UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
| (MARK ONE) | ||
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| OR | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the fiscal year ended December 31, 2011 | Commission file number 1-2189 |
Abbott Laboratories
| An Illinois Corporation | 36-0698440 | |
| 100 Abbott Park Road Abbott Park, Illinois 60064-6400 |
(I.R.S. employer identification number) (847) 937-6100 (telephone number) |
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Each Exchange on Which Registered |
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|---|---|---|
| Common Shares, Without Par Value |
New York Stock Exchange Chicago Stock Exchange |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ý | Accelerated Filer o | Non-accelerated Filer o | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No ý
The aggregate market value of the 1,503,071,318 shares of voting stock held by nonaffiliates of the registrant, computed by reference to the closing price as reported on the New York Stock Exchange, as of the last business day of Abbott Laboratories' most recently completed second fiscal quarter (June 30, 2011), was $79,091,612,753. Abbott has no non-voting common equity.
Number of common shares outstanding as of January 31, 2012: 1,572,356,859
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2012 Abbott Laboratories Proxy Statement are incorporated by reference into Part III. The Proxy Statement will be filed on or about March 15, 2012.
PART I
GENERAL DEVELOPMENT OF BUSINESS
Abbott Laboratories is an Illinois corporation, incorporated in 1900. Abbott's* principal business is the discovery, development, manufacture, and sale of a broad and diversified line of health care products.
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS, GEOGRAPHIC AREAS, AND CLASSES OF SIMILAR PRODUCTS
Incorporated herein by reference is Note 6 entitled "Segment and Geographic Area Information" of the Notes to Consolidated Financial Statements included under Item 8, "Financial Statements and Supplementary Data" and the sales information related to Humira® included in "Financial Review."
NARRATIVE DESCRIPTION OF BUSINESS
Abbott has five reportable revenue segments: Proprietary Pharmaceutical Products, Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products.
On October 19, 2011, Abbott announced that it plans to separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals. The diversified medical products company will consist of Abbott's existing diversified medical products portfolio, including its branded generic pharmaceutical, devices, diagnostic and nutritional businesses, and will retain the Abbott name. The research-based pharmaceutical company will include Abbott's current portfolio of proprietary pharmaceuticals and biologics and will be named later.
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Proprietary Pharmaceutical Products
These products include a broad line of adult and pediatric pharmaceuticals manufactured, marketed, and sold worldwide (except as noted) and are generally sold directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from Abbott-owned distribution centers and public warehouses. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies.
The principal products included in the Proprietary Pharmaceutical Products segment are:
The Proprietary Pharmaceutical Products segment directs its primary marketing efforts toward securing the prescription, or recommendation, of Abbott's brand of products by physicians. Managed care providers (for example, health maintenance organizations and pharmacy benefit managers) and state and federal governments and agencies (for example, the United States Department of Veterans Affairs and the United States Department of Defense) are also important customers.
Competition in the Proprietary Pharmaceutical Products segment is generally from other health care and pharmaceutical companies. The search for technological innovations in pharmaceutical products is a significant aspect of competition in this segment. The introduction of new products by competitors and changes in medical practices and procedures can result in product obsolescence in the Proprietary Pharmaceutical Products segment. Price can also be a factor. In addition, the substitution of generic drugs for the brand prescribed has increased competitive pressures on pharmaceutical products that do not have patent protection.
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Established Pharmaceutical Products
These products include a broad line of branded generic pharmaceuticals manufactured, marketed, and sold outside the United States and are generally sold directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from Abbott-owned distribution centers and public warehouses, depending on the market served. Certain products are co-marketed or co-promoted with other companies.
The principal products included in the Established Pharmaceutical Products segment are:
The Established Pharmaceutical Products segment directs its primary marketing efforts toward securing the prescription, or recommendation, of Abbott's brand of products by physicians both in the primary care and secondary (hospital) care environment. Government agencies are also important customers.
Competition in the Established Pharmaceutical Products segment is generally from other health care and pharmaceutical companies. Changes to government tenders and reimbursement schemes are significant factors with respect to pricing. In addition, the substitution of generic drugs for the brand prescribed and introduction of additional forms of already marketed established products by generic or branded competitors have increased competitive pressures.
Diagnostic Products
These products include a broad line of diagnostic systems and tests manufactured, marketed, and sold worldwide to blood banks, hospitals, commercial laboratories, clinics, physicians' offices, government agencies, alternate-care testing sites, and plasma protein therapeutic companies. The segment's products are generally marketed and sold directly from Abbott-owned distribution centers, public warehouses and third-party distributors. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served.
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The principal products included in the Diagnostic Products segment are:
In addition, under a distribution agreement with Celera Group, the Diagnostic Products segment exclusively distributes certain Celera molecular diagnostic products, including the ViroSeq® HIV genotyping system and products used for the detection of mutations in the CFTR gene, which causes cystic fibrosis.
The Diagnostic Products segment's products are subject to competition in technological innovation, price, convenience of use, service, instrument warranty provisions, product performance, long-term supply contracts, and product potential for overall cost-effectiveness and productivity gains. Some products in this segment can be subject to rapid product obsolescence or regulatory changes. Although Abbott has benefited from technological advantages of certain of its current products, these advantages may be reduced or eliminated as competitors introduce new products.
Nutritional Products
These products include a broad line of pediatric and adult nutritional products manufactured, marketed, and sold worldwide. These products are generally marketed and sold directly to customers and to institutions, wholesalers, retailers, health care facilities, government agencies, and third-party distributors from Abbott-owned distribution centers or third-party distributors. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served.
Principal products in the Nutritional Products segment include:
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Primary marketing efforts for nutritional products are directed toward securing the recommendation of Abbott's brand of products by physicians or other health care professionals. In addition, certain nutritional products sold as Gain™, Grow™, PediaSure®, PediaSure Sidekicks®, Pedialyte®, Ensure®, Zone Perfect®, EAS®/Myoplex®, and Glucerna® are also promoted directly to the public by consumer marketing efforts in select markets.
Competition for nutritional products in the segment is generally from other diversified consumer and health care manufacturers. Competitive factors include consumer advertising, formulation, packaging, scientific innovation, intellectual property, price, and availability of product forms. A significant aspect of competition is the search for ingredient innovations. The introduction of new products by competitors, changes in medical practices and procedures, and regulatory changes can result in product obsolescence. In addition, private label and local manufacturers' products may increase competitive pressure.
Vascular Products
These products include a broad line of coronary, endovascular, vessel closure, and structural heart devices for the treatment of vascular disease manufactured, marketed and sold worldwide. The segment's products are generally marketed and sold directly to hospitals from Abbott-owned distribution centers and public warehouses. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served.
The principal products included in the Vascular Products segment are:
The Vascular Products segment's products are subject to competition in technological innovation, price, convenience of use, service, product performance, long-term supply contracts, and product potential for overall cost-effectiveness and productivity gains. Some products in this segment can be subject to rapid product obsolescence or regulatory changes. Although Abbott has benefited from technological advantages of certain of its current products, these advantages may be reduced or eliminated as competitors introduce new products.
Other Products
The principal products in Abbott's other businesses include blood glucose monitoring meters, test strips, data management software and accessories for people with diabetes, including the FreeStyle® product line, and medical devices for the eye, including cataract surgery, LASIK surgery, contact lens care products, and dry eye products. These products are mostly marketed worldwide and generally sold directly to wholesalers, government agencies, health care facilities, mail order pharmacies, and independent
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retailers from Abbott-owned distribution centers and public warehouses. Some of these products are marketed and distributed through distributors. Blood glucose monitoring meters, contact lens care products, and dry eye products are also marketed and sold over-the-counter to consumers. These products are subject to competition in technological innovation, price, convenience of use, service, and product performance. Medical devices for the eye also can be subject to rapid product obsolescence or regulatory changes.
INFORMATION WITH RESPECT TO ABBOTT'S BUSINESS IN GENERAL
Sources and Availability of Raw Materials
Abbott purchases, in the ordinary course of business, raw materials and supplies essential to Abbott's operations from numerous suppliers in the United States and abroad. There have been no recent significant availability problems or supply shortages.
Patents, Trademarks, and Licenses
Abbott is aware of the desirability for patent and trademark protection for its products. Accordingly, where possible, patents and trademarks are sought and obtained for Abbott's products in the United States and all countries of major marketing interest to Abbott. Abbott owns and is licensed under a substantial number of patents and patent applications. Principal trademarks and the products they cover are discussed in the Narrative Description of Business on pages 1 through 6. These, and various patents which expire during the period 2012 to 2031, in the aggregate are believed to be of material importance in the operation of Abbott's business. Abbott believes that no single patent, license, trademark (or related group of patents, licenses, or trademarks), except for those related to adalimumab (which is sold under the trademark Humira®), are material in relation to Abbott's business as a whole. The United States composition of matter (that is, compound) patents covering adalimumab will expire in December 2016. In addition, the following patents, licenses, and trademarks are significant for Abbott's Pharmaceutical Products segment: those related to lopinavir/ritonavir (which is sold under the trademarks Kaletra® and Aluvia™), those related to fenofibrate (which is sold under the trademarks TriCor® and Trilipix®), those related to niacin (which is sold under the trademarks Niaspan® and Simcor®), and those related to testosterone (which is sold under the trademark AndroGel®). The United States composition of matter patent covering lopinavir will expire in 2016. The United States non-composition of matter patent covering lopinavir/ritonavir will expire in 2016. The principal United States non-composition of matter patents covering the fenofibrate products will expire in 2018, 2020, 2023, and 2025. The principal United States non-composition of matter patents covering the niacin products will expire in 2013, 2017, and 2018. The principal non-composition of matter patent covering AndroGel® will expire in 2020 for the 1.62% formulation and, due to pediatric exclusivity, in 2021 for the 1% formulation. Litigation related to the products listed above is discussed in Legal Proceedings on pages 17 through 21. Agreements that may affect exclusivity are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations" on pages 28 through 50.
Although the expiration of a composition of matter patent may lead to increased competition, in most cases Abbott owns or has a license to other patents that expire after the composition of matter patent related to particular formulations, uses, or processes for manufacturing the pharmaceutical. These non-composition of matter patents and Abbott's other intellectual property, along with such other factors as a competitor's need to obtain regulatory approvals prior to marketing a competitive product and the nature of the market, may allow Abbott to continue to have commercial advantages after the expiration of the composition of matter patent, including in some instances exclusivity.
Seasonal Aspects, Customers, Backlog, and Renegotiation
There are no significant seasonal aspects to Abbott's business. Abbott has no single customer that, if the customer were lost, would have a material adverse effect on Abbott. Orders for Abbott's products are
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generally filled on a current basis, and order backlog is not material to Abbott's business. No material portion of Abbott's business is subject to renegotiation of profits or termination of contracts at the election of the government.
Research and Development
Abbott spent $4,129,414,000 in 2011, $3,724,424,000 in 2010, and $2,743,733,000 in 2009, on research to discover and develop new products and processes and to improve existing products and processes. The majority of research and development expenditures is concentrated on proprietary pharmaceutical products.
Environmental Matters
Abbott believes that its operations comply in all material respects with applicable laws and regulations concerning environmental protection. Regulations under federal and state environmental laws impose stringent limitations on emissions and discharges to the environment from various manufacturing operations. Abbott's capital and operating expenditures for pollution control in 2011 were approximately $14 million and $60 million, respectively. Capital and operating expenditures for pollution control in 2012 are estimated to be $7 million and $64 million, respectively.
Abbott has been identified as one of many potentially responsible parties in investigations and/or remediations at several locations in the United States, including Puerto Rico, under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund. Abbott is also engaged in remediation at several other sites, some of which are owned by Abbott, in cooperation with the Environmental Protection Agency (EPA) or similar agencies. While it is not feasible to predict with certainty the final costs related to those investigations and remediation activities, Abbott believes that such costs, together with other expenditures to maintain compliance with applicable laws and regulations concerning environmental protection, should not have a material adverse effect on Abbott's financial position, cash flows, or results of operations.
Employees
Abbott employed approximately 91,000 persons as of December 31, 2011.
Regulation
The development, manufacture, marketing, sale, promotion, and distribution of Abbott's products are subject to comprehensive government regulation. Government regulation by various federal, state, and local agencies, both domestic and international, addresses (among other matters) inspection of, and controls over, research and laboratory procedures, clinical investigations, product approvals and manufacturing, labeling, packaging, marketing and promotion, pricing and reimbursement, sampling, distribution, quality control, post-market surveillance, record keeping, storage, and disposal practices. Abbott's international operations are also affected by trade regulations in many countries that limit the import of raw materials and finished products and by local and international laws and regulations that seek to prevent corruption and bribery in the marketplace (including the United States Foreign Corrupt Practices Act and the United Kingdom Bribery Act which provide among other things, guidance on corporate interactions with government officials). In addition, Abbott is subject to laws and regulations pertaining to health care fraud and abuse, including state and federal anti-kickback and false claims laws in the United States. Prescription drug, nutrition, and medical device manufacturers such as Abbott are also subject to taxes, as well as application, product, user, establishment, and other fees. Governmental agencies can also invalidate intellectual property rights and control the entrance of multi-source drugs for small molecule and generic biologic medicines.
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Compliance with these laws and regulations is costly and materially affects Abbott's business. Among other effects, health care regulations substantially increase the time, difficulty, and costs incurred in obtaining and maintaining approval to market newly developed and existing products. Abbott expects this regulatory environment will continue to require significant technical expertise and capital investment to ensure compliance. Failure to comply can delay the release of a new product or result in regulatory and enforcement actions, the seizure or recall of a product, the suspension or revocation of the authority necessary for a product's production and sale, and other civil or criminal sanctions, including fines and penalties.
In addition to regulatory initiatives, Abbott's business can be affected by ongoing studies of the utilization, safety, efficacy, and outcomes of health care products and their components that are regularly conducted by industry participants, government agencies, and others. These studies can call into question the utilization, safety, and efficacy of previously marketed products. In some cases, these studies have resulted, and may in the future result, in the discontinuance of marketing of such products domestically or globally, and may give rise to claims for damages from persons who believe they have been injured as a result of their use.
Access to human health care products continues to be a subject of investigation and action by governmental agencies, legislative bodies, and private organizations in the United States and other countries. A major focus is cost containment. Efforts to reduce health care costs are also being made in the private sector, notably by health care payors and providers, which have instituted various cost reduction and containment measures. Abbott expects insurers and providers to continue attempts to reduce the cost of healthcare products. Outside the United States, many countries control the price of health care products directly or indirectly, through reimbursement, payment, pricing, coverage limitations, or compulsory licensing. Domestic and foreign budgetary pressures may also heighten the scope and severity of pricing pressures on Abbott's products for the foreseeable future.
Specifically, U.S. federal laws requiring pharmaceutical manufacturers to pay certain statutorily-prescribed rebates to state Medicaid programs on prescription drugs reimbursed under state Medicaid plans, and the efforts by states to seek additional rebates, affect Abbott's proprietary pharmaceutical business. Similarly, the Veterans Health Care Act of 1992 requires manufacturers to extend additional discounts on pharmaceutical products to various federal agencies, including the Department of Veterans Affairs, Department of Defense, Public Health Service entities and institutions, as well as certain other covered entities. The Act also established the 340B drug discount program, which requires pharmaceutical manufacturers to provide products at reduced prices to designated health care facilities.
In the United States, most states also have generic substitution legislation requiring or permitting a dispensing pharmacist to substitute a different manufacturer's version of a pharmaceutical product for the one prescribed. In addition, the federal government follows a diagnosis-related group (DRG) payment system for certain institutional services provided under Medicare or Medicaid and has implemented a prospective payment system (PPS) for services delivered in hospital outpatient, nursing home, and home health settings. DRG and PPS entitle a health care facility to a fixed reimbursement based on the diagnosis and/or procedure rather than actual costs incurred in patient treatment, thereby increasing the incentive for the facility to limit or control expenditures for many health care products. End stage renal disease treatment is covered through a bundled payment that likewise creates incentives for providers to control costs. Medicare enters into contracts with private plans to negotiate prices for medicine delivered under Part D.
In March 2010, Congress enacted the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (together, the "Affordable Care Act"). Under the Affordable Care Act, Abbott pays a fee related to its pharmaceutical sales to government programs. Also in 2011, Abbott began providing a discount of 50 percent for branded prescription drugs sold to patients who fall into the Medicare Part D coverage gap, or "donut hole." In 2013, manufacturers are scheduled to begin paying an
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excise tax on sales of medical devices. Medicare is also implementing a competitive bidding system for durable medical equipment, enteral nutrition products, and supplies.
The Affordable Care Act also includes provisions known as the Physician Payments Sunshine Act, which require manufacturers of drugs, biologics, devices and medical supplies covered under Medicare and Medicaid starting in 2012 to record any transfers of value to physicians and teaching hospitals and to report this data beginning in 2013 to the Centers for Medicare and Medicaid Services for subsequent public disclosure. Similar reporting requirements have also been enacted on the state level domestically, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with health care professionals. Failure to report appropriate data may result in civil or criminal fines and/or penalties.
In the United States, governmental cost containment efforts also affect Abbott's nutrition business. Under regulations governing the federally funded Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), all states must have a cost containment program for infant formula. As a result, through competitive bidding states obtain rebates from manufacturers of infant formula whose products are used in the program.
Abbott expects debate to continue during 2012 at all government levels worldwide over the marketing, availability, method of delivery, and payment for health care products and services. Abbott believes that future legislation and regulation in the markets it serves could affect access to health care products and services, increase rebates, reduce prices or the rate of price increases for health care products and services, change health care delivery systems, create new fees and obligations for the pharmaceutical, nutrition, diagnostic, and medical device industries, or require additional reporting and disclosure. It is not possible to predict the extent to which Abbott or the health care industry in general might be affected by the matters discussed above.
Abbott is a party to a consent decree entered in 1999 that requires Abbott to ensure its diagnostics manufacturing processes in Lake County, Illinois conform to the U.S. Food and Drug Administration's (FDA) Quality System Regulation and restricts the sale in the United States of certain products in the Diagnostic Products segment. In 2003, the FDA concluded that those operations were in substantial conformity with the Quality System Regulation.
INTERNATIONAL OPERATIONS
Abbott markets products worldwide through affiliates and distributors. Most of the products discussed in the preceding sections of this report are also sold outside the United States. In addition, certain products of a local nature and variations of product lines to meet local regulatory requirements and marketing preferences are manufactured and marketed to customers outside the United States. International operations are subject to certain additional risks inherent in conducting business outside the United States, including price and currency exchange controls, changes in currency exchange rates, limitations on foreign participation in local enterprises, expropriation, nationalization, and other governmental action.
INTERNET INFORMATION
Copies of Abbott's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through Abbott's investor relations website (www.abbottinvestor.com) as soon as reasonably practicable after Abbott electronically files the material with, or furnishes it to, the Securities and Exchange Commission.
Abbott's corporate governance guidelines, outline of directorship qualifications, code of business conduct and the charters of Abbott's audit committee, compensation committee, nominations and governance committee, and public policy committee are all available on Abbott's investor relations website (www.abbottinvestor.com).
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In addition to the other information in this report, the following risk factors should be considered before deciding to invest in any of Abbott's securities. Additional risks and uncertainties not presently known to Abbott, or risks Abbott currently considers immaterial, could also affect Abbott's actual results. Abbott's business, financial condition, results of operations, or prospects could be materially adversely affected by any of these risks.
Abbott may acquire other businesses, license rights to technologies or products, form alliances, or dispose of or spin-off businesses, which could cause it to incur significant expenses and could negatively affect profitability.
Abbott may pursue acquisitions, technology licensing arrangements, and strategic alliances, or dispose of or spin-off some of its businesses, as part of its business strategy. Abbott may not complete these transactions in a timely manner, on a cost-effective basis, or at all, and may not realize the expected benefits. If Abbott is successful in making an acquisition, the products and technologies that are acquired may not be successful or may require significantly greater resources and investments than originally anticipated. Abbott may not be able to integrate acquisitions successfully into its existing business and could incur or assume significant debt and unknown or contingent liabilities. Abbott could also experience negative effects on its reported results of operations from acquisition or disposition-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets. These effects could cause a deterioration of Abbott's credit rating and result in increased borrowing costs and interest expense.
The expiration or loss of patent protection and licenses may affect Abbott's future revenues and operating income.
Many of Abbott's businesses rely on patent and trademark and other intellectual property protection. Although most of the challenges to Abbott's intellectual property have come from other businesses, governments may also challenge intellectual property protections. To the extent Abbott's intellectual property is successfully challenged, invalidated, or circumvented or to the extent it does not allow Abbott to compete effectively, Abbott's business will suffer. To the extent that countries do not enforce Abbott's intellectual property rights or to the extent that countries require compulsory licensing of its intellectual property, Abbott's future revenues and operating income will be reduced. Abbott's principal patents and trademarks are described in greater detail in the sections captioned, "Patents, Trademarks, and Licenses" and "Financial Review," and litigation regarding these patents is described in the section captioned "Legal Proceedings."
Abbott faces increasing competition from lower-cost generic products. The expiration or loss of patent protection for a product typically is followed promptly by generic substitutes that may significantly reduce Abbott's sales for that product in a short amount of time. If Abbott's competitive position is compromised because of generics or otherwise, it could have a material adverse effect on its revenues, margins, business, and results of operations.
Competitors' intellectual property may prevent Abbott from selling its products or have a material adverse effect on Abbott's future profitability and financial condition.
Competitors may claim that an Abbott product infringes upon their intellectual property. Resolving an intellectual property infringement claim can be costly and time consuming and may require Abbott to enter into license agreements. Abbott cannot guarantee that it would be able to obtain license agreements on commercially reasonable terms. A successful claim of patent or other intellectual property infringement could subject Abbott to significant damages or an injunction preventing the manufacture, sale or use of
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affected Abbott products. Any of these events could have a material adverse effect on Abbott's profitability and financial condition.
Abbott is subject to cost-containment efforts that could cause a reduction in future revenues and operating income.
In the United States and other countries, Abbott's businesses have experienced downward pressure on product pricing. Cost-containment efforts by governments and private organizations are described in greater detail in the section captioned "Regulation." To the extent these cost containment efforts are not offset by greater patient access to healthcare or other factors, Abbott's future revenues and operating income will be reduced.
Abbott is subject to numerous governmental regulations and it can be costly to comply with these regulations and to develop compliant products and processes.
Abbott's products are subject to rigorous regulation by the U.S. Food and Drug Administration, and numerous international, supranational, federal, and state authorities. The process of obtaining regulatory approvals to market a drug or medical device can be costly and time-consuming, and approvals might not be granted for future products, or additional indications or uses of existing products, on a timely basis, if at all. Delays in the receipt of, or failure to obtain approvals for, future products, or new indications and uses, could result in delayed realization of product revenues, reduction in revenues, and in substantial additional costs.
In addition, no assurance can be given that Abbott will remain in compliance with applicable FDA and other regulatory requirements once clearance or approval has been obtained for a product. These requirements include, among other things, regulations regarding manufacturing practices, product labeling, and advertising and postmarketing reporting, including adverse event reports and field alerts due to manufacturing quality concerns. Many of Abbott's facilities and procedures and those of Abbott's suppliers are subject to ongoing regulation, including periodic inspection by the FDA and other regulatory authorities. Abbott must incur expense and spend time and effort to ensure compliance with these complex regulations. Possible regulatory actions could include warning letters, fines, damages, injunctions, civil penalties, recalls, seizures of Abbott's products, and criminal prosecution. These actions could result in, among other things, substantial modifications to Abbott's business practices and operations; refunds, recalls, or seizures of Abbott's products; a total or partial shutdown of production in one or more of Abbott's facilities while Abbott or Abbott's suppliers remedy the alleged violation; the inability to obtain future pre-market clearances or approvals; and withdrawals or suspensions of current products from the market. Any of these events could disrupt Abbott's business and have a material adverse effect on Abbott's revenues, profitability and financial condition.
Laws and regulations affecting government benefit programs could impose new obligations on Abbott, require Abbott to change its business practices, and restrict its operations in the future.
Abbott's industry is also subject to various federal, state, and international laws and regulations pertaining to government benefit program reimbursement, price reporting and regulation, and health care fraud and abuse, including anti-kickback and false claims laws, the Medicaid Rebate Statute, the Veterans Health Care Act, and individual state laws relating to pricing and sales and marketing practices. Violations of these laws may be punishable by criminal and/or civil sanctions, including, in some instances, substantial fines, imprisonment, and exclusion from participation in federal and state health care programs, including Medicare, Medicaid, and Veterans Administration health programs. These laws and regulations are broad in scope and they are subject to evolving interpretations, which could require Abbott to incur substantial costs associated with compliance or to alter one or more of its sales or marketing practices. In addition, violations of these laws, or allegations of such violations, could disrupt Abbott's business and result in a material adverse effect on Abbott's revenues, profitability, and financial condition.
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Changes in the health care regulatory environment may adversely affect Abbott's business.
A number of the provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 require further rulemaking action by governmental agencies to implement. The laws change access to health care products and services and create new fees for the pharmaceutical and medical device industries. Future rulemaking could increase rebates, reduce prices or the rate of price increases for health care products and services, or require additional reporting and disclosure. Abbott cannot predict the timing or impact of any future rulemaking.
Abbott's research and development efforts may not succeed in developing commercially successful products and technologies, which may cause Abbott's revenue and profitability to decline.
To remain competitive, Abbott must continue to launch new products and technologies. To accomplish this, Abbott commits substantial efforts, funds, and other resources to research and development. A high rate of failure is inherent in the research and development of new products and technologies. Abbott must make ongoing substantial expenditures without any assurance that its efforts will be commercially successful. Failure can occur at any point in the process, including after significant funds have been invested.
Promising new product candidates may fail to reach the market or may only have limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, inability to obtain necessary regulatory approvals, limited scope of approved uses, excessive costs to manufacture, the failure to establish or maintain intellectual property rights, or infringement of the intellectual property rights of others. Even if Abbott successfully develops new products or enhancements or new generations of Abbott's existing products, they may be quickly rendered obsolete by changing customer preferences, changing industry standards, or competitors' innovations. Innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice or uncertainty over third-party reimbursement. Abbott cannot state with certainty when or whether any of its products under development will be launched, whether it will be able to develop, license, or otherwise acquire compounds or products, or whether any products will be commercially successful. Failure to launch successful new products or new indications for existing products may cause Abbott's products to become obsolete, causing Abbott's revenues and operating results to suffer.
The proposed separation of Abbott into two publicly-traded companies may not be completed on the currently contemplated timeline or terms, or at all, and may not achieve the intended benefits.
Unforeseen developments, including possible delays in obtaining various tax, regulatory and works council approvals or clearances, could delay or prevent the proposed separation or cause the proposed separation to occur on terms or conditions that are less favorable and/or different than expected. Expenses incurred to accomplish the proposed separation may be significantly higher than Abbott currently anticipates. Following the proposed separation, the combined value of the common stock of the two publicly-traded companies may not be equal to or greater than what the value of Abbott's common stock would have been had the proposed separation not occurred.
New products and technological advances by Abbott's competitors may negatively affect Abbott's results of operations.
Abbott's products face intense competition from its competitors' products. Competitors' products may be safer, more effective, more effectively marketed or sold, or have lower prices or superior performance features than Abbott's products. Abbott cannot predict with certainty the timing or impact of the introduction of competitors' products.
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The manufacture of many of Abbott's products is a highly exacting and complex process, and if Abbott or one of its suppliers encounters problems manufacturing products, Abbott's business could suffer.
The manufacture of many of Abbott's products is a highly exacting and complex process, due in part to strict regulatory requirements. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters, and environmental factors. In addition, single suppliers are currently used for certain products and materials. If problems arise during the production of a batch of product, that batch of product may have to be discarded. This could, among other things, lead to increased costs, lost revenue, damage to customer relations, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred. To the extent Abbott or one of its suppliers experiences significant manufacturing problems, this could have a material adverse effect on Abbott's revenues and profitability.
Significant safety issues could arise for Abbott's products, which could have a material adverse effect on Abbott's revenues and financial condition.
Health care products typically receive regulatory approval based on data obtained in controlled clinical trials of limited duration. Following regulatory approval, these products will be used over longer periods of time in many patients. Investigators may also conduct additional, and perhaps more extensive, studies. If new safety issues are reported, Abbott may be required to amend the conditions of use for a product. For example, Abbott may be required to provide additional warnings on a product's label or narrow its approved intended use, either of which could reduce the product's market acceptance. If serious safety issues arise with an Abbott product, sales of the product could be halted by Abbott or by regulatory authorities. Safety issues affecting suppliers' or competitors' products also may reduce the market acceptance of Abbott's products.
