Abbott Laboratories (ABT) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2012 Earnings Conference Call. (Operator Instructions) This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Brian Yoor, Vice President, Investor Relations.

Good morning, and thank you for joining us. Joining me today on the call will be Miles White, Chairman of the Board and Chief Executive Officer; and Tom Freyman, Executive Vice President, Finance and Chief Financial Officer. Miles will provide his opening remarks in our 2013 outlook. Tom will then provide a brief overview of our fourth quarter and full year 2012 performance as well as some additional detail on our 2013 outlook and guidance. I will then provide highlights and guidance for each of our major businesses. Following our comments, Miles, Tom and I will take your questions. Please note that our discussion of 2012 performance will include results of what is now AbbVie. However, AbbVie will provide additional highlights and details of their 2012 performance and 2013 outlook on their call Next Wednesday, January 30. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the planned separation of the research-based pharmaceutical company from the diversified medical products company and the expected financial results of the 2 companies after the separation. Abbott cautions that these forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1a, Risk Factors, to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2011, and in the interim reports filed on form 10-Q for subsequent quarterly periods. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. In today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measure in our earnings release and regulatory filings from today, which will be available on our website at abbott.com. With that, I will now turn the call over to Miles.

Okay, thanks Brian. Good morning. This morning I will review our 2012 results and our outlook for 2013. Abbott reported another year of strong performance in 2012 and executed on a number of key actions that will drive future growth for the company. On January 1, we launched AbbVie as an independent Fortune 200 biopharmaceutical company. The creation of AbbVie is a significant event in Abbott’s history and our ability to change is the reason that Abbott has endured as evidenced by the fact that in 2013 we also enter our 125th year well positioned for future success. As we announced this morning, we expect to deliver another year of strong performance. We issued ongoing 2013 EPS guidance of $1.98 to $2.04, representing double digit growth over 2012. I’ll talk more about the year ahead in just a moment. As Brian mentioned, our fourth quarter and full year 2012 results are for total Abbott and include the proprietary pharmaceutical business. So for the full year 2012, Abbott delivered ongoing EPS growth that exceeded our initial guidance range. We also generated record operating cash flow of more than $9 billion, returning more than $3 billion to shareholders in the form of dividends. We’ve increased our dividend payout for 40 consecutive years. Abbott is one of only a handful of companies to deliver with such consistency. Since our separation announcement in October 2011 to the end of last year, Abbott stock price appreciation and dividends generated a total shareholder return of nearly 30%, compared to the S&P 500 return of somewhat above 19%. Before I review our business results, I want to spend a few minutes on the longer term outlook for the company, with the expectation that Abbott will be one of the largest and fastest growing diversified healthcare investments. Over…

Thanks Miles. Before I review our financial performance, I’d like to explain how we’ll handle the transition from pre-separation Abbott results to post-separation Abbott results. In our remarks today regarding 2012, our results reflect all of the pre-separation businesses, including the proprietary pharmaceutical business. Our 2013 guidance and outlook will reflect only the new Abbott businesses. Regarding 2013 comparisons to 2012 for New Abbott, we plan to provide investors with a post-separation base line of the quarterly income statement on both the GAAP and non-GAAP basis with appropriate reconciliations prior to our first quarter earnings release in April. This will be for 2012. In order to provide this information, we must first complete in the coming weeks the so-called audited carve out of AbbVie results from Abbott’s combined fourth quarter results. So while we don’t have the final 2012 baseline established as of today’s call, we understand that investors are looking for perspective on 2013 growth rates on both the top and bottom line. With that in mind, today we’ll provide you with our projections of full year sales and ongoing earnings per share growth in 2013 over an estimated 2012 baseline. Please keep in mind the growth rates against the actual 2000 baseline may change somewhat once the final 2012 carve out is completed. Let’s move on to our fourth quarter and full year 2012 results for the total company. We’re very pleased with how we ended 2012 as we exceeded our initial expectations for ongoing earnings per share for the full year. For the fourth quarter, we reported ongoing diluted earnings per share of $1.51, in line with our previous guidance range. Sales for the quarter increased 5.6% on an operational basis and 4.4% on a reported basis, that is including an unfavorable 1.2% impact from foreign exchange.…

