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Exploring Corporate Strategy CLASSIC CASE STUDIES

Fisons: the Fall from Grace Helen Peck The case study covers the period from 1990 to 1995 which saw the spectacular decline of Fisons through a series of events triggered by the environmental impact of the peat digging activities of the company’s smallest division (Horticultural). From a position of great strength in the late 1980s – when Fisons was generally regarded as very well managed – by 1995 the company was reduced to a pharmaceutical division turning in losses. The other two divisions had been sold and rumours of a takeover persisted. The case study illustrates the importance of understanding and managing stakeholder expectations and relationships. l l l

During the early 1980s, John Kerridge, chairman and chief executive of Fisons, achieved one of the most remarkable business turnarounds in recent times. After selling off the company’s loss-making core fertiliser business, he went on to create a highly profitable mini-conglomerate with three distinct areas of business. The Pharmaceutical Division, with its small portfolio of specialist asthma and anti-allergy drugs, was by far the most profitable part of the business. The Scientific Equipment Division was the largest non-American supplier of scientific equipment anywhere in the world. It occasionally outperformed Pharmaceuticals in terms of turnover, but never profits. The very nature of the Scientific Equipment business meant that it was vulnerable to recession. Then there was the tiny, reliable and modestly profitable Horticulture Division, specialising in lawn fertilisers and an array of value-added peat products. By 1984, Kerridge’s transformation of the business was complete. In January 1986, a poll conducted by stockbrokers James Capel had identified Fisons as the best managed company in its sector.1 As the 1990s dawned, Fisons was generally regarded as a superbly managed company; highly skilled in the art of mergers and acquisitions, and very efficiently run. Fisons’ senior management saw, therefore, no need to give regular presentations to analysts (unlike its pharmaceutical competitors who communicated assiduously with the City), and field trips to view the company’s sites and facilities were not permitted. Despite this tendency towards secrecy, the majority of analysts slept soundly in their beds at night, confident that Fisons’ remarkable financial performance could be relied upon for the foreseeable future. But while the City fêted Kerridge and his management team, the company’s reputation was declining fast in other quarters. It seemed that the Horticulture Division’s peat-cutting activities were rapidly developing into a cause célèbre. Fisons was by far the largest cutter of peat in the UK. According to the conservationists, 90 per cent of its cutting was on land which had been designated at Sites of Special Scientific Interest (SSSIs). Fisons was legally entitled to continue working the sites where planning permission predated the award This case was prepared from published sources by Helen Peck, Cranfield School of Management, as a basis for class discussion rather than to illustrate effective or ineffective handling of administrative situations. © Helen Peck, 1995. 1

The Financial Times Health and Household sector.

