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 June 30, 2006

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  xNo  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer  x            Accelerated Filer  o            Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  oNo  x

As of June 30, 2006, Abbott Laboratories had 1,527,807,035 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

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2006

 

2005

 

2006

 

2005

 

Net Sales

 

$

5,501,124

 

$

5,523,800

 

$

10,684,583

 

$

10,906,479

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

2,388,613

 

2,631,835

 

4,558,317

 

5,154,366

 

Research and development

 

556,337

 

445,258

 

1,041,479

 

881,914

 

Acquired in-process and collaborations research and development

 

493,000

 

 

493,000

 

 

Selling, general and administrative

 

1,520,397

 

1,351,792

 

2,984,812

 

2,639,413

 

Total Operating Cost and Expenses

 

4,958,347

 

4,428,885

 

9,077,608

 

8,675,693

 

 

 

 

 

 

 

 

 

 

 

Operating Earnings

 

542,777

 

1,094,915

 

1,606,975

 

2,230,786

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

81,683

 

43,244

 

116,202

 

85,514

 

(Income) from TAP Pharmaceutical Products Inc. joint venture

 

(134,503

)

(107,153

)

(235,814

)

(189,998

)

Net foreign exchange loss

 

8,017

 

9,568

 

7,407

 

6,522

 

Other (income) expense, net

 

(69,556

)

2,786

 

(72,973

)

4,422

 

Earnings Before Taxes

 

657,136

 

1,146,470

 

1,792,153

 

2,324,326

 

Taxes on Earnings

 

44,892

 

269,418

 

315,026

 

609,386

 

Net Earnings

 

$

612,244

 

$

877,052

 

$

1,477,127

 

$

1,714,940

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.40

 

$

0.56

 

$

0.97

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

 

$

0.40

 

$

0.56

 

$

0.96

 

$

1.09

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.295

 

$

0.275

 

$

0.59

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

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

 

1,524,589

 

1,552,823

 

1,527,681

 

1,555,077

 

Dilutive Common Stock Options and Awards

 

7,048

 

16,083

 

7,441

 

14,678

 

 

 

 

 

 

 

 

 

 

 

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

 

1,531,637

 

1,568,906

 

1,535,122

 

1,569,755

 

 

 

 

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

96,071

 

22,469

 

86,456

 

22,469

 

 

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)

 

 

Six Months Ended

 

 

 

June 30

 

 

 

2006

 

2005

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

 Net earnings

 

$

1,477,127

 

$

1,714,940

 

 Adjustments to reconcile earnings to net cash from operating activities —

 

 

 

 

 

 

 

 

 

 

 

 Depreciation

 

494,862

 

436,130

 

 Amortization of intangibles

 

271,341

 

241,727

 

 Share-based compensation

 

210,957

 

15,286

 

 Acquired in-process research and development

 

452,000

 

 

 Trade receivables

 

311,014

 

245,285

 

 Inventories

 

189,214

 

(3,250

)

 Other, net

 

(717,858

)

(318,177

)

Net Cash From Operating Activities

 

2,688,657

 

2,331,941

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

 Acquisition of businesses

 

(4,321,016

)

 

 Investment in Boston Scientific common stock, note receivable and derivative financial instruments

 

(2,095,780

)

 

 Acquisitions of property and equipment

 

(671,358

)

(633,852

)

 Other investment securities transactions

 

8,205

 

746,540

 

 Other

 

(32,537

)

11,629

 

Net Cash (Used in) From Investing Activities

 

(7,112,486

)

124,317

 

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

 (Repayments) of commercial paper

 

 

(820,000

)

 Proceeds from issuance of long-term debt

 

4,000,000

 

 

 (Repayments) of long-term debt

 

(501,189

)

(150,000

)

 Other borrowing transactions, net

 

167,373

 

12,857

 

 Purchases of common shares

 

(754,502

)

(602,227

)

 Proceeds from stock options exercised, including tax benefit

 

155,946

 

189,843

 

 Dividends paid

 

(873,616

)

(832,319

)

Net Cash From (Used in) Financing Activities

 

2,194,012

 

(2,201,846

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

59,880

 

(99,142

)

 

 

 

 

 

 

Net cash provided by operating activities of discontinued operations

 

67,152

 

66,316

 

 

 

 

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

(2,102,785

)

221,586

 

Cash and Cash Equivalents, Beginning of Year

 

2,893,687

 

1,225,628

 

Cash and Cash Equivalents, End of Period

 

$

790,902

 

$

1,447,214

 

 

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)

 

 

June 30

 

December 31

 

 

 

2006

 

2005

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

790,902

 

$

2,893,687

 

Investment securities

 

305,938

 

62,406

 

Trade receivables, less allowances of $207,641 in 2006 and $203,683 in 2005

 

3,673,178

 

3,576,794

 

Inventories:

 

 

 

 

 

 Finished products

 

1,262,161

 

1,203,557

 

 Work in process

 

667,620

 

630,267

 

 Materials

 

702,489

 

708,155

 

Total inventories

 

2,632,270

 

2,541,979

 

Prepaid expenses, deferred income taxes, and other receivables

 

2,495,497

 

2,181,260

 

Assets held for sale

 

 

129,902

 

Total Current Assets

 

9,897,785

 

11,386,028

 

Investment Securities

 

1,774,215

 

134,013

 

Property and Equipment, at Cost

 

14,270,986

 

12,760,421

 

 Less: accumulated depreciation and amortization

 

7,473,314

 

6,757,280

 

 Net Property and Equipment

 

6,797,672

 

6,003,141

 

Intangible Assets, net of amortization

 

5,896,146

 

4,741,647

 

Goodwill

 

7,624,088

 

5,219,247

 

Other Long-term Assets and Investments in Joint Ventures

 

2,071,361

 

1,624,201

 

Assets Held for Sale

 

 

32,926

 

 

 

$

34,061,267

 

$

29,141,203

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

309,203

 

$

212,447

 

Trade accounts payable

 

1,036,931

 

1,032,516

 

Salaries, dividends payable, and other accruals

 

4,379,182

 

3,771,274

 

Income taxes payable

 

26,293

 

488,926

 

Current portion of long-term debt

 

1,942,575

 

1,849,563

 

Liabilities of operations held for sale

 

 

60,788

 

Total Current Liabilities

 

7,694,184

 

7,415,514

 

 

 

 

 

 

 

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

 

3,006,882

 

2,737,852

 

Long-term Debt

 

8,174,695

 

4,571,504

 

Liabilities of Operations Held for Sale

 

 

1,062

 

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: 2006: 1,541,188,223; 2005: 1,553,769,958

 

3,791,827

 

3,477,460

 

Common shares held in treasury, at cost -
Shares: 2006: 13,381,188; 2005: 14,534,979

 

(195,406

)

(212,255

)

Earnings employed in the business

 

10,270,234

 

10,404,568

 

Accumulated other comprehensive income (loss)

 

1,318,851

 

745,498

 

Total Shareholders’ Investment

 

15,185,506

 

14,415,271

 

 

 

$

34,061,267

 

$

29,141,203

 

 

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

June 30, 2006

(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 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, 2005.

Note 2 — Supplemental Financial Information

 

Three Months Ended

 

Six Months Ended

 

(dollars in thousands)

 

June 30

 

June 30

 

 

 

2006

 

2005

 

2006

 

2005

 

Net Interest Expense:

 

 

 

 

 

 

 

 

 

Interest expense

 

$

110,663

 

$

59,990

 

$

183,634

 

$

117,305

 

Interest income

 

(28,980

)

(16,746

)

(67,432

)

(31,791

)

Total

 

$

81,683

 

$

43,244

 

$

116,202

 

$

85,514

 

 

The increases in Other (income) expense, net for the second quarter and six months ended June 30, 2006 are primarily due to fair value adjustments to certain derivative financial instruments included with the investment in Boston Scientific common stock.

Other, net in Net Cash From Operating Activities for 2006 and 2005 includes the effects of contributions to the main domestic defined benefit plan of $200 million and $641 million, respectively, and to the post-employment medical and dental plans of $40 million and $140 million, respectively, and changes in income taxes, primarily income tax payments.

(dollars in thousands)

 

June 30

 

December 31

 

 

 

2006

 

2005

 

Current Investment Securities:

 

 

 

 

 

Time deposits and certificates of deposit

 

$

56,510

 

$

62,406

 

Investment in Boston Scientific common stock

 

249,428

 

 

Total

 

$

305,938

 

$

62,406

 

 

 

 

 

 

 

Long-term Investment Securities:

 

 

 

 

 

Investment in Boston Scientific common stock

 

$

814,253

 

$

 

Other equity securities

 

113,507

 

116,447

 

Note receivable from Boston Scientific, 4% interest

 

830,826

 

 

Other

 

15,629

 

17,566

 

Total

 

$

1,774,215

 

$

134,013

 

 

The cost basis of the Boston Scientific shares is $1.326 billion, of which $999 million is classified as available-for-sale securities and $327 million is classified under the cost method of accounting.  The fair value of the available-for-sale shares was $737 million at June 30, 2006, resulting in a charge of $157 million to Accumulated other comprehensive income (loss), net of income taxes of $105 million.  The fair value of the shares recorded under the cost method amounted to $239 million.

The decline in the fair value of the Boston Scientific shares, as noted above, is considered by management to be temporary as these shares have been owned by Abbott for a relatively short period of time and Abbott has both the ability and intent to hold the shares for a period of time to allow for the decline in value to reverse.

5




Note 3 — 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 two patent disputes with third parties who claim Abbott’s products infringe their patents.  In one dispute, Abbott has agreed to arbitrate and is subject to a minimum amount of damages, which Abbott has reserved.  In the second dispute, which Abbott assumed as part of the Guidant acquisition, reserves equal to the expected resolution have been recorded.

