United States. Since Upjohn maintained a notable distribution network with the United States, Ekberg contacted Upjohn’s chief executive officer John Zabriskie. At their meeting in Washington, D.C., Zabriskie suggested a merger. Viewing the companies as complementary—Upjohn the generalist and Pharmacia in specialized niches—Ekberg considered the idea seriously. He sent a team from Pharmacia to ascertain the state of Upjohn’s research and development activities, and—finding them viable—agreed to the merger. The new company—Pharmacia & Upjohn—established its headquarters in Kalama-zoo, Michigan.

The merger of Pharmacia & Upjohn created a “truly global” enterprise, with business activities in Europe, the United States, and Asia. Yet, the combined company reported poor earnings.

In 1996, the company issued the first public stock offering for one of its subsidiaries, Biacore International AB. In the transaction, Pharmacia & Upjohn sold nearly 60 percent of its share of the company. During 1997 the company’s biotechnology supply subsidiary Pharmacia Biotech merged with Amersham Life Science. A new company, Amersham Pharmacia, was born from the agreement.

Despite the power of the combined companies, Pharmacia & Upjohn’s stock value fell owing to poor earnings and management confusion after the merger. Sales growth slowed, which accounted for some of the disappointing earnings. Moreover, British, Italian, American, and Swedish executives now shared management of the company, and many literally did not speak the same language. The chief executive officer contributed to the confusion by resigning.

In response to these challenges, Pharmacia & Upjohn appointed Fred Hassan as the new chief executive in 1997. A native of Pakistan but a citizen of the United States, Hassan worked for many years in Switzerland, so he was well acquainted with cultural differences. In fact, Hassan earned a reputation for pulling together separate businesses in his previous work at American Home Products. The company counted on him to amalgamate and resolve the many differences that emerged after the merger.

New Products and Markets for the Future

The merger of Pharmacia & Upjohn did not bring the expected results immediately. Nevertheless, the new chief officer showed potential for executing a turnaround at the company, and the company’s new products in development or awaiting approval looked encouraging. In 1996, the company launched the glaucoma drug Xalatan in the United States. After achieving the status as a leader among branded ophthalmic medications there, Xalatan was scheduled to be available in Europe by 1998. Detrusitol, another new product, offered treatment for patients with overactive bladders. Approved in 14 European markets, the therapy was expected to be available in the United States as Detrol. Pharmacia & Upjohn introduced Edronax, an antide-pressant, in the United Kingdom before marketing the drug to a dozen European countries.

In addition to new products, the company expanded its markets for existing medications. For example, Pharmacia & Upjohn retrieved the sales and marketing rights in Japan for one of its more prominent drugs, the growth hormone therapy Genotropin, beginning in January 1997. Sales of Camptosar, a therapy for colorectal cancer, and the anithrombotic Fragmin each increased throughout 1997, and the company’s drug for Parkinson’s disease performed well enough in the United States to introduce the product in Europe during 1998. Over-the-counter medications—including Nicorette nicotine-replacement therapy for the cessation of smoking and Rogaine hair replacement products—continued to gain thrive in the marketplace as well.

To add slightly to the minor chaos that had come with the merger, in early 1998 Pharmacia & Upjohn announced that the company was considering moving its headquarters out of Kala-mazoo, Michigan. Employees and residents of the city, alike, did everything they could to persuade the company to stay put. Employees wanted some continuity, which had been somewhat absent since the merger, with employees traveling back and forth a lot between the Kalamazoo offices and the Pharmacia & Upjohn offices that were located in London, England—serving as a gateway to the European side of the operation. Furthermore, the Kalamazoo community wanted the company to stay put, due in large part to the high level of involvement that Pharmacia & Upjohn had in local business, education, and community life. Ultimately, however, the company announced that it would be moving to New Jersey later that year.

In the company’s 1997 annual report, Fred Hassan explained that the future would hold more changes for Pharmacia & Upjohn. “We believe the changes we are making will help us become a stronger company that is more fit to compete in the global arena,” he wrote. “We acknowledge that some of these changes have been difficult for our employees, who have undergone a challenging transition …. We are indebted to them for their patience, understanding and resilience.” Soren Gyll concurred in his 1997 Message from the Chairman of the Board: “Our company is continuing to undergo a transition from two mid-sized multinational companies to a large, global competitor. We are taking decisive action to stabilize the company, maximize our most important products and improve our financial performance. The board of directors is confident that Fred Hassan is on the right course, and we are pleased with the progress he has made. The directors are fully united behind the chief executive, and we are confident about the future.”