Abbott Laboratories (ABT) — Q4 2018 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; 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 2019. 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, 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 fourth-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 is defined in our earnings news release issued earlier today. With that, I will now turn the call over to Miles.

Thanks, Scott, and good morning. Today, I'll discuss our 2018 results as well as our outlook for 2019. For the full year 2018, we achieved ongoing earnings per share of $2.88, representing 15% growth versus the prior year. Strong performance across our businesses, along with underlying margin expansion and our synergy capture from recent acquisitions, enabled us to achieve EPS at the upper end of the initial guidance range we issued at the beginning of last year despite unfavorable currency shifts as we progressed through the year. With our recent strategic shaping completed, our focus in 2018 was on running the company we've built, and the result was an excellent year by every measure. All 4 of our major businesses performed well, contributing to overall organic sales growth of more than 7%, which is above the initial guidance range we set at the beginning of last year. At the same time, we generated operating cash flow of more than $6 billion, returning $2 billion to shareholders in the form of dividends, and announced a 14% increase in our dividend beginning this year. We also increased our investments in capabilities for the future, including expanding manufacturing capacity in 2 important areas that will drive significant long-term growth: FreeStyle Libre, our revolutionary continuous glucose monitoring system; and Alinity, our family of highly differentiated diagnostic systems. And lastly, following 2 major acquisitions in 2017, we repaid more than $8 billion of debt, which significantly enhances our strategic flexibility going forward. Our performance this past year demonstrates the strength of our strategy and execution. And for 2019, we're forecasting another year of strong financial performance. As we announced this morning, we forecast organic sales growth of 6.5% to 7.5% and adjusted earnings per share of $3.15 to $3.25, reflecting double-digit growth. I'll now provide a brief overview of our 2018 results and 2019 outlook for each business. I'll start with Nutrition, where sales increased mid-single digits in 2018, reflecting a notable improvement in our growth rate versus the prior year. Sales growth this past year was well balanced across our Pediatric and Adult Nutrition businesses. Internationally, our focus on enhancing competitiveness with our well-known and trusted brands led to strong growth in both Asia and Latin America. In China, we saw improvement in both the market and our performance after the government transitioned to new food safety regulations in that country at the beginning of last year. And in the U.S., growth was driven by our Pediatric Nutrition business, led by above-market growth of Similac, our market-leading infant formula brand; and Pedialyte, our market-leading rehydration brand. Overall, the fundamental demographic and socioeconomic trends in the global nutrition market remain favorable, and our position in the market remains very competitive. In Established Pharmaceuticals, or EPD, sales grew 7% in 2018, led by double-digit growth in both India and China. Our strategy in EPD is unique and quite simple: to build significant presence, scale and leadership positions in the most attractive emerging markets where long-term growth in medicines will be driven by aging populations and the related rise in chronic diseases, increasing incomes, and expanding access to care. We've built our business over time through a series of strategic steps to be powered globally but driven locally. Our global scale sets us apart and provides a unique competitive advantage versus local players, particularly when it comes to manufacturing and innovation. And our local decision-making allows us to be nimble and navigate the complexities of each country. Health care spending in most emerging markets is less than half that of developed markets, which means there's lots of room for future growth. And our focus continues to be on strong execution across all elements of our business model to capitalize on the growth opportunities ahead. Moving to Diagnostics, where we've consistently achieved above-market growth with our leading platforms. 2018 was no different with global organic sales growth of 7%. This past year was particularly important as we accelerated the launch of Alinity, our family of highly differentiated instruments in Europe and other international markets. Customer feedback has been outstanding, which isn't a surprise to us given that Alinity was designed based on countless hours of listening to and observing the needs of our customers. These systems are designed to be more efficient, running more tests in less space, generating results faster, minimizing human errors while continuing to provide quality results. In 2019, while the international launch continues to gain momentum, we anticipate obtaining U.S. regulatory approvals for a critical mass of our test menu over the coming months, which will allow us to accelerate the launch of Alinity in the U.S. later this year. 2018 was also an important year for our newly formed Rapid Diagnostics business. We achieved our sales and synergy targets for the year and are very pleased with the pace and progress of the integration of this business. We also made important advancements in our pipeline with new product launches in the areas of diabetes and cardiac care as well as molecular rapid tests for infectious diseases. These new products, along with continued focus on strong execution across our portfolio, will drive accelerated growth for this business going forward. And lastly, I'll cover Medical Devices, where sales grew 9% in 2018, exceeding the initial guidance range we set at the beginning of the year. Strong growth this past year was led by several areas, including Electrophysiology, Structural Heart and Diabetes Care, as well as stabilization in our Rhythm Management and Vascular businesses. In Electrophysiology, growth of 20% was led by our heart mapping and ablation portfolio. During the year, we advanced our product portfolio in this area with the launch of our Advisor HD Catheter, which creates highly detailed maps of the heart. And earlier this week, we announced U.S. FDA approval of our innovative TactiCath Sensor Enabled Catheter, which will further strengthen our competitiveness in this highly underpenetrated market. In Structural Heart, 2018 was a landmark year for our business. We achieved double-digit growth and, perhaps more importantly, announced clinical trial results for MitraClip, our market-leading device for the minimally invasive repair of the mitral valve, which demonstrated improved survival and clinical outcomes in patients with the most prevalent form of this heart disease. We submitted this study data to the U.S. FDA during the fourth quarter to support consideration of an expanded indication for MitraClip. If approved, this advancement would further enhance our leadership position in this large and highly underpenetrated disease area and offer the potential to create a new multibillion-dollar cardiac device market over time. And lastly, in Diabetes Care, we achieved growth of 35% in 2018. Growth was led by FreeStyle Libre, which achieved global sales of more than $1 billion, an increase of 100% versus the prior year. During the fourth quarter, we added 300,000 new users. As of the end of 2018, there are now approximately 1.3 million active users worldwide, of which approximately 2/3 are type 1 diabetics and 1/3 are type 2. In the U.S., we saw an accelerating trend of new users as we ramped up our awareness efforts during the second half of the year, and pharmacy insurance coverage continued to increase, including an emerging trend of seeing Libre granted preferred copay status versus competitive systems due to its compelling overall value proposition. In Europe, during the fourth quarter, we initiated the launch of Libre 2.0, which includes optional alarms that warn patients if glucose levels fall out of range. Due to our unique product design and a highly automated manufacturing process, we're able to offer this feature to Libre users without increasing the cash pay price. This affordable and simple-to-use device is fundamentally changing the way people with diabetes manage their disease. And given the fact that more than 400 million people are living with diabetes around the world, Libre promises to be a significant growth driver for years to come. So in summary, 2018 was another outstanding year for us. We achieved our strategic and financial objectives despite challenging currency shifts during the year. Our top-tier performance demonstrates the strength of our strategy, our portfolio, and our execution. And for 2019, we're forecasting continued strong organic sales growth and double-digit EPS growth. I'll now turn the call over to Brian to discuss our 2018 results and our 2019 outlook in a bit more detail. Brian?

