Abbott Laboratories Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: Abbott Laboratories (ABT)

Abbott Laboratories (NYSE:ABT)

Q2 2012 Earnings Call

July 18, 2012 9:00 am ET


John B. Thomas - Vice President of Investor Relations & Public Affairs

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

Larry Peepo


Michael N. Weinstein - JP Morgan Chase & Co, Research Division

David R. Lewis - Morgan Stanley, Research Division

Jami Rubin - Goldman Sachs Group Inc., Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Jeffrey Holford - Jefferies & Company, Inc., Research Division

Charles Anthony Butler - Barclays Capital, Research Division


Good morning, and thank you for standing by. Welcome to Abbott's Second Quarter 2012 Earnings Conference 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.

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

John B. Thomas

Good morning, and thanks for joining us. Also on today's call will be Tom Freyman, Executive Vice President, Finance, and Chief Financial Officer; and Larry Peepo, Divisional Vice President of Investor Relations.

Tom will review the details of our financial results for the quarter and outlook for the year. Larry and I will then discuss the highlights of our major businesses. Following our comments, as always, we'll take any questions that you might have.

Some statements made today may be forward-looking, including the planned separation of the research-based pharmaceutical company, AbbVie, from the diversified medical products company, Abbott, and the expected financial results of the 2 companies after separation. 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.

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, 2011, and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

In today's conference call, as we always do, non-GAAP financial measures will be used to help investors understand our 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 with that, I will now turn the call over to Tom. Tom?

Thomas C. Freyman

Thanks, John. For the second quarter of 2012, Abbott delivered ongoing earnings per share that exceeded our guidance range, reflecting growth of nearly 10%, and we're confirming our full year ongoing EPS guidance range for 2012. We also made significant progress in our work to separate our research-based pharmaceutical business into a new publicly traded company and we remain on track to complete the separation at the end of this year.

For the second quarter, we reported ongoing diluted earnings per share of $1.23, an increase of nearly 10% over the prior year, exceeding our ongoing EPS guidance range of $1.20 to $1.22. Sales for the quarter increased 6.7% on an operational basis, that is excluding an unfavorable 4.7% impact from exchange rates. Operational growth was driven by strong performance across a number of our products and businesses, including emerging market operational growth of more than 12%. Including the negative impact of exchange, reported sales increased 2%.

In the second quarter, we experienced one of the larger exchange effects we've seen in a single quarter in some time. This exchange impact was approximately 1% more unfavorable than our estimate when we provided guidance in April, reflecting changes in rates since that point in time.

Given the significant impact of exchange on top line results, to understand underlying growth across our businesses it's particularly important this quarter to focus on operational growth, that is growth before the impact of exchange as detailed in our earnings news release. For example, exchange trimmed almost 10% off reported growth in our international Proprietary Pharmaceuticals and Established Pharmaceuticals businesses in the quarter. Both businesses reported accelerating operational growth in the quarter, at or above our previous expectations.

To help you understand underlying growth in both the Proprietary Pharmaceuticals and diversified medical products businesses, John and Larry will also outline exchange impact in detail in their remarks as well as other transactional effects impacting some of the businesses, such as the phaseout of Promus royalty revenue in the Vascular business.

As we'll discuss today, exchange is expected to continue to impact sales in a significant way in the second half, in particular in the third quarter.

During the quarter, we also saw a continued meaningful improvement in the adjusted gross margin ratio, up 310 basis points from the prior year, or more than 63%, as a result of the many margin improvement initiatives we've been implementing across our businesses as well as the impact of exchange.

In the quarter, we saw improvements in the operating margin ratios over the prior year in our Vascular, Nutritionals and Diagnostics businesses. In the quarter, we delivered a 170-basis-point improvement in the company's adjusted operating margin ratio while continuing to invest in the businesses.

Ongoing R&D investment approached 10% of sales, reflecting continued progress across our new product programs. We also increased SG&A investment behind many of our key products and businesses to drive future growth.

Turning to our outlook for 2012. Today, we're confirming our full year 2012 ongoing earnings per share guidance of $5 to $5.10, which represents growth of 8.4% over 2011 at the midpoint of the range. With our planned separation on track for completion at the end of this year, the guidance we provided continues to reflect a full year outlook for the company in total.

Regarding sales growth for 2012, we continue to forecast a full year operational growth in the mid-single digits. Based on current exchange rates, we would see a negative impact of exchange on sales of approximately 3.5% for the full year, which is 1 percentage point more negative than our previous guidance. We continue to forecast reported sales growth, that is net of exchange, in the low single digits for the full year.

Also for 2012, we're forecasting continued improvement over the prior year in our adjusted gross margin ratio, which we expect to exceed 62% for the full year. This reflects the favorable impact of efficiency initiatives, mix and the impact of foreign exchange, partially offset by the expected continued decline in U.S. lipid sales as well as the phaseout of Promus royalty revenues in our Vascular business.

We're forecasting continuing investments to drive growth in 2012 and beyond with full year ongoing R&D of 9.5% to 10% of sales and ongoing SG&A of approximately 28% of sales.

Overall, we continue to expect to expand our operating margin ratio by around 100 basis points in 2012. We're forecasting ongoing net interest expense of approximately $425 million, and we continue to expect an ongoing tax rate of 14.5% to 15% for the full year 2012.

Turning to the outlook for the third quarter. We're forecasting ongoing earnings per share of $1.26 to $1.28. We forecast specified items of $0.15 in the third quarter, primarily reflecting onetime costs related to the separation and costs of previous restructuring and integration actions. I'll discuss onetime separation costs in more detail in a moment.

Our operational sales growth in the third quarter is expected to be in the mid-single digits. At current exchange rates, we'd see a roughly 5-percentage-point negative impact from exchange in the third quarter, resulting in reported sales growth in the low single digits.

We're forecasting an adjusted gross margin ratio of approximately 62% in the third quarter, an increase from the third quarter of 2011.

As mentioned, we remain on track with our plans to separate Abbott at year end into 2 leading health care companies, one in diversified medical products, which will continue to be named Abbott, and the other in research-based pharmaceuticals, named AbbVie. We expect the separation will provide 2 unique and compelling investment opportunities for shareholders.

Our transition organization has been fully engaged in the separation since our announcement, and we continue to work through the details of separating the 2 organizations. The process is proceeding according to plan and is going well.

