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Abbott Laboratories (ABT)

Q1 2010 Earnings Call Transcript

April 21, 2010 9:00 am ET

Executives

John Thomas – VP, IR

Tom Freyman – EVP, Finance and CFO

Larry Peepo – Divisional VP, IR

Analysts

Mike Weinstein – JP Morgan

Glen Novarro – RBC Capital

David Lewis – Morgan Stanley

Rick Wise – Leerink Swann

Sara Michelmore – Cowen

Jami Rubin – Goldman Sachs

Bruce Nadel – UBS

Derrick Sung – Bernstein

Catherine Arnold – Credit Suisse

Larry Biegelsen – Wells Fargo

Operator

Good morning and thank you for standing by. Welcome to Abbott's first quarter 2010 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, and 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 express written permission.

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

John Thomas

Thank you and good morning and thanks everyone for joining us. Also on today's call will be Tom Freyman, Executive Vice President, Finance and Chief Financial Officer; and Larry Peepo, Divisional Vice President, Investor Relations. Tom will review the details of financial results for the quarter and the outlook for the year. I'll then discuss the highlights of our major businesses. Following our comments, Tom, Larry and I will take any questions that you may have.

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 1-A, risk factors to our annual report on Securities and Exchange Commission Form 10-K, for the year ended December 31st, 2009, 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 investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measure in our earnings news release and regulatory filings from today, which will be available on our website at abbott.com. In addition will include operational sales results today, which are given on a constant currency basis that is excluding foreign exchange.

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

Tom Freyman

Thanks, John. As you can see from our earnings news release this morning we had a strong first quarter as our major businesses are healthy and our fundamentals remain strong, and we enhance our long-term growth outlook with the closing of the Solvay Pharmaceuticals’ acquisition and the announced acquisition of Facet Biotech, reporting our emerging market strategy, adding to our R&D spending base, and also adding to our late stage pharmaceutical pipeline.

In the quarter, we delivered double-digit sales growth across each of our fourth major global businesses, and we reported ongoing EPS of $0.81, up 11% and at the high end of our previous guidance range of $0.79 to $0.81. Included in our ongoing EPS this quarter was the negative $0.03 per share impact related to US healthcare reform, which I will discuss more in a moment. Excluding the impact of healthcare reform, ongoing earnings per share were $0.84, up 15%.

Sales growth in the quarter was 14.6%, including a favorable 4.1% impact from exchange rates. The first quarter included six weeks of Solvay sales in the US and only two weeks of Solvay international sales given our standard one-month lag in reporting of international sales.

Sales in the quarter were reduced by approximately $50 million due to the impact of higher Medicaid rebates required under recently enacted US healthcare reform legislation. Excluding this impact, sales would have increased 15.5%. The adjusted gross margin ratio was 57.4%, ahead of our forecast for the quarter driven by strong performance across several businesses, including vascular and diagnostics, and less of a negative impact from foreign exchange than originally forecast.

We also had double-digit growth in investment spending in the quarter with R&D up nearly 15%, reflecting continued progress in our broad-based pipeline. This includes programs in biologics and vascular, as well as promising Phase I and Phase II clinical programs in HCV, oncology and neuroscience.

SG&A expense increased nearly 10% as we invest in programs to drive growth in 2010 and beyond. The ongoing tax rate of 15.3% was in line with our previous forecast. As you may recall, when we provided guidance in January, the outlook for the enactment of US healthcare reform was unclear. Accordingly, we and most other companies did not include the impact of this legislation in our 2010 guidance. As you are aware, we now have a new law which will expand access to millions of patients over the coming years.

The resulting law is complex as many provisions that are important to our patients, our company, and our industry. As a healthcare company, there are commitments required of our industry to help pay for this effort. Beginning this year, the legislation includes an increase in Medicaid rebates, primarily as a result of the increase in the basic Medicaid rebate from 15.1% to 23.1%, and an extension of rebates to drugs provided through Medicaid managed care organizations.

As a result, we are forecasting a negative impact of US healthcare reform legislation on 2010 sales of approximately $230 million. This translates into a full year 2010 ongoing earnings per share impact of approximately $0.11 per share, including the $0.03 per share impact reported in the first quarter. Favorable performance in the underlying business is expected to partially offset this impact. Therefore we have adjusted our previous guidance range by $0.07. This results in our updated ongoing earnings per share guidance range for the full year 2010 of $4.13 to $4.18, which of course excludes the specified items. The midpoint of this guidance range reflects growth of nearly 12% over 2009.

As you know, healthcare reform is being phased in over several years. In 2011, additional aspects of the bill become effective, including the fee on the pharmaceutical industry and additional rebates related to the Medicare Part D donut hole, and in 2013 the Medical Device Tax [ph] becomes effective. As I indicated, these regulations are complex and are subject to further interpretation. However, based on what we know at present we are forecasting the impact of healthcare reform on 2011 sales to be a little more than $200 million on top of the 2010 impact.

Turning back to our outlook for the full year 2010, we continue to expect strong double-digit sales growth, including nearly $3 billion in sales from the Solvay Pharmaceuticals acquisition. Our 2010 sales forecast reflects an estimated favorable impact of foreign exchange of 1% to 2% based on current exchange rates. We continue to forecast an improvement in the full year gross margin ratio over 2009 with a ratio of around 59.5%. This increase reflects the favorable impact of product mix and efficiency initiatives, as well as the addition of Solvay Pharmaceuticals.

Also in 2010, we are forecasting continued investment in research and development programs to drive future growth with R&D up approximately 9.5% of sales. We continue to forecast SG&A expense somewhat above 27% of sales in 2010. Regarding other aspects of our outlook for the year, we continue to expect less than $100 million of other income, net interest expense of approximately $450 million, and the full-year tax rate of between 16% and 16.5%.

Now let us turn to our quarterly outlook. For the first time we are providing second quarter ongoing earnings per share guidance of $0.98 to $1, including $0.03 negative impact from Medicaid rebates required under US healthcare reform. The midpoint of this EPS range represents growth over the prior year of more than 11%. We are forecasting strong double-digit sales growth in the second quarter, including Solvay. We expect the favorable impact from exchange on sales of approximately 3% to 3.5% and an ongoing gross margin ratio approaching 60%.

So in summary, our global diversified business strategy is continuing to deliver strong sustainable results. The market leading product within our core franchises and the strategic actions we have taken all provide a strong foundation from which we will continue to grow despite changes in our operating environment.

Our outlook for double-digit ongoing EPS growth in 2010 continues to have its reputation as a leader among our healthcare peers, and with that I will turn it over to John for the business operating highlights.

John Thomas

Thanks Tom. This morning I will review the performance of our major business segments, pharmaceuticals, nutritionals and medical products.

