FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / 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 l3 or l5(d) of the Securities Exchange Act of l934 during
the preceding l2 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
As of October 31, 1999, Abbott Laboratories had 1,522,169,258 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 Nine Months Ended
September 30 September 30
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net Sales .......................................... $ 3,120,662 $ 3,035,767 $ 9,662,859 $ 9,147,433
----------- ----------- ----------- -----------
Cost of products sold .............................. 1,584,643 1,375,010 4,444,416 3,952,753
Research and development ........................... 276,240 292,078 858,361 879,086
Selling, general and administrative ................ 683,631 665,202 2,051,631 2,029,539
----------- ----------- ----------- -----------
Total Operating Cost and Expenses ............. 2,544,514 2,332,290 7,354,408 6,861,378
----------- ----------- ----------- -----------
Operating Earnings ................................. 576,148 703,477 2,308,451 2,286,055
Net interest expense ............................... 19,545 26,373 67,812 78,346
Income from TAP Holdings Inc. joint venture ........ (109,925) (69,271) (277,830) (189,907)
Net foreign exchange loss .......................... 3,441 5,551 21,922 20,575
Other (income) expense, net ........................ 15,689 2,322 30,775 6,375
----------- ----------- ----------- -----------
Earnings Before Taxes ........................... 647,398 738,502 2,465,772 2,370,666
Taxes on earnings .................................. 181,271 206,780 690,416 663,786
----------- ----------- ----------- -----------
Net Earnings ....................................... $ 466,127 $ 531,722 $ 1,775,356 $ 1,706,880
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic Earnings Per Common Share .................... $0.31 $0.35 $1.17 $1.12
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted Earnings Per Common Share .................. $0.30 $0.34 $1.15 $1.10
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash Dividends Declared Per Common Share ........... $0.17 $0.15 $0.51 $0.45
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average Number of Common Shares Outstanding
Used for Basic Earnings Per Common Share ........ 1,521,521 1,520,914 1,519,765 1,524,556
Dilutive Common Stock Options ...................... 18,112 23,766 21,243 22,052
----------- ----------- ----------- -----------
Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options .............. 1,539,633 1,544,680 1,541,008 1,546,608
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Outstanding Common Stock Options Having No Dilutive
Effect........................................... 18,861 564 1,709 564
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes to 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)
Nine Months Ended
September 30
--------------------------
1999 1998
----------- -----------
Cash Flow From (Used in) Operating Activities:
Net earnings ............................................. $ 1,775,356 $ 1,706,880
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization ............................ 631,893 591,032
Trade receivables ........................................ (7,327) 14,671
Inventories .............................................. (63,329) (135,017)
Other, net ............................................... 196,682 90,547
----------- -----------
Net Cash From Operating Activities ..................... 2,533,275 2,268,113
----------- -----------
Cash Flow From (Used in) Investing Activities:
Acquisitions of businesses, net of cash acquired ......... -- (242,713)
Acquisitions of property and equipment ................... (734,516) (703,677)
Investment securities transactions ....................... (43,209) (135,897)
Other .................................................... 7,763 11,040
----------- -----------
Net Cash Used in Investing Activities .................. (769,962) (1,071,247)
----------- -----------
Cash Flow From (Used in) Financing Activities:
Repayments of commercial paper, net ...................... (874,000) (301,000)
Proceeds from issuance of long-term debt ................. -- 400,000
Other borrowing transactions, net ........................ (6,445) (51,748)
Common share transactions ................................ 101,678 (581,419)
Dividends paid ........................................... (744,544) (663,824)
----------- -----------
Net Cash Used in Financing Activities .................. (1,523,311) (1,197,991)
----------- -----------
Effect of exchange rate changes on cash and
cash equivalents ......................................... (17,162) (5,429)
----------- -----------
Net Increase in Cash and Cash Equivalents .................. 222,840 (6,554)
Cash and Cash Equivalents, Beginning of Year ............... 308,230 230,024
----------- -----------
Cash and Cash Equivalents, End of Period ................... $ 531,070 $ 223,470
----------- -----------
----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
Abbott Laboratories and Subsidiaries
Condensed Consolidated Balance Sheet
(dollars in thousands)
September 30 December 31
1999 1998
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ................................................. $ 531,070 $ 308,230
Investment securities ..................................................... 99,310 75,087
Trade receivables, less allowances of $185,487 in 1999 and $190,952 in 1998 1,883,498 1,950,058
Inventories:
Finished products ....................................................... 713,404 697,494
Work in process ......................................................... 326,916 345,776
Materials................................................................ 376,985 367,339
------------ ------------
Total inventories ..................................................... 1,417,305 1,410,609
