美國雅培 (ABT) 2011 Q3 法說會逐字稿

Good morning and thank you for standing by.

Welcome to Abbott's third-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 can not be recorded or rebroadcast without Abbott's expressed written permission.

I would now like to introduce Mr.

John Thomas, Vice President of Investor Relations and Public Affairs.

Thanks.

Good morning, everyone, and thanks for joining us.

Today we are going to be discussing two important Abbott news events.

First, our announcement to separate into two independent publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals.

And, second, we will be talking about our strong third-quarter ongoing earnings results.

Joining me on today's call is Miles White, Chairman of the Board and Chief Executive Officer; Tom Freyman, our Executive Vice President Finance and Chief Financial Officer; Rick Gonzalez, Executive Vice President Global Pharmaceuticals; and Larry Peepo, Divisional Vice President of Investor Relations.

Miles and Rick will review the strategic rationale related to our announcement this morning, as well as provide an overview of each of these new companies and their investment identities.

Tom will discuss certain financial aspects and conclude with a brief review of our third-quarter results, which we have summarized today to allow for sufficient time to discuss today's other major announcement.

Details on our third quarter can be found in our earnings news release.

Following our comments today, of course, we will take any questions you have as always.

I would also note that we posted a 12-page slide deck to our Abbott website this morning at www.abbottinvestor.com, and this deck summarizes the details of our announcement this morning regarding the separation.

In addition, this morning I am pleased to announce that we will be hosting a two-hour investor meeting this coming Friday in New York.

Miles, Rick Gonzales, Tom Freyman, as well as Dr.

John Leonard, our head of Pharmaceutical Research and Development, will be in attendance along with myself, Larry and some other people from our Investor Relations and Media departments.

At Friday's meeting, we will discuss the growth opportunities in Abbott's diversified medical products business, as well as growth opportunities in the research-based pharmaceutical company.

We are going to walk you through the pharmaceutical pipeline in more detail, and we will spotlight certain programs that we are particularly enthused about, including early data from our HCV trials, and Rick will talk more about that in a minute.

So, given that you are going to hear from us this coming Friday, we are going to try to limit and focus our call today and try to keep it to approximately an hour.

Before we get started, let me remind you that some statements may be forward-looking, including the planned separation of the research-based pharmaceutical company from the diversified medical products company and the expected financial results of the two companies after separation.

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, and there is no assurance as to the timing of a planned separation or whether it will be completed.

Economic, competitive, governmental, technological and other 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 in the interim reports filed on Form 10-Q for subsequent quarterly periods.

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

On today's conference call, as in the past, non-GAAP financial measures will be used to help 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, as well as regulatory filings from today, which will be available on our website at abbott.com.

And with that, I'm now pleased to turn the call over to Miles.

Miles?

Okay.

Thanks, John.

Good morning.

As you can see from our strong third-quarter results, Abbott delivered another quarter of strong performance across our mix of businesses.

Our ongoing earnings-per-share growth was more than 12% as we have now posted double-digit growth in 17 of our last 18 quarters.

We will generate similar performance for the full year, which will, again, place us among the top performers in our peer group.

So we are pleased with our consistent financial performance, but as evidenced by today's other important news, we are taking a significant next step in aligning our long-term strategic goals with our shareholders' best interests.

Today's announcement to separate into two publicly traded companies in diversified medical products and research-based pharmaceuticals is a logical step in the further evolution of our Company.

Over the past 12 years, our actions have dramatically reshaped Abbott.

Let me give you some background and examples.

Since 1998 Abbott has nearly quadrupled in revenues to nearly $40 billion in annual sales.

During that same 12-year period, we shifted our geographic sales mix from what was more than 60% US-based sales in 1998 to more than 60% international sales today.

In 2001 the reshaping of our pharmaceutical business began in earnest when we purchased Knoll Pharmaceuticals, which included an R&D program that is now called by its well-known commercial name, HUMIRA.

As you know, HUMIRA is on track to soon become the world's leading biologic for autoimmune diseases with annual sales this year of approximately $8 billion.

And today our total research-based pharmaceutical business generates nearly $18 billion in annual sales.

In 2006 we globalized our leading Nutritionals business to sharpen its focus and better capture international growth opportunities, and it worked.

We have doubled the division's international sales over the last five years.

Also, in 2006, we acquired Guidant Vascular and subsequently built our existing vascular business into a leading interventional cardiology company headlined by the number-one global drug-eluting stent brand, XIENCE.

In the last four years, we have also rebuilt our core diagnostic business to deliver higher returns, doubling its operating margin and significantly improving its cash flow.

So those are just some of the actions that we have taken over the last decade.

More recently, we have moved to advance our strategy with an eye toward two major initiatives, rapid expansion in fast-growing emerging markets and a concerted effort to re-energize and retool our research and development pipeline.

To that end, we significantly accelerated our emerging markets presence with the acquisitions of Solvay and Piramal Healthcare Solutions, the latter of which has positioned Abbott as the largest pharmaceutical company in India, the second fastest-growing pharmaceutical market in the world.

We also created a new Established Pharmaceuticals division, a separate fully integrated $5 billion Branded Generics pharmaceutical business that provides the infrastructure to expand in emerging markets.

And we aggressively rebuilt our late-stage research-based pharmaceutical pipeline through concentrated internal R&D efforts, as well as strategic in-licensing and late-stage collaborations.

In the last four years alone, we have tripled the number of new molecular entities.

In the last two years, we have doubled our late stage programs.

Each of these major strategic changes, plus other advancements that we have made along the way, has continually strengthen Abbott to better compete in our ever changing healthcare environment.

The news we announced today to separate into two independent companies is driven by this same disciplined, deliberate and aggressive process.

As John mentioned, we will be hosting an investor meeting in New York this Friday morning to further discuss today's news, including details on the two companies' growth prospects and new product pipelines, which offer both companies the opportunity for stronger and more sustainable growth.

So given our two-hour analyst meeting on Friday, we are going to keep our comments brief today, touching on only the strategic rationale, the key benefits to shareholders and a summary of each respective company's unique investment identity.

The strategic rationale and action behind today's announcement is the result, as I said, of a deliberate and exacting process and part of the strategic evolution that has been underway for quite some time.

We are now ready to separate into two independent publicly traded companies because the investment identity and the operating model of each separate enterprise is very different from the other.

It is just that simple and straightforward.

Our Proprietary Pharmaceuticals business is more research intensive than the rest of Abbott, and that is by design based on its business needs and strong sources of cash flow and earnings power.

As you are all aware, pharmaceutical and biologic companies have to produce innovative medical treatments that demonstrate clear patient benefits.

These specialized proprietary medicines are more often used in the developed world, including the US and Europe where best-in-class therapies generate significant demand.

The majority of revenues for this new pharma company will be generated from developed markets with 45% of revenues outside the United States.

So that is a snapshot of the new Proprietary Pharmaceuticals company.

The Abbott diversified medical products company has countless sources of high-growth opportunities that are well balanced across literally hundreds of different product brands, different business franchises and different payers.

The pipeline includes dozens of game-changing medical technologies, next-generation diagnostic systems and devices, newly formulated nutritional brands and an array of other incremental enhancements such as consumer-friendly packaging, new product flavors and other meaningful brand initiatives.

The diversified medical products company will embody a vast portfolio of medical technologies and consumer nutritionals that will resonate in the developed world, but even more importantly in the most rapidly growing emerging markets where Abbott is well positioned.

We have taken actions over the last several years to pick up our pace of expansion into international markets that offer the most promising growth prospects based on improving socioeconomic conditions.

This is nowhere more evident than in the key BRIC countries such as India.

Abbott is the number one company in India because we moved quickly on a unique asset in Piramal Healthcare Solutions.

It was a rare opportunity, so we acted fast, and we are pleased that we did.

