Abbott Laboratories (NYSE:ABT)
Q4 2015 Results Earnings Conference Call
January 28, 2016, 09:00 AM ET
Scott Leinenweber - VP, IR
Miles White - Chairman and CEO
Tom Freyman - EVP, Finance and Administration
Brian Yoor - SVP, Finance and CFO
Mike Weinstein - JPMorgan
Kristen Stewart - Deutsche Bank
Glenn Novarro - RBC Capital Markets
Larry Biegelsen - Wells Fargo
Rick Wise - Stifel Nicolaus
Good morning and thank you for standing by. Welcome to Abbott's Fourth Quarter 2015 Earnings Conference Call. All participations will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] This call is being recorded by Abbott.
With the exception of any participants' 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.
Good morning and thank you for joining us. With me today are Miles White, Chairman of the Board and Chief Executive Officer, Tom Freyman, Executive Vice President, Finance and Administration, and Brian Yoor, Senior Vice President, Finance and Chief Financial Officer. Miles will provide opening remarks, and Brian and I will discuss our performance in more detail. Following our comments, Miles, Tom, Brian, and I will 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 2016. Abbott cautions that these forward-looking statements are subject to the risk 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 reports on Securities and Exchange Commission Form 10-K for the year ended December 31, 2014. 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 fourth quarter financial results and guidance provided on today's call for sales, EPS and line items of the P&L will be for continuing operations only. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings release and regulatory filings from today, which will be available on our website at abbott.com. Our commentary on sales growth refers to operational growth, which excludes the impact of foreign exchange unless otherwise noted.
With that, I will now turn the call over to Miles.
Thanks, Scott. Good morning. Today I’ll discuss our results for 2015, as well as our outlook for 2016. For 2015 we achieved our financial objectives for the year reflecting strong double digit EPS growth when excluding the impact foreign exchange and almost 9% growth on an absolute basis, excluding the same sales grew over 9% including strong double digit growth in emerging markets and we continued to expand our growth and operating margins.
Overall, we made good progress against our strategic objectives. I would like to highlight few two key achievements from the past year. In established pharmaceuticals, we completed the sale of our developed markets business and successfully integrated CFR Pharmaceuticals in Latin America and Veropharm in Russia.
The integration of CFR provides the scale, manufacturing and portfolio of breadth to establish Abbott as a top 10 branded generics company in Latin America and actually number one in many of the markets in Latin America. And Veropharm had a similar impact in Russia positioning Abbott among the top branded generics companies in this key market.
We also made significant progress improving our commercial execution, expanding our local product portfolios and driving awareness of our Abbott brand with patients, physicians and pharmacies.
In Nutrition, we achieved double digit growth and share expansion in China with the portfolio of Pediatric Nutrition products that are customized to meet local preferences. In the U.S. we expanded our product offering in the tolerance and up-age categories with the portfolio of non-GMO products providing parents with additional formula choices.
Our international adult nutrition business achieved another year of strong growth as we continue to bold and shape this category globally. And we achieved another year of significant margin expansion.
In Medical Devices, MitraClip achieved sales of more than $250 million and we further solidified our leadership position in the transcatheter mithral valve repair market with the acquisitions of Tendyne and an option agreement to acquire Cephea Valve Technologies. Along with MitraClip, these technologies position Abbott well to sustain our leadership position in this attractive segment of the market.
In medical optics, we continue to launch a number of innovative products that are driving growth and share expansion most notably in the premium len segment. And in diabetes care, we introduced our revolutionary flash glucose monitor FreeStyle Libre in several countries throughout Europe. Consumer response for this product continues to be very positive and we recently expanded capacity to meet the growing demand.
We also made the progress during the year to bring the Libre technology to the U.S. with the regulatory submission for approval of Libre Pro, our professional use device in June of last year.
And finally in diagnostics, the combination of commercial execution, high quality platforms and customer focus solutions resulted in another year of above market growth across those developed and emerging markets.
This business also achieved another year of margin expansion, while simultaneously investing in the development of next generation system platforms across all three of its segments including the Core Lab, Molecular Diagnostics and Point of Care Diagnostics.
So we’re entering 2016 with good underlying momentum. Our businesses have well aligned with favorable long term trends including the continued expansion of healthcare and emerging economy. While there has been some softening in this economies on a macro basis, national policies focused on expending access to care and feasible demographic trends, or driving growth in healthcare which is outpacing overall economic growth in these markets.
The fundamentals in the market and geographies where we compete remains strong, and we expect to deliver another year of strong double digit underlying earnings growth in 2016.
However, a couple of items are impacting our growth outlook on an absolute basis and you’ve heard this all weak, most notably foreign exchange. The rapid strengthening of the U.S. dollar relative to several emerging market currencies beginning in the third quarter of last year means that foreign exchange will again be a growth headwind in 2016.
We're now entering the fifth year of this dollar bull cycle, while we actively worked to mitigate the impact of currency on our results, the impact of exchange on our bottom line would be more pronounced in 2016 due to the mix of currency movements and certain timing effects.
In comparing our 2016 forecast, we were mindful of finding right balance between managing through these transitory currency dynamics in the near term while concurrently making the right choices in appropriate investments to drive sustainable long term growth.
The other notable impact to our 2016 outlook relates to Venezuela, which has been a good market for us for many years. As many of you know, market conditions in Venezuela have become more challenging including high inflation, increasing price and margin controls, regulations on import, and slowing demand.
As a result, our forecast assumes a significantly lower contribution from Venezuela operation in 2016. Brian will provide more specific details on the impacts of currency in Venezuela in a few minutes.
So for 2016, our adjusted earnings per share guidance range of $2.10 to $2.20 reflects another year of strong double digit underlying earnings growth offset by the negative impact of foreign exchange and a lower contribution from Venezuela that I just mentioned.
In this environment, we remain focused on what we control. Our commercial and operational execution, our innovations and our efforts to expand margins. In nutrition, our R&D organization continues to be highly productive and is now developing new products closer to our customers than ever before. We will be opening up several new R&D centers in Asia over the last several years.
