美國雅培 (ABT) 2016 Q3 法說會逐字稿

Good morning and thank you for standing by. Welcome to Abbott's third-quarter 2016 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 express written permission.

I would now like to introduce Mr. Scott Leinenweber, 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; Tom Freyman, Executive Vice President, Finance and Administration; and Brian Yoor, Senior Vice President, Finance, and Chief Financial Officer. Miles will provide opening remarks and Brian will discuss our performance in more detail. Following their comments, Miles, Tom, Brian 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 2016. Abbott cautions that these forward-looking statements are subject to the 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, 2015, and in our quarterly report on Form 10-Q for the period ended June 30, 2016.

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.

Please note that third-quarter financial results and guidance provided on the call today for sales, EPS, and line items of the P&L will be for continuing operations only.

On today's conference call, as in the past, non-GAAP financial measures will be used to help investors to 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 abbott.com.

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

As you'll recall, Abbott issued a press release on April 28, 2016, announcing the transaction with St. Jude Medical, and a related press release on October 18, 2016. Please refer to those releases for additional important information about Abbott, St. Jude, and related matters.

With that, I will now turn the call over to Miles.

Okay. Thanks, Scott. Good morning. Today we reported adjusted earnings per share of $0.59, at the high end of our guidance range. We also raised the midpoint of our 2016 adjusted earnings per share guidance and narrowed the range to $2.19 to $2.21, exceeding the initial guidance we set at the beginning of the year.

Sales increased 4% in the quarter, or more than 5.5% excluding the impact of Venezuela. Growth was led by strong performance in established pharmaceuticals and medical devices. We achieved our expectations overall and our pipeline continues to deliver a steady cadence of new product approvals and launches that are contributing to growth.

At the same time, we continued to actively and strategically shape our portfolio. In September, we took the next logical step in shaping our medical device business with the announcement that we will sell our medical optics business to J&J. This action is in line with our strategic decision to sharpen our focus on building leadership in cardiovascular devices.

I will now briefly review our third-quarter results, and I will start with diagnostics, where we achieved sales growth of 5.5% in the quarter driven by continued above-market performance in core laboratory and point-of-care diagnostics.

In August, at the American Association for Clinical Chemistry Conference, we unveiled our next-generation suite of instruments called Alinity. The Alinity suite includes new instruments for every segment of the diagnostics market in which we compete. Over the next few months, we'll launch new systems for point-of-care, immuno-assay testing, clinical chemistry, and blood screening in Europe. Over time, we'll introduce additional systems and launch the full Alinity suite into additional geographies, providing a highly differentiated platform for sustainable, long-term growth.

In nutrition, sales declined 1% in the quarter, below our expectations, due to soft performance in China pediatric nutrition. As you may recall, I expressed caution on the near-term outlook in China in our last earnings call. Over the last few months, market conditions have remained challenging there, including rapid channel shifts and new safety regulations that are driving an oversupply of product in the market, and aggressive levels of discounting.

Although conditions are expected to remain challenging in the near term, the long-term fundamentals of the market remain attractive. We have the right portfolio of products for the various channels, and the best-in-class global supply network. We have also continued to focus on strengthening our competitiveness in order to deliver growth over the long term.

Outside of China, we continue to perform well in Southeast Asia and Latin America, and again achieved above-market growth in US pediatric nutrition.

In medical devices, sales growth in our vascular business was led by double-digit growth of MitraClip, our market-leading device for the minimally invasive treatment of mitral regurgitation; and high-single-digit growth in endovascular products, driven by vessel closure products and Supera, our unique stent for the treatment of blockages in the leg.

During the quarter, we received FDA approval for Absorb, the only fully dissolving vascular stent, and an important addition to our drug-eluting stent portfolio.

