Abbott Laboratories 2015 Annual Report Download - page 67

FINANCIAL REVIEW
65
ABBOTT 2015 ANNUAL REPORT
OPERATING EARNINGS
Gross profit margins were 54.2percent of net sales in 2015,
51.7percent in 2014 and 50.2percent in 2013. The gross profit
margin improvement in 2015 reflects higher margins in the
Nutritional, Diagnostics, and Vascular Products 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 $1.405billion in 2015,
$1.345billion in 2014, and $1.371billion in 2013 and represented
a4.5 percent increase in 2015, and a 1.9percent decrease in 2014.
The 2015 increase in research and development expenses was
primarily due to higher spending across various businesses. In
2015, research and development expenditures totaled $474million
for the Diagnostics Products segment, $239million for the
Vascular Products segment, $206million for the Nutritional
Products segment, and $137million for the Established
Pharmaceutical Products segment.
Selling, general and administrative expenses increased 3.9percent
in 2015 and 2.5percent in 2014 versus the respective prior year.
The 2015 increase reflects the impact of the CFR and Veropharm
acquisitions, partially oset by the impact of cost improvement
initiatives and the favorable impact of foreign exchange. 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.
BUSINESS ACQUISITIONS
In August2015, Abbott completed the acquisition of the equity of
Tendyne Holdings,Inc. (Tendyne) that Abbott did not already own
for approximately $225million in cash plus additional payments up
to $150million to be made upon completion of certain regulatory
milestones. The acquisition of Tendyne, which is focused on
developing minimally invasive mitral valve replacement therapies,
allows Abbott to broaden its foundation in the treatment of mitral
valve disease. The preliminary allocation of the fair value of the
acquisition resulted in non-deductible acquired in-process
research and development of approximately $220million, which
is accounted for as an indefinite-lived intangible asset until regula-
tory approval or discontinuation, non-deductible goodwill of
approximately $142million, other assets of approximately $13mil-
lion, net deferred tax liabilities of approximately $80million, and
contingent consideration of approximately $70million. The pre-
liminary allocation of fair value of the above acquisition will be
finalized when the valuation is completed.
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
Excluding the unfavorable impact of foreign exchange, total
Established Pharmaceutical Products sales increased 34.1 percent
in 2015 and 14.9 percent in 2014. The Established Pharmaceutical
Products segment is focused on several key emerging markets
including India, Russia, China and Brazil. Excluding the impact of
foreign exchange, sales in these key emerging markets increased
32.4 percent in 2015 and 11.0 percent in 2014. Excluding the impact
of foreign exchange, sales in Established Pharmaceuticals’ other
emerging markets increased 39.6 percent in 2015 and increased
30.1 percent in 2014. The increases in 2015 and 2014 include the
impact of the acquisitions of CFR Pharmaceuticals in September
2014 and Veropharm in December 2014. Excluding sales from the
acquisitions and the impact of foreign exchange, revenues
increased 13.4% in 2015 and 7.9% in 2014.
Excluding the unfavorable impact of foreign exchange, total
Nutritional Products sales increased 5.5 percent in 2015 and
5.0percent in 2014. In Abbott’s International Pediatric Nutritional
business, the 2015 increase in sales was driven by growth in China,
Russia, and several countries in Latin America and the Middle
East as a result of share gains and market growth. The increase
in2015 U.S. Pediatric Nutritional sales primarily reflects higher
infant formula revenue from new product launches.
Excluding the unfavorable impact of foreign exchange, the 2015
and 2014 increases in International Adult Nutritional sales are
dueprimarily to volume growth in emerging markets and contin-
ued expansion of the adult nutrition category internationally. The
decrease in 2015 and 2014 U.S. Adult Nutritional sales reflects the
eects of increased competition and market dynamics in retail
andinstitutional categories.
Excluding the unfavorable impact of foreign exchange, total
Diagnostic Products sales increased 7.3 percent in 2015 and
6.4percent in 2014. The sales increases were primarily driven
byshare gains in the Core Laboratory markets in the U.S. and
internationally. 2015 and 2014 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 impact of foreign exchange, total
Vascular Products sales grew 1.3% in 2015 and were virtually flat
in 2014. In 2015, growth of Abbott’s MitraClip structural heart
product, its Endovascular business, including the Supera peripheral
stent, and the Absorb bioresorbable vascular scaold in various
international markets was almost entirely oset by continued
pricing pressures in DES products.
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 2015, 2014 and 2013.
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.