Abbott Laboratories Q3 2017 Earnings Conference Call Transcript (ABT)

Abbott Laboratories Q3 2017 Earnings Conference Call Transcript (ABT)

Abbott Laboratories (NYSE: ABT)

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Q3 2017 Earnings Conference Call
Oct. 18, 2017, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for standing by. Welcome to Abbott’s third quarter 2017 earnings conference call. All participants will be able to listen only until the question and answer portion of this call. During the question and answer session, you will be able to ask your question by pressing the *1 keys on your touchtone phone. Should you become disconnected throughout this conference call, please redial the number provided to you and reference the Abbott earnings call. This call is being recorded by Abbott. With the exception of any participant’s questions asked during the question and answer session, the entire call, including the question and answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott’s express written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations.

Scott LeinenweberVice President of Investor Relations

Good morning, and thank you for joining us. With me today are Miles White, Chairman of the Board and Chief Executive Officer; and Brian Yoor, Executive Vice President of Finance, and Chief Financial Officer. Miles will provide opening remarks, and Brian will discuss our performance outlook in our detail. Following our comments, Miles, Brian, and I will take your questions.

Before we get started, some statements today may be forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2017. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological, and other factors that may affect Abbott’s operations are discussed in Item 1A, Respectors to our Annual Report, and Securities and Exchange Commission Form 10K for the year ending December 31, 2016. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. Please note that third 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 release and regulatory findings from today, which are available on our website at Abbott.com. Unless otherwise noted, our commentary on sales growth refers to comparable operational sales growth, which adjusts the 2016 basis of comparison to include results for St. Jude Medical, and to exclude the impact of exchange, as well as current and historical results for Abbott’s medical optics and St. Jude’s vascular closure businesses, which were divested during the first quarter of 2017.

Comparable growth also reflects a reduction in St. Jude’s historic sales related to administrative fees paid to Group Purchasing Organization in order to conform with Abbott’s presentation. Earlier this month, Abbott concluded its acquisition of Alere. Given there are only three months remaining in the year, I’d note that comparable sales growth guidance for the fourth quarter and full year 2017 do not include Alere, which is consistent with the guidance methodology we’ve utilized since the beginning of the year. With that, I will now turn the call to Miles.

Miles WhiteChairman of the Board and Chief Executive Officer

Okay. Thanks, Scott, and good morning. Today, we report an ongoing earnings per share of 66 cents at the high end of our guidance range and reflecting double digit growth. We also raised the midpoint of our 2017 adjusted earnings per share guidance and narrowed the range to 248 to 250, which is at the upper end of the range we set at the beginning of the year. Sales increased more than 5.5% in the quarter, led by strong performance in established pharmaceuticals and medical devices. At the beginning of the year, I commented that we were entering a period where innovation and new product launches would enhance our competitiveness and fortify our leading market positions. We’re seeing this play out through the first three quarters of the year, with significant growth contributions from several recently launched products and important advancements across our innovative new product pipeline.

I’ll highlight several examples as I summarize our third quarter results in more detail before turning the call over to Brian. I’ll start with diagnostics, where we achieved sales growth of more than five% in the quarter, which was led by strong international performance. During the quarter, we continued the initial European launch of our new Alinity family of systems, which now includes five recently launched instruments in the areas of immuno assay , clinical chemistry, blood screening, hematology, and point of care testing. As we’ve stated previously, our primary focus during this initial launch period has been to convert a number of long-tenured Abbott customers to Alinity, and we continue to make progress on that front across all the major European countries. We continue to anticipate CE mark for our Alinity molecular diagnostic system in the coming months, and expect to begin the Alinity launch of the Alinity instruments in the U.S. in 2018.

During the quarter, we also announced our acquisition of Alere, establishing Abbott as the global leader in point of care testing. This combination creates the broadest point of care testing portfolio in the world, with leading positions across cardio, metabolic, infectious disease, and toxicology testing.

In nutrition, sales grew very modestly in the quarter. In pediatric nutrition, continued above market performance in the U.S. was led by recently launched infant formula products and strong growth of our PediaSure toddler brand. Internationally, we’ve seen some market stabilization in China, and we prepared for pending new food safety regulations that are set to go into effect on January 1 st of next year. Outside of China, as expected, we continue to see soft market conditions across a few international markets, and in adult nutrition, international growth of 5.5% was led by our market leading Ensure and Glucerna brands.

In established pharmaceuticals, or EPD, double digit sales growth was led by strong performance across our key emerging markets, including double digit growth in Brazil, Russia, India, and China. As expected, as contemplated in our third quarter guidance, we saw a modest level of channel restocking in India after the implementation of a new tax system in that country on July 1 st , which contributed approximately two-and-a-half percentage points of growth in the quarter. Excluding this impact, total EPD sales would have grown around 12% in the quarter. With our unique geographic footprint and business model, as well as our scale and leading positions in several geographies, EPD is well-positioned for sustained above market performance.

And in medical devices, sales growth was led by double digit growth in heart failure, electrophysiology, structural heart, neuromodulation, and diabetes care. In addition to strong growth, we achieved several new product approvals and clinical trial milestones across our portfolio during the third quarter. In heart failure, we received U.S. FTA approval and launched our HeartMate 3 pump, which provides crucial support for advanced heart failure patients as they wait for their treatment, including heart transplants. HeartMate3 offers a number of advantages compared to existing options, and further strengthens our global leadership position in this area.

