美國雅培 (ABT) 2014 Q2 法說會逐字稿

Good morning and thank you for standing by.

Welcome to Abbott's second-quarter 2014 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. Brian Yoor, Vice President Investor Relations.

Okay good morning and thank you for joining us.

Joining me today on the call will be Miles White, Chairman of the Board and Chief Executive Officer, and Tom Freyman, Executive Vice President Finance and Chief Financial Officer.

Miles will provide opening remarks and Tom and I will discuss our performance in more detail.

Following our comments, Miles, Tom and I will take your questions.

Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995 including the expected financial results for 2014.

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.

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, 2013.

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

Note that any sales or earnings per share guidance provide today on the call will continue to include the developed markets branded generics pharmaceuticals business in our forecast.

Tom will discuss in more detail how we expect to report the results of this business beginning with the third quarter.

In 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 measures in our earnings news release and regulatory filings from today which will be available on our website at www.abbott.com.

Our commentary on sales growth refers to operational sales growth which excludes the impact of foreign exchange unless otherwise noted.

With that I will now turn the call over to Miles

Okay, thanks, Brian.

Good morning.

This morning we reported second-quarter ongoing earnings per share of $0.54 above our guidance range and representing growth of 17%.

As expected, sales increased 3% on an operational basis.

This was a sequential improvement from the first quarter and we're on track to accelerate sales growth in the second half of the year.

We're ahead of our expectations through the first half of this year and we're raising our full year 2014 ongoing earnings per share guidance to $2.19 to $2.29 from $2.16 to $2.26.

At the same time, we're actively shaping Abbott for durable long-term growth.

Part of our growth strategy is to build critical mass and leadership positions in key emerging geographies across our diverse portfolio.

In Diagnostics, we were early to establish our presence in the geographies of China, Russia and Brazil.

In Devices, we have significant opportunities in the cataract lens and diabetes markets given demographic trends as well as in our Vascular business with innovative devices such as Absorb.

And in Established Pharmaceuticals and Nutrition, where we already have large and growing business in emerging geographies, we've taken a series of steps over the last few months to further shape these businesses for the long term.

As I discussed on our conference call on Monday, in our branded generics pharmaceuticals business, the recent acquisitions of CFR Pharmaceuticals in Latin America and Veropharm in Russia as well as the sale of our developed markets business to Mylan accelerate our strategic intent to drive balanced and sustainable growth in emerging geographies.

And the net proceeds from the sales of Mylan shares over time provide us with a number of choices and possibilities to pursue opportunities that continue to build Abbott for higher growth.

Following the close of these transactions, our Established Pharmaceuticals business will operate entirely in emerging geographies where the growth of branded generics are driven by favorable demographics including growing healthcare systems and a customer base that largely pays out of pocket for high-quality trusted brands.

Abbott will hold leading positions in many of the largest and fastest-growing pharmaceutical markets for branded generics in the world including India, Russia and Latin America.

In Nutrition, we're similarly building this business for sustainable growth by continuing to invest in our global infrastructure including our supply chain.

Last week we announced a strategic alliance with Fonterra to develop a dairy farm hub in China to invest locally in China's milk supply.

Fonterra is the world's largest dairy cooperative and has been a supplier to Abbott for many years.

The strategic alliance leverages Fonterra's expertise in dairy nutrition and farming and Abbott's continued commitment to business development in China to ultimately help meet the growing demand for high-quality dairy ingredients in China.

This strategic alliance is the latest of a series of investments we've made to build our local presence and capabilities in China over the last decade, which includes our R&D center in Shanghai and the opening last month of our Nutrition manufacturing plant in Jiaxing.

A stronger footprint in country will allow us to be closer to our customers and work faster to create and customize new product for their needs.

Our new plant is one of the most technologically advanced nutrition plants in the world and will manufacture high-quality nutrition products for Chinese consumers including a new infant formula brand that we're launching now called Similac QINTI.

This new product launch is one of several in both our adult and pediatric nutrition businesses across numerous geographies this year.

The transactions we've announced over the last several weeks proactively build and shape Abbott in emerging geographies.

At the same time we're executing on the substantial organic growth opportunities across our Company.

I'll briefly overview our second-quarter results.

And I'll start with Nutrition, where we anticipate returning to double-digit sales growth in the second half of this year as this business anniversaries or lapse the sales disruption in international and nutrition and launches new products.

Our innovations bring advanced nutrition to bring the needs of our customers, drive share expansion and grow the market.

We'll open three new manufacturing facilities in total this year to support the strong global near and long-term demand for adult and pediatric nutrition.

Two weeks following the launch of our China plant, we opened our new state-of-the-art aseptic liquid plant in Ohio and we expect to open our manufacturing operations in India in the second half of this year.

In Diagnostic, sales growth was driven by continued above market performance in core laboratory diagnostics including double-digit growth in the US.

We're funding investments in growth and advancing multiple new system platforms across our laboratory, molecular and point of care that will launch over the next few years.

In Medical Devices, we continue to launch differentiated new products to capture share.

In Vascular, we're continuing to see market adoption of our breakthrough structural heart technology MitraClip, as well as our new peripheral stent Supera.

