Abbott Laboratories (ABT) Q2 2017 Earnings Report, Transcript and Summary

Good morning and thank you for standing by. Welcome to Abbott’s Second 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 and outlook 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 risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1A, “Risk Factors” to our Annual Report on Securities and Exchange Commission Form 10-K for the year-ended December 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 second 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 year and historical results for Abbott’s Medical Optics 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 historical 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 $0.62 which exceeds our previous guidance range and reflects double-digit growth. Sales increased 3% on a comparable basis in the quarter and we continue to expect accelerated sales growth in the second half of the year. We started the year targeting double-digit EPS growth and we’re adding to it today by raising midpoint of our full year adjusted EPS guidance from $2.45 to $2.48, which represents 13% growth over last year. Halfway through the year, we’re on track with all of our key priorities. The integration of St. Jude continues to go well and we’re right on track with our deal model and projected synergy targets. We’re also right on track in terms of our new product launch expectations, which includes bringing our MRI compatible rhythm management devices to the U.S. During the first half of the year, we received FDA approval for our MRI compatible pacemaker and we completed regulatory submissions for our MRI compatible defibrillator devices including submission of our CRT-D device in June. We’ve also seen significant growth contributions from several recently launched products across our portfolio, which I’ll highlight, as I summarize our second quarter results in more detail before turning the call over to Brian. I’ll start with diagnostics where we achieved sales growth of 5.5% in the quarter. Growth was led by strong performance in core laboratory and point of cure diagnostics. This business, which is already a global leading and growing faster than its market, is in the early innings of significantly enhancing its competitive position with the launch of Alinity, a highly differentiated and innovative suite of new systems across all areas where we compete. During the quarter, we achieved CE Mark approval for Alinity hq, our new hematology system which quantifies different types of blood cells to help diagnose blood-related diseases. This represents the fifth new Alinity system we’ve launched in Europe since November of last year and will continue this launch cadence next year by bringing these systems into the U.S. market. In nutrition, sales grew modestly in the quarter. Internationally, as you know, market conditions are expected to remain challenging in China over the near-term in advance of pending regulatory changes in that country. Outside of China, we’ve seen some softening in our few international markets. While volume continues to grow at levels consistent with historical trends, pricing power which has previously contributed to overall market growth has moderated. As a result, we lowered our full year nutrition growth guidance earlier this year and we now expect the global nutrition market to grow in the low to mid single digits over the longer term, which is still a healthy growth rate for a market this size. We remain focused on outperforming the market with our well-balanced portfolio of leading brands which we’re achieving in U.S. pediatric nutrition where sales grew 8% in the quarter as we continue to capture share with recently launched infant formula products as well as our strong growth of our nutrition toddler brand. In established pharmaceuticals or EPD, growth in the quarter was led by double-digit growth in China, Russia and several markets in Latin America including Brazil. During the quarter, sales were impacted by channel dynamics associated with the implementation of the new Goods and Services Tax system in India. Excluding this impact, EPD sales would have grown high single digits overall, in line with our previous guidance. This business is fulfilling the vision we had when we created it. There is no other business like it in the world. We’re in the right countries, in the right therapeutic areas, and our unique model is driving consistent above market performance in the fastest growing pharmaceutical markets in the world. In the medical devices, sales growth was led by continued double-digit growth in electrophysiology, neuromodulation and diabetes care as well as high single-digit growth in structural heart. In neuromodulation, sales growth of nearly 50% further strengthened our leadership position in a fast-growing market for treating chronic pain from spinal stimulation. Our strong growth in this market has been led by recently launched products that offer improved pain relief and fewer side effects. In structural heart, sales were led by continued double-digit growth of MitraClip, our market- leading device for the minimally invasive repair of mitral regurgitation. In June, we completed