Abbott Laboratories (NYSE:ABT) Q3 2023 Earnings Call Transcript

Abbott Laboratories (NYSE:ABT) Q3 2023 Earnings Call Transcript October 18, 2023

Abbott Laboratories beats earnings expectations. Reported EPS is $1.14, expectations were $1.1.

Operator: Good morning, and thank you for standing by. Welcome to Abbott’s Third Quarter 2023 Earnings Conference Call. All participants 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 reproduced broadcast without Abbott’s expressed written permission. I would now like to introduce Mr. Mike Comilla, Vice President, Investor Relations.

Mike Comilla: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; Bob Funck, Executive Vice President, Finance; and Phil Boudreau, Senior Vice President, Finance and Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments, we’ll 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 2023. Abbott cautions that these forward-looking statements are subject to risks 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 report on Form 10-K for the year ended December 31, 2022. 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. 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 news release and regulatory filings from today, which are available on our website at abbott.com.

Note, that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the quarterly results press release issued earlier today. With that, I will now turn the call over to Robert.

Robert Ford: Thanks, Mike. Good morning, everyone, and thank you for joining us. Today we reported third quarter adjusted earnings per share of $1.14. Based on our performance through the first nine months of the year, we raised the midpoint of our full year adjusted earnings per share guidance and narrowed the range to $4.42 to $4.46. Organic sales growth on the base business, which excludes COVID testing, increased double digits for the third consecutive quarter and was led by double-digit growth in all four of our major businesses. This acceleration in sales growth is a result of our strong position in attractive growth markets, in conjunction with the additional investments we made across the company during the pandemic.

In addition to the strong top line performance, we continue to deliver accelerating earnings power on our base business and remain on track to deliver on the financial commitments we set at the beginning of the year. With a positive growth outlook for the businesses and the momentum we’re building across the portfolio, we are well positioned for a strong finish to the year and heading into 2024. I will now review our performance in more detail before turning the call over to Phil. I’ll start with nutrition, where sales increased 18% in the quarter. In pediatric nutrition, growth of 25% was led by continued market share capture in the U.S. infant formula business, where we have now reclaimed the leadership position. Internationally, we continue to deliver well-balanced growth coming from both infant formula products and our PediaSure toddler brand.

In adult nutrition, growth of 12% was driven by strong demand for Abbott’s market-leading Ensure and Glucerna brands across the U.S. and international markets. Turning to established pharmaceuticals, sales increased 11% in the quarter. This strong performance was broad-based and led by double-digit growth in several markets and therapeutic areas, including cardiometabolic, women’s health, and CNS pain management. In September, we announced an agreement with global biotech leader mAbxience to commercialize several biosimilars in emerging markets. This collaboration will help introduce cutting-edge medicines in the areas of oncology, women’s health and respiratory diseases to people in countries that have historically lacked access to these treatment options.

An operating room with a doctor monitoring a patient’s vital signs during surgery with a medical device.

Moving to diagnostics, excluding COVID testing, organic sales grew 10%, led by core lab diagnostics where sales grew double digits, driven by above market performance in the US and internationally. Growth was driven by a continued increase in global demand for routine diagnostic testing and a strong recovery of our blood transfusion testing business following a period of lower plasma donations that occurred during the COVID-19 pandemic. In rapid diagnostics, double-digit organic sales growth on the base business benefited from increased demand for respiratory tests in anticipation of an earlier than normal start to the flu season in the Northern Hemisphere. And I’ll wrap up with medical devices, where sales grew nearly 15%, including double digit growth in both the U.S. and internationally.

In diabetes care, FreeStyle Libre sales were $1.4 billion in the quarter and grew 28%. The global Libre user base now exceeds 5 million people with nearly 2 million of those in the U.S. where the Libre user base has nearly doubled in the last two years. A recent analysis of our U.S. user base showed that a growing number of Libre users are using Libre in combination with GLP-1 medications as part of a companion therapy approach for managing their diabetes. On average, those using both Libre and a GLP-1 exhibited a higher rate of use for both products, wearing Libre sensors more often and taking GLP-1 medication more frequently compared to other users. This increase in use or better compliance is a positive sign that these users are taking an even more active role in managing their diabetes.

While we traditionally think of therapy choices as having to compete against one another, this is a good example of a complementary relationship between two products that both help optimize the treatment of diabetes. In cardiovascular devices, sales grew 10% overall in the quarter, led by double-digit growth in electrophysiology and structural heart. In electrophysiology, sales growth of 17% was driven by double-digit growth across all major international geographic regions and high teens growth of ablation catheters in the U.S. In structural heart, performance was driven by double digit growth of MitraClip and strong growth from several recently launched new products, most notably Navitor, our latest generation TAVR valve. In Rhythm Management, growth was led by double-digit growth in pacemaker sales, led by Aveir, our recently launched leadless pacemaker that can be used for both single chamber and dual chamber pacing.

