Abbott Laboratories (ABT) Q1 2008 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. Welcome to Abbott's First Quarter 2008 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.

Good morning, and thanks for joining us today. Also on the call will be Tom Freyman, our Executive Vice President, Finance and Chief Financial Officer. Tom will review the first quarter results and I will discuss the business operating highlights. Following our comments, we will take any questions that you may have as usual. Some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our Annual Report on Securities and Exchange Commission Form 10-K for the year ended December 31st, 2007 and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. In today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measure in our earnings news release and regulatory filings from today, which will be available on our website at abbott.com. So with that, I will now turn the call over to Tom. Tom?

Thanks, John, and good morning. As you can see from our earnings news release this morning, we had a strong first quarter, delivering double-digit sales and earnings growth ahead of our expectations. In addition, we confirmed our EPS outlook for the full year, which reflects strong double-digit growth. Our major businesses are healthy, and our outlook continues to call for an accelerating EPS rate of growth this year. During the first quarter, we also accomplished a number of our strategic objectives as we reached an agreement to conclude the TAP joint venture, and received approval for five key new products or indications that collectively have significant future growth potential. For the quarter, we reported diluted earnings per share of $0.63, at the high end of our previous guidance range of $0.61 to $0.63 excluding specified items. This reflects earnings per share growth of 14.5%, in line with our full-year 2008 forecast of EPS growth, and follows last year's 12.3% rate of growth. Sales this quarter increased nearly 14%, including a favorable 5.5% effective exchange rate. Results were strong across each of our global businesses, with Pharmaceuticals, Diagnostics and Nutritionals, all contributing double-digit. Of particular note were the strength of HUMIRA, which increased nearly 54% worldwide; and the growth from our combined lipid franchise, including Tricor, Niaspan and Simcor, which together increased more than 20%. John will discuss this in more detail in his review of the business operating highlights. During the quarter, we continued to invest in the business to drive future growth. We remain on track for a significant number of major new product launches in 2008. SG&A expense this quarter included new and ongoing promotional initiatives, including strong investment spending to support the first quarter launch of two new indications for HUMIRA, the launches of Simcor, FreeStyle glucose meters and the expected second quarter U.S. launch of our next generation drug-eluting stent, XIENCE V. R&D expense in the quarter was 9.2% of sales, in line with our previous guidance. Comparison with the prior year was impacted by the timing of R&D program spending, with high levels of R&D expense in the prior-year quarter supporting significant late-stage pipeline activity in Pharmaceuticals and Medical Products. As a reminder, R&D expense was up roughly 27% in the first quarter of last year. Forecast the rate of growth in R&D spending to increase over the last three quarters of this year, with a full-year increase in the mid-to-high single digits. The adjusted gross margin ratio in the quarter was 56.8%, somewhat below the prior year, due in part to generic competition for Omnicef. Although foreign exchange had a favorable impact on sales, it also negatively impacted the gross margin ratio due to the mix of sales affected by exchange and the impact of exchange on international manufacturing costs, particularly Europe-based costs. We’re forecasting adjusted gross margin ratio to improve to approximately 58% over the remaining three quarters of 2008 at current exchange rates. Income from the TAP joint venture this quarter of $102 million was in line with our expectations. As you know, we recently reached an agreement with Takeda to conclude the joint venture. Under the agreement, both parties will be sharing equally in the value of the joint venture, with Abbott receiving total ownership of the market-leading oncology treatment, Lupron, including its U.S commercial organization, as well as projected cash payments from Takeda of approximately $1.5 billion over the next five years. Forecast the transaction to be neutral to 2008 earnings per share and neutral or better over the next five years. Transaction is expected to close in the second quarter of 2008, and I will discuss the effect on our P&L profile in a few moments. Tax rate in the quarter was 19.2%, consistent with our previous guidance. And during the quarter, we repurchased $800 million of Abbott’s stock. Now, let's turn to the outlook for the remainder of 2008. Compared to our previous forecast, although our EPS guidance is unchanged, two new items will affect our P&L profile. Let me walk you through both of these before I provide the outlook for the full year and the second quarter. First item is the TAP transaction. After the closing, which is again expected in the second quarter, Abbott will no longer record joint venture income. Instead U.S. Lupron sales, costs and operating profit associated with the franchise will be included in Abbott's operating results. For the remainder of the year, we expect to add approximately $400 million of Lupron sales to our top line. As a reminder, annualized Lupron sales in the U.S. are projected to be approximately $600 million in 2008. Abbott will also receive future cash payments from Takeda related to TAP products moving over to Takeda. Statements will be recorded in the other income line of Abbott's P&L. These include payments related to on-market product sales and the development pipeline. We will be conservatively forecasting the timing of these payments as we work through 2008. As indicated earlier, the TAP transaction is expected to be neutral to earnings per share this year. Regarding the second item, foreign exchange, U.S. dollar has weakened to a level that has exceeded our original forecast for the year. This has had a positive impact on sales in the first quarter, and we project this to continue over the last three quarters. But this also impacts our outlook for the profile of some of our P&L line items. Let me now walk you through the P&L, as we are forecasting it for the full-year 2008 and the second quarter. Today, we are confirming our full-year 2008 earnings per share guidance of $3.20 to $3.25, excluding specified items. Regarding sales growth, with the addition of U.S. Lupron sales expected after the close and exchange rate trends, today we are raising our sales forecast. We now project low-teen sales growth for the full-year 2008. With respect to the gross margin, again we are forecasting a ratio of approximately 58% for the full year. Given the size and timing of the TAP transaction, it has only a modest impact on the R&D and SG&A ratios as a percent of sales in 2008. As a result, we continue to forecast full-year SG&A as a percentage of sales of approximately 27%. Regarding R&D, our current forecast for total dollar spending for the year is roughly in line with our original forecast. However, due to the impact of foreign exchange on sales, R&D as a percentage of sales is expected to be closer to 9% for the full year. Majority of our R&D spending is denominated