ABBOTT LABORATORIES Financial Review
Abbott's revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott's products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs.
Abbott's primary products are medical devices, diagnostic testing products, nutritional products and branded generic pharmaceuticals. Sales in international markets comprise approximately 64 percent of consolidated net sales.
Over the last several years, Abbott proactively shaped the company with the strategic intent to deliver sustainable growth in all of its businesses.
Significant steps over the last three years included:
In
global medical device manufacturer, for approximately
? of the acquisition, Abbott also assumed, repaid or refinanced approximately
opportunities for future growth and is an important part of the company's
effort to develop a strong, diverse portfolio.
In
service provider, for approximately
Abbott also tendered for Alere's preferred shares for a total value of
? approximately
in point of care testing, expanded Abbott's global diagnostics presence and
provided access to new products, channels and geographies.
In
? vision care business, to Johnson & Johnson for
recognized an after-tax gain of
The increase in total sales over the last three years reflects both volume growth across Abbott's businesses and the 2017 acquisitions of St. Jude Medical and Alere. Volume growth reflects the introduction of new products as well as higher sales of existing products. Sales in emerging markets, which represent approximately 40 percent of total company sales, increased 8.2 percent in 2019 and 12.3 percent in 2018, excluding the impact of foreign exchange. (Emerging markets include all countries exceptthe United States ,Western Europe ,Japan ,Canada ,Australia and New Zealand .) Over the last three years, Abbott's operating margin was positively impacted by margin improvements in various businesses, includingEstablished Pharmaceutical Products , Diabetes Care,Rapid Diagnostics , and Structural Heart. A reduction in the costs associated with the recent business acquisitions also drove the improvement in operating margins from 2017 to 2019. In 2019, Abbott's operating margin increased by approximately 2 percentage points primarily due to lower intangible amortization expense and lower business integration and restructuring costs compared to 2018. In 2018, Abbott's operating margin increased by approximately 6 percentage points primarily due to operating margin improvement in various businesses and lower inventory step-up amortization and integration costs associated with the acquisitions.
Beginning in the fourth quarter of 2019, the results of the Diabetes Care business, which had previously been included in the non-reportable segment category, were aggregated with the results of the businesses in the Cardiovascular and Neuromodulation segment to comprise the Medical Devices reportable segment. Historic periods have been adjusted to reflect this change.
Excluding the impact of foreign exchange, sales in the Medical Devices segment
increased 10.5 percent in 2019 and 9.0 percent in 2018. The sales increase in
2019 was driven primarily by higher Diabetes Care, Structural Heart,
Electrophysiology and Heart Failure sales. The sales increase in 2018 was
driven primarily by higher Diabetes Care, Structural Heart, Electrophysiology,
and Neuromodulation sales.
In 2019, operating earnings for this segment increased 7.7 percent. The
operating margin profile increased from 29.2 percent of sales in 2017 to 30.8
percent in 2019 primarily due to sales volume growth and various cost
improvement initiatives, partially offset by investment spending to drive the
growth of new products.
20
In 2019, in the Medical Devices segment, product approvals from the
the TactiCath® contact force ablation catheter, Sensor enabled™, which is
? designed to help physicians treat atrial fibrillation, a form of irregular
heartbeat.
a new, expanded indication for Abbott's MitraClip® heart valve repair device to
? treat clinically significant secondary mitral regurgitation (MR) as a result of
underlying heart failure. This new indication expands the number of people
with MR that can be treated with the MitraClip device.
the next-generation version of the MitraClip device, which includes a new
? leaflet grasping enhancement, an expanded range of clip sizes and facilitation
of procedure assessment in real time to offer doctors further options when
treating mitral valve disease.
the Proclaim XR recharge-free neurostimulation system for people living with
? chronic pain which works by using low doses of mild electrical pulses to change
pain signals as they travel from the spinal cord to the brain.
InMarch 2019 , Abbott announced new data from its MOMENTUM 3 clinical study, the largest randomized controlled trial to assess outcomes in patients receiving a heart pump to treat advanced heart failure, which demonstrated Abbott's HeartMate 3® Left Ventricular Assist Device (LVAD) improved survival and clinical outcomes in this patient population. InOctober 2018 , the FDA approved HeartMate 3 as a destination (long-term use) therapy for patients living with advanced heart failure.
In
InJanuary 2020 , Abbott received CE Mark approval inEurope for its Tendyne Transcatheter Mitral Valve Implantation system for the treatment of significant MR in patients requiring a heart valve replacement who are not candidates for open-heart surgery or transcatheter mitral valve repair. In Abbott's worldwide diagnostics business, sales growth over the last three years reflected the acquisition of Alere inOctober 2017 , as well as continued market penetration by the core laboratory business in theU.S. and internationally. Alere's results are included in Abbott's Diagnostic Products reportable segment from the date of acquisition. Worldwide diagnostic sales increased 5.9 percent in 2019 and 33.6 percent in 2018, excluding the impact of foreign exchange. Excluding the impact of the Alere acquisition, as well as the impact of foreign exchange, sales in the Diagnostic Products segment increased 6.5 percent in 2018. The 2019 and 2018 growth includes the continued adoption by customers of Alinity®, which is Abbott's integrated family of next-generation diagnostic systems and solutions that are designed to increase efficiency by running more tests in less space, generating test results faster and minimizing human errors while continuing to provide quality results. Abbott has regulatory approvals in theU.S. ,Europe ,China , and other markets for the "Alinity c" and "Alinity i" instruments and multiple assays for clinical chemistry and immunoassay diagnostics, respectively. Abbott has obtained regulatory approval for the "Alinity h" instrument for hematology inEurope andJapan . In 2019, Abbott continued the roll-out inEurope of its "Alinity s" blood and plasma screening system and receivedU.S. FDA approval for "Alinity s" and several testing assays. In 2019, Abbott also announced that it had obtained CE Mark for its "Alinity m" (molecular) diagnostics system and several testing assays. In 2019, operating earnings for the Diagnostics segment increased 2.3 percent. The operating margin profile decreased from 26.1 percent of sales in 2017 to 24.8 percent in 2019 primarily due to dilution from the acquisition of Alere, the negative impact of foreign exchange, and costs to accelerate the roll-out of Alinity, partially offset by the continued focus on cost improvement. 21 In Abbott's worldwide nutritional products business, sales over the last three years were positively impacted by numerous new product introductions, including the roll-out of HMO in infant formula, that leveraged Abbott's strong brands. Sales were also positively affected by demographics such as an aging population and an increasing rate of chronic disease in developed markets and the rise of a middle class in many emerging markets. In 2019, excluding the impact of foreign exchange, total adult nutrition sales increased 6.6 percent led by the continued growth of Ensure®, Abbott's market-leading complete and balanced nutrition brand, and Glucerna®, Abbott's market-leading diabetes-specific nutrition brand, across several countries, partially offset by the unfavorable impact of the discontinuation of a non-core product line in theU.S. In 2019, excluding the impact of foreign exchange, total pediatric nutrition sales increased 3.4 percent driven by the PediaSure® and Pedialyte® brands in theU.S. as well as infant and toddler product growth across several markets inAsia andLatin America , partially offset by challenging conditions in theGreater China market. In 2018, excluding the impact of foreign exchange, the nutritional business experienced above-market growth in the worldwide pediatric business driven by the Similac® and Pedialyte brands in theU.S. as well as growth across several markets inAsia . Worldwide, adult nutrition sales increased in 2018 led by the growth of Ensure and Glucerna.The Established Pharmaceutical Products segment focuses on the sale of its products in emerging markets. Excluding the impact of foreign exchange, Established Pharmaceutical sales increased 7.3 percent in 2019 and 7.0 percent in 2018. The sales increase in 2019 was driven by growth in several geographies includingChina ,Brazil ,Russia andIndia . The sales increase in 2018 was driven by double-digit growth inIndia andChina . Operating margins increased from 19.8 percent of sales in 2017 to 20.1 percent in 2019 primarily due to the continued focus on cost reduction initiatives, partially offset by the unfavorable impact of foreign exchange. In conjunction with the funding of the St. Jude Medical and Alere acquisitions and the assumption of St. Jude Medical's and Alere's existing debt, Abbott's total short-term and long-term debt increased from approximately$9.0 billion atDecember 31, 2015 to$27.9 billion atDecember 31, 2017 . In 2018, Abbott repaid approximately$8.3 billion of debt, net of borrowings, bringing its total debt to$19.6 billion atDecember 31, 2018 . In 2019, Abbott repaid approximately$1.6 billion of debt, net of borrowings, bringing its total debt to$18.1 billion atDecember 31, 2019 . Abbott declared dividends of$1.32 per share in 2019 compared to$1.16 per share in 2018, an increase of approximately 14 percent. Dividends paid totaled$2.270 billion in 2019 compared to$1.974 billion in 2018. The year-over-year change in the amount of dividends paid primarily reflects the increase in the dividend rate. InDecember 2019 , Abbott increased the company's quarterly dividend by approximately 12.5 percent to$0.36 per share from$0.32 per share, effective with the dividend paid inFebruary 2020 . In 2020, Abbott will focus on continuing to invest in product development areas that provide the opportunity for strong sustainable growth over the next several years. In its diagnostics business, Abbott will continue to focus on driving market adoption and geographic expansion of its Alinity suite of diagnostics instruments. In the medical devices business, Abbott will continue to focus on expanding its market position in various areas including diabetes care, structural heart, electrophysiology, and heart failure. In its nutritionals business, Abbott will continue to focus on driving growth globally and further enhancing its portfolio with the introduction of several new science-based products. In the established pharmaceuticals business, Abbott will continue to focus on growing its business with the depth and breadth of its portfolio in emerging markets. 22
