美國雅培 (ABT) 2014 Q3 法說會逐字稿

Good morning and thank you for standing by.

Welcome to Abbott's third-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.

Good morning and thank you for joining us.

With me today are 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 maybe forward-looking for purposes of the Privates 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.

Also you will see in our earnings news release this morning that financial results from the developed markets branded generics pharmaceutical business have been presented as discontinued operations this quarter due to the pending sale to Mylan.

As a result the line items of our consolidated statement of earnings are now reported on the basis of continuing operations.

We also provide in the release a reconciliation between continuing and discontinued operations for the third quarter and the first nine months of 2013 and 2014.

For the remainder of 2014, our earnings-per-share guidance will include results from both continuing operations, as well as discontinued operations associated with the developed markets branded generics pharmaceutical business being sold to Mylan.

Our commentary and guidance for sales and other P&L line items, will be for continuing ops only.

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 adjusted earnings per share above expectations and another quarter of sequential improvement in total company sales growth.

We're also raising the midpoint for full-year EPS guidance range, which is now $2.25 to $2.27 representing double-digit growth.

Third-quarter adjusted earnings per share of $0.62 increased approximately $0.13 or 13%, I'm sorry, including discontinued operations, which is above our previous guidance range.

Today I'll focus my comments on results from Abbott's continuing operations, where sales increased 6.7% operationally.

Emerging market sales will now represent nearly 50% of Abbott's total sales and increased 15% in the quarter with double-digit growth in established pharmaceuticals, nutrition and diagnostics.

In the quarter we also advanced the number of transactions in our branded generics business to accelerate our ability to drive balance to a sustainable growth in emerging geographies.

We remain on track to divest our developed markets business in Mylan in the first quarter of next year.

Mylan is well-positioned in its global scale and capabilities to do well with this business over the long-term.

We completed our acquisition of CFR Pharmaceuticals at the end of September, which establishes Abbott as a top 10 pharmaceutical company in Latin America.

CFR provides scale and a product portfolio that strongly complements Abbott's presence in Latin America and more than doubles our branded generic sales in the region.

CFR also brings a network of manufacturing plants and R&D facilities in Columbia, Chile, Peru, and Argentina, which further diversifies our cost base in emerging markets.

And most importantly CFR adds top talent, with strong local market knowledge and a proven ability to quickly develop, manufacture, and bring new products to market.

We expect our announced acquisition of Veropharm to close by the end of the year.

Veropharm positions Abbott to become a top five branded generics company in Russia, providing us with income for manufacturing and a broad portfolio well aligned for our therapeutic areas of focus.

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

Moving forward we would expect this business to generate sales growth in the upper single to double digits.

We're also executing on our organic growth opportunities, including the launch of a number of new products and innovations across our businesses.

I'll briefly review our third-quarter results.

And I'll start with nutrition, where sales increased double digits this quarter.

We've largely recovered from the sales disruption in our international business at the same time we're executing on multiple new product launches across key geographies.

We continue to invest in our global infrastructure to support the strong global demand for adult and pediatric nutrition.

As we discussed last quarter, we reinforced our footprint in China through the opening of our new manufacturing plant in Jiaxing and our strategic alliance with Fonterra to invest locally in China's milk supply.

And last week in India we announced the opening of our third new manufacturing facility this year in nutrition.

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

In diagnostics we delivered 6% operational growth in the third quarter of sequential improvement from the second quarter, driven by continued above market performance in core laboratory diagnostics and point of care diagnostics.

We're funding investments in growth and advanced multiple new system platforms across all three of our diagnostics businesses.

In medical devices, our vascular business is performing below our expectations primarily related to sales of our drug eluting portfolio.

We remain focused on improved execution and increasing the penetration of ABSORB in Europe and several key emerging geographies.

MitraClip, our structural heart technology delivered strong double-digit growth in the quarter and we expect continued adoption in the US following improved reimbursement and national medicare coverage.

Our peripheral stent Supera also contributed to growth of our new vascular business in the quarter.

In diabetes care we launched our next generation flash glucose monitor FreeStyle Libre, into the nearly $4 billion blood glucose monitoring market in Europe.

Libre is an revolutionary new glucose sensing technology that's generated very positive feedback early in its launch.

It eliminates the need for routine finger sticks and provides glucose data in a simple format that allows people with diabetes to achieve better health outcomes.

In our vision care 70% of our sales are generated by our cataract products which increased double digits again this quarter.

Our new cataract lenses and the uptake of our Catalys laser cataract system are driving above market growth.

To support the growing global demand for our cataract lenses, we've recently broke ground in a new manufacturing facility in Malaysia.

In Established Pharmaceuticals, as we expected, sales improved sequentially again this quarter.

The emerging market branded generics business increased double digits 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 as we exit the year, including CFR where sales have been growing consistently at a double-digit pace.

So in summary, we're right on track with our expectations that we communicated at the beginning of this year.

Operational sales growth has improved sequentially each quarter we're particularly pleased to see that type of improvement in our branded generics business and nutrition, as well as study durable performance in diagnostics and vision care.

We again exceeded adjusted earnings-per-share expectations for the quarter and increased midpoint of our EPS guidance range, which results in another year of double-digit adjusted EPS growth.

And we're continuing to build Abbott for durable growth over the long-term, completing the CFR acquisition in the third quarter and working toward our first quarter 2015 close of the sale of our developed market branded generics business to Mylan.

