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Abbott Laboratories (NYSE:ABT)

Q3 2009 Earnings Call

October 14, 2009 9:00 am ET

Executives

Thomas C. Freyman - Chief Financial Officer and Executive Vice President of Finance

John B. Thomas - Vice President, Investor Relations

Analysts

Frederick Wise - Leerink Swann, LLC

Michael Weinstein - J.P. Morgan

Jami Rubin - Goldman Sachs, Co.

Glenn Novarro - RBC Capital Markets

Bruce Nudell - UBS

Derrick Sung - Sanford Bernstein

Catherine Arnold - Credit Suisse

Sara Michelmore - Cowen & Co.

Welcome to Abbott's third quarter 2009 earnings conference call. All participants will be able to listen-only until the question and answer portion of this call. (Operator Instructions).

This call is being recorded by Abbott. With the exception of any participants' questions asked during the question and answer session, the entire call including the question and answer session is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission.

I would now like to introduce Mr. John Thomas, Vice President, Investor Relations.

John B. Thomas

Good morning and thanks for joining us. Also on today's call will be Tom Freyman, Executive Vice President, Finance and Chief Financial Officer. Tom will review the details of our financial results for the quarter and outlook for the remainder of the year. I will then discuss the highlights of our major businesses. Following our comments, as always, we will take any questions.

Some statements made today may be forward-looking. Abbot cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2008, and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

In today's conference call, as in the past, non-GAAP financial measures will be used to help our investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measure in our earnings news release and regulatory filings from today which will be available on our website at www.abbott.com. In addition, we will include operational sales results today which are given on a constant currency basis, i.e., excluding foreign exchange.

With that, I will turn the call over to Tom.

Thomas C. Freyman

Good morning. Today we are pleased to report strong third quarter results with ongoing earnings per share of $0.92 reflecting growth of 16.5%. This was above our guidance range of $0.88 to $0.90 for the quarter. Based on our strong performance, today we’re raising our 2009 EPS guidance range to the $3.70 to $3.72 reflecting nearly 12% growth at the midpoint. This was particularly strong growth given the full impact we’re absorbing from generic Depakote this year, currency head wins, and the global economic environment. We’ve exceeded the midpoint of our guidance range each up to three-quarters this year reflecting the fundamental strength of our diverse portfolio.

In addition to our strong operating performance, we are very active this quarter in terms of positive news flow with outstanding scientific data on Xience, two important new technology acquisitions in medical devices and the strategic and highly accretive acquisition of Solvay Pharmaceuticals which I’ll recap in a moment.

First, let me provide some additional color on the third quarter. Regarding sales, operational growth that is foreign exchange was 8.4% reflecting double digit growth in our global nutritional business, international pharmaceuticals and international vascular business. Exchange was unfavorable at 4.9%, so on a reported basis, sales increased 3.5%. Recall that our international businesses report sales on a one-month lag, so our exchange impact reflects year-over-year currency changes for the 3 months ended August

31st.

Excluding a 3% negative effect from the decline in Depakote sales from generic competition, operational sales growth was 11.4%. Depakote negatively impacted global pharmaceutical growth by 5.5% and US pharmaceutical growth by 10.5%.

The adjusted gross margin ratio in the quarter was 57.1% in line with our forecast reflecting margin improvement in nutritional and diagnostic businesses offset by lower Depakote sales and the negative impact of foreign exchange on the ratio.

Regarding spending levels in the quarter, both SG&A and R&D were in line with our forecast. Ongoing R&D expenses reflected timing of investment in our broad-based pipeline including programs in vascular devices, biologics, neuroscience, oncology, and HCV. Ongoing SG&A expense was 25.4% of sales in line with our forecast for SG&A leverage in 2009, particularly in the second half of the year. The tax rate in the quarter was 17.8%, in line with our previous guidance.

Before I turn to the outlook for the remainder of the year, let me give you a quick overview of our recently announced Solvay Pharmaceuticals acquisition. The acquisition is both strategically and financially attractive further diversifying our pharmaceutical growth and adding more than $3 billion in sales for our global pharmaceuticals business next year. This includes the portfolio of durable, sustainable on-market products that complements our current offerings. It bolsters our presence in fast-growing, key emerging markets where we’ll leverage distribution channels to accelerate growth taking both Abbott and Solvay products into new geographies.

The acquisition adds more than $500 million of R&D investment capacity next year. As a result, we’d expect Abbott’s overall R&D as a percent of sales to increase at least half a percentage point from its current level. This incremental R&D spending is expected to further accelerate Abbott’s longer term pharmaceutical growth.

The acquisition establishes Abbott’s presence in the global vaccines market and includes a smaller molecular diagnostics business. Importantly, the transaction offers a very attractive ongoing EPS accretion profile and strong operating cash flow. We are forecasting ongoing EPS accretion of approximately $0.10 in 2010, ramping to more than $0.20 accretion by 2012 and increasing thereafter.

So, overall, the acquisition advances our growth strategies and enables us to significantly add to our R&D investment, strengthening our pipeline in both the near and long-term. We’re confident the acquisition will further enhance the growth of our pharmaceutical business over the coming years.

