Abbott Laboratories (ABT) Q1 2018 Earnings Report, Transcript and Summary

Good morning and thank you for standing by. Welcome to Abbott's First Quarter 2018 Earnings Conference 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 expressed 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 2018. 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, through our Annual Report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2017. 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 organic sales growth, which adjusts the 2017 basis of comparison to exclude the impact of exchange and historical results for Abbott's Medical Optics and St. Jude's vascular closure businesses, which were divested during the first quarter of 2017, as well as the current and prior years sales for Alere, which was acquired on October 3, 2017. With that, I will now turn the call over to Miles.

Okay. Thanks, Scott, and good morning. Today, we reported the results of a very strong quarter. Ongoing earnings per share were $0.59 at the high end of our guidance range and reflecting 23% growth. Sales increased 7% on an organic basis in the quarter, led by continued strong growth in Medical Devices and improving performance in our Nutrition business. Our full year 2018 adjusted earnings per share guidance of $2.80 to $2.90 remains unchanged and reflects mid-teens growth at the midpoint. Back in January, I commented that we were entering the year with strong momentum, which has continued as we forecasted. Strong growth we're achieving is a direct result of the steps we've taken to position the company in the most attractive areas of health care as well as the outstanding productivity of our new product pipeline. 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 5.5% in the quarter. We remain focused on accelerating the launch of our new Alinity systems in Europe where we've made good progress on test menu expansion and where we're seeing increasing competitive win rates. Diagnostics has been our most consistent growth business over the past several years, and Alinity is a highly differentiated platform which will build upon that strong track record for years to come. In Rapid Diagnostics, which we created in the fourth quarter of last year with the acquisition of Alere, we achieved sales of nearly $560 million, somewhat ahead of our expectations and partially due to the strong flu season in the United States. This is a very attractive area of diagnostics testing and our integration of this business into Abbott continues to go well as we put in place the building blocks to drive sustainable growth and margin expansion. In Nutrition, sales increased more than 4.5% in the quarter, marking the fifth consecutive quarter of improving performance. Sales growth this quarter was balanced across our Pediatric and Adult Nutrition businesses. In Pediatric Nutrition, above-market growth in the U.S. was led by Similac, our leading infant formula brand. Internationally, performance improved across several countries and we continued to see stable market conditions in China following the implementation of a new food safety -- of new food safety regulations in that country at the beginning of this year. In Adult Nutrition, sales growth was led by our market-leading Ensure and Glucerna brands in both the U.S. and internationally. In Established Pharmaceuticals, or EPD, sales growth of 7% was led by double-digit growth in India, China and Brazil. Our unique branded generics model was built to focus specifically on key emerging countries with socioeconomic and competitive conditions that provide a favorable environment for long-term growth. We serve each of these markets with a broad product offering tailored to address local needs. This unique and successful approach positions EPD to continue delivering superior performance in the fastest-growing pharmaceutical markets in the world. And lastly, I'll cover Medical Devices where sales grew nearly 10%, led by strong growth in Electrophysiology, Structural Heart, Neuromodulation and Diabetes Care. In Electrophysiology, growth of 19% was led by market uptake of several recently launched products, including our EnSite Precision cardiac mapping system and Confirm, the world's first and only smartphone compatible insertable cardiac monitor which helps physicians remotely identify cardiac arrhythmias. The first quarter [Audio Gap] by our market-leading portfolio, which includes several recently launched products that offer improved relief for patients suffering from chronic pain and movement disorders. I'll wrap up with Diabetes Care where sales grew over 30% in the quarter, driven by FreeStyle Libre, our highly differentiated sensor-based glucose monitoring system. Libre now has over 650,000 users across the globe which represents an unprecedented level of patient adoption in the industry. As we've discussed previously, we're investing significant capital to expand manufacturing capacity which will allow us to meet anticipated demand over the coming years. Libre offers a true mass-market opportunity with its unique combination of affordability, accessibility and ease-of-use, and we're positioning ourselves to maximize its impact. So in summary, as expected, the momentum we carried into the year has continued as reflected by our strong first quarter results. We continue to see significant growth contributions from a number of recently launched products across our portfolio and we're well positioned to achieve our financial objectives for the year, including top-tier sales growth and mid-teens EPS growth, as we continue to make investments to sustain our growth momentum into the future. I'll now turn the call over to Brian to discuss our results and outlook for the year in more detail. Brian?

