美國雅培 (ABT) 2016 Q4 法說會逐字稿

Good morning and thank you for standing by.

Welcome to Abbott's fourth-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 expressed 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, 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 remarks, Miles, 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 2017.

Abbott cautions that these forward-looking statements are subject to risk 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, as well as in St.

Jude Medical's annual report on Form 10-K for the fiscal year ended January 2, 2016, and St.

Jude Medical's quarterly report on Form 10-Q for the fiscal quarter ended April 2, 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 forecast financial results and guidance provided on today's call 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 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.

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

Thanks, Scott, and good morning.

Today I will discuss our 2016 results as well as our outlook for 2017.

For the full year 2016, we achieved ongoing earnings per share of $2.20, representing double-digit underlying growth.

Continued strong performance across many of our businesses and operating margin expansion enabled us to deliver adjusted earnings per share at the upper end of the initial guidance range we set forth at the beginning of last year.

Importantly, 2016 was a year of significant shaping for Abbott.

We have aligned our businesses with long-term growth trends and it has been our intention to build leadership positions in all areas of healthcare where we compete.

This past year we took multiple strategic steps to ensure we are in the right businesses that provide the best opportunities for our future.

I will start with the pending sale of our medical optics business, or AMO.

We entered the vision care business several years ago with the intent that AMO would be a foundational cornerstone for us to build upon.

Under Abbott, this business performed well, gaining share and improving operating profitability.

However, as we looked over the long term we didn't see sufficient opportunities for us to build AMO into a more broad-based leader in vision care.

So strategically the decision was made to strengthen our medical device business in a market that offered the greatest long-term growth and leadership potential, and that market is cardiovascular care, one of the largest and most important areas of healthcare.

The recent acquisition of St.

Jude Medical creates the kind of market-leading position we seek in all of our businesses.

This includes strong positions in nearly every area of the $30 billion cardiovascular device market, including coronary stents, cardiac rhythm management, atrial fibrillation, and heart failure.

And importantly, Abbott now has one of the strongest product pipelines of the industry.

The combined best-in-class portfolio has the depth, breadth, and innovation to help patients restore their health and deliver greater value to customers and payers.

So we enter 2017 as a stronger company.

The fundamentals of the markets where we compete remain strong and we have good momentum across our businesses.

We are also entering a period where innovation and new product launches will fortify our leadership positions.

I will touch on some examples of important new products during my commentary on each of our businesses in a moment.

As we announced this morning, we expect to deliver strong financial performance in 2017.

Our adjusted earnings per share guidance range of $2.40 to $2.50 reflects double-digit growth at the midpoint.

I will now provide a brief overview of our 2016 results and the 2017 outlook for each business.

I'll start with nutrition, where Abbott is the global leader in the adult market and maintains leadership positions in the pediatric market across several geographies, including the number one position in the United States.

As expected, fourth-quarter sales growth was affected by challenging market conditions in China, including new food safety regulations that are set to go into effect in January 2018, and a consequent oversupply of product in the market.

Although we expect market conditions will remain challenging in 2017, the longer-term fundamentals of the Chinese infant formula market remain attractive.

With localized R&D in China and a world-class global supply chain, we're well-equipped to navigate this highly dynamic market with a competitive portfolio of products that are aligned with evolving customer needs and purchasing channels.

In the US, we continue to outperform the pediatric nutrition market, driven by several recently launched new products, and we continue to drive strong growth in both pediatric and adult nutrition in Latin America and Southeast Asia.

Turning to established pharmaceuticals, or EPD, which achieved double-digit operational sales growth for both the fourth quarter and full year 2016.

EPD has grown into the business that we envisioned when we created and further shaped it through a series of strategic actions, including the sale of our developed markets business and the acquisitions of CFR Pharmaceuticals in Latin America and Veropharm in Russia.

With leading market positions in several geographies, including India, Russia, and Latin America, EPD is well-positioned for sustained above-market growth in some of the largest and fastest-growing pharmaceutical markets in the world.

In 2017, we will continue to execute our unique operating model which focuses on portfolio selling in core therapeutic areas where we have well-recognized, highly-trusted brands.

This portfolio approach creates unique channel opportunities and differentiated relationships with physicians, retailers, and pharmacies that are looking to offer a complete line of solutions to treat prominent local health conditions.

We continuously refresh and enhance our localized product offerings through internal development, cross-registration of brands across geographies, as well as local and regional acquisitions and in-licensing.

In 2017 we will further strengthen our development capabilities with an expanded EPD innovation center in India.

In addition to developing new drug formulations, dosing, and other differentiated offerings, the center will act as a hub, shipping products to over 30 countries that will further develop differentiated products to suit local needs.

In diagnostics, we achieved another year of above-market sales growth in 2016 and, importantly, we initiated the global launch of Alinity, an integrated family of next-generation diagnostic systems for every area of diagnostics in which we compete.