So, in summary, there is no question that both our research-based pharmaceutical and diversified medical products businesses have evolved over time in very different ways into two very distinct and compelling investment identities.

For example, the new pharmaceutical company is today generating nearly $18 billion in annual sales.

It has delivered market-leading performance, including double-digit topline growth in four of the last five years.

That performance was built on a sustainable mix of well-known prescription brands, including HUMIRA.

Going forward we have strengthened the pharmaceutical pipelines through more productive discovery and development, strategic in-licensing agreements and select late-stage collaborations.

This Company will generate robust and sustainable cash flow with the flexibility to accelerate pipeline programs as needed and the ability to leverage breakthrough medications that can deliver meaningful benefits for patients.

The end result should be strong and steady shareholder returns, including a competitive dividend policy.

I'm pleased to announce today that the research-based pharmaceutical company, which will be named at a later date, will be led by Rick Gonzalez, a 30-year Abbott veteran who currently serves as Executive Vice President of our Global Pharmaceutical business.

Rick has served in numerous senior leadership positions throughout his Abbott career, including head of our Medical Products business and for several years as the Company's President and Chief Operating Officer.

Those investors who followed us over the years know that Rick is an experienced, well-respected senior leader within Abbott, as well as within the healthcare industry.

I have every confidence that Rick will do an exceptional job as Chairman and CEO of the new Proprietary Pharmaceuticals company.

I don't think it could be in better hands.

I will continue to serve in my current position as Abbott's Chairman and Chief Executive Officer, so let me quickly summarize what the new Abbott will look like, and, again, we will talk more about this on Friday.

Abbott as a diversified medical products company will generate revenues of approximately $22 billion in sales, supported by a multitude of durable high-growth franchises.

Our portfolio will remain as well balanced as it is today with four major business segments, each roughly similar in size, including Nutritionals, Established Pharmaceuticals, Diagnostics and Medical Devices, which encompasses our Vascular Devices, Vision Care and Diabetes Care businesses.

Approximately 40% of our customer mix will be self pay, making it generally less dependent on the US economy.

In fact, approximately 30% of total Abbott diversified medical product sales will be generated in the United States with 70% of sales generated ex-US.

Emerging-market sales will be the largest geographic component and nearly 40% of total Abbott diversified medical product sales.

We will continue to expand in emerging markets because that is where the growth is, and that growth is now 3 times the growth rate of the developed world.

We also plan to more effectively leverage the power of the Abbott corporate brand across each of these diversified medical product segments.

For example, in our global nutritionals and branded generics businesses, we will take advantage of channel synergies to more efficiently reach our growing customer base.

So what can investors expect from the diversified medical products company in terms of growth?

Well, here is what I expect.

I expect the Company to deliver at least high single-digit sales growth and sustainable double-digit ongoing earnings per share growth, which should place it among the most attractive large-cap healthcare investments.

We will achieve this with balanced success across Nutritionals, Established Pharmaceuticals, Diagnostics and Medical Devices.

Nutritionals will be the largest business for now and one of the strongest global players in the industry with well-known brands such as Similac and Ensure.

It generates high return on invested capital and very strong cash flow.

We expect to grow our worldwide nutritional sales at a double-digit pace with a cadence of new product launches and increased penetration in key international markets such as China, India and Brazil.

We will also significantly improve both the gross margin and operating margin profiles of this business.

Our Established Pharmaceuticals division, or EPD, is among the leading branded generics businesses in the world, generating more than $5 billion in sales from a portfolio that is composed of literally hundreds of different brands.

EPD enjoys a significant commercial footprint and boasts a registration pipeline of more than 1000 individual products, which are beginning to launch now in numerous geographic markets.

As a result, we expect EPD to generate sustainable, mid to high single-digit sales over the next several years with strong double-digit sales growth in the largest emerging markets.

We will continue to optimize its cost structure as well, driving efficiencies where needed.

Our global Diagnostics business includes the world's leading immunoassay and blood screening businesses, as well as our faster growing Point of Care and Molecular Diagnostics segments, which today are modest in size but will be meaningful to earnings in just a few short years.

We expect Molecular Diagnostics, for example, to exceed $1 billion in sales by 2015.

Our concerted effort to dramatically improve bottom-line performance in Diagnostics has resulted in steady operating margin expansion.

That will continue as will better cash flow generation.

And finally, we have Medical Devices.

We define this segment with our global Vascular business, our Diabetes Care business and our Vision Care business.

As you know, our Vascular business has a healthy and strong commercial presence that is defined by the industry's best-in-class drug-eluting stent, XIENCE.

In a matter of just a few short years, XIENCE and XIENCE PRIME have captured the number one share position in what is a competitive DES global marketplace.

But this is not just a XIENCE story.

We have an industry-leading pipeline that contains upward of 20 new products with a near-term launch of XIENCE PRIME in the US and a robust pipeline of DES, structural heart and endovascular development programs.

These range from our bioresorbable vascular scaffold, or DVS, which has the potential to reinstate the DES market to our MitraClip next-generation structural heart valve.

In Diabetes Care, we will continue to focus on the insulin-dependent patient, a segment where we are growing faster than any other competitor in the US.

And in Vision Care, we expect to launch numerous new products in technology advancements over the next several years with an eye toward operating margin expansions.

In summary, the new diversified medical products company will maintain Abbott's heritage of financial strength with abundant sources of revenues and cash flows and considerable flexibility to invest in strategic priorities and new growth initiatives.

The Company will be a well-balanced blend of diverse healthcare businesses and new geographies driven by a broad mix of payers and unique base of customers, many of whom are living in high-growth emerging markets where income levels are steadily on the rise, along with socioeconomic conditions.

So with approximately $22 billion in sales, the diversified medical products should be without question one of the most attractive and largest health-care investment opportunities.

It should also be among the fastest-growing.

Abbott's high single-digit topline growth, coupled with continued margin expansion, will deliver sustainable double-digit ongoing EPS.

As the environment has changed, so, too, has our Company.

We have reshaped, advanced and grown Abbott in a manner that makes today's news possible.

As a result of this separation, our shareholders will benefit from two new companies that have evolved into two distinct investment opportunities and identities.

With that, I will now turn the call over to Rick to discuss the new research-based pharmaceutical company in more detail.

Rick?

Thank you, Miles, and good morning.

As Miles indicated, our new research-based pharmaceutical company has a long track record of demonstrated commercial and operating strengths.

These attributes position us well for sustainable performance going forward and help us succeed when we become an independent publicly traded company.

Having worked in leadership positions across Abbott for quite some time, including leading our pharmaceutical business for the last two years, I can tell you this is truly a very strong business.

It is an organization with a long track record of industry-leading performance.

This includes double-digit sales growth four out of the last five years, a significant accomplishment in today's healthcare environment.

The fact that we have maintained such strong performance underscores the strength and experience of our pharmaceutical management team.

We have industry-leading specialty-focused portfolios that include a mix of growth brands such as HUMIRA, as well as sustainable performance such as Synthroid and Lupron among others.

Over the past several years, we have built a promising R&D pipeline of specialty medicines focused on important disease states such as hepatitis C, chronic kidney disease, multiple sclerosis, oncology and other areas of significant medical needs.

Since I will be providing a more detailed overview of our pharmaceutical business and R&D pipeline on Friday, I will keep my message focused on two basic things today -- first, the sustainable performance of our existing commercial portfolio, and second, a brief review of select highlights from our advanced late-stage pharmaceutical pipeline.

Our new research-based pharmaceutical company generates nearly $18 billion in annual sales today, driven by strong marketing presence and leadership positions across more than 20 major pharmaceutical brands.

