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Executives

Brian Yoor - Vice President of Investor Relations

Miles White - Chairman and Chief Executive Officer

Tom Freyman - Chief Financial Officer and Executive Vice President of Finance

Analysts

Kristen Stewart - Deutsche Bank

David Roman - Goldman Sachs

Rick Weiss - Stifel Nicolaus

Glenn Novarro - RBC Capital Markets

Michael Weinstein – JP Morgan Chase & Co

Rajeev Jashnani – UBS Research

David R. Lewis - Morgan Stanley

Larry Biegelsen – Wells Fargo

Abbott Laboratories (ABT) Q1 2013 Earnings Call April 17, 2013 9:00 AM ET

Operator

Good morning and thank you for standing by. Welcome to Abbott's First Quarter 2013 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.

Brian Yoor

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 opening remarks and Tom and I will discuss our performance in more detail. Following our comments, Miles, Tom and I will take your questions.

Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2013. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are disclosed in Item 1a, Risk Factors, to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2012. 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 measures 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 Miles.

Miles White

Okay, thanks Brian. Good morning. This morning we reported first quarter results that were in line with our expectations. Ongoing earnings per share were $0.42, which is at the high end of our guidance range, and sales increased 3.5% operationally led by a strong performance in our nutrition and diagnostics businesses. We are confirming our full year 2013 ongoing earnings per share outlook which is for double-digit growth at the mid-point of the range.

We are delivering on our current growth expectations despite a mixed global economy, developed markets globally continue to be challenged by 2012 austerity measures and weak economic conditions and that impacted our results this quarter as we saw sales decline low single digits before exchange in these markets. We planned for that and expect to see some improvement in the second half of the year. And while most developed market currencies were relatively stable, the Yen weakened significantly representative of the efforts by some governments to stimulate weak economies.

At the same time emerging markets continue to be a significant opportunity for us, one where the demand for healthcare and nutrition is going rapidly and where Abbott is well positioned to benefit from the favorable trends that are taking place in these markets. This quarter more than 40% of our total sales were in emerging markets, in the first quarter we saw particularly strong growth in China, India, Russia and Vietnam, with sales in 8 key emerging markets up 18% before exchange.

As we accelerate growth across these countries, we expect to expand our emerging market sales more than 50% of Abbott's total sales over the next several years. Before Tom and Brian discuss our results in detail, I will briefly comment on our strategic priority as they relate to first quarter performance.

As I just discussed, driving above market growth across emerging markets is a key priority. Our sales across all of the emerging markets were $2.2 billion in the first quarter, increasing 15% with strong results across our major businesses including, nutrition, core diagnostics and vascular devices. In nutrition, emerging market sales represent 45% of total nutrition sales and increased more than 20%. We have broad global reach today with our pediatric and adult brands and we prioritize the group of key markets to deliver on our future growth targets. This includes multiple countries where we are expanding our current leadership positions such as the Vietnam, where we are shaping new markets such as India, and where we are aggressively expanding our geographic reach such as China.

By 2015 we expect to more than double our presence in China, which is the largest and fastest growing nutritional market in the world. We are executing well against that goal through the first quarter of this year. We are also making progress with the expansion of global capacity to support the continued strong global demand for pediatric and adult nutrition. Our three new facilities in China, India and the U.S. are expected to come online later this year or early next year.

In established pharmaceuticals, we have prioritized 14 emerging markets where the demand for healthcare is rapidly expanding and where we are building our presence to drive above market growth. Sales at these key emerging markets represent approximately 50% of EPD's sales, and this quarter increased nearly 9% led by growth in Russia, India and China. We anticipate our key emerging markets to deliver double-digit growth for the full year as we continue to build out our local product portfolios and expand in-country in these markets.

In medical devices, vascular devices delivered 20% emerging market growth while medical optics and diabetes care delivered mid-teens growth. Medical devices growth was driven by continued strong performance of our TECNIS brand of cataract intraocular lenses and our market leading vascular leading technology. In our diabetes care business, our emerging markets strength was driven by share gains in several key market including China. In diagnostics, more than 70% of our sales occur outside the United States with a growing portion in emerging markets. In core laboratory diagnostics, these markets represent nearly 40% of sales and we continue to outpace market growth in our priority markets, again China, Brazil and Russia.

We have seen continued strong demand in the core laboratory for our industry-leading systems including ARCHITECT. In China this business again grew nearly 40%. Our second priority is to continue to drive share gains and market expansion through new product launches and brand enhancements. In nutrition this quarter we completed 19 new product launches globally, on track for approximately 70 by year-end. This includes the first international market launches of our new Similac next generation formula and a continued global roll-out of our infant formula tolerance line. These innovations contributed to our 21% growth rate in international pediatric nutrition.

In the U.S. we have launched a new line of ZonePerfect bars as well as innovations across our Similac brand, to maintain our leading infant formula share position in the hospital and retail segments. In established pharmaceuticals we completed more than 45 new product launches across 16 geographies. This included new formulations in core brands that broaden our key therapeutic portfolios in gastroenterology and neurology. In medical devices, we continued the roll out of absorb in international markets and in January initiated our absorb U.S. pivotal trial.

Also in January in the U.S. we launched our new drug-eluting stent system, XIENCE Xpedition, and are on track for a mid-year approval in Japan. MitraClip, our structural heart device for mitral regurgitation increased double-digits internationally. In medical optics, we launched the new cataract intraocular lens in Japan which now give us access to 70% of the market where we were not previously competing. We also expect to launch our TECNIS Toric IOL in the U.S. shortly.

In diabetes care we are on track to initiate our pivotal trial by year-end for our next generation sensor that we expect to first bring to the European market by the end of 2014. And in diagnostics we continue to broaden our ARCHITECT menu with several new tests. We also launched our next generation automation solution that improves efficiency and work flow and increased testing volumes. Development work continued on six new system platforms across core laboratory point of care and molecular that are expected to launch over the next several years. These new systems add new features that are important to our customers such as speed, scalability and shorter turnaround time.

The third priority I’ll highlight is margin expansion. Our operating margin in the first quarter was in line with our expectation and we remain on track to deliver approximately 100 basis points of expansion for the full year. While we’re focused on margin improvement across our businesses, nutrition and diagnostics are driving much of the improvement this year.

