Abbott Laboratories' Management Presents at the Wells Fargo Securities Research & Economics 2013 Healthcare Conference (Transcript)

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Abbott Laboratories (NYSE:ABT) Wells Fargo Securities Research & Economics 2013 Healthcare Conference June 19, 2013 10:05 AM ET


Thomas C. Freyman - EVP, Finance and CFO


Lawrence Biegelsen - Wells Fargo Securities

Lawrence Biegelsen - Wells Fargo Securities

Good morning. I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my pleasure to introduce this morning Abbott. With us, we have Tom Freyman who's the Executive Vice President, Finance and Chief Financial Officer and we also have Brian Yoor who leads the Investor Relations effort along with Tina Ventura who's Senior Director of Investor Relations.

So the format is going to be a fireside chat style and I'll ask a series of questions. And if anyone in the audience has questions, just raise your hand and we'll bring a mic over to you.

Tom, I thought a good place to start would be with the separation complete and about six months under your belt as the new Abbott, to hear from you how things have gone if you could provide some examples of things that have progressed ahead and maybe things that have progressed maybe behind schedule?

Thomas C. Freyman

Sure. Well, as you know, we separated Abbott into two companies at the beginning of this year. We're really proud of how we delivered on the commitment there, on time and I think both from a strategic perspective and really the market reception of the overall concept of the separation has been very positive. Both companies, I think, are off to a good start this year both in terms of share performance but also in terms of their operating performance as each reported in the first quarter. So I think overall the separation has gone well.

It is quite different. As we sit in this company and I've been with the company over 30 years as a combined organization and it does feel very different today as you look at the mix of our business. Previously, we were very focused obviously in the pharmaceutical sector. The developing world was a much more important part of the company. Today, we're 70% ex-U.S., 40% emerging markets and businesses that previously had less focus because of the emphasis on the pharmaceutical business are getting a lot more attention both from investors and even internally in terms of our focus on their execution and their importance for the contribution to our overall results.

As we started out, and you phrased that the new Abbott – and we use that phrase as well, we're looking at given the different portfolio mix how we should approach things differently. The heavy ex-U.S. and emerging markets presence to the company is affecting the way we think about things. I think it's – we think about the company much more geographically than we did previously where I think it was more of a product orientation and driving certain product growth. Since each business is made up of a myriad of products and no one product is driving the overall identity of a business, it's causing us to view the business more geographically.

We have significant presence of each of these eight businesses in all the markets. One of the things we think about is how to better leverage our presence in markets such as China, India, Russia; bring these different businesses not only into individual product segments but across the country that we participate in and leverage the opportunities there through strong regulatory functions, strong government affair functions. We're looking at those types of changes in the organization, getting the support services closer to where the businesses are given that so much more of the business is outside of the U.S.

We're going through a lot of those organizational planning changes as we speak. I think all of those plans are pretty much on schedule. We're pleased with how we're thinking through the changes of the organization and I think we're really in line with our expectations and the progress we expect both operationally, financially and organizationally.

Lawrence Biegelsen - Wells Fargo Securities

There's always the follow-up question. What has progressed maybe a little bit more slowly than you expected?

Thomas C. Freyman

It's hard to separate the operating performance from actually the internal projects we've taken on. I think clearly our Nutrition business is probably performing a little bit better than we expected. Perhaps the device businesses are a little bit behind expectations. I think when you add it all up, net-net operationally we're very much in line with our expectations for the year. But we do have expectations that all the businesses will see accelerated growth rates in the second half of the year. We have a lot of plans in place to accelerate growth and execution within the businesses and are pretty confident that each one will contribute to our performance in the second half of the year.

Lawrence Biegelsen - Wells Fargo Securities

So that's a good segue to my next question and just to remind people, your fiscal 2013 sales guidance is for mid to high single digits constant currency growth and I think double-digit EPS growth. And in the first quarter, I think you reported 3.5% constant currency growth and guided to mid single digit constant currency growth for sales in the second quarter, if I'm correct. So how do you achieve the mid to high single digit growth for the year and what are some of the key drivers in the second half?

