Abbott Laboratories (NYSE:ABT)
Presentation at Barclays Healthcare Conference
March 14, 2013 8:30 a.m. ET
Brian Yoor - IR
Thomas Freyman - CFO
Good morning, and thanks for joining us for our second morning session. Really pleased to have Abbott with us this morning, and we’re going to have a fireside chat with the CFO, Tom Freyman and also Brian Yoor from investor relations. Maybe to kick it off, this is kind of a new era for Abbott. Do you want to talk about separation and how things have changed and how that went, and how it feels to be at the new Abbott?
Sure. Good morning everyone. It’s a pretty exciting time. As those of you that follow us know, we separated into two companies on January 1. That was a big project last year, and we are really proud of the fact that we delivered it right on schedule from the initial target. Really, the separation process went extremely well, and both companies, I think, are off to a great start as independent companies.
Abbott is actually entering its 125th year this year, but when I came in on January 2, it truly felt like a new company, and I’ve been there 30 years, and I’ve seen the evolution. It’s really interesting to focus now on these four major businesses we have, but the company is so different than it was 10 or 15 years ago in terms of geographic presence. Abbott is now a 30% U.S. company and 70% outside the U.S., 40% emerging markets, growing to 50% over the next few years.
That makes for a very different dynamic in terms of our view towards how we manage the company and what we’re going to focus on. So there’s a lot of energy and a lot of excitement in this company as we start out the new year.
I think as we look at our portfolio, we have very good growth prospects. I think if you look at the opportunities in each, both from a geographic opportunity, the emerging markets presence as a growth accelerator, and some of our innovation, there’s lots of opportunity for growth, and I think we’ve got a very good top line story.
But it’s also a company that’s focused on the bottom line. We’ve done a reasonable job of expanding margins the last couple of years, as a combined company, but we have further aspirations to improve our margins going forward. And so we definitely think we can grow the bottom line and earnings per share at a more rapid rate than the top line, and it’s a big focus of the management.
You know, one of the things I think that has not changed, as we start up here, is the focus on innovation. As you go through each of these businesses, innovation is still extremely important to our growth and to our ability to compete in the various markets. Although it’s a little bit different, and the innovation varies across the businesses. It can tend to be more consumer oriented than what you might have known from the Abbott in the past, or more incremental innovation, but there’s also some game-changing types of innovation across these businesses, and it continues to be a very important part of our story.
So I’d just say, as we start out this new year, we’re off to a good start. We’re very pleased with the opportunity we have as a company, with the pharmaceutical business and its own independent place, and there’s plenty of opportunity here for growth.
Great, that’s a good overview. And there’s definitely a lot to talk about with the overall opportunity set and the different businesses. If you want to start out with the nutritionals, that’s a business where you’ve been focused on expanding geographically and with your product lines and improving margins as well. Can you help us frame the opportunity there and give us some guidepoints in terms of what we should look out for over the next 12 months in the business?
Nutrition is an important part of our company now. It’s over $6 billion in sales, a little bit more than half of that outside the U.S. And it’s been probably our most rapidly growing business, if you look at recent results. And that really is a function of good markets. We’re participating in markets that are growing well. But also extremely good execution across the product portfolio.
You know, outside the U.S. is probably our greater growth opportunity. If you look at 2013, we expect double-digit growth overall outside the U.S. That’s driven by a number of factors. Certainly geography and expanding markets in emerging markets in particular. China is important to us, but we have a very broad range of exposure to the emerging markets, and all of them are executing extremely well.
I think it’s also important to understand Abbott’s nutrition business is not just a pediatric business. About 55% of our business is pediatric, but 45% is adult nutrition, which is a very exciting growth opportunity for us, really in the U.S. and outside the U.S. going forward.
We have really the leading position in adult nutrition globally, with very strong shares, and so for us, a big part of the growth story is expanding category use, which we’re working on through a lot of execution on the ground and good brand promotion, but also expansion of the use of these adult nutrition products in the market.
Over time, we expect to emphasize HEOR studies to a great degree to help the medical community understand the importance of adult nutrition and its impact on lowering cost in the healthcare system. So the top line story in nutrition is very exciting, both from a geographic, a product, and also the balance between these two businesses in terms of their opportunities.
The other part of the story for us in nutrition is the opportunity to expand margins. This is a business where we believe, compared to where we were a couple of years ago, we can grow our operating margins around 700 basis points to over 20%. We made good progress on that in 2012, and we have a very detailed program in place to achieve that.
