Abbott Laboratories 2012 Annual Report Download - page 52

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Abbott 2012 Annual Report
$100 million for the annual pharmaceutical manufacturer fee. This fee
is not tax-deductible and is included in selling, general and administra-
tive expenses. With the separation of AbbVie at the beginning of 2013,
Abbott no longer sells pharmaceutical products in the U.S. and there-
fore is no longer subject to the annual pharmaceutical fee or the
additional rebates. Beginning in 2013, Abbott will begin paying the
2.3 percent medical device tax under U.S. health care reform legisla-
tion. This tax will be included in selling, general and administrative
expenses and the amount of the tax is not expected to be material.
In the fourth quarter of 2012, Abbott extinguished $7.7 billion of
long-term debt and incurred a charge of $1.35 billion related to the
early repayment, net of gains from the unwinding of interest rate
swaps related to the debt. Abbott’s short- and long-term debt totaled
$20.5 billion at December 31, 2012. This balance includes $1 billion
of short-borrowings and $14.7 billion of long-term debt that was
issued by AbbVie Inc. in 2012. After the separation of AbbVie on
January 1, 2013, Abbott has no remaining obligations related to this
$15.7 billion of debt. At December 31, 2012, Abbott’s long-term debt
rating was A+ by Standard and Poor’s Corporation and A1 by Moody’s
Investors Service. Operating cash flows in excess of capital expendi-
tures and cash dividends have partially funded acquisitions over the
last three years.
In 2013, Abbott will focus on several key initiatives. In the nutritional
business, Abbott will continue to build its product portfolio with the
introduction of new science-based products, expand in high-growth
emerging markets and implement additional margin improvement ini-
tiatives. In the established pharmaceuticals 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
diagnostics business, Abbott will focus on the development of next-
generation instruments and other advanced technologies, expansion
in emerging markets, and further improvements in the segment’s
operating margin. In the vascular business, Abbott will continue to
focus on marketing products in the Xience and endovascular fran-
chises, increasing international MitraClip sales, and obtaining
regulatory review of the MitraClip device in the U.S. as well as further
clinical development of ABSORB, its bioresorbable vascular scaffold
(BVS) device and a further roll-out of ABSORB in numerous countries.
In Abbott’s other segments, Abbott will focus on developing differenti-
ated technologies in higher growth markets.
Critical Accounting Policies
Sales Rebates – In 2012, approximately 56 percent of Abbott’s con-
solidated gross revenues were subject to various forms of rebates and
allowances that Abbott recorded as reductions of revenues at the time
of sale. Most of these rebates and allowances are in the Proprietary
Pharmaceutical Products segment and the Nutritional Products seg-
ment. Abbott provides rebates to pharmacy benefit management
companies, state agencies that administer the federal Medicaid pro-
gram, insurance companies that administer Medicare drug plans, state
agencies that administer the Special Supplemental Nutrition Program
for Women, Infants, and Children (WIC), wholesalers, group purchas-
ing 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 pay-
ment 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 eight 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 2012, 2011 and 2010 amounted to
approximately $6.2 billion, $5.5 billion and $4.9 billion, respectively, or
22.9 percent, 22.2 percent and 23.1 percent, respectively, based on
gross sales of approximately $26.9 billion, $24.8 billion and $21.1 bil-
lion, respectively, subject to rebate. A one-percentage point increase
in the percentage of rebates to related gross sales would decrease
net sales by approximately $269 million in 2012. 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 $542 million,
$409 million and $415 million for cash discounts in 2012, 2011 and
2010, respectively, and $365 million, $490 million and $537 million
for returns in 2012, 2011 and 2010, 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 histori-
cal 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 bal-
ances 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 esti-
mates 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 substan-
tially. 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, 2012, Abbott had WIC
business in 22 states.
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