In diabetes care, international sales growth of more than 20% was driven by continued consumer uptake of our revolutionary FreeStyle Libre system in Europe. In September we received FDA approval for our FreeStyle Libre Pro system in the United States. Libre Pro will help healthcare professionals make better customized treatment decisions for their patients, and at a significantly lower cost than other professional continuous glucose monitoring systems.

We also submitted the consumer version of the FreeStyle Libre system for FDA review during the quarter. This system is designed to eliminate the need for routine fingersticks, and provides glucose data in a simple format that allows people with diabetes to achieve better health outcomes.

And in established pharmaceuticals, or EPD, sales grew 9% in the quarter. Double-digit growth in key emerging markets was led by strong growth in India, China, and Latin America. EPD continues to execute at a very high level, and remains well aligned with the fundamentals, driving long-term growth in emerging markets, a rising middle-class, improving access to healthcare, and consumers that are seeking and willing to pay for high-quality brands.

So in summary, we achieved our financial expectations for the quarter, and our diverse business model continues to deliver reliable growth. We've continued to advance our leadership and competitive position through several new product approvals and launches across our businesses, and we continued to take strategic steps to shape our portfolio, building leadership positions for long-term growth.

I will now turn the call over to Brian to discuss our results and outlook for the year in more detail. Brian?

Okay. Thank you, Miles. Sales for the quarter increased 4% on an operational basis, that is, excluding an unfavorable impact of 1.1% from foreign exchange. Reported sales increased 2.9% in the quarter.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 57.3% of sales, adjusted R&D investment was 6.2% of sales, and adjusted SG&A expense was 29.7% of sales, in line with our prior guidance.

Turning to our outlook for the full-year 2016, we narrowed our adjusted earnings per share guidance range to $2.19 to $2.21. The midpoint of our guidance range reflects double-digit underlying growth, offset by the impact of foreign exchange on our operating results. We continue to forecast operational sales growth in the mid-single digits for the full-year 2016. Based on current exchange rates, we expect exchange to have a negative impact, somewhat above 2% on our full-year reported sales. This would result in reported sales growth in the low single digits for the full-year 2016.

We continue to forecast an adjusted gross margin ratio of around 57% of sales for the full year, which includes underlying gross margin improvement initiatives across our businesses. We also continue to forecast adjusted R&D investment of around 6.5% of sales, and adjusted SG&A expense of approaching 31% of sales for the full year.

Turning to our outlook for the fourth quarter of 2016, we forecast adjusted earnings per share of $0.64 to $0.66, again reflecting double-digit underlying growth. We forecast operational sales growth of mid single digits in the fourth quarter.

We have now annualized the significant strengthening of the US dollar that began late in the second quarter of last year, and at current exchange rates we expect a favorable impact to sales from exchange of somewhat more than 50 basis points in the fourth quarter.

Turning to other aspects of the P&L for the fourth quarter, we forecast an adjusted gross margin ratio somewhat above 57%, adjusted R&D investment somewhat above 6.5% of sales, and adjusted SG&A expense of around 28% of sales. And finally, we project specified items of $0.25 in the fourth quarter.

Before we open the call for questions, I will now provide a quick summary of our fourth-quarter operational sales growth outlook by business. For established pharmaceuticals, we forecast high-single-digit sales growth. In nutrition, we forecast sales growth similar to the third quarter. In diagnostics, we forecast mid-single-digit growth.

And lastly, in our medical devices business, for vascular we forecast mid-single-digit sales growth. In diabetes care, we forecast double-digit sales growth. And in medical optics, we forecast low- to mid-single-digit sales growth.

With that, we will now open the call for your questions.

(Operator Instructions). Mike Weinstein, JPMorgan.

Let me start with nutritionals, Miles. That's now your challenged business, so to speak. Could you just spend a few more minutes on China? What you are seeing playing out in the market, and how much of what is playing out today is transient versus a longer-term or structural change?

Yes, I'll try to. I'd say the market in China has been in a bit of a transition for a number of months, it would appear, maybe even a little more. And it depends on who you are and what channels you're in and so forth, depending on how it affects you.

