Abbott Laboratories (ABT) — Q4 2015 Earnings Call Transcript

Good morning and thank you for joining us. With me today are Miles White, Chairman of the Board and Chief Executive Officer, Tom Freyman, Executive Vice President, Finance and Administration, and Brian Yoor, Senior Vice President, Finance and Chief Financial Officer. Miles will provide opening remarks, and Brian and I will discuss our performance in more detail. Following our comments, Miles, Tom, 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 2016. Abbott cautions that these forward-looking statements are subject to the risk 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 reports on Securities and Exchange Commission Form 10-K for the year ended December 31, 2014. 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 fourth quarter financial results and guidance provided on today's call 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 release and regulatory filings from today, which will be available on our website at abbott.com. Our commentary on sales growth refers to operational growth, which excludes the impact of foreign exchange unless otherwise noted. With that, I will now turn the call over to Miles.

Thanks, Scott. Good morning. Today I’ll discuss our results for 2015, as well as our outlook for 2016. For 2015 we achieved our financial objectives for the year reflecting strong double-digit EPS growth when excluding the impact of foreign exchange and almost 9% growth on an absolute basis, excluding the same. Sales grew over 9%, including strong double-digit growth in emerging markets, and we continued to expand our growth and operating margins. Overall, we made good progress against our strategic objectives. I would like to highlight a few key achievements from the past year. In established pharmaceuticals, we completed the sale of our developed markets business and successfully integrated CFR Pharmaceuticals in Latin America and Veropharm in Russia. The integration of CFR provides the scale, manufacturing and portfolio breadth to establish Abbott as a top 10 branded generics company in Latin America and actually number one in many of the markets in Latin America. Veropharm had a similar impact in Russia, positioning Abbott among the top branded generics companies in this key market. We also made significant progress improving our commercial execution, expanding our local product portfolios, and driving awareness of our Abbott brand with patients, physicians, and pharmacies. In Nutrition, we achieved double-digit growth and share expansion in China with the portfolio of pediatric nutrition products that are customized to meet local preferences. In the U.S., we expanded our product offerings in the tolerance and up-age categories with the portfolio of non-GMO products providing parents with additional formula choices. Our international adult nutrition business achieved another year of strong growth as we continue to bold and shape this category globally. We achieved another year of significant margin expansion. In Medical Devices, MitraClip achieved sales of more than $250 million and we further solidified our leadership position in the transcatheter mitral valve repair market with the acquisitions of Tendyne and an option agreement to acquire Cephea Valve Technologies. Along with MitraClip, these technologies position Abbott well to sustain our leadership position in this attractive segment of the market. In medical optics, we continue to launch a number of innovative products that are driving growth and share expansion, most notably in the premium lens segment. In diabetes care, we introduced our revolutionary flash glucose monitor FreeStyle Libre in several countries throughout Europe. Consumer response for this product continues to be very positive and we recently expanded capacity to meet the growing demand. We also made progress during the year to bring Libre technology to the U.S. with the regulatory submission for approval of Libre Pro, our professional use device in June of last year. Finally, in diagnostics, the combination of commercial execution, high-quality platforms, and customer-focused solutions resulted in another year of above-market growth across developed and emerging markets. This business also achieved another year of margin expansion, while simultaneously investing in the development of next-generation system platforms across all three of its segments including the Core Lab, Molecular Diagnostics, and Point of Care Diagnostics. So we’re entering 2016 with good underlying momentum. Our businesses are well-aligned with favorable long-term trends including the continued expansion of healthcare in emerging economies. While there has been some softening in these economies on a macro basis, national policies focused on expanding access to care and favorable demographic trends are driving growth in healthcare which is outpacing overall economic growth in these markets. The fundamentals in the market and geographies where we compete remain strong, and we expect to deliver another year of strong double-digit underlying earnings growth in 2016. However, a couple of items are impacting our growth outlook on an absolute basis and you’ve heard this all week, most notably foreign exchange. The rapid strengthening of the U.S. dollar relative to several emerging market currencies beginning in