Abbott Laboratories (NYSE:ABT) Q4 2022 Earnings Call Transcript

Abbott Laboratories (NYSE:ABT) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Good morning and thank you for standing by. Welcome to Abbott’s Fourth Quarter 2022 Earnings Conference Call. 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, Licensing and Acquisitions.

Scott Leinenweber: Good morning and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we will take your questions. Before we get started, some statements made today maybe 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, 2021.

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, excluding COVID testing sales. 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 excludes the impact of foreign exchange. With that, I will now turn the call over to Robert.

Robert Ford: Thanks, Scott. Good morning, everyone and thank you for joining us. Today, I will discuss our 2022 results as well as our outlook for this year. For the full year 2022, we achieved ongoing earnings per share of $5.34, which is well above the original EPS guidance we set at the beginning of the year. As you know, macro business conditions have been highly dynamic and challenging over the last few years, particularly for U.S. based multinational companies. COVID-19 pandemic played a big role in this of course. We saw the U.S. dollar strengthened significantly and inflation reached new heights last year. Supply chains continue to face challenges and our healthcare customers have been navigating staffing challenges that are negatively impacting certain medical device procedure trends and routine diagnostic testing volumes.

As we start the new year, however, while all these factors remain headwinds, I am cautiously optimistic that we are starting to see them peak and in some cases, ease a bit. Over the past few months, the impact of COVID-19 on society has lessened and economies around the world are increasingly reopening. In the U.S., the U.S. dollar weakened a bit and inflation has eased somewhat and hospital-based procedures and routine testing trends continue to steadily improve in many areas. As you know, COVID testing has been a big part of our story these past couple of years and I am proud of what our team has built, a full suite of tests across several platforms and the intentionality and how we established a leading role in the world’s response to the pandemic.

In total, we have delivered nearly 3 billion COVID tests globally since the start of the pandemic. Going forward, we expect COVID-19 to transition to more of an endemic seasonal type of respiratory virus. And with that, COVID testing, while still important, is expected to decline significantly. We expect variance will continue to emerge, and therefore, our tests will remain an important part of our leading respiratory testing portfolio, along with flu, RSV and Strep, which we offer across multiple testing platforms, including lab-based systems and hospitals, small desktop devices in urgent care centers and physician offices as well as at-home tests. As we reflect back on the impact of COVID testing efforts over the last few years, it’s clear that our success in this area will have a positive, long-lasting impact for the company.

It strengthened our strategic position in diagnostics through the expansion of our installed base of instruments, including ID NOW, our wrap point-of-care molecular testing platform and through the opening of new testing channels, such as physician offices and at-home testing. It enabled us to increase investments in priority growth areas across the company, including R&D and commercial initiatives in support of several recent and upcoming new product launches, while at the same time, increasing returns to our shareholders in the forms of dividend growth and share repurchases. And lastly, it further strengthened our overall financial health and balance sheet, which will provide significant strategic flexibility as we look to build and grow the company even further.

I am proud of the role we played in fighting COVID the last few years. It reinforced our purpose, had a meaningful impact on society and enhanced our long-term strategic position going forward. Turning now to our outlook for 2023, as we announced this morning, we forecast ongoing earnings per share of $4.30 to $4.50. We forecast organic sales growth, excluding COVID testing sales in the high single-digits and we forecast around $2 billion of COVID testing sales for the full year 2023. I will now provide more details on our results by business area before turning the call over to Bob. And I will start with Nutrition, where sales declined around 6% in both the fourth quarter and full year as a result of manufacturing disruptions at one of our U.S. infant formula facilities last year.

Production at the facility is up and running. And as we have mentioned previously, our initial supply priority was to the WIC, Women, Infants and Children federal food assistance program to ensure underserved participants have access to infant formula. As our manufacturing capacity has continued to recover, we have been able to increase production of our non-WIC brands with a focus on serving the broader infant formula market and building back inventory levels on retail shelves. Turning to Diagnostics, where as expected, sales growth in the fourth quarter was negatively impacted by a year-over-year decline in COVID-19 test sales. COVID testing sales were $1.1 billion in the fourth quarter with rapid testing platforms, including BinaxNOW in the U.S., Panbio internationally, and ID NOW globally compromising approximately 95% of these sales.

Excluding COVID testing sales, worldwide diagnostics grew over 11% in the fourth quarter. Growth in the quarter was led by rapid diagnostics, where excluding COVID-19 tests, sales increased 30% compared to the prior year. As I mentioned earlier, during the pandemic, we significantly expanded the installed base of ID NOW and open new testing channels. This expanded footprint drove strong growth and supported testing needs when flu and other respiratory infection surged late last year. During this past year, we continued the rollout of Alinity, our innovative suite of diagnostic instruments and expand test menus across our platforms for immunoassay, clinical chemistry and molecular testing. Moving to Established Pharmaceuticals or EPD where sales increased 8% in the fourth quarter and over 10% for the full year.

