When Is a Sales Rep Not a Sales Rep? When You're at Abbott Labs, Facing More Layoffs

Last Updated Jun 14, 2010 6:35 PM EDT

Good news, bad news for Abbott Labs' (ABT) pharmaceutical sales reps: They recently won a court ruling that paves the way for an award of backpay for unpaid overtime, but they're also bracing for another round of layoffs, possibly on June 30.

The ruling is the latest in a string that suggests drug reps don't actually qualify as salespeople because they're not really selling anything -- they're just promoting pills, not actually executing transactions. Thus, under federal law, they may be entitled to overtime payments.

Abbott has historically been strict about making sure it has as few sales reps as possible to make its revenues, and CFO Tom Freyman signalled to Wall Street in his Q1 2010 conference call that the discipline will continue:

It's going to take time for us to complete our integration plans and begin to execute, ... you know, part of our mix as we go into 2011 is the return to SG&A leverage and improving gross margin and I think you're going to see that trend go back the other way next year.
That's industry jargon for layoffs. The majority of any drug company's SG&A budget is sales reps, and the only way to increase their "leverage" is to have fewer of them.

Freyman also talked about getting Solvay, which Abbott acquired a few months ago, into "cost-reduction mode" -- the same thing applies. Abbott took on an extra $3 billion in debt to fund that acquisition, so the company will need to make some savings to pay that off. The layoffs have already begun: 120 lost their jobs at this factory in California and 23 were axed at Solvay's Ohio facility.

You'd think Abbott would be hiring people, given that its revenues rose 15 percent in Q1 2010 to $7.6 billion. But Abbott has struggled to leverage its monopolies on HIV drugs Norvir and Kaletra as governments have pushed back on the high prices Abbott wants. Its Depakote monopoly lost its patent exclusivity last year. Most seriously of all, Abbott has a massive baby-boomer problem looming: Up to 40 percent of the company's employees are facing retirement in the near term.

So while the overtime ruling may be dramatic -- it could go to the Supreme Court because different federal courts have reached clashing conclusions on the same issue -- it arguably increases your problems if you're an Abbott employee right now, because you're looking just a bit more expensive today, from management's point of view, than you were yesterday.

And finally, that OT scorecard: On the issue of backpay for reps, Abbott, Schering-Plough and Boehringer Ingelheim have all lost rulings that favored OT for reps. But Novartis and Ortho McNeil both won cases. There are similar cases pending at Amgen and Serono.