These include HUMIRA, our market-leading biologic for immune diseases, which has an eight-year track record of commercial success; Kaletra and Norvir, Abbott discovered HIV protease inhibitors that changed the global landscape of HIV treatment; Synthroid for thyroid disease, one of the most widely prescribed medicines that doctors choose to give their patients in the US; Lupron, a market-leading therapy for prostate cancer, endometriosis and other conditions; Synagis, a biologic for infants suffering from respiratory disease; Creon, a leading therapy for conditions associated with cystic fibrosis; AndroGel, the number one therapy for correcting low testosterone levels in men and numerous other medications.

So let's start with HUMIRA, which will remain a significant growth driver for our new independent company.

HUMIRA has a best-in-class profile, including a strong track record of demonstrated clinical, performance, utility across a broad spectrum of indications and a well-established safety profile.

And these strengths have played out in the marketplace as evidenced by HUMIRA's strong ongoing performance.

Despite the entry of several new competitors over the last few years, HUMIRA continues to gain market share and demonstrate strong growth, and there is plenty of runway left.

As Miles said, this year we expect annual sales for HUMIRA to reach approximately $8 billion.

This level of performance is a testament to the outstanding commercial execution, as well as the significant benefits HUMIRA delivers for a wide array of patients suffering from serious medical conditions such as rheumatoid arthritis, Crohn's disease, psoriasis, ankylosing spondylitis and others.

I expect our organization to sustain this positive momentum as it drives to meet the demand in an expanding overall anti-TNF market where penetration rates remain low across all three therapeutic areas -- rheumatology, dermatology and GI.

We will also add to our broad list of approved uses for HUMIRA with the launch of several new indications, as well as other product enhancements that we anticipate will further improve the overall patient experience.

In addition to our proactive long-term growth strategy, we have planned for some possible changes in the anti-TNF market, including the potential approval of an oral competitor, as well as the possible entry of biosimilars in the later years of our long-range plan.

Orals and biosimilars may both someday have a place in the market, but their potential entry will not materially change HUMIRA's strong growth profile.

HUMIRA will remain a growing, sustainable and leading commercial global brand in the years to come.

The global anti-TNF biologic market is significant and continues to grow nicely.

In addition to HUMIRA, several other market-leading brands in our current portfolio will complement our total company sales growth story.

To that end, we expect this portfolio, including HUMIRA's sustainable robust growth outlook, to help us achieve an expected total topline growth profile for the new Company of flat to low single-digit sales growth in 2013 and 2014, consistent with Wall Street consensus and similar to our pharmaceutical peers.

Factored into this growth outlook are realistic expectations for our more mature lipids franchise, which we have said in the past will see generic entrance beginning in mid-2012.

Then beginning in 2015, we expect our sales growth to accelerate based on HUMIRA's continued strong underlying growth, as well as the launch of new products from our late-stage pipeline.

So, finally, let me touch briefly on select highlights from our pipeline, which I will cover in more detail on Friday.

Like all pharmaceutical and biotech companies, our business relies on a productive R&D engine capable of generating a steady stream of products that serve unmet patient clinical needs.

Over the past few years, we have rapidly advanced our internal programs such as hep C, and we have added 11 new assets through a concerted focus on strategic licensing, acquisitions and partnering activity.

As a result, we have tripled the number of new molecular entities with more than 30 in human clinical trials today.

We now have a total of 20 new compounds or indications in Phase 2 and Phase 3 development.

Our focus is on medicines that hold promise in difficult to treat diseases with significant market opportunities.

Our goal is to develop products that have strong clinical performance and deliver meaningful economic value in today's healthcare environment.

Bardoxolone, a compound we licensed from Reata Pharmaceuticals, is a great example of this.

This treatment, which is in Phase 3 development for chronic kidney disease, has the potential to dramatically change the treatment landscape.

Current therapies only modestly slow the progression of the disease, while bardoxolone has the potential to markedly improve patient outcomes.

We expect commercialization for bardoxolone as early as 2014.

In neuroscience we are addressing conditions such as Alzheimer's disease, Parkinson's, schizophrenia, pain in MS.

Daclizumab, our next generation biologic for MS, is in Phase 3 development.

Our recently announced results from our Phase 2 registrational trial suggests that daclizumab may offer patients the right balance of high efficacy and a manageable safety profile.

We expect to launch in 2015.

I am also particularly enthused about our internal hepatitis C development program.

Our compounds have the potential to dramatically change how patients are treated today by improving tolerability and cure rates and significantly shortening therapy duration.

We are projecting market entry in 2015 for a triple combination HCV therapy.

On Friday, for the first time, we will give you a preview of some select early-stage data from our HCV program.

These three opportunities alone -- bardoxolone, daclizumab and HCV -- can together generate multibillion-dollar peak year sales if successful.

In addition, we have other promising medicines progressing through our pipeline, and we will discuss some of these on Friday as well.

In summary, we have a very compelling opportunity to create a new, independent, publicly traded pharmaceutical company, with a distinct identity for our shareholders.

Today we are very fortunate to have a unique sustainable growth driver in HUMIRA, one of the most successful pharmaceutical products of all time, as well as leadership positions in a host of other sustainable, global commercial brands.

We also expect to see meaningful contributions from our pipeline in the coming years.

In the meantime, over the next 12 months, we will focus on running the global Proprietary Pharmaceuticals business within Abbott just as we would normally.

As you know, this business has strong margins and generates robust sustainable cash flow.

As an independent company, this financial strength provides the opportunity for healthy returns to shareholders, including an industry competitive dividend.

With that, let me turn the call over to Tom for some transaction details.

Thanks, Rick.

Let me review some of the key aspects of the transaction as we see them today.

We expect to accomplish the separation through a tax redistribution to shareholders.

At the time of the separation, Abbott's then current shareholders will own 100% of both publicly traded companies.

The final distribution ratio will be determined later in the process.

We expect the separation to be completed by the end of next year subject to regulatory approvals and final approval of the distribution of shares of the new Company by our Board of Directors.

Both companies are expected to have the strong balance sheets and cash flow to support strong investment grade credit ratings.

Credit ratings for the two companies will be determined by the rating agencies based upon financial projections and capital structures that will be determined in the coming months.

We would expect to tender for a portion of the current Abbott long-term debt outstanding in conjunction with this transaction funded with debt issued by the new pharmaceutical company.

It is expected that Abbott and the new pharmaceutical company will pay a dividend that when combined would equal the Abbott dividend at the time of separation.

We expect to incur one-time separation costs, including bond refinancing costs over the course of the separation process.

These costs will be quantified at a future date and will be treated as one-time items in our quarterly reporting.

As a result, there is no impact from this separation to our 2011 ongoing earnings per share guidance.

We will complete audited financial statements that will result in a three-year financial history for the new pharmaceutical company.

This information will be part of a Form 10 filing, which is targeted to occur in the next few months.

And finally, we expect to complete this process in an efficient manner given the experience and integration and separation that we have built over the years.

I will close our prepared remarks with a brief summary of our third-quarter earnings release.

As you have now seen, we reported very strong third-quarter results that beat the Street estimates and were at the high end of our forecast.

We delivered another quarter of double-digit sales and ongoing earnings growth with ongoing earnings per share of $1.18, up 12.4%, and we confirmed our full-year outlook for double-digit ongoing EPS growth of 2011.

Sales growth in the quarter was 13.2%, including a favorable 5.3% impact from exchange rates.

Organic sales growth in the quarter was nearly 7%.

The majority of our major businesses delivered double-digit reported sales growth.

This includes more than 15% growth for durable growth businesses driven by double-digit growth in Nutritionals, Core Laboratory Diagnostics, Diabetes Care and Established Pharmaceuticals.

Our Proprietary Pharmaceuticals business also delivered strong growth with reported sales up more than 13%.

This reflects impressive worldwide performance for HUMIRA, which increased nearly 26% on a reported basis and more than 18%, excluding exchange.