We expected this year to see 7% to 8% growth in China, slightly above the GDP growth, et cetera. And what we're seeing now is flat to low single digits, and I think some of our competitors have reported the same. So we've gotten some triangulation on just underlying market growth rate.

But beyond that, a number of dynamics are at work here. There's some pretty rapid channel shift from traditional channels like modern trade to various e-commerce channels and so forth. And I don't think that's surprised anybody in terms of just overall trends. But the speed and magnitude of it I think has hit China differently than what you'd see in the US or other countries. And so that's been a pretty big chunk.

In the process of that, what has happened is some inventories have piled up in, let's say, traditional channels while the market's needs have been satisfied by e-commerce channels. And so, the market has got to burn through that, I guess to some degree, so we've seen growth slow.

And in our case, there's been a loss of about 0.5 share point, we estimate. We're also seeing a fair amount of market and competitor reaction to the anticipated new food safety laws which will become effective in a little over a year, in January of 2018.

Those new laws will limit the number of brands per manufacturing plant per competitor, et cetera. All products have to be re-registered, and so on. And the government has got a number of goals for that, but I think what's at work here is we're seeing a lot of competitors oversupply this market. And under those scenarios, you see a lot of discounting.

So, we're seeing that. We're seeing the discounting. We're seeing the channel shift. We're seeing slower growth there. I do think it's transitional. I do think it's transient, but I don't think it's going to be a quick adjustment.

I'm cautious for 2017 because I think that it's a little hard to predict the reaction of the many competitors and many brands in the market to these new food safety laws.

So, I think what we're seeing here could be with us for a while. But I think the long-term attractiveness of the market is definitely there because there aren't fewer moms, there aren't fewer babies, et cetera. But we're in kind of an odd transition period that I don't think was anticipated by the government's intent with its new food safety laws or, frankly, even the channel shift.

So, I know that's kind of a long-winded answer, but there's a lot of things stacked up here happening at the same time. We have watched the results of some of our competitors and see that it hit all of us, but all of us kind of differently, depending on what channels we might be more prominent in. And taking that apart and trying to understand all the dynamics there I'd say has been a key focus of the last couple of quarters here, and I think we've got a pretty good handle on what's happening. But I think it's going to be this way for several quarters.

Understood. I'm going to just ask a question about 2017. And Miles, I know you are not going to give 2017 guidance, but I just want to think about the framework for it. When we had the call to announce the St. Jude acquisition, and then on the call that you and I had back in June, you talked about the goal of the Company historically of delivering double-digit underlying EPS growth, which is to say that's 10%; and that the goal for 2017 would be to try and deliver that. And then on top of it, you get the accretion from the transactions. Obviously we don't know yet what's going to happen with Alere, but it looks like St. Jude is on track to close.

If we think about the base business piece of that, given that nutritional is obviously looking weaker than it was six months ago; the device business is looking better, so there's some pluses and minuses -- is the underlying business on track to deliver 10% next year? And is the right way to think about 2017 the underlying 10%-plus the accretion, or should we back off of the underlying expectations? Thanks.

Well, I'd say, first of all, you're right. It's too early to be giving 2017 guidance, or even be able to be precise about it. But I would say, look, the underlying growth does continue to be strong in our businesses. Fortunately we are very diverse -- many companies, many businesses, many products, many geographies -- and we are not that overindexed in China in any particular case.

So, I can't say that I think the China pediatric business is going to be great growth next year. But I don't think it's going to impact, in a fashion, the overall strength of the growth of the Company globally.

So I'd tell you that I see the underlying growth continuing to be strong. Clearly that will have some impact on us. But at this point, I think we're seeing great growth in our pharmaceutical business. We're in the midst of preparing to launch a number of new systems and diagnostics. FreeStyle Libre, I'd say, is going gangbusters in Europe, and we're looking forward to having that in the US shortly. There's a lot of new product launch and approval happening, so there's a lot of drivers of growth here.

