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John Thomas - VP of IR

Tom Freyman - EVP of Finance and CFO


Glenn Reicin - Morgan Stanley

Mike Weinstein - J.P. Morgan

Glenn Novarro - Banc of America

Rick Wise - Bear Stearns

Sara Michelmore - Cowen & Company

Abbott Laboratories (ABT) Q3 2007 Earnings Call October 17, 2007 9:00 AM ET


Good morning, and thank you for standing by. Welcome to Abbott's Third 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 third quarter results and I will discuss the business operating highlights. Following our comments, we will take any questions that you have.

Some statements made today may be 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 31, 2006 and are incorporated by reference. We undertake no obligation to release any publicly revised to forward-looking statements as a result of subsequent events or developments.

In today's 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

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's earnings news release, our third quarter results reflect continued strong momentum across our major businesses. Sales growth in the mid-teens and the earnings 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-end of our EPS guidance range for 2007 as I'll discuss in a moment.

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

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

International nutritional sales were up more than 15%, with continued 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 track for a record number of major new product launches and regulatory submissions this year and into 2008.

Gross margin ratio was 57.7%, roughly in line with our forecast provided last quarter. Comparison with the prior year was favorably impacted by improved product mix, offset by the reduction and the contribution from Synagis in the US and the impact of generic competition on Omnicef sales. We also saw a slight impact of commodity prices in nutrition. We have a mitigation plans which will offset this in future quarters.

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

SG&A expense included the impact of the Kos acquisition, as well as new and ongoing promotional initiatives, including new indications for HUMIRA and the continuing international launch of XIENCE.

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

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

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 and raising the lower end of our previous guidance range. As a result, our 2007 EPS guidance is now $2.82 to $2.84, excluding specified items. Midpoint at this range reflects earnings per share growth of nearly 12% over the prior year. This new full year guidance results in fourth quarter earnings per share range of $0.91 to $0.93 also excluding specified items.

Let me walk you through some of the key P&L line items as we forecast them for the fourth quarter. We expect sales growth of 13% to 15% consistent with the growth we've seen in each of the quarters so far this year, and consistent with the forecast at the beginning of the year. We forecasted gross margin ratio of approximately 59%, R&D as a percentage of sales of around 9%, SG&A expense as a percentage of sales of approximately 25% and the tax rate of approximately 19.5%.

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

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

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

John Thomas

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

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

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

Our international Crohn's launch is also off to a rapid start, driving HUMIRA growth to nearly 60% this quarter. HUMIRA also represents a promising treatment for psoriasis, an indication we expect will be approved in the first quarter of 2008. At the recent World Congress of Dermatology meeting, we presented HUMIRA psoriasis data from two clinical studies. The results were powerful. Both studies indicate that nearly three out of four HUMIRA patients experienced a significant reduction in their disease as defined by PASI 75 scores. The market opportunity for psoriasis is large and growing, with peak year sales expectations exceeding $3 billion worldwide for biologic therapies.

Dermatologists are rapidly gaining experience and confidence with HUMIRA. In fact approximately 30% of dermatologists have already prescribed HUMIRA to treat psoriatic arthritis. Recently HUMIRA was honored with the 2007 Galen Prize for best biotechnology product awarded by Prix Galien USA. This is one of the highest accolades in the pharmaceutical and biomedical industry, recognizing excellence in medical and scientific research and innovation.

Finally as Tom mentioned given the recent sales trends in the strength of the Crohn's launch today we are raising our estimate for full year 2007 global sales for HUMIRA to $3 billion. In our lipid management franchise, our portfolio is uniquely positioned to take advantage of the trend toward adjunctive therapies, that is, those therapies that treat beyond LDL levels to also focus on HDL and triglycerides. These therapies reduce cardiovascular risk beyond what a statin can deliver alone. TriCor, our cholesterol and triglyceride therapy reported sales of $300 million this quarter up 13%. TriCor continues to be the best therapy in the market for lowering triglycerides with a known and long established safety and efficacy profile.

TriCor prescription trends remain strong, growing in line with the total cholesterol market. In the fourth quarter we expect continued double-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 new film-coated Niaspan extended release tablet has been well received by both physicians and patients with sales in the quarter of nearly $170 million. We've seen improved trends since we have added Abbott promotional efforts and integrated our sales force following the Kos acquisition.

