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Abbott Laboratories (NYSE:ABT)

Q4 2008 Earnings Call

January 21, 2008 9:00 am ET

Executives

Miles White – Chief Executive Officer

Tom Freyman – Chief Financial Officer

John Thomas – Vice President of Investor Relations

Analysts

Bruce Nudell – UBS

Sara Michelmore - Cowen and Company

David Lewis - Morgan Stanley

Frederick Wise - Leerink Swann

Michael Weinstein - J.P. Morgan

Glen Navarro - RBC Capital Markets

Operator

Welcome to Abbott’s fourth quarter 2008 earnings conference call. (Operator Instructions). I would now like to introduce Mr. John Thomas, Vice President, Investor Relations.

John Thomas

Good morning, and thanks for joining us. Also on today's call will be Miles White, Chairman of the Board and Chief Executive Office, and Tom Freyman, our Executive Vice President of Finance and Chief Financial Officer. Miles will provide opening remarks, and Tom will review the details of our financial results and guidance for 2009. I will then discuss the highlights of our major businesses, and of course as always, following our comments, we’ll take any questions that you have.

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 2007 Form 10-K and in Abbott’s quarterly reports in Securities and Exchange Commission Form 10-Q for the quarters ended June 30th and September 30th 2008 and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as the result of subsequent events or developments.

In today's conference call, as in the past, non-GAAP financial measures will be used to help all of you 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. With that, I will now turn the call over to Tom.

Miles White

Good morning everyone. I’ll ask you to bear with me. I’m getting a little bit of winter cold, so my voice is not quite what it ought to be, but I think we can do this. I’m going to review our 2008 performance as well as our outlook for 2009 across our diverse mix of healthcare businesses. Tom and John will walk you through more details on our results as well as our 2009 outlook. I will keep my comments brief so that you have time for your questions.

As you can see from our earning news release, Abbott reported another year of strong results in 2008, with double-digit sales growth in each of our major global businesses, including medical devices, pharmaceutics, nutritionals, and diagnostics. We ended the full year with total Abbott sales of nearly $30 billion. During 2008, we raised our EPS guidance twice, and for the full year, we reported an additional $0.10 of EPS out of our original guidance finishing the year with EPS growth of approximately 17%. For 2009, we expect another year of double digit EPS growth, which is reflected in the guidance range we announced last week of $3.65 to $3.70 a share. I’ll talk more about 2009 in a moment.

2008 was another productive and successful year for Abbott and our leadership team. We delivered on our major strategic, operational, and financial goals. We generated record operating cash flow, returned more than $2 billion in cash to shareholders in the form of dividends reflecting an 11% increase, and we repurchased approximately $1 billion in stock Abbott stock. 2008 represented our 36th consecutive year of dividend increased. This return of cash in addition to our stock price performance gave our shareholders a total return on the Abbott investment of 46% over the last three years compared to a decrease of 23% for the S&P.

Our cash flow also allowed us to improve our financial flexibility by reducing net debt by $3 billion in 2008. This strong cash flow puts us in a good position to be ready should any important strategic opportunities arise. Last year we achieved important milestones that further strengthened our company including delivering on one of the most productive late stage pipelines in our industry.

In 2008, we received approval for 9 major new products we had on review by regulatory agencies. So we had a tremendous amount of new product activity. Among some of the highlights, in pharmaceutics, we launched two new indications for Humira, both of which are helping us drive continued strong double digit growth in 2009. We received approval for Trilipix, a next generation fenofibrate, which will help us continued to grow our cholesterol franchise, and we launched Simcor, a combination lipid therapy.

In vascular, we received US approval for our Xience V drug-eluting stent, which quickly became the market leader with total platform share of more than 50%. In diabetes care, we received approval for two new freestyle glucose testing products. In diagnostics, we launched Architect 1000 analyzer and assays as well as new molecular testing products, and in nutrition, we introduced a new formulation of Similac advanced called Early Shield developed to improve a baby’s immune system.

Last year, we also continued to augment and reshape our business portfolio through strategic acquisitions, partnerships, and divestitures of non-strategic assets. Most importantly, we concluded our TAP joint venture in the first half of 2008, ending a 30-year history with an equal spread of the business’s strategic assets, and added Lupron to our pharmaceutical business which strengthens our position in cancer therapeutics, a significant area of interest for us and one where we continue to advance products through our R&D pipeline. Last year, we also expanded our position in molecular diagnostics with our recent acquisition of Ibis Biosciences. Ibis has a highly sensitive molecular testing system for rapid identification and characterization of infectious agents. The system has numerous potential commercial applications including disease surveillance, forensics, and human diagnostics in the hospital and clinical setting.

Most recently, we announced the acquisition of Advanced Medical Optics or AMO. This acquisition further strengthens Abbott’s medical device business and marks our entry into the attractive vision care industry, adding a market-leading, diverse, and sustainable new growth platform with more than $1 billion in annual sales. With these new products and portfolio refinements, Abbott is well positioned for 2009. In addition to having one of the lowest exposures to generic pharmaceuticals over the next several years, we have leadership positions in a wide range of attractive growth markets.

Humira, our biologic for the treatment of autoimmune disease, has achieved the top sales growth rate and share gain of any biologic and is well positioned for continued strong double digit growth. There continues to be plenty of room for further penetration in all three market segments in rheumatology, dermatology, and gastroenterology particularly internationally where there is significant opportunity to treat more patients. In the cholesterol market, Niaspan is the number one drug for raising HDL or the good cholesterol, and our TriCor/Trilipix franchise includes the best therapies for reducing triglycerides. Our nutrition business if one of the strongest globally, and we’re the market share leader in a majority of the categories in which we compete including infant formula, adult nutrition, therapeutic nutrition, and performance nutrition.

In vascular devices, we are market leader in bare metal stents, guidewires, and now drug-eluting stents, where as I mentioned Xience V is the number one DES in both the US as well as Europe. We look forward to launching Xience V in Japan by the end of 2009 or early 2010. Japan, as you may know, is a $500 million market opportunity. With the acquisition of AMO, we will be taking a leadership position in the $22 billion vision care industry, a market supported by favorable demographic trends, including a steadily growth elderly population. There are more than 700 million people globally over 60 years old, and this number is estimated to hit 1 billion by 2020. Cataracts are the leading case of vision loss for this population, and AMI has the number two position. AMO is number one in LASIK or refractive surgery and has well-known consumer brands in the eye care segment including Complete and Blink Tears.

