UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2010

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                           to                          

 

Commission File No. 1-2189

 

ABBOTT LABORATORIES

 

An Illinois Corporation

 

I.R.S. Employer Identification No.

 

 

36-0698440

 

100 Abbott Park Road

Abbott Park, Illinois 60064-6400

 

Telephone:  (847) 937-6100

 

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of March 31, 2010, Abbott Laboratories had 1,543,565,059 common shares without par value outstanding.

 

 

 



 

PART  I.  FINANCIAL INFORMATION

 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Financial Statements

 

(Unaudited)

 



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Earnings

 

(Unaudited)

 

(dollars and shares in thousands except per share data)

 

 

 

Three Months Ended March 31

 

 

 

2010

 

2009

 

Net Sales

 

$

7,698,354

 

$

6,718,368

 

 

 

 

 

 

 

Cost of products sold

 

3,335,104

 

2,935,921

 

Research and development

 

730,367

 

650,743

 

Selling, general and administrative

 

2,162,400

 

2,070,945

 

Total Operating Cost and Expenses

 

6,227,871

 

5,657,609

 

 

 

 

 

 

 

Operating Earnings

 

1,470,483

 

1,060,759

 

 

 

 

 

 

 

Interest expense

 

118,201

 

124,190

 

Interest (income)

 

(29,531

)

(36,044

)

Net foreign exchange loss (gain)

 

70,019

 

14,434

 

Other (income) expense, net

 

(10,413

)

(974,300

)

Earnings Before Taxes

 

1,322,207

 

1,932,479

 

Taxes on Earnings

 

319,192

 

493,842

 

Net Earnings

 

$

1,003,015

 

$

1,438,637

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.65

 

$

0.93

 

Diluted Earnings Per Common Share

 

$

0.64

 

$

0.92

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.44

 

$

0.40

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share

 

1,547,815

 

1,545,767

 

Dilutive Common Stock Options and Awards

 

13,508

 

10,618

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards

 

1,561,323

 

1,556,385

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

29,403

 

67,391

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

 

2



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Cash Flows

 

(Unaudited)

 

(dollars in thousands)

 

 

 

Three Months Ended March 31

 

 

 

2010

 

2009

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

1,003,015

 

$

1,438,637

 

Adjustments to reconcile earnings to net cash from operating activities -

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

287,249

 

270,072

 

Amortization of intangibles

 

275,252

 

193,973

 

Share-based compensation

 

173,866

 

186,947

 

Derecognition of a contingent liability associated with the conclusion of the TAP Pharmaceutical Products Inc. joint venture

 

 

(797,130

)

Trade receivables

 

291,638

 

375,665

 

Inventories

 

(49,631

)

(198,704

)

Other, net

 

(458,637

)

(770,742

)

Net Cash From Operating Activities

 

1,522,752

 

698,718

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(245,143

)

(252,151

)

Acquisitions of businesses, net of cash acquired

 

(6,415,648

)

(1,492,059

)

Proceeds from sales of investment securities, net

 

874,139

 

138,962

 

Deposit of restricted funds

 

(1,870,000

)

 

Other

 

(2,108

)

(510

)

Net Cash (Used in) Investing Activities

 

(7,658,760

)

(1,605,758

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Proceeds from issuance of short-term debt and other

 

775,006

 

1,770,418

 

Proceeds from issuance of long-term debt

 

 

3,000,000

 

Payment of long-term debt

 

(1,254

)

(1,983,176

)

Purchases of common shares

 

(861,368

)

(822,953

)

Proceeds from stock options exercised, including income tax benefit

 

188,169

 

279,394

 

Dividends paid

 

(620,752

)

(559,081

)

Net Cash (Used in) From Financing Activities

 

(520,199

)

1,684,602

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(586,312

)

(14,789

)

 

 

 

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

(7,242,519

)

762,773

 

Cash and Cash Equivalents, Beginning of Year

 

8,809,339

 

4,112,022

 

Cash and Cash Equivalents, End of Period

 

$

1,566,820

 

$

4,874,795

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

 

3



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Balance Sheet

 

(Unaudited)

 

(dollars in thousands)

 

 

 

March 31
2010

 

December 31
2009

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,566,820

 

$

8,809,339

 

Investments, primarily time deposits and certificates of deposit

 

255,253

 

1,122,709

 

Restricted funds, primarily U.S. treasury bills

 

1,870,000

 

 

Trade receivables, less allowances of $315,873 in 2010 and $311,546 in 2009

 

6,520,222

 

6,541,941

 

Inventories:

 

 

 

 

 

Finished products

 

2,138,884

 

2,289,280

 

Work in process

 

746,890

 

448,487

 

Materials

 

525,147

 

527,110

 

Total inventories

 

3,410,921

 

3,264,877

 

Prepaid expenses, deferred income taxes, and other receivables

 

4,067,462

 

3,575,025

 

Total Current Assets

 

17,690,678

 

23,313,891

 

Investments

 

1,120,483

 

1,132,866

 

Property and Equipment, at Cost

 

16,803,187

 

16,486,906

 

Less: accumulated depreciation and amortization

 

8,743,073

 

8,867,417

 

Net Property and Equipment

 

8,060,114

 

7,619,489

 

Intangible Assets, net of amortization

 

10,663,369

 

6,291,989

 

Goodwill

 

15,007,686

 

13,200,174

 

Deferred Income Taxes and Other Assets

 

816,292

 

858,214

 

 

 

$

53,358,622

 

$

52,416,623

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

5,730,427

 

$

4,978,438

 

Trade accounts payable

 

1,663,523

 

1,280,542

 

Salaries, dividends payable, and other accruals

 

6,301,954

 

6,137,187

 

Income taxes payable

 

769,488

 

442,140

 

Current portion of long-term debt

 

718,093

 

211,182

 

Total Current Liabilities

 

15,183,485

 

13,049,489

 

 

 

 

 

 

 

Long-term Debt

 

10,878,649

 

11,266,294

 

Post-employment Obligations, Deferred Income Taxes and Other Long-term Liabilities

 

6,284,148

 

5,202,111

 

Commitments and Contingencies

 

 

 

 

 

Shareholders’ Investment:

 

 

 

 

 

Preferred shares, one dollar par value Authorized — 1,000,000 shares, none issued

 

 

 

Common shares, without par value Authorized - 2,400,000,000 shares

 

 

 

 

 

Issued at stated capital amount -

 

 

 

 

 

Shares: 2010: 1,616,801,616; 2009: 1,612,683,987

 

8,413,595

 

8,257,873

 

Common shares held in treasury, at cost -

 

 

 

 

 

Shares: 2010: 73,236,557; 2009: 61,516,398

 

(3,945,682

)

(3,310,347

)

Earnings employed in the business

 

17,367,857

 

17,054,027

 

Accumulated other comprehensive income (loss)

 

(975,671

)

854,074

 

Total Abbott Shareholders’ Investment

 

20,860,099

 

22,855,627

 

Noncontrolling Interests in Subsidiaries

 

152,241

 

43,102

 

Total Equity

 

21,012,340

 

22,898,729

 

 

 

$

53,358,622

 

$

52,416,623

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

 

4



 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2010

 

(Unaudited)

 

Note 1 — Basis of Presentation

 

The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements.  However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made.  It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

Note 2 — Supplemental Financial Information

 

Unvested restricted stock units that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method.  Under the two-class method, net earnings are allocated between common shares and participating securities.  Net earnings allocated to common shares for the three months ended March 31, 2010 and 2009 were $1.001 billion and $1.436 billion, respectively.

 

Other (income) expense, net, for the first quarter of 2009 includes the derecognition of a contingent liability of $797 million and ongoing contractual payments from Takeda associated with the conclusion of the TAP joint venture, and income from the recording of certain investments at fair value in connection with business acquisitions.

 

Net foreign exchange loss (gain) includes a charge of approximately $86 million for the impact of the devaluation of the bolivar currency in Venezuela on balance sheet translation.

 

Other, net in Net cash from operating activities for 2010 and 2009 includes the effects of contributions to defined benefit plans of $466 million and $741 million, respectively, and to the post-employment medical and dental benefit plans of $66 million and $13 million, respectively.

 

The judgment entered by the U.S. District Court for the Eastern District of Texas against Abbott in its litigation with New York University and Centocor, Inc. requires Abbott to secure the judgment in the event that its appeal to the Federal Circuit court is unsuccessful in overturning the district court’s decision.  In the first quarter of 2010, Abbott deposited $1.87 billion with an escrow agent and considers these assets to be restricted.

 

The components of long-term investments as of March 31, 2010 and December 31, 2009 are as follows:

 

 

 

March 31

 

December 31

 

(dollars in millions)

 

2010

 

2009

 

Equity securities

 

$

144

 

$

153

 

Note receivable from Boston Scientific, 4% interest, due in 2011

 

884

 

880

 

Other

 

92

 

100

 

Total

 

$

1,120

 

$

1,133

 

 

Note 3 — Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of lower statutory tax rates and tax exemptions in several foreign taxing jurisdictions.  As a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act which were signed into law in the first quarter of 2010, Abbott recorded a charge of approximately $60 million in the first quarter 2010 to reduce deferred tax assets associated with retiree health care liabilities related to the Medicare Part D retiree drug subsidy.