Okay. Thanks, Miles. And as Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with the guidance we provided back in January. Turning to our results. Sales for the first quarter increased 6.9% on an organic basis and exchange had a positive impact of 4.2% on sales. The favorable impact of exchange rates on sales this quarter was driven primarily by strengthening of the euro and other developed market currencies which considering our cost base and hedging program, has minimal fall-through and impact on our earnings. Regarding other aspects of the P&L. The adjusted gross margin ratio was 59.3% of sales, adjusted R&D investment was 7.4% of sales and adjusted SG&A expense was 33.2% of sales, all in line with our previous guidance. Turning to our outlook. For the full year 2018, we continue to forecast organic sales growth of 6% to 7%. And based on current rates, we expect exchange to have a favorable impact of a little more than 2% on full year reported sales with more than half of this impact driven by strengthening of the euro. In addition, we continue to expect Rapid Diagnostics to contribute sales of a little more than $2 billion. We continue to forecast an adjusted gross margin ratio of somewhat above 59% of sales, reflecting underlying gross margin improvement across our businesses. Adjusted R&D investment of around 7.5% of sales and adjusted SG&A expense of somewhat above 30.5% of sales. Turning to our outlook for the second quarter of 2018. We forecast an adjusted EPS of $0.70 to $0.72. We forecast organic sales growth of 6% to 7% and at current rates, would expect exchange to have a positive impact of a little below 3% on reported sales. In addition, we expect Rapid Diagnostics to contribute sales of approximately $500 million in the second quarter. We forecast an adjusted gross margin ratio of around 59% of sales, adjusted R&D investment of around 7.5% of sales and adjusted SG&A expense of somewhat above 30.5% of sales. Before we open the call for questions, I'll now provide an overview of our second quarter organic sales growth outlook by business. For Established Pharmaceuticals, we forecast double-digit sales growth. In Nutrition, we forecast low to mid-single-digit sales growth. In Diagnostics, we forecast a modest sequential improvement in sales growth of around 6%. And in Medical Devices, we forecast sales to increase mid to upper single digits, which reflects continued double-digit growth in several areas of the business. With that, we will now open the call for questions.

[Operator Instructions] And our first question comes from Mike Weinstein from JPMorgan.

Let me start, if I can, on a couple of product launches. I was hoping you could provide some additional color on how the U.S. launches are going for both Libre and Confirm. And then second, the EPD business had a slightly weaker quarter this quarter than was expected. Brian commented in the second quarter guidance that he expects the business to rebound to double digits in the second quarter. So if you can just call out if there -- anything in particular that might have impacted the first quarter that you would view as one-time in nature.

Okay. Thanks for the question, Mike. And before I go into those answers, I'd like to take a minute and just acknowledge you as an analyst in our space for just the terrific job you've done over the years and acknowledge your change of career. We won't have you on these calls anymore, but you've always had great questions and you always hit the right points. And good luck to you in whatever you're going to do and we'll miss you here.

Thank you, Miles.

