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, 2008

 

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) 937-6l00

 

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 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. (Check one):

 

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, 2008, Abbott Laboratories had 1,543,296,270 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

 

 

 

2008

 

2007

 

Net Sales

 

$

6,765,603

 

$

5,945,561

 

 

 

 

 

 

 

Cost of products sold

 

2,961,072

 

2,592,011

 

Research and development

 

619,957

 

619,056

 

Acquired in-process research and development

 

18,700

 

 

Selling, general and administrative

 

2,018,033

 

1,786,869

 

Total Operating Cost and Expenses

 

5,617,762

 

4,997,936

 

 

 

 

 

 

 

Operating Earnings

 

1,147,841

 

947,625

 

 

 

 

 

 

 

Interest expense

 

142,534

 

147,542

 

Interest (income)

 

(49,356

)

(23,337

)

(Income) from TAP Pharmaceutical Products Inc. joint venture

 

(101,942

)

(146,632

)

Net foreign exchange loss (gain)

 

6,221

 

4,851

 

Other (income) expense, net

 

(10,342

)

124,536

 

Earnings Before Taxes

 

1,160,726

 

840,665

 

Taxes on Earnings

 

222,859

 

143,128

 

Net Earnings

 

$

937,867

 

$

697,537

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.61

 

$

0.45

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

 

$

0.60

 

$

0.45

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.36

 

$

0.325

 

 

 

 

 

 

 

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

 

1,544,022

 

1,540,315

 

Dilutive Common Stock Options and Awards

 

16,545

 

17,919

 

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

 

1,560,567

 

1,558,234

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

6,399

 

20,928

 

 

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

 

 

 

2008

 

2007

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

937,867

 

$

697,537

 

Adjustments to reconcile earnings to net cash from operating activities –

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

265,808

 

234,468

 

Amortization of intangibles

 

186,046

 

197,956

 

Share-based compensation

 

151,922

 

163,170

 

Acquired in-process research and development

 

18,700

 

 

Trade receivables

 

43,998

 

162,752

 

Inventories

 

(36,749

)

(49,622

)

Other, net

 

(262,441

)

(349,974

)

Net Cash From Operating Activities

 

1,305,151

 

1,056,287

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(332,983

)

(392,676

)

Sales of Boston Scientific common stock

 

318,645

 

 

(Purchases of) proceeds from sales of other investment securities, net

 

(860,623

)

2,927

 

Other

 

(18,204

)

769

 

Net Cash (Used in) Investing Activities

 

(893,165

)

(388,980

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Proceeds from issuance of short-term debt and other

 

989,946

 

354,835

 

Payment of long-term debt

 

(200,000

)

(260,618

)

Purchases of common shares

 

(819,150

)

(861,203

)

Proceeds from stock options exercised, including income tax benefit

 

307,488

 

714,136

 

Dividends paid

 

(504,550

)

(453,807

)

Net Cash (Used in) Financing Activities

 

(226,266

)

(506,657

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

67,847

 

506

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

253,567

 

161,156

 

Cash and Cash Equivalents, Beginning of Year

 

2,456,384

 

521,192

 

Cash and Cash Equivalents, End of Period

 

$

2,709,951

 

$

682,348

 

 

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
2008

 

December 31
2007

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,709,951

 

$

2,456,384

 

Investments, including $307,500 of investments measured at fair value at December 31, 2007

 

926,648

 

364,443

 

Trade receivables, less allowances of $263,484 in 2008 and $258,288 in 2007

 

4,998,280

 

4,946,876

 

Inventories:

 

 

 

 

 

Finished products

 

1,809,504

 

1,677,083

 

Work in process

 

684,082

 

681,634

 

Materials

 

582,050

 

592,725

 

Total inventories

 

3,075,636

 

2,951,442

 

Prepaid expenses, deferred income taxes, and other receivables

 

3,401,225

 

3,323,588

 

Total Current Assets

 

15,111,740

 

14,042,733

 

Investments

 

1,084,132

 

1,125,262

 

Property and Equipment, at Cost

 

15,923,027

 

15,597,801

 

Less: accumulated depreciation and amortization

 

8,302,323

 

8,079,652

 

Net Property and Equipment

 

7,620,704

 

7,518,149

 

Intangible Assets, net of amortization

 

5,524,952

 

5,720,478

 

Goodwill

 

10,293,626

 

10,128,841

 

Deferred Income Taxes and Other Assets

 

1,542,418

 

1,178,461

 

 

 

$

41,177,572

 

$

39,713,924

 

 

 

 

 

 

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

2,956,591

 

$

1,827,361

 

Trade accounts payable

 

1,228,243

 

1,219,529

 

Salaries, dividends payable, and other accruals

 

5,232,601

 

5,077,428

 

Income taxes payable

 

130,445

 

80,406

 

Current portion of long-term debt

 

1,222,565

 

898,554

 

Total Current Liabilities

 

10,770,445

 

9,103,278

 

 

 

 

 

 

 

Long-term Debt

 

9,042,858

 

9,487,789

 

Post-employment Obligations and Other Long-term Liabilities

 

3,384,725

 

3,344,317

 

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: 2008: 1,587,408,102; 2007: 1,580,854,677

 

6,526,510

 

6,104,102

 

Common shares held in treasury, at cost -
Shares: 2008: 44,111,832; 2007: 30,944,537

 

(2,001,815

)

(1,213,134

)

Earnings employed in the business

 

11,200,647

 

10,805,809

 

Accumulated other comprehensive income (loss)

 

2,254,202

 

2,081,763

 

Total Shareholders’ Investment

 

17,979,544

 

17,778,540

 

 

 

$

41,177,572

 

$

39,713,924

 

 

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, 2008

 

(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, 2007.

 

Abbott’s core laboratory diagnostics business, including Point of Care, was presented as discontinued operations in the Consolidated Statement of Earnings and the Statement of Cash Flows and as net assets held for sale in the Consolidated Balance Sheet in the Form 10-Q for the three months ended March 31, 2007.  Subsequently, a decision was made to retain the businesses and the 2007 results and net assets are presented as continuing in this Form 10-Q. The results for the three months ended March 31, 2007 included depreciation and amortization through January 17, 2007.  The amount of depreciation and amortization not recorded in the first quarter of 2007 was $38 million, which was recorded in a subsequent quarter in 2007.

 

Note 2 – Supplemental Financial Information

 

Other (income) expense, net, for the first quarter of 2007 includes a $149 million fair market value loss adjustment to Abbott’s investment in Boston Scientific common stock, partially offset by fair value gain adjustments of $24 million to certain derivative financial instruments related to the investment in Boston Scientific common stock.

 

Supplemental Cash Flow Information – Other, net in Net cash from operating activities for 2008 and 2007 includes the effects of contributions to the main domestic defined benefit plan of $200 million in each period and to the post-employment medical and dental plans of $65 million and $75 million, respectively.

 

The components of investments as of March 31, 2008 and December 31, 2007 are as follows:

(dollars in thousands)

 

 

 

March 31

 

December 31

 

 

 

2008

 

2007

 

Current Investments:

 

 

 

 

 

Time deposits and certificates of deposit

 

$

926,648

 

$

56,943

 

Boston Scientific common stock

 

 

307,500

 

Total

 

$

926,648

 

$

364,443

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

Equity securities

 

$

185,615

 

$

229,518

 

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

 

854,004

 

850,594

 

Other

 

44,513

 

45,150

 

Total

 

$

1,084,132

 

$

1,125,262

 

 

5



 

Notes to Condensed Consolidated Financial Statements

March 31, 2008

(Unaudited), continued

 

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 domestic dividend exclusion and the benefit of lower statutory tax rates and tax exemptions in several taxing jurisdictions.

 

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 one of those disputes, filed in April 2007, Abbott is unable to estimate a range of possible loss, if any, and no reserve has been recorded.  Abbott’s acquisition of Kos Pharmaceuticals Inc. resulted in the assumption of various cases and investigations and Abbott has recorded reserves related to several of those cases and investigations.

 

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 recorded reserves for its estimated losses in a few of the cases, however, Abbott is unable to estimate the range or amount of possible loss for the majority of the 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.

 

There are several civil actions pending brought by state attorneys general and private entities alleging antitrust and unfair competition claims in connection with the sales of TriCor. Abbott licenses TriCor from a third party and the licensor has also been named as a defendant.  Abbott is unable to estimate a range of loss, if any, and no loss reserves have been recorded.

 

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 $130 million to $310 million.  The recorded reserve balance at March 31, 2008 for these proceedings and exposures was approximately $185 million.  These reserves represent management’s best estimate of probable loss, as defined by Statement of Financial Accounting Standards No. 5, “Accounting for 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 and fourth paragraphs of this footnote, the resolution of which could be material to cash flows or results of operations for a quarter.

 

6



 

Notes to Condensed Consolidated Financial Statements

March 31, 2008

(Unaudited), continued

 

Note 5 – Post-Employment Benefits

(dollars in millions)

 

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

 

 

 

2008

 

2007

 

2008

 

2007

 

Service cost — benefits earned during the period

 

$

60

 

$

61

 

$

12

 

$

15

 

Interest cost on projected benefit obligations

 

86

 

76

 

26

 

25

 

Expected return on plans’ assets

 

(119

)

(103

)

(8

)

(6

)

Net amortization

 

13

 

22

 

5

 

8

 

Net cost

 

$

40

 

$

56

 

$

35

 

$

42

 

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  In the first quarters of 2008 and 2007, $200 was contributed to the main domestic defined benefit plan and $65 and $75, respectively, was contributed to the post-employment medical and dental benefit plans.