Most recently, last month, we filed our initial Form 10 for AbbVie that provided historical results for AbbVie on a GAAP basis for the past 3 years and for the first quarter of 2012. These historical results include an allocation of certain costs previously held at the corporate level to the business. In addition, senior management assignments for AbbVie were identified.

Also since the April call, we've established new short-term credit facilities for both companies, which will back up commercial paper borrowings as well as a bridge credit facility to support the previously discussed refinancing of long-term debt in anticipation of the separation.

In the second half of this year, we expect to file amendments to the Form 10 as more information becomes available. These amendments will include 2012 quarterly results for AbbVie as we progress through the year and pro forma adjustments to reflect the impact of expected debt, cash balances and interest expense for AbbVie as an independent company. We'd expect amendments to our filing until it's declared effective later in the year.

Also, we're now in a position to forecast 2012 onetime costs associated with the separation. Through the first 2 quarters of 2012, we've incurred $0.06 per share in separation costs and we expect to incur another $0.17 per share in the second half of 2012. This is now included in our forecast of specified items for 2012.

As previously indicated, as we establish AbbVie's capital structure, we'll also expect to incur onetime bond refinancing costs. As you know, all of Abbott's debt is currently carried by the parent company, and ultimately, a portion of the debt will be carried by AbbVie. So we have plans to execute a tender process for a portion of the existing Abbott debt, funded by the proceeds of debt to be issued by AbbVie. We expect the AbbVie debt to be issued prior the separation while AbbVie is still a wholly-owned subsidiary of Abbott. The expected onetime financing costs associated with that process will be largely a result of today's interest rates being significantly lower than the rates currently paid on Abbott's bonds. We'll provide a forecast of these onetime costs, which will be a function of the dollar amount of bonds tendered and market conditions, as we get closer to the tender date in the second half of 2012.

Regarding the timing of separation. We're on track to be ready to separate at the end of this year, assuming approvals progress as expected. Given this likely timing, for a number of reasons, it would make sense for Abbott and AbbVie to become separate companies beginning on the first day of the new year. As you can imagine, there are many aspects of the separation that will be simplified by completing the full year 2012 as one Abbott and beginning 2013 as separate companies.

Shortly after final review and approval of the transaction by our board, expected later this year, we would issue a news release that would announce a special dividend distribution of all the outstanding shares of Abbott -- of common stock of AbbVie to Abbott shareholders as well as the distribution ratio, record date and payment date for the distribution, which will be the first date that AbbVie is an independent company.

As we proceed towards the separation date, we'll be initiating a comprehensive investor relations effort to provide investors with more information regarding the 2 companies. This will include road shows for both companies with their respective senior management teams.

So in summary, we're delivering on our expectations for 2012 and confirming our 2012 ongoing EPS guidance, which reflects strong top-tier performance as we execute the steps necessary to separate Abbott into 2 leading healthcare companies at the end of this year.

With that, let's turn to the business operating highlights. John?

John B. Thomas

Thanks, Tom. I'm going to start with our diversified medical products businesses, and then Larry will discuss the Proprietary Pharmaceutical business, which will become AbbVie.

Operational sales for our diversified medical products businesses increased 4.5% in the second quarter, excluding the negative impact of foreign exchange. So on a reported basis, sales were roughly flat.

As you know, this year, we're experiencing a negative transitional impact to our top line growth rate from the phaseout of certain royalty revenues in our Vascular business, as well as the shift to direct distribution in certain markets in our International Nutrition business. Excluding these transitional impacts, sales for diversified medical products approached 7% this quarter.

We also continued to expand operating margins in the quarter across our diversified medical products businesses, including Nutrition, Diagnostics, Vascular and Diabetes Care.

So let me start with Nutrition where global sales in the quarter increased more than 8% on an operational basis and more than 6% on a reported basis, which of course, includes the impact of foreign exchange. In the U.S., sales increased 13% with U.S. Pediatric Nutritionals sales increasing 25%. We continue to increase our share position in the U.S. infant formula market with Similac and remain the clear market leader. We expect continued growth of our Similac brand this year as we launch new products to support it in the prenatal segment of the market. Our toddler brand, PediaSure, continues to grow at a double-digit pace. And in the second quarter, we launched the new PediaSure SideKicks Clear beverage that is helping to drive growth.

U.S. Adult Nutritionals sales increased 3% in the quarter as we exited certain lower-margin brands in the quarter as part of our ongoing margin improvement initiative. Excluding this impact, sales increased in the high single digits, driven by strong growth of both Ensure and Glucerna. In fact, these 2 products combined are on track to generate roughly $2 billion in full year global sales this year alone.

We continue to launch new innovations to these product lines that are driving sustainable growth. In the second quarter, we launched a new product called Ensure Clear, which is a new fruit-flavored Ensure brand with the same supplemental nutrition as our traditional Ensure Shakes.

Outside of the U.S., Nutritionals sales increased 4.5% on an operational basis with both pediatric and adult nutrition growing at a similar mid-single-digit rate. As we saw in the second quarter, top line growth in International Nutritionals sales this year is expected to be lower than underlying demand, as we transition from a distributor model to a direct distribution model in certain markets. As we discussed, this new distribution strategy is another component of a comprehensive initiative in our global Nutrition business to drive significant gross and operating margin improvement. In fact, we expect to improve AN operating margin from the low teens in 2011 to our target of more than 20% by 2015 through these and numerous other efforts.

In addition to the direct distribution I mentioned, we're also focused on manufacturing, distribution and logistics where we're improving our production processes and building more efficient plants that are closer to our customers, particularly in fast-growing emerging markets. Construction of 3 manufacturing facilities are underway in the U.S., China and India.

We're also reducing product costs on our Nutrition business such as packaging costs, ingredient costs and material costs. And we're improving our mix. We're assessing both product and geographic mix to focus on our more profitable Nutrition segments. We're implementing a number of these improvement initiatives in this year, 2012, which are expected to drive significant operating margin expansion in this business beginning next year in 2013 and beyond.

As we look ahead to the third quarter in our global Nutrition business, we expect high single-digit growth on an operational basis and mid-to-high single-digit growth on a reported basis with the impact of foreign exchange. This third quarter outlook for Nutritionals includes mid-to-high single-digit growth in the U.S. and double-digit operational growth internationally, with mid-single-digit growth internationally on a reported basis.