Thomas C. Freyman

Well, one of the big things to keep in mind about our performance between the two halves is comparisons in the various business and there are a number of pretty tough comparisons in the first half of the year that really get better in the second half, and just going through them. In our established pharmaceutical business, there were a number of austerity measures in the developed world in particular Europe as well as the biannual Japanese price deductions that go on across all health care businesses that basically lap in the first half of the year. So there's some pretty tough comps in that business in the first half.

In our vascular business, we had the lapping of the Promus distribution wind down in Japan which is really the last phase of the comp issues we've run into at Promus. And there was a competitive entrance in the stent markets that made some headway last year that while we improved our share position sequentially in the first year, in the year-over-year comps, they're pretty tough in the first half of the year. That will improve in the second half.

Exchange also is our biggest headwind we believe will be in the first half of the year. That is significant in the revenue line but it's even more significant in the profit line where the tougher exchange comps are in the first half as some of the effects of last year kind of rolled through our performance in the first half. That should improve significantly in the second half helping our overall performance.

Another area of comp improvement in the second half is in our Nutrition business. Those of you that follow us know that we've gone through as part of our margin expansion initiatives a number of distribution channel changes in 2012 where basically we began to go direct to customers in a number of markets. That put a couple percentage point headwind in our revenue growth in 2012. Those comps will be improving in the second half.

We've also seen beyond the comp issue very good momentum in our ex-U.S. Nutrition business. We saw growth in the 15% range in the first quarter. We expect that to accelerate as our investments in that business continue to pay off as the markets continue to grow and as our share improves in a number of those markets in the second part of the year. So we expect accelerating growth in that business.

We expect improved commercial execution in established pharmaceuticals. In vascular we expect decent ramp ups in our new product launches whether it's Xpedition in Europe and the U.S., ABSORB in the U.S. or MitraClip which is accelerating with better reimbursement support in the European markets.

So, there are a number of drivers. A lot of it is comps but a lot of it is execution that should drive better revenue growth in the second half, less exchange challenges in the second half and better margin performance from leveraging our expense base.

Lawrence Biegelsen - Wells Fargo Securities

That's great. AMO, I didn't hear you touch upon that but with the new products there, that would seem to be a business that could – there's place to improve. Would you agree?

Thomas C. Freyman

Yeah, this is a business – our AMOs, our Medical Optics business, and it's had growth in the lower single digit range for a period of time. That's been largely driven by the fact that the LASIK market where we're a 60% market share player has been a pretty tough market over the last couple of years and really has not been growing. That kind of masks what the good news is going on in the cataract business we have. We're basically the number two cataract player in the market. It's a great market from a demographic point of view both in the developed world and in the emerging markets where aging populations are driving demand.

And what I think is pretty notable for us in the Medical Optics business is our innovation progress. We are starting to see a good cadence of new products come into the market. We've launched in this year the TECNIS Toric in the U.S. That's a very important segment of the market for us where we have not been playing before. We launched the Optiblue product in Japan which is again playing in the light filtering segment which is a really important part of that market where we had not been playing.

What you saw in the first quarter is growth in the cataract segment moving from the mid or mid to upper single digit range and we expect upper single digit type growth in the cataract market in the second half of the year. And that along with better comps and stabilization in the Medical Optics LASIK segment should drive growth in that business, into that mid or mid to upper single digit range in the second half. So we're very optimistic that we kind of turned the corner in Medical Optics. We're seeing good momentum there and we hope to see more reasonable growth going forward in that business as well as margin expansion in that business.

Lawrence Biegelsen - Wells Fargo Securities

Perfect. Let me scan the room to see if there are any questions. I wanted to transition to nutritionals, but let me just see and if anyone has a question just raise your hand please. Over here.

Question-and-Answer Session

Unidentified Analyst

Hi. I was wondering if you could touch on your diagnostics business. I don't think you mentioned it.