in U.S. dollars. And we are forecasting the other income line of the P&L at approximately $300 million for the full year related to the cash payments we expect to receive from Takeda. Regarding the tax rate, with the conclusion of the TAP joint venture we're now forecasting a full-year rate of around 21%. This higher tax rate has been factored into our neutral EPS guidance for the TAP transaction. As you'll recall, the income from the TAP joint venture line item of our P&L reflected our half of the after-tax profit of the joint venture. This resulted in a lower overall tax rate for Abbott in the past. Going forward, profit from the Lupron franchise and the estimated future cash payments from Takeda will be taxed at U.S. statutory rates to the income tax expense line of our P&L, resulting in the higher 21% rate. Now, let's turn to our outlook for the second quarter. We are providing earnings per share guidance of $0.78 to $0.80 excluding specified items. Mid-point of this range represents another quarter of mid-teens EPS growth. Let me walk you through some of the key P&L line items as we forecast them for the second quarter. We expect sales growth in the low-teens, gross margin ratio of approximately 58%, R&D as a percentage of sales around 9%, SG&A as a percentage of sales of approximately 28% and other income of approximately $100 million, which reflects cash payments from Takeda. Second quarter tax rate is expected to be around 22%. This combined with the first quarter rate of 19.2% results in a first-half tax rate in line with our full-year forecast rate of around 21%. We expect a tax rate of around 21% in the third and fourth quarters. So in summary, as we look at the first quarter, we are pleased with the performance of our major businesses. We reported double-digit sales growth and EPS at the high end of our guidance range, while we continue to build on our strong track record of major regulatory submissions and new products approvals. Finally, we're extremely pleased to have concluded the TAP joint venture in a manner that was economically attractive for our shareholders. All of these factors give us confidence in our outlook for double-digit earnings per share growth this year and over the next several years. 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; Pharmaceuticals, Nutritionals, and Medical Products including Diabetes Care, Diagnostics and Abbott Vascular. And you will have to forgive me, I have got head cold, so I may pause here occasionally. Let me start with our global Pharmaceutical business where sales increased more than 14% in the quarter, driven by 25% growth in international Pharmaceuticals. Excluding the impact of generic Omnicef, U.S. Pharmaceuticals increased approximately 14%. Including the impact, reported U.S. Pharmaceutical sales increased 3.6%. In Immunology, worldwide HUMIRA sales were up 54% to $878 million, which includes nearly 70% international growth. In 2008, we expect global HUMIRA sales will exceed $4 billion as HUMIRA continues to capture a majority of all patients new to anti-TNF therapy in a market that continues to grow double digit with HUMIRA driving a majority of that market growth. In the quarter, we continued to build our positions in both Dermatology and Gastroenterology segments, while maintaining our consistent share gains in Rheumatology. And with the FDA approval of two new indications in the first quarter alone, HUMIRA is now approved for six indications in total. In addition, this morning we are pleased to announce the approval of HUMIRA for rheumatoid arthritis in Japan. This new market opportunity represents to Abbott alone more than $300 million in additional peak year sales. We will co-market this product with Eisai in Japan. At the end of January, we launched HUMIRA for psoriasis and the result so far have exceeded our expectations. Our U.S. new prescription share in dermatology has grown by nearly 8 percentage points in just the first few months of launch, increasing our [inaudible] share in Dermatology to more than 20%. HUMIRA's early success in psoriasis is based on its outstanding clinical data. HUMIRA has raised the bar for what physicians and patients should expect for reliable skin clearance. We've demonstrated that nearly 75% of HUMIRA patients achieved a 75% reduction in their symptoms. In February, we presented new longer-term data at the American Academy of Dermatology meeting, demonstrating HUMIRA's durability of response. Unlike some other therapies, which decrease in response over time, HUMIRA clinical results continue to improve longer term, now out to 18 months. We also continue to see steady growth HUMIRA in Crohn's disease, which we launched just over a year ago. We've recently surpassed 35% share in Crohn's as we continue to see strong demand for HUMIRA as the biologic of choice for both new patients and those switching from other therapies. HUMIRA offers the only self-administered biologic treatment for Crohn's patients, providing a distinct convenience advantage over the competition. We'll also present new, longer-term Crohn's data at the Digestive Disease Week meeting this May, demonstrating HUMIRA's sustainability and durability of response. Crohn's and psoriasis are the two largest markets after rheumatoid arthritis, each at approximately $1 billion in sales today with strong double-digit growth expected over the next several years. Also in the quarter, we launched our sixth indication for HUMIRA, juvenile rheumatoid arthritis. HUMIRA is the first biologic treatment to receive FDA approval for this condition in almost a decade and the first to be self-administered once every two weeks. The growing awareness of HUMIRA among physicians and the growing body of best-in-class clinical data should continue to drive demand for HUMIRA. In our lipid management franchise in the first quarter, we received U.S. approval for Simcor in line with our expectations. The launch is very early, but is proceeding quite well. Our full primary care sales force is now promoting this new brand and was able to reach approximately 80,000 physicians during the first week of launch. Simcor combines two well-established medications, Niaspan and Simvastatin, to powerfully target multiple lipid parameters in a single therapy. Data from two Phase III trials have demonstrated Simcor's role in improving key lipid levels versus the use of a statin alone. We began shipping Simcor in early March with active sales force detailing, beginning in late March. Sales of Simcor in the quarter were close to $20 million, on track for our full-year sales forecast this year of approximately $100 million. Niaspan, our HDL-raising therapy, grew 24% in the first quarter. Since the launch last year of our new film-coated Niaspan tablets as well as the additional Abbott promotional efforts following the Kos acquisition, we have steadily increased Niaspan prescription share growth. Total prescriptions are now growing faster than the overall cholesterol market, our first for this product in more than two years. Niaspan is the only prescription therapy capable of increasing HDL 25% to 35% on average with proven cardiovascular outcomes. It's a safe, effective and very well known therapy. Flushing is a temporary side effect associated with any Niaspan therapy. For most patients this side effect is greatly reduced when Niaspan is taken with Aspirin, one of the safest and most trusted medications. In pivotal studies, less than 6% of Niaspan patients discontinued therapy due to a flushing side effect. Similar results were also seen in our two pivotal trials for Simcor, which contains Niaspan. This