Abbott Laboratories (ABT) Q1 2017 Earnings Report, Transcript and Summary

Good morning and thank you for standing by. Welcome to Abbott’s First Quarter 2017 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any 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. Scott Leinenweber, 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 Brian Yoor, Executive Vice President, Finance and Chief Financial Officer. Miles will provide opening remarks and Brian will discuss our performance in more detail. Following their comments, Miles, Brian, 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 2017. Abbott cautions that these forward-looking statements are subject to the 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, 2016. 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. Please note that first quarter financial results and guidance provided on the call today for sales, EPS and line items of the P&L will be for continuing operations only. On 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 are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to comparable operational sales growth, which adjust the 2016 basis of comparison to include results for St. Jude Medical and to exclude the impact of exchange, as well as current and historical results for Abbott’s Medical Optics business and St. Jude’s vascular closure businesses, which were divested during the first quarter of 2017. Comparable growth also reflects a reduction to St. Jude’s historic sales related to administrative fees paid to group purchasing organizations in order to conform with Abbott’s presentation. With that, I will now turn the call over to Miles.

Okay, thanks, Scott. Good morning. Today, we reported ongoing earnings per share of $0.48 exceeding our previous guidance range. Sales increased 3% in the quarter, which is at the upper-end of our expectations. Our full-year 2017 adjusted earnings per share guidance of $2.40 to $2.50 remains unchanged and reflects double-digit growth at the midpoint. As you know, we completed several important strategic steps during the quarter to shape our company for sustainable long-term growth, including the acquisition of St. Jude Medical, which establishes Abbott as a leader in the medical device arena. The combination with St. Jude positions Abbott with one of the strongest new product pipelines in the industry, including several recently launched products that are setting new treatment standards and contributing growth today. The combined portfolio has the depth, breadth and innovation to help patients restore their health and deliver greater value to customers and payors. In terms of the integration of St. Jude into Abbott, the team has made tremendous progress over the first few months of the year when we’re on track to meet our objectives. The newly formed leadership team reflects a blend of Abbott and St. Jude leaders, and importantly, the team has remained focused on achieving its new product milestones, synergy targets, and financial objectives for the year. Additionally, last week, Abbott and Alere announced that the companies have agreed to amend the existing terms of our agreement to acquire Alere. Point-of-care testing remains an attractive growth segment within the in vitro diagnostics market and the acquisition of Alere will significantly expand our diagnostics presence and leadership in that space. I’ll now summarize our first quarter results before turning the call over to Brian, and I’ll start with diagnostics, where we achieved sales growth of nearly 5% in the quarter in line with expectations. Growth in the quarter was led by continued above market performance in core laboratory and point-of-care diagnostics. During the quarter, we initiated the launch of our new Alinity systems in Europe with the ongoing roll out of four new instruments in the areas of immunoassay, clinical chemistry, blood screening and point-of-care. Later this year, we plan to launch two additional Alinity instruments in Europe in the areas of hematology and molecular diagnostics, which will be followed by the initial roll out of the Alinity suite of instruments in the U.S. during 2018. In nutrition, sales declined 1% in the quarter. As expected, challenging market conditions in China impacted the results of our international pediatric business. As we previously discussed, we expect these market challenges to persist throughout the year that continue to hold a favorable outlook on the Chinese and infant formula market on a longer-term basis. With the pending new regulations in China, we remain confident that our supply chain and product portfolio is well-positioned to meet evolving customer preferences and purchasing channels. In the U.S., we continue to achieve above market performance in pediatric nutrition with a portfolio of innovative product offerings for infants and toddlers and in adult nutrition where Abbott is the global leader, high single-digit international growth in the quarter was led by continued expansion of Abbott’s market-leading brand Ensure across many international markets. In Established Pharmaceuticals or EPD, sales growth of roughly 6% was led by double-digit growth in key emerging markets including above market growth in Latin America, China and several markets in Southeast Asia. Our continued focus on enhancing local capabilities and expanding our product portfolio within core therapeutic areas targeted specifically to address local market needs continues to strengthen Abbott’s unique position in these markets. And in Medical Devices, which comprises our new cardiovascular and neuromodulation business, along with our diabetes care business, sales grew 4.5% in the quarter. Sales growth in cardiovascular and neuromodulation was led by double-digit growth in electrophysiology, structural heart and neuromodulation. In electrophysiology, we initiated the U.S. launch of our Ensite Precision cardiac mapping system, which provides physicians with improved automation and three-dimensional images to better treat irregular heartbeats. Growth in structural heart was led by continued double-digit growth of MitraClip, our market-leading device for the repair of mitral regurgitation. And in neuromodulation, growth was led by recently launched products including Burst for the treatment of chronic pain and deep brain stimulation for the treatment of movement disorders such as Parkinson’s disease. During the first part of the year, we also achieved several important new product milestones across the business including U.S. FDA approval for MRI compatible pacemaker, European launch of our Confirm Implantable Cardiac Monitor and submission of our MRI compatible ICD device for FDA review. In diabetes care, international sales growth of 29% was driven by FreeStyle Libre, our innovative sensor-based glucose monitoring system that eliminates the need for routine finger sticks. Now available in more than 30 countries outside the U.S., we continue to see strong demand as consumers, healthcare professionals and payors recognize the cost, comfort and convenience advantages Libre offers. So in summary, our first quarter results reflect a strong start to the year. The integration of St. Jude is going well and we’re on track to achieve our projected synergy targets. And as we continue to execute on our key business priorities, we expect to deliver on our double-digit ongoing EPS growth target for the full year. I’ll now turn the call over to Brian to discuss our results and our outlook for the year in more detail. Brian?

