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Edited Transcript of ABT earnings conference call or presentation 16-Oct-19 1:00pm GMT

Q3 2019 Abbott Laboratories Earnings Call

ABBOTT PARK Oct 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Abbott Laboratories earnings conference call or presentation Wednesday, October 16, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian B. Yoor

Abbott Laboratories - Executive VP of Finance & CFO

* Miles D. White

Abbott Laboratories - Chairman of the Board & CEO

* Robert B. Ford

Abbott Laboratories - President & COO

* Scott Michael Leinenweber

Abbott Laboratories - VP of IR

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Conference Call Participants

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* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Frederick Allen Wise

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Lawrence H. Biegelsen

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Robert Justin Marcus

JP Morgan Chase & Co, Research Division - Analyst

* Vijay Muniyappa Kumar

Evercore ISI Institutional Equities, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2019 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, Licensing and Acquisitions.

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Scott Michael Leinenweber, Abbott Laboratories - VP of IR [2]

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Good morning, and thank you for joining us. With me today are Miles White, Chairman of the Board and Chief Executive Officer; Robert Ford, President and Chief Operating 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, we'll 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 2019. 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 items 1A, Risk Factors, to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2018. 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 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 commentary on sales growth refers to organic sales growth, which is defined in our earnings news release issued earlier today.

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

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [3]

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Okay. Thanks, Scott. Good morning. Today, we reported results of another strong quarter with ongoing earnings per share of $0.84, reflecting 12% growth on an absolute basis and even higher growth when excluding the impact of currency.

Sales increased more than 7.5% on an organic basis in the quarter led by double-digit growth in Medical Devices and sequential improvements in Established Pharmaceuticals and Diagnostics. We also narrowed off our full year adjusted earnings per share guidance range to $3.23 to $3.25, which, at current rates, would reflect high-teens growth, excluding the impact of currency and is at the upper end of the range we set at the beginning of the year.

As we've discussed previously, following our recent strategic shaping and acquisitions, we've been completely focused on running the company we built. This focus on organic execution is delivering strong performance on a remarkably consistent basis. Over the last 8 quarters, we've averaged 7.5% organic sales growth worldwide with very little variation. We've also continued to strengthen our portfolio with new products, expanded access on reimbursement coverage and generated new clinical data that further enhances the sustainability of our strong growth outlook going forward.

I'm particularly pleased with the continued exceptional performance across several of our key growth platforms, including FreeStyle Libre, MitraClip and Alinity, which I'll highlight as I summarize our third quarter results in more detail.

And I'll start in our Medical Devices business where sales increased double digits for the second quarter in a row. In Structural Heart, we achieved 16% sales growth led by MitraClip, our market-leading device for the treatment of mitral regurgitation or leaking heart valve. MitraClip sales increased more than 30% in the quarter, including U.S. growth of nearly 50%. During the quarter, we received U.S. FDA approval for our next-generation MitraClip device, and we initiated the first-ever U.S. pivotal trial for the minimally invasive treatment of tricuspid regurgitation, which will evaluate the safety and efficacy of our TriClip repair system.

Turning now to FreeStyle Libre, our market-leading continuous glucose monitoring system that eliminates the need for routine fingersticks. We achieved sales of $0.5 billion in the quarter and continued to add significantly to our global user base, as reflected by organic sales growth of nearly 70%. During the quarter, FreeStyle Libre obtained public reimbursement coverage in Ontario and Quebec, becoming the first and only sensor-based glucose monitoring system to be listed by any provincial health plan in Canada.

We also continued to advance our strategy to develop integrated solutions where people with diabetes can seamlessly manage their condition across devices, including recent announcements that we're seeking to integrate Libre with the insulin delivery technologies of Sanofi and Tandem as well as the digital care platform of Omada Health. This easy-to-use, affordable device is changing the way millions of people manage their diabetes. And our ongoing efforts to expand awareness, adoption and access for Libre around the world will drive tremendous growth for years to come.

Turning now to Diagnostics where sales grew 6.5% in the quarter led by double-digit growth in Core Laboratory Diagnostics. The rollout of Alinity in Europe and other international markets continues to drive strong growth in our Core Laboratory business outside the U.S. In the U.S. where we continue to outperform the market with our legacy ARCHITECT system, we've made good progress achieving regulatory approvals of immunoassay and clinical chemistry test for Alinity and are beginning to ramp up our launch efforts in these areas. With highly differentiated instruments and a matrix rollout across multiple geographies and diagnostic testing areas over time, Alinity is well positioned to be a multiyear growth platform for our Diagnostics business.

