Abbott Laboratories 2014 Annual Report Download - page 64

FINANCIAL REVIEW
ABBOTT 2014 ANNUAL REPORT
62
the Special Supplemental Nutrition Program for Women, Infants,
and Children (WIC), wholesalers, group purchasing 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 payment 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 one to six months after sale. Abbott
regularly analyzes the historical rebate trends and makes adjust-
ments to reserves for changes in trends and terms of rebate
programs. Rebates and chargebacks charged against gross sales
in 2014, 2013 and 2012 amounted to approximately $2.1billion,
$1.9billion and $1.8billion, respectively, or 19.2 percent, 18.4 per-
cent and 18.3 percent, respectively, based on gross sales of
approximately $10.7billion, $10.5billion and $9.8billion, respec-
tively, subject to rebate. A one-percentage point increase in the
percentage of rebates to related gross sales would decrease net
sales by approximately $107million in 2014. 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 $138million,
$146million and $144million for cash discounts in 2014, 2013
and 2012, respectively, and $210million, $208million and
$198million for returns in 2014, 2013 and 2012, respectively.
Cash discounts are known within 15 to 30 days of sale, and there-
fore can be reliably estimated. Returns can be reliably estimated
because Abbott’s historical 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
balances each quarter. In the domestic nutritional business, man-
agement 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 estimates 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 substantially. 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, partici-
pant 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, 2014, Abbott had WIC business
in 23 states.
Alpine, was launched in the U.S. late in the fourth quarter of
2014 and is the only product on the market in the U.S. with an
indication to treat chronic total inclusions (CTO). The XIENCE
franchise maintained its market-leading global position in 2014.
In 2014 and 2013, while MitraClip, Absorb, and the endovascular
franchise contributed to sales growth, total vascular sales were
flat, excluding the unfavorable eect of exchange, as volume
increases were almost entirely oset by pricing pressures primar-
ily related to DES and other coronary products as well as lower
DES market share in the U.S. Operating margins improved from
33.2 percent in 2012 to 36.5percent in 2014 as cost improvement
initiatives were executed across the business.
Abbott’s short- and long-term debt totaled $7.8billion at
December31, 2014. At December31, 2014, 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 2014, Abbott
extinguished approximately $500million of long-term debt that
was assumed as part of the acquisition of CFR and incurred a
charge of $18.3million related to the early repayment of this debt.
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 declared dividends of $0.90 per share in 2014 compared
to $0.64 per share in 2013, a 40% increase. Dividends paid were
$1.342billion in 2014 compared to $882million in 2013. The year-
over-year change in dividends reflects the impact of the increase
in the dividend rate. In December 2014, Abbott increased the
company’s quarterly dividend to $0.24 per share from $0.22 per
share, eective with the dividend paid in February 2015.
In 2015, 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
approvals across numerous countries and increasing its penetration
of emerging markets. In the diagnostics business, Abbott will focus
on the development of next-generation instrument platforms 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 market-
ing products in the coronary and endovascular franchises, and
increasing MitraClip sales, as well as further clinical development
of ABSORB, its bioresorbable vascular scaold (BVS) device and a
further penetration of ABSORB in numerous countries. In Abbott’s
other segments, Abbott will focus on developing dierentiated
technologies in higher growth markets.
CRITICAL ACCOUNTING POLICIES
Sales Rebates—In 2014, approximately 43 percent of Abbott’s
consolidated 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
in 2014 are in the Nutritional Products and Diabetes Care seg-
ments. Abbott provides rebates to state agencies that administer