Abbott Laboratories

Good morning, and thank you for standing by. Welcome to Abbott's fourth quarter 2018 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 questions by pressing star 1 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 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 express written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing, and Acquisitions.

Good morning, and thank you for joining us. With me today are Miles White, Chairman of the Board and Chief Executive Officer of and Brian Yor, Executive Vice President, Finance, and Chief Financial Officer. Miles will provide opening remarks, and Brian will discuss our performance and outlook in more detail. Following their comments, Miles, Brian, and I will take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2019. AVID 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 AVID's operations are discussed in items 1A, Risk Factors, to our annual report on Securities and Exchange Commission Form 10-K, for the year ended December 31, 2017. AVID undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. Please note that fourth quarter financial results and guidance provided on the call today for sales, EPS, and line items of the P&L will be for continuing operations only. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth. which is defined in our earnings news release issued earlier today. With that, I will now turn the call over to Miles.

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

Thanks, Miles. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance. Turning to our results, Sales for the fourth quarter increased 6.4% on an organic basis, in line with our guidance of mid to high single-digit growth. Rapid diagnostics, which was acquired in late 2017 and is therefore not included in our 2018 organic sales growth results, achieved sales of $548 million. Exchange had an unfavorable year-over-year impact of 3.7% on fourth quarter sales. During the quarter, we saw the U.S. dollar continue to strengthen modestly, resulting in a somewhat larger unfavorable impact on our results in the fourth quarter compared to expectations had exchange rates held steady since the time of our earnings call in October. Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.3 percent of sales, adjusted R&D investment was 7.2 percent of sales, and adjusted SG&A expense was 29.2 percent of sales. Overall, as we look back at 2018, we delivered strong organic sales growth of more than 7%, adjusted earnings per share growth of 15%, and exceeded our cash flow and debt repayment objectives. Turning to our outlook for the full year 2019, today we issued guidance for adjusted earnings per share of $3.15 to $3.25. For the full year, We forecast organic sales growth of 6.5% to 7.5%. Based on current rates, we would expect exchange to have an unfavorable impact of approximately 3% on our full-year reported sales, with the vast majority of the impact expected to occur in the first half of the year. We forecast an adjusted gross margin ratio of somewhat above 59.5% of sales for the full year, which reflects underlying gross margin improvement across our businesses partially offset by the impact of currency. We forecast adjusted R&D investment of around 7.5% of sales and adjusted SG&A expense of approximately 29.5% of sales. We forecast net interest expense of around $600 million and non-operating income of around $200 million. Lastly, we forecast an adjusted tax rate of around 15% for the full year 2019 which contemplates the anticipated impact from U.S. tax reform. Turning to our outlook for the first quarter, we forecast adjusted EPS of 60 cents to 62 cents, which reflects strong double-digit underlying growth, partially offset by the impact of foreign exchange on our results. We forecast organic sales growth of a little less than 7%. which contemplates a difficult comparison versus the first quarter of last year when we saw abnormally strong sales in our rapid diagnostics business due to our record flu season. At current rates, we would expect exchange to have a negative impact of around 5.5% on our first quarter reported sales. We forecast an adjusted gross margin ratio of around 58.5% of sales adjusted R&D investment of around 7.5% of sales, and adjusted SG&A expense of somewhat above 32% of sales. Before we open the call for questions, I'll now provide a quick overview of our first quarter and full year organic sales growth outlook by business. For established pharmaceuticals, we forecast mid-single digit growth in the first quarter, which is comprised of mid to high single-digit growth in our priority key emerging markets, along with a modest decline in other EPD sales, which reflects the recent discontinuation of a non-core low-margin third-party supply agreement. For the full year, we forecast established pharmaceuticals growth of mid to high single digits. In nutrition, we forecast low to mid single-digit growth for both the first quarter and the full year. In diagnostics, we forecast Abbott's legacy diagnostics businesses, which is comprised of core laboratory, molecular, and point of care, to grow mid to high single digits for both the first quarter and full year, driven by the continued strong sales momentum across our portfolio of instruments. Rapid diagnostics, which will now be included in our organic sales growth results in 2019, is expected to be relatively flat in the first quarter, reflecting the difficult flu season comparison I mentioned earlier. For the full year, we forecast rapid diagnostics growth of low to mid single digits. And in medical devices, we forecast high single digit sales growth for both the first quarter and the full year, which reflects continued double digit growth in several areas of the business. With that, we will now open the call for questions.

Ladies and gentlemen, if you have a question at this time, please press the star, 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 star, then one to ask a question. And our first question will come from Matt Taylor from UBS. Your line is open.

