Abbott Laboratories (ABT) Q4 2010 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] 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 express written permission. I would now like to introduce Mr. John Thomas, Vice President, Investor Relations and Public Affairs.

Good morning, and thanks for joining us. Also on today's call will be Miles White, Chairman of the Board and Chief Executive Officer; Tom Freyman, Executive Vice President and Chief Financial Officer; and Larry Peepo, Divisional Vice President of Investor Relations. Miles will provide his opening remarks and Tom will review the details of our fourth quarter results and our outlook for 2011. I'll then discuss the highlights of our major businesses. Following our comments, Miles, Tom, Larry and I will take your questions. Some statements made today may be forward-looking. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2009, and in Item 1A, Risk Factors to our quarterly reports on Securities and Exchange Commission Form 10-Q for the quarters ended March 31, 2010, and September 30, 2010, and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. In today's conference call, as we do in the past, non-GAAP financial measures will be used to help our investors understand Abbot’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. And so with that, it's my pleasure to introduce Miles White. Miles?

Thanks, John. Good morning. This morning, I'll review our 2010 performance as well as our outlook for 2011. Tom and John will walk you through the details of our fourth quarter and full year results, as well as our 2011 outlook and then we’ll take your questions. As you can see from our earnings news release, Abbott reported another year of industry-leading performance in 2010. Despite the strength of this performance, it was a challenging year for Abbott as it was for the entire healthcare industry and for the global economy. In 2010, the healthcare industry, as a whole, faced a number of significant headwinds. These pressures have been well documented and include the slow recovery of the global economy, the costs associated with U.S. healthcare reform, European pricing pressures and austerity measures in a regulatory environment in which it's frankly more difficult to get products approved. Each of these factors is considerable in and of itself. Combined, they added up to a significant impact on our business. Despite this, we delivered. We managed through the challenges, as we've always done, and delivered double-digit EPS growth. However, this is the environment we're operating in, and so we have to continue to respond in ways that protect our shareholders and strengthen the long-term sustainability of our business. This morning, we took actions in our Pharmaceutical business to reduce commercial and manufacturing operating costs primarily in the U.S. You'll recall that we took similar actions outside the U.S. last year in conjunction with the Solvay integration. At the same time in 2010, we built for our future by expanding our emerging markets infrastructure and investing in and expanding our pipeline. As we announced this morning, Abbott achieved full year ongoing EPS growth of 12%. We also drove a 200 basis point improvement in gross margin to more than 60% of sales and delivered another record year of operating cash flow of more than $8 billion, well exceeding our 2009 level of $7.3 billion. And we returned $2.7 billion to shareholders in the form of dividends. Our payout ratio is strong at more than 40%. We've increased our dividend for 38 consecutive years making Abbott one of only a handful of U.S. companies to deliver with such consistency. Our results, again, underscore why we've remained a broad-based healthcare company with a diverse mix of businesses and geographic operations as well as numerous sources of earnings and cash flow. Out of that diversity, we can achieve strong, reliable performance. That's our identity and that's what you expect from us. As we announced this morning, we expect to deliver double-digit earnings growth, again, in 2011. I'll talk more about the year ahead in just a moment. In 2010, our sales and earnings growth came in many different forms: from our existing products, from new product launches, from geographic expansions and from acquisitions. We maintained commercial leadership positions in a wide range of attractive growth markets and importantly, we not only grew our sales, but we improved the profitability of our operating businesses. So let me highlight a few examples. In our Vascular business, which includes more than 100 brands across more than a dozen segments, our XIENCE family of drug-eluting stents captured the number one global position with its successful launch in Japan early last year. We also hold the number one position in the metallic stents and guide wires and expect the forthcoming U.S. launch of our TREK balloon to help us capture the number one market position in that category as well. As a result of our success, Abbott Vascular has quadrupled its operating margin from 2008 to 2010 to more than $900 million. In Pharmaceutical, we successfully completed the acquisitions of both Solvay Pharmaceuticals and Piramal Healthcare Solutions, which added significant commercial infrastructure in emerging markets, hundreds of new branded generics as well as two market-leading products, CREON and AndroGel. HUMIRA, our biologic for the treatment of autoimmune diseases, delivered growth of nearly 20% for 2010. We are well positioned with this product over the long term including continued double-digit growth in 2011. In Vision Care, we hold the number one position in LASIK and the number two position in cataract lens technology, launching several new intraocular lenses last year and a new contact lens solution. Our Nutrition business is one of the strongest globally. It generates high return on invested capital and significant cash flow. Outside the United States, we expect to maintain double-digit growth with stronger growth in emerging markets. In the U.S., our underlying performance is strong. However, as you know last year, we had a recall of some our infant formula products. We've addressed it, and our recovery is tracking slightly ahead of our expectations as we work hard to recapture our share. Within Core Laboratory Diagnostics, Abbott holds the number one position globally in blood screening and immunoassay diagnostics, where we launched a number of key assays last year and expect to launch a dozen more this year. Our Molecular and Point of Care Diagnostics businesses are smaller in size but are growing at a strong double-digit pace. And over the last several years, we've significantly improved cash flow generation and expanded operating margins in our Diagnostics businesses. We expect steady improvement going forward. In 2010, we also took a number of important strategic steps to continue to position Abbott for long-term sustainable growth in an increasingly difficult environment and rapidly changing world. We focused on building our infrastructure in emerging markets as well as our pipeline. I'll start with emerging markets, which will play a critical role in the success of the healthcare industry going forward. Today, Abbott is one of the best-positioned healthcare companies to capture growth in this segment. Over the past several years, we've expanded our product offerings and strengthened our emerging markets' presence across our businesses. And in 2010, we took several actions to frame our future in these regions. In addition to completing the Solvay and Piramal acquisitions, we entered into a licensing agreement with Zydus Cadila of India. These actions, together, expanded our presence in many of the most populous, fast-growing markets. They brought us a large portfolio of stable, branded generic products and together with our existing businesses made us the largest pharmaceutical company in India, an $8 billion pharmaceutical market that's expected to double in the next five years. We also created our new Established Products Division, or EPD. Similar to what we did it with our international Nutritionals business several years ago, we carved out EPD from our international pharmaceuticals organization to give it the focus it needs to drive profitable growth of our branded generics portfolio, particularly in emerging markets. These product have strong brand identity and customer loyalty that make them more profitable than traditional commodity generics. In 2011, we expect EPD sales of approximately $5 billion. These actions have given us the right commercial footprint to become one of the largest pharmaceutical companies in emerging markets, which are expected to grow at 3x the rate of developed markets. This is driven by population growth, rising incomes and modernization of health systems and an increase in the treatment of chronic diseases. These markets represent one of the greatest opportunities in healthcare, not only in pharmaceuticals, but across our business segments. We are also focused on maximizing the growth potential of our International and Nutritionals business. After Pharmaceuticals, it's the second largest segment of our business in emerging markets. We expect to more than double our Nutritionals sales in emerging markets over the next five years, with sales in China alone approaching $1 billion by 2014. Abbott is particularly well positioned to take advantage of the growth we're seeing in emerging markets as evidenced by our results today. In 2010, our total sales in emerging markets broadly defined for more than $8 billion or nearly 25% of Abbott's total sales. In 2011, we expect sales to exceed $9 billion for this geographic segment and by 2014, we expect more than $14 billion in emerging markets sales reflecting a compound annual growth rate of more than 15%. As important as capturing new geographic growth opportunities is, is the development of our new product pipeline. At our core, we are an innovation-driven business and developing new life-saving and life-changing medicines and technologies for patients is vital to our long-term success. In 2010, we invested 10% of our sales or $3.5 billion in research and development across our broad-based pipeline. We made progress advancing our own internal pipeline and aggressively enhanced our mid- and late-stage pharmaceutical pipelines through licensing and acquisitions. We added a total of four new molecular entities that are in late stage development. And by the end of this year, we'll have nearly 20 new molecular entities and indications in Phase II or III. This includes unique compounds for hepatitis C, chronic kidney disease, neuroscience and pain management, women's health, immunology and oncology, among other areas of high medical benefit and opportunity. Let me highlight a few of the more promising opportunities. We've made significant progress with our internal hepatitis C program. The HCV treatment landscape is expected to change rapidly over the next several years and will evolve considerably even after the newest therapies come to market. In HCV, it's not about arriving first but arriving with the best treatment. Last year, our program moved faster than any competitors, and we believe we're in a position to become a significant player. We're one of the only companies with compound spending multiple mechanisms of action. We have one of the best HCV protease inhibitors in development, based on data that's shown unprecedented antiviral activity. We'll present additional data on that compound as well as our other HCV compounds throughout the year. We expect to have five different Phase II HCV programs underway by year-end. Through our agreement with Reata Pharmaceuticals, we acquired international rights to bardoxolone excluding certain Asian markets. It's a compound for chronic kidney disease that we expect to enter Phase III in the first half of this year. Chronic kidney disease is a significant cost to the global healthcare system, driven by a patient's eventual need for dialysis. Bardoxolone has the potential to prevent and possibly reverse the progression CKD. To date, no treatment has been shown to reverse disease progression. Bardoxolone could change the treatment landscape as well as have a significant economic benefit to the healthcare system. In our neuroscience pipeline, we have 14 compounds in human trials to address a myriad of conditions from pain to Alzheimer's disease to multiple sclerosis. Daclizumab is a biologic for multiple sclerosis that we obtained through our acquisition of Facet last year. It's currently in Phase III studies and has the potential to offer enhanced efficacy over many existing MS therapies along with a favorable safety profile. We also continue to make good progress in oncology. Our pipeline includes a number of new molecular entities in clinical development for more than a dozen different cancer types. Elotuzumab, which we also acquired through the Facet acquisition, has demonstrated very good response rates in relapsed multiple myeloma, the second most common blood cancer in the U.S. We anticipate initiating Phase III development with our partner company early this year. So as you can see, we have a lot moving forward in our pharmaceutical pipeline, and look forward to numerous new trial starts and new data presentations throughout the year. We also expect 2011 to be an active year in our medical devices pipeline. In the Vascular business, we're working on well-staged advances and truly game-changing technologies that have the ability to restate the market. These include devices such as XIENCE NANO and XIENCE PRIME in the U.S., as well as our bioresorbable vascular scaffold or BVS technology called ABSORB. We recently received European approval for ABSORB and are several years ahead of any competitor in this space. Given its unique attributes, we believe ABSORB has the ability to revolutionize the treatment of coronary artery disease. Another potential breakthrough technology in our vascular pipeline is MitraClip, which treats significant mitral regurgitation. It's the most common structural heart defect and causes numerous downstream effects such as congestive heart failure, stroke and eventually death. MitraClip is on the market in Europe and is under U.S. FDA review. We continue to work toward an advisory panel for MitraClip in 2011. In our Vision Care pipeline, we expect 20 new products and technology advancements over the next five years. In Diagnostics, we have a number of new assays and next-generation systems launching over the next several years that collectively will contribute to our future growth. This includes our IBIS molecular technology, which has numerous applications including forensics, bio-preparedness, public health surveillance and bio-pharmaceutical testings. So as I look back at 2010, despite the many challenges that are impacting our industry, Abbott had another productive year. As we look to 2011, we have a realistic view of our future. We're planning and preparing for a similar environment. It's not getting any easier. However, we have a very experienced management team that has navigated through some difficult headwinds before and I have every confidence that we will succeed. We’ll continue to respond and structure the company to be successful going forward. At the same time, we're enhancing R&D productivity and expanding geographically to capture new growth opportunities in the years ahead. As our industry continues to evolve, so does Abbott. We expect our earnings per share growth trajectory to remain at the top of our peer group, maintaining Abbott's long-established position as a dependable, durable, high-performing leader in the healthcare industry. Our diversified base of earnings and our ability to manage through adversity, differentiates Abbott from many of its peers and as a result despite challenges in the global business environment, we are confident on our strong financial position and we continue to target double-digit earnings per share growth in the years ahead. With that, I'll turn it over to Tom and John for a more detailed overview of the fourth quarter as well as 2011. And then we'll come back and take your questions. Tom?