Turning to our outlook for the remainder of the year, as I mentioned earlier today, we’re raising our 2009 earnings per share guidance reflecting strong double digit growth over 2008. Regarding the 2009 sales outlook for the full year we expect low to mid single digit growth on a reported basis including the incremental sales from AMO.

Our sales forecast for the full year includes an estimated negative impact from foreign exchange of somewhat more than 4% based on year-to-date performance in current exchange rates. As a result, we expect operational sales growth for the full year that is excluding exchange in high single digits. We expect the full year gross margin ratio of approximately 58%.

As I mentioned, we expect to deliver SG&A leverage in 2009 with SG&A as a percentage of sales and somewhat above the 26% for the full year which reflects a reduction of more than 100 basis points this year. We continue to forecast R&D as a percentage of sales for the full year of approximately 9%.

Regarding other aspects of our 2009 outlook, we expect ongoing other income approaching $300 million primarily related to the conclusion of the TAP joint venture and we’re forecasting net interest expense of roughly $400 million including financing costs associated with the AMO transaction. As a result, when you look at the overall P&L for 2009, we expect further improvement in our operating margin ratio as well as our net margin ratio.

The P&L profile results in our full-year 2009 EPS guidance range of $3.70 to $3.72. This includes a forecast for fourth quarter reported sales growth in the high single digits including an estimated favorable impact from exchange of approximately 2%. We expect an ongoing gross margin ratio of approximately 58% in the fourth quarter reflecting the impact of Depakote and the rapid movement in currency rates that we’ve seen recently, particularly when related to a move in the opposite direction in 2008.

Overall, we’re pleased with our third quarter and our performance year-to-date. We’re delivering strong operating results while taking strategic actions to ensure our top tier performance over the long term. This includes the medical technology acquisitions of AMO, Ibis, Visiogen, and Evalve; our acquisition of Wockhardt’s nutritional business in India and most recently who sold pharmaceuticals acquisition. In addition to these new platforms, our core businesses continue to perform well and remain important contributors to our sales and earnings growth outlook.

With that, let me turn it over to John for the business operating highlights.

John B. Thomas

Because we’ve had significant activity over the last month and several chances to communicate with our investors as well as our analysts, I’m going to try to keep my remarks somewhat brief today.

As I review the performance of our major business segments including pharmaceuticals, nutritionals, and medical products, I’m going to focus primarily on operational sales which as a reminder is performance before the impact of foreign exchange and for reference our earnings news release contains a review of sales results before and after the impact of foreign exchange both on an operational and a reported basis.

So, let me begin with pharmaceuticals where worldwide operational sales excluding the impact of Depakote increased more than 9%. Including Depakote, operational sales increased approximately 4% and reported sales declined approximately 1.5%. In Immunology, global Humira operational sales increased approximately 32% worldwide to nearly $1.5 billion. Performance was driven by strong international operational sales growth of 41.5% and strong US growth of 21%, actually more than 21%. Given the performance of Humira year-to-date, today we’re raising our full-year global Humira forecast for operational sales growth to 28% to 30% worldwide and for reported global sales growth to 18% to 20%. Humira continues to grow faster than the self-injectable anti-TNF market. Internationally strongly double-digit market growth continues in the major European countries where earlier this year Humira advanced into the number one market share position.

Humira clinical data continues to compare favorably versus existing agents or potential new competitors. In fact at the upcoming American College of Rheumatology or ACR meeting, we’ll present data regarding Humira’s ability to inhibit joint destruction out to 8 years in patients with rheumatoid arthritis. Based on outstanding clinical data across our full range of indications and more than 12 years of clinical experience, we’re well positioned for success in what is an efficacy driven market. Humira continues to represent a strong and steady growth driver for Abbott as penetration rates in the global anti-TNF market remain relatively low. Currently penetration rates for RA are in the mid 20s in the US and mid teens internationally.

Crohn’s disease penetration in the US is in the low 20s and low teens internationally, and in psoriasis, penetration both in the US and internationally is in the mid-single digits. We expect penetration rates across all indications to continue to increase over the next several years. Moving onto our lipid franchise where Niaspan sales were $250 million in the quarter, up more than 10%, continuing to outpace the total cholesterol market which is growing in the mid-single digits. TriCor Trilipix franchise sales were $330 million similar to the prior year. Sales growth this quarter was impacted by the comparison to the prior year when sales increased double-digit as well as a temporary reduction in net price associated with broader managed care access and expanded patients’ assistance program that is temporary. The launch of Trilipix is on track with prescription growth for the franchise growing faster than the overall cholesterol market, and growth of new patients resulting in total market share gains for the TriCor Trilipix franchise.

During the quarter, AstraZeneca’s sales force began co-promotion of Trilipix in the US, expanding reach and brand awareness to additional physicians. As you may recall, Abbott began co-promotion of Crestor last year. Both agreements strategically positioned Abbott and AstraZeneca’s sales forces for the first half 2010 expected approval of Certriad, the fixed dose combination of Trilipix and Crestor. As a reminder, Trilipix is our next generation fenofibrate and the first and only approved product for combination use with statins. Also during the quarter, we initiated a Trilipix branded consumer awareness campaign which has driven increased patient increase across all channels. The campaign will continue in the fourth quarter when we are expected to drive incremental share performance.

