Abbott Laboratories
Q3 2012 Earnings Call Transcript

Published: 17 Oct 2012

[Operator:]

Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. John Thomas, Vice President, Investor Relations and Public Affairs.

[John B. Thomas:]

Good morning, and thanks for joining us. Today, we'll discuss our third quarter ongoing earnings results, as well as provide new information regarding the separation of Abbott's proprietary Pharmaceutical business into a new independent company called AbbVie. Joining me on today's call is Miles White, Chairman of the Board and Chief Executive Officer of Abbott; Tom Freyman, Executive Vice President, Finance and Chief Financial Officer of Abbott; Rick Gonzalez, who will become Chairman of the Board and Chief Executive Officer of AbbVie; Bill Chase, who will become Executive Vice President, Finance and Chief Financial Officer of AbbVie; and Laura Schumacher, who will be Executive Vice President and General Counsel of AbbVie and head of a number of corporate functions, including Licensing and Acquisitions, External Affairs and Investor Relations. Also joining on today's call is Brian Yoor, who will become the new Head of Investor Relations of Abbott post separation. Brian has been with Abbott in numerous financial roles for 15 years, most recently as Controller of our diagnostics division. Larry Peepo, who is also on today's call, will remain Divisional Vice President of Investor Relations at Abbott. I will be moving over to AbbVie to head Investor Relations and Public Affairs. Today, Miles will begin with an update on the separation, as well as our outlook for the new Abbott. Tom will provide a brief overview of our third quarter performance and then provide some additional context for how we're planning to launch 2 new independent companies in January of next year, including their respective capital structures, as well as annual dividends. They'll also provide some additional detail on our 2013 for the new Abbott. Following Miles, Tom and Rick, we'll provide an overview of AbbVie and its future outlook, and Bill will cover AbbVie's third quarter results and provide some further context on 2013. Following our comments, as we normally do, we'll take any questions that you might have. Before we get started, some statements may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the planned separation of the research-based pharmaceutical company from the diversified medical products company and the expected financial results of the 2 companies after the separation. Abbott cautions that these forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements, and there's no assurance as to the timing of the planned separation or whether it will be completed. 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, 2011, and the interim reports filed on form 10-Q for subsequent quarterly periods. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. In 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 measure in our earnings news release and regulatory filings from today, which will be available on our website at abbott.com. And with that, I will now turn the call over to Miles. Miles?

[Miles D. White:]

Okay. Thanks, John. Good morning. One year ago this week, we announced the most significant transformational event in Abbott's 125-year history, our decision to separate into 2 leading public health care companies with completely new and unique investment identities. So today, in addition to reviewing our third quarter earnings, we're going to give you some additional insight into what these 2 companies will look like going forward beginning in 2013. With regard to our third quarter results, Abbott delivered another quarter of strong performance, with ongoing earnings per share growth of more than 10%. In addition to generating strong operating results, we are continuing to prepare for separation. We've completed a significant amount of work since last October, and both companies are ready to operate independently beginning January 1. Over the past year, we've taken a number of steps to prepare AbbVie to become a new company. We've named the leadership team, designating several senior leaders who will move from Abbott to AbbVie, which will complement the strong commercial and operational leaders who are currently part of our proprietary pharmaceutical business. As we announced last year, Rick Gonzalez will become AbbVie's Chairman and CEO. Rick has more than 30 years of Abbott experience and has been Executive Vice President of our global pharmaceuticals business for the last 2 years. Laura Schumacher, Abbott's current Executive Vice President and General Counsel and a more than 20-year Abbott veteran, will lead that function at AbbVie as well as a number of corporate functions, including Licensing and Acquisitions, External Affairs and Investor Relations. And Bill Chase, who is currently Vice President of Licensing and Acquisitions at Abbott, will become AbbVie's CFO. Bill has been at Abbott for more than 20 years also serving as Corporate Treasurer and the Controller of the International Pharmaceutical Division. We've also continued to strengthen AbbVie's mid- and late-stage pipeline since our separation announcement last year, and we've seen impressive progress from later-stage development programs, such as Hepatitis C, which you heard a little bit about earlier this week. In addition to an advancing pipeline, we understand that investors do seek a positive return while that pipeline continues to progress. As you know, AbbVie generates robust cash flow and is committed to returning cash to shareholders. AbbVie is expected to pay a strong attractive dividend, which Tom and Bill will discuss in more detail later in the call. So the separation we announced 1 year ago is nearing completion, and our shareholders will soon benefit from 2 fundamentally different investment opportunities with distinct strategic profiles and business priorities. The AbbVie Form 10 has provided some perspective on the pre-separation financial profile of AbbVie and a Form 10 amendment filed last month outlined the AbbVie capital structure and pro forma interest expense. We recognize that investors and analysts need more information to help them model both companies separately. So as the next step of this process, today we'll provide some additional information on separation-related aspects of the AbbVie P&L, including the tax rate, interest expense and costs for AbbVie to run as an independent company. We'll also provide some other aspects of the P&L profile for both companies. Although it's too soon for a specific 2013 EPS guidance, our intent is to help you establish a baseline for both companies, each of which will have a different profile after the separation. Tom and Bill will cover the profiles for the 2 companies in their remarks. We've structured both companies for future success and have taken the actions necessary to support the unique attributes of each company. AbbVie will be a large cap biopharmaceutical company with a number of differentiated growth brands, including a sustainable biologic, HUMIRA, and a compelling pipeline. It generates significant cash flow and will have the appropriate capital structure to support strong returns for shareholders, including a strong dividend. As you know, I will continue to serve as Chairman and CEO of Abbott, so let me take a few minutes now to provide some brief comments on what the new Abbott will look like in the future. As of the 1st of next year, Abbott will be one of the largest diversified health care products companies in the industry. It will be comprised of 4 roughly equal-sized businesses

[Thomas C. Freyman:]

