Abbott Laboratories

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Abbott Laboratories

Abbott Park
North Chicago, Illinois
U.S.A.
(312) 937-6100
Public Company
Incorporated: March 6, 1900 as Abbott Alkaloidal
Company
Employees: 33,500
Sales: $3.808 billion
Market Value: $14.617 billion
Stock Index: New York London Zurich Basle Geneva
Lausanne

Abbott Laboratories is one of the oldest and most successful of America’s pharmaceutical companies. The man most responsible for the company’s current impressive performance in the market place is Robert A. Schoellhorn. When Schoellhorn joined Abbott in 1973 (after 27 years with American Cyanamid), he found the company in an unprecedented state of disarray. Three years earlier the Food and Drug Administration had banned production of cyclamates, an artificial sweetener of which Abbott was a major producer; the FDA had also ordered the company to recall 3.4 million bottles of a contaminated intravenous solution. Though only a divisional vice-president at the time, Schoellhorn would later prove crucial to Abbott’s impressive comeback. Today Abbott’s prospects have never looked so good—it is one of the few drug manufacturers recommended as an investment by Wall Street brokers.

Abbott Laboratories has its origin in the late 19th century in a small pharmaceutical operation run from the kitchen of a Chicago physician named Wallace Calvin Abbott. As did other physicians of the time, Dr. Abbott commonly prescribed morphine, quinine, strychnine and codeine —all of which were liquid alkaloid extracts—for his patients. Because they existed only in a liquid form, these drugs were prone to spoilage over time, mitigating their effectiveness as treatments. In 1888 Dr. Abbott heard that a Belgian surgeon had developed alkaloids in solid form. Alkaloid pills soon became available in Chicago, but Dr. Abbott was dissatisfied with their quality, and he decided to manufacture his own.

Dr. Abbott began to advertise his products to other doctors in 1891. So successful was his business that he eventually sold shares to other doctors and incorporated his operation in 1900 as the Abbott Alkaloidal Company. By 1905 annual sales had grown to $200,000.

During World War I Abbott’s company was essential to the medical community: several important drugs, manufactured exclusively by German companies, were no longer available in the United States. Abbott developed procaine, a substitute for the German novacaine, and barbital, a replacement for veneral.

After the war, Abbott continued to concentrate on the research and development of new drugs. In 1921 the company established a laboratory at Rocky Mount, North Carolina which developed a number of new drugs, including sedatives, tranquilizers, and vitamins. Despite Dr. Abbott’s death that year, the company continued to invest heavily in new product development and aggressive marketing campaigns.

DeWitt Clough was named president of the company in 1933, ending a period of somewhat stale communal leadership. A more dynamic character than any since Dr. Abbott, Clough is best remembered for the inauguration of the company magazine, What’s New? The publication had such a positive impact on worker morale and public opinion that several of Abbott’s competitors started similar publications.

During World War II Abbott once again played an important role in battlefield and hospital health care. By this time American pharmaceutical companies such as Abbott were much less dependent on Germany companies, particularly the IG Farben—a conglomeration of the world’s most advanced drug manufacturers. After the war much of the IG Farben’s research was turned over to American manufacturers. Abbott, however, had little to gain from this information; it was already a worthy competitor on its own.

After the departure of DeWitt Clough in 1945, Abbott shifted its attention to the development of antibiotics. The company developed erythromycin, which, under the brand names Erythrocin and E.E.S., constituted a significant portion of Abbott’s prescription drug sales for several decades—even after the expiration of its 17-year patent. Sales of the drug increased dramatically when it was found to be an effective treatment for Legionnaire’s Disease.

Abbott stumbled onto a lucrative new product when one of its researchers accidentally discovered that a chemical with which he had been working had a sweet taste. The chemical, a cyclamate, could be used as an artificial sweetener. Initially, from 1950, it was marketed to diabetics, but in the 1960’s, as Americans became more health and diet conscious, it was increasingly used as a sugar substitute in a wide variety of foods.

By 1965 Abbott had gone several years without a major breakthrough in research and, worse yet, none was projected at any time in the immediate future. Two years later Edward J. Ledder was named president of the company. He advocated a reduction in Abbott’s emphasis on Pharmaceuticals by diversifying into other fields. In the years that followed, Abbott introduced an array of consumer products, including Pream non-dairy creamer, Glad Hands rubber gloves, Faultless golf balls, and Sucaryl, a cyclamate sugar substitute. In an effort to insure the success of Abbott’s consumer product line, Ledder placed Melvin Birnbaum, a highly experienced and able manager he had hired away from Revlon, in charge of the division.

Ledder’s policy of diversification laid the groundwork for more flexible corporate strategies. No longer exposed exclusively within the pharmaceuticals market, Abbott was able to cross-subsidize failing operations until they could be rehabilitated. Despite this flexibility, Abbott soon realized new obstacles to its growth.

The company’s hospital products competed in a limited, institutional market. New drugs had greater profit margins, but were subject to government approval procedures that kept companies waiting for several years before they could market their discoveries. Consumer products, on the other hand, involved more expensive marketing and generated less profit than pharmaceuticals. Unable to increase profits without substantial risk, Abbott’s management decided to maintain the strategies that were in place.