Earlier this year and ahead of schedule, Abbott and AstraZeneca announced the FDA regulatory submission for Certriad which provides comprehensive lipid management targeting all three lipid parameters HDL, LDL, and triglycerides in a single pill. The filing for Certriad is supported by data from multiple studies of Trilipix and combination with the most commonly prescribed doses of Crestor, the 5, 10, and 20 mg in large controlled clinical trials.

In these studies, combination therapy improved HDL and triglycerides compared to Crestor alone and improved LDL compared to Trilipix alone. Given the product profile and the size of the overall market, both companies believe Certriad represents a significant sales opportunity. As I mentioned, we expect FDA approval during the first half of next year. There are more than 100 million adults in the United States with lipid problems, and prevalence is expected to rise given increasing diabetes and obesity rates. Approximately 35 million patients currently take lipid medications with fewer than one in three reaching treatment targets for all three key lipid measures.

Abbotts lipid product portfolio is uniquely positioned to address the growing need for adjunctive and combination therapies, treatments that help patients achieve recommended lipid goals, and there continues to be significant opportunity for patients to benefit from adjunctive therapies as penetration rates remain low so as we look ahead to the fourth quarter in our worldwide pharmaceutical business, on a reported basis which includes the impact of foreign exchange, we expect sales growth to be in the mid to high single digits including the continued negative impact of generic competition on Depakote sales.

Moving on to our nutritionals business where operational sales increased 13% this quarter. US sales increased more than 4% in the quarter where we are beginning to see strong market share gains in the critical retail sector driven by the launch of numerous new brands, new formulations, and line expression as we have discussed in the past. In our infant formula business specifically, we continued to leverage superior innovation and hospital and retail execution to hold a commanding share lead over our nearest competitor. In our adult business, our core brands Ensure and Glucerna reported double-digit growth in the quarter as a result of our successful targeted marketing and promotional campaigns.

We also launched a new zone perfect product in the third quarter called ZonePerfect Indulgence Nutrition Squares. The remainder of our medical adult nutrition portfolio including our growing specialty nutrition products moved double-digits in the third quarter. International nutritional sales this quarter increased 22% operationally, driven by 27% growth in pediatric nutritionals and 15% growth in adult nutritionals. We continue to expand our presence in emerging markets which represents a high-growth opportunity over the long term, so as we look ahead to the fourth quarter in our nutritionals business in the US, we expect to mid-single-digit sales growth. In our international nutritionals business on a reported basis which includes the impact of foreign exchange, we expect double-digit growth in the fourth quarter.

Let me now turn to our diagnostic business where worldwide operational sales in the quarter increased 6%. In our core laboratory diagnostics segment which includes immunochemistry and hematology, operational sales increased 3.6%. We are also reducing overall cost in this business, improving efficiencies, and continuing to expand operating margins. During the quarter, we launched our ARCHITECT c4000 system for low to midsize laboratories. We also received CE Mark ARCHITECT test that detects NGAL, a protein that is an early indicator for patients at risk for acute kidney injury. We also recently launched an assay for HIV in our PRISM blood screening system, completing the PRISM infectious test panel. In both our Point of Care and Molecular Diagnostic businesses, operational sales in the quarter grew double digits.

In August, we announced an agreement with Pfizer to develop a molecular test to screen non-small cell lung cancer tumors for the presence of particular genes. This follows a similar partnership we announced with GSK last quarter. Both agreements advance our strategy to develop companion diagnostics for personalized medicine, and as Tom mentioned, we acquired IBIS earlier this year which brought us the PLEX-ID molecular diagnostic system. This technology which had the potential to detect unknown or new disease strains was recently named the overall gold medal winner among 500 entrants in the Wall Street Journal's Technology Innovation awards which has recognized ground breaking innovations over the last decade.

So as we look ahead to the fourth quarter in our worldwide diagnostic business on a reported basis which includes the impact of foreign exchange, we expect mid-single digit sales growth. This includes low single digits sales growth in our core laboratory business and double-digit growth in both Molecular Diagnostics as well as Point of Care.

In our other medical products businesses, worldwide operational sales in our diabetes business declined 4%. While the market has been negatively impacted by the economy, we continue to grow our retail prescription share through expanded consumer outreach and patient education initiatives. In the fourth quarter in our global diabetes business on a reported basis, we expect sales to be essentially flat compared to the prior year.

Let me move on now to the vision care where sales in the quarter were $263 million which was in line with our expectations. As Tom mentioned in September, we announced the acquisition of Visiogen which will add a late stage accommodating IOL technology called Synchrony to our vision care pipeline. Synchrony is on the market in Europe, and we expect approval in the US in the second half of next year. Accommodating IOLs represent the next wave of cataract technology and move more like the eyes natural lens providing a full range of functional vision. Cataract surgery is one of the most frequently performed surgeries in the world and the leading cause of blindness. It is expected to steadily grow over the long term with the aging baby boomer population in the US as well as growth in emerging markets.