In addition, in the ordinary course of business, Abbott is the subject of product liability claims and lawsuits alleging that its products or the products of other companies that Abbott promotes have resulted or could result in an unsafe condition for or injury to patients. Product liability claims and lawsuits and safety alerts or product recalls, regardless of their ultimate outcome, may have a material adverse effect on Abbott's business and reputation and on Abbott's ability to attract and retain customers. Consequences may also include additional costs, a decrease in market share for the products, lower income or exposure to other claims. Product liability losses are generally self-insured. Product liability claims could have a material adverse effect on Abbott's profitability and financial condition.
Further deterioration in the economic position and credit quality of certain European countries may negatively affect Abbott's results of operations.
If economic conditions in certain European countries, including Greece, Portugal, Italy, and Spain, continue to worsen, the time it takes to collect outstanding trade receivables may increase. Financial instability and fiscal deficits in these countries may result in additional austerity measures to reduce costs, including health care. At the same time, ongoing sovereign debt issues, including the impact of recent credit downgrades, could increase Abbott's collection risk given that a significant amount of Abbott's receivables in these countries are with governmental health care systems.
13
The international nature of Abbott's business subjects it to additional business risks that may cause its revenue and profitability to decline.
Abbott's business is subject to risks associated with doing business internationally. Sales outside of the United States make up approximately 60 percent of Abbott's net sales. The risks associated with Abbott's operations outside the United States include:
These risks may, individually or in the aggregate, have a material adverse effect on Abbott's revenues and profitability.
Other factors can have a material adverse effect on Abbott's future profitability and financial condition.
Many other factors can affect Abbott's profitability and its financial condition, including:
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements that are based on management's current expectations, estimates, and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "forecasts," variations of these words, and similar expressions are intended to identify these forward-looking statements. Certain factors, including but not limited to those identified under "Item 1A. Risk Factors" of this Form 10-K, may cause actual results to differ materially from current expectations, estimates, projections, forecasts, and from past results. No assurance can be made that any expectation, estimate, or projection contained in a forward-looking statement will be achieved or will not be affected by the factors cited above or other future events. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as the result of subsequent events or developments.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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Abbott's corporate offices are located at 100 Abbott Park Road, Abbott Park, Illinois 60064-6400. The locations of Abbott's principal plants, as of December 31, 2011, are listed below.
| Location | Segments of Products Produced | |
|---|---|---|
| Abbott Park, Illinois | Proprietary Pharmaceutical and Diagnostic Products | |
| Alcobendas, Spain | Non-Reportable | |
| Altavista, Virginia | Nutritional Products | |
| Anasco, Puerto Rico* | Non-Reportable | |
| Baddi, India | Established Pharmaceutical Products | |
| Barceloneta, Puerto Rico | Established Pharmaceutical, Proprietary Pharmaceutical, Diagnostic and Vascular Products | |
| Branch Beringen, Switzerland* | Vascular Products | |
| Brockville, Canada | Nutritional Products | |
| Campoverde di Aprilia, Italy | Established Pharmaceutical and Proprietary Pharmaceutical Products | |
| Casa Grande, Arizona | Nutritional Products | |
| Chatillon, France | Established Pharmaceutical Products | |
| Clonmel, Ireland | Vascular Products | |
| Columbus, Ohio | Nutritional Products | |
| Cootehill, Ireland | Nutritional Products | |
| Cork, Ireland | Proprietary Pharmaceutical Products | |
| Des Plaines, Illinois | Diagnostic Products | |
| Donegal, Ireland | Non-Reportable | |
| Fairfield, California* | Nutritional Products | |
| Granada, Spain | Nutritional Products | |
| Hangzhou, China | Non-Reportable | |
| Irving, Texas | Diagnostic Products | |
| Jayuya, Puerto Rico | Proprietary Pharmaceutical Products | |
| Karachi, Pakistan | Established Pharmaceutical Products | |
| Katsuyama, Japan | Established Pharmaceutical Products | |
| Longford, Ireland | Diagnostic Products | |
| Ludwigshafen, Germany | Established Pharmaceutical and Proprietary Pharmaceutical Products | |
| Milpitas, California* | Non-Reportable | |
| Murrieta, California | Vascular Products | |
| Neustadt, Germany | Established Pharmaceutical Products | |
| North Chicago, Illinois | Proprietary Pharmaceutical Products | |
| Olst, the Netherlands | Established Pharmaceutical Products | |
| Ottawa, Ontario, Canada* | Diagnostic Products | |
| Princeton, New Jersey | Diagnostic Products | |
| Redwood City, California* | Vascular Products | |
| Santa Clara, California | Diagnostic Products | |
| Singapore | Nutritional Products | |
| Sligo, Ireland | Proprietary Pharmaceutical, Nutritional and Diagnostic Products | |
| Sturgis, Michigan | Nutritional Products | |
| Temecula, California | Vascular Products | |
| Tlalpan, Mexico | Established Pharmaceutical Products | |
| Uppsala, Sweden | Non-Reportable | |
| Weesp, the Netherlands | Established Pharmaceutical Products | |
| Wiesbaden, Delkenheim, Germany | Diagnostic Products | |
| Witney, Oxon, England | Non-Reportable | |
| Worcester, Massachusetts | Proprietary Pharmaceutical Products | |
| Zwolle, the Netherlands | Nutritional Products |
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In addition to the above, Abbott has manufacturing facilities in seven other locations in the United States, including Puerto Rico, and in five other countries outside the United States. Abbott's facilities are deemed suitable and provide adequate productive capacity.
In the United States, including Puerto Rico, Abbott owns nine distribution centers. Outside the United States, Abbott owns seven distribution centers. Abbott also has twenty-two United States research and development facilities located at: Abbott Park, Illinois; Alameda, California; Albuquerque, New Mexico; Carlsbad, California; Columbus, Ohio (two locations); Des Plaines, Illinois; Fairfield, California; Hollywood, Florida; Irving, Texas; Long Grove, Illinois; Menlo Park, California; Milpitas, California; Mountain View, California; North Chicago, Illinois; Princeton, New Jersey; Redwood City, California; Santa Ana, California; Santa Clara, California; South Irvine, California; Temecula, California; and Worcester, Massachusetts. Outside the United States, Abbott has research and development facilities in Canada, England, Germany, Ireland, Israel, Japan, the Netherlands, Singapore, South Africa, Spain, Sweden, and Switzerland.
Except as noted, the corporate offices, and those principal plants in the United States listed above, are owned by Abbott or subsidiaries of Abbott. The remaining manufacturing plants and all other facilities are owned or leased by Abbott or subsidiaries of Abbott. There are no material encumbrances on the properties.
Abbott is involved in various claims, legal proceedings and investigations, including (as of January 31, 2012, except where noted below) those described below. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on Abbott's financial position, cash flows, or results of operations, except where noted below.
A case is pending against Abbott in which New York University (NYU) and Centocor, Inc. assert that adalimumab (a drug Abbott sells under the trademark Humira®) infringes a patent co-owned by NYU and Centocor and exclusively licensed to Centocor. In June 2009, a jury found that Abbott had willfully infringed the patent and awarded NYU and Centocor approximately $1.67 billion in past compensatory damages. In December 2009, the district court issued a final judgment and awarded the plaintiffs an additional $175 million in prejudgment interest. Abbott appealed the district court's final judgment. In February 2011, the Federal Circuit reversed the district court's final judgment and found Centocor's patent invalid. Centocor, now known as Janssen Biotech, Inc., filed a petition for review with the United States Supreme Court in November 2011. Abbott is confident in the merits of its case and believes that it will prevail.
Several cases, brought as purported class actions or representative actions on behalf of individuals or entities, are pending against Abbott that allege generally that Abbott and numerous other pharmaceutical companies reported false pricing information in connection with certain drugs that are reimbursable under Medicare and Medicaid and by private payors. These cases, brought by private plaintiffs, state Attorneys General, and other state government entities, generally seek monetary damages and/or injunctive relief and attorneys' fees. The federal court cases were consolidated for pre-trial purposes in the United States District Court for the District of Massachusetts under the Multi District Litigation Rules as In re: Pharmaceutical Industry Average Wholesale Price Litigation, MDL 1456. Two of the remaining consolidated cases, State of Mississippi, filed in July 2009 on behalf of its state health plan, and a class action case of Medicare Part B consumers and third party payors and other consumers, filed in June 2003, were settled in June 2011. MDL 1456 now includes only one state Attorney General suit filed in August 2006 on behalf of the State of South Carolina. In addition, several cases are pending against Abbott in state courts: Commonwealth of Kentucky, filed in September 2003 in the Circuit Court of Franklin County, Kentucky; State of Wisconsin, filed in June 2004 in the Circuit Court of Dane County, Wisconsin; State of Illinois, filed
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in February 2005 in the Circuit Court of Cook County, Illinois; State of South Carolina (on behalf of its state health plan), filed in August 2006 in the Court of Common Pleas, Fifth Judicial Circuit of Richland County, South Carolina; State of Alaska, filed in October 2006 in the Superior Court for the Third Judicial District in Anchorage, Alaska; State of Idaho, filed in January 2007 in the District Court of the Fourth Judicial District in Ada County, Idaho; State of Utah, filed in November 2007 in the Third Judicial District in Salt Lake County, Utah; State of Louisiana, filed in October 2010 in the Nineteenth Judicial District, Parish of Baton Rouge, Louisiana. In October 2011, Abbott settled the case brought by the State of Oklahoma, filed in September 2010 in the District Court of Pottawatomie County, Oklahoma.
Several lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010) et al. have been consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi District Litigation Rules as In re AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission ("FTC"), generally allege Solvay's 2006 patent litigation involving AndroGel was sham litigation and the patent litigation settlement agreement and related agreements with three generic companies violate federal and state antitrust laws and state consumer protection and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys' fees. MDL 2084 includes: (a) 3 individual plaintiff lawsuits: Supervalu, Inc. v. Unimed Pharmaceuticals, Inc. et al., was filed in April 2010 in the Northern District of Georgia; and Rite Aid Corp. et al. v. Unimed Pharmaceuticals, Inc. et al. and Walgreen Co. et al. v. Unimed Pharmaceuticals, Inc. et al., both of which were filed in February 2009 in the United States District Court for the Middle District of Pennsylvania; (b) 7 purported class actions: Meijer, Inc. et al. v. Unimed Pharmaceuticals, Inc. et al., Rochester Drug Co-Operative, Inc. et al. v. Unimed Pharmaceuticals, Inc. et al., and Louisiana Wholesale Drug Co., Inc. et al. v. Unimed Pharmaceuticals, Inc. et al., all of which were filed in May 2009 in the United States District Court for the Northern District of Georgia; Fraternal Order of Police v. Unimed Pharmaceuticals, Inc. et al., filed in September 2009 in the United States District Court for the Northern District of Georgia; Jabo's Pharmacy, Inc. v. Solvay Pharmaceuticals, Inc. et al., filed in October 2009 in the United States District Court for the Eastern District of Tennessee; LeGrand v. Unimed Pharmaceuticals, Inc. et al., filed in September 2010 in the United States District Court for the Northern District of Georgia; and Health Net, Inc. v. Solvay Pharmaceuticals, Inc., filed in February 2011 in the Northern District of Georgia; and (c) a lawsuit brought by the FTC, Federal Trade Commission v. Watson Pharmaceuticals, Inc. et al., filed in May 2009 in the United States District Court for the Northern District of Georgia. In February 2010, Solvay's motion to dismiss the cases was partially granted and all of the FTC's claims and all of the plaintiffs' claims except those alleging sham litigation were dismissed. In June 2010, the FTC appealed the decision to the United States Court of Appeals for the Eleventh Circuit, and this appeal is pending. In February 2010, two cases, Scurto et al. v. Unimed Pharmaceuticals, Inc. et al., filed in March 2009 in the United States District Court for the District of New Jersey, and United Food & Com. Workers Unions & Employ. Midwest Health Benefits Fund et al. v. Unimed Pharmaceuticals, Inc. et al., filed in May 2009 in the United States District Court for the District of Minnesota, were dismissed. One class action lawsuit, Stephen L. LaFrance Pharmacy. Inc. et al. v. Unimed Pharmaceuticals, Inc. et al., filed in March 2009 in the United States District Court for the District of New Jersey, was dismissed in June 2011.
A case is pending against Abbott under the name Myla Nauman, Jane Roller and Michael Loughery v. Abbott Laboratories and Hospira, Inc. in which former Abbott employees alleged that (i) their transfer to Hospira, Inc., as part of Abbott's spin-off of Hospira, adversely affected their employee benefits in violation of the Employee Retirement Income Security Act and (ii) Abbott's conduct in connection with their transfer breached a fiduciary duty to plaintiffs involving employee benefits. The plaintiffs generally sought reinstatement as Abbott employees, or reinstatement as participants in Abbott's employee benefit plans, and an award of the employee benefits they have allegedly lost. In April 2010, the United States District Court for the Northern District of Illinois entered judgment in favor of Abbott on all counts. In February 2012, the United States Court of Appeals for the Seventh Circuit upheld the district court's judgment.
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The United States Department of Justice, through the United States Attorney for Maryland, is investigating the sales and marketing practices of Abbott for Micardis®, a drug co-promoted for (until March 31, 2006) and manufactured by Boehringer Ingelheim. The government is seeking to determine whether any of these practices resulted in any violations of civil and/or criminal laws, including the Federal False Claims Act and the Anti-Kickback Statute, in connection with the Medicare and/or Medicaid reimbursement paid to third parties. The United States Attorney's office for the District of Massachusetts is returning all documents produced by Abbott and Abbott considers the investigation closed.
The United States Department of Justice, through the United States Attorney for the Western District of Virginia, is investigating Abbott's sales and marketing activities for Depakote. The government is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties. While it is not feasible to predict with certainty the outcome of this investigation, its ultimate resolution is expected to be material to cash flows in a given year. Eight state Attorneys General Offices (Florida, Illinois, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina and Texas) have formed a committee on behalf of themselves and other State Attorneys General to investigate Abbott's sales and marketing activities for Depakote to determine whether any of these activities violated various state laws, including state consumer fraud/protection statutes.
The United States Department of Justice, through the United States Attorney's offices for the District of Massachusetts and the Eastern District of Tennessee, and the Texas State Attorney General are investigating the sales and marketing activities of Abbott's biliary stent products. Investigations are also ongoing relating to the sales and marketing activities for Abbott's carotid and coronary stents and stent related products by the United States Attorney's Office for the Eastern District of Tennessee, as previously mentioned, and the United States Attorney's Office for the District of Maryland. The government is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties.
Eight shareholder derivative lawsuits are pending in federal and state court in Illinois against certain of Abbott's current and former directors and members of senior management. The lawsuits allege a breach of fiduciary duty in relation to certain business practices regarding the sales and marketing of Depakote. In each case, the plaintiffs request damages nominally on behalf of Abbott, attorneys' fees, and other forms of relief. Six consolidated lawsuits are pending in the United States District Court for the Northern District of Illinois: Chester County Employees' Retirement Fund, Warren Pinchuck and Roy Sapir, and Jacksonville Police & Fire Pension Fund, all filed in November 2011; Louisiana Municipal Police Employees' Retirement System and Pipefitters Local Union 537 Pension Fund, both filed in December 2011; and Public School Retirement System of the School District of Kansas City, Missouri, filed in January 2012. Two lawsuits are pending in the Circuit Court for the Nineteenth Judicial Circuit, Lake County, Illinois: Patricia Goodman, filed in November 2011, and William Bojan, filed in December 2011.
In January 2008, Cordis Corporation and Wyeth filed suit against Abbott in the United States District Court for the District of New Jersey alleging the Xience V stent infringes three patents and seeking an injunction, damages, and a determination of willful infringement. In January 2012, the court issued an order invalidating the plaintiff's patents and dismissing the case against Abbott. In September 2009, Wyeth, Cordis Corporation, and Cordis LLC filed suit against Abbott in the United States District Court for the District of New Jersey alleging the Xience V (and later the Xience Prime) stent infringes an additional patent, and in August 2010 the plaintiffs amended their lawsuit to add a second related patent to this case. The plaintiffs in this case seek an injunction and damages. Abbott denies all substantive allegations in this case.
19
In December 2008, Medinol Limited (Medinol) sued Abbott in the High Court of Ireland, the District Court of The Hague, the Netherlands, and the Regional Court in Dusseldorf, Germany asserting that Abbott's Vision and Xience V stents infringe one of Medinol's European stent design patents. Medinol has since accused Abbott's Multi-Link 8 and Xience Prime stents of infringement. In Germany, Medinol further asserts that Abbott's Vision, Xience V, Penta, Xience Prime, Multi-Link 8, and Zeta stents infringe two Medinol German stent design patents and one Medinol German stent design utility model. Medinol seeks damages and injunctions in Ireland and The Netherlands and seeks damages in Germany. Abbott initiated an action in the German Federal Patent Court seeking a declaration that Medinol's patents are invalid. Abbott also initiated an action in the High Court of Justice in the United Kingdom asserting that Abbott's stents do not infringe Medinol's European patent and two other Medinol patents, which were previously revoked at the European Patent Office (EPO), and seeking a declaration that all three Medinol patents are invalid. In Ireland, Abbott asserts that Medinol's European patent is invalid and not infringed. During 2011, the High Court of Ireland found that the asserted patent was not infringed by any of the Abbott stents and that Medinol's asserted patent is invalid. In December 2009, the Dutch court found that Abbott's stents do not infringe Medinol's European patent but did not rule on the patent's validity. Medinol has appealed the Dutch court's finding that Abbott's stents do not infringe Medinol's patent. In March 2010, the Dusseldorf court, which does not assess the validity of patents, found that Abbott's stents do not infringe Medinol's European patent, but that they do infringe two of Medinol's German stent design patents. Medinol has appealed the non-infringement decision and Abbott has appealed the infringement decisions. In June 2011, Medinol asserted a related patent against Abbott in the Dusseldorf court seeking the same remedies. In November and December 2010, the German Federal Patent Court held two invalidity hearings on the three patents being asserted by Medinol in Germany. In January 2011, the German Federal Patent Court found all three Medinol patents invalid. However, after allowing Medinol to modify the claims for one of its German patents, the court concluded that the modified claims of that patent were valid. In October 2010, the United Kingdom court found that Abbott's products do not infringe any of the three Medinol patents and that one of the two revoked patents previously revoked at the EPO is invalid. Although both parties have appealed aspects of this decision, the invalidity finding became final in the United Kingdom when Medinol withdrew its appeal of the EPO's revocation decision. Abbott denies all substantive allegations in each case.
Abbott is seeking to enforce its patent rights relating to fenofibrate tablets (a drug Abbott sells under the trademark TriCor®). In a case filed in the United States District Court for the District of New Jersey in September 2011, Abbott and the patent owner, Laboratories Fournier, S.A. (Fournier), allege infringement of three patents and seek injunctive relief against Mylan Pharmaceuticals Inc. and Mylan, Inc. (Mylan). In a second case filed in the United States District Court for the District of New Jersey in December 2011, Abbott and Fournier allege infringement of the same patents and seek injunctive relief against Wockhardt, Ltd. and Wockhardt USA, LLC (Wockhardt). In related cases where Abbott is involved as a result of its acquisition of Fournier Laboratoires Ireland Ltd. (Fournier Ireland), Abbott is seeking to enforce additional rights relating to fenofibrate tablets. In a case filed in the United States District Court for the District of New Jersey in September 2011, Abbott's subsidiary, Fournier Ireland, and joint patent owner, EDT Pharma Holdings Ltd. (EDT Pharma), allege infringement of two jointly-owned patents and seek injunctive relief against Mylan. EDT Pharma subsequently transferred its rights in the patents at issue to Alkermes Pharma, Ireland Ltd. (Alkermes). In a second case filed in the United States District Court for the District of New Jersey in December 2011, Alkermes and Fournier Ireland allege infringement of the same patents and seek injunctive relief against Wockhardt.
Abbott is seeking to enforce its patent rights relating to ritonavir/lopinavir tablets (a drug Abbott sells under the trademark Kaletra®). In cases filed in the United States District Courts for the Northern District of Illinois and for the District of Delaware in March 2009, Abbott alleges that Matrix Laboratories, Inc., Matrix Laboratories, Ltd., and Mylan, Inc.'s proposed generic products infringe Abbott's patents and seeks declaratory and injunctive relief. The case in Delaware was dismissed in April 2009. Upon Matrix's motion
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in November 2009, the United States District Court for the Northern District of Illinois granted a five-year stay of the litigation unless good cause to lift the stay is shown.
Abbott is seeking to enforce its patent rights relating to niacin extended release tablets (a drug Abbott sells under the trademark Niaspan®). In February 2010, Abbott filed a case in the United States District Court for the District of Delaware alleging that Sun Pharmaceutical Industries Limited's and Sun Pharma Global FZE's generic product infringes Abbott's patents and seeks declaratory and injunctive relief. In a second case filed in June 2010 in the United States District Court for the District of Delaware, Abbott alleges Sandoz, Inc.'s proposed generic product infringes Abbott's patents and seeks declaratory and injunctive relief. In a third case filed in January 2012 in the United States District Court for the District of Delaware, Abbott alleges Zydus Pharmaceuticals USA, Inc.'s proposed generic product infringes Abbott's patents and seeks declaratory and injunctive relief.
Abbott is seeking to enforce certain patent rights that cover the use of fully human anti-TNF alpha antibodies with methotrexate to treat rheumatoid arthritis. In a case filed in the United States District Court for the District of Massachusetts in May 2009, Abbott alleges Centocor Inc.'s product Simponi® infringes Abbott's patents and seeks damages and injunctive relief. In November 2011, the case was stayed while the parties arbitrate issues related to Centocor's license defenses.
Abbott is seeking to enforce its patent rights relating to testosterone gel product (a drug Abbott sells under the trademark AndroGel®). In a case filed in the United States District Court for the District of Delaware in April 2011, Abbott alleged that Teva Pharmaceuticals USA's (Teva) proposed generic product infringes Abbott's patent and sought declaratory and injunctive relief. Teva asserted various counterclaims, including monopolization claims. In December 2011, the parties reached a confidential settlement and this case was dismissed in January 2012.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of Abbott are elected annually by the board of directors. All other officers are elected by the board or appointed by the chairman of the board. All officers are either elected at the first meeting of the board of directors held after the annual shareholder meeting or appointed by the chairman after that board meeting. Each officer holds office until a successor has been duly elected or appointed and qualified or until the officer's death, resignation, or removal. Vacancies may be filled at any time by the board. Any officer may be removed by the board of directors when, in its judgment, removal would serve the best interests of Abbott. Any officer appointed by the chairman of the board may be removed by the chairman whenever, in the chairman's judgment, removal would serve the best interests of Abbott. A vacancy in any office appointed by the chairman of the board may be filled by the chairman.
Abbott's executive officers, their ages as of February 21, 2012, and the dates of their first election as officers of Abbott are listed below. The executive officers' principal occupations and employment for the past five years and the year of appointment to the earliest reported office are also shown. Unless otherwise stated, employment was by Abbott. There are no family relationships between any corporate officers or directors.
Miles D. White, 56
1999 to present — Chairman of the Board and Chief Executive Officer, and Director.
Elected Corporate Officer — 1993.
Richard W. Ashley, 68
2004 to present — Executive Vice President, Corporate Development.
Elected Corporate Officer — 2004.
John M. Capek, 50
2007 to present — Executive Vice President, Medical Devices.
2006 to 2007 — Senior Vice President, Abbott Vascular.
Elected Corporate Officer — 2006.
Thomas C. Freyman, 57
2004 to present — Executive Vice President, Finance and Chief Financial Officer.
Elected Corporate Officer — 1991.
Richard A. Gonzalez, 58
2010 to present — Executive Vice President, Pharmaceutical Products Group.
2009 to 2011 — President, Abbott Ventures Inc.
2007 to 2009 — Retired.
2006 to 2007 — President and Chief Operating Officer, and Director.
Elected Corporate Officer — 2010 (Mr. Gonzalez was also an Abbott corporate officer from 1995 until he retired in 2007).
John C. Landgraf, 59
2011 to present — Executive Vice President, Nutritional Products.
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2008 to 2010 — Senior Vice President, Pharmaceuticals, Manufacturing and Supply.
2004 to 2008 — Senior Vice President, Global Pharmaceutical Manufacturing and Supply.
Elected Corporate Officer — 2000.
Edward L. Michael, 55
2008 to present — Executive Vice President, Diagnostic Products.
2007 to 2008 — Executive Vice President, Diagnostics.
2007 — Senior Vice President, Medical Products.
2003 to 2007 — Vice President and President, Molecular Diagnostics.
Elected Corporate Officer — 1997.
Laura J. Schumacher, 48
2007 to present — Executive Vice President, General Counsel and Secretary.
2005 to 2007 — Senior Vice President, Secretary and General Counsel.
Elected Corporate Officer — 2003.
Carlos Alban, 49
2011 to present — Senior Vice President, Proprietary Pharmaceutical Products, Global Commercial Operations.
2009 to 2011 — Senior Vice President, International Pharmaceuticals.
2008 to 2009 — Vice President, Pharmaceuticals, Western Europe and Canada.
2007 to 2008 — Vice President, Western Europe and Canada.
2006 to 2007 — Vice President, Pharmaceutical European Operations.
Elected Corporate Officer — 2006.
Brian J. Blaser, 47
2010 to present — Senior Vice President, Diagnostics.
2008 to 2010 — Vice President, Diagnostics, Operations.
2008 — Divisional Vice President, Global Operations.
2007 to 2008 — Divisional Vice President, Manufacturing.
2004 to 2007 — Divisional Vice President, Strategic Operations Improvement.
Elected Corporate Officer — 2008.
A. David Forrest, 50
2010 to present — Senior Vice President, International Nutrition.
2007 to 2010 — Divisional Vice President, Europe and Canada.
2004 to 2007 — General Manager, United Kingdom.
Elected Corporate Officer — 2010.
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Stephen R. Fussell, 54
2005 to present — Senior Vice President, Human Resources.
Elected Corporate Officer — 1999.
Robert B. Hance, 52
2008 to present — Senior Vice President, Vascular.
2006 to 2008 — Senior Vice President, Diabetes Care Operations.
Elected Corporate Officer — 1999.
Heather L. Mason, 51
2008 to present — Senior Vice President, Diabetes Care.
2007 to 2008 — Vice President, Latin America Pharmaceuticals.
2005 to 2007 — Vice President, International Marketing.
Elected Corporate Officer — 2001.
James V. Mazzo, 54
2009 to present — Senior Vice President, Abbott Medical Optics.
2006 to 2009 — Chairman of the Board of Directors, Advanced Medical Optics, Inc. (a global leader in the development, manufacture, and marketing of medical devices for the eye).
2004 to 2009 — Chief Executive Officer, Advanced Medical Optics, Inc.
2004 to 2007 — President, Advanced Medical Optics, Inc.
Elected Corporate Officer — 2009.
Michael J. Warmuth, 49
2010 to present — Senior Vice President, Established Products, Pharmaceutical Products Group.
2008 to 2010 — Senior Vice President, Diagnostics.
2008 — Vice President, Hematology Diagnostics.
2007 to 2008 — Vice President, Global Engineering Services.
2006 to 2007 — Divisional Vice President, Global Engineering Services.
Elected Corporate Officer — 2007.
J. Scott White, 43
2010 to present — Senior Vice President, U.S. Nutrition.
2007 to 2009 — Division Vice President and Regional Director for Latin America, Abbott Nutrition International.
2005 to 2007 — Division Vice President and General Manager for Pediatric Nutrition, U.S. Nutrition.
Elected Corporate Officer — 2009.
Greg W. Linder, 55
2001 to present — Vice President and Controller.
Elected Corporate Officer — 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Principal Market
The principal market for Abbott's common shares is the New York Stock Exchange. Shares are also listed on the Chicago Stock Exchange and traded on various regional and electronic exchanges. Outside the United States, Abbott's shares are listed on the London Stock Exchange and the Swiss Stock Exchange.
| |
Market Price Per Share | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | |||||||||||
| |
high | low | high | low | |||||||||
First Quarter |
$ | 49.45 | $ | 45.07 | $ | 56.79 | $ | 52.21 | |||||
Second Quarter |
54.24 | 49.05 | 53.25 | 45.26 | |||||||||
Third Quarter |
53.60 | 46.29 | 52.86 | 44.59 | |||||||||
Fourth Quarter |
56.44 | 48.96 | 53.75 | 46.03 | |||||||||
Shareholders
There were 62,939 shareholders of record of Abbott common shares as of December 31, 2011.
Dividends
Quarterly dividends of $.48 and $.44 per share were declared on common shares in 2011 and 2010, respectively.
Abbott Laboratories is an Illinois High Impact Business (HIB) and is located in a federal Foreign Trade Sub-Zone (Sub-Zone 22F). Dividends may be eligible for a subtraction from base income for Illinois income tax purposes. If you have questions, please contact your tax advisor.
