美國雅培 (ABT) 2011 Q2 法說會逐字稿

Good morning and thank you for standing by.

Welcome to Abbott's second-quarter 2011 earnings conference call.

(Operator Instructions).

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 expressed written permission.

I would now like to introduce Mr.

John Thomas, Vice President Investor Relations and Public Affairs.

Good morning, everyone, and thanks for joining us.

Also on today's call with me will be Tom Freyman, Executive Vice President Finance and Chief Financial Officer, and Larry Peepo, Divisional Vice President of Investor Relations.

Tom will review the details of the financial results for the quarter and our outlook for the year, and Larry and I will then discuss the highlights of our major businesses.

Following our comments, we will take questions.

Some statements made today may be forward-looking.

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

Factors that may affect Abbott's operations are discussed in Item 1A risk factors to our Annual Report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2010, 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.

In today's conference call, as we do always, non-GAAP financial measures will be used to help our investors understand Abbott's ongoing business performance.

These non-GAAP financial measures are reconciled with the comparable GAAP financial measure in our earnings news release and regulatory filings from today, which will be available on our website at Abbott.com.

I would also like to call your attention to a supplemental slide deck that we will be posting to our website after our call concludes today.

It includes highlights of Abbott's recent pipeline progress and a more detailed list of information on related market opportunities.

And while these slides are not intended to be a comprehensive overview of our broad-based pipeline, our goal here is to provide investors with additional color on certain opportunities across our emerging portfolio.

And we plan to build on this supplemental information as we go forward in future quarters.

So consider this a starting point, and we hope you find it useful.

With that, I will turn the call over to Tom.

Tom?

Thanks, John.

Today we are pleased to report strong second-quarter results as we delivered ongoing earnings per share of $1.12, up 10.9%, and at the high-end of our previous guidance.

And we raised our full-year EPS guidance range confirming our outlook for double-digit growth in 2011.

We are also pleased with the progress we have seen from our broad-based pipeline so far this year.

We have launched a number of new products or indications across the Company, advanced two promising compounds into Phase 3 development, submitted three significant new products or indications for regulatory review, and added a mid-stage biologic for the treatment of rheumatoid arthritis and psoriasis to the pipeline.

Sales growth in the quarter was 9%, including a favorable 4.6% impact from exchange rates.

Growth in the quarter was led by a 13% increase from Proprietary Pharmaceuticals, including strong global performance from HUMIRA, which was up nearly 19% before exchange.

And our emerging-market sales in the quarter were nearly $2.6 billion, an increase of more than 23%, underscoring the contribution of these markets to Abbott's overall growth profile.

Durable growth business sales increased 7.5%, driven by double-digit growth in International Nutritionals, Point of Care Diagnostics and Established Pharmaceuticals, and Innovation-Drive Device business sales increased 3.1%, including double-digit growth in Molecular Diagnostics.

Regarding other aspects of the P&L in the quarter, the adjusted gross margin ratio was 60.2%, ahead of our previous forecast driven by improved product mix.

The ongoing tax rate of 15.2% was in line with our previous forecast for the quarter.

Turning to our outlook for 2011, today we are raising our ongoing earnings-per-share guidance for the full year to $4.58 to $4.68.

The midpoint of this guidance range continues to reflect double-digit ongoing EPS growth for 2011.

For the third quarter, today we are issuing ongoing earnings-per-share guidance of $1.16 to $1.18.

The midpoint of this EPS range represents more than 10% growth over the prior year.

We forecast specified items of $0.18 in the third quarter, primarily reflecting integration costs from past acquisitions and cost of previous restructuring actions.

We are forecasting low double-digit sales growth in the third quarter, including an estimated favorable impact from exchange of approximately 3.5%, and we are forecasting an adjusted gross margin ratio of around 60%.

Also, for the third quarter, we are forecasting R&D investment, approaching 10% of sales and SG&A of around 28% of sales.

Regarding our tax rate, we are continuing to forecast a full-year 2011 rate approaching 15% with third quarter between 14.5% and 15%.

So, in summary, we are pleased with our performance through the first half of this year.

We have delivered on our commitments, raised our guidance range and confirmed our strong outlook for 2011.

We have made steady progress in our broad-based pipeline with new approvals, regulatory filings and late stage trial initiations.

And we continue to see strong results from our strategic actions to expand our emerging markets presence across the businesses.

With that, I will turn it over to John and Larry for the business operating highlights.

John?

Thanks, Tom.

Today Larry and I will walk you through as we did last quarter our three business categories.

Let me start with our Durable Growth and Innovation-Drive Device businesses, and then Larry will give you an overview of our Proprietary Pharmaceuticals business, as well as our pharmaceutical pipeline.

Sales growth will be discussed on a reported basis, which includes the impact of foreign exchange.

Let me start with our Durable Growth businesses.

In Established Pharmaceuticals, which includes international sales of our branded generics portfolio, we reported global sales of more than $1.3 billion.

More than half of EPD sales are in emerging markets, which this quarter were $775 million, up 25%.

Our large portfolio of Established Pharmaceuticals consist of hundreds of branded generic products spanning primary care therapeutic categories.

The depth of our portfolio and the diversity of our geographic footprint help us drive durable sustainable performance.

We expect more than $5 billion in Established Pharmaceuticals sales in 2011.