The Alinity solutions represent a major leap forward over competitive systems in terms of automation, throughput, space efficiency, and ease-of-use, which will help our customers address issues they face every day including higher testing volumes, constrained staffing and space, and complex disparate processes and instruments.

In the fourth quarter of last year we obtained CE Mark for our point of care, immunoassay, clinical chemistry, and blood screening systems and have initiated the launch of these four systems in Europe.

Over the next couple of years, we will launch the full Alinity suite across Europe and into additional geographies, including the US, in the 2018 timeframe.

This unprecedented level of innovation is an extremely ambitious undertaking and one that will strengthen our competitive position tremendously for years to come.

Lastly, I will cover our medical devices business.

As I mentioned earlier, 2016 was truly a transformational year for this business.

The acquisition of St.

Jude represents a major strategic move that establishes Abbott with a premier medical device business comprised of cardiovascular, neuromodulation, and diabetes care.

These represent some of the largest and fastest-growing areas of healthcare and we now hold leading positions in each area.

In 2017, our focus will be on integrating the businesses, achieving the projected synergies and financial targets, and successfully delivering on new product launches.

Our integration approach will bring forward the best of both companies with a focus on creating a best-in-class cross-functional organization.

In terms of synergies, we anticipate annual pretax synergies of $500 million by 2020, including revenue expansion opportunities as well as operational and SG&A efficiencies.

We've modeled the progression of these synergies as fairly linear over the next four years.

Lastly, 2017 will be an important year for innovation across our medical device business.

In our diabetes care business, growth is being driven by FreeStyle Libre, our innovative sensor-based glucose monitoring system that eliminates routine finger sticks.

This system offers convenience, ease-of-use, and affordability and is a truly differentiated solution for the large and growing diabetic population.

In 2017, we will continue to focus on driving uptake in Europe, where we now have over 250,000 users.

We received US approval for the professional use version of Libre in the third quarter of 2016 and we look forward to bringing the consumer version of Libre to the US market in the second half of this year.

Other areas where the combined Abbott and St.

Jude business will drive rapid growth and important new product innovations include mitral valve disease, where Abbott is the global leader in minimally-invasive repair with MitraClip, and has multiple ongoing development programs in the area of mitral valve replacement.

The combination with St.

Jude strengthens our R&D expertise in this area and broadens our commercial presence.

Atrial fibrillation, where Abbott is now the number two player in this fast-growth market with a broad portfolio of products, including the recently launched EnSite Precision mapping system; heart failure, where Abbott is now the clear global leader in assist devices and is developing other important heart failure products with great potential to improve outcomes and reduce costs; and neuromodulation, a fast-growing device market that addresses pain and movement disorders such as Parkinson's disease.

The addition of St.

Jude adds multiple recently-launched products that will drive continued strong growth in this business.

So in summary, we delivered on our projections in 2016 and expect double-digit adjusted earnings per share growth in 2017.

Our portfolio is aligned with favorable demographic trends that are driving growth in healthcare.

Through a series of organic and inorganic strategic actions, we've built leading positions across all of our businesses.

And our broad-based innovation pipeline has never been stronger than it is today.

With these growth drivers intact, Abbott is well-positioned to deliver significant growth in 2017 and the years beyond.

I will now turn the call over to Brian to discuss our 2016 results and 2017 outlook in more detail.

Brian?

Thanks, Miles.

Today we reported fourth-quarter adjusted earnings per share from continuing operations of $0.65, in line with our previous expectations.

Sales for the quarter increased 3.8% on an operational basis, excluding an unfavorable impact of 1% from foreign exchange.

Reported sales increased 2.8% in the quarter.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 57.4% of sales, adjusted R&D investment was 6.3% of sales, and adjusted SG&A expense was 28.3% of sales, all in line with previous guidance.

Overall, as we look back at 2016, we achieved our financial objectives for the year; including mid single-digit operational sales growth and margin improvement to once again deliver double-digit underlying adjusted earnings growth.

Turning to our outlook for the full year 2017.

Today we issued guidance for adjusted earnings per share of $2.40 to $2.50, which reflects double-digit underlying growth of Abbott's base business; accretion from the acquisition of St.

Jude of $0.21; the pending sale of our medical optics business, which is expected to close in the first quarter of 2017; and the expected unfavorable impact of foreign exchange on our operating results based on current exchange rates.

In terms of our 2017 sales forecasts, please note that all references to sales growth, unless otherwise noted, are on a comparable basis, which adjusts the 2016 basis of comparison to include St.

Jude's 2016 results, adjusted for the recent sale of its vascular closure business, and exclude sales of our medical optics business.

On this basis, our 2016 sales baseline would be $25.4 billion and we forecast comparable operational sales growth in the mid-single digits for the full year 2017.

Based on current exchange rates, we expect exchange to have a negative impact of around 2.5% on our full-year comparable reported sales.

We forecast an adjusted gross margin ratio of around 60% of sales for the full year, which reflects the profitability mix of Abbott and St.

