Abbott Laboratories (ABT) Q3 2014 Earnings Report, Transcript and Summary

Good morning and thank you for standing by. Welcome to Abbott’s Third Quarter 2014 Earnings conference call. All participants will be able to listen only until the question-and-answer portion of this call. (Operator Instructions) Should you become disconnected throughout this conference call, please dial 1-773-799-3472 and reference the Abbott earnings call. This call is being recorded by Abbott. With the exception of any participant’s 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. Brian Yoor, Vice President, Investor Relations.

Good morning and thank you for joining us. With me today are Miles White, Chairman of the Board and Chief Executive Officer; and Tom Freyman, Executive Vice President, Finance and Chief Financial Officer. Miles will provide opening remarks and Tom and I will discuss our performance in more detail. Following our comments, Miles, Tom and I will take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2014. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1(a), Risk Factors to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2013. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. Also you will see in our earnings news release this morning that financial results from the developed markets branded generics pharmaceuticals business have been presented as discontinued operations this quarter due to the pending sale to Mylan. As a result the line items of our consolidated statement of earnings are now reported on the basis of continuing operations. We also provide in the release a reconciliation between continuing and discontinued operations for the third quarter and the first nine months of 2013 and 2014. For the remainder of 2014, our earnings per share guidance will include results from both continuing operations as well as discontinued operations associated with the developed markets branded generics pharmaceuticals business being sold to Mylan. Our commentary and guidance for sales and other P&L line items will be for continuing ops only. In today’s conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott’s ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which will be available on our website at abbott.com. Our commentary on sales growth refers to operational sales growth, which excludes the impact of foreign exchange unless otherwise noted. With that, I will now turn the call over to Miles.

Okay, thanks Brian, good morning. This morning we reported adjusted earnings per share above expectations and another quarter of sequential improvement in total company sales growth. We’re also raising the midpoint of our full year adjusted EPS guidance range which is now $2.25 to $2.27 representing double-digit growth. Third quarter adjusted earnings per share of $0.62 increased approximately 13% including discontinued operations which is above our previous guidance range. Today I’ll focus my comments on results from Abbott’s continuing operations for sales increase 6.7% operationally. Emerging market sales will now represent nearly 50% of Abbott’s total sales and increased 15% in the quarter with double-digit growth and establish pharmaceuticals, nutrition and diagnostic. In the quarter, we also advanced number of transactions in our branded generics business to accelerate our ability to drive balanced and sustainable growth in emerging geographies. We remain on track to divest our developed markets business in Mylan in the first quarter of next year. Mylan is well positioned with its global scale and capabilities to do well with this business over the long-term. We completed our acquisition of CFR Pharmaceuticals at the end of September, which establishes Abbott as a top 10 pharmaceutical company in Latin America. CFR provides scale and a product portfolio that strongly compliments Abbott’s presence in Latin America and more than doubles our branded generic sales in the region. CFR also brings a network of manufacturing plants and R&D facilities in Columbia, Chile, Peru and Argentina, which further diversifies our cost base in emerging markets. And most importantly CFR adds top talent with strong local market knowledge and a proven ability to quickly develop manufacturing and bring new products to market. We expect our announced acquisition of Veropharm to close by the end of the year. Veropharm positions Abbott to become a top 5 branded generics company in Russia providing us with income for manufacturing and a broad portfolio well aligned to our therapeutic areas of focus. Following the close of these transactions, our established pharmaceuticals business will operate entirely in emerging geographies where the growth of branded generics are driven by favorable demographics, including growing healthcare systems and a customer base that largely pays out of pocket for high quality, trusted brands. Moving forward, we would expect this business generates sales growth in the upper single to double digits. We are also executing on our organic growth opportunities including the launch of a number of new products and innovations across our businesses I’ll briefly review our third quarter results. And I’ll start with nutrition, where sales increased double digits this quarter. We’ve largely recovered from the sales disruption in our international business at the same time we’re executing a multiple new product launches across key geographies. We continue to invest in our global infrastructure to support the strong global demand from adult pediatric nutrition. As we discussed last quarter we reinforced our footprint in China to the opening of our new manufacturing plant in Jiaxing and our strategic alliance with Fonterra to invest locally in China’s milk supply. And last week in India we announced the opening of our third new manufacturing facility this year in nutrition, a stronger footprint in our key geographies will allow us to be closer to our customers and work faster to creating customized new products for their needs. In diagnostics, we delivered 6% operational growth in third quarter of sequential improvement from the second quarter driven by continued above market performance in core laboratory diagnostics and point of care diagnostics. We are funding investments in growth and advanced multiple new system platforms across all three of our diagnostics businesses. In medical devices, our vascular business is performing below our expectations primarily related to sales of our drug eluting portfolio. We remained focused on improved execution and increasing penetration of absorbing Europe and several key emerging geographies. MitraClip, our structural heart technology delivered strong double digit growth in the quarter and we expect continued adoption in the U.S. following improved reimbursement national Medicare coverage. Our peripheral stent, Supera also contributed the growth of our new vascular business in the quarter. In diabetes care, we launched our next generation flash glucose monitor FreeStyle Libre into the nearly $4 billion blood glucose monitoring market in Europe. Libre is a revolutionary new glucose sensing technology which generated very positive feedback early in its launch; it eliminates the need for routine finger sticks and provides glucose data in a simple format that allows people with diabetes to achieve better health outcomes. And in vision care, 70% of our sales are generated by our cataract product, which increased double-digits again this quarter. Our new cataract lenses and the uptick of our catalyst laser cataract system are driving above market growth to support the growing global demand for our cataract lenses we recently booked ground on a new manufacturing facility in Malaysia. In established pharmaceuticals, as we expected, sales improve sequentially again this quarter. The emerging market branded generic business increased double digits as a result of improved commercial execution and continued expansion of product portfolios in several of our therapeutic areas of focus. We expect continued momentum in EPD as we exit the year including CFR where sales have been growing consistently at a double-digit pace. So in summary, we’re right on track with our expectations that we communicated at the beginning of this year. Operational sales growth has improved sequentially each quarter. We’re particularly pleased to see that type of improvement in our branded generics business and nutrition as well as steady global performance in diagnostics and vision care. We again exceeded adjusted earnings per share exceptions for the quarter and increased the midpoint of our EPS guidance range which results in another year double-digit adjusted EPS growth. And we’re continuing to build Abbott for global growth over the long term including the CFR acquisition in the third quarter and working toward our first quarter 2015 close of the sale of our developed market branded generics business for Mylan. I’ll now turn the call over to Tom.