In our worldwide Nutritional business, global sales increased 5.4% this quarter, driven by double-digit growth internationally.

In the United States, as we have mentioned previously, we planned for a difficult comparison in our US Nutritional business during the first half of this year as we work to recapture share in our infant formula business.

US Nutritionals sales as a result were down 3.5% in the second quarter, which was in line with our forecast slightly better.

We continue to hold the number one infant formula share position in hospitals, which drives consumption at the retail level, and we are making good progress in our efforts to return our retail share to pre-call levels.

And we anticipate better sales growth for the US nutrition business in the second half of the year.

PediaSure in the quarter grows strong double-digits, driven by continued success of our new SideKicks brand.

In our US adult nutrition business, we saw continued momentum from the new line extensions of our Ensure brand.

Outside of the US, Nutritionals sales increased 14% this quarter.

Growth was driven by continued strong growth in emerging markets, which comprised the majority of our international nutrition sales.

This quarter our emerging markets sales for the nutritions business were $630 million, up 16%.

This was driven by strong performance in Asian and Latin American markets where we continue to launch new products, increased penetration and capture market growth.

For the full-year 2011, we are forecasting more than $2 billion in emerging market Nutritional sales, which we expect to double over the next five years.

In China alone, we expect nutrition sales to reach $1 billion by 2014.

So, as we look ahead to the third quarter in our global nutritions business, we expect worldwide sales to accelerate to double-digit growth with US sales up mid-single digits and international sales up strong double digits.

In our global diabetes business, this quarter worldwide sales increased 2.7%.

US sales increased more than 4%, and international sales were up approximately 2%.

We received CE mark in May for our new freestyle InsuLinx blood glucose monitor, which includes a meal time insulin calculator.

InsuLinx is designed to help provide suggested insulin dosing advice for patients with diabetes who require insulin to manage their condition.

So, as we look ahead to the third quarter in global diabetes, we expect high single-digit revenue growth.

In our Core Laboratory Diagnostics business, which includes immunoassay and hematology, global sales increased 8%.

US sales increased 4.4%, driven by strong growth of our ARCHITECT platform.

Outside of the US, we saw strong growth in emerging markets, up 9% in the quarter.

This was driven by double-digit growth in Asia, including strong sales in China.

So, as we look ahead to the third quarter in our Core Laboratory Diagnostics business, we expect high single-digit growth.

In our Point of Care Diagnostics business, sales this quarter increased 17%, driven by strong troponin and the CHEM8+ test cartridge sales.

For the third quarter in Point of Care Diagnostics, we expect another quarter of strong double-digit growth.

I will now turn to our Innovation-Driven Devices businesses, starting with Molecular Diagnostics where global sales in the quarter increased more than 18%, driven by international sales growth of more than 30%.

During the quarter we placed our 1000th m2000 analyzer.

One of our core strategies in Molecular Diagnostics is advance the field of companion diagnostics or personalized medicine.

On that front we developed a molecular test to pair with Pfizer's drug in development for non-small cell lung cancer.

We recently submitted this ALK gene test for regulatory review in the US and Japan.

Also in the quarter we received FDA approval for a real-time PCR molecular test for measuring the viral load of hepatitis C, completing our core menu on the m2000.

So, as we look ahead to the third quarter in Molecular Diagnostics, we expect strong double-digit growth.

In our Vision Care business, worldwide sales this quarter increased 7.5%.

Globally we continue to gain share in our cataract business with our Tecnis Multifocal and Monofocal IOLs.

We also continue to grow share in our corneal business with our new RevitaLens contact lens solution, which is doing quite well and has gained approximately 6% share points since the beginning of the year.

As we look ahead to the third quarter in our Vision Care business, we expect high single-digit sales growth.

In our vascular business, worldwide sales in the second quarter were $835 million, slightly ahead of the expectations and outlook we have provided last quarter.

In our international vascular sales, which is more than half of our total vascular sales business, we saw 25% growth in emerging markets.

International markets comprised two-thirds of the global drug-eluting stent market, and in emerging markets, procedure volume is going on average at a mid-teens rate.

Abbott is particularly well positioned internationally, and we have seen impressive performance with both XIENCE and our next generation XIENCE PRIME drug-eluting stent.

Our global DES franchise sales, which includes XIENCE sales, as well as third-party DES revenues, were approximately $485 million in the second quarter.

Global XIENCE sales increased both sequentially and year over year.

This was offset in the quarter by a double-digit decline in third-party DES revenues.

XIENCE remains the number one drug-eluting stent globally with worldwide market share of approximately 35%.

In the quarter we continued to advance our leadership position with the US launch of XIENCE nano, our stent for small vessels.

The small vessel segment of the market represents approximately 10% of all the vessels that are treated, so this is a new market segment where we can now compete with XIENCE nano.

We expect this new product will help us continue to gain XIENCE share over the next several months.

Our endovascular and other coronary businesses, which comprise approximately 40% of our vascular sales, also performed well in the quarter.

We have had multiple new product launches in numerous new geographies over the past year, which has helped drive good momentum through the first half.

The first-quarter launch of our new TREK balloon catheters in the US and Japan following a successful launch in Europe last year drove double-digit sales growth of our balloon segment in the quarter.

Solid endovascular sales also positively impacted the second quarter led by sales in vessel closure and our Armada 14 balloon line.

