美國雅培 (ABT) 2017 Q4 法說會逐字稿

Good morning, and thank you for standing by.

Welcome to Abbott's Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions) This call is being recorded by Abbott.

With the exception of any participant's 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.

Thank you, and good morning.

Thank you for joining us.

I'd like to apologize here at the start for the late start.

We had a few difficulties with the phone connection.

With me today are Miles White, Chairman of the Board and Chief Executive Officer; and Brian Yoor, Executive Vice President, Finance and Chief Financial Officer.

Miles will provide opening remarks, and Brian will discuss our performance and outlook in more detail.

Following their comments, 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 2018.

Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements.

Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 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 fourth 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 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 are available on our website at abbott.com.

Unless otherwise noted, our 2017 commentary on sales growth refers to comparable operational sales growth, which adjusts the 2016 basis of comparison to include results for St.

Jude Medical and to exclude the impact of exchange; the current year and historical results for Abbott's Medical Optics and St.

Jude's vascular closure businesses, which were divested during the first quarter of last year; as well as the current year sales for Alere, which was acquired on October 3, 2017.

Comparable growth also reflects a reduction to St.

Jude's historic sales related to administrative fees paid to group purchasing organization in order to conform with Abbott's presentation.

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

Okay.

Thanks, Scott, and good morning.

Today, I'll discuss our 2017 results as well as our 2018 outlook.

For the full year 2017, we achieved ongoing earnings per share of $2.50, representing 13.5% growth.

Strong performance across many of our businesses enabled us to achieve adjusted earnings per share well above the midpoint of the initial guidance range that we set at the beginning of last year.

This past year was a very good and important one for our company.

We performed well and our new product pipeline was highly productive, and we took some very important strategic steps forward, as you know.

Also, a key element of our long-term success has been our ability to proactively shape our company to ensure we're in the right businesses that provide the best opportunities for growth.

This past year was important in that regard.

It began with the acquisition of St.

Jude in January; followed by the sale of our Medical Optics business; and in the fall, our acquisition of Alere.

The additions of St.

Jude and Alere enhanced our leadership, scale and presence in attractive areas of health care.

We've long been a major global player in diagnostics, and Alere adds Rapid Diagnostics to our existing leadership position in the $50 billion global diagnostics market.

St.

Jude, on the other hand, made us a leading player in Medical Devices, particularly in the very important cardiovascular area, where we previously had leadership in only certain focused areas.

Adding St.

Jude made us a major player in nearly every area of the $30 billion cardiovascular device market.

St.

Jude also brought us into a promising new era -- area, neuromodulation, to treat chronic pain and movement disorders.

While we were adding these pieces, we sold AMO, our Medical Optics business.

Though this business was very successful for us, we didn't see a path that would move us into a broader leadership position across the larger Vision Care market.

So we sold the business to J&J, who was already in that position, which allowed us to focus on other priorities and growth opportunities.

So as we enter 2018, we're more diverse and better balanced than ever before.

We've sharpened our focus and enhanced our leadership positions and opportunities for growth.

And importantly, our R&D productivity is at a new high.

Over the past several months, we've launched a number of products that will increase our competitiveness, open new markets and contribute to growth in 2018 and beyond.

Great products are coming from our pipeline, which I'll highlight as I review each of our businesses in just a moment.

All of this translates into our expectations for another year of strong financial performance in 2018.

As we announced this morning, we forecast adjusted earnings per share of $2.80 to $2.90, which reflects 14% growth at the midpoint.

I'll now provide a brief overview of our 2017 results and 2018 outlook for each business.

I'll start with Nutrition, where sales grew low single digits in the fourth quarter, reflecting a modest sequential improvement versus the prior quarter.

In the U.S., growth this quarter was balanced across our Pediatric and Adult businesses.

In Pediatric Nutrition, growth was led by PediaSure and Pedialyte.

And in Adult Nutrition, growth was driven by our market-leading Ensure and Glucerna brands.

Internationally, while much has been discussed regarding market dynamics in China, particularly the evolving regulatory environments and ongoing channel dynamics, I'd note that we've continued to see improving market conditions there.

As expected, the new food safety regulations went into effect in that country at the start of this year.

We were well prepared for this change, and the market is in the early stages of transitioning to new products.

As we look at the overall $30 billion global nutrition market, we see a market that remains attractive.

Favorable demographic and socioeconomic trends remain intact, which provides strong foundational support for market growth going forward.

And our position within the market remains highly competitive, with well-known and trusted brands in both pediatric and adult nutrition and a great global footprint that spans both developed and emerging markets.

Our focus is to continue enhancing our competitiveness and to capitalize on future growth opportunities in this market.

Turning to Established Pharmaceuticals, or EPD, where we achieved another quarter of double-digit sales growth, led by broad-based performance across several countries, including India, China and Latin America.

As you know, over the past several years, we've shaped this business through a series of strategic moves.

These actions not only shaped how we participate by adding scale and strengthening our product portfolios, but also fundamentally enhanced where we participate.

Our business is unique in that we're focused exclusively on emerging markets.

There's no other business like it in the world.

Emerging markets are growing rapidly, their populations are aging, their middle classes are expanding and their health care systems are developing.

Our strategy to build significant presence and scale in these fast-growing markets is unique and has been highly successful.

Moving to Diagnostics, where we consistently achieved above-market growth with our leading platforms in core laboratory, molecular and point-of-care testing.

The fourth quarter was no exception with sales growth of nearly 7%.

This past year was important for this business on 2 fronts: First, the addition of Alere expands our presence in one of the few areas in diagnostics where we weren't already the leader, the highly attractive Rapid Diagnostics market.