Let's move on to Established Pharmaceuticals, which includes international sales of our branded generics portfolio. Sales in the quarter increased nearly 4% on an operational basis. Including a nearly 10% negative impact of foreign exchange, reported sales declined mid-single digits. Emerging markets represent about 60% of total EPD sales, and in the second quarter, emerging markets sales increased in the low double digits on an operational basis. We're growing in these markets as we continue to expand our presence and launch new brands, packaging enhancements and new formulations.

Our large and growing portfolio of more than 500 established pharmaceuticals consists of trusted, well-known brands that have broad use throughout the world. Over the next several years, we expect to bring the benefits of these medicines to much broader patient populations through registrations across multiple geographies as well as launches of improved formulations to enhance efficacy and improve convenience.

So as we look ahead to the third quarter in EPD, we expect mid-single-digit growth on an operational basis, that is, before the expected nearly 10% negative effect of foreign exchange. As a result, reported sales for the third quarter in EPD are expected to decline in the mid-single digits.

In Core Laboratory Diagnostics, which includes immunoassay, hematology and blood screening, global sales increased 8.6% on an operational basis this quarter. Reported sales increased 3.3%, including a more than 5% negative impact from foreign exchange. In the U.S., sales increased 15%. The strong growth was driven by continued uptake of our ARCHITECT immunoassay and PRISM blood screening systems, driven by strong commercial execution.

Outside of the U.S., sales increased 7% on an operational basis and 1% on a reported basis. We delivered strong growth in emerging markets with sales in China, Brazil and Russia collectively increasing approximately 30% on an operational basis. In each of these markets, we continue to expand our presence with numerous new account wins internationally.

In Point of Care Diagnostics, worldwide sales increased more than 14% on an operational basis. And in Molecular Diagnostics, worldwide sales increased 5.5% on an operational basis.

So looking ahead to the third quarter in our global Diagnostics business, we expect mid-to-high single-digit growth on an operational basis and low single-digit growth on a reported basis.

So let me move on now to medical devices and our vision care business, where global sales increased low single digits in the second quarter on an operational basis. This was driven by mid-single-digit operational growth in cataract, our largest, most profitable and fastest-growing segment within vision care. We also saw a continued strong double-digit cataract growth in a number of key emerging markets such as India and China.

Looking ahead to the third quarter in vision care, we expect low single-digit sales on an operational basis and roughly flat sales on a reported basis.

In our global Diabetes Care business, worldwide sales increased 3.3% on an operational basis and declined 1% on a reported basis. U.S. sales increased more than 8% as we continued to execute on our strategy to drive share gains among insulin-using patients, as well as roll out new blood glucose meter InsuLinx in the U.S. International sales were roughly flat on an operational basis and down more than 7% on a reported basis, including an 8% negative impact from foreign exchange.

Looking ahead to the third quarter in Diabetes Care, we expect a low single-digit decline on an operational basis and a mid-single-digit decline on a reported basis with better growth expected going into the fourth quarter.

In our Vascular business, reported sales in the quarter included the impact of the phaseout of certain royalty and supply arrangement revenues, including Promus, as well as the negative impact of foreign exchange. Excluding these impacts, worldwide Vascular sales increased 4.6%. As a reminder, the U.S. Promus transition will be completed by the end of this year and that positions our Vascular business in 2013 for stronger reported sales growth. Operating margin in our Vascular division remains strong, increasing year-over-year.

In the second quarter, our Vascular business delivered strong growth internationally, increasing 11% on an operational basis. Sales in emerging markets, which comprise more than 20% of total Vascular sales, grew more than 25% on an operational basis.

Worldwide sales of our XIENCE drug-eluting stent franchise were approximately $400 million in the quarter, and that's an increase of 5.6% on an operational basis. Outside of the U.S., which is about 65% of our worldwide drug-eluting stent business, sales grew more than 10% on an operational basis.

In Japan, in the second quarter, we launched XIENCE PRIME, our next-generation drug-eluting stent, where we continue to hold leading share in the exclusive position in the long-length Everolimus Eluting Stent segment. In the U.S., XIENCE sales declined modestly year-over-year despite the expected trialing related to a new competitive product.

And we're on track to launch our next-generation XIENCE Xpedition in the second half of this year in Europe and in 2013 in the United States. Xpedition combines the impressive safety and efficacy of XIENCE and sets a new standard for deliverability. Also in our pipeline, we continue to expect to launch ABSORB, our bioresorbable vascular scaffold, in Europe by year end. To date, more than 1,000 patients have received ABSORB.

In Endovascular, sales increased in the low single digits on an operational basis, including nearly 10% growth internationally.

In structural heart, MitralClip, which is our product for the treatment of mitral regurgitation, continues to see strong demand outside of the U.S. with sales of $23 million this quarter.

So as we look ahead to the third quarter in our global Vascular business, including the expected decline of royalty and supply arrangement revenues, as I mentioned earlier, as well as the negative impact of foreign exchange, we would expect reported sales to decline mid-single digits, including roughly 5% of negative foreign exchange impact.

Finally, we continue to execute on our margin expansion programs, as Tom mentioned, in each of our major diversified medical products businesses with Nutrition, Diagnostics, Vascular and Diabetes Care seeing especially good improvement in the second quarter. As a result, the adjusted operating margin increased 170 basis points over 2011, as Tom mentioned. We expect continued steady margin expansion for our diversified medical products businesses over the course of this year and going forward into 2013 and beyond.

So with that, let me turn it over to Larry, and he will review the Proprietary Pharmaceuticals business. Larry?

Larry Peepo

Thanks, John. Worldwide Proprietary Pharmaceuticals sales increased 9.3% on an operational basis, excluding the negative impact from foreign exchange. On a reported basis, global sales increased 4.9%, including growth of nearly 8% in the U.S. and reported growth of approximately 1% internationally, which as Tom mentioned, includes nearly 10 percentage points of negative exchange.

In immunology, global HUMIRA sales increased 23% on an operational basis and more than 16% on a reported basis. Performance was driven by strong growth in the U.S. and internationally, consistent with the underlying trends we saw throughout the quarter.

We're continuing our development efforts for HUMIRA, including the study of new indications. We recently received a positive opinion in the EU for the treatment of axial SpA, a condition associated with chronic back pain and stiffness that can also be accompanied by the presence of arthritis, inflammation in the eye or GI tract. Upon a final decision from the European Commission, HUMIRA will be the first and only medication for this chronic condition. And this approval will mark the eighth major indication for HUMIRA in the European Union.

