Abbott Laboratories (ABT) Q4 2007 Earnings Report, Transcript and Summary

Good morning and thank you for standing by. Welcome to Abbott's Fourth 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. Thank you, sir; you may begin.

Thanks, good morning and thanks for joining us everybody. Also on today's call will be Miles White, Chairman of the Board and Chief Executive Officer; and Thomas Freyman, Executive Vice President, Finance and Chief Financial Officer. Miles will provide opening remarks on Abbott's 2007 performance and outlook for 2008, and Tom will review the details of our financial results, I will then add some additional information on the major businesses. Following our comments, we will take any questions that you have. Some statements made today maybe forward-looking for purposes of the Private Securities Litigation Reform Act of 1995 and the cautions of these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological, and other factors that may affect Abbott's operations are discussed in Item 1A risk factors to our Annual Report on Securities and Exchange Commission Form 10-K for the year ended December 31st 2006, and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. In today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. If non-GAAP financial measures are reconciled with the comparable GAAP financial measure and earnings news release and regulatory filings from today, which will be available on Abbott's website at abbott.com. So with that, I'll turn the call over to Miles. Miles?

Okay. Thanks John, and good morning to all of you. As you can see from our earnings news release, Abbott reported another year of strong results in 2007 while at the same time investing for our future. In addition, we positioned Abbott for continued success by executing on our major priorities and goals for the year. Our confidence in the future is based on the strength and the balance of our broad mix of leading businesses from medical products to pharmaceuticals to nutritionals and diagnostics. Together these businesses provide a diverse mix of cash flows and multiple sources of earnings growth that should help us achieve consistent leading performance in the coming years. Going forward, we are targeting higher growth markets including emerging market, where we can distinguish Abbott from the competition with leading technology and innovative new products that meet the needs of patients and customers. In 2007, we saw that focus pay-off as our unique mix of businesses and new product delivered strong results with full year sales growth of more than 15%. For the first time in our history, our mix of total sales favored our international business, which accounted for slightly more than 50% of our $26 billion in sales. Ongoing earnings per share growth for the full year increased more than 12%, and we expect strong performance again this year, which is reflected in our EPS guidance range of $3.20 to $3.25 a share. As we have indicated before, our guidance accounts for realistic assumptions regarding Depakote sales. Tom will walk you through our financial results in a moment, including more details on our fourth quarter results and our outlook for 2008 and John will add further color to our business and product performance. Before they do so, let me start with my perspective on 2007. Our strong financial performance was only one aspect of the Abbott story in 2007. We achieved a number of important milestones that further strengthened our company and complement the changes that we have made; much of what we have accomplished last year will be evident in our performance over the next several years. So, let me take a moment to review some of these highlights. First, we met or exceeded every timeline for regulatory submission or approval across our board base late stage development pipeline. In pharmaceuticals, we received global regulatory approval and launched the Crohn's indication of HUMIRA. We also filed for approval of Psoriasis, which we received in both U.S. and Europe within the last few weeks. In addition, we submitted for the approval of two new products that hold promise for expanding our lipid franchise Simcor, our combination therapy of Niaspan and generic simvastatin and ABT-335, our next-generation fenofibrate. Our fourth product submission was Vicodin CR, our extended release version of the well-known branded pain medication. And finally, our TAP joint venture filed TAK-390MR, its next-generation proton pump inhibitor for treatment of gas from intestinal disorders. The execution of these filings means that over the next 12 months our commercial teams are poised to launch four new Abbott Pharmaceutical brands in the U.S. Our late stage pipeline flow, however, was by no mean limited to pharmaceuticals last year. In our vascular business, we filed for U.S. Regulatory approval of XIENCE V last June, then received a positive recommendation for approval from an FDA Advisory Panel in late November. In our diabetes care business, we launched FreeStyle Lite, our new no-calibration blood glucose monitoring device. FreeStyle Freedom Lite, our second new no-coding meter was launched in Europe and submitted for U.S. approval. In our global nutrition's business, we launched new formulation of our leading and formula brand Similac, and continue to expand the market for adult nutritionals through the introduction of new and short formulation in select markets. In our global diagnostic business, we recently added new assays to PRISM menu strengthening our number one position in the blood screening market. We also launched our new high volume architect Immunochemistry Systems. In a molecular diagnostics, we launched our m2000 Real-Time PCR System in the U.S. So as you can see, we had a good deal of activity on the new product front in 2007. Second highlight from last year was the effective return of cash to shareholders. We paid approximately $2 billion in dividend, the 35th consecutive year of increasing dividend, and we repurchased more than $1 billion worth of Abbott stock. We also used our financial strength to invest more in our R&D pipeline as well as our commercial operations to ensure we fully leverage our late stage pipeline and related new product launches. To that point, last year our combined investments in R&D and SG&A grew double-digits including the impact of the Kos acquisition. Our third major accomplishment last year was refining our pharmaceutical research and development efforts around our early and mid-stage pipeline, where we saw good productivity improvements. Our pharmaceutical R&D teams improved both their execution and their decision making as they moved innovative high quality programs forward more efficiently than in the past and with some tangible results. A significant number of compounds moved from discovery to development last year and more than 75% of our new molecular entities advanced to the next stage of discovery or development. This included promising early stage compounds in neuroscience and oncology as well as later stage therapies such as ABT-874 our next generation IL-12/23 biologic, which we just moved into final Phase III clinical trials for Psoriasis based on outstanding Phase II results. Our fourth major accomplishment of 2007 included two important new capital investments that will support our fast growing business lines. We completed construction of our new state-of-the-art biologics manufacturing facility in Puerto Rico to support our long-term growth outlook for HUMIRA and other innovative biologics that are in development. In addition, we continued construction at our new manufacturing facility in Singapore to support our long-term growth projections for global nutritionals, where consumer demand is driving rapid growth in the fastest growing emerging economies of Asia and Latin America. The fifth major achievement I had mentioned in last year was the completion of the integration of our Kos Pharmaceuticals acquisition, which strengthened our position in lipid management. That gives you a sense for some of the major accomplishments in 2007 in addition to our strong financial results. The common thread among all our achievements last year was that each one of them help position Abbot for consistent performance in the future. And as we enter 2008, our leadership team has outlined new goals and expectations that will drive our organization, and like last year I expect that we will deliver on them. It's very early in the year, but we are up to a good start HUMIRA psoriasis received FDA approval just a few days ago following EU approval in December, so let me discuss HUMIRA first. HUMIRA, as you know, is our flagship biologic for a variety of autoimmune diseases and it continues to have significant long-term potential. In 2007, HUMIRA outperformed on every level and finished the year with total global sales exceeding $3 billion making it the first Abbot brand to reach that level of success. But once last year, the Crohn's indication consistently exceeded our expectation as HUMIRA rapidly gained market share. That level of acceptance continues today with more than one in three biologics patients in the U.S. now receiving HUMIRA for the treatment of their Crohn's disease. We expect similar results for HUMIRA's launch and psoriasis, which is just now getting underway in both Europe and the U.S. supported by clinical data that is truly best-in-class. HUMIRA is differentiated by efficacy and convenience within our global psoriasis market that should reach $3 billion over the next few years making it the fastest growing market segment within biologics. Given HUMIRA's continued strength as well as the promise of our newest indications, we now expect global sales of approximately $4 billion in 2008. As important as it is, HUMIRA represent only one pillar of our global pharmaceutical strategy. As I mentioned earlier, 2007 proved to be a critical year in establishing Abbott as a major player in lipid management currently the largest U.S. pharmaceutical market. So another priority this year is the launch of Simcor, a fixed-dose combination of Niaspan and simvastatin that combines the LDL lowering effects of the statin with the HDL raising benefits of Niaspan. We've built our lipid franchise to address the growing patient need for comprehensive lipid management, where Abbott could participate with as many as five unique therapies by 2010. Of course another priority in 2008 is the approval and launch of XIENCE in the United States and the continued successful launch of XIENCE via new international markets. XIENCE remains the only drug-eluting stent that has demonstrated clinical superiority over another drug-coated stent in controlled randomized clinical trials. A strong body of scientific data for XIENCE as well as our experienced U.S. vascular sales force puts us in a good position when we launch. Recall that Abbott maintains market share leadership in bare metal stents with division platform. So our commercial team does know how to win and what remains a highly competitive market. We are also advancing several next generation stent technologies behind XIENCE V as we work to meet our goal of releasing new technology at regular intervals over the next several years. This includes the continued development progress of our fully bioabsorbable drug-eluting stents, the first and only said program currently in human clinical trials. With the U.S. launch of XIENCE V and the continued strength of our portfolio of related products, our emerging vascular business continues to offer the promise of significant growth in the coming years. International nutritionals is another driver of profitable growth for Abbott and another top priority for 2008. As you saw from today's result, this business grew close to 20% last year. Like others, we have had good success in emerging market such as Southeast Asia and Latin America as improving economies and population growth drive increasing demands for nutritional products. In order to meet this strong, particularly in markets such as China, next year we will open our new manufacturing facility in Singapore. In our other medical products businesses, our priority for 2008 is the continued execution of product launches such as the Architect and PRISM menus and Diagnostics, and FreeStyle Lite and Freedom Lite in diabetes care. We expect continued strong results in these businesses. As I have noted earlier, we have increased the speed and efficiency with which we advance our early stage programs, where Abbott scientists are doing some promising work in areas such as oncology and neuroscience. We will be doing more this year to ensure that our early stage pipeline productivity keeps pace with our late stage pipeline success. So in summary, I am confident that our board mix of high growth businesses provides us with a unique balance one that can help us offset any possible challenges. As we build on that balance model, we are continuing to grow stronger with the diverse array of new earnings growth drivers that should benefit our performance for years to come. With that I will turn it over to Tom and John for a more detailed look at our fourth quarter highlights and our outlook for 2008. Tom?