Jude, as well as underlying gross margin improvement across our integrated business.

We forecast adjusted R&D investments of the combined businesses of somewhat above 7.5% of sales and adjusted SG&A expense of approximately 30% of sales, which includes expense synergies associated with the addition of St.

Jude.

We forecast net interest expense of around $700 million.

The increase over 2016 reflects debt-related interest expense associated with the St.

Jude transaction, partially offset by deployment of proceeds from the sale of St.

Jude's vascular closure business and the pending sale of our medical optics business.

We forecast a loss of approximately $15 million on exchange gain loss line of the P&L for the full year 2017 and we forecast around $45 million of nonoperating expense.

Lastly, we forecast an adjusted tax rate of around 16.5% for the full year 2017.

The 2017 adjusted tax rate is lower than our historical adjusted tax rate of somewhat above 18.5%, which reflects the tax deductibility of the higher interest expense that I discussed earlier.

Turning to our outlook for the first quarter of 2017.

We forecast an adjusted earnings per share of $0.42 to $0.44.

As you would expect, synergies associated with the St.

Jude acquisition are expected to ramp as we progress through the year.

We forecast comparable operational sales growth in the low single digits and, at current exchange rates, we'd expect a negative impact from exchange of around 1.5%, resulting in low single-digit comparable reported sales growth for the first quarter 2017.

We forecast an adjusted gross margin ratio of approximately 59.5% of sales, adjusted R&D investment of somewhat above 8% of sales, and adjusted SG&A expense of around 33% of sales.

Lastly, we forecast net interest expense of around $210 million in the first quarter.

Before we open the call for questions, I will now provide a quick overview of our full-year and first-quarter operational sales growth outlook by business.

For established pharmaceuticals, we forecast high single-digit operational sales growth for the full year 2017, with balanced above-market growth across our key emerging markets, and we forecast low to mid single-digit growth for the first quarter.

In nutrition, we forecast operational sales growth in the low to mid single digits for the full year 2017 and relatively flat sales growth for the first quarter, with expected sequential improvement in growth rates as we progress through the year.

In diagnostics, we forecast operational sales growth above mid-single digits for the full year 2017, driven by continued above-market performance in the US and international markets, and we forecast low to mid single-digit growth for the first quarter.

In diabetes care, we forecast double-digit operational sales growth for both the full year and first quarter, driven by continued strong market uptake of FreeStyle Libre.

And lastly, Abbott's legacy vascular business and St.

Jude have been combined into our cardiovascular and neuromodulation business.

Yesterday we issued an 8-K that provides comparable quarterly unaudited sales for the first nine months of 2016, which assumes that St.

Jude was part of Abbott in 2016.

This morning we provided an additional 8-K to update the comparable quarterly unaudited sales to include the fourth quarter of 2016.

For the full year 2017, we forecast comparable operational sales growth in the low to mid single-digits for this business and we forecast comparable operational sales growth in the low single-digits for the first quarter.

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

(Operator Instructions) Mike Weinstein, JPMorgan.

Good morning, Miles.

Couple I want to touch on first.

One, can you talk about the St.

Jude performance in the fourth quarter?

The St.

Jude CRM sales coming in below it looks like the Street's expectations and the guidance for the first quarter since Jeff said that business is still struggling from the recall they had in the third quarter.

So if you could touch on the St.

Jude performance and then the outlook there.

And then, second, the overall business, the expectation I think that Brian laid out was that the business would grow operationally low single-digits in the first quarter, but then get to mid single-digits for the year.

So if you could just walk us through that, that would be great.

Thanks.

First comment on St.

Jude fourth quarter.

CRM I think has continued to struggle.

We can see that in the sales and the share and so forth.

I expect that to be rectified imminently here, shortly.

The good news is we've seen in other markets around the world, when they've gotten their MRI claim, they have recovered and restored whatever position they have lost.

That has obviously been an overhang for them for this last year and fourth quarter was no exception.

So good news is we expect that very shortly, but your observation about it was correct.

I will turn to Brian here for a little bit of underlying detail on your second question.

Sure, Mike.

A step-up in sales throughout the year is simply what Miles message is: the stabilization of the CRM that we just talked about on the MRI claim.

But also the opportunity to penetrate the accounts that we have with the combined business together is another contributor as we go to the market with a much broader presence of products as the call on the various accounts.

And also, you will note that they had some nice approvals that we talked about with EnSite Precision, a key driver of growth in atrial fibrillation, which has been growing in the double digits.

We expect a lot of continued strong growth here.

And there's also a couple key catalysts that we are expecting as we move through the year, one being CONFIRM, which is in the heart failure space with atrial fibrillation.

We expect that to be a unique contributor for the patients who have atrial fibrillation.

And then also the continued contribution of neuromodulation.

They recently have the burst technology, which has had a lot of success and we expect that to continue.

And that for our deep brain stimulation as well.

Then, finally, there's one more catalyst and that is HeartMate 3. It's been doing really well in Europe.