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Issuer Purchases of Equity Securities
Period
|
(a) Total Number of Shares (or Units) Purchased |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
October 1, 2011 — October 31, 2011 |
92,682 | 1 | $ | 53.386 | 0 | $ | 3,392,180,505 | 2 | |||||
November 1, 2011 — November 30, 2011 |
113,491 | 1 | $ | 54.011 | 0 | $ | 3,392,180,505 | 2 | |||||
December 1, 2011 — December 31, 2011 |
442,455 | 1 | $ | 55.116 | 0 | $ | 3,392,180,505 | 2 | |||||
Total |
648,628 | 1 | $ | 54.675 | 0 | $ | 3,392,180,505 | 2 | |||||
These shares do not include the shares surrendered to Abbott to satisfy tax withholding obligations in connection with the vesting of restricted stock or restricted stock units.
26
ITEM 6. SELECTED FINANCIAL DATA
| |
Year ended December 31 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||
| |
(dollars in millions, except per share data) |
|||||||||||||||
Net sales |
$ | 38,851.3 | $ | 35,166.7 | $ | 30,764.7 | $ | 29,527.6 | $ | 25,914.2 | ||||||
Earnings from continuing operations |
4,728.4 | 4,626.2 | 5,745.8 | 4,734.2 | 3,606.3 | |||||||||||
Net earnings |
4,728.4 | 4,626.2 | 5,745.8 | 4,880.7 | 3,606.3 | |||||||||||
Basic earnings per common share from continuing operations |
3.03 | 2.98 | 3.71 | 3.06 | 2.34 | |||||||||||
Basic earnings per common share |
3.03 | 2.98 | 3.71 | 3.16 | 2.34 | |||||||||||
Diluted earnings per common share from continuing operations |
3.01 | 2.96 | 3.69 | 3.03 | 2.31 | |||||||||||
Diluted earnings per common share |
3.01 | 2.96 | 3.69 | 3.12 | 2.31 | |||||||||||
Total assets |
60,276.9 | 60,573.9 | 52,581.6 | 42,419.2 | 39,713.9 | |||||||||||
Long-term debt |
12,039.8 | 12,523.5 | 11,266.3 | 8,713.3 | 9,487.8 | |||||||||||
Cash dividends declared per common share |
1.92 | 1.76 | 1.60 | 1.44 | 1.30 | |||||||||||
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Review
Abbott's revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott's products under a contract or by a pharmacy benefit manager most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs. Abbott's primary products are prescription pharmaceuticals, nutritional products, diagnostic testing products and vascular products. Sales in international markets are approximately 60 percent of consolidated net sales.
In 2011, Abbott announced a plan to separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals. To accomplish the separation, Abbott plans to create a new company for its research-based pharmaceuticals business which will include Abbott's Proprietary Pharmaceutical Products segment. The transaction is expected to take the form of a tax-free distribution to Abbott shareholders of the stock of the newly created research-based pharmaceutical company and is expected to be completed by the end of 2012. Subsequent to the separation, the historical results of the research-based pharmaceuticals business will be presented as discontinued operations.
Continued robust growth of HUMIRA in a broad range of indications, the acquisitions of Solvay's pharmaceuticals business (Solvay Pharmaceuticals) and Piramal Healthcare Limited's Healthcare Solutions business, continued growth and market penetration by the Xience drug eluting stent franchise, the loss of patent protection for some pharmaceutical products, an ongoing government investigation of Abbott's sales and marketing activities related to Depakote, and the challenging economic environment in many countries around the world have impacted Abbott's sales, costs and financial position over the last three years.
Pharmaceutical research and development is focused on therapeutic areas that include immunology, oncology, neuroscience, pain management, hepatitis C (HCV), chronic kidney disease and women's health. During the last three years, Abbott acquired the rights to various in-process pharmaceutical research and development projects including the development of second-generation oral antioxidant inflammation modulators and a product for the treatment of chronic kidney disease.
In 2003, Abbott began the worldwide launch of HUMIRA for rheumatoid arthritis, followed by launches for five additional indications, which increased HUMIRA's worldwide sales to $7.9 billion in 2011 compared to $6.5 billion in 2010, and $5.5 billion in 2009. Abbott forecasts low double-digit growth for worldwide HUMIRA sales in 2012. Abbott is studying additional indications for HUMIRA. Substantial research and development and selling support has been and continues to be dedicated to maximizing the worldwide potential of HUMIRA. Abbott expects generic competition for TriCor to begin in the second half of 2012. Austerity measures implemented by several European countries reduced healthcare spending and affected pharmaceutical pricing in 2010 and 2011. The 2010 healthcare reform legislation in the U.S. resulted in rebate changes beginning in 2010 and the payment of an annual fee beginning in 2011, which negatively affected Abbott's pharmaceutical business. The impact of the austerity measures and the U.S. healthcare reform legislation is expected to continue.
In February 2010, Abbott acquired Solvay Pharmaceuticals which provided Abbott with a large and complementary portfolio of pharmaceutical products and expanded Abbott's presence in key global emerging markets. The acquisition added approximately $3.1 billion to Abbott's 2010 total sales, primarily outside the U.S. In September 2010, Abbott completed the acquisition of Piramal's Healthcare Solutions business, propelling Abbott to market leadership in the Indian pharmaceutical market and further accelerating the company's growth in emerging markets. In 2011 and 2010, Abbott recorded approximately $345 million and $710 million, respectively, of expense related to the integration of the Solvay business and
28
a restructuring plan announced in September 2010 to streamline operations, improve efficiencies and reduce costs primarily in certain Solvay sites and functions. The restructuring plan is further described below. In 2011, Abbott recorded a litigation charge of $1.5 billion related to ongoing settlement discussions in the U.S. government's investigation related to Depakote.
In Abbott's worldwide nutritional products business, favorable economic development in emerging markets and an aging population in developed markets have provided significant opportunities to leverage strong nutritional brands and introduce innovative products.
In the fourth quarter of 2008, Abbott's Xience V product became the market-leading drug eluting stent in the U.S. In June 2009, Xience PRIME, Abbott's next generation drug eluting stent, received CE Mark approval and was launched in Europe in August 2009. Abbott received approval to market Xience V in Japan in January 2010 and Xience V became the market-leading drug eluting stent in Japan in the second quarter of 2010. With the U.S. launches of Xience nano and Xience PRIME in May and November 2011, respectively, and continued strong performance in Japan, China, and other international markets, Xience, which includes Xience V, PRIME and nano, ended 2011 as the market-leading drug eluting stent globally. At the same time the third party distributor of the Promus product began transitioning away from the product and that distribution agreement will end in 2012.
In 2010, the U.S. government passed health care reform legislation which included an increase in Medicaid rebate rates and the extension of the rebate to drugs provided through Medicaid managed care organizations beginning in 2010. The legislation also imposed annual fees which pharmaceutical manufacturers began paying in 2011 and medical device companies will begin paying in 2013, as well as additional rebates related to the Medicare Part D "donut hole" beginning in 2011. In addition to a 2010 one-time charge of approximately $60 million to reduce deferred tax assets associated with retiree health care liabilities related to the Medicare Part D retiree drug subsidy, the legislation's negative impact on Abbott's performance grew from more than $200 million in 2010 to approximately $400 million in 2011 and is expected to remain at approximately $400 million in 2012.
Abbott's short- and long-term debt totaled $15.4 billion at December 31, 2011, largely incurred to finance acquisitions. Operating cash flows in excess of capital expenditures and cash dividends have partially funded acquisitions over the last three years. At December 31, 2011, Abbott's long-term debt rating was AA by Standard and Poor's Corporation and A1 by Moody's Investors Service.
In 2012, Abbott will focus on several key initiatives. In the proprietary pharmaceutical business, Abbott will continue maximizing the market potential for HUMIRA and other products, including AndroGel, as well as continuing to build its global presence. Pharmaceutical research and development efforts will continue to focus a significant portion of expenditures on compounds for immunology, oncology, neuroscience, pain management, HCV, chronic kidney disease and women's health. Current research and development projects are described in the Research and Development Programs section.
In the established pharmaceutical business which includes international sales of branded generic products, Abbott will continue to focus on obtaining additional product approvals across numerous countries and expanding its presence in emerging markets. In the vascular business, Abbott will continue to focus on marketing products in the Xience franchise, obtaining regulatory review of the MitraClip device in the U.S., and increasing international MitraClip sales as well as further clinical development of ABSORB, its bioresorbable vascular scaffold (BVS) device and a further roll-out of ABSORB in CE Mark countries. In Abbott's other segments, Abbott will focus on developing or acquiring differentiated technologies in higher growth segments of those markets.
Critical Accounting Policies
Sales Rebates — Approximately 54 percent of Abbott's consolidated gross revenues are subject to various forms of rebates and allowances that Abbott records as reductions of revenues at the time of sale.
29
Most of these rebates and allowances are in the Proprietary Pharmaceutical Products segment and the Nutritional Products segment. Abbott provides rebates to pharmacy benefit management companies, state agencies that administer the federal Medicaid program, insurance companies that administer Medicare drug plans, state agencies that administer the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), wholesalers, group purchasing organizations, and other government agencies and private entities. Rebate amounts are usually based upon the volume of purchases using contractual or statutory prices for a product. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate, which customer or government agency price terms apply, and the estimated lag time between sale and payment of a rebate. Using historical trends, adjusted for current changes, Abbott estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when Abbott records its sale of the product. Settlement of the rebate generally occurs from two to 24 months after sale. Abbott regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs. Rebates and chargebacks charged against gross sales in 2011, 2010 and 2009 amounted to approximately $5.5 billion, $4.9 billion and $4.4 billion, respectively, or 22.2 percent, 23.1 percent and 23.8 percent, respectively, based on gross sales of approximately $24.8 billion, $21.1 billion and $18.4 billion, respectively, subject to rebate. A one-percentage point increase in the percentage of rebates to related gross sales would decrease net sales by approximately $248 million in 2011. Abbott considers a one-percentage point increase to be a reasonably likely increase in the percentage of rebates to related gross sales. Other allowances charged against gross sales were approximately $409 million, $415 million and $414 million for cash discounts in 2011, 2010 and 2009, respectively, and $490 million, $537 million and $456 million for returns in 2011, 2010 and 2009, respectively. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because Abbott's historical returns are low, and because sales returns terms and other sales terms have remained relatively unchanged for several periods.
Management analyzes the adequacy of ending rebate accrual balances each quarter. In the domestic nutritional business, management uses both internal and external data available to estimate the level of inventory in the distribution channel. Management has access to several large customers' inventory management data, and for other customers, utilizes data from a third party that measures time on the retail shelf. These sources allow management to make reliable estimates of inventory in the distribution channel. Except for a transition period before or after a change in the supplier for the WIC business in a state, inventory in the distribution channel does not vary substantially. Management also estimates the states' processing lag time based on claims data. In addition, internal processing time is a factor in estimating the accrual. In the WIC business, the state where the sale is made, which is the determining factor for the applicable price, is reliably determinable. Estimates are required for the amount of WIC sales within each state where Abbott has the WIC business. External data sources utilized for that estimate are participant data from the U.S. Department of Agriculture (USDA), which administers the WIC program, participant data from some of the states, and internally administered market research. The USDA has been making its data available for many years. Internal data includes historical redemption rates and pricing data. At December 31, 2011, Abbott had the exclusive WIC business in 23 states.
In the domestic proprietary pharmaceutical business, the most significant charges against gross sales are for Medicaid and Medicare Rebates, Pharmacy Benefit Manager Rebates and Wholesaler Chargebacks. In order to evaluate the adequacy of the ending accrual balances, management uses both internal and external data to estimate the level of inventory in the distribution channel and the rebate claims processing lag time. External data sources used to estimate the inventory in the distribution channel include inventory levels periodically reported by wholesalers and third party market data purchased by Abbott. Management estimates the processing lag time based on periodic sampling of claims data. To estimate the price rebate percentage, systems and calculations are used to track sales by product by customer and to estimate the contractual or statutory price. Abbott's systems and calculations have developed over time as rebates have become more significant, and Abbott believes they are reliable.
30
The following table is an analysis of the four largest rebate accruals, which comprise approximately 68 percent of the consolidated rebate provisions charged against revenues in 2011. Remaining rebate provisions charged against gross sales are not significant in the determination of operating earnings. (dollars in millions)
| |
|
Domestic Proprietary Pharmaceutical Products | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Domestic Nutritionals WIC Rebates |
Medicaid and Medicare Rebates |
Pharmacy Benefit Manager Rebates |
Wholesaler Chargebacks |
|||||||||
Balance at January 1, 2009 |
$ | 162 | $ | 295 | $ | 228 | $ | 146 | |||||
Provisions |
747 | 563 | 505 | 1,134 | |||||||||
Payments |
(756 | ) | (506 | ) | (494 | ) | (1,120 | ) | |||||
Balance at December 31, 2009 |
153 | 352 | 239 | 160 | |||||||||
Provisions |
616 | 899 | 841 | 1,162 | |||||||||
Payments |
(640 | ) | (617 | ) | (670 | ) | (1,163 | ) | |||||
Balance at December 31, 2010 |
129 | 634 | 410 | 159 | |||||||||
Provisions |
575 | 985 | 831 | 1,361 | |||||||||
Payments |
(568 | ) | (899 | ) | (735 | ) | (1,349 | ) | |||||
Balance at December 31, 2011 |
$ | 136 | $ | 720 | $ | 506 | $ | 171 | |||||
Historically, adjustments to prior years' rebate accruals have not been material to net income. Abbott employs various techniques to verify the accuracy of claims submitted to it, and where possible, works with the organizations submitting claims to gain insight into changes that might affect the rebate amounts. For Medicaid, Medicare and other government agency programs, the calculation of a rebate involves interpretations of relevant regulations, which are subject to challenge or change in interpretation.
Income Taxes — Abbott operates in numerous countries where its income tax returns are subject to audits and adjustments. Because Abbott operates globally, the nature of the audit items are often very complex, and the objectives of the government auditors can result in a tax on the same income in more than one country. Abbott employs internal and external tax professionals to minimize audit adjustment amounts where possible. In accordance with the accounting rules relating to the measurement of tax contingencies, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. Application of these rules requires a significant amount of judgment. In the U.S., Abbott's federal income tax returns through 2008 are settled except for one item, and the income tax returns for years after 2008 are open. Abbott does not record deferred income taxes on earnings reinvested indefinitely in foreign subsidiaries.
Pension and Post-Employment Benefits — Abbott offers pension benefits and post-employment health care to many of its employees. Abbott engages outside actuaries to assist in the determination of the obligations and costs under these programs. Abbott must develop long-term assumptions, the most significant of which are the health care cost trend rates, discount rates and the expected return on plan assets. The discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits. The health care cost trend rates represent Abbott's expected annual rates of change in the cost of health care benefits and is a forward projection of health care costs as of the measurement date. A difference between the assumed rates and the actual rates, which will not be known for decades, can be significant in relation to the obligations and the annual cost recorded for these programs. Low asset returns due to poor market conditions and low interest rates have significantly increased actuarial losses for these plans. At December 31, 2011, pretax net actuarial losses and prior service costs and (credits) recognized in Accumulated other comprehensive income (loss) for Abbott's defined benefit plans and medical and dental plans were losses of $3.8 billion and $237 million, respectively. Actuarial losses and gains are amortized over the remaining service
31
attribution periods of the employees under the corridor method, in accordance with the rules for accounting for post-employment benefits. Differences between the expected long-term return on plan assets and the actual annual return are amortized over a five-year period. Note 4 to the consolidated financial statements describes the impact of a one-percentage point change in the health care cost trend rate; however, there can be no certainty that a change would be limited to only one percentage point.
Valuation of Intangible Assets — Abbott has acquired and continues to acquire significant intangible assets that Abbott records at fair value. Transactions involving the purchase or sale of intangible assets occur with some frequency between companies in the health care field and valuations are usually based on a discounted cash flow analysis. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, the cost of capital, terminal values and market participants. Each of these factors can significantly affect the value of the intangible asset. Abbott engages independent valuation experts who review Abbott's critical assumptions and calculations for acquisitions of significant intangibles. Abbott reviews definite-lived intangible assets for impairment each quarter using an undiscounted net cash flows approach. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to its fair value, which is usually the discounted cash flow amount. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable. Goodwill and indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, are reviewed for impairment annually or when an event that could result in an impairment occurs. At December 31, 2011, goodwill and intangibles amounted to $15.7 billion and $10.0 billion, respectively, and amortization expense for intangible assets amounted to $1.6 billion in 2011. There were no impairments of goodwill in 2011, 2010 or 2009. In 2011, Abbott recorded impairment charges of $174 million for certain research and development assets due to changes in the projected development and regulatory timelines for the projects.
Litigation — Abbott accounts for litigation losses in accordance with FASB Accounting Standards Codification No. 450, "Contingencies." Under ASC No. 450, loss contingency provisions are recorded for probable losses at management's best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period as additional information becomes known. Accordingly, Abbott is often initially unable to develop a best estimate of loss, and therefore the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased, resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected. Abbott estimates the range of possible loss to be from approximately $1.59 billion to $1.63 billion for its legal proceedings and environmental exposures. Reserves of approximately $1.6 billion have been recorded at December 31, 2011 for these proceedings and exposures. These reserves represent management's best estimate of probable loss, as defined by FASB ASC No. 450, "Contingencies."
32
Results of Operations
Sales
The following table details the components of sales growth by reportable segment for the last three years:
| |
|
Components of Change % | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total % Change |
||||||||||||
| |
Price | Volume | Exchange | ||||||||||
Total Net Sales |
|||||||||||||
2011 vs. 2010 |
10.5 |
1.2 |
6.5 |
2.8 |
|||||||||
2010 vs. 2009 |
14.3 | (0.1 | ) | 13.2 | 1.2 | ||||||||
2009 vs. 2008 |
4.2 | (0.1 | ) | 8.3 | (4.0 | ) | |||||||
Total U.S. |
|||||||||||||
2011 vs. 2010 |
5.4 |
4.4 |
1.0 |
— |
|||||||||
2010 vs. 2009 |
6.8 | 0.7 | 6.1 | — | |||||||||
2009 vs. 2008 |
0.4 | (0.3 | ) | 0.7 | — | ||||||||
Total International |
|||||||||||||
2011 vs. 2010 |
14.3 |
(1.2 |
) |
10.6 |
4.9 |
||||||||
2010 vs. 2009 |
20.7 | (0.8 | ) | 19.3 | 2.2 | ||||||||
2009 vs. 2008 |
7.7 | 0.2 | 15.1 | (7.6 | ) | ||||||||
Proprietary Pharmaceutical Products Segment |
|||||||||||||
2011 vs. 2010 |
11.0 |
3.5 |
5.2 |
2.3 |
|||||||||
2010 vs. 2009 |
13.2 | 0.3 | 12.3 | 0.6 | |||||||||
2009 vs. 2008 |
0.2 | (0.2 | ) | 4.0 | (3.6 | ) | |||||||
Established Pharmaceutical Products Segment |
|||||||||||||
2011 vs. 2010 |
19.8 |
(1.7 |
) |
17.2 |
4.3 |
||||||||
2010 vs. 2009 |
53.7 | (0.3 | ) | 51.1 | 2.9 | ||||||||
2009 vs. 2008 |
(7.6 | ) | 0.4 | (1.1 | ) | (6.9 | ) | ||||||
Nutritional Products Segment |
|||||||||||||
2011 vs. 2010 |
8.6 |
3.0 |
3.6 |
2.0 |
|||||||||
2010 vs. 2009 |
4.7 | 1.7 | 1.2 | 1.8 | |||||||||
2009 vs. 2008 |
7.3 | 1.5 | 8.6 | (2.8 | ) | ||||||||
Diagnostic Products Segment |
|||||||||||||
2011 vs. 2010 |
8.8 |
(1.1 |
) |
6.5 |
3.4 |
||||||||
2010 vs. 2009 |
6.0 | 0.1 | 4.3 | 1.6 | |||||||||
2009 vs. 2008 |
0.1 | 1.4 | 3.7 | (5.0 | ) | ||||||||
Vascular Products Segment |
|||||||||||||
2011 vs. 2010 |
4.4 |
(4.3 |
) |
5.5 |
3.2 |
||||||||
2010 vs. 2009 |
18.6 | (4.7 | ) | 22.3 | 1.0 | ||||||||
2009 vs. 2008 |
20.1 | (2.9 | ) | 26.0 | (3.0 | ) | |||||||
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
33
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.
| |
2011 | Percent Change |
2010 | Percent Change |
2009 | Percent Change |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(dollars in millions) |
||||||||||||||||||
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
34
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
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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 | ||
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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
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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.
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Research and Development Programs
Abbott currently has numerous pharmaceutical, medical and nutritional products in development.
Research and Development Process
In the Proprietary Pharmaceuticals segment, the research and development process generally begins with discovery research which focuses on the identification of a molecule that has a desired effect against a given disease. If preclinical testing of an identified compound proves successful, the compound moves into clinical development which generally includes the following phases:
The clinical trials from all of the development phases provide the data required to prepare and submit a New Drug Application (NDA), a Biological License Application (BLA) or other submission for regulatory approval to the U.S. Food and Drug Administration (FDA) or similar government agencies outside the U.S. The specific requirements (e.g., scope of clinical trials) for obtaining regulatory approval vary across different countries and geographic regions.
The research and development process from discovery through a new drug launch typically takes 8 - 12 years and can be even longer. There is a significant amount of uncertainty inherent in the research and development of new pharmaceutical products and there is no guarantee when, or if, a molecule will receive the regulatory approval required to launch a new drug or indication.
In addition to the development of new products and new formulations, proprietary pharmaceutical research and development projects also may include Phase IV trials, sometimes called post-marketing studies. For such projects, clinical trials are designed and conducted to collect additional data regarding, among other parameters, the benefits and risks of an approved drug.
In the Established Pharmaceuticals segment, the research and development process focuses on the geographic expansion and continuous improvement of the segment's existing products to provide Improved Therapeutic Benefits (ITBs) to patients and customers. As Established Pharmaceuticals does not actively pursue primary research, development usually begins with work on existing products or after the acquisition of an advanced stage licensing opportunity.
Depending upon the product, the phases of development may include:
The specific requirements (e.g. scope of clinical trials) for obtaining regulatory approval vary across different countries and geographic regions. The process may range from one year for a bioequivalence study project to 6 or more years for complex formulations and new indications.
In addition to the development of new ITBs, development projects may also include Phase IV studies similar to the post-marketing studies described above for proprietary pharmaceuticals.
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In the Diagnostics segment, the phases of the research and development process include:
As with pharmaceutical products, the regulatory requirements for diagnostic products vary across different countries and geographic regions. In the U.S., the FDA classifies diagnostic products into classes (I, II, or III) and the classification determines the regulatory process for approval. While the Diagnostics segment has products in all three classes, the vast majority of its products are categorized as Class I or Class II. Submission of a separate regulatory filing is not required for Class I products. Class II devices typically require pre-market notification to the FDA through a regulatory filing known as a 510(k) submission. Most Class III products are subject to the FDA's Pre-Marketing Approval (PMA) requirements. Other Class III products, such as those used to screen blood, require the submission and approval of a BLA.
In the EU, diagnostic products are also categorized into different categories and the regulatory process, which is governed by the European In Vitro Diagnostic Medical Device Directive, depends upon the category. Certain product categories require review and approval by an independent company, known as a Notified Body, before the manufacturer can affix a CE mark to the product to show compliance with the Directive. Other products only require a self-certification process.
In the Vascular segment, the research and development process begins with research on a specific technology that is evaluated for feasibility and commercial viability. If the research program passes that hurdle, it moves forward into development. The development process includes evaluation and selection of a product design, completion of clinical trials to test the product's safety and efficacy, and validation of the manufacturing process to demonstrate its repeatability and ability to consistently meet pre-determined specifications.
Similar to the diagnostic products discussed above, in the U.S., vascular products are classified as Class I, II, or III. Most of Abbott's vascular products are classified as Class II devices that follow the 510(k) regulatory process or Class III devices that are subject to the PMA process.
In the EU, vascular products are also categorized into different classes and the regulatory process, which is governed by the European Medical Device Directive, varies by class. Each product must bear a CE mark to show compliance with the Directive. Some products require submission of a design dossier to the appropriate regulatory authority for review and approval prior to CE marking of the device. For other products, the company is required to prepare a technical file which includes testing results and clinical evaluations but can self-certify its ability to apply the CE mark to the product. Outside the U.S. and the EU, the regulatory requirements vary across different countries and regions.
After approval and commercial launch of some vascular products, post-market trials may be conducted either due to a conditional requirement of the regulatory market approval or with the objective of proving product superiority.
In the Nutritional segment, the research and development process generally focuses on identifying and developing ingredients and products that address the nutritional needs of particular populations (e.g., infants, athletes) or patients (e.g., people with diabetes). Depending upon the country and/or region, if claims regarding a product's efficacy will be made, clinical studies typically must be conducted. Most
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other product development, such as a product form change from liquid to powder, generally does not necessitate clinical studies.
In the U.S., the FDA requires that it be notified of proposed new formulations and formulation or packaging changes related to infant formula products. Prior to the launch of an infant formula or product packaging change, the company is required to obtain the FDA's confirmation that it has no objections to the proposed product or packaging. For other nutrition products, notification or pre-approval from the FDA is not required unless the product includes a new food additive. In some countries, regulatory approval may be required for certain nutritional products, including infant formula and medical nutritional products.
Areas of Focus
Abbott's significant areas of therapeutic focus include the following:
Proprietary Pharmaceutical Products —
Immunology — Projects are ongoing to identify new mechanisms with the potential to treat an array of immune-mediated diseases. Projects include early stage work in oral DMARD therapies and a number of biologic candidates. ABT-122 and ABT-981 are both dual variable domain immunoglobulins in Phase I clinical trials with potential to be disease modifying anti-arthritic drugs.
Additional indications of HUMIRA have registration submissions under review, including ankylosing spondylitis in China where the registration filing was submitted in September 2011 and pediatric Crohn's disease where the European Union (EU) registration was submitted in October 2011 and the U.S. submission is expected in mid-2012. Global regulatory applications for ulcerative colitis were submitted in early 2011. Phase III trials are ongoing for ulcerative colitis in Japan, uveitis in the U.S., EU and Japan, peripheral and axial spondyloarthritis in the U.S. and EU, and hidradenitis suppurativa in the U.S. and EU. Approval for juvenile idiopathic arthritis was obtained in July 2011 for Japan.
Neuroscience/Pain — Abbott is focused on the development of compounds that target receptors in the brain that help regulate neurological functions to address conditions such as Alzheimer's disease, schizophrenia, pain, Parkinson's disease and multiple sclerosis (MS). These efforts include four compounds directed toward the treatment of Alzheimer's disease. Abbott expects ABT-126 to start Phase IIb studies in the first half of 2012, ABT-354 to enter Phase IIa in late 2012 or early 2013, ABT-363 to complete Phase I in late 2012, and ABT-957 to start Phase I in the first half of 2012. Daclizumab, a next-generation antibody, is in ongoing Phase III clinical trials for relapsing remitting MS. ABT-652 is under development for the treatment of multiple pain indications with Phase IIb clinical trials expected to start in June 2012. Duopa is completing its U.S. Phase III program for Parkinson's disease and a registration is expected to be submitted in the second half of 2012.
Oncology — Abbott is focused on the development of targeted treatments that inhibit tumor growth and improve response to common cancer therapies. Abbott has new molecular entities in development for more than a dozen types of cancer including:
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Hepatitis C — Abbott's antiviral program is focused on developing treatments for hepatitis C (HCV) and development is ongoing for ABT-450, part of the Enanta collaboration, polymerase inhibitor ABT-333, and ABT-267, a NS5A inhibitor.
Women's Health — In 2010, Abbott entered into a collaboration agreement with Neurocrine to develop and commercialize elagolix, an oral gonadotropin-releasing hormone (GnRH) antagonist, for the treatment of endometriosis-related pain and fibroids. A Phase III study in endometriosis is expected to begin in mid-2012 and a Phase IIa study for uterine fibroids was initiated in November 2011.
Chronic Kidney Disease — In 2010, Abbott entered into an agreement with Reata Pharmaceuticals for ex-U.S. rights, excluding certain Asian markets, to bardoxolone, an investigational treatment for chronic kidney disease (CKD). A global Phase III trial was initiated in June 2011. A global Phase IIb study was initiated for atrasentan in June 2011.
In 2011, new formulations of Abbott's existing pharmaceutical products were approved, including Lupron 6-month depot in June and 3-month depot in August in the U.S. A new strength for Creon was approved in the U.S. in June and AndroGel 1.62% was approved in April in the U.S. Work is also continuing on numerous early-stage programs, including the biologic acquired from Pangenetics for chronic pain in late 2009, a cMet antibody for cancer in partnership with Pierre Fabre SA, and other programs across all of Abbott's therapeutic areas of focus.