Thanks, Miles. As you can see, from our earnings news release this morning we had a strong fourth quarter delivering double-digit sales and ongoing earnings growth, and we are very pleased with our overall performance in 2010 as we delivered top-tier results. For the fourth quarter, we reported ongoing diluted earnings per share of $1.30, an increase of 10.2% over the prior year consistent with our previous guidance. Sales growth in the quarter was 13.4% including an unfavorable 0.4% impact from exchange rate. The adjusted gross margin ratio was 60.6%, up 230 basis points from the prior year. The ratio reflects improving operating performance across several businesses including Vascular, Pharmaceutical, Diabetes Care and Diagnostics. We also had strong investment spending in the quarter, including the contribution from the Solvay Pharmaceuticals acquisition. Ongoing R&D investment was nearly 10% of sales, reflecting continued progress in our broad-based pipeline. This includes opportunities in medical devices and Nutritionals as well as promising clinical programs in HCV, oncology, chronic kidney disease and neuroscience. Overall, as we look at 2010, we delivered double-digit ongoing EPS growth despite a number of factors that impacted our industry. We improved our competitive position in emerging markets and added to our late-stage pipeline and are taking actions to improve the overall efficiency of the company, while continuing to invest in the business to drive future growth. Today, we issued 2011 ongoing earnings per share guidance of $4.54 to $4.64. As Miles noted, this reflects another year of double-digit growth as the midpoint of the range. Before I get into the specifics of guidance for the year, let me discuss some of the factors that have influenced our outlook for 2011. This includes a number of environmental factors that are impacting the industry around the world. As we outlined last year, after the passage of U.S. healthcare reform, there are new aspects of the bill that will become effective in 2011 for all pharmaceutical companies. For Abbott specifically, these represent an incremental cost of more than $200 million in 2011. This is in addition to more than $200 million in increased rebates resulting from the bills that were implemented in 2010. The new aspects of the bill for 2011 include the pharmaceutical industry fee and additional rebates related to the Medicare Part D donut hole. In accordance with industry accounting guidance, the Pharmacy must be recorded as an SG&A expense. The additional costs associated with the Medicare donut hole will be recorded as a reduction to net sales in the U.S. Pharma business. Our 2011 outlook also reflects that carryover impact on pharmaceutical pricing from the European austerity measures implemented last year and an estimate of actions anticipated in 2011. As you know, significant actions taken by several European countries largely occurred in the second half of last year. So there is an incremental impact in 2011. Our forecast of the combined incremental 2011 impact of these 2010 and 2011 pricing actions exceeds $250 million. Our 2011 guidance assumes that we continue the recovery in our U.S. Nutritionals business that we've seen in recent weeks following the recall last year. Inventories in the distribution channel are near normal levels. The recall will create difficult sales comparisons for this business in the first half of 2011, as John will discuss in a few minutes. And finally, as you know, Abbott has historically reported the quarterly results of our International businesses on a one-month lag. We will be eliminating the one-month lag beginning in 2011, resulting in more timely reporting of international results as well as certain internal efficiencies. As you are aware, in 2010, our reported international results reflected the 12 months ended November 30. For 2011, our international results will reflect the 12 months ended December 31. We do not expect any material variations in comparisons of sales and ongoing results to the prior year due to this change. So with these factors and assumptions in mind, let's turn back to our outlook for 2011. Regarding sales in 2011, we expect high-single-digit growth including the contribution from the acquisitions of Solvay Pharmaceuticals, which closed in February 2010, and Piramal Healthcare Solutions, which closed in September 2010. This is particularly strong growth given the expectations I’ve mentioned for the impacts of U.S. healthcare reform, European pricing and our U.S. Nutritionals business in the first half. We are assuming a neutral impact from foreign exchange on full year 2011 sales. Also for 2011, we're forecasting an adjusted gross margin ratio somewhat above 2010, which was 60.2%, reflecting underlying and favorable product mix and efficiency initiatives, partially offset by the impacts from U.S. healthcare reform and European pricing measures. We're forecasting continuing strong investments in R&D to drive long-term growth, with R&D of around 10% of sales. We forecast SG&A at somewhat above 27% of sales. This reflects some SG&A leverage despite our continued investment in emerging markets infrastructure across the businesses and the negative impact of the pharmacy associated with U.S. healthcare reform, which is inflating SG&A growth over 2010, as I mentioned earlier. We’re forecasting net interest expense of approximately $475 million in 2011, and we're not forecasting share repurchases in 2011 as we plan to build additional liquidity this year. Now let's turn to our quarterly earnings outlook. We’re forecasting quarterly ongoing EPS growth in 2011 that's fairly consistent with our full year growth guidance of approximately 10% at the midpoint of the range. Today, for the first time, we're providing first quarter ongoing EPS guidance of $0.88 to $0.90, the midpoint of which would reflect double-digit growth. We're forecasting specified items for the first quarter of approximately $0.32 per share, primarily associated with acquisition integration, cost reduction initiatives and in-process R&D related to the Reata collaboration. We're forecasting mid-teens sales growth in the first quarter including the impact of the Solvay and Piramal acquisitions. We've assumed an unfavorable impact from exchange on sales of approximately 1% and a gross margin ratio approaching 60% in the first quarter. We forecast the tax rate at 15.5% to 16% in the first quarter. As a reminder, in the first quarter, we expect to begin reporting the results of our new divisions, Established Products, or EPD, in our earnings news releases. Our Pharmaceutical business will be reported in two parts: our patented products business with its U.S. and x U.S. divisions and EPD, which will be focused on x U.S. sales of branded generic products. So in summary, our global diversified business strategy is continuing to deliver sustainable results. In 2010, we achieved our key financial goals and continue to shape Abbott for the long term. Our diversified business mix, the market-leading products within our core franchises and the strategic actions we've taken all provide a strong foundation from which we expect to continue to grow in 2011 and beyond. With that, let's turn to the business operating highlights. John?

