Abbott Laboratories (ABT) Q2 2008 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. Welcome to Abbott's Second Quarter 2008 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this 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. John Thomas, Vice President, Investor Relations. Sir, you may begin.

Thanks. Good morning everyone, and thank you for joining us. Also on today's call will be Tom Freyman, our Executive Vice President, Finance, and Chief Financial Officer. Tom will review the second quarter results and I will discuss the business operating highlights. Following our comments, we'll take any questions that you have. Some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995. 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, 2007 and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. In today's conference call, as we do 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 measure in our earnings news release and regulatory filings from today, which will be available on our website at abbott.com. So with that, I'll now turn the call over to Tom. Tom?

Thanks John, and good morning. Today we are pleased to announce that Abbott reported a stronger than expected second quarter with diluted earnings per share of $0.84, which is $0.05 above the midpoint of our previous guidance range of $0.78 to $0.80. The $0.84 represents EPS growth of nearly 22%. Approximately half of this outperformance can be attributed to higher sales growth across our diverse mix of businesses and geography and a higher gross margin ratio of 58.4%. The remainder relates to higher than forecasted other income, reflecting higher ongoing payments from Takeda this quarter following the conclusion of the TAP joint venture. Sales for the quarter were also strong at $7.3 billion, an increase of nearly 15% ahead of our previous forecast. Based on our first half results, we're very pleased with the performance of the company, as well as the outlook for the remainder of the year and into 2009, when we expect to again deliver double-digit earnings per share growth. So this morning, before I provide my usual remarks, I want to spend a few minutes putting these strong results and first half accomplishments into context what our outperformance means in the short-term and over the longer-term. In the near term, we're raising our full-year ongoing earnings per share guidance range to $3.24 to $3.28. The midpoint of this higher guidance range represents EPS growth of approximately 15%. At the same time we're raising EPS guidance. We're in a position where we can selectively increase our investment spending this year to support the performance of our most important products particularly in those businesses where we disproportionately benefit from market growth. The work we've been doing over the last several years to build and reshape Abbott as an even stronger and more durable growth company with sustainable growth businesses and a diversified base of earnings does clearly hang off. We've positioned the company to afford the right balance on delivering top-tier double-digit earnings growth while investing to sustain growth into 2009 and beyond. As we assess our performance mid-year, we're also very pleased with the company's consistent level of execution, particularly in the area of clinical and regulatory development where we've met or exceeded our timeline for regulatory submissions and approvals in virtually every case. What our management team has bet it would do, it's done. And what we've said would be approved, has been approved. This year that list includes eight major new products and indications in the first half alone across medical devices, biologics, diagnostics and pharmaceuticals. Our goal is to provide our investors consistency and durability. I believe we've achieved that over the last several years as we've delivered on our commitments in terms of financial performance, strategic actions and regulatory submissions and approvals. We fully expect this type of performance to continue in the future. So with that, let me turn to provide an overview of our performance in the second quarter, as well as our outlook for the second half of the year. Sales this quarter increased nearly 15% including a favorable 5.9% effective exchange rate with some modest sales of Lupron in the U.S. Results were strong across each of our global businesses with Pharmaceuticals, Diagnostics, Vascular and Nutritional, all contributing double-digit sales growth, with particularly strong performance in international markets. We also saw a good performance from our key growth drivers including HUMIRA, which was up nearly 50% worldwide and our lipid franchise, which again outpaced the market. John will discuss these in more detail in his review of the business operating highlights. SG&A expense as adjusted increased more than 16%, reflecting investment spending across the businesses in part to support the launches of new products and indications. R&D increased almost 9% with continued investment in our broadbased pipeline with early to mid-stage opportunities across a number of therapeutic areas including oncology, immunology, hepatitis C, neuroscience and our bioabsorbable stent program. The adjusted gross margin ratio in the quarter was 58.4% up 40 basis points from the prior year and up 160 basis points sequentially from the first quarter reflecting improved business and product mix. The other income line of the P&L as adjusted was $163 million. This was related to ongoing payments from Takeda following the conclusion of the TAP joint venture. While in the quarter this was a little more than $60 million above our previous projections, our full-year forecast for these ongoing payments remains approximately $300 million. The tax rate this quarter was 22.3%, slightly higher than our forecasted rate. The tax rate for the first half of 2008 was 21% in line with our previous forecast and our outlook for the full-year rate. Now let's turn to the outlook for the remainder of 2008. Today, we are raising both our full-year forecast for sales growth and earnings per share. As I mentioned, we now expect full-year 2008 earnings per share of $3.24 to $3.28, the midpoint of which reflects growth of approximately 15%. And we now expect mid-teens sales growth for the full year. We're also forecasting an increase in our level of investment spending as we've identified a number of areas to drive future growth. As a result, full-year SG&A is expected to increase approximately 15%. We continue to forecast a gross margin ratio of approximately 58% for the full year. And as I indicated, we're forecasting the other income line of the P&L at approximately $300 million for the full year related to payments from Takeda. Regarding the tax rate, we are confirming our forecasts for a full-year rate of around 21%. Now let's turn to our outlook for the third quarter. For the first time we're providing earnings per share guidance of $0.76 to $0.78, the midpoint of which reflects growth of approximately 15%. Let me walk you through some of the key P&L line items and as we forecast them for the third quarter. We expect sales growth in the mid-teens, R&D up high single-digits, SG&A up mid-teens, other income of approximately $75 million and a tax rate of around 21%. We forecast the gross margin ratio for the second half of the year at around 58%, consistent with our previous forecast. The ratio is expected to be between 57% and 57.5% in the third quarter and around 59% in the fourth quarter. This is consistent with the pattern you saw in 2007 with a relatively lower third quarter and relatively higher fourth. So in summary, as we look at the second quarter, we are very pleased with the performance of our diverse businesses. We reported stronger than expected sales growth approaching 15%, EPS that beat our original guidance and we raised our earnings per share guidance range for the full year with a midpoint reflecting growth of 15%. We're also very pleased to have concluded the TAP joint venture and to receive FDA approval of XIENCE V, which represents a major event in patient care. Certainly the favorable trends of the business give us even more confidence as we look towards the future. Given these factors, we continue to expect double-digit earnings per share growth in 2009 and over the next several years. With that, let's turn to the business operating highlights. John?

