Abbott Laboratories (ABT) Q2 2011 Earnings Report, Transcript and Summary

Good morning and thank you for standing by. Welcome to Abbott's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Should you become disconnected throughout this conference call, please dial 1 (210) 234-0060 and reference the Abbott Earnings Call. 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 and Public Affairs.

Good morning, everyone, and thanks for joining us. Also on today's call with me will be Tom Freyman, Executive Vice President, Finance and Chief Financial Officer; and Larry Peepo, Divisional Vice President of Investor Relations, Tom will review the details of the financial results for the quarter and our outlook for the year, and Larry and I will then discuss the highlights of our major businesses. Following our comments, we'll take questions. Some statements made today may be forward-looking. 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. 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, 2010, 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 always, non-GAAP financial measures will be used to help our 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. I'd also like to call your attention to a supplemental slide deck that we'll be posting to our website after our call concludes today. It includes highlights of Abbott's recent pipeline progress and a more detailed list of information on related market opportunities. And while these slides are not intended to be a comprehensive overview of our broad-based pipeline, our goal here is to provide investors with additional color on certain opportunities across our emerging portfolio. And we plan to build on this supplemental information as we go forward in future quarters, so consider this a starting point, and we hope you find it useful. With that, I'll turn the call over to Tom. Tom?

Thanks, John. Today, we're pleased to report strong second quarter results, as we delivered ongoing earnings per share of $1.12, up 10.9% and at the high end of our previous guidance. And we raised our full year EPS guidance range, confirming our outlook for double-digit growth in 2011. We're also pleased with the progress we've seen from our broad-based pipeline so far this year. We've launched a number of new products or indications across the company, advanced 2 promising compounds in the Phase III development, submitted 3 significant new products or indications for regulatory review and added a mid-stage biologic for the treatment of rheumatoid arthritis and psoriasis to the pipeline. Sales growth in the quarter was 9%, including a favorable 4.6% impact from exchange rates. Growth in the quarter was led by a 13% increase in Proprietary Pharmaceuticals, including strong global performance from HUMIRA, which was up nearly 19% before exchange. And our emerging market sales in the quarter were nearly $2.6 billion, an increase of more than 23%, underscoring the contribution of these markets to Abbott's overall growth profile. Durable Growth business sales increased 7.5%, driven by double-digit growth in international Nutritionals, Point of Care Diagnostics and Established Pharmaceuticals. And Innovation-Driven Device business sales increased 3.1%, including double-digit growth in Molecular Diagnostics. Regarding other aspects of the P&L in the quarter, the adjusted gross margin ratio was 60.2%, ahead of our previous forecast, driven by improved product mix. The ongoing tax rate, at 15.2%, was in line with our previous forecast for the quarter. Turning to our outlook for 2011. Today, we're raising our ongoing earnings per share guidance for the full year to $4.58 to $4.68. The midpoint of this guidance range continues to reflect double-digit ongoing EPS growth for 2011. For the third quarter, today we're issuing ongoing earnings per share guidance of $1.16 to $1.18. The midpoint of this EPS range represents more than 10% growth over the prior year. We forecast specified items of $0.18 in the third quarter, primarily reflecting integration costs from past acquisitions and costs of previous restructuring actions. We're forecasting low double-digit sales growth in the third quarter, including an estimated favorable impact from exchange of approximately 3.5%. And we're forecasting an adjusted gross margin ratio of around 60%. Also for the third quarter, we're forecasting R&D investment approaching 10% of sales and SG&A of around 28% of sales. Regarding our tax rate, we're continuing to forecast a full year 2011 rate approaching 15%, and the third quarter, between 14.5% and 15%. So in summary, we're pleased with our performance through the first half of this year. We've delivered on our commitments, raised our guidance range and confirmed our strong outlook for 2011. We've made steady progress in our broad-based pipeline with new approvals, regulatory filings and late-stage trial initiations, and we continue to see strong results from our strategic actions to expand our emerging markets presence across the businesses. With that, I'll turn it over to John and Larry for the business operating highlights. John?