the third quarter of last year means that foreign exchange will again be a growth headwind in 2016. We're now entering the fifth year of this dollar bull cycle. While we actively worked to mitigate the impact of currency on our results, the impact of exchange on our bottom line would be more pronounced in 2016 due to the mix of currency movements and certain timing effects. In comparing our 2016 forecast, we were mindful of finding the right balance between managing through these transitory currency dynamics in the near term while concurrently making the right choices in appropriate investments to drive sustainable long-term growth. The other notable impact to our 2016 outlook relates to Venezuela, which has been a good market for us for many years. As many of you know, market conditions in Venezuela have become more challenging including high inflation, increasing price and margin controls, regulations on imports, and slowing demand. As a result, our forecast assumes a significantly lower contribution from our Venezuela operation in 2016. Brian will provide more specific details on the impacts of currency in Venezuela in a few minutes. So for 2016, our adjusted earnings per share guidance range of $2.10 to $2.20 reflects another year of strong double-digit underlying earnings growth offset by the negative impact of foreign exchange and a lower contribution from Venezuela that I just mentioned. In this environment, we remain focused on what we control: our commercial and operational execution, our innovations, and our efforts to expand margins. In nutrition, our R&D organization continues to be highly productive and is now developing new products closer to our customers than ever before. We will be opening up several new R&D centers in Asia over the last several years. We expect continued growth and share expansion in China, Latin America, and other priority markets including another year of strong international adult nutrition growth. While we've made great progress expanding margins in this business, margin improvement remains a key priority and we continue to see opportunities for steady expansion going forward. In established pharmaceuticals, our execution has improved significantly and we’re focused on strengthening our capabilities in key channels and geographies, and building a well-recognized brand that allows consumers to take a permanent role in making decisions about their healthcare. Internal development programs and local product acquisitions are driving a steady cadence of new products in our established pharma business to strengthen local portfolios. In 2015, our productivity of new product launches increased versus the previous year and we expect another strong year for new product launch productivity in 2016. In medical devices, we expect continued growth and share expansion in our cataract business driven by the ongoing launch and market uptick of our premium intraocular lens product across multiple geographies. In diabetes care, we recently expanded capacities to meet the strong demand for FreeStyle Libre in Europe. We expect to bring this technology into a number of new markets in 2016 targeting the multi-billion dollar global blood glucose monitoring market. In vascular, we continued to drive uptake of MitraClip and expect to bring Absorb to new markets throughout the year. Finally, in diagnostics, which remains one of our most consistent growth businesses, we will continue to execute our commercial strategy to drive above-market growth in both developed and emerging markets. As we progress through the year, we look forward to providing more specifics regarding our next-generation diagnostic systems platforms as we get closer to launch. Before turning it over to Brian, I’d like to comment briefly on capital allocations. You always ask me about that and you know that we take a very balanced approach here which includes increasing our dividend, share repurchases, and M&A activity. Last month, we announced an increase to our quarterly dividend marking the 44th consecutive year we’ve increased our dividend. That is only one of only a handful of companies to deliver with such consistency. Share repurchases have and will continue to be part of our capital allocation mix. And lastly, while 2015 was relatively quiet for us on the M&A front, adding to our business with good M&A remains a key priority. We see plenty of opportunities and we will continue to remain active on this front. As always, we remain disciplined and focused on finding the right balance of strategic fit and measures of return that will benefit long-term shareholders. I'm sure you’re going to have questions for me later on that topic. But overall you can see, cash flows remain strong, margins remain strong, and the underlying growth of our businesses remain strong. In summary, the fundamentals of the market and geographies in which we compete all remain strong. We continue to focus on what we can control. For 2016, the impact of foreign exchange and the Venezuela dynamics I mentioned earlier are offsetting double-digit underlying earnings growth. These impacts, while significant, are transitory in nature and therefore we remain focused on making the right decisions to drive long-term growth for our shareholders. I’ll now turn the call over to Brian to discuss 2015 results and 2016 outlook in more detail.