Let me start with our global pharmaceuticals business, where worldwide sales in the quarter increased 13%, driven by strong double-digit growth through our immunology, as well as our lipid management franchises. In immunology, global HUMIRA sales increased 36% to nearly $1.4 billion. Performance was driven by strong international sales growth of almost 40%, and US growth of more than 32%. The US growth rate benefited from a favorable comparison to the prior year.

Underlying demand for HUMIRA continues to outpace the overall market with particularly strong growth in dermatology and gastroenterology, and new competitive entrants continue to track in line with our modest expectations for these products.

Internationally strong double-digit growth continues in the major European countries, where HUMIRA holds the number one share position. We anticipate that HUMIRA will eventually become the number one anti-TNF worldwide surpassing the current global market share leader.

We are continuing to launch new indications into new countries around the world. Earlier this year, HUMIRA was the first biologic approved for the treatment of psoriasis and psoriatic arthritis in Japan, and we also recently received approval for RA in China. The growing awareness of HUMIRA among physicians and patients, the expanding body of best-in-class clinical data and further market penetration across indications and geographies will continue to drive demand in the years to come.

We continue to expect a reported global sales in 2010 of approximately 20% for HUMIRA.

Moving on to our lipid franchise, where Niaspan sales were $205 million, up nearly 15%, significantly outpacing the growth of the total cholesterol market. The Arbiter-6 HALTS study presented last year have helped Niaspan prescription share reach an all-time high that we continued to maintain. We will be initiating new promotional activities for Niaspan in the second quarter, which we expect further increase patient awareness to Niaspan and drive incremental share gains.

We continue to anticipate FDA approval this year for two new dosage strengths of Simcor that include 40 milligrams of simvastatin. When approved, the new dosage strengths will provide additional flexibility for physicians as almost half of simvastatin prescriptions are written for the 40-milligram dose.

Global TriCor/TRILIPIX franchise sales were $291 million in the quarter, and that is up more than 15%, including a modest partial quarter contribution of international fenofibrate sales following the close of Solvay Pharmaceuticals.

TriCor/TRILIPIX franchise prescription growth continues to exceed the growth of the overall cholesterol market and TRILIPIX now accounts for more than 30% of total franchise prescriptions.

Last month, Astrazeneca and Abbott announced that the FDA issued a complete response letter for the new drug applications for CERTRIAD, which is our fixed dose combination of CRESTOR and TRILIPIX. We are working with Astrazeneca to prepare a response to the agency. We continue to have a high degree of confidence in CERTRIAD, and believe it represents a promising treatment for patients with mixed dyslipidemia.

During the quarter, we completed the acquisition of Solvay Pharmaceuticals’ business as Tom mentioned, bolstering our presence in key emerging markets, and providing us with significant incremental R&D spending capacity to drive future pharmaceutical growth. Immediately following the February Solvay close, we began to integrate the business and were pleased with the results to date.

Solvay brings to Abbott nearly $3 billion worth of successful, consistently performing global products, approximately three quarters of which are in international and emerging markets with a mix of products that are predominantly stable, branded generics. Recall that Solvay has a significant footprint in key emerging markets such as Russia, India and Brazil.

Our focus on emerging markets is driven by the strong opportunity for growth, which is expected to be three times the growth rate of developed markets and account for 70% of pharmaceutical growth in the next five years. This rapid growth is being driven by evolving demographics, rising income, monetization of health systems and increase in the treatment of chronic diseases. Clearly these markets represent one of the greatest growth opportunities not only in pharmaceuticals, but across our broad based business segments today.

So as we look into the second quarter, including a full quarter of contribution of the global Solvay sales, we expect double-digit reported sales growth in both the US and international pharmaceutical businesses.

Turning now to our global nutritionals business, reported sales in the quarter increased nearly 12%. U.S. sales increased nearly 6% driven by continued strong growth in both our adult and pediatric businesses. In a adult nutrition business, Ensure and Glucerna brands continue their strong performance. In our infant formula business, our innovative products continue to resonate in the hospital and retail settings, helping us to maintain a strong share lead over our nearest competitor.

We are also expanding our proprietary Early Shield brand to our infant formula tolerance line. Tolerance formulas designed for sensitive baby stomachs make-up 30% of the infant formula market, and Abbott will be the first to market with this innovation.

International nutritionals sales in the quarter increased 18%. We continue to see very strong growth across geographies, including emerging markets, which is the fastest growing segment of our international nutritional business. In China, for example, Abbott is growing twice the market rate and we're now the number three player in pediatric nutrition in the country’s top tier cities.

We are increasing our footprint in key emerging markets, and we are launching next generation products across many of our brands. So as we look ahead to the second quarter in our global nutritionals business, we expect continued double-digit reported sales growth, with mid single-digit sales growth in our US business and double-digit reported growth internationally.

Turning to our medical products businesses, let us start with worldwide diagnostics, where reported global sales increased 12% in the quarter. In our core laboratory diagnostics segment, which includes immunochemistry and hematology, reported sales increased nearly 10%. Sales were primarily driven by double-digit growth of our architect and prism platforms, and especially strong performance in emerging markets such as China.

We have expanded our presence in small and mid-sized labs with our new ARCHITECT ci4100 system, and US PRISM [ph] sales were also very strong fuelled by continued uptake of our HIV blood screening assay. We have also submitted two new ARCHITECT assays in the US, one for HIV and one for rapid detection of acute kidney injury. Both assays will be the first of their kind in the US, and two of several key essays we plan to launch on ARCHITECT this year.

In both our point of care and molecular diagnostic businesses for the quarter, global reported sales grew double-digits. In molecular, reported sales were up 30% driven by our m2000 platform. We also continued to pursue our strategy in pharmcogenomics, where we now have multiple collaborations underway for unique cancer diagnostics that help determine what patients may benefit from certain therapies.

In our point of care business, reported sales were up 20%, driven by the continued success of our Chem8 test in cardiac menu.

So as we look ahead to the second quarter in our worldwide diagnostic business, we expect high single-digit reported sales growth. This includes mid-single reported sales growth in our core laboratory business, where we expect continued profitability and cash flow improvement throughout the year. We are forecasting double-digit growth in both molecular diagnostics, as well as point-of-care.

In our other medical products businesses, our diabetes business reported worldwide mid single-digit sales growth this quarter. In our international business reported sales increased nearly 5%, and in the U.S. sales growth was nearly 3%. We also continue to focus on improving profitability in this business similar to our diagnostic business. So looking ahead to the second quarter in our global diabetes business, we expect mid single-digit reported growth.

Let me move on to vision care and AMO where sales were $260 million in the quarter. In January we launched our new TECNIS Multifocal 1-Piece intraocular lens for cataract patients in Europe, followed by the US launch earlier this month, which we expect to drive share gains for this segment for our business over the course of the year. We also continue to anticipate 2011 US launch for our new Synchrony accommodating IOL based on the likely timing of panel review in the second half of 2010.