Critical Accounting Policies
Sales Rebates - In 2019, approximately 44 percent of Abbott's consolidated gross revenues were subject to various forms of rebates and allowances that Abbott recorded as reductions of revenues at the time of sale. Most of these rebates and allowances in 2019 are in the Nutritional Products and Diabetes Care businesses. Abbott provides rebates to state agencies that administer theSpecial Supplemental Nutrition Program for Women , Infants, and Children (WIC), wholesalers, group purchasing organizations, and other government agencies and private entities. Rebate amounts are usually based upon the volume of purchases using contractual or statutory prices for a product. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate, which customer or government agency price terms apply, and the estimated lag time between sale and payment of a rebate. Using historical trends, adjusted for current changes, Abbott estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when Abbott records its sale of the product. Settlement of the rebate generally occurs from one to six months after sale. Abbott regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs. Rebates and chargebacks charged against gross sales in 2019, 2018 and 2017 amounted to approximately$3.1 billion ,$3.0 billion and$2.8 billion , respectively, or 19.1 percent, 19.0 percent and 20.5 percent of gross sales, respectively, based on gross sales of approximately$16.3 billion ,$16.0 billion and$13.9 billion , respectively, subject to rebate. A one-percentage point increase in the percentage of rebates to related gross sales would decrease net sales by approximately$163 million in 2019. Abbott considers a one-percentage point increase to be a reasonably likely increase in the percentage of rebates to related gross sales. Other allowances charged against gross sales were approximately$169 million ,$175 million and$166 million for cash discounts in 2019, 2018 and 2017, respectively, and$192 million ,$191 million and$204 million for returns in 2019, 2018 and 2017, respectively. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because Abbott's historical returns are low, and because sales returns terms and other sales terms have remained relatively unchanged for several periods.
Management analyzes the adequacy of ending rebate accrual balances each quarter.
In the domestic nutritional business, management uses both internal and external data available to estimate the accruals. In the WIC business, estimates are required for the amount of WIC sales within each state where Abbott holds the WIC contract. The state where the sale is made, which is the determining factor for the applicable rebated price, is reliably determinable. Rebated prices are based on contractually obligated agreements generally lasting a period of two to four years. Except for a change in contract price or a transition period before or after a change in the supplier for the WIC business in a state, accruals are based on historical redemption rates and data from theU.S. Department of Agriculture (USDA) and the states submitting rebate claims. TheUSDA , which administers the WIC program, has been making its data available for many years. Management also estimates the states' processing lag time based on sales and claims data. Inventory in the retail distribution channel does not vary substantially. Management has access to several large customers' inventory management data, which allows management to make reliable estimates of inventory in the retail distribution channel. AtDecember 31, 2019 , Abbott had WIC business in 26 states. Historically, adjustments to prior years' rebate accruals have not been material to net income. Abbott employs various techniques to verify the accuracy of claims submitted to it, and where possible, works with the organizations submitting claims to gain insight into changes that might affect the rebate amounts. For government agency programs, the calculation of a rebate involves interpretations of relevant regulations, which are subject to challenge or change in interpretation. Income Taxes - Abbott operates in numerous countries where its income tax returns are subject to audits and adjustments. Because Abbott operates globally, the nature of the audit items is often very complex, and the objectives of the government auditors can result in a tax on the same income in more than one country. Abbott employs internal and external tax professionals to minimize audit adjustment amounts where possible. In accordance with the accounting rules relating to the measurement of tax contingencies, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. Application of these rules requires a significant amount of judgment. In theU.S. , Abbott's federal income tax returns through 2016 are settled except for the federal income tax returns of the former Alere consolidated group which are settled through 2015 and the former St. Jude Medical consolidated group which are settled through 2013. Undistributed foreign earnings remain indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in its foreign entities is not practicable. 23 Pension and Post-Employment Benefits - Abbott offers pension benefits and post-employment health care to many of its employees. Abbott engages outside actuaries to assist in the determination of the obligations and costs under these programs. Abbott must develop long-term assumptions, the most significant of which are the health care cost trend rates, discount rates and the expected return on plan assets. The discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits. The health care cost trend rates represent Abbott's expected annual rates of change in the cost of health care benefits and are a forward projection of health care costs as of the measurement date. A difference between the assumed rates and the actual rates, which will not be known for years, can be significant in relation to the obligations and the annual cost recorded for these programs. Low interest rates have significantly increased actuarial losses for these plans. AtDecember 31, 2019 , pretax net actuarial losses and prior service costs and (credits) recognized in Accumulated other comprehensive income (loss) for Abbott's defined benefit plans and medical and dental plans were losses of$4.1 billion and$434 million , respectively. Actuarial losses and gains are amortized over the remaining service attribution periods of the employees under the corridor method, in accordance with the rules for accounting for post-employment benefits. Differences between the expected long-term return on plan assets and the actual annual return are amortized over a five-year period. Note 15 to the consolidated financial statements describes the impact of a one-percentage point change in the health care cost trend rate; however, there can be no certainty that a change would be limited to only one percentage point. Valuation of Intangible Assets - Abbott has acquired and continues to acquire significant intangible assets that Abbott records at fair value at the acquisition date. Transactions involving the purchase or sale of intangible assets occur with some frequency between companies in the health care field and valuations are usually based on a discounted cash flow analysis. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, cost of capital, terminal values and market participants. Each of these factors can significantly affect the value of the intangible asset. Abbott engages independent valuation experts who review Abbott's critical assumptions and calculations for acquisitions of significant intangibles. Abbott reviews definite-lived intangible assets for impairment each quarter using an undiscounted net cash flows approach. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to its fair value, which is usually the discounted cash flow amount. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable.Goodwill and indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, are reviewed for impairment annually or when an event that could result in impairment occurs. AtDecember 31, 2019 , goodwill amounted to$23.2 billion and net intangibles amounted to$17.0 billion . Amortization expense in continuing operations for intangible assets amounted to$1.9 billion in 2019,$2.2 billion in 2018 and$2.0 billion in 2017. There was no significant reduction of goodwill relating to impairments in 2019, 2018 and 2017. Litigation - Abbott accounts for litigation losses in accordance withFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 450, "Contingencies." Under ASC No. 450, loss contingency provisions are recorded for probable losses at management's best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period as additional information becomes known. Accordingly, Abbott is often initially unable to develop a best estimate of loss, and therefore the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased, resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss provisions.
Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.
Abbott estimates the range of possible loss to be from approximately
Accruals of approximately$110 million have been recorded atDecember 31, 2019 for these proceedings and exposures. These accruals represent management's best estimate of probable loss, as defined by FASB ASC No. 450, "Contingencies."
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Results of Operations
Sales
The following table details the components of sales growth by reportable segment
for the last two years:
Components of % Change
Business
Total Acquisitions/
% Change Divestitures Price Volume Exchange
Total Net Sales
2019 vs. 2018 4.3 - 0.2 7.3 (3.2)
2018 vs. 2017 11.6 4.9 (1.0) 8.1 (0.4)
Total U.S.
