Abbott Laboratories (ABT) — Q2 2019 Earnings Call Transcript

Good morning, and thank you for joining us. With me today are Miles White, Chairman of the Board and Chief Executive Officer; Robert Ford, President and Chief Operating Officer; and Brian Yoor, Executive Vice President, Finance and Chief Financial Officer. Miles will provide opening remarks, and Brian will discuss our performance and outlook in more detail. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2019. Abbott cautions that these forward-looking statements are subject to the risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, risk factors, to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2018. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. Please note that second quarter financial results and guidance provided on the call today for sales, EPS and line items of the P&L will be for continuing operations only. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in our earnings news release issued earlier today.

Thank you, Scott. Good morning. Today, we reported results of another strong quarter with ongoing earnings per share of $0.82, above our previous guidance range and reflecting double-digit growth. Sales increased 7.5% on an organic basis in the quarter with all 4 businesses exceeding expectations. I'm particularly pleased with our ability to consistently achieve these types of strong results. Over the past 2 years, our quarterly organic sales growth has averaged more than 7%. And importantly, we're well positioned with our portfolio and new product pipeline for this type of strong growth going forward. Based on our performance and momentum in the first half of the year, we're raising our full year outlook, and we now forecast adjusted earnings per share of $3.21 to $3.27, reflecting nearly 13% growth at the midpoint on a reported basis and even faster growth when excluding the impact of foreign exchange. While we achieved broad-based growth across several areas of our portfolio, I'd like to highlight just a few areas where we continue to perform exceptionally well. I'll start with our Medical Devices business with FreeStyle Libre, where we achieved sales of $430 million and continued to add significantly to our global user base, as reflected by our organic sales growth of more than 70% in the quarter. We also continue to make excellent progress expanding reimbursement and access in the U.S., where Libre is now reimbursed for approximately 75% of people with private pharmacy benefit insurance. Libre offers a unique value proposition. And as by design, it provides great clinical benefits, and we priced it to ensure affordability. Peers recognize that value and are increasingly providing reimbursement coverage for Libre, which also lowers out-of-pocket costs even further for patients. As I've mentioned before, we've been investing significantly to expand our manufacturing capacity for Libre to meet demand. The first wave of that expansion will come online in the next couple of months, followed by a cadence of incremental capacity after that. There's a massive population that needs help managing their diabetes, and our intent is to make Libre broadly accessible to all of them. Turning to our Structural Heart business, where we achieved mid-teens growth, this was led by MitraClip, our market-leading device for the treatment of mitral regurgitation, which had global sales growth of more than 30% in the quarter. And MitraClip grew more than 50% in the U.S., where we recently received a new expanded indication. Earlier this week, we announced U.S. approval of our fourth generation MitraClip device, which builds on this leading platform with enhanced features and new clip sizes, providing physicians further options when treating the disease. We've been building our position in Structural Heart for more than a decade and have a deep pipeline of technologies in development, including Tendyne and Cephea, which are minimally invasive devices to replace faulty mitral heart valves; TriClip, a first of its kind device for the repair of a leaky tricuspid heart valve; and AMPLATZER Amulet, our left atrial appendage device, to reduce the risk of stroke in patients with atrial fibrillation. With the rapid adoption of MitraClip in a highly underpenetrated market, as well as a pipeline of technologies targeting new growth areas that will launch over the next several years, our Structural Heart business is well positioned for strong, steady growth for years to come. Next, Diagnostics, where we remain focused on the global rollout of our Alinity suite of instruments for every area of diagnostics in which we compete. We're making great progress with our systems for immunoassay in clinical chemistry testing in Europe, where the launch of Alinity is helping to drive double-digit growth in our international core laboratory business. We're now also in the early stages of launching Alinity instruments for hematology and molecular testing in Europe. In the U.S., we're making steady progress achieving regulatory approvals for our broad menu of core laboratory tests. And just last week, we announced the FDA approval of Alinity s for blood and plasma screening. Abbott screens the majority of the world's blood supply, and this system is designed to be faster and more efficient within a smaller amount of space while maintaining the highest levels of accuracy. The global rollout of Alinity is an ambitious undertaking that positions our Diagnostics business for sustainable, strong growth going forward. So in summary, all 4 of our businesses exceeded expectations in the quarter. Our growth is strong, it's accelerating and it's sustainable. We've strategically positioned ourselves in some of the most attractive areas of health care, and our key growth platforms are delivering impressive results. And today, we're adding to what was already a strong growth forecast by raising our outlook for the year. I'll now turn the call over to Brian to discuss our results and outlook for the year in more detail. Brian?