 

Note 6 – Comprehensive Income, net of tax

(dollars in thousands)

 

 

 

Three Months Ended
March 31

 

 

 

2008

 

2007

 

Foreign currency translation gain adjustments

 

$

190,956

 

$

15,982

 

Unrealized (losses) gains on marketable equity securities

 

(25,196

)

6,962

 

Amortization of net actuarial losses and prior service cost and credits

 

11,836

 

20,178

 

Net adjustments for derivative instruments designated as cash flow hedges

 

(5,157

)

6,002

 

Other comprehensive income, net of tax

 

172,439

 

49,124

 

Net Earnings

 

937,867

 

697,537

 

Comprehensive Income

 

$

1,110,306

 

$

746,661

 

 

 

 

 

 

 

Supplemental Comprehensive Income Information, net of tax:

 

 

 

 

 

Cumulative foreign currency translation (gain) adjustments

 

$

(3,139,308

)

$

(1,811,125

)

Net actuarial losses and prior service cost and credits

 

903,008

 

1,237,390

 

Cumulative unrealized (gains) on marketable equity securities

 

(41,207

)

(19,522

)

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

 

23,305

 

(27,468

)

 

7



 

Notes to Condensed Consolidated Financial Statements

March 31, 2008

(Unaudited), continued

 

Note 7 – Segment Information

(dollars in millions)

 

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, two pharmaceutical divisions are aggregated and reported as the Pharmaceutical Products segment.

 

Nutritional ProductsWorldwide sales of a broad line of adult and pediatric nutritional products.

 

Diagnostic ProductsWorldwide 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 and vessel closure 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.  Effective in 2007, the Diagnostic segment was reorganized.  Prior years’ segment information has been adjusted to reflect this change.  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 (Loss)

 

 

 

2008

 

2007

 

2008

 

2007

 

Pharmaceutical Products

 

$

3,854

 

$

3,373

 

$

1,345

 

$

1,162

 

Nutritional Products

 

1,110

 

1,002

 

184

 

180

 

Diagnostic Products

 

832

 

710

 

52

 

26

 

Vascular Products

 

452

 

420

 

(31

)

(22

)

Total Reportable Segments

 

6,248

 

5,505

 

1,550

 

1,346

 

Other

 

518

 

441

 

 

 

 

 

Net Sales

 

$

6,766

 

$

5,946

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

(113

)

(90

)

Non-reportable segments

 

 

 

 

 

72

 

64

 

Net interest expense

 

 

 

 

 

(93

)

(124

)

Income from TAP Pharmaceutical Products Inc. joint venture

 

 

 

 

 

102

 

147

 

Share-based compensation (a)

 

 

 

 

 

(152

)

(163

)

Other, net (b)

 

 

 

 

 

(205

)

(339

)

Consolidated Earnings Before Taxes

 

 

 

 

 

$

1,161

 

$

841

 

 


(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, 2007, includes net fair market value adjustments of Abbott’s investment in Boston Scientific common stock and the related gain-sharing derivative liability and acquisition integration expenses related to the acquisitions of Guidant’s vascular intervention and endovascular solutions businesses and Kos Pharmaceuticals Inc.

 

8



 

Notes to Condensed Consolidated Financial Statements

March 31, 2008

(Unaudited), continued

 

Note 8 – Incentive Stock Program

 

In the first quarter of 2008, Abbott granted 19,336,869 stock options, 1,220,319 replacement stock options, 740,250 restricted stock awards and 476,700 restricted stock units under this program.  At March 31, 2008, approximately 32 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at March 31, 2008 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

144,812,466

 

100,997,365

 

Weighted average remaining life (years)

 

6.9

 

5.9

 

Weighted average exercise price

 

$

48.50

 

$

46.72

 

Aggregate intrinsic value (in millions)

 

$

989

 

$

863

 

 

The total unrecognized share-based compensation cost at March 31, 2008 amounted to approximately $382 million which is expected to be recognized over the next three years.

 

Note 9 – Equity Method Investment

(dollars in millions)

 

Abbott’s 50 percent-owned joint venture, TAP Pharmaceutical Products Inc. (TAP), is accounted for under the equity method of accounting.  Summarized financial information for TAP is as follows:

 

 

 

Three Months Ended March 31

 

 

 

2008

 

2007

 

Net sales

 

$

711

 

$

749

 

Cost of sales

 

183

 

181

 

Income before taxes

 

321

 

462

 

Net income

 

204

 

293

 

 

 

 

March 31

 

December 31

 

 

 

2008

 

2007

 

Current assets

 

$

1,443

 

$

1,101

 

Total assets

 

1,781

 

1,354

 

Current liabilities

 

1,140

 

914

 

Total liabilities

 

1,262

 

1,037

 

 

As discussed in Note 14, Abbott and Takeda concluded the TAP joint venture on April 30, 2008.

 

9



 

Notes to Condensed Consolidated Financial Statements

March 31, 2008

(Unaudited), continued

 

Note 10 – Fair Value Measures

(dollars in millions)

 

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

 

 

 

Balance at
March 31
2008

 

Quoted Prices in
Active Markets
for Identical Items

 

Significant Other
Observable Inputs

 

Assets:

 

 

 

 

 

 

 

Marketable available-for-sale securities

 

$

149

 

$

149

 

$

 

Interest rate swap derivative financial instruments

 

31

 

 

31

 

Foreign currency forward exchange contracts

 

71

 

 

71

 

 

 

$

251

 

$

149

 

$

102

 

Liabilities:

 

 

 

 

 

 

 

Interest rate swap derivative financial instruments

 

$

7

 

$

 

$

7

 

Fair value of hedged long-term debt

 

2,524

 

 

2,524

 

Foreign currency forward exchange contracts

 

116

 

 

116

 

 

 

$

2,647

 

$

 

$

2,647

 

 

 

 

 

 

Basis of Fair Value Measurement

 

 

 

Balance at
December 31
2007

 

Quoted Prices in
Active Markets
for Identical Items

 

Significant Other
 Observable Inputs

 

Assets:

 

 

 

 

 

 

 

Trading securities

 

$

308

 

$

308

 

$

 

Marketable available-for-sale securities

 

193

 

193

 

 

Foreign currency forward exchange contracts

 

24

 

 

24

 

 

 

$

525

 

$

501

 

$

24

 

Liabilities:

 

 

 

 

 

 

 

Interest rate swap derivative financial instruments

 

$

25

 

$

 

$

25

 

Fair value of hedged long-term debt

 

1,475

 

 

1,475

 

Foreign currency forward exchange contracts

 

45

 

 

45

 

 

 

$

1,545

 

$

 

$

1,545

 

 

The following table summarizes the activity for a gain sharing derivative financial instrument liability which was measured using significant unobservable inputs.  The adjustment to record this liability at fair value was recorded in Other (income) expense, net for the three months ended March 31, 2007.

 

Balance at December 31, 2006

 

$

(25

)

Adjustments to record item at fair value

 

24

 

Balance at March 31, 2007

 

$

(1

)

 

10



 

Notes to Condensed Consolidated Financial Statements

March 31, 2008

(Unaudited), continued

 

Note 11  Goodwill and Intangible Assets

(dollars in millions)

 

Foreign currency translation adjustments and other adjustments increased goodwill in the first quarter 2008 and 2007 by approximately $165 and $16, respectively.  There were no reductions of goodwill relating to impairments or disposal of all or a portion of a business.  The amount of goodwill related to reportable segments at March 31, 2008 was $6,348 for the Pharmaceutical Products segment, $206 for the Nutritional Products segment, $262 for the Diagnostic Products segment and $2,126 for the Vascular Products segment.

 

The gross amount of amortizable intangible assets, primarily product rights and technology, was $9,033 as of March 31, 2008 and $9,043 as of December 31, 2007, and accumulated amortization was $3,508 as of March 31, 2008 and $3,323 as of December 31, 2007.  The estimated annual amortization expense for intangible assets is approximately $740 in 2008 and 2009 and approximately $730 in 2010, 2011 and 2012.  Intangible assets are amortized over 4 to 25 years (average 11 years).

 

Note 12 – Business Acquisition

 

In the first quarter of 2008, Abbott acquired a less than 20 percent interest in a molecular diagnostic company resulting in a charge to acquired in-process research and development of $18.7 million.

 

Note 13 – Restructuring Plans

(dollars in millions)

 

In 2007, 2006 and 2005, 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.  In addition, Abbott implemented facilities restructuring plans in 2007 related to the acquired operations of Kos Pharmaceuticals Inc.  Additional charges of $22 and $14 were subsequently recorded in the first quarter of 2008 and 2007, respectively, relating to these restructurings, primarily for accelerated depreciation.  The following summarizes the activity for restructurings:

 

 

 

2008

 

2007

 

Accrued balance at January 1

 

$

194

 

$

193

 

Restructuring charges

 

11

 

6

 

Payments and other adjustments

 

(48

)

(33

)

Accrued balance at March 31

 

$

157

 

$

166

 

 

11



 

Notes to Condensed Consolidated Financial Statements

March 31, 2008

(Unaudited), continued

 

Note 14 – Subsequent Event and Pro Forma Information

 

On April 30, 2008, Abbott and Takeda ended their TAP Pharmaceutical Products Inc. (TAP) joint venture, evenly splitting the value and assets of the joint venture.  Abbott exchanged its equity interest in TAP for the assets, liabilities and employees related to TAP’s Lupron business.  The Internal Revenue Service has issued a private letter ruling that the transaction qualifies as tax-free for U.S. income tax purposes.

 

Beginning on May 1, 2008, Abbott began recording Lupron net sales and costs in its operating results and no longer records income from the TAP joint venture.  TAP’s sales of Lupron were $147 million for the three months ended March 31, 2008 and $645 million for the full year 2007.  Abbott will also receive payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP, which will be recorded by Abbott as Other (income) expense as earned.  Such payments, which will be subject to tax, are expected to approximate $1.5 billion over a five-year period.

 

The exchange transaction will be accounted for as a sale of Abbott’s equity interest in TAP and as an acquisition of TAP’s Lupron business under SFAS No. 141 “Business Combinations.”  The sale of Abbott’s equity interest in TAP will result in the recording of net assets of approximately $250 million related to the Lupron business, primarily cash, receivables, inventory and other assets, net of accounts payable and other accrued liabilities, offset by a credit to Abbott’s investment in TAP in the amount of approximately $250 million.