HUMIRA's utility across a growing number of diseases is one of the many attributes that set it apart from other competitive agents. HUMIRA currently holds the #1 global share position, and demand continues to outpace the global market, where we're seeing strong market growth both in the U.S. and internationally. We're well on track to achieve our sales growth outlook for HUMIRA in 2012.

Moving onto AndroGel, where U.S. sales were approximately $275 million, up more than 26%. AndroGel holds a strong leadership position in the testosterone replacement market, where growth is being driven by increasing diagnosis and treatment of low testosterone. AndroGel 1.62, our new low-volume formulation, has quickly become a leading therapy in the category, now accounting for more than half of AndroGel total franchise sales.

U.S. sales of CREON were $88 million, up more than 12%. CREON maintains market leadership in the pancreatic enzyme market, where we continue to capture the vast majority of new prescription starts.

U.S. sales of Lupron were $140 million. Our 6-month formulation approved last year continues to perform well, driving share gains and further expanding our category leadership.

U.S. sales of Synthroid were approximately $120 million in the quarter. Synthroid maintains strong brand loyalty and retains more than 20% market share despite the entry of generics into the market many years ago.

Moving on to our more mature lipid franchise, where, as expected, global TriCor/TRILIPIX sales were $388 million, down 6.6%, and sales of Niaspan were $211 million, down 14.7%. As discussed last quarter, our lipid franchise has been impacted by softness in the overall branded cholesterol market, as well as continued impact from last year's ACCORD and AIM-HIGH study results.

So as we look ahead to the third quarter in our global Proprietary Pharmaceuticals business, we expect low single-digit growth on an operational basis. We're forecasting a negative impact from foreign exchange of roughly 4.5%, which will lower reported growth in the quarter.

Moving on to our Proprietary Pharmaceuticals pipeline, where we continue to make good progress. Starting with our renal care pipeline, where we have compounds in development for chronic kidney disease and acute kidney injury, bardoxolone is a promising treatment in Phase III development for CKD with our partner, Reata. Data to date have been unprecedented, showing treatment with bardoxolone produces significant and sustained improvement in kidney function. Enrollment in the Phase III study is ahead of schedule, reflecting the significant demand for new therapies. We expect results from this 2,000-patient global trial in 2013.

Also in development for the treatment of kidney disease is atrasentan. Results from a Phase II dose-ranging trial showed atrasentan reduced protein in the urine, a symptom that is often predictive of renal function. A Phase IIb study in patients with diabetic kidney disease is currently underway, with results expected later this year.

We recently acquired global rights to a novel investigational compound from Action Pharmaceuticals (sic) [Action Pharma] for the prevention of acute kidney injury or AKI. AKI is a prevalent complication in patients undergoing major cardiac and abdominal surgery. There are currently no pharmacologic treatments for AKI, which is known to be associated with increased short- and long-term mortality, as well as prolonged hospitalization and permanent decline in renal function. ABT-719, as we now know it, is currently in Phase IIb development with potential market entry in the 2015 time frame.

Moving on to immunology, where we have a number of next-generation programs underway, all with the objective to raise the bar with differentiated efficacy and safety. This high bar is important, as we believe the success of new compounds will be based on their ability to offer incremental efficacy and safety benefits beyond what's currently available to physicians and patients today. Our programs span both small molecule and biologic targets.

Our next-generation oral JAK-1 inhibitor, in development with partnership with Galapagos, is currently in Phase IIa development for RA with the potential to start Phase IIb next year. We believe this molecule, which preferentially targets the JAK1 pathway, differentiates it from other JAKs in development and may lead to a better overall profile. The early Phase II results presented at the EULAR meeting last month confirmed this compound's promising profile.

BT-061 is our anti-CD4 biologic in development in partnership with Biotest. The compound is currently in Phase II clinical trials for RA and psoriasis.

Our DVD-Ig platform holds promise in the treatment of RA as well as other conditions. This proprietary technology unites 2 antibodies in a single molecule with dual variable domains.

Last year, we started a Phase I study of ABT-122, which pairs 2 established mechanisms, anti-TNF and IL-17, with the goal of elevating efficacy and improving the overall clinical profile in RA.

Additionally, ABT-981, which pairs IL-1alpha and IL-1beta, is currently in Phase I for osteoarthritis.

We are also evaluating a number of other oral candidates, including an internal JAK1 candidate, a SYK inhibitor, as well as next-generation antioxidant inflammation modulators, or AIMs, through our collaboration with Reata.

Moving on to neuroscience, where we're developing compounds to address conditions such as Alzheimer's disease, Parkinson's, schizophrenia, pain and MS. Daclizumab is a next-generation biologic for MS, currently in late-stage development with a partner company. Results from the Phase III study are expected in 2014.

ABT-126 is our alpha7 NRR. It's currently in mid-stage development for Alzheimer's disease and schizophrenia. Preclinical and clinical data from this mechanism indicates the potential for improvement in a number of cognitive areas associated with both conditions. We recently initiated Phase IIb studies in CDS and Alzheimer's disease.

We're also developing an intestinal gel for the treatment of advanced Parkinson's disease. The gel, currently in advanced clinical development in the U.S. and marketed as Duodopa in Europe, consists of 2 compounds with proven efficacy in this disease. We expect to complete our U.S. registration submission this year.

Moving on to oncology, where we're focused on developing targeted treatments that inhibit tumor growth and improve response to common cancer therapies. Elotuzumab is being developed with a partner company for the treatment of multiple myeloma, the second most common blood cancer. The Phase III study, which is evaluating elotuzumab and standard of care in both refractory and first-line multiple myeloma, is ongoing. We also have active PARP and Bcl2 inhibitor programs currently underway, as well as a number of other early-stage oncology compounds in development.

Moving on to women's health, where we're studying elagolix for the treatment of uterine fibroids and endometriosis. The compound has a unique profile that provides symptom reduction while avoiding the significant bone loss or other adverse effects that can sometimes be associated with current treatments. The Phase IIb -- or Phase II clinical program for fibroids is ongoing and we recently initiated the Phase III study in endometriosis.

And finally, turning to our HCV program, where we have a broad portfolio with compounds in development spanning 3 mechanisms of action, including protease, non-nucleoside polymerase and NS5A inhibitors. We presented Phase II data at the EASL meeting in April, demonstrating that Abbott's 12-week interferon-free regimen is capable of delivering 93% to 95% cure rates across all genotype-1 treatment-naive patient subtypes. Data showed that the regimen, which included just 2 of our 3 compounds in development, was well tolerated and most adverse events were mild in severity.