Thanks, Miles. Today, we reported ongoing diluted earnings per share for the third quarter of $1.30, an increase of 10.2% over the prior year and above our previous guidance range. Sales for the quarter increased 4.1% on an operational basis, which was more than offset by an unfavorable 4.5% impact from exchange rates. As we saw last quarter, there continues to be a significant impact from exchange on top line results. Emerging markets remained a significant growth contributor, with sales in the quarter of $2.6 billion, an increase of more than 10% on an operational basis. Regarding sales for what will become the new Abbott businesses, there have been 2 factors that are transitional in nature that have impacted growth trends. The first is the decline in the Promus-related revenue and our Vascular businesses as we no longer provide products under the previous distribution agreement. And the second is the shift to direct distribution in certain international nutrition markets as part of our gross margin improvement initiative. Excluding these transitional factors, a new Abbott operational sales growth is in the mid-single digits year-to-date. We saw a continued improvement in the adjusted gross margin to 63.8% in the quarter, up 340 basis points from the prior year. Half of this improvement was due to exchange, while the other half resulted from the various margin improvement initiatives we're implementing across our businesses. Year-to-date, we've seen our adjusted gross margin ratio increase 310 basis points over the prior year, with nearly half of this improvement driven by the effect of the changes in foreign exchange rates on the ratio. Again, the remainder of this improvement resulted from our margin improvement initiatives. Those of you who have followed our results over the years know that the extreme volatility in exchange rates has both positively and negatively impacted the adjusted gross margin ratio, depending on the year, by as much as a full percentage point or more. You may recall that 2010 was favorably impacted, 2011 negatively impacted, and we are again seeing a favorable effect this year through 3 quarters. Looking ahead to the fourth quarter, we expect this trend to reverse, with exchange negatively impacting the ratio by as much as a full percentage point. As we see things today, we'd expect this trend to continue into next year, with exchange negatively impacting the gross margin ratio for both Abbott and AbbVie. Turning to our full year 2012 outlook. We're narrowing our ongoing earnings per share guidance range to $5.06-$5.08, reflecting growth of 8.8% at the midpoint. This 2012 guidance continues to reflect a full year outlook for the company in total, as the separation is expected to be effective January 1. We're pleased with our overall performance this year, delivering ongoing earnings per share growth ahead of our original guidance provided back in January, despite the challenging global economy and currency headwinds affecting sales. Regarding the fourth quarter, we expect reported sales growth in the low- to mid-single digits, which includes an estimated negative 1% impact in foreign exchange. Both our fourth quarter sales forecast and EPS expectations for the year assume that a generic TriCor enters the market in the fourth quarter. We expect a gross margin ratio of around 63%, including the exchange effect discussed earlier. As we are now further along in our separation process, as Miles indicated, today we're in a position to give you some more information regarding certain aspects of the financial profiles of new Abbott and AbbVie once separated. While we're providing this additional information today, I'd again note that it's too early in the process for either company to provide EPS guidance for 2013. Between now and January, we'll continue our usual planning process. While the profile information we'll provide for each company today could change somewhat over the coming months, each company will be ready by its fourth quarter earnings conference call to provide more specific details of its 2013 outlook, including EPS guidance. Those forecasts will reflect the latest assumptions on business and economic factors, including foreign exchange. As we previously indicated, the primary rationale for the separation is the fact that these 2 businesses have evolved differently and as a result, they have different investment identities. These differences are broad and deep, and they affect how each company plans to structure and run its business going forward. So let me start with dividend policy. The dividend has always been an important component of Abbott's investment identity. We had previously indicated that we expected the combined dividend of the 2 companies to be at least equal to Abbott's pre-separation annual dividend. And we expect AbbVie to be even more focused on shareholder returns in the form of dividends, paying a larger portion of the dividend. With this in mind, today we're announcing that we expect AbbVie to pay an annual dividend of $1.60 per share, starting with the quarterly dividend to be paid in February. This, like all dividends, will be subject to approval by the future AbbVie board in January 2013. We're also announcing that we expect the new Abbott dividend to be $0.56 per share, in line with its peer group and growth prospects, again, starting with the dividend to be paid in February and again, subject to approval by the Abbott board. In the end, this combined annual dividend rate of $2.16 for the 2 companies exceeds the current annual dividend rate of $2.04. And this increase is expected to be implemented 1 quarter earlier than in past years. Regarding debt and related interest expense, as Miles indicated, last month we provided the pro forma capital structure for AbbVie and an amendment to the Form 10. Consistent with our previous commentary, the pre-separation debt has been apportioned roughly in line with each company's share of the pre-separation cash flows after dividend and capital expenditures. As a reminder, this rebalancing of the debt will be accomplished by the following actions. First, AbbVie is expected to raise just under $16 billion in total debt. Second, AbbVie will provide a net cash distribution to Abbott of around $8.5 billion. And finally, Abbott will use the proceeds of that distribution to execute a tender for a portion of its debt outstanding and to pay down a portion of its commercial paper outstanding. As a result, the new Abbott expects to carry approximately $7.5 billion in debt as of the separation date, consisting of long-term debt, commercial paper and other short-term borrowings. Abbott expects to have around $5 billion of cash on the balance sheet post separation. As detailed in our earnings news release today and as discussed last quarter, as a result of the low interest rate environment, we expect one-time charges to be incurred in the fourth quarter related to the debt extinguishment cost, driven by higher interest rates on the existing bonds compared to the rates currently prevailing. The resulting capital structure of each company will determine ongoing interest expense for each going forward. For new Abbott, net interest will be driven by its remaining debt outstanding, including the impact of existing interest rate swaps partially offset by interest earned on cash balances. As you know, interest earned today on cash is very low. As a result, we're forecasting net interest expense of a little more than $100 million in 2013 for new Abbott. Bill will discuss the outlook for AbbVie's net interest expense in a few minutes. Regarding taxes, we believe that the tax rate for new Abbott will be approximately 21.5% in 2013. We will need to see what, if any, congressional actions may occur at the end of the year or the early part of 2013 to determine our final estimate for the tax rate. Regarding AbbVie, as an independent company focused on returns to shareholders, management plans to establish an appropriate balance across its global cash flows to provide maximum flexibility. As a result, we expect an ongoing tax rate of around 22% for AbbVie. While this rate is above the historical average for this business, it's reflective of a shift in emphasis from investing in successful x-U.S. growth opportunities in the past to a stronger emphasis on shareholder returns going forward. This rate will support AbbVie's strong dividend policy. We're also in a position at this time to clarify the profile of some other line items of the new Abbott P&L. Bill will discuss AbbVie's profile in a few minutes. As we see our 2013 sales outlook today for the new Abbott, we expect reported sales of roughly $23 billion based on today's exchange rate. This would reflect growth in the mid to high single digits over where we expect to end 2012. Regarding the gross margin for new Abbott, for modeling purposes today, we're forecasting a ratio of roughly 55%, excluding noncash amortization, reflecting underlying business trends and the expected impact of foreign exchange rates on the ratio I mentioned earlier. I'll discuss how we expect to report noncash amortization expense going forward in a moment. We expect R&D investment for new Abbott that's in line with the investment needs of our various businesses, which averages out between 6% and 7% of sales. We expect the SG&A ratio to be around 30% of sales for new Abbott, again, in line with the competitive profiles of our various businesses, with ongoing efficiency efforts to generate SG&A leverage over time. Our outlook for SG&A includes an estimated impact from the medical device tax under the U.S. Affordable Care Act that begins in 2013. Finally, we would expect minimal nonoperating income and roughly $30 million of loss in the exchange gain/loss line of the P&L in a typical year. Before I turn it over to Rick and Bill for their thoughts on AbbVie, let me discuss a change in our reporting for next year regarding noncash amortization that will affect both companies. As you know, Abbott has historically recorded noncash amortization expense as part of cost of goods sold and included it in our non-GAAP ongoing earnings per share metric. This expense has well exceeded $1 billion annually in recent years as we've completed several strategic acquisitions that have reshaped Abbott. The majority of this noncash amortization, approximately $850 million or $0.42 a share in 2013, relates to new Abbott. Going forward, cash EPS, that is, ongoing EPS excluding the impact of noncash amortization, is a more meaningful metric, meaningful non-GAAP metric for assessing new Abbott's earnings power and growth. This is particularly true as amortization expense begins to decline in the coming years. So beginning with the guidance to be provided for 2013, by January of next year, new Abbott is expected to provide ongoing earnings per share guidance on a cash basis. As a result, we will remove amortization from cost of goods sold starting in 2013 in order to calculate the adjusted gross margin ratio. We will, of course, also continue to reconcile this guidance to EPS on a GAAP basis, which would include amortization expense and specified items. AbbVie plans to use a similar cash EPS approach as it begins to report independently next year, which Bill will cover in more detail in a few minutes. So with that, let me turn the call over to Rick for an overview of the prospects of AbbVie, followed by Bill, who will review the third quarter results for Proprietary Pharmaceuticals, as well as the financial profile for AbbVie. Rick?

