Abbott Laboratories

NYSE:ABT

Earnings Call Transcript 2019-Q2

[Operator]

Good morning and thank you for standing by. Welcome to Abbott’s Second Quarter 2019 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] 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, Licensing and Acquisitions.

[Scott Leinenweber, VP, IR, 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; Robert Ford, President and Chief Operating Officer; and Brian Yoor, Executive Vice President, Finance and Chief Financial Officer. Miles will provide opening remarks and Brian will discuss our performance and outlook in more detail. Following their comments, we’ll take your questions.

Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2019. Abbott cautions that these forward-looking statements are subject to the risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements.

Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2018. 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 second 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.

[Miles White, Chairman and CEO]

Thank you, Scott. Good morning.

Today, we reported results of another strong quarter with ongoing earnings per share of $0.82, above our previous guidance range and reflecting double-digit growth. Sales increased 7.5% on an organic basis in the quarter with all four businesses exceeding expectations. I'm particularly pleased with our ability to consistently achieve these types of strong results. Over the past two years, our quarterly organic sales growth has averaged more than 7%. And importantly, we're well positioned with our portfolio and new product pipeline for this type of strong growth going forward.

Based on our performance and momentum in the first half of the year, we're raising our full-year outlook and we now forecast adjusted earnings per share of $3.21 to $3.27, reflecting nearly 13% growth at the midpoint on a reported basis, and even faster growth when excluding the impact of foreign exchange. While we achieved broad-based growth across several areas of our portfolio, I'd like to highlight just a few areas where we continue to perform exceptionally well.

I'll start our medical devices business with FreeStyle Libre, where we achieved sales of $430 million and continued to add significantly to our global user base, as reflected by organic sales growth of more than 70% in the quarter. We also continued to make excellent progress expanding reimbursement and access in the U.S. where Libre is now reimbursed for approximately 75% of people with private pharmacy benefit insurance.

Libre offers a unique value proposition and that’s by design. It provides great clinical benefits and we priced it to ensure affordability. Payers recognize that value and are increasingly providing reimbursement coverage for Libre, which helps lower out of pocket cost even further for patients.

As I’ve mentioned before, we’ve been investing significantly to expand our manufacturing capacity for Libre to meet demand. The first wave of that expansion will come online in the next couple of months followed by cadence of incremental capacity after that. There’s a massive population that needs help managing their diabetes and our intent is to make Libre broadly accessible to all of them.

Turning to our Structural Heart business where we achieved mid-teens growth. This was led by MitraClip, our market leading device for the treatment of mitral regurgitation, which had global sales growth of more than 30% in the quarter. And MitraClip grew more than 50% in the U.S. where we recently received the new expanded indication.

Earlier this week, we announced U.S. approval of our fourth generation MitraClip device, which builds on this leading platform with enhanced features and new clip sizes, providing physicians further options when treating the disease.

We’ve been building our position in Structural Heart for more than a decade and have a deep pipeline of technologies and development including Tendyne and Cephea, which are minimally invasive devices to replace faulty mitral heart valves. TriClip, a first of its kind of device for the repair of a leaky tricuspid heart valve, and Amplatzer Amulet, our left atrial appendage device to reduce the risk of stroke in patients with atrial fibrillation.

With the rapid adoption of MitraClip in a highly underpenetrated market as well as a pipeline of technologies targeting new growth areas that we’ll launch over the next several years, our Structural Heart business is well positioned for strong, steady growth for years to come.

Next diagnostics, where we remain focused on the global rollout of our Alinity suite of instruments for every area of diagnostics in which we compete. We’re making great progress with our systems for immunoassay and clinical chemistry testing in Europe where the launch of Alinity is helping to drive double-digit growth in our international Core Laboratory business. We’re now also in the early stages of launching Alinity instruments for hematology and molecular testing in Europe.

In the U.S., we’re making steady progress, achieving regulatory approvals for our broad menu of core laboratory tests. And just last week, we announced FDA approval of Alinity S for blood and plasma screening. Abbott screens the majority of the world’s blood supply. And this system is designed to be faster and more efficient within a smaller amount of space while maintaining the highest levels of accuracy. The global rollout of Alinity is an ambitious undertaking that positions our diagnostics business for sustainable, strong growth going forward.

So, in summary, all four of our businesses exceeded expectations in the quarter. Our growth is strong, it’s accelerating and it’s sustainable. We’ve strategically positioned ourselves in some of the most attractive areas of healthcare, and our key growth platforms are delivering impressive results. And today, we’re adding to what was already a strong growth forecast by raising our outlook for the year.

I’ll now turn the call over to Brian to discuss our results and outlook for the year in more detail. Brian?