Hi, thank you for taking the question. I wanted to ask about Freestyle Libre to start off. You had another good quarter of patient ads, and it seems like you're expanding more into Type 2 with the new disclosure. Could you talk about the trends there, what the 2.0 ads and some of your longer-term vision for Libre?

Yeah, sure, Matt. Well, two things about Libre, or actually several things about Libre. First of all, It's going extremely well. We did have 300,000 patients last quarter. That's almost equivalent to the entire user base of the number two competitor in the space. So I'd say that's going very well. We've got over 1.3 million patients now. Two-thirds of those are type 1. Our intent with this device has been to serve the entire diabetic community and not niche it because we think it has mass market potential worldwide. We target both segments, both type 1 and type 2, and we're doing very well in the type 1 segment, actually, and as our capacity expands, we'll put even more effort behind the expansion with type 2 patients. There's a constant, I'll say, cadence of enhancements, et cetera, to the product. We've recently launched 2.0 in Europe. That should come to the U.S. shortly. We've obviously invested a fair bit in capacity expansion. At the rate we're adding patients, obviously that's something we started paying attention to a couple of years ago. I'd say a significant quantum of capacity will come online in the second half of this year. From my perspective, that allows us to open the floodgate much wider. At this point, we're having a tremendous amount of success with Libre without putting much push behind it. And at that point, we're going to have an ability to turn on a lot of push. And then we've got a steady cadence of capacity additions after that. And because of the magnitude of the size of the diabetic market, both for type 1 diabetics and type 2 diabetics, our view was this had to have a value proposition for patients and for the healthcare system that was accessible and affordable by everybody and not just driven by a rebate system and so forth. So we've got a very low cost position. We've got a good value access price point. And I think all of that is playing through our markets and our patient groups and influence groups and so forth very well. The product, obviously, is getting all the emphasis in development, et cetera, that anybody would like to see. I think this is a very big, long-term, sustainable growth product for the company. I don't have any other way to say it. This is a happy topic.

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

I'm going to be careful how much I say publicly on the phone. I think you can assume that we're obviously developing every aspect of this product that you can imagine. That's all going very well. I wouldn't communicate what I would forecast as timelines. I think that the current growth rate speaks for itself. the current submissions and features of the product that we're adding speak for themselves. You know, we're pretty highly focused on bringing that capacity online. Not because we're constrained yet, but right now we're adding, as I said, 300,000 patients a quarter and growing. And so you have to pay attention to keeping that momentum increasing. And, you know, at this point, with that many patients and the magnitude of the opportunity, Our intent is to make this very much a mass market product, but with 40 million type 1 diabetics out there, mass market means every one of those type 1 diabetics ought to be able to access this product economically, and that's worldwide. And then, of course, there's an enormous type 2 market beyond that. This is not a product that's targeted solely at type 1 or solely at type 2. Its accuracy and performance obviously has meaning and efficacy in all segments. Our cost position is as low as anything in the industry. We have probably number one cost position, number one volume of patients position. pretty easily declare ourselves the leader in continuous glucose monitoring and growing faster than everybody else. So, you know, I just say that all the things that you would expect us to be doing, including working with other third-party partners who would benefit from this technology, all underway, have been for some time.

Great. Thanks for the detailed answer. I'll let some others jump in.

Thank you. And our next question comes from Robbie Marcus from J.P. Morgan. Your line is open.

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

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

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

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

Yeah, I'd reiterate a couple of things. This is Miles. First of all, Brian mentioned exchanges, we know it right now, is factored into our guidance, and we're still at a double-digit EPS growth. You know, the exchange that we're, I don't know, seeing in our guidance is, you know, a factor of last year, meaning 18, that we've got a lap. And so it's that roll through that is currently taking us from, you know, what otherwise would have been 15% to what at the midpoint would be 11. So we're still healthy double digits, and it's in effect caused by lapping last year's guidances. None of us are currency traders, so there's no way to predict what's going to happen with the year. I hesitate to do so for fear the fates strike us down. With regard to profits and performance and so forth, I'd say the company has always been fortunate that it's had strong profits and strong cash flow. With regard to forecasting and so forth, we start every year with a double-digit target and a high bar, and that's our aspiration every single year, and gosh, more often than not, that's where we start with our guidance. Now, having said that, out of the last 11 years, and why do I not go back further than 11 years? I don't have the data, but I could get it, but out of the last 44 quarters that we've reported, we have beat 39 of them, exceeded the investors' expectations, beat 39 of them, and met on five. And so I think the company has demonstrated that if it exceeds its expectations, if it exceeds Wall Street's expectations, if it exceeds in performance expectations, We do share that back to our investors in increased profitability or increased return to the investor. And there's no reason to see a change to that. We've got strong cash flow. We are able to cover all of our cash and investment needs from a capital standpoint, from a dividend standpoint. We have the capacity to buy back shares to offset dilution or frankly buy back shares if it's the best investment that we can make. We have the capacity to do M&A. We've obviously been able to pay down a lot of debt and very, very rapidly so that we would have the balance sheet flexibility that we want. So we have very strong performance, strong profitability, strong cash flow and so if we exceed our expectations and our performance, then obviously we have the decision, and that's a nice place to be. We have the decision to share that with our investors, which is exactly what our investors would expect. And you can tell that 90% of the quarters for the last 11 years, investors have benefited.

