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Abbott Laboratories (NYSE:ABT)
Q3 2018 Earnings Conference Call
Oct. 17, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and thank you for standing by. Welcome to Abbott's Third Quarter 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 "*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

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, 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, 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 2018. Abbott cautions that these forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. 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 31st, 2017. 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 the third quarter financial results and guidance provided on the call today for sales, EPS, and line items of the P&L will be for continuing operations only.

On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings 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 adjusts the 2017 basis of comparison to exclude the impact of exchange and historical results for Abbott's medical optics and St. Jude's vascular closure businesses, which were divested during the first quarter of 2017, as well as current and prior-year sales for Alere, which was acquired on October 3rd, 2017. With that, I will now turn the call over to Miles.

Miles D. White -- Chairman and Chief Executive Officer

Okay. Thanks, Scott, and good morning. Today we reported results of another strong quarter, with ongoing earnings per share of $0.75 along with sales growth of approximately 8% on an organic basis, reflecting well-balanced growth across all four of our businesses. I'm particularly pleased with the continued productivity of our new product pipeline and would like to highlight a couple of areas where our products are creating and fundamentally shaping markets.

I'll start with structural heart, where we're the world or global leader in minimally invasive treatments for mitral regurgitation or a leaky heart valve. We've recently made several significant advancements in this area. In July in the U.S., we initiated a pivotal trial for Tendyne, our device that's designed to replace damaged mitral heart valves without the need for open heart surgery.

We also received U.S. FDA approval for our third-generation version of MitraClip, our market-leading device for the repair of mitral heart valve. And in September, we announced the results of our landmark COAPT trial, which demonstrated that MitraClip improved survival and clinical outcomes for patients with functional mitral regurgitation, the most prevalent form of this condition. We expect to submit this study data to the U.S. FDA in the coming weeks to support consideration of an expanded indication for MitraClip.

These advancements will further enhance and strengthen our leadership position in this large and highly under-penetrated disease area and will bring new therapies to patients where effective treatment options are currently limited.

Diabetes care is another area where our technologies are making a big impact, specifically FreeStyle Libre, a revolutionary glucose monitoring system that eliminates the need for routine finger sticks. In the U.S., we received FDA approval for a 14-day sensor with a shorter one-hour warmup, making Libre the longest lasting wearable glucose sensor available. And in Europe, we obtained CE mark for our FreeStyle Libre 2 system, our newest-generation 14-day system with optional real-time alarms. In a relatively short period of time, FreeStyle Libre now has more than 1 million users across the globe, a testament to the mass-market appeal of this product, which is fundamentally changing the way people with diabetes manage their disease.

I'll now summarize our third quarter results in more detail before turning the call over to Brian. I'll start with diagnostics, where sales grew 7.5% in the quarter. Alinity, our family of highly differentiated instruments, is achieving accelerated growth and strong competitive win rates in Europe, where more than 50% of Alinity instrument placements thus far are coming from share capture. The global rollout of Alinity positions this business for consistent above-market growth for years to come, as we capture share and bring the full suite of systems to additional geographies, including the U.S. In rapid diagnostics, third quarter sales were driven by cardiometabolic testing. We just completed the first-year anniversary of our acquiring this business and we're pleased with the progress we've made to position ourselves for growth and margin expansion going forward.

In established pharmaceuticals, or EPD, sales were led by double-digit growth in several geographies, including Russia and China. As expected, sales growth in the quarter was impacted by a difficult comparison versus the prior year when we saw channel restocking across the market in India following implementation of a new tax system in that country. Our unique branded generics business, focused specifically on key emerging markets, continues to execute its strategy and grow faster than the market in several of our priority countries, including India and China.

In nutrition, sales increased 6% in the quarter, led by strong performance in our international business. In pediatric nutrition, global growth was well-balanced across infant and toddler nutrition, as well as above-market growth in the U.S. and double-digit growth broadly across our international markets. And in adult nutrition, growth was led by our market-leading Ensure and Glucerna brands, most notably internationally, where we achieved 7% growth overall in adult nutrition.

Lastly, I'll cover our results from medical devices, where sales grew 10% in the quarter, led by double-digit growth in electrophysiology, structural heart, and diabetes care.

In electrophysiology, growth of 20% was led by double-digit growth across our heart mapping and ablation portfolio, as well as Confirm, the world's first and only smartphone-compatible, insertable cardiac monitor.

In structural heart, we achieved strong growth across several areas of our portfolio, including more than 20% growth of MitraClip and double-digit growth of AMPLATZER PFO, our minimally invasive device that plugs life-threatening holes in the heart.

And in diabetes care, sales grew 40% in the quarter, led by FreeStyle Libre, which achieved sales of over $300 million in the quarter, an increase of more than 100% versus the prior year.

