Financial Review: Part 3
In 2011 and 2010, Total Net, Total U.S., Total International, Proprietary Pharmaceutical Products segment and Established Pharmaceutical Products segment sales reflect the acquisition of Solvay’s pharmaceuticals business on February 15, 2010 and unit growth, while the relatively weaker U.S. dollar favorably impacted international sales across all segments. Total Net, Total International and Established Pharmaceutical Products segment sales growth in 2011 also reflects the acquisition of Piramal Healthcare Limited’s Healthcare Solution business in September 2010. Total Net Sales growth in 2009 reflects unit growth and the acquisition of Advanced Medical Optics, Inc. on February 25, 2009, partially offset by the negative effect of the relatively stronger U.S. dollar. Total Net, Total U.S. and Proprietary Pharmaceutical Products segment sales in 2009 also reflect decreased sales of Depakote due to generic competition. Excluding U.S. Depakote sales, Total Net sales increased 7.7 percent, Total U.S. sales increased 7.6 percent and Proprietary Pharmaceutical Products segment sales increased 7.8 percent from 2008 to 2009.
A comparison of significant product and product group sales is as follows. Percent changes are versus the prior year and are based on unrounded numbers.
(dollars in millions) |
2011 |
Percent Change |
2010 |
Percent Change |
2009 |
Percent Change |
Proprietary Pharmaceuticals — |
||||||
Total U.S. Proprietary sales |
$9,455 |
8 |
$8,744 |
12 |
$7,794 |
(8) |
HUMIRA |
3,427 |
19 |
2,872 |
14 |
2,520 |
12 |
TRILIPIX/TriCor |
1,372 |
1 |
1,355 |
1 |
1,337 |
— |
Niaspan |
976 |
5 |
927 |
8 |
855 |
9 |
AndroGel |
874 |
35 |
649 |
n/m |
— |
— |
Lupron |
540 |
12 |
483 |
(11) |
540 |
43 |
Synthroid |
522 |
16 |
451 |
9 |
415 |
(5) |
Kaletra |
326 |
(10) |
363 |
(19) |
447 |
(13) |
Total International Proprietary sales |
7,567 |
15 |
6,587 |
15 |
5,751 |
14 |
HUMIRA |
4,505 |
23 |
3,676 |
24 |
2,969 |
31 |
Kaletra |
844 |
(5) |
892 |
(3) |
920 |
(4) |
Lupron |
270 |
2 |
265 |
2 |
260 |
(5) |
Total Established Pharmaceuticals — |
5,413 |
20 |
4,519 |
54 |
2,941 |
(8) |
Clarithromycin |
542 |
4 |
521 |
(11) |
587 |
(8) |
TriCor and Lipanthyl (fenofibrate) |
320 |
29 |
248 |
n/m |
22 |
5 |
Creon |
296 |
58 |
187 |
n/m |
— |
— |
Serc |
233 |
30 |
180 |
n/m |
— |
— |
Duphaston |
223 |
64 |
136 |
n/m |
— |
— |
Synthroid |
116 |
12 |
104 |
20 |
87 |
(3) |
Nutritionals — |
||||||
U.S. Pediatric Nutritionals |
1,268 |
5 |
1,208 |
(7) |
1,306 |
3 |
International Pediatric Nutritionals |
1,926 |
15 |
1,676 |
9 |
1,543 |
12 |
U.S. Adult Nutritionals |
1,368 |
2 |
1,345 |
6 |
1,269 |
9 |
International Adult Nutritionals |
1,427 |
13 |
1,268 |
15 |
1,106 |
3 |
Diagnostics — |
||||||
Immunochemistry |
3,150 |
8 |
2,904 |
4 |
2,798 |
(2) |
Vascular Products — |
||||||
Coronary Stents |
2,078 |
4 |
2,007 |
24 |
1,618 |
35 |
|
n/m – Percent change is not meaningful
|
||||||
The increases in U.S. Proprietary product sales in 2011 and 2010 are primarily due to increased sales of HUMIRA and the acquisition of Solvay Pharmaceuticals in February 2010, partially offset by decreased sales of Depakote and Zemplar. U.S. Proprietary product sales in 2009 were impacted by decreased sales of Depakote due to generic competition, partially offset by increased sales of HUMIRA and the addition of Lupron sales from the conclusion of the TAP joint venture in April 2008. U.S. sales of Depakote were $148 million, $161 million and $331 million in 2011, 2010 and 2009, respectively. Worldwide sales of Kaletra in all three years were negatively affected by market competition. International Proprietary product sales in all three years were favorably impacted by increased sales of HUMIRA. The increases in Established Pharmaceutical sales in 2011 and 2010 are primarily due to the acquisitions of Solvay Pharmaceuticals and Piramal and growth in emerging markets. U.S. Pediatric Nutritionals sales in 2011 and 2010 were affected by the voluntary recall of certain Similac-brand powder infant formulas in September 2010 and the subsequent recovery in market share in 2011. International Pediatric and Adult Nutritionals sales increases over the three years were due primarily to volume growth in developing countries. International