It’s comprehensive. It goes really from the top line to the bottom line, with a lot of focus on rationalization of commercial opportunities, being sure we’re investing in those areas with the greatest opportunity, perhaps disinvesting in areas that are less profitable. And so we’ve been working on that at the top line level.
There’s also been a lot of activity in the cost and distribution areas. We’re building three new efficient plants, which is in part a reflection of demand, but it also provides us with the capability of getting our production closer to our customers, improving logistics costs, and building those plants in a very efficient way that we think can help improve our margins.
We’ve also been focusing on distribution. Over the years, as we expanded, particularly outside the U.S., we tended to rely on distributors to a great degree. We’ve been deemphasizing that over the last year or two, bringing the margins into the company, taking full control of our distribution in the countries. We’ve also been working on a number of just pure blocking and tackling logistics programs that are helping reduce our costs.
So this margin expansion program has a lot of emphasis in the manufacturing area, and there’s also some degree of SG&A leverage we think we can get now that we’ve really made a number of our investments in infrastructure, particularly in emerging markets. We’re hoping to get additional sales activity and leverage through SG&A.
We have a pretty detailed, thorough, well laid out plan to achieve our margin objectives. Certainly by 2015 we hope to be in that 20% range, and at the pace we’re going, in particular as we saw in 2012, as we exceeded our objectives, we hope to get there a little bit sooner.
And I think that’s only one point. Once we get there, certainly we’re going to be looking to continue to improve and expand, and I think there’s going to be opportunity to do that, particularly as we bring innovation to the market and the opportunity to gain share and really improve our offerings to our customers.
Let’s transition to diagnostics. I know in the past you’ve talked about your improvement in diagnostics margins over the last couple of years as somewhat of a playbook for nutritionals. But can you talk about diagnostics and how much more room there is to grow margins there? And the top line story and the different components of that business, whether it be core or molecular, or point of care?
Those of you who follow us know that we’ve had quite a turnaround story in our diagnostics business. If you go back five or six years, relatively low margin business, and we are struggling on the top line. At that point in time, we decided we really needed to change our approach, and our focus, and for the next few years what we asked the team to do was focus on improving margins and cash flow and returns on the business, and really emphasizing the top line a little bit less and really focusing on those business areas that would be the most economically beneficial to us. And that team really undertook that challenge and has executed extremely well.
And similar to what we did in nutrition, and as you said, Matt, it kind of was the blueprint for what we did in nutrition. Very comprehensive approach. Again, top line, rationalizing markets, looking at those areas where we can improve margins, focusing on customer channels that were more attractive than others, a lot of work there.
We did a lot of work in manufacturing. We have much more efficient plants in place than what we had previously, and that’s helped a lot on margin, and there’s also been focus on SG&A. It’s really interesting, even though we asked the team not to focus on top line, through really the culture change that this program caused, we actually saw better top line performance than we expected.
And if you look, over the last year or two, this has been one of the more rapidly growing businesses in the Abbott portfolio, and depending on the quarter, easily this business is growing 6%, 7%, or sometimes even 8%, which, as you know, is really good growth in this day and age. And so it’s a real credit to the team in terms of their ability to balance commercial execution with the margin expansion, and it’s really been a good story.
There’s another element that’s helped the top line in this business. We tend to think of this business as the lab business, the core lab, which is very good, and it’s a very good business for us, and certainly that’s about 80% of the sales.
But we do have two more rapidly growing businesses, one being the point of care, which has been growing in the mid teens recently, and another one, molecular, which has a good growth track record, and we expect returns and double-digit growth in the second half of the year. Those are two businesses that really have helped accentuate the growth profile of the business and have also been a really nice contributor to the performance of the business.
What’s even more exciting to us as we go forward is despite the fact that we moved the margins up in this business over the years, one of the things we did not do was reduce R&D investment. And we know that in a competitive market, it’s important to continue to invest in the product and the product line, and really ultimately help our customers become more efficient.
So we have been investing, in particular the last couple of years, in a series of new platform programs, which should be rolling out over the next few years. We think these programs are going to give us two or three big advantages. One is we are designing these systems, obviously, to meet customer needs.
We think, as we roll them out, we’re going to bring more efficiency to our customers, more features that they value, helping in the [flowings] in the lab, helping with data accumulation and use of data in the labs. So a lot of ability to bring value to our customers, and ultimately market share gains.
Also, we’re designing these systems to be more cost efficient. Certainly that will help us to be more competitive in the market. So that’s a big opportunity. I guess the other thing I’d say about diagnostics, to really underscore the opportunity that we have in this business, is that, like the rest of the businesses in Abbott, emerging markets is a huge opportunity here, and it’s been a very significant contributor to our growth over the last couple of years.
