Abbott Laboratories (ABT) — Q4 2023 Earnings Call Transcript

Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; Bob Funck, Executive Vice President, Finance; and Phil Boudreau, Senior Vice President, Finance and Chief Financial Officer. Robert and Phil 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 2024. 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, 2022. 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, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert.

Thanks, Mike. Good morning, everyone, and thank you for joining us. Today, I'll discuss our 2023 results as well as our outlook for this year. But before I do that, I think it's important that we take a moment to look back at the challenging environment that we all faced over the last few years and how our actions during that time have positioned the company to be in an even stronger position today than before the start of the pandemic. In the two years preceding the start of the pandemic, Abbott delivered organic sales growth of more than 7%, which was considered top tier given the large size of our company. We expected growth in 2020 to be in a similar range, but then COVID-19 arrived and disrupted that trajectory. And while our procedures-driven businesses such as Medical Devices and Routine Diagnostic Testing experienced a slowdown due to the healthcare systems around the world shifting their focus, our Branded Generics Pharmaceutical business was able to stay the course and our Nutrition business accelerated as people around the world placed a greater emphasis on protecting their health. While some companies saw their entire portfolio suffer during the pandemic, Abbott's diversified business once again proved to be resilient. It was also during this time that we created a multibillion-dollar COVID testing business in just a matter of months that helped play a role in reducing the spread of the virus around the world. COVID testing grew to become a significant part of our portfolio, representing nearly 20% of our sales in 2021 and 2022. And given the important role that these tests had on society and on our financial performance, COVID testing temporarily altered our identity and became a main point of focus to the general public, our investors and other stakeholders. But we knew that the pandemic would not last forever, so we planned ahead. We pulled forward or accelerated investments in several areas across the company when the demand for COVID testing was at peak levels, knowing that we would scale these investments back down when the eventual decline in demand for COVID testing occurred. And the experiences we gained in creating the COVID testing business and then managing the rapid scale-up and subsequent scale down of that business will have a lasting positive impact on our company. Our R&D pipeline was one of the areas we targeted for accelerated investments, and we're seeing those investments pay off. In the last two years, we have announced more than 25 new growth opportunities, which include a mix of new products, new indications and geographic and reimbursement expansions. This level of pipeline activity is occurring across the entire company. In EPD, for example, we announced an agreement to commercialize several biosimilars in emerging markets. In Nutrition, we continue to invest in science-based solutions to address emerging medical needs with particular emphasis on the fast-growing Adult Nutrition segment. In Diagnostics, we announced approvals for new tests, new instruments and a new laboratory automation solution. In Medical Devices, we announced ten new product approvals along with several new opportunities to further improve the growth outlook of the existing portfolio. These new opportunities are well balanced with each of our seven Medical Device businesses accomplishing at least one significant pipeline-related achievement. Looking back at our performance in 2023, it is clear that these new opportunities contributed to an acceleration in our growth. Both our sales and earnings growth exceeded the expectations we communicated at the beginning of last year. Sales, excluding COVID testing, grew double digits every quarter last year and finished the year up more than 11% higher than our original guidance of high-single-digit growth. Adjusted earnings per share finished the year at $4.44, which was above the midpoint of our original guidance range despite COVID testing sales coming in much lower than originally forecasted. This is a testament to the strength of the Abbott portfolio and a strong indication of the top-tier sustainable performance we are positioned to continue to deliver as we move past the pandemic. Turning to our outlook for 2024, as we announced this morning, we forecast sales growth excluding COVID testing to be in the range of 8% to 10%, which equates to generating organic sales growth of more than $3 billion. We forecast adjusted earnings per share of $4.50 to $4.70, which contemplates double-digit earnings growth on the base business. I'll now provide additional details on our 2023 results by business area before turning the call over to Phil. I'll start with Nutrition, where sales increased 14% in the quarter. In Pediatric Nutrition, double-digit growth in the U.S. was driven by continued market share capture in the U.S. and from formula business, where we are once again the market leader. International growth of 18% was driven by growth coming from both infant formula products and our PediaSure toddler brand. In Adult Nutrition, sales for the full year surpassed $4 billion and grew 13.5% in the quarter, driven by strong demand for Abbott's market-leading Ensure and Glucerna brands. Turning to Established Pharmaceuticals, or EPD, where sales increased nearly 9% in the quarter and 11% for the full year. This is the third consecutive year that EPD sales have grown double digits. Our unique business model of offering broad product portfolios across a targeted set of therapeutic areas that are tailored to the local needs of each emerging market we operate in continues to deliver outstanding results. Moving to Diagnostics, growth in Rapid Diagnostics was impacted by seasonality related to the respiratory virus testing. The flu season arrived later this year than last year, which caused sales of flu and other respiratory tests to be lower in the fourth quarter compared to that of the prior year. But in Core Lab Diagnostics, growth of nearly 10% continues to be driven by the success of our Alinity suite of systems paired with our broad test menu offering. Alinity continues to drive high contract renewal rates and competitive win rates. We recently announced that we received FDA approval for our new lab automation system that offers cutting-edge technology to help laboratories increase performance and improve the overall quality of their operations. The system has been available in international markets, and we look forward to offering this to customers in the U.S. I'll wrap up with Medical Devices, where sales grew more than 15% in the quarter, led by double-digit growth in six of our seven Medical Device businesses. In Diabetes Care, fourth quarter sales of FreeStyle Libre, our market-leading continuous glucose monitoring system, grew 24% and ended the year with global sales surpassing $5.3 billion. In terms of sales dollars, Libre has become the most successful medical device in history, and it has outpaced market growth in 13 out of the last 16 quarters. In Electrophysiology, sales growth of 21% was driven by double-digit growth across all major geographic regions, including more than 20% growth in Europe. In Rhythm Management, growth was led by double-digit growth in pacemaker sales led by Aveir, our recently launched leadless pacemaker that can be used for both single-chamber and dual-chamber. In Structural Heart, double-digit growth in the quarter and full year was led by MitraClip, as well as several recently launched new products, including Amulet, TriClip and Navitor. For the full year, MitraClip sales grew high teens internationally and 10% on a global basis. In Heart Failure, sales grew more than 15% in the quarter and 12% for the full year, driven by continued adoption of both chronic and acute circulatory support devices. Lastly, in Neuromodulation, sales grew nearly 19% driven by the recent launch of Eterna, our first rechargeable neurostimulation device for pain management. So in summary, we exited the pandemic in an even stronger position. 2023 was a very successful year. We outperformed our initial expectations on both the top and bottom lines. The pipeline is generating a lot of new opportunities for growth, and we're forecasting this positive momentum to continue and contribute to the strong growth we're forecasting for 2024. I'll now turn over the call to Phil. Phil?

Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our fourth quarter results, sales increased 2.1% on an organic basis, which, as expected, reflects the impact of the year-over-year decline in COVID testing-related sales. Excluding COVID testing sales, underlying base business organic sales growth was 11% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 0.8% on fourth quarter sales. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.9% of sales. Adjusted R&D was 6.1% of sales, and adjusted SG&A was 26.3% of sales in the quarter. Lastly, our fourth quarter adjusted tax rate was 14%. Turning to our outlook for 2024, today, we issued guidance for full year adjusted earnings per share of $4.50 to $4.70, which includes an adjusted earnings per share forecast of $0.93 to $0.97 for the first quarter of 2024. For the year, we forecast total underlying base business organic sales growth, which excludes COVID testing sales to be in the range of 8% to 10%. Based on current rates, we would expect exchange to have an unfavorable impact of a little more than 1% on our reported full year sales, which includes an unfavorable impact of approximately 2% on our first quarter reported sales. We forecast nonoperating income of approximately $130 million and an adjusted tax rate of 15%. With that, we'll now open the call for questions.

Congrats on a nice end to the year here. So Robert, pre-COVID, Abbott was growing 7% to 8% organically as you mentioned, you're guiding to 8% to 10% today for 2024 off of a higher revenue base. What has changed? And what is giving you the confidence to guide that high to start the year? Maybe talk about the key assumptions, and I'll leave it there for my one question.

