Abbott Laboratories 2012 Annual Report Download - page 56

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Abbott 2012 Annual Report
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 in numerous countries. 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 $4.322 billion in 2012,
$4.129 billion in 2011 and $3.724 billion in 2010 and represented
increases of 4.7 percent in 2012, 10.9 percent in 2011 and 35.7 per-
cent in 2010. Excluding charges related to the Solvay restructurings
announced in September 2010, research and development expense
increased 6.2 percent in 2011 and 29.4 percent in 2010. 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 increases in 2012, 2011
and 2010 also reflect continued pipeline spending, including programs
in biologics, hepatitis C and diagnostics. The majority of research and
development expenditures over the three years were concentrated
on pharmaceutical products. $2.9 billion of Abbott’s 2012 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 2012, research and develop-
ment expenditures totaled $367 million for the Vascular Products
segment, $382 million for the Diagnostics Products segment,
$275 million for the Established Pharmaceutical Products segment
and $186 million for the Nutritional Products segment.
Selling, general and administrative expenses decreased 5.5 percent in
2012 and increased 22.9 percent in 2011 and 23.4 percent in 2010.
2012 includes approximately $405 million related to the separation of
AbbVie from Abbott and a $100 million litigation charge related to the
government investigation related to Depakote while 2011 includes a
litigation charge of $1.5 billion related to the Depakote investigation.
Excluding separation costs, litigation charges and Solvay-related
restructuring and integration costs, selling, general and administrative
expenses increased 4.6 percent in 2012 and 6.7 percent in 2011.
Excluding charges related to Solvay restructuring and integration proj-
ects, 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 pharma-
ceuticals business in 2010 and Advanced Medical Optics, Inc. in 2009
and higher provisions for litigation in 2010. 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 2011, the impact of the pharmaceutical fee imposed
by U.S. healthcare reform legislation.
Restructurings
In 2012, Abbott management approved plans to streamline various
commercial operations in order to reduce costs and improve efficien-
cies in Abbott’s core diagnostics, established pharmaceutical and
nutritionals businesses. Abbott recorded employee related severance
charges of approximately $167 million in 2012. Additional charges of
approximately $22 million were also recorded in 2012, primarily for
asset impairments. Approximately $70 million is recorded in Cost of
products sold and approximately $119 million as Selling, general and
administrative expense. As of December 31, 2012, no significant cash
payments have been made relating to these actions.
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 and 2010, Abbott recorded charges of approximately
$194 million and $56 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. The following
summarizes the activity for these restructurings:
(dollars in millions)
Accrued balance at January 1, 2010 $ 145
2010 restructuring charges 56
Payments, impairments and other adjustments (124)
Accrued balance at December 31, 2010 77
2011 restructuring charges 194
Payments, impairments and other adjustments (94)
Accrued balance at December 31, 2011 177
Payments and other adjustments (48)
Accrued balance at December 31, 2012 $ 129
An additional $110 million, $25 million and $13 million were recorded
in 2012, 2011 and 2010, respectively, relating to these restructurings,
primarily for accelerated depreciation.
In 2012 and 2010, Abbott management approved restructuring
plans primarily related to the acquisition of Solvay’s pharmaceuticals
business. These plans streamline operations, improve efficiencies and
reduce costs in certain Solvay sites and functions as well as in certain
Abbott and Solvay commercial organizations in various countries.
In 2012, Abbott recorded a charge of approximately $150 million for
employee severance and contractual obligations, primarily related
to the exit from a research and development facility. Approximately
$142 million is recorded as Research and development and $8 million
as Selling, general and administrative. In 2010, 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 these restructurings:
(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
Restructuring charges 150
Payments and other adjustments (143)
Accrued balance at December 31, 2012 $ 115
Financial Review