So, in summary, this was another very good quarter, with all four businesses contributing to strong growth overall. Our pipeline continues to be highly productive, including significant recent advancements in structural heart and diabetes care that are creating and shaping markets. And lastly, we're forecasting EPS and organic sales growth at the upper end of the ranges we set at the beginning of 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 B. Yoor -- Executive Vice President, Finance and Chief Financial Officer

Thanks, Miles. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance.

Turning to our results, sales for the third quarter increased 7.8% on an organic basis. Rapid diagnostics, which was acquired late last year and is therefore not included in our organic sales growth results, achieved sales of $481 million.

Exchange had an unfavorable year-over-year impact of 2.7% on third quarter sales. During the quarter, we saw the U.S. dollar strengthen versus several currencies, resulting in a larger unfavorable impact on our results this quarter compared to the expectations had exchange rates held steady since the time of our earnings call in July.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.5% of sales, adjusted R&D investment was 7.3% of sales, and adjusted SG&A expense was 29.7% of sales.

Turning to our outlook for the full-year 2018, we forecast organic sales growth of approximately 7%, at the top end of the guidance range we provided at the beginning of the year. At current rates, we expect exchange would now have a slightly negative impact on full-year reported sales. In addition, we continue to expect rapid diagnostics to contribute sales of a little more than $2 billion.

We forecast an adjusted gross margin ratio of around 59.5% of sales, which includes underlying gross margin improvement across our businesses. We forecast adjusted R&D investment of a little less than 7.5% of sales and adjusted SG&A expense of around 30.5% of sales.

Turning to our outlook for the fourth quarter of 2018, we forecast an adjusted EPS of $0.80 to $0.82. We forecast organic sales growth of mid- to high single digits and, at current rates, would expect exchange to have a negative impact of a little more than 3% on reported sales. In addition, we expect rapid diagnostics to contribute sales of around $500 million in the fourth quarter, which as I previously mentioned is not included in our organic growth rate this year.

Before we open the call for questions, I'll now provide an overview of our fourth quarter organic sales growth outlook by business. For established pharmaceuticals, we forecast mid-single-digit sales growth, which reflects a difficult comparison in our non-core other business segment relative to the fourth quarter of last year, when sales increased strong double digits. In nutrition, we forecast low to mid-single-digit sales growth. In diagnostics, we forecast mid- to high single-digit sales growth. And in medical devices, we forecast high single-digit sales growth, which reflects double-digit growth in several areas of this business.

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

Miles D. White -- Chairman and Chief Executive Officer

Is the operator there?

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

Operator? Operator, are you there?

Questions and Answers:

Operator

Please press "*1" on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press "#". We kindly ask that if you are using a speakerphone to please pick up the handset before asking your question. And, again, that's "*1" to ask a question.

Our first question comes from David Lewis from Morgan Stanley.

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

We cannot hear the question, operator.

Operator

Please check that your line is not on mute.

David Lewis -- Morgan Stanley -- Analyst

Can you hear me now?

Miles D. White -- Chairman and Chief Executive Officer

Yes.

David Lewis -- Morgan Stanley -- Analyst

Okay. Thank you. So, Miles, two questions for you. Obviously, a lot of business momentum here in 2018 and meaningful drivers ahead, like Libre 2 and MitraClip. So, as you think about sort of sustainability, is sort of 6% to 7% range sustainable over the intermediate term and how are you feeling about Abbott's ability to deliver double-digit or low-teen earnings given the currency environment and all of these various opportunities to grow?

Miles D. White -- Chairman and Chief Executive Officer

Okay. Thanks, David. Let me take the first part of that. The answer is sort of definitively and absolutely yes on the sustainability of earnings -- or rather sales top-line and I'll get to earnings in a minute. In that 6% to 7% range, I say yes. And frankly, I'm even looking at 7% and better. But if you look at the underlying momentum of each of these businesses today and the underlying growth of each of these businesses, there's actually some places I think it could get better. There's places we're obviously trying to improve. I wouldn't forecast it yet but I still see plenty of growth, plenty of opportunity, frankly, with the new product pipeline for years to come.

And you're seeing the evidence of that right now in the performance of all the businesses. The diagnostics business growth rate has clearly turned up. That is clearly the impact of Alinity taking hold. It's having great success in Europe. Libre is doing super well. And on top of that, we haven't really put a lot of promotional emphasis behind it. So, I see a strong future for both of those. The new product cadence coming out of medical devices is really good and, frankly, we expect another approval imminently here in the U.S.