Proprietary Pharmaceuticals, International Adult Nutritionals and Immunochemistry sales in 2011 and 2010 were positively impacted by the effect of the relatively weaker U.S. dollar and were negatively impacted in 2009 by the effect of the relatively stronger U.S. dollar. Abbott has periodically sold product rights to non-strategic products and has recorded the related gains in net sales in accordance with Abbott’s revenue recognition policies as discussed in Note 1 to the consolidated financial statements. Related net sales were approximately $58 million and $120 million in 2010 and 2009, respectively, while there were no significant sales in 2011.
The expiration of licenses, patent protection and generic competition can affect the future revenues and operating income of Abbott. There are currently no significant patent or license expirations in the next three years. Under a license agreement for TriCor 145 mg, generic competition is not expected before July 2012. Under a license agreement for Trilipix 45 mg and 135 mg, generic competition may begin in January 2014 except that under certain circumstances the license may commence as early as July 2013. Under an agreement relating to Abbott’s niacin products and acquired with the Kos Pharmaceuticals acquisition, Niaspan may become subject to generic competition in September 2013. AndroGel 1% sales are expected to be impacted by generic competition in 2015.
Operating Earnings
Gross profit margins were 60.0 percent of net sales in 2011, 58.3 percent in 2010 and 57.1 percent in 2009. The increase in the gross profit margin in 2011 was due, in part, to improved margins in the established pharmaceutical, diagnostics and diabetes businesses and was partially offset by the unfavorable effect of exchange on the profit margin ratio. The increase in the gross profit margin in 2010 was due, in part, to improved margins in the established pharmaceutical, vascular, diabetes, diagnostics and nutritional businesses and the favorable effect of exchange on the gross profit margin ratio. The decrease in the gross profit margin in 2009 was due, in part, to the negative impact from lower sales of Depakote and the unfavorable effect of exchange on the gross profit margin ratio; partially offset by improved margins in the vascular and diagnostics businesses.
In the U.S., states receive price rebates from manufacturers of infant formula under the federally subsidized Special Supplemental Nutrition Program for Women, Infants, and Children. There are also rebate programs for pharmaceutical products. These rebate programs continue to have a negative effect on the gross profit margins of the Nutritional, Proprietary Pharmaceutical and Established Pharmaceutical Products segments.
Research and development expense was $4.129 billion in 2011, $3.724 billion in 2010 and $2.744 billion in 2009 and represented increases of 10.9 percent in 2011, 35.7 percent in 2010 and 2.0 percent in 2009. Excluding charges related to the Solvay restructurings announced in September 2010, research and development expense increased 29.4 percent in 2010 and 6.2 percent in 2011. The 2010 increase, exclusive of the effects of the restructuring charges, reflects the acquisitions of Solvay’s pharmaceuticals business in February 2010 and Facet Biotech in April 2010. The increase in 2009 reflects the favorable effect of exchange rates which reduced research and development expense in 2009. Excluding the effect of exchange, research and development expenses increased 3.4 percent in 2009. The increases in 2011, 2010 and 2009 also reflect continued pipeline spending, including programs in vascular devices, biologics, neuroscience, oncology and hepatitis C. The majority of research and development expenditures are concentrated on pharmaceutical products. $2.8 billion of Abbott’s 2011 research and development expenses related to Abbott’s pharmaceutical products, of which $2.2 billion was directly allocated to the Proprietary Pharmaceutical Products segment. In 2011, research and development expenditures totaled $403 million for the Vascular Products segment, $325 million for the Diagnostics Products segment, $251 million for the Established Pharmaceutical Products segment and $165 million for the Nutritional Products segment.