 

5



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

Note 4 — Litigation and Environmental Matters

 

Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations.  Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure.  No individual site cleanup exposure is expected to exceed $3 million, and the aggregate cleanup exposure is not expected to exceed $15 million.

 

There are a number of patent disputes with third parties who claim Abbott’s products infringe their patents.  In April 2007, New York University (NYU) and Centocor, Inc. filed a lawsuit in the Eastern District of Texas asserting that HUMIRA infringes a patent co-owned by NYU and Centocor and exclusively licensed to Centocor.  In June 2009, a jury found that Abbott had willfully infringed the patent and awarded NYU and Centocor approximately $1.67 billion in past compensatory damages.  In October 2009, the district court overturned the jury’s finding that Abbott’s infringement was willful, but denied Abbott’s request to overturn the jury’s verdict on validity, infringement, and damages.  In December 2009, the district court issued a final judgment and awarded the plaintiffs an additional $175 million in prejudgment interest.  Abbott has appealed the jury’s verdict.  Abbott is confident in the merits of its case and believes that it will prevail on appeal.  As a result, no reserves have been recorded in this case.  Abbott’s acquisition of Kos Pharmaceuticals Inc. resulted in the assumption of various cases and investigations and Abbott has recorded a reserve.

 

There are several civil actions pending brought by individuals or entities that allege generally that Abbott and numerous pharmaceutical companies reported false or misleading pricing information relating to the average wholesale price of certain pharmaceutical products in connection with federal, state and private reimbursement.  Civil actions have also been brought against Abbott, and in some cases other members of the pharmaceutical industry, by state attorneys general seeking to recover alleged damages on behalf of state Medicaid programs.  In May 2006, Abbott was notified that the U.S. Department of Justice intervened in a civil whistle-blower lawsuit alleging that Abbott inflated prices for Medicaid and Medicare reimbursable drugs.  Abbott has settled a few of the cases and recorded reserves for its estimated losses in a few other cases, however, Abbott is unable to estimate the range or amount of possible loss for the remaining cases, and no loss reserves have been recorded for them.  Many of the products involved in these cases are Hospira products.  Hospira, Abbott’s former hospital products business, was spun off to Abbott’s shareholders in 2004. Abbott retained liability for losses that result from these cases and investigations to the extent any such losses both relate to the sale of Hospira’s products prior to the spin-off of Hospira and relate to allegations that were made in such pending and future cases and investigations that were the same as allegations existing at the date of the spin-off.

 

Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott.  For its legal proceedings and environmental exposures, except as noted above, Abbott estimates the range of possible loss to be from approximately $190 million to $315 million.  The recorded reserve balance at March 31, 2010 for these proceedings and exposures was approximately $235 million.  These reserves represent management’s best estimate of probable loss, as defined by FASB ASC No. 450, “Contingencies.”

 

While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the cases and investigations discussed in the third paragraph and the patent case discussed in the second paragraph of this footnote, the resolution of which could be material to cash flows or results of operations.

 

6



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

Note 5 — Post-Employment Benefits

 

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans.  Net cost for the three months ended March 31 for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:

 

 

 

Defined Benefit Plans

 

Medical and Dental Plans

 

(dollars in millions)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Service cost - benefits earned during the period

 

$

78

 

$

60

 

$

14

 

$

12

 

Interest cost on projected benefit obligations

 

117

 

94

 

26

 

26

 

Expected return on plans’ assets

 

(149

)

(127

)

(7

)

(6

)

Net amortization

 

28

 

18

 

6

 

4

 

Net cost

 

$

74

 

$

45

 

$

39

 

$

36

 

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  In the first quarters of 2010 and 2009, $466 million and $741 million, respectively, was contributed to defined benefit plans and $66 million and $13 million, respectively, was contributed to the post-employment medical and dental benefit plans.

 

Note 6 — Comprehensive Income, net of tax

 

 

 

Three Months Ended
March 31

 

(dollars in millions)

 

2010

 

2009

 

 

 

 

 

 

 

Foreign currency translation (loss) adjustments

 

$

(1,987

)

$

(59

)

Unrealized (losses) gains on marketable equity securities

 

(2

)

3

 

Amortization of net actuarial losses and prior service cost and credits

 

22

 

16

 

Net adjustments for derivative instruments designated as cash flow hedges

 

137

 

9

 

Other comprehensive (loss), net of tax

 

(1,830

)

(31

)

Net Earnings

 

1,003

 

1,439

 

Comprehensive (Loss) Income

 

$

(827

)

$

1,408

 

 

 

 

March 31
2010

 

December 31
2009

 

Supplemental Comprehensive Income Information, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Cumulative foreign currency translation (gain) adjustments

 

$

(1,048

)

$

(3,035

)

Cumulative unrealized (gains) on marketable equity securities

 

(22

)

(24

)

Net actuarial losses and prior service cost and credits

 

2,139

 

2,161

 

Cumulative (gains) losses on derivative instruments designated as cash flow hedges

 

(93

)

44

 

 

7



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

Note 7 — Segment Information

 

Abbott’s principal business is the discovery, development, manufacture and sale of a broad line of health care products.  Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world.  Abbott’s reportable segments are as follows:

 

Pharmaceutical Products — Worldwide sales of a broad line of pharmaceuticals.  For segment reporting purposes, three pharmaceutical divisions are aggregated and reported as the Pharmaceutical Products segment.

 

Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.

 

Diagnostic Products — Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites.  For segment reporting purposes, three diagnostic divisions are aggregated and reported as the Diagnostic Products segment.

 

Vascular Products — Worldwide sales of coronary, endovascular, vessel closure and other products.

 

Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements.  Segment disclosures are on a performance basis consistent with internal management reporting.  Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings.  The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost.  Remaining costs, if any, are not allocated to segments.  For acquisitions prior to 2006, substantially all intangible assets and related amortization are not allocated to segments.  The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.

 

 

 

Three Months Ended March 31

 

 

 

Net Sales to
External Customers

 

Operating
Earnings

 

(dollars in millions)

 

2010

 

2009

 

2010

 

2009

 

Pharmaceutical Products

 

$

4,103

 

$

3,636

 

$

1,528

 

$

1,305

 

Nutritional Products

 

1,320

 

1,181

 

188

 

180

 

Diagnostic Products

 

915

 

816

 

146

 

88

 

Vascular Products

 

747

 

645

 

182

 

160

 

Total Reportable Segments

 

7,085

 

6,278

 

2,044

 

1,733

 

Other

 

613

 

440

 

 

 

 

 

Net Sales

 

$

7,698

 

$

6,718

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

(120

)

(94

)

Non-reportable segments

 

 

 

 

 

90

 

61

 

Net interest expense

 

 

 

 

 

(89

)

(88

)

Share-based compensation (a)

 

 

 

 

 

(169

)

(174

)

Other, net (b)

 

 

 

 

 

(434

)

494

 

Consolidated Earnings Before Taxes

 

 

 

 

 

$

1,322

 

$

1,932

 

 


(a)         Approximately 40 to 45 percent of the annual net cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.

 

(b)         Other, net, for the three months ended March 31, 2009, includes the derecognition of a contingent liability of approximately $797 established in connection with the conclusion of the TAP joint venture.

 

8



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

Note 8 — Incentive Stock Programs

 

In the first three months of 2010, Abbott granted 1,510,300 stock options, 163,395 replacement stock options, 1,734,700 restricted stock awards and 5,611,368 restricted stock units under these programs.  At March 31, 2010, approximately 200 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at March 31, 2010 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

113,746,326

 

103,058,409

 

Weighted average remaining life (years)

 

5.5

 

5.2

 

Weighted average exercise price

 

$

50.26

 

$

49.78

 

Aggregate intrinsic value (in millions)

 

$

435

 

$

435

 

 

The total unrecognized share-based compensation cost at March 31, 2010 amounted to approximately $450 million which is expected to be recognized over the next three years.

 

Note 9 — Business Acquisitions

 

In February 2010, Abbott acquired Solvay’s pharmaceuticals business (Solvay Pharmaceuticals) for approximately $6.1 billion, in cash, plus additional payments of up to EUR 100 million per year if certain sales milestones are met in 2011, 2012 and 2013.  Contingent consideration of approximately $290 million was recorded based on a preliminary valuation.   The acquisition of Solvay Pharmaceuticals provides Abbott with a large and complementary portfolio of pharmaceutical products and expands Abbott’s presence in key global emerging markets.  Abbott acquired control of this business on February 15, 2010 and the financial results of the acquired operations are included in these financial statements beginning on that date.  Net sales and pretax loss of the acquired operations, including acquisition and integration expenses, for the first quarter 2010 were approximately $210 million and $37 million, respectively.  The acquisition was funded with current cash and short-term investments.  The preliminary allocation of the fair value of the acquisition is shown in the table below (in billions of dollars).  The allocation of the fair value of the acquisition will be finalized when the valuations are completed.