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EPD continues to perform at a high level, having carved out an attractive growth space in the global pharmaceutical market, specifically our geographic focus on fast growing emerging markets with a broad portfolio targeting attractive therapeutic areas. Strong performance in the quarter was led by double-digit growth across several geographies, including India, China, Brazil and Mexico. And I will wrap up with medical devices, where sales grew 7.5% in the fourth quarter and 8% for the full year. Growth in both the quarter and full year was led by double-digit growth in electrophysiology, structural heart and diabetes care in the U.S. Internationally, sales growth was negatively impacted by COVID surges in China during the fourth quarter as well as lingering supply challenges in a couple of areas.

In diabetes care, fourth quarter sales of FreeStyle Libre, our market leading continuous glucose monitoring system grew over 40% in the U.S. and global Libre sales reached $4.3 billion for the full year 2022. We continue to strengthen our medical device portfolio with numerous pipeline advancements and launches, including recent U.S. regulatory approvals of Aveir, our highly innovative leadless pacemaker used to treating people with slow heart rhythms, Eterna, the smallest implantable rechargeable spinal cord stimulation system currently available in the market for the treatment of chronic pain. FreeStyle Libre 3, which provides continuous glucose readings in the world’s smallest and most accurate wearable sensor. Libre was recently named the best medical technology of the last 50 years by Galen Foundation.

And finally, Navitor our latest generation transcatheter aortic heart valve replacement system. So in summary, 2022 was another highly successful year for Abbott. We are optimistic about the early signs we are seeing of an improving operating environment and excited about the growth opportunities that lie ahead for all of our businesses and we continue to strengthen our overall strategic position with a steady cadence of innovative technologies that are either in the early stages of launching or expected to launch over the course of this year. I will now turn over the call to Bob. Bob?

Bob Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange. Turning to our results, sales decreased 6.1% on an organic basis in the quarter. COVID testing-related sales were $1.1 billion in the quarter, which while stronger than the forecast we provided back in October, reflect a year-over-year decline versus sales in the fourth quarter of the prior year. Excluding both COVID testing-related sales and U.S. infant formula sales that were impacted by manufacturing disruptions last year in our Nutrition business, total Abbott sales increased 7.1% on an organic basis in the fourth quarter and 7.4% for the full year 2022.

Foreign exchange had an unfavorable year-over-year impact of 5.9% on fourth quarter sales, which resulted in a somewhat favorable impact on sales compared to exchange rates at the time of our earnings call in October as we saw the dollar weaken a bit late last year. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 55.6% of sales, which reflects the impact of the nutrition manufacturing disruptions and inflation we have experienced on certain manufacturing and distribution costs across our businesses. Adjusted R&D investment was 6.5% of sales and adjusted SG&A expense was 28% of sales in the fourth quarter. Turning to our outlook for the full year 2023, today, we issued guidance for full year ongoing earnings per share of $4.30 to $4.50.

For the year, we forecast organic sales growth excluding the impact of COVID testing-related sales to be in the high single-digits. We forecast COVID testing-related sales of around $2 billion with around $750 million forecasted in the first quarter. Based on current rates, we would expect exchange to have an unfavorable impact of approximately 1% on our reported full year sales, which includes an expected unfavorable impact of approximately 3% on our first quarter reported sales. We forecast an adjusted gross margin ratio for the full year of approximately 56% of sales. Also for the year, we forecast R&D investment of around $2.5 billion and SG&A investment of around $11 billion, which reflects investments to support several ongoing and upcoming new product launches and strategic growth initiatives.

We forecast net interest expense of around $300 million, non-operating income of around $450 million, and a full year adjusted tax rate of approximately 14% for the year. As Robert mentioned, the strength and resiliency of our business, particularly since the start of the pandemic has allowed us to concurrently invest in our strategic priorities, provides strong return to our shareholders and further strengthen our financial health, which provides a strong base on which to grow the company going forward. With that, we will now open the call for questions.

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Q&A Session

Operator: Thank you. And our first question will come from Robbie Marcus from JPMorgan. Your line is open.

Robbie Marcus: Great. Thanks. Good morning, everyone. Robert, maybe to kick it off, I appreciate the guidance, but there is a lot of moving parts through the different business lines with macro involved with a lot of new product launches involved. Maybe you could just build up how we should be thinking about how you came up with the guidance range on both the top and bottom lines given all the moving parts?

Robert Ford: Sure. I mean, there is obviously a macro environment here that’s been complex and you have mentioned it. And as I said €“ and as I said in my remarks and I think they have gotten significantly better versus where we were in October, on our last earnings call. So I think that we have factored some of that improvement and some of that stabilization in there. I mean, I don’t necessarily think that we have got too many moving parts here. I mean, obviously, we run a €“ the company has got a lot of business and business segments. But I mean, if you look at really the two areas I would say, Robbie, that kind of have had this effect of maybe sometimes distorting the results a little bit is our COVID testing business and the impact of the recall products last year, right.