Let's start with Libre. The Libre launch, I'd say, has gone exceptionally well at the -- and is going exceptionally well. We obviously expected to keep going exceptionally well worldwide. As I mentioned, we're up to over 650,000 patients at this point. We're adding over 50,000 patients a month. We added about 150,000 just over that this last quarter. So if I look at the acquisition rate of patients, we expect to obviously be over 1 million patients at year-end and trending in a pretty healthy fashion. And then, I'm pretty gratified by that growth. It's true globally and I'd say in terms of color, the mix of patients is very strong. Our reimbursement is -- I think we're reimbursed at about 2/3 of all sales now internationally. That's strong. We keep getting reimbursement approvals in countries. I think that the value proposition of Libre, the affordability is particularly strong and appealing to patients as well as the performance, ease-of-use of the product and so forth. We get a lot of feedback that way. About 2/3 of the patient base are type 1 diabetics and about 1/3 are type 2 patients. So we've got -- we're seeing validation of the appeal and use of the product in both segments. We're investing a significant amount of capital in capacity expansion, anticipating that the growth legs on this product are going to be long because it's got a real mass-market appeal and fit. And there are, as you know, tens of million of diabetics and tens of millions of insulin-using diabetics, the majority of which are actually international. And in our case so far, the vast majority of our patients are international, but we're off to a strong start in the U.S. as well. At this point, we're a little over 50,000 patients in the U.S. and trending strong. And I think as far as starts go and continuations and expansions and so forth, I guess that's all good news. So we're running hard and the reception of patients here and abroad has been exceptional. I think that the opportunity in the category is quite large. And the category gets a lot of attention and for us is a future growth driver. We think it's pretty strong. I'm not sure what other detail to fill in, but nice thing is it's the kind of growth challenge you like to have, we are not having to overinvest in SG&A because the customers are our strongest marketers. And given social media and so forth, that's been a huge plus. So everything about it is doing really well. And I think we'll see this be a major growth driver for the company for quite a long time. With regard to Confirm, also off to a strong start. The -- we're capturing share, physician feedback has been very positive. It's a simple procedure. And I think one of the appeals, it is the only device that is smartphone compatible. It's a nice market opportunity and it's been a nice bump up in the growth rate. I know there's competition out there, there's competition in every category we're in and competition always makes you pay attention to innovation and next steps and next improvements and so forth. And I suspect we'll see response to the success of this product but in the meantime, doing quite well. And then finally, EPD. You know it falls into the category for me of it's always something. And given the focus on -- whether it's emerging or high-growth markets, we seem to have a given market that affects our EPD or even our Nutrition business from time to time somewhere. And in this particular case, it's Russia. And in the case of Russia, the market has been -- the market growth rate has been slowing. We still see that in our IMS data and so forth. As you know, we have 2 businesses in EPD there, the EPD brand and the Veropharm brand. The Veropharm brand has withstood that slowing market growth rate far better than the EPD brand because a lot of it is hospital-based whereas the EPD brand is more pharmacy-based. There's been a lot of expansion on pharmacies, but that doesn't mean that there's expansion of prescriptions. And so the overall market, I think, is one of temporary distribution channel dynamics as those pharmacies expanded. And that has now ceased to -- at that rate. And the market, I think, will stabilize in terms of distribution channels, outlets and so forth. But that's created a little disruption in that market temporarily. And that's all this is -- is that in Russia. And without Russia, we'd be in the 8.5% to 9% range as a business, and this would look healthier. So I'd say, you got that and then maybe a small dynamic in Mexico where we've seen a couple of distributors consolidate. And when distributors consolidate, there's a little more negotiating power and so forth. So we've seen a little bit of disruption in Mexico. But to be honest, that one hardly makes the radar screen of impacting the overall global growth of EPD. The biggest issue was this quarter Russia. I think we'll still see Russia impacting the numbers next quarter. So I'd say, we're probably going to look at the same kind of a number, particularly given the Russia impact next quarter, and then I think we'll start to see it turn.

That's good color. Miles, let me just ask one follow-up. So you grew 6.9% organic this quarter. Your guidance for the year is 6% to 7%. If there's probably a bigger-picture question people will have, it's on sustainability. So would you mind just spending a minute? It's obviously only April of 2018, but just -- could you just give us your thoughts on your ability to sustain this type of revenue growth.

