Abbott Laboratories (ABT) — Q4 2021 Earnings Call Transcript

Good morning and thank you for joining us. With me today are Robert Ford, Chairman 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 will take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2022. 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 on our website at abbott.com. Unless otherwise noted, our commentary on 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, and good morning, everyone, and thank you for joining us. Today, we reported another strong quarter and highly successful year for Abbott. For the year, we reported organic sales growth of 23% and ongoing earnings per share of $5.21, which reflects more than 40% growth compared to the prior year and exceeded the original EPS guidance we set last January. These last couple of years have truly been unique on many levels. The challenge throughout the pandemic has been the sheer breadth of its impacts. And for Abbott, it's reinforced the value of our diversified business model, which is uniquely balanced across multiple dimensions, including our business mix, customer and payer types, innovation cycles across our businesses and geographic footprint. We've always said that our business model allows us more opportunities to win during the good times and makes us more resilient during the tough times, and never has this been put to the test more so than over the past couple of years. It's been tested by a major global pandemic and has proven to be highly resilient, delivering strong growth and returns for our shareholders. COVID testing has been a big part of this, of course. We delivered 1 billion tests last year and approximately $300 million in the fourth quarter alone and continue to play a significant role in the world's response to the pandemic. But just as importantly, we demonstrated Abbott's strength across our company, delivering strong growth across our businesses while continuing to expand our portfolio with innovations that will fuel our success for years to come regardless of the pandemic situation. Turning to our outlook for 2022. As we announced this morning, we forecast ongoing earnings per share of at least $4.70, which reflects nearly 50% growth compared to our pre-pandemic baseline in 2019. We forecast organic sales growth for our base business, excluding COVID tests, in the high single digits, and our guidance includes an initial COVID testing sales forecast of $2.5 billion. We're seeing very strong demand for testing to start the year with the recent emergence of the Omicron variant. And as you know, forecasting COVID testing demand for more than a few months at a time has been challenging. Therefore, our initial forecast compromises sales that we expect to occur in the early part of the year. And we'll update this forecast one quarter at a time over the remainder of the year. I'll now provide more details on our 2021 results before turning the call over to Bob. And I'll start with Nutrition, where sales grew nearly 6% in the fourth quarter and over 7.5% for the year. Adult Nutrition delivered 9% growth for the quarter and double-digit growth for the year, led once again by Ensure, our market-leading complete and balanced nutrition brand; and Glucerna, our leading diabetes nutrition brand. In Pediatric Nutrition, U.S. sales growth of more than 10% for the year was led by strong growth of Pedialyte, our oral rehydration brand; and market share gains for Similac, our market-leading infant formula brand. During the past year, we continued to expand our Nutrition portfolio with several new product and line extensions, including the launch of Similac 360 Total Care in the U.S. and continued global expansion of our PediaSure, Glucerna and Ensure brands with line extensions such as plant-based, lower-sugar and high-protein products. Turning to Medical Devices, where continued recovery from the impacts of the pandemic and strong growth in Diabetes Care drove sales growth of 16% in the quarter and nearly 20% for the year. In Diabetes Care, sales growth of nearly 30% for both the fourth quarter and full year was led by FreeStyle Libre, our market-leading continuous glucose monitoring system. Rebased Libre sales grew over 35%, which translates to year-over-year growth of $1 billion to a total of $3.7 billion in 2021. This past year, we continued to strengthen our Medical Device portfolio with several pipeline advancements and launches. In the U.S., expanded Medicare reimbursement coverage for MitraClip will make it possible for more people to benefit from this life-changing technology. We launched NeuroSphere Virtual Clinic, a first-of-its-kind technology that lets patients communicate with physicians and receive new treatment settings remotely. We received U.S. FDA approval for our Amplatzer Amulet heart device, which treats people with atrial fibrillation who are at risk of ischemic stroke. And we received U.S. FDA approval of our Portico heart valve replacement system for people with severe aortic stenosis; and CE Mark for Navitor, our