美國雅培 (ABT) 2004 Q3 法說會逐字稿

Good morning and thank you for standing by.

Welcome to the Abbott Laboratories third quarter 2004 earnings conference call.

All participants will be able to listen only until the question-and-answer portion of this call.

During the question-and-answer session you will be able to ask a question by pressing star 1 on your touch-tone phone.

Should you become disconnected throughout this conference call please dial 312-470-7008 and reference the Abbott Laboratories call.

This call is being recorded by Abbott.

With the exception of any participants' questions asked during the question-and-answer session the entire call, including the question-and-answer session, is material copyrighted by Abbott.

It cannot be recorded or rebroadcast without Abbott's express written permission.

I would now like to introduce Mr. John Thomas, Divisional Vice President, Investor Relations.

Sir, you may begin.

Thank you.

And good morning and thanks for joining us.

Also on today's call will be Tom Freyman our Executive Vice President, Finance, and Chief Financial Officer.

Tom will review the third quarter financial results, and I will cover the business operating highlights and our Medical Products and Pharmaceutical Products Groups.

Following our comments we'll take any questions you have as always.

Some statements made today may be forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995.

Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated.

Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in the Exhibit 99.1 of our quarterly report on Securities and Exchange Commission Form 10-Q for the quarter ended June 30th, 2004, and are incorporated by reference.

We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

Today's call, as in the past, non-GAAP financial measures will be used to help investors understand our ongoing business performance.

In accordance with the SEC's Regulation G, and in line with Abbott's standard reporting practice these non-GAAP financial measures are reconciled with the comparable GAAP financial measure in our earnings news release and Q&A issued this morning which is also available on our website at www.abbott.com.

So with that I will turn the call over to Tom.

Tom?

Thank you, John, and good morning, everyone.

For the third quarter we reported ongoing diluted earnings per share from continuing operations of 53 cents consistent with our previous guidance range of 51 to 53 cents.

Sales increased more than 10% in line with the sales guidance I provided on the second quarter earnings call of high single to low double-digit growth.

Sales performance in the quarter was driven by continued double-digit growth in our Pharmaceutical Products Group led by many of our key marketed products including Humira, TriCor, Kaletra, Ultane, and Omnicef.

In the Medical Products Group sales of vascular devices and Abbott diabetes care both grew double-digits including the acquisition of TheraSense.

Exchange favorably impacted sales by 1.8%.

Before I go through the remaining P&L line items I'd like to summarize a couple of items that should be netted to arrive at the correct impact on Abbott in the quarter.

Specifically the past joint venture increased its reserves for litigation related to previously disclosed civil litigation regarding Lupron, our share of this increase after taxes provided by TAP was reflected as a $40 million reduction in the income TAP joint P&L line item.

However, we had previously reserved $25 million at Abbott for this.

The net negative impact on the quarter was only $15 million.

We reversed our $25 million reserve this quarter since TAP has the item fully covered which is reflected in our P&L as a reduction and SG&A expense.

So going back to the review of our P&L for the quarter the gross margin ratio was 55.0% up slightly from prior-year.

This ratio was favorably impacted by product mix, foreign exchange, and a $20 million payment received from Gen-Probe that resolved litigation involving Gen-Probe's use of Abbott patented technologies.

These positive factors affecting the gross margin ratio were largely offset by higher manufacturing costs.

To summarize the unusual items in our ongoing results of 53 cents per share the 20 million favorable Gen-Probe payment was largely offset by the net TAP litigation expense of 15 million resulting in a net $5 million favorable impact.

With regard to investment spending combined SG&A and R&D investment increased nearly $100 million or roughly 7%.

SG&A increased more than 11% driven by continued investment in the worldwide launch of Humira and promotional spending on other major global pharmaceutical brands.

Previously mentioned reserve reversal reduced the rate of SG&A increase by 2.5 percentage points.

R&D investment declined around 4% reflecting the timing of investments related to our pharmaceutical pipeline and our vascular device program.

I'd note that R&D increased double-digits in the third quarter of last year, as well as the second quarter of this year.

Year-to-date R&D investment has increased mid single-digits and we're projecting a mid single-digit increase in the fourth quarter as well consistent with previous forecasts for full-year R&D growth.

As I mentioned earlier our share of the TAP joint venture income was down from the prior-year due mainly to an increase in litigation reserves recorded by TAP.

Tax rate for continuing operations was 24.2% consistent with previous guidance.

For the first time we're providing guidance for on going earnings per share from continuing operations for the fourth quarter of 66 to 68 cents.

We're forecasting low double-digit sales growth for the fourth quarter.

This includes an estimated favorable impact from foreign exchange of approximately 1%.

Our fourth quarter guidance combined with the actual performance through 3 quarters would result in forecasted full-year earnings per share consistent with the range of previous guidance.

This would reflect full-year performance in line with our original expectations with double-digit sales and EPS growth and strong increases in investment spending.

We completed our previously authorized share repurchase program in the third quarter and the Board of Directors has approved a new 50 million share repurchase program.

In summary it was another strong quarter as we saw solid performance across many of our broad-based businesses.

And we're pleased with the consistent growth we've been seeing overall.

With that let's turn to the business operating highlights beginning with the Medical Products Group.

John?

Thanks, Tom.

The Medical Products Group collectively delivered growth this quarter of more than 8%, and that's the fourth consecutive quarter of high single to low double-digit growth for MPG.