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.  The outcome of these investigations and litigation could include the imposition of fines or penalties.  Abbott is unable to estimate the amount of possible loss, and no loss reserves have been recorded for these exposures.  Many of the products involved in these cases are Hospira products.  Abbott retained liability for losses that result from these cases and investigations to the extent any such losses both relate to the sale of Hospira’s products prior to the spin-off of Hospira and relate to allegations that were made in such pending and future cases and investigations that were the same as allegations existing at the date of the spin-off.

Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott.  For its legal proceedings and environmental exposures, excluding the cases and investigations discussed in the third paragraph of this footnote, Abbott estimates the range of possible loss to be from approximately $175 million to $370 million.  The recorded reserve balance at June 30, 2006 for these proceedings and exposures was approximately $205 million.  The increase in the reserve and range of possible loss compared to those amounts at March 31, 2006 is primarily due to loss contingencies acquired with the Guidant businesses in April 2006.  These reserves represent management’s best estimate of probable loss, except for one which is recorded at the minimum, 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 paragraph of this footnote, the resolution of which could be material to cash flows or results of operations for a quarter.

Note 4 — Comprehensive Income, net of tax

(dollars in thousands)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2006

 

2005

 

2006

 

2005

 

Foreign currency gain (loss) translation adjustments

 

$

637,659

 

$

(405,899

)

$

735,385

 

$

(465,586

)

Unrealized (losses) gain on marketable equity securities, net of income taxes of $(107,700) and $(106,000) for the three months and six months ended June 30, 2006, respectively

 

(161,519

)

4,137

 

(158,972

)

(12,523

)

Net adjustments for derivative financial instruments designated as cash flow hedges

 

(19,816

)

23,883

 

(3,060

)

48,560

 

Other comprehensive income (loss), net of tax

 

456,324

 

(377,879

)

573,353

 

(429,549

)

Net Earnings

 

612,244

 

877,052

 

1,477,127

 

1,714,940

 

Comprehensive Income

 

$

1,068,568

 

$

499,173

 

$

2,050,480

 

$

1,285,391

 

 

 

 

 

 

 

 

 

 

 

Supplemental Comprehensive Income Information, net of tax:

 

 

 

 

 

 

 

 

 

Cumulative foreign currency translation (gain) adjustments

 

 

 

 

 

$

(1,496,560

)

$

(1,249,315

)

Minimum pension liability adjustments

 

 

 

 

 

8,931

 

355,103

 

Cumulative unrealized losses (gains) on marketable equity securities

 

 

 

 

 

150,525

 

(5,178

)

Cumulative losses on derivative financial instruments designated as cash flow hedges

 

 

 

 

 

18,253

 

5,207

 

 

6




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 six months ended June 30 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

 

 

 

2006

 

2005

 

2006

 

2005

 

Service cost — benefits earned during the period

 

$

109.4

 

$

106.0

 

$

26.2

 

$

21.5

 

Interest cost on projected benefit obligations

 

138.9

 

132.1

 

39.0

 

31.5

 

Expected return on plans’ assets

 

(187.7

)

(181.2

)

(7.8

)

(4.4

)

Net amortization

 

41.2

 

32.9

 

10.6

 

4.2

 

Net cost

 

$

101.8

 

$

89.8

 

$

68.0

 

$

52.8

 

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  In the first quarters of 2006 and 2005, $200 and $641, respectively, was contributed to the main domestic defined benefit plan and $40 and $140, respectively, was contributed to the post-employment medical and dental benefit plans.

Note 6 — Taxes on Earnings

Taxes on earnings reflect the estimated annual effective rates and the effect of discrete tax events that occurred in the second quarter of 2006.  For the six months ended June 30, 2006, 6.2 percentage points of tax benefit was attributed to discrete items, primarily the tax benefit on acquired in-process and collaborations research and development.  The first six months 2005 includes additional income tax expense of approximately $52 million for remittances of foreign earnings of approximately $600 million in connection with the American Jobs Creation Act of 2004.  The effective tax rates, excluding the effect of the income taxes on the remittances of foreign earnings and the discrete items, 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 7 — Segment Information
(dollars in millions)

Revenue Segments— 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.  Effective with the acquisition of Guidant’s vascular intervention and endovascular solutions businesses on April 21, 2006, Abbott’s base vascular business and Guidant’s vascular intervention and endovascular solutions businesses are reported as the Vascular Products segment.  Effective January 1, 2006, Abbott’s segments were reorganized to reflect the shift of nutritional products from Abbott’s International division to a newly formed division, Abbott Nutrition International.  As a result of this reorganization, total assets of approximately $850 have been transferred from the International division to the Abbott Nutrition International Products division.  For segment reporting purposes, Abbott’s Ross Products division and the Abbott Nutrition International division are aggregated and reported as the Nutritional Products segment and the U.S. and international pharmaceutical products divisions are aggregated and reported as the Pharmaceutical Products segment.  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.

7




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

Nutritional Products— Worldwide sales of a broad line of adult and pediatric nutritional products.  For segment reporting purposes, two nutritional divisions are aggregated and reported as the Nutritional 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 segmentsFor 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.

 

 

Net Sales to External Customers

 

Operating Earnings

 

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

June 30

 

June 30

 

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Pharmaceuticals (a)

 

$

3,013

 

$

3,342

 

$

5,907

 

$

6,645

 

$

1,066

 

$

999

 

$

2,081

 

$

2,009

 

Diagnostics

 

1,007

 

958

 

1,925

 

1,844

 

127

 

130

 

182

 

227

 

Nutritionals

 

1,049

 

949

 

2,191

 

1,945

 

265

 

210

 

652

 

503

 

Vascular (b)

 

259

 

61

 

342

 

116

 

(52

)

(33

)

(90

)

(79

)

Total Reportable Segments

 

5,328

 

5,310

 

10,365

 

10,550

 

1,406

 

1,306

 

2,825

 

2,660

 

Other

 

173

 

214

 

320

 

356

 

 

 

 

 

 

 

 

 

Net Sales

 

$

5,501

 

$

5,524

 

$

10,685

 

$

10,906

 

 

 

 

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

 

 

 

 

92

 

88

 

170

 

136

 

Non-reportable segments

 

 

 

 

 

 

 

 

 

(14

)

(10

)

(41

)

(9

)

Net interest expense

 

 

 

 

 

 

 

 

 

82

 

43

 

116

 

86

 

Acquired in-process and collaborations research and development

 

 

 

 

 

 

 

 

 

493

 

 

493

 

 

(Income) from TAP Pharmaceutical Products Inc. joint venture

 

 

 

 

 

 

 

 

 

(135

)

(107

)

(236

)

(190

)

Share-based compensation (c)

 

 

 

 

 

 

 

 

 

65

 

7

 

211

 

15

 

Other, net

 

 

 

 

 

 

 

 

 

166

 

139

 

320

 

298

 

Consolidated Earnings Before Taxes

 

 

 

 

 

 

 

 

 

$

657

 

$

1,146

 

$

1,792

 

$

2,324

 


(a)    The decreases in Pharmaceutical Product segment sales are due primarily to the effects of the amendment to the Boehringer Ingelheim distribution agreement.

(b)    The increase in Vascular Product segment sales is primarily due to the acquisition of Guidant’s vascular intervention and endovascular solutions businesses on April 21, 2006.  These results include approximately ten weeks of domestic sales and only approximately five weeks of international sales due to Abbott’s policy of recording the results of international operations on a one-month lag.

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

 

8




Note 8 — Business Combination and Related Transactions

In order to expand Abbott’s presence in the growing vascular market, Abbott acquired Guidant’s vascular intervention and endovascular solutions businesses for approximately $4.1 billion, in cash, in connection with Boston Scientific’s acquisition of Guidant.  These businesses were acquired on April 21, 2006 and the financial results of the acquired operations are included in these financial statements beginning on that date.  In addition, Abbott will also pay to Boston Scientific $250 million each upon government approvals to market the XIENCE drug-eluting stent in the U.S. and in Japan.  Each $250 million payment will result in the recording of additional goodwill.  The preliminary allocation of the acquisition cost is shown in the table below (in millions of dollars).  These allocations will be finalized when appraisals are completed.

Goodwill

 

$

1,807

 

Acquired intangible assets, primarily product rights for
marketed products, customer relationships and technology

 

1,249

 

Acquired in-process research and development

 

452

 

Acquired net tangible assets

 

620

 

Total preliminary allocation of acquisition cost

 

$

4,128

 

 

The acquisition cost has been allocated to the acquired net assets based on preliminary appraisals of the estimated fair values on the date of acquisition.  Acquired intangible assets are expected to be amortized over 3 to 14 years (average of approximately 9 years).  Acquired in-process research and development was charged to income in the second quarter of 2006.  The net tangible assets acquired consist primarily of property and equipment of approximately $540 million, trade accounts receivable of approximately $250 million and inventories of approximately $120 million, net of assumed liabilities, primarily trade accounts payable, litigation reserves and other liabilities.

