Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Horizon Logo

Abbott Laboratories (ABT)

Q2 2007 Earnings Call

July 18, 2007 9:00 am ET

Executives

John Thomas - VP, IR

Tom Freyman - EVP, Finance & CFO

Analysts

Mike Weinstein - J.P. Morgan

Glenn Reicin - Morgan Stanley

Rick Wise - Bear Stearns

Glenn Novarro - Banc of America

Larry Biegelsen - Wachovia

Sara Michelmore - Cowen and Co.

Presentation

Operator

Good morning, and thank you for standing by. Welcome to Abbott's Second Quarter 2007 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 Thomas

Good morning, and thanks for joining us. Also on today's call will be Tom Freyman, our Executive Vice President, Finance, and Chief Financial Officer. Tom will review the second quarter results, and I will discuss the business operating highlights. Following our comments, we will take any questions you may have.

Some comments made today maybe forward-looking for purposes of the Private Securities Litigation Reform Act of 1995. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements.

Economic, competitive, governmental, technological, and other factors that may affect Abbott's operations are discussed in item 1A, Risk Factors to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31st, 2006, 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. And so with that, I will now turn the call over to Tom. Tom?

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Tom Freyman

Thanks, John, and good morning. As you can see from our earnings news release this morning, we reported very strong results for the second quarter, with mid teen sales growth and EPS of $0.69 per share, at the high end of our guidance range. Results were broad based, with pharmaceuticals, medical products, and international nutritionals all reporting strong double-digit growth.

Our major pharmaceuticals, including Humira and TriCor, had a particularly good quarter, as John will discuss in a moment. In addition, our core Laboratory Diagnostics business performed well, with sales up low double-digits. This business includes our amino chemistry, hematology and point of care businesses, which I'll refer to today as our core Diagnostics Business.

Before I go through the P&L, I'd like to take a moment to bridge you to how we are reporting results this quarter and in the future. As indicated in our earnings news release, due to the recent decision to retain core diagnostics, we determined late in our reporting process that under accounting rules we are required to report second quarter results of this business as continuing operations.

So in our earnings news release, we've shown sales of worldwide diagnostics to allow you to build up sales by segment to the reported total sales this quarter, and on a year-to-date basis. The worldwide diagnostics segment in the release includes our core diagnostics and molecular diagnostics businesses, which is how we will report going forward. We have also included in our release the historical sales for this segment, including the four quarters of 2006.

So, as I indicated earlier, in the second quarter we recorded diluted earnings per share excluding specified items of $0.69, which compares to our previous guidance range of $0.67 to $0.69. Sales, including core diagnostics, increased 15.8% in the quarter, above our previous guidance range of 13% to 15%. Exchange favorably impacted sales by 2.7%. Gross margin ratio in the quarter, including core diagnostics was 58%, up slightly over 2006.

This ratio was favorably impacted by improved product mix, partially offset by the reduction in the contribution from Synagis in the U.S., as well as the impact of generic competition on Omnicef and Biaxin XL sales. On the basis we originally forecasted the quarter, which excluded core diagnostics, the gross margin ratio would have been close to 61%.

R&D investment increased nearly 8% excluding specified items, reflecting continued investment in our pharmaceutical and medical products pipeline, including HUMIRA, ABT-335, ABT-874, controlled release Vicodin, and XIENCE. SG&A expense, excluding the impact of acquisitions and specified items, increased approximately 10%, driven by new and ongoing promotional initiatives, including new indications for HUMIRA, and the continuing international launch of XIENCE. Interest expense of $125 million was consistent with our previous guidance. Income from the TAP joint venture of $116 million was in line with expectations, and the tax rate in the quarter was 20%, also consistent with previous guidance.

Now, let's turn to the outlook for the second half of 2007. We're narrowing our full year 2007 earnings per share guidance range to $2.80 to $2.84, excluding specified items. For the third quarter, we're confirming our previously forecasted guidance of $0.64 to $0.66, also excluding specified items.

As you may recall, we provided EPS guidance for the third quarter back in January. And this third quarter guidance is the same as we provided at that time, when we noted that the quarterly pattern of Abbott's EPS would be quite different throughout 2007 than it had been in the past as a result of the positive mix changes we've made to the company over the last few years.

Guidance for the full year and the third quarter, as indicated earlier, reflects the inclusion of core diagnostics in continuing operations for the full year. Results of this business for the first quarter of 2007, previously reported as discontinued operations, have been reclassified to continuing operations in the year-to-date results reflected in today's earnings news release.

This reclassification has no impact on our EPS guidance, but it does change certain aspects of our P&L profile. As a result, let me walk you through some of the key P&L items as we now forecast them.

For the full-year, with core diagnostics as part of continuing operations, we expect sales growth of 13% to 15% off of last year's sales base of $22.5 billion, including the core diagnostics business, a gross margin ratio of approximately 58% with a higher ratio forecasted for the fourth quarter, R&D as a percentage of sales in the range of 9.5% to 10%, full-year SG&A expense as a percentage of sales of around 27%, and full-year interest expense of around $500 million.

For the third quarter, we forecast sales growth of 11% to 12%, a gross margin ratio of around 58%, R&D as a percentage of sales around 10%, SG&A as a percentage of sales of around 28%, and interest expense similar to levels in the first two quarters.

Regarding the tax rate, solely as a result of the reclassification of the core diagnostics business to continuing operations and related revised assumptions for net interest expense in the second half of the year, the full-year tax rate is now forecasted at 19.5%. Given the higher tax rate of 20% in the first and second quarters, this would result in a third quarter tax rate of approximately 18.5%, with a fourth quarter rate of approximately 19.5%. Again, this would result in a full-year tax rate of approximately 19.5%.