Turning now to our vascular business where worldwide operational sales were $666 million or an increase of 8%. Last month, as you know, we hosted an investor meeting in webcast at the TCT conference or meeting in San Francisco. Our vascular senior leadership team updated investors on their business and the pipeline as well as highlighted impressive clinical data for our drug-eluting stent XIENCE V. The data from SPIRIT III and SPIRIT IV trials as well as the compare trial showed XIENCE significantly outperformed Boston Scientific’s TAXUS Express as well as TAXUS Liberte drug-eluting stents on both safety and efficacy endpoints.

Statistically superior results were once again achieved on the primary endpoint of SPIRIT IV with a 38% reduction in target lesion failure and our three-year results from SPIRIT III demonstrated that the clinical advantages of XIENCE continued to increase over time compared to TAXUS. The safety data was even more impressive. For the first time, we saw statistical difference on safety between XIENCE and TAXUS, with an 80% reduction in stent thrombosis for XIENCE and SPIRIT IV.

In addition, SPIRIT III showed an impressive 2% rate of very late stent thrombosis, 0.2% rate, and finally data from the 1800-patient compare trial demonstrated statistically significant better outcomes for XIENCE in key safety and efficacy measures compared to TAXUS Liberte which is Boston Scientific's latest PES offering. These collective results support XIENCE best in class reputation. As you would expect, our sales and marketing organization is sharing this new data with their interventional cardiologist customers. We expect to maximize this good news to drive additional market share gains for the XIENCE platform both in the US and in the international markets over the next six months, and regarding US market share, XIENCE remains the number one drug-eluting stent with initial third-quarter market share in the high 20s, and preliminary September monthly market share data suggest that XIENCE only share increased several share points since August.

Initial third-quarter data shows the XIENCE platform which includes both XIENCE and PROMUS accounts for more than half the total US market. The share data is starting to show the impact of the data presented at TCT although it's early, and we would expect both XIENCE and XIENCE platform share increase as we exit the year in the fourth quarter.

The US DES market dynamics remain very positive. PCI volume is up in the low single digits, increased in the low single digits year-over-year as reported by third party data sources and confirmed by our own internal data. US DES penetration is approximately 75% and that is an increase of four percentage points year-over-year. Sales performance was driven by the continued success of our drug-eluting stent XIENCE as well as the international launch of our next generation product XIENCE PRIME, and global DES franchise sales which includes XIENCE as well as other third party DES product revenues for more than $330 million in the third quarter, an increase of approximately 10%.

Early physician feedback for XIENCE PRIME has been outstanding as we continue to expand international markets. XIENCE PRIME uses the same step material, cobalt chromium, well-studied drug, Everolimus, and proven biocompatible polymer as our market leading XIENCE V. In addition, it offers a novel stent design and modified delivery system for greater flexibility and improved deliverability. It is available in a broad size matrix including long lengths.

We’re also expanding in the new geographies. In the third quarter, XIENCE was approved in China as well as Canada. China is the second largest DES market in the Asia Pacific region where PCI volumes are growing double digits. We expect an early 2010 launch in Japan as we said before which is more than half billion dollar total DES market, so as we look ahead to the fourth quarter for Abbott Vascular, we expect reported sales to increase mid single digits.

Most importantly, we continue to see significant operating margin expansion in this business, and as we stated in our TCT investor meeting, we expect mid to high single digit topline growth and double-digit bottom-line growth for Abbott Vascular over the five-year long-range plan for that business.

Finally in our vascular pipeline, we are working on more than 10 coronary technologies over the next five years making it one of the most robust pipelines we believe in the industry. Our new technologies include new devices such as the ultra thin metallic DES, our XIENCE NANO small-vessel DES in the US, next-generation balloons, as well as our bioabsorbable drug-eluting stent program. We’re several years away from any competitor in the bioabsorbable DES space, and will have 3-year data from our first cohort at AHA in November.

Also as Tom noted, we announced the Evalve acquisition in the third quarter which gives Abbott the leadership position in mitral valve’s structural heart repair and another late stage pipeline technology. Structural heart is one of the fastest growing sectors in cardiovascular disease. Evalve’s minimally invasive MitraClip device treats mitral regurgitation which is approximately four times more prevalent than aortic disease and is currently treated through open heart surgery alone. The MitraClip is on the market in Europe and we expect it to be approved in the US sometime in 2011, so in summary, you're obviously very pleased with our strong operational performance here in the third quarter, our ability to raise our EPS outlook for the full year and with the strategic actions we have taken to enhance our long-term growth.

Abbott Vascular will leverage the compelling data on XIENCE to continue to drive DES share gains while executing on the leading vascular pipelines in the industry, and our acquisitions of Evalve and Visiogen add two competitive late stage pipeline technologies in large and growing markets for the future, and finally the acquisition of Solvay as Tom mentioned diversifies the sources of our pharmaceutical growth and expands our presence in high-growth emerging markets. At the same time, it accelerates our R&D investment and is highly accretive to Abbott’s ongoing EPS beginning next year.

In short, we believe we are well positioned for sustainable long-term growth, and with that, we will be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today is from Frederick Wise - Leerink Swann, LLC.