This quarter double-digit growth was achieved across a number of major businesses which include Abbott Diabetes Care, Point-of-Care, Abbott Vascular Devices, and Spinal Concepts.

In our Ross U.S.

Nutritional Business we announced on Monday as you may know our intent to acquire experimental and applied sciences, also known as EAS, this transaction further strengthens our presence in the Healthy Living Category, the fastest growing segment of the U.S.

Nutritional Industry.

EAS, which is the maker of the AdvantEdge and Myoplex Bars, will accelerate our entry into Weight Management and Sports Enhancement, 2 important segments within the Healthy Living Category.

With respect to the quarter sales growth at Ross was modest as forecasted and impacted by the difficult comparison versus the prior-year quarter which did include initial stocking to support the California WIC Infant Formula Contract.

In Adult Nutritionals double-digit sales growth was driven by the continued strength in sales of ZonePerfect Bars and Glucerna Weight Loss Shakes.

And also during the quarter Ross launched the latest edition to the Glucerna product line, Glucerna Crispy Snack Bars.

This new product leverages the product technology we acquired through ZonePerfect.

Looking ahead to the fourth quarter we expect Ross to deliver high single-digit sales growth excluding any incremental sales from a fourth quarter close of the recent EAS acquisition which would clearly add significantly to that growth rate.

I will now turn to the Worldwide Diagnostic Business where we reported growth of more than 10% including incremental revenues from the TheraSense acquisition and strong growth in Point-of-Care.

High single-digit growth outside the U.S. was offset by the expected decline in U.S. immunoassay sales.

On a sequential quarterly basis however, relative performance continues to improve in that segment of the business.

The launch of new assays also continues with more than 50 assays now launched year-to-date.

Third quarter assays launched on the ARCHITECT System included key cardiac assays, such as CKMB and Troponin-I, important gatekeeper assays that help drive instrument placements.

More than 25 additional assay launches are planned for the fourth quarter.

Also in the third quarter we placed more than 100 ARCHITECT Systems of which approximately 50% are combined into ci8200s integrating the immunoassay and clinical chemistry modules.

Placements outside the U.S. continue to be strong given the broader assay menu and greater depth of experience with the ARCHITECT platform outside the U.S.

In laboratories where we've placed the ci8200 Integrated System immunoassay shares increased more than 10%.

In the fourth quarter Worldwide Diagnostics, which is a reminder includes our 80-D segment, Abbott Diabetes Care, Abbott Molecular, and Point-of-Care is forecasted to achieve low double-digit sales growth.

Moving to Molecular Diagnostics normalized growth excluding the previously announced withdrawal of LCx Products was more than 10% this quarter.

Also in the quarter we announced an exclusive agreement with BioGenix to market an instrument that will automate the slide preparation for FISH test. [FISH lye] preparation for test ,such as PathVysion and UroVysion is currently a highly manual process with close to 30 individual steps.

The new automated FISH instrument will simplify the process of 3 steps, a significant reduction in the hands-on labor associated with processing these important assays.

Looking ahead to the fourth quarter sales growth in Molecular Diagnostics excluding LCx is expected to be strong double-digits.

Turning to Abbott Diabetes Care global sales growth of more than 45% included incremental sales of TheraSense.

Since the acquisitions our combined U.S. market share has increased now to 18.5%, gaining about 1.5 market share points in August alone.

We continue to -- with the global launches of the FreeStyle Mini and the MediSense Xceed with introductions this quarter in Germany and Northern Europe.

In the new product pipeline the FreeStyle Navigator, our continuous glucose monitor, is underactive review at FDA.

The key to success with a continuous monitor device, such as Navigator will be a replacement claim, which means patients can receive their numerical results and act upon these results without a finger stick confirmation from a traditional monitor.

To ensure we have enough data to support the claim we're initiating an additional 100 patients study to broaden the diversity of our Navigator clinical trial patient population.

The results of this study are expected in the first half of 2005 and we anticipate a subsequent FDA advisory panel.

So we anticipate launching the FreeStyle Navigator in the second half of 2005.

And looking forward to the fourth quarter we project strong double-digit sales growth in Abbott Diabetes Care which includes TheraSense.

In our Point-of-Care Business sales grew nearly 30%.

The continued ramp of the recently launched Troponin-I assays is resulting in an increased i-STAT instrument placements in addition, to expanded utilization of the current installed base.

Troponin-I knows the key cardiac marker that aides in the diagnosis of myocardial infarction.

Recent American Heart Association guidelines recommend that emergency rooms provide Troponin-I results in 30 to 60 minutes, virtually impossible with the traditional laboratory-based process. i-STAT, however, can provide a Troponin-I result in 10 minutes using a whole blood sample, eliminating the time associated with the sample transport and sample preparation, such as centrifuging and [alloquating.] Additional cardiac markers include CKMB and BMP will be launched on the i-STAT platform in 2005.

In Point-of-Care strong double-digit growth is expected as we look forward to the fourth quarter.

And finally in our Vascular Device Business sales grew more than 10% this quarter.

We announced this quarter also the initiation as you know of our enrollment in ZOMAXX I, our XUS drug-coated [stentrial.] This is a randomized non-inferiority study comparing ZoMaxx performance to that of Boston's Taxus Express Stent.

The 400-patient trial will be conducted in more than 30 centers in Europe, Australia, and New Zealand.

And the primary endpoint for this trial is a 9-month end-segment late loss.

And the primary investigator is Dr. Bernard Chevalier.

As a reminder our ZoMaxx Drug-coated Stent Program is comprised of 3-key components.