I'll now turn the call over to Tom.

Thanks Miles.

As Brian mentioned up front because guidance previously provided for the third quarter and the full year 2014 included the developed market branded generics business being sold to Mylan, we will continue to include the contribution from this business in our EPS guidance for the remainder of 2014.

However, our commentary in guidance for sales and other P&L line items this quarter and for the fourth-quarter forecast, will be for continuing operations only that is excluding the business being sold to Mylan.

Today we reported third-quarter diluted earnings per share excluding specified items of $0.62, above our previous guidance range.

Sales from continuing operations that is excluding the developed markets branded generics business increased 6.7% on an operational basis and 5.8% on a reported basis in the quarter.

Including the contribution from discontinued operations, sales would've increased 5.6% on an operational basis in line with previous guidance.

Operational sales growth was driven by a strong performance in several businesses, including double-digit growth in Established Pharmaceuticals and nutrition and steady growth in diagnostics and vision care, while the Company sales in emerging markets increased 15% on an operational basis in the quarter.

The adjusted gross margin ratio was 55.4% of sales, adjusted R&D investment was 6% of sales and adjusted as SG&A expense was 29.4% of sales from continuing operations.

Turning to our outlook for the full-year 2014, today we're raising the midpoint and narrowing our EPS guidance range, excluding specified items to $2.25 to $2.27 which includes the results from our developed markets branded generics business now presented as discontinued operations and reflect double-digit growth over 2013.

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

Based on current exchange rates, we expect exchange to have a negative impact of approximately 2% on our full-year reported sales, which was somewhat more negative than previous expectations driven by the recent strengthening of the US dollar.

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

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

We forecast in adjusted gross margin ratio of approximately 55% of sales, adjusted R&D investment of somewhat more than 6% of sales, and adjusted SG&A expense of around 30% of sales from continuing operations for the full-year 2014.

Turning to the outlook for the fourth quarter of 2014, we forecast double-digit operational sales growth from continuing operations.

As Miles mentioned earlier we've recently completed the acquisition of CFR Pharmaceuticals and expect this business to contribute approximately $200 million to sales in the fourth quarter.

Based on current exchange rates we expect exchange to have a negative impact of somewhat more than 2.5% on sales in the quarter.

This would result in reported sales growth in the high single-digit for the fourth quarter.

We forecast an adjusted gross margin ratio of approximately 55.5% of sales, adjusted R&D investment of approximately 6.5% of sales and adjusted SG&A expense of around 28% of sales from continuing operations in the fourth quarter.

So in summary, our sales and earnings progression for the year is playing out as we forecasted back in January as we continue to forecast another year of double-digit adjusted earnings-per-share growth.

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

Thanks Tom.

This morning I'll review our third-quarter 2014 performance and fourth-quarter sales outlook by business.

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

I'll start with our nutrition business where global sales increased 10% in the third quarter.

In our international pediatric nutrition business sales increased 14%.

We have recaptured our share in China and Vietnam following the previously reported 2013 sales disruption and continue to drive uptake of new products.

This includes new infant formula products Similac QINTI and Eleva that we recently launched into the premium segments of the Chinese market to further enhance our competitive position.

International adult nutrition sales increased strong double-digits in the quarter.

Representing the fourth consecutive quarter of double-digit sales growth in this business.

Sales growth was led by continued strong performance of our Ensure brand and double-digit growth in emerging markets.

Last week, Abbott announced the opening of our new nutrition manufacturing plant in India.

The third plant we opened this year to meet increasing demand for our nutrition products.

This new manufacturing plant is one of Abbott's most technologically advanced nutrition plants in the world, and will source up to 80% of ingredients locally in India.

We'll work together with Abbott's nutrition R&D center in India to deliver innovations to address unmet health needs in pediatric and adult nutrition while also meeting specific local tastes and preferences.

In the US, nutrition sales increased low single digits in the quarter in line with expectations.

Looking ahead to the fourth quarter, we expect global nutrition to deliver double-digit sales growth on an operational basis.

In our diagnostics business sales increased 6% in the third quarter, representing sequential improvement from the second quarter with sales in emerging markets growing double digits.

Core laboratory diagnostic sales increased nearly 7% as we continued to outperform the market.

In the US, sales growth was impacted by comparison to the third quarter of 2013, when sales were higher due to the timing of equipment sales.

Year-to-date growth of 7.5% better reflect the underlying performance of the US business where we continue to build momentum with our enterprise account commercial models.

International sales in the quarter increased 8% driven by continued strong growth in emerging markets.

In molecular diagnostics, our core focus and largest business is infectious disease testing where year-to-date sales increased mid single-digits.

In the quarter, growth in our infectious disease business was offset by a decline in some of our smaller businesses, as well as the timing of tenders in several emerging markets.

In point of care diagnostics, worldwide sales increased 6.7% representing a sequential improvement from the first two quarters of the year.

International sales increased 17% as this business continues to build and expand its presence and targeted developed and emerging markets.

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

In medical devices, vascular sales decreased low single-digits in the quarter.

Sales growth was relatively flat excluding the impact of the third-quarter 2013 sales related to a third-party agreement.

We continue to see strong market adoption of MitraClip our breakthrough technology for the treatment of mitral regurgitation and growth from Supera, our peripheral stent for the superficial femoral artery or SFA.

