Abbott Laboratories (ABT) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. Welcome to Abbott's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. And I would now like to introduce Mr. John Thomas, Vice President, Investor Relations and Public Affairs.

Good morning, and thanks for joining us. Also on today's call will be Tom Freyman, Executive Vice President, Finance, and Chief Financial Officer; and Larry Peepo, Divisional Vice President of Investor Relations. Tom will review the details of our financial results for the quarter and outlook for the year. Larry and I will then discuss the highlights of our major businesses. Following our comments, as always, we'll take any questions that you might have. Some statements made today may be forward-looking, including the planned separation of the research-based pharmaceutical company, AbbVie, from the diversified medical products company, Abbott, and the expected financial results of the 2 companies after separation. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Factors that may affect Abbott's operations are discussed in Item 1a, Risk Factors, to our Annual Report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2011, and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. In today's conference call, as we always do, non-GAAP financial measures will be used to help investors understand our ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measure in our earnings news release and regulatory filings from today, which will be available on our website at abbott.com. And with that, I will now turn the call over to Tom. Tom?

Thanks, John. For the second quarter of 2012, Abbott delivered ongoing earnings per share that exceeded our guidance range, reflecting growth of nearly 10%, and we're confirming our full year ongoing EPS guidance range for 2012. We also made significant progress in our work to separate our research-based pharmaceutical business into a new publicly traded company and we remain on track to complete the separation at the end of this year. For the second quarter, we reported ongoing diluted earnings per share of $1.23, an increase of nearly 10% over the prior year, exceeding our ongoing EPS guidance range of $1.20 to $1.22. Sales for the quarter increased 6.7% on an operational basis, that is excluding an unfavorable 4.7% impact from exchange rates. Operational growth was driven by strong performance across a number of our products and businesses, including emerging market operational growth of more than 12%. Including the negative impact of exchange, reported sales increased 2%. In the second quarter, we experienced one of the larger exchange effects we've seen in a single quarter in some time. This exchange impact was approximately 1% more unfavorable than our estimate when we provided guidance in April, reflecting changes in rates since that point in time. Given the significant impact of exchange on top line results, to understand underlying growth across our businesses it's particularly important this quarter to focus on operational growth, that is growth before the impact of exchange as detailed in our earnings news release. For example, exchange trimmed almost 10% off reported growth in our international Proprietary Pharmaceuticals and Established Pharmaceuticals businesses in the quarter. Both businesses reported accelerating operational growth in the quarter, at or above our previous expectations. To help you understand underlying growth in both the Proprietary Pharmaceuticals and diversified medical products businesses, John and…

Thanks, Tom. I'm going to start with our diversified medical products businesses, and then Larry will discuss the Proprietary Pharmaceutical business, which will become AbbVie. Operational sales for our diversified medical products businesses increased 4.5% in the second quarter, excluding the negative impact of foreign exchange. So on a reported basis, sales were roughly flat. As you know, this year, we're experiencing a negative transitional impact to our top line growth rate from the phaseout of certain royalty revenues in our Vascular business, as well as the shift to direct distribution in certain markets in our International Nutrition business. Excluding these transitional impacts, sales for diversified medical products approached 7% this quarter. We also continued to expand operating margins in the quarter across our diversified medical products businesses, including Nutrition, Diagnostics, Vascular and Diabetes Care. So let me start with Nutrition where global sales in the quarter increased more than 8% on an operational basis and more than 6% on a reported basis, which of course, includes the impact of foreign exchange. In the U.S., sales increased 13% with U.S. Pediatric Nutritionals sales increasing 25%. We continue to increase our share position in the U.S. infant formula market with Similac and remain the clear market leader. We expect continued growth of our Similac brand this year as we launch new products to support it in the prenatal segment of the market. Our toddler brand, PediaSure, continues to grow at a double-digit pace. And in the second quarter, we launched the new PediaSure SideKicks Clear beverage that is helping to drive growth. U.S. Adult Nutritionals sales increased 3% in the quarter as we exited certain lower-margin brands in the quarter as part of our ongoing margin improvement initiative. Excluding this impact, sales increased in the high single digits, driven by strong…

Thanks, John. Worldwide Proprietary Pharmaceuticals sales increased 9.3% on an operational basis, excluding the negative impact from foreign exchange. On a reported basis, global sales increased 4.9%, including growth of nearly 8% in the U.S. and reported growth of approximately 1% internationally, which as Tom mentioned, includes nearly 10 percentage points of negative exchange. In immunology, global HUMIRA sales increased 23% on an operational basis and more than 16% on a reported basis. Performance was driven by strong growth in the U.S. and internationally, consistent with the underlying trends we saw throughout the quarter. We're continuing our development efforts for HUMIRA, including the study of new indications. We recently received a positive opinion in the EU for the treatment of axial SpA, a condition associated with chronic back pain and stiffness that can also be accompanied by the presence of arthritis, inflammation in the eye or GI tract. Upon a final decision from the European Commission, HUMIRA will be the first and only medication for this chronic condition. And this approval will mark the eighth major indication for HUMIRA in the European Union. HUMIRA's utility across a growing number of diseases is one of the many attributes that set it apart from other competitive agents. HUMIRA currently holds the #1 global share position, and demand continues to outpace the global market, where we're seeing strong market growth both in the U.S. and internationally. We're well on track to achieve our sales growth outlook for HUMIRA in 2012. Moving onto AndroGel, where U.S. sales were approximately $275 million, up more than 26%. AndroGel holds a strong leadership position in the testosterone replacement market, where growth is being driven by increasing diagnosis and treatment of low testosterone. AndroGel 1.62, our new low-volume formulation, has quickly become a leading therapy in the category,…

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

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

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

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

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

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

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

Our next question is from David Lewis from Morgan Stanley.

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

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

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

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

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

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

Our next question is from Jami Rubin from Goldman Sachs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It's stabilized and trending slightly downward.

And our next question is from Rajeev Jashnani from UBS.

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

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

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

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

Our next question is from Jeffrey Holford from Jefferies.

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

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

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

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

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

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

With our own products you're talking about.

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

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

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

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

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

What was your first question, Tony?

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

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

And you mentioned the Q4 call...

On the Q4 call.

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

Yes. And lastly, Tony, I'd say -- just I wanted to mention this and I forgot to, on your question about Vascular. Just remember that when you exclude the Promus royalty transition, which is this year and obviously will improve going forward into 2013, if you exclude that situation and FX, the underlying business there grew in the mid-single digits globally. And so I think we're pretty pleased with that overall. Actually, let me just remind everybody of the replay, sorry about that. The replay of the call will be available after 11 Central Time today on our website at abbottinvestor.com, and after 11 Central via telephone at (402) 220-9697. The confirmation code is 3458. The audio replay will be available until 4 Central on Wednesday, August 1. Again, thanks, everybody, for joining us today.

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