The balance of our businesses including our strong positions in these large technology driven markets strengthens our position as a company that combines safety and growth in multiple market environments. We are also focused on improving margins and returns companywide in each of our major core businesses. For example, in our vascular business, the early success of Xience V last year will contribute significantly to the division’s operating profits this year and to our EPS. We’ve used our financial strength to invest in our R&D pipeline as well as our commercial operations to ensure we fully leverage our late-stage pipeline and our many new product introductions.

With the success of our late-stage pipeline, we are now focused on our early to mid-stage opportunities. In pharmaceuticals, we have a number of unique compounds in early stage development in neuroscience, pain management, oncology, immunology, infectious disease and other opportunistic areas. In neuroscience, we are developing compounds to address Alzheimer’s disease, schizophrenia, pain, and other neurological conditions. In oncology, our compounds in development employ unique less toxic approaches to inhibit tumor growth and improve the response to common cancer therapies.

In immunology, we are focused on our strength in biologic research and development, but we’re also evaluating a number of small molecule compounds in our preclinical immunology program. In HCV, we are pursuing both small molecule in biologic targets, and the compounds in our pipeline have the potential to improve upon current treatment options, and we have proprietary research technology that can lead the combination biologic therapies with potential applications in a number of therapeutic areas including oncology and immunology. We are also focused on expanding our medical products pipeline with new and improved nutritional products, new diagnostic systems and tests, and new next-generation vascular technologies. For example, in diagnostics, we continue our efforts to develop more sensitive molecular testing that can predicts which patients are likely to benefit from particular therapies.

In vascular, we’re developing a next generation Xience VES platform that will further improve deliverability, and we’re leading the way in the development of the market’s first fully bioabsorbable drug-eluting stent. We also continue to develop and new and improved nutritional products, and we anticipate opening our new Singapore manufacturing facility in the first quarter to support growing global demand.

To summarize 2008, we met our major goals and invested in new opportunities that will help us achieve consistent performance in the coming years. We further positioned Abbott for sustainable performance driven by multiple new growth franchises, well defined market leadership positions, significant cash flow, and a well-diversified base of reliable earnings. As we enter 2009, we’re pleased with our momentum, and we’re optimistic about our outlook. We expect to deliver another year of double-digit EPS growth supported by constant currency sales growth in the low double digits. We started 2009 focused on doing more of what we do best including taking strategic actions to enhance our mix of businesses. We’ve also reshaped our existing core businesses to drive consistent growth and better returns including our previously announced plans to accelerate margins and generate higher cash flow in our core diagnostics business.

In summary, following a successful 2008, Abbott is better positioned strategically, much stronger financially, and more diverse operationally. We are in the right growth areas, with major new medical devices and pharmaceuticals that are both high growth and durable. With that, I’ll turn it over to Tom and John for a more detailed look on our fourth quarter as well as our outlook for 2009.

Tom Freyman

As you can see from our earnings news release, we had a strong fourth quarter, delivering double-digit sales and earnings growth, and our 2009 EPS outlook which reflects continued double-digit growth. Our major businesses are healthy, and our outlook our strong. During 2008, as Miles indicated, we accomplished a number of strategic objectives that position Abbott for continued industry-leading performance this year and beyond. For the fourth quarter, we reported diluted earnings per share of $1.06, an increase of 14% over the prior year, within our previous guidance range.

Sales growth in the quarter was 1.1% despite a negative 2.5% impact from exchange rates. The adjusted gross margin ratio in the quarter was well ahead of our expectations at 60.9%, reflecting improved product mix, strong operating performance for the vascular business, and a favorable impact of foreign exchange on the ratio. We also had strong investment spending in the quarter, with mid teens growth in both SG&A and R&D. This accelerated level of investment in the fourth quarter will support growth in 2009 and beyond. R&D investment reflects continued progress in our pipeline including programs in biologic and vascular as well as promising phase I and phase II clinical trial programs in neuroscience, oncology, and HPV.

SG&A expense was higher than the previous forecast reflecting accelerated promotional initiatives across most of our businesses including spending to support nine new product approvals in 2008. Other income of $71 million reflects ongoing payments related to our previous joint venture. Tax rate for ongoing operations in the quarter was 17.8%. As a reminder, the fourth quarter tax rate included the full year benefit of the US R&D tax credit since it was enacted retroactively to the beginning the year during the fourth quarter. We took advantage of the positive tax rate trend in the quarter to increase our investment spending as I indicated earlier. The tax in the fourth quarter was sustainable as it is expected to continue at approximately the same rate into 2009 as I’ll discuss in a moment.

Overall as we look at the full year 2008, it was a very successful year. We exceeded our sales growth forecast and our original EPS target, delivering 14% topline growth and 17% EPS growth. We also showed improvement in gross margin, operating margin, and net margin ratios while continuing to invest in the business to drive future growth. Today, we’re confirming the 2009 earnings per share guidance we provided last week of $3.65 to $3.70 reflecting 10-12% growth over 2008. We’re pleased with this level of performance as we’re delivering strong growth despite the expected decline in Depakote sales, which we’ve discussed many times previously.

Our EPS guidance range is forecast to be the same on a GAAP and a non-GAAP basis. We expect 2009 specified items related to the AMO transaction and continuation of the cost reduction initiatives in core diagnostics announced last year to be offset by favorable specified items related to our previous joint venture. Regarding 2009 sales, we expect mid to high single-digit growth on a reported basis. This includes incremental sales from AMO of approximately three quarters of its annual sales as the transaction is expected to close for the end of the first quarter. Our sales forecast reflects an estimated negative impact from foreign exchange of somewhat more than 5% based on current exchange rate. So on a constant currency basis, sales would be up low double digits in 2009.

We are forecasting a modest improvement in the full year gross margin ratio over 2008 to a ratio of somewhere about 58.5% for the full year 2009. The favorable impact on the ratio with improved product mix and efficiency initiatives as well as continued strong growth in Humira and a full year of US Xience sales are expected to be offset by the effect of lower Depakote sales in 2009. We’re forecasting continued investment in research and development programs to drive future growth, with R&D as a percentage of sales of approximately 9%.