Thanks, Tom. This morning I'll review the quarterly performance of our major business segments, Pharmaceuticals, Nutritionals, and Medical Products, including Diabetes Care, Diagnostics, and Abbott Vascular. So let me start with our medical products businesses, where sales increased 14.7%. In our Vascular business, global sales were driven by 35% growth internationally as we continue to gain market share with our drug-eluting stent, XIENCE V. The XIENCE PROMUS platform is now the market leader in Western Europe surpassing Endeavor, Cypher and Taxus. As a result, in the second quarter, our global DES franchise sales, which include XIENCE, as well as other third-party DES product revenues were $125 million, more than double over the prior-year quarter, and up 25% sequentially from the first quarter. As a reminder, our DES franchise sales include XIENCE PROMUS and the Medtronic royalty. Following the FDA approval two weeks ago today, Abbott's Vascular sales force immediately began launching XIENCE in the U.S. We're pleased to bring this superior product offering to market providing a new alternative to the approximately 13 million U.S patients who have coronary artery disease. XIENCE is a true next generation drug-eluting stent with superior performance and durable clinical benefits. With XIENCE, physicians retain the best-in-class deliverability they've become accustomed to with our market-leading MULTI-LINK vision bare metal stent system which, as you probably know, has a more than 60% share in the U.S. While we are in the early days of the U.S. XIENCE launch, we're very pleased with our progress to date. The anecdotal feedback has been extremely positive and demand is, quite frankly, better than expected. XIENCE is clearly the preferred product of interventional cardiologists based on its clinical data and other distinct performance attributes. Our goal within the first 30 days of launch is to penetrate the majority of accounts that represent a significant percentage of total U.S. procedure volume. So, although it’s still very early, based on the first two weeks of launch we are right on track with our weekly launch goals, if not ahead. Looking at the DES market broadly, we continue to see steady improvement. U.S. PCI volumes continued to improve on a sequential quarterly basis and U.S. DES penetration is now in the high 60% range. We priced XIENCE to recognize the fair and appropriate value of the product, including its superior clinical data, improving premium attributes. As a reminder, the U.S. launch of XIENCE is supported by outstanding clinical data. XIENCE is the first and only drug-eluting stent that demonstrates superiority over the market-leading DES in two randomized controlled clinical trials. XIENCE robust clinical program includes long-term data from the more than 1,300 patients enrolled in SPIRIT I, SPIRIT II and SPIRIT III trials, as well as the continued access and post-approval programs. Last week we began enrolling our XIENCE V USA post-approval study, which will evaluate patients over the course of five years. This study will allow physicians to further review the safety and efficacy of XIENCE V in a more complex patient population and continue to gain experience using the product. Two-year data from our larger 1,000 patient U.S. pivotal trial SPIRIT III which we presented at EuroPCR in May demonstrated the sustained efficacy and safety of XIENCE. Patients treated with XIENCE experienced better long-term clinical outcomes, and lower rates of stent thrombosis from patients treated with TAXUS. And we're seeing the differences between XIENCE and TAXUS increasing over time. At two years in SPIRIT III, XIENCE demonstrated the following results, a clinically superior 45% reduction in the risk of major adverse cardiac events or MACE, a clinically superior 32% reduction in target vessel failure or TVF and a low rate of very late stent thrombosis between one and two years for the ARC definition. Also in the second quarter, we received approval for XIENCE in South Korea and submitted a marketing authorization license for XIENCE in Japan. The application for Japan included safety data from the SPIRIT III clinical trial, including data from a Japanese patient population. We’re forecasting a XIENCE launch in Japan, at this time in the second half of 2009. Also in the quarter, we launched StarClose SE, our next generation vessel closure device, and we did that worldwide. StarClose SE builds upon the premium clip-based design of its predecessor, StarClose with improved ease of use features. So, as we look ahead to the third quarter, we expect global Vascular sales to grow very strong double-digits as we continue to gain share with XIENCE and build on the successful early U.S. launch. We expect DES franchise sales to nearly double again from the second quarter to approximately $225 to $250 million in the third quarter. Let me turn now to our worldwide Diagnostics business, where sales grew more than 17% in the quarter with continued strong growth in our international business. We saw 16% growth in our Core Diagnostic segment this quarter. This included double-digit growth in the U.S. and internationally. ARCHITECT sales were up double-digits worldwide, as we continue to improve the menu in the United States and introduce new systems. We recently launched the ARCHITECT i1000 immuno assay instrument for lower volume labs. Early customer feedback for the i1000 has been positive as we have already placed more than 200 instruments into the market. We’ll showcase the i1000 and other ARCHITECT instruments at the upcoming American Association of Clinical Chemistry or AACC on July 27 to the 31 in Washington, DC. Strong PRISM sales helped drive U.S. performance in the quarter as well as customers added the higher… highly anticipated HTLV test for their instruments. Emerging markets continue to represent a promising opportunity for future growth in our Core Diagnostic business, as we saw a double-digit growth this quarter in both Latin America and China. Efforts to improve profitability continue to be a significant focus in our Core Diagnostics business, as we evaluate ongoing opportunities to reduce overall costs and continue to improve efficiencies. We're encouraged by the early outcomes of our efforts and anticipate continued margin improvement in that division in the years ahead. In our Point of Care business, sales grew nearly 20% in the quarter. Growth was driven by strong cardiac cartridge sales and further penetration of our CHEM 8 test, which received acclaim for broader use last year. And in Molecular Diagnostics, sales this quarter increased more than 25%. Placements for our m2000 Real-Time PCR system were up worldwide. In the quarter, we received CE Mark for a hepatitis C genotyping assay, further expanding our infectious disease menu on the m2000. We also plan to launch an HPV test for the m2000 internationally by year-end. In the U.S., we recently received approval for a Chlamydia Gonorrhea PCR test and have ongoing clinical trials for hepatitis C and B assays. In the quarter, we made an equity investment in Ibis, a subsidiary of Isis, for the development of a new cutting edge molecular diagnostics technology for the future. So, looking ahead to the third quarter, in our worldwide diagnostics businesses we anticipate continued double-digit growth. In diabetes care, sales increased more than 9% globally in the quarter, driven by strong international sales and increasing adoption of our new no-calibration meters, FreeStyle Lite and FreeStyle Freedom Lite, which eliminate the manual calibration step required by most glucose meters, improving convenience for people with diabetes. In the U.S., sales growth was impacted by the comparison to the prior-year, when FreeStyle Lite was first launched. In the quarter, we had strong meter placements, representing good prescription growth. We've seen positive share results from a promotional program we initiated last quarter. In the third quarter, we expect approximately 10% growth worldwide in Abbott diabetes care. Moving to our global Nutritionals business, sales were up more than 12% in the quarter, driven by 21% growth in international Nutritionals, as demand continues to increase for high quality nutritional products, particularly in emerging markets. We continue to see double-digit growth across both pediatric and adult nutrition products internationally. U.S. Nutritionals sales were up mid-single digits, driven by strong sales of PediaSure, ZonePerfect and Glucerna. Our Similac infant formula brand continues to gain share thanks to the successful introduction of Similac Sensitive, a formula for babies with lactose sensitivities. In the third quarter, our Nutritionals business we expect continued strong double-digit growth internationally and continued mid-single digit growth in the US. Turning to our global Pharmaceuticals business, where sales increased nearly 17% in the quarter led by strong reported growth of nearly 27% in international Pharmaceuticals. We expect double-digit sales growth for our global Pharmaceuticals business to continue in the third and fourth quarters, with double-digit growth projected for both the U.S. and international businesses. U.S. pharmaceutical sales this