Abbott Laboratories (ABT) Earnings Call Transcript & Summary

Good morning, everyone. Happy to kick off day 2 of the JPMorgan Healthcare Conference on the medtech track. I'm Robbie Marcus, the analyst here for medical devices. Very happy to have Abbott as our next company. Robert Ford, the CEO, is going to do a little bit of a fireside chat with me. We're going to start off with a couple of questions from my end. And then I can -- feel free to ask questions online or send me, and I could do my best to ask as many as I can. But Robert, I really appreciate you taking the time to be here and speak today.

Nice being with you virtually.

Yes. So let's start with everybody's favorite discussion, which is COVID testing. Abbott has been a leader here. Maybe give us your latest thoughts and update on the COVID testing situation.

Yes, sure. Well, if you think about where we were last year and when we spoke last year at this event, I was very clear about how I believe testing was still an important component. We're going into the vaccination phase, just kicking off the ramping up of the vaccination phase. But we always believe that testing was going to play an important role, whether we didn't have really good data yet on longevity of the protection, we didn't know the uptake of the vaccination, and I'm talking globally, and also the notion of variants, right? It was clear maybe because of that full year 2020 that people really wanted to kind of believe on the silver bullet, the vaccine will clear it all up. And I think it took Delta for us to ultimately realize that there is no silver bullet that you have to have vaccines, therapeutics and testing. So that's -- I think that's an important part, even to start off on your question, Robbie, because it's now very clear, I think, that people kind of believe this now and see it and in practicality, whether it's for diagnosing, I've got symptoms, I need to know. Do I have the flu? Is it COVID? Is this something else? Or even more importantly, for screening and testing to be able to kind of open up, whether it's schools, employment, et cetera. So as you said, we established a leadership position with COVID testing across all platforms. Abbott is really the only company that looked at all the technologies in testing and diagnostics to be able to approach the virus and the testing of the virus in a couple of different ways. Obviously, we have a PCR system with our lab-based testing where we have a rapid molecular -- isothermal molecular rapid system. And then obviously, the rapid antigen test, both a product here for the U.S. and a product internationally. So really a comprehensive suite of products to be able to use our leadership in this space to be able to provide a suite of solutions. And rapid testing, quite frankly, when we spoke about this last year also, we talked about how we believe the rapid testing portion was going to be, I'd say, the more sustainable one, the one that would -- if there was going to be a decline, it would be the platform that would decline later. And really because of the value proposition, right, availability, cost, turnaround time, super importantly, which is why we invested heavily right from the beginning on manufacturing capacity in the U.S. and internationally. If you combine our 4 to 5 manufacturing operations, we're well over 100 million tests a month for manufacturing and an opportunity, obviously, to expand on that. I think you're seeing -- I mean we're all seeing this. We all saw this, Thanksgiving, Christmas, very big surge in testing both, I would say, on symptomatic testing, and you see that in PCR, you see it in our rapid molecular testing also, the use of those technologies to be able to kind of do rapid diagnosing. And then on the screening side with the rapid antigen test also, a big, big demand also there. So big surge, whether it's here in the U.S., internationally, also very strong surge again also for both diagnosing and screening. It's a challenge to forecast, right, Robbie? I mean you've kind of seen a little bit of kind of how this has played out in 2021. I think the part that we did get right was the importance of rapid testing, the importance of having the scale and of that technology. Probably, the timing of it was a little bit difficult. But I think that's going to be our challenge. We've got plenty of capacity to support U.S. demand and international demand. And I think you're seeing also even more companies ramp up their manufacturing. The challenge here is just going to be, okay, how does this play out over time throughout the year? And we'll be getting to that in a couple of weeks when we go through guidance. I think it was good to watch and see how testing has evolved over this last month, 1.5 months. And I think having that information is going to allow us to have a better sense as how we're going to guide for 2022. But we've got plenty of capacity and we've got strong leadership positions, as I said, across all the platforms. I think the bigger picture here is, obviously, there will be -- it will be -- testing will eventually ramp down, but there will be a portion that will be sustained. And I think that's probably, for me, and I talked about this in some of our earnings calls also, the importance and the bigger picture of what we've been doing throughout this, right, which is the acceptance and the growing of this category, this rapid point-of-care, rapid testing, OTC testing. And that's, I think, an interesting kind of strategic play for us also is to use the portfolio of products that we have and really kind of start to build a more sustainable rapid point-of-care, rapid diagnostic business, not only that goes straight to the consumer, but also into other channels outside of the 4 walls of the hospital. So testing has definitely surges there. Abbott is working non-stop. We've got a lot of capacity. We've obviously had a pretty strong last couple of months of testing, and we expect that to continue here in the more immediate future. And the question is just going to be, okay, how is that going to play out throughout the rest of the year? And what's our strategic play more long term with this? And I think that we're in a great position.

