Abbott Laboratories (NYSE:ABT) Q4 2023 Earnings Call Transcript

Abbott Laboratories (NYSE:ABT) Q4 2023 Earnings Call Transcript January 24, 2024

Abbott Laboratories reports earnings inline with expectations. Reported EPS is $1.19 EPS, expectations were $1.19. ABT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and thank you for standing by. Welcome to Abbott’s Fourth 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 2024. 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 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, I’ll discuss our 2023 results as well as our outlook for this year. Before I do that, I think it’s important that we take a moment to look back at the challenging environment that we all faced over the last few years and how our actions during that time have positioned the Company to be in an even stronger position today than before the start of the pandemic. In the two years preceding the start of the pandemic, Abbott delivered organic sales growth of more than 7%, which was considered top-tier given the large size of our Company. We expected growth in 2020 to be in the similar range, but then COVID-19 arrived and disrupted that trajectory.

And while our procedures-driven businesses, such as medical devices and routine diagnostic testing, experienced a slowdown due to the healthcare systems around the world shifting their focus, our branded generics pharmaceutical business was able to stay the course, and our nutrition business accelerated as people around the world placed a greater emphasis on protecting their health. While some companies saw their entire portfolio suffer during the pandemic, Abbott’s diversified business once again proved to be resilient. It was also during this time that we created a multi-billion dollar COVID testing business in just a matter of months that helped play a role in reducing the spread of the virus around the world. COVID testing grew to become a significant part of our portfolio, representing nearly 20% of our sales in 2021 and 2022.

And given the important role that these tests had on society and on our financial performance, COVID testing temporarily altered our identity and became a main point of focus to the general public, our investors, and other stakeholders. But we knew that the pandemic would not last forever. So we planned ahead. We pulled forward or accelerated investments in several areas across the Company when the demand for COVID testing was at peak levels, knowing that we would scale these investments back down when the eventual decline in demand for COVID testing occurred. And the experiences we gained in creating the COVID testing business and then managing the rapid scale up and subsequent scale down of that business will have a lasting positive impact on our Company.

Our R&D pipeline was one of the areas we targeted for the accelerated investments, and we’re seeing those investments pay off. In the last two years, we have announced more than 25 new growth opportunities, which include a mix of new products, new indications, and geographic and reimbursement expansions. And this level of pipeline activity is occurring across the entire Company. In EPD, for example, we announced an agreement to commercialize several biosimilars in emerging markets. In nutrition, we continue to invest in science-based solutions to address emerging medical needs, with particular emphasis on the fast-growing adult nutrition segment. In diagnostics, we announced approvals for new tests, new instruments, and a new laboratory automation solution.

And in medical devices, we announced 10 new product approvals, along with several new opportunities to further improve the growth outlook of the existing portfolio. These new opportunities are well-balanced, with each of our seven medical device businesses accomplishing at least one significant pipeline-related achievement. Looking back at our performance in 2023, it is clear that these new opportunities contributed to an acceleration in our growth. Both our sales and earnings growth exceeded the expectations we communicated at the beginning of last year. Sales and earnings growth for individuals excluded COVID testing grew double-digits every quarter last year and finished the year up more than 11%, higher than our original guidance of high single-digit growth.

Adjusted earnings per share finished the year at $4.44, which was above the midpoint of our original guidance range, despite COVID testing sales coming in much lower than originally forecasted. And this is a testament to the strength of the Abbott portfolio and a strong indication of the top-tier sustainable performance we are positioned to continue to deliver as we move past the pandemic. Turning to our outlook for 2024, as we announced this morning, we forecast sales growth, excluded COVID testing, to be in the range of 8% to 10%, which equates to generating organic sales growth of more than $3 billion. We forecasted adjusted earnings per share of $4.50 to $4.70, which contemplates double-digit earnings growth on the base business. And I’ll provide additional details on our 2023 results by business area before turning the call over to Phil.