In Nutrition, sales increased nearly 4% in the quarter led by double-digit growth in international Adult Nutrition for the third quarter in a row. In Pediatric Nutrition, above-market growth in the U.S. and several other countries was partially offset by challenging market dynamics in Greater China, which comprises a little less than 10% of our overall nutrition sales. While consumers continue to trade up for premium brands, which is the segment where we compete, we've seen volume in the market decline due to historically low birth rates. We remain focused on strengthening our portfolio and competitiveness across the various segments and purchasing channels in China and given our broad portfolio and global footprint, anticipate continued strong performance across other geographies and long-term growth opportunities such as Adult Nutrition.

I'll wrap up with Established Pharmaceuticals, or EPD, where sales increased 8% in the quarter led by strong growth in several geographies including India, China and Brazil. Sales growth in EPD has now improved sequentially for each of the last 3 quarters. With leading market positions in several international growth geographies, EPD is well positioned for sustained above-market growth in some of the largest and fastest growing pharmaceutical markets in the world.

So in summary, we're performing extremely well across several areas of the portfolio, resulting in another quarter of strong sales and earnings growth. We continue to strengthen our product portfolios and key product platforms with a steady cadence of new product approvals, reimbursement coverage and clinical data. And we're well on track to deliver ongoing EPS and organic sales growth at the upper ends of the ranges we set at the beginning of the year.

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

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Brian B. Yoor, Abbott Laboratories - Executive VP of Finance & CFO [4]

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Okay. Thanks, Miles. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance.

Turning to our results. Sales for the third quarter increased 7.6% on an organic basis. During the quarter, we saw the U.S. dollar strengthen modestly, resulting in an unfavorable impact on sales of 1.9% from exchange or 50 basis points higher than if rates held steady since the time of our call in July. Reported sales increased 5.5% in the quarter.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.2% of sales, adjusted R&D investment was 7% of sales and adjusted SG&A expense was 29.1% of sales.

Turning to our outlook for the fourth quarter. We forecast adjusted EPS of $0.94 to $0.96, which reflects nearly 17.5% growth at the midpoint. We forecast organic sales growth of around 8% and at current rates, would expect exchange to have a negative impact of somewhat above 1.5% on fourth quarter reported sales. We forecast an adjusted gross margin ratio of approximately 59.5% of sales, adjusted R&D investment of around 7% of sales and adjusted SG&A expense approaching 27.5% of sales.

Before we open the call for questions, I'll now provide a quick overview of our fourth quarter organic sales growth outlook by business. For Established Pharmaceuticals, we forecast high single-digit growth. In Nutrition, we forecast low to mid-single-digit growth. In Diagnostics, we forecast mid- to high single-digit growth. And in Medical Devices, we forecast growth similar to the third quarter, which reflects continued double-digit growth in several areas of this business.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from David Lewis from Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [2]

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Just a couple of questions for me. Miles, just want to start off on growth. So I mean this time of year, investors are very focused on sustainability. And you obviously said you've been averaging 7.5% for 7 to 8 quarters. So a couple of questions. One, your guidance for the fourth quarter implies a little bit of momentum deceleration in the business. Anything specific to call out there? And then more specifically, as you think about 2020, what are those drivers that get you confident that you can deliver your growth in that 7%, 7.5% range that you've been doing the last couple of years? And then one quick follow-up.

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [3]

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Okay, David. Well, I'll start with what you said. We have had 8 straight quarters averaging 7.5%. Going into the fourth quarter, we actually are going to be close to 8%. And then going into next year, I think where we are in the range we've given, I think we gave a range at the beginning of this last quarter of 7% to 8%, somewhere in that range. And frankly, I've seen no change to that. I don't see any change to momentum at all here. If anything, we've got pretty strong momentum across the board. We've got sequential growth in a number of areas that we've expected improvement in, and we're seeing that. EPD comes to mind.

Obviously, our growth drivers, Libre and MitraClip and the Alinity systems, et cetera, are all very strong, Structural Heart is very strong. So as I've said in the past many times, this is sustainable and strong going forward. I see no change to momentum, no change to progress, no change to growth rates. If anything, it gets better. So -- and it clearly will in the fourth quarter.