Over the past few months, the team has made good progress integrating this business, and we continue to see several levers for growth acceleration, including opportunities for geographic, platform and test menu expansion.

And secondly, we initiated the launch of the Alinity platforms of instruments, an integrated family of next-generation diagnostic systems for every area of diagnostics in which we compete.

As we previously discussed, the global launch of Alinity will be a multiyear process.

We initiated the launch last year in Europe and will launch in additional geographies, including the U.S., over time.

This highly differentiated platform promises to be a significant sustainable growth driver for this business over the coming years.

And lastly, I'll cover Medical Devices, where sales grew nearly 10% in the fourth quarter, led by strong growth in Electrophysiology, Heart Failure, Structural Heart, Neuromodulation and Diabetes Care.

As I mentioned earlier, adding St.

Jude was truly a game changer for us, instantly transforming us into a broad-based medical device leader with scale, presence and a great pipeline of next-generation products.

One area in particular that shined this past year was our new product productivity.

In Rhythm Management, we closed the MRI-safe product gap across our portfolio in the U.S., including FDA approvals of our pacemaker, ICD and CRT-D devices.

These approvals enhance our competitiveness tremendously in this area.

In Electrophysiology, we launched insight precision, our best-in-class cardiac mapping system.

We also launched our next-generation Confirm insertable cardiac heart monitor in Europe and the U.S. With a slimmer product profile, easy insertion procedure and smartphone connectivity, initial customer feedback on Confirm has been very positive.

In Heart Failure, we launched HeartMate 3 in the U.S. This life-saving system helps pump blood through the body for advanced heart failure patients as they await further treatment, including heart transplant.

We also have an ongoing development program to expand our indication here to include destination therapy for patients where transplant isn't an option.

In Vascular, we launched XIENCE SIERRA, the newest generation of our leading XIENCE stent system in Europe.

Initial market feedback has been positive, and we anticipate bringing SIERRA to the U.S. in the next few months.

And in Structural Heart, in addition to double-digit growth, we continue to advance our pipeline in several areas, including minimally invasive new approaches for mitral and aortic valve replacement as well as tricuspid valve repair.

As you can see, the combination of Abbott and St.

Jude created a best-in-class cardiovascular device portfolio with depth, breadth and innovation to help patients to restore their health, delivering greater value to customers and payers.

We had a long-term strategy to become a leader in cardiovascular care.

We laid the foundation over a number of years, and the combination of Abbott and St.

Jude brought it to fruition.

St.

Jude also brought us into Neuromodulation, where several recently launched products led to 30% growth in the fourth quarter through both share capture and market expansion.

This leading portfolio of products offers a proven relief for patients living with chronic pain and helps those suffering from movement disorders.

Positive effects of these products are nothing short of amazing.

And in Diabetes Care, sales grew 28% in the fourth quarter, led by FreeStyle Libre, our highly differentiated glucose monitoring system.

Over the course of last year, we also achieved a number of important regulatory and reimbursement milestones for Libre.

Notably, in North America, we received regulatory approvals in the U.S. and Canada.

On the reimbursement front, we obtained national coverage in the U.K., France and Japan.

And earlier this month, we announced that FreeStyle Libre obtained Medicare coverage in the U.S.

So in summary, 2017 was a very good year for us.

We performed well.

Our new product pipeline was highly productive, and we took some very important strategic steps forward, which yielded both immediate results and strengthened our long-term growth opportunities.

We're entering 2018 with very good momentum.

We're more diverse and better balanced.

Our leadership positions are stronger.

And importantly, a significant number of recent and upcoming product launches position us for strong growth in 2018 and beyond.

I'll now turn the call over to Brian to discuss our 2017 results and 2018 outlook in more detail.

Brian?

Okay.

Thank you, Miles.

As Scott mentioned earlier, please note that all references to 2017 sales growth, unless otherwise noted, are on a comparable basis and do not include results from our Alere acquisition, which is consistent with the guidance methodology we utilized all of last year.

Turning to our results.

Sales for the fourth quarter increased 7.7% on an operational basis.

Exchange had a positive impact of 2% on sales, resulting in reported sales growth of 9.7% in the quarter.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 58.8% of sales, adjusted R&D investment was 6.9% of sales and adjusted SG&A expense was 28.9% of sales.

Overall, as we look at 2017, we delivered strong adjusted EPS growth of 13.5% and significantly exceeded our cash flow objectives, with full year 2017 operating cash flow in excess of $5 billion and free cash flow in excess of $4 billion.

Turning to our outlook for the full year 2018.

Today, we issued guidance for adjusted earnings per share of $2.80 to $2.90, which reflects 14% growth at the midpoint.

In terms of our 2018 sales forecast, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis.

On this basis, our 2017 sales baseline would be $26.7 billion, which excludes sales from Alere, or Rapid Diagnostics, as we call it, which we acquired in the fourth quarter of last year; and also excludes sales from our former Medical Optics and vascular closure businesses, which we sold during the first quarter of 2017.

So for the full year 2018, we forecast organic sales growth of 6% to 7%.

In addition, we expect Rapid Diagnostics to contribute sales of a little more than $2 billion for the full year 2018.

Based on current rates, we would expect exchange to have a favorable impact of a little below 2% on our full year reported sales, with more than half of this favorable impact driven by strengthening of the euro.

As we discussed previously, when the euro moves, the fall-through impact on our results is modest, taking into account our European cost base and our hedging programs.

Before I review our outlook for the P&L, I'd note that we'd reclassified certain pension-related items in order to comply with recent changes in pension accounting standards.

