Abbott Laboratories (NYSE:ABT)
William Blair 34th Annual Growth Stock Conference
June 11, 2014 5:40 p.m. ET
Tom Freyman - Executive Vice President, Finance and Chief Financial Officer
Ben Andrew - William Blair
Ben Andrew - William Blair
Well, thanks, everybody for joining us. The last presentation here on Wednesday in the end of the conference. I am Ben Andrew, one of the medtech analysts at William Blair, joined by Brian Weinstein who co-covers the name with me along with Margaret Kaczor. So we have got a whole team on this one. I don’t own the stock. I don’t have any disclosures but you can see the balance of disclosures for the firm at williamblair.com.
Just want to make a couple of comments before we start up the presentation with the Chief Financial Officer, Tom Freyman. Abbott is one of those rare large cap names that actually has some compelling growth opportunities that in aggregate should allow them to grow substantially faster than many of their peers. Been through a little bit of a tricky year for a variety of non-self imposed reasons that are resolving themselves and setting up for a much better second half. And so the core investment thesis of accelerating revenue growth, expanding operating margins and shareholder returns that I am sure Tom will talk about, is very much what we are excited about with the outperform rating and excited to see what happens here in the next year or two with the stock.
So with that I will turn it over to Tom.
Thanks, Ben, and good afternoon everyone. So today I am going to provide a brief overview of Abbott. I will discuss how we uniquely diversified large cap healthcare company as Ben indicated and demonstrate how that will translate into a durable growth and income investment. Before I begin please take a moment to review our forward-looking statement which is shown on the second slide.
Abbott's identity is one that of durable growth and income investment. It's represented by a broad portfolio of leading businesses aligned with favorable healthcare trends with a significant portion of sales in faster growing developing markets. We strive to deliver top tier growth as we work to expand our margins and generate strong cash flow and increase our returns to shareholders.
Abbott is one of the largest diversified healthcare product companies in the industry. We are comprised of four roughly equal sized businesses. Nutrition, which includes both adult and pediatric nutrition; medical devices, a segment comprised of vascular, diabetes care and vision care technologies; established pharmaceuticals, a branded generic pharmaceutical business with an emerging markets focus; and diagnostics, which includes market leading systems and tests in almost every segment of the in-vitro diagnostics market.
Abbott's geographic mix is well balanced with 70% of sales outside the United States and one the largest emerging market revenue bases of any large cap healthcare company. With more than 40% of our sales in these higher growing markets, we are leveraging our large and diverse healthcare presence as well as the Abbott brand across our portfolio. And it's not only our commercial presence, we have continued to shape and build our footprint across distribution, R&D and manufacturing to support and sustain our long-term growth in these markets.
All of our business compete in large markets where they hold leadership positions. In nutrition, a $28 billion fast growing global market, we are the worldwide leader in adult nutrition and hold leadership positions in pediatric nutrition across several geographies including the number one position in the United States. In the $4 billion drug-eluting stent market, we have a global leadership position with our XIENCE drug-eluting stent and the world's first bioresorbable scaffold called ABSORB.
In vision care, we are number one in LASIK. In the $4 billion cataract surgery market, we hold the number two position in cataract lenses where we have been gaining share with recent new product launches which has resulted in double-digit sales growth. In our branded generics business, we hold the number one market position in India, which is one of the fastest growing pharmaceutical markets in the world. And with recently announced acquisition of CFR Pharmaceuticals, we will hold a top-ten position in Latin America.
In the $27 billion in-vitro diagnostics market, we are the number one globally in immunoassay diagnostics and blood screening and we have a leading point-of-care bedside testing system. Our businesses are also well aligned with favorable long-term healthcare trends. These include, improving socioeconomic conditions in emerging markets that are driving investments in healthcare. Over the next five years emerging markets are expected to grow more than twice as fast as developed markets. And healthcare spending in emerging markets is still very low as a percent of GDP representing a significant opportunity for expansion. In addition, the global population is growing older where we are seeing an increase in age-related chronic diseases. At the same time this generation is living longer and has a desire to more active, healthier lives.