So it's pretty strong, and the earnings flows with it. And we're not going to make any guidance forecast or anything, but I think directionally here, all fundamentals are strong for us.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [4]

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Okay. Very helpful. And just one quick product question, Miles. There's been -- Libre 2, obviously, an important driver for next year. I just want to get your commentary. The longer this product has not been approved, it's led to a kind of concern about the product, the regulatory time line. Your view, your Tandem partnership yesterday suggests to us that you're still confident in Libre 2 iCGM. Are you still confident in Libre 2 iCGM? And how are you thinking about the timing potential for that product?

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [5]

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I'd say I'm going to comment myself and then I'm going to hand it to Robert Ford here to comment as well. But first, are we confident? Absolutely. The product is performing wonderfully. The growth is strong. The expansion is strong. There's a lot to be pretty encouraged about. And while I recognize a lot of people, including us, are feeling impatience, impatience doesn't translate to concern. We're all inpatient and we'd all like everything yesterday. But it's not quite working out as yesterday. And Robert can comment on that here, but there is nothing but good here looking forward with Libre. And we anticipate a lot of expansion with this product, including with some of these partnerships that we've announced and working with the interoperability with various partners for what I think will be the future of glucose monitoring and diabetes management. I think all of this is not just on plan, but spectacular, particularly for diabetes patients. And I have nothing but confidence in it. So let me turn over to Robert to expand on that a little bit.

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Robert B. Ford, Abbott Laboratories - President & COO [6]

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Sure. Yes, David. Listen, admittedly, it's taking longer than we had expected. We obviously misjudged that. We're currently working through a handful of open items with the agency. And what I can tell you, I'm -- I've got the same confidence level that Miles does. I'm confident in the data. I'm confident in the product, right? In the meantime, if you look at Libre in Q3, we had an exceptional Q3. Sales of just under $0.5 billion, that puts us on a $2 billion run rate here with growth rate over 70%. Our international business grew 50%, and that's on a large base. And then the U.S. sales nearly tripled. So -- and it's tripled because we're adding new patients at a strong and steady rate. And it's a high rate. And you could see that progression in our total Rxs. So -- and one of the challenges we've had over, like, the 9 months here has really been about how to pulse our demand generation activities with aligning to our supply, and we talked a little bit about kind of some of those supply constraints.

So we've now released in the third quarter, towards the end of the third quarter, our next tranche of manufacturing capacity on plan, on schedule. And I can tell you, the commercial team right now is really feeling excited about not being able to have that constraint over and really start to intensify the commercial promotional efforts, whether that's advertising, whether that's sampling, et cetera, both in the U.S. and international. I think that gives us a lot of excitement as we exit the year going into next year.

The value proposition still continues to be very strong to patients and physicians and to payers. And as Miles mentioned in his opening comments, we achieved reimbursement in Canada, public reimbursement, the only sensor system reimbursed in Canada. And it's important because it's one of the top 5 largest glucose monitoring markets in the world. And similar to what we saw in some of these large markets when we obtained national reimbursement, we see a pretty accelerated kind of explosive growth. We saw that in Germany, we saw that in France and U.K. So we expect to see that same trajectory in Canada. And early indications suggest that kind of same curve. So that'll be also exciting for the team as we move into Q4.

And as Miles also said, we're pleased with the partnership strategy that we've adopted. We've gone through it at a very intentional phased approach first with Bigfoot, as you know. We then moved into announcing our agreements with insulin manufacturers, like Novo and Sanofi, that connect Libre to their pen systems. And the next phase here, we'll start to move into insulin pumps, and that was the agreement that we announced yesterday with Tandem to codevelop an integrated system because we know this is an important segment also connecting to pumps. And we're now at a phase where we feel we can start to kind of roll that out as we've thought about our partnership strategy. So I think momentum here on Libre is exceptional. It is very strong. As we go into Q4, I think we've got a lot of stuff going right, firing all cylinders, whether it's commercial, whether it's operation, whether it's our R&D program. So I'm very confident on the sustainability of Libre and Libre going forward.

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Operator [7]

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Our next question comes from Larry Biegelsen from Wells Fargo.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [8]

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So 2 for me, 1 on capital allocation, 1 on MitraClip. Let me start, Miles, with capital allocation. Now that you have more financial flexibility, how are you thinking about capital allocation and the importance of reloading the pipeline? I think on the Q2 call, you seem to deprioritize buybacks. But yesterday, you announced a $3 billion share repurchase authorization. So has your view changed? And I just have one follow-up on MitraClip.