An expanded indication for our RX ACCULINK carotid stent also contributed to positive momentum.

In our vascular pipeline, XIENCE PRIME, our next-generation drug-eluting stent, continues to perform well internationally as we expand our global DES leadership position.

PRIME provides physicians with enhanced deliverability on a best-in-class DES platform.

We now expect approval and launch of PRIME in the United States in the first half of 2012.

MitraClip is our minimally invasive device approved in Europe, Australia, Singapore and other countries for the treatment of select patients with mitral regurgitation.

In the US it is currently under FDA review.

As part of our ongoing dialogue with the agency, we are providing an additional information and analysis.

Subsequent to this review, we will be in a better position to estimate timing.

Also in our vascular pipeline is our ABSORB bioabsorbable vascular scaffold.

It is designed to slowly metabolize and eventually be absorbed by the body after providing support to the vessel during the healing process, leaving no permanent metallic implant behind.

It received CE mark in January, and a full scale launch in Europe is planned by the end of 2012.

So, as we look ahead to the third quarter in our global vascular business, we now expect mid-single-digit sales growth.

So, with that, I will turn the call over at this time to Larry for a review of our Proprietary Pharmaceuticals business and a few pipeline highlights as well.

Larry?

Thanks, John.

As a reminder earlier this year, we globalize our Proprietary Pharmaceuticals business, creating one division to allow for streamlined commercial efforts and coordination between functions.

Worldwide Proprietary Pharmaceuticals sales increased 13% in the quarter, driven by growth of 9% in the US and 19% internationally.

In immunology global HUMIRA sales increased more than 18% before the favorable impact of exchange.

Performance was driven by international sales growth of 19% before exchange and US sales growth of more than 18% consistent with the underlying trends we saw throughout the quarter.

Demand for HUMIRA continues to outpace the global market, and new competitive entrants are tracking in line with our expectations for these products.

Internationally double-digit market growth continues in the major European countries where HUMIRA holds the number one share position, and HUMIRA growth in the US continues to outpace the market.

We are continuing our development efforts for HUMIRA, including the study of new indications and product enhancements.

Our regulatory applications for ulcerative colitis are currently under review, and we are evaluating other indications currently in mid- to late-stage development.

We also continue to introduce new indications in geographies around the world.

We recently received approval for our fifth indication in Japan for HUMIRA, juvenile idiopathic arthritis or JIA.

With an outstanding clinical profile across our full range of indications and more than 14 years of clinical experience, we continue to be well positioned for success in this market.

HUMIRA is off to a strong start this year, and based on this performance and the outlook for the remainder of the year, we are raising our forecast.

We expect high teens reported global sales growth for HUMIRA in 2011, up from our original expectations of low teens growth.

Moving on to our lipid franchise where sales of Niaspan were $247 million, while it is still early, we have seen a modest impact to prescription trends beginning late in the quarter, following the discontinuation of the AIM-HIGH trial in late May.

Physician feedback from experienced Niaspan users and key opinion leaders continues to be favorable regarding the value of Niaspan and treating HDL.

US sales of TRILIPIX TriCor increased more than 3%.

Global sales of AndroGel and Creon were $227 million and $149 million respectively.

During the quarter Abbott received FDA approval for AndroGel 1.62%.

The new low-volume formulation provides patients with a more convenient application process, delivering rapid and sustained improvements in testosterone levels with less gel than the previous formulation.

Creon maintains a leadership position in the pancreatic enzyme market, and over the past year, we have captured significant market share in the US.

We continue to garner the vast majority of new prescription starts in this category.

Last month we received FDA approval for an infant specific dose of Creon.

This new dose provides the lowest approved dosage strength in the class and enables more precise titration.

Moving on to two consistent performers within our Proprietary Pharmaceuticals portfolio, Synthroid and Lupron, US sales of Lupron were up 12%.

Last month Abbott announced FDA approval for a new six-month formulation of LUPRON DEPOT, expanding dosing options.

We expect more than $750 million in total global Lupron sales in 2011.

And US sales of Synthroid remain strong at $140 million.

We expect more than $450 million in total US Synthroid sales this year.

So, as we look ahead to the third quarter, in our global Proprietary Pharmaceuticals business, we expect high single-digit sales growth, including mid-single-digit growth in the US and another quarter of strong double-digit growth internationally.

Moving on to our Proprietary Pharmaceuticals pipeline where, as Tom mentioned, we continue to make good progress.

We currently have more than 20 new compounds or indications in Phase 2 or 3 development across oncology, immunology, HCV, neuroscience and pain management and other areas of significant medical need.

Let's start with chronic kidney disease or the loss of kidney function, which is on the rise driven by higher rates of diabetes, obesity and an aging population.

We are leveraging our decades of expertise in renal disease to address this highly prevalent condition.

Last month Phase 2 bardoxolone data were published in the New England Journal of Medicine and presented at a European renal meeting.

These data show that bardoxolone produced sustained improvements in kidney function over 52 weeks in patients with moderate to severe CKD and Type 2 diabetes.

And last month we initiated the global Phase 3 clinical program for bardoxolone with our partner company.

Results from the 1600-patient study are expected in 2013 with potential commercialization in the 2014 timeframe.

We also continue to make significant progress with our internal hepatitis C program.