 

Goodwill, non-deductible

 

$

2.1

 

Acquired intangible assets, non-deductible

 

4.1

 

Acquired in-process research and development, non-deductible

 

0.6

 

Acquired net tangible assets

 

0.8

 

Deferred income taxes recorded at acquisition

 

(1.2

)

Total preliminary allocation of fair value

 

$

6.4

 

 

Acquired intangible assets consist primarily of product rights for currently marketed products and will be amortized over 2 to 14 years (average of 11 years).  Acquired in-process research and development will be accounted for as indefinite lived intangible assets until regulatory approval or discontinuation.  The net tangible assets acquired consist primarily of trade accounts receivable of approximately $620 million, inventory of approximately $420 million, property and equipment of approximately $710 million, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities.

 

The following unaudited pro forma financial information reflects the consolidated results of operations of Abbott as if the acquisition of Solvay Pharmaceuticals had taken place on January 1, 2010 and January 1, 2009.  The pro forma information includes adjustments for amortization of intangible assets and fair value adjustments to acquisition-date inventory as well as acquisition and integration expenses.  The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date. (in billions of dollars, except per share amounts)

 

 

 

Three Months Ended
March 31

 

 

 

2010

 

2009

 

Net sales

 

$

8.3

 

$

7.4

 

Net earnings

 

1.0

 

1.3

 

Diluted earnings per common share

 

0.63

 

0.86

 

 

9



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

In March 2010, Abbott acquired STARLIMS Technologies for approximately $105 million, in cash, net of cash held by STARLIMS, providing Abbott with leading products and expertise to build its position in laboratory informatics.   A substantial portion of the fair value of the acquisition has been allocated to amortizable intangible assets and goodwill.  The allocation of the fair value of the acquisition will be finalized when the valuation is completed.

 

On April 20, 2010, Abbott acquired the outstanding shares of Facet Biotech Corporation for approximately $430 million, in cash, net of cash held by Facet.   The acquisition enhances Abbott’s early- and mid-stage pharmaceutical pipeline, including a biologic for multiple sclerosis and compounds that complement Abbott’s oncology program.  A substantial portion of the fair value of the acquisition will be allocated to acquired in-process research and development that will be accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation.

 

In February 2009, Abbott acquired the outstanding shares of Advanced Medical Optics, Inc. (AMO) for approximately $1.4 billion in cash, net of cash held by AMO. Prior to the acquisition, Abbott held a small investment in AMO. Abbott acquired AMO to take advantage of increasing demand for vision care technologies due to population growth and demographic shifts and AMO’s premier position in its field. Abbott acquired control of this business on February 25, 2009 and the financial results of the acquired operations are included in these financial statements beginning on that date. The acquisition was financed with long-term debt. The allocation of the fair value of the acquisition is shown in the table below: (dollars in billions)

 

Goodwill, non-deductible

 

$

1.7

 

Acquired intangible assets, non-deductible

 

0.9

 

Acquired in-process research and development, non-deductible

 

0.2

 

Acquired net tangible assets

 

0.4

 

Acquired debt

 

(1.5

)

Deferred income taxes recorded at acquisition

 

(0.3

)

Total allocation of fair value

 

$

1.4

 

 

Acquired intangible assets consist of established customer relationships, developed technology and trade names and are amortized over 2 to 30 years (average of 15 years). Acquired in-process research and development is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The net tangible assets acquired consist primarily of trade accounts receivable, inventory, property and equipment and other assets, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities. In addition, subsequent to the acquisition, Abbott repaid substantially all of the acquired debt of AMO.

 

In January 2009, Abbott acquired Ibis Biosciences, Inc. (Ibis) for $175 million, in cash, to expand Abbott’s position in molecular diagnostics for infectious disease. Including a $40 million investment in Ibis in 2008, Abbott acquired 100 percent of the outstanding shares of Ibis. A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets, and acquired in-process research and development that will be accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The investment in Ibis in 2008 resulted in a charge to acquired in-process research and development. In connection with the acquisition, the carrying amount of this investment was revalued to fair value resulting in recording $33 million of income, which is reported as Other (income) expense, net.

 

The allocation of the fair value of the 2009 acquisitions of Visiogen, Inc. and Evalve, Inc. will be completed when the valuations are completed.

 

Except for the acquisition of Solvay Pharmaceuticals, had the above acquisitions taken place on January 1 of the previous year, consolidated net sales and income would not have been significantly different from reported amounts.

 

10



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

Note 10 — Financial Instruments, Derivatives and Fair Value Measures

 

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, totaling $1.3 billion and $2.0 billion at March 31, 2010 and December 31, 2009, respectively, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value.  Accumulated gains and losses as of March 31, 2010 will be included in Cost of products sold at the time the products are sold, generally through the next twelve months.

 

Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity.  For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, in exchange for primarily U.S. dollars and other European currencies.  For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar, European currencies and Japanese yen.  At March 31, 2010 and December 31, 2009, Abbott held $8.3 billion and $7.5 billion, respectively, of such foreign currency forward exchange contracts.

 

Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $570 million and approximately $575 million as of March 31, 2010 and December 31, 2009, respectively.  Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.

 

Abbott is a party to interest rate swap contracts totaling $5.5 billion at March 31, 2010 and December 31, 2009 to manage its exposure to changes in the fair value of fixed-rate debt due 2011 through 2019.  These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt.  Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.  No hedge ineffectiveness was recorded in income in 2010 or 2009 for these hedges.

 

The following table summarizes the amounts and location of certain derivative financial instruments as of March 31, 2010 and December 31, 2009:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(dollars in millions)

 

March 31
2010

 

Dec. 31
2009

 

Balance Sheet Caption

 

March 31
2010

 

Dec. 31
2009

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

73

 

$

80

 

Deferred income taxes and other assets

 

$

151

 

$

218

 

Post-employment obligations, deferred income taxes and other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

15

 

 

Prepaid expenses, deferred income taxes, and other receivables

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts —

Hedging instruments Others not designated as hedges

 

 

 

90

68

 

 

 

31

 

 

 

Prepaid expenses, deferred income taxes, and other receivables

 

 

 

3

79

 

 

 

27

87

 

 

 

Salaries, dividends payable and other accruals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt designated as a hedge of net investment in a foreign subsidiary

 

 

 

 

 

570

 

575

 

Short-term borrowings

 

 

 

$

246

 

$

111

 

 

 

$

803

 

$

907

 

 

 

 

11



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and the amounts and location of income (expense) and gain (loss) reclassified into income in the first three months of 2010 and 2009 and for certain other derivative financial instruments.  The amount of hedge ineffectiveness was not significant in 2010 and 2009 for these hedges.

 

 

 

Gain (loss) Recognized in
Other Comprehensive
Income (loss)

 

Income (expense) and
Gain (loss) Reclassified
into Income

 

 

 

(dollars in millions)

 

2010

 

2009

 

2010

 

2009

 

Income Statement Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

27

 

$

(3

)

$

 

$

(2

)

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt designated as a hedge of net investment in a foreign subsidiary

 

2

 

40

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

n/a

 

n/a

 

76

 

(23

)

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts not designated as a hedge

 

n/a

 

n/a

 

14

 

50

 

Net foreign exchange loss (gain)

 

 

The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.

 

The carrying values and fair values of certain financial instruments as of March 31, 2010 and December 31, 2009 are shown in the table below. The carrying values of all other financial instruments approximate their estimated fair values.  The counterparties to financial instruments consist of select major international financial institutions.  Abbott does not expect any losses from nonperformance by these counterparties.