And lastly, in neuromodulation, sales grew 19%, driven by the recent launch of Eterna, our first rechargeable neural stimulation device for pain management, which targets a large segment of the market where we previously did not compete. So in summary, this was a very strong quarter with all four major businesses delivering double-digit organic sales growth, excluding COVID testing-related sales. Growth rates in the base business have improved every quarter this year on both the top and bottom lines. And the momentum we are building positions us well for a strong finish to the year and heading into 2024. I’ll now turn over the call to Phil. Phil?

Philip Boudreau: Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our third quarter results, sales decreased 1.5% on an organic basis due to, as expected, a year-over-year decline in COVID testing-related sales. Excluding COVID-testing sales, underlying base business organic sales growths was 13.8% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 1.4% on third quarter sales. During the quarter, we saw the U.S. dollar strengthen somewhat versus several currencies, which resulted in a slightly more unfavorable impact on sales compared to exchange rates at the time of our earnings call in July.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 55% of sales. On a year-to-day basis, our adjusted gross margin ratio is 55.4% of sales, which is below our original full year guidance of approximately 56% that we provided back in January. The difference is primarily due to lower gross margins on COVID tests due to lower volumes and price compared to our original forecast assumptions and the impact of higher inventory obsolescence as a result of maintaining higher inventory levels throughout the pandemic to help ensure product supply during a time when global supply chains were less predictable. As the global supply chain environment continues to improve, we’re adjusting our inventory levels to align with that trend. Adjusted R&D was 6.2% of sales and adjusted SG&A was 26.4% of sales in the third quarter.

Lastly, our third quarter adjusted tax rate was 14%. Turning to our 2023 outlook. For the full year we now forecast ongoing earning per share of $4.42 to $4.46, which is comprised of our year-to-date results plus ongoing earning per share guidance of $1.17 to $1.21 for the fourth quarter. For the fourth quarter, we forecast total underlying base business organic sales growth excluding COVID testing sales to be in the low double digits and exchange to have an unfavourable impact of a little more than 1% on fourth quarter reported sales. With that, we’ll now open the call for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] And our first question will come from Josh Jennings from TD Cowen. Your line is open.

Joshua Jennings: Hi, good morning. Thanks for taking the questions and congratulations on another strong quarter. Robert, [indiscernible] growth nearly touched the mid-teens range for the core business in 3Q. And I realize we recently talked about the sustainability of the momentum generated this year, but I think investors would like to hear about your confidence level in the core business delivering high-signature organic revenue growth and solid margin expansion in 2024 off the 2023 comp that’s only moved higher over the course of this year. Thanks for taking the question.

Robert Ford: Sure, Josh. I mean, the confidence level is very high, especially with this kind of momentum that we’re seeing. Clearly, there’s going to be some macro environment challenges as companies head into 2024. But I’d say our portfolio has really been built to withstand this type of environment and we tend to do pretty well in this type of environment. And as I said in my comments also, we’ve further strengthened the portfolio and the position that we had with the investments that we made during the pandemic, and that’s helped lead to step up here in our growth rate this year. The base businesses has grown double digits three quarters in a row, and I expect to be doing that again in Q4. And if you look at the EPS contribution, as I said in the comments, it’s really having a positive impact and a lot of power coming through on the base business as we continue to grow that.

And it’s sequentially gotten better every quarter. So we’re forecasting another step up in the fourth quarter. So if you look at that EPS for the fourth quarter and put it all together, the base business here is going to contribute about $4.10 of EPS, and we’ve raised that twice this year. So there’s clearly momentum that’s building here, both in the top and the bottom lines, and I believe that momentum is going to sustain and continue as we go into 2024. I think it starts, Josh, always with a top line. And if you can drive higher top line growth, I think that’s really the building block. And if you look at our, let’s say our pre-pandemic kind of growth formula here, we were growing around 7%. So I expect that to accelerate in next year, without a doubt.