The HCV treatment landscape is expected to continue to evolve considerably over the next several years, and we believe we are in a position to become a significant player.

We have three mechanisms of action in Phase 2 development including protease, polymerase, and NS5A inhibitors.

Over the past year, our HCV program has moved quickly and will continue to progress throughout the year as we have a number of combination trials underway, including studies with and without interferon.

In neuroscience we are developing compounds to address conditions such as Alzheimer's disease, Parkinson's, schizophrenia, pain and MS.

A Phase 3 study of daclizumab, a next-generation biologic being evaluated in MS, is currently underway.

Abbott and our partner company expect to present Phase 2 data for daclizumab at a European clinical meeting in October.

We are also continuing development of an intestinal gel known as duodopa internationally for advanced Parkinson's disease.

It is currently in Phase 3 development in the US and is already on the market in most European countries where adoption of this novel system is continuing to grow.

We recently presented interim data from a Phase 3 open-label study of duodopa showing patients reported an increase in the amount of time when disease symptoms were well-managed.

In immunology we are leveraging our experience with HUMIRA to identify novel approaches to improve therapeutic outcomes for patients with autoimmune diseases.

We continue our work on HUMIRA and plan to introduce a cadence of new indications over the next several years.

Beyond ulcerative colitis, we have two additional indications in Phase 2 or 3 studies, including uveitis and in chronic skin disease, that most commonly affects the sweat glands.

All told we expect new indications to drive more than $1 billion in incremental peak year sales.

Our pipeline also includes early development work in oral DMARD therapies and biologics.

And our proprietary DVD-Ig technology brings the capability of uniting two antibodies in a single agent.

We expect our first combination biologic to move into the Phase 1 clinical trials by year-end.

Last month Abbott entered into an agreement with Biotest to develop and commercialize a novel anti-CD4 biologic, which is currently in Phase 2 clinical trials for RA and psoriasis.

Our goal with this agreement and all of our R&D and licensing efforts in immunology is to raise the bar with differentiated efficacy.

Endometriosis and fibroids are both associated with a multitude of symptoms, including pain and infertility.

Our partnered compound, elagolix, has a unique profile that provides symptom reduction while avoiding significant bone loss or other adverse effects that can sometimes be associated with current treatments.

We're working with regulators to finalize the Phase 3 clinical program for endometriosis and the Phase 2 clinical program for fibroids with a targeted trial initiation near year-end.

We also continue to make good progress in oncology.

Our pipeline includes 11 new molecular entities for more than a dozen different cancer types.

Elotuzumab has demonstrated very good response rates in multiple myeloma, the second most common blood cancer in the US.

We recently began the Phase 3 program for elotuzumab with our partner company.

Our multi-targeted kinase inhibitors seeks to cut off the blood supply to a tumor to stop the progression of cancer.

A Phase 3 study of this compound in liver cancer is underway.

And our PARP inhibitor, which may enhance the effectiveness of cancer therapies, is being studied in mid-stage trials for a variety of cancer types.

So, in summary, this quarter Abbott delivered strong double-digit performance with ongoing EPS growth of 11% at the high end of our previous guidance range.

And we raised our ongoing EPS outlook for the full year, reflecting double-digit growth over 2010 at the midpoint of the range.

So with that, Tom, John and I will be glad to take your questions.

Operator?

(Operator Instructions).

Mike Weinstein, JPMorgan.

Maybe just a couple of items just to clarify.

One, you had a very good quarter for HUMIRA, and you raised your HUMIRA guidance for the year.

So if you could provide any color on what you think is going on in the underlying markets both in the US and o-US, that would be appreciated.

And then second, one item we are struggling a bit with is that if we look at the international pharmaceutical performance, HUMIRA, as we noted, was very strong.

But it looks like there is a pretty meaningful drop-off in sales of other products once you kind of back out HUMIRA and then submit a product that you list in the press release.

So if you can give any color there as to what is going on.

Are those old Solvay products that are dropping off?

Any insights would be appreciated.

Thanks.

For HUMIRA we are seeing really globally good market performance to start with.

In the US in particular, growth rates have picked up this year, and that is certainly bolstering the product.

And in international, as you know, growth rates have been quite a bit stronger than the US, and they have continued to be at midteens or even better growth rates.

So certainly that is helping support the product.

We are also executing quite well in the businesses in terms of share performance, most significantly in the derm and the gastro areas, but also we are seeing some progress in RA as well, despite the fact that there is some -- you know, a fair amount of competition in that space.

So globally we are just seeing good market growth, good share performance, and very good execution on the part of our business people.

On the question on pharma growth, I think if you look at most of the products we are seeing pretty strong growth across them in the quarter.

So maybe you could be a little more specific about exactly what your question is in pharma growth?

(multiple speakers)

This is Larry.

(multiple speakers) in the quarter, so did HUMIRA obviously.

There is not that many products actually in the proprietary business any longer.

Again, a lot of the Solvay products other than say a duodopa have moved over into the established pharma business.

So most of the other products, as Tom said, had pretty good quarters.

Well, if you look at -- I'm sorry, just to dive in here -- if you looked at international pharma and you backed out HUMIRA and you backed out Kaletra and, let's say, Lupron just for kicks as well, you would get the balance of that international pharma piece is down about $250 million year over year.

So about a $600 million business last year is now about a $350 million business once you strip out the stuff that you guys report.