 

For the acquired Lupron business, Abbott will record intangible assets, primarily Lupron product rights, of approximately $700 million, goodwill of approximately $350 million and deferred tax liabilities related to the intangible assets of approximately $250 million.  The intangible assets will be amortized over fifteen years.  Abbott has also agreed to remit cash to TAP if certain research and development events are not achieved on the development assets retained by TAP.  These amounts will be recorded as a liability at closing in the amount of approximately $1.1 billion.  Related deferred tax assets of approximately $400 million will also be recorded, resulting in an after-tax liability of up to $700 million.  If these payments are not required, the liability would be reduced and a gain would be recorded.

 

The exchange of Abbott’s investment in TAP for TAP’s Lupron business resulted in a gain at closing that is expected to be approximately $100 million, which is in addition to the amounts discussed in the second paragraph above.  Abbott expects the earnings impact of the transaction, including the amortization of the Lupron intangible product rights, but excluding the gain, to be neutral to net earnings and earnings per share in 2008 and neutral or better over the next five years.

 

12



 

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.

(dollars in millions)

 

 

 

Net Sales to External Customers

 

 

 

2008

 

Percent
Change

 

2007

 

Percent
Change

 

Pharmaceutical Products

 

$

3,854

 

14.3

 

$

3,373

 

16.6

 

Nutritional Products

 

1,110

 

10.8

 

1,002

 

(12.3

)

Diagnostic Products

 

832

 

17.1

 

710

 

10.2

 

Vascular Products

 

452

 

7.6

 

420

 

407.9

 

Total Reportable Segments

 

6,248

 

13.5

 

5,505

 

15.5

 

Other

 

518

 

17.3

 

441

 

5.2

 

Net Sales

 

$

6,766

 

13.8

 

$

5,946

 

14.7

 

Total U.S.

 

$

3,043

 

3.7

 

$

2,933

 

9.7

 

Total International

 

$

3,723

 

23.6

 

$

3,013

 

20.1

 

 

The sales growth in 2008 and 2007 reflects unit growth and the positive effect of the relatively weaker U.S. dollar.  The relatively weaker U.S. dollar increased first quarter 2008 consolidated net sales 5.5 percent, increased Total International sales 10.9 percent, increased Pharmaceutical Products segment sales by 5.9 percent, increased Nutritional Product segment sales by 3.0 percent, increased Diagnostic Products segment sales by 8.1 percent and increased Vascular Products segment sales by 4.9 percent over the first quarter of 2007.   The relatively weaker U.S. dollar increased first quarter 2007 consolidated net sales 2.7 percent, increased Total International sales 5.5 percent, increased Pharmaceutical Products segment sales by 2.8 percent, increased Nutritional Product segment sales by 1.0 percent, increased Diagnostic Products segment sales by 3.9 percent and increased Vascular Products segment sales by 2.7 percent over the first quarter of 2006.  The sales growth in 2007 for the Nutritional Products segment was impacted by the completion of the U.S. co-promotion of Synagis in 2006 and sales growth in 2007 for the Vascular Products segment was impacted by the acquisition of Guidant’s vascular intervention and endovascular solutions businesses in the second quarter of 2006.  Slower growth of U.S. sales in 2008 is primarily due to decreased sales of Omnicef due to generic competition.

 

13



 

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.

(dollars in millions)

 

 

 

Three Months Ended March 31

 

 

 

2008

 

Percent
Change

 

2007

 

Percent
Change

 

 

 

 

 

 

 

 

 

 

 

Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

U.S. Specialty

 

$

1,034

 

19.9

 

$

862

 

22.4

 

U.S. Primary Care

 

683

 

(12.2

)

778

 

38.7

 

International Pharmaceuticals

 

1,909

 

26.0

 

1,515

 

19.4

 

 

 

 

 

 

 

 

 

 

 

Nutritional Products —

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

305

 

4.5

 

292

 

7.1

 

International Pediatric Nutritionals

 

293

 

24.5

 

235

 

17.9

 

U.S. Adult Nutritionals

 

271

 

3.9

 

261

 

2.8

 

International Adult Nutritionals

 

234

 

16.4

 

201

 

8.6

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

Immunochemistry

 

660

 

17.8

 

560

 

9.7

 

 

Increased sales of HUMIRA and Depakote accounted for the majority of the sales increases for U.S. Specialty products in both 2008 and 2007.  U.S. sales of HUMIRA were $401 million, $289 million and $218 million for the three months ended March 31, 2008, 2007 and 2006, respectively.  U.S. Primary Care sales in 2008 were impacted by decreased sales of Omnicef due to generic competition, partially offset by increased sales of Niaspan and TriCor.  U.S. Primary Care sales in 2007 were favorably impacted by sales of Niaspan, a new product from the acquisition of Kos Pharmaceuticals Inc. in the fourth quarter of 2006, and TriCor and were unfavorably impacted by decreased sales of Biaxin.   Increased sales of HUMIRA favorably impacted International Pharmaceutical sales in both 2008 and 2007.  International sales of HUMIRA were $476 million, $282 million and $174 million for the three months ended March 31, 2008, 2007 and 2006, respectively.  International Pediatric Nutritionals sales increases in 2008 and 2007 were due primarily to volume growth in developing countries.  The favorable effect of the relatively weaker U.S. dollar favorably impacted international product sales growth in both years.

 

The gross profit margin was 56.2 percent for the first quarter 2008, compared to 56.4 percent for the first quarter 2007.  The decrease in the gross profit margin in 2008 was due, in part, to the impact of generic competition for Omnicef and to the unfavorable effect of exchange on the gross profit margin.

 

Research and development expenses increased 0.1 percent in the first quarter 2008 over the first quarter 2007.  This increase reflects timing of spending in the first quarter of 2007 and increased spending to support pipeline programs, including TriLipix/Crestor fixed-dose combination for cholesterol, ABT-874, a biologic for psoriasis and Crohn’s disease, controlled-release Vicodin CR, Xience V, as well as several Phase I and Phase II clinical programs in neuroscience and oncology.  The majority of research and development expenditures are concentrated on pharmaceutical products.

 

Selling, general and administrative expenses for the first quarter 2008 increased 12.9 percent over the first quarter 2007.  This increase reflects increased selling and marketing support for new and existing products, including increased spending to support two new indications for HUMIRA, the launch of Simcor and the upcoming U.S. launch of Xience V, as well as spending on other marketed pharmaceutical products.

 

14



 

FINANCIAL REVIEW

(continued)

 

Basis of Presentation

 

Abbott’s core laboratory diagnostics business, including Point of Care, was presented as discontinued operations in the Consolidated Statement of Earnings and the Statement of Cash Flows and as net assets held for sale in the Consolidated Balance Sheet in the Form 10-Q for the three months ended March 31, 2007.  Subsequently, a decision was made to retain the businesses and the 2007 results and net assets are presented as continuing in this Form 10-Q. The results for the three months ended March 31, 2007 included depreciation and amortization through January 17, 2007.  The amount of depreciation and amortization not recorded in the first quarter of 2007 was $38 million, which was recorded in a subsequent quarter in 2007.

 

Business Acquisition

 

In the first quarter of 2008, Abbott acquired a less than 20 percent interest in a molecular diagnostic company resulting in a charge to acquired in-process research and development of $18.7 million.

 

Restructurings

(dollars in millions)

 

In 2007, 2006 and 2005, 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.  In addition, Abbott implemented facilities restructuring plans in 2007 related to the acquired operations of Kos Pharmaceuticals Inc.  Additional charges of $22 and $14 were subsequently recorded in the first quarter of 2008 and 2007, respectively, relating to these restructurings, primarily for accelerated depreciation.  The following summarizes the activity for restructurings:

 

 

 

2008

 

2007

 

Accrued balance at January 1

 

$

194

 

$

193

 

Restructuring charges

 

11

 

6

 

Payments and other adjustments

 

(48

)

(33

)

Accrued balance at March 31

 

$

157

 

$

166

 

 

Interest (Income)

 

Interest income increased in the first quarter 2008 over 2007 primarily as the result of higher international investment balances.

 

(Income) from TAP Pharmaceutical Products Inc. Joint Venture

 

Abbott’s income from the TAP Pharmaceutical Products Inc. joint venture is lower in 2008 compared to 2007 due primarily to a favorable outcome in a patent dispute recorded by TAP Pharmaceutical Products Inc. in the first quarter of 2007.

 

As discussed below, Abbott and Takeda concluded the TAP joint venture on April 30, 2008.

 

15



 

FINANCIAL REVIEW

(continued)

 

Other (Income) Expense, net

 

Other (income) expense, net for the first quarter of 2007 includes a $149 million fair market value loss adjustment to Abbott’s investment in Boston Scientific common stock, partially offset by fair value gain adjustments of $24 million to certain derivative financial instruments related to the investment in Boston Scientific common stock.

 

Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the domestic dividend exclusion and the benefit of lower statutory tax rates and tax exemptions in several taxing jurisdictions.

 

Subsequent Event and Pro Forma Information

 

On April 30, 2008, Abbott and Takeda ended their TAP Pharmaceutical Products Inc. (TAP) joint venture, evenly splitting the value and assets of the joint venture.  Abbott exchanged its equity interest in TAP for the assets, liabilities and employees related to TAP’s Lupron business.  The Internal Revenue Service has issued a private letter ruling that the transaction qualifies as tax-free for U.S. income tax purposes.

 

Beginning on May 1, 2008, Abbott began recording Lupron net sales and costs in its operating results and no longer records income from the TAP joint venture.  TAP’s sales of Lupron were $147 million for the three months ended March 31, 2008 and $645 million for the full year 2007.  Abbott will also receive payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP, which will be recorded by Abbott as Other (income) expense as earned.  Such payments, which will be subject to tax, are expected to approximate $1.5 billion over a five-year period.

 

The exchange transaction will be accounted for as a sale of Abbott’s equity interest in TAP and as an acquisition of TAP’s Lupron business under SFAS No. 141 “Business Combinations.”  The sale of Abbott’s equity interest in TAP will result in the recording of net assets of approximately $250 million related to the Lupron business, primarily cash, receivables, inventory and other assets, net of accounts payable and other accrued liabilities, offset by a credit to Abbott’s investment in TAP in the amount of approximately $250 million.

