Abbott Laboratories (ABT) — Q2 2021 Earnings Call Transcript

Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance, and Chief Financial Officer. Robert and Bob will provide opening remarks. 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 2021. Abbott cautions that these forward-looking statements are subject to 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 Form 10-K for the year ended December 31, 2020. 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. 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 at our website at abbott.com. Unless otherwise noted, our commentary for sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert.

Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported results of a very strong quarter. Ongoing earnings per share were $1.17, reflecting more than 100% growth compared to the prior year. Sales increased 35% on an organic basis in the quarter compared to last year. Given the significant negative impact COVID had on demand for elective medical procedures and routine diagnostic testing last year, comparing sales versus pre-pandemic levels of 2019 provides one of the more relevant measures of performance. On this comparison, excluding sales from our COVID testing business, organic sales grew nearly 11.5% in the second quarter, driven by strong sales growth across all four of our major businesses, including double-digit growth in Established Pharmaceuticals, Nutrition, and Medical Devices. I'll now summarize our second quarter results before turning over the call to Bob. And I'll start with Nutrition, where sales increased 9.5% compared to last year. Strong growth in the quarter was led by mid-teens growth in Adult Nutrition, including more than 20% growth internationally. Since the beginning of the pandemic, we've seen two factors positively impact Adult Nutrition demand: new users are entering the category and existing customers have increased their usage. As the global market leader, these dynamics are driving strong growth for our Ensure and Glucerna brands. In Pediatric Nutrition, sales grew nearly 4.5% in the quarter, led by growth of nearly 9% in the U.S., where we continue to capture share with our leading portfolio of infant formula and toddler brands. Sales of Pedialyte, our global rehydration brand, grew strong double digits, driven by recently launched new products and increased investments we're making in direct-to-consumer promotion. Turning to Diagnostics, sales increased more than 55%, which includes $1.3 billion of COVID testing-related sales. Excluding COVID testing-related sales, underlying Diagnostics sales increased 37% compared to last year. Strong sales growth in our underlying Diagnostic business is being driven by improving routine diagnostic testing as health care systems continue to recover from the pandemic, as well as the continued rollout of our Alinity platforms. Excluding COVID testing-related sales, second quarter sales in Core Laboratory and Molecular Diagnostics grew mid-single digits compared to pre-pandemic levels in the second quarter of 2019. Moving to Established Pharmaceuticals, where sales grew nearly 15% in the quarter. Strong sales performance in the quarter was broad-based across several countries, including double-digit growth in India, China, Russia, and Brazil, leading to overall sales growth of nearly 18.5% in our key emerging markets. While we continue to see COVID cases surge in several emerging markets, including the recent surge in India, our team is executing at a high level to meet market demand for our medicines. Lastly, I'll cover Medical Devices, where sales grew 45% in the quarter compared to last year and more than 15.5% compared to the second quarter of 2019. Strong growth in the quarter was led by Structural Heart, Electrophysiology, Heart Failure, and Diabetes Care, all of which grew double digits compared to the second quarter of 2019. In Structural Heart, we achieved the highest number of MitraClip procedures ever in the second quarter, including a record number of procedures in the month of June. Now I'll wrap up with Diabetes Care, where strong growth was led by FreeStyle Libre sales of more than $900 million. The global user base for Libre grew to approximately 3.5 million users, including approximately 1 million users in the U.S., driven by market expansion and awareness efforts as well as ongoing new product launch activity in every major market around the world. So in summary, we're achieving strong growth across all four of our major businesses, and we are particularly pleased with the strong momentum and growth contributions we're seeing from several recently launched products and investments we're making in our key growth platforms. Our new product pipeline continues to be incredibly productive, delivering a steady cadence of new products with more to come over the next several months. I'll now turn over the call to Bob to discuss our results and outlook for the full year in more detail. Bob?