2019 vs. 2018 5.2 - (0.4) 5.6 -
2018 vs. 2017 12.1 8.0 (1.1) 5.2 -
Total International
2019 vs. 2018 3.9 - 0.5 8.3 (4.9)
2018 vs. 2017 11.4 3.2 (1.0) 9.7 (0.5)
Established Pharmaceutical Products Segment
2019 vs. 2018 1.4 - 3.0 4.3 (5.9)
2018 vs. 2017 3.2 - 2.2 4.8 (3.8)
Nutritional Products Segment
2019 vs. 2018 2.5 - 0.9 3.9 (2.3)
2018 vs. 2017 4.4 - 0.2 4.7 (0.5)
Diagnostic Products Segment
2019 vs. 2018 2.9 - (0.5) 6.4 (3.0)
2018 vs. 2017 33.5 27.1 (2.0) 8.5 (0.1)
Medical Devices Segment
2019 vs. 2018 7.6 - (0.9) 11.4 (2.9)
2018 vs. 2017 10.1 - (2.7) 11.7 1.1
Diabetes Care sales, which had previously been reported in Other, are now Note: included in the Medical Devices segment. Historic periods have been
adjusted to reflect this change.
The increase in Total
The price declines related to the Medical Devices segment in 2019 and 2018
primarily reflect pricing pressures on drug eluting stents (DES) as a result of
market competition in the
25
A comparison of significant product and product group sales is as follows.
Percent changes are versus the prior year and are based on unrounded numbers.
Total
Total Impact of Change
(dollars in millions) 2019 2018 Change Exchange Excl. Exchange
Total Established Pharmaceuticals -
Key Emerging Markets $ 3,392 $ 3,363 1 % (7) % 8 %
Other 1,094 1,059 3 (3) 6
Nutritionals -International Pediatric Nutritionals 2,282 2,254 1 (4) 5 U.S. Pediatric Nutritionals 1,879 1,843 2 - 2 International Adult Nutritionals 2,017 1,900 6
(5) 11
U.S. Adult Nutritionals 1,231 1,232 - - -
Diagnostics -
Core Laboratory 4,656 4,386 6 (4) 10
Molecular 442 484 (9) (3) (6)
Point of Care 561 553 2 - 2
Rapid Diagnostics 2,054 2,072 (1) (2) 1
Medical Devices -
Rhythm Management 2,144 2,198 (3) (3) -
Electrophysiology 1,721 1,561 10 (3) 13
Heart Failure 769 646 19 (1) 20
Vascular (a) 2,850 2,929 (3) (3) -
Structural Heart 1,400 1,239 13 (3) 16
Neuromodulation 831 864 (4) (2) (2)
Diabetes Care 2,524 1,933 31 (5) 36
(a) Vascular Product Lines:
Coronary and Endovascular 2,740 2,778 (1) (2) 1
26
Total
Total Impact of Change
(dollars in millions) 2018 2017 Change Exchange Excl. Exchange
Total Established Pharmaceuticals -
Key Emerging Markets $ 3,363 $ 3,307 2 % (5) % 7 %
Other 1,059 980 8 2 6
Nutritionals -International Pediatric Nutritionals 2,254 2,112 7 - 7 U.S. Pediatric Nutritionals 1,843 1,777 4 - 4 International Adult Nutritionals 1,900 1,782 7
(1) 8
U.S. Adult Nutritionals 1,232 1,254 (2) - (2)
Diagnostics -
Core Laboratory 4,386 4,063 8 - 8
Molecular 484 463 5 1 4
Point of Care 553 550 - - -
Rapid Diagnostics 2,072 540 n/m n/m n/m
Medical Devices -
Rhythm Management 2,198 2,132 3 1 2
Electrophysiology 1,561 1,353 15 1 14
Heart Failure 646 643 - - -
Vascular (a) 2,929 2,892 1 1 -
Structural Heart 1,239 1,083 14 1 13
Neuromodulation 864 808 7 - 7
Diabetes Care 1,933 1,414 37 2 35
(a) Vascular Product Lines:
Coronary and Endovascular 2,778 2,727 2 1 1
n/m = percent change is not meaningful.
Insertable Cardiac Monitor (ICM) sales, which had previously been reported Note: in Electrophysiology, are now included in Rhythm Management. Historic
periods have been adjusted to reflect this change.
In order to compute results excluding the impact of exchange rates, current yearU.S. dollar sales are multiplied or divided, as appropriate, by the current year average foreign exchange rates and then those amounts are multiplied or divided, as appropriate, by the prior year average foreign exchange rates.
The Established Pharmaceutical Products segment is focused on several key emerging markets includingIndia ,Russia ,China andBrazil . Excluding the impact of foreign exchange, total sales in these key emerging markets increased 7.9 percent in 2019 due to growth in several geographies includingChina ,Brazil ,Russia andIndia . In 2018, excluding the impact of foreign exchange, total sales in these key emerging markets increased 7.4 percent as sales inIndia andChina experienced double-digit growth. Excluding the impact of foreign exchange, sales inEstablished Pharmaceuticals' other emerging markets increased 5.6 percent in 2019 and 5.8 percent in 2018. Total Nutritional Products sales increased 4.8 percent in 2019 and 4.9 percent in 2018, excluding the impact of foreign exchange. In 2019, the 4.6 percent increase in International Pediatric Nutritional sales, excluding the effect of foreign exchange, was driven by growth across Abbott's portfolio, including Similac and PediaSure in various countries inAsia andLatin America and Pedialyte inLatin America . This growth was partially offset by challenging market dynamics in theGreater China infant category. The 7.2 percent increase in 2018 International Pediatric Nutritional sales, excluding the effect of foreign exchange, was driven primarily by growth inAsia andLatin America .
In
theU.S. Pediatric Nutritional business, the 1.9 percent increase in 2019 sales reflects growth in Pedialyte and PediaSure. 2018 U.S. Pediatric Nutritional sales increased 3.7 percent primarily due to above-market performance in Abbott's infant and toddler brands, including Similac and Pedialyte. 27 In the International Adult Nutritional business, the 10.9 percent increase in 2019 sales, excluding the effect of foreign exchange, reflects continued growth of Ensure, Abbott's market-leading complete and balanced nutrition brand, and Glucerna, Abbott's market-leading diabetes-specific nutrition brand in several countries. In 2018, the 8.0 percent sales increase in the International Adult Nutritional business, excluding the effect of foreign exchange, was led by growth of Ensure and Glucerna inAsia andLatin America . In 2019,U.S. Adult Nutritional sales were unchanged from 2018 due to the impact of Abbott's discontinuation of a non-core product line during the third quarter of 2018 that was offset by growth in other areas of the business. In 2018, the 1.7 percent decrease inU.S. Adult Nutritional was also primarily driven by the wind down of this non-core product line. Total Diagnostic Products sales increased 5.9 percent in 2019 and 33.6 percent in 2018, excluding the impact of foreign exchange. The sales increase in 2019 was driven by above-market growth inCore Laboratory in theU.S. and internationally, where Abbott is achieving continued adoption of its Alinity family of diagnostic instruments. InJuly 2019 , Abbott receivedU.S. FDA approval for its "Alinity s" blood and plasma screening system and several testing assays. The 6.3 percent decrease in 2019 Molecular sales, excluding the effect of foreign exchange, reflects the negative impact of lower non-governmental organization purchases inAfrica . InMarch 2019 , Abbott announced that it obtained CE Mark for its "Alinity m" molecular diagnostics system and several testing assays. InRapid Diagnostics , sales growth in 2019 in various areas, including infectious disease testing in developed markets and cardio-metabolic testing, was mostly offset by lower than expected infectious disease testing sales inAfrica . In 2018, the increase in total Diagnostic Products sales included the acquisition of Alere, which was completed onOctober 3, 2017 . Excluding the impact of the acquisition, as well as the impact of foreign exchange, sales in the Diagnostic Products segment in 2018 increased 6.5 percent. The 2018 increase in sales was primarily driven by above-market growth inCore Laboratory in theU.S. and internationally. In 2018, Abbott accelerated the roll out of its Alinity systems forCore Laboratory inEurope . Excluding the effect of foreign exchange, total Medical Devices sales grew 10.5 percent and 9.0 percent in 2019 and 2018, respectively. The 2019 sales increase was driven by double-digit growth in Diabetes Care, Structural Heart, Electrophysiology and Heart Failure. The 2018 sales increase was driven by growth in several areas, including double-digit growth in Diabetes Care, Electrophysiology and Structural Heart. The 2019 and 2018 growth in Diabetes Care revenue was driven by continued growth of FreeStyle Libre, Abbott's continuous glucose monitoring system, internationally and in theU.S. In 2019, Freestyle Libre sales totaled$1.842 billion , which reflected a 69.8 percent increase over 2018 sales, excluding the effect of foreign exchange. InJuly 2018 , Abbott receivedU.S. FDA approval of its FreeStyle Libre 14 day sensor, making it the longest lasting wearable glucose sensor available. InOctober 2018 , Abbott obtained CE Mark for its Freestyle Libre 2 system, a next-generation product offering with optional real-time alarms. The 2019 growth in Structural Heart revenue was broad-based across several areas of the business, including MitraClip, Abbott's market-leading device for the minimally invasive treatment of mitral regurgitation (MR), a leaky heart valve. During the first quarter of 2019, Abbott receivedU.S. FDA approval for a new, expanded indication for MitraClip to treat clinically significant secondary MR as a result of underlying heart failure. This new indication expands the number of people with MR that can be treated with the MitraClip device. InJuly 2019 , Abbott receivedU.S. FDA approval of the next generation of its MitraClip device, which includes a new leaflet grasping enhancement, an expanded range of clip sizes and facilitation of procedure assessment in real time to offer doctors further options when treating mitral valve disease. In 2018, growth in Structural Heart was driven by several product areas including MitraClip and the AMPLATZER® PFO occluder, a device designed to close a hole-like opening in the heart. InSeptember 2018 , Abbott announced positive clinical results from its COAPT study, which demonstrated that MitraClip improved survival and clinical outcomes for select patients with functional MR. InSeptember 2019 , Abbott announced additional data from its COAPT trial that shows that MitraClip is projected to increase life expectancy and quality of life compared to guideline-directed medical therapy alone in heart failure patients with secondary MR.