In order to facilitate Boston Scientific’s acquisition of Guidant, Abbott also acquired 64.6 million shares of Boston Scientific common stock directly from Boston Scientific and loaned $900 million to a wholly-owned subsidiary of Boston Scientific.  Abbott is required to dispose of the shares by October 2008.  Unless the shares trade above an average of $30 per share for twenty consecutive trading days, Abbott cannot dispose of any shares until October 2006.  Sales of the shares are limited to approximately 5.4 million shares per month until October 2007.  The amount recorded upon the acquisition of the shares includes a discount to market, based on an appraisal, to reflect the value of the restrictions on sale.  On the date of acquisition, half of the shares were recorded as available for sale in accordance with SFAS No. 115 and the remainder under the cost method in accordance with APB No. 18.  The loan, which is due in April 2011, is guaranteed by Boston Scientific and bears a favorable effective interest rate of 4 percent, which is reflected in the valuation of the note receivable.  In connection with the acquisition of the shares, Boston Scientific is entitled to certain after-tax gains upon Abbott’s sale of the shares.  Abbott would retain any gains on the sale of the Boston Scientific shares up to a sales price of $23.83; Boston Scientific would receive any after-tax gains on the sale of the shares for the portion of the sales price in excess of  $23.83 but lower than $26.00; and Boston Scientific would receive one-half of any after-tax gain for the portion of the sales price in excess of $25.99.  Based on an appraisal, Abbott recorded approximately $114 million for this gain-sharing derivative financial instrument liability.  In addition, Boston Scientific agreed to reimburse Abbott for certain borrowing costs on debt incurred to acquire the Boston Scientific shares.  After Abbott incurs the first $10 million of interest expense on debt incurred to acquire the shares, Boston Scientific will reimburse Abbott for the next $60 million of interest expense.  Reimbursement for the incremental interest expense will be in the form of additional common stock of Boston Scientific, payable 18 months after the acquisition.  Abbott recorded approximately $55 million for this interest derivative financial instrument asset.  The effect of recording the shares, the loan to Boston Scientific and the derivative financial instruments at fair value on the date of acquisition resulted in the recording of additional goodwill of approximately $204 million.  The financial assets and liability acquired from Boston Scientific were valued and recorded at acquisition as follows (in millions of dollars):

Boston Scientific common stock

 

$

1,326

 

Note receivable

 

829

 

Derivative financial instruments, net

 

(59

)

Total

 

$

2,096

 

 

9




Note 9 — Incentive Stock Programs

In the first six months of 2006, Abbott granted 23,587,971 stock options, 1,842,056 replacement stock options, 1,047,100 (net of forfeitures of 100,000 shares) restricted stock awards and 674,797 (net of forfeitures of 11,100 shares) restricted stock units under the programs.  The purchase price of shares under option must be at least equal to the fair market value of the common stock on the date of grant, and the maximum term of an option is 10 years.  Options granted in 2006 vest equally over three years except for replacement options, which vest in six months.  Most options granted before January 1, 2005 included a replacement feature.  When an employee tenders mature shares to Abbott upon exercise of a stock option, a replacement stock option is granted equal to the amount of shares tendered.  Replacement options are granted at the then current market price for a term that expires on the date of the underlying option grant.  Upon a change in control of Abbott, all outstanding stock options become fully exercisable, and all terms and conditions of all restricted stock awards are deemed satisfied.  Restricted stock awards granted in 2006 have a 5 year term, with no more than one-third of the award vesting in any one year upon Abbott reaching a minimum return on equity target.  Restricted stock units granted in 2006 vest over three years and upon vesting, the recipient receives one share of Abbott stock for each vested restricted stock unit.  Restricted stock awards and settlement of vested restricted stock units are issued out of treasury shares.  Abbott issues new shares for exercises of stock options.  Abbott does not have a policy of purchasing its shares relating to its share-based programs.  At June 30, 2006, approximately 26 million shares were reserved for future grants.

The number of restricted stock awards and units outstanding and their weighted-average grant-date fair value at January 1, 2006 and June 30, 2006 was 2,381,800 ($50.09) and 3,680,245 ($45.41), respectively.  The number of restricted stock awards and units, and their weighted-average grant-date fair value, granted, vested and lapsed during the six months ended June 30, 2006 were 1,832,997 ($43.95), 415,452 ($49.95) and 119,100 ($44.03), respectively.  The fair value of restricted stock awards and units vested in the six months ended June 30, 2006 and 2005 was $24,941,000 and $6,691,000, respectively.

 

 

Options Outstanding

 

Exercisable Options

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Life (Years)

 

Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Life (Years)

 

January 1, 2006

 

141,122,811

 

$

42.69

 

6.3

 

98,328,158

 

$

42.77

 

5.4

 

Granted

 

25,430,027

 

44.03

 

 

 

 

 

 

 

 

 

Exercised (total intrinsic value was $73,317,000)

 

(6,780,703

)

32.24

 

 

 

 

 

 

 

 

 

Lapsed

 

(4,472,793

)

46.85

 

 

 

 

 

 

 

 

 

June 30, 2006

 

155,299,342

 

$

43.24

 

6.5

 

110,803,443

 

$

42.83

 

5.4

 

 

The aggregate intrinsic value of options outstanding and exercisable at June 30, 2006 was $387 million and $367 million, respectively.  The total unrecognized compensation cost related to all share-based compensation plans at June 30, 2006 amounted to approximately $303 million and is expected to be recognized over the next three years.

On January 1, 2006, Abbott adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” which requires that the fair value of share-based awards be recorded in the results of operations.  Abbott used the modified prospective method of adoption.  Under this method, prior years’ financial results do not include the impact of recording stock options using fair value.  Under the revised standard, awards issued after 2005 and the remainder of any unrecognized cost for grants issued prior to 2006 are charged to expense.  Total non-cash compensation expense charged against income in the second quarter and first six months of 2006 for share-based plans totaled approximately $65 million and $211 million, respectively, and the tax benefit recognized was approximately $15 million and $50 million, respectively.  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.  Compensation cost capitalized as part of inventory is not significant.  Through December 31, 2005, Abbott measured compensation cost using the intrinsic value-based method of accounting for stock options and replacement options granted to employees.

10




Had compensation cost been determined using the fair value-based accounting method in 2005, pro forma net income (in millions) and earnings per share (EPS) amounts would have been as follows:

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 

 

 

 

 

Net earnings, as reported

 

$

877

 

$

1,715

 

Compensation cost under fair value-based accounting method,
net of taxes of $21 and $47, respectively

 

(45

)

(135

)

Net earnings, pro forma

 

$

832

 

$

1,580

 

 

 

 

 

 

 

Basic EPS, as reported

 

$

0.56

 

$

1.10

 

Basic EPS, pro forma

 

0.54

 

1.02

 

Diluted EPS, as reported

 

0.56

 

1.09

 

Diluted EPS, pro forma

 

0.53

 

1.01

 

 

The weighted average fair value of an option granted in 2006 and 2005 was $11.72 and $12.17, respectively.  The fair value of an option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

2006

 

2005

 

Risk-free interest rate

 

4.6

%

3.8

%

Average life of options (years)

 

6.1

 

5.4

 

Volatility

 

28.0

%

29.0

%

Dividend yield

 

2.7

%

2.2

%

 

The risk-free interest rate is based on the rates available at the time of the grant for zero-coupon U.S. government issues with a remaining term equal to the option’s expected life.  The average life of an option granted in 2006 is based on both historical and projected exercise and lapsing data.  Prior to 2006, the average life of an option granted was based on historical experience.  Expected volatility for 2006 option grants is based on implied volatilities from traded options on Abbott’s stock and historical volatility of Abbott’s stock over the expected life of the option.  Expected volatility for options granted prior to 2006 was based on historical volatility over a period prior to the option grant equal to the option’s expected life.   Dividend yield is based on the option’s exercise price and annual dividend rate at the time of grant.

Note 10 — 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 June 30

 

Six Months Ended June 30

 

 

 

2006

 

2005

 

2006

 

2005

 

Net sales

 

$

882.3

 

$

841.2

 

$

1,667.0

 

$

1,601.9

 

Cost of sales

 

203.8

 

237.2

 

413.2

 

460.0

 

Income before taxes

 

423.6

 

337.5

 

742.7

 

598.4

 

Net earnings

 

269.0

 

214.3

 

471.6

 

380.0

 

 

 

 

 

 

 

June 30

 

December 31

 

 

 

 

 

 

 

2006

 

2005

 

Current assets

 

 

 

 

 

$

1,177.7

 

$

1,339.1 8

 

Total assets

 

 

 

 

 

1,307.4

 

1,470.2

 

Current liabilities

 

 

 

 

 

931.8

 

1,082.2

 

Total liabilities

 

 

 

 

 

989.6

 

1,136.2

 

 

11




Note 11 — Goodwill and Intangible Assets
(dollars in millions)

Abbott recorded total goodwill of approximately $2,011 related to the acquisition of Guidant’s vascular intervention and endovascular solutions businesses in the second quarter of 2006.  Foreign currency translation adjustments and other adjustments increased (decreased) goodwill in the first six months of 2006 and 2005 by approximately $394 and $(232), respectively.  There were no reductions of goodwill relating to impairments or disposal of all or a portion of a business.

The gross amount of amortizable intangible assets, primarily product rights and technology, was $8,184 as of June 30, 2006 and $6,776 as of December 31, 2005, and accumulated amortization was $2,306 as of June 30, 2006 and $2,053 as of December 31, 2005.  Intangible assets with indefinite lives are not significant.  The estimated annual amortization expense for intangible assets is $589 in 2006, $635 in 2007, $622 in 2008, $621 in 2009, and $623 in 2010.   These amounts include the estimated amortization of intangible assets acquired in 2006 and are subject to change when appraisals are completed.  Intangible assets are expected to be amortized over 3 to 25 years (average 12 years).