Thanks, Tom. Today, Larry and I will walk you through, as we did last quarter, our 3 business categories. Let me start with our Durable Growth and Innovation-Driven Device businesses, and then Larry will give you an overview of our Proprietary Pharmaceuticals business, as well as our pharmaceutical pipeline. Sales growth will be discussed on a reported basis which includes the impact of foreign exchange. Let me start with our Durable Growth businesses. In Established Pharmaceuticals, which includes international sales of our branded generics portfolio, we reported global sales of more than $1.3 billion. More than half of EPD sales are in emerging markets, which this quarter were $775 million, up 25%. Our large portfolio of Established Pharmaceuticals consists of hundreds of branded generic products spanning primary care therapeutic categories. The depth of our portfolio and the diversity of our geographic footprint help us drive durable, sustainable performance. We expect more than $5 billion in Established Pharmaceuticals sales in 2011. In our worldwide Nutritional business, global sales increased 5.4% this quarter, driven by double-digit growth internationally. In the United States, as we've mentioned previously, we planned for a difficult comparison in our U.S. Nutritional business during the first half of this year as we work to recapture share in our infant formula business. U.S. Nutritional sales as a result, were down 3.5% in the second quarter, which was in line with our forecast, slightly better. We continue to hold the #1 infant formula share position in hospitals, which drives consumption at the retail level. And we are making good progress in our efforts to return our retail share to pre-call levels. And we anticipate better sales growth for the U.S. Nutrition business in the second half of the year. PediaSure in the quarter grew strong double digits, driven by continued success of our new SideKicks brand. In our U.S. Adult Nutrition business, we saw continued momentum from the new line extensions of our Ensure brand. Outside of the U.S., Nutritional sales increased 14% this quarter. Growth was driven by continued strong growth in emerging markets, which comprised the majority of our international Nutrition sales. This quarter, our emerging markets sales for the Nutritions business were $630 million, up 16%. This was driven by strong performance in Asian and Latin American markets, where we continue to launch new products, increase penetration and capture market growth. For the full year 2011, we're forecasting more than $2 billion in emerging market Nutritional sales, which we expect to double over the next 5 years. In China alone, we expect nutrition sales to reach $1 billion by 2014. So as we look ahead to the third quarter in our global Nutritions business, we expect worldwide sales to accelerate to double-digit growth, with U.S. sales up mid single digits and international sales up strong double digits. In our global diabetes business this quarter, worldwide sales increased 2.7%. U.S. sales increased more than 4% and international sales were up approximately 2%. We received CE Mark in May for our new FreeStyle InsuLinx blood glucose monitor, which includes a mealtime insulin calculator. InsuLinx is designed to help provide suggested insulin dosing advice for patients with diabetes who require insulin to manage their condition. So as we look ahead to the third quarter in global diabetes, we expect high single-digit revenue growth. In our Core Laboratory Diagnostics business, which includes immunoassay and hematology, global sales increased 8%. U.S. sales increased 4.4%, driven by strong growth of our ARCHITECT platform. Outside of the U.S., we saw strong growth in emerging markets, up 9% in the quarter. This was driven by double-digit growth in Asia, including strong sales in China. So as we look ahead to the third quarter in our Core Laboratory Diagnostic business, we expect high single-digit growth. In our Point of Care Diagnostics business, sales this quarter increased 17%, driven by strong Troponin and the CHEM 8 test cartridge sales. For the third quarter in Point of Care Diagnostics, we expect another quarter of strong double-digit growth. I'll now turn to our Innovation-Driven Device businesses. Starting with Molecular Diagnostics, where global sales in the quarter increased more than 18%, driven by international sales growth of more than 30%. During the quarter, we placed our 1000th m2000 analyzer. One of our core strategies in Molecular Diagnostics is to advance the field of companion diagnostics or personalized medicine. On that front, we developed a molecular test to pair with Pfizer's drug in development for non-small cell lung cancer. We recently submitted this ALK [anaplastic lymphoma kinase] gene test for regulatory review in the U.S. and Japan. Also in the quarter, we received FDA approval for a real-time PCR molecular test for measuring the viral load of hepatitis C, completing our core menu on the m2000. So as we look ahead to the third quarter in Molecular Diagnostics, we expect strong double-digit growth. In our Vision Care business, worldwide sales this quarter increased 7.5%. Globally, we continue to gain share in our cataract business with our TECNIS multifocal and monofocal IOLs. We also continue to grow share in our corneal business with our new RevitaLens contact lens solution which is doing quite well and has gained approximately 6% share points since the beginning of the year. As we look ahead to the third quarter in our Vision Care business, we expect high single-digit sales growth. In our Vascular business, worldwide sales in the second quarter were $835 million, slightly ahead of the expectations and outlook we provided last quarter. In our international Vascular sales, which is more than half of our total Vascular sales business, we saw 25% growth in emerging markets. International markets comprised 2/3 of the global drug eluting stent market. And in emerging markets, procedure volume is growing, on average, at a mid-teens rate. Abbott is particularly well positioned internationally, and we've seen impressive performance with both XIENCE and our next-generation XIENCE PRIME drug eluting stent. Our global DES franchise sales, which include XIENCE sales as well as third-party DES revenues, were approximately $485 million in the second quarter. Global XIENCE sales increased both sequentially and year-over-year. This was offset in the quarter by a double digit decline in third-party DES revenues. XIENCE remains the #1 drug eluting stent globally, with worldwide market share of approximately 35%. In the quarter, we continued to advance our leadership position with the U.S. launch of XIENCE NANO, our stent for small vessels. The small vessels segment of the market represents approximately 10% of all the vessels that are treated, so this is a new market segment where we can now compete with XIENCE NANO. We expect this new product will help us continue to gain XIENCE share over the next several months. Our endovascular and other coronary businesses, which comprise approximately 40% of our vascular sales, also performed well in the quarter. We've had multiple new product launches in numerous new geographies over the past year which has helped drive good momentum through the first half. The first quarter launch of our new TREK balloon catheters in the U.S. and Japan, following a successful launch in Europe last year, drove double-digit sales growth of our balloon segment in the quarter. Solid endovascular sales also positively impacted the second quarter, led by sales in vessel closure and our Armada 14 balloon line. An expanded indication for our RX ACCULINK carotid stent also contributed to positive momentum. In our Vascular pipeline, XIENCE PRIME, our next-generation drug eluting stent, continues to perform well internationally as we expand our global DES leadership position. PRIME provides physicians with enhanced deliverability on a best-in-class DES platform. We now expect approval and launch of PRIME in the United States in the first half of 2012. MitraClip is our minimally invasive device approved in Europe, Australia, Singapore and other countries for the treatment of select patients with mitral regurgitation. In the U.S., it's currently under FDA review. As part of our ongoing dialogue with the agency, we're providing them additional information and analysis. Subsequent to this review, we'll be in a better position to estimate timing. Also in our Vascular pipeline is our ABSORB bioresorbable vascular scaffold. It's designed to slowly metabolize and eventually be absorbed by the body after providing support to the vessel during the healing process, leaving no permanent metallic implant behind. It received CE Mark in January, and a full-scale launch in Europe is planned by the end of 2012. So as we look ahead to the third quarter in our global Vascular business, we now expect mid-single-digit sales growth. So with that, I'll turn the call over at this time to Larry for a review of our Proprietary Pharmaceutical business and a few pipeline highlights as well. Larry?