Yes. I think, overall, I'd say this range of revenue growth we're going to sustain. I know that I indicated on the last call, I expect to be at the higher end of this. And each day that goes by, whether you have a Russia or a tweet or something that affects the expectations in the market, it adjusts. I'm less concerned about a couple of tenths of a point of growth and I'm less concerned about the details of each quarter. I mean, I pay attention to that because obviously it matters to investors. I'm much more concerned about the long-term sustainability of the overall growth trajectory of the company. And that, I'm pretty confident in. I'm not sure I can predict every quarter to the 10th. And -- but I would tell you that the overall sustainable growth of the company, I feel pretty confident about and particularly in this range for now for this year and beyond because there is so much new product launch and so much sustainable launch. I mean, just between the series of Alinity analyzers and Libre and the new products launched by our Medical Device groups, there's an awful lot of new product tracking here. And so -- and that's not just a temporal thing that goes a couple of months or a couple of quarters. Our objective was to make sure that we had really healthy, robust R&D pipelines and a good cadence of new product launches so we could sustain growth organically. And then, whether we ever do anything else opportunistically in M&A and so forth becomes purely that: opportunistic and very strategic. So I think with the underlying baseline, I'm pretty confident of the current sales trajectory of the company. And I think we've got some pretty solid validation points here with the performance of the new products that have launched that are quite visible, quite trackable, quite predictable to validate the growth prospects going forward. So whether it's 6.5%, 6.7%, 6.9% might vary quarter-to-quarter because lots of things happen quarter-to-quarter. But overall, I think that growth range is pretty doable.

And our next question comes from David Lewis from Morgan Stanley.

[indiscernible] David's having some technical [indiscernible] [Technical Difficulty]

Our next question will come from Larry Biegelsen from Wells Fargo.

I wanted to start with Nutrition and then ask a couple of follow-up questions on Libre. Obviously, the bright spot here in the quarter was the acceleration in Nutrition. So Miles, can you talk about the sustainability of that? The International Pediatric Nutrition improved and also the Adult Nutrition business in the U.S. also improved. Those are areas that saw some challenges last year. And I was just curious as to why you're guiding to low to mid-single digits for Q2. And then I had a follow-up on Libre.

Okay. Let me deal with Nutrition first. I think for the long term, I'd be cautious about setting expectations much higher than low to mid-single digits in this business because markets around the world have slowed to a degree. They're not growing at as high a growth rate as they have historically. There are still healthy markets and I think particularly some international, call it, emerging markets and so forth still have some hefty growth opportunity. The -- but I think overall, when you put it altogether, it's probably a low to mid-single-digit business from a growth standpoint. It is profitable. It does generate a lot of cash and it is a fundamentally very strong and valuable business. So I'm happy about that. I would say that we've seen some sequential improvement because we've been attending to what I think have been adjustments to how we market, how we sell, adjusting to digital, digital channels or online channels and so forth in some markets where there's been a tremendous amount of distribution channel shift and change. China sticks out. But it's been true in a lot of places. So I think that it's a highly competitive business in a branded space. We've reacted to that pretty well. I give our U.S. team a lot of credit for how well they've done in the pediatric and adult space. It's extremely competitive and it's competitive in both pediatric and adults, not just pediatric in the U.S. And we will see from time to time a competitor try to pulse advertising or other things to take momentary share. But I think overall, we've not only sustained our position, but steadily grown it from a share standpoint. We certainly see that in the U.S. So I'm feeling pretty good about how the U.S. is doing overall. And in some markets where we've had some either competitive issues or just disruption like the disruption in China for the last 2 years over this change in food safety and so forth, the law, I think we've responded to that pretty well. And I think we're seeing that stabilize. As I said, we're making adjustments in how we market, what channels we go to, where the emphasis is. I think we've got some stability in China. But I would tell you, we also have a lot of ambition to do better competitively in China which we're getting our hands around. So right now, I think if we're able to see steady, stable growth in this business at the rate we're at or even sequential improvement going forward, that'd be pretty good. I wouldn't want to get out over the tips of my skis on that and predict a whole lot faster or higher. Right now, I'm happy that it's stable and headed north.