As a result, approximately $150 million of net pension-related income has been removed from operating lines of the P&L, primarily cost of goods sold and SG&A expense, and now will be reported as nonoperating income.

With that in mind, we forecast an adjusted gross margin ratio of somewhat above 59% of sales for the full year, which reflects underlying gross margin improvement across our businesses.

We forecast adjusted R&D investment around 7.5% of sales and adjusted SG&A expense of somewhat above 30.5% of sales, which reflects the pension-related reclassification I just mentioned as well as incremental investments in the businesses to support recent product launches and to further strengthen our pipeline.

We forecast net interest expense of around $775 million.

This forecast includes the net interest impact of $4 billion of debt that was repaid earlier this month as well as anticipated additional debt repayments throughout 2018.

We forecast a gain of approximately $5 million on the exchange (gain) loss line of the P&L for the full year 2018 and around $110 million of nonoperating income, which includes, as mentioned earlier, pension-related net income in accordance with the recent changes in accounting guidelines.

Lastly, as a result of U.S. tax reform and our forecasted mix of global income, we forecast an adjusted tax rate of 14.5% to 15% for the full year 2018.

Turning to our outlook for the first quarter of 2018.

We forecast an adjusted EPS of $0.57 to $0.59.

In terms of our 2018 first quarter sales forecast, please note that the first quarter 2017 organic sales baseline would be $6.15 billion, which, as we commented earlier, excludes sales from our former Medical Optics and vascular closure businesses, which we sold during the first quarter of last year.

On this basis, we forecast organic sales growth of 6% to 7%.

In addition, we expect Rapid Diagnostics to contribute sales of a little more than $500 million in the first quarter.

At current rates, we would expect exchange to have a positive impact of around 3.5% on our first quarter reported sales.

We forecast an adjusted gross margin ratio of somewhat above 59% of sales, adjusted R&D investment around 7.5% of sales and adjusted SG&A expense of around 33% of sales.

Lastly, we forecast net interest expense of around $200 million in the first quarter.

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

For Established Pharmaceuticals, we forecast high single-digit sales growth for both the first quarter and the full year.

In Nutrition, we forecast low single-digit sales growth for both the first quarter and the full year.

In Diagnostics, we forecast organic sales growth of mid-single digits in the first quarter and mid to high single digits for the full year.

And in Medical Devices, we forecast sales to increase mid to high single digits for both the first quarter and for the full year.

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

(Operator Instructions) Our first question comes from Mike Weinstein from JPMorgan.

I think probably helpful because the fourth quarter of '16 to the fourth quarter '17 has some moving parts.

What do you think the -- kind of the clean organic performance was for 4Q '17?

Yes, Mike, I would just chime in.

There are a couple, but they're relatively modest.

As you know, St.

Jude had a battery recall in the fourth quarter of last year, which suppressed that baseline a bit.

And we had a little bit of timing in EPD.

But other than that, that's about it.

Our organic growth would be around 7% this quarter, really strong.

And the confidence in the 2018 outlook, Miles, the 6% to 7%, which I think The Street -- if you would have surveyed The Street before they would have said you guys would have said mid-single digits.

So obviously, this is at the upper end or more bullish than that.

Is it the momentum that you're seeing, particularly on the device side of the business?

And could you speak specifically to a couple of product launches, one of them I think I'd like to hear about is Libre; and another one is Confirm, which (inaudible) off to a very nice launch.

Yes.

I'll tell you, the -- look, the forecast we've put out, it's a strong forecast.

It just is.

I mean, relative to peer groups, competitors, segments, the whole thing -- and even relative to us.

And to be honest, even looking at that, yes, I feel pretty confident about it.

I mean, I don't know the unknown.

I don't know what exchange may or may not do.

That's always unpredictable.

But based on everything we know at this point, my view is, yes, 6% to 7% and probably closer to the high end of that.

And if I look at the underlying performance of the business and in different segments, and I'll just recap some of this, the drag on some of the growth there has been Nutrition.

Even that is sequentially improving, and the situations that we've seen that have set that business back a little bit have all improved and are all improving.

So I think, first of all, that's a good omen.

Secondly, in all the other areas, take EPD, very sustainable growth.

They had a very strong fourth quarter.

I think it was 14%.

I don't expect 14% for the whole year '18.

But let's face it, they're running strong.

And then I look at Diagnostics and devices, and they both got just a tremendous bunch of new product launches, and they're not flash in the pan product launches.

These are going to sustain growth over a number of years because these are big and broad product launches.

The Alinity product launch, I think, is going to make a big, significant difference in Diagnostics.

I think we're going to see increasingly better performance out of Alere.

But look, Alinity is across 6 segments of Diagnostics, and so I think that's a pretty sustained momentum.

And they've been doing a terrific job, frankly, in the 6% to 8% growth range with a lot of, I'd say, aging systems and older systems.

Now they've got an entirely brand-new product line out there in all categories.

So I think that bodes well.

And then I finally look at the whole cardiovascular device area.

You'll recall, Mike, many people challenged whether St.

Jude was really growth, and there was a lot of grumbling a year ago about that acquisition.

And sequentially, over the course of this year, St.

Jude's gone from first quarter 2.4% to 4% in the second quarter, 4.2% in the third quarter and 10% in the fourth quarter.

I won't tell you that I think 10% is sustainable for the year, but they had a 10% fourth quarter and they didn't have to stretch to do it.

And the product launches and approvals, mainly the product approvals, particularly in the U.S. that I forecasted to you in both July and October, all happened.