Thanks, Miles. 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 our previous guidance. Turning to our results. Sales for the fourth quarter increased 6.4% on an organic basis, in line with our guidance of mid- to high single-digit growth. Rapid Diagnostics, which was acquired in late 2017 and is therefore not included in our 2018 organic sales growth results, achieved sales of $548 million. Exchange had an unfavorable year-over-year impact of 3.7% on fourth-quarter sales. During the quarter, we saw the U.S. dollar continue to strengthen modestly, resulting in a somewhat larger unfavorable impact on our results in the fourth quarter compared to expectations had exchange rates held steady since the time of our earnings call in October. Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.3% of sales, adjusted R&D investment was 7.2% of sales, and adjusted SG&A expense was 29.2% of sales. Overall, as we look back at 2018, we delivered strong organic sales growth of more than 7%, adjusted earnings per share growth of 15%, and exceeded our cash flow and debt repayment objectives. Turning to our outlook for the full year 2019. Today, we issued guidance for adjusted earnings per share of $3.15 to $3.25. For the full year, we forecast organic sales growth of 6.5% to 7.5%. Based on current rates, we would expect exchange to have an unfavorable impact of approximately 3% on our full year reported sales, with the vast majority of the impact expected to occur in the first half of the year. We forecast an adjusted gross margin ratio of somewhat above 59.5% of sales for the full year, which reflects underlying gross margin improvement across our businesses, partially offset by the impact of currency. We forecast adjusted R&D investment of around 7.5% of sales and adjusted SG&A expense of approximately 29.5% of sales. We forecast net interest expense of around $600 million and nonoperating income of around $200 million. Lastly, we forecast an adjusted tax rate of around 15% for the full year 2019, which contemplates the anticipated impact from U.S. tax reform. Turning to our outlook for the first quarter. We forecast adjusted EPS of $0.60 to $0.62, which reflects strong double-digit underlying growth, partially offset by the impact of foreign exchange on our results. We forecast organic sales growth of a little less than 7%, which contemplates a difficult comparison versus the first quarter of last year, when we saw abnormally strong sales in our Rapid Diagnostics business due to a record flu season. At current rates, we would expect exchange to have a negative impact of around 5.5% on our first quarter reported sales. We forecast an adjusted gross margin ratio of around 58.5% of sales, adjusted R&D investment of around 7.5% of sales and adjusted SG&A expense of somewhat above 32% of sales. Before we open the call for questions, I'll now provide a quick overview of our first quarter and full year organic sales growth outlook by business. For Established Pharmaceuticals, we forecast mid-single-digit growth in the first quarter, which is comprised of mid- to high single-digit growth in our priority key emerging markets, along with a modest decline in other EPD sales, which reflects the recent discontinuation of a noncore low-margin third-party supply agreement. For the full year, we forecast Established Pharmaceuticals growth of mid- to high-single digits. In Nutrition, we forecast low- to mid-single-digit growth for both the first quarter and the full year. In Diagnostics, we forecast Abbott's legacy Diagnostics businesses, which is comprised of Core Laboratory, Molecular and Point of Care, to grow mid- to high-single digits for both the first quarter and full year, driven by the continued strong sales momentum across our portfolio of instruments. Rapid Diagnostics, which will now be included in our organic sales growth results in 2019, is expected to be relatively flat in the first quarter, reflecting the difficult flu season comparison I mentioned earlier. For the full year, we forecast Rapid Diagnostics growth of low- to mid-single digits. And in Medical Devices, we forecast high single-digit sales growth for both the first quarter and the full year, which reflects continued double-digit growth in several areas of the business. With that, we will now open the call for questions.