Thanks, Miles. As Brian mentioned upfront because guidance previously provided for the third quarter and the full year 2014 included the developed markets branded generics business for the Mylan, we will continue to include the contributions in this business and our EPS guidance for the remainder of 2014. However, our commentary and guidance for sales and other P&L line items this quarter and for the fourth quarter forecast will be for continuing operations only that is excluding the business being sold to Mylan. Today, we reported third quarter diluted earnings per share excluding specified items of $0.62 above our previous guidance range. Sales from continuing operations that is excluding the developed markets branded generics business increased 6.7% on an operational basis and 5.8% on a recorded basis during the quarter. Including the contribution from discontinued operations sales would have increase 5.6% on an operational basis in line with previous guidance. Operational sales growth was driven by strong performance in several businesses including double-digit growth in established pharmaceuticals and nutrition and steady growth in diagnostics and vision care. Total company sales in emerging markets increased 15% on an operational basis in the quarter. The adjusted gross margin ratio was 55.4% of sales, adjusted R&D investment was 6% of sales and adjusted SG&A expense was 29.4% of sales from continuing operations. Turning to our outlook for the full year 2014, today we’re raising the midpoint and narrowing our EPS guidance range excluding specified items to $2.25 to $2.27 which includes results from our developed markets branded generics business now presented as discontinued operations and reflect double-digit growth over 2013. We forecast operational sales growth from continuing operations in the mid-single digit for the full year 2014 based on current exchange rates we expect this change to have a negative impact of approximately 2% on our full year recorded sales which is somewhat more negative than previous expectations driven by the recent strengthening of the U.S. dollar. This would result in reported sales growth in the low to mid-single digits for the full year 2014. Brian will review the growth outlooks by business in a few minutes. We forecast an adjusted gross margin ratio of approximately 65% of sales adjusted R&D investment of somewhat more than 6% of sales and adjusted SG&A expense of around 30% of sales from continuing operations for the full year 2014. Turning to the outlook for the fourth quarter of 2014, we forecast double-digit operational sales growth from continuing operations. As Miles mentioned earlier, we recently completed the acquisition of CFR Pharmaceuticals and expect this business to contribute approximately $200 million to sales in the fourth quarter. Based on current exchange rates, we expect this change to have a negative impact of somewhat more than 2.5% on sales in the quarter. This would result in recorded sales growth in the high single digits for the fourth quarter. We forecast on adjusted gross margin ratio of approximately 55.5% of sales, adjusted R&D investment approximately 6.5% of sales, and adjusted SG&A expense of around 28% of sales from continuing operations in the fourth quarter. So in summary, our sales and earnings progression for the year is playing out as we forecasted back in January as we continue to forecast another year of double-digit adjusted earnings per share growth. And with that I’ll turn it over to Brian to review the business operating highlights and outlook.