patient enrollment in our trial to evaluate the safety and effectiveness of MitraClip in patients with functional mitral regurgitation. We expect the final results from this trial around this time next year, which could result in a significant expansion of U.S. market opportunity for MitraClip. In electrophysiology, which achieved another quarter of double-digit growth, we continue to anticipate U.S. approval of our Confirm Insertable Cardiac Monitor during the second half of the year. And at heart failure, we continue to anticipate U.S. approval of HeartMate 3 later this year. I’ll wrap on medical devices with diabetes care where international sales growth of 25% was driven by FreeStyle Libre, our innovative glucose monitoring system that eliminates the need for routine finger sticks. During the quarter, Libre achieved regulatory approval in Canada and we continue to achieve national reimbursement status in a number of counties, most recently France and Switzerland. Today roughly half of our Libre sales come from patients with full or partial reimbursement. And just last week, we announced an agreement with Bigfoot Biomedical to develop and commercialize diabetes management systems. This collaboration will help bring these best-in-class technology to more patients with the goal of transforming the way diabetes is managed. So, in summary, we’re on track with all of our key priorities, including growth contributions from recently launched products and achievement of important regulatory milestones across our pipeline. The integration of St. Jude continues to go very well, and we’re on track to achieve our projected synergy targets. And we’re raising our full year adjusted EPS guidance range which continues to reflect double-digit growth. 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 previously provided. Turning to our results. Sales for the second quarter increased 2.9% on an operational basis. Excluding the transitory impact of the new goods and service tax system implementation in India which lowered our sales in our established pharmaceuticals, total operations sales would have grown 3.7% in the quarter, which is in line with previous guidance. Exchange had an unfavorable impact of 1% on total sales, resulting in reported sales growth of 2% in the quarter. As you know, exchange headwinds have eased somewhat since the beginning of the year. I’d note that the majority of the lower foreign exchange impact on our sales has been driven by strengthening of the euro and other developed market currencies. And when these particular currencies move, the follow-through impact on our result is relatively modest, taking into account our European cost base and our hedging programs. Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.8% of sales. Adjusted R&D investment was 7.5% of sales, and adjusted SG&A expense was 30% of sales. Before I review our financial outlook, I’d note that our sales and adjusted earnings per share 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. As previously communicated, we will provide an update regarding expected financial impact of this transaction at a later date. So, turning to our outlook for the full year 2017, we are raising our adjusted earnings per share guidance range to $2.43 to $2.53. We continue to forecast full year 2017 operational sales growth in the mid single digits. And based on current rates, exchange would have a negative impact of around 0.5% on our full year reported sales, which is modestly lower than the negative exchange impact of around 1% back at April rates. We forecast an adjusted gross margin ratio of somewhat about 59.5% of sales, adjusted R&D investment of approximately 7.5% and SG&A expense of approximately 30% of sales. Turning to our outlook for the third quarter of 2017. We forecast an adjusted EPS of $0.64 to $0.66. We forecast operational sales growth in the mid-single digits and at current rates expect exchange would have a negative year-over-year impact of around 0.5%. We forecast an adjusted gross margin ratio approaching 59.5% of sales, adjusted R&D investment of approximately 7.5% of sales, and adjusted SG&A expense around 29% of sales. Finally, we project specified items of $0.35 in the third quarter, primarily reflecting intangible amortization and expenses associated with St. Jude acquisition. Before we open the call for questions, I’ll now provide a quick overview of our third quarter comparable operational sales growth outlook by business. For established pharmaceuticals, we forecast high double-digit sales growth. In nutrition, we forecast low single-digit sales growth. In diagnostics, we forecast sales to increase mid to high single digits. And finally, in medical devices, for cardiovascular and neuromodulation, we forecast sales to increase double-digits across our combined high growth areas of electrophysiology, structural heart, heart failure and neuromodulation which will be partially offset by sales in our foundational areas of rhythm management and vascular, which we forecast in combination to be down low to mid single digits in the third quarter. And in diabetes care, we forecast double-digit sales growth. With that, we will now open the call for questions.