Wanted to ask about FreeStyle Libre to start off. You had another good quarter of patient adds, and it seems like you're expanding more into type 2 with the new disclosure. Could you talk about the trends there, what's the 2.0 adds and some of your longer-term vision for Libre?

Yes, Matt. There are several things to mention about Libre. First and foremost, it's performing exceptionally well. We added 300,000 patients last quarter, which is nearly equivalent to the total user base of our second-largest competitor. Currently, we have over 1.3 million patients, with two-thirds being type 1 diabetics. Our aim with this device is to cater to the entire diabetic community rather than focusing on a niche, as we believe it has significant mass-market potential globally. We are actively targeting both type 1 and type 2 segments, and we are seeing strong results in the type 1 segment. As our capacity grows, we plan to increase our efforts to reach more type 2 patients. There is a steady stream of product enhancements. We recently launched version 2.0 in Europe, which is expected to be available in the U.S. soon. We've invested significantly in expanding capacity, something we've been mindful of for a couple of years now. A substantial increase in capacity is expected to be operational in the latter half of this year, which will enable us to broaden our reach. We are currently achieving considerable success with Libre without much promotional effort, and once we amplify our marketing, we anticipate even greater success. Additionally, we have ongoing capacity additions planned. Given the size of the diabetic market for both type 1 and type 2 diabetics, we believe our product has to provide a value proposition that is accessible and affordable for all, rather than relying heavily on rebates. Our pricing strategy is very competitive, and I believe this is resonating well with our markets and patient groups. The product is receiving significant development focus and I consider it a major long-term growth opportunity for the company. I can't emphasize enough how positive this situation is.

Yes, it's been phenomenal growth. I was just curious, as you look forward in segmenting the market, you now have Libre 2 with alarms. You have a partnership with a pump company. Can you talk about how you might bifurcate your strategy to go after different segments, whether you need a low-cost offering and a higher feature offering as you kind of expand through the Libre portfolio?