Finally, as we indicated last week, our earnings outlook for 2008 remains unchanged. Given the momentum in the businesses, including a number of major growth drivers, we expect to deliver accelerating EPS growth for 2008 when compared to the 2007 rate of growth.

So in summary, we're extremely pleased with the performance of our business this quarter, including our core diagnostics business. We reported mid teen sales growth, EPS at the high end of our guidance range, and solid performance in many of our key products and businesses.

We also made tremendous progress with a number of future growth drivers, including HUMIRA, XIENCE, and our lipid franchise, which John will discuss in his review of the business operating highlights. John will also discuss the diagnostics in a bit more detail to help reground you on these businesses as we move forward with them as part of the Abbott portfolio.

With that, I'll turn it over to John.

John Thomas

Thanks, Tom. As Tom indicated, in the second quarter we reported strong results across our broad-based portfolio. In medical products, global sales increased 20%, led by the performance of our Abbott Vascular, core laboratory diagnostics and molecular diagnostics businesses. Continued double-digit growth in international nutritionals drove the performance in our worldwide nutritional business. In our pharmaceutical business, the strong performance of HUMIRA, TriCor, and Niaspan helped drive a more than 17% sales increase worldwide, and a more than 26% increase in the U.S.

So let me start with our medical products and our emerging vascular business. Worldwide sales for Abbott Vascular were $423 million in the quarter, up significantly over last year, and on track to reach our target of approximately 60% sales growth for the full year. In late May, we submitted our final PMA module for FDA approval of XIENCE V, our drug-eluting stent.

Our PMA submission includes safety and efficacy data from the XIENCE SPIRIT family of clinical trials, which not only met their primary end points, but demonstrated superiority of XIENCE over Taxus. This is the first ever FDA submission to include clinical trial data that demonstrates the superiority of one drug-eluting stent over another. We anticipate launching XIENCE in the first half of next year.

The international launch of XIENCE continues to proceed well. Interventional cardiologists are impressed with the clinical data, as well as the deliverability of the XIENCE platform. We're capturing new accounts as they become available through the hospital tender process. Since our launch in the fourth quarter of last year, we're gaining on average four share points per quarter. In many of the early launch countries, we have exceeded 20% market share. XIENCE is performing exceptionally well in the Asia Pacific region. In India, for example, when looking across the major competitors, XIENCE has already surpassed 30% market share. So we remain on track to exit 2007 with overall market share in the mid to high 20% range.

Our global DES franchise sales, which as a reminder, includes XIENCE, as well as other DES product revenues that we receive, were approximately $60 million. This included a 40% increase in XIENCE sales on a sequential quarterly basis, offset by lower sequential third party-related DES revenues. We're also encouraged by the upward trend we've seen for May XIENCE sales, which grew nearly 40% from April monthly sales. In addition, sales of XIENCE in June were the highest monthly sales since the launch at the end of last year. As a reminder, June sales are not reported here in the second quarter, given that we report international sales on a one month lag.

In May at the EuroPCR meeting, results from our SPIRIT first trial demonstrated no thrombosis and a very low MACE rate out to three years. At the same meeting, data from a 1,300 patient meta-analysis of SPIRIT II and SPIRIT III reaffirm the superiority of XIENCE compared to Taxus. These results add to the growing body of evidence supporting XIENCE as a best-in-class next generation DES technology. And as you know, Abbott is in a unique position to participate in both the drug-eluting and the bare metal stent markets.

Physicians appreciate the excellent deliverability and acute performance of our Vision bare metal stent, which remains the global market leader. So, total coronary stent sales, which again include bare metal and drug-eluting stents, were $166 million in the quarter, up sequentially from the first quarter. In our DES pipeline, we're advancing a number of next generation stent technologies behind XIENCE. Our goal is to release new technology at regular intervals over the next several years. This includes a more deliverable workhorse stent, a bifurcation stent design, as well as our bioabsorbable drug-eluting stent.

Moving on to endovascular, which includes vessel closure, carotid stents and core endovascular products, sales were up 16% in the quarter. In vessel closure, we anticipate launching a new, easier to use version of StarClose called the StarClose SE later this year. So looking ahead to the third quarter, we again anticipate double-digit growth for Abbott Vascular; strong double-digit growth.

In our Diabetes Care business, global sales this quarter increased more than 6%. Last month at the American Diabetes Association meeting, we launched the FreeStyle Lite, a new blood glucose meter that does not require coating, yet retains the accuracy of the FreeStyle platform. By eliminating this manual step required by most meters, FreeStyle Lite makes the testing process easier for patients.

Early feedback from physicians and customers has been very positive. We also recently received European CE Mark for our FreeStyle Navigator Continuous Blood Glucose Monitoring System, which compared to competitive systems demonstrates best-in-class accuracy. Navigator remains under active U.S. regulatory review.

We're also developing a fully integrated blood glucose monitoring system that combines a meter, test strips, and lancing capabilities in one device, enabling simple point and click testing.

So as we look ahead to the third quarter, with the launch of FreeStyle Lite and additional new products in this business, we anticipate accelerating growth in Abbott Diabetes Care.

In molecular diagnostics, sales this quarter grew nearly 14%. In the U.S., we launched our m2000 Real-Time PCR system with the HIV viral load assay. The m2000 reduces the manual procedures and hands-on time required to prepare patient samples for molecular testing by as much as 75%. In Europe, we introduced our Real-Time PCR hepatitis B assay, expanding the m2000 system's growing manual menu of tests, and rounding out the menu for infectious disease assays in Europe.