We expect continued growth and share expansion in China, Latin America, and other priority markets including another year of strong international adult nutrition growth. And while we've made great progress expanding margins in this business, margin improvement remains a key priority and we continue to see opportunities for steady expansion going forward.
In established pharmaceuticals, our execution has improved significantly and we’re focused on strengthening our capabilities in key channels and geographies, and building a well-recognized added brand with consumers take a permanent role in making decisions about their healthcare.
Internal development programs and local product acquisition are driving a steady cadence of new products in our established pharma business to strengthen local portfolios. In 2015, our productivity of new product launches increased versus the previous year and we expect another strong year at new product launch productivity in 2016.
In medical devices, we expect continued growth and share expansion in our cataract business driven by the ongoing launch and market uptick of our premium intraocular lens product across multiple geographies.
In diabetes care, we recently expanded capacities as I mentioned, to meet the strong demand for FreeStyle Libre in Europe. And we expect to bring this technology into a number of new markets in 2016 targeting in the multibillion dollar global blood glucose monitoring market. And in vascular, we continued to drive uptick of MitraClip and expect to bring it Absorb to new markets through the year.
Finally in diagnostics which remains one of our most consistent growth businesses. We will continue to execute our commercial strategy to drive above market growth at both developed and emerging markets. And as we progress through the year, we look forward to providing more specifics regarding our next generation diagnostic systems platforms as we get closer to launch.
Before turning it over to Brian, I’d like to comment briefly on capital allocations. You always ask me about that and you know that we take a very balanced approach here which rest includes increasing our dividend, share repurchases, and M&A activity.
Last month, we announced an increase to our quarterly dividend marking the 44th consecutive year we’ve increased our dividend. That is only one of only a handful of companies to deliver with such consistency.
Share repurchases have and will continue to be part of our capital allocation mix. And lastly, while 2015 was relatively quiet for us on the M&A front, adding to our business with good M&A remains a key priority. We see plenty of opportunities and we will continue to remain active on this front.
As always, we remain disciplined and focused on finding the right balance of strategic fit and measures of return that will benefit for long term shareholder. I'm sure you’re going to have a question for me later on that topic.
But overall you can see, cash flows remain strong, margins remain strong, the underlying growth of our businesses remain strong. In summary, the fundamentals of the market and geographies in which we compete, all remain strong. And we continue to focus on what we can control.
For 2016, the impact of foreign exchange and the Venezuela dynamics I mentioned earlier are offsetting double digit underlying earnings growth. These impacts while significant are transitory in nature and therefore we remain focused on making the right decisions, drive long term growth for our shareholders.
I’ll now turn the call over to Brian to discuss 2015 results and 2016 outlook in more detail. Brian?
Okay, thanks Miles. Today, we reported fourth quarter adjusted earnings per share from continuing operation of $0.62 in line with our previous guidance range. Sales for the quarter increased 4.9% on an operational basis, driven by strong performances in our branded generics, diagnostics and adult nutrition businesses.
Reported sales declined 3.1% in the quarter including an unfavorable impact of 8% from foreign exchange. The negative impact from exchange was approximately 1.5 percentage points higher than previous expectations due to the continued strengthening of the U.S. dollar relative to several currencies in the quarter.
The fourth quarter adjusted gross margin ratio was 58.2% of sales, up 130 basis points over 2014, driven by continued margin expansion in diagnostics and nutrition. In the quarter, adjusted SG&A was 29.6% of sales and adjusted R&D investment was 7% of sales, reflecting investments in development programs across the businesses including several next generation diagnostic system platforms.
The fourth quarter adjusted tax rate was somewhat lower to previous forecast due to inclusion of the impact of U.S. tax legislation inactive in December. Overall, as we look at 2015, we achieved our financial objectives for the year despite difficult environment. And we delivered strong underlying growth, while continue to make significant progress on our margin initiatives.
Turning to our 2016 outlook, today we issued guidance for adjusted earnings per share of $2.10 to $2.20. While this forecast reflects another year strong double-digit underlying earnings growth, foreign exchange in the Venezuela dynamics that Miles discussed are impacting our 2016 absolute growth outlook.
Let me take a moment to provide more detail on each of these items. As you know in the third quarter of 2015, several emerging market currencies weakened rapidly relative to the U.S. dollar and have continued to steadily weaken since that time. Based on the geographic mix with currencies that weakened and the rapid pace at which these currency decline, foreign exchange will be a greater offset to our underlying earnings growth in 2016 versus 2015.
Additionally in 2015, our hedging programs served to mitigate some of the underlying foreign exchange exposure and volatility. While our program remains in place for 2016 and it anticipate to deliver some offsetting impact to our exposure. The benefit of our hedges have naturally lessened over time.
So the follow through from translational foreign exchange combined with these hedging dynamics, negatively impact EPS growth in our guidance by little more than 10% for the full year of 2016.
Lastly, as Miles mentioned, due to challenging market conditions in Venezuela, our 2016 forecast assumes a significantly lower contribution from Venezuelan operations. This impact lowers our 2016 sales growth rate by almost 2%. And excluding this impact, the midpoint of our 2016 guidance range would reflect adjusted earnings per share growth in the mid single digits even with the more pronounced foreign exchange impact I discussed earlier. As the year progresses, we will provide any relevant updates on our business in Venezuela.
I'll now provide more specifics for our 2016 outlook. For the full year 2016, we forecast operational sales growth in the mid single digits. Based on current exchange rates, we'll expect a negative impact at around 4% on our full year reported sales, which would result in reported sales growth in the low single-digits for the full year 2016.
Scott will provide more detail on 2016 outlook wide business in a few minutes. The forecast in adjusted gross margin ratio around 57% of sales, reflecting the negative impact from exchange was partially offset by underlying gross margin initiatives across our businesses.