Both our structural heart and endovascular businesses increased double digits globally this quarter.

And in our drug eluting portfolio, we're driving increased penetration of Absorb in Europe and several key emerging geographies as we work to bring it to the US, Japan and China which represent more than 50% of the world's coronary stent market.

In diabetes care, performance was in line with our expectations and we're on track to receive CE Mark in the second half of this year for our next-generation sensing technology call FreeStyle Libre.

And in vision care, above market growth of our cataract lens business drove another quarter of double-digit sales growth.

We expect double-digit sales growth for the full year with continued positive momentum from new products.

In Established Pharma, as we anticipated, second-quarter operational sales growth improved sequentially versus the first quarter.

In key emerging markets, sales increased nearly 10% driven by double-digit growth in India, Brazil and China as a result of improved commercial execution and continued expansion of product portfolios in several of our therapeutic areas of focus.

We expect continued momentum in EPD in the second half of this year with improved market growth in India and the benefit of additional plant capacity to meet sales demand for key products.

So in summary, we're ahead of our expectations through the first half and we're raising our full-year ongoing earnings per share guidance.

We delivered a sequential improvement in sales growth this quarter and continue to expect accelerating sales growth in the second half of this year.

And we're actively shaping the Company with the shareholder in mind as we build Abbott for long-term growth and healthy cash returns.

I'll now turn the call over to Tom.

Thanks, Miles.

Today we reported ongoing diluted earnings per share for the second quarter of $0.54 exceeding our previous guidance range.

Sales for the quarter increased 3% on an operational basis that is excluding an unfavorable impact of around 1% for foreign exchange.

Reported sales increased approximately 2% in the quarter.

Operational sales growth was driven by strong performance in diagnostics and vision care and improved growth in Nutrition and Established Pharmaceuticals.

Sales growth in emerging markets approached 8% on operational basis in the quarter.

Excluding the estimated impact on the previously reported sales disruption in our Nutrition business last year, sales in emerging markets increased closer to 10% in the quarter.

The second quarter adjusted gross margin ratio was 55.3% of sales ahead of our previous guidance due to continued underlying improvement in diagnostics, and better vascular gross margin as a result of the resolution of an intellectual property matter that lowered product costs this quarter and will continue to benefit this business going forward.

In the quarter, ongoing R&D investment was 6% of sales and ongoing SG&A expense was 30.5% of sales in line with previous expectations.

Before I review our financial outlook I'd like to explain how we expect to report the results of our developed markets branded generics business going forward.

As you know we announced on Monday an agreement to sell this business to Mylan.

Therefore, beginning in the third quarter of this year, the sales and earnings from this business are expected to be reported as discontinued operations in our income statement.

However, guidance for the third quarter and the full year 2014 that we provide today will continue to include this business in our forecast.

For the third quarter call, we will reconcile the combined results on both a GAAP an adjusted basis to the guidance we're providing today.

So turning to our outlook for the full year 2014, today we're raising our ongoing earnings per share guidance range to $2.19 to $2.29 which reflects double-digit growth over 2013 at the midpoint of the range.

We continue the forecast operational sales growth in the mid-single digits for the full year 2014.

Based on current exchange rates, we expect exchange to have a negative impact of somewhat more than 1% on our full-year reported sales.

This would result in reported sales growth in the low to mid single digits for the full year 2014.

Brian will review the growth outlooks by business in a few minutes.

We continue to forecast an ongoing adjusted gross margin ratio of approximately 55% for the full year.

We forecast ongoing R&D somewhat above 6% of sales and ongoing SG&A expense of around 29.5% of sales supported by our continuing efforts to manage G&A expenses.

Overall we now project our full-year adjusted operating margin ratio to expand by approximately 100 basis points in 2014 above our previous guidance of 60 basis points of expansion.

Turning to the outlook for the third quarter of 2014, we're providing for the first time we're forecasting ongoing earnings per share of $0.59 to $0.61.

We forecast both operational and reported sales growth in the mid-single digits.

Reflecting a neutral impact of foreign exchange on sales in the third quarter based on current exchange rates.

We forecast an ongoing adjusted gross margin ratio of approximately 55% of sales in the third quarter.

We also forecast ongoing R&D around 6% of sales and ongoing SG&A expense of approximately 29% of sales in the third quarter.

I'd note that in 2013, we experienced a below trend tax rate in the third quarter while in 2014 we expect the ongoing tax rate to again be around 19%.

We project specified items of $0.27 in the third quarter reflecting the same items as we identified for the full year in our earnings release.

This forecast excludes specified items to be provided at a future date related to recently announced transactions.

So in summary, second-quarter sales growth improved sequentially over the first quarter of 2014.

We're on track with our expectations for accelerated growth in the second half of the year and we're raising our full-year ongoing earnings per share guidance.

With that I'll turn it over to Brian to review the business operating highlights and outlook.

Brian?

Thank you, Tom.

This morning I will review our second-quarter 2014 performance and third quarter sales outlook by business.

As I mentioned earlier, my comments will focus on operational sales growth.

