Abbott Laboratories (ABT) Earnings Call Transcript
June 1, 2021
Earnings Call Speaker Segments
Good morning, and thank you for standing by. Welcome to Abbott's Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber Vice President, Investor Relations, Licensing and Acquisitions.
Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert will provide opening remarks. Following his comments, we'll take your questions. Before we get started, some statements made today may be forward looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2021. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2020. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. Please note that financial information provided on the call today for sales, EPS and the line items of the P&L will be for continuing operations only. On today's conference call, our prepared remarks will include non-GAAP earnings per share projections for the full year 2021 to help investors understand Abbott's expected ongoing business performance. This non-GAAP projection is reconciled with the comparable GAAP measure in our news release, which is available on our website at abbott.com. Unless otherwise noted, our commentary on sales 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. As you know, Abbott took a decisive role in ramping up testing capabilities during the pandemic. Our efforts led to the rapid development of 12 COVID tests globally and the scale-up of manufacturing to meet the massive need for testing during the height of the global pandemic. Our tests and ability to scale made us a trustworthy and reliable supplier of affordable, high-quality tests that contributed significantly in stemming the spread of COVID. Before we share details about our updated guidance, I'd like to take you through what we've seen since our April earnings call. At that time, we were seeing COVID case rates hold steady in the U.S. and other major developed markets, which is where we were generating most of our COVID test sales. We had just received U.S. approval, and we're initiating the launch of our OTC BinaxNOW test for at-home use. And we were in discussions with numerous governmental bodies and other large organizations about providing rapid testing for return to work and school as well as other screening and surveillance efforts. While we've always said, the demand for COVID testing sales would eventually work its way to a flu-like level, we couldn't have anticipated what has occurred over the past several weeks. What we've seen is a sharp and rapid decline in demand for COVID test, particularly rapid test, which compromised the bulk of our testing portfolio. This has been driven by several factors, including: Significant reductions in COVID cases in much of the world, but particularly in the U.S. and other major developed countries, where daily new sales -- daily new cases are down more than 60% since mid-April; continued rollout of vaccines globally, which has been particularly strong in the U.S. and is accelerating in many countries internationally; and very recently, in the U.S., unexpected changes in health authority guidelines related to COVID testing for fully vaccinated individuals. While it's positive that these external events and trends signal an accelerated return to normalcy for many countries, they have suddenly and fundamentally impacted current and expected market demand for COVID testing, particularly for screening and surveillance with rapid testing. As a result, today, we updated our financial guidance for the year. We're now forecasting ongoing earnings per share of $4.30 to $4.50, which continues to reflect strong double-digit growth compared to the prior year and more than 30% growth compared to our pre-pandemic EPS in 2019. As part of our forecast, we now forecast approximately $4 billion to $4.5 billion of COVID testing-related sales, inclusive of around $1.1 billion of COVID testing sales in the second quarter. While we're disappointed to take this action, our successful leadership in COVID testing gave us additional flexibility to further invest in our base business. As we've discussed previously, we increased R&D and SG&A investment levels this year based on our original COVID testing revenue expectations. As part of our updated guidance, we removed a portion of that investment to partially mitigate the earnings impact from the projected decline in COVID test sales. That said, we're taking a mindful approach to ensure our actions don't negatively impact the strong momentum we're seeing in our base business, specifically in several high-growth business areas such as Diabetes Care, Structural Heart, Electrophysiology and Diagnostics, where we're seeing positive early impacts from the investment we put in place. Our forecast contemplates R&D and SG&A spending in our base business at profiles that are in line with our pre-pandemic levels. In the first quarter of this year, our base business achieved sales growth of nearly 10% organically compared to the first quarter of 2019, which is the most relevant pre-pandemic comparison. And to start the second quarter, our base business sales grew low double digits in April compared to April of 2019. We expect this accelerating growth trend to continue over the remainder of the year. Just as importantly, our new product pipeline continues to be highly productive, with a nice mix of both iterative and transformational opportunities across our businesses. Several recently launched new products are gaining momentum and contributing to our strong base business growth. And we anticipate multiple additional launches over the next several months in large attractive growth markets, including: Amulet for the minimally invasive left atrial appendage closure; Navitor and Portico, our minimally invasive transcatheter aortic valve replacement devices; CardioMEMS, for remote heart failure monitoring; and Aveir, our leadless pacemaker for the heart. So while the rapidly changing environment has negatively impacted our COVID testing revenue expectations and EPS forecast, we're encouraged with the demand and procedure trends we're seeing across our base business, which is well positioned for sustainable strong growth going forward, which will be supported by several recent and upcoming new product launches across our portfolio. And with that, we'll now open the call for questions.
[Operator Instructions] Our first question comes from Bob Hopkins with Bank of America.
