Business Context and Reporting Period
Abbott Laboratories filed this Form 10-K for the fiscal year ended December 31, 2009. Abbott develops, manufactures, and sells health care products through four reportable segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. Approximately 50% of consolidated net sales were generated outside the United States.
The filing includes fourth-quarter 2009 results. Fourth-quarter net sales were $8.790 billion and net earnings were $1.539 billion.
Financial Performance and Position
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $30.765 billion | $29.528 billion | +4.2% |
| Operating earnings | $6.236 billion | $5.694 billion | +9.5% |
| Net earnings | $5.746 billion | $4.881 billion | +17.7% |
| Diluted EPS | $3.69 | $3.12 | +18.3% |
| Operating margin | 20.3% | 19.3% | +1.0 percentage point |
| Gross margin | 57.1% | 57.3% | -0.2 percentage point |
| Cash flow from operations | $7.275 billion | $6.995 billion | +4.0% |
| Capital expenditures | $1.089 billion | $1.288 billion | -15.4% |
| Long-term debt | $11.266 billion | $8.713 billion | +$2.553 billion |
| Total debt, including short-term borrowings | Approximately $16.5 billion | Not clearly provided in the filing text | Increased |
- Cash and cash equivalents were $8.809 billion at year-end, compared with $4.112 billion in 2008. Working capital increased to $10.3 billion from $5.5 billion.
- Abbott reported $6.3 billion of unused credit lines supporting commercial paper facilities. Short-term borrowings were $4.978 billion, and domestic commercial paper outstanding was $2.9 billion.
- Dividends declared were $1.60 per common share, up from $1.44 in 2008. Dividends paid totaled $2.414 billion.
- Research and development expense was $2.744 billion, up from $2.689 billion. Amortization of intangible assets was $879 million.
- Total assets increased to $52.417 billion from $42.419 billion, principally reflecting acquisitions, higher cash, goodwill, and intangible assets.
Segment Results
| Segment | 2009 Sales | Sales Change | 2009 Operating Earnings |
|---|---|---|---|
| Pharmaceutical Products | $16.486 billion | -1.3% | $6.443 billion |
| Nutritional Products | $5.284 billion | +7.3% | $910 million |
| Diagnostic Products | $3.578 billion | +0.1% | $406 million |
| Vascular Products | $2.692 billion | +20.1% | $557 million |
Humira worldwide sales increased to $5.5 billion from $4.5 billion. Vascular growth reflected continued Xience performance and acquisitions. Pharmaceutical sales were pressured by generic competition, particularly for Depakote, Omnicef, and clarithromycin. The stronger U.S. dollar reduced reported international sales and margins.
Material Changes Versus the Prior Comparable Period
- Net sales increased 4.2%, driven by volume growth and the acquisition of Advanced Medical Optics, partly offset by foreign exchange and generic competition.
- Net earnings benefited materially from unusual items, including a $797 million derecognition of a TAP-related contingent liability and a $287 million gain from settlement of Medtronic intellectual-property litigation.
- Abbott acquired Advanced Medical Optics for approximately $1.4 billion, Ibis Biosciences for $175 million, Visiogen for $400 million, and Evalve for $320 million plus potential contingent consideration. These transactions increased goodwill and intangible assets.
- Abbott issued $3.0 billion of long-term debt in 2009, primarily to fund the Advanced Medical Optics acquisition and repay acquired debt.
- Operating cash flow rose modestly, while investing cash outflows increased to $3.699 billion from $2.087 billion because of acquisitions and capital expenditures.
- Gross margin declined slightly because of lower Depakote sales and foreign exchange, partially offset by improved Vascular and Diagnostics margins.
- Abbott funded $700 million into its main domestic pension plan, compared with $200 million in each of the prior two years.
Guidance, Outlook, Risks, and Unusual Items
- Management forecast worldwide Humira sales growth of approximately 20% in 2010.
- Management expected a 2010 effective tax rate of approximately 16% to 16.5%.
- The Solvay pharmaceuticals acquisition closed on February 15, 2010 for approximately $6.2 billion in cash, with up to EUR 300 million of additional milestone payments. Abbott forecast approximately $2.9 billion of 2010 sales from the acquired business and approximately $500 million of incremental annual research and development spending.
- Abbott expected operating cash flow to continue exceeding capital expenditures and cash dividends. Main domestic pension funding was expected to be approximately $200 million annually.
- A court judgment in the Humira patent litigation totaled approximately $1.845 billion, including prejudgment interest. Abbott appealed and expected to deposit approximately $1.8 billion into escrow during the first quarter of 2010 if required to secure the judgment.
- Other significant risks include generic substitution and patent expirations, pricing and reimbursement pressure, regulatory actions, product safety and liability claims, manufacturing interruptions, foreign exchange exposure, acquisition integration, pension obligations, and healthcare reform.
- Abbott estimated probable legal and environmental loss reserves of approximately $215 million, with an estimated range of possible losses of approximately $170 million to $310 million, excluding matters for which a loss could not be estimated.
- In January 2010, Abbott suspended European Union sales of sibutramine and reflected the primary inventory impact in 2009 results. Abbott did not expect a significant consolidated financial effect.
- The filing states that internal control over financial reporting was effective and that the independent auditor issued unqualified opinions. The assessment excluded Abbott Medical Optics, representing approximately 7% of consolidated assets and 3% of consolidated sales.
Important Facts for Investors to Verify
- Reconcile reported 2009 earnings with the $797 million TAP liability derecognition, $287 million Medtronic settlement gain, and other acquisition-related and restructuring items.
- Track the outcome and cash collateral requirements of the Humira patent litigation and related potential enhanced damages.
- Assess post-acquisition leverage and liquidity following the Solvay transaction, including commercial paper maturities and the $6.3 billion of available credit lines.
- Monitor Humira growth against the approximately 20% 2010 forecast and evaluate the effect of generic competition on Depakote and other mature products.
- Verify integration, sales contribution, intangible amortization, and impairment risks associated with Solvay, Advanced Medical Optics, Visiogen, Evalve, and Ibis.
- Review rebate assumptions: rebates and chargebacks were approximately $4.4 billion in 2009, and a one-percentage-point increase in the rebate rate would reduce net sales by approximately $184 million.
- Evaluate pension and post-employment obligations, including significant actuarial losses and the sensitivity of medical obligations to healthcare-cost trends.
- Review pending government investigations and pricing, marketing, antitrust, product-liability, and patent matters that could materially affect cash flows or results of operations.