We expect Abbott Molecular to become a more significant contributor to our sales and earnings growth over our five year long range plan as pharmacogenomics continues to play a more significant role in matching patients to the most appropriate treatments. We've already seen this type of success with our PathVysion test for breast cancer, which is used to identify the most appropriate candidates for treatment with Herceptin. So as we look ahead to the third quarter and the full year, we expect strong, double-digit growth to continue in Abbott Molecular.

Now, moving on to our core Laboratory Diagnostics business, which includes our amino assay, clinical chemistry, hematology, and point of care businesses. By way of background to reground you in this business, recall that last year in '06, this business reported approximately $2.7 billion in total sales. In the second quarter, this business performed very well, growing 11%. In amino chemistry and hematology specifically, Abbott remains the global leader in in-vitro diagnostics which includes our diagnostic assays and instrument systems, such as Architect and PRISM.

We now have nearly 70,000 institutional customers in more than 100 countries. The base amino chemistry and blood banking business grew more than 10% in the quarter. Our international business, which comprises the majority of our total sales, drove much of the growth, with particularly strong sales in Europe, Latin America, and Japan. Going forward, we'll continue to focus on higher growth, emerging markets.

Also this quarter, our diagnostic business won some key contracts with two major group purchasing organizations for a broad line of amino chemistry and hematology products. Last week, we announced the FDA approval of our PRISM HCV test, which is used by our laboratory technicians to screen for hepatitis C. This test completes the Prism hepatitis panel and is the first fully automated test to screen blood for hepatitis C. So looking ahead to the third quarter and the full year in amino chemistry and hematology specifically, we expect performance in the mid to upper single-digit range.

Separately, in our point of care business, sales grew more than 25% as our i-STAT cardiac menu gains traction. As a reminder, last year we launched a test for CKMB, which is used to help diagnose a heart attack, and a BMP test, which helps diagnose the presence and severity of heart failure. So for the third quarter and the full year, we expect continued strong double-digit growth for our point of care business.

Moving on to global nutritionals, where international nutritional sales grew in the mid teens this quarter. We continue to see strong demand for pediatric and adult nutritional products as we expand our presence in emerging markets such as China and Southeast Asia. In pediatric nutrition, increased demand for up-age or extended age formulas for older infants, toddlers, and school-age children continues to drive growth. Internationally, adult nutritional sales were up nearly 15%, driven by institutional demand for products such as Ensure.

In the U.S., sales of pediatric nutritionals increased mid single-digits, led by growth in infant formula and PediaSure. However, as we previously forecasted, total U.S. nutritional sales declined in the quarter on a reported basis, impacted by the completion of the U.S. co-promotion of Synagis during 2006. So as we look ahead to the third quarter in nutritionals, we expect continued double-digit growth, strong double-digit growth internationally, with sales in the U.S. down mid single-digits, again, due to the impact of Synagis. Adjusted for Synagis, U.S. nutritional sales are expected to be up mid single-digits.

Moving on to our pharmaceutical business and Humira, which had another very strong quarter. Global Humira sales were $735 million, up 50%. U.S. sales exceeded $400 million for the first time in a quarter, and international sales increased nearly 60%. Humira U.S. prescription trends remain very strong, growing more than 35% year-over-year and growing more than twice the rate of the self-injectable biologics market. Based on trends we've seen so far this year, as well as the very good launch, strong launch of our recent Crohn's indication, we recently raised our full-year global sales forecast for Humira to more than $2.8 billion.

During the second quarter, we launched Humira for Crohn's in Europe, the fourth major disease state indication for Humira. This follows the U.S. Crohn's launch in February, where we've already seen broad penetration. More than 4,000 Crohn's patients have initiated Humira therapy in the U.S. already, and total prescription share in the gastro segment has more than doubled since launch. Humira is the first and only self-administered biologic treatment for Crohn's disease, which provides a convenience advantage for this patient population primarily comprised of young adults between the ages of 15 and 40.

Unlike other currently available therapies that must be infused by a health care professional, Humira can be a self-administered at home. In April, we submitted Humira for psoriasis. Our global submission includes best-in-class data from our two Phase III pivotal trials, demonstrating superiority of Humira to the current standard of care. These studies indicate that nearly three out of four Humira patients experience a significant reduction in their disease and one out of five patients achieved complete clearance. The market opportunity for both Crohn's and psoriasis is large and growing, with peak year expectations of several billion dollars worldwide for biologic therapies in both indications.

In addition to psoriasis, we submitted Humira for juvenile rheumatoid arthritis. We continue with Phase III studies for ulcerative colitis and we expect to initiate Phase II studies in asthma in the coming months. Our clinical development expertise and superior commercial execution have made Humira one of the fastest-growing biologics on the market today. And our follow-on indications have multibillion dollar peak potential over the next several years.

Moving on to our cardiovascular franchise, TriCor, our cholesterol and triglyceride therapy, reported sales of more than $300 million, which was up 21%. TriCor continues to be the best therapy on the market for lowering triglycerides with a known and well-established safety and efficacy profile. TriCor prescription trends remain strong, growing in line with the total cholesterol market. So as we look ahead to the third quarter, we expect continued double-digit growth and remain on track for full-year growth in the range of 15% to 20% for TriCor.

In May, we introduced our new film-coated Niaspan extended release tablet, which allows for slower absorption of niacin in the body. Niaspan is the most effective therapy available for raising HDL, with the longest record of success and safety. We're making steady progress with the launch, as we've seen improvement in Niaspan prescription trends since we've fully integrated and trained our cardiovascular sales force.

Niaspan sales in the quarter were $170 million, and as a result of this strong performance, we are today raising our Niaspan sales forecast for the full year to approximately $650 million, which is up from our previous forecast of around $600 million. We have also one of the leading pipelines in cholesterol management, and in the second quarter, we submitted Simcor for FDA approval. Simcor is a fixed dose combination of Niaspan and Simvastatin that targets both HDL and LDL cholesterol. We anticipate presenting data from the Simcor Phase III pivotal trials later this year.