Thanks, Larry. As I mentioned in my prepared remarks and throughout most of 2023, the strategy we implemented to reinvest some of the COVID revenue into our core business is pivotal. We operate across four business segments, and their fundamental appeal remains very sustainable. Strengthening our already robust positions in these areas was definitely the right approach because we consider these sectors essential in healthcare. I would argue that all four of our major businesses are now in a better and stronger position than they were before the pandemic, which was about $10 billion less and growing in the 7% to 8% range. For EPD, these are three consecutive years of double-digit organic sales growth. This team is one of the best in the industry, successfully navigating challenging markets and significantly growing both revenue and profit margins. Despite foreign exchange issues and other market challenges, they have improved their operating margin by 300 basis points. We've also introduced a new growth opportunity by adding biosimilars to markets where this hasn't been easily accessible. In Nutrition, we regained our leadership position in the U.S. last year, highlighting the trust customers have in our products. Our Adult Business has grown by $1 billion since pre-pandemic and continues to strengthen, now at $4 billion with high single-digit growth. Many medical technology companies have strong valuations based on such growth and scale, and we are investing in this area as well. Diagnostics is performing exceptionally well, particularly our Core Lab business, which has seen significant large account wins on a global scale due to our solid portfolio and the trust customers have in Abbott. Our Rapids portfolio has excelled with new instruments for decentralized testing, and we've invested in new assays to support these instruments. Historically, our Medical Devices segment saw high single-digit growth, but we've made strategic investments in parts of our CRM and Vascular businesses that were previously stagnant, boosting them into double-digit growth. You saw evidence of this in Q4 with our CRM segment, largely from our leadless technology. In Vascular, we've combined inorganic growth with organic strategies to shift our portfolio to higher growth areas. Overall, we have spent the last couple of years enhancing these four attractive segments. We're now seeing consistent double-digit growth, and they're becoming stronger, leading to more growth opportunities. While there may be headlines about accelerating sales not yet reflected in earnings, our Core business grew our earnings per share by over 40 percent last year. We project double-digit earnings per share growth at the midpoint this year, although there's volatility in the global landscape. We've shown resilience, and I believe our earnings range captures the potential we have. I think there’s more upside than downside, but it’s only January, so this serves as a solid starting point.

Congratulations on a strong finish to the year. I wanted to follow up on your comments about earnings power and margin expansion. Abbott's situation is unique compared to its peers, especially since you didn't face margin pressures during the pandemic thanks to the COVID Testing business you developed. I'm curious about the pre-pandemic margin expansion trajectory, which was in the 30 to 50 basis point range. Could you provide more insight into the factors driving market expansion and how your team anticipates that trajectory for 2024 and beyond?

We recognize that many companies are striving to return to their pre-pandemic operating margins, but our situation is quite distinct compared to our competitors. Our operating margin is already in line with what it was during the pandemic. As I previously mentioned, we strategically managed our spending, ramping up investments during the peak sales periods of COVID and maintaining stable spending over the past couple of years despite significant top-line growth. Our main opportunity for margin expansion lies in gross margin. This year, we can pursue our five key initiatives simultaneously, with gross margin being a top priority. We anticipate a substantial improvement in our gross margin, approximately 75 basis points, driven by several factors. We have a solid history of implementing internal margin improvement strategies, monitoring them monthly for visibility and accountability. Additionally, challenges we've encountered recently are beginning to shift into advantages, with factors like commodity costs and distribution now appearing favorable. The mix of our portfolio also plays a role, as the growth in our Device businesses, which have higher margins, supports our overall gross margin expansion. While we expect to eventually restore our pre-pandemic gross margin levels, it's a matter of timing rather than possibility. We aim for a 50 to 75 basis point increase, acknowledging that the path may not be perfectly linear. This expansion presents a valuable opportunity for earnings growth in the coming years. Overall, we believe we have effectively managed our spending, and our primary focus now is on enhancing gross margin.

I wanted to ask a little bit more about your Electrophysiology business. That segment has been very strong, and I've been impressed that you've been able to put up that European growth rate in the face of some competitive PSA launches. So I would love to hear what's going on behind the scenes there, how you're getting those growth rates, and how you're thinking about the U.S. EP business as we see some PSA launches this year?

I believe we've demonstrated strong growth in our Electrophysiology business throughout the year, even with the competition in the end market. The growth has been notable not just in Europe but also in the U.S. and China, especially in value-based pricing. Although we faced some pricing challenges during the year, the increase in volume and market share more than compensated for that. The strength of our portfolio has been key, highlighted by our EnSite X mapping system along with our quality mapping and diagnostic disposables. The launch of TactiFlex, which features a flexible tip combined with contact force, has resulted in excellent outcomes for patients and reduced procedure times globally. Additionally, we have a dedicated team that maintains close relationships with our customers and has fostered the adoption of our new technologies. While we acknowledge some challenges with first-generation products, I anticipate an increase in their usage. In Europe, we've noticed that the uptake has been stronger in the Cryo segment initially, and I expect a similar trend in the U.S., though the speed of adoption remains uncertain. Overall, our team has been effective in promoting our technology.