During the quarter, we also received U.S. FTA approval of our MRI-compatible ICD, or implantable defibrillator, which follows up the approval of our MRI-compatible pacemaker earlier this year. These approvals significantly enhance our competitive position in the U.S. cardiac rhythm management market. In structural heart, double digit growth was drive by continued global update microclip . During the quarter, we achieved several important clinical milestones, including completion of enrollment in our U.S. trial for Portico , our Taber product. And we began enrolling patients in a new bicuspid valve disease trial, which utilizes our market leading trans-catheter valve repair system. In neuromodulation, we achieved growth of approximately 50% for the third consecutive quarter, driven by recently launched products that offer improved relieve for chronic pain patients, and help for those suffering from movement disorders.

With our broad portfolio of innovative solutions, we continue to advance our leadership position in this fast growing market. I’ll wrap up with diabetes care, where an international sales growth of nearly 35% was driven by FreeStyle Libre, our innovate glucose monitoring system that eliminates the need for routine finger sticks. Libre now has more than 4,000 users internationally. And during the quarter, we obtained national reimbursement status in Japan and the United Kingdom, which represent two of the largest diabetes markets in the world. In the U.S. during the quarter, Libre received U.S. FDA approval as a replacement for blood glucose monitoring. This revolutionary technology is the only system available that comes factory-calibrated, thus eliminating the need for daily finger sticks that are required to calibrate other systems currently available.

So, in summary, we exceeded expectations for the quarter and raised the midpoint of our full year EPS guidance, which is now at the upper end of the range we set at the beginning of the year. Our sales growth increased sequentially, and recently launched products are contributing significant growth across our portfolio. And we’re particularly pleased with the productivity we’re seeing across our new product pipeline, which is delivering a steady cadence of approvals and launches of innovative technologies. I’ll now turn the call over to Brian to discuss our results and outlook for the year in more detail. Brian?

Brian YoorExecutive Vice President of Finance and Chief Financial Officer

Thanks, Miles. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on a comparable basis and do not include Alere, which is consistent with the guidance methodology we’ve utilized since the beginning of the year. Turning to our results, sales for the third quarter increased 5.6% on an operational basis. Exchange had a positive impact on sales at 0.6%, resulting in a reported sales growth of 6.2% in the quarter. The favorable impact of exchange rates on our sales this quarter was driven primarily by strengthening of the euro and other developed market currencies, which, considering our European cost base and hedging program, have a relatively modest follow through impact on our earnings. Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.3% of sales. Adjusted R&D investment was 6.9% of sales, and adjusted SG&A expenses was 29.4% of sales.

Turning to our outlook for the full year 2017, today we narrowed and raised at the midpoint our adjusted earnings per share guidance range to $2.48 to $2.50. Before reviewing our outlook in more detail, I’d note that Alere, which we acquired earlier this month, is expected to contribute around $475 million dollars to our reported sales, and we forecast a mutual impact on adjusted earnings per share this year. We continue to forecast full year 2017 comparable operational sales growth in the mid-single digits. And based on current exchange rates, would expect exchange to have a positive impact of nearly 0.5% on our full year reported sales. We forecast an adjusted gross margin ratio of around 59.5% of sales, adjusted R&D investment of approximately 7.5%, and SG&A expense of approximately 30% of sales.

Turning to our outlook for the fourth quarter of 2017, we forecast an adjusted earnings per share of 72 to 74 cents. We forecast comparable operational sales growth in the mid to high single digits, and at current rates, would expect exchange to have a positive impact of somewhat above two% on our fourth quarter [inaudible] [0:12:34] sales. Before I open the call for questions, I’ll now provide a quick overview of our fourth quarter operational sales growth outlook by business.

For established pharmaceuticals, we forecast double digit sales growth. In nutrition, we forecast low single digit sales growth. In diagnostics, we forecast sales to increase mid-single digits. And in medical devices, we forecast sales to increase mid to high single digits, which reflects continued double digit growth in diabetes care, as well as several areas in our cardiovascular and neuromodulation business. With that, we will now open the call for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We kindly ask that if you are using a speakerphone, to please pick up the handset before asking your question. And again, that’s *1 to ask a question. Our first question comes from Mike Weinstein from J.P. Morgan. Your line is open.

Mike WeinsteinJP. MorganAnalyst

Good morning, and thank you for taking the question. Miles, I was hoping we could touch on two topics. First is Alere, now that it’s closed, and second is Libre, now that you have an FDA approval. First, Alere. Can you talk now about how we should think about the outlook for Alere, both top line growth and then accretion? Obviously, everybody’s familiar with what you initially were expecting from accretion, with 12 to 13 cents year one, more than 20 cents, year two. But a lot happened with your business over that time. You renegotiated terms, you had to divest some assets. So, I think everybody would appreciate an update on how you’re viewing that business, and then we’ll circle back on Libre. Thanks.