So 2 quick questions. The first question is that in Abbott's old guidance, before today, I think you had assumed it around $6.5 billion in COVID testing and around $1.5 billion of reinvestments of those profits. It sounds like today, the new guidance assumes $4 billion to $4.5 billion of testing revenue for COVID. But I'm just curious where that, is that assumption on the $1.5 billion of reinvestment gone? How much lower is that? And then I have 1 follow-up.
Sure, Bob. So you're correct on the COVID forecast now. And on the investment spend, as I said in my comments, we wanted to make sure that we were continuing to strengthen the strong momentum we're seeing on the base business. So we partially mitigated the impact of the COVID sales. I'd say we're probably looking at a couple of hundred million dollars of expense cuts. We try to prioritize our R&D spending and the programs that we had already started, but it's a couple of hundred million dollars, Bob.
Okay. And then the second question is, given the volatility in testing, I'm sure a lot of people would be really interested in the following. And that is, if you look at Abbott's kind of underlying profitability and operating margin in 2021, if you look at this new guidance, what are you assuming for the underlying operating margin of the business in 2021, excluding testing and assuming a normalized level of spend? So I'm just curious, like, in other words, what would the earnings per share be in 2021, ex testing and assuming a normalized spend? So we can just try to understand the core underlying earnings power of the company.
Sure. Our operating margin with this revised forecast here is going to be between 23.5%, 24%. What we're working on is to ensure that we're in a stronger position in our base business exiting this year than when we were in 2019. So you look at a lot of our profiles on R&D and SG&A, as I made that comment, we'll see our SG&A and R&D profiles, very much in line with the profiles that we had in our 2019 kind of pre-pandemic levels. And we expect to have that same kind of margin profile in the base business in 2021.
Okay. And so just one last quick one. How would you want people to start thinking about next year, given all these moving pieces?
Sure. Well, it's a little too early here to talk about 2022. A lot of my focus here has been on making this adjustment today. But as you know, Bob, we always start our planning process every year with a double-digit target, and we'll start our budgeting process for 2022 in the upcoming months. And we'll be contemplating a lot of the different moving parts here as a result to that, our sales forecast, our investments, the spending mix, prioritization, et cetera. So as part of those moving parts here, I'd say, obviously, COVID will be one of those moving parts. And I can probably tell you that it'd be difficult to assume any kind of meaningful amount here. And I think to assume any meaningful amount of sales next year wouldn't necessarily be prudent. That being said, the base business, it's clearly well positioned for strong double-digit growth. We've got a lot of momentum in the base business. We're continuing to see that improvement that we saw in the back half, in the back end of Q1, continue to play out in Q2. And so we've got a lot of momentum, and we've got a lot of ongoing and upcoming launch activity here, so -- which is why we left these investments in place to be able to support, not only that double-digit growth in our base business, not only in 2022, but going forward into the outer years.
Our next question comes from Robbie Marcus with JPMorgan.
So maybe just turning back to 2021 here in the cadence. You gave guidance of at least $1 in second quarter in EPS. I know there's -- COVID testing was helping certain line items a lot, particularly margins. So how do we think about, now that COVID is coming out, how do we think about gross margin and spend for the rest of the year? And any just cadence you could talk about in third and fourth quarter would be helpful.
Sure. I'll say a little bit about kind of what we're seeing in the second quarter here. I'll ask Bob to kind of give you a little bit more details on the gross margin side. But listen, we're 2 months into the second quarter here. We've obviously seen a pretty sharp decline in COVID testing. I outlined there that we expect our COVID test sales for this quarter to be around $1.1 billion. So we feel good about our current forecast here of at least $1, not only based on the COVID test sales that we're seeing and that we factored in, but also more importantly, about our base business and the recovery we're seeing in our base business. So Bob, why don't you talk about the gross margin profile?
Sure, sure. Robbie, so we expect gross margin in the second quarter to be around 56%. That includes some friction from currency, although we're seeing some tailwind on currency on the topline. A lot of that's coming from developed markets where we have a higher cost base, in particular, in the euro and some hedging activities as well. We also have some friction in the second quarter related to the actions we took today in the COVID business. So around 56% in the second quarter.
Got it. And maybe just a follow-up on Bob's question. Maybe asked a different way. Coming into COVID, the business was doing operating margin somewhere in the low 20s. There's been a lot of shifts happening since then. Alinity is picking up, Diabetes is picking up, Structural Heart continues to grow. What do you think going into next year when you ex out COVID testing? And as you said, that's not a meaningful number next year. How do you think about the trajectory? Should sort of low to mid-20s operating margin be building off of where you were pre-COVID the right way to think about the underlying business?