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

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

In addition to TriCor and Niaspan we have what we believe is the industry leading pipeline in cholesterol management with three late stage programs in development. In the second quarter we submitted Simcor for FDA approval. Simcor is a fixed-dose combination of Niaspan and Simvastatin that provides comprehensive lipid management. We've confirmed that we will present data on the Simcor Phase III pivotal trials in November at the American Heart Association meeting.

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

As we announced earlier in the quarter, we have jointly decided with AstraZeneca to advance ABT-335 with Crestor. We expect to file this fixed-dose combination therapy for approval in 2009. So 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.

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

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

This quarter we submitted for regulatory approval a new Lower-Strength Kaletra tablet for pediatric use. So, for the fourth quarter, we anticipate 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% of total Depakote prescriptions. We anticipate continued double-digit sales growth for Depakote going into the fourth quarter resulting in strong double-digit for the full year.

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

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

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

TAP plans to share data on TAK-390MR in the first half of next year. Febuxostat, TAP's compound for gout recently completed enrollment in its supplemental trial of 2,700 patients, evaluating drug in 40 milligram and 80 milligram doses. TAP is now forecasting a mid 2008 FDA submission for Febuxostat.

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

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

FreeStyle Freedom Lite, our second no coding meter, began shipments in Europe in October and our US launch is anticipated for the first 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 also positively contribute to this quarter's performance. Abbott's Diabetes Care products are resonating with patients in these growing markets, especially China where we are outpacing market growth considerably.

As we continue to improve testing convenience for people with diabetes, we are 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, for the fourth quarter and the full year, we anticipate continued double-digit growth in Diabetes Care, as we continue to introduce new products and strengthen our presence in emerging markets.

Next, let me move onto to Abbott Vascular, which had worldwide sales growth in the quarter of 15% as we've now fully lapped the Guidant acquisition. Performance in the quarter was positively impacted by higher sequential quarterly growth in XIENCE and higher year-over-year bare-metal stent sales. However, growth was tampered by overall DES market conditions and lower 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 PMA is the first and the only FDA submission of a drug-eluting stent that has proven superiority over the current market leading drug-eluting stent in a randomized clinical trial. Our PMA submission include safety and efficacy data from our SPIRIT I, SPIRIT II and SPIRIT III XIENCE clinical trials, which represent approximately 1,400 patients.

In SPIRIT II and III, which compared XIENCE to TAXUS, we not only met the primary endpoints of in-stent and in-segment late loss respectively, but also exceeded them that demonstrate the statistical superiority of XIENCE over TAXUS. Both SPIRIT II and III also showed XIENCE was superior and the clinical endpoint of Major Adverse Cardiac Events or MACE.

MACE measures important patient safety endpoints, including myocardial infarction and death. This was the first time ever that one drug-eluting stent was proven statistically superior over another drug-eluting stent on an important 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 to complete our submission and the FDA has not requested any new clinical trial patient data. We believe we supplied a robust data package based on FDA requirements and we've remained very comfortable with the status of our filing submissions, as we continue to work with FDA toward a panel review for XIENCE on November 29th. We look forward to the opportunity to review our data with the panel. That data will include two-year follow-up from several 100 XIENCE patients from SPIRIT I, II and III who have gone through their normally scheduled two-year follow-up.

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

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

Regarding the international launch of XIENCE, we continue to make steady progress as tenders become available. In virtually every country we are gaining share. In 14 countries we have share in excess of 20% with more than half of those countries in excess of 25% market share. And we have a few countries now in excess of 30% market share. The feedback we've had on XIENCE to 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 to reinforce its best-in-class clinical profile in a truly next-generation drug-eluting stent. So, our global DES franchise sales, which include XIENCE as well as third party DES product revenues, were $65 million in the third quarter. This includes an approximately 25% increase in XIENCE sales on a sequential quarterly basis despite a sequential decline in PCI volumes in the low double digits.

XIENCE performance was offset by lower than anticipated third party revenues also as the result of softer market conditions year-over-year. As a reminder, our international business reports on a one month lag. So this quarter included the months of June, July and August, which is 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 include bare 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 and bare metal stent markets. The strong performance in coronary stent sales was partially offset by other coronary sales reflecting lower third party revenues including a decline in third party catheter sales.

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

Moving on briefly to our vascular pipeline we are advancing several next-generation stent technologies beyond XIENCE. Our goal is to release new technology at regular intervals over the next several years, which are based off of our already well-known and well tested vision platform. This includes a more deliverable workhorse stent as well as our bioabsorbable drug-eluting stent.