Okay, thanks Miles. As Scott mentioned earlier, please note that all references to sales growth rates unless otherwise noted are on a comparable basis which is consistent with the guidance we provided back in January. Turning to our results, sales for the first quarter increased 3.2% on an operational basis. Exchange had an unfavorable impact of 0.6% on sales, resulting in reported sales growth of 2.6% in the quarter. Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.2% of sales, adjusted R&D investment was 8% of sales and adjusted SG&A expense was 32.5% of sales. The over delivery in the first quarter EPS compared to our guidance is primarily due to timing of spending and certain non-operating items. I’d note that while exchange rates eased somewhat since our call in January, a follow-through impact on our first quarter results is fairly modest, taking into account our hedging program and the lag time that it takes for rate changes to work through our product costs. Before I review our financial outlook, I’d note that our sales and adjusted EPS forecast do not include any contribution associated with the Alere acquisition, which is expected to close by the end of the third quarter 2017 subject to certain closing conditions. We will provide an update regarding the expected financial impact of this transaction at a later date. So, turning to our outlook for the full year 2017, we continue to forecast operational sales growth in the mid-single digits and based on the current exchange rates, exchange would have a negative impact of around 1% on our full year reported sales. We continue to forecast an adjusted gross margin ratio of around 60% of sales for the full-year, which reflects the profitability mix of Abbott and St. Jude, as well as underlying gross margin improvement across our businesses. We continue to forecast adjusted R&D investment of somewhat about 7.5% of sales and adjusted SG&A expense of approximately 30% of sales, which includes expense synergies associated with the addition of St. Jude. Turning to our outlook for the second quarter of 2017, we forecast an adjusted EPS of $0.59 to $0.61. We forecast operational sales growth in the low to mid-single digits and at current rates expect exchange would have a negative impact of around 1.5%. We forecast an adjusted gross margin ratio around 60% of sales, adjusted R&D investment of around 7.5% of sales, and adjusted SG&A expense of approximately 30.5% of sales. Finally, we project specified items of $0.55 in the second quarter, primarily reflecting intangible amortization and expenses associated with acquisitions. Before we open the call for questions, I’ll now provide a quick overview of our second quarter comparable operational sales growth outlook by business. For Established Pharmaceuticals, we forecast high single-digit sales growth. In nutrition, we now forecast low single-digit sales growth for both the second quarter and the full-year. In diagnostics, we forecast sales to increase mid-single digits. Turning to medical devices. In diabetes care, we forecast double-digit sales growth. And lastly, in our Cardiovascular and Neuromodulation business, we forecast relatively flat comparable sales growth in the second quarter, which includes a difficult comparison versus last year when sales were favorably impacted by the resolution of a third-party royalty agreement in our vascular business. Excluding this third-party royalty comparison, underlying sales growth in the second quarter would be low single digits. With that, we will now open the call for questions.

Thank you. [Operator Instructions] And our first question comes from Mike Weinstein from JPMorgan. Your line is open.

Good morning, everybody. And Miles, I was hoping I could start with Alere. You didn’t update on the potential financial impact of Alere. But I was hoping that you could talk about your view of the math on the company’s earnings power today versus the time that you announced the transaction and how we should think about that assuming that we go forward to a deal closing here?