compares very favorably to the competitive data we've seen. We expect strong double-digit growth for Niaspan to continue throughout 2008. Also in the quarter Tricor sales were up nearly 10%. Tricor remains the best available therapy for lowering triglycerides with a long-established safety and efficacy profile. We also presented our pivotal Phase III clinical trial results on our new fenofibric acid molecule, TriLipix, at the American College of Cardiology meeting last month. Our goal with the development of TriLipix was to design an optimal compound that could be combined with statins to address the difficult-to-treat mixed dislipidemic patient population. These are patients with high triglycerides, low HDL and high LDL, more than 40 million patients in total. Our Phase III data showed that we met our clinical development goal. Results from two of our trials demonstrated the TriLipix in combination with Lipitor and Zocor significantly improve three key lipid parameters, doubling triglyceride reduction, doubling HDL improvement and producing clinically meaningful LDL reductions. This is the largest and first-ever clinical program to evaluate the efficacy and safety of a fibrate in combination with statins. We expect to present additional Phase III data from our TriLipix program throughout this year, including data from our third combination trial with CRESTOR at the National lipid Association meeting at the end of May and at a podium presentation at the American Diabetes Association meeting this June. We submitted TriLipix for FDA approval at the end of last year and we remain on track for FDA approval in the fourth quarter of this year. The next step in our development program is our partnership with AstraZeneca to combine TriLipix and CRESTOR as a fixed-dose therapy. This combination product is in Phase III development, and we expect to submit for regulatory approval in the second half of next year. With many unique therapies that address lipid problems beyond LDL alone, Abbott's lipid franchise is extraordinarily well positioned to address the growing needs for comprehensive lipid management now and over the long-term. For the full year, we expect continued strong double-digit growth in our lipid franchise. Moving on to HIV where both Kaletra and Norvir were up double digits worldwide in the first quarter, we recently announced European regulatory approval of a new lower strength formulation of Kaletra, which is suitable for pediatric use. Depakote sales in the first quarter were up double-digits. Depakote ER, our once-a-day version of Depakote, accounts for more than 50% of total Depakote prescriptions. And in the TAP joint venture, sales of both the PPI Prevacid and the hormone therapy Lupron, which Abbott will be receiving when the deal is closed, were in line with our expectations. Prevacid sales were $550 million, and in March TAP received a favorable court ruling against Teva upholding the validity and enforceability of Prevacid's compound patent. The compound patent extends through November of 2009, assuming a six-month pediatric extension. TAP's next generation PPI, TAK-390 MR, was also submitted for U.S. FDA approval in early January or late... actually late last year, and results from the Phase III clinical trial program will be at the upcoming Digestive Disease Week medical meeting in May. Lupron sales were $147 million in the first quarter, on track to achieve full-year sales of approximately $600 million. And as Tom mentioned, we expect to close on the TAP transaction in the second quarter. At that time, Abbott will begin selling Lupron as part of our domestic pharmaceutical business and we expect it to contribute approximately $400 million in sales this year, although as we mentioned annualized sales are closer to $600 million. As a reminder, the majority of Lupron sales come from its indication for prostate cancer where it holds market-leading share. It's also a leading therapy for endometriosis and central precocious puberty. The addition of Lupron will accelerate Abbott's on-market presence in oncology where we currently have several therapies in early and mid-stage development in our Abbott pipeline. So in summary, in Pharmaceuticals for the second quarter and the full-year, we expect double-digit sales growth for both our domestic and international Pharmaceutical businesses. In our global Nutritionals business, sales in the quarter were up nearly 11%, driven by 21% growth in international Nutritionals as demand continues to increase for high-quality nutritional products in emerging markets. We continue to see broad-based growth across our International Nutritionals business, including several very strong growth objectives in pediatric... in the pediatric segment. U.S. Nutritionals sales were up low single-digit, lead by growth of new products including our infant formula, Similac Sensitive. In the second quarter, we expect mid-single digit growth in our U.S. Nutritionals business and continued strong double-digit growth internationally. So if we turn now to our Medical Products businesses, let me start with Diabetes Care where worldwide sales increased more than 14%. In the U.S., we recently launched our second automated calibration meter, FreeStyle Freedom Lite. Both FreeStyle Lite and FreeStyle Freedom Lite meters eliminate the manual calibration step required by most glucose meters, which improves convenience for people with diabetes. In the U.S., we've also launched the FreeStyle Navigator continuous glucose monitoring system, which monitors glucose levels every minute. Continuous information about glucose levels allows patients to more closely manage their disease. Navigator was launched in Europe last year. We also further expanded our diabetes commercial presence in emerging markets where sales in Asia and Latin America grew at strong double-digit rates. And in the U.S., we recently initiated a new promotional program in major media outlets including television, radio and print. In the second quarter, we expect double-digit growth worldwide in our Abbott Diabetes Care business. Now, let me turn to our worldwide Diagnostics business where sales grew more than 17% in the quarter, driven by continued strong growth in our international business. We saw double-digit growth in our Immunochemistry and Hematology segment this quarter, driven by sales in Europe, Latin America and Asia, particularly China, where we had strong double-digit growth. Abbott PRISM sales and ARCHITECT placements drove U.S. performance in the quarter. In January, we received FDA approval for our fifth automated blood-screening test for PRISM, HTLV. We plan to further expand the PRISM menu with the launch of HIV. We also recently launched a new ARCHITECT platform, the i1000, to meet the needs of our smaller volume lab customers. We continue to gain share with our larger volume analyzers, which were launched at the end of last year. In our Point-of-Care business, sales in the quarter were more than 20%. Growth was driven by strong cardiac cartridge sales and further penetration of our CHEM 8 test, which received a claim for broader use last year. And in Molecular Diagnostics, sales also increased more than 20% in the quarter. Our m2000 real-time PCR System continues to gain share worldwide. In the U.S., we submitted chlamydia, gonorrhea test for FDA [ph] approval for the m2000 system and additional infectious disease submissions are planned for later this year. We continue to expand our presence in the area of Pharmacogenomics. As part of this strategy, we entered into a collaboration agreement with Genentech recently to develop a companion