Established Pharmaceuticals — Abbott is currently working on active ITB plans for about 20 - 30 key brands. Depending on the product, the development activities focus on new markets, formulations, combinations, or indications.
Vascular — Ongoing projects in the pipeline include:
Medical Optics — Abbott is expanding its proprietary laser platforms into new vision correction applications, including laser refractive cataract surgery. Abbott has also developed a new diagnostic instrument and laser treatment planning software which is designed to improve visual outcomes. This instrument and software received CE Mark in November 2011 and will be launched in Europe in the second quarter of 2012. A PMA filing for U.S. regulatory approval is targeted for submission in the second quarter of 2012. A PMA filing for an ophthalmic viscoelastic for the U.S. market was submitted to the FDA in February 2011 and is currently under review. Abbott is also developing new products for patients
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undergoing cataract surgery, including: the Synchrony intraocular lens (IOL) designed to mimic the eye's natural ability to change focus and deliver improved vision at all distances; advanced IOLs that address astigmatism as well as presbyopia; IOL insertion systems that improve surgeon efficiency and enable implantation through smaller incision sizes; and feature enhancements to phacoemulsification systems.
Molecular Diagnostics — Numerous new molecular diagnostic products, including oncology and infectious disease assays as well as a new instrument system, are currently under development. Abbott's companion diagnostic test for an ALK gene rearrangement test for non-small-cell lung cancer was launched in the U.S. in 2011 and is currently in clinical trials and undergoing regulatory review in numerous other countries. In 2011, an assay to aid in the management of HCV-infected patients undergoing antiviral therapy received U.S. regulatory approval and additional assays to detect the presence of HIV virus and CMV viral load as well as a test to detect hepatitis B drug resistance in patients received CE Mark.
Core Laboratory Diagnostics — Abbott is researching dozens of novel biomarkers focusing on areas such as infectious disease, oncology, cardiac and neuroscience disorders and also has several next-generation instrument systems in development.
Diabetes Care — Abbott submitted its FreeStyle InsuLinx blood glucose monitoring system that includes new features designed to support the insulin-using patient for regulatory approval in the U.S. in June 2011. After receiving CE Mark for this system in May 2011 and Health Canada approval in October 2011, Abbott is continuing to provide R&D support as the product is launched in additional markets. Development is also continuing on an updated hospital blood glucose monitoring system for which filings for approval are projected to be submitted in the U.S. and Europe during the first half of 2013. Abbott is also developing a next-generation monitoring system under the Precision product platform. Abbott anticipates submitting filings for approval in various markets in 2013.
Nutrition — Abbott is focusing its research and development spend on six benefit platforms that span the pediatric, adult and performance nutrition areas: immunity, cognition, lean body mass, inflammation, metabolism and tolerance. Numerous new products that build on advances in these benefit platforms are currently under development and are expected to be launched in 2012.
Given the diversity of Abbott's business, its intention to remain a broad-based healthcare company and the numerous sources for potential future growth, no individual project is expected to be material to cash flows or results of operations over the next five years. Factors considered included research and development expenses projected to be incurred for the project (compound or device) over the next year relative to Abbott's total research and development expenses as well as qualitative factors, such as marketplace perceptions and impact of a new product on Abbott's overall market position. There were no delays in Abbott's 2011 research and development activities that are expected to have a material impact on operations.
While the aggregate cost to complete the numerous pharmaceutical and medical device projects currently in development is expected to be material, the total cost to complete will depend upon Abbott's ability to successfully complete each project, the rate at which each project advances, and the ultimate timing for completion. Given the potential for significant delays and the high rate of failure inherent in the research and development of new pharmaceutical and medical device products and technologies, it is not possible to accurately estimate the total cost to complete all projects currently in development. However, Abbott plans to continue to manage its portfolio of projects to achieve research and development spend equal to approximately 9.5 percent to 10 percent of sales each year. Abbott does not regularly accumulate or make management decisions based on the total expenses incurred for a particular development phase in a given period.
Generally, Abbott seeks to obtain various forms of exclusivity for each product in development. Abbott obtains patent protection, where available, in all significant markets and/or countries for each product in development. Additionally, Abbott also seeks to obtain other forms of legal or regulatory
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exclusivity that would protect the product upon approval. These forms of regulatory exclusivity have a variety of terms, from 3, 5 to 7 years in the United States, and up to 10 years in the European Union. This regulatory exclusivity is granted upon the approval of each development project. In certain instances, regulatory exclusivity may protect a product where patent protection is no longer available or for a period of time in excess of patent protection. The availability of and length of such regulatory exclusivity is based, in part, on the length of the regulatory review process and can only be determined upon product approval. It is not possible to estimate for each product in development the total period of exclusivity that will be obtained if regulatory approval is obtained.
Generally, upon approval, products in development may be entitled to exclusivity. Abbott seeks patent protection, where available, in all significant markets and/or countries for each product in development. In the United States, the expiration date for patents filed on or after June 8, 1995 is 20 years after the filing date. Given that patents relating to pharmaceutical products are often obtained early in the development process and given the amount of time needed to complete clinical trials and other development activities required for regulatory approval, the length of time between product launch and patent expiration may be significantly less than 20 years if a product in development ultimately obtains regulatory approval. The Drug Price Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act) permits a patent holder to seek a patent extension commonly called a patent term restoration for patents on products (or processes for making the product) regulated by the Federal Food, Drug and Cosmetic Act. The calculation of the patent extension is roughly based on 50 percent of the period of time extending from the filing of an Investigational New Drug application to the submission of the NDA, plus 100 percent of the time period from NDA submission to regulatory approval. The extension, however, cannot exceed 5 years and the remaining patent term after regulatory approval cannot exceed 14 years. Only one patent related to the first commercial marketing of a newly approved pharmaceutical product is eligible for a patent term restoration.
Additionally, products may be entitled to obtain other forms of legal or regulatory exclusivity upon approval. These forms of regulatory exclusivity have a variety of terms in the United States and are variable in other jurisdictions. In the United States, when the FDA approves a new chemical entity that it has not previously approved alone or in combination with other chemical entities, the product is granted 5 years of regulatory exclusivity. The FDA may grant 3 years of market exclusivity for an NDA, including supplementary applications, if the application contains reports of new clinical investigations that have not previously been relied upon by the FDA. If the FDA grants pediatric exclusivity, the longest existing exclusivity (patent or regulatory) related to the product would be extended by 6 months. If the FDA designates a product as an orphan drug that is either used to treat conditions that afflict a relatively small population or for which there is not a reasonable expectation that the research and development costs will be recovered, the FDA may grant 7 years of exclusivity.
This regulatory exclusivity is granted upon the approval of each development project. In certain instances, regulatory exclusivity may protect a product where patent protection is no longer available or for a period of time in excess of patent protection. It is not possible to estimate for each product in development the total period of exclusivity that will be obtained if regulatory approval is obtained. However, given the length of time required to complete clinical development of a pharmaceutical product, the minimum and maximum periods of exclusivity that might be achieved in any individual case would not be expected to exceed 3 and 14 years, respectively. These estimates do not consider other factors, such as the difficulty of recreating the manufacturing process for a particular product or other proprietary knowledge that may provide some level of additional protection against generic incursion.
Business Combinations, Technology Acquisitions and Related Transactions
On September 8, 2010, Abbott acquired Piramal Healthcare Limited's Healthcare Solutions business, a leader in the Indian branded generics market, for $2.2 billion, in cash, plus additional payments of $400 million annually in 2011, 2012, 2013 and 2014. Abbott recorded a $1.6 billion liability for the present
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value of the additional payments at the acquisition date. The acquisition was financed with cash. The allocation of the fair value of the acquisition resulted in the recording of $2.7 billion of deductible acquired intangible assets and $1.0 billion of deductible goodwill. Acquired intangible assets consist primarily of trade names, customer relationships and associated rights and are amortized over an average of 19 years.
In February 2010, Abbott acquired Solvay's pharmaceuticals business (Solvay Pharmaceuticals) for approximately $6.1 billion, in cash, plus additional payments of up to EUR 100 million per year if certain sales milestones are met in 2011, 2012 and 2013. Contingent consideration of approximately $290 million was recorded. The acquisition of Solvay Pharmaceuticals provides Abbott with a large and complementary portfolio of pharmaceutical products and expands Abbott's presence in key global emerging markets. Abbott acquired control of this business on February 15, 2010 and the financial results of the acquired operations are included in these financial statements beginning on that date. Net sales for the acquired operations for 2010 were approximately $3.1 billion. Pretax loss of the acquired operations, including acquisition, integration and restructuring expenses, for 2010 was approximately $395 million. The acquisition was funded with cash and short-term investments. The allocation of the fair value of the acquisition is shown in the table below (in billions of dollars).
Goodwill, non-deductible |
$ | 2.2 | ||
Acquired intangible assets, non-deductible |
4.1 | |||
Acquired in-process research and development, non-deductible |
0.5 | |||
Acquired net tangible assets |
0.7 | |||
Deferred income taxes recorded at acquisition |
(1.1 | ) | ||
Total allocation of fair value |
$ | 6.4 | ||
Acquired intangible assets consist primarily of product rights for currently marketed products and are amortized over 2 to 14 years (average of 11 years). Acquired in-process research and development projects are accounted for as indefinite lived intangible assets until regulatory approval or discontinuation. The net tangible assets acquired consist primarily of trade accounts receivable of approximately $675 million, inventory of approximately $390 million, property and equipment of approximately $725 million, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities.
Had the acquisition of Solvay Pharmaceuticals taken place on January 1, 2010 and January 1, 2009, unaudited pro forma net sales, net earnings and diluted earnings per share for 2010 and 2009 would have been $35.8 billion and $34.2 billion, $4.6 billion and $5.2 billion and $2.96 and $3.36, respectively. The pro forma information includes adjustments for amortization of intangible assets and fair value adjustments to acquisition-date inventory as well as acquisition, integration and restructuring expenses. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date.
In March 2010, Abbott acquired STARLIMS Technologies for approximately $100 million, in cash, net of cash held by STARLIMS, providing Abbott with leading products and expertise to build its position in laboratory informatics. A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets.
In April 2010, Abbott acquired the outstanding shares of Facet Biotech Corporation for approximately $430 million, in cash, net of cash held by Facet. The acquisition enhances Abbott's early- and mid-stage pharmaceutical pipeline, including a biologic for multiple sclerosis and compounds that complement Abbott's oncology program. A substantial portion of the fair value of the acquisition has been allocated to acquired in-process research and development that is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation.
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In February 2009, Abbott acquired the outstanding shares of Advanced Medical Optics, Inc. (AMO) for approximately $1.4 billion, in cash, net of cash held by AMO. Prior to the acquisition, Abbott held a small investment in AMO. Abbott acquired AMO to take advantage of increasing demand for vision care technologies due to population growth and demographic shifts and AMO's premier position in its field. Abbott acquired control of this business on February 25, 2009 and the financial results of the acquired operations are included in these financial statements beginning on that date. The allocation of the fair value of the acquisition resulted in non-deductible goodwill of approximately $1.7 billion, non-deductible definite-lived intangible assets of approximately $900 million and net tangible assets of approximately $400 million. In addition, Abbott assumed $1.5 billion of debt. Acquired intangible assets consist of established customer relationships, developed technology and trade names and are amortized over 2 to 30 years (average of 15 years). In addition, subsequent to the acquisition, Abbott repaid substantially all of the acquired debt of AMO.
In October 2009, Abbott acquired 100 percent of Visiogen, Inc. for $400 million, in cash, providing Abbott with a next-generation accommodating intraocular lens (IOL) technology to address presbyopia for cataract patients. The allocation of the fair value of the acquisition resulted in non-deductible acquired in-process research and development of approximately $200 million which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, non-deductible definite-lived intangible assets of approximately $24 million and goodwill of approximately $200 million.
In October 2009, Abbott acquired Evalve, Inc. for $320 million, in cash, plus an additional payment of $90 million to be made upon completion of certain regulatory milestones. Abbott acquired Evalve to obtain a presence in the growing area of non-surgical treatment for structural heart disease. Including a previous investment in Evalve, Abbott has acquired 100 percent of the outstanding shares of Evalve. In connection with the acquisition, the carrying amount of this investment was revalued to fair value resulting in recording $28 million of income, which is reported as Other (income) expense, net. The allocation of the fair value of the acquisition resulted in non-deductible definite-lived intangible assets of approximately $140 million, non-deductible acquired in-process research and development of approximately $220 million which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, goodwill of approximately $100 million and deferred income taxes of approximately $110 million. Acquired intangible assets consist of developed technology and are being amortized over 11 years.
In January 2009, Abbott acquired Ibis Biosciences, Inc. (Ibis) for $175 million, in cash, to expand Abbott's position in molecular diagnostics for infectious disease. Including a $40 million investment in Ibis in 2008, Abbott has acquired 100 percent of the outstanding shares of Ibis. A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets, and acquired in-process research and development which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The investment in Ibis in 2008 resulted in a charge to acquired in-process research and development. In connection with the acquisition, the carrying amount of this investment was revalued to fair value resulting in recording $33 million of income, which is reported as Other (income) expense, net.
Except for the acquisition of Solvay Pharmaceuticals, had the above acquisitions taken place on January 1 of the previous year, consolidated net sales and income would not have been significantly different from reported amounts.
In 2011, Abbott entered into a collaboration agreement for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to acquired in-process research and development of $400 million. In 2010, Abbott entered into an agreement to acquire licensing rights outside the U.S., excluding certain Asian markets, to a product in development for the treatment of chronic kidney disease resulting in a charge to acquired in-process research and development of $238 million. In 2011, certain milestones were achieved and charges to acquired in-process research and development of $188 million were recorded. Additional payments of approximately
46
$200 million could be required for the achievement of certain development and regulatory milestones. In addition, equity interests of approximately $62 million each were acquired in 2011 and 2010. In 2011, Abbott entered into an agreement to develop and commercialize a treatment for rheumatoid arthritis and psoriasis resulting in a charge to acquired in-process research and development of $85 million. Additional payments totaling up to $395 million could be required for the achievement of certain development, regulatory and commercial milestones under the agreement. In 2010, Abbott also entered into an agreement to develop and commercialize a product for the treatment of endometriosis resulting in a charge to acquired in-process research and development of $75 million. Additional payments of approximately $500 million could be required for the achievement of certain development, regulatory and commercial milestones under this agreement. In 2009, Abbott acquired the global rights to a novel biologic for the treatment of chronic pain for $170 million resulting in a charge to acquired in-process research and development.
Goodwill
At December 31, 2011, goodwill recorded as a result of business combinations totaled $15.7 billion. Goodwill is reviewed for impairment annually or when an event that could result in an impairment occurs. The results of the last impairment test indicated that the fair value of each reporting unit was substantially in excess of its carrying value except for the Medical Optics unit. While the fair value of the Medical Optics business exceeds its carrying value, extended economic pressure on government-reimbursed cataract procedures in Europe and on the global LASIK surgery business as well as longer regulatory approval timelines for products currently under development could result in a valuation in the future where the fair value of the Medical Optics unit has declined below its carrying value, thereby triggering the requirement to estimate the implied fair value of the goodwill and measure for impairment.
Financial Condition
Cash Flow
Net cash from operating activities amounted to $9.0 billion, $8.7 billion and $7.3 billion in 2011, 2010 and 2009, respectively. Trade accounts payable and other liabilities in Net cash from operating activities in 2011 includes the non-cash impact of a litigation reserve of $1.5 billion and Income taxes payable includes $580 million of tax benefits related to the favorable resolution of various tax positions pertaining to prior years. While substantially all of Abbott's cash and cash equivalents at December 31, 2011, 2010 and 2009 is considered reinvested indefinitely in foreign subsidiaries, Abbott does not expect such reinvestment to affect its liquidity and capital resources. If these funds were needed for operations in the U.S., Abbott would be required to accrue and pay U.S. income taxes to repatriate these funds. Abbott believes that it has sufficient sources of liquidity to support its assumption that the disclosed amount of undistributed earnings at December 31, 2011 can be considered to be reinvested indefinitely. Abbott funded $394 million in 2011, $525 million in 2010 and $862 million in 2009 to defined pension plans. Abbott expects pension funding for its main domestic pension plan of $200 million annually. Abbott expects annual cash flow from operating activities to continue to exceed Abbott's capital expenditures and cash dividends.
For 2010, the reductions in cash and cash equivalents due to the effect of exchange rate changes was primarily driven by the impact of changes in the value of the U.S. dollar compared to the euro on non-dollar denominated cash and cash equivalents. While future fluctuations in the strength of the U.S. dollar against foreign currencies could have a substantial effect on the dollar value of Abbott's cash and cash equivalents, such fluctuations are not expected to materially impact Abbott's liquidity.
As discussed above, the United States Department of Justice, through the United States Attorney for the Western District of Virginia, is investigating Abbott's sales and marketing activities for Depakote. Abbott recorded a non-cash charge of $1.5 billion in 2011 related to this investigation. However, the discussions to resolve potential civil and criminal claims related to this matter are ongoing, and until
47
concluded, there can be no certainty about definitive resolution. The ultimate resolution of this matter in any reporting period is expected to have a material impact on Abbott's cash flows for that year.
Debt and Capital
At December 31, 2011, Abbott's long-term debt rating was AA by Standard & Poor's Corporation and A1 by Moody's Investors Service. Abbott has readily available financial resources, including unused lines of credit of $6.7 billion that support commercial paper borrowing arrangements of which a $3.0 billion facility expires in October 2012 and a $3.7 billion facility expires in 2013. Related compensating balances, which are subject to withdrawal by Abbott at its option, and commitment fees are not material.
In October 2008, the board of directors authorized the purchase of up to $5 billion of Abbott's common shares from time to time. Under this authorization, 14.8 million and 14.5 million shares were purchased in 2010 and 2009 at a cost of approximately $800 million in both years. No shares were purchased under this authorization in 2011. Abbott plans to purchase shares from time to time in 2012.
In 2011, Abbott repaid $2 billion of long-term notes using primarily short-term borrowings. Under a registration statement filed with the Securities and Exchange Commission in February 2009, Abbott issued $3.0 billion of long-term debt in the second quarter of 2010 that matures in 2015, 2020 and 2040 with interest rates of 2.7 percent, 4.125 percent and 5.3 percent, respectively. Proceeds from this debt were used to pay down short-term borrowings. Abbott is in the process of evaluating the impact of the proposed separation on its future capitalization structure and liquidity. In 2012, Abbott expects to tender for a portion of its outstanding long-term debt with the tender funded by debt issued by the new pharmaceutical company. Under the February 2009 registration statement, Abbott issued $3.0 billion of long-term debt in the first quarter of 2009 that matures in 2019 and 2039 with interest rates of 5.125 percent and 6.0 percent, respectively. Proceeds from this debt were used to fund the acquisition of Advanced Medical Optics, Inc. and to repay debt of Advanced Medical Optics, Inc. In addition, Abbott repaid $1 billion of long-term notes that were due in 2009 using primarily short-term borrowings.
The judgment entered in 2009 by the U.S. District Court for the Eastern District of Texas against Abbott in its litigation with New York University and Centocor, Inc. required Abbott to secure the judgment in the event that its appeal to the Federal Circuit court was unsuccessful in overturning the district court's decision. In the first quarter of 2010, Abbott deposited $1.87 billion with an escrow agent and considered these assets to be restricted. On February 23, 2011, the Federal Circuit reversed the district court's final judgment and found Centocor's patent invalid. On April 25, 2011, Centocor petitioned the Federal Circuit to rehear and reconsider the decision. In June 2011 the Federal Circuit denied Centocor's petition and the restrictions on the funds were lifted.
Working Capital
Working capital was $8.3 billion at December 31, 2011, $5.1 billion at December 31, 2010 and $10.3 billion at December 31, 2009. The increase in working capital in 2011 was due primarily to higher cash generated from operating activities and lower debt levels. The decrease in working capital in 2010 was due primarily to cash and investments used to acquire Solvay's pharmaceuticals business and Piramal Healthcare Limited's Healthcare Solutions business.
A significant amount of Abbott's trade receivables in Greece, Portugal, Italy, and Spain are with governmental health systems. Given the economic conditions and sovereign debt issues in these countries, the time it takes to collect outstanding receivables increased in 2011. Outstanding net governmental receivables in these four countries totaled $1.73 billion, $1.50 billion, and $1.59 billion at December 31, 2011, 2010, and 2009, respectively. The percentage of governmental receivables in these four countries over a year past due was 27 percent, 22 percent, and 23 percent at December 31, 2011, 2010, and 2009, respectively. With the exception of Greece, Abbott historically has collected almost all of the outstanding receivables in these countries. Abbott continues to monitor the credit worthiness of customers located in
48
these and other geographic areas and establishes an allowance against a trade receivable when it is probable that the balance will not be collected. If government funding were to become unavailable in these countries or if significant adverse changes in their reimbursement practices were to occur, Abbott may not be able to collect the entire balance.
Capital Expenditures
Capital expenditures of $1.5 billion in 2011, $1.0 billion in 2010 and $1.1 billion in 2009 were principally for upgrading and expanding manufacturing, research and development, investments in information technology and administrative support facilities in all segments, and for laboratory instruments placed with customers.
Contractual Obligations
The following table summarizes Abbott's estimated contractual obligations as of December 31, 2011: (dollars in millions)
| |
Payment Due By Period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | 2012 | 2013-2014 | 2015-2016 | 2017 and Thereafter |
|||||||||||
Long-term debt, including current maturities and future interest payments |
$ | 20,070 | $ | 1,882 | $ | 1,985 | $ | 3,757 | $ | 12,446 | ||||||
Operating lease obligations |
509 | 112 | 161 | 103 | 133 | |||||||||||
Capitalized auto lease obligations |
85 | 28 | 57 | — | — | |||||||||||
Purchase commitments (a) |
3,112 | 3,004 | 80 | 2 | 26 | |||||||||||
Other long-term liabilities reflected on the consolidated balance sheet — |
||||||||||||||||
Benefit plan obligations |
3,753 | — | 828 | 924 | 2,001 | |||||||||||
Other |
4,421 | — | 3,851 | 209 | 361 | |||||||||||
Total (b) |
$ | 31,950 | $ | 5,026 | $ | 6,962 | $ | 4,995 | $ | 14,967 | ||||||
Contingent Obligations
Abbott has periodically entered into agreements in the ordinary course of business, such as assignment of product rights, with other companies which has resulted in Abbott becoming secondarily liable for obligations that Abbott was previously primarily liable. Since Abbott no longer maintains a business relationship with the other parties, Abbott is unable to develop an estimate of the maximum potential amount of future payments, if any, under these obligations. Based upon past experience, the likelihood of payments under these agreements is remote. In addition, Abbott periodically acquires a business or product rights in which Abbott agrees to pay contingent consideration based on attaining certain thresholds or based on the occurrence of certain events.
Recently Issued Accounting Standards
In 2011, the Financial Accounting Standards Board (FASB) issued an amendment to Topic 270 in the FASB's Accounting Standards Codification. The amendment requires that all non-owner changes in
49
stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Abbott adopted this amendment for the year ended December 31, 2011 and retrospectively presented all non-owner changes in stockholders' equity in two separate but consecutive statements. Adoption of this amendment did not have a material impact on Abbott's results of operations, cash flows or financial position.
Legislative Issues
In the first quarter 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively referred to herein as "health care reform legislation") were signed into law in the U.S. Health care reform legislation included an increase in the basic Medicaid rebate rate from 15.1 percent to 23.1 percent and extended the rebate to drugs provided through Medicaid managed care organizations. These Medicaid rebate changes will continue to have a negative effect on the gross profit margin of the Proprietary Pharmaceutical Products segment in future years.
Beginning in 2013, health care reform legislation will eliminate the federal income tax deduction for prescription drug expenses of retirees for which Abbott receives reimbursement under the Medicare Part D retiree drug subsidy program. As a result, Abbott recorded a charge of approximately $60 million in the first quarter 2010 to reduce deferred tax assets associated with retiree health care liabilities.
In 2011, Abbott began recording the annual fee imposed by health care reform legislation on companies that sell branded prescription drugs to specified government programs. The amount of the annual fee will be based on the ratio of certain of Abbott's sales as compared to the total such sales of all covered entities multiplied by a fixed dollar amount specified in the legislation by year. In 2011, additional rebates were incurred related to the Medicare Part D coverage gap "donut hole." Beginning in 2013, Abbott will record the 2.3 percent excise tax imposed by health care reform legislation on the sale of certain medical devices in the U.S.
Abbott's primary markets are highly competitive and subject to substantial government regulations throughout the world. Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services. It is not possible to predict the extent to which Abbott or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors, to the Annual Report on Form 10-K.
Private Securities Litigation Reform Act of 1995 — A Caution Concerning Forward-Looking Statements
Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Abbott cautions investors that any forward-looking statements or projections made by Abbott, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to the Annual Report on Form 10-K.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Instruments and Risk Management
Market Price Sensitive Investments
Abbott holds available-for-sale equity securities from strategic technology acquisitions. The market value of these investments was approximately $93 million and $75 million as of December 31, 2011 and 2010, respectively. Abbott monitors these investments for other than temporary declines in market value, and charges impairment losses to income when an other than temporary decline in value occurs. A hypothetical 20 percent decrease in the share prices of these investments would decrease their fair value at December 31, 2011 by approximately $18 million. (A 20 percent decrease is believed to be a reasonably possible near-term change in share prices.)
Non-Publicly Traded Equity Securities
Abbott holds equity securities from strategic technology acquisitions that are not traded on public stock exchanges. The carrying value of these investments was approximately $224 million and $165 million as of December 31, 2011 and 2010, respectively. One equity investment is recorded at $124 million with no other individual investment in excess of $18 million. Abbott monitors these investments for other than temporary declines in market value, and charges impairment losses to income when an other than temporary decline in estimated value occurs.
Interest Rate Sensitive Financial Instruments
At December 31, 2011 and 2010, Abbott had interest rate hedge contracts totaling $6.8 billion and $7.3 billion, respectively, to manage its exposure to changes in the fair value of debt. The effect of these hedges is to change the fixed interest rate to a variable rate. Abbott does not use derivative financial instruments, such as interest rate swaps, to manage its exposure to changes in interest rates for its investment securities. At December 31, 2011, Abbott had $450 million of domestic commercial paper outstanding with an average annual interest rate of 0.07% with an average remaining life of 12 days. The fair value of long-term debt at December 31, 2011 and 2010 amounted to $15.1 billion and $15.7 billion, respectively (average interest rates of 5.2%) with maturities through 2040. At December 31, 2011 and 2010, the fair value of current and long-term investment securities amounted to approximately $1.7 billion and $2.1 billion, respectively. A hypothetical 100-basis point change in the interest rates would not have a material effect on cash flows, income or market values. (A 100-basis point change is believed to be a reasonably possible near-term change in rates.)
Foreign Currency Sensitive Financial Instruments
Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts are designated as cash flow hedges of the variability of the cash flows due to changes in foreign currency exchange rates and are marked-to-market with the resulting gains or losses reflected in Accumulated other comprehensive income (loss). Gains or losses will be included in Cost of products sold at the time the products are sold, generally within the next twelve months. At December 31, 2011 and 2010, Abbott held $1.6 billion and $1.3 billion, respectively, of such contracts, which all mature in the following calendar year.
Abbott enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated intercompany loans and trade payables and third-party trade payables and receivables. The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed. At December 31, 2011 and 2010, Abbott held $15.7 billion and $10.8 billion, respectively, of such contracts, which mature in the next twelve months.
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Abbott has designated foreign denominated short-term debt of approximately $680 million and approximately $650 million as of December 31, 2011 and 2010, respectively, as a hedge of the net investment in a foreign subsidiary. Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.
