The Wall Street Journal - November 3, 1999
Thomas M. Burton, Staff Reporter

The test kits at issue, representing about $250 million in annual sales, will disappear from the U.S. market in 30 days under the terms of a consent agreement reached with the Food and Drug Administration. Abbott, of North Chicago, Ill., said it will record a pretax charge of $168 million to cover the payment to the government and write down the value of certain inventory.

The news drove Abbott's shares lower. At 4 p.m. on the New York Stock Exchange Tuesday, Abbott closed at $37.5625, down $2.75, a decline of 6.8%. Abbott said the charge will result in a downward adjustment in its previously announced third-quarter results.

FDA Says Abbott Lab Assay Kit Fails to Comply With Standards (Sept. 29) The test kits at issue, manufactured at Abbott's main medical-diagnostics facility in Lake County, Ill., north of Chicago, are used to test samples of patients' blood, urine and other bodily fluids. Some of the tests that will be pulled off the market, when the agreement takes effect, include tests for vitamin B12, folate and ferritin in patients with anemia, and other tests for the presence of therapeutic drugs in the blood. For the laboratories and doctors' offices that use these tests kits, plenty of competing options exist.

Some Kits to Remain

Abbott's most important diagnostic test kits, such as those for HIV, hepatitis, prostate and colon cancer, will stay on the market. In most cases, this was because Abbott, the world leader in medical diagnostics, is the sole or primary supplier of those 175 products that won't be affected. Nevertheless, Abbott faces increasingly intense competition from companies such as Germany's Bayer AG to supply medical laboratories and doctors' offices with these kits and the machines used with them.

The FDA has instituted a complex web of regulations for what constitutes good manufacturing practices of such chemical test kits, and they have changed in recent years.

"These are steps in manufacturing that assure that you have a consistent product," said David Feigal, director of the FDA's Center for Devices. "When those systems aren't in place, you don't even know where you are."

Negotiating with the government is always a difficult proposition, because it can force the withdrawal of products from the market. In this instance, however, Abbott was at a particular disadvantage, because two acquisitions, including the planned purchase of drug-delivery company Alza Corp., could be imperiled as Abbott's stock has fallen in the wake of its FDA difficulties. The Alza merger was valued at $7.3 billion in June, when Abbott stock was trading at $44.1875.

Vulnerable Position

"They went into the negotiations with the FDA fairly vulnerable because they needed to go ahead with their deals," said Merrill Lynch analyst Daniel Lemaitre. "The size of the payment, and the amount of work they have to do under the consent agreement, are sizable." In particular, he said, the $250 million in annual sales affected is "a bigger number than most people thought was vulnerable."

Abbott said it is "committed to going ahead" with the Alza acquisition. An Alza spokeswoman said the company is "pleased to learn that Abbott has resolved these issues. We are looking forward to working with Abbott in evaluating this agreement." At 4 p.m. on the New York Stock Exchange Tuesday, Alza closed at $41.75, down $2.50.

Industry executives suggested the situation could give rise to potential legal liability for Abbott if it knew, and failed to disclose, that the FDA was pushing for a consent order on the quality-assurance issue. In fact, there already have been at least three lawsuits, seeking class-action status, in which Abbott investors alleged that the company didn't divulge material information regarding the FDA.

Claims No Quality Drop-Off

"I don't think this represents a drop-off" in Abbott quality control, said the company's chief executive, Miles D. White, in an interview. "I think the regulatory standards have gotten more rigorous." He said the underlying fundamentals of all Abbott businesses are strong. Its diagnostics division, however, had been counted on to perform well to compensate for the hard times that have hit the company's longtime profit engine, the pharmaceutical division, which needs some new drugs to bolster its aging product line.

Under the agreement with the government, third-party experts will scrutinize Abbott's manufacturing plant and make recommendations for corrections, which the company would be bound to follow. The process is expected to take 12 months. The FDA has found shortcomings in Abbott's diagnostic plant for six years, beginning with an inspection in 1993. The agency sent Abbott a warning letter in March 1994, and the FDA continued to find deficiencies through last year. In March of this year, it sent Abbott another warning letter and conducted another inspection during the summer, finding what it termed "continuing deficiencies." It was then, according to FDA officials, that it decided a court order would be necessary to bring the plant into compliance with federal rules.
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