Thanks, Robert. 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 35% on an organic basis, which was led by strong performance across all of our businesses. Excluding COVID testing-related sales, organic sales growth was 29% versus last year, and nearly 11.5% compared to the second quarter of 2019. Foreign exchange had a favorable year-over-year impact of 4.5% on second quarter sales, resulting in total reported sales growth of 39.5% in the quarter. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 56.9% of sales, adjusted R&D investment was 6.2% of sales, and adjusted SG&A expense was 25.8% of sales. Our second quarter adjusted tax rate was 14.4%, which reflects an adjustment to align our year-to-date tax rate with our revised full-year effective tax rate forecast of 14.7%. The revised full-year forecast is modestly lower than the estimate we provided in January due to a shift in the mix of our business and geographic income. Turning to our outlook for the full year 2021, our full-year adjusted earnings per share guidance of $4.30 to $4.50 remains unchanged and reflects strong double-digit growth compared to last year and approximately 35% growth at the midpoint compared to our pre-pandemic adjusted earnings per share in 2019. We continue to forecast $4 billion to $4.5 billion in COVID testing-related sales for the full year 2021. Based on current rates, we would expect exchange to have a favorable impact of around 2% on our full-year 2021 sales. Turning to the outlook for the third quarter, we forecast adjusted earnings per share of at least $0.90, which reflects continued strong growth and momentum in our core underlying business and a sequential step-down in COVID testing-related sales compared to the second quarter. Based on current rates, we would expect exchange to have a favorable impact of around 1% on our third-quarter reported sales.

I'll keep my questions quick and high level. First, for Robert, I'm just curious about your view on the pace of the recovery in surgical procedures generally. Is it kind of continued throughout the quarter and into July? Or are you starting to see signs of the spread of variants that could cause a little lumpiness in the pace of the recovery? Just wanted to get your views on how things are going.

Sure. We had a very strong quarter in terms of recovery, which we had anticipated in the U.S., Europe, and certain Asian markets. In fact, it turned out a bit better than we expected. We're not seeing the same negative impact from rising COVID cases that we did in the past, such as hospitals shutting down procedures or stopping testing. The situation this year is quite different from last year, despite global case counts being similar to October of last year. We have therapeutics, vaccines, and testing, so we aren't experiencing those previous challenges. Our device business has performed well, with overall growth in the mid-teens compared to the second quarter, driven mainly by areas like EP, Heart Failure, Structural Heart, and Diabetes. Specifically, in the cardiovascular segment, we saw about 2% growth compared to March of 2019 at the end of the first quarter, and June growth was around 7% compared to June of 2019. This indicates a sequential recovery in procedures, which is consistent with our growth rates. Recent data from the first couple of weeks of July shows a similar trajectory, both in the U.S. and internationally, although some markets are behaving differently. Overall, we are optimistic about continued recovery in procedures and diagnostic testing for the rest of the year.

Okay. That's really helpful. And then my second question for Bob. I'd love you to comment on two things, if okay. One, just you had a nice EPS beat relative to consensus and really relative to the way you guys just guiding the quarter. But you're leaving guidance the same. Just wanted to understand that dynamic. Why not boost the EPS a little bit? And then secondly, do you think consensus estimates, as we look forward a little bit, are kind of reflecting the way you guys are viewing the world right now? I'm specifically talking about next year. So any preliminary thoughts on whether consensus is sort of capturing the world as you see it? And wondering just about the EPS guidance for this year.

Yes. Bob, I'll take the first question on the guidance for this year. Clearly, about one-third of that beat was due to the little higher COVID sales than we had projected. Forecasting COVID is quite challenging. That was about one-third of the beat. About two-thirds really was better performance in the base business versus how the Street had modeled that. The way we look at it, we gave a pretty wide range on earnings guidance back at the beginning of June. That really accounts for any fluctuations or changes in the COVID testing in the back half of this year, as well as underlying base business performance. So we feel really comfortable about the range we have and feel that captures different scenarios around COVID testing. Bob, on the question of consensus for the rest of the year, I mean, I think this is how we're thinking about the second half. From a top line perspective, we're going to have to lap some of our COVID sales that we had in Q3 and Q4. That was really the height of our ramp-up in COVID sales. The underlying business, excluding COVID sales, will be getting sequentially better every quarter. We're looking at our base underlying business growing low double digits for the rest of the year. From a gross margin perspective, we'll see expansion in gross margin versus where we were in Q2. There's some friction on some input costs, commodities, freight, etc., but the team works hard to offset those. We'll see improvement as the base business recovers and the margin profiles from that recovery expand. We'll continue to make the ramp-up of investments that we talked about from an R&D and SG&A perspective. Some of those investments have a faster and more immediate return. For example, direct-to-consumer advertising in Nutrition or Libre and some of those investments are a little bit more medium-term, like R&D programs or getting ready for upcoming launches. The real factor here becomes COVID testing. We gave guidance about a month ago about $4 billion to $4.5 billion. After the two quarters, we're about $3 billion to $3.5 billion. We've got between $0.5 billion and $1 billion to go in the next six months. That’s really the question here: how will testing play itself out in the second half of the year, whether it's variants, vaccination rates, etc. So that's something that we're paying attention to. As Bob said, that's why our guidance range was pretty wide, which is to account for that.