So Robert, speaking about outside of the box, you recently gave the keynote address at the Consumer Electronics Show, I believe, last week. I think it'd be really helpful and insightful if you give us a quick recap of what went on there. There were several new stories and alerts that came out.

Sure. Well, I mean, obviously, the CES is the premier tech event of the year. And I think that the organization there wanted to start to incorporate health a little bit more prominently into the programming, into the booths. And so we were invited to keynote -- to be one of the keynote speakers at CES. It's the first time a health care company was invited to be able to do that keynote. And I think that it was a recognition both of the organizers of CES on this convergence that I talked about during my keynote, this convergence of digital tech and health tech coming together with incredible opportunities to advance health care, change health care, change the way it's delivered, address costs. And you know in our device space that we've been working for at least 4 or 5 years on this convergence and kind of leveraging kind of our technology and be able to kind of look at consumer technology and how to bring those 2 together to provide a more personalized experience for the patient and even help out on the cost side with the health systems and the delivery of the health systems. So -- and I think that the organizers of CES recognized that in Abbott, recognized what we were doing, and it was great to be there. We shared our vision of a lot about where and how that was going to happen. Not everything is clearly defined. There's still a lot of experimentation that we're seeing. But we've seen intentionality from Abbott to be able to lead in this convergence, right? And so we gave a couple of examples. Obviously, Binax, we could have done just a simple test, but we also -- we paired it together with our app, within Abbott a:care app, and kind of worked to be able to provide that kind of direct experience where somebody could buy the test and then also get their pass on their phone. We talked a lot about remote monitoring, the power of remote programming and remote monitoring devices. We showed an example of deep brain stimulation and the NeuroSphere virtual clinic that we launched last year. I talked about testing moving outside the hospital walls or the lab. And an example that we shared was our traumatic brain injury test. And then -- for concussions. And then a lot of the other work on how that's happening. So obviously, Libre was a great example of that. And Heart Failure, we picked an example to show how one can be connected with all these devices. We got a patient with 3 Abbott devices and talked about how that connectivity occurs with him and with the health system. So I think overall, it was a great opportunity for us to kind of showcase how we're thinking about it. And then we took advantage and put a stake in the ground on something that I've been talking quite a bit about, which is leveraging the Libre platform on the diabetes space and looking at it to be able to extend outside of diabetes. I've been talking about how we've been working with this platform. And we made an announcement of what I would -- I guess what I would call Phase I of that strategy, which is to roll out a whole new category of consumer biowearables under the brand of Lingo and its expansion, leveraging this platform that we have. So we announced our intention to develop a glucose -- a non-diabetes glucose kind of system, a keto sensor for ketone management and the applications that exist there, a lactate sensor and even an alcohol sensor. So I think that was an exciting announcement for us. We put a stake in the ground. It's time to now start to think about our platform and think about beyond diabetes. I mean diabetes has got a lot of -- I've talked about how diabetes is still in the early innings. But it's our job also to start to think about, okay, what's the next kind of big growth driver for us? And it will take a little bit of time here. It's a completely different business model than diabetes. But we put a stake in the ground, and we want to be intentional about it. So it's more of a declaration of intention, I would say, from Abbott to say, okay, we're going to be a leader in this convergence. I know there's a lot of companies that are thinking like this, but we definitely want to be a leader here, and it was a good opportunity to be able to showcase that.