Thanks, Miles. For the fourth quarter, we reported diluted earnings per share excluding specified items of $0.93 within our guidance range of $0.91 to $0.93. Sales this quarter increased 16.1% including a favorable 4.5% effect on exchange rates. Results were strong across our businesses, with pharmaceuticals, diagnostics, and nutritionals all contributing double digit growth. The adjusted gross margin ratio on the quarter was 58.3% up sequentially from the third quarter. This was somewhat below the prior due to the reduction in the contributions from Synagis and Omnicef in the U.S. and an increase in commodity cost in our nutritionals business. During the quarter, we continue to invest in the business to drive future growth. R&D investments reflect continuing progress in our pipeline. As indicated earlier, this includes the new HUMIRA indications, ABT-874, controlled-release Vicodin and XIENCE as well as several promising Phase I and Phase II Clinical programs in neuroscience and oncology. SG&A expense included the new and ongoing promotional initiatives, including the launch of the Crohn's and psoriasis indications for HUMIRA, the international launch of XIENCE V, and preparation for key product launches in 2008. Income from the TAP joint venture this quarter of $122 million was in line with our expectations. Tax rate for ongoing operations in the quarter was 19.5% consistent with our previous guidance. For the full year 2007, we delivered sales growth of 15.3% and ongoing earnings per share growth of 12.3%. Overall, 2007 was a successful year as we delivered on our financial commitments, and executed on our initiative to ensure a strong 2008, which I will turn to now. For the full year 2008, we expect high single to low double-digit sales growth and we are providing earnings per share guidance of $3.20 to $3.25 excluding specified items. Forecasting steady improvement in the gross margin ratio over 2007, with a ratio between 58% and 59% for the full year 2008, reflecting improved product mix and efficiency initiatives. The forecasting continuing investment and programs to drive future growth with R&D as a percentage of sales between 9% and 10%. SG&A as a percentage of sales for the full year 2007 was close to 27%, and we are forecasting a similar level for 2008. SG&A in 2008 reflects both the synergies of the Kos acquisition and an appropriate level of investments to properly execute five major product launches that are planned for the year. Regarding other aspects of our 2008 outlook we are forecasting income from the TAP joint venture of $350 million to $400 million, and net interest expense of roughly $400 million. We are projecting a modest reduction in the tax rate for 2008 based on continued changes in the mix of income across the various tax jurisdictions. The tax rate for 2008 is expected to be somewhat above 19%. As a result, when you look at the overall P&L for the year, we are forecasting an improvement in our operating margins and net margin ratios in 2008. Now let's turn to our outlook for the first quarter. We are providing earnings per share guidance of $0.61 to $0.63 excluding specified items. Midpoint of this range represents nearly 13% growth over the prior year. We expect somewhat stronger growth over the balance of the year with growth of approximately 13% to 14% over each of the remaining three quarters, forecasting high single to low double-digit sales growth in the first quarter for the gross margin ratio approaching 58%. Given the timing and number of product launches in 2008, we are forecasting SG&A as a percent of sale in the first quarter in the high 20s which should decline as we progress through the year again with the full year average at roughly 27%. With that, let's turn to the business operating highlights. John?