That's very helpful. And then on Libre, clearly, the launch is off to a good start in the U.S. and the international numbers have been spectacular. But I think investors want to get some confidence about the sustainability of that. So I guess my question is, first, earlier in the year, you seemed comfortable with $50 million to $100 million for the U.S. in 2018. Is that still the case? And second, what can you say on the pipeline? I know you don't want to disclose much, but investors obviously want some visibility beyond 2018. Is there anything you can tell us to give investors confidence that there's more to come here?

More to come on Libre?

On the pipeline. I mean, you have collaboration with Bigfoot, you're expected to deliver next-generation device to them with alarm, that kind of thing. So the pipeline and the sustainability.

Got it. Got it. Yes. Okay. So let me go back to your first question about the -- we previously said $50 million to $100 million of sales in year 1 seemed reasonable and so forth. Absolutely. And we'll be at the higher end of that range and we're tracking that way now. And it's very early in the year as you know, so yes, I have no concern about that at all. And let's just say, we're ahead of our expectations here. And you can see that in the growth rates and the numbers and the patient acquisition rates and so forth. I think we'll go out at the end of this year, $1 billion or more on run rate and 1 million patients or more. In fact, I think we're going to have well over 1 million patients at that point because our patient acquisition rate right now is pretty steady and rising. So yes, I think all of that is pretty reasonable. I'd validate that for you. And then with regard to pipeline, the product improvements and so forth, yes. I mean, as you know, we've got a pediatric claim in Europe. We'll have that in the U.S., that'll file this year. There's improvements, alarms and so forth that will be -- that's coming. I'm trying to think of all the things coming. But I would just say, yes, there's plenty coming and other dimensions of it in -- coming out of R&D that we'll have announcements for this year and next year. So there's a steady cadence of improvements, variations, claims, et cetera, in the product going forward that I think keep this going for a long time.

And our next question comes from David Lewis from Morgan Stanley.

Okay. Can you hear me?

We can now.

Perfect. Glad we got that fixed. So Miles, wanted to start with Diagnostics. Two things to focus on there and maybe a follow-up on the balance sheet. Two things, Alere to our model kind of recovered faster than, I guess, we expected. So can you talk about Alere recovery and how the integration is going? And then secondarily, Alinity and how you see the pipeline building there, U.S., ex U.S. throughout the balance of the year?

Yes. I'm just the making notes so I can remember all that okay. All right. I'll start with Alere. Yes. I'll tell you what, I'm really pleased with our management team. We've -- I'd say the integration, the bulk of hard work of the integration of that and St. Jude is pretty well complete. I mean, there's a lot of things we'll keep improving in both businesses over time, investments we want to make and so forth, but I think the notion of making it part of the company, getting everything under control, getting a management team established, getting strategies and directions established and so forth, that's all gone exceptionally well. We're on track with all our synergies. I think we've benefited. We've -- it's been a blessing there's been a particularly strong flu season. And a big chunk of Alere's business, probably 15% or so, Alere sales is seasonal and somewhat dependent on things like the flu season, it's not the flu season in particular. So we saw an obvious upshoot in our flu-related and strep-related testing and so forth from late fall into the winter, and that's clearly reflected in the numbers. That will vary from year-to-year depending on morbidity and the flu season and so forth. But some years it will probably be lighter. But this year it was particularly strong and that was a big plus. Now underlying that interestingly enough, as we've told you, and we think they have a lot of good product lines that were undermarketed. We've had increasing success with a number of those product lines and strategies. One of the things that's on our radar screen that we're working at and we want to put a lot more money into R&D, product refreshments, product improvements, that sort of stuff. That's a multiyear thing. That's not going to be next quarter kind of evidence. But I think we've got our hands around the commercial opportunities, there's places where we see room for correction, improvement, et cetera. But I think we've got the management team stabilized. I think it's financially stabilized. I think the uptick in sales, while largely driven in this particular period by the flu season, there's also underlying improvements in key product lines and key sales that I think are going really well that we're pretty, pretty happy about. Then Alinity...