Okay. Thanks, Miles. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance. Turning to our results. Sales for the second quarter increased 7.5%. Sales in medical devices grew 10.5% with double-digit growth in Electrophysiology, Heart Failure, Structural Heart and Diabetes Care. In Nutrition, sales increased 5.1%, led by strong growth in Adult Nutrition. Sales in Established Pharmaceuticals grew 6.1% with 8% growth in our key emerging markets. And sales increased 6.2% in Diagnostics, led by high single-digit growth in Core Laboratory Diagnostics and sequential improvements in point-of-care and Rapid Diagnostics. Exchange had an unfavorable impact on total Abbott sales of 4.6%, which was approximately 0.5% more unfavorable to our expectations at the time of our earnings call in April. Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.4% of sales. Adjusted R&D investment was 7.1% of sales, and adjusted SG&A expense was 29.9% of sales. The second quarter adjusted tax rate was 13.7%, lower than our previous full year guidance of around 15%, due entirely to continued implementation of and adaptation to the U.S. tax reform regulations. Our second quarter tax rate reflects the aggregate adjustment to align our tax rate for the first half of 2019 with our revised full year effective tax rate forecast of 14.5%. Turning to our outlook for the full year, we now forecast organic sales growth of 7% to 8%. Based on current rates, we would expect exchange to have a negative impact of approximately 3% on our full year reported sales, which is in line with the expected impact we had at the beginning of the year. We forecast an adjusted gross margin ratio of a little less than 59.5% of sales for the full year. This is modestly lower than our prior forecast and reflects the temporary effect of investments to support the unprecedented ramp-up and market adoption of our Alinity diagnostics systems as well as investments in Libre capacity expansion. We forecast adjusted R&D investment of somewhat less than 7.5% of sales and adjusted SG&A expense of around 29.5% of sales. And as I mentioned previously, we forecast an adjusted tax rate of around 14.5% for the full year 2019. Turning to our outlook for the third quarter, we forecast adjusted EPS of $0.83 to $0.85, which reflects strong double-digit growth. We forecast organic sales growth of 7% to 8%, and at current rates, we would expect exchange to have a negative impact of around 1.5% on our third quarter reported sales. We forecast an adjusted gross margin ratio of a little less than 59.5% of sales, adjusted R&D investment of around 7.5% of sales, and adjusted SG&A expense of around 29% of sales. Before we open the call for questions, I'll now provide a quick overview of our third quarter organic sales growth outlook by business. For Established Pharmaceuticals, we forecast mid- to high single digit growth. In Nutrition, we forecast mid-single-digit growth. In Diagnostics, we forecast Abbott's legacy diagnostics businesses, which is comprised of core laboratory, molecular and point-of-care, to grow high single digits. And in Rapid Diagnostics, we forecast low to mid-single-digit growth. And finally, in Medical Devices, we forecast high single-digit growth, which reflects continued double-digit growth in several areas of this business.

Congrats on the quarter and the guide. And Miles, I have 2 questions for you, the first on diabetes, the second on the outlook for the year. So just starting with diabetes, ADA, Miles, ushered in some concerns around the Libre 2.0 iCGM designation. Should investors read anything into the lack of approval? And what's your confidence level on iCGM approval? And what does the trend in BGM this particular quarter tell us about the Libre adoption?

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

Yes, we filed this in iCGM. We mentioned this in our last earnings call, and we submitted it as an iCGM. The standards and special controls for the iCGM are very clear and transparent regarding accuracy, thresholds, alarms, sensor shutoffs, and so on. We would not have filed an iCGM if we thought we would not meet those special controls. In fact, the agency encouraged us to file Libre 2 as an iCGM. I know some people want to speculate and pinpoint an exact date. We're not behind our timelines, so we cannot provide an exact date yet, but we expect it relatively soon.