In addition we have a number of clinical trials in our peripheral business that have recently been initiated. Peripheral market is currently a $1billion market worldwide that's anticipated to grow at a double-digit pace over the next several years. We are working on a number of new product -- pipeline products to treat vascular disease outside the coronary arteries, including a stent to treat renal artery disease as well as an SFA product.

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

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

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

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

As a reminder, the m2000 reduces the manual procedures and hands-on-time required to prepare patient samples from molecular testing by as much as 75%, thus improving laboratory efficiencies. We are in the early stages of the US launch of the m2000. Also in molecular diagnostics, we continue to explore innovative, collaborative research opportunities in the area of pharmacogenomics. Longer term, we hope to share updates on research progress that are in early stages of development.

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

Moving on to global nutritionals, where sales of international nutritionals increased more than 15% as a result of focused promotional efforts and sales force activities as we further penetrate new global markets. We continue to see strong demand for pediatric and adult nutritional products, as we 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 age children continue to perform well. Internationally adult nutritional sales, including products such as Ensure and Glucerna grew double-digits in the quarter.

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

So, overall reported US sales were down modestly as we previously forecasted, impacted by the completion of the US co-promotion agreement of Synagis in 2006. If you exclude Synagis from both years, U.S. Nutritional sales increased nearly 7%. Looking ahead to the fourth quarter in nutritionals, we are forecasting continued double-digit sales growth internationally with sales growth in the US of low to mid single-digits.

Finally, let me briefly discuss the Abbott pipeline. Again this quarter, in our news release we highlight several of the major programs in our broad based pipeline, including our growing oncology pipeline. Today, I would like to briefly discuss our ongoing efforts in Neuroscience and Pain Management.

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

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

As we focus on advancing our promising mid-term pipeline programs, our late-stage, broad-based pipeline remains on track to deliver five major 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 pleased with our very strong performance. Several of our businesses outperformed our expectations 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 outlook for both 2007 and 2008, where we expect an accelerating rate of earnings growth over 2007. We raised our HUMIRA guidance to $3 billion for this year and we look forward to a major new indication with psoriasis in early 2008.

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

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

Question-and-Answer Session


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

Glenn Reicin - Morgan Stanley

All right. Good morning, folks. Glenn Reicin, Morgan Stanley.

John Thomas

Hi, Glenn.

Tom Freyman

Hi, Glenn.

Glenn Reicin - Morgan Stanley

Lot of questions here, but let me sort of get to the point. Next year you have a couple of unknowns, I just want to know how you are going to manage this, both operationally and from an EPS guidance perspective. You have the XIENCE launch obviously timing is out of your control at this point. And then you have potential prospects of Depakote ER going off patent. Well, I know you haven't provided 2008 guidance, maybe you can walk us through something here that will give us some idea of the magnitude of the effect?

Tom Freyman

Glen, I'll take this, this is Tom. I don't know when you talk about XIENCE is an uncertainty and certainly we are very much looking forward to this November 29th panel. We are very optimistic about the product as we've been saying for sometime, and its great technology and robust safety and efficacy data as John mentioned. As you know, we've consistently forecasted a first half '08 approval for XIENCE and that is unchanged from our perspective. But, to answer your question, with contingency plan as well and even if we saw a delay, the later part of 2008 for XIENCE which we don't expect. 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 you have been seeing all year, I am very confident on our ability to deliver at least the first call mean of $3.20, which would represent accelerating EPS growth over 2007.

So, we were prepared for that in the low probably if it where 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 2008 performance. For Depakote, we've been saying for sometime that Depakote ER will go off patent in the middle of next year. We have been planning for that all along and in all of our forecasting we do have patents on Depakote ER, but we've been down this road and we understand the need to plan realistically for that to be sure that '08 is not exposed in any way to any unfavorable outcome on that product. So, we've factored that in, and really it's the power of HUMIRA and the pharmaceuticals, the acceleration of Diabetes Care you are starting to see this quarter, the continued good performance in international nutrition. All of these things are going to really get us through the realistic assumption, shall we say, on Depakote for the second half of 2008.

Glenn Reicin - Morgan Stanley

Okay. So, this might be very clear here and I don't want to put 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 get there even with Depakote ER going off patent and why you are not planning for this even with the delay in XIENCE past the first half of the year?