latest-generation transcatheter aortic valve replacement system. Moving to Established Pharmaceuticals, or EPD, where sales increased nearly 6% in the fourth quarter and over 10% for the full year. Strong performance was broad-based across several countries, led by India, Russia, and China. EPD has performed well throughout the pandemic, fueled by strong execution and a steady flow of new product introductions in our core therapeutic areas. And I'll wrap up with Diagnostics, where COVID testing was a big part of the story but far from all of it. COVID testing sales were $2.3 billion in the fourth quarter with rapid testing platforms, including BinaxNOW in the U.S., Panbio internationally and ID NOW globally, comprising approximately 90% of those sales. Demand for testing continues to remain strong, and we remain committed to help ensure broad access. Since the start of the pandemic, we've invested significantly to build both U.S. and international manufacturing supply chains, and we're working to expand our capacity further to meet global demand. Excluding COVID testing sales, worldwide Diagnostics sales grew over 8% in the fourth quarter and 13% for the year. We continue to roll out Alinity, our innovative suite of diagnostic instruments, and expand test menus across our platforms. During the year, we placed more than 3,000 Alinity instruments for immunoassay and clinical chemistry testing, with approximately two-thirds of those placements coming from share capture. And in Molecular Diagnostics, excluding COVID testing, sales grew double digits in both U.S. and internationally as we continue the rollout of our Alinity m instrument for molecular testing. So in summary, 2021 was another highly successful year for Abbott. We continue to play a vital role in combating COVID-19 as a result of our massive scale we've built in rapid testing capacity. All four of our major businesses delivered strong performance this past year and are well positioned for continued success going forward. And we continue to strengthen our overall strategic position with a steady cadence of important new products from our pipeline in several attractive growth areas. I'll now turn the call over to 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 excludes the impact of foreign exchange. Turning to our results. Sales for the fourth quarter increased 7.7% on an organic basis, which was led by strong performance across all of our businesses, along with global COVID testing-related sales of $2.3 billion in the quarter. Excluding COVID testing sales, organic sales growth was 10.3% versus the fourth quarter of 2020 and 10.8% compared to our pre-pandemic baseline in the fourth quarter of 2019. Foreign exchange had an unfavorable year-over-year impact of 0.5% on fourth quarter sales, resulting in total reported sales growth of 7.2% in the quarter. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 57.7% of sales, adjusted R&D investment was 6.3% of sales, and adjusted SG&A expense was 26.2% of sales. Our fourth quarter adjusted tax rate was 16.9%, which reflects an adjustment to align our tax rate for the first three quarters of last year with our revised full year effective tax rate of 15.5%, which is modestly higher than the estimate we provided in October due to a shift in the mix of our business and geographic income. Turning to our outlook for the full year 2022. Today, we issued guidance for the full year adjusted earnings per share of at least $4.70. For the year, we forecast organic sales growth, excluding the impact of COVID testing-related sales, to be in the high single digits. We forecast COVID testing-related sales of approximately $2.5 billion, with a significant portion of these sales expected to occur in the early part of the year. We'll update our COVID testing sales forecast one quarter at a time throughout the year. Based on current rates, we would expect exchange to have an unfavorable impact of approximately 2% on our reported sales. We forecast an adjusted gross margin ratio of approximately 58.5% of sales for the year, which reflects our forecasted business mix, underlying gross margin improvement initiatives across our businesses, along with the impact of inflation on certain manufacturing and distribution costs. For the year, we forecast R&D investment of around $2.7 billion and SG&A expense of around $10.8 billion, which reflects investments to support several ongoing and upcoming new product launches and strategic growth initiatives. We forecast net interest expense of around $500 million, non-operating income of around $375 million and a full year adjusted tax rate of approximately 14.5% for the year. Turning to our outlook for the first quarter. We forecast adjusted earnings per share of at least $1.50 and organic sales growth, excluding the impact of COVID testing-related sales, to be in the high single digits. Lastly, at current rates, we would expect exchange to have an unfavorable impact of approximately 3% on our first quarter reported sales. With that, we'll now open the call for questions.