I will be cautious about what I share publicly regarding our product development, but you can assume we are progressing well on all fronts. I am not ready to provide specific timelines, but the current growth rate and our ongoing feature additions are telling. We are focused on enhancing our capacity, and while we are not constrained yet, we are adding 300,000 patients every quarter, which is growing. It's important to maintain that momentum. At this stage, with such a substantial patient base and the size of the opportunity, we aim to make this a mass-market product. There are 40 million individuals with type 1 diabetes, and we believe everyone in that group should be able to afford this product globally. Additionally, there's a vast market for type 2 diabetes patients beyond that. This product is not limited to just type 1 or type 2; its accuracy and effectiveness are relevant across all segments. Our cost structure is among the most competitive in the industry, and we have the highest patient volume. We can confidently recognize ourselves as the leader in continuous glucose monitoring, growing faster than anyone else. We are actively collaborating with various third-party partners who can leverage this technology, and these efforts have been ongoing for quite some time.

Miles, maybe I can ask a guidance question. So Abbott's guidance for 2019 is 6.5% to 7.5%, basically in line with 2018 and a bit better than what the Street was expecting to start the year. So maybe you could give us a little background on what your confidence is at the starting point? And maybe specifically, touch on some of the key growth drivers for 2019 that people are focused on. MitraClip, you talked about Libre, and maybe hit on an Alinity.

Yes, well, I think you've touched base on several of them already. What you should read into that guidance is we had an outstanding '18, and we just gave you guidance that's even better than '18. The underlying growth rates are strong. The pipelines are strong. It's all organic growth. It's not dependent on lapping an acquisition. It's not driven by lapping an acquisition. It's not dependent on acquiring something. All the things that are driving our growth are coming right out of our own pipeline and launching globally. If I take that a piece at a time, Libre as a story just gets better and better and better. That's a pretty big and high-growth driver. That's a good thing. The Alinity program has had an outstanding year rolling out in the Core Lab, which is primarily driven by Europe. We haven't really unleashed it yet fully in the U.S. or even fully in Asian markets. And as that menu reaches what I'll call critical mass, that will tip up as well. So far, everything we've seen with the rollout in Europe has been exceptional. Our share capture, our retention of rolling over a lot of our own customers and our own installed base, our price point and value point are extremely competitive, but they're better than that. So that's going well, and that momentum only gets better as we expand geographies. Frankly, there are a couple of aspects of that program that haven't really gone to market yet fully, our hematology piece, etc. So I think those are strong drivers. When we acquired Alere in the diagnostic space, it was a declining to slightly flat business. That's been a nice story for us in terms of integrating it. We're going to be looking for now improving the growth of the new product pipeline and momentum going forward in that business, which is incrementally positive for the business. As I already mentioned, Nutrition, compared to the prior 4, 5 years, has a nice, steady, sustainable forward-looking growth in the, let's call it, 3% to 5% range, somewhere in there. That's a plus; that's an upside. The pipeline in devices is strong. It's good. I mean, we spoke earlier in the year about the COAPT trial driving MitraClip in Structural Heart. There's a nice pipeline of products and enhancements coming behind that. We just launched or got approval for HeartMate 3 for destination therapy, some additional catheters in our Electrophysiology business that help us be even more competitive than the 20% growth rate we've got now. Just everything across the board gets better. Where do we see problems? Well, we've got a couple of places that we're not too happy about our own performance in. We know neuromod is a super good growth business. We expect to see sequentially improving growth out of that business over the course of the year. I've talked about that on previous calls. We believe we're in control of our destiny there. If anything, I probably estimated the speed at which we could correct our direction there wrong. It's taken a little longer than I would have guessed. But that's going to get sequentially better, and I think that's a plus. The Point of Care business that's part of our Diagnostic business, not Alere but our own Point of Care business, we had some corrections to make in our strategy, and we've done that. I'm quite optimistic that our management team there has a good path, a good management team, etc. That'll improve. So if I had a concern at all, it's the things I can't control. I think our fundamental underlying strategy in the pharmaceutical business is solid. I think the underlying growth rates in emerging markets are solid. I know the world worries about the volatility of those markets and the reliability of those markets and, in particular, currency. We're all going to live with currency if we're a multinational company, and I don't think we're any different. To be honest, we're not that differently indexed now with the addition of Medical Devices and Diagnostics and so forth in the company. While we may have individual spotty circumstances in any given emerging market in any given year, which we expect, I think the underlying growth of that business driven by the development of those economies and the health care systems is solid. I look at all aspects of the company. Whenever we're not performing where we think we should in a given business, we take corrective steps. As I look across the portfolio, every single business that had such a great year last year actually had a little better one this year or a lot better one this year and on a sustainable basis going forward. Looking forward into '19, there's a lot of caution in the world about economies and any number of other things. We base our growth rates and our growth projections on our products, on the market dynamics we see in each of our product areas in the segments we compete in. We've got a rich portfolio of products right now and a rich portfolio of products coming out of our organic R&D and a lot of longevity on the driving of those products in the market for years to come. Whatever the windiness of the currency markets or other things may be, we've demonstrated through '18 and will demonstrate into '19 that we can power through that and continue to deliver the kind of growth that our shareholders reliably expect.