Exploring Corporate Strategy by Johnson, Scholes & Whittington

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Fisons: the Fall from Grace

of SSSI status. It was, however, clearly sensitive about outside interest in its peat-cutting activities, and was rapidly acquiring a very bad reputation among sections of the local and national press. In 1989, a Sunday Times photographer had had to be rescued by police after being held against his will by Fisons’ employees, who blocked in his car for 45 minutes, demanding that he hand over his film. But in March 1990, Fisons overstepped the mark when it illegally drained and severely damaged a 65 acre peat bog on the edge of Thorne Moor, a South Yorkshire nature reserve. The company admitted destroying the Thorne Moor bog, but claimed that it had been a ‘genuine mistake’. Environmentalists were not convinced. Similar incursions had been made before when the company ‘accidentally’ cut peat from important conservation sites on neighbouring Snaith and Cowick Moor. The Thorne Moor incident prompted ten highly influential conservation groups – including Friends of the Earth, the Royal Society for Nature Conservation, the Royal Society for the Protection of Birds and the Worldwide Fund for Nature – to take up the cause, banding together to form the Peatlands Campaign. The campaigners, led by the Prince of Wales, called for gardeners to boycott peat products and save the remaining peat bogs from total destruction. The Peatlands Campaign did not stop there. In May 1990, it contacted 50 investment managers controlling over £870m worth of Fisons’ shares (around 42 per cent of the total) in advance of the company’s forthcoming annual meeting. Institutional shareholder, the Borough of Lewisham, supported by the South Yorkshire Pensions Authority (SYPA) and the Pearl Assurance Pension Fund, agreed to press the company to end its peat-cutting operations, urging it to invest instead in the development of peat substitutes. Fisons refused, but its vocal opponents were rallying support from other quarters. The issue was debated in the House of Lords and in the House of Commons, where an early day motion in support of the Peatlands Campaign was signed by 25 Members of Parliament. Fisons remained firm, but 34 local authorities joined the Prince of Wales in banning the use of peat products on their properties. More worryingly for Fisons’ shareholders, B&Q – Britain’s largest DIY and gardening chain – announced that, ‘on conservation grounds’, it had decided to ban all peat cut from SSSIs from its stores. Its leading competitors quickly followed suit. The row rumbled on, but the overall impact on the group’s bottom line was negligible. The entire Horticulture Division accounted for only 7 per cent of the company’s turnover and 5 per cent of its profits. However, the SYPA – holder of £1m worth of Fisons’ shares – continued to demonstrate concern for its local bogs, requesting that it be allowed to visit the SSSIs in its own area where peat cutting was taking place. The SYPA received a letter from head of corporate affairs, Peter Woods, informing it that ‘Relations between Fisons and major customers are operational and confidential and as such we would not comment on these to shareholders or any other third party.’ Permission for the visit was refused. In the meantime, investors’ attention focused on the forthcoming announcement of Fisons’ results for the half-year to June 1991. On 16 September, the eve of the announcement, analysts were still gleefully predicting an 11 per cent rise in interim profits. Little growth was expected from the Scientific Equipment or Horticulture businesses, but hopes were high for the seemingly recession-proof Pharmaceuticals Division. Sales of the anti-asthma drug ‘Tilade’ – Fisons’ most important new drug for many years – were expected to have gathered momentum, and analysts were hopeful that the US Food and Drugs Administration (FDA) was about to approve the drug, granting it access to the world’s most lucrative pharmaceutical market. However, the results announced by Kerridge the following day were not quite as everyone had expected. For the first time in over a decade, Fisons’ profits – while up by 6 per cent – had failed to meet expectations. The reason, explained Kerridge, was that £10m had been wiped off profits following supply problems with two of the company’s older drugs – Imferon (a blood product) and Opticrom (an anti-allergy eye treatment). Kerridge went on to explain that the disruption to supplies was caused by the ‘extremely pedantic’ FDA. The City was stunned, and Fisons’ share price took a 35p downward leap, closing at 464p on the day (see Exhibit 1). The analysts had rarely complained about Fisons’ non-communicative manner while profits soared, but the company’s continued reluctance to discuss key areas of the business now made them suspicious that the US problems were more serious than the interim statement had implied. Their worst fears were Exploring Corporate Strategy by Johnson, Scholes & Whittington

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Fisons: the Fall from Grace

Exhibit 1 Fisons’ share price, 30 December 1988 to 31 December 1993

Source: Datastream.

confirmed – and exceeded – on 11 December 1991, when Fisons announced that the drugs would not be reinstated as quickly as was originally thought, and that the result would be a £65m reduction in profits for 1991. Fisons stressed that the impact on profits would be short term in nature, and that US sales and market share of both drugs would be quickly recaptured, once full supply was resumed the following year. Fisons was nevertheless reportedly furious with the FDA, blaming the delay in clearing Imferon and Opticrom on a dispute between the FDA’s Washington and Buffalo offices. Within minutes of the announcement, a further £340m was sliced off the value of the company. The affair had by now reduced the price of the company’s stock by a third, wiping over £1bn off its stock market value. Fisons’ longer-term growth prospects were now in doubt. As one analyst observed: ‘They’ve been growing through acquisitions based on the strength of their shares, and with the shares so weak, they won’t be able to keep it up.’ Two weeks later, as the stock markets reopened from the Christmas break, Fisons’ share price nosedived again, as further revelations about its difficulties with the FDA swept the City. According to an article published in FDC Reports – an American technical magazine with close links to the FDA – there were long-standing leakage problems with the inhalers used to dispense the anti-asthma drug Intal – Fisons’ best-selling pharmaceutical product. The article claimed that the company had switched to an alternative design of valve without FDA approval, and that the company had allegedly produced deceptive test results on the new equipment. According to the magazine, Intal had been allowed to remain on the market only because of ‘the medical necessity of the product’. The report went on to reveal that the FDA inspectors had also uncovered significant deviations from best practice at Fisons’ Holmes Chapel manufacturing plant, including the practice of storing drug solutions for the manufacture of Imferon in what the inspector identified as ‘beer kegs’. The company’s immediate reaction was to dismiss the allegations as ‘scaremongering’ and ‘nonsense’. The City was unimpressed. Three days later, on 30 December, a detailed press statement was issued by the company. It stated that ‘At no time did Fisons use “beer kegs” in the manufacture of Imferon’, and refuted or explained in detail the background to each of the allegations made by the FDC Reports. The statement steadied the stock market, but for at least one institutional investor – the SYPA – this was one mishap too many. On 6 January 1992, in a letter to the Financial Times, the institution’s clerk and financial officer expressed his concern over ‘the board’s failure to manage effectively both Exploring Corporate Strategy by Johnson, Scholes & Whittington

