Tom Freyman - EVP, Finance & CFO
Scott White - SVP, International Nutrition
Kristen Stewart - Deutsche Bank
Abbott Laboratories (ABT) Deutsche Bank 38th Annual Health Care Conference Call May 29, 2013 2:10 PM ET
Kristen Stewart - Deutsche Bank
All right, good afternoon. I just want to welcome you all to the afternoon session, I guess here now. I am Kristen Stewart medical device analyst at Deutsche Bank; it is my pleasure to introduce Abbott. We do have Tom Freyman, the CFO here with us today to give a broad overview. We also have Scott White with many of you probably have not met before. He is the SVP of International Nutritional business, so he will also be talking about that part of Abbott which is really more of the growth engine for Abbott, so I think that’s a really unique opportunity today. We should have some time for questions, so as always feel free at the time just raise your hand or you can submit questions to the Your In-App, it’s Your In.com/db.
So with that further ado, I’ll turn it over to Tom.
Okay, thanks Kristen, good afternoon everyone. Today, I will provide a brief overview of Abbott before turning over to Scott, as Kristen mentioned, our Senior Vice President of International Nutrition, who is going to discuss our nutrition business in more detail. Nutrition as many of know is one of our most compelling growth businesses and it has delivered outstanding performance in recent years.
Before I begin though, let me take a moment to our forward-looking statement which is shown on the second slide.
While, many of you may know Abbott quite well; let me take just a few minutes to ground you on the company and how we are a differentiated healthcare investment. Abbott today is one of the largest diversified healthcare products companies in the industry. We comprise of four roughly equally sized businesses, established pharmaceuticals which our brand in generic business; medical devices, diagnostics and nutritionals. We have leadership positions across our diverse portfolio from the number one global position in immunoassay and blood screening to adult nutrition to vascular devices. We are continuing to drive growth across these businesses by launching new products and expanding geographically.
All of our businesses compete in large markets that are aligned with favorable healthcare trends. These include global population that’s growing older and living longer, resulting in an increase in age related and chronic diseases; improving socioeconomic conditions in emerging markets that are driving investments in healthcare and the increasing focus on the type of innovation that delivers value to customers, reduce the cost for payers and improves outcomes for patients. Many of these trends are driving sustainable growth of our Nutrition business which Scott will discuss in a moment.
Abbott’s geographic mix is well balanced with one of the largest emerging market revenue basis of any large healthcare company. Today, more than 40% of Abbott’s sales are in emerging markets and we expect that to increase to 50% by 2015. Abbott is well positioned to deliver a top-tier growth as a reliable and sustainable healthcare investment. Across our diverse businesses, we hold leadership positions where we delivering customer focused innovation. Our balanced portfolio is aligned with favorable demographics that are driving growth in healthcare. We are leveraging our large and diverse healthcare presence in rapidly growing emerging markets and we are expanding margins to support top-tier earnings growth.
As Scott takes you through our Nutrition business, you will see how each of these growth drivers applies to nutrition and how we expect nutrition to be an attractive growth business for many years to come. So I'll turn it over to Scott.
Thanks, Tom. I am very pleased to be speaking with you this afternoon. The potential of our Nutrition business, the potential for this Nutrition business has never been greater. We continue to be at the forefront of this large and growing market. Abbott’s Nutrition business was established with a focus on developing science-based nutrition solutions.
Today, we are a global leader in nutrition with annual revenues of $6.5 billion. In 2012, our revenues grew nearly 9% on an operational basis and we expanded our operational margins by 240 basis points. For the full year 2013, we expect our global nutrition sales to grow double-digits led by strong international growth and we are on-track to improve our operating margins by at least 300 basis points.
The global nutrition market is large and growing. Today, the market is approximately $36 billion with expectations that it will grow to more than $50 billion over the next several years. Market dynamics and favourable healthcare trends are fuelling growth for both pediatric and adult nutrition.