 

For the acquired Lupron business, Abbott will record intangible assets, primarily Lupron product rights, of approximately $700 million, goodwill of approximately $350 million and deferred tax liabilities related to the intangible assets of approximately $250 million.  The intangible assets will be amortized over fifteen years.  Abbott has also agreed to remit cash to TAP if certain research and development events are not achieved on the development assets retained by TAP.  These amounts will be recorded as a liability at closing in the amount of approximately $1.1 billion.  Related deferred tax assets of approximately $400 million will also be recorded, resulting in an after-tax liability of up to $700 million.  If these payments are not required, the liability would be reduced and a gain would be recorded.

 

The exchange of Abbott’s investment in TAP for TAP’s Lupron business resulted in a gain at closing that is expected to be approximately $100 million, which is in addition to the amounts discussed in the second paragraph above.  Abbott expects the earnings impact of the transaction, including the amortization of the Lupron intangible product rights, but excluding the gain, to be neutral to net earnings and earnings per share in 2008 and neutral or better over the next five years.

 

16



 

FINANCIAL REVIEW

(continued)

 

Liquidity and Capital Resources at March 31, 2008 Compared with December 31, 2007

 

Net cash from operating activities for the first three months 2008 totaled approximately $1.3 billion.  Other, net in Net cash from operating activities for 2008 and 2007 includes the effects of contributions to the main domestic defined benefit plan of $200 million each period and to the post-employment medical and dental plans of $65 million and $75 million, respectively. Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends.

 

Working capital was $4.3 billion at March 31, 2008 and $4.9 billion at December 31, 2007.

 

During the first quarter of 2008, Abbott paid off $200 million of long-term notes that were due in March of 2008 using short-term borrowings.

 

At March 31, 2008, 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 $3.0 billion that support commercial paper borrowing arrangements.

 

In 2006, the board of directors authorized the purchase of $2.5 billion of Abbott’s common shares from time to time.  During the first three months of 2008 and 2007, Abbott purchased approximately 14.1 million and 15.4 million, respectively, of its common shares at a cost of approximately $800 million and $827 million, respectively.

 

Under a registration statement filed with the Securities and Exchange Commission in February 2006, Abbott may offer and sell from time to time debt securities in one or more offerings through February 2009.

 

Legislative Issues

 

Abbott’s primary markets are highly competitive and subject to substantial government regulation throughout the world.  Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services.  Abbott believes that if legislation is enacted, it could have the effect of reducing access to health care products and services, or reducing prices or the rate of price increases 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 on Form 10-K for the year ended December 31, 2007.

 

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 to the Annual Report on Form 10-K for the year ended December 31, 2007.

 

17



 

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.  During the quarter ended March 31, 2008, there were no 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.

 

18



 

PART II.    OTHER INFORMATION

 

Item 1.             Legal Proceedings

 

Abbott is involved in various claims, legal proceedings and investigations, including (as of March 31, 2008, except as otherwise indicated) those described below.

 

As reported in our 2007 Form 10-K, a case is pending against Abbott in the United States District Court for the Eastern District of Texas, in which New York University (NYU) and Centocor, Inc. assert that Humira® infringes a patent co-owned by NYU and Centocor and exclusively licensed to Centocor.  On March 5, 2008 an arbitrator ruled that Abbott has a license to the patents at issue for a portion of Humira® sales.  Non-licensed sales remain at issue in the litigation.

 

As reported in our 2007 Form 10-K, in the case In re: Pharmaceutical Industry Average Wholesale Price Litigation, MDL 1456, a number of cases are pending that allege generally that Abbott and numerous other pharmaceutical companies reported false pricing in connection with certain drugs that are reimbursable under Medicare and Medicaid and by private payors.  In March 2008, eleven pharmaceutical companies, including Abbott, agreed to settle a purported class action in which plaintiffs were seeking to certify nationwide classes of Medicare Part B consumers, third party payors and other consumers.  The settlement is subject to court approval.

 

As of April 18, 2008, twenty five states and the District of Columbia had filed a lawsuit, State of Florida, et al. against Abbott, Fournier Industrie et Sante and Laboratoires Fournier, S.A., in the United States District Court for the District of Delaware alleging antitrust and consumer fraud claims in connection with the sale of fenofibrate formulations.  Together with the District of Columbia, the states seek treble damages, injunctive relief and other relief on behalf of residents and state agencies.

 

Abbott is seeking to enforce its patent rights relating to fenofibrate tablets (a drug Abbott sells under the trademark Tricor®).  In a case filed in the United States District Court for the Northern District of Illinois in February 2008, Abbott with the patent owner, Laboratoires Fournier, S.A., seeks injunctive relief against Teva Pharmaceuticals USA Inc.

 

Abbott is seeking to enforce its patent rights relating to extended release divalproex sodium (a drug Abbott sells under the trademark Depakote® ER).  In a case filed in the United States District Court for the Eastern District of Michigan in February 2008, Abbott seeks injunctive relief against Sun Pharmaceutical Industries Ltd.

 

While it is not feasible to predict with certainty the outcome of the pending claims, proceedings and investigations in which Abbott is involved, management is of the opinion that their ultimate dispositions should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except (i) as noted in our 2007 Form 10-K, and (ii) with respect to the fourth paragraph above, the ultimate disposition could be material to Abbott’s financial position, cash flows or results of operations for a quarter.

 

19



 

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

(c)        Issuer Purchases of Equity Securities

 

Period

 

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

 

(b) Average
Price Paid per
Share (or Unit)

 

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

 

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

 

January 1, 2008 – January 31, 2008

 

8,520,967

(1)

$

56.304

 

7,726,000

 

$

1,047,933,446

(2)

February 1, 2008 – February 29, 2008

 

6,779,792

(1)

$

57.595

 

6,376,000

 

$

680,352,632

(2)

March 1, 2008 – March 31, 2008

 

285,112

(1)

$

54.405

 

0

 

$

680,352,632

(2)

Total

 

15,585,871

 

$

56.831

 

14,102,000

 

$

680,352,632

(2)

 

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 780,967 in January, 389,792 in February, and 271,112 in March; and

 

 

 

(ii)

 

the shares purchased on the open market for the benefit of participants in the Abbott Canada Stock Retirement Plan 14,000 in January, 14,000 in February, and 14,000 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 18, 2006, Abbott announced that its board of directors approved the purchase of up to $2.5 billion of its common shares.

 

20



 

Item 5.             Other Information

 

On April 30, 2008, Abbott Laboratories and Takeda Pharmaceutical Company Limited completed their transaction to conclude their joint venture that had been operated through TAP Pharmaceutical Products Inc., a close corporation.  The information appearing in this Item is intended to satisfy Abbott’s disclosure obligations under Items 2.01 and 9.01 of Form 8-K.  The disclosure appearing in Part 1 under the heading “Financial Review – Subsequent Event and Pro Forma Information” is incorporated by reference into this Item.

 

Item 6.             Exhibits

 

Incorporated by reference to the Exhibit Index included herewith.

 

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 2, 2008

 

 

 

21



 

EXHIBIT INDEX

 

Exhibit No.

 

Exhibit

 

 

 

 

 

2

 

Contribution and Exchange Agreement by and among Abbott Laboratories, Takeda Pharmaceutical Company Limited, Takeda America Holdings, Inc., TAP Pharmaceutical Products Inc., Lake Products Inc. and Takeda Pharmaceuticals LLC dated as of March 19, 2008.

 

 

 

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.

 

 


Exhibit 2

 

 

 

 

 

 

 

 

Contribution and Exchange Agreement by and among Abbott Laboratories, Takeda Pharmaceutical Company Limited,
Takeda America Holdings, Inc., TAP Pharmaceutical Products Inc., Lake Products Inc.

and Takeda Pharmaceuticals LLC dated as of March 19, 2008*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


*                 In accordance with Item 601(b)(2) of Regulation S-K, the schedules and similar attachments to this agreement, which are listed in the table of contents of this agreement, have not been filed, with the exception of Exhibit I to this agreement. The registrant agrees to furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

 



 

Execution Version

 

CONTRIBUTION AND EXCHANGE AGREEMENT

 

by and among

 

ABBOTT LABORATORIES

 

TAKEDA PHARMACEUTICAL COMPANY LIMITED

 

TAKEDA AMERICA HOLDINGS, INC.

 

TAP PHARMACEUTICAL PRODUCTS INC.

 

LAKE PRODUCTS INC.

 

and

 

TAKEDA PHARMACEUTICALS LLC

 

dated as of March 19, 2008

 



 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

ARTICLE 1 Definitions

 

2

 

 

 

Section 1.01

Definitions

2

 

 

 

ARTICLE 2 Transfer and Assumption of Assets and Liabilities

2

 

 

 

Section 2.01

Contribution of the Transferred Assets and Assumption of the Assumed Liabilities

2

Section 2.02

Retained Assets and Liabilities

2

Section 2.03

Contribution Deliveries

2

Section 2.04

Third Party Consents; Assignment of Contracts and Rights

4

Section 2.05

Governmental Authorizations

6

Section 2.06

Authorization of Transactions

7

 

 

 

ARTICLE 3 Exchange

 

7

 

 

 

Section 3.01

Exchange

7

Section 3.02

Closing

7

Section 3.03

Closing Balance Sheet; Adjustment of Estimated Net Assets Differential

11

Section 3.04

Time Adjustment Amount

13

 

 

 

ARTICLE 4 Representations and Warranties of TAP

14

 

 

 

Section 4.01

Organization and Qualification

14

Section 4.02

Authority; Binding Obligation

14

Section 4.03

Non-Contravention; Required Filings and Consents

14

Section 4.04

Capitalization of TAP

15

Section 4.05

Ownership of Newco Stock

16

Section 4.06

Governmental Authorizations

16

Section 4.07

Subsidiaries and Affiliated Transactions

16

Section 4.08

Financial Statements and Condition

17

Section 4.09

Absence of Certain Developments

17

Section 4.10

Absence of Undisclosed Liabilities

17

Section 4.11

Litigation; Legal Proceedings; Disputes

17

Section 4.12

Compliance with Laws

17

Section 4.13

No Basis for Exclusion or Debarment

18

Section 4.14

Relations with Governments

18

Section 4.15

Intellectual Property

18

Section 4.16

Health Care Compliance and Pricing

19

Section 4.17

FDA Regulatory Compliance

20

Section 4.18

Environmental Matters

20

Section 4.19

Compliance with Plea and Related Agreements

21

Section 4.20

Contracts

21

Section 4.21

Labor and Employment Matters

22

 

i



 