[Brian Yoor, EVP, Finance and CFO]

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 second quarter increased 7.5%. Sales in Medical Devices grew 10.5% with double-digit growth in Electrophysiology, Heart Failure, Structural Heart and Diabetes Care.

In nutrition, sales increased 5.1%, led by strong growth in Adult Nutrition. Sales in Established Pharmaceuticals grew 6.1% with 8% growth in our key emerging markets. And sales increased 6.2% in diagnostics, led by high single-digit growth in Core Laboratory Diagnostics and sequential improvements in Point of Care and Rapid Diagnostics.

Exchange had an unfavorable impact on total Abbott sales of 4.6%, which was approximately 0.5% more unfavorable to our expectations at the time of our earnings call in April. Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.4% of sales, adjusted R&D investment was 7.1% of sales and adjusted SG&A expense was 29.9% of sales.

The second quarter adjusted tax rate was 13.7%, lower than our previous full-year guidance of around 15%, due entirely to continued implementation of and adaptation to the U.S. tax reform regulations. Our second quarter tax rate reflects the aggregate adjustment to align our tax rate for the first half of 2019 with our revised full-year effective tax rate forecast of 14.5%.

Turning to our outlook for the full-year. We now forecast organic sales growth of 7% to 8%. Based on current rates, we would expect exchange to have a negative impact of approximately 3% on our full-year reported sales, which is in line with the expected impact we had at the beginning of the year. We forecast an adjusted gross margin ratio of a little less than 59.5% of sales for the full-year. This is modestly lower than our prior forecast and reflects the temporary effects of investments to support the unprecedented ramp-up and market adoption of our Alinity diagnostic systems as well as investments in Libre capacity expansion.

We forecast adjusted R&D investment of somewhat less than 7.5% of sales and adjusted SG&A expense of around 29.5% of sales. And as I mentioned previously, we forecast an adjusted tax rate of around 14.5% for the full-year 2019.

Turning to our outlook for the third quarter, we forecast adjusted EPS of $0.83 to $0.85, which reflects strong double-digit growth. We forecast organic sales growth of 7% to 8% and at current rates, we would expect exchange to have a negative impact of around 1.5% on our third quarter reported sales.

We forecast an adjusted gross margin ratio of a little less than 59.5% of sales, adjusted R&D investment of around 7.5% of sales, and adjusted SG&A expense of around 29% of sales.

Before we open the call for questions, I'll now provide a quick overview of our third quarter organic sales growth outlook by business.

For Established Pharmaceuticals, we forecast mid to high single-digit growth; in Nutrition, we forecast mid single-digit growth; in Diagnostics, we forecast Abbott’s legacy diagnostics businesses, which is comprised of Core Laboratory, Molecular and Point of Care to grow high single digits and in Rapid Diagnostics, we forecast low to mid single-digit growth. And finally in Medical Devices, we forecast high single-digit growth, which reflects continued double-digit growth in several areas of this business.

With that, we will now open the call for questions.

[Operator]

[Operator instructions] And our first question comes from David Lewis from Morgan Stanley. Your line is open.

[David Lewis, Morgan Stanley]

Good morning. Congrats on the quarter and the guide. Miles, I have two questions for you, the first on diabetes, second on the outlook for the year. So, just starting with diabetes. ADA, Miles, [ushered] [ph] in some concerns around Libre 2 iCGM designation. Should investors read anything into the lack of approval? And what's your confidence level in iCGM approval? And what does the trend in BGM this particular quarter tell us about the Libre adoption?

[Miles White, Chairman and CEO]

I'm going to give a couple of answers. So one, no, we shouldn't have concern. We're confident that we're going to have the approval what we expect and what we applied for. So, I know that there's always uncertainty until the day comes and questions from investors that know we’re confident. And actually, let me ask, our COO to give you a little bit of more background and detail on that.

[Robert Ford, President and COO]

Yes. I mean, we filed as an iCGM. We made that comment in our last earnings. And we filed this as an iCGM. The standards and special controls for the iCGM, they’re very clear, and they're very transparent as it relates to accuracy thresholds, alarms, sensor shutoffs, et cetera. And we wouldn't have filed an iCGM, if we felt that we’re going to fall short of those special controls. In fact, we were encouraged by the agency to file Libre 2 as an iCGM. So, I know, people want to speculate and kind of tie it to the exact date. We're not behind our timelines. So, we're not going to expect speculate on exact date here, but we expect it relatively soon.

[David Lewis, Morgan Stanley]

And then, the second thing Miles for you is just guidance for the year. So, the guidance range suggests, you obviously see 2019 as a year of acceleration over ‘18. I'm just really curious, what gets better into the second half of the year? And if you think about the middle part of the range versus the upper part of the range, what are the key success factors in the back half that gets you to that top end of the range? Thanks so much.