As Miles mentioned during the third quarter MitraClip received national Medicare coverage and improved payment rate for the procedure which will help drive adoption of MitraClip in the US.

Both structural heart and endovascular products grew double-digits in third quarter globally.

In our drug eluting portfolio in September, we presented the first randomized clinical trial results for ABSORB, our bioresorbable vascular scaffold.

One of these results from the ABSORB II study demonstrated that ABSORB provides comparable results to science and lower rates of angina or chest pain.

Also in the quarter we launched additional XIENCE for expanding the potential for ABSORB's use in more coronary procedures.

As we look ahead, we expect to see improvement in vascular sales growth driven by commercial execution and contribution from new products, as well as further ABSORB penetration as we exit the year.

So for the fourth quarter we expect to see a sequential improvement in growth from the third quarter with relatively flat year-over-year sales on an operational basis.

In diabetes care global sales in the third quarter were somewhat ahead of our expectations as the rate of decline in the US was moderating.

Outside of the US we are focused on driving growth in both emerging and developed markets in our diabetes care business, and recently announced European launch of our revolutionary new glucose sensing technology called FreeStyle Libre.

It eliminates routine finger pricks and finger prick calibration and reads glucose levels discreetly through a sensor that can be worn on the back of the upper arm.

In the near term we're working to obtain reimbursement for Libre in Europe, as well as bring it to the market in a number of additional countries next year.

For the fourth quarter, in our global diabetes business, we expect a mid single-digit decline on an operational basis with international growth offset by the later stages of the market transition in the US in line with our forecast earlier this year.

In vision care, sales increased 9% in the third quarter.

Sales of our cataract products, which represent approximately 70% of our vision care business, increased double-digits, outpacing the growth of the global cataract market.

We continue to capture market share with our recently launched premium intraocular lenses including our TECNIS OptiBlue line of lenses in Japan and our TECNIS Toric lenses in the US and Japan.

In addition we continue to see strong adoption of our new Catalys laser cataract system.

We also receiving strong feedback from early adopters of our new TECNIS Symfony extended range of vision intraocular lens that we launched in Europe in the second quarter.

TECNIS Symfony provides patients with a continuous range of vision including far, intermediate and near distances but with reduced incidence of halo and glare.

And last week we announced a distribution agreement in the US with Carl Zeiss Meditec, the leading ophthalmolic diagnostics company.

The Zeiss product line of diagnostics and visualization systems, combined with Abbott's intraocular lenses, lens removal systems and laser cataract system, provides surgeons with comprehensive portfolio of cataract products to maximize the visual outcome and streamline patient flow.

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

And lastly, our established pharmaceuticals business or EPD where sales from continuing operations, that is excluding the developed markets branded generics pharmaceutical business, increased nearly 13% in the quarter.

This strong performance was driven by double-digit sales growth across several emerging markets including India, Russia, Mexico, and Vietnam.

This business continues to make meaningful progress in becoming a more consumer-oriented organization and is focused on expanded product portfolios in key therapeutic areas, implementing new brand initiatives across the portfolio and increasing its focus on marketing to the pharmacy channel.

For the fourth quarter of 2014, we forecast double-digit sales growth on an operational basis from continuing operations in our emerging markets branded generics business.

This includes CFR Pharmaceuticals, which is expected to contribute sales of approximately $200 million in the fourth quarter.

So in summary, sales growth improved sequentially this quarter as we expected and we exceeded earnings-per-share expectations, raising the midpoint of our full-year guidance range.

We are on track for another year of double-digit adjusted earnings-per-share growth in 2014.

We will now open the call for questions.

Thank you.

(Operator Instructions)

Mike Weinstein, JPMC.

Thank you.

For taking the questions and congratulations on a nice quarter.

Miles I wanted to really start with the EPD business and first the updated agreement today with Mylan could you spend a minute on that?

Because obviously there was some question about whether that transaction as it was initially constructed.

So A, could you comment on that?

And then B, the EPT performance of this quarter up 12.9%.

Can you just talk about the sustainability of that performance?

It seems like a very high number so can you just talk about how we should think about that business going forward, thanks.

Well I assumed that one of the questions this morning was some clarity on whether or not the transaction with Mylan was going forward.

I think that's clear.

We've reported discontinued operations.

About the financials et cetera.

And as we very clearly said in the earnings release, yes we are tracking forward, no change.

I don't think there's much more to comment on than that.

So that should take away some speculation or uncertainty there.

And that's all tracking according to schedule.

The performance of the remainder of EPD, actually I'd say both halves we've actually seen improvement in the developed market part of the business which is a good thing.

That's the part that we're divesting to Mylan.

And we've seen improvement in the emerging market piece.

Some I'd say some improvement in market economy in a few of these markets like India, but overall it's an improvement in the overall performance of the business which we've been expecting and waiting for and you know that was kind of what we intended kind of what we planned and we're seeing it so I can say that's gratifying.

Now you know I think everybody around the world every company I've seen report is expressing caution around economies everywhere and currencies everywhere and so forth and I think the one issue that I continue to track closely which we have obviously less control of than the operating performance of these businesses is just the overall currency volatility around the world and that of course affects this business because it's purely an ex-US business.

But other than that I think what we're seeing here and gradual improvement in our performance in the business is good.

That's good.

I'm feeling pretty good about that because as you know, earlier in the year we were projecting sequential improvement in this business as the year went on and you know you guys rightly ask me that at every quarter and you know we're seeing that, your greatest fear is that you don't see that.