Our proprietary [asoprisnil] and analog ABT-578, Pharmacoat, our proprietary polymer coating, and TriMaxx, our novel stent platform.

At TCT TriMaxx received accolades from clinicians for its low-crossing profile, which is actually the lowest available, its flexibility and its conformability.

We also announced plans for ZOMAXX II, a 1,670-patient trial which will be conducted at 70 centers in North America.

The primary endpoint will be 9-month target vessel [revascularization] or TBR.

Also at TCT successful security trial results were presented and a security trial evaluated the EmboShield and Xact Stent for use in carotid applications in a high-risk population.

Based on the results Abbott has submitted a PMA for EmboShield and the Xact Stent.

We're planning to initiate a clinical trial in a low-risk patient population that will support broader use of these devices.

So as we look into the fourth quarter Abbott Vascular Devices is forecasting low double-digit growth.

And then finally with spinal concepts again we saw excellent growth of more than 50% driven by strong sales across the broad product portfolio.

And for the fourth quarter spinal concepts should continue to deliver strong double-digit growth.

So in summary the Medical Products Group continues to execute on its strategy to focus on the development of novel technologies to address the emerging needs of the higher growth segments of healthcare.

This side of our business remains an important component of our broad-based model and our commitment to deliver consistent, reliable growth.

Collectively the Medical Products Group is expected to deliver high single-digit to low double-digit growth as we look into the fourth quarter and also for the full-year, excluding any incremental benefit we might get on sales from EAS acquisition assuming we close that deal in the fourth quarter.

As we move on to pharmaceuticals, our Pharmaceutical Products Group delivered another strong quarter with the U.S. pharmaceutical business now achieving double-digit growth in 16 of the last 17 quarters.

So let me briefly walk you through this quarter's results by major product and then we'll highlight several of our late-stage pipeline products including several Phase II and III clinical trial results that we're looking forward to presenting over the next several weeks.

So let's begin with our immunology franchise and Humira which again delivered another strong quarter with 227 million in sales worldwide which is consistent with our expectations for the quarter and our projection of more than 800 million in sales globally for the full-year.

Outside the U.S. the launch is proceeding exceptionally well.

Humira is now approved in 54 countries and recently became the number one anti-TNF in Ireland.

In the U.S.

Humira's share of prescriptions for the rheumatoid arthritis indication continues to decline.

Our estimates suggests we are now capturing more than 1/3 of the new self-injectable prescriptions for RA.

Moving to HIV we submitted a supplemental new drug application for Kaletra in the quarter seeking a once daily dosing indication which should enhance patient choice and convenience.

Global sales this quarter grew more than 20% on track for double-digit growth for the full-year.

Kaletra remains the No. 1 protease inhibitor in the world and we anticipate continued double-digit growth in the fourth quarter.

In our anti-infectives franchise global Biaxin sales were down slightly, which is in line with our expectations.

Our once-daily formulation of Biaxin, known as Biaxin XL which has an improved side-effect profile over Biaxin IR now has approximately 65% of our U.S.

Biaxin business.

We hope to improve that rate of conversion as the flu season gets started which, as you know, is just beginning.

With regard to Omnicef the FDA recently approved a new 250 milligram oral suspension dosage formulation.

This new more concentrated dose offers the same efficacy as the previous 125 milligram dose, but allows patients to administer fewer teaspoons per dose to their children -- parents, excuse me, providing additional convenience.

Omnicef was up 17% in the quarter.

In neuroscience Depakote had another good quarter with sales up mid single-digits on track for high single-digit growth for the full-year.

And we're pleased to share with you that we expect to file for the bipolar indication for Depakote ER by the end of this year.

Depakote ER is currently indicated for the prevention of migraine headaches and for the treatment of epilepsy.

Moving on to Synthroid, as expected, U.S. sales of 153 million were down slightly from the prior year given the impact of generic competition, as you know.

However, we continue to actively promote the product and we're very pleased with the early results since the launch of generics.

Our brand retention, which measures the percentage of pre-generic prescriptions retained by Synthroid, is currently at 73%.

This compares favorably to typical pharmaceuticals at 14 weeks post-generic launch.

While the results-to-date have been strong it still remains difficult to predict where Synthroid's brand retention rate will settle out at the end of this year.

So as a result our fourth quarter earnings guidance that Tom discussed does contemplate, again, a range of possible outcomes for Synthroid.

Moving on to TriCor we continue to expand market share reporting solid growth this quarter and we're on track for double-digit growth for the full-year.

We remain very confident in our strategy to manage TriCor for the long-term.

As you know we've talked about an improved formulation for TriCor that we have not provided a lot of detail for competitive reasons.

However, it is our expectation that we'll be able to tell you what you want to know about this product shortly, certainly before the end of the year.

Longer term we believe TriCor could have a unique role as well as a combination product and we've started several studies to evaluate this opportunity.

In our Anesthesia Business Ultane grew double digits this quarter following a rather soft second quarter where sales growth was less than 1%.

Sevorane had another strong sales outside the U.S. this quarter as well leading to more than 20% growth worldwide.

With regard to Flomax worldwide sales this quarter increased nearly 10% to 207 million.

As we stated on our second quarter call our contract terms with BI transitioned from active co-promotion to a sales distribution arrangement for Flomax at the end of August.

So as a result of this change we're not going to break out Flomax in the product sales summary pages of our earnings release going forward.

So for the overall U.S.