[Miles White, Chairman and CEO]

Well, I'd say couple of things, first of all about the guidance. We are seeing strength in our growth drivers. We've got a lot of launches going on in all segments across the board. We're going to be opening up the capacity and new manufacturing and so forth to supplement Libre; the Alinity systems are obviously successfully rolling out; MitraClip is picking up momentum. A lot of the businesses that I've been sort of chronically dissatisfied with from time-to-time, have also in sequential improvement, which I'm happy to see. I'm never quite satisfied with that. But, the pharmaceutical business, the cardiac rhythm management business, the stent business, neuromodulation, the point of care diagnostics business, the rapid diagnostics business, which is primarily the Alere acquisition, they're all showing sequential sales growth improvement, which is what we planned, what we've worked for, et cetera.

So, based on the strength across the board of all that, we feel comfortable that frankly, our growth rate on the top-line going forward, we sort of see in that 7% to 8% range. And I challenged the team, I said, is this temporary for the quarter, the half year thing or do we feel fairly sustainable about this, and we feel sustainable about it. So, I think, that’s all good, and then, with record earnings. There’s a step up in earnings here in the second half earnings growth rate. And it’s just unusual quarter. I mean, we always target, as you know at the beginning of the year double-digit growth. We always set kind of an aggressive or at least ambitious target for ourselves going into the next year. That’s no different now. So, in the second half, our earnings remain strong.

I don’t know -- I’m kind of -- I feel pretty good that we do the numbers we say and we never fall short. So, it’s 18% on the bottom-line right now. So, you’re asking me about what do we do to get the high end of the range? I’m thinking, geez, isn’t that good enough. It’s a pretty healthy growth rate. So, 7 to 8 on the top and high double-digit teens on the bottom I think is probably best in class in the peer group that we’re compared to and several different peer groups that we’re compared to. And quite frankly, with the breadth of products launching and rollouts, obviously there’s always challenges somewhere in the world in some way, but we seem to be doing pretty well across the board here in all areas. And I think that’s a pretty good investment.

[David Lewis, Morgan Stanley]

Great. Well said. Thanks so much. Congrats again.

[Operator]

Thank you. Our next question comes from Robbie Marcus from JP Morgan. Your line is open.

[Robbie Marcus, JP Morgan]

Great and congrats on a good quarter. Maybe two product questions for you. I want to hit on MitraClip and Alinity. Maybe you could comment on the status of CMS reimbursement in MitraClip. It doesn’t seem to have hindered your growth at all in the quarter. But maybe just give us some update on the timelines and then maybe some considerations for the trend line of uptake going forward there, once you do get approval?

[Miles White, Chairman and CEO]

Okay. I'm going to have Robert answer that question for you, and I’ll come back to Alinity.

[Robert Ford, President and COO]

So, Robbie, so, you saw, we had a great quarter in MitraClip global sales over 30%, really driven by U.S. over 50%. The majority of that growth in U.S. will be coming through increased productivity in the existing accounts. So, we -- obviously, we’re constantly doing market development, opening new accounts but majority of that growth coming through increased utilization. So, we continue to invest in clinical and field sales expansion. And when you do this, they have this direct impact in account utilization and productivity. International was up also double-digits in the quarter. You’ve got Japan where we believe there is a significant opportunity for us long-term there where we’re building our capabilities in Japan and Europe saw a rebound in Q2 versus where we were in Q1. I think, the teams there, the clinical and medical teams have done a really good job at putting into context and framing some of those conflicting trials that came out in the second half of the year. So, we think there’s a lot of sustainability here, not only in the U.S., I mean, our penetration rates here in terms of the opportunity are still kind of low single-digit. So, we’ve got a lot of runway here.

Regarding your question on CMS, I mean, there’s obviously a lot of coordination that’s been going on between CMS and the physician societies. We expect the NCD to be opened up very soon as part of that coordination. As I say, I’m not going to forecast the exact timeline here. But, we anticipate getting through the process around year-end early next year. As you said, the process hasn’t really kind of impeded our growth. We have seen a dozen or so flight of commercial insurance companies already reflect updates to their decision -- to their coverage to include the new indication. Obviously, the larger segment there is the Medicare segment. But it’s good to kind of see that traction in the private segment. So, very good quarter, we continue to see this expansion in the second half of the year and towards the end of the year, looking at achieving CMS reimbursement.

[Robbie Marcus, JP Morgan]

Great. And then, following up on Alinity, this is one, it hits all of your different product lines and diagnostics. So, it’s hard to really pick out. But, maybe you could just give us a status update on the progress of the launch in Europe and the just starting launch in the U.S. And maybe any competitive data points you could give us, we see some of your competitors struggling, both on the top line and the margin side as it relates to competitive systems. Anything you are seeing out in the market that could be useful? I appreciate it.