I'll first discuss our Nutrition business where global sales increased 3% in the second quarter, a sequential improvement versus the first quarter and on track for second half acceleration as we anniversary the August 2013 sales disruption in our international pediatric nutrition business.

In our international pediatric nutrition business, we're on track to return to double-digit sales growth in the second half of this year as we continue to recapture share in the affected markets and launch new products across several new segments and geographies.

This includes Similac QINTI, a new infant formula we're currently launching into China.

It's the first product to be manufactured in our new China facility and is available in our innovative reclosable packaging.

In addition to further enhance our competitiveness and capture share in the Chinese infant formula market, Abbott launched a new formula Eleva in the second quarter and Similac simple pack late last year in the online segment of the market.

Sales of international pediatric attrition increased modestly in the second quarter impacted by the unfavorable year-over-year comparison created by the previously reported 2013 sales disruption.

The impact of this event continues to decline as we recapture share and is estimated to have reduced international pediatric sales in the quarter by approximately $40 million or 7 percentage points.

We also experienced some recent government initiated pricing changes in Vietnam and Saudi Arabia which we're managing.

International adult sales increased 10% in the quarter driven by strong growth of our Ensure brand and double-digit growth in emerging markets.

This marks the fifth consecutive quarter of high single -- double-digit sales growth in this business.

Abbott continues to shape and grow its priority adult nutrition market as it launches several new products this year including the recent launch of a new adult brand Enevo in Japan, our largest adult nutrition market outside the US.

Enevo is a next-generation follow-on product to our market-leading Ensure brand.

In the US, nutrition sales increased low-single digits in the quarter driven by pediatric nutrition as Abbott remains the market leader in the non [wick] segment of the US infant formula market.

As we move into the second half of the year, we expect global nutrition sales to return to double-digit growth on an operational basis as this business lapse the international pediatric sales disruption and executes on its strategic priorities, including launching new products, opening a new manufacturing facility in India and expanding its full-year operating margin.

In our Diagnostics business, sales increased 5.5% in the quarter including double-digit growth in emerging markets.

Core laboratory diagnostic sales increased 7% as this business continues to deliver above market performance in both developed and emerging markets.

US sales increased 11% as we continue to build momentum with our enterprise account commercial model to capture significant contract wins as customers select Abbott to increase their operational efficiencies.

We're also broadening and differentiating our ARCHITECT assay menu and launched a new diabetes test in the US in April to address the growing prevalence of diabetes.

International sales increased 6% in the quarter driven by continued growth in emerging markets.

In molecular diagnostics, worldwide sales were impacted by the timing of tenders in our infectious disease business in several emerging markets.

We expect improved growth in our molecular business going forward with a favorable impact from the timing of expected tender wins in the second half of this year.

In point of care diagnostics, worldwide sales increased 4% representing a sequential improvement from the first quarter as this business continues to build and expand its presence in targeted European and emerging markets and as the US market continues to stabilize.

For the third quarter in global diagnostics, we're forecasting mid to high single-digit operational sales growth.

In medical devices, vascular sales increased low-single digits in the quarter, in line with our expectations.

International vascular sales increased 3.5% driven by double-digit sales growth of MitraClip and endovascular products which include our new peripheral stent Supera for the treatment of blockages in the superficial femoral artery, or SFA.

In the second half of this year we expect new products to continue to drive share expansion and sales growth including Supera, MitraClip and Absorb.

At the same time, we continue to make good progress to bring Absorb to the US, China and Japan markets over the next few years.

Data presented at international medical meetings continues to reinforce strong clinical results for Absorb in a broad range of patients.

In the second half of this year, we expect to present one-year results from our Absorb II clinical trial which is the first randomized trial to compare Absorb to standard of care.

As we look ahead to the third quarter, we expect sales in our global vascular business to be relatively flat.

While we expect to continue to show sequential improvement in our base business, we'll also experience a difficult comparison versus the prior year third quarter when we realize the final sales true up related to a third-party agreement.

In diabetes care, global sales in the second quarter decreased 10% in line with our expectations.

Outside of the United States, diabetes care is focused on driving continued growth and expects to receive European CE Mark for it's new FreeStyle Libre next-generation sensing technology in the second half of this year.

US sales continue to be impacted by the carryover effect from implementation of the CMS competitive bidding program for Medicare patients in July of last year.

For the third quarter in our global diabetes business, we forecast some moderation in the sales decline and expect a mid to high single-digit decline on an operational basis.

In vision care, we achieved 12% sales growth in the second quarter which represents the fourth consecutive quarter of double-digit growth.

Sales of our cataract products represent nearly 70% of our vision care business and increased strong double digits outpacing the growth of the global cataract market driven by market share gains of our recently launched products.

These products include the TECNIS OptiBlue and the TECNIS OptiBlue pre loaded lenses in Japan and the TECNIS Toric lenses in the US and Japan.

In addition, the adoption of our new Catalys laser cataract system is exceeding our expectations due to strong customer interest in our technology.

During the second quarter, we received European CE Mark for TECNIS Symfony extended range vision intraocular lens.

TECNIS Symfony is a premium lens that provides patients with continuous range of vision including far, intermediate and near distances but with reduce incidence of halo and glare.