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [9]

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Well, I'd say -- look, we've come through a period where we've paid down a lot of debt, and I think we find ourselves in a good capital balance. I think we're -- we've gotten to the place where our net debt to EBITDA ratio is well ahead of what we targeted probably a year earlier than we expected and that's with an aggressive pay down strategy, et cetera. Our business is performing strong. Our cash flows are strong. Can we still continue to pay down debt? We can. Can we refinance debt? We can. Can we do things that are prudent, good balance sheet management? Yes. And we're also generating cash. We are generating sufficient cash, more than sufficient cash, to invest in a lot of manufacturing expansion for all the new products we've talked about. Robert just mentioned one of the biggest, and that's fully funded and obviously coming online and good.

So you say, all right, well, then how about the dividend? Well, we raised the dividend 14% last December. And we have a targeted range where we like to keep that dividend as a percent of our EPS, et cetera. So as we go across all the things you can do with your cash, returning cash to shareholders is also a positive thing to do if the conditions are right and if the return is good, et cetera. And we want to be prepared to have that flexibility on the table as well. We have not done significant share repurchase, as you know, for several years while we focused on the pay down of debt. But now we wanted to add back the flexibility to do that as well.

So I'd say, in general, we find ourselves in a strong cash position, strong performance position, good strong balance sheet position. We can continue to pay down some debt, but we've got the flexibility to do just about whatever makes sense for us on a return basis or return to shareholder basis. We don't have any active M&A on the radar screen to the extent that we track or follow anything. I'd say it's your typical bolt-ons and tuck-ins and so forth that are additions to already strong businesses. We're pretty happy with our pipeline. We're pretty happy with our R&D pipeline. So our standards are pretty high right now about what's attractive and what may not be. But I'm not forecasting anything significant at all in the M&A area. So obviously, we want to keep our options open here with how we manage cash for our shareholder.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [10]

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Very helpful. And then on MitraClip, you have -- U.S. reimbursement goes up in October. You hopefully will have coverage for the functional MR indication next spring. So you're thinking about 2020 as an inflection year for MitraClip. And in Europe, it looks like sales improved, growth improved this quarter. How are you feeling about MitraClip outside the U.S.?

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [11]

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Larry, I'm going to toss that one to Rob Ford.

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Robert B. Ford, Abbott Laboratories - President & COO [12]

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Larry, thanks for the question. So we filed our MitraClip NCD. It was kind of opened in August. That time line there is -- usually takes about 9 months. I mean that's the statutory maximum, as we'll say. When we did FMR in MitraClip, that took about 7 months. So I think we'll be in the December-January time frame kind of get exactly what quarter that's going to land in. But in the meantime, you see kind of our growth rate. The reimbursement is going to be important, but Structural Heart was up mid-teens and the big driver of that was MitraClip, up 30%, up 50% in the U.S. So reimbursement is going to be important. There will definitely be an inflection point when we get it. But as I said in the previous call, that is a component. It's a building block here that we're focusing on.

So opening new centers is another kind of key building block. We have about 400 today, and I do want to get to about 550 over time. And we've been supporting that with investments, investments in our sales force, our clinical specialists, our therapy development specialists, so that we can not only train the centers, train the implanters to keep up with that demand that we see, but also to support the demand generation through the development of this patient referral network. So that investment is ongoing, on target, on plan in terms of how we're ramping up the field team. And as Miles said in his opening comments, we continue to invest also in the innovation side, on the product development side. So in July, we obtained approval for our fourth-generation MitraClip, which has independent graspers, more sizes, et cetera, that basically give more options to the position. And so I think that MitraClip here is in its really early innings, although I think this is a multiyear, multibillion-dollar growth opportunity that we've got. And it is going to continue to ramp over time, and we're making the investments to make sure we're going to lead in that. So as I look into 2020, I think we've got the right momentum. And once we have NCD coverage, yes, I think there'll be an inflection to growth.

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Operator [13]

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

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [14]

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Just 2 quick product related questions. First, a follow-up on the Libre 2 commentary. Just to kind of set expectations, just curious, has there been any new data request from the agency? And is approval of Libre 2 in the U.S. you think possible in the next couple months? Or could it take a little longer?

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [15]

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Listen, we've -- what I'll say is that, probably, we've obviously misjudged that. So I'm not going to sit here and try and pinpoint the exact time line of the approval. As I said also, we've actively been working through a handful of open items with the agency. And that's where we're at.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [16]

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Okay. Fair enough. And then I'd also want to ask on Pediatric Nutritionals in China. And it's -- just curious if you could elaborate a little bit more on the slowdown there. And then just wondering if you could comment on China more broadly and your confidence in growth continuing in China. So just comment on Pediatric Nutritionals in China, please.