Congratulations on a really strong finish to a strong year. Robert, can you talk about how you thought about the 2022 guidance? Why is $2.5 billion for COVID testing the right starting point? And how are you thinking about reinvesting the upside from COVID testing implied in the $4.70 EPS guidance? And I have one follow-up.

At the start of the year, we were looking to balance Abbott's unique long-term growth opportunities with some uncertainty. This year, there seems to be a bit more uncertainty than usual. There are several factors affecting our forecasts, including the ongoing pandemic and its potential new waves, staffing shortages in hospitals, and patients' readiness to undergo procedures. Additionally, supply chain and inflation issues are challenges that many companies in the healthcare sector are facing. Another aspect influencing our forecast is the future of COVID testing and how it will evolve throughout the year. We acknowledge the existing uncertainties, but we also recognize the strength of Abbott's core business, which is projected to grow at a high single digit rate. We have made investments to support our product launches and are fully prepared for various opportunities this year. While we’ve set an initial COVID testing forecast of $2.5 billion, I do not expect the demand for COVID testing to simply disappear in the second quarter. The challenge remains in accurately estimating the demand. We have built considerable capacity, particularly in rapid testing, and we will continually update our forecasts as necessary. If we had applied our usual guidance method, we might have landed in the middle of your expectations, but I chose not to limit potential upside, hence the $4.70 guidance. To summarize, we've considered the challenges many companies face, have fully funded our growth initiatives, and believe there is potential upside from COVID testing as it is unlikely to fade away entirely, which could positively impact our performance as the year progresses.

That's super helpful. Robert, just for my follow-up, Libre had another remarkable year. How are you thinking about Libre growth in 2022? And what are the drivers of that growth this year?

Certainly. Libre continues to grow at a strong pace, with over 4 million users and more than 35% growth this year. We're starting geographic expansion of Libre 3 in the next few weeks, moving from Germany into key markets like the U.K. and France. Looking ahead to 2022, I anticipate strong double-digit growth, around $1 billion in additional sales per year, which translates to approximately 25% growth. The main driver for us is that our market is still very under-penetrated. We have a significant opportunity to lead in continuous glucose monitoring, as there are potentially 60 to 80 million people worldwide who could benefit from our technology. The international market still has low CGM penetration compared to the U.S., and we're also focusing on patient segments that have been historically underserved, such as type 2 patients on single injection therapy. In the U.S., we've had a successful year with nearly 16% growth, reaching over 1 million users. Our investments in sales and advertising last year are paying off, as we have a high share of new user growth. With our international expansion, the rollout of Libre 3, and continued growth in the U.S. among underserved type 2 populations, we are still in the early stages of the Libre journey.

I'll also add my congratulations on a nice quarter. Two for me. I'll ask them both upfront. First question, maybe you could spend a minute on cadence throughout the year. The first quarter has a lot more COVID testing sales than we had thought but also implies somewhat of a different cadence than we have been thinking. So just top and bottom line, what are the impacts there? How is inflation, FX hitting throughout? And then second question is probably tied into it. If you could just touch on what you're seeing in current device and procedure trends as we sit here today and how you're thinking about the evolution of that over the course of '22.

