The Rising Influence of Rising Affluence

[DewDiligence]

Barron’s Profiles Miles White, ABT’s CEO

[White will stay on as CEO of ABT after the AbbVie pharma spinoff—he knows that what remains of ABT will be the faster-growing and more exciting of the two successor companies.]

http://online.barrons.com/article/SB50001424053111904346504577534861098874948.html

›JULY 28, 2012
By LAWRENCE C. STRAUSS

It was the kind of job that can help make a corporate career. In 1988, Miles White was offered a chance to head the Asia Pacific region of the diagnostics division of Abbott Laboratories, working out of Japan, then the hottest economy in the world. The then-33-year-old former McKinsey & Co. consultant was the division's U.S. marketing chief. White turned the job down, he says, because his wife wanted to open a children's bookstore in Libertyville, Ill., and because he didn't want to disrupt the lives of his three young sons.

At the time, he recalls, the company's chief operating officer "told me I was making a mistake in my career for my wife's hobby." But for White, striking a balance in his life and in his work has always been a priority. "This was more about balancing a two-career marriage than it was about my ambition," he says.

As it turned out, the decision didn't hold him back. Eleven years later, he was named CEO of Abbott Labs, making him the youngest chief of a major health-care and pharmaceutical firm. "Everybody was older than me," he says. "I don't remember anybody near my age."

Now 57, White is an elder statesman in the industry, and his tenure at the top is longer than almost all of his peers'. "I hate to say there's not much I haven't seen," he says, "but there's not much I haven't seen."

With $40 billion in projected revenue this year, Abbott is a major player in pharmaceuticals. Humira, for rheumatoid arthritis and Crohn's disease, will likely top $8 billion in sales this year, making it the world's largest-selling drug. [I would omit the word “likely” insofar as Humira is growing at a nice clip and has already sold $4.3B in the first half of 2012.]

Abbott's nutritional business, including Similac and Ensure, is a global leader with $6 billion in sales. Diagnostic products, for everything from HIV and hepatitis to blood analysis and DNA testing, bring in $4.1 billion. Branded prescription generics, like Biaxin and Brufen, produce another $5.4 billion. And vascular products, like drug-eluting stents, make up much of the rest.

Abbott's revenue has grown fourfold on White's watch due in part to a number of successful acquisitions such as Knoll and Kos]. Earnings per share are up almost as much, to a projected $5.05 this year, quite a feat in an industry in which mergers have driven revenue growth but diluted earnings per share.

In a meeting with Barron's at Abbott's sprawling corporate campus in Abbott Park, Ill., 40 miles north of Chicago, the subject of balance came up a lot. When asked about the role of a CEO, for example, he says, "I don't think you can just take the position that you solely exist to make money for shareholders. You have got to find a balance, and I can tell you that no one ever thinks you are in balance or that you have it right. But that's one of the challenges—to have a balance where the company is doing the right thing for its owners, its shareholders, its employees. But also for the people you exist for," which in Abbott's case are the patients and health-care providers.

Last year, for example, Abbott spent $4.1 billion—more than 10% of its revenue—on research and development. "Our core lab-diagnostic products are all home-developed," White points out, as are most of the nutritional products, including Ensure. Two big HIV drugs, Kaletra and Norvir, also were developed in-house.

Humira, on the other hand, was acquired in the 2001 purchase of Knoll, a German pharmaceuticals firm, but it still needed major investment. "When we acquired Knoll [for $7 billion], Humira was in development," White recalls. "We then finished the development, taking it to market. So I would say there's a balance."

Investors, however, tend not to look at the company's long-term successes. "There is an inordinate focus on the quarter," he says. "Your R&D can take anywhere from 10 to 12 years to pay off, but the investor expects you to get it right to the penny every 90 days," he says. "Straddling that is a challenge."

Here again, White is striking a balance. "Our identity was very much driven by pharma and the success that we've had there," White observes. And investors in big pharma companies want to see tangible returns, in the form of dividends and share buybacks. "They don't value your pipeline until they can see it," White adds. Investors in medical products, meanwhile, are focused on growth.

To satisfy both constituencies, Abbott announced in October 2011 that it would spin off the proprietary drug business into an $18 billion-in-revenue stand-alone company, recently named AbbVie. White will continue to run Abbott Labs. The spinoff is scheduled to be completed on Dec. 31.

Ian Sanderson, who covers Abbott for Cowen, expects AbbVie's profit to grow 4% next year, to $5.7 billion, or $3.55 a share, on a 4% increase in revenue, to $18.4 billion. Earnings for Abbott, the diversified medical company, will, by his forecast, grow 13% to $2.9 billion, or $1.78 a share, on a 6% revenue increase to $23.7 billion.

