Lack of Replacement for Abbott COO Affects Exec. Structuring

By deciding not to fill the No. 2 job held by Richard Gonzalez, who is retiring next month, Abbott Laboratories has thrust into the spotlight the executives who head four major operating units at the North Chicago-based health-care giant. The heads of medical devices, pharmaceuticals, nutritionals and diagnostics will now report directly to Miles White, Abbott’s chairman and chief executive. While corporations often pit a handful of ambitious sector heads against one another in a competition to demonstrate which one has the right stuff to inherit the crown, and White himself won his spot in such a race, Abbott adamantly denies that it is doing any such thing. In fact, White has criticized the horse race format as being divisive, company insiders say, in part because it led to hard feelings and some executive departures among followers of those who lost. In 1998 White was tapped for the CEO spot by beating out two other division heads, including former Abbott veteran and current Baxter International Inc. Chairman and CEO Bob Parkinson. What’s more, White is only 52, which means Abbott isn’t under immediate pressure to identify and groom a successor. If anything, White is using the Gonzalez retirement to reshape the management structure. “This is not a succession move. This is how our CEO chooses to run the company,” said Melissa Brotz, a company spokeswoman. White’s move is certainly a break from the past. The North Chicago company has historically had a chief operating officer — except for occasional monthslong gaps. Before Gonzalez became the clear-cut No. 2 in early 2006 there were even two chief operating officers. He was president and chief operating officer of the medical products group for the preceding five years, sharing president and chief operating officer duties with Dr. Jeffrey Leiden, who headed pharmaceuticals with a similar title but left to pursue other interests in early 2006. Gonzalez, 53, is closing out a 30-year career at Abbott, capped by the complex 2006 integration of Guidant Corp.’s vascular business, acquired for $4.1 billion, and this year’s closing on the $3.7 billion acquisition of cholesterol drug-maker Kos Pharmaceuticals Inc. In light of Gonzalez’s long tenure at Abbott and the throat cancer he successfully battled in recent years, Gonzalez’s retirement at a relatively young age did not come as a major surprise, company sources said. Gonzalez “is a close friend and colleague with whom I’ve worked virtually my whole career at Abbott,” White said in a statement. “I thank him for his many great contributions to our company.” “Rick’s a big loss,” for Abbott, said Cowen & Co. analyst Sara Michelmore. The primary senior executives reporting to White will be Executive Vice President and Chief Financial Officer Thomas Freyman, 52, and the four Abbott division heads. They are: Holger Liepmann, 55, executive vice president, global nutrition; Edward Michael, 50, executive vice president, diagnostics; John Capek, 45, executive vice president, medical devices; and James Tyree, 54, executive vice president, pharmaceutical products group, who is replacing the retiring Bill Dempsey, 55, an Abbott veteran. Industry analysts say they don’t fear a void in the Abbott executive suite, because all of White’s division heads are seasoned executives who know the businesses well. Succession could come from even younger people not yet visible given the age of the four division heads, company sources and analysts say. “Any responsible leader and any responsible board is always going to be thinking about the next generation of management, and here’s a way of giving the responsibility and visibility to a fine group of executives,” said Rick Wise, an analyst at Bear Stearns in New York, who has followed Abbott for more than 15 years. “We have to say for ourselves that it is some kind of signal from Abbott that they are on very solid ground and very comfortable in their future.” Current and former company executives also say White wants to stick around to enjoy the growth he and Gonzalez put together through unprecedented spending on acquisitions in recent years. The benefits already are becoming more apparent. Abbott’s second-quarter earnings climbed 61 percent, fueled by an impressive 50 percent jump in sales of Abbott’s flagship Humira rheumatoid arthritis drug and robust growth of cholesterol drugs like Niaspan, which Abbott acquired as part of the Kos purchase. By next year Abbott is poised to reap what could be the biggest prize of its 2006 acquisition of Guidant when U.S. regulators are expected to approve the experimental drug-coated stent known as Xience, which some analysts say could dominate a $6 billion worldwide market largely shared today by drug-coated devices Cypher, sold by Johnson & Johnson, and Taxus, sold by Boston Scientific Corp. Stents are tiny metal scaffoldlike devices that are snaked into coronary arteries via a balloon-tipped catheter. While U.S. approval of Xience would provide Abbott with a valuable endorsement in an uncertain market for drug-coated stents, analysts are also concerned that Abbott’s stent might face more scrutiny. Abbott executives have yet to hear from the FDA on whether Xience might face a special hearing before one of the agency’s advisory panels. Such an advisory panel for Xience is something Wall Street considers a wild card, especially since the FDA is under scrutiny for its approvals of drugs such as the pain pill Vioxx and Avandia for diabetes, which were found to present heart risks after they had been on the market several years. Safety issues have been a key topic before Congress this year, putting more pressure on the FDA to intensify its surveillance of drugs before and after they are approved. “It’s an uncertain environment,” Wise said. With Xience awaiting regulatory approval, much is at stake for devices chief Capek. He joined Abbott in 2006 from Guidant and was a key executive in the devicemaker’s pipeline development, which included Xience, considered the crown jewel of Abbott’s acquisition. The performance of pharmaceuticals, currently the biggest of the four divisions, also will be watched closely as Abbott has spent billions to bolster its pipeline. Tyree is succeeding Dempsey, who has run the division for four years and been with Abbott for more than two decades. “I would expect that more attention will be given to the fellow that is in charge of the pharmaceutical business and the guy in charge of the vascular business” which falls under medical devices, Cowen’s Michelmore said. Tyree helped seal the acquisition of Knoll Pharmaceuticals, which Abbott acquired in 2001 for $6.9 billion to gain access to what today is the nearly $3 billion-a-year seller Humira, the rheumatoid arthritis drug. Now the company is looking for growth from the Kos deal and cholesterol drugs, a lucrative franchise dominated by Pfizer Inc., maker of Lipitor, and Merck & Co., maker of Zocor, both of which lower LDL, or so-called bad cholesterol. Abbott wants to market some newer drugs that raise HDL, or good cholesterol, and lower LDL. In nutritionals, the company is looking to Liepmann to expand international growth in the wake of lackluster U.S. sales, which were down 5 percent in the second quarter. Worldwide sales, however, were up 5 percent, driven by nearly 20 percent growth from outside the U.S. In emerging countries, where milk is not a large part of the diet and nutritionals are more prevalent, there could be a large potential for Abbott’s flagship infant formula, Similac, among other products. In diagnostics, Michael will be running a division that was largely expected to disappear until Abbott and General Electric Co. decided earlier this summer to pull the plug on GE’s plan to acquire much of the division. Abbott is now committed to keeping its diagnostics operation and investors are looking for improved growth. Diagnostics sales were up 11.4 percent in the second quarter. The division faces a more competitive landscape, however, particularly after German giant Siemens AG closes its recently announced $7 billion acquisition of Deerfield-based Dade Behring Holdings Inc. Abbott stands to fall to No. 3 worldwide in in-vitro diagnostics revenues, behind the Siemens-Dade combination and Roche Holdings. Analysts say more will be expected of the division heads now that they report directly to White. Cowen’s Michelmore said “some are more battle tested than others” and are now being given “autonomy to run the businesses.” SOURCE: Chicago Tribune