Yes. As I said, I'm not going to go into specifics on 2022. But if you look at our base business without COVID, that's the range that we were at pre-pandemic, and I expect that to be the range as we go into 2022. And then as the product launches start to gain more traction into 2022 and into 2023, I'd expect those margins to sequentially get better. But as we think about exiting this year and going into next year, I think those are the right margin profiles. Because we are going to want to keep our spend level at those same kind of profiles, R&D and SG&A, given the opportunities that we have.
Our next question comes from Larry Biegelsen with Wells Fargo.
Robert, one on the underlying business growth that's assumed in the new guidance and one on the pipeline. On the underlying business, you talked about 10% underlying growth in Q1 over 2019 and an acceleration that you've seen in Q2. Can you talk about what's embedded for the non-COVID testing in that new guidance? I think the street's at about, call it, 12% to 13% year-over-year growth in '21 or about 10% versus 2019. And in 2022, are you confident you can grow the underlying business at a high single-digit rate? And I have one follow-up.
Sure. So I think all those numbers are exactly right. I tend, Larry, to look at the comparison versus 2019. I just think it's more meaningful because you had so much disruption and comp effect versus last year. So when we look at our base business and look at its growth trajectory right now, we see our base business growing little more than 10% versus 2019 full year. And if you think about our pre-pandemic target growth rate of 7% to 8%, that is definitely at an accelerating pace. And we're seeing that continued growth momentum in our more consumer businesses with Nutrition, with Established Pharmaceuticals, which is doing very well even in the pandemic, and Diabetes Care with Libre doing really well. So the consumer part of the business was not only on a strong growth last year. It continues that same strong growth. And then adding to that then is this recovery in what I would call, more hospital-based businesses in -- let's say, in Diagnostics and especially in Cardiovascular care. So we saw that in kind of mid-Feb, into March, we continue to see that in April. And I don't have May data with me yet, but we've been looking at May pretty regularly here. And I feel confident that, that same improvement, that same theme of improvement in those hospital-based businesses are going to continue. So that growth rate continues to accelerate. And then you've got a significant amount of launches. So when you ask me, does 2022 look on the base business at that high single digit? Yes, I think we're in a strong position today, and we're going to be adding to that with our new product launches.
That's very helpful. And then on the pipeline, given there's so much focus on it, when are we going to see the GUIDE-HF data? How important do you think a mortality benefit is to physicians and payers in that data set? And any update on when we'll see the pivotal Amulet data?
Sure. I'm going to kind of continue my point here on the data. We'll probably see that data in the second half of the year, and we're just looking at the right venue for that data. So for both those sets, you're probably looking at it at the second half of this year. I think Amulet is a great opportunity for us. You know the space pretty well. It's a large market. It's about $1 billion today. It's growing double digits. We have a highly competitive device in Europe. And we completed a trial. We filed for regulatory approval late last year. So a lot of our focus right now is preparing for launch. On GUIDE, for CardioMEMS, I've said, I think this is a big opportunity for us. I think mortality is an important bend. But to be honest with you, I think hospitalization and ability to remote monitor and prevent hospitalization I think it's just as important. And I think it's even gotten strengthened that concept as we've gone through COVID and the notion of remote monitoring. So I think both of those products are great opportunities for Abbott. They're all multibillion-dollar segments with high-growth rates, and we'll be seeing data in the second half of this year.
Our next question comes from Matt Taylor with UBS.
So I wanted to ask a question on testing. I guess with the guidance that you gave us today, it really implies pretty minimal testing revenue through the end of the year, and you mentioned not prudent to put a lot into next year. So are you not thinking that there's going to be any kind of resurgence or ramp-up of screening testing in the fall? And then what are you going to do with all the capacity that you've built up in the pricing of the test? Is that going to change at all? Just some more color on your testing outlook would be really helpful.
Sure. Well, listen, we -- as I've said, we have observed a sharp decline more on the rapid kind of point-of-care testing. The PCR lab-based testing, I mean, that's been declining, but it's been declining very much along the lines that we had planned and we had projected. And what's really driving the rapid decline is obviously real acceleration in the vaccination rates, especially over the last month, 1.5 months. But I think, more importantly, to your question there on the surge is, and we've seen a change in health authority guidelines here for vaccinated people, where now the guidelines are, you don't really need to test if you've been vaccinated and you've come across some sort of exposure. And that ultimately puts a challenge there into the value proposition of kind of surveillance and screening with affordable kind of rapid testing. So even if you do see a surge, I think that, that is going to be a little bit in contrast with -- right now, the guidance is that if you've had the vaccine and you come across some sort of exposure, you really don't need to test. So I would say we've got the capacity to be able to help out -- help in a surge and to be able to supply the market with more tests. But I guess I would question whether that would be the case, even if you do have a surge. I'd say the testing on the rapid side, which is the bulk of our product sales and our forecast was really tied to kind of surveillance and screening and the continuity of that. And once you remove those guidelines, at least here in the U.S., that I think becomes a challenge in terms of being able to forecast whether people will be doing that testing or not. We've then announced actions today to be able to rightsize our manufacturing network. We have, as we've discussed over the last 12 months, we've built a robust network of the existing capacities that we had and new facilities. So we'll be reducing some of our facilities here in the U.S. But we still have capacity in the U.S. and still have capacity internationally to be able to deal with any kind of surge. I would just kind of emphasize here that this is about the demand -- adjusting for a demand decline. We still have the broadest range of tests, we still have the capacity, we'll be adding combined flu and COVID tests. So we still think that we'll be one of the leaders here in the category. It's just that this category is becoming smaller and, quite frankly, faster than what we thought.