So, I think in terms of sustainability at top line, I feel very good about that. I feel very good about the underlying growth of the company, the sustainability of it, etc. The little elephant in the room is clearly exchange and I think that's true for practically every multinational out there. I think all of us -- all investors, all companies doing business in international markets -- are experiencing the upturn in exchange now. And frankly a bit of uncertainty about how long it lasts. Because every time we enter a new year, we kind of think we've got a notion of what exchange and currency and so forth is going to do and it never lasts the entire year. We always see it change once or twice during the year. And some of that's just driven by news. Some of it's driven by trade talk and other things. But I think for all of us, it's a little hard to forecast.

So, we see that in the third quarter. We've seen a tick-up in currency impact. We're clearly moving into a headwind here. We'll see that in the fourth quarter. And I think that's going to continue into next year. The question is how far into next year and how heavy is that headwind. And in our case, we look at the overall business and say, look, the underlying growth rates, the underlying strength of the business is really strong. And we've been able historically to absorb exchange, mitigate exchange, deal with exchange, etc., and be a very reliable performer for our investors. And that's always our goal. We always start the year with a double-digit earnings goal every year and it's the rare year when we don't achieve that, hit it or exceed it. And this is no different.

I think, right now, we're a few months ahead of next year and a lot always happens in the first quarter. So, we don't have any way to reliably tie down what we think currency is going to do. I don't think anybody does obviously. I know that it will be a headwind starting out and what happens from there, who knows. But we go into the year looking at double digits and with underlying growth like we have in all of our businesses, I'd say that looks pretty solid.

David Lewis -- Morgan Stanley -- Analyst

Okay, Miles, very clear. And the second, just a follow-up for you, is just can you help us put the Robert Ford announcement into perspective and sort of share your thoughts on what it means for you over the intermediate term?

Miles D. White -- Chairman and Chief Executive Officer

Well, what it means for me over the intermediate term is I get a lot more help, which I'm happy about. Look, it's obviously a succession step. And one of the things that I think any good leader has got to do with his company is make sure that there's always good, strong succession building, growing, etc. in the company. And that applies to me too. So, I think for the continuity of the performance of this company, the continuity of its strategies, the continuity of its sustainable growth rates and so forth going forward, that's important.

Robert Ford has been at this company his entire career. I've known him 22 years and paid a lot of attention to his career, as you might imagine, and he's been an excellent operator. He's handled our entire St. Jude integration, done a terrific job with medical devices, and consequently, I want all those medical device businesses continuing to report directly to him, even as he takes on more responsibility. And I'd say, with time, this will develop pretty nicely and I think it's a very good, strong move for the company.

David Lewis -- Morgan Stanley -- Analyst

Okay. Thanks so much.

Operator

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

Robbie Marcus -- J.P. Morgan -- Analyst

Great. Thanks for taking the question and congratulations on the great quarter. Miles, I wanted to ask you about COAPT. A lot of us were at the TCT conference in San Diego last month and saw the great data there, to a room of standing ovation, which we don't see in medical devices that often. So, us on the street, we can think about big numbers with such a large patient opportunity. Maybe tell us how you're thinking about MitraClip over the next few years and how you think the street should be thinking about it.

Miles D. White -- Chairman and Chief Executive Officer

Well, I'll tell you what. Obviously, the performance of MitraClip in that study was a real homerun. And it's not often that studies are so definitively positive and so good in terms of their impact for patients. So, we're obviously very happy about that and very proud of that. Our objective will be to move through the regulatory processes as rapidly as can be done and make it available for that use as rapidly as we can. I think the medical community sees tremendous medical benefit in that. And when you can make that kind of a difference, it's obviously a big, important, good thing.

And how rapidly we go through that regulatory process, hard to predict. We have not got a lot of -- well, we don't have any particular impact for next year in our roadmap for next year at this point, for any impact from that product. So, anything that happens is upside. And obviously, beyond that, I think it's got a pretty sizable opportunity. And it's not a broad, mass-market product but the number of patients that will benefit from the product is significant. And so I think it will clearly make a difference in the overall performance of the company's medical device business, the company, etc. It's not one that's going to get lost in rounding error, I can tell you that. Scott, do you want to add anything to that?

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

No, that's fair. We'll submit it, as Miles mentioned in his prepared remarks, to the FDA in the coming weeks and after that, it's in their hands and we'll let that process play out.

Robbie Marcus -- J.P. Morgan -- Analyst

Okay, great. And maybe a follow-up on Libra. This is a product that's been wildly successful. You're now over $100 million run rate in the U.S., over $1 billion globally, and you really have one major competitor here that's -- let's call it at the upper end of the technology scale. And Abbott, I view as the low-cost, easy to access, very easy to use product in continuous glucose monitoring. So, as we think about the evolution of Libre over the next few years, how do you think about Libre staying at the lower end of the cost and ease-of-use curve versus moving up and trying to compete with your main competitor there? Thanks.

