Abbott Laboratories 2015 Annual Report Download - page 70

FINANCIAL REVIEW
ABBOTT 2015 ANNUAL REPORT
68
AbbVie in 2013 and 2014. These assets and liabilities have been
presented as held for disposition in the Consolidated Balance
Sheet. At December 31, 2015, the assets and liabilities held for
disposition consist of cash and trade accounts receivable of
$54million, inventories of $43million, other assets of $10million,
and trade accounts payable and accrued liabilities of $373million.
Abbott has recorded a prepaid asset of $266million for its obliga-
tion to transfer these net liabilities held for disposition to AbbVie.
Abbott has retained all liabilities for all U.S. federal and foreign
income taxes on income prior to the separation, as well as certain
non-income taxes attributable to AbbVie’s business. AbbVie gener-
ally will be liable for all other taxes attributable to its business. In
2015, 2014 and 2013, discontinued operations include a favorable
adjustment to tax expense of $4million, $166million and
$193million, respectively, as a result of the resolution of various
tax positions pertaining to AbbVie’s operations.
The operating results of Abbott’s developed markets branded
generics pharmaceuticals and animal health businesses as well as
the income tax expense related to the businesses transferred to
AbbVie, which are being reported as discontinued operations are
as follows:
(inmillions)
Year Ended December31
2015 2014 2013
Net Sales
Developed markets generics
pharmaceuticals and animal
health businesses $256 $2,076 $2,191
AbbVie ———
Total $256 $2,076 $2,191
Earnings Before Tax
Developed markets generics
pharmaceuticals and animal
health businesses $÷13 $÷«505 $÷«480
AbbVie ———
Total $÷13 $÷«505 $÷«480
Net Earnings
Developed markets generics
pharmaceuticals and animal
health businesses $÷62 $÷«397 $÷«395
AbbVie 3166 193
Total $÷65 $÷«563 $÷«588
RESEARCH AND DEVELOPMENT PROGRAMS
Abbott currently has numerous pharmaceutical, medical devices,
diagnostic and nutritional products in development.
RESEARCH AND DEVELOPMENT PROCESS
In the Established Pharmaceuticals segment, the development
process focuses on the geographic expansion and continuous
improvement of the segment’s existing products to provide bene-
fits to patients and customers. As Established Pharmaceuticals
does not actively pursue primary research, development usually
begins with work on existing products or after the acquisition
ofan advanced stage licensing opportunity.
DISCONTINUED OPERATIONS AND SEPARATION
OF ABBVIE INC.
On February 27, 2015, Abbott completed the sale of its developed
markets branded generics pharmaceuticals business to Mylan Inc.
(Mylan) for equity ownership of a newly formed entity (Mylan
N.V.) that combined Mylan’s existing business and Abbott’s devel-
oped markets pharmaceuticals business. Mylan N.V. is publicly
traded. Historically, this business was included in Abbott’s
Established Pharmaceutical Products segment. At the date of the
closing, the 110million Mylan N.V. shares that Abbott received
were valued at $5.77billion and Abbott recorded an after-tax gain
on the sale of the business of approximately $1.6billion. Abbott
retained its branded generics pharmaceuticals business in emerg-
ing markets. At the close of this transaction, Abbott and Mylan
entered into a transition services agreement pursuant to which
Abbott and Mylan are providing various back oce support ser-
vices to each other on an interim transitional basis. Transition
services may be provided for up to 2 years. Charges by Abbott
under this transition services agreement are recorded as a reduc-
tion of the costs to provide the respective service in the applicable
expense category in the Consolidated Statement of Earnings.
This transitional support does not constitute significant continu-
ing involvement in Mylan’s operations. Abbott also entered into
manufacturing supply agreements with Mylan related to certain
products, with the supply term ranging from 3 to 10 years and
requiring a 2 year notice prior to termination. The cash flows
associated with these transition services and manufacturing sup-
ply agreements are not expected to be significant, and therefore,
these cash flows are not direct cash flows of the disposed compo-
nent under Accounting Standards Codification 205.
On February10, 2015, Abbott completed the sale of its animal
health business to Zoetis Inc.
As a result of the disposition of the above businesses, the current
and prior years’ operating results of these businesses up to the
date of sale are reported as part of discontinued operations on
theEarnings from Discontinued Operations, net of taxes line in
the Consolidated Statement of Earnings. Discontinued operations
include an allocation of interest expense assuming a uniform
ratioof consolidated debt to equity for all of Abbott’s historical
operations.
On January1, 2013, Abbott completed the separation of AbbVie
Inc. (AbbVie), which was formed to hold Abbott’s research-based
proprietary pharmaceuticals business. Abbott has received a ruling
from the Internal Revenue Service that the separation qualifies
asa tax-free distribution to Abbott and its U.S. shareholders for
U.S. federal income tax purposes.
For a small portion of AbbVie’s operations, the legal transfer of
AbbVie’s assets (net of liabilities) did not occur with the separa-
tion of AbbVie on January 1, 2013 due to the time required to
transfer marketing authorizations and other regulatory require-
ments in each of these countries. Under the terms of the
separation agreement with Abbott, AbbVie is subject to the risks
and entitled to the benefits generated by these operations and
assets. The majority of these operations were transferred to