Welcome to Plugging the Gap (my email newsletter about Covid-19 and its economics). In case you don’t know me, I’m an economist and professor at the University of Toronto. I have written lots of books including, most recently, on Covid-19. You can follow me on Twitter (@joshgans) or subscribe to this email newsletter here. (I am also part of the CDL Rapid Screening Consortium. The views expressed here are my own and should not be taken as representing organisations I work for.)
For weeks in June and July, workers at a Maine factory making one of America’s most popular rapid tests for Covid-19 were given a task that shocked them: take apart millions of the products they had worked so hard to create and stuff them into garbage bags.
Soon afterward, Andy Wilkinson, a site manager for Abbott Laboratories, the manufacturer, stood before rows of employees to announce layoffs. The company canceled contracts with suppliers and shuttered the only other plant making the test, in Illinois, dismissing a work force of 2,000. “The numbers are going down,” he told the workers of the demand for testing, saying it wasn’t their fault. “This is all about money.”
Ah, yes, the beginning of Summer optimism when many were making Fall plans. This almost looks like an Econ 101 exam question: when demand is expected to fall, what will happen to the quantity supplied?
But is it? Abbott was not just reacting to the moment. You aren’t in this business unless you pay attention to epidemiological forecasts. And with the large numbers of unvaccinated and the Delta variant, they had to know that Covid wasn’t going away and that cases would rise right through Fall and Winter 2022. But then again …
Demand for the 15-minute antigen test, BinaxNOW, is soaring again as people return to schools and offices. Yet Abbott has reportedly told thousands of newly interested companies that it cannot equip their testing programs in the near future. CVS, Rite Aid and Walgreens locations have been selling out of the at-home version, and Amazon shows shipping delays of up to three weeks. Abbott is scrambling to hire back hundreds of workers.
In other words, they made a mistake. They thought demand was going to be down for much longer but that wasn’t to be. And that change was driven by the CDC.
But then the C.D.C. came out with a game-changing announcement: Vaccinated people without symptoms no longer needed to be tested, even after exposure.
“We couldn’t have anticipated what has occurred over the past several weeks,” Mr. Ford told investors on another call, describing “a sharp and rapid decline in demand,” particularly for rapid tests, and dropping the company’s earnings forecast. Abbott later announced a $500 million restructuring plan.
Abbott is in the public health business. Therefore, their entire demand is heavily influenced by what public health recommends. It appears they carry substantial risk in that regard.
But let’s delve deeper. It’s not about cases. Instead, it is about vaccine mandates. Those mandates are not to have a vaccine per se but to be vaccinated or have a recent negative test. For instance, MLSE who runs the hockey franchise, Maple Leafs, amongst other stuff in Canada, are requiring fans to be vaccinated or have a recent negative test. This is becoming very common. Fearful of making vaccines compulsory, organisations worked out that what they needed was another option. Tests were that option; they gave people a choice. What’s more, if hockey fans are required to have negative tests, people are gonna ask: what about the children going to school? It seems like only a matter of time.
In other words, things changed in a way many were not expecting. Even if Abbott knew cases would be up, there had been no indications that testing would play a larger role than it had previously and, indeed, the signals from many governments, especially in the US, was that they were loathed to do anything related to Covid requirements. It turns out that despite that, the market for testing has turned around.
But, as always, the story had a wrinkle. Abbott didn’t just reduce production, it destroyed inventory. Well sort of.
In an interview, Robert B. Ford, Abbott’s chief executive, argued that the discarded materials — finished test cards — should not be viewed as tests. Kits for sale also include swabs, liquid buffer and instructions.
“I would just caution in terms of using the word ‘destroy’ because it kind of gives a sense here that we’ve got all these tests that were in packages and we threw them away,” he added.
Asked why the materials needed to be thrown away, Mr. Ford cited a limited shelf life. But photographs taken in June and July of some of the estimated 8.6 million Abbott test cards employees said were shredded show expiration dates more than seven months away.
Tests are a bunch of stuff. But the stuff that expires is on the test cards. Everything else has a longer shelf life. So Abbott just disposed of the stuff that might expire. That makes sense as it can then repackage the rest if needed. And yes, the expiration dates were seven months away. But that put expiration in March. There was likely a risk that anything shipped might not be used by then at projected demand. As people stockpile this stuff, you know they are going to choose things with a later expiry date. So Abbott faced a dilemma and seems to have done something that isn’t necessarily crazy.
In the end, where are we? This is more a story about a company trying to navigate uncertain terrain than about what might be some nefarious plan to save labour costs. Yes, that was part of it, but that take seems a weak point.
As a broader picture, some supply constraints on testing are in our future. This is something we monitor at the CDL Rapid Screening Consortium but since we don’t procure tests we can only monitor and provide that aggregate information to governments and others who need it. To governments who want to keep the testing option open, the message from this is: act now. The more you do so, the less you force these companies to gamble and the more likely it is that there will be enough supply to manage the coming year.