Thanks Tom. This morning I’ll provide a brief overview of the fourth quarter and full year 2012 performance for each of our major businesses that comprise the New Abbott. I’ll also review our 2013 sales outlook by business. My comments will focus primarily on operational sales growth, which excludes the impact of foreign exchange. I’ll start with our established pharmaceuticals business or EPD, where sales in the fourth quarter and the full year increased in the low single digits on an operational basis. Full year 2012 sales in the emerging markets grew high single digits on an operational basis, with the BRIC and key emerging markets growing mid-teens. This growth was largely offset by mid-single digit declines in developed markets where austerity measures impacted performance. In 2013, we expect to accelerate operational sales growth from the low single digits into the mid-single digits by executing on a number of product and geographic expansion initiatives. We’re also moving a large number of registrations through our pipeline and regulatory approval process. This includes increasing the breadth of our product offerings by launching new and improved formulations of our current trusted brands such as Creon and Brufen as well as launching new products, such as Amitiza which we recently launched in Japan; expanding geographically, including registrations of numerous productions across multiple geographies such as Central and Eastern Europe and Africa. And accelerating and capturing new sources of growth through select licensing agreements. Through our agreement with [Noble] in Turkey, we are expanding our cardio-metabolic offering and through our agreement with Zydus we are launching new products into key Eastern European markets. We expect to deliver double-digit growth in emerging markets in 2013 growing faster than the market in many key countries where we have strong positions. We are particularly focused on the BRIC…

(Operator instructions). Our first question today is from Mike Weinstein from JP Morgan.

I have a bunch of questions. Let me start with, could you just spend a minute, Tom, on the spread between the GAAP and cash guidance for 2013. It’s obviously more than the amortization expense. So are you just assuming certain charges that will run through over the course of the year and that’s why the GAAP numbers are off?

Yeah. There’s two basic things happened beyond amortization. There’s a little bit of post-separation. I call it residual separation cost and there’s some previously announced actions we took in areas of cost reduction, particularly in areas that impact manufacturing that do carryover into 2013. So that’s the difference.

Okay. And then can you -- two questions, one, do you have, Tom, a new Abbott EPS number at this point for 2012. And the second, can you aggregate up all the divisional revenue guidance to what your organic revenue guidance is in reported revenue guidance for 2013 for the total company.

On the second point, we provided mid to upper overall operational growth as guidance for 2013 and if you were to go through all the details that Brian outlines in his remarks, those details will build up to that type of growth. So I think you will find that certainly this all hangs together. With regard to the 2012 base line, as I spent a few minutes in my remarks, we need to provide investors and we plan to do so before the first quarter call with the adjusted 2012, effectively continuing operations base line for new Abbott. As I indicated in my remarks, we can't really do that until we have completed this carve out work which we still need to complete the fourth quarter which we are going to do in the coming weeks. And once we do that, we will be provide you detailed quarterly GAAP and non-GAAP reconciled P&L base line, if you will. But of course we have done some modeling, and as we model it and based upon this guidance range and if you take the middle of this ongoing range we have provided, that would be double-digit growth plus over what we believe the 2012 base line will come in at. So I think things are very consistent with what we have been saying and it just kind of takes us a little bit of time to come up with the precise numbers. Among the challenges we will have when we present that is just effectively normalizing capital structure between the year. As you know when we look at the carve out of AbbVie, AbbVie did not have debt in the carve out. They do have debt going forward. Abbott will have less debt than what we have had historically in the implied carve out of the Abbott side. So there will be some adjustments in those areas where we will build a 2012 base line that’s meaningful relative to how we are growing the business in 2013. Hopefully that answers your question.

Yeah. And then maybe, Miles, I want to zip it on this last one. But EPD is probably the business that people have probably the least amount of visibility into and probably the least amount of conviction in terms of sustainability of mid to high-single digit growth which you guys have talked about. Can you just talk a little bit about the strategy to accelerate growth of those, what looks to be a subpar year in 2012?