Great, that's really helpful. And maybe one for Brian. On the bottom line, EPS guidance implies growth of 9% to 13% on a reported basis, closer to mid-teens on a constant currency basis. This is higher than what we've seen in the past from Abbott but also off the higher starting top line. So as we go through the year, if there's incremental upside, how should investors think about the willingness to allow that to fall to the bottom line versus reinvesting in the business at these growth rates?

I'll defer to Miles on that question because I know he makes the choices ultimately between the balance of growth, the sustainable growth versus what we give back to shareholders. But I think we've shown a good propensity to be balanced in that. We showed that demonstration even last year as we gave some pennies back to investors when we had a variable tax rate but invested heavily in the growth opportunities that Miles talked about that create the kind of sustainable growth that we're looking for. Your math is right. I said back on the October call that exchange would be around 4% to the bottom line impact. It's just a little touch above 4%. You could imply that, that would mean about mid-teens EPS growth. Even as you look at our quarters, I mentioned in my script that FX would be more front-end loaded. It's a first half phenomenon. The underlying growth that we're portraying for the first quarter and the full year is pretty range-bound in that underlying double-digit earnings per share growth of the mid-teens, plus or minus a couple of points. There's a lot of underlying gross margin improvement still ongoing across our businesses. There's a lot of synergy still being captured in gross margins as well as in SG&A as it pertains to our continued integration with St. Jude and also with Rapid Diagnostics. So you're seeing the margin expansion come through in our operating margin line in our guidance.

Yes, I'd like to emphasize a few points. This is Miles. First, Brian mentioned that the exchange rates we currently see are already included in our guidance, and we are still expecting double-digit EPS growth. The exchange impacts we are factoring in relate to last year, specifically 2018, which we need to account for. This has adjusted our expectations from what would have been 15% down to 11% at the midpoint. We're still looking at healthy double digits, mostly due to the impact of lapping last year's guidance. None of us are currency experts, so it’s challenging to predict what will happen this year, and I’m reluctant to make forecasts due to potential uncertainties. However, in terms of profits and performance, the company has consistently been in a strong position with solid profits and cash flow. We approach every year with a double-digit growth target and set high expectations for ourselves. Typically, this is where we start with our guidance. Over the last 11 years—limited to this timeframe due to the lack of data beyond that—we’ve reported 44 quarters, beating expectations in 39 of them and meeting expectations in 5. The company has shown that when we surpass expectations, whether those are our own or Wall Street’s, we pass that value back to our investors through increased profitability or returns. There’s no reason for that to change. Our strong cash flow allows us to meet all our investment and dividend needs. We have the ability to buy back shares to counteract dilution, and we can also buy back shares if it's our best investment option. Furthermore, we have the capacity for mergers and acquisitions, and we've been able to pay down debt quickly to maintain the balance sheet flexibility we desire. With strong performance, profitability, and cash flow, if we exceed our expectations, we can choose to share that success with our investors, which is what they expect. Investors have benefitted in about 90% of the quarters over the last 11 years.

Miles, just a couple for you. In thinking about or listening to your commentary on 2019, the one comment that comes to mind was balance; your commentary that most businesses get better or a lot better. That being said, a lot of investors are still very focused on Libre and MitraClip. So as you think about the guidance and how it was formulated, how dependent is 2019 guidance on a significant inflection for MitraClip or a Libre 2 product launch?

Zero.