diagnostic test for their cancer medication, Tarceva. We also made an equity investment in Ibis, a subsidiary of Isis, for the development of a new Molecular Diagnostics technology. So in the second quarter, our worldwide Diagnostics businesses, we anticipate continued double-digit growth. This includes continued strong double-digit growth in both Molecular Diagnostics as well as Point-of-Care and high single-digit growth in Immunochemistry and Hematology. In our Vascular business, in the quarter global sales were driven by approximately 35% growth internationally, as we continue to drive share and launch XIENCE into new geographies. As expected, U.S. sales were impacted by year-over-year declines in PCI volume and third-party catheter sales, although we do see very encouraging signs in the market as both U.S. PCI volume and DES penetration improved sequentially from the fourth quarter of last year, with DES penetration ending the month of March at the highest level we've seen in nearly a year in the mid-to-high 60s. So let me start with XIENCE where we ended February with XIENCE-only share, excluding France, in the low to mid 20s. In February, we were granted reimbursement for XIENCE in France, the second largest DES market in Europe. XIENCE launch has got off to a strong start with share already in the high-teens in France several weeks post-launch, given the outstanding commercial execution we've seen from our sales and marketing efforts in France. Our first quarter results only include two weeks of sales, given that our international business reports on a one-month lag. Recently, we also launched a 2.25-millimeter version of XIENCE in international markets, offering physicians access to a wider range of stent sizes to treat a variety of patient types. We expect to see a more meaningful impact from the 2.25 product and France launches in the second quarter. In the U.S., we continue to expect a second-quarter launch for XIENCE. The strong body of scientific data for XIENCE as well as our highly experienced U.S. Vascular sales force positions us extremely well for launch. In fact, we have one of the largest U.S. Vascular sales forces in the industry, which is nearly 100% intact post the Guidant acquisition. Recall that Abbott maintains market share leadership in bare-metal stents with approximately 60% VisionShare. So our commercial team knows how to win in what remains a highly competitive market. In addition, we remain confident in our manufacturing capacity. As we’ve said many times in the past, we can supply more than 50% of the worldwide market at this time. Outside of the U.S., our ex-U.S. team has begun to promote XIENCE with longer-term data. This includes one-year data on more than 1000 patients from our SPIRIT III trial. In addition, a few weeks ago at the American College of Cardiology meeting, we presented follow-up data for XIENCE. Two-year clinical results from our smaller ex-U.S. SPIRIT II clinical trial demonstrated a 40% reduction in major adverse cardiac events or MACE compared to TAXUS. MACE is an important clinical measure of safety and efficacy outcomes for patients and physicians and is defined as cardiac death, heart attack or ischemia-driven target lesion revascularization. XIENCE has consistently reduced MACE by 40% or more compared to TAXUS at any given time point measured in SPIRIT II or SPIRIT III clinical trials. In mid-May, at EuroPCR, we look forward to presenting two-year data from our larger 1,000-patient U.S. pivotal trial, SPIRIT III. We are pleased today to confirm that this data has been accepted as a late-breaker presentation and the lead investigator of the trial, Dr. Gregg Stone, will be highlighting the data at a podium presentation. We'll also present four-year data from SPIRIT I as well as 30-day data from SPIRIT V, which is our 2,700 patient registry trial that completed enrollment at the end of the last year. Additionally, we anticipate publication of the one-year SPIRIT III data very soon. We continue to enroll patients in our U.S. continued access trial, SPIRIT IV, which now has more than 3,000 patients enrolled. As a reminder, we expanded SPIRIT IV to nearly 3,700 patients in this trial last year, which is evaluating the primary end-point of MACE at one year. So for the quarter, our global DES franchise sales, which include XIENCE as well as our third-party DES product revenues, were approximately $100 million for the quarter, up nearly 30% sequentially from the fourth quarter. Despite an expected high single-digit decline in U.S. PCI volumes versus the first quarter of last year, worldwide coronary stent sales, which include bare-metal and drug-eluting stents, were up more than 18% in the quarter. PCI volumes also impacted other coronary sales where we saw lower third-party catheter sales in the first quarter. As a sign of market recovery however, U.S. PCI volumes were up sequentially versus the fourth quarter, and DES penetration also improved to the mid-to-high 60% range at the end of March. This is encouraging as we continue to see evidence that the DES market has stabilized and we anticipate the entry of new next-generation DES technology, including XIENCE, will help to improve market growth as we move throughout the year. Looking forward to the second quarter in Vascular, we expect double-digit growth for the business. Finally, let me take a few minutes to address our overall pipeline. [inaudible] after submitting a record number of major new products for approval last year, we've already received several regulatory approvals and begun to launch process for a number of products. And we continue to execute on every phase of our late-stage pipeline and regulatory approval. As I've mentioned, already this year we have launched HUMIRA for psoriasis and juvenile rheumatoid arthritis, as well as Simcor for comprehensive cholesterol treatment. In diabetes, we received U.S. approval for FreeStyle Navigator, our continuous glucose meter... monitor, as well as the launch of FreeStyle Freedom Lite. Also this year, we anticipate FDA approval for our drug-eluting stent, XIENCE V, as Tom said in the second quarter; our next-generation fenofibrate, TriLipix, and our controlled-release branded medication, Vicodin CR. And in the next several months, we plan to present data on several of our pipeline compounds. Upcoming data that I haven't mentioned includes the first presentation of our Phase III pivotal trial data in chronic pain for controlled-release Vicodin at the American Pain Society meeting in May. This past February, we presented data from our Vicodin CR long-term safety trial as well as additional efficacy trials. We submitted Vicodin CR to FDA at the end of last year from moderate to moderately severe pain indication and anticipate approval at the end of this year. From our early stage pipeline, we'll be presenting data at the American Psychiatric Association in May on ABT-089, one of neuroscience compounds for ADHD, as well as early stage data from our oncology compounds at ASCO in June. We believe we have one of the highest productivity rates for late-stage pipeline products in our industry. As a result, 2008 is one of the most significant years for Abbott in terms of major new product launches, including three major new products that have been accepted by the agency and are currently under active FDA review, including XIENCE, TriLipix and Vicodin CR. So in summary, we are pleased with our results for the quarter. In 2008, we continue to expect another year of double-digit performance accelerating as well. With that, we'll now open up the call for questions. Question and Answer

