Marion Merrell Dow, Inc.

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Marion Merrell Dow, Inc.

9300 Ward Parkway
Kansas City, Missouri 64114-0480
U.S.A.
(816) 966-4000
Fax: (816) 966-4001

Public Company
Incorporated: 1964 as Marion Laboratories, Inc.
Employees: 9,808
Sales: $3.32 billion
Stock Exchanges: New York
SICs: 2834 Pharmaceutical Preparations

Marion Merrell Dow is the product of a 1989 merger between Marion Laboratories, once a prosperous pharmaceutical company, and the Merrell’Dow Pharmaceuticals division of the Dow Chemical Company. At the time of the merger, analysts’ expectations of the new company were low, as the patents on Marion’s most profitable drugs were nearing expiration, and no new medicines were under development. Despite Marion Laboratories’ refusal to allocate the funds necessary to develop new drugs, the company retained its position in the drug industry after the merger, bolstered by Merrell Dow’s introduction of several new products to its line.

Marion Laboratories, Inc. was founded by Erwing Marion Kauffman. After serving as an officer in the U.S. Navy during World War II, Kauffman took a job on the sales staff of a pharmaceutical company in Decatur, Illinois. Energetic and aggressive, Kauffman flourished. Within a year his commissions made him the highest paid employee of the company, including the company’s president. When the company reduced the size of his territory and trimmed his commissions, Kauffman resigned, starting his own company in 1950 with $4,000 in capital.

Kauffman decided to focus on the manufacture of a calcium supplement made from crushed oyster shells. To keep overhead costs down, he established the business in the basement of his house; during the day he produced and packaged the product and made sales calls, while in the evenings he typed orders and package labels. As his company grew steadily, Kauffman moved the business outside of his home and added a staff of employees, whom he offered both share options and a profit sharing plan. During the 1950s the plan purchased shares in the company, and as the company eventually achieved 40 percent of the $100 million a year market, four Marion employees were able to retire with a net worth of more than $ 1 million.

Kauffman’s company was incorporated as Marion Laboratories, Inc. in 1964, and that year it saw profits of $130,000. During its first decade the new company actively pursued a policy of acquisitions; the fruits of diversification eventually accounted for 40 percent of the company’s sales. During this time, the cost of researching and developing new drugs was prohibitive, and, rather than increase its debt load, Marion Laboratories opted to avoid developing original products entirely, saving millions of dollars on product research. Instead, Kauffman sought to establish a niche in the marketplace through existing products. In 1974 the company’s research budget stood at zero, and $1.8 million was spent on reformulating and developing products discovered but rejected by other companies. By 1974 earnings on sales were $12 million, and the company enjoyed a 36 percent return on equity.

In 1978 Marion Laboratories established its consumer products division, which introduced Gaviscon, an over-the-counter antacid. Marketed in chewable tablet form, the product provided for the temporary relief of heartburn. It was immediately successful, and accounted for six percent of the company’s net sales in 1986.

The company maintained its focus on drugs for the treatment of ailments related to calcium intake. Cardizem, which garnered the largest percentage of net sales—47 percent in 1986— slowed calcium buildup, preventing the artery muscles from being blocked by calcium deposits. Used in the treatment of stable and unstable angina, Cardizem gained the approval of the Food and Drug Administration, which allowed Marion to release Cardizem in tablet form. Competition increased as similar compounds were submitted to the FDA for approval by other companies in the latter part of 1986.

Marion’s ulcer drug, Carafate, gained FDA approval in 1982. Providing a new way to treat stomach ulcers, Carafate formed a protective barrier preventing further damage to mucosal tissues, which block the diffusion of gastric acid and pepsin in ulcer craters. The drug posed no threat to healthy tissue where proteins were bound.

Both Carafate and Cardizem originated from research conducted by the Japanese company Tanabe Seiyaku, and Marion paid licensing fees to Tanabe. The mutual interests of both companies grew, and in 1984 they entered into a joint venture to manufacture and market Tanabe products in the United States and Canada.

During the early 1980s, Marion Laboratories marketed: Sivadone, a cream used to prevent infections in cases of second and third degree burns; Ditropan tablets and syrup, a urological agent that treated certain bladder conditions; Nito-Bid Capsules and Ointment, which managed angina pectoris or chest pain caused by insufficient blood flow to the heart; Ard and Bac-T-Screen, which facilitated the identification of bacteria in the blood stream that could cause infection in patients using antibiotics; and Culturette, a disposable, ten-minute culture transport system used by hospitals and clinics to diagnose Group A streptococci. Another product, ToxiLab, a broad spectrum drug detection system, gained popularity as concern about drug abuse in the workplace increased.

In December 1988, Marion Laboratories sold off its Analytical Systems division and purchased the American Biomaterials Corporation, a manufacturer of dextranomer-based wound treatments. In an effort to regain its focus on Pharmaceuticals, Marion Laboratories sold its Scientific Products division in April 1989. And then, to strengthen its drug development capabilities, the company purchased a minority interest in U.S. Bioscience.

In July 1989 the company was informed that Merrell Dow, the pharmaceutical division of Dow Chemical, was interested in merging its operations with Marion Laboratories. Merrell Dow had hoped to acquire Marion as early as 1985, but was unable to afford it. Therefore, Merrell Dow offered to purchase a 67 percent stake of Marion.

Marion, with its strong sales network, appeared to be the perfect match for Merrell Dow, which had a strong research and development organization but a weak position in the Pharmaceuticals industry. In addition, Merrell Dow’s Seldane antihistamine, Lorelco anti-cholesterol drug, Nicorette anti-smoking gum, and Cepacol mouthwash added strength to Marion’s flagging product line.

Marion Merrell Dow shares were buoyed by the persistent rumor that Dow was ready to buy up the 30 percent of the company that it did not own. While this never happened, Merrell Dow retired debt from its acquisition of Marion, further bolstering the shares’ value.

The new company announced plans for several new drugs, including Perfan, for treatment of congestive heart failure, Targocid antibiotic, and Sabril, an anti-epilepsy treatment. In addition, Marion Merrell Dow introduced Nicoderm, a nicotine skin patch designed to relieve smokers’ urge for cigarettes.

None of these, however, was as profitable as Cardizem and Carafate.

In order to further improve its new product development, Marion Merrell Dow acquired a stake in Gensia Pharmaceuticals, which was developing angina treatments. It also licensed five allergy medicines from Immulogic Pharmaceuticals and took over the Canadian Nordic Laboratories and German Henning Berlin company. The company’s effort to extend its product line received a boost in 1992, when Cardizem was approved for treatment of angina, as well as hypertension.

After four years as Marion Merrell Dow, the company witnessed a drop in annual growth from 20 percent to less than ten percent. Moreover, the company was forced to abandon Marion’s unique position in the industry as primarily a marketer of drugs. In the early 1990s, analysts questioned whether Marion Merrell Dow will be able to convert the synergies of its predecessor companies into a more dynamic and competitive organization.