So that's a perfect segue to the next question. You're moving beyond diabetes, but diabetes is still a great growth engine for Abbott now. So maybe give us the latest on how that's doing outside the U.S. with the Libre 3 launch, and what's going on in the U.S. as we sit here today?

Yes, sure. I would say -- listen, Libre, we've always looked at Libre as a mass-market opportunity for us versus traditional -- some of our traditional competitors in the space and how they thought about it. We try to think differently about the opportunity that exists with this platform. If you just think about the TAM that exists, over 100 million people that are doing some sort of testing, whether you're a type 1, an MDI, a type 2 MDI, et cetera. We believe there's about 100 million people -- 80 million and 100 million people that are doing some sort of testing, some more frequent than others. So we had to think differently about how we approach this. We've always believed that to do that, we would have to change some of our paradigms. One that I talked about sometimes is historically in health care, we look at the reward for innovation as being some sort of a premium on your pricing. And we look at this category because of this thinking, the reward that we get for the innovation that we've deployed for Libre, we think about it in terms of market expansion, penetration, large reimbursement patient pools covered under the technology. And that was a little different for us in the beginning, back when we first started developing the strategy. And it really comes down to like what I would call a conversion strategy and a creation strategy. Using Libre to be able to convert the existing users that are fingerprinting and using blood glucose monitoring systems and be able to convert those, those are typically your kind of type 1, type 2 MDIs, type 2 conventional injectors. So that strategy has worked very well. And then on top of that, we said, okay, is there a market-creating strategy where we can actually target Libre to existing diabetes users that somehow the blood glucose monitoring business didn't do that well with those users. So they're more like a type 2 on oral meds or even on diet and exercise. So the combination of that strategy here, we really looked at a framework that said, okay, we got to make consumer-based products, intuitive, disposable. We're the first company to do that. We knew that, that would make a difference. Invest in outcomes to be able to show that we don't want to get too bogged down in feature and kind of widget wars. Ultimately, in today's world with consumers and payers, does it deliver an outcome? And we've shown consistently with Libre with various different types of patient groups the ability to deliver on those outcomes. And then a cost profile that allows us to think mass market, allows us to be able to price the product for broad adoption and access while, at the same time, using that cost profile and that scale to be able to kind of have a med device like gross margin profile. And that's worked very well for us. And I think 2021 is behind us now, but it's definitely a very, very successful year, I mean, of the execution of that strategy. We had over $1 billion of growth from 2020 to 2021. For the first 9 months of the year, Libre was up 40% year-to-date, approaching close to 4 million users, which is significantly ahead of our other competitors. Globally, we're #1. We're #1 with type 1s globally. We're #1 with type 2s globally. And I think that this strategy has kind of worked out very well. We're the #1 diabetes device company, at least in terms of revenue right now. So I think that's worked out very well. As I look forward in terms of the opportunities, definitely, I'd say the biggest 2 opportunities that I see ahead of us are type 2 penetration and penetration into that segment, which is very large, and also international. I think that there are large international markets that are still very underpenetrated. And I think that Abbott is in a very good situation over there. So Libre 3 is doing very well. It's doing exactly what we wanted it to do. We rolled it out initially in Germany. And this month, we'll start to kind of roll that out into other geographies. So it's done very well. It's exactly what we wanted it to do and received a lot of great feedback from patients and physicians. So we're excited with that. And Libre has done very well here in the U.S., Libre 2. Obviously, you could see -- everybody can see prescriptions and market shares of prescriptions of new users and refills, et cetera. So I think it's done very well. We've supported the U.S. growth with sales force expansion, with advertising. And I think we can all see that and we've seen the impact of that. So like I said, I think we're in the early innings of this still. And those are my 2 big opportunities I see, international and type 2 penetration. I think Abbott is in a great position to capitalize on those 2 opportunities.

Great. Maybe if we think about Abbott beyond COVID testing and Libre, there's still a lot in the pipeline that's exciting and has a lot of potential significance moving forward. Maybe if you could just highlight a few of the key items in Abbott's pipeline for investors.