[Operator Instructions] And our first question comes from Mike Weinstein from J.P. Morgan. Your line is open.

Thank you for taking the questions. Maybe a couple of quick ones to start with. So, first, the FX delta since the start of the year, Brian, what does that mean to EPS? I know you moved your guidance since. Is that the full impact of the EPS swing from FX or is there a greater impact or are you giving yourself more push? And then, second, Miles, could you just spend a minute on the adult nutritional business? We focused so much time on pediatric at the U.S. adult business, has been disappointing so far this year. Probably you could spend a few minutes talking about why that is and kind of what drives the turn around.

Okay. Brian, do you want to talk FX first and then…

Yes. Mike, I would say that 3 -- and we acknowledged in the first half, maybe $0.02 or $0.03. And could it be a little more? Yes, if rates continue to hold. It depends on the mix of currencies. But right now, we’re not factoring that in because that’s getting down to a level of precision that for a penny or two, we’re just not ready to project that yet, as we don’t want to necessarily forecast the mix of currency changes the rest of the year.

Okay. Then, U.S. adult nutrition, I agree with you, Mike. We’re disappointed too. And I would say, what we’re seeing -- first of all, I commented in my remarks that we’re seeing softening markets worldwide here, at least in a lot of markets. And as I’ve looked at a lot of the data, first, the volume rates are all still there; it’s mostly loss of pricing power in some of these markets. And we see the same phenomenon in both ped and adult nutrition. In the U.S., it’s a little different version than other markets. In the U.S., we’re seeing a fair amount of intensity around private label competition. And every few years, this will happen. We got a competitor in U.S. in Nestle that is also feeling the same pinch, as we look at our market data. We know that the competition right now is private label and there is contingence and the way private label is being marketed I guess on the shelf and so forth in terms of its positioning, proximity to our brands and so on. So, we’re seeing some of the impact of that. It’s something we’re addressing. Every few years, we see private label crank up and then it subsides again. Right now, we’re having one of those years when we see a lot of intense pressure on that particular segment, and that’s taken some of the growth off that. Last year and year before, both we and Nestle invested in the category. And when any of us invest in the category, all of us benefit. As soon as that larger investment sort of subsided, the private label cranked up and went right back at it. So, it’s kind of an ebb and flow thing, but it’s definitely taking an edge off the growth that we’ve seen historically. We’re aware of it, we know it, we’re taken the actions we think we can and should to mitigate and deal with it, try and correct it and so forth. But that’s what the intensity that’s coming from.

Okay. And then just one quickly follow on Libre. You didn’t give us much of an update on the U.S. I know inter quarter miles and we’ve talked about this; you started a couple of trials to confirm the accuracy of Libre to the FDA. Does that mean that approval is likely more like yearend or early next year? And do you have any sense of whether the FDA has gotten comfortable with the idea of a factory calibrated device?

Well, there’s been a lot of conversation back and forth with the FDA. We’ve explained to the FDA how our factory calibration is done. And I think that conversation has gone well. I never want to predict the FDA. I think we have what we consider to be a fairly proprietary process for this factory calibration. So, it’s not something we are anxious to share widely. And it’s unique. So, I guess I’m not surprised that it needed further discussion. But I think that’s gone well. I don’t know that I can predict at all, Mike, when the FDA will come to a conclusion of its process. It was submitted almost a year ago. So, we are coming up on a date here, an annualized date. But, I don’t have any evidence that says, gee! It’s going to be a year end or longer. So, I don’t know that I could -- I certainly wouldn’t say that because that may not be true. So, I don’t have that common indication. And I would say look, there is good, active, ongoing dialogue back and forth. That’s always a good sign. It’s the right kind of dialogue. I just wouldn’t forecast it. I don’t know.

Our next question comes from Matthew Taylor from Barcalays. Your line is open.

The first thing I wanted to explore was you mentioned in your opening remarks, thinking about your MRI safe device approvals in the U.S. is being on track. And I was hoping you could talk about, not the submission but what’s going on with Sylmar, any progress you have made there and confidence that you can get timely approvals, just given what we have seen with the warning letter?

Yes. No problem. Thanks for the question, Matt. First of all, with regard to Sylmar, we are making good progress. And I don’t mean that just in a generalization. We had a very detailed plan that we shared with the FDA of course after we received the warning letter. The good news is, as I mentioned in previous call, we have been in Sylmar with the St. Jude management since August of last year. And St. Jude was very open to us and allowed our quality operations, GMP people and so forth in to participate with them. So, we have been working with them on a lot of issues, questions, processes and so forth in Sylmar for a year now. And that is a huge positive because it gave us a real running head start on things the FDA observed when did it inspection early in the year. So that gave us a big lead. So, we have the ability to put before the FDA a very comprehensive plan of corrective actions, remediations et cetera at the site. And that plan is nearly complete. So, we are coming up on -- we will put all the things in place, change processes and so forth that we needed to change. That’s all positive. We will be updating the FDA on that in the coming weeks. I won’t give you a specific date, because I don’t want to create a trigger here. But I would say, look at this point, we are absolutely on schedule with our own pace. And it was seem as if we did it rapidly. The fact is, it will be about a year and all by the time we are done here. But relative to the timing of the warning letter itself, it was seem like a rapid turnaround but there was quite a lot of work before that inspection that took place. So, we are getting through the completion of that comprehensive plan we put in front of the FDA and we’ll have dialogue with them. I’m very optimistic about what we’re doing with Sylmar. I’m very happy with the progress of our theme there. So, I feel good about that. And as I said in the last call, I have no reason to change in a meaningful way, the expectations around the couple of key product licensors of products that come out of that facility. And I know that there is a fair amount of question about, well will they be impacted or not. I think I’d have to say look, they might be impacted by couple of months. But in a meaningful way, I don’t think so. So, I’m not willing to change those launch dates for the purposes of projecting or modeling or anything yet, because to be honest, we don’t know. We’ve not had a conversation with the FDA, specifically about that. I know that the review side in medical devices has continued to review all of our products; they’re licensor on the same pace anyway. And I know what that pace is and I know where the standing of those products it, and it’s all very good. So at the end of the day, the agency’s reaction to the remediation actions and so forth will obviously influence it. It clearly has the ability to license those products, if it chooses to. And we will wait and see.