Okay. It is...

Yes. Go ahead.

No, sorry. Just Alinity, yes.

Alinity. We've taken some pretty deliberate steps to dramatically tip up our launch activity. The -- with these large systems and their multitest menus, it's really important to have full or nearly full menus at launch because customers when they switch over a lab or switch over given instruments and so forth, want to be able to switch all the tests on that product and not to have to run 2 different systems and so forth. And we're sort of hitting stride now on the completion or breadth of the menu offerings, particularly Europe, U.S. is coming along, et cetera. Our blood screening system, Alinity s, has a full menu, that's up. So we've got some pretty ambitious plans about not only conversion of the existing install base, but share capture and account capture. I would say about 15% of accounts come up for renewal or contracting each year. So this will be a fairly steady multiyear rollout and trend. But if I -- I track things like our prospect list or prospect bank, how many prospects, how many actively in the sales process, what's our win rate with existing accounts, what's our win rate with new accounts and I'd say, the magnitude of the prospect banks and accounts that we're in has increased about sixfold. And our win rate in our existing accounts is extremely high, up in the -- well over 90% category, which you'd expect because we've got happy customers and they're always easier to sell to than new ones. But our win rate in new accounts is quite high also. And so that's been pretty gratifying. And that's -- so far, Europe [ end ] is evidence. And so we're investing in expansion of sales force and expansion of installation, service teams, expansion of support. It's well underway and it's going well. So we're pleased.

Okay. Miles, very clear. And then just a quick one from me. I think a lot of commentary this morning on growth drivers, but one of the big successes for us this year is debt pay down. It looks like you could be at 1.5, 2 turns net debt to EBITDA by the end of the year. I just wonder how capital priorities could change towards the end of the year. And do you have capacity for sort of growth-oriented M&A towards the back half of the year?

Yes. In terms of debt, we paid down $6 billion already this year, it's April. And we -- I'd say we expect to pay down another $2 billion before year-end. And cash flows are strong. We've paid a lot of attention to that because it is our intent to bring our debt down. As you know, when we completed these 2 acquisitions, we had about $28 billion in gross debt, and we're already at $22 billion and we'll be $20 billion or a little lower at year-end. That will put us at about 2x net debt-to-EBITDA ratio, not 1.5, but 2. And I still think that's pretty healthy, and it's a pretty rapid rate of pay down on the debt. So the -- do you start to change your capital priorities at that point? As -- I can tell you right now, we think the dividend is important for a category of our investors, and we like to target our dividend in 40% of EPS to maybe a little more than 40% of EPS range, 40% to 45% of earnings. And we like to maintain that range and we've been steadily raising the dividend. And I think that remains a priority. Obviously, debt pay down remains a priority. But we're in a -- we're getting rapidly to a very healthy range and healthy balance. Would we keep paying down debt? We would. And yet I think to answer your point, will we have capacity if we choose to? We would. But I would tell you right now, that's not my priority. And we're not looking at M&A. We're not looking at anything. It's not in our priority list just now. I do want to keep paying down debt, do want to pay a healthy dividend. And frankly, we've got some organic capital opportunities here internally both between the launch of Alinity and the capacity expansion with Libre that are worthwhile. And I don't see that impinging on us so much that it squeezes us. We have the flexibility you refer to. And of course, as we get into '19, we clearly have flexibility. But right now, I don't feel constrained, but I also don't have anything on the radar screen that I'm particularly interested in pursuing because we've got so much organic growth opportunity as it is. And I'm feeling pretty good about the debt balance, feeling pretty good about the ability to fund our internal needs, our dividend, all of those things. We're in a good spot.

And our next question comes from Rick Wise from Stifel.