Well, I don’t think I’m prepared today to give you a lot of detail on that Mike. But I can say this, look, the company had some challenges, we all know that, and it’s a bit of a fixer upper and we know that. I’d say, we’re pleased to have the resolution of this matter behind us. We want to go forward and close this deal. We want to close it in the next few months. It’s going to be a little unpredictable, because they’ve still got to file their 10-K and they need that in order to do a proxy statement to do a shareholder vote and so forth. So there’s a – there’s some steps to get through here before we can close. And we’ve got to finish the divestiture of a couple of businesses that will have to divest because of the regulatory approvals and anti-trust approvals. And I know what I would say is, we’re committed all of us to get all of that done in the next coming months here. So I’m looking to close this hopefully, and I’m – this is just a guesstimate by end of summer, allowing for enough time for, what Alere has got to do with the shareholders and so forth. But I’d say, look, if it remains on strategy, we really like the space. We like this point-of-care space. We like the expansion to our diagnostics business. We like the businesses. We will divest a couple of pieces. When we first announced the signing of the deal, that wasn’t clear and wasn’t known. So and they had issues with a couple of pieces of businesses as we know. So, I wouldn’t say that the same sales will be there. Obviously, the businesses that have had problems will either be gone or smaller. And the ones we divest won’t be in the portfolio. So the amount of sales and profits that we add to our models will change. As far as earnings power and all that sort of stuff, I’m just not prepared to give at this point. I’d tell you that I think that the resolution of the matter between us is fair and it’s behind us and we move forward. And beyond that, I think we’re going to have to wait till, first of all, we’re in possession of the company and obviously, it’s going to take us a bit to get our hands around that. So I’d say, we’re not going to really be in a good position to give a lot of detail guidance until minimum fourth quarter and probably normal guidance time. And I know, you’re going to all of our analysts and investors are going to want guidance before that at some level. And I think we’ll be able to give it at some level within ranges. But I can’t do much detail today.

Okay. Let me switch to St. Jude and that’s what the question people have is relative to the Sylmar warning letter. So can you give your thoughts on how that warning letter impacts the business? Any guess at this point on how long you think it will take to resolve? And I assume that that means that the MRI compatible ICD approval timelines to push out. So given that, are you able to stabilize the business while you’re waiting for the warning letter to lift and for those devices to get approved?

Well, I want to be careful not to make assumptions about things that the FDA gets to decide. I would say this. First, the warning letter clearly a disappointment, but not unanticipated. We’ve been aware of the circumstances here for sometime and we’ve been working with our St. Jude colleagues for sometime even before close on GMP matters at the site. So, we’ve got a pretty good head start here on the issues and a fair amount of dialogue with the FDA about the issues. So having said that and being clearly disappointed in the outcome, I’d say, the impact will depend a lot on our response, how thorough, how effective that response is. And I can tell you, we’ve got an excellent team of people on that. We’ve basically taken everybody that is exp0ert in the field in our company and then we have a lot of very good people in the area focused on and working on not only Sylmar, but we’re doing a full valuation across all the sites and make sure that we understand everything here in detail. We’ve got a very strong track record ourselves in GMP performance, et cetera, the FDA is aware of that. So I’d say, the effectiveness of our response, the thoroughness and so forth will determine a lot of this. Now, in the mean time, how fast they will resolve? Can’t really predict, but I’d say, we’ve got a pretty, pretty good sized head start on this. It’s not like we received a letter and said, go. We’ve had a pretty good visibility to all the issues and matters at the site starting last year. And so, I think we’re well along here. And with regard to the timing of approvals and all the new products that we have under review with the FDA remain under review. We know that they’re continuing to review those submissions. So that’s a good thing. And so I don’t think we can draw any conclusions from that that are negative or positive. I think that it’s going to depend on the quality of our response here, and I’m very, very confident in our team. So, at this point, I’m not going to change our launch dates, our assumptions on approval dates and so forth, because I don’t see a reason to do that yet, or a direction to do it in. And so I think right now, I’m just going to leave it where it is. And we know that there’s some uncertainty around that. We know that this will depend on our actions at the site and we’ll see how that progresses and then I’ll have a stronger position or point of view about that probably later this year. But right now, we’re focused on what needs to be done in terms of corrective actions and improvements at our site, and that’s where the focus ought to be. And then was – is that makes clear progress and shows clear effectiveness and all, I think it’ll be time to try to figure out what impact is going to have on launch dates of new products.

Okay. Let me ask one last question, if I can, Miles. The discussion on the street right now really, I would put it in two buckets on. It’s a question of okay, what is ultimately Abbott’s earnings power post this deployment of capital in the acquisition of St. Jude and ultimately Alere here? And what does that look like? And okay, what is the ease for the company? And then the second discussion is really what I was hoping to have you comment on which is, okay, well, what do we pay for Abbott going forward? And the discussion essentially ends up centering around this question of well, is Abbott’s mix of assets today post the acquisition of St. Jude and Alere and the change in the outlook for the Nutritions business as good as it was two to three years ago, and effectively what should we be paying for Abbott today? Can you give us just your own thoughts on that in terms of the overall quality of the portfolio today versus two to three years ago?