Okay, thanks Miles. Today, we reported fourth quarter adjusted earnings per share from continuing operations of $0.62, in line with our previous guidance range. Sales for the quarter increased 4.9% on an operational basis, driven by strong performances in our branded generics, diagnostics, and adult nutrition businesses. Reported sales declined 3.1% in the quarter, including an unfavorable impact of 8% from foreign exchange. The negative impact from exchange was approximately 1.5 percentage points higher than previous expectations due to the continued strengthening of the U.S. dollar relative to several currencies in the quarter. The fourth quarter adjusted gross margin ratio was 58.2% of sales, up 130 basis points over 2014, driven by continued margin expansion in diagnostics and nutrition. In the quarter, adjusted SG&A was 29.6% of sales and adjusted R&D investment was 7% of sales, reflecting investments in development programs across the businesses including several next-generation diagnostic system platforms. The fourth quarter adjusted tax rate was somewhat lower than previous forecasts due to the inclusion of the impact of U.S. tax legislation enacted in December. Overall, as we look at 2015, we achieved our financial objectives for the year despite a difficult environment. We delivered strong underlying growth while continuing to make significant progress on our margin initiatives. Turning to our 2016 outlook, today we issued guidance for adjusted earnings per share of $2.10 to $2.20. While this forecast reflects another year of strong double-digit underlying earnings growth, foreign exchange and the Venezuela dynamics that Miles discussed are impacting our 2016 absolute growth outlook. Let me take a moment to provide more detail on each of these items. As you know, in the third quarter of 2015, several emerging market currencies weakened rapidly relative to the U.S. dollar and have continued to steadily weaken since that time. Based on the geographic mix with currencies that weakened and the rapid pace at which these currencies declined, foreign exchange will be a greater offset to our underlying earnings growth in 2016 versus 2015. Additionally, in 2015, our hedging programs served to mitigate some of the underlying foreign exchange exposure and volatility. While our program remains in place for 2016 and is anticipated to deliver some offsetting impact to our exposure, the benefit of our hedges has naturally lessened over time. So the follow-through from translational foreign exchange combined with these hedging dynamics negatively impact EPS growth in our guidance by a little more than 10% for the full year of 2016. Lastly, as Miles mentioned, due to challenging market conditions in Venezuela, our 2016 forecast assumes a significantly lower contribution from Venezuelan operations. This impact lowers our 2016 sales growth rate by almost 2%. Excluding this impact, the midpoint of our 2016 guidance range would reflect adjusted earnings per share growth in the mid-single digits, even with the more pronounced foreign exchange impact I discussed earlier. As the year progresses, we will provide any relevant updates on our business in Venezuela. I'll now provide more specifics for our 2016 outlook. For the full year 2016, we forecast operational sales growth in the mid-single digits. Based on current exchange rates, we'll expect a negative impact of around 4% on our full-year reported sales, which would result in reported sales growth in the low single-digits for the full year 2016. The forecast for adjusted gross margin ratio is around 57% of sales, reflecting the negative impact from exchange, which is partially offset by underlying gross margin initiatives across our businesses. We forecast adjusted R&D investment to be somewhat above 6.5% of sales and adjusted SG&A expense of around 30.5% of sales for the full year. We forecast net interest expense of around $125 million, up over 2015, primarily due to higher U.S. interest rates and lower forecasted interest income in certain countries. We forecast a loss of approximately $25 million on the exchange gain-loss line of the P&L for the full year. We forecast around $10 million of non-operating expense for the full year of 2016. We forecast an adjusted tax rate of somewhat above 18.5% for the full year of 2016, similar to 2015, and reflecting the effect of the U.S. tax legislation enacted in December. Before I review our first quarter outlook, I'd like to provide some context for our forecasted pattern of quarterly earnings growth in 2016. We forecast underlying adjusted EPS growth in double digits for each quarter of 2016. However, in absolute terms, foreign exchange and the Venezuela dynamics will have more pronounced impacts on our results in the first half of the year. We expect the pace of both sales and adjusted EPS growth to progressively accelerate throughout the year. For the first quarter, we forecast adjusted earnings per share of $0.38 to $0.40, reflecting double-digit underlying growth, which is more than offset by the impact of foreign exchange and the lower contribution from the Venezuela operations. We forecast operational sales growth in the low single digits. Based on our current exchange rates, we expect a negative impact of exchange around 6%, resulting in a reported sales decline in the low single digit. The Venezuela dynamics that I discussed lowered our first quarter operational sales growth forecast by around 3 percentage points. The forecast for adjusted gross margin ratio is approaching 57% of sales, adjusted R&D investment of somewhat above 7% of sales, and adjusted SG&A expense of around 34% of sales in the first quarter. We forecast net interest expense of around $25 million in the first quarter. In summary, we achieved strong growth in 2015 despite a challenging environment. Our business is ending 2016 with good underlying momentum and we continue to execute well on our margin expansion initiatives. Our underlying earnings growth forecast is to remain strong in 2016, very similar to the underlying earnings growth we saw in 2015. With that, I'll turn it over to Scott to review the business operating highlights now.

