Abbott Tries a Crash Diet

Another day, another round of layoffs at a pharmaceutical company. Abbott Labs (NYSE: ABT  ) joined Wyeth (NYSE: WYE  ) , Schering-Plough (NYSE: SGP  ) , and Amgen (Nasdaq: AMGN  ) , among others, in cutting back its workforce.

Abbott's cuts are particularly interesting because the company doesn't seem to be in trouble, like the other drugmakers mentioned are. Wyeth made cuts in large part because its heartburn medication, Protonix, started receiving generic competition from Teva Pharmaceutical (Nasdaq: TEVA  ) . Schering and Merck (NYSE: MRK  ) are struggling after the Enhance trial slowed the growth of Vytorin sales. And Amgen's anemia franchise has been anemic of late.

Abbott, on the other hand, posted 15% year-over-year sales growth last quarter. Sales of diagnostic tests, the division from which the 1,000 jobs will be cut, were up more than 17%. The company is clearly trying to increase margins, even in good times, and that's definitely something investors should be looking for in a company.

The cuts will result in pre-tax charges of about $370 million over the next several years, with almost 40% of that sum coming in the third quarter. After the plan is complete, Abbott should see savings of $150 million per year -- not a bad return on its investment.

Abbott had planned to sell the diagnostic-test division to General Electric (NYSE: GE  ) , but the deal fell through last year. In the end, I think that was a good thing for the health-care conglomerate. The tests give the company diversity, which should provide stability if one of its other divisions slips up.

Abbott hasn't gotten much love from investors this year, but this move should give stockholders more confidence that management is doing everything it can to improve the bottom line.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a right-sized disclosure policy.


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