For the third quarter of 2014, we expect our global vision care business to continue to grow double digits on an operational basis.

And lastly our Established Pharmaceuticals Business, or EPD, where sales increased more than 2% in the quarter and also demonstrated a sequential improvement versus the first quarter.

Sales in our key emerging market segment increased nearly 10% driven by double-digit sales growth in India, Brazil and China.

Improved market dynamics coupled with commercial execution in India, expansion of product portfolios in Brazil and stronger growth in China, including the replenishment of a key women's health product, contributed to strong sales growth in the quarter.

Sales in our developed and other market segments decreased 5% in the quarter in line with our expectations.

In the second half of the year, we expect further improvement in the sales growth rates of EPD driven by improved market growth coupled with commercial execution in India as well as the benefit from the recent plant capacity expansion to meet demand for certain key products including those belonging to our women's health portfolio.

And for the third quarter of 2014 we continue to forecast sales growth in our Established Pharmaceuticals business in the low single digits on an operational basis.

So in summary, we've had a pretty active second quarter executing on several transactions to further shape Abbott for the long term, and we're ahead of expectations through the first half of the year resulting in our raise today of our full-year ongoing EPS guidance.

We will now open the call for questions.

(Operator Instructions)

Glenn Novarro, RBC Capital.

Miles I wanted to start with a question on Nutritionals.

It's good to see Nutritionals getting back to positive growth and we tend to focus so much on pediatrics, but what caught me by surprise was the strength in adults particularly outside the US up 10%.

So I'm wondering if you can spend some time talking about adults, is that 10% growth sustainable and how should we be thinking about that growth beyond this quarter and what could be the key drivers?

Thanks.

Sure.

The direct answer to your question is yes I think it is sustainable.

It may go up a point down a point who knows from time to time, but the general direction at that magnitude I think is sustainable.

And as you know Glenn, we are the world leaders in that category in almost every country and there's still enormous amounts of opportunity out there given the demographics of the world, not just in developed countries but also in emerging countries.

There's a big opportunity for us I think in China in particular and part of our expansion in China will address that over time.

We got a big opportunity to enter that market, build that market, create it in do in China what we've done in a lot of other countries around the world.

So I think there's still a lot of opportunity, there's always room for innovation whether it be in the form -- we have a product now Clear in the United States that's not a milk-based product that I think will be popular with consumers.

And I think that given different flavors, different forms, different packages and so forth, I think there's a lot of opportunity to expand in markets and grow the market where we've already got pretty strong share, that's an important part of our business.

And you're right, the pediatric segment tends to get a lot of the attention but I think a lot of the growth and opportunity here remains in the adult segment.

And just as a follow up if I'm looking at the operating margins for the Nutritionals business about 20% yet some of your peers are closer to 25%, so is -- now that you're at 20%, is 25% the next goal?

You know something, my management in that business will say if we reach 25% are we done, and I'll of course say no, 30% would be the next goal.

And if we reach 30%, would 35% be the next goal?

I'm not sure I'm ever going to be satisfied.

But I'd say this, we're not done and we're not stopping.

There's a lot of things that go into determining what the margin is in the business and in terms of our cost to deliver.

A lot of the moves that we've made in the last year with our supply chain globally, including some of the things that we've done with Fonterra and other suppliers, are aimed at lowering our cost to deliver.

Some of the products that we've had manufactured by third parties, we'll bring in-house and do ourselves, part of our plant strategy here with not only our liquid plant in Ohio but our plant expansion in China and India is to do that.

There's obviously large freight savings when you manufacture in key markets as opposed to ship from the US or Europe or other locations.

So there's a number of things that go into the overall cost structure and I'd say there's still plenty of room to improve our margins in this business and the team has been very focused on that.

Some of them take a little longer than others to realize because of structural or infrastructure changes in our whole supply chain system, but I'd say there is more room there.

Okay.

Great, thank you.

Mike Weinstein, JPMC.

Tom, I want to spend a minute on the operating line.

If I look in the first half of the year most of the incremental growth is coming from your work on controlling operating spending.

And even if I adjust for FX it probably would have been down low-single digits.

And it looks like for the year the bus and the guidance is a function primarily of your operating spend coming in.

So could you spend some time talking about where those reductions are coming from and how we should think about the trend not just this year but going forward?

We talked about this off and on over the last few quarters, Mike, and when we exited the separation it was clear to the entire organization that our G&A levels in particular were higher than they should have been in we've been working very hard to address that through process improvements in the back office, basic efficiencies only providing the appropriate services to the businesses and it's been kind of a steady progress we've made on that.

Every quarter we're able to change the trend of the run rate and it's just been steadily chipping away at that.

I wouldn't say we're done.

We still have a few things we want to do.

We're getting more efficient in IT areas and some of the finance and accounting areas and even especially in the purchasing area where we've invested a lot of time and we think we can drive savings as well.

So it's a very broad-based approach.

I'd say a very steady approach and to your point it's really contributed to the flattening of the SG&A.

What we have not been doing is tuning back on productive SG&A, things that really drive sales and growth.

We've tried very hard to sustain and even increase investment in those areas while we're tuning back in the other areas.