Prepaid expenses, income taxes, and other receivables ....................... 1,946,866 1,809,152
------------ ------------
Total Current Assets .................................................. 5,878,049 5,553,136
------------ ------------
Investment Securities Maturing after One Year ............................... 666,454 783,842
------------ ------------
Property and Equipment, at Cost ............................................. 9,654,073 9,396,236
Less: accumulated depreciation and amortization ........................... 4,937,539 4,657,393
------------ ------------
Net Property and Equipment ................................................ 4,716,534 4,738,843
Deferred Charges, Intangible and Other Assets............................... 2,313,188 2,140,392
------------ ------------
$ 13,574,225 $ 13,216,213
------------ ------------
------------ ------------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term borrowings and current portion of long-term debt ............... $ 872,791 $ 1,759,076
Trade accounts payable .................................................... 1,191,383 1,056,641
Salaries, income taxes, dividends payable, and other accruals ............. 2,264,833 2,146,409
------------ ------------
Total Current Liabilities ............................................. 4,329,007 4,962,126
------------ ------------
Long-Term Debt .............................................................. 1,336,425 1,339,694
------------ ------------
Other Liabilities and Deferrals ............................................ 1,239,140 1,200,732
------------ ------------
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: 1999: 1,539,606,033; 1998: 1,533,774,332 ........................ 1,516,933 1,231,079
Earnings employed in the business ......................................... 5,815,966 4,782,349
Accumulated other comprehensive income (loss) ............................. (380,528) (227,701)
Common shares held in treasury, at cost -
Shares: 1999: 17,671,334; 1998: 17,710,838 ............................. (258,055) (46,735)
Unearned compensation - restricted stock awards............................ (24,663) (25,331)
------------ ------------
Total Shareholders' Investment.......................................... 6,669,653 5,713,661
------------ ------------
$ 13,574,225 $ 13,216,213
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
Abbott Laboratories and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements have
been prepared pursuant to rules and regulations of the Securities and Exchange
Commission and, therefore, do not include all information and footnote
disclosures normally included in audited financial statements. However, in the
opinion of management, all adjustments (which include only normal adjustments)
necessary to present fairly the results of operations, financial position and
cash flows have been made. It is suggested that these statements be read in
conjunction with the financial statements included in Abbott's Annual Report on
Form 10-K for the year ended December 31, 1998.
Note 2 - Supplemental Financial Information
(dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ----------
Net interest expense:
Interest expense .... $ 35,002 $ 41,027 $ 111,842 $ 119,388
Interest income ..... (15,457) (14,654) (44,030) (41,042)
--------- --------- --------- ----------
Total .................. $ 19,545 $ 26,373 $ 67,812 $ 78,346
--------- --------- --------- ----------
--------- --------- --------- ----------
Note 3 - Taxes on Earnings
Taxes on earnings reflect the estimated annual effective tax rates. The
effective tax rates are less than the statutory U.S. Federal income tax rate
principally due to tax incentive grants related to subsidiaries operating in
Puerto Rico, the Dominican Republic, Ireland, the Netherlands, and Italy.
Note 4 - Litigation and Environmental Matters
Abbott is involved in various claims and legal proceedings including numerous
antitrust suits and investigations in connection with the pricing of
prescription pharmaceuticals. These suits and investigations allege that
various pharmaceutical manufacturers have conspired to fix prices for
prescription pharmaceuticals and/or to discriminate in pricing to retail
pharmacies by providing discounts to mail-order pharmacies, institutional
pharmacies and HMOs in violation of state and federal antitrust laws. The
suits have been brought on behalf of individuals and retail pharmacies and
name both Abbott and certain other pharmaceutical manufacturers and
pharmaceutical wholesalers and at least one mail-order pharmacy company as
defendants. The cases seek treble damages, civil penalties, injunctive and
other relief. During 1998, settlements were reached in the federal class
action lawsuit, whereby Abbott paid $57 million, and thirteen other separate
actions. Abbott has filed or intends to file a response to each of the
remaining complaints denying all substantive allegations.
In addition, 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 Abbott-owned locations.
The matters above are discussed more fully in Note 14 to the financial
statements included in Abbott's Annual Report on Form 10-K, which is available
upon request.
Subsequent to the end of the third quarter 1999, five lawsuits
were filed relating to the item discussed in Note 5. The lawsuits allege
failure to comply with the disclosure requirements of the Securities Exchange
Act of 1934, purport to be class actions brought on behalf of certain
purchasers of Abbott stock, and seek unspecified damages and other relief.
While it is not feasible to predict the outcome of such pending claims,
proceedings, investigations and remediation activities with certainty,
management is of the opinion that their ultimate disposition should not have
a material adverse effect on Abbott's financial position, cash flows, or
results of operations. Abbott expects that within the next year, legal
proceedings will occur which may result in a change in the estimated reserves
recorded by Abbott.