Thanks, Tom. This morning, I will review the performance of our major business segments: Pharma, Nutritionals, and Medical Products, including Diabetes Care, Diagnostics and Abbott Vascular. So let me start with our Global Pharmaceutical business, where sales grew nearly 19% in the quarter and 18% for the full year. In our Immunology business, HUMIRA surpassed our expectations for the full year, exceeding $3 billion in worldwide sales. With its well established safety and efficacy profile, HUMIRA is becoming the anti-TNF therapy of choice. Now with four additional indications approved beyond rheumatoid arthritis, Crohn's disease, psoriatic arthritis, ankylosing spondylitis, and now psoriasis, HUMIRA is securing a strong position in both the gastro and dermatology markets in addition to the rheumatology market. In Crohn's disease, HUMIRA offers the only self administered biologic treatment for patients providing a distinct convenience advantage over the competition. And for this reason and others, we are seeing strong demand from new patients, as well as those switching from other therapies. And following last week's announcements, we just launched HUMIRA for psoriasis in the U.S. following Europe. Our data in psoriasis have demonstrated that three out of four HUMIRA patients achieve 75% skin clearance nearly half of patients reaching 90% skin clearance and nearly one in five patients achieved complete remission from their disease. And HUMIRA is the only therapy that's demonstrated superiority over the standards systemic treatment, methotrexate and a head-to-head clinical trial. This data versus what's been shown with other biologics has raised the bar for reliable skin clearance and moderate to severe psoriasis patients. These results and growing awareness of HUMIRA among dermatologist should provide for a promising entry into this expanding biologics market. It's a market that is currently $1 billion in global sales and is expected to triple in the next several years. In 2008, we expect continued growth across all five of HUMIRA's indication. Now we plan add a six, juvenile rheumatoid arthritis in the coming months. So in 2008, as Miles indicated, we anticipate global HUMIRA sales of approximately $4 billion. In our Lipid Management franchise, Niaspan, our HDL raising therapy posted nearly $180 million of sales in the quarter, exceeding our forecast of $650 million for the full year of 2007. Niaspan is the only prescription therapy capable of increasing HDL 25% to 35% on average with proven cardiovascular outcomes. Low HDL is recognized as an independent risk factor for heart disease in the guidelines developed by the National Cholesterol Education Program, a leading authority on cholesterol management in the U.S. Since the launch last year of a new film coated Niaspan tablets and the additional promotional efforts following the Kos acquisition, we have steadily increased Niaspan share growth. We expect double-digit growth for Niaspan to continue in 2008. At the same time, our sales force in commercial organization are preparing for the first quarter launch of our combination therapy Simcor. We presented Phase III data at the American Heart Association late last year that demonstrated Simcor's role and proving key lipid levels versus the use of a stent alone. Also in the quarter, TriCor had good performance with double-digit growth for the full year as well. TriCor remains the best available therapy for lowering triglycerides with a long established safety and efficacy profile. We submitted ABT-335, our next generation fenofibrate for FDA approval at the end of 2007 and we remain on-track for FDA approval of this product in the fourth quarter of 2008. So, for 2008 we expect strong double-digit growth in our lipid franchise again. Moving and to our virology franchise, where both Kaletra and Norvir were up strong double-digits in the quarter. Kaletra remains the gold standard protease inhibitor providing physicians with the clinical confidence to manage HIV as a chronic long-term illness. In November in the U.S., we launched a new lower strength Kaletra tablets specifically formulated for children, and expect approval on Europe soon. For 2008, we expect worldwide sales of Kaletra in the mid single digit range. Depakote sales in the quarter were up double-digits. Depakote ER, our once daily...once a day version of Depakote accounts for more than 50% of total Depakote prescriptions. With regard to Synthroid, U.S. sales in the quarter were $132 million and $458 million for the full year. For 2008, we anticipate U.S. Synthroid sales to again exceed $400 million. So for 2008 in our U.S. pharmaceuticals business, we expect full year sales growth in the high single-digits, which includes as Miles mentioned a realistic assumption for Depakote sales for the full year. And we expect international pharmaceutical sales growth in the mid to high single-digits. And in the TAP joint venture sales of Prevacid and Lupron in the quarter were inline with our expectations. Earlier this month TAP submitted TAK-390MR, its next generation proton pump inhibitor for FDA approval. A filing, which was completed earlier than expected, includes clinical trial data from over 6000 patients have plans to present data on this product during the first half of 2008. TAP also continues to forecast a mid-2008 submission for Febuxostat, its compound for TAP [ph]. In our Global Nutritionals business, sales in the quarter were up 11%, driven by 26% in international nutritionals as demand continues to increase for high quality nutritional products particularly in the emerging markets. Performance was balanced across both adult and pediatric nutritional. In the U.S., excluding Synagis nutritional sales increased 11% this quarter, with more than 10% sales growth across both the adult and pediatric segments. New product introductions, especially our infant formula Similac Sensitive and Similac Organic are contributing to this momentum. In 2008, we expect mid single-digit sales growth in our U.S. nutritionals business and mid-teens growth internationally. Turning now to our medical product businesses; let me start with diabetes here. Our worldwide sales were up 15% in the fourth quarter, and nearly 10% for the full year. We continue to gain new user share with our more convenient FreeStyle Lite meter. Launched in June, FreeStyle Lite offered