Pharmaceutical Business our performance remains on track to achieve our forecasted double-digit growth for the full-year with high single-digit growth anticipated for the fourth quarter.

With respect to our Abbott International Division the continued successful launch of Humira and strong growth of Kaletra, international pharmaceuticals reported mid-teens growth this quarter including the impact of exchange.

We expect Abbott international to deliver double-digit growth again in the fourth quarter.

Now let's move on and take a look quickly at our TAP Pharmaceutical Products in the third quarter.

Regarding Prevacid sales declined approximately 8% and that was in line with our expectations.

TAP expects full-year 2000 Prevacid sales to be down at least 10%.

Tap's taking steps as we talked about last quarter to improve the performance of Prevacid as new formulations, including Prevacid SoluTab and Prevacid IV continue to improve the product's convenience and its use in the hospital market.

Lupron sales this quarter were up 15% in line with TAP's expectations of stronger growth in the second half of the year.

This growth is aided by improved year-over-year comparisons and continued improvement in Lupron's urology market share.

And so finally let me finish with some review of some of the highlights of our pipeline where our global R&D organization continues to deliver results.

Let me start with Humira follow-on indications which are progressing as scheduled through the pipeline.

In psoriasis we shared 24-week Phase II data at the American Academy of Dermatology meeting in July.

The results demonstrated that Humira was well tolerated and provided patients with rapid relief as soon as the first week of treatment. 64% of patients demonstrated a 75% improvement in their disease, and 42% demonstrated a 90% improvement.

These results were achieved using the standard RA dose of 40 milligrams every other week.

And so as a point of comparison, Embril's Phase II -- excuse me, Phase III 24-week data showed that only 54% of psoriasis patients demonstrated a 75% improvement using double their RA dose.

As a reminder our Phase III trials in psoriasis are going begin later this year.

At the upcoming American College of Rheumatology, or ACR meeting, we had 19 abstracts that were accepted.

These abstracts are currently on-line and include late-breaking Phase III data on psoriatic arthritis and early RA.

We're extremely encouraged by the Phase III psoriatic arthritis results that showed patients taking Humira achieved significant improvement in both their joints and skin with a very rapid response.

Nearly 25% of psoriatic arthritis patients achieved an ACR 70 response and 42% of patients achieved a posi 90 response.

Embril's results in a similar trial showed that only 9% of Embril patients achieved an ACR 70 response and only 6% a posi 90 response.

Results from our early RA study called Premier were also presented.

This pivotal Phase III study shows that early aggressive intervention with Humira in patients with RA less than 3 years provides the most favorable outcomes. 61% of patients taking Humira with methotrexate achieved ACR 50 after 1 year and nearly all maintained that response through the end of the 2-year study.

As a reminder we plan to submit supplemental biologic licensing applications for both psoriatic arthritis and early RA by the end of this year.

We also have interim results from our 1-year Phase III juvenile RA clinical trial which showed at 16 weeks 95% of patients taking Humira plus methotrexate demonstrated clinical improvement.

In addition to the indications that I just mentioned Humira's follow-on indications also include as a reminder Crohn's disease and ankylosing spondylitis.

Combined all additional Humira indications could add more than 1 billion in incremental sales to our already established long-term Humira sales forecast.

Also at ACR TAP we will be presenting data on the safety and efficacy of febuxostat.

As a reminder febuxostat is TAP's late-stage compound for the treatment of elevated uric acid levels which are associated with gout.

The pivotal Phase III trial of 760 patients showed that 62% of patients taking febuxostat once daily achieved lower uric acid levels compared with 21% of patients receiving allopurinal, which is as you know is a current standard of therapy.

Febuxostat was also shown to be safe and well tolerated.

Also during this quarter we submitted our new drug application for Zemplar capsules.

And Zemplar capsules is our oral formulation of Zemplar for the treatment of secondary hyperparathyroidism, in early stage chronic kidney disease before patients require kidney dialysis.

Our leading position and established presence in this category with the current IV form of Zemplar gives us a unique ability to further penetrate this vast market.

Zemplar IV is the most widely used Vitamin D therapy in the United States used by more than 90% of all kidney dialysis patients who have secondary hyperparathyroidism.

We will be presenting our Phase III pivotal trials for Zemplar capsules at the American Society of Nephrology meeting which is at the end of this month.

These abstracts are also on-line.

In summary 91% of patients who receive Zemplar capsules achieved a reduction in parathyroid hormone levels, or PTH levels, compared to just 13% of placebo patients.

And finally we remain on track to submit a new drug application for our prostate cancer drug [Zenlay] as we've told you before, by year-end.

So in summary we're beginning to realize the promise of our late-stage pipeline.

In addition to the impressive clinical trial data that we will be presenting in the coming weeks we've completed 2 of the 6 regulatory submissions we have planned for the second half of this year with Kaletra once daily dosing and Zemplar capsules already filed.

And we're on track to submit applications for Humira psoriatic arthritis and early RA, Zenlay, and febuxostat by the end of the year.

And today as we announced we added another submission to that list making 7 with Depakote ER for bipolar.

So that concludes our formal remarks and with that we'll now open up the call for your questions.

And we would ask you as a matter of professional courtesy, we try to ask you that you would limit your questions to one topic, if you can do that, and we thank you for that.

And we'll open the call up now.

Thank you.

We are now ready to begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Kathryn Martinelli.

You may ask your question.

Great thank you.

Specifically just wanted to ask for a little bit more detail with respect to the fourth quarter in terms of 2 products, what you're thinking about when you said you're considering a range of options for Synthroid.