I think the quality of the portfolio today is clearly strong and improving better. I think that’s an easy one, geez, did you tee that up on purpose? You know if I look back two to three years ago at – I’ll just run through the portfolio. I love the nutrition business, yes, it has its ups and downs occasionally, but it is a strong solid grower, driven today obviously by emerging markets in a lot of cases, but it’s been a great profit and cash flow generator, solid business et cetera, challenges occasionally in China notwithstanding. The pharma business, our branded generic business, I think is in a much stronger position than it was several years ago. We’re focused on the markets where high double-digit growth exists, we’re seeing it. We are seeing the execution of that strategy being, I’d say, beautifully executed by our team. The only headwind we’ve seen in that is exchange and you know when I can control exchange and predict it for you, you know we’ll do even better. But I think the EPD business has been a true gem among branded generic pharma companies and it’s proving it with its growth rates and its performance. You know we just keep expanding the product lines and expanding our footprint in countries and we keep growing at strong singe or low double-digits there, I’d have nothing, but good things to say about that business. Diagnostics is in the process of launching the biggest range of new systems and new products that’s ever been done in the entire space in history. I used to run the R&D in that business years ago and I know the challenges and the complexity of developing big mainframe systems for diagnostic laboratories and this team has just launched four of them into the market at the same time. These are new systems with full menus, and you know it will be a rolling rollout, but I think when you look at two more systems coming, six systems across the board, a complete redo of the entire product line, I think the strength of that to drive the growth of our diagnostics business, gosh, for the next decade is unprecedented, absolutely unprecedented. And designed not only for their size, their efficiency, their cost, I think there is nothing, but good there and nobody has done that, so I’m extremely enthusiastic about that. And then Mike, you yourself have challenged us on the breadth of our medical device business for a number of years and I think that the addition of St. Jude here is powerful. I mean, arguably, we’ve got the best stent in the world and it’s challenging for everybody in this space to incrementally improve on the efficacy and quality of stents today. We have a lead position in the stent business and now we’ve broadened that across six other major cardiovascular categories. And I look back at the last few years in the medical optics business, which you know frankly I think J&J has acquired at a particularly opportune time, because it’s taking share in the intraocular lens space at a pretty nice clip, but they’ve got leading technology and that business had its own struggles when we first acquired it. So, you know if I look at Alere and St. Jude or even parts of Abbott that need you know improvements or whatever, I think we’ve got a very strong track record of improving performance in businesses that needs some improvements. And I look at KMO, I’m – we’re very proud of how AMO has performed over these last six years. And I think that was proven in the sale and value and so forth that J&J saw in it and I think they’re very happy to have that business, we’re very proud of it and we wish it well, because we’re pretty happy with how low it did. So I look back three, four years and I think we’re much stronger today and have a much more robust and strong portfolio across the board. You can say, well, now aren’t there challenges to fixing the business? I think any large company with diverse set of businesses is always going to have some defects. We’re always going to have something that’s not up to our standards or that we want to improve on and then there’s always going to be currency or something going on somewhere in the world. If you are in a 130 countries, there’s always going to be somewhere and something. So, I look at it and I think, yeah, I’m very pleased with how we’ve done and I think that for the growth prospects going forward are stronger than they’ve ever been. And to be honest, we start every year with a target of double-digit earnings growth. I mean, I – there have been, gosh, in the last 10 or 11 years, maybe two years that we’re high single-digit, but otherwise we target double-digit earnings every year almost without exception and that’s unusual in our space, and I think you know that. So at some point, I’d say, we’re the same company, but with a much better portfolio. And we live to the investment identity that we’ve been and creative and that’s our intent, that’s why we’ve made the moves we did with both St. Jude and Alere. And even though that we’ve got to put sometime and investment into these businesses to help achieve the growth aspirations we have. We just look at the strength of the portfolios across the Board. I don’t think we’ve ever had rich new product portfolios coming like we see across these businesses today. So thanks for the question, that was kind of an easy one.

Thanks, Miles.

Thank you. And our next question comes from Matt Taylor from Barclays. Your line is open.

Hi, thanks for taking the question. A couple of areas of the portfolio I wanted to ask about. The first was on diabetes, you had a really strong quarter. We actually saw some acceleration in that business outside the U.S. And I was hoping you could make some comments on, I guess, A, how FreeStyle Libre is doing? And what your expectations are for that in the U.S. you could give us an update there?

Yes, no problem. Look, I’d say, we’re pretty excited about FreeStyle Libre. It’s doing very well, doing really well across Europe. As I mentioned, I think in my opening remarks, we’re in about 30 countries now. The expansion within those countries is going well. I think we’re at about 300,000 patients. I mean, you can compare that to a like competitor, and I think that stacks up really favorably. We’re getting reimbursement across European countries, that’s unprecedented. And even within Germany and other countries, the reimbursement is expanding, that’s helping. In some cases, where it’s patient pay, we’re still growing very well, patients accepting it. So we’ve got both great patient acceptance, great value proposition. And then as we said payors, governments, sick funds and so forth are all giving a lot of support to the product because of the not only what it does, but the value proposition represents relative to what patients can do today. And it makes a heck of the difference in the care and treatment of diabetic patients and their care for themselves. So, I think, we’re pretty excited about this product and the pace at which it’s growing and expanding nothing, but good. As far as the U.S. goes, still working with the FDA to get approval in the U.S. and submitted, waiting, excited anticipating, in patient.