blood glucose results at an average of just 5 seconds while eliminating the manual calibration step required by most meters in the market. We are on-track to launch FreeStyle Freedom Lite, our second no-coding meter in the U.S. this quarter, following a successful introduction in Europe last October. With both FreeStyle Freedom and Lite products we continue to differentiate ourselves from the competition. We also further expanded our commercial presence in the emerging markets. In India and China for example sales grew more than 70% in the fourth quarter. In our pipeline, we are focused on continuing to improve testing convenience for people with diabetes, and developing a fully integrated blood glucose monitoring system that combines a meter, test strips and lancing capabilities in one device, enabling simple, point, and quick testing. We also anticipate launching our navigator continuous glucose monitoring in the U.S. later this quarter, but for 2008, we expect continued double-digit growth in Abbott Diabetes Care. Now let me turn to our Diagnostic business, where sales grew 13% in the quarter driven by continued strong growth in our International business, which comprises a significant portion of our overall sales. We also saw a double-digit growth in our Immunochemistry and Hematology segment this quarter. Our International business drove much of this growth, with strong sales in Europe, Latin America and Asia. Sales in China for example were up more than 30%. We launched two new ARCHITECT platforms in the quarter, which were designed to meet the needs of our high volume lab customers. We expect to launch our ARCHITECT platform for the lower volume labs in the next few months. And U.S. PRISM sales more than doubled in the quarter with a successful launch of our new Hepatitis C assay. We just launched an additional infectious disease assay HTLV on PRISM in the U.S., which further strengthens our position. Placements of new platforms such as ARCHITECT and PRISM will continue to aid growth this year. In our point-of-care business, sales grew more than 25% in the quarter and more than 20% for the full year. And molecular diagnostic sales increased more than 25% in the quarter and nearly 20% for the full year. With approval in approximately 50 countries, our m2000 Real-Time PCR System continues to gain share worldwide. Since its international launch 2.5 years ago, we have placed more than 400 systems and continue to expand our presence, including the expected clearance in the U.S. this year for several additional infectious disease assays. So in 2008 in our worldwide diagnostic businesses, we anticipate mid to high single-digit growth for the full year. This includes continued strong double-digit growth in both molecular diagnostics and point-of-care as well as mid single-digit growth in Immunochemistry and Hematology. Finally in our vascular business, global sales were up 7% in the fourth quarter and 54% for the full year. First, let me start with an update on our drug-eluting stent XIENCE V. In the U.S. as noted earlier we received a positive recommendation at our FDA panel meeting in November. Although we can't speculate on specific timing, for planning purposes we are modeling a second quarter 2008 approval and launch, which is in within our previous forecast for the first half. Regarding the international launch of XIENCE, we continue to make steady progress ending the year with European share in the low 20s. Looking at total XIENCE platform share, which includes both XIENCE and PROMUS share was in the mid-20s. We are encouraged by the upward trajectory we see across every country in which we've launched XIENCE currently approximately 10 countries have had or exceeded 30% share with several now approaching 40% market share, and more recently our ex-U.S. team has began to promote XIENCE with the longer-term data, this includes one-year data on more than 1000 patients and data on several hundred patients up two years, providing physicians with additional confidence in the XIENCE platform. We will present longer-term XIENCE results throughout this year. Our global DES franchise sales, which includes XIENCE as well as third party DES product revenues exceeded $260 million for the full year and were nearly $80 million in the quarter. We also continue to enroll patients in our XIENCE SPIRIT trials. SPIRIT IV is now at really 2,500 patients and the 2,700 patients SPIRIT V registry completed new enrolment at the end of 2007. Total coronary stent sales, which includes bare metal and drug-eluting stents were up 45% in the quarter. As you know, Abbott is in the position to participate in both the drug-eluting and bare metal stent markets. The strong performance in coronary stent sales is partially offset by endovascular and other coronary sales reflecting lower third party revenues including a decline in third party catheter sales as expected. An expected high single-digit decline in U.S. PCI volumes versus the fourth quarter of 2006 also impacted sales of other coronary products including guidewires and balloon catheters. However, U.S. PCI volumes were up sequentially versus the third quarter. And briefly in our vascular pipeline, we are advancing several next generation stent technologies behind XIENCE. Our goal is to release new technology at regular intervals over the next several years, which are based of our already well-known and well-tested vision platform includes a more deliverable workforce drug-eluting stent as well as our bioabsorable stent. We will have data on our bioabsorable stent as well as our XIENCE platform at scientific meetings throughout the year. So in 2008, we again expect strong double digit growth for our vascular business, we anticipate more modest growth in the first quarter of 2008 with growth improving over the course of the year. Finally, again this quarter in our news release, we highlight several of our major programs in our pipeline including our late-stage compound and devices as well as some early and mid-stage pipeline programs. So in summary, we are pleased with our results for the fourth quarter and the full year. In 2007, we achieved ongoing earnings per share growth of more than 12% and sales growth in the mid-teens. And for 2008, we expect another year of double digit performance. So with that, we'll now open the call up for questions, operator. Question And Answer