Note 12 — Restructuring Plans

In 2005, Abbott management approved plans to realign its global manufacturing operations and selected international commercial operations.  An additional $22 million was subsequently recorded in the first six months of 2006 relating to these restructurings, primarily for accelerated depreciation.  The following summarizes the activity for restructurings (dollars in millions):

 

Employee-
Related
and Other

 

Asset
Impairments

 

Total

 

 

 

 

 

 

 

 

 

2005 restructuring charges

 

$

191.7

 

$

63.8

 

$

255.5

 

Payments and impairments

 

(36.9

)

(63.8

)

(100.7

)

Accrued balance at December 31, 2005

 

154.8

 

 

154.8

 

Payments and other adjustments

 

(52.4

)

 

(52.4

)

Accrued balance at June 30, 2006

 

$

102.4

 

$

 

$

102.4

 

 

 

12




FINANCIAL REVIEW

Results of Operations

The following table details sales by reportable segment for the second quarter and first six months:
(dollars in millions)

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

 

Net Sales to
External Customers

 

Absolute
Percentage
Change (a)

 

Percentage
Change
Excluding
BI
Products (b)

 

Net Sales to
External Customers

 

Absolute
Percentage
Change (a)

 

Percentage
Change
Excluding
BI
Products (b)

 

 

 

2006

 

2005

 

 

 

 

 

2006

 

2005

 

 

 

 

 

Pharmaceuticals

 

$

3,013

 

$

3,342

 

(9.9

)

9.3

 

$

5,907

 

$

6,645

 

(11.1

)

5.4

 

Diagnostics

 

1,007

 

958

 

5.2

 

5.2

 

1,925

 

1,844

 

4.4

 

4.4

 

Nutritionals

 

1,049

 

949

 

10.5

 

10.5

 

2,191

 

1,945

 

12.7

 

12.7

 

Vascular

 

259

 

61

 

323.0

 

323.0

 

342

 

116

 

195.7

 

195.7

 

Total Reportable Segments

 

5,328

 

5,310

 

0.3

 

12.8

 

10,365

 

10,550

 

(1.8

)

9.0

 

Other

 

173

 

214

 

(19.1

)

(19.1

)

320

 

356

 

(10.3

)

(10.3

)

Net Sales

 

$

5,501

 

$

5,524

 

(0.4

)

11.4

 

$

10,685

 

$

10,906

 

(2.0

)

8.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

2,750

 

$

3,025

 

(9.1

)

12.7

 

$

5,433

 

$

5,993

 

(9.4

)

9.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

2,751

 

$

2,499

 

10.1

 

10.1

 

$

5,252

 

$

4,913

 

6.9

 

6.9

 


(a)    Percentage changes are versus the prior year and are based on unrounded numbers.

(b)    The Pharmaceutical Products segment has an agreement with Boehringer Ingelheim (BI) to co-promote and distribute three of its products in the U.S. In 2005, Abbott and BI amended the agreement.  Effective January 1, 2006, Abbott no longer distributes or records sales for distribution activities for the BI products.  Abbott continued to co-promote one product, Micardis, through March 31, 2006, and receives residual commissions on BI’s sales of the products.

Worldwide sales for the second quarter and six months 2006 compared to 2005, excluding sales of BI products, reflect primarily unit growth and the acquisition of Guidant’s vascular intervention and endovascular solutions businesses on April 21, 2006 and are partially offset by the negative effect of the relatively stronger U.S. dollar.  The acquired businesses accounted for increases in sales of 268 percent and 142 percent in the Vascular Products segment and 3.0 percent and 1.5 percent in total net sales for the second quarter and six months ended June 30, 2006, respectively.  The results from this acquisition include approximately ten weeks of domestic sales and only approximately five weeks of international sales due to Abbott’s policy of recording the results of international operations on a one-month lag.   The relatively stronger U.S. dollar decreased second quarter and first six months 2006 consolidated net sales 0.9 percent and 1.8 percent, respectively, and decreased Total International sales 2.0 percent and 3.9 percent, respectively, over the second quarter and first six months of 2005.  In addition, the effect of the relatively stronger U.S. dollar decreased second quarter and first six months 2006 sales in the Diagnostic Products segment by 1.7 percent and 3.0 percent, respectively, and sales in the Pharmaceutical Products segment by 0.9 percent and 1.9 percent, respectively.  Sales for the Nutritional Products segment were favorably impacted in 2006 by increased sales volume of international pediatric products and by incremental revenue from a revised agreement for the U.S. promotion of Synagis.

13




A comparison of the product group sales by segment for the six months ended June 30 is as follows: (dollars in millions)

 

Six Months Ended June 30

 

 

 

 

 

Percentage

 

 

 

Percentage

 

 

 

2006

 

Change (a)

 

2005

 

Change (a)

 

Pharmaceuticals —

 

 

 

 

 

 

 

 

 

U.S. Pharmaceutical Operations

 

$

1,806

 

9.1

 

$

1,656

 

7.4

 

U.S. Specialty Operations

 

1,029

 

10.4

 

933

 

8.3

 

International Other Pharmaceuticals

 

2,011

 

9.2

 

1,842

 

22.1

 

International Anti-Infectives

 

404

 

(15.6

)

479

 

9.2

 

International Hospital Pharmaceuticals

 

320

 

2.2

 

313

 

12.4

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

Immunochemistry

 

1,086

 

(0.6

)

1,092

 

4.0

 

Diabetes Care

 

563

 

10.1

 

511

 

50.9

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

549

 

(0.7

)

553

 

(3.5

)

International Pediatric Nutritionals

 

435

 

32.1

 

329

 

15.4

 

U.S. Adult Nutritionals

 

567

 

5.1

 

540

 

27.2

 

International Adult Nutritionals

 

371

 

6.2

 

349

 

11.0

 


(a) Percentage changes are versus the prior year and are based on unrounded numbers.

Increased sales volume of Humira and Tricor in 2006 favorably impacted U.S. Pharmaceutical Operations.  These increases were partially offset by lower U.S. sales of Biaxin due to generic competition for the immediate-release formulation as well as a weaker flu season.  U.S. sales of Biaxin were $80 million and $173 million in the first six months of 2006 and 2005, respectively.  U.S. Specialty Operations were favorably impacted by increased sales volume and price for Depakote and Kaletra.  Decreased sales volume due to generic competition for clarithromycin unfavorably impacted International Anti-Infectives.  Immunochemistry sales for 2006 were negatively affected 3.5 percent by the relatively stronger U.S. dollar.  Diabetes Care product sales growth in 2005 was favorably impacted by the acquisition of TheraSense in the second quarter of 2004.  The decrease in sales of U.S. pediatric nutritionals in the Nutritional Products segment in 2006 was due to competitive share loss and the decrease in sales of U.S. pediatric nutritionals in 2005 was primarily due to overall infant nutritionals non-WIC category decline and competitive share loss.  International Pediatric Nutritionals sales increased due primarily to volume growth in developing countries.

On January 1, 2006, Abbott adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” which requires that the fair value of share-based awards be recorded in the results of operations.  Abbott used the modified prospective method of adoption.  Under this method, prior years’ financial results do not include the impact of recording stock options using fair value.  Total non-cash compensation expense charged against income in the first six months of 2006 for share-based plans totaled approximately $211 million.  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 grants of share-based awards.

The gross profit margin was 56.6 percent for the second quarter 2006, compared to 52.4 percent for the second quarter 2005.  First six months 2006 gross profit margin was 57.3 percent, compared to 52.7 percent for the first six months 2005.  The increases in the gross profit margins were due to favorable product mix, primarily as a result of decreased sales of Boehringer Ingelheim products that have lower margins than for other products in the Pharmaceutical Products segment.  These increases were partially offset by higher intangible asset amortization and other acquisition related costs associated with the acquisition of Guidant’s vascular intervention and endovascular solutions businesses.

Research and development expenses increased 24.9 percent in the second quarter 2006 and 18.1 percent for the first six months 2006 over comparable 2005 periods.   The increases are due to the acquisition of Guidant’s vascular intervention and endovascular solutions businesses, the effect of recording compensation expense relating to share-based awards and increased spending to support pipeline programs, including follow-on indications for Humira, and other late-stage clinical programs in pharmaceuticals, diabetes care and vascular.  The majority of research and development expenditures are concentrated on pharmaceutical products.

14




Selling, general and administrative expenses for the second quarter and first six months 2006 increased 12.5 percent and 13.1 percent, respectively, over the comparable 2005 periods.  Both 2006 periods include the effect of recording compensation expense relating to share-based awards and the acquisition of Guidant’s vascular intervention and endovascular solutions businesses.  These items increased selling, general and administrative expenses by 6.1 percentage points and 7.1 percentage points over the second quarter and first six months of 2005.   The remaining increases were due, in part, to increased selling and marketing support for new and existing products, including continued spending for Humira, as well as spending on other marketed pharmaceutical products.

Net interest expense

Net interest expense increased in both the second quarter and first six months of 2006 due to higher interest rates and higher borrowings as a result of the acquisition of Guidant’s vascular intervention and endovascular solutions businesses, and Abbott’s investments in the common stock of Boston Scientific and the note receivable; partially offset by higher interest income.

Other (income) expense, net

The increases in Other (income) expense, net for the second quarter and six months ended June 30, 2006 are primarily due to fair value adjustments to certain derivative financial instruments included with the investment in Boston Scientific common stock.

Taxes on Earnings

Taxes on earnings reflect the estimated annual effective rates and the effect of discrete tax events that occurred in the second quarter of 2006.  For the six months ended June 30, 2006, 6.2 percentage points of tax benefit was attributed to discrete items, primarily the tax benefit on acquired in-process and collaborations research and development.  The first six months 2005 includes additional income tax expense of approximately $52 million for remittances of foreign earnings of approximately $600 million in connection with the American Jobs Creation Act of 2004.  The effect of the increased income taxes on the remittance of foreign earnings was to increase the first six months 2005 effective tax rate by approximately 2.2 percentage points.  Abbott estimates that the effective tax rate for the last six months of 2006 will be between 23.5 percent and 24.0 percent.  The effective tax rates, excluding the effect of the income taxes on the remittances of foreign earnings and discrete items, 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.

TAP Pharmaceutical Products Inc. Joint Venture

 

In August 2006, TAP Pharmaceutical Products Inc. received an approvable letter from the U.S. Food and Drug Administration (FDA) for the investigational compound febuxostat for the management of hyperuricemia in patients with gout.  TAP intends to discuss with the FDA next steps for pursuing approval for febuxostat.  This approvable letter has no impact on Abbott’s previously stated earnings per share guidance for 2006.