Miles D. White -- Chairman and Chief Executive Officer

Well, I'll tell you, interestingly enough, I don't actually look at it the way you just described. I think Libre is a pretty different product. It's got tremendous capability but given that value point that we have it priced at, it is accessible to patients all over the world. And when we first launched in Europe, we launched without any government reimbursement and, for the first time, glucose monitoring was patient-pay and it had wildly great acceptance just on that basis, which actually encouraged governments to reimburse the product. So, I think with healthcare today, a lot of things that come to market are very expensive, whether they're pharmaceuticals or devices. And in this particular case, it was important that this have a medical and an economic value proposition that made it accessible to all patients or as many as possible.

And there's tens of millions of diabetes patients out there. Obviously, there's Type 1s and insulin-dependent patients and there's Type 2s trying not to be. And so the product has a much broader appeal across a much broader patient base. And in our case, we have a much lower cost and far greater automated manufacturing capability to not only allow that cost but to allow for mass production. And that's the path we've taken. And we've gone at this from an access standpoint that's far more retail and direct-to-consumer oriented. It's made a big difference.

So, I'd say, at this point, we're making healthy profits on this product. We have no intention of changing the value proposition at all. I mean, your question sort of suggests that we would raise price in order to be competitive. I'd say you ought to be asking the other side what they're going to do to make themselves a value proposition because this product is an incredibly good value proposition which is why it's got such high demand. And to be honest, we don't even measure ourselves relative to any competition, including finger stick, at this point. We know how many potential patients there are out there and it's our intent to capture the vast majority or possible maximum of them that we possibly can in just a few years.

So, I look at Libre right now and a lot of people call it a wild success. I kind of think we're just getting started. And we're investing heavily in capacity to allow even more rapid expansion. And people will say, "Well, how do you model that?" And I think I'm not sure we can model it. It's that good. So, I'd tell you, you probably need to think about this a little differently, in terms of value proposition and the kind of access that affords.

And I think the future of healthcare kind of demands that from us, from all companies. There are certain products, obviously. They're small volume, they're niche medical treatments, and so forth, that are costly to develop, costly to make and provide and so forth. But there's others that have much broader impact and much broader appeal. And part of the future of healthcare and the necessity for companies like ours is making those things as broadly accessible as possible. And we still obviously have to earn our return and I can assure you we're making a nice, healthy return on Libre.

Robbie Marcus -- J.P. Morgan -- Analyst

That's very helpful. Thanks for taking the question.

Operator

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

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Thank you and good morning. Can you hear me OK?

Miles D. White -- Chairman and Chief Executive Officer

Just fine.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Great. So, two quick questions. First, a product question and then an earnings growth question. On the product side, obviously the context here is that Abbott's a company delivering absolutely top-of-class revenue growth, but one thing in the quarter that I wanted to ask about was neuromodulation. That was a little slower, like the last quarter, and I'm just curious. Has your outlook for that business changed at all? Or is this just still temporary hiring issues and when do you think you can return to more like double-digit growth in that division?

Miles D. White -- Chairman and Chief Executive Officer

Okay. Thanks. I think it's more of the same from last quarter and I do think this is temporary. I think it's going to take us a couple of quarters to work through let's call it the commercial execution issue we have. And you don't fix that overnight but we will fix it and fix it in the near-term. And I do think that this is a business that should return to double-digit growth. So, I even look at that as something that gets better for us. It was obviously very strong last year. It hit a stall point during this year. But I do think that upside is there and it's strictly in our hands at this point. So, yeah, I'm pretty optimistic about it. Do you go to bed happy about it? No. Can you fix it? Yes. And we are.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Okay. Two other quick little things. What was the imminent U.S. product approval you guys were highlighting in your prepared remarks? And then I also want to just follow up really quickly on David's question on earnings growth. I realize you start every year at 10%. The street is modeling roughly 12% earnings growth for really the next couple of years. Given all the puts and takes, is that a reasonable place to start or could currency make that a little challenging? Thank you.

Miles D. White -- Chairman and Chief Executive Officer

Okay. First question is really easy. I was referencing HeartMate 3 and a new claim.

Second question, good question. I know the street is where it is. The street, generally, in its consensus, hasn't tried to factor in or tried to model exchange. And we're all looking at the same exchange trends right now, even the street. So, I'd say, look, if I privately polled the 20 analysts or so on the sell side that cover Abbott, or any company, for that matter, you'd probably all say, "Well, this is my current estimate based on underlying growth but I'm not sure how exchange is going to impact it. And, secondly, I'm not sure how much everybody's going to try to absorb in their P&L and how much they're going to pass through in their estimates and so forth." I think we're all kind of in that boat together right now.