In 2019, the growth in Electrophysiology revenue reflects higher sales of
cardiac diagnostic and ablation catheters in both the
InJanuary 2019 , Abbott announcedU.S. FDA approval of its TactiCath® contact force ablation catheter, Sensor Enabled™, which is designed to help physicians treat atrial fibrillation, a form of irregular heartbeat. In 2018, the growth in Electrophysiology was led by higher sales in cardiac mapping and ablation catheters. InMay 2018 , Abbott announcedU.S. FDA clearance of the Advisor HD Grid Mapping Catheter, Sensor Enabled, which creates detailed maps of the heart and expands Abbott's electrophysiology product portfolio. 28 In 2019, the growth in Heart Failure revenue was driven by rapid market adoption in theU.S. of Abbott's HeartMate 3® Left Ventricular Assist Device (LVAD) following FDA approval inOctober 2018 as a destination (long-term use) therapy for people living with advanced heart failure as well as higher sales of Abbott's CardioMEMS® heart failure monitoring system. InMarch 2019 , Abbott announced new data from its MOMENTUM 3 clinical study, the largest randomized controlled trial to assess outcomes in patients receiving a heart pump to treat advanced heart failure, which demonstrated HeartMate 3 improved survival and clinical outcomes in this patient population. In 2018, growth in international Heart Failure sales was offset by lowerU.S. sales. In Vascular, excluding the effect of foreign exchange, sales in 2019 were flat as the 1.3 percent increase in coronary and endovascular product sales, which includes drug-eluting stents, balloon catheters, guidewires, vascular imaging/diagnostics products, vessel closure, carotid and other coronary and peripheral products, was offset by reductions in royalty and contract manufacturing revenue. In 2018, growth in Vascular imaging, vessel closure and other endovascular revenues was partially offset by lower DES sales due to lower U.S. market share and price erosion in various markets. During the second quarter of 2018, Abbott received approval from theU.S. FDA for the XIENCE Sierra Drug Eluting Stent System, the newest generation of its coronary stent system. During the second quarter of 2018, the XIENCE Sierra Drug Eluting Stent System also received national reimbursement inJapan to treat people with coronary artery disease. In Rhythm Management, higher 2019 international sales, excluding the effect of foreign exchange, were offset by a 4.4 percent decrease inU.S. revenue. In 2018, market share gains in the new patient segment for Rhythm Management and theU.S. launch of Abbott's Confirm Rx® Insertable Cardiac Monitor (ICM), the world's first and only smartphone-compatible ICM designed to help physicians remotely identify cardiac arrhythmias, were partially offset by replacement cycle dynamics. In 2019, the 2.4 percent decline in Neuromodulation sales, excluding the effect of foreign exchange, reflects a 4.2 percent decline inU.S. sales. In 2018, the growth in Neuromodulation reflects higher revenue for various products for the treatment of chronic pain and movement disorders.
Abbott has periodically sold product rights to non-strategic products and has recorded the related gains in net sales in accordance with Abbott's revenue recognition policies as discussed in Note 1 to the consolidated financial statements. Related net sales were not significant in 2019, 2018 and 2017.
The expiration of licenses and patent protection can affect the future revenues and operating income of Abbott. There are no significant patent or license expirations in the next three years that are expected to materially affect Abbott.
InApril 2017 , Abbott received a warning letter from theU.S. FDA related to its manufacturing facility inSylmar, CA which was acquired by Abbott onJanuary 4, 2017 as part of the acquisition of St. Jude Medical. This facility manufactures implantable cardioverter defibrillators, cardiac resynchronization therapy defibrillators, and monitors. The warning letter relates to theFDA's observations from an inspection of this facility. Abbott has prepared a comprehensive plan of corrective actions which has been provided to the FDA.
Abbott is continuing to execute the corrective actions in the plan.
Operating Earnings
Gross profit margins were 52.5 percent of net sales in 2019, 51.3 percent in 2018 and 47.5 percent in 2017. In 2019, the increase primarily reflects lower intangible amortization expense and lower integration and restructuring costs. In 2018, the increase primarily reflects lower inventory step-up amortization related to the St. Jude Medical and Alere acquisitions and margin improvements in various businesses. Research and development (R&D) expense was$2.4 billion in 2019,$2.3 billion in 2018, and$2.3 billion in 2017 and represented a 6.1 percent increase in 2019, and a 1.7 percent increase in 2018. The increase in R&D spending in 2019 primarily reflects higher spending on the acquisition of R&D assets which were immediately expensed. In 2019, spending on R&D assets totaled$116 million and included the acquisition of an R&D asset valued at$102 million that was acquired in conjunction with the acquisition ofCephea Valve Technologies, Inc. In 2018, Abbott acquired R&D assets valued at$47 million which were also immediately expensed. The 2019 increase in R&D expense was also driven by higher R&D spending in various businesses, primarily in Medical Devices, partially offset by the favorable effect of foreign exchange. The 2018 increase in R&D expenses was primarily due to higher spending on various projects, partially offset by lower restructuring and integration costs. In 2019, R&D expenditures totaled$1.2 billion for the Medical Devices segment,$553 million for the Diagnostic Products segment,$193 million for the Nutritional Products segment and$185 million for theEstablished Pharmaceutical Products segment. 29 Selling, general and administrative (SG&A) expenses were basically flat in 2019 and increased 6.1 percent in 2018 versus the respective prior year. In 2019, the favorable effect of foreign exchange and lower acquisition-related integration costs offset higher selling and marketing costs to drive continued growth across various businesses. The 2018 increase was primarily due to the impact of the acquisition of the Alere business inOctober 2017 , as well as higher spending to drive continued growth and market expansion in various businesses, partially offset by lower acquisition-related expenses.
