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The fight to save Tylenol (Fortune, 1982)

October 7, 2012, 5:00 PM UTC

Editor’s note: Every week, publishes a story from our magazine archives. On September 28, former Johnson & Johnson CEO James E. Burke died at the age of 87. Burke led J&J through one of its biggest crises, the 1982 Tylenol poisonings, which occurred 30 years ago this month and killed seven people in the Chicago area.

 In 1990, Fortune inducted Burke into its National Business Hall of Fame, noting, “Few managers of corporate crises have survived an episode of the perfect crime — unsolved murder — in which their product was the murder weapon and their customers the innocent victims. Indeed, James Burke of Johnson & Johnson may be the first CEO ever to have confronted such a horror — twice. He managed it so well that he not only restored Tylenol, his company’s single most important profitmaker, to preeminence, but he also enhanced the company’s fine reputation in the process. During his tenure Burke also took J&J’s earnings and stock prices to new highs.”

This feature from November 1982 examines how Johnson & Johnson worked to save the Tylenol brand’s reputation and is a testament to Burke’s business acumen and empathy in the face of unthinkable crisis.

The first call came in around ten on the morning of September 30. It was from Jim Ritter, a consumer reporter for the Chicago Sun-Times. He said he was working on a background story about Tylenol and needed information about its history and current sales. Johnson & Johnson, the $5.4-billion-a-year health care giant that owns 149 companies in addition to McNeil Consumer Products, the maker of Tylenol, had a reputation for being courteous but closed-mouthed about numbers for specific products. So most business journalists and security analysts turned elsewhere to find out what was going on inside the company. Still, a few press calls a day came in from reporters who didn’t know better.

James Murray, a public relations deputy, routinely told Ritter he’d check with the people at McNeil and call him back.

“Is this about the terrible thing that happened in Chicago?” asked Elsie Behmer, the director of communications at McNeil, when Murray rang up.

“No,” he said, noticing she sounded out of breath. “What happened in Chicago?”

“We heard some people have been poisoned with Tylenol capsules. I’m going down to a meeting right now to find out more.”

Murray started to get up from his desk when his secretary told him the Sun-Times reporter was on the phone again and said it was urgent. Ritter told him he hadn’t known why his city editor had asked him to call before, but that now he did: the Cook County Medical Examiner’s Office had reported that three people had been killed as the result of ingesting cyanide in Tylenol capsules. Did Johnson & Johnson have a comment?

Stress test

“Are you sure this isn’t a hoax?” asked Arthur M. Quilty, a member of the executive committee, when the call came up to the top floor from public relations. He was finishing some last-minute arrangement for a trip to Europe the next week to discuss the company’s ambitious expansion plans abroad.

On the fifth floor of J&J’s unassuming red brick headquarters in New Brunswick, New Jersey, Chairman James E. Burke, 57, was having a quiet meeting with President

David R. Clare, 57. Every other month the two men would set as ide a morning like this one to talk over important but nonpressing matters they didn’t find time to deal with in the normal course of events. Clare had just come back from taking a stress test as part of the company’s “Live for Life” employee health program and was gloating over the fact that apart from some excess weight, he was in pretty good shape.

Burke had reason to feel good too. At a time when many other businesses were being battered by a bad economy, Johnson & Johnson was moving a head at a steady clip. Earnings were up 16.7% in 1981, and “1982 looked even better. In fact, Burke’s chief concern at the executive committee’s annual three-day strategic planning review after Labor Day was that things were going too well. ” I took some kidding at that meeting for worrying about things I don’t have to,” recalls Burke, a determined man with white hair and baby-blue eyes. “We had been marveling at how lucky we were to be in our industry, to have some very profitable brands doing so well, and I had said, offhand, what if some thing happens to one of them, like Tylenol? Nothing is impregnable, but it was such an extraordinary business, there didn’t seem to be any downside. Nobody could come up with anything.”

But downside there was. As Burke and Clare chatted on that sunny morning, Quilty barged into the room and told them about the cyanide deaths in Chicago.