 

 

 

March 31 2010

 

December 31 2009

 

(dollars in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities

 

$

144

 

$

144

 

$

153

 

$

153

 

Note receivable

 

884

 

917

 

880

 

925

 

Other

 

92

 

77

 

100

 

79

 

Total Long-term Debt

 

(11,597

)

(12,459

)

(11,477

)

(12,304

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

158

 

158

 

31

 

31

 

(Payable) position

 

(82

)

(82

)

(114

)

(114

)

Interest Rate Hedge Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

88

 

88

 

80

 

80

 

(Payable) position

 

(151

)

(151

)

(218

)

(218

)

 

12



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

 

 

 

Basis of Fair Value Measurement

 

(dollars in millions)

 

Outstanding
Balances

 

Quoted
Prices in
Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

March 31, 2010:

 

 

 

 

 

 

 

 

 

Equity and other securities

 

$

93

 

$

71

 

$

 

$

22

 

Interest rate swap derivative financial instruments

 

88

 

 

88

 

 

Foreign currency forward exchange contracts

 

158

 

 

158

 

 

Total Assets

 

$

339

 

$

71

 

$

246

 

$

22

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

5,490

 

$

 

$

5,490

 

$

 

Interest rate swap derivative financial instruments

 

151

 

 

151

 

 

Foreign currency forward exchange contracts

 

82

 

 

82

 

 

Contingent consideration related to business combinations

 

451

 

 

 

451

 

Total Liabilities

 

$

6,174

 

$

 

$

5,723

 

$

451

 

 

December 31, 2009:

 

 

 

 

 

 

 

 

 

Equity and other securities

 

$

104

 

$

75

 

$

 

$

29

 

Interest rate swap derivative financial instruments

 

80

 

 

80

 

 

Foreign currency forward exchange contracts

 

31

 

 

31

 

 

Total Assets

 

$

215

 

$

75

 

$

111

 

$

29

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

5,362

 

$

 

$

5,362

 

$

 

Interest rate swap derivative financial instruments

 

218

 

 

218

 

 

Foreign currency forward exchange contracts

 

114

 

 

114

 

 

Total Liabilities

 

$

5,694

 

$

 

$

5,694

 

$

 

 

The recorded value of investments that are valued using significant unobservable inputs did not change significantly.  Changes in these values are recorded in Accumulated other comprehensive income.  The fair value of the contingent consideration was determined based on an independent appraisal adjusted during the period for the time value of money.

 

13



 

Notes to Condensed Consolidated Financial Statements

March 31, 2010

(Unaudited), continued

 

Note 11 — Goodwill and Intangible Assets

 

Abbott recorded goodwill of approximately $2.1 billion in 2010 related to the acquisitions of Solvay Pharmaceuticals and STARLIMS Technologies.  In addition, in the first quarter of 2010, Abbott paid $250 million to Boston Scientific as a result of the approval to market the Xience V drug-eluting stent in Japan, resulting in an increase in goodwill.  Abbott recorded goodwill of approximately $1.7 billion in 2009 related to the acquisitions of Advanced Medical Optics, Inc. and Ibis Biosciences, Inc.  Goodwill related to the Solvay Pharmaceuticals acquisition was allocated to the Pharmaceutical Products segment, goodwill related to the Boston Scientific payment was allocated to the Vascular Products segment and goodwill associated with the Ibis and STARLIMS acquisitions was allocated to the Diagnostic Products segment.  Foreign currency translation adjustments and other adjustments decreased goodwill in the first three months of 2010 and 2009 by approximately $600 million and $2 million, respectively.  The amount of goodwill related to reportable segments at March 31, 2010 was $8.4 billion for the Pharmaceutical Products segment, $206 million for the Nutritional Products segment, $417 million for the Diagnostic Products segment and $2.7 billion for the Vascular Products segment.  There were no reductions of goodwill relating to impairments or disposal of all or a portion of a business.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $14.9 billion as of March 31, 2010 and $10.8 billion as of December 31, 2009, and accumulated amortization was $5.4 billion as of March 31, 2010 and $5.1 billion as of December 31, 2009. Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, was approximately $1.2 billion and $610 million at March 31, 2010 and December 31, 2009, respectively. The estimated annual amortization expense for intangible assets is approximately $1.4 billion in 2010, $1.5 billion in 2011, $1.4 billion in 2012, $1.0 billion in 2013 and $965 million in 2014.  Amortizable intangible assets are amortized over 2 to 30 years (average 11 years).

 

Note 12 — Restructuring Plans

 

In 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  Charges of approximately $14 million and $9 million were recorded in the first three months of 2010 and 2009, respectively, relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2011 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.  The following summarizes the activity for this restructuring: (dollars in millions)

 

 

 

2010

 

2009

 

Accrued balance at January 1

 

$

98

 

$

110

 

Restructuring charges

 

 

1

 

Payments and other adjustments

 

 

(1

)

Accrued balance at March 31

 

$

98

 

$

110

 

 

In 2009 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Charges of $3 million and $9 million were subsequently recorded in the first three months of 2010 and 2009, respectively, relating to these restructurings, primarily for accelerated depreciation and product transfer costs.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2010

 

2009

 

Accrued balance at January 1

 

$

145

 

$

105

 

Restructuring charges

 

 

26

 

Payments and other adjustments

 

(31

)

(24

)

Accrued balance at March 31

 

$

114

 

$

107

 

 

14



 

FINANCIAL REVIEW

 

Results of Operations

 

The following table details sales by reportable segment for the three months ended March 31.  Percent changes are versus the prior year and are based on unrounded numbers.

 

 

 

Net Sales to External Customers

 

(dollars in millions)

 

2010

 

Percent
Change

 

2009

 

Percent
Change

 

 

 

 

 

 

 

 

 

 

 

Pharmaceutical Products

 

$

4,103

 

12.9

 

$

3,636

 

(5.7

)

Nutritional Products

 

1,320

 

11.8

 

1,181

 

6.4

 

Diagnostic Products

 

915

 

12.1

 

816

 

(1.8

)

Vascular Products

 

747

 

15.8

 

645

 

42.7

 

Total Reportable Segments

 

7,085

 

12.9

 

6,278

 

0.5

 

Other

 

613

 

39.2

 

440

 

(15.0

)

Net Sales

 

$

7,698

 

14.6

 

$

6,718

 

(0.7

)

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

3,253

 

8.4

 

$

3,001

 

(1.3

)

 

 

 

 

 

 

 

 

 

 

Total International

 

$

4,445

 

19.6

 

$

3,717

 

(0.2

)

 

The net sales growth in 2010 reflects unit growth, the favorable effect of a relatively weaker U.S. dollar and the acquisition of Solvay Pharmaceuticals.  Excluding 4.1 percent of favorable exchange, net sales increased 10.5 percent in 2010.  Net sales in 2009 reflect the negative effect of a relatively stronger U.S. dollar.  Excluding 6.1 percent of unfavorable exchange, net sales increased 5.4 percent in 2009, which reflects primarily unit growth.  The relatively weaker U.S. dollar increased first quarter 2010 Total International sales by 7.4 percent, increased Pharmaceutical Products segment sales by 4.4 percent, increased Nutritional Product segment sales by 2.6 percent, increased Diagnostic Products segment sales by 5.5 percent and increased Vascular Products segment sales by 3.2 percent over the first quarter of 2009.  The relatively stronger U.S. dollar decreased first quarter 2009 Total International sales by11.1 percent, decreased Pharmaceutical Products segment sales by 6.6 percent, decreased Nutritional Product segment sales by 4.2 percent, decreased Diagnostic Products segment sales by 7.8 percent and decreased Vascular Products segment sales by 4.5 percent over the first quarter of 2008.    Sales growth in the Pharmaceutical Products segment was impacted by the acquisition of Solvay Pharmaceuticals in the first quarter of 2010.  The sales growth in 2009 for the Pharmaceutical Products segment and Total U.S. sales in 2009 were impacted by decreased sales of Depakote due to generic competition. The sales growth in 2009 for the Vascular Products segment was impacted by the U.S. launch of the Xience V drug eluting stent in the third quarter of 2008.  The increase in Other sales in 2010 was impacted by the acquisition of Advanced Medical Optics, Inc. on February 25, 2009.

 

15



 

FINANCIAL REVIEW

(continued)

 

A comparison of significant product group sales for the three months ended March 31 is as follows.  Percent changes are versus the prior year and are based on unrounded numbers.

 

 

 

Three Months Ended March 31

 

(dollars in millions)

 

2010

 

Percent
Change

 

2009

 

Percent
Change

 

Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

U.S. Specialty

 

$

890

 

(2.2

)

$

910

 

(12.0

)

U.S. Primary Care

 

649

 

4.4

 

622

 

(9.0

)

International Pharmaceuticals

 

2,129

 

10.5

 

1,927

 

0.9

 

 

 

 

 

 

 

 

 

 

 

Nutritional Products —

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

309

 

4.8

 

295

 

(3.2

)

International Pediatric Nutritionals

 

391

 

16.3

 

336

 

14.7

 

U.S. Adult Nutritionals

 

318

 

10.3

 

288

 

6.2

 

International Adult Nutritionals

 

288

 

20.6

 

238

 

1.8

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

Immunochemistry

 

705

 

9.8

 

642

 

(2.6

)

 

Decreased sales of Depakote, due to continued generic competition, and Lupron decreased U.S. Specialty product sales in 2010 and was partially offset by increased sales of HUMIRA.  Decreased sales of Depakote due to generic competition impacted U.S. Specialty product sales in 2009.  This was partially offset by the addition of Lupron sales from the conclusion of the TAP joint venture in April 2008.  U.S. sales of Depakote for the first three months of 2010, 2009 and 2008 were $23 million, $110 million and $341 million, respectively.  U.S. Primary Care sales in 2010 were impacted by increased sales of Niaspan and the TriCor/Trilipix franchise.  U.S. Primary Care sales in 2009 were impacted by decreased sales of Omnicef due to generic competition.  Increased sales of HUMIRA favorably impacted International Pharmaceutical sales in both 2010 and 2009.  International sales of HUMIRA for the first three months of 2010 and 2009 were $855 million and $614 million, respectively.  Abbott forecasts full year worldwide HUMIRA sales growth of approximately 20 percent in 2010.  The relatively weaker U.S. dollar increased International Pharmaceutical sales in 2010 by 7.7 percent and the relatively stronger U.S. dollar decreased International Pharmaceutical sales in 2009 by 12.1 percent.  U.S. Pediatric sales in 2009 were affected by the impact of a decline in the U.S. infant nutritional market, partially offset by higher market share.  International Pediatric Nutritionals sales increases in 2010 and 2009 were due primarily to volume growth in developing countries.  The relatively weaker U.S. dollar increased International Adult Nutritional sales in 2010 by 7.1 percent and the relatively stronger U.S. dollar decreased International Adult Nutritional sales in 2009 by 10.7 percent.  The relatively weaker U.S. dollar increased Immunochemistry sales in 2010 by 6.0 percent and the relatively stronger U.S. dollar decreased Immunochemistry sales in 2009 by 8.4 percent.