Thanks a lot.

Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is open.

Good morning. Thanks for taking the question. Miles, just a couple for you. In thinking about or listening to your commentary on 2019, the one comment that comes to mind was balance, your commentary that most businesses get better or a lot better. That being said, a lot of investors are still very focused on Libre and MitraClip. So if you think about the guidance and how it was formulated, how dependent is 2019 guidance on a significant inflection for MitraClip or a Libre 2 product launch? Zero. Okay. That's pretty clear. I guess we can leave it at that. Well, it is.

I mean, you know, I think, I mean, to be honest, I'm trying to be coy with you. It's very hard to predict, you know, what the regulatory timing will be, for example, on MitraClip. So... And there's no reason for us to kind of play with the number and play with something that we're not sure we can predict. So what we do know is when it comes, which is very compelling, you know, there's a number of things that have to happen. FDA has to approve it. We obviously would want CMS to reimburse it and so on. And I think it'll have that kind of compelling story with the regulatory bodies. It's obviously the COAP study was very powerful, and I think the regulatory bodies will give that all the right consideration. But trying to pin that down and trying to pin down timing and so forth is not something that's easy to do, and I'm not sure we'd be doing our investors any good service by trying to predict that. What I do know is it's compelling. When it comes, it'll come, and it'll have impact, and rather than put it in our estimates, we haven't.

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

Well, I'd say a couple things. First of all, you earn your highest return on organic growth and not your highest return on M&A. I mean, as you know, a lot of M&A deals struggle to return a good return to shareholders. We've had, let's say, an excellent track record going back, Deep in our history with Knoll and Humira and so forth, we've had a really good track record with the M&A we've done over time. And we've managed those companies and their products well over time. So I'd say, first of all, you make a much higher return on your organic growth. The growth we're getting from all of our businesses and even St. Jude is coming out of pipelines. And it's coming out of our own organic development, et cetera. And right now, those are the highest returns. Those are the highest or biggest opportunities. And we certainly don't see gaps right now that we have to fill with M&A. So we're able to return a pretty good sales and profit growth rate across the business. We've also been careful over time. There's times to be in the M&A markets, and there's times not to be. You know, when multiples are really high, bad time to buy. But to be honest, I don't see anything right now that is so appealing that we feel like that's necessarily a good direction for us. And, you know, the kinds of things we might look at, well, I would never tell you anyway, and you know that. But right now our opportunities are so good with our own organic – products and execution that we don't need it. And there's not something that's so attractive. You know, all of the various investment banking houses that you can imagine have put many things in front of us as opportunities as they do every company, et cetera. So it's not like we're not aware of what opportunities may be out there. It's just they wouldn't meet our criteria. I don't see something compelling. I don't see something that we need. And, you know, right now we're in a fortunate position where we've got very strong products and pipelines and strategies across all of our businesses. I will say we could execute better in some places, but you can't buy that. So, you know, we fix our own execution, you know, with our talent and strategies and so forth. But it's just not necessary for us to put our money into M&A right now because I don't think we'd turn a better return for our shareholders now or at least in the foreseeable future doing that. We're going to make a lot more money for our shareholders investing in our growth, investing in the products we have, investing in our expansion, investing in our own capital. And as you know, we have plenty of cash flow to do that. And we have plenty of cash flow that we can still return increasing dividends. And at some point here, we'll have a choice. We're going to keep paying down debt because I think it's a good idea. Our net debt to EBITDA ratio now is below 2. And as you know, it was more like 4 to 4.3 when we completed the Aaliyah and St. Jude deals. That wasn't that long ago. So to have brought our net debt to EBITDA ratio down that far, that fast, and particularly as we look forward at a rising interest rate environment or potentially so, depending on what you believe, You know, I think we're doing the right things in the management of our balance sheet. I've wanted to get that debt down fast. We have. I've wanted to have strategic flexibility. We have it. What I really want is capital allocation, flexibility, you know, to earn the right returns and the optimal returns for our shareholders. And I think we're in that position. So I just don't see M&A right now as a high priority.