So I was just hoping to get some color on the products that are going away.

Is that old Solvay business that you guys have decided to stop marketing because that is pulling down your international pharma growth by a fair amount?

Certainly within established pharmaceuticals, there are a handful of products that are at the end of their life.

Lansoprazole, for example, in a couple of markets has gone off patent.

But in terms of Abbott, those are relatively minor -- there has been a little bit of Solvay-related turbulence, shall we say, as we work through the products that are remaining in the portfolio compared to those that are going to be -- we are no longer going to be promoting.

But I would only very selective relatively minor and really I would say anything that is -- that you are talking about is really being worked through in the first half here and is not representative of what we expect in terms of growth rates for these businesses going into the third and fourth quarters.

So, yes, there was a little bit of that, but really it is not significant to our performance in the quarter.

Okay.

And then on the emerging market numbers you guys are now providing -- so you reported 23% emerging markets sales growth -- Tom, do you have any kind of estimate on what that would be if we looked at it on an organic basis?

So if we tried to adjust for currency and for the timing of the Piramal deal?

In terms of M&A, the only impact in there is Piramal.

As you know, we have fully lapped Solvay.

So that does not have an impact, and you have a pretty good idea what our annual sales for Piramal are.

Exchange generally speaking is lower in the emerging markets than it is for the overall company.

Obviously the positive currency in the quarter was mainly due to yen and euro.

So I don't have a precise number for you, but I think you can factor in less exchange in those businesses than what you are seeing broadly across Abbott and just adjust for the quarter of Piramal that we did not have in the 2010 base.

David Lewis, Morgan Stanley.

Just a quick question on stent dynamics.

Obviously this particular quarter you are facing a very, very challenging comp.

But considering competitor issues, I wonder if you could update us about what expectations you have for the next three to four quarters in the stent market, specifically on opportunities for share and then secondarily price stabilization potentially?

Well, as I mentioned in my call remarks, we have done quite well internationally with XIENCE and XIENCE PRIME launching, and we are continuing to gain incremental share there as well.

And we are optimistic with the launch of XIENCE PRIME and approval coming here in the first half of 2012.

DES pricing has been stable, I would say, down low single digits sequentially and upper single digits year over year as expected.

It has been a little bit better.

So I would say overall we feel pretty good about that market in terms of its moderation and price.

And with one of the main competitors leaving the market, that obviously opens up an opportunity that is about $400 million, particularly in the small vessel stent area with our recent launch of nano.

So we expect to gain some of that share and take some of that market as well.

I think the thing that people forget about is international sales and markets for our overall DES portfolio make up more than 60% of our total global sales now.

So we continue to see better growth in emerging markets, and PCI volume obviously in those markets is growing midteens versus flattish here in the US.

Tom, just thinking about margins in the quarter, Miles made a comment earlier on in the year that I interpreted as his comfort or visibility on double-digit earnings growth for 2012, and I think about your progress through the first half of this year I wonder if you would be able to update us on your visibility on double-digit earnings growth for 2012 based on the performance in the first half?

Well, it is clearly too early to talk about 2012 today.

I mean we have had a great quarter, a great first half of the year, and obviously we are feeling good about the business as we have increased our guidance range for the year.

So the momentum is good.

Obviously HUMIRA I think is outperforming most expectations this year.

We are seeing really nice momentum in that product.

Ex-US nutrition I think you're going to see accelerated growth in the second half, so that bodes well going forward.

The same thing in our Established Pharmaceuticals, you are going to see stronger growth in the second half as we work through some of these transitional issues.

So I think the momentum is good.

I think we have got a lot of growth drivers.

We have talked a lot about operating margin opportunities which have been dampened down a little bit this year by some of the headwinds we talked about earlier in the year that we are overcoming quite nicely with our performance.

And so while operating margins this year are only expected to improve modestly, we think they are still -- there is going to be much more opportunity going forward there.

So I think we have got a lot of things going our way to have another strong year in 2012, but it is a little too early to start forecasting until we get deeper into this year and get through our budgeting processes.

And Tom, just maybe a quick follow-up on your comment on Nutritionals.

As that business recovers, is it possible for Abbott to expand the Nutritionals market through M&A either in the US or o-US, or do you think existing market share becomes an impediment to that?

I don't think we need to do things like that.

We have done a really nice job the last four or five years in terms of organic growth and investments of commercial resources and infrastructure in these various markets as we have grown them so strongly.

So we have great brands.

We play both obviously on the infant side and on the medical side.

A lot of the competition does not have that -- both sides of the business and the strong performance.

This business is very committed to innovation, and if you look at whether it is formulations or packaging, we have done a very nice job in terms of enhancing our market position through our R&D efforts.

So the answer is we don't need to do any M&A activity to be successful there, but we like the business.

It is a core part of the Company, very important to us, and we are always looking for any opportunity to grow the business.

Rick Wise, Leerink Swann.

Can you discuss just generally pharma had a solid quarter.

Can you talk about the impact of pricing or inventory stocking, de-stocking in the quarter how that helped or dragged or anything there?

We had very, very stable inventories at very comfortable levels for us throughout the quarter.

So there was really no impact of inventories in the quarter.

And pricing?

There was some price obviously going positive in the quarter.

Okay.

