Abbott Laboratories (ABT)
2013 William Blair & Company Growth Stock Conference
June 11, 2013 12:30 PM ET
Brian Yoor – Vice President of Investor Relations
David Forrest – Executive Vice President, Nutritional Products
Ben Andrew – William Blair & Co. LLC
Ben Andrew – William Blair & Co. LLC
I think we have a quorum. So why don’t we get started maybe a few seconds early. I’m Ben Andrew, one of the medical technology analysts here at William Blair & Company joined by Brian Weinstein. We co-cover Abbott having picked it up the stub, if you will of the core company left with after the AbbVie spin back in December, and as everybody can tell, both stocks have performed well, and it’s been I think a good start to the separate lives as a public company. We don’t have any disclosures, but you can see the balance of those at williamblair.com.
Just a couple of quick comments, if you think about opportunities for investing in medical technology in the 20 years or 18 years I’ve been covering the space, we’ve seen the evolution towards the dearth of true growth stocks and what used to be ripe with double-digit growers and many market capitalizations has evolved into a lot of 3% to 5%-ers and frustration sometimes even getting to there based on product innovation.
And one of the reasons that we wanted to pick up Abbott was the exceptional nature of the growth and the opportunity to perhaps see that improve and all the things go along with the spin. So to the extent that the company has 40% of their revenue coming from emerging markets, that is a massive differentiator in terms of the opportunity, and we believe truly differentiates this company with kind of a 7% top line, maybe a little faster if things go the right way and low double-digits or low-teens earnings growth, which truly makes it exceptional in the large cap range.
So with that, I will introduce our speaker, David Forrest, who is the Executive Vice President of Nutritional Products; and Brian Yoor, who runs Investor Relations is with us as well. David?
Thank you, Ben. Good afternoon everyone. Today, I’ll provide a brief overview of Abbott, before I turn it over to David Forrest, our Executive Vice President of Nutrition. He is going to discuss our Nutrition business in more detail. Nutrition is one of our most compelling growth businesses and has delivered outstanding performance in recent years. Before we begin, please take a moment to review our forward-looking statement as noted on the second slide.
While many of you know Abbott quite well, let me take a few minutes to ground you in the company and how we are a differentiated healthcare investment. Abbott today is one of the largest diversified healthcare products companies in the industry.
We’re comprised of four roughly equal size businesses, established pharmaceuticals, our branded generics business, medical devices, diagnostics, and nutritionals. We hold leadership positions across our diverse portfolio from the number one global position in immunoassay diagnostics and blood screening to adult nutrition to vascular devices. We are continuing to drive growth across these businesses by launching new products and expanding geographically.
All of our businesses compete in large markets that are aligned with favorable long-term healthcare trends. These trends include a global population that’s growing older and living longer resulting in an increase in age related and chronic diseases, improving socioeconomic conditions in emerging markets that are driving investments in healthcare and the increasing focus of innovation that delivers value to customers, reduces cost for payers, and improves outcomes for patients.
Abbott’s geographic mix is well balanced with one of the largest emerging market revenue basis of any large cap healthcare company. Today, more than 40% of Abbott’s sales are in emerging markets, and we expect that to increase to 50% of sales by 2015.
Abbott is well positioned to deliver top tier growth as a reliable and sustainable healthcare investment. Across our diverse businesses, we hold leadership positions where we’re delivering customer-focused innovation. Our balance portfolio is aligned with favorable demographics that are driving growth in healthcare. We are leveraging our large and diverse healthcare presence in rapidly growing emerging markets, and we are expanding margins to support top tier earnings growth.
Let me provide a short overview of our established pharmaceuticals, medical devices, and diagnostics businesses before I turn it over to David to take you through our Nutrition business in more detail. I’ll start with established pharmaceuticals business, which is otherwise known internally to us as EPD.
EPD is home to our branded generics business. It generates sales entirely outside the United States from a growing portfolio of hundreds of products that have broad use throughout the world. This business is more like our consumer-driven nutrition business than it is a typical pharmaceutical business. It has a development organization that moves fast, refresh, and improved key brands, and it markets products to customers in the developing world who typically pay out-of-pocket for their healthcare expenditures.
In many of these markets, product growth is sustained by brand equity, which is established by customer trust and products that are readily available of high quality, affordable, and tailored to the needs of each market. EPD has a number of early-stage geographic and product expansion initiatives underway to steadily accelerate the growth of this business over the next several years.
Our growth strategy focuses on increasing the breadth of our product offerings by launching new and improved formulations and registering products across multiple geographies and accelerating and capturing new sources of growth by targeting 14 key emerging markets where the opportunities for rapid, sustainable, and profitable growth are the greatest. These key emerging markets comprise approximately 50% of EPD sales today, and we expect that to increase to approximately 65% of sales by 2016.