Frederick Wise - Leerink Swann, LLC

Excellent quarter. Just trying to understand a little better, gross margin, if you could start with that, tell me if I understand your 58% guidance now for the full year, wasn’t that 58.5% before, you’ve never given fourth quarter gross margin before, does this imply a little more caution? Maybe you could help us understand some of the moving pieces there

Thomas C. Freyman

There’s only one significant moving piece in that, really how much currency has changed since we talked on the second quarter call. As you recall the way we’re positioned internationally, as the dollar weakens while it helps the topline and certainly there’s some profit impact because of the mix effect from the countries it puts a little pressure on the ratio and on top of that when it moves very rapidly there are lags between the immediate impact of topline and as it moves through the earnings statement through the gross margin; so, between the two that’s probably costing us about half a point this year on the gross margin just because of the exchange; that’s really what’s changed since the last time we talked.

Frederick Wise - Leerink Swann, LLC

On Humira, the third quarter US growth was 21%; the fourth quarter you’ve got a tough competition; can Humira grow double digits in the fourth quarter given that competition and given the environment, and maybe you could talk a little bit about how you’re thinking about or what kind of competitive impact that you’re seeing and expect from J&J Symphony and Stelara which was just launched in psoriasis?

Miles D. White

I think if you look at our full-year guidance of 18% to 20% reported and 28% to 30% on an operational basis globally, we did raise that and that would imply double digit growth in the fourth quarter; we can break it out specifically but clearly it reflects strong growth internationally in excess of 20% and continued strong double digit growth; in the US it imply roughly low double digit type growth; so, we’re still very confident in Humira, the projections for the full year, the projections for the fourth quarter. I would remind you though as we discussed earlier in the year we have not factored in any aggressive buying patterns from wholesalers in the fourth quarter, so we’re being a little conservative on that front; so, could there be upside to some of that that’s possible but we think we factored that in appropriately. On competition, really it’s been going as expected for the new competitive entrance and our story on Humira continues to be one of very strong efficacy and safety as you know. The 5-year radiographic progression that we have on the label as I mentioned in my comments will be presenting 8-year radiographic progression data at ACR. Of course we’ve got physical function and major clinical response data and over 12 years of total clinical data. So, we feel very comfortable with the competitive position of Humira, the products that are coming new to the market as we’ve discussed in the past, our fifth, sixth, seventh products to market that really don’t offer any significant clinical advantages versus Humira standard of care. So, we feel very good about it. They’re progressing along in a modest rate if you look at the total scripts for these new entrants. So, we factored that into the modeling, we factored that into our guidance, and really there hasn’t been anything that’s changed since the launch that would change our outlook in any way.

Frederick Wise - Leerink Swann, LLC

And just a last quick broad question for Tom; given the moving target on healthcare reform, what’s your latest thoughts about the potential impact on that from whether it’s the Baucus tax or just what’s happening in Washington?

Thomas C. Freyman

It is still a moving target; I mean there was a positive step obviously yesterday but I think the way we were thinking about it; there are ways to go here and until we see what really comes out of conferencing and all the steps that have to happen, it’s very hard to figure out exactly what we’re dealing with; that said, we would definitely be contingency planning for different scenarios and factoring into our thinking and planning as we work our way towards 2010.

Operator

Our next question is from Michael Weinstein - J.P. Morgan.

Michael Weinstein - J.P. Morgan

Let me follow up on the Solvay acquisition then I want to turn to some pipeline questions; part of what appealed Solvay is that it’s giving you this R&D capacity which you wouldn’t have had just with Abbott to move some of your phase 1, 2 programs forward; you talked about it, an incremental 50 basis points of cumulative added R&D spend with Solvay in the fold, can you just highlight programs you think that you will accelerate as now that Solvay got pulled into the company you have this incremental spending that you wouldn’t have before, would it be the Alzheimer’s program, would it be one of the oncology programs?

John B. Thomas

I think it’s a little premature for us to do that; probably when we close the deal we’ll be in a better position to provide some updates. There are a number of interesting late stage and early stage platforms that Solvay has in their pipeline. It does afford us the opportunity and we can talk more about them in terms of broadly investing in some of our programs in oncology, in Alzheimer’s, in HCV and immunology; we can talk a little bit about that later; I think overall there are some good programs there, there are some interesting things, we’re still testing all of it and determining next steps as we work to integrate the deal.

Thomas C. Freyman

And as Miles talked about on the call, it gives us many options including if there’s an external opportunity that is equally interesting or more interesting than any of the others, we’re open to that as well; so, we’re going to be working through all of those alternatives as we work our way towards closing the deal. As John said, I think we can give a lot more granularity to that in a few months.

John B. Thomas

We talked about this on the call with Miles when we announced the deal, they do have some interesting things for Parkinson’s and neuropathic pain that is associated with shingles, there’s a partner company involved in some work on gabapentin ER, so there’s a number of different things there and we’ll be assessing all those. On our pipeline, we talked in general about some of the oncology, neuroscience, HCV, immunology compounds in that pipeline, and I think you’ll see more of that next year; in fact, we expect three compounds in late stage or advanced clinical studies in oncology alone next year as we move some of those earlier stage programs along.

