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Why Are Abbott Shares Trending 20% Lower?

Story Highlights

A complaint warning about the safety issues at the Sturgis plant was sent to OSHA in February 2021, much earlier than the officially known complaints. Will production at the Sturgis plant again shut down?

In the latest twist to the baby formula controversy at Abbott Laboratories (ABT), it has come to the fore that Abbott received warnings from a former employee about quality control issues at the baby-formula Sturgis plant much earlier than previously known, according to a report by the Wall Street Journal.

At the time of writing the article, shares of the U.S.-based multinational medical devices and health care company had dropped almost 18% following the news.

The Timeline of Complaints

A former employee first filed a discrimination complaint with the Michigan Occupational Safety and Health Administration (OSHA) upon being fired in August 2020.

In February 2021, in a subsequent complaint filed with the U.S. Labor Department’s OSHA, the same employee raised product-safety concerns and various other problems at the Sturgis plant, including deteriorating equipment and formula that could have been unsafe for consumption.

According to the government official, Labor Department officials provided the February 2021 complaint to Abbott as well as to the FDA, as reported by WSJ. Two months later, Abbott submitted a formal response to the complaint.

Eight months later, in October 2021, a more elaborate complaint followed, with more details added to the former allegations, which were later made public by Congress in April 2022.

In February 2022, Abbott shut down its plant at Sturgis, the company’s biggest formula factory, after the FDA found traces of a potentially deadly bacteria that caused illness in several infants.

Abbott is one of the four biggest formula producers in the U.S., and the halt in production worsened an already acute shortage of baby formula in the country.

In May 2022, after facing heavy criticism, U.S. Food and Drug Administration (FDA) Commissioner, Robert Califf, indicated that the agency’s food safety division needed to undergo reforms following its delay in responding to the safety lapses at Abbott, citing slow coordination and the use of outdated technology as reasons behind the delay.

On June 5, Abbott restarted production at its Michigan baby formula plant, which had remained closed since February due to the issues. Abbott claimed that it had addressed and corrected the issues.

It is important to note that this is not the first time that Abbott’s plant in Sturgis has come under the regulatory scanner. In 2010, Abbott recalled around five million containers of powdered Similac after they were detected with beetles or their larvae in the formula.

In the following years, there were reports of potentially deadly bacteria in the formula, standing water, damage to drying equipment, etc. at the manufacturing plant.

Abbott and FDA’s Response

In response, a spokesman for Abbott stated that the former employee was fired for violations of food-safety policies. Further, in his tenure at Abbott, he didn’t raise product-safety concerns with the company’s office of ethics and compliance.

Meanwhile, the FDA accepted the receipt of the October 2021 complaint. However, there was no mention of the complaint made in February 2021.

Christopher Calamari, SVP of U.S. nutrition at Abbott, stated that the company came to know of the complaint after it was made public by Congress in April 2022.

Wall Street’s Take

On June 7, following the restarted production, Morgan Stanley analyst Cecilia Furlong reiterated a Buy rating on Abbott Labs with a price target of $145 (26.4% upside potential).

Furthermore, the Wall Street community remains optimistic about the stock with a Strong Buy consensus rating based on eight Buys and a Hold. The average Abbott price target of $140 implies a potential upside of 21.74%.

Conclusion

There has been severe criticism concerning the timeline of events leading up to the FDA’s warning and Abbott’s recall. The extreme deficit of infant formula in the U.S. is another grave concern.

Shares of Abbott are down over 17% year-to-date. The new turn of events may diminish consumers’ confidence in Abbott’s product quality, if not addressed quickly, and may not bode well for the stock.

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