And that’s off a much larger sales base than we were pre-pandemic. And like I said, that’s based off the momentum that we’re seeing and increased contributions that we’ll be seeing from a lot of our growth drivers that I’m sure we’ll be talking about throughout the call. The street model’s double digit EPS on the base business right now, and I feel real good about our ability to deliver that. Obviously, a lot of focus is going to come from gross margin and gross margin expansion. And I think we’ve got momentum until when here as we’re going to go into 2024. So when we go to our call in January, I’ll be able to kind of quantify that and give you better ranges on all of that. But I’d say, it’s really about reiterating and reinforcing our growth model, our growth framework, which is high single-digit revenue growth, double-digit bottom-line growth, margin expansion, strong free cash flow generation, and a balanced capital allocation strategy.

So, again, I feel very good sustaining this momentum going into next year.

Joshua Jennings: Understood. Thanks a lot.

Operator: Thank you. And our next question will come from Larry Biegelsen from JPMorgan. Your line is open.

Larry Biegelsen: Thanks for taking the question. Just to be clear, it’s Wells Fargo. But good morning, Robert.

Robert Ford: We know who you are, Larry.

Larry Biegelsen: Okay, good. So, Robert, China has been in the news a lot. Love to hear your thoughts on how you’re thinking about China, big picture. How is Q3 and what are you expecting from the VBP impact in the EP business and from the anti-corruption initiatives we’ve been hearing about there. Thanks for taking the question.

Robert Ford: Sure. Well, China has been and will continue to be an important market for us as it relates to I think this theme on this anti-corruption discussion point there. Listen, we’ve been operating in China for 35 years. We follow our compliance standards, follow all applicable laws. I didn’t see any kind of meaningful impact in Q3. Larry, I was actually there last week and had a chance to meet with the teams and go through the businesses and I didn’t really see any meaningful impact. Devices grew 20% in the quarter, so I think that’s — we’ll just have to keep on monitoring that situation. But I didn’t see any real impact in the quarter. As it relates to VBP, listen, this is — this is a term that’s used for China, but I think it’s just a common theme that we see across the world with governments trying to provide the care to their populations and manage their budgets.

So I don’t think this is anything completely extraordinary than what we’ve seen. There was a VBP on the EP business. That process started earlier this year in April. I’d say about 80% of the market has now been implemented, and I expect the remainder of that to be implemented by year end. Yes, there’s a little bit of a price impact that we felt, but net-net, it was positive for our EP business in China, because we were able to pick up share and pick up volume. So I think that’s the status there. I think we announced a VBP on diagnostics. That’s not unexpected either. I think the process will start sometime in the first half of next year. Right now, from the list of products that we’ve seen, it involves about 20% of our core lab business. And then as we’ve seen with businesses that have capital and service tied to it, the rollout is a little bit different from the rollout that you see on, what I would call, more pure consumables.

So it’s more of a kind of phased approach like we saw in EP. Each province will go and do their implementation. It will take a few quarters to implement here. But like I said, I don’t think these are different than what we see in other markets in terms of how we manage the balance of our technology and our access. But I think China is still a big opportunity of growth, not just in devices and diagnostics, but in adult nutrition and our pharma business. So, it’s an important market for us and the team is doing a really good job at operating there.

Larry Biegelsen: Thanks so much.

Operator: Thank you. Our next question will come from Robbie Marcus from JP Morgan. Your line is open.

Robbie Marcus: Oh, great. Thanks for taking the question. Congrats on a really nice quarter. Robert, I want to ask you the overwhelming topic of discussion the past few months has been GLP-1s and the possible impact on the future medtech market growth. You talked about it with respect to diabetes, but I’d love to just get your thoughts on a broader basis on GLP-1s, and do you see it as a negative, neutral, or positive to your different end markets you participate in over the next five, 10 years. Thanks a lot.

Robert Ford: Sure, Robbie. Obviously, this has been a hot topic over the last couple of months. Let me just start off by saying with 20 plus years of experience in diabetes, I think every time new therapies, new technologies come to address this disease and this population, I think it’s all great. And these are great new medications that are going to have very positive effect on the treatment of diabetes. There’s obviously a lot of investor angst here, Robbie, about the potential impact of these drugs and what’s going to happen to different industries and different companies. I feel that the investor angst is probably driven more by those that have a little bit less domain knowledge in medtech, I would say, it seem to be moving a lot with like headlines or any new study or publishment there or publishment of any kind of study headlines, et cetera.

So you’ve seen valuations in medtech, significantly be impacted by the fear, like you said, about the reduction in these market sizes, whether it’s going to happen in the next few years or it’s going to happen in decades from now. And I guess my view there is that, I understand that new technologies will naturally cause us to think differently about the future. And I think early on, those initial thoughts about the future are generally impacted more by emotion than facts and data. And I think that’s what you’re seeing right now today as it relates to GLP-1 and medtech markets. I think there’s a — if you think about it long-term here on the bigger picture, I think there’s a fundamental mismatch here on revenue and revenue forecasts that we’re seeing versus potential impact of patient and patient temps.