Thank you. [Operator Instructions]. Our first question this morning is from Glenn Reicin, and please state your company name, sir.

Morgan Stanley. Thank you. Two questions, guys. The first is for Tom. Can you go over how FX actually impacts your company both top line and bottom line? I think there is a lot of focus right now on gross margins. If you can quantify the impact of FX in Q1 and what do [ph] you think it is going to impact the gross margins for the year? And then the second question is about XIENCE. Can you talk a little bit about the ramp in Europe and what you would expect out of overseas sales for the second quarter?

Sure, Glenn. Obviously, foreign exchange helped our top line a little over 5% in the first quarter. And you know, we've been going through many quarters of this pattern. For our company, the fall-through effect on gross margin of exchange has been pretty consistently negative and that's because the countries where we had these favorable exchange variances on sales, the average gross margin on those countries is below our corporate average and so you get a bit of a mix effect… a country mix effect in gross margin. And that really is the entire reason that we are a little below our previous forecast that we provided on the fourth-quarter call and it was a good chunk of the decline from the prior year along with the Omnicef item we mentioned. Another thing to keep in mind about Abbott is we do have and over the years we have much more manufacturing overseas than we used to have. Really, this is a good thing in the long term because when it comes to exchange, we've got a much better match of our costs and our revenues. So when the dollar weakens as it has, we get a little less benefit and if the dollar were to start strengthening again we'd be very much protected as we’d move forward from that point of view. So I think you're going to see a lot less volatility from this strategy, but in the short run you have seen some impact on the ratio. That said, we will still managed to deliver very strong, as you know, bottom line growth for the quarter, and when you look at gross margin for the full-year, we brought it down probably 0.7% or 0.8% from our original forecast. All of that is exchange. The underlying businesses are performing as we expected and hopefully this will just be a transitional item.

Your previous guidance said, it was in the 58%, 59% range, is that what it was for the year?