HUMIRA is on track to exceed the sales guidance of high teens growth that we raised just last quarter.

In our Innovation-Driven Device businesses, sales increased 6%, including continued double-digit growth in Molecular Diagnostics and double-digit international growth in Vascular and Medical Optics.

And emerging markets continued to represent a significant growth contributor with sales in the quarter of $2.6 billion, an increase of 21%, consistent with the high growth expectations we have for these markets.

Regarding other aspects of P&L in the quarter, the adjusted gross margin ratio was 60.4%, ahead of our previous forecast, driven by improved product mix.

As reflected in higher SG&A expense, we increased our litigation reserves from a previously disclosed litigation identified as a specified item in our earnings release.

Turning to our full-year outlook, today we are confirming our expectation for double-digit ongoing earnings per share growth for 2011 and narrowing our guidance range.

Our guidance for the full year is $4.64 to $4.66, reflecting 11.5% growth at the midpoint of the range.

For the fourth quarter, today we are issuing ongoing earnings per share guidance of $1.43 to $1.45.

The midpoint of this ongoing EPS range represents continued double-digit growth over the prior year.

We forecast specified items of $0.30 in the fourth quarter, primarily reflecting the integration costs from past acquisitions and costs of previous restructuring actions.

We are forecasting mid to high single digit sales growth in the fourth quarter, including a favorable effect from foreign exchange of approximately 1% and a gross margin ratio approaching 61%.

So, in summary, while we delivered another strong performance in the quarter, more significantly we announced a major strategic change for Abbott.

The separation of Abbott into two publicly traded companies creates two enterprises that are well positioned in their respective markets.

Abbott is expected to be one of the fastest-growing, large-cap diversified medical products companies with a durable mix of products, and the research-based pharmaceutical company will be a leader in its industry with a strong and sustainable portfolio of specialty medicines and a promising pipeline.

We believe that both of these companies will be attractive opportunities for investors.

And with that, I will turn the call back to John, and we will take your questions.

Thanks, Tom.

We are now ready to take questions, please.

(Operator Instructions).

Jami Rubin, Goldman Sachs.

Thank you, and congratulations to you, all, Miles, especially to you.

This is a very bold decision and clearly in our view the right decision for the Company going forward, and we hope other companies follow your lead.

So congratulations.

I just wanted to ask a couple of questions.

Just apart from splitting up the two businesses and getting higher values for those businesses, obviously the device business has been under pressure -- not under pressure but the multiple has reflected concerns around the HUMIRA franchise and therefore you have not gotten full value for some of your durable growth businesses.

But aside from splitting up the businesses and getting what you would think, what you would imagine to be appropriate valuations for the two very distinct businesses with different risk and growth profiles going forward, can you talk about some of the other advantages to breaking up, such as how we should think about capital deployment; how we should think about operating margins of these businesses?

I mean one thing that we have noticed is that Abbott has a very large overhead or redundancy that I would think would be able to go away if you complete this transaction.

So if you could just talk about some of the other efficiencies that you can create by splitting up the two companies.

And then I have a question for Rick on the pharma business.

I mean clearly HUMIRA was a big driver of the overall business and will be an even bigger driver in terms of its contribution to the Proprietary Pharmaceutical business.

With competition coming in the next year or two from tofacitinib, with competition from biosimilars, clearly this will be an issue.

I'm just wondering if you could talk a bit about strategies you have in place to protect that franchise.

Thanks.

Okay.

That may be the longest question I have ever experienced in my 13 years -- (multiple speakers)

Oh, come on, it wasn't that long.

(multiple speakers)

The fundamental -- let me just give by way of background the fundamental basis for the separation here.

I heard a comment this morning from another analyst source that causes me to want to make sure I make the point.

We have always pursued a diverse model, and we believe in that model, and we believe in the diversity of the business and the growth opportunities it gives us and, frankly, the reliability and sustainability over time.

But what has happened here is we have been so successful in our proprietary pharma business over time, it has grown quite large.

And, frankly, arguably, I believe, it will be very successful going forward.

I think when the companies are split I believe both will be valued at the top of their peer groups but for very different reasons.

In a portfolio of diverse companies, the characteristics of those businesses need to be similar.

And, as our proprietary pharma business has grown large, it has different characteristics, and it is also quite dominant now in the portfolio.

And I think that it has given the company clearly an identity of pharma with, oh, by the way, you have these other diverse businesses.

But, as you can see by how we proposed the split, the Company has $22 billion in a very diverse mix of similar characteristic businesses as I described and a very successful proprietary pharma business that is delivering great returns and cash flows and has great potential and durability going forward, but it's a business that investors seeking return will look to.

Investors who are looking for a large-cap diverse double-digit grower are not necessarily looking for the same type of investment identity as pharma.

So what happens here is the pharma piece got so big and is different that these two investments make sense separately, and both are of a critical mass and size that they have great sustainability going forward as independent companies, etc.

As we divide them, their characteristics, their P&Ls, their balance sheets, etc., are quite different.

The capital structure I will have Tom deal with in just a minute, but both have strong cash flows, both have strong pipelines and products.

Arguably they are different.

One is dependent on big products.

One is dependent on hundreds or thousands of products over time.

The diverse company will be dependent on a lot of market growth and international expansion.

The pharmaceutical company is still quite heavily a developed market company, and it will, too, have emerging market opportunities.

But it is very much a developed market game.

So they have become very different.

And I think that both will be valued more accurately or, frankly, appreciated more by investors.

And I think we will see that we attract investors who have not been in our Company or have not invested in our stock as we allow them the choice of these two distinct identities.

I think there is opportunity for operating margin expansion and gross margin expansion, particularly in the diverse company.

I think visibility to margins in the pharma company will compare quite favorably to its peer group.

I think you will see that.

With regard to the overhead question you asked, I would say we are always looking at the opportunity to be more efficient, and given the distinctive separation of the companies, that is something that we will look at.

Because there is a different mix for the pharma business and a different mix for the international-based diverse products business, and we will be looking for those opportunities to be a lot more efficient.

That is about all I would say about that at the time.

But, at this point, I think -- (technical difficulty)

The points I would make, and I think we made these points in the remarks, I mean both of these companies are going to have extremely strong cash flow.

Both of them are going to have very good balance sheets.

It is going to give both companies a lot of options to use that cash flow.

We've talked about our expectation of a dividend, and there will continue to be a dividend in line with what Abbott is paying today is our current view.

The one thing I would point out on cash flow is between the two businesses, and if you look at our amortization expense, which, as you know, is a fairly large item in our P&L, in the $1.4 billion range, more of the amortization relates to the diversified company than to the new pharmaceutical company, which means that that cash flows are even a little more balanced than the profit levels when you look between the two businesses.

So both are healthy.

They are going to have a lot of options, and both managements will -- it is kind of a nice problem to have as they move forward as they consider what to do with those cash flows.

Are you still there?

I am, I am.

I was just wondering if Rick was going to address my question, or we could wait until Friday.

But that is going to be the key pushback in my opinion, which is the pharma business is now completely dominated by HUMIRA, and how we should be thinking about that equation going forward with competition coming from tofacitinib and biosimilars in 2016?

I think it is a very good question.

I would characterize it this way, so start at the very top.

If you look at where our pipeline starts to emerge in 2015 and beyond in a very meaningful way, it will add to the performance of the business above and beyond HUMIRA.

If you look at the performance of HUMIRA, we believe that performance is very sustainable going forward.

In fact, if you look back to 2007, HUMIRA has grown on average $1.1 billion every year, and we believe that is sustainable and actually slightly accelerating as we move from 2011 into 2012.

Now what drives that is the ability to continue to penetrate the markets that we are in today, like RA, like psoriasis, like Crohn's.

Those markets are still tremendously under-penetrated.

I will give you an example.