Synchrony is designed to mimic the eyes’ ability to change focus, delivering improved vision at all distances and eliminating the need for glasses and contacts. We expect high single digit sales growth for AMO and our vision business in the second quarter.

Turning now to our vascular business which delivered very strong growth this quarter. Worldwide reported sales were $747 million, and that is up nearly 16%. This was driven by international vascular sales growth of 33% and the continued success of XIENCE V and XIENCE PRIME in international markets. Global DES franchise sales in the quarter were nearly $400 million, and that is up approximately 20%. As a reminder global franchise sales include XIENCE, XIENCE PRIME, as well as our other third-party DES product revenues.

We launched XIENCE in February in Japan with results that exceeded our expectations. In just one month XIENCE claimed the number one market share position, exceeding 40% market share. With the addition of Promus, total XIENCE platform share in Japan now exceeds 50%, which is the second largest DES market after the US as you know at $500 million to $600 million.

With the success and promotion of XIENCE, we also saw share improvements in our core products in Japan, including bare metal stents and balloons. Keep in mind our international business reports on one-month lag and included the only February Japan sales. So the strength of our international business was primarily driven by the continued success of our next generation DES XIENCE PRIME in other international markets in Europe, where the XIENCE family remains the market share leader.

And in the US the XIENCE platform, which also includes Promus maintained market leadership with approximately 60% share in the first quarter. We look forward to the publication of the (inaudible) results in a top tier medical journal here in the second quarter. The publication of this data, which shows the superiority of XIENCE over Taxus in real-world patients will further increase awareness of the XIENCE clinical profile among physicians.

In the US DES market, PCI [ph] volume was up modestly in the quarter versus the prior year. DES penetration was approximately 78%, up a few points over last year. The continued success in the US and Europe, as well as the impressive launch in Japan the XIENCE family has become the number one DES worldwide. This strong top line growth has led to continued improvements in the operating margin of our vascular business as expected.

We also had a strong showing at the ACC meeting last month for several of our vascular pipeline products, including our MitraClip device, which I will discuss when I review the pipeline in a moment. So looking ahead to the second quarter in our global vascular business, we expect continued double-digit reported sales growth.

Now moving on to our broad-based pipeline. In 2010, we expect to see continued advancement of our pipeline, including the anticipated approval for several new products or indications. In our pharmaceutical pipeline, we have a number of unique compounds in early and mid-stage development for oncology, immunology, HCV, neuroscience and pain management.

In oncology, ABT-869, a multi-targeted kinase inhibitor has already generated early data in liver, lung and kidney cancer. It is currently in Phase III for hepatocellular carcinoma, and in Phase II for additional cancer types. ABT-263, our Bcl-2 family inhibitor is in Phase II for chronic lymphoid leukemia and other solid tumors. And ABT-888, our PARP inhibitor is being evaluated in a number of cancer types, including a Phase II study in metastatic melanoma, which could potentially serve as a registrational study.

And we recently added an early stage biologic to our oncology pipeline as you may recall through a worldwide licensing agreement with Pierre Fabre to develop and commercialize a novel antibody for the treatment of cancer. In immunology, we are leverage our experience with HUMIRA to identify new mechanisms with the potential to treat an array of immune-mediated diseases. Our pipeline includes early stage work in oral DMARD therapies, as well as a number of biologic candidates, including ABT-874, our IL-12/23 for psoriasis, currently in Phase III and on track for regulatory submission this summer.

In HCV, we recently initiated a Phase II trial investigating three additional HCV compounds with the goal to markedly transform current treatment practices by shortening therapy duration, improving tolerability and increasing cure rates.

In neuroscience, we are developing compounds to address Alzheimer's disease, schizophrenia, pain and other neurological conditions. We currently have two compounds from our NNR, and H3 platforms in Phase II development for Alzheimer's.

We recently expanded our pain portfolio with an innovative anti-nerve growth factor biologic in development for chronic pain. In the first quarter, we announced a definitive agreement to acquire Facet Biotech, which will enhance our mid and late stage pharmaceutical pipeline.

The acquisition further expands our biologics pipeline in two of Abbott’s key therapeutic areas, immunology and oncology. Daclizumab is a next-generation biologic candidate, expected to enter Phase III development for multiple sclerosis in the second quarter. And there are two oncology compounds in early to mid-stage development. Facet also brings a broad-based expertise in the area of biologics that will complement our existing biologics programs.

And also in our broad-based pipeline, in our vascular pipeline we expect to bring more than 10 coronary technologies to market over the next five years, making it the most robust pipeline in the industry. These include new devices such as MitraClip, XIENCE NANO small vessel DES, XIENCE PRIME in the US, and ultrathin metallic DES, next-generation balloons, as well as our bio reabsorbable vascular scalpel or BVS.

We have completed enrolment of our XIENCE PRIME US clinical trial, which is evaluating a range of stent sizes, including small vessel and long lengths. We remain on track for a US approval of XIENCE PRIME in 2012. In March, at the American College of Cardiology or ACC meeting, we announced pivotal data for our MitraClip device from the landmark EVEREST II trial. MitraClip is in development for the treatment of mitral regurgitation, which is the most common heart valve insufficiency in the world. It affects more than 8 million people in the US and Europe, and is four times as large as aortic valve disease.

Mitral regurgitation is currently managed with medicine are treated with rested [ph] open heart surgery with less than 20% of patients having surgery. At one year of the MitraClip device compared to surgery met its primary safety and efficacy endpoints and demonstrated meaningful clinical benefits for patients, including improvements in heart function and quality of life and a decrease in cardiac symptoms. The EVEREST II results demonstrate that the MitraClip is a potential new option for treatment of mitral regurgitation.

MitraClip is on the market in Europe, and we submitted the final PMA module for FDA review in March. We expect approval for MitraClip in 2011 based on the likely timing of a panel review in the second half of this year. We also expect to present additional data from EVEREST II at PCR here in May.

Also at ACC, we presented new data from our BVS clinical trial. Positive 30 day results from the second phase of our ABSORB trial demonstrated no stent thrombosis, no TLR, and a very low MACE rate. This phase of the trial enrolled 100 patients, and incorporates device enhancements designed to improve deliverability and vessel support.

These results build on the long-term success we have seen with the BVS technology in the first phase of the ABSORB trial, which has generated positive data on 30 patients out of 3 years. Abbott is the only company with long-term clinical data evaluating the safety and performance of a BVS. We plan to show six-month data from cohort B at PCR.

We are also advancing our balloon offerings with the goal to recapture the number one share position in balloons over the next few years. In 2009, we launched our VOYAGER NC balloon and gained approximately 6 share points of the total US balloon market. We plan to launch our next-generation balloon in the front line segment, the larger segment of the market, later this year did the expectation for continued market share gains.