That's right. And now we are closer to 58% on average we think for the year.

Okay. So what was the exacting [ph] impact from Omnicef and from FX gross margins for this quarter year-over-year?

The impact of FX was close to a point and Omnicef was a little less than that, and there are offsetting items elsewhere going positively in the business.

Okay. That's helpful.

Glenn, this is John. On your question about EU launch, obviously we are very pleased with the way things are going, particularly with the early start in France. That is going ahead of our expectations. We have strong share there of high-teens after just a couple of weeks in the market. So that obviously will have a impact on second quarter where we expect very, very strong double-digit growth, EU, as we continue to penetrate in France, which is the second-largest market and also one where we've gotten pricing that's very competitive and actually better than the most recent product that came into market. So we are doing well. As I mentioned in my comments, overall share excluding France is in the low to mid 20s and we are just now penetrating that. In some markets, we are seeing share reach the 30% or 40% range and we are continuing to launch in different geographies around the world. So I'd say we are pretty pleased. We have more and more longer-term data. Remember, when we began the launch of this product in Europe, we were dealing with small amounts of data over a short period of time and we now have SPIRIT III, one year; SPIRIT II, two year; and we will have the full two-year SPIRIT III data, as I mentioned, the PCR here, in a couple of weeks. So we feel pretty good about the way things are going in obviously not only EU but we're focused on U.S. launch during the second quarter.

I’m not going to let you off that easily. So for the second quarter, are you looking at $15 million sequential growth, $30 million sequential growth, $50 million, can you give us some ballpark?

I'd say it's between those last two numbers that you gave.

Between 30 and 50?

Roughly.

Thank you very much.

You're welcome.

Thank you. Our next question is from Larry Keusch, and please state your company name.

Yes, it's Goldman Sachs. Tom, first on no mention really of the cash flow generation in the quarter, I am wondering if you could just give us any feel to the extend that to have it. And on top of that, I think if you add up the share repurchase with the 800 million that you've purchased in the first quarter, you did 1 billion last year, you're coming close to that $2.5 billion authorization, maybe just help us again to think about how you are thinking about deploying cash? And then the second question, for either of you guys, as J&J mentioned, some early hints that maybe there were some weakening in surgical procedures growth, and again I know you don't hit the surgical suite in a major way, but just any thought there would be helpful.

Cash flow was very good in the quarter. Our operating cash flow was up over 25%. That will be reflected in our 10-Q, so very good story there. Shares, we have around $700 million remaining on our authorization. And you're right, Larry, last year we did buy back around $1 billion and as evidenced in our first-quarter buybacks and really what we've done in the last few years, this continues to be a very important program for us in terms of returning cash to shareholders and returning value to shareholders. So we hope to continue that as we progress. Cash deployment, I mean we increased our dividend over 10% announced [ph] back in February and shareholders will see that for the first time in their May checks. So we continue to be committed to a strong dividend growth as we have been over the last 35 plus years. And the share repurchase you mentioned, certainly I think we may look at debt to a degree, but we are somewhat comfortable with our debt levels right now and I think the other items would be probably higher priority over the near-term. I'll comment a little bit on surgical procedures. As I talk to our various business people, I'm hearing really none of that. Perhaps it's because of the nature of our businesses that we're not as capital intense in terms of sales as some of the other companies that have talked about this. Obviously, we're not capital intensive or we really don't depend on that. And if you look at our device businesses in the first quarter, they were strong, certainly I think relative to expectations, and we are really not seen any impact some of the other companies have talked about. Maybe John can comment on that as well.

Now, I... the business reviews that we've done, Larry, there is no indication across the board that there is any impact from the economy on our businesses in general and certainly not with procedures or buying patterns that we've seen.

Okay. Terrific. Thanks, guys.

Okay.

Thank you. Our next question is from Michael Weinstein, and please state your company name.

Hi, good morning. JPMorgan.

Good morning.

Good morning. I'm going to apologize upfront because I was jumping back and forth between your call and the St. Jude call, so I missed some of the discussion. Did you give some metrics relative to the HUMIRA license for psoriasis and where you think you are with the derms right now?

Yes, we did. I mentioned in my remarks, Mike, that we were up about eight share points since the launch, which has only been a few weeks, and that we are in excess of 20% share in derm now.

Okay, perfect. Let me switch gears on the discussion around the TAP resolution and the bringing of Lupron in-house. Could you just talk a little bit strategically about the company's efforts to build out an oncology presence? And obviously, you've done some collaborations that are pretty interesting and you've got an early-stage pipeline, but between now and the development of that pipeline there is going to be some time. So how do [ph] you think about external opportunities in oncology? Has that become a priority for the company as it looks to build out a bigger presence in oncology in near and longer term?

Well, it’s certainly a key strategic priority. We had a very, I think, well-received arrangement with Genentech last year where we were going to co-develop two Abbott compounds and obviously Genentech brings a lot of things to the party for us in terms of development expertise and ultimately partnering potential in the oncology market when these products come to market. On top of that, we have three other pretty significant opportunities in earlier stages in oncology and those are totally within our control. So it is an important strategic area for us, and Lupron coming in with this good oncology franchise is something we can build around. And obviously Lupron has been a product that's been very steady on the market for a long period of time and we expect that to continue many years into the future, and as the product progress their way through the development pipeline we will be able to build around that and ultimately with Genentech with a couple of products and building around this Lupron franchise have a good commercial presence when the products come to market.