Thanks, Tom. This morning, I'll review the quarterly performance of our major business segments: Pharmaceuticals, Medical Devices, Diagnostics and Nutritionals. Let me start with our global Pharmaceutical business where worldwide reported sales in the quarter increased more than 22%, driven by 30% growth in our International Pharmaceuticals business and more than 14% growth in our U.S. business. For the full year 2010, worldwide reported sales increased more than 20%. Sales included the contribution from the Solvay Pharmaceuticals acquisition, which closed in February, and the Piramal Healthcare Solutions acquisition, which closed in September. In our Proprietary Pharmaceuticals business, global HUMIRA operational sales, which excludes the impact of foreign exchange, increased more than 15% in the quarter. Performance was driven by strong international operational sales growth of more than 17% and U.S. sales growth of more than 13%. Full year global sales increased 19%, which was in line with our expectations. Internationally, strong double-digit market growth continues in the major European countries where HUMIRA holds the number one share position. And the HUMIRA growth in the U.S. continues to outpace the overall market. We're continuing our development efforts with HUMIRA as well, including the study of new indications and other product enhancements. To that end, we recently submitted our U.S. regulatory application for ulcerative colitis and we’re expecting to submit our application in Europe shortly. We're also evaluating other incremental indications currently in mid- to late-stage development. We also continue to launch HUMIRA indications into new countries around the world, including the recent approval for our ankylosing spondylitis and Crohn's disease indications in Japan. HUMIRA clinical data continues to compare favorably versus existing agents or potential new competitors. At the recent ACR, or American College of Rheumatology, meeting, we presented data across the rheumatology indications including long-term radiographic inhibition data. Based on an outstanding clinical profile across our full range of indications, more than 13 years of clinical experience, as well as our strong managed care standing, we are well positioned for continued growth with HUMIRA. To that end, our full year 2011 forecast, we expect global HUMIRA reported sales growth in the low teens. Moving on to our lipid franchise, where sales of Niaspan or HDL-raising therapy were $286 million in the quarter and that's up nearly 13%. And significantly outpacing the growth of the overall lipid market. Full-year Niaspan sales were more than $921 million. Our focus on high-risk patients, as well as the HALTS data, which showed significant benefits in this patient population, has driven market share growth over the past year. So in 2011, we expect another year of double-digit growth for Niaspan. Global TRILIPIX/TriCor sales in the quarter increased more than 19%, including the international contribution from Solvay. In the U.S., sales were flat. In 2011, we expect a modest decline for TriCor/TRILIPIX in the U.S. and internationally, we expect sales of nearly $300 million. U.S. sales of two key products we picked up from Solvay, AndroGel and CREON, were $216 million and $92 million respectively. AndroGel holds the number one share position in the testosterone replacement market. It's an attractive category where growth is being driven by increasing diagnosis and treatment of low testosterone. CREON also maintains a leadership position in the pancreatic enzyme market. And over the past year, we've captured significant market share in the U.S. U.S. sales of Centro in the quarter remains strong at more than $450 million for the full year. And we expect continued, steady growth in 2011. As you may be aware, last year's CMS finalized a policy regarding the bundled-payment rate for end-stage renal disease treatment, including certain drugs used as part of the therapy. As a result, renal care providers have sought significant price reductions for impacted drugs and that includes Zemplar. Based upon the latest pricing and resulting contracts for 2011, we're expecting U.S. Zemplar sales this year of approximately $250 million. This is a reduction of more than $200 million versus the prior year, and that's been incorporated into our 2011 guidance. In terms of our 2011 outlook for U.S. pharmaceuticals overall, we expect mid- to high- single-digit growth and our total International Pharmaceutical business, which includes both our Proprietary business as well as our new Established Products Division, we expect low double-digit growth including the partial year contributions to Solvay and Piramal. As discussed, we’ll report sales from EPD this year beginning with first quarter earnings. We continue to expect sales for this new division to be approximately $5 billion in full year 2011. Let me now turn to our Medical Devices business, where our Vascular business delivered very strong performance in the fourth quarter particularly in international markets where growth was robust. Worldwide reported sales increased nearly 14% in vascular, and international vascular sales grew 37% driven by the continued success of our drug-eluting stents XIENCE and XIENCE PRIME. Global DES franchise sales in the quarter were approximately $470 million and that's up 25% from a year ago. We continue to expand our position with the number one drug-eluting stent globally. In the international markets, which now account for 60% of our DES business, XIENCE PRIME continues to capture share. In Europe, for example, XIENCE PRIME has driven an approximate eight-share point gain for Abbott's total DES franchise since its launch, while our next closest competitor has lost between eight- and 10-share points. We also recently expanded our XIENCE PRIME indication in Europe for critical limb ischemia, CLI. CLI is the most advanced form of peripheral artery disease and can ultimately lead to limb amputation. XIENCE also maintains its leadership position in Japan with total XIENCE share in the 45% to 50% range. Japan is the second-largest DES market, as you know, with market sales of $500 million to $600 million annually. And in the U.S., XIENCE maintained market share leadership with more than 30% share in the fourth quarter. Also in the U.S., PCI volume in the fourth quarter was down modestly versus the prior year and DES penetration remained in the high-70s. As Miles mentioned, earlier this month, we announced the CE Mark approval of ABSORB in Europe. ABSORB is the world's first drug-eluting bioresorable vascular scaffold, or BVS device. It restores blood flow by opening a clogged vessel and providing support to the vessel until the vessel dissolves completely, leaving patients with a treated vessel-free of a permanent metallic implant. We believe ABSORB will change the way coronary artery disease is treated in the future. ABSORB will be made available in select sized to a limited number of centers in Europe later this year and into 2012. This will enable physicians in these centers to increase their clinical experience of the technology and to continue to develop the therapy. A full-scale European commercial launch of ABSORB with a broad-sized matrix is planned by the second half of 2012. And we expect to begin our global trial for U.S. approval later this year. We continue to broaden our product offerings in other vascular segments as well. Our next-generation balloon TREK is picking up share since its launch last year in Europe, as more physicians are discovering its best-in-class deliverability and broad-sized matrix. We plan to launch TREK in a range of sizes in the U.S. and Japan here early in 2011. And regarding our Carotid business, today, an FDA panel is reviewing CREST Clinical Trial data as part of our submission to expand our indication for our Acculink Carotid Stent System. The CREST data demonstrated that carotid stenting was equally safe and effective as surgery in both patients at standard risk for surgery as well as those who are at high risk for surgery. Today, Acculink is only indicated for high-risk patients. So looking ahead to 2011 in our global Vascular business, we