Restructurings

In 2005, Abbott management approved plans to realign its global manufacturing operations and selected international commercial operations.  An additional $22 million was subsequently recorded in the first six months of 2006 relating to these restructurings, primarily for accelerated depreciation.  The following summarizes the activity for restructurings (dollars in millions):

 

Employee-
Related
and Other

 

Asset
Impairments

 

Total

 

 

 

 

 

 

 

 

 

2005 restructuring charges

 

$

191.7

 

$

63.8

 

$

255.5

 

Payments and impairments

 

(36.9

)

(63.8

)

(100.7

)

Accrued balance at December 31, 2005

 

154.8

 

 

154.8

 

Payments and other adjustments

 

(52.4

)

 

(52.4

)

Accrued balance at June 30, 2006

 

$

102.4

 

$

 

$

102.4

 

 

15




Business Combinations and Related Transactions

In order to expand Abbott’s presence in the growing vascular market, Abbott acquired Guidant’s vascular intervention and endovascular solutions businesses for approximately $4.1 billion, in cash, in connection with Boston Scientific’s acquisition of Guidant.  These businesses were acquired on April 21, 2006 and the financial results of the acquired operations are included in these financial statements beginning on that date.  In addition, Abbott will also pay to Boston Scientific $250 million each upon government approvals to market the XIENCE drug-eluting stent in the U.S. and in Japan.  Each $250 million payment will result in the recording of additional goodwill.  The preliminary allocation of the acquisition cost is shown in the table below (in millions of dollars).  These allocations will be finalized when appraisals are completed.

Goodwill

 

$

1,807

 

Acquired intangible assets, primarily product rights for
marketed products, customer relationships and technology

 

1,249

 

Acquired in-process research and development

 

452

 

Acquired net tangible assets

 

620

 

Total preliminary allocation of acquisition cost

 

$

4,128

 

 

The acquisition cost has been allocated to the acquired net assets based on preliminary appraisals of the estimated fair values on the date of acquisition.  Acquired intangible assets are expected to be amortized over 3 to 14 years (average of approximately 9 years).  Acquired in-process research and development was charged to income in the second quarter of 2006.  The net tangible assets acquired consist primarily of property and equipment of approximately $540 million, trade accounts receivable of approximately $250 million and inventories of approximately $120 million, net of assumed liabilities, primarily trade accounts payable, litigation reserves and other liabilities.

In order to facilitate Boston Scientific’s acquisition of Guidant, Abbott also acquired 64.6 million shares of Boston Scientific common stock directly from Boston Scientific and loaned $900 million to a wholly-owned subsidiary of Boston Scientific.  Abbott is required to dispose of the shares by October 2008.  Unless the shares trade above an average of $30 per share for twenty consecutive trading days, Abbott cannot dispose of any shares until October 2006.  Sales of the shares are limited to approximately 5.4 million shares per month until October 2007.  The amount recorded upon the acquisition of the shares includes a discount to market, based on an appraisal, to reflect the value of the restrictions on sale.  On the date of acquisition, half of the shares were recorded as available for sale in accordance with SFAS No. 115 and the remainder under the cost method in accordance with APB No. 18.  The loan, which is due in April 2011, is guaranteed by Boston Scientific and bears a favorable effective interest rate of 4 percent, which is reflected in the valuation of the note receivable.  In connection with the acquisition of the shares, Boston Scientific is entitled to certain after-tax gains upon Abbott’s sale of the shares.  Abbott would retain any gains on the sale of the Boston Scientific shares up to a sales price of $23.83; Boston Scientific would receive any after-tax gains on the sale of the shares for the portion of the sales price in excess of  $23.83 but lower than $26.00; and Boston Scientific would receive one-half of any after-tax gain for the portion of the sales price in excess of $25.99.  Based on an appraisal, Abbott recorded approximately $114 million for this gain-sharing derivative financial instrument liability.  In addition, Boston Scientific agreed to reimburse Abbott for certain borrowing costs on debt incurred to acquire the Boston Scientific shares.  After Abbott incurs the first $10 million of interest expense on debt incurred to acquire the shares, Boston Scientific will reimburse Abbott for the next $60 million of interest expense.  Reimbursement for the incremental interest expense will be in the form of additional common stock of Boston Scientific, payable 18 months after the acquisition.  Abbott recorded approximately $55 million for this interest derivative financial instrument asset.  The effect of recording the shares, the loan to Boston Scientific and the derivative financial instruments at fair value on the date of acquisition resulted in the recording of additional goodwill of approximately $204 million.  The financial assets and liability acquired from Boston Scientific were valued and recorded at acquisition as follows (in millions of dollars):

Boston Scientific common stock

 

$

1,326

 

Note receivable

 

829

 

Derivative financial instruments, net

 

(59

)

Total

 

$

2,096

 

 

16




Investment in Boston Scientific Common Stock

The cost basis of the Boston Scientific shares as of June 30, 2006, is $1.326 billion, of which $999 million is classified as available-for-sale securities and $327 million is classified under the cost method of accounting.  The fair value of the available-for-sale shares was $737 million at June 30, 2006, resulting in a charge of $157 million to Accumulated other comprehensive income (loss), net of income taxes of $105 million.  The fair value of the shares recorded under the cost method amounted to $239 million.

The decline in the fair value of the Boston Scientific shares, as noted above, is considered by management to be temporary as these shares have been owned by Abbott for a relatively short period of time and Abbott has both the ability and intent to hold the shares for a period of time to allow for the decline in value to reverse.

Liquidity and Capital Resources at June 30, 2006 Compared with December 31, 2005

Net cash from operating activities for the first six months 2006 totaled approximately $2.7 billion.  The increase in cash from operating activities compared to 2005 was primarily due to higher contributions to retirement benefit plans in 2005 compared to 2006 and lower inventory levels and trade accounts receivable; partially offset by income taxes.  The retirement plan payments are included in Other, net in the Condensed Consolidated Statement of Cash Flows.  Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends.

At June 30, 2006, Abbott had working capital of approximately $2.2 billion compared to working capital of approximately $4.0 billion at December 31, 2005.  The decrease in working capital was due primarily to cash and cash equivalents used in the acquisition of Guidant’s vascular intervention and endovascular solutions businesses.

At June 30, 2006, 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 supports commercial paper borrowing arrangements.  Subsequent to the announced potential acquisition of Guidant’s vascular intervention and endovascular solutions businesses, Standard and Poor’s affirmed its current debt ratings for Abbott and maintained its current “stable” outlook.  On April 21, 2006, Moody’s Investors Service affirmed its current debt ratings for Abbott and changed its current outlook from “stable” to “negative.”

Under a registration statement filed with the Securities and Exchange Commission in February 2006, Abbott issued $4.0 billion of long-term debt in the second quarter of 2006 that matures in 2009 through 2016 with interest rates ranging from 5.375 percent to 5.875 percent.  Proceeds from this debt were used to pay down domestic commercial paper borrowings that were incurred to partially fund the acquisition of Guidant’s vascular intervention and endovascular solutions businesses.   In addition, subsequent to June 30, 2006, commercial paper borrowings were used to repay $1.6 billion of long-term debt.

In October 2004, the board of directors authorized the purchase of 50 million shares of Abbott’s common stock from time to time.  During the six months ended June 30, 2006 and 2005, Abbott purchased approximately 17.3 million and 13.2 million, respectively, of its common shares under this authorization at a cost of approximately $755 million and $602 million, respectively.  At June 30, 2006, 2.7 million shares may be purchased in the future under the October authorization.

17




Recently Issued Accounting Standards

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”  This Interpretation requires that a recorded tax benefit must be more likely than not of being sustained upon examination by tax authorities based upon its technical merits.  The amount of benefit recorded is the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.  Upon adoption, any adjustment will be recorded directly to beginning retained earnings. The Interpretation is effective for Abbott beginning no later than January 1, 2007.  Abbott has not yet adopted the Interpretation and has not analyzed its potential effect on Abbott’s financial statements.

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 in the Annual Report on Form 10-K for the year ended December 31, 2005 and to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

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 and Exhibit 99.1 to the Annual Report on  Form 10-K for the year ended December 31, 2005 and Item 1A, Risk Factors to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

At June 30, 2006, Abbott holds 64.6 million shares, or $1.1 billion of Boston Scientific common stock and has a $900 million loan to a wholly-owned subsidiary of Boston Scientific.  Abbott’s cost basis in the shares is approximately $1.3 billion and the fair value of the shares is $976 million.  A hypothetical 20 percent decrease in Boston Scientific’s share price would decrease the value of the Boston Scientific shares by approximately $220 million.  Abbott is required to dispose of the shares by October 2008.  Unless the shares trade above $30 per share for twenty consecutive days, Abbott cannot dispose of any shares until October 2006.  Finally, sales of Boston’s shares are limited to approximately 5.4 million shares per month until October 2007.  In addition, Abbott is a creditor of Boston Scientific for the $900 million loan that is due in 2011 and, as such, is subject to credit risk.  Abbott issued $4.0 billion of long-term debt in the second quarter of 2006 that matures in 2009 through 2016 with interest rates ranging from 5.375 percent to 5.875 percent.

 

18




PART I.  FINANCIAL INFORMATION

Item 4.  Controls and Procedures

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

(b)         Changes in internal control over financial reporting.  On April 21, 2006, Abbott acquired Guidant’s vascular intervention and endovascular solutions businesses in connection with Boston Scientific’s acquisition of the remainder of Guidant.  Until the accounting processes can be separated, Abbott has relied and will continue to rely on Boston Scientific for certain accounting processes of the businesses acquired by Abbott.  Abbott and Boston Scientific have begun to implement plans for Abbott to assume full accounting responsibility for its acquired businesses.  During the quarter ended June 30, 2006, there were no other changes in Abbott’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Abbott’s internal control over financial reporting.