Thanks, Brian. Today, I'll provide an overview of the fourth quarter sales performance and 2016 outlook by business. As I mentioned earlier, my comments will focus on operational sales growth. I'll start with diagnostics, where sales increased 7% in the quarter. In core laboratory diagnostics, international sales increased nearly 8%, driven by double-digit growth in emerging markets. In the U.S., we continue to achieve above-market performance with growth of more than 6%. The molecular diagnostic sales grew 3%, led by strong growth in our core focus area of infectious disease testing. As expected, U.S. sales were impacted by the planned scale-down of our genetics business. Lastly, point-of-care diagnostics where sales increased nearly 9% in the quarter. U.S. and international growth were driven by continued market adoption of i-STAT, our hand-held device which provides critical information at the patient's side, helping healthcare providers choose the best treatments in a variety of care settings when minutes matter the most. In 2016, we'll continue to leverage our best-in-class model and provide customers with a full offering of solutions to help them most efficiently operate their businesses while improving care. We expect global diagnostics sales to increase mid-single-digits on an operational basis for both the full year and the first quarter of 2016. In Nutrition, global sales increased 5.5% in the quarter. Pediatric nutrition sales increased approximately 4%, and were led by continued market uptake of Eleva in China and Similac Advance non-GMO in the U.S. As expected, international pediatric nutrition was impacted by a difficult comparison versus the prior year when sales increased more than 25%, driven by market uptake of product launches in China and Southeastern Asia. In adult nutrition, sales were led by 10% international growth, including double-digit operational growth in several Latin American countries. U.S. performance was led by growth of venture in the retail and institutional segments of the market. In 2016, we'll continue to focus our efforts on capturing share with locally relevant pediatric nutrition products and growing and shaping the adult nutrition category globally. For the full year 2016, we expect global nutrition sales to increase mid-single-digit on an operational basis. It's important to note that the Venezuela dynamics that Miles and Brian reviewed most significantly impact our forecast for nutrition and established pharmaceuticals. Excluding this impact, we forecast operational sales growth for our global nutrition business would be mid- to high-single digits for the full year 2016. For the first quarter, we are forecasting global nutrition sales to increase low to mid-single-digits on an operational basis. In medical devices, as expected, vascular sales were relatively flat for the quarter. MitraClip, our first-in-class device for the treatment of mitral regurgitation, once again grew strong double digits. Cephea, our innovative endovascular stent, continued to perform well. This growth is mitigated by market dynamics and the coronary stent market. In 2016, we'll continue to drive market uptake in MitraClip and Cephea and expect to bring Absorb, our fully dissolving stent to the U.S. market. For the full year and first quarter of 2016, we expect global vascular sales to decline in the low single digits on an operational basis. In diabetes care, sales growth was again driven by strong international sales of FreeStyle Libre in Europe. In 2016, with the recently completed capacity expansion, we look forward to bringing this breakthrough technology to more consumers around the world. For the full year 2016, we expect global diabetes sales to increase double digits on an operational basis. For the first quarter, we’re forecasting global diabetes sales to increase mid-single digits on an operational basis. In medical optics, global sales increased 2%, and strong performance in the cataract business, notably in the premium lens segment, was partially offset by dynamics in refractive markets. In 2016, we'll continue to drive updates of our innovative premium intraocular lenses and we expect global medical optic sales to increase low to mid-single digits on an operational basis for both the full year and first quarter of 2016. Lastly, Established Pharmaceuticals or EPD, where sales again increased double digits. Sales growth in the quarter was led by strong performance in several markets, including Russia, India, and China. For the full year 2015, EPD sales grew double digits operationally with and without the impact of recent acquisitions. In 2016, we'll continue to broaden our portfolio with globally relevant products, remaining focused on successfully building our presence and scale in key countries. For the full year 2016, we expect EPD sales to increase mid-to-high single digits on an operational basis. For the first quarter, we're forecasting EPD sales to increase mid-single digits on an operational basis, reflecting double-digit operational growth excluding the impact of Venezuela. In summary, we achieved another year of strong underlying sales and margin growth, and are well positioned to maintain that type of momentum for the full year 2016. We will now open the call for questions.

Let's start with Venezuela and maybe you could just give us a bit more in terms of what you're doing, one, with your operations there; and two, the change you're assuming. It sounds like you're marking to market the business basically at different exchange rates. Can you just walk through financially what you're doing? And again, why that's impacting the business as much as it is in 2016?