quarter increased high single digits, despite a difficult comparison to the prior-year, reflecting strong double-digit growth for HUMIRA, Niaspan and Synthroid. Partially offsetting this performance was the negative impact of generic competition for Omnicef, as well as some modestly lower wholesaler buying this quarter. In Immunology, worldwide HUMIRA sales this quarter were up nearly 50% to $1.1 billion, including more than 70% international growth. Today, based on the strength of our HUMIRA sales so far this year and our outlook for the remainder of this year we're raising our forecast for full-year global HUMIRA sales to more than $4.3 billion. Earlier this year, we launched HUMIRA for psoriasis and the results have continued to exceed our expectations. Our U.S. new prescription share in dermatology has doubled since approval, reaching nearly 30%. More than 3,700 dermatologists have written prescriptions for HUMIRA with nearly 1,000 dermatologists writing HUMIRA prescriptions for the first time since our psoriasis approval in January. This significant increase in HUMIRA used by dermatologists is promising for the future, because once the profound efficacy is experienced first-hand by a physician, we know they're more likely to prescribe HUMIRA again. Our early success in this market is based on differentiating clinical data. We've demonstrated that more than 70% of HUMIRA psoriasis patients achieved a 75% reduction in their symptoms and a remarkable 20% of patients achieved 100% reduction or complete clearance. Based on outstanding clinical data in the more than a decade of clinical experience with HUMIRA now, we believe we're well positioned for continued success in the dermatology market. We also continued to see steady growth for HUMIRA in Crohn's disease, with total share recently surpassing 40%. HUMIRA continues to offer the only self-administered biologic treatment for Crohn's patients providing a distinct convenience advantage over the competition. Other biologic treatments require IV administration or must be reconstituted and administered by a healthcare professional via multiple injections in the office. During the quarter, we presented new longer-term Crohn's data at this Digestive Disease Week meeting or DDW, demonstrating HUMIRA’s sustainability of remission with three out of four patients maintaining remission out to two years. These data are important because Crohn's disease is a lifelong and serious [ph] condition with no cure and patients need treatments that demonstrate sustained remission over time. We also presented new data at the European League Against Rheumatism or EULAR meeting demonstrating HUMIRA’s proven durability of response across our full suite of rheumatic disease indications. That's rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis and that was out to seven years. Additionally, results from analysis of open label studies of HUMIRA in these three distinct indications demonstrate HUMIRA's effectiveness in patients with a previously inadequate response to other anti-TNF therapies. These data coupled with a five-year radiographic progression data that’s currently in HUMIRA's label, underscore HUMIRA's proven ability to halt disease progression and effectively treat rheumatic disease over the long-term. HUMIRA continues to represent a major growth driver for the company out through the next several years at least with significant opportunity remaining in both U.S. and international markets where penetration rates are currently in the single-digits for biologics. Today, the global biologics market for all HUMIRA indications is approximately $14 billion and that's estimated to exceed $20 billion by 2012. In our lipid management franchise in the second quarter, our growth continues to outpace the overall cholesterol market. Niaspan sales were $194 million in the quarter up nearly 14%. Currently more than one million patients are on Niaspan therapy. We presented additional pivotal Phase III clinical results on our next generation fenofibric acid molecule, TriLipix at the National Lipid Association’s 2008 scientific sessions. Data from a study of more than 1,400 patients with mixed dyslipidemia demonstrated that TriLipix given in combination with Astrazeneca's Crestor met its primary endpoints and led to greater improvements across all three key lipids compared to monotherapy. We also presented data on TriLipix Crestor at the American Diabetes Association annual meeting that demonstrated that TriLipix in combination with Crestor improved key lipids in patients with Type 2 diabetes. Patients with Type 2 diabetes often are at risk for cardiovascular events because of multiple risk factors including lipid problems and the patients with diabetes typically have mixed dyslipidemia at higher rates than non-diabetic patients, a factor that elevates treatment urgency. Of the more than 21 million American adults with diabetes, more than 14 million have problems affecting one or more of the three key lipid parameters. As a reminder, these results add to our existing TriLipix data package, including data presented earlier this year demonstrating efficacy and safety of TriLipix in combination with other two leading statins, Lipitor and Zocor. Our three combination studies along with the 52-week long-term open label expansion study are part of the largest clinical program to date designed to evaluate the safety and efficacy of a fibrate in combination with statins. We submitted TriLipix for FDA approval at the end of last year and remain on track for FDA approval in the fourth quarter of this year. The next step in our development program is our partnership with Astrazeneca to combine TriLipix and Crestor as a Fixed-Dose therapy. The strong data presented at NLA and ADA bode well for our development program for this promising Fixed-Dose therapy. This combination product is in Phase III development and we expect to submit for regulatory approval in the second half of next year. With many unique therapies that address lipid problems beyond LDL alone, Abbott's lipid franchise is clearly uniquely positioned to address the growing need for comprehensive lipid management now and over the longer term. So for the full year, we expect double-digit growth in our lipid franchise. Moving on to HIV, where Kaletra was up double-digits worldwide in the quarter to $355 million, driven by continued success of the tablet launch in international markets and sales of Synthroid this quarter were up in double digits increasing nearly 12% in the US. Regarding Depakote during the quarter, we resolved our Depakote ER litigation with a number of companies providing more certainty around the ER franchise. As a result, we anticipate generic competition for Depakote ER on January 1 of 2009. We continue to expect generic competition for Depakote ER upon expiration of pediatric exclusivity later this month and that's all factored into our forecast and plans. Moving on to Lupron, where this quarter we integrated the Lupron franchise following the equal split of our TAP joint venture in the conclusion of that agreement and we began selling the hormone therapy Lupron as part of our U.S. pharmaceuticals business. U.S. sales of Lupron this quarter were $81 million reflecting a partial quarter of sales, following conclusion of the joint venture. Lupron sales in the quarter were lower than forecasted due to the commercial transition of the product from our previous TAP joint venture to our Abbott commercial organization. However, we continue to forecast Lupron sales approaching $400 million in 2008 as we previously indicated. So in summary, in Pharmaceuticals, for the third quarter and for the full year, as I mentioned, we expect double-digit sales growth for both our U.S. and international pharmaceutical businesses. And finally, as Tom mentioned, our broadbased pipeline continues to be highly productive with eight new major regulatory approvals so far this year in 2008 including four approvals in our pharmaceutical business and four approvals in Medical Products with XIENCE V obviously being approved just two weeks ago today. We anticipate approval of our next generation fenofibric acid product, TriLipix as well as our controlled-release branded pain medication, Vicodin CR by the end of this year. In our earlier stage pipeline, we presented data from our novel oncology compounds at ASCO in May. We also have innovative research programs in neuroscience, where programs are underway to address such conditions as ADHD, Alzheimer's disease and schizophrenia. We continue our work in immunology with ABT-874, our IL-12/23 product in late-stage development as well as other innovative treatments including oral therapies and other biologic targets. And in Abbott Vascular, we are leading the way in the development of truly revolutionary new stent technology with our unique and one-of-a-kind bioabsorbable stent program. So in summary, the Abbott management team, we are all very pleased with our overall strong performance from our diverse mix of global businesses and truly best-in-class products including such products as HUMIRA and XIENCE V that are meeting the critical needs of today's patients. So with that, we'll be glad to take questions, operator. Question and Answer