Thanks Tom. This morning I’ll review our third quarter 2014 performance and fourth quarter sales outlook by business. As I mentioned earlier my comments will focus on operational sales growth. I’ll start with our nutrition business where global sales increase 10% in third quarter. In our international pediatric nutrition business, sales increase 14%. We’ve recaptured our share in China and Vietnam following the previously recorded 2013 sales disruption and continue to drive uptake of new products. This includes new infant formula products Similac QINTI and Eleva that we recently launched into the premium segments of the Chinese market to further enhance our competitive position. International adult nutrition sales increased strong double digit in the quarter, represents the fourth consecutive quarter of double-digit sales growth in this business. Sales growth is led by continued strong performance of our Ensure brand and double-digit growth in emerging markets. Last week Abbott announced the opening of our new nutrition manufacturing plant in India, the third plant we open this year to increasing demand for our nutrition products. This new manufacturing plants is one of Abbott’s most technologically advanced nutrition plants in the world and sourced up to 80% of ingredients locally in India. We will work together with Abbott’s nutrition R&D center in India to deliver innovations to address unmet health needs in pediatric and adult nutrition while also meeting specific local tastes and processes. In the U.S., nutrition sales increased low single digits in the quarter in line with expectations. Looking ahead to the fourth quarter, we expect global nutrition to deliver double-digit sales growth on an operational basis. In our diagnostics business, sales increased 6% in the third quarter representing sequential improvements from the second quarter where sales in emerging markets growing double-digits. Core laboratory diagnostics sales increase nearly 7% as we continue to outperform the market. In the U.S., sales growth was impacted by comparison to the third quarter of 2013 when sales were higher due to the timing of equipment sales. Year-to-date growth of 7.5% better reflects the underlying performance of the U.S. business where we continue to build momentum with our enterprise account commercial model. International sales in the third quarter increased 8%driven by continued strong growth in emerging markets. In molecular diagnostics, our core focus and largest business is infectious disease testing where year-to-date sales increased mid-single digits. In the quarter, growth in our infectious disease business was offset by decline in some of our smaller businesses as well as timing of tenders in several emerging markets. In point of care diagnostics, worldwide sales increased 6.7%, representing a sequential improvement from the first two quarter of the year. International sales increased 17% as this business continues to build and expand its presence in targeted developed and emerging markets. For the fourth quarter, in global diagnostics we’re forecasting mid-to-high single-digits operational sales growth. In medical devices, vascular sales decreased low single digits in the quarter. Sales growth was relatively flat excluding the impact of the third quarter 2013 sales through up related to a third-party agreement. We continue to see strong market adoption of MitraClip, our breakthrough technology for the treatment of mitral regurgitation and growth from Supera, a peripheral stent for the superficial femoral artery or SFA. As Miles mentioned during the third quarter, MitraClip received national Medicare coverage and an improved payment rate for the procedure, which will help drive adoption of MitraClip in the U.S. Both structural heart and endovascular products grew double digits in the third quarter globally. In our drug eluting portfolio on September, we presented the first randomized clinical trial result for Absorb our Bioresorbable Vascular Scaffold. One year results from the Absorb II study demonstrated that Absorb provides comparable results to science and lower rate of angina or chest pain. Also in the quarter, we launched additional XIENCE for expanding the potential for Absorb used in more coronary procedures. As we look ahead, we expect to see improvement in vascular sales growth driven by commercial execution and contribution from new products as well as further Absorb penetration as we exit the year. So for the fourth quarter, we expect to see a sequential improvement in growth in the third quarter with relatively flat year-over-year sales on an operational basis. In diabetes care, global sales in the third quarter were somewhat ahead of our expectations as the rate of decline in the U.S. was moderating. Outside of the U.S. we’re focused on driving growth in both emerging and developed markets in our diabetes care business and recently announced European launch of our revolutionary new glucose sensing technology called FreeStyle Libre. It eliminates routine finger pricks and finger-prick calibration, and with glucose levels discreetly through a sensor that can be worn on the back of the upper arm. In the near term, we’re working to obtain reimbursement for Libre in Europe as well as breakthrough market in a number of additional countries next year. For the fourth quarter, in our global diabetes business, we expect a mid-single digit decline on an operational basis with international growth offset by the later stages of the market transition in the U.S. in line with our forecast earlier this year. In vision care, sales increased 9% in the third quarter. Sales of our cataract product which represents approximately 70% of our vision care business increased double digits, outpacing the growth of the global cataract market. We continue to capture market share with our recently launched premium intraocular lenses including our TECNIS OptiBlue line of lenses in Japan and our TECNIS Toric lenses in the U.S. and Japan. In addition, we continue to see strong adoption of our new CATALYS laser cataract system. We are also receiving strong feedback from early adopter of our new TECNIS Symfony extended range of vision intraocular lens that we launched in Europe in the second quarter. TECNIS Symfony provides patients with a continuous range of vision including far, intermediate and near differences but with reduced incidence of halo and glare. And last week, we announced the distribution agreement in the U.S. with Carl Zeiss Meditec, a leading ophthalmology diagnostic company. The Zeiss product line of diagnostics and visualization systems combined with Abbott's intraocular lenses, lens removal systems and laser cataract systems provide surgeons a comprehensive portfolio of cataract products to maximize the visual outcome and streamline patient flow. For the fourth quarter of the 2014, we expect our global vision care business to grow double digits on an operational basis. And lastly, our established pharmaceuticals business or EPB where sales from continuing operations that is excluding the developed markets branded generics pharmaceutical business increased nearly 13% in the quarter. This strong performance was driven by double digits sales growth across several emerging markets including India, Russia, Mexico, and Vietnam. This business continues to make meaningful progress and becoming a more consumer oriented organization and is focused on expanding products portfolios in key therapeutic areas. Implementing new branding initiatives across the portfolio and increasing its focus on marketing to the pharmacy channel. For the fourth quarter of 2014, we forecast double-digit sales growth on an operational basis from continuing operations in our emerging markets branded generics business. This includes CFR pharmaceuticals, which is expected to contribute sales of approximately $200 million in the fourth quarter. So in summary, sales growth improves sequentially this quarter as we expected and we exceeded earnings-per-share expectations, raising the midpoint of our full year guidance range. We are on track for another year of double-digit adjusted earnings per share growth in 2014. We will now open the call for questions.

Thank you. (Operator Instructions) Our first question today is from Mike Weinstein from JPMC.

Thank you for taking the questions and congratulations on a nice quarter. Miles I wanted to really start with the EPD business and first the updated agreement today with Mylan could you spend a minute on that? Because obviously there was some question about whether that transaction as it was initially constructed. So A, could you comment on that? And then B, the EPT performance of this quarter up 12.9%. Can you just talk about the sustainability of that performance? It seems like a very high number so can you just talk about how we should think about that business going forward, thanks.