Robert, maybe I could ask on Libre. This is the most successful medical device. At the conference just a few weeks ago in San Francisco, you were talking about really robust growth rates moving forward and targets. Maybe you could help us understand where the growth is going to come from in '24 and beyond, and one question I get a lot from investors is we see the IQVIA script data. It's the best we have. It seems like Libre sales or at least prescriptions are flattening out, yet the sales keep growing. How do we think about the discrepancy there? And how big is the Medicare DME business? And the growth we're getting there from basal.

Sure. We experienced strong growth in the fourth quarter, exceeding $1.5 billion, with a 32% increase in the U.S. The team hasn’t even had to fully utilize L3 in the U.S. market this year, but I anticipate significant impacts in 2024. The growth rates in the U.S. achieved without launching a competitive new system highlight our strong position, scale, and brand. Opportunities for growth are considerable, particularly in the basal segment, which I see as a major multiyear opportunity that will extend beyond just 2024 and 2025. Libre is dominating the pharmacy channel, with seven out of ten new prescriptions for this patient segment coming from Libre, showcasing the product's strength and value. In Japan and France, where reimbursement is exclusive to Libre, we are also seeing positive contributions to growth. Currently, most of the U.S. population is covered by either Medicare or private commercial plans, with Medicare representing about one-third of the market. There’s a significant opportunity to raise awareness and enhance experiences with primary care, which we have been actively working on for some time, setting up a solid growth trajectory for the next two-plus years. Another exciting opportunity lies in pump connectivity, which we haven't fully accessed yet. This presents a market conversion chance as there are 150,000 to 200,000 new pump users annually. With recent regulatory approvals that allow us to connect with various pump manufacturers, I believe this can be a game-changer for us and beneficial for patients who need reliable insulin delivery systems. An independent third-party study published recently indicates that Libre 3 is superior to a competitor's newly launched product across several metrics. For pump manufacturers looking to offer the best solutions, these findings are crucial. With basal and pump connectivity as promising growth drivers for 2024 and 2025, we have multiple growth avenues on this platform ahead of us.

Congratulations on a strong finish to the year and your optimistic guidance. Robert, since the focus appears to be primarily on top-line growth, I noticed you haven’t mentioned the Fab 5, which is one of my favorite references, for quite some time. I may have missed it, but I’d like to know about those five products and your thoughts on their launch trajectories and revenue contributions. Do you still see a Fab 5, and how do they fit into the 8% to 10% organic growth forecast for 2024?

Yes, thanks. I'm not sure if I regret my choice of words, but I would say that yes, they are excellent products. We didn't label them because we thought they would only be temporary for a year or two. We view these as long-term growth opportunities that will significantly benefit the company in the coming years. In fact, they have already contributed a substantial amount of growth for us this year, and we expect that to continue accelerating. For 2023, those five products accounted for approximately 0.5 points of growth, and I anticipate that increasing to about 1 point of growth in 2024. They are definitely increasing in importance, and I see some of them as market-creating opportunities, such as tricuspid and CardioMEMS, where we're generating clinical data, reimbursement data, and referral pathways. We understand the pace needed, particularly with med tech products, but with products that have such significant growth potential, some clinical work is necessary for market expansion and development. Some other products on that list are likely more about market conversion, targeting large growth segments with our technologies like Navitor in TAVR and Aveir in CRMs. Aveir holds enormous promise in the $3 billion global pacing market, with a value proposition that's very appealing to both implanters and patients. I have high expectations for both Aveir and Navitor. We will be introducing two new line extensions for Navitor this year, Navitor Vision and Navitor Titan, and we are investing in these areas. The Fab 5 products are still excellent and will continue to grow, with a forecast of at least 50% growth next year, contributing around 1 point of growth to the overall company. While these products require focus, we have additional projects in progress, such as Lingo and our TBI test. We are set to launch a nutritional drink for GLP-1 users and are actively developing our PFA solution. We've already announced updates about our clinical trials this year. Additionally, I discussed our biosimilars in EPD and our dual analyzer sensor for Libre, as well as our plans for a new Alinity system to address a segment of the diagnostic market where we're currently not competing. So, while the Fab 5 have made significant contributions, there's much more in the pipeline, which I believe will sustain our growth beyond 2024 and 2025.