Thanks, John. As a reminder, earlier this year, we globalized our Proprietary Pharmaceuticals business, creating one division to allow for streamlined commercial efforts and coordination between functions. Worldwide Proprietary Pharmaceutical sales increased 13% in the quarter, driven by growth of 9% in the U.S. and 19% internationally. In immunology, global HUMIRA sales increased more than 18% before the favorable impact of exchange. Performance was driven by international sales growth of 19% before exchange and U.S. sales growth of more than 18%, consistent with the underlying trends we saw throughout the quarter. Demand for HUMIRA continues to outpace the global market, and new competitive entrants are tracking in line with our expectations for these products. Internationally, double-digit market growth continues in the major European countries where HUMIRA holds the #1 share position. And HUMIRA growth in the U.S. continues to outpace the market. We're continuing our development efforts for HUMIRA, including the study of new indications and product enhancements. Our regulatory applications for ulcerative colitis are currently under review, and we're evaluating other indications currently in mid- to late-stage development. We also continued to introduce new indications in geographies around the world. We recently received approval for our fifth indication in Japan for HUMIRA, juvenile idiopathic arthritis or JIA. With an outstanding clinical profile across our full range of indications and more than 14 years of clinical experience, we continue to be well positioned for success in this market. HUMIRA is off to a strong start this year. And based on this performance and the outlook for the remainder of the year, we are raising our forecast. We expect high teens reported global sales growth for HUMIRA in 2011, up from our original expectations of low teens growth. Moving on to our lipid franchise, where sales of Niaspan were $247 million. While it is still early, we've seen a modest impact to prescription trends beginning late in the quarter following the discontinuation of the AIM-HIGH trial in late May. Physician feedback from experienced Niaspan users and key opinion leaders continues to be favorable regarding the value of Niaspan and treating HDL. U.S. sales of TRILIPIX/TriCor increased more than 3%. Global sales of AndroGel and CREON were $227 million and $149 million, respectively. During the quarter, Abbott received FDA approval for AndroGel 1.62%. The new low-volume formulation provides patients with a more convenient application process, delivering rapid and sustained improvements in testosterone levels with less gel than the previous formulation. CREON maintains a leadership position in the pancreatic enzyme market. And over the past year, we've captured significant market share in the U.S. We continue to garner the vast majority of new prescription starts in this category. Last month, we received FDA approval for an infant-specific dose of CREON. This new dose provides the lowest approved dosage strength in the class and enables more precise titration. Moving on to 2 consistent performers within our Proprietary Pharmaceuticals portfolio, Synthroid and Lupron. U.S. sales of Lupron were up 12%. Last month, Abbott announced FDA approval for a new 6-month formulation of Lupron Depot, expanding dosing options. We expect more than $750 million in total global Lupron sales in 2011. And U.S. sales of Synthroid remained strong at $140 million. We expect more than $450 million in total U.S. Synthroid sales this year. So as we look ahead to the third quarter in our global Proprietary Pharmaceuticals business, we expect high single-digit sales growth, including mid single-digit growth in the U.S. and another quarter of strong double-digit growth internationally. Moving on to our Proprietary Pharmaceuticals pipeline, where as Tom mentioned, we continue to make good progress. We currently have more than 20 new compounds or indications in Phase II or III development across oncology, immunology, HCV, neuroscience and pain management and other areas of significant medical need. Let's start with chronic kidney disease or the loss of kidney function, which is on the rise, driven by higher rates of diabetes, obesity and an aging population. We're leveraging our decades of expertise in renal disease to address this highly prevalent condition. Last month, Phase II bardoxolone data were published in the New England Journal of Medicine and presented at a European renal meeting. These data showed that bardoxolone produced sustained improvements in kidney function over 52 weeks in patients with moderate to severe CKD and Type 2 diabetes. And last month, we initiated the global Phase III clinical program for bardoxolone with our partner company. Results from this 1,600-patient study are expected in 2013, with potential commercialization in the 2014 timeframe. We also continue to make significant progress with our internal hepatitis C program. The HCV treatment landscape is expected to continue to evolve considerably over the next several years, and we believe we're in a position to become a significant player. We have 3 mechanisms of action in Phase II development, including protease, polymerase and NS5A inhibitors. Over the past year, our HCV program has moved quickly and will continue to progress throughout the year as we have a number of combination trials underway, including studies with and without interferon. In neuroscience, we're developing compounds to address conditions such as Alzheimer's disease, Parkinson's, schizophrenia, pain and MS. A Phase III study of daclizumab, a next-generation biologic being evaluated in MS, is currently underway. Abbott and our partner company expect to present Phase II data for daclizumab at a European clinical meeting in October. We are also continuing development of an intestinal gel known as Duodopa internationally for advanced Parkinson's disease. It's currently in Phase III development in the U.S., and is already on the market in most European countries, where adoption of this novel system is continuing to grow. We recently presented interim data from a Phase III open label study of Duodopa, showing patients reported an increase in the amount of time where disease symptoms were well managed. In immunology, we're leveraging our experience with HUMIRA to identify novel approaches to improve therapeutic outcomes for patients with autoimmune diseases. We continue our work on HUMIRA and plan to introduce a cadence of new indications over the next several years. Beyond ulcerative colitis, we have 2 additional indications in Phase II or III studies, including uveitis and a chronic skin disease that most commonly affects the sweat glands. All told, we expect new indications to drive more than $1 billion in incremental peak-year sales. Our pipeline also includes early development work in oral DMARD therapies and biologics. And our proprietary DVD-Ig technology brings the capability of uniting 2 antibodies in a single agent. We expect our first combination biologic to move into Phase I clinical trials by year end. Last month, Abbott entered into an agreement with Biotest to develop and commercialize a novel anti-CD4 biologic, which is currently in Phase II clinical trials for RA and psoriasis. Our goal with this agreement, and all of our R&D and licensing efforts in immunology, is to raise the bar with differentiated efficacy. Endometriosis and fibroids are both associated with a multitude of symptoms, including pain and infertility. Our partnered compound, elagolix, has a unique profile that provides symptom reduction while avoiding significant bone loss or other adverse effects that can sometimes be associated with current treatments. We're working with regulators to finalize the Phase III clinical program for endometriosis and a Phase II clinical program for fibroids with a target of trial initiation near year end. We also continue to make good progress in oncology. Our pipeline includes 11 new molecular entities for more than a dozen different cancer types. Elotuzumab has demonstrated very good response rates in multiple myeloma, the second most common blood cancer in the U.S. We recently began the Phase III program for elotuzumab with our partner company. Our multi-targeted kinase inhibitor seeks to cut off the blood supply to a tumor to stop the progression of cancer. A Phase III study of this compound in liver cancer is under way. And our PARP-inhibitor, which may enhance the effectiveness of cancer therapies, is being studied in mid-stage trials for a variety of cancer types. So in summary, this quarter, Abbott delivered strong double-digit performance with ongoing EPS growth of 11%, at the high end of our previous guidance range. And we raised our ongoing EPS outlook for the full year, reflecting double-digit growth over 2010 at the midpoint of the range. So with that, Tom, John and I will be glad to take your questions. Operator?