And, frankly, I think there's a lot of growth to be seen in St. Jude as well. So, I remain kind of in the same position. I know we've got a slower situation in China. But I don't see us as so overindexed in China that that is somehow going to knock us back in a way that I can forecast for you right now, that this is going to have a huge impact on the Company next year.

Frankly, if it was going to have a huge impact fashion, you'd have seen it this quarter, and we did. We've seen it in our China numbers, but look at how the Company performed. We exceeded our expectations yet again.

And owing to the strength and the diversity of the Company and the strength in pharmaceuticals, the strength in medical devices -- I can remember a couple of years ago, we were talking about medical devices as the weakness, not so much the strength. So, I'd say the good news is we got a lot of parts of the business that are performing well, if not better, in the midst of new product cycles and launches. And, frankly, the other parts of nutrition are doing reasonably well.

If you look at the US -- which I think everybody has become accustomed to ignoring in the numbers -- the US is having a better year than planned, better year than in a long time, and it's better than solid. So, I think there's a lot of things happening that offset China to some degree, so I'd caution this way: I'd say, look, we always start the year looking for double-digit earnings growth. And, yes, we will have the addition of St. Jude on top of that. And as you said, Alere remains to be seen.

But in any case, I'm not in a position yet where I can say, no, I've got different expectations for 2017. I actually think the underlying growth continues to be strong, and everything tracking according to expectations on strategic moves otherwise.

Perfect. I'll let some others jump in. Thank you, Miles.

Glenn Novarro, RBC Capital.

Miles, two questions on St. Jude. The deal is on track to close by the end of this year. But in the third quarter you had a cyber security report issued. You had St. Jude issue an advisory regarding battery depletion of some of its older [ICs]. I know you've been in contact with St. Jude, but maybe talk about what gives you the confidence that these issues will not impact St. Jude's business, post- the deal close. And then I had a follow-up.

Well, what I'd tell you so far is I think the St. Jude has handled all this pretty well, pretty thoroughly; and not only in terms of their taking it seriously, their own investigations, the third-party consultants and investigators that they've worked with and employed. I have to say they definitely put patient safety and patient credibility and physician credibility and the product performance and so forth, first, and that's right. And I think they've done all the right things. They've been in great communication with us.

And based on everything that we know, I don't see this impacting the close of the deal, or the business long-term. I've seen a lot of speculation in the press. And every time there's a product issue or a hiccup or whatever it may be, everybody wants to run to the headlines and speculate about the deal. I'll tell you, based on everything I see, this deal is going to close. And determined by the timing of the regulatory approval, it's probably going to close by year end. And I haven't seen anything to date that would suggest otherwise.

Regarding the performance of the company after that, I'll tell you honestly, what I'm most anxious for is for their MRI compatible claim to be approved by the FDA in the US. And frankly, if you look at the rest of their businesses, they are all growing at a pretty healthy rate, and particularly overseas. And I think their success overseas has demonstrated that when they do get their MRI compatible claim in the US, that their recovery of share, recovery of growth rate, et cetera, there should be pretty strong. So, I haven't changed my expectations about the performance of St. Jude going forward.

And I can probably someday give you my opinion about the current circumstances with the cyber security claims and so forth. But I'll keep my thoughts to myself right now, and we'll wait till the deal is closed.

Okay. And just a quick follow-up. St. Jude is going to be accretive to 2017. But your accretion calculations, did it contemplate the divestitures that you just announced to Terumo? Thanks.

Yes; in a fashion, Glenn, it has.

Okay. Thank you.

Matt Taylor, Barclays.

I wanted to focus a little bit on the core business. We already talked about nutrition, but maybe you could just discuss some updated thoughts on how you think the diagnostics business at Abbott could perform over the next few periods of the Alinity launch. And how things are going in medical devices, and some specifics on Absorb and MitraClip and other moving parts there.