So in summary, we are pleased with our better than expected performance in the first quarter. We delivered ongoing EPS at the top end of our range at $0.81, and excluding the impact of healthcare reform as Tom mentioned, EPS would have been $0.84 or a growth of 15%, betting the First Call Mean by $0.04. We effectively raised our full-year ongoing earnings per share outlook excluding healthcare reform. With healthcare reform, the midpoint of our newly updated guidance range reflects approximately 12% EPS growth over the prior year.

We also had a better-than-expected gross margin in the quarter, and double-digit investment spending, including nearly 15% in R&D. We delivered double-digit sales growth across our four broad-based businesses, including strong performance of our immunology and lipid franchises in line with our expectations, impressive performance of our international vascular business, broad-based growth across our global nutritionals business, and double-digit growth in diagnostics, and we saw continued productivity and movement within our broad-based pipeline.

We are also looking forward to upcoming data publications and data presentations from our vascular business, including PCR in May. And over the next several months, we will be participating in several upcoming healthcare conferences with our senior management team, Tom Freyman and Miles White.

And with that operator, we will now open the call for your questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question is from Mike Weinstein from JP Morgan.

Mike Weinstein – JP Morgan

Thank you. Good morning.

Tom Freyman

Good morning.

Mike Weinstein – JP Morgan

Let me start with healthcare reform, which took a little bit of wind out of your sales this quarter. Obviously you would have beaten by $0.03 absent reform, and you are taking a $0.11 out of this year. If I look at 2011, and the comment that it should be a little more than $200 million incremental impact over ’10, is that roughly $0.11?

Tom Freyman

Yes, I mean, Mike this is Tom. The – obviously, the majority of this adjustment is basically in the revenue line. So there is a pretty heavy fall through. So I think using a ratable estimate would be appropriate. Obviously, you know, we've got a lot of things going our way in 2011. Certainly, this is going to be part of our mix as we plan for that. As always we target double-digit growth as we go into our planning cycle and as you know next year between improvements from Solvay and various other margin improvement initiatives, we've taken on over the last two years, I think there are lot of good things going our way to help mitigate what is a new cost of doing business.

Mike Weinstein – JP Morgan

Right. Tom, can you talk a little bit about HUMIRA growth in the US, you obviously had a new comp this quarter, and so you put up the very good numbers, can you give us your thoughts on how growth looks from here, and while we are talking of the US, can you talk internationally as well?

Tom Freyman

Well, our international continues to be very strong as you've seen. I mean, we continue to be in the strong double-digit area and we are very much in line if not as you know, with our expectations for the quarter and I think with investor expectations, and we expect to see that rate of growth continue throughout the year. So we don't really see a slowdown in international. The product continues to be competing in markets that are less penetrated and they continue to gain share and our execution continues to be outstanding.

As you know, the US market has been a slower growing market in the last couple of years just because it's more penetrated, but still very good growth and I think you've seen scrip rates you know, in the upper single to low double-digit range depending on the period you look at, and we would expect growth in that product continue pretty much in line with scripts.

John Thomas

And I'd add to that Mike that the penetration rates obviously remain fairly low across the globe, in particular they are low outside the US where we have only low single-digit overall penetration rates in dermatology, low double-digit type rates in gastroenterology and in the mid-teens in rheumatology.

Mike Weinstein – JP Morgan

Okay. Let me as just one last question, then I will drop. TriCor/TRILIPIX post the presentation, if I missed that, I apologize. Did you have any discussion with the FDA about an advisory panel, and just talk about script trends in your view of the product in the wake of that data?

Tom Freyman

Let me first comment on the ACCORD data. The FDA did indicate after the NIH presentation of ACCORD that they would take a look at that and are doing that. We've had no further discussions with them about a panel. Don't believe that a panel would be necessary, but obviously that's always the prerogative of the agency. As we mentioned before with regards to CERTRIAD, we are working with Astrazeneca to have a meeting set up with the agency and report on that.

We still have a lot of confidence in that product as well as ACCORD. I would tell you that following ACCORD, there has been no change in position prescribing patterns or behavior. In fact, the overall script trends have been consistently strong and well above the market rate. Larry would you have anything to say.

Larry Peepo

Yes, I would say, you know, Mike we've seen for weekly data points. You know, post ACC for the TriCor/TRILIPIX script trends and they do look very consistent across those four weeks.

Tom Freyman

Okay.

John Thomas

Hello.

Operator

Thank you. Our next question is from Glen Novarro from RBC Capital.

Glen Novarro – RBC Capital

Hi, hey, thanks. Good morning. Two questions on Solvay, one you reiterated you expected 2.9 billion in revenues for this year, yet the dollar continues to strengthen. So is that, as you look at that 2.9 billion are you saying that you are seeing better growth or you are feeling more optimistic about some of the products that you have acquired in that portfolio. That is question one, and then obviously we have all looked at the $0.10 are accretion this year, and we thought some of it would be spent away via acquisitions, and given the impact of healthcare reform, I'm wondering if that cushion now going to be used for Medicare reform or should we still see the company active in acquisitions this year? Thank you.

Tom Freyman

Glen, this is Tom. I'd say at this point you know, obviously in the quarter we only had a very small portion of Solvay activity. Fundamentally we don't really have a different view on the sales performance of the underlying products, and I think when we put our plan together we had exchange rate assumptions that were not too different from even where we are right now with the dollar.

I mean, obviously there is more to the world than just the euro, and certainly the euro has been a little weak, but a number of the other currencies have been stronger, and as I indicated in my remarks, our basic view on exchange impact on the top line for the company continues to be for the full year in that 1% to 2% range. So not a lot of change for our outlook on exchange, and I think we'll have a little more color on the Solvay product performance by the second quarter as we get more than you know, for example, the two weeks we had in this quarter in terms of performance and the numbers.

So, no fundamental change there. Obviously, the question on spending, I mean, you know, with the Solvay acquisition, we are bringing a lot of their spending into our P&L. We've been very outspoken about the R&D that we are bringing in the $500 million, our ability to increase investments over time, reallocate those to high-priority opportunities, and you have seen some licensing over the last 3 or 4 months in pharma as we augment our pipeline, and certainly some of those programs which John talked about in his remarks will be partially funded by the increased opportunity we get from Solvay.

So I don't think fundamentally Solvay’s impact on our 2010 results is much different than we thought about back in January, and I think what you're seeing with absorbing part of healthcare reform is basically better performance across our businesses so that the entire $0.11 impact is partially offset by better performance.

Glen Novarro – RBC Capital

So just a follow up on the M&A side. Will 2010 be somewhat of a similar year to 2009, where we see more tuck-ins than something on the larger side?

Tom Freyman

Obviously, we were very active in 2009 culminating in the closing of Solvay this quarter, and when you have that much activity, I think it is important for the most part to focus on integration, and I think perhaps and you know, be sure that the assets we’ve acquired are going to perform at the level we expected when we acquired them. That said as you know, you know, we are always looking at opportunities.