Thanks for the feedback on that. So, one other area I wanted to ask you about that has been very active is in diagnostics for the Alinity launches outside of the U.S. I guess the core of my question is I was wondering when you think we might start to see a pickup O-U.S. growth from those launches. I know it’s kind of a slow battleship that’s turning here through your install base. So, when could we actually see some pickup, and how much might that be?

Well, let me just correct one thing that you might have inadvertently said. You said when do we see the growth in the U.S.? U.S. won’t start launching until next year but they’ve been in effect and licensed and launched in Europe. So, let me respond to Europe. And frankly, the question you’re asking is the same one I keep prodding our management with. And I do that just to keep the feet to the fire. But, the launch itself is going well. And customer response has been very positive. We’re taking what I would call a fairly systematic and careful and methodical approach. Because when you launch new systems, you don’t want your customer to have to debug something in the field. You want it to go to the field day one. And the history of launches of instruments in diagnostics in general as an industry has not been that. As you may know, I used to run that business years ago before I was the CEO of the Company and was responsible for R&D at point When we launch systems, you get so much data, so much use early on from your -- clinicals but you tend to find all the little bugs you missed in development. So, when we launch products or systems in diagnostics, you’ve got a big installation or big changeover from their current systems and so forth. So, it does take time. And because of those early installations are where you do a little bit of your learning, you want it to go well. So, I would say I give them that slack early on in the launch in terms of early, slow, methodical, careful whatever and yet there has actually been really good order activity, really good uptake. We’re on track I would say with numbers of closed accounts, instruments placements et cetera, we’re getting some pretty nice sites closes; we’re getting some pretty I’d say great reference accounts in all of this. So, while it starts a little slow, I think we will see that order rate pick up. We will see it in Europe, we will begin -- in 2018, we will see clearly some impact there. A lot of our early installations will have heavy cannibalization of existing systems and existing volume, but we are getting new accounts as well. And I like the mix of what I’m seeing, both in experienced Abbott customers and those who have the competitive take away and so on. So, I think the launch is going well. I think it is going to be hard to see for a little bit here, at least in 2017. We are trying to figure out how we show you, investors, the success of that launch and how it’s going, without giving away a lot of competitive information to our competitors and so forth. That’s a little bit of an issue or least a challenge, communication wise. But I would say that launch is going really well. And I’m pleased with that. It’s one of those things we are -- it’s kind of a slow motion launch. It’s not an instantaneous kaboom, but it’s a rolling launch where you are going to see rolling impact that picks up more and more momentum over the next couple of years, and you will see that.

Our next question comes from Rick Wise from Stifel. Your line is open.

Let me start with a Alere, which seems to be marching toward completion here. A couple of things. We saw an asset sale announced. Is that it? Is there more to come? And maybe, I know it’s early and I know you would like to be conservative. But, can you just help frame in those general sense, is it fair to assume that Alere is neutral this year to EPS? How do we think about it just directionally, broadly in 2018? Is it neutral, is it accretive, is it dilutive? Any color would be really helpful? Thank you.