Does that mean a continued erosion, or where are you expecting your brand retention to settle out?

And then also Biaxin, have you baked in anything into your expectations related to the Chiron flu vaccine issue that would presumably translate into some stronger Biaxin sales going into Q4 recognizing we don't know about the severity of the flu season yet?

Yeah, I'll take that, Kathryn, those are 2 very good questions.

Let me start with the last one, Biaxin.

Right now it's a little difficult to predict exactly what's going to happen with Biaxin given the Chiron flu vaccine shortage situation that you noted.

Obviously that could provide some incremental positive impact unfortunately for us, unfortunately for patients as well who aren't able to get that flu vaccine because there does appear to be a shortage.

But I would tell you also that I think the more important thing here is the strain of the flu, which is a much more predictive measure of the severity and the spread of the disease what kind of a strain we're going to have.

And it's a little early to know that, as you probably know we just started with the flu season.

There isn't any reporting data that's available yet, so it's possible that that unfortunate situation could benefit Biaxin, but we're planning more conservatively and our expectations for Biaxin are much more modest than what one would expect based on that situation.

With regard to Synthroid, we are again in a situation where we'd like a little bit more time to see how this plays out.

We're obviously very pleased with what we've seen so far, and it does speak to what we talked about before in terms of the product's attributes, the significant patient and physician loyalty to this product, the issues with neurotherapeutic index products like this.

And so the 73% brand retention, the 45, 46% share that we've been able to maintain 14-weeks post-generic is I think probably pretty impressive, and certainly better than we had expected originally.

But there are still a number of outcomes here that could happen, and so we're planning for a range of those outcomes, and planning fairly conservatively as we look into the fourth quarter.

The rate of erosion, as you know, has moderated over the last several weeks, anywhere between 10 and 30 basis points.

We'll have to see if that continues.

It's a favorable trend.

We'd like more data, though.

Okay.

That's very helpful.

I will keep it to one question.

Thanks.

Thank you.

And our next question comes from Glenn Reicin.

You may ask your question and please state your company name.

Glenn Reicin, Morgan Stanley.

Actually I have a couple of questions so let me just lay them out and you can answer them however you want.

Firstly, on gross margins and on operating margins.

There's obviously been a lot of concern in the past about the BI arrangement, and I'd love to know, year-over-year, whether the operating margins in the U.S.

PhRMA are actually up and what your anticipation is going forward?

And then when I look at your promoted products they all seem to be better than expected.

Is there something happening, maybe the co-promote fees or some of the smaller products they are being de-emphasized?

Because I sort of don't understand why top-line growth for the entire business was not even better given that all the promoted products were very strong.

Then lastly, what is your plans for repatriation of overseas profits?

Thank you.

Glen, I'll take those.

I think you will see when the 10-Q comes up that our PhRMA margins, operating margins, are up pretty substantially over the prior-year.

So I don't think you -- and if you look at gross margins even within that business I don't think there's any concern whatsoever about what's happening there.

I think one of the issues just in this third quarter is that sequentially if you look back over history at Abbott it tends to be a lower margin quarter because, you know, we don't have the Biaxin sales from the flu season.

And, for example, within Ross, [synergist] is an early in the year type product as well.

So I think you're going to see going into the fourth quarter sequential improvement in the overall gross margin.

And you're going to see in the 10-Q that the PhRMA margins overall on the operating side are going to be up in excess of sales and I think you'll feel pretty good about that.

I'll talk a little bit about repatriation.

As you know the bill just passed a couple of days ago, and it's long and complex and we're really in the process of studying all of the provisions.

But assuming it's signed by the President we definitely see that as an excellent means to fund some of our domestic initiatives, you know, consistent with the requirements of the bill.

We have in the range of $4 billion of unrepatriated earnings which could potentially qualify.

So we're going to be studying the provisions and coming up with a definitive plan we'll probably share that with you assuming we get it through our internal processes, by the fourth quarter call.

Just as a reminder, if we were to decide to go forward with it, obviously the tax cost associated with that repatriation would be an incremental charge, if you will, on the repatriated amount.

Right.

Just a couple of follow-ups then on the PhRMA side, on the margins, what do you anticipate going forward with Synthroid going generic?

I think a lot of that depends on what John was talking about, how well we level out.

Obviously, Synthroid continues to be a profitable product and if we can level things out I would think that really would not be a factor.

As I said earlier I think you will see sequential improvement in the gross margin in the fourth quarter and we'll just continue -- when we talk about the guidance for '05 probably next January, we'll go through that with you as well.

Okay.

And the non-promoted products, anything happening there for co-promotion fees or anything?

Not really, Glen.

Okay.

Thank you.

Thanks.

Thank you.

Our next question comes from Sara Michelmore.

You may ask your question.

And please state your company name.

Sara Michelmore, SG Cowen.

Just a follow-up to that, I guess on Humira where are we in terms of scouring out investment related to Humira on the sales and marketing?

Are we still in a upswing on the investment there or is it starting to tail off or at least get to a more stable level?

I don't think we want to talk a lot about that.

Obviously, that's a competitive issue, so I don't think we'll go into a lot of detail on that.

Is it fair to say, though, that the SG&A growth is going to continue to be sort of in the level that it's been in the last few quarters?

For the fourth quarter we are looking at pretty decent SG&A growth again, so I think the pattern will continue.

If you look at the full-year 2004, we had estimated back in January we'd be up somewhere in the range of 10%, and if you look at where we're probably going to come in it's going to be more like mid-teens.