That's kind of a big question. Well, let me start with diagnostics. I think the diagnostics business has been one of the consistent, reliable, star performers of the Company. It's been good mid- to higher-single-digit performing overall. It does have a fair number of moving parts. The core laboratory business I think has performed exceptionally well; continues to. I think the point-of-care business has. We are going through the exit of an agreement in our molecular business that we will lap in a number of months. But in any case, I think all of those businesses are performing commercially well.

What I'm more impressed with, with this team, than anything is that over the last 4 to 5 years they have had an unprecedented number of systems, new diagnostic systems, in development in R&D that are all beginning to launch now. And I don't think ever in the history of this industry or this business has any company attempted to develop and launch multiple new systems simultaneously across every category of its business. And our diagnostics businesses, both in immuno-assay, in clinical chemistry, in hematology, in blood screening, in point-of-care. And then to be followed in molecular diagnostics.

And that's an unprecedented pipeline move that we will see that roll out over years now. They are beginning to launch in Europe. We've gotten approvals to go. So we're in an unprecedented launch phase that I think sustains the global diagnostics business across the board for years to come. And no other competitor is in a position to say that.

And I think that the value proposition, the performance proposition, the economic proposition of those systems was well thought out, well designed. They were unveiled and shown at the recent AACC meeting in the United States, to great reception.

So, I have nothing but high and positive expectations. Now, having said that, customers roll slowly. They tend to be long-term contractors. They tend to be five, seven, sometimes 10 years in contracts and in tenders and so forth, so I don't expect it to be a vertical line in terms of sales.

But I think if you think about the gradual rolling of a customer base and taking of share as tenders come due, and so forth, I do expect that our diagnostics business has a long positive trajectory ahead of it, and no one else does. So I'm pretty excited about that.

I think they are in a uniquely strong position as we look forward, and we're all pretty happy about that. It's a challenge to launch that many systems, but we're reviewing them all closely, looking at them all closely. And while you have all the natural hiccups at the end of a project that you do that cost you a week here and a week there, a week in the grand scheme of things isn't much. So I'm pretty pleased with how that's going.

With regard to medical devices, also pleased. I can start at the top. Let me mention in medical optics, where I think the cadence of new products and the performance of that R&D team has been exceptional, and particularly even recently with the launch of the Symfony intraocular lenses.

And a while we have made a deal to sell that business to J&J, we sell it in great shape with great products, great technology. They are gaining share in the cataract and intraocular lens business. I'm really pleased with what the team has been able to do there, and I think the business will be in a strategically great home at J&J.

We think we got fair value for the business, and we're working on the integration transition of that to J&J. But I think they've been innovative. They've had a great cadence of new product development over time. I realize that that's mostly to the benefit now of J&J's shareholders. But the point is, across our businesses we're seeing productivity out of our R&D and new product development like we've never seen before.

If I moved to diabetes care, our FreeStyle Libre launch in Europe has gone well. We have over 200,000 patients now. That's a lot, and that's a really good success rate so far. We have very ambitious plans for this product. And to be honest, we're behind our plans by a month or two, but it's fairly vertical ramp. It's a pretty high ramp. And that ramp is occurring at the trajectory we projected, but about a month or two behind what we projected. And it will probably stay that way. So, we're going to have a terrific performance, as you can already see in the numbers, for this year. And even that was behind what we had hoped.

But it's not because it's not on that trajectory. It just started slower than we had planned, but now it's pretty on track. And we are anxious to launch the consumer version in the United States and enjoy the same sort of success here.

I think it owes to that capability of the product, the unique medical proposition of the product, and frankly the economic proposition of the product. A lot of payers and a lot of governments will tell you today, don't bring me new technology; bring me something more cost-effective that impacts my ability to spread my budget further and treat patients better. Well, Libre has got that in the equation in a big way. So, we're looking forward to the launch of that.