I assumed somebody would ask that. Well, couple of things. First of all, there is one more asset sale that has not been made public. It was one that was required by the regulatory bodies for antitrust proposes and so forth. And we’ve got a good buyer, good price et cetera. The other party just hasn’t said anything publicly. So, we don’t want to say if they haven’t said it. But yes, there is one more and it’s modest in size. But, it’s on track. I don’t see any hiccups with it or anything. It just hasn’t been made public. And I expect that that will be soon. And that’s progressing really well. I would say, we are very happy with the status of divestitures for antitrust purposes, where that stands. We are happy with the buyers; we are happy with price; we are happy with transition, plans and so forth. That’s all good. We are in fact, I would say, racing toward close. I’m anxious to get it finished and I’m quite confident that it will. At this point, I would love to have one of those surprises you didn’t expect where all of a sudden regulatory bodies approved it and you weren’t ready but we are ready. And we have named our transition team internally here at Abbott and how we are going to manage it, how we are going to integrate it and so forth. Those plans are all very well underway. And so, we are prepared for that and ready to go. With regard to this year, I had indicated and I would continue to indicate, neutral. I wouldn’t plan for any accretion. I think because this particular deal has gone on so long, I am reluctant to make projections about accretion. As we are into the second half of the year and if the deal doesn’t close until September as is currently projected, that gives us all of about three months with the business in our hands. And so, at that point, I think look, -- I don’t know that I could project any accretion. I would like to get the business on the path to integration as rapidly as possible in anticipation of rolling into 2018. And so what I’m communicating and the guys are communicating here is assume it’s neutral, assume there is no accretion in 2017 and the question then rolls to 2018. And originally, I think we estimated, this is probably well more than a year ago now when we first announced the acquisition of Alere. We had estimated I think it was somewhere in the neighborhood of $0.11 to $0.13, something like that of accretion for the first full year. At this point, I have no reason to change that however and no negatives that I would tell you cause we pause. And I don’t intent to be conservative for cuteness or sandbagging or anything else. But I would say, I want the get the business in our hands and evaluate that more directly than we’ve been able to over the last year and a half. So, before I reconfirm with any precision or any estimate, accretion for 2018, I want to have few months of the business in our hands, so we can reconfirm for ourselves while managing the business, synergies, sales rates, all that sort of stuff. Because when we gave that first estimate of accretion, we had not taken into account the divestiture of the Triage business or the pieces we had to divest for antitrust. And they had not at that point lost the Arriva business with CMS in U.S. So, I would like see, during the first few months when we have this business, what we’ve really got, before I give any kind of accretion estimate for 2018. I do expect that it will be accretive, I just don’t know exactly where. I don’t mean that to be an indication of, gee! It’s likely to be less or whatever. I’m not even prepared to say that. I’d just like to be able to evaluate it in our hands because we’re well beyond deal model in terms of timeframe for close here. So, I think we’ve got to have it in our hands, so we can make those estimates more directly. With regard to Arriva, we’re looking at whether or not we can restore that and at what level restore that standing with CMS that makes a difference in our estimates. There is a number of things that would make a difference in how we evaluate the ongoing performance of the business and the timing of that. So, we got a few moving parts on Alere before I can be -- even give you a range of accretion but I would tell you that I expect it to be accretive. And at this point I’m not prepared to change what we already put out there as an estimate little over a year ago.

That’s really helpful. And just on a separate topic. One of the compelling aspects of combining St. Jude and Abbott on the device side, it does seem to be -- obviously be the compellingly broad portfolio. Can you talk, Miles, a little bit about the progress you’ve made on the contracting side, dealing with large hospitals, large integrated delivery networks, GPOs et cetera, presenting the whole bundle, just progress you’ve made broadly since post merger? And do you see that contributing to growth in 2017 and 2018 that aspect of the story? Thank you very much.

Yes. Thank you. I’d say, since we announced the acquisition a year ago, St. Jude had already started to make changes in the way it approached large national account type organizations in United States. And we with them took that further. There were some promotions, management hires, new changes, new changes in the way we went to market at St. Jude; we contemplated the, call it the full offering across our product lines. And I’d say, we’ve made terrific progress internal in our approach to St. Jude. We have had some success. We’ve had a lot of positive reaction from customers, in general, positive reaction to Abbott, positive reaction to the breath of product line, positive reaction to St. Jude’s pipeline and the products that are coming. So I would say all in all, I think all that’s been really good. I also would stress, a lot of times when people refer to bundling with large national accounts, hospital groups and so forth, there is a presumption of one product line subsidizes another and there is leverage in that. And while that’s true and can be true, there is also a greater positive synergy of the full offering, the full service level, and the service and account gets across product lines. And as you know, these large integrated health groups, they don’t want to deal necessarily with five or six suppliers in a given area; they generally deal with two or three. And we are finding that in the mix, in the breadth of our portfolio, one of the places it really benefits us and St. Jude is that it’s very easy for us to be one of the two. And it’s a lot easier when you got the broad product line, when you got innovation with those product lines, when you got a good compelling medical and value proposition. And it’s not always about just subsidizing. And so, I find that with the mix, and this is one of the strategic reasons we wanted this acquisition, I find that the breadth of that product line, the innovation across the product line, the depth of products, that full offering makes us extremely competitive, and I think both from a medical and the value proposition standpoint. So we definitely see that. I think we will see that increasingly over the course of 2017, 2018 and beyond. I think if you just look at the dynamics in the medical device business at large, the consolidation that’s taken place across a lot of product lines has been well-documented and talked about for several years. I think this puts us in a really strong position in the field now. As we look at our product line, of course we and other competitors think there are holes. Well, we need this product, or we need that product, but I would say small holes but all of us one way or another are always looking to fill either through our own R&D here or other M&A activity. But I feel like we are very, very competitive in all regards now. And that’s a good positive.