We forecast adjusted R&D investment are somewhat above 6.5% of sales and adjusted SG&A expense of around 30.5% of sales for the full year. We forecast net interest expense of around $125 million, up over 2015 primarily due to higher U.S. interest rates and lower forecasted interest income in certain countries.
We forecast a loss of approximately $25 million on the exchange gain-loss line of P&L for the full year. And we forecast around $10 million of non-operating expense for the full year of 2016.
We forecast adjusted tax rate of somewhat above 18.5% for the full year of 2016, similar to 2015 and reflect in the effect of the U.S. tax legislation inactive in December.
Before I review our first quarter outlet outlook, I'd like to provide some context for our forecasted pattern of quarterly earnings growth in 2016. We forecast underlying adjusted EPS growth in double digits for each quarter of 2016. However, in absolute terms for foreign exchange in the Venezuela dynamics, we'll will have a more pronounced impacts on our results in the first half of the year.
We expect the pace of both sales and the adjusted EPS growth to progressively accelerate throughout the year. So for the first quarter, we forecast adjusted earnings per share $0.38 to $0.40 cents reflecting double-digit underlying growth, which is more than the offset by the impact of foreign exchange and the lower contribution to the Venezuela operations.
We forecast operation sales growth in the low single digits. And our current exchange rates, we expect a negative impact of exchange around 6% resulting in a reported sales decline in a low single digit. The Venezuela dynamics that I discussed lowered our first quarter operations sales growth forecast by around 3 percentage points.
The forecast in adjusted gross margin ratio approaching 57% of sales, adjusted R&D investment of somewhat above 7% of sales and adjusted SG&A expense of around 34% of sales in the first quarter. And we forecast net interest expense of around $25million in the first quarter.
In summary, we achieved strong growth in 2015 despite a challenging environment. Our business at end of 2016 with good underlying momentum and we continue to execute well on our margin expansion initiatives. Our underlying earnings growth forecast is to remain strong in 2016, very similar to the underlying earnings growth we saw in 2015.
With that, I'll turn it over to Scott to review the business operating highlights now. Scott?
Thanks, Brian. Today, I'll provide an overview of the fourth quarter sales performance in 2016 outlook by business. As I mentioned earlier, my comments will focus on operational sales growth.
I'll start with diagnostics where sales increased 7% in the quarter. In core laboratory diagnostics, international sales increase nearly 8% driven by double digit growth in emerging market.
And in the U.S., we continue to achieve above market performance with growth of more than 6%. The molecular diagnostic sales grew 3%, led by strong growth in our core focus area of infectious disease testing. As expected, U.S. sales were impacted by the planned scale down of our genetic business.
And lastly, point of care diagnostics where sales increased nearly 9% in the quarter. U.S. and international growth were driven by continued market adoption of i-STAT, our hand-held device which provides critical information at the patient's side helping healthcare providers choose the best treatments in a variety of care setting when minutes matter the most.
In 2016, we'll continue to leverage our best-in-class model and provide customers with a full offering of solutions to help them most efficiently operate their businesses while improving care. We expect global diagnostics sales to increase mid single-digits on an operational basis with both the full year and the first quarter of 2016.
In Nutrition, global sales increased 5.5% sales in the quarter. Pediatric nutrition sales increased approximately 4% and were led by continued market uptake of Eleva in China and Similac Advance non-GMO in the U.S. As expected, international pediatric nutrition were all impacted by a difficult comparisons versus the prior year when sales increased more than 25% driven by market uptake of product launches in China and South East Asia.
In adult nutrition, sales were led by 10% international growth, including double digits operational growth in several Latin American countries. U.S. performance was led by growth of venture in the retail and institutional segments of the market.
In 2016, we'll continue to focus our efforts on capturing share with locally relevant pediatric nutrition products and growing and shaping the adult nutrition category globally. For the full year 2016, we expect global nutrition sales to increase mid single digit on an operational basis.
It's important to note that the Venezuela dynamics that Miles and Brian reviewed most significantly impact our forecast for nutrition and established pharmaceuticals. Excluding this impact, we forecast operational sales growth for our global nutrition business would be mid-to-high single digits for the full year 2016. For the first quarter, we are forecasting global nutrition sales to increase low to mid single digits on an operational basis.
In medical devices, as expected vascular sales was relatively flat for the quarter. MitraClip, our first-in-class device for the treatment of mitral regurgitation once again grew strong double digits. And Cephea, our innovative endovascular stent continued to perform well. This growth is mitigated by market dynamics and the coronary stent market.
In 2016, we'll continue to drive market uptake in MitraClip and Cephea and expect to bring Absorb, our fully dissolving stent to the U.S. market. For the full year and first quarter of 2016, we expect global vascular sales to decline whole single digits on an operational basis.
In diabetes care, sales growth was again driven by strong international sales of FreeStyle Libre in Europe. In 2016, with the recently completed capacity expansion, we look forward to bringing this breakthrough technology to more consumers around the world.
For the full year 2016, we expect global diabetes sales to increase double digits on an operational basis. For the first quarter, we’re forecasting global diabetes sales to increase mid-single digits on an operational basis.
In medical optics, global sales increased 2% has strong performance in the cataract business, notably in the premium lens segment was partially offset by dynamics in refractive markets. In 2016, we'll continue to drive updates of our innovative premium intraocular lenses and we expect global medical optic sales to increase low to mid single digits on an operational basis for both the full year and first quarter of 2016.
And lastly, Established Pharmaceuticals or EPD, where sales again increased double digits. Sales growth in the quarter was led by strong performance in several markets, including Russia, India and China.
For the full year 2015, EPD sales grew double digits operationally with and without the impact of recent acquisitions. In 2016, we'll continue to broaden our portfolio with globally relevant in products, remain focus on successfully building our presence and scale in key countries are focus.
For the full year 2016, we expect EPD sales to increase mid-to-high single digit on an operational basis. As I mentioned earlier, Venezuela has a significant impact in our forecasted EPD growth rate. Excluding this impact, we would forecast operational sales growth for EPD in the low double digits for the full year 2016.