Your first question has several parts, so let me address the first one, then the second, and I’ll also revisit your first question to discuss some inflation-related challenges. In terms of demand dynamics, especially in our hospital-based business, we observed a strong recovery trajectory at the beginning of Q4. To avoid complication with comparisons, I prefer looking at growth rates relative to 2019 for 2021. Our growth rates in the more cardio-focused sectors were improving, generally in the 3% to 4% range, and this trend continued through the quarters. However, in December, we experienced a significant decline due to Omicron impacting most of our device businesses. The exceptions were Heart Failure, which increased significantly in December compared to 2019, and Libre, which saw a substantial rise as well. Omicron's impact was primarily due to staffing issues and patients delaying hospital visits. This trend has continued into January, with a more noticeable impact in the U.S. compared to other markets, as Europe and Asia have performed somewhat better. We predict some pressure in January and February moving into March, but expect improvements in Q2. For the second half of the year, we anticipate these businesses will return to their normal performance levels. I was pleased with our new product launches during the last quarter, as they performed well in both Europe and the U.S., which reflects the ongoing demand for our products and technologies. On the consumer side, especially with Libre, our Nutrition and EPD segments performed well during Q4, showing resilience against the Omicron impact, similar to how they survived Delta's effects. Innovation drives these areas. Regarding cadence, it's a combination of our recovering device and core testing procedures as we approach Q2, Q3, and Q4. Once we have more confidence in our COVID testing, we can provide better insights. By April, we will have a clearer picture of Q2 for both the U.S. and international markets, allowing us to revise our forecasts accordingly. You also inquired about inflation, which is another focus area for us, and I’ll ask Bob to share more details on that.

Sure. Robbie, you inquired about currency and inflation. Let me start with currency. We have observed the U.S. dollar strengthening since the middle of last year, particularly in recent months. As mentioned earlier, at current rates, this amounts to roughly a 2% headwind on our revenue for the year. We expect a greater impact in the first quarter, around 3%, continuing into the second quarter. However, the effect should become less severe as we move through the year. Regarding inflation, it's closely tied to supply chain issues, which have struggled to meet strong demand. This is not a challenge exclusive to us or our industry. We are observing impacts on transportation costs, manufacturing inputs, and commodities. We do have some flexibility to adjust pricing in certain areas of our business, particularly in consumer-facing segments like Nutrition. In other areas, that flexibility is limited. Overall, considering these challenges, we anticipate about a $0.5 billion impact on gross margins, which is incorporated in our guidance. As supply chains gradually normalize, we expect to see cost improvements in some sectors. For instance, commodity costs for Nutrition have fluctuated historically. However, our current outlook does not predict any significant changes from the existing market dynamics.

I have two questions. My first one is regarding the new product side. Robert, you mentioned a potential consumer product at CES at Lingo. I'm curious about the opportunity here. It seems a bit different from our perspective. For Abbott, you have experience in consumer markets. How significant is this opportunity? Can you provide any insight on the anticipated timing for a U.S. launch? Should we expect more analytes? I believe you showcased four analytes at CES, but I'm interested to know if other products are expected soon.

Sure, Vijay. So we made a decision to put a stake in the ground here and start talking about what we've always believed to be another opportunity, a sizable opportunity for Abbott, and that was really using the Libre platform that we had developed to look into other analytes, other areas. I talked about this recently, and quite frankly, we've talked about it several years ago also. And you referenced some of the analytes that we have been working on: ketones, lactate, alcohol, glucose for people with known diabetes. And those are big opportunities. As I've said, the model is a little bit different. It is probably a much larger total addressable market in terms of people, but the usage of the sensors is probably more intermittent than you would kind of get on a person, for example, with diabetes today, where we're very clear whether you're a type 1 on a pump or a type 1 injector or a type 2, like we know through the data we’ve covered here in terms of the usage patterns. So the usage pattern is a little bit different, but the sample size is significant. If you think about like a keto sensor and the opportunity to be able to provide real-time feedback for somebody who's trying to manage their keto diet, I think there's a large amount of people—a large consumer pool that whether it's more disciplined keto diets or kind of more on an on-off basis, there's a very large amount of people. And we'll have to just think about how to market it a little bit differently, and our go-to-market strategy will be a little bit different. But I'd say we've always seen this as a big opportunity. And we funded it, and we have a separate team that is obviously leveraging the platform, but they're managed differently. They have a completely different organizational structure, and they're just focused on developing not only the technical side of the analytes but obviously doing all the market development work. So we're really, really in the early inning stages here, but I think the numbers could be pretty significant and pretty large. And why not? Over a good period of time, maybe it's even bigger than diabetes once you line these up. The first phase of analytes, we announced at CES that this is our intention, that we were designing these. Timing, we expect to launch our first products outside of the United States towards the second half of this year. In the United States, we'll obviously be having the conversations with the agency in terms of how that regulatory path is going to shape up, probably a little bit too early right now to talk about that. But we're very excited about this opportunity because we've seen this opportunity many, many years back and made the moves. On your question about other analytes, yes, I would say Part 1 or Phase 1 is what I would call these more consumer-facing, more consumer-driven opportunities. But we are looking at other analytes that we probably have, I would say, more of a medical clinical application, whether it's in the hospital or for discharges, etc. So there is opportunity there that we're also working on. So I think it's very large, and we're just in the beginning right now in terms of market creation.