So from a COVID perspective in 2022, we actually sold more tests than we sold in 2021 and then obviously, the impact of recall products that was a negative. Both of those split next year. So if you take those out of the equation, you kind of go back to what we were growing pre-pandemic, right, which was top tier, high single-digits, 7% to 8% growth. That’s what we grew in 2022, again excluding COVID and the impact of the recall products. And then if you take that comp out on the recall product side this year as we return to market and look at the base business, obviously, without the COVID testings, we are going to be growing high single-digits, probably at a higher end of that pre-pandemic range probably 8% plus. So I think it starts with the top line.

And that’s probably the number one part of our guidance is obviously making sure that we feel that our top line is taking advantage of all the good parts, all the good product launches, etcetera that we have. And from that perspective, I think a lot of what we are doing kind of supports that ongoing high single-digit growth rate. If you look at our device portfolio, we will be looking at high single-digit growth rate, low double-digit growth rate, combination of both kind of recovery, the steady recovery procedures that we are seeing combined with all these product launches that we have got lined up that will ultimately have a full year impact, whether it’s Libre 3, Amulet, Aveir, Navitor, CardioMEMS, Eterna on the neuromodulation side, our mapping system in EP, we are going to launch a new ablation catheter.

So, the device portfolio is well set up to be able to drive those high single €“ sorry, high single-digit, low double-digit growth rate. I mean, I think we are going to continue to see strong performance in EPD. I think as the world continues to reopen, those emerging markets continue to be a great opportunity for us. We have strengthened our position in diagnostics throughout these years and we will see continued successful rollout of Alinity in our core molecular diagnostics and recovery in infant formula too. So I think you put all that in place, our core business, Abbott that we knew pre-pandemic is actually stronger than we were pre-pandemic with the investments that we made. And I think that’s the other part of, I guess, in the P&L, if you look at what we have been able to do this year is because of COVID and the investments that we made during COVID in these growth areas, we are able to drive this high single-digit growth across the company with a fairly flat investment line, whether it’s R&D and SG&A, so really getting the leverage across the businesses.

So I mean, I think it really starts with our top line and the confidence we have and the products we’re launching, the pipeline that we have. And then COVID, we forecast about $2 billion next year, and I think that’s the right number right now. Obviously, we see kind of society transitioning here. We’ve got a strong installed base. We’ve got manufacturing capacity. We haven’t factored in any kind of real surge but if that happens, we do have the capacity to be able to do that. So I’d say those are some of the moving pieces there. But fundamentally, we’re in a real strong position in terms of our long-term growth opportunities. Leading positions in these attractive growth areas, strong pipeline, which I’m sure we will get into some of them and a strong balance sheet.

So that’s how this has been constructed, and I think that we’re in a good position here.

Robbie Marcus: Great. Thanks, Robert. Really helpful. Maybe one for Bob, you gave us the full year guide and you gave some commentary down the P&L, which is really helpful. But how should we be thinking about some of the quarterly cadence here? How FX flows, what is FX on the bottom line? And how did that compare to €˜22? And any just things we should be thinking about first half versus second half on the P&L? Thanks a lot.

Bob Funck: Yes. So if you think about the kind of the cadence of our business for 2023, it really starts with the top line and some of the things that Robert kind of talked about. First, we have a lot of the new product launch activity, especially in our medical device businesses. You got products that either launched last year, we will be launching this year. I’m sure we will talk about some of those on the call today. So you’ll see the impact of those launches kind of grow over the course of the year, kind of feather into that top line. Secondly, we are seeing a steady improvement in procedure trends in the U.S. and Europe. We’ve been seeing that and we expect to continue to see kind of a steady improvement there on procedure trends over the of the year.

In our Nutrition business, we will see improvement as we continue to supply the market, in particular, the non-WIC segment of the infant formula market in the U.S. And so will recover share there. And so we will have the impact of that over the course of the year. For China, Robbie, I’d say we’ve assumed a softer start in Q1 given some of the dynamics there at the start of this year, but we anticipate that will improve over the course of the year. And so all those changes €“ all those impacts on the top line as that builds over the course of the year will flow through to earnings as Rob about we’re going to get leverage in the middle here. And so for the first quarter, we’re €“ we think earnings will be approximately $1, and then we will build from there.

On your question on foreign exchange, rates have improved a bit recently, but exchange is still a headwind, particularly on earnings. At current rates, as I said in my opening exchange is approximately a 1% headwind on sales. EPS, it’s a little bit more than $0.30 headwind for us in 2023. The fall-through impact when currencies move like we have seen over the last year is always complex. Translation is just a piece of the impact. And while that has improved from where we were a few months ago, it still remains a headwind. One of the biggest drivers that we’re seeing is the impact from our hedging program. We realized pretty significant hedging gains last year that won’t repeat this year. And you can really see the impact of those hedging gains on our 2022 results.

Last year, there was a pretty significant exchange headwind on sales, a little over 5% or $2.1 billion, but a fairly modest impact on earnings as it was less than dime. And that was really the benefit we realized last year on those hedging gains that won’t repeat in 2023. That’s not a unique dynamic that we’re seeing. We’re seeing that from some other multinationals as well.