I’ve looked at the consensus forecast for this class of drugs and I’m looking out 4 years to 5 years here, they seem to be in that $60 billion to $70 billion range, which is pretty significant as a category. It’s probably one of the largest categories that we’ve ever seen. But then if you take the pricing, at least the public pricing that we’ve seen, whether it’s the US pricing or the lower international pricing and you convert that into user bases and back into the numbers. I mean, we’re looking at 10 million to 15 million people in the next 4 years to 5 years that will be on this drug. That’s a real small fraction of the size of these medical device markets that we’re talking about, right? There’s about half a billion people with diabetes, maybe another half a billion people that got cardiovascular disease, and maybe there’s an overlap of people with diabetes and cardiovascular, but still you’re talking tens of millions of people with maybe a billion or under a billion people.

So I think there’s a little bit of a mismatch there in terms of how we’re seeing this impact equating the revenue and the potential growth of the revenue with the patient pool tamp. So that’s one big area I would say. I think there’s another question here of just about the question of coverage and obviously these drugs have great outcomes and great outcomes impact and then the question is, what’s the appropriate cost to achieve that outcome? I’ve seen a lot of discussions and new stories about payers and what the payers are going to do and insurance companies and PBMs and pharmacy chains. Those aren’t payers. The real payers are the employees, the employers and the companies that pay for these. And I think as you look at companies and higher medical expense costs, inflation, I think that’s going to be a factor as we go into next year also.

So I think those are, I’d say, the bigger aspect here on the long term. On the short term though, as you mentioned, on the diabetes, I actually see it as a positive impact on the diabetes business. As I mentioned in the opening remarks, we completed an analysis recently that showed a significant number of Libre users were on these drugs, and the data showed that those that are using both products are actually using more of those both products when you compare them to other users. They tend to wear Libre sensors more often and they tend to take their GLP-1 medication more frequently. And I think that’s a great thing, because higher therapy compliance ultimately is going to improve health outcomes. And that’s not different, Robbie. This complementary relationship [indiscernible] very well.

It’s not uncommon to see that. Medical device procedures, you have patients that are taking medications either before and after their procedure. And you see it in diabetes, like I said, I’ve seen this in my 20 years where it’s very common to use multiple tools in combination, whether it’s insulin and oral meds, whether it was fast-acting insulin and long-acting insulin. And so, I think more treatment options here is a good thing for patients. And I think these drugs are a real nice addition to the mix. I think as you go forward though, I think there are some — there are definitely some other areas of interest related to this topic that we’re exploring. I think one thing that is clear to us as we’ve gone through this process is to really use the data a little bit more to our advantage.

Since the launch of Libre, we’ve collected de-identified data from the user base. I’d probably go as far as to say that we probably have the most robust glucose data set in the world. I think the last time I looked at it, we’ve got close to 50 billion hours of glucose monitoring data. So I think Libre is a perfect platform here to actually evaluate the effectiveness outside of a more controlled trial, look at it more in a real world setting. And there’s just so many different ways we can look at the data, look at how the drugs work over time, does one drug work better than the other? What kind of job do they do in terms of a profile, in terms of time and range? So again, I think we can do this on a population level. We can do this on an individual level.

So I think that’s going to be, I’d say, an important thing going forward for us here is to use that data set to be able to kind of explore that. And I’ll just finally say with a portfolio, with a diverse portfolio that Abbott has where we look at healthcare across the full spectrum from nutrition to diagnostics to then treatment. I think that this then provides the company with an opportunity to further explore where we can bring value to patients that are using these drugs. I think it’s common knowledge here that there are side effects, that there are side effects with most drugs. And one of those being increased loss of muscle mass. I’d say, we have experience here in the area of nutrition. And losing that amount of muscle mass as a ratio, it can be problematic.

So we’ve got an opportunity here to be able to develop whether it’s a nutritional product or other products that can help address one of these side effects, which is muscle mass loss. So there’s good opportunities for there for us also in the portfolio. So, bottom line, I think it’s fantastic science, it’s fantastic biology. This is great for public health in the short term. I think the concerns are overblown and I think in the long term if we want to look out 15 years, 20 years, I mean, I think it’s — I think there’s still a lot of question marks there given some of the facts that I’ve raised.