expect low- to mid-single-digit reported sales growth with stronger growth expected in the first quarter. Turning to our global Diabetes business, worldwide reported sales were up nearly 2% in the quarter. We continue to grow our retail prescription share through expanded consumer outreach and patient education. In addition, in 2010, we significantly improved the profitability of our Diabetes Care business as a result of a more favorable product mix and operating cost reductions. And we expect continued margin improvement in this year 2011. Looking ahead to 2011 in our global Diabetes business, we expect low- to mid-single-digit revenue growth. Let me move on to Vision Care and AMO where worldwide reported sales were $280 million in the quarter and more than $1 billion for the full year 2010. As a reminder, as we noted on our fourth quarter 2009 earnings call, we transitioned AMO to a calendar-reporting structure in 2009. So fourth quarter 2009 results include an additional month of international sales. Adjusting for this, international sales were up double digits this quarter. U.S. sales were up nearly 7% in the quarter as we continued to gain momentum with our TECNIS Multifocal 1-Piece IOL and our new RevitaLens contact lens solution. So as we look ahead to the full year 2011, we expect high-single-digit reported sales growth for AMO. In worldwide diagnostics, reported sales were up 4% this quarter, with U.S. diagnostics sales up more than 8%. In Core Laboratory Diagnostics, which includes immunochemistry and hematology, reported global sales were up 1%. We continue to expand our presence in emerging markets. In China, sales were up more than 50% as we introduced new customers to our leading ARCHITECT systems. As Miles mentioned, we continued to improve the profitability and cash flow of this business as well, while expanding the menu of our leading ARCHITECT system. In the fourth quarter, we introduced a new assay in Europe to measure levels of vitamin D in blood, which will help position us to better treat a number of conditions including low bone density. We also have a number of test launch planned for 2011. In our Molecular business, reported sales were up 21%, driven by our m2000 platform and its expanding test menu. In the U.S., we've seen steady uptake of our new Abbott RealTime HBV assay. The assay runs on our m2000 system and is intended to help manage care for patients with chronic hepatitis B infection undergoing antiviral therapy. We're on track to submit a PMA filing for a companion diagnostics to an oral cancer therapy on the market for non-small cell lung cancer in the first half. And we expect to place our 1,000th m2000 instrument this year. In our Point of Care business, reported sales were up nearly 19% driven by the continued success of our Tanite Test [ph] and cardiac menu. So as we look ahead to the full year 2011 in our worldwide Diagnostic business, we expect mid-single-digit sales growth. Turning now to our worldwide Nutritional business, where reported global sales were flat in the fourth quarter. As expected, U.S. sales were impacted by the product recall we announced last September. International nutritional sales were up nearly 8%, in line with our previous forecast. In the United States, Abbott Nutrition continues to maintain its strong market position in both infant formula and adult nutritionals. In 2010, we launched several new product innovations including PediaSure SideKicks and newly reformulated Ensure Shakes that offer a variety of nutrient blends to address key health needs, including immune health and muscle and bone strength. Since our last earnings call, we have made significant progress in our Similac recall recovery efforts. Today, as Tom said, our inventory is near normal operating levels. Since the initial recall in September, Similac has maintained its number one hospital share position as well. As a result of the recall, there will be a difficult comparison for this business in the first half of 2011 when we expect U.S. sales to be down in the mid-single-digits. We expect to recapture share over the course of the year. Worldwide sales for adult nutritionals, including Ensure and Glucerna, grew 8% in the fourth quarter. Our Ensure product line with REVIGOR, a proprietary ingredient, continues to do well. REVIGOR helps to rebuild muscle mass lost naturally with age. Abbott will continue to deliver product enhancements to better meet the changing nutritional needs of the baby boomers. So as we look ahead to the full year 2011 in our global Nutritionals business, we're forecasting a modest decline in our U.S. business as we regain share in infant nutritionals. We expect double-digit growth for our International business once again. Turning to our broad-based pipeline. Since Miles spent time this morning discussing many of the compounds and technologies in the portfolio, let me spend a few minutes outlining some of the milestones we expect to occur this year. We've taken significant strategic actions to add to and advance our pipeline and we expect a good deal of activity. Starting with new product launches and approvals, as you know, we recently received CE Mark for ABSORB. Also U.S. clearance for our COMPLETE RevitaLens solution and approval for our Crohn's and AS indications for HUMIRA in Japan. So we’re in various stages of launch for each of these three products. We also expect to launch our next-generation TREK balloon in the U.S. and Japan in the coming weeks. We're also on track for our U.S. clearance of our small vessel DES, XIENCE NANO, during the second half of this year. We continue to expect the panel for MitraClip this year. As I mentioned, we recently submitted our U.S. regulatory application for HUMIRA and ulcerative colitis, and we expect a decision on that later this year. In addition, this year we expect U.S. decisions on several new formulations of existing pharmaceutical products, including Lupron's six-month depot and AndroGel 1.62. And our next-generation IOL, Synchrony, remains under FDA review. As previously announced, we discontinued our joint collaboration for the development of CERTRIAD and we withdrew our regulatory applications for ABT-874, our IL-12/23 biologic for psoriasis. Regarding CERTRIAD, Abbott and AstraZeneca made the joint decision to end the collaboration due to the commercial attractiveness of the product based on regulatory feedback and delays. Regarding ABT-874, following feedback from regulatory authorities indicating the need for further analysis including the potential for additional studies, we withdrew our applications and are evaluating next steps including possible resubmission at a later date. Moving on to new Clinical Trial starts. We expect to start a global Phase III study of our CKD compound, bardoxolone, in the coming months. During the first half, we expect to initiate the Phase III program for Elotuzumab with our partner and we’re working with regulatory authorities on next steps for Elagolix, including potential initiation of the Phase III program. As Miles indicated, our HCV program is progressing rapidly and we expect to begin a number of combination trials this year. And we expect to begin our global study of ABSORB by year end, which we plan to use for U.S. approval. And finally, in terms of key data presentations upcoming, we expect the following: additional Phase II data on our protease inhibitor ABT-450 at the EASL meeting later this quarter; and data on our polymerase inhibitors and NS5A Inhibitors this year, as well. Also during the first half, we'll have 52-week results from our by bardoxolone Phase IIb study. And during the second half of this year, we expect to present data from a daclizumab Phase II select trial. And long-term data for XIENCE, ABSORB and MitraClip will be presented at various medical meetings throughout the year. This includes two-year data from our MitraClip device this spring. So in summary, we are pleased with the work we completed throughout 2010 to position Abbott for sustainable [audio gap] difficult environment. And as Miles and Tom mentioned, we expect to again deliver double-digit ongoing earnings per share growth in 2011. With that, we will now open up the call for questions.