The following table reflects the total foreign currency forward contracts outstanding at December 31, 2011 and 2010: (dollars in millions)
| |
2011 | 2010 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Contract Amount |
Weighted Average Exchange Rate |
Fair and Carrying Value Receivable/ (Payable) |
Contract Amount |
Weighted Average Exchange Rate |
Fair and Carrying Value Receivable/ (Payable) |
|||||||||||||
Receive primarily U.S. Dollars |
|||||||||||||||||||
Euro |
$ | 10,526 | 1.329 | $ | 102 | $ | 5,803 | 1.347 | $ | 16 | |||||||||
British Pound |
1,501 | 1.571 | 3 | 1,422 | 1.581 | 2 | |||||||||||||
Japanese Yen |
2,458 | 80.3 | (3 | ) | 2,256 | 82.7 | (2 | ) | |||||||||||
Canadian Dollar |
280 | 1.026 | (2 | ) | 538 | 1.021 | 4 | ||||||||||||
All other currencies |
2,544 | N/A | (1 | ) | 2,090 | N/A | (25 | ) | |||||||||||
Total |
$ | 17,309 | $ | 99 | $ | 12,109 | $ | (5 | ) | ||||||||||
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
53
Abbott Laboratories and Subsidiaries
Consolidated Statement of Earnings
(dollars and shares in thousands except per share data)
| |
Year Ended December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | |||||||
Net Sales |
$ | 38,851,259 | $ | 35,166,721 | $ | 30,764,707 | ||||
Cost of products sold |
15,540,580 | 14,665,192 | 13,209,329 | |||||||
Research and development |
4,129,414 | 3,724,424 | 2,743,733 | |||||||
Acquired in-process and collaborations research and development |
672,500 | 313,200 | 170,000 | |||||||
Selling, general and administrative |
12,756,817 | 10,376,324 | 8,405,904 | |||||||
Total Operating Cost and Expenses |
33,099,311 | 29,079,140 | 24,528,966 | |||||||
Operating Earnings |
5,751,948 | 6,087,581 | 6,235,741 | |||||||
Interest expense |
530,141 | 553,135 | 519,656 | |||||||
Interest (income) |
(85,196 | ) | (105,453 | ) | (137,779 | ) | ||||
Net foreign exchange (gain) loss |
(50,271 | ) | (10,924 | ) | 35,584 | |||||
Other (income) expense, net |
158,632 | (62,011 | ) | (1,375,494 | ) | |||||
Earnings Before Taxes |
5,198,642 | 5,712,834 | 7,193,774 | |||||||
Taxes on Earnings |
470,193 | 1,086,662 | 1,447,936 | |||||||
Net Earnings |
$ | 4,728,449 | $ | 4,626,172 | $ | 5,745,838 | ||||
Basic Earnings Per Common Share |
$ | 3.03 | $ | 2.98 | $ | 3.71 | ||||
Diluted Earnings Per Common Share |
$ | 3.01 | $ | 2.96 | $ | 3.69 | ||||
Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share |
1,557,643 | 1,546,400 | 1,546,983 | |||||||
Dilutive Common Stock Options and Awards |
9,746 | 9,622 | 8,143 | |||||||
Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards |
1,567,389 | 1,556,022 | 1,555,126 | |||||||
Outstanding Common Stock Options Having No Dilutive Effect |
26,789 | 29,403 | 66,189 | |||||||
The accompanying notes to consolidated financial statements are an integral part of this statement.
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Abbott Laboratories and Subsidiaries
Consolidated Statement of Comprehensive Income
(dollars in thousands)
| |
Year Ended December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | |||||||
Net Earnings |
$ | 4,728,449 | $ | 4,626,172 | $ | 5,745,838 | ||||
Foreign currency translation (loss) gain adjustments |
(817,539 | ) | (2,290,256 | ) | 2,295,757 | |||||
Net actuarial (losses) and prior service cost and credits and amortization of net actuarial losses and prior service cost and credits, net of taxes of $(391,528) in 2011, $(70,389) in 2010 and $8,125 in 2009 |
(510,444 | ) | (59,447 | ) | (259,814 | ) | ||||
Unrealized gains on marketable equity securities, net of taxes of $8,338 in 2011, $61 in 2010 and $3,949 in 2009 |
14,442 | 106 | 6,842 | |||||||
Net adjustments for derivative instruments designated as cash flow hedges, net of taxes of $19,857 in 2011 and $20,567 in 2010 |
83,202 | 128,677 | (24,872 | ) | ||||||
Other Comprehensive (loss) income |
(1,230,339 | ) | (2,220,920 | ) | 2,017,913 | |||||
Comprehensive Income |
$ | 3,498,110 | $ | 2,405,252 | $ | 7,763,751 | ||||
Supplemental Accumulated Other Comprehensive Income Information, net of tax as of December 31: |
||||||||||
Cumulative foreign currency translation loss (gain) adjustments |
$ | 72,527 | $ | (745,012 | ) | $ | (3,035,268 | ) | ||
Net actuarial losses and prior service cost and credits |
2,730,619 | 2,220,175 | 2,160,728 | |||||||
Cumulative unrealized (gains) on marketable equity securities |
(38,429 | ) | (23,987 | ) | (23,881 | ) | ||||
Cumulative (gains) losses on derivative instruments designated as cash flow hedges |
(167,532 | ) | (84,330 | ) | 44,347 | |||||
The accompanying notes to consolidated financial statements are an integral part of this statement.
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Abbott Laboratories and Subsidiaries
Consolidated Statement of Cash Flows
(dollars in thousands)
| |
Year Ended December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | |||||||
Cash Flow From (Used in) Operating Activities: |
||||||||||
Net earnings |
$ | 4,728,449 | $ | 4,626,172 | $ | 5,745,838 | ||||
Adjustments to reconcile earnings to net cash from operating activities — |
||||||||||
Depreciation |
1,395,371 | 1,207,450 | 1,210,977 | |||||||
Amortization of intangible assets |
1,648,523 | 1,416,855 | 878,533 | |||||||
Derecognition of a contingent liability associated with the conclusion of the TAP Pharmaceutical Products Inc. joint venture |
— | — | (797,130 | ) | ||||||
Share-based compensation |
382,602 | 387,183 | 366,357 | |||||||
Acquired in-process and collaborations research and development |
672,500 | 313,200 | 170,000 | |||||||
Investing and financing (gains) losses, net |
141,565 | 126,337 | 41,967 | |||||||
Trade receivables |
(670,152 | ) | (394,665 | ) | (387,749 | ) | ||||
Inventories |
(129,621 | ) | 139,857 | 230,555 | ||||||
Prepaid expenses and other assets |
413,266 | 553,145 | (386,889 | ) | ||||||
Trade accounts payable and other liabilities |
1,789,652 | 572,533 | (374,715 | ) | ||||||
Income taxes |
(1,402,078 | ) | (212,086 | ) | 577,416 | |||||
Net Cash From Operating Activities |
8,970,077 | 8,735,981 | 7,275,160 | |||||||
Cash Flow From (Used in) Investing Activities: |
||||||||||
Acquisitions of businesses and technologies, net of cash acquired |
(672,500 | ) | (9,433,243 | ) | (2,370,630 | ) | ||||
Acquisitions of property and equipment |
(1,491,500 | ) | (1,015,075 | ) | (1,089,048 | ) | ||||
Purchases of investment securities |
(5,109,987 | ) | (805,932 | ) | (248,970 | ) | ||||
Proceeds from sales of investment securities |
5,648,720 | 954,361 | 16,306 | |||||||
Release of (deposit of) restricted funds |
1,870,000 | (1,870,000 | ) | — | ||||||
Other |
16,099 | (18,426 | ) | (6,368 | ) | |||||
Net Cash From (Used in) Investing Activities |
260,832 | (12,188,315 | ) | (3,698,710 | ) | |||||
Cash Flow From (Used in) Financing Activities: |
||||||||||
(Repayments of) proceeds from issuance of short-term debt and other |
(1,964,685 | ) | (203,854 | ) | 3,217,331 | |||||
Proceeds from issuance of long-term debt and debt with maturities over 3 months |
1,000,000 | 4,000,000 | 3,000,000 | |||||||
Repayments of long-term debt and debt with maturities over 3 months |
(3,012,426 | ) | (1,673,998 | ) | (2,483,176 | ) | ||||
Purchases of common shares |
(77,007 | ) | (866,825 | ) | (826,345 | ) | ||||
Proceeds from stock options exercised, including income tax benefit |
968,759 | 328,411 | 508,669 | |||||||
Dividends paid |
(2,938,096 | ) | (2,671,475 | ) | (2,414,460 | ) | ||||
Net Cash (Used in) From Financing Activities |
(6,023,455 | ) | (1,087,741 | ) | 1,002,019 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(43,005 | ) | (620,893 | ) | 118,848 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
3,164,449 | (5,160,968 | ) | 4,697,317 | ||||||
Cash and Cash Equivalents, Beginning of Year |
3,648,371 | 8,809,339 | 4,112,022 | |||||||
Cash and Cash Equivalents, End of Year |
$ | 6,812,820 | $ | 3,648,371 | $ | 8,809,339 | ||||
Supplemental Cash Flow Information: |
||||||||||
Income taxes paid |
$ | 1,781,602 | $ | 809,710 | $ | 635,445 | ||||
Interest paid |
544,559 | 580,168 | 514,326 | |||||||
The accompanying notes to consolidated financial statements are an integral part of this statement.
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Abbott Laboratories and Subsidiaries
Consolidated Balance Sheet
(dollars in thousands)
| |
December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | |||||||
| |
|
(As Adjusted See Note 1) |
(As Adjusted See Note 1) |
|||||||
Current Assets: |
||||||||||
Cash and cash equivalents |
$ | 6,812,820 | $ | 3,648,371 | $ | 8,809,339 | ||||
Investments, primarily time deposits and certificates of deposit |
1,284,539 | 1,803,079 | 1,122,709 | |||||||
Restricted funds, primarily U.S. treasury bills |
— | 1,872,490 | — | |||||||
Trade receivables, less allowances of — 2011: $420,579; 2010: $388,564; 2009: $311,546 |
7,683,920 | 7,184,034 | 6,541,941 | |||||||
Inventories: |
||||||||||
Finished products |
2,220,527 | 2,058,735 | 2,289,280 | |||||||
Work in process |
432,358 | 383,580 | 448,487 | |||||||
Materials |
631,364 | 746,419 | 527,110 | |||||||
Total inventories |
3,284,249 | 3,188,734 | 3,264,877 | |||||||
Deferred income taxes |
2,700,540 | 3,076,051 | 2,364,142 | |||||||
Other prepaid expenses and receivables |
2,002,706 | 1,544,770 | 1,210,883 | |||||||
Total Current Assets |
23,768,774 | 22,317,529 | 23,313,891 | |||||||
Investments |
378,225 | 302,049 | 1,132,866 | |||||||
Property and Equipment, at Cost: |
||||||||||
Land |
633,917 | 648,988 | 546,204 | |||||||
Buildings |
4,467,387 | 4,334,236 | 4,010,439 | |||||||
Equipment |
12,216,388 | 11,813,618 | 11,325,450 | |||||||
Construction in progress |
698,873 | 577,460 | 604,813 | |||||||
|
18,016,565 | 17,374,302 | 16,486,906 | |||||||
Less: accumulated depreciation and amortization |
10,142,610 | 9,403,346 | 8,867,417 | |||||||
Net Property and Equipment |
7,873,955 | 7,970,956 | 7,619,489 | |||||||
Intangible Assets, net of amortization |
9,989,636 | 12,151,628 | 6,291,989 | |||||||
Goodwill |
15,705,380 | 15,930,077 | 13,200,174 | |||||||
Deferred Income Taxes and Other Assets |
2,560,923 | 1,901,613 | 1,023,214 | |||||||
|
$ | 60,276,893 | $ | 60,573,852 | $ | 52,581,623 | ||||
57
Abbott Laboratories and Subsidiaries
Consolidated Balance Sheet
(dollars in thousands)
| |
December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | |||||||
| |
|
(As Adjusted See Note 1) |
(As Adjusted See Note 1) |
|||||||
Liabilities and Shareholders' Investment |
||||||||||
Current Liabilities: |
||||||||||
Short-term borrowings |
$ | 2,347,859 | $ | 4,349,796 | $ | 4,978,438 | ||||
Trade accounts payable |
1,721,127 | 1,535,759 | 1,280,542 | |||||||
Salaries, wages and commissions |
1,260,121 | 1,328,665 | 1,117,410 | |||||||
Other accrued liabilities |
7,854,994 | 6,014,772 | 4,399,137 | |||||||
Dividends payable |
754,284 | 680,749 | 620,640 | |||||||
Income taxes payable |
514,947 | 1,307,723 | 442,140 | |||||||
Current portion of long-term debt |
1,026,896 | 2,044,970 | 211,182 | |||||||
Total Current Liabilities |
15,480,228 | 17,262,434 | 13,049,489 | |||||||
Long-term Debt |
12,039,822 | 12,523,517 | 11,266,294 | |||||||
Post-employment Obligations and Other Long-term Liabilities |
8,230,698 | 8,022,770 | 5,078,444 | |||||||
Commitments and Contingencies |
||||||||||
Shareholders' Investment: |
||||||||||
Preferred shares, one dollar par value Authorized — 1,000,000 shares, none issued |
— | — | — | |||||||
Common shares, without par value Authorized — 2,400,000,000 shares Issued at stated capital amount — Shares: 2011: 1,638,870,201; 2010: 1,619,689,876; 2009: 1,612,683,987 |
9,817,134 | 8,744,703 | 8,257,873 | |||||||
Common shares held in treasury, at cost — Shares: 2011: 68,491,382; 2010: 72,705,928; 2009: 61,516,398 |
(3,687,478 | ) | (3,916,823 | ) | (3,310,347 | ) | ||||
Earnings employed in the business |
20,907,362 | 19,215,768 | 17,342,694 | |||||||
Accumulated other comprehensive income (loss) |
(2,597,185 | ) | (1,366,846 | ) | 854,074 | |||||
Total Abbott Shareholders' Investment |
24,439,833 | 22,676,802 | 23,144,294 | |||||||
Noncontrolling Interests in Subsidiaries |
86,312 | 88,329 | 43,102 | |||||||
Total Shareholders' Investment |
24,526,145 | 22,765,131 | 23,187,396 | |||||||
|
$ | 60,276,893 | $ | 60,573,852 | $ | 52,581,623 | ||||
The accompanying notes to consolidated financial statements are an integral part of this statement.
58
Abbott Laboratories and Subsidiaries
Consolidated Statement of Shareholders' Investment
(dollars in thousands except per share data)
| |
Year Ended December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | |||||||
| |
|
(As Adjusted See Note 1) |
(As Adjusted See Note 1) |
|||||||
Common Shares: |
||||||||||
Beginning of Year |
||||||||||
Shares: 2011: 1,619,689,876; 2010: 1,612,683,987; 2009: 1,601,580,899 |
$ | 8,744,703 | $ | 8,257,873 | $ | 7,444,411 | ||||
Issued under incentive stock programs |
||||||||||
Shares: 2011: 19,180,325; 2010: 7,005,889; 2009: 11,103,088 |
954,148 | 316,071 | 545,724 | |||||||
Share-based compensation |
382,326 | 388,493 | 366,128 | |||||||
Issuance of restricted stock awards |
(264,043 | ) | (217,734 | ) | (98,390 | ) | ||||
End of Year |
||||||||||
Shares: 2011: 1,638,870,201; 2010: 1,619,689,876; 2009: 1,612,683,987 |
$ | 9,817,134 | $ | 8,744,703 | $ | 8,257,873 | ||||
Common Shares Held in Treasury: |
||||||||||
Beginning of Year |
||||||||||
Shares: 2011: 72,705,928; 2010: 61,516,398; 2009: 49,147,968 |
$ | (3,916,823 | ) | $ | (3,310,347 | ) | $ | (2,626,404 | ) | |
Issued under incentive stock programs |
||||||||||
Shares: 2011: 4,638,841; 2010: 4,166,200; 2009: 2,477,853 |
249,876 | 224,237 | 133,042 | |||||||
Purchased |
||||||||||
Shares: 2011: 424,295; 2010: 15,355,730; 2009: 14,846,283 |
(20,531 | ) | (830,713 | ) | (816,985 | ) | ||||
End of Year |
||||||||||
Shares: 2011: 68,491,382; 2010: 72,705,928; 2009: 61,516,398 |
$ | (3,687,478 | ) | $ | (3,916,823 | ) | $ | (3,310,347 | ) | |
Earnings Employed in the Business: |
||||||||||
Beginning of Year, as adjusted |
$ | 19,215,768 | $ | 17,342,694 | $ | 14,114,050 | ||||
Net earnings |
4,728,449 | 4,626,172 | 5,745,838 | |||||||
Cash dividends declared on common shares (per share — 2011: $1.92; 2010: $1.76; 2009: $1.60) |
(3,011,631 | ) | (2,731,584 | ) | (2,476,036 | ) | ||||
Effect of common and treasury share transactions |
(25,224 | ) | (21,514 | ) | (41,158 | ) | ||||
End of Year |
$ | 20,907,362 | $ | 19,215,768 | $ | 17,342,694 | ||||
Accumulated Other Comprehensive Income (Loss): |
||||||||||
Beginning of Year |
$ | (1,366,846 | ) | $ | 854,074 | $ | (1,163,839 | ) | ||
Other comprehensive income (loss) |
(1,230,339 | ) | (2,220,920 | ) | 2,017,913 | |||||
End of Year |
$ | (2,597,185 | ) | $ | (1,366,846 | ) | $ | 854,074 | ||
Noncontrolling Interests in Subsidiaries: |
||||||||||
Beginning of Year |
$ | 88,329 | $ | 43,102 | $ | 39,140 | ||||
Noncontrolling Interests' share of income, business combinations, net of distributions and share repurchases |
(2,017 | ) | 45,227 | 3,962 | ||||||
End of Year |
$ | 86,312 | $ | 88,329 | $ | 43,102 | ||||
The accompanying notes to consolidated financial statements are an integral part of this statement.
59
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 — Summary of Significant Accounting Policies
NATURE OF BUSINESS — Abbott's principal business is the discovery, development, manufacture and sale of a broad line of health care products.
CONCENTRATION OF RISK AND GUARANTEES — Due to the nature of its operations, Abbott is not subject to significant concentration risks relating to customers, products or geographic locations, except that three U.S. wholesalers accounted for 22 percent of trade receivables as of December 31, 2011 and 23 percent of trade receivables as of December 31, 2010 and 2009. In addition, governmental accounts in Greece, Portugal, Italy and Spain accounted for 23 percent, 21 percent, and 24 percent of total net trade receivables as of December 31, 2011, 2010, and 2009, respectively. Product warranties are not significant.
Abbott has no material exposures to off-balance sheet arrangements; no special purpose entities; nor activities that include non-exchange-traded contracts accounted for at fair value. Abbott has periodically entered into agreements in the ordinary course of business, such as assignment of product rights, with other companies which has resulted in Abbott becoming secondarily liable for obligations that Abbott was previously primarily liable. Since Abbott no longer maintains a business relationship with the other parties, Abbott is unable to develop an estimate of the maximum potential amount of future payments, if any, under these obligations. Based upon past experience, the likelihood of payments under these agreements is remote. Abbott periodically acquires a business or product rights in which Abbott agrees to pay contingent consideration based on attaining certain thresholds or based on the occurrence of certain events.
BASIS OF CONSOLIDATION AND CHANGE IN ACCOUNTING PRINCIPLE — 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.
The balance sheets as of December 31, 2010 and 2009 have been appropriately revised to include long-term deferred tax liabilities of $1.1 billion and $165 million, respectively, within Post-employment obligations and other long-term liabilities. Such amounts had previously been netted within Deferred income taxes and other assets.
In 2011, Abbott changed its presentation of comprehensive income to include a Consolidated Statement of Comprehensive Income in accordance with FASB ASC No. 220, "Comprehensive Income."
USE OF ESTIMATES — The financial statements have been prepared in accordance with generally accepted accounting principles in the United States and necessarily include amounts based on estimates
60
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
and assumptions by management. Actual results could differ from those amounts. Significant estimates include amounts for sales rebates, income taxes, pension and other post-employment benefits, valuation of intangible assets, litigation, derivative financial instruments, and inventory and accounts receivable exposures.
REVENUE RECOGNITION — Revenue from product sales is recognized upon passage of title and risk of loss to customers. Provisions for discounts, rebates and sales incentives to customers, and returns and other adjustments are provided for in the period the related sales are recorded. Sales incentives to customers are not material. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales. Revenue from the launch of a new product, from an improved version of an existing product, or for shipments in excess of a customer's normal requirements are recorded when the conditions noted above are met. In those situations, management records a returns reserve for such revenue, if necessary. In certain of Abbott's businesses, primarily within diagnostics and medical optics, Abbott participates in selling arrangements that include multiple deliverables (e.g., instruments, reagents, procedures, and service agreements). Under these arrangements, Abbott recognizes revenue upon delivery of the product or performance of the service and allocates the revenue based on the relative selling price of each deliverable, which is based primarily on vendor specific objective evidence. Sales of product rights for marketable products are recorded as revenue upon disposition of the rights. Revenue from license of product rights, or for performance of research or selling activities, is recorded over the periods earned.
INCOME TAXES — Deferred income taxes are provided for the tax effect of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at the enacted statutory rate to be in effect when the taxes are paid. U.S. income taxes are provided on those earnings of foreign subsidiaries which are intended to be remitted to the parent company. Deferred income taxes are not provided on undistributed earnings reinvested indefinitely in foreign subsidiaries as working capital and plant and equipment. Interest and penalties on income tax obligations are included in taxes on income.
EARNINGS PER SHARE — Unvested restricted stock units and awards that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method. Under the two-class method, net earnings are allocated between common shares and participating securities. Net earnings allocated to common shares in 2011, 2010 and 2009 were $4.714 billion, $4.613 billion and $5.733 billion, respectively.
PENSION AND POST-EMPLOYMENT BENEFITS — Abbott accrues for the actuarially determined cost of pension and post-employment benefits over the service attribution periods of the employees. Abbott must develop long-term assumptions, the most significant of which are the health care cost trend rates, discount rates and the expected return on plan assets. Differences between the expected long-term return on plan assets and the actual return are amortized over a five-year period. Actuarial losses and gains are amortized over the remaining service attribution periods of the employees under the corridor method.
FAIR VALUE MEASUREMENTS — For assets and liabilities that are measured using quoted prices in active markets, total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are valued by reference to similar assets or liabilities, adjusted for contract restrictions and other terms specific to that asset or liability. For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets or liabilities in active markets. For all
61
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
remaining assets and liabilities, fair value is derived using a fair value model, such as a discounted cash flow model or Black-Scholes model. Purchased intangible assets are recorded at fair value. The fair value of significant purchased intangible assets is based on independent appraisals. Abbott uses a discounted cash flow model to value intangible assets. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, the cost of capital, terminal values and market participants. Intangible assets, goodwill and indefinite-lived intangible assets are reviewed for impairment at least on a quarterly and annual basis, respectively.
SHARE-BASED COMPENSATION — The value of stock options and restricted stock awards and units are amortized over their service period, which could be shorter than the vesting period if an employee is retirement eligible, with a charge to compensation expense.
LITIGATION — Abbott accounts for litigation losses in accordance with FASB ASC No. 450, "Contingencies." Under ASC No. 450, loss contingency provisions are recorded for probable losses at management's best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. Legal fees are recorded as incurred.
CASH, CASH EQUIVALENTS AND INVESTMENTS — Cash equivalents consist of time deposits and certificates of deposit with original maturities of three months or less. Investments in marketable equity securities and certain investments in debt securities are classified as available-for-sale and are recorded at fair value with any unrealized holding gains or losses, net of tax, included in Accumulated other comprehensive income (loss). Investments in equity securities that are not traded on public stock exchanges are recorded at cost. Investments in other debt securities are classified as held-to-maturity, as management has both the intent and ability to hold these securities to maturity, and are reported at cost, net of any unamortized premium or discount. Income relating to these securities is reported as interest income.
Abbott reviews the carrying value of investments each quarter to determine whether an other than temporary decline in market value exists. Abbott considers factors affecting the investee, factors affecting the industry the investee operates in and general equity market trends. Abbott considers the length of time an investment's market value has been below carrying value and the near-term prospects for recovery to carrying value. When Abbott determines that an other than temporary decline has occurred, the investment is written down with a charge to Other (income) expense, net.
TRADE RECEIVABLE VALUATIONS — Accounts receivable are stated at their net realizable value. The allowance against gross trade receivables reflects the best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. Accounts receivable are charged off after all reasonable means to collect the full amount (including litigation, where appropriate) have been exhausted.
INVENTORIES — Inventories are stated at the lower of cost (first-in, first-out basis) or market. Cost includes material and conversion costs.
62
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
PROPERTY AND EQUIPMENT — Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. The following table shows estimated useful lives of property and equipment:
Classification
|
Estimated Useful Lives | |
|---|---|---|
Buildings |
10 to 50 years (average 27 years) | |
Equipment |
3 to 20 years (average 11 years) |
PRODUCT LIABILITY — Abbott accrues for product liability claims, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The liabilities are adjusted quarterly as additional information becomes available. Receivables for insurance recoveries for product liability claims are recorded as assets, on an undiscounted basis, when it is probable that a recovery will be realized. Product liability losses are self-insured.
RESEARCH AND DEVELOPMENT COSTS — Internal research and development costs are expensed as incurred. Clinical trial costs incurred by third parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development arrangements, the milestone payment obligations are expensed when the milestone results are achieved.
ACQUIRED IN-PROCESS AND COLLABORATIONS RESEARCH AND DEVELOPMENT (IPR&D) — The initial costs of rights to IPR&D projects obtained in an asset acquisition are expensed as IPR&D unless the project has an alternative future use. These costs include initial payments incurred prior to regulatory approval in connection with research and development collaboration agreements that provide rights to develop, manufacture, market and/or sell pharmaceutical products. The fair value of IPR&D projects acquired in a business combination are capitalized and accounted for as indefinite-lived intangible assets.
Note 2 — Supplemental Financial Information
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(dollars in millions) |
|||||||||
Long-term Investments: |
||||||||||
Equity securities |
$ | 317 | $ | 240 | $ | 153 | ||||
Note receivable from Boston Scientific, 4% interest |
— | — | 880 | |||||||
Other |
61 | 62 | 100 | |||||||
Total |
$ | 378 | $ | 302 | $ | 1,133 | ||||
The judgment entered by the U.S. District Court for the Eastern District of Texas against Abbott in its litigation with New York University and Centocor, Inc. required Abbott to secure the judgment in the event that its appeal to the Federal Circuit court was unsuccessful in overturning the district court's decision. In the first quarter of 2010, Abbott deposited $1.87 billion with an escrow agent and considered these assets to be restricted. On February 23, 2011, the Federal Circuit reversed the district court's final judgment and found Centocor's patent invalid. On April 25, 2011 Centocor petitioned the Federal Circuit
63
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 2 — Supplemental Financial Information (Continued)
to rehear and reconsider the decision. In June 2011 the Federal Circuit denied Centocor's petition and the restrictions on the funds were lifted.
As discussed in Note 1, Other (income) expense, net, for 2011 includes a charge of $137 million to recognize the cumulative immaterial impacts to 2009 and 2010 relating to the change in year end for foreign subsidiaries. In addition, 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.
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(dollars in millions) |
|||||||||
Other Accrued Liabilities: |
||||||||||
Accrued rebates payable to government agencies |
$ | 1,049 | $ | 900 | $ | 641 | ||||
Accrued other rebates (a) |
1,238 | 862 | 668 | |||||||
All other (b) |
5,568 | 4,253 | 3,090 | |||||||
Total |
$ | 7,855 | $ | 6,015 | $ | 4,399 | ||||
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(dollars in millions) |
|||||||||
Post-employment Obligations and Other Long-term Liabilities: |
||||||||||
Defined benefit pension plans and post-employment medical and dental plans for significant plans |
$ | 3,301 | $ | 2,425 | $ | 2,394 | ||||
Deferred income taxes |
703 | 1,112 | 165 | |||||||
All other (c) |
4,227 | 4,486 | 2,519 | |||||||
Total |
$ | 8,231 | $ | 8,023 | $ | 5,078 | ||||
64
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 3 — Financial Instruments, Derivatives and Fair Value Measures
Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, totaling $1.6 billion, $1.3 billion and $2.0 billion at December 31, 2011, 2010 and 2009, respectively, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value. Accumulated gains and losses as of December 31, 2011 will be included in Cost of products sold at the time the products are sold, generally through the next twelve months. The amount of hedge ineffectiveness was not significant in 2011, 2010 and 2009.
Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity. For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, in exchange for primarily U.S. dollars and other European currencies. For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar, European currencies and Japanese yen. At December 31, 2011, 2010 and 2009, Abbott held $15.7 billion, $10.8 billion and $7.5 billion, respectively, of such foreign currency forward exchange contracts.
Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $680 million, $650 million and $575 million as of December 31, 2011, 2010 and 2009, respectively. Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.
Abbott is a party to interest rate hedge contracts totaling $6.8 billion, $7.3 billion and $5.5 billion at December 31, 2011, 2010 and 2009, respectively, to manage its exposure to changes in the fair value of fixed-rate debt. These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt. Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount. No hedge ineffectiveness was recorded in income in 2011, 2010 and 2009 for these hedges.
Gross unrealized holding gains (losses) on available-for-sale equity securities totaled $64 million and $(2) million, respectively, at December 31, 2011, $40 million and $(1) million, respectively, at December 31, 2010; and $42 million and $(3) million, respectively, at December 31, 2009.
