Abbott Laboratories (ABT) Earnings Call Transcript & Summary

Good morning, everyone. We'll get started here. I'm Robbie Marcus, the medtech analyst at JPMorgan. I'm very happy to have Robert Ford, the incoming CEO of Abbott joining us today.

Well, thank you for having us, Robbie. It's great to be here. We've got an exciting time at Abbott right now. I'd like to thank the audience for your interest at Abbott.

Maybe we could kick it off. Abbott has established an impressive track record of delivering organic sales growth in the 7% to 8% range, no small feat for a company with $30 billion in sales. Now the company has often reiterated that you expect this type of performance to continue over time. Maybe share with us why you feel confident Abbott can sustain that level of growth going forward.

Sure. Our goal here has always been to position Abbott as a growth company. And to achieve that, we feel that, that 7% to 8% range and doing it sustainably is what gets us there. The key strategic framework behind driving that sustainable growth here is really a philosophy of always looking ahead, anticipating where medical technology, medical needs, et cetera, will be so that we can be relevant and be sustainable. And we've been doing that for 130 years. A recent example of that was a few years ago when we decided to reshape our company with the acquisitions of St. Jude and Alere and really position Abbott in highly attractive segments and with leadership positions. If I look at the diabetes and cardiovascular care, in my opinion, these are the 2 most significant health care challenges of our lives. And through these moves, we've built and assembled a portfolio of products that really positions us in these attractive segments. Obviously, with Libre in the diabetes segment, we believe there's a lot of growth and penetration for the CGM technology in the diabetes population and how we define the market and how we see the market. And with our rejuvenated cardiovascular portfolio with the St. Jude acquisition, we've got extremely long opportunities, multiyear, multibillion-dollar growth opportunities in our Structural Heart, in our Electrophysiology and Heart Failure portfolio. So we feel very good about the sustainability of our strategy and our pipelines in those segments. The Diagnostics segment is often an overlooked segment in health care. And it shouldn't be. About 70% of health care decisions are done through diagnostic testing. But yet, it accounts for a very small portion of the overall health care expense. And we see a lot of growth in the Diagnostic business, whether it's increased penetration of diagnostic systems in emerging markets, the emergence of personalized medicine, distributed testing that can be growing in different channels, like MinuteClinics, et cetera. So we've assembled here a portfolio, a very complete portfolio to be able to capitalize on that growth trend, whether it's in our immunoassay, clinical chemistry, hematology transfusion businesses really poised for capitalizing on that growth. And then we've also aligned our business to what we believe to be very exciting markets, emerging markets, specifically, where 85% of the world's population, 2 to 3x the GDP growth versus developed markets, and what we see a trend, a continued trend of increased expansion of health care as a percent of GDP and as a portion of populations' disposable income. And our businesses in Nutrition and branded generic pharmaceutical really capitalize from that presence as these populations are allocating more of their income towards health care, and they're allocating their spend towards brands and products that they trust. So we reshaped our company for the long run. I like our portfolio. We're aligned to the most pressing medical needs. We've aligned ourselves to the most exciting geographies. Our pipelines are rich. We don't think of our innovations as a one and done, but really establish a cadence in each of these segments. Our operating culture is very strong also. We've had a history of setting ambitious targets, ambitious goals and a culture of accountability to meeting those. So I put that all together, the markets we're in, the pipelines we're building, the culture we have, the culture of performance we have in Abbott, and I feel very, very good about the sustainability of that growth rate.

Robert, you mentioned Libre as a key driver for the future of the company. Maybe tell us why Libre has been so successful? And what's the longer-term outlook for this product?