Robbie Marcus: Thanks a lot.

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

Larry Biegelsen: Good morning. Thanks for taking the question. Robert, I feel compelled to ask about Libre again, just given how important it is. So maybe I’d like to hear from you the outlook for 2023. How should we think about worldwide growth? Can it exceed 20% this year? And can you talk about international, where you’ve been negatively impacted by the supply issues and the transition to Libre 3 in Germany, when do you expect those issues to be resolved? And just the growth drivers like Basel and the vitamin C, resolution, what are some of the growth drivers to look forward to this year for Libre? And I had one follow-up. Thank you.

Robert Ford: Sure, Larry. Well, I think Libre had not a great year, full year growth of over 21% strong growth in the U.S. over 42%. And international kind of grew in those mid-teens number. We were impacted a little bit by back orders, as you said, on the international side. And I’d say probably a little bit more on our early generation products so kind of Libre 1 was that. We had a significant improvement in that situation in Q4. I expect 1 or 2 more months of until we can completely resolve that, but a significant improvement over there on our international performance. I think one of the key things on the international side is it was a little bit of this supply chain on chips that we had, like that I said, is mostly behind us.

The other part of it is the upgrade cycle, right? And when you go with an accelerated upgrade cycle versus with Libre 3 that we did from Libre 2 in some of our key markets, when we went from Libre 1 to Libre 2, we let that upgrade kind of somewhat happen naturally. And that takes about 1.5 years, 2 years to a complete. For Libre 3, we wanted to go more aggressively in some of these markets. So that takes our sales force away from new demand generation to making sure that we can get the scripts and do all the behind-the-scenes work for those upgrades. So that’s €“ I would say that’s still ongoing, but I’d call it about 80% to 85% complete. So then that allows us starting now in 2023 on the international side to start kind of driving new additions here.

So I’d say, I expect continued growth in the U.S. in terms of market expansion, Basel opportunity, I think, is a great opportunity, and I think it will start in the U.S. But I think we’re seeing that also internationally. And now that we’ve got the supply chain issue largely behind us, and the upgrade cycle, again, largely behind us, we can forecast our demand generation activities on new users. So I think that, that’s one key driver of growth for us €“ can we see a path for another 20% growth in 2023. Yes, I can. And I think there is a lot of opportunities of growth. I think one of them that you mentioned being the Basel expansion is a significant opportunity. I think we’ve been leading the charge over here, Larry, in terms of generating the clinical data that’s required to be able to support reimbursement.

It will start, I think, in the U.S., but I don’t think it will be a U.S.-only phenomenon. But in the U.S., we will probably start first. You’ve got about 4 million Type 2 Basel patients in the U.S., about third of them are Medicare. And even if you assume a reasonable market penetration, you also have to assume difference in annual utilization rates versus Type 1 an MDI or a pumper. But even if you take all that into consideration, the opportunity starts with a $1 billion and it can range depending on the speed and the uptake of that. So I think this is a great growth opportunity. And like I said, I don’t think it’s a U.S.-only situation. I think this is going to is going to start to expand across the world, given the clinical data that you see with Libre and the impact that it has.

So I think this is another great opportunity for us. The vitamin C issue that you asked, we’ve submitted our response. We’re working with the FDA on this, and I’m not going to try and forecast that approval. But what I would say is that as soon as that gets approved, then we will start to see the product with a couple of quarters connect to ID pump systems. We have already launched a connected ID system, AID system in Europe, initial results of the receptivity of that product combined product in Europe has been very favorable. So I think that’s another key growth driver for us in 2023. And then finally, I would say on the pipeline perspective, I don’t think it’s a 2023 milestone for sales, but I think it’s an important development activity for us is going to be the running our trial for the compline glucose ketone sensor with the FDA and generating the data to support a dual sensor because I think, again, as I’ve mentioned, it seems to be the go-to sensor for pumpers will be this ability to measure glucose and ketones and factoring that into the algorithms.

So that’s going to be €“ that’s obviously having a lot of focus of us in terms of running that trial. And then finally, I would say, outside of Libre, the Lingo platform is another kind of key growth driver for us. I’ve talked about expanding Libre, the Libre platform outside of diabetes and using this more broadly for a much more broader target. We have a separate team that’s been working on that development, Larry. We will be launching two Lingo products this year. In Europe, I’d say the first one will probably be in the first half of this year and the second one in the second half. So I’ve talked about Libre being a $10 billion product by 2028 that implies a 15% annual growth rate. We will do better than that this year. And I think the opportunities we have to be able to drive to that kind of revenue for this product are very real.

And I think we’ve been executing very strongly on all these areas.

Larry Biegelsen: That’s super helpful. Just one brief follow-up, you talked about being excited about the TriClip opportunity at JPMorgan. I think it was just a month. I know it’s limited in what you can say because you are presenting the TRILUMINATE data at ACC. But how are you thinking about that opportunity relative to mitral? Do you still expect to do you still expect approval in the U.S. by year-end €˜23? Thanks for taking the questions.