Psoriasis has a penetration rate of about 6%.

Our most mature market, RA, has a penetration rate in the 20% range.

So the goal here -- and you have seen us introduce programs around the world that allow us to be able to drive the market to grow faster through early diagnosis of patients and then cycling in through less effective, old therapies more rapidly, and you have seen that market growth particularly outside the US emerge very, very rapidly with the markets growing midteens in many countries around the world, even in Europe.

And so there is still a lot of opportunity to drive growth for HUMIRA in the markets we are in today.

Additionally we have six indications that we are in the process of developing and submitting for HUMIRA.

Those six indications will have a material impact on the growth of the product going forward, and there are likely to be indications that competition does not have at least out of the blocks.

So I would tell you that I feel very confident that HUMIRA has a lot of legs going forward and can continue to be a sustainable growth vehicle for us for a long, long time.

Now let me address the competition.

I will start with orals first.

As we look at this market, just I would say from a global standpoint, this is a very difficult market for competitors to break into.

You know the data as well as I do.

So six competitors have entered the biologic market over the last five years.

Not one of them has gotten over 3% market share collectively in total.

All five of them have not gotten over 11% market share.

So the three major players -- us, Enbrel and Remicade -- control between 80% and 90% of this market.

So it is a difficult market to break into because safety is a critical component, and those three products have the longest safety database of any products on the market and have very good efficacy.

I mean these drugs work well.

They get the efficacy in patients that physicians want to see and patients want to have.

So this is not a market that competitors break into easily, particularly if they don't have long-term safety data and very good safety data.

Now we don't know what the oral products label is going to look like.

We have looked very carefully, I have looked very carefully at the data that has come out of their trials thus far, and I would say characterize it right now based on what I know as roughly equivalent efficacy to HUMIRA or other TNFs; a safety profile that is similar to TNFs from an infection rate may be slightly higher -- it is hard to tell based on the data at this point -- and then other safety questions that will have to be addressed from a labeling standpoint like increases in creatinine, increases in anemia that have caused patients to drop out, and increases in LDL.

I would say based on what we believe the profile of the product has to be to get rapid uptake in the market, we are relatively comfortable with being able to defend our position against oral products.

Biosimilars, I think, are a different issue.

First of all, as you know, our molecular patent does not expire until early 2017 in the US and 2018 in Europe.

So we feel that the product is very well protected to that point.

We have numerous IP patents from a process standpoint to go beyond that.

We will have to see which of those is applicable with any competitor that comes forward.

From a regulatory standpoint, clearly in the US the regulatory path is still undefined.

I think what we do know is that the FDA will hold a biosimilar product to a standard similar to the innovative product from a standpoint of efficacy and safety.

So that will require in all likelihood significant clinical trial work, which will be expensive and time-consuming.

But I think the biggest issue will be that in all likelihood these products will not be interchangeable.

In fact, I think it is highly unlikely that they will be interchangeable like oral solid generics are.

And so it creates a very different competitive dynamic when they have to go out and apply SG&A and that SG&A has to be effective in the marketplace, and they are going to have to sell on their own data, not use the innovators data.

And so it will be a very significant issue to come head-to-head against the established players and be able to take share away.

Now that is not to say that we take either competitor lightly.

I can tell you that we do a lot of planning to try to understand how we are going to be able to deal with that, and I think our strategies around that make me feel comfortable that HUMIRA will be a very sustainable brand.

And, as I said, I also look at our pipeline and I look at a number of the assets in that pipeline that will emerge in 2015 and beyond, and I feel pretty comfortable that will be a very meaningful impact going forward.

Mike Weinstein, JPMorgan.

I offer my congratulations as well.

Let me do a couple of financial questions first and then talk more strategy, and Tom, hopefully you can help here.

But maybe two quick ones.

Tom, first off, when I think about the tax structures of these two businesses, the proprietary pharma piece is going -- would seem to have a lot lower tax structure versus the durable medical products business.

Am I thinking about that correctly, and is there any damage to the tax structure from the split?

I'm assuming no, but if you could give me your thoughts on that, that would be helpful.

Yes, we are not going to go into a lot of modeling issues today as we talked about in the beginning.

We are trying to focus today more on the strategic discussion here.

What I would say is, I think it is accurate that between the two companies the diversified would be a little bit higher than the other company, but that is about as much as we will share with you today.

Okay.

And then on the proprietary piece, can you give us an estimate of the percentage of the profits and the proprietary piece that would come from HUMIRA post-spin?

As you know, we -- if you are looking at -- just to get a sense of profitability on these businesses, we do disclose in our segment footnotes these businesses broken out.

So that gives you a good sense overall, and clearly HUMIRA is an important product for us.

You can have a sense of the relative sales, and it is definitely an important part of that business.

But, as Rick said, it is one that we think has a very long-term future, lots of growth opportunity, continuing to grow new indications and plenty of opportunity to be a long-term contributor to the business.

Okay, last financial piece.

You talked, Miles, about growth in some of the DMP pieces or medical product pieces, and you talked about Nutritionals growing double-digit.

You talked about some other pieces, including Vascular.

You all seem to suggest that those businesses would accelerate.

Like Nutritionals globally has not grown double digits.

It has grown more like high single digits.

And so there is some expectation that growth would accelerate.

Could you just maybe touch on why should we assume that those businesses accelerate and how DMP goes from being what right now looks to be more mid-single digits to high single digits?

We will go into it more on Friday, but actually let me correct you.

Nutrition has grown double digits outside the United States, and frankly, I do expect even more acceleration from the businesses, particularly as we expand the footprint in emerging markets and internationally.

So I do expect not only acceleration of the sales, but also acceleration of the bottom line, and those programs are underway.

But the performance and elements are there now, and we are seeing that.

At any given point in time, one country or another is going to look different than the mix of the whole.

But yes, we can talk about that more on Friday.

Okay.

But just so I'm clear, you are taking the whole Nutritionals business, not just the international piece, right?

You mean on this side of the business?

Yes, right.

Yes.

Okay.

Because I was talking about the overall growth profile of Nutritionals but --

You would be right about overall, but the international piece has doubled in size in the last five years, and we can back into that growth rate.

That is clearly double-digit.

Right, absolutely.

So let me talk more strategy stuff.

So I guess what people are asking me, probably number one today, is the decision on why today versus a year ago or a year from now, so the timing question.

And then two, in the math that you did on this in trying to -- you are going to go through a very tough process here in splitting the company up.

How much value in your estimation are you unlocking by the math that you guys did in doing this to make it worthwhile?

I'm going to enjoy answering that one.

Let me address the why now.

There is actually method in the madness as to why now.

As you know, we acquired Solvay and Piramal, and we went through an integration process and then, frankly, a separation process internally of our Proprietary Pharma business and our Established Pharmaceutical business, which are very, very different businesses.

So we had kind of a double pass there of not only the integration of the legacy Abbott businesses but also those two new ones and not to mention our additional agreement with Zydus in India, which enhanced our product lines.

But there was a process there to establish that infrastructure and stabilize all of that and separate the two pharma businesses.

That is essentially complete, and that was necessary work to do regardless.

But we needed that to be complete, and we also wanted some of our pipeline initiatives on the Proprietary Pharmaceutical side to have been completed and, frankly, our internal organic pipeline to have advanced in order to be at a point of what we would consider to be readiness.

Those are the primary drivers of why now.

I don't think we would have been ready a year ago, and I think we are ready now.

We have got the positioning and a lot of the work done so that the difficulty of separation -- frankly, a lot of it has been done, and it is ready to go.

So there is no real point in waiting now.

It is we get on with it.

With regard to unlocking, as you might guess, I have looked at more investment banker and consultant and other presentations and estimations and so forth of the so-called unlocking of value.

I would not venture an estimate or a guess.