[Miles White, Chairman and CEO]

Well, so first, you made the comment that it touches every part of diagnostics, that’s true. And these are six different systems, the immunoassay system, the clinical chemistry system, obviously a smaller point of care system for that market, there is a dedicated blood and plasma screening system and then of course hematology and molecular. And they are all at various stages of rollout. The one that is the furthest along would be the rollout of our immunoassay and clinical chemistry systems in the core laboratories of Europe. We're also in the process of expanding menu approvals in United States and China and Southeast Asia, where customers want to have a certain critical mass of menu as they make the conversion from whatever they are using to these new Alinity systems.

So, I’d say, we're running as fast as we can, I think at this point in Europe, and that’s going pretty well. There is over 3,000 systems placed now, running test, generating revenue, et cetera. We do measure not just the deal, the close of the deal et cetera, we measure what we call test of record when the account is up and running, generating results, generating tests et cetera. And so, I’d say, that process is going well. That’s going to begin the pick up more momentum in the United States as we're getting more and more menu breadth, same with China, we're tracking all of that pretty closely as we build those menus. We're talking hundreds of tests.

We did recently get approval for the Alinity, as the blood and plasma screening system. Today, we screen about 80% of the world’s blood supply as it is. This is -- it’s an important transition product that labs I think will find more efficient, more economic et cetera. But that’s a plus. We closed and started up with Japanese Red Cross, which is the largest Japanese blood screening organization, and we took that from a longstanding Japanese competitor. So, that was a big win for us.

So, there is just a lot of success that way. Hematology is in the very early stages of rolling out, the molecular system in the earlier stage of rolling out and -- which is why this will be I guess a slower moving launch that’s got sort of years of growth and momentum in it, as we look over the next, call it five to seven years to completely replace an existing installed base and add a lot of new share, new volume. And to that end, I think we’ve quoted you before and remains true, in accounts where we already have the business, we're winning about 95% of the time; and in accounts where we do not have the business and there is an entrenched competitor of ours, we're winning about 60% of the time. Those win rates and penetration rates and share gains and so forth in our experience so far over now what I said is over 3,000 instruments, tell us that we’ve got a very competitive system. We do run into, on the occasional accounts, heavy duty price cutting. We've got a very-disciplined system of our pricing and contracting in accounts. We have not had to do that. I think that speaks to the superiority of the instrument and assay offering. So, we're feeling like our offering is uniquely competitive. It’s borne out by the win rates, no matter what type of account. It's unprecedented to launch this many systems across the board in all areas. So, I think this only picks up momentum and gets better as the assay menu expands and as there's some experience in the field with the analyzers.

[Operator]

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

[Bob Hopkins, Bank of America]

Just two quick questions, one for Miles and a big picture and then one quick financial question, if okay. Miles, if okay, I want to ask a question on the management team additions that you announced recently. Congrats on hiring Lisa to run devices. I guess, my question is, when Robert was promoted as COO, back in October of last year, Abbott said that Robert would keep devices. So, just wondering if you could comment on kind of the reasons for the change. What Robert will do with all his newfound free time? And investors are always curious about your long-term plans. So, it's a question on the recent hire.

[Miles White, Chairman and CEO]

Okay. Well, I can tell you, he’s not playing golf. I'd say a couple of things. First of all, we anticipated that for the time being, we wanted him to stay directly on top of the medical device business because he's been responsible for bringing on-board St. Jude. As we acquired that, he was integral to that entire integration. We went through with St. Jude, a reorganization of the business to align with the way we like to run a business at Abbott. And I guess, I would describe that as we like to have a fully integrated business, meaning the general manager of that business, president of that business has responsibility for commercial -- the commercial people, commercial sales, customers, et cetera, but also manufacturing R&D, technical support, service, et cetera. We like all those functions reporting to one GM. So, we realigned St. Jude. We did the same with Alere quite frankly, when we took them over. And so, each of the business has full integrated general management responsibility, and that was a transition. And Robert led that. It's all in place. That meant that we added a number of experienced general managers, we replaced some who had left us as part of the St. Jude or earlier acquisitions and so forth. So, we went through a management transition.

And at the same time, there's been a little bit of a general regional change happening here. Quite certainly, there have been an awful lot of people that have been part of my management team for a long time, and a lot of our managers are long term Abbott groomed and grown management teams. But we've also been thinking about making sure that with all the growth we've got, the new products, the new organization and the new structure of that organization, that we're always looking at the talent and the experience of our management team as we look forward now toward, let’s just call it, a decade of what I think is going to be pretty robust growth.