And I’ll start with nutrition, where sales increased 14% in the quarter. In pediatric nutrition, double-digit growth in the U.S. was driven by continued market share capture in the U.S. infant formula business, where we are once again the market leader. International growth of 18% was driven by growth coming from both infant formula products and our PediaSure toddler brand. In adult nutrition, sales for the full year surpassed $4 billion and grew 13.5% in the quarter, driven by strong demand for Abbott’s market-leading Ensure and Glucerna brands. Turning to established pharmaceuticals or EPD, where sales increased nearly 9% in the quarter and 11% for the full year. This is the third consecutive year that EPD sales have grown double-digits. Our unique business model of offering broad product portfolios across a targeted set of therapeutic areas that are tailored to the local needs of each emerging market we operate in continues to deliver outstanding results.

Moving to diagnostics, growth in rapid diagnostics was impacted by seasonality related to the respiratory virus testing. The flu season arrived later this year than last year, which caused sales of flu and other respiratory tests to be lower in the fourth quarter compared to that of the prior year. But in core laboratory diagnostics, growth of nearly 10% continues to be driven by the success of our Alinity suite of systems paired with our broad test menu offering. Alinity continues to drive high contract renewal rates and competitive win rates. We recently announced that we received FDA approval for our new lab automation system that offers cutting-edge technology to help laboratories increase performance and improve the overall quality of their operations.

The system has been available in international markets and we look forward to offering this to customers in the US. I’ll wrap up with medical devices, where sales grew more than 15% in the quarter led by double-digit growth in six of our seven medical device businesses. In diabetes care, fourth quarter sales of Freestyle Libre, our market-leading continuous glucose monitoring system, grew 24% and ended the year with global sales surpassing $5.3 billion. In terms of sales dollars, Libre has become the most successful medical device in history and it has outpaced market growth in 13 out of the last 16 quarters. In electrophysiology, sales growth of 21% was driven by double-digit growth across all major geographic regions including by double-digit growth across all major geographic regions including more than 20% growth in Europe.

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. In structural heart, double-digit growth in the quarter and full year was led by MitraClip as well as several recently launched new products including Amulet, TriClip and Navitor. For the full year, MitraClip sales grew high-teens internationally and 10% on a global basis. In heart failure, sales grew more than 15% in the quarter and 12% for the full year, driven by continued adoption of both chronic and acute circulatory support devices. And lastly, in neuromodulation, sales grew nearly 19% driven by the recent launch of Eterna, our first rechargeable neurostimulation device for pain management.

So in summary, we exited the pandemic in an even stronger position. 2023 was a very successful year. We outperformed our initial expectations on both the top and bottom lines. The pipeline is generating a lot of new opportunities for growth and we’re forecasting this positive momentum to continue and contribute to the strong growth we’re forecasting for 2024. I’ll now turn it over 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 fourth quarter results, sales increased 2.1% on an organic basis, which as expected, reflects the impact of the year-over-year decline in COVID testing-related sales. Excluding COVID testing sales, underlying base business organic sales growth was 11% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 0.8% on fourth quarter sales. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.9% of sales, adjusted R&D was 6.1% of sales, and adjusted SG&A was 26.3% of sales in the quarter. Lastly, our fourth quarter adjusted tax rate was 14%.

Turning to our outlook for 2024, today we issued guidance for full-year adjusted earnings per share of $4.50 to $4.70, which includes an adjusted earnings per share forecast of $0.93 to $0.97 for the first quarter of 2024. For the year, we forecast total underlying base business organic sales growth, which excludes COVID testing sales, to be in the range of 8% to 10%. Based on current rates, we would expect exchange to have an unfavorable impact of a little more than 1% on our reported full-year sales, which includes an unfavorable impact of approximately 2% on our first quarter reported sales. We forecast non-operating income of approximately $130 million and an adjusted tax rate of 15%. With that, we’ll now open the call for questions.

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Q&A Session

Operator: Thank you. [Operator instructions] And our first question will come from Larry Biegelsen from Wells Fargo. Your line is open.