[Richard A. Gonzalez:]

Thanks, Tom. It's a pleasure to have the opportunity this morning to discuss our strategic vision and outlook for AbbVie. As Miles mentioned, since the separation announcement 1 year ago, we have been focused on delivering strong performance in 2012, as well as preparing to operate as an independent company. I'm pleased to say we're succeeding on both fronts. Our research-based pharmaceutical business is delivering another strong year, with year-to-date operational sales growth of 8%. We're ready to begin as a new company on January 1. January 2 will be our first official day of trading on the New York Stock Exchange under the ticker symbol ABBV. Between now and then, we will continue to actively reach out together with Abbott to the investment community at large, through our roadshows, our meetings and our other communications. Our goal is to help investors better understand our distinct investment identity. Today, we have an opportunity to begin that dialogue. First, it's important to understand that AbbVie is not a traditional pharmaceutical company. AbbVie will blend the stability, global scale, resources and commercial capabilities of a pharmaceutical company with the focus, culture and agility of a biotech, creating a unique biopharmaceutical company. At launch, AbbVie will have a number of strengths and attributes that will position us well for continued success when we begin trading as an independent company. These characteristics include a track record of outstanding operating performance; a specialty-focused commercial portfolio, with numerous market-leading differentiated therapies; foremost among them is HUMIRA, which will continue to be a significant driver of growth for AbbVie; a strong financial foundation, with annual operating cash flow of approximately $6 billion; a commitment to return cash to shareholders, including an attractive $1.60 annualized dividend, which will be recommended for approval by the AbbVie board, and a commitment to grow that dividend; a compelling late-stage pipeline with several assets that have billion-dollar-plus peak revenue opportunities, including HCV; and an advancing mid-stage pipeline that includes key assets with compelling proof-of-concept human clinical data. Finally, we have a strong, experienced and highly committed leadership team to drive AbbVie's continued success. Before Bill discusses some financial considerations for 2013, I'd like to provide a high-level perspective on our unique product portfolio and our advancing late-stage pipeline. I'll start with our current product portfolio, which includes a balance of differentiated growth brands, as well as sustainable performers. We compete in markets that offer significant growth potential and we hold strong category leadership positions in our therapeutic segments. Certainly, HUMIRA remains the cornerstone of our portfolio and is a strong driver for AbbVie, and will remain so. Not many brands are able to achieve and sustain the level of performance we've demonstrated with HUMIRA. Clearly, HUMIRA has a strong clinical profile. But our commercial, our development and our regulatory execution on HUMIRA have been outstanding. HUMIRA's performance continues to be exceptional, as evidenced by the strong double-digit growth this year. Several factors are driving that performance. First, strong patient demand has led to global market share gains in both dermatology and gastroenterology. Second, the addition of 2 new indications for patients

[William J. Chase:]