Selling, general and administrative expenses increased 22.9 percent in 2011, increased 23.4 percent in 2010 and decreased 0.4 percent in 2009. The U.S. Department of Justice through the United States Attorney for the Western District of Virginia is investigating Abbott’s sales and marketing activities for Depakote. In 2011, Abbott recorded a litigation charge of $1.5 billion related to ongoing settlement discussions in this investigation. Excluding the litigation charge and Solvay-related restructuring and integration costs, selling, general and administrative expenses increased 6.7 percent in 2011. Excluding charges related to Solvay restructuring and integration projects, selling, general and administrative expenses in 2010 increased 18.2 percent. This increase, exclusive of the effects of the restructuring and integration charges, reflects the acquisitions of Solvay’s pharmaceuticals business in 2010 and Advanced Medical Optics, Inc. in 2009 and higher provisions for litigation in 2010. The 2009 decrease reflects the favorable effect of exchange rates which was offset by expenses relating to the acquisition of Advanced Medical Optics, Inc. and the settlement of litigation. Excluding the effects of the charges and exchange, selling, general and administrative expenses increased 0.9 percent in 2009. The remaining increases in selling, general and administrative expenses over the three year period were due primarily to increased selling and marketing support for new and existing products, including continued spending for HUMIRA, inflation, and in 2010, the impact of the pharmaceutical fee imposed by U.S. healthcare reform legislation.
Restructurings
In 2011 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs. In 2011, 2010 and 2009, Abbott recorded charges of approximately $194 million, $56 million and $114 million, respectively, reflecting the impairment of manufacturing facilities and other assets, employee severance and other related charges. Approximately $76 million in 2011 is classified as Cost of products sold, $69 million as Research and development and $49 million as Selling, general and administrative. Approximately $56 million in 2010 is classified as Cost of products sold and $114 million in 2009 as Selling, general and administrative. The following summarizes the activity for these restructurings:
(dollars in millions) |
|
Accrued balance at January 1, 2009 |
$105 |
2009 restructuring charges |
114 |
Payments, impairments and other adjustments |
(74) |
Accrued balance at December 31, 2009 |
145 |
2010 restructuring charges |
56 |
Payments, impairments and other adjustments |
(124) |
Accrued balance at December 31, 2010 |
77 |
2011 restructuring charges |
194 |
Payments and other adjustments |
(94) |
Accrued balance at December 31, 2011 |
$177 |
An additional $25 million, $13 million and $47 million were recorded in 2011, 2010 and 2009, respectively, relating to these restructurings, primarily for accelerated depreciation.
In 2010, Abbott management approved a restructuring plan primarily related to the acquisition of Solvay’s pharmaceuticals business. This plan streamlines operations, improves efficiencies and reduces costs in certain Solvay sites and functions as well as in certain Abbott and Solvay commercial organizations in various countries. Under this plan, Abbott recorded charges to Cost of products sold, Research and development and Selling, general and administrative of approximately $99 million, $152 million and $272 million, respectively. The following summarizes the activity for this restructuring:
(dollars in millions) |
|
2010 restructuring charge |
$523 |
Payments, impairments and other adjustments |
(113) |
Accrued balance at December 31, 2010 |
410 |
Payments and other adjustments |
(302) |
Accrued balance at December 31, 2011 |
$108 |
An additional $102 million and $12 million were recorded in 2011 and 2010, respectively, relating to this restructuring, primarily for additional employee severance and accelerated depreciation.
In 2011 and 2008, Abbott management approved plans to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business. In 2011 a charge of $28 million was recorded in Cost of products sold. The following summarizes the activity for these restructurings:
(dollars in millions) |
|
Accrued balance at January 1, 2009 |
$110 |
Payments and other adjustments |
(12) |
Accrued balance at December 31, 2009 |
98 |
Payments and other adjustments |
(10) |
Accrued balance at December 31, 2010 |
88 |
2011 restructuring charge |
28 |
Payments and other adjustments |
(37) |
Accrued balance at December 31, 2011 |
$79 |
In addition, charges of approximately $42 million, $60 million and $54 million were recorded in 2011, 2010 and 2009, primarily for accelerated depreciation and product transfer costs. Additional charges will be incurred through 2012 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.
