From Good to Great, Act Two

In 1974, Abbott Labs underwent a transformation. Can CEO Miles White make it happen again?
Dec 01, 2003

In his best-selling 2001 business book, Good to Great, consultant Jim Collins set out to discover what made some companies so much more successful than others. He researched more than 1,400 corporations, looking for examples of dramatic long-term improvements.

He settled on 11 that had been achieving average results, but after a particular point became great, turning in cumulative stock returns of at least three times the market-and sustained that level of performance for at least 15 years. The list included Walgreens, Kimberly-Clark, Circuit City, and one pharma company: Abbott Laboratories.

"When George Cain became CEO of Abbott Laboratories [in 1958]," Collins wrote, "it sat in the bottom quartile of the pharmaceutical industry, a drowsy enterprise that had lived for years off its cash cow, erythromycin. Cain didn't have an inspiring personality to galvanize the company, but he had something much more powerful: inspired standards. He could not stand mediocrity in any form and was utterly intolerant of anyone who would accept the idea that good is good enough."

Cain replaced many of the company's top managers-including several of his own relatives. He made profits per employee a key metric, as it is to this day. And he began a process that reshaped Abbott.

"It was under George Cain that we acquired Ross Laboratories, what is now the Ross nutritional division, in 1964," explains Cathy Babington, vice-president for investor relations/public affairs. "Under his tenure, we established the joint venture with Dainippon Pharmaceutical that led to the strong presence we have in Japan today. We began to get into radiopharmaceuticals, which led to the creation of the diagnostics division. He took what had been a pure pharma and some hospital supply business and made it a much broader-based healthcare company. As those investments evolved, they created a lot of the momentum that we saw in the seventies, eighties, and nineties." By 1974, according to Jim Collins' standards, Abbott was great.

But greatness isn't necessarily permanent. By 1999, when the current CEO Miles White took over, the company was showing signs of slowing down. For years, 15 percent annual growth in shareholder value had been a kind of company mantra. Now growth was down to the low double digits. There were questions about sustainability, about the pipeline, about product mix. It was time to see if Abbott could once again make the transition.

During White's tenure, science has become a core focus. The crucial acquisition of BASF's Knoll Pharmaceuticals has brought new research tools, new personnel with sophisticated skills in discovery and biotech manufacturing, and a blockbuster product in the form of Humira (adalimumab) a monoclonal antibody for rheumatoid arthritis, which is expected to exceed sales of $250 million this year. Meanwhile, through a process of acquisitions and divestitures, the company has been sculpting itself in the spirit of what George Cain started building 40 years ago.

There have been glitches along the way, most notably ongoing problems getting Abbott's Lake County, Illinois, diagnostics plant in line with FDA manufacturing standards. But the shape of the Abbott of the new century is starting to become clear. And with that new shape comes a new mantra: sustainability.

A Tactical Environment Miles White didn't intend to work in pharmaceuticals. In 1984, with an MBA from Stanford and a stint at McKinsey & Co. under his belt, he was looking for opportunities in Silicon Valley. He interviewed at Abbott as a favor to a mentor and ended up in just the kind of job he'd been hoping for-manager of national account sales in the domestic part of the diagnostics division, with eight people reporting to him and $80 million in sales responsibility.

What he discovered was a big change from McKinsey, with its Harvard and Wharton grads and its near obsession with critical thinking.

"This was a very tactical environment," says White. "You could tell they brought very few people into middle management positions from the outside. The people who succeeded had to fit the cultural norm of having come into an entry-level position and stayed a long time. They had to have 'carried a bag.'"

After a series of promotions that moved him up through several different functions on the life sciences side of the business, including marketing, R&D, and the business side of the instruments business, in 1998 White was informed that he was in competition with two other execs to be CEO.

"The biggest void in my knowledge was the pharmaceutical business, which was close to half the sales and profits of the corporation," says White. "And

I wasn't going to learn that over the course of that horse race, however long it lasted, because I had no responsibility for anything on the pharmaceutical side." He studied that part of the company on his own, and nine months later, when he was selected as CEO, he had a plan in mind-one that focused heavily on the problems he saw there.

A key move for Miles White (r) was bringing in Jeffrey Leiden (l) to head global pharmaceuticals.
At the time, Abbott's mainstay drug was Biaxin (clarithromycin), an anti-infective. But the category posed several problems: It was crowded and getting more so. The business was highly seasonal, so the October-to-April flu season had a major impact on first- and second-quarter revenues. And the season wasn't what it had been.

"My first four years in this job, the flu season has declined steadily every year," says White. "As a cornerstone product for a pharma business, I wanted something a lot more stable."

More important, Abbott's R&D effort was fragmented and underfunded. The company did research in 13 clinical areas and spent about $600 million on pharmaceutical R&D-at a time when most experts thought that a company the size of Abbott needed to invest $1 billion to $2 billion a year to have a sustainable pipeline.

Pipeline issues became acute right around the time White took the helm. A few months before he took over, Abbott's Norvir (ritonavir), an antiviral, developed problems with polymorphism. An advanced generation protease inhibitor, Kaletra (lopinavir and ritonavir), was in the works, but in the short run, Norvir's capsule form had to be pulled from the market, though the liquid remained available. Also, three months before he took over, Abbokinase (urokinase), a thrombolytic, was pulled from the market because of manufacturing concerns. A few months later, Hytrin (terazosin), a treatment for benign prostatic hyperplasia and another Abbott mainstay, went generic. Together, Abbokinase and Hytrin added up to a $700 million sales hit.

"If you looked at the mainstay products," says White, "Biaxin was going to slow considerably, Norvir was having a challenge, Hytrin was going generic, Abbokinase came off the market. Depakote [divalproex] was stable. And there wasn't much in the pipeline behind them except Kaletra for a long time. We were spread too thin over too many categories. It didn't look competitive. We needed to make sure the R&D engine that was going to develop new medicines over time was a good engine. That became priority number one."

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