Longer-term, Abbott's [as opposed to AbbVie’s] revenue could increase at a substantially faster clip. Sales of nutritionals alone, the company has said, could climb to nearly $10 billion in 2015 from $6 billion currently, driven by growth in emerging markets. "He made a great move," says Sanderson. "It's a great way to unlock value." Since the announcement of the spinoff in October 2011, the shares are up 24%. Sanderson thinks the combined companies are worth as much as $67 a share.

White was raised by a single mother in Las Vegas. A waitress and later a real-estate agent, she wanted to ensure that he got into a good college, so she sent him to Culver Academy, a military school in Indiana, at age 13. Though homesick at first, he calls his years there "a kind of wrenching transition to independence."

At Culver he joined the rowing team, which taught him to focus on what, for a young teenager, was a distant goal. "Rowing can be pretty tedious," he says. "It is a lot of work. For a few races, you are practicing all year long. But it is special because you are in a boat with, in my case, seven other guys, working in exquisite unison. That was a heck of a lesson."

From there he went on to Stanford, where he earned a degree in mechanical engineering in 1978 and an M.B.A. two years later. (And it was in Palo Alto, Calif., he says, that he first learned that, unlike Las Vegas, the rest of the world didn't stay open 24 hours a day everywhere.) Then on to McKinsey in Chicago.

Working with both industrial and consumer products, White learned a lot about problem-solving, but soon discovered that he didn't like being an outsider. "I wanted to get up in the morning excited to go to work for what I could build," he says. "At McKinsey, you work on great projects with great clients, but then it was on to another one and another one, and I didn't find that as fulfilling."

After five months of interviews at Abbott—"I thought it was one of the most indecisive companies–it was interview after interview," he recalls—he signed on in 1984 as manager of national account sales in the diagnostics division, turning down a job in strategic planning. "I took the sales job because I wanted to manage people and results," he says.

Less than two years later, he switched over to marketing and later led several business units in areas such as cancer testing, where he focused on longer-term matters such as R&D, manufacturing, and product design, rather than short-term sales targets.

Then came the offer of a transfer to Japan.

White, who is big on always having a Plan B, says, "I figured there were a lot of Plan Bs. There were a lot of different positions or jobs that someday I might be considered for. When you are 33 years old, you don't think you are stymied."

The decision worked out all around; his wife, Kim, ran the Crocodile Pie Bookshop for 19 years before selling it in 2008.

By 1998, White had been running the company's global diagnostic operations for four years when Duane Burnham, the CEO at the time, called him and two other rising executives into his office. The upshot was that they would compete in a race to become the next CEO. White was not the initial favorite, he recalls, not least because he was the youngest of the three.

Though he ultimately won, he found the process extremely damaging. "The organization divided into camps behind its known leaders, and decision-making kind of ground to a halt because nobody wanted to commit to anything until they knew" who was going to run the company, White remembers. "It created a bad environment, to be honest."

Even though he's still relatively young and shows no signs of slowing down, he has put a lot of time into succession planning, working closely with the company's board of directors. "You shouldn't have to artificially create a bake-off to figure it out," he maintains.

During White's time as CEO, the company has become much more globally focused. Last year, nearly 60% of its sales came from outside the U.S. Abbott is especially well-positioned in India, thanks to its $2.2 billion acquisition in 2010 of Piramal's Healthcare Solutions, a big player in branded generics [#msg-50436738, #msg-50473238].

Closer to home in the U.S., Obamacare will, by Abbott's estimate, cut operating profit by some $450 million, in part owing to expanded Medicaid rebates. White appears not to be shaken by the prospect, coming back to the theme of balance. "Having been around the block a few times, you are a lot more stable, balanced and calm in adversity," he says.

Which is not to say that he doesn't take his responsibility to shareholders seriously. On the wall of his office is a large print of Sisyphus, the mythological Greek king who was cursed to forever push a rock up a hill, only to have it roll back down before he reached the top—an unusual symbol for a high-achieving CEO.

Asked about it, he says, "I made an analogy one day with a couple of my senior staff people about how watching the stock price was like Sisyphus pushing a rock up a hill. You can never take for granted that your stock will stay where it is, because it goes up, it goes down, it goes up, it goes down. And as it falls, you've got to just keep working to push it back to the top.

"I know the myth goes well beyond that. The only part that was kind of relevant to me was the rock and the hill. When you are at the top of the hill, you can count on the fact that you are going to take a blow here and there, and you just have to keep rolling the rock back up the hill. It's about perseverance."

White's perseverance has paid off for shareholders, who would likely never compare him to Sisyphus. Since he took over as chief executive, Abbott's shares have risen an average of 5.3% annually (with dividends), compared with 2.6% for the Standard & Poor's 500' and 1.5% for the S&P 500 Pharmaceuticals index.

"Finding the right balance between the short term and the longer term," says White, "those trade-offs are very important for a CEO."

Well said. And in White's case, very well done.‹