I think your characterization is correct that if we were to do anything more it would tend to be augmentation of pharma pipeline, which I would characterize as tuck in and we also continue to be interested in emerging markets and geographic expansion complimentary to the product lines we have. So I think the way you’ve characterized, if there is more activity this year as more tuck in I think that is appropriate.

Glen Novarro – RBC Capital

Okay, thanks Tom.

Tom Freyman

Thanks Glen.

Operator

Thank you. Our next question is from David Lewis from Morgan Stanley.

David Lewis – Morgan Stanley

Good morning.

Tom Freyman

Hi, good morning.

David Lewis – Morgan Stanley

Tom, it is pretty clear that obviously core operating performance is helping to offset the impact of reform, can you just walk us through some of the primary drivers of operating improvement here in 2010?

Tom Freyman

Yes, I think fundamentally at least in the quarter and I'm hopeful we do a little better during the year. We're just seeing a little bit better gross margin performance, a better product mix, a little more efficiency in our manufacturing operation. I'd say fundamentally that what we saw in the quarter, we are expecting a little bit more than the forecast and we'll see if we can do better as the year progresses.

David Lewis – Morgan Stanley

Tom, just a follow up to that, obviously GMs are very strong this quarter versus our expectations, but then obviously core spending as you told was also higher as well, how should we think about those gross margin expenditure as playing out throughout the remainder of the year?

Tom Freyman

While the forecasts I provided in my remarks were totally consistent with what I said back in January around 9.5% of sales in R&D and a little over 27%. As we talked about back at that time for SG&A, as we talked about back at that time our SG&A profile, we do believe will pick up this year because of the addition of Solvay. Solvay spends more per dollar sales than our average and so we do expect that to pick up, but as we’ve also said we are planning very few efficiencies during 2010 related to Solvay.

It's going to take time for us to complete our integration plans and begin to execute, and we do expect that trend to reverse in 2011, and as I responded to the first question on the call, you know, part of our mix as we go into 2011 is the return to SG&A leverage and improving gross margin and I think you're going to see that trend go back the other way next year.

David Lewis – Morgan Stanley

Okay. Very helpful, and just last question Tom, just speaking about cyclical recovery, many kind of peer group companies were talking about some level of cyclical recovery. In certain areas of your business whether it be AMO, and specifically in diagnostics, it seems that there may be some evidence that you are seeing similar trends. Maybe just talk just about, have you seen material evidence that we have some evidence of cyclical recovery or is it too early to tell?

Tom Freyman

In general, as you recall from last year, we generally had relatively modest impact of economics even in our diagnostic division, which perhaps some companies had some economic impact but because we are not capital intense in that business and we tend to – the vast majority of our business is disposables. We really didn't see much change due to the economy there as well. I think we are seeing, I characterize it as just slightly more optimism for example in the LASIK area, but nothing that we would bank on as a significant recovery this year.

As you recall in our guidance call in January, we were not counting on much economic recovery. So from our perspective we are just starting to see a little not significant to our forecast. We are hopeful as we move into 2011 that that will pick up on some of these businesses that are little more sensitive that the cycle will start performing better.

David Lewis – Morgan Stanley

Okay, thank you very much.

Tom Freyman

Thank you.

Operator

Thank you. Our next question is from Rick Wise from Leerink Swann.

Rick Wise – Leerink Swann

Hi, good morning.

Tom Freyman

Hi Rick.

Rick Wise – Leerink Swann

Couple of things, one, briefly back to HUMIRA, just to make sure I'm understanding – thinking about it correctly, so the report you had guided us to 20% HUMIRA growth, reported sales growth, but now currency trends are less favorable than when you originally issued the guidance at January. So in essence maybe you are – is it fair to think that your guidance actually better operational growth for HUMIRA and absorbing the less favorable currency? Is that a fair statement?

Tom Freyman

Rick again I, I mean, HUMIRA is growing just fine, and it's growing in line with our expectations, maybe a little better, but again when we put our plan together relative to currency forecast, perhaps we were a little more conservative than others. For the full year we're not seeing net across all the currencies much change from our initial expectations. So, hopefully, you know, it's kind of steady as you go as far as we are concerned. The product continues to perform extremely well, but I wouldn't characterize currency as being a big driver in this forecast.

Rick Wise – Leerink Swann

Okay. So, complete response letter, can your update us there and you know, as Tom said, change your view at all of what peak sales could be just given the timing of generics in 2012?

Tom Freyman

Well, you know, as I mentioned in the call remarks, Rick, you know, we have – we are working with AZ to prepare this briefing package in response to the complete response letter. We'll share that with the FDA at the appropriate time and then request the meeting as would be the normal sequence of events in this. We still have a high degree of confidence in the product as does AZ. I don't think we have had any difference in our expectations for peak year sales.

Obviously for modeling purposes, all the guidance we gave today, we're not assuming any sales this year, which wouldn't be the prudent thing to do, but we do have high expectations for the product going forward. We haven't given a peak year sales forecast per se, but given the data that we've seen the fact that they’re too strong products both involved in that product, you know, as you know any information that we’ve shared so far, we feel good about that and so that's where we go. We go forward from there.

Rick Wise – Leerink Swann

Okay, couple of last quick ones. Just to make sure I understood your comment Tom, you expect SG&A as a percentage – or you hope, you are trying to get SG&A as a percentage of your sales in 2011, less than wherever you end up in 2010. So however we are modeling it, you think it should be similar?

Tom Freyman

That's correct. Again we expect as the Solvay integration gets into a true cost-reduction mode that we’ll be able to take cost out there without impacting investment in the business or the things that are going to drive longer-term growth and start seeing leverage again in SG&A, the way we thought in 2008-2009.

Rick Wise – Leerink Swann

Okay, and then just last on diabetes, you talked about the improving margins, maybe just give us some perspective on where we are and where we could go or what is happening and when you expect to see a rebound there, back to some kind of normalized growth? Thank you.

Tom Freyman

So, the diabetes care overall we are seeing you know, a nice steady performance as we talked about in my remarks. I think the main focus there as we’ve talked about in the past year recently is approaching that business more like we did the diagnostic business a couple of years ago and improving the profitability of that business, and focusing on the right patient mix and more profitable patient mix and we've been more disciplined about that and we are seeing the results of that.

So, you know, the outlook is steady. You know, that market does see some impact from the economy and there has been some decline in price and volume as a result as people become more price conscious, but we're starting to see that improve slightly as we go forward here.

Rick Wise – Leerink Swann

Thank you.

Operator

Thank you. Our next question is from Sara Michelmore from Cowen.

Sara Michelmore – Cowen

Great. Thank you. You know, Tom, I was just hoping you could comment on the operating margin trends in the vascular business, there was a huge pickup for you in 2009 and I'm just curious that we're this year looking out, and if you could just talk about some investments you are making there in new products, and now the shapes out in terms of the margin trend there?