19




PART II.  OTHER INFORMATION

Item 1.                  Legal Proceedings

Abbott is involved in various claims, legal proceedings and investigations, including (as of June 30, 2006, except as otherwise indicated) those described below.

In its 2005 Form 10-K, Abbott reported that five cases were pending in which Abbott seeks to enforce its patents for divalproex sodium (a drug that Abbott sells under the trademark Depakote®).  As previously reported, Abbott filed two of those cases in November 2005, one in the U.S. District Court for the Northern District of Illinois and the other in the U.S. District Court for the Northern District of West Virginia.  During the second quarter, the District Court in the Northern District of Illinois found that it had jurisdiction over the case.  Consequently, the case against Mylan in the Northern District of West Virginia was dismissed.  In the previously reported case against Nu-Pharm, Abbott amended its complaint to add Apotex Corp. and Apotex Inc. as defendants.  During the second quarter, Abbott filed two additional cases in the U.S. District Court for the Northern District of Illinois against Mylan, Nu-Pharm, Apotex Corp., and Apotex Inc. in connection with amendments to their Abbreviated New Drug Applications.

In its 2005 Form 10-K, Abbott reported that one case was pending, Reliant Pharmaceuticals, in which Abbott seeks to protect the patents for fenofibrate (a drug Abbott sells under the trademark Tricor®).  The parties agreed to settle the case on terms not material to Abbott.  The case has been voluntarily dismissed with prejudice.  In its 2005 Form 10-K, Abbott reported that one case was pending in the U. S. District Court for the Eastern District of Texas, involving patents regarding monoclonal antibodies, which plaintiffs claim covers adalimumab (a drug sold by Abbott under the trademark Humira®).  The litigation has been stayed as the parties have agreed in principle to enter into a binding alternative dispute resolution proceeding.

In its 2005 Form 10-K, Abbott reported that it is involved in litigation pending in the U.S. District Court for the Northern District of Illinois related to Abbott’s patents for clarithromycin extended release (a drug Abbott sells under the trademark Biaxin®XL).  As previously reported, Abbott obtained a preliminary injunction against Teva, Ranbaxy and Andrx preventing each from launching their extended release clarithromycin products.  In June 2006, the Federal Circuit issued an opinion vacating the preliminary injunction against Teva. In July 2006, Abbott and Teva entered into a confidential agreement in principle resolving the pending litigation. In July 2006, Abbott and Ranbaxy entered into a confidential agreement in principle resolving the pending litigation. The terms of both settlements are subject to court approval. The case with Teva has been voluntarily dismissed.

20




In its 2005 Form 10-K, Abbott reported that twenty lawsuits, including fifteen purported class actions are pending against Abbott, Fournier Industrie et Sante, and Laboratories Fournier, S.A. (Fournier), alleging antitrust and unfair competition claims in connection with the sale of fenofibrate formulations.  During the second quarter, Abbott was notified that an additional individual case was filed in the U.S. District Court for the District of Delaware:  American Sales Company, Inc. (filed in March 2006).

In its 2005 Form 10-K, Abbott reported that a number of cases, brought as purported class actions or representative actions on behalf of individuals or entities, are pending that allege generally that Abbott and numerous other pharmaceutical companies reported false pricing information in connection with certain drugs that are reimbursable under Medicare and Medicaid and by private payors.  Most of the federal court cases have been consolidated in the U.S. District Court for the District of Massachusetts as In re:   Pharmaceutical Industry Average Wholesale Price Litigation, MDL 1456.  The previously reported case, State of Arizona, has been removed to federal court and transferred to MDL 1456.  The previously reported case, International Union of Operating Engineers, has been remanded to state court.  In addition, in May 2006, Abbott was notified that the U.S. Department of Justice intervened in a civil whistle-blower lawsuit pending in the Southern District of Florida alleging that Abbott inflated prices for Medicaid and Medicare reimbursable products.  The original lawsuit against additional defendants remains under seal.  While it is not feasible to predict the outcome of these proceedings and investigations with certainty, management is of the opinion that their ultimate dispositions could be material to cash flows or results of operations for a quarter.

In its 2005 Form 10-K, Abbott reported that it is a defendant in numerous lawsuits involving the drug oxycodone (a drug sold under the trademark OxyContin®), which is manufactured by Purdue Pharma.  Abbott previously promoted OxyContin under a co-promotion agreement with Purdue Pharma.  Most of the lawsuits allege generally that plaintiffs suffered personal injuries as a result of taking OxyContin.  A few lawsuits allege consumer protection violations and unfair trade practices. One suit by a third party payor alleges antitrust pricing violations and overpricing of the drug. As of June 30, 2006, there are a total of 156 lawsuits pending in which Abbott is a party.  Seven cases are pending in federal court and 149 cases are pending in state court.  149 cases are brought by individual plaintiffs, and 7 cases are brought as purported class action lawsuits.  In June 2006, a court in Putnam County, West Virginia in the case McCallister certified a state wide class against Abbott.  Purdue Pharma is a defendant in each lawsuit and, pursuant to the co-promotion agreement, Purdue is required to indemnify Abbott in each lawsuit.

In its 2005 Form 10-K, Abbott reported that it is a defendant in a number of lawsuits involving the drug sibutramine (sold under the trademarks Meridia®, Reductil®, ReductylTM, and ReductalTM) that have been brought either as purported class actions or on behalf of individual plaintiffs.  The lawsuits generally allege design defects and failure to warn.  Certain lawsuits also allege consumer protection violations and/or unfair trade practices.  In May 2006, the Sixth Circuit Federal Court of Appeals affirmed summary judgment in favor of Abbott in the cases captioned In Re Meridia MDL No. 1481.  Outside of the United States, one additional case was filed in France (Radufe, filed in May 2006 in the Caen Court of First Instance, Caen,

21




France).

While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate dispositions should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except as noted above.

22




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

 

April 1, 2006 — April 30, 2006

 

42,412

(1)

$

41.815

 

0

 

2,709,556

(2)

May 1, 2006 — May 31, 2006

 

67,837

(1)

$

33.758

 

0

 

2,709,556

(2)

June 1, 2006 — June 30, 2006

 

195,438

(1)

$

32.425

 

0

 

2,709,556

(2)

Total

 

305,687

 

$

34.0235

 

0

 

2,709,556

(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 — 29,412 in April, 54,837 in May, and 182,438 in June; and

(ii)            the shares purchased on the open market for the benefit of participants in the Abbott Canada Stock Retirement Plan — 13,000 in April, 13,000 in May, and 13,000 in June.

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 14, 2004, Abbott announced that Abbott’s board of directors approved the purchase of up to 50 million of its common shares.

 

23




Item 4.          Submission of Matters to a Vote of Security Holders

Abbott Laboratories held its Annual Meeting of Shareholders on April 28, 2006.  The following is a summary of the matters voted on at that meeting.

(a)             The shareholders elected Abbott’s entire Board of Directors.  The persons elected to Abbott’s Board of Directors and the number of shares cast for and the number of shares withheld, with respect to each of these persons, were as follows:

Name

 

 

 

Votes For

 

Votes Withheld

 

Roxanne S. Austin

 

1,317,630,595

 

19,498,947

 

 

 

 

 

 

 

William M. Daley

 

1,304,476,484

 

32,653,058

 

 

 

 

 

 

 

W. James Farrell

 

1,312,666,890

 

24,462,652

 

 

 

 

 

 

 

H. Laurance Fuller

 

1,305,358,978

 

31,770,564

 

 

 

 

 

 

 

Richard A. Gonzalez

 

1,308,822,901

 

28,306,641

 

 

 

 

 

 

 

Jack M. Greenberg

 

1,296,574,115

 

40,555,427

 

 

 

 

 

 

 

The Lord Owen CH

 

1,317,241,010

 

19,888,532

 

 

 

 

 

 

 

Boone Powell Jr.

 

1,306,074,923

 

31,054,619

 

 

 

 

 

 

 

W. Ann Reynolds, Ph.D.

 

1,301,761,655

 

35,367,887

 

 

 

 

 

 

 

Roy S. Roberts

 

1,317,434,514

 

19,695,028

 

 

 

 

 

 

 

William D. Smithburg

 

1,304,553,905

 

32,575,637

 

 

 

 

 

 

 

John R. Walter

 

1,304,941,261

 

32,188,281

 

 

 

 

 

 

 

Miles D. White

 

1,303,803,275

 

33,326,267

 

 

(b)            The shareholders ratified the appointment of Deloitte & Touche LLP as Abbott’s auditors.  The number of shares cast in favor of the ratification of Deloitte & Touche LLP, the number against, and the number abstaining were as follows:

For

 

 

 

Against

 

 

 

Abstain

 

 

1,320,082,269

 

7,600,232

 

9,447,041

 

 

24




(c)             The shareholders rejected a shareholder proposal on pay-for-superior performance. The number of shares cast in favor of the shareholder proposal, the number against, the number abstaining, and the number of broker non-votes were as follows:

For

 

 

 

Against

 

 

 

Abstain

 

 

 

Broker Non-Vote

 

396,982,093

 

717,763,872

 

18,415,923

 

203,967,654

 

(d)            The shareholders rejected a shareholder proposal on corporate political contributions.  The number of shares cast in favor of the shareholder proposal, the number against, the number abstaining, and the number of broker non-votes were as follows:

For

 

 

 

Against

 

 

 

Abstain

 

 

 

Broker Non-Vote

 

93,507,615

 

914,955,146

 

124,699,128

 

203,967,653

 

(e)             The shareholders rejected a shareholder proposal on the roles of Chair and CEO.  The number of shares cast in favor of the shareholder proposal, the number against, the number abstaining, and the number of broker non-votes were as follows:

For

 

 

 

Against

 

 

 

Abstain

 

 

 

Broker Non-Vote

 

348,833,339

 

769,433,312

 

14,895,239

 

203,967,652

 

Item 6.          Exhibits

Incorporated by reference to the Exhibit Index included herewith.