For the first quarter, we're forecasting EPD sales to increase mid single digits on an operational basis reflecting double digit operational growth excluding the impact of Venezuela.
In summary, we achieved another year of strong underlying sales and margin growth, and are well positioned to maintain that type of momentum for the full year 2016.
We will now open the call for questions.
[Operator Instructions] Our first question comes from Mr. Mike Weinstein from JPMorgan. Sir, your line is open.
Let's start with Venezuela and maybe you could just give us a bit more in terms of what you're doing, one, with your operations there; and two, the change you're assuming it sounds like you're marking to market the business basically at different exchange rates. So can you just walk through financially what you're doing? And again, why that's blowing the business as much as it is in 2016?
Hi, Mike. This is Tom. I don't – I’ll talk about what's going on for us in the country, but I want to make it very clear that we're not changing our exchange rate assumptions for the country. This is really about what's happening to the market through economic activity of those markets, and really demand and ability to pay for products.
The oil price was high at the beginning of the year, it declined throughout the year and the top markets became more challenging and we would talk as Scott talked about and Brian talked about significantly lower volume as we exited 2015.
And as Miles indicated in his remarks with price controls, very high inflation. And when we look at the remainder of 2016 going forward, we see very challenging conditions and much lower volumes in the country.
So we're focused on supplying the market, more focused on medically critical products. Our products are important to the market, but just the profitability of what we would expect for the year from that activity is a very low contribution compared to what we experienced largely in the first half of 2015.
So that is a situation and I think it will basically take some volatility out of our forecast, but reflects the reality of the market we're dealing in.
So two more fundamental follow-up. So one, the Pediatric Nutritional business had a tougher comp in the fourth quarter internationally on optimum product launches and particularly in China. Can you just separate out for us the tough comp versus the underlying growth and degree to what you think you're seeing maybe slowdown in any of your markets?
Sure Mike. I would say in international, as particularly and the slow down we’re seeing on the surface, nothing has changed about our underlying momentum here. If you go back to fourth quarter of 2014, that was the period where we were launching our innovations particularly, Eleva and QINTI into the market. And as you know, Eleva has had great success in the portion of the market that it's playing in.
So there is a little bit of a tougher comparison, fourth quarter '15 over '14. If you blend it out in China there on the average, Nutrition business grew over the mid teens for the full year. And so that's more reflective of the performance for this business for a year and it's still ongoing. We still have the momentum there. We still have plans for further opportunities of how we compete and how we've been priced to the various channels. So nothing has changed about the momentum and it continues in the 2016.
So Miles bringing you in here. So all this discussion, the underlying business if we can pull out Venezuela and we can pull out may be one or two other smaller items. The underlying business hasn't changed, but the environment has changed in some places and the price update for prices for assets has changed. Have your priorities on the capital allocation and the M&A question, have your priorities changed at all in the last six months?
No. Let me go back, Michael and paraphrase that for you. The frustrating thing and I think it's frustrating for a lot of multinational companies that are U.S. based is the underlying market dynamics remain strong in a lot of places. Every morning we get up, we see CNBC. Everybody brings their hands about China, but whether China is 7% growth or 6% growth, 6% is way bigger than the rest of the world. It's a fundamentally strong market for us as our practically all of these emerging markets.
Now, the oil-based economy, the ones we were extremely dependent on oil, take Venezuela – okay, there are different stories. And the volatility, unreliability and sustainable market there is different than just about anywhere in the world.
So okay, there was an outlier. And every year there is going to be some outliers somewhere. And I think if you're in a broad mix of currencies and a broad mix of countries and geographies as a multinational, somewhere something is not going to be great. But the fundamentals of the markets particularly for us in healthcare are good.
And yes, translating that back during this period it's unusual, it's frustrating. I mean none of this have seen this kind of oil price in couple of decades, none of us have seen this kind of currency pile on in a long time.
So okay, that said, we all know that every multinational CEO has said in the last two weeks in his earnings calls and we all see it, we all experience it.
Now, going back to your next question, has my expectation of our underlying momentum changed? No. Has my priority changed in terms of M&A activity? I'll tell you one thing about it that's changed a little bit. We've been looking at properties largely internationally. And I'd say, I'm probably balanced in that a little bit back in other way. I don't think in the past it was pretty hard in a lot of expansion opportunities in branded generic pharmaceuticals.
And I think there are opportunities there. But I think as you and others, we've watched those valuations over the last year when deal heat turned and I can tell you that there was still one particular one that we were involved in an auction for and the valuation that that property went for, we did not win it.
But the valuation that property went for was non economic. I mean just plain non economic. I would challenge the buyer to explain where the economic return was in that particular deal. They obviously have their reasons and they obviously saw something rest of us didn’t appreciate. I’d say is an understatement but the evaluation are at a level in some cases that you have to question prudence.
And I think at the end of the day while we got strategic reasons we want to expand our footprint in different places. Those valuations when we redeploy the capital on behalf of our shareholders have to make some sense. And I don’t think that we are anymore, and I think we are prudent, I think we’re disciplined, I think we’ve made good deals in the past.
I've gone through so much of this where I've heard we paid too much, we didn’t pay enough, we got a good deal et cetera. But I think some of things I saw last year said but I don't think I mind of losing that one. I don’t think I've minded not participating that one.
So I think right now, first of all I don’t see a lot that people are offering up for sale in effect and you know the old maxim; everything is for sale at some price. Well the price of some of these things would be for sale at isn’t prudent, it just isn’t prudent.
So I think you have to step back and say we’re not in that zone. We’re not going to be that irrational in some cases and that’s me, I mean I hate that I’m going to see some of this in print later but I think that.
So, you look at some of the currencies and some of the weakening of the currencies, we would do a lot of those deals in local currency, in fact almost all of them in local currency and I’d say based on where those currency rates are today you could say it’s time, this is the time because there is not as much currency rift in a purchase in that particular market et cetera.