We're building on these strong results with data from our large global Phase IIb Aviator trial, a 14-arm, 560-patient study that includes various combinations of all 3 compounds in our portfolio. We expect to present results from this study at the American Association for the Study of Liver Diseases meeting this fall. We expect to start our Phase III program in 2013 with commercialization in 2015, putting us in a very competitive position. We have a high level of confidence that our HCV compounds in development will dramatically change the treatment landscape.

So in summary, this quarter, Abbott delivered strong performance with ongoing EPS growth of nearly 10%, exceeding our guidance range, and a gross margin ratio of more than 63%, up 310 basis points from the prior year. We confirmed our outlook for 2012 ongoing earnings per share and remain focused on the process of separating Abbott into 2 leading healthcare companies, which is on track to be completed at the end of this year.

With that, Tom, John and I will be glad to take your questions. Operator?

Question-and-Answer Session


[Operator Instructions] Our first question today is from Mike Weinstein from JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Let me just ask one question, Tom. Just on the guidance, you kept your guidance unchanged. We've obviously seen companies this week that have trimmed their guidance for the year because of the currency moves. Is there a way to calculate what the FX move has meant to your bottom line? I know you guys are pretty well hedged, but any way to do that math for us to give a sense of what you're absorbing here?

Thomas C. Freyman

Well, Mike, as we talked about, clearly there was a significant top line impact across the businesses and we tried to provide some pretty good detail on that. And as we talked about in the past, and you alluded to it, the way we were structured around the world in terms of our manufacturing sites and kind of our cost centers and really the way we've organized ourselves, our read as we compare ourselves to others -- and it's hard to do because we don't know exactly what's going on in other companies -- because of that we're probably somewhat less exposed to currency movements. I would say that, certainly, it's not 0. We have had some effect this year. But the way we've looked at it and we've gone through the year is that things like this happen every year and we try our best to manage through it. When John talked about the plants in Nutrition that we're building around the world, I think it's indicative of the approach we've taken to some degree. Certainly, when we build those plants and get them closer to the customers, it makes a lot of sense from a logistics perspective and in terms of minimizing inventories and the like, when you're closer to the markets. But another benefit we see from that, and we really do factor it into our thinking as we look at the plant locations, is that there's a better match of currency between revenues and costs. And I think we've been pursuing that thinking for a number of years as we make our investments. And -- but I think that does help us be a little -- a little bit less exposed. So certainly, we've had some impact this year, but it's fallen into the range of the types of things that happen to the business every year, which is our job to manage. And because of some -- the margin performance you're seeing this quarter, some strength in the businesses, we're able to confirm our guidance for the 2012 year.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

With the Form 10 filed this quarter, let me just ask a couple of questions that I've gotten a lot the last several weeks. One of them is, as we look to 2013, so if we assume Jan 1, 2013, there's these 2 separate companies. How should we think about the earnings impact of the separation? I think when you guys talked last October, you were hoping to offset some of that naturally dilutive impact of having to create a separate infrastructure for AbbVie. Should we look at it as, okay, take the 2013 EPS estimate for consensus or your own estimate and then separate that between the 2 companies? Or should we assume that there's some dilution off the 2013 current Abbott number as we separate the 2 companies into separate entities?

Thomas C. Freyman

Yes. I mean, certainly, it's too early to talk about 2013 right now. As we get into the fall and we pursue the road shows that we talked about for the 2 separate companies, it'll be a much more appropriate time. And really, once we get through a bit more of the year, get through some of our planning processes, fully assess what's happening in the environment as we move into next year, that's the time when it's best to talk about our outlook for 2013. So it's a little early now. To your question, I mean it is -- and we've talked about this, that it is clear that we need to set up headquarters functions for AbbVie. We need to incur -- AbbVie will be incurring public company costs such as the audit fees associated with being a public company, those types of things, and their guidance will factor that in. It's interesting: I have seen analysts modeling that from other transactions they've seen and certainly there will be some impact. As you mentioned, we did establish a longer-term goal to offset those types of costs to the extent we can and we're working on that as we speak, and we'll be able to talk more about that in the fall.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Okay. Maybe one last question then. There obviously is a lot of questions about dividend and how you're going to allocate that between the 2 entities. I don't expect you to give the answer today, but maybe you could help, because when people saw the Form 10, they saw that the tax rate for AbbVie in the Form 10 and that got to a whole discussion of U.S. free cash flow versus o U.S. free cash flow and the ability of AbbVie to support a significant dividend despite what looks like a significant portion of its cash flow coming outside of the U.S. Can you just talk to that and just talk about AbbVie's ability to support a significant dividend, given what looks like the vast majority of its profits are coming o U.S.?

Thomas C. Freyman

I mean, I think the key is -- and when you look at the Form 10 and as we look at our forecast for AbbVie, and everyone's known this for quite some time, I mean, there's very significant cash flow in that company. And we recognize and as we think through, and ultimately, the AbbVie board will determine the amount of dividend. But it's pretty clear, as current board and management team thinks through this, that this type of business should have a substantial dividend. When we talk about the total Abbott dividend being at least equal to the existing -- between the 2 companies, I should say, be at least equal to the Abbott dividend at the time of separation, it's very likely that the larger portion of that will be coming from AbbVie. And they will definitely have the cash flow to support a competitive dividend going forward. That's another item that we'll be going through in detail, exactly how that'll work, in the fall when we talk about 2013 for both companies.


Our next question is from David Lewis from Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Tom, I wanted to come back to Nutritionals. I mean, it still remains probably one of the bigger drivers of the Abbott margin story heading into next year and beyond. So I know you've done some of this publicly, but could you maybe quantify the CapEx and derivative spends sort of required to get to those Nutritionals margins by 2015? And I wonder, you keep talking about 2015. Do you see 2015 as the peak margin? Or do we talk about 2015 because that's really the inflection year for margins?