Thanks, Rick. It's a pleasure to be here this morning and to have the opportunity to be part of the AbbVie team. To Rick's remarks, you should now have a good understanding of how we're viewing the broader identity of AbbVie. I'd like to take a few moments to expand on this from my financial standpoint. I'll also provide some color on our third quarter results, and then discuss certain aspects of the AbbVie financial profile, which will become evident when we begin operations in 2013. As we build AbbVie, we're keeping a close eye on what we feel is the most important for the investor. First, a sustainable top line supported by products that are leaders within their categories; second, robust cash flow that will support an attractive and dependable dividend; third, a continued commitment to driving efficient operations; and finally, a financial policy that balances both the short and long term. We recognize the importance of growing the dividend, and we're implementing plans to deliver this, while also ensuring that our new product pipeline is appropriately funded. I'd like to now take you through how we're tracking against these objectives. In the third quarter, worldwide sales for what will be considered AbbVie increased approximately 7% on an operational basis, excluding a negative impact from foreign exchange of roughly 4 percentage points. Global HUMIRA sales increased nearly 16% on an operational basis and 10% on a reported basis. HUMIRA performance in the U.S. was driven by continued strength across therapeutic categories, with particularly robust growth in the germ and gastro segments, where HUMIRA continues to outpace the market's double-digit growth. International HUMIRA growth was 7.5% on an operational basis. This growth would have been higher when normalized for the timing of tender shipments. Year-to-date, global sales of HUMIRA are up 19.3% and international sales are up 14.5%, both on an operational basis. So as you can see, we're well on track to achieve our 2012 global sale growth outlook for HUMIRA of low double-digit reported growth. Moving on to some of our other major products, AndroGel achieved U.S. sales of nearly $280 million. AndroGel holds the leadership position within the testosterone replacement market. Global sales of Lupron were nearly $190 million. Our 6-month formulation, approved last year in the U.S, continues to perform well, driving share gains and further expanding our category leadership. U.S. sales of Synthroid were $132 million in the quarter. Synthroid maintains strong brand loyalty and retains more than 20% market share despite the entry of generics into the market many years ago. And finally, U.S. sales of CREON were $92 million. CREON maintains market leadership in the pancreatic enzyme market, where we continue to capture the vast majority of new prescription starts. We are confident that our portfolio of products provides a strong and sustainable base for AbbVie, generating significant cash flow as our late-stage pipeline continues to develop. Turning to our outlook post separation, as Tom mentioned, we plan to set AbbVie's annual dividend at $1.60 per share subject to approval of the AbbVie board. This dividend level represents a strong payout and should support a healthy initial valuation for AbbVie, given current dividend yields in the 3.5% to 4% range for many of our pharma peers. As Tom said, in the coming weeks, AbbVie expects to raise just under $16 billion of debt. After a net cash distribution to Abbott of approximately $8.5 billion, AbbVie will begin operations with around $7 billion of cash on the balance sheet. This cash includes the $2.5 billion of funding raised for future operating and financing needs, as noted in our recent Form 10 amendment. I'm quite pleased with the strength of our financial position as we start operations. Our capital structure and a strong cash flow will ensure our ability to support both our dividend and the funding of our operations going forward. Today, we're also providing our current estimates of our P&L profile as we know this will be important as you begin to model AbbVie in the coming months. We've mentioned previously that 2013 and '14 will be a time of transition for our product portfolio, as our lipid franchise experiences the entry of generics. We fully expect generic competition throughout 2013 for TriCor and for generic events to play out during the year for TRILIPIX and Niaspan, and we're planning for this appropriately. And as Tom noted, our forecast for the fourth quarter assumes the launch of a generic TriCor, and we recommend that you model less than $200 million in U.S. TriCor/TRILIPIX sales in the fourth quarter. Given the expected timing of generic TriCor late in 2012, the year-over-year sales and gross margin ratio impacts will be more acutely felt by AbbVie in 2013. As a result, we're forecasting 2013 sales of less than $1 billion for our combined lipid franchise, including TriCor/TRILIPIX, Niaspan and SIMCOR, reflecting a decline of roughly $1.2 billion next year. We plan to cover a significant portion of this decline through growth of key marketed products, including HUMIRA. So as we see it today, we'd expect AbbVie's total sales to be somewhat above $18 billion in 2013 at current exchange rates. As Tom mentioned, AbbVie expects to report adjusted EPS on a cash basis, removing noncash amortization from cost of goods sold. For modeling purposes today, we're forecasting a gross margin ratio of around 76.5%, excluding noncash amortization, which reflects the impact of both lipids and some unfavorable foreign exchange. We're very pleased with our pipeline and expect to appropriately fund R&D investment to drive long-term growth. As Rick mentioned, we expect R&D expense of around 14% of sales. We expect SG&A to be around 26% of sales. This includes the incremental cost of becoming an independent company, as well as AbbVie's share of Abbott's corporate costs. While some analysts and investors have estimated these incremental expenses at 1% to 2% of AbbVie sales or up to $360 million, we have managed AbbVie's costs to be less than 1% of AbbVie's sales. This reflects our initial efforts to minimize these costs, and it remains our goal over time to offset as much of the remaining cost as possible through efficiency efforts. Given our debt outstanding and average interest rates, we expect net interest expense of approximately $400 million for AbbVie in 2013. The gross interest expense, that is, before interest income, was reflected in the pro forma adjustments in the September amendment to the Form 10. We're also forecasting minimal other income, as an existing agreement that was previously generating other income expires in 2013. And we expect a tax rate of approximately 22% in 2013, as Tom previously discussed. As outlined in our Form 10, we expect roughly $435 million or $0.21 per share of noncash amortization in 2013. This is important to note, as we expect AbbVie to provide its 2013 ongoing EPS guidance on a cash basis, that is, excluding noncash amortization for comparability purposes to most of our peers. We will also reconcile this guidance to EPS on a GAAP basis, which would include amortization expense and specified items. As I said earlier, I'm very pleased with how we're positioning AbbVie for future success, including our overall capital structure, the strength and durability of our cash flows, the sustainability of our on-market products and the emergence of a leading late-stage pipeline. I look forward to meeting many of you in the next few months and in the coming year. And with that, I'll turn it back over to John for some final comments.

[John B. Thomas:]

Thanks, Bill. Before we open the call for questions, let me give you a brief overview of the next steps in the separation process. We continue to expect that Abbott and AbbVie will be independent companies on January 1, 2013. This is, of course, subject to the final approval of our Board of Directors, declaration that the Form 10 is effective and other customary conditions. A few weeks prior to separation, we'll issue a news release describing the special dividend distribution of AbbVie stock, including the distribution ratio and the record date. We expect that when-issued trading of both company stocks to begin in mid-December, with regular rate trading of both companies to begin on January 2 on the New York Stock Exchange. Abbott will continue to trade under the ticker symbol ABT, and as Rick mentioned, AbbVie will trade under the symbol ABBV. In addition, both Abbott and AbbVie will have separate investor roadshows beginning next month, and we look forward to seeing you then. With that, Elan, we'll now open the call for questions.

[Operator:]

[Operator Instructions] And our first question today is from David Lewis from Morgan Stanley.

[David R. Lewis:]

Miles, I thought maybe we'd start with a strategic question. As I think about the DMP strategy or the Abbott strategy going forward, I feel like investors see nutrition as a big source of leverage. They see Established Pharma, and as we've seen this year, as sort of a source of growth. But they have questions on the device franchise. So I guess, how do you see the development of the device franchise? Is this a growth asset? Is it a leverage asset? And what impact do you think M&A is going to play in the development of that device franchise over time?

[Miles D. White:]