Abbott’s global leadership in nutrition extends across a very broad portfolio. In pediatric nutrition, Abbott is the market leader in the U.S. and several key countries around the world with flagship brands of Similac for infant nutrition and PediaSure for toddlers and children.
In adult nutrition, Abbott is the market leader in the U.S. and globally with our Ensure brand as well as other therapeutic nutrition brands such as Glucerna for diabetes. Globally, Abbott holds the number one or number two market position in 25 countries around the world.
Our leadership is attributable to the depth and breadth of our product portfolio, our science-based heritage and our balance of our healthcare and consumer orientation. Our products are developed from strong and proven clinical science and readily endorsed by healthcare professionals around the world.
Our nutrition product portfolio is uniquely balanced both geographically and across segments. Today, more than 50% of our sales occur outside of the U.S including 45% of sales that occur in rapidly growing emerging markets. Our product portfolio spans the spectrum of life, from new born babies to older adults. This type of geographic and portfolio balance is unique to Abbott Nutrition.
We’re driving growth and value creation by further strengthening our portfolio with a steady rhythm of science-based new products, expanding our footprint in key high growth emerging markets, growing, shaping and further penetrating the adult nutrition market and expanding our operating margins to fund investments and growth. I will now spend some time reviewing each of these in a bit more detail.
Adult nutrition leads with science, its part of our DNA; we set the standard for science-based nutrition leading the development of innovative solutions that support the health and well being of infants, toddlers, children and adults around the world. Our investments in research and development have resulted in a five-fold increase in the number of new products launched annually since 2008 and a 10-fold increase in both clinical trials and patent applications.
We are also expanding our global R&D footprint, most recently in Singapore, India and China to ensure meeting the local needs and preferences of our customers. In fact by 2016, more than 35% of our R&D staff will be located in high growth emerging markets.
Lastly, we are expanding our external partnerships to complement our strong internal R&D capabilities to expand our knowledge, technology and talent around the world. One example is our recent partnership with Syngene, in India which will accelerate the development and commercialization of products in that market.
Our R&D efforts are focused on six benefit platforms; tolerance, cognition, immunity, lean body mass, metabolism and inflammation. These benefit platforms are important to our customers span the nutritional needs of adults, infants and address key demographic shifts that position us for strong future growth. These innovation efforts have resulted in robust science based portfolio that is differentiated in its breadth and depth. Globally our pediatric sales grew more than 13% in the first quarter of this year, including growth of more than 20% internationally. Our ability to identify and design solutions that meet the unique needs of mothers and infants around the world is paying dividends for us.
Today emerging markets represent 45% of our global nutritional business. Sales in these markets increased more than 20% in the first quarter of 2013. Our strategy focuses on expanding our footprint in key high growth emerging markets. While we have broad global reach to more than 100 countries around the world, we have prioritized the group of key countries where we are expanding our key, our current leadership positions such as in Vietnam where we are shaping new markets such as in India and where we are aggressively expanding our geographic reach such as in China. In total, we are focused on seven priority emerging markets where the priorities for rapid sustainable and profitable growth are the greatest.
Today I will provide a little more depth on our strategies in both China and in Vietnam. China is the largest and fastest growing nutrition market in the world. Our strategy is China is focused on winning share in the super premium infant nutrition segment with the broad clinically proven portfolio.
The super premium segment is approximately 70% for the total infant nutrition market in terms of dollar value and is growing at a double-digit growth rate. In addition to building the most diversified portfolio, we're also rapidly expanding our footprint in China with plans to place more than double -- with plans in place to more than double our presence in China through a city expansion.
Vietnam is our largest business outside the U.S. and China. Our product portfolio in Vietnam is well-balanced and we hold leadership positions in infant nutrition with Similac, toddler nutrition with PediaSure and adult nutrition with Ensure. Our growth strategy is focused on developing and launching new innovations that meet the local needs to strengthen our market leadership. Last year we also completed the strategic acquisition of our distributor in Vietnam to bring us closer to our customers and enhance our retail point of sales capabilities and these also improved our operating margins as well.