Tom Freyman

Sure Sara. As you know, in 2009 we moved the op margin for that business to around 20%. I mean that's gone from basically a loss position two years ago to a very nice profitable situation, And as always included in that 20% of amortization expense from the deal. So there would be cash out margins, if you think of it that way are actually higher. We have forecasted for 2010 a move into the mid-20s, the volume we are getting out of markets such as Japan and continued growth in Europe and improvements in share in the US are continuing to drive efficiencies in that operation and they continue to do an outstanding job from a manufacturing perspective and from an efficiency point of view as well.

I think there is room to go further in that business as we go into 2011, and as I said earlier you know, part of our thinking on 2011 is when we look across these businesses whether it's SG&A leverage or manufacturing gross margin improvements, we see pretty much margin improvements across all of them and we think vascular will be one, which is going to be an important part of our planning as we go into 2011.

Sara Michelmore – Cowen

Okay, and I HUMIRA is another one, or there are other product areas or specific products that we should be thinking about that has that type of trend?

Tom Freyman

Well, it's pretty much across – you know, pretty much across the businesses. You know, we expect – we talked about diabetes a minute ago, we expect better op margins there from some efficiency programs. Diagnostics, you know, we've gone through this fairly significant you know, efficiency plan has taken a couple of years to implement. The savings of that really started kicking in 2011, and our nutrition business, we expect to see some improvements there as well. So it's pretty much across the board and you know, with the product mix in pharma improving, we'd hope to see a little bit there as well. So it's really across all the businesses there.

Sara Michelmore – Cowen

Okay. And John thanks for going through some of the pipeline details, just curious, are there any upcoming data presentations that you would point out to us, either Phase II programs that might be at ASCO or any additional look at the 874 Phase III clinical trials coming up in the next couple of months?

John Thomas

Yes, we do have a number of those. I talked about some of them. I’ll let Larry describe a few of those. We don't have specifics on some of those yet, but there are a number of data presentations from some of these earlier stage programs that we're really excited about that are moving more rapidly through the pipeline now. Do you want to expand some of that?

Larry Peepo

Sure. Hi Sara. Yes, at ASCO we will see data across three of our oncology programs, a combination of Phase II data for 263, ABT-888 as well as 869. We will see also 874 data. There is a final Phase III study that should be presented later on this year at a fall derm meeting. We’ll also see HUMIRA ulcerative colitis data. We've seen the induction data already. So that will be again presented at DDW here in May. We'll also see for the first time the maintenance data at a conference later in the year.

I don't have the specific venue or timing for that just yet, but I should see that later in the year, and then you know, on the other side of the business, don't forget to add PCR in late May. We’ll see some additional one year results for MitraClip. John mentioned BVS data six month data from cohort B will be presented at PCR. We'll also see some additional XIENCE data there, and in the back half of the year, you know, we've got the MitraClip panel as well as the synchrony panel and that the synchrony panel that would be the first presentation of the pivotal data for that product.

John Thomas

And then of course as I mentioned in my remarks, the spirit four [ph] data being published in a major medical journal will also be a “catalyst” if you will looking for those things.

Sara Michelmore – Cowen

Okay. And then lastly if you could just – are there any items from the Solvay Pharmaceuticals pipeline that you have highlighted?

Tom Freyman

You mean, in terms of data presentations?

Sara Michelmore – Cowen

Just in terms of products that you guys are focused on or think that are interesting.

Tom Freyman

Yes, you know, the two big products there are Creon and Androgel, both doing very well. You know, we, because of the close of the deal, we weren’t in a position yet to break those out, but we might do that going forward. Creon has really done very well, gained significant market share over the last year, and then Androgel has been surprisingly strong as well. So we are going to talk about that more as we go through the next quarter.

John Thomas

Obviously, you know, a partial quarter on those products wouldn't have been very meaningful.

Tom Freyman

You know, you've probably seen that you know, the partner on gabapentin ER discussed the recent filing of the US NDA for that product. So that's another piece from their pipeline that's moving forward.

Sara Michelmore – Cowen

Great, thank you.

Tom Freyman

Thank you.

Operator

Thank you. Our next question is from Sebastian Paquette from Goldman Sachs.

Jami Rubin – Goldman Sachs

Good morning. This is (inaudible) Jami Rubin. How are you?

John Thomas

Good morning. Good.

Jami Rubin – Goldman Sachs

All right. First off, can we just talk about additional pricing details for the DES business in the US, Europe, and Japan?

Tom Freyman

What information are you looking for?

Jami Rubin – Goldman Sachs

Just in terms of how the first quarter pricing trends, for drug eluding stents, you know, in those various geographies.

Tom Freyman

Okay, well we haven't seen any incremental overall pricing pressure as you know, this market has always been competitive. There has been some price being taken by some of the other competitors, older technologies in certain select accounts. You know, we are pretty good sequentially year-over-year. As you probably know the overall pricing is down in the marketplace, which was expected, but you know, as we go through the year and as we’ve launched PRIME ex-US and now XIENCE in Japan, both of those are premium priced products into premium markets, where we are getting the premium for the technology and the kind of data results that we’ve shown with XIENCE. So, US declined as expected, but the volume obviously increasing significantly, and the bottom-line performance of the business increasing significantly, and then premium pricing outside the US.

Jami Rubin – Goldman Sachs

On a sequential basis in the US then, drug-eluting stents XIENCE pricing has been roughly flat sequentially in the US?

Tom Freyman

It is down probably low single digits sequentially.

Jami Rubin – Goldman Sachs

Okay. And then have we been able to take price in Europe with PRIME?

Tom Freyman

We have. Yes, we are getting a premium price with PRIME in Europe as we move to supplement our product portfolio in those markets.

Jami Rubin – Goldman Sachs

Okay. So as we look forward to the like the 5 points of operating margin improvement in the vascular business in 2010, if pricing will be flat to down likely on a sequential basis, and especially year-over-year, will that operating margin improvement be driven mostly by the roughly, let us say $850 million in additional geographies for 2010, or there are other kind of metrics there we should be looking at?

Tom Freyman

Yes, this is Tom. We’re getting a lot of leverage from the incremental sales in Japan, Asia the markets we’ve launched in this year. You know, relatively fixed expense phase and a more efficient manufacturing operation, very sensitive to volume increases. So the dynamics there continue to be very good as we continue to expand geographically with the products.

John Thomas

And I’d also keep in mind that we planned for a US lower pricing environment this year that was in our expectations and continues to be as we talk about these businesses and the growth rates.

Jami Rubin – Goldman Sachs

Okay, great. And then for the HUMIRA pricing environment in Europe, are you not seeing a significant pricing pressure from EU markets such as Germany, Spain, Turkey, and UK? Or is HUMIRA offsetting these prices entirety with share gains?