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Robert B. Ford, Abbott Laboratories - President & COO [17]

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Sure. Let me start off then with the nutritional question here then. So you saw our Nutrition business was just under 4%. We had really good growth in the U.S. in pediatrics up 4%, double-digit growth in international adult for the second quarter in a row. So our challenge here really was the international pediatric performance. This was really driven by Greater China. And I would say there were some challenging market dynamics here. As Miles mentioned, we're seeing the consumer trade up into the premium brand segment, but the volume has been declining partly because of this low birth rate. So this has led to, what I would say, a much more competitive environment, competitive in terms of pricing, competitive in terms of promotional activities. And this has now got our full attention, full attention from the management team here. And our key thing is really focusing. And the market dynamics are the market dynamics, but we've got to really focus on improving our competitive fitness, our competitive position here in the pediatric segment. We're launching a series of new strategies here in the coming weeks regarding our media campaigns, strengthening our consumer relationship platforms. We've got some plans to launch some new products over the next several quarters. So I'd say that the key focus of us right now in nutrition really has been, at this point here, to focus on improving our competitive fitness in China.

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [18]

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And I'll follow up on the rest of the other businesses in China. I'll give you a little bit of context. I think I'll speak as a CEO. We, the multinational CEOs of the world, or we -- if we do business in China, are we nervous about trade? Are we nervous about China? Are we nervous about all this? I think you can't help but be nervous about it. But I'll tell you what's interesting. While it's affecting some segments of the U.S. economy and U.S. businesses pretty directly, it doesn't seem to be affecting us or our business. The nutrition challenge we have is completely separate from any kind of trade or economic or economy issues other than birth rates. And the performance in our Device businesses, our Diagnostics businesses and so forth are double digits and strong. There's all kinds of ways that people can hypothesize that maybe the Chinese government would intervene and make things more difficult and so forth for U.S. multinationals. But in our business, we actually don't see that. And the product approvals are coming in a timely manner. The China FDA is doing everything that they're supposed to do and -- for our products. We haven't seen any of that kind of friction at all. And the demand for our products and the performance of our businesses in China has been strong. Other than the challenge we've got with Pediatric Nutrition, all other businesses are doing well, show no signs of any kinds of issues. So while I know that there are industries and segments that are tied to whether it's automobiles, oil, big industries, et cetera, that may have challenges, particularly agriculture, we're not seeing that. And our China business is good.

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Operator [19]

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Our next question comes from Vijay Kumar from Evercore ISI.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [20]

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Two for me. Maybe Miles, starting off with that last question on the macro of China. I know there are number of moving parts, China, 4X7 on the drug side. Some questions around maybe CapEx slowdown, Diagnostics slowdown. Just to be clear, what is your exposure either on the drug or diagnostics side to China? And maybe broadly comment on emerging markets in general. It looks like some of those markets are slowing down. And how is Abbott positioned to handle some of the macro slowdown, if you will?

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [21]

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Well, we're just going to try to figure out who answers what part of that question. I'd say this. Underlying growth in emerging markets is still good. Has it slowed some? Yes, it has slowed some, but it's still good. It's a relative thing. So the underlying growth we see in India, Latin America, China, et cetera, it's all good. You can say there's the occasional Argentina. Okay, that's not good. Argentina is its own thing. But there are -- the advancement of health care systems, the advancement in demand for health products, pharmaceuticals, et cetera, strong. China, in particular, for us for our pharmaceutical business, strong. We're doing well. I don't think we have a lot of exposure. I'll let Robert expand on that in a minute. But overall, I think the conditions for us on those markets remain strong. As we've said many, many times, single most difficult thing we deal with is the volatile currency, if it's volatile. And sometimes it is, sometimes it isn't. And right now, currency isn't exactly working on our favor in those markets. So while we grow at a pretty healthy rate on an underlying basis and typically faster than the market, currency erases some of that. Robert?

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Robert B. Ford, Abbott Laboratories - President & COO [22]

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Yes. I'll just -- Vijay, on the generic pharma in China, I think you're referring to the 4+7 tendering process there. We haven't seen an impact, and we don't anticipate a significant impact going forward. We have a fairly kind of concentrated portfolio here of products, just about 15 products here. Most of these products are more specialized kind of segments and areas where there's it's kind of difficult to manufacture. So on the generic side of the pharma business, we're less susceptible to this. Obviously, we're going to monitor. We're part of this process. We understand how the tendering process is going to work. But if I think about kind of bigger impact, we have less of an impact here given the portfolio of products we have in China.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [23]

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That's helpful, guys. And just one quick one on guidance maybe for Brian. Brian, looks like the Q4 guidance is implying really strong margin expansion, 200 basis points plus. Just given some of the comments on FX, maybe clarify the FX hit to Q4 on the margin side. And in general, when you look at 2020, what kind of headwinds are we looking at from an FX perspective?