Robert Ford: I think it’s a great opportunity for us. And I think that we’ve shown that we’re definitely here one of the leaders when it comes clip-based heart valve repair market. And I think it’s €“ I think it’s €“ it could be bigger than mitral. I’m not sure I would go that far yet. But I would say that the uptake of the tricuspid repair market, I think, will be faster than the uptake for the mitral just because I think when mitral was launched, it was the first repair system and now you have a large group of implanting physicians that are familiar with the clip technology are familiar with mapping that clip technology and the procedure. We did make some changes to the delivery device for the clip, it’s a little different anatomy, a little bit more challenging to get there with the clip the tricuspid area.

But I think that it’s a great opportunity. I mean, I think there is 3 million people today that suffer from tricuspid regurgitation. There is not a lot of really good options available for treatment which is why we invested in the trial here in the U.S. to bring products to the trial. Like you said, we’re going to be presenting that in a couple of months. And I think it’s a great opportunity for us. We’ve already seen real nice traction of that in Europe. We launched that in 2021. The team wanted to launch it right in COVID. And I must say at the beginning, I was somewhat against that but they proved me wrong and the product’s done really well in Europe. So I think this is another great opportunity for us here in the U.S., too. So we’re not ignoring MitraClip, it’s part of our entire portfolio.

And I think the combination of those two products in the implanting position will be very powerful for Abbott.

Larry Biegelsen: Alright. Thanks so much.

Operator: Thank you. And our next question will come from Josh Jennings from Cowen. Your line is open.

Josh Jennings: Hi, thanks for taking the questions. Good morning. Robert, I was hoping just to follow-up on Larry’s question just on Libre, just thinking more kind of in the out years and this $10 billion target that you’ve set. I think maybe just €“ I think you outlined everything for 2023, probably holds true for over the next 5 years. But just if you could reiterate your confidence we’re not in that $10 billion out-year target? And just you expect consolidation between pump and CGM companies. And maybe it would be just great to hear strategic rationale of whether a combined pump CGM offering under one roof would be advantageous for either Abbott or another company? And then the second question is just on Navitor and the launch here in the United States.

What would represent a win for Abbott from a U.S. share gain perspective? And what segment is the low-hanging fruit considering the current label? Is it the elderly patients that don’t have a long life expectancy that are high risk or even intermediate risk how do you expect a Navitor launch to play out and add to the macro device growth in 2023? Thanks for taking the question.

Robert Ford: Sure. Well, I mean, I guess on Libre, to your question on how to get to $10 billion by 2028, I mean, the math will say 15%, right. How do you get 15%. I mean there are real three key areas, and I talked a little bit about them. But I’d say, first of all, it’s to continue to have a dominant share heavy insulin user segment. We have that today with the non-pumpers with the MDI both in the U.S. and globally, internationally. So the real focus there becomes, okay, how do we focus now on the pumper segment and the connectivity over there. And like I said, I think we will do that with a little bit of catch-up with Libre 2 in terms of what is currently offered in the market. But then to leapfrog that, I think the combined sensor glucose ketone sensor is ultimately the way we will play.

And we will see what pump company is going to want to line up to be first on that connectivity if and once we get that approval because again, I continue to hear from KOLs the importance of that product for the pumper segment. So the second part is the Basel expansion. And like I said, you can look at the Basel population globally, assume a certain rate globally, a certain utilization rate, and that adds a significant amount of growth to that number. And then the third piece of that is really expanding Libre beyond just diabetes and looking at the lingo platform. So the adding up and the execution of those strategies are what ultimately gives us confidence that we can get there and we can sustain that 15% growth rate over the next kind of 5 years.

Regarding your questions on pumps, listen, I think that it’s an important segment. It’s one that benefits quite significantly from a combined system. We’re now €“ we’re focusing more aggressively on that. As it relates to an all in one, I think the market has spoken in terms of the pumpers want choice. They want to be able to choose what is the best sensor pump combination. And so I think right now, my view on that is the consumers have spoken, the market has spoken, the regulators spoken, they want that interchangeability. And I think that our focus will be on providing the best sensor for the pump systems that are out there. So that’s €“ I think I covered your Libre questions. I think you had a question on Navitor. Listen, we’re excited about this.

It’s a large market. It’s a large segment here in the U.S., it’s about $3 billion. Our label is about 50% €“ sorry, it’s about 50% of the market because we’re only approved right now for the high-risk patients. But it’s got a strong clinical profile. I mean we will be sharing data at CRP specifically to this, but I mean we’ve already released some data on it last year comparing it to other valve systems. So I think that we’ve been very intentional about wanting to enter this market and to do it in a way that is sustainable. Expectations, I mean, I talked a little bit about this. There is obviously two pretty well entrenched players in the U.S. market. do I think that we can be a leader in 3, 4, 5 years, I think that might be difficult. But I think that we can come into this market and offer another choice, another opportunity that provides additional benefits differentiated benefits versus other systems that allow us to pick up share.