So we're pleased with that.

Now in addition we add CFR to that,CFR's performance in Latin America has been consistent double-digit growth and that's also a plus in going forward so now I think if you look at the underlying performance of the business we exceeded double-digit growth and there's very little CFR in here because of the timing of the close.

There's not a lot of CFR in the numbers and even without it business is growing double-digit so I'm pleased with what I see in the emerging markets.

When we're done with the Mylan transaction with the developed market business this business will be purely an emerging market business which has been our strategic intent to focus on because we see the conditions in those markets and the developing economies quite favorable to the business over time.

So that remains an important strategic focus for us and I think the investors now will have a much clearer visibility and transparency to the opportunity in most markets.

One of the great things about emerging markets is the growth potential there in these economies in these healthcare systems and that's why we're focused on that, that's a very important source of growth.

It comes with volatility which means you've got to be diverse you've got to be diverse in the geographies you're in fortunately we are, we're well spread out I think CFR helped us even further with that.

So I like the prospects for the business.

I'm glad we're seeing the fundamentals improve.

So Miles, just two quick follow ups if I can.

So one obviously one you're confident that the transaction is going to go through.

Two, the piece that we talked about that you didn't really address in all of your opening comments of this call was the vascular business which obviously had a difficult quarter.

So can you just talk a little bit about how you're thinking about that business strategically and how you turn that business around given your success now in turning around EPD?

Thanks.

Yes.

Well first of all back to your original question about confidence.

We're right on track with our transaction with Mylan and I'm superstitious enough not to want to speculate or hypothesize or whatever.

I would say we're on track with what we said, what we expected, and everything that we're doing is pointed at the conclusion on time, on schedule as described.

And I don't know what else to say about it for now, I don't want to get into a lot of speculation about other stuff, but I think it's as I said tracking exactly where we wanted to be.

So that's about as much as I can say.

And or think I should say.

The vascular business is a disappointment.

There's just no question about that.

And this is our performance.

You know to a degree I think all of us competing in this business can look at a slower market, but this isn't about slower market this is about us.

The part of this business where I am most disappointed is the US, in us and our performance there.

There's a lot of price competition, but you know when there's price competition that price affects everybody so the whole market is experiencing price competition.

I think that there's a fair amount of commoditization that's happening here it's customers returning more and more towards value and less and less toward differentiation and performance of products.

I think when that happens your competitors begin to sell on price.

And other factors.

I think this market has definitely changed.

The dynamics, the competitive dynamics have changed and our approach to it needs to change as well.

And that's just a fact.

For us you know if you look at the performance it's primarily the stent business.

And it's primarily the US.

Now is there a residual effect in Europe?

There is.

Is there a residual effect in Japan?

There is, I'd say in both countries, both geographies that is Japan and Europe it's price.

But in addition, I think that there's definitely a share war going on where the leaders in the category as such we -- a lot of the we're targeted by everybody else.

And we don't seem to be dealing with that as well as we should.

But I think that's pretty clear.

So at this point I don't have any projection to make to you other than it's got our full attention.

Thank you, David Roman, Goldman Sachs.

Thank you good morning everybody.

I wanted to sort of follow along the train of thought on the vascular business.

And Miles if we make the comparison to the turnaround you may be able to execute on EPD, it seems like it's not completely analogous.

And the reason I say that is EPD operated in very attractive end markets largely in the emerging markets.

Whereas in vascular the vast majority of the business is in stents which I think would be hard to call an attractive market.

So as you think about this business strategically do you need to rethink the business mix or the potential to engage in more aggressive portfolio modification to really change the growth portfolio of that vascular franchise?

Well first of all of me tell you I don't see an analogy between this and EPD other than there's been a time when both have performed below our expectations and we frankly we just need them to perform at or above our expectations so there's the comparability.

Other than that you're right, they're different.

The answers to the device business or the stent business are clearly different.

The dynamics of the market are different and so on.

In our case I think there's two things.

One is we clearly have to deal with our competitiveness in the stent category and in particular in the US.

We simply have to figure out here how to be a lot more competitive than we apparently have been.

So that's point number one, point number two beyond that I think for this business to be a contributor to growth it's got to be broader, we've got to broaden our footprint here, we've got to broaden into new areas and new innovations.

Now in our case MitraClip, the peripheral, the longer term prospects for ABSORB and frankly any other expansion beyond that they're all considerations here we can't just sit here and be a drug eluding stent company and rely on that.

So it's clearly our intent to broaden the business and grow other dimensions of it in the device area.

But you have to do that on strong foundations so we've got it fix the competitiveness of the underlying business first, and we're clearly looking at how we expand and shape this business going forward.

You know I have no intention of being out of the business, I have no intention of shrinking, I have no intention of any other changes other than full steam ahead, but I'd say the underlying competitiveness and then expansion from there is what's on the table.

Okay that's helpful for perspective and then maybe just on the underlying business, maybe you could talk a little bit more about adult nutritionals that that is a franchise that looks to be doing reasonably well and it obviously looks to be a pretty big opportunity in China on a go forward basis.

Could you maybe just help us understand the adult opportunity that exists in front of you?

And then how we should think about the impact that has to the global growth of that nutrition business on a go forward basis.

Yes, I'll tell you I think this is a great business and again I always think we can do better at it and this case very different dynamic we are the adult nutrition business worldwide.