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from Glenn Reicin with Morgan Stanley. Please go ahead.

Good morning, this is David Robinson [ph] for Glenn. Just a couple of questions, first on the pipeline; could you give me a sense on your data on ABT-335? And then the second is [indiscernible] any discussions with Vicodin?

Okay. David we are having a problem hearing you. I don't know if anybody else could hear you. I think we got the questions, but it was a bad connection. So, forgive us here if we don't get this right. But I think you asked about ABT-335 and data. We will have data presented at the ACC scientific meeting in March, that's the most likely venue for that data in the near term. And regarding Vicodin...

Vicodin, it was the scheduling.

Vicodin scheduling; our goal is still Scheduled III on that product; it is something that would be working with the FDA on as we progress through the approval process. Our goal again schedule 3, but either way if it is schedule 2 or schedule 3, we think it can be a significant product if you look at some of the competitive products that are out there in the space that are schedule 2 like Duragesic and Oxycom are doing quite well, but again goal is scheduled 3.

Okay, thanks. And then second question, just talking the cost reduction, and other structuring initiative, can you just give us a sense as to when that's expected to be complete and what type of run time [ph] we should be looking for in 2008?

Again you broke up, but... this is Tom. With everything except vascular in the last vestiges of our shut down of some older pharma plants and really the buttoning up in the final salary depreciation, we are through everything. There is a little bit of trailing vascular into 2008, and a very small amount of wrap up on pharma. So we are pretty much through it as we stand at the end of the year.

Okay, thank you. Sorry about the connection.

Thank you. Our next question comes from Mike Weinstein with JP Morgan please go ahead.

Thank you. Is this better? Can you hear me okay?

Much better, thanks Mike.

Okay, sure. I am going to ask a couple of just clean up questions from the quarter and then maybe a strategic one for Miles; please do have him on. First question on the pharma business John; was there...were there any inventory swings on the U.S. business that might have helped to hurt this quarter?

No, nothing, unusual. We are very comfortable with the inventory levels, the only one where we typically see a little bit of modest buying activity if you will is TriCor in the quarter; other than that overall across the board very comfortable.

Okay, and then if we can just pick claim them...pick up some clarification on what you are saying on XIENCE for the year, your guidance for 2008, and I apologize I missed it, but your guidance for 2008 assumes a mid-year approval for XIENCE or you are not being that specific?

What we said was our guidance is still at the first half, but in my comments I noted that it's more likely it will be the second quarter.

But the question was is that included in the guidance?

Right.

Yes.

Theanswer is yes, Mike.

Okay. And then Miles, if you could just talk with all that transpired really the last 24 months with the company, could you talk to us a little bit about the portfolios today? You seem to have the pieces in place right now to drive pretty good growth obviously in 2008 and 2009. But if you think beyond 2009 in the growth of the company into the next decade, do you feel like you have got the right pieces in the portfolio today? Do you think there is likely be more reshuffling? Do you think the company is likely to pick up again on the M&A front? How do you think about the positioning the company beyond obviously the growth is going give the next couple of years from the HUMIRA, from XIENCE, and from the other products?

Well, I have said it's the first...a couple of things I had comment on just to give us some context is clearly the M&A activity of the past say seven, eight years had a purpose in terms of enriching the portfolio both in the pharma business in particular, and also in the balance of the medical product businesses in the company. And I think we have achieved a lot of our goals there. There is a number of areas that we have looked at from time-to-time that we are tracking, that we watch, that we monitor for opportunity. But the difference I would say going forward is now I like the portfolio mix, but I am always going to be watching for where it might be further improved. And I have commented in the past that I think it's a benefit for us to have a balance or a mix of sources of performance, cash flow, profits, et cetera in our portfolio and that balance means balance not only within the pharma business, but across all of our business, nutritionals and medical devises, medical products et cetera. I wouldn't forecast the kind of M&A activity of the past seven or eight years, I would characterize anything that we might do and I say might, because I don't have anything in particular or specific on my radar screen right now. It's opportunistic; it would have to fit the criteria that we have for what we think fits the mix of our portfolio. I think we are conscious of the fact that whatever we may invest in has to earn a healthy return, it's got be growing, it's got be profitable, it's got have good cash flows et cetera. It's got to fit strategically with a lot of the things we are trying to do. And so, we are going, I think it's prudent for us to continually be evaluating the portfolio of the company to ensure that all the pieces of it fit that mix. But I think any management team ought to be doing that with their company, and generally probably are. So I would say, don't look for the next 10 years to be like the last 10. Last 10 was a pretty definitive, we need to change the mix here. I like the mix where we are, but I would not be so naïve as to think that we just stand pat and never adapt or adjust the changes in medical practice, or changes in technology or frankly changes in market. So, I think that from an investor standpoint, I would expect thus to be careful, prudent, selective, opportunistic. And just to rapid up I would told you today, I don't have on my radar screen a significant target from an M&A standpoint either by market segment or specific asset. There are small things we invest in from time to time, whether it's a product in development that we add to the pharma portfolio or technology or IP or whatever the case maybe, but those are smaller compared to, the size of the Knoll or Kos or Guidant acquisitions. And I don't have anything like that on my radar screen right now. I won't promise you that I will never have something on my radar screen, I just don't. And I like the mix now; I like the performance in the mix. We built this so that we could sustain double-digit growth. And I think we are in a fortunate position, where instead of having to overly focus on just this year's performance, or even the next three to five, we are in a fortunate position, where we can be sort of managing our portfolio and mix for the five to 10 years out, and we look at our pipelines and our products that way. Now obviously we pay a lot of attention to current performance quarter-to-quarter also. But I like the position, where in where we can be thinking a lot about the LRP over five years and frankly the LRP over 10. And given the development times for products and some of our businesses like the vascular business or the pharmaceutical business, I think that the real healthy place to be, because increasingly there are fewer and fewer companies that have all the infrastructure and capability to bring products to market in those segments, and it does require longer-term planning and the ability to sustain and commitment to a strategy to get there, and I think that's where we are. That's where we wanted to be, that's what we built over the last 10 years, and I think that's what we will just continue to manage ongoing. I hope that answered your question. I guess --