Gross margins, Tom, obviously were very solid, and you are giving us good guidance again for the third quarter.

Can you give a little more color on what is driving that?

It has been a long time coming getting to that 60% market.

Sustainably is it going to be at 60% going forward as best you can judge today?

Well, that is my forecast.

But we have talked a lot about this year in particular, and it's a bit frustrating because we are executing extremely well in terms of efficiencies and product mix.

Exchange has been a bit of a head wind this year.

It probably took more than 2 points out of our year-over-year comparison in the quarter.

So we are over 60% despite that.

But the mix is improving, and that is what helped us get to the 60% level this year.

I think we are going to work through the impact of European austerity and some of these things we talked about earlier in the year by the end of 2011.

So once we are through some of those one-time transitional issues, certainly our expectation is to stay sustainably above 60% and expand it, and that is part of our growth story as we move into 2012 and beyond.

So product mix is really helping.

I think some of the things going on this year are masking real progress, and we have made good progress.

Not as much as we might have, but I think you're going to see more of that as we go into next year.

That is a very helpful.

Just one last quick one maybe for John.

John, you talked about MitraClip briefly US under review.

Any sense of timing?

And remind me where we are internationally, and am I mis-remembering that maybe there were some manufacturing issues?

Are they resolved?

Just where do things stand?

Thank you.

Right.

We can't be specific on timing as we are still optimistic about a panel.

It is less likely that panel is going to occur in 2011, but it is, as you know, up to the agency.

So we will be talking to them on that going forward, and we have provided additional information that they are looking for.

So we will update you on that as soon as we know something.

Internationally we did have a recall of MitraClip.

It was based on the tip of the catheter.

We have resolved that, and we expect to have that back on the market here in the third quarter.

Glenn Novarro, RBC Capital Markets.

Two questions.

First, on Niaspan the scripts data has trended down since we have seen the AIM-HIGH study, and you had a good quarter with Niaspan, and my guess is it is because of pricing.

So I'm wondering is 2Q do you think 2Q is the peak of this product?

Should we model down sales going forward?

So just your thoughts on Niaspan going forward.

And then I had a follow-up question for Tom.

Sure.

This is Larry.

Certainly we have been watching the scripts, and everybody has seen what they have done.

Six weeks after AIM-HIGH relative to six weeks before, we would say that they are down about 5%.

So a pretty modest impact at this point, but we certainly continue to watch those.

We believe that we have incorporated a reasonable estimate here for the second half for Niaspan and our outlook for 2011, and to your point price will still play a bit of a positive role here in the second half.

But still six weeks out it is a little bit early to make an official call on it.

We continue to watch it, but at this juncture down 5%, six weeks before compared to six weeks after is again a fairly modest decline at this point.

But we feel like we have got a pretty reasonable expectation for the second half.

And so should we assume sales decline here from the 2Q level?

Is that a fair assumption?

I don't know if I could specifically guide you to that at this point.

Again, price will play a little bit of a role.

We will see how it plays out.

Again, scripts are down about 5%.

Yes, I think at this point we expect positive growth out of Niaspan in the third quarter.

Okay.

Great.

And then, Tom, on the tax rate, third quarter you are saying that the tax rate is going to be a little bit lower than the full year, the full year around 15% but 3Q in a 14.5% to 15%.

So what is bringing down the tax rate a little bit lower in the third quarter?

Well, you remember on the first-quarter call when we talked about Puerto Rico, which there is this excise tax for our operations there, we are incurring expense up in the cost of sales line, which is another item that is holding back our progress in gross margin transitionally this year.

But anyway so we had the growth expense up there, but we have the credibility reflected in the tax line.

That is the way we have to do it.

And so for the full year, in the first quarter, we had brought down the full-year tax rate to reflect that credit.

And what you are seeing is just the progression of these changes through the P&L over the quarter.

So, again, for the full year, consistent with what we said on the first quarter, approaching 15% tax rate average for the full year, and you cited our guidance for the fourth quarter or for the third quarter.

Okay.

So maybe a little bit tick up in the tax rate in the fourth quarter then?

I think you should just look at the full year approaching 15%, and the math will take care of itself.

Rajeev Jashnani, UBS.

I was wondering if you could discuss the operating margin outlook for some of the segments, Nutritionals, Diagnostics and Established Pharmaceuticals, although I know that is a little bit early perhaps at this stage.

But maybe, if you could, quantify to the extent you are comfortable with at this point where you see those in 12, 24 months from now, that would be helpful.

Thank you very much.

When you look at the businesses, there's a lot of good stories there in terms of operating margin improvement.

Probably leading the pack is our diagnostics business, which a couple, three years ago before the team really focused on margin expansion, we were running in the upper single-digit range.

In this quarter we are in the upper teens range.

They have made tremendous progress in terms of manufacturing efficiencies, but also product mix and pricing and really managing the business better top to bottom.

So that is a very good story for us.

Our vascular business has done a very nice job in the last few years.

We were in a negative position about three or four years ago and moving to the upper 20s in terms of operating margins in that business.

I think there is a more room to go there.

I mean clearly we have made a lot of progress, and I would remind people that that operating margin includes about $150 million of non-cash amortization expense.

But we have made significant progress there, and there is probably a little bit of room to go.

Some of our smaller businesses but still significant, Medical Optics, Diabetes Care, still great opportunities there.