Can I ask about one of the business that has struggled and that's the diabetes business and with the impact of competitive bidding.

Can you spend a bit more time on the strategy for that business, I think everyone's aware you're working and coming out with this novel product in Europe later this year.

But more broadly than that, what's the plan for the US business going forward?

Is it to largely run that business as a meter business and run it for cash and try and just maximize profitability?

Mike, this is Miles.

I'd say for a transition period that's probably an accurate comment.

I think that business has done a great job of managing its cost and its expenses and so forth.

We still have a very healthy gross margin in the business and so it's a tale of two businesses and particularly in the US.

And I'd say that because it remains profitable and cash generating, et cetera, you've got this older legacy circumstance of strategy market channels products, et cetera, that clearly is under pressure from competitive bidding and what CMS has done.

And then you've got very new innovative products that frankly really matter and make a significant difference for patients like Libre which is coming first in Europe.

And that we believe will be a significant growth driver for this business here over time and it will come to the US and it'll be a global product just like our core base business.

So you've got a transition here of the core base business as we grow the more innovative future product and future forms to that product.

Because while it's launching as a single product, there's actually a product line coming here.

So I think that will continue to drive the business and have a very different proposition for the patient.

Okay.

Thank you, guys.

Josh Jennings, Cowen and Company.

So first Miles I wanted to ask about the Nutritionals business, you made some commentary in your prepared remarks about the strategic alliance with Fonterra and also opening up the new manufacturing plant in China as well.

I wanted to see if you could provide a little more color on how important these two initiatives are in returning pediatric nutritionals to a sustainable higher growth trajectory?

And if you can also talk a little bit more about the ongoing broader strategy in China, one of the answers or one of the questions was on the adult opportunity there too, but hoping to get a little bit more color.

Okay.

First of all I'd say Fonterra has been a partner and supplier of ours for a very long time.

And it's no secret that a year ago they had a recall that impacted us, impacted other competitors as well and nobody tried to have a recall and nobody try to have a problem but it set us back for a period in China, Saudi Arabia, Vietnam, some other countries.

And out of our discussions came a number of ideas for the companies going forward.

You can spend your time arguing about something nobody wanted to happen or you can look ahead and say where are our opportunities.

And the fact is China is an opportunity for us as is the global supply chain in general because as we look at the growth prospects of both the pediatric and adult business worldwide, as I said China is not the only growth opportunity.

There's a lot of countries out there where there's still a lot of opportunity for both companies.

And so we very constructively looked at what the companies could do together, and out of that came the notion of this dairy hub idea in China which I think and they think will be very important for serving China.

China is a big market and it's big for pediatric nutrition and it's big for adult nutrition I think.

I think it will be.

It's not well established at this point but I believe it will be.

And one of the key points of this business is your a lot more economically able to serve if you are into -- in market or close to market and responding to the desires and the needs of local consumers.

We have R&D in Singapore and we have R&D in Shanghai.

We have manufacturing there.

We're now going to vertically integrate and supply from there in addition to the supplies we take into China and other countries from New Zealand and other milk suppliers in Europe and other places.

So overall we're looking at this as a comprehensive global network of access to very high-quality milk and where we process it and then how we tailor the product to given local markets.

So I think while somebody won't pay a lot of attention to some of these steps with Fonterra or the plants that we've put in place today, within a few years we'll look back and say boy that was really key to do that because now we're in a very strong position to immediately serve in those markets.

Now further I would tell you, and this is speaking more globally not just specific to China, having our manufacturing in countries helps us in effect self hedge exchange as currency fluctuates in countries around the world.

It's clearly a strong commitment to the country which helps us from a regulatory standpoint, it helps us from a cost to serve and freight standpoint.

There a number of things that countries expect today that companies or businesses that are doing business in their country make rooted commitments in those economies.

And that's what in effect we're doing.

And I think it will put a very, very strong foundation under this Nutritional business and a lot of countries around the world.

China obviously is one of the largest right there with the United States in terms of size and potential and therefore very important one for us to commit to and make the kind of investments we're making.

Great, thanks for that.

And a follow up, the ability of large corporations with breadth and scale of product portfolio being better positioned to partner with hospitals and then contracting gain shares, we see a lot of attention we see in the medical device industry, I know you spoke to was on the call on Monday to a degree.

I want to return to your strategic outlook for the medical device division with vascular, diabetes and optho units.

Is the strategy for the divisions to build breadth and scale there or is that enough to bolster the growth profile, the entire unit or do you need new divisions in medical devices to compete more effectively as to health care delivery systems in both developed and emerging markets evolve?

And where are your priorities there strategically?

Thanks a lot.

Well I'd say the first part of your question I'd say the answer is both.

Not only do we want breadth and scale but I'm open to expansions that are in new areas provided we believe that we can add value or do better with them than they might stand alone.

So there's a delicate balance.

There are times when we acquired AMO in the ophthalmology business several years ago, a lot of people raised their eyebrows and said gee, what do you guys know about ophthalmology?

And you might say well that was an expansion into a different area.

It was one that we had very carefully studied for some years.

It was very intentional and it's one more we believed the demographics, the economics, the future of the business is frankly very favorable for us and for that particular segment.