Okay. Thanks, David. Well, I'd characterize the device franchise in the following way. I think we are in a transition period. We've just launched a number of new products in our Vascular business, for example. We're lapping our Promus arrangement with Boston Scientific. So we got a number of things that are sort of in transition there. So I look for growth out of the Vascular business. I'd say our -- and on a continuing basis because, as you know, we've established a very strong franchise there with our entire XIENCE franchise. I think we've got growth potential -- tremendous growth potential really with ABSORB and with MitraClip and frankly with our Endovascular franchise. So I expect that to be a growth business, and we simply have to lap the circumstance of Promus and we've got to get our new products launched, which we're under way with. No, I think we've got opportunity there, a lot of opportunity, including in emerging markets. On the front of the Ophthalmology business, part of that is market and economy driven, and part of that is new product launches, which we have a number of coming. And then part of it is expansion into emerging markets. So it's a similar story. But I'd say we're in the "let's get all the ducks lined up to achieve that and be ready to do that." That business has been somewhat disappointing over the last couple of years. But as you know, the LASIK part of it and others are very dependent on economic conditions, and that's really been a headwind for that business. So I look for that business also to be a growth contributor in the future. And then finally, Diabetes Care, I would characterize in 2 ways. One, it's clearly a tougher, more competitive market over time. There's been a lot of price pressure, reimbursement pressure and so forth, particularly from governments in Europe. On the other hand, we've got a particularly innovative pipeline and system of products coming that I think really change diabetes testing for the type 1 and type 2 tester going forward. The first product in that lineup, InsuLinx, is in the market now. And I'd say I've got a pretty exciting product line coming there. So I look for that business to also improve from a growth standpoint going forward. So I'm looking for growth out of all 3. All 3 happen to be in transitional phases right now, but they got a nice cadre of products coming. At the same time, we put a fair amount of emphasis on gross margin improvement in all of them, and we're seeing -- we've seen a lot of margin improvement over the last few years out of Vascular. We've seen it out of our Diabetes Care business. I think all the prospects look good there. But in terms of the evolution of the performance of businesses, I'd say, diagnostics, for example, is ahead of others on those tracks, also with a healthy pipeline of systems that's in development. As I mentioned, there hasn't been a lot new in the diagnostics or Core Laboratory Diagnostics arena in the last many years, actually, several years. And the pipeline of products under development there, I think are quite exciting for us and for the market. And I look at that across the board. I think the evidence from our nutrition and pharmaceutical business, EPD, the expansion in the emerging markets, the number of products that have entered those markets, they are all laying the foundation for growth in what are going to be growth markets anyway. So as I look forward, my expectations are optimistic. I'd say -- from time to time, a number of analysts, including yourself, have challenged us on our market assumptions, and I think that market has been tougher and slower to recover or slower to pick up than I had certainly hoped and any of us had hoped. But at the same time, you got to be prepared to grow through the markets. So I put a lot of attention on our organic or internal capability in innovation, R&D and new products. One of the things I'm quite pleased with as we split the company is that both companies have what I consider to be an appropriate critical mass of spending or level of spending in R&D. As you'll know, over the last 10 to 12 years, we've been steadily, I'd say, restoring or improving spending rates or investment rates in R&D. If you'll note in the AbbVie profile, on the split, they'll spend 14.5% in R&D. If you went back 10, 12 years ago, we would have struggled to spend at that level in R&D. So I'm pleased that with the performance of the company over the last 10 or 12 years and the growth, we've also improved the investment and spending rates in both R&D and SG&A to pretty healthy levels, so that the company is capable of sustaining organic innovation and sustainability going forward, which has been a focus. You asked me about M&A. I'd say M&A remains, from my point of view, only opportunistic. I'm putting an awful lot of our focus and emphasis right now internally. And I think that's important, particularly during the split when we'll have transition service agreements, and we've got to get through the separation and let the dust settle and so forth. I would -- I also never forecast M&A transactions, but I'm mindful that the foundation of the company has to be operating well and on an organic basis. Otherwise, I think we -- well, I think that's what we need to pay attention to. So I don't rule anything out. But I'm not looking for anything big and we're not particularly active. As you can see, over the last year, we haven't been. There are a few categories or areas where we're particularly mindful, whether or not there's opportunities to adjunctively add to the business or enhance the strategic strength of a business. We're always watching for that. We're always tracking that. But I'd say, right now, I don't have anything that I could forecast on the radar screen, and my focus is primarily organic. I know it's a long answer. It's more than you asked for. But I thought it would cover a number of things you'd be curious about.

[Operator:]

Our next question is from Jami Rubin from Goldman Sachs.

[Jami Rubin:]

Sort of a similar question to both Bill and Rick. Appreciate the granularity that you provided today on AbbVie going forward. But I'm wondering if you could -- you gave us a good sense for operating margins in 2013. But since, again, this business is going through so much transition with base business not changing much, but facing competition in the lipid business and then new products likely to come to the market 2015 and beyond. Can you give us a sense for where we -- where you see opportunities for operating margin leverage? The gross margin level you said was 76.5%. Where can that go realistically, driven by continued growth of HUMIRA, plus new product contributions? And then how should we think about SG&A and R&D going forward? And then, lastly, just on HUMIRA, Dave, obviously, this franchise has done extremely well. When we think about HUMIRA 2013 and beyond, just wondering what you are thinking internally about tofacitinib. Are you assuming, as I think the market is, a restricted third line label. If it's a second line label, how would that affect your thoughts on HUMIRA going forward?

[Richard A. Gonzalez:]

Okay, Jami, this is Rick. That was a long question.

[Jami Rubin:]

Sorry, I didn't mean to be so verbose.

[Richard A. Gonzalez:]

Hopefully, I wrote it all down right.

[Miles D. White:]

She's getting all her follow-up questions in now.

[Richard A. Gonzalez:]

I think, if you look at our business over the next 3 or 4 years, your perspective on it is correct. We're going to go through a transition period where we're going to have relatively flat to slightly down top line for the next couple of years driven by the loss of exclusivity primarily on our dyslipidemia franchise, and then the underlying emerging growth that we continue to see out of HUMIRA offsets the majority of that. Going forward, we anticipate that HUMIRA will continue to drive growth. Those markets are still areas where we can continue to drive penetration. As you know, the penetration rates, really, across all 3 segments are relatively low and we continue to see uptake of these kinds of products going forward as we expand into more and more patients and we expand geographically. Starting in roughly 2015, you'll start to see the emergence of our pipeline going forward and you'll see top line start to accelerate particularly in the second half of '15. From a margin standpoint, we still have opportunity to be able to improve margins between now and then, gross margins, and we continue to work on operational improvements. There'll be some mix improvement over time, although some of that will be offset by the loss of exclusivity of some products that also have relatively high margins so there'll be a little bit of a mixed bag there. But I think, generally speaking, we're focused on operational improvements in those areas. From an SG&A and an R&D standpoint, as I said in my comments, we have a strong late-stage pipeline. We have a number of assets that are in our mid-stage pipeline that we believe have compelling-enough data, that they will likely be able to advance into Phase III. This is an innovation-driven business. We're certainly going to drive everything that we have that we think could be successful, going forward. So we have a commitment to be able to support R&D at a level that's appropriate, based on those programs that advance. As I indicated, I think, for 2013, you should be assuming in the range of about 14%. On the SG&A front, I'd tell you that, in general, both R&D and SG&A, based on what we know about the industry, we're one of the most efficient operating models. And I think we operate very efficiently in the SG&A area. We're always careful about how we build infrastructure and make sure that we're as lean as possible but yet effective. And so that's an area that we always focus on, and it's sort of an Abbott tradition and we plan on continuing that as part of AbbVie. On the tofa front, I think our read in the U.S. is consistent with what you described, I think, based on the label, that we would anticipate -- on the data that we've seen publicly, we would expect it to be third line. We've anticipated both in our planning process. Essentially, I think, I believe that ultimately, if it comes out behind TNFs, based on the profile, we feel very, very comfortable with how HUMIRA will perform against it. Even if it came out with second line, I think we feel very comfortable with how HUMIRA will perform against tofa. And so we're obviously doing a lot of work in that area. We've done a tremendous amount of market research to understand the positioning of that product and how HUMIRA stacks up against it and we feel confident with how HUMIRA will perform going forward. I think that was everything.

[Operator:]

Our next question is from Michael Weinstein from JPMorgan.

[Michael N. Weinstein:]

First question, let me just ask

[Thomas C. Freyman:]

Mike, this is Tom. I -- as we did describe in our comments, those were the 2 kind of transitional factors that masked the real growth rate of new Abbott. I'd say, each of those, on average -- Promus is probably in the 1.5% range and the direct distribution is closer to -- approaching 1%. So I -- if you adjust for those, we did have growth more in that 4% range. And as I mentioned in my remarks, if you look at the...

[Miles D. White:]

You're talking about vascular in the books...