Nutrition operating margin increased significantly over the first quarter 2012 on track to improve at least 300 basis points for the full year. We’re confident in our ability to deliver on our target of 20% of sales by 2015 as we implemented a number of planned actions last year and expect to continue our progress in 2013.

In diagnostics operating margin also improved over the prior year as we continue to execute on our efficiency initiatives in manufacturing supply chain. We’re on track to reach our 2015 operating margin target in this business as well which is to exceed 20% of sales.

So in summary, our first quarter results were in line with our expectations and as we continue to execute on our key business priorities we expect to deliver on our double digit ongoing EPS growth target for the full year.

I’ll now turn the call over to Tom to review our first quarter results and the 2013 outlook in more detail. Tom?

Tom Freyman

Thanks Miles. Before we review our financial performance, I’d like to mention that yesterday we furnished an 8-K detailing the 2012 quarterly income statement for New Abbott on both the GAAP and non-GAAP basis with appropriate reconciliations. With that in mind our review of results for the first quarter of 2013 and our outlook for the second quarter and full year 2013 will reflect comparisons with 2012 ongoing baseline in the 8-K.

So for the first quarter of 2013, we reported ongoing diluted earnings per share of $0.42 at the upper end of our previous guidance range. Sales for the quarter were in line with previous guidance, with operational growth of 3.5% and 1.8% growth on a reported basis, which includes an unfavorable impact of 1.7% from foreign exchange. Sales growth was driven by strong performance across a number of products and businesses, most notably nutrition and diagnostics, along with strong growth across all of our business in emerging markets which grew 15% on an operational basis in the quarter.

First quarter adjusted gross margin ratio was 55.8%, somewhat above our forecast due in part to the timing of exchange effect on this ratio. In the quarter, ongoing R&D investments was around 6.5% of sales and ongoing SG&A expense was around 32.5% of sales, both in line with expectations.

Turning to our outlook for the full year 2013, today we’re confirming our ongoing earnings per share guidance of $1.98 to $2.04 which reflects double digit growth over 2012 at the midpoint of the range. Regarding sales, for the full year 2013 we continue to forecast operational growth, that is excluding the impact of foreign exchange in the mid to high single digits with a somewhat higher forecast for nutrition offset by somewhat lower expectations for vascular. Based on current exchange rates, we expect exchange to have a negative impact of around 1% on our full year reported sales. Brian will review the growth outlooks by business in a few minutes.

We forecast an ongoing adjusted gross margin ratio for the full year of approximately 55% consistent with guidance previously provided. We also continue to forecast ongoing R&D of 6% to 7% of sales and ongoing SG&A expense somewhat above 30% of sales for the full year of 2013. Overall we continue to project expansion of our full year adjusted operating margin by around 100 basis points in 2013, consistent with previous guidance. We continue to forecast net interest expense of around $110 million in 2013, non-operating income of approximately $20 million and around $50 million of expense in the exchange gain loss line of P&L. Finally, we continue to expect an ongoing tax rate of around 21% for the full year 2013 consistent with guidance previously provided.

Turning to the outlook for the second quarter of 2013. We’re forecasting ongoing earnings per share of $0.43 to $0.45. Our operational sales growth in the second quarter is expected to be in the mid-single digits. At current exchange rates we would expect roughly 1% negative impact from exchange and sales in the second quarter. So that at these exchange rates we forecast reported sales growth approaching mid-single digits. We forecast an ongoing adjusted gross margin ratio at around 54.5% of sales in the second quarter, which includes a negative impact from exchange of nearly 1%. We also forecast ongoing R&D at around 6.5% of sales and ongoing SG&A expense of somewhat under 32% of sales for the second quarter.

So in summary, we are off to a good start in 2013 delivering at the upper end of our ongoing EPS expectations and confirming our 2013 ongoing earnings per share guidance. This outlook again reflects strong performance as we continue to build Abbott to deliver reliable top tier performance in the years ahead. With that let's turn to Brian for the operating highlights by business.

Brian Yoor

Thanks, Tom. This morning I will provide an overview of the first quarter 2013 performance for each of our business and we will also review our second quarter 2013 sales outlook by business. My comments will focus primarily on operational sales growth which excludes the impact of foreign exchange. Let's start with our nutrition business, where global sales increased 9% in the first quarter on an operational basis driven by 15% growth internationally. International pediatric sales grew 21% operationally, driven by uptake of new innovations in Similac formula, continued strong double-digit growth of PediaSure, and above market growth in the emerging markets as we continue our geographic expansion.

Adult nutrition sales increased 6% led by continued strong growth of Ensure and Glucerna. As the global leader in adult nutrition, we continue to shape this market as the world's population ages. In the U.S., first quarter nutrition sales increased 2.1% in line with our expectations. U.S. pediatric sales were driven by continued strong growth of our PediaSure toddler brand, partially offset by a slight decline of infant formula sales. While we continue to have a leading share position in the U.S., we experienced some unfavorable year-over-year impact due to lower (inaudible) volume.

First quarter U.S. adult sales were driven by share and category growth of our market leading Ensure brand, somewhat offset by lower than expected retail category growth. As we look ahead to the second quarter, we expect our global nutrition business to growth high single digits on an operational basis. Again, led by strong international sales growth as we continue with our portfolio of innovations and geographic expansion to drive share gains in emerging markets.

Moving on to diagnostics. In core laboratory diagnostics, operational sales increased nearly 6% in the first quarter. About 80% of our core laboratory diagnostics sales are generated outside the U.S. where we saw nearly 9% operational growth in the quarter. As Miles mentioned, we also saw a strong emerging market sales growth led by China and Russia which grew 40% and 35% respectively. We delivered on several new product approvals in the quarter, expanding our ARCHITECT platform menu by launching six new tests and launching our next generation automation solution designed to help laboratories improve efficiencies and workflow.