Robbie Marcus: I really appreciate that, Robert. Maybe if I could sneak one more in on CGM, something that I think has really flown under the radar with the GLP-1 noise is, you’ve recently gotten Type II Basel coverage in France. You have it in the U.S. and Japan as well. Just thinking about future opportunities in countries to approve Type II Basel, which could materially expand your reimbursed coverage opportunity around the world. How should we think about that, and how do you size that opportunity over the next few years for Abbott? Thanks a lot.

Robert Ford: Sure. Well, we had a really good quarter, up 28%. International was up 26%. U.S., we continue to do pretty well in the plus 30% range there. And to your point, we saw a nice impact from that basal coverage, especially in the international markets, right? And it’s nice to see the international growth accelerate again. I remember last year, the question marks about our international growth and a lot of our focus was on our upgrade strategy for Libre 3. So getting the sales team now reworking the demand generation. And a lot of that growth is, as you pointed out, we’re seeing nice growth from that basal segment, especially in France and Japan, where we got reimbursement — differentiated reimbursement, right? We’ve added about $150,000.

I think that was the day that we reviewed over the last 12 months, of basal users onto the user base. And if you look at that last 12 months, a larger portion of that $150,000 was happening towards the second half of that. So there’s definitely acceleration ongoing there. I was actually surprised to see the speed at the U.S. coverage. So right now, about, I’d say, 90% of commercial payers have now adopted some level of basal coverage. So that’s very positive. So both those three markets, U.S., Japan and France are doing very well in terms of basal and basal coverage and providing that kind of tailwind of growth. And again, there’s a lot of good data to be able to support while that it benefits these types of patients also and saw that in the data that we presented with the French claims data.

So I’d say, yes, it’s a great opportunity. It’s not something that’s happened. We’ve been focused on this, generating the clinical evidence, building the sales forces to be able to reach a primary care team, investing in direct-to-consumer advertising where we’re allowed to do that. And that’s a key growth driver here of this target, we have to reach $10 billion by 2028. I’d say that’s an important growth driver. It’s not the only growth driver, but it’s an important growth driver, and we’ve got a lot of good momentum there, Robbie.

Robbie Marcus: Appreciate it. Thanks a lot

Operator: Thank you. Our next question will come from Daniel Antalffy from UBS. Your line is open.

Danielle Antalffy: Hi. Good morning, everyone. Thanks so much for taking the question, Robert and Phil just wanted to follow up on Josh’s question earlier, and I appreciate you’re not going to give 2024 guidance. But just at a high level, there’s a few puts and takes I can think of, Robert, I appreciate the momentum in the underlying business, but you will have competition coming on the EP side, which has been a strong double-digit grower looking at MitraClip and a quarter of double-digit growth, that was great to see, like how sustainable is that? And comps are just inherently potentially a little bit tougher. So, if you could maybe walk through in a little bit more detail. Some of the puts and takes at a high level that we should consider nutrition, tough comps there, should consider as we think about 2024, that would be awesome.

Robert Ford: Yes. I mean you’re — not sure we’ll do a planned review here. But I mean there’s a lot there. I’ll try and touch on some of the topics there. I mean I’d just go back to — we have a growth model and a growth forecast that I’d say, during the last two years has been masked a little bit by COVID and the ups and downs of COVID-testing, but being able to sustain high single-digit growth, double-digit growth in the bottom line. That’s what we’ve been doing this year, a pretty significant double-digit bottom line because we forward invested back in 2022. So, if you look at our top line growth, right now, we haven’t had to put as much SG&A to be able to kind of support that growth this year. So — but the growth model of that high single-digit growth and double-digit bottom line growth is been happening throughout this pandemic with COVID testing.

And as the COVID testing numbers come down, you get to see that a little bit more now. So I feel good about delivering that, In 2024, yes, there’s a macro environment that’s out there. But as it relates to all the elements that are directly in our control, I feel very good about it. Your comment on electrophysiology, yes, we’ll have competition. We have competition today. We grew — in Europe, we grew mid-teens and we’ve been growing mid-teens for the first nine months with the competition that you referred to. So we feel good about our position there. On MitraClip, we’ve seen double-digit growth in MitraClip for the last three quarters, big driver of that has been international and growth international, and we’re starting to see a little bit now of a rebound in U.S. U.S. was up 5% in MitraClip this quarter.

And again, that’s sequentially better from the previous quarter and sequentially better from the one before that. So — and we’ve had competition in that space also we’ve had competition internationally and we’ve had competition in the U.S., too. So again, you referred to comps, yes, there’s — listen, I’m not going to deny there’s some comps. Obviously, probably the biggest one there is nutrition this year. But every year, there’s comps. Every year, a company has got comps. And I’d say if you remove some of those comps from our Q3 we would still be growing double digits also. So again, I feel good about our high single-digit growth forecast. I feel good about our double-digit EPS growth. We’ve got a lot to work with. Yes, there’s challenges, but we have a lot to work with.