Yes. I mean I think our pipeline is second to none. I wouldn't change it for anybody else's, to be honest with you. And I think the team has done an incredible job. I give them kudos to be able to advance the pipeline through COVID. It's challenging with kind of remote work. It's challenging with clinical trials. And I think that the team in 2021 did an excellent job across the board across all of our businesses to advance our pipeline. If you look at EPD and Nutrition, we know how that innovation cycle works and what wins in terms of innovation. So just more iterations, extensions and this kind of continuous drumbeat in this area, whether it's -- we did a really good job in Nutrition. Towards the end of the year, we launched our next-generation infant formula, and that will be kind of rolling out globally. And EPD, building regional portfolios in the markets that we're competing in emerging markets, that worked out very well. In the Diagnostics space, Alinity is still in its rollout phase right now. I mean we ultimately launched our Alinity molecular system right in the pandemic, and that's been a great strategy for us to be able to seed the market with our systems. There's a lot of menu expansion in Alinity. And I think that's the key aspect of our strategy is not only to be able to kind of win the accounts and the RFPs that are coming up, but the businesses that we have to be able to get new assays put in through those systems and through those boxes, that's a great strategy for us in terms of returns. So a lot of work on the menu side of Diagnostics. And then other segments that we're looking at and investing to be able to get ready to come into other segments, whether it's in rapids or in core lab also. So -- and then on devices, which I know you know pretty well, Robbie, but I think the team has done a great job over here. We've got a lot of new launches, a lot of new product approvals towards the second half of last year. So they're in their kind of early stages of rollout, but the TriClip product which has done very well the moment that we made modifications to delivery catheter and be able to use a repair system for the tricuspid valve. That's been doing very well. We're in the very early innings of a mitral replacement with Tendyne. It reminds me a lot of back in 2009, 2010, when we started with MitraClip, building the evidence there, and I think that that's going very well. I like the fact that our sales force has both a replace and repair system. The Amulet, the LAA product here in the U.S., it's done very well internationally, and we got approval towards Q3 of last year. So we've been rolling the launch over there and here in the U.S. Our EnSite X, our next-generation mapping system, rolled out. So these are all products that we were working on. And right in the pandemic, we're able to obviously submit them, complete the trials or submit them and kind of get approval. So that's worked very well. And then going forward into next year, we've got some interesting opportunities, whether it's with CardioMEMS. We showed our data for our GUIDE-HF trial and looking for label expansion, which would significantly increase the market size for CardioMEMS. So that's an opportunity for us going into 2022. Aveir, which is our leadless pacemaker, that's another opportunity for us in 2022. And then obviously, all the iterations that we have with our sensor portfolio, whether it's Libre and Lingo, rolling out some of those products, at least in Europe, on the Lingo side this year. So I think it's a very rich pipeline. I mean there's still a lot to kind of talk about, some of the 2023, 2024 products, but these are probably the ones that are at the forefront now for me to be able to capitalize on the investments that we made in bringing these products to market. Now it's about execution out in the marketplace, and I'm excited about that. I'm excited for the team to have these products and see what they can do.

So maybe one more question here, Robert. You've generated a ton of cash, especially over the past 2 years as COVID started. You're building up this armamentarium of potential firepower to go out and do something with the cash. So maybe give us your thoughts on how Abbott is prioritizing capital allocation, where the money is going and where you see the most potential for shareholder value.