Section 4.22

Employee Benefit Matters

22

Section 4.23

Inventory

24

Section 4.24

Products Liability

24

Section 4.25

Title and Condition of Assets

25

Section 4.26

Accounts Receivable

25

Section 4.27

Insurance

25

Section 4.28

Books and Records

26

Section 4.29

Broker’s Fees

26

Section 4.30

Privacy Laws

26

 

 

 

ARTICLE 5 Representations and Warranties of Abbott

26

 

 

 

Section 5.01

Organization

26

Section 5.02

Authority; Binding Obligation

26

Section 5.03

Non-Contravention; Required Filings and Consents

27

Section 5.04

Ownership of TAP Stock

27

Section 5.05

Abbott Defined Benefit Plan Contributions

28

Section 5.06

Related Intellectual Property

28

Section 5.07

Affiliated Transactions

28

Section 5.08

Certain Payments

28

Section 5.09

Broker’s Fees

28

 

 

 

ARTICLE 6 Representations and Warranties of TAH and Takeda

29

 

 

 

Section 6.01

Representations and Warranties of TAH

29

Section 6.02

Representations and Warranties of Takeda

31

 

 

 

ARTICLE 7 Covenants Regarding TAP

33

 

 

 

Section 7.01

Conduct Until the Closing

33

Section 7.02

Restructuring of TAP Subsidiaries

33

Section 7.03

VEP LLC Matters

35

Section 7.04

Access to Information

35

Section 7.05

Termination of Certain Inter-company Contracts

35

Section 7.06

Engagement of Auditor

35

 

 

 

ARTICLE 8 Covenants of Takeda and TAP

36

 

 

 

Section 8.01

Non-Solicitation

36

 

 

 

ARTICLE 9 Covenants of Abbott and Newco

36

 

 

 

Section 9.01

Access to Information

36

Section 9.02

Non-Solicitation

36

 

 

 

ARTICLE 10 Covenants of the Parties

37

 

 

 

Section 10.01

Further Assurances

37

Section 10.02

TAP Dividends

37

Section 10.03

Notice of Developments

37

Section 10.04

Public Announcements

37

 

ii



 

Section 10.05

Privacy and Security

38

Section 10.06

Confidentiality

39

Section 10.07

Access to Information; Retention of Records

39

Section 10.08

Plea and Related Agreements

40

Section 10.09

Pre-Closing Coordination

41

Section 10.10

Notices; Updates

41

Section 10.11

Tolling Agreements

41

Section 10.12

Transfer Taxes

41

Section 10.13

Title Defects

42

Section 10.14

Estimated Net Assets

42

Section 10.15

TAP Corporate Integrity Agreement

42

Section 10.16

TAP Disclosure Schedules

42

Section 10.17

TAP Decisions Regarding Ilaprazole

43

Section 10.18

Intellectual Property

43

 

 

 

ARTICLE 11 Conditions to Closing

44

 

 

 

Section 11.01

Conditions to the Obligations of Each Party Under This Agreement

44

Section 11.02

Additional Conditions to the Obligations of TAH

44

Section 11.03

Additional Conditions to Obligations of Abbott

46

 

 

 

ARTICLE 12 Survival; Indemnification

48

 

 

 

Section 12.01

Survival

48

Section 12.02

General Indemnification Obligations

49

Section 12.03

Newco Indemnification Obligations for Pre-Closing TAP Matters

51

Section 12.04

TAP Indemnification Obligations for Pre-Closing TAP Matters

52

Section 12.05

Third Party Claims

53

Section 12.06

No Duplication; Offset for Insurance and Third Party Indemnity Payments; Tax Impact Adjustment

53

Section 12.07

Release of Certain TAP Representatives

54

Section 12.08

Indemnification in the Event of Strict Liability or Negligence

54

Section 12.09

Exclusive Remedy

54

Section 12.10

Purpose

55

 

 

 

ARTICLE 13 Termination

 

55

 

 

 

Section 13.01

Termination

55

Section 13.02

Effect of Termination

55

 

 

 

ARTICLE 14 Certain Matters with Respect to VEP Products

56

 

 

 

Section 14.01

Third Party Royalties

56

Section 14.02

Commercially Reasonable Efforts

57

Section 14.03

VEP LLC Operating Agreement

58

 

iii



 

ARTICLE 15 Miscellaneous

58

 

 

 

Section 15.01

Notices

58

Section 15.02

Amendments; No Waivers

59

Section 15.03

Expenses

60

Section 15.04

Successors and Assigns

60

Section 15.05

Dispute Resolution

60

Section 15.06

Governing Law

62

Section 15.07

Counterparts; Effectiveness

62

Section 15.08

Entire Agreement

62

Section 15.09

Severability

62

Section 15.10

Specific Performance

63

Section 15.11

No Right to Setoff

63

Section 15.12

Third Parties

63

Section 15.13

Construction

63

Section 15.14

Descriptive Headings

63

Section 15.15

No Partnership or Joint Venture

64

Section 15.16

Obligations of Takeda

64

Section 15.17

Effect of Amendment and Restatement

64

 

 

 

EXHIBITS

 

 

 

Exhibit I

Definitions

 

Exhibit II

Royalty Deduction Schedule

 

Exhibit III

TAP Long Range Plan (Selected Items)

 

Exhibit IV

Agreed Accounting Conventions

 

Exhibit V

Description of Headquarters Facility

 

Exhibit VI-A

Abbott Knowledge Persons

 

Exhibit VI-B

Takeda Knowledge Persons

 

Exhibit VI-C

TAH Knowledge Persons

 

Exhibit VI-D

TAP Closing Knowledge Persons

 

Exhibit VI-E

TAP Signing Knowledge Persons

 

Exhibit VII

Base Transaction Conventions

 

 

 

 

TAP DISCLOSURE SCHEDULES TO THE

SIGNING REPRESENTATIONS

 

 

 

Schedule 4.01

Organization and Qualification

 

Schedule 4.02

Authority; Binding Obligation

 

Schedule 4.03(a)

Non-Contravention; Required Filings and Consents

 

Schedule 4.03(d)

Non-Contravention; Required Filings and Consents

 

Schedule 4.04

Capitalization of Tap

 

Schedule 4.06

Governmental Authorizations

 

Schedule 4.07(a)

Capitalization of Subsidiaries

 

Schedule 4.08

Material Changes in Accounting Principles

 

 

iv



 

Schedule 4.09

Certain Developments

 

Schedule 4.10

Undisclosed Liabilities

 

Schedule 4.11

Legal Proceedings

 

Schedule 4.13

No Basis for Exclusion Or Debarment

 

Schedule 4.14

Relations with Governments

 

Schedule 4.27

Insurance

 

Schedule 4.28

Books and Records

 

Schedule 4.29

Broker’s Fees

 

 

 

 

TAP DISCLOSURE SCHEDULES TO THE

CLOSING REPRESENTATIONS

 

 

 

Schedule 4.03(b)

Required Third Party Consents

 

Schedule 4.03(c)

Non-Contravention; Required Filings and Consents

 

Schedule 4.05

Ownership of Newco Stock

 

Schedule 4.07(b)

Subsidiaries and Affiliated Transactions

 

Schedule 4.12

Compliance with Laws

 

Schedule 4.15(a)(i)

Owned Identifiable Intellectual Property: Split-Off Business

 

Schedule 4.15(a)(ii)

Owned Identifiable Intellectual Property: Retained Business

 

Schedule 4.15(a)(iii)

Other Owned Identifiable Intellectual Property

 

Schedule 4.15(b)

Intellectual Property

 

Schedule 4.15(c)(i)

Tap Intellectual Property Exceptions: Exclusive Licenses

 

Schedule 4.15(c)(ii)

Tap Intellectual Property Exceptions: Noncompetition

 

Schedule 4.15(d)

Intellectual Property

 

Schedule 4.16

Health Care Compliance and Pricing

 

Schedule 4.17(a)

FDA Regulatory Compliance

 

Schedule 4.17(b)

FDA Regulatory Compliance

 

Schedule 4.17(c)

FDA Regulatory Compliance

 

Schedule 4.18

Environmental Matters

 

Schedule 4.19

Compliance with Plea and Related Agreements

 

Schedule 4.20(a)

Material Contracts

 

Schedule 4.20(b)

Material Contracts

 

Schedule 4.21

Labor and Employment Matters

 

Schedule 4.22(a)

Benefit Plans

 

Schedule 4.22(b)(iv)

Contributions to Multiemployer Plans

 

Schedule 4.22(c)-(i)

Employee Benefit Matters

 

Schedule 4.23(a)

Inventory

 

Schedule 4.23(b)

Inventory

 

Schedule 4.24

Products Liability

 

Schedule 4.25

Title and Condition Of Assets

 

Schedule 4.26

Accounts Receivable

 

Schedule 4.30

Privacy Laws

 

 

 

 

OTHER SCHEDULES

 

 

 

Schedule 3.02(c)

Resigning Directors and Officers

 

 

v



 

Schedule 5.06

Abbott TAP-Related Intellectual Property

 

Schedule 6.02(h)

Takeda TAP-Related Intellectual Property

 

Schedule 7.05

Termination of Certain Inter-company Contracts

 

 

 

 

ATTACHMENTS

 

 

 

Attachment A

Form of Special Warranty Deed

 

Attachment B

Form of Identifiable Intellectual Property Assignment Documents

 

Attachment C

Joint Transition Team

 

Attachment D

Joint Information Technology Team

 

Attachment E

Control of Third Party Claims

 

Attachment F

Form of VEP Report

 

Attachment G

Form of Escrow Agreement

 

 

vi



 

CONTRIBUTION AND EXCHANGE AGREEMENT

 

This Contribution and Exchange Agreement (this “Agreement”), dated as of March 19, 2008 and amended and restated as of April 30, 2008, by and among Abbott Laboratories, an Illinois corporation (“Abbott”), Takeda Pharmaceutical Company Limited, a Japanese corporation (“Takeda”), Takeda America Holdings, Inc., a New York corporation and wholly-owned subsidiary of Takeda (“TAH”), TAP Pharmaceutical Products Inc., a close corporation incorporated in Delaware (“TAP”), Lake Products Inc., a Delaware corporation (“Newco”), and Takeda Pharmaceuticals LLC, a Delaware limited liability company (“VEP LLC”), amends and restates in its entirety the Contribution and Exchange Agreement, dated as of March 19, 2008, by and among Abbott, Takeda, TAH, TAP and Newco (the “Original Agreement”).