Hi, Mike. This is Tom. I don't – I’ll talk about what's going on for us in the country, but I want to make it very clear that we're not changing our exchange rate assumptions for the country. This is really about what's happening in the market through economic activity of those markets, and really demand and ability to pay for products. The oil price was high at the beginning of the year, it declined throughout the year, and the top markets became more challenging. As Scott and Brian talked about, we experienced significantly lower volume as we exited 2015. As Miles indicated in his remarks, with price controls, very high inflation, and when we look at the remainder of 2016 going forward, we see very challenging conditions and much lower volumes in the country. So we're focused on supplying the market, more focused on medically critical products. Our products are important to the market, but just the profitability of what we would expect for the year from that activity is a very low contribution compared to what we experienced largely in the first half of 2015. So that is the situation and I think it will basically take some volatility out of our forecast, but reflects the reality of the market we're dealing in.

So two more fundamental follow-up questions. One, the Pediatric Nutritional business had a tougher comp in the fourth quarter internationally on optimum product launches and particularly in China. Can you just separate out for us the tough comp versus the underlying growth and the degree to which you think you're seeing maybe a slowdown in any of your markets?

Sure Mike. I would say in international, as particularly the slowdown we’re seeing on the surface, nothing has changed about our underlying momentum here. If you go back to the fourth quarter of 2014, that was the period where we were launching our innovations particularly, Eleva and QINTI into the market. As you know, Eleva has had great success in the portion of the market that it's playing in. So there is a little bit of a tougher comparison, fourth quarter '15 over '14. If you blend it out in China, the Nutrition business grew over the mid-teens for the full year. That’s more reflective of the performance for this business for a year and it’s ongoing. We still have the momentum there. We still have plans for further opportunities on how we compete and how we price to the various channels. So nothing has changed about the momentum and it continues into 2016.

So Miles bringing you in here. With all this discussion, the underlying business if we can pull out Venezuela and maybe one or two other smaller items. The underlying business hasn't changed, but the environment has changed in some places and the price update for assets has changed. Have your priorities on capital allocation and the M&A question changed at all in the last six months?

No. Let me go back, Michael and paraphrase that for you. The frustrating thing—and I think it's frustrating for a lot of multinational companies that are U.S.-based—is the underlying market dynamics remain strong in a lot of places. Every morning we get up, we see CNBC and everybody wrings their hands about China, but whether China is 7% growth or 6% growth, 6% is way bigger than the rest of the world. It's a fundamentally strong market for us as are practically all of these emerging markets. Now, the oil-based economy—the ones we were extremely dependent on oil—takes Venezuela; okay, there are different stories. The volatility, unreliability, and sustainable market there is different than just about anywhere in the world. So, okay, there was an outlier. And every year there are going to be some outliers somewhere. If you are in a broad mix of currencies and a broad mix of countries and geographies as a multinational, somewhere something is not going to be great. But the fundamentals of the markets particularly for us in healthcare are good. And yes, translating that back during this period is unusual; it's frustrating. I mean none of us have seen this kind of oil price in couple of decades, and none of us have seen this kind of currency pile on in a long time. So, going back to your next question, has my expectation of our underlying momentum changed? No. Has my priority changed in terms of M&A activity? I'll tell you one thing about it that's changed a little bit. We've been looking at properties largely internationally. I'd say I'm probably balanced in that a little bit back in the other way. It was pretty hard in a lot of expansion opportunities in branded generic pharmaceuticals, and I think there are opportunities there. But as you and others, we've watched those valuations over the last year when deal heat turned and I can tell you that there was still one particular one that we were involved in an auction for, and the valuation that that property went for was non-economic—just plain non-economic. I would challenge the buyer to explain where the economic return was in that particular deal. They obviously have their reasons, and they obviously saw something the rest of us didn’t appreciate. So I'd say right now, first of all I don’t see a lot that people are offering up for sale. The old maxim: everything is for sale at some price. Well the price of some of these things would be for sale at isn’t prudent; it just isn’t prudent. So I think you have to step back and say we’re not in that zone. We’re not going to be that irrational in some cases. I think you have to be very strategic about it, and I know that a lot of people think that a lot happened last year and we should have been in the midst of it, but I didn’t see anything go by that I felt particularly bad about not being in the mix of it.