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Fisons: the Fall from Grace

its business and its investor relations’. The SYPA was looking for institutional support for a motion to challenge the board at the forthcoming annual meeting. Fisons’ shares were widely held, with the six largest shareholders controlling around 15 per cent of the equity. The following day, an article in London’s Evening Standard revealed that the SYPA’s letter had drawn a ‘positive response’. Kerridge’s resignation – with immediate effect – was announced one week later. The man who stepped into Kerridge’s shoes to become executive chairman was Patrick Egan, a nonexecutive director of the company since 1985. Egan stressed that, once a new chief executive had been appointed, he would be concentrating his energies on the company’s strategic direction and on improving relations with the City and the company’s shareholders. Promising a more open style of management, Egan acknowledged that Fisons’ relationships with institutional investors and City opinion-formers had not always been well handled in the past. ‘But if you think there are any further skeletons to come out of the cupboard, then you are wrong,’ he said. The respite was short-lived. On 16 January, the full report of the FDA’s latest visit to the Fisons’ Holmes Chapel plant became available under US freedom of information legislation. The report revealed that the FDA had identified a catalogue of faults during an inspection of the site in 1990. Several months later, a reinspection by the regulators had found that some of its recommendations had still not been put into practice. A spokesman for Fisons had dismissed the FDA’s findings as ‘not significant’, adding that ‘All drug companies get these reports. The FDA is ever increasing its quality standards.’ The FDA was incensed. The following day, Peter Smith, associate director of the FDA’s International Programmes and Technical Support Branch – the department responsible for overseas inspections – made plain his views on the matter. In a statement in the Guardian newspaper, Smith insisted that ‘The points in the inspection report were very significant from the FDA standpoint ... We have invested more time and money in Fisons than any other company ever and [they] keep failing inspections.’ Smith went on to explain that an inspection usually takes two to five days, but visits to Fisons could take up to three weeks. ‘And this is all at the expense of the FDA. There are always problems there.’ At the company’s annual meeting on 12 May 1992, it became apparent that Opticrom was unlikely to be readmitted to the USA in time for the all important hay fever season. Worse still, it came to light that its US patent would expire early the following year. With sales of Opticrom disrupted, its market would quickly disappear as rival versions of the relatively simple drug entered the market. The company also confirmed that, due to the long absence of Imferon, the American drugs group Starius had just received FDA approval to market a similar product. Fisons was at this point still awaiting final approval from the FDA for its new drug, Tilade. The shares took their now customary skip downwards. A profits warning was issued one month later, indicating that profits for the half-year to June 1992 would be only around half those for the same period last year. The shares crashed 77p on the day, wiping off almost a quarter off the company’s value. Only speculation that a bid must now be imminent prevented them from falling further. Fisons struggled through the next year, under a new chief executive, former head of the Scientific Equipment Division, Cedric Scroggs. The company continued its negotiations with the FDA, finally securing approval for Tilade on 31 December 1992. The difficulties surrounding Intal’s dispensers were resolved, but discussions regarding the relicensing of Opticrom continued, in the hope that it might yet win back some of its market share. Imferon was formally abandoned. Scroggs’ tenure as chief executive was short-lived. He was effectively sacked in December 1993, after recessionary pressures had plunged the Scientific Equipment Division deep into the red, and some dubious (though not illegal) accounting practices were revealed in the Pharmaceutical Division. Under a new chief executive, Stuart Wallis, Fisons sold off its Scientific Equipment and Horticulture interests, disposing of the troublesome peat bogs. By early 1995, all that remained of the miniconglomerate was a cash-rich pharmaceutical shell which continued to turn in operating losses. The company was negotiating a possible merger with Medeva, a small and dynamic pharmaceutical company, and in the meantime speculation persisted that Fisons was a takeover target for a much larger player, Zenica. Exploring Corporate Strategy by Johnson, Scholes & Whittington

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