Well, Abbott's been in diabetes for about 1/4 of a century, right? We know the problem. We know the magnitude of the issue. We know the opportunity that's ahead of us. And we always believed that there was a better way to do glucose monitoring. And we always believed that CGM would be that answer to making that a better solution for diabetes monitoring. We launched our first CGM system back in 2008, and we failed. We had to remove the product out of the market after 2 years. We had about 3,000 patients. And we came to realize that the product was too expensive to build. It was too expensive to sell. It really wasn't as an intuitive consumer product. So we went back to the drawing board, developed Libre and launched in 2014. And after 5 years, we've got about 2 million patients on the product, annualized revenue of $2 billion, growing at about 65%. And the biggest realization we had to be able to build Libre was the understanding that while a type 1 segment, a segment of patients that are on pumpers are important, and there was a medical need for CGM. We saw it as a much larger opportunity than that. The medical need also existed for people that were injecting insulin, patients that were on oral medications, trying to prevent getting on insulin. And we took an approach to say, this is a much larger opportunity, and we have to go about it differently. And we had 2 real kind of philosophies behind developing Libre. The first one is what we call kind of a fisher-price friendly approach, which was really to kind of build a system that was easy to use, intuitive and provide a real positive experience to the consumer, not only with the product but also in its -- in the purchase process. So making the product available through web shops and making available at retail pharmacies, where you could just walk in and buy the product versus having to go through mail order, DME suppliers, et cetera. And that's worked out very well. The other concept we had was we coined this latte a day kind of affordability price. We knew that if we wanted to expand the market and really be true to our vision, we had to price it at an affordable price point. And there's kind of this narrative that we hear sometimes, which is because we've priced our product at about a 70% discount to our competitor that for some reason our product is not as good as the competitor or we're not as profitable, et cetera. And both of those are really not true. If you look at really what we've thought about for CGM, yes, features are important, accuracy is important. And accuracy was always important in Libre. We've constantly innovated on different versions of Libre and built more accuracy, more innovation. But anybody who knows CGM knows that the real benefit of CGM is to be able to look at the data and the patterns and the insights and then have that translate into behavior change. Libre is the most studied CGM on the market. We've got sponsored RCT trials that we've done, we've seen third-party government institutions run our CT trials. We have the largest data set of real-world glucose and they all point to the same kind of pattern, which is a patient that uses Libre lowers their A1c. They lower their hypoglycemia. They reduce their hospitalizations, and they increase their time that they spend in a normal range. So when I think about Libre's value proposition, it's really about an easy-to-use intuitive product that is a positive consumer -- positive experience for the consumer, drives and delivers meaningful outcomes, both short term and long term and priced at a point that allows for mass adoption. We'll continue to invest in Libre, continue to expand on its features, expand on our manufacturing capabilities. We see this TAM as about 80 million to 100 million people. Now are we going to penetrate 100% of that? No, I don't think so. But it's more than the 2 million, 3 million, 5 million, 10 million patients that are discussed today. If you look at CGM penetration through the lens of type 1 and pumpers and you say, well, maybe that will steady out in the next couple of years, maybe. But we don't look at it that way. We look at not only those segments but across all diabetes patients. And I think that's the key driver of our growth for Libre going forward.

Let's spend a minute on the new suite of Alinity diagnostic systems. Maybe provide an update of where things stand today and the status of the launch.

Yes. So we've set aggressive targets for our Alinity system launch. We've began rolling that out 2 years ago. And 2 years into it, we're right where we want to be, right where we need to be. We always saw this as a growth opportunity, as I said in the beginning, 70% of health care decisions made on diagnostic testing. And a lot of growth potential beyond that, whether it's emerging markets or the growth of distributed testing. The historic model, industry model for these kind of system development and rollout is you kind of develop 1 system and you make some modest improvements, and then you roll it out. And our ambition was a little bit more bolder than that. We took a step-back approach, did a whiteboard, talked to hundreds of customers to get insight and feedback. And that really translated into not just 1 system, but a suite of solutions that we call Alinity that goes through, not only immunoassay, clinical chemistry, hematology, transfusion, molecular and point-of-care systems. So they're smaller, they're faster, they're more automated and they're easier to use. We've initiated this roll out about 2 years ago. We started in Europe. We increased some service and some sales implementation teams to be able to kind of implement the rollout on the scale that we wanted to. And the success has been very positive. I think you see that in our performance over the last 8 quarters, a step-change in our core lab performance already in the high single-digit growth rates. So we see high renewal rates. So a percentage of customers that are renewing with us in the high 90s and customers that are switching to Abbott from competitive systems also at a high rate. And then we'll start to roll this out now into the U.S. as our menu of assays becomes more complete, we'll start to roll this out. I think one of the key things here in this business is that at every given year, given the contract cycles and dynamics, there's only about 15% of the market that comes up for tender at any given year. So you combine the contract, tendering dynamics with this kind of geographic rollout here, we see multiple years here of sustained growth in our Diagnostics platform.

I know Structural Heart is an area Abbott's targeting for long-term growth. MitraClip's clearly the flagship product in the franchise today, but you have a number of different products coming out of the pipeline over the next few years. Can you provide a general overview of the different growth drivers in the franchise we should look out for?