So we made that step to expand.

And I think that was a good addition for Abbott.

The first couple of years of performance with that business were a little less than anybody really wanted, and right now it's probably the fastest growing division in the Company.

So I think that there are times when adding to the Company that way will make sense.

And I think there's times when clearly if we can broaden our footprint, expand our position in a business, whether it's diagnostics or pharmaceuticals or whatever, I think that's to our advantage.

I think that's good.

So we look both ways I guess is the point.

And what was the second half of your question?

Did I get that?

You did, you did.

Thank you very much.

Okay, good

Kristen Stewart, Deutsche Bank.

I wanted to clarify.

I know you had talked about how you're going to be reporting going forward for the third quarter with respect to the now discontinued operations.

So you're going to report both.

And then thinking ahead to 2014, will you have to do anything in terms of the ownership that you'll have with respect to the Mylan business since it's going to be 21%?

Well again today the guidance we provided is on a consistent basis with the way we started the year and continued through the first quarter.

And it's the combination of both the continuing operations starting in third quarter as well as the discontinued operations of the EPD, Established Developed Markets business.

We'll just very simply show those two pieces and reconcile it back to the guidance provided today.

And I just think it's the cleanest way to bridge to the new reporting.

Obviously for 2015 since we will also be reporting that business as discontinued until it's actually -- the deal closes early in the year, we'll more likely be giving guidance obviously on that basis.

And what was the second part of your question Kristen?

No, I was wondering since there will be a 21% ownership interest, if I understand it correctly --

Yes, we'll be basically caring this investment at cost and when it sold hopefully it gains, those gains will be reflected as specified items throughout the period during which we sell it.

Okay, perfect.

And then any color just on the performance of the MitraClip program?

MitraClip continues to progress nicely.

We had a very good progression in the second quarter.

We still are on track for this product to approach $200 million in sales which would be up 50% over the prior year.

And we're getting better coverage in Europe, more reimbursement in Europe and we're making very good progress through the US reimbursement process and we hope to have some good news on that in the second half of the year.

And then more broadly on transcatheter valves, can you comment on whether you feel like you need a whole portfolio to be more -- top more effectively complete within that space?

Okay that's one I probably wouldn't answer directly for you even if the answer was no because -- I'll put this in the context Kristen of yesterday I saw an article in the media were many buy side and sell side analysts speculated on what the next steps would be that we'd be interested in and of course which was very interesting.

It was interesting to know the thoughts of a lot of people, but what I almost never do is try to telegraph where we might be interested because a lot of times that's going to affect other companies and stuff too.

So if you don't mind, I'm going to avoid that question.

Totally fair, thank you.

Jayson Bedford, Raymond James.

On EPD, you witnessed a pretty strong acceleration in growth from your key emerging markets and I wanted to get a little more detail on some of the factors that drove the acceleration in the second quarter, meaning how much was just better execution, contribution from new products or just stronger end markets?

Yes I think I -- this is Brian, how are you doing, Jason?

I think I'd start, first of all recall with India, which is our largest market, last year we all experienced a little bit of a slowdown in that market when they implemented what was called the drug price control order.

So the whole industry which is good news for us being this is our largest presence, the market has come back up into what I'd say is more high-single digits.

It had actually reached low-single digits through some of its disruption around the implementation of this control order last year.

But that also with execution is serving very well for us in India driving double-digits growth.

We're set up very nicely for the second half of the year as well both from our execution as well as a nice comparison in terms of that markets rebound.

As I move to Brazil, that was one that was more about portfolio expansion.

We had expanded out our products along the therapeutic area that we refer to as our women's health, so that's going very well.

And as I mentioned in China again execution but also coupled with, recall in the first quarter we talked about a plant shutdown to build out capacity for one of our most successful products in the women's health arena.

That's starting to come back.

It doesn't come back all at once but I talked about seeing some benefits in the second quarter and third quarter now that that plant is online.

So we expect the key emerging markets to continue to do well for the rest of the year.

And when you look at this thing globally with the developed markets business, it's still that nice steady sequential improvement that we were talking about from the beginning of the year.

Okay, that's helpful.

And sticking with EPD and it may be a little premature, but lingering question from Monday, from a Management perspective you're bringing on a couple new businesses, shedding another one.

So my question is who's going to lead the new and refreshed EPD business?

And I realize the end markets are growing a little faster here in emerging markets, but is the business going to be run any differently than it is today?

Thanks.

Well it already is being run differently and the Management that's going to run is already there.

We -- there were a number of changes that have been made in the last 1.5 years or so and some new folks brought into the Company, some others moved and I'd say no change anticipated in the Management team, and I'm sure they'll be glad to hear that.

But that's already in place.

We're executing against the plans, we have expanding our product lines and our depth in various therapeutic areas.

We're rolling out our branding strategies in a number of these countries.

And I think while it's difficult when you have a whole portfolio of a lot of countries to see the specific needle move in general, we track them all pretty individually and by detail.

And we're seeing progress on the initiatives that we have in place.

So I think the Management and I both expect to see continued improvement in those countries and I think even this year in the third and fourth quarter, so I think you'll see that play out in the second half of the year here.

