Abbott Laboratories 2014 Annual Report Download - page 63

FINANCIAL REVIEW
61
ABBOTT 2014 ANNUAL REPORT
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 July 2014, Abbott announced that it will sell its developed
markets branded generics pharmaceuticals business to Mylan Inc.
(Mylan) for 110million shares of a newly formed publically traded
entity that will combine Mylan’s existing business and Abbott’s
developed markets pharmaceuticals business. The sale of this
business closed on February27, 2015. In November 2014, Abbott
entered into an agreement to sell its animal health business to
Zoetis Inc. The sale of this business closed on February10, 2015.
On January1, 2013, Abbott completed the separation of AbbVie
Inc. (AbbVie), which was formed to hold Abbott’s research-based
proprietary pharmaceuticals business. The historical operating
results of these businesses prior to disposition are excluded from
Earnings from Continuing Operations and are presented on the
Earnings from Discontinued Operations line in Abbott’s Consolidated
Statement of Earnings. Any assets or liabilities related to these
businesses are being reported as held for sale in Abbott’s
Consolidated Balance Sheet at December31, 2014. The cash flows
of these businesses up through the date of disposition or separa-
tion are included in its Consolidated Statements of Cash Flows
for all periods presented.
Over the last three years, sales growth and margin improvement
was driven primarily by the nutritional and diagnostics businesses.
Sales in emerging markets, which represent nearly 50 percent of
total company sales, increased 12.5 percent in 2014 and 10.8 percent
in 2013, excluding the impact of foreign exchange. (Emerging
markets include all countries except the United States, Western
Europe, Japan, Canada, Australia and New Zealand.) Abbott
expanded its operating margin by 200 basis points in 2014 and
380basis points in 2013. Abbott’s sales, costs, and financial position
over the same period were impacted by a challenging economic
and fiscal environment in several emerging economies and the
strengthening of the U.S. dollar relative to several international
currencies during 2013 and 2014.
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 15.7 percent
in 2012 to 21.0 percent in 2014.
In the second half of 2013 and the first two quarters of 2014,
sales growth in International Pediatric Nutrition was aected 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. Abbott initiated investments
in the third quarter of 2013 in these markets to rebuild consumer
confidence and this business had recovered from this disruption
by the beginning of the third quarter of 2014.
In 2014, Abbott increased the local presence of its nutrition busi-
ness in various countries by investing in its global infrastructure.
Abbott opened three new manufacturing plants, one in China,
one in India, and one in the United States to meet the demand for
its products, and formed a strategic alliance with Fonterra, the
world’s largest dairy cooperative, to develop a proposed dairy
farm hub in China.
In Abbott’s worldwide diagnostics business, margin improvement
continued to be a key focus in 2014. Operating margins increased
from 19.2 percent of sales in 2012 to 22.9 percent in 2014 as the
business continued to execute on eciency 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 6.4 percent in 2014 and 8.3 percent in
2013, excluding foreign exchange.
In the Established Pharmaceutical Products segment, Abbott
announced in July 2014 that it will sell its developed markets
branded generics pharmaceuticals business to Mylan Inc. As a
result, the current and prior year operating results of the devel-
oped markets branded generics business are reported as part of
discontinued operations. Following the close of this transaction,
the Established Pharmaceuticals business will operate entirely in
emerging markets. On September 26, 2014, Abbott completed its
acquisition of a controlling interest in CFR Pharmaceuticals S.A.
(CFR). The acquisition of CFR more than doubles Abbott’s
branded generics pharmaceutical presence in Latin America and
further expands its presence in emerging markets. On December
12, 2014, Abbott acquired control of Veropharm, a leading Russian
pharmaceutical company. Through this acquisition, Abbott estab-
lishes a manufacturing footprint in Russia and obtains a portfolio
of medicines that is well aligned with Abbott’s current pharma-
ceutical therapeutic areas of focus.
The growth in Established Pharmaceuticals sales from continuing
operations accelerated over the course of 2014 after macroeco-
nomic and market pressures in certain emerging markets impacted
this business in 2013. For the year in total, 2014 sales increased
14.9percent excluding the eect of foreign exchange.
In the vascular business, over the last three years, Abbott has
continued to develop its worldwide market-leading XIENCE
drug-eluting stent (DES) franchise. The XIENCE franchise
includes XIENCE V, Prime, nano, Pro, ProX, Xpedition, and Alpine.
Abbott Vascular Products’ latest product introduction, XIENCE