So I think you are seeing in general pretty solid SG&A investment, and, you know, again, it's a balancing factor.

If the capacity is there, there's plenty of places in our businesses that would benefit from incremental SG&A investment.

And back on the gross margin, you mentioned higher manufacturing costs being a negative on gross margin this quarter.

What exactly are those higher costs and what parts of the business are they in?

This is basically, we've got about $2 billion of manufacturing costs in the quarter and really what we're seeing is kind of a normal labor and material type costs impacting the margin, which really is just offsetting some of the [favorabilities] we saw in the quarter.

And really on a net basis, although it was slight, our gross margin was up somewhat over the prior-year when you net it all out.

Great.

Thank you.

Thanks.

Thank you.

Our next question comes from Rick Wise.

You may ask your question.

And please state your company name.

Good morning.

Rick Wise, Bear Stearns.

Couple of questions.

First, I see you're more aggressively promoting Mobic after the Vioxx withdrawal.

Are you seeing any early pickup there?

Could that benefit the fourth quarter?

Second, I was a little surprised on Humira performance which had, in the U.S. you had a very strong sequential performance second quarter over first, but up only 7 million sequentially in the third quarter.

What should we read into that, and how do we think about sequential U.S. growth in the fourth quarter?

And last, maybe a little more detail on the diagnostic business.

I think you said, John, that immunoassay sales were still down in the fourth quarter?

When do we expect that turn to occur?

And maybe talk a little bit about where the competitive environment with these placements.

Are you taking shares?

Is this just an existing account?

Just give us some additional perspective.

Thanks.

Okay.

Well, there's a lot there to cover.

Let me start with Mobic and Humira, then we'll work our way to ADD.

So with Humira in the U.S. it's right on track -- right in line with our expectations for the full-year.

As I said on the prepared remarks, we're capturing about 1/3 of the self-injectable RA scripts right now.

We think that's very good.

The momentum is strong there.

We're certainly on track to come in at our forecast of more than 800 million worldwide for the full-year and so we're pleased with the progress we're making on the pipeline.

So I'd say that things are right in line and well on track with regards to Humira.

Mobic is not our product, it's BI's product, so, you know, there's only so much we can say about that.

But I would say that I think it's pretty clear from what we can tell, the IMS data shows that they have recently picked up the prescriptions which are up pretty significantly and by our account they're capturing upwards of 10% or so of those Vioxx scripts that came off the market or ended.

So clearly there's some favorability there.

How that plays out going into the fourth quarter we'll have to watch that.

But I think it's safe to say that there's some positive favorability for Mobic, at least for the fourth quarter and then we'll have to see how things play out going into the next year.

And obviously they're picking that up because they're not considered to be a true Cox-2 Inhibitor.

They're either classified as a Cox Inhibitor or an NSAIDS.

So there has been some positive spill over effect there.

With regard to ADD we do expect going into next year we have said that this -- that we'll see more positive growth, better growth in the U.S. in particular, and this has been a transition year as you know.

It's been one where we focused on launching assays which we're on track to launch more than 75 or 80 assays for the full-year, and things are going well.

But it's been one where we're climbing out of a situation where the market share had eroded, as you know, in the U.S., stabilizing and now building that share through more assays that will drive more penetration of ARCHITECT Systems and placements.

But the good news here is that the ARCHITECT System has been very well received, as I noted we placed more than 100 ARCHITECT Systems in the third quarter and 55% of those are integrated.

So they're combining the modular immunoassay and [Cling 10 System] which is a key driver of growth for that business.

So as we get some of these key Gatekeeper Assays out, the Cardiac Markers, and Hepatitis Menu expansion that will also help drive placements.

We have over 2,000 placements of ARCHITECT now, Systems worldwide and if they continue to execute next year should be a better year and we should see some positive momentum going into next year.

Just a quick follow-up on that.

Do you have any sense of where you're -- who you're gaining share from as you make these placements?

You know, no one in particular.

It's a pretty fragmented market depending on the segments between immunoassay and [clinchem].

And obviously clinical chemistry and the modular system where we have very modest share, less than 5% right now, is a place where we can help drive expansion of the ARCHITECT System and take share away from some of the more traditional clinchem players.

So we expect that that will happen probably more impactfully next year.

Thank you.

Okay.

Thank you.

Our next question comes from Mike Weinstein.

You may ask your question.

And please state your company name.

Thank you.

J. P. Morgan.

Actually I just want to ask a couple of follow-ups to some of the questions that were just raised on Mobic, which you just discussed.

When should we be assuming that Mobic will see generic competition?

I realize that won't be your product, in not too long, but when do we expect to see that go away?

I'm glad you asked, Mike.

This is John.

It's an interesting situation.

It's a little bit different than most products as you probably know.

It has market exclusivity.

There are no patents behind it, and BI is the -- obviously, the owner of this product, so they're in a better position to explain it.

But there's market exclusivity that expires either in April of 2005 or if there's a pediatric extension it could be 6 months later than that.

And our understanding of it is that any ANDAs that would be filed for Mobic would have to be filed after that exclusivity expires, and then we'd expect probably or I should say BI would probably expect -- I don't want to speak for them -- a normal review time for an ANDA which could be up to 18 months.

So we don't have any expectations of timing on generic competition specific to that.

As you know our co-promotion agreement with BI extends until April of next year when we transition to a sales distribution arrangement.