 

The gross profit margin was 56.7 percent for the first quarter 2010, compared to 56.3 percent for the first quarter 2009.  The increase in the gross profit margin in 2010 was due, in part, to non-recurring charges in 2009 for a delayed product launch and the discontinuation of a product.

 

Research and development expenses increased 12.2 percent in the first quarter 2010 over the first quarter 2009.  This increase reflects continued pipeline spending, including programs in vascular devices, immunology, neuroscience, oncology and Hepatitis C.  The majority of research and development expenditures are concentrated on pharmaceutical products.

 

Selling, general and administrative expenses for the first quarter 2010 increased 4.4 percent over the first quarter 2009.  This increase reflects increased selling and marketing support for new and existing products, including spending for HUMIRA and Xience V, and inflation.

 

16



 

FINANCIAL REVIEW

(continued)

 

Business Acquisitions

 

In February 2010, Abbott acquired Solvay’s pharmaceuticals business (Solvay Pharmaceuticals) for approximately $6.1 billion, in cash, plus additional payments of up to EUR 100 million per year if certain sales milestones are met in 2011, 2012 and 2013.  Contingent consideration of approximately $290 million was recorded based on a preliminary valuation.   The acquisition of Solvay Pharmaceuticals provides Abbott with a large and complementary portfolio of pharmaceutical products and expands Abbott’s presence in key global emerging markets.  Abbott acquired control of this business on February 15, 2010 and the financial results of the acquired operations are included in these financial statements beginning on that date.  Net sales and pretax loss of the acquired operations, including acquisition and integration expenses, for the first quarter 2010 were approximately $210 million and $37 million, respectively.  The acquisition was funded with current cash and short-term investments.  The preliminary allocation of the fair value of the acquisition is shown in the table below (in billions of dollars).  The allocation of the fair value of the acquisition will be finalized when the valuations are completed.

 

Goodwill, non-deductible

 

$

2.1

 

Acquired intangible assets, non-deductible

 

4.1

 

Acquired in-process research and development, non-deductible

 

0.6

 

Acquired net tangible assets

 

0.8

 

Deferred income taxes recorded at acquisition

 

(1.2

)

Total preliminary allocation of fair value

 

$

6.4

 

 

Acquired intangible assets consist primarily of product rights for currently marketed products and will be amortized over 2 to 14 years (average of 11 years).  Acquired in-process research and development will be accounted for as indefinite lived intangible assets until regulatory approval or discontinuation.  The net tangible assets acquired consist primarily of trade accounts receivable of approximately $620 million, inventory of approximately $420 million, property and equipment of approximately $710 million, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities.

 

The following unaudited pro forma financial information reflects the consolidated results of operations of Abbott as if the acquisition of Solvay Pharmaceuticals had taken place on January 1, 2010 and January 1, 2009.  The pro forma information includes adjustments for amortization of intangible assets and fair value adjustments to acquisition-date inventory as well as acquisition and integration expenses.  The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date. (in billions of dollars, except per share amounts)

 

 

 

Three Months Ended
March 31

 

 

 

2010

 

2009

 

Net sales

 

$

8.3

 

$

7.4

 

Net earnings

 

1.0

 

1.3

 

Diluted earnings per common share

 

0.63

 

0.86

 

 

In March 2010, Abbott acquired STARLIMS Technologies for approximately $105 million, in cash, net of cash held by STARLIMS, providing Abbott with leading products and expertise to build its position in laboratory informatics.   A substantial portion of the fair value of the acquisition has been allocated to amortizable intangible assets and goodwill.  The allocation of the fair value of the acquisition will be finalized when the valuation is completed.

 

On April 20, 2010, Abbott acquired the outstanding shares of Facet Biotech Corporation for approximately $430 million, in cash, net of cash held by Facet.   The acquisition enhances Abbott’s early- and mid-stage pharmaceutical pipeline, including a biologic for multiple sclerosis and compounds that complement Abbott’s oncology program.  A substantial portion of the fair value of the acquisition will be allocated to acquired in-process research and development that will be accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation.

 

17



 

FINANCIAL REVIEW

(continued)

 

In February 2009, Abbott acquired the outstanding shares of Advanced Medical Optics, Inc. (AMO) for approximately $1.4 billion in cash, net of cash held by AMO. Prior to the acquisition, Abbott held a small investment in AMO. Abbott acquired AMO to take advantage of increasing demand for vision care technologies due to population growth and demographic shifts and AMO’s premier position in its field. Abbott acquired control of this business on February 25, 2009 and the financial results of the acquired operations are included in these financial statements beginning on that date. The acquisition was financed with long-term debt. The allocation of the fair value of the acquisition is shown in the table below: (dollars in billions)

 

Goodwill, non-deductible

 

$

1.7

 

Acquired intangible assets, non-deductible

 

0.9

 

Acquired in-process research and development, non-deductible

 

0.2

 

Acquired net tangible assets

 

0.4

 

Acquired debt

 

(1.5

)

Deferred income taxes recorded at acquisition

 

(0.3

)

Total allocation of fair value

 

$

1.4

 

 

Acquired intangible assets consist of established customer relationships, developed technology and trade names and are amortized over 2 to 30 years (average of 15 years). Acquired in-process research and development is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The net tangible assets acquired consist primarily of trade accounts receivable, inventory, property and equipment and other assets, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities. In addition, subsequent to the acquisition, Abbott repaid substantially all of the acquired debt of AMO.

 

In January 2009, Abbott acquired Ibis Biosciences, Inc. (Ibis) for $175 million, in cash, to expand Abbott’s position in molecular diagnostics for infectious disease. Including a $40 million investment in Ibis in 2008, Abbott acquired 100 percent of the outstanding shares of Ibis. A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets, and acquired in-process research and development that will be accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The investment in Ibis in 2008 resulted in a charge to acquired in-process research and development. In connection with the acquisition, the carrying amount of this investment was revalued to fair value resulting in recording $33 million of income, which is reported as Other (income) expense, net.

 

The allocation of the fair value of the 2009 acquisitions of Visiogen, Inc. and Evalve, Inc. will be completed when the valuations are completed.

 

Except for the acquisition of Solvay Pharmaceuticals, had the above acquisitions taken place on January 1 of the previous year, consolidated net sales and income would not have been significantly different from reported amounts.

 

Restructuring Plans

 

In 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  Charges of approximately $14 million and $9 million were recorded in the first three months of 2010 and 2009, respectively, relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2011 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.  The following summarizes the activity for this restructuring: (dollars in millions)

 

 

 

2010

 

2009

 

Accrued balance at January 1

 

$

98

 

$

110

 

Restructuring charges

 

 

1

 

Payments and other adjustments

 

 

(1

)

Accrued balance at March 31

 

$

98

 

$

110

 

 

18



 

FINANCIAL REVIEW

(continued)

 

In 2009 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Charges of $3 million and $9 million were subsequently recorded in the first three months of 2010 and 2009, respectively, relating to these restructurings, primarily for accelerated depreciation and product transfer costs.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2010

 

2009

 

Accrued balance at January 1

 

$

145

 

$

105

 

Restructuring charges

 

 

26

 

Payments and other adjustments

 

(31

)

(24

)

Accrued balance at March 31

 

$

114

 

$

107

 

 

Interest Expense (Income)

 

Interest expense and interest income decreased in the first quarter 2010 compared to 2009 primarily as a result of lower interest rates.

 

Other (income) expense, net and Net foreign exchange loss (gain)

 

Other (income) expense, net, for the first quarter of 2009 includes the derecognition of a contingent liability of $797 million and ongoing contractual payments from Takeda associated with the conclusion of the TAP joint venture, and income from the recording of certain investments at fair value in connection with business acquisitions.

 

Net foreign exchange loss (gain) includes a charge of approximately $86 million for the impact of the devaluation of the bolivar currency in Venezuela on balance sheet translation.