[Operator Instructions] Our first question today is from Mike Weinstein from JPMorgan.

Maybe just a couple of items just to clarify. One, you had a very good quarter for HUMIRA and you raised your HUMIRA guidance for the year. So if you could provide any color on what you think is going on in the underlying markets, both in the U.S. and o U.S., that would be appreciated. And then second, one item we're struggling a bit with it is that if we look at the international pharmaceutical performance, HUMIRA as we noted was very strong, but it looks like there's a pretty meaningful drop-off in sales of other products once you kind of back out HUMIRA and then submit a product that you list in the press release. So if you can give any color there as to what's going on. Are those old Solvay products that are dropping off? Any insights would be appreciated.

Yes, this is Tom. For HUMIRA, we're seeing really globally, good market performance to start with. In the U.S. in particular, growth rates have picked up this year and that is certainly bolstering the product. And in international, as you know, growth rates have been quite a bit stronger than the U.S., and they've continued to be in mid-teens or even better growth rates. So certainly, that is helping support the product. We're also executing quite well in the businesses in terms of share performance, most significantly in the derm and the gastro areas. But also, we're seeing some progress in RA as well, despite the fact that there's some -- a fair amount of competition in that space. So globally, we're just seeing good market growth, good share performance and very good execution on the part of our business people. And Mike, on the question on pharma growth, I think if you look at most of the products, we're seeing pretty strong growth across them in the quarter. So maybe you could be a little bit more specific about exactly what your question is on the pharma growth.

This is Larry. [indiscernible] quarter, so did HUMIRA obviously. There's not that many products actually in the proprietary business any longer. Again, a lot of the Solvay products other than, say, a Duodopa have moved over into the Established Pharma business. So most of the other products, as Tom said, had pretty good quarters.

Well, if you look at -- I'm sorry, but just to dive in here, but if you looked at international pharma and you backed out HUMIRA and you backed out Kaletra and let's say Lupron just for kicks as well, you would get that -- the balance of that international pharma piece is down about $250 million year-over-year. So about a $600 million business last year is now about a $350 million business once you strip out the stuff that you guys report. So I was just hoping to get some color on the products that are going away. Is that old Solvay business that you guys have decided to stop marketing? Because that is pulling down your international pharma growth by a fair amount.