Okay. Very clear. I'll jump back in queue. Thanks, Miles.

Thank you. Our next question comes from Joanne Wunsch from BMO Capital Markets. Your line is open.

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

Well, I get that speculation, geez. If I don't get it every quarter, it's almost every quarter. So thanks for asking the question, Joanne. You know, we like our mix right now. There's a role to everything in our portfolio. And, you know, the one I'm asked more frequently about than anything is nutrition. And, you know, you can transact. You can try to make money for your shareholders with transactions. But I would say this. As you know, Joanne, I've been in this job a long time, and earlier in my tenure, there was a role for nutrition in our portfolio. I got the same question then. One of the roles was it's got a global presence, global infrastructure. It's highly profitable, generates a lot of cash. A lot of the M&A activities and other things that we did back in my earlier years benefited from the cash flows and position of nutrition. You know, even today, there are great benefits to our nutrition business, to the company. Now, that's not to say that any given part of a company has to be part of it. It's clearly a different business, as is our pharmaceutical business, et cetera. But today, I'd say, look, it makes sense as part of our company. I don't think we need to be considering a transaction just to do it. we're well-valued, we're performing well. I don't honestly think I would create more value for our investors by separating it. If everybody asks you about it often enough, you go look at it. Okay, I've looked at it. I don't think we can create differential improved value for our shareholders than what is already being executed by us. I think that's a plus. I think that in general, while a lot of people might ask me about it, It's also performing well. I'm happy that it's performing a lot better than it did for a couple of years there. So it's just not on my radar screen. I don't think we're going to improve Abbott. I don't think we're going to create value by considering it. And I think we'll distract ourselves with that at a time we don't even need to be distracted. So it's just not on my radar screen as a way to create value for shareholders, because I don't think it will. And I think it's being well-valued as part of Abbott, as is the rest of Abbott. So it's just not on my radar screen, and nor do I think it's necessarily beneficial to us. I guess that's the simplest thing to say.

Okay, I appreciate that. As a follow-up, two businesses I just want to talk about the pipeline. Neuromod, what does it take to reaccelerate that growth rate? And then you talked about an Aaliyah pipeline, which I don't think the streets really focus on, if you just give us some highlights there. Thank you.

Yeah, so first of all, the single biggest thing that Neuromod immediately will change how we're doing in Neuromod is actually our Salesforce expansion in the U.S. and our training and execution there. And that's what we're focused on. Then longer term, we've put a lot of emphasis in our R&D pipeline. We have a number of new people, new management, broader pipeline under development. I'm not going to give you any kind of insights to it and so forth because I don't really want to get the world focused on it. But It's an area where we think there's a lot of opportunity in the types of products we have. We don't think we've sort of fully gotten the benefit of the two main products we have now. And so I'd say it's got our attention. We've doubled our investment in R&D there. And I think in the coming years, we'll see that roll out. What was the second part after Neuromod? You know, we've reorganized the rapid diagnostics business into four segments. Each of them has their emphasis, their target. Each has an R&D plan. Each has a new product plan. We are increasing Are investment and R&D also there? I can give you a couple of high points and examples. Infectious disease product, ID Now, which we think has got a lot of potential that we're rolling out. The Affinian 2 cardiometabolic platform, another opportunity that we're putting emphasis behind. But I think there's, you know, generally speaking, there's a lot more possibility for us in incrementally updating and renewing a number of these platforms, and then there's newer stuff than that. And so when we took over the company, which we now have in our possession a little over a year, one of our targets was to get our hands around the R&D of each of these segments and make sure we had an R&D plan in place so there was a steady cadence of improvements and new products in each of these businesses That does take a little time. In our first year, a lot of our focus was stabilizing the organization and structure, the management, people, execution with what we've got, synergies, et cetera, which we've talked about. Now our attention turns to this, and it has been. I mean, we've been increasing our spending and increasing our focus on this, and that's what the management team is focused on now is that new product cadence. So beyond that, I don't want to be more specific, otherwise we'll be tracking it all here.

Thank you very much.

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

Well, thanks, and good morning. I just wanted to follow up, if I might, on the commentary earlier on MitraClip, given its visibility. Can you just give us a sense as to what the growth rate of MitraClip was in the fourth quarter? And then to be clear relative to your earlier comments, do you really not assume that U.S. approval and reimbursement for MitraClip and FMR at all in 2019? Is that not assumed at all?