5
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited), continued
Note 5 - U.S. Food and Drug Administration Consent Decree
On September 28, 1999, Abbott announced that it had been notified by the
United States Government of alleged noncompliance with the Food and Drug
Administration's Quality System Regulation at Abbott's Diagnostics Division
facilities in Lake County, Ill. On November 2, 1999, Abbott announced that it
has reached agreement with the U.S. Food and Drug Administration to have a
consent decree entered which will settle issues involving Abbott's diagnostic
manufacturing operations in Lake County, Ill. The decree requires Abbott to
ensure its diagnostic manufacturing processes in Lake County, Ill. conform
with the FDA's current Quality System Regulation. The decree allows for the
continued manufacture and distribution of medically necessary diagnostic
products made in Lake County, Ill. However, Abbott is prohibited from
manufacturing or distributing certain diagnostic products until Abbott
ensures the processes in its Lake County, Ill., diagnostics manufacturing
operations conform with the current Quality System Regulation. Under the
terms of the consent decree, among other actions, Abbott has agreed to submit
to the FDA a proposed master compliance and validation plan to ensure its
processes conform with the current Quality System Regulation. The decree
requires Abbott to ensure its facilities are in conformance with the current
Quality System Regulation within one year. The consent decree allows Abbott
to export diagnostic products and components for sale and distribution
outside the United States if they meet the export requirements of the Federal
Food, Drug and Cosmetic Act. The consent decree resulted in a one-time charge
of $168.1 million, which includes charges associated with actions required by
the FDA, and a $100 million payment to the U.S. Government as follows (in
millions):
Payment to U.S. Government $100.0
Long-term asset impairments 24.4
Inventory exposures 22.7
Contractual obligations 21.0
------
$168.1
------
------
Note 6 - Comprehensive Income
(dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net Earnings ............................................... $ 466,127 $ 531,722 $ 1,775,356 $ 1,706,880
----------- ----------- ----------- -----------
Other comprehensive income (loss):
Foreign currency translation adjustments ................ (11,060) (30,947) (133,234) (66,701)
Tax (expense) benefit related to foreign
currency translation adjustments .................... 541 (463) 586 (463)
Unrealized gains (losses) on marketable equity securities (6,583) (850) (33,631) (16,245)
Tax (expense) benefit related to unrealized losses
on marketable equity securities ..................... 2,633 340 13,452 6,498
----------- ----------- ----------- -----------
Other comprehensive income (loss), net of tax .............. (14,469) (31,920) (152,827) (76,911)
----------- ----------- ----------- -----------
Comprehensive Income ....................................... $ 451,658 $ 499,802 $ 1,622,529 $ 1,629,969
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
As of September 30, 1999, the cumulative net of tax balances for foreign
currency translation loss adjustments and the unrealized (gains) on marketable
equity securities were $393,359, and ($12,831), respectively.
6
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited), continued
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 and services.
Abbott's products are generally sold directly to retailers, wholesalers,
hospitals, health care facilities, laboratories, physicians' offices and
government agencies throughout the world. Segments are identified as those
revenue divisions which report directly to the chief operating officer of
Abbott. Abbott's products are sold through six revenue segments as follows:
PHARMACEUTICAL PRODUCTS - U.S. sales of a broad line of pharmaceuticals.
DIAGNOSTIC PRODUCTS - Worldwide sales of diagnostic systems for blood
banks, hospitals, consumers, commercial laboratories and alternate-care sites.
HOSPITAL PRODUCTS - U.S. sales of intravenous and irrigation fluids and
related administration equipment, drugs and drug delivery systems, anesthetics,
critical care products and other medical specialty products for hospitals and
alternate-care sites.
ROSS PRODUCTS - U.S. sales of a broad line of adult and pediatric
nutritional products, pediatric pharmaceuticals and consumer products.
INTERNATIONAL - Non-U.S. sales of all Abbott's pharmaceutical, hospital
and nutritional products. Products sold by International are manufactured by
domestic segments and by international manufacturing locations.
CHEMICAL & AGRICULTURAL PRODUCTS - Worldwide sales of chemicals and
agricultural products for crop protection, forestry and animal health and a
supplier of bulk drugs for the Pharmaceutical Products, Hospital Products,
and International segments.
SEGMENT ACCOUNTING POLICIES - 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 sold
to segments at predetermined rates which approximate cost. Remaining costs, if
any, are not allocated to revenue segments. The following segment information
has been prepared in accordance with the internal accounting policies of Abbott,
as described above, and may not be presented in accordance with generally
accepted accounting principles.
7
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited), continued
Note 7 - Segment Information, continued
(dollars in millions)
Net Sales to Operating
External Customers Earnings
--------------------------------------- --------------------------------------
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30 September 30 September 30 September 30
------------------- ------------------ ------------------ ------------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ------- ------ ------- ------- ------- ------- ------
Pharmaceutical ....................... $ 565 $ 616 $ 1,778 $ 1,905 $ 269 $ 322 $ 923 $1,037
Diagnostics .......................... 752 691 2,227 2,018 (40) 114 211 314
Hospital ............................. 511 464 1,572 1,380 108 91 372 292
Ross ................................. 478 461 1,449 1,372 152 145 496 425
International ........................ 749 724 2,362 2,207 147 147 529 490
Chemical & Agricultural .............. 66 79 240 263 13 20 61 83
------- ------- ------- ------- ------- ------- ------- -------
Total Segments ....................... 3,121 3,035 9,628 9,145 649 839 2,592 2,641
Other................................. -- 1 35 2
------- ------- ------- -------
Net Sales ............................ $ 3,121 $ 3,036 $ 9,663 $ 9,147
------- ------- ------- -------
------- ------- ------- -------
Corporate and service functions .................................................. 38 35 102 108
Benefit plans costs .............................................................. 27 33 85 85
Net interest expense ............................................................. 20 26 68 78
Income from TAP Holdings Inc. .................................................... (110) (69) (278) (190)
Net foreign exchange (gain) loss ................................................. 3 6 22 21
Other expense (income), net ...................................................... 24 69 127 168
------- ------- ------- -------
Consolidated Earnings Before Taxes ............................................... $ 647 $ 739 $2,466 $2,371
------- ------- ------- -------
------- ------- ------- -------
The three months and nine months ended September 30, 1999 operating
earnings for Diagnostics reflect the charge of $168.1 described in Note 5.
Note 8 - Pending Acquisitions
On June 21, 1999, Abbott and ALZA Corporation announced that the companies
entered into a definitive agreement for Abbott to acquire ALZA, a research-based
pharmaceutical company with a growing portfolio of urology and oncology products
and leading drug delivery technologies.
