3M 2004 Annual Report Download - page 49

23
Health Care Business (21.1% of consolidated sales):
2004 2003 2002
Sales (millions) $4,230 $3,995 $3,560
Sales change analysis:
Local currency (volume and price) 1.7% 6.0% 7.7%
Translation 4.2 6.2 0.2
Total sales change 5.9% 12.2% 7.9%
Operating income (millions) $1,123 $1,027 $ 900
Percent change 9.3% 14.1% 19.5%
Percent of sales 26.5% 25.7% 25.3%
The Health Care segment serves markets that include medical, surgical, pharmaceutical, dental and orthodontic,
health information systems and personal care. Products provided to these markets include medical and surgical
supplies, skin health and infection prevention products, pharmaceuticals, drug delivery systems, dental and orthodontic
products, health information systems, microbiology products, and closures for disposable diapers.
In 2004, local-currency sales in Health Care increased 1.7%, with the first nine months of 2004 negatively impacted
by 2003 pharmaceutical and drug delivery agreements that did not repeat. Fourth quarter 2004 local-currency sales
grew 5.0%, as year-on-year comparisons became more favorable. Operating income increased 9.3% to
$1.123 billion in 2004.
The 3M product platform of immune response modifiers (IRMs) continues to progress. 3M received U.S. Food and
Drug Administration (FDA) approval in March 2004 to market Aldara™ (imiquimod) Cream, 5%, for the treatment
of certain types of actinic keratosis (a pre-cancerous skin condition). In July 2004, the FDA granted approval for
Aldara for the treatment of superficial basal cell carcinoma (a common form of non-melanoma skin cancer). The
patent and related rights for the imiquimod molecule are important to the Health Care Business. The original
patent on the imiquimod molecule expired in August 2004, but the patent term extension runs through August
2009.
In the pharmaceuticals business, an agreement was reached with Eli Lilly and Company in September of 2001 to
collaborate on resiquimod, an investigational compound for the treatment of genital herpes. 3M received
$100 million in the fourth quarter of 2001 from Lilly in consideration for research and development efforts.
Revenue was recognized on a pro-rata basis over the service period. 3M recognized $44 million of revenue
relating to this agreement in 2003, $43 million in 2002 and $7 million in 2001. In the third quarter of 2003, 3M and
Eli Lilly reached a final agreement to return control of resiquimod to 3M. Upon termination of the agreement in
2003, 3M recognized the majority of the remaining revenue (with deferral of some immaterial remaining
obligations until 2004 when the obligations were finalized).
In October 2003, IVAX Corporation agreed to assume exclusive rights to 3M’s branded health care respiratory
products, together with related marketing and sales personnel, in nine European countries. The agreement
covered QVAR™ (beclomethasone dipropionate HFA) Inhalation Aerosol, a “maintenance” medication used to
prevent asthma attacks, and also covered Airomir™ (albuterol sulfate) Inhaler, a “rescue” medication used to
relieve acute asthma symptoms. 3M will continue to manufacture and supply these products to IVAX. The total
consideration due under the agreement, including minimum annual royalty payments, was $77 million, of which
$26 million was paid in 2003 and $24 million was paid in 2004. 3M expects to receive $24 million in 2005 and
$3 million in 2006. 3M may also receive additional royalty payments (up to a maximum of approximately $7 million
in total) if IVAX achieves certain annual sales levels. The Company recognizes the royalty revenue related to the
IVAX agreement ratably over the term of the licensing arrangement.
In 2003, local-currency growth and total sales growth in the Health Care segment were broad-based. Geographic area
local-currency growth was led by the Asia Pacific area and the Latin America, Africa and Canada area, with the United
States and Europe showing moderate growth. Operating income improvement was also broad-based. In 2003, the
combined benefit from both the Eli Lilly agreement and the IVAX Corporation agreement was partially offset by
separation costs in Health Care, resulting in a net benefit to operating income of approximately $20 million.