They are the leader there.

We do expect an approval of HeartMate 3 in the US as we move through 2017, and that would be a contributor on the back half.

Okay.

Then just quickly on your bridge, if you would, Brian, the assumed impact from both FX and from the AMO divestiture for 2017.

The assumed -- again, on a comparable reported sales basis, which Scott and -- we filed an 8-K this morning -- it's 2.5% of sales on a comparable basis.

And then the AMO business will likely have sales in the first quarter of no more than a couple hundred million dollars, but as you recall, the full year was about $1.2 billion.

Sorry, I mean EPS.

Oh, on the earnings per share, de minimis, Mike, on AMO.

It typically is not a big earner in the first quarter, just based on the pattern of spending.

Again, if there is a little de minimis contribution, that also plays into the moving parts of where we are offsetting the dilution that we are seeing from the vessel closure divestiture.

Sorry, Brian; I was talking about the full-year bridge for 2017, the FX headwind.

I think in our model that we were at about $0.08 for FX for the full year.

Is that close to what you guys (multiple speakers)?

You're in the range; it might be a little bit north of that, Mike.

We are probably closer to a dime.

Okay.

And the AMO divestiture, is that still about $0.11?

You're right, Mike.

Remember this offset to -- the AMO divestiture is $0.11, but we are deploying proceeds, so the net is $0.07.

And that is a complete wash with otherwise what we had a long time ago with our general-purpose financing, which was also negative $0.07.

Understood.

Thank you, guys.

Matt Taylor, Barclays.

Thanks for taking the question.

I wanted to explore I guess some of the trends in nutrition, because you talked about improvement throughout the year as well there too.

Obviously we know about some of the challenges that you had in China last quarter and you had some puts and takes in the results this quarter.

Can you walk us through your assumptions for how China fairs for the early part of the year until you'll have your comps?

And then what else is driving that improvement in nutrition?

Matt, this is Scott.

I will touch on it very quickly.

As you know, market conditions continue to remain relatively challenging in China for all competitors; it is a market dynamic.

We do expect as we go through the year our performance in that business to improve.

Certainly as we start to lap through some of the impacts that we started to feel in the third and fourth quarter here of 2016, you will see some natural improvement, but we also expect our business to improve as well.

If you go outside of China, though, really there's been nice performance in Latin America and in Southeast Asia.

We continue to perform very well in the US on the pediatric side of the business.

And then obviously, as you know, optically our results have looked a bit suppressed because of our scale down in Venezuela, so our results and our performance in 2016 actually are a little bit higher than the print would indicate there as well.

We have a number of initiatives in place in China.

We are well prepared and understand the situation on the ground.

We will work our way through it at the beginning of this year and we expect our growth rates there to improve throughout the year.

Great.

Then just one follow-up, kind of on that earlier CRM question; just because MRI is such a big deal.

Can you talk about why you have confidence that I guess the pacemaker approval could be imminent?

And can you give us any update on the timeline for your high-power expectation for the timing of that approval in the US?

I will touch base on the high-power piece initially.

Our updates on that are -- it will be later in the year.

We're looking at about the fourth quarter there for both of those high-power devices.

The pacemaker piece we think is a little bit more imminent.

We've had ongoing discussions with the FDA on that front and we feel like that one is right around the corner and should start to contribute here fairly early in the year.

But the other two will be second half of 2017 items.

Great, thanks for the color.

Rick Wise, Stifel.

Good morning, everybody.

Hello, Miles.

It's hard to resist asking you a bigger picture question.

Obviously we are witnessing what could be dramatic political policy changes in Washington.

If I listen to the news, it seems like a lot could have potentially positive impacts on Abbott, but there's some worrisome things as well: hospital capital spending uncertainty post ACA changes, trade agreement -- especially some of the trade agreement changes.

I'm just curious; it's hard again to resist asking you how are you thinking about some of these issues.

Are you concerned that this is all going to be a net plus or negative?

How are you adapting, etc.?

Especially given your significant OUS exposure.

Yes, it's hard to speculate.

I would say, in general, I'm optimistic and I'd say for a number of reasons.

Some of the things that have been talked about won't necessarily directly affect us.

They may affect a number of multinationals.

Obviously, our new administration is pro-business, but there's a lot of moving parts in that, as you know.

The things I look for that might affect us, I think early on I think we're all waiting to see if there's a tax reform package that would allow us the ability to access overseas cash and repatriate cash, etc.

I think that would make a big difference for a lot of multinationals.

I don't really expect to see any changes in the Affordable Care Act directly affect us as much as I think they will affect other segments of the healthcare industry or business.

And I think a lot of the effort will be pointed at other segments more than the spaces we are in.

At least as far as that is impacted, we are primarily a diagnostic device company in the United States and so I think that, to some degree, some of that impact could be favorable for us.

The other things that I watch going forward is policies that affect strong dollar, weak dollar, strength of currencies, and so on, because we are so geographically diverse internationally.