So clearly any generic competition will be probably well beyond that time frame.

Fair.

That's very helpful.

Thank you.

I want to actually follow-up as well on the diagnostic business and not so much on the top-line, but some of the margin improvement.

And I guess this question as well goes to the SG&A spending this year because absent this quarter you guys have spent an accelerated rate versus what you were spending on the prior-years and versus what you originally said in the beginning of January.

I just would like to get some sense of where that spending is going relative to the different businesses and within that maybe you could give us some commentary on operating margins within the diagnostic business.

Just based on the first 2 quarters they hadn't ramped maybe as quickly as some people were thinking.

So how do we see the margins play out in diagnostics over the next couple of years and where are you spending that incremental SG&A?

Thanks.

Mike, I'll just take a quick part on this on the margins.

Again, when you look at the 10-Q that comes out and where we show the segment profitability which, which as John reiterated earlier, includes, you know, Diabetes, the core Immuno Business, Molecular and the Point-of-Care.

You will be seeing improvements in the operating margin ratios again in the third quarter.

So I think we're pleased about that and the trends continue to move in the right way.

Obviously, a goal of this division is to continue to move those margins up.

We were probably in the upper teens prior to some of the issues we encountered back in the late 90s.

So I think you will see a degree of expansion.

We will have to think internally about balancing that a bit in terms of reinvesting back in the business.

So we'll be working on that as we go through the planning process.

If you look at where the SG&A has gone the last few years, the bulk of it has been definitely in the PhRMA Business that's where it is the most sensitive in terms of generating sales growth to incremental SG&A spending and that's really where we've been focused.

Primarily on the newer products, such as Humira, but also a number of the other marketed products.

And one last follow-up, and this is a TAP question.

Can you give us any visibility today or when can you give us some visibility on TAP's plans to introduce product that might be able to transition ahead of Prevacid seeing competition potentially at the end of this decade?

Are you talking about Next-Generation Prevacid?

Yep.

Yeah, we're not in a position to do that, or I should say TAP is not.

We have acknowledged TAP has discussed, and [Tacada] I believe as well, there is a next-generation Prevacid in early development, but we're not at a point yet where we can share any details.

They're looking at a number of different things and they have done some recent technology deals along those lines in terms of drug delivery which you probably saw as well.

So there's a number of things going on there.

When we can share more we certainly well.

Okay.

Thank you.

Thank you.

Thank you.

Our next question comes from Adam Galeon.

You can ask your question.

And please state your company name.

It's CSFB.

Two quick questions on forma.

First on Biaxin, John, acknowledging the potential for a strong flu season you still said you have modest expectations for Biaxin next quarter.

Can you just frame for us a little better what a strong flu season could look like versus your modest expectations?

And then secondly, it was a record quarter for TriCor -- John, you also mentioned share gains there.

What changed in the quarter that drove those share gains?

Okay, well with respect to Biaxin you have to remember, too, that there's a very difficult comp versus the prior-year we had an early and strong flu season last fourth quarter in '03.

So we had a pretty big comparator there.

So again, it's so difficult to predict this early in the flu season what the impact will be.

And as you probably know Biaxin does tend to track along with the severity of the flu season because it's often used as a macrolide antibiotic for secondary infections that go along with severe flu, pneumonia, and bronchitis, those types of things.

So as the severity of the flu season ramps up you tend to see more use of stronger antibiotics that are more geared towards those secondary infections and certainly Biaxin falls in that category.

So again, a little difficult to predict right now.

We'll obviously be watching it and we'll keep you posted on at front.

With regard to TriCor the product just continues to do very well.

The growth there is in line with our expectations, slightly ahead, and continues to grow strong double-digit growth.

It's a product that has gotten more attention as the new guidelines, cholesterol lowering guidelines have come out as you've probably seen in terms of its use in the best product for certain patient populations in combination with the use with statins, and those guidelines came out a month or so ago, and so there may be some benefit there as well.

But it's certainly a very good product and we're looking forward to the next-generation formulation.

Hopefully we can talk about that very soon.

Next question.

Our next question comes from Bruce def Cranna.

You may ask your question.

And please state your company name.

Hi, good mornings.

It's Leerink Swann.

Couple of things if I could.

John, on febuxostat can you comment at all at this point about labeling?

In other words, do you or TAP envision a chronic gout indication only or perhaps could you go for a broader hyperuricemia label as well?

So the question is about febuxostat, which is TAP's gout compound.

I think it's a little bit early to talk about a specific label indication, but clearly reduction of uric acid levels associated with gout is in general what the product does and has shown to do in the Phase III data that we talked about at ACR.

We had over 60% of patients who were taking febuxostat once daily achieved that lower uric acid level compared to only 21% of patients receiving allopurinal.

So it was 3x as as affected as allopurinal and it doesn't appear to have the side effects -- the hypersensitivity syndrome that you see with allopurinal at times.

So we'll see what happens there.

It's a little bit early to talk about that, but clearly reducing uric acid levels is generally where we're going to go with that.

And do you think given the data that we've seen, at least on an early basis, is it reasonable for us to be thinking about an expedited review do you think or is it too early as well there?

I think it's a little early to talk about that.

I don't believe TAP is in a position to discuss that yet.

Okay.

And just quickly on the diag piece again, what's ARCHITECT up to in the U.S. menu wise now?

Placement wise I think we're --

I'm sorry, assay.

Oh, assays.

On ARCHITECT specifically in the U.S.

I don't have those numbers.

We're obviously driving for a much broader menu.