So, in that, we needed to replace the EVP role that Robert had held previous to the Chief Operating Officer role. We did that. We went outside for that and of course sourced Lisa, who we think has a terrific background and experience for that. We're very pleased to have brought fresh perspective and great experience and great energy level into the company. So, we’re very pleased with that. We went through a little further, I’d say organization change, to kind of break up what had gotten big and perhaps unwieldy in some cases into slightly smaller units, because we are managing some pretty aggressive growth, capital improvement, plant building et cetera in a number of these businesses including diagnostics. And to give us more focus around it, we’ve done some of that adjusting. I feel like that’s gone very smoothly and very well. Obviously, we read into Robert who’s in his mid-40s moving up into the COO role that we expect him to be in a key leadership role at the Company for a long time, read between the lines.

And so, there’s a preparation process going on. And I think one of the most important things I can do after leading the Company for so long is to make sure that when the transition comes, nobody knows this, and the best legacy to leave is that the momentum of this Company, its growth and its prospects are every bit as good going forward as we think they are now. And from my perspective, a smooth leadership transition which is not just me, it’s literally right down through the upper ranks of all management is key and important. And I feel like of all the sort of track record, or legacies that I can give this company I think a transition that way is probably the most important of all. So, you can read into it that we’re preparing for continuity of leadership, what I would call it with no speed bumps. And I think that actually is going exceptionally well. Will I give you a timeframe? No. Do I think we should be nervous about it? No. I think that this Company is poised to perform well across the board for years to come that I got great confidence in that continuity and the management team because we got a nice mix here of very experienced and trained Abbott people and people we brought from other companies from the outside like Lisa. And I think the mix we’ve got in that team is exceptional. Robert’s been with the Company over 20 years. I’ve known him every bit of those 20 plus years. And I think he brings to his job right now tremendous experience, perspective, everything you would look for in a leader, in the COO of a company. So, from my perspective, I think this is nothing but good and just keeps getting better.

[Bob Hopkins, Bank of America]

Very, very helpful. Thank you so much, Miles. That’s great perspective. And it just seems like an odd transition, but I do have a little question on the tax rate, just quickly for Brian. You guys have been doing a great job over the last couple of years of kind of slowly and steadily bringing the tax rate down. And I know you made comments on the year. But, maybe, if you could just talk bigger picture, is -- where are you in that process and are the current rates that we’re seeing here today sustainable down here in the kind of lowish teens? Thank you.

[Brian Yoor, EVP, Finance and CFO]

Yes. Bob, we always set the tax rate to where we think it’s sustainable. We don’t like it to be bounced around; we want it to be steady. And we assess the rates as they come out. We have a series of rates come out just recently and digested those, we’re always adapting to that and adapting to the situation to be as efficient as we can here. 14.5% is where I call the sustainable rate right now as we look forward. I will say and we can’t predict the future but there’s another series of clarity around rates that will come out in Q3. And when that happens, we will digest that and adapt accordingly as well. But as we sit here today, we’re happy with the efficiency of our tax rate and continue to manage it for sustainability. And we just don’t want to see it bumping around on you or us.

[Bob Hopkins, Bank of America]

Thank you.

[Operator]

Our next question comes from Kristen Stewart from Barclays. Your line is now open.

[Kristen Stewart, Barclays]

Hi. Congrats on a great quarter and thanks for the question. Miles, I was just wondering if you could just talk through your thinking on just the level of investments in the Company and just how you think about how much of this really impressive top-line you let flow through. And then also just from a capital allocation prospective, how you are just thinking about going forward with the Company, just given the growth dynamics that you have and/or opportunities you could see to maybe strengthen some of the other business lines that maybe offer little bit more lackluster growth of the medical devices? Thanks.

[Miles White, Chairman and CEO]

Well, I’ll give you a couple of perspective. First of all, the great thing is, we’ve got a lot of things to invest in. From a capital standpoint, obviously, it was important for us to pay down debt, we did. We paid down a significant amount, going on $10 billion at this point. And as we’ve said before, we're in a comfortable position of strategic flexibility. But, that doesn’t mean, we're dying to go use it. So, the next need was obviously we’ve got some capital to put into plant and expansion. And we put a fair amount into both Diagnostics and Libre at this point. We're investing in expansion of plant manufacturing for MitraClip and other products. So, given that we’ve got an awful lot of growth happening and the potential for more, obviously, we’ve got to support that growth from a plant and capital standpoint in a timely fashion and appropriate quality and so forth, and we're doing that. And so, this capital use et cetera there. Will we continue to pay down debt? We will. We’ll be prudent and careful about making sure it makes sense, it’s the right debt, right time and all that good stuff. We will maintain a healthy, strong dividend. We increased it substantially at the end of last year; we will continue to grow our dividend. Given where the PE is now, I’ve been told by a number of shareholders that trying to get that yield rate, upward dividend funds are happy as difficult, but that’s a nice problem to have. We will continue to grow our dividend, it’s been the hallmark of the Company for decades, and it will continue to be.