Next, I’ll cover medical devices, which includes our diabetes care, vision care, and vascular businesses. In diabetes care, we’re advancing our new product pipeline with products such as FreeStyle InsuLinx with the goal of simplifying the glucose testing process. We are also investing in the next generation sensing technology that we expect to initially bring to the European market in the next couple of years.
In vision care, we’re the global leader in LASIK and number two in cataracts. Our Cataract business is the largest and fastest growing of our vision care businesses. We’re launching new products to continue to grow our share in this segment, including the recent launches of our TECNIS Toric intraocular lens in the U.S. and our TECNIS Optiblue intraocular lens in Japan, both of which provide us access to new segments of the market. We’re also capturing growth in countries such as India and China where we’re introducing new products tailored to the local market needs.
And in vascular, our growth strategy is focused on expanding our global leadership positions. This includes targeting the emerging markets where interventional procedures are growing double digits. Emerging markets, which have been growing in the double digits for this business comprises approximately 25% of our vascular sales today.
In our Coronary segment, we’re focused on expanding our global drug-eluting stent leadership position and driving market adoption to MitraClip, our first-of-kind device for mitral regurgitation. In drug-eluting stents, we launched XIENCE Xpedition in Europe last August and in the United States earlier this year. Xpedition combines the impressive safety and efficacy of XIENCE PRIME and sets a new standard for deliverability.
We expect to launch Xpedition in Japan later this year. In September of last year, we launched our Bioresorbable Vascular Scaffold Absorb in Europe and in a number of other international markets. And earlier this year, we announced the start of our Absorb pivotal trial in the United States. Absorb acts like a drug-eluting stent, but unlike a metallic stent has the added benefit of slowly absorbing over time, much like sutures do after a wound heals. The result is a vessel that can naturally flex and pulse similar to an untreated one. Absorb puts Abbott in a unique position to offer the only technology of this kind.
The last major business that I will cover is diagnostics. Abbott’s global leadership in diagnostics extends across our broad portfolio of businesses. We provide market leading systems, tests, and informatics solutions in almost every segment of in-vitro diagnostics, immunoassay, clinical chemistry, hematology, blood screening, molecular diagnostics and point-of-care.
We are the global leader in immunoassay testing and blood screening. The core laboratory is where the majority of testing is done, and Abbot provides a broad range of innovative instruments, systems, and tests to more than 22,000 customers in more than 100 countries. With more than 170 best-in-class assays coupled with a family of complementary instrument systems, we are able to deliver total solutions that are efficient, flexible, and cost effective to large health systems and reference labs.
Our solutions enable clinicians to detect and manage diseases and the progression of the illness when treatments are more effective and less costly. It also addresses the growing needs of our customers for process improvements, analytics, informatics, and automation. Abbot molecular diagnostics develops instruments and tests to detect changes in genes and chromosomes to aid with earlier diagnosis, selection of appropriate therapies, and monitoring of disease progression.
We offer the broadest and most precise testing options available today in the infectious disease market segment, which includes some of today’s most challenging diseases such as HIV and hepatitis. Our Point of Care business provides critical handheld diagnostics products for rapid blood analysis at a patient’s bedside. The Abbott i-STAT handheld platform is the leader in the U.S. point of care diagnostic market. Today, one of the three hospital emergency departments in the U.S. use i-STAT system to improve patient outcomes, drive down costs, and improve the efficiency of their operation. We anticipate increasing penetration in all market segments and fast paced growth in emerging markets and are targeting continued above growth in diagnostics over the next several years.
Margin improvement has been and continues to be a key focus in diagnostics. From 2007 to 2011, we improved our operating margin from 8% of sales to more than 18% of sales, more than doubling margin in dollar terms. Our long-term goal had been to exceed 20% of sales by 2015. We are ahead of schedule and are progressing towards this goal and now expect to well exceed our long-term target over the next several years. Expanding our diagnostics margins has enabled us to invest in R&D, the engine that will further strengthen our leadership advantage, with six next generation systems currently in development. Designing from the ground off, based on our customer needs, these platforms will offer features to improve and standardize laboratory operations and informatics to help labs manage vast quantities of data. So in summary, these businesses hold leadership positions and are well positioned to deliver top tier growth in the years ahead.
I will now turn it over to David to take you through our nutrition business, which is the fastest growing business in our portfolio and has the opportunity for margin expansion. David?