 

Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of lower statutory tax rates and tax exemptions in several foreign taxing jurisdictions.  As a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act which were signed into law in the first quarter of 2010, Abbott recorded a charge of approximately $60 million in the first quarter 2010 to reduce deferred tax assets associated with retiree health care liabilities related to the Medicare Part D retiree drug subsidy.

 

Liquidity and Capital Resources March 31, 2010 Compared with December 31, 2009

 

Net cash from operating activities for the first three months 2010 totaled approximately $1.5 billion. Other, net in Net cash from operating activities for 2010 and 2009 includes the effects of contributions to defined benefit plans of $466 million and $741 million, respectively.  Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends.

 

The acquisition of Solvay’s pharmaceuticals business was funded with current cash and short-term investments.

 

Working capital was $2.5 billion at March 31, 2010 and $10.3 billion at December 31, 2009.  The decrease in working capital was due to current cash and investments used in the acquisition of Solvay Pharmaceuticals.

 

At March 31, 2010 Abbott’s long-term debt rating was AA by Standard & Poor’s Corporation and A1 by Moody’s Investors Service.  Abbott has readily available financial resources, including unused lines of credit of $6.3 billion that support commercial paper borrowing arrangements of which a $3.3 billion facility expires in October 2010 and a $3.0 billion facility expires in 2012.

 

19



 

FINANCIAL REVIEW

(continued)

 

Under a registration statement filed with the Securities and Exchange Commission in February 2009, Abbott issued $3.0 billion of long-term debt in the first quarter of 2009 that matures in 2019 and 2039 with interest rates of 5.125 percent and 6.0 percent, respectively.  Proceeds from this debt were used to fund the acquisition of Advanced Medical Optics, Inc. and to repay debt of Advanced Medical Optics, Inc.  In addition, Abbott repaid $1 billion of long-term notes that were due in February of 2009 using short-term borrowings.

 

In October 2008, the board of directors authorized the purchase of up to $5 billion of Abbott’s common shares from time to time and 14.8 million shares and 14.5 million shares were purchased under this authorization in the first three months of 2010 and 2009 at a cost of approximately $800 million per quarter for 2010 and 2009.

 

Legislative Issues

 

In the first quarter 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively referred to herein as “health care reform legislation”) were signed into law in the U.S.  Health care reform legislation includes an increase in the basic Medicaid rebate rate from 15.1% to 23.1% and extends the rebate to drugs provided through Medicaid managed care organizations.  As a result, Abbott recorded an additional provision of approximately $60 million against gross sales in the first quarter 2010 for the impact of the rebate charges on first quarter sales as well as other products in the distribution channel.  These Medicaid rebate changes will continue to have a negative effect on the gross profit margin of the Pharmaceutical Products segment in future quarters.

 

Beginning in 2013, health care reform legislation will eliminate the federal income tax deduction for prescription drug expenses of retirees for which Abbott receives reimbursement under the Medicare Part D retiree drug subsidy program.  As a result, Abbott recorded a charge of approximately $60 million in the first quarter 2010 to reduce deferred tax assets associated with retiree health care liabilities.

 

In 2011, Abbott will begin recording the annual fee imposed by health care reform legislation on companies that sell branded prescription drugs to specified government programs.  The amount of the annual fee will be based on the ratio of certain of Abbott’s sales as compared to the total such sales of all covered entities multiplied by a fixed dollar amount specified in the legislation by year.  In 2011, additional rebates will be incurred related to the Medicare Part D coverage gap “donut hole.”  Beginning in 2013, Abbott will record the 2.3% excise tax imposed by health care reform legislation on the sale of certain medical devices.

 

Abbott’s primary markets are highly competitive and subject to substantial government regulations throughout the world.  Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services.  It is not possible to predict the extent to which Abbott or the health care industry in general might be adversely affected by these factors in the future.  A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors, in the 2009 Annual Report on Form 10-K.

 

Private Securities Litigation Reform Act of 1995 — A Caution Concerning Forward-Looking Statements

 

Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Abbott cautions investors that any forward-looking statements or projections made by Abbott, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors, in the 2009 Annual Report on Form 10-K.

 

20



 

PART I.                            FINANCIAL INFORMATION

 

Item 4.                                 Controls and Procedures

 

(a)                                 Evaluation of disclosure controls and procedures.  The Chief Executive Officer, Miles D. White, and Chief Financial Officer, Thomas C. Freyman, evaluated the effectiveness of Abbott Laboratories’ disclosure controls and procedures as of the end of the period covered by this report, and concluded that Abbott Laboratories’ disclosure controls and procedures were effective to ensure that information Abbott is required to disclose in the reports that it files or submits with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by Abbott in the reports that it files or submits under the Exchange Act is accumulated and communicated to Abbott’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)                                 Changes in internal control over financial reporting.  On February 15, 2010, Abbott completed its acquisition of Solvay’s pharmaceuticals business.  During the quarter ended March 31, 2010, there were no other changes in Abbott’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Abbott’s internal control over financial reporting.

 

PART II.                       OTHER INFORMATION

 

Item 1.                                 Legal Proceedings

 

Abbott is involved in various claims, legal proceedings, and investigations, including (as of March 31, 2010, except as otherwise indicated) those described below.  While it is not feasible to predict the outcome of such pending claims, proceedings, and investigations with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the case filed in April 2007 referred to in the second paragraph of Note 4 to Abbott’s financial statements and the cases and investigations discussed in the third paragraph of such note, the resolution of which could be material to cash flows or results of operations.

 

Several lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010) et al. have been consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi District Litigation Rules as In re AndroGel Antitrust Litigation, MDL No. 2084.  These cases, brought by private plaintiffs and the Federal Trade Commission (“FTC”), generally allege Solvay’s 2006 patent litigation involving AndroGel was sham litigation and the patent litigation settlement agreement and related agreements with three generic companies violate federal and

 

21



 

state antitrust laws and state consumer protection laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys’ fees.  MDL 2084 includes:  (a) 2 individual plaintiff lawsuits: Rite Aid Corp. et al. v. Unimed Pharmaceuticals, Inc. et al. and Walgreen Co. et al. v. Unimed Pharmaceuticals, Inc. et al., both of which were filed in February 2009 in the United States District Court for the Middle District of Pennsylvania; (b) 8 purported class actions:  Meijer, Inc. et al. v. Unimed Pharmaceuticals, Inc. et al., Rochester Drug Co-Operative, Inc. et al. v. Unimed Pharmaceuticals, Inc. et al., and Louisiana Wholesale Drug Co., Inc. et al. v. Unimed Pharmaceuticals, Inc. et al., all of which were filed in February 2009 in the United States District Court for the Northern District of Georgia;  Stephen L. LaFrance Pharmacy, Inc. et al. v. Unimed Pharmaceuticals, Inc. et al. and Scurto et al. v. Unimed Pharmaceuticals, Inc. et al., both of which were filed in March 2009 in the United States District Court for the District of New Jersey; Fraternal Order of Police v. Unimed Pharmaceuticals, Inc. et al., filed in April 2009 in the United States District Court for the District of New Jersey; United Food & Com. Workers Unions & Employ. Midwest Health Benefits Fund et al. v. Unimed Pharmaceuticals, Inc. et al., filed in May 2009 in the United States District Court for the District of Minnesota; and Jabo’s Pharmacy, Inc. v. Solvay Pharmaceuticals, Inc. et al., filed in October 2009 in the United States District Court for the Eastern District of Tennessee; and (c) a lawsuit brought by the FTC, Federal Trade Commission v. Watson Pharmaceuticals, Inc. et al., filed in January 2009 in the United States District Court for the Central District of California.  In February 2010, Solvay’s motion to dismiss the cases was partially granted and all of the FTC’s claims and all of the plaintiffs’ claims except those alleging sham litigation were dismissed.  In April 2010, Supervalu, Inc., an individual plaintiff, filed a lawsuit against Abbott in the United States District Court for the Northern District of Georgia asserting substantially the same allegations as the plaintiffs above and seeking monetary damages and/or injunctive relief and attorneys’ fees.

 

In its 2009 Form 10-K, Abbott reported that litigation is pending in the Regional Court in Dusseldorf, Germany in which Bayer HealthCare LLC asserts that Humira® infringes Bayer’s patent and seeks damages, but not an injunction.  In March 2010, Abbott filed an action in the German Federal Patent Court asking that Bayer’s patent be revoked.