As you know, we’ve been building SG&A over the last two years to support the launch of several significant growth drivers across our business. As a result, in 2008 SG&A as a percentage of sales was close to 27.5%. In 2009, we expect to deliver SG&A leverage, with SG&A as a percentage of sales between 26 and 27% for the full year. We expect SG&A as a percentage of sales in the first half of 2009 to be higher than the full year average.

Regarding other aspects of our 2009 outlook, we’re forecasting other income of approximately $300 million related to the ongoing payments from the previous joint venture, and we expect net interest expense of $400 to $450 million including financing costs associated with the AMO transaction.

We’re projecting a 2009 tax rate of 17.5% to 18%, similar to the fourth quarter rate. This rate is based on the growth of key products, the opening of new facilities, and a related mix of income across the various tax jurisdictions. As a result, when we look at the overall P&L for 2009, we expect further improvement in the operating margin ratio as well as the net margin ratio.

Now, let’s turn to our quarterly outlook. For the first time, we are providing first quarter earnings per share guidance of $0.69 to $0.71. This range represents growth over the prior year of 10-12%, in line with our full year EPS growth outlook. Looking forwarding to the remaining quarters of 2009, we expect second quarter EPS growth in the mid single digits in comparison to the prior year when there was a high level of joint venture-related income. Third and fourth quarter EPS growth is expected to be in the low teens. We’re forecasting low single digit sales growth in the first quarter on a reported basis. This includes an estimated negative impact from foreign exchange approaching 6%. So on a constant currency basis, sales growth will be in the high single digits. We expect an ongoing gross margin ratio of around 58% in the first quarter. Other income, again related to our previous joint venture, is forecast at $125 to $160 million in the first quarter, and the tax rate is expected to be in line with our full year guidance.

In summary, our diversified businesses are strong, and we remain well positioned financially. Our performance in 2008 underscores the fact that due to the unique businesses mix Abbott has we perform well regardless of the environment, and we expect that to continue in 2009 with another year of double-digit EPS growth. With that, let’s turn to the business operating highlights.

John Thomas

This morning, I’ll review the performance of our major business segments—pharmaceuticals, nutritionals, and medical products which include diabetes care, diagnostic, and Abbott vascular of course. Let me start with our global pharmaceuticals business where sales grew nearly 10% in the quarter and 14% for the full year. Several key products drove this strong performance, beginning with our immunology business.

Since Humira’s initial market launch in 2003, we’ve exceeded our internal sales expectations and most of yours as well every year. Once again, Humira surpassed our original expectations in 2008 with more than $4.5 billion in global sales, and as you may recall, our original forecast for 2008 was $4 billion worldwide, which we provided one year ago at this time. In the fourth quarter, we saw continued strong patient demand for Humira with global sales up more than 40%. With six indications in total, Humira is poised to achieve the number two market share position in the anti-TNF market during the first half of 2009.

US growth of Humira and all specialty segments continue to outpace the overall anti-TNF market contributing the majority of overall prescription drugs in the category. The growing awareness of Humira among physicians and the expanding body of best in class clinical data will continue to drive further physician and patient demand. Today more than 310,000 people worldwide are being treated with Humira across all six indications.

Let me talk about our success in our major treatment categories. In Crohn’s, Humira US prescription share now exceeds 41%, and we continue to be pleased with the results of our launch into the psoriasis market where Humira US prescription share approaches 30%. The global biologics markets for Crohn’s disease and psoriasis are both expected to grow significantly over the next several years. In fact, the global biologics market for all Humira indications is estimated to exceed about $25 billion by 2012, and with these outstanding clinical results we’re well positioned for continued success in these markets. As a result based on the current momentum and the ongoing launches of new indications, we anticipate global Humira sales growth of more than 25% in 2009.

In lipid management, we continue to outpace the growth of the cholesterol market with double digit growth for both TriCor and Niaspan. Niaspan sales were up 24% in the quarter ending the year with sales of nearly $790 million. In our TriCor-Trilipix franchise, sales for the quarter were $455 million, up 16%. Full year TriCor-Trilipix franchise sales totaled more than $1.3 billion, up more than 10%. We began shipping Trilipix in the fourth quarter following the approval in mid December. In the future, we will continue to report sales of these products as a combined franchise.

Trilipix as you may recall is our next generation fibrate and the first and only fibrate approved for combination use for statins. Supported by the largest clinical program of its kind involving approximately 2700 patients, Trilipix has demonstrated safety and efficacy when used alone or in combination with a statin. Data from three large clinical studies show that Trilipix in combination with the most commonly prescribed statins, Crestor, Lipitor, and Zocor, doubled triglyceride reduction and doubled HDL improvement, the good cholesterol, versus statins alone and significantly improved LDL versus Trilipix alone. Combination therapy was well tolerated with reported safety similar to the monotherapies.

Also during the fourth quarter at the American Heart Association meeting, we presented data from our long-term safety and efficacy study which showed that therapy with Trilipix plus statins combinations was safe, well tolerated, and resulted in comprehensive and sustained improvement in triglycerides, HDL, and LDL. The data also showed sustained improvement from CRP levels and patients with mixed dyslipidemia. CRP or C-reactive protein is associated with information and a risk factor for heart disease and cardiovascular events. Of more than 100 million adults with lipid disorders, only 30 million are being treated with lipid therapies, and only one in four patients reach treatment goals. Majority are taking single therapies, primarily focused on treating only LDL or bad cholesterol, suggesting that many patients could benefit from combination approach treatment to help mange all three lipid levels. As a reminder, development continues on a fixed dose combination of Trilipix and Crestor to address all three lipid parameters in a single pill. We are currently in phase III development and plan to submit an NDA to the agency in the second half of this year. For 2009, we expect continued double digit growth in our total lipid franchise.

Moving on to our virology franchise where we sell the protease inhibitors, Kaletra and Norvir. Kaletra remains a leading treatment for HIV providing physicians with a clinical confidence to manage the disease as a chronic long-term illness. Global Kaletra sales for the quarter were $378 million and full year sales exceeded $1.4 billion. For 2009, in our HIV franchise, which includes both Kaletra and Norvir, we expect mid single digit growth. Regarding Lupron, US sales for the quarter were $147 million and $377 million for the full year 2008. As a reminder, this reflects a partial year of US Lupron sales since the joint venture concluded in April as part of the equal spilt of the assets. For 2009, expect US Lupron sales to approach $600 million, and finally Synthroid continues to remain in a strong market position with US sales of $435 million for 2008. We expect a similar level of total Synthroid sales this year.