If I look at where we are in Europe, we launched this in Europe, and we have high single-digit share in Europe. And we’re not in all centers we’re in about half of the market, in the centers that we are implanted and available, our shares in the mid-teens. So you put that together, we’re high single, but where we’re competing, we’re in the mid-teens. So I think this will be a ramp. I think we’ve got the sales force in place. We want to roll this out in a way that allows us to sustainable in that strategy of being able to be a double-digit share gain over the next couple of years.

Josh Jennings: Appreciated it. Thank you.

Operator: Thank you. And our next question will come from Joanne Wuensch from Citibank. Your line is open.

Joanne Wuensch: Good morning. And thank you for taking the questions. I have two. The first one has to do with Nutrition. And if you could outline where the company is in terms of the recovery and when do you think it will return to growth? And then the second question has to do with the use of cash, what are your thoughts on it and where you are on share repurchases? Thank you.

Robert Ford: Sure. Well, on Nutrition, as I said in the opening statements, production at Sturgis is up and running. The team is working around the clock, nonstop, very hard. Number one focus here, as I said, was to serve the customers, get product back on shelves. We started with WIC with the inventory levels on our WIC contracts are very good as we entered into Q4, and we then started to focus on our non-WIC brands, and that’s progressed very well in the fourth quarter and as we go into this year, looking very good. So I would say, if you look at our growth rate, obviously, you’ve got this year-over-year comp. You’re going to see the growth already in Q1, Joanne, right, because we were impacted last year in February. But I guess the right way to look at this is, okay, strip away the comp, strip away where this year-over-year effect of coming back on the market, etcetera, I expect our business €“ our overall nutrition business to be growing at that pre-pandemic level between 4% and 6%.

Our market shares in WIC have largely recovered and we are seeing a nice cadence of recovery in the non-WIC share here in the U.S. So, I think you will start to see that growth rate already on the print in Q1, obviously, in Q2 and Q3. But the important thing here is we are looking at our share and the share recovery is very much in line with our forecast that we have set for the full year. I would like to see our market share get back to pre-pandemic levels by the end of the year. I am sorry, what was your other question?

Joanne Wuensch: Thank you. Use of cash and whether €“ where would you stand on share repurchases? Thank you.

Robert Ford: Sure. While use of cash, talked about this. We have taken this balanced approach. I would say if I were to kind of rank it in terms of use of cash, we are committed to growing a dividend, a strong and growing dividend. So, that’s probably number one use of cash. We announced that increase of about 9% in our dividend last year. So, that’s I will say is priority number one. Number two is obviously ensuring that all of these new products that we have got launching are appropriately resourced in terms of manufacturing and a lot of our CapEx investments. On the buybacks, we did throughout the first nine months of last year we had about $3 billion of buybacks. And I would say, we probably did a little bit of catch-up there, Joanne, in terms of catching up to some of the dilution as we were focusing on getting our leverage down post acquisitions.

So, we do a little bit of catch-up there. And I would say in terms of buybacks going forward, we will be contemplating them and they will be largely focused on offsetting any kind of dilution that we had this year. I would say the other kind of key use here for us this year is going to be debt. We have some debt towers coming up and we are not going to be renegotiating those just given interest rates. We want to move those off. So, that’s probably where you see the use of cash. On the M&A side, which I know is always a question, so I will preempt anybody over there who has got that on their list. I have talked about it where €“ on several calls, we are interested. We are actively assessing the opportunities, whether it’s tuck-in on up. Clearly, the valuations here have come down somehow and I think they need to stabilize a little bit.

But we cast a pretty wide net. Diagnostics devices are the areas where we have most interest. And again, if it financially makes sense for our shareholders, and it fits strategically, then we will €“ we have got that strategic flexibility in our balance sheet to do that. And we are going to be looking at businesses where we can bring value, whether it’s €“ whether we can accelerate sales, whether we can enhance an R&D program or enhance its probably success, a growth area that we can build and have a path to building a position or even if it’s just to augment our own existing pipeline. I think when we have taken that approach, our track record shows that when we have taken that approach, it’s largely been very successful for our shareholders.

Joanne Wuensch: Thank you.

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

Vijay Kumar: Hey guys. Thanks for taking my questions. Good morning to you Robert. Maybe my first question on your organic growth assumptions here. I think I heard 8 plus is a reasonable number for F €˜23. What is that assuming for any impact from China supply chain, any VBP impact? If you could just give us some assumptions around those macro factors that would be helpful.

Robert Ford: Well, I will let Bob talk a little bit about some of the potentially other macro factors. But the ones you just mentioned here. I mean China, it’s an important market for us, Vijay. It’s an important growth market and it’s good that it’s moved to a more kind of reopening play. I think that has not only a big impact for us in China, where we have got a strong position. I mean we are not overly reliant, I would say, it’s about less than 5% of our total sales. But nonetheless, it’s an important kind of growth market for us. And I think that reopening in China is going to have a real positive spillover effect in other areas of the world. And I would say, predominantly in Asia, Southeast Asia, where we have got strong position in our EPD and in our nutrition business and some device areas, too.