Johnson & Johnson will not be the same again soon. In the weeks that followed, the company went through a trauma from which it s till hasn’t recovered. In the first phase of its shock it s imply tried to figure out what had happened. In the second phase it assessed and tried to contain the damage. And in the third phase, which it is still in, J&J is preparing to get Tylenol capsules back on the market again.

Despite the company’s size and wide diversification, the blow to Tylenol will have a huge and direct impact on J&J. Beginning in 1960 McNeil carefully promoted Tylenol among doctors and pharmacists as an alternative pain reliever for people who suffer stomach upset and other side effects from aspirin. Seven years ago McNeil began advertising it aggressively to the public, and by this year it had an astounding 35% share of the $1-billion analgesic market. Tylenol contributed an estimated 7% of J&J’s worldwide sales and 15% to 20% of its profits last year. Before the poisonings McNeil executives were confident Tylenol would take over 50% of the market by 1986.

J&J’s stock had risen in the last two years from the low 20s to 46 1/8 the night before the poisonings. Within a few days it dropped seven points, but then stabilized in the low 40s.

A dramatic sequel

Tylenol’s rise was generally credited in the trade as one of the headiest success stories in the last decade, all the more so because acetaminophen, which is Tylenol’s only active ingredient, is a compound that any drug company can make. Now, with the damage to the name, with 35% to 40% of the total Tylenol line removed from retailers’ shelves, Johnson & Johnson executives are planning what they hope will be an even more dramatic sequel, the Tylenol comeback.

Several floors below Burke and Clare, David E. Collins, 48, chairman of McNeil Consumer Products, was holding an urgent speakerphone conference with a J&J subsidiary in Mexico. His secretary poked her head in to say Burke wanted him in his office. It was an emergency. Collins told her he’d be up as soon as he finished with the emergency he already had on the phone. If he couldn’t get supplies fast to his Mexican company, which couldn’t pay for them because of the new Mexican currency controls, it would be out of business by the end of the year.

A former general counsel and company group chairman, Collins had been named to J&J’s 12-man executive committee just a month before and given the added job of chairman of McNeil Consumer Products. “It was a felicitous appointment for me, or so I thought at the time,” says Collins. “Before this promotion I had responsibility for Mexico, where there had been two devaluations in one year, Central America, where there had been war, and several South American countries with rampant inflation and more devaluations. I was coming from a scenario of problem upon problem to McNeil, a company with a great future and what I thought was an opportunity to win a few.”

Fifteen minutes after Collins hung up the phone on the Mexican dilemma, Burke was filling him in on the biggest problem of his career. He was to take charge of coordinating the company’s response to the Tylenol crisis. Burke told him to take a lawyer, a public relations aide and a security person and fly immediately in the company helicopter over to McNeil, 60 miles away in Fort Washington, Pennsylvania, to handle things from there. Burke dispatched a company plane to fly a scientist, a P.R. assistant, and a security agent directly to Chicago.

Like the plague

By this time the switchboards were lighting up at both McNeil and Johnson & Johnson. At first the calls came from the newspapers, TV, and radio stations, some as far away as Honolulu and Ireland. But as the story started to break, even more calls began to pour in from pharmacies, doctors, hospitals, poison control centers, and hundreds of panicked consumers, many asking for clarifications J&J couldn’t give, and many others making what turned out to be false reports of possible poisonings.

“It looked like the plague,” recalls Collins. “We had no idea where it-would end. And the only information we had was that we didn’t know what was going on.” Collins’s first move was to call an old roommate of his from Notre Dame, a lawyer who handled some of J&J’s business in Chicago, and ask him to get down to the Cook County Medical Examiner’s Office, find out as much as he could, and call him back at McNeil. “I needed my own eyes and ears on the scene,” he says.