Because I have been here long enough to have seen a PE of a company in the high 20s and a PE in the low teens or whatever.

You can talk about unlocking value, but at the end of the day, the background of what is happening in a marketplace with the values of companies as a whole or the economies as a whole can clearly affect that up or down.

Do I think investors will realize or see or recognize higher value on both sides of the Company as separate companies?

I do.

I think investors will appreciate both companies more than is the case today because I think there will be a lot greater appreciation and attraction to investors who focus on these two very different investment profiles.

The same investor does not invest in both profiles necessarily and vice versa.

So I think we will see appreciation for both companies, but what happens in the overall marketplace over time, I don't know.

So I would not venture a guess.

I leave that to you guys.

Thank you, Miles.

Again, congrats.

Tony Butler, Barclays Capital.

My congratulations as well, and Miles, really just two questions.

One, any consideration instead of a tax-free spin for an outright sale of the pharma business and maybe even to some degree even rights to HUMIRA as one would think about this perceived unlocking of value or either less reliance on a single product?

And then the second question is a little more related to strategy.

And if you go back to your Q4 comments, I want to ask either about sentiment around HUMIRA or selling the or spinning out the Nutritionals business, you commented or at least the sentiment I took away was that the sentiment in the market is wrong.

We need to do a better job of really talking about each particular business and the long term opportunities.

And you seem to harp on this notion of, if you make a knee-jerk decision on what the market wants you to do in the very, very near-term, you may be wrong a year or two years or three years or five years later.

And I would like for you to comment on that because that seems to be slightly different in tone than what we see today.

Thanks very much.

Okay.

Let me deal with the first part, did we consider selling?

I think the obvious here is, first of all, that would take a long time, and secondly, the tax on a sale like that and whether there was somebody that was interested in such a thing is prohibitive.

Now I have to tell you, I think we have got two long-term sustainable companies here.

We have no interest in selling.

We have no intention to sell.

We are not looking to sell it or merge it with something else, etc.

We think we have got the best path for investors here, which is two independent companies going forward that both have great cash flow, profits, growth prospects, etc.

depending on the Company here.

But they are two different investments, and I think that for investors and for the sustainability of these investments is the right path for both companies.

Otherwise, I don't think we are doing the right thing if we just try to sell it.

That does not strike me as the right path here at all, which is why we believe the path of separation and letting investors appreciate each company appropriately is the right path.

With regard to the last calls or whatever that you are referencing, the call at the time or the question at the time was a focus on Nutritionals.

And the point I tried to make at the time -- and let me be clear -- this was in our planning and preparation for some time.

This is not some knee-jerk reaction to the last few months or years even.

We have been considering what is the appropriate long-term disposition of the Company or companies for several years.

Obviously I cannot speculate about that to analysts or investors on any given call, but, as you know, analysts speculate to me.

So when they speculate to me publicly about, for example, in this case about nutrition, one thing I feel obligated to do sometimes is disabuse us of the notion of some path that may not be correct, and that is not correct, and it was not correct at the time.

I do think what I reflected or intended to reflect at the time was the precursor to this notion of investors will appreciate the parts of the Company differently.

There is a different investment identity to different parts of the Company.

And I think that the notion that the different parts of the Company were not being appreciated that way or different investors were not seeing it that way was clearly in those comments, and that is probably the tone you heard.

But the answer to that, which I think you see today, I think is the right answer.

I don't think it is to just break things up into little pieces.

I do believe there is value in the diversified model that is Abbott.

We believe that fundamentally, and I think that has been proven out over decades.

But I also note that the characteristic of the elements of that diverse model do have to have a common or complementary characteristics and balance.

And the big distinction here is it was our Proprietary Pharma business that did so well and dominated the identity of the Company over time, and not only were we out of balance, but the identity of that business was very different as it evolved.

So what we ended up with is two very distinct successful pieces.

And the notion that nutrition was the proper piece of that was the part that I did not agree with because it is very consistent with a lot of the characteristics of the rest of the Company, the growth prospects, etc.

At the time, it was being compared to a PE of a competitor.

Now I think all of us in this industry would love to have the PE of that competitor.

Who knows how sustainable any of these PEs are over time, but I think that the mix as we have described it today is correct given our strategy as a diverse company in healthcare with a particular balance.

So I don't think this is at all inconsistent with what -- the tone I communicated at the time.

I think it is, frankly, very consistent, but at the time I could not say to you, hey, good idea, but you have got the wrong business that you carve out here.

That is kind of the essence of this.

The notion at the time, the question I got was more a notion of, are you sure all of this mix fits together?

That is how I would take it, and the hypothesis was, gee, the nutrition one is the one you could carve out.

I think the notion had merit.

I think the Proprietary Pharma business is the one that has the distinctly different identity, and I think this makes sense today.

David Lewis, Morgan Stanley.

Miles, just a quick question that has been addressed here a little bit, but I want to ask it maybe in a different way.

But we believe Abbott is undervalued, and the primary issue certainly does seem in the eyes of most investors to be confusion over HUMIRA.

As I think about your current multiple, it does imply real concern around HUMIRA, its cash flow growth and profitability.

But you are and management is much more bullish on the potential for HUMIRA than consensus.

So I wonder why not wait to see for that to be appreciated in the market as competitive threats prove less material than most people think, which is only really two to three years away?

Well, I think two things.

First of all, I think that this split is not about confidence around HUMIRA.

It is around the identities of the businesses, as I described earlier.

I agree with you that the Company is underappreciated and perhaps undervalued, but I don't know any CEOs out there who would not claim that their companies are undervalued.

I think the entire sector may well be undervalued.

You know, the entire stock market could be undervalued.

It depends on your perspective for the business.

It depends on your perspective of the development of international markets.

It depends on your perspective of a lot of things.

I would support your notion that we are undervalued.

But I think the notion of a split here is -- it has the right merit, logic given our intent regarding the investment identities of the Company, and what belongs in a diverse mix.

At the end of the day, the questions around HUMIRA's durability will clearly be answered.

I think we will go a long way toward answering that even more thoroughly on Friday.

Rick answered a lot of it earlier in the phone call.

But I think we can respond to the durability of HUMIRA going forward.

As Rick acknowledged earlier, the growth of HUMIRA continues to be very strong and continues to be in excess of about $1 billion a year.

That is the equivalent of a so-called blockbuster a year here in growth.

Now granted that is not going to happen forever, but there is obviously several years left of that kind of durability and growth and strength in that business and that franchise.

And I believe that with further explanation on Friday, we will further lay out why we see the development of the market, the biosimilars, the orals, etc., as we do, and investors will make their choices.

But I think we have evaluated that pretty closely and pretty carefully over the last couple of years.

We have a view.

We have a view of the durability of HUMIRA.

We will share that with investors.

And I think the obvious next question an investor has is, what about after HUMIRA?

What then?

And I think that greater visibility to the pipeline of the Proprietary Pharmaceuticals business will go a long way towards filling in those gaps for analysts and investors, and I think we are beginning to fill those gaps now.

But even if there were great visibility to that on the part of investors and analysts, and even if there were a great understanding of all of that, by the same, we would still be splitting the Company because we believe there are two really distinct, different and valuable investment identities here that makes sense as two separate public companies.

That is very clear.

Thank you, Miles.

And maybe just one more strategic question.

You like a lot of healthcare CEOs have talked about the healthcare environment and what that may look like over the next three to five years.

I guess, the question is, isn't size an asset in this environment, and I wonder will this limit your flexibility at all?

For example, if your device franchise standalone needed more breadth to compete and more bundling would occur in that segment of the marketplace, couldn't HUMIRA cash flow have enabled future acquisitions there?

So simply is size an asset, and does this limit your flexibility at all?

No, I don't think it limits our flexibility at all.

You have got to remember we are a very large company becoming two very large companies.