I think one of the benefits -- it's not the primary benefit, but one of the benefits of the St.

Jude acquisition is it does spread and balance us into developed market currencies a little more than we have been.

In general, I'd like to see stability in the currency markets for us relative to the dollar, which has been a headwind for us for at least four years now.

And I think that will affect all multinationals.

So while there's a lot of uncertainty around the various things that this administration appears to be making priorities out of, I'd say that there's relative few that would impact us early on.

And I think the impact is likely to be favorable, that being primarily tax and/or cash access.

Turning to a cash flow question, maybe Brian, you'd want to talk about the cash flow outlook post the St.

Jude deal and maybe any stepped-up initiatives to focus even more on even better cash generation potential.

And help us think what that might mean for debt paydown over the next couple of years and your targets there.

Brian is pointing at me take that question, Rick.

There is a stepped-up emphasis on cash flow definitely and I would say, look, we've always been a pretty strong cash flow generator and we balance our use of cash, as you know, among internal CapEx, dividend, share repurchase, M&A activity, and so forth.

Obviously, for the next little while we're not going to be putting a lot of emphasis into M&A.

We're going to hold back on magnitude of share repurchase, etc.

We're maintaining our dividend, growing it a bit, and a lot of emphasis will be put on, I'd say, rapid paydown or reduction of debt.

And I think that's kind of a prudent place to be for the nearest term.

So we are being very, very prudent about cash use, cash flow, etc., internally.

I think we can do that for a while here and put ourselves back in a range where I think a conservative financial company like us would be and get back to kind of the normal balance.

We have slowed the growth in the dividend.

Will we restore that?

We will.

But we want to get to some targets, some leverage targets, first and we want to get there rapidly.

And so not only in terms of our internal investments and so forth that we have, across the board, got a very heavy emphasis on freeing and generating cash.

And I would say generally when we have had even a little bit of emphasis on that in the past we've done very well.

So that definitely is getting a lot of attention right now.

Just one last quick one from me on Libre.

Libre is off to a clearly brilliant start in Europe and you said I think second-half 2017 filing the US.

How do we think about growth from here and what kind of label you are hoping for to drive US adoption of the technology?

Thanks.

Well, it's already filed, but I have to say, to be honest, the FDA has shifted sand on us a couple times here.

And so, consequently, we are seeking both claims, replacement claim and adjunctive claim.

We are going parallel path on this.

I think that the performance of the product thus far ex-US, Europe and other countries, has been, frankly, excellent and does have replacement claim and so forth.

I think the potential for the US is extraordinary and I think not only is the product itself an extraordinary product, but I think its value proposition is unparalleled.

And I think the reason we have been able to get reimbursement in Europe and drive uptake as much as we have owes to the fact that reimbursement or governments there recognize the value proposition in the product as not only impact for patients, but impact on the cost in the healthcare system.

So I'd say at this point I, clearly, can't predict what the FDA's timelines and so forth are going to be here, but we are upbeat about the potential for it.

Thank you very much.

Glenn Novarro, RBC Capital Markets.

Good morning, guys.

Just a follow-up on the MRI-safe ICD.

Last year St.

Jude was telling the Street approval I think somewhere around the second quarter of 2017.

You're now saying fourth quarter of 2017.

Can you talk to us about what's creating this delay?

What's the hold up at the FDA?

I think you're referencing -- I think you're confusing two different products possibly here, which is high-volume versus -- high-voltage versus low-voltage.

In effect, we are telling you we expect the low-voltage, which is the primary bulk of use, imminently here -- which you could read first quarter, not second quarter -- and high-voltage later in the year.

Two different areas.

Yes, I'd just add to that as well.

Obviously, we've been working with them on the low-voltage piece.

There's a bit of a gating factor and these things generally run in parallel as well.

So those discussions overlap and the process overlaps (technical difficulty) as well, so there's some sequencing to that.

I will say on all of these timing items that I gave around the MRI-safe, all of those were contemplated along those lines in our DM model, so there's nothing different in our DM model relative to those timelines.

All right.

I guess for some reason I thought they were assuming a 4Q 2016 pacemaker MRI-safe approval and a 2Q 2017 MRI-safe ICD approval.

But let me just ask you one other question.

The cash proceeds that you're getting from selling the medical optics business to J&J and the cash proceeds that you've received from the asset sales to Terumo, have you applied that to your 2017 guide?

In other words, are the cash proceeds being used to pay down debt or is it -- are we waiting to get more clarity on Alere?

Thanks.

No, we're not waiting for more clarity.

We have pretty much applied it to our entire borrowing scheme, etc.

No surprise.

We've been able -- we sort of as we went into this have planned for many different paths and outcomes, so it's contemplated in our financing.

Okay, great.

Thanks for the clarity, guys.

Larry Biegelsen, Wells Fargo.

Good morning, thanks for taking the questions.

First, on EPD and diagnostics, the Q4 guidance was a little softer than the full-year 2017 guidance.