But I think if I would think about mix of geographies and the mix of currencies and so forth that we currently have, I'm not sure investors would applaud further wading toward it just now. I think there is a prime issue here.
I’d tell you, having said that if there was a right opportunity and the right place and I believe that we are strategically very important to us or real opportunity for investors and you know the balance of what we first saw in both of that market in the position, currency and so forth. They are all lined up and the valuation looked good, I’d probably do that deal but that was a step up of a lot of ifs right now.
So you’d say what's changed? I’d say where I’m looking and what I’m considering it hasn’t changed, it’s just shifted in some of its balance. I think, I’ve got all the same sort of pharmaceutical opportunities on my radar screen but I’m prioritizing some others now that are maybe more important I think in this market, this environment in terms of strengthening our businesses.
Now I’ve heard other CEOs say the same thing, I’ve heard a lot of people say actually, I’ve mostly heard bankers say that it’s a very robust, everybody is out there trying to buy stuff market. I’ve heard it more from bankers than from other companies reporting.
I don’t think there is that many things out there for people to consider in our spaces. I don’t think there is that many properties, I don’t think there is that many assets, I don’t think there that much to consolidate. So I think it’s fairly predictable particularly for an analyst in this space as you are to predict the kind of things that people are going to be looking at there is not a lot out there to consider.
So I think for us we know what our strategic priorities are. We know what can help our business. We know where there's real plusses and opportunities and the question is whether or not the other parties whoever they maybe see the same sort of opportunity and we can come together on an overlap of valuation and make something happen.
I know that sounds like textbook platitude but that’s really what it is. There is a lot of people at the dance looking at each other and trying to decide whether they want to dance but I don’t think there is that many opportunities to be made and everybody is in the same environment where they think their own evaluations are low and they are looking at evaluations from last year that will turn a high and I think you’re in a zone where people are adjusting to what's my value.
And so having said all that, am I any less focused on it? No, I’m probably more focused on it if anything. But I’d say we’re also pretty analytical about what we can do with the businesses and what's the right valuation and what's the right timing and so forth because you know we don’t get swept up in deal heat. We’re fairly strategic about it and I know that a lot of people think that a lot happened last year and we should have been in the midst of it but I didn’t see anything go by that I felt particularly bad about not being in the mix of it.
I mentioned there was one particular one we were in the hunt on and the evaluation at the end was so high, I don’t mind missing it at all. So I realize that’s a long ramble for you Mike but that probably gives you a fair degree of insight into how I’m thinking about it. We’re definitely not inactive that’s for sure.
Listen, I have follow-ups, but I'm going to let some others jump in. Thanks, Miles.
Our next question comes from Ms. Kristen Stewart from Deutsche Bank.
Good morning. Thanks for taking my questions. Just to kind of follow up, I guess, along Mike's line of thinking, I know you talked a lot about more from a geographic point of view. I was just wondering if you could talk more about the balance of Abbott from more of a business mix point of view. Has the way that you've looked at the mix of Abbott from that perspective changed over the last kind of year or so, really since the spin of AbbVie?
And if I look at the growth rates for this year, medical devices, the growth operationally was 1.5. If that division were to be separated out, I just look at Abbott as - it would be even stronger as a company and how do you think about that franchise and strengthening it, or just kind of the composition of Abbott today and the future.
Well I think I’d start with that would be all about strengthening rather than separating out, but we're committed to all four major segments that we have in the company. One of the important things about those segments is they are in relative balance in terms of size, sales, profitability et cetera. They have all got you now somewhat different dynamics and they have also got a lot in common, because the EPD and nutrition globally, they share a lot of channel dynamics and so forth devices, diagnostics, I mean there is a lot of different things going on with these businesses.
But I’d say first is balance matters in the mix with the investment identity of the company for a investor because we want to be reliable performer steadily over time. And as you know our proprietary pharma business avaricely grew to a terrific size and based on one product in particular. And so we were out of balance as a company and so we split into two companies. But we got balance in these businesses.
That said, you know I’d say from an M&A perspective and the places where we are looking to be perfectly fair, we are not looking to do anything with regard to M&A in our nutrition business today. I mean if something came along opportunistically we would look at everything but the fact is that business is - that’s an organic business for us and all of our performance objectives and things we want to do in the nutrition business globally are organically driven and we think we’re in a good position for all of that.
So the kind of investments that we make in those businesses and we’re a capital plant et cetera in the right market for the world and managing supply chains and so forth.
The other three businesses are each a different tale, you know diagnostics I’d say we got a very strong business here. It’s actually a diverse business. It’s wanted in a segment of diagnostics and if we opportunistically could add to it we would. Obviously all the criteria you look at have to make sense but that’s a business where we don’t really have to but if we had opportunities we will.
EPD similar, you know we’ve got a gem of a business there and having done a lot of things to shape that business in the last several years, we are in the right growth markets, we’re in high growth markets, we’re in markets where the profitability and the market development, the retail facing, all the structural and channel dynamics for a brand of generics are good.
We’ve identified like let’s say in priority 15 countries in particular that meet our criteria and we’ve got strong positions and most of those particularly important ones and we’re always looking to enhance our footprint in those markets if we can and expand our brands in those markets.
Latin America was a great example of that and so there is still many geographic opportunities to do so, but I always make the distinction to investors and others that it’s really where we can distinctively differentiate branded generic pharmaceuticals which means retail and channel and so forth right till the end, other Latin American countries and so forth.
And so when we have those opportunities it’s great to add on but what we’ve got is core business now, a very strong branded generic international largely focused on emerging market business where there is tremendous tailwind of market growth.
So that’s one that’s opportunistic. And then devices, I’d say it’s some of both. We look at that, we’d always want to strengthen that business, we do wish to strengthen that business, there are a number of ways for doing that and obviously there is organic in-house and then there is our venture organization where we're building a number of small companies who are investing in other early stage companies and so forth and building our pipelines for the future.