These are both large-cap companies at the end of the day.

They are both very strong companies, and they both have very strong cash flow.

The cash flow of each of these companies is equivalent to what the entire Company was not that long ago.

The cash flows are very strong on both sides.

I don't feel like either one of these two companies is going to be constrained or limited by what it may wish to do.

We are not actively seeking large acquisitions.

I think at least on the side of the medical -- the diverse medical products company I would tell you I think that there is so much potential for growth and sustained double-digit margin growth that we can do that organically.

For us, any acquisitions or additions to the Company I think will be very much opportunistic, and because there is an opportunity, we believe we can uniquely leverage in the mix of our business over time.

Will there be those opportunities?

I think there will be over time, and we will react to them and evaluate them as they come, and we will be able to do it opportunistically, and we will have no shortage of capital or flexibility to do it.

On the Proprietary Pharma side, I think the same is true.

I think there are pipeline opportunities for Rick to add to that business.

There is no shortage of capital flexibility to do so.

Both will have very strong cash flows.

We are not reliant as a company on HUMIRA alone.

As I indicated earlier, all of these businesses are generating positive cash flow today.

And actually, if you went back 10 years ago, that was not true.

The diagnostics business did not generate cash.

The diabetes business did not generate cash at the time.

Today they do.

All these businesses generate strong cash flow.

So no shortage of flexibility.

Great.

Well, congrats on an historic move.

Thank you.

Rick Wise, Leerink Swann.

I would start with -- sort of pick up with where you left off with David's question.

Is it too soon, Miles, to talk in a little more detail about your preliminary vision for the ongoing Abbott?

You said you made some comments that you will continue to expand in emerging markets.

I would expect to hear that you are already a strong presence.

But you talked about channel synergies, and you highlighted the self-pay mix.

Maybe help us think, where does Miles White see the Company going over the next five years?

More of a consumer-oriented company?

You know, is there other capital -- opportunities in capital or IT?

Just any preliminary thoughts would be fabulous.

Well, as we've talked about on previous calls, the emerging markets in particular are a big growth opportunity because of the expansion of those economies and the expansion of the healthcare systems in those economies.

And the structures of those markets are very different, not different just with each other, but different than, say, the US, Europe, Japan historically.

They are much more self-pay markets than reimbursed markets in general, and our Established Pharmaceuticals, our Branded Generics business and our Nutritional businesses are generally speaking those markets are self-pay businesses and yet growing very rapidly in those markets.

They share common outlets.

They share common distribution channels and so forth.

And while we have not at this point attempted any kind of synergy between them they do share, common visibility, brand, outlet, pharmacy, wholesaler, etc., in all those markets, and I think that footprint will definitely benefit us going forward.

I think it is a plus to have a mix of sources of how your products are paid for.

For a Company in our business, if you are solely dependent on the US and Europe, well, then you are going to be dependent on governments and payers that are highly concentrated, and that is going to be true of the characteristics of our Proprietary Pharma business, and that has been the case for a lot of our mix of business over time.

One of the things that was attractive to me about the ophthalmology business was that a big chunk of that business is consumer discretion business, the LASIK business.

And while that business has been pressured by the economy in the last few years, I like the fact that we are not just dependent on government reimbursement in a lot of cases for payment for our products.

Because I think for those countries, those businesses, those products where consumers make the decision, your business is somewhat less vulnerable to large structural moves in the payment system.

So I think that makes us good.

I think that we will continue to expand in emerging markets.

Because, as I said earlier, growth is there.

We are not ignoring developed markets.

There is a big chunk of the Company, both companies, frankly, in developed markets, and those are important markets to us.

But I will take you that I think the developed markets will be much slower growers for the future, and a lot of the growth will come internationally and especially in emerging markets.

So I think that the obvious distinction that way between the pharmaceutical business and the diverse medical products business is the diverse medical products business has the market growth, the expansion, the expansion of those economies, a tail wind of growth that is not going to be that dependent on single large products.

The pharmaceutical business will always be dependent on single large products because that is the nature of that business, and the productivity of our R&D, and, therefore, the importance of our pipeline, and the durability of products like HUMIRA very important for that business.

And I think that is why our pharmaceutical business has been so successful over the last decade and I think will continue to be going forward.

But those are different and different market dynamics.

Just to follow up, you highlighted the potential for improving gross margins and operating margins.

Maybe you want to talk a little about that.

Is that factory consolidation?

Is it just realigning how products are made and where and distributed?

Is that significant in your mind?

And maybe just, Tom, when will we see you start reporting some kind of breakdown for the two companies differently?

Will it wait until the Form 10 comes out?

Thank you.

I will just say we are going to explain more about this on Friday to the first part of your question on margins.

You know, in our segment information, you already have quite a bit of basis for understanding the major businesses here.

I mean obviously we do need to go through this carveout financial process, which is going to take several months, and that is when you will see a little more specifically more of a fully allocated picture of the pharma business than what you see in the segment footnotes.

But you have pretty good information right now.

I would say as we get later into the process, after we do the Form 10 and get closer to the true separation, we will be getting more granular in how these two businesses look.

Thank you so much.

To answer the granular point you put up front on the gross margin, there are several businesses here that are changing the structure of manufacturing and other things in their sourcing and even how they go to market in some cases.

Diagnostics has had a great program underway that way and has expanded its gross margin.

Diabetes Care same; Nutritionals; major programs underway right now to change the mix of its gross margin.

Some of it is our manufacturing strategy globally.

Some of it is whether we make it ourselves versus source it, etc.

There are a number of factors that contribute to it, but we will talk about it a little bit more on Friday.

Glenn Novarro, RBC Capital Markets.

Congratulations and thank you for taking my call.

I have two questions.

One, the Established Pharmaceuticals business, I wonder if you can walk through the reasoning why that was not put with the pharmaceutical business?

I would have expected that this could have been a nice buffer against any pipeline failures and government intervention that you mentioned.

So maybe comment on that.

And then the second question is, I wonder we are all asking about timing, but also we are now in this unusual period now where there is healthcare reform implementation, we have got a super committee discussing further Medicare cuts.

I wonder if this also played into the time now to do the split?

First comment on the Established Pharmaceuticals business and the Proprietary business.

I will tell you other than the fact that they both have the word pharmaceutical in their headline, they are really different.

Their business models are different, the markets where -- that are attractive to them are different.

You know, the Proprietary Pharmaceuticals business is very much a developed economy business for all the reasons we know.

The kinds of products that we sell and the costs of those products and so forth, their affordability and so on, those are developed market products.

The Established Products division, at least here you will note, does not have a US business and won't.

It is not our anticipation to be in the US because it would not make money here, and at the end of the day, we are trying to earn a return on the investors capital.

So that business will stay focused on international markets.

And then the nature of the competition and the selling, frankly, has a lot more in common with businesses like our Nutrition business than it does the Proprietary Pharma business.

It is a business about a breadth of product line and key leaders in key categories, your feet on the street and relationships with many, many, many pharmacies and wholesalers and so forth in these emerging markets.

The business model and how money is made are very, very different, and there is not actually a lot in common there.

So it made sense to us that the Established Pharmaceuticals business belonged with the other very durable growth businesses and not with the Proprietary Pharma business.

With regard to health care reform, I would say healthcare reform is a contributor to the environment in general.

It clearly has impacted the environment for healthcare products.

It has impacted the environment for pharmaceuticals and for medical device products.

Frankly, so has the debt crisis and pay crisis in Europe.

The impacts on the economies in the US and Europe, aging populations, all the things that we know are happening to pressure the healthcare products markets in the US and Europe all contribute to a different environment.

And, at the end of the day, I would say, all that does is change the nature of the environment in which we compete and operate.

That is going to clearly have an impact on all the businesses, not just pharma.