And there was some skepticism about that because of the situation in Sylmar.

But frankly, our team has done a terrific job in Sylmar and a terrific job communicating with our U.S. regulators.

And we got all those product approvals, and those launches are all out of the blocks and going well.

So -- and knock on wood, I look into 2018 and it all feels remarkably strong and sustainable, and I think that's terrific.

Tax reform was a nice boost.

And there's a lot of things here that are all looking up.

And then I finally come to Libre, which -- I enjoy the fact that every time something is announced with Libre, it's a surprise to somebody because everybody seems to have such low expectations for it.

And I think we're going to continue to surprise people in that category.

We're investing several hundred million dollars in expansion.

This is a big product.

I think you estimated $1.50 million to $100 million in the U.S. this year.

I think that's a good range of estimate.

But frankly, it's going strong.

We're adding probably 50,000 customers a month right now, and that's increasing, and that was primarily Europe.

That doesn't even reflect much U.S. yet.

So as we came out of the fourth quarter, the growth rate of that product is just tremendous, and we've got a series of enhancements and approvals and additions to it coming that only make it better.

And as I said, it's not a niche product.

It's a mass-market product.

There are tens of millions of type 1 diabetics and frankly, the same -- and type 2s trying not to be type 1 diabetics, and I'm one of them.

So I wear the product.

I live the product.

I know the product.

And I think this product has a long track road ahead of it.

And so as I look at all the growth drivers of the company and then some of the elements of St.

Jude, like Neuromodulation and Structural Heart and other things, I think there's just an awful lot of growth here.

So I go into '18, I look at the numbers that we forecasted and yes, I feel pretty confident about it.

So at this point, I'm looking at the success we're having with cash flow and the balance sheet, investment in expansion, investment in capacities, investments in R&D and SG&A, which I put more money into, and everything looks pretty good.

I realize it was a long answer, but you kind of asked the big question.

No, no, no.

That was perfect.

And just so you guys know, the sound quality isn't great on our end.

So just FYI.

The -- Miles, I did want to ask you about capital allocation and the benefit of tax reform.

Tax reform is going to lower your overall tax rate in 2018 by 150, 200 basis points.

You're also getting access to your previously trapped cash and your global cash flow just going forward.

Can you just talk about what you plan to do with the trapped cash and then how the access to global cash flows changes at all your capital allocation plans?

And then I'll drop.

Yes.

Well, it's not trapped anymore, and it's terrific to have access to it.

I have to say, I'm pleased with where tax reform came out.

As a multinational and a company that had a lot of debt in the last 2 years because of the acquisitions, I had concerns about some of the structures they were looking at, but it all turned out pretty good.

And I think it will stimulate a lot of growth and investment in the U.S., in particular, and you can see that in a lot of the things that companies are communicating.

The same is going to be true for us.

As far as capital allocation, Brian mentioned in his remarks, we were up to a gross $28 billion of debt because of our acquisitions of St.

Jude and Alere and a little bit of lingering debt we had just over time.

And we just paid off $4 billion of that, so we're down to $24 billion.

And over the next 6 months, we'll pay off probably $3.5 billion to $4 billion more, and we'll be down to $20 billion by the end of '18.

The cash flows in the company are strong.

Brian's run a program with our EVPs to be very conscious of cash generation, and that's been extremely successful.

And our cash flows and profits and so forth right now are as strong as they've ever been.

So as I've said, we want to make a priority out of getting that cash -- or getting that debt down to a more balanced level.

We will -- we've already exceeded the targets that the rating agencies had for us.

And we'll be below -- on debt-to-EBITDA, we will be below 3 at year-end.

And on a net basis -- net debt basis, we'll be below 2. So we'll be in a very strong metrics position at year-end, and that puts us in a, let's say, a position to kind of be at a more normal capital allocation viewpoint at that point.

We raised our dividend in December by 6%.

I'd anticipate we'll raise it again at the end of the year probably more than that because we like to maintain a payout ratio of a little better than 40% of EPS.

So I think our capital allocation, our cash flow is strong.

We're pushing down the debt fast, faster than we anticipated by at least 18 months.

And so all of that right now is, frankly, looking quite good, largely due to the tax reform and frankly, the management of cash flow here.

And our next question comes from Matthew Taylor from Barclays.

So the first question I wanted to ask was specifically on Diagnostics.

I guess I was just a little intrigued by the fact that the guidance you gave for the year implies some improvement, and you also talked about that in your comments.

And I wanted to explore 2 things: One is, can you talk about how the Alinity rollout could cadence through the year?

And then, secondly, now that you have had Alere or Rapid Diagnostics under your belt for a little while, can you talk about the state of the state for that asset and how you expect that to grow over the coming years?

Yes.

Thanks, Matt.

Well, let me start with Alinity.

First of all, it's 6 different systems: 2, in particular, that are in the core laboratory; 1 that will address transfusion; 1 that will address point-of-care testing; 1 that will address hematology; then 1 that will address Molecular Diagnostics.

And so there's multiple dimensions to this.

When you've got approvals around the world, they're all approved in Europe at this point.

A couple are approved in the U.S. We expect more approvals the following year.

We tend to be pretty much on those approvals.

The menu expansions in our developments have gone extremely well in the last, say, 10 to 12 months.

So they've got very full menus.

And therefore, the pace of introduction can go much faster because accounts don't really want to address change until they've got full menus or close to it.

So that momentum picks up.

And then you've got to deal with the life cycle of contracts that are out there in the world.

Now today, we've got, I want to say, 25,000, 26,000, 27,000 instruments out there in these main categories -- the main core lab categories.

