Abbott Laboratories (ABT) — Q3 2022 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'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 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, 2021. 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. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates that could impact reported sales growth. 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. Good morning, everyone, and thank you for joining us. Today, we reported results of another strong quarter, including ongoing earnings per share of $1.15. Based on our performance through the first 9 months of the year, we increased our full year adjusted earnings per share guidance to $5.17 to $5.23, which is more than 10% higher than the initial guidance we provided back in January. As you know, the macroeconomic conditions remain challenging. Inflation continues to be a stubborn force globally, but we've started to see some moderating impacts in certain areas of our businesses compared to earlier in the year. At the same time, the U.S. dollar has continued to strengthen, including throughout the most recent quarter. COVID remains as unpredictable as ever with intermittent surges continuing throughout the world. And lastly, global supply chain dynamics and staffing shortages continue to impact our health care markets, though we're seeing steady signs of improvement. Over the last few months, we've made progress in several important areas following the temporary shutdown of our infant formula manufacturing plant in Sturgis, Michigan earlier this year. We restarted production at Sturgis in July with a focus on our EleCare and other specialty infant formulas. In September, we began production of several Similac products, which we expect will begin to reach retail store shelves over the coming weeks. We also boosted production in our global network to increase infant formula supply to the U.S. In fact, we delivered roughly the same volume of formula to our U.S. customers this past quarter as we did during the 3 months prior to the recall. Our number one supply priority was to the WIC, Women, Infant, and Children federal food assistance program to ensure that underserved participants would have access to infant formula. During the quarter, we also made leadership changes, both at our Sturgis site and in our prior organization, and we concluded a month-long investigation into the accusations that were made by a former employee. The investigation, which included extensive document reviews and interviews, concluded that the allegations about quality were unfounded. And during the quarter, the same former employee dropped the federal OSHA complaint. Lastly, we conducted an analysis of the U.S. infant formula market and concluded that this country would benefit from more manufacturing capacity and redundancy. As such, we're moving forward with plans for a $0.5 billion investment in a new U.S. nutrition facility for specialty and metabolic infant formulas. We're currently in the final stages of determining the site location and will work with regulators and other experts to ensure this facility is state-of-the-art and sets a new standard for infant formula production. We recognize there's more to do but feel confident in the progress we're making, and I want to thank all the Abbott employees that have been working around the clock on this matter. I'll now summarize our third quarter results for our remaining businesses in more detail before turning the call over to Bob. I'll start with Established Pharmaceuticals, or EPD, where sales increased more than 12% in the quarter. Strong performance was led by double-digit growth across several countries, including India, China, Brazil, and Vietnam, along with broad-based strength across several therapeutic areas. EPD has now achieved double-digit organic sales growth since the beginning of last year, fueled by a steady cadence of new product launches and strong commercial execution. EPD has also expanded its profitability profile over the same time period, which is quite unique given the current macroeconomic headwinds. Moving to Diagnostics, where COVID test sales of $1.7 billion were significantly higher than expectations but lower compared to last year, which resulted in a modest decline in sales growth overall. The decline in COVID test sales compared to last year was driven by lower demand for laboratory-based tests. Whereas demand for our rapid tests, which include BinaxNOW, Panbio, and ID NOW continues to be strong, with sales this past quarter at a similar amount to the third quarter of last year. Rapid tests have proven to be very important and highly practical tools. They provide a quick and affordable way to test COVID almost anywhere and at any time, whether you're experiencing symptoms or just want to know your status before attending events or gatherings. Excluding COVID testing revenues, sales of routine diagnostic tests grew 6% in the quarter overall and even faster internationally, fueled by the continued