We will continue to broaden our menu throughout this year and continue to invest in the development of our next generation platforms. In molecular diagnostics, worldwide sales increased nearly 2% on an operational basis in the first quarter, in line with our expectations. Led by strong growth in emerging markets, partially offset by market conditions in Europe. In point of care diagnostics, worldwide sales increased more than 17% on an operational basis as we continue to expand our leadership positions in the United States.

For the second quarter we are forecasting our global diagnostics business segment to generate mid to high single-digit operational sales growth with continued strong growth from core lab and point of care diagnostics and accelerated growth in molecular diagnostics. I will now review our established pharmaceuticals business or EPD. Sales in the quarter increased just over 1% on an operational basis, consistent with our previous guidance. In EPD, we are focused on 14 key emerging markets which include, India, Russia, China, Brazil, and ten additional key markets. These markets comprise nearly 50% of EPDs sales and grew approximately 9% in the quarter. As previously discussed, we expect the emerging markets to comprise an even larger portion of EPDs sales over time.

As expected, growth in other markets, which includes developed markets such as Western Europe and Japan and other emerging markets was negatively impacted by European austerity measures and the Japan NHI pricing actions taken in 2012. We expect to accelerate operational sales growth in EPD over the course of the year as the impact of austerity and pricing actions subside and as we execute on a number of product and geographic expansion initiatives. With respect to the second quarter, we expect low single digit operational sales growth from our established pharmaceuticals business.

And finally, Medical Devices, which includes our vascular, diabetes care and vision care businesses. In our vascular business, worldwide sales decreased 6% on an operational basis, including the expected non-commercial revenue decline related to the Promus agreement, as well as the negative impact of Japan 2012 NHI pricing actions. Excluding Promus, sales declined 2.5% on an operational basis.

International sales, which comprise more than 60% of total vascular sales increased 4% operationally. Sales in the emerging markets represent 25% of vascular sales and grew 20% in the quarter. Recent international launches of our XIENCE Xpedition drug eluting stent and bioresorbable vascular scaffold ABSORB, coupled with contributions from MitraClip and strong growth in the emerging markets are the key drivers of our international performance. Last month at the American College of Cardiology meeting, we announced positive long-term results from the ABSORB trial indicating that our bioresorbable vascular scaffold provided unique benefits not possible with metallic stents. These benefits include increases in vessel over time, reduction in plaque and improved vessel function.

U.S vascular sales in the quarter declined 19% driven by the expected decline of certain royalty revenues and soft market conditions, including price. Looking ahead to the second quarter of 2013, we expect our global vascular business to be relatively flat on an operational basis. We expect to improve our performance over the course of this year with the continued uptake of XIENCE Xpedition in the U.S, the expected launch of XIENCE Xpedition in Japan, continued emerging markets execution and continued penetration of our new products MitraClip and ABSORB.

In diabetes care, global sales in the first quarter were relatively flat on an operational basis, in line with our expectations. Outside the U.S, growth of 3% was driven by share gains in key emerging markets which grew double digits in the quarter, as well as the continuing uptake of our freestyle InsuLinx meter. In the U.S, we saw continued share gains in the hospital and retail segments, offset by marketing pricing pressures and lower Medicare mail order purchases.

Moving to the second quarter in our diabetes care business, we project sales to be relatively flat on an operational basis. As we have previously discussed, while we are forecasting strong growth in key emerging markets, the 2013 implementation of CMS or the competitive bidding for Medicare patients will impact our U.S sales this year.

In vision care, global operational sales increased approximately 2% in the first quarter. Cataract sales, which represent about 60% of our global vision care sales, continued to outpace the market in the quarter, led by above market growth of our TECNIS brand of intraocular lenses. We expect continued strong growth in our cataract business, with several important launches this year. This include our recent launch of TECNIS OptiBlue in Japan which provides Abbott access to the largest segment of the Japan market and the expected upcoming U.S launch of our TECNIS Toric IOL. We also saw continued strong performance of cataract business in emerging markets, with more than 30% growth in the quarter. For the second quarter in our global vision care business, we expect low single digit operational sales growth.

So in summary, our results were in line with our expectations and we remain on track to meet our full year forecast. We delivered strong performance in both nutrition and diagnostics this quarter, while also executing on a number of new product launches and geographic expansion. And we expect accelerated growth as the year progresses.

We will now open the call for questions.

Question-and-Answer Session

Operator

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

Michael Weinstein – JP Morgan Chase & Co

Good morning. Can you hear me okay? If I think about the company, I thought by the way you guys, I thought did an excellent job in laying it out in the press release, which is -- you had a lot different details than you have had before. You have got 40% of the company in emerging markets, it's growing 15% this quarter. You (inaudible) in developed markets that was down like 3% this quarter. If we think about the acceleration in this whole company over the balance of this year, is the developed market piece gets better, if you think about it in aggregate, or is it the emerging market piece? I think I know the answer but I just want you to flush that out a little bit.

Miles White

Well, it's a little bit of both. I would tell you that a little bit of improvement in developed market goes a long way but the emerging markets for us are showing pretty strong growth, and I would say even a bad day in an emerging market looks a lot better than a developed market right now. So when we look at some of these emerging markets and even at the very strong growth rates we see there, they are a little slower than what we may have historically seen in last couple of years. So I think it kind of depends. Unfortunately, they are not all binary and separated, they are linked. They are somewhat interdependent. And I would say we are seeing the roll through, right now in the developed markets of the actions, austerity actions that have been taken obviously in the last year to 15 months. And I think that’s going to be with us for a while.

I know the senior management at Johnson & Johnson commented a little bit on that yesterday, and I though their comments were quite eloquent about that and quite correct, that it's going to take a while for this to roll through and for businesses or companies to lap the actions we have seen in the developed markets. But a little bit of improvement there as I said goes a long way. At the same time, the emerging markets are still very robust and strong comparatively speaking and frankly even in the absolute. So you know I think all of us, we look at our various businesses, it's really as you point out a two-part story. Developed markets, emerging markets, and they are pretty different. And so the tactics or the things that we put in place in any of those markets are different. We are expanding as rapidly as we can where the growth is. And we are finding better ways to be efficient and compete more effectively and frankly compete for share in the developed markets.