Well, I assume there is one of the question this morning was some clarity on whether or not that transaction with Mylan is going forward I think that’s clear we reported discontinued operations, - financials et cetera and as we very clearly said in the earnings release yesterday tracking forward no change probably that’s what comment on that. So that was special takeaway some speculation on certainty there and that’s all tracking according to schedule. The performance of the remainder of EPD actually it’s both halves, we’ve actually seen improvement in the developed markets part of the business which is good thing that’s the part that we’re divesting to Mylan. And we've seen improvement in the emerging market piece. I think some improvement in market and economy in few of these markets like India but overall let’s say improvement in the overall performance of the business which we’ve been expecting and waiting for and that was kind of what we intended and what we planned and we’re seeing it. So, that’s gratifying, I think everybody around the world, every company I have seen reporting as expressing caution around economies everywhere and currencies everywhere so forth and I think one issue that I continue to track closely which we’ve obviously less control of then the operating performance of these businesses is just the overall currency volatility around the world and that of course effects this business because it’s purely an ex-U.S. business but other than that I think what we’re seeing here and gradual improvements in our performance in the business is good, that’s good and I’m feeling pretty good about that because as you know earlier in the year we were projecting sequential improvements in this business as the year went on and you guys directly ask about it every quarter and we’re seeing that. Your greatest fear is that you don’t see that so we’re pleased with that now in addition we add CFR to that, CFR’s performance in Latin America has been consistent double-digit growth and that’s also a plus and going forward. So, I think if you look at the underlying performance of the business we exceeded double-digit growth and there is very little CFR in here because of the timing close there is not a lot of CFR in the numbers and even without it business is going double digit. So I’m pleased with what I see in emerging markets when we’re done with the Mylan transaction with the developed market business this business will be purely an emerging market business which has been our strategic intent to focus on because we see the conditions in those markets and the developing economies quite favorable to the business over time. So that remains an important strategic focus for us and I think the investors now will have a much clearer visibility of transparency to the opportunity in those markets. One of the great things about emerging markets is the growth potential there of these economies and the healthcare systems and that’s why we’re focused on that, that’s a very important source of growth, it comes with volatility which means you got to be diverse, you got to be diverse in geographies you’re in fortunately we’re well spread out I think CFR helped us even further with that. So, I like the prospects for the business and I’m glad we’re seeing the fundamental improve.

So Miles, just two quick follow ups if I can. So one obviously one you're confident that the transaction is going to go through. Two, the piece that we talked about that you didn't really address in all of your opening comments of this call was the vascular business which obviously had a difficult quarter. So can you just talk a little bit about how you're thinking about that business strategically and how you turn that business around given your success now in turning around EPD? Thanks.

Well first of all back to your original question about confidence. We’re right on track with our transaction with Mylan and I’m superstitious enough not to want to speculate or hypothesize or whatever. I would say we’re on track with what we said, what we expected and everything we’re doing is pointed at the conclusion on time, on schedule as described. And I don’t know what else to say about it I don’t really want to get into a lot of speculation about other stuff, but I think it’s, as I said, tracking exactly where we wanted to be. So, that’s about as much as I can say and only thing I should say. The vascular business is a disappointment. There is just no question about that. And this is our performance. You know to a degree, I think all of us competing in this business can look at a slower market, but this isn't about slower markets this is about us. The part of this business where I am most disappointed is the US in us and our performance there. There's a lot of price competition, but you know when there is price competition that price affects everybody, so the whole market is experiencing price competition. I think that there's a fair amount of commoditization that's happening here, its customers returning more and more towards value and less and less toward differentiation and performance of products. And I think when that happens your competitors begin to sell on price and other factors. I think this market has definitely changed. The dynamics, the competitive dynamics have changed and our approach to it needs to change as well and that's just a fact. For us, you know, if you look at the performance is primarily the stent business and it's primarily the US. Now is there a residual effect in Europe, there is, is there a residual effect in Japan? There is. I’d say in both countries, both geographies, that is Japan and Europe its price. But in addition, I think that there's a definitely a share war going on where the leaders in the category and as such, we’re targeted by everybody else. And we all seem to be dealing with that as well as we should. And I think that's pretty clear. So, at this point, I don't have any projections to make to you other than you've got our full attention.

Thank you. Our next question is from David Roman from Goldman Sachs.

Thank you good morning everybody. I wanted to sort of follow along the train of thought on the vascular business. And Miles if we make the comparison to the turnaround you may be able to execute on EPD, it seems like it's not completely analogous. And the reason I say that is EPD operated in very attractive end markets largely in the emerging markets. Whereas in vascular the vast majority of the business is in stents which I think would be hard to call an attractive market. So as you think about this business strategically do you need to rethink the business mix or the potential to engage in more aggressive portfolio modification to really change the growth portfolio of that vascular franchise?

Well, first of all, let me tell you, I don't see an analogy between this and EPD other than there's been a time when both have performed below our expectations and we frankly - which in the pro forma at or above our expectations, so there is the comparability. Other than that, you’re right. They’re different. The answers to the device business or the stent business are clearly different. The dynamics of the market are different and so on. In our case, I think, there is two things. One is we clearly have to deal with our competitiveness in the stent category and in particular in the US. We simply have to figure out here how to be a lot more competitive than we apparently have been. So that's point number one, point number two beyond that, I think for this business to be a contributor to growth it's got to be broader. We've got to broaden our footprints here. We've got to broaden into new areas and new innovations. Now, in our case, MitraClip, the peripheral, the longer term prospects for Absorb and frankly any other expansion beyond that, they're all considerations here. We can't just sit here and be a drug-eluding stent company and rely on that. So it's clearly our intent to broaden the business and grow other dimensions of it in the device area. But you have to do that on strong foundations, so we've got to fix the competitiveness of the underlying business first. And we’re clearly looking at how we expand and shape this business going forward. I have no intention of being out of the business, I've no intention of shrinking, I have no intention of any other changes other than full steam ahead, but I’d say the underlying competitiveness and then expansion from there is what's on the table.