Abbott has a strong track record of delivering reliable and sustainable top-tier growth. We have always set the bar high and have delivered a double-digit ongoing EPS growth in six of the past seven years. Our ongoing full-year 2014 EPS guidance is for a double-digit growth at the midpoint again this year. And double-digit ongoing EPS growth remains our long-term target. To support top-tier earnings growth, we are focused on both gross and operating margin expansion in each of our divisions. We expanded our operating margin 110 basis points last year and expect another 60 basis points of expansion this year.
Our progress on margin expansion is expected to accelerate as we move through the second half of this year and into 2015. Abbott generates strong cash flow with more than $4 billion expected this year. We have a balanced approach to capital allocation across dividends, M&A and share repurchases. Beginning in 2014, we increased our dividend by 57% and our payout ratio is roughly 40%. We are also continuing to shape and augment the company through a disciplined approach to M&A. We enhanced our medical devices business last year with two strategically important technology acquisitions, one in vision care and the other in our peripheral vascular business. With the acquisition of CFR Pharmaceuticals this year, we will significantly expand our presence and reach in the branded generics market in Latin America.
Now let me provide a brief overview of our four businesses beginning with nutrition. Our nutrition business has the most opportunity for margin expansion and it's our most consumer facing business. We are a global leader with sales last year of $6.7 billion. Our nutrition product portfolio is uniquely balanced across geographies and product segments. More than 50% of our sales occur outside of the U.S. including 45% of sales in rapidly growing emerging markets. Our product portfolio spans a spectrum of life from newborn infants to older adults.
We have four strategic priorities in nutrition. First, to recapture share in our international pediatric nutrition business following the supplier recall initiative last August. We are on track with our expectations to return to pre-recall share levels in the third quarter. Second, capture market share by launching new products into new market segments. Our R&D investments have resulted in a five-fold increase in the number of new products launched annually since 2008. Most recently this includes a new infant formula product, Eleva, launched in China in April. And we are expanding global capacity with three new manufacturing facilities opening this year, in the U.S., China and India. In fact, our new plant in China opened just last week where we are manufacturing a new Similac infant formula product for the Chinese market.
Our third priority is to grow and shape markets, which is particularly relevant for our leading adult nutrition business. We created this category 40 years ago with the launch of Ensure and have been innovating and expanding that ever since. The world's population is aging and the demographic shift provides a strong tailwind to grow, shape and further penetrate the adult nutrition market.
And finally, to expand our operating margin to fund investments and grow. Over the last several years our discipline and comprehensive focus on improving our margins has yielded impressive results. We improved operating margin in our nutrition business by nearly 300 basis points in 2013 and expect meaningful expansion again this year. Our medical devices business generated $5 billion of sales last year and includes our vascular, diabetes care and vision care businesses. In vascular, our growth strategy is to expand our global leadership position in drug-eluting stents, drive market adoption in MitraClip, our first of a kind structural heart technology, and grow our endovascular business.
In our drug-eluting stent portfolio we have been gaining share in Europe where we launched our Absorb Bioresorbable Vascular Scaffold. We are making significant progress to bring Absorb to three major markets where it's not yet available, in the U.S., Japan and China which represents more than 50% of the world's coronary stent market. In structural heart, our MitraClip device is a breakthrough treatment option for patients suffering from mitral regurgitation which is the most common structural heart condition affecting 4 million Americans. The standard of care today is open-heart surgery, an invasive procedure, or medication which doesn’t stop the progression of the disease. MitraClip is available in Europe and was just launched in U.S. last year and continues to advance in both geographies as we work to build this new segment of the structural heart market.
And in our endovascular business, our Supera stent received U.S. FDA approval in the first quarter. It treats blockages of the superficial femoral artery or SFA, one of the largest and fastest growing segments of the peripheral stent market.
In diabetes care, while our U.S. business is in a year of transition as a result of CMS competitive bidding, our international business continues to grow driven by strong emerging market growth. We are also moving our next generation of flash glucose monitoring technology through development and expect to receive Europe CE Mark in the second half of this year.