Also this year, we plan to file ABT-335, which is our next generation fenofibrate. Combination therapies are the fastest-growing segment of a $17 billion cholesterol market, and we continue to work with Astra Zeneca on a fixed dose statin and fenofibrate combination therapy that will target all three lipid parameters, HDL, LDL and trigs. The fixed dose product will combine Crestor with either TriCor or ABT-335, which will be determined later this year.

We anticipate submitting this combination therapy in 2009. With TriCor, Niaspan, Simcor, ABT-335, and our combination with Crestor, Abbott's growing cholesterol franchise has the potential to include at least five unique therapies by 2010. So as you can see, there's great potential from within our growing cardiovascular business. This year alone, we anticipate this franchise will have sales approaching $2 billion.

Moving on to Kaletra, where during the quarter worldwide sales grew nearly 19%, driven in part by continued market share gains across Europe following the international launch of the more convenient Kaletra tablets last year. Kaletra remains the number one most prescribed protease inhibitor in the world. For the third quarter, we anticipate global sales growth to be up mid single-digits, with stronger growth internationally.

Regarding Depakote, sales for the quarter were up strong double-digits. And Depakote ER, our once a day version of Depakote, now accounts for more than 50% of total Depakote prescriptions. Regarding Synthroid, sales this quarter in the U.S. were $103 million, and we expect full year sales for Synthroid to again exceed $400 million for the full year. So as we look ahead to the third quarter in pharmaceuticals, we expect continued double-digit growth in the U.S., with mid to high single-digit growth internationally.

Moving to our TAP joint venture, sales of Prevacid and Lupron were in line with our expectations. And TAP's pipeline TAK-390MR, which is TAP's next generation proton pump inhibitor, completed Phase III trial enrollment and is on track for an early 2008 FDA submission. TAP plans to share data for TAK-390MR in the first half of next year. Febuxostat, TAP's compound for gout, also continues in Phase III development.

And finally, I want to talk a little bit about Abbott's pipeline. On pages -- the last couple of pages of the news release this morning, we highlighted just a few of the programs where we've seen some steady progress in our broad-based pipeline, both in our early stage pipeline, as well as our later stage clinical programs in both pharmaceuticals and medical products. This is not by any means comprehensive, but it gives you an idea of some of the significant programs.

One of the most exciting areas of R&D for Abbott is oncology, where, as you probably know, we recently announced a partnership with Genentech to develop and commercialize two Abbott compounds. These were compounds developed by Abbott scientists. They include ABT-263, which is a Bcl-2 protein antagonist, and ABT-869, a multi-targeted kinase inhibitor, which represents a promising unique approach to treating cancer.

In addition to our earlier stage work, our late stage pipeline is also delivering significant results with five major regulatory filings this year. So far this year, we've submitted Humira for psoriasis, Simcor and XIENCE, and we plan to file later this year ABT-335 and controlled release Vicodin. All these products have significant commercial potential.

Moving forward, our research and development efforts will provide us with a number of innovative and significant opportunities over our five year long range plan. So we look forward to updating you on these and other ongoing development programs as we continue to achieve important research milestones and continue to make progress in our productivity with the pipeline. And so with that, operator, we will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today, is from Mike Weinstein. And please state your company name.

Mike Weinstein - J.P. Morgan

Thank you. It's JPMorgan. Excuse me, a couple questions, if we could start off. There was during this quarter, there was that Barron's article and there was noise on TriCor, in particular, its uses with statins. And the Company never really came out and made a response to that, but there's obviously a lot of research has been done on TriCor with statins, including the Sapphire -- I am sorry its Safari trial. And there's work it's obviously ongoing with 335 in combination with various statins. So in particular what would be helpful is if you could talk about the 335 studies that are ongoing combination with various statins and what you know from that data so far and when you think that data might be published? Thanks.

John Thomas

Sure. Hi, Mike, this is John.

Mike Weinstein - J.P. Morgan

Hi, John.

John Thomas

Hi. So on the Barron's TriCor article that came out, unfortunately, that article was fairly skewed in the facts. We did feel like we responded through our media folks to that article as best that we could. I will tell you, though, that's one of those things that's unfortunate when those things happen. I'm sure it's a very fine reporter at Barron's. But for fact-based for our investors, I think it's important to understand that this particular reporter did not -- is not a health care reporter, did not know about Abbott, and did not know about the lipid market.

We tried to educate her, but sometimes these things turn out the way they do. The facts are, though, that TriCor's safety is very well understood. There is no data or nothing new here with TriCor to substantiate any of the implications that were made in that article. Fibrates, as you probably know, have been around for more than 30 years, and TriCor specifically has been used by 2 million patients or more than 2 million patients and has been available in the U.S. for ten years.

So we're not seeing any concerns from physicians or prescribers. In fact, hopefully we put that to rest with the 21% growth in the quarter and the very robust prescription growth that we're seeing with TriCor. Its safety profile is very well understood by clinicians and prescribing physicians, and we have checked with our commercial team. And as you can see from the results, there's really been no impact to prescribing patterns.

With regard to 335, we're obviously very encouraged by the development of that program. We have completed the trials. We expect to show that data early next year, publicly. We're working with AstraZeneca to determine next steps. As I mentioned in my remarks, about do we pick TriCor, existing TriCor or do we pick the next generation product 335? So because of that partnership, we have seen data, but I don't want to discuss it at this point.