Listen, I have follow-ups, but I'm going to let some others jump in. Thanks, Miles.

Good morning. Thanks for taking my questions. Just to kind of follow up, I guess, along Mike's line of thinking, I know you talked a lot about more from a geographic point of view. I was just wondering if you could talk more about the balance of Abbott from more of a business mix point of view. Has the way that you've looked at the mix of Abbott from that perspective changed over the last year or so, really since the spin of AbbVie? If I look at the growth rates for this year, medical devices, the growth operationally was 1.5%. If that division were to be separated out, I just look at Abbott as it would be even stronger as a company, and how do you think about that franchise and strengthening it, or just kind of the composition of Abbott today and the future?

Well I think I’d start with that would be all about strengthening rather than separating out. We're committed to all four major segments that we have in the company. One of the important things about those segments is their relative balance in terms of size, sales, profitability, etc. They all have different dynamics and a lot in common because EPD and nutrition globally share a lot of channel dynamics. Devices and diagnostics have a lot of different things going on with them. I'd say first is balance matters in the mix with the investment identity of the company for an investor because we want to be a reliable performer steadily over time. As you know, our proprietary pharma business grew to a terrific size based on one product in particular, and so we were out of balance as a company and so we split into two companies. But we got balance in these businesses. That said, I’d say from an M&A perspective and the places where we are looking to be perfectly fair, we are not looking to do anything with regard to M&A in our nutrition business today. I mean if something came along opportunistically we would look at everything, but the fact is that business is that’s an organic business for us and all of our performance objectives and things we want to do are driven organically. The kind of investments we make are capital-planted in the right market for the world and managing supply chains and so forth. The other three businesses have each a different tale. I would say diagnostics has a very strong diverse business. It’s wanted in a segment of diagnostics and if we opportunistically could add to it we would. Obviously, all the criteria you look at have to make sense but that’s a business where we don’t really have to, but if we had opportunities we will. EPD is similar; we’ve got a gem of a business there and having done a lot to shape that business, we are in high-growth markets where the profitability and the market development and the channel dynamics for branded generics are good. We’ve identified 15 countries in particular that meet our criteria, and we’re looking to enhance our footprint in those markets if we can. Latin America is a great example of that, and so there are still many geographic opportunities to do so, but I always make the distinction to investors and others that it’s really where we can distinctively differentiate branded generic pharmaceuticals, which means retail and channel dynamics right to the end, across Latin American countries and so forth. So when we have those opportunities it’s great to add on, but what we’ve got is a core business now that’s a very strong branded generic international business largely focused on emerging markets where there is tremendous tailwind of market growth. For devices, we look at that—we want to and need to strengthen that business, and there are a number of ways of doing that. There’s organic in-house and our venture organization where we're building a number of small companies and investing in other early-stage companies and so forth. Then there’s always M&A. So we are always mindful of those opportunities. It gives you a sense of how we think about each of those segments.

Okay. I'm curious about the capacity expansion for FreeStyle Libre. What is the timeline for that in the U.S., and will it be a consumer product or just targeted at physicians?

Well, I think it depends on what timeframe you're asking. It's going to be both, eventually. Right now, I want the fastest regulatory path possible. This product has been exceptionally well received in Europe. Spectacularly well received, I should say. Consumers and users, diabetics, and so forth have just given us an overwhelming positive response. So that's good, and we're just in the process now of releasing all the new capacity we invested in last year. The next wave of capacity expansion is underway. It's one of those great challenges where I want to play from my own perspective. The diabetic community in the United States wants this product, and it's a regulatory pacing issue here. It wasn't so in Europe. All I can say is I'm in a hurry because we know the value proposition of this product on top of the medical proposition is just fabulous. I have great expectations for it. There is sort of two dimensions to that: enough capacity, which for a while we will have, and then we will have another tranche coming on, and the regulatory process for how fast we can go.

Any sense on when the first product could hit the market in the U.S.?

I'm one of those superstitious people that no matter what I tell, I'm going to be wrong. So I don't want to jinx anything. I would optimistically hope towards this year, but I don't know.

Hi, good morning, guys. Miles, first question is on the Mylan stake. I'm wondering if you'll give us an update on this stake. What you're thinking is— in the past you've said you're not going to be a long-term holder. Are you any closer to selling that stake? And will the sale be associated with some M&A? Thanks.