In particular, Diabetes has executed on nice margin expansion, and we think more of that will continue going forward.

Now Nutritionals this year is artificially depressed by the impact of the infant formula from last year, but we are recovering very nicely from that as John mentioned in his remarks.

We should see a better operating margin this year.

One thing I will say is that that is a business we do continue to invest in commercially.

So some of the gross margin improvements we expect there will be invested back in the business because we continue to see really great growth opportunities across these markets, and they are pretty responsive to commercial investment.

So while we expect progress this year and in future years, our margin might be a little bit slower in the nutrition business because of the ongoing growth opportunities in that business.

Great.

That is very helpful.

If I could just follow up with one on HUMIRA, I think if I heard you correctly you mentioned $1 billion of revenue from new indications.

I was wondering if you could just go into a little bit more detail on that in terms of timing and indication beyond ulcerative colitis, I think, which is for the end of this year?

Right.

We would expect action by the agencies, Europe and the US here towards the end of the year on ulcerative colitis.

We are also working in Phase 3 in uveitis.

That has a potential market entry in the 2013 timeframe.

The Phase 3s are ongoing at this point.

We have got, again, this other indication in skin disease that most commonly affects the sweat glands, known as HS.

That could be a potential market entry in 2014.

And then we have this umbrella indication for inflammatory joint diseases that would include a number of subgroups that don't have, call it a major indication at this point, but like reactive arthritis in a number of different smaller indications.

When you collectively look at those again over that period of time probably later this year for UC, 2013 for uveitis, 2014 for HS and the spine indication could be an entry into 2012, the peak there is in excess of $1 billion in our minds, and we think that each of those probably have a several hundred million dollar opportunity over time.

So that is kind of how they break down at this point.

But greater than $1 billion of incremental from here is pretty significant.

Yes.

Thanks so much.

I appreciate it.

Sara Michelmore, Brean Murray.

Larry, this is, I guess, the second quarter you have broken out AndroGel and Creon.

Could you just talk about the growth trajectory of those products, and just in terms of addressable market sizes, etc., just so we could get a sense of how big they could be eventually?

Well, I don't think I can put a total cap on where they could go, but certainly AndroGel is becoming a fairly significant product here with the sales that I talked about for the quarter if you annualized that.

Creon, a little bit smaller, but the growth rates on both of them continue to be very strong double digits, and both products have leadership in their respective categories.

So we are very optimistic for our proprietary pharma business with both of these two products.

The new formulation of AndroGel that we just got approved is also very helpful.

Again, it is lower volume and is a much improved product for patients.

So we are very pleased.

And then again, this infant-dosing indication that we got for Creon as well gives us a nice opportunity, albeit in a smaller piece of that market, but nonetheless an advantage and a uniqueness to Creon that others don't have.

Okay.

And then just in the pipeline, you guys have had clearly gone out in the last 12, maybe 18 months, and assembled a series of partnerships here to fill in the pipeline in terms of external resource Phase 2 moving into Phase 3 types of candidates.

Where are you in that process in terms of building the pipeline?

I mean should we continue to expect you to be active there, or have you done a lot of activity and things should slow down from here?

Thanks.

I think we are still open to opportunities to further expand the number of bets we have in the late-stage pipeline.

You never can have enough in proprietary pharma.

As you know, the regulatory and clinical processes are challenging.

I do think we have done a very nice job of supplementing the portfolio with four or five really, really promising late-stage programs, and we are real happy with where we stand now.

And I think even compared to a year ago, our late stage pipeline is significantly more advanced and promising than people would have expected.

So our licensing organization is very good at this.

They work closely with the business to identify good opportunities that we can leverage Abbott's capabilities, and we continue to be open to opportunities there.

And it seems like a lot of the activity is aligned with your commercial strengths rather than a therapeutic category type strategy.

Is that a fair assessment?

I would say in today's world it is the quality of the science that is really the first screen.

You cannot be overly selective in terms of therapeutic areas of focus.

It is finding compounds or biologics that really have proof of concept and have a good chance of making it to market is really the first screen.

Because we have shown through HUMIRA, for example, that we can build commercial presence fairly readily, particularly in specialty areas if you have a high quality product to bring to market.

So that really is the first screen.

The only other thing I would say is our international proprietary organization in particular is extremely strong and well respected in the markets and well established.

And that is -- that international distribution asset is one that we do explain to potential licensing partners very extensively, and we have made some pretty nice progress identifying opportunities to bring in there.

So it is a combination of our strengths and things we are bringing to the party, but also if there is good science that we think we can commercialize, we are open to something that might be a little outside of our wheelhouse from time to time.

Jami Rubin, Goldman Sachs.

(technical difficulty).

Can you hear me?

I'm sorry.

Technical difficulties on my side.

Sorry about that.

You have got to take it off mute.

That was probably the problem.

So just quickly, Tom, you had talked about of the Established Pharmaceuticals business, $775 million of that $1.3 billion was emerging markets, which grew 25% year over year.

Is that right?

My question is this -- the remaining $560 million or so of that $1.3 billion, I mean you are showing operational growth of just $3.2 billion, and I know there is a lot of noise there.

But if emerging markets is up 25%, what -- can you just describe the performance of the remaining $564 million in sales?

Well, we are lapping some issues in the quarter.

Reductil is one.