We’ve got a great pipeline of products that we’re going to be — that we’ve not only just launched, but that we’re going to be launching also. So yes, there’s always puts and takes, Danielle. But I think in the aggregate, if you look at the aggregate of our positions in these markets, I think we’re in a real strong position.

Danielle Antalffy: That is super helpful. Thank you so much Robert.

Operator: Our next question will come from Joanne Wuensch from Citibank. Your line is open.

Joanne Wuensch: Good morning and thank you for the question. Nutrition, your comments, if I remember them correctly, are that you are back in a leadership position in the nutrition business. Are you back at 100%? Are you humming along? Do you feel like there’s anything that’s lagging or maybe ahead of the game? And I’m going to squeeze in your current thoughts on M&A, particularly given a lot of pullbacks in valuations. Thank you.

Robert Ford: Sure. We never believe that we were going to recover all the share in a quarter, right? So the way this market works and the way we’ve kind of modeled it out is that, we’ll be showing month-by-month kind of sequential increases in our market share. So, if you look at the volume right now is measured by a third party, we’ve now crossed over that leadership position in the month of September. We’re not 100% back to where we were before the recall, but I always said that we would be there towards the end of the year. So we’re probably at about 90% back to that initial — to that pre-recall market share. But it’s nice to see across all the segments here, real nice sustained growth in our market share. And even if when you look at different segments of the IMF, so if you look at the channels, WIC and non-WIC.

WIC, we’ve been a market leader since the beginning of the year, and that was a result of our strategy in the second half of last year to stay focused on that underserved population. And the non-WIC channel, we’re seeing nice continuous month-by-month gains of market share. And I think the team is doing a real good job. I think we can all see that the shelves are pretty well replenished right now. And now it’s just about continuing to execute on our demand generation and I feel good about what the team is doing and recovering that market share. So that’s gone pretty much to plan there. And then what was your other question?

Joanne Wuensch: M&A, particularly given pullback on valuations? Thank you.

Robert Ford: Yes. Well, listen, we’ve completed three transactions over the last six months. We acquired CSI and in the process of integrating that business. I think it’s going to be a nice addition to our vascular business and start to reposition that business to kind of more higher growth markets. This quarter, we announced the acquisition of [Big Foot] (ph) and this is just going to be able to allow us to broaden our offerings with Libre and provide a nice opportunity from a global perspective, and then also an announcement on the EPD side to expand access to biosimilars. So we’ve been active, and we continue to be active. Yes, I think valuations have come down. The same way they came down, let’s say, post pandemic in that 2022 time frame.

It’s a good opportunity. Like I’ve said, I think sometimes companies need to understand if it’s a short term or if there’s something more fundamental in that valuation, but we’re in a great strategic position to be able to execute on our M&A strategy, which is really focused on can we add value to the asset and does it fall into our strategic framework of areas that we want to invest in and growth in. The ones that I highlighted here are strategic, and we believe that we can add a lot of value to them. So we’ve got plenty of capacity to engage. And if there’s the right opportunity that comes along in this period, we’ll be ready.

Joanne Wuensch: Thank you very much.

Operator: Thank you. Our next question will come from Vijay Kumar from Evercore ISI. Your line is open.

Vijay Kumar: Hi, Robert. Thanks for taking my question and congrats on the good print here. I had two questions. My first one is, could you just elaborate on this China VBP for Diagnostics. How big is Core Lab in China for you guys at this point in time? And I think I heard 20% would be impacted next year? Is the assumption that rest of core would be impacted in fiscal 2025, but how do these contracts flow up? Because my understanding is, you will see volume gains or those volumes [indiscernible] price headwinds?

Robert Ford: Yes. So the way this is kind of working out, right, this was announced recently, I think proposals are due within the provinces that are going to be bidding, Vijay, I’d say, in the next 30 days, right? And then there’s like another 30 days, 30 days to 60 days to evaluate all the proposals. So I think that this is going to probably start, I’d say, late Q1 and into Q2. Right now, the list of assays that are on VBP equate to about 20% of the market. So our annual sales are in China are about $1 billion. So — and then if you look at the specific assays, it’s infectious disease, there’s some fertility assays there, et cetera. So that’s where the — that’s where the VBP is kind of focused on. I haven’t heard and team hasn’t heard about expanding that to other areas of — other areas of testing, such as oncology or hormones or other areas like that.