Our next question comes from Glenn Novarro from RBC Capital Markets. Your line is open.

My first question is on the cardio and neuromodulation line. It came in better than expected, and I have got to believe that’s function of St. Jude. So, Miles, can you comment on how St. Jude performed in the quarter? What was the growth rate that the St. Jude business in total deliberated in the second quarter? Thanks.

Yes. St. Jude, if we carve them out standalone, was up by 4%. And if you recall, before we acquired St. Jude, its prior -- or before we announced the deal, its prior four years have been flat. And we discussed how we thought over that period of time. They’d made great investments in their product pipeline across their businesses, their internal organic R&D I thought had been very productive and very successful, so had they. And it was a point of quite a bit of, let’s call it, negotiation during the deal process. They had rather robust forecast for their sales going forward. And of course that ultimately is part of a whole negotiation. I would say this, their representation about their pipeline I thought was valid and proves to be. And as I have said before, both in the calls we’ve made about the deal itself or in our quarterly earnings calls, our forecast or our deal model was built on the expectation of sequential improvement in their sales going forward due to first of all, correcting the MRI compatible issue, which is well-underway; and then the launch of a lot of new products, and we’re seeing that. And then frankly, in our own deal model, we had pretty much aligned it with what analysts collectively viewed as how St. Jude would look going forward. And so far, the expansion of the growth rate and its sequential performance quarter to quarter has been on our deal model and is steadily growing. And we estimated in our deal model, they get up to 4.5%, 5%, something like that and this quarter they were at 4%. And each quarter is successively better than the last. We’re seeing improvement in CRM and we’re seeing share recovery with the low voltage pacemaker. As I mentioned, I guess it was at the end of the first quarter, St. Jude, we estimated lost about, I think it was 7 points of share in the low voltage pacemaker business last year between April and December and in the first two months or three months here of launch with the MRI compatible claim, they’ve regained 4 of those share points already. So, we’re seeing quarter to quarter sequential improvement in share in CRM; you can see it in the growth rate comps; it’s getting better and better and quarter to quarter. We expect that to continue. New products launches are occurring according to expectation. I think the whole thing is remarkably going according to our deal model, according to our forecast and according to what we told analysts. And right now, I think the quarter of 4% out of St. Jude is pretty good thing.

Yes, I agree. And then, just I don’t know if you or Brian have these numbers, but just as a follow-up, would you be able to give us your U.S. and worldwide pacing growth and U.S. and worldwide ICD and CRT growth? Thanks.

I don’t think I can do that right this minute. You prepare a lot of things for these calls. That’s one I don’t have at my fingertips. We can probably follow up with you Glenn.

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

I wanted to ask one about how to think about Q3 given some of the onetime items in Q2. And then I have product related question. So, I think it was 2.9% growth in Q2 on a comparable pro forma basis, but I think you had an 80 basis-point hit from headwind from EPD, and I think you had about a 50 basis-point hit in vascular from the royalty. So, is the starting point really about 4.2%, 2.9 plus 1.3 and we get back the 80 bibs or about the $50 million loss in EPD from the general services tax in Q3? And I had one follow-up.

Yes. I would say a couple of things. First of all, what you describe there, the ins and outs going into the third quarter, you’re right, and that’s a good assessment. And your assessment of, I think it was a little bit better than 4%; I think that’s a good assessment too. With regard to EPD, this Goods and Services Tax in India, as you -- I think others have already noted, clearly impacted the second quarter. I think it’s been hard for everybody to forecast how it’s going to come back in the third quarter. In the first couple of days of the quarter, we saw a clear response to restocking by distributors, and then it softened for a couple of days, and then it came back again for a couple of days. So, we are seeing it restore. Whether we will see it completely restore in the quarter, I don’t know, but so far so good. It’s going according to what we projected. So, whether it will come back like full dollar per dollar, I don’t know, but so far it looks that way. And I would say so far projections look good that way to truly be a quarter-to-quarter shift. And that’s kind of the experience we are seeing thus far.