Our next question comes from Joanne Wuensch with Citi.
It's actually 2 pieces of it. One is, I was curious if you could discuss sort of the regional impact that you're seeing in this pullback and the decline? And then the second thing is, when we've talked about the use of cash in the past, it's been in terms of, first of all, investment, R&D and SG&A, but also potentially an external M&A. And I'm just curious whether or not the trends you're seeing changes that ratio of how you think about use of cash?
Sure. I'd say, on your question on geographic trends, we're seeing it much more accentuated. I mean the rapid drop that we've seen here is much more accentuated in the U.S. and as I said, really driven by the focus on vaccine and vaccination and the acceleration we've seen as a result of that focus and that focus shifting from testing to vaccination combined with revised guidelines. The international markets, we expect a similar trend to happen, and I think we'll start to see that, first, with the developed markets as the vaccination rates in those developed markets continues to increase and accelerate. Emerging markets, we still see pretty high COVID cases versus the U.S. and other international developed markets. But all of them are also on a decline here. So we've got COVID testing in these countries. Obviously, there are some segments that makes sense for us to participate and we are selling. And there are other segments here where it doesn't make sense for us, given the economics and those economics are not working for us. So that, on a test dynamic by geography, seeing it very rapidly here in the U.S., and we expect that to move through on international markets also. Regarding your question on M&A, well, first of all, I'll tell you, not going to tip my hand like that, especially when it comes to M&A, but you know our philosophy here. We're always actively looking. We're monitoring. We're studying. And if there's something that's attractive, that grows or that we could do well with, we're going to be interested. But it doesn't change. This won't change our capital allocation process. Obviously, we might have had some CapEx built in there for some COVID manufacturing enhancements that we'll no longer need to do, but it doesn't change our capital allocation strategy, okay? So I will -- let me just offer a few closing comments here. I'd say, pandemic has been a pretty unique experience, obviously, for all of us and for all companies, especially for Abbott. Not only have we obviously been focusing on our supply chains, our people, our manufacturing, our customers, but obviously working hard to develop all these tests to help and contribute in the fight against this virus. And I'm very proud of what the Abbott team have done and what they've mobilized and how they met the moment. We've had a lot of positives out of these efforts. We've developed, as I said, the broadest set of COVID tests. We have significant manufacturing capacity that's available. We'll have our combo tests. And as I said, I still expect us to be one of the category leaders here. It's just a -- it's a category that's declining and declining a little bit more faster than what we had forecasted. Strategically, I'd say it's advanced Abbott. The response we had has brought us closer to a lot of customers and market segments we hadn't previously penetrated. I talked about the ability to accelerate the rollouts of some of our capital systems like the Alinity molecular, Alinity m or ID NOW for point-of-care testing. And then it's allowed us to invest in a lot of growth platforms across the company. If you look at it just from a financial perspective, the efforts and the investments were all clearly positive. We generated very strong returns and several billion dollars in net positive cash flow here. So when you put all of this together, obviously, we're disappointed that we had to take this action today. It's clearly not the way we envisioned things unfolding this year. And it's a decision that wasn't something that we took lightly. That said, as I noted in my remarks, I think it is important to keep in a perspective here that our revised EPS guidance is up 20% versus last year and more than 30% compared to our pre-pandemic EPS in 2019. So -- and I mentioned that because I think there's just a couple of companies in our peer group here that have been able to achieve that sort of growth since the start of the pandemic. And then an important factor that we had in our decision-making, as I laid out, was we didn't want to do any harm to our base business. It's in a very strong position. Our growth rate is accelerating, and we need to ensure that we maintain that momentum. So we've got a lot of ongoing and upcoming launch activity, and these launches are in big high-growth markets, and it's the right decision here to fund these opportunities appropriately. Because ultimately, it's our base business here that will drive our strong, long-term sustainable growth for the years to come, and it's what it's been positioned to do even with the announcements today. So with that, I'd like to thank you for joining us.
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.
This concludes today's conference call. Thank you for participating. You may now disconnect.
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