Okay that's helpful for perspective and then maybe just on the underlying business, maybe you could talk a little bit more about adult nutritionals that that is a franchise that looks to be doing reasonably well and it obviously looks to be a pretty big opportunity in China on a go forward basis. Could you maybe just help us understand the adult opportunity that exists in front of you? And then how we should think about the impact that has to the global growth of that nutrition business on a go forward basis.

I’d tell you, I think this is a great business and again I always think we can do better at it. And in this case, it’s very different dynamic. We are the adult nutrition business worldwide. And its one where - it's not about riding growth or competing with particular competitors because we're quite large I guess, I would say in the area. So we have to drive the growth and create the demand as well. And the single biggest uncreated opportunity thus far is China. And we’re recently launching into that arena with powder-based products and so forth. We’ll learn our way in here. We think we understand the dynamics of the market, but you always think you understand the dynamics of the market then the market teaches you more. In this case, we’ve launched. I think there's a big opportunity there. I think there's a future opportunity beyond that, beyond the powder-based business in liquids. And we’re prepared for that as well, but I think we’ll go at this - I don’t want to say cautiously because that's not the right term. But thoughtfully, progressively we’ll establish our distribution, establish our brand, establish our products, establish us in the categories. The dynamics in China are different than the dynamics in the US or other countries of the world their own behaviors and practices as consumers are different and so it’s not like you can just take up a U.S. or European or Latin American model and apply China, you can’t. But I think there is a big opportunity there and I think there is opportunity in the rest of the world to continue to grow the business. In this case, we don’t measure our success so much on shares we do in so many other categories, we measure our success on real growth because our share is high and I think that a very high share and given segment you can’t often too comfortable and that drive the opportunity or the market growth. I don’t think our people are comfortable, I think they all understand there's a much bigger opportunity there to drive growth in this business we certainly do like that. And so for me that's a real upside for us that's on our radar screen for a lot of investment attention and as you know we've recently invested in additional plant capacity not only in China and India, but also here in the U.S. in Ohio where we built a brand-new liquid plant that is specifically dedicated to this business. And we’re already into phase 2 expansion there so we've got great expectations of the ability this business to drive growth in the future both here and in the areas overseas.

Okay and maybe lastly for you or Tom, even if you don't monetize the Mylan shares that you'll receive still be sitting on a pretty big chunk of cash fairly under the level of interest rate still level of potentially rising and any updates on how we should think about use of capital going into next year and how you might look to offset the Mylan dilution and any headwinds that might materialize from foreign exchange in 2015.

Well, you got similar questions there, one is sort of capital allocation and the Mylan shares and then currency so let me just deal with the capital allocation first. I’d say I'm probably not going to tell you right now what our intentions would be or what we’ll do. I'd say your best proxy for that is just to simply to look at we've been good stewards and capital allocators in the past we always pay a healthy dividend, we always try to balance share repurchase, but at the end of the day we also have been investors in strategic growth opportunities and so forth and I think the best expectation is a mix of the above. We’re not going to run the one side of the ship and tip. We’re going to keep things relatively balanced. I think we’ll be opportunistic about our Mylan holding. Obviously, we don't want to do anything to destabilize that holding or either company. And we think that's a pretty strong and valuable investment for us so we can afford to be I’d say thoughtful about the disposition of those shares over time. Although it's not our intent to be long-term shareholders of Mylan I think that's been pretty clear. And you know I'm glad to have the capital and the challenge how to best allocated for our investors but I think, if we look at our track record historically we've been pretty good at balancing that for the range of investors we have those that rely on the income those that rely on a cash return those that rely on good strategic investments so forth so, without betraying any future direction here, and certainly time and opportunity can change here so you can expect more of the same from us and not something dramatically different in what you come to expect. With regard to currency, I note that a lot of companies that have reported in last couple of weeks a flag caution around currency around the world and you know rightly so. As you know our business is 70% international and in the continued operations now we’ll be about 50% of emerging markets and some of those currencies have been disappointing or volatile if you’re an American company and competing in dollars. And it remains a challenge for us so over the past few years we like other companies have taken quite a dent from currency and I’d point out that over that time as you know the companies made tremendous strides in improving margins improving gross margins and distribution margins and unfortunately well fortunately and unfortunately we've done that because it’s been able to absorb a lot of the currency hit and all pricing pressure that we've experienced around the world over the last couple of years and we still manage to improve margins, but or it would be eroding the bottom line that we’re experiencing. So going forward I don't think any American company likes to have to keep dealing with that but for a period of time it appears to me we’re going to be under some exchange pressure at companies around the world and expense in the market basket mix. Over the long term, our best hedge against currency fluctuations is to have our cost basis in the markets where we serve. And what I mean by that is our production, our plans, our products we've got a matchup some of our production in a proportion with profitability of markets and in fact that means producing end markets for the market and a lot of these large emerging markets and even the smaller ones that want foreign investments or want American brands or American companies or frankly European companies they also want you to invest there to build plants and employ people et cetera in their markets and over the long haul the best hedge against currency is to have your costs where your profits are and we happen to have profits in a lot of countries of the world and so we've got to ensure that we have also thought through, how to put some of our production capacity, R&D capacity, and so forth there we can’t solely be exporters from the United States or concentrated places, capital all your cost in India, and exports it to the rest of the world. You've actually got to match it up where your profits are, invest in most countries and mitigate exchange. So I think over the next three years that's something that's going to get a lot of focus from us and other multinational that are 40%, 50%, 60% international companies and businesses. And you’re going to see many of us working to balance that overtime because to the extent that the kind of currency we've experienced continues, and we expect it to continue in the 2015. I’d say right now, you know, I'm not ready to even start hinting about the 2015. We always start the year targeting double digits. And we always do target double digits. We always set a high bar for ourselves even in small economy. But the hardest part of predicting this is the currencies. And then we still deliver on the top of that. So I think overtime, the only real way to mitigate currency is to do as I just described. You can head short-term, but that's it short-term, and for the long-term we’ve got to deal with that. Because I think, if we want the growth from a participation of these markets then we've also got to shape our business to deal with the fluctuations of currencies because as you know our investors require us to get it right every quarter.