Michael Weinstein - J.P. Morgan

John, I wanted to ask you some pipeline questions in terms of when you guys think you’ll provide updates and two of them would be on the pending acquisitions of Visiogen and Evalve; you’ve seen the Visiogen data, but when do you think we’ll see that data, when you think you’ll disclose the Evalve pivotal data once you have that data in-house and then I think the one form of pipeline product that we could see in the first half of next year would be the metastatic breast cancer trial for ABT869, do you think that will make in time for ASCCA?

John B. Thomas

You’re right, Evalve has got some interesting data, there’s been some registry data that’s already been presented on Evalve that was interesting. I don’t have specifics yet on when those show, the rest of the data; so, we’ll keep you posted on that front as well as regulatory timelines and what’s going to happen with the Everest II data. So, we haven’t seen it yet, it’s blinded, the trial has not been as you noted; probably some time in 2010, we’ll have that and then we can show that to you at that time. What was your other question?

Michael Weinstein - J.P. Morgan

The Visiogen data which you do have and then ABT869, I think that’s from the oncology pipeline, that would be the first one when we get the stage II data from.

John B. Thomas

Yes, we’re moving that into phase 3 as we talked about and I mentioned that’s one of the three compounds that will be in phase 3. I don’t have any specifics yet on where we’ll present data next year, but as we get towards the end of the year and probably on the fourth quarter call, we might have a better stance of where we might present that data.

Operator

Our next question is from Jami Rubin - Goldman Sachs, Co.

Jami Rubin - Goldman Sachs, Co.

Just a couple of points of clarification, Tom, you had stated that you expected the Solvay accretion next year to be $0.10 and I am assuming that you are aware of first call consensus of 412, so, can I assume that you are implicitly comfortable with the consensus estimate next year of 412 given your comment about $0.10 accretion on top of underlying earnings. And my second question relates to the company’s priorities with respect to cash; you’re obviously generating in terms of cash flow you’ve been extremely busy this year with business development activities, but how important is debt reduction and share buy-backs relative to continued business development activities going forward?

Thomas C. Freyman

Taking your first question, it sounds almost like I’d be giving guidance if I answered it directly and it’s certainly premature for 2010 guidance, and I guess I’d reiterate what we’ve been saying all along and when to draw your conclusions; we continue to target double digit EPS growth year in and year out as a baseline and when we announced Solvay, we said that the $0.10 was additive to anything that we would be targeting. So, that’s about as far as I’m going to go in terms of 2010 EPS forecasting at this point. Typically, we provide specifics by the fourth quarter call. On the use of cash, going right down the line of our options, we continue to take a very balanced approach. We value a strong dividend and solid dividend growth, and if you look at our record, it’s been outstanding in that regard for years and decades. Share repurchases are steady program for us, we like to buy shares year in and year out and I think it’s a good way to increase returns to shareholders and certainly debt reduction to the extent we have additional cash flow and there are not strategic opportunities, we’d be interested in doing a degree of that to the extent it presents to us, but I think given the strong cash flow of the company and as evidenced by the fact that with the Solvay acquisition we are acquiring it without taking on additional debt, we’re in a great position to manage a very strong position in a lot of different ways.

Jami Rubin - Goldman Sachs, Co.

And Tom lastly, are we correct in assuming that there was approximately $100 million in stocking in the fourth quarter last year in US Humira sales?

Thomas C. Freyman

The advanced buying was probably somewhat more than that and again when that occurred in the fourth quarter, the anticipation for Humira was that the fourth quarter growth rates will continue into 2009, and as you know in the first quarter that shift did not happen; so, there was a number of at least that amount in the quarter and then probably a little bit more.

Operator

Our next question is from Glenn Novarro - RBC Capital Markets

Glenn Novarro - RBC Capital Markets

I wanted to follow up on Jami’s question because next year you’re saying that Solvay adds $0.10 to EPS, but you’ve also done in the backend of this year Evalve and Visiogen which I suspect are dilutive transactions, so we’re all going to be in the next couple of months trying to model 2010, but should we assume that $0.10 of accretion from Solvay is somewhat offset by dilution from Evalve and Visiogen? That’s question one.

Thomas C. Freyman

No, I think you’re getting a little too scientific there; when we announced Evalve and Visiogen within the R&D priorities of the company, we were able to absorb those deals in without changing our thinking about earnings growth or guidance, so I don’t think that should impact your thinking, and what I said to Jami is pretty much the way you should interpret that Solvay be.

Glenn Novarro - RBC Capital Markets

Okay, thank you for clarifying. Secondly, Tom, can you give us some thought on the company’s tax rate going forward and the reason I’m asking that is that we were all a month ago at Baxter’s Analyst Meeting, they had told that their tax rate which is close to where you guys are this year is going to go up meaningfully over the next 5 years, so may be just some thoughts about your tax planning and maybe where the Abbott tax rate will go over the next couple of years?

Thomas C. Freyman

I cannot speak for other companies; certainly I think I’ve been reading lately and it sounds there’s good reason to think that policy makers are hearing some of the implications of raising corporate taxes and some of the proposals that were floated earlier in the year do not seem to be getting much attraction, so I think that’s good news for anyone worried about corporate tax rates going forward; they way we’re structured and given the products, their growth rates, etc., and based upon where the various products are located, I am not in a similar position; I don’t see our tax rate going up going forward, and I would think with the news that has been coming out recently, I feel pretty good about our ability to sustain our tax position.