global rollout of our Alinity instrument for immunoassay, clinical chemistry, and molecular testing. Lastly, I'll wrap up with Medical Devices, where sales grew 6.5% in the quarter globally. In the U.S., sales growth of approximately 11.5% was led by strong double-digit growth in Electrophysiology, Structural Heart, and Diabetes Care. During the quarter in the U.S., cardiovascular procedure volumes were somewhat soft in July before strengthening in August and September. Internationally, in addition to similar procedure volume trends, sales were negatively impacted by intermittent COVID lockdowns in China as well as supply constraints in certain areas, most notably in Electrophysiology. In Diabetes Care, sales of FreeStyle Libre exceeded $1 billion in the quarter, and our user base expanded to approximately 4.5 million users globally. In the U.S., where sales grew more than 40%, we initiated the full launch of Libre 3, which automatically delivers up-to-the-minute glucose readings with unsurpassed accuracy in the world's smallest and thinnest wearable sensor. Internationally, organic sales growth was impacted by a couple of transitory items, including supply constraints on Libre 1 in certain emerging markets, which we expect to improve over the next couple of months. Secondly, a strategic choice we made in Germany to rapidly transition our large existing user base to our latest generation Libre 3 system, which temporarily reduced our focus on new user additions during the quarter in that country. We already transitioned well over half of our users with the vast majority of the remaining users expected to move to Libre 3 by year-end. This move strategically fortifies our leadership position in the second-largest continuous glucose monitoring market in the world and further enhances our already strong strategic position as we work to bring the benefits of Libre to more and more people, including those with type 2 diabetes that are not reliant on insulin to manage their disease. In summary, despite the challenging environment, we achieved another strong quarter that significantly surpassed expectations, reflecting the strength of our diversified business model and execution. Based on our strong performance for the first 9 months of the year, we're once again raising our EPS guidance for the year. I'll now turn the call to Bob. 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 increased 1.3% on an organic basis in the quarter. COVID testing-related sales were $1.7 billion, which while stronger than anticipated, reflect a year-over-year decline versus sales in the third quarter of last year. Additionally, organic sales growth was negatively impacted by a temporary shutdown of manufacturing at our nutrition plant in Sturgis, Michigan earlier this year. Excluding COVID testing-related sales and the U.S. sales impacted by the temporary manufacturing shutdown, total Abbott sales increased 6% on an organic basis in the third quarter. Foreign exchange had an unfavorable year-over-year impact of 6% on third quarter sales. During the quarter, we saw the U.S. dollar continue to strengthen against several currencies, which resulted in a slightly more unfavorable impact on sales compared to exchange rates at the time of our earnings call in July. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.9% of sales, which reflects the impacts of the nutrition manufacturing disruption and inflation we've experienced on certain manufacturing and distribution costs across our businesses. Adjusted R&D investment was 6.1% of sales, and adjusted SG&A investment was 25.9% of sales in the third quarter. Lastly, our third quarter adjusted tax rate was 18.1%, which reflects an adjustment to align our year-to-date tax rate with our revised full year effective tax rate forecast of 15.5%. The revised full year forecast is modestly higher than the estimate we provided in July due to a shift in the mix of our business and geographic income. Turning to our 2022 outlook. For the full year, we now forecast ongoing earnings per share of $5.17 to $5.23, which is comprised of our year-to-date results through September, plus ongoing earnings per share guidance of $0.86 to $0.92 for the fourth quarter. We forecast total company organic sales growth, excluding the impact of COVID testing-related sales, to be in the mid-single digits for the fourth quarter. Excluding U.S. sales impacted by the temporary manufacturing disruption, we forecast fourth quarter organic sales growth to be in the mid-to-high single digits for the remainder of our combined businesses, which includes Medical Devices, Established Pharmaceuticals, Diagnostics, excluding COVID testing-related sales, and areas of nutrition not impacted by the disruption. We forecast COVID testing-related sales of approximately $500 million, which does not assume a COVID testing surge in the fourth quarter. Lastly, based on current rates, we expect exchange to have an unfavorable impact of approximately 7% on our fourth quarter reported sales.