And Michael is to replace that entire base and of course, take a fair amount of share over the next 5 to 10 years.

So there's a ramp there.

There's a scale there.

It's a significant scale.

And our attention now is all about scale-up and all about pace and magnitude.

This is not going to be some incremental slow-rolling thing.

It starts that way.

Initially, it starts as a slow roll, and then it's going to pick up tremendous momentum because it's our intent to replace that entire base and frankly, take a lot of share with it.

So I think we're in a really great position with Alinity.

Our challenge now is just mass scaling and -- as we attack that market.

On Alere, I'd say our team has done a terrific job.

We have an entirely new, from Abbott, management team there.

I'd say their progress in terms of integration, reorganization, et cetera, has gone extremely well.

Literally within a couple of weeks, we reorganized the entire company into business units -- fully integrated business units with management teams and so forth.

I'd say that our assumption of the business has gone at warp speed and gone well.

We're ahead of schedule on literally everything, on target on our synergies.

We're ahead of our targets on sales and profit.

Flu and strep seasons in the U.S. have aided that, to some degree.

But thus far, I'd say everything is sort of on point, as we've projected.

And beyond that, I don't have a lot more detail to give you other than so far, so good.

And I think our transition management has been excellent.

It's been that way with St.

Jude, too.

What we did at St.

Jude, we've done faster at Alere, and St.

Jude was pretty fast.

So we went through sort of the same things with St.

Jude.

We reorganized a lot of businesses there into fully integrated business units.

We did it in the first 6 months.

That's usually very disruptive, but we managed to do it without disruption.

And we did it with Alere in a matter of weeks.

So I'd say we're in a strong position.

I'm very pleased with the management team and how rapidly it's up to speed.

We've got a couple of new hires on some of the business.

But I'd say this team has gotten up to speed quick.

And one follow-up.

This is probably the most pleased I've heard you kind of sound in a while on how things are going.

And the results kind of speak for themselves, but I know you're never satisfied.

What areas would you point us to where things aren't going well that you want to improve?

And how do you think about dropping all this good growth on the top line through to the bottom line versus investing in all the things that you have to invest in now?

Well, I'd say 2 things.

We still got improvement to make in Nutrition.

And we know that, and our Nutrition team knows that.

And we've had a lot of discussion about that.

I personally talked to our GMs around the world and so forth.

And there's no point to having your dauber down.

We simply want to do better.

And I'd say even where our growth rates are right now, sequential improvement is a plus.

Now there are a number of places we're pretty positive and pretty happy with performance.

I'd say the U.S. stands out as executing really well.

There's a number of countries around the world executing well, and the ones that had difficulty are improving.

So that remains a point of attention to us.

I'd say in terms of the happy column, a lot of our success right now and what we're focused on is organic growth.

We've never had such productivity out of R&D at Abbott.

And frankly, so has St.

Jude.

And I now consider them Abbott.

And what St.

Jude had said about their pipeline and to The Street over a number of years is true.

They had and do have a terrific pipeline of products.

We've gotten the approvals.

We've closed the gaps where they had deficiencies, and there's a lot of growth there.

And so I -- what I'm particularly happy about is that the organic growth opportunity here across all of our businesses, Nutrition, EPD, Pharma business, the new product launches in Diagnostics and Devices, including St.

Jude and Alere, it's just -- it's broad and it's deep and it's exciting to have that much innovation and new products to be launching.

And so our challenges aren't so much fixing problems or deficiencies.

Our challenges are how fast we can scale and how fast we can run.

I'm pretty confident that it's sustainable and it's sustainable for a long time because it is organic growth of new products.

So I'm pretty happy about that.

It's -- I'm not out looking for M&A, and I don't have any significant M&A on the radar screen.

In fact, I don't have any M&A on the radar screen because I want to hit those debt targets by year-end.

Our targets are more aggressive than the ratings agencies.

I want to get back to where our capital allocation flexibility is as flexible as it's ever been.

And I want to get there fast, and I'm going to get there fast.

So I think our challenges are how to keep the pedal down on that growth because all of these businesses have opportunities at the same time and some of it's -- some fairly significant scale-up.

And Libre is a tremendous opportunity.

It's a mass-market product, and it's unlike any other medical device.

Medical devices, by nature, sort of niche therapies, this one is not.

And this one has a totally different rhythm to it, and the pace of scale and the magnitude of opportunity is more like tech than it is med tech.

And that's an interesting challenge for us.

It's a positive challenge.

It's a good challenge.

And fortunately, we've got such strong cash flow, we can afford the capital investment that we want to spend while we're paying down our debt and paying our dividend and so forth.

So I mean, as challenges go, that's a pretty nice set of challenges.

You don't lose sleep on those.

Our next question comes from David Lewis from Morgan Stanley.

Miles, there's a lot of conversation this morning on growth, but it was fairly robust EPS guidance for Abbott to start the year.

And I think for us, what's interesting is unlike a lot of your peers, who are dropping through all the tax down to the bottom line, you're reinvesting, which it makes sense given your premium growth.

But I'm wondering if you can sort of give us a sense of where that reinvestment is going.

And given your flexibility, how you're feeling about this sort of mid-teens EPS growth over the next couple of years.

Well, nice try.

I don't give guidance that far ahead.

But yes, it's a good question.

I have seen that a number of companies have dropped through quite a lot of tax benefits to the bottom line.

And frankly, I expect to see that.

I mean, there are some industries and some -- there are some businesses that really benefited from tax reform.

If you're -- if the primary source of your sales and profits is the U.S., obviously, you got a really demonstrative benefit.