[Thomas C. Freyman:]

Yes, new Abbott. And as I mentioned in my remarks, if you look at our year-to-date adjusted for those items, we're in the mid-single-digit range. So that gives you a feel. Clearly, we expect, particularly in the nutrition area with -- when these direct distribution plans are completed, that that's going to be a really nice acceleration in growth next year and will be a big part of our ability to move this growth rate up from what you're seeing this year in new Abbott.

[Michael N. Weinstein:]

Okay. And Tom, I want to ask you about the dividend and the tax rate. The -- what you laid out in the dividend is really consistent with what we had modeled out so there was really no surprises there in how you split it and what basically you're forecasting for '13 on the dividend. But you indicated on the call that AbbVie's tax rate is going to go up by about 10 points from where it has been and where the Street is modeling to where it's going to be in 2013, which obviously has a big impact on people's earnings models for AbbVie and combined Abbott, going forward. I think our math on it was that it's about 8.5% negative hit to combined Abbott's EPS, going forward, from that increase in the AbbVie tax rate. So is it that the -- you need to shift that much of your profits in order to support the AbbVie dividend going forward? Is that why the tax rate is going from 12% to 22%?

[Thomas C. Freyman:]

Mike, I think the key thing here is, and it's really the point we've been making from the very first day we talked about this. These are very different businesses going forward, and they're operating independently. And AbbVie -- a lot of the cash flow historically has been efficient capital that we've been able to deploy to a lot of opportunities that have really helped the overall Abbott portfolio and performance. And going forward, as separate companies, AbbVie is much more focused on returns. And it's essential that a dividend gets set at an appropriate level, particularly given the focus on yields that investors have on these stocks these days. So making that a big priority for that company, it was important to rethink the balancing of the cash flows and what would be an appropriate, sustainable level going forward. Obviously, we're -- we continue to be hopeful that, over time, Washington will continue to focus on this area. It could provide additional opportunities for both companies if we move to a more competitive tax system. But the rate at which AbbVie will be starting its existence is a very good sustainable rate given that the profile of the business, the expectations of the investors and what the future holds, as opposed to what was appropriate in the past.

[Michael N. Weinstein:]

So I mean -- so this is a surprise to the Street today and that's why I'm focusing on it because obviously we didn't model it this way, I know people weren't modeling it. And that's in part because of the comments you guys had made last October on the tax rate. So...

[Thomas C. Freyman:]

As Miles -- Mike, as Miles indicated, it's been a process since last October to provide additional information to investors as we get closer to the point at which investors are going to separately value these stocks, and today is a big step in that regard. Obviously, we're going to be talking to people about the companies as we get out and talk to investors over the next couple of months. And it's important that they have this information and understand the rationale and that it really sets AbbVie up to be very well positioned for its objectives.

[Miles D. White:]

Mike, this is Miles. The one thing I'd say that's clear to us as we've gone through the separation

[Michael N. Weinstein:]

I appreciate that. So Tom, what is the payout ratio that, that implies for AbbVie going forward?

[Thomas C. Freyman:]

Roughly -- the dividend, you're talking about, Mike?

[Michael N. Weinstein:]

Yes, just given the higher tax rate.

[Thomas C. Freyman:]

Roughly 50% payout on cash earnings for the dividend.

[Operator:]

Our next question is from Glenn Novarro from RBC Capital Markets.

[Glenn J. Novarro:]

Two questions for Rick, first is on the HUMIRA franchise. If you look at the HUMIRA franchise just this quarter, OUS came in a little light. And you mentioned the timing of tenders. But I've got to believe that European austerity is having an impact as well. And if that's the case, is this going to be a headwind for the HUMIRA OUS franchise over the next couple of years? And are there any offsets? And then, as a follow-up on HUMIRA, the patents in both U.S. and Europe expire over the next 5 years, is there a strategy in place that can extend the patents? And then I'd like to ask a follow-up on hepatitis after you passed -- answered the HUMIRA questions.

[Richard A. Gonzalez:]

Okay. So Glenn, on the growth rate in the third quarter, there were essentially 2 tenders that moved between quarters. One moved out into fourth quarter, one moved back into second quarter. If you essentially adjust for those changes, HUMIRA is continuing to run about mid-teens, so there isn't any material impact on HUMIRA. Having said that, clearly, the impact across everyone's business in Europe is being felt with some of the austerity measures that are being taken. I wouldn't say that we feel differently than we felt for the last couple of years. 2010, from a price standpoint, was probably the most difficult year, the most challenging year. If you look at this year, it's in that range but slightly below that from a price erosion standpoint. What we modeled for '13 is close to 2010, so we're planning in that range. But it hasn't had a material impact on the performance of HUMIRA going forward and we don't expect that, going forward. As far as biosimilar competition in 2017 or 2018, which is what you're talking about, obviously, we spend a lot of time working on that strategy. You have to remember that, beyond just the molecule patents, there are a number of process patents that will be important in the process and a number of other things that we continue to look at. And as you know, if you look at biosimilars, it's a very different ballgame from small molecules. We do not believe that it will be an interchangeable kind of or a substitutable kind of product. And they will have to sell based on their own data if and when they come to market. And we believe that HUMIRA's track record will stack up nicely against them. And so it certainly will have an impact, we recognize that, but we think it's a manageable impact and we believe we have a number of strategies to be able to protect HUMIRA going forward...

[Glenn J. Novarro:]

So from a modeling point of view, we should assume some generics entering the market 2017, 2018, correct?

[Richard A. Gonzalez:]

You should assume some biosimilar activity, based on some entering the market around 2017, 2018, correct.

[Glenn J. Novarro:]

Okay. And then just as a follow-up. I had a question on your hepatitis program. So we've seen very good, very strong data from the current regimen, but the current regimen also -- the protease inhibitors boosted with ritonavir. And there's a lot of questions out there, whether or not this will limit the ability to take market share because of ritonavir's interaction with other drugs. What's your best guess is as to what a ritonavir booster will do in terms of limiting the market share for your platform? And then, as a follow-up, the data in the nulls was really, really strong and this could really establish you as a major player in that segment of the market. How big do you think the null market would be?

[Richard A. Gonzalez:]

Let me start with ritonavir, and there's obviously been a lot of questions around ritonavir. I think it's important to recognize that the dose of ritonavir in the HCV cocktail, or in the PI [ph] specifically, is 1/12 the dose -- the labeled dose in ritonavir. So we have not seen any of the side effect profile that people talk about, like GI side effects, lipid profile side effects, in any of the clinical trials. And we've now done a substantial number of patients, as you know. The tolerability in the trial had less than a 2% discontinuation rate and a very low rate of any kind of drug-to-drug interactions. So we don't -- everyone can talk about ritonavir, and obviously, our competitors are talking about it. The reality is the data speaks for itself, and you're going to get a chance to see the data. And a patient doesn't know or a physician doesn't really care whether it has ritonavir in it or not. What they care about is high cure rates, tolerability and ease of use of the protocol, right? And I think, in those fronts, based on the data that we've seen thus far, we're pretty confident about what we have. And I think the data will play out over time. We'll do our Phase III trials. It will be an even larger cohort of patients, and we'll have an opportunity to see that. But there's nothing in this data -- and I can tell you we have been through this data very, very carefully. There is nothing in this data that concerns me, from a tolerability standpoint, with ritonavir. Now I -- oh, the nulls. The null performance is very, very impressive. And as you know, it's -- we haven't seen anything from any other product that even comes close to this level of performance. The way we calculate nulls -- and we spent some time looking at this. It would suggest to us that nulls alone are somewhere around a $2.5 billion to $3 billion opportunity, so they're a pretty sizable opportunity. And obviously, the market will continue to grow as more and more therapies come out there. So we believe that could be a very significant differentiating factor for our therapy. We'll have to see how other data that comes out over the course of time, but certainly, 93% performance in null-responding patients is something that the industry has not seen before.