25




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:   August  8, 2006

 

26




EXHIBIT INDEX

Exhibit No.

 

Exhibit

 

 

 

 

 

 

 

10.1

 

Purchase Agreement, dated as of April 21, 2006, between Guidant Corporation and Abbott Laboratories.

 

 

 

 

 

10.2

 

Amendment to Purchase Agreement, dated as of April 21, 2006, between Guidant Corporation and Abbott Laboratories.

 

 

 

 

 

10.3

 

Promissory Note, dated April 21, 2006, from BSC International Holding Ltd.

 

 

 

 

 

10.4

 

Subscription and Stockholder Agreement, dated as of April 21, 2006, between Boston Scientific Corporation and Abbott Laboratories.

 

 

 

 

 

10.5

 

Amendment to Subscription and Stockholder Agreement, dated as of April 21, 2006, between Boston Scientific Corporation and Abbott Laboratories.

 

 

 

 

 

10.6

 

Form of Time Sharing Agreement between Abbott Laboratories, Inc. and M.D. White, R.A. Gonzalez, and T.C. Freyman.

 

 

 

 

 

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 10.1

 

FINAL FORM

 


 

PURCHASE AGREEMENT

 


 

Between

 

GUIDANT CORPORATION

 

and

 

ABBOTT LABORATORIES

 

Dated as of April 21, 2006

 



 

TABLE OF CONTENTS

 

 

Page

 

 

ARTICLE I

DEFINITIONS

 

 

SECTION 1.01. Certain Defined Terms

2

SECTION 1.02. Definitions

9

 

 

ARTICLE II

PURCHASE AND SALE

 

 

SECTION 2.01. Purchase and Sale of the Shares

11

SECTION 2.02. Purchase and Sale of Assets

11

SECTION 2.03. Assumption and Exclusion of Liabilities

15

SECTION 2.04. Purchase Price; Allocation of Purchase Price

16

SECTION 2.05. Milestone Payments

17

SECTION 2.06. Closing

17

SECTION 2.07. Closing Deliveries by Guidant

18

SECTION 2.08. Closing Deliveries by Abbott

19

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF GUIDANT

 

SECTION 3.01. Organization, Authority and Qualification

19

SECTION 3.02. Organization, Authority and Qualification of the Transferred Subsidiaries

20

SECTION 3.03. Capitalization; Ownership of Shares

20

SECTION 3.04. No Conflict

21

SECTION 3.05. Governmental Consents and Approvals

21

SECTION 3.06. Conduct in the Ordinary Course

22

SECTION 3.07. Litigation

23

SECTION 3.08. Compliance with Laws

23

SECTION 3.09. Environmental Matters

23

SECTION 3.10. Intellectual Property

24

SECTION 3.11. Title

26

SECTION 3.12. Employee Benefit Matters

26

SECTION 3.13. Taxes

30

SECTION 3.14. Material Contracts

31

SECTION 3.15. Regulatory Matters

32

SECTION 3.16. Assets

34

SECTION 3.17. Brokers

34

SECTION 3.18. Disclaimer

34

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF ABBOTT

 

SECTION 4.01. Organization and Authority

34

 

 

i



 

SECTION 4.02. No Conflict

35

SECTION 4.03. Governmental Consents and Approvals

35

SECTION 4.04. Litigation

35

SECTION 4.05. Brokers

36

SECTION 4.06. Disclaimer

36

 

ARTICLE V

ADDITIONAL AGREEMENTS

 

SECTION 5.01. Acknowledgment

36

SECTION 5.02. Access to Information; Confidentiality

36

SECTION 5.03. Regulatory and Other Authorizations; Notices and Consents

37

SECTION 5.04. Notifications

38

SECTION 5.05. Release of Indemnity Obligations

39

SECTION 5.06. Tax Election

39

SECTION 5.07. Insurance

41

SECTION 5.08. Trademarks

41

SECTION 5.09. Further Action

43

SECTION 5.10. Mixed Contracts and Accounts

44

SECTION 5.1l. Intercompany Arrangements

45

SECTION 5.12. Restructuring

45

SECTION 5.13. Books, Records and Files

45

SECTION 5.14. Other Agreements

45

SECTION 5.15. Third Party Claims Against Both the Business and the Excluded Business

46

 

ARTICLE VI

EMPLOYEE MATTERS

 

SECTION 6.01. Transferred Employees

47

SECTION 6.02. Employee Benefits

47

SECTION 6.03. General Matters

50

SECTION 6.04. Mutual Non-Solicitation

51

 

ARTICLE VII

TAXES

 

SECTION 7.01. Apportionment

52

SECTION 7.02. Tax Return Filing and Amendment

52

SECTION 7.03. Refunds

52

SECTION 7.04. Resolution of Tax Controversies

53

SECTION 7.05. Tax Cooperation

53

SECTION 7.06. Conveyance Taxes

53

 

ARTICLE VIII

CONDITIONS TO CLOSING

 

SECTION 8.01. Conditions to Obligation of Guidant

54

SECTION 8.02. Conditions to Obligation of Abbott

55

 

ii



 

ARTICLE IX

TERMINATION

 

SECTION 9.01. Termination

56

SECTION 9.02. Effect of Termination

56

 

ARTICLE X

INDEMNIFICATION

 

SECTION 10.01. Survival of Representations and Warranties

56

SECTION 10.02. Indemnification by Guidant

56

SECTION 10.03. Indemnification by Abbott

57

SECTION 10.04. Limits on Indemnification

57

SECTION 10.05. Notice of Loss; Third Party Claims

58

SECTION 10.06. Tax Treatment of Indemnity Payments

58

 

ARTICLE XI

GENERAL PROVISIONS

 

SECTION 11.01. Expenses

59

SECTION 11.02. Notices

59

SECTION 11.03. Public Announcements

60

SECTION 11.04. Severability

60

SECTION 11.05. Entire Agreement

60

SECTION 11.06. Assignment

61

SECTION 11.07. Amendment

61

SECTION 11.08. Waiver

61

SECTION 11.09. No Third Party Beneficiaries

61

SECTION 11.10. Other Remedies; Specific Performance

61

SECTION 11.11. Interpretive Rules

62

SECTION 11.12. Guarantees of Performance

62

SECTION 11.13. Governing Law

62

SECTION 11.14. Waiver of Jury Trial

63

SECTION 11.15. Exchange Rate

63

SECTION 11.16. Counterparts

63

 

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EXHIBITS:

 

Exhibit A

Form of Assumption Agreement

Exhibit B

Form of Bill of Sale

Exhibit C

Form of Business Transfer Agreement

Exhibit D

Form of Equity Purchase Agreement

Exhibit E

Form of Intellectual Property Transfer Agreement

Exhibit F

Form of License and Technology Transfer Agreement

Exhibit G

Form of Note

Exhibit H

Form of Release

Exhibit I

Form of Supply Agreement

Exhibit J

Form of Transition Services Agreement

 

SCHEDULES:

 

Schedule 1.01(a)

Asset Purchasers & Asset Sellers

Schedule 1.01(b)

Leased Business Real Property

Schedule 1.01(c)

Owned Business Real Property

Schedule 1.01(d)

Share Sellers, Share Purchasers & Transferred Subsidiaries

Schedule 2.02(a)(i)

Clonmel – Purchased Assets

Schedule 2.02(a)(ii)

Leased Business Real Property – Purchased Assets

Schedule 2.02(a)(iii)

Guidelines for Tangible Personal Property

Schedule 2.02(a)(xv)

Guidelines for Permits, Licenses, Certifications & Approvals

Schedule 2.02(a)(xvi)

Guidelines for Computer Software Data and Information

Schedule 2.02(a)(xxi)

Assets

Schedule 2.02(c)(iv)

Real Property – Excluded Assets

Schedule 2.02(d)

Investments

Schedule 2.02(e)

Intellectual Property Transfers

Schedule 2.04(a)

Withholding Taxes

Schedule 2.06

Required Consent Jurisdictions & Deferred Local Closings

Schedule 5.12

Restructuring Actions

Schedule 6.01(a)

U.S. Business Employees

Schedule 6.01(b)

Non-U.S. Business Employees

Schedule 6.02(f)

Payment Principles

 

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PURCHASE AGREEMENT, dated as of April 21, 2006 (this “Agreement”), between GUIDANT CORPORATION, an Indiana corporation (“Guidant”), and ABBOTT LABORATORIES, an Illinois corporation (“Abbott”).

 

WHEREAS, Boston Scientific Corporation, a Delaware corporation (“Boston Scientific”), Galaxy Merger Sub, Inc., an Indiana corporation and a wholly owned subsidiary of the Boston Scientific (“Sub”), and Guidant have entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 25, 2006, pursuant to which, upon consummation of the Merger (as defined in the Merger Agreement), Sub will be merged with and into Guidant and Guidant will become a wholly owned subsidiary of Boston Scientific;

 

WHEREAS, Guidant, directly and through its various Affiliates (as defined below), including the Transferred Subsidiaries (as defined below) and the Asset Sellers (as defined below), is engaged in, among other things, the vascular intervention and endovascular solutions businesses at various locations around the world (such businesses of Guidant and its Affiliates, collectively, the “Business”);

 

WHEREAS, certain assets of the Transferred Subsidiaries that are not primarily used in the Business will be transferred by the Transferred Subsidiaries to Guidant, Boston Scientific or one of their respective Affiliates prior to the Closing, the Excluded Liabilities (as defined below) of the Transferred Subsidiaries will be assumed by Guidant, Boston Scientific or one of their respective Affiliates prior to the Closing, and the Shares (as defined below) and the Purchased Assets (as defined below) will be sold by Guidant or the applicable Seller (as defined below) to the applicable Purchaser (as defined below) at the Closing, all as more fully set forth herein;

 

WHEREAS, for purposes of this Agreement, references to the Business shall be deemed to include the Assets (as defined below) and the Shares if the context so requires;

 

WHEREAS, subject to the satisfaction or (to the extent permitted by Law) waiver of the conditions to the parties’ obligations to close the transactions contemplated by the Merger Agreement, Guidant wishes to sell, or cause to be sold, to the Purchasers, and the Purchasers wish to purchase from Guidant and the Sellers, the Transferred Subsidiaries and all right, title and interest in and to all assets of the Business, and in connection therewith the Purchasers are willing to assume certain liabilities relating thereto, all upon the terms and subject to the conditions set forth herein; and

 

WHEREAS, simultaneously with the execution of this Agreement, Boston Scientific has executed that certain Guarantee of Performance (the “Guarantee of Performance”), pursuant to which Boston Scientific unconditionally guarantees to Abbott the prompt and complete performance of all the obligations required to be performed by Guidant and its Affiliates pursuant to this Agreement.