Interest expense and Interest (income)
In 2011, interest expense decreased due to lower debt levels and interest income decreased as a result of lower rates. In 2010, interest expense increased due primarily to increased debt levels. In 2009, interest expense decreased primarily as a result of lower interest rates, partially offset by increased debt levels related to the acquisition of Advanced Medical Optics, Inc. Interest income decreased in 2010 due to lower investment balances and decreased in 2009 due to lower interest rates.
Change in Accounting Principle and Other (income) expense, net
Prior to January 1, 2011, the accounts of foreign subsidiaries were consolidated based on a fiscal year ended November 30 due to the time needed to consolidate these subsidiaries. Effective January 1, 2011, the one month lag in the consolidation of the accounts of foreign subsidiaries was eliminated and the year-end of foreign subsidiaries was changed to December 31. Abbott believes that the change in accounting principle related to the elimination of the one month reporting lag is preferable because it will result in more contemporaneous reporting of the results of foreign subsidiaries. In accordance with applicable accounting literature, a change in subsidiaries’ year-end is treated as a change in accounting principle and requires retrospective application. The cumulative effect of the change was an increase in retained earnings of $289 million as of January 1, 2009 and a corresponding decrease in other long-term liabilities. The impact of the change was not material to the results of operations for the previously reported annual and interim periods after January 1, 2009, and thus, those results have not been revised. A charge of $137 million was recorded to Other (income) expense, net in 2011 to recognize the cumulative immaterial impacts to 2009 and 2010. Had the financial statements been revised, net sales, operating earnings and net earnings in 2009 would have increased by $211 million, $36 million and $38 million, respectively, and net sales, operating earnings and net earnings in 2010 would have decreased by $21 million, $195 million and $175 million, respectively.
Other (income) expense, net, for 2011 includes $56 million of fair value adjustments and accretion in the contingent consideration related to the acquisition of Solvay’s pharmaceutical business. Other (income) expense, net, for 2009 includes the derecognition of a contingent liability of $797 million associated with the conclusion of the TAP Pharmaceutical Products Inc. joint venture. The contingent liability was established at the conclusion of the joint venture as Abbott agreed to remit cash to Takeda if certain research and development events were not achieved on the development assets retained by Takeda. In 2009, the research and development events were achieved and the contingent liability was derecognized. In addition, Other (income) expense, net for 2009 includes a $287 million gain from the settlement reached between Abbott and Medtronic, Inc. resolving all outstanding intellectual property litigation between the two parties and income from the recording of certain investments at fair value in connection with business acquisitions. Other (income) expense, net, for 2011, 2010 and 2009 also includes ongoing contractual payments from Takeda associated with the conclusion of the TAP joint venture.
Taxes on Earnings
The income tax rates on earnings were 9.0 percent in 2011, 19.0 percent in 2010 and 20.1 percent in 2009. Taxes on earnings in 2011 reflect the effect of the tax rate applied to a litigation reserve and the recognition of $580 million of tax benefits as a result of the favorable resolution of various tax positions pertaining to prior years, which also decreased the gross amount of unrecognized tax benefits by approximately $1.3 billion. Exclusive of these discrete items, the effective rates are lower than the U.S. federal statutory rate of 35 percent due primarily to the benefit of lower foreign tax rates and tax exemptions that reduced the tax rates by 22.9, 19.4, and 16.4 percentage points in 2011, 2010 and 2009, respectively. The tax rate reductions are primarily derived from operations in Puerto Rico, Switzerland, Ireland and Singapore where Abbott benefits from a combination of favorable statutory tax rules, tax rulings, grants, and exemptions. See Note 5 to the consolidated financial statements for a full reconciliation of the effective tax rate to the U.S. federal statutory rate.
As a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act which were signed into law in 2010, Abbott recorded a charge of approximately $60 million in 2010 to reduce deferred tax assets associated with retiree health care liabilities related to the Medicare Part D retiree drug subsidy. The tax rate in 2009 was affected by a higher tax rate applied to the derecognition of a contingent liability associated with the conclusion of the TAP Pharmaceutical Products Inc. joint venture and the Medtronic intellectual property litigation settlement.
In October 2010, Puerto Rico enacted legislation that assesses a tax beginning in 2011 on certain products manufactured in Puerto Rico. This excise tax is recorded in Cost of products sold although the tax is creditable for U.S. income tax purposes.