Miles WhiteChairman of the Board and Chief Executive Officer

Yeah, I think it’s premature, Mike, to get real specific about Alere. We closed the deal a couple of weeks ago literally. And our new management team has taken over the business, but obviously very rapidly getting up to speed, meeting all their employees, going through all the things you do to start integration and so forth. And I’d say, first of all, that’s gone very well. The management team we’ve put in place has moved very quickly, and I have to say, very deliberately to get their hands around everything. But that takes some time. So, as we’ve said to people, given the timing of when we closed it, we expect no accretion this year, so I wouldn’t look for any particular impact on the bottom line in 2017. With regard to ’18, since our initial estimates of accretion that were quite some time ago, as you know, when we first announced this deal, because it’s taken a very long time to close, there have been a number of changes, including divestitures and so forth. So, I don’t want to give you a specific number. I’d say it’s fair to think that the accretion will be much more modest than what we initially indicated for the first year.

We will get a full year. We’ll get a quarter’s headstart, and obviously, our intent is to be accretive to our company and our business, so we believe that with the acquisition, we’ve positioned ourselves as the leader in point of care testing worldwide. All of that has the intent of good solid growth and profit growth for our investors. But I’m gonna be cautious about what I communicate for ’18 at this point until we’ve really had a chance to assess it more thoroughly

Mike WeinsteinJP. MorganAnalyst

And do you think that business kind of as you own it, and call it the pro forma Alere under Abbott, does that business grow in 2018, and is low single digits an appropriate expectation?

Miles WhiteChairman of the Board and Chief Executive Officer

I think it’s a good target. I don’t know that we know yet. But that’s certainly, I think, an expectation we at Abbott ought to have. And the question is how rapidly we can do that. So, yeah, look, I think it’s a fair expectation. And if I was — and I am — totally honest with you, yeah, I wouldn’t have a lesser expectation.

Mike WeinsteinJP. MorganAnalyst

Okay. All right. Let me switch to Libre, if I can, and maybe try asking you a couple questions then. So, one, obviously everybody’s excited, not only based on all your success outside the U.S. with Libre, but now that you have this opportunity in the U.S. What would you view as a successful launch for Libre in 2018? Is there something you could characterize [inaudible] [0:17:10] than a number? Is it 50 million? Is it 100 million? If you want to take a stab at that. And then second, what is your expectation for commercial payers? Can you tell us about the conversations you’ve had and the willingness and the timing that you see commercial payers getting on board? Thanks.

Miles WhiteChairman of the Board and Chief Executive Officer

Well, I’d say a couple things. Your estimate is — let’s just say your estimate, I’ll take, and you gave me a nice range there, so thank you. And I think that you can assume that we’ll be looking at this from a lot of perspectives, because we’ve got a lot of data. Having had a run rate in Europe — we launched in Europe, and it basically went country by country. We started it as full patient pay, and we had really terrific uptake and consumer interest. And that was the first introduction of Libre to the market. The fact that there was no reimbursement early on was an unknown to us. And it was a new concept and a new way for diabetics to test. And we experienced tremendous demand. Our first year, we were capacity limited, and yet we had a fair bit of demand. The second year, obviously, has gone exceptionally well. And so, as I indicated, we’ve got over 400,000 customers. It was remarkably well-embraced for reimbursement by government bodies in Europe and regions in Germany, etc. That’s extremely gratifying, that the value proposition that we see with Libre is strong, and it’s intended to be.

And consequently, we believe that part of the appeal is not just what Libre can do and the information that it provides to a diabetic, who’s a very informed patient and a very self-managing patient. It provides them tremendous information from just guidance and the management of diabetes. And I know that firsthand. I wear one. And I gotta tell you, it’s just a phenomenal device. It’s a super product. I can see why consumers like it as much as they do. And that’s true for both type ones and type twos. And we’re seeing the universally across the board. They use it in different ways, or at least information means something to them in different ways, whether they’re managing insulin or whether they’re managing diet and exercise and other things. So, I’d say first of all, I expect demand to be pretty strong. Secondly, the U.S. market knows about Libre. It knows a lot about Libre because of all the experience that we’ve had in the last year in Europe. So, I do expect a more educated, ready, prepared, anticipating, demanding market in the U.S.

As relates to payers, which I would call the second dimension of this, I think our value proposition is quite strong. The product is priced at a very economic and affordable level. The intention there is as much and broad access as possible and as rapidly as possible. And I think that value proposition is stunning compared to competitive offerings, and I think that’s gonna make it strong. We are in discussions with payers, and we are in discussion with payers about that value proposition, and I believe that will all go very well. I know that’s not as much detail as you’d like to have, but it’s as much as I’m willing to share at this point, because right now, I would tell you we expect a good strong out of the box performance, like you described.

And beyond that, I mean, right now, Mike, we’re adding about 50,000 patients a quarter, and that’s across a continent that we had to go at one country at a time, one reimbursement system at a time. Of course, the U.S. is quite large, and Japan and the U.K. in addition to this are also quite large. So, I mean, we have a fair amount of optimism, and try not to get too far ahead of ourselves.

Mike WeinsteinJP. MorganAnalyst

Sounds good. I have a lot more questions, but I’ll let some others jump in. Thank you, Miles.

Miles WhiteChairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Matt Taylor from Barclays. Your line is open.