So in summary in pharmaceuticals for 2009, we expect mid single digit growth for our global pharmaceuticals business. This includes low single digit growth for our US pharmaceutical sales including the impact of lower Depakote sales and mid single digit growth for international pharmaceuticals including a significant negative impact of foreign exchange.

In our global nutritionals business, sales were up 11% in the fourth quarter, driven by mid-teens growth in international nutritionals, where demand continues to increase for high-quality nutritional products in various emerging markets. Performance was especially strong in pediatric nutritionals where sales outside of the US were up nearly 30%. As Miles mentioned, we are opening a new state-of-the-art manufacturing facility in Singapore. This 500,000 square foot facility will address the growing global demand for our nutritional products while also specifically serving the needs and opportunities of the expanding Asian markets.

In the US, nutritional sales increased nearly 7% in the fourth quarter. New product introductions including the launch of our improved infant formula Similac Advanced EarlyShield and the continued success of Glucerna and Ensure are contributing to this positive momentum, so in 2009, we again expect double-digit growth in our global nutritional business with mid-single digit growth in our US nutritional business and mid-teens growth internationally.

Turning to our medical products businesses, let me start with diabetes care where US sales were up 7% due to the continued successful uptake of our FreeStyle no calibration meters. With both FreeStyle Freedom Lite and FreeStyle Lite products, we continue to differentiate ourselves from the competition. Outside of the US, we remain the number two player, and we continue to expand our presence in emerging markets. So in diabetes care for 2009, we expect mid single digit growth worldwide with stronger growth in Asia and Latin America.

Let me now turn to our diagnostics business where sales were up 4.4% in the fourth quarter and up 13% for the full year. Growth in our global immunochemistry and hematology segment this quarter was a result of continued uptake of our prism blood analyzer and our ARCHITECT immunochemistry system including the continued roll out of our new ARCHITECT i1000 for lower volume labs. In the fourth quarter, we completed the US ARCHITECT transplant menu with the launch of a cyclosporine assay. Also in the quarter, we launched a Chagas test on PRISM outside the US. As you know, Chagas is a parasitic disease endemic to Latin America.

It’s our priority to continue to improve profitability as Miles mentioned in our core diagnostic business, reducing overall costs, improving efficiencies and expanding margins. In fact, we expect to roughly double profit and cash flow in this business over the next several years.

In our Point Of Care business, sales grew more than 8% in the fourth quarter and 16% for the full year. The FDA granted a CLIA waiver for 5 of our i-STAT point of care tests broadening their use beyond the hospital setting.

In molecular diagnostics sales increased more than 18% in the fourth quarter and more than 25% for the full year. In November, we launched in Europe a molecular assay for detection of HPV. Unlike other HPV tests, the Abbott RealTime High Risk HPV assay combines two diagnostic tools in the one test, HPV high risk screening and viral genotyping.

We recently announced the acquisition also of IBIS Biosciences expanding at its molecular diagnostic technology portfolio with the IBIS T5000 Biosensor system.

So, for our worldwide diagnostic business in 2009, we anticipate modest growth for the full year. This includes relatively flat sales growth in immunochemistry and hematology reflecting the impact of foreign exchange as well as continued strong double-digit growth in both molecular diagnostics and point of care.

And finally, in our vascular business, global sales in the fourth quarter were $663 million, up nearly 60%. Sales were driven by the continued success of our drug-eluting stent XIENCE V. Global DES franchise sale which includes XIENCE as well as other third-party DES product revenues were $332 million for the quarter. Sales of XIENCE V now account for approximately 75% of our total DES franchise revenue.

XIENCE has become the clear US market leader gaining share at the expense of all three major competitors. US market share for XIENCE in the fourth quarter was approaching 30%. XIENCE is clearly the product of choice among interventional cardiologists based on its clinical data and best in class deliverability.

Looking at the DES part market more broadly, we’re pleased to see continued steady improvement with US DES penetration now in the mid 70s, and that’s up about 15 percentage points from earlier in 2007 or late 2007.

Outside of the US, XIENCE continues as the market leader in Europe with share in the mid to upper 20% range. As you know, we completed our regulatory submission for XIENCE in Japan in June 2008, and Japan is a $500 million market that’s had consistently high DES penetration rates. Given these market characteristics plus a Japanese patient population that tends to have smaller vessels, we expect that XIENCE V will do well given its superb deliverability profile and very low late loss.

In addition to Japan, we anticipate launching XIENCE this year in Canada, China, and Mexico. We are also continuing to expand our current XIENCE platform, and in the fourth quarter began enrolling our SPIRIT Small Vessel clinical trial to evaluate XIENCE NANO, a 2.25 mm XIENCE size. XIENCE NANO is already available outside of the US and features the proven efficacy, safety, and deliverability of XIENCE for smaller vessels.

In our vascular pipeline, we continue to work on our next generation XIENCE DES. We’re capitalizing on the proven attributes of XIENCE V, and at the same time improving deliverability, especially in longer lengths. This will increase physician access to complex anatomy and disease and minimize vessel injury. We expect to launch this next generation DES in Europe before the end of this year, and we’ll begin our US clinical trials for this next generation XIENCE this year. We anticipate XIENCE only sales this year in 2009 to approach a billion dollars in total, contributing to the strong double-digit sales growth expectations for our vascular business for the full year in addition to the margin contribution that Miles mentioned.

Our broad-based pipeline continues to be productive. We had nine new major regulatory approvals last year including five approvals in our global pharmaceuticals business and four approvals in medical products. In 2009, we anticipate a number of new product filings and approvals including regulatory submissions for the combined asthma product, Flutiform, and the TRILIPIX/CRESTOR fixed dose combination. As I mentioned, we expect European approval of our next-generation XIENCE drug-eluting stent by the end of this year and in Japan we anticipate approval for XIENCE V and plan to file for our HUMIRA Crohn’s indication in the second half of the year.