Operator

Our next question is from Bruce Nudell - UBS.

Bruce Nudell - UBS

A couple of fenofibrate questions and then one on Humira. Clearly, you have good expectations from Certriad; is there any way you can quantify that in terms of bigger than a bread basket which is in the context of how much it would add to the fenofibrate franchise as you see it, and also, is your thinking still that Trilipix will coexist with TriCor for the long haul?

Miles D. White

Yes, on Certriad we are as I mentioned very optimistic about this product for a number of different reasons, so is AstraZeneca; because we have a partner, we need agreement on before we give out an official peak-year sales forecast for the product, but I think it’s fair to say that given the size of the cholesterol market which as you know is over $20 billion and the attributes of these products, Crestor and Trilipix from the data that we have, and the fact that there are two companies involved who are splitting the proceeds, if you will, it will have to be a significant product of at least a billion dollar peak potential if not more than that to make it worth our efforts if you will. So, I think it’s safe to say it falls in that category, but we’ve not given a specific peak-year forecast. Regarding Trilipix and TriCor; yes, as we said before our expectation is that we continue to provide both products and market both products for the foreseeable future until further notice.

Bruce Nudell - UBS

My followup question on Humira is really general and qualitative; it’s performance ex-US is pretty remarkable. It is bigger than it is in the US, it’s growth rate is extremely high on an operational basis. Could you just give us some qualitative color as to what explains its performance ex-US, either by geography or market dynamics that may be somewhat different than that as in the United States?

Miles D. White

I think it’s a credit to our marketing organization and maybe Tom can add to it, but we have an outstanding international pharmaceutical marketing organization that will take advantage of products like Humira that have outstanding superior clinical data and I think that’s the difference, and we have been able to show to payers in countries outside the US that there are downstream cost benefits to treating patients and stopping disease progression, which is, let us not forget what these products are all about and what they’re supposed to do, which is what differentiates Humira from virtually every other product is its ability to inhibit joint destruction which is so critical to patients and these are insidious life-threatening diseases. So, we have been able to show that. Payers have been good about that in terms of understanding the economic benefits. So, we’re growing very strongly in markets like Europe where market growth is by itself about 20%. We have been growing two times the rate of both Enbrel and Remicade. We have the number one market share position in double-digit countries outside the US. There is significant room for further market growth and expansion as there is a large pool of patients that are still yet untreated and should be and could be treated. The penetration rates both in the US and particularly ex-US is significantly lower than I think what some people have expected or estimated. So, there is a lot of room for opportunity there. We have a good look into next year. We feel very confident about the growth of the product internationally as we go into next year. We know what the payer scenarios are in the major countries. We have always done a good job of working with those payers and there is nothing new there that would suggest or put us off a trajectory that would say this product can grow strong double digits next year.

Operator

Our next question is from Derrick Sung - Sanford Bernstein.

Derrick Sung - Sanford Bernstein

So it looks like the Humira scripts for last month came in this morning and showed Humira at about 14% which I think is probably the lower in the year and it looks like there has been a bit of a trend down in script growth, the TRx’s from IMS. Can you speak to what you’re seeing there, is that representative, and what you think is going on; is that the competition coming in or what’s happening there?

Miles D. White

Let’s keep this on proper context. IMS has had its challenges as you know. So, this is clearly not a perfect science. Their data has been somewhat unreliable and they have acknowledged that with a number of re-statements and other things that have gone on there. So, you have got to take that with a little bit of a grain of salt in terms of the overall performance of the product. We have our own information that we collect as we’ve talked about before, sell out directly to customers that we track, and that is all obviously factored into not only our performance this quarter which was about 50 million above what most analysts expected, but also our outlook for the rest of the year and going into next year. Clearly, the underlying trends are still strong for the product. The TRx growth is good, it’s probably higher than what that suggests, and then there are other things going on there too that you have to be careful of like holidays, Labor Day holidays this year compared to last year that creates some fluctuations in the data, but everything we’ve seen that we get it looks like Humira continues to grow strongly in the US and we’re confident and obviously we’ve factored that into our thinking when we gave the raised number for the year.

Derrick Sung - Sanford Bernstein

By your count are you seeing a trend down in the growth through your numbers as well or are your numbers showing growth constant or even possibly up?

Miles D. White

Our data suggests that the product is growing in the mid-to-high teens on a TRx level; so higher than what was suggested by IMS this morning.

Derrick Sung - Sanford Bernstein

Moving to TriCor/Trilipix; we saw that the quarter looked a little weak this quarter, you mentioned a temporary reduction in pricing due to a number of factors; can you go into that a little bit more detail and how do you give us confidence that that is temporary and how much did that affect sales this quarter?

Miles D. White

There was this temporary effect on net pricing because what happened there basically is we went out with a purposeful program there to help patients through a patient assistance program and we more or less bridged them to the point where we had enough managed care access there. They could get traditional managed care coverage which is where we’re at now. We have very good managed care coverage with Trilipix, significant presence in good chair positions. So, that strategy worked. Obviously the script data, if you look at the script data, it is growing in the mid-to-high single digits ahead of the overall cholesterol market and certainly ahead of the absolute dollar amount that was this quarter. So we do think it was temporary and our expectations for the fourth quarter are more in line with the script data.