Thomas C. Freyman

Yes, to -- and I'll answer the last part of your question first. I mean, we're never satisfied, so it was a convenient point in time where a lot of the initiatives we now have underway will have been fully implemented, and certainly gets us back into the range of the levels that we think this business should have at a bare minimum. But you can never rest, and certainly, there'll be a lot more thinking over the next 2 or 3 years to continue that type of improvement as we go beyond 2015. I think the best example of that is our own Diagnostics initiative here, where we have accomplished tremendous things in the first 3, 4 years of that division's margin expansion improvement program. And as I look at this quarter's margin in Diagnostics and I think of where we were 4 years ago, and as I talk to that team and listen to their plans as we move forward, the more you work on these things, the more opportunity you find. And I think that's the type of model we're going to continue to apply across all of our businesses. To your question on capital, to me the most encouraging thing about the capital investments we're making in Nutrition is that it's really driven by demand. And we're building plants in Asia to support rapidly growing markets and developing markets. That's a very good thing. And the U.S. plant we announced a couple months ago, that's driven by a great opportunity we have in the U.S. in the liquids area. And so that's the kind of capital we like to invest. It has high returns and will certainly be a positive for the sustainable cash flow, both in the Nutrition business and the new Abbott in the future. There is some moderate levels, or I would even say modest levels of capital that we would be investing in some of our existing plants to improve our efficiency. But again, those will be the types of things that would have good financial returns, rapid paybacks and would be well spent on behalf of shareholders. So I think all of the news in Nutrition is good and we want to keep building on the success we've had so far.

David R. Lewis - Morgan Stanley, Research Division

Okay. And then maybe Larry, just thinking about HUMIRA, I think most investors would have been surprised to see HUMIRA accelerate yet again here in the second quarter, but that, based on our math, seems to be what you've done. So if you think about maybe price being less of a tailwind in the second quarter, it sort of implies that HUMIRA is either seeing greater share gains than we would have expected or just better general market growth for anti-TNFs. Could you just help us understand what you think are the primary drivers of that sort of re-acceleration, if pricing got a little softer incrementally?

Larry Peepo

Sure. Well, if you look at the underlying trends, you will see very strong growth for HUMIRA. And so as I said in my remarks, the fundamentals continue to support this level of growth. There is a little bit of price, as you mentioned, in there. But I think the key points for us really are in a couple of these larger portions of the market, including dermatology, which continues now to grow double digits. We've actually seen a nice acceleration in that derm market over the last year or so. Some of that is just our own commercial effort and execution. Some of that is awareness of the products in the marketplace via advertising, et cetera. So I think that's become a pretty big component of our growth, and we're gaining share there, displacing the former product that was at the top. We are now #1 here in the U.S. in dermatology. In the gastro space, we continue to see very strong double-digit growth there as well, with HUMIRA gaining share and growing faster than that market. Again, awareness of the disease and really just the overall strength of HUMIRA in gastro as well as dermatology, really. The results from the studies in both of those disease states position HUMIRA quite well relative to the competition. I'd say rheumatology is growing well, mid-single digits. Obviously, it's a more mature market, but we see good share strength there for us as well with our growth outpacing the marketplace. So I think it's really the 3 major components of that overall market, Abbott's overall execution, the product strength, and I think it really points to the durability of that product longer term.

David R. Lewis - Morgan Stanley, Research Division

Okay, just one more quickly, maybe for John. John, you mentioned some comments about Vascular and where you think that franchise can be by the fourth quarter. I just wonder, do you think the U.S. Vascular business can begin getting better in the third quarter? Or is that something we really should be thinking closer to the fourth?

John B. Thomas

No, we -- the fourth quarter was a comment about Diabetes Care, specifically. It'll definitely be getting modestly better as we go into the back half of the year. And I think the main point there is what I talked about in terms of this being a royalty transition year with Promus revenues coming out of the mix, so the non-commercial piece of it had an impact, as well as FX. And the trends are actually pretty good. So if you look at what's happening there and even with the competitive launch of the product that I mentioned coming into the market, XIENCE, alone, was only down about 2%. And the latest share data that we've gotten in the last couple of days indicates that from May to June, we've actually picked up a couple of share points in the U.S. as well. And as you know, worldwide, we continue to do very well with that product and the growth, in particular in the emerging markets, has been outstanding. We also have a number of new products launching. XIENCE PRIME in Japan just recently and then Xpedition will be coming with better deliverability in -- later in the year in the fourth quarter, to your point, and helping that business to improve. And meanwhile, on the bottom line, the business is holding up quite well and doing well in terms of expanding margins.


Our next question is from Jami Rubin from Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

Just have a few questions. Tom, what was the impact of foreign exchange on the 300-basis-point improvement in gross margins? I don't recall foreign exchange being called out so much before, and I just want to understand that.

Thomas C. Freyman

Right. Similar to the first quarter, it was roughly half of the improvement. I don't know -- those of you that follow us for a long time have seen quarters where exchange is a negative. And throughout the first half of the year, it's been about half of our margin improvement. The rest has been executing on the gross margin improvement initiatives we've talked about in detail.

Jami Rubin - Goldman Sachs Group Inc., Research Division

So you would expect, then, gross margins to further improve if currency has gotten worse, correct?

Thomas C. Freyman

Well, our guidance has factored in current exchange rates. That's typically what we do. We don't try to forecast changes. But I think if rates were to hold at this level, you'd see gross margins of the -- in line with our guidance that we've provided. To your point, though, if the euro did weaken quite a bit, yes, you'd probably see a little bit more favorable gross margin, but I'd personally rather have the sales stability and deliver gross margin improvement through our own initiatives.

Jami Rubin - Goldman Sachs Group Inc., Research Division

And just if you could comment on what you're seeing in terms of European austerity measures. I mean, looking at your numbers, it would appear that the currency has been obviously the biggest headwind to international sales. But is there any way that you could quantify what you're seeing in terms of pricing dynamics, tendering? J&J certainly called that out yesterday on their conference call. And if you're seeing any changes in terms of collectibles in some of the markets or receivables? And just my last question and it, I think, refers to an earlier question that was asked. If we look at -- and again, related to the cost of separating the 2 companies, if I look across S&P 500 and other precedent separations that have occurred, it seems that the sort of typical costs that we see regarding additional corporate costs is around 2% of net sales. Is that a fair assumption to make for Abbott? Or is -- are there differences that we should take into consideration? I understand you're not going to give that guidance, but as we're starting to think about this, is 2% of sales fair?