If you're a multinational and -- or you had a lot of debt or something, it's not as demonstrative.

Now having said that, we've dropped through some of that tax benefit into our EPS, and I think that's reflected in our guidance this morning.

I did direct a significant amount of the benefit from tax into R&D and SG&A.

And I think that's warranted given not only the new product launches and how fast we want to run with some of these.

But -- so I've directed some of the benefit to increased R&D investments.

And you can imagine, I mean, I've directed some of that at Diabetes Care and Libre.

I've directed some of that at Neuromodulation and other cardiovascular products.

Directed a fair bit of it at SG&A expansion and so forth.

When you've got these kinds of opportunities, you got to invest in them and put fuel behind them.

And fortunately, tax reform has given us that ability.

We will spend some of that money investing in manufacturing in the United States.

As it's predicted that, that would happen, we will.

I won't tell you where or what products and so forth because I don't want to forecast that to competitors and so forth.

But in fact, the U.S. will benefit, and as will some locations overseas, where we've got already existing capability, facilities, expertise, et cetera.

But we are directing a fair amount of this to help ensure we've got not only sustainable product pipelines and rapid innovation and enhancements to products, but that we're also doing our best in marketing areas and so forth to maximize the opportunity that's in front of us as rapidly as we can.

We don't want to think about it so incrementally because I think sometimes, when you've got these new products and opportunities, you got to go hard and fast.

And I think when you do that, you establish a better share position, a better market position, a better use position with customers, regulators, et cetera, and that's much more sustainable over time.

So as you asked me, I think if we get our job done, particularly in the areas where we just -- that I've just highlighted, which is a lot, I think our growth rates are pretty sustainable.

We start every year with a double-digit earnings growth target.

And as we've indicated this year on an apples-to-apples comparable growth basis, we expect 7 -- 6% to 7%.

And I'm in the upper half of that range, in my beliefs.

But I'd like to see that growth rate increase even substantially going forward.

We're always trying to be double-digit earnings.

I'm not concerned about having a double-digit earnings growth rate on a sustainable basis for the next few years.

I want to drive the top line so that I can sustain that at an even higher rate, and that's where my focus is.

Okay, it's very clear.

And I think St.

Jude has gotten a lot of attention on the call, but Alere, less so.

What's your focus for 2018 for Alere?

Can this asset definitively get back to sort of underlying growth in '18?

And how quickly can Alere get back to what you would think is market growth for Point of Care?

Well, I'd say slower than St.

Jude.

St.

Jude, as you all remember, it went through about a 4- or 5-year period where it didn't have much growth, and The Street was unhappy with that.

And they missed the earnings target a couple of times.

What they were right about was they had a robust R&D pipeline and a product pipeline, and they were right about that.

And I think the people that led and managed St.

Jude should feel vindicated about that and we do because there was a fair amount of concern and criticism when we acquired St.

Jude.

But frankly, as you can see in the numbers, there's growth here, and there's going to be growth here.

And it's not just small incremental growth.

It's significant.

I'm really happy with the performance of St.

Jude.

I think Alere is a little longer story.

The company had a lot of internal operating challenges.

It hadn't been invested in.

So I think pipelines are going to take a little longer to develop.

I think restoring sort of the cohesiveness and performance of functions in the business and some of the business.

It's going to take a little longer.

So I expect Alere to emerge, I'm going to say, over 2 to 3 years because we want to put more investment into new products, refreshing products, R&D, SG&A, et cetera.

We do have some rationalization to do.

That doesn't mean restructuring.

That means the integration of those functions and businesses and figuring out what are old products, what are new products and so forth.

So I think Alere will be a little slower emergence than St.

Jude has been.

St.

Jude sort of exploded on the scene here over 1 year.

And I don't think Alere will explode on the scene, but I don't think Alere is going to be flat, either.

I think -- we believe there's a lot of growth here in this entire Rapid Diagnostic and Point of Care space.

I think there's a lot of growth.

And I think that growth is sustainable over many years, but I don't think it's going to be -- I'm not going to be telling you the same story about Alere at the end of the year.

And at the end of '18, I'm going to say we had a good year.

It tracked better than we thought.

It's showing growth.

I'm going to tell you all those things at year-end, I'm pretty sure.

And we love the underlying assets and products and so forth.

I think that's all going to be true.

But I think operationally, it's going to take a little longer to get this back on an investment cycle in products and launches and so forth that we'll want to see.

The good news is we've got so many other opportunities at the same time that I think it's nicely staged.

You don't want everything to show up at the same time.

So I think it's nicely staged to help sustain the growth of Diagnostics while they're dealing with the scale-up of Alinity.

Our next question comes from Joanne Wuensch from BMO.

Can we turn a little bit to EPD?

That area of growth tends to be a little bit of a black box for investors.

How do we think of -- about the sustainability of that growth rate?

This is the second quarter in a row of mid-teens growth.

Yes.

Joanne, it's -- I think the fundamentals underlying the markets, drive an awful lot of the growth.

The managers in that business -- and I sort of have this ongoing debate, I'm always chronically dissatisfied and they're always telling me, "Hey, look, we're really growing fast here." But the fact is the underlying dynamics of the market drive a lot of the growth because we've selected markets and countries, emerging markets in particular, that have growth characteristics, which I characterized in my remarks.

So the underlying fundamentals of those markets are all very positive in terms of growing health care systems, growing middle class, spending on health care, et cetera.

But succeeding in those markets requires a certain amount of presence and strength and scale.

Meaning, you want to be in the top 5 competitors in most of these markets.