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

I would like to highlight a few important points regarding our guidance. We are experiencing strong performance from our growth drivers, with numerous launches taking place across all segments. We are expanding our capacity and new manufacturing to support Libre. The Alinity systems are successfully being rolled out, and MitraClip is gaining momentum. Many areas, which I have occasionally been dissatisfied with, have shown sequential improvements, which is encouraging. The pharmaceutical business, cardiac rhythm management, stent, neuromodulation, point-of-care diagnostics, and Rapid Diagnostics, particularly the Alere acquisition, are all demonstrating sequential sales growth improvements as planned. Given this overall strength, we are confident in our projected growth rate for the top line, anticipating it will fall within the 7% to 8% range. I have challenged our team to assess whether this trend is temporary or sustainable, and we believe it is sustainable. Additionally, with record earnings, we expect an increase in our earnings growth rate in the second half of the year. As always, we aim for double-digit growth at the start of the year, and that ambition remains unchanged. Our earnings continue to be robust, and currently, we are looking at an 18% growth on the bottom line. When asked about reaching the high end of the range, I think our current performance is already strong. A growth rate of 7% to 8% on the top line and high double-digit growth on the bottom line positions us as best in class among our peers. Despite the challenges that may arise globally, we are performing well across the board, making this a solid investment.

Great, and congrats on a good quarter. Maybe 2 product questions for you. I want to hit on MitraClip and Alinity. Maybe you could comment on the status of CMS reimbursement in MitraClip. It doesn't seem to have hindered your growth at all in the quarter, but maybe just give us some update on the timelines, and then maybe some considerations for the trend line of uptick going forward there once you do get approval.

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

So Robbie, so you saw we had a great quarter of MitraClip, global sales over 30%, really driven by U.S. over 50%, most of that growth in U.S. really coming through increased productivity in the existing accounts. So we obviously were constantly doing market development, opening new accounts, but a majority of that growth coming through increased utilization. So we've continued to invest in clinical and field sales expansion. And when you do this, they have this direct impact on account utilization and productivity. International was up also double digits in the quarter. You've got Japan, where we believe is a significant opportunity for us long-term there where we're building our capabilities in Japan. And Europe saw a rebound in Q2 versus where we were in Q1. I think the teams there, the clinical and medical teams have done a really good job at putting into context and framing some of those conflicting trials that came out in the second half of the year. So we think there's a lot of sustainability here not only in the U.S. I mean, our penetration rates here, in terms of the opportunity, are still kind of low single digits. So we've got a lot of runway here. Regarding your question on CMS, I mean, there's obviously a lot of coordination that's been going on between CMS and the physician societies. We expect the NCD to be opened up very soon as part of that coordination. As I say, we're not going to forecast an exact timeline here, but we anticipate getting through the process around year-end early next year. But as you said, the process here hasn't really kind of impeded our growth. We have seen a dozen or so private commercial insurance companies already reflect updates to their decision to their coverage to include the new indication. Obviously, the larger segment there is the Medicare segment, but it's good to see that traction in the private segment. So very good quarter. We continue to see this expansion in the second half of the year and towards the end of the year looking at achieving the CMS reimbursement.

Great. Following up on Alinity, it encompasses all your product lines and diagnostics, making it challenging to pinpoint specifics. Could you provide a status update on the launch progress in Europe and the initial launch in the U.S.? Additionally, any insights on competitive data would be helpful. We've observed some of your competitors facing challenges with both their revenue and margins concerning competitive systems. Is there anything in the market that you've noticed that could be beneficial? Thank you.