Great. Congrats on the quarter. Robert, maybe we could start, we're already towards the end of 2022. And I think people's attention are really shifting to next year. Just with so many moving pieces, both in revenues and down the P&L with currency and inflation and COVID testing assumptions and so on. So I was hoping sometimes at this point in the year, you might give us some early thoughts on next year. Anything you can provide to help us narrow the range of outcomes would be great.

Sure. With all those topics, we could spend the whole call on it, right? So I'll provide as broad a framework as I can. Obviously, the macro conditions are going to remain challenging, right, Robbie. I don't think that anybody right now as we're planning going into next year is forecasting that this is just going to ease up, right? Specifically, I would say probably inflation, I don't expect to get better. And I'd say the currency headwinds are very much in play here for next year. Those are probably two of the big macro impacts for us. But I still see a lot of opportunity for growth as I have been talking about our business and our portfolio. There's a clear path in my mind here for top line growth of high single digits. You can get there by looking across our businesses. In Medical Devices, we've got a lot of upcoming product launches. So Libre 3, Amulet, Aveir, CardioMEMS, Navitor, we expect to be launching next year here in the U.S. EnSite X, our mapping system, and a new ablation catheter into the market globally next year also. I'm probably sure there's more that I could kind of rattle off here in terms of devices. So I think the device portfolio looks very strong as we go into next year. I expect the same kind of growth rate that we're seeing in Established Pharmaceuticals. I expect to see continued share capture that we're seeing in core diagnostics and, obviously, a strong recovery in U.S. infant nutrition. As I said, you see that high single-digit growth in the clear path just based on how those businesses will perform and how they're performing and the launches that we've got upcoming. Then you mentioned COVID, right? And that's the other piece of the business. So high single-digit growth, excluding COVID. COVID is an interesting one, Robbie, where I think over the last couple of years, we've been talking about the sustainability of COVID. Many of you writing that COVID testing will probably go away. Here we are in the third quarter, in the summer months, with a $1.5 billion to $1.6 billion number here in the third quarter. I think that as we look — I want to see how the next few months develop. I think Bob made a comment regarding our forecast for Q4. We haven't really planned for a large surge. It’s more of an endemic-like forecast for Q4, and I think that's the kind of endemic forecast that we'll see going into 2023. Right now, it's looking like COVID test sales are stickier than most have assumed. So those are the components on the top line. Down the P&L, as I've said, we're going to be taking a close look at our cost structure. We have been. We've increased that over the last couple of years, made the investments. We talked about those investments. I'm looking to get a lot of leverage out of those investments that we've made historically. At the top line, the way it's laid out comes through, and the leverage falls through; you'll see that sales growth falling through at pretty healthy margins. Rob is going to invest in the areas that we know have good growth. Those get the investment dollars. In the past, many of you have written about the big three of Abbott, where there was Libre, Alinity, and MitraClip and those remain big contributors to driving growth. But we've got a new class of products, I guess I would call them the Fab Five, looking at TriClip, Aveir, Navitor, CardioMEMS, and LAA. These products combined have an annual run rate of about $0.5 billion, growing 50%, and they will also receive the investments to be able to drive their growth since I think they're still in the early innings of growth for us. We'll look at managing the P&L and our investments in our structures and choosing the areas where we're going to continue to invest. Then, in other areas, we'll see some of the leverage from the investments that we've made in the past. As we go into 2023, fundamentally, nothing has changed. Our markets are still very attractive. We've got leading positions in these very large, high-growth markets. I like the pipeline, and we've got a lot of ongoing and upcoming launch activity. So that, I'd say, hasn't really changed. We're going to have to be mindful, obviously, of the cost structure, some of the inflation pressures, and FX challenges we have. On top of that, we have a strong balance sheet. We've talked about that, and that provides us a lot of strategic and financial flexibility as we go into next year. So that's probably my best characterization here in the condensed version of 2023.

That's really helpful. And maybe one for Bob. The fourth quarter implied EPS guide came in a little bit lower than the Street. We also saw a much bigger FX headwind. So how should we be thinking about the impact on the bottom line in the third quarter? What's implied in the fourth quarter? And if we start thinking about our models for next year, Robert gave us the top line considerations. How do we think about FX at current rates heading into next year?