Can you talk about what's driving that and what drives the acceleration?

Just second for me, Brian, can you talk a little about the margin profile of the Company beyond 2017?

The guidance you gave for this year implied it might average right about a 22% operating margin and a better gross margin than we expected.

Just a little color on how to think about the margins going forward, thanks.

Sure.

Larry, I'm going to assume when you were talking about established pharma you are referring to the Q1 guidance, and it is a little bit low.

In 2016 it was the last and it was just the timing of when these shipments are received, some essential medicines into Venezuela.

So that's just causing the last of our quarters of comps here.

They will step up right to the growth rates we have been accustomed to seeing for several quarters now, which has been high single, even double digits, based on the strength of this business.

That's with respect to EPD.

With respect to the margin and how to think about it, there definitely is the impact of bringing in St.

Jude into the mix and that provides some natural accretion there.

You are probably in a very tight range there with what you referenced in terms of a profile of 22%.

I think of the expansion over 2016 being roughly half mix, but also synergies.

Keep in mind we're going to improve the profiles that historically St.

Jude have had and those will ramp significantly in Q2 and even further from there as we move through the year.

Then, finally, gross margin, as you know, and operating margin has always been a focus for us.

If you want to deliver double-digit underlying base earnings growth, you are going to be naturally in that 70 to 80 bps of range based on mid single-digit top-line growth.

Brian, thanks for that.

On the diagnostic business, I didn't hear you comment as to why, if I heard the guidance correctly, you expect low to mid single-digits in Q1, but greater than mid single-digit for the full year.

If you could just comment on that, that would be great.

And that's it for me.

Thanks, guys.

What we anticipate in diagnostics, which as Miles mentioned in his prepared remarks, is some really strong growth.

In particular as we hit the second half of the year and Alinity really starts to gain some traction and we gain access to some contracts on that front.

So there's some natural strength there in the back half of the year.

In the first half of the year, the first quarter, what you are seeing -- to Brian's point on EPD, there was a smidgen of Venezuela in the first quarter of 2016 in diagnostics and you are also seeing some of that at last scale down within our genetics business, which is well-known and as expected in our molecular diagnostics business as well.

So it's more of a comparable item there; the underlying strength of that business is strong and it will actually pick up steam as we head out through the year.

Thanks for taking the questions, guys.

Kristen Stewart, Deutsche Bank.

Just a modeling question, then a big picture question.

For the interest expense line item I think you're modeling about $700 million for the full year.

That does include, I think, some of the debt that was taken out for Alere.

What are you assuming with that for the balance of the year in terms of redeployment?

Is that assuming you're going down to pay down debt or share repurchase?

Or how should we just think about that to the extent Alere does come in or doesn't come in, in terms of accretion?

Kristen, the way to think about the build of the $700 million is we took out $15 billion of debt for the St.

Jude transaction and I think that was some around 3.75%.

Keep in mind, too, we are also assuming some debt from St.

Jude as well.

That was a contributor to the addition of debt.

And we just had our ongoing normal debt that had interest on it for Abbott.

When you add all those things up, and then to Miles's point, say that we said we are contemplating the deployment of proceeds from the divestitures that we talked about, that's is how you net out to the $700 million.

Okay, great.

Then I guess big picture for Miles, you had mentioned obviously earlier in the remarks this is a significant year of shaping for Abbott.

Certainly think we can all agree to that; it's been several years of shaping.

As you look over the next three to five years, how do you just think about Abbott overall?

Is it likely that we will see another reshaping of the mix?

Any thoughts on further divestitures of the businesses or potential, I guess, breakups?

I know you are, obviously, putting a lot in 2017 here, but I guess how do you just think about the evolving healthcare environment and kind of macro environment now relative to the mix of your businesses?

Thanks.

Well, I'd put this in a little bit of context.

When we spun off AbbVie, which has now been four years ago, there was a lot of, call it, post-separation cleanup to do.

We had to take the attendant overhead in the company down; finish the back-office operations and so forth with AbbVie.

And as you know, we did want to reshape some of our portfolio.

We sold the developed market generic drug business to Mylan and we acquired CFR and Veropharm, so we made a number of moves that we think positioned the EPD business very strongly.

We had great organic internal investments in diagnostics and strong business that really wouldn't benefit from a lot of M&A in nutrition.

And the weaker part of the Company that got attention from analysts, investors, and others that we believe needed strengthening as a fourth leg of the Company, was medical devices.

And with the St.

Jude acquisition, we think we've pretty directly addressed that.

And having placed our investment on the cardiovascular health segment, which we believe is pretty important, we determined we didn't have the same opportunity in medical optics to build and add on and grow onto that, like in this case J&J would, so we divested that.

Now, at this point, having made all those significant changes, we look at the Company and say we've got four very strong sectors that are very well-positioned in their respective product markets and their respective geographic markets.

Our challenge, or at least opportunity, now looking forward for the next few years is integrate St.