And it's one where you know it's not about riding growth or competing with particular competitors because we're quite large I guess I would say in the area.

So we have to drive the growth and create the demand as well.

And the single biggest uncreated opportunity thus far is China.

And we're recently launching into that arena with powder-based products and so forth, we'll learn our way in here, we think we understand the dynamics of the market but you always think you understand the dynamics of the market and in the market teaches you more.

In this case we're launched, I think there's a big opportunity there, I think there's a future opportunity beyond that, beyond the powder-based business in liquids and we're prepared for that as well.

But I think we'll go at this, I don't want to say cautiously because that's not the right term, but thoughtfully, progressively, we'll establish our distribution, establish our brand, establish our products, establish a category, the dynamics in China are different than the dynamics in the US or other countries of the world.

Their own behaviors and practices as consumers are different and so you know it's not like you can just take a US or European or Latin American model and applied to China you can't.

But I think there's a big opportunity there and I think there's opportunity in the rest of the world to continue to grow the business.

In this case you know we don't measure our success so much on shares we do in so many other categories we measure our success on real growth.

Because our share is high.

And I think you know when you're a very high share in a given segment you can often be too comfortable and not try the opportunity or the market growth.

I don't think our people are comfortable.

I think they all understand there's a much bigger opportunity here to drive growth in this business.

We certainly do think that.

And so for me that's a real upside for us that's on our radar screen for a lot of investment potential.

And as you know you know we've recently invested in additional plant capacity not only in China and India, but also here in the US in Ohio where we built a brand-new liquid plant that is specifically dedicated to this business.

And were already into phase II expansion there so we've got great expectations of the ability of this business to drive growth in the future both here and in the areas overseas.

Okay.

And then maybe lastly for you or Tom, even if you don't monetize the Mylan shares that you'll receive, you'll still be sitting on a pretty big chunk of cash.

Fairly under lever interest rates still low but potentially rising and any updates on how we should think about use of capital going into next year and how you might look to offset the Mylan delusion and any headwinds that might materialize from foreign exchange in 2015.

Well you've got two different questions there, one is sort of capital allocation and the Mylan shares and then with currency.

So let me just deal with the capital allocation first.

I'd say I'm probably not going to tell you right now what our intentions would be or what we'll do.

I'd say your best proxy for that is just to simply look at we've been good stewards and capital allocators in the past we always pay a healthy dividend, we always try to balance share repurchase, but at the end of the day we also have been investors in strategic growth opportunities and so forth and I think the best expectation is a mix of the above.

We're not going to run to one side of the ship and tip.

We're going to keep things relatively balanced.

I think we'll be opportunistic about our Mylan holding obviously we don't want to do anything to destabilize that holding or either company.

And we think that's a pretty strong and valuable investment for us so we can afford to be I'd say thoughtful about the disposition of those shares over time.

Although it's not our intent to be long-term shareholders of Mylan I think that's been pretty clear.

And you know I'm glad to have the capital and the challenge how to best allocate it for our investors.

But I think you know if you look at our track record historically we've been pretty good at balancing that for the range of investors.

We have those that rely an income, those that rely on a cash return, those that rely on good strategic investment and so forth.

So you know without betraying any future direction here, and certainly time and opportunity can change here, I'd say you can expect more of the same from us and not something dramatically different than what you've come to expect.

With regard to currency, you know I note that a lot of companies that have reported in the last couple of weeks have flagged caution around currency around the world and you know rightly so.

As you know our business is 70% international and in the continued operations now will be about 50% emerging market and some of those currencies have been disappointing or volatile if you're an American company and competing in dollars and it remains a challenge for us.

So you know over the past few years we like other companies have taken quite a dent from currency and as we point out that over that time as you know the Company's made tremendous strides in improving margins, improving gross margins and distribution margins.

And you know unfortunately well fortunately and unfortunately, fortunately we've done that because it's been able to absorb a lot of the currency hit and/or pricing pressure that we've experienced around the world over the last couple of years and we still managed to improve margins.

But where it would be eroding the bottom line that we're experiencing.

So going forward you know I don't think any American company likes to have too keep dealing with that.

But for a period of time it appears to me we're going to be under some exchange pressure at companies around the world and the market basket mix.

Over the long term our best hedge against currency -- foreign currency fluctuations is to have our cost basis in the markets where we serve.

What I mean by that is our production, our plants, our products we've got a matchup some of our production in a proportion with profitability of markets.

And in fact that means producing in market for the market.

A lot of these large emerging markets and even the smaller ones that want foreign investments or want American brands or American companies are frankly European companies they also want you to invest there to build plants and employ people et cetera in their markets.

And over the long haul the best hedge against currency is to have your costs where your profits are.

And we happen to have profits in a lot of countries of the world and so we've got to ensure that we've also thought through how to put some of our production capacity, R&D capacity and so forth we can't slowly the exporters you know from the United States or concentrating places, you can't put all your cost in India and export to the rest of the world.

You've actually got to match it up where your profits are, invest in those countries and mitigate exchange.

So I think over the next few years that's something that's going to get a lot of focus from us and other multinationals that are 40%, 50%, 60% international companies and businesses.

And you're going to see many us working to balance that over time because to the extent that the kind of currency we've experienced continues and we expected it to continue into 2015, I'll tell you right now you I'm not ready to even start hinting about 2015.