Particularly in the BRIC countries, we’re finding that the healthcare systems have grown and expanded, both in terms of volume of usage, but also in terms of sophistication and need for sophisticated systems, to the point where our higher-end systems are increasing in terms of customer need in these markets, and our ability to grow has been significant.
The team has invested significantly in commercial presence in these markets, and we’ve really done an excellent job of execution. The markets are growing very strongly, often in the mid-teens to even 20%, and the team has been growing in excess of those rates in countries like China, Russia, and Brazil.
So there’s an emerging market story here, and as those healthcare systems evolve, it’s a great opportunity for this business as well. It’s top to bottom. It’s a very exciting business for us, an area of great growth opportunity, and while we’ve delivered on a lot of margin expansion, we’ve moved from basically 8% to close to 19% in about 4 or 5 years, we still think there’s room to grow.
We’re still executing on the final stages of some of our manufacturing programs, and there’s always the opportunity to leverage the expense pace. So I think moving this business into the 20s is very achievable, and is part of the overall margin expansion story for the company.
And you touched on emerging markets, these growth markets that are a key theme for Abbott’s growth. Can you talk a little bit about the [EPB] unit, because that is highly levered to those markets, and maybe one that investors have less visibility into? Can you give us a framework in terms of how to think about the developed markets and the growth markets, and what your strategy is there to grow that business?
So, our established pharmaceuticals business was actually carved out of our pharmaceutical division a little more than two years ago. What we found was that we had, in the company that is now Abbott, obviously some very exciting high-end products, very focused on the specialty channels. But then we also had a portfolio of around $5 billion of products, highly profitable, very solid, important products for our customers and for the market. But tougher to focus on those when you have products like [unintelligible].
So what we decided to do is set up a dedicated management team. This was a business that is entirely outside the U.S. And when we looked at the portfolio of products, we found that a big portion of that portfolio was in a category that we call branded generics, which is generic products that have brand recognition, brand durability, loyalty, in various markets.
And as we looked at how to run that business, we realized that this is more of a consumer approach, a portfolio of products approach, than what you might perceive typical pharmaceutical commercial activities to be. And so that team is established. The headquarters is established outside the U.S., the growth opportunity here is emerging markets. 60% of that $5 billion in sales is in emerging markets.
As you know, the healthcare systems in those markets are expanding. A lot more money is going in. And a big difference in those markets is they tend to be much more self-pay, and much less reimbursed, which plays into a portfolio that emphasizes quality and brand and the patients themselves are much more making the decision on which product to buy than often the healthcare providers, as you see more in the developed world.
And so the team is focused on driving growth in these emerging markets. We saw in 2012 overall double digit growth in that portfolio of markets. The team really take a portfolio of strategies, tailored to the individual markets, very focused on executing on this broad branded generic strategy and really trying to improve our market position and riding the wave of growth of healthcare in those markets.
So it’s an exciting business for us. About 40% of that business is in the developed world. That is a bit of a tougher element of the business for is. We don’t view it as a growth business, and actually it has been slightly declining. But when you weight that out against the 60% in the high growth market, we think this can be a reasonable growth business for us overall.
In 2013, we’re targeting modest accelerate of the overall growth of this business into the mid single digit range. And we think sustainably, as emerging markets become a bigger part of the portfolio, and as those higher growth markets are a bigger weight in the overall growth of the business, we can easily move this into the mid to upper single digit range with very good margins, good cash flow, and really a good funding mechanism for funding growth of our various businesses.
So it’s a very interesting business. I agree with you, Matt, that it’s not as well understood, and it’s not one product or one country. It’s a wide range of countries and a wide range of products. But I think the overall strategy is exciting, and we’re looking forward to accelerating the growth in that business.
And maybe just to round it out, can you talk about devices? You have a few new product launches this year, and the MitraClips. The panel is next week, so can you walk us through the product drivers. That business has strong margins, and what’s the opportunity to maintain or grow margins in that business?
We are the leader, I think in vascular devices, with a business that’s over $3 billion in sales. Obviously the lead product in that portfolio is XIENCE, which is the leading drug eluting stent in the world. We have strong global market share, strong share in most markets, really in all markets, and it’s been a very successful business for us.
When we acquired this business a few years ago, and added our existing portfolio of vascular businesses to it, it was actually losing money. Over the last five years, it’s grown to close to a billion dollars in profit and around 30% margin. So it’s been very successfully managed, it’s been a very good contributor to us over the last few years. And it continues to be an area of excitement and focus for the company.