I will tell you that we're encouraged with the general situation with 335. We will file that product, I think as I mentioned, as a monotherapy later this year irregardless of what decision we make with AstraZeneca. But we're getting closer to a decision with them. And I can't give you a specific time line, but I would expect in the coming months that you'll hear from us on 335 and where we go with AstraZeneca.

Mike Weinstein - J.P. Morgan

Okay. Let me follow-up with a couple different questions. At that first, I think probably everybody like to hear a little bit more of a thought on this strategy of the diagnostics business going forward. I don't know if Tom wants to take that, or if Rick's on the line. But maybe what we'd like to dive into is to what degrees you'll be digging up this businesses as a long-term piece of Abbott while the GE deal fell apart.

Obviously there might be other interested parties. And have you heard from the other parties, and now you willing to entertain any of those discussions? And then the last item is just on the guidance for the back half of the year. Humira obviously was well above consensus expectations.

A number of other products are strong, XIENCE is doing well, you raised your guidance on Niaspan. A lot of things are obviously moving in the right direction. And then you left your EPS guidance for the year unchanged, even though you lowered your tax rate a little bit. So maybe just talk about with the upside we're seeing from some of the key drivers of the Company, why leave the EPS guidance intact, and where are you going to spend that money? Thanks.

Tom Freyman

Mike, let me take the second question first on the tax rate, because this does require a little explanation. And I think your impression is not -- and I understand it because it's a little confusing -- is not the right one. So let me walk through it. The lower tax rate we're forecasting for the full year is pure optics. It's a function of now having diagnostics in the mix versus our assumptions back in April that we would sell the business and redeploy the proceeds.

Now let me give you a couple ways to think about that. If, back in April when our forecast of tax rate turned positive and we lowered the rate in our guidance, if at that time we had known that ADT would be part of the mix, instead of reducing the rate to 20%, we would have reduced the rate to 19.5%, which is what our rate is now. So that's one way to think about it.

The other way to think about it is under the previous scenario, back in April when we were assuming sale of the business, we were also assuming redeployment of proceeds in the second half, primarily to pay down debt. As we've said all along on this deal, the 2007 impact of the deal was EPS neutral. Under the scenario, the baseline scenario of running the business, we had a relatively low tax rate on the business.

Under the scenario of selling the business, interest is subject to a relatively high tax rate. So when the assumption of reduced interest goes out of our forecast, the optics are -- that our average rate for the year goes down slightly. And so it really -- in total, we're really assuming nothing different. It's a function of the way the neutral EPS was balanced between running the business or disposing of the business and paying down debt.

Mike Weinstein - J.P. Morgan

Got you. That makes sense.

Tom Freyman

So hopefully that explains it. On diagnostics itself from a strategic point of view, I think, John, at this point really did a nice job of regrounding people on what the position of this business in is. As you all know, it is a global leader, the global leader in -- in vitro. Got a huge footprint of instruments globally. With the Architect and the Prism systems being state of the art and leading systems. Clearly, in blood banking we're in the best position.

Point of care is a smaller business, but more rapidly growing. And that is a concept that continues to catch on at hospitals, and something we think can really add to the growth rate. It was a $2.7 billion business last year. We think it's going to approach $3 billion this year. So there's decent growth in it. And as John indicated, the international business is performing extremely well, which is about 80% of the business.

And from a GPO or a group purchasing organization point of view, ADD has been successful in securing two major contracts that will really help them over the next several years of the long range planning forecast cycle. So the base business is solid, is performing well, and there's a lot to build on here. Now, senior management is going to be spending more time looking at the strategies going forward. We're working on that as we speak. We're spending a lot of time with the senior management at the division. And I think we'll have more to say about that in the coming quarters as we move forward.

Mike Weinstein - J.P. Morgan

Okay, great. I'll let someone else jump in here.

Tom Freyman

Thank you.

Operator

Thank you. Our next question is from Glenn Reicin and please state your company name.

Glenn Reicin - Morgan Stanley

Glenn Reicin, Morgan Stanley. Thank you.

Tom Freyman

Hi, Glenn.

Glenn Reicin - Morgan Stanley

Two quick questions. Actually one not very quick question. But the quick question is without GE now, are there any assets at this point that you are considering to sell? Were there any sort of strategic areas you need to focus in on? So sort of what are the implications of not having the extra cash from the GE deal? So that's question number one. And then, Tom, I think it would make life a lot easier if you can reconcile your old guidance in terms of the various line items with the new guidance. And just sort of quantify what the impact of the diagnostics business is, because I think that's really just confusing everyone. So I'll leave it at that.

Tom Freyman

Okay. From a portfolio perspective, as we said even before the GE deal and before the diagnostic business came back into the fold here, we're very happy with the portfolio. Between the Guidant, Kos and Knoll acquisitions, the (Sarasense) acquisition, and the spinoff of Hospira a few years ago, when we look at this portfolio, we're very happy with the growth prospects and the market positions of these products, and the technology-driven nature of them, and our ability to innovate and grow them over the long-term. So we are very happy with this portfolio, all aspects of it.

And you can see in the quarter good things happening in all of those businesses. As always, every business could benefit from technology augmentation or niche type additions. And as you know, we have a very active M&A group that continually look at those types of opportunities.

I don't think there's anything critical, though that we need to execute on our strategic plan and to be successful in our financial forecast as we put them together. There's really no crying need for a deal. And if we were to think about it, the odds are at this point in time given how happy we are with the overall portfolio, that it would tend to be a smaller niche type of thing if we pursued anything.

Glenn Reicin - Morgan Stanley

Could I just interrupt. Just to answer Michael's question about diagnostics, would you say now it's a very low likelihood that anything will be done in the future with that business? And also what is the status of TAP?

