Abbott spokesperson Melissa Brotz said:
We are taking this action from a position of strength to improve profitability and competitiveness moving forward, addressing excess capacity, reducing cost and improving efficiencies.She was referring to the fact that Abbott's diagnostics division is currently growing at 17 percent, and the company told investors recently that it expects continued "double-digit growth" in that area.
But the move raises a question: If Abbott's diagnostics are in such a "position of strength," why would it implement all these diagnostic job cuts? A peek at the Abbott radar screen shows that it is not all plain sailing ahead. Let's take the good news first:
Abbott recently settled a class action lawsuit that had accused the company of inflating the price of its HIV drug, Norvir. The settlement was just $37.5 million. That's pennies on the dollar for Abbott; some people had estimated that the price could go as high as $1.1 billion. (Side note: This goes to my earlier point, here and here, that drug companies may be better at estimating their legal liabilities than they let on.)
On top of that, Abbott is one of the few companies whose sales force is actually becoming more efficient. Its SG&A dollars generated $3.56 in revenues for every dollar spent last quarter, up slightly from $3.55 a year ago. That's one of the highest ratios in the business. (Many companies have seen recent declines in their marketing efficiency -- see my previous note about Sepracor.)
So you can see why Abbott thinks it's in that "position of strength." But the company is talking less about the not-so-good stuff. On January 1, 2009, its bipolar and epilepsy drug Depakote goes generic. Am extended release version, Depakote ER, sees competition kick in this month. So the company is about to say goodbye to a franchise that earned $414 million in the last quarter alone and grew 2.4%.
Second, Fitch recently downgraded the company's debt ratings due to its "sustained high leverage" that "remained above expectations." Not a huge deal, but not as good as it was.
Lastly, Abbott may be worrying about trouble in foreign countries that believe the company sells its Kaletra HIV drug at way too high a price: Thailand issued a compulsory license for Kaletra last year; Indonesia is thinking about it; and there's pressure in Colombia and Mexico to do the same.
If all that were to happen, it would devastate Kaletra's global sales, currently at $355 million a quarter and growing at a clip of 12 percent.
Here's the improbable, worst-case scenario: The collapse of Depakote and Kaletra at the same time could cost Abbott $1 billion in revenue. According to Fitch, the company has $1 billion in debt that comes due in the same year. That debt will, presumably,be easily refinanced by the company, which Fitch points out has "solid cash flow." However, Fitch also notes that much of that cash will likely be dedicated to shareholders.
So now all those layoffs from a "position of strength" suddenly start to make a bit more sense -- diagnostics are one of the places in the company where there's likely to be fat.