Sure. Valvular disease, valvular heart disease has always been a big opportunity. We've always saw this as a big opportunity for growth, given the aging population. It's a $7 billion market growing high single digits. And when we did the St. Jude integration, we really saw an opportunity here, a very unique opportunity to be able to combine what was MitraClip together with St. Jude's portfolio. We actually removed the MitraClip product from the vascular organization and put it together with the St. Jude portfolio to create a stand-alone business unit focused on Structural Heart solutions, and -- with its own dedicated management team, R&D, clinical, et cetera. And they've been working at this for 2, 2.5 years. And I think the team here has made really, really good progress. Obviously, MitraClip here is the cornerstone of the franchise. It's a great product. It's a tiny device, minimally invasive device to treat leaky mitral valves. And it's got an annual sales run rate of about $700 billion, growing at about 30%, and we'll continue to see that growth as we get new indications with the product. But we also have 2 products that I expect approval fairly soon -- see market approval really soon, which is our TriClip product and this is a modification of our MitraClip product to be able to do the same thing, repair a leaky valve. But in this case, the tricuspid valve. This is a market opportunity, which is probably about 1/3 of the size of the MitraClip opportunity, and a penetration rate which is very, very low. And we'll also see relatively soon approval of our Tendyne system. And this is the minimally invasive system for mitral valve replacement. And we'll be the only company on the market treating mitral valve with 2 solutions with a repair solution in MitraClip and a replacement solution in Tendyne. Both these products, the TriClip and Tendyne, are currently enrolling in the U.S. So our intention is obviously to bring those products here into the U.S. On the TAVR space, we have a product called Portico. We've made a lot of R&D and clinical investments over the last couple of years on this product. It's an attractive segment. Obviously, we'll be kind of fourth to market, but we believe there is a segment of the market that Abbott will be able to effectively compete and compete aggressively on. So this product is currently under FDA review, and we expect to be able to launch this product sometime this year. Another part of this portfolio in Structural Heart is what we call the structural interventions part of our business. So combination of our congenital portfolio and our PFO product for stroke prevention. These are products that are growing double digits. And we're also working. Currently, one of our products, Amulet, is in clinical evaluation. And this is a product that will compete in the LAA market. So again, the structural interventions portfolio business, very attractive with good margins and high-growth prospects. So I look at everything that we've done in the Structural Heart space to really build not just a follower approach but a very unique portfolio, a very complete portfolio across surgical structural interventions, transcatheter therapies, whether we're looking at the aortic, mitral and tricuspid valve. I think the team here has really built a robust portfolio that allow us to capitalize on what we believe is a long-growth opportunity.

Great. Maybe last question before we wrap it up, can you provide us updates of where Abbott's capital priorities lie going forward?

Sure. Well, I think the framework and the philosophy here doesn't change in terms of how we thought about our capital allocation strategy. Obviously, following the acquisition of St. Jude and Alere, a lot of the focus of our capital allocation was to pay down debt and build back some of that strategic and financial flexibility we wanted. And we did that over the last 3 years, and we did it fairly rapidly, too. So we paid down about $9 billion in debt. Our debt-to-EBITDA ratio is around 1.5. And we've seen, over the years, multiple upgrades from the rating agencies. We're also going to ensure that we allocate a portion of that capital back to our shareholders. The dividend is a core part of our identity. We've increased our dividend for the last 47 years consecutively. And we just announced a 13% increase in our dividend for 2020. And end of last year, we announced a $3 billion share repurchase authorization that we'll do from time-to-time here mainly to offset dilution. But we're also going to make sure that we're allocating some of that capital to our own internal growth opportunities. And as I described here, I think we got very good, very strong opportunities that we want to invest in. And we talked a little bit about Alinity and the capital that we've invested to be able to roll out the systems. The manufacturing ramp-up of Libre in anticipation of what we believe is a mass-market product and allocating the capital to build that manufacturing capacity. And most recently, at the end of last year, we announced the building of a second MitraClip manufacturing facility here in the U.S. So we will always make sure that we're appropriately funding our growth opportunities. They provide a great return to our shareholders. And then finally, on the M&A side, we'll always be looking at opportunities out there. Obviously, during the debt repay down, we weren't as active, but we were always looking, always studying, always tracking. But we'll always look at it from the lens of, is the move strategic and is it opportunistic. And right now, at least on our radar screen, we don't see anything that checks those 2 boxes, but we'll continue to always look, always study, always track and be ready in case we do see something that is strategic and opportunistic for us. So I think we've got a very balanced approach here in terms of how we look at our capital, capital allocation in terms of funding our growth opportunities, building our strategic and financial flexibility and providing some of that back to our shareholders.

Great. I think that's about it.

Yes. Thank you.

Thank you, Rob. I appreciate the conversation.

Thank you.