Thomas C. Freyman

That's a lot of questions. I think I'll start on the receivables situation. We saw during the quarter a significant improvement in Southern Europe. Between the -- these governments are taking their situation seriously. They've implemented austerity measures. And in a couple markets, in particular, we saw really, really strong payments in the quarter. And so I think we feel very good about our business in Southern Europe and our ability to sustain that. In terms of Europe generally, maybe -- I guess it's the mix of our business. While certainly it's not a big growth driver right now and in certain pockets, in particular our Diabetes Care business, we have felt a little bit of pressure from austerity, when you look overall at Abbott it's been a fairly modest impact. I think part of that is due to the quality of our products and the differentiation in the market and just basically the fundamental demand for them. As we said, a couple years ago we had a little more price than we'd typically have, but that is largely normalized this year on the pharmaceuticals side of the business, so I'd say that Europe, from a demand perspective, is a relatively modest matter for us at the current time. Just on your question on headquarters costs, again, we'll talk about the modeling of these 2 companies in the fall, and I just don't think it would be productive to talk about what other companies have done in this area at this time.

Jami Rubin - Goldman Sachs Group Inc., Research Division

And just -- I'm sorry, I just -- one last question. Does your tax rate guidance assume the R&D tax credit by the end of this year?

Thomas C. Freyman

No, the -- as you know, the credit is not operative this year, so our guidance does not assume that.


Our next question is from Glenn Novarro from RBC Capital Markets.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Two questions. On the pharmaceutical guidance, does that assume that -- particularly the third quarter guidance that you gave, does that assume TriCor faces a generic competition? And if it does and there is no generics, we've calculated that the impact would be favorable up to $0.05, so I don't know if that's in the ballpark. But would you let that fall to the bottom line? Or would that be reinvested? And then I had a follow-up on stents.

Thomas C. Freyman

Yes. Just to talk about TriCor, I mean, as John and Larry talked about, clearly the lipid space is very soft right now. The branded products are down around 20 -- 29%, 30% year-to-date. And for us -- and we've identified these as mature franchises and we are definitely planning for generic competition in these areas. And our guidance for the third quarter does assume generic competition because, as you know, there are competitors that have a right to launch at any time. I've heard people talk about delays. All I would say on that, and you've kind of touched on it, Glenn, if there was a delay, that's certainly something we can't count on and it is not something that's really meaningful -- would be meaningful beyond 2012 if it were to happen. We need to plan for these products to basically be generic and we've talked about that in the fall. So that's our planning assumption going forward. And to your point, if something was delayed, we would very likely reinvest that back in the business because it really wouldn't be a sustainable benefit.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Okay, and then just on the U.S. stent business, the competitor that you referenced, it's the Medtronic stent Resolute. Do you know whether or not we are now through the trialing period? It seems like maybe it is, because, John, you referenced that you've recently picked up share gains, so I'm wondering if the trialing period's ending there and now XIENCE is back in the position to recapture share. And then do you have any market dynamics, particularly in the U.S., that you can share with us with respect to stent pricing, DES penetration and PCI volume?

John B. Thomas

Sure, yes. So to your first point, yes, it's hard to say that the trialing is over. It's still relatively new, but it is encouraging in terms of the recent trends that we've seen with the 2 major market share data services that we use. We have picked up, in June, 2 to 3 share points depending on which service you use. So that competitive product has picked up about 10 share points. And we -- with the different products that we have launching and Xpedition coming and so forth, there are a number of things there that we're encouraged about. We're also -- we have picked up a couple of major share account wins recently and we have a number of plans in place with the team to compete against that. And obviously, with our depth of data and the deliverability and the overall profile of XIENCE, we have clearly the best-in-class product here. So we still hold the market leadership position in the U.S. We do expect to regain share, particularly as we go into the fourth quarter. As we look at the market dynamics overall, price has been -- it's encouraging. The trend has been more low single-digit decline. So it continues to moderate on a sequential basis. So it's about the third quarter in a row of mid-single-digit-type year-over-year declines, but moderating sequentially to low single digits on price. So that's been encouraging. Clearly, outside of the U.S., where -- it's a different situation. PCI volume definitely impacted the overall market. It was down about 5% in the U.S. So despite that and the competitive entry that you mentioned, XIENCE, as I said before, was only down about 2% in the U.S. So that dynamic we expect hopefully to improve as we go into the back half of the year. And DES penetration has been running around 79% recently.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

And just one follow-up. The competitor launch, which took 10 points, is that continuing to move higher? Or has that kind of stabilized, based on the...

John B. Thomas

It's stabilized and trending slightly downward.


And our next question is from Rajeev Jashnani from UBS.

Rajeev Jashnani - UBS Investment Bank, Research Division

My question was on the Vascular business. I'm just wondering, maybe you could talk about the margins for that business. The margins are up this year despite the royalties going down. And maybe you could talk about what the outlook for that and continued margin expansion there is, especially given that, I guess, a significant portion of that is coming from emerging markets now and which I had thought might have been at a lower margin, but maybe you could touch on that as well.

Thomas C. Freyman

Sure. The Vascular team has done a tremendous job in terms of operating more efficiently, particularly in the manufacturing area, and that's really helped blunt the impact of the Promus royalties on the margin ratio and the operating margin, but that's really what the story is about. The emerging market pricing is actually quite -- in a number of these markets is actually quite reasonable. There tend to be multi-tier markets, where some of the branded products you see in the developed world are -- there's a readiness to pay a premium. And so the pricing actually is quite good in these markets and is really not a negative drag on the operating margin of the business. I will say for Vascular, it's got a good operating margin. That team is looking to certainly continue to improve. But relative to some of our other businesses, it's in a reasonable range and I think you would see relatively modest incremental improvements from here as opposed to step changes.

Rajeev Jashnani - UBS Investment Bank, Research Division

That's helpful. And if I could ask one follow-up on the EPD business. It looks like there was a pretty nice improvement there from the second quarter to the first quarter. Maybe if you could talk about austerity measures, specifically on that business, whether you've contemplated that, whether you could envision that getting any worse. And maybe just touch on what drove the improvement from the second quarter from the first quarter.

Thomas C. Freyman

Well, I think you've captured it properly, that when we look at the EPD performance, it's very good progress in line with what we've been talking about. The growth rate is marching up towards that mid-single range, which is what we'd been expecting for this year and what we expect in the second half. And to remind everyone, this is a business that when you weight out all the markets, we're targeting mid-to-upper growth sustainably here and I think the progress you saw this quarter gives us a good feeling that, that's achievable. And hopefully, as we progress through the year, you'll -- we'll continue to build your confidence in that business with the sales growth in the third and fourth quarters. I think the bigger -- the most important aspect of this business obviously is the emerging markets piece, where demand continues to be strong. And I think what we're starting to see is the execution starting to play out. I mean, this team has really only been in place effectively 1.5 years or so. They're gelling quite nicely. Their strategic plans are beginning to be implemented. And I think we're just starting to see better execution in the field as we get the right people in place and deliver on the strategic plans. And over time, the developed markets will be a smaller part of this business and I think it'll -- as the emerging markets grows and I think that'll provide a nice growth boost as well.