Well, good news. You're right. We're not going to be a long-term shareholder of Mylan. But the good news is, we don't have to sell it right away. We have the freedom to sell it. We just don't have an immediate reason to have to. So I'd say we can leave it in Mylan shares or we can leave it in cash; either way. And you ask if it had something to do with M&A. Obviously, that might trigger it. I think it depends on what the price of Mylan is in the market and the manner in which we might market our shares and so forth. There are a couple of dynamics there, but I would confirm that we don’t intend to be long-term Mylan holders. We don't think holding this back is probably a trigger for M&A activity. Maybe a little valuation, but we're not particularly hung up on value right now. We did watch the entire Perrigo process and hoped for a path until that stabilized and was finished. There was no point in being in the way of that, so that happened, that stabilized, that's finished. There is a stable market now for Mylan shares, and we'll just wait and see what triggers it. We otherwise have no reason to move one way or the other until there is some trigger like M&A, I would guess.

Okay. Let me just follow up — Miles, if you could on your vascular business, because if you strip out currency, I think over the last 12 months, even going forward, most of the businesses are on track, at least performing in line with our expectations. But the vascular business continues to come—at least relative to our expectations—continues to come in below. I know you’ve highlighted Absorb, but a lot of our channel checks are not very positive on Absorb. So I guess my question is what's the commitment to this vascular business? Is this a business that you need to build up through M&A, and the reason we haven't seen a lot of M&A is it because the targets have still unreasonably valuations? Thanks.

Well, I'll say a couple of things. First of all, we're committed to the business. And I think these are the bigger market conditions here. If you look at the markets around the world, not just the U.S., but literally every major country in the world, the markets have stabilized among competitors. Share doesn't move a lot, but it does move a little. The provisions in these spaces take new products, and they experiment with it a little bit, and that's about it. The innovation here is at a point where I'd say, the incremental value recognized by the healthcare system is limited. If you think about what drug-coated stents have done in the vascular space, it's been a tremendous boon in the treatment of patients. But I think now we see this market is far more driven by cost and prices in either countries or hospital groups and others, trying to manage the overall cost of healthcare. So I think all of us see the same dynamics where we're increasingly challenged on more value propositions than just innovation. The payer, whether it's government or purchasing people or insurers, whatever it is, are increasingly more influential here than the preferences of physicians. You say, well, those aren't very good dynamics. Well, they're not bad dynamics either. We have to compete in this business just like we compete in a lot of other businesses. I think we and our competitors in this business are all broadening our product lines, innovating in other surrounding spaces, and broadening those offerings. There's still a lot of room for innovation, but it may not be specifically just on the stents. What behooves us is to expand our business, and to some degree, or to a large degree, that is M&A. In our case, it's been a lot of small-ball M&A and looking to expand around those businesses might require those kinds of things. Well, MitraClip is very significant that way. We look at expanding into structural heart or heart failure or other categories, and we're trying to build our breadth in those other categories. I don't think that's very different for any of the companies in this business worldwide. I think it's been difficult for any market that has been kind of a robust innovation-driven growth that this one did back in early 2000s. It's a different market today, and it's a different market everywhere. So, is it a slower growth market? Yes. Is it still a very attractive market? Yes. It's still a very profitable market for all participants, and it's why it gets a lot of pressure from a cost standpoint from payers, etcetera. I don't think that's a secret to anybody. So while others may make performance evaluations of the business and say, ‘Gee, it's a little lower than expectations,’ I'm beginning to think it's just robustly adjusting our expectations to sort of a reality of the value propositions in the market today. I believe in the medical device space right now and long term, but I don't think it will be the same kind of space it was 10, 15 years ago.

You had mentioned priorities. Is vascular higher up on your priority list now?

Well, that implies it wasn't before. I would say the device space has always been high on my priority list.

Good morning. Thanks for taking the question. It's just a one clarification question and then two real questions. On the emerging market growth in Q4, can you give us the trend of the organic constant currency growth for this quarter, please?

Yes. Larry, if you look at the quarter and take out the impact of what we talked about—a little bit slowed in Venezuela throughout the year—we are in the double-digit range for emerging markets across Abbott's businesses. The emerging market momentum.

Sorry, Brian, that was for Q4 2015?

Q4 2015. And for the four years as well, double-digit growth; the underlying momentum continues into '16 as well.

