Abbott Laboratories 2013 Annual Report Download - page 61

ABBOTT 2013 ANNUAL REPORT
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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 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 nutritional products, branded
generic pharmaceuticals, diagnostic testing products and vascular
products. Sales in international markets comprise approximately
70 percent of consolidated net sales.
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 created a new company, AbbVie Inc.
(“AbbVie”) for its research-based pharmaceuticals business
which consists primarily of Abbott’s historical Proprietary
Pharmaceutical Products segment. On January 1, 2013, Abbott
distributed all of the outstanding shares of AbbVie to Abbott’s
shareholders and AbbVie became an independent company
trading under the symbol “ABBV”.
The historical operating results of the research-based
proprietary pharmaceuticals business prior to separation are
excluded from Earnings from Continuing Operations and are
presented on the Earnings from Discontinued Operations line
in Abbott’s Consolidated Statement of Earnings. The assets,
liabilities, and cash flows of the research-based proprietary
pharmaceuticals business are included in Abbott’s Consolidated
Balance Sheet and its Consolidated Statements of Cash Flows for
periods prior to January 1, 2013.
Sales growth and margin improvement in the nutritional and
diagnostics businesses and the challenging economic and fiscal
environment in many countries around the world have impacted
Abbott’s sales, costs and financial position over the last three
years. Sales in emerging markets increased 11 percent per year in
2013 and 2012, excluding foreign exchange, despite the slowdown
in several emerging economies and a weakening of key emerging
market currencies in 2013. (Emerging markets include all
countries except the United States, Western Europe, Japan,
Canada, and Australia.)
In Abbott’s worldwide nutritional products business, sales over
the last three years were positively impacted by demographics
such as an aging population and an increasing rate of chronic
disease in developed markets and the rise of a middle class in
many emerging markets, as well as by numerous new product
introductions that leveraged Abbott’s strong brands. At the same
time, manufacturing and distribution process changes and other
cost reductions drove margin improvements across the business.
Operating margins for this business increased from 13.2 percent
in 2011 to 18.7 percent in 2013.
In 2013 sales growth in International Pediatric Nutrition was
affected by a product recall initiated in August 2013 in China
and two other markets for certain pediatric nutritional products
supplied to Abbott by a third-party manufacturer. While there
were no health issues associated with the recalled products, and
the supplier subsequently determined that the products had been
safe for consumption, the recall created significant disruption in
these markets. As a result, International Pediatric Nutrition sales
were significantly lower than Abbott’s previous expectations for
this business for the second half of 2013. While Abbott initiated
investments in the third quarter of 2013 in these markets to
rebuild consumer confidence, Abbott expects the recall to con-
tinue to have a negative impact on sales in the first half of 2014.
In Abbott’s worldwide diagnostics business, margin improvement
continued to be a key focus in 2013. Operating margins increased
from 19.2 percent of sales in 2011 to 22.2 percent in 2013 as the
business continued to execute on efficiency initiatives in the man-
ufacturing and supply chain functions. In addition to continued
margin improvement, unit growth across geographical regions
positively impacted worldwide diagnostic sales. Worldwide sales
for this business increased 8.3 percent in 2013 and 7.3 percent in
2012, excluding foreign exchange.
In the Established Pharmaceutical Products segment, macroeco-
nomic and market pressures in certain emerging markets impacted
this business in 2013. Nevertheless, sales in this segment’s 14 key
emerging markets increased 6.3 percent in 2013 excluding the effect
of foreign exchange. However, the growth in emerging markets was
largely offset by declines in developed markets where austerity
measures have continued to impact performance.
Over the last three years in the vascular business, Abbott continued
to build its Xience drug-eluting stent franchise with the receipt of
approval to market Xience Xpedition in various countries, including
Japanese approval in the third quarter of 2013 and U.S. approval in
the fourth quarter of 2012. Xience Pro received CE Mark approval
in the second quarter of 2012. Abbott’s market share also benefited
from the U.S. launches of Xience nano and Xience PRIME in 2011,
and the Japanese launches of Xience PRIME small vessel DES in
2013 and Xience PRIME in April 2012. Xience, which includes Xience
V, PRIME, nano, Pro, and Xpedition, ended 2013 as the market-lead-
ing drug eluting stent globally. In 2013, ABSORB and MitraClip also
contributed to sales growth. In 2011, the third party distributor of
the Promus product began transitioning away from the product and
that supply agreement ended in 2012. The effect of the winding
down of the agreement continued into the first quarter of 2013.
Abbott’s short- and long-term debt totaled $6.6 billion at
December 31, 2013. At December 31, 2013, Abbott’s long-term
debt rating was A+ by Standard and Poor’s Corporation and A1 by
Moody’s Investors Service. 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.
In October 2013 Abbott announced a 57 percent increase in
Abbott’s quarterly dividend to $0.22 per share from $0.14 per
share, effective with the dividend paid in February 2014.
In 2014, Abbott will focus on several key initiatives. In the nutri-
tional 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 initiatives. In the established pharmaceuticals busi-
ness, Abbott will continue to focus on obtaining additional product
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