Okay, great. Well, and then just on the St. Jude side of things, so there’s a few areas that we’re pretty strong. But you continue to have some negative growth in Rhythm Management and heart failure. I guess, my question is, can you stabilize that business before you get ICD approval? And what are the things that would help that? Maybe you could comment on the pacemaker launch and how that’s going?

Well, pacemaker launch is going fine. We’ve got about 75% of our accounts are contracted about 25% to go. And because it’s a new product, new leads, there’s a little bit training and re-contracting involved, because it’s not the same old product. So, yes, I’d say that roll out is going well. It’s interesting you always wanted to be instantaneous and it takes a little time to roll it in. So I actually expect to see improving sequential quarters in terms of its growth, or decline. We’re comparing to last year when it lost some share, while it waited for approval. So I expect to see that improve steadily through the year, obviously, it will be helped when a high voltage is approved. But, as I said earlier, I can’t make predictions about that right now. We’re hopeful that we will be able to resolve matters sufficiently, or show enough progress with the FDA that we can stay on track with that. But I can’t predict that just yet, but I think that will make a difference as well. But I’d say everything is going very well with low voltage.

Okay, great. And one last follow-up. I just wanted to clarify on the Alere timeline as a few steps here. Do you think that it’s going to basically take kind of through the summer, what’s the soonest ticket close and kind of what are the key uncertainties in that timeline around FTC?

Well, I don’t know. I don’t want to speak for Alere, because that’s – right now they and their auditors working on their 10-K and so forth. I can tell you they’re just as anxious to get finished as we are. So that aside, I think we just arbitrarily sort of say end of 3Q, or third quarter, but it’s kind of an arbitrary date, you know do I think it’ll take longer than that? No. And I would tell you that both companies will get there as soon as they can. You know we got a couple of pacing items, I mean obviously we got our divestitures to finish up, but they will not – I don’t think be the long pole in the tent here, I think it’ll be the shareholder vote, but I don’t know that. I just think that we both got actions to finish up here in parallel and you know we’re going to act as I think we practically can.

Okay. Alright, thanks very much.

Thank you. And our next question comes from Rick Wise from Stifel Nicolaus, your line is open.

Good morning, Miles.

Good morning.

Let me start with China, in China nutritionals, no surprise you know the issues you called out. Maybe help us – you know maybe talk us through some of the steps you are taking now to set the stage for a better 2018? How confident are you that 2018 will be better? Obviously you are going to have some easy comps, you know whether it’s product or management or other initiatives, help us sort of frame the outlook as we look ahead there?

Yes, I’m thinking how to characterize that because we’re talking about one of the most dynamic markets of any market I’ve ever seen in the world. Would you have new management? I like the management a lot, very impressed with the experience, the background, the understanding of the markets, the actions taken et cetera. I’m pleased with the actions that we’ve identified. We’re not completely in control of what happens in China as you might guess, so you know we know that there’s a lot of inventory in that market. We know there’s a lot of channel shift happening in that market that takes time to play through. We believe we’ve refocused on the appropriate channels, the digital channel in particular has exploded and sucked a lot of the activity and energy out of traditional modern trade channels and so forth and that’s been a pretty big shift to us, because we have historically been heavy modern trade, but we have reacted to that, I think, now well. I wish we had been quicker, but we weren’t, so I think that the team there is making all the right adjustments in terms of where we promote, how we promote, where we ship, how we ship, product benefits and value propositions. I mean literally across the board I think our nutrition business has put a lot of attention on adjusting to what is frankly a fascinatingly dynamic changing market. We still like the long-term prospects of China. We look at the growth rates and so forth and there is not any big underlying detriments to how strong that market has been, it’s been – you know a lot more the reaction of competitors and all of us to pending regulation changes and what the government will allow in terms of number of SKUs competitors in the market and so forth, we’re actually in a very strong position for that given the number of different plans we have, different products and so forth. But we’re focused on only a few, very strong products and we’re focused on the – let’s say the differentiation that moms in China wants in their products. Some of them want European products, some of them want New Zealand products, some of them want American products, some of them want local product and we actually have that and all of that. So, I think it’s an adjustment to a lot of channel, a lot of digital and a lot of product, and then on top of that a lot of government regulation and so in this particular case, there are so many competitors in China, a lot of them have pushed a lot of inventory into that market in anticipation of a lot of that and we have to see that play through. So, it’s made this year hard to predict. You know we think we’re in a good position thus far, I mean I hate to be superstitious, I’ll knock on wood and say, right now China has not been a surprise or an issue for 2017, but I felt that way last year at about this time too. So, you know I want to see a lot more this year play out before I can predict how the year is going to finish or even how 2018 will be, but I think we feel pretty good about China for the long-term, but as the government transitions through these new regulations, I think that’s going to be a little bumpy and it has been, otherwise I like the management team and the actions we’re taking right now and that’s about all I can tell you.