And then, it’s not only that prudent to buy back shares, the timing matters, the return matters et cetera. Is it an option? Yes, it is. Probably won't get too carried away because frankly we're able to grow and return cash to shareholders a number of different ways and return -- good return to our shareholders. So, it’s always an option as it presents itself, we just got a lot we can do.

If you're asking about M&A and other things, we don’t feel like right now that we need something, nor do we think we see something that we can add sufficient value to, to make it worth it to invest in. And we’ve got so many organic growth opportunities that while we continue to monitor and we're always tracking opportunities in all of our businesses, I can't tell you that that’s real front runner right now. We don’t ignore it, we don’t -- we try to maintain our currency on the things that we might be interested in. We just did a small acquisition in Germany that’s a nice adjunctive thing to our diagnostics business in terms of automation and so forth, things like that that I think are valuable for us. But, we have so much growth potential and opportunity in devices, diagnostics, even nutrition and pharma that we’re just not outcut and real hard on M&A front right now, nor do I foresee that being through for quite a while.

So, that’s the capital side. On the expense side, we're always trying to balance the voracious appetite of investors for growing earnings with investing in the growth of the business. And I doubt that there's a general manager or business at Abbott that wouldn't claim that if we gave them more money, they could spend it effectively and efficiently to grow our products faster. So, we're always trying to find the right balance of how much gas that’s thrown in the fire of the growth of the products with returning a healthy return to the expectations of our investors. I think that's always a balance, because there's always some investor who thinks there is -- there must be an extra penny in the quarter. And I was speaking to somebody this morning who asked about that very issue, another penny. So, the issue here is much bigger than a penny. We've got tremendous growth, our top-line we’re accelerating is strong, it’s sustainable. This isn't about penny in a given quarter. This is about pretty healthy sales growth rate and a commensurate healthy growth rate on the bottom-line that's unusual in our sector, and particularly unusual for companies of our size to be able to sustain such a healthy growth rate with so much new products, richness for the coming years, and it's not coming quarter, it's coming year. So, you raise the right question is how do we keep investing in the spending and R&D and the sales and marketing expenses to drive that growth. And we're trying to find that right balance as well by putting enough fuel to fire here to drive the growth rates even higher.

[Kristen Stewart, Barclays]

Okay. Then, just one question on how do you view -- the medical device business growth was phenomenal this quarter. How do you just think about the ability to sustain that level of growth? It seems the Medical Devices has a bit of a tale of two cities with several businesses reporting really nice strong double-digit growth, but a couple of obvious businesses kind of still lagging around that flattish growth. How do you kind of think about the longer term dynamics there? Thanks so much for taking the questions.

[Miles White, Chairman and CEO]

Yes. You've got a mix of businesses here. You've got some that are a little more mature than others, some that have brand new products that are terrific innovations. In general in medical devices innovation is what drives the growth. And over time, that's the case. And different businesses are at different stages of either maturity or new innovation.

We believe there's still a lot of opportunity there. I remember in my discussions with Dan Starks when we were negotiating over the acquisition of St. Jude, Dan felt pretty strongly that the pipeline at St. Jude was underappreciated and that in their own internal models that the growth rate was out there in the high single-digits. The street didn't agree with that at the time, because it didn't see it yet, et cetera. But Dan was right. And I think that we've seen that in the performance of the medical device business we acquired from St. Jude, because it's been performing at sort of a 9% to 10% level as new products have gone to the market, either replacing older products or just simply brand new products altogether.

So, I'd say, the first thing about medical devices is you got to keep innovating in new spaces, MitraClip’s new space, Heart Failure and HeartMate and so forth. These are new spaces, new technologies, et cetera. Libre is that. Libre is unique. It approaches a mass market, not a niche market, most medical devices address niches of therapy. But diabetes is something that affects more than 80 million people around the world and would benefit from Libre in a about a 50-50 of type 1s and type 2s, and that is massive. It's unlike anything seen before in device or diagnostic businesses. And so, there's just an enormous, enormous opportunity there. To be honest, traditional medical device companies aren't used to having to deal with at that kind of scale. And so, we’re addressing that by investing very heavily in manufacturing expansion so that we can go after the mass market, not a niche. And so, I think the sustainability of the growth is driven not only by the innovation but the ability to go after much bigger markets at a much more affordable level. More people will have access, there will be more growth as we make technologies and products more and more affordable.