Business Acquisitions
OnJanuary 4, 2017 , Abbott completed the acquisition of St. Jude Medical, a global medical device manufacturer, for approximately$23.6 billion , including approximately$13.6 billion in cash and approximately$10 billion in Abbott common shares, which represented approximately 254 million shares of Abbott common stock, based on Abbott's closing stock price on the acquisition date. The cash portion of the acquisition was funded through a combination of medium and long-term debt issued inNovember 2016 and a$2.0 billion 120-day senior unsecured bridge term loan facility which was subsequently repaid. As part of the acquisition, approximately$5.9 billion of St. Jude Medical's debt was assumed, repaid or refinanced by Abbott. The acquisition provides expanded opportunities for future growth and is an important part of the company's ongoing effort to develop a strong, diverse portfolio of devices, diagnostics, nutritionals and branded generic pharmaceuticals. The combined business competes in nearly every area of the cardiovascular device market, as well as in the neuromodulation market. In 2016, Abbott and St. Jude Medical agreed to sell certain businesses to Terumo Corporation for approximately$1.12 billion . The sale included the St. Jude Medical Angio-Seal™ and Femoseal™ vascular closure and Abbott's Vado® Steerable Sheath businesses. The sale closed onJanuary 20, 2017 and no gain or loss was recorded in the Consolidated Statement of Earnings. OnOctober 3, 2017 , Abbott acquired Alere, a diagnostic device and service provider, for$51.00 per common share in cash, which equated to a purchase price of approximately$4.5 billion . As part of the acquisition, Abbott tendered for Alere's preferred shares for a total value of approximately$0.7 billion . In addition, approximately$3.0 billion of Alere's debt was assumed and subsequently repaid. The acquisition establishes Abbott as a leader in point of care testing, expands Abbott's global diagnostics presence and provides access to new products, channels and geographies. Abbott utilized a combination of cash on hand and debt to fund the acquisition. See Note 11 - Debt and Lines of Credit for further details regarding the debt utilized for the acquisition. In the third quarter of 2017, Alere entered into agreements to sell its Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run onBeckman Coulter analyzers to Quidel Corporation (Quidel). The transactions with Quidel reflect a total purchase price of$400 million payable at the close of the transaction,$240 million payable in six annual installments beginning approximately six months after the close of the transaction, and contingent consideration with a maximum value of$40 million . In the third quarter of 2017, Alere entered into an agreement withSiemens Diagnostics Holding II B.V. (Siemens) to sell its subsidiary,Epocal Inc. , for approximately$200 million payable at the close of the transaction. Alere agreed to divest these businesses in connection with the review by theFederal Trade Commission and theEuropean Commission of Abbott's agreement to acquire Alere. The sale to Quidel closed onOctober 6, 2017 , and the sale to Siemens closed onOctober 31, 2017 . No gain or loss on these sales was recorded in the Consolidated Statement of Earnings. OnJuly 17, 2017 , Abbott commenced a tender offer to purchase for cash the 1.77 million outstanding shares of Alere's Series B Convertible Perpetual Preferred Stock at a price of$402 per share, plus accrued but unpaid dividends to, but not including, the settlement date of the tender offer. This tender offer was subject to the satisfaction of certain conditions, including Abbott's acquisition of Alere and upon there being validly tendered (and not properly withdrawn) at the expiration date of the tender offer that number of shares of Preferred Stock that equaled at least a majority of the Preferred Stock issued and outstanding at the expiration of the tender offer. All conditions to the offer were satisfied and Abbott accepted for payment the 1.748 million shares of Preferred Stock that were validly tendered (and not properly withdrawn). The remaining shares were cashed out for an amount equal to the$400.00 per share liquidation preference of such shares, plus accrued but unpaid dividends, without interest. Payment for all of the shares of Preferred Stock was made in the fourth quarter of 2017. 30 Restructurings From 2017 to 2019, Abbott management approved restructuring plans as part of the integration of the acquisitions of St. Jude Medical into the Medical Devices segment, and Alere into the Diagnostic Products segment, in order to leverage economies of scale and reduce costs. Abbott recorded employee related severance and other charges of approximately$72 million in 2019,$52 million in 2018 and$187 million in 2017. Approximately$19 million in 2019,$5 million in 2018 and$5 million in 2017 are recorded in Cost of products sold, approximately$4 million in 2019 and$10 million in 2018 are recorded in Research and development, and approximately$49 million in 2019,$37 million in 2018 and$182 million in 2017 are recorded in Selling, general and administrative expense.
Abbott also assumed restructuring liabilities of approximately
From 2016 to 2019, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses including the nutritional, established pharmaceuticals and vascular businesses. Abbott recorded employee related severance and other charges of approximately$66 million in 2019,$28 million in 2018 and$120 million in 2017. Approximately$16 million in 2019,$10 million in 2018 and$7 million in 2017 are recorded in Cost of products sold, approximately$28 million in 2019,$2 million in 2018 and$77 million in 2017 are recorded in Research and development, and approximately$22 million in 2019,$16 million in 2018 and$36 million in 2017 are recorded in Selling, general and administrative expense. Additional charges of approximately$2 million in 2017 were recorded, primarily for accelerated depreciation.
Interest Expense and Interest (Income)
Interest expense decreased$156 million in 2019 due to the favorable impact of the euro debt financing inSeptember 2018 , as well as the repayment of debt in 2018 and the first quarter of 2019. In 2018, interest expense decreased primarily due to the net repayment of$8.3 billion of debt, partially offset by lower interest income due to lower cash balances. In 2017, interest expense increased primarily due to the$15.1 billion of debt issued in November of 2016 related to the financing of the St. Jude Medical acquisition which closed onJanuary 4, 2017 . Debt Extinguishment Costs
On
OnOctober 28, 2018 , Abbott redeemed approximately$4 billion of debt, which included$750 million principal amount of its 2.00% Notes due 2020;$597 million principal amount of its 4.125% Notes due 2020;$900 million principal amount of its 3.25% Notes due 2023;$450 million principal amount of its 3.4% Notes due 2023; and$1.300 billion principal amount of its 3.75% Notes due 2026. Abbott incurred a net charge of$153 million related to the early repayment of this debt and the unwinding of related interest rate swaps. OnMarch 22, 2018 , Abbott redeemed all of the$947 million principal amount of its 5.125% Notes due 2019, as well as$1.055 billion of the$2.850 billion principal amount of its 2.35% Notes due 2019. Abbott incurred a net charge of$14 million related to the early repayment of this debt.
Other (Income) Expense, net
Other (income) expense, net, for 2019, 2018 and 2017 includes approximately$225 million ,$160 million , and$160 million of income in each year, respectively, related to the non-service cost components of the net periodic benefit costs associated with the pension and post-retirement medical plans. 2017 includes a pre-tax gain of$1.163 billion on the sale of AMO to Johnson & Johnson.
Taxes on Earnings
The income tax rates on earnings from continuing operations were 9.6 percent in 2019, 18.8 percent in 2018 and 84.2 percent in 2017.
31
The Tax Cuts and Jobs Act (TCJA) was enacted in the
The TCJA reduces theU.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As ofDecember 31, 2018 , Abbott completed its accounting for all of the enactment date income tax effects of the TCJA. Effective for fiscal years beginning afterDecember 31, 2017 , the TCJA subjects taxpayers to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. InJanuary 2018 , the FASB staff provided guidance that an entity may make an accounting policy election to either recognize deferred taxes related to items that will give rise to GILTI in future years or provide for the tax expense related to GILTI in the year that the tax is incurred. Abbott has elected to treat the GILTI tax as a period expense and provide for the tax in the year that the tax is incurred.
In the fourth quarter of 2017, Abbott recorded an estimate of net tax expense of
The estimate was provisional and included a charge of approximately$2.89 billion for the transition tax, partially offset by a net benefit of approximately$1.42 billion for the remeasurement of deferred tax assets and liabilities, and a net benefit of approximately$10 million related to certain other impacts of the TCJA. In 2018, Abbott recorded$130 million of additional tax expense which increased the final tax expense related to the TCJA to$1.59 billion . The$130 million of additional tax expense reflects a$120 million increase in the transition tax from$2.89 billion to$3.01 billion and a$10 million reduction in the net benefit related to the remeasurement of deferred tax assets and liabilities. In 2019, taxes on earnings from continuing operations include an$86 million reduction to the transition tax. The$86 million reduction to the transition tax liability was the result of the issuance of final transition tax regulations by theU.S. Department of Treasury in 2019.