Let’s now transition to our global opportunity in the adult nutrition segment. The world’s population is aging and as the global leader in adult nutrition, this demographic shift provides a strong tailwind to grow, shape and further penetrate the adult nutrition market. In the U.S., the aging population is referred to as the baby boomers, but this demographic shift extends well beyond that of the U.S. In fact, projected growth is even more pronounced in many large countries outside the U.S. By 2050, the number of people aged 50 and older is expected to top 2 billion with the vast majority of this increase occurring in our priority markets. This aged demographic will comprise 40% of the total global population, nearly double what it represents today.
For Abbott Nutrition, this presents a tremendous opportunity. We created the category of adult nutritional supplementation 40 years ago with the launch of Ensure and have been innovating and expanding geographically in this category ever since. Today the global Ensure brand generates revenues of more than $1 billion and this comprised of a portfolio formulations that are designed to meet the needs of patients and consumers of the world.
In addition to Ensure, our broad portfolio of adult nutrition products includes brands that span the clinical needs of adults recovering from health setbacks, living with chronic disease, or seeking to maintain a healthy and active life styles at their age.
Our disease specific brands are well aligned to chronic illnesses that are on the rise and where nutrition can make a meaningful impact such as Glucerna for diabetes, Nepro for chronic kidney disease and ProSure for oncology.
Our science based products are recommended and endorsed by healthcare professionals around the world. As I mentioned earlier, lean body mass is a priority benefit platform for our R&D efforts. As we age, we naturally lose muscle mass. In fact between the ages of 40 and 70 adults lose on average 8% of muscle mass each decade.
And the rate of loss increases the 15% per decade after the age of 70. The loss of lean body mass is even more profound in hospitalized order adults. In just three days of bed rest older adults lose on average more than two pounds of muscle mass. The consequences can be debilitating including reduce mobilities and activities of daily life, increased susceptibility to illness and infection and reduced recovery from surgery illness and injury.
It is therefore promising that a health economic study published in the American Journal of Managed Care found that nutritional supplementation is beneficial to both patients and hospitals. The study of more than 44 million hospital Abbott serves in the U.S. over an 11 year time horizon found that nutrition intervention decreased hospital life of stay by 21%, reduced hospitalization cost by 21.6% and reduced the likelihood of being readmitted 30 days after discharge by 6.7%.
With hospitals and healthcare systems around the world facing unprecedented budget challenges, these results are very encouraging and represent an opportunity in both developed and emerging markets. As the global leader at adult nutrition we are committed to further expanding the healthcare, health economic evidence in driving awareness of the role that proper nutrition can play in improving patient outcomes and importantly reducing healthcare cost.
Let me close with an overview of our margin expansions initiatives. Over the past several years, our disciplined and very comprehensive approach to improve our margins has yielded impressive results. In 2012, we expanded operating margins by 240 basis points and are on track to improve at least 300 basis points for the full year of 2013. We’re confident in our ability to deliver on our initial target of 20% by 2015 as we continue to execute our comprehensive plan to improve the profitability of this business.
As a part of our margin expansion plan and to meet increasing demand for our products around the world, we’re making good progress on the unprecedented expansion of our global manufacturing capacity. In the U.S., we’re building a new aseptic liquid facility to meet the demands for Ensure and PediaSure. In India, our new plant in (inaudible) will produce nutritional solutions that are tailored to meet local needs and in China in addition to the fully imported infant formula that we market today.
Our new plant in [Zaojing] will produce infant formula from fully imported milk, all of these plants are expected to be online in late 2013 or early '14. In summary, Abbott nutrition is a profitable and attractive business that is well aligned with the favorable demographics and emerging market trends. Our portfolio of products is well balanced across segment and geographies and in emerging markets we are delivering strong results and investing to expand our portfolio presence and our capabilities.
Globally, we expect double digit revenue growth for full year 2013, at the same time we're continuing to execute our plans to expand operating margins and are confident in our ability to deliver at least 300 basis points of margin expansion in 2013 this combination of double digit top line growth and operating margin expansion is unique in healthcare industry, and is representative of Abbott's ability to deliver top tier growth as reliable and substantial healthcare investment, thank you.
Kristen Stewart - Deutsche Bank
Then I'd like to open it up for the opportunity for anybody any audience if they have a question just raise your hand, all right. Tom, I'm just going to start with you from moving back over to Scott but from the big picture perspective just now that and the separation is now complete, how should investors just think about Abbott and just the capital allocation strategy seems like on the most recent call, you guys were talking little bit more about potentially through your sights on M&A so maybe just remind us particularly towards M&A, what type of criteria look for, what different parts of Abbott do you think kind of need strengthening and just kind of a minute?
Sure, Kristen. Well, when it comes to capital allocation, first of all, I think the company is in a great position just from a cash flow perspective. We even post separation from the proprietary pharmaceutical business. We have very strong cash flows and the ability to have a lot of options with the use of that cash flow. We've historically have been very committed to and really broader than just M&A. I talk about the various uses of cash. We've always been very committed to our strong and growing dividend. We started as a so called new Abbott post separation with a payout ratio on cash basis somewhere between 25% and 30% and our expectation is to continue to grow the dividend. That's very important to us.
Consistent with our balanced approach, historically, even pre-separation, share repurchase continues to be part of the mix. It's something that we've been doing for decades and we continue through 2012 and even in the fourth quarter of 2013, we repurchased around $850 million worth of our stock, which we think is a good use of cash and redeployment to shareholders if you will. We have a pretty good M&A track record over the years. Those of you that follow us know that we used a pretty disciplined approach and while we've been opportunistic, the deals we've done have been strategically sound and I think have contributed quite nicely to the portfolio and the ability of the company to have the growth profile that it does but that said, in the last couple of years, we've been little bit less active as we've focused on other activities and just opportunities have not presented themselves. I think it's fair to say that there are areas we look at potentially to redeploy cash in M&A, I'd characterize them as relatively modest from a dollar size perspective in terms of what those potential deals could be we are interested in technologies that could compliment our businesses particularly I would say in our medical device business where historically we've made a series of equity investments minority equity investments and companies and potentially can piggyback on those to bring additional complementary technologies in to those businesses.
So it's entirely possible that activity picks up a little bit but it would have to be something that sounds, something strategic and something that has a good return for us to consider bringing something else into the portfolio.
Kristen Stewart - Deutsche Bank
So, I understand you correctly it sounds like the preference is certainly more on the smaller side and not necessarily anything that would be larger --
Yeah. I mean you can never say never, but I think we have find that complementary deals, the deals that fit in to existing commercial infrastructure or technology capabilities we have, returns are generally better and the execution risk is more controllable and probability of a good return increases. So I think those obviously are the best deals, particularly since as we sit here today and as Scott talked about, during his presentation, we think that in most of our businesses organic growth opportunities are very good and by investing in our existing brands, expanding geographically and distributing our products more broadly across countries in various geographies that we can drive the vast majority of our growth through that organic growth.
Kristen Stewart - Deutsche Bank
Okay. Then Scott you brought up on within your presentation the opportunity in China, can you maybe just provide a little bit more color just on what you think it takes to win in China and what some of the key drivers are for infant nutritionals are?
Yeah, I think it's important to keep in mind the diversity of what China provides to us, obviously it's the largest infant nutrition market in the world of $8 billion and we like our position in there with our Similac business. But also it's important to keep in mind that for us, we're beyond just an infant formula manufacturer, we also can leverage the opportunity in our adult portfolio as well.
So well on one hand in China there's an $8 billion ethane formula market, there's about $100 million adult nutrition market. And when you look at the demographics it's much like we have a baby boom here in the US and China's baby boom is 4X our size. There's 325 million people in China over the age of 50 we expect that to come close to 650 million by 2015 representing a really nice broad opportunity for us. So, right now our focus is very heavily on continue to build shares in China and that's done by a couple of different focus areas for us. First and foremost it is about product innovation and continuing to build out and broaden our portfolio of products.
The second component of that is building our city footprint over the last few years we've doubled the number of cities that we have feet on the streets sales representatives this marketing capability and over the next few years, we expect to double that yet again. So building out our footprint in terms of local capability is important. The other piece that I think is a very good differentiator for us and I mentioned in my talking points was that we are close in late 2013 early '14 we'll be able to have local manufacturing which gives us a cost advantage, but we're also complementing that with local R&D. So, our ability to be able to have real time food scientists, nutrition and R&D capability on the ground together with a manufacturing facility not only provides cost advantages, but in the emerging markets particularly in China our ability to adapt quickly and capitalize our unmet needs is we believe will be advantage and puts us in the position to build our infant share pretty affectively.
Just a quick follow-on in terms of the supply chain capabilities in China, you mentioned that you are importing all of your milk currently even with the new facility you got there. I am just curious as you strive to achieve that share into the men’s growth opportunity, at what point does not having a 100% indigenous supply chain begin to constrain that growth and how quick you kind of ramp up given what we have seen five quarters again those and otherwise?
I don't think there is a constraint to growth via the supply chain whether it’s fully imported or imported locally manufactured. Right now the market drives that dynamic in terms of consumers work for imported milk as a primary indicator of what brand they are going to buy and many of the local manufacturers in china as well as the MNCs all import their milk whether it’d be from Europe or from New Zealand or Australia. So at this point in time, we don't see that an inhibitor to growth but we do like our position because we are going to have the combination of the fully imported product coming out of Singapore and we will continue with that, but it will be complemented by local manufacturing as well. So it allows us to balance out the diversity of our portfolio and be prepared regardless of what direction the market moves. I think we're well positioned to be able to capitalize on that over the bed in long-term.
And one more question over here. As you may read one online and (inaudible). The one I was submitted in is as the nutritional business grows in size, Tom, this is (inaudible). Any thoughts on separating the nutritional business and the established pharma from medical device and diagnostics, so I guess opportunities for further spin-off and (inaudible)?
The answer to, is there any interest? The answer is none whatsoever. We really like these businesses. We feel like there is a very good rationale for these businesses being part of one company in particular because of our emerging markets presence and ultimately our ability to leverage the Abbott brand and the broad portfolio in these various markets and I think we're really only at the early stages of that.
When you look at the breadth of our products from nutrition but through diagnostics, branded generic pharmaceuticals, ophthalmology and in terms of cataract, it's just an incredibly broad range of healthcare products that with enhanced branding of the corporation and what our company means to these various markets, we think ultimately can leverage and drive additional volume and success for the various businesses. So we really like the combination of businesses, a very strong overlap particularly with the emerging markets presence and it's something we really want to build on and deliver additional value to shareholders through that leveraging.
My question relates to pricing power in the nutritional area. Can you just talk about the different segments where you think you could increase prices on and also in the hospital nutrition area, are you in the IV area and maybe is there pricing there?
I will answer and let's Scott fill in. In general, our strategy is not about price in this business, I mean the only over time one needs to recover cost, but input costs in this business have been relatively stable for a number of years. And so just in general, our gross strategy is geared around bring innovation to patients and driving market share, expanding geographically and only in the long term if there was some fundamental shift in the commodity cost structure which at this time we don't see given the relative stability over time that really is not a major factor in our business strategy. Scott, would you add to that?
I think well said.
Okay. Another question Scott you brought this up to just kind of the opportunities for the adult nutrition I guess lot of times people turn their focus on infant but and just emerging but it seems like adult nutritional kind of must seem little emerging markets. So can you just comment on just the prospects their longer term and kind of where you see that over the next three to five years?
This is a part of what I think makes Abbott Nutrition unique, we have that diversity of both the pediatric business and the adult business. And when we talk about emerging markets obviously it's a geographic component, but when you look at adult in terms of the penetration that we could possibly have in Asia, in the Middle East and in Latin America but also in United States as well. The demographics are incredibly favourable from the standpoint of the aging population and the importance of nutrition being able to make a change in a patient, the consumer’s life. But ultimately save money as well. I mentioned our health economic studies, something we're really excited about in terms of demonstrating healthcare professionals and payers alike. And in some places that payer is a private payer in the emerging markets. There is no insurance, there is no government it's on the individual.