 

W I T N E S S E T H

 

WHEREAS, TAP is a close corporation jointly owned by TAH and Abbott and is engaged in the Split-off Business and the Retained Business;

 

WHEREAS, upon the terms and subject to the conditions of this Agreement, (i) TAP desires to contribute to Newco certain Assets used or held for use primarily in the conduct of the Split-off Business, certain other Assets, and an amount of cash, if any, equal to half of the Net Assets of TAP (prior to the Contemplated Transactions) less the Net Assets of the Split-off Business (giving effect to the Contemplated Transactions), subject to subsequent adjustment, and (ii) Newco desires to assume, among other things, the Liabilities associated primarily with, or to the extent arising out of the conduct of, the Split-off Business and such other Assets and certain other Liabilities;

 

WHEREAS, upon the terms and subject to the conditions of this Agreement, TAP desires to exchange with Abbott, and Abbott desires to exchange with TAP, immediately following the consummation of the Contribution and Assumption, all of the issued and outstanding Newco Stock for all of the issued and outstanding TAP Class A Common Stock owned by Abbott;

 

WHEREAS, in accordance with the Original Agreement, VEP LLC has been established to facilitate certain arrangements between TAP and Newco with respect to VEP Products after the Closing, and the Parties wish to amend and restate the Original Agreement in its entirety and to provide for the amendment and restatement of certain other Transaction Documents to reflect changes to the documentation of the Contemplated Transactions as contemplated by the Original Agreement; and

 

WHEREAS, the Parties are entering into the Contemplated Transactions pursuant to a plan of reorganization in accordance with Sections 368(a)(1)(D) and 355 of the Code, and the Parties intend for such Contemplated Transactions to qualify as a tax free reorganization under such sections of the Code.

 



 

NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth hereinafter and in the other Transaction Documents, the Parties agree as follows:

 

ARTICLE 1

 

DEFINITIONS

 

Section 1.01          Definitions.  Capitalized terms used but not otherwise defined herein shall have the respective meanings specified in Exhibit I to this Agreement.

 

ARTICLE 2

 

TRANSFER AND ASSUMPTION OF ASSETS AND LIABILITIES

 

Section 2.01          Contribution of the Transferred Assets and Assumption of the Assumed Liabilities.  Upon the terms and subject to the conditions of this Agreement, including Article 12, immediately prior to the Exchange, (i) TAP shall assign, transfer, convey and deliver as a capital contribution to Newco, and Newco shall accept, all of the right, title and interest of TAP in, to and under the Transferred Assets, free and clear of all Liens running for the benefit of TAP or any of the TAP Subsidiaries, (ii) if the Estimated Net Asset Equalization Amount is greater than zero, TAP shall contribute to Newco cash in the amount of the Estimated Net Asset Equalization Amount and (iii) Newco shall assume and agree to pay, perform and discharge when due all of the Assumed Liabilities (clauses (i), (ii) and (iii), collectively, the “Contribution and Assumption”).

 

Section 2.02          Retained Assets and Liabilities.

 

(a)        Notwithstanding anything to the contrary herein, TAP shall not assign, transfer, convey or deliver to Newco, nor shall Newco accept, any right, title or interest in, to or under any Retained Assets.

 

(b)        Newco shall not assume or have any responsibility for any Retained Liabilities.

 

Section 2.03          Contribution Deliveries.

 

(a)        Immediately prior to the Exchange on the Closing Date (the “Contribution Effective Time”), TAP shall duly execute and/or deliver to Newco:

 

(i)         a wire transfer of immediately available funds in an amount equal to the Estimated Net Asset Equalization Amount, if the Estimated Net Asset Equalization Amount is greater than zero;

 

(ii)        (A) a special warranty deed conveying the Headquarters Facility to Newco in the form attached hereto as Attachment A (the “Special Warranty Deed”), (B) a title policy from First American Title Insurance Company (or another title company mutually acceptable to Abbott and TAH) (the

 

2



 

Title Company”) for an ALTA extended coverage title policy insuring Newco in an amount equal to at least the Title Commitment Headquarters Value in form and substance reasonably acceptable to Abbott and containing the following endorsements: (1) an endorsement deleting the standard printed exceptions; (2) an endorsement insuring that the insured property is the same as depicted in the Survey; (3) an endorsement insuring access to the Premises by vehicles from North Field Drive, Lake Forest, Illinois; (4) an endorsement insuring against loss of title to the Headquarters Facility or the inability of the owner of the Premises to maintain or operate the improvements now located on the Premises by reason of a violation of a covenant, condition or restriction of record at Closing affecting the Headquarters Facility; (5) a 3.1 zoning endorsement insuring that the Headquarters Facility, as currently operated, is in compliance with all applicable zoning ordinances and regulations; (6) a tax parcel endorsement; (7) a contiguity endorsement and (8) such other endorsements as Abbott may reasonably request which the Title Company commits to issue (the “Title Policy”), (C) a current survey of the Headquarters Facility prepared in accordance with “Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys,” jointly established and adopted by ALTA and ACSM in 2005 in form and content reasonably acceptable to Abbott and including ALTA Table A items 2, 3, 4, 6, 7(a), 7(c), 8, 9, 10, 11(c), 16 and 18 (the “Survey”) and (D) all affidavits, statements, transfer tax declarations and other items necessary to effectuate the transfer of the Headquarters Facility to Newco and cause the Title Company to issue the Title Policy; provided that any and all costs and expenses of the deliveries identified in clauses (B) and (C) shall be borne entirely by TAP (which costs and expenses shall be reflected as a Liability on the TAP Closing Balance Sheet or paid by TAP prior to the Closing);

 

(iii)       the Contribution, Conveyance and Assumption Agreement;

 

(iv)       instruments for the transfer to Newco of the Identifiable Intellectual Property set forth in Schedule 4.15(a)(i) of the TAP Disclosure Schedules, in the forms attached hereto as Attachment B;

 

(v)        the Transferred Assets specified in clause (m) of the definition of Transferred Assets; and

 

(vi)       a non-foreign person affidavit as required by Section 1445 of the Code.

 

(b)        At the Contribution Effective Time, Newco shall duly execute and deliver to TAP:

 

(i)         the Contribution, Conveyance and Assumption Agreement; and

 

3



 

(ii)        instruments for the transfer to Newco of the Identifiable Intellectual Property set forth in Schedule 4.15(a)(i) of the TAP Disclosure Schedules, in the forms attached hereto as Attachment B.

 

(c)        Notwithstanding anything in Section 2.01 or this Section 2.03 to the contrary, TAP may assign, transfer, deliver, convey and contribute to Newco any Transferred Asset and cause Newco to assume any Assumed Liability, in each case, prior to the Contribution Effective Time and upon mutual written agreement of the Parties.  Any such mutual written agreement shall specify that the subject action may be unwound in the event this Agreement is terminated pursuant to Section 13.01.

 

Section 2.04          Third Party Consents; Assignment of Contracts and Rights.

 

(a)        Subject to the terms of this Agreement, prior to the Contribution Effective Time, TAP shall, and Abbott and TAH shall each instruct TAP to (and, if applicable, vote to cause TAP to), use commercially reasonable efforts to take such actions, make such filings, furnish such information and seek timely to obtain any Third Party Consents reasonably determined by either TAH or Abbott as being required in connection with the consummation of the Contemplated Transactions.  Fifty percent (50%) of all out-of-pocket costs, including any consent fees, incurred by TAP in connection with taking such actions, making such filings, furnishing such information and seeking or obtaining such Third Party Consents (to the extent such costs are not reflected on the TAP Closing Balance Sheet or paid by TAP prior to the Closing) shall be promptly reimbursed by Newco upon the written request of TAP.

 

(b)        In the event any Third Party Consent, which is determined by Abbott to be required in connection with the consummation of the Contemplated Transactions, is not obtained prior to the Contribution Effective Time, TAP shall, and TAH shall cause TAP to, subsequent to the Contribution Effective Time, continue to use its commercially reasonable efforts to promptly obtain such Third Party Consent.  In the event that TAP makes any payment to any Person to induce such Person to grant any Third Party Consent, which Third Party Consent is determined by Abbott or TAH to be required in connection with the consummation of the Contemplated Transactions and is not obtained prior to the Contribution Effective Time, fifty percent (50%) of the amount of such payment and related out-of-pocket costs and expenses (including reasonable attorneys’ fees) of TAP shall be promptly reimbursed by Newco upon written request by TAP (to the extent not reflected on the TAP Closing Balance Sheet or paid by TAP prior to the Closing); provided that any such payment shall be approved in advance in writing by Abbott.  Abbott shall cooperate with TAP in connection with obtaining such Third Party Consents and shall use commercially reasonable efforts (but not payment of money) to obtain such Third Party Consents.  After the Contribution Effective Time, until any such Third Party Consent is received, (i) TAP and Newco shall cooperate with each other in any reasonable and lawful arrangements designed to provide to Newco the benefits, obligations and Liabilities associated with such Transferred Asset, (ii) Newco shall timely discharge and perform when due all of the obligations of TAP associated with such Transferred Asset, including all payment obligations, as if Newco were the Party in interest thereto, and (iii) TAP shall enforce, at the reasonable request of Newco, any rights of TAP relating to such Transferred Asset; provided that, upon written request of TAP, Newco shall promptly reimburse TAP for (x) fifty percent (50%) of all out-of-pocket costs and expenses (including reasonable attorneys’ fees) of TAP incurred

 

4



 

pursuant to clause (i) of this sentence after the Closing but prior to the one year anniversary of the Closing Date and (y) all out-of-pocket costs and expenses (including reasonable attorneys’ fees) of TAP incurred pursuant to clause (iii) of this sentence after the Closing or pursuant to clause (i) of this sentence on or after the one year anniversary of the Closing Date, to the extent, in the case of each of the foregoing clauses (x) and (y), not reflected on the TAP Closing Balance Sheet.  Once such Third Party Consent for the transfer of any applicable Transferred Asset not transferred at the Contribution Effective Time is obtained, TAP shall promptly transfer, or cause to be transferred, such Transferred Asset to Newco for no additional consideration.