Do I think that 10% to 12% range right now is reasonable? We start every year at double digits and whatever -- I think, as I said earlier, the underlying growth of these businesses is there. There's puts and takes, there's ins and outs. There's not just products ins and outs, there's tax rate. Everybody did experience tax reform, is going to experience some adjustments in tax rates this year. There's puts and takes. We obviously made a change in some of our debt costs with Euro debt. That's a positive for us. So, there's a bunch of pluses and minuses we've got to sort out. The one that's hard to forecast in some way is exchange. And yet, you know we're on the dot, to the penny or penny above or better, every single quarter. So, we tend to like a lot of precision in our forecasting and the hardest thing to forecast here is exchange.

So, do I think that could be a bit of a mitigator here? It might be. But we're all going to know a lot more about that in a few months when it's time to set our guidance for next year. Historically, as you know, we have always tried to offset in some fashion or mitigate as much exchange as possible so that we can reliably deliver what our investors expect. I mean, look, there's a lot of moving parts in the world and we're always trying to synthesize all those moving parts and give you, the investor, reliability to the penny every quarter. And so far, I think for the last 15-20 years, we've been pretty damn good at that. Going into next year, our goals will be no different.

And right now, I think that even analysts and their estimates that inform that 12% consensus that you referenced as being out there now is subject to change by analysts factoring in exchange or any number of other things. But in our case, we're always trying to mitigate that. I don't know where it'll come out but I think somewhere in that range is probably right. We'll be starting at 10% and we'll see what happens after that. I would tell you this: if exchange mitigates and we suddenly see a weak dollar, we're not going to have a problem making you happy.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Fair enough. Thanks for the answer.

Operator

Thank you. Our next question comes from Vijay Kumar from Evercore. Your line is open.

Vijay Kumar -- Evercore ISI -- Analyst

Hey, guys. Thanks for taking my question. Congrats on the nice quarter here. So, Miles, maybe the first one on the sustainability question. If I'm looking at '19, you have MitraClip FMR indication, which is incremental. Libre continues its trends. You have HeartMate 3, which is incremental. Portico U.S. launch, which is incremental. A stable fee outlook. In neuromod, your comps get easy. Alinity, it should be ramping in the U.S. It really feels like all the strength we've seen in '18, this should continue into '19. So, maybe can you just talk about some drivers for how we should be thinking about the pluses and the minuses?

Miles D. White -- Chairman and Chief Executive Officer

Well, Vijay, you forgot to mention Alere. You forgot to mention COAPT. You forgot to mention some improvements in EPD. It's interesting. I've never in my career here seen such breadth across the company in new products, new product launches, market conditions, etc. Even nutrition right now is doing considerably better than it has in the last couple of years. I wouldn't forecast better for nutrition but I like what it's doing right now. And EPD, it's in high growth, or at least moderate to high-growth, markets with great tailwinds. It, of course, has a currency headwind like everything else. But all of these things are performing really well. And even the ones that you can see and forecast and track pretty well, like Libre or Alinity, etc., they're actually accelerating. And that just gets better.

So, I think the sustainability of the growth and the diversity of it is a huge plus. It's not like we're reliant on a single product or a single country. We're not highly indexed in China and we're not over-dependent on a single product. There's just great diversity of growth opportunity across the board. And I'm really proud of the company from a productivity and pipeline standpoint. And that goes for St. Jude as well. As I've said a number of times, St. Jude, in the course of our acquisition negotiations with them, continued to talk to us the veracity of their pipeline and how good it was. And to be honest, they were right. And that's proven.

So, I'm pretty bullish on just the diversity of opportunity here. And while we can try to point to one or two of them, I think Libre and Alinity stick out, but incremental matters. And incremental in any business here, whether it's HeartMate 3 or neuro or even EPD or Alere or anything else, Portico, all of these things contribute to the growth of the company and that's how we like it. We like every bit of this company performing well.

Vijay Kumar -- Evercore ISI -- Analyst

That's helpful. And maybe one for Brian. Brian, when you look at the guidance for Q4 and implications for '19, the gross margins at 59.5%, that would imply an actual ratio to Q4. Any particular reason why GM sequentially should step up? How much did FX cost you guys in the EPS? Because a lot of questions on why guidance was not raised for the year. And it looks like at least $0.05 hit in the back half here. And is that sort of a similar number we should be thinking about, just given where FX is, when you think about for '19? Thank you.

Brian B. Yoor -- Executive Vice President, Finance and Chief Financial Officer

All right, Vijay. Let me start with the gross margin. Our underlying gross margin improvement has been strong. It's ticking up nearly half a point year-over-year and that's largely the effect of our synergies that are going on, both with respect to Alere and its integration and also continued synergies with St. Jude. And every year, we put an emphasis on improving our underlying gross margin of all of our businesses so that we have the healthy reinvestment back into the business. FX really is not -- it mixes, it moves around a bit here and there. It changes every day. But it's not really having too much of an impact. So, we're seeing, call it close to 40 bps of gross margin improvement. That's all underlying for the year.