That is a product that has been assigned -- as you know, we have no Reductil sales in 2011, but we did have a fair amount of --

What were the size of those?

I don't have that at my fingertips here.

There were some smaller products, and I mentioned in Mike's question, Lansoprazole, for example, in a few markets went generic during the quarter.

There were a couple of other of those.

So there were definitely some transitional products during the quarter that dampened down the non-emerging markets growth of Established Pharmaceuticals.

But we think that that is going to really work its way out of the system in the first half this year, and we do expect a nice pickup.

Another product that was off a little bit growth-wise compared to the prior year was clarithromycin, and as you know, that product goes up and down with the seasons depending on the year.

So there is some noise in there, but we do think it's going to pick up, and we have worked through a number of these.

So you would expect operational sales growth in the third quarter to pick up from the 3.2%?

Because that 3.2% also includes Piramal, which was not in the numbers a year ago?

Absolutely.

You will see better growth than that.

Damien Conover, Morningstar.

Just a question on the global anti-TNF market penetration.

In previous quarters you talked about penetration rates in RA in the mid-20s and the US midteens internationally for Crohn's disease in the low 20s in the US and both teens internationally and lower for the derm markets.

I wonder if we can get an update on where those penetration rates are currently?

And then also what kind of strategies are you using to increase the penetration and also what are the key areas of potential resistance given the relatively low penetration rates for the class?

You know, your penetration rate assumptions are fairly accurate at this point in time as I look across them.

In the US rheumatology would kind of be in the mid-20s.

Ex-US is probably in the midteens, maybe a little north of 15% in that 15% to 20% range.

Derm, as you mentioned, I will give you a number you said it is lower.

It is actually low singles in both the US and ex-US, kind of in that 5%, 6%, 7% range depending on when you measure it.

So there is a lot of opportunity there.

And in gastro I think you were right on with low 20s in the US and kind of low double-digit or low teens ex-US.

So you were very close.

I think the key really that continues in the international markets is the overall cost benefit of a product like HUMIRA.

In single-payer systems, that really makes a lot of sense to them in that a product like HUMIRA saves considerable downstream costs whether that is unemployment costs, surgical costs, things like that.

The upfront investment of treating a patient with HUMIRA certainly pays significantly downstream.

The penetration rates in derm in the past has probably been down in this range.

In Europe they don't quite treat it as severely as a disease state, the moderate to severe psoriasis patient.

In the US we tend to treat them just a little bit more frequently, although the penetration rate in the US is still fairly low.

But I think that overall the strategy of cause/benefit is really the key for us, and that plays certainly very well when you are discussing a product like this with single-payer systems.

Operator, we want to be respectful of people's time here and keep it to an hour, so we will take one more question.

Catherine Arnold, Credit Suisse.

I wanted to ask you a quick question on Nutritionals, and then if I had time for a follow-up on the pipeline.

On Nutritionals you said a lot about that business, Miles, but I'm just wondering you have a competitor that has disclosed sort of operating margins more in the 20 -- mid-20s range, and I wonder, is that an operating margin target that is reasonable for your business as your geography and your mix of products evolves over time?

And then I have a follow-up on the pipeline.

Right.

Well, absolutely we have greater aspirations on margins in our nutrition business.

Before we had the kind of transitional year here we had as we recovered marketshare in the US, we were in the upper teens range, and then obviously with the recovery in the domestic market, we have gone down a little bit this year, and we expect that to recover somewhat in the second half but still be below 2010.

I don't know any reason structurally why we could not be at levels at or close to the competition.

We have talked a little bit about this publicly that that particular management team is very, very focused on operating margin expansion.

We are kind of running a balance there between investing in growth as I talked about on this call and driving operating margin.

So we are going to try to do both.

But there are a lot of initiatives going on in the logistics manufacturing area to drive costs out and get our operating margins much closer to some of the levels you are seeing in other companies.

So I think that is certainly over a medium-term an achievable objective, and the management team is very focused on delivering on that.

Great.

And then just to follow up on the pipeline, could you talk about your strategic interest and investment in the cardiometabolic area?

Obviously you are moving towards the exclusivity loss of Niaspan and Tricor, and of course, you have bardoxolone, but is this an area of strategic importance for you guys?

Well, the cardiology, the primary care products we have in lipids in those areas are clearly mature for us.

As we look at the development of science in these areas, it does seem that there is not a lot of new opportunities and a lot of the needs have been met by the existing products.

So we are focused more in other areas both from an R&D perspective and from an M&A perspective, and I think you are going to see the mix of our portfolio shift to more specialty products.

We talked a lot about them today in the pipeline review.

You see immunology products, HCV products, a lot of other areas where we think there is more opportunity to deliver more benefits for patients than there is in the cardiology space.

Thank you.

And that concludes our conference call today.

As I mentioned earlier in the call, we will also now be posting to our website a slide deck that highlights our recent pipeline progress in some of our select areas, and that is something that, as I said, we will be building on going forward.

To listen to a replay of today's call after 11 AM central time, go to Abbott's Investor Relations website at abbottinvestor.com and after 11 AM Central time via telephone at 203-369-0536.

The confirmation code is 2128751.

The audio replay will be available until 4 PM on Wednesday, August 3.

Thanks for joining us, and have a good day.

Thank you.

This concludes today's conference.

You may disconnect at this time.