On July 8, 1999, Abbott and Perclose, Inc. announced that the companies
entered into a definitive agreement for Abbott to acquire Perclose, the leading
arterial closure device manufacturer.
Abbott expects to account for each transaction as a pooling of interests.
8
FINANCIAL REVIEW
RESULTS OF OPERATIONS - THIRD QUARTER AND FIRST NINE MONTHS 1999 COMPARED WITH
SAME PERIODS IN 1998
The following table details sales by segment for the third quarter and first
nine months 1999:
(dollars in millions)
Net Sales to Percentage Net Sales to Percentage
External Customers Change* External Customers Change*
------------------ ---------- ------------------ -----------
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------ --------------------------------------------
1999 1998 1999 1998
------ ------- ------- ------
Pharmaceutical ........ $ 565 $ 616 (8.3) $1,778 $1,905 (6.7)
Diagnostics ........... 752 691 8.7 2,227 2,018 10.3
Hospital .............. 511 464 10.0 1,572 1,380 13.9
Ross .................. 478 461 3.9 1,449 1,372 5.6
International ......... 749 724 3.4 2,362 2,207 7.0
Chemical & Agricultural 66 79 (16.5) 240 263 (9.0)
------ ------ ------ ------
Total Segments ........ 3,121 3,035 2.8 9,628 9,145 5.3
Other ................. -- 1 35 2
------ ------ ------ ------
Net Sales ............. $3,121 $3,036 2.8 $9,663 $9,147 5.6
------ ------ ------ ------
------ ------ ------ ------
Total U.S. ............ $1,917 $1,894 1.2 $5,947 $5,667 4.9
------ ------ ------ ------
------ ------ ------ ------
Total International ... $1,204 $1,142 5.4 $3,716 $3,480 6.8
------ ------ ------ ------
------ ------ ------ ------
* Percentage changes are based on unrounded numbers.
Worldwide sales for the third quarter and first nine months reflect primarily
unit growth. Excluding the negative effect of the relatively stronger U.S.
dollar, sales increased 3.3 percent and 6.1 percent, respectively, over the
comparable 1998 periods. Pharmaceutical segment sales decreased primarily due
to volume shortfalls for Abbokinase, as the result of production issues more
fully described below, and Hytrin. Diluted earnings per common share
decreased 11.8 percent for the third quarter 1999 and increased 4.5 percent
for the first nine months 1999 over the same periods in 1998. Net earnings
decreased 12.3 percent for the third quarter 1999 and increased 4.0 percent
for the first nine months 1999, respectively, over the comparable 1998
periods. Earnings per share and net earnings were negatively affected 8 cents
and $121 million by the charges described in Note 5 relating to the FDA
consent decree.
Gross profit margin (sales less cost of products sold, including
freight and distribution expenses) was 49.2 percent for the 1999 third
quarter, compared to 54.7 percent for the 1998 third quarter. First nine
months 1999 gross profit margin was 54.0 percent, compared to 56.8 percent a
year earlier. Excluding the charges described in Note 5 relating to the FDA
consent decree, gross margins for the 1999 third quarter and first nine
months 1999 would have been 54.6 percent and 55.7 percent, respectively.
Gross margins, excluding the consent decree charges, for both periods were
affected by unfavorable product mix, primarily lower sales of
pharmaceuticals, partially offset by net payments related to the Hytrin
patent dispute.
Research and development expenses were $276.2 million for the third
quarter 1999 and $858.4 million for the first nine months 1999. Research and
development expenses represented 8.9 percent of net sales for both the third
quarter and first nine months 1999, compared to 9.6 percent in the comparable
1998 periods. The majority of research and development expenditures continues to
be concentrated on pharmaceutical and diagnostic products.
Selling, general and administrative expenses for the third quarter and
first nine months 1999 increased 2.8 percent and 1.1 percent, respectively, over
the comparable 1998 periods, due primarily to increased selling and marketing
support for new and existing products.
Abbott holds patents on Hytrin in the United States and several major
markets throughout the world. Abbott is facing a number of patent challenges
from generic manufacturers in the United States, and the ultimate outcome of
litigation cannot be predicted with certainty. In August 1999, Geneva
Pharmaceuticals, Inc. began shipments of generic Hytrin in the United States.
Abbott believes that the resulting generic competition will adversely impact
Abbott's Hytrin sales. For the first nine months of 1999, Abbott recorded U.S.
sales of Hytrin of $388 million and U.S. sales of Hytrin in 1998 amounted to
$542 million.
9
FINANCIAL REVIEW
(continued)
In late 1998, the U.S. Food and Drug Administration (FDA) suspended its
approval of the release of production lots of Abbott's pharmaceutical product
Abbokinase due to current Good Manufacturing Practice concerns raised by the FDA
following inspections of Abbott and its raw material supplier. In January 1999,
after Abbott revised the product's labeling to add additional warnings and the
FDA issued a health care provider information sheet, the FDA released certain
lots that were under its review. Since January, the FDA has established new
criteria for the release of additional lots. In a letter dated July 14, 1999,
the FDA raised additional concerns regarding these criteria and identified
several additional criteria which Abbott must address as part of its corrective
actions. Abbott continues to work with the FDA to resolve the remaining issues.