China is a little different.

But you want to be in sort of the top 5 competitors.

You want to have very broad product lines, and you want to have some depth in various therapeutic categories.

And you want to have a strong brand.

I think our teams around the world have done a super job at that.

And I think there's countries where we believe we can do even better, a lot better.

So I'd say, first of all, the underlying dynamics are strong.

We've put a fair amount of emphasis in renewing and broadening our products.

We put a lot of attention into our own, let's call it, development productivity, registration productivity, et cetera.

We're putting more and more investment into India and our distributor organizations to do just that because we believe we can and should.

We're putting a lot of attention on gross margin management to improve our gross margins, whether in procurement or things that we source from third parties that we should do ourselves and so forth.

So there's a lot of emphasis on margin improvement.

And frankly, the margin is already good -- better than good.

But we know that there's opportunity to improve it still further, and a lot of people think of generics as commodity generics that don't make much money.

These are branded generics where the brand matters.

It's sort of an OTX-type thing in a lot of these markets, and we make pretty good profits here.

So the characteristics of these markets have been that.

That said, the last couple quarters have some anomalies that bump these numbers up and down.

We went through a couple of disruptions in India, for example, which is a big part of our business, where we went through the demonetization issue and then the GST tax thing.

We actually managed that really well, I think.

But that affected inventory management by wholesalers and distributors, which are a big part of our business system here.

And so sometimes, I think we're going to see some of these quarters look very up.

And other times, they're going to be a little less up, but they're always up.

And I think -- I don't think the 14% we saw in the fourth quarter is something we'd expect every quarter.

Now if it starts to happen 3 or 4 quarters in a row, I'm going to be back with my manager saying, "I think you're a little conservative." But I think it's a double-digit grower.

I think it's easily sort of 9% to 11% on a very sustainable basis on the sales line.

So a lot of that is fundamentally in the markets.

And then we're pressing to kind of broaden our product lines and gain share because of the way we manage the business.

As my follow-up, Neuromodulation sales were up 30% in the quarter after being up 50% for the beginning portion of the year.

How do we think about that growth going forward?

And there's a lot of good buzz coming out of NANS.

Could you please update us on that?

Yes.

I'm going to have a Scott help me with that, but -- because I asked the same thing.

I said, "Geez, why are we down to 30%?" It's because of the comparison to this quarter -- or this fourth quarter last year.

And Scott can give you a little color on that.

But this -- the growth rate here remains strong, and the opportunity remains strong.

This is one of the bright -- well, we've got a lot of bright spots.

This is one, clearly.

Scott?

Yes.

Joanne, as you recall, we launched first -- deep brain stimulation products in the fourth quarter of last year, to Miles' point.

Obviously, the business is coming off a great year.

We're #1 now in the chronic pain segment.

We do expect to capture more share next year.

The market is growing in the low teens, and we expect to grow faster than that.

Our next question comes from Josh Jennings from Cowen.

I wanted to start back on St.

Jude.

You guys laid out some synergy targets around the acquisition.

I just wanted to get an update on whether or not you think that there's upside to those historic targets, particularly on the revenue synergy side.

We've been assuming revenue synergies hitting in year 2, but are you already seeing revenue synergies come?

And then also, just on the margin contribution with the rebound in top line growth with the St.

Jude franchise, is it safe to assume that the market contribution outlook for that unit in 2018 is going to step up nicely?

Yes.

I think -- this is Brian.

I think those are the right assumptions.

I mean, we're right on with our synergies as we tracked.

We've always said $500 million by 2020.

We had a great year.

We executed very well.

We integrated and achieved our synergies and expect that to continue, and that's incorporated into our guidance.

As Miles discussed earlier, we're very excited about the acceleration of top line growth here, and there's a lot of opportunities.

And I think the continued growth and sequential growth momentum '18 over '17 should be accretive to the operating margins not only for that business unit, but for Abbott as well.

And then just a follow-up on Nutrition.

And the food safety law took effect in China on Jan 1. I know it's very early, but can you help us think through what you're seeing initially and what you expect to see over the next couple of quarters in the pediatric China market?

And also, an update on nutritional pricing in the U.S.

Okay.

I'll answer part of that, and then I'll phone a friend here at the table.

I'd say, first of all, I personally was concerned at this switchover in the food safety law, what we had to do -- all do to comply with product labeling and number of products and so forth.

I was afraid it was going to be terribly disruptive.

And it turns out, we've already experienced the disruption in the past 2 years as the market was flooded with many products and a lot of volume and a lot of channels and so forth.

The single biggest issue we all had to do was reregister products and comply with the elements of the law.

And my -- all of our concerns were would we get our products through the regulatory bodies in China and be ready for that transition, and the answer is we made it.

So I think that, I'm happy with.

We've been careful to monitor our inventories of previous product versus new product, et cetera.

So to the extent that we can have visibility to that, I think we're comfortable with how that transition has gone.

I think we're not seeing the kind of disruption that we might have or that we've seen the last couple of years.

So I'd say, look, thus far, I'm glad we don't see unpredicted disruption.

And so, hopefully, we can now stabilize back into a more normal, call it, competition in the market.

It's a very, very dynamic market anyway in terms of channels and numbers of competitors and the intensity of competition and so forth.

We didn't need the disruption of the food safety law, but I think that's stable and kind of behind us at this point.

Brian or Scott?

Sure.

On the U.S. side, you asked about the price.

And I will just say, we've never historically really relied on price.

It's about volume.

And we had a great year in our pediatric business in the U.S., and that's all about share capture in the instant milk formula market part of the pediatric business with innovations that we introduced.