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

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

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

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

Great. Thanks very much.

Thank you. Our next question comes from Glenn Navarro from RBC Capital Markets. Your line is open.

Hi. Good morning, guys. Two device questions. First, on rhythm management in the quarter, down 2% to 3%. Is that market softness, or are you guys just losing share to Boston Scientific because of their heart logic feature or you're losing share to Medtronic because they've got, you know, micro leadless pacer. So that's, that's first question. And then, um, the vascular business down 5% in the U S that, that was, that, that's surprising to me, given, you know, you're, you're launching Zion Sierra. So similar question, is this just, you know, the market is, is, is weaker, uh, in drug looting stents for the U S is there more pricing pressure or, or is the product simply not gaining traction? Thanks.

Hi, Glenn. Yeah, I'll start with rhythm management here. As you know, when we acquired that business, it was declining at a fairly heavy clip. We've been able to stabilize it. The overall market, to your point, is down modestly, and our performance is generally in line with that. When it comes to vascular... Same thing, again, the market is down modestly. Zion Sierra is doing well. It's capturing share. In fact, we gained about five share points since the launch of Zion Sierra. Pricing in the space remains a challenge for all of the market, but Zion Sierra is definitely performing there. And quite frankly, our performance overall is a little bit above the market.

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

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

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

Okay, great. Thanks, Scott.

Thanks, operator. We'll take one more question.

Thank you. And our final question comes from Rick Wise from Stiefel. Your line is open.

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

No, I don't think about it as dividing it equally. You know, for any particular capital use, You know, there's a timing and there's a need. You know, if we've got to invest in capacity internally and manufacturing and so forth, you know, obviously that's a good thing. And as I've said, we can afford all of that and more. We're keeping our dividend healthy. We target our dividend, you know, generally in a range 40% or higher of our EPS as a payout ratio, a nice healthy range. and a number of our peer groups don't do that at all. So I think we've got a good, healthy dividend, and that matters to us because we have a large segment of investors that care about that. With regard to M&A, M&A is necessarily opportunistic. It depends on the product, the company, the business, the timing, market values, multiples, all sorts of things. And right now I don't see any of that lining up. to say, wow, there's something we're dying to go look at. And then with regard to share buybacks, Rick, it sort of depends on valuations in the market. There's times when share buybacks aren't that economical and other times when they're high return. And in our case, right now, we've got the flexibility You know, if we want to do any kind of share buyback, just offset dilution and so forth, we can do that. But I think you've got to look at it and say, is that my best use of cash? I still want to pay down debt. I don't want to assume we're just going to carry this forward. We've paid down a lot of debt fast. It would actually be in our interest to keep doing that, to keep paying it down. I think we're well into a reasonable range. now of debt, but we still want to keep paying that debt down. And our cash flow is strong enough that we do have choice. We have the ability to pay the dividend. We have the ability to do all these things. We can satisfy our capital needs internally. So I think, I guess the best thing about it is we don't think about it in any mechanistic or formula way, dividing it in half or whatever. We kind of look at where the best, where the need is and where the best return is. And I think it behooves us to leave ourselves also in a very strong position at, you know, lower debt level. So, you know, we've got places to use it and places to use it economically. Before tax reform, when so much cash was trapped overseas, we were fortunate that we had M&A opportunities to invest that cash for good return. We're not stuck like that now. We can manage cash, manage the cash flows of the company and so forth far more efficiently in terms of the best returns or the best needs. And that's kind of how we look at it. If we find that our best use of the cash or a strong use of the cash is share buybacks, we'd certainly consider that. But right now, I wouldn't say that's our highest priority either. It's still a high priority to just keep paying down the debt. And a couple of years down the road here, depending on what happens with interest rates and so forth, we'll probably be glad we did and we'll have tremendous strategic flexibility and still have very strong cash flow. So I think it just depends on circumstances at a given point in time.

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

Oh, I think there's, you know, Rick, I think there's a number of product things that could do that. You know, we've already mentioned MitraClip's possibility, and, you know, it wouldn't take a whole lot, you know, a couple of ticks in any of these businesses of improvement. You know, last year our nutrition business actually did better than we expected. We thought it would do better than prior years, but it did better than that. and better than we expected. Some of those tick-ups make a big difference. I think if we turn the corner as we expect to and plan to, things like Neuromod and other places where we know the fundamental underlying business is strong, it doesn't take a whole lot to correct the underperformance of some businesses whether it's our point-of-care business or Neuromod or some individual countries in the pharmaceutical business. And, you know, the upside here is fairly strong.

Much appreciated. Thank you.

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

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