So right now, I’d say, this is going to be our focus in 2024. If there’s volume upside to be gained, yes, there could be volume upside to be gained. I mean we do have good market share in some of these segments and others, we have lower market share, so it presents us an opportunity. So I think in areas where you’ve got higher market share, you’ll feel more price. And then if you can offset that price by gaining volume in segments that you’ve got lower share. So I don’t think that’s rocket science there, and we will just have to see how that all plays out. But we’ve had experience going VBP in China. We’ve gone through with [indiscernible], we’ve gone through it with VBP certain parts of our pharma business, certain parts in CRM also. So the team knows how to do this.

They know to kind of think about it and manage it pretty well. We adjust some of our cost structure is also as a result of that. So I think the team has got a good formula here how to manage it. And we’ll just have to see how this kind of plays out.

Vijay Kumar: That’s helpful, Robert. And my second one, I know you touched upon PFA. I think Abbott’s launching their own PFA at some point in fiscal 2025, 2026. How should we think in the interim, right? I think your peer had some pretty robust assumptions for what percentage of procedures would be PFA. Is Abbott concerned about share loss when you think about that medium-term time frame? And are there offsets to it, right? When you haven’t touched upon Lingo. I think previously you had said Lingo could be as big as Libre, where are we on the Lingo launch?

Robert Ford: Yes. So we’ll have to see how — what other companies report to go to see if we’re gaining or losing share right now. But I’d say we still have got good robust growth. I’d say as we look into 2024, I’d expect us to grow generally in line with market, which has historically been double digits. We’ve got some good innovation that’s rolling out on the RF side. And as we’ve spoken about our EP business, we talk about PFA. That’s going to be a product that’s going to be really geared towards AF ablation, you still have BT and SVT ablations, where we do have good positions over there. A good portion of our sales are also on the mapping side and the mapping and the diagnostics and those consumables. So I see those being less impacted also.

So I’d say for 2024, we’ve got a good opportunity with our AP portfolio to be growing there in line with the market. And I think to the previous question, yes, we’ve got plenty of different shots on goal here to be able to deliver our high single-digit growth rates. And we’ve got a very rich portfolio, and we’re in exciting markets. Yes, Lingo, we didn’t touch on it because it wasn’t asked, but now that you have asked, yes, it is a great growth opportunity for us. We’re launching it in the U.K., I’d say, I’d call it more of a controlled launch, Vijay, to understand kind of the marketing mix, the marketing messaging, the positioning, the inner positioning with Libre and the learnings we’ve got are fantastic. And I’m excited about a full-on launch in the U.K. starting next year.

And then the opportunity to be able to bring that here to the U.S. I’ve been public about our intention to file Lingo here in the U.S. by the end of the year. And I think that’s going to provide another great opportunity for growth for us also.

Vijay Kumar: Understood. Thanks guys.

Operator: Thank you. Our next question will come from Matt Miksic from Barclays. Your line is open.

Matt Miksic: Hey. Thanks so much for taking the questions and for all the great color today. So I kind of maybe follow up on a couple of pipeline opportunities and growth drivers, one being TRILUMINATE and TriClip, sort of if you could maybe walk us through the expected pathway for commercialization in the U.S. on that front? And then back to diabetes, I know the GLP-1s dominated to the discussion there, but with Tandem rolling out integration with their pump and kind of making wider availability here of closed-loop integration in Q4. Just it would be great to hear your thoughts on what that ramp looks like, what additional support or efforts you expect will be required on your end? And just what we can expect over the next 12 months, 18 months that’s out there and available to patients. Thanks.

Robert Ford: Sure. On your question on TriClip, yes, so we submitted to the FDA for review earlier this year. It’s my understanding that CMS is going to review this in parallel also. I think I made a comment to this last time, we’ll likely see a panel review here, and I don’t think it’s unexpected to be quite honest with you. A lot of the novel therapies go through an advisory panel process with TAVR — with MitraClip. So I expect that to be the case here for TriClip. Right now, the expectation of that panel is, I said the date that we think we have right now is January, but we’ll have to see how that occurs. But again, I don’t — the fact that we’ll probably go through a panel, I still feel very enthusiastic and confident about the opportunity that we have with TriClip.