Certainly, within Established Pharmaceuticals, there are a handful of products that are at the end of their life, Lanzaprazole for example, in a couple of markets, has gone off-patent. In terms of Abbott, those are relatively minor. There has been a little bit of Solvay-related turbulence, shall we say, as we work through the products that are remaining in the portfolio compared to those that are going to be -- we're no longer going to be promoting. But I would only -- it's very selective, relatively minor and really, I'd say anything that is -- that you're talking about is really being worked through in the first half here and is not representative of what we expect in terms of growth rates for these businesses going into the third and fourth quarters. So there was a little bit of that, Mike, but really not significant to our performance in the quarter.

Okay. And then on the emerging market numbers you guys are now providing. So you reported 23% emerging markets sales growth. Tom, do you have any kind of estimate on what that would be if we looked at it on an organic basis? So if we try to adjust for currency for the timing of the Piramal deal?

In terms of M&A, the only impact in there is Piramal. As you know, we've fully lapped Solvay, so that does not have an impact. And you have a pretty good idea what our annual sales for Piramal are. Exchange, generally speaking, is lower in the emerging markets than it is for the overall company. Obviously, the positive currency in the quarter was mainly due to yen and euro. So I don't have a precise number for you, but I think you can factor in less exchange in those businesses than what you're seeing broadly across Abbott, and just adjust for the quarter of Piramal that we didn't have in the 2010 base.

Our next question is from David Lewis from Morgan Stanley.

Just a quick question on stent dynamics. Obviously this particular quarter, you're facing a very, very challenging comp. But considering competitor issues, I wonder if you could update us about what expectations you have for sort of the next 3 to 4 quarters in the stent market, specifically on opportunities for share and then secondarily price stabilization, potentially?

Yes. Well, as I mentioned in my call remarks, we've done quite well internationally with XIENCE and XIENCE PRIME launching, and we're continuing to gain incremental share there as well. And we're optimistic with the launch of XIENCE PRIME and approval coming here in the first half of 2012. DES pricing has been stable, I would say, down low single digits sequentially and upper single digits year-over-year as expected. It's been a little bit better, so I'd say overall, we feel pretty good about that market in terms of its moderation in price. And with one of the main competitors leaving the market, that obviously opens up an opportunity. That's about $400 million particularly in the small vessel stent area with our recent launch of NANO, so we expect to gain some of that share and take some of that market as well. I think the thing that people forget about is international sales and markets for our overall DES portfolio make up more than 60% of our total global sales now. So we continue to see better growth in emerging markets, and PCI volume obviously in those markets is growing mid-teens versus flattish here in the U.S.

Tom, just thinking about margins in the quarter, Miles made a comment earlier on in the year that I interpreted as his comfort or visibility on double-digit earnings growth for 2012, and then I think about your progress through the first half of this year. I wonder if you'd be able to sort of update us on your visibility on double-digit earnings growth for 2012 based on the performance in the first half.

Well, it's clearly too early to talk about 2012 today. I mean, we've had a great quarter, a great first half of the year. And obviously, we're feeling good about the business, as we've increased our guidance range for the year. So the momentum is good. Obviously, HUMIRA, I think is outperforming most expectations this year. We're seeing really nice momentum in that product. Our x U.S. Nutrition, I think you're going to see accelerated growth in the second half, so that bodes well going forward. Same thing in our Established Pharmaceuticals, you're going to see stronger growth in the second half as we work through some of these kind of transitional issues. So I think the momentum is good. I think we've got a lot of growth drivers. We've talked a lot about operating margin opportunities which have been dampened down a little bit this year by some of the headwinds we talked about earlier in the year that we're overcoming quite nicely with our performance. And so while operating margins this year are only expected to improve modestly, we think there's still -- there's going to be much more opportunity going forward there. So I think we've got a lot of things going our way to have another strong year in 2012, but it's a little too early to start forecasting till we get deeper into this year and get through our budgeting processes.

And Tom, just maybe a quick follow up on your comment on Nutritionals. As that business recovers, is it possible for Abbott to expand the nutritionals market through M&A, either in the U.S. or o U.S., or do you think existing market share becomes an impediment to that?

I don't think we need to do things like that. We've done a really nice job the last 4 or 5 years in terms of organic growth and investments of commercial resources and infrastructure in these various markets, as we've grown them so strongly. So we have great brands. We play both, obviously, in the infant side and in the medical side. A lot of the competition doesn't have that both sides of the business and the strong performance. This business is very committed to innovation. And if you look at whether its formulations or packaging, we've done a very nice job in terms of enhancing our market position through our R&D efforts. So the answer is we don't need to do any M&A activity to be successful there. But we like the business, it's a core part of the company, very important to us, and we're always looking for any opportunity to grow the business.

Our next question is from Rick Wise from Leerink Swann.

Can you discuss just generally the -- pharma had obviously a solid quarter. Can you talk about the impact of pricing or inventory stocking, de-stocking in the quarter? How that helped or dragged or anything there?

We had very, very stable inventories at very, very comfortable levels for us throughout the quarter, so there was really no impact of inventories in the quarter.

And pricing?

Yes, there was some price, obviously, going positive in the quarter.