However serene the impeccably landscaped McNeil plant grounds appeared to

Collins as his helicopter touched down on the pad, inside the natural order of things was in turmoil. Harried managers were running back and forth between telephone banks and McNeil President Joseph Chiesa’s office, bringing in new reports of fatal ities and other supposed poisonings. Each bit of information was scribbled with a laundry marker on drawing paper held by a big easel. As the reports accumulated, the sheets were ripped from the easel and pinned up on the walls. Soon the room was papered with a confusing mass of information with arrows drawn between them: victims, causes of deaths, lot numbers on the poisoned Tylenol bottles, the outlets where they had been purchased, dates when they had been manufactured, and the route they had taken through the distribution system — all the way back to the 14 stainless steel machines in Fort Washington that encapsulate and spew out pills at the rate of over1,000 a minute.

From the start the company found itself entering a closer relationship with the press than it was accustomed to. Johnson & Johnson bitterly recalled an incident nine years ago in which the media circulated a misleading report suggesting that some baby powder had been contaminated by asbestos. But in the Tylenol case J&J opened its doors. For one thing, the company was getting some of its most accurate and up-to-date information about what was going on around the country from the reporters calling in for comment. For another, J&J needed the media to get out as much information to the public as quickly as possible and prevent a panic.

The dangers of trying to manage the news were firmly in mind when the company had to reverse itself on whether any cyanide was used on the premises. It was Collins’s first question to McNeil executives when he got off the helicopter. He was told no, but later in the day he learned to his dismay that cyanide was in fact used in the quality assurance facility next to the manufacturing plant to test the purity of raw materials. The public relations department released this startling bit of information to the press the next morning. While the reversal embarrassed the company briefly, J&J’s openness made up for any damage to its credibility-the last thing the company could afford to lose under the circumstances.

By the end of the first day, a Thursday spent largely sorting out facts from false alarms, Collins and the other McNeil executives felt strongly that the poisonings did not occur at their plant, either accidentally or intentionally. If someone had dumped a dose of cyanide small enough to escape detection into one of the drug mixing machines, the mixture would have been so diluted as to be nearly harmless, and the contaminated pills would have ended up all around the country, not simply on Chicago’s West Side. Moreover, all the samples from the lot reported to have poisoned the first Chicago victims turned out to be normal.

An important discovery

The first phase of the crisis ended early Friday morning, when the company learned that the sixth victim had been poisoned with Tylenol capsules from a lot manufactured at McNeil’s other plant in Round Rock, Texas. That proved the tampering had to have taken place in Chicago and not in the manufacturing process, because poisoning at both plants would have been almost impossible. The discovery was important for the company because it signaled the end of its initial helter-skelter involvement with fact gathering and the beginning of its effort to assess the impact the poisonings would have on its product and to figure out what to do about it. But for Collins, who had gone to bed exhausted at a nearby motel at 2 A.M. only to be reawakened an hour later by a phone call reporting the Round Rock development, its significance — like so much else that first day — was not immediately apparent. “The fact the second batch came from Round Rock didn’t say a damn thing to me,” he admits, “except that, oh Jesus, now I’ve got two lots to recall instead of one.”

Had the incident not been so extraordinary, Johnson & Johnson, ardent in its commitment to decentralization, would have expected McNeil Consumer Products to cope with the problem on its own. Reassuring as it was to have the resources of J&J at its disposal, McNeil executives didn’t seem altogether thrilled by the new scrutiny they were getting from above. “Managing a crisis is one thing,” says McNeil President Chiesa, “but managing all the helpful advice is another.”

In Johnson & Johnson’s eyes the Tylenol crisis was a major public health problem and a major threat to the company. J&J carefully restricts the company name to relatively few items, such as baby products and Band-Aids. “One of the things that was bothering me,” says Burke, “is the extent to which Johnson & Johnson was becoming deeply involved in the affair. The public was learning that Tylenol was a Johnson & Johnson product and the dilemma was how to protect the name and not incite whomever did this to attack other

Johnson & Johnson products.” According to company surveys, less than 1% of consumers knew before the poisonings that J&J was the parent company behind Tylenol; now more than 47% are aware of that fact.