Tom Freyman

Yes, we have no -- we are committed to the diagnostics business for the long-term. There are no plans to reconsider a sale of the business. So we're moving forward with this as part of the portfolio, and we're going to manage it for the long-term. TAP, we talked about this a number of times publicly.

Both companies have expressed interest in running that business on their own in different ways over the years. We've never been able to come to a conclusion on that. Would that make sense? Yes, it might if the appropriate arrangement could come in. But there's nothing -- no immediate prospect of that happening. We'll see. We'll see if anything would change in that. And to answer Mike's question, we have no plans on any other businesses for dispositions.

Glenn Reicin - Morgan Stanley

Okay. The question about GE and the P&L, for example the gross margin guidance today versus what it was a quarter ago, and try to help us walk through the various line items and how GE impacted that.

Tom Freyman

Yes, the main -- there are really two main areas where collapsing GE back -- or I'm sorry, diagnostics back into the business affected anything really in the quarter. While the business had a very nice growth rate of low double-digits, as we talked about in the release and on the call today, it was somewhat below the corporate average. So from a sales growth perspective, there was about 0.5 point impact of bringing GE into the results.

The one area, and I mentioned it in my remarks, is gross margin. And as we said from the very beginning, there's about a 300 basis point impact when we thought it would be sold, and there's about a 300 basis point negative impact coming back in, which gets us to the 58% gross margin that I forecasted for the full year.

The other line items are fairly modest, a couple ticks on R&D, because the R&D spending on this business was a little bit less than our corporate average, and a little bit on the SG&A ratio. But given that it's 10%, 12% of the business, even though the profiles are slightly different in those other areas, it really doesn't have much impact. So the key areas are slight impact on growth rate on the top line in the quarter, and really the gross margin going forward.

Glenn Reicin - Morgan Stanley

Okay. Thank you very much.

Tom Freyman

Thanks.

Operator

Thank you. Our next question is from Rick Wise. Please state you company name.

Rick Wise - Bear Stearns

Good morning. It’s Rick Wise, Bear Stearns.

Tom Freyman

Good morning.

Rick Wise - Bear Stearns

Hi, Tom. Couple of questions. First, since we're talking about diagnostics, maybe you could expand on the timing of FDA resolution. Where are we now? And how quickly does this get resolved?

Tom Freyman

Yes, the situation in ADD is for most of our plants with the exception of Dallas, we've come through a pretty good inspection record here, very significantly in Lake County, we very recently completed an inspection there. And as many of you know, our Lake County facility is our most significant one, it's our largest one, which is where the assays are manufactured, which is where the products that generate the sales really are produced.

That particular inspection had zero observations, so we're in very good shape there. The Dallas facility is under a warning letter. We did respond back in March to the observations the FDA had on that plant, and we are moving forward with our remediation activities, and I think are making very, very good progress in that regard. Really can't speculate on timing on these things and we're not prepared to do that today. But we're making good progress.

Rick Wise - Bear Stearns

Trust it doesn't really affect the business or the outlook?

Tom Freyman

No, this doesn't affect our ability to ship product. And again, the key thing for us is to address the observations, put the remediation plans in, which we have done already. And it's just a matter of validating that they're operating and then working through the final clearance process with the FDA. So we're working through that, but it doesn't affect the business.

Rick Wise - Bear Stearns

Okay. Turning back to XIENCE. Can you just remind us of the next milestone or milestones we expect? You reiterated your belief that I think you said first half '08 approval. Do you expect a panel this year or early next year? Just again, anything you can share with us?

John Thomas

Yes, hi, Rick. With XIENCE, obviously we're very early into the PMA submission process. It's only six weeks into that. We, as a Company, have ongoing dialogue with the FDA. Can't speak for other companies, but we have ongoing dialogue with the FDA. Obviously, can't talk about that specifically. But I think the next couple of events that investors are interested in are obviously, will there be a panel to review XIENCE and/or another product?

And we have not been notified by the FDA yet whether we're going to be scheduled for a panel. If we are, that's fine. We'd more than welcome the opportunity to talk about our data side by side with the competitive data that's under review. If we don't go to a panel, that's fine too. Either way, it doesn't change our forecast, which has been, and continues to be that we expect to receive approval and launch in the U.S. in the first half of next year.

So the other things that are of interest, obviously, would be new data. And at TCT we're going to have some new data on XIENCE where we'll talk about SPIRIT II and SPIRIT III one year, I believe that's a pooled analysis. And then SPIRIT III one year data including subset analysis. Also we should have by then, I think the timing we will work out that we'll have 12 month clinical data on ABSORB, the fully-bioabsorbable program.

So those are some things to look out for. We're very likely to have another analyst meeting at TCT like we did last year, and we'll give you information on that. And if there's anything new between now and then or shortly thereafter to talk about in terms of FDA response, we'll let you know on that, as well.

Rick Wise - Bear Stearns

Okay. Let me just touch up with two quick last ones here. During the call, there was a press release that said that Merck KGA had transferred Niaspan rights OUS to Abbott.

John Thomas

Right.

Rick Wise - Bear Stearns

Is this new news? And is this significant upside? And one last question for Tom. Obviously, the diagnostics sale was going to accelerate debt pay down. Maybe just review your thoughts about cash flow and debt pay down with diagnostics back in? Thanks.

John Thomas

Let me answer your question on the Merck KGA first and then I'll let Tom take the debt question. Yes, this release just went out this morning. And we got this question from investors when we did the Kos Pharmaceuticals acquisition last year. And at that time, if you recall, what we told people was any international opportunity would be in addition to what our base modeling assumptions were for Kos. We didn't include that to be conservative. So we are pleased that we've gotten these rights back, and we're evaluating that opportunity internationally right now. And we'll keep you posted on that. But that is a new item, yes.