Our medical device business will certainly be enhanced by the addition of St. Jude. But at the same time, I think there's a lot of good things happening in our vascular business. MitraClip is going well. Supera is going well. We continue to do well in our stent business in what is otherwise not a growth business. We still remain the world leader in that category, and Absorb has been licensed and launched in the United States.

So, I think across the board in diagnostics and devices, without exception, even including AMO, all these businesses have shown, in the last few years, real progress, real progress. Tangible progress in R&D, in innovation, in development, and meeting their timelines in a disciplined fashion, bringing new products to market.

And we're seeing all that roll out now and over the next couple of years. And frankly, I think it will be sustained after that. Now, having said that, I expect the same out of our St. Jude piece, and I think there's nothing but good there. So we are pretty bullish about.

Great. Thanks for all the thoughts.

Rick Wise, Stifel Nicolaus.

Miles, maybe the first question just on Alere. Obviously there's been a lot of public noise, if you will, a lot of headlines, a lot of discussion. But I think when people ask me about it, they just want to be reassured that the long-term, post-merger opportunity that you saw initially is still there. Is that the way -- do you still see it as basically intact, and the plug-and-play for the portfolio -- Abbott diagnostic portfolio -- still makes sense? Where are you today on Alere?

Well, I'm going to be very limited in the comments that I'm willing to make about Alere, but some of that is easy to answer. So, first of all, yes, there's been a lot of noise, and it has come from a lot of places. Not us. And it isn't prudent for us to respond to noise.

I think the questions you asked are the right questions. Is the strategic fit there? Yes, it is. We like the products. We like the businesses. We've said that, and I continue to say that. Is the long-term, post-merger opportunity and fit there? Yes, it is. And I've never wavered on that. And I believe that right now, even this minute.

So, none of that has changed for me or for us. I believe -- I just told you how great I think our diagnostics business is doing. Do I think that the Alere businesses are a good fit to expand that footprint, and especially our point-of-care business? I do. Yes; I have had no change in my view strategically that way at all.

Okay. So, turning to a different topic, back to China briefly and nutritionals. Am I right in thinking -- a couple of parts to the question. Am I right in thinking that China pediatrics is 3% or less of sales? Does it get worse in 2017 from here? Or are you where you are, and, yes, it will take a year or so to work through?

And maybe two last aspects of the question. Knowing you and the way your hands-on approach to management, maybe -- are there are things that you can do to maybe mitigate some of the near-term challenges? And maybe last, related to all this, is the long-term outlook and how confident are you that the excellent performance in Latin America and Southeast Asia is a sustainable offset in this next few quarters as we get ready for 2018 in China? Thanks, Miles.

Are we talking just nutrition there, Rick?

Yes, yes. Thank you.

Okay. Okay, there's a lot there. Yes. China I think is about 3% of overall sales. Now, that said, yes, it's a small part of the Company as a whole. Nevertheless, it's an important business; it's a big business; it's a business we pay a lot of attention to. Frankly, China is an important country for us for a lot of our businesses. But it is true that in the grand scheme of Abbott, as China pediatric goes, the Company isn't necessarily going to be driven by just that.

So, we think all of our businesses -- particularly large ones, and that's a large one -- are important. But the diversity of the Company and the size of the Company obviously absorb shock when it happens in other parts of the Company.

So, to your question about, are we hands-on mitigating and dealing with what we think we can do with the challenges? Yes, we are. The EVP of that business is spending a lot of time in China. We have made some management and leadership changes in China in a proactive way to enhance our management, our experience, our knowledge, our skill, et cetera there.

I think hope always springs eternal when you make changes in your leadership team, et cetera. But it's getting a lot of focused attention by the senior leadership team, on down. And in the right ways; the CFO, the Controller, everybody who's got any kind of way to have a stake in this has weighed in. We do, as a team, look at our spending allocations, our capital allocations, how we're spending, where we're spending, where the bang for the buck is, et cetera.