Our next question is from Jeffrey Holford from Jefferies.

Jeffrey Holford - Jefferies & Company, Inc., Research Division

I've got 3. The first is on the gross margin. Just on the actual operational efficiency gains for that, can you just give us a bit more color on what divisions or products that's coming from?

Thomas C. Freyman

Well, as we mentioned in our remarks, the 3 big improvements in the quarter, and you'll see this in the 10-Q when it comes out in the segment footnotes, was Diagnostics, where we're now above 20%. Not many people would've thought that a few years ago. Nutrition, we saw about a 150-basis-point improvement over the prior year. There are some seasonality effects in that business, but we expect again a very -- a nice improvement for the full year in that business. And the Vascular business, we saw over 200 basis points of improvement in the quarter, again from the types of things I talked about on the last question. So those were the 3 big movers for the efficiency gains. And even though it's a smaller business, not to minimize it, our Diabetes Care business, which is a $1-billion business, is also showing very nice margin improvement and John mentioned that in his remarks as well.

Jeffrey Holford - Jefferies & Company, Inc., Research Division

Then I was hoping you can comment on what level of buybacks were made during the quarter, because maybe there were some share options exercised as well. And just related to that also, and if the group is doing it now in its capital allocation process, which parts, post-separation, are more likely to do buybacks?

Thomas C. Freyman

Well, we did around $600 million in buybacks in the second quarter. That brings the year-to-date number to about $1.6 billion, so we have been active there. And similar to my other responses, and I know we are getting close, as we get into the fall here, we'll be able to provide a lot more color on the companies. But certainly, as each talks about the intended uses of their cash flows, whether it's dividend, share buybacks or investments in the business, the teams will cover those issues or those opportunities when we get into the fall.

Jeffrey Holford - Jefferies & Company, Inc., Research Division

And then just the last question is, obviously, you've got some exciting data coming in up in hep C in November. During any of those studies or separate to those studies, have you started doing any co-formulation work with any of the actives? And I don't suspect that you have yet, but when will you start to look at co-formulation of some of those actives?

Larry Peepo

You can assume that we have done a fair amount of work already in co-formulation...

John B. Thomas

With our own products you're talking about.

Larry Peepo

Right, yes, with the 3 products that we have in our development portfolio. You can assume that's underway.


And our final question today is from Tony Butler from Barclays Capital.

Charles Anthony Butler - Barclays Capital, Research Division

If I may go back to Vascular just a minute, I'm very respectful of the comments you made around PCI volume for Q2. But if I look back to the Q1 call, you did forecast for Q2, despite FX and the royalty agreements, that you would have high single digits. So I'm curious if, in fact, Resolute coming to market had a greater short-term impact, if you will, than you might have expected. And I have one follow-up.

John B. Thomas

Okay, Tony, this is John. Yes, I think it's fair to say it had a little bit more impact than we probably originally had forecasted. Also, PCI volume being down 5% was a factor as well. But like I said, the trend here recently is upward and the share count has -- or the share gains over the last month, from May to June, look promising. There's also a number of initiatives that we're doing. And as I said before, in the response to another question, we have recently won a couple of big accounts and that will factor in as we go through the rest of year. The team is obviously very focused, and execution will be important. And we have every confidence that, that team will take the challenge and they are already seeing the results of that in the latest data. And in general, I think there's a number of -- there's a cadence of products launching here that are pretty unique in terms of the timing and the overall attributes across all the segments of the Vascular business, so in DES and Endovascular and our other carotid area and so forth, we have a number of balloons, guidewires, new catheters, Xpedition launching. So generally, we're very encouraged. The U.S. is improving. x U.S., we continue to do well and I mentioned double-digit growth in the emerging markets in my commentary. So overall, it's a pretty good story and the bottom line impact on the businesses is what we've been talking about a lot, and that obviously has been very good. And Tom mentioned that 200-basis-point improvement, so we're working on it.

Charles Anthony Butler - Barclays Capital, Research Division

And then finally, the direct distribution model for which Nutritionals is switching, could you perhaps provide a timeline when you believe that will be fully implemented? And then lastly, if you are to split apart on January 1, if we assume that, do you actually host a Q4 call in January on the consolidated business?

Thomas C. Freyman

What was your first question, Tony?

Charles Anthony Butler - Barclays Capital, Research Division

Yes, it was really on the direct distribution model in Nutritionals. When do you fully believe that will be implemented?

Thomas C. Freyman

Yes, the key thing there is this is a selective program. It's only certain markets. It's not -- we're already direct in a number of markets and in certain markets it makes sense for us to continue to work through distributors, so it's only selected markets. The vast majority of that should play through this year. There's probably a modest amount in 2013 and we had a fair amount of it in the second quarter here. So I think it's really important to just keep in mind that this is a -- only select markets and the majority will play through this year.

John B. Thomas

And you mentioned the Q4 call...

Charles Anthony Butler - Barclays Capital, Research Division

On the Q4 call.

Thomas C. Freyman

That is a good question and it's a unique situation for us as well, and we'll be talking that through with the management team. Obviously, if this timing plays out the way I outlined on the call, it will be kind of a unique period of time when the report will be on the total company. But clearly, investors will be focused on the future 2013 and it'll clearly be necessary for both management teams to be talking about that. So the exact way we structure it has not been determined, but we are talking about that and we should have some answers for you in the coming months.

John B. Thomas

Yes. And lastly, Tony, I'd say -- just I wanted to mention this and I forgot to, on your question about Vascular. Just remember that when you exclude the Promus royalty transition, which is this year and obviously will improve going forward into 2013, if you exclude that situation and FX, the underlying business there grew in the mid-single digits globally. And so I think we're pretty pleased with that overall.

Actually, let me just remind everybody of the replay, sorry about that. The replay of the call will be available after 11 Central Time today on our website at, and after 11 Central via telephone at (402) 220-9697. The confirmation code is 3458. The audio replay will be available until 4 Central on Wednesday, August 1. Again, thanks, everybody, for joining us today.


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

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