[Operator:]

Our next question is from Rajeev Jashnani from UBS.

[Rajeev Jashnani:]

My question first was on new Abbott. And just not getting too much into guidance, but I was just hoping you could help us think about outlook a little bit in the sense that you've talked about margins impacting -- or FX impacting the margins next year. And obviously, margin expansion is one of the attractive points for that company. Maybe you could help us understand the way rates are currently sitting, how much is that going to dilute the margin expansion next year. Can we still expect some net margin expansion in that business?

[Thomas C. Freyman:]

Sure. This is Tom. As you've seen from Abbott's performance over the years, certainly within a year, currency has been a little bit less impactful to us than maybe some other companies. And it really is a function kind of the way things flow through our business. As you know, sales, when currency moves, that's an immediate impact whereas the impact on cost to sales kind of -- tends to lag through the inventory process. And we've had quite a bit of that this year and some of that is going to carry into next year. And so I'd say, as we've been saying all along on the quarters with the favorability of exchange that we've been pointing out in the gross margin improvement, some of that was a bit transitional this year and it's going to flip back a little bit the other way next year. So I just think it's normalizing. And if you look at underlying, what's really going on in these businesses, it's very quite positive, as we've talked about, in terms of improving the gross margins fundamentally. And I think, once we get through this one-time adjustment, if you will, of getting the margin back to a more normalized level, you'll be able to see the growth of that margin, as we've been talking about.

[Miles D. White:]

Rajeev, this is Miles. I would just add to that the following, by way of background explanation. One of the reasons that exchange doesn't translate from the top line to our bottom line as much as it may in other companies, and other companies frankly do the same thing, we try to put our cost base, our manufacturing, et cetera, also in the same markets where we may experience exchange fluctuation in sales and top line because there's a natural hedge there in cost, et cetera. So for example, over time, to the extent that costs and manufacturing and other things are in some of the growth markets where we are growing and we are putting our plants there, et cetera, for the products that we will sell there, there's a natural hedging there that helps mitigate the top line impact of exchange down to the bottom line. So some years, that's a plus for us on the margin line. For this -- for example, this year, while the -- while the top line is experiencing negative exchange, the gross margin line is experiencing positive exchange. Important to point out, though, that on that gross margin line, it's not all exchange. It -- there's a big chunk of that improvement in the gross margin line that is actually actions taken to improve our cost structures or mix and whatever the case may be. So if exchange improves on the top line next year, as Tom says, that'll have a dampening effect on the continued improvement of gross margin. But we expect to continue to improve, from our own actions, the gross margin line. It just won't benefit from an extra boost from exchange, so it's kind of a mitigated thing both ways. If -- at the end of the day, what we're looking to do in the way we structure our own approach to exchange is to mitigate its volatility on the bottom line.

[Rajeev Jashnani:]

Yes, no, thanks for that. I think, clearly, what's important is what happens on an underlying basis, but it's just helpful to have expectation in the right place as far as the numbers go, I thought. I did have a follow-up on nutritionals. I guess the growth there was a little bit lighter than what we were looking for in pediatric. And I know you talked about some of the distributor issues, but those are obviously things that you've known for several quarters. Maybe just particularly on x U.S., if you could talk about if any of the underlying market dynamics have changed materially this quarter and if you're thinking about the markets there any differently than you have been in the past.

[Miles D. White:]

Well, I'd say a couple of things, then I'm going to let Tom weigh in here too. There aren't really distributor issues. There's one circumstance, fairly significant, where we bought out the distributor and there's an adjustment we're going through while we let that inventory wind down and come -- and the sales wind down and come back into our own system. It -- when -- we're -- in effect, we're going direct in a lot of our markets and some of our significant ones overseas. So there's a transition there as you do that. It clearly is dampening. And it's not an issue per se, it's a deliberate action on our part to go more direct for a lot of favorable reasons. Tom?

[Thomas C. Freyman:]

I guess I'd just say that, really, the items we noted on the distributor changes are the kind of the drag on what one might expect. And we do expect in the fourth quarter upper-single growth in this business. So you're going to see a better rate, we believe, in the fourth quarter, and we think it's even got better potential in 2013. So I think, once we get through this transition, you will feel confident that those types of growth rates are possible for this business and we plan to deliver on them.

[Miles D. White:]

I mean, you asked if there's an underlying fundamental downshift in some way, not that we see, no. No, we're not looking at that or expecting that.

[Operator:]

Our next question is from Larry Biegelsen from Wells Fargo.

[Lawrence Biegelsen:]

Emerging market growth this quarter, it was over 10%, so -- and it was 12% last quarter, so it seems like it's in that 10% to 12% range. Is that a realistic rate, going forward? And maybe if you can talk about AbbVie versus Abbott, if there's differences there. And then I just had one follow-up.

[Thomas C. Freyman:]

Well, certainly, in the quarter, and then -- and we said this in the October meeting last year and throughout, emerging markets is much more a part of the story and a much more important part of the growth opportunity on the Abbott side. And in fact, in the quarter, even though overall company grew double digits, it was stronger on the Abbott side and a little bit below that on the AbbVie side. So it clearly is a more important part of the story now. That said, I think, AbbVie, and we've said this also, does see opportunities there. And I think somewhere in the range of $1 billion of growth in emerging markets over the 5-year period is still a part of their story. But clearly, the performance is much -- was better in the quarter on the Abbott side and really is a bigger part of the story. The other thing I would say is some of the tenders that Rick talked about when he was talking about HUMIRA also tended to dampen down AbbVie in the third quarter, and I think that is a bit transitional.

[Lawrence Biegelsen:]

And then that -- one for Miles. At the analyst meeting last October, you laid out some goals for the new Abbott to grow high single digits and EPS at a double-digit rate. Today, you're saying you can grow mid-single digits in 2013. Could you give us a little bit of an update on kind of the long-term goals for the new Abbott and why maybe next year is mid-single digits versus your original high-single-digit goal?

[Thomas C. Freyman:]

That's mid to upper, Larry. I just wanted to clarify.