And then, Miles, XIENCE has been an amazing product, but given the issues with Absorb, do you feel -- what is the pipeline, the long-term strategy there? Do you feel you need a drug eluting stent with the bioabsorbable polymer, similar to Boston Scientific SYNERGY, which seems to have been successful? Thanks for taking the questions.

Yes, I’ll tell you what, Absorb has become a very much in niche product; that’s for sure. And I would have wished for it to be a lot bigger than that. But XIENCE remains best-in-class stent. That’s still true. Do we need a bioabsorbable coated stent? I’ll tell you, I think the bigger issue is I think we need an even more deliverable stent. The issue right now with physicians is deliverability. And I think that’s been one of the hallmarks of Boston SYNERGY stent is the deliverability. So, I think the issue is more the deliverability than the coating. And we will launch early next year, Sierra, next generation of XIENCE, which will address that. So, that’s what I think is our single -- most important focus right now. Do I think long-term that there is still improvements and performance improvements and so forth to make in stents, whether it’s coating or material or deliverability et cetera? I do. I am not going to detail what that plan is from our standpoint, but our next focus in stents is primarily that deliverability with Sierra.

Our next question comes from Robert Hopkins from Bank of America Merrill Lynch. Your line is open.

I appreciate the opportunity to ask a question. So, just I’ll start with the product question. I just want to be clear on MRI, the outlook for MRI safe for ICDs. What is the latest official guidance on when you expect that to come to market? And do you have a sense for whether you’ll need a warning letter to be lifted to get that through?

The warning letter doesn’t have to be lifted. The FDA has the ability, if it chooses to, to license it if they’re satisfied with remediation actions and so forth. They always have that ability. So, it’s not dependent on particular formal lifting of warning letter. At the same time, the FDA always has the right to decide what it wants to do. And I would say with regard to expectations at this point, we’ve said second half or a year-end and I think that’s probably, for right now, at least as modeling and planning purposes go, probably fine assumption. I can’t be more specific than that because I can’t read their minds and don’t want to forecast and put them in a tough spot. So, I would say, as far as modeling goes, model second half somewhere and year end, but I don’t know that I can give anything more precise than that.

Okay. That’s helpful. That’s 2017 obviously, right?

Yes.

And then one another, Miles, bigger picture question on the outlook for revenue growth for Abbott, because when you look through your results here this quarter, one thing you notice is that if you look at your different businesses, there is a very wide range of growth rates with some businesses like neuromod, just doing extremely well and other struggling a little bit. If we think about 2018, there is some strong incremental drivers of growth and there is something like neuromod that will probably slow a little bit. So, when net all that out, do you think as we kind of look forward into next year that you can again start to talk about Abbott again as something better than a mid single digit revenue growth company?

Well, I think that depends on a whole lot of things including the businesses. I think it depends on what’s happening with global markets et cetera. I mean that’s always our goal. In our goal, we always start every year with the notion that we are going to grow profits double digits. And to do that, you’ve got to have fundamental revenue growth, as you know. And as we look at the mix of the business, I think the observation you make is correct. I mean, I’d love it if everything grew like neuromod, but it doesn’t. And there are some of these businesses that I would say are much more mature, like CRM and even the stent business, much more mature. The good news about those businesses is, they are extremely profitable and they generate high cash flows. So, in the mix of our portfolio, that’s positive, that’s a good thing. On the other hand, if you’re maintaining a growth profile, you’ve got to have lean toward growth in the mix. And we’ve got a pretty good lean toward growth, I would say of late. The one that’s got my attention from a longer term perspective is nutrition, particularly internationally and what I’ve seen there is a slowing. I think that business longer term or at least on a stable basis for now, looks like it’s going to be a low to mid single digit business, call that 3 to 5, something like that, 3% to 5%. But that’s a mix. There are some countries that are 1% or 2% or some countries and geographies that are double digits. The global volume growth in that business for infant formula for example, tends to be 3% to 3.5% and the biggest change in the growth has been price. Not that the price has come down, it just isn’t going to go up much. And I think that that’s perhaps indicative of some maturing in some of those markets. We’re looking at that closely right now. So, as I forecast it, interestingly enough it’s also very profitable and a high cash generator. And as I’ve talked about nutrition in the past and the mix of Abbott Laboratories, it’s been one of the biggest cash generators in the Company for a long time. I used to refer to it as the bank as it funded a lot of M&A. So it’s a very healthy business that way. I think our questions right now are assessing the shift of market tone. China for example is actually much more stable than the last 12 to 18 months. I like what I’m seeing in China right now. We still have the government regulation continue and it’s impacted competitors, there is a lot of reaction to the shrinkage of the number of SKUs in the market and so forth. And we’ve talked about that. But as far as what we’re seeing in 2017 here, we’re performing according to our expectations. I think the comps obviously get better here in the second half; we will see. So, as I look forward, yes, it is our goal to be a healthy grower to be able to generate that double-digit bottom-line growth. I think that we’ve got to continually look at the mix, as you suggest. How many growers we’ve got, as you observe, the growth rate of something like neuromod will come down simply because it gets bigger in the base, but it’s actual raw dollar growth I don’t see changing for quite a while. So I think that’s a plus. And I think we see improved growth in other areas. So, I know there is a lot of ins and outs there but at the end of the day, we are always looking to build our Company, grow the Company, expand the Company, gain market share for the Company. And the acquisitions of St. Jude and Alere were part of building that core leadership base in the businesses that we are in to continue to drive that growth, and the goal hasn’t changed.