Yes, you did. Let me just ask one follow-up and I want to drop, because I know I've been on a while. Should we just assume at this point that you indicate not be able to resolve the relationship that you won't be able to come this in sort of agreement between now and in perhaps this is going generic, or do you think there is still possibility?

I think there is still a possibility. We have been a long while, but I sort of said that now for nine years. And I am always optimistic, and we always have what I call constructive dialogue and there is no change to that. I wouldn't...I would say at this way. I wouldn't tell you that it's highly likely and I wouldn't tell you it's highly unlikely, I would acknowledge that it is possible.

Okay. Great, thank you.

Thank you. Our next question comes from Larry Keusch with Goldman Sachs. Please go ahead.

Yes, hi, good morning. Tom, I am wondering if you could provide perhaps a little bit more color on you think it's realistic assumption around Depakote sort of are you assuming that generic is coming immediately upon the expiration of patents and any...you guys had experience with generics here, a couple of years, are you assuming a very difficult generics with penetration as you think about the '08 guidance?

I think the key thing you said Larry is last part, we have been through this before and we understand despite the existence of what we think is good intellectual property that the generic companies have been awfully aggressively in this area and that it's just not prudent to assume that even your appropriate position from a financial planning perspective is one that should be the same. So, we have been very realistic about the behavior of generics over the compounds goes offs in the post pediatric exclusivity late July. And we have...we do understand that at least in one indication area there could be some retention because of the nature of the epilepsy market. But that's really a modest assumption we have been very realistic about the likely impact of generics coming in.

I would add to that, just as a reminder that because of the number of significant product launches that we have this year or have launched in the past say six to 12 months. We are in the really fortunate position of having all those ramping, at the same time Depakote would face generic competition. And so consequently, we are in a very fortunate position to still perform well and deliver the guidance that we have indicated. And we think we have captured the assumptions as Tom said appropriately in that guidance. So in spite of the fact that Depakote will face generic competition we are very confident in the balance and the guidance that we gave.

Okay. And then just two other quick ones, in terms of the first quarter guidance, which came out a little bit below the street consensus, Tom, maybe you can talk a little bit about sort of how you are thinking about, and you touched on it in your prepared comments, how are you thinking about the expensive and therefore launches of new products, where you don't have the revenue yet and are you really sort of waiting those expenses in first quarter? And you are you also not assuming XIENCE in the first quarter as well, so that molecules will become a bit of more conservative approach and then you start to see things pick up through the year?

No, Larry I am glad you asked this question, because the poses their consensus it's out there right now is really fueled by a huge outlier. First of all there is only seven analysts that have forecasted the first quarter at this point prior to our guidance, one of them is at $0.73, which would be 33% growth in the quarter, which I just obviously that's not anything we would plan for nor would others. So, when you that one outlier out, the average in the quarter is $0.63, which is captured within our guidance range for the quarter. So, I am glad you asked that, and I think it's an important clarification for people that are looking at that aspect of our guidance. It is important to remember that in the first quarter the growth rate if you go to the midpoint of that range, it is close to 13%. That's very similar to what we are looking at across all the quarters during the year. So, our country to some years whether it's ins and outs and variability and growth rates over the quarters. We are back to fairly steady quarterly growth throughout the year, which I think is really good news and it really sinks up well with what Miles was talking about of...even though some products are likely to head south such as Depakote. We have got all the strength in the other products to help us maintain steady performance throughout the year. The first quarter, does have a couple of things to remember. Omnicef as you know went generic in the middle of '07, so we have a very, very low sale; that impacted the quarter a little bit. And as I indicated in my remarks, it is a quarter, where we are doing a lot of spending on these launches and we are only seeing the early aspects from the top-line point of view are contributing to the quarter. And as indicated from a modeling point of view, John indicated that XIENCE is in the second quarter for our modeling. So when you put that all together and close to 13% midpoint EPS growth in that quarter, I think it is very, very reasonable. And hopefully people are clear about what the guidance situation and what the consensus situation is right now.

Okay. And then just lastly and maybe for Miles on this one is, clearly, Miles, the Prevacid patent expiration will start to come up as a topic of discussion here. TAK-390MR has been filed. I guess the two questions are...if you look at experience with other biologic products in this space, they don't have a lot of success. And so again I just want to give you a sense as you talked about double-digit growth. You are really thinking about even in years, where you may have challenges like that that you can still deliver on that type growth given the portfolio.