No additional lots have been released. Abbott cannot predict whether it will be
able to resolve the FDA's concerns or the effect of this matter on future sales
of Abbokinase. During 1998, Abbott sold approximately $277 million of
Abbokinase, primarily in the United States.
On September 28, 1999, Abbott announced that it had been notified by
the United States Government of alleged noncompliance with the Food and Drug
Administration's Quality System Regulation at Abbott's Diagnostics Division
facilities in Lake County, Ill. On November 2, 1999, Abbott announced that it
has reached agreement with the U.S. Food and Drug Administration to have a
consent decree entered which will settle issues involving Abbott's diagnostic
manufacturing operations in Lake County, Ill. The decree requires Abbott to
ensure its diagnostic manufacturing processes in Lake County, Ill. conform
with the FDA's current Quality System Regulation. The decree allows for the
continued manufacture and distribution of medically necessary diagnostic
products made in Lake County, Ill. However, Abbott is prohibited from
manufacturing or distributing certain diagnostic products until Abbott
ensures the processes in its Lake County, Ill., diagnostics manufacturing
operations conform with the current Quality System Regulation. Under the
terms of the consent decree, among other actions, Abbott has agreed to submit
to the FDA a proposed master compliance and validation plan to ensure its
processes conform with the current Quality System Regulation. The decree
requires Abbott to ensure its facilities are in conformance with the current
Quality System Regulation wihtin one year. The consent decree allows Abbott
to export diagnostic products and components for sale and distribution
outside the United States if they meet the export requirements of the Federal
Food, Drug and Cosmetic Act. The consent decree resulted in a one-time charge
of $168.1 million, which includes charges associated with actions required by
the FDA, and a $100 million payment to the U.S. Government as follows (in
millions):
Payment to U.S. Government $100.0
Long-term asset impairments 24.4
Inventory exposures 22.7
Contractual obligations 21.0
------
$168.1
------
------
Abbott believes fourth quarter 1999 earnings may be negatively impacted by as
much as two cents per share. For the full-year 2000, sales may be negatively
impacted up to $250 million and earnings per share may be negatively impacted
up to 10 cents per share.
LIQUIDITY AND CAPITAL RESOURCES AT SEPTEMBER 30, 1999 COMPARED WITH DECEMBER 31,
1998
Net cash from operating activities for the first nine months 1999 totaled $2.533
billion. Abbott expects annual cash flow from operating activities to continue
to approximate or exceed Abbott's capital expenditures and cash dividends.
Abbott has maintained its favorable bond ratings (AAA by Standard & Poor's
Corporation and Aa1 by Moody's Investors Service) and continues to have readily
available financial resources, including unused domestic lines of credit of
$2.505 billion at September 30, 1999. These lines of credit support domestic
commercial paper borrowing arrangements.
Abbott may issue up to $1.350 billion of senior debt securities in the
future under a registration statement filed with the Securities and Exchange
Commission on July 23, 1999. Of the $1.350 billion total, Abbott may issue up to
$600 million either in the form of debt securities or additional common shares
without par value. The remaining $750 million may only be issued in the form of
debt securities.
In December 1998, Abbott suspended purchases of its common shares and in
June 1999, the Board of Directors revoked its resolutions authorizing future
purchases of common shares. Abbott's short-term borrowings have decreased by
approximately $886 million since December 31, 1998, due, in part, to the
cessation of the common stock purchases.
10
FINANCIAL REVIEW
(continued)
LEGISLATIVE ISSUES
Abbott's primary markets are highly competitive and subject to substantial
government regulation. Abbott expects debate to continue at both the federal and
the state levels 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 prices, or reducing the rate of
price increases for medical products and services. International operations are
also subject to a significant degree of government regulation. 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, in the
Annual Report on Form 10-K, which is available upon request.
YEAR 2000
The Year 2000 ("Y2K") issue results from the inability of some computer programs
to identify the Year 2000 properly, potentially leading to errors or system
failure.
Abbott has organized its efforts to resolve the Y2K issue as follows:
internal information systems; landlord and embedded systems; electronic products
currently marketed or in the field; and suppliers providing products and
services to Abbott. Progress goals have been established in each area.
Internal information systems were inventoried and assessed, and
remediation started in 1992. All remediation and testing has been completed.
Landlord and embedded systems were inventoried and Y2K assessment
completed by May 1998. All critical systems were resolved by July 1999.
Abbott has assessed the ability of its medical electronic and software
products to cope with the Y2K issue. Customers may access Abbott's assessment on
Abbott's Web site. For i-STAT products and the recently acquired Murex product
line, a referral source for customers to contact the manufacturer is provided on
the Web site. Most of Abbott's products are not affected by the Y2K issue. For
those products requiring remediation, all have solutions available and Abbott is
working with customers to complete remediation that remains according to plan.
Beginning in March 1998, key suppliers were requested to certify that they
were Y2K compliant or, if not, to provide their plans to become compliant.
Ninety-eight percent of suppliers responded; Seventy-three percent of those
responding certified compliance currently and twenty-seven percent have stated
they have action plans for compliance in place. Follow-up with all key suppliers
is being conducted according to plan.
Each of the above areas began developing business continuity plans during
1998. All business continuity plans were completed by September 30, 1999.
Abbott has been working with customers to ensure that the supply chain is
capable of handling Y2K-related demand fluctuations. The amount of sales which
might occur in 1999 due to Y2K that would otherwise occur in 2000 is currently
estimated to be immaterial.