Thank you. [Operator Instructions]. Our first question comes from Phil Nalbone. Your line is open and please state your company.

Thank you very much. Phillip Nalbone with RBC Capital Markets. Tom, the first question for you relating to the gross margin on as adjusted basis, we saw a pretty significant sequential jump, 160 basis points. Can you remind us what the factors were in the first quarter that led to the weakness, and how that whole foreign exchange aspect played out in the second quarter. Just kind of walk us through what the swing factors were that contributed to that strength in Q2?

Sure Phil. In the second quarter, a couple of things. Our business mix was better, you saw the very strong global performance of pharma. Pharma is a little bit higher percent of our sales in the quarter and that contributed nicely. And in particular, the Vascular business, we saw very nice improvement in profitability and gross margin in that business, that’s all geared around XIENCE, both side, the commercial performance prior to the U.S launch that is outside the U.S. and then also, as we prepare for the U.S. launch. So, those are really the factors that cause the improvement sequentially here. I think if you compare it to the first quarter, it's really even more a story of business and product mix. After the exchange comments we made in the first quarter, we really geared our second quarter forecast to be in line with what we knew at that time. And what you're really seeing now is just, everything we’ve been talking about for a long period of time, as we built this company and as we built these businesses with higher-margin products, we’re starting to see some of that come into play, and I think that's really what's happening sequentially, going from first quarter to second quarter.

Great, thank you. As a follow-on, Tom, St. Jude confirmed this morning a co-marketing arrangement with Abbott, apparently to bundle their CRM products with Abbott's Vascular products. Can you talk about that arrangement and what it might imply for pricing for products such as XIENCE?

Yes. I’ll let John take that question Phil.

Hey Phil. So, yeah, we do have a limited agreement with St. Jude that basically is in place for those select accounts where there might be interest on the customer's part in a CRM and DES contracting solutions. So you might be aware that there was a previous agreement like this in place between St. Jude and another competitor, it’s directionally similar to that and really it’s expected to be used on very limited basis and it’s been in place since the launch. I don't believe it’s been used yet, and based on the past agreement, probably it will be used only in a handful accounts, if and when it is needed.

Great. Thank you very much.

You are welcome.

Our next question comes from Mike Weinstein. Your line is open and please state your company.

Thank you, it’s J.P. Morgan.

Hi Mike.