65
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 3 — Financial Instruments, Derivatives and Fair Value Measures (Continued)
The following table summarizes the amounts and location of certain derivative financial instruments as of December 31:
| |
Fair Value — Assets | Fair Value — Liabilities | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | Balance Sheet Caption | 2011 | 2010 | 2009 | Balance Sheet Caption | ||||||||||||||
| |
(dollars in millions) |
|||||||||||||||||||||
Interest rate swaps designated as fair value hedges |
$ | 598 | $ | 138 | $ | 80 | Deferred income taxes and other assets | $ | — | $ | 36 | $ | 218 | Post-employment obligations and other long-term liabilities | ||||||||
Interest rate swaps designated as fair value hedges |
— | 8 | — | Other prepaid expenses and receivables | — | — | — | n/a | ||||||||||||||
Foreign currency forward exchange contracts — |
||||||||||||||||||||||
Hedging instruments |
115 | 16 | — | Other prepaid expenses and receivables | 2 | 10 | 27 | Other accrued liabilities | ||||||||||||||
Others not designated as hedges |
165 | 109 | 31 | 179 | 120 | 87 | ||||||||||||||||
Debt designated as a hedge of net investment in a foreign subsidiary |
— | — | — | n/a | 680 | 650 | 575 | Short-term borrowings | ||||||||||||||
|
$ | 878 | $ | 271 | $ | 111 | $ | 861 | $ | 816 | $ | 907 | ||||||||||
The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative financial instruments. The amount of hedge ineffectiveness was not significant in 2011, 2010 and 2009 for these hedges.
| |
Gain (loss) Recognized in Other Comprehensive Income (loss) |
Income (expense) and Gain (loss) Reclassified into Income |
|
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | Income Statement Caption | |||||||||||||
| |
(dollars in millions) |
|
||||||||||||||||||
Foreign currency forward exchange contracts designated as cash flow hedges |
$ | 65 | $ | 170 | $ | (65 | ) | $ | (26 | ) | $ | 63 | $ | (64 | ) | Cost of products sold | ||||
Debt designated as a hedge of net investment in a foreign subsidiary |
(30 | ) | (75 | ) | 15 | — | — | — | n/a | |||||||||||
Interest rate swaps designated as fair value hedges |
n/a | n/a | n/a | 488 | 248 | (309 | ) | Interest expense | ||||||||||||
Foreign currency forward exchange contracts not designated as hedges |
n/a | n/a | n/a | (11 | ) | 155 | (106 | ) | Net foreign exchange (gain) loss | |||||||||||
The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.
The carrying values and fair values of certain financial instruments as of December 31 are shown in the table below. The carrying values of all other financial instruments approximate their estimated fair
66
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 3 — Financial Instruments, Derivatives and Fair Value Measures (Continued)
values. The counterparties to financial instruments consist of select major international financial institutions. Abbott does not expect any losses from nonperformance by these counterparties.
| |
2011 | 2010 | 2009 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
| |
(dollars in millions) |
||||||||||||||||||
Investment Securities: |
|||||||||||||||||||
Current |
$ | 20 | $ | 20 | $ | — | $ | — | $ | — | $ | — | |||||||
Long-term: |
|||||||||||||||||||
Equity securities |
317 | 317 | 240 | 240 | 153 | 153 | |||||||||||||
Note receivable |
— | — | — | — | 880 | 925 | |||||||||||||
Other |
61 | 42 | 62 | 43 | 100 | 79 | |||||||||||||
Total Long-term Debt |
(13,067 | ) | (15,129 | ) | (14,568 | ) | (15,723 | ) | (11,477 | ) | (12,304 | ) | |||||||
Foreign Currency Forward Exchange Contracts: |
|||||||||||||||||||
Receivable position |
280 | 280 | 125 | 125 | 31 | 31 | |||||||||||||
(Payable) position |
(181 | ) | (181 | ) | (130 | ) | (130 | ) | (114 | ) | (114 | ) | |||||||
Interest Rate Hedge Contracts: |
|||||||||||||||||||
Receivable position |
598 | 598 | 146 | 146 | 80 | 80 | |||||||||||||
(Payable) position |
— | — | (36 | ) | (36 | ) | (218 | ) | (218 | ) | |||||||||
67
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 3 — Financial Instruments, Derivatives and Fair Value Measures (Continued)
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:
| |
|
Basis of Fair Value Measurement | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Outstanding Balances |
Quoted Prices in Active Markets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
|||||||||
| |
(dollars in millions) |
||||||||||||
December 31, 2011: |
|||||||||||||
Equity securities |
$ | 93 | $ | 93 | $ | — | $ | — | |||||
Interest rate swap financial instruments |
598 | — | 598 | — | |||||||||
Foreign currency forward exchange contracts |
280 | — | 280 | — | |||||||||
Total Assets |
$ | 971 | $ | 93 | $ | 878 | $ | — | |||||
Fair value of hedged long-term debt |
$ | 7,427 | $ | — | $ | 7,427 | $ | — | |||||
Foreign currency forward exchange contracts |
181 | — | 181 | — | |||||||||
Contingent consideration related to business combinations |
423 | — | — | 423 | |||||||||
Total Liabilities |
$ | 8,031 | $ | — | $ | 7,608 | $ | 423 | |||||
December 31, 2010: |
|||||||||||||
Equity securities |
$ | 75 | $ | 75 | $ | — | $ | — | |||||
Interest rate swap financial instruments |
146 | — | 146 | — | |||||||||
Foreign currency forward exchange contracts |
125 | — | 125 | — | |||||||||
Total Assets |
$ | 346 | $ | 75 | $ | 271 | $ | — | |||||
Fair value of hedged long-term debt |
$ | 7,444 | $ | — | $ | 7,444 | $ | — | |||||
Interest rate swap financial instruments |
36 | — | 36 | — | |||||||||
Foreign currency forward exchange contracts |
130 | — | 130 | — | |||||||||
Contingent consideration related to business combinations |
365 | — | — | 365 | |||||||||
Total Liabilities |
$ | 7,975 | $ | — | $ | 7,610 | $ | 365 | |||||
December 31, 2009: |
|||||||||||||
Equity and other securities |
$ | 104 | $ | 75 | $ | — | $ | 29 | |||||
Interest rate swap financial instruments |
80 | — | 80 | — | |||||||||
Foreign currency forward exchange contracts |
31 | — | 31 | — | |||||||||
Total Assets |
$ | 215 | $ | 75 | $ | 111 | $ | 29 | |||||
Fair value of hedged long-term debt |
$ | 5,362 | $ | — | $ | 5,362 | $ | — | |||||
Interest rate swap financial instruments |
218 | — | 218 | — | |||||||||
Foreign currency forward exchange contracts |
114 | — | 114 | — | |||||||||
Total Liabilities |
$ | 5,694 | $ | — | $ | 5,694 | $ | — | |||||
The fair value of the debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis. The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money, exchange and other changes in fair value.
68
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 4 — Post-Employment Benefits
Retirement plans consist of defined benefit, defined contribution and medical and dental plans. Information for Abbott's major defined benefit plans and post-employment medical and dental benefit plans is as follows: (dollars in millions)
| |
Defined Benefit Plans | Medical and Dental Plans |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||
Projected benefit obligations, January 1 |
$ | 8,606 | $ | 6,852 | $ | 5,541 | $ | 1,673 | $ | 1,705 | $ | 1,443 | |||||||
Service cost — benefits earned during the year |
332 | 288 | 221 | 55 | 60 | 45 | |||||||||||||
Interest cost on projected benefit obligations |
446 | 421 | 368 | 88 | 101 | 94 | |||||||||||||
Losses (gains), primarily changes in discount rates, plan design changes, law changes and differences between actual and estimated health care costs |
608 | 565 | 747 | (104 | ) | (153 | ) | 175 | |||||||||||
Benefits paid |
(294 | ) | (289 | ) | (251 | ) | (62 | ) | (74 | ) | (58 | ) | |||||||
Acquisition of Solvay's pharmaceuticals business |
— | 1,045 | — | — | 28 | — | |||||||||||||
Settlement |
(776 | ) | — | — | — | — | — | ||||||||||||
Other, primarily foreign currency translation |
41 | (276 | ) | 226 | 7 | 6 | 6 | ||||||||||||
Projected benefit obligations, December 31 |
$ | 8,963 | $ | 8,606 | $ | 6,852 | $ | 1,657 | $ | 1,673 | $ | 1,705 | |||||||
Plans' assets at fair value, January 1 |
$ | 7,451 | $ | 5,812 | $ | 3,997 | $ | 396 | $ | 341 | $ | 266 | |||||||
Actual return on plans' assets |
29 | 782 | 1,096 | 5 | 55 | 62 | |||||||||||||
Company contributions |
394 | 525 | 862 | 40 | 74 | 71 | |||||||||||||
Benefits paid |
(294 | ) | (289 | ) | (251 | ) | (52 | ) | (74 | ) | (58 | ) | |||||||
Acquisition of Solvay's pharmaceuticals business |
— | 763 | — | — | — | — | |||||||||||||
Settlement |
(776 | ) | — | — | — | — | — | ||||||||||||
Other, primarily foreign currency translation |
157 | (142 | ) | 108 | — | — | — | ||||||||||||
Plans' assets at fair value, December 31 |
$ | 6,961 | $ | 7,451 | $ | 5,812 | $ | 389 | $ | 396 | $ | 341 | |||||||
Projected benefit obligations greater than plans' assets, December 31 |
$ | (2,002 | ) | $ | (1,155 | ) | $ | (1,040 | ) | $ | (1,268 | ) | $ | (1,277 | ) | $ | (1,364 | ) | |
Long-term assets |
$ | 66 | $ | 27 | $ | 21 | $ | — | $ | — | $ | — | |||||||
Short-term liabilities |
(35 | ) | (34 | ) | (31 | ) | — | — | — | ||||||||||
Long-term liabilities |
(2,033 | ) | (1,148 | ) | (1,030 | ) | (1,268 | ) | (1,277 | ) | (1,364 | ) | |||||||
Net liability |
$ | (2,002 | ) | $ | (1,155 | ) | $ | (1,040 | ) | $ | (1,268 | ) | $ | (1,277 | ) | $ | (1,364 | ) | |
Amounts Recognized in Accumulated Other Comprehensive Income (loss): |
|||||||||||||||||||
Actuarial losses, net |
$ | 3,822 | $ | 2,879 | $ | 2,699 | $ | 601 | $ | 713 | $ | 685 | |||||||
Prior service cost (credits) |
25 | 30 | 34 | (364 | ) | (406 | ) | (184 | ) | ||||||||||
Total |
$ | 3,847 | $ | 2,909 | $ | 2,733 | $ | 237 | $ | 307 | $ | 501 | |||||||
The projected benefit obligations for non-U.S. defined benefit plans was $2.3 billion, $3.0 billion and $2.0 billion at December 31, 2011, 2010 and 2009, respectively. The accumulated benefit obligations for all defined benefit plans was $7.7 billion, $7.5 billion and $5.8 billion at December 31, 2011, 2010 and 2009, respectively. For plans where the accumulated benefit obligations exceeded plan assets at December 31, 2011, 2010 and 2009, the aggregate accumulated benefit obligations were $6.7 billion, $2.0 billion and
69
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 4 — Post-Employment Benefits (Continued)
$1.5 billion, respectively; the projected benefit obligations were $7.9 billion, $2.2 billion and $1.8 billion, respectively; and the aggregate plan assets were $5.8 billion, $1.1 billion and $780 million, respectively.
| |
Defined Benefit Plans | Medical and Dental Plans |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||
| |
(dollars in millions) |
||||||||||||||||||
Service cost — benefits earned during the year |
$ | 332 | $ | 288 | $ | 221 | $ | 55 | $ | 60 | $ | 45 | |||||||
Interest cost on projected benefit obligations |
446 | 421 | 368 | 88 | 101 | 94 | |||||||||||||
Expected return on plans' assets |
(608 | ) | (571 | ) | (506 | ) | (34 | ) | (31 | ) | (24 | ) | |||||||
Settlement |
40 | — | — | — | — | — | |||||||||||||
Amortization of actuarial losses |
163 | 136 | 52 | 38 | 38 | 30 | |||||||||||||
Amortization of prior service cost (credits) |
4 | 4 | 4 | (42 | ) | (22 | ) | (22 | ) | ||||||||||
Total cost |
$ | 377 | $ | 278 | $ | 139 | $ | 105 | $ | 146 | $ | 123 | |||||||
Other comprehensive income (loss) for 2011 includes amortization of actuarial losses and prior service cost of $163 million and $4 million, respectively, and net actuarial losses of $1.1 billion for defined benefit plans and amortization of actuarial losses and prior service credits of $38 million and $42 million, respectively, and net actuarial gains of $66 million for medical and dental plans. Other comprehensive income (loss) for 2010 includes amortization of actuarial losses and prior service cost of $136 million and $4 million, respectively, and net actuarial losses of $305 million for defined benefit plans and amortization of actuarial losses and prior service credits of $38 million and $22 million, respectively, and net actuarial gains of $177 million for medical and dental plans. Other comprehensive income (loss) for 2009 includes amortization of actuarial losses and prior service cost of $52 million and $4 million, respectively, and net actuarial losses of $197 million for defined benefit plans and amortization of actuarial losses and prior service credits of $30 million and $22 million, respectively, and net actuarial losses of $128 million for medical and dental plans. The pretax amount of actuarial losses and prior service cost (credits) included in Accumulated other comprehensive income (loss) at December 31, 2011 that is expected to be recognized in the net periodic benefit cost in 2012 is $253 million and $4 million, respectively, for defined benefit pension plans and $35 million and $(42) million, respectively, for medical and dental plans.
The weighted average assumptions used to determine benefit obligations for defined benefit plans and medical and dental plans are as follows:
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Discount rate |
5.0 | % | 5.4 | % | 5.8 | % | ||||
Expected aggregate average long-term change in compensation |
5.3 | % | 5.1 | % | 5.2 | % | ||||
70
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 4 — Post-Employment Benefits (Continued)
The weighted average assumptions used to determine the net cost for defined benefit plans and medical and dental plans are as follows:
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Discount rate |
5.4 | % | 5.8 | % | 6.7 | % | ||||
Expected return on plan assets |
7.8 | % | 7.8 | % | 8.2 | % | ||||
Expected aggregate average long-term change in compensation |
5.1 | % | 4.9 | % | 4.3 | % | ||||
The assumed health care cost trend rates for medical and dental plans at December 31 were as follows:
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Health care cost trend rate assumed for the next year |
7 | % | 7 | % | 7 | % | ||||
Rate that the cost trend rate gradually declines to |
5 | % | 5 | % | 5 | % | ||||
Year that rate reaches the assumed ultimate rate |
2019 | 2016 | 2016 | |||||||
The discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits. The health care cost trend rates represent Abbott's expected annual rates of change in the cost of health care benefits and is a forward projection of health care costs as of the measurement date. A one-percentage point increase/(decrease) in the assumed health care cost trend rate would increase/(decrease) the accumulated post-employment benefit obligations as of December 31, 2011, by $231 million/$(188) million, and the total of the service and interest cost components of net post-employment health care cost for the year then ended by approximately $25 million/$(20) million.
71
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 4 — Post-Employment Benefits (Continued)
The following table summarizes the bases used to measure defined benefit plans' assets at fair value:
| |
|
Basis of Fair Value Measurement | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Outstanding Balances |
Quoted Prices in Active Markets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
|||||||||
| |
(dollars in millions) |
||||||||||||
December 31, 2011: |
|||||||||||||
Equities: |
|||||||||||||
U.S. large cap (a) |
$ | 1,470 | $ | 1,449 | $ | 21 | $ | — | |||||
U.S. mid cap (b) |
423 | 152 | 271 | — | |||||||||
International (c) |
1,217 | 485 | 732 | — | |||||||||
Fixed income securities: |
|||||||||||||
U.S. government securities (d) |
857 | 370 | 487 | — | |||||||||
Corporate debt instruments (e) |
527 | 223 | 304 | — | |||||||||
Non-U.S. government securities (f) |
450 | 228 | 222 | — | |||||||||
Other (g) |
45 | 21 | 24 | — | |||||||||
Absolute return funds (h) |
1,709 | 334 | 751 | 624 | |||||||||
Commodities (i) |
183 | 8 | 165 | 10 | |||||||||
Other (j) |
80 | 78 | — | 2 | |||||||||
|
$ | 6,961 | $ | 3,348 | $ | 2,977 | $ | 636 | |||||
December 31, 2010: |
|||||||||||||
Equities: |
|||||||||||||
U.S. large cap (a) |
$ | 1,523 | $ | 1,499 | $ | 24 | $ | — | |||||
U.S. mid cap (b) |
437 | 162 | 275 | — | |||||||||
International (c) |
1,552 | 758 | 794 | — | |||||||||
Fixed income securities: |
|||||||||||||
U.S. government securities (d) |
793 | 355 | 438 | — | |||||||||
Corporate debt instruments (e) |
524 | 237 | 286 | 1 | |||||||||
Non-U.S. government securities (f) |
758 | 172 | 586 | — | |||||||||
Other (g) |
40 | 20 | 19 | 1 | |||||||||
Absolute return funds (h) |
1,426 | 258 | 582 | 586 | |||||||||
Commodities (i) |
242 | 5 | 234 | 3 | |||||||||
Other (j) |
156 | 156 | — | — | |||||||||
|
$ | 7,451 | $ | 3,622 | $ | 3,238 | $ | 591 | |||||
December 31, 2009: |
|||||||||||||
Equities: |
|||||||||||||
U.S. large cap (a) |
$ | 1,267 | $ | 1,247 | $ | 20 | $ | — | |||||
U.S. mid cap (b) |
339 | 105 | 234 | — | |||||||||
International (c) |
1,186 | 455 | 731 | — | |||||||||
Fixed income securities: |
|||||||||||||
U.S. government securities (d) |
753 | 321 | 430 | 2 | |||||||||
Corporate debt instruments (e) |
478 | 203 | 272 | 3 | |||||||||
Non-U.S. government securities (f) |
346 | 163 | 183 | — | |||||||||
Other (g) |
46 | 21 | 23 | 2 | |||||||||
Absolute return funds (h) |
1,296 | 237 | 536 | 523 | |||||||||
Other (j) |
101 | 74 | 27 | — | |||||||||
|
$ | 5,812 | $ | 2,826 | $ | 2,456 | $ | 530 | |||||
72
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 4 — Post-Employment Benefits (Continued)
Equities that are valued using quoted prices are valued at the published market prices. Equities in a common collective trust or a registered investment company that are valued using significant other observable inputs are valued at the net asset value (NAV) provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund minus its liabilities. Fixed income securities that are valued using significant other observable inputs are valued at prices obtained from independent financial service industry-recognized vendors. Absolute return funds and commodities are valued at the NAV provided by the fund administrator.
The following table summarizes the change in the value of assets that are measured using significant unobservable inputs:
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(dollars in millions) |
|||||||||
January 1 |
$ | 591 | $ | 530 | $ | 303 | ||||
Transfers (out of) in from other categories |
(1 | ) | (37 | ) | 3 | |||||
Actual return on plan assets: |
||||||||||
Assets on hand at year end |
(14 | ) | 41 | 99 | ||||||
Assets sold during the year |
(1 | ) | (2 | ) | (5 | ) | ||||
Purchases, sales and settlements, net |
61 | 59 | 130 | |||||||
December 31 |
$ | 636 | $ | 591 | $ | 530 | ||||
The investment mix of equity securities, fixed income and other asset allocation strategies is based upon achieving a desired return, balancing higher return, more volatile equity securities, and lower return, less volatile fixed income securities. Investment allocations are made across a range of markets, industry sectors, capitalization sizes, and in the case of fixed income securities, maturities and credit quality. The
73
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 4 — Post-Employment Benefits (Continued)
plans do not directly hold any securities of Abbott. There are no known significant concentrations of risk in the plans' assets. Abbott's medical and dental plans' assets are invested in a similar mix as the pension plan assets.
The plans' expected return on assets, as shown above, is based on management's expectations of long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plans are invested, as well as current economic and capital market conditions.
Abbott funds its domestic pension plans according to IRS funding limitations. International pension plans are funded according to similar regulations. Abbott funded $394 million in 2011, $525 million in 2010 and $862 million in 2009 to defined pension plans. Abbott expects pension funding for its main domestic pension plan of $200 million annually.
Total benefit payments expected to be paid to participants, which includes payments funded from company assets as well as paid from the plans, are as follows: (dollars in millions)
| |
Defined Benefit Plans |
Medical and Dental Plans |
|||||
|---|---|---|---|---|---|---|---|
2012 |
$ | 284 | $ | 80 | |||
2013 |
297 | 82 | |||||
2014 |
311 | 87 | |||||
2015 |
331 | 92 | |||||
2016 |
351 | 98 | |||||
2017 to 2021 |
2,082 | 592 | |||||
The Abbott Stock Retirement Plan is the principal defined contribution plan. Abbott's contributions to this plan were $151 million in 2011, $147 million in 2010 and $137 million in 2009.
Abbott provides certain other post-employment benefits, primarily salary continuation plans, to qualifying domestic employees, and accrues for the related cost over the service lives of the employees.
Note 5 — Taxes on Earnings
Taxes on earnings reflect the annual effective rates, including charges for interest and penalties. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. U.S. income taxes are provided on those earnings of foreign subsidiaries which are intended to be remitted to the parent company. Abbott does not record deferred income taxes on earnings reinvested indefinitely in foreign subsidiaries. Undistributed earnings reinvested indefinitely in foreign subsidiaries as working capital and plant and equipment aggregated $31.9 billion at December 31, 2011. It is not practicable to determine the amount of deferred income taxes not provided on these earnings. In the U.S., Abbott's federal income tax returns through 2008 are settled except for one item, and the income tax returns for years after 2008 are open. There are numerous other income tax jurisdictions for which tax returns are not yet settled, none of which are individually significant. Reserves for interest and penalties are not significant.
74
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 5 — Taxes on Earnings (Continued)
Earnings before taxes, and the related provisions for taxes on earnings, were as follows: (dollars in millions)
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Earnings Before Taxes: |
||||||||||
Domestic |
$ | 364 | $ | (275 | ) | $ | 1,502 | |||
Foreign |
4,835 | 5,988 | 5,692 | |||||||
Total |
$ | 5,199 | $ | 5,713 | $ | 7,194 | ||||
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Taxes on Earnings: |
||||||||||
Current: |
||||||||||
Domestic |
$ | (586 | ) | $ | 1,462 | $ | 194 | |||
Foreign |
1,187 | 835 | 521 | |||||||
Total current |
601 | 2,297 | 715 | |||||||
Deferred: |
||||||||||
Domestic |
162 | (1,068 | ) | 905 | ||||||
Foreign |
(293 | ) | (142 | ) | (172 | ) | ||||
Total deferred |
(131 | ) | (1,210 | ) | 733 | |||||
Total |
$ | 470 | $ | 1,087 | $ | 1,448 | ||||
Differences between the effective income tax rate and the U.S. statutory tax rate were as follows:
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Statutory tax rate on earnings |
35.0 | % | 35.0 | % | 35.0 | % | ||||
Benefit of lower foreign tax rates and tax exemptions |
(22.9 | ) | (19.4 | ) | (16.4 | ) | ||||
Resolution of certain tax positions pertaining to prior years |
(11.2 | ) | — | — | ||||||
Effect of non-deductible litigation reserve |
9.1 | — | — | |||||||
State taxes, net of federal benefit |
(0.4 | ) | 0.4 | 1.0 | ||||||
All other, net |
(0.6 | ) | 3.0 | 0.5 | ||||||
Effective tax rate on earnings |
9.0 | % | 19.0 | % | 20.1 | % | ||||
As of December 31, 2011, 2010 and 2009, total deferred tax assets were $6.3 billion, $6.1 billion and $4.4 billion, respectively, and total deferred tax liabilities were $2.9 billion, $3.0 billion and $1.8 billion, respectively. Abbott has incurred losses in a foreign jurisdiction where realization of the future economic benefit is so remote that the benefit is not reflected as a deferred tax asset. Valuation allowances for
75
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 5 — Taxes on Earnings (Continued)
recorded deferred tax assets were not significant. The tax effect of the differences that give rise to deferred tax assets and liabilities were as follows: (dollars in millions)
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Compensation and employee benefits |
$ | 1,658 | $ | 1,327 | $ | 1,332 | ||||
Trade receivable reserves |
492 | 525 | 369 | |||||||
Inventory reserves |
212 | 293 | 251 | |||||||
Deferred intercompany profit |
711 | 255 | 232 | |||||||
State income taxes |
227 | 233 | 187 | |||||||
Depreciation |
(164 | ) | (64 | ) | (93 | ) | ||||
Acquired in-process research and development and other accruals and reserves not currently deductible |
2,886 | 3,401 | 1,889 | |||||||
Other, primarily the excess of book basis over tax basis of intangible assets |
(2,636 | ) | (2,905 | ) | (1,593 | ) | ||||
Total |
$ | 3,386 | $ | 3,065 | $ | 2,574 | ||||
The following table summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled. (dollars in millions)
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
January 1 |
$ | 2,724 | $ | 2,172 | $ | 1,523 | ||||
Increase due to current year tax positions |
588 | 635 | 544 | |||||||
Increase due to prior year tax positions |
282 | 171 | 234 | |||||||
Decrease due to prior year tax positions |
(824 | ) | (94 | ) | (90 | ) | ||||
Settlements |
(647 | ) | (160 | ) | (39 | ) | ||||
December 31 |
$ | 2,123 | $ | 2,724 | $ | 2,172 | ||||
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is approximately $1.9 billion. Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by up to $550 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters.
Note 6 — Segment and Geographic Area Information
Abbott's principal business is the discovery, development, manufacture and sale of a broad line of health care products. Abbott's products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians' offices and government agencies throughout the world. Effective January 1, 2011, Abbott's segments were reorganized to reflect the shift of international branded generic pharmaceutical products to a newly formed division, Established Pharmaceuticals, and the combination of the domestic and international proprietary pharmaceuticals businesses into one global
76
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 6 — Segment and Geographic Area Information (Continued)
division. The segment information below has been adjusted to reflect the reorganizations. Abbott's reportable segments are as follows:
Proprietary Pharmaceutical Products — Worldwide sales of a broad line of proprietary pharmaceutical products.
Established Pharmaceutical Products — International sales of a broad line of branded generic pharmaceutical products.
Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.
Diagnostic Products — Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites. For segment reporting purposes, the Core Laboratories Diagnostics, Molecular Diagnostics, Point of Care and Ibis diagnostic divisions are aggregated and reported as the Diagnostic Products segment.
Vascular Products — Worldwide sales of coronary, endovascular, structural heart, vessel closure and other medical device products.
Non-reportable segments include the Diabetes Care and Medical Optics segments.