This is not motivated solely by healthcare reform at all, but healthcare reform you could say is a contributor to the overall environment that has contributed to a bigger consideration about the investment identities of these two businesses.

(multiple speakers)

We have time for, I believe, about two more questions if we have people in the queue.

Catherine Arnold, Credit Suisse.

Congratulations on your announcement.

I wanted to probe a little bit on the pharmaceutical business if I could.

I know I for one have been looking for more and more disclosure on your pipeline, and I guess we will get that on Friday.

But I know you have a high level of optimism about the outlook for that business, and I am anxious to hear the details.

But clearly some of the assets like hepatitis and MS are very much changing quickly in terms of standard of care and have a lot of intense competition.

So, let's just say, there is some risk in terms of the pipeline of that particular Proprietary Pharmaceutical business.

How are you thinking about that in regards to business development and if you could comment about the cash flow outlook?

I think that you are implying HUMIRA will probably grow another $1 billion per year for, I would say, a couple of years.

I don't know if that would mean -- a couple means two or three to me.

But, at the same time, you are losing the lipids franchise.

So where are we in the adequacy of the cash flow for business development?

Because I'm sure you want to make sure that there is some cushion, some buffer in the outlook for the pipeline given the competitive dynamics and some of the key franchises in the late stage and given obviously longer-term acknowledgment of some risks on HUMIRA.

That is a mouthful.

I appreciate that.

(multiple speakers)

It was a long question.

I am out of breath now.

And I would say a big part of that we are going to answer on Friday.

I would tell you we understand the competitive dynamics pretty well in hepatitis, as well as MS, and I think we can walk through that on Friday.

I would also tell you just don't focus on hepatitis and MS.

Bardoxolone is a big asset.

We have a number of other assets that we will talk to you about.

But clearly the areas we are going into are areas of high unmet clinical needs.

They are competitive, okay?

I think we understand the profile that we need.

HUMIRA, I think you have described it.

You have described it in a way that is consistent with what we think, although I would say I have a view that is different than you about sustainability, and that is the key to this.

We believe there is strong underlying growth that will be maintained for a longer period of time.

We believe there is plenty of opportunity to penetrate these markets, and on top of that, the pipeline will play out.

There certainly will be a period where the generic impact on our dyslipidemia franchise will depress overall growth rates, but the underlying growth rate will be very, very strong.

So when that plays through, you will see it pop back up with very healthy growth.

Okay.

I think we have time for one last question, especially since we are going to be talking to folks on Friday.

Barbara Ryan, Deutsche Bank.

Congratulations.

Thanks for taking my question.

Most of them have been asked, but I'm just wondering I think you answered why you separated Established Products from the Proprietary business because the risk profile and the cash flow characteristics and persistency make it fit more with the Medical Products business.

But I'm just wondering when you acquired those businesses you did talk about the opportunity to cross-sell the two companies' products.

I'm just wondering if there are any dis-synergies associated with separating those two?

I know you talked about that they have been separated largely internally.

And if there is a plan to commercializing some of your Proprietary products in those emerging markets that are dominated by these Established Products?

And then I have another question.

You know, it is interesting.

I don't expect dis-synergies, and the companies will in some cases still maintain common brands and some examples where the EPD business will have a brand overseas in some markets and the Proprietary business will have it in the US or some others.

That is not uncommon.

As you know, products like Enbrel or Remicade and others have had two companies marketing them in different markets over time.

So I think that some of the things that some might assume would be dis-synergies or conflicts will not be, and it will not be for us.

So I don't see that there is an issue there.

The notion of cross-selling and shared, the companies, frankly, where it makes sense can cooperate.

We are not going to be in any kind of direct competition anyway.

We aren't now.

So I don't think there is any threat to the original comment, although clearly neither necessarily relies on that for its success.

I mean both can be completely independently successful without reliance on the other, even if there are some shared assets.

Rick, do you want to add anything to that?

No, I mean I think that covers it.

Clearly emerging markets are not as significant for the Proprietary business as they are for the other business, but they are a significant contributor to our growth in certain emerging markets where you have reimbursement access.

That is the key for the Proprietary products.

I think that is an important point.

The Proprietary business will also have opportunities in the emerging markets, and we will definitely go after those opportunities.

They have presence there now, they have people there now, and there is market there now, albeit smaller in terms of numbers of people or whatever, but sizable in terms of dollars for some of the places that Rick mentioned.

So, Barbara, you had one more question?

Yes, thank you so much.

So the question is really about the outlook.

You made some very specific comments about the growth outlook both for top and bottom line in the Medical Products business.

You spoke to sort of competitive, low single-digit topline growth for Proprietary business, but you did not comment on earnings.

I'm just wondering, given the fact that the Company has been diversified and along with that your investor base is looking for persistency and consistency and double-digit earnings growth, whether there is likely to be any change in the investment profile of the Proprietary business?

I.e.

do you see opportunities to spend more in that business that you were reluctant to do and maybe believe you should be doing because they were married to a business with different kinds of expectations?

I think if you look at the investment identity of pharmaceuticals within Abbott, I would say that the way we plan and the way we run businesses within Abbott, although we are all part of a big family, the reality is we build our own P&Ls, our own plans by year, and we try to invest in a way that is appropriate for the rate of return for the investor.

And so I can tell you without question that the pharmaceutical business was never underfunded on programs that they believe that they could advance more rapidly.

Now it depends a lot on the evolution of your pipeline.

As you get more and more of your pipeline in Phase 3, it is far more expensive to be able to develop those products.

But whether we were inside of Abbott or outside of Abbott, that would be the same investment profile that we would drive the business in order to maximize the return on that investment going forward.

You know, I think you will see eventually here in the split of the companies and their P&Ls and balance sheet and so forth, a profile in the Proprietary Pharma business is pretty healthy, a profit profile and a spending profile that is pretty healthy.

Its R&D spending compares well.

Its SG&A spending compares well, particularly given the focus of its business in specialty categories.

I agree with what Rick said.

It has not in any way been underfunded or had to subsidize anything else.

When you look at the whole of Abbott Laboratories and you look at the profiles of R&D spending or profits and so forth, there is a dilution that occurs there in the mix of all of that that makes it difficult to see the individual profiles of businesses.

You know, the R&D intensity of Nutritionals business by comparison is low single digits.

It is not necessary to spend more nor does it take more, and when you marry the size of the sales of a business with a lower profile where your spending is much higher in SG&A than it is in R&D and so forth and you look at the combined total, I think you can question that.

But, as you see the Proprietary business broken out, I think what you will see is a very healthy profile that in no way constrains it.

And I think you will see proper profiles that are competitive in the other businesses, as well on the other side.

Thank you, Barbara.

That concludes our conference call today.

As I mentioned earlier, we did post a 12-page slide deck to our Abbott Investor website that summarizes today's announcement about the separation into two publicly traded independent companies.

I also mentioned, if you joined us late in the call, that we are hosting an investor meeting this Friday, October 21, in New York from 9.00 AM to 11.00 AM where we will discuss the growth opportunities in each of these businesses in more detail and answer some of the questions that came up today as well.

Miles, Rick, Tom and Dr.

John Leonard, who I mentioned is our head of R&D for pharma, will be in attendance, along with Larry and me and some other folks.

Additionally, if you listen to a replay or if you would like to listen to a replay of our conference call today after 11.00 AM central time, it will be available on our Investor Relations website at abbottinvestor.com, and after 11.00 AM Central time via telephone at 203-369-3519, confirmation code 212-8756.

The audio replay will be available until 4.00 PM on Wednesday, November 2.

So thank you all for joining this morning.

We look forward to seeing hopefully many of you in New York on Friday or in the coming weeks and months as we talk to you individually about this transaction and the growth opportunities going forward.

Have a good day.

Thank you and this concludes today's conference.

You may disconnect at this time.