Yeah, I think you are right. I think people do lack a certain understanding or visibility to the business, Mike. And I think it comes from two major dimensions. One is, there is a lot less, call it publicly available sources of data for a lot of the countries that make up this business, at least for you know analysts and investors to have an independent look at. And there is a lot of countries here as you know. But I think the first thing is that the absence of that and the second is, this is a business that’s a segment business. Meaning there is a proprietary pharma business in a lot of countries, there is a commodity generic business in a lot of countries, and there is a branded generic business. And they are all three different. They are different. And this branded generic business is quite large and much more like our nutrition business. It’s very consumer facing and a lot more like that in terms of consumer choice, consumer pay etcetera. And that’s why some of the lack of complete understanding and so on. The business however is quite attractive. It’s very profitable, it’s quite attractive. It’s growing very nicely. But it’s a story of really two geographies and maybe two market segments. 60% of the business now is in what we will characterize as emerging or growth markets and 40% of it is in developed markets. And those developed markets as you know, have been under a fair amount of austerity pressure. So if I were going to [do you] an upgrade, so we get a tale of two different segments here. The BRIC countries and the other emerging markets and so forth depending on which markets, are either growing very high single digits or…

Our next question is from David Lewis from Morgan Stanley.

Good morning. Maybe one quick question for Tom and then for Miles. Tom, when we think about the first half of the year where you gave much better visibility, if we think about the acceleration from first to second quarter, I think it sets up nicely for the acceleration story for the whole year. So I wanted to come back to the first half of the year. I think if you think about the first quarter to second quarter, is it really two components? First, the headwinds are fading which are largely vascular as well as the nutritional distribution and that gets you from low singles to mid. I guess what I’m really asking is to get from mid to that upper end or upper single digit part of the guidance, what are the key growth areas that get you from mid to high? And if you could just confirm that to get from low to mid it’s more the vascular and nutritional distribution.

Well, there’s a lot of things going and as I’d remind you from my remarks, the first quarter and really you’ll be looking at dollars and the Yen. The first quarter is the one quarter where we’re still getting a pretty tough exchange comparison of around 1.5 points on the topline. So that’s certainly part. You’re correct that this lapping of the Japan piece is probably the biggest anomaly. The second after that is the direct distribution getting better as we go through the quarters throughout the year. And just frankly, a lot of the execution we are expecting across these businesses, in businesses such as EPD and really the momentum we’re starting to see as nutrition exits 2012 is what’s going to continue to build throughout the year. So I think it’s a matter of building momentum. Vascular, we shouldn’t dismiss the potential second half benefits of ABSORB and MitraClip doing better in Europe, the expedition benefits we think we’re going to get in the market. Vascular we’re expecting to see a nice pickup in momentum as we move from the first quarter on through the year. So there are a number of elements of it. Just to remind and I want to be sure from your question that it’s clear to investors, our full year estimated growth over the baseline is mid to upper single digits growth. So I think that level of growth across the quarters with maybe a little bit better in the back and as we said, a little bit softer in the first quarter is the way to think about the year. So I think there are a lot of things going on that are going to accelerate the growth and we feel confident about that.

Very clear, Tom. And then Miles, maybe more of a strategic question. You’ve been very clear about the growth objectives and the growth potential of New Abbott. If you think about capital allocation, what should investors be prepared for over the next couple of years? You have a dividend, an extremely clean balance sheet that’s likely to get cleaner by the end of the year. So in the first two years of the development of the New Abbott growth story, is this more dividend share repurchased or is this more dividend with selective M&A? What should investors be prepared for over the next couple of years as it relates to capital deployment?

Well, I think we've been clear that there is a certain level of dividend and share repurchase that investors have come to expect from us on a relatively reliable, steady, even growing basis. We've not been one to do big spikes of share repurchase, et cetera to – we believe more in a steady return to shareholders over time. And I think it’s important that we live to that steady and reliable return to shareholder identity. I got some feedback from investors in the fall both positive -- more positive I guess about dividend. People like the reliability of income but they always want more income. And the payout ratios between the two companies now in the split are different. They are combined greater than what Abbott paid up through the end of last year on a percent of EPS basis. But AbbVie pays proportionality higher as a percentage of EPS, we now pay proportionally lower as a percentage of EPS. But both are growing dividends. And I got feedback from some thoughtful investors about that and I always listen to investors, but I would say at this point we have communicated at least and opening philosophy of the dividend payout. But frankly, could that change with time, it could. But I would tell you that the change is, it’s likely to increase not do anything else. So because we actually believe in a cash return to our investors in a dividend like fashion. Now buried in your question there was that secret little, what about M&A thing. And we have had a track record in the past of occasionally adding pieces to our business when it made the most economic sense for us etcetera. And while that hasn’t been an area of high focus in the last one to…

Our next question is from David Roman from Goldman Sachs.