Okay, that's pretty clear. I guess we can leave it at that. The second point, so...

No, it is very hard to predict the timing of regulatory approvals, such as for MitraClip. There's no benefit in making uncertain predictions about it. What we do know is that once it arrives, it will be significant, but several factors need to align, including FDA approval and CMS reimbursement. The COAPT study was strong, and I believe the regulatory bodies will take it seriously. However, estimating the timing is challenging, and it wouldn't serve our investors well to make predictions. What I do know is that it is compelling, and when it arrives, it will have an impact. We haven't factored it into our estimates.

Okay, very clear. And then just following up on another point you made this morning. Thinking about the balance sheet, you went from 2 years ago an overlevered company to now, frankly, relative to peers an underlevered company. I think debt paydown and free cash generation were sort of unsung heroes of last year. So many other companies have picked up the relative pace of M&A. You're still growing at a pretty robust 7-plus percent rate without significant M&A the last couple of years. So where do you stand now as you think about reinvestment for growth? How active are you likely to be in '19 relative to '18 on the M&A front?

I would like to highlight a few points. Firstly, the highest returns come from organic growth rather than mergers and acquisitions. Many M&A deals often fail to deliver good returns to shareholders. Historically, we have an excellent track record with companies like Knoll and Humira, as well as our overall M&A efforts. The returns from organic growth are significantly higher. Currently, our growth across all our businesses, including St. Jude, is driven by our own development efforts. This presents us with the best return opportunities, and at this moment, we don't see any gaps that need to be filled through M&A. This allows us to achieve robust sales and profit growth. We have also been prudent over time; there are appropriate times for M&A and times when it is not advisable. High valuation multiples typically indicate it is not a good time to acquire. Right now, there isn't anything particularly attractive that we consider a good direction for us. Furthermore, while I cannot disclose specific areas we might explore, our strong results with our own organic products and execution mean we do not require outside acquisitions. We are aware of various opportunities presented by investment banks, but they do not align with our criteria. I do not find anything compelling or necessary at the moment. We are fortunate to possess strong products, pipelines, and strategies across all our businesses. While there is always room for improved execution in certain areas, that cannot simply be purchased; it requires our talent and strategies. Thus, we do not see the need to allocate funds towards M&A as I believe it would not yield better returns for our shareholders now or in the foreseeable future. We will generate greater returns for our shareholders by investing in our growth, product lines, expansion efforts, and capital. We are in a strong position with ample cash flow to support these initiatives and continue increasing our dividends. In the future, we will have decisions to make regarding capital allocation. We intend to continue paying down debt, as it is prudent. Our net debt-to-EBITDA ratio is now below 2, significantly reduced from around 4 to 4.3 after completing the Alere and St. Jude acquisitions. We've made substantial progress in lowering our net debt-to-EBITDA ratio quickly, especially in a potentially rising interest rate environment. We believe we are managing our balance sheet effectively. I aimed to reduce debt rapidly; we have succeeded. I wanted to ensure strategic flexibility, which we have achieved. My primary goal is to have the flexibility in capital allocation to achieve optimal returns for our shareholders, and we are currently in that position. Therefore, I do not see M&A as a high priority at this time.

I'm going to take the flip side of David's question. Instead of thinking about M&A and adding things, how do you feel about having all 4 legs of the stool remain in the Abbott house? I think there was some lay press discussion regarding a possible sale of the nutritionals business.

Well, I get that speculation; jeez, if I don’t get it every quarter, it’s almost every quarter. So thanks for asking the question, Joanne. We like our mix right now. There's a role to everything in our portfolio. The one I'm asked more frequently about than anything is Nutrition. You can transact, you can try to make money for your shareholders with transactions, but I would say this: as you know, Joanne, I've been in this job a long time. Early in my tenure, there was a role for Nutrition in our portfolio. One of the roles was it's got a global presence, global infrastructure. It's highly profitable, generates a lot of cash. A lot of the M&A activities we did in my earlier years benefited from the cash flows and position of Nutrition. There are great benefits to our Nutrition business to the company today. I don't think we need to be considering a transaction just to do it. We're well valued, we're performing well. I don’t think I would create more value for our investors by separating it. If everybody asks you about it often enough, you go look at it. Okay, I've looked at it. I don’t think we can create differential improved value for our shareholders than what is already being executed by us. That’s a plus. I think, in general, while a lot of people might ask me about it, it’s also performing well. I'm happy that it's performing better than it did for a couple of years. So it's just not on my radar screen. I don't think we're going to improve Abbott. I don’t think we're going to create value by considering it. I don't think it’s beneficial to us. That's the simplest thing to say.