Sure. Well, so first, you made a comment that it touches every part of diagnostics. That's true. And these are 6 different systems: the immunoassay system, the clinical chemistry system, obviously a smaller point of care system for that market. There's a dedicated blood and plasma screening system, and then, of course, hematology and molecular. And they're all at various stages of rollout. The one that is the furthest along would be the rollout of our immunoassay and clinical chemistry systems in the core laboratories of Europe. We're also in the process of expanding menu approvals in the United States and China and Southeast Asia, where customers want to have a certain critical mass of menu as they make the conversion from whatever they're using to these new Alinity systems. So I'd say we're running as fast as we can, I think, at this point, in Europe, and that's going pretty well. There's over 3,000 systems placed now running tests, generating revenue, et cetera. We do measure not just the deal, the closure of a deal, et cetera. We measure what is called test of record when the account is up and running, generating results, generating tests, et cetera. And so I'd say that process is going well. That's going to begin to pick up more momentum in the United States as we're getting more and more menu breadth. Same with China. We're tracking all of that pretty closely as we build those menus. We're talking about hundreds of tests. We did recently get approval for the Alinity as the blood and plasma screening system. Today, we screen about 80% of the world's blood supply as it is. This is an important transition product that labs, I think, will find more efficient, more economic, et cetera, but that's a plus. We closed and started up the Japanese Red Cross, which is the largest Japanese blood screening organization, and we took that from a long-standing Japanese competitor. So that was a big win for us. So there's just a lot of success that way. Hematology's in the very early stages of rolling out; the molecular system in the earliest stage of rolling out. And which is why this will be, I guess, a slower-moving launch that's got sort of years of growth and momentum in it as we look over the next, call it, 5 to 7 years to completely replace an existing installed base and add a lot of new share and new volume. And to that end, I think we've quoted you before, that remains true. In accounts where we already have the business, we're winning about 95% of the time. And in accounts where we do not have the business, and there's an entrenched competitor of ours, we're winning about 60% of the time. Those win rates and penetration rates and share gains and so forth in our experience so far, over now what I've said is over 3,000 instruments, tell us that we've got a very competitive system. We do run into, on the occasional accounts, heavy-duty price-cutting. We've got a very disciplined system of our pricing and contracting in accounts. We have not had to do that. I think that speaks to the superiority of the instrument and assay offering. So we're feeling like our offering is uniquely competitive. It's borne out by the win rates no matter what type of account. It's unprecedented to launch these many systems across the board in all areas. So I think this only picks up momentum and gets better as the assay menu expands and as there's some experience in the field with the analyzers.

Just 2 quick questions, one for Miles and a big picture, and then one quick financial question if okay. Miles, if okay, I wanted to ask a question on the management team additions that you announced recently. Congrats on hiring Lisa to run devices. And I guess, my question is, when Robert was promoted as COO back on October of last year, Abbott said that Robert would keep devices. So just wondering if you could comment on kind of the reasons for the change, what Robert will do with all his newfound free time. And investors are always curious about your long-term plans. So it's a question on the recent hire.

I can assure you he’s not playing golf. We believed it was important for him to stay focused on the medical device business since he played a key role in integrating St. Jude following its acquisition. We reorganized St. Jude to match our preferred business structure at Abbott, which involves having a fully integrated operation with the general manager responsible for all aspects, including commercial sales, manufacturing, R&D, and technical support. We did a similar realignment with Alere when we acquired them. Each business now has comprehensive general management responsibility, and Robert led this transition, which has been successfully implemented. This process included adding experienced general managers and replacing some who left due to the acquisitions. We are also undergoing a generational change within the management team, with many long-standing members still present but also bringing in new talent to support our anticipated growth over the next decade. To fill the EVP position that Robert previously held, we brought in Lisa, who we believe brings valuable experience and energy. We have made additional organizational adjustments to streamline operations as we manage significant growth and improvements across several sectors, including diagnostics. These changes have gone smoothly. Given that Robert is in his mid-40s and has moved into the COO role, we foresee him being in a significant leadership position at the company for a long time. My goal after leading the company for so long is to ensure a seamless transition when that time comes, so that the momentum and growth of the company remain strong. I believe that achieving this smooth leadership transition is one of the most important legacies I can leave. Thus, our preparations for continuity are progressing exceptionally well.

Thank you for your insights, Miles. That's a valuable perspective. I have a quick question for Brian regarding the tax rate. Over the past couple of years, you have effectively been reducing the tax rate gradually. While you've commented on it this year, could you discuss it in a broader context? Where do you currently stand in this process, and are the current rates we are observing sustainable in the low teens?