Great. Congrats on a good quarter. Bob, maybe to follow up on the last question. There's a lot of moving pieces down the P&L right now. You had a really good operating margin in the quarter. I was just wondering if you could update us on the latest on how you're thinking of reinvestment of COVID testing revenues, how that's flowing through the P&L. And if you have any preliminary thoughts on the impact or benefit it might add to next year as people think about their models now.

In terms of investment, Robbie, if you look at our SG&A and R&D combined, we're up around $700 million versus the prior year. We expect to sustain strong investment in the base business. We've reinvested some of those COVID testing sale profits back into the base business to drive growth going forward. As you say, we had a really healthy operating margin profile in the second quarter. We're going to see some impact on that operating margin profile and the rest of the year with the step-down in those COVID testing sales in the back half of this year. That's going to have an impact on our operating margin profile while we sustain a lot of that investment, particularly in the R&D and SG&A spaces to drive growth the rest of the year and into next year.

Great. I'd like to follow up on new product launches and clinical data sets. We have two notable ones coming at ESC later in August with CardioMEMS and Amulet. I was wondering if we could get the latest updates on approval timing, product launch potential, and how we should approach near-term expectations for product launches, considering the ongoing impact of COVID on hospitals.

Sure. On Amulet, we talked about this, right, Robbie. We filed with the FDA late last year. Right now, we plan to present the data at ESC, so that's in the late August timeframe. We think it's an attractive market, a great opportunity for growth for us. The product is available in Europe and in those markets, albeit a smaller market than the U.S. We have a 50% market share. We feel very good about our ability here to compete with the product we have. Regarding timing, it's one of those where I can't give you an exact timing. We think it's in the second half. It'll just depend on when the approval hits this year. If it's more towards the back end of the year, then we'll see less of an impact. If it's sooner, that will be an opportunity for us to execute on that. On CardioMEMS, I guess, it's similar. We think this is another great opportunity. Both of these products were products when we began the St. Jude integration that we really wanted to invest in and drive on clinical evidence and the clinical evidence of these two products. So it's great to see we're in a position to disclose and share the data from these trials that we put together. We filed our label expansion with the FDA on CardioMEMS this second quarter, more towards the end of the second quarter. Again, we think it's a great opportunity also. Probably in terms of an approval there, we're not really banking on that approval from a sales perspective this year.

Congrats on the strong print this morning. Robert, maybe one high-level question on the base business here. I think there is some confusion this morning. On the base ex-COVID rate versus pre-pandemic 2019 levels, I think you did 11% in 2Q and that was perhaps low double digits in Q1. So the question is, if we had sequential improvements, is 11% versus 10%, that seems a little light. But I think that kind of ignores the business mix. Can you talk about what's happening to the device business? What was the sequential acceleration? And what is baked in for the back half? Should we continue to see some benefit from backlog and further acceleration?

Sure. I think the Med Device kind of grew again, Q2 versus 2021. That growth rate has been increasing and has been sequentially improving, as I said, in the first question. Obviously, the recovery is not uniform across all businesses. If you look at our device portfolio, one part that's lagging in recovery has been Neuromodulation, where I'd characterize that as a bit more elective than some of the other procedures. We've seen a slower recovery trend in that business versus, say, Structural Heart, Electrophysiology, or Diabetes. Similar to Diagnostics, our immunoassay and clinical chemistry business is growing high single digits in the second quarter versus the second quarter of 2019, and that's improving versus where we were in Q1. One of the issues we see in our Diagnostic business is a slower recovery in blood donations, which obviously impacts our transfusion business. Similar to neuro, we've seen a slower recovery. But those businesses that were more impacted by COVID in Q2 of last year have largely recovered very well, and we expect that trend to continue in the second half.