So, I think the overall opening of China is good. Like Bob said, there is going to be some choppiness in the first quarter because seeing a lot of cases, hospitalizations, etcetera. But I think as that moves €“ starts to move down, I think we will see a pretty strong rebound in our growth prospects over there. So, the VBP that you mentioned, yes, I mean that does have an impact. It’s more restricted for 2023 in our electrophysiology business. So, we will feel a little bit of an impact there, but I think that the market opens up for us because of the strategy we took on VBP side. So, I think it’s net-net, it’s going to be positive for us in the long-term here, medium, long-term in terms of that being an opportunity for us. We have seen this, Vijay.

I mean this happened to us €“ this happened in the market with stents in 2019 in our vascular business. That business is back to what I would call pre-VBP levels this year. So, there is an impact. In that case, we didn’t necessarily win some of the contracts. In the case of VBP, we did win a contract, so €“ or a portion of the contract. So, I would say macro, yes, we have got some of these headwinds that we have talked about. FX, I think Bob has already talked about it, inflation, but all those seem to be easing off a little bit and the recovery of the procedures and the pipeline and the product launch is a key growth driver for us.

Vijay Kumar: Understood. And then Bob, one for you on that gross margins, you are at 56%. That’s a step down year-on-year. When I look at pre-pandemic, you guys were at 59%. Is there a simple bridge Bob on how much of this has been inflation, you did spoke for hedging impact. Is that all hitting your gross margin line? And why shouldn’t inflationary pressures improve? And when can we start seeing gross margins creep back up to pre-pandemic levels?

Bob Funck: Yes. So, the €“ as I have said in my opening remarks around 56% for the year, that’s a modest step-up kind of from where we exited last year. As you would expect, Vijay, in this environment, there is a lot of different dynamics that multinationals are facing. We have got some headwinds. We have talked about those inflationary impact, how that flows through, including the inventory we built last year that will be sold this year. We talked about currency, where we are going to €“ we are not going to see a repeat of those hedging gains that we had in €˜22. So, that’s a €“ that’s a bit of a headwind there. On the positive side, I would say the recovery we are forecasting in the U.S. infant nutrition business will contribute positively.

And as that recovery occurs over the course of the year that will have a more positive impact. We also have gross margin improvement programs across all of our businesses that will help to offset some of those headwinds. And we are taking price where we can, I would say, in our more consumer-facing businesses. And then finally, I would say just kind of from a mix standpoint, as we continue to see an acceleration in our medical device business with some of these new product launches, those are higher gross margins than the overall company, and that will positively contribute to our gross margin. If you €“ to your question about kind of where we pre-pandemic in what we are guiding to this year kind of I would say the biggest impact on a cumulative basis has really been inflation.

And that’s really the €“ I would say the big difference here in terms of where we are guiding right now, and where we were pre-pandemic. But as we continue to see an acceleration from a mix standpoint and continue to work at some of our costs, we would expect over time to see that gross margin to continue to improve.

Vijay Kumar: Understood. Thank you, guys.

Operator: Thank you. And our next question will come from Travis Steed from Bank of America. Your line is open.

Travis Steed: Hi. Good morning. Thanks for taking the question. Just a follow-up to Vijay’s question. On the inflation piece, is that still $1 billion baked into the 4.40 guidance? I just want to make sure I understand what’s baked in on the gross margin line. And then anything to call out on the 2023 operating margin expansion kind of the moving parts to get the op margin expansion there. It looks like 22% is kind of what’s implied by the guide?

Bob Funck: Yes. So, yes, on the gross €“ on the operating margin, yes, we are around 22% kind of where we were pre-pandemic. We are getting the high-single digit growth on the top line kind of in the €“ excluding the COVID testing. We are getting leverage down the P&L, which Robert talked about where we were able forward invest over the last couple of years. So, we are going to get leverage in the expense area and that gets you to about around 22% op margin. In terms of inflation, we are going to see a carryover impact from last year, still pretty meaningful. But we have been able to mitigate a good portion of that through both our gross margin improvement programs that we have across our businesses as well as taking some price where we can.

Travis Steed: Okay. That’s helpful. And a couple of product questions on EP. I think you mentioned the new EP catheter mapping system. I know that was new, maybe I missed that in the past. I am curious how you are thinking about ablation and the impact on your EP business. And then the other product question was on Libre. The vitamin C, is that on Libre 2 or Libre 3, just want to understand the pathway to get vitamin C on Libre 3 and the timing there?

Robert Ford: Sure. On the Libre 3, Vit C, I mean it’s going to start off with Libre 2. So, we want to get that done first, and then we will progress on to Libre 3. So, focus right now is on Libre 2. And then we will move to Libre 3. On your question on EP, yes, I mean I think the new catheter that we have launched in Japan and started to launch in Europe towards the end of last year is our TactiFlex, which is really using contact force together with the flexible tip that we had in our flex catheter. So, the feedback we have got in that is really, really positive. So, I think the combination here of our enhanced new mapping system together with our market-leading mapping catheter in HD grid and now bringing TactiFlex. That combination is very powerful.