Finally, regarding the acquisition we announced last week of Advanced Medical Optics, a global leader in ophthalmology. AMO produces more than $1 billion in annualized revenue from three vision care segments; cataract surgery, LASIK’s laser vision correction, and eye care. As Tom indicated, given that we anticipate closing the transaction by the end of the first quarter, approximately three-quarters of these annualized sales will be incremental to Abbot’s sales base in 2009. We have one update post last week’s conference call on our acquisition. AMO received FDA approval last Friday for the TECNIS Multifocal Intraocular Lens or IOL. The TECNIS Multifocal IOL are readily available in Europe has performed well in international markets. It gives patient superior near vision and reading speed compared to other presbyopia-correcting IOLs and has the highest patient satisfaction rate at 95%. Cataract surgery including IOLs is AMO’s largest business segment with about $500 million in sales and this will help them continue to grow their share in the market, more than $4 billion globally.

So, in summary, we’re very pleased with our strong and diversified performance for the fourth quarter and for the full year 2008. We delivered double-digit sales growth in each of our major global businesses in the fourth quarter as well as EPS growth of 14%. Our underlying businesses are strong, our core growth franchises are healthy, and at the same time we’re investing to sustain this performance in the future. For 2009, we expect another year of double-digit EPS growth. With that, operator, we’ll open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question this morning is from Mike Weinstein from J.P. Morgan.

Michael Weinstein - J.P. Morgan

Tom, if I just compare your guidance versus where the street is at, and there is a little bit of apples and oranges because the street models don’t include AMO yet, your SG&A guidance is for more leverage as what the street is modeling and there is a lower tax rate than what the street is modeling. So, given the fact your EPS guidance is certainly bracketed where the street was at, why shouldn’t numbers be higher than what you are suggesting on the bottomline for 2009?

Thomas C. Freyman

We did over-deliver in 2008. We had an excellent year in terms of continually beating our own forecast throughout the year, and certainly if the business performance, that’s a possibility going forward at this point in time. This is the range we feel comfortable with particularly with the dynamics going on, and certainly, if we perform better, hopefully we will deliver at the higher end of that range as we did last year.

Michael Weinstein - J.P. Morgan

What offset should be thinking about in terms of holding back the business? Could you just comment on both the impact of the dollar in the macro-environment?

Thomas C. Freyman

When I indicated those sales impact in my guidance against our reported namely 5% plus for the year in 2009 estimated now and 6% plus in the first quarter, I think that’s a good indication to you and our investors that we have taken into account very realistic assumptions on exchange, and we could properly dial that into our forecast for the year. So, I think we’re in good shape on that. We knew as we went through our budgeting process this year that that was something that we’d have to manage and that is our job to manage and we’ve done that with the guidance we’ve delivered. So, we feel pretty good about that and again it’s up to our businesses, we’ll see how they perform, and as always, we love to perform at the higher ends of the range, we’ll see what happens.

Michael Weinstein - J.P. Morgan

Miles, you started off the year by announcing the AMO transaction. We were at the J&J meeting yesterday and everybody heard some of the comments relative to the opportunities in 2009. You, like J&J are in a strong position financially, you’ve taken advantage of that opportunity early in the year; should we view 2009 and the fact that you’re in relatively good shape at this point and generating the earnings growth that you are targeting, you’re in good position financially. Should we view it as a year in which you’ll continue to take advantage of some of the better opportunities out there in the marketplace particularly given where companies are being valued.

Miles D. White

I think it’s a good time to be a buyer as long as there is a willing seller, and I think that’s the big if here, as long as there is a willing seller. A lot of values are depressed and for a lot of good reasons in some cases and not for good reasons in others. So, as is normal we maintain pretty tight vigilance over a lot of opportunities that we’re interested in across the board for all of our businesses and try to stay as current and up to date on those opportunities as we can because you wait for the right timing and the right opportunity and the right atmosphere and so forth to capitalize, I think this is one of those years when that’s possible. I want to be careful and prudent about that though and not get too far ahead of ourselves, and I think, no investor has an appetite as usual for dilution and so I am cautious about that and cautious about making fair deals that are valued properly, relative to the prospects of the business, and it doesn’t always work out that way. So, sometimes the deal doesn’t get made, but I am vigilant, I would say, we all are, to watching for the things that we would like to put in the mix at Abbott. I would not forecast to you anything of, what I call are, gargantuan in size. I don’t have anything on the front burner. I told you months ago I didn’t have anything on the front burner and then bought AMO. It was not on the front burner at that time, but it got there. We don’t have something on the front burner now, but I think your observation that this is a year to at least be vigilant and watching for those opportunities is quite valid.

Michael Weinstein - J.P. Morgan

Last question, you’ve talked over the years, Miles, about ideally, in an ideal world, shifting the mix of business a little bit more towards devices than it has stood in that past or is at today. Is that still valid, that ideal world, would you like to have a little bit more device exposure?

Miles D. White

Yes, I would, and interesting enough, it is not specific to devices. I mean it could be any number of categories. I know I give you distinction with AMO. I was particularly interested in some segments of business that are of course tech driven and R&D driven growth businesses and so forth, that they have the characteristics of a lot of our businesses, but not as dependant on reimbursement or insurance, etc. Now, with AMO that’s what you get, but you also get that it’s vulnerable to a tough economy, and frankly, if it wasn’t vulnerable to a tough economy I am not sure we’d own it, because we might not have had the opportunity that exists here. So, I do want the company to have a diverse mix of businesses with some different characteristics because in particular in times like this, you want a lot of moving parts at work to work with in order to sustain the projection of earnings or growth or returns that we have as an identity for our investors, and I think in order to have the identity that we do as a business much like J&J’s because we both have diverse models in our business and we’re not pure-play pharma or pure-play device or whatever, I think, we’re a more stable and reliable long-term investment, and frankly a lot stronger investment in the short term and particularly in adversity; and if you have the mix of different business models to work with, you can sustain that. So, as I look at it, I’ve certainly been happy with the performance on the pharma side of the business. There have been a couple of times when I wished that we had opportunities on the device or non-pharma side and sure enough something like Kos comes along and it’s attractive and we add it to the pharma business. So, my inclination is more balanced on the non-pharma side. I need all of these businesses to be performing well and that includes pharma and all the device and non-pharma businesses. If you are looking for an inclination of where’s my priority, yes sure, my priority on non-pharma, but I am not going to pass up an attractive pharma opportunity if it exists and fits us.