So the breadth of the study and the importance of nutrition and being able to keep healthcare cost down, but also improve the lives of consumers by getting them out of the hospital faster, keeping them out of the hospital once they are discharged and incredibly opportunistic area for us going forward. The benefits here and what sets it up, there are three things that really matter; it's really about having good clinical science to be able to substantiate the performance of your product. The ability to build a strong healthcare professional recommendation and strong global brand equities.
In Abbott nutrition, we have all three of those. So we're well positioned to be able to build and capitalized in the tailwinds of this market not just in emerging markets, but the US as well have the science, the research and ultimately the infrastructure footprint and capability to able to take advantage of that and a really robust product pipeline to be able to support it longer term and it gives us a life of excitement for the future.
Kristen Stewart - Deutsche Bank
Okay. And then just in terms of the growth outlook nutritional broadly I mean this year as you had mentioned, I guess you guys are double digit growth rate that you're expecting what can we expect longer term and it seems that given all that you've discussed today used to be able to at least sustain high single digits, I don't know if you would agree with that?
I think we'd agree with high singles, our goal obviously is to push that up into the low doubles if possible, but high singles is very achievable, Tom's (Inaudible).
Kristen Stewart - Deutsche Bank
Okay. And then any other questions in the room for as one last one? One of the areas where I frequently get asked a lot of questions just on the outlook for the balance of the years within the established pharmaceutical -- not pharmaceutical -- EPD business. And so how I guess comfortable are you still with seeing the acceleration as you move forward into 2013, and just what do you see as a longer term growth rate of that business, it doesn't seem like that necessarily has perhaps the margin opportunity of that nutrition has or maybe even diagnostics but maybe just talk both about top line growth to that franchise (Inaudible) margin?
Sure, let me just talk fundamentally about the business, so this business has a great role within the portfolio and margins are quite good cash flow is very strong it's a relatively light, it's a not a capital intensive business so that cash flow is available to fund growth opportunities elsewhere in the business as well as various things that come along with our shareholder return programs et cetera. So an excellent business for Abbott, it's fair to say that the growth rates have been a little lower than, we think the long term potential is in the last couple of years.
A big part of that is the fact that this is tale of two businesses, we have a strongly growing emerging markets business which is about 60% of the portfolio and we have a business in the developed world which is about 40% which has been not growing at that pace because, in large part because of various austerity measures that as you all know that the develop markets have been going in the last couple, three years post the financial crisis, it gives us a good feeling about the second half of the year compared to the first half, where we're seeing probably low single type growth rates is the lapping of the more severe austerity measures and includes the biannual price reductions we see across all businesses in Japan.
That should finish up after middle of second quarter here, going in to the second half as well as the more aggressive European austerity measures which impacted this business pretty significantly over the last year or two that pretty much has played through in what we're seeing as more of a normalization of those markets from that perspective. So by comparisons alone, we think you're going to see better growth rates and we also are expecting better execution of our business through commercial execution, return on the investments we've made in the market as well as the broadening of the portfolio of branded generic products we offer.
Kristen Stewart - Deutsche Bank
Correct. And that we're out of time but just closing, do you still feel as confident as you were, I know you're articulating the longer-term growth outlook for Abbott as if genuinely output a split of achieving kind of that mid to high topline growth prospects with double-digit EPS growth?
Yeah, certainly, our guidance, our topline guidance is here. It's been mid to upper topline and as we talked about what the various margin expansion programs, we expect double-digit growth this year on an ongoing basis and that continues to be what we strive to target and hopefully accelerate a little bit more in the topline over time to help us deliver those types of growth targets we've talked about.
Kristen Stewart - Deutsche Bank
Perfect, all right. Thank you for the time.
Thanks so much.
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