So I think we've looked at just about everything we can, not only to specifically focus on improving the situation and the performance in China, but also how to mitigate it if it doesn't improve enough or fast enough. And so, yes, it's getting a fair amount of attention that way across the Company.

With regard to Latin America and Southeast Asia, I'm pleased with the progress in both places. Pleased with the performance of the business; frankly, pleased with the performance of the business in Europe and other places, too. But I'm going to be careful not to project what I think can happen in any given country, because the year always starts with a certain set of expectations and then has some surprise you didn't anticipate. Which is one of the reasons I always tout the diverse model, because somewhere something is going to go awry or different from your expectations, no matter how tightly you manage everything.

In our case, I'm pleased with our management teams in the various geographies you mentioned. I think they are all doing well. We've got a lot of talent in the organization. We've made some changes where we needed to. In this particular case, our challenge in China wasn't challenged-based as much as a market-driven, and a lot of dynamics that changed rapidly there that we've had to react to, and deal with.

So, I think there are a number of other countries picking up slack here, the US, surprisingly, one of them in the nutrition business. I think you can see that in the numbers in the earnings report. Vietnam doing well, strong for us. A lot of other, smaller countries doing well.

Vietnam, as you know, is a big business for us in the nutrition business. And we've got a terrific manager there and have had for a long time, and that's doing well. So there are some places that are picking up some of the slack there. And frankly, so are other businesses of Abbott, like the pharmaceutical business and so forth; having a great year in China and other countries, and good, sustained, high-growth performance. So, again, yes. It's proactive. We are mitigating. It's why we're not giving any guidance or anything at this point.

As I answered to Mike Weinstein earlier, the underlying fundamentals of the overall growth rates in our market are good. But one place that sticks out right now as a challenge is the pediatric business in China, which is about 3% of the Company's sales.

Thank you.

Larry Biegelsen, Wells Fargo.

Just two for me. First, Miles, I know it's a sensitive subject, but on Alere, the other question we get is now that Alere has fulfilled its reporting requirements, and the business trends have been decent, what else does Abbott want to see before closing the deal? And along those lines, if you don't complete Alere, how should we think about the dilution from the AMO divestiture and offsetting that in 2017? I did have one follow-up. Thanks.

Well, first of all, Alere is not a sensitive subject. And at this point, I'm just not going to make a lot of comments about it. I'd say we are pursuing all the necessary regulatory approvals for the deal. And at this point, that is the path. That is the things that have to happen between now and whether a deal finishes here, is regulatory approval. So, all necessary approvals are being pursued.

We're doing everything we're supposed to do on the contract. And beyond that I'm not going to forecast it or try to. But that's it. I can't say a lot more about Alere, or express opinions or whatever. I think I've said about what I can say, to Rick Wise's question and to yours. And other than that, we'll work through the regulatory approvals and see what happens.

With regard to AMO, we've said the perceived dilution of that business will be offset in some fashion, so you don't need to adjust your model, et cetera. I assume that's the basis of the question. Because, net of all considerations here, in the mix of our financing of these deals, there is enough moving parts that we won't need to absorb dilution there.

That's very helpful. And then you talked about focusing on cardiovascular devices earlier. And your diabetes business is doing well, seems to have a bright future with Libre. I guess my question is, is diabetes still strategic for Abbott, now that the focus is more on cardiovascular devices? Thanks for taking the question.

Yes, diabetes is definitely strategic for Abbott. There have been a number of occasions over the past -- gosh, I think five years -- when I've had inbound phone calls of people interested in acquiring the diabetes care business, and we have absolutely said no. Because we had a program here that started with Navigator years ago, that became Libre, that fundamentally changes diabetic monitoring, glucose monitoring, et cetera, that we believe is game changing, market changing, healthcare changing, et cetera.