Abbott's underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings. The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost. Remaining costs, if any, are not allocated to segments. For acquisitions prior to 2006, substantially all intangible assets and related amortization are not allocated to segments. In addition, no intangible assets or related amortization are allocated to the Established Pharmaceutical Products segment. The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements. (dollars in millions)
| |
Net Sales to External Customers (a) | Operating Earnings (a) |
Depreciation and Amortization |
Additions to Long-term Assets |
Total Assets | |||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||
Proprietary Pharmaceuticals |
$ | 17,022 | $ | 15,331 | $ | 13,545 | $ | 7,155 | $ | 6,545 | $ | 5,748 | $ | 639 | $ | 553 | $ | 346 | $ | 168 | $ | 2,779 | $ | 146 | $ | 10,974 | $ | 11,421 | $ | 8,725 | ||||||||||||||||
Established Pharmaceuticals (b) |
5,413 | 4,519 | 2,941 | 1,301 | 985 | 695 | 169 | 148 | 38 | 183 | 2,804 | 93 | 6,986 | 6,730 | 2,490 | |||||||||||||||||||||||||||||||
Nutritionals |
6,006 | 5,532 | 5,284 | 797 | 777 | 910 | 183 | 177 | 157 | 205 | 163 | 173 | 3,241 | 3,244 | 3,368 | |||||||||||||||||||||||||||||||
Diagnostics |
4,126 | 3,794 | 3,578 | 766 | 559 | 406 | 339 | 244 | 282 | 409 | 319 | 453 | 3,429 | 3,462 | 3,688 | |||||||||||||||||||||||||||||||
Vascular |
3,333 | 3,194 | 2,692 | 980 | 910 | 557 | 233 | 252 | 238 | 148 | 528 | 611 | 5,272 | 5,390 | 5,403 | |||||||||||||||||||||||||||||||
Total Reportable Segments |
35,900 | 32,370 | 28,040 | $ | 10,999 | $ | 9,776 | $ | 8,316 | $ | 1,563 | $ | 1,374 | $ | 1,061 | $ | 1,113 | $ | 6,593 | $ | 1,476 | $ | 29,902 | $ | 30,247 | $ | 23,674 | |||||||||||||||||||
Other |
2,951 | 2,797 | 2,725 | |||||||||||||||||||||||||||||||||||||||||||
Net Sales |
$ | 38,851 | $ | 35,167 | $ | 30,765 | ||||||||||||||||||||||||||||||||||||||||
77
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 6 — Segment and Geographic Area Information (Continued)
| |
2011 | 2010 | 2009 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(dollars in millions) |
||||||||||
Total Reportable Segment Operating Earnings |
$ | 10,999 | $ | 9,776 | $ | 8,316 | |||||
Corporate functions and benefit plans costs |
(529 | ) | (558 | ) | (354 | ) | |||||
Non-reportable segments |
276 | 139 | 209 | ||||||||
Net interest expense |
(445 | ) | (448 | ) | (382 | ) | |||||
Acquired in-process and collaborations research and development |
(673 | ) | (313 | ) | (170 | ) | |||||
Share-based compensation |
(383 | ) | (387 | ) | (366 | ) | |||||
Other, net (c) |
(4,046 | ) | (2,496 | ) | (59 | ) | |||||
Consolidated Earnings Before Taxes |
$ | 5,199 | $ | 5,713 | $ | 7,194 | |||||
| |
|
|
|
2011 | 2010 | 2009 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
|
|
(dollars in millions) |
||||||||||||||||
Total Reportable Segment Assets |
$ | 29,902 | $ | 30,247 | $ | 23,674 | ||||||||||||||
Cash, investments and restricted funds |
8,476 | 7,626 | 11,065 | |||||||||||||||||
Current deferred income taxes |
2,701 | 3,076 | 2,364 | |||||||||||||||||
Non-reportable segments |
4,173 | 5,385 | 5,371 | |||||||||||||||||
All other, net, primarily goodwill and intangible assets not allocated to reportable segments |
15,025 | 14,240 | 10,108 | |||||||||||||||||
Total Assets |
$ | 60,277 | $ | 60,574 | $ | 52,582 | ||||||||||||||
78
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 6 — Segment and Geographic Area Information (Continued)
| |
Net Sales to External Customers (d) |
Long-term Assets | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||
| |
(dollars in millions) |
|||||||||||||||||||
United States |
$ | 16,014 | $ | 15,194 | $ | 14,453 | $ | 15,867 | $ | 16,769 | $ | 14,886 | ||||||||
Japan |
2,342 | 2,025 | 1,590 | 1,225 | 1,172 | 1,161 | ||||||||||||||
Germany |
1,759 | 1,846 | 1,481 | 5,909 | 5,950 | 6,914 | ||||||||||||||
The Netherlands |
2,108 | 2,001 | 1,801 | 462 | 312 | 365 | ||||||||||||||
Italy |
1,189 | 1,144 | 1,172 | 229 | 242 | 274 | ||||||||||||||
Canada |
1,098 | 1,036 | 902 | 237 | 224 | 166 | ||||||||||||||
France |
1,297 | 1,216 | 959 | 214 | 87 | 106 | ||||||||||||||
Spain |
1,063 | 1,066 | 970 | 293 | 291 | 342 | ||||||||||||||
United Kingdom |
971 | 888 | 779 | 1,273 | 1,272 | 1,095 | ||||||||||||||
All Other Countries |
11,010 | 8,751 | 6,658 | 10,799 | 11,937 | 3,959 | ||||||||||||||
Consolidated |
$ | 38,851 | $ | 35,167 | $ | 30,765 | $ | 36,508 | $ | 38,256 | $ | 29,268 | ||||||||
Note 7 — Litigation and Environmental Matters
Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations. Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure. No individual site cleanup exposure is expected to exceed $4 million, and the aggregate cleanup exposure is not expected to exceed $15 million.
There are a number of patent disputes with third parties who claim Abbott's products infringe their patents. In April 2007, New York University (NYU) and Centocor, Inc. filed a lawsuit in the Eastern District of Texas asserting that HUMIRA infringes a patent co-owned by NYU and Centocor and exclusively licensed to Centocor. In June 2009, a jury found that Abbott had willfully infringed the patent and awarded NYU and Centocor approximately $1.67 billion in past compensatory damages. In December 2009, the district court issued a final judgment and awarded the plaintiffs an additional $175 million in prejudgment interest. On February 23, 2011, the Federal Circuit reversed the district court's final judgment and found Centocor's patent invalid. On April 25, 2011 Centocor petitioned the Federal Circuit to rehear and reconsider the decision. In June 2011 the Federal Circuit denied Centocor's request to reconsider. In November 2011, Centocor, now known as Janssen Biotech, Inc., petitioned the United States Supreme Court to review the Federal Circuit's decision. Abbott is confident in the merits of its case and, as a result, no reserves have been recorded in this case.
The United States Department of Justice, through the United States Attorney for the Western District of Virginia, is investigating Abbott's sales and marketing activities for Depakote. The government is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act, and the anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement to third parties. In addition, eight state Attorneys General Offices (Florida, Illinois, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina and Texas) have formed a committee on behalf of themselves and other State Attorneys General to investigate Abbott's sales and marketing activities for Depakote to determine whether any of these activities violated various state laws,
79
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 7 — Litigation and Environmental Matters (Continued)
including state consumer fraud/protection statutes. Discussions to resolve potential civil and criminal claims arising from this matter have advanced to a point where Abbott believes a loss is probable and estimable and therefore, Abbott recorded a charge of $1.5 billion in 2011. If the discussions are successfully concluded, Abbott expects the discussions to result in resolution of the Depakote-related federal claims, as well as similar state Medicaid-related claims, but not state consumer fraud/protection claims. However, the discussions are ongoing, and until concluded, there can be no certainty about definitive resolution.
Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott. For its legal proceedings and environmental exposures Abbott estimates the range of possible loss to be from approximately $1.59 billion to $1.63 billion, which includes the $1.5 billion charge discussed above. The recorded reserve balance at December 31, 2011 for these proceedings and exposures was approximately $1.6 billion. These reserves represent management's best estimate of probable loss, as defined by FASB ASC No. 450, "Contingencies."
While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott's financial position, cash flows, or results of operations except for the federal government investigation discussed in the third paragraph of this footnote, the resolution of which is expected to be material to cash flows in a given year.
In 2009, Abbott and Medtronic, Inc. reached a settlement resolving all outstanding intellectual property litigation between the two parties. Under the terms of the settlement, Medtronic paid Abbott $400 million. The settlement also includes a mutual agreement not to pursue additional litigation on current and future vascular products, subject to specific conditions and time limits. In connection with the settlement, Abbott recognized a gain of $287 million which is included in Other (income) expense, net. The remaining amounts were recognized as royalty income as earned.
Note 8 — Incentive Stock Program
The 2009 Incentive Stock Program authorizes the granting of nonqualified stock options, replacement stock options, restricted stock awards, restricted stock units, performance awards, foreign benefits and other share-based awards. Stock options, replacement stock options and restricted stock awards and units comprise the majority of benefits that have been granted and are currently outstanding under this program and a prior program. In 2011, Abbott granted 1,757,339 stock options, 852,819 replacement stock options, 1,180,159 restricted stock awards and 6,793,336 restricted stock units under this program. The purchase price of shares under option must be at least equal to the fair market value of the common stock on the date of grant, and the maximum term of an option is 10 years. Options vest equally over three years except for replacement options, which vest in six months. Options granted before January 1, 2005 included a replacement feature. Except for options outstanding that have a replacement feature, options granted after December 31, 2004 do not include a replacement feature. When an employee tenders mature shares to Abbott upon exercise of a stock option, a replacement stock option may be granted equal to the amount of shares tendered. Replacement options are granted at the then current market price for a term that expires on the date of the underlying option grant. Upon a change in control of Abbott, all outstanding stock options become fully exercisable, and all terms and conditions of all restricted stock awards and units are deemed satisfied. Restricted stock awards generally vest between 3 and 5 years and for restricted stock awards that vest over 5 years, no more than one-third of the award vests in any one year upon Abbott reaching a minimum return on equity target. Restricted stock units vest over three years and upon vesting,
80
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 8 — Incentive Stock Program (Continued)
the recipient receives one share of Abbott stock for each vested restricted stock unit. The aggregate fair market value of restricted stock awards and units is recognized as expense over the service period. Restricted stock awards and settlement of vested restricted stock units are issued out of treasury shares. Abbott generally issues new shares for exercises of stock options. Abbott does not have a policy of purchasing its shares relating to its share-based programs. At December 31, 2011, approximately 180 million shares were reserved for future grants. Subsequent to year-end, the reserve was reduced by approximately 25 million shares for stock options and restricted stock awards and units granted by the Board of Directors.
The number of restricted stock awards and units outstanding and the weighted-average grant-date fair value at December 31, 2010 and December 31, 2011 was 12,449,413 and $54.02 and 14,698,595 and $50.29, respectively. The number of restricted stock awards and units, and the weighted-average grant-date fair value, that were granted, vested and lapsed during 2011 were 7,973,495 and $46.85, 4,998,410 and $53.94 and 725,903 and $51.18, respectively. The fair market value of restricted stock awards and units vested in 2011, 2010 and 2009 was $237 million, $203 million and $81 million, respectively.
| |
Options Outstanding | Exercisable Options | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Life (Years) |
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Life (Years) |
|||||||||||||
December 31, 2010 |
109,921,688 | $ | 50.46 | 4.9 | 100,739,252 | $ | 50.06 | 4.6 | |||||||||||
Granted |
2,610,158 | 48.43 | |||||||||||||||||
Exercised |
(20,872,261 | ) | 48.36 | ||||||||||||||||
Lapsed |
(6,220,306 | ) | 55.96 | ||||||||||||||||
December 31, 2011 |
85,439,279 | $ | 50.52 | 4.7 | 81,734,460 | $ | 50.51 | 4.5 | |||||||||||
The aggregate intrinsic value of options outstanding and exercisable at December 31, 2011 was $529 million and $508 million, respectively. The total intrinsic value of options exercised in 2011, 2010 and 2009 was $94 million, $77 million and $129 million, respectively. The total unrecognized compensation cost related to all share-based compensation plans at December 31, 2011 amounted to approximately $242 million which is expected to be recognized over the next three years.
Total non-cash compensation expense charged against income in 2011, 2010 and 2009 for share-based plans totaled approximately $383 million, $385 million and $365 million, respectively, and the tax benefit recognized was approximately $116 million, $119 million and $118 million, respectively. Compensation cost capitalized as part of inventory is not significant.
The fair value of an option granted in 2011, 2010 and 2009 was $6.23, $9.24 and $9.28, respectively. The fair value of an option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Risk-free interest rate |
2.7 | % | 2.9 | % | 2.7 | % | ||||
Average life of options (years) |
6.0 | 6.0 | 6.0 | |||||||
Volatility |
21.0 | % | 22.0 | % | 22.0 | % | ||||
Dividend yield |
4.1 | % | 3.2 | % | 3.0 | % | ||||
81
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 8 — Incentive Stock Program (Continued)
The risk-free interest rate is based on the rates available at the time of the grant for zero-coupon U.S. government issues with a remaining term equal to the option's expected life. The average life of an option is based on both historical and projected exercise and lapsing data. Expected volatility is based on implied volatilities from traded options on Abbott's stock and historical volatility of Abbott's stock over the expected life of the option. Dividend yield is based on the option's exercise price and annual dividend rate at the time of grant.
Note 9 — Debt and Lines of Credit
The following is a summary of long-term debt at December 31: (dollars in millions)
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
3.75% Notes, due 2011 |
$ | — | $ | — | $ | 500 | ||||
5.6% Notes, due 2011 |
— | — | 1,500 | |||||||
5.15% Notes, due 2012 |
— | 1,000 | 1,000 | |||||||
1.95% Yen Notes, due 2013 |
321 | 299 | 288 | |||||||
4.35% Notes, due 2014 |
500 | 500 | 500 | |||||||
2.7% Notes, due 2015 |
750 | 750 | — | |||||||
5.875% Notes, due 2016 |
2,000 | 2,000 | 2,000 | |||||||
5.6% Notes, due 2017 |
1,500 | 1,500 | 1,500 | |||||||
5.125% Notes, due 2019 |
2,000 | 2,000 | 2,000 | |||||||
4.125% Notes, due 2020 |
1,000 | 1,000 | — | |||||||
6.15% Notes, due 2037 |
1,000 | 1,000 | 1,000 | |||||||
6.0% Notes, due 2039 |
1,000 | 1,000 | 1,000 | |||||||
5.3% Notes, due 2040 |
1,250 | 1,250 | — | |||||||
Other, including fair value adjustments relating to interest rate hedge contracts designated as fair value hedges |
719 | 225 | (22 | ) | ||||||
Total, net of current maturities |
12,040 | 12,524 | 11,266 | |||||||
Current maturities of long-term debt |
1,027 | 2,045 | 211 | |||||||
Total carrying amount |
$ | 13,067 | $ | 14,569 | $ | 11,477 | ||||
Principal payments required on long-term debt outstanding at December 31, 2011, are $1.0 billion in 2012, $330 million in 2013, $505 million in 2014, $750 million in 2015, $2.0 billion in 2016 and $7.8 billion thereafter.
At December 31, 2011, Abbott's long-term debt rating was AA by Standard & Poor's Corporation and A1 by Moody's Investors Service. Abbott has readily available financial resources, including unused lines of credit of $6.7 billion that support commercial paper borrowing arrangements of which a $3.0 billion facility expires in October 2012 and a $3.7 billion facility expires in 2013. Related compensating balances, which are subject to withdrawal by Abbott at its option, and commitment fees are not material. Abbott's weighted-average interest rate on short-term borrowings was 0.4% at December 31, 2011 and 2010 and 0.2% at December 31, 2009.
82
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 10 — Business Combinations, Technology Acquisitions and Related Transactions
On September 8, 2010, Abbott acquired Piramal Healthcare Limited's Healthcare Solutions business, a leader in the Indian branded generics market, for $2.2 billion, in cash, plus additional payments of $400 million annually in 2011, 2012, 2013 and 2014. Abbott recorded a $1.6 billion liability for the present value of the additional payments at the acquisition date. The acquisition was financed with cash. The allocation of the fair value of the acquisition resulted in the recording of $2.7 billion of deductible acquired intangible assets and $1.0 billion of deductible goodwill. Acquired intangible assets consist primarily of trade names, customer relationships and associated rights and are amortized over an average of 19 years.
In February 2010, Abbott acquired Solvay's pharmaceuticals business (Solvay Pharmaceuticals) for approximately $6.1 billion, in cash, plus additional payments of up to EUR 100 million per year if certain sales milestones are met in 2011, 2012 and 2013. Contingent consideration of approximately $290 million was recorded. The acquisition of Solvay Pharmaceuticals provides Abbott with a large and complementary portfolio of pharmaceutical products and expands Abbott's presence in key global emerging markets. Abbott acquired control of this business on February 15, 2010 and the financial results of the acquired operations are included in these financial statements beginning on that date. Net sales for the acquired operations for 2010 were approximately $3.1 billion. Pretax loss of the acquired operations, including acquisition, integration and restructuring expenses, for 2010 was approximately $395 million. The acquisition was funded with cash and short-term investments. The allocation of the fair value of the acquisition is shown in the table below (in billions of dollars).
Goodwill, non-deductible |
$ | 2.2 | ||
Acquired intangible assets, non-deductible |
4.1 | |||
Acquired in-process research and development, non-deductible |
0.5 | |||
Acquired net tangible assets |
0.7 | |||
Deferred income taxes recorded at acquisition |
(1.1 | ) | ||
Total allocation of fair value |
$ | 6.4 | ||
Acquired intangible assets consist primarily of product rights for currently marketed products and are amortized over 2 to 14 years (average of 11 years). Acquired in-process research and development projects are accounted for as indefinite lived intangible assets until regulatory approval or discontinuation. The net tangible assets acquired consist primarily of trade accounts receivable of approximately $675 million, inventory of approximately $390 million, property and equipment of approximately $725 million, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities.
Had the acquisition of Solvay Pharmaceuticals taken place on January 1, 2010 and January 1, 2009, unaudited pro forma net sales, net earnings and diluted earnings per share for 2010 and 2009 would have been $35.8 billion and $34.2 billion, $4.6 billion and $5.2 billion and $2.96 and $3.36, respectively. The pro forma information includes adjustments for amortization of intangible assets and fair value adjustments to acquisition-date inventory as well as acquisition, integration and restructuring expenses. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date.
In March 2010, Abbott acquired STARLIMS Technologies for approximately $100 million, in cash, net of cash held by STARLIMS, providing Abbott with leading products and expertise to build its position in laboratory informatics. A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets.
83
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 10 — Business Combinations, Technology Acquisitions and Related Transactions (Continued)
In April 2010, Abbott acquired the outstanding shares of Facet Biotech Corporation for approximately $430 million, in cash, net of cash held by Facet. The acquisition enhances Abbott's early- and mid-stage pharmaceutical pipeline, including a biologic for multiple sclerosis and compounds that complement Abbott's oncology program. A substantial portion of the fair value of the acquisition has been allocated to acquired in-process research and development that is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation.
In February 2009, Abbott acquired the outstanding shares of Advanced Medical Optics, Inc. (AMO) for approximately $1.4 billion in cash, net of cash held by AMO. Prior to the acquisition, Abbott held a small investment in AMO. Abbott acquired AMO to take advantage of increasing demand for vision care technologies due to population growth and demographic shifts and AMO's premier position in its field. Abbott acquired control of this business on February 25, 2009 and the financial results of the acquired operations are included in these financial statements beginning on that date. The allocation of the fair value of the acquisition resulted in non-deductible goodwill of approximately $1.7 billion, non-deductible definite-lived intangible assets of approximately $900 million and net tangible assets of approximately $400 million. In addition, Abbott assumed $1.5 billion of debt. Acquired intangible assets consist of established customer relationships, developed technology and trade names and are amortized over 2 to 30 years (average of 15 years). In addition, subsequent to the acquisition, Abbott repaid substantially all of the acquired debt of AMO.
In October 2009, Abbott acquired 100 percent of Visiogen, Inc. for $400 million, in cash, providing Abbott with a next-generation accommodating intraocular lens (IOL) technology to address presbyopia for cataract patients. The allocation of the fair value of the acquisition resulted in non-deductible acquired in-process research and development of approximately $200 million which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, non-deductible definite-lived intangible assets of approximately $24 million and goodwill of approximately $200 million.
In October 2009, Abbott acquired Evalve, Inc. for $320 million, in cash, plus an additional payment of $90 million to be made upon completion of certain regulatory milestones. Abbott acquired Evalve to obtain a presence in the growing area of non-surgical treatment for structural heart disease. Including a previous investment in Evalve, Abbott has acquired 100 percent of the outstanding shares of Evalve. In connection with the acquisition, the carrying amount of this investment was revalued to fair value resulting in recording $28 million of income, which is reported as Other (income) expense, net. The allocation of the fair value of the acquisition resulted in non-deductible definite-lived intangible assets of approximately $140 million, non-deductible acquired in-process research and development of approximately $220 million which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, goodwill of approximately $100 million and deferred income taxes of approximately $110 million. Acquired intangible assets consist of developed technology and are being amortized over 11 years.
In January 2009, Abbott acquired Ibis Biosciences, Inc. (Ibis) for $175 million, in cash, to expand Abbott's position in molecular diagnostics for infectious disease. Including a $40 million investment in Ibis in 2008, Abbott has acquired 100 percent of the outstanding shares of Ibis. A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets, and acquired in-process research and development which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The investment in Ibis in 2008 resulted in a charge to acquired in-process research and development. In connection with the acquisition, the carrying amount of this
84
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 10 — Business Combinations, Technology Acquisitions and Related Transactions (Continued)
investment was revalued to fair value resulting in recording $33 million of income, which is reported as Other (income) expense, net.
Except for the acquisition of Solvay Pharmaceuticals, had the above acquisitions taken place on January 1 of the previous year, consolidated net sales and income would not have been significantly different from reported amounts.
In 2011, Abbott entered into a collaboration agreement for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to acquired in-process research and development of $400 million. In 2010, Abbott entered into an agreement to acquire licensing rights outside the U.S., excluding certain Asian markets, to a product in development for the treatment of chronic kidney disease resulting in a charge to acquired in-process research and development of $238 million. In 2011, certain milestones were achieved and charges to acquired in-process research and development of $188 million were recorded. Additional payments of approximately $200 million could be required for the achievement of certain development and regulatory milestones. In addition, equity interests of approximately $62 million each were acquired in 2011 and 2010. In 2011, Abbott entered into an agreement to develop and commercialize a treatment for rheumatoid arthritis and psoriasis resulting in a charge to acquired in-process research and development of $85 million. Additional payments totaling up to $395 million could be required for the achievement of certain development, regulatory and commercial milestones under the agreement. In 2010, Abbott also entered into an agreement to develop and commercialize a product for the treatment of endometriosis resulting in a charge to acquired in-process research and development of $75 million. Additional payments of approximately $500 million could be required for the achievement of certain development, regulatory and commercial milestones under this agreement. In 2009, Abbott acquired the global rights to a novel biologic for the treatment of chronic pain for $170 million resulting in a charge to acquired in-process research and development.
Note 11 — Goodwill and Intangible Assets
Abbott recorded goodwill of approximately $3.4 billion in 2010 related to the acquisitions of Solvay's pharmaceuticals business, Piramal Healthcare Limited's Healthcare Solutions business, Facet Biotech and STARLIMS Technologies. Goodwill related to the Solvay, Piramal and Facet acquisitions was allocated to the pharmaceutical products segments. In addition, in 2010, Abbott paid $250 million to Boston Scientific as a result of the approval to market the Xience V drug-eluting stent in Japan, resulting in an increase in goodwill in the Vascular Products segment. Abbott recorded goodwill of approximately $2.2 billion in 2009 related to the acquisitions of Advanced Medical Optics, Inc., Ibis Biosciences, Inc., Visiogen, Inc. and Evalve, Inc. Goodwill of approximately $120 million related to the Ibis acquisition was allocated to the Diagnostic Products segment and goodwill of approximately $160 million related to the Evalve acquisition was allocated to the Vascular Products segment. Foreign currency translation and other adjustments (decreased) increased goodwill in 2011, 2010 and 2009 by $(225) million, $(879) million and $997 million, respectively. The amount of goodwill related to reportable segments at December 31, 2011 was $6.2 billion for the Proprietary Pharmaceutical Products segment, $3.0 billion for the Established Pharmaceutical Products segment, $207 million for the Nutritional Products segment, $383 million for the Diagnostic Products segment, and $2.6 billion for the Vascular Products segment. There were no significant reductions of goodwill relating to impairments or disposal of all or a portion of a business.
85
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 11 — Goodwill and Intangible Assets (Continued)
The gross amount of amortizable intangible assets, primarily product rights and technology was $17.5 billion, $17.3 billion and $10.8 billion as of December 31, 2011, 2010 and 2009, respectively, and accumulated amortization was $8.3 billion, $6.5 billion and $5.1 billion as of December 31, 2011, 2010 and 2009, respectively. Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, were approximately $814 million, $1.4 billion and $610 million at December 31, 2011, 2010 and 2009, respectively. In 2011, Abbott recorded impairment charges for certain research and development assets due to changes in the projected development and regulatory timelines for the projects. $125 million related to a non-reportable segment and $49 million related to the Other categories in Abbott's segment reporting. Discounted cash flow analysis was used to analyze fair value and the charges are included in research and development expenses. The estimated annual amortization expense for intangible assets recorded at December 31, 2011 is approximately $1.5 billion in 2012, $1.3 billion in 2013, $1.0 billion in 2014, $800 million in 2015 and $765 million in 2016. Intangible asset amortization is included in Cost of products sold in the consolidated statement of earnings. Amortizable intangible assets are amortized over 2 to 30 years (average 10 years).
Note 12 — Restructuring Plans
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
86
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 12 — Restructuring Plans (Continued)
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.
Note 13 — Spin-off of Abbott's Proprietary Pharmaceuticals Business
In October 2011, Abbott announced a plan to separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals. To accomplish the separation, Abbott plans to create a new company for its research-based pharmaceuticals business which will include Abbott's Proprietary Pharmaceutical Products segment. The transaction is expected to take the form of a tax-free distribution to Abbott shareholders of the stock of the newly created research-based pharmaceutical company and is expected to be completed by the end of 2012. Subsequent to the separation, the historical results of the research-based pharmaceuticals business will be presented as discontinued operations.
87
Abbott Laboratories and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 14 — Quarterly Results (Unaudited)
(dollars in millions except per share data)
| |
2011 | 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
First Quarter |
||||||||||
Net Sales |
$ | 9,040.9 | $ | 7,698.4 | $ | 6,718.4 | ||||
Gross Profit |
5,181.9 | 4,363.2 | 3,782.4 | |||||||
Net Earnings |
863.8 | 1,003.0 | 1,438.6 | |||||||
Basic Earnings Per Common Share (a) |
.56 | .65 | .93 | |||||||
Diluted Earnings Per Common Share (a) |
.55 | .64 | .92 | |||||||
Market Price Per Share — High |
49.45 | 56.79 | 57.39 | |||||||
Market Price Per Share — Low |
45.07 | 52.21 | 44.10 | |||||||
Second Quarter |
||||||||||
Net Sales |
$ | 9,616.3 | $ | 8,826.0 | $ | 7,494.9 | ||||
Gross Profit |
5,745.8 | 5,282.1 | 4,365.9 | |||||||
Net Earnings |
1,942.8 | 1,291.7 | 1,288.1 | |||||||
Basic Earnings Per Common Share (a) |
1.24 | .83 | .83 | |||||||
Diluted Earnings Per Common Share (a) |
1.23 | .83 | .83 | |||||||
Market Price Per Share — High |
54.24 | 53.25 | 48.37 | |||||||
Market Price Per Share — Low |
49.05 | 45.26 | 41.27 | |||||||
Third Quarter |
||||||||||
Net Sales |
$ | 9,816.7 | $ | 8,674.5 | $ | 7,761.3 | ||||
Gross Profit |
5,843.4 | 4,933.4 | 4,401.2 | |||||||
Net Earnings |
303.2 | 890.7 | 1,480.4 | |||||||
Basic Earnings Per Common Share (a) |
.19 | .58 | .95 | |||||||
Diluted Earnings Per Common Share (a) |
.19 | .57 | .95 | |||||||
Market Price Per Share — High |
53.60 | 52.86 | 49.69 | |||||||
Market Price Per Share — Low |
46.29 | 44.59 | 43.45 | |||||||
Fourth Quarter |
||||||||||
Net Sales |
$ | 10,377.4 | $ | 9,967.8 | $ | 8,790.1 | ||||
Gross Profit |
6,539.6 | 5,922.8 | 5,005.9 | |||||||
Net Earnings |
1,618.7 | 1,440.8 | 1,538.7 | |||||||
Basic Earnings Per Common Share (a) |
1.03 | .93 | .99 | |||||||
Diluted Earnings Per Common Share (a) |
1.02 | .92 | .98 | |||||||
Market Price Per Share — High |
56.44 | 53.75 | 54.97 | |||||||
Market Price Per Share — Low |
48.96 | 46.03 | 48.41 | |||||||
88
Management Report on Internal Control
Over Financial Reporting
The management of Abbott Laboratories is responsible for establishing and maintaining adequate internal control over financial reporting. Abbott's internal control system was designed to provide reasonable assurance to the company's management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Abbott's management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2011, the company's internal control over financial reporting was effective based on those criteria.
Abbott's independent registered public accounting firm has issued an audit report on their assessment of the effectiveness of the company's internal control over financial reporting. This report appears on page 91.
Miles
D. White
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Thomas
C. Freyman
EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
Greg
W. Linder
VICE PRESIDENT AND CONTROLLER
February 21, 2012
89
Reports of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Abbott Laboratories:
We have audited the accompanying consolidated balance sheets of Abbott Laboratories and subsidiaries (the "Company") as of December 31, 2011, 2010, and 2009, and the related consolidated statements of earnings, comprehensive income, shareholders' investment, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2011, 2010, and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2011 the Company changed the year end of its foreign subsidiaries from a November 30 fiscal year end to a December 31 calendar year end and changed its presentation of comprehensive income.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2012 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Chicago,
Illinois
February 21, 2012
90
To the Board of Directors and Shareholders of Abbott Laboratories:
We have audited the internal control over financial reporting of Abbott Laboratories and subsidiaries (the "Company") as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2011 and our report dated February 21, 2012 expresses an unqualified opinion on those financial statements and includes an explanatory paragraph regarding the Company's change to the year end of its foreign subsidiaries and change to its presentation of comprehensive income during 2011.