So at the end of the day, while we have given guidance that we expect to be mid to high-single digits depending on how long sort of the economic conditions persist, will be towards the mid. And if it begins to improve, we will start to move the other way.

Michael Weinstein – JP Morgan Chase & Co

Okay. Let's take EPD because I think that’s the probably the business where there is probably the biggest range of these on the growth profile of that business. And if you would look at it this quarter and then what you are expecting over the balance of the year, you have got your emerging markets piece, which is posting good growth. Not double-digits, but pretty close. And then you have got your rest of Europe which has been declining, it has been a drag. So if EPD gets better over the balance of the year, is that because you are sure to lap some of those cuts that occurred in Europe last year, or is it because the emerging markets accelerate?

Miles White

Again, it's a little bit of both. We definitely get better as we lap some of last year. The developed market part of EPD in some ways has been more strongly hit than any other businesses, or that business in developed markets more strongly impacted because of just the direct impact of price cuts in Japan or Europe. And then of course you have got the Yen on top of it and we have got a pretty significant business in Japan there. So we have got a disproportionate index on the developed markets in EPD. So I think as we lap that it gets better. But at the same time, as you pointed out, the growth rate of the EPD in the emerging markets is about 9% and frankly I expect that to improve in the latter half of the year.

Michael Weinstein – JP Morgan Chase & Co

Okay. And then one last follow up for Tom. The gross margin commentary for the second quarter, you are expecting a step down from 1Q to 2Q despite having probably $200 million in incremental revenues. Is that just because of the first quarter was just higher than it normally would be because of FX hedges?

Tom Freyman

Yeah, we just had the timing of the flow-through of the exchange really just kind of -- it helped the first quarter a little bit and it will be a little bit of an offset in the second or the last three quarters of the year. I think the big -- the key message on gross margin is, as we look at the full year we are right on track with what we thought we would have as we talked about back in January. So it’s really just a timing thing, Mike.

Operator

Our next question is from Rajeev Jashnani from UBS.

Rajeev Jashnani – UBS Research

Just wondering if you’d comment a little bit about maybe what’s going on beneath the surface of SG&A. there’s a lot of probably activity in emerging markets and maybe talk about some of the investments you’re making there versus what you’re doing in the developed markets to just facilitate the longer term growth verse.

Miles White

Rajeev, this is Miles. I think that’s a pretty good summary right there. We’re definitely expanding in growth markets around the world both in headcount and promotional spending and so forth to support that growth and we’re doing that at a prudent rate. We’re also tightly managing the sales and marketing expenses in markets where we’re not going to get the return or aren’t getting the return. I would also say a little bit of what’s going on there and you’ll probably see this play out over the remaining quarters of the year. We’re putting an awful lot of emphasis on our G&A. it’s not that we want spend less or invest less in our sales and marketing support of our businesses or investment businesses, but I do want to run the company at a very efficient level from a G&A standpoint.

And so we’ve put a lot of emphasis on how we are performing in all of our call it overhead or support functions around the world. It doesn’t matter what country you’re in for that one or what business and we’re looking at any duplication between our businesses and corporate and so on. Now that we’ve got a little different configuration of the company without the proprietary pharma business, it gives us an opportunity to look pretty closely at a lot of our support spending in G&A. that’s not something we can do in just a quarter, but over the coming quarters we’ll definitely be putting some emphasis on that. And is it enough that you could see that play out in the SG&A? Yes. The question is driven more towards gee, are you too tight on SG&A? I’d say no, we don’t feel like we’re starving SG&A. I think not at all actually.

If we have the opportunity to invest more where we know we can get the return and grow, we’re definitely doing that. There’s a certain pace at which you can do that and a certain quality at which you can do that and we’re mindful of that, but we want to make sure we put that investment into the growth of the businesses. And I say the same with R&D. you look at the profile of R&D this quarter and it looks like it might be slightly down. That’s really a timing issue. We don’t like to shift or reduce any kind of R&D spending at all provided it’s productive.

So we like the notion of investing more in R&D and we like investing it well and we don’t want to make our bottom line based on what we do with discretionary spending in SG&A or R&D. that bottom line needs to be driven by core performance at the gross margin level and that’s why we’re putting so much emphasis on the gross margin improvement in the businesses which is going quite well. That not only is good for the investor at the bottom line, but affords us more investment capability in R&D and SG&A. that’s a long winded answer, but there you go.

Rajeev Jashnani – UBS Research

That was very helpful. And I guess one quick follow up on the product side. Just wondering if you could talk about the ABSORB product in Europe and what your -- maybe a little bit more granular on what you’re seeing there in terms of uptake and how you expect that to broaden out over the coming quarters. Thanks.

Miles White

Well, I’d say the uptake is taking a little longer to ramp than we might like, but it is coming along pretty nicely. We’re confident that this is going to be a workhorse stent for us over time and I think the initial trial and positioning of the stent has people trying it and you might even say in its initial launch it looks like it’s going to a very high niche. On the other hand, that’s the starting point, to get some experience with physicians and doctors. It’s our intent to drive it into what I would call very common workhorse use. And the pace of that is steady. I think we’re always going to be impatient and wanting to drive it faster. For a little while it was about having the range of sizes. We solved that in a number of our markets. So I expect that to continue to perform pretty well.

Operator

Our next question is from David Lewis from Morgan Stanley.

David R. Lewis - Morgan Stanley

Miles, I’d thought I’d come back to one of the bigger growth drivers in nutrition and two specific points and maybe a follow up. There’s been a lot of talk intra quarter about the Hong Kong ban. It’s pressured some of the peers in the space. What is Abbott’s positioning on the impact the Hong Kong ban would have, if any, on the business. And I guess the second follow would be, Ensure, I think a business that people are not focusing as much on, obviously, a launch in late last year. How you are thinking about ensuring the opportunity in China?

Miles White

Okay. You know what, I am going to let Brian or Tom answer your Hong Kong question because I think, frankly, the answer is, we are not having an impact. But we will give you more granularity on the impact we are not having.

Brian Yoor

Yeah, David, I think -- this is Brian. We had a great quarter as you could see in nutrition that was driven by strong growth in China. That dynamic is not our dynamic and I know you and I discussed this a little bit. We are not as over-indexed in Hong Kong as our competition. If you look across Hong Kong and China, our shares are relatively the same. So we don’t see this dynamic impacting us but clearly there is an impact on the industry if they make restrictions of products that can cross the border there.