Good morning. Couple of questions. First, John, could you just quantify the impact of any wholesaler de-stocking on the foreign business. There were a few products including smear [ph] that were below the script trends.

Sure. We did see some reduced wholesaler buying activity this quarter in particular that affected a couple of our products as you probably noted from the overall growth rates, which were slightly below some estimates on the Street. That probably impacted U.S. pharmaceutical sales growth approximately a couple of percentage points. And then of course, the other things I talked about had a bigger impact year-over-year comparisons regarding generic Omnicef competition, and then the Lupron sales which were additive, of course this year the top line growth and estimates that we had, but as we work through the closing of the TAP transaction and moving that commercial organization sales force over to underneath Abbott’s umbrella, we saw a little bit of temporary disruption as a result of that. So, our full-year forecast for Lupron that we had given at the time of the closing of the transaction of about $400 million is the same for the full-year, so we will make that up later. And I think the main point on U.S. pharma is to recognize that we expect strong double-digit growth in the third and the fourth quarter based on HUMIRA, based on all the performance of the other products, the lipid franchise, Niaspan, Depakote which was affected to some degree as well by some of that buying pattern that we saw.

Okay. Let me touch on a couple of other items. Your commentary on the drug-eluting stents become positive which you guys reported. Your third quarter commentary of $225 million to $250 million that was above what we’re modeling, we had this over $200 million. So, I would like to get a sense of how you're thinking about the cadence of the U.S. launch in terms of market share and the short-term impact that might have?

Sure. You know while I guess it's difficult at this time to put hard data around the launch because it's still so early. I can tell you though that as you can expect, you might expect that I’ve been in the close contact with the management team at AVD [ph], almost on an hourly basis. It's going, I would say, it's fair to say better than we expected. The platform acceptance meeting XIENCE/PROMUS is better than we expected. Clearly, the market... the reaction in the market with physicians and eventual cardiologists and hospital administrators were also involved in the purchasing decisions. It is bifurcated into two segments those who want XIENCE and PROMUS and the other products in the market. So based on the attributes of the product, the way the launch is gone, although it is early, in the first two weeks, we feel very confident that we can reach the target range of $225 million to $250 million. We continue at this point to estimate market share for XIENCE alone within the first 12 months in the range of 25% to 30%. But I would say that that's based and that's been our market share estimate for some time. That's based on pre-launch estimates. We will have to evaluate how the launch is going and if it's appropriate at a later time to raise that estimate, you can be sure that we will do that. But I think it's fair and your characterization is fair as we look at the models that are out there, that estimate of $225 million to $250 million is clearly well above what the Street had expected and we're obviously very pleased with that.

If I may ask one final question. I want to make sure I understand your commentary on the [inaudible], it's been a digging point, obviously this quarter was above the expectation, but you're guiding to about 100 basis points or so sequential decline in the third quarter. I understand some of that should happen because of geography in Depakote IR and then a big step up again in the fourth quarter. So to help me understand the next cadence and anything else that might be going on there that causes gross margin to be down by as much as you are expecting 2Q to 3Q and then the big step up in 4Q.

I mean that's just our global pattern with the summer months attracting the mix of products and pharma in particular having usually a very strong fourth quarter and being our highest margin business and fourth quarter has always been our highest gross margin quarter.

Sorry to comment. It’s not best of your, I mean the historical swings from 2Q to 3Q are usually are 100 basis points down and then hundred plus basis points up.

Well, I think we saw a decline last year, Mike, and estimating this thing within a couple of [inaudible] is probably challenging. That's what the model show when we look at the mix of businesses and, we’ll see what happened, hopefully will be better than that, but that is our best estimate at this point and I think the key thing to remember is we’re right on the 58% number that we forecasted on the first quarter call for the full-year and for the second half. We are little better this quarter, which is nice and we expect the year to turn out pretty much the way we forecasted on that first quarter call.

Perfect, okay. Great. Thank you guys.

Okay. Thank you.

Our next question comes from Rick Wise [ph]. Your line is open. Please state your company.

Good morning Tom, Good morning John.

Hi Rick.

Couple of things. First EPS. You took the $3.20 - $3.25 to $3.24 - $3.28. Can you help us understand your thinking, Tom, along with the beat in the quarter, as you both called out was the extra TAP income... TAP related income and other, but the range seems to be, you’ve raised it mostly by that increment. So you're beaten by our number in consensus by nickel, but you have raised the bottom and the upper end of the range by $0.04 and $0.03. Can you just help us understand you're thinking again? Thanks.

Well, I think it's pretty much what I said in my remarks. I mean, we have had a great first half of the year and certainly we are passing a good chunk of that in the guidance for the year, and again I’d remind you that when you go to a midpoint of our new guidance, we got 15% earnings growth for 2008 and I thought in this market, and in this industry, I think that's really a stellar EPS growth. I think this is a good place to be at the end of the second quarter. I think, as we go into the second half of the year, we'll see how things progress. The other thing I'd say is, it is important to understand a little bit, it is just the phasing here. We were a little favorable on the TAP related income in the quarter, some of that income materialized earlier in our previous forecast. So, since the full year it is the same number, we were a little lower in the second half and we are not just thinking about 2008 this year. As I indicated in my remarks, there are a lot of markets here where some degree of investment in the market where we have really a proportionate market share of incremental scripts or whatever the product areas, we really benefit disproportionately. And so we are going to invest a little bit in that in the second half and I think what that's really going to help is '09 and continue this very strong growth pattern we have seen over the last three, four years of accelerating earnings. We are just trying to make the right balance here, Rick, between giving a very healthy increase in the guidance getting very strong growth this year in our earnings per share and still building for the future. And I think when you put that all together, we are very bullish about the second-half, you are going to see sales growth in the second half, we think stronger than what you saw in the first half. And I think, when you add it all up, it's a great position to be in as we finish '08 and move into 2009.

Yes, and just to be clear Rick, this is John, on the TAP payments, that was about half of the $0.05 fee and the other half was the fundamental underlying strength of the businesses which is one of the reasons that we’ve increased the earnings range and feel very comfortable about that range in the second half, very comfortable.