We always start the year targeting double digits and we always do target double digits and we always set a high bar for ourselves even in slow economies.

But the hardest part of predicting this is the currencies.

And then we still deliver on top of that.

I think over time the only real way to mitigate currency is to do as I just described you can hedge short-term but that is short-term and long-term you got to deal with that.

Because I think if we want the growth and the participation in these markets we've also got to shape our business to deal with the fluctuations of currencies because as you know our investors require us to get it right every quarter.

Understood.

Thank you.

David Lewis, Morgan Stanley

Good morning.

Miles I just want to come back to a strategic question here and you know and with nutrition back on track and the [receipting] in EPD you have two legs of the stool growing out in excess of the target rate you laid out for Abbott at the spin.

Devices is the obvious departure which is more vascular and diabetes but one of your larger diversified peers is actually getting smaller in devices.

And I guess the question is even though everyone's discussing large device consolidation, in light of the strength you have in the other two legs, and arguably better secular fundamentals in this business is why even bother getting much bigger in devices versus doing tuck in technologies for focusing on better execution?

Well I think two things, first of all I'd correct you a little bit and say that three major businesses that are doing really well I think diagnostics is doing well too.

And I think relative to the kind of opportunities diagnostics has and how it's been performing it's been a really solid performer over the last few years and has a hell of the bank of systems and new products coming.

So I'd take your analysis and I'd say look -- and by the way I haven't told nutrition they're back on track yet, you just did.

But I keep the fire to our feet here on this performance, but okay let's take your description and say the established pharmaceutical business and nutrition are trending in the right direction in terms of growth expansion and so forth, I'd take that.

I think diagnostics has been a very solid performer that leaves devices and I would take that in three pieces and say you know the diabetes care business actually I think is doing very well.

I think they've stabilized the underlining business relative to the competitive bidding dynamics of the US every major competitor took their hit there.

We just launched a unique and I'd say spectacular product that in Europe at this point that I think is going to drive a whole new generation of performance there that we're excited about.

I think in terms of the things we would do for our diabetes care business we're pretty happy with how that's progressing at this point.

In our medical optics business is best-performing division in the Company right now which is ironic because as you know for a couple of years after we acquired it we kept reporting disappointing performance to you and of course you all rightly challenged us on that, but that business is performing well taking share in its business it's had a great run here of new product delivery and continues to.

So I like what I see in medical devices out of those two businesses at this point, good innovation, good R&D productivity, good commercial execution, good expansion, good platform I just can't say enough good about it.

That leaves vascular.

And vascular's got its challenges which I already talked about.

So you'd say that's the one part of our release where you'd say I'm disappointed in the trajectory, I'm disappointed in what I see in terms of performance.

And we know that.

I mean nobody's going to be surprised to hear me say that over the phone.

So you know you can look at it any number of ways you can say well that's not very good any more, lets just do something with that or shrink or get rid of it or whatever.

But I don't want to think that's necessary I think right now our issue isn't you can say the market is slower all markets are slower.

All markets are slower there's no question about that.

First issue here is our performance.

Our strategy, our execution, how we're doing our business in these markets and relative to our competitors.

I don't think you abandon commitment to an investment in a business because of your own execution I think you go and fix your execution.

And in our case that's what I'm going to focus on.

Do I think there's still a lot of opportunity in medical devices?

I do.

I think there is opportunity there are some segments of medical devices that are attractive to us and some that are not.

There's some that we would not choose to be in and haven't chosen to be in and there are some that we would choose to be in an I'd say that ebbs and flows it's not clear at given points in time what's going to evolve, what's going to develop.

I'd say we all know that the easy part of it with a big tailwind of innovation funded by government reimbursements and so forth that's not as easy anymore.

Now you've really got to compete and you've really got to be innovative and you've really got a better at it than your competition and you've got to put a value proposition on the table with a product somebody wants and is willing to pay for.

So I think right now my focus on the device business is both fixing the base of that particular business as I described, and looking at where we would selectively choose to invest or expand.

I think one of the benefits of being large and diverse as we are is that when we can afford to absorb occasional poor performance or economic downturn or whatever the case may be and fix a business or improve its performance but we can afford to be patient about what new opportunities may come along and where we want to invest.

You know there have been a number of transactions that we've done over time to build the Company that have been from a timing standpoint opportunistic.

We've tracked those businesses and those segments for a long period of time and when an opportunity presented itself that fit and was economically good for us, and our investors then we pounced on it.

And I think in this case some dimensions of the future of the device business requires some patience here.

Because the markets as you know aren't as favorable as they could be and it's not clear when that will change and it's not clear where the new opportunities in some of the areas of devices will be attractive.

But I think for the long-term and especially in some out of the US geographies and so forth there's still a lot of opportunity here so I'm not ready to throw the towel on this at all

And Miles, just to follow-up on something you mentioned on nutrition.

All US adult very very strong, your pediatric little less so.

Is pediatric the business that you'd like to see greater improvement and what steps need to be taken to do that.

I'm not sure I understood the question there.

Just in terms of nutrition we had OUS adult very strong and then pediatric maybe not as strong as we expected and given your comments on nutrition back on track but not quite where you want it.

I wonder if the area of improvement is that more in pediatric than it is in adult?

And what specifically has to happen a pediatric nutrition to improve that performance?

Yes okay.

As you know over the last three or four years there has been some you know large event that impacted the pediatric nutrition business usually in China.