Tom Freyman

Yes, this is Tom. Certainly, for decades we've been dealing with government programs that the general trend is downward prices you know, very low single digits type over the years and doing very well in those environments. If you went into our 2010 planning cycle, you know, we were cognizant because of the economic downturn and the pressure on taxes [ph], but there potentially would be a little more pressure on European healthcare budget in particular, and we planned for that going into 2010, and you know, the news headlines have been there, and you referred to them in your question. Certainly we have seen a little more pressure. That's pretty much in line with our expectations and our forecast that we provided today, you know, the updated guidance et cetera, take into account what is happening in Europe with some of those budget issues.

Jami Rubin – Goldman Sachs

Okay.

Tom Freyman

Whether it is that product or any other.

Jami Rubin – Goldman Sachs

Okay, and then finally, I know we've touched on M&A already, but maybe just it as a fact of kind of bigger picture five years down the road, we have seen a flurry of kind of small to mid-sized deals lately, but is there kind of an estimation or a goal for achieving estimated M&A revenues as kind of a percentage of total revenues five years down the road or what is the larger strategy that Abbott is employing with kind of its increased deal activity?

Tom Freyman

No, I mean, our forecasts and expectations, our baseline assumes no significant M&A activity. I know we've been pretty active over the last two years and I think the assets we brought in portfolio have been truly outstanding, and it really accelerated the baseline, but our expectation going forward is to deliver the types of growth people expect largely from organic sources, and then if we can opportunistically find things to add, to bring a little more accelerated growth. You know, we will consider that from time to time, but we're not counting on M&A to deliver the growth we are expecting.

Jami Rubin – Goldman Sachs

All right. Thanks a lot.

Tom Freyman

Thank you.

Operator

Our next question is from Bruce Nadel with UBS..

Bruce Nadel – UBS

Good morning. Just – first question is to the very topic that you discussed that no one doubts the acumen of the management team of the kind of earnings power of the company as configured today. I think people are you know less certain about the trajectory of the top line, you know over the mid-term with kind of the products that are through Phase III or progressing through Phase III. So, just to put the number on the baseline, top line that you guys expect to deliver with what you know is pretty firm, or could you just articulate that?

Tom Freyman

Well, you know, I think there tends to be when people are looking at our overall top line, you know, it tends to be a little more focused on pharma when they are doing that math in their head, and obviously pharma is important for us, but we've got 40%, 45% of the business that is non-pharma that is totally different from a portfolio perspective, from a growth rate perspective, from a durability perspective, and you know, it's not just the product mix that people have to consider, but it's also the geographic mix which you know, we are becoming more and more an international company.

John talked extensively in his remarks about the various emerging markets’ initiatives across the businesses, and for us you know, that's not only pharma but it is nutrition, diagnostics, vascular, and all of these markets where, you know, there is a tremendous amount of geographic growth potential in the mix for Abbott, and when we put that all together, I think we have to have a baseline revenue growth in the upper single digits to achieve what we expect to do from an earnings perspective, and I think that's very achievable when you look broadly across the portfolio, when you look at some of the, you know, our pipeline starting to progress and products coming out in three, four years and, you know, the growth potential of the product in the mix already being very strong over the next three-four years and so we bring stronger pharma growth to the mix. So there is a lot going on here, emerging markets, geographic, it’s key, and I think those revenue forecasts are achievable.

Bruce Nadel – UBS

And just one follow-up on HUMIRA, you know, the markets are relatively opaque for us, but do you foresee just given the potential geographic rollouts, an indication of expansions around the world, do you see that that deceleration, which is inevitable to be kind of gentle going forward?

Tom Freyman

Yes, I mean, this is Tom Again. I mean, tremendous quarter again this year, this quarter, 37% HUMIRA growth in the quarter, 30% excluding [ph]. Very strong quarter and obviously it's going to be another great year for HUMIRA, but as you indicate there they’re tough to grow at that rates forever, but we do see very strong double-digit growth for many years to come, and declining somewhat year-over-year, but still very strong, and it's just going to become a little bit less important element of our growth over the years as these other businesses and geographic expansions, et cetera, contribute more and more going forward.

Bruce Nadel – UBS

Thanks so much.

Tom Freyman

Thank you.

Operator

Thank you. Our next question is from Derrick Sung from Bernstein.

Derrick Sung – Bernstein

Hi, good morning. Thank you.

Tom Freyman

Good morning.

Derrick Sung – Bernstein

Let me just follow up really briefly on that last point that you are making on – that Bruce was making on the HUMIRA US growth, you know even in this quarter, while you talk you did see very strong growth of 27%, there was a kind of step down from the low 40s that has been sort of the run rate that we have been after for the last few quarters. Was there – do you have the visibility to point to any new indication expansion or any event that we are kind of anniversarying leading to that step down, and then more importantly sort of moving forward, are there any sort of indication expansions, new entries into countries that we can be aware of to sort of help us model, how that step down might occur going forward?

Tom Freyman

This is Tom. I think I can't identify anything specific to your question. I mean, I think it is a bit of a lot of large numbers. I mean, it's a very significant product for us outside the US, but – and certainly I think there is a little economic impact in there and some of the price discussions we had before. Certainly some of that rolls through the growth potential as these European budgets tighten down a little bit this year. That's probably the one thing that's a little different than last year, again which we planned for and have reflected in our forecast. But I think it's really just the fact that the businesses has gotten large, and I still think 27% of the very strong rates and we expect strong double digits continue in this international market.

Larry Peepo

Yes, in terms of new geography Derrick, this is Larry. You know, John mentioned that we did get in Japan the psoriasis and psoriatic arthritis indication approval here early in 2010. You know, that is something that will expand our opportunity in the Japanese market over time. You know, RA continues to move up in Japan for us as well. You know, we just got approval for that in mid ’08, but as you know, that market takes a little while for all products to evolve, and so now we are kind of just hitting you know, the stronger portion of the run rate for RA in Japan.

We also have other countries we mentioned RA in China. We continue to rollout Crohn's disease in some of the Latin American countries that haven't gotten it yet. We are ruling out psoriasis across you know, some Eastern European countries, South Africa, et cetera. So there still is geographic expansion for the product going on.

Derrick Sung – Bernstein

Okay, great. And going back to healthcare reform, can you maybe run us through kind of the key pharmaceutical products that have exposure to Medicaid, that are going to hit on the rebate this year, and then also next year the Medicare products that will be exposed to donut hole fill?

John Thomas

You know, virtually every product has – in our release it's basically allocated by products. So every single product had some impact of the higher Medicaid rebates in the quarter. I'd say generally speaking the antivirals are a little bit more. Lipids are a little bit more. HUMIRA is probably a little bit less. So – and we even have some residual.

As you know, Depakote, the neuroscience products tend to be a little, quite a bit higher Medicaid and while that did go generic last year and our sales were down to $300 million last year that is still you know, a baseline which we did give up some additional rebates for Depakote in the first quarter. So I think that characterizes, but I think one thing to keep in mind as you look at our sales growth numbers for the quarter, is virtually every product has some impact from these Medicaid rebates.