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

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

We've got many investment opportunities ahead of us. It's vital that we reduce our debt, and we've successfully paid down nearly $10 billion. While we maintain a position of strategic flexibility, we're not eager to utilize it just yet. Our immediate need involves investing capital in plant and expansion, especially for Diagnostics and Libre, as well as in the manufacturing for MitraClip and other products. We must support our growth in plant and capital in a timely and high-quality manner, which we are currently doing. We will continue to pay down debt prudently, ensuring it's the right debt at the right time, and we will uphold a strong dividend, which we significantly increased at the end of last year. Our goal is to continue growing this dividend, as it has been a consistent feature of our company for decades. While buying back shares is an option, we won't overdo it since we have various ways to return cash to shareholders while simultaneously maintaining good returns. At present, we don’t see a need for mergers and acquisitions, as we have abundant organic growth opportunities to pursue. Although we keep an eye on potential acquisitions, we recently made a small purchase in Germany to enhance our Diagnostics business, which reflects our strategy. Our focus on organic growth in devices, diagnostics, nutrition, and pharma means we won't be actively pursuing major M&A in the near future. On the expense side, we aim to balance investors' desire for earnings growth with investments in our business's growth. Every general manager at Abbott believes they could utilize more funding effectively to enhance growth. Thus, we continually seek the right equilibrium between investing in growth and meeting investor returns. The discussion shouldn't just focus on marginal earnings improvements since our overall growth is strong and sustainable, marking a significant trend over the coming years instead of just one quarter. The challenge is how to keep investing in R&D and in sales and marketing to fuel this growth, and we're focused on striking that balance to further elevate our growth rates.

Just one question about the medical device business growth, which was outstanding this quarter. How do you see the potential to maintain that growth level? It looks like there are strong double-digit growth rates in several areas, but some segments are still experiencing flat growth. What are your thoughts on the long-term dynamics there?

Yes, this year features a variety of businesses, some more established than others, and some introducing exciting new products. Generally, in Medical Devices, innovation is a key driver of growth, and this will continue over time. Different businesses are at varying stages of maturity and innovation. We see ample opportunities ahead. I recall discussions with Dan Starks during the St. Jude acquisition negotiations, where he strongly believed that St. Jude's pipeline was undervalued and their internal models suggested a growth rate in the high single digits. At that time, the market did not share that viewpoint, but Dan turned out to be correct. We've observed that in the medical device business we acquired from St. Jude, which has been growing at about 9% to 10% as new products have entered the market, either replacing older ones or being entirely new offerings. The key takeaway for Medical Devices is the need for ongoing innovation in new areas. For instance, MitraClip represents a new domain, as do Heart Failure and HeartMate technologies. Libre is also a standout; it addresses a mass market rather than a niche, with diabetes impacting over 80 million people globally, including a roughly equal split of type 1 and type 2 diabetes. This presents a significant opportunity, unlike anything previously seen in the diagnostic device sector. We are investing heavily in manufacturing expansion to pursue this mass market approach. Thus, the sustained growth will not only come from innovation but also from addressing larger markets at more affordable prices, increasing access for more people and driving further growth. As for the businesses that are not growing as quickly, while I wish they were performing better, I’m encouraged by the sequential quarter-to-quarter improvements across almost all of them. We have seen progress in CRM, neuromodulation, even EPDs, and stents. While some mature businesses might not show high single-digit or double-digit growth, I believe they still have the potential for solid growth in the low to mid-single-digit range, with room for improvement. For example, if we manage to elevate a flat or slightly negative CRM business to 3% or 4% growth, that represents a significant increase. The same incremental advancements are achievable, albeit at lower percentages. There’s a lot here to maintain the current growth trajectory. We will always have new products like Libre, MitraClip, or HeartMate that can drive growth disproportionately for a time. A benefit of our diverse device offerings is that there will always be segments experiencing growth while others are focused on future innovations.

I'd like to spend a little bit of time on Nutrition, particularly international nutrition. And the adult piece of that really did well in the quarter. Is there anything you could give us as an update on that particular franchise?

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

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

And as my second question, one of the 'problem children' in Medical Devices is in neuromodulation. Can you walk us through a pathway to the recovery in that?