And we believe that the notion and the opportunity was such that we just plain had a different game plan than everybody else, and that it was worth us making that core and pursuing it; and we have. And we're seeing the benefit of that now with the rollout of Libre in Europe and assumed rollout in the United States. And there's a lot of opportunity for Libre beyond that, depending on how we develop it and how we take it.

So, it is strategically core to us. If you think that's on my radar screen for some strategic move, take it off your screen. That's core to Abbott and will remain core to Abbott. And the opportunity there, we think, is nothing but great looking forward.

Very clear. Thanks for taking the questions.

Operator, we'll take one more question.

Jayson Bedford, Raymond James.

Maybe just to actually follow up on the diabetes, clearly it was a standout in the quarter. It was a noticeable step-up from trend, and the guidance implies a follow-through in the fourth quarter. You have a unique offering with Libre. Is double-digit growth how you expect this franchise to play out over the next couple years?

Well, there's a -- you've got two franchises going here. You've got the old, established, legacy franchise of blood glucose monitoring. And then you've got what we call flash glucose monitoring, or Libre. And that older blood glucose monitoring market is clearly under both volume and price pressure. And Libre is growing rapidly in Europe, and we expect to grow rapidly in the United States. So, at some point we would hope that Libre would grow so significantly that it would overtake the other.

So I don't expect, obviously, that kind of growth out of the base. But I think we're going to keep experiencing pretty heavy double-digit growth out of Libre for the foreseeable future. So, yes, I think it drives a lot of growth. But where it crosses and, say, the overall business is somehow double-digit, I'm not sure I can project.

Okay, that's fair. And then just second question on gross margin. It's down year-over-year. My understanding is that FX has weighed on this metric. Is there a point where we anniversary the FX headwinds and are able to see some gross margin expansion in the base business, meaning excluding St. Jude and Alere?

Well, I'll tell you, it's interesting. We put out fair amount of focus on gross margin -- oh, gosh, more than 4 or 5 years ago -- in a couple of our businesses. And you can see that. You can see it in the performance. You can see it in the bottom line of those businesses. You can see it in the bottom line of the Company. You can see it in the gross margin of the Company. So we expanded those efforts across the Company in a number of places.

And I think what we've obviously learned from that is there's always opportunity to improve your business model, improve your cost structure, improve your gross margin, et cetera. And it hasn't been done with price. It's been done with the fundamental inputs in costs and the way we do business, the way we manage [actual], the way we do a lot of things. So, I think there's always opportunity. And we approach the business, and the businesses, every year with that in mind.

And it's fortunate that we have, because we've had some great success there in a couple businesses particularly, which has offset the effects of exchange over the last, say, three, four years which, as you know, has been pretty heavy. And without that, the Company would have obviously been under a lot more profit growth pressure. So, for us, it's become a routine. We look for more gross margin improvement opportunity every year.

And if I look across the businesses, there are still many opportunities for us as we benchmark competitors or other models, business models we see out there, to improve the cost structure of our business in ways that are meaningful to the corporation. Included in that is even the costs of new things launching. The costs of our new diagnostic analyzers will be a tremendous improvement over the cost of our current diagnostic analyzers. And one of the ways you can affect gross margin over the long-term is designed it into your products, and we are.

So, I think there's a lot of initiatives internally at the Company and across businesses now that make this part of routine daily life, to keep improving gross margin. I can't forecast to you right now how that will impact us. But I think in a world where you are denominated in dollars, and every year exchange tries to erode some of your top and bottom line, it becomes a routine part of your business to always be looking at ways to improve your margin. And we do, and we are; and we're having a fair amount of success with that.

I appreciate the color. Thank you.

Thank you, Operator, and thank you for all of 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 abbottinvestor.com; and after 11 AM Central Time via telephone at 404-537-3406, passcode 79624675. The audio replay will be available until 4 PM Central Time on Wednesday, November 2. Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.