The 3,000 workers who will lose their jobs as Abbott Labs (ABT) tries to make its $6.1 billion acquisition of Solvay's pharmaceutical unit pay off may want to ask why the increase in annual revenue that Solvay brings nonetheless requires job cuts.
Solvay will add about $2 billion a year to Abbott's top line annually. By amazing coincidence, that's almost exactly the size of Abbott's pending liabilities in its Humira patent litigation, in which Johnson & Johnson (JNJ)'s Centocor unit won $1.67 billion in a federal court trial after proving that Abbott did not own the rights to the blockbuster autoimmune disorder therapy. The court also awarded Centocor a further $175 million in prejudgment interest, bringing Abbott's total liabilities to $1.9 billion.
Abbott is appealing the ruling but it has already placed that money in escrow. While the Solvay acquisition should have made Abbott richer, the Humira judgment essentially wipes out the first year's worth of revenues Solvay brings in, and the first several years' worth of profits (Solvay's drug group only earned â‚¬31 million in the first half of 2010, according to page 8 of this Q2 2010 earnings release).
The largest layoff in Abbott's history -- affecting 3 percent of its 93,000 workers -- will close the the former U.S. HQ of Solvay in Marietta, Ga., by the end of 2011. About 500 positions at a site in the Netherlands will be eliminated, along with 300 in Hannover, Germany.
The Humira litigation and the Solvay acquisition aren't linked, of course, but the Humira damages -- the largest patent damages ever awarded -- certainly make Abbott's need to find savings more dramatic.
The company never actually secured exclusive use of the technique required to make Humira, according to this discussion paper. The case is technical but it revolves solely around the question of whether Centocor -- which markets a similar product, Remicade -- held the patent for Humira before Abbott did. The reason there's confusion over such a seemingly simple question is because the technique required to make it was first patented by Peptech, a UK-Australian biotech company. Knoll AG then used Peptech's technique to develop Humira. Knoll was then acquired by BASF AG, and then Abbott acquired BASF's drug operations -- including Humira -- in 2001.
At the same time, however, Centocor was collaborating with New York University to use Peptech's technique to develop Remicade.
In sum, both companies bought rights to the same company's development technique, and Abbott didn't manage to keep those rights exclusive to itself.
That's a growing problem for Abbott, as Bayer (BAY.DE) also claims Abbott is infringing on its patents, according to the discussion paper, authored by the Scope eKnowledge Center. Worse, Bayer's lead lawyer, T. John Ward Jr., is the son of federal Judge T. John Ward of Marshall, Texas, who awarded Centocor the $1.67 verdict against Abbott.
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