Miles, just a big question to start off with. Maybe you could talk a little bit about your internal investing priorities. It seems SG&A stepped up a little higher than I might have thought. You're clearly investing in R&D, and you've highlighted some topics, Libre, Diagnostics. But maybe where are your priorities more broadly? And do you see that extra investment or that extra opportunity to investment as sustaining or accelerating the kind of 6% to 7% organic growth outlook you're talking about?

Rick, I don't have an investment at Abbott that doesn't think they can use more money or a business at Abbott. It's actually a good problem to have. They all believe with more sales and marketing expense and resources that they can expand faster, run faster, et cetera. And of course, there's always kind of a prudent balance to that. But I'd say we're kind of lucky. We've got a lot of things that are launching, a lot of new product opportunities and we've got some market expansion opportunities in EPD and so forth. So -- and the combination of it is, adding sales reps, adding service and support and increasing our penetration in a number of places. So we're very fortunate I think with Libre in particular that it's not as sales and marketing intensive from an expense standpoint as you might think. We get a lot of benefits. It's extremely, let's say, productive, what I'll call the digital world, social media world, et cetera, the places that I think would benefit from a lot more resource. Obviously, there's various device areas that would, but you also got -- make sure you've got the product ready to go and so forth. So we've got a nice steady pipeline. I'd like to put more money behind it. And Nutrition, it depends. It's dependent on given countries and given channels. It's more selective. Would I put more money behind it? Yes, I think so. I think our spend rate could stand to improve in some areas of Nutrition. I think it could stand to improve in EPD. If I put more behind Libre, I don't know. I mean, the growth rate right now is pretty hefty. So the good news is we're always going to be in this balance between how much we beat earnings by and how much we feedback into the business. And what I've tried to do over the years is find the balance there, a balance for the investor and a balance for the business to keep sustaining it and keep up with it. We watch on a percent of sales basis and where our opportunities are. I think right now, I'm going to put a lot more into Alinity. And because I think that clearly gets a bit of a boost and it's labor intensive. So I know that's a bit of a ramble, but the good news is I don't have a problem figuring out where to put money. It's a bigger challenge at making sure I always keep the balance between what the investor would like to see and what we keep plowing back into the business because I know you guys want to see sustained growth. I'm confident we have sustained growth and then it's just a question on how hard to push on the gas pedal.

Got you. And just last from me, that, on a more focused basis. Maybe you'd reflect a little bit about the current dynamics in cardiac rhythm management, CRM. The business was flat this quarter. We had assumed a low single-digit growth. Your portfolio's filled out. I assume you were -- did well on the de novo side, maybe not so well on the replacement side. But just -- what's the outlook from here? What are you expecting? Is this -- can this business grow? And just how are you thinking about this longer term?

Yes. Thanks for the question. The business can grow. And you're exactly right, that's a tale of 2 different situations, the de novo and the replacement. We're doing very well in de novo, to be honest. And that's pretty gratifying. And it's a little slower in replacement for a reason that some of that got pulled forward when there was a battery issue a couple of years ago. So a lot of that replacement got pulled forward. So it's a little bit out of the sync of the normal rate of sales that come from replacement versus sales that come from de novo. So I do think that's kind of a temporary phenomenon while we move out of that zone. But the de novo side is quite robust, and I'm pretty happy about that. So as we move forward, do I think this business grows more than 1% or 2%? I think it can. So -- and I think we see that evidence and we've given that attention. I also think we've got a lot of opportunity in Electrophysiology. I mean, there's parts of this business that whether it's stents or CRM, they're lower growth rates because they're mature and established markets. And you say to yourself, can you grow these at a little healthier growth rate than 1% or 2%? In both cases, yes. Our Vascular business was slower this quarter. We lost a couple of share points in the United States over the last few quarters. And yet with the approval and launch of XIENCE SIERRA in the United States, I think that changes. So we've got plans. You run your more legacy and mature businesses one way and your new product launches another way, but you can't ignore the large, established positions you've got in CRM and stents and so forth. And we're not, we're not. It does go up and down with different competitive launches or improvements and so forth from time to time. It pulses a little here and there. But we believe we can drive CRM and our vascular stent business at better rates than we see right now. The CRM numbers you see are exactly the anomaly you called out between de novo and replacement.