Tom Freyman

Rick, to answer your question on debt, as you know, we've been generating extremely strong operating cash flow for the last few years, and that's continuing to this year, well over $5 billion before dividends last year. We would expect that to continue probably another record this year. That's what we forecast. And we expect a nice improvement in our net debt position as we progress through the year.

I'm a little hesitant to give a forecast on that because that's somewhat dependent on our decisions and what we do with share repurchase. But plenty of cash flow. And I think if you look at our net debt position, you're going to see a significant reduction when you look at it compared to 2006. Over the longer term, we've said this many times, with that strong operating cash flow, we see a mix of uses.

Certainly some debt reduction is something we want to continue to do, but also share repurchases continue to be active. We have $1.7 billion remaining on our current program. So that's something we would expect to continue to do. And I think there's plenty of cash flow and capacity in the event we did have some smaller niche augmentations to the business from an M&A perspective.

So feel very good about our cash position, our credit rating is very strong. No change from S&P and Moody's when the announcement of our retention of ADD was made. So I think we're in pretty good shape.

Rick Wise - Bear Stearns

Thank you so much.

Tom Freyman

Thanks.

Operator

Our next question is from Glenn Novarro. And please state your company name.

Glenn Novarro - Banc of America

Thanks. Hey guys. Banc of America. Couple of questions. First on the pharma side, Humira, Depakote, TriCor, all handily exceeded our expectations. I just want to get a sense of the organic growth. Was there any stocking in the quarter? Were there any pricing -- was there any price increases on these drugs? I just want to get a sense of how sustainable the growth is. That's question one.

John Thomas

Okay.

Glenn Novarro - Banc of America

Second is the bare metal stent leader. Can you give us a sense of where you think DES penetration is in the U.S. right now and what your sense of PCI volume? And then a quick one, Simcor, you haven't talked about OUS. Is there any plans for OUS? Do you have the rights to Simcor OUS? Thanks.

John Thomas

Okay, Glenn. Let me try to address those questions. As far as inventory, et cetera, we feel very comfortable with our inventory position. We did not see any major swings in inventory, and we obviously look at that very carefully. And like to keep our inventory levels in a very comfortable position.

So that was not an impact. There was very modest impact on price year-over-year on pharma sales in this second quarter. So we did see some modest year-over-year price increases, but there were no price increases taken on any of the major pharmaceuticals in the quarter. So I hope that answers your question there.

Glenn Novarro - Banc of America

Yes.

John Thomas

On DES penetration, our information shows that it's in the mid to upper 60% range, which I think is fairly consistent with what we've heard from our competitors. And its looks like it's stabilizing in the U.S. X-US, it's actually ticking up a little bit depending on the market, Europe and Japan.

And the forecast is that that will continue to tick upward. So we're pleased with that. And of course, having the latest new technology in the marketplace with XIENCE will hopefully help with that when we get the product launch in the U.S. to launch into an accelerating -- reaccelerating marketplace. PCI volume based on the data that we have, which is pretty good, that we triangulate on in terms of catheter sales and so forth, our PCI volume looks to be down in the high single-digit range.

And then in terms of Simcor, I would tell you at this point that we are evaluating that opportunity, X-US. However, the dynamic in the marketplace is that combination drugs outside the U.S. are not as well reimbursed as they are in the U.S. So there could be some selected countries where there's opportunity. But we've always looked at it, and for modeling purposes internally considered the U.S. as the market that will drive the growth of this product when it's approved.

Glenn Novarro - Banc of America

Okay. One just last question for Tom. Tax rate for 2008, should we continue to assume about 20%?

Tom Freyman

Yes, we, as I mentioned in my remarks, are forecasting 19.5% this year. And again, based upon the description that before, that really should be what you consider as kind of a baseline going forward. And as we said back in April when we reduced our rate forecast, we think that's sustainable. So I think that's the way you should think about 2008.

Glenn Novarro - Banc of America

Okay. So 19.5% should be in our models?

Tom Freyman

That would be --

Glenn Novarro - Banc of America

Okay. Good. Thank you.

Tom Freyman

Thanks.

Operator

Thank you. Our next question is from Larry Biegelsen. And please state your company name.

Larry Biegelsen - Wachovia

It's Wachovia. Good morning.

Tom Freyman

Good morning.

Larry Biegelsen – Wachovia

The first question, does your goal for accelerating EPS growth in 2008 assume that generic Depakote ER does not enter into the market in '08? And if it does, how would that change your outlook? And then I have a cholesterol related question.

Tom Freyman

Larry, we've been through a number of generic challenges over the last few years, and I think we've managed through them extremely well. I mean when you think about Synthroid, Biaxin, Sevoflurane and Omnicef, the strength of the business has allowed us to work through those. And each of those had an interesting set of legal challenges and fairly unpredictable outcomes in terms of if and when any one of them would go generic.

And the way we like to approach that from a forecasting point of view is to be realistic and even conservative to the point where -- we're not going to tell you exactly what our assumptions are because obviously we feel very good about our legal position. But from a financial planning perspective, it's challenging to totally count on predictability from these processes. And so we have been very, very realistic about what will happen to that franchise when the compound patent expires in the middle of 2008. And we feel very comfortable with the way we've built our '08 assumptions in light of the realities that we're dealing with.

John Thomas

And the only thing I'd add there, Larry, is, as you know, Depakote ER has patents that go out to 2018, not that that's factoring into the realistic assumptions, because we are being very conservative in taking that out of our planning assumptions, and still delivering what we believe will be accelerating EPS in '08.