The most likely worst-case Y2K scenarios are subject to a wide range of
speculation. However, the business continuity plans assume Y2K failures are
primarily third party, are intermittent, are of relatively short duration, or
are localized at one site or region, primarily outside the United States.
Abbott's policy is to expense Y2K remediation costs as incurred. Y2K
remediation costs from inception through the end of 1999 are expected to
approximate $100 million, of which approximately one-third is expected to be
spent in 1999.
11
FINANCIAL REVIEW
(continued)
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union took effect and
introduced the euro as the official single currency of the eleven
participating member countries. On that date the currency exchange rates of
the participating countries were fixed against the euro. There is a
three-year transition to the euro, and at the end of 2001, the legacy
currencies will be eliminated. In 1997, Abbott organized an internal
cross-functional task force to address the euro issues and expects to be
ready for the full conversion to the euro. Costs required to prepare for the
euro are not material to Abbott's financial position, results of operations
or cash flows. The impact, if any, of the euro on Abbott's competitive
position is unknown.
PENDING ACQUISITIONS
On June 21, 1999, Abbott and ALZA Corporation announced that the companies
entered into a definitive agreement for Abbott to acquire ALZA, a research-based
pharmaceutical company with a growing portfolio of urology and oncology products
and leading drug delivery technologies.
On July 8, 1999, Abbott and Perclose, Inc. announced that the companies
entered into a definitive agreement for Abbott to acquire Perclose, the leading
arterial closure device manufacturer.
Abbott expects to account for each transaction as a pooling of interests.
Abbott remains committed to the ALZA and Perclose acquisitions. Both
companies have been advised of Abbott's recent consent decree with the U.S.
Government regarding Abbott's diagnostic manufacturing operations in Lake
County, Ill. Abbott understands that ALZA is analyzing the information and
its implications. Abbott and ALZA have informed the plaintiffs, in the
lawsuits brought by ALZA stockholders described in Part II, Item I below,
that Abbott and ALZA will not close the proposed merger before December 30,
1999, absent a new vote of the ALZA stockholders. Perclose has advised Abbott
that it intends to distribute to its stockholders a supplement to the proxy
statement/prospectus dated August 26, 1999, relating to the proposed merger
with Abbott and that its stockholders meeting to vote upon the merger is
scheduled for November 19, 1999.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995--A CAUTION CONCERNING
FORWARD-LOOKING STATEMENTS
Any statements made in this Form 10-Q that deal with information that
is not historical, such as statements concerning Abbott's anticipated
financial results, are forward-looking statements. As such, they are subject
to the occurrence of many events outside Abbott's control and to various risk
factors that could cause results to differ materially from those expressed in
such forward-looking statements. The risk factors include those described in
Abbott's reports filed with the Securities and Exchange Commission including
Form 10-K and include, without limitation, the risk factors associated with
complying with the consent decree described above and returning products to
market successfully.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in Abbott's 10-K for the fiscal year ended December
31, 1998, Abbott is involved in numerous antitrust suits and two
investigations regarding Abbott's pricing of pharmaceutical products. As of
October 29, 1999, 116 antitrust suits are pending in federal court and 15 are
pending in state courts. The prescription pharmaceutical pricing antitrust
suits allege that various pharmaceutical manufacturers and pharmaceutical
wholesalers have conspired to fix prices for prescription pharmaceuticals
and/or to discriminate in pricing to retail pharmacies by providing discounts
to mail-order pharmacies, institutional pharmacies, and HMOs in violation of
state and federal antitrust laws. The suits have been brought on behalf of
individual consumers and retail pharmacies and name both Abbott and certain
other pharmaceutical manufacturers and pharmaceutical wholesalers and at
least one mail-order pharmacy company as defendants. The cases seek treble
damages, civil penalties and injunctive and other relief. Abbott has filed or
intends to file a response to each of the complaints denying all substantive
allegations. The federal cases are pending in the United States District
Court for the Northern District of Illinois under the Multidistrict
Litigation Rules as In re: Brand Name Prescription Drug Antitrust Litigation,
MDL 997. The state cases are pending in the following state courts:
Tuscaloosa County and Clarke County, Alabama; Monterey County, California;
San Francisco County, California (five cases); San Joaquin County,
California; Prentiss County, Mississippi; San Miguel County, New Mexico;
Burleigh County, North Dakota; Hughes County, South Dakota; Cocke County,
Tennessee; and Marshall County, West Virginia. As previously reported, a
settlement agreement for the four consumer cases pending in Alameda County,
California and San Francisco County, California was approved by the court on
April 21, 1999. The amount to be paid in settlement is $6.2 million. An
appeal was filed challenging this settlement agreement. The appeal has been
withdrawn.