Okay. Turning to guidance, you obviously beat the first quarter, chose not to raise it full year, I think you talked about the timing of spending and some other issues. And when we look at the second quarter, you sort of basically framed current consensus, as I understand it, with your EPS guidance anyway. Help us understand a little more behind your thinking, is it simply caution as you look at the many moving pieces in terms of the outlook for the full-year and for second quarter, specifically, can you perhaps walk us through the bridge from first quarter to second quarter, $0.48 to $0.60 the puts and takes that that get us up to that kind of ramp in the second quarter?

Well, I may have to phone a friend for that last part. But let me address the first part. You’ll recall, well, first of all, we set our targets for the year that healthy double digits. Now, we’ve got St. Jude in the mix there, so there’s extra healthy double digits. But even on top of just last year on a comparable basis, there’s a double-digit earnings growth target here, which again, I would point out is not typical across our peer group, or competitors, et cetera, or even the companies that our investors compare us to many of which are not healthcare. And so we start the year with healthy double-digit target and guidance. And then the gating of that guidance over the quarters, as you may recall in the first quarter, that the issue was jeez, it looks back-end loaded. And our fourth quarter is always strong and our first quarter is always the low quarter of the year. And so you look at that and you say, okay, the investor tends to think that last quarter, gosh, it looks like such a big hill. So, we have a strong first quarter that tends to be the case. We tend to have lower guidance then and we tend to beat it each year, tend to be – tends to be a pattern. And then there’s, I look at each year a little superstitiously. I guess, if you’ve been around long enough, you get to see this. But every year exchange or something happens later in the year, where there’s a change. There’s a political change, there’s an exchange, just a matter of some kind or whatever. So I’m reluctant to adjust guidance in the first quarter for almost anything, and because I’d like to see the year play out a little more first, because I don’t like the whip around shareholders, particularly when we’re all already, looking at a double-digit growth target, which is annual for us. And so I look at it and say, okay, we’re off to a nice strong start. We have had a bit of favorable exchange. We do know there’s some timing in there, and there’s also some strength in there. And I’d like to see that strength sustained and I’d like to see the exchange sustain. I’d like to see more than three months play out here. So in the meantime, my view would be, let’s take some of the gaining off the back part of the year, or let’s regain this a little bit more gently, call it, a little smoother, and let’s wait to see another card played in the second quarter. I just don’t think it’s prudent at this early point in the year to make adjustments to earnings that are already double-digit targets until we see more cards played. I mean, that’s that’s basically my thought process right now.

Yes.

I mean, we can second-guess me all you want, but that’s how I thought about it. Scott, do you want to, or Brian, Brian is going to help me with your second question on the quarter.

Yes, the question gone up from Q1 to Q2 and then we talked a little bit about this on our first call. I mean, as Miles talked about China, while we anticipate pressures to be there through the year, we’re expecting some relief as we move through the year, not a lot. But obviously, that comp becomes a little bit easier for us as we move through the year. That’s one area of nutrition. One area, Rick, and we talked about this. We expected a lower branded generics sales in Q1 and that – some of that was around the anticipation around what they were going through a process known as demonetization. Established Pharma and also it was our last quarter of sales of Venezuela. It just so happened and we talked a little bit about that too. This is our last quarter. Established Pharma would have grown a 11% to 12% this quarter had we adjusted for that comparable on Venezuela. So we expect that to flow through in Q2. You also saw in diagnostics, whereas diagnostics came in the full range. They’d be closer to 6.5% much for Venezuela. So we anticipate all these moves when we projected our Q2 earnings. And also I’d note too, we expected a very modest contribution from St. Jude in Q1. You have the dilution from the shares, but it takes time to ramp the synergies. And so we move into Q2, you’re going to start to see those synergies ramp in St. Jude as we move through the year, and that’s really the bridge to take you from what you saw the $0.48 to $0.60.

Okay. Thanks so much.

Thank you. And our next question comes from Glenn Novarro from RBC Capital Markets. Your line is open.

Hey, good morning, guys.

Good morning.

I wonder if you can provide a little bit more detail on your CRM performance in the quarter. U.S. was down 18%. Can you break it down between Pacing and ICDs? I would imagine pacing did better, given that you have the MRIC for approval. And it seems like from the numbers, ICDs came in worse. So a little bit more clarity on CRM performance in the first quarter. Thanks.

Sure, this is Scott. As Miles mentioned, we did make some progress there in the U.S. on the CRM side during the first quarter. We’re off to a good start with the pacer, particularly as we exited the quarter and started to add more and more contracts, and we think we’ll wrap up that process here in the second quarter and do better with the pacer throughout the year. So the pacer sales were down in the mid-single digits and then the remainder would have been obviously the performance of the defibrillation business. We did make some progress there as well. With respect to filing, we filed the ICD in March, and we expect to file the CRTD here in the second quarter. So we’ve made progress in terms of approval milestones on that front as well.