Burke quickly decided to elevate the management of the crisis to the corporate level, personally taking charge of the company’s response and delegating responsibility for running the rest of the company to other members of the executive committee. While the first phase had been one of problem identification and containment, the second phase was one of communication. Burke allotted the next week to establishing a good working relationship between the company and the police and health authorities investigating the crime. On Monday he went to Washington to meet with the FBI and the Food and Drug Administration. Burke had begun to advocate a recall of all Extra-Strength Tylenol capsules but — in a surprising role reversal — both the FBI and the FDA counseled him against recalling the drug precipitously. “The FBI didn’t want us to do it,” explains Burke, “because it would say to whomever did this, ‘Hey, I’m winning, I can bring a major corporation to its knees.’ And the FDA argued it might cause more public anxiety than it would relieve.”

On Tuesday, however, following what appeared to be a copycat strychnine poisoning with Tylenol capsules in California, the FDA agreed with Burke that he had to recall all Tylenol capsules-31 million bottles with a retail value of over $100 million. “Often our society rails against bigness,” Burke says, “but this has been an example where size helps. If Tylenol had been a separate company, the decisions would have been much tougher. As it was, it was hard to convince the McNeil people that we didn’t care what it cost to fix the problem.”

By mid-week an extortion note threatening a second wave of poisonings turned up at McNeil. “Imagine our reaction,” explains Collins. “We get this note that says send $1 million to a bank account number at Continental Bank in Illinois. We had to laugh. This guy’s gotta be an idiot. We’re still not convinced he did it.”

Through advertisements promising to exchange tablets for capsules, through thousands of letters to the trade, and through statements to the media, the company was hoping to demystify the incident. “There was a lot of noise out there, most of it associating Tylenol with death,” says Chiesa. “We wanted to clear up any misunderstanding, to make sure everyone had all the facts we did, that the problem was limited to one area of the country, and only a few bottles of Tylenol capsules were contaminated.

Worst-case scenario

From the start, Burke squelched one obvious option: abandoning Tylenol and reintroducing the pain reliever under a new name. Despite the long odds many outside marketing experts give against a complete comeback, and the fact that sales of Tylenol products initially dropped 80%, company executives say they never had any question about whether to bring back Tylenol. Says Wayne Nelson, Collins’s predecessor at McNeil, who is now a company group chairman, “Even in our worst-case scenario, where we get back only half the base we had before, it would still be the market leader.”

By the second weekend Burke had moved on to the third phase: rebuilding the brand. “We were still in a state of shock,” explains Burke. “It’s like going through a death in the family. But the urgency of bringing about Tylenol’s recovery makes it important we move out of the mourning stage faster than usual.”

The following Monday he formed a strategic group of key executives to oversee the McNeil task forces. It seemed clear that the company would have to come up with a new tamper-resistant package, as would the rest of the drug industry. But how consumers ultimately feel about the product — and what conflicts the poisonings posed in their minds — will be the determining factor in the comeback. Burke called in Young & Rubicam, J&J’s oldest advertising agency, to begin polling consumer attitudes. Initially he wanted to know how the public was reacting to the crisis, but he also knew the surveys would be indispensable in building a data base for what was obviously going to be, as he put it, “a very complicated communications problem.”

Good news, bad news

One of the more astonishing things learned from the first surveys was that an overwhelming number of people — 94% of the consumers surveyed — were aware that Tylenol had been involved with the poisonings. The implications of that figure, when coupled with other data, were both good and bad.

The good news, says Burke, was that 87% of the Tylenol users surveyed said they realized the maker of Tylenol was not responsible for the deaths. The bad news was that although a high percentage didn’t blame Tylenol, 61% still said they were not likely to buy Extra-Strength capsules in the future. Worse, 50% felt that way about — Tylenol tablets as well as capsules. In short, many consumers know it wasn’t Tylenol’s fault but say they aren’t going to buy it anyway, revealing a fear associated with the name that is not likely to dissipate soon.

The most heartening piece of information in the surveys-and the one on which the company will base its comeback strategy —  is that the frequent Tylenol user seems much more inclined to go back to the product than the infrequent user. The message: the company can forget about making new converts in the next year or two. Instead it will concentrate on bring ing back to the fold the loyal customers of the past.