As previously reported, five cases involving Abbott's patents
for terazosin hydrochloride, a drug that Abbott sells under the trademark
Hytrin -Registered Trademark-, has been filed in the United States District
Court for the Northern District of Illinois. The other parties to these cases
were Geneva Pharmaceuticals, Inc. ("Geneva"), Novopharm Limited ("Novopharm"),
Invamed, Inc. ("Invamed"), Mylan Pharmaceuticals, Inc. ("Mylan"), and Warner
Chilcott, Inc.("Warner Chilcott"). Abbott sued each of these five other
corporations alleging patent infringement after learning that they had
applied to the Federal Food and Drug Administration for approval for a
generic version of terazosin hydrochloride. Each of these corporations
contends that Abbott's patent which covers their version of terazosin
hydrochloride is invalid and unenforceable. The Geneva, Invamed, and
Novopharm cases were all pending before the same judge, who, on September 1,
1998, entered a judgment in each of those cases ruling that the Abbott patent
at issue in those cases is invalid. Abbott appealed this ruling and on July
1, 1999, the appellate court affirmed the lower court's decision. Abbott
filed a petition for rehearing which was denied on August 5, 1999. Abbott has
filed a petition for a writ of certiorari in the United States Supreme Court.
On October 4, 1999, Mylan's motion in the appellate court for Summary
Affirmance, based on the September 1, 1998 ruling in the Geneva case, was
granted.
In April 1996, Zenith Laboratories, Inc. ("Zenith") sued Abbott
in the United States District Court for the District of New Jersey alleging
that Abbott had engaged in unfair competition, abuse of process, tortious
interference with prospective economic advantage, and fraud in attempting to
protect Hytrin from generic competition. Zenith sought money damages and a
declaration that certain of Abbott's patents covering terazosin hydrochloride
are invalid. Abbott filed counterclaims alleging patent infringement. On
March 31, 1998, Abbott and Zenith reached an agreement that resolved the
litigation between the parties. In the settlement, Zenith acknowledged the
validity of Abbott's terazosin hydrochloride patents and agreed to refrain
from selling a generic version of terazosin hydrochloride until the
expiration of one of Abbott's patents for terazosin hydrochloride (U.S.
Patent No. 4,251,532). On April 1, 1998, Abbott and Geneva reached an
agreement under which Geneva would not market its Food and Drug
Administration approved generic terazosin hydrochloride products until
resolution of the pending litigation between the parties. Abbott agreed to
make quarterly payments to Zenith and monthly payments to Geneva until the
date on which they could enter the market for terazosin hydrochloride under
their agreements. Under the agreements, both Zenith and Geneva would have
been free to enter the market for terazosin hydrochloride in the United
States if certain of Abbott's patents for terazosin hydrochloride were
determined to be invalid and if another company legally entered the generic
market in the United States. On August 12, 1999, Abbott and Geneva terminated
their April 1, 1998 agreement, and Geneva returned to Abbott a portion of the
payments held in escrow under the agreement. On August 13, 1999, Geneva
entered the market with its product.
In addition to the lawsuits Abbott has previously reported,
five new lawsuits have been brought concerning Abbott's agreements regarding
terazosin hydrochloride. On August 19, 1999, Drug Mart Pharmacy Corp. sued
Abbott, Geneva, and Zenith in the Supreme Court of New York, Kings County,
alleging that Abbott's agreements with Geneva and Zenith regarding terazosin
hydrochloride violate New York's antitrust laws. The case purports to be a
class action brought on behalf of indirect purchasers of terazosin
hydrochloride and seeks actual damages, treble damages, and other relief. On
August 30, 1999, Valley Drug Co. sued Abbott and Geneva in the United States
District Court for the Southern District of Florida, alleging Abbott's
agreement with Geneva regarding terazosin hydrochloride violates the federal
antitrust laws. It purports to be a class action and seeks actual damages,
treble damages, and other relief. On October 5, 1999, United Wisconsin
Services, Inc., Blue Cross & Blue Shield of Wisconsin, Inc., Compare Health
Insurance Corp., Unity Health Plans Insurance Corp., and Valley Health Plan
Inc. sued Abbott in the Circuit Court of Cook County, Illinois. The
plaintiffs allege Abbott violated the Illinois Fraud and Deceptive Trade
Practices Act by filing lawsuits based on allegedly "irrelevant" or "invalid"
terazosin hydrochloride patents and by entering into agreements with Geneva
and Zenith that had an adverse effect on competition. The case purports to be
a class action and seeks actual damages, punitive damages, interest, and
other relief. On October 19, 1999, Char-Mar Pharmacy, Inc. sued Abbott, Geneva,
and Zenith in the United States District Court for the Eastern District of
New York alleging that Abbott's agreements with Geneva and Zenith regarding
terazosin hydrochloride violate federal antitrust laws. The case purports to be
a class action and seeks actual damages, treble damages, and other relief.
Finally, on October 29, 1999, Ewald and Lavera Grosskrueger sued Abbott in
the Circuit Court of Cook County, Illinois. The plaintiffs allege Abbott
violated the Illinois Fraud and Deceptive Trade Practices Act by filing
lawsuits based on allegedly "irrelevant" or "invalid" terazosin hydrochloride
patents and by entering into agreements with Geneva and Zenith that had an
adverse effect on competition. The case purports to be a class action and
seeks actual damages, punitive damages, interest, and other relief. Abbott has
filed or intends to file a response to each complaint denying all substantive
allegations.