Great, thank you.

Ben Andrew, William Blair.

Two questions for us.

First can you talk about where the adult and infant nutritional businesses will settle out over the next several quarters as we annualize the one time and bit easier comps here with all the manufacturing capacity increases and what that does for gross margins over that window?

Once we get through the second half of the year where again you're going to see strong double-digit growth for the Nutrition business.

We believe that when you weight the two businesses which as you know we're 55% pediatric, 45% adult, this should be an upper single-digit growing business.

And interestingly in all the forecasts we look at, the adult is growing at roughly the equivalent rate as the pediatric.

So as Miles indicated earlier, it's an extremely important business to us strategically.

So once we're through as you know what is going to be a first half, second half story this year with the recovery, I think that upper single-digit range is one that we view as sustainable for the business that has great demographics on both the pediatric and adult side.

And obviously we're well invested in a broad range of more rapidly growing markets around the world with our emerging market strategy.

Okay.

And then on the diabetes side, you talked about Libre being a family of products.

Can you give us some more insights into what that looks like beyond the initial flash version and in what time frame you might think about as well as what the regulatory requirements may be for those products given some of the claims you've been talking about?

I'd probably say it's a little premature for us to forecast that.

And I would only say it's not a one-off product.

There will be other manifestations of it, other versions of it.

And over time I think our first priority is to get this first one launched.

I think it'll be very well received and very innovative and then it will be followed by others, other versions for various segments of the market.

And I think it's premature for us to comment on what that might be.

Okay.

Maybe I can sneak in another one of the diagnostic side.

You all have talked about a handful of instrument systems coming, obviously core labs has been great, but with the molecular it's been a bit weaker.

We haven't seen those new platforms launch, can you give us a bit of an update on any of those and when we might see those?

Thank you.

There's an unprecedented number of systems in development in our diagnostics business broadly defined.

There's a new family of hematology analyzers, new family for blood screening, a new family for core lab amino assay in chemistry.

We also have a program underway in our molecular space.

There's our Ibis system in addition to that in molecular, a second system there.

And then next-generation for our point of care business.

So across-the-board literally new systems and updated systems in development for all these businesses.

They obviously can't all launch at exactly the same time.

So I'd say there's a call it a three to five-year frame here where they will all sequentially roll out, God willing and everything staying on time.

And I think it -- as I said it's unprecedented for that much to be done in a similar period of time.

But when and as complete, I'd say our diagnostics business will have the most up-to-date delivery platforms in their various spaces across the board in the industry and we'll be very, very well positioned.

Thank you.

Jeff Holford, Jefferies.

Three questions.

The first on gross margins.

So you're flagging that you're going to have a drive on purchasing going forward and obviously you've been putting out some new manufacturing facilities.

So it sounds like you got quite some opportunity to increase gross margins going forward unless there's something in the mix that's going to pressure that against some of that.

So maybe you can talk about opportunity for gross margin expansion maybe over two, three-year period.

Then second, wondering if you can help --

Would you mind holding the second and third question until we answer the first?

Sure.

I'm finding I don't remember the third by the time I get done with the second.

Let's answer that one first and then we'll go right back to you for the second question.

You're right, you characterized it well.

I think that our manufacturing and supply chain and distribution initiatives and so forth will in fact improve our margins across the board.

That's been the case for the last three years as well in nutrition and I think that's primarily what we're talking about here.

All of the business focus on margin improvement, but -- and as I said there a number of things that will improve margins, but that has been the case.

Some of that as we've seen has dropped into gross margin improvement in the overall Company P&L.

In some cases that gross margin improvement has offset either currency fluctuation in the wrong direction or in some cases price pressures, end markets or other things from time to time.

So -- and I think we call it out pretty well when it occurs, where the gross margin improvement has occurred and so forth.

And as you know price is part of that.

So -- and price is generally not going up in our businesses around the world, it's usually under some pressure somewhere.

So that improvement in gross margin also preserves margins where we do have price pressures and every now and then there's some country that determines it's going to have a pricing action of some kind.

Saudi Arabia, Vietnam others from time to time do that.

And our gross margin improvements have either offset that or further added to the bottom line and I think that's as we said earlier there's opportunity here going forward and there continues to be margin expansion opportunity with that.

Second question?

So the second one is really if you can help us a bit more about the base cost of deferred EPD from the perspective just thinking how much net cash will drop through for share repurchases as you dispose of the Mylan shares?

Well first of all there's an assumption that I would use it all for share repurchase, wish I (inaudible).

So I would call out the fact that it gives me a lot of optionality in terms of cash disposition but I'm probably not going to tell you today what that's going to be.

Okay, the third question, and to be clear this is related to a wire that's come up this morning saying you may have talked with Sanofi about their mature products business, a little bit more general question off the back of that.

Do you think there's significant opportunity for you to add significant more product breath to EPD because in the past you've talked more about geographic bolt-ons and in filling but obviously a transaction like that, I'm not saying that you are doing obviously, would that be adding significant product breath, would that be something that was important for the business?

Well I'd answer that two ways.

