Abbott Labs: Drugmaker, Heal Thyself
The meeting wasn't exactly what Miles D. White expected. Last fall, White and two other internal candidates for the top job at Abbott Laboratories spent a day at a New York hotel making presentations to the board on how they would lead the $12.5 billion health-care company. While White, now 44, had drawn up an extensive blueprint to revive Abbott's sluggish growth, the directors were more interested in seeing how he stood up under pressure. "The board immediately tried to knock him off his feet, and he reacted very well," recalls David A. Jones, chairman of Humana Inc., who headed the committee handling Abbott's succession.
The good news: White's confident instincts won the board over, and in January he succeeded longtime Abbott chief Duane L. Burnham. The bad news: He will need that confidence to tackle the daunting challenges. Although Abbott has long churned out predictable, decent earnings gains, that reliability had a price. While other drugmakers bet heavily on new blockbuster drugs that created years of heady growth, Abbott's plodding ways left it with a sparse pipeline, slowing growth, and subpar stock. White's prescription: a dramatic ramp-up in research spending and a flurry of dealmaking. Indeed, in June, he struck Abbott's biggest acquisition ever--its $7.3 billion purchase of drug-delivery specialist Alza Corp. Says White: "The world is changing, and we have to be decisive and adaptive."
Certainly, few would argue with that. Last year, Abbott's sales increased only 5%, while earnings grew 11.4%, well below the 16.5% annual growth it averaged in the late 1980s. This year, PaineWebber Inc. analyst David J. Lothson figures Abbott's net income will climb just 10.3%, to $2.6 billion, on $13.5 billion in sales.
Yet while White's dealmaking should help, many on Wall Street worry that he is overpaying for acquisitions. And skepticism about any imminent rebound is rife. Since White took over in January, Abbott's stock has dropped 18%, while the Standard & Poor's Health Care Composite index is down around 10%. "This takes time, and there is some [earnings] dilution associated with these fixes," says Merrill Lynch & Co. analyst Daniel T. Lemaitre, speaking of White's overhaul.
ABOVE THE FRAY. The biggest headaches have been in the company's $4 billion drug operation. It's the largest business at Abbott, whose other units produce diagnostic equipment for medical labs, hospital products such as anesthesia, and nutrition items like the infant formula Similac. Pharmaceuticals also generate well over 50% of operating income, according to analysts.
But a weak new-product pipeline has caused growth in drug sales to plummet--from 15% in 1997 to just 5% last year. While rivals have spent the '90s aggressively striking acquisition or co-marketing deals, Abbott mostly stayed out of the fray. "We tended to find reasons why deals didn't make sense rather than looking at their strategic value," says Arthur J. Higgins, head of pharmaceutical operations. Worse, Abbott will invest just $550 million on drug research last year. That's about 13% of pharmaceutical sales--well below the 17%-plus rate such market leaders as Pfizer Inc. plow in.
But the bigger problem has been Abbott's undisciplined approach to research. Abbott spent millions, for example, to develop and roll out an asthma drug called Zyflo, even after company tests indicated that the large doses needed could cause liver problems in some patients. Moreover, the drug development team didn't focus on the product improvements needed to keep ahead of rivals. Abbott didn't move quickly enough in the early 1990s to develop a once-a-day or an intravenous version of its $1.2 billion antibiotic Biaxin for the U.S. market. Since rival Pfizer's Zithromax has those versions, Biaxin's U.S. sales have slipped.
The company has taken some other big hits as well. In August, Geneva Pharmaceuticals Inc. brought out a generic rival to Abbott's $690 million drug Hytrin for hypertension and noncancerous enlarged prostate. That is likely to cut Hytrin sales to $500 million next year. And early this year, the Food & Drug Administration halted sales of Abbott's $275 million clot-dissolving agent Abbokinase because of poor manufacturing controls. "You've got three blockbusters in your portfolio that aren't doing what they've done historically," says John R. Schroer, portfolio manager at Invesco Funds Group Inc., which is a large Abbott shareholder. "And there's nothing immediately to fill in for them."
VITALITY SHOT. If anyone within Abbott can nurse the company back to health, however, White looks to be the one. A snowboarding fan who swigs Diet Cherry Pepsi, White brings vitality and informality to the staid company. A former McKinsey & Co. consultant, White joined Abbott's diagnostic division--which makes testing equipment for labs, hospitals, and doctors--in 1984. A decade later, when White took the helm, revenues were growing at less than 4% a year. He pushed into new markets, including a move into blood-glucose monitoring, with the $867 million acquisition of MediSense Inc. in 1996. And he pumped more money into developing new products. His formula paid off. In 1998, diagnostic sales grew 11%, excluding the impact of currency, four times the industry growth. "Miles has consistently delivered results," says Dennis C. Carey, vice-chairman of executive search firm Spencer Stuart U.S.
Now, White is applying that aggressive medicine to the rest of Abbott. In addition to Alza, he will pay $680 million for Perclose Inc., a maker of devices used to seal arteries after major invasive surgery. The dealmaking has not come cheap, however. The Alza deal, in particular, will shave 3 cents off next year's earnings per share. And while Alza will add some much-needed new products, analyst Michael Krensavage of Brown Brothers Harriman warns that it does little to improve Abbott's ability to develop new drugs, since Alza's strength is in creating new ways to deliver existing drugs.
To repair the new-product machine, White will nearly double the research and development spending for pharmaceuticals, to $1 billion, in the next three years. Just as important, White is bringing more discipline to research. The company is paying more attention to follow-on products, for example. And new teams which include executives involved in research, marketing, and manufacturing have been set up to give input on new drugs at early stages of their development.
Still, those moves will simply pull Abbott even with its far more successful rivals. And some industry pros say the company's small size puts it at a major disadvantage as the costs of drug development soar. Stephen S. Tang, national director of the health-care industry practice at A.T. Kearney Inc., says smaller players such as Abbott need to concentrate on a limited number of categories. While Abbott has pulled out of two fields--immunology and cardiovascular research--it still competes in seven other areas. "They'd be better off focusing on the few where they can be leaders," says Tang.
Moreover, White has challenges beyond the drug operation. The company is saddled with an underperforming $1.8 billion U.S. business in nutritional and pediatric products. Last year, sales declined slightly, as pricing pressure continued to hit infant formula. To drive growth, White wants to push further into higher-margin lines related to pediatric health. He's also expanding Abbott's line of nutriceutical products, such as the Ensure Glucerna snack bar for diabetics. Reasonable moves all, but are they worth it? Plenty on Wall Street agree with PaineWebber's Lothson in arguing that White should dump the slow-growing unit and concentrate on restoring Abbott's core.
But for now, White says Abbott has no need to slim down. Instead, he's concentrating on cultural changes that he hopes will spur better cooperation among Abbott's units. For starters, there are little things such as volleyball and soccer fields under construction at company headquarters. But more critical changes are under way as well. The pharmaceutical and diagnostic units, for example, both have research programs in HIV. Now, a companywide team exists to coordinate research and planning work. "We've made it clear we don't expect our people to be in insulated fiefdoms," White says. It may not sound like much, but that sort of change represents a radical move for Abbott. And it's absolutely critical if White is to transform this laggard into a market leader.