Well, I mean Abbott has always taken a very balanced approach to our capital allocation. And I would say I see it the same way. I don't see deviating from that path, so a very kind of balanced approach. We do believe and support a strong and growing dividend. And if you look at the last 2 years, we increased our dividend 25% last year; and then going into this year, another 5%. So 30% increase versus 2020. So we do support that kind of growing dividend, and I think that's an important aspect. On the buyback side, I think historically, we focus more on just trying to offset any kind of dilution. If you look at the first 9 months of 2021, we did about $1.3 billion in terms of share buybacks. It was definitely a little bit more than what we, what I would say, previously just offsetting dilution. And listen, we've got, as you said, we've got an opportunity to do more than that. And so if I look at the combination of our dividends and our buybacks at least for the first 9 months on the buyback side, 50% of our off-cash flow was returned to shareholders. I think that combination of those 2 for 2021 was the right way to look at the allocation. We've got great organic opportunities, and we'll talk about some of those right now, whether it's Libre manufacturing, MitraClip manufacturing, Alinity placements. I mean those are all great opportunities for us to deploy our capital and have great returns for our shareholders, as we've shown. So we're very clear on what we need to do to be able to fund those organic opportunities, and those are all contemplated. On the M&A side, similar kind of position, we'll see how 2022 evolves. But I would say, first of all, we're looking closely at devices and diagnostics. That's kind of where we -- our sweet spot of looking. We want to make sure that they're strategic. We want to make sure that they don't dilute our profile, whether it's kind of our top line growth, et cetera. And it's something that we know that we can add value to that, coming to an Abbott infrastructure enterprise, that we can add value to that asset, then we'll definitely look at it. And if it makes sense financially and our shareholders benefit, we'll look at it. It's a little -- we'll see how things kind of play out. Last year has things a little bit frothy in those areas that we were looking at. So one thing I will say, Rob, is that we'll maintain the financial discipline that we've always maintained and find the right deals that will drive value for us. I -- we talked about our pipeline and all the opportunities we have. We don't need, I would say, kind of M&A to be able to drive our top line. I'm confident with our organic, but that puts us in a position of good strategic flexibility. If there's something strategic and it's the right time, it's the right price and makes sense for us, then we have that, as you said at the beginning of your question, we have that strategic flexibility here. So I think it's a balanced approach as it relates to capital allocation. And I think that, that doesn't change. Support a growing dividend, looking at buybacks and funding our organic opportunities. And if something presents itself from an M&A perspective, we'll be looking at it.

Robert, maybe just to follow up on this. Everybody loves to see technology-driven acquisitions, which are typically on the smaller side. Is Abbott averse to something more medium to larger size in terms of M&A? Or are you looking more on the bolt-on side?

Listen, we're looking -- I don't think something transformational is required. I think that if you look at kind of bolt-ons, there's opportunities over there. There could be opportunities in the midsize. But I think it goes back more about opportunity, strategic fit and timing is probably kind of the bigger drivers over there. But we're very active in looking at kind of early technology with our ventures group and our L&A team looking at opportunities too. And like I said, if the right time comes, then we'll be in a good position.

Great. Maybe I could shift the conversation back. We started with COVID testing. We just got -- yesterday, the government expanded COVID testing reimbursement to commercial insurance plans. How do you think about that move from the government? And does it expand the Binax tail or the COVID testing tail as more people get freer access to COVID testing at home?

Yes. I mean I think that can have an opportunity here. I think the behavior is there in terms of, hey, if I'm going to meet people, I just want to make sure. We're seeing an opportunity in workplace as a lot of companies are bringing their employees back and whether you're vaccinated or not vaccinated, offering testing. So I think that's a kind of long-tail opportunity. I think the schools, we're seeing that right now, across the country are really focusing on using testing as a way to keep the schools open. And I think that's very important, and that's an area that Abbott specifically wants to be a part of because I think that schools being open reopens the economy as parents can get back to work also and not have to worry about home schooling, et cetera. So I think that's an opportunity. And I would add the insurance coverages also as another opportunity, too. So...

Great. Maybe -- it's funny, we were sitting here at this time last year, and you ended up a few weeks later giving a guidance range for 2021 of COVID testing sales. I would wager that it didn't go the way you originally planned on how we ended up here. But your original guidance looks like it was pretty good a year out. How are you thinking about guiding for such a complex entity like COVID testing sales in 2022 here? Not asking for the guidance. We'll get that in 2 weeks, but just the mentality approach.