That's helpful, Robert. And maybe my second question, in the balance sheet, I think you guys probably have over $40 billion of capacity right now conservatively. With valuations coming down, what kind of opportunities do you see? And one of the things that always frightens me is Abbott is very large in diagnostics, #1, #2 in most of your end markets. If you look at diagnostics, liquid biopsy, cancer screening diagnostics is—that's a massive opportunity, but I don't see Abbott having a stake in the ground in that area. Is that an area that would interest Abbott?

Well, regarding the M&A question here is yes, there seems to be some dislocation now. And I think this could make sense. If there's anything out there that looks strategic for us and that makes financial sense, then yes, we've got plenty of capacity, as you said. We've generated a lot of strong cash flow, and quite frankly, it's been a meaningful step-up in that cash flow over the last year and a half or so. So yes, strategic financial fits, as I've always said, we're in a great position now to be able to look at that. Devices and diagnostics, I will say, are the areas that we're looking at more carefully. Scott's team is always looking at everything, but he's got more special lens here in devices and diagnostics. The areas that you referenced are areas that are in the list of things that we would be interested in looking at. Tuck-in and medium-sized deals probably are more likely, if, again, if those situations present themselves. But again, we're always looking at everything. So I would say yes, nothing has changed regarding what I've said about M&A, if it's strategic and it makes financial sense and we can deliver value for our shareholders. We are now in a great position as a result of all the efforts that we've had, quite frankly, on cash flow conversion. And now with COVID cash, that also helps.

Rob, just first, wanted to ask a question on 2022 guidance. I understand you don't want to put the top end of the range there and cap the upside. Clearly, there's a potential upside with the increased COVID testing outside of that $2.5 billion revenue stream that you're expecting in the early part of the year. But just in a scenario where COVID testing does fall off in that guidance for the revenue from that franchise turns into reality, can you just refresh us on some of the other levers you have that you can pull to drive EPS growth? I think last year, in June when COVID testing fell off, your team talked about share repurchase, accretive M&A, some cost-cutting reductions. But just wanted to get a refresh there and see if you could help us think through those levers. And then second question is just on the diabetes franchise. And clearly, Libre has a long runway. You're looking — I believe you just talked about in one of your answers about the consumer opportunity. But how should we be thinking about the diabetes franchise and Abbott's desire to kind of leverage the positioning there with other products, either insulin delivery devices or other portfolio adds as we move into 2022 and beyond?

Sure. Regarding your first question, we have taken steps to minimize risks and are fully funded, while also being positioned to capitalize on potential opportunities in COVID testing. Although it seems unlikely that COVID testing will decline significantly, if it does, we will need to reassess our investments and make necessary adjustments, particularly as we approach 2023. However, I believe COVID testing will remain relevant, especially after the changes brought about by Omicron, which has led to a substantial shift in global rapid testing and screening. The key will be observing how this evolves over the next 9 to 12 months. Should the scenario change, we will adapt as needed, but currently, we are managing the entire enterprise effectively, with profits from COVID testing being reinvested back into the business. If the situation changes this year, we are prepared and fully funded for our growth initiatives. We also have the option of share buybacks, which provides us with significant flexibility. Last year, we executed about $2 billion in buybacks, and I expect we will be active in the market again this year since we have the capacity to do so. Now, regarding your second question about diabetes and growth opportunities, could you clarify a bit more?