 

In its 2009 Form 10-K, Abbott reported that litigation is pending in the High Court of Ireland, the District Court in The Hague, Netherlands, and the Regional Court in Dusseldorf, Germany in which Medinol Limited asserts that certain Abbott stents infringe various Medinol stent design patents and seeks damages and injunctions, and in the High Court of Justice in the United Kingdom in which Abbott asserts that its stents do not infringe Medinol’s patents and seeks a declaration that Medinol’s patents are invalid.  In February 2010, Medinol appealed the Dutch court’s finding that Abbott’s stents do not infringe Medinol’s patent.  In March 2010, the Dusseldorf court found that Abbott’s stents do not infringe Medinol’s European stent design patent, a patent also at issue in the other venues, but that they do infringe two of Medinol’s German stent design patents.  Medinol can seek to enforce its right to damages and a provisional injunction in Germany.  Abbott has the right to appeal the decision of the Dusseldorf court.  In addition, as previously reported in Abbott’s 2009 Form 10-K, Abbott filed an action in the German Federal Patent Court asserting that the three Medinol patents at issue are invalid.  If the German Federal Patent Court invalidates Medinol’s patents, then any relief granted by the Dusseldorf court could be rescinded.

 

22



 

Abbott is seeking to enforce its patent rights relating to niacin extended release tablets (a drug Abbott sells under the trademark Niaspan®).  In February 2010, Abbott filed a case in the United States District Court for the District of Delaware alleging that Sun Pharmaceutical Industries Limited’s and Sun Pharma Global FZE’s generic product infringes Abbott’s patents and seeks declaratory and injunctive relief.

 

Item 1A.                        Risk Factors

 

There have been no material changes in our risk factors from those disclosed in Abbott’s 2009 Form 10-K, except for the following:

 

Changes in the health care regulatory environment may adversely affect Abbott’s business.

 

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law on March 23, 2010 and March 30, 2010, respectively.  A number of the provisions of those laws require rulemaking action by governmental agencies to implement, which has not yet occurred.  The laws change access to health care products and services and create new fees for the pharmaceutical and medical device industries.  Future rulemaking could increase rebates, reduce prices or the rate of price increases for health care products and services, or require additional reporting and disclosure.  Abbott cannot predict the timing or impact of any future rulemaking.

 

23



 

Item 2.                                 Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)                                  Issuer Purchases of Equity Securities

 

Period

 

Total
Number of
Shares (or
Units)
Purchased
(1)

 

Average Price
Paid per
Share (or
Unit)

 

Total Number
of Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs

 

Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
(2)

 

January 1, 2010 - January 31, 2010

 

178,219

 

$

55.120

 

0

 

$

4,192,197,703

 

February 1, 2010 - February 28, 2010

 

14,920,479

 

$

54.118

 

14,782,750

 

$

3,392,180,505

 

March 1, 2010 - March 31, 2010

 

71,215

 

$

54.691

 

0

 

$

3,392,180,505

 

Total

 

15,169,913

 

$

54.132

 

14,782,750

 

$

3,392,180,505

 

 

1.                          These shares include:

 

(i)             the shares deemed surrendered to Abbott to pay the exercise price in connection with the exercise of employee stock options - 178,219 in January, 115,229 in February, and 48,715 in March; and

 

(ii)          the shares purchased on the open market for the benefit of participants in the Abbott Laboratories, Limited Employee Stock Purchase Plan - 0 in January, 22,500 in February, and 22,500 in March.

 

These shares do not include the shares surrendered to Abbott to satisfy tax withholding obligations in connection with the vesting of restricted stock or restricted stock units.

 

2.                      On October 13, 2008, Abbott announced that its board of directors approved the purchase of up to $5 billion of its common shares, from time to time.

 

Item 6.                                 Exhibits

 

Incorporated by reference to the Exhibit Index included herewith.

 

24



 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

ABBOTT LABORATORIES

 

 

 

 

 

By:

/s/ Thomas C. Freyman

 

Thomas C. Freyman,

 

Executive Vice President,

 

Finance and Chief Financial Officer

 

 

Date: May 4, 2010

 

25



 

EXHIBIT INDEX

 

Exhibit No.

 

Exhibit

 

 

 

3.1

 

*By-Laws of Abbott Laboratories, as amended and restated effective as of April 23, 2010, filed as Exhibit 3.1 to the Abbott Laboratories Current Report on Form 8-K dated February 19, 2010.

 

 

 

10.1

 

Abbott Laboratories Europe Work Contract, dated February 28, 2010, between Abbott Laboratories SA and Mr. Olivier Bohuon.**

 

 

 

10.2

 

*Employment and Retention Agreement, dated as of January 11, 2009, by and among James V. Mazzo, Abbott and the Purchaser, filed as Exhibit 10.3 to the Advanced Medical Optics, Inc. Current Report on Form 8-K dated January 13, 2009.**

 

 

 

12

 

Statement re: computation of ratio of earnings to fixed charges.

 

 

 

31.1

 

Certification of Chief Executive Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)).

 

 

 

31.2

 

Certification of Chief Financial Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)).

 

 

 

Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be “filed” under the Securities Exchange Act of 1934.

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following financial statements and footnotes from the Abbott Laboratories Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 4, 2010, formatted in XBRL: (i) Condensed Consolidated Statement of Earnings; (ii) Condensed Consolidated Statement of Cash Flows; and (iii) Condensed Consolidated Balance Sheet.

 


*                                         Incorporated herein by reference.  Commission file number 1-2189.

**                                  Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.

 

26


Exhibit 10.1

 

ABBOTT LABORATORIES EUROPE

 

WORK CONTRACT

 

BETWEEN THE UNDERSIGNED :

 

ABBOTT LABORATORIES SA, company incorporated under the Law of Switzerland, with a capital of 50.000 Switzerland Francs, registered under the Commercial and Company Registry of Zoug, under the number 107 927, CH 170.3.015197-9, whose registered office is Neuhofstrasse 23, 6341 Baar, Switzerland.

 

Whose French branch is located at 10, rue d’Arcueil, Zone Silic, in Rungis (94), and which is registered under the Commercial and Company Registry of Créteil under the number B 450 675 905, represented by Stephen R. Fussell, in his capacity as Senior Vice President, Human Resources, and Thierry Coosemans, in his capacity as Area Finance Director Western Europe and Canada.

 

Hereinafter referred to as “the company”.

 

ON ONE HAND,

 

Mr. Olivier BOHUON, born on               ,                 nationality, residing at                                                                , registered under the Social Security no:                            .

 

Hereinafter referred to as “Mr. Olivier BOHUON”.

 

ON THE OTHER HAND,

 

Hereinafter together referred to as the “parties”.

 



 

IT HAS BEEN AGREED AS FOLLOWS:

 

ARTICLE 1 : PURPOSE

 

The Company has hired, on the terms set forth below, Mr. Olivier BOHUON, who accepts, as Executive Vice President Pharmaceutical Products top-level executive status.

 

As the Executive Vice President Pharmaceutical Products, Mr. Olivier BOHUON is required to perform his duties as described below.

 

Mr. Olivier BOHUON is in charge of / responsible for:

 

·                  Managing Abbott’s financial assets.

·                  Profitably grow the Pharmaceutical business by leading people and managing key functions and processes.

·                  Develop business strategies and assure their implementation. Communicate these strategies to employees.

·                  Develop an annual business plan for the Pharmaceutical business and achieve goals that have been committed to.

·                  Guarantee that the organization attracts, develops and retains the talent necessary to grow the business / business success.

·                  Conduct all business in an ethical manner following Abbott’s Code of Business Conduct.

·                  Take corrective actions to protect Abbott’s assets, reputation and business. Keep senior management informed of all important issues that may affect the business.

·                  Understand the Pharmaceutical business and business environment so as to seek out opportunities for Abbott and address any potential threats.

 

The missions as described do not intend to restrict management’s right to assign or re-assign duties to this job, such change not being considered as an essential modification of this work contract, as expressly acknowledged by Mr. Olivier BOHUON when signing this employment contract.

 

Mr. Olivier BOHUON shall report to his superior, currently the Chief Executive Officer or to such person(s) as directed by the Company.

 

For this purpose, the Collective Bargaining Agreement currently applicable within the company is the one applicable to “Technical Studies,” Consulting Engineer’s Offices and Consulting Companies” Called SYNTEC.

 

This reference to the Collective Bargaining Agreement is not considered as a substantial condition of this employment contract as acknowledged by the parties when signing this contract.

 

Mr Olivier BOHUON formally declares that he is free from any commitment towards another company.

 

Mr. Olivier BOHUON must inform the company of any changes in his personal status (address, tax residency status, etc) which could modify his prior statements.

 

2



 

ARTICLE 2 : TRIAL PERIOD

 

The present employment contract is concluded for an unlimited period of time, as from February 2010, with no trial period.

 

The seniority acquired by Mr. Olivier BOHUON with ABBOTT since June 1st, 2003, is entirely taken into account for the entitlement to all related benefits.

 

ARTICLE 3 : PLACE OF WORK

 

Mr. Olivier BOHUON’s place of work is at the premises of the company, which are presently located at 10, rue d’Arcueil, Zone Silic, Rungis (94) in France.

 

ARTICLE 4 : BUSINESS TRIPS

 

During the performance of his duties, Mr. Olivier BOHUON agrees to undertake business trips in France and abroad, and thus to be away from his home for limited periods of time. For business trips abroad, he will be compensated as described in Article 8.