I think the framework mentality is very much what I spoke about in October, which is we'll have to kind of get comfortable with a number or a range of what we think is a pretty comfortable number here, and that doesn't mean conservative. It just means visibility and understanding. And then from there, kind of be able to update it as we go along throughout the year. I think that's probably the framework about how to think about COVID testing. So -- and then the question is, okay, is the number full year? Is it more kind of first half? We'll see. We'll be talking about it in a couple of weeks. But I think the framework here is going to have to be like updating as we go. The key thing here is that we've got a lot of capacity, Robbie, across all of our platforms. We've invested in that capacity, whether it's PCR, rapid molecular, rapid antigen. So we do have the capacity and leadership position to be one of the leaders with whatever occurs in Q2, Q3, Q4, et cetera.

Great. Abbott is a very diverse company. You have a lot of businesses, a lot of different markets. How are you thinking now, let's call it, 2 years after COVID started? Abbott's diversity has proved to be a huge benefit to the company, and you've significantly outperformed a lot of your medical device peers. But as we sit here today, do you think this diversified nature is the right place for Abbott to be? And do you ever sit there and think about maybe pruning some of the business lines at Abbott that may make sense somewhere else?

Well, I think on that question, I would say the model has proved itself pretty well. We've always talked about different opportunities for growth and resilience in tough times and never really had a tough time to prove it out. And now we proved it out. I think if you're in the right -- diversify for just being diversified, I mean you got to be in the right segments. And I think that we've intentionally looked at the segments that we want to be as a health care company, whether it's cardiovascular, whether it's nutrition, whether it's emerging markets, diagnostics. These are all kind of high-growth areas, important medical needs. So I think we're in the right areas. And then the question becomes, are you performing at a best-in-class performance? And I would say, if you look at 2021 across every one of our businesses, we either grew markets or we took share, we performed above market. So I like the businesses that Abbott is involved in. I like the innovation and the pipeline that exists behind them. And I like the performance of the team and the execution that we've been able to do. Now we've got to keep at it. New year, 2021 done. So we'll focus on that, but I think we're in a great shape with the businesses that we have.

Great. Maybe I could jump around a little bit. People always ask you on Libre. They ask you on COVID testing, Structural Heart. I want to ask you on your Diagnostics business. So there's really a 2-pronged question here. One is you've placed a lot of units into the field associated with COVID testing in the past 2 years. So part one is, what's your vision for your ability to maintain share and utilization of those boxes as COVID testing potentially wanes in the future? And part two is Alinity is still in the very early innings of the rollout. How are you feeling about Alinity and its ability to continue to take share for several years to come?

Well, on the expansion of our instrument census and base during COVID, I mean that we've always kind of had that mindset, right? So if you look at our ID NOW census, it's grown pretty significantly. And I would say the 2 key things there that drive the sustainability of that going forward is, one, how well did we service and support those customers that had those boxes during COVID during all this challenge of getting demand? And I think our team has done an amazing job at providing the kind of service level that is expected during this moment. So I think the relationships with all these new customers have been built and they're very strong. I think that's one aspect. The other aspect is to ensure that we can add onto those boxes. So whether it's kind of RSV, flu and COVID, are there other assays that we can put on those boxes, especially looking at where those boxes have been placed. Does every single one of those new boxes are going to be just as productive? No, because we realize that some of them are just really focused on COVID. But a large portion of them, there will be a tailwind of upper respiratory infectious disease testing, but then there's an opportunity for us to develop new tests and add to those boxes. And that's strategically what the team has been working on as we're ramping up on COVID, the R&D team has been working on new assays to put on those boxes. Regarding Alinity, these cycles, these contracts are 10 -- 7, 10 years. So every year, you got 15% of the market that's coming up for an RFP. And I think our team has done very well. The value proposition of the Alinity system is very clear in terms of what it does for a lab, whether it's throughput, whether it's greater efficiency. And I think we've got -- we've had success in winning these accounts with that value proposition. I continue to believe that, that kind of win rate is sustainable. And then the key thing, as I said, is how do you add more to that box that's been installed? How do you add more assays? And similar to what I talked about on the rapid side, the core lab is also about menu expansion and increasing the throughput of those systems. So...

Well, great. Robert, unfortunately, we're out of time. I want to thank you for a great discussion, and hope you and everybody else has a great rest of their day.

Thanks, Robbie.