Okay, appreciate that. As a follow-up, 2 businesses I just want to talk about the pipeline. Neuromod, what does it take to reaccelerate that growth rate? And then you talked about an Alere pipeline, which I don't think the Street is really focused on. If you could just give us some highlights there.

Yes. So first of all, the single biggest thing that immediately will change how we're doing in neuromod is actually our sales force expansion in the U.S. and our training and execution there. That's what we're focused on. Longer term, we put a lot of emphasis in our R&D pipeline. We have a number of new people, new management, broader pipeline under development; I’m not going to give you any kind of insights to it because I don't really want to get the world focused on it. There's a lot of opportunity in the types of products we have. We don’t think we've fully gotten the benefit of the 2 main products we have now. We've doubled our investment in R&D there. I think in the coming years, we'll see that roll out. What was the second part after neuromod? Rapid Diagnostics. We've reorganized the Rapid Diagnostics business into 4 segments. Each of them has their emphasis, their target. Each has an R&D plan. Each has a new product plan. We are increasing our investment in R&D also there. I can give you a couple of high points and examples: Infectious disease product, ID now, which we think has a lot of potential that we're rolling out. The Afinion 2 cardiometabolic platform, another opportunity we're putting emphasis behind. There's generally a lot more possibility for us in incrementally updating and renewing a number of these platforms, and there are newer products than that. When we took over the company, which we've now had in our possession a little over a year, one of our targets was to get our hands around the R&D of each of these segments and make sure we had an R&D plan in place, so there was a steady cadence of improvements and new products in each of these businesses. That does take a little time. In our first year, a lot of our focus was stabilizing the organization, its structure, the management, people, execution of what we've got, synergies, etc., which we've talked about. Now our attention turns to this, and it has been. We've been increasing our spending and increasing our focus on this. The management team is focused on new product cadence. Beyond that, I don't want to be more specific. Otherwise, we'll be tracking it all here.

I would like to follow up on the earlier discussion about MitraClip due to its visibility. Can you provide us with the growth rate of MitraClip in the fourth quarter? Additionally, to clarify your previous comments, do you not anticipate U.S. approval and reimbursement for MitraClip in FMR at all in 2019? Is that completely off the table?

No, that's not what I said, and that's not what the question was. I'm not assuming that. But the question was whether or not that was pivotal to making our earnings guidance for the year or our sales guidance. And the answer was, it has no bearing on our sales and earnings guidance for the year. But you're asking me a different question now, do I expect approval? I'd say, well, we'll see. I mean, we're certainly hopeful that we'll get that kind of consideration. Is it possible? I suppose it's possible, but we just don't know.

With respect to the MitraClip growth rate, MitraClip grew about 30% in the fourth quarter.

Okay. So it accelerated a little bit. Okay, I hear you on MitraClip. And then the other sort of product-oriented question that I wanted to ask is that you mentioned in your remarks that Libre is getting some preferred copay status. I found that intriguing. I was just wondering if you could expand on what that means specifically, how broad the program is. Is that just because Libre is a little lower cost? Or are payers trying to incentivize patients to use Libre? So maybe just a little color on the copay status.

As you think about copay status and the way payers use it, that is essentially what they're trying to do, is they're trying to incentivize a preferred offering with respect to the value proposition that that offering brings. As we progress in the second half of the year in our payer dialogue, we saw that certain payers were starting to put Libre in a higher tier, Tier 2, which would result for the end patient in a lower copay, quite frankly. I think as they look at the overall value proposition, the outcomes data and whatnot, they see a compelling argument to do it, and we're starting to see that trend.

I have two questions regarding devices. First, I noticed that Rhythm Management declined by 2% to 3% this quarter. Is this due to market softness or are you losing share to Boston Scientific because of their HeartLogic feature, or to Medtronic because of their leadless pacer, Micra? My second question is about the Vascular business, which decreased by 5% in the U.S. This is surprising, especially considering the launch of XIENCE Sierra. Is the U.S. market for drug-eluting stents simply weaker, are you facing more pricing pressure, or is the product not gaining the expected traction?