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Brian B. Yoor, Abbott Laboratories - Executive VP of Finance & CFO [24]

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Yes. From a top line next year, I'm not prepared to talk about next year. But I think there would be naturally some flow through on the top line next year, Vijay. Perhaps Scott can get back to you on that, but let me circle back. If you look at Q3, you saw we had gross margins of 59.2%. You were absolutely correct. Foreign exchange had an impact on us of about 50 basis points. Otherwise, it would be at 59.7%. So I feel good about where we're guiding Q4. Q4 tends to be that quarter where we get a little bit more natural leverage as well. And you'll see that play out through the bottom line. Pretty consistent with how we thought about this at the beginning of the year. As you know, I mean, gross margin improvement is just part of our DNA. It's part of what we do and how we think about in addition to cash flow and is something we're going to continue to improve upon across all of our businesses. And I think you could expect that to continue in the next year. That's how we get to double-digit growth that we usually start with and continue to invest back into our SG&A and R&D for our growth.

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Operator [25]

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Our next question comes from Robbie Marcus from JPMorgan.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [26]

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Miles, I was hoping you could touch on the Diagnostics business. This is one you've called out for many quarters now as a durable, multiyear growth driver for the company. We saw fantastic growth in Core Lab this quarter, even without really benefit from Alinity hitting U.S. Maybe you could just update us on the status of where you are in Europe in terms of the rollout, what you're seeing in terms of competition because we're seeing some negative results from competitors and then the latest and thoughts on the U.S. launch and how we think that uptake there.

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [27]

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Okay. Thanks, Robbie. I'm going to have Robert do that.

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Robert B. Ford, Abbott Laboratories - President & COO [28]

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So Robbie, we've talked about how this is a multiyear opportunity, and we've been executing on this. Very, very focused here. If you think about the Core Lab and the rollout of Alinity program, it's doing very well. And you can see that in our top line. The rollout has been particularly strong in Europe. We're winning over 50% of the businesses where we targeted an entrenched competitor. And if you think about kind of the renewal process, we're retaining nearly all of our current business that comes up for contract. So we placed over 3,000 -- over 3,700 instruments. And when we gave out that number, we're talking about instruments that are actually placed in the market, placed in the account, running tests and generating revenue. So that's gone very well.

In the quarter, you saw that we also got an approval in the U.S. for the Alinity blood and plasma screening. So this fourth quarter here, the team is already kind of rolling out that commercial launch. We had a lot of success in rolling out the blood plasma systems in Europe and in Asia last year. So it's great to see that a little bit ahead of schedule here in the U.S. And the team has jumped on, on the opportunity.

As relates to the immunoassay side, a lot of our focus here is really kind of ramping up on the R&D side, ramping up the menu and the assay menu. I'd say that assay completion rate of what we need to be kind of fully competitive in Europe is getting close to that 100% mark that we need. And in the U.S., it's a little bit behind, but a lot of our focus here is to get those systems, those assays approved and in place. And we'll start to see that kind of play affecting our growth rate in the U.S. as we move into next year. So I think, internationally, we're doing really well. U.S., we've got the opportunity here as the assays come onboard to be able to accelerate our growth rates. So I'm really pleased with the momentum that the team has done here. Of course, we could -- we feel that we can always do better, and that's what we're going to keep on pushing to.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [29]

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Great. And maybe just one quick follow-up in Neuromodulation. Numbers came in a little softer than The Street was looking for. I'm assuming a big chunk of that was in the spinal cord stim market. Maybe you could just update us as to what exactly you're seeing on the ground with Abbott and what you think is driving the deceleration in the market here in the U.S.?

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [30]

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Yes, sure. So obviously, still work in progress here. It's a little bit longer than we had initially hoped. When we've talked about it over the last couple of quarters, we've talked about the sales force hiring, the sales force productivity. And it's a very specific selling process here in devices. And if you're a new rep, it takes some time to kind of understand it. So that's been going -- that's been progressing well. We've had some stabilization in the sales force. And some of the monthly KPIs that we track them on, they're improving. But we've also seen, as you pointed out, a little bit of a market decline, especially in the first half of this year. And it follows a couple of years of double-digit growth, right? So a lot of our focus here has got to be on sales force execution and productivity.