That's helpful. And maybe one on the product side on CardioMEMS. We did some work. It looks like it's an interesting trial, a pretty large trial, I think, with 3,600 patients enrolled. Assuming some of these results, if they were to mimic CHAMPION or the original trial in terms of reduction in heart failure hospitalizations, should CardioMEMS be a multibillion-dollar product for Abbott? The reason I'm asking is historical adoption trends have been quite slow, but your investments in such a large trial suggest some optimism. So I'm curious how you guys are thinking about the longer-term opportunity.

Sure. A lot of these device segments we see have large opportunities. The key is ensuring we have the clinical evidence to drive a strong market development approach. When we looked at CardioMEMS back in 2017, there were some reimbursement issues with CMS, ascertaining the maximum worth reimbursing, etc. You had positive CHAMPION data. I'm aware of some perceived shortcomings of that trial, but there's plenty of real-world evidence showing similar benefits and results. We believe this represents a significant opportunity in the cardiovascular space. Monitoring pulmonary arterial pressure is an excellent indicator for preventing acute heart failure, so we decided to invest in a larger trial to address the perceived shortcomings or augment the data set. I'm hesitant to put a number around this, but we think this is an opportunity as we build our Heart Failure portfolio. Our investments will drive growth in CardioMEMS. Hospitalization reduction is important for health systems, and we think this is a great opportunity for us.

Just two for me. I'll start with Libre, Robert. Just maybe at a high level, your thoughts on the roadmap for Libre from here, given that you're closing in on $1 billion a quarter in sales. More specifically, any update on the launch of Libre 3 in Europe and how delays at FDA might impact the timing of Libre 3 in the U.S.? I had one follow-up.

Sure. Listen, we had a strong quarter, as you saw, and we are approaching that $1 billion mark on a quarterly perspective, sales above 40%. The user base here is significant; it's a different kind of device business. We're looking at this from a mass market perspective versus others that could be considered niche. The retention level we're seeing on the product, between 80% and 90% globally, resembles a subscription-like model, which makes the user base crucial. We've done a commendable job expanding internationally and in the U.S. We've discussed that we have 3.5 million users, and I've mentioned potential numbers all the way up to 80 million users when you consider insulin users and type 2s. We're focusing on building the user base. Libre 3 was launched at the beginning of the year in Germany, and we focused on understanding our marketing messaging, positioning, and user reactions. This pilot launch has surpassed my expectations. We're transitioning to full launch mode of Libre 3 in approved markets. Specifically in the U.S., we understand the FDA backlog exists regarding diabetes products. I won't comment on timing, but we're excited to bring Libre 3 to the U.S. and augment our portfolio with the product.

That's helpful, Robert. Lastly for me. I know I've asked about this on a few earnings calls, but I'm just curious how your thoughts on capital allocation are evolving, given your strong balance sheet. We know valuations are relatively high. Are there areas where you think valuations look more attractive? Historically, the sweet spot for Abbott's been acquisitions in the $5 billion to $10 billion range. Is that still the case? I mean, obviously, St. Jude was an exception to that, but I'm curious to see how your thoughts are evolving on M&A.

Specifically on M&A, there's been no change in thought. Rather than have a number tied to it, it's about whether it strategically fits and if we can execute and drive more value from it. We've been moderating our approach more than we did back in 2017. There are elevated valuations right now, and I won't do anything that dilutes our profiles or growth rates. A key driver here is whether it’s strategic. A lot of our opportunities in capital allocation lie internally as we have great returns by deploying capital to support opportunities in our pipeline, specifically regarding manufacturing and ramp-up in capacity for products like Libre and MitraClip. We also see significant opportunity in Adult Nutrition, where we've seen strong double-digit growth.

I did want to ask one about COVID testing. Your guidance for the year implies lower sales in the last two quarters. I was wondering if you could give us any insight into the trends that you're seeing in testing, especially outside of the U.S. where we have less visibility, so we can think about some scenarios you’re baking into the guidance for the rest of the year.

Sure. About a month ago, we talked a lot about COVID testing here, and I don't think we've seen anything materially different over the last 30 days. I would say we continue to see some lowering in testing volumes in the U.S., whether PCR or rapid, but we did better than forecasted for the second quarter, largely driven by international markets. About 80% of our sales are on the rapid side, but we saw higher international sales, probably driven by the delta variant. Many of those international sales are more tender-driven, and we have good visibility on rising cases and our position in those markets. We've become a preferred supplier due to our scale, quality, and pricing. The question is, even with surges, will testing increase? I think it will more internationally than in the U.S. in the second half.