Tom Freyman

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

Glenn Reicin - Morgan Stanley

Perfect. Thank you.


Thank you. Our next question is from Mike Weinstein. And please 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 a couple of questions. And I am going to first focus on XIENCE, because obviously it'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 even though the SPIRIT II and SPIRIT III won't have competed their two-year follow-up on all the patients, obviously there is number of patients who have reached those two-year marks. And so, you are going to compile that data and have 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 two years of XIENCE if you do that on November 29th panel?

John Thomas

Yeah. So, you are right Mike. What I did say in the comments was, and I don't think we've shared this previously that we will have some two year follow-up data from the three trials. I'd say it's a little difficult to say preciously right now what that number will be but I think it's fair to say it'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 and then obviously you will have the full data set from SPIRIT II and SPIRIT III out one year correct?

John Thomas

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

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

So revascularizations, reinterventions are not benign and that's an important part of it. So we've got a very compelling packing. We are looking forward to going to panel and we are looking forward to presenting a one 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 got ABT-874 and JNJ obviously has Anti-IL-12/IL-23 as well in development, a little further along. Could you talk a little bit about how you view the positioning of 874 as well as [IL-12/IL-23] class versus HUMIRA and psoriasis and once you get that product grouped how you would position the two products? And then second, one other question that has been on investors mind since then -- the positioning of Niaspan potentially was the competition coming from Merck may be in 2008 assuming that goes well for Merck. How do you view the positioning of Niaspan versus Cordaptive and once you guys wrap up that? Thanks.

John Thomas

Okay. All right, thanks Mike. Well I think first on ABT-874 that's our investigation of IL-12/IL-23 antibody, which by the way we have a very strong position on. We have six or seven patents that we will then develop our licensed stent so we feel like we have got a very broad and strong patent position around that particular pathway. But we do have that product in development that's in Phase II. It will be moving in the Phase III by the end of 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 of skin clearance, were greater than 90%, which is better than anything that's been seen to-date. So we're very much looking forward to that. It's a category that is new obviously and there are some, competitive products out there as well.

I think they will have a place in the market at this point for those who have not responded to TNAP treatments. But TNAP treatments have a lot of history and HUMIRA in particular, which has 10 years of clinical history and thousands and thousands of patients who've been treated safely and effectively with the product is going to be probably the first line therapy and of course, as you know, HUMIRA showed very good results in psoriasis as well in terms of the PASI scores the 75s, 50s and so forth. Those scores were two to seven times better than the competitive product that's out there right now, the other self-injectable product. So there is a good safety and efficacy profile for HUMIRA that would give it a good start in the market and as we mentioned on our 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 we look at that is, Niaspan has been used safely and effectively for many years. It's well known well established product. Physicians feel very comfortable with it. I am not real comfortable commenting on our competitor's product other than to say in general it's always a situation where if there is a new molecular entity involved, and an unknown safety profile around such an entity that's difficult to know longer term, how that will stand up in the market place. It's also difficult to know how physicians might respond to adding in a flushing agent, which is a long-term situation to manage what is in essence a very short-term transient effect that happens with a small percent of patients.

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

Mike Weinstein - J.P. Morgan

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

Tom Freyman

Thank you.


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

Glenn Novarro - Banc of America

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

John Thomas

All right. Thanks Glenn. Let me start with the first couple of questions here and then may be Tom could help with the last one. In France we are now expecting reimbursement in early next year. There have been some delays -- administrative delays in the reimbursement office just general administrative matters so we are expecting France to come in the first part of 2008. So, that's a modest impact to our overall plan for the fourth quarter. We didn't have much in terms of sales, and for France. But of course, that's an important market and one of the higher priced in Europe. So, given the technology that XIENCE demonstrates and the premium technology that it is, we are looking forward to getting that on the market in the first part of next year. So, that's kind of what's going on in France.

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

So, you have got a market where adjunctive therapies and fixed-dose combination therapies are growing at a rapid rate. Some estimate more than 80%, 90% compared to the overall market growth, which is more in the mid-teens. As patients realize, and doctors realize that they have to be more aggressive about managing their lipids and getting the target, because lot of patients, 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 for cholesterol management, about three-quarters of those don't currently reach their target lipid goals. And there is another 80 million estimated that are untreated for general dyslipidemia.

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

Glenn Reicin - Morgan Stanley

You have just one….