Thomas C. Freyman

Well, hopefully I was hoping we would get around to it and we're just working our way through, but we'd love to talk about diagnostics because it's been one of our best performers in the last two or three years. It's been a very steady performer in the top line, mid to upper type growth every quarter. That's been driven by really good emerging market performance in this business.

In Brazil, Russia and China in particular we've been investing in commercial resources in those markets and those markets have basically been – as they're spending more in heath care, as volumes become more important to the systems there, we're seeing essentially those markets grow into the higher end technology that we generally offer. So we're seeing outstanding emerging markets growth in that segment.

We're seeing extremely good performance in our point-of-care business which has been growing in the mid teens pretty steadily quarter-after-quarter as we continue to penetrate the U.S. market for our point-of-care devices. And there's really a great opportunity going forward to increase penetration in the U.S. as well as start penetration the ex-U.S. market. Our point-of-care business is only about 20% outside the U.S. and we really have an opportunity to invest and grow in that business as we go forward.

We're also excited about our molecular business. It's roughly $500 million business. It went through a slower growth period over the last year or so as we went through some reimbursement changes in one of the segments, but already in the second quarter we expect a nice pickup in growth in that business and it definitely has the potential to grow double digits. So when you look at the contribution of emerging markets, the point-of-care growth and the accelerating growth molecular, we think diagnostics has the potential to continue growth in the mid to upper single digit range and a steady base for years to come.

The other part of the diagnostics story for us has been a significant improvement in the margin of this business. If you go back even four years ago, four, five years ago, this was basically a business with an 8% operating margin. We're now in the upper teens through a multipronged approach towards margin expansion from manufacturing costs to market rationalizations to leveraging the P&L.

So we've done a very nice job from a margin prospect in that business which we expect to continue in the years to come. We expect the margin in that business to exceed 20% in the next couple of years and we would expect that to continue to grow going forward. So diagnostics over the last five years has been a very good story for us. It's been a great turnaround story and the momentum is very good to continue to progress in that business.

Lawrence Biegelsen - Wells Fargo Securities

Perfect. One more over here.

Unidentified Analyst

Hi, Larry. Is it appropriate to ask a question about vascular?

Thomas C. Freyman

I will be glad to talk about all our businesses.

Unidentified Analyst

Great, thanks.

Thomas C. Freyman

The vascular business…

Unidentified Analyst

I was going to ask a question, if I may. Congratulations on the introduction of ABSORB. It's really exciting to see this new technology come into the marketplace in Europe and other markets. My question is, Abbott came out with high reimbursement and high pricing for ABSORB in CE mark countries, but that now channel checks are showing that there's price variability in different markets. What guidance would you give us to pricing premium of ABSORB over DES in the next couple of years?

Thomas C. Freyman

ABSORB is a key product for us going forward. It's a very important one and it's kind of evolved from and very quickly from a position of people viewing it as interesting technology to its having a real major role in the treatment of vascular disease. Our goal with ABSORB is not for it to be a niche product, high priced for only certain segments of certain markets. Our goal is for it to become a workhorse stent within the market. We view it as only one of a range of products. We've got XIENCE, XIENCE PRIME, XIENCE Xpedition and now ABSORB.

I think it's fair your comments on the pricing are accurate in the sense that while initially it did start out at a relatively high price premium, our goal is that price while we think this product deserves a premium because of its unique technology, we don't want price to be a barrier to our ultimate goal of this becoming a workhorse stent in the market. So I think you're seeing some of that play out in the market. We actually are seeing a very nice ramp of ABSORB as we progress through the year and I think as you see our results, you'll see evidence of that, but that's less important to us than its ability to drive overall share in the market for us is one component of that. And we're very excited about our opportunity to do that.

Now right now you're seeing that in Europe where we do have approval but we did start our U.S. trial at the beginning of this year. We started our Japanese trial just a couple of weeks ago and we have plans to initiate a trial for the Chinese market in the fairly near term. So this is not only a technology that is gaining acceptance with physicians and – physicians are becoming much more comfortable with it being used in a much wider range of lesions but it also is a product that has geographic expansion opportunity over the next several years and is a very important driver of our growth over that period.