And we want to continue to sustain to be a share leader there.

But also, bright spots there in that pediatric portfolio are Pedialyte and PediaSure, which also have done quite well in the U.S. and are great brands for us.

And then I think the story in the adult is we knew we had some adjustments to make.

We're making the right adjustments.

We know we have some innovations coming, and we're seeing sequential improvement even here in the fourth quarter '17.

And we just want to continue to sustain that momentum and compete on share and market expansion on the adult because we just typically hadn't relied on price in the U.S. or other areas for that matter.

We've gained some share back in adult.

That's nice to see.

I think the team's done a terrific job in the ped market, and we remain the clear leader in that market.

And at this point, as Brian said, we're not reliant on price.

I think there's a clear value proposition to be marketed out there, and we haven't tried to stretch that and nor will we.

Our next question comes from Lawrence Biegelsen from Wells Fargo.

I'll just ask 2 quick product-related questions and drop.

CRM, I think you grew about 2% in the fourth quarter.

Is that how we should think about 2018?

Or do you think that could get better?

And then there was a question asked earlier on Confirm Rx.

Maybe just setting expectations, could you do, say, $50 million in 2018 on that product?

Is that realistic?

Thanks, Larry.

Yes, I think on CRM, you're about right.

We would expect something in the low single digits on that front.

To your point, Confirm, really great opportunity.

Obviously, we're still early in the launch of that, first quarter.

The feedback that we're getting from physicians on that one is very positive.

This is the only device out there that's smartphone-compatible, so there's a big benefit on the patient side of it as well.

Your forecast on that one, I think, seems reasonable as well.

Our next question comes from Glenn Novarro from RBC Capital Markets.

Two quick questions for me as well, and both are for Brian.

Brian, the U.S. dollar -- the weaker U.S. dollar has become a tailwind to the top line.

Does any of that fall to the bottom line?

Or is that completely hedged away, question one?

And then number two, the lower tax rate for this year, is this a sustainable new run rate for the next couple years?

Sure.

Let me take the exchange question.

As always, it's early in the year, so we're reluctant to necessarily flow what's through there.

It's a little modest.

We know we have to hedge there, so we have a modest impact from the sales I quoted.

As I think Miles said before, let's see how things go.

If rates hold and things pan out, and history is an indicator, similar to last year, we may see some of those flow through.

But I think it's just too early.

There's a lot of events that we watch, right, throughout the year.

Go ahead, Miles.

Yes, let me just add one comment to that.

As you plan a year, we all can calculate what we believe our tax reform impact is going to be given our geographic mix and so forth, as you know.

And then there's exchange.

And if you're multinational, you got a lot of currencies to deal with.

It's not so predictable.

The exchange happens to us a lot of times, and so we try to prepare for that with hedges.

That said, going into the year, what we chose to do was say, listen, we're going to put some of the tax benefit from tax reform into the EPS and we're going to put some of it into investment, as I described earlier, because that, we can forecast.

We can predict.

It's knowable.

Exchange isn't so knowable.

So if exchange continues to benefit us, there's really not enough time in a given quarter or year to reliably invest back the benefit of exchange.

So the likelihood is if exchange runs better than we forecasted at this point, investors are likely to see some of that.

Obviously, we hedge some of it to protect the stability of earnings, but you can't hedge it all.

So if we are favorable, yes, you'll probably see it.

And on the tax rate.

Sure.

And as I mentioned earlier, the range we got was 14.5% to 15% for '18.

There's a lot of moving parts to tax reform.

I'll just note that regulations are still being formed.

Interpretations are ongoing.

But from where we sit today, we believe we should generally be in the same ballpark of this range.

And we'll provide further updates as we learn more, too, as the tax laws unfold here.

Our final question comes from Bob Hopkins from Bank of America.

Just 2 quick questions.

One is on emerging markets.

I just wanted to see what emerging market growth was in the quarter and if that accelerated in the fourth quarter versus earlier in the year, and then what your outlook is for kind of 2018 from an emerging market perspective because it seems like things are really going well in emerging markets generally.

That's just the first question.

Yes, I think that's a fair characterization.

Generally, when it's quiet, things are going good in emerging markets, and it's been fairly quiet.

We did deliver double-digit growth in emerging markets this quarter.

To Miles' point, there's a lot of strong fundamentals in those markets that would point towards growth going forward.

And then the other one I wanted to ask about was just back on FreeStyle Libre, I think you mentioned earlier in the call that you're bringing on 50,000 new customers, I believe you said, a month.

And actually, I assume...

A quarter.

Yes, I'm sorry.

Let me -- if I misspoke, per quarter.

Okay, that makes more sense.

But still, a big number.

And I assume right now, the majority of that, obviously, is outside the United States.

Can you give us a sense as to kind of your -- the pace of your sign-ups in the U.S. and what you sort of think for 2018 from a patient perspective for Libre in the U.S.?

Yes.

I would just say, look, we launched pretty much right at the end of the year.

Obviously, there's very modest sales in the fourth quarter number there.

Without getting the number, I would say, the scripts are basically tracking right with our expectations.

I think Miles had mentioned a quarter or so back when asked what a reasonable estimate for year 1 sales would be, and it was agreed upon it'd probably be in the $50 million to $100 million range, and that's still where we sit today.

Well, very good.

Well, 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 a.m.

Central Time today on Abbott's Investor Relations website at abbottinvestor.com and after 11 a.m.

Central Time via telephone at (404) 537-3406, passcode 8277348.

The audio replay will be available until 10 p.m.

Central Time on February 7. 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.