I'll start with Rhythm Management here. As you know, when we acquired that business, it was declining at a fairly heavy clip. We've been able to stabilize it. The overall market, to your point, is down modestly, and our performance is generally in line with that. When it comes to Vascular, same thing. Again, the market is down modestly. XIENCE Sierra is doing well. It's capturing share. In fact, we gained about 5 share points since the launch of XIENCE Sierra. Pricing in the space remains a challenge for all of the market, but XIENCE Sierra is definitely performing there. Quite frankly, our performance overall is a little bit above the market.

Glenn, what you're also seeing there is a reduction in third-party royalty revenue, not share. The stent and the system, XIENCE Sierra, are capturing share, but what you're seeing is the roll-through of the loss of a third-party revenue.

Okay. And one follow-up. Can you give us an update on both your TAVR and mitral program? TAVR, specifically Portico, when do we see a U.S. filing and approval? And then mitral, update on Tendyne enrollment and then maybe comment on the latest acquisition.

On TAVR, we would expect to file that here in the second half of this year. We're wrapping up that trial as we speak. With respect to Tendyne and Cephea, obviously, we're expanding them. We've had a long-term vision here in the mitral space to really build a toolbox. Tendyne, we filed actually for CE Mark before the end of last year, so we could possibly see approval here this year. The U.S. is still several years away. The Cephea program looks like a really great program, but again, still several years away.

Maybe just one big picture and one product question. Brian has done and the team has done a fabulous job paying down debt. You highlighted some thoughts about your comfort in not doing M&A in today's portfolio. Obviously, that suggests share buyback and dividend. You've touched on it a little bit. But just wondering, are you feeling strongly about taking your excess cash and dividing it equally depending on stock price? I mean, do you have a priority? How are you thinking about it?

No, I don't think about it as dividing it equally. For any particular capital use, there's a timing, and there's a need. If we got to invest in capacity internally and manufacturing and so forth, obviously, that's a good thing. We can afford all of that and more. We're keeping our dividend healthy. We target our dividend generally in a range of 40% or higher of our EPS as a payout ratio, a nice healthy range. A number of our peer groups don't do that at all. I think we've got a good healthy dividend. That matters to us because we have a large segment of investors that care about that. With regard to M&A, M&A is necessarily opportunistic. It depends on the product, the company, the business, the timing, market values, multiple, all sorts of things. Right now, I don't see any of that lining up to say, "Wow, there's something we're dying to go look at." With regard to share buybacks, it sort of depends on valuations in the market. There are times when share buybacks aren't that economical and other times when they're high return. In our case, right now, we've got the flexibility. If we want to do any kind of share buyback just to offset dilution, we can do that. But I think you've got to look at it and say, "Is that my best use of cash?" I still want to pay down debt. I don't want to assume we're just going to carry this forward. We paid down a lot of debt fast. It would actually be in our interest to keep doing that. I think we're well into a reasonable range of debt now, but we still want to keep paying that debt down. A couple of years down the road, depending on what happens with interest rates, we'd probably be glad we did, and we'll have tremendous strategic flexibility and still strong cash flow. It just depends on circumstances at a given point in time.

Yes, that's a great answer. Just last, maybe quickly, I know you love to talk about what could push you to the upper end of your 6.5% to 7% guidance for '19. But there were some wild cards that helped out. You exceeded your initial 2018 organic growth guidance in '18. Maybe just touch on quickly, if you would, what could push you to the upper end or above for your '19 range?

Oh, I think there are a number of product things that could do that. We've already mentioned MitraClip is a possibility. It wouldn’t take a whole lot; a couple of ticks in any of these businesses of improvement would make a big difference. Last year, our Nutrition business actually did better than we expected. We thought it would do better than prior years, but it outperformed. Some tick-ups make a big difference. If we turn the corner as we expect to and plan to, things like neuromod and other places where we know the fundamental underlying business is strong, it doesn't take a lot to correct the underperformance. Whether it's our Point of Care business or neuromod or some individual countries in the pharmaceutical business, the upside here is fairly strong.

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 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today.