The approval of Proclaim XR this quarter, I think, really provides a nice addition to the portfolio. It provides the sales force with a new technology to promote. And early signs of the launch, it's only been a couple of weeks, but early signs are positive. We tend to look at our trials -- on our trials across the U.S. in spinal as our leading indicator. And I'd say, early signs are positive, but there's more monitoring there for us to be aware of.

On the market side, there's real no third-party data source here like we have in stents or pacemakers, et cetera. So it's a little bit difficult to peg the growth rate here. We usually have to wait until everybody reports and can kind of look at and add it up and kind of see where it's at. So I would anticipate here Q3 to be similar in terms of market growth rate as to the first half of this year, which is in that low to mid-single-digit decline here.

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Operator [31]

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Our next question comes from Rick Wise from Stifel.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [32]

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Miles, I'm always embarrassed to ask questions about the EPD business because I always feel like I don't really understand it. But I understand enough to see that you actually, x currency, had another solid quarter in many of the emerging markets that you're targeting. Maybe just help us understand some of your high-level thoughts there or the outlook. Is it going as you would have expected? Growth has slowed a little bit relative to the last few years. But again, seems like on track and sustainably on track. Is that the right way to think about it?

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [33]

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Yes. Rick, I'd say I'm never quite as satisfied as I'd like to be. That's for sure. What -- we've learned a couple of things. I think of the 7 or 8 years we've now been fundamentally focused on emerging markets and their growing economies and so forth, I'd say, if anything was underestimated, it was the degree of volatility of currency, which is also heavily driven by the strength of the U.S. dollar. And while we can't predict those things, since this business is 100% in emerging markets, that's always a bit of a challenge. Now that said, the underlying growth in those markets has been steadily strong. And it's interesting. One indicator of the attractiveness for those markets is, let's just say, the multiples and prices and so forth that anybody who owns a pharmaceutical business in those markets thinks that the company is worth. And as we track those for a long time, they're probably some of the highest multiples in the world than any business -- the businesses that make money. They're attractive. The markets are attractive. The attractive parts of branded, generic pharmaceutical worldwide, they're the most profitable. They're very profitable markets for good branded products as compared to Europe or the U.S. or something like that if you're in that business. So we targeted this business for a reason. There's underlying real growth. Brands matter. Quality matters. Breadth matters. And it's kind of all the fundamentals that we think are stable, durable, attractive, et cetera. And frankly, all those economies have progressed as we would like, maybe not as stably and maybe not as strongly, in some cases, but the growth there is still strong.

Our own challenge is the R&D investments, to continue to expand product lines and product depth into the markets. We keep our R&D somewhat decentralized by region. India has its own, Latin America has its own, et cetera. We're always looking for greater and greater productivity and greater and greater launch activity out of our teams. Every now and then, we're going to run into an Argentina, a Venezuela or a tax issue in a country, like we did in India a couple of years ago, et cetera that are going to put a dent in the growth rate for a given year, and we've seen that. But the underlying fundamentals are quite strong, quite good. And we keep plugging away at all the fundamentals that we know how to manage. And as you can tell, this last year, we've had steady sequential improvement in our performance, excluding exchange. And they're up at 8%. I think that's pretty good. That means that we know how to take the corrective actions to get stronger, to get better, to drive the business better. And I think the fact that the managers of pharmaceutical business are up to an 8% growth rate and looking forward to even improvement in that -- I think that's pretty strong. So yes, we like the business.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [34]

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Great. And if I could follow up just on 2 quick things. At TCT, we saw some very solid Portico data. I assume we're still on track for mid-2020 U.S. launch. Any updates there would be great on Portico. And last, just -- the U.S. Vascular business still seems pressured, not really improving. What are the issues? What are you doing? I know you're so focused on execution. Is it competition? Is it -- how do you turn that portion of the business around?

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Robert B. Ford, Abbott Laboratories - President & COO [35]

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Rick, this is Robert here. So on your Portico question, yes, we submitted end of Q3, so we expect a kind of midyear approval here and launch. And we're getting ready for that.