We were particularly pleased by the evolution of the acceptance of this technology as evidenced from the PCR meeting that was just held. There's lot of buzz around the whole product category and obviously we're way ahead of the competition in terms of bringing the product to market and executing in the market, combined with our just broad presence in the market and our ability to drive share. So it's a really important product. It's getting very good traction and we're very pleased with the way it's progressing.

Unidentified Analyst

[Question Inaudible]

Thomas C. Freyman

Yeah, I don't want to talk specifically about our price levels. Again, what I'd say is we think the market can and should and will recognize that it is a premium product. But given health care budgets around the world and really our goal of having this be a workhorse product, we're trying to price in a way where it's not a barrier ultimately towards utilization.

Lawrence Biegelsen - Wells Fargo Securities

I wanted to stay on vascular for a minute and talk about MitraClip because I think the product's done better than most people expected in a short period of time. In Europe, I think, from the fourth quarter call, you said it was about $30 million in that quarter and the full launch, I think, was only in Europe sometime in 2011, so annualizing about $120 million for the full year, if I'm correct. And you said reimbursement improved in Germany in 2013. So I don't know if there's a Q1 number that you can share with us in terms of MitraClip sales? And I also think you could – do you expect it to double or nearly double in 2013. So a little color on that would be helpful, because I find these conversations with investors just a big underappreciated on that product. In U.S., you had a positive panel from a vote's standpoint. Investor expectations right now are relatively low that you'll get approval before the confirmatory [collect] trial is done, but that's not until 2017, 2018, maybe a little bit of commentary around your expectations in the U.S. and Europe would be helpful?

Thomas C. Freyman

Sure. I'd love to talk about MitraClip. It's a really important product because it addresses a major unmet need, not invasive treatment of mitral regurgitation. The mitral space is much larger than the aortic space. I think that's something that isn't appreciated. And again, particularly for high risk patients, there's a great unmet need. The surgery is effective with these patients but for the high risk population, which is a very large percentage of the population, it is not an alternative and the MitraClip is really the product that is the opportunity.

To your point, Larry, the launch initially in Europe over the last year and a half or so has gone reasonably well. There was limited reimbursement until the beginning of this year in the largest market, which is Germany. We received normal or full reimbursement at a very good level at the beginning of the year and that is facilitating a ramp up of the product. This is a product not dissimilar from ABSORB that will take a little bit of time to ramp. It was initially used in the higher end centers where the KOLs were very familiar with the product. There is a protocol and a process within each institution and around scheduling the suite to prepare the various physicians required to deliver the product and that takes time to roll through the various institutions.

So it is a gradual ramp. We're seeing good progress in the first half of the year. We expect it to continue to accelerate into the second half. We think for this year, this is a product that should sell somewhere in the $150 million to $200 million range depending on that ramp this year. So, Europe is an important market for us and it's proving the value of the technology and there is great demand for it. I mean there are definitely – there have been backlog since that time of patients that they really need the procedure.

The U.S. approval is important to us. And as you mentioned there was a panel earlier this year. There was a 5/3 vote in favor of the – basically stating the benefits of the product outweighed the risks. There was an 8/0 vote on safety and there was kind of an inconclusive vote on the specific trial that we were putting forward to support the indication. But on balance it was a vote in support of the product. We are in discussions now with the FDA where the panel obviously was just one step in the process. And we'll see how that plays out through. I mean obviously the approval of any form of that product is in the FDA's hands and we'll see how that progresses through the year.

What I would say is we're not counting on an approval this year in terms of our financial projections of any. If it plays out positively that would be a good thing. Obviously from a patient perspective, we need to get this product to market. To you point, we do have another trial enrolled more specifically to address this high risk patient population, and we're optimistic that in due course the product will be coming to the U.S. market and it will be a very important part of our vascular portfolio and our growth potential for the business.