And then finally, opportunistically, there are available opportunities where it fits our market segments and so forth, and then there is always M&A. So we are always mindful of those opportunities. It gives you a sense of how we think about each of those segments. Would you think about something completely unrelated difference? Probably not. There are too many opportunities to build or strengthen the ones we have, and their needs from a strengthening standpoint vary. Some have more need to have more breadth of product than others and some are purely opportunistic.
Okay. And then just thinking about -- I know one of the areas that you've highlighted earlier was building out the capacity for FreeStyle Libre. What about the U.S. timing for that and is that going to be a consumer product, or is that just going to be more of the physician product?
Well, I think it depends on what timeframe you're asking. And it's going to be both, eventually. I mean, right now, I want the fastest regulatory path possible. This product has been exceptionally well received in Europe. Spectacularly well received I should say. Consumers and users and diabetics and so forth have just given us an over whelming positive response. So that's good and we're just in the process now to releasing all the new capacity we invested in, in the last year.
And we got the next way to capacity expansion underway. So it's kind of one of those great challenges where I want to play from my own perspective. The diabetic community in United States wants this product. And it's a regulatory pacing issue here. It wasn't so in Europe. And I would say no more about that, but I'm in a hurry because we know the value of the product. We know the reception of the product. We know what the physician community reception of the product is. We know all of that and the value proposition of this product on top of the medical proposition is just fabulous.
I have great expectations for it. I'm excited about it. And there is sort of two dimensions to that. One is enough capacity, which for a while we'll have and then we'll have another tranche coming on. And the regulatory process for how fast we can go.
Any sense on when the first product could hit market in the U.S.?
I'm one of those superstitious people that no matter what I tell, I'm going to be wrong. And so I don't want to jinx anything. So I'll say, I would optimistically hope towards this year, but I don't know.
Okay, fair enough. Thank you very much for question.
Our next question comes from Glenn Novarro of RBC Capital Markets. Your line is open.
Hi, good morning, guys. Miles, first question is on the Mylan stake. I'm wondering if you'll give us an update on this stake. What you're thinking is -- in the past you've said you're not going to be a long-term holder. Are you any closer to selling that stake? And will the sale be associated with some M&A? Thanks.
Well, good news. You're right. We're not going to be a long term shareholder of Mylan. But the good news is, we don't have to sell it right away. We have the freedom to sell it. We just don't have an immediate reason to have to. So I'd say we can leave it in Mylan shares or we can leave it in cash, either way. And you ask if it had something to do with M&A. Well, obviously that might trigger it. I think it depends on what the price of Mylan is in the market and the manner in which we might market our shares and so forth. There is a couple of dynamics there, but I would confirm.
No. We don't intend to be long-term Mylan holders. And well, we don't think holding this back is probably trigger of M&A activity. Maybe a little evaluation, but we're not particularly hung up on value right now. We did watch the entire Perrigo process and hoped for a path and we though until that stabilize and was finished, there was no point in being in the way of that. So that happened, that stabilized, that's finished. There is a stable market now for Mylan shares. And we'll just wait and see what triggers it. But we otherwise have no reason to move one way or other until there is some trigger like M&A, I would guess.
Okay. Let me just follow up --
If the price were to rocket north, we'd probably view that as a trigger too, to be obvious.
Let me ask a specific question on your vascular business because, if you strip out currency, I think over the last 12 months, even going forward, most of the businesses are on track, at least performing in line with our expectations. But the vascular business continues to come -- at least relative to our expectations, continues to come in below. And I know you highlighted Absorb, but a lot of our channel checks are not very positive on Absorb.
So I guess my question is what's the commitment to this vascular business? Is this a business that you need to build up through M&A and the reason why we haven't seen a lot of M&A, is it because the targets have still unrealistic valuations? Thanks.
Well, I'll say couple of things. First of all, we're committed to the business. And I think these are the bigger market conditions here. If you look at the markets around the world, not just the U.S. but literally every major country in the world, the markets have stabilized among competitors. Share doesn't move a lot. It does moves a little. The provisions in these spaces -- they take a new product and they experiment with it a little bit and that's about it.
The innovation here is at a point where I'd say, the incremental value recognized by the healthcare system is limited. If you think about what drug code it stands for and so forth have done in the vascular space, it's been a tremendous boon in the treatment of patients. But I think now what we see is this market is far more driven by cost and prices in either countries or hospital groups and others, trying to manage the overall cost of healthcare.
So I think all of us see the same dynamics where we're increasingly challenged on more value proposition than just innovation. And I think increasingly the payer, whether it's government or purchasing people or insurer, whatever it is are increasingly more influential here than preference of physicians.
You say, well, those aren't very good dynamics. Well, they are not bad dynamics either. We have to compete in this business just like we compete in a lot of other businesses. And I think we and our competitors in this business are all broadening our product lines or innovating in other surrounding spaces and broadening those offerings in the space. And there is still a lot of room to innovation, but it may not be specifically just on the stents.
So that - what behooves us is to expand our business and to some degree, or to a large degree, that is M&A. And in our case it's been a lot of small-ball M&A and look to expand around those businesses might require to Absorb those kind of things or incremental. Well, MitraClip is very significant that way. We look at expanding into structural heart or heart failure or other categories, and we're trying to build our breadth in those other -- let's say, surrounding spaces that way.
I don't think that's very different for any of the companies in this business, worldwide. I think it's been difficult for any market that have been kind of a robust-innovation driven growth that this one did back in early 2000s. It's a different market today. It's a different market everywhere, today.
So is it a slower growth market? Yes. Is it still a very attractive market? Yes. It's still a very profitable market for all participants. And it's why it gets a lot of pressure from a cost standpoint from payers, etcetera. I don't think that's a secret to anybody. So while other make it a --performance of the business and say, gee, it's a little lower expectations. I'm beginning to think its just robust adjusting our expectations to sort of a reality of the value propositions in the market today.