Larry Biegelsen: Good morning. Thanks for taking the question and congrats on a nice end to the year here. So Robert, pre-COVID Abbott was growing 7% to 8% organically, as you mentioned. You’re guiding to 8% to 10% today for 2024 off of a higher revenue base. What has changed and what is giving you the confidence to guide that high to start the year? Maybe talk about the key assumptions and I’ll leave it there for my one question. Thank you.

Robert Ford: Thanks, Larry. As I said in my prepared remarks and quite frankly, as we talked about — throughout most of 2023, the impact of the strategy we took to take some of the COVID revenue and reinvest in the base business. I think ultimately that’s really the factor here. We operate in these four business segments and their underlying attractiveness still is very sustainable. So strengthening our positions that were already pretty strong in each of these four segments was absolutely the right strategy here because we believe that these are important areas of healthcare to be in. So I’d make the case here that all four of our major businesses are actually in a better and stronger shape than when we were pre-pandemic, which was about $10 billion less and growing at that 7% to 8% range.

You look at EPD, as I said in my comments, these are three consecutive years of double-digit organic sales growth. This is probably one of our best commercial teams. They operate in a very challenging geographies in different markets. And they’ve done an exceptional job at growing the top-line and expanding the bottom line. I think even with all the effects and all the challenges that we’ve seen in those markets, they’ve expanded their op margin profile by 300 basis points. So it’s pretty strong position, strong team. And then we layered in that now a new growth vertical by adding Biosimilars, which historically hasn’t been a platform that’s been readily available in emerging markets. It’s probably been more of a developed markings play. So I think that’s going to provide a new growth vertical for us there.

Nutrition, I think did an incredible job here. As we said at the beginning of last year, at regaining our leadership position here in the US, I think it speaks a lot about the trust that our users and customers have for our product, but even adult, our adult business. Our adult business has increased a billion dollars, since pre-pandemic, and it’s just strengthening and getting stronger. it’s $4 billion growing high single digits. There’s a lot of medtech businesses, Larry, that command very strong premiums in terms of evaluation, just by having those kind of growth rates and sizes. And we’re making investments in that channel also. Diagnostics has got a great track record here. Our core lab business has done very well. We’ve talked about our algorithm and formula here and framework for growth.

We’ve gotten some recent very large account wins, globally here. I think that’s the result of our portfolio and quite frankly, the trust that these customers have and have it, and our ability to execute. And our RAPIDS portfolio has done very well in terms of placing a lot of new instruments out there for decentralized testing. And we’ve been making investments on new assays to be able to put through those instruments. And then medical devices, historically was in that high single digit growth. I think what’s changed there to become now a double-digit grower for us on a very large size business is that you have historically double-digit growth businesses like AFib or EP, Structural Heart, ADC. Those are continuing. I think what’s changed here is that we’ve taken a strategic look at about 40% of the revenue in medical devices, our CRM and vascular businesses, that were showing very little growth historically and made investments in them to accelerate their growth rates.I think you saw that in Q4.

With CRM, I’d say it’s predominantly been an organic play with our leadless platform and technology. On vascular, it’s been a combination of adding in organically to the business and organic plays to reposition some of the portfolio to higher growth segments. I think that’s really, in a nutshell, across all these very four attractive segments, we’ve spent the last couple of years strengthening it. You saw that last year. Every year, double-digit growth. And they’ve gotten stronger and they’ve gotten better and they’ve gotten more growth opportunities with them. So I think that’s really the driver there. I’ve gotten some of the headlines here about accelerating sales, but not seeing maybe that come through on the earnings. Again, this is another one where you look at the impact that COVID had on us and the clouding of it.

Our core business grew EPS last year 40 plus percent. We’re forecasting double-digit earnings per share growth at the midpoint, double-digit this year. We’ve got a range around it. There’s a lot of volatility in the world, Larry. So I’d say, yes, I don’t have to list all those out in terms of macro and geopolitics, but we’ve proven to be pretty resilient there. And I think the range captures the opportunity that we have on the earnings side. I’d say there’s probably more upside than downside in that range, but it’s only January. So I think this is a good starting point.

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