[Miles D. White:]

Larry, I'd say this. There's no difference in our long-term goals at all, or even our long-term expectations. I think there's a number of things that are different now than last year but only relatively speaking. So for example, I'd say, right now, in 2013, I'm looking for mid- to high single digits. And I think, at that meeting last year, I distinctly remember at least one of you, if not a couple of you, were more cautious about economy, et cetera, going forward, and you proved to be right. I'd say, right now, the difference in my outlook is more about market conditions than anything else and how slow a recovery in a number of markets around the world will come. I think that the biggest change that I see is slower market growth rates in emerging markets. But I'm cautious about how I describe that because, when people in general look at China, and this is any company that's doing business in China today, not necessarily in health care and medical products, people say, "Gee, the Chinese market's really slowed. It was at 9%, now it's at 7%." Well, slow is a relative term. 7% looks pretty attractive, as a matter of generality, compared to developed markets and a lot of developing markets. But I'd say that the underlying market growth rates in a number of the economies around the world are slower, particularly in emerging markets, than we might have originally expected, and I think all industries are experiencing that right now. And then, who knows whether these things will recover as fast as everybody would like or not. The whole world now is pretty interlocked so that, if the developed markets are slow, it does roll back into a number of the developing or emerging or growth markets. So single biggest difference, I think, in our outlook is the underlying market growth rates or expansion rates, which I think, in relative terms, is a more near-term thing than a long-term thing. I think all those markets overseas that we view as growth markets are growth markets for the long term, and my expectations are high-single-digit top line for the long term and mid to high in the nearer term. Our goals haven't changed, but we just -- we have to be realistic about the underlying market conditions. Our objective is to do better than market in any circumstance so that we're growing and gaining share, et cetera, in our targeted geographies and targeted segments of the business. So I'd say there's no change to my expectations. There's a change to my assumptions about the conditions in which we operate. That affects exchange too, although we all understand exchange. I mean, I think the biggest change or surprise to my own expectations for the year was the exchange impact from growth markets. Historically, with AbbVie as part of Abbott, Europe is a huge part of exchange for us. That's less true for new Abbott going forward. It's much more a market basket of a lot of currencies around the world, which is different, and a lot of those currencies have performed differently this year. So I think a lot of this is adjustment to conditions. And frankly, I think our underlying expectations, which are generally driven by our own performance, the new products we bring to market, the share we gain, the market opportunities we access, I have -- there's no change in my expectations about those.

[Operator:]

Our next question is from Tony Butler from Barclays Capital.

[Charles Anthony Butler:]

A couple of questions on Hep C. Rick, you commented, with respect to the very good data, the very good 12-week data in genotype 1, that you would be the first in the market in 2015 against genotype 1. And I'm curious if that statement was correct, as I wrote it down. And second, what is your -- AbbVie's expectations with respect to the competition being in the market at what time? And then the second question around Hep C is around nulls. You did provide some commentary around the market and that's very helpful. Although, I'm curious, and I seem to recall that the null data that has been presented is without cirrhotics. Is that correct? And then I have one financial follow-up.

[Richard A. Gonzalez:]

Okay. As far as the nulls are concerned, it is without cirrhotics, that is correct. We're going to do a cirrhotic trial now. So it's nulls without cirrhotics. As far as the timing, you heard the comment correct. We do anticipate that if we hit the window of early 2015, based on how we've modeled out time lines for competitive products, it would suggest to us that, that could be the first product to enter the market for genotype 1. There may be products that enter the market for genotype 2 and 3 prior to that, in fact I think there could be in all likelihood, products that enter the market after that. Now, that's based on a set of assumptions that we're making that essentially are based on our competitive intelligence of how long we think trials would take to be able to start up. I can tell you, all of this recognized, that this will be a race to get to market. And we anticipate early in 2015 is the time frame that we should be able to hit. And based on what we know today, we're assuming that, that would be first to market. But we'll have to see how it plays out over time.

[Charles Anthony Butler:]

Yes, sir, I understand the race all too well. The one financial question, that was around AbbVie's debt-to-EBITDA. Are you happy with that debt-to-EBITDA, at least in the short term? I.e., would you take excess cash beyond the dividend to pay that debt down? And if not, does the high tax rate really imply a fair level of repatriation of capital? And that is again for AbbVie.

[William J. Chase:]

So Tony, what we've done is we've structured AbbVie with what we think is a very strong, responsible balance sheet at the onset. As cash is generated, yes -- I mean, I think one of the priorities we would have is we balance our cash. And we do look at it as an exercise in balancing between returning to shareholder, funding the business, but one of the other items is ultimately paying down debt as well. And we would look to do that when we have maturities through the next couple of years. In regards to the need to repatriate, I think, if you look at AbbVie, we've got a pretty strong balance sheet. We've got $7 billion of cash, starting out. The 22% tax rate will allow us to appropriately balance geographic cash flows between our needs and our uses. And so I don't think any additional repatriation would be necessary.

[Operator:]

Our next question is from Jeff Holford from Jefferies.

[Jeffrey Holford:]

One part of capital allocation you haven't discussed yet for either AbbVie or Abbott is share repurchases. Can you just outline any thoughts that you have there?

[Thomas C. Freyman:]

Yes, I mean, both companies do anticipate continuing their share repurchase programs. As you are aware, Abbott's been more active this year than we have been in the last couple. And the specific of that, each company is going to have to talk about it at future dates.

[Operator:]

We'll move on to our next question. Our next question is from Danielle Antalffy.

[Danielle Antalffy:]

Just if I could focus in for the legacy of the Abbott device business. On the Vascular side, one of -- another cardiovascular company just this morning talked about pressure, cardiovascular procedure volumes in Europe. I'm just wondering if you could talk about what you guys are seeing over in Europe and how that could be impacting stent sales, going forward.

[Miles D. White:]

Well, I think -- I don't know what the other company said this morning, Danielle, but we are seeing a definite pressure on PCI volumes, or procedure volumes and so forth and procedure rates. The -- what we see -- and I think it depends on what geographies you're in. For us, the pressures in Europe are somewhat offset by the growth in procedures in developing markets or growth markets, other markets. But I think, for some time, at least for the near term, we can expect to see some continued pressure on Europe, perhaps the U.S.

[Danielle Antalffy:]

And then just again on the Vascular business. Evalve, I wasn't there, but talked to a few docs that attended the ESC meeting, and it sounds like there's more excitement being drummed up for the MitralClip. Just wondering what your status is on that filing here in the U.S. And should we view this business any differently after hearing some more positive data points coming out of the ESC meeting in August?

[John B. Thomas:]

Yes, Danielle. So we're -- in the U.S., we're still hopeful for a panel probably in early part of next year in the first quarter. That's the latest thinking, okay? All right, thank you. Operator, that concludes today's conference call. If you'd like to listen to a replay of the call after -- call in after 11

[Operator:]

Thank you. And this does conclude today's conference. You may disconnect at this time.