 

NOW, THEREFORE, in consideration of the promises and the mutual agreements and covenants hereinafter set forth, and intending to be legally bound, the parties hereby agree as follows:

 



 

ARTICLE I

 

DEFINITIONS

 

SECTION 1.01. Certain Defined Terms. For purposes of this Agreement:

 

Action” means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or arbitral or similar forum.

 

Affiliate” means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person; provided, however that TAP Pharmaceutical Products, Inc. (“TAP”) and its subsidiaries shall be deemed not to be Affiliates of Abbott, but only for so long as Abbott (either directly or indirectly) owns fifty percent or less of the voting stock of TAP (or its subsidiaries) or does not otherwise have control of TAP (or its subsidiaries). For purposes of this Agreement, with respect to all periods following consummation of the Merger or the transactions contemplated by this Agreement, as applicable, “Affiliate” shall include, (a) with respect to Boston Scientific, Guidant and its Affiliates following the Merger, (b) with respect to Guidant, Boston Scientific and its Affiliates following the Merger, (c) with respect to Abbott, any Person to be acquired pursuant to this Agreement, and (d) with respect to each party hereto, any Person resulting from any internal reorganization, provided such resulting Person is an Affiliate.

 

Ancillary Agreements” means the Assumption Agreements, the Equity Purchase Agreement, the Bills of Sale, the Transfer Agreements, the Supply Agreements, the License and Technology Transfer Agreement, the Transition Services Agreement, the Note, the Release and any other agreements that the parties may mutually agree.

 

Assets” means (i) the Purchased Assets and (ii) the assets, rights, properties and businesses of every kind and description (wherever located, whether tangible or intangible, real, personal or mixed) of the Transferred Subsidiaries, in each case that (except as otherwise expressly set forth in this Agreement or the Ancillary Agreements) are used primarily in, or related primarily to (with “primarily” being determined by taking into account revenues, assets, personnel, registrations and other relevant factors), the Business.

 

Asset Purchasers” means, individually or collectively, the Affiliates of Abbott that are identified on Schedule 1.01(a) attached hereto.

 

Asset Sellers” means, individually or collectively, the Affiliates of Guidant that are identified on Schedule 1.01(a) attached hereto.

 

Assumption Agreements” means the Assumption Agreements to be executed by the applicable Asset Purchasers and Guidant and/or the applicable Asset Sellers at the Closing, substantially in the form of Exhibit A.

 

Bills of Sale” means the Bills of Sale and Assignment to be executed by Guidant and/or the applicable Asset Sellers at the Closing, substantially in the form of Exhibit B.

 

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Books, Records and Files” means any studies, reports, records (including shipping and personnel records), books of account, invoices, contracts, instruments, surveys, data (including financial, sales, purchasing and operating data), computer data, disks, diskettes, tapes, marketing plans, customer lists, supplier lists, distributor lists, correspondence and other documents.

 

Business Day” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in The City of New York.

 

Business Intellectual Property” means all Intellectual Property used primarily in, or related primarily to, the Business and (a) owned by Guidant or any of its Affiliates or (b) licensed to or by, or controlled by, Guidant or any of its Affiliates.

 

Business Transfer Agreements” means the Business Transfer Agreements with respect to the relevant jurisdiction to be executed by the applicable Asset Sellers and the applicable Asset Purchasers at the Closing, substantially in the form of Exhibit C.

 

Carotid Stent Assets” means the Assets related to the research, development, manufacture, distribution, marketing and sale of carotid stent systems, including embolic protection devices.

 

Code” means the Internal Revenue Code of 1986, as amended through the date hereof.

 

Contract” means any loan or credit agreement, bond, debenture, note, mortgage, indenture, lease, supply agreement, license agreement, development agreement or other contract, agreement, obligation, commitment or instrument that is intended by Guidant or any of its Affiliates to be legally binding, including all amendments thereto.

 

control” (including the terms “controlled by” and “under common control with”), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative or executor, by contract, credit arrangement or otherwise.

 

Credit Agreement” means the principal credit agreement of Boston Scientific, as amended, restated, modified, renewed, refunded, replaced or refinanced, in whole or in part from time to time.

 

Disclosure Schedule” means the Disclosure Schedule attached hereto, dated as of the date hereof, delivered by Guidant to Abbott in connection with this Agreement.

 

Encumbrance” means (a) with respect to the Shares, or any other shares of capital stock of a Transferred Subsidiary, any voting trusts, shareholders’ agreement, proxy or other similar restriction, and (b) with respect to the Assets and the Shares, any security interest, pledge, hypothecation, mortgage, lien, adverse ownership claim, title defect or other

 

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encumbrance of any kind or nature whatsoever, other than, with respect to Intellectual Property included in the Assets, any licenses of Intellectual Property.

 

Environmental Laws” means any United States Federal, state or local or any foreign Laws (including the common law), Governmental Orders, notices, Permits or binding Contracts issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources or the presence, management, Environmental Release of, or exposure to, Hazardous Materials, or to human health and safety.

 

Environmental Release” means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing or migrating into or through the environment or any natural or man-made structure.

 

Equity Purchase Agreement” means the Subscription and Stockholders Agreement, to be executed at the Closing between Boston Scientific and Abbott in the form of Exhibit D.

 

FDA” means the United States Food and Drug Administration.

 

GAAP” means United States generally accepted accounting principles and practices in effect from time to time applied consistently throughout the periods involved.

 

Governmental Authority” means any United States federal, state or local or any non-United States government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.

 

Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.

 

Hazardous Materials” means (a) petroleum products and by-products, asbestos and asbestos-containing materials, urea formaldehyde foam insulation, medical or infectious wastes, polychlorinated byphenyls, radon gas, radioactive substances, chloroflurocarbons and all other ozone-depleting substances, and (b) any other chemical, material, substance, waste, pollutant or contaminant that is prohibited, limited or regulated by or pursuant to any Environmental Law.

 

HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.

 

Indebtedness” means, with respect to any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than current trade payables incurred in the ordinary course of such Person’s business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all

 

4



 

capital lease obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party or applicant under or in respect of acceptances, letters of credit, surety bonds or similar arrangements, (g) all guarantee obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (f) above and (h) all obligations of the kind referred to in clauses (a) through (g) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any lien on property (including accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness expressly provide that such Person is not liable therefor.

 

Intellectual Property” means all intellectual property rights of any kind, including rights in, to and concerning (a) patents, patent applications and statutory invention registrations, including divisionals, continuations, continuations-in-part, re-issues and re-examinations thereof, (b) Trademarks, (c) published and unpublished works of authorship and copyrights therein, and copyright registrations and applications for registration thereof and all renewals, extensions, restorations and reversions thereof, (d) software, code, data, databases and compilations of information, and (e) confidential and proprietary information, inventions, formulas, processes, developments, technology, research, trade secrets and know-how.

 

Intellectual Property Transfer Agreement” means the Intellectual Property Transfer Agreements with respect to the relevant jurisdictions to be executed by Advanced Cardiovascular Systems, Inc., its subsidiaries or Guidant Endovascular Solutions, Inc. and the applicable Asset Purchaser immediately prior to the Closing, substantially in the form of Exhibit E.

 

IRS” means the Internal Revenue Service of the United States.

 

Knowledge” means, when used in connection with (a) a Purchaser with respect to any matter in question, the actual knowledge of Abbott’s executive officers after making due inquiry of the current employees having primary responsibility for such matter, and (b) Guidant with respect to any matter in question, the actual knowledge of Guidant’s executive officers after making due inquiry of the current employees of Guidant or any of its Affiliates having primary responsibility for such matter who are treated as a Tier I Employee and Tier II Employee for purposes of the Guidant CIC Plans.

 

Law” means any United States federal, state, local or foreign statute, law, ordinance, regulation, rule, code, order, other requirement or rule of law.

 

Leased Business Real Property” means all the Real Property leased by Guidant, any Asset Seller or any Transferred Subsidiary, as tenant and described on Schedule 1.01(b) that are acquired, directly or indirectly, by the Purchasers by the way of a Share purchase or as a Purchased Asset pursuant to the transactions contemplated by this Agreement.

 

5



 

Liabilities” means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including those arising under any Law, Action or Governmental Order and those arising under any contract, agreement, arrangement or undertaking (but excluding any performance obligations under any such contracts, agreements, arrangements or undertakings).

 

License and Technology Transfer Agreement” means the License and Technology Transfer Agreement dated as of                    , 2006, among Boston Scientific, Guidant and Abbott, in the form of Exhibit F.

 

Material Adverse Effect” means any change, effect, event, occurrence, state of facts or development which individually or in the aggregate would reasonably be expected to result in any change or effect, that is materially adverse to the business, financial condition or results of operations of the Business,