Yes, certainly. So we've seen the dollar significantly strengthen this year, including throughout the third quarter. The biggest moves have really been in developed market currencies, the euro, the pound, the yen. This is something that most, if not all, multinationals are dealing with and certainly not unique to us. Robbie, maybe these headwinds are a little bit underappreciated in terms of the impact here. We're always looking to mitigate as best we can, but there's certainly going to be a limit in terms of what can be done. We try to match our cost, hedging programs, and take price where appropriate. This year, at current rates, our full year headwind is a little more than $0.15 in terms of earnings. But about $0.10 of that is happening just in the fourth quarter alone. While there are certainly other moving parts, that fourth quarter impact should give you a pretty good feel for the magnitude of headwind that's flowing into next year, particularly in the first 2 to 3 quarters of the year. We'll provide our earnings guidance in January as we always do, and we'll take currency rates into account at that time.

Two product-related questions for me. First, I wanted to start with Libre. A lot going on there, Robert. Obviously, the exciting news this quarter was the type 2 basal LCD from CMS. So I'd love to hear your thoughts on that opportunity. Our back of the envelope math suggests that could be a $1 billion opportunity for Abbott in 5 years. I'd love to hear if you agree. Lastly, on the vitamin C timing of that resolution and any color — any additional color you want to provide on Libre. I did catch in your prepared remarks that you talked about non-insulin patients, which was interesting. And I did have one follow-up.

Sure. That's the catch-all Libre question. Let me take the CMS one. It is very exciting. If I think about your model, you're probably more aligned to my team, but I think my team is cutting it short in terms of what we could actually do with this indication, and I'll tell you why in a second. It's significant. You've got 4 million basal patients in the U.S.; about one-third of them are covered by CMS. This is probably going to be in terms of the timing of public comments and the amount of time it's going to take for CMS to make the decision and then the implementation date, etc. This is probably more of a second half 2023 item, I would say, but it's pretty significant. It's going to expand CGM coverage by about 1.5 million patients on CMS. As you probably know, Larry, one CMS makes that determination, then there’s a natural flow that will then move into the private commercial market. I'm looking at the opportunity of ultimately 4 million patients that will have the potential to get some sort of coverage and benefit from the technology. It's not surprising from the perspective of this coming up because we've been leading in the generation of data and evidence to support this proposal. If you do a literature search on all the studies that have been done on CGM and then segment them between pump studies, basal studies, and type 2 studies, you'll see that Libre's at the head of all of those type 2 studies. This is part of the investments that we've been making clinically to show the evidence and how this benefits a broader population. With the value proposition that Libre has, I know what your model is saying. I just think that we'll have a disproportionate share of that. This is a market that, whether it's in the U.S. or Europe, predominantly drives around primary care. This is a segment where we do exceptionally well. If you carry out an audit of prescriptions by physician class, Libre has taken about 80% market share of the primary care Rx. So my team has been working on that. I think this is a great opportunity, and I think this fuels into the notion that this is a much larger market than has historically been contemplated as part of CGM, and that's what our strategy from the moment we entered the market has been. We're not looking at sprinting quarter-to-quarter; we're looking at this over the long term and making the investments to sustain this kind of growth rate. We announced manufacturing capacity expansions in this quarter for Diabetes Care because we believe this is a $10 billion franchise by 2028. We believe that we've got the pathway to 15 million and 20 million users of this product. We've resourced our manufacturing, our scale, our commercial infrastructure, our service, our clinical investments to support what I believe is a significant growth opportunity, and we intend to lead that. I think your other question was on vitamin C. Yes, we have completed the clinical work on vitamin C. I'll provide updates at the appropriate time. I recognize that this is an important, I would call short-term to medium-term growth driver for us. Consider our franchise as focusing on basal, type 2, and pump integration in the next couple of years as key core growth drivers. More longer-term, to achieve those numbers, I announced at the beginning of this year regarding looking at this outside of diabetes on our Lingo franchise, and that will sustain our growth going forward. We’ve accomplished the study, and we feel good about the results. I'll be updating once we have something to share. We're working on pump integrations outside the United States, and we will have a pump integration launch by the end of this year or the beginning of next year in Europe with one of our pump partners. I believe they'll benefit significantly from our user base that we have in those countries.

Robert, that was super helpful. Just for my follow-up, I'd love to get your reaction to the PASCAL data at TCT and the launch in the U.S. Specifically, your thoughts on the greater durability effect they showed with PASCAL. I know we haven't seen that in the MitraClip registries. Just any update on the locking issue we heard about this quarter.

