Abbott Laboratories 2013 Annual Report Download - page 65

ABBOTT 2013 ANNUAL REPORT
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to have a negative effect on the gross profit margins of the
Nutritional and Established Pharmaceutical Products segments.
Research and development expense was $1.452 billion in 2013,
$1.544 billion in 2012 and $1.512 billion in 2011 and represented
a 6.0 percent decrease in 2013, and a 2.1 percent increase in 2012.
The 2013 decrease primarily reflects the incurrence of restructur-
ing and asset impairment charges in 2012 which did not recur
in 2013. In 2013, research and development expenditures totaled
$336 million for the Vascular Products segment, $416 million
for the Diagnostics Products segment, $239 million for the
Established Pharmaceutical Products segment and $188 million
for the Nutritional Products segment.
Selling, general and administrative expenses decreased 6.8 percent
in 2013 and increased 1.1 percent in 2012. The 2013 decrease
reflects the transfer of certain 2012 corporate costs to AbbVie in
the separation as well as certain information technology and other
back office support costs that are being charged to AbbVie in 2013
under transition services agreements. Prudent cost management
and a reduction in restructuring costs also contributed to the
decrease. The 2012 increase primarily reflects increased selling
and marketing support for new products and geographical
expansion, largely offset by prudent cost management.
BUSINESS ACQUISITIONS
In August 2013, Abbott acquired 100 percent of IDEV Technologies,
net of debt, for $310 million, in cash. The acquisition of IDEV
Technologies expands Abbott’s endovascular portfolio. The alloca-
tion of the fair value of the acquisition resulted in non-deductible
acquired in-process research and development of approximately
$170 million which is accounted for as an indefinite-lived intangible
asset until regulatory approval or discontinuation, non-deductible
definite-lived intangible assets of approximately $66 million, non-
deductible goodwill of approximately $123 million and net deferred
tax liabilities of $56 million. Acquired intangible assets consist of
developed technology and are being amortized over 11 years.
In August 2013, Abbott acquired 100 percent of OptiMedica for
$260 million, in cash, plus additional payments up to $150 million
to be made upon completion of certain development, regulatory
and sales milestones. The acquisition of OptiMedica provides
Abbott with an immediate entry point into the laser assisted
cataract surgery market. The allocation of the fair value of the
acquisition resulted in non-deductible definite-lived intangible
assets of approximately $160 million, non-deductible acquired
in-process research and development of approximately $60 million
which is accounted for as an indefinite-lived intangible asset until
regulatory approval or discontinuation, non-deductible goodwill
of approximately $151 million, net deferred tax liabilities of
$70 million and contingent consideration of approximately
$70 million. The fair value of the contingent consideration
was determined based on an independent appraisal. Acquired
intangible assets consist primarily of developed technology that
is being amortized over 18 years.
The preliminary allocations of the fair value of these acquisitions
will be finalized when valuations are completed. Had the above
acquisitions taken place on January 1 of the previous year, consoli-
dated net sales and income would not have been significantly
different from reported amounts.
RESTRUCTURINGS
In 2013, Abbott management approved a plan to reduce costs and
improve efficiencies across various functional areas as well as
a plan to streamline certain manufacturing operations in order
to reduce costs and improve efficiencies in Abbott’s established
pharmaceuticals business. In 2012, Abbott management approved
plans to streamline various commercial operations in order to
reduce costs and improve efficiencies in Abbott’s core diagnostics,
established pharmaceutical and nutritionals businesses. Abbott
recorded employee related severance charges of approximately
$78 million in 2013 and $167 million in 2012. Additional charges
of approximately $4 million and $22 million were also recorded
in 2013 and 2012, respectively, primarily for asset impairments.
Approximately $35 million in 2013 and $70 million in 2012 is
recorded in Cost of products sold and approximately $47 million
in 2013 and $119 million in 2012 is recorded as Selling, general
and administrative expense.
In 2013 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 2013, Abbott recorded employee severance charges of
approximately $11 million. In 2011, Abbott recorded charges of
approximately $194 million reflecting the impairment of manufac-
turing facilities and other assets, employee severance and other
related charges. Approximately $11 million in 2013 and $18 million
in 2011 is classified as Cost of products sold. The remaining 2011
charge of $176 million related to businesses transferred to AbbVie
and is being recognized in the results of discontinued operations.
An additional $41 million, $110 million and $25 million were
recorded in 2013, 2012 and 2011, respectively, relating to these
restructurings, primarily for accelerated depreciation.
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.
These charges related to businesses transferred to AbbVie and
have been recognized in the results of discontinued operations.
In 2011, 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. In addition,
charges of approximately $16 million and $42 million were
recorded in 2012 and 2011, primarily for accelerated depreciation
and product transfer costs.
INTEREST EXPENSE
In 2013, interest expense decreased due to a lower level of
borrowings, which resulted from the transfer of approximately
$14.6 billion of debt to AbbVie as part of the separation. In 2012,
interest expense included bridge facility fees related to the
separation of AbbVie from Abbott.
FINANCIAL REVIEW