We’ll take one more question, operator.

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

Brian, just a couple of quick ones for you and then one strategic one for Miles. So, just a couple of incremental financial questions. The incremental change to gross margin in the guide of 50 basis points, what was driving that? And then, as you just thinking about the pacing of the back half of the year, obviously you’re guiding to improvement in the third quarter. Is the right way to think about it that back half is going to be mid single digits and obviously better than the first half or do you think the business gets a little better in the fourth quarter from an organic growth perspective than the third? And just a quick one for Miles after that.

I think to your last question, you will see sequential improvement from Q3 to Q4. There is a lot of items that Miles talked about in the acceleration, including new products and just the momentum of our businesses. So, I think that’s the fair assessment. With respect to question on gross margin, our operational improvements and gross margin underlying continue to be there that we’ve talked about it before. You do get a little noise around the mix of FX and what that does, and that’s a simply math there. Nothing has changed about our aspirations to continue to expand our gross margins on an underlying basis, probably 50 to 75 basis points on that, David.

Miles, just thinking about the strategic importance of the Bigfoot announcement and I don’t want to make too much of a single investment. But just as a natural extension of building the brand and the reach of Libre and CGMS, or does it suggest an interest in pumping? And maybe said another way, I mean do you think to win in diabetes going forward, do you need to have an integrated pump and sensor under one roof?

No, I would say, in the grand scheme of things with diabetes care, I don’t think we need to have a pump. But, I think there is a strategic, what would I call it, change happening or there will happen over the next couple of years in the market, particularly for type 1 diabetics and for multiple daily injectors which could be type 2s that are insulin-dependent. And what’s interesting about Bigfoot is they are taking a different approach to the ease and the integration of what those multiple daily injectors have as solutions to manage their disease, separate from pumping. And it’s a fairly clever service and approach that I think will create, not just an alternative that makes the management of the disease or management of someone’s insulin easier but I think the value proposition of it is going to be pretty compelling. And I think that will change the competitive dynamics in that realm that is pumping. I mean the penetration of pumps or pumping relative to the market size of multiple daily injectors is really quite small. You would say wow! There is a lot of potential for further penetration. The question is the value proposition. A lot of times, the reason it hasn’t penetrated further is, it might be too costly or viewed that way. And I think what Bigfoot’s doing, if I could comment on it from a distance, because I’ve never had a conversation with them myself, is they’ve come up with a pretty unique value proposition that not only is good from the standpoint of the patient or even the payer, but also in general, in the cost of managing the disease for a diabetic. I think it’s a pretty interesting use of technology to make it simpler, easier and affordable. Now, I probably sound like a brochure from them. I think it’s -- I just think that their approach is interesting. And in our case, the technology that is Libre is a component of that and a fairly compelling piece of it that expands the use of Libre beyond what Libre can even do today. And then beyond that, there is other expansions and improvements to Libre that aren’t just in that segment. But I think that the sensor technology and the nature the way Libre works has a lot of applications beyond how it’s used today. And the Bigfoot approach is just one of those. And I think it’s a pretty unique, compelling idea that puts Libre as a part of the competition in that sort of pumping or multiple daily injector world. It’s a great opportunity for us and I think it further enhances the management of the disease for patients.

Good. 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 abbottinvestor.com, and after 11 am Central Time via telephone at 404-537-3406, passcode 41003454. The audio replay will be available until 4 pm Central Time on August 2nd. Thank you for joining us today.

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