Derrick Sung - Sanford Bernstein

One last one for Tom; in terms of cost controls in SG&A, we saw a pretty marked impressive improvement this quarter, I think a 190 basis points over last quarter in SG&A reduction. How sustainable is that moving into 2010 and how much more room is there to cut further?

Thomas C. Freyman

It’s a steady target for us to leverage SG&A. We did ramp it quite a bit prior to ’09 as we launched products and build infrastructure to businesses, but focusing more on the non-value added areas, the more administrative type costs, IT, and those types of things, we’re very very focused and there is no reason for a lot of those costs to grow; they should be flat to down and we got a number of programs within the company to keep those costs down, and so we would expect sales to continue to grow faster than those costs in particular and continue leverage going forward. It is again a little premature to quantify that for ’10 but we will be talking about that in the fourth quarter call.

Operator

Our next question is from Catherine Arnold - Credit Suisse.

Catherine Arnold - Credit Suisse

I wanted to follow up with the conversation we were just having about TriCor/Trilipix, if I could, and then more broadly ask you about the evolution of rebating and out-of-pocket costs. In terms of the comment on the script growth, that’s clear and we see the progress there in terms of Trilipix, but what I am wondering is if you have a program in terms of reducing the cost and rebating it, I would assume it would be hand in glove with that, the implied price that you are getting per prescription for TriCor/Trilipix, how does that increase next quarter or subsequent quarters given that usually those programs, once you provide the rebates, it’s hard to get them back, and maybe that’s a mix of what you’re going to tell me on patient assistance versus rebate; so that would be helpful in terms of modeling the price per prescription. Then, just jutting back the big picture, could you talk about the rebating environment and out-of-pocket cost on assistance programs for Humira and the rest of the portfolio; how have you seen these trends evolve year to date; what do you expect to happen over the next 12 months?

Miles D. White

I would say that we haven’t really seen any major changes in our rebating; I know one of our competitors talked about that; nothing different than what our standard practice would be. So, that’s not really what the dynamic was, that was the play here. It was much more about patient assistance programs, cards that we distribute like we did with Humira to help patients who are in need economically and we had a lot of those cards go out and the use of those cards was better than we expected frankly. As we work through that and now those patients get more traditional coverage on managed care, we do think that’s a temporary effect. So, I wouldn’t say that there is any real change in rebating even though that is what was implied by one of our competitors.

Catherine Arnold - Credit Suisse

Are you with that; you’re taking deductions from gross sales to net versus your SG&A lines? I am talking about the credit cost for patients to help them.

Miles D. White

That’s exactly right.

Catherine Arnold - Credit Suisse

Then in the TNF space is there anything different happening than the rest of the portfolio?

Miles D. White

No, we have talked about that earlier in the year and pretty much the same as we talked about before. Really no change there.

Operator

Our final question is from Sara Michelmore - Cowen & Co.

Sara Michelmore - Cowen & Co.

Two thoughts; one, John, I appreciate you going through the penetration rates for the various indications for Humira; is there anyway you can give us a little bit more color in terms of the growth rate of the drug in each of those indications; it would be helpful just in terms of visibility in trying to forecast it going forward if we understand what’s going on in each of those three areas?

John B. Thomas

I think what I can give you is penetration rates for those; global penetration for rheumatology is in the low 20s, global penetration for dermatology is in the mid single digits, and global penetration for gastro indications in the mid-to-high teens right now. I don’t have indication break-up by growth; we don’t typically do it that way.

Sara Michelmore - Cowen & Co.

Then a question for Tom; as I look out to the model next year, one of the biggest dynamics I see is that it’s one of the first years in a while that you guys haven’t had a major small molecule generic challenge; just curious if there’s anyway to quantify the hit that you’ve taken this year in Depakote and what should we be thinking about in terms of gross margin line in terms of that coming on?

Thomas C. Freyman

Obviously with a billion-dollar-plus product in the generic small molecule there, it has been a very significant percentage impact. I don’t have the exact number in front of me, but it has been a real drag all year and it does mask I think some good mix shift in the rest of the business. Again, we expect continued steady gross margin expansion and until we really roll up all the budgets to see the pieces, with exchange being such a volatile dynamic, I am just afraid it’s premature to give you an idea until we get to that fourth quarter call.

Miles D. White

Sara, I would note as you guys can see through your modeling in the quarters as they accumulate that year-to-date, Depakote is down about $760 million from 2008 and that’s obviously a product that has margins above the corporate profile; is that fair to say Tom?

Thomas C. Freyman

Yes, that’s accurate.

John B. Thomas

That concludes our call today. A replay of this call will be available after 11 o’clock Central Standard Time on our Investor Relations website at abbottinvestor.com, and after 11 am Central via telephone at 203-369-3011; the confirmation code for that is 7609413. The audio replay will be available until 4 pm Central on Wednesday, October 28, 2009. Thank you all for joining us. If you have any questions, please give me or my staff a call. Thank you.

Operator

Thank you and that concludes today’s conference. You may disconnect at this time.

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Source: Abbott Laboratories, Q3 2009 Earnings Call Transcript
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