Operator

Our next question is from Glen Navarro from RBC Capital Markets.

Glen Navarro - RBC Capital Markets

A couple of things; first on HUMIRA. US sales were stronger than I was thinking, and I know, in the fourth quarter you get some wholesaler buying; can you quantify, was there any wholesaler buying in the fourth quarter, was it pure demand; and then, the OUS number was a little bit lower than I was thinking and I am wondering is that a demand or is that mostly currency; and then as you look at ’09 for HUMIRA, can you break down a little bit in terms of guidance, US versus OUS sale. I know you gave 25% growth, but are you thinking 20% or less in the US and faster OUS?

Thomas C. Freyman

Glen, we actually had very strong prescription growth if you look at total scripts than the year end of fourth quarter and in December. There was also a little bit of price that helped us. So, no, there wasn’t any major wholesaler buying activity regarding HUMIRA in the quarter. I think it’s pretty close to, if you add up those pieces on scripts written and price increase. Ex-US, we looked at in a constant currency basis in line with previous quarters except you take our exchange from the mix as we go forward, it should be similar. So, pretty balanced as we go into 2009, and as I did mention, we noted more than 25% growth for the overall product globally. So, continues showing momentum with all the different indications and a continued strong data that we see with the product longer term, and obviously as we’ve mentioned many times before, physicians consider HUMIRA now the gold standard in an environment where they want to use products that they’re comfortable with and are not as willing to use products that are either new mechanisms of actions or where their safety record isn’t as long as HUMIRA has now.

Glen Navarro - RBC Capital Markets

Just a followup, for the price increase that you mentioned in the fourth quarter in the US, was that the first price increase of the year for HUMIRA, and secondly, what was the increase, 2% or 3%, can you tell us what the increase was?

Thomas C. Freyman

It was less than 5%, but there was also a price increase that we’d taken about a year ago. So, you have one in January and then you had one in December.

Glen Navarro - RBC Capital Markets

One last followup, just to clarify, you mentioned XIENCE approval in Japan toward the end of this year, but I believe the launch is more ’10 because then you have to sit and wait for reimbursement, is that correct?

Thomas C. Freyman

Yes, let me be clear about that. We don’t have huge expectations for that. In fact, we don’t have anything in our model for ’09 to be conservative. The numbers I talked about were vascular approaching a billion dollars of XIENCE sales this year did not include any XIENCE in Japan. So, what we have is, we think we could get it by the end of this year, and if we do, we’ll obviously launch it and that’d be great, but I think early ’10 is probably more realistic for modeling purposes.

Operator

Our next question is from Rick Wise from Leerink Swann.

Frederick Wise - Leerink Swann

Let me go back to the strategic issues again, as long as I’ve got you, can you expand in another direction, Miles, I hear you have the diversity, from whatever angle you like. I see with AMO, a large market, aging population, technology, new markets, and reimbursement; is there anything thematic you are looking for or when you are thinking about acquisitions, are you looking at disease states, maybe a little more color from those angles, about your thought process.

Miles D. White

Yes, actually, Rick, we do. I’ll use ophthalmology as an example. We’ve been studying that market for over three years very closely, and we’ve done a lot of work learning the market, understanding its dynamics, its underlying dynamics, competitions, the technology, the patent situations, etc. We wanted to know everything about it because since it was a new area for us we wanted a really thorough understanding of it before we entered it and we wanted a clear idea of what we were going to do in the market once we had a cornerstone platform and a leadership position, you know, where are we going to go from here. So, we did all that. Now, I’d tell you as a priority, we’ve looked at a number of market segments that way. We tend to look at those where there’s a lot of opportunity for innovation, where there’s clearly an opportunity for a better product that makes a difference, where there’s clearly an opportunity for growth, and hopefully robust growth so that the demographics or whatever the situation is will drive it because that’s what our investors look for, its long-term growth, cash flow generation, etc., and innovation driven. So, we want to make sure that we understand what phase II, phase III, phase IV of the generations of that business are going to look like and understand what we’re going to do about them, both organically or possibly by adding to them. As we look at other things that we might add to the company, obviously, one of our first priorities is expanding on the business as we know, whether it be in other product lines or geographically as the case may be, but we’re looking to add to the franchises or the platforms that we’ve already developed to extend them, and so, in terms of the kinds of things we look at, we aren’t just opportunistically reacting to the ones that knock on the door. We have in mind where we’re interested in dobbing our businesses, whether we already own them or see a way to build a new addition to Abbott like ophthalmology. So, that’s how we approach it, and then of course, there’s always the constraint of how do we finance it relative to all our cash uses and what’s the right mix of returns for the investor. At the end of the day you can’t do everything.

Frederick Wise - Leerink Swann

That’s good news. Turning to a couple of operational questions; diabetes, Tom, you seem to grow nicely, I suspect, better than the market. You seem to be gaining share. May be talk about the key drivers there. As well, the Singapore facility now opening, can you talk a little bit about the impact on growth, i.e., through distribution and profitability, i.e., lower cost and margins, just reflect on that a little bit.

Thomas C. Freyman

Yes, the Singapore facility is opening this quarter as Miles indicated in his remarks. This is a very large, the largest nutritional plant ever, and we’ll need to service a very rapidly growing Asian market. Historically, we’ve been sourcing this market from Europe, which has been a higher cost environment, and certainly we’re moving pretty heavy products and we have freight inefficiencies and the like. There are a lot of good operating reasons to go there. It’s a very modern nutrition plant and that’s a contributor from a gross margin point of view going forward in that nutrition business. So, that’s a very nice addition and it’s moving this quarter and it’ll be supporting that market for a long time to come. In diabetes care, we have been doing better, particularly in the US, we’ve been gaining share, I think. You are just seeing better commercial execution from our perspective. We’ve had some very good promotional programs and I think the brand recognition of the FreeStyle products is increasing, and we’re seeing a nice market share pick up. So, that’s good news and we hope to continue that going into 2009.

Operator

Our next question is from David Lewis from Morgan Stanley.