That's great, very helpful perspective from both of you. A couple of other follow-ups here. Just to touch on XIENCE briefly. Our early physician checks suggest a very strong interest in the XIENCE/PROMUS family, but a wide range of opinions about XIENCE versus PROMUS mix mostly driven by price. And any early read from your perspective John or Abbott's perspective on your ability to hold your price premium or Boston's aggressiveness. And last I'll just throw it out, Tom, just... you were giving some very good longer-term perspective in this notion of trying to drive sort of steady acceleration in top and bottom line, which I appreciate. Can you give us maybe some just bigger picture thoughts on now that you're in this solid execution phase, talk about cash flow, and maybe this quarter, the outlook for cash flow, what you're going to do with it to enhance shareholder value over the next couple of years? Just give us your larger picture perspective. Thanks so much.

All right, let me take your first question, Rick on XIENCE and then I'll let Tom answer your second part of your question. I would put it this way. We are very confident. We're winning the majority of accounts against PROMUS. At the same time, we're not at all surprised that they are selling PROMUS very aggressively. I think they recognize and I'll let them speak for themselves when they have their quarterly call that the platform is the preferred platform of interventional cardiologist as you recognize and other people have as well who are doing their checks in the marketplace. And that's not a surprise to us based on the clinical data, the attributes and the other things. So I think they recognize that there is a shift in the marketplace and they'd rather get something rather than nothing if they have to lose an account. But that being said, I will tell you, we feel highly confident in our Vascular sales force that we have robust sales force in the industry that has been trained over and over. I can assure you they've been thoroughly prepared for this launch. They are very incentivized to sell aggressively for us. We have Abbott, a full complement of inventory and consignments stocking that we can offer customers. We have a well forced... a well-trained sales force that’s able to provide in servicing, training, support to physicians. Let's not forget, we are the original manufacturer. So we obviously know this product inside and out. And I think for certain physicians and in fact probably most of them, it's important to establish a relationship with a sales force and understand what's in the product pipeline and we have we think one of the best pipelines in the industry in this particular area with our next-generation drug-coated stent as well as our bioabsorbable stents. So those things in addition to very strong offering of some value-added services makes us a very formidable competitor. We obviously respect Boston Scientific for who they are and what they are capable of doing. We have a full appreciation for their capabilities, but we are going to compete very aggressively as well. At the same time, I would tell you as I mentioned in my comments, we expect to get an appropriate and fair value for XIENCE and so far we're seeing that in the marketplace. There has not been deep discounting in this market. We expect to get a fair and appropriate value and we're seeing that so far. At the same time, I would tell you, we are also, as you know, strong marketers and competitors and we will compete in this market place.

Thank you, John.

You're welcome.

Rick, on the cash flow, we had another really good quarter in cash flow if you look at our year-to-date operating cash flow, we are up 18%. It's pretty much the same thing we've been talking about. We like a balance between strong dividend increases and we've increased that dividend double-digit for a number of years here and had a very nice increase this year. And our continued share buyback is really the other primary area, we did buy back some additional shares in the quarter and that's really going to be the use of cash flow, we feel very positive about our ability to drive cash flow at least in line with the earnings growth. And we put it to good use over the next couple of years.

Excellent. Thank you.

You're welcome.

Our next question comes from Larry Keusch. Your line is open. Please state your company.

Hi, it's Goldman Sachs. Good morning everyone.

Hi Larry.

John, just starting, I do have XIENCE question. But let me just start one other place which is the comments that you made about the U.S. pharma business in growing double-digit in the third quarter. What are the drivers that gets you to that growth given the fact that you're obviously are going to experience generic competition to Depakote IR, that's a little bit surprising that you guys were still forecasting that sort of growth, even with that... with the competition coming.

Yes. So, obviously HUMIRA continues to grow robustly and that's the main growth driver of the business right now. We've been growing that business, as we said, 50% worldwide, 70% over the last two quarters. In the U.S. it's been growing 30% or so. We expect at least that level of growth as we continue to penetrate, as I mentioned in the strong psoriasis indication in market penetration. The overall Niaspan lipid franchise, TriCor, we did have some impact, as I mentioned, I think Mike Weinstein asked about, was there a wholesaler buying activity in the quarter? There was that lowered the growth by a couple of percentage points. We expect that to rectify as we go to the back half of the year that will impact not only TriCor, but probably Kaletra and Depakote as well. So, there is that there is the Lupron contribution that I mentioned, $400 million for the full-year. So, there is a lot of positive things that are happening in the third and fourth quarter and we feel very confident in strong double-digit growth both in the U.S. and internationally as we lookout to both of those quarters.

Okay. And John, on Depakote, would you be willing to just help us understand now that you've got the settlements in place on the ER version and clarity on the generic competition coming here. How you are thinking about that franchise for the remainder of the year?

Well, we do expect generic competition for DR in early August and that's factored into all the forecast that we have given and then of course with the settlement, ER will happen probably in January 1st, that's factored into our forecast. And again, both of those are in the mix of our strong double-digit earnings growth outlook for 2009 and our 15% sales growth outlook for the full-year 2008. So, we will see some amount of competition there. We have intentions to protect as much of that as we can and to continue to market that product aggressively as we compete in the marketplace with what is one of the best sales forces. So that's sort of the general situation, I can't give you specifics around that, but I would just tell you that we've been very realistic as we've said many times before about our assumptions for what happens in that marketplace and that’s factored into the growth outlook.

Okay. And then just lastly, for Tom, you certainly have said... certainly over the last six months that [inaudible] there really isn't any M&A that's on the radar screen. Again, just given some of your growing cash balances here in the strong cash flow from operations. Again, if you could just give us some sense of again how you are thinking about M&A specifically? And then John, on XIENCE, are you hearing of pricing aggressively across the nation or is it more geographic on that aggressive pricing from PROMUS?