Well thanks, Brian. So I’m very pleased to have the opportunity to speak with you this morning. As the potential for our Nutrition business in Abbott has never been greater and at the same time, while we continue to be at the forefront of this large and growing market. Abbott’s Nutrition business was established with the focus on developing science-based nutritional solutions.
Today, we’re a global leader in nutrition with annual revenues of $6.5 billion. In 2012, our revenues grew nearly 9% on an operational basis, and we expanded our operating margin by 240 basis points. For the full-year 2013, we expect our global nutrition sales to grow double-digits led by strong international growth and we’re on track to improve our operating margin by at least 300 basis points.
The global nutrition market is large and growing. Today, the market is approximately $36 billion with expectations that it will grow to more than $50 billion over the next several years, market dynamics and favorable healthcare trends of fueling growth of both pediatric and adult nutrition.
Abbott’s global leadership in nutrition extends across our broad portfolio. In pediatric nutrition, Abbott is the market leader in the U.S. and several other key countries around the world with our flagship brands of Similac for infant nutrition and PediaSure for toddlers and children. And in adult nutrition, Abbott is the market leader in the U.S. and globally with our Ensure brand as well as other therapeutic nutrition brands such as Glucerna as the diabetes.
Globally, Abbott holds the number one or number two position in 25 countries around the world, and our leadership is attributable to the depth and breadths of our product portfolio, our science-based heritage on a balance of healthcare and consumer orientation. Our products are developed from strong and proven clinical science and are readily endorsed by healthcare professionals around the world. Our nutrition product portfolio is uniquely balanced both geographically and across segments. Today, more than 50% of our sales occur outside of the U.S. including 45% of sales that occur in rapidly growing emerging markets.
Our product portfolio spans the spectrum of life from new born infants and babies to the older adults. This type of geographic and portfolio balance is unique to Abbott Nutrition. We’re driving growth and value creation by further strengthening our portfolio with a steady rhythm of science based new products; expanding our footprint in key high growth emerging markets; growing, shaping and further penetrating the adult nutrition market; and expanding our operating margins to fund investments in growth. I’ll now spend some time reviewing each of these in detail.
Abbott Nutrition leads with science as part of our DNA. We set the standard for science based nutrition leading the developments of innovative solutions that’s full of the health and well being of infants, toddlers, children and adults around the world. Our investments in research and development have resulted in a fivefold increase in the number of new products launched annually since 2008 and a tenfold increase in both clinical trials and patent applications.
We’re also expanding our global research and development footprint, most recently in Singapore, India, and China, to ensure that we meet the local needs and preferences of our customers. In fact by 2016, more than 35% of our R&D staff will be located in high growth emerging markets. And lastly, we are expanding our external partnerships to complement our strong internal R&D capabilities and expand our knowledge, technology, and talent around the world. One example is our recent partnership with Syngene in India, which will accelerate the development and commercialization of products in that country.
Our R&D efforts are focused on six benefit platforms that you can see on the slide here. Tolerance, cognition, immunity, lean body mass, metabolism, and information. These benefit platforms are important to our customers, they spam the nutritional needs of infants and adults and address key demographic shifts that position us the strong future growth. These innovation efforts have resulted in a robust science-based portfolio that is differentiated in its breadth and depth.
Globally, our pediatric sales grew more than 13% in the first quarter of this year, including growth of more than 20% internationally. Our ability to identify and design solutions that meet the unique needs of mothers and infants around the world is paying dividends.
Today, emerging markets represent 45% of our global nutrition business. Sales in these markets increased more than 20% during the first quarter of 2013. Our strategy focuses on expanding our footprint in key high growth emerging markets. While we have broad global geographic reach in more than a 100 countries around the world, we have prioritized a group of key countries, where we are expanding our current leadership position such as Vietnam, where we are shaping new markets such us India, and where we are aggressively expanding our geographical reach such as China.
In total, we’re focused on seven priority emerging markets, where the opportunities for rapid, sustainable, and profitable growth for the greatest. Today, I’ll provide a little more depth on our strategies in both China and Vietnam.
China is the largest and softest growing nutrition market in the world. Our strategy in China is focused on winning share in the super premium infant nutrition segment with a broad clinically proven portfolio. The super premium segment is approximately 70% of the total nutrition market in terms of dollar value and is growing double digits. In addition to building the most diversified portfolio, we’re also rapidly expanding our footprint in China with plans in place to more than double our city presence in China by 2015 through expansion activities.