David Lewis - Morgan Stanley

Miles, I hate to repeat the M&A horse yet again, but just very quickly; if what I am hearing is correct, Abbott is more inclined to pursue gross acquisition at potentially a premium or potential dilution than they are to pursue distressed or value assets?

Miles D. White

Jeez, I don’t think I said that. No, I don’t think that was the message. Did it sound like I said something like that?

David Lewis - Morgan Stanley

How about growth versus value or growth versus distressed assets?

Miles D. White

I try to characterize. A lot of people would say that, for example, that AMO was distressed by the economy and they’d say it’s a growth asset too. What’s distressed? The stock price or the business fundamentals or what? I think at the end of the day I look for strategically what fits what we do. We do look for something that is going to be growing business, whether it’s distressed or not doesn’t bother me. I am not particularly dis-inclined towards distressed or not distressed. In some cases I think that we may well be able to bring the resources or management to the party to help the business in some fashion. I don’t rule out distressed, but I look more for what businesses we want to be in and how they fit with us. With regard to dilution in general, I am averse to dilution and I think investors are. So, we tend to look for deals that frankly we can make happen without dilution or at least if there’s going to be any, it’s so modest that we ought to be able to absorb it in sort of the rounding area of the larger business, but I am not inclined to give investors significant dilution or even modest dilution, to tell you the truth, because I think especially at a time like this, our investors want to know that they can rely on us to deliver the EPS we forecasted, and that is by God what we’re going to do. So, when we do our planning for the year. We think then properly conservative on all the moving parts and anticipated many things that could happen that could affect us, and so, as I look at a lot of these deals, I’d say if I was ever going to offer something to our investors that had dilution, it would have to be mightily compelling, and then make the case that it was mightily compelling, but I haven’t done that since Knoll, I think it was seven years ago or whenever it was, and that one was mightily compelling and I think that’s proven to be the case. Anyone who is unhappy with the dilution at that time will say now what a great buy that was; it seemed to work out okay.

David Lewis - Morgan Stanley

In terms of the regulatory framework, I wonder if you’d comment on politically what are the hawked at issues for Abbott and the board heading into the new political environment.

Miles D. White

I think the entire industry has got all the same issues. There are some issues that transcend industries. I am most concerned in the new administration about corporate tax policy, etc., because that will affect a lot of industries and the incentive for businesses in the United States to invest to create jobs, and I think that the creation of jobs is going to be extremely important to the recovery of the economy in the United States which is going to be important to everybody, and that affects us too; that’s one of the things that I am watching carefully, whether it’s in the stimulus package or elsewhere. Then of course there are things that are specific to our industry. We’ve tried to quantify what we believe might be the impact of any number of different outcomes depending on how the administration goes about any changes to healthcare or healthcare reform and so on. With regard to the regulatory environment at the FDA I think all of us have experienced over the last decade increases in the fees we pay to have more and more people at the FDA able to review the submissions we make and so on and so forth. We saw at the end of last year an awful lot of companies received what is now called a complete response letter and there was an awful lot of that implying that the agency didn’t have enough resource to complete the task in some cases or reviewing these many products and that is an issue and it is a problem. In some cases many of us have been told to go back and provide more data, etc., and we will do the same, but sort of the avalanche of all of that from about July to the end of the year, I thought, was a warning light that, ‘hey, this needs either more headcount or more management’ because there is some kind of bottleneck here that’s clearing affecting the pharma side of the business. I would tell you that we generally had and specifically had a very good year from the standpoint of getting our products through the FDA. We worked with the agency the way the agency wanted to be worked with and when we had ten major things we wanted to get out of the agency, we got nine, and fell short on the tenth, but I think that was a pretty good track record overall, although all of us would like to have an agency that could do what it has to do with regard to the safety and efficacy of products, but at the same time execute in a timely fashion, and I think we’ve gone through a bit of a transition on that because last year you saw a lot of concern over safety and some changes in the kind of data they wanted and so on. I look at that and I think I’m glad we got all of our new products out, and right now we are in launch mode for the next couple of years, launching those products, and that will drive our growth for at least the next five, and we are back in a phase where we are looking at earlier and mid stage stuff, so we are not as dependent right now, in fact, not at all dependent on whatever change may take place at the agency. We are not hung up in it, which I think, is fortunate for us. I guess everything got out the door just in time.

David Lewis - Morgan Stanley

In terms of capital flow, given the $5 billion buyback which is larger than we’ve seen in the last couple of years and the AMO transaction, can we still expect you to execute on that buyback in totality or significantly given AMO, and then what’s the expectation for shares outstanding for 2009?

Tom Freyman

That buyback was intended to cover a long period of time. If you’ve followed us, we have been buying somewhere in the range of $800 million to $1 billion in stock every year, and in 2008, we did buy back $1 billion dollars in stock, and certainly we intend to repurchase shares in 2009 even with the AMO financing, and we’ve talked to the rating agencies about that, and they are comfortable with that, so we’ll continue to buy back shares. The $5 billion gives us flexibility in the event that there is something truly opportunistic, but I think if you were modeling Abbott, I’d plan for something steadier and over a reasonable period of time.

Operator

The next question comes from Bruce Nudell from UBS.

Bruce Nudell – UBS

Miles, I have a question for you. We are modeling around $9 billion in Humira sales 2012 to 2013. First of all, is a franchise of that scale feasible in that timeframe in your mind, and what are the strategic consequences both from a margin and cash flow perspective, as well as the balancing of risks of having such a dominant franchise?

Miles White

Generally, I don’t forecast out that far, at least publicly. We got our own models and stuff internally, but if you ask me in the simple basis is it feasible, yes, it’s feasible. It could be that. Now at the same time, I’m mindful of the fact that a franchise that large does create a dependency if you will. What’s fortunate here is if that product, when that product faces competition more direct even generic-like competition, it won’t be the same model as what we see in a typical primary care pill-type product, but having said that, I would tell you that among the things that we think about right now and all the time in the staging of our pipeline is the fact that someday that product will peak and perhaps diminish, and as far out as that may be, it behooves us right now to be preparing for what’s going to replace that product and replace that growth, and as you have seen in some of the companies in our industry, some people haven’t done that very well. I’d point to us this year, we are going through Depakote going generic right now, and yet while Depakote has gone generic, we still delivered 17% EPS growth in 2008, and we are still forecasting double-digit EPS growth in 2009, and we haven’t lapped it yet, and so we are going to see the impact of Depakote against that, and one of the reasons we are able to do that and steadily deliver is because again of the diversity of the products we’ve got and the magnitude of new products that we’ve got, and somewhere out there 2012 or 2013, we will obviously need to have products coming that will fill whatever diminishment Humira begins to experience at that time. We understand that’s the past, we understand that’s job, and we are not going to wait till then to worry about it. We are paying attention to that right now in the depth of our pipeline and so forth because that’s what you do. Our identity as a company is growth, and if one of your major products is going to cease to grow or even diminish, then you have to be prepared for that, and we will be.