This adjustment decreased the cumulative net tax expense related to the TCJA to
The one-time transition tax is based on Abbott's total post-1986 earnings and profits (E&P) that were previously deferred fromU.S. income taxes. The tax computation also requires the determination of the amount of post-1986 E&P considered held in cash and other specified assets. As ofDecember 31, 2019 , the remaining balance of Abbott's transition tax obligation is approximately$1.33 billion , which will be paid over the next seven years as allowed by the TCJA. In 2019, taxes on earnings from continuing operations included$68 million of tax expense resulting from tax legislation enacted in the fourth quarter of 2019 inIndia . In 2018, taxes on earnings from continuing operations included$98 million of net tax expense related to the settlement of Abbott's 2014-2016 federal income tax audit in theU.S. , partial settlement of the former St. Jude Medical consolidated group's 2014 and 2015 federal income tax returns in theU.S. and audit settlements in various countries. In 2017, taxes on earnings from continuing operations include$435 million of tax expense related to the gain on the sale of the AMO business. Exclusive of these discrete items, tax expense was favorably impacted by lower tax rates and tax exemptions on foreign income primarily derived from operations inPuerto Rico ,Switzerland ,Ireland ,the Netherlands ,Costa Rica , andSingapore . Abbott benefits from a combination of favorable statutory tax rules, tax rulings, grants, and exemptions in these tax jurisdictions. See Note 16 to the consolidated financial statements for a full reconciliation of the effective tax rate to theU.S. federal statutory rate.
Discontinued Operations
Earnings from discontinued operations, net of tax of
OnJanuary 1, 2013 , Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott's research-based proprietary pharmaceuticals business. Abbott has retained all liabilities for allU.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income taxes attributable to AbbVie's business. AbbVie generally will be liable for all other taxes attributable to its business. 32
Business Disposition
InSeptember 2016 , Abbott announced that it entered into a definitive agreement to sell Abbott Medical Optics (AMO), its vision care business, to Johnson & Johnson for$4.325 billion in cash, subject to customary purchase price adjustments for cash, debt and working capital. The decision to sell AMO reflected Abbott's proactive shaping of its portfolio in line with its strategic priorities. InFebruary 2017 , Abbott completed the sale of AMO to Johnson & Johnson and recognized a pre-tax gain of$1.163 billion including working capital adjustments, which was reported in the Other (income) expense, net line of the Consolidated Statement of Earnings in 2017. Abbott recorded an after-tax gain of$728 million in 2017 related to the sale of AMO. The operating results of AMO up to the date of sale continued to be included in Earnings from continuing operations as the business did not qualify for reporting as discontinued operations. For 2017, the AMO loss before taxes included in Abbott's consolidated earnings was$18 million .
Research and Development Programs
Abbott currently has numerous pharmaceutical, medical devices, diagnostic and nutritional products in development.
Research and Development Process
In theEstablished Pharmaceuticals segment, the development process focuses on the geographic expansion and continuous improvement of the segment's existing products to provide benefits to patients and customers. AsEstablished Pharmaceuticals does not actively pursue primary research, development usually begins with work on existing products or after the acquisition of an advanced stage licensing opportunity.
Depending upon the product, the phases of development may include:
? Drug product development.
Phase I bioequivalence studies to compare a future Established Pharmaceutical's
? brand with an already marketed compound with the same active pharmaceutical
ingredient (API).
? Phase II studies to test the efficacy of benefits in a small group of patients.
? Phase III studies to broaden the testing to a wider population that reflects
the actual medical use.
? Phase IV and other post-marketing studies to obtain new clinical use data on
existing products within approved indications.
The specific requirements (e.g., scope of clinical trials) for obtaining regulatory approval vary across different countries and geographic regions. The process may range from one year for a bioequivalence study project to 6 or more years for complex formulations, new indications, or geographic expansion in specific countries, such asChina .
In the Diagnostics segment, the phases of the research and development process include:
? Discovery which focuses on identification of a product that will address a
specific therapeutic area, platform, or unmet clinical need.
Concept/Feasibility during which the materials and manufacturing processes are
? evaluated, testing may include product characterization and analysis is
performed to confirm clinical utility.
Development during which extensive testing is performed to demonstrate that the
? product meets specified design requirements and that the design specifications
conform to user needs and intended uses.
The regulatory requirements for diagnostic products vary across different countries and geographic regions. In theU.S. , the FDA classifies diagnostic products into classes (I, II, or III) and the classification determines the regulatory process for approval. While the Diagnostics segment has products in all three classes, the vast majority of its products are categorized as Class I or Class II. Submission of a separate regulatory filing is not required for Class I products. Class II devices typically require pre-market notification to the FDA through a regulatory filing known as a 510(k) submission. Most Class III products are subject to theFDA's Premarket Approval (PMA) requirements. Other Class III products, such as those used to screen blood, require the submission and approval of a Biological License Application (BLA). 33 In theEuropean Union (EU), diagnostic products are also categorized into different categories and the regulatory process, which has been governed by the European In Vitro Diagnostic Medical Device Directive, depends upon the category, with certain product categories requiring review and approval by an independent company, known as a Notified Body, before the manufacturer can affix a CE mark to the product to declare conformity to the Directive. Other products only require a self-certification process. In the second quarter of 2017, the EU adopted the new In Vitro Diagnostic Regulation (IVDR) which replaces the existing directive in the EU for in vitro diagnostic products. The IVDR will apply after a five-year transition period and imposes additional premarket and postmarket regulatory requirements on manufacturers of such products. In the Medical Devices segment, the research and development process begins with research on a specific technology that is evaluated for feasibility and commercial viability. If the research program passes that hurdle, it moves forward into development. The development process includes evaluation, selection and qualification of a product design, completion of applicable clinical trials to test the product's safety and efficacy, and validation of the manufacturing process to demonstrate its repeatability and ability to consistently meet pre-determined specifications. Similar to the diagnostic products discussed above, in theU.S. , medical devices are classified as Class I, II, or III. Most of Abbott's medical device products are classified as Class II devices that follow the 510(k) regulatory process or Class III devices that are subject to the PMA process.
In the EU, medical devices are also categorized into different classes and the regulatory process, which has been governed by the European Medical Device Directive and the Active Implantable Medical Device Directive, varies by class.
Each product must bear a CE mark to show compliance with the Directive. In the second quarter of 2017, the EU adopted the new Medical Devices Regulation (MDR) which replaces the existing directives in the EU for medical devices. The MDR will apply after a three to five-year (depending on product classification) transition period and imposes additional premarket and postmarket regulatory requirements on manufacturers of such products. Some products require submission of a design dossier to the appropriate regulatory authority for review and approval prior to CE marking of the device. For other products, the company is required to prepare a technical file which includes testing results and clinical evaluations but can self-certify its ability to apply the CE mark to the product. Outside theU.S. and the EU, the regulatory requirements vary across different countries and regions.
After approval and commercial launch of some medical devices, post-market trials may be conducted either due to a conditional requirement of the regulatory market approval or with the objective of proving product superiority.
In the Nutritional segment, the research and development process generally focuses on identifying and developing ingredients and products that address the nutritional needs of particular populations (e.g., infants and adults) or patients (e.g., people with diabetes). Depending upon the country and/or region, if claims regarding a product's efficacy will be made, clinical studies typically must be conducted. In theU.S. , the FDA requires that it be notified of proposed new formulations and formulation or packaging changes related to infant formula products. Prior to the launch of an infant formula or product packaging change, the company is required to obtain theFDA's confirmation that it has no objections to the proposed product or packaging. For other nutritional products, notification or pre-approval from the FDA is not required unless the product includes a new food additive. In some countries, regulatory approval may be required for certain nutritional products, including infant formula and medical nutritional products.
Areas of Focus
In 2020 and beyond, Abbott's significant areas of therapeutic focus will include the following:
Established Pharmaceuticals - Abbott focuses on building country-specific portfolios made up of high-quality medicines that meet the needs of people in emerging markets. Over the next several years, Abbott plans to expand its product portfolio in key therapeutic areas with the aim of being among the first to launch new off-patent and differentiated medicines. In addition, Abbott continues to expand existing brands into new markets, implement product enhancements that provide value to patients and acquire strategic products and technology through licensing activities. Abbott is also actively working on the further development of several key brands such as Creon™, Duphaston™, Duphalac™ and Influvac™. Depending on the product, the activities focus on development of new data, markets, formulations, delivery systems, or indications. 34
Medical Devices - Abbott's research and development programs focus on:
Cardiac Rhythm Management - Development of next-generation rhythm management
? technologies, including enhanced patient engagement and expanded magnetic
resonance (MR)-compatibility.
Heart Failure - Continued enhancements to Abbott's left ventricular assist
? systems and pulmonary artery heart failure system, including enhanced
connectivity, user-interfaces and remote patient monitoring.