And then, finally, you asked about some of the businesses that aren’t growing that fast. And I’d say well, I'm always disappointed that they’re not growing as fast as we’d like them to. But, I am pleased that we’ve seen sequential improvement quarter-to-quarter in almost all of them. We’ve seen that in CRM, we’ve seen it in neuromod, we’ve seen in it in even in EPD and stems and so forth. We’re seeing incremental improvement. Some of these businesses as more mature businesses may not see strong, -- or high single-digit or double-digit growth, but I think they’re still capable of pretty strong growth in the low to mid single-digit area and there’s still lot of upside. If we take a CRM business from what is flat, slightly negative to 3% or 4%, that’s a pretty big bump in growth. If it was going from 10 to 14, we’d be all excited about it. So, the same incremental growth improvement I think is possible, it’s just the lower level. So, I think that there is a lot here to sustain the kind of growth we’re seeing. There’s always going to be new products like Libre or MitraClip or a HeartMate that singularly for a period of time disproportionately drive the overall growth. One of the benefits of having many businesses in the device arena is there’s always going to be somewhere that’s growing that way in other places where we’re innovating for the future.

[Operator]

Thank you. And our next question comes from Joanne Wuensch from BMO Capital Markets. Your line is open.

[Joanne Wuensch, BMO Capital Markets]

Good morning, everybody, and thank you for taking the question. I’d like to spend a little bit of time on nutrition, particularly international nutrition and the adult piece of that really did well in the quarter. Is there anything you can give us an update on that particular franchise?

[Robert Ford, President and COO]

Yes. So, we had, as you noticed, sequential improvement in our nutrition business. We’re very pleased with the performance. We continue to see kind of above market growth in several of the countries. We’ve made a lot of enhancements and changes in people and strategies to enhance our competitiveness over the years, new products execution and we get to see that. We do think it is sustainable, we are executing well. We kind of see the market in that 3% to 4% range. So, we’re always driving for something above that and you saw that again in this quarter with a 5% kind of growth and good execution in our adult business specifically coming out of Asia.

[Miles White, Chairman and CEO]

The OUS business, Joanne, was up little over 10% in the adult -- OUS adult business, and a lot of that is new product innovation, new formats, expansion in given markets like Vietnam and other places where we’ve got pretty strong holds but also a lot of opportunity for further growth. So, we’ve put a lot more attention on some of those. I’d say, historically, in this business, the U.S. and China always get all the attention but there’s a lot of opportunity. And as Robert said, Southeast Asian markets and others where there’s a lot of growth, India and the like, and particularly in the adult segment.

[Joanne Wuensch, BMO Capital Markets]

Thank you. And as my second question, one of the “problem children” in medical devices is in neuromodulation. Can you walk us through the pathway to the recovery in that? Thanks.

[Miles White, Chairman and CEO]

Yes, sure. So, we saw an improvement in Q2. Obviously, that’s not our landing spot, we’re obviously not -- where we want to be, but an improvement there. We completed the sales force expansion that we’ve been talking about. We increased the sales force by about 40%. And when you go through something like that, Joanne, there is some disruption that occurs in terms of cutting the territories and the trading et cetera. So, we’ve completed that and now obviously the focus is improving the productivity of that sales team. And we saw that in the second quarter. If you look at some of the KPIs, if you look at whether it's trials or trial to permanent implant conversion rates, we saw definitely sequential improvement versus Q1, and we expect that to improve as we go into second half of this year. A big portion of this also is, I’d say, product innovation life cycle. You’ve seen a couple of quarters now where there really hasn’t been any kind of launch from competitors in this space. That’s a key driver also, so sales force productivity and execution. We will start to see some of our innovation output. We made double the investment in that R&D business over the last couple of years. We will start to see some output of that in the second half of this year, beginning of next year in terms of new products that will I’d say provide more for the sales team to kind of work with.

[Scott Leinenweber, VP, IR, Licensing and Acquisitions]

Thanks. Operator, we will take one more question.

[Operator]

Thank you. And our final question comes from Matthew Taylor from UBS. Your line is open.

[Matthew Taylor, UBS]

Hi. Thank you for taking the question. I wanted to circle back on Libre on two points. So, the first is that you mentioned that you're working on increasing the capacity. There was an article yesterday and Reuters that said that you're expanding capacity by three to five times. So, if we think about Libre this year, it’s approaching maybe $2 billion, based on consensus. Does that mean that ultimately you think it could be $6 billion to $10 billion type product as you go mass market? And can you talk about how you can step on the gas in the second of the year with that additional capacity and the approval of Libre 2 to more rapidly expand use?

[Miles White, Chairman and CEO]

Matt, you are one aggressive guy. I remember I got this call -- or this question last quarter, can’t recall if it was you on whether we thought we could get the $5 billion and how soon. And gosh, three months later, it’s 10. I’ve got the same ambitions, to be honest. I just wouldn't have expected of 90 days later. But to answer your question, I think that kind of potential is there. I think, it’s awfully hard to speculate about a number that big. But, will we -- do I think we will get the $5 billion and do I think we will do in a reasonable time, $5 billion of sales over? Yes, I do. And I think it’s -- the growth rate here is reflective of not only the size of the market but the need and utility and affordability of the product. And I think, it’s just as I said many times, it’s a very different market where affordability and the utility, the access, all those things make this a mass market product, now the niche and its design for that, its price for that, it’s a very profitable product. And we're going through the large scale, scale-up of addressing that kind of growth, which is unprecedented for products in our space.