Tom Freyman

Question on Depakote…

Glenn Reicin - Morgan Stanley

Just one follow-up question. Crestor, AstraZeneca, Pfizer they've huge sales forces detailing Lipitor or Crestor for instance, do you have the manpower or is this something that's going to have to get beefed up next year to 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. And so, we have over 2,000 reps in our lipid franchise already. So, I don't see a big need for adding additional sales force. I think we can handle it with what we have.

Glenn Reicin - Morgan Stanley

Okay, great. And on Depakote?

Tom Freyman

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

Glenn Reicin - Morgan Stanley

Okay. Great, thank you.

John Thomas

Thanks, Glenn.


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

Rick Wise - Bear Stearns

Good morning everybody.

Tom Freyman

Hello, Rick.

Rick Wise - Bear Stearns

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

Tom Freyman

Sure. Well, regarding the third quarter, and we are pretty darn close to my forecast that I have provided last quarter. I have said around 58%, I think, and we came at a little below that. And it's hard to call this within a tick or two given all the complexities of our business. But, I feel pretty good about the forecast. As I said in my remarks the one thing that's probably slightly different than what we were seeing back than is some pressure from nutritional commodity costs. I characterize that more as the lag effect. We've got mitigation plans, we have already started to implement in the business and it's pretty much the obvious things. They are going to allow us to offset that as we forward in future quarter. So, a temporary slight impact of that we are going to manage through going forward.

In terms of longer term trends, again, fourth quarter should be 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 much repeatedly characterized it as steady, because as you are correct about mix improving for our business and the right products growing, we've had some things to overcome such as Synagis this year and Omnicef, which have been drags on the margin as we work through those generic issues and those the ending of the Synagis co-promotion.

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

Rick Wise - Bear Stearns

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

John Thomas

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

Rick Wise - Bear Stearns

Good. Two last questions. First, just in general, International Nutritionals obviously had a stellar quarter. How sustainable is that kind of growth as we look over the next year or so? Or how should we think about 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 with or without in '08. But, truly the market outlook for these procedures in general is tougher today than it was when you bought the Guidant business a year 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 is entering one and the longer term positive contribution it can make is it going to be less than you might have dreamt at one time?

Tom Freyman

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

So we are still very happy with the acquisition, the product, as you know, the XIENCE data actually came out a lot better than even we anticipated when we brought the company. So that's clearly an upside to our original modeling. We thought it would be equivalent and we turned out to be superiors. 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 that organization are very solid and we believe we'll have a series of innovations that'll continue to sustain our position in that market going forward.

And, Rick in regards to your question on international nutritional. We have obviously been very pleased and for those who don't recall, remember we created that business internally and separated it from our overall AAI business what used to be AI international business so that we could get the focus and the results that we are seeing now. And so the growth that we saw this quarter, we think is very sustainable, in fact, in the near-term, the fourth quarter our outlook is even better. We expect very strong double-digit growth going into the fourth quarter and for next year a little early to give precise guidance, but based on the trends, based on the emerging market growth, the products and the dynamics in terms of demographics and so forth, outside the 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 the longer term plan horizon for this, and in the 2008, strong double-digit growth is expected to continue, I mean there is tons of potential in this market and I would remind you that we are building a very large plant in Singapore, and the anticipation of that, and we are putting our money behind our forecast. So this is a business that's going to continue to be a big contributor to our growth for years to come.

Rick Wise - Bear Stearns

Appreciate that. Thanks.

John Thomas

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


Thank you. Our final question, is from Sara Michelmore and please 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 in international markets. It’s obviously a big piece of the overall revenue stream there, and it's been outpacing the US growth pretty substantially. Can you just give us a sense of what the growth drivers there, either by country market 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. I think, overall, and just the general market, there is low penetration of biologics, and we have seen that penetration rate for the market continue to increase 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 dosage delivery system for HUMIRA, has been very well received in those market. So, the penetration overall is probably the biggest factor having excellent data as we've shown with HUMIRA, rheumatology first and then with psoriatic arthritis and now Crohn's.

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

Sara Michelmore - Cowen & Company

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

Tom Freyman

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

Sara Michelmore - Cowen & Company

Okay. Thank you.

John Thomas

Thank you. And that concludes our conference call. A replay will be available after 11 a.m. Central Time today on our website, at, 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. on Wednesday, October 24th. Thank you all for joining us.


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

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Source: Abbott Laboratories Q3 2007 Earnings Call Transcript
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