Derrick Sung – Bernstein

Okay, and then as we think forward to 2011 are there certain products that might have more exposure to the donut hole fill than others?

John Thomas

That's very hard to tell because the mechanics of how the doughnut hole is going to work, and which products you could actually have some relatively low-cost products once you're in the doughnut hole getting rebates. So it's a pretty tough thing to estimate at this point of time.

Derrick Sung – Bernstein

Okay, and then just lastly, when can we expect to see some operating leverage in the nutritionals business? You mentioned that there is some opportunity there…

John Thomas

Yes, I don't think you're going to see much. I don't think you're going to see much operating leverage in ‘10 because you know, given the strong top line growth you're seeing there, it's being driven by continued SG&A investment and basically feet in the street in a number of these markets, and 2010 is another year where we’re doing that. I am hopeful we can see some op margin in 2011 as that stabilizes a little bit, but the reason nutrition has been fairly flat is because that's been a relatively higher SG&A investment business for us.

Derrick Sung – Bernstein

Great. Thank you very much.

Tom Freyman

Thank you.

Operator

Thank you. Our next question is from Catherine Arnold from Credit Suisse.

Catherine Arnold – Credit Suisse

Good morning.

Tom Freyman

Good morning.

Catherine Arnold – Credit Suisse

Obviously, gross margin is an important feature of this year and you had given us guidance of consolidated levels, and you expected some expansion. I wanted to ask you two questions for gross margin, one is when you gave that guidance, did you anticipate healthcare reform, and had you incorporated some element of risk to your outlook for gross margins, except that you had already factored that in, or should we be thinking about the fact that your optimism suggests that despite healthcare reform, you are still comfortable with the gross margins. And then the second piece, which I know might be a little bit detailed, but I really am asking kind of for the summary version of this, if you sort of look through your divisions, if you could kind of talk about what the key drivers are, positive or negative, in terms of gross margins that will get that consolidated. Is there any division that is not going to see improvement. There are lots of things going on with mix and volume and reforms, and so I thought if you just stepped back, and kind of went through that that would be helpful?

Tom Freyman

Sure Catherine. I think you have captured really a good point in terms of our gross margin forecast for the year. As I indicated in my remarks, when we did guidance the outlook for healthcare reform legislation was very unclear, and we did not incorporate that into our gross margin forecast.

Despite that in the quarter, and the fact that we did have $60 million sales effect of healthcare reform, they outperformed our forecast in the quarter. And for the full year, we pretty much held it steady despite the fact that you know we are getting around

$230 million sales impact for the full year. And so that indicate underlying across the business better performance than our baseline expectation at the beginning of the year.

So I think you captured a good point, and I think it shows, once we get through this phase of transition in healthcare reform, the trends in our business continue to be good. And I have talked often about a number of these during the call this morning. We talked extensively about vascular with the volume impacts being very beneficial to their gross margins.

When you strip away healthcare reform, between Solvay coming in which is positive to our margin and the mix effects of lipids and HUMIRA and the like, the trends there are positive as well. Diagnostic is clearly one that is going through particularly in 2011 at a nice step function in gross margin, as the savings from these cost reduction programs initiated a couple of years ago start kicking in.

So those are the big ones that are going to be driving improved margin performance in ’11, and you are already seeing some of it in ’10.

Catherine Arnold – Credit Suisse

And Tom, just as a quick follow-up is there any comment to be made about nutritionals or ophthalmology businesses?

Tom Freyman

Yes, nutritionals, I would characterize as fairly steady. Because of the nature of the manufacturing processes, they are being much more material than labor or you know overhead. It is a little tougher to move cost savings into that business. You know, the margins are more impacted by geographic mix and product mix, and I figure that one as being steady to only slightly up.

And in eye care, in AMO, I think the key one there is going to be when the LASIK business picks up. A little more profitable piece of that business is volume increases. We are not seeing much this year as I indicated in my remarks. They are fairly steady there, and hopefully if we get some economic impact that one will start moving the right way in ’11 as well.

Catherine Arnold – Credit Suisse

Great. That is helpful. Thanks.

John Thomas

Thank you.

Tom Freyman

Thank you.

John Thomas

And operator, I think we have time for one last question if there is one.

Operator

Thank you. Our final question today is from Larry Biegelsen from Wells Fargo.

Larry Biegelsen – Wells Fargo

Hi, good morning. Thanks for fitting me in.

John Thomas

Good morning.

Larry Biegelsen – Wells Fargo

I apologize if this is – if you already talked about this, I was jumping between calls. But Solvay contribution in the quarter, did you give that out, the dollar amount?

Tom Freyman

Yes, I mean on the top line, and this is very ratable with the full-year $3 billion number we provided. It was a little more than $200 million in the quarter.

John Thomas

And remember that was the two weeks of international and six weeks of US.

Tom Freyman

Exactly. So if you do that math, you'll find that it is very consistent with the $3 billion forecast for the full year.

Larry Biegelsen – Wells Fargo

And second, XIENCE share in the US and Europe, I thought I heard John at 60% number. I wasn't sure if that was US or Europe or both?

John Thomas

Yes. That was platform share in the US. The combination of XIENCE and Promus.

Larry Biegelsen – Wells Fargo

And Europe?

John Thomas

And Europe, we are – I think we are over 30 now total share.

Larry Biegelsen – Wells Fargo

I got it. And then lastly, again on the M&A front, like a lot of pharmaceutical companies, you know your late stage pipeline has had some setbacks recently. The Facet deal looks like it brings you a nice asset there. But that is more likely a 2014 launch. I think I have heard you say. So how likely are you or how compelled do you feel to add something a little bit near term for your late stage pharma pipeline? Thanks.

Tom Freyman

Well, you know we like our pipeline. We think we have a lot of good things going on, progressing from our internal pipeline and to your point, Facet brings some very nice compounds in oncology and immunology. This is a portfolio that particularly with daclizumab later stage. And so we should see those coming to market in the not too distant future.

And in this business, it never hurts to have more bets, and we continue to be very vigilant and look at opportunities, primarily licensing opportunities to put more into the mix and increase the probability of getting more and more products out. So we are very open to that, and I would say that – that is a focus area for us as I indicated earlier in my – some of the Q&A on this call.

Larry Biegelsen – Wells Fargo

Thanks Tom.

John Thomas

Okay. Thank you Larry. That concludes our conference call today. A replay of this call will be available after 11 AM Central Time today on our investor relations website at abbottinvestor.com and after 11 AM Central Time via telephone at 203-369-0548, confirmation code 138-1449. The audio replay will be available until 4 PM on Wednesday, May 5. Thank you all for joining us today, and please call us, call Larry if you have any questions. Thank you.

Operator

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

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Source: Abbott Laboratories Q1 2010 Earnings Call Transcript
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