 

ARTICLE 5 : WORKING TIME

 

Mr. Olivier BOHUON is considered as a top-level executive in accordance with the provisions of article L. 3111-2 of the Labour Code, given the nature of this duties, the large freedom which he has been granted in the organization of this working time and, demonstrated by the high level of responsibilities and remuneration, he is not subject to the legal regulations related to the duration of work and is exclusively remunerated for the successful completion of his assigned tasks.

 

ARTICLE 6 : PAID HOLIDAYS

 

Mr. Olivier BOHUON will be entitled to 25 vacation days per year.

 

The referenced year for holiday runs from June 1st of the preceding year to May 31st of the succeeding year.

 

3



 

ARTICLE 7 : COMPENSATION

 

7.1 Fixed Compensation

 

In compensation for his services, effective March 1, 2010, Mr. Olivier BOHUON shall receive a gross annual remuneration amounting to 576.388 €uros (five hundred and seventy six thousand three hundred and eighty eight euros), to be paid in 13 equal monthly instalments. His fixed compensation will be reviewed and adjusted on an annual basis.

 

The thirteenth payment will be paid at the end of November each year.

 

This remuneration includes the holiday bonus, which is provided by article 31 of the applicable Collective Bargaining Agreement.

 

Mr. Olivier BOHUON’s gross annual salary is a global payment which covers the whole working time required for the expected performance of his duties, irrespective of the actual hours worked.

 

7.2. Variable compensation

 

Mr. Olivier BOHUON will receive a variable remuneration according to the achievement of the targets determined each year by the company, corresponding to 105% of his base remuneration if established, applicable Company, Division, and individual performance targets are achieved, as governed by the Performance Incentive Plan.

 

7.3 Tax Equalization

 

Given the conditions of performance of his duties and given the activities of the company, Mr. Olivier BOHUON is requested to travel abroad frequently and on periods reaching many weeks in one year.

 

In order to take into account the time spent abroad for the needs of and in the interests of the company, and in order to facilitate compliance with applicable country income tax laws, Mr. Olivier BOHUON will be covered by the Tax Equalization program as defined in the Abbott Cross Border Transfer policy now in effect and as changed from time to time.  Tax preparation services under this program will be provided by a Company-designated tax consulting firm.

 

A primary objective of this program is to ensure that his tax burden while performing his duties abroad will follow tax principles reasonably similar to those that would have been applicable had he remained in France.  As an exception to the standard program elements and only for Tax Equalization calculation purposes, he will be deemed to benefit in France from an exempted Expatriation Bonus capped for calculation purposes only at 30%/(1+30%) of his Fixed and Variable Compensation as defined above.

 

It is expressly agreed that Mr. Olivier BOHUON shall record and justify his business travels in an internal document and keep copies of all receipts of his business trips (expense, receipt, plane tickets, reports, hotels etc) in order to prove, from a tax equalization standpoint, the number of days spent outside France and the purposes of these travels.

 

4



 

ARTICLE 8 : PROFESSIONAL EXPENSES

 

Professional expenses and, in particular, expenses related to business trips taken by Mr. Olivier BOHUON in the exercise of his duties will be reimbursed upon presentation of supporting receipts, in accordance with the procedures in force within the company.

 

ARTICLE 9 : COMPANY CAR

 

For the performance of these duties, Mr. Olivier BOHUON will benefit from a company car, as defined in the Car Policy of the company.

 

ARTICLE 10 :  COMPANY BENEFITS

 

Mr. Olivier BOHUON will be registered to the complementary retirement scheme of CGIS-CIS CIRCO and ACGME (Groupe Mornay, 5 to 9 rue van Gogh — 75591 PARIS CEDEX 12) and to the provident scheme MERCER (36, rue Raspail, 92536 Levallois Perret cedex), in force within the company.

 

These schemes will be subject to any legal modification that could be subsequently decided.

 

ARTICLE 11 : SICKNESS

 

In the case of incapacity to work due to sickness or accident, Mr Olivier BOHUON shall advise the company as soon as possible, and at the latest within 24 hours.

 

Mr. Olivier BOHUON shall also justify his incapacity to work by submitting a medical certificate to his management within 48 hours of his absence at the latest.

 

ARTICLE 12 : FINANCIAL PLANNING

 

Abbott executives are eligible to participate in the Abbott Financial Planning Program provided by Ernst & Young, JMG Financial, or Northern Trust. Each of the providers will contact Mr. Olivier BOHUON to provide him with information regarding the service they can provide. Abbott will reimburse him for these services up to the maximum allowable, U.S. $ 10,000. He will be responsible for any amount over the maximum.

 

This benefit is taxable to Mr. Olivier BOHUON as imputed income. In any quarter that uses this service, the provider will bill Abbott directly and Abbott will pay the bill up to the maximum benefit. The charge for this service will be included in his gross earnings and applicable tax and social security deductions made from a paycheck prior to the end of that quarter.

 

5



 

ARTICLE 13 : PROFESSIONAL OBLIGATIONS

 

13.1 Exclusivity

 

Given the confidential nature of his duties as well his responsibilities and level of remuneration, Mr. Olivier BOHUON shall devote the whole of his working time to the performance of his professional activities to the company and shall not be engaged, for any reason whatsoever, on his own behalf or on behalf of another individual, in any other professional activities to the company and shall not be engaged, for any reason whatsoever, on his own behalf or on behalf of another individual, in any other professional activity, a fortiori a competing activity, while employed by the company, except with the prior written consent of the company’s legal representative.

 

13.2 Confidentiality

 

Mr. Olivier BOHUON shall keep secret and shall not at any time during his employment or after termination of his employment contract, for whatever reason, use, communicate or reveal to any person, directly or indirectly, for whatever reason, any secret or confidential information which shall have come to his knowledge during his employment with the company, except with prior written authorization from the company’s legal representative.

 

“Confidential information” includes all information of whatsoever nature (technical scientific, commercial or other) and, in particular, all information belonging to the company or any other company of the group relating to its strategy, its financial situation, its functioning, its clients, its products, its software programs, its fabrication, marketing and development plans, business secrets of whatsoever nature.

 

This commitment will apply to all information relating to the company’s (or any other company of the group) relationship with clients and suppliers.

 

ARTICLE 14 : RESTITUTION

 

In case of termination of his employment contract for whatsoever reason, and on the last day of effective work, Mr. Olivier BOHUON shall immediately hand over to the company all documents, books, materials, recordings, correspondence, access codes, computer software, computer specifications, papers and information (on whatever media and wherever located) relating to the company’s activity and / or any other company of the group to which the company belongs.

 

Mr. Olivier BOHUON shall immediately hand over any magnetic disk on which information relating to the company’s activity is stored, and all keys, credit cards and any other means of the company or any other entity to which the company is linked. He will have to show the evidence of the good accomplishment of the above obligation.

 

6



 

ARTICLE 15 : TERMINATION

 

Each party shall have the right to terminate this employment contract by giving a notice period as determined by the applicable Collective Bargaining Agreement and at present fixed at 3 months.

 

However, this notice period is not due in case dismissal for serious misconduct or gross misconduct.

 

ARTICLE 16: MISCELLANEOUS

 

This Agreement constitutes the entire agreement entered into between the Company and Mr. Olivier BOHUON. It nullifies and supersedes in all respects any other contract or agreement, whether written or oral, entered into with the Company and/or any affiliated companies and more generally any arrangements or conventions whatever previously entered into and relating to the matters dealt in this Agreement by the parties.

 

ARTICLE 17 : APPLICABLE LAW

 

This employment contract shall be construed and governed by French law.

 

French courts will be the only competent courts regarding the execution, interpretation and termination of this employment contract.

 

 

In two originals

 

 

RUNGIS

 

February

 

 

For the company ABBOTT LABORATORIES

 

/s/ Stephen R. Fussell

 

 

Mr. Stephen R. Fussell

 

 

Senior Vice President, Human Resources

 

 

 

 

/s/ Thierry Coosemans

 

 

Mr. Thierry Coosemans

 

 

Area Finance Director Western Europe and Canada

 

 

 

 

/s/ Olivier BOHUON

 

 

For the employee

 

 

Mr Olivier BOHUON

 

 

 

7


Exhibit 12

 

Abbott Laboratories

 

Computation of Ratio of Earnings to Fixed Charges

 

(Unaudited)

 

(dollars in millions)

 

 

 

ThreeMonths Ended

 

 

 

March 31, 2010

 

Net Earnings

 

$

1,003

 

Add (deduct):

 

 

 

Taxes on earnings

 

319

 

Capitalized interest cost, net of amortization

 

(1

)

Noncontrolling interests

 

1

 

 

 

 

 

Earnings from Operations, as adjusted

 

1,322

 

 

 

 

 

Fixed Charges:

 

 

 

Interest on long-term and short-term debt

 

118

 

Capitalized interest cost

 

6

 

Rental expense representative of an interest factor

 

26

 

 

 

 

 

Total Fixed Charges

 

150