 

(c)        Unless the Parties agree otherwise, any Mixed Contract that exists as of the Contribution Effective Time shall be assigned in part to Newco, if so assignable, upon or after the Contribution Effective Time, so that each of Newco and TAP shall be entitled to the rights and benefits and shall assume the related portion of any Liabilities inuring to their respective businesses; provided, however, that in no event shall TAP be required to assign any Mixed Contract in its entirety.  If any Mixed Contract cannot be so partially assigned, TAP and Newco shall take such other reasonable and permissible actions to cause (i) the Assets associated with that portion of each Mixed Contract that relates to the Retained Business to be enjoyed by TAP; (ii) the Liabilities associated with that portion of each Mixed Contract that relates to the Retained Business to be borne by TAP; (iii) the Assets associated with that portion of each Mixed Contract that relates to the Split-off Business to be enjoyed by Newco; and (iv) the Liabilities associated with that portion of each Mixed Contract that relates to the Split-off Business to be borne by Newco.

 

(d)        At the Closing, the Interchangeable Assets shall be physically apportioned between the Retained Business and the Split-off Business on an approximately pro rata basis in accordance with the overall usage of the Interchangeable Assets by the Retained Business and the Split-off Business as of immediately prior to the Closing Date.  The portion of the Interchangeable Assets so apportioned to the Retained Business shall constitute Retained Assets and the portion of the Interchangeable Assets so apportioned to the Split-off Business shall constitute Transferred Assets.  After the Closing, except as otherwise provided in this Agreement or any other Transaction Document, (i) Newco and its Affiliates shall have no right of access to, possession of or use of the Interchangeable Assets that constitute Retained Assets and (ii) TAP and its Affiliates shall have no right of access to, possession of or use of the Interchangeable Assets that constitute Transferred Assets.  Prior to the Closing, TAH and Abbott shall cooperate in good faith to identify and determine the allocation of each such Interchangeable Asset in accordance herewith.

 

(e)        Subject to the terms of any arrangement between TAP and Newco pursuant to clause (i) in Section 2.04(b), subsequent to the Contribution Effective Time, TAP shall promptly pay to Newco when received any amounts received by TAP pertaining primarily to any Transferred Asset or any claim, right or benefit arising under any Transferred Asset.

 

(f)        Subsequent to the Contribution Effective Time, Newco shall promptly pay to TAP when received any amounts received by Newco pertaining primarily to any Retained Asset or any claim, right or benefit arising under any Retained Asset (including any Split-off Accounts Receivable retained by TAP as a Retained Asset pursuant to the terms of this Agreement).

 

5



 

Section 2.05          Governmental Authorizations.

 

(a)        Subject to the terms of this Agreement, prior to the Contribution Effective Time, TAP shall, and Abbott and TAH shall each instruct TAP to (and, if applicable, vote to cause TAP to), and Abbott and TAH (at the cost and expense of TAP) shall, as the case may be, use commercially reasonable efforts to take such actions, make such filings, furnish such information and seek timely to obtain such Governmental Authorizations, if any, as are required in connection with the consummation of the Contemplated Transactions.  In addition, pursuant to 21 C.F.R. § 314.72(a)(1), TAP shall, at the time of transfer, notify the FDA in writing of all NDAs and INDs transferred from TAP to Newco and that all rights to such NDAs and INDs have been transferred to Newco.

 

(b)        Notwithstanding anything to the contrary herein, Newco acknowledges and agrees that if there are any Governmental Authorizations pertaining primarily to the Split-off Business (or are otherwise necessary to engage in the Split-off Business from and after the Contribution Effective Time) that are non-transferable or otherwise not transferred to Newco prior to or at the Contribution Effective Time pursuant to this Agreement (the “Non-Transferred Permits”), the same shall be retained by TAP from and after the Contribution Effective Time for the benefit of Newco.  For a period of one year after the Closing Date, TAP shall, and TAH shall cause TAP to, continue to use its commercially reasonable efforts to promptly transfer any transferable Non-Transferred Permits pertaining primarily to the Split-off Business.  In the event TAP makes any payment to any third party to transfer any such transferable Non-Transferred Permit, fifty percent (50%) of the amount of such payment and related out-of-pocket costs and expenses of TAP (including reasonable attorneys’ fees) shall be promptly reimbursed by Newco upon written request by TAP (to the extent not reflected on the TAP Closing Balance Sheet or paid by TAP prior to the Closing); provided that (except for any such payment to a Governmental Authority that is required by Law to transfer any Non-Transferred Permit) Newco shall be obligated to make the respective payment to TAP only if Abbott has approved such third party payment in writing in advance.  TAP and Newco shall cooperate with each other in any reasonable and lawful arrangements to provide to Newco the benefits, obligations and Liabilities associated with each Non-Transferred Permit until such time as Newco obtains a replacement Governmental Authorization, but the obligations of TAP under this Section 2.05(b) to maintain any Non-Transferred Permit and provide any benefits thereunder to Newco shall expire on the one year anniversary of the Closing Date (the “Permit Expiration Date”) and TAP shall have no obligation to renew or take action to otherwise extend any such Non-Transferred Permit that expires prior thereto on its own terms.  After the Closing, Newco shall timely discharge and perform when due all of the obligations of TAP associated with such Non-Transferred Permit, including all payment obligations, as if Newco were the party in interest thereto.  TAP may terminate any and all Non-Transferred Permits in its discretion upon or at any time after the Permit Expiration Date.  From and after the Closing, in the event TAP identifies a Governmental Authorization transferred to Newco as a Transferred Asset that is related to the Retained Business, then upon written request by TAP, (i) Newco shall cooperate with TAP in any reasonable and lawful arrangement designed to provide TAP with the benefits associated with such Governmental Authorization, and (ii) TAP shall promptly reimburse Newco for fifty percent (50%) of its out-of-pocket costs and expenses (including reasonable attorneys’ fees) attributable to providing TAP with the benefits associated with such Governmental

 

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Authorization.  The obligations of Newco under this Section 2.05(b) to make any Governmental Authorization available to TAP shall expire on the Permit Expiration Date.

 

Section 2.06          Authorization of Transactions.  In accordance with Section 350 of the General Corporation Law of the State of Delaware, TAH and Abbott hereby agree that TAH and Abbott, as the stockholders of TAP, shall control the authorization and approval, on behalf of TAP, of this Agreement and the Contemplated Transactions, and each of TAH and Abbott hereby grants all consents and approvals necessary for the consummation of the Contemplated Transactions under the organizational documents of TAP, the Laws of the State of Delaware and any applicable Contracts between such Parties and TAP.

 

ARTICLE 3

 

EXCHANGE

 

Section 3.01          Exchange.  Upon the terms and subject to the conditions of this Agreement, the Parties agree that, following the consummation of the Contribution and Assumption, at the Closing, TAP shall transfer and deliver to Abbott all of the issued and outstanding Newco Stock, free and clear of any and all Liens, and in exchange for such Newco Stock, Abbott shall concurrently transfer and deliver to TAP all of the issued and outstanding TAP Class A Common Stock (the “Exchange”), free and clear of any and all Liens.

 

Section 3.02          Closing.

 

(a)        Upon the terms and subject to the conditions of this Agreement, the closing of the transactions contemplated hereby (the “Closing”) will be held at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 333 West Wacker Drive, Chicago, Illinois, on the later of (i) April 30, 2008 (the “Target Closing Date”) if the conditions to the Closing set forth in Article 11 have then been satisfied or waived (other than such conditions which by their nature are to be satisfied at the Closing) and (ii) the last Business Day of the month in which satisfaction or waiver of the conditions set forth in Article 11 occurs (other than such conditions which by their nature are to be satisfied at the Closing), in each case other than as TAH and Abbott may mutually agree in writing.  Notwithstanding anything herein to the contrary, if satisfaction or waiver of the conditions set forth in Article 11 (other than such conditions which by their nature are to be satisfied at the Closing) occurs prior to the Target Closing Date, the Closing shall be held on any Business Day prior to the Target Closing Date that Takeda designates upon written notice to Abbott at least five (5) Business Days prior to such designated date; provided that such designated date must be the last Business Day of a month.  The date on which the Closing actually occurs shall be referred to as the “Closing Date,” and, except as otherwise expressly provided herein, the Closing shall for all purposes be deemed effective as of 11:59 PM, Central Time, on the Closing Date.

 

(b)        At the Closing, TAH or TAP, as appropriate, shall duly execute (and, if applicable, TAP shall cause the TAP Sales Subsidiary to execute) and/or deliver or cause to be delivered to Abbott or Newco, as the case may be:

 

(i)           certificates evidencing the shares of Newco Stock to be delivered by TAP under this Agreement, free and clear of all Liens, preemptive

 

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or similar rights or any other limitation or restriction, duly endorsed in blank or accompanied by stock powers duly endorsed in blank;

 

(ii)          the Transition Services Agreement;

 

(iii)         the Tolling Agreement-Prevacid;

 

(iv)        the Tolling Agreement-Uloric;

 

(v)         the Tolling Agreement-Lupron;

 

(vi)        the Headquarters Lease;

 

(vii)       the Amended and Restated Tax Agreement;

 

(viii)      the Amended and Restated Employee Matters Agreement;

 

(ix)        the Marketing and Distribution Agreement (Canada);

 

(x)         the Amendment to Marketing and Distribution Agreement (Canada);

 

(xi)        the Marketing and Distribution Agreement (Puerto Rico);

 

(xii)       the Amendment to Marketing and Distribution Agreement (Puerto Rico);

 

(xiii)      the Amendment to Prev-Pac Co-Promotion Agreement;

 

(xiv)      the Lease Assignment and Assumption Agreement (Arlington);

 

(xv)       the Lease Assignment and Assumption Agreement (Bedminster);

 

(xvi)      the Lease Assignment and Assumption Agreement (Bannockburn);

 

(xvii)     a certificate of an executive officer of TAH as to the matters set forth in Sections 11.03(b) and 11.03(e) (as to matters regarding TAH); and

 

(xviii)    all other previously undelivered certificates and other documents required to be delivered by TAH or TAP, as the case may be, to Abbott or Newco, as the case may be, in connection with the Contemplated Transactions.