And last question, do you want to talk a little bit about expectations for XIENCE as the launch approaches in the U.S., assuming this will be the... hopefully will be the last earnings call prior to the approval? The Street has been jacking [ph] around with what they think XIENCE might do domestically. Do you want to update your thoughts there?

Well, we feel very good about it. Obviously, with the data this product has we’ve felt great about it all along. The deliverability of this stent has really played out, we think, in Europe, and as we've seen bare-metal recover here with the temporary declines in DES market, the platform is obviously very, very popular and it's a great platform. So with the commercial organization we have, the data, the stent platform, we continue to see no reason we can't have for XIENCE alone a year out from launch 25% to 30% share of the U.S. market and that certainly is our baseline target. And we don't see any reason we can't do at least that well going forward.

Okay, great. Thank you, Tom.

Thank you.

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

Hi, thanks. Wachovia. Thanks for taking the question.

Hello.

On TAP, the $1.5 billion in payments over five years, what percent of that is royalties, what percent is milestone payments? That's my first question.

Larry, we haven't broken that out specifically. It's cash payments spread over five years and what we are going to do is update you as we go through the year on an outlook, we gave you the second quarter of a 100 million and that's all cash payments from Takeda related to the deal. So as we go forward we'll do that. But we are not specifically breaking out the percentages of that.

Okay. Any update on Depakote ER and your expectations for a generic to launch once the IR patents expire in July?

Yes, certainly Larry. As we've said many times in the past, this... the IR compound patent does expire late July. We've fully factored that into our plan. As you know, we have processed intellectual property patents around the ER version and as John mentioned in his remarks well over 50% of the scripts are in the ER version, but we have watched and experienced over the last few years aggressive activity from generics and have concluded that while we will defend our intellectual property as we always do, it would not be prudent to predict the behavior of generic companies and not... we really have not built our forecast for the second half of the year counting on much out of Depakote ER. The only thing we are expecting is a degree of brand loyalty, fairly modest, and the epilepsy aspect of that product, but we’ve very realistic about planning it. Nothing really has changed from the last time we talked about it on the fourth quarter call, and we feel very comfortable that we've very realistically factored in the Depakote generic issue in our financial forecast for the year.

My last question is just could you talk about how you view the disruption in the cholesterol market caused by ENHANCE? I mean specifically, do you see it as a net positive or negative for your cholesterol franchise? Thanks.

Yes. Hi, Larry. So actually what we've seen is, we have… as you probably have noted there has been some recent prescription trend impact to the products that you are referring to, both Vytorin and Zetia, but really no others in the class. And as I mentioned in my remarks, both of our products… in fact all three of our products now have done quite well and total prescription share for Tricor and Niaspan are both growing ahead of the cholesterol market, albeit at a cholesterol market growth rate that is somewhat down from last year. But still we are growing in excess of the market, Niaspan almost twice as strong as the market. And so, really it's a question of which therapies are being used and we've continued to see in the market an expansion of generic Zocor, Simvastatin, which is to be expected and that actually is not a bad thing for us as the base of generic Zocor prescriptions expands with Simcor. That's a natural opportunity for us as well. So [inaudible] about what we’ve got, haven't seen significant impact here in the marketplace really only to those two therapies.

Thanks.

Thank you.

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

Good morning, everybody, couple of questions here. Tom, tax rate I think it [ph] includes R&D tax credits. Can you remind us what the potential impact is?

Sure. First of all, we don't have that included in our forecast nor should anybody because obviously Congress is not extended or enacted the new R&D tax credit that’s being contemplated. It's fairly modest impact. If it did happen, that would be a bit of an upside to our tax rate, it would take it down a little bit, but it's not huge for us, relatively modest, but certainly it's not something we can count on or that frankly anyone should gone on this year.

Okay. Turning back to XIENCE, you all continue to expect a second quarter launch. Can you give us any perspective on what you've incorporated in your second quarter guidance, either in timing, any kind of color you can give us? And there has been some concern that there was some [ph] back and forth with the FDA on issues... unnamed issues. Do you feel like you're working through whatever process you're going through and are you as confident, more confident, any color would be helpful?

Okay. Well, I would say that we're right on track as we mentioned with our second quarter approval timing, and based on that we're obviously far along in the process. So, we are not going to respond to any speculation on discussions with the FDA, that's not appropriate, but obviously we are comfortable in terms of tracking right to that the second quarter timing expectation. And to get there we would have to be far along. We are not going to get specific about what month or what week it's going to be and I don't think that investors are interested in that as much as they are with the fact that the product is going to come to market, that it's going to take significant share when it does get to market. So, I'd say in general, things are progressing in a positive manner and we're in the final steps of the process.

And Rick, we're careful planners and my second quarter is not dependent on precise timing of the XIENCE approval.

That's good to hear. And Tom, related to that you highlighted the... you all highlighted the increasing PCI procedures, the increasing DES penetration. On the other side, can you talk about price pressures? We've heard about a little more aggressive price pressure with Endeavor now on the market. Is it tracking in line with what you would have thought [inaudible] any perspective there would be welcome?