Sorry. Absolutely. Just thinking about anything you can share just in terms of internal development programs outside of advancing Libre in diabetes and on the consumer channel on the sensing side. Any other products within the diabetes device realm that you could add to the portfolio? Or should we be thinking about the diabetes franchise just sticking with the playbook that you have that's been so successful over the last number of years and has a long runway?

Got it. Got it. So listen, yes, we're in the beginning here. There's still a lot of opportunities, still a lot of under-penetration, whether it's internationally or type 2s. As I've said, a key aspect here is to ensure your pipeline is relevant and is advancing. We've launched Libre 3 in Europe, and we'll be expanding that launch now globally. I expect to be able to bring Libre 3 here into the U.S. I won't necessarily get into the specifics, but I figured you guys would eventually ask this. We have filed Libre 3 here in the U.S. as an iCGM to the FDA last year. I won't get into specifics about timing there, but it's the review process happens in the same agency that reviews diagnostic tests. So as you would imagine, there's a lot of busy work going on with that area of the agency. So we've obviously seen our data that we've submitted to the agency. We've obviously seen data from a competitive system. And I'd say we're feeling pretty good about where we stand. So I think that's a key component there is to expand the portfolio. I've talked about Libre 4, not necessarily what exactly that is, but we do have that as an active program. Connecting to insulin delivery systems is also part of that strategy. And we've got active programs with all pump suppliers and pen delivery systems also to be able to connect Libre onto that. So I think we'll stay focused on making the best sensor, sticking to our strategy of consumer-friendly, showing outcomes, price for access and affordability and continue to innovate with our sensor platform and then look at opportunities to use those sensors to not only expand into other platforms but also to connect to other devices.

I have a big picture one and a specific one. Big picture, one of the themes of your keynote address at CES was the marriage of tech and medtech. And I'm curious if you could highlight how you sort of take that lens in terms of your product pipeline. And then my specific question has to do with your Structural Heart franchise. Portico is out in the market, Amulet is out in the market, and I would love just a little bit of an update on how those products are doing.

Certainly. We've been witnessing convergence for some time, particularly during the St. Jude acquisition and integration. We aimed to connect our portfolios to various sectors like consumer electronics and cloud services, enhancing consumer empowerment and solutions to improve outcomes. Our device portfolio has been progressing in this direction, positively impacting both Cardiovascular and Neuromodulation segments. I mentioned in my opening remarks that our virtual clinic has the potential to transform its business model while also enhancing outcomes for both Deep Brain Stimulation and spinal cord stimulation. We've also focused on Diagnostics, particularly with the development of Binax, which integrates our expertise in accurate COVID testing with an app for easier access and partner collaboration. This integration is evident across our entire portfolio. In our pharmaceutical division, we're utilizing digital tools to help ensure that patients adhere to their medications. This strategic approach is being applied throughout all our businesses, reflecting a broader convergence that we aim to lead. Regarding Structural Heart, we received approval for Amulet in the third quarter of last year and launched it quickly. Initial feedback has been very promising, especially concerning superior closure rates and allowing patients to leave the hospital without blood thinners. We've received positive input on broader sizes for better anatomical fit and flexibility. We ensured good peer-to-peer proctoring during the launch, though it posed challenges in late November and December. Despite that, we managed to perform around 500 procedures last year, mainly in Q4, achieving approximately 10% market share, which is encouraging but still below our potential based on our European performance. For Portico, this area is crucial for Structural Heart, and while facing two established competitors, we believe in our technology and are progressing systematically to strengthen our position. We launched our generation 2 Navitor product in Europe, which has also received positive reviews and boasts a strong clinical profile for high-risk surgery patients. We're making necessary investments to expand our presence, and I feel optimistic about our Structural Heart portfolio as we head into 2022.