“People forget how we built up such a big and important franchise,” says Burke. “It was based on trust. People started taking Tylenol in hospitals or because their doctors recommended it. In other words, they were not well and in a highly emotional state.” The contrary view, it can be argued, is that those same people who originally bought Tylenol because they didn’t want to take a chance on aspirin’s side effects are the last people who would want to take a chance now with the emotionally charged brand-name.

The competition is not standing idly by. American Home Products has increased production of its acetaminophen, Anacin-3, at both its plants from two to three shifts on a round-the-clock basis. Bristol-Myers will not discuss any marketing plans it has for its acetaminophen, Datril, except to say that demand is up considerably and the company is looking into new packaging for all its analgesic products.

Halloween candy

While Chairman Burke says the competition does not appear to be unfairly exploiting the situation, other J&J executives are not so sure. “While the Anacin-3 commercial says it is like Tylenol, the unspoken message is that Anacin is not involved in any deaths,” says Wayne Nelson. If the murderer is caught, J&J’s job will be easier. It would not eliminate the possibility of copycat poisonings, which have already been tried in everything from orange juice to Halloween candy. But it would solve this particular mystery and dispel some of the fear associated specifically with Tylenol.

In the meantime Johnson & Johnson must absorb giant losses. The company estimates the recall costs alone at $100 million before taxes, dropping third-quarter earnings from 78 cents a share in 1981 to 51 cents this year. (The lion’s share of that $100 million was the expenses of buying the bottles back from retailers and consumers and shipping them to disposal points.) While it is not saying precisely what it expects its losses to be, J&J is not disagreeing strenuously with security analysts who project a 70% drop in what normally would have been $100-million-plus in sales for Tylenol’s over-the-counter line of products in the fourth quarter. (Prescription sales of Tylenol with codeine, about $18 million a quarter, are not likely to be affected.) Next year Tylenol had been expected to record sales of half a billion dollars. Some analysts say the company will be lucky to do half that.

The question that will decide the market in the next year is whether fear will cause

many Tylenol users to change brands permanently or simply switch to Tylenol tablets, as the company is urging, until the new tamper-resistant package is available. There’s a hidden danger, however, in the switch back to tablets, not unlike what befell U.S. auto manufacturers when the public switched to less expensive small cars: it may lead to a serious decline in the previously fast-growing revenues of the analgesics market as a whole. “The more expensive Extra-Strength capsule format mass-marketed by Tylenol has done wonders for the revenues per headache dosage,” says Michael LeConey, a health care analyst with Merrill Lynch. “The number of headaches certainly hasn’t gone up by 15% to 20% a year, as the dollar growth in the market would indicate. A lot of this has been due simply to the upgraded capsule format.” An Extra Strength capsule in a jar of 100 costs about 5 1/2 cents, a penny more than an Extra-Strength tablet. To hear J&J tell it, capsules have a placebo effect that can help cure headaches for some people, presumably because they look more like prescription drugs than do tablets.

The makers of Tylenol will be embarking on an extremely delicate mission of psychological warfare. Timing is crucial. If J&J brings Tylenol back before the hysteria has subsided, the product could die on the shelves. If the company waits too long, the competition could gain an enormous lead.

Sophisticated though the consumer surveys are, they don’t give a clear answer on timing. “The problem with consumer research,” says an impatient Joe Chiesa, “is that it reflects attitudes and not behavior. The best way to know what consumers are really going to do is put the product back on the shelves and let them vote with their hands.”

With carefully measured public service-like ads vowing to regain consumer trust, the company has set a discreet tone for its new campaign. Says Collins, “We’re coming back against a tragedy, so there’s no way we can come riding in on elephants, blowing horns and saying here we are.”

Perhaps even more important is the effort that most of the public won’t see. At the end of October, a month to the day after the crisis began, Burke mobilized 2,259 salespeople from all of Johnson & Johnson’s domestic subsidiaries to persuade doctors and pharmacists to begin recommending Tylenol tablets to patients and customers. It is the same road the makers of Tylenol took when they began marketing the product 22 years ago. Tylenol is not out of the game, but it is back at square one.