Abbott Laboratories 2014 Annual Report Download - page 67

FINANCIAL REVIEW
65
ABBOTT 2014 ANNUAL REPORT
Abbott has periodically sold product rights to non-strategic prod-
ucts and has recorded the related gains in net sales in accordance
with Abbott’s revenue recognition policies as discussed in Note1
to the consolidated financial statements. Related net sales were
not significant in 2014, 2013 and 2012.
The expiration of licenses and patent protection can aect the
future revenues and operating income of Abbott. There are
currently no significant patent or license expirations in the
next three years that are expected to aect Abbott.
OPERATING EARNINGS
Gross profit margins were 51.7 percent of net sales in 2014,
50.2percent in 2013 and 50.2 percent in 2012. The gross profit
margin improvement in 2014 reflects higher margins in the
Nutritional, Diagnostics, and Vascular Products segments.
The gross profit margin in 2013 remained relatively unchanged
versus the prior year as improved margins in the Nutritional
and Diagnostics Products segments were oset by margin
declines in Established Pharmaceuticals and Vascular Products
due to pricing pressures and product mix as well as the impact
of unfavorable foreign exchange across segments.
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 eect
on the gross profit margins of the Nutritional and Established
Pharmaceutical Products segments.
Research and development expense was $1.345billion in 2014,
$1.371billion in 2013, and $1.461billion in 2012 and represented a
1.9 percent decrease in 2014, and a 6.2 percent decrease in 2013.
The 2014 decrease in research and development expenses primar-
ily reflects lower investment due to the completion of several
programs in the Vascular business. In 2014, research and develop-
ment expenditures totaled $268million for the Vascular Products
segment, $432million for the Diagnostics Products segment,
$129million for the Established Pharmaceutical Products seg-
ment, and $191million for the Nutritional Products segment.
Selling, general and administrative expenses increased 2.5percent
in 2014 and decreased 5.4percent in 2013 versus the respective
prior year. The 2014 increase reflects an increase in restructuring
costs associated with cost reduction initiatives and deal and other
expenses related to recent acquisitions, partially oset by continued
prudent cost management. 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 oce support
costs that were charged to AbbVie in 2013 under transition ser-
vices agreements. Prudent cost management and a reduction in
restructuring costs also contributed to the decrease.
BUSINESS ACQUISITIONS
In September, 2014, Abbott completed the acquisition of the
controlling interest in CFR Pharmaceuticals S.A. (CFR) for
approximately $2.9billion in cash ($2.8billion net of CFR cash
on hand at closing). Including the assumption of approximately
$570million of debt, the total cost of the acquisition was $3.4bil-
lion. The acquisition of CFR more than doubles Abbott’s branded
generics pharmaceutical presence in Latin America and further
Excluding the unfavorable eect of exchange, total Established
Pharmaceutical Products sales increased 14.9 percent in 2014 and
7.5 percent in 2013. The Established Pharmaceutical Products
segment is focused on several key emerging markets including
India, Russia, China and Brazil. Excluding the eect of exchange,
sales in these key emerging markets increased 7.7 percent in 2014
and 6.0 percent in 2013. Excluding the eect of exchange, sales in
Established Pharmaceuticals’ other emerging markets increased
43.1 percent in 2014 and increased 14.4 percent in 2013. The
increase in 2014 includes the impact of the acquisition of CFR
Pharmaceuticals in September 2014. Excluding sales from CFR
and the eects of exchange, revenues increased 7.9% in 2014.
Excluding the unfavorable eect of exchange, total Nutritional
Products sales increased 5.0 percent in 2014 and 5.4 percent in
2013. International Pediatric Nutritional sales increased in 2014
and 2013 due primarily to volume growth in developing countries.
A supplier’s recall of product in August 2013 in certain interna-
tional markets negatively impacted International Pediatric
Nutritional sales in the third and fourth quarters of 2013, as well
as the first two quarters of 2014. While there were no health issues
associated with this supplier recall and the supplier subsequently
determined that the product had been safe for consumption, this
event created significant disruption in these markets. The decline
in 2014 U.S. Pediatric Nutritional sales primarily reflects lower
infant formula revenue. U.S. Pediatric sales were flat in 2013
due to lower formula share, partially oset by higher sales of
toddler products.
The 2014 and 2013 increases in International Adult Nutritional
sales are due primarily to volume growth in developing countries
and were negatively impacted by the eect of the relatively stron-
ger U.S. dollar. The decrease in 2014 U.S. Adult Nutritional sales
reflects a decline in performance nutrition, as well as weakness in
the institutional market segment. The 3.1 percent decline in 2013
U.S. Adult Nutritional sales reflects Abbott’s exit from certain
non-core business lines as part of the business’ margin improve-
ment initiative; most of the sales decline resulting from this exit
was oset by higher Ensure revenues.
Excluding the unfavorable eect of exchange, total Diagnostic
Products sales increased 6.4 percent in 2014 and 8.3 percent in
2013. The sales increases reflect unit growth across geographical
regions. 2014 and 2013 sales of immunochemistry products, the
largest category in this segment, reflect continued execution of
Abbott’s strategy to deliver integrated solutions to large health-
care customers.
Excluding the unfavorable eect of exchange, total Vascular
Products sales were virtually flat in 2014 and 2013. In 2014, growth
of Abbott’s Mitraclip structural heart product and Endovascular
business, including Supera peripheral stent, as well as increased
penetration of the Absorb bioresorbable vascular scaold in vari-
ous international markets, was oset by decline in sales of DES
products due to year-over-year decreases in the U.S. DES market
and in market share. In 2013, growth in international markets,
driven by continued share gains in key geographies of XIENCE
Xpedition and Absorb, was oset by declines in the U.S. market
due to the negative impact of pricing pressure and a decline in
procedures due to market conditions, as well as the expected
decline of certain royalty revenues.