Lawrence Biegelsen - Wells Fargo Securities

Perfect. I wanted to transition to nutritionals but again scanning the room here to see if there's any questions. So your fastest growing business I think is nutritionals. Your guidance is for high single digit approaching double digit in 2013. You touched upon it earlier but maybe if we could hear more detail, some of the key drivers to get to the higher end of approaching double digit growth, how do you achieve sustainable double digit growth in that business?

Thomas C. Freyman

Sure. Well, to your point, Larry, in the first quarter we grew this business on a constant currency basis around 9%. Ex-U.S. was 15% and that clearly was where that highest growth opportunity is, although the U.S. market we believe because of the demographics particularly in the adult segment has good growth opportunity as well. I'd say the growth drivers really fall into two basic categories; one is geographic and outside the U.S., the markets for Nutrition are growing extremely well which are basically in the upper single digit range.

And a key differentiator for us in this business compared to other companies you may look at is the fact that we are both an adult business and a pediatric business. We're about 55% pediatric and 45% adult. And we are very excited about the adult segment in particular because of the demographics and aging populations not only in the developed world but also in the developing world.

If you were to look at China's aging baby bloomer population which as you know is a big demographic driving utilization of heath care in the U.S., the Chinese market is four times the U.S. size in terms of the aging population. So adult nutrition where we are clearly the market leader from a share perspective and in terms of brand recognition with insuring Glucerna, Glucerna is $1 billion global brand, extremely well recognized as the adult nutrition product. We are very well positioned to ride that demographic wave.

In particular outside the U.S. where a lot of these markets are in the early stages of development and we have shown a track record in countries like Vietnam of the ability to identify when the market is ready for development and actually build these markets and drive our leading position with these products. Even in the developed world we think there's great growth potential as new [HERO] data is coming out supporting the importance of Nutrition.

There just was a broad study, a 10-year retrospective study of 44 million hospitalizations in the U.S. looking at the impact of nutrition on patients. What that study showed was that a high percentage of patients are malnutrition, malnourished when they come into the hospital setting. And for those patients that were provided supplemental nutrition, it reduced the length of stay and the cost of stay over 20% and reduced the readmission rate significantly.

And as you know in the hospital setting, readmissions are a very, very important focus area and something that the institutions need to get down in order to maintain their reimbursement under the U.S. health care reimbursement schemes. So, the importance of Nutrition is increasing. There is going to be more and more data we believe coming out supporting it, which should drive the overall growth of the market and its economic base, not just based on the consumerization of the market. So, there are a lot of good trends that we think are supporting the adult which are going to drive ex-U.S. growth as well as U.S. growth.

On the pediatric side, it really is driven by the overall growth of the market. The Chinese infant market is $8 billion and much larger than the U.S. market. The growth in the middle class, the movement of more and more women into the working population in markets such as China or India are really going to drive the overall growth of the market. And we believe that we can drive our share position up in these markets, in particular through the expansion of innovation. We've had a significant growth in the productivity of our own R&D in Nutrition. If you were to go back four or five years ago, you'd see us generating somewhere in the range of 20 new product innovations in a year.

By globalizing this business, more effectively linking market needs to our R&D organization, we've now got that productivity up into the 70 innovation per year. (Inaudible) we've seen that over the last couple of years and we're very confident in our ability to drive innovation in this business, for example, in areas such as tolerance where if we can broaden out the range of the children that can benefit in the products regardless of their evolution through the various feeding stages, it helps us keep babies and children in the franchise when they run into different issues.

That's a big focus of our innovation initiative that we think ultimately can drive increased share on top of the fundamental market growth that's going on. So demographics are good, market growth rates are good. I think our execution will be better and the contribution of innovation of gaining market share are all key elements of our ability to drive Nutrition growth not only this year but for many years to come.

Lawrence Biegelsen - Wells Fargo Securities

Not only one of your most important growth drivers, it's also a lot of margin expansion opportunity. I think this year, you're guiding to 300 basis point improvement in that business year-over-year which is obviously quite impressive. So, could you talk a little bit about your margin expectations going forward for that business?