Got it. And maybe I could just ask one follow-up on recovery in Diagnostics versus med tech. I know you called out this issue with blood donations. Excluding that, should we think about the recovery in your core diagnostics business, ex-COVID, similar to med tech? Could you flesh out the blood donation headwind and how much is that?

Yes. At a high level, I would say we’re seeing a similar recovery trend within each segment. Our immunoassay and clinical chemistry business, which represents about 80% of our core lab business, was up high single digits in Q2 versus Q2 of 2019. We are seeing that recovery on the core lab. Some assays have yet to recover as much. Post-surgery policies at some hospitals involve fewer overnight stays, which affects the number of tests performed. However, we're seeing share gain and growth in new accounts with the rollout of Alinity. The main issue is low donation rates that are impacting our transfusion business, where we have over 60% market share. We're working to raise awareness about this situation, as it's critical for blood inventory. If the low donation rates continue, it could present challenges in the U.S. Hopefully, we'll begin to see recovery towards the end of the year.

It's really two questions. The first one is a follow-up on what Bob was asking earlier on, is there anything that you can give us on 2022? I'm getting a lot of questions as it relates to margins, COVID, double-digit EPS. So anything on a framework basis that would be helpful. I'd appreciate it.

Sure. We've discussed this already and I think it’s too early to provide that forecast given the various moving parts. We're beginning our process right now. The framework doesn't change; excluding COVID testing will be well positioned for strong growth, top and bottom line based on trends we see and the pipeline of new products. We need to consider COVID testing, a factor where we talked about not assuming significant amounts. If there's demand, we have plenty of capacity to meet it. We'll begin to lap some testing in Q3 and Q4 of this year. If we look at our spend, we need to modulate it in a way that doesn't detract from sustainable growth looking past 2022. We have a lot of momentum, ongoing launches, and I want to capitalize on the opportunities we've built upon.

And I've heard the word pipeline investment a couple of times there. Other than some products we've already focused on, such as Amulet, CardioMEMS, and Libre 3, are there other products in the pipeline that you'd like to draw our attention to?

Yes, absolutely. If you look at Structural Heart, I think there are two good opportunities for us. TAVR with bringing the product to the U.S. and launching our second-generation product in Navitor in Europe. We are well-positioned and have solid strategies as we enter this market in the U.S., which will be a great opportunity for us. The second product in Structural Heart is our tricuspid repair system; it's a significant opportunity with a potential market of around a billion dollars. We're doing well; our sales are annualized around $100 million, and we launched this amid the pandemic last year. So I think we have a great near-term opportunity. In CRM, we're making investments to get our leadless program back on track for a single chamber, with future plans for a dual chamber. We're targeting market entry next year, starting with a single chamber and expanding from there. We have strong opportunities in the device space. In Diagnostics, we continue to build our menu of assays and are investing in our rapid business to leverage our placements for ID NOW with COVID to drive flu and other respiratory viruses.

Robert, just wanted to ask a multipart question on the duopolies in the U.S. market. You're about to create one with the entrance at Amulet. And then down the line, you'll be in a different position as the first mover in the duopoly being created by a competitor coming into the edge-to-edge mitral repair market. I hope you could just give us your views on U.S. duopolies in terms of second players entering the market, catalyzing market growth, how you think about that, the risk for competitive pricing, and the potential for that second mover to capture share.

Sure. Competition always drives innovation and investment. A competitor can catalyze further category growth. We can see how our entrance into the U.S. with Libre had a significant impact on the market and made all technologies better. On the flip side, competition might drive pricing as a lever to gain demand or share. We focus on a value proposition that sustains our pricing strategy and showcases the benefits of our solution. Competition has these two aspects, true for both two-player and three-player markets. We're excited to come into the LAA market in the U.S. We are already active internationally, making significant investments. For example, we've already begun our investment in market expansion in LAA with our CATALYST trial, comparing our product to NOAC, the standard of care. We believe this is positive. To sum up, our results show strong growth across all businesses, devices, Diagnostics, Established Pharmaceuticals, and Nutrition. As we look to the second half of the year, we expect this growth to continue. You might see some fluctuations as we adjust for sales tied to our role in COVID testing. However, this won't obscure our strong long-term business outlook. Our pipeline is productive with ongoing launches, and we're optimistic about our investments in key growth platforms.

Thank you, operator, and thank you for all of your questions. That now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today.