Larry it's Tom. Nothing new to what we've been saying recently about M&A, nothing on the front burner. And we have been active over the years, but right now we're in a phase of really executing on the assets with accumulated and the great products we have in the portfolio. We're in such a good position to drive, top and bottom line now that we don't need acquisitions to achieve the types of growth rates we're delivering this year and what we expect to deliver next year and over the next several years. So anything we would consider would be complementary to what we have I would think, and but certainly nothing imminent are on the front burner.

Okay.

So Larry, let me answer your question. I want to be very clear about this. I did not indicate they were aggressively discounting or what I said was they are aggressively selling. I think some other people have suggested there may have been some price discounts and that's to be expected in certain select accounts, you're going to have a little bit of that. But I would tell you from what we've seen so far it's modest, the value of the franchise in the platform is being up held as it should be, and we're getting fair and appropriate value both on the XIENCE... certainly on the XIENCE side as well as the PROMUS side. I don't think it's really appropriate for me to comment on their commercial strategy per se, I'll let them do that. But we've been very pleased so far and I wouldn't describe the selling price as aggressive. I would describe them aggressively selling the product and the platform, which is what I meant and what we can understand certainly.

Okay, great. Thanks for your clarification.

You're welcome.

Your next question comes from Bruce Nudell. Your line is open. Please state your company.

UBS. Thanks so much. I was wondering if you could comment about... couple of questions about the cholesterol franchise, TriCor, was overall below our expectations in the quarter. What do you foresee the potential growth rate for that drug this year? Also when you think about SIMCOR, you could comment of how it's doing so far, but when you think of it trying to couch it in terms of percent of simvastatin scripts that might ultimately find their way into SIMCOR formulations. For frame or reference, I guess Advicor's 6% to 7% of Lovastatin scripts. Thanks so much.

Yes. Hi, Bruce. I would say that overall the lipid market growth for the first half of the year has been modestly lower than expectations for the overall cholesterol market and players, it's been growing in the low-single digits. But the good news is Abbott's products have been growing faster than the overall market. We would expect that trend to continue as physicians in the marketplace recognized the importance of adjunctive therapies. So, while that's happening in the quarter, specifically as I mentioned before, we did see some reduced wholesaler buying activity around certain products that included TriCor and Niaspan, which would reduce reported growth for the quarter. But we expect that to improve as the year goes out, Niaspan as we... as you saw, and we've been talking about it on quite well and I think in the context of the Niaspan/SIMCOR franchise, when we were selling SIMCOR or we're selling Niaspan we're really selling both. So, our efforts on both of those have helped drive the overall Niaspan/SIMCOR franchise, which is doing quite well. I think post-ENHANCE with all the noise around that, there is a certain level of modest resistance to prescribing combination therapies, given what happened with ENHANCE, which was unfortunate. But we expect that as we get further away from that, the market in general should rebound, and we will continue to do well, and will continue to sell against the attributes of those products, which as you know, are strong. There is no other product on the marketplace like Niaspan that treats HDL as well as, as it does and with the issues that the other competitors have had with their attempted development programs, whether it’s CTAP or Cordaptive. Those have not happened. So that obviously gives us a little bit more runway over the next couple of years, where we have the exclusive HDL-raising product in the marketplace. But I would tell you as a result of that, we had to do a little bit more heavy lifting on our own and help grow this market, and so some of the investment spending that Tom talked about is geared towards that as we help to grow the overall market.

And a follow-up question pertains to the HUMIRA franchise, could you provide an estimate for your patient share in RA, and given the upcoming launch of… more presumptive launch of belimumab, where do you think your patients share might go over the next several years? Thanks a lot.

Sure. RA specifically is… RA share for HUMIRA is in the 35% to 40% range. Now currently we expect that to continue to increase. When we look at competitive products, I think it is safe to say that HUMIRA has the best clinical data in terms of efficacy, but also long-term suppression and radiographic remissions. So, our data, our label goes out to five years. Physicians have 10 plus years of experience with the product, or I should say, there is 10 plus years of the experience with the product overall. Physicians are very comfortable with it, clearly they consider the gold standard in the marketplace, the one to beat. With respect to belimumab in particular, I think we are very competitive with them and very comfortable with the strengths of HUMIRA. As you probably know, whether it's this product or any others, those that come fourth or fifth to market, historically, if you look at the overall prescription trends and the overall pharmaceutical market, those that combat late to the game that don't offer clear clinical benefits over this current standard of care, which we don't think that they do based on the data we've seen, particularly the ACR scores, they don't typically get more than modest market share and that would be our expectation for that product.

Thanks so much.

Our next question comes from Larry Biegelsen. Your line is open, please state your company.

Larry Biegelsen, Wachovia. Can you hear me ok?

Yes.

Thanks for taking the question. Let me ask a question that was asked early in a different way. I mean you beat this quarter in the upper end of the range by about $0.04 and you raised guidance by $0.03 to $0.04. The Depakote ER was… you expected that to go generic and we estimate that that gives you a few cents benefit. I mean was there something else that changed, Tom and then I have a follow-up question.

Again I think it is very important to go back to my remarks on the first… on the second quarter overperformance. About half of it was due to earlier than expected income related to the payments from Takeda associated with the conclusion of the TAP joint venture and the full-year numbers are roughly the same. So, you know, that was part of what occurred in the first quarter. The rest was underlying performance as evidenced by the sales growth and the gross margin being higher than we expected. And that is what’s contributing to the raise as well as a little better performance expected in the second half balanced off by a degree of selective investment spending in some of these areas that are really going to drive market growth for us in the later part of the year but certainly in 2009. If you look at that, again, as I said in my remarks, we try to balance this off in a way that delivers 15% earnings growth for the company in the year and continues to drive us to very strong earnings growth for years beyond this. And so again, if I put those two buckets in mind, and I think you see this second half particularly given our revenue forecasts of mid-teens growth as being a very strong second half and setting us up very nicely for 2009.