As I look across the number of the businesses in the fourth quarter, there was a nice acceleration versus a slowing in Q3. And I guess more specifically I would point out nutritionals, molecular, diagnostics, diabetes, and medical optics. Can you maybe just talk about some of the dynamics underpinning that uptick in growth? And I guess the reason I asked that is that a lot of the guidance that you are providing for certain segments also does point to growth improving throughout the course of 2013. So maybe you could just provide some perspective to the yearend turnaround? And then what are the drivers to allow that to continue and hit the numbers that you're putting out there?

David, I'll take a little crack at framing this and then I'll let Tom and Brian chime in here. I'd say, first of all, while we like nice sequential smooth quarters, the world doesn't actually provide us that. The world doesn't act in smooth fashion. And our third quarter tends to always be, I guess I'd say the slowest of the four of the year because of obvious seasonal impacts and so forth. Whether it's exchange or any of the temporal events that Tom talked about earlier during the course of the year, that obviously has some impact too. Over the course of the year, there were a number of programs or projects that we undertook that you'd begin to see the fruition come to you in the latter part of the year to jumpstart 2013. So I'd say a lot of that is at play here and some of it's just plain old economy in some places or the launch of products taking hold. As we look at 2013, Tom indicated, we're still lapping some of the one-time events of the early part of the year, particularly exchange and so even '13 won't look particularly beautiful in terms of smoothness. It will look like the tale of two halves; a slower first half and a much more robust second half, and that's not really a hockey stick in there as much as it’s comparisons. The underlying true growth of the business is nice and solid, and the launch and timing of products and so forth, solid. So one of our challenges for the year is giving you good visibility to that quarterly gating and what underlying momentum is. Mike called out earlier there's a need I think too for analysts and investors to know what the baseline is they're…

Yeah. David, I think Brian will just cover a couple of the business as you talked about where the momentum did pick up in the quarter and give you a little more color on that. Why don't you go ahead, Brian?

Hi David. Let me start with Nutritionals. As you saw in the quarter, we performed at double-digits. We were up double-digits year-over-year, and we had strong performance both in the U.S. as well as our international business. We've been seeing strong performance out of the U.S. all year. In this quarter we saw particularly continued strong performance from our up-age toddler brands and we have PediaSure and Pedialyte there that have been performing double-digits; PediaSure, most notably consistently throughout the year. We also maintained as you know the share leadership there in the U.S. market as far as our infant formula market, where we have a commanding share lead. As we move into 2013, this may moderate a little bit, but we're up against the market in infant formula. That’s relatively flat. However, we have a lot of momentum from our PediaSure and Pedialyte that will continue into next year that will help offset that. Also we have on our adult business has been growing very strong. It's been growing double digits in the Ensure business for the U.S. and a lot of this comes from new product launches. We've launched a lot of products across our Ensure line, most notably Ensure Complete and we're seeing that these innovations matter. And as Miles mentioned, we had 80 product launches this year across nutrition. So that's been a real differentiator for our portfolio. If you switch over to international, and you take out what we have been talking about these headwinds on the distribution, as we change how we distribute to our end customer, we have been growing double-digits in our Nutrition business. This quarter, we didn't have any headwinds from the distribution programs that we are working through, and what you're seeing is now the results coming through on a peer basis. We have very nice momentum in China, where sequentially we're gaining share and we continue to plan to do so as well into next year. And then if you take a lot of the key emerging markets in nutrition, we are growing double-digits and consistently have been.