Yes. It wasn't unexpected. Every time at TCT, there's always an expectation of a landmark study or an approval. That wasn't unexpected. They got approval for DMR, which is one of the smaller indications, accounting for about one-third of the market. We've competed with PASCAL internationally already for a couple of years. I expect to see some trialing in the U.S. The question is going to be how much it is going to stick. MitraClip has performed very well internationally, and we've held on to a good portion of our share. In Europe, we're kind of at that 80-20 split. I think I expect some of those dynamics to play out here in the U.S., and I think MitraClip is going to do very well. Regarding the data set, I think it was 117 or 120 patients, maybe versus 63 for MitraClip. We’ve done over 150,000 implants, Larry, and we've got great data on our products. We have over 1,000 patients in the registry. I think the data set is pretty small right now. We're investing in our clinical trials and product advancements in MitraClip. The biggest opportunity is market expansion, which we will be driving with the FMR indication. I mentioned this in the last call; the biggest impact with our portfolio regarding COVID was not being able to benefit the FMR indication and the NCD. So I see market expansion as the biggest opportunity for driving demand and referrals. With respect to the locking mechanism, we did take a field action, and so far, that’s been proceeding well. I haven’t had any issues, and our supplies are back to normal.

I'd like to jump off a little bit from the MitraClip conversation and try and peel apart the double-digit growth in Structural Heart this quarter, a little bit stronger than we were looking for. How much of that is MitraClip versus demand for Portico versus something else? How do you think about developing that segment a little bit further?

Sure. We've mentioned how critical the Structural Heart portfolio has been for us, especially since the acquisition of St. Jude and building this franchise. We've been intentional about that. MitraClip had a good quarter. We saw a growth of about 6%. That was impacted a little bit in the U.S., but we had nearly double-digit growth internationally. You can see that as some of the other parts of the portfolio are now starting to gain scale, they're starting to have a stronger impact on the portfolio. Amulet and Navitor internationally, I know you mentioned Portico, but I'd say it's probably more Navitor in Europe doing very well for us, and it continues to thrive. We've acknowledged that we're behind two market leaders here, but we're making the investments, and it's done quite well. In Europe, we've got about an 8%-9% market share, and in the accounts where we have Navitor, we’re close to the mid-teens. That product is very competitive, and we're looking forward to bringing that to the U.S. We filed with the FDA, and we expect to bring it to market here in the first half of next year.

Yes. As Robert mentioned, the growth in the Structural Heart business is driven by a combination of products including Amulet, which has been performing very well, showing strong traction, particularly in the early adopter accounts that started late last year. Our share in those accounts is around 40% at this point. This illustrates that once we get in and gain experience, we can achieve a strong share position, and we are doing that in those early adopter accounts. We have great opportunities to build as we expand our accounts, seeing nice growth there. As Robert said, this also represents a long-term opportunity for MitraClip.

In Nutrition, one of the things we talk about with investors is how you think about the recovery in that segment once your supply is back up. Do you see yourself just returning to growth at the market rate or taking a good percentage of the share back? Any guidance you could give us on modeling going forward would be helpful.

I would say we've had situations like this before, back in 2010, and seen other competitors face similar circumstances. There are a couple of key considerations for you when thinking about share recovery. You should look at your share of the WIC program, your ability to continue to engage pediatricians, and your share in hospitals. This quarter, we’ve focused disproportionately with our global supply network on those channels. One challenge with the WIC channel is that it’s lower-priced than the non-WIC channel. So that's where we decided to allocate our available volume. As I mentioned in my opening comments, we supplied the market this quarter at the levels we did in the 3 months prior to the recall. The mix of that supply was overly weighted toward the WIC states and the contracts we had there. We committed to those states that they would not face backward supply shortages. By focusing on that, we not only upheld our commitments and contracts but established a foundation for the future. Looking at the Nielsen data, we can see share recovery. We probably lost about 20 share points from the recall, and the last read I saw in September showed that we retrieved half of it back. The WIC side has recovered all of our share, and now we’re turning our capacity to the non-WIC channel.