On your question on Vascular, as we've previously mentioned, there are a couple, what I would call, noncommercial items that impacted growth rate here. These are third-party royalties, third-party manufacturing agreements that we put in place as part of the St. Jude divestiture, some of the assets. So those -- as those ramp down, as those manufacturing agreements ramp down, those royalties ramp down, they obviously impact the growth rate. And we've allocated those agreements into the U.S. line, even though they're global agreements. So if you remove those items that are naturally going down as we transition the manufacturing over to the new owners of those businesses and as the royalties ramp down, you remove that out, our Vascular business was flat. And the dynamic there was really a little bit of pricing that we've seen on the stent side. We've continued to grow share in the U.S. actually and maintain our leadership position in the international markets. And that price pressure was then offset by double-digit growth in our Endo and peripheral business and in our imaging and diagnostic business. And that's part of our strategy, which is we know that there will be some pricing pressure on the DES side, and we know we need to make our investments to maintain our competitive position there. But we also know that we're over investing in our Endo and our imaging strategy, so that those businesses can get large enough and that those double digits then can really return Vascular to a healthy growth rate.

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Operator [36]

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And our last question comes from Matt Taylor from UBS.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [37]

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I was hoping that you might just expound a little bit on the Libre dynamics given the continued strength that you've seen outside the U.S. Could you comment on anything like installed base, mix of type 1 versus type 2? Are payers getting involved? Do they see value there? Anything like that, that could help us understand the sustainability of the growth, especially outside the U.S. where you continue to have a larger and larger base?

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Robert B. Ford, Abbott Laboratories - President & COO [38]

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Yes. So let's talk about that base. I mean, the one way to describe it here that it's pretty large and it's growing. We focus a lot on the sales side. But if you look at the user base where you're at the 1.5 million, close to 1.6 million users at the end of this quarter, as we talked a little bit, there's a little bit of constraint on that user base given our manufacturing capacity. So as we've now unleashed it, I think we've got the potential here to kind of grow that user base even faster.

One of the things that is important here that we've seen as payers and contract start to look at this is that they're very convinced on the outcomes of using sensor-based technology. There's a lot of clinical data that proves that. We actually have RCT trials that show that Libre reduces hypo, reduces time out of range, reduces the time that patients are in hypoglycemia. And we backed it up with some fairly large real world evidence trials showing that. And competitors also have that, too.

So the value proposition here is how do you get that outcome at a cost that makes sense for the payer where they can actually expand the use of the product and the technology into a much larger user base versus kind of niching it to kind of very small segments. And that's been the value proposition that we've adopted. And as I said in the beginning of the call, that value proposition is not only very intact, but it is growing. And we see that in the negotiations we've had with Canadian reimbursement authorities. We see that expansion of the technology beyond just type 1 or insulin users in other markets. We start seeing it expand into type 2. So we think the value proposition here is very strong, and it's a real opportunity to provide the benefits of the outcomes that are proven at a cost profile that makes sense for the payers. So -- and it's ultimately about having the impact on outcomes for patients. And we're seeing that through our trials and through our real world evidence.

If you think about the composition of the patients, we're looking at 50-50. We're getting a lot of type 1s and insulin users, but we're also getting a lot of type 2s, type 2s that are on single injections or type 2s that are on oral medication. There are different utilization rates, but we're getting all those patients.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [39]

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One quick follow-up. Are you now completely unconstrained on manufacturing?

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Robert B. Ford, Abbott Laboratories - President & COO [40]

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Yes.

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Miles D. White, Abbott Laboratories - Chairman of the Board & CEO [41]

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Okay. I'm going to wrap up where we started. We had a strong quarter, exceptionally strong quarter. Our momentum continues. We've got some great growth drivers in Libre, MitraClip, the Alinity platforms, other businesses. They're all growing, many of them double digits and across the board. So the balance of that performance across all businesses and across all geographies is heartening. It is sustainable. We -- our top line growth rate was 7.6% this quarter. We think it will be close to 8% in the fourth quarter. And as we look into 2020, I see no reason to change any expectations about the strength of our top line sales growth rate, which is, I think, all of you know, for a fairly large company, unusual to find. The other people that are able to do this are tech companies. And so we've got some great strengths here owing to the strength of our pipeline, our new product launches, the improvements to access and/or reimbursements and further capabilities of those products. So we've got a good sustainable road ahead of us. Obviously, there are surprises or things that don't meet our expectations from time to time or the speed with which we want to accomplish things. But overall, I think this is good evidence to you all, a good performance, super performance, really, and sustainably so. We look at 2020 with great optimism and great expectations, in spite of a lot of the uncertainties in the world and in the economies around the world. We're feeling pretty strong and pretty bullish about where we sit. So with that, we'll see you in 90 days.

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Scott Michael Leinenweber, Abbott Laboratories - VP of IR [42]

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Well, thank, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today.

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Operator [43]

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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.