Matt TaylorBarclays CapitalAnalyst

Hey, good morning. Thanks for taking the question. The first thing I wanted to ask about was certainly, it was encouraging that you got MRI conditional labeling for your ICD in the quarter. So, I was hoping we could get an update on how things are going in Somar, and then when we might expect the approval for CRTD, and maybe the ICM as well.

Miles WhiteChairman of the Board and Chief Executive Officer

Yeah, I’d say a couple things, Matt. First of all, let me back up and give a bigger context

to this. Over the course of the year, there was a lot of skepticism on the part of analysts and/or investors about all the things that we had to get accomplished that were backend loaded. A lot of third quarter, fourth quarter things. And depending on how you’re looking at it, it looks pretty daunting. But we all know everything doesn’t go right. And the

Somar inspection put some of that in doubt. Now, having said that, we stuck to our guns on what our estimates were and our projections were about when we would get product approvals and claim approvals, licensure approvals, and so forth. And the third quarter alone here has been pretty gratifying, in that we basically got every approval we forecasted, and within — let’s call it within 30 days or so of what we forecasted.

And I think that’s been pretty gratifying, that what we said is what happened. And that includes Libre, that includes the high voltage MRI claim, that includes HeartMate, in includes the closure of Alere, it includes Libre — it includes a lot of things. I don’t generally like being backend loaded because it feels like a lot of risk that everything has to go right. But everything did. And our progress with Somar is no exception, because I’ve indicated on prior calls our team that has been working with the Somar team and so forth has done an exceptional job. We’ve provided all information, taken all actions, done all remediation, everything basically done on time, delivered to FTA , discussed with FTA, etc. And at this point, we’re just experiencing those new systems, populating them with new experience, new data, new decision making, etc.

And all of that is going exactly as planned, exactly as forecasted, exactly as communicated with the FTA, and thus far, without a hiccup. And I think that’s recognized by the FTA. I think it’s recognized they have discretion. They don’t have to license new products out of that facility, but they have. And I think that that is evidence of how we’re progressing with Somar, and the fact that the FTA is giving it all the scrutiny that they would and should, and that what we’ve submitted to them for approvals has been given fair and objective consideration, and we’ve gotten our approval so far. With that said, the remaining ones, I’m not gonna change my estimates on. I’m not gonna change what we forecasted. I have no reason to believe otherwise. They clearly have the discretion not to, but that’s not been our experience. And so, consequently, I remain optimistic that we’re on a track that will deliver what we said.

Matt TaylorBarclays CapitalAnalyst

Thanks. And I wanted to turn to another thing that you mentioned in the prepared remarks. On China, you said that you’re preparing for the regulations, the change in nutrition in the new year, and did improve a little bit sequentially. Could you talk about what kind of opportunity you could have in China if that comes to pass on time with regards to being able to maybe soak up some of the capacity that gets lost as local players have to shut down or change their operations?

Miles WhiteChairman of the Board and Chief Executive Officer

Well, I’ll tell you what. I’m not sure. I would tell you this. First of all, we have the product approvals we need. We’re ready for the transition, building inventory for such, etc. So, as far as responding to the new law — and I think this is true for at least the large multinational competitors, I think most of us, if not all of us, have our product approvals. We’re ready to transition, etc. How we all manage that, who knows? But I think at least we are, and I think others are, ready with new approved replacement products, etc., as we’ve been required to do. So, I think we’re all ready for the transition on January 1st. What you can’t know very well, at least about everybody else, is how much inventory everybody has in various channels — how long that transition’ll take for any given competitor and so forth. We’re comfortable with our inventory levels. We’re comfortable with our inventory levels both on current product and post-Jan. 1 st product.

So, we’re comfortable with what we think we have to do with our own transition. What’s hard to project is not just multinationals, but all the hundreds of other Chinese competitors that are facing the same regulations. So, I’d say we’ve seen a stabilizing of China. It hasn’t been as choppy as it was in the last two years. I’d say our estimates around market growth are hard to pin down. We were more conservative on market growth than recent data we’ve seen. Market growth is better than we indicated or better than we believe, or better than we thought, and we’re looking pretty closely at all the sources of our market data, because there are many, and they’re not all perfectly comprehensive across all channels and in all sources of products, or even all geographies. So, it’s a hard one. China’s a particularly difficult one to pin down because there are a number of channels. There are a lot of competitors. There are a lot of data sources. It’s not like going to A.C. Nielsen in the U.S. or something.

So, I’m cautious about it. I think we’ve seen the tough part, and I think we’re going back into a phase where it’s the same kind of end to end competition we’ve opened across multiple channels. I like that. I think that’s better, because at least then whether we do well or don’t do well is a function of our execution. I haven’t been particularly pleased with our execution, and I don’t exclude a number of other countries where we do see soft market conditions, but I also see less than great execution on our part. So, this business is getting a lot of attention from us and from all of us top to bottom. And it will get some attention. I think it’s probably the one soft spot in our release. I think a lot of things are going awfully well, as I just commented to you in the device area. But this one’s gonna get a lot more attention.

I feel that China is at least reasonably stable or predictable. We haven’t been right about the market growth rates. Those look better than we expected. So, that’s a plus. And I guess I’ll just leave it there.