Robert, I wanted to ask about the COVID testing franchise and just the strength in 2022, and thinking about the comp for 2023. Is there anything you can share in terms of contracts that are in place for 2023 and what that base could look like? Whether contracts from 2022 could roll over into 2023? I know it's impossible to forecast utilization or uptake of COVID testing next year, but any base commentary you can offer would be helpful. I just have one follow-up.

Yes, looking at the market between government contracts and nongovernment contracts is something that we've spent a lot of time this year doing because those government contracts are high-volume and do skew a bit of the run rate. For our Q4 number, our forecast reflects what I would call an endemic state. About $0.5 billion across the world, across all our platforms, in a winter season without forecasting any surge like the one we saw last year. In that number, we do not have any significant government contracts. What governments have realized is that they do need to invest and hold some level of testing inventory. So we have active dialogues with many governments that recognize Abbott's ability to scale up rapidly. We have ample capacity, so they know that and understand the value of our product. They work efficiently to determine COVID and the new variants, and they recognize that we’re well-positioned. So, we don't have any significant numbers in Q4 this year, but we see that as a right run rate from an endemic standpoint. If a surge occurs and governments realize the need for more testing, we have the product, reliability, and supply, and they're aware of that. So we're in good standing in that sense.

Excellent. One follow-up on Libre. You mentioned the path to achieving full iCGM status and understand that there's a segment of the CGM that will open up for Libre. But I was wondering if you could share your thoughts on the potential impact to clinician sentiment towards the accuracy of the platform and payer sentiment in terms of any formulary prioritization decisions considering the pricing? Also, how are you thinking about pricing for Libre 3, particularly in this inflationary environment?

Sure. This is an important segment. The vast majority of CGM users and potential future users are either using insulin pens or syringes or aren’t using insulin at all. We recognize this segment is vital. As I mentioned, we completed the work on Libre 2 regarding vitamin C, and we will update the market and our partners as we progress through that process with the agency. We believe there is potential to innovate further in pump integration. We talked about this in the last call. At ADA in June, we announced the creation of a dual-analyze sensor, a glucose and ketone sensor. Everybody I've spoken to believes this would be the prime sensor for pump integration because the ketone functionality provides an added safety feature. If there's an interruption in insulin delivery from the pump, ketone levels will rise before glucose levels, making that continuous ketone measurement crucial in the pump environment. I think it does provide, I guess, a step ahead in terms of innovation for pump integration. About accuracy, it’s commonly understood; the data is clear that FreeStyle Libre 3 — even FreeStyle Libre 2 — is a best-in-class accurate sensor. It's the only CGM with sub-8% MARD, so I don’t believe we have that issue. This segment is crucial, and we are going to invest in it, aiming to provide something more advanced and beneficial. Regarding pricing, yes, Libre 3 pricing, like Libre 2 pricing and Libre 1 pricing, is practically all the same. The more volume we can bring to Libre 3, the more we can lower those COGS. But we currently maintain parity pricing. That pricing strategy, as I mentioned last year, is important. In both international markets and the U.S., people face copays or formulary and reimbursement challenges. Our value proposition is robust, and it will prove itself as single-payer systems look to fine-tune their budgets.

Robert, maybe my first one for you. The headline organic ExCo within 3Q was around 3%-ish low singles. When you back out some of the supply chain impact, I think you mentioned Germany and Nutrition, what was the underlying organic growth? When can we get back to an environment where there is no mismatch in the headline organic and underlying rate? It's a clean number. So maybe just talk about that cadence to normality.

It was high single — mid- to high single once you do all those exclusions. I don't like doing that. I understand it's essential to isolate challenges and issues, whether they are transient or sustained. The challenges we faced in this quarter regarding supply chain have been quite significant, particularly in Med Devices, leading to the impacts we saw in our Med Device business. If you consider the back orders we had — be it Libre 1 and back orders in Electrophysiology — we would be high single digits. But when excluding these issues, we see mid to high overall for the company. Regarding the timeline to reach a more normal organic state, I think part of the challenge lies with COVID. As the base becomes smaller than this year — likely, we will see a similar volume of COVID test sales as last year. As we move into next year, that could slightly influence the overall growth rate. However, looking ahead, I see high single-digit growth once we exclude COVID influence.