So, do I think it can grow to that sort of level? I won't jinx anything by trying to make some prognostication about $10 billion but I would say that I think it's got enormous potential, and it's got potential beyond glucose. It's got potential as a wearable and in other analytes and other products over time. We have R&D programs underway, not only for the repeated enhancement improvement, expansion of Libre, but also in the other categories beyond diabetes and other analytes and so forth. So, I think that there's just a lot of things that will evolve over the coming years here that today people aren't even contemplating with the product. We're going as hard as we can at the glucose opportunity, which is enormous. But there's so much more beyond that that I think, at least your aspirational consideration, to be honest, has validity. I'm not ready to put any numbers around it.

[Matthew Taylor, UBS]

And then, maybe one last follow-up, that was a great answer. But just wanted to get your feedback on what you think is misunderstood about Libre today, when you get feedback from investors that bubbles up to you? Where do you think that the internal view of Libre really differs from the Street’s perception or people's perception?

[Miles White, Chairman and CEO]

Let me ask to the COO. He is been living within it a long time.

[Robert Ford, President and COO]

Yes. I think, when we went up about this several years ago, the challenge here, Matt, wasn't to get an accurate reading of glucose from the interstitial fluid. Navigator, when we had launched it back in 2008, we were able to do that. It was very accurate and we were able to get an accurate reading. The challenge that we went about with Libre is how to do that in a way that is cost effective for the health systems and for consumers and for -- and for all of that. So, that was what we really went after is how could you get the accurate reading at a cost position at the core of Libre. And you might remember the time Navigator at the time was considered the most accurate sensor. In the core of leverage is that chemistry, is that core technology of Navigator, which provides accurate reliable readings. But we're able to do that at a cost position that now makes sense for the insurance and for the payer community and the health systems to cover it.

It wasn't a question of whether the outcomes were right, or whether the outcomes were enough. They were convinced that the outcomes were there for sensor-based glucose monitoring. It was just, can I now do it in a way that makes sense for me to do it on a mass scale. And Miles has talked about this about mass scale. That's what we went after 10 years ago. And that's at the core. I think maybe that's misunderstood, because a lot of this discussion that’s focused on well, accuracy at this level and accuracy at that level. And the reality of accuracy is obviously important. But, our goal here is to make this massively available without having to sacrifice accuracy. And the fact that we priced it at a different price point I wouldn't say necessarily imply that it's somehow missing something, we just had a different strategy and different view of what we can do.

[Miles White, Chairman and CEO]

The only product out there that the Street has been able to compare it to is expensive and high cost and aimed at niche in the United States. Ours is not expensive, and it's not high cost. It does not lack for clinical performance, accuracy, or any of the like. But because manufacturing is so sophisticated and automated, we are able to achieve a pretty low cost and what is a pretty sophisticated product. It's a highly profitable product. So, we haven't compromised that it’s a product is successful in terms of profit; that’s not been comprised at all. It has a completely different design and approach and cost structure, it relies on scale for that cost. And we’ve actually seen improving gross margin. We told it before, the gross margin is over 60%, it is and rising. And that’s with the heavy capital investment, so that we can produce the kind of volume that is broadly available.

So, I think among the misunderstandings out there, I think people say, well geez, how do you make money? Oh, we make money. We do just fine. Thank you. And the product is designed to be affordable and accessible. I guess, there are some days when we think if the healthcare market community, insurers, payers, congress, patients whatever, I always say, it’s got to be lower cost, healthcare’s got to be more affordable. Here’s your example, and it is, it’s massively so. And so, we’ve gone at it with that approach to make it broadly available, broadly in this case means 80 million people worldwide that’s unprecedented.

So, I'm not sure that the device community has totally understood it because it’s so different. But we keep saying so. And I think now as the new capacity comes on line, we’ve also staged the capacity so that literally every 90 days we’re adding another increment, significant incremental capacity. We will not be capacity constrained. And that kind of release is a lot of freedom to market and put some product forward and even open up markets we haven’t opened yet. So, I think there’s a lot of opportunity here. And I think too there’s opportunity for a number of things like this is. I mentioned earlier, in what’s called the wearables market, the more affordable and accessible technologies make products like this, then I think we’re going to see a very different market expansion.

[Scott Leinenweber, VP, IR, Licensing and Acquisitions]

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 am Central Time today on Abbott Investors Relations website at abbottinvestor.com. 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 wonderful day.