Matt TaylorBarclays CapitalAnalyst

Great. Thanks, Miles.

Operator

Thank you. Our next question comes from Bob Hopkins from Bank of America. Your line is open.

Bob HopkinsBank of AmericaAnalyst

Hi, thanks and good morning. So, first, I just wanted to clarify something you said on Alere. Obviously, I heard you that the accretion for ’18 will be lower than you originally thought. That’s not surprising. But I just wanted to confirm, do you still think it’ll be accretive in 2018? And is roughly half the original accretion a reasonable placeholder?

Miles WhiteChairman of the Board and Chief Executive Officer

Yeah, I expect it to be accretive. We’ve got a lot of work to do to identify our synergies and identify our growth opportunities. We’re going through a reorganization of the business right now, and I mean, that’s actually gonna be a plus. I don’t want to describe how it was organized, because I think that’s kind of a waste of time and will take a long time. But we went through a restructuring of the ordering structure of St. Jude. And we did it within six months, and as you know, organized integrated business units that — I’d say that organization is still kind of setting. The glue is still kind of setting. But we moved to it within six months. That might have been aggressive, but the organization’s very stable. The restructuring activities that we had to go through and a lot of synergizing as far as people go — we’ve gone through changes in management, we’ve gone through — etc. That all got done at about the six-month level at St. Jude. It all got done at Alere in six days.

So, that’s a running start. And what we’re moving to, I think it’s an organization — look, all organizations, all people want to do well. They want to achieve. They want to grow. They want to be proud of the businesses they’re running. They do want to do well. And I’d say our early days with the employees of Alere have been positive. And we announced that we’re gonna go to that kind of a structure. We’ve announced how we’re gonna do it, why we’re gonna do it, etc. And I think that’s well-received at this point. So, as far as we look into 2018, I think your question about is half of that a good placeholder, yeah, it’s a good placeholder. I can’t tell you with any precision that that’s what it’ll be. But I think it’s a good placeholder.

Bob HopkinsBank of AmericaAnalyst

Okay. That’s very helpful, thank you. And then I’m sure there will be a lot of other questions on Libre. But I wanted to focus on the rest of the pipeline for a second, because there are a number of other things in addition to Libre that could help in 2018. And you touched on the MRI Safe approvals. But I just want kind of ask specifically on some of the other things that you’ve got in the pipeline, and just to make sure that the timelines and your thoughts on those haven’t changed at all relative to what you’ve been saying previously. And so, that would include things like the new stents that you talked about, Sierra, the Confirm implantable cardiac monitor that’s entering what is a very attractive market. And so, I’m just curious on those couple things that the timeline’s still the same as what you’ve been saying previously.

Miles WhiteChairman of the Board and Chief Executive Officer

Well, a couple things. First of all, with regard to Sierra, the stent, yeah, same schedule, no change. That’ll be first quarter of the year, we think. And with regard to Confirm, it’s partly approved already. As you may understand, it gets approved in pieces, and so far, so good. There are some peripheral pieces we are waiting for approval on. But the first and very critical portion of that is approved, so yeah, I think that’s — so far, everything we’ve seen is very encouraging, and no change.

Bob HopkinsBank of AmericaAnalyst

No change. So, Confirm can be a full launch in 2018?

Miles WhiteChairman of the Board and Chief Executive Officer

Well, right now, that’s what I’d bet on.

Bob HopkinsBank of AmericaAnalyst

Okay. Great. Thanks a lot. That’s all I have.

Miles WhiteChairman of the Board and Chief Executive Officer

Okay.

Operator

Thank you. And our next question comes from Rick Wise from Seful . Your line is open.

Rick WiseSeful — Analyst

Good morning, Miles. Miles, just after a solid quarter, again, coming out in ’17 to the upper end of the range, I know it’s early to put all this pieces together in ’18. But as I reflect on it, in ’18, with multiple large new product opportunities, launching St. Jude, Alere working, shouldn’t we expect at least similar top line growth and potentially better, if not accelerating top line growth against — especially when you think about some of the headwinds you’ve faced and worked through in ’17? Is that the right way to think about it?

Miles WhiteChairman of the Board and Chief Executive Officer

I’m trying to think about how to sound conservative to you. Look, we got our acquisitions closed. We’re gonna have a number of product approvals that happened in the third quarter and fourth quarter that obviously should hit their stride. I mean, ideally, you look at ’18, and you’d like to have your product approvals exactly where we got them, going into the next year. We got a really good 2017. We beat all expectations, not just in the numbers, but in the approvals. And you all have to admit you had a lot of skepticism about some of this. And maybe rightly so, after 2016. But look, we’ve hit every target we had for this year. And with all those approvals, one ought to think that should bode positively for 2018. That said, we go through our budgeting every year. It’s kind of a negotiating hustle with our managers around the world about what’s possible in their given markets and so forth.