The growth drivers as we look forward are, as you said, in the new product area, but before I talk about a couple of those products, it is important, like our other businesses, to emphasize the emerging markets aspect of this business as well. The PCI volumes, or the coronary procedure volumes, are growing very nicely in emerging markets.
About 20% of the business today growing very rapidly. Even though we tend to have the premium products in a lot of these markets, that becomes an increasing percentage of the share of the use of these products in those markets. So we’re well-positioned, we’re growing extremely well in countries like China and India, and our evolving portfolio, I think, is going to meet the needs in those markets as well.
The most exciting new product growth areas for us are ABSORB, which is our bioresorbably stent. It basically is a product that, unlike a metal stent, will reabsorb into the body after a couple of years in the system. We have three-year data that was just released last week that shows that from a safety and efficacy point of view it’s very similar to the top end product in the metallic drug eluting stent area. So it’s a very exciting growth area for us.
We launched in Europe a full range of the sizes in the fall. It’s progressing very nicely as we work through the year. It is a product area where additional data will help our progress. We’re continuing to run a number of clinical trials in this product, including the initiation of the U.S. trial that will facilitate U.S. approval. So it’s a very exciting area for us. We hope for this not to be just a niche product within the field, but to become a very mainstream type of product over time, and that’s really our strategic focus.
The other truly exciting area is the MitraClip product. This is the first product treating mitral regurgitation, noninvasively. It’s had a very successful launch in Europe thus far. We’ve basically doubled the sales each year in the past two years, and it’s a product that we think can approach $200 million in Europe this year.
We just received broader reimbursement in the key German market recently, and that should help fuel growth in 2013. There is a panel next week for MitraClip, considering U.S. approval. That will be an interesting discussion. It’s clear to us that the data and the use of this product in Europe demonstrates the benefit for patients, and we’ll see how that goes through panel.
I think it will be a very important discussion. I think it’s fair to say that most analysts have not modeled significant sales in the U.S. in the near term for this product, pending the resolution of that panel. And I think a successful panel there and an early approval probably would be an upside to any forecasts that are out there right now.
That said, we have a number of trials up and going to further support that product and further approvals in various markets, and we’re confident that longer term this can be a very significant contributor to the division and to the company. So some very exciting new product areas.
I guess the other thing I would say, before I leave the ABSORB discussion, the indications I was talking about were in the coronary. This is also a product that has great potential in the periphery. We’re actually running some trials now with ABSORB in the periphery, and so another area of growth over the next few years for that product.
There’s a lot going on, and really between emerging markets, ABSORB, MitraClip, and the launch of the Xpedition, which is the new version of XIENCE, in the U.S. just recently, we think we can gain share in this market and continue to be a leader in the vascular space.
And maybe just to wrap up, do you want to talk about use of capital and how you’re thinking about your M&A strategy and also returning cash to shareholders, how you balance those and how you’re targeting things by division?
Well, I think the word you used, balance, has been Abbott’s hallmark in this area. And I think, even as I said, a separate company from what we were combined with pharmaceuticals before. I think lots of [unintelligible] carrying forward. We have been a very good dividend payer historically. We’re launching with a good dividend payout. I think there’s opportunity to continue to grow the dividend, and make it an important part of return to shareholders, and that continues to be a very important part of our identity.
Share repurchase has been something we’ve continually done over the years, and you can expect to see that in this new company as we move forward. And the company has very good cash flow, about $4 billion of operating cash flow. After the current dividends and capex, we still have a couple of billion dollars of cash flow to deploy to either share repurchase or other areas.
We’ve been pretty good at M&A over the years. We have a good track record. We haven’t been that active the last two or three years, particularly outside of the pharmaceutical space. But I think going forward that’s something we’ll consider, but there’ll be a lot of discipline around that. I think our deals in the past have had very good financial discipline, and we’ve been able to pretty much deliver on expectations.
And I think if we were to do anything in the M&A area, it would tend to be augmentation for complementary technologies or geographic opportunities to our existing businesses. So building something that would bring a lot of synergy and really short term return to shareholders.
So I think we’ve got a lot of options. We start out with a very healthy balance sheet, strong cash flow, and given our track record of prudently using shareholder capital, I think it gives us a lot of opportunity to invest in the business and have a very good return program for shareholders.
Great. Thank you so much. Thanks for your time, and I appreciate your comments.
Thank you, everyone.
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