Jude and, frankly, focus on the organic pipelines of new products coming and execute so that we can see the growth benefit of the strength of these four segments around the world in their various segments.

We want to see growth out of ADG for all these new systems.

We want to see the growth out of St.

Jude and our vascular business for their new products.

Obviously the same with EPD, which has got a very good sustained growth track.

And same with our nutrition business.

So I'd say we're going to be focused pretty operationally here for the next several years.

That's our intent.

I think, when you go through a phase where you've made a number of transactions, people get very transaction-focused.

And we are still an operating company and that is what we intend to be here is an operating company.

Operate them very well and grow the targets that we've grown.

We have always had double-digit earnings targets and we've positioned ourselves in growth markets, both product and geographically, for the purpose of sustaining that identity for investors to grow -- be double-digit earnings growers and so forth.

And with the new product pipelines and the strategic positioning of the Company, I think we are extremely well-positioned to deliver on that.

So that's going to be our focus for the next few years.

Okay.

You've certainly made a lot of individual purchases in the stock, so clearly I guess that expresses your view on what the future holds.

I'd say it very much expresses my view on what the future holds.

You always hear these comments about alignment with your shareholder; I am a shareholder and I believe that the stock represents excellent value.

That's why I bought the shares.

Perfect, thanks very much.

Bob Hopkins, Bank of America Merrill Lynch.

Thanks very much for taking the questions.

First question is I just wanted to make sure I understand the fourth-quarter growth rates in a little bit more detail.

Would you be willing to give us what was the sort of core legacy Abbott growth rate this quarter, ex Venezuela?

I know it was 3.8% organically, but how much did Venezuela detract from that?

Our core growth rate, excluding Venezuela, would have been around 5%.

And most of that drag goes away in Q1?

As we discussed earlier, we will have bits and pieces in EPD mainly, but then we are through it.

Okay.

Then two other quick things.

I was wondering if you could give us for the fourth quarter, what was the legacy growth rate of St.

Jude's revenue base kind of ex divestitures.

I was just curious what a clean revenue growth rate was for St.

Jude in the fourth quarter.

A clean growth rate, it was in the low single digits, on the upper end of that; around 2.5% or so.

We expect, obviously, as we go through the year with some of the launches, with the approvals on the MRI side, with EnSite Precision, and some of these other innovations that are coming, as well as with some of the modest revenue synergies that we have baked in initially that will ramp over time that the St.

Jude combined business with ours should accelerate growth here in 2017 over 2016.

Then just lastly really quickly.

On 2017 two quick things: one, the EPS guidance for the first half was a little bit below where the Street was.

Can you help us understand the cadence of the earnings power over the course of the year?

Like maybe what percentage of the earnings is in the back half, just given that that Q1 number was a little bit below what we were thinking?

Then also, I was just wondering if you could give us your view on Abbott's opinion of the outlook for the growth rate of the ICD market as we look forward to the 2017, given that that has been obviously challenged of late.

Thank you.

Let me take the first one here, Bob.

I think it's safe to assume that you are going to have greater than 50% on the back half of the year.

And also contemplating that is the benefit of this financing also that we talked about.

A combination of that, the deployment of our proceeds to generate benefit and synergies ramp is just going to naturally put you into a stronger second half versus the first half.

The other thing in the first quarter I'd just note is that when you think about the FX impact, it has a modestly heavier impact on Q1 relative to the other quarters.

So we feel comfortable with this ramp; we know the places are in piece.

Some of them are just simply the comps.

And then on ICDs?

We expect that market to be relatively flat as an overall market, which would be a little bit of price down offset by some modest volume.

Thanks very much for taking the questions.

David Lewis, Morgan Stanley.

Good morning.

Maybe two quick ones for Brian and then one strategic question for Miles.

Brian, two questions.

It's been a long time since we got the first synergy number, almost a year.

Any greater clarity post close of St.

Jude how you are thinking about that synergy number, either the mix of revenue or cost synergies; the absolute size of that number; and the cadence over the next couple years?

David, nothing really.

We said it was going to be linear, fairly linear.

We talked about the mix being heavier on the SG&A side initially and then the revenues ramping over time.

I'd say the difference about us versus just putting a revenue or, excuse me, a full synergy number out there is we go out and identify these relatively fast as part of our normal acquisition due diligence.

So those are well in place; they are in plans to be executed.

We hope to do a little better maybe in the first year than what we said in linear, but we'll see how that plays out over the year.

Okay.

And I know you and Miles both stressed free cash flow earlier on in the call.

Is there any kind of target, either in 2017 or 2018, as a percent of net income we should be thinking about in terms of free cash?

That's a question for Brian.

Miles, I just think given what happened earlier this week, it's pretty interesting; the two best consumer-oriented device companies were probably yourselves and J&J.

They're buying one of your consumer-based franchises, but they announced they want to get out of their other consumer-facing diabetes franchises.

Can you just talk about how you see the diabetes franchise going forward and why you think that's the right consumer franchise for Abbott to stay in versus ophthalmology where you made a different decision?

