Few companies operate under a darker cloud of uncertainty than drugmakers. Already criticized for rising prices and aggressive marketing, the industry has come under intense fire following revelations that Merck & Co. and others may have underestimated the heart-related risks of popular pain medications, such as Merck's Vioxx. Investors, worried about lawsuits and a lack of diversification beyond big brand-name drugs, have lately shunned the sector.
But at least one big U.S. drugmaker may be seeing a break in the clouds: Abbott Laboratories. CEO Miles White has spent five years diversifying and strengthening the Abbott Park, Illinoisbased firm. White, who previously ran Abbott's diagnostics business, has built broad product lines in both drugs and medical devices and last May spun off slow-growing hospital unit Hospira, which was a drag on valuation.
The company's earnings rose 18 percent in 2004. Its shares are up more than 20 percent in the past seven months -- in sharp contrast to the steep declines experienced by other drug companies.
To be sure, Abbott has had its share of troubles. In November 1999, less than a year into White's tenure as CEO, the U.S. Food and Drug Administration slapped the company with a $100 million fine for failing to correct what the agency said were long-standing deficiencies in manufacturing quality at Abbott's diagnostics (lab test equipment) division. For three years, Abbott operated under an FDA consent decree that halted some of the unit's manufacturing and hurt sales. In 2001 a joint venture between Abbott and Osaka, Japanbased Takeda Pharmaceuticals paid the U.S. government $875 million to settle charges that it gave doctors free or discounted drugs and encouraged them to bill Medicare for the full cost -- the largest fraud settlement of its kind to date.
"I wouldn't wish the experience on anyone," admits White, 50, a former McKinsey & Co. consultant who joined Abbott in 1984 with no biology or medical background, having earned an undergraduate engineering degree and an MBA from Stanford University. While operating under the consent decree he launched a companywide quality-assessment program to clean things up. He says the episode has made Abbott stronger.
With market-leading drugs like Norvir and Kaletra for treating AIDS, Depakote for epilepsy and migraine headaches and Humira for rheumatoid arthritis, Abbott has built some momentum. Merrill Lynch & Co. analyst Katherine Martinelli, for example, forecasts double-digit earnings growth for the company this year and has a $52 price target on the stock, which in early March was trading at about $46.
Although Abbott hasn't been caught up in the pain-medication controversy, White finds himself in the middle of the debate over drug study disclosures and aftermarket monitoring of medications and their side effects as chairman of the Pharmaceutical Research and Manufacturers of America, a lobbying group. White recently spoke with Institutional Investor Contributor Andrew Osterland.
Institutional Investor: How did the FDA sanctions affect Abbott?
White: It was very difficult, and the process took a lot longer than we expected. We had to assess quality across our systems and across the corporation, and we had to adapt quickly. Without the pressure of the consent decree, the changes we've made might have taken a lot longer to make. We felt like we were the first company to face this fire, and we got a lot of negative attention from the situation. But the flip side of being first is that our problems are now well behind us, and other companies have come to us for advice on how to cope with the process.
Are you happy with Abbott's current sales mix, 60 percent pharmaceuticals and 40 percent medical devices?
We don't want to be a pure pharmaceuticals manufacturer. Investors look at us as a more balanced and less risky company because we're diversified. The life cycle of drugs on the pharmaceuticals side averages about ten to 12 years, while it's two to four years on the devices side. The diversification helps us balance out investments and risks. I would still like an even better balanced revenue mix, but I obviously don't want to get there through lower pharmaceuticals sales.
Some critics say that your medical devices business lacks strategic focus.
The diagnostics division was a tiny idea in the 1970s. Now it generates more than $4 billion in annual revenue. Our devices business has grown largely through acquisitions, so it wasn't in our interests to forecast where we were going. Now we can communicate our direction more clearly. We're investing in high-acuity, mostly hospital-based markets, such as vascular, diagnostics and orthopedics. The smallest of these are growing at 50 percent annually, and we think that some of them can be billion-dollar markets.
Do you anticipate more mergers of big drug companies?
I don't see massive consolidation into a few megapharmaceuticals companies. The argument is that companies need global infrastructure to realize returns on their huge and risky investments. But not all drugs are the same. If you're in the primary care business, like Pfizer, GlaxoSmithKline and Merck, it's about having thousands of feet on the street and being able to advertise heavily. You have to reach thousands of doctors, and when a major drug goes generic, it's a very big hit to revenues. The largest companies are struggling with that. They're also struggling with the R&D decision process. Some companies are spending more than $4 billion a year on research, and there is tremendous complexity in determining what to invest in and what to bring forward.
How is Abbott different?
At $20 billion in revenues, we're considerably smaller than the biggest companies. [Pfizer, the biggest drugmaker of all, posted $52.5 billion in revenues last year.] We also focus more on specialty care areas like oncology, immunology and virology, where the nature of the competition is different. Because we promote our products to a more focused group of specialists, we're less dependent on having a huge sales force than we are on the performance of our products. Product development is still expensive, but it costs less to bring these kinds of drugs to market.
What does the Vioxx controversy signify for the pharmaceuticals industry?
It has shown that postmarketing surveillance of drugs is an important task and that improvements can probably be made at the FDA. But there's a risk of overfixing things. Physicians understand that there is always a trade-off between a drug's risks and benefits. But the public expects perfection when it comes to product safety. When something like Vioxx happens, it throws the risk-benefit analysis into disarray. The regulatory hurdles for bringing drugs to market will likely increase. And drugs with good risk-benefit profiles may not come to market because the process becomes too expensive and onerous.
What is your view of the new FDA board that will monitor drugs already on the market?
We support the independent safety board. However, there is much to learn about how it will be set up and how it will operate. Regulatory decisions need to be based on sound science that balances both benefits and risks. We need to be sure that we don't deny access to patients who really need a given medication. No medicine is risk-free. All have side effects that need to be weighed against the potential benefits. That is why medical judgment is critical.
Should details about clinical drug trials be accessible to the public?
The clinical trials of products already on the market should be available to the public. But for products not yet on the market, it involves trade secrets, and the appropriate way to deal with the issue is more difficult.
How do you justify a nearly sixfold price hike last year in Norvir, your AIDS drug?
A lot of AIDS drugs out there wouldn't work nearly as effectively without Norvir, and the prices of some of those drugs are shockingly high. Norvir was being used to subsidize those high prices. Abbott investors were not seeing value for the performance of Norvir, while other drugs were piggybacking on its effectiveness.
What's your stance on importing cheaper drugs from Canada?
The importation of cheap prescription drugs from Canada is dangerous, and it's not a solution. There are operations out there creating dangerous or counterfeit drugs and feeding them into the cross-border pipeline because the financial incentives are so great. It doesn't make sense to me that we react the way we have to something like Vioxx, yet we're willing to leave our borders open to a drug trade we don't regulate.