Thank you, and our next question is from David Lewis from Morgan Stanley

Miles I just want to come back to a strategic question here and you know and with nutrition back on track and the [receipting] in EPD you have two legs of the stool growing out in excess of the target rate you laid out for Abbott at the spin. Devices is the obvious departure which is more vascular and diabetes but one of your larger diversified peers is actually getting smaller in devices. And I guess the question is even though everyone's discussing large device consolidation, in light of the strength you have in the other two legs, and arguably better secular fundamentals in this business is why even bother getting much bigger in devices versus doing tuck in technologies for focusing on better execution?

Well, I’d say two things. First of all, I’ll correct you a little bit and say I got three major businesses that are doing really well. I think diagnostics is doing well too. And I think relative to the kind of opportunities diagnostics has and how it’s been performing, it’s been a really solid performer over the last few years and has a hell of the bank of systems and new products coming. So, I think your analysis and I'd say look - and by the way I haven't told nutrition are back on track, you just did. But I keep the fire to our feet here on this performance. But, okay, let’s take you description and say, the established pharmaceutical business and nutrition are trending in the right direction in terms of growth, expansion and so forth. I think diagnostics is going to be a very solid performer at least devices. And I would take that in three pieces and say, you know the diabetes cure business actually I think is doing very well. I think they've stabilized the underlining business relative to the competitive bidding dynamics of the U.S. Every major competitor took their hit there. We just launched a unique, and I say spectacular products that in Europe at this point, that I think is going to drive a whole new generation of performance there that we’re excited about. So I think in terms of things that we would do for our diabetes care business, we're pretty happy with how that's progressing at this point. In our medical optics business, it’s best-performing division in the company right now, which is ironic because as you know for a couple of years after we acquired it, we kept reporting disappointing performance to you, and of course you all really challenge us on that. But that business is performing well, taking share in its business. It's had a great run here of new product delivery and continues to. So, I like what I see and medical devices out of those two businesses at this point, good innovation, good R&D productivity, good commercial execution, good expansion, good platform, I just can't say enough good about it. That leaves vascular and vascular has got challenges, which I already talked about. So, that’s the one part of our release where you’d say I am disappointed in the trajectory of disappointed in what I see in terms of performance. And we know that. I mean, nobody is going to be surprised to hear me say that over the phone. So, you can look at it any number of ways, you can say, well that's not very good any more. We’ll just do something with that or shrink or just get rid of it or whatever. And I don't want to think that's necessary. I think right now our issue isn't - you can say the market is slower. All markets are slower. All markets are slower. There's no question about that. First issue here is our performance, our strategy, our execution, how we’re doing our business in these markets. And relative to our competitors, I don't think you abandon commitment to our investments in the business because of your own execution I think you go picture execution. And in our case, that's what I'm going to focus on. Do I think there's still a lot of opportunity in medical devices? I do. I think there is opportunity there are some segments of medical devices that are attractive to us and some that are not. There's some that we would not choose to be in and having chosen to be in, and there are some that we would choose to be in. And I'd say that ebbs and flows, it's not clear given point in time, what’s going to evolve, what’s going to develop. I’d say we all know that the easy part of it with a big tailwind of innovation funded by government reimbursements and so forth, that's not as easy anymore. Now you've really got to compete, and you've really got to be innovative, and you've really got to be better at it in your competition and you got to put a value proposition on the table with a product somebody wants and is willing to pay for it. So I think right now my focus on the device business is both fixing the base of that particular business as I described, and looking at where we would selectively choose to invest or expand I think one of the benefits of being large and diverse as we are is that we can afford to absorb occasional poor performance or economic downturn or whatever the case maybe and fix the business or improve its performance but we can afford to be patient about what new opportunities may come along and where we want to invest. There've been a number of transactions that we've done over time to build the company that have been from a timing standpoint opportunistic. We track those businesses and those segments for a long period of time and when an opportunity presented itself that fit and it was economically good for us and our investors then we pounced on it. And I think in this case some dimensions of the future of the device business require some patience here because the markets as you know aren't as favorable as they could be and it's not clear when that will change and it's not clear where the new opportunities in some of the areas of devices will be attractive. But I think for the long-term and especially in some out of the U.S. geographies and so forth there is still a lot of opportunities here so I’m not ready to throw the challenge and miss it all.

And Miles just to follow-up on something you mentioned on nutrition, U.S. adult very very strong, your pediatric maybe little less so. Is pediatric the business that you’d like to see greater improvement and what steps need to be taken to do that?

I'm not sure I understood the question there.

Just in terms of nutrition, we had all U.S. adult very strong and in pediatric maybe not as strong as we expected and given your comments on nutrition back on track but not quite where you wanted I wonder it’s the area of improvement is that more in pediatric than this is in adult and what specifically has to happen in pediatric nutrition to improve that performance.?