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

Tom, can you just help us with what you think the acquisitions contribute to 2011 revenues and what that means for organic growth?

Yes. Overall, again, we're forecasting high-single-digit sales growth, around 3% of that is Solvay and Piramal, the rest is organic. So very solid, mid- to upper-organic growth in 2011. As I mentioned, as we currently view it, the forecast has no exchange impact in 2011.

Miles, while we've got you here, can you just talk about the sustainability of 10% earnings growth in your view? There seems to be a bit of a disconnect between how management's looking at its long-term outlook and how the street's modeling Abbott as we go out beyond 2011.

Mike, we targeted -- as a matter of our investment identity, we've been able to do it on a very consistent basis. As you can see, our investment profile and R&D and SG&A is up. We have expanding margin. We're not burning any shingles, but we felt the impact of healthcare reform and all the regulatory actions that others have identified, the pricing pressures in Europe and so forth. There's awful lot of pressures on this industry. At the end of the day, you rely on new products, you rely on geographic expansion, you rely on share gain and you rely on managing. And I think the actions that we initiated today are part of that, things like healthcare reform don't come without consequences to a business. But at the end of the day, you manage all of these things. I think our investment identity is a double-digit grower and I don't see any reason at this point why we would shift away from that. I think it's harder, a lot harder than it used to be. It's hard to sustain. Obviously, a lot of companies in our industry are finding it very difficult to sustain that, but I think you take care of business and make sure your pipeline is robust and that you have good growth platforms in a lot of geographic markets -- and I think we've done that. With regard to the disconnect with the street, I don't know how to comment on the sentiment of the street. I think the company has consistently delivered against the expectations we've set that appears to not have been recognized on a consistent basis by the street. I don't know how to explain that, you know the sentiment of the street much better than I do. I think if there's a place where the investment community is disconnected from Abbott, it's an appreciating the other parts of the business. We tend to get an awful lot of focus on one drug and it's a wonderful drug and I think it’s doing terrific things for Abbott and it's a fantastic product. But the fact is, I think analysts under-appreciate the Nutrition business. I think they under appreciate the branded generics, our Established Products business and emerging markets. I think analysts, in general, are only beginning to learn about those markets in a real depth. I think there are smaller businesses here, smaller relative to others that are growing at a very rapid rate that have great growth potential. And when I look at models, of where the main disconnects are, it's not so much in estimating patented pharma, it's in estimating the performance of all the other businesses that represent the diversity of Abbott and in particular, in other geographic markets. So if I were going to advise analysts where to look for how sustainable is the growth future of Abbott, I would encouraged them to look not only at the patented pharma pipeline which I also think is underappreciated, but I would look at the Established Products business, Nutritionals, the Diagnostics, the Devices and in particular, the geographic expansion opportunities because that's where most of the disconnects are, Mike.

The first quarter guidance was relative to where the street was at, was below the street you're looking for, as you said, a more even cadence of earnings growth over the course of the year. Just anything you can add to that -- your first quarter and the difference between where you guys are coming out in the street.

Mike, obviously this is the first time we've provided guidance. As I look at the models in the first quarter, it's clear that they were very, very inconsistent with what the full year forecast that all the analysts are projecting. My only speculation is they really didn't have any information and to have growth rates far in excess of our full year growth rate, which is really what the street has is not reasonable. We've got health care reform lapping in the first quarter, we've got European price hitting us in the first quarter. And as John mentioned, the recall in nutrition in the U.S. is going to be a very difficult comparison in the first half of the year. So I think it’s a combination of just a lack of information by people modeling the quarter and a lack of understanding of some of these comparable comparisons to 2010.

And the other thing I'd add, Mike, is just from an IR perspective, we don't get all the numbers in the first quarter as you know and the data that we looked at picked up only eight or nine analysts and some of those had growth rates of 25%, 30%, and so there was a little bit of modeling adjustments that had to go on there as well.

Our next question is from Rick Wise from Leerink Swann.

Let me start with a big picture question. J&J and others have been sounding some pretty somber, serious notes about the outlook for the economy, pricing utilization. I think J&J yesterday said lower prices sort of the "new reality" it's not going to come back as the economy comes back. I'd just be curious your perspective on where you think we are in a recovery. Are you more concerned as you look at 2011? And just maybe your thoughts on incremental pricing utilization pressures.

I think J&J and others have characterized it right, Rick. I think it is a tough environment. I don't expect it to get better. I don't expect the pressures to ease up. I think that the characterization of a tougher economy, pressure on utilization, pressure on budgets, pressure on pricing, pressure on access or the regulatory systems I think all of those things continue. I would not forecast they get better. I think the pressure then becomes do the companies know what to do to navigate and adapt to that environment. And I would tell you that at varying degrees, I think companies are very rational and figure out what to do to adapt to run their businesses. I think we've done that really well, I think that our performance over the last several years and particularly in positioning our company going forward demonstrate that. Whether that's widely recognized or not, that's kind of up to you guys to judge. But we've seen varying degrees of performance out of the companies in our industry. But I'll tell you, this industry has lost a lot of jobs in the United States and overseas. It may continue to do so. Companies will adjust their cost structures. They will adjust how they market their products. They will adjust where they invest. But what I don't think companies will do is give up or quit on the obligations they have to investors. Companies will be rational and we're the same. We know what to do to deliver against the expectations of the investors and the shareholders that we're responsible for. We know how to change and adapt our business. Some of that is short-term actions; some of that is long-term strategic shaping and positioning of the business. You'll hear a lot of companies talk about the future being in emerging markets. Several of us, not all of us, have positioned ourselves I think very well there. And I hit on that today because I think that it has been underappreciated. Where a lot of future growth opportunities are, segments are shifting. I think our U.S.-based investors primarily understand patented pharma, don't necessarily understand pharma in an emerging world. Don't understand diagnostics or other things. We have an education task there and an information task to inform investors and shareholders and analysts and so forth, more about what we know about those markets, more about what we know about our pipelines. I think all of us as companies are reshaping our pipelines to product areas where we believe that there is real medical opportunity and frankly, some prospect of navigating a regulatory system that currently says no more often than yes. And I think that we will all adapt that way. We are large companies. The R&D that we invest in is expensive; its years in the making, so that adapting isn't quick. It takes time. But I think the characterization of other companies who've described the market had characterized it properly. I think at the end of the day, what differentiates us all is how well we adapt to it and how well we manage to live up to our shareholders' expectations.

Tom, gross margins in 2011, I think if I understood, you said may be a little bit better or whatever your language was versus 2010. But shouldn't we see some meaningful gross margin improvement? Solvay is integrated, HUMIRA is continuing to grow, vascular is doing great, product mix is favorable. What could push gross margins to the higher end of the range?