Miles White

I would say our growth rate in China is pretty robust and we are not seeing that impact. Frankly our growth rate in Hong Kong is pretty good too. And your second question was?

David R. Lewis - Morgan Stanley

On Ensure, Miles. Is it too early to start thinking about how big the Ensure opportunity could be in China?

Miles White

Well, we are thinking about how big it might be. I am not sure I can quantify it for you but we think it's a fairly significant opportunity and we are investing to, frankly, drive and create that market. And I think there is -- how would I put it -- I think it should be a terrific opportunity for us. It's a market that I think demographically and from a culture and a usage standpoint is perfect for Ensure. We are currently, as you know, investing in capacity for our liquids in the United States. We will probably -- we will enter that market first with our powder versions of Ensure and then we will transition to liquid then we will add on to our plants or one of our plants in Asia to give us the capacity to manufacture in or near market for Ensure.

That’s one where we are very confident of the opportunity. I think almost any projection we put together will be wrong but I know it will all be good. So that’s when we look forward to running out as fast as we can, I would tell you. I think it's a big opportunity.

David R. Lewis - Morgan Stanley

Okay, it's very clear. Just really a quick follow up for Tom. Tom, if you think about the road map you laid out on the road show for nutrition margin expansion. Now that we are sort of three-four months post that, where do we sit now in terms of where we stand? Are we on plan, slightly ahead of plan, potentially behind? And then what are kind of the key guide posts in terms of either manufacturing capacity or cost reduction issues over the next several quarters we should be focused on?

Tom Freyman

Well, we are ahead of plan. When you look at the first quarter, when you see the Q come out, we got to see a really good operating margin for this business. I think you have to be a little careful with that and we really need to look at this on a full year basis because in the last three quarters we are planning some investments in the business and we are starting up the plants that Miles talked about. And so I wouldn’t straight line the margin you see in the first quarter out for the full year, but as Miles indicated in his remarks, year-over-year for the full year we expect 300 basis points of improvement in the operating margin in this year alone. Which gets us very well on the track towards the target he talked about. So we are ahead of plan and that business is really clicking on all cylinders when it comes to the margin expansion.

Operator

Thank you. Our next question is from Kristen Stewart from Deutsche Bank.

Kristen Stewart - Deutsche Bank

Just a follow-up I guess on MitraClip. Given that you guys have had the panel, what are your expectations just in terms of whether you are optimistic that the FDA will ultimately approve the product or whether we should just expect to see perhaps some of the other studies before granting full approval. And then if you could also update just on the performance and sales level in Europe too, that would be great?

Miles White

Okay. I guess, Kristen, the first thing I would say is, we are pleased we got a favorable indication from the panel that we recently held with the FDA. But I have found over time it's never good to speculate about what the FDA may or may not do or may or may not think. You know we are hopeful and we are working as constructively as we can with the agency regarding U.S. But I don’t find it useful at all for us to speculate of put the FDA in a spot or whatever. You know we want them to work constructively with us and I think the best I can say is, we can't predict it and we are not in a position to really comment much further than that.

And then I guess with regard to Europe and the 30 countries that it’s available in today, we’re pretty pleased with the performance. It’s been planted in 8,000 patients and we’ve had good performance with it. It’s growing quite nicely in the markets where we’re marketing it and growing at a very nice healthy double digit rate. We’d certainly like to bring it to the U.S for patients who are in the high risk and have no other option and we’ll just see how that plays out.

Kristen Stewart - Deutsche Bank

And then any high-level thoughts just on capital allocation, M&A strategy here, now that the spinoff is complete?

Miles White

Tom loves it when you ask about capital allocations. I’ll let him take that.

Tom Freyman

Kristen, as we entered the year it’s similar really to the way we view this even prior to separation. It’s a balanced approach. We pay a healthy dividend. We believe in a growing dividend. We execute on share repurchase each year and we did some of that in the first quarter and plan to do that this year. There is some degree of cash buildup and some potential of moderating on the debt level. So it’s a balanced approach and the cash flow of the company is good. We’ve projected $4 billion this year. That gives us a lot of options and it’s more the same as we progress through 2013.

Operator

Our next question is from Larry Biegelsen from Wells Fargo.

Larry Biegelsen – Wells Fargo

Let me start with the US. The international performance was very strong, but some of the US businesses came in a little weaker than we expected. Maybe if you could talk about whether there were fewer selling days in the quarter that might have had an impact. And the three businesses that would be helpful to get some color from you on are Vascular, Adult Nutritionals and Core Labs. And then I just had one follow-up. Thanks.

Brian Yoor

Larry, this is Brian. There were some impacts on the selling days. That’s something we’ve not stressed in the past calls, but it definitely impacted our nutritional business to where those sales would have been a little bit higher as well as the vascular side even to a little bit to an extent. You saw clearly the U.S I’d probably start with where the pressures are on the vascular side that you’re seeing. With there, we have seen some market pressures. We’ve seen like nearly a 10% decline in this market primarily pricing related and we are down a little bit on a share year over year basis. However, we are gaining share sequentially if you look through the fourth quarter to the first quarter where our share has picked up about a couple of points. And again, Xpedition I would say is early in its launch in the U.S. and so as we discussed before, we expect some continued share gain in the U.S and for that business to pick up as we move throughout the year on vascular.

Miles White

Larry, I would add to that for you, I think if you compare just on share in that business versus a year ago, I think we’re down about 2 points best as we can tell. On the other hand we’re on an uptick because we launched Xpedition just after the first of the year. So I would expect that to pick up. Pressure in vascular, very heavily a market pressure and part of it is competitive and pricing in the market and part of it is just utilization. I would say one of the benefits we have here looking across all these businesses, because we have the diverse portfolio we do and we’re in so many countries, we get the benefit of comparing the performances of different businesses across those different geographies. And I would tell you that as we look at the U.S, Japan, the European Union, Canada, et cetera, the developed markets and look across the various businesses, whether it’s vascular or diagnostics or any of these businesses, it’s pretty uniform, the growth rates and the market growth rates and frankly the business growth rates and pressures that we see.