Yes, okay. As you know, over the last 3-4 years there has been some largely there that impacted the pediatric nutrition business usually in China. And the recall that we had over a year ago clearly affected the business in China and several other countries. And when that happens to the pediatric business it typically takes a year or more to recover. And you might note that one of our competitors who was impacted more than we were by that particular recall has not recovered and we have. So, I think first thing I'd say is our team in China and Saudi Arabia and other places, Vietnam they’ve done a wonderful job recovering not only share they had in the market but performance trajectory, brand confidence with the consumer et cetera and we’re seeing that now. While we completely there we’re close that cost a year’s worth of growth and base and so forth to those countries. We're in a good trajectory in China a lot of new product launches are going on right now that are driving us I think very nicely, I'm not sure we’re going to be satisfied and let ourselves to be satisfied in pediatric business in China until we've taken incremental share over and above where we were when the recall happened but we’re on a good trajectory there and I think the team is doing well at that. We’ve a launched a lot of new products around the world country by country over the last three years, our R&D productivity in the nutrition business has been exceptional, tops in the company and then put a lot of new products into the marketplace and it's our own commercial execution that needs to make those products successful in those markets. So I'd say, we're in so many countries that the opportunity from a pediatric standpoint is really strong, really good, and driven by good demographic circumstances in those countries and economic development circumstances. So I’m pleased with all of that. As I turn to the U.S., the U.S. has always been Abbott competition there's no tailwind of growth for the pediatric business in the United States, this is hand-to-hand combat. That's primarily Mead Johnson. And they’re to be respected for medical competitor and they make us better and hopefully we make them better I think they're a very strong competitor with both relatively equivalent share in the United States and we just slug it out every day and I think that puts a lot of pressure on both companies to be innovative, to perform well, to always be looking at new ways to reach the consumer. And the medical community and in our case I think we've done really well. I think that our share growth, our share gain in various segments of the business has been excellent and if you asked me if I'm satisfied I'm never satisfied. I always want us to do better than we've done and I think the attention that we give that business is warranted and we've got a lot of attention on that business. Because I think it can do even better than it has I think we've got really good management team there and I think the opportunity and the upside for us is good. It's not a market driven growth, it’s a competition driven growth we have to compete. And I tell the people in the company that if you really want to see head-to-head competition and understand what competition looks like in a business whether the pediatric nutrition business because in every country of the world it is head-to-head with our competitors. And I think we've done really well there from share standpoint and gross standpoint to access that market so that gets a lot of attention and focus for us. It’s a profitable business, it generates strong cash flow. I like everything about it.

Thank you. Our next question is from Larry Biegelsen from Wells Fargo.

Good morning, thanks for taking the question, so just one multi-part question for me just starting with the Mylan deal. I think when you announced the deal you said it would be $0.22 diluted any update from the new terms? And how should we think about EPS growth off of the 2014 base with the Mylan dilution and the CFR accretion? And just lastly on the same theme, I think Miles in the past you said that you tried to make up any delusion from M&A. Is that still the case following the Mylan deal? Thank you.

Going down the list, no change at all in our --

Just to be clear that’s comps.

No change at all on our forecast of 2015 impact of the divestiture of the developed markets business for EPD to the Mylan. That stays at the $0.22. We estimated that in July. CFR, the way to think about that is we indicated that would add $0.07 to any baseline, you would develop in 2015. And the third question was, was what Larry?

I think in the past you and Miles, I think it's Miles, I think I've heard say that you would try to make up any dilution from the M&A, is that still the case here?

I mean I don’t know if that’s quite the right way to phrase to I mean. We are very sensitive to dilution and I think if you go back and the many deals we’ve done in the last several years, investors have not been impacted by dilution on any deal and so our efforts have always been that if there is some modest impact of the business that we find the way to manage through that without impacting investors. And I think that’s the way to approach it and that’s definitely in our history and I continue to be way we think about deals going forward.

You know, Larry, I would just add to it. There is $0.22 on this divestiture of this business and that’s - its chunk of make up now obviously our EPS well figured in that, but that all chunk of makeup. CFR will offset fair amount of that. And then I would only point out that to the question earlier, we aren’t constrained with capital in terms of opportunities. But we want to be opportunistic in terms of any opportunities that we had with the company, so I don’t want to just rush out and you’re not suggesting this I understand. But obviously deploy capital is simply replace EPS and in long-term I am always looking to build EPS and grow the Company. So we clearly with not only the continuing cash we earn and accumulate, but as the Mylan proceeds and so forth have tremendous flexibility for M&A and kind of without constraint. The only thing that constrains us is opportunities and fit of those opportunities and so on. So I think to the degree that they are investors who look at the net let’s call it dilution from the sale of scaffold product business in the developed markets to Mylan, I would say be patient, you can’t offset that or fix that in a few weeks, but longer term obviously our motive is to grow and improve the company. And I just can’t predict the timing of that, but I can certainly figure all the possibility in the all deal is.

And Larry, I’ll just add one more thing to what Miles said and the way I entered the question. Obviously, Miles just pointed in the near term we will have - we won’t have the earning of that particular business, but as we talked about that in July and as you saw on this quarter and this first quarter reported continuing operation, you saw significantly enhanced top line growth rate, a better bottom line growth rate and that obviously investors like that message when we deliver in July and that’s when we shouldn’t lose as we move into 2015.

Our final question today is from Rick Wise from Stifel Nicolaus.