And so I think it's a very strong business, it's a very healthy one in recent that respect. We still invest quite substantially in R&D and innovations there, and clinical trials and so forth. We get innovations that are in R&D and in the clinical space and a lot of investments around it. So would it benefit from a much broader footprint?
Well, it probably would. The question is how to get to that broader footprint. And I think the current medical device space broadly defined today, there is either a bunch of big companies or bunch of little companies. There is not much in the middle. And the couple of things in the middle are extremely highly valued relative to their current performance. And I think there is a lot of speculation or question about whether or not that kind of value will play out.
So it will just evolve in little time. We've made a lot of investments in a smaller companies or segments, as you know, whether Tendyne or Cephea or others to expand our footprint here. So I think -- I believe in medical device space right now and long term, but I don't think it will be the same kind of space it was10, 15 years ago.
You had mentioned priorities. Is vascular higher up on your priority list now?
Well, that implies it wasn't before. I would say the device space has always been high on my priority list. And whether its -- the vascular space or the optic space or whatever, this has been high on priority list for a while.
Okay. Great. Thank you, Miles.
Our next question comes from Mr. Larry Biegelsen of Wells Fargo. Your line is open.
Good morning. Thanks for taking the question. It's just a one clarification question and then two real questions. On the emerging market growth in Q4, can you give us the trend of the organic constant currency growth for this quarter, please?
Yes. Larry, if you look at the quarter and you take out the impact of what we talked about a little bit slow in Venezuela throughout the year, we are in the double-digit range for emerging markets across Abbott's businesses. The emerging market momentum --
Sorry, Brian, that was for Q4 2015?
Q4 2015. And for the four years as well, double-digit growth to the underlying momentum continues in the '16 as well.
Okay. Thanks for that. And then so for my two real questions, one is on deal size. Miles, you've talked about in the past a sweet spot of $5 billion to $7 billion. That's one thing you haven't touched upon this morning. Any color on that? Is that still the case? And then I had one follow-up. Thanks.
In reality, we've got a lot of capacity and it just depends. We've obviously done a lot of small things and small can be measured in a lot of ways. I can remember when I thought a $1 billion dollars was huge. Now people seem to think of that as dinky. We've done a lot of things smaller than that and also mid size -- I don't feel constrained at $7 billion. I don't feel constrained at $8 billion or $10 billion. I don't feel constrained. So I'd say look if the opportunity is right, the strategic fit is right and the valuation is right, I don't feel constrained by size right now.
That's very helpful. And then I hope you understand the spirit of this question, because it's kind of a question that we'll probably get today. But I was struck by your comment earlier, Miles, when you said every year there is some outlier somewhere when you were talking about Venezuela. And I think, in the past, Abbott would absorb those outliers. So I guess why not now and what can you do to kind of mitigate that in the future? Thanks.
Well, I think that's a good question. And I'd say what we always do everything we can to mitigate. Here is what's different this time. Last year exchange was a strong headwind for any U.S.-based multinational across the board. And I recall at this very time last year from December to now, you'll recall both oil and exchange kind of hit, kind of sudden hit accepted the oil price drop at that point was a very high level -- much higher level than where we are today.
But there was this sudden hit in sort of late fourth quarter '14 and then in early '15, and everybody scrambled to readjust their ETF guidance for the year to try to deal with what they saw coming as currency and was already happening. And a lot of companies dialed back to single digit or whatever and laid it on exchange and so forth, which was valid.
In our case, we said -- we think we can navigate through it and we did. And we had extremely strong underlying growth in our market as we still do. And it wasn't just double digits. It's been healthy double digits all year long. And so in our case, we were able to mitigate and off of lot of that exchange all year long and still deliver what was frankly very differentiated higher growth than many, many of our peers, even multinational peers not in healthcare.
And what we got now is another year on top of that, okay, same sort of thing. And if you look at the exchange rate graphs, who would have thought these exchange rate could in a lot of cases, be even bigger. Even bigger exchange rates -- how we want to translate it to have stronger philosophy on the other side. And then on top of that, nobody predicted $25 to $30 oil. Now, that's a curve ball for the whole world.
As so when you throw that curve ball in there, it dramatically unbalances the mix of their currencies because of the oil-based economies where lower oil prices really affect the underlying performance of the country.
So you take a country like Russia or Venezuela or Saudi Arabia. Now these are countries, they are all strong countries for us. And to different degrees they’ve been impacted by their own oil revenues and therefore their own ability to pay for products.
Now, having said that, is Russia still a strong market for us? It is. Do we have the same kind of difficulties in Russia that we have in Venezuela? We don't. It is a fundamentally good market, strong underlying market et cetera. The only thing it’s not strong is the Ruble which is dramatically weaker versus the Dollar than even a year ago.
And so there is this disproportionate imbalance in the pressures in the currency basket if you will from a little handful of countries where they already had currency translation, challenges just like the rest of the world. Except that they have oil dependence on top of it which amplifies it even more.
And when you start to stack up all of those things, you’ll say, okay, could we navigate through this? And the answer is, we could. I can cut a lot of expenses, I can delay a lot of investments. There is a lot of things that frankly, I have the discretion to do. We, as a company have the discretion to do.
And I could then say to you, we’ll either have 5% earnings growth or high single digit earnings growth, but in our judgment, this year is so unusual this way with the ongoing depth of currency walls and the unusual circumstance of oil prices and its impact on its economies, that I would look out and say, I don’t think it’s prudent to compromise our ability to the laughter all this underlying growth for one year. In suspect it’s more prudent to take out Venezuela out of the assumptions.
It’s more prudent to take that one out and keep right ongoing, and I think if you believe in the underlying strength of economies around the world, the ones that are delivering growth, and if you believe in the underlying growth of healthcare and those economies, and you believe in the underlying growth of all our products, if you believe in Abbott’s ability to continue to access all that growth, then my judgment was okay, I’m going to roll out of the pocket here, take Venezuela out of the assumption. If I hadn’t taken Venezuela out of the assumptions, I'd be telling you right now that you are going to have mid-single digit growth on the top and bottom line.