Yes, we have factored in let's say appropriate expectations from the joint venture, Larry. We have captured that in our guidance and frankly our expectations going forward whether it's three, five years whatever it is. I think we have got realistic expectations here. We have watched that market and business carefully. And because it's a separate company, we are careful about how we plan it at least from our perspective at Abbott in terms of the impact on EPS, because obviously we want to be very reliable in the EPS guidance we give and don't want a lot of surprises that we don't control to effect that. So, I think we have got that properly balanced.

Okay great, thank very much guys.

Thank you. Operator we are having some issues hearing couple of people that are queuing up.

Yes sir, we are trying to adjust our lines when we open them, so...

Thank you.

We will work on that.

Thank you.

Thank you. Our next question comes from Rick Wise with Bear Stearns. Please go ahead.

Hello?

Rick, your line is open.

Hi, good morning everybody, sorry about that.

I thought we have got that [ph].

Good morning everybody.

Hi Rick.

Couple of things, the HUMIRA psoriasis indication approval came a bit earlier than we thought. Maybe just a couple of questions related to that. Is that slightly early and then three or four weeks earlier than we thought baked into your numbers. And maybe give us some perspective on the degree of and why we say there is a off label use you guys have seen so far? How big is the opportunity that's remained? What percentage of derms have written HUMIRA scripts at this point for psoriasis, thanks a lot?

Yes Rick, sure. So we did get the approval in the U.S. slightly ahead of our forecast, we are obviously pleased about that; and launched again immediately last week when we got the approval following the European approval in December. So it is a significant market opportunity for us. It remains a pretty under penetrated market. Right now if you look at the total script breakout for HUMIRA about 80% of it is rheumatology, about roughly 12% is gastro, and I would say around 8% is the derm market and that is a function really of our psoriatic arthritis indication, where we can't promote on that that indication to dermatologists. Obviously we haven't and can't until now promote on psoriasis. So we see about that percentage breakout. We do know that roughly 30% of dermatologists have written a HUMIRA prescription as a result of the psoriatic arthritis indications. So there is some good experience with the product in that regard. But obviously a lot of opportunity is still left.

Yes. One other thing I wanted to follow-up with is on gross margin. Gross margins were a tad weaker than I...we looked for anyway for the second quarter in a row, and you very clearly detailed why in your press release. Can you just remind us that some of the factors that are affecting it. How long are they going to drag your gross margins, the Synagis? And on the nutritional side, how do you work to offset the higher cost impact on gross margins? Can we hope for some release there going forward John or any body, Tom?

Rick, gross margins we are through the Synagis effect, and I think the news really you are looking for is, in 2008 as I indicated in my remarks we are looking for an improvement in the gross margin ratio. One other things in addition to what we put in the script is as the dollar continues to weaken and there is very rapid movement, there tends to be a lag between the sales benefit of exchange and the gross margin benefit of exchange. And some of that will carry into 2008 and help us. So it's really those things and the good news is we see an improvement in 2008 for the full year ratio. And on the nutrition side, we have done a number of things, we have done contracting with a number of suppliers stabilized those costs, we have refocused on cost efficiencies in our manufacturing operations. And we have seen those costs stabilize and actually even decline in the last few weeks, which could be good news for '08 relative to what we have run into in '07 and can also support improving gross margin during the year.

Okay. Thank you very much.

Thank you. Our next question comes from Sara Michelmore with Cowen & Company. Please go ahead.

Yes thank you. Good morning. I guess a question for Miles first. It just seems Miles that there is a higher level of activity in your pharmaceutical pipeline, particularly with products in the clinic at this point, and I am wondering since we haven't focused a lot on it recently, if you could just kind of give us a run down of what you think are the most important projects that you are working on currently and what could be most impactful for you out of that pipeline over a five-year timeframe?

Well, let me take it this way. We obviously still have more claims that we are exploring on HUMIRA, and I am sticking with the five year timeframe. We have fixed those combination and developments with AstraZeneca and CRESTOR and ABT-335. ABT-874, which could be terrific treatment for various autoimmune diseases like Crohn's and psoriasis obviously coming Flutiform for asthma, couple of oncology products that we are co-developing with partner Genentech. I think there is just a number of things there that are fairly promising for us over the next three to five years. What I spend more time worrying about...I am not worrying about, but I want to say paying attention to given the lead times is that early in mid-stage development area and discovery, and both internally and in terms of the opportunities that may be available to us outside, but internally in particular, because it's important for us to be effective with our own organic growth. And that's why the comments I made in my more prepared remarks regarding the productivity of our R&D group, I think are important. Because we have made a number of distinct changes in a way in which we are managing and driving our R&D in the pharma business. And that is clearly resulting in a higher degree of productivity in terms of compound identified and then moved along through various stages of the development. So it's been an area of focus for us. And I think appropriately so, because increasingly of course the whole industry is challenged by its R&D productivity. We put a lot of effort into that. I think the early returns look good and that allows us to spend time thinking about the pipeline that is developing for the timeframe beyond five years. I think we are in really sound condition here for driving our growth over the next five, even five to ten out of our pharma business. I think it's a very healthy pipeline and nicely balanced with a nice mix. And so consequently those early stage things are for the later year is out there, and even that is developing nicely.

Okay, that's helpful. And philosophically, Miles, can you...it sounds as if you are not looking for major acquisitions that you are going to have a significant amount of free cash flow to work with here in the couple of years. Can you just talk through, what you think the correct appointment of that capital is going to be in terms of either debt pay down, share buyback, or whatever else you would like to prioritize those funds for?