So I just had two margin questions I wanted to ask. The first one, I guess I'll frame it as, if we take the $1.50 from Q1, that implies about $1.06 to $1.07 for the remaining three quarters of the year. So is that how we should view your base business earnings power? Or are you still spending more through the year from some of the COVID testing profits or being conservative? Would love just any additional color on the base business earnings power ex testing.

Yes. Matt, I'll take that. This is Bob. So we don't really think about earnings or at the bottom line base versus COVID. We manage the whole company. Obviously, the first quarter is benefiting from the majority of the COVID sales that we've got forecasted at this point in time, kind of our starting point. But we funded our growth throughout the rest of the quarter. So what you have is COVID testing, initial COVID testing sales in that first quarter, but our investments throughout the entire year. And so as we update our COVID testing each quarter, kind of as Robert talked about, that will fall through, certainly at a higher level than our overall margin profile.

I'd just add on to that, Matt, we absolutely expect there to be COVID testing after the first quarter. The question is at what level. And as I said in the beginning, to be able to kind of forecast a full year out like that, given the magnitude of how this can shift, it's just prudent to do it a quarter at a time. So when we're here in April, we'll have a better sense of what Q2 is going to look like in terms of COVID testing, and we'll be able to kind of update you there, okay?

Got you. Can I just have one follow-up on gross margin? You mentioned that there was about $500 million headwind from inflation and supply chain. If we add that back in, it looks like gross margins are closer to 60%. Additionally, could you discuss your expectations for gross margins going forward over the long term if conditions normalize? Do you think those levels are achievable in 2023 if things improve, or what factors might affect gross margins in the longer term?

Well, I think the add back gets you a little bit below that. But the way we think about gross margin every year is looking for ways to expand that. Every one of our businesses has dedicated teams focused on gross margin initiatives. And you're seeing some of that benefit actually in our 2022 forecast helping to offset the impact of the inflation that we're seeing. We continue those programs. They are not a one-year program. We do them every year, and we'll continue to do those into next year. The other thing we're seeing is a benefit of kind of the business mix. So as medical devices and routine diagnostic testing recover, that benefits our overall gross margin for the business. Obviously, Robert talked about a lot of the opportunity. Some of the opportunities are even more that we have to drive growth in our Medical Device business as well as in Diagnostics. And as we grow those businesses, that will have a positive impact overall on our gross margin profile.

Okay, let me conclude by echoing some of my earlier points. I recognize that there are many uncertainties in the macro environment at the moment, which pose challenges for forecasting for investors, particularly in the short term. Factors such as the pandemic's duration, its phases, the transition to an endemic state, and the recovery of procedures present difficulties in making precise forecasts. However, if I assess the market at the beginning of the year, especially within the health care sector, it’s clear that medtech and diagnostics have been significantly affected by these uncertainties. It's crucial to remember that health care remains an essential need and a robust area for long-term growth, as the foundational market dynamics have not changed due to the pandemic; in fact, some of them may have improved. Demographic trends remain advantageous, and we can expect a resurgence in procedures and routine testing, although predicting the exact timing is challenging. Moreover, the innovation pipelines throughout the industry are currently stronger than ever. In this light, Abbott is well-positioned; we operate in attractive markets with leading roles in several substantial and rapidly expanding segments, including diabetes, devices, diagnostics (including COVID testing), nutrition, and pharmaceuticals in emerging markets. We hold strong positions, brands, and franchises across all these areas. Additionally, we are at the forefront of the digital transformation towards more patient-centered care with solutions like biowearables, connected devices, and remote monitoring. This diversification, which I mentioned earlier, further enhances our growth potential and provides a natural buffer against occasional macroeconomic impacts. Our diversity extends not just to our business mix but also includes variations in customer demographics, payer types, geographic reach, and a robust supply chain. This accumulation of strengths translates into strong, sustainable financial health characterized by growing revenues, cash flows, and dividends. Our balance sheet is solid, and I'm optimistic about the opportunities it presents. Overall, we find ourselves in an excellent strategic and financial position, and I'm enthusiastic about the growth opportunities that lie ahead. Thank you all for joining us today.

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 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us.