Your observation on FX as far as earnings is pretty spot-on. If you recall, we came out at the beginning of the year when we thought that FX would actually be a tailwind of about $0.05. It's probably now closer to that, $0.03 to $0.04 down on a full-year basis. So, we're powering through that. We're powering through that with all of the underlying performance that Miles has talked about with respect to all the businesses. So, when you look underlying, it's outstanding. Very strong performance that carries momentum into 2019.

Miles D. White -- Chairman and Chief Executive Officer

I would just add one comment to that. Blame it on the CEO comment. I don't get overly worked up about raising in the fourth quarter. We've been ahead all year. We're performing strong. Like you, I'm looking at next year and the continuity and sustainability of it all. Whatever the fourth quarter is, it will be, and we're not going to miss. I think that's incredibly unlikely. We are all observing that exchange is a bigger headwind. But when you get to giving guidance for the fourth quarter or raising, I think generally one is tweaking. And at this point in the year, I think tweaking for one quarter is kind of "eh." I'm looking at next year. And so I wouldn't read too much into that, other than, look, the obvious. We all know exchange is getting headier. But beyond that, I think the story here is the underlying growth and that is pretty strong and pretty sustainable. So, don't read too much into it.

Vijay Kumar -- Evercore ISI -- Analyst

Thanks, guys.

Operator

Thank you. Our next question comes from Raj Denhoy from Jefferies. Your line is open.

Raj Denhoy -- Jefferies -- Analyst

Hi, good morning. I wonder if I could maybe ask about one of the areas in medical devices that continues to be a little slower and that's vascular. So, a couple questions there. One, is there anything you can give us in terms of how the initial launch of the XIENCE Sierra stent is doing? And second to that, also the PHP, your percutaneous pump, that trial is still halted. So, any updates in terms of when that might get restarted?

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

Hi, Raj. This is Scott. Good morning. Yeah, I would just say with respect to the vascular business, I think the big news item earlier this year was the U.S. approval of our XIENCE Sierra stent. That's off to a very good start. We knew going into that that physician feedback on it was very positive through our experience in Europe there. So, we've added Sierra to a number of our contracts here in the U.S. We've actually recaptured several share points in the U.S. during the quarter. We also launched the product in Japan recently and it's performing there very well.

So, the business has some momentum behind the Sierra stent. It's a very good product. There's a little bit of masking of that growth with respect to some of the non-commercial royalty revenue that we get but that's noise. The commercial side of the business is really performing quite well with respect to that launch.

With respect to PHP, that's a program we're still committed to. Very much so. We have not provided any updates on the timeline of late. I would expect we will in the future at some point.

Raj Denhoy -- Jefferies -- Analyst

Okay. Fair. Maybe just, for my second question, just kind of a broader one on kind of the tone and outlook for the business broadly. Obviously, it depends a lot on the portfolio various companies have but is there anything you can offer in terms of how procedure volumes and pricing broadly are tracking in the industry right now?

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

Yeah. No change really. I mean, procedures and demand volume from that side of things are fairly constant to the way they've been running and trending for the last several quarters. Pricing in some of the segments, such as CRM and vascular, is a modest headwind. But demand is strong and offsetting most of that. Those are really the only two areas of the medical device business where we think about price. The others are very healthy.

Raj Denhoy -- Jefferies -- Analyst

Great. Thank you.

Operator

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

Glenn Navarro -- RBC Capital Markets -- Analyst

Good morning, guys. Two quick questions. First, Miles, on Alere, you'll do $2 billion in revenues this year. I think that's hitting expectations. But Alere is going to be folded into organic growth in 2019 so can you help us think about Alere growth in 2019 and beyond? That's the first question. And then quickly, on Libre 2, can you give us an update on the U.S. approval timing? Thanks.

Miles D. White -- Chairman and Chief Executive Officer

Yeah. Let me address Alere first. So, our first year, you're spot-on on all your observations. Our first year was obviously stabilize, integrate it, organize, put management in place, etc. All done, all done well, and so on. And we benefited in this last year from probably one of the stronger flu seasons in a long time so the infectious disease business in Alere, the infectious disease testing business, did well in that context. Going forward, obviously, we now need to turn to driving growth. And I can't give you a forecast or a prediction on that for '19 yet or even '20 beyond that. But that's where the attention turns.

I think we're mostly through all the disruption and/or transition, synergies, etc., all that activity. In fact, I've got an update on that after this meeting later today. And at this point, our entire emphasis turns to what kind of sustainable growth rate we can now generate and trend out of that business. So, I don't have a specific answer for you yet, Glenn, but I think that's one of our growth drivers of the future and that's kind of next steps with it. And I'm sorry. What was the second half of your question?

