Q2 2003 Abbott Laboratories Earnings Conference Call - Part 2.

(From Fair Disclosure Wire)

With that, we will open up the call for questions. I would remind you, again, as a professional courtesy, we ask that each caller try to limit his or her questions to one topic only. Thank you and we'll take the first question. OPERATOR: Thank you. At this time, we're ready to begin the question and answer session. If you'd like to ask a question, please press star 1. When asking your question, please use your handset as opposed to speakerphone. To withdraw your question, please press star 2. The first question is from Bruce Jacobs with Deutsche Bank. BRUCE JACOBS, ANALYST, DEUTSCHE BANK SECURITIES: Thanks so much, guys. Can I ask on the consent to creed, John, your comments about the FDA inspection by the end of the year I want to be clear if you're expecting full resolution by the end of the year? Or just the inspection to commence? And perhaps walk us through the steps between now and then and the internal audits and so fourth?

JOHN THOMAS: It's not been our intention to give play by play, as you know. We purposely tried to put our head down and get through this and do the work that we need to do. So, what I can tell you is that, as I said, the division has met its internal goals, which need to be done, in terms of preparing for a reinspection, by the FDA, which is still on track to happen sometime before the end of the year. Of course, we would hope that that inspection would not take nearly as long as the last inspection did, but, of course, that's up to the FDA. But nonetheless, if that were to occur, we would hope to be finished by the end of the year. Obviously we cannot give 100% guarantee that's going to happen, but we think that by the end of the year or certainly very close to the end of the year is still a very reasonable target based on the work that we need to do, the GAAP analysis, the priority of projects, the auditing by the two outside firms. Everything is on track to meet that timeline. BRUCE JACOBS: Great. Thanks very much. JOHN THOMAS: Okay. OPERATOR: Rick Wise from Bear Stearns. You may ask your question. RICK WISE, ANALYST, BEAR STEARNS: Good morning. A two-part question. First, can you expand on your comments about the hospital admission issues? Can you help us quantify what you saw, it seems to have been unexpected to happen late in the quarter. Is it getting worse as we speak? Getting better? Why should we feel more comfortable in the second half? And just last on Abbokinase, if I remember correctly, your guidance was significantly higher. Why the sharp pullback to the $25 to $35 million range? Can you help us understand why you're less optimistic there? Thank you. JOHN THOMAS: Sure. I'll take those, Rick. Let me take your first question first -- or your second question first, excuse me. With regard to Abbokinase, we never really gave a forecast for this year. We've talked about in the past when we relaunched the product last year, we gave a sense of the total available market for the product based on its indications, which we said were up to $200 million and that's still the case. We did have higher expectations for the drug this year. We never gave a forecast. Although it's below our expectations and we think we're in that $25 to $35 million range based on the uptake, it still has good growth potential longer term. This could still be a $100 million plus product, but we're finding that there is some resistance at the pharmacy within the hospitals because it's a premium-priced product, as we've talked about in the past. But vascular surgeons and doctors still trust the product. They still use it and still want it. As I said on the call, we have about 1,000 hospitals that now have it on formulary. So, the division continues to be optimistic longer term, but the ramp-up is just taking a little longer than we originally thought. So, that's Abbokinase. Hospital admissions, we do our own internal surveys and our survey that we have done more recently suggests that from the period of January through March-April, year-over-year, hospital admissions are slightly down. Now, that's not a comprehensive survey, but it is one of about 50 different-sized hospitals across the company. Again, you're going to see, in some parts of the country, in certain geographic segments, it's down significantly. In some areas, it's up modestly, 5% or 6%. But there are some areas where hospital admissions are down 12% to 15%. But net-net, our indicators are that we're slightly down in hospital admissions. We also think because of the economy and the higher co-pays with managed care, dropped coverage for some people who have been laid off, all of these things have, together, made for a somewhat sluggish -- and I think there is some validity to that in terms of media reports that I've seen that we've looked at that also suggest that hospital admissions have been down year-over-year. Does that answer your question?

RICK WISE: It does, but just a follow-up. Are you seeing stabilization overall now -- JOHN THOMAS: Right. RICK WISE: -- or do you think it gets better or worse in the second half. JOHN THOMAS: Yeah. It appears that the outlook is, based on our survey, looks better, moderately better going into the second half of the year, but again, I think it's going to be dependent to some degree on how the economy improves. RICK WISE: Thank you, John. JOHN THOMAS: Thanks. OPERATOR: Matthew Dodge from SG Cowen. Go ahead. MATHEW DODGE, ANALYST, SG COWEN: Good morning. John, quick question on the gross margin. I know year-over-year decline you talked about GMP costs. Sequentially, U.S. pharma grew about $200 million from Q1. That was almost the entire increase in the sales, but sequentially. And the GM was flat there. So, can you comment more sequentially on why the GM didn't increase more with that kind of growth in U.S. pharma?

JOHN THOMAS: I will take that. When you look at the mix of our businesses, including the growth in pharma, we do have favorable mix impact in the quarter. Offsetting that in the analysis is this kind of unusual situation we have in the way exchange impacts our gross margin. While exchange is a positive top line impact on us, the way our international businesses are organized in Latin America, et cetera, we don't get as good as fall-through on exchange impact on sales as the corporate average. In fact, that exchange impact on the ratio itself is offsetting what you have correctly identified as some positive trends on mix. Going forward, obviously, it is that mix issue, as I indicated in my remarks, that you, you know, by the fourth quarter you should be seeing this improvement in gross margin and we appear after a series of quarters of deterioration here of bottom and are hopefully heading back the other direction by the fourth quarter. MATHEW DODGE: Thanks. Can I get one quick housekeeping follow-up?

TOM FREYMAN: Okay. MATHEW DODGE: The sales for Mavik and Tarka, they weren't broken out in Q2?

JOHN THOMAS: They were up, but I don't have that in front of me. Can we get back to you on that? Thank you. I'll have someone follow up with you on that. MATHEW DODGE: Thanks. OPERATOR: Mike Weinstein from JP Morgan. You may ask your question. MIKE WEINSTEIN, ANALYST, J.P. MORGAN: Thank you, just a couple of clarifications. First, a number of the pharmaceutical products came in ahead of expectations in the U.S. and ahead of some of the RX trends we've been watching. Is there anything unusual in the quarter in terms of inventory patterns that we should be aware of?