Business Times - 07 Mar 2009
Staying in the pink of health
Abbott Laboratories' diversification strategy is reaping rewards for the company in the midst of an ailing global economy. And part of that strategy includes seeking out new investments in Asia, says CEO Miles White. By Chen Huifen
AS a child growing up in the bustling city of Las Vegas, Miles White thought that shops everywhere stayed open 24 hours a day.
'So when I went away to school, in places like California where Stanford was, and everything was closed at nine o'clock, I didn't understand,' said Mr White, CEO of global healthcare giant Abbott Laboratories. 'I just couldn't believe everything was closed!'
That was not all. He had thought that gambling and military testing was the way of life until eighth grade, when, at the age of 13, he went to study in a high school far away from home. That was when he saw a world vastly different from the one he knew for a long time.
But the contrasting experience left an indelible impression on him and played a part in shaping his world view.
'You develop a perspective ... there's just so much difference in the world that right away you know that you've got to respect and understand the diversity of culture, the diversity of the places, the diversity of customs,' he said. 'And I would guess to some degree, that probably made me pretty flexible about accepting or learning a lot of different customs and cultures of people.'
That disposition certainly came in useful for the man who now heads a diversified healthcare company with products sold in more than 130 countries. He is comfortable dealing with people, be they regulators, customers or researchers.
Which explains why, when he was offered two positions at Abbott more than 20 years ago, he picked the post of a sales manager over another in strategic corporate planning.
'I wanted to learn the business at the customer level,' Mr White told BT Weekend. 'And I wanted to be responsible for people, products and customers, directly.'
Nearly 15 years later, he rose to become the CEO - and one of the longest tenured one in today's pharmaceutical industry. It was 1999 then when he took over the reins. The global pharmaceutical industry was undergoing a wave of consolidation. Sandoz AG and Ciba-Geigy AG had completed a merger to form the third biggest drug maker in Novartis AG. Britain's Zeneca Group and Sweden's Astra agreed to combine their resources, while SmithKline Beecham plc and Glaxo Wellcome plc were seeking a marriage as well.
Abbott then was just trotting along. With annual sales of US$12.5 billion, it trailed far behind Merck & Co, then the biggest drug firm with annual sales of US$26.9 billion.
But how things have changed. In over a decade, Abbott has caught up steadily to become one of the top 10 drug companies with a market capitalisation exceeding US$80 billion. Sales last year jumped 13.9 per cent to US$29.5 billion, giving rise to a net income of US$5.2 billion.
In the five years to the end-December period, its share price went up 22.4 per cent, against the S&P's dip of 18.8 per cent. Even including dividends, Abbott's total return over the same period grew 38.4 per cent.
No mean feat, considering that many of its peers are seeing their share prices eroding, as they struggle with expiring patents and dwindling pipelines. The right prescription for Abbott, according to Mr White, is its diversification strategy.
'I think the companies that have diverse business models will do well, and that includes us, Novartis, and Johnson & Johnson,' said Mr White. 'I think that Roche will do well. Of those that are reliant on only pharmaceuticals, some will be able to continue to innovate and grow, and others will simply consolidate or gradually decline and shrink.'
If his assessment is right, then Abbott is poised to be among the last giants standing. Under Mr White's leadership, Abbott has been making moves that increasingly diversify its product, customer and geographic mix.
Take the 2001 acquisition of Knoll Pharmaceuticals, for instance. That purchase gave it Humira, a biologic product for treating severe debilitating auto-immune diseases. Since its launch in 2003, sales of Humira have grown to more than US$4.5 billion annually and is Abbott's biggest brand ever.
More recently, the acquisition of Guidant's vascular business in 2006 provided Abbott with the drug eluting stent Xience, which helped push coronary stent sales to US$1.9 billion last year. And a bio-absorbable version is getting close to market.
And it looks like Abbott will not stop shopping.
'Well, like all the companies in our industry today, we are looking at what opportunities there may be to add to our company,' said Mr White. 'I am not looking for a large merger or acquisition like the Pfizer-Wyeth type or anything like that. We are looking at possible opportunities to add to our businesses, of a much smaller nature.'
Any targets will have to fulfil the criteria of adding to the company's earnings, innovation and diversity mix. In the case of the purchase of Advanced Medical Optics (AMO) announced in January, the latter's lasik, cataract and eyecare solutions businesses provided a good balance of diversity.
'In a tough economy, because the consumers have to pay for lasik themselves, that business drops way off,' explained Mr White. 'But the cataract surgery business, which is often covered by insurance, has not dropped off.