Okay. That’s helpful. And then maybe as a follow up to that and maybe, Miles, you could help me think. Just on a longer-term basis where you think conceptually about the growth rate of the business and the top line, that it’s sort of a combination of emerging markets growth driven by strengthening of those economies, lab build out, higher healthcare consumption. And what drives the acceleration in the over top line is really EM becoming a larger percentage of total and the higher segments like nutritional starting to comprising a bigger part of the business. And then a backstop on that new product launches in things like vascular and medical optics and diabetes to at least keep those businesses stable. Is that a fair way to think about the long term growth rate?

Well, I think about the long-term growth rate in a couple of ways. First of all you are right, the emerging markets have their own tailwinds. You know their own wave, if you will. And in those markets I want a bigger surfboard to ride that wave and I think that’s a question of expanding product lines. Whether it’s registrations in the pharmaceutical business or more product innovations in the nutrition business, or taking our device businesses more thoroughly into those markets, which we are doing. We are seeing great opportunity for all of them as those economies and those healthcare systems develop and the sophistication of medicine practice there expand. We are seeing the impact of that on diagnostics, we are seeing it in our coronary business, we are seeing it in our medical optics business. They are all benefiting from that. And the Abbott presence there and the Abbott brand there is actually a big boost to that. I would tell you that -- I recall a consultant telling me about five years ago that there was no point in diagnostics being in China. Five years later I am glad we ignored that. You know it’s a fantastic market for us. We fit well there. It’s great growth and great profitability on top of it so we are in a nice position there. So those markets that have their own tailwind of expansion and growth are great. And it still behooves us to expand and tailor our product lines and so forth to those markets which we are doing. Developed markets are still of very high importance and interest to us. And I think that to be forthright about it, it’s a little different story. You are not relying on the tailwind of growth, you have to take…

Okay. Let me just take one real quick one here, since you didn't put numbers out on HUMIRA. Any perspective you can provide on inventory build or price versus volume growth in the quarter? It looked like a pretty good number there?

Well, I can tell you that Rick Gonzalez won't want me answering any of his questions. I'm going to leave it for him next week to ask him about HUMIRA, because I now live in a no-HUMIRA world here.

I had to try. Thank you very much for the perspective and detail.

Our next question is from Rajeev Jashnani from UBS.

Good morning. I was wondering if you could talk about the U.S. Nutritionals business and specifically the adult segment. The growth there was pretty robust and I know you've provided guidance for the U.S. Nutritionals business overall, but maybe talk about what your – what we can really anticipate over a longer period of time for the U.S. adult business and what kind of opportunities you see there? Thanks.

As Brian indicated in his – when he answered the question a bit earlier, we've just – even though the infant side of this market is a little tougher because of birthrates and the like, we've just had outstanding brand execution on the PediaSure and the Ensure and a number of our brands really across the portfolio and it does come down to innovation. When we can bring out a differentiated product that delivers value for customers, we're finding we can take share in the various markets, and I think the team did a truly outstanding job at that in 2012. For 2013, we have a little bit lower growth expectation in that business and to the contrary a little bit higher growth expectation on the international side. So overall higher growth for the nutrition business overall and really it's just continued brand execution and more or less offsetting a flattish instant market that we've been experiencing. That's an area where clearly we'd like to continue to take share and gain some growth and the team is focused on that. So I think in the U.S., more of a mid to upper sustainable growth rate is probably more in the range, but I think that team aspires to push towards upper single growth and that's what we'll continue to target longer term as we build this business.

And I did – this follows on to Mike's question earlier about getting to EPD and the performance in Western Europe in a little bit more detail. You talked about perhaps taking some measures to improve the performance there in Western Europe with respect to EPD. Could you go into a little bit more detail as to what your options are to change the trajectory there?

As we've talked about before on EPD, this team is really moving into its full execution mode after coming together from the disparate businesses, a lot of focus on commercial execution in this market. And then there has been some cost management as well in this side. So we're trying to be sure that the costs are in line with the revenue opportunities and I'd say those are the two key things. We're open to product opportunities coming out of the various product pipelines, including areas like the collaborations we've had, et cetera. To the extent we can bring those to the market that should offset some of the austerity measures. The last thing I'd say is while the last 12 to 18 months have been tough from an austerity perspective, as we exit 2012 and as we go into 2013, I think we are seeing a bit of stabilization there and I think the comps in the second half of the year relative to the austerity measures should be better and hopefully the government won't be quite as aggressive as we go forward as they have been, as they've gone through this very, very difficult period the last couple of years.