Those two and I will jump back in queue.

Thank you.

I would say we are in kind of a unique position relative to a lot of the traditional competitors in this space in diabetic glucose monitoring.

In the past, the four major competitors there -- and there's always a lot of other smaller ones -- it has been a finger prick and a little chip business.

We have a unique position here with Libre that is a completely different product that eliminates the need for that fingerstick and gives a continuous glucose read that is, frankly, impactful for the patient, both type 2 and type 1, in a very different way.

I think that puts us in a unique position to see a transformation of that market and to benefit from it, if not lead it.

Others don't have that and I think that the competition in what I will call the traditional part of the market and the commodity nature of it, the economics of it have clearly changed negatively in the past couple of years.

Ironically, J&J kind of led that.

In our case, we've got a different position with Libre that I think gives us a unique platform to benefit as one of the disruptors.

And going forward, I believe that platform has possibly utility for us in other testing segments.

In our case, we see a growing business that as we replace the traditional fingerstick business -- not only ours, but others -- I think there's an opportunity there that is a real growth opportunity and a very valuable one.

Okay.

Then, Brian, just on free cash.

Is there a decent percentage to think about, maybe this year or next year, as a percent of net income that the free cash generation can be?

David, let me provide some context, too.

I think you saw our cash flow from 2015.

I think with all the things that Miles mentioned of emphasis you should expect to see a little bit of a step up when you get to the K in 2016 showing the step function of the efforts we are making here on free cash.

You know, it's tough to completely model out what the ongoing, sustainable I'll say free cash flow conversion is to net income in the early years with an integration.

But if you look at St.

Jude, they are a very powerful cash earner.

We're excited about bringing that into the portfolio.

If you take away the one-time things that are transitory, David, if you go with an integration, be that expense or capital that bears fruit long term, we will probably be in that competitive range that you see others.

Probably somewhere in that 70% to 80% range; that's probably what we target.

Great, thanks so much.

Matt Miksic, UBS.

Thanks for squeezing me in.

Just one follow-up here.

I know there's been a number of questions on MRI and St.

Jude, but maybe just a couple of clarifications, if I could.

We hear some different expectations in the field around these low-power pacer leads.

If you could just clarify whether this is a new lead system you're waiting on, which was our original understanding, or whether we should expect the pending approvals to relate to labeling on existing leads.

It's a nuance that obviously could make a difference as we think about the ramp.

And I have one follow-up.

Our initial expectation will be a new lead and I think that is a strong position for us.

We like that.

But we are also seeking approval on the existing lead so that we can provide that as well for existing patients.

But I think going forward we like the notion of a new lead and so we expect the initial approval here to be that.

Great.

Then the follow-up, just Miles or Scott, if I could on EPD.

Just one of the things we get often, questions we get often is just around the sustainability of this growth that you have seen; impressive high single, low double-digit.

It would be helpful if you could shed some light on maybe what we can -- the drivers of that business: how we can think about sustainability; what potential future growth drivers could be to carry this into 2018 or beyond would be very helpful.

Matt, this is Scott.

That business has been delivering at a high level here fairly consistently for years, quite frankly.

Since it's been reshaped.

The demographics in these markets are aligned with growth for the long term.

The model that we operate, quite frankly, is quite unique.

There's not another multinational company or local company, quite frankly, that operates the model that we operate with the variety of shareholders, including the trade channel, which is a very powerful channel for us.

So given the demographics in the model we operate and the strong brands that we have, we see this growth rate as highly sustainable over the long term.

And that's through sort of -- is it portfolio expansion of that product?

Is it also geographic expansion on that sort of core model that you're describing?

You've got several drivers of growth, Matt.

First of all, the call it growth or emergence of a middle class in a lot of emerging markets -- remember this business is 100% focused in what we would characterize as emerging markets.

The middle class income growth and the growth of their healthcare systems alone is a major underlying growth driver.

Most of these markets are not reimbursement-driven; they are consumer-driven and have a model that is both a combination of call it medically-driven through the physician or consumer-driven through the patient and the pharmacist.

So all the drivers of that growth and the distribution structure and so forth say this has got strong underlying growth.

I would say it's target-rich for geographic expansion in addition and beyond that portfolio expansion, so a lot of our organic effort internally is driven toward expansion of key areas, expansion of product, formulation innovation on product, and distribution management.

And in a lot of these countries where we are the leader, we are a leader with not that big a share.

So you get all the benefits of being a leader on the shelf, leader in distribution, leader in breadth, etc., with a lot of potential expansion in share gain as well.

So all of the various factors that would drive growth are pretty favorable in these geographies and product areas that we have targeted.

That's great, thank you.

Thank you, operator, and thank you for all of your questions.

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 phone at 404-537-3406, passcode 35472887.

The audio replay will be available until 4 PM Central Time on Wednesday, February 8. Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may all disconnect.

Everyone, have a wonderful day.