Really the environment, Rick. It's all the things we talked about. And we've got to do all of those things to offset these European pricing pressures, which hopefully we've had the bulk of them hit, and we're going to get back to normal levels. That is our expectation. This last lapping of U.S. healthcare reform and some of the comps on nutrition and things like that are slowing a bit, the rate of our improvement in gross margin. But I think we will see steady progress this year. We do think the ratio will be above 2010 and hopefully when we get through some of these transitional things, we can move that a little quicker.

Miles, since we’ve got you on the line, maybe you could just give us your latest thinking on your portfolio priorities in or out. And maybe specifically, are you interested in building out the Evalve business with a tabby offering? And I'm just going to put in a personal note here: Miles, if you feel like we don't understand the patented pharma pipeline, let's have a New York pharma analyst day and get the guys out. It's been a long time. I'd love to have that.

Back to your original piece of this in terms of the portfolio, I would say right now, I like the portfolio we hold. I'm always, as I've told you in the past, always aware. And I'd like to think that we stay on top of where opportunities may exist for us. I would say in general right now, I don't see a licensing or M&A environment that's particularly robust. That's okay. We like the hand we're holding. There's a relatively small handful of things that might appeal to me or us should they be available at reasonable value or whatever the case may be. But we’re happy with the hand we hold, and I think right now, we're putting an awful lot of focus on operating well. In this sort of environment, if there were an opportunity, it’s probably a good time to take advantage of it. At the same time I think it's important to operate really well, because given all the pressures you highlighted earlier, it's your own execution and operating well that helps you to navigate it and meet the sometimes unrealistic expectations of investors. But whether they're realistic or not, our job is to meet them. And I think you have to execute well and operate well in all the operating aspects of your business, and that means for us integrate the businesses we have. Structure our business well, position them well in new markets, execute well in our pipelines and in our regulatory efforts and so forth. That's where we're focused. And that means that a lot of activity on the M&A or other fronts would probably be less. But as you know, I haven't passed a really good opportunity, if there's been a really good opportunity, and I think our track record there speaks for itself. I don't see a lot of that right now out in the market place, so I'm focused on our geographic expansion efforts and our execution. And the things you're talking about, margin improvement, et cetera.

Our next question is from David Lewis for Morgan Stanley.

I apologize, Miles, but I may have a sentiment, single stock question. First starting off on HUMIRA. Clearly management has a view about the sustainability of HUMIRA that's a little different from sentiment or consensus, so maybe you just can share with us some of the things people are not appreciating about the sustainability of HUMIRA franchise? And related to that is, if management’s correct and HUMIRA is more sustainable there's a dramatic amount of underappreciated cash flow from Abbott over the next several years, and considering it sounds like right now the M&A environment in your mind is not as robust, could we see some of that the cash flow begin to return to shareholders in the form of an accelerated dividend or increasing buybacks as we get a year or two out here?

I'll give you a couple of things. First of all with regard to sentiment on HUMIRA, I don't know that there's anything a company can do to change the sentiment on a particular product or business, or whatever. I can tell you after 12 years in this job that there have been so many times that I've listened to sentiments and three-year later, that sentiment was clearly wrong. I’ve never seen an analyst yet that went back and said, "Boy, I was wrong". I would tell you we're not whistling through the graveyard about any kind of futures here. We know that some of the competitive offerings coming will compete, they will have success, they will have some level of success and we also know it will take them some years to establish themselves to have that success. That's a fact. That's model-able. That's model-able by us, by them, by you, by any number of people. We know that Biosimilars will have some impact on the product over time. The question is magnitudes and trajectories. And HUMIRA is a very large product, as you know, and we've obviously studied all those things very carefully and in lot of detail. I think that the analyst community or the Street or investment community sometimes takes a fairly precipitous, sudden look at things and think that things happen very quickly when they don't. And I think that trends, whether it be competitive products or Biosimilars or other things that will affect the biologics market, will happen less precipitously than what you see happening to an Oral Solid that is a primary cure drug. The models are not the same; they're not going to be the same. That's not to say there won't be impacts on HUMIRA. There will be. Obviously HUMIRA's growth will slow, at some point it will begin to decline, but it will be a large and robust product, because it's a very, very fine product in terms of what it does. It will be successful for a long time. Now that said, it's also our job to replace the sales and profits of that product with others, and that's where I go back to our pipeline. I think pipeline is somewhat underappreciated. So the biggest difference I think that we may have with the Street over the trajectory of HUMIRA is what the shape of the trajectory looks like and over how many years. And whether pipeline offering’s coming and so forth, obviously, replace and continued the growth in our patented Pharma business overtime. So, I would tell you, I don't think we've taken an unrealistic view of it, but I -- I don't know how to combat dueling models and dueling projections between what the company thinks and what analyst may think of competitive offerings. I think competitive offerings will be successful. I just don't think that they're going to be based on all of our analysis as immediately successful in such a precipitous manner, and I think when you look at the entire mix of products, whether it's in the coming portfolio or how HUMIRA does or the geographic mix, we don't happen to share Wall Street's view. So I think the only unfortunate thing to that we’ll only be right once we've been right, which is years out and if investors choose to believe otherwise, well, they're going to miss a company that keeps steadily growing double digits. I can't say how many times I've had people project we couldn't keep doing this. And it's not smoke and mirrors and it's not magic, we manage. I guess we could do a better job communicating and explaining. At this point, I'd say I think a lot of the fears around HUMIRA have been overblown. It will face competition. It will decline at some point. The rate and timing of that will be, I believe, different than what has been projected and beyond that, there's an awful lot of very strong and powerful things coming in our pipeline to sustain our growth. So I think we've managed it. What was the second half of your question, David?

Just on cash flow to the extent that if you’re correct and that trajectory is slower from a competitive perspective, the amount of cash it will generate for HUMIRA is fairly dramatic the next several years. The question is what would you do with that cash. . .

We're definitely going to generate a lot of cash and you'd be right, we will generate a lot of cash and obviously, we've been a fairly steady dividend producer and we've allocated our cash, I think, pretty well overtime, whether it be share buyback or M&A activity or whatever it may be, we are fortunate that we have very strong cash flow and the last several years, we've exceeded the projections and frankly even our own plans for cash flow as we did again this last year. So, Tom, you want to comment on cash flow a little bit? And then obviously we're not going to project too accurately for David what he wants us to project, but...

We have been growing cash flow very nicely, as we mentioned, well in excess of $8 billion in 2010, very nice increase over 2009. And I think to echo Miles, I mean, this balanced approach over the years, I mean, we've had steady dividend increases for 38 years. We have a very strong dividend payout. We do have a -- we've done share repurchase over the years. And from time to time, we build cash to maintain strategic flexibility in order to execute on the M&A, which I think most people would agree we've done an outstanding job on. And there will also be some investment in the business, organic as Miles mentioned, in terms of emerging markets investments. But this balanced approach has served us well and I think over time, as the business grows and improves and cash flow goes up, we'll continue to apply that.

The one thing I would add to this, to your question, and I realize at the end of the day it's how much you can model and how much you can analyze, whether it's HUMIRA or cash flows or the rest of the businesses or anything else. The one thing I’d suggest that is worth something here is track record. If you look at the track record or performance of the company and its management, we are consistently delivering. And whether we've projected it for you well enough in advance, I can't say. But up to now whether it's been capital allocation or the performance with our products and so forth, I think we've consistently delivered. So to the extent that track record matters, I'd say that's worth a little something looking forward even if we differ on our models.