/s/
Deloitte & Touche LLP
Chicago,
Illinois
February 21, 2012
91
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Evaluation of disclosure controls and procedures. The Chief Executive Officer, Miles D. White, and the Chief Financial Officer, Thomas C. Freyman, evaluated the effectiveness of Abbott Laboratories' disclosure controls and procedures as of the end of the period covered by this report, and concluded that Abbott Laboratories' disclosure controls and procedures were effective to ensure that information Abbott is required to disclose in the reports that it files or submits with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and to ensure that information required to be disclosed by Abbott in the reports that it files or submits under the Exchange Act is accumulated and communicated to Abbott's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Management's annual report on internal control over financial reporting. Management's report on Abbott's internal control over financial reporting is included on page 89 hereof. The report of Abbott's independent registered public accounting firm related to their assessment of the effectiveness of internal control over financial reporting is included on page 91 hereof.
Changes in internal control over financial reporting. During the quarter ended December 31, 2011, there were no changes in Abbott's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Abbott's internal control over financial reporting.
None.
92
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated herein by reference are "Information Concerning Nominees for Directors," "Committees of the Board of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance," and "Procedure for Recommendation and Nomination of Directors and Transaction of Business at Annual Meeting" to be included in the 2012 Abbott Laboratories Proxy Statement. The 2012 Proxy Statement will be filed on or about March 15, 2012. Also incorporated herein by reference is the text found under the caption, "Executive Officers of the Registrant" on pages 22 through 24 hereof.
Abbott has adopted a code of ethics that applies to its principal executive officer, principal financial officer, and principal accounting officer and controller. That code is part of Abbott's code of business conduct which is available free of charge through Abbott's investor relations website (www.abbottinvestor.com). Abbott intends to include on its website (www.abbott.com) any amendment to, or waiver from, a provision of its code of ethics that applies to Abbott's principal executive officer, principal financial officer, and principal accounting officer and controller that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The material to be included in the 2012 Proxy Statement under the headings "Director Compensation," "Executive Compensation," and "Compensation Committee Report" is incorporated herein by reference. The 2012 Proxy Statement will be filed on or about March 15, 2012.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Plan Category
|
(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights |
(b) Weighted- average exercise price of outstanding options, warrants and rights |
(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders1 |
85,439,279 | $ | 50.52 | 189,812,220 | ||||||
Equity compensation plans not approved by security holders |
0 | $ | — | 0 | ||||||
Total1 |
85,439,279 | $ | 50.52 | 189,812,220 | ||||||
If there is a lapse, expiration, termination, forfeiture or cancellation of any benefit granted under the 1996 Program without the issuance of shares or payment of cash thereunder, the shares subject to or reserved for that benefit, or so reacquired, may again be used for new stock options, rights, or awards
93
of any type authorized under the 1996 Program. If shares are issued under any benefit under the 1996 Program and thereafter are reacquired by Abbott pursuant to rights reserved upon their issuance, or pursuant to the payment of the purchase price of shares under stock options by delivery of other common shares of Abbott, the shares subject to or reserved for that benefit, or so reacquired, may not again be used for new stock options, rights, or awards of any type authorized under the 1996 Program.
In April 2009, the 1996 Program was replaced by the Abbott Laboratories 2009 Incentive Stock Program. No further awards will be granted under the 1996 Program.
(ii) Abbott Laboratories 2009 Incentive Stock Program. Benefits under the 2009 Program include stock options that do not qualify for special tax treatment under Section 422 of the Internal Revenue Code ("non-qualified stock options"), restricted stock, restricted stock units, performance awards, other share-based awards (including stock appreciation rights, dividend equivalents and recognition awards), awards to non-employee directors, and foreign benefits. The shares that remain available for issuance under the 2009 Program may be issued in connection with any one of these benefits and may be either authorized but unissued shares or treasury shares (except that restricted stock awards may be satisfied only from treasury shares).
If there is a lapse, expiration, termination, forfeiture or cancellation of any benefit granted under the 2009 Program without the issuance of shares or payment of cash thereunder, the shares subject to or reserved for that benefit, or so reacquired, may again be used for new stock options, rights, or awards of any type authorized under the 2009 Program. If shares are issued under any benefit under the 2009 Program and thereafter are reacquired by Abbott pursuant to rights reserved upon their issuance, or pursuant to the payment of the purchase price of shares under stock options by delivery of other common shares of Abbott, the shares subject to or reserved for that benefit, or so reacquired, may not again be used for new stock options, rights, or awards of any type authorized under the 2009 Program.
(iii) Abbott Laboratories 2009 Employee Stock Purchase Plan for Non-U.S. Employees. Eligible employees of participating non-U.S. affiliates of Abbott may participate in this plan. An eligible employee may authorize payroll deductions at the rate of 1% to 10% of eligible compensation (in multiples of one percent) subject to a limit of US $12,500 during any purchase cycle.
Purchase cycles are generally six months long and usually begin on August 1 and February 1. On the last day of each purchase cycle, Abbott uses participant contributions to acquire Abbott common shares. The shares acquired come from treasury shares. The purchase price is 85% of the lower of the fair market value of the shares on that date or on the first day of that purchase cycle.
(iv) Advanced Medical Optics, Inc. Plans. In 2009, in connection with its acquisition of Advanced Medical Optics, Inc., Abbott assumed options outstanding under the Amended and Restated Advanced Medical Optics, Inc. 2002 Incentive Compensation Plan, as amended; AMO's 2004 Stock Incentive Plan, as amended and restated; the Advanced Medical Optics, Inc. 2005 Incentive Compensation Plan; the VISX, Incorporated 1995 Director Option and Stock Deferral Plan, as amended and restated; the VISX, Incorporated 1995 Stock Plan, as amended; the VISX, Incorporated 2000 Stock Plan; and the VISX, Incorporated 2001 Nonstatutory Stock Option Plan. As of December 31, 2011, 1,859,446 options remained outstanding under the plans. These options have a weighted average purchase price of $71.68. No further awards will be granted under the plans.
For additional information concerning the Abbott Laboratories 1996 Incentive Stock Program, the Abbott Laboratories 2009 Incentive Stock Program, and the Abbott Laboratories 2009 Employee Stock Purchase Plan for Non-U.S. Employees, see the discussion in Note 8 entitled "Incentive Stock Program" of the Notes to Consolidated Financial Statements included under Item 8, "Financial Statements and Supplementary Data."
94
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The material to be included in the 2012 Proxy Statement under the headings "The Board of Directors," "Committees of the Board of Directors," "Corporate Governance Materials," and "Approval Process for Related Person Transactions" is incorporated herein by reference. The 2012 Proxy Statement will be filed on or about March 15, 2012.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The material to be included in the 2012 Proxy Statement under the headings "Audit Fees and Non-Audit Fees" and "Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Auditor" is incorporated herein by reference. The 2012 Proxy Statement will be filed on or about March 15, 2012.
95
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Abbott Laboratories Financial Statement Schedules
|
Page No. | ||
|---|---|---|---|
Valuation and Qualifying Accounts (Schedule II) |
99 | ||
Schedules I, III, IV, and V are not submitted because they are not applicable or not required |
|||
Report of Independent Registered Public Accounting Firm |
100 | ||
Individual Financial Statements of businesses acquired by the registrant have been omitted pursuant to Rule 3.05 of Regulation S-X |
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Abbott Laboratories has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ABBOTT LABORATORIES | ||||
By |
/s/ MILES D. WHITE Miles D. White Chairman of the Board and Chief Executive Officer |
|||
Date: February 21, 2012 |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Abbott Laboratories on February 21, 2012 in the capacities indicated below.
| /s/ MILES D. WHITE Miles D. White Chairman of the Board, Chief Executive Officer and Director of Abbott Laboratories (principal executive officer) |
/s/ THOMAS C. FREYMAN Thomas C. Freyman Executive Vice President, Finance and Chief Financial Officer (principal financial officer) |
|
/s/ GREG W. LINDER Greg W. Linder Vice President and Controller (principal accounting officer) |
||
/s/ ROBERT J. ALPERN, M.D. Robert J. Alpern, M.D. Director of Abbott Laboratories |
/s/ ROXANNE S. AUSTIN Roxanne S. Austin Director of Abbott Laboratories |
|
/s/ SALLY E. BLOUNT, PH.D. Sally E. Blount, Ph.D. Director of Abbott Laboratories |
/s/ W. JAMES FARRELL W. James Farrell Director of Abbott Laboratories |
|
/s/ H. LAURANCE FULLER H. Laurance Fuller Director of Abbott Laboratories |
/s/ EDWARD M. LIDDY Edward M. Liddy Director of Abbott Laboratories |
97
| /s/ NANCY MCKINSTRY Nancy McKinstry Director of Abbott Laboratories |
/s/ PHEBE N. NOVAKOVIC Phebe N. Novakovic Director of Abbott Laboratories |
|
/s/ WILLIAM A. OSBORN William A. Osborn Director of Abbott Laboratories |
/s/ SAMUEL C. SCOTT III Samuel C. Scott III Director of Abbott Laboratories |
|
/s/ GLENN F. TILTON Glenn F. Tilton Director of Abbott Laboratories |
98
ABBOTT LABORATORIES AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009
(in thousands of dollars)
Allowances for Doubtful Accounts and Product Returns |
Balance at Beginning of Year |
Provisions/ Charges to Income |
Amounts Charged Off and Other Deductions |
Balance at End of Year |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2011 |
$ | 388,564 | $ | 429,794 | $ | (397,779 | ) | $ | 420,579 | ||||
2010 |
311,546 | 401,818 | (324,800 | ) | 388,564 | ||||||||
2009 |
280,519 | 249,634 | (218,607 | ) | 311,546 | ||||||||
Note: Prior year amounts have been adjusted to conform to the current year presentation which includes the provisions and amounts charged off related to product returns.
99
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Abbott Laboratories:
We have audited the consolidated financial statements of Abbott Laboratories and subsidiaries (the "Company") as of and for the years ended December 31, 2011, 2010, and 2009, and the Company's internal control over financial reporting as of December 31, 2011, and have issued our reports thereon dated February 21, 2012, which report relating to the consolidated financial statements expresses an unqualified opinion and includes an explanatory paragraph regarding the Company's change to the year end of its foreign subsidiaries and change to its presentation of comprehensive income during 2011; such reports are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Chicago,
Illinois
February 21, 2012
100
EXHIBIT INDEX
ABBOTT LABORATORIES
ANNUAL REPORT
FORM 10-K
2011
Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be "filed under the Securities Exchange Act of 1934."
| 10-K Exhibit Table Item No. |
|
||
|---|---|---|---|
2.1 |
*Amendment No. 2 to Business Transfer Agreement dated January 29, 2011, by and among Abbott Healthcare Private Limited, Abbott Laboratories, Piramal Healthcare Limited ("Piramal") and certain shareholders of Piramal, filed as Exhibit 2 to the Abbott Laboratories Quarterly Report on Form 10-Q for the quarter ended March 31, 2011. |
||
3.1 |
*Articles of Incorporation, Abbott Laboratories, filed as Exhibit 3.1 to the Abbott Laboratories Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. |
||
3.2 |
*By-Laws of Abbott Laboratories, as amended and restated effective as of December 9, 2011, filed as Exhibit 3.1 to the Abbott Laboratories Current Report on Form 8-K dated December 13, 2011. |
||
4.1 |
*Indenture dated as of February 9, 2001, between Abbott Laboratories and The Bank of New York Mellon Trust Company, N.A. (as successor to J.P. Morgan Trust Company, National Association, successor to Bank One Trust Company, N.A.) (including form of Security), filed as Exhibit 4.1 to the Abbott Laboratories Registration Statement on Form S-3 dated February 12, 2001. |
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4.2 |
*Supplemental Indenture dated as of February 27, 2006, between Abbott Laboratories and The Bank of New York Mellon Trust Company, N.A. (as successor to J.P. Morgan Trust Company, National Association), filed as Exhibit 4.2 to the Abbott Laboratories Registration Statement on Form S-3 dated February 28, 2006. |
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4.3 |
*Form of 3.75% Note, filed as Exhibit 4.28 to the 2004 Abbott Laboratories Annual Report on Form 10-K. |
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4.4 |
*Form of 4.35% Note, filed as Exhibit 4.29 to the 2004 Abbott Laboratories Annual Report on Form 10-K. |
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4.5 |
*Actions of Authorized Officers with respect to Abbott's 3.75% Notes and 4.35% Notes, filed as Exhibit 4.30 to the 2004 Abbott Laboratories Annual Report on Form 10-K. |
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4.6 |
*Officers' Certificate and Company Order with respect to Abbott's 3.75% Notes and 4.35% Notes, filed as Exhibit 4.31 to the 2004 Abbott Laboratories Annual Report on Form 10-K. |
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4.7 |
*Form of 5.875% Note, filed as Exhibit 99.3 to the Abbott Laboratories Current Report on Form 8-K dated May 9, 2006. |
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4.8 |
*Actions of the Authorized Officers with respect to Abbott's 5.375% Notes, 5.600% Notes and 5.875% Notes, filed as Exhibit 99.3 to the Abbott Laboratories Current Report on Form 8-K dated May 9, 2006. |
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4.9 |
*Officers' Certificate and Company Order with respect to Abbott's 5.375% Notes, 5.600% Notes and 5.875% Notes, filed as Exhibit 4.25 to the 2006 Abbott Laboratories Report on Form 10-K. |
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101
| 10-K Exhibit Table Item No. |
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|---|---|---|---|
4.10 |
*Form of $1,000,000,000 5.150% Note due 2012, filed as Exhibit 99.4 to the Abbott Laboratories Current Report on Form 8-K dated November 6, 2007. |
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4.11 |
*Form of $1,500,000,000 5.600% Note due 2017, filed as Exhibit 99.5 to the Abbott Laboratories Current Report on Form 8-K dated November 6, 2007. |
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4.12 |
*Form of $1,000,000,000 6.150% Note due 2037, filed as Exhibit 99.6 to the Abbott Laboratories Current Report on Form 8-K dated November 6, 2007. |
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4.13 |
*Actions of the Authorized Officers with respect to Abbott's 5.150% Notes due 2012, 5.600% Notes due 2017 and 6.150% Notes due 2037, filed as Exhibit 99.3 to the Abbott Laboratories Current Report on Form 8-K dated November 6, 2007. |
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4.14 |
*Form of $2,000,000,000 5.125% Note due 2019, filed as Exhibit 99.4 to the Abbott Laboratories Current Report on Form 8-K dated February 26, 2009. |
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4.15 |
*Form of $1,000,000,000 6.000% Note due 2039, filed as Exhibit 99.5 to the Abbott Laboratories Current Report on Form 8-K dated February 26, 2009. |
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4.16 |
*Actions of the Authorized Officers with respect to Abbott's 5.125% Note due 2019 and 6.000% Note due 2039, filed as Exhibit 99.3 to the Abbott Laboratories Current Report on Form 8-K dated February 26, 2009. |
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4.17 |
*Form of 2015 Note, filed as Exhibit 99.4 to the Abbott Laboratories Current Report on Form 8-K dated May 27, 2010. |
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4.18 |
*Form of 2020 Note, filed as Exhibit 99.5 to the Abbott Laboratories Current Report on Form 8-K dated May 27, 2010. |
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4.19 |
*Form of 2040 Note, filed as Exhibit 99.6 to the Abbott Laboratories Current Report on Form 8-K dated May 27, 2010. |
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4.20 |
*Actions of the Authorized Officers with respect to Abbott's 2.70% Notes, 4.125% Notes and 5.30% Notes, filed as Exhibit 99.3 to the Abbott Laboratories Current Report on Form 8-K dated May 27, 2010. |
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|
Other debt instruments are omitted in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. Copies of such agreements will be furnished to the Securities and Exchange Commission upon request. |
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10.1 |
*Supplemental Plan Abbott Laboratories Extended Disability Plan, filed as an exhibit (pages 50-51) to the 1992 Abbott Laboratories Annual Report on Form 10-K.** |
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10.2 |
*Abbott Laboratories Deferred Compensation Plan, as amended effective January 1, 2008, filed as Exhibit 4.1 to the 2008 Abbott Laboratories Annual Report on Form 10-K.** |
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10.3 |
*Abbott Laboratories 401(k) Supplemental Plan, as amended and restated, filed as Exhibit 10.3 to the 2009 Abbott Laboratories Annual Report on Form 10-K.** |
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10.4 |
*Abbott Laboratories Supplemental Pension Plan, as amended and restated, filed as Exhibit 10.4 to the 2009 Abbott Laboratories Annual Report on Form 10-K.** |
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10.5 |
*The 1986 Abbott Laboratories Management Incentive Plan, as amended and restated, filed as Exhibit 10.5 to the 2009 Abbott Laboratories Annual Report on Form 10-K.** |
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102
| 10-K Exhibit Table Item No. |
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|---|---|---|---|
10.6 |
*1998 Abbott Laboratories Performance Incentive Plan, as amended effective January 1, 2008, filed as Exhibit 10.7 to the 2008 Abbott Laboratories Annual Report on Form 10-K.** |
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10.7 |
*Rules for the 1998 Abbott Laboratories Performance Incentive Plan, as amended and restated, filed as Exhibit 10.7 to the 2009 Abbott Laboratories Annual Report on Form 10-K.** |
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10.8 |
*The Abbott Laboratories 1996 Incentive Stock Program, as amended and restated through the 6th Amendment February 20, 2009, filed as Exhibit 10.11 to the Abbott Laboratories Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.** |
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10.9 |
*Abbott Laboratories 2009 Incentive Stock Program, filed as Exhibit B to the Abbott Laboratories Definitive Proxy Statement on Schedule 14A dated March 13, 2009.** |
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10.10 |
*Abbott Laboratories Non-Employee Directors' Fee Plan, as amended and restated, filed as Exhibit 10.10 to the 2009 Abbott Laboratories Annual Report on Form 10-K.** |
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10.11 |
*Form of Non-Employee Director Stock Option Agreement under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 18, 2005, filed as Exhibit 10.7 to the Abbott Laboratories Current Report on Form 8-K dated February 18, 2005.** |
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10.12 |
*Form of Employee Stock Option Agreement for a Non-Qualified Stock Option granted with an Incentive Stock Option under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.1 to the Abbott Laboratories Current Report on Form 8-K dated August 20, 2004.** |
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10.13 |
*Form of Employee Stock Option Agreement for a Non-Qualified Stock Option under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.2 to the Abbott Laboratories Current Report on Form 8-K dated August 20, 2004.** |
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10.14 |
*Form of Employee Stock Option Agreement for an Incentive Stock Option granted with a Non-Qualified Stock Option under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.3 to the Abbott Laboratories Current Report on Form 8-K dated August 20, 2004.** |
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10.15 |
*Form of Employee Stock Option Agreement for an Incentive Stock Option under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.4 to the Abbott Laboratories Current Report on Form 8-K dated August 20, 2004.** |
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10.16 |
*Form of Employee Stock Option Agreement for a Replacement Stock Option under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.5 to the Abbott Laboratories Current Report on Form 8-K dated August 20, 2004.** |
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10.17 |
*Form of Employee Restricted Stock Agreement under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.6 to the Abbott Laboratories Current Report on Form 8-K dated August 20, 2004.** |
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10.18 |
*Form of Employee Restricted Stock Unit Agreement under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.7 to the Abbott Laboratories Current Report on Form 8-K dated August 20, 2004.** |
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10.19 |
*Form of Non-Employee Director Stock Option Agreement under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.8 to the Abbott Laboratories Current Report on Form 8-K dated August 20, 2004.** |
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103
| 10-K Exhibit Table Item No. |
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|---|---|---|---|
10.20 |
*Form of Non-Employee Director Restricted Stock Unit Agreement under Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.2 to the Abbott Laboratories Current Report on Form 8-K dated December 10, 2004.** |
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10.21 |
*Form of Employee Stock Option Agreement for a Non-Qualified Stock Option granted with an Incentive Stock Option under the Abbott Laboratories 1996 Incentive Stock Program on or after February 18, 2005, filed as Exhibit 10.1 to the Abbott Laboratories Current Report on Form 8-K dated February 18, 2005.** |
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10.22 |
*Form of Employee Stock Option Agreement for a new Non-Qualified Stock Option under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 18, 2005, filed as Exhibit 10.2 to the Abbott Laboratories Current Report on Form 8-K dated February 18, 2005.** |
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10.23 |
*Form of Employee Stock Option Agreement for an Incentive Stock Option granted with a Non-Qualified Stock Option under the Abbott Laboratories 1996 Incentive Stock Program on or after February 18, 2005, filed as Exhibit 10.3 to the Abbott Laboratories Current Report on Form 8-K dated February 18, 2005.** |
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10.24 |
*Form of Employee Stock Option Agreement for an Incentive Stock Option under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 18, 2005, filed as Exhibit 10.4 to the Abbott Laboratories Current Report on Form 8-K dated February 18, 2005.** |
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10.25 |
*Form of Employee Restricted Stock Agreement under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.5 to the Abbott Laboratories Current Report on Form 8-K dated February 18, 2005.** |
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10.26 |
*Form of Employee Restricted Stock Unit Agreement under the Abbott Laboratories 1996 Incentive Stock Program, filed as Exhibit 10.6 to the Abbott Laboratories Current Report on Form 8-K dated February 18, 2005.** |
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10.27 |
*Form of Performance Restricted Stock Agreement for an award of performance restricted stock under Section 10 of the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 17, 2006, filed as Exhibit 10.1 to the Abbott Laboratories Current Report on Form 8-K dated February 16, 2006.** |
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10.28 |
*Form of Performance Restricted Stock Agreement for an award of performance restricted stock under Section 11 of the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 17, 2006, filed as Exhibit 10.2 to the Abbott Laboratories Current Report on Form 8-K dated February 16, 2006.** |
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10.29 |
*Form of Performance Restricted Stock Unit Agreement for an award of performance restricted stock units under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 17, 2006, filed as Exhibit 10.3 to the Abbott Laboratories Current Report on Form 8-K dated February 16, 2006.** |
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10.30 |
*Form of Non-Qualified Stock Option Agreement for an award of non-qualified stock options under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 17, 2006, filed as Exhibit 10.4 to the Abbott Laboratories Current Report on Form 8-K dated February 16, 2006.** |
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104
| 10-K Exhibit Table Item No. |
|
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|---|---|---|---|
10.31 |
*Form of Restricted Stock Unit Agreement for an award of restricted stock units under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 17, 2006, filed as Exhibit 10.5 to the Abbott Laboratories Current Report on Form 8-K dated February 16, 2006.** |
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10.32 |
*Form of Performance Restricted Stock Agreement for an award of performance restricted stock under Section 10 of the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 16, 2007, filed as Exhibit 10.49 to the 2006 Abbott Laboratories Report on Form 10-K.** |
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10.33 |
*Form of Performance Restricted Stock Agreement for an award of performance restricted stock under Section 11 of the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 16, 2007, filed as Exhibit 10.50 to the 2006 Abbott Laboratories Report on Form 10-K.** |
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10.34 |
*Form of Performance Restricted Stock Unit Agreement for an award of performance restricted stock units under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 16, 2007, filed as Exhibit 10.51 to the 2006 Abbott Laboratories Report on Form 10-K.** |
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10.35 |
*Form of Restricted Stock Unit Agreement for an award of restricted stock units under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 16, 2007, filed as Exhibit 10.52 to the 2006 Abbott Laboratories Report on Form 10-K.** |
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10.36 |
*Form of Performance Restricted Stock Agreement for an award of performance restricted stock under Section 10 of the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.1 to the Abbott Laboratories Current Report on 8-K dated February 20, 2009.** |
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10.37 |
*Form of Performance Restricted Stock Agreement for an award of performance restricted stock under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.2 to the Abbott Laboratories Current Report on 8-K dated February 20, 2009.** |
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10.38 |
*Form of Non-Qualified Stock Option Agreement for an award of non-qualified stock options under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.3 to the Abbott Laboratories Current Report on 8-K dated February 20, 2009.** |
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10.39 |
*Form of Non-Qualified Replacement Stock Option Agreement for an award of non-qualified replacement stock options under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.4 to the Abbott Laboratories Current Report on 8-K dated February 20, 2009.** |
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10.40 |
*Form of Restricted Stock Agreement for an award of restricted stock under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009 (ratable vesting), filed as Exhibit 10.5 to the Abbott Laboratories Current Report on 8-K dated February 20, 2009.** |
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10.41 |
*Form of Restricted Stock Agreement for an award of restricted stock under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009 (cliff vesting), filed as Exhibit 10.6 to the Abbott Laboratories Current Report on 8-K dated February 20, 2009.** |
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105
| 10-K Exhibit Table Item No. |
|
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|---|---|---|---|
10.42 |
*Form of Restricted Stock Unit Agreement for an award of restricted stock units under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.7 to the Abbott Laboratories Current Report on 8-K dated February 20, 2009.** |
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10.43 |
*Form of Non-Employee Director Non-Qualified Replacement Stock Option Agreement for an award of non-qualified replacement stock options under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.8 to the Abbott Laboratories Current Report on 8-K dated February 20, 2009.** |
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10.44 |
*Form of Non-Employee Director Non-Qualified Stock Option Agreement, filed as Exhibit 10.2 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.45 |
*Form of Non-Employee Director Restricted Stock Unit Agreement, filed as Exhibit 10.3 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.46 |
*Form of Non-Employee Director Non-Qualified Replacement Stock Option Agreement, filed as Exhibit 10.4 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.47 |
*Form of Non-Qualified Stock Option Agreement (ratably vested), filed as Exhibit 10.5 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.48 |
*Form of Non-Qualified Replacement Stock Option Agreement, filed as Exhibit 10.6 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.49 |
*Form of Performance Restricted Stock Agreement, filed as Exhibit 10.7 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.50 |
*Form of Restricted Stock Agreement (ratably vested), filed as Exhibit 10.8 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.51 |
*Form of Restricted Stock Agreement (cliff vested), filed as Exhibit 10.9 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.52 |
*Form of Performance Restricted Stock Agreement (annual performance based), filed as Exhibit 10.10 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.53 |
*Form of Performance Restricted Stock Agreement (interim performance based), filed as Exhibit 10.11 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.54 |
*Form of Restricted Stock Unit Agreement (cliff vested), filed as Exhibit 10.12 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.55 |
*Form of Restricted Stock Unit Agreement (ratably vested), filed as Exhibit 10.13 to the Abbott Laboratories Current Report on Form 8-K dated April 24, 2009.** |
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10.56 |
*Form of Agreement Regarding Change in Control by and between Abbott Laboratories and its named executive officers (other than Messrs. White and Freyman), filed as Exhibit 10.34 to the 2008 Abbott Laboratories Annual Report on Form 10-K.** |
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10.57 |
Base Salary of Named Executive Officers.** |
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106
| 10-K Exhibit Table Item No. |
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|---|---|---|---|
10.58 |
*Form of Time Sharing Agreement between Abbott Laboratories, Inc. and M.D. White and T.C. Freyman, filed as Exhibit 10.6 to the Abbott Laboratories Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.** |
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10.59 |
*Amended and Restated Advanced Medical Optics, Inc. 2002 Incentive Compensation Plan, as amended, filed as Exhibit 4.3 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.** |
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10.60 |
*First Amendment to Amended and Restated Advanced Medical Optics, Inc. 2002 Incentive Compensation Plan, filed as Exhibit 4.4 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.** |
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10.61 |
*2004 Stock Incentive Plan, as amended and restated, filed as Exhibit 4.5 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.** |
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10.62 |
*Advanced Medical Optics, Inc. 2005 Incentive Compensation Plan, filed as Exhibit 4.6 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.** |
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10.63 |
*VISX, Incorporated 2001 Nonstatutory Stock Option Plan, filed as Exhibit 4.7 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.** |
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10.64 |
*VISX, Incorporated 2000 Stock Plan, filed as Exhibit 4.8 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.** |
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10.65 |
*VISX, Incorporated 1995 Director Option and Stock Deferral Plan, as amended and restated, filed as Exhibit 4.9 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.** |
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10.66 |
*VISX, Incorporated 1995 Stock Plan, as amended, filed as Exhibit 4.10 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.** |
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12 |
Computation of Ratio of Earnings to Fixed Charges. |
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21 |
Subsidiaries of Abbott Laboratories. |
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23.1 |
Consent of Independent Registered Public Accounting Firm. |
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31.1 |
Certification of Chief Executive Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)). |
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31.2 |
Certification of Chief Financial Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)). |
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32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101 |
The following financial statements and notes from the Abbott Laboratories Annual Report on Form 10-K for the year ended December 31, 2011 filed on February 21, 2012, formatted in XBRL: (i) Consolidated Statement of Earnings; (ii) Consolidated Statement of Cash Flows; (iii) Consolidated Balance Sheet; (iv) Consolidated Statement of Shareholders' Investment; and (v) the notes to the consolidated financial statements. |
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107
The 2012 Abbott Laboratories Proxy Statement will be filed with the Securities and Exchange Commission under separate cover on or about March 15, 2012.
Abbott will furnish copies of any of the above exhibits to a shareholder upon written request to the Secretary, Abbott Laboratories, 100 Abbott Park Road, Abbott Park, Illinois 60064-6400.
108