Larry Biegelsen - Wachovia

Great. And then on the cholesterol franchise, within the past you've given ranges for peak sales of pipeline products. I would love to hear your thoughts on how big you think Simcor could be in fixed combination of Crestor and one of your fibrates. Or maybe you can discuss where you think the cholesterol franchise sales can go in three to five years from the $1.9 billion or so in '07?

Tom Freyman

Yes.

Larry Biegelsen - Wachovia

And just lastly, could you just remind us of the patent life of ABT-335? Thanks.

John Thomas

Okay. Well, we are going to be seeking some new intellectual property protection around that, and I don't have any specifics with me right now. But as we file that and hopefully it gets approved by the FDA, we'll be able to share more along the lines of what we expect for 335. I think you're absolutely right in your general observation that our cholesterol franchise in totality could be a significant contributor to Abbott over the longer term.

We're already looking at upwards of $2 billion between TriCor and Niaspan this year, and both have very good growth trajectories. And then there is significant opportunity, as I mentioned, with the other programs, 335, Simcor, and then a fixed dose combination with AstraZeneca, whether that's TriCor or 335. And I think I mentioned this in remarks, we're going to have five unique cholesterol therapies if all goes well by 2010.

Specifically on Simcor, this is a product that if things go well, certainly could be in excess of $0.5 billion, and perhaps moving towards that $1 billion mark over time. 335 is a similar type of product. We'll talk more about it once we have a clearer path there in terms of discussion around filing and approval and so forth and we can talk about the data, which as I said, will be early next year and then I think you'll get a better sense of our optimism around the product. And anything else from you, Larry? I think we have time for one more question.

Larry Biegelsen - Wachovia

Who's going to book the fixed combination with AstraZeneca? Can you just tell us that? I mean, how that's going to be booked, the TriCor-Crestor fixed combination?

John Thomas

Well, you mean booked? We'll book sales.

Larry Biegelsen - Wachovia

You guys will book sales, not AstraZeneca? Or how will that be split?

John Thomas

I'm going to check on that exactly how the accounting for that will work, because I think they're booking some, as well. But I'm not -- I'll get back to you on that piece of it.

Larry Biegelsen - Wachovia

Thanks, John.

John Thomas

Okay. We have time for one more question, operator.

Operator

Thank you. Our final question today is from Sara Michelmore and please state your company name.

Sara Michelmore - Cowen and Company

Yes, Cowen and Company. Good morning.

John Thomas

Hi.

Sara Michelmore - Cowen and Company

Could you give us a quick update on the operating margin trend in that core diagnostics business? I know the sales have picked up, and before you guys had announced the divestiture, the operating margin was looking a little bit better on that business. Can you just give us an update in terms of the profitability trends there?

Tom Freyman

Yeah, I think if you're modeling '07, approaching 10% is the way we see it, probably very high single-digit to approaching 10%. Just a slight word of caution in the GAAP-defined segment data we provided in the first quarter. That isn't exactly the way the internal tracking within the company is, which as you know, is what is used for segment reporting. So we'll be back to the normal segment reporting approach. And I think for '07, that's the way to think about this business.

Sara Michelmore - Cowen and Company

Okay. And in terms of Niaspan and the Kos integration broadly, I assume with the sales picking up there that you're on track with the integration there? But can you just give us an update in terms of where you are in terms of making that deal neutral to accretive, and if there's any potential upside from that based on the sales pickup?

Tom Freyman

Well, we've executed extremely well in that integration. Probably a little ahead of schedule in some areas, and the products are doing very nicely. I think certainly going into 2008 that's going to be ahead of our expectations in terms of what we put into our deal model. From 2007 perspective, I think its all part of the mix here. But I tell you, the team has done a tremendous job, very near completion on things.

And you're going to see a lot of the synergistic benefits in SG&A in the fourth quarter. And as we mentioned today, we've increased the forecast on Niaspan sales because you're starting to see the commercial execution take hold. You're starting to see the script rates move up. And that's going to bode well going into 2008.

Sara Michelmore - Cowen and Company

Okay. Thanks. And in terms of Ultane, I guess that was a little bit below my forecast this quarter. Could you just give us some commentary in terms of the progression of Ultane and Sevoflurane internationally, and what we should expect in terms of a contraction for that product?

John Thomas

Okay. Sure, Sara. I'll answer that and then I want to follow-up on that previous question from Larry Biegelsen, because I found some more information on that. So Sevoflurane actually has done fairly well compared to our expectations, at least. And I think most of the models that we look at, I think it's actually in line or slightly above of what people expected. And as you know, we have modeled in a decline due to some new competition in the marketplace.

But also mainly is due to some price actions that we took proactively, as you might recall last year, when there was another product launch in the market. So actually based on what we've been seeing and what we've been modeling, we've done fairly well and the share has been fairly stable.

We continue to actively promote the product. We have a very strong promotional presence around that, and we have the vast majority of the major accounts, over 80% of the marketplace, that we've been able to retain. So what we've done in terms of price has really been the driver of the decline, which is fully expected. So net, net, we've done fairly well.

Back to Larry Biegelsen's question on the fixed dose. When and if that product gets approved, which we hope it will be down the road, the way that our agreement works with AstraZeneca, our portion of profits that we get from that partnership will be booked as revenues. So that unlike the former Beringer Ingleheim agreement, should be a good one in terms of gross margin. And then AstraZeneca, I believe they'll book sales, as well. But the profit that we receive from the split, we will book as revenue. So I hope that's helpful.

So that concludes our conference call today. A replay of this call will be available after 11 a.m. Central time on Abbott's investor relations website, at Abbottinvestor.com, and after 11 a.m. Central time via telephone at 402-220-6421. Confirmation code 3144138. The audio replay is available until 4 p.m. on Wednesday, July 25th. Thank you all for joining us this morning.

Operator

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

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Abbott Laboratories Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts