Abbott Laboratories Q3 2007 Earnings Call Transcript

| About: Abbott Laboratories (ABT)

Abbott Laboratories (NYSE:ABT)

Q3 2007 Earnings Call

October 17, 2007 9:00 am ET

Executives

John Thomas - VP of IR

Tom Freyman - EVP of Finance and CFO

Analysts

Glenn Reicin - Morgan Stanley

Mike Weinstein - J.P. Morgan

Glenn Novarro - Banc of America

Rick Wise - Bear Stearns

Sara Michelmore - Cowen & Company

Operator

Good morning, and thank you for standing by. Welcome toAbbott's Third Quarter 2007 Earnings Conference Call. All participants will beable 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 askedduring the question-and-answer session the entire call including thequestion-and-answer session is material copyrighted by Abbott. It cannot berecorded or rebroadcast without Abbott's expressed written permission.

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

John Thomas

Good morning, and thanks for joining us. Also on today'scall will be Tom Freyman, our Executive Vice President, Finance, and ChiefFinancial Officer. Tom will review the third quarter results and I will discussthe business operating highlights. Following our comments, we will take any questionsthat you have.

Some statements made today may be forward-looking forpurposes of the Private Securities Litigation Reform Act of 1995. Abbottcautions that these forward-looking statements are subject to risks anduncertainties that may cause actual results to differ materially from thoseindicated in the forward-looking statements.

Economic, competitive, governmental, technological, andother factors that may affect Abbott's operations are discussed in Item 1A,"Risk Factors," to our Annual Report on Securities and ExchangeCommission Form 10-K for the year ended December 31, 2006 and are incorporatedby reference. We undertake no obligation to release any publicly revised toforward-looking statements as a result of subsequent events or developments.

In today's call, as in the past non-GAAP financial measureswill be used to help investors understand Abbott's ongoing businessperformance. These non-GAAP financial measures are reconciled with thecomparable GAAP financial measure in our earnings news release and regulatoryfilings from today, which will be available on our website at abbott.com.

And so with that, I will turn the call over to Tom. Tom?

Tom Freyman

Thanks John, and good morning. As you can see from today'searnings news release, our third quarter results reflect continued strongmomentum across our major businesses. Sales growth in the mid-teens and theearnings per share of $0.67, above our previous guidance range of $0.64 to$0.66 and based on our performance so far this year we've raised the lower-endof our EPS guidance range for 2007 as I'll discuss in a moment.

The strong overall sales growth of 14.4% in the quarter wasahead of our previous forecast. Exchange favorably impacted sales by 2.8%.Sales in our Medical Products businesses increased 12%, growth of nearly 14% inDiabetes Care, 15% in Vascular and nearly 10% in Worldwide Diagnostics. InGlobal Pharmaceuticals sales increased almost 20% as each of our major brandsdelivered strong double-digit growth.

Quarterly HUMIRA sales exceeded $800 million for the firsttime, based on the continued strong performance in rheumatoid arthritis, aswell as new indications. A recent Crohn's launch continues to exceed ourexpectations. In our estimate, full year 2007 global sales for HUMIRA up $3billion.

International nutritional sales were up more than 15%, withcontinued strong performance in key emerging markets such as China and Latin America.And we continue to make progress with the robust late-stage pipeline, on trackfor a record number of major new product launches and regulatory submissionsthis year and into 2008.

Gross margin ratio was 57.7%, roughly in line with ourforecast provided last quarter. Comparison with the prior year was favorablyimpacted by improved product mix, offset by the reduction and the contributionfrom Synagis in the USand the impact of generic competition on Omnicef sales. We also saw a slightimpact of commodity prices in nutrition. We have a mitigation plans which willoffset this in future quarters.

R&D investment, excluding specified items from bothperiods, increased 11%. This reflects continued investment in ourpharmaceutical and medical products pipelines, including HUMIRA, ABT-335,ABT-874, controlled-release Vicodin, and XIENCE, as well as several promisingcompounds in mid-stage development.

SG&A expense included the impact of the Kos acquisition, as well as new and ongoing promotionalinitiatives, including new indications for HUMIRA and the continuinginternational launch of XIENCE.

Interest expense of $106 million was somewhat lower than ourforecast due to the better cash flow and lower interest rates and the incomefor the TAP joint venture was in line with our expectations.

Tax rate for the quarter of 18.6%, as well as the year-to-daterates of 19.5% were both consistent with the guidance we discussed lastquarter.

Now let's turn to the outlook for the remainder of 2007.Based on our year-to-date performance we're confirming our 2007 EPS outlook andraising the lower end of our previous guidance range. As a result, our 2007 EPSguidance is now $2.82 to $2.84, excluding specified items. Midpoint at thisrange reflects earnings per share growth of nearly 12% over the prior year.This new full year guidance results in fourth quarter earnings per share rangeof $0.91 to $0.93 also excluding specified items.

Let me walk you through some of the key P&L line itemsas we forecast them for the fourth quarter. We expect sales growth of 13% to15% consistent with the growth we've seen in each of the quarters so far thisyear, and consistent with the forecast at the beginning of the year. Weforecasted gross margin ratio of approximately 59%, R&D as a percentage ofsales of around 9%, SG&A expense as a percentage of sales of approximately25% and the tax rate of approximately 19.5%.

Overall, as we look to third quarter, we're very pleasedwith the performance of our major businesses. We reported mid-teens salesgrowth, EPS above our guidance range, and we raised the lower end of our fullyear 2007 EPS outlook. And we made steady progress in advancing our R&Dpipeline, which is on track for a record number of major product submissionsand approvals this year.

As we look ahead to 2008, we have a high degree ofconfidence, given the strong momentum we are seeing across our broad base ofproducts and businesses. We also remain confident in our outlook for anaccelerating rate of earnings per share growth in 2008 compared to 2007.

With that I'll turn it over to John for a review of thebusiness operating highlights. John?

John Thomas

Thanks Tom. As Tom indicated our third quarter resultsdemonstrate the strength of our diversity, as the number of businesses andproducts outperformed our expectations, including international nutritionals,diabetes care and pharmaceuticals.

So I will start with our pharmaceutical business whereHUMIRA had another exceptional quarter. Global HUMIRA sales were up nearly 50%to $803 million. HUMIRA US prescription trends remained strong, growing nearlytwice the rate of a self-injectable biologics market. HUMIRA is gaining shareacross the rheumatology, dermatology and gastroenterology markets, with morethan 130,000 US patients on HUMIRA across all indications.

In Crohn's Disease our newest indication, HUMIRA continues tooutperform. We've gained more than 30% of the US Biologics market for Crohn'ssince HUMIRA's launch in February. This growth is coming both from patients whoare naive to biologics as well as those who have failed Remicade. HUMIRA hasdemonstrated strong efficacy against this insidious disease which causespatients to suffer bleeding, pain and other GI distress. In addition, HUMIRA isthe only self-administered biologic treatment for Crohn's and provides aconvenient advantage for this young active patient population.

Our international Crohn's launch is also off to a rapidstart, driving HUMIRA growth to nearly 60% this quarter. HUMIRA also representsa promising treatment for psoriasis, an indication we expect will be approvedin the first quarter of 2008. At the recent World Congress of Dermatologymeeting, we presented HUMIRA psoriasis data from two clinical studies. Theresults were powerful. Both studies indicate that nearly three out of four HUMIRApatients experienced a significant reduction in their disease as defined by PASI75 scores. The market opportunity for psoriasis is large and growing, with peakyear sales expectations exceeding $3 billion worldwide for biologic therapies.

Dermatologists are rapidly gaining experience and confidencewith HUMIRA. In fact approximately 30% of dermatologists have alreadyprescribed HUMIRA to treat psoriatic arthritis. Recently HUMIRA was honoredwith the 2007 Galen Prize for best biotechnology product awarded by Prix GalienUSA.This is one of the highest accolades in the pharmaceutical and biomedicalindustry, recognizing excellence in medical and scientific research andinnovation.

Finally as Tom mentioned given the recent sales trends inthe strength of the Crohn's launch today we are raising our estimate for fullyear 2007 global sales for HUMIRA to $3 billion. In our lipid managementfranchise, our portfolio is uniquely positioned to take advantage of the trendtoward adjunctive therapies, that is, those therapies that treat beyond LDL levelsto also focus on HDL and triglycerides. These therapies reduce cardiovascularrisk beyond what a statin can deliver alone. TriCor, our cholesterol andtriglyceride therapy reported sales of $300 million this quarter up 13%. TriCorcontinues to be the best therapy in the market for lowering triglycerides witha known and long established safety and efficacy profile.

TriCor prescription trends remain strong, growing in linewith the total cholesterol market. In the fourth quarter we expect continueddouble-digit growth for TriCor with full-year growth in the range of 15% to 20%consistent with our previous expectations. Also in lipid management our newfilm-coated Niaspan extended release tablet has been well received by bothphysicians and patients with sales in the quarter of nearly $170 million. We'veseen improved trends since we have added Abbott promotional efforts andintegrated our sales force following the Kosacquisition.

We've also seen consistent gains across dynamic prescriptionshare, which includes new patients as well as those who are switchingtherapies. Niaspan is the leading therapy for raising good cholesterol or HDLwith a long established safety and efficacy profile. Niaspan is the onlyprescription therapy capable of increasing HDL 25% to 30% on average withproven cardiovascular outcomes.

Low HDL is recognized as an independent risk factor forheart disease and the guidelines developed by the National CholesterolEducation Program, a leading authority on cholesterol management in the US. Sowe continue to forecast full year's Niaspan sales to exceed $650 million.

In addition to TriCor and Niaspan we have what we believe isthe industry leading pipeline in cholesterol management with three late stageprograms in development. In the second quarter we submitted Simcor for FDAapproval. Simcor is a fixed-dose combination of Niaspan and Simvastatin thatprovides comprehensive lipid management. We've confirmed that we will presentdata on the Simcor Phase III pivotal trials in November at the American HeartAssociation meeting.

In addition to Simcor, we remain on track to file ABT-335,our next-generation fenofibrate for regulatory approval this quarter. Weanticipate presenting Phase III data in the first half of next year.Combination therapies are the fastest growing segment of the $20 billioncholesterol market. And we continue to make progress in our partnership programwith AstraZeneca on a fixed-dose combination therapy that targets all threelipid parameters HDL, LDL and trigs.

As we announced earlier in the quarter, we have jointlydecided with AstraZeneca to advance ABT-335 with Crestor. We expect to filethis fixed-dose combination therapy for approval in 2009. So with TriCor,Niaspan, Simcor, ABT-335 and our combination with Crestor, Abbott's growingcholesterol franchise has the potential to include at least five uniquetherapies by 2010.

Moving on to Kaletra, where during the quarter worldwidesales grew 15%. Kaletra remains the number one most prescribed proteaseinhibitor in the world. With seven years of data demonstrating no resistancefor 99% of patients new to therapy, Kaletra continues to be the gold standardprotease inhibitor providing physicians with the clinical confidence to managethe disease as a chronic long-term illness.

In Europe, just over one year past our tablet launch morethan 70,000 HIV patients throughout Western Europe are being treated withKaletra, which now holds HIV market leadership in eight countries. Kaletratablets improve patient convenience by reducing the number of pills patientstake each day and eliminating refrigeration requirements.

This quarter we submitted for regulatory approval a newLower-Strength Kaletra tablet for pediatric use. So, for the fourth quarter, weanticipate continued strong double-digit global sales growth for Kaletra.

Depakote sales in the quarter were up double-digits.Depakote ER, our one-a-day version of Depakote, accounts for more than 50% oftotal Depakote prescriptions. We anticipate continued double-digit sales growthfor Depakote going into the fourth quarter resulting in strong double-digit forthe full year.

Regarding Synthroid, sales in the quarter were $110 million,and we now expect full year sales for Synthroid to approach $450 million, upfrom our previous guidance of more than $400 million.

And looking to the fourth quarter in pharmaceuticals, intotal, we expect low to mid-teens growth in both our US and international businesses.

Moving on to our TAP joint venture, sales of Prevacid andLupron were in line with our expectations. In TAP's research and developmentpipeline TAK-390MR, which is TAP's next generation proton pump inhibitor,completed Phase III trial enrollment of more than 5,000 patients and remains ontrack for a FDA submission in the first quarter of 2008.

TAP plans to share data on TAK-390MR in the first half ofnext year. Febuxostat, TAP's compound for gout recently completed enrollment inits supplemental trial of 2,700 patients, evaluating drug in 40 milligram and80 milligram doses. TAP is now forecasting a mid 2008 FDA submission forFebuxostat.

Turning to our medical products businesses, let me startwith Diabetes Care, which exceeded our expectations in the quarter with globalsales up nearly 14%. Double-digit growth in the US was driven by the success of ourmore convenient FreeStyle Lite meter where we are steadily gaining new usershare.

Launched in June, FreeStyle Lite offers blood glucoseresults in an average of just 5 seconds. It also provides patients with addedconvenience by eliminating the manual coding step required by most meters.

FreeStyle Freedom Lite, our second no coding meter, beganshipments in Europe in October and our US launch is anticipated for thefirst quarter of 2008. With both FreeStyle Freedom Lite and FreeStyle Lite products,we are significantly differentiating ourselves from most of the competition.

Double-digit sales in emerging markets such as Russia, China,Southeast Asia and Latin America alsopositively contribute to this quarter's performance. Abbott's Diabetes Careproducts are resonating with patients in these growing markets, especially China where weare outpacing market growth considerably.

As we continue to improve testing convenience for peoplewith diabetes, we are also developing a fully integrated blood glucosemonitoring system that combines a meter, test strips and lancing capabilitiesin one device, enabling simple point and click testing.

So, for the fourth quarter and the full year, we anticipatecontinued double-digit growth in Diabetes Care, as we continue to introduce newproducts and strengthen our presence in emerging markets.

Next, let me move onto to Abbott Vascular, which hadworldwide sales growth in the quarter of 15% as we've now fully lapped theGuidant acquisition. Performance in the quarter was positively impacted byhigher sequential quarterly growth in XIENCE and higher year-over-year bare-metalstent sales. However, growth was tampered by overall DES market conditions andlower other coronary sales, which include lower third-party revenues.

First, let me start with an update on our drug-eluting stents,XIENCE V. We submitted the XIENCE PMA for approval on May 31st. Our XIENCE PMAis the first and the only FDA submission of a drug-eluting stent that hasproven superiority over the current market leading drug-eluting stent in arandomized clinical trial. Our PMA submission include safety and efficacy datafrom our SPIRIT I, SPIRIT II and SPIRIT III XIENCE clinical trials, whichrepresent approximately 1,400 patients.

In SPIRIT II and III, which compared XIENCE to TAXUS, we notonly met the primary endpoints of in-stent and in-segment late loss respectively,but also exceeded them that demonstrate the statistical superiority of XIENCEover TAXUS. Both SPIRIT II and III also showed XIENCE was superior and theclinical endpoint of Major Adverse Cardiac Events or MACE.

MACE measures important patient safety endpoints, including myocardialinfarction and death. This was the first time ever that one drug-eluting stentwas proven statistically superior over another drug-eluting stent on animportant safety and efficacy endpoint. MACE rates were very low with XIENCE,two to three times lower than TAXUS.

Our PMA includes all the pre-agreed upon data necessary tocomplete our submission and the FDA has not requested any new clinical trialpatient data. We believe we supplied a robust data package based on FDArequirements and we've remained very comfortable with the status of our filingsubmissions, as we continue to work with FDA toward a panel review for XIENCEon November 29th. We look forward to the opportunity to review our data withthe panel. That data will include two-year follow-up from several 100 XIENCEpatients from SPIRIT I, II and III who have gone through their normally scheduledtwo-year follow-up.

Beyond our PMA filing we continue to enroll patients inseveral additional XIENCE, SPIRIT trials, including SPIRIT IV and V which areenrolling rapidly with more than 2,000 patients in each trial now. We alsoinitiated enrollment in SPIRIT WOMEN in August of this year, which is the firstand only clinical trial to date to evaluate a drug-eluting stent in women withcardiovascular disease.

So, across all of our post-marketing trials, we anticipatestudying more than 12,000 XIENCE patients in total that includes our 5,000patients post-approval trial for XIENCE, USA.

Regarding the international launch of XIENCE, we continue tomake steady progress as tenders become available. In virtually every country weare gaining share. In 14 countries we have share in excess of 20% with morethan half of those countries in excess of 25% market share. And we have a fewcountries now in excess of 30% market share. The feedback we've had on XIENCEto date has been exemplary. Physicians appreciate the performance of XIENCE,because it's built upon technology they've known, trusted and used for years.The excellent deliverability and acute performance of vision.

In addition, the XIENCE clinical data sets are continuing toreinforce its best-in-class clinical profile in a truly next-generationdrug-eluting stent. So, our global DES franchise sales, which include XIENCE aswell as third party DES product revenues, were $65 million in the thirdquarter. This includes an approximately 25% increase in XIENCE sales on asequential quarterly basis despite a sequential decline in PCI volumes in thelow double digits.

XIENCE performance was offset by lower than anticipatedthird party revenues also as the result of softer market conditionsyear-over-year. As a reminder, our international business reports on a onemonth lag. So this quarter included the months of June, July and August, whichis typically the slowest month of the year for European countries.Year-to-date, our DES franchise revenue is north of $185 million.

Our total coronary stent sales in the quarter, which includebare metal and drug-eluting stents, were up 85% year-over-year. As you know,Abbott is in the unique position to participate in both the drug-eluting andbare metal stent markets. The strong performance in coronary stent sales waspartially offset by other coronary sales reflecting lower third party revenuesincluding a decline in third party catheter sales.

Unexpected decline in US PCI volumes versus the thirdquarter of last year also impacted sales of other coronary products, includingguide wires and balloon catheters. And the vascular sales in the quarter thenwere in line with our expectations. So looking ahead to the full year 2007 wecontinue to anticipate growth of more than 50% for Abbott Vascular.

Moving on briefly to our vascular pipeline we are advancingseveral next-generation stent technologies beyond XIENCE. Our goal is torelease new technology at regular intervals over the next several years, whichare based off of our already well-known and well tested vision platform. Thisincludes a more deliverable workhorse stent as well as our bioabsorbabledrug-eluting stent.

In addition we have a number of clinical trials in ourperipheral business that have recently been initiated. Peripheral market iscurrently a $1billion market worldwide that's anticipated to grow at adouble-digit pace over the next several years. We are working on a number ofnew product -- pipeline products to treat vascular disease outside the coronaryarteries, including a stent to treat renal artery disease as well as an SFAproduct.

At the upcoming TCT meeting in Washington we'll be hosting an InvestorMeeting at 7 am Eastern Time on Tuesday, October 23rd. Where we'll discuss ourpipeline in more detail as well as our XIENCE Spirit III one year data, whichwill be presented in the lay breaker session Monday at TCT. And also on Mondayat TCT we'll present one year data on our fully bioabsorbable stent, which istruly a ground breaking new technology. If you are attending the TCT meeting weencourage you to join us and please RSVP if you have a chance. A webcast willbe available on our website.

With that let me move onto our diagnostic business wheresales grew nearly 10% in the quarter. In our immunochemistry and hematologysegment, sales grew 9%. Our international business, which comprises 80% of ourtotal worldwide sales, drove much of this growth with particularly strong salesin Europe, Latin America and Japan.The international launch of the c16000, our large volume chemistry analyzer isoff to a strong start. We plan to launch in the US by the end of this year. In thequarter, we launched the PRISM Hepatitis C Assay, which completes the PRISMHepatitis Panel. In the coming months, we plan to add additional retrovirustests to the PRISM menu, strengthening our position in the blood screeningsegment.

In our point of care business, sales grew more than 20%.Recently, we announced that our, i-STAT CHEM8 test granted a broader claim bythe FDA. This means that the CHEM8 test, which is routinely ordered basicmetabolic panel, was deemed simple and accurate enough for use beyond thehospital setting. This greatly expands our market opportunity by allowing morehealthcare providers to use i-STAT to aid in patients care.

Moving on to molecular diagnostics, where worldwide salesincreased nearly 10%. Our m2000 Real-Time PCR System continues to gain shareworldwide. This was internationally launched two years ago. We have placednearly 400 systems, and continue to expand our presence, including our recentapproval in China.In fact, our m2000 instrument and Real-Time PCR Assay sales were up 65% in thequarter.

As a reminder, the m2000 reduces the manual procedures andhands-on-time required to prepare patient samples from molecular testing by asmuch as 75%, thus improving laboratory efficiencies. We are in the early stagesof the USlaunch of the m2000. Also in molecular diagnostics, we continue to exploreinnovative, collaborative research opportunities in the area ofpharmacogenomics. Longer term, we hope to share updates on research progressthat are in early stages of development.

So, as we look forward into fourth quarter for our worldwidediagnostics businesses we anticipate high single to low double-digit growth.This includes strong double-digit growth in Abbott Molecular, high single-digitperformance in amino chemistry and hematology, and continued strongdouble-digit growth in point of care.

Moving on to global nutritionals, where sales of internationalnutritionals increased more than 15% as a result of focused promotional effortsand sales force activities as we further penetrate new global markets. Wecontinue to see strong demand for pediatric and adult nutritional products, aswe gain share in emerging markets, such as Latin America, China, and Southeast Asia.

In pediatric nutrition, products such as Gain, Grow and PediaSure,which are specially formulated for older infants, toddlers and school agechildren continue to perform well. Internationally adult nutritional sales,including products such as Ensure and Glucerna grew double-digits in thequarter.

In the USsales of pediatric nutritionals increased double-digits led by growth in infantformula. This quarter we launched NutriPals Fruit Bars for kids, which featurenine times more fruit than the leading cereal bar, as well as Similac Sensitivea specialty formula, and also our 8-ounce Ready-to-Feed packaging.

So, overall reported USsales were down modestly as we previously forecasted, impacted by thecompletion of the USco-promotion agreement of Synagis in 2006. If you exclude Synagis from bothyears, U.S. Nutritional sales increased nearly 7%. Looking ahead to the fourthquarter in nutritionals, we are forecasting continued double-digit sales growthinternationally with sales growth in the US of low to mid single-digits.

Finally, let me briefly discuss the Abbott pipeline. Againthis quarter, in our news release we highlight several of the major programs inour broad based pipeline, including our growing oncology pipeline. Today, Iwould like to briefly discuss our ongoing efforts in Neuroscience and PainManagement.

In Pain, we are presently in Phase III development for acontrolled-release formulation of Vicodin, we've filed for approval of VicodinCR this quarter. In Neuroscience, we are developing compounds forschizophrenia, ADHD, and Alzheimer's disease. This includes ABT-089 andABT-894, NNRs or neuronal nicotinic receptor agonists, they are in Phase IIdevelopment for ADHD. These compounds target receptors in the brain that play arole in regulating pain, mood, memory and other neurological functions.

Also on our mid-stage Neuroscience pipeline, ABT-925 isprogressing through Phase II development for schizophrenia. This compound targetsdopamine 3 or D3, a mechanism to treat both negative and positive symptoms ofthis disease, while limiting side effects. Both of these platforms representtruly novel science and is successful with results in a significant advance inthe treatment of these diseases in market that total more than $10 milliontoday and are growing, as the prevalence of these diseases increases.

As we focus on advancing our promising mid-term pipelineprograms, our late-stage, broad-based pipeline remains on track to deliver fivemajor regulatory filing this year. Those include HUMIRA Psoriasis, Simcor,XIENCE, ABT-335 and controlled-release Vicodin.

So, in summary for the quarter, we are obviously pleasedwith our very strong performance. Several of our businesses outperformed ourexpectations as sales grew 14.4% ahead of expectations. We delivered EPS of$0.67 above our guidance range of $0.64 to $0.66. We confirmed our EPS outlookfor both 2007 and 2008, where we expect an accelerating rate of earnings growthover 2007. We raised our HUMIRA guidance to $3 billion for this year and welook forward to a major new indication with psoriasis in early 2008.

And finally, we're moving forward to a XIENCE panel onNovember 29th, with a strong and compelling package of data that supports thesafety and efficacy of this truly next generation technology.

Now, with that operator we would be glad to open up the callfor questions.

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions). Our first question todayis from Glenn Reicin. And please state your company name.

Glenn Reicin - MorganStanley

All right. Good morning, folks. Glenn Reicin, MorganStanley.

John Thomas

Hi, Glenn.

Tom Freyman

Hi, Glenn.

Glenn Reicin - MorganStanley

Lot of questions here, butlet me sort of get to the point. Next year you have a couple of unknowns, Ijust want to know how you are going to manage this, both operationally and froman EPS guidance perspective. You have the XIENCE launch obviously timing is outof your control at this point. And then you have potential prospects of DepakoteER going off patent. Well, I know you haven't provided 2008 guidance, maybe youcan walk us through something here that will give us some idea of the magnitudeof the effect?

Tom Freyman

Glen, I'll take this, this is Tom. I don't know when youtalk about XIENCE is an uncertainty and certainly we are very much lookingforward to this November 29th panel. We are very optimistic about the productas we've been saying for sometime, and its great technology and robust safetyand efficacy data as John mentioned. As you know, we've consistently forecasteda first half '08 approval for XIENCE and that is unchanged from ourperspective. But, to answer your question, with contingency plan as well andeven if we saw a delay, the later part of 2008 for XIENCE which we don'texpect. But when we look at the momentum of what we are seeing in our business,the product growth and really what you are seeing this quarter, and what youhave been seeing all year, I am very confident on our ability to deliver atleast the first call mean of $3.20, which would represent accelerating EPSgrowth over 2007.

So, we were prepared for that in the low probably if itwhere to occur. Of course, as XIENCE was approved on our anticipated timeline,there would be upside to that and let's consider that as floor for our 2008performance. For Depakote, we've been saying for sometime that Depakote ER willgo off patent in the middle of next year. We have been planning for that allalong and in all of our forecasting we do have patents on Depakote ER, butwe've been down this road and we understand the need to plan realistically forthat to be sure that '08 is not exposed in any way to any unfavorable outcomeon that product. So, we've factored that in, and really it's the power of HUMIRAand the pharmaceuticals, the acceleration of Diabetes Care you are starting tosee this quarter, the continued good performance in international nutrition.All of these things are going to really get us through the realisticassumption, shall we say, on Depakote for the second half of 2008.

Glenn Reicin - MorganStanley

Okay. So, this might be very clear here and I don't want toput you in a corner or pin you in a corner here. But, as you are saying the$3.20 in earnings is more or less in line in XIENCE. Do you think you can getthere even with Depakote ER going off patent and why you are not planning forthis even with the delay in XIENCE past the first half of the year?

Tom Freyman

Yeah. Under that pessimistic scenario, and certainly allalong we have been very realistic about Depakote. But, even under thatpessimistic scenario on XIENCE that's what I am saying, yes.

Glenn Reicin - MorganStanley

Perfect. Thank you.

Operator

Thank you. Our next question is from Mike Weinstein. Andplease state your company name.

Mike Weinstein - J.P.Morgan

Thank you. It's J.P. Morgan. That was a good answer there,Tom.

Tom Freyman

Thanks Mike.

Mike Weinstein - J.P.Morgan

I think people probably liked that one. Let me ask you acouple of questions. And I am going to first focus on XIENCE, because obviouslyit's got a lot of potential over the last week. You guys made a comment there,John, that you are going to go ahead and look at and follow up on patients eventhough the SPIRIT II and SPIRIT III won't have competed their two-yearfollow-up on all the patients, obviously there is number of patients who havereached those two-year marks. And so, you are going to compile that data andhave that data build to the panel. You made the comment several hundred. So,can you give us a better sense of how many patients you think will have twoyears of XIENCE if you do that on November 29th panel?

John Thomas

Yeah. So, you are right Mike. What I did say in the commentswas, and I don't think we've shared this previously that we will have some twoyear follow-up data from the three trials. I'd say it's a little difficult tosay preciously right now what that number will be but I think it's fair to sayit's going to be in the range of 200 to 300 patients.

Mike Weinstein - J.P.Morgan

Okay and obviously you have 200 to 300 out two years andthen obviously you will have the full data set from SPIRIT II and SPIRIT IIIout one year correct?

John Thomas

Right, that's right, and we are going to present that at TCTnext week, we'll go over that in our Analyst Meeting, Tuesday morning. But Ithink it's also important that we discuss and I mentioned in my comments thatwe'll have that which I hope gives some comfort to people who have beenconcerned about that and we understand where the concern comes from becausethere were some comments made. But more importantly is the overall package andas I mentioned we think we've submitted a very powerful package to the FDA, itscompelling data. We met or exceeded all the original protocol criteria thatwere established by FDA.

We think it's an important product to get on the market andit would be a disservice to patients if it didn't come on to the market. Theother thing, I think is, important in this discussion around the number ofpatients in late stent thrombosis is the fact that it's only one parameter ofsafety. Safety is much broader than just thrombosis you probably know betterthan anybody, and when we look at that and we consider the overall safetystory, rates of cardiac death, heart attack, revascularization, which[comminute] in the safety and efficacy end point of MACE we did exceptionallywell. We were statically superior to that product based on the data we'vealready show and the data we will show at TCT. We are very pleased with that.

So revascularizations, reinterventions are not benign andthat's an important part of it. So we've got a very compelling packing. We arelooking forward to going to panel and we are looking forward to presenting aone year data, which we were pleased with from the SPIRIT III data set.

Mike Weinstein - J.P.Morgan

Let me ask you a couple of pharma questions just reflects by[can a] couple of positioning questions if you would. First, you have gotABT-874 and JNJ obviously has Anti-IL-12/IL-23 as well in development, a littlefurther along. Could you talk a little bit about how you view the positioningof 874 as well as [IL-12/IL-23] class versus HUMIRA and psoriasis and once youget that product grouped how you would position the two products? And thensecond, one other question that has been on investors mind since then -- thepositioning of Niaspan potentially was the competition coming from Merck may bein 2008 assuming that goes well for Merck. How do you view the positioning ofNiaspan versus Cordaptive and once you guys wrap up that? Thanks.

John Thomas

Okay. All right, thanks Mike. Well I think first on ABT-874that's our investigation of IL-12/IL-23 antibody, which by the way we have avery strong position on. We have six or seven patents that we will then developour licensed stent so we feel like we have got a very broad and strong patentposition around that particular pathway. But we do have that product indevelopment that's in Phase II. It will be moving in the Phase III by the endof this year. The data that we have shown on that so far has been excellent,the Phase II data, the PASI scores -- PASI 75 scores, which are a measure ofskin clearance, were greater than 90%, which is better than anything that'sbeen seen to-date. So we're very much looking forward to that. It's a categorythat is new obviously and there are some, competitive products out there aswell.

I think they will have a place in the market at this pointfor those who have not responded to TNAP treatments. But TNAP treatments have alot of history and HUMIRA in particular, which has 10 years of clinical historyand thousands and thousands of patients who've been treated safely andeffectively with the product is going to be probably the first line therapy andof course, as you know, HUMIRA showed very good results in psoriasis as well interms of the PASI scores the 75s, 50s and so forth. Those scores were two toseven times better than the competitive product that's out there right now, theother self-injectable product. So there is a good safety and efficacy profilefor HUMIRA that would give it a good start in the market and as we mentioned onour comments, we look forward to hope for approval here in the first part of'08 for that indication.

Your other question was Niaspan and Cordaptive. The way welook at that is, Niaspan has been used safely and effectively for many years.It's well known well established product. Physicians feel very comfortable withit. I am not real comfortable commenting on our competitor's product other thanto say in general it's always a situation where if there is a new molecularentity involved, and an unknown safety profile around such an entity that'sdifficult to know longer term, how that will stand up in the market place. It'salso difficult to know how physicians might respond to adding in a flushingagent, which is a long-term situation to manage what is in essence a veryshort-term transient effect that happens with a small percent of patients.

So this, from what we can tell about that product at leastthe data we've seen, flushing is not eliminated by that product. So I guessit's a question of using an underlying therapy like Niaspan that you have knownand trusted for a long time or Aspirin to help control flushing versus puttingin the mix of product where you have got a different form of Nias and not Niaspanwith a anti-flushing agent that is not known as of yet to control a short-termphenomena.

Mike Weinstein - J.P.Morgan

Great. Thanks guys. I'll let some others to jump in.

Tom Freyman

Thank you.

Operator

Thank you. Our next question, is from Glenn Novarro andplease state your company name.

Glenn Novarro - Bancof America

Thanks, Glenn Novarro with Banc of America. A couple of quickquestions, one what is the status of XIENCE reimbursement in France, two on Simcorwhat's going to be the edge for that growth in other words if someone is welltreated on Lipitor and Crestor why does some one move to Simcor and if aphysician is comfortable providing with the current stent on the market whywould they put a patient on Simcor. And then just lastly for Depakote next yearyou are represent a half of the revenues, should we be just cutting our Depakotenumber in half or should we assume a further erosion in Depakote revenues nextyear? Thanks.

John Thomas

All right. Thanks Glenn. Let me start with the first coupleof questions here and then may be Tom could help with the last one. In Francewe are now expecting reimbursement in early next year. There have been somedelays -- administrative delays in the reimbursement office just generaladministrative matters so we are expecting France to come in the first part of2008. So, that's a modest impact to our overall plan for the fourth quarter. Wedidn't have much in terms of sales, and for France. But of course, that's animportant market and one of the higher priced in Europe.So, given the technology that XIENCE demonstrates and the premium technologythat it is, we are looking forward to getting that on the market in the firstpart of next year. So, that's kind of what's going on in France.

With Simcor, I think the situation there is really, you havegot a fixed-dose combination of Niaspan and generic Zocor or Simvastatin. Thesetypes of products can help with compliance, convenience and we think that giventhe profile of this product, which you will see more about when we show thedata at AHA, can deliver Vytorin like reductions in LDL, while also deliveringNiaspan's unprecedented HDL raising benefit and the Trig benefit that Vytorincan't match.

So, you have got a market where adjunctive therapies andfixed-dose combination therapies are growing at a rapid rate. Some estimatemore than 80%, 90% compared to the overall market growth, which is more in themid-teens. As patients realize, and doctors realize that they have to be moreaggressive about managing their lipids and getting the target, because lot ofpatients, as you know, don't reach target on statin therapy alone. In fact,there is an estimate that of the 30 million adults who are treated in US forcholesterol management, about three-quarters of those don't currently reachtheir target lipid goals. And there is another 80 million estimated that areuntreated for general dyslipidemia.

So, it's obviously a huge market. I believe it's the largestpharmaceutical market in the world, with about 20 billion in the US inparticular. So, lot of room for growth. A very good product and we look forwardto presenting the result at AHA.

Glenn Reicin - MorganStanley

You have just one….

Tom Freyman

Question on Depakote…

Glenn Reicin - MorganStanley

Just one follow-up question. Crestor, AstraZeneca, Pfizer they'vehuge sales forces detailing Lipitor or Crestor for instance, do you have themanpower or is this something that's going to have to get beefed up next yearto be competitive with Simcor?

John Thomas

No, we believe we have got the sales force in place.Remember, this is a sales force that's have been selling TriCor for sometime.We brought in and integrated the best of the best in the core sales force. Andso, we have over 2,000 reps in our lipid franchise already. So, I don't see abig need for adding additional sales force. I think we can handle it with what wehave.

Glenn Reicin - MorganStanley

Okay, great. And on Depakote?

Tom Freyman

Yeah. Glenn, first of all as you know that this productshould be going into July next year with full patent protection, so that's akey thing to factor in your modeling. And I am not going to give you a specificnumber today, but I will say a couple of things. Certain of the diseasestreated by that product probably will be a little more resistant to change thanyou would typically see in the generic situation. So, there is a degree of thatyou have to factor in your modeling. And I think as we've looked at the streetmodels for Depakote for '08, I think they have done a pretty reasonable job ofestimating what we think is going to happen with the product.

Glenn Reicin - MorganStanley

Okay. Great, thank you.

John Thomas

Thanks, Glenn.

Operator

Thank you. Our next question is from Rick Wise. And pleasestate your company name.

Rick Wise - BearStearns

Good morning everybody.

Tom Freyman

Hello, Rick.

Rick Wise - BearStearns

Couple of question, First, Tom, maybe you could give us alittle more color on gross margins. You mentioned the higher costs and may becould you help us understand what those were, how you plan to address it andmay be just give us a little more color on just the longer term trends of grossmargin. Shouldn't we expect to see gross margins trend higher over time giventhe improving mix of the business?

Tom Freyman

Sure. Well, regarding the third quarter, and we are prettydarn close to my forecast that I have provided last quarter. I have said around58%, I think, and we came at a little below that. And it's hard to call thiswithin a tick or two given all the complexities of our business. But, I feelpretty good about the forecast. As I said in my remarks the one thing that'sprobably slightly different than what we were seeing back than is some pressurefrom nutritional commodity costs. I characterize that more as the lag effect.We've got mitigation plans, we have already started to implement in thebusiness and it's pretty much the obvious things. They are going to allow us tooffset that as we forward in future quarter. So, a temporary slight impact ofthat we are going to manage through going forward.

In terms of longer term trends, again, fourth quarter shouldbe our best quarter of the year at around 59%, as I indicated in my remarks.And we were seeing steady progress in the gross margin. I pretty muchrepeatedly characterized it as steady, because as you are correct about miximproving for our business and the right products growing, we've had somethings to overcome such as Synagis this year and Omnicef, which have been dragson the margin as we work through those generic issues and those the ending ofthe Synagis co-promotion.

In '08, we'll have a little bit moreof that from Omnicef, and obviously, Depakote will have some impact. But, evenwith all of that, given the remaining mix of the business we see steadyprogress in average gross margin in '08 compared to '07. So, I think that's whatyou should be watching for.

RickWise - Bear Stearns

All right. Turning to Niaspan,obviously, Niaspan had a good quarter year-over-year. But, if I am looking atmy number correctly $170 million was basically equal to the second quarter. Imight have thought we would see some sequential growth given the new technologyand the larger sales force. Again, what's takes to get that going or do we haveto wait for the combo products for this area to really take off?

JohnThomas

Well, I guess we'd beg to differ. Wethought the growth was pretty good. We are on track for in excess of $650million for the full year, which is little bit ahead of our originalexpectations. The trends, the RX trends have been good and that product hasbeen growing 2% to 3%, now growing about 4% to 6% after we fully integrated theco-sales force. So, we are plugging right long there. Overall market growth ispretty good. As I mentioned, adjunctive therapies and HDLand Trigs are an important part of that and they are growing well. So, we thinkwe are right on track with our expectations for the full year and, obviously,we will do a lot better than that next year.

RickWise - Bear Stearns

Good. Two last questions. First, just in general,International Nutritionals obviously had a stellar quarter. How sustainable isthat kind of growth as we look over the next year or so? Or how should we thinkabout that growth? And last, just I would be curious to hear your thoughts.Tom, I appreciate your comments and perspective upon the impact of XIENCE withor without in '08. But, truly the market outlook for these procedures ingeneral is tougher today than it was when you bought the Guidant business ayear ago. Prices just in this quarter seem to be down 5%, procedures were down.How are you thinking about the impact that sort of the market that XIENCE isentering one and the longer term positive contribution it can make is it goingto be less than you might have dreamt at one time?

Tom Freyman

Well I think is -- I'll take the second question first. Ithink as we look at '08, clearly the market is different than when we boughtthe company and but again for us even if it's a $5 billion market versus a $6billion, it's a market where we are barely participating in now globally andwith the quality of the product, the efficacy of the product and the ability webelieve of the former [Guidant organization] now Abbott to execute. We are veryconfident we will get plenty of share and more than enough profit from thisproduct to more than justify the acquisition.

So we are still very happy with the acquisition, theproduct, as you know, the XIENCE data actually came out a lot better than evenwe anticipated when we brought the company. So that's clearly an upside to ouroriginal modeling. We thought it would be equivalent and we turned out to besuperiors. So I think when you net it all out its going to be very positive in'08 and well beyond particularly given that our R&D activities in thatorganization are very solid and we believe we'll have a series of innovationsthat'll continue to sustain our position in that market going forward.

And, Rick in regards to your question on internationalnutritional. We have obviously been very pleased and for those who don'trecall, remember we created that business internally and separated it from ouroverall AAI business what used to be AI international business so that we couldget the focus and the results that we are seeing now. And so the growth that wesaw this quarter, we think is very sustainable, in fact, in the near-term, thefourth quarter our outlook is even better. We expect very strong double-digitgrowth going into the fourth quarter and for next year a little early to giveprecise guidance, but based on the trends, based on the emerging market growth,the products and the dynamics in terms of demographics and so forth, outsidethe US, we would expect another year of strong double-digit growth.

John Thomas

I will just add as well, that as we have looked out over thelonger term plan horizon for this, and in the 2008, strong double-digit growthis expected to continue, I mean there is tons of potential in this market and Iwould remind you that we are building a very large plant in Singapore, and theanticipation of that, and we are putting our money behind our forecast. So thisis a business that's going to continue to be a big contributor to our growthfor years to come.

Rick Wise - BearStearns

Appreciate that. Thanks.

John Thomas

Okay. I think, operator, we have time for probably one morequestion.

Operator

Thank you. Our final question, is from Sara Michelmore andplease state your company name.

Sara Michelmore -Cowen & Company

Yes. Cowen & Company. Good morning.

John Thomas

Hi, Sara.

Sara Michelmore -Cowen & Company

John, can you give us a little more color on HUMIRA ininternational markets. It’s obviously a big piece of the overall revenue streamthere, and it's been outpacing the US growth pretty substantially. Canyou just give us a sense of what the growth drivers there, either by countrymarket or in terms of where the approvals are and where it's scaling up?

John Thomas

Okay. Sure. Actually there is a couple of dynamics there. Ithink, overall, and just the general market, there is low penetration ofbiologics, and we have seen that penetration rate for the market continue toincrease as some of these new therapies come to market, HUMIRA in particular,as we launched the Crohn's indication, we have seen very good response to that.The PEN Container, which you might recall was an advancement in the dosagedelivery system for HUMIRA, has been very well received in those market. So,the penetration overall is probably the biggest factor having excellent data aswe've shown with HUMIRA, rheumatology first and then with psoriatic arthritisand now Crohn's.

We have just continued to pick up a lot of share at thecompetitor's expense and also ride the wave of an under penetrated market asthat continues to grow, so, a significant opportunity still outside the US. Weexpect that to continue as we go into the fourth quarter and early next yearparticularly as we get the psoriasis approval, which is as I mentioned weexpect in the early part of '08. That's a global filing so we'll have thatready to launch in both the USand internationally.

Sara Michelmore -Cowen & Company

Okay. That's helpful and Tom may be could you give us alittle sense of where you are in terms of the operating margins for HUMIRA. Youare obviously past the point of investing a lot of the R&D dollars that youneed to invest to expand the [labeling] for the product and you built a lot ofthe commercial infrastructure. Can you just give us a sense of where you are interms of the operating margin percent for that product and where you think it'sgoing to go heading into next year?

Tom Freyman

I think you have characterized in general the dynamicproperly that we are pretty well sized in terms of commercial infrastructureand as we are seeing this volume expand we are getting quite a bit ofadditional drop through and that clearly SG&A is not leveraging with thesales of the product. So that absolutely is a positive dynamic and then if youtake it all the way to the bottom we also are seeing benefits of our -- some ofour plant investments in terms of bottom line contribution from the products.So there is continuing leverage from HUMIRA and I think you have characterizedit pretty well.

Sara Michelmore -Cowen & Company

Okay. Thank you.

John Thomas

Thank you. And that concludes our conference call. A replaywill be available after 11 a.m. Central Time today on our website, atabbottinvestor.com, and after 11 a.m. Central via telephone at 203-369-0514,confirmation code 3144144. The audio replay will be available until 4 p.m. onWednesday, October 24th. Thank you all for joining us.

Operator

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

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