Glenn Navarro -- RBC Capital Markets -- Analyst

Timing Libre 2 in the U.S.

Miles D. White -- Chairman and Chief Executive Officer

I might have to ask Scott for some help on that because I'm not sure we can give you timing on that.

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

Yeah, that's right, Miles. We haven't provided timing yet on Libre 2 in the U.S. Obviously, we will bring an alarm version to the U.S. at some point in time. The current version is obviously doing quite well as well. So, that's just another opportunity in the pipeline but we have not provided specifics on timeline yet.

Miles D. White -- Chairman and Chief Executive Officer

I would tell you this. It should take a lot less time than it seems to. The U.S. lags Europe and the rest of the world on some of these approvals in a way that I find hard to explain but it is what it is.

Glenn Navarro -- RBC Capital Markets -- Analyst

Okay. Thanks, guys.

Operator

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

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Good morning. Thanks for taking the questions, guys. One on capital allocation, one on nutrition. Miles, you've been paying down debt. You've been quiet on the M&A front in 2018. Do you expect that to change in 2019? And I just had one question on nutrition.

Miles D. White -- Chairman and Chief Executive Officer

Okay. Let me deal with that one first. Well, first of all, I think the organization has done a terrific job on cash generation and debt pay down. And I give Brian Yoor and the management team total credit for that because what we've done for cash management, debt management, debt pay down, and stuff has been led by him and terrific job. And to be honest, when we took all the borrowing down in order to do the St. Jude and Alere acquisitions, our debt to EBITDA ratio was, I think, like 4.3, something like that. And we made commitments to the rating agencies that we would get that down pretty fast and we're down to, I think, 2. So we've obviously paid off a lot of debt very fast and we're happy with the rate of that. And it gives us a lot of flexibility from a capital allocation or strategic flexibility standpoint.

But will we continue to pay down debt? We will. But I think we also -- we have other capital needs. For example, we want to target our dividend in a certain range as a percent of our EPS and we are completely able to do that and meet those targets and those goals for dividend payouts. Some of our capital attention has been paid to growth. And we are investing in Alinity and we're investing in Libre. We're making a large investment in capacity expansion for Libre that I think you'll see drive even more growth out of Libre than you can see now and fulfill kind of the larger mass-market ramp-up we see for that product. We're putting a fair bit of investment into the expansion of Alinity. So, when we can invest our capital in growth, not only near-term but long-term with high return, that's a good use for our capital and we're obviously doing that.

We haven't, to be fair, seen a lot on the M&A front that interests us. And as I indicated in the past, we always keep our ear to the ground. We're always doing our homework on what possibilities may or may not be out there and what might interest us, what might fit our portfolio, but right now, we haven't seen anything that draws our attention that way. So, we don't have anything on our radar screen from the standpoint of M&A that we think is beneficial to us. We've got so much more opportunity in the company organically and out of our pipelines and the expansion of all the things we talked about earlier that that's really where our focus is. And fortunately for us, it can be, it ought to be. So, we just haven't seen anything to draw our cash for capital investment from the standpoint of M&A. I mean, there might be little things here and there but nothing that I would say is particularly needle-moving on a big scale here in any near-term way.

And then, finally, I suppose the fifth, last opportunity that I haven't mentioned -- it's not last in priority but -- is share buyback. And right now, we haven't been. What you're seeing in our EPS growth and so forth is pure growth and not enhanced at all by share buybacks. And to be honest, as we've all seen during the year, that hasn't been a high return investment for a lot of companies and we've had better uses for our capital that do have high returns for us. And so consequently, it doesn't rule it out. It doesn't rule out that we could do it but we'll only do it if it's got a good return for us and our investor, etc. And right now, our best investment is us. So, we're directing our cash that way. I think our cash flow is strong enough that we've got a lot of good choices. We will continue to pay down debt. But we're at the point where we've got strategic flexibility. It's just a question of where we use it. And I think that's all good.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Very clear. And just last for me, Miles, on nutrition. A year ago, that was the slowest growing business. That's clearly turned around. The international pediatric nutrition business is doing really well. Any color on what's going on in China? And lastly on that, the adult nutrition business in the U.S. has been a little weak recently. Is that still private label competition? What's the outlook there? Thanks for taking the questions.

Brian B. Yoor -- Executive Vice President, Finance and Chief Financial Officer

Okay. Yeah, I'll take the last one first, Larry. This is Brian. With respect to the U.S., what you're seeing is the impact of a wind-down of a non-core product line for us. You'll see that here in Q3. Otherwise, the U.S. business would be growing. You'll see it in Q4 as well. It's non-core to us and we just decided to wind it down. That's the only thing going on in the U.S.