Yes, and I would just add to there, Larry, as an observation that if you compare that 15% EPS bottom line, it’s very favorable to the peers, no matter what industry you're looking at and certainly against our purest diversified competitors were growing at roughly twice their bottom line rate.

And I guess the last thing I would say is, it is mid year and we'll see how it goes in the second half. You know, we like the momentum we are seeing in the business and again, we'll just see how it is progressing. That's where we are right now, and I think it's a very strong statement to raise the guidance the way we did to deliver the growth rates that we're forecasting and to continue to build for the future.

Right. And could you raise it later, maybe we'll see, not at this time though.

And on the pharma side, SIMCOR sales in the quarter, and are you still on track to exceed a 100 million this year, I think, you have said earlier. And lastly, on HUMIRA, the growth I think in the U.S. was about 29% the lowest, I think with U.S. growth rate we have seen, is that temporary and I don't know if you’ve mentioned any wholesaler destocking on that one earlier, John? Thanks.

Yes, the underlying script trends on HUMIRA are a little bit stronger than that. So, yes, we expect that that will perform better, stronger, I mean, we are talking about relative performance here, 30% or whether it’s going to be 30% or 40% but yes, we expect it to improve in the U.S and then it's… we look at the business as a whole, and obviously we did remarkably better than every analyst model that we track on the international side with 70% growth this quarter and last quarter. So, it's the blend of all those things and that obviously let us to raise our HUMIRA global guidance to more than $4.3 billion for the full year. We think that's pretty good. So, yes, we expect better outcomes here in the third and fourth quarter, there were some temporary effects in the quarter that were non-recurring. So, the underlying strength is very, very strong and we expect good things. As far as SIMCOR, the sales this quarter were modest because we had the end of the quarter approval and some initial wholesaler buying into that. So, we saw as expected a leveling off of that in the second quarter, and then we expect more contribution in the third and fourth quarter and it will... it will approach 100, I'm not sure, we'll get to a 100. As I said, some of that is due to the market which is growing low-single digits overall in the cholesterol market and the effects have enhanced, which we think over time will mediate. And then of course when we look at it, we talk about Niaspan and SIMCOR together and Niaspan is growing mid-teens growth. We expect that to continue and that's what we are really interested in. And so, the combined franchise of Niaspan and SIMCOR should be very close to what we expected earlier in the year.

Thank you.

Yes. You're welcome and I think we’ll have time for one more question. Operator?

Thank you. We have a question from Sara Michelmore. Your line is open. Please state your company.

Great. Cowen and Company, thank you. Tom, if I could just ask you to talk about the TAP income, and particularly, can you just talk about the variability that we should expect on the income going forward, I mean it was obviously higher than you expected this quarter. How variable is that line item going to be in future quarters, then can you give us a little sense of what your visibility is on a quarter-to-quarter basis, how that's going to shake out things?

Yes. This is... this area, as we indicated before, will be a little more volatile than the whole TAP joint venture income, because there are some events. As I said on the first quarter call, we're going to forecast those very conservatively so that there are no surprises. But with the number of, roughly 160 this quarter, the second half is roughly that number as well. So you can see that there is a degree of variability, which again, part of that was occurred earlier than we thought and when you average it out for the year, it's around $300 million. So, we'll just have to provide you with that guidance quarter-to-quarter. I think the safest thing to do is assume relatively flat and if there is something different coming at any point in time, we'll let you know.

Okay. And can you give us an update on profitability of the Vascular business, both on a cash and non-cash basis. I know it's been profitable on a cash basis, but it's been low profit or close to breakeven on a non-cash basis. What should we expect now that you've got the U.S. XIENCE launch underway? Thanks.

Well, we had a very nice step-up in profitability this quarter. Last year we were in investment mode this quarter and there actually was a loss after amortization, as you indicated on a cash basis we were making income. But this quarter we turned into a income after amortization, very nice contribution from gross margin from the business. We expect the remaining quarters to be profitable this year, and obviously accelerating, particularly in the fourth quarter when XIENCE really hit stride in the U.S. and volumes are very strong through the manufacturing process. So, I think we're into profit mode even after amortization for this business and we expect that to be very strong in 2009, obviously that's where the real payoff of getting this U.S. approval and the momentum we've seen in Europe, the progress we’ve seen in Europe. It's really going to pay off in the bottom line in '09 and it's an important part of our story in '09.

Okay. And John, I'm sorry if I missed this but can you give us an update on the status of the Japanese launch of HUMIRA? Thanks.

We launched very recently as you know. So, I don't have a lot of hard data on that yet. That process, you go through, you get approval and then you do pricing and it's only been a few weeks. So as far as I know, it's going well. That's a market where several hundred million dollar opportunity over the next several years and we are well positioned there but it's a little early to give specifics. So that's what's happening there and before we end, operator, I thought Tom wanted to wrap it up with just a couple of quick comments.

Yes. Again I think this is a great quarter for Abbott. I have been doing this job for 8 years and one of the strongest, probably the strongest quarter that I have delivered here. It was one where we beat the guidance we provided for the quarter. Significantly, we raised our guidance for the year significantly, you're looking at a business that is 15% top and bottom line for the year which I think compared to the industry is truly top-tier. Eight significant approvals in the first half alone and all this is driven by the payoff on our diversified mix of products and geography that we felt over the last few years that we think is a business that can provide sustainable, durable double-digit EPS growth in 2009 and beyond driven by products like HUMIRA, XIENCE and a number of the other products John talked about today. So, thank you very much for your time today.

And let me just wrap up with the concluding remarks and the replay of the call will be available after 11 a.m. Central today on our website at abbottinvestor.com and after 11 a.m. Central Time via telephone at 203-369-3524 and the confirmation code is 5567501. That’s 5567501. The audio replay will be available until four o'clock on Wednesday, July 23. We thank you all for joining us today. Please call us if you have any follow-ups. Thank you.

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