Well, I'll take that Rick. Actually, the pricing situation year-over-year, as expected, is similar to I think what one of the competitors mentioned last year in terms of an overall decline in the U.S. of about 6%. EU, our numbers are actually a little bit better than what heard yesterday, down about 8% year-over-year. But what's encouraging is the sequential decline is actually only about 1% in both the U.S. and EU from fourth quarter to first quarter. So, price is holding up quite nicely, and as we talked about before, we've got a premium price in France for our product, that's a better product with the best technology and best data and ahead of what the last competitor that came to market was able to get in that market. So, pricing has actually appeared to stabilize and is only down a little bit sequentially.

I must sneak in one last one here. Obviously, you have been spending in advance of all the new products that are launching and as you have highlighted, John, are expected to launch throughout this year. Question, Tom, is on operating leverage. With gross margins maybe a little more pressured than you thought and we thought, can we still expect to see positive operating leverage on the operating line as we go through the year, and is there... I keep thinking there's going to be more leverage in the P&L maybe at some point as these new products launch and the positive mix flows through. Is that realistic?

That continues to be an objective, and looking at the operating margin ratio we do see a degree of leverages that’s here for the full year as we forecast it right now. But I think when you look... even though our gross margin is a little down from our expectation, it still has the potential to be slightly up from last year and when you look at the rest of the P&L that should result in a bit of operating leverage this year. But now this is not the year when you're launching such important products for us to be that focused on operating average, and we've got to get these products well-established, which we are making great progress on as John talked about in the first quarter. And I think the SG&A leverage for us... and we said this on the fourth quarter call that we are going to be roughly the same level as we were last year as a percent of sales. Operating leverage probably comes a little beyond 2008 for us, but it continues to be an objective and we want to see the ratios improve as well. But with that said, we… you still see EPS for us growing faster than sales this year and to me that's the ultimate leverage when you add it all the way up to the bottom line including the good job we've done in the tax area over the years. You are seeing leverage and EPS and that's very important.

Thank you so much.

Thank you.

Thank you. Our next question is from Bruce Cranna, and please state your company name.

Hi, good morning. It's Leerink Swann.

Hello.

Hi, guys. John, just so I’m clear on the Takeda thing, I don't want to... I won't push too hard, but if I roughly look at the Lupron sales and figure, kind of a normal pre-tax rate on that, and then add $300 million or so run rate from Takeda, is it fair to look at that combination on a pre-tax basis as being maybe slightly more favorable to you this year than the way we've been looking at the other income line from TAP?

No. What you really got to be careful on is the tax issue here, and remember that while it's true our pre-tax income when you combine the two lines, both the Lupron margins and the other income line that I talked about in my remarks, it will be higher. The tax rate on this flowing through our tax line is also higher and that's closer to U.S. statutory rates. When we get down to the net profit, at least in 2008, that's where we get to the neutral to EPS conclusion. As I said in my remarks and we said earlier when we announced the deal, beyond 2008 this could be neutral to better to earnings. But this year because of the net effect, pretty neutral.

Okay. And then [inaudible] at EuroPCR, any comment on what sort of numbers we might see in [ph] patients for two years?

What do you mean what sort of numbers?

Well, how many patients for two years you think?

I think we’ve got about... yes, it's about a 1000 and we look forward to presenting that data and investors are interested in that data. We are in the process of compiling it right now. So we'll see it in a couple of weeks.

And then John, lastly for me, I have to ask on the Niaspan side, you mentioned your expectations for '08 sort of… I think you said strong double digits. How do you think about the risks to that franchise from a presumptive Coadaptive launch and if so how do you manage that if that drug does in fact launch?

Well, the way we look at it and we've always said this is that we expect that product to come to market. It is in our models. I can't comment and I don’t think it would be appropriate for us to comment on potential FDA approval or not or delays or so forth because we've obviously heard different views. Our job is to plan for the most conservative situation, and so we plan that they will be in the market. We think that will bring additional share of voice and emphasis on the importance of raising HDL and that's a good thing for growing the entire market. We have a lot of respect for Merck and their abilities on the pharma side. And so, between the two of us, I think we will continue to promote the benefits of HDL raising, which are well known. Niaspan stands out on its own in terms of its data for HDL raising as I mentioned and it's also one of the safest products. It has been around a long time. Our new film-coated version has some benefits that older extended release Niaspan products do not have in terms of tolerability, side-effect profile and so forth. So, when you look at all of that together, I guess the only thing I'd say is if that product does come to market, that being Coadaptive, the only thing we look at is it doesn't really provide in our opinion an efficacy benefit. It adds a new molecular entity over the long term to lower what is a nuisance side effect, not a safety issue, and that product does not eliminate that side effect. In fact, as I mentioned in my remarks, when you look at discontinuation rates due to flushing, our data suggests that Niaspan has less than 6% of patients continue due to flushing and that stacks up last I saw very favorably to what Merck has shown on Coadaptive.

Okay. That's helpful. Thank you.

You're welcome.

I would now like to turn the call back over to the speakers for closing remarks.

Okay, thank you. That concludes our conference call. A replay of this call will be available after 11 AM Central Time today on Abbott's Investor Relations website at abbottinvestor.com and after 11 AM Central Time via telephone at 402-220-6439, confirmation code 5567475. The audio replay will be available until 4 PM next Wednesday, April 23rd. And we do thank you again for joining us today. Please call us if you have any questions.

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