Well, I think it's all of the above. Our shareholders base clearly expects its dividend, its rising dividend. And we tend to budget and buyback about $800 million to $1 billion worth of shares a year on an ongoing basis. That could vary in some years, but generally that's what we did last year, and so we expect this year. We do have obviously additionally desire to pay down some debt. And fortunately our cash flows are strong enough that if there is an opportunity that comes along for given deals somewhere, we have the strength to do that as well. And I think my own desire would be to make sure we keep all of that in the right balance, so we maintain our strategic flexibility in the event an opportunity comes along that we want to react to. I don't want to be balance sheet constrained that way. But as I said fortunately, we have had strong cash flows across the board that we have been able to do all of the above buyback shares, pay down debt, pay dividend, and do some selective M&A. And that I think is probably what we will continue to do going forward.

Okay. And just one final question for you on diagnostics; now that you have gone back and made a long-term commitment to that business. Any notable changes in terms of the level of investment there, where you plan to invest in the diagnostics business going forward?

Well, I don't know what I described is investment as much as the manner, in which we are manage it. I would say it's kind of a tale of two different stories. The international markets have terrific growth, and we are clearly the market share leader in the international market. And in fact the majority of that business is in international markets and always has been. And you can see in the report that we are seeing very healthy growth in international markets today. And so, I would call those a growth orientation to a large degree. The U.S. market is considerably more competitive and lower growth. And I would say that in the whole business as a whole, I think we need to be focusing on returns and running it for profits and not just growth. And in particular in the U.S., we should run that...that part of our business for improved returns and profit. And I think we have to take careful attention to that in overseas markets as well so that the growth we are getting is truly good return and good profit. And I think a heightened emphasis on that is probably the single biggest shift given that the diagnostic market in general isn't as robust a growth market as it used to be.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Tony Butler with Lehman Brothers. Please go ahead.

Yes, thanks very much. If I may, Tom, just go back to the gross margin comment you made. And in the first quarter, I believe you gave guidance of approaching 58%, I am implying that the back-half of the year would probably be better than that level in order to get to the target of 58% to 59%. So outside of currency effects, are there other mix shifts, which actually improve that GM? And then the second question really relates to HUMIRA's contribution. When you...were you able to negotiate with Genentech with respect to the two oncology products and actual elimination of the royalty payment based on the Boss/Cabilly patents that I assume you were paying part of that? And is that actually also making a contribution? Thank you.

Yes, I mean when you look at the gating gross margin, the company is always strongest in the fourth quarter when we have our strongest quarter and there is plenty of fall through on the sales. And that's really the same pattern we are seeing in 2008 as we have seen in 2007. As I indicated earlier, the first quarter will be impacted by the fact that the last...well, actually the second last round on these steps we will have a little bit in the second quarter next year. It will put a little pressure on, but as we go through the year with HUMIRA going strongly, the XIENCE launch, the new pharma products we have been talking about launching that really is going to show good progression in the gross margin in the third and fourth quarters in particular, part of it consistent with our pattern and even a little better than that given the mix shift to those products. The royalty you suggested because of the way these types of things get recorded there is no significant impact of a change in the royalty arrangements that we talked about.

Thank you.

Operator, I think we have time for one more question.

Thank you. Our final question comes from Larry Biegelsen with Wachovia. Please go ahead.

Hi everyone, thanks for taking my question.

Hi Larry.

Does the tax guidance include the R&D tax credit?

The answer is no. As you all know, the R&D tax credit has not been re-enacted by Congress. And so, we did not and include that in our guidance. If that were to come through during the year, there would be some positive effect to the tax rate if it came through later in the year, we will see what happens there.

And just a follow-up on TAK-390MR; could you just give us some color on whether you envision that being kind of a full launch? And by that, if we look at on the operating expense side, historically, the run rate for TAP's operating expenses between 2003 and 2006 were $1 billion to $1.2 billion. We understand your realistic expectations for maybe the sales, but I mean the PPI market is very promotional, sensitive. Could you give us a little color on that on your expectations there? And then I just have one more on TriCor after that.

Okay. Yes we do expect to have a full launch of TAK-390 MR. As I mentioned, TAP did file that product here recently, which should things go well, put it on the market, well in advance of the compound patent exploration for Prevacid, which is November of 2009 with pediatric extension. So TAP is planning on a full scale launch of that product and further information obviously will provide with TU as we get closer to that, I should say TAP well, as we get a little bit closer to that date.

Yes John, in recent quarters operating expenses for TAP have been coming down, but because...maybe because it's an older product. But, if you have a full launch, operating expenses could...is it fair to assume that they could increase?

It could.

And then on TriCor. John I didn't hear any growth guidance for 2008. And on ABT-335, I think you submitted 12-week later with statins to ACC and the data was actually posted last week. Is it going to be apparent from the presentation at ACC? If, what advantage 335 has over TriCor? Thanks.

Sure. So we do expect close to double-digit growth for TriCor again this year in 2008. And 335 we've all discussed more about the data at the ACC meeting. And we have talked about that as having some advantages in terms of using combination with statins. And potentially some labeling advantages with that as well, which as you know, the adjunctive market is the big opportunity in the overall cholesterol market as there is a shift more towards further reduction in cardiovascular risk beyond what LDL can do. And that's where we have a lot of opportunities across HDL, LDL entrants with our complete portfolio of products. And you will see more about that when we present the data at ACC.

Thank you.

Okay. All right, well that concludes our conference call. A replay of the call will be available after 11:00 A.M. Central today on Abbott's Investor Relations website at abbottinvestor.com, and after 11:00 A.M. Central via telephone at 203-369-0225 and the confirmation code is 5567444. Audio replay as always will available until next Wednesday, January 30. Thank you all for joining us.

Thank you. That does conclude today's conference. You may disconnect at this time.