'Still that was tough for AMO's performance as a company. But within Abbott Laboratories, we can continue to invest in the R&D of AMO, marketing the products of AMO, the expansion of it and so the company, as part of Abbott, can ride through this economy much better without having to compromise its investment profile and innovation. It gives us another leg that has the characteristics we look for.'
Although the group is open to biotech opportunities, which Mr White reckons are mainly in the US, Abbott's priorities are clearly in places like Latin America and Asia.
'We will still have healthy businesses in Europe and the US,' said Mr White. 'But if you look at the expansion of wealth and the need for healthcare in Asia, whether it's China, Vietnam, Singapore, the Philippines, India, you name it, those are all going to be very, very attractive growth markets. Right now is the time to build the platforms to grow from in those markets.'
Sales from Asia have soared more than 50 per cent since 2005. About 10 per cent of Abbott's total sales worldwide come from the region. That proportion could have been more, if not for the hiccups it encountered in Thailand concerning the anti-Aids drug Kaletra. The Thai government of the time had decided not to buy the patented Kaletra from Abbott and instead allowed the manufacture and use of cheaper versions within the country. The volatile political situation made it a challenge to renegotiate.
Notwithstanding the difficulties, Abbott wants to establish a stronger presence in Asia over the next few years. The company already has manufacturing facilities in China's Shanghai and Guangzhou, and Indonesia's Cimmangis. Just last month, it opened its largest nutritional manufacturing plant in Singapore. At US$300 million, it is also Abbott's single-largest investment in Asia.
'So steadily we are looking at investments in India. Steadily we're expanding, and I think you want to have the manufacturing close to the markets you serve. And if you can, you want to make sure your R&D that's going to create the products, or tailor them for those markets, is close to those markets as well - so that you'll understand the product needs.'
Abbott is doing that now. This year alone, it has announced two R&D investments in Singapore - a lab to do analytical and stability studies for pharmaceutical products, and a US$20 million nutrition science R&D centre.
Eventually, Asia could be a growing source of innovation for Abbott, driven by government policies that are stimulating investments in education, particularly in science and engineering, noted Mr White.
'We think that an economic downturn, particularly, is the right time for us to invest and establish our position in what we think will be pretty strong markets for us for decades,' he added. 'And I think that investment requires you to be here in a fundamental way, not just with sales people, but manufacturing, research and development. And, with employees who were raised and live in these markets.'
It's not just organic growth that Abbott is looking for. Mr White sees potential M&A candidates that could deepen his company's interests in nutritionals and pharmaceuticals.
'India stands out to a degree,' he said. 'There are a lot of capabilities there. It's a different place to do business for sure. There're some opportunities, I'd say, in China ... but it's much more difficult.'
Abbott currently employs 8,000 staff in Asia, out of some 69,000 staff worldwide across a spectrum of business that ranges from pharmaceuticals, diagnostics and medical devices to nutritionals. For competitive reasons, it never reveals the number of products in the pipeline, except to say that there are dozens in human trials now - 'several in the oncology area, some in the biologics area that we are enthusiastic about'. The opaqueness is also to prevent hype.
'You don't want to over-emphasise any one thing over another - particularly when it's still in a risky development phase,' said Mr White. 'So you want to protect the development of something before the world starts to throw up expectations for it.'
Despite the comfortable position that Abbott is in, he is realistic about the outlook of the industry. As Roche seems bent on courting Genentech, and with Pfizer set to merge with Wyeth, it's unlikely there will be a flurry of major M&As to mirror the situation of the late 1990s.
'You know, the pharma companies have cash,' he said. 'And in a lot of cases, the cash is outside the US. So the opportunities to acquire something may be in the US. For example, the biotech companies. If the resource is outside the US, then it's difficult. You've got to make a decision - do I bring it back or not?
'And the bigger the deal, the harder it is to do. Because they're going to have to cut a lot of jobs, and take out a lot of synergies, to make the economics work. And so if they're going to do that, those are very difficult deals. You'll have a hard time convincing your investors that the economics are favourable to them because what you're really selling to them is restructuring, not growth.'
MILES D WHITE
CEO and chairman, Abbott Laboratories
· 1955 Born in Minnesota
· 1978 Graduates from Stanford University with Bachelor's degree in mechanical engineering
· 1980 Earns Master's degree in business administration from Stanford University. Joins McKinsey & Company
· 1984 Joins Abbott as manager, national accounts, in Abbott Diagnostics Division
· 1993 Named vice-president, diagnostic systems and operations, Abbott Diagnostics Division
· 1994 Becomes senior vice-president of Abbott Diagnostics Division
· 1998 Named executive vice-president. Elected to Abbott's board of directors
· 1999 Elected chairman and CEO of Abbott
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