Nice start to the year or nice end to last year, too. So here is a question I have in Nutrition, you've done a great job of sounds like returning to normalcy. I'm wondering if there are pockets that still need to sort of get back on track or whether we should think of this returning to sort of a mid-single-digit segment growth category.

I want to commend the team for achieving our target of market leadership that we set at the start of last year. By our October call, we'd already confirmed our position, and this has been strengthening over the past couple of months compared to the number two player. With the full-year impact of our market share, I believe we will surpass our pre-recall share, although I'm not sure precisely when that will happen. There will be some partial year effects from price adjustments across our entire Nutrition portfolio, so I estimate we are likely above the four to six percent range we had prepandemic, at least into 2024. I believe we can reach the higher end of that range once things stabilize. A significant growth driver moving forward will be the Adult segment, which is growing at a high single-digit rate, and we hold strong market share globally. Our brand and underlying science align well with a sustainable demographic trend of an aging population focused on health and nutrition. This presents us with an opportunity to potentially exceed the higher end of the six percent range. Currently, you can see the impact of our share in the U.S., along with the partial year effect of pricing that puts us above the six percent threshold. Looking ahead to next year, we will see the effects of our planned launches in the Adult segment.

Robert, congratulations on a nice Q4 and a solid guide. I guess my one question is on M&A. Looking at the balance sheet phenomenal position, you at least have a minimum of $20 billion of firepower, Abbott hasn't done any large deals in the last few years. So my question is, how do you see the opportunity for larger-sized deals, what is Abbott's appetite for a larger-sized, more meaningful transaction?

We have a solid balance sheet that gives us considerable flexibility in our capital allocation strategy. Regarding mergers and acquisitions, we have a robust pipeline and strong organic growth opportunities that can drive sustainable growth. This puts us in a position where we don’t need to rely on M&A to boost our top line or fill any existing gaps. We can be more selective, seeking out opportunities that align with our strategic goals and can deliver attractive returns. However, I’m not interested in acquiring businesses just to enhance our revenue figures. Profitability and earnings are important. When considering larger deals, it is crucial to have a strong belief and understanding of how they will generate returns, rather than just viewing them as a means to increase sales figures. Such deals have become more challenging. For instance, when we reviewed our St. Jude acquisition, the deal model we created accurately predicted the impact on our company. I’m not dismissing any potential acquisitions, but I want to emphasize that they are harder to execute successfully if we look beyond just revenue growth to evaluate return on invested capital and other important financial metrics. We don’t need to pursue acquisitions to address any revenue shortfalls. Any future acquisitions would be strategic and focused on the long-term growth of the company, not merely to fill revenue gaps.

Operator, we'll take one more question, please.

So some of the insurance companies are getting surprised by higher procedure utilization. Some of the tech companies are kind of calling out above-normal growth. So curious, Robert, if you look at your net device markets, are there areas where you think you're seeing some kind of above elevated catch-up still coming through? Or do you think this is kind of more normalized growth rates that you're seeing in 2024? Just kind of curious on some of your thoughts on the overall market.

I don’t believe we’re experiencing any catch-up or pent-up demand. What you’re observing is more adoption of the technologies in our portfolio. There was some disruption in specific procedures that needed more pre-operative planning or imaging before and after. Those factors, combined with the labor shortages from 2022, likely slowed some procedures down, but I don’t think there was a significant influx returning as a result. We are simply seeing a return to normal procedure volumes, evidenced by increases in structural heart procedures and CRM and EP procedures, not just in the U.S. but globally. Routine diagnostic testing is also showing positive trends, as a substantial part of our diagnostic business, particularly our Core Lab business, operates in hospitals. I haven’t seen a surge in testing either. We view this as a return to normal procedure levels, with new technologies set to enhance patient care and quality of life. The adoption curve varies by market and position. Overall, 2023 has been a very successful year, marking a transition as we move past COVID. We effectively managed scaling up and down in response to COVID needs, and now our performance is driven by broad strength across the company. We achieved double-digit organic sales growth in every base business each quarter, and we are entering 2024 with significant momentum. We anticipate strong growth in 2024, and the EPS guidance reflects more potential for upside than downside. We’re off to a solid start in January and look forward to executing well this year.

OK. Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott Investor Relations website. Thank you for joining us today.