Vietnam is our largest nutrition business outside of the U.S. and China. Our product portfolio in Vietnam is well balanced and we hold leadership positions in infant nutrition with Similac, toddler nutrition with PediaSure and adult nutrition with Ensure. Our growth strategy is focused on developing and launching new innovations that meet local needs to strengthen our market leadership. Last year, we also completed the strategic acquisition of our distributor in Vietnam to bring us closer to our customers, enhance our retail point of sales capabilities and improve our operating margins.
Let’s now transition to our global opportunity in the adult nutrition segment. The world’s population is ageing and as the global leader in adult nutrition, this demographic shift provides a strong tailwind to grow, shape and further penetrate the adult nutrition market. In the U.S., the ageing population is referred to as baby boomers, but this demographic shift extends well beyond the U.S. In fact, the projected growth is even more pronounced in many large countries outside of the U.S. By 2050, the number of people aged 50 and older is expected to top two billion with a vast majority of this increase occurring in our priority markets. This age demographic will comprise 40% of the total global population, nearly double what it represents today.
For Abbott Nutrition, this presents a tremendous opportunity. We created the category of adult nutritional supplementation 40 years ago with the launch of Ensure and have been innovating and expanding geographically in this category ever since. Today, the global Ensure brand generates revenues of more than $1 billion and is comprised of a portfolio of formulations that are designed to meet the needs of patients and consumers around the world.
In addition to Ensure, our broad portfolio of adult nutrition products include brands that expand the clinical needs of adults recovering from health setbacks, living with chronic illnesses or seeking to maintain health on an active lifestyle as they age. Our disease specific brands are well aligned to chronic illnesses that are on the rise and where nutrition can make a meaningful impact such as Glucerna for diabetes, Nepro for chronic kidney disease and ProSure for oncology.
Our science based products are recommended and endorsed by healthcare professionals around the world. As I mentioned earlier, lean body mass is a priority benefit platform for our R&D assets. As we age, we naturally loose muscle mass. In fact, between the ages of 40 and 70, adult loose on average, 8% of muscle mass each decade and the rate of loss increases to 15% per decade after the age of 70.
The loss of lean body mass is even more profound in hospitalized older adults. In just three days of bed rest, older adults loose on average, more than two pounds of muscle mass. The consequences can be debilitating, including reduced mobility on activity for daily living, increased susceptibility to illness and infection, and reduced recovery from surgery, illness and injury. We’re therefore promising that our recent health economic study published in The American Journal of Managed Care found that nutritional supplementation is beneficial to both patients and hospitals.
The study of more than 44 million hospital episodes in the U.S. over an 11 year time horizon found that nutrition intervention decreased hospital length of stay by 21%, reduced hospitalization cost by nearly 22% and reduce the likelihood of being readmitted 30 days after discharge by approximately 7%. With hospitals and healthcare systems around the world facing unprecedented budget challenges, these results are very encouraging and represent some opportunity in both developed and emerging markets. As the global leader in adult nutrition, we’re committed to further expanding the health economic evidence and driving awareness of the role that proper nutrition can play in improving patient outcome and reducing healthcare costs.
Let me close with an overview of our margin expansion initiatives. Over the last several years, our disciplined and comprehensive focus on improving our margin has yielded impressive results. In 2012, we expanded operating margins by 240 basis points and are on track to improve at least 300 basis points for the full year 2013. We’re confident on our ability to deliver on our initial target of 20% of sales by 2015, as we continue to execute our comprehensive plans to improve the profitability of our business. As part of our margin expansion plans and to meet increasing demand for our products, we are making good progress on the unprecedented expansion of our global manufacturing capacity.
In the U.S., we’re building a new aseptic liquid facility to meet demand for Ensure and PediaSure. In India, a new plant in Gujarat will produce nutritional solution for the [tylectomy] local market needs, and in China, in addition to the fully imported infant formula that we’ll market today, our new plant in Jiaxing will produce infant formula from fully imported milk. All of these plants are expected to be online in late 2013 or early 2014.
So in summary, Abbott Nutrition is a profitable and attractive growth business that is well aligned with favorable demographic and emerging market trend. Our portfolio of products is well balanced across segments and geographies. In emerging markets, we’re delivering strong results and investing to expand our portfolio presence and capabilities. Globally, we expect double-digit revenue growth for the full year 2013.
And at the same time, we’re continuing to execute our plans to expand operating margins and are confident in our ability to deliver at least 300 basis points of margin expansion in 2013. This combination of double-digit top line growth and operating margin expansion is unique in the healthcare industry and is representative of Abbott’s ability to deliver top tier growth as reliable and sustainable healthcare investment. Thank you.
Ben Andrew – William Blair & Co. LLC
Please join me in thanking Brian and David for the presentation. The break out will be downstairs in the LaSalle Room B. Thank you.
[No Q&A session for this event]