Okay. Thanks for that. And for my two real questions, one is on deal size. Miles, you've talked about in the past a sweet spot of $5 billion to $7 billion. That's one thing you haven't touched upon this morning. Any color on that? Is that still the case? And then I had one follow-up. Thanks.

In reality, we've got a lot of capacity, and it just depends. We've obviously done a lot of small things, and small can be measured in a lot of ways. I can remember when I thought a $1 billion deal was huge. Now people seem to think of that as dinky. We've done a lot of things smaller than that and also mid-size. I don't feel constrained at $7 billion. I don't feel constrained at $8 billion or $10 billion. I don't feel constrained. If the opportunity is right, the strategic fit is right, and the valuation is right, I don't feel constrained by size right now.

That's very helpful. I hope you understand the spirit of this question, because it's kind of a question that we'll probably get today. But I was struck by your comment earlier, Miles, when you said every year there's some outlier somewhere when you were talking about Venezuela. In the past, Abbott would absorb those outliers. So I guess why not now, and what can you do to kind of mitigate that in the future? Thanks.

Well, I think that's a good question. And I'd say we always do everything we can to mitigate. Here is what's different this time. Last year exchange was a strong headwind for any U.S.-based multinational across the board. I recall at this very time last year from December to now, both oil and exchange kind of hit. It was a very high level, and much higher level than where we are today. There was this sudden hit in sort of late fourth quarter '14 and early '15, and everybody scrambled to readjust their guidance for the year to try to deal with what they saw coming as currency, and it was already happening. Many companies dialed back to single digit or whatever and laid it on exchange and so forth, which was valid. In our case, we said we think we can navigate through it and we did. We had extremely strong underlying growth in our market as we still do. It wasn't just double digits; it's been healthy double digits all year long. In our case, we navigated through exchange all year long and still delivered what was frankly very differentiated higher growth than many, many of our peers, even multinational peers not in healthcare. We have another year on top of that, okay, same sort of thing. If you look at the exchange rate graphs, who would have thought these exchange rates could, in a lot of cases, be even bigger? Even bigger exchange rates—we want to translate that to have a stronger philosophy on the other side. I think the market is more dependent on oil. When you stack all of these items up, they change the fundamental economics of those countries and so—as a healthcare company, we have to be a little prudent about the medically necessary part. That’s why we are where we are. We’re healthcare providers, and we have been in Latin America and in Venezuela for decades. A lot of foreign companies exit from those countries immediately when the economics turn sour. But we continue to have medically necessary products there at a much lower promotional level.

Very helpful, thanks Miles.

Thanks for the question. Miles, hard to resist just asking one more question on Venezuela, and I totally understand the point you were making there. But you sort of said in your last comment that maybe a quarter or two of headwind. Wouldn't it be more prudent to think this might be a couple of year issue and might be structural? And then just as part of that, maybe for Brian, is the simple monkey math on this - you're really growing mid-teens; some of that 15%. If Venezuela is a 5% hit to EPS growth and FX is 10%, that's what you're really growing on a sustained basis.

Yes, let me deal with your Venezuela question first, and then I can let Brian wrap up with, close on what he just said about our growth rate. You know, you could be dead right about Venezuela, but here is the difference for us. We’re healthcare companies, and among our businesses there are products that are medically necessary. We’re mindful that we have medically necessary products. We’re mindful that we’ve been in Latin America and in Venezuela for decades, and a lot of times in the past, foreign companies have exited those countries. Abbott has never done that in 90 years in Latin America and we are large healthcare providers there. My judgment was to de-risk expectations around this and up against that currency backdrop. I’m not certain if it’s prudent to compromise investment in a lot of these businesses. It is a very deep change that we’re both unique and difficult. There is a judgment called, under what conditions do I take Mexico out of the estimates has resulted in decreased market impact, and we will see the long-lasting impact of Latin America in structure markets, but let’s be fair, as we said in February during outlook, it’s certainly unusual beyond what we expected in exchange rates. Brian, can I throw it back to you?

Sure. Rick, when you think about Venezuela and a decision to de-risk this and just assume for a second if that’s your reality, your growth rate doesn't change. Your growth rate will actually become better as you move through time, so nothing’s changed about Abbott’s growth perspective— they may even become better. When you think about what I’ve said and what you’ve modeled in '15, you know that we had mid-teens underlying growth, and if we take these things that we talked about into account and just derisk Venezuela on what it means to our earnings, as well as the FX, you are going to get right back to the mid-teens.