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

Two questions for Miles. One, just one more touching on the longer-term outlook. Some of the concerns that I hear center around 2012. Because in 2012, TriCor will likely face generics and the PROMUS contribution will be less. So I'm wondering, Miles, can you address the challenges and potential offsets? And can you still grow earnings double digits with those two headwinds? And then the second question I have, Miles, is regarding the...

Glen, can we take them one at time or I won't even remember it. I’d tell you, first of all, with regard to PROMUS, we're doing our best every day to take PROMUS with XIENCE. So I'm not sure that I would consider that a huge issue there. It's our objective to make XIENCE number one and it is. So let me come back to the headwinds in 2012. Yes, we obviously faced some things going generic. But as a portion of the entire company, I don't want to minimize the magnitude of any given product. It'll be significant, but we've navigated that in the past. We went through that with Depakote, when it went generic and nobody noticed, because the variety of growth sources that we rely on, whether they be new products or geographic expansion or anything else are significant. So I'd tell you that in general, whether it's sales growth, geographic expansion or margin expansion, at this point, now barring what I don't know which is environmental to a large degree, I have not changed our target in terms of 2012 which always starts with double-digit bottom line. So I haven't seen any reason yet to back off of double-digit earnings as a target for 2012. And I can tell you that after 2010, which I think was one of the most difficult and challenging years for this company and for all the companies in our industry because healthcare reform was not trivial, it was a huge impact on all companies in our business negatively and the European pricing pressures that all of us, as multinationals, experienced in Europe, regulatory issues, any number of things, devaluations in particular countries, you name it, recalls, products removed from the market. I mean, if you look across the industry, we all experienced these things. The cumulative effect of all of those was significant, and I emphasize that with a capital S. And we're all adjusting and adapting to it. Having said that, we’re forecasting double-digit growth for 2011 and at this point, barring the unforeseen, I'm targeting it again for 2012.

And then my second question was on the lipid franchise. CERTRIAD has gone away. TriCor will face generics next year. Does the company remain focused on the lipid franchise longer-term or does this become de-emphasized beyond 2012?

Yes, it's a mature product area, it becomes de-emphasized beyond 2012. Because frankly, the environment broadly defined is not supportive of a lot of innovation there. I think that's how I'd put it.

Our next question is from Jami Rubin from Goldman Sachs.

Miles, I just wanted to continue along the questioning that I think Rick began on portfolio strategy. I know you like your portfolio and your portfolio of businesses have clearly served you very well with respect to revenue and earnings growth. But you are not in any way getting paid for your diversified earnings stream. And I'm just wondering, when you were asked the question, you focused on potential for licensing deals, M&A. But you didn't talk about the potential to spin-off or sell some of these businesses for which you are not getting any credit for. And just -- one example is your Nutritionals business. Obviously, if you slapped on a Mead Johnson multiple, I would presume that you would capture far more value for that business than you are right now. I mean, that is one strategy that you might want to consider if you think the Street isn't appreciating your non-pharma assets. And I'm wondering if you could just comment on that.

I don't make the strategic decisions for the company based on transactions the Street might like to see. I think the Nutritional business is an incredibly strong and attractive business. I think it’s my job, our job, to grow the business and to educate our investors about the value of that business. I think that it is a long-term, strategic growth driver, margin driver and cash flow contributor, and it’ll remain part of Abbott. I think that one of the things that we sort of suffer from is the success of HUMIRA. The more successful it is, which I like, the more worried others get. And the more people focus on, "Gee, this one product seems to dominate a lot of your performance." And I think that it's easy then for people not to pay a lot of attention to the other pieces of business. And while it might be easy for investors to say, "Gee, pure-play companies are a lot easier for us to value," et cetera, that is not what the identity or strategy of this company’s been. One of the reasons that we can navigate the environment we are is because of the variety of sources of sales and/or growth that we have, whether it be devices or geography or whatever. I mean, if you look at the history of this company, there was a time when diagnostics or hospital products or any number of other things were the real growth drivers and pharma wasn't the big deal. Pharma became a big part of this company in the last 10 years. Before that, it really wasn't. And I take a longer-term view of the company rather than a short-term one- to two-year or three-year view. We have held our value far better than most of the companies in our industry over the last decade. Many of them have lost 2/3 of their value as PEs have collapsed, and we have not lost our value. Now we've grown, we've almost quadrupled the size of the company. We've held our value. It doesn't feel particularly good to say held, but it's better than the performance of most of our industry in terms of value. So I have to take the view in the long term as well. And because of the R&D life cycles in pharma and because of the time it takes to establish products or to establish presence and leadership positions in geographic markets, you can't look at it in one-, two- and three-year chunks. You've got to look at it in five-, 10- and 15-year chunks. We wouldn't be the leaders globally in the Vascular Device business if not for the fact that Rick Gonzalez and I started looking at that 12 years ago and putting the pieces in place to position ourselves for the opportunities we've had. You don't have the opportunities you have in pharma without looking out 10 or 12 years at where you're going to put your investments and going through those things in the pipeline. And I don't think you're going to be leaders in an emerging market by suddenly deciding to go there once they're established. You have to put your footprint in place early, and it's got to be a big footprint. You've got to put the infrastructure in place, the distribution, et cetera, and the manpower. And they pay off longer term. And as I've explained on previous calls, we -- in putting ourselves into emerging markets, in the fundamental way that we have, India, being a prime example, that's an investment that we expect to pay off in a five to 10-year timeframe and beyond, not in the next five. So while it might be reassuring to investors to break up the company or spin pieces or sell pieces, I think that flies in the face of the overall longer-term view of the company which is, we are a broad, multinational diverse company with a broad source of -- or group of sources of income and cash flow, and that's what's allowed us to thrive and do as well as we have over the last 10 to 12 years. I don't think that's been wrong. I think that's been proven to be right because so much of our industry has been merged out of existence in some fashion or another, or struggled with real volatility in terms of their ability to manage sustainability and stability in their businesses. While I think you're right to criticize how well we've explained or communicated the roles or the contributions of those other businesses in our portfolio, I don't think the answer is necessarily to separate them or spin them off. I've shown in the past, that where I think the situation is right and the circumstances is right, I'll do that. I did that with hospital products in Hospira, there’s been a terrific, successful spin-off. At one point, I thought it was correct to sell our Diagnostics business, in retrospect I'm glad we didn't because this year Diagnostics turned in its highest profits and highest cash flow ever in its history and is doing extremely well. So I take your point. But I think the portfolio, Jami, is actually correct. And I think that in separating EPD or the emerging markets business there from patented pharma, we really have two very distinctly different pharma businesses. And I think that the growth that will be driven out of EPD is a very different kind of growth and profit than is driven out of our patented Pharma business. So I think we've got to do a better job of explaining where we see these businesses going, how we see the mix of the company shaping over time. I think all people are concerned about the long-term sustainability of the patented Pharma business because, frankly, it's not a very supportive environment out there in the Western developed economies for the kind of innovation that patented Pharma companies do. In our case, that means, we not only try to pay attention to what we're doing in the patented Pharma business, but we must also pay a lot of attention to the other growth sources in the company that are not patented pharma and. . .

Miles, I take that as a "no".

Okay.

Our next question is from Bruce Nudell from UBS.

Just kind of -- you clearly have a very specific view of the competitive environment in the anti-inflammatory space. Could you just help people and maybe get on your soapbox and explain, specifically with regards to the JAK-3 inhibitors, like mid-decade or so, how you scale that threat relative to your current RA and Psoriatic Arthritis franchise with HUMIRA.

I'm not quite sure I understand the question, Bruce.