? Electrophysiology - Development of next-generation technologies in the areas of
ablation, diagnostic, mapping and visualization and recording and monitoring.
? Vascular - Development of next-generation technologies for use in coronary and
peripheral vascular procedures.
? Structural Heart - Development of minimally-invasive devices for the repair and
replacement of heart valves and other structural heart conditions.
Neuromodulation - Development of next-generation technologies with enhanced
? patient and physician engagement and expanded MR-compatibility to treat chronic
pain, movement disorders and other indications.
Diabetes Care - Develop enhancements and additional indications for the
? FreeStyle Libre platform of continuous glucose monitoring products to help
patients improve their ability to manage diabetes.
Core Laboratory Diagnostics - Abbott continues to commercialize its next-generation blood screening, immunoassay, clinical chemistry and hematology systems, along with assays, including a focus on unmet medical need, in various areas including infectious disease, cardiac care, metabolics, and oncology, as well as informatics solutions to help optimize diagnostics laboratory performance and automation solutions to increase efficiency in laboratories.Molecular Diagnostics - Several new molecular in vitro diagnostic (IVD) tests and 'Alinity m', a next generation instrument system, are in various stages of development and launch.
Nutritionals - Abbott is focusing its research and development spend on platforms that span the pediatric and adult nutrition areas: gastro intestinal/immunity health, brain health, mobility and metabolism, and user experience platforms. Numerous new products that build on advances in these platforms are currently under development, including clinical outcome testing, and are expected to be launched over the coming years. Given the diversity of Abbott's business, its intention to remain a broad-based healthcare company and the numerous sources for potential future growth, no individual project is expected to be material to cash flows or results of operations over the next five years. Factors considered included research and development expenses projected to be incurred for the project over the next year relative to Abbott's total research and development expenses, as well as qualitative factors, such as marketplace perceptions and impact of a new product on Abbott's overall market position. There were no delays in Abbott's 2019 research and development activities that are expected to have a material impact on operations. While the aggregate cost to complete the numerous projects currently in development is expected to be material, the total cost to complete will depend upon Abbott's ability to successfully finish each project, the rate at which each project advances, and the ultimate timing for completion. Given the potential for significant delays and the risk of failure inherent in the development of medical device, diagnostic and pharmaceutical products and technologies, it is not possible to accurately estimate the total cost to complete all projects currently in development. Abbott plans to manage its portfolio of projects to achieve research and development spending that will be competitive in each of the businesses in which it participates, and such spending is expected to approximate 7.0 percent of total Abbott sales in 2020.
Abbott does not regularly accumulate or make management decisions based on the total expenses incurred for a particular development phase in a given period.
35
Goodwill
At December 31, 2019 , goodwill recorded as a result of business combinations
totaled $23.2 billion . Goodwill is reviewed for impairment annually in the
third quarter or when an event that could result in an impairment occurs, using
a quantitative assessment to determine whether it is more likely than not that
the fair value of any reporting unit is less than its carrying amount. The
income and market approaches are used to calculate the fair value of each
reporting unit. The results of the last impairment test indicated that the fair
value of each reporting unit was substantially in excess of its carrying value.
Financial Condition
Cash Flow
Net cash from operating activities amounted to $6.1 billion , $6.3 billion and
$5.6 billion in 2019, 2018 and 2017, respectively. The decrease in Net cash
from operating activities in 2019 was primarily due to an increased investment
in working capital, timing of pension contributions relative to 2018 and higher
income tax payments, partially offset by the favorable cash flow impact of
improved segment operating earnings and lower interest and acquisition-related
expenses. The increase in Net cash from operating activities in 2018 was
primarily due to higher segment operating earnings, continued improvements in
working capital management, timing of pension contributions and lower
acquisition-related expenses. The income tax component of cash from operating
activities in 2018 includes the non-cash impact of the $120 million adjustment
to the transition tax associated with the TCJA. The income tax component of
operating cash flow in 2017 includes the non-cash impact of $1.46 billion of net
tax expense related to the estimated impact of the TCJA.
While a significant portion of Abbott's cash and cash equivalents at December
31, 2019 , are reinvested in foreign subsidiaries, Abbott does not expect such
reinvestment to affect its liquidity and capital resources. Due to the
enactment of the TCJA, if these funds were needed for operations in the U.S. ,
Abbott does not expect to incur significant additional income taxes in the
future to repatriate these funds.
Abbott funded $382 million in 2019, $114 million in 2018 and $645 million in
2017 to defined benefit pension plans. Abbott expects pension funding of
approximately $387 million in 2020 for its pension plans. Abbott expects annual
cash flow from operating activities to continue to exceed Abbott's capital
expenditures and cash dividends.
Debt and Capital
AtDecember 31, 2019 , Abbott's long-term debt rating was A- byStandard & Poor's Corporation and A3 by Moody's. Abbott expects to maintain an investment grade rating. Abbott has readily available financial resources, including unused lines of credit that support commercial paper borrowing arrangements and provide Abbott with the ability to borrow up to$5 billion on an unsecured basis. The lines of credit are part of a 2018 revolving credit agreement that expires in 2023. Any borrowings under the current revolving credit agreement will bear interest, at Abbott's option, based on either a base rate or Eurodollar rate, plus an applicable margin based on Abbott's credit ratings. In conjunction with the funding of the St. Jude Medical and Alere acquisitions and the assumption of St. Jude Medical's and Alere's existing debt, Abbott's total short-term and long-term debt increased to$27.9 billion atDecember 31, 2017 . The increase in debt included the following transactions:
In the first quarter of 2017, as part of the acquisition of St. Jude Medical,
approximately
refinanced by Abbott. This included the exchange of certain St. Jude Medical
debt obligations with an aggregate principal amount of approximately
? billion for approximately
this exchange, approximately
remained outstanding. There were no significant costs associated with the
exchange of this debt. In addition, during the first quarter of 2017, Abbott
assumed and subsequently repaid approximately$2.8 billion of various St. Jude Medical debt obligations. 36
In 2017, Abbott borrowed
loan agreement and borrowed
from such borrowings were used to finance the acquisition of Alere, to repay
certain indebtedness of Abbott and Alere, and to pay fees and expenses in
connection with the acquisition. The borrowings bore interest based on a
? Eurodollar rate, plus an applicable margin based on Abbott's credit ratings.
Abbott paid off the term loan in
paid off
the remaining
in conjunction with the acquisition of Alere, Abbott assumed and subsequently
repaid
In 2017, Abbott also paid off a
? borrowing during the year and issued 364-day yen-denominated debt, of which
respectively.
In 2018, Abbott committed to reducing its debt levels and onFebruary 16, 2018 , the board of directors authorized the early redemption of up to$5 billion of outstanding long-term notes. Redemptions under this authorization during 2018 included$0.947 billion principal amount of its 5.125% Notes due 2019 and$2.850 billion principal amount of its 2.35% Notes due 2019. Abbott incurred a net charge of$14 million related to the early repayment of this debt.
On
On
OnOctober 28, 2018 , Abbott redeemed$4.0 billion principal amount of its outstanding long-term debt. This amount is in addition to the$5 billion authorization discussed above. In conjunction with the redemption, Abbott unwound approximately$1.1 billion in interest rate swaps relating to the 3.40% Note due in 2023 and the 3.75% Note due in 2026. Abbott incurred a net charge of$153 million related to the early repayment of this debt and the unwinding of related interest rate swaps. The 2018 transactions described above, including the repayment of$2.8 billion under the 5-year term loan and$1.15 billion of borrowings under the lines of credit, resulted in the net repayment of approximately$8.3 billion of debt.
On
InSeptember 2019 , the board of directors authorized the early redemption of up to$5 billion of outstanding long-term notes. This bond redemption authorization superseded the board's previous authorization under which$700 million had not yet been redeemed. OnDecember 19, 2019 , Abbott redeemed the$2.850 billion outstanding principal amount of its 2.90% Notes due 2021. After redemption of the 2.90% Notes,$2.15 billion of the$5 billion debt redemption authorization remains available. OnNovember 19, 2019 , Abbott's wholly owned subsidiary, Ireland Financing DAC, completed a euro debt offering of €1.180 billion of long-term debt. The proceeds equated to approximately$1.3 billion . The Notes are guaranteed by Abbott. OnNovember 21, 2019 , Abbott borrowed ¥59.8 billion under a 5-year term loan and designated the yen-denominated loan as a hedge of its net investment in certain foreign subsidiaries. The term loan bears interest at TIBOR plus a fixed spread, and the interest rate is reset quarterly. The proceeds equated to approximately$550 million .