But yeah, we ought to have pretty good momentum going into ’18. What can I say? All the organic R&D projects, and system projects, and launches, and approvals, and so forth, they’re all happening. And the Alinity products, probably most miraculously, five of those have begun their launch process in Europe, and they’ll start in the U.S. next year. That’s been a huge, huge undertaking. We’re extremely excited about Libre. We’re excited about all the medical device products. Everything that St. Jude represented to Abbott about its pipeline has come to fruition and is coming to fruition. And so, we’re very, very bullish about all that, and I think there’s an awful lot of validation in this about that acquisition. We don’t know as much about Alere yet, but we will. And whether it’s a big impact during ’18, or if it’s beyond ’18, either way, I think we’re pretty happy to have that business. So, Rick, I think your assessment’s right. I mean, it’d be kind of hard for me to say, no, it’s gonna be a tough year.

Rick WiseSeful — Analyst

All right. Well, that’s a great answer, and I’ll take it. Another big picture reflection. One of the concerns, obviously, with two major acquisitions was balance sheet, cash flow. But my sense is, in the first half, at least, you ran ahead of your cash flow generation commitments and goals. Can you give us any feeling about how the third quarter went? Remind us what your targets are in terms of leverage, and just again, as we think about the next six, 12 months, where do you think you’ll be from a leverage and cash position? Thank you. Any color would be welcome.

Miles WhiteChairman of the Board and Chief Executive Officer

Okay. Well, first, I’d tell you that this got great leadership and attention from our CFO and our EVPs and SVPs from day one. And I’m gonna let him answer that question, because they’ve exceeded all of our targets, not just by a little, but a lot. Cash flow is strong, and I’ll let him tell you about it.

Brian YoorExecutive Vice President of Finance and Chief Financial Officer

All right, thanks, Miles. Yeah, we continue to make great progress in our programs. If you recall, I talked about operating cash flow being around four-and-a-half billion for the full year. I won’t quote you an exact number for Q3, but I think you’ll safely assume that when you see the quarter filed, that we are well on track to that, and I would say ahead of it. And so, we are going to continue to make that progress. As you talk about some of the ratios, I think it’s important to keep in mind both that and that debt. So, at the end of the year, we projected a debt to EBITDA dollar ratio of around four. However, when you look at the cash flow programs and look at our net debt position, we’ll be closer to three when you look at the net debt as a ratio to EBITDA. So, we’re in great shape, and we want to keep the momentum going, because this is the number one priority to build max strategic flexibility here.

Miles WhiteChairman of the Board and Chief Executive Officer

I think, Rick, I would comment — I just want to get a commercial out there. This all gets even better if there’s tax reforms. So, I’m hopeful. I wouldn’t put it odds on it anymore than anybody else watching our government. But we are extremely hopeful of a territorial system that gives us access to our cash flows and earnings around the world at a reasonable rate and at a competitive rate. And that does make a difference to us in addressing current debt and cash flows. But cash flow itself? Super good.

Rick WiseSeful — Analyst

Appreciate it. Thank you.

Operator

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

Larry BiegelsenWells Fargo — Analyst

Good morning, everyone. Thanks for taking the questions, and congratulations on a strong quarter. Just two. One, it was noteworthy that you didn’t mention the impact from the weather. You still had a strong quarter despite the weather. I imagine it had to have some impact. So, is there any color you can provide? And I have one follow-up.

Miles WhiteChairman of the Board and Chief Executive Officer

Yeah, it did. I would comment on a couple of things. First of all, it was a strange quarter for us, in that multiple hurricanes, whether in the Texas Gulf Coast or across Puerto Rico, impacted anybody who had operations there. The earthquake in Mexico impacted us. The brushfires and forest fires in California actually impacted us the day after we closed the Alere — a key Alere facility there. And to be honest, it was more an impact on our employees than on our plant operations. We had a little bit of roof damage and a little water leakage here and there. But it would appear the hurricane affected different countries different ways going across Puerto Rico, because I’ve noted that some competitors have indicated more damage or more impact than we’ve experienced. It took a superhuman effort by a lot of our people to try to address some of that, which we did. The biggest issue was access to power generation in Puerto Rico. And our folks addressed that really rapidly, and we’re very happy about that.

Our plants are — I guess back up and running is the right way to say it. There’s one that we’re starting this week, and we’re back up, is what it amounts to. And so, I would call it a modest impact. It’s affected us, I’d say, at a modest level, not a material level. Our first priority was to find all of our people and aid them, which we’ve done. And so, in Puerto Rico, we have not experienced the kind of disruption that some others have. I noted that another large healthcare company yesterday I think had similar comments, that they’ve been able to address it. We’re kind of large in Puerto Rico, so it could have been worse, but it wasn’t. And the St. Jude facilities that we inherited there with the acquisition of St. Jude were not particularly impacted. I mean, they were, but not to the degree we might have expected. I mean, everything has been more about power generation than damage. And unfortunately, that’s not true for our employees, and it’s not true for some other competitors, and I wouldn’t wish that on anybody. But we’ve been pretty fortunate to get everything back up and running.

So, we don’t have an impact to report for the fourth quarter that we haven’t somehow managed or absorbed already in our estimates. The facility that was threatened in California was not damaged. We were able to move things out of that facility and prepare for damage, but there wasn’t damage. And so, we’ll be back up and running soon. We did have employees who unfortunately lost homes and so forth, and we’re dealing with that as a company. But from the standpoint of the operation of the business, we are in good shape, relatively speaking, and to the extent that there’s any impact, we’ve already included it in our estimates for this quarter and absorbed it.