Okay. And then I guess from Miles commentary, you’re assuming pacers throughout the year get stronger, as it fully gets launched, as doctors get trained. So this is a business that will go from down 5 to flat to up throughout the year, is that a fair assumption? And I guess we should assume ICDs continue in this downward trend until MRIC gets approved, is that fair?

Yes, I think you’ve got it there. Definitely pacers will improve throughout the year.

Okay. Thank you. And then one quick follow-up for Miles on China. We talked about the challenges in 2017. Once we get through the regulations, as you go into 2018 and beyond, what’s the new norm in terms of market growth for China? When Abbott and AbbVie split up. Miles, you talked about China being a double-digit growth market. So what’s the new norm in 2018 and beyond for growth in China in nutritional? Thanks.

This is just a stab in the dark. But I would tell you, I’d probably for right now forecasted it mid-single. I think we’re going to have to see some – it’s a big number. I mean, first of all China is a big market. So we’re talking about growth on top of a big number. And so you got the lot of big numbers working against us there. But I’d say mid single for now is a safe assumption and beyond that, I think, we’re going to have to kind of see how it goes.

Okay, great. Thanks for – thank you, guys.

Thank you. And our next question comes from Larry Biegelsen from Wells Fargo. Your line is open.

Good morning, guys. Thanks for taking the question. Let me start with capital allocation and then product-related question. So I think, Brian, when you announced the St. Jude deal a year ago, you talked about a goal of getting down to 3.5 times debt to EBITDA in 2018. Is that still a realistic goal, given the Alere deal now? And how should we think about your uses of cash priorities? One of the concerns investors have is that with the debt you have right now that – or post the Alere deal that you’ll be constrained and you won’t be able to do even small tuck-in deals to augment, let’s say, the St. Jude business, or other business. So can you talk a little bit about that and I have one follow-up?

Yes, Larry, we see a path to the 3.5 for 2018 in closing Alere. I think something to keep in mind and remember is, we divested a couple businesses and we received full and fair value there. And so that gives us some optionality such that the debt we would take on under Alere is less than what you might have originally modeled in your deal model. So at Alere point in time, we’ll come back and help you reconcile that. And as you know, we talked about this. Cash flow has been a focus for us. We projected very strong operating cash flow and free cash flow as a percent of net income for this year. And that remains on track, I’d say, in the first quarter, let’s wait till the Q comes up, but we may even be a little bit ahead here in terms of our efforts here to make improvements in our working capital process and also just further strengthen what was also a strong process around our capital expenditures. So we feel good about that. Our priorities go back to strategic flexibility and nothing changes about those commitments we made sometime ago.

That’s helpful. And then on the product side just two. One is on EPD, you touched upon the demonetization, which doesn’t look like it’s had much of an impact based on your Q1 results. But how are you thinking about the impact of the goods and services tax in India later this year? And just lastly, on the heart failure results this quarter, which were a little week, I think that’s primarily the Thoratec business, which has been strong in prior quarters. Can you talk about the outlook there and why it might have been weak this quarter and obviously you have HeartMate 3 coming in the U.S. later this year hopefully so that that should help. Thanks for taking the questions.

Sure, thanks Larry, this is Scott. With respect to the monetization, yes, it did have a little bit of transitory choppiness on the overall economy quite frankly in India and we saw a modest impact on our results. That impact is diminishing and will continue to diminish we think going forward. With respect to the goods and services tax, as you know the government is looking at implementing a new tax scheme. They have been looking at this for quite sometime. The date has moved once previously. So we are certainly going to monitor that decision. At current time, the expectation is that they would implement on July 1. If they do that could have an impact potentially on the way distributors manage inventory before and after that implementation. So, we didn’t make that into our guidance per se, because the timeline has been a little bit fluid here. But if we go through the quarter and that solidifies, we’ll update you at the appropriate time.

I think it’s important to stress though, it’s hard to predict what the distributors will do to manage inventories and so forth based on this, but that they will at some level. And so we could see some less predictable numbers in the second – between the second and third quarter. If the timing, what Scott said, but I don’t think it’s going to affect our overall business. And it’s going to affect all players in the market, you know all manufacturers or all retailers et cetera. And at the end of the day, I think it’ll stabilize, but we’re just going to go through a lumpy start. And then I think it also depends on whether or not people recover this tax with price or other thing, so we’ll just have to see.

With respect to your question on LVADs or the heart failure bucket, you know as you know that that market can be a little bit choppy from time-to-time. There is some interplay between LVADs procedures and the heart transplant procedure, so we saw some of that. We did see as we exited the quarter growth rates start to improve and as you mentioned, we do expect to see acceleration in the second-half of the year when we bring HeartMate 3 to U.S. here. So we’re well positioned in that market, we have the market leading product. We are – although albeit on a smaller base, we are continuing to see some nice strong growth on CardioMEMS as well.