You can see the pressure or the economic conditions in the retail markets for our nutrition business. You can see it in the hospital market. You can see it in frankly any segment of market, the pharma markets and so forth. They’re all pretty similar and what we take from that, obviously we know how we’re doing and we know how some of our competitors are doing and so forth. What we take from that there is an underlying call it economic malaise or weakens that’s pretty consistent across the developed markets and it’s not unique to the U.S. It’s not unique to Europe. It manifests itself in some different ways depending on how the products are paid for or by whom. Whether it's patient payer or government payer or third party insurer payer or so forth. But overall, they are pretty similar. And the conditions are such that you have got that headwind in literally all of the developed markets. And one way or another we are seeing it in each of these businesses. Conversely, in the emerging markets, it's just the opposite. And they are almost uniformly all pretty robust. They are a little more volatile, little less predictable, you have got some currency swings here and there and so forth, which is why it's great to be in a pretty broad portfolio of emerging markets and not over-indexed in any one.

But the fact is, consistently across the board there are pretty healthy growth rates in those markets. And I would say that the unique distinctions among them pretty much blend out across them, whereas there is a lot more consistency across the weakness of the developed markets. Tom?

Tom Freyman

Just to answer your question on core lab, Larry. We outlined this in the earnings release but there was kind of a comp issue in the blood banking business and we had a really strong unusual order last year that was really non-recurring. So I would not trend out that first quarter and you should see better performance in the U.S. on core lab.

Miles White

Did we answer everything you asked there, Larry?

Larry Biegelsen – Wells Fargo

You did. Thank you. Let me just ask one follow-up of Tom. Thanks for providing the 2012 quarterly numbers. It's the first time to get to hear your perspective on those numbers. And just two things stood out to me. One is the gross margin came in at about 55%, that’s what you are guiding to this year. And the tax rate was about 25% last year and you are guiding to 21% this year. So just curious on the gross margin. Why no improvement in 2013? And second, just wanted to understand, the tax rate, obviously a great improvement from 25% to 21%, but just a little bit of color on how you could then achieve 400 basis point improvement and maybe where it can go from here. Thanks.

Tom Freyman

Sure. Thanks, Larry. The gross margin is actually on an underlying basis improving across this business. We have about a 1% exchange headwind because of lag effect and hedges and the like, comparing '12 versus '13. And we said, we talked about this on the fourth quarter call that we would be flattish in gross margin but underlying is improving and it's just kind of tough year from an exchange comp perspective. So I think that’s pretty consistent with what we have said before. Regarding the tax rate, there are a couple of things. When you look at the tax rate in this base line, clearly it's a carve-out or residual of a carve-out. You know we ran the whole company the way we ran it and we repatriated for the whole company and this is what shook out relative to the Abbott that we are now running.

So it's just -- that’s one thing to keep in mind. And really the two things that are causing the improvement over that carve-out if you will, is the tax law changes that were enacted and as you know at the beginning of the year, for the whole of 2012 we were unable to recognize any benefits associated with that. And there were certain provisions of that that went beyond the R&D tax credit that were helpful to the company. And we are seeing a shift of income to a better, lower tax jurisdiction, shall we say. Which is kind of a mix effect on income which is helping us to run at the 21% rate this year.

So those are the reasons. And I guess, the other thing I would just note is, when you compare year-over-year progress in our growth, you know tax is helping it for sure but if you just call that aside and look at operating growth, we are still growing at that double-digit level, which is again the way we have built and what we hope to sustain the growth profile of this business. So that’s the explanation on the tax rate.

Operator

Thank you. Our next question is from David Roman from Goldman Sachs.

David Roman - Goldman Sachs

I was hoping you could spend a little bit more time on the U.S. medical devices. Certainly we can appreciate some of the challenges in the coronary stent market as it relates to pricing and overall utilization. But I was hoping you could just expand upon it. Where do you think we are with respect to volumes? The PCI volumes have been down now for several years. I think was some perception that that was sort of cyclical, it's turning out to seem a little bit more secular. But how should we think about your vascular business going forward?

Brian Yoor

Yeah, David, this is Brian. I will start it off here and perhaps turn it over to Miles or Tom for more perspective. But we have seen on a year-over-year basis the PCIs, to your point, volume being down approximately 5%. And we are still continuing to see pricing pressures on a year-over-year basis almost as much as 7%. You write these things out with the other dynamics of the market. That was the 10% that I was talking about being down year over year. I’d say sequentially we still are seeing some modest decline even sequentially in this price and PCI as well. If you look at some of the news that was out there and Miles mentioned it, there’s a lot out there in terms of the healthcare space with some of the health management associations then reporting that there’s certain utilizations that have just flattened off and we still continue to see that pressure. So for us in the U.S it really is going to be about the share momentum and gaining back as Miles mentioned with respect to the Xpedition launch.

Tom Freyman

But obviously it’s very similar to what we’ve been talking about throughout this call. It’s really a tale of two markets. Developed world we’re more challenged, but the emerging markets grew 20% in the quarter in this and we’re seeing double digit PCI in a number of the Asian markets. So between this, MitraClip, ABSORB progress Xpedition launch and the like, there’s a portfolio of growth drivers that we believe are going to help level off this business and start it back on the growth path globally.

Miles White

David, I think the other thing I’d point out and I think Brian sort of covered it, first of all there are two dynamics going on here. One is BTI volume and one is the price. The quarter compares to a quarter a year ago. We also look at the most immediate past quarter, the fourth quarter in this case of 2012. So if you look at the current strength and current sequential trend, the difference you see versus a year ago has slowed considerably. So it’s PCI growth down 5%. Now on a sequential basis quarter to quarter barely a percent down. So the rate at which it’s declined would appear to be slowing, moderating, whatever, but it isn’t recovering. That part is true.

It’s not recovering and the same I could say for price. Price hasn’t taken a lot of pressure over the last three, four, five months, but it certainly did versus a year ago. So we look at it both ways. What’s the case versus year going and how they’re trending right now. And I’d say both of those factors at least its impact has flattened modestly, slightly down maybe, but pretty much flattened, but it isn’t recovering. So it’s a pretty, as you said, it wasn’t temporary. It seems to be hanging in there.