Cyclamate sales had grown so dramatically that by 1969 they accounted for one-third of Abbott’s consumer product revenues—or about $50 million. The increasing popularity of cyclamates as an ingredient in diet foods, however, led the FDA to conduct an investigation of possible side-effects from their overuse. The FDA’s research was widely criticized as “fragmentary” and “fatally flawed,” but it was nonetheless used as evidence that cyclamates were carcinogenic. The market collapsed in August 1970 when the FDA banned domestic sales of cyclamates. Abbott, which overnight had suffered the loss of one of its most profitable operations, protested the ban, but was unable to reverse the decision. Although the company has continued to petition the FDA, subsequent studies have confirmed that metabolization of cyclamates can lead to chromosome breakage and bladder cancer.

Less than a year after cyclamates were banned, Abbott was forced to recall 3.4 million bottles of intravenous solution. The bottles were sealed with a varnished paper called Gilsonite, which, it was discovered, harbored bacteria. The contamination was discovered only when health care workers noticed and then investigated the high incidence of infection in patients who had been administered Abbott’s intravenous solutions. The Center for Disease Control linked the contaminated solutions to at least 434 infections and 49 deaths. With litigation imminent and sales down from $17.9 million to $3 million, Abbott’s share price began to fall. Abbott moved quickly to replace its Gilsonite seals with synthetic rubber, but then the company faced the larger problem of regaining market share.

The crises of the early 1970’s left the company’s upper echelon of management weakened and vulnerable to criticism. Although Edward Ledder was recognized for the success of his diversification program (and largely excused for his inability to prevent either the cyclamate ban or the intravenous solution crisis), conditions were obviously ripe for the expression of talent by a new manager. Robert Schoellhorn, a veteran of the chemical industry, was just such a manager. His efforts as a vice-president in the hospital products division at Abbott resulted in a revenue increase of 139% for that division between 1974 and 1979. He correctly predicted that the next most profitable trend in health care would be toward cost-effective analysis and treatment. Schoellhorn was later promoted to president and chief operating office of the company.

Abbott Laboratories registered an annual sales growth rate of 15.5% and an earnings growth rate of 16.5% by 1979. This expansion was attributed by financial analysts to the company’s increased productivity, reduced costs, expansion into foreign markets, and greater involvement in hospital nutritionals and diagnostic testing equipment. The company also introduced three new drugs in 1979 — Depakene, an anticonvulsant, Tranxene, a mild tranquilizer, and Abbokinase, a treatment for blood clots in the lungs. All three products were the direct result of the company’s increased investment in research and development in the mid-1970’s.

Utilizing its knowledge of intravenous solution production, vitamin therapy, and infant formula (Abbott holds one-half of the market for infant formula with Simulac), Abbott developed a comprehensive nutritional therapy program to speed the recovery of hospital patients and thereby reduce medical care costs. As many as 65% of all hospital patients suffer from some form of malnutrition, and Abbott has been highly successful in marketing their program. Another advantage of adult nutritional products is that they have a place in the growing home care market.

Abbott has had similar success marketing its lines of diagnostic equipment. Electronic testing devices developed by Abbott are more accurate than manual procedures. In order to strengthen the technical end of its diagnostic equipment research, Abbott hired two top executives away from Texas Instruments to head the division. Some of the products currently under development by Abbott include a device that can detect cancer from a blood test as well as fibers to be used to transmit surgical laser beams.

Robert Schoellhorn, now chairman and chief executive officer, has continued to emphasize investment in pharmaceutical research and development—seven new drugs introduced in 1982 accounted for 17% of sales in 1985. Foreign operations also remain extremely important to Abbott (the company has 77 foreign subsidiaries and manufacturing facilities in 28 countries). Schoellhorn continues to support Ledder’s original diversification policy. The introduction of Murine eye-care products and Selsan Blue dandruff shampoo has served to expand the domestic consumer product line and promises to provide earning stability in the event of a downturn in any of the company’s other markets.

While other hospital product companies struggle to compete in the new cost-conscious market, Abbott Laboratories has successfully engineered the smooth transition into the 1980’s and looks superbly positioned to continue to grow in the 1990’s.

Principal Subsidiaries

Abbott Diagnostics Inc.; Abbott Pharmaceuticals Inc.; Oximetrix de Puerto Rico Inc.; Hemostatix Inc.; CMM Transportation Inc.; Haven Leasing Corp. (80%); Murine Co. Inc.; M & R Diatetic Laboratories Inc.; Oximetrix Inc.; Ross Laboratories Inc.; Sorenson Research Co. Inc.; Swan-Meyers Inc.; Tobal Products Inc.; Takeda-Abbott Products Inc. (50%). The company also owns subsidiaries in the following countries: Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, Colombia, Denmark, Ecuador, El Salvador, England, France, Greece, Guatemala, Hong Kong, Ireland, Italy, Jamaica, Japan, Lebanon, Mexico, Mozambique, The Netherlands, Panama, Peru, Philippines, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, Uruguay, Venezuela, and West Germany.