And you know something you think that was terrific in this environment. And if you compare this to all the other multination in our phase or, frankly, other multinational species, they’ll tell you that’s right now with everybody else.
So in this case we said, if don’t want to artificially compromise our investments in a lot of these businesses, whether it’s an SG&A investment or R&D or whatever, because of Venezuela. So I think I’m going to take that one out and keep right ongoing because I believe in the longer term growth prospects of these economies in these businesses, and I’m not going to compromise that for couple of quarters in Venezuela, so at the end of day, could we manage through it? Yes.
And you know this. If you look back at even 10 years of track record of Abbott, it’s absolutely been reliable at double digit bottom line and high single-digit topline unlike almost any other large, diverse multinational out there.
We’ve been a very reliable performer that way in a very diverse world. So I don’t say all that defensively, even though it might sound like it. I look at the world and say man, this is like a total different circumstance that anyone of us have ever seen. And that’s going to make a judgment of how far do I go to push off what we ought to be doing to sort of wait out this oddball storm we’re in.
And I think there’s a lot of people who project oil prices are going to stay down for a long time. And yet everyone says, yes, but what is down. And At what point do these oil driven economies start performing better, 60 bucks, 70 bucks, 50 bucks?
There is different thresholds where the performance of economy change dramatically through a lot of different businesses in the world, not just us. In our case, healthcare is pretty good, no matter what the oil price is. The dynamics of Venezuela are unique. They are unique. And even the Saudis. Do they still spend on healthcare? Yes, they do. It’s still a very strong important market for us and so is Russia and so on.
So I don’t know, that’s a long round of a way of saying, we made a deliberate decision. It was discretionary. Could I have made the decision to say, I’m going to deliver high single-digit earnings no matter what? Yes probably, but I’d have had to compromise the underlying momentum and whereas I didn’t think it was prudent.
For exchange, yes we can manage exchange. Venezuela, I think it’s more prudent to just take Venezuela out of the mix in terms of what our expectations are and that’s an unusual anomaly. I challenge back to 2015, we lived through exchange, can we live through exchange again? Yes we can. And the single biggest in difference in our guidance for this year is actually Venezuela.
I don’t know if that answers your question but that was my judgment you know it’s not an inability, it’s more of a decision. If you look at our spending rates and stuff in our go forward guidance our spending rates are healthy.
Very helpful, thanks Miles.
The next question comes from Mr. Rick Wise of Stifel Nicolaus. Sir your line is open.
Thanks for the question. Miles, hard to resist just asking one more question on Venezuela, and I totally understand the point you were making there. But you sort of said in your last comment that maybe a quarter or two of headwind. Wouldn't it be more prudent to think this might be a couple of year issue and might be structural? And then just as part of that, maybe for Brian, is the simple monkey math on this - you're really growing mid-teens, some of that 15%. If Venezuela is a 5% hit to EPS growth and FX is 10%, that's what you're really growing on a sustained basis.
Yes let me deal with your Venezuela question first and then I'll let Brian wrap up with, close on what he just said about our growth rate. You know you could be dead right about Venezuela, I don’t know but here is the difference for us. We’re healthcare company and among our businesses there are products that are medically necessary and we have to pay attention to medically necessary.
We don’t have to lose money all the time, we don’t have to be irrational, for whatever reason but we’re mindful that we’re a healthcare company. We’re mindful that we have medically necessary products. We’re mindful that we’ve been in Latin America and in Venezuela for decades and a lot of times in the past in decades, foreign companies have exited those countries immediately when the economics turned sour.
And the long term commitment to that continent, the governments of those countries and the healthcare systems of those countries, they know that and they recognize that. Abbott has never done that in 90 years in Latin America and we are a fundamentally large healthcare provider in Latin America. So our judgment was to make these decisions one step at a time as we see how circumstances develop.
It’s a pretty big decision that we’ve taken just to say we’re going to take the sales and profit expectations out of our expectations for the year so that our investors, frankly you’re getting news today that we’re taking it out of our expectations right, and yet all I’m trying to do here is de-risk your expectations, de-risk your riding the roller coaster volatility here with that particular country, because that one’s unique.
And so we just chose to take it out of the estimates because we know we’re going to continue to have medically necessary products there but that’s going to be in our view at a much lower promotional level even in the past.
So for right now I think that’s the right prudent place to be for that change I suppose anything to change. I hope the change is more favorably frankly but I’m not listening through the graveyard, I just know that they are in a very tough circumstance as a country and they are volatile, they are unpredictable and it’s not a very reliable market as markets go.
So I think this is the right step, you could say we shouldn’t just go a lot further and I’d say you know you could say that if you were just in some common industrial consumer or whatever good but I don’t think as an healthcare company you can quite do the same things.
So, I think we have to be a little prudent here about the medically necessary part, that’s why we’re where we are. And Brain you can address Rick’s final comment about underlying growth rate.
Sure. Rick, when you think about Venezuela and a decision to derisk this and just assume for a second if that’s your reality, your growth rate it doesn’t change. Your growth rate will actually become better as you move through time, so nothing’s changed about Abbott’s growth perspective, they may even become better.
When you think about what I’ve said and what you’ve modeled in '15, you know that we had mid-teens underlying growth not for the impact of foreign exchange and we take these things that we talked about into account be about the de-risking of Venezuela on what it means to our earnings, as well as the FX, you are going to get right back to the mid teens.
Rick, I think you did a better job summarizing than Brian did
Thank you, operator, and thank you for all of your questions. And that concludes Abbott’s conference call. A replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor website at abbottinvestor.com, and after 11:00 a.m. Central Time via telephone at 203-369-3630, passcode 6422. The audio replay will be available until 4:00 p.m. Central Time on Thursday, February 11. Thank you for joining us today.
That concludes today's conference. Thank you for participating. You may now disconnect.
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