The 2019 transactions described above resulted in the repayment of approximately
of
InSeptember 2014 , the board of directors authorized the repurchase of up to$3.0 billion of Abbott's common shares from time to time. Under the program authorized in 2014, Abbott repurchased 36.2 million shares at a cost of$1.666 billion in 2015, 10.4 million shares at a cost of$408 million in 2016, 1.9 million shares at a cost of$130 million in 2018, and 6.3 million shares at a cost of$525 million in 2019 for a total of approximately$2.730 billion . InOctober 2019 , the board of directors authorized the repurchase of up to$3 billion of Abbott's common shares from time to time. The new authorization is in addition to the$270 million unused portion of the share repurchase program authorized in 2014. 37
OnApril 27, 2016 , the board of directors authorized the issuance and sale for general corporate purposes of up to 75 million common shares that would result in proceeds of up to$3 billion . No shares have been issued under this authorization. Abbott declared dividends of$1.32 per share in 2019 compared to$1.16 per share in 2018, an increase of approximately 14 percent. Dividends paid were$2.270 billion in 2019 compared to$1.974 billion in 2018. The year-over-year change in dividends paid primarily reflects the impact of the increase in the dividend rate. Working Capital Working capital was$4.8 billion atDecember 31, 2019 and$5.6 billion atDecember 31, 2018 . The decrease in working capital in 2019 reflects the presentation of$1.3 billion of Senior Notes due 2020 as current liabilities atDecember 31, 2019 , partially offset by an overall net increase in working capital of approximately$485 million due to changes in accounts receivable, inventory and accounts payable associated with the growth of the business. Abbott monitors the credit worthiness of customers and establishes an allowance against a trade receivable when it is probable that the balance will not be collected. In addition to closely monitoring economic conditions and budgetary and other fiscal developments, Abbott regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables. Abbott also monitors the potential for and periodically has utilized factoring arrangements to mitigate credit risk although the receivables included in such arrangements have historically not been a material amount of total outstanding receivables.
Capital Expenditures
Capital expenditures of$1.6 billion in 2019,$1.4 billion in 2018 and$1.1 billion in 2017 were principally for upgrading and expanding manufacturing and research and development facilities and equipment in various segments, investments in information technology, and laboratory instruments placed with customers. Contractual Obligations The table below summarizes Abbott's estimated contractual obligations as ofDecember 31, 2019 . Payments Due By Period 2025 and (dollars in millions) Total 2020 20212022 20232024 Thereafter Longterm debt, including current maturities$ 18,049 $ 1,278 $
757 $ 3,527 $ 12,487
Interest on debt obligations 9,432 576 1,137 1,061 6,658
Operating lease obligations 1,138 238 352 195 353
Purchase commitments (a) 3,187 2,974 194 11 8Other longterm liabilities (b) 4,117 -
1,885 1,178 1,054 Total (c)$ 35,923 $ 5,066 $ 4,325 $ 5,972 $ 20,560
(a) Purchase commitments are for purchases made in the normal course of business
to meet operational and capital expenditure requirements.
(b) Other long-term liabilities include estimated payments for the transition tax
under the TCJA, net of applicable credits.
Net unrecognized tax benefits totaling approximately $580 million areexcluded from the table above as Abbott is unable to reasonably estimate the
period of cash settlement with the respective taxing authorities on such
items. See Note 16 - Taxes on Earnings from Continuing Operations for further (c) details. The company has employee benefit obligations consisting of pensions
and other post-employment benefits, including medical and life, which have
been excluded from the table. A discussion of the company's pension and
post-retirement plans, including funding matters is included in Note 15 -
Post-employment Benefits.
38
Contingent Obligations
Abbott has periodically entered into agreements with other companies in the
ordinary course of business, such as assignment of product rights, which has
resulted in Abbott becoming secondarily liable for obligations that Abbott was
previously primarily liable. Since Abbott no longer maintains a business
relationship with the other parties, Abbott is unable to develop an estimate of
the maximum potential amount of future payments, if any, under these
obligations. Based upon past experience, the likelihood of payments under these
agreements is remote. In addition, Abbott periodically acquires a business or
product rights in which Abbott agrees to pay contingent consideration based on
attaining certain thresholds or based on the occurrence of certain events.Legislative Issues
Abbott's primary markets are highly competitive and subject to substantial government regulations throughout the world. Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services. It is not possible to predict the extent to which Abbott or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors.
Recently Issued Accounting Standards
InDecember 2019 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which among other things, eliminates certain exceptions in the current rules regarding the approach for intraperiod tax allocations and the methodology for calculating income taxes in an interim period, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard becomes effective for Abbott in the first quarter of 2021 and early adoption is permitted. Abbott does not expect adoption of this new standard to have a material impact on its consolidated financial statements. InFebruary 2018 , the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act, from Accumulated other comprehensive income (loss) to retained earnings (Earnings employed in the business). Abbott adopted the new standard at the beginning of the fourth quarter of 2018. As a result of the adoption of the new standard, approximately$337 million of stranded tax effects were reclassified from Accumulated other comprehensive income (loss) to Earnings employed in the business. InOctober 2016 , the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. Abbott adopted the standard onJanuary 1, 2018 , using a modified retrospective approach and recorded a cumulative catch-up adjustment to Earnings employed in the business in the Consolidated Balance Sheet that was not significant.
In
The new methodology requires the recognition of an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset. The new standard will be effective for Abbott at the beginning of 2020. Adoption of the new standard will not have a material impact on the consolidated financial statements. InFebruary 2016 , the FASB issued ASU 2016-02, Leases, which requires lessees to measure and recognize a lease asset and liability on the balance sheet for most leases, including operating leases. Abbott adopted the new standard as ofJanuary 1, 2019 using the modified retrospective approach and applied the standard's transition provisions as ofJanuary 1, 2019 . As a result, no changes were made to theDecember 31, 2018 Consolidated Balance Sheet. Abbott elected to apply the package of practical expedients related to transition. These practical expedients allowed Abbott to carry forward its historical assessments of whether any existing contracts are or contain leases, the lease classification for each lease existing atJanuary 1, 2019 , and whether any initial direct costs for such leases qualified for capitalization. 39 The new lease accounting standard did not have a material impact on the amounts reported in the Consolidated Statement of Earnings but does have a material impact on the amounts reported in the Consolidated Balance Sheet. Adoption of the new standard resulted in the recording of approximately$850 million of new right of use (ROU) assets and additional liabilities for operating leases on the Consolidated Balance Sheet as ofJanuary 1, 2019 . InJanuary 2016 , the FASB issued ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities, which provides new guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. Abbott adopted the standard onJanuary 1, 2018 . Under the new standard, changes in the fair value of equity investments with readily determinable fair values are recorded in Other (income) expense, net within the Consolidated Statement of Earnings. Previously, such fair value changes were recorded in other comprehensive income. Abbott has elected the measurement alternative allowed by ASU 2016-01 for its equity investments without readily determinable fair values. These investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Changes in the measurement of these investments are being recorded in Other (income) expense, net within the Consolidated Statement of Earnings. As part of the adoption, the cumulative-effect adjustment to Earnings employed in the business in the Consolidated Balance Sheet for net unrealized losses on equity investments that were recorded in Accumulated other comprehensive income (loss) as ofDecember 31, 2017 was not significant. InMay 2014 , the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for accounting for revenue from contracts with customers and supersedes nearly all previously existing revenue recognition guidance. The core principle of the ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Abbott adopted the new standard as ofJanuary 1, 2018 , using the modified retrospective approach method. Under this method, entities recognize the cumulative effect of applying the new standard at the date of initial application with no restatement of comparative periods presented. The cumulative effect of applying the new standard resulted in an increase to Earnings employed in the business in the Consolidated Balance Sheet of$23 million which was recorded onJanuary 1, 2018 . The new standard has been applied only to those contracts that were not completed as ofJanuary 1, 2018 . The impact of adopting ASU 2014-09 was not significant to individual financial statement line items in the Consolidated Balance Sheet and Consolidated Statement of Earnings.
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.
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