Not only this is — these are patients that are in real rough shape and there is not a lot of treatment options. And we’ve shown in the TRILUMINATE study that we can reduce TR and our understanding and our belief is that reduction of TR is important, and we’ll be going through that. And then I’d say the safety profile of the TriClip product is very important as you think about building a new category and a new area, but you’ve got 5 million people here, Matt, that suffered from TR globally. I believe this is a $1 billion-plus opportunity for sure, and we’re committed to building a real strong position on here with innovation on the product and strong clinical evidence to support it. What was your other question?

Matt Miksic: Closed-loop integration with Tandem and maybe the ramp or expectations for that process?

Robert Ford: Yes, it’s my understanding here that we’ll see a launch sometime by the end of this year with Tandem. And we’re excited about that. There’s about 150,000 to 200,000 new pump users globally. So I think this is an area that we’ve historically haven’t been a player in, and now we will be a player in. We’ve launched an AID system in Europe, let’s say, more towards the end of last year into this year, and I was reviewing the results of the team. I mean that pump company has had tremendous kind of growth partnering with us. And so that’s a proof point there that when you bring in the choice and the option and you put it together with Libre that there’s a real strong value proposition to connecting the pump with Libre.

And then as I’ve said, we want to be a leader in this space, not just be a competitor. So there’s a lot of work ongoing right now with our dual analyte glucose ketone sensor, which we believe there’s a lot of applications there, Matt, but I think one of the clear applications and value propositions is to be able to kind of pair that with an insulin pump and have a much more richer algorithm and safety algorithm in the insulin delivery system. So we feel good about that.

Mike Comilla: Operator, we will take one more question please.

Operator: Thank you. And our last question will come from Jayson Bedford from Raymond James. Your line is open.

Jayson Bedford: Good morning. Thanks for squeezing me in. Just a couple of quick ones. First, what is the updated expectation for COVID testing revenue here in 2023? And then second one, Robert, you alluded to gross margin expansion in 2024. Can you just frame the sources of gross margin? I assume nutrition is a key driver there. And then maybe just bigger picture, and I appreciate that everyone in the industry is facing these challenges. But is there visibility into clawing back to pre-COVID gross margin levels? Thanks.

Robert Ford: Sure. Yes, there’s visibility. I mean, the visibility is in the first half of 2024, then I’d say no, but we do have a plan to be able to kind of drive gross margin and gross margin expansion. I’d say as you look at it into next year, Jayson, there’s really a couple of elements here that will be tailwinds for us. I’d say lower commodity costs, that for sure. And those were pretty big headwinds for us in, I’d say, in 2022 and 2023. On one hand, you’ve got commodity costs in nutrition, but you also got other commodity costs that are impacting the entire company. And what we have seen, and I think a lot of companies have seen is, those commodity costs start to bend and move down the other way. So — and that will be particularly important for us as we think about nutrition, which is highly dependent on a large number of commodity and commodity inputs.

Seeing a lower freight and distribution. And again, I think a lot of companies are seeing that, but we’re seeing that not only just in terms of rates, but also with more normalized supply chains, we can use different modalities of freight that can also lower cost and not using air all the time. So that’s going to help. We’ve got a, I think, a pretty robust process and teams in place that work on gross margin and gross margin improvement plans, they have been very busy, I’d say, over the last 12 months, 18 months. I expect those teams to continue to deliver on their strategies to deliver cost reductions, and then favorable product and portfolio mix, right? So as our faster-growing, higher-margin businesses and new products become a large portion of our overall sales and sales mix.

I think that also contributes to that. So yes, we understand that gross margin is key to be able to deliver on that double-digit bottom line EPS growth. And we’re — this is something that we work on every year. And I think we’ve got a little bit more of a better environment for our teams to work on. So — on your COVID question, I’ll ask Phil to give you the details there.

Philip Boudreau: Jason, relative to 2023 COVID testing sales forecast full year is about $1.5 billion here.

Robert Ford: Okay. So I’ll just wrap up here with a few comments. It’s clear that we’re seeing broad-based growth across the entire company. As I said in my comments, we’ve now delivered double-digit organic sales growth here for the past three quarters and forecasting that type of growth again this next quarter EPS contributions and the growth in the base business has increased every quarter, and we’ve exceeded the expectations we set for the initial guidance of the year. The pipeline to some of the points that were made there, a big kind of opportunity for us going into 2024 is our pipeline, and it continues to be productive with several new product approvals, indications reimbursement and geographic expansions there. So momentum is clearly building and well positioned for a strong end of the year and going into 2024. So with that, I’ll wrap up and thank you for joining us.

Mike Comilla: Thank you, operator, and thank you all for your questions. This now concludes Abbott’s conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott’s Investor Relations website at abbottinvestor.com. Thank you for joining us today.

Operator: Thank you. This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.