Okay. Gross margins, Tom, obviously, were very solid and you're giving us good guidance again for the third quarter. Can you give a little more color on what's driving that? And it's been a long time coming, you sort of getting to that 60% mark. Are we sustainably going to be at 60% going forward as best you can judge today?

Well, that is my forecast. But we talked a lot about this, this year in particular, and it's a bit frustrating because we're executing extremely well in terms of efficiencies and product mix. Exchange has been a bit of a headwind this year. It probably took more than 2 points out of our year-over-year comparison in the quarter. So we were over 60% despite that. But the mix is improving, and that's what helped us get to the 60% level this year. I think we're going to work through the impact of European austerity and some of these things we talked about earlier in the year by the end of 2011. So once we're through some of those onetime transitional issues, certainly, our expectation is to stay sustainably above 60% and expand it. And that's part of our growth story as we move into 2012 and beyond. So product mix is really helping. I think some of the things going on this year are masking real progress. And we've made good progress. And not as much as we might have, but I think you're going to see more of that as we go into next year.

That's very helpful. Just one last quick one maybe for John. John, you talked about MitraClip briefly, U.S. under review. Any sense of timing? And remind me where we are internationally. And am I misremembering that maybe there were some manufacturing issues? Are they resolved? Just where do things stand?

Right. We can't be specific on timing. We're still optimistic about a panel. It's less likely that panel's going to occur in 2011 but it's, as you know, up to the agency. So we'll be talking with them on that going forward, and we've provided additional information that they're looking for. So we'll update you on that as soon as we know something. Internationally, we did have a recall of MitraClip. It was based on the tip of the catheter. We've resolved that, and we expect to have that back on the market here in the third quarter.

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

Two questions. First on Niaspan, the script data has trended down since we've seen the AIM-HIGH study. And you had a good quarter with Niaspan and my guess is it's because of pricing. So I'm wondering, is 2Q -- do you think 2Q is the peak of this product? Should we model down sales going forward? So just your thoughts on Niaspan going forward. And then I had a follow-up question for Tom.

Sure. This is Larry. Certainly, we've been watching the scripts, and everybody has seen what they've done, 6 weeks after AIM-HIGH relative to 6 weeks before, we'd say that they're down about 5%. So a pretty modest impact at this point. But we certainly continue to watch those. We believe that we've incorporated a reasonable estimate here for the second half for Niaspan and our outlook for 2011. And to your point, price will still play a bit of a positive role here in the second half. But still 6 weeks out. It's a little bit early to make an official call on it. We continue to watch it. But at this juncture, down 5%, 6 weeks before and compared to 6 weeks after is, again, a fairly modest decline at this point. But we feel like we've got a pretty reasonable expectation for the second half.

And so should we assume sales decline here from the 2Q level? Is that fair assumption?

I don't know if I could specifically guide you to that at this point. Again, price will play a little bit of a role. We'll see how it plays out. Again, scripts are down about 5%.

Yes. I think at this point, we expect positive growth out of Niaspan in the third quarter.

Okay, great. And then, Tom, on the tax rate. Third quarter, you're saying that the tax rate's going to be a little bit lower than the full year. Full year around 15%, but 3Q in the 14.5% to 15%. So what's bringing down the tax rate a little bit lower in the third quarter?

You remember on the first quarter call, when we talked about Puerto Rico, which there's this excise tax for our operations there. We're incurring expense up in the cost of sales line, which is another item that's holding back our progress in gross margin transitionally this year. But anyway, so we have the gross expense up there, but we have the creditability reflected in the tax line. That's the way we have to do it. And so for the full year, in the first quarter, we had brought down the full year tax rate to reflect that credit. And what you're seeing is just the progression of these changes through the P&L over the quarter. So again for the full year, consistent with what we said on the first quarter, approaching 15% tax rate average for the full year, and you cited our guidance for the fourth quarter -- or for the third quarter.

Okay. So maybe a little bit tick up in the tax rate in the fourth quarter then.

I think you should just look at the full year approaching 15%, and the math will take care of itself.

Our next question is from Rajeev Jashnani from UBS.

I was wondering if you could discuss the operating margin outlook for some of the segments, Nutritionals, Diagnostics and Established Pharmaceuticals, although I know that's a little bit early perhaps at this stage. But maybe if you could quantify to the extent you're comfortable with at this point, where you see those in 12, 24 months from now, that would be helpful.

Well, when you look at the businesses, there's a lot of good stories there in terms of operating margin improvement. Probably leading the pack is our Diagnostics business which a couple, 3 years ago, before the team really focused on margin expansion, we were running in the upper single-digit range. In this quarter, we're in the upper teens range. We've made tremendous progress in terms of the manufacturing efficiencies, but also product mix and pricing, and really managing the business better top to bottom. So that's a very good story for us. Our Vascular business has done a very nice job in the last few years. We were in a negative position about 3, 4 years ago and moving to the upper 20s in terms of operating margins in that business. I think there's a little more room to go there. I mean, clearly, we've made a lot of progress. And I would remind people that, that operating margin includes about $150 million of non-cash amortization expense. But we've made significant progress there, and there's probably a little bit of room to go. Some of our smaller businesses, but still significant, Medical Optics, Diabetes Care, still great opportunities there. In particular, diabetes has executed on nice margin expansion, and we think more of that will continue going forward. Now Nutritionals, this year is artificially depressed by the impact of the infant formula from last year, but we're recovering very nicely from that, as John mentioned in his remarks, and we should see a better operating margin this year. The one thing I will say is that, that's a business we do continue to invest in commercially. So some of the gross margin improvements we expect there will be invested back in the business because we continue to see really great growth opportunities across these markets and they're pretty responsive to commercial investments. And so while we expect progress this year and in future years on margin, it'll be a little bit slower in the Nutrition business because of the ongoing growth opportunities in that business.