Larry BiegelsenWells Fargo — Analyst

That’s good to hear. For my follow-up, I wanted to ask about whether RX management — it’s the one business where if you improve that dramatically, it could really impact positively your growth. So, I’m just curious what your expectations are for that business going forward. Could it be potentially flat in 2018, and just if you could clarify or confirm RX is gonna be booked in that line or not? Thanks for taking the questions.

Miles WhiteChairman of the Board and Chief Executive Officer

Okay. I’m gonna have Scott answer that one for you.

Scott LeinenweberVice President of Investor Relations

Good morning, Larry. Yeah, as you know, on the MRI Safe side, we continue to see good progress on the pacemaker. We received approval for the ICD very late in the quarter, so that certainly didn’t have an impact this quarter, here in the third quarter. But we do expect it to have an impact, a positive impact, in the fourth quarter. So, yes, I do think you will see a nice step up in growth, starting, quite frankly, next quarter, and then as we move into 2018.

Miles WhiteChairman of the Board and Chief Executive Officer

And it’s gratifying that our experience with the pacemaker has matched our experience in Japan and Europe with the MRI approvals in terms of share recovery and so forth. So, I think that bodes well for the ICD as well.

Larry BiegelsenWells Fargo — Analyst

Thanks for taking the questions, guys.

Operator

Thank you. Our next question comes from Glen Novarro from RBC Capital Markets. Your line is open.

Glen NovarroRBC Capital Markets — Analyst

Hey, good morning. Thanks for taking the question. Miles, you guys are doing a great job in terms of cash flow generation. You’re gonna get to your targets faster for 2018. But it sounds from Brian’s commentary that 2018 is not gonna be any type of deal here. It’s gonna be paying down debt. Is that a fair assumption, or do you actually have more flexibility, that if something does pop up that’s really interesting, that you can do it next year? Then I have just some housekeeping questions after that.

Miles WhiteChairman of the Board and Chief Executive Officer

Well, let me answer it this way. I don’t really want the organization focused on M&A right now. And I think I’d give you that answer regardless of what Brian said about debt and cash flow and so forth. And secondly, I wouldn’t forecast it even if I had it in my gun sights. My experience with you guys over the past 19 years has been you like to have some indication of what’s coming. And usually, I surprised you with most of the acquisitions or other things that we’ve done. That hasn’t always been particularly well received, but they’ve always turned out pretty well. But I generally don’t like to forecast where we’re going and what we’re going until we announce it. And so, I probably wouldn’t tell you anyway.

Glen NovarroRBC Capital Markets — Analyst

But is there some power for next year, or is next year really, let’s focus on St. Jude, let’s focus on Alere before we think about anything else?

Miles WhiteChairman of the Board and Chief Executive Officer

Well, honestly, I think there is a focus on St. Jude and Alere. And right now, that is paying off. Look, the focus on St. Jude, it’s clearly paying off. The focus on Alere will pay off. The focus on the internal product launches of Alinity and so forth, these things will pay off. These are fundamental drivers of sustained growth. I mean, if the hallmark and the identity of the company is sustained growth, and we target double digit earnings growth every single year, your organic performance, both in terms of R&D, pipeline, commercial performance, etc., has to be sustainable. And that is where the focus is. And we’ve acquired a couple of businesses that initially were criticized as not growth, and I beg to differ. And I think that we’re demonstrating so far with St. Jude that there’s a terrific pipeline and growth and share gain, etc., and I think you can see that. And you can see that in the initial couple of quarters here, so yeah, I think there’s gonna be a lot of focus on not just St. Jude and Alere, but the fundamental organic performance of all of our business.

It took a while for analysts and investors to appreciate the uniqueness of our strategy in established pharma, and I think it sort of called out that there’s a segment of pharma that’s not commodity generic, that’s branded generic, that’s higher market and higher growth, etc., in pretty key markets around the world. And right now, that’s our fastest growing business, other than neuromod. And the neuromod’s hard to touch. But we’re growing that business at double digits. But the team is doing a terrific job. Those markets represent the kind of opportunity we said they did. And those kinds of growths, from an operating standpoint, growth rates out of the business, that’s what you want. So, to some point, if we can add to our footprints and add to our strategies, if we want to be in a flexible position to do that, we obviously want to get to a position where we have the strategic flexibility that we’ve always felt we had.

So, I don’t think it’s a bad idea for us to focus on the operations, keep pushing our cash flow, keep pushing that debt down. So, that’s where the focus will be next year. And I think we get ourselves back to strategic flexibility quicker that way, which is a good thing.

Glen NovarroRBC Capital Markets — Analyst

Yeah. Okay, and just — I agree with everything you just said. Just some housekeeping that’s maybe for Scott. You said Portico , you finished enrolling, that’s the U.S. trial. Would that put you on pace for a 2019 U.S. launch? And then I think you talked about Mitro , which is the Tendine program, and I think you said you started enrolling. Is that enrolling in the European trial, and then is there an update on the start of the U.S. trial? Thanks.

Miles WhiteChairman of the Board and Chief Executive Officer

I’m gonna let Scott answer that.