Thomas C. Freyman

Yeah. So while we've been very pleased with our commercial execution in this business over the last several years and the growth rate within quite good, particularly outside the U.S., when we looked at the margin and cash flow generation of this business, we concluded four, five years ago that there was significant room for improvement. We kind of took a page out of our diagnostic business playbook that I talked about earlier where we moved the margin from 8% to now the high teens, and looked at our Nutrition business comprehensively in terms of product mix, market mix, manufacturing sites, materials and packaging, logistics, the distribution channels, our use of distributors, our cost to serve customers and looked at all those components and concluded that we have significant margin expansion opportunity in this business to go along with the pipeline growth.

And what we found as we really brought focus to the business and really alignment between commercial manufacturing, distribution and R&D that we were able to drive significant improvement in this business already and we have pretty high aspirations for improvement. So while four years ago we were probably in the low teen from a margin perspective in this business, last year we improved it 240 basis points. To your point, Larry, we expect and have committed to an improvement of 300 basis points in 2013. That would move us up into the upper teens range this year. We've set kind of an initial threshold of 20% by 2015.

I'd say if anything we're ahead of that from a scheduling point of view. It's a very broad based program, literally hundreds of initiatives that all add up to a significant improvement in this business. So the combination of the pipeline growth which we've been seeing and this margin improvement up 20% and hopefully beyond makes the Nutrition business a significant contributor to our overall profit growth and really top line growth. So I'd say that we're hitting really on all cylinders in this business and the team has really done a great job coordinating their efforts to drive both top and bottom line growth.

Lawrence Biegelsen - Wells Fargo Securities

Perfect. So we have a couple of minutes left and I wanted to touch upon EPD, your established pharmaceutical products division, and that's kind of the tale of two businesses with the impact of austerity in the developed world and high single digit performance in emerging markets and I think you're breaking that out now in your press release. So, in Q1 I think the key emerging markets grew 9% constant currency. Can you get that into the double digit range and what would that take? And second, how should we think about easing comps in the developed markets and that growth going forward?

Thomas C. Freyman

So, you've captured kind of the tale of two businesses story appropriately. I mean we are very excited about the opportunity in the emerging markets for this business. Our presence is quite good. We're in most of the markets where we want – we got very good presence in most of the markets we think are key to our growth. And the important thing for us is really on two levels. One is to continue to build out our portfolios in these markets. Again, this was a brand of generics business where the rest of portfolio matters.

We're having private compounds in all the key segments that matter to the various markets is important, and that's where our development as opposed to our R&D capability is really our development capability, our ability to bring new formulations, new presentations of existing molecules and broaden our portfolio in the markets of key. So, R&D execution and having those portfolios tailored to the various markets and they're all different is an important part of accelerating our growth.

Now, while in the emerging markets high single growth is good, I don't think we're satisfied with that. To your point, Larry, we believe this portfolio of markets should be able to grow double digits driven by the increasing investment in heath care in the markets and both our R&D execution as well as payoff in our commercial investments and our commercial execution is gaining share in this market.

Overall, emerging markets is around 60% of that business. That business we can drive at double digits. It's going to be a very, very important part of driving the overall growth rate of this business back into the mid to mid to upper single digit type range longer term. We expect to see better progress in that in the second half. We expect to see better emerging markets growth and also a bit of a moderation in the growth of that business in the developed world as lapped some of the austerity measures and what I crave is some of the more severe austerity measures that we've seen in the 2011 and 2012 timeframe.

So, we should see better comps, as I discussed earlier, and better emerging market progress and we should see – while even in the second quarter the growth rates are going to be pretty tough in this business, we believe in the second half we should be moving more in the direction of that mid single digit growth range and ultimately more consistent with the [data] that we expect. But we need to deliver better execution. We have plans and plays to do that and I'm confident you'll see better growth rate in that business in the second half and as we progress into 2014.

Lawrence Biegelsen - Wells Fargo Securities

Perfect. So with that, we'll end it and Tom, Brian and Tina, thank you very much for coming to the conference.

Thomas C. Freyman

Thank you very much.

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