Regarding PSA, it’s definitely an area of interest. We have been investing in it. We actually had two internal programs, had a bake off and saw the one that we felt stronger about taking some of the learnings that we are seeing from the current on-market products. And there is obviously some trialing that’s ongoing right now, but I would say it’s a growth opportunity. It’s an interesting area. I think it’s still too early to say in terms of will the market move completely over to this technology or not. I think it’s important to have it and hence, why we are investing in our program and incorporating into our R&D program, all of sort of the deficiencies that we have heard from some of the current on-market products are the ones that are being put in development right now.

So, important area, important investment area for us in EP definitely benefited from kind of the investments that we made during COVID. And I think it’s an important product to have. It’s ability to convert I think it will convert a portion of the market. My sense is Cryo was probably the first one, but how much of Cryo, still up to see, but definitely an interesting area for investment.

Travis Steed: Great. Thank you.

Scott Leinenweber: We will take one more question.

Operator: Thank you. And our last question will come from Matt Miksic from Barclays. Your line is open.

Matt Miksic: Hey. Thanks for getting me in. I figure maybe just if we could wrap it up with an update on a couple of the pipeline products, the five products, Robert, that you have highlighted in the past, Amulet and CardioMEMS, maybe if you could just talk a little bit about where you are with these launches in terms of size, scale, momentum and maybe what kinds of catalysts we can look for or metrics we can see for these two products this year? Thanks.

Robert Ford: Sure. I mean I think those five products that I have discussed on the last call, and we talked about them exiting at an annual run rate of 500. They actually exited at a run rate of 550 and they grew around €“ they grew around 100%. So, I expect those five products to kind of have maybe not 100%, but pretty high growth rate in next €“ in this year. Regarding Amulet, listen, I think it’s €“ like I said, it’s a great space. We have been rolling out the product last year, building the sales force. Key focus here is obviously ensuring good implanting technique with the physicians. We are in about 225 accounts right now. I expect that in terms of growth catalysts, getting more share of those existing accounts as the physicians become more and more accustomed to using our product and see the benefits of using our product versus other systems.

I think that will be a growth catalyst and then expanding. We do want to start to expand more as our sales force has increased, the competency of our sales team has increased and our clinical team has increased, we feel more confident now to be able to kind of expand to more accounts. And that’s what we will be focused on. Another key catalyst of growth here is obviously the trial that we have been investing on in catalysts, which is to compare Amulet to novel oral anticoagulant. So, that’s another opportunity. It’s not one in 2023, but continuing that enrollment in that trial is an important driver for kind of the long-term growth strategy here of Amulet. CardioMEMS has done very good. We saw an indication expansion last year in the U.S., seen a nice step-up in sales.

I think it’s a great long-term opportunity. I think it’s part of those five products that are driving a lot of growth. And I would say probably the next kind of big area, I mean we have been investing in sales force and rolling this out. Next big area here is working on that NCD. I think that will remove some of maybe some regional hang-ups in terms of reimbursement. So, the NCD is something that we are going to be working on this year with the data that we have collected as part of all of our trials. So, I think they look very strong as part of that group of five products. I would like to close up the call here. Just a few remarks. The operating environment still remains challenging, right. But it’s not as challenging as we saw back in Q3 of 2022 in October.

There are definitely signs here of stability. There are signs of improvement, whether it’s in the macroeconomic side or whether it’s specifically in the segments that we are competing in. And Abbott is well positioned. We are well positioned to both capitalize on this improving environment or to navigate if there is any unforeseen volatility over here. That’s what our portfolio has been built for. That’s what our balance sheet is set up for. It’s set up for these kind of situations and these kind of scenarios. We always knew that pandemic level testing was not a base case. We knew that eventually this would move down to an endemic like testing. And we are €“ our view here is that in 2023, we will start this process of moving to that. And so as a result of that, we did do this forward investing into our growth areas, whether it’s devices, diagnostics, certain areas in EPD or nutrition.

And that’s allowed us to grow at the pre-pandemic level, this high-single digit top-tier growth without having to make the OpEx investment that you would expect to be able to sustain that growth. So, we are getting that flow through on the P&L and net leverage on our investments. I do recognize the cost pressures. The company recognized those cost pressures. We talked about this now to Vijay’s question, we are going to be working relentlessly on getting our gross margin back to that pre-pandemic level, and it’s a combination of working in our cost profiles and our GMI programs, but also as we accelerate the growth in our device business, that mix shift contributes to that. And finally, our balance sheet is strong and provides us the strategic flexibility we need to navigate.

And we take this balanced approach where we can provide returns to our shareholders, while at the same time, investing for the long-term. So, thank you for being on the call overall. I think Abbott is very well positioned as we kind of exit this kind of pandemic state and move into more of an endemic state. I think we are well positioned and now it’s all about execution.

Scott Leinenweber: Thank you, operator and thank you for all of your questions. This now concludes Abbott’s conference call. A webcast replay of this call will be available after 11 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.