And our next question comes from Chris Pasquale from Guggenheim.

One question on Libre and then one on the Neuro business. First, can you give us any color on who's using Libre in the U.S. today? And I'm thinking in particular about how the patients you onboarded so far break down in terms of type 1 versus type 2 and then CGM naive versus competitive wins.

Yes. Okay. I'm going to have Scott take that question for you. Go ahead, Scott.

Yes. I would say in terms of the mix, it generally as best we can tell, it's a little bit harder with data in the U.S. than some of what we get out of Europe because we sell a lot through our web shop in Europe. But we're getting -- we estimate around 2/3 type 1 and 1/3 type 2 in the U.S. just like we are internationally. We think that would hold. And we're also getting -- we feel a nice balance of competitive wins versus people that are trying CGM for the first time and expanding that overall category. So a nice balance kind of across both dimensions.

Okay. And then Neuro continues to be a really strong segment for you. Last year, you actually became the market share leader in the SCS space in the U.S. I'm curious with all the focus on the opioid epidemic in the country right now and pain management in general, do you see an opportunity to move spinal cord stimulation up the treatment continuum to reduce the dependence on drug therapy for those patients?

Yes. I would say -- look, that has been a great space for us and we're now the #1 player in chronic pain. So certainly, we have a great portfolio, and that's playing out with physicians and with patients and they're seeing great results and whatnot in the real world. So I do think that, that category continues to expand. I think it will take some market development certainly with respect to reimbursement and guidelines and things of that nature. So it may build itself over time. It's not going to be a spike. But certainly, we feel that's a really nice space longer term.

And our final question comes from Glenn Novarro from RBC Capital Markets.

Miles, I have two questions on China. The first is relating to all this tariff noise that we're hearing. Abbott has a major presence in China, but I don't believe you manufacture a lot in China and then send manufactured product back to the U.S. So maybe can you discuss the impact of any of these tariff threats between the U.S. and China on your sales and EPS? And then the second question is on China nutritionals which did perform better than our expectations. Is China recovering sooner than you expected and why?

Let me take that one first. No, it's not recovering sooner than I expected. I expected it earlier than this. But I'm glad that it is it stabilized now. I think we expected stability much sooner than this. But we're there now. So I think we've got a reasonably stable predictable market. Are we doing as well as we'd like? Well, we'll see that over time here. We're doing better, but I'd like to do better than better. So there's still room to go to improve performance and improve share gain, improve channel shift and so on. But yes, I wouldn't tell you that this is ahead of my expectations or whatever because mine may have been running a little ahead of where we are. Then with regard to production in China, I hate to disabuse you of this notion, but we do produce in China. And we do bring product to the U.S. from China. And that happened because Alere produced a lot in China or at least a reasonable amount. So what we manufacture in China that is exported from China or imported to the U.S. is almost entirely diagnostic products in the Alere acquisition. And so there could be some impact financially on that if something were to happen from a tariff standpoint. We have done that analysis. And ironically, we've got a lot of business in China. We export a lot to China. We do manufacture infant nutrition in China as it is. So we've got a balance. We've got a balance of things that we manufacture, import, export, et cetera. When we net out the impact of potential tariffs, the tariffs we might experience exporting to China or into China are minimal. The tariffs we would experience coming back to the U.S. from products manufactured in China are where the impact would be. And I would say that based on everything I've seen so far, total magnitude of impact on us if it were to happen at all, about $0.01. And so we think we've got a highly manageable circumstance if what we've seen and estimated and the degree of tariff, tariff rates, products they apply it to and so forth, about $0.01. And so I put that in the category of I'm always solving for $0.01 somewhere. So that's a manageable outcome.

Very good. Well, thank you, operator. And thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. 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 great day.