Bruce Nudell – UBS

A followup on Humira. Ulcerative colitis is the one major identified segment that you don’t have a label for yet. What do you think of the timing of the US approval? Is it a 2011 event? Could you scale its opportunity relative to Crohn’s, let’s say?

Miles White

It’s a smaller opportunity, Bruce, and a longer term one, and I don’t have any update on specific timing for you today, but I’ll get back to you. It’s obviously a couple of years out.

Bruce Nudell – UBS

Could you give some general color on the response to Trilipix, the strategy generally speaking, and will it require the combination of those pills to really resonate with the customer?

Miles White

Yeah, it’s a little early to be commenting on Trilipix. As I mentioned in my commentary Bruce that we had some initial shipments that happened in the fourth quarter. We are just now beginning the launch in earnest with our sales force. As I mentioned in the comments there is a lot of compelling data, the largest clinical study of its kind that was done with over 2700 patients, so clearly the product has demonstrated through research studies and those published that it’s got the safety and efficacy when used alone or in combination with the statin, so we are looking forward to that. That will be part of the mix of that TriCor and Trilipix franchise, which is again expected to grow in a nice clip here in 2009. I might remind you that has been growing ahead of the overall market, so we feel like we are in pretty good shape there. We have talked about Crestor fixed dose; that’s another part of the overall program. That’ll give us unprecedented number of compounds and therapies in this category if you look across from everything from TriCor, Trilipix to Niaspan to Simcor and then the fixed dose; that’s five categories. So, we are in a unique position unlike any of our peers, and we can continue to grow that product.

Operator

Our final question is from Sara Michelmore from Cowen and Company.

Sara Michelmore – Cowen and Company

Miles, can you just talk a little about the investments that you’ve made the last couple of years and the pharmaceutical R&D pipeline? It does seem like you do have an increase in the amount of phase I or phase II compounds that are coming through. Can you talk just philosophically about the R&D focus there and maybe highlight for us what you think are the areas we should be focused on the next two to three years?

Miles White

Yes, we went through a fairly rigorous self-evaluation, and we had some outside help with this, which was actually terrific of our pharmaceutical, both discovery and development operations several years ago, and out of that came a sharper focus on the categories that we believed we could do well in that we had some strength in or that had real value to therapy, to patients, etc., and so we did focus, and we have seen some productivity improvements, we’ve changed the way that we manage discovery. We have been much more productive the last years in things coming out of discovery and in to phase I or phase II. We had approximately 20 phase I or II starts in 2008, which was nearly double the number of new chemical entities that started in 2007, so we are seeing nice productivity there. We got a number of exciting areas that, I think, have best in class potential. Our BCL 2 program is a new mode of treating cancer. We think that could extend the areas beyond cancer, like immunology. We’ve got a TRPV-1 where our goal is create a non-opioid analgesic to address unmet needs and opiate dependence, the side effect issues in the pain management area. We’ve got an antiviral depth which helps us with our HCV programs. We’ve got some technology that frankly helps us with combination biologics, which I think will have tremendous potential and then of course we’ve got some biologics in development coming that will be even better for psoriasis and Crohn’s disease than the therapies existing today, so I think we have a lot of things there. There is a lot of work we are doing in CNS, in particular in Alzheimer’s that I’m excited about. We haven’t talked a lot about this. Generally the street loves to hear about the pipelines, but it does not seem to do a lot, so I think we are in a phase where we are pretty excited about a lot of things that are in phase I and II coming, and that’s particularly important for us because of the previous question. If you go out five to ten years, we want to make sure that we’ve got a robust set of sizeable and important products, and I’d say for the next five years, the shape of our business is such that we can reliably, I think, see steady double-digit bottomline growth. We are spending more time in our R&D pipelines planning and sorting out years six through ten and eleven through fifteen, and I think in a company like ours with the diverse products we have and the long lead times in the R&D cycle that we have in some areas, that’s what you have to do, and if you want to be organically driven, and we do, you’ve got to do that, and we are, and so I think we are in a really good place that way. It doesn’t mean that you would never enhance it with other acquisitions or partnerships or licensing agreements. Obviously we would, which is always gravy, but we want the fundamental core of our R&D to be strong and sustainable, and I like where we are right now.

Sara Michelmore – Cowen and Company

A question for Tom on the income that you are getting from Takeda. I think I asked this question also on the last call, but just wondering as you look at the share, it says $300 million that you talked about. Is that sort of a firm number or is there some potential for some variability there based on milestones?

Tom Freyman

That’s very consistent with the number we have been providing as an annual level of income related to the previous joint venture, and pretty close to where we were last year, so there are some events, but we consider those to be high probability of them that would drive a modest portion of that, and as we’ve said before we tend to plan conservatively for those things, and so we are very comfortable with the $300 million number we have in the forecast for 2009.

Sara Michelmore – Cowen and Company

Do we need to think about delays or other things like that in the Takeda pipeline from products that were part of that TAP joint venture?

Tom Freyman

These items are totally predictable by quarter, but as we plan our guidance, we take into account and conservatively consider very high probability scenarios before we put them into our numbers, so yet there will be some quarterly variability, but we have been pretty cautious about that.

John Thomas

That concludes our conference call for today. A replay will be available after 11 o’clock central time on our investor relations website at abbottinvestor.com and after 11 o’clock central via telephone at 203-369-0329, and the confirmation code for that is 1272691. Audio replay will be available until 4 p.m. next week Wednesday, February 4th, and again thank you all for joining us this morning and for your time.

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Source: Abbott Laboratories Q4 2008 Earnings Call Transcript
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