As you know, AxSYM has upwards of 70 or 80-assay menu.

We're not nearly that close with ARCHITECT yet.

So it's probably a third or a quarter of that at this point, but we're continuing to drive more tests and that menu should expand pretty rapidly.

And then on one call, I think it might have been 2Q, you mentioned your B&P share, and I think at the time you said 10%.

I just wondered if you had any updates there with respect to your share of the B&P market where you guys think you are today?

It's around there right now.

So, you know, it may have gone up just a little, bit but it's close to that.

Okay, and last thing, Humira, can you tell us if you've put through any pricing increases since the launch and if not could that happen going forward?

So Humira price increases we did take a modest price increase in August which matched a price increase that was taken ahead of that by Embril so that we could stay at parity with Embril, but it was less than 5%.

Great.

Thank you.

Okay.

You're welcome.

Thank you.

Our next question comes from Larry Keusch.

You may ask your question.

And please state your company name.

Goldman Sachs.

Good morning, 2 questions.

I guess first, John, it looks like if you look in the last monthly scripts Prevacid is actually beginning to accelerate versus the market growth.

So I'm wondering if you could potentially touch on, do you think a lot of the impact of the OTC and generic kind of switching is perhaps now more behind us given that we've anniversaried that?

And also I guess a long with that is there any change in either pricing or rebating or what other methods might TAP be using?

And then second question, on the R&D, I know you suggested timing was a portion of the reason why things were, I think, a little bit less than what you stated in the second quarter where you were looking for strong increases in R&D.

So I just wanted to see if actually any programs had changed or what changed in the timing that I suspect we'll get some catch up as you suggested in the fourth quarter.

Why don't I take the Prevacid question first, and then Tom can take the R&D.

So with regard to Prevacid script, you're right, we have seen a modest improvement in Prevacid share over the course of the last few weeks.

But again, I would say it's modest, and if you look at year-over-year trends it's down about one share point versus the prior-year.

I think in general it's safe to say that Prevacid, as well as the other branded PPI products have been impacted by the OTC Prilosec, probably longer than most of us had anticipated, and it certainly has affected the growth rate, which our data indicates that market growth year-to-date for the branded, or the entire I should say, PPI market is actually down now.

We're forecasting -- or TAP is forecasting that that trend continues going into the fourth quarter with some stabilization and perhaps some modest growth in the market.

And Prevacid, as they continue to at TAP expand and drive the indications on the SoluTab, the IV, the Pediatric indication, they're hopeful they can improve performance, but we're planning pretty conservatively.

And as I said on the call, they're going to be down probably at least 10% sales growth which is consistent where we've been and where we think they're going.

With regard to rebates that's certainly part of the economic model for all the branded PPIs, but TAP, as far as we know, has nothing new to report on that front.

Larry, I'll take the question on spending.

Obviously when you -- when I talked about spending in the last call it was kind of a combined approach SG&A and R&D and clearly in the quarter we had another very solid quarter overall.

The R&D did come in a bit lighter than what we were forecasting before.

I just attribute that to forecasting and just spend rates slowing from what we thought at that point in time, and as you indicated we're expecting that all to catch up in the fourth quarter and everything to be consistent with our full-year forecast.

And there's nothing fundamental going on in that area.

Great.

Thank you.

Thanks.

And I think we have time for one last question.

Thank you.

And our last question comes from Robert Goldman.

You may ask your question and please state your company name.

Thank you.

Bob Goldman at Buckingham Research.

Two questions.

First on Zemplar, outside of the opportunity on capsules I didn't hear, although I might have missed, you know, what the sales trends are on the IV.

Second goes back to gross margin.

I know it's been asked before, but let me ask it this way: In the first quarter, if my numbers are correct, the gross margin went up by 250 basis points.

The second quarter by about 170.

And in the third, they were at best flat.

So it really looks like something happened in the third quarter that has made the gross margin increase come to an abrupt end, and I might have missed it, but I just haven't heard the answer yet.

All right, let me take your Zemplar question.

Zemplar sales were down this quarter primarily because of a very tough comp to the prior-year when we had very strong double-digit growth, over 20%, so we expect that to improve as we go into the fourth quarter, and obviously we're very excited about the filing of Zemplar capsules which gets us into a whole new potential patient population.

So that's sort of the situation with Zemplar.

Tom, do you want to comment on that?

Yeah, as I indicated before we were up slightly, perhaps the pace of expansion has slowed, but the third quarter is always an odd quarter because of the seasonality of our businesses, and you should see sequential improvement over that 55% into the fourth quarter.

And it's a big complex business with a lot of products flying around and a lot of overall things going on, and that's really the best I can provide for it at this point.

I fell confident that you will see that improvement sequentially in the fourth quarter and it continues to be an area that we focus on very closely in terms of what products we emphasize, sales mix issues, and trying to push the higher margin products in terms of the prioritization with the Company.

So that ultimately we can continue to expand that margin ratio.

Good.

Thank you.

Okay.

That concludes Abbott's conference call today.

We thank you for joining us.

A replay of this call will be available after 12:00 CT today on our Investor Relations website at www.abbottinvestor.com and after 12 CT via telephone at 203-369-0396 confirmation code: 7850307.

The audio replay as always will be available until 5 p.m.

CT one-week prior, one-week subsequent which is Thursday, October 21st.

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If you have any questions please give us a call.

Thank you.

Thank you and this concludes Abbott Laboratories third quarter earnings call.

Thank you for your participation.