Scott LeinenweberVice President of Investor Relations

Sure. Glen, on Portico, we would expect to file in the U.S. in the first quarter of 2019, to your question, so now you have the regulatory process after that. With respect to the Tendine in Europe, we expect to complete enrollment here in the first quarter. It’s a one year endpoint, so you can kind of do that math after that. We’re on the 2020 range or so on approval on the Tendine product. Really great opportunity, though, really. And the structural heart portfolio here in portfolio has really come together with the [inaudible] [0:49:01] which St. Jude brought to bear here, so we’re excited about Avonaterm .

Miles WhiteChairman of the Board and Chief Executive Officer

Yeah, it’s a really good one to note. I mean, that’s one that came out of our own venture group from our own investments and so forth. And we’ve been able to combine these things with St. Jude in a way that I think is pretty synergistic, pretty favorable. So, we’re pretty excited about that one.

Glen NovarroRBC Capital Markets — Analyst

Any update on when you start a U.S. trial for Tendine?

Scott LeinenweberVice President of Investor Relations

Yeah. We could initiate a U.S. trial here in 2018.

Glen NovarroRBC Capital Markets — Analyst

Okay, great. Thank you.

Scott LeinenweberVice President of Investor Relations

Okay, thanks. Operator, we’ll take one more question.

Operator

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

David LewisMorgan Stanley — Analyst

Thank you. Good morning. Miles, I thought I’d end on a couple of questions on growth. And I guess I’m a little surprised the neuromodulation has not come up in this call, given it’s been the biggest growth driver for St. Jude this year, 50% growth through the first three quarters. I think every single quarter, we expect that growth rate to come in a little bit. It’s been extremely durable across the three quarters. Can you just give us a sense of factors that are driving that growth and sort of how you think about the sustainability of that growth into 2018? And I have a quick follow-up for Scott.

Miles WhiteChairman of the Board and Chief Executive Officer

I mean, I think anybody that claimed a 50% growth rate was sustainable would be an idiot, but — so, I’m not gonna be one. Look, we’re very pleased with the performance of neuromod. I think it’s obviously drive by the fact we’ve got three great products there. They’re being exceptionally well received by the market. They have an impact on real life on patients and their pain levels. We’re seeing great real world results from Burst and ERG. I think it’s a really great group of products and a strong organization. I think that products hit a segment that’s in crying need of improvements for patients, and particularly at a time when pain drugs and so forth are a national issue. So, I don’t know. I think the new products are driving the growth, and the execution’s been strong. The uptake’s been strong. We’ve had three quarters in a row of 50% or better growth. How long will it be like that? We’ll start to lap it, and the law of big numbers will start to diminish the growth rat. But the actual raw growth will still be pretty strong. So, I don’t know. I like what we see, but it’s hard for me to hold it up as an example to all the other businesses that you should do this.

David LewisMorgan Stanley — Analyst

Sure, very clear. And then, hey, Brian or Scott, just to wrap up here, into the fourth quarter, because I think it could set the tone for investors as they think about next year’s growth rate, you’re certainly guiding to sequential acceleration, sort of mid to high. Can you just kind of run through kind of sequentially, what are those key components that get that acceleration? Because as I said, I think it sets the tone for ’18. Thanks so much.

Brian YoorExecutive Vice President of Finance and Chief Financial Officer

Hey, I’ll take this. I think it’s just been what Miles has talked about, the continued growth of our brand and generics business. It’s been performing at the double digit range, and I think you should expect more of the same there. If we look in diagnostics, to sustain what you’re doing, we do expect improvement of that business over time as we continue to roll out our Alinity platforms across the globe. Diabetes care, you know that story. It’s growing very strong, and we’re excited to bring that here to the U.S. And most notably — and I mentioned this in my guidance on the medical device side — that’s where the step-up is, where I talked about a mid to high single digit, and Scott kind of brought color to that by saying you should expect further sequential improvement on the Sierra RM side of the business. Because we’ve always had the magic formula, is just bring that back to flat, and the double digit growth of all these high growth areas will shine through and deliver five or six% on our medical device business. Those are really the key catalysts here, so we’re looking forward to a good fourth quarter here.

David LewisMorgan Stanley — — Analyst

Okay. Thanks so much.

Scott LeinenweberVice President of Investor Relations

Very good. Thank you, operator, and thank you for all of your questions. And that concludes Abbott’s conference call. A replay of this call will be available after 11:00 AM Central Time today on Abbott’s investor relations website at abbottinvestor.com. And after 11:00 AM Central Time via telephone at 404-537-3406, passcode 88967373. The audio replay will be available until 9:00 AM Central Time on November 1 st . Thank you for joining us today.

Operator

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

Duration: 54 minutes

Call participants:

Scott Leinenweber — Vice President of Investor Relations

Miles White — Chairman of the Board and Chief Executive Officer

Brian YoorExecutive Vice President of Finance and Chief Financial Officer

Mike WeinsteinJ.P. Morgan — Analyst

Matt TaylorBarclays Capital — Analyst

Bob HopkinsBank of America — Analyst

Rick WiseSeful — Analyst

Larry BiegelsenWells Fargo — Analyst

Glen NovarroRBC Capital Markets — Analyst

David LewisMorgan Stanley — Analyst

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