 

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(c)        At the Closing, Abbott or Newco, as appropriate, shall duly execute (and/or cause Abbott-Canada and/or Abbott-Puerto Rico and/or Abbott Laboratories Inc. to execute, if applicable) and/or deliver or cause to be delivered to TAH or TAP, as the case may be:

 

(i)           certificates evidencing the shares of TAP Class A Common Stock to be

delivered by Abbott under this Agreement, free and clear of all Liens, preemptive or similar rights or any other limitation or restriction, other than as set forth in TAP’s certificate of incorporation, duly endorsed in blank or accompanied by stock powers duly endorsed in blank;

 

(ii)          the Transition Services Agreement;

 

(iii)         the Tolling Agreement-Prevacid;

 

(iv)        the Tolling Agreement-Uloric;

 

(v)         the Tolling Agreement-Lupron;

 

(vi)        the Headquarters Lease;

 

(vii)       the Amended and Restated Tax Agreement;

 

(viii)      the Lupron License and Supply Agreement;

 

(ix)        the Amended and Restated Employee Matters Agreement;

 

(x)         the Amended and Restated Abbott Guarantee;

 

(xi)        the Marketing and Distribution Agreement (Canada);

 

(xii)       the Amendment to Marketing and Distribution Agreement (Canada);

 

(xiii)      the Marketing and Distribution Agreement (Puerto Rico);

 

(xiv)      the Amendment to Marketing and Distribution Agreement (Puerto Rico);

 

(xv)       the Amendment to Prev-Pac Co-Promotion Agreement;

 

(xvi)      the Contribution and Distribution Agreement;

 

(xvii)     the Lease Assignment and Assumption Agreement (Arlington);

 

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(xviii)    the Lease Assignment and Assumption Agreement (Bedminster);

 

(xix)      the Lease Assignment and Assumption Agreement (Bannockburn);

 

(xx)       a counterpart signature page to the VEP LLC Operating Agreement documenting Newco’s becoming the Class B Member;

 

(xxi)      resignations from each director and officer of TAP listed on Schedule 3.02(c);

 

(xxii)     a certificate of an executive officer of Abbott as to the matters set forth in Sections 11.02(b) (as to matters regarding Abbott) and 11.02(c);

 

(xxiii)    Schedule 5.06; and

 

(xxiv)     all other previously undelivered certificates and other documents required to be delivered by Abbott or Newco, as the case may be, to TAH or TAP, as the case may be, in connection with the Contemplated Transactions.

 

(d)        At the Closing, TAP shall duly execute (and/or cause the TAP Sales Subsidiary and/or Newco Lupron Sales Subsidiary to execute, if applicable) and/or deliver or cause to be delivered, as the case may be:

 

(i)         to Abbott, a certificate of the president and executive vice president of TAP as to the matters set forth in Sections 11.03(d) and 11.03(e) (as to matters regarding TAP);

 

(ii)        (A) to each of the parties thereto and to Abbott, the Contribution and Distribution Agreement and (B) to the other party thereto and to Abbott, a contribution, conveyance and assumption agreement between the TAP Sales Subsidiary and Newco Lupron Sales Subsidiary, substantially similar to the Contribution, Conveyance and Assumption Agreement, evidencing the transfer of Transferred Assets and assumption of Assumed Liabilities contemplated by Section 7.02(a)(ii)(B);

 

(iii)       to TAH, a certificate of the president and executive vice president of TAP as to the matters set forth in Sections 11.02(b) (as to matters regarding TAP) and 11.02(d);

 

(iv)       to Abbott, Newco and Newco Sales Subsidiary, resignations from each director and officer of Newco and Newco Sales Subsidiary;

 

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(v)        to the other party thereto, the VEP LLC Operating Agreement and, to Newco, a counterpart signature page to the VEP LLC Operating Agreement documenting Newco’s becoming the Class B Member;

 

(vi)       to each of the other parties thereto, the VEP LLC Contribution Agreement;

 

(vii)      to VEP LLC, the Supply Agreement; and

 

(viii)     to VEP LLC, the Master Services and Supply Agreement.

 

(e)        At the Closing, Takeda shall duly execute and deliver to Abbott or Newco, as the case may be:

 

(i)         the Amended and Restated Takeda Guarantee;

 

(ii)        the Lupron License and Supply Agreement;

 

(iii)      a certificate of an executive officer of Takeda as to the matters set forth in Section 11.03(c) and 11.03(e) (as to matters regarding Takeda);

 

(iv)       Schedule 6.02(h);

 

(v)        the Amended and Restated Employee Matters Agreement; and

 

(vi)       all other previously undelivered certificates and other documents required to be delivered by Takeda to Abbott or Newco, as the case may be, in connection with the Contemplated Transactions.

 

(f)            At the Closing, VEP LLC shall duly execute and deliver:

 

(i)         to Abbott, Newco, TAH and TAP, the Amended and Restated Tax Agreement;

 

(ii)        to TAP, the Master Services and Supply Agreement;

 

(iii)       to the TAP Sales Subsidiary, the Supply Agreement; and

 

(iv)       to TAP and the TAP Sales Subsidiary, the VEP LLC Contribution Agreement.

 

Section 3.03          Closing Balance Sheet; Adjustment of Estimated Net Assets Differential.

 

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(a)        As promptly as practicable, but in any event within 90 Business Days after the Closing Date, TAP shall:

 

(i)         prepare the TAP Closing Balance Sheet, the Retained Business Closing Balance Sheet and the Split-off Business Closing Balance Sheet in accordance with GAAP applied on a basis consistent with the TAP 2007 Audited Balance Sheet and the Agreed Accounting Conventions;

 

(ii)        deliver to Abbott and TAH (A) the TAP Closing Balance Sheet, together with a report thereon of Deloitte & Touche LLP (“Deloitte & Touche”) substantially to the effect that the TAP Closing Balance Sheet presents fairly, in all material respects, the assets and liabilities of TAP as of the Closing Date, on the basis of accounting described in a note to the TAP Closing Balance Sheet (which note shall state in substance that the TAP Closing Balance Sheet reflects the assets and liabilities of TAP and its Subsidiaries, including Newco and VEP LLC, on a consolidated basis immediately prior to the Contribution and Assumption, but after the transactions contemplated by Section 7.02(a) and Section 7.03, and shall otherwise describe accounting in accordance with the requirements of Section 3.03(a)(i) as the basis for the TAP Closing Balance Sheet), (B) the Retained Business Closing Balance Sheet, together with a report thereon of Deloitte & Touche substantially to the effect that the Retained Business Closing Balance Sheet presents fairly, in all material respects, the assets and liabilities of TAP as of the Closing Date, on the basis of accounting described in a note to the Retained Business Closing Balance Sheet (which note shall state in substance that the Retained Business Closing Balance Sheet reflects the assets and liabilities of TAP and its Subsidiaries, including VEP LLC but excluding Newco and its Subsidiary, on a consolidated basis after the Contribution and Assumption, but prior to the Exchange, and shall otherwise describe accounting in accordance with the requirements of Section 3.03(a)(i) as the basis for the Retained Business Closing Balance Sheet) and (C) the Split-off Business Closing Balance Sheet, together with a report thereon of Deloitte & Touche substantially to the effect that the Split-off Business Closing Balance Sheet presents fairly, in all material respects, the assets and liabilities of Newco as of the Closing Date, on the basis of accounting described in a note to the Split-off Business Closing Balance Sheet (which note shall state in substance that the Split-off Business Closing Balance Sheet reflects the assets and liabilities of Newco and its Subsidiary on a consolidated basis after the Contribution and Assumption, but prior to the Exchange, and shall otherwise describe accounting in accordance with the requirements of Section 3.03(a)(i) as the basis for the Split-off Business Closing Balance Sheet); and

 

(iii)       prepare and deliver to Abbott and TAH an explanation of the preparation of the TAP Closing Balance Sheet, the Retained Business Closing Balance Sheet and the Split-off Business Closing Balance Sheet in such detail as to permit a reasonable review and analysis thereof by TAH and Abbott, which explanation shall include general ledger account-level detail and all relevant analysis and supporting documentation.

 

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(b)        In preparing and reviewing the TAP Closing Balance Sheet, the Retained Business Closing Balance Sheet and the Split-off Business Closing Balance Sheet, TAP and Newco shall cooperate with one another, including by providing reasonable access to such other Party and to the Representatives of such Party during normal business hours to its offices, properties, books and records, and employees.  TAH and Abbott shall have at least fifteen (15) Business Days to review the TAP Closing Balance Sheet, the Retained Business Closing Balance Sheet and the Split-off Business Closing Balance Sheet following the delivery by TAP of all of the items specified in Section 3.03(a)(i)-(iii).

 

(c)        Within five (5) Business Days after TAH and Abbott consent to the TAP Closing Balance Sheet, the Split-off Business Closing Balance Sheet and the Retained Business Closing Balance Sheet, an adjustment with respect to the Estimated Net Asset Equalization Amount shall be made as follows:

 

(i)         if the Estimated Net Assets Differential exceeds the Net Assets Differential, then an amount equal to such excess shall be paid by Newco to TAP by wire transfer of immediately available funds to the account designated in writing by TAP; and

 

(ii)        if the Net Assets Differential exceeds the Estimated Net Assets Differential, then an amount equal to such excess shall be paid by TAP to Newco by wire transfer of immediately available funds to the account designated in writing by Newco;

 

plus interest thereon from (but not including) the Closing Date at the Federal Funds Rate (compounded monthly) up to (and including) the actual date of payment; provided, however, any amount paid pursuant t