The irony of Europe is, depending on the country, but sometimes the price pressure is greater on the generic or branded generic products than the innovative products. And it depends on the country because they do protect innovation and they do protect the patented products. But once of course it’s off patent, then it's a different story. But I think we have felt a fair amount of pressure there and to some degree the impact on the business is a lot less than probably what it could have been. And I think that the innovations that we put into our products, improvements in our products, expansion of the registrations and products on the shelf or adding new products, all of that helps. And it's sort of a -- it's hard to be specific within detail because it kind of depends locally on each market, each country and the mix of product in that country, and I'd say scale that we are on the shelf in that country. But I think Tom has answered it. It's one that we're paying a lot of attention to and in the meantime while we deal with the headwinds in Europe we try to manage cost and expense very tightly.

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

Two questions, one for Tom. I wonder if you can help us with the quarterly earnings split for the year. You've given us guidance for 1Q, $0.40 to $0.42. Should we assume 2Q is in that range and then 4Q we get a big hockey stick with EPS north of $0.60? And then any commentary on share count, share repurchase? And then I had a follow-up on nutritionals?

Yeah, I'll say just a few things. First of all, when you look at the baseline of the new Abbott businesses, the patterning we're seeing in 2012, there are couple of anomalies as I talked about in my remarks. But overall in general and it's been in this way in this company for number of years with or without the pharmaceutical business, that the second half is generally a more profitable year, growth is driven harder, generally stronger, and margins are a little bit better as we are leveraging that expense base. So, I don't think the patterning you are going to see here is that much different than what you really have seen at Abbott over the years and it's just a function of the business, and as Miles mentioned for example, some of the seasonality factors. So, I think that's one piece of it. And then when you're talking about the second quarter, I think the best thing to do is just to take the profile information I've provided in my remarks and that should give you a good sense of at least this point where we see the quarter coming out and obviously when we get into the first quarter call we'll provide a more specific guidance range. But the intention of trying to give you an early look at the second quarter was to help you kind of build that quarterly gating before we get this final baseline out in front of you. So, I think it's -- and as I said in my remarks, when you cut through the anomalies you're going to find that the year-over-year growth quarter-to-quarter is pretty consistent across the year.

You're not going to have to wait for the fourth year to see it, Glenn, fourth quarter, rather.

Okay. And then any commentary on share repurchase or shares outstanding?

Well, we had a pretty active year in 2012 and we are definitely planning a level of share repurchase for 2013. Obviously with the separate company our relative amounts perspective changes, but I think it will be meaningful and at this point we're just not going to provide forecast on what that will be.

We continue to have robust cash flow.

Okay. And then let me ask you just a follow-up on nutritional, and specifically on China. That's one area of concern that I hear with investors and that is, China in the nutritional market is slowing. And I think the investors hear that because that's commentary coming from Mead Johnson. So, Miles, can you talk about the size of your China nutritionals business and how you see that market? I'm assuming your growth is accelerating, but commentary would be helpful?

China is an important market for us. We're not as concentrated solely in China. We're fairly-- we're in 100 countries in our nutrition business across the board, but clearly China is an important one for us, number one. Number two, investors have asked me all during the late fall, gee, are we seeing a slowing in China? The answer is no, we're not. We're actually seeing acceleration and expansion and we're expanding and our growth rate in China is pretty healthy. And I think China, I would tell you, is a very difficult market for investors, analysts, and even the manufacturers to measure from time-to-time. I did see that one of our competitors in the industry there acknowledged inventory challenges in China. It's hard to measure inventory in China and it's hard to keep track of inventory in China. We know that. I think the large multinationals that are extremely well established have a better view of that than many. It's one of the reasons to be out of distributors and go direct. You can have a greater control over inventories and so forth. I’ve seen that some competitors have indicated that they may have inventory challenges in the market and it's a hard – if you got too much inventory in the market you might think the market is slowing. I would tell you the underlying fundamentals of that market don't appear to us to be changing of slowing. So I think that any of us from time-to-time go through little ups and downs of the absorption of our products in that market. It's such a healthy market, such a good market that I think measuring it quarter-to-quarter isn't always that informative. You’ve got to look at it over the course of the year and I think our competitors will probably acknowledge the same that it's a very healthy market, still robust and we're all still expanding into more cities. It's intensely competitive. It’s obviously drawn a lot of competitive attention of the large four multinationals, which includes us, Mead, the Europeans do very well in that market and there's some local Chinese manufacturers in the value segments that are also growing and doing well. I don't have much to say about the market except that it's really robust, good and we're not experiencing a slowdown there, Glenn.