In our models like the U.S., the RA/Psoriatic Arthritis market in 2015 is going to be about $9 billion. Like, how much of an impact would the JAK-3 reasonably expected to have on the HUMIRA franchise in that timeframe?

This is Tom. We've been talking some...

I was going to say, "ask Pfizer."

We've been telling some investors lately and just to put this in perspective, and you can never totally count on analysts' forecasts, obviously, but if you go out to 2015, if you were just to take the JAK's comp out from Pfizer and assume it gets through the regulatory process, which obviously these days is no slam dunk, the forecast for that on average were around $1 billion in 2015. Put it in perspective, we've had a lot of competition in the bio space. A lot of products have come in and gotten very little market share because it's really the big three products that tended to continue to maintain the majority of the share. And so this would be another competitor, but if you believe those forecasts, you believe $1 billion, then you look at Abbott’s global market share in the space of around 25%, say in the 2015, on a multi-billion dollar product obviously in 2011, we're forecasting well in excess of $7 billion for this product given our growth guidance today. That's around $250 million of competitive impact on this product, that far. And that's the middle of the decade. So I do think that obviously, I think a bit of an emotional reaction, perhaps not totally consistent with the forecast in terms of what it means. And to Miles' point, we have so many other things going on and under-appreciated growth opportunities that – that’s really minimal impact out that far. So hopefully that's puts you in perspective a little bit about this one product still in Phase III, not approved, could potentially impact the market.

And one of the products -- I was very impressed with bardoxolone results. One of the questions people have raised is like with inotropes and cardiac failure, are you kind of burning out the kiln, could you speak to that? And also, you're scaling of the potential of a drug like that in ex-U.S. markets.

I haven't heard anything, Bruce, this is Larry, regarding your concern. What we've seen thus far in the Phase II data and certainly we’ll see more of that Phase II data here, the 52 week data later this year, we haven't seen anything of that nature. In fact, obviously the efficacy’s been terrific and so have the safety profiles of the drug. As we look at the geographies that we have rights to with bardoxolone, you know that chronic kidney disease is a significant drain on all of the medical systems, and really a significant cost to all of the worldwide healthcare systems. And clearly, dialysis is about a $75,000 a year process. If you can forestall and/or eliminate that need, that’s a considerable amount of savings. And as we look at the models, again for our geographies which x U.S. excluding some of the Asian markets, we have a significant profile of this product easily exceeding $1 billion in peak year just for our geographies.

Our next question is from Catherine Arnold from Crédit Suisse.

I wanted to ask you guys if you could talk about Piramal on a couple points. You had given guidance that the business in India should achieve about $2.5 billion by 2020. And I'm wondering if we should be thinking of a very front-loaded growth curve. If you could comment on that first and I have a couple of follow-ups.

This is Tom. We were very much on track with our expectations for the Piramal acquisition as we put the 2011 forecast together. And with a market that's growing 20-ish percent or a business we think is going to grow 20-ish percent, and as Miles indicated, the payoff of this, really, is in the second five years of a 10-year time frame. And obviously, at that type of growth rate, you're going to see the majority of the growth in the back period. But in the early years, off of a smaller base, it’s roughly a $0.5 billion at 20% a year. That gives you an idea of the types of growth we expect over the next two, three, four years.

Just to correct that, Catherine, the business is actually a little bigger than that when you factor in all the pieces of the business. That was just Piramal. Abbott has a lot more Pharma business in India beyond that from Solvay, Knoll and Abbott legacy business. So you look at the growth rate on top of India for that business, it's a fairly steady growth rate. It doesn't all happen in a hockey stick at the end. It doesn't all happen right at the beginning either. It's a fairly steady growth rate driven by market expansion.

So with that can you quantify or at least directionally or give us a sense for how much of your Indian business is Piramal versus Solvay versus Abbott?

Well it's all Abbott now. . .

Of course. But I think you’ve said that Piramal was around $400 million.

Last year.

So I'm just thinking about the base and taking the base and getting to $2.5 billion and that might be something that is not well understood and projections in the models as per previous conversations.

You may be right because we haven't given a lot of visibility to the various pieces of that and as we integrated -- that's a good point. We'll take that as advice to explain not just India but frankly our position in the significant emerging markets that we're targeting. And I understand it’d probably be easier for you to either understand it or model it if we could characterize what's well established, in place, et cetera, what's integrated, what's new product, et cetera, what's coming. I assume that's your point.

It is.

It's several hundred million dollars on top of the Piramal base.

So Piramal is maybe slightly over half?

Yes, I think that’s fair. Yes.

When Piramal reported recently, they had disclosed their discontinued operations and there was a pretty big reduction in net income and one of the key products, fencitital [ph].I just wondered, I assume that it’s some kind of weird inventory thing or something of a onetime nature. Could you elaborate on that?

Well, they reported their quarter through the close date, which was in early September. So you were looking at a partial quarter for them. I know that caused some confusion in the fall, and I tried to clear that up with folks as questions came in. But again, it was more of a partial quarter concept going on for them in their reporting.

So their quarter ended September 30 wasn't a full quarter?

That's correct. It was two months only.

Our final question is from Tony Butler from Barclays Capital.

Speaking with the same one as being misunderstood, if we stay with emerging markets, one of the areas that I think everyone’s puzzled about is really what the gross margins that get returned to the total business might be. And if, in fact, you look at the total business and you make the observation and margin on the gross side stay roughly flat or even move higher as you alluded to this year and I assume you’ll allude to in '12, the argument becomes -- given the growth in those markets, how is in fact that possible? And connecting those dots, if you will, on the margin side, can help us understand the value or the greater outside of volume and revenue for the entire EM business.

Tony, we'll take a crack at it. I’ll give you some background. First of all, it depends on the business. And if we take pharma first, because it's a branded, generic business, and a branded business where the breadth of product line and the offering is different than what I'd call a commodity generic business, the profitability of the business tends to be considerably higher and the gross margin of the business tends to be consistent with the kinds of gross margins we see in other Abbott businesses. That's true in pharma, that's true in Nutrition and those are the two single biggest growth drivers, and we’re selective about how we compete with our other products. I would tell you that in the base core of whether -- in Pharma in particular, costs are considerably lower in that business which contributes to that profile when you compare it to a patented or a developed market business. So the cost structure, the infrastructure, a whole lot of things are commensurate with the locale of the business, the kind of businesses it is, where we manufacture, where we source, et cetera. And that's a fundamental part of the business. It’s one of the reasons why we separate the business completely from our patented pharma operations, in R&D, manufacturing regulatory sales, you name it. It's just got its own independent cost structure and so on. Similarly, we are moving in the same fashion with our Nutrition business, but we enjoy pricing in a lot of these emerging markets comparable to the U.S. and therefore, profitability comparable to the U.S. And then we're just very selective about the remainder of the businesses. So while the -- perhaps the historic notion has been that these are low-margin businesses, no, they're not. They're low cost and healthy margin. And you have to be selective about where you compete.

And the only thing I'd add there, Tony, is certainly below the gross margin level, these are businesses that require over time, as Miles indicated, based on the lower cost structure and just the nature of the market's lower R&D and SG&A commitments, and so the op [operating] margin on these businesses are very healthy. I’m going to give you an example. In India, the prices of a number of our products are very, very low and yet the margins on those products still very, very healthy. And it doesn't fit a Western model, it's a different model.

That concludes our conference call today. A replay of the call will be available after 11 a.m. central time today on Abbot's Investor Relations website at abbottinvestor.com. And after 11 a.m. central time via telephone at (402) 220-2173, confirmation code 212-8692. The audio replay will be available until 4:00 p.m. on Wednesday, February 9. Thank you, all, for joining us and please call us if you have questions.

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