I think for a lot of the hospital segments frankly and I think hospitals today are even more aware of fixed budgets if not declining budgets and they’re putting a lot of pressure on utilization and or price procedures et cetera as they try to deal with hey, we’ve only got so much to spend and we’re trying to allocate it as best we can.

David Roman - Goldman Sachs

That's helpful. And then maybe on the emerging markets piece, obviously another very strong quarter and you called out some of the highlights in key segments. What I was hoping you could just spend a couple seconds on is how you view the competitive dynamics stacking up across your biggest businesses and where -- is most of your growth coming from building new categories that didn't really previously exist in markets? Are you taking share? How do locals stack up? I know in China, for example, there are a decent cadre of local stent manufacturers, but your numbers continue to show quite a bit of strength. Maybe just help us frame out the competitive impact versus the new market development impact in those regions.

Miles White

I think first of all, it’s very heavily new market, new growth and that’s why those markets are growing. As their healthcare system expand, as the medical practices expand, as incomes expand and so forth, you actually see the evolution of two or three, sometimes four pricing tiers and segments. There’s often a call it a high end niche. There’s a midmarket. There’s a lower tier and sometimes a very low tier. All of them are growing and you see a migration of that mid-tier to the upper tiers in some cases. In a lot of case the multinationals and or exporters that are not local manufacturers in those markets are in those upper tiers and trying to move down and the local manufacturers in the lower to mid-tier is trying to move up. We see that in almost every business we’re in. but I would tell you in spite of the fact there’s multiple competitors, whether local or multinational and pretty healthy competition amongst us all, we’re all being driven by a heavy tailwind of growth in expansion and utilization in those markets as their healthcare system expands. So you can track in a lot of cases, and we were careful to look at this internally not to get too excited about our growth if we are not taking share. You know we want to be paying attention to whether or not we are winning in these markets and in the competition. It's wonderful to have the growth but at the same time we are mindful that your competitiveness is measured in your share as well.

So I would tell you that the emerging markets are very very much a tailwind of growth but at the same time we are all mindful of the competition.

David Roman - Goldman Sachs

Okay. And then maybe lastly on EPD. I think one of the things that you had communicated on the fourth quarter conference call was some expectation for moderation of pressure in Europe throughout the course of the year, given some of the austerity measures that were in place last year perhaps sort of stabilizing. Any visibility on that at this point or is that something that we'd sort of have to wait and see how that plays out over the course of the year?

Miles White

Yeah, I am afraid it falls into the wait and see category. No, I am not seeing it yet. It's something we expect in the second half of the year. But no, we are not seeing it yet. I think what we are seeing right now is the flow-through of the measures in the past, as I said 12 months or 2012, there were a lot of pricing actions taken by governments and we are seeing that flow through the business now in the comps. And I would expect to see us lap some of that and see it moderate in the second half of the year but we haven’t seen it yet.

Operator

Thank you. Our next question is from Rick Weiss from Stifel.

Rick Weiss - Stifel Nicolaus

I will start off on the diabetes side. You are clearly doing well in emerging markets, you have softer outlook I assume in part due to the new U.S. reimbursement, lower reimbursement, CMS reimbursement for diabetes test strips. Just if you could give us your perspective on some of the next drivers in diabetes. Is this sharp reduction in test strip reimbursement reflected in the numbers and maybe remind us of the Medicare and non-Medicare mix in the business in the U.S. business?

Miles White

Well, in the U.S., first of all, I would say it's one of those rare circumstances where you are glad your share is not real high in a particular segment. I really don’t know if it sounds like some rationalization but we are not -- we don’t have a real high Medicare share. And we have one of the lowest shares in mail order. So the CMS competitive bidding that has been put in place in the United States is going to have an impact on all manufacturers. But it's frankly, relatively speaking, less on us because we are not highly indexed there.

The business itself has segmented and focused on the high testing or frequenting testing insulin dependent user for quite some time. And that’s a more robust segment where we have been steadily incrementally gaining some share, we have targeted our R&D efforts on next generation sensors and testing on those users that are looking for more than just a test strip and a test. So looking for a lot more information management, lot more user testing and so forth. So I would tell you that the product lines that we have in development in that business today which I think are very innovative and will have tremendous value for those patients, are steadily moving along.

I was just recently out in California meeting with the group for a day, and I am very pleased with what I see there. I think that we have targeted a segment of the market that is a lot less, say cost sensitive and much more performance sensitive around what they are testing and information gives them. And I am thinking that the business is certainly positioned in the right place going forward here over the coming years today, and it's a very tough competitive commodity like market for the type 2s and the less frequent testers and in the U.S. Tom?

Tom Freyman

Rick, I would just say that when we went through our planning process last fall, I mean it was very clear what was coming in competitive bidding in the business and our plan totally factored in pretty much what had played out in the bidding process. So we are well covered in our guidance for the evolution of the U.S. market here.

Rick Weiss - Stifel Nicolaus

Good. And on the EPD side. You have talked about launching new and different formulations of existing drugs and (inaudible) drugs in the portfolio in new additional geographies. Can you update us there and your progress there? What we should be looking for on those front?

Miles White

Yeah, as I mentioned in my remarks, there were 45 of them that came through in the first quarter. There have been hundreds of submissions made to the various regulatory bodies around the world and one of the things we’re finding is that those regulatory bodies are capacity constrained in their ability to process registrations in a number of countries. So it’s slower going than we might hope, but we’re making progress and it’s something that each of our local regulatory people is working through with the various regulatory bodies in each country. But we’re making progress with it and as we do it’s gradually expanding the product lines. One of the things we’re trying to do is prioritize into those registrations that are higher volume, higher likely usage and so forth ahead of those that are less so to fill out our product launch. Trying to get the priority straight. That’s not always easy to do with the regulatory body because their interests aren’t necessarily the same as our interests. But we’re making progress there.