In vision care, sales have been growing at a double-digit pace in recent quarters, driven by accelerating growth in our cataract lens business. This business now represents more than 65% of our vision care sales and has been growing well in excess of market growth rates with positive momentum from new products. Our established pharmaceuticals division generated $5 billion in sales last year, entirely outside the United States from a growing portfolio of hundreds of brands. Approximately 60% of its sales are in developing markets with the remaining 40% in the developed world. And with the acquisition of CFR, an even greater percent of this mix will shift to higher growth geographies. This business, particularly in the emerging markets is more like our consumer driven nutrition business than a typical pharmaceutical business. It has a development organization that moves fast to refresh and improve key brands and it markets products to consumers in the developing world who typically out of pocket for their healthcare.
In many of these markets product growth is sustained by brand equity which is established by customer trust in products that are reliably available, of high quality, affordable and tailored to the needs of each market. The operating models in developed markets and emerging markets are quite different for this business. Developed markets have a more traditional pharmaceutical reimbursement environment where we are focused on maintaining profitability and cash flow and optimizing our investment spending. In emerging, we are building winning portfolios and pharmacy channel strategies across our core therapeutic areas of focus, including women's health and gastroenterology, as we are expanding in key growth markets.
A recent example of this is the announced acquisition of CFR pharmaceuticals. CFR pharmaceuticals is one of the leading branded generic pharmaceutical companies in Latin America consistently delivering double-digit operational sales growth over the last several year. CFR will complement Abbott's current presence in Latin America and brings a comprehensive portfolio in branded generic products that are well aligned with Abbott's current areas of therapeutic focus. CFR is also known for its proven ability to quickly develop manufacturing and bring new products to market and in 2013 alone launched more than 200 new products. We will also acquire CFR's manufacturing plants and R&D facilities in Colombia, Chile, Peru and Argentina, which will help us to better manage our sales with our costs in this geographic segment.
Combined with our current established pharmaceuticals business, CFR will establish Abbott as a top ten pharmaceutical company in Latin America and will more than double our presence in the region. And finally, diagnostics is one of our durable growth business. In 2013, this business generated $4.5 billion in sales across three segments, core laboratory diagnostics, molecular and point of care. Diagnostics has been growing at a mid to high single digit growth rate for the last several years, delivering growth of more than 8% last year. Our growth is in part a result of our commercial strategy to provide our customers with a full suite of best in class solutions to help them improve efficiency. Our strength in this segment is supported by the quality of our systems and the performance of our highly sensitive tests.
Faster growing emerging markets such as China, Brazil and Russia represent another significant growth opportunity. For example, China represents a nearly $2 billion market that’s been growing at a high teens rate. We have been growing faster than the market in China due to increase in demand for industry-leading systems such as our ARCHITECT platform. Over the last five years, our discipline and relentless focus on improving our gross margin has yielded impressive results, exiting last year with industry-leading operating margins for this segment of roughly 22%.
Expanding our margins has enabled us to invest in R&D, the engine that will further strengthen our leadership advantage and sustain our long-term growth trajectory. We have multiple, next-generation systems that span the entire diagnostics segment in which we have compete. These platforms have been designed from the ground up and with our customer needs to improve and standardize laboratory operations in mind, include informatics to help labs manage vast quantities of data and allow us to continue to drive growth in this business for many years to come.
So I will conclude with a recap of our investment identities. We have a strong and diverse portfolio that’s well matched to where growth in healthcare is today and where it will be in the future. Our leadership positions are aligned with large and growing markets in attractive demographics. We have built and enhanced our global footprint to have a significant presence in high growth geographies. We are active managers of our portfolio to shape it for growth and to do so with our investor in mind and we strive to provide a durable, top tier growth investment while at the same time providing for strong cash returns to our shareholders.
And with that Ben, that concludes the formal part of our presentation and we can turn to Q&A.
(No Q&A session with this event)
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