Great. That's very helpful. If I could just follow up with one on HUMIRA. I think, if I heard you correctly, you mentioned $1 billion of revenue from new indications. And I was wondering if you could just go into a little bit more detail on that in terms of timing and indication beyond ulcerative colitis, I think, which is for the end of this year.

Right. We would expect action by the agencies, Europe and the U.S. here, towards the end of the year on ulcerative colitis. We're also working in Phase III in uveitis. That has a potential market entry in the 2013 timeframe. The Phase IIIs are ongoing at this point. We've got again, this other indication in a skin disease that most commonly affects the sweat glands known as HS. That could be a potential market entry in 2014. And then we kind of have this umbrella indication for inflammatory joint diseases that would include a number of subgroups that don't have, call it a major indication at this point, but like reactive arthritis, in a number of different other, smaller indications. That when you collectively look at those, again, over that period of time, probably later this year for UC, '13 for uveitis, '14 for HS and the spine indication could be an entry into 2012. The peak there is in excess of $1 billion in our minds, and we think that each of those probably have a several hundred million dollar opportunity over time. So that's kind of how they break down at this point. But greater than $1 billion of incremental from here is pretty significant.

Our next question is from Sara Michelmore from Brean Murray.

Larry, this is I guess the second quarter you've broken out AndroGel and CREON. Could you just talk about the growth trajectory of those products? And just in terms of addressable market sizes, et cetera, just so we can get a sense of how big they could be eventually?

Yes. I don't think I can put a total cap on where they could go, but certainly, AndroGel is becoming a fairly significant product here with the sales that I talked about for the quarter, if you annualize that. CREON a little bit smaller, but the growth rates on both of them continue to be very strong double digits. And both products have leadership in their respective categories. So we're very optimistic for our Proprietary Pharma business with both of these 2 products. And a new formulation of AndroGel that we just got approved is also very helpful. Again, it's lower volume and it is a much-improved product for patients. So we're very pleased. And then again, this infant dosing indication that we got for CREON as well gives us a nice opportunity, albeit in a smaller piece of that market, but nonetheless an advantage, and a uniqueness to CREON that others don't have.

Okay. And then just in the pipeline, you guys have clearly gone out in the last 12, maybe 18 months, and assembled a series of partnerships here to kind of fill in the pipeline in terms of external resource, Phase II moving into Phase III type of candidates. Where are you in that process in terms of building the pipeline? I mean, should we consider -- continue to expect you to be active there, or have you done a lot of activity and things should slow down from here?

I think we're still open to opportunities to further expand the number of bets we have in the late-stage pipeline. You never can have enough in Proprietary Pharma. As you know, the regulatory and clinical processes are challenging. I do think we have done a very nice job of supplementing the portfolio with 4 or 5 really, really promising late-stage programs and we're real happy with where we stand now. And I think even compared to a year ago, our late-stage pipeline is significantly more advanced and promising than people would have expected. So our licensing organization is very good at this. They work closely with the business to identify good opportunities that we can leverage Abbott's capabilities. And we continue to be open to opportunities there.

And it seems like a lot of the activity is aligned with your commercial strengths rather than a therapeutic category-type strategy. Is that a fair assessment?

I'd say in today's world, it's the quality of the science that's really the first screen. You can't be overly selective in terms of therapeutic areas of focus. It's timing compounds or biologics that really have proof of concept and have a good chance in making it to market is really the first screen. Because we've shown, through HUMIRA for example, that we can build commercial presence fairly readily, particularly in specialty areas, if you have a high-quality product to bring to market. So that really is the first screen. The other thing I would say is our international proprietary organization in particular is extremely strong and well respected in the markets and well established. And that is a -- that international distribution asset is one that we do explain to potential licensing partners very extensively. And we've made some pretty nice progress identifying opportunities to bring in there. So it's a combination of our strengths and things we bring to the party. But also if there's good science that we think we can commercialize, we're open to something that might be a little outside of our wheelhouse from time to time.

Our next question is from Jami Rubin from Goldman Sachs.

So just quickly. Tom, you were talking about, of the Established Pharmaceuticals business, $775 million of that $1.3 billion was emerging markets, which grew 25% year-over-year. Is that right? My question is this. The remaining $560 million or so of that $1.3 billion, I mean, you're showing operational growth of just $3.2 billion, and I know there's a lot of noise there. But if emerging markets is up 25%, what -- can you just describe the performance of the remaining $564 million in sales?

Well, we're lapping some issues in the quarter. Reductil is one. That's a product that has been assigned. As you know, we have no Reductil sales in 2011, but we did have a fair amount of Reductil...

What were the size of those?