Rick Wise - Stifel Nicolaus

And just last, Miles, I hate to always ask you about acquisition plans. It's hard to resist, since I'm asked -- it's almost the first question I get asked every time I speak about Abbott. And just I guess your latest thoughts on strategy and focus. I get asked about your priorities, U.S or OUS, one business or another. And maybe talk about the pressure you feel or don't feel to move forward on that front. Thanks.

Miles White

I guess I’d answer it a couple of different ways. I don’t feel any particular pressure because I think there’s a balance between the things you might like to do strategically or look at versus the pricing or the values in the market or whatever the case may be. We like to think, I’m sure every business and competitor out there likes to think that we are prudent stewards of shareholder values and that we make prudent deals and so forth when we do. Our track record has been pretty good that way. But we’re mindful of that and I think it depends. There have been some areas of the business that we’ve wanted to expand obviously and I think I’ve commented in the past. We’re looking at quite a wide variety of potential things in the device businesses to expand our device footprint and platforms and so on. But it depends where and when they’re ready and or we like what we see at the value we see, et cetera.

So I’d say we’re always active there. We were not so active last year because first of all I think a lot of things weren’t ready and secondly we were pretty focused on all of the activity with regard to the separation. But having the separation activity behind us, we’re able to turn our attention now to what some of those things may be, but it doesn’t mean we’re out on a buying spree either. I think we tend to be pretty selective. We always balance it versus the value of the business and what we can do with the business and the capacity of our businesses to absorb additional new things to do because whether it’s big or small it takes a lot of effort to put it into your portfolio and drive it appropriately.

So I’d say we’re actively looking there. We’re not trying to -- I’d say in the device businesses and so forth, we’re not U.S versus not U.S or overseas or whatever. I think as everyone in this market can tell, it’s often faster to be in the markets in Europe than it is in the U.S these days and I think that’s fairly apparent. But that doesn’t mean you only buy ex-U.S businesses or look at licensing products ex-U.S. the U.S is still a very important market to us and it’s one in which we have ambitions to keep growing in our device businesses. So there’s no distinction geographically there at all. In our EPD business, that business is not in the U.S and it has no intention to be.

So any interest we have in properties there that might expand our geographic footprints would all be ex-U.S. and again, we follow that pretty regularly, but I have to say the valuations and things that we’ve seen in a lot of cases haven’t made sense to us. So we’re careful about that. And then in nutrition I’d say our nutrition business has some interest in some things. I would characterize them as relatively small and given the growth rate of the business, I don’t think there’s any need there. It would have to be a particular opportunity we thought had robust potential because with the way the business is performing you don’t want to over distract it with an acquisition or integration when it’s hitting on all cylinders like it is. So I’m sure that kind of describes the waterfront there. I am intentionally not going to be specific with you about what we may be looking at. When we were doing our road shows last fall, I did get a lot of questions on it from investors and analysts. And I always get specific questions about specific businesses or specific segments, that I realize our investors have other investments in and they are trying to triangulate on interest. But there is nothing I have been asked about that we haven’t been following or looking at closely or studying, or looking at in some fashion.

I think one of the things that makes any company successful in the M&A or licensing area is that you have done your homework and you have been doing it overtime, so that when you finally decide to make a move with something, you know you have had a lot of diligence and you know why you want to do it and so forth and you are ready. And I would tell you that that’s always been our practice to kind of be on top of whatever portfolio of opportunities there might be for us.

Miles White

Okay. Elan, we have time for one more question.

Operator

Thank you. Our final question today is from Glenn Novarro from RBC.

Glenn Novarro - RBC Capital Markets

I just had a follow up on the use of cash. Tom, you highlighted the dividend as well as some debt pay down. But what about share buyback? Is that something of focus and how should we think about shares outstanding? And then I had one more follow-up on the use of cash.

Tom Freyman

Well, I did mention them when I gave my recap there. Share buyback has always been part of our mix of use of cash. We have bought a fair amount of shares in the first quarter and it's something we continue to look at as we progress through the year. So absolutely it's an important part of the mix for us, it's a good way to return cash to shareholders and obviously with the view we have about the long term of this company, it's a good investment for our shareholders. So, absolutely, it's part of the mix and we did execute on a fair amount of that in the first quarter.

Glenn Novarro - RBC Capital Markets

Is there a target for shares outstanding by the end of the year?

Tom Freyman

I wouldn’t say that. I mean sometimes that fluctuates with the stock price fluctuations and the impact on diluted shares. But what we have is the target for deploying cash into share buyback and we executed on a fair amount of that in the first part of the year here.

Glenn Novarro - RBC Capital Markets

Okay. And then just as a follow up. I would assume that most of your cash is now sitting outside the U.S. So if that’s correct, how does that impact, this is specifically for Miles, how does this impact your M&A thoughts. I would think more target would therefore be outside the U.S.

Miles White

Well, I don’t necessarily target the businesses by -- or the interest strategically by where the cash is. You know we first look at the strategic fit of any given business of interest to us, with the businesses we are in or what we can do with it. And obviously we look at returns and all the obvious and important metrics that we ought to look at. And then depending on our access to cash or where that business maybe, we have that as a consideration. But I would tell you, we don’t start with that as a constraint, we don’t start with it as necessarily the determining factor of where we ought to be hunting or looking. And our interest outside the U.S. is because, frankly, that’s where the growth is and it's an awful lot of growth and we want to feed that growth.

So to the extent that we can invest in that growth, we do. And therefore in some ways it's very convenient to have significant portions of cash outside the U.S. to support that growth. Now having said that, there are things that we also are interested in that are in the U.S. and device businesses in particular tend to be U.S. centric, at least as a point of resonance. And we don’t feel like we are particularly constrained or unable to react to ones that we are interested in to acquire. We have found it possible to manage our cash and our returns appropriately. So while I would say it would be nice if the U.S. government continued its efforts with tax reform at some point which would find a path to allow companies economic repatriation that would certainly be in everybody's interest. But right now it's not determining where we focus our M&A activity.

Brian Yoor

Well, thank you, Elan and thanks to everyone for 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 402-998-0462; pass code 4638. The audio replay will be available until 4.00 PM Central Time on Wednesday, May 1. Thank you for joining us today.

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