With respect to China, the transition has gone smoothly. The food safety law transition has gone smoothly. I think behavior has been rational in the market. The market growth rates in China have been strong and we're always trying there to grow share. But our greater China business has done quite well this year and we expect the market there in China to remain strong and stable going forward on the pediatric side of the business.

Miles D. White -- Chairman and Chief Executive Officer

Yeah, I would only add that the whole nutrition business obviously is doing a lot better this year than it did last year. And where it is right now, there's various countries or various segments of business where we want to do better. There's ups and downs. But overall, if you take it as a whole, a lot happier where it is today than where it was a year ago.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Great. Thank you.

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

Operator, we'll take one more question.

Operator

Thank you. Our final question comes from Chris Pasquale from Guggenheim. Your line is open.

Christopher Pasquale -- Guggenheim Securities -- Analyst

Thanks for sneaking me in. I wanted to follow up on the FX commentary and try to make sure we're all on the same page as we think about next year. Brian, if rates were to stay where they are right now, what would the earnings impact from currency be in 2019?

Brian B. Yoor -- Executive Vice President, Finance and Chief Financial Officer

It's going to be somewhere probably between 3% and 4% of our earnings. And we've seen that before and as Miles said, we always work to mitigate as much of that as possible and the great news is that we have a lot of underlying growth in the businesses and sales growth that we're going to power through as much of that as possible.

Miles D. White -- Chairman and Chief Executive Officer

I would add to that, Chris, it's always kind of a judgment trade-off. If you could predict currency for the whole year or beyond, it would be one thing, but we can't. And so we take a lot of different actions to mitigate the volatility of it or the impact of it. We've got a very sophisticated and, frankly, complex rolling hedging program on the currencies that we can hedge. So, we take out a lot of the unpredictability with that. Obviously, over the long-term, we're not currency traders and we're not trying to be but we're trying to be able to make our earnings and our sales more predictable, more stable, more reliable, in terms of what our investors want to see, and, frankly, the impact on us so we can plan and manage.

That said, gosh, today's currency rates, if sustained, it would be a heavy headwind. Do I think all of that somehow passes through to the investor? I do not. Do I think that the current currency rates will be the same three months from now or the same six months from now? I do not. If you ask me do I think they'll be up or down, I have no idea. All I know is, as I told you earlier, we look at the right balance of what is right for us to try to mitigate or hedge or whatever we're going to do to perform to the investment identity that our investors expect of us and where are we in a prudent range of how we manage that balance and how we deal with exchange and so forth in the performance for our investors. And we always start with a double-digit target of growth so a lot of moving parts. And we'll see.

Right now, I think that's kind of the only elephant in the room for us. And everything else looks positive and strong or is in our hands to manage and the one that's not entirely in our hands to manage is what currency hands us. But then we do have a lot of things to do to try to minimize its impact on the overall performance of the company for our investors.

Christopher Pasquale -- Guggenheim Securities -- Analyst

Thanks for that. And, Brian, just to make sure that I'm hearing you correctly, you're saying about $0.10 headwind for next year, give or take?

Brian B. Yoor -- Executive Vice President, Finance and Chief Financial Officer

It's a range. Currency moves every day. If you look at 3% to 4%, about that.

Christopher Pasquale -- Guggenheim Securities -- Analyst

Okay. And then, Miles, just one last one on Alinity in the U.S. What's the latest on the timing there and when you think you'll have a broad enough menu in place to really make a big push domestically with that product?

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

Hi, Chris. This is Scott. I would just say, as you know, that the clinical chemistry and amino assay instruments is the core business there. The instruments are approved and we are building our test menu at a pretty ratable kind of rate quarter-to-quarter, so to speak, and making progress on that front. It'll still take a few more quarters until we get what we consider a critical mass there. So, you're probably looking back half of 2019 where we feel like we're really going to have the menu and the systems we need to go out and get business.

Christopher Pasquale -- Guggenheim Securities -- Analyst

Great. Thanks.

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

Okay. 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 11:00 a.m. Central Time today on Abbott's Investor 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.

Duration: 52 minutes

Call participants:

Scott Leinenweber -- Vice President, Investor Relations, Licensing, and Acquisitions

Miles D. White -- Chairman and Chief Executive Officer

Brian B. Yoor -- Executive Vice President, Finance and Chief Financial Officer

David Lewis -- Morgan Stanley -- Analyst

Robbie Marcus -- J.P. Morgan -- Analyst

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Vijay Kumar -- Evercore ISI -- Analyst

Raj Denhoy -- Jefferies -- Analyst

Glenn Navarro -- RBC Capital Markets -- Analyst

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Christopher Pasquale -- Guggenheim Securities -- Analyst

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