On September 28, 1999, Abbott announced that it had been
notified by the United States government of alleged noncompliance with the
Food and Drug Administration's Quality System Regulation at Abbott's
Diagnostics Division facilities in Lake County, Illinois. On
November 2, 1999, a consent decree was entered in the United States District
Court for the Northern District of Illinois which settles the issues
involving Abbott's diagnostic manufacturing operations in Lake County,
Illinois. The decree requires Abbott to make a payment of $100 million to
the United States government and to ensure its diagnostic manufacturing
processes in Lake County, Illinois conform with the Food and Drug
Administration's current Quality System Regulation. The consent decree does
not represent an admission by Abbott of any violation of the Federal Food,
Drug and Cosmetic Act or its regulations. The decree allows for the continued
manufacture and distribution of medically necessary diagnostic products made
in Lake County, Illinois, such as assays for hepatitis, retrovirus,
cardiovascular disease, cancer, thyroid disorders, fertility, drug
monitoring, and congenital and respiratory conditions. However, Abbott is
prohibited from manufacturing or distributing certain diagnostic products
until Abbott ensures the processes in its Lake County, Illinois diagnostics
manufacturing operations conform with the current Quality System Regulation.
Under the terms of the consent decree, among other actions, Abbott has agreed
to submit to the Food and Drug Administration a proposed master compliance
and validation plan to ensure its processes conform with the current Quality
System Regulation. The decree requires Abbott to ensure its facilities are
in conformance with the current Quality System Regulation within one year.
The consent decree does not affect Abbott's MediSense, i-STAT, hematology or
Murex products; the clinical chemistry products Abbott Spectrum -Registered
Trademark-, Aeroset -Registered Trademark-, and Alcyon -Registered
Trademark-; or any other Abbott divisions or products. The consent decree
allows Abbott to export diagnostic products and components for sale and
distribution outside the United States if they meet the export requirements
of the Federal Food, Drug and Cosmetic Act. Abbott believes that fourth quarter
1999 earnings may be negatively impacted by as much as two cents per share.
For the full-year 2000, sales may be negatively impacted up to $250 million
and earnings may be negatively impacted up to 10 cents per share.
As of November 3, 1999, Abbott had knowledge of nine lawsuits
naming Abbott as a defendant and claiming violations of the securities laws
in connection with alleged regulatory noncompliance described above. All of
these lawsuits were filed in the United States District Court for the
Northern District of Illinois. On October 20, 1999, Tom Anderson sued Abbott
and Miles White, its chief executive officer. Abbott and White were also
sued by Adele Brody on October 26, 1999; Solomon Glazer also on October 26,
1999; Deborah Isaac on October 29, 1999; and, on November 3, 1999, Feivel
Alter. Each of these cases (i) alleges that the defendants violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 by misrepresenting or
omitting material information about the alleged regulatory noncompliance,
(ii) purports to be a class action brought on behalf of purchasers of Abbott
stock between March 17, 1999, and September 29, 1999, and (iii) seeks
unspecified monetary damages and other relief. Abbott denies all of the
substantive allegations of these lawsuits and will vigorously defend against
them. The four other lawsuits all purport to be class action lawsuits filed
on behalf of a class of holders of ALZA Corporation ("ALZA") stock as of
August 16, 1999. On October 7, 1999, Gayle Stahl sued Abbott, Miles White,
ALZA, and ALZA's Chief Executive Officer, Ernest Mario. On October 13, 1999,
Galina Mikhailova sued Abbott, Miles White, ALZA, Ernest Mario, Gary Coughlan
(who is Abbott's Chief Financial Officer), Gary Flynn (who is Abbott's
Controller), and Abbott's board of directors. Abbott, Miles White, ALZA, and
Ernest Mario also were sued by Ted Dellas on October 15, 1999, and Sylvia
Piven on October 25, 1999. Each of these cases alleges the defendants
violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 by
soliciting the approval of ALZA's shareholders for a merger of ALZA with
Abbott by means of a proxy statement/prospectus, which the plaintiffs allege
contained materially false and misleading statements or omissions concerning
the alleged regulatory non-compliance described in the preceding paragraph.
Each of these four cases requests, in addition to unspecified damages and
other relief, a preliminary and permanent injunction stopping the pending
merger of ALZA with Abbott and requiring that the ALZA shareholders be given
another opportunity to vote on the merger. Abbott intends to oppose these
requests for an injunction, and denies all of the substantive allegations of
these suits. Abbott will vigorously defend these suits.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 8, 1999, Abbott Laboratories exchanged 4,985,475 shares of
its common stock for the 5,099,720 shares of Abbott Laboratories common stock
owned by MSI, Inc., a Utah corporation. No underwriters were involved and no
commission or other remuneration was paid or given directly or indirectly for
soliciting the exchange. The exchange was exempt from registration under Section
3(a)(9) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.1 By-Laws of Abbott Laboratories, as amended and
effective October 8, 1999 - attached hereto.
12. Statement re: computation of ratio of earnings to
fixed charges - attached hereto.
27. Financial Data Schedule - attached hereto.
b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter ended
September 30, 1999. In a Form 8-K dated September 29, 1999,
Abbott reported that on September 28, 1999, it announced
that it has been notified by the government of alleged
noncompliance with the Food and Drug Administration's
Quality System Regulation at Abbott's Diagnostics Division
facilities in Lake County, Illinois. In addition, in a Form
8-K dated November 4, 1999, Abbott reported that a consent
decree was entered in the United States District Court for
the Northern District of Illinois which settles the issues
involving Abbott's diagnostics manufacturing operations
in Lake County, Illinois.
SIGNATURE
Pursuant to the requirements of the Securities and 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
/s/ Gary L. Flynn
-------------------------------------------
Date: November 5, 1999 Gary L. Flynn, Vice President
and Controller (Principal Accounting Officer)