Thanks for taking the questions guys.

Thank you. Our next question comes from Josh Jennings from Cowen & Company. Your line is open.

Hi, good morning. Thanks for taking the questions. I was hoping to start, just a follow-up on your comments Miles on the FDA warning letter. Can you just refresh us on whether or not there are any non-CRM products that come out of the Sylmar facility. And then also you mentioned that the warning letter wasn’t completely unanticipated. How are you feeling about some of the other St. Jude facilities and just I think if you could comment specifically on the neuromodulation facility in Plano where there was a historic tribulations with an FDA warning letter?

Okay while I don’t have any comments about Plano, I mean I don’t have any update for you there. I would say any time you get a warning letter or even observations, 43 observations on GMP at any facility or any plants, it behooves us to go back and look not only at that plant, but all of our plants across the board. So that the corrective actions we take whatever they may be are consistent and our systems and processes are consistent across all facilities. So any time you get an observation like this or any observation at a single facility, our practice is to go back and look at all facilities. And I’m comfortable that we’re not sitting here at risking our other facilities, but that said we always go back proactively and preemptively and look at every facility to make sure that whatever we’re correcting in one is something that we’ve looked at checked out, assessed, evaluated whatever you want to call it in all of them. So that’s standard practice. And frankly I think that’s one of the reasons we have the track record we have in GMP in our facilities and the reputation we have with the FDA, so I think that’s a good thing. So I don’t – I’m not sitting here with a lot of nervousness about other facilities. We’ve had a chance to look at all of St. Jude’s facilities. We had a chance to assess that. Right now I don’t see an indication of something like this elsewhere. So, but that said, we’re all over everything in this – with this warning letter everywhere. I can’t remember what I missed in the question, because it was a long question.

Yes, I would say – yes, I would say with respect to the products, the most significant products there are the defibrillator and the CRM products. There are others that are smaller that go through generally a 510(k) process, but the biggest ones are the defibs that you pointed out.

Understood, I was hoping just to ask a follow-up question on just the CardioMEMS product line. Are there any updates on interactions with the CMS and the path to national coverage termination. And just your outlook on that asset, it had been one of the growth drivers I believe when the deal was announced last year and any update would be fantastic. Thanks for taking the questions.

Yes. Our longer term perspective on CardioMEMS is unchanged and we’ve said that since we announced the St. Jude acquisition, quite frankly that we think that there is a lot of long-term potential here. Near-term, we’ve pointed to the fact that there’s more work to be done. We have had interactions with the respective bodies with respect to CardioMEMS and what it will take to get into a better position from a reimbursement standpoint and those are ongoing, I don’t want to get into too many specifics. But with what we have today, the product is growing nicely, growing 20%, above 20% quite frankly, albeit again on a smaller base. So we are making progress with it. The real world results that we’re seeing, physicians are seeing with it, are strong. Probably better than expected in terms of what most physicians give us feedback on. So, we’re happy with the way the product is performing. We think there’s great long-term potential and we’ll work through the process here and generate the data we need in the near term.

Operator, we’ll take one more question.

Thank you. And our last question comes from David Lewis from Morgan Stanley. Your line is open.

Good morning. Thanks for squeezing me in, I’ll be quick. Brian, just a quick follow-up on Alere and two fast ones. So, is it safe to assume as it relates to Alere, I know you’re not giving a specific accretion. The way to think about it is, we probably have some less synergies based on operating performance and some of the divestitures, but you’ve got a lot more financing flexibility that helps to make up the difference, is that a decent paraphrase of what we’ll see?

It’s a decent paraphrase over the coming year, you know once we bring this business under us I’ll compare the assessment, David.

Okay thank you, and two quick ones. The first is, Miles, maybe for you, you talked a lot about India and some on China. I wonder just for this new two invoice policy in China as it relates to your EPD business and device franchise. Any disruption we should be thinking about this year? Any changes to distributors regarding the two invoice policy? And then if there’s any update on the PHP product within heart failure that would be great. Thanks so much.

Yes, this is Scott. Within China we don’t see any disruption, in fact our EPD business continues to perform extremely well in China as does our diagnostics business double-digit growth on both fronts. So we expect strong growth going forward there as well. With respect to the PHP, we did temporarily pause the trial and commercial implants. We continue to investigate that and we’ll give an update at the appropriate time, a very modest financial impact though it’s a small product.

Thank you.

Okay, well good. Well, 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 AM Central Time today on Abbott’s Investor Relations website at abotinvestor.com and after 11 AM Central Time via telephone at 404-537-3406, pass code 86879273. The audio replay will be available until 4 PM Central Time on Wednesday May 3. Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone has a wonderful day.