And the recall that we had over a year ago clearly affected the business in China and several other countries.

And you know when that happens to the pediatric business it typically takes a year or more to recover.

And you might note that one of our competitors who was impacted more than we were by that particular recall has not recovered.

And we have.

So I think first thing I'd say is our team in China and Saudi Arabia and other places and Vietnam, they've done a wonderful job with covering not only share they had the market but performance trajectory, brand confidence with the consumer et cetera.

And we're seeing that now.

Are we completely there?

We're close.

But that cost a year's worth of growth in base and so forth for those countries.

We're in a good trajectory in China a lot of new product launches are going on right now that are driving us I think very nicely.

I'm not sure we're going to be satisfied or let ourselves be satisfied in the pediatric business in China until you know we've taken incremental share over and above where we were when the recall happened but we're on a good trajectory there and I think the team's doing well at that.

We've launched a lot of new products around the world country by country over the last three years.

Our R&D productivity in the nutrition business has been exceptional, tops in the Company, and they put a lot of new products into the marketplace and it's our own commercial execution that needs to make those products successful in those markets.

So I'd say we're in so many countries that the opportunity from a pediatric standpoint is really strong, really good, and driven by good demographic circumstances in those countries and economic development circumstances so I'm pleased with all of that.

As a turn to the US, the US has always been about competition there's no tailwind of growth for the pediatric business in the United States.

This is hand-to-hand combat.

That's primarily Mead Johnson.

They're a to be respected for medical competitor and they make us better and hopefully we make them better I think they're a very strong competitor.

You know we're both relatively equivalent share in the United States and we just slug it out every day and I think that puts a lot of pressure on both companies to be innovative, to perform well to always be looking at new ways to reach the consumer and the medical community and in our case I think we've done really well.

I think that our share growth, our share gain in various segments of the business has been excellent and if you ask me if I'm satisfied, I'm never satisfied.

I always want us to do better than we've done and I think the attention that we give that business is warranted we've got a lot of attention on that business.

Because I think it could do even better than it has I think we've got really good management team there.

And I think the opportunity and the upside for us is good.

It's not a market driven growth, it's competition driven growth we have to compete.

And I tell the people in the Company that if you really want to see head-to-head competition and understand what competition looks like in a business look at the pediatric nutrition business because in every country of the world it is head-to-head with our competitors.

And I think we've done really well there from share standpoint and a growth standpoint so.

Lot of attention of focus for us it's a profitable business it generates strong cash flow, I like everything about it.

Larry Biegelsen, Wells Fargo.

Good morning, thanks for taking the question, so just one multi-part question for me just starting with the Mylan deal.

I think when you announced the deal you said it would be $0.22 diluted any update from the new terms?

And how should we think about EPS growth off of the 2014 base with the Mylan dilution and the CFR accretion?

And just lastly on the same theme, I think Miles in the past you said that you tried to make up any delusion from M&A.

Is that still the case following the Mylan deal?

Thank you.

So going down the list no change at all in our - -

Just to be clear that's Tom speaking.

No change at all on our 2015 impact of the divestiture of the developed markets business for EPD to Mylan, that stays with the $0.22 we estimated back in July.

The CFR the way to think about that is we indicated that would add $0.07 to any baseline you would develop in 2015.

And the third question was what Larry?

I think in the past you and Miles, I think it's Miles, I think I've heard say that you would try to make up any dilution from the M&A, is that still the case here?

I mean I don't know if that's quite the right way to phrase it.

I mean you know we're very sensitive to delusion and I think if you go back in the many deals we've done in the last several years, investors have not been impacted by dilution on any deal.

And so our efforts have always been that if there is some modest impact of a business that we find a way to manage through that without impacting investors and I think that's the way to approach it.

And that definitely has been our history and that continues to be a way we think about deals going forward.

You know I would just add to it.

You know there is $0.22 on this divestiture of this business, but -- enough to try to make up obviously our EPS is a lot bigger than that but that's still a chunk to make up.

CFR will offset a fair amount of that.

And then I want to point out to the question earlier.

We are constrained with capital in terms of opportunities but we want to be opportunistic in terms of any opportunities that we add to the Company.

So I don't want to just rush out, and you're not suggesting this I understand, but the capital is simply replaced EPS.

You know long-term I'm always looking to build EPS and grow the Company.

So we clearly with not only the continuing cash we earn and accumulate, but the Mylan proceeds and so forth have tremendous flexibility for M&A and kind of without constraint, the only thing that constrains us is opportunities and the fit of those opportunities and so on.

So I think to the degree that they're investors who look at the net let's call it delusion from the sale of established products business in the developed markets to Mylan, I'd say be patient, you can't offset that or fix that in a few weeks.

But longer-term obviously our motive is to grow and improve the company and I just can't predict the timing and that but I can certainly tell you I've all the flexibility in the world.

And Larry I just add one more thing to what Miles said and the way I answered the question.

Obviously to Miles' point in the near-term we will have we won't have the earnings of that particular business.

But as we talked about back in July and as you saw in the quarter, in this first quarter we reported continuing operations you saw a significant enhanced topline growth rate, better bottom-line growth rate and [not] obviously investors like that message when we delivered it in July and that's one we shouldn't lose as we move into 2015.

Thanks for taking the question.

We have time for one more question.

Rick Wise, Stifel Nicolaus.

Thanks.

Morning Miles, hi Tom.