That's helpful. On the financial side, gross margins were down Q-on-Q. I'm wondering what was the FX incremental inflationary impact. I think Robert Funck mentioned $0.10 of FX impact in Q4. Should we annualize that to $0.40 of FX impact for next year? I'm not sure how to think about FX and inflationary impact for next year. We didn't talk about Lingo; should that be an incremental driver here and not '23?

Let me — Vijay, I'll address the exchange first. I wouldn’t necessarily take that $0.10 impact in the fourth quarter and extrapolate that for the full year of next year. However, you'd expect to see a significant impact through the first three quarters based on current conditions. In the fourth quarter, you will be at these rates we currently have. Nevertheless, the headwind will be considerable next year. We're also facing inflation impacts, including commodities, manufacturing input costs, and logistics. We incorporated another $100 million impact to gross margin in our current guidance, totaling about $1 billion for the year. This translates to roughly 240 basis points on the gross margin. As Robert mentioned, we've seen slight moderation in the rate of increase in the third quarter compared to earlier in the year, and we’re attempting to take pricing wherever we can, especially in our consumer-facing businesses. Notably, the inventory we purchased and manufactured this year at higher costs will negatively impact us next year when that inventory is sold, even if inflationary pressures decrease next year.

Regarding your question on Lingo, Vijay, we have factored in a launch next year, although it will be an international launch. It’s a different business model, as I've discussed, focusing more on a direct-to-consumer wellness subscription model. We’re on target for a launch in Q1. We will be launching in a challenging environment, but I believe that establishing such a wellness subscription model with our extensive platforms represents a fantastic growth opportunity for us.

Operator, we'll take one more question.

I wanted to ask about China and how you see the recovery shaping up there. There will be another headwind next year and any new VBPs that you see coming up in China?

Yes. It will be a bit of a headwind. You can consider it from either a currency perspective or VBP. We've gone through this in some other areas of our business as we expect the value-based procurement, or pricing, to unfold here. The next area under scrutiny will likely be in electrophysiology. Over time, we have seen price ranges from 30% to 80% depending on whether it’s a national or regional process. Some categories have been more regional and tend to be on the lower end of the spectrum. Conversely, when more participants are involved, it can skew towards the higher range. On the EP side, we have seen that when a system-based approach is taken, including capital, technical support, and infrastructure associated support, those tend to fall on the lower end of that price range. So, we’re planning for VBP to impact EP primarily next year.

No. That’s helpful. I wanted to inquire about the M&A environment as well since it hasn't been mentioned yet on this call. Also, how it relates to your device growth longer term; are you still able to grow at the high end of med tech? Do you need to complement device growth with M&A over time?

No, I don’t feel an M&A is necessary to sustain that high single-digit growth we've been posting consistently in devices. I did mention in the last call that we are interested in the space and that our interest has increased. We’re actively evaluating all opportunities. However, since we do have a strong balance sheet and flexibility, we will proceed from a strategic and financial perspective. Valuations have come down somewhat, which can enhance financial modeling and attractiveness. I believe that valuations need to stabilize to ensure meaningful discussions can occur. As those stabilize, I anticipate a pickup in the M&A environment. We’re in a good position — no need for M&A at this time, but we are open to opportunities. To sum up, Q3 was a particularly challenging quarter for us; probably our most challenging yet. The impacts of inflation and supply chain issues, along with some back orders, posed a headwind to our performance. We are also facing headwinds from FX as we look to the future, but our portfolio strength and execution brightened the quarter's results and our outlook for the full year. This scenario has provided us with opportunities to make strategic decisions that strengthen our business and our position, creating momentum as we transition into 2023. There was a nice recovery in our institutional businesses, with the pipeline I discussed demonstrating potential for growth acceleration. We have many organic growth opportunities ahead in 2023. I highlighted the potential for high single-digit revenue growth. Alongside this, our strong balance sheet will allow us to deploy capital in a balanced manner to benefit our shareholders and fuel future 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's Investor Relations website at abbottinvestor.com. Thank you for joining us today.