We have time for one more question.

And our final question today is from Larry Biegelsen from Wells Fargo.

Good morning. Thanks for fitting me in. Tom, let me start with a financial question. The midpoint of the old guidance that you gave was about $2.03. The tax rate came down a little bit, gives you about $0.02. So that gets you about to $2.05 and the midpoint for today's guidance is $2.01. So am I doing the math right? What changed? And the baseline operating margin -- so I think the midpoint of the operating margin guidance for 2013 in the last call was about 18.5%. What is your best guess as that what that was for the new Abbott in 2012? And then I just have one follow-up.

I'd just like to clarify something. Obviously, this was the first time we’ve provide guidance. On the third quarter call, as we moved into our discussions on the two new companies, we felt it was appropriate to provide some meaningful profile perspectives on both companies, which we did on that call and certainly -- and I think the key message there was from a New Abbott perspective was that given the topline growth and our ability to grow the bottom line and expand margins that we saw this as a double digit grower. So this was the first time we provided guidance. Now, if you look at that profile information, a lot has changed in the world since October, but not a lot has changed in terms of our forecast. We're still very close to that profile that we provided. Tax is a little bit better because of the R&D tax credit which obviously we didn't know about back in October and we've gone through a budgeting process. We've looked at final exchange rates, which in a number of countries have moved significantly since October and it’s just a function of completing our budget process, which is why we didn't provide guidance in October because we knew we needed to go through that process before we could provide you a meaningful guidance number. So I think what we're providing today is very, very consistent with what we've talked about in October and anything that – $0.01 or $0.02 up or down is really a function of just the process we've been going through. So I think that hopefully answers your question there, Larry.

Tom, and the R&D tax credit for 2012, did you pushed that into 2013? And then I just wanted to ask, on the Established Pharma, the potential impact to the new drug pricing list in India, can you talk a little bit about that? We've gotten some questions on it. I think you guys have roughly $800 million to $1 billion of exposure in India, and I'll drop. Thank you.

Yeah. So the 2012 R&D tax credit, which as most investors know who have been following the story, very odd for all companies, the way this has to be handled. Since Congress didn't approve the law until after the 31st of December, the accounting impact of getting the 2012 credit actually becomes a 2013 accounting event. That is not reflected in our ongoing guidance. We're planning to call that out as a specified good news item, if you will, in our quarterly reporting in 2013 and that is not reflected. What is included in the guidance is the regular 2013 R&D credit, which is now law, which we can count on as we move through the year. With regard to your question on India, obviously there has been a fair amount of discussion with various ministries on the pricing environment in India. As one might expect, this has gone through a quite a range of discussion. The most recent feedback on this was more of a market-based model, which is much more consistent with the way we view the appropriate approach towards balancing innovation and customer needs within the market. And if you look at the result of that conclusion, it's very consistent with our planning assumptions for 2013 for the established pharmaceutical division. So, at this point in time we feel good about our assumptions. I know there are additional discussions going on and there is not a final approach towards this, but all information we have at this point is that our assumptions are solid for 2013.

Okay. Thank you, operator, and thank you for all of your questions. And that concludes Abbott’s conference call. A replay of this call will be available after 11.00 AM Central Time today on Abbott’s Investor Relations website at www.abbottinvestor.com, and after 11.00 AM Central Time via telephone at 203-369-3329; pass code 5109. The audio replay will be available until 4.00 PM Central Time on Wednesday, February 6. Thank you for joining us today.

Thank you. And this does conclude today's conference, you may disconnect at this time.