I don't have that at my fingertips here, Jami. There were some smaller products, and I mentioned in Mike's question. Lanzaprazole for example, in a few markets, went generic during the quarter. There are a couple of other of those. So there were definitely some transitional products during the quarter that dampened down the non-emerging markets growth of Established Pharmaceuticals, but we think that, that's going to really work its way out of this system in the first half of this year. And we do expect a nice pickup. And another product that was off a little bit growth-wise compared to the prior year was Clarithromycin. And as you know, that's a product that goes up and down with the season depending on the year. So there's some noise in there, but we do think it's going to pick up, and we've worked through a number of these.

So you would expect operational sales growth in the third quarter to pick up from the 3.2%. Because that 3.2% also includes Piramal, which wasn't in the numbers a year ago.

Absolutely. You'll see better growth than that.

Our next question is from Damien Conover from MorningStar.

Just a question on the global anti-TNF market penetration. In previous quarters, you talked about penetration rates in RA, in the mid-20s in the U.S., mid-teens internationally. For Crohn's, in the low 20s in the U.S. and low teens internationally and lower for the derm markets. Wondering if we could get an update on where those penetration rates are currently. And then also, what kind of strategies are you using to kind of increase the penetration? And also, what are the key areas of potential resistance, given the relatively low penetration rates for the class?

Sure, Damien. This is Larry. Your penetration rate assumptions are fairly accurate at this point in time, as I look across them. In the U.S., rheum would kind of be in the mid-20s. X U.S. is probably in the mid-teens, maybe a little north of 15%, in that 15% to 20% range. Derm, as you mentioned -- I mean, I'll give you a number. You said it's lower, it's actually low singles in both the U.S. and x U.S., kind of in that 5%, 6%, 7% range depending on when you measure it. So there's a lot of opportunity there. And in gastro, I think you were right on with low 20s in the U.S. and kind of low double digit or low teens x U.S. So you were very close. I think the key, really, that continues in the international markets is the overall cost/benefit of a product like HUMIRA. In single-payer systems, that really makes a lot of sense to them, in that a product like HUMIRA saves considerable downstream costs, whether that's unemployment costs, surgical costs, things like that. The upfront investment of treating a patient with HUMIRA certainly pays significantly downstream. The penetration rates in derm in the past have probably been down in this range. In Europe, they don't quite treat it as severely as a disease state, the moderate to severe psoriasis patient. In the U.S., we tend to treat them just a little bit more frequently, although the penetration rate in the U.S. is still fairly low. But I think that overall, the strategy of cost/benefit is really the key for us and that plays certainly very well when you're discussing a product like this with single-payer systems.

And our final question is from Catherine Arnold from Credit Suisse.

I wanted to ask you a quick question on Nutritionals. And then if I had time, for a follow-up on the pipeline. On Nutritionals, you've said a lot about that business, Miles. But I'm just wondering, your competitor that has disclosed sort of operating margins more in the 20, mid-20s range. And I wonder, is that an operating margin target that's reasonable for your business as your geography and your mix of products evolves over time? And then I have a follow up on the pipeline.

Right. Well, absolutely. We have greater aspirations on margins in our Nutrition business. Before we had the kind of transitional year here, we had -- as we recover market share in the U.S., we were in the upper teens range. And then obviously, with the recovery in the domestic market, we've gone down a little bit this year, and we expect that to recover somewhat in the second half but still be below 2010. I don't know any reason structurally why we couldn't be at levels at or close to the competition. And we've talked a little bit about this publicly that, that particular management team is very, very focused on operating margin expansion. We're kind of running a balance there between investing in growth, as I've talked about on this call, and driving operating margin, so we're going to try to do both. But there are a lot of initiatives going on in the logistics, manufacturing area to drive cost out and get our operating margins much closer to some of the levels you're seeing at other companies. So I think that is certainly over a medium term, an achievable objective. And the management team is very focused on delivering on that.

Right. And then just a follow-up on the pipeline. Could you talk about your strategic interest in investment in the cardio metabolic area? Obviously, you're moving towards the exclusivity loss of Niaspan and TriCor. And of course, you have bardoxolone. But is this an area of strategic importance for you guys?

Well, the cardiology, the primary care products we have in lipids and those areas are clearly mature for us. And as we look at the development of science in these areas, it does seem that there's not a lot of new opportunities and a lot of the needs have been met by the existing products. So we are focused more in other areas, both from a R&D perspective and from a M&A perspective. And I think you're going to see the mix of our portfolio shift to more specialty products. We talked a lot about them today in the pipeline review. You see immunology products, HCV products, a lot of other areas where we think there's more opportunity to deliver more benefits for patients than there is in the cardiology space.

Thank you. And that concludes our conference call today. As I mentioned earlier in the call, we'll also now be posting to our website a slide deck that highlights our recent pipeline progress in some of the select areas. And that's something that, as I said, we'll be building on going forward. To listen to a replay of today's call after 11:00 a.m. Central Time, go to Abbott's Investor Relations website at www.abbottinvestor.com. And after 11:00 a.m. Central Time, via telephone at (203) 369-0536. The confirmation code is 2128751. The audio replay will be available until 4:00 p.m. on Wednesday, August 3. Thanks for joining us and have a good day.

Thank you. And this concludes today's conference. You may disconnect at this time.