Miles you've approach this in multiple ways but I'd sort of like to ask you more directly when I think about the last year or so you've done an amazing amount of operational and portfolio reshaping.

I mean clearly it seems like vascular is something that you're going to be paying more attention to.

But if you list the top three priorities for your attention here where are you focused and you know operationally and portfolio perspective now that you've addressed so many of the major challenges?

Well I'm focused on vascular and I'm focused on devices.

You think about where you spend your time it's not like you run to one thing and always spend your time there, they all get a lot of time and attention from all of us.

But we know very clearly where we're headed, what we want to execute, what we have to do in almost every business here.

Where we don't seem to be executing or defining that future as well is clearly in the vascular business.

I think it's not even devices it's the vascular business.

And we can think of the vascular business as vascular we can think of it more broadly as medical devices exclusive of optics and diabetics care center for a minute and I'd say that particular leg has both a fixed dimension to it and an expansion future strategy dimension to it and it's got both.

So you know that's something that's going to get a lot of attention from all of us and more so.

I mean I would say we believe we have been paying sufficient attention to all the things necessary in that business, but clearly it shows in the performance right now that that's not sufficient.

And we've got to think through this a lot more clearly.

And I think from a standpoint of being more successful we just got a be a lot more successful not only in the current business but in the future.

So I guess if you said where's the majority of my worry time spent or my focus time or strategy time or whatever, it's with my folks in the vascular business now.

Got you.

And just to last operational questions.

If you could talk a bit more about China are you back to normal in China?

And do you think the new plant distribution from Tera, the new products had we think about growth and share there you know over the next year or two?

It seems like there could be it could be quite extraordinary.

And just last briefly remind us on the flash FreeStyle, how big the opportunity is, I know the market is huge, how big an opportunity how big a product could this be?

And remind us about the US approval and launch times thanks so much?

Okay.

With regard to China yes, I think were back to where we were are we ahead of where we were, have we made up for a lost year?

No.

But we're back to where we were in my view.

And with regard to prospects in China going forward I'd say there's sort of the near-term and long-term.

The near-term is often a bumpy ride in China.

And it can likely be because of local conditions, it can be economy, it can be the government it can be the unexpected recall it could be anything.

China's a bumpy ride.

And yet it's a very attractive long-term market so we've made long-term commitments and investments and have a long-term strategy there including the ownership and development of our own dairies and own milk supply inside the country and I think that that is unique among multinationals at this point.

We've ensured our own supply and our own access to an ingredients at a very high-quality level and I think for the long-term that makes a big difference were very very well-positioned.

I think the prospects in China are very good for the long term in spite of the fact that it is an occasional bumpy ride.

And I think the underlying potential dynamics are all very strong and very good.

It's a very competitive place it's a different place to do business.

But I could say that about any market around the world and people say, they tend to lump emerging markets together like they're all the same.

They're not the same.

There are no two the same and yet they represent tremendous growth and I think China does in particular.

Now in our case I'd say we're pretty spread across the lot of foreign markets and emerging markets around the world because we don't want to be over dependent on just China just India, just Russia, just of Brazil et cetera.

So as you know with our CFR transaction, CFR doesn't happen to be substantial in Brazil or Mexico or very large markets.

It's in a lot of next level markets medium-sized et cetera where there's tremendous opportunity.

So in our case we don't wish to over index necessarily just in China or India and now when we're in a market we want to be very successful in it so we're the largest healthcare company and the largest pharmaceutical company in India and I like that position.

But at the same time our share's at a point where there's still tremendous growth opportunity ahead of us.

We just don't want to be over dependent on any one market and while China is a tremendous growth opportunity, so is the rest of the world.

With regard to Libre which is the flash glucose product you just reference.

I don't know that I can tell you what the potential is to be honest.

I think you know we're going at it at the beginning here with I'd say modest financial expectations but aggressive marketing intent.

We're going at this a different way.

I don't want to be overly reliant on reimbursement because I think this product has tremendous consumer or user appeal for the insulin-dependent diabetic.

And I think the experience for that particular patient or user is so superior to what's available today or what they could do today that I think our challenge is to establish the value proposition and the product and its benefit and its use and its experience to that patient group.

And if we do that well, then it won't be as dependent on the gatekeeping or hurdles of government reimbursement et cetera.

Although it may be well enhanced by that at some point.

But we're trying to go about it more from a consumer approach perspective and go direct to the patient with this.

And to the extent that all regulatory circumstances allow.

So I think it's got great potential opportunity.

I don't know how to put a dollar value on that yet so I'm reluctant to kind of forecast one.

Our team in diabetes care knows that almost any number they give me won't beat my expectations and I think that's kind of how we leave it internally right now it's not clear that we can completely project what the uptake will be or how fast, but we're very pleased by initial reactions of consumers and professionals and physicians and so forth.

And I think after we've had some months of experience we'll better able to put some numbers around what we expect here in terms of continuing trajectories, expansion, share gain, et cetera in the biggest user group there is which is the insulin-dependent diabetic and the frequent testers.

So I think that's the best I can tell you about it at this point, right now we've got an awful lot of expectations and hope and we're not you know overly focused on meeting particular numbers.

Because right now the numbers are small of course because this is the initial launch phase but it's launched in 70 new countries and that's going to be a pretty good test for us.

Thanks again.

Yes

Okay thank you operator and thank you for all of your questions.

That includes Abbott's conference call.

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