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

I wanted to circle back on Libre on 2 points. So the first is that you mentioned that you're working on increasing the capacity. There was an article yesterday, and Reuters said that you're expanding capacity by 3x or 5x. And so if we think about Libre this year as approaching maybe $2 billion based on consensus, does that mean that ultimately, you think it could be a $6 billion to $10 billion type of product as you go mass market? And can you talk about how you can step on the gas in the second half of the year without additional capacity in the approval of Libre 2 to more rapidly expand use?

You are quite the ambitious person. I recall receiving a similar question last quarter about whether we could reach $5 billion, and just three months later, it’s $10 billion. I share those ambitions, though I didn't expect them to materialize so quickly. To answer your question, I do believe that kind of potential exists. It's difficult to speculate on such a large figure, but I do think we will achieve $5 billion in sales within a reasonable timeframe. The growth rate demonstrates not only the size of the market but also the necessity, utility, and affordability of our product. As I’ve mentioned before, this is a distinct market where affordability, utility, and access make it a mass-market product rather than a niche one. It’s designed and priced accordingly. We're in the process of scaling up to meet this unprecedented growth in our sector. While I won't make predictions about reaching $10 billion, I do see substantial potential in our future. Moreover, our product has capabilities beyond glucose monitoring; it can serve as a wearable for other analytes and products as time goes on. We have research and development initiatives focused not only on enhancing and expanding Libre but also on other areas beyond diabetes and other analytes. There are many developments on the horizon that people aren't even considering today. We're fully committed to seizing the glucose opportunity, which is significant, but there’s much more beyond that, and I believe your aspirations have merit. However, I'm not prepared to assign specific numbers to it just yet.

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

Geez, I don't know. Let me ask the COO. He's been living with it for a long time.

Yes. I think when we went about this several years ago, the challenge here, Matt, wasn't to get an accurate reading of glucose from interstitial fluid. Navigator, when we launched it back in 2008, we were able to do that. It was very accurate, and we were able to get an accurate reading. The challenge that we went about with Libre is how to do that in a way that is cost-effective for the health systems and for consumers and for all of that. So that was what we really went after, is how can you get the accurate reading at a cost position at the core of Libre? And you might remember at the time, Navigator was considered the most accurate sensor. In the core of Libre is that chemistry, is that core technology of Navigator, which provides accurate, reliable readings, but we're able to do that at a cost position that now makes sense for the insurance and for the payer community and the health systems to cover it. It wasn't a question of whether the outcomes were right or whether the outcomes were enough. They were convinced that the outcomes were there for sensor-based glucose monitoring. It was just, can I now do it in a way that makes sense for me to do it on a mass scale? And Miles just talked about this about mass scale. That's what we went after 10 years ago. And that's at the core. And I think maybe that's misunderstood because a lot of this discussion gets focused on, well, accuracy at this level and accuracy at that level. And the reality is accuracy is obviously important, but our goal here is to make this massively available without having to sacrifice accuracy. And the fact that we priced it at a different price point wouldn't say necessarily imply that it's somehow missing something; we just have a different strategy and adjustment view of what we could do.

The only similar product in the market is costly, targeted at a niche audience in the United States. Our product is affordable and maintains excellent clinical performance and accuracy. Thanks to our advanced and automated manufacturing processes, we've managed to keep production costs low while offering a sophisticated product. It is highly profitable, and we have not compromised on that aspect. Our design, approach, and cost structure are entirely different, relying on scale to keep costs down, and we have observed an improvement in gross margins, which exceed 60% and continue to rise, even with significant capital investment to support high production volumes. Some may wonder how we're making money, but we are doing well. Our product is meant to be accessible and affordable. We believe that the healthcare market needs to focus on lower costs, and our product exemplifies that significantly. We aim to make it available to 80 million people worldwide, which is unprecedented. The device community may not fully understand our approach since it's quite different, but we continue to communicate this. As new production capacity comes online, we are adding significant increments every 90 days, ensuring we remain unconstrained in our capacity. This flexibility gives us the freedom to promote and expand our product into new markets. There are numerous opportunities here, especially in the wearables market, where affordable and accessible technologies will lead to different market growth.

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 Investor Relations website at abbottinvestor.com. Thank you for joining us today.