Thanks. Morning Miles, hi Tom. Miles you've approach this in multiple ways but I'd sort of like to ask you more directly when I think about the last year or so you've done an amazing amount of operational and portfolio reshaping. I mean clearly it seems like vascular is something that you're going to be paying more attention to. But if you list the top three priorities for your attention here where are you focused and you know operationally and portfolio perspective now that you've addressed so many of the major challenges?

I am focused on vascular and I am focused on devices. I think, you think about where you spend your time it’s not like you run the one thing and only spend your time there. I mean they all got a lot of time and attention from all of us, but we know very clearly where we’re headed and what we want to execute. What we have to do in almost every business here where we don’t seem to be executing or defining that future as well is clearly in the vascular business and I think it’s not even devices it’s the vascular business and we can think of the vascular business as vascular we can think of it more broadly as medical devices exclusive of optics and probably just care center for minute and I’d say that particular leg has both fix it dimension to it and an expansion of future strategy dimension to it and its capital so that’s something that’s going to get a lot of attention from all of us and more or so I mean I would say we believe we have been paying sufficient attention to all the things necessary in that business but clearly it shows in the performance right now but that’s not sufficient and we’ve got to take through this a lot more thoroughly. And I think thinking from a standpoint of being more successful we just got to be a lot more successful not only in the current business but in the future. So, I guess if you said where is the majority of my worry time spent or my focus time or strategy time or whatever it’s with my folks in the vascular business now.

Got you. And just to last operational questions. If you could talk a bit more about China are you back to normal in China? And do you think the new plant distribution from Tera, the new products had we think about growth and share there you know over the next year or two? It seems like there could be it could be quite extraordinary. And just last briefly remind us on the flash FreeStyle, how big the opportunity is, I know the market is huge, how big an opportunity how big a product could this be? And remind us about the US approval and launch times thanks so much?

Okay, with - China yes, I think we’re back to where we were or we ahead of where were, we made up for the last year no but we’re back to where we were in my view. And with regard to prospects in China going forward I’d say the sort of the near term and the long term, the near term is often a bumpy ride in China and that can be because of local conditions, it can be economy, it can be the government, it can be the unexpected recall it can be anything, China is a bumpy ride and yes, it’s a very attractive long term market so we made long term commitments and investments and have a long term strategy there including the ownership and development of our own dairies and own milk supply inside the country and I think that is unique among multinationals at this point. We’ve ensured our own supply and our own access to ingredients at a very high quality level et cetera and I think for the long term that makes a big difference we’re very very well positioned. So, I think the prospects in China are very good for the long term in spite of the fact that it’s an occasionally bumpy ride okay and I think the underlying potential dynamics are all very strong and very good, it’s a very competitive place, it’s a different place to do business. But I can say that about any market around the world and I know people say it would they tend to lump emerging markets together like they’re all the same, they’re not the same and they’re no two that’s same and yes, they represent tremendous growth and I think China does in particular. Now in our case, I’d say we’re pretty spread across a lot of foreign markets and emerging markets around the world because we don’t want to be over dependent on just China, just India, just Russia, just Brazil et cetera. So as you know with our CFR transaction, CFR doesn’t happen to be substantial in Brazil or Mexico or very large market it’s in a log of next level markets medium size et cetera where there is tremendous opportunities. In our case we don’t risk to over index necessarily just in China or India now when - market we want to be very successful in it so with the largest healthcare company, largest pharmaceutical company in India and I like that position but at the same time our share is at a point where there is still tremendous growth opportunity ahead of us we just don’t want to be over dependent on any one market and while China is a tremendous growth opportunity so it’s the rest of the world. With regard to Libre which is the flash glucose product just reference I don’t know what I can tell you about the potential is to be honest I think we’re going on at the beginning here with I think modest financial expectations but aggressive marketing intent, we’re going at this a different way, I don’t want to be overly reliance on reimbursement because I think this product has tremendous consumer or user appeal for the insulin dependent diabetic and I think the experience for that particular patient or user is so superior to what’s available today or what they can do today that I think our challenge is to establish the value proposition and the product and it’s benefits and it’s use and it’s experience to that patient group. And if we do that well then it won’t as dependent on get keeping your hurdles of government reimbursement et cetera although it may be well enhanced by that at some point but we’re trying to go about it more from a consumer approach perspective and go direct to the patient with this and to the extent that all regulatory circumstances allow. So, I think that’s got great potential opportunity I don’t know how to put a dollar value on that yet so I’m reluctant to kind of Forecast one. Our team in diabetes care knows that almost any number they give me won’t meet my expectations and I think that’s kind of how we live it internally right now it’s not clear that can completely project what the uptick will be or how fast but we’re very pleased by initial reactions of consumers and professionals and physicians and so forth. And I think after we’ve had some months of experience we’ll be better able to put some numbers around what we expect here in terms of continuing trajectories, expansion share gain et cetera in the biggest user group there is which is insulin dependent diabetic and the frequent tester. So I think that’s the best I can tell you about that at this point, right now we got an awful lot of expectation and hope and we’re not overly focused on meeting particular numbers because right now the numbers are small of course because that’s the initial launch phase but it’s launched in 7 new countries and that’s going to be pretty good test for us.

Okay, thank you operator and thank you for all of your questions. And that concludes Abbott’s conference call. A replay of this call will be available after 11:00 AM Central Time today on Abbott’s Investor Relations Web site at www.abbottinvestor.com and after 11:00 AM Central Time via telephone at 203-369-0489 pass code 2343. The audio replay will be available until 04:00 PM Central Time on Wednesday, November 05th. Thank you for joining us today.

Thank you and this does conclude today’s conference. You may disconnect at this time.