First of all I saw the report on Sanofi and my understanding is that's a reference to their European-based business, and we're in the process of selling ours.

So I think these are two completely different questions here.

Would I be interested in broadening our emerging market portfolio?

Sure.

Yes, we're always interesting in broadening or deepening our portfolio in our EPD business.

But for us going forward, that's going to be the emerging market business and so consequently businesses that are similar products but in Europe or the US would not be of interest to us.

That's great.

Thank you.

Okay, we'll take one more question.

David Lewis, Morgan Stanley.

Miles a quick trip down memory lane for you here.

As the Nutritionals approaches normalcy I wonder if you could provide us some perspective 18 months post the spin.

If you go back to the time of the spin you talked about the Abbott growth story.

I think you discussed upper single-digit growth.

And as we sit here 18 months later, I wonder are you getting the growth contribution from the areas you expected?

And do you still think you have the assets to get back to upper single-digit growth here?

I do.

I think if I look at the single biggest event that was a setback for that business, it was the recall in Asia approximately a year ago in that Nutrition business, which clearly impacted us in China and other countries as I mentioned earlier.

And when that happens it's a year to recover because the consumer is an incredibly quality conscious consumer that once that consumer has shifted to another brand it's very difficult to regain them.

And that wasn't something anybody anticipated.

It wasn't something anybody wanted to happen, including Fonterra.

But when that happens, it does set you back a bit.

And I think we've recovered about as well as we could have within that year timeframe.

I like the progress that our team is making in China and other countries.

The world is volatile.

The great thing about emerging markets is they represent I think terrific growth.

The unfortunate thing about them for businesses that measure their success every 90 days is that they can be pretty volatile.

And in our case we're in a number of emerging markets like a portfolio which one hopes over time dampens the overall absorption of volatility.

And I think it does and I think you have to learn how to shape your portfolio and shape your approach to minimize volatility of markets whether it's currency driven, politically driven, whatever the case may be and deliver that growth on a more consistent durable basis for investors.

And of course that's our intent and that's what we're trying to do.

So if I look at our businesses across the board I think -- I always think we can do better.

I think we're getting back to the track we want to be on with Nutrition.

I think we're getting back to the track we want to be on with our pharmaceutical business.

The pharmaceutical business as I've said in the past is two very different businesses.

There's the developed market business which is low growth but still attractive and profitable, and the much higher growth emerging market business.

And since we've defined the Company around durable growth, our emphasis and focus by strategic intent is on those emerging markets.

And we think that given the scale necessary for the consolidation that's happening in those developed markets, that at least in our case, Mylan was a better home for our business than we were otherwise.

We were faced with the possibility of having to expand and consolidate still further in those markets.

And for us that wasn't the same in terms of strategic intent and growth as what we're trying to do in emerging markets.

So I think as two of the large businesses in the portfolio, I think they are getting back into the shape and direction and top line growth that we intend.

But I think as we've said, everything we're doing is directed toward that.

I see that evolving and emerging here.

Our first quarter with EPD as you'll recall, we had a plant shutdown because we were expanding the plant.

And so there's a number of factors at work here that I think we'll see play out in the third and fourth quarter that will give our investors much more confidence in the ongoing trajectory of our Pharma business.

And I think the Nutrition business will evolve that way over time too.

It's already a very strong business.

It's doing well and the infrastructure and so forth that we've put in place and the recovery that we've seen in China and other countries shows, and frankly we will have lapped it in the second half the issue we had last year.

And you'll see that those growth rates are back where you'd like to see them.

Great.

Maybe a quick follow up for Tom.

Tom, your guidance for gross margin remains unchanged but it still implies that back half recovery.

Where you sit now, what are some of the factors that give you the confidence you can get back to that gross margin improvement in the back half of the year?

And in general I feel like investors are very focused on the Abbott SG&A story, they're a little less focused on the GM story.

What are some of the opportunities for Abbott both in the back half of the year but more specifically over the next couple of years?

Thank you.

The guidance I provided on gross margin was pretty steady really from the second quarter through the fourth quarter.

It's a situation and we talked about this at the very beginning of the year.

It was a particularly acute exchange year on the gross margin ratio and that's playing through -- played through in the second quarter.

It was a bit of a headwind and its playing through a little more in the third quarter.

So I think on a gross margin level pretty much all the guidance is steady the rest of the year.

Certainly we're going to work hard to do as well as we can in that area.

But I think once we've lapped through this year of exchange challenges, we'll be back on the fundamentals and it's something that we'd like to see some steady improvement over time even taking into account some of the challenge Miles outlined in his earlier remarks.

So I think the second half is really more of a sales acceleration story and continuing to drive down these G&A costs to ultimately deliver on the forecasts.

Okay.

Well thank you, operator, and thank you for all your questions and that concludes Abbott's conference call.

A replay of this call will be available after 11 AM Central Time today on Abbott's investor relations website at www.abbottinvestor.com and after 11 AM Central Time via telephone at 203-369-0489 passcode 3332.

The audio replay will be available until 4 PM Central Time on Wednesday, July 30.

Thank you for joining us today.

Thank you and this does conclude today's conference.

You may disconnect at this time.