Abbott Laboratories (ABT)
UBS Global Healthcare Conference Call
May 22, 2013, 8:30 am ET
Brian Blaser - Executive Vice President - Diagnostics Products
Thomas Freyman - Chief Financial Officer, Executive Vice President - Finance
Rajeev Jashnani - UBS
Rajeev Jashnani - UBS
Hi, good morning, everyone. Thanks for participating in the UBS Healthcare Conference this year. Today, we are very pleased to have Abbott Labs present. Kicking it off will be Tom Freyman, long time CFO of Abbott and after that we are very glad to have Brian Blaser and talk about the diagnostics business.
With that, I will turn it over to Tom.
Okay, thank you, Rajeev. Good morning, everyone. Today, this morning I am going to provided a brief overview of Abbott, then I will turn it over to Brian here who is our Executive Vice President of Diagnostics. He is going to discuss our diagnostics business in more detail. As you know diagnostics is one of our more durable growth businesses that really has delivered outstanding performance in recent years. But before we begin, please take a moment to review our forward-looking statements as noted on the second slide.
While many of you know Abbott quite well, let me take a few minutes to provide this overview of the company and why we believe Abbott is a differentiated healthcare investment. Abbott is one of the largest diversified healthcare companies in the industry, where we are driving growth across four roughly equally sized businesses, established pharmaceuticals, which is our branded generics business, medical devices, diagnostics and nutrition.
They all compete in large markets, and are aligned with favorable long-term healthcare trends. These trends include the growth and development of healthcare systems in emerging markets. The uptake of new technologies that create value for both patients and payors and the increasing incidence of chronic disease compounded by the rise in the aging population.
Many of these trends are supporting the sustainable growth we expect for our diagnostics business which Brian will cover in a moment. We hold leadership positions across our diverse portfolio. From number one global positions 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.
Abbott's geographic mix is well balanced with one of the largest emerging market basis of any large cap healthcare company. Today, more than 40% of Abbott sales are in emerging markets and we expect that to increase to 50% by 2015.
Abbot is well positioned to deliver top-tier growth as a reliable and sustainable healthcare investment. Across our major businesses we hold leadership positions where we are delivering a customer focused innovation. Our portfolio is aligned with favorable demographics that are driving growth in healthcare. We are leveraging our large and diversified healthcare presence in rapidly growing and emerging markets. We are expanding margins to deliver and support top-tier growth.
As Brian takes you through our diagnostics business in more detail, you will see how each of these growth drivers apply to diagnostics and how we expect this business to be an attractive growth business for many years to come. So, Brian, I will turn it over to you.
Thanks, Tom, and good morning, everyone. As Tom said, I am Brian Blaser, Executive Vice President of Diagnostics. I am responsible for our three diagnostics businesses, the core laboratory, molecular and point of care businesses at Abbott. In 2012, diagnostics represented $4.3 billion of Abbott's total sales. As many of you know, we have improved the profitability of this business over the last several years and at the same time we have been growing the top line at mid-single digits and above.
Today what I would like to discuss is the Abbott's leadership positions within the large and growing in vitro diagnostics markets, the trends that are driving this market growth and how we plan to accelerate sales growth across our three business segments over the next several years. Our vision for diagnostics is very clear. We aspire to be the industry leader in terms of developing customer focused solutions that enhance clinical decision-making and ultimately improve the lives of patients.
We are accomplishing this by delivering innovative systems and technologies that allow doctors to make better and faster decisions for their patients and by helping providers drive down costs to meet the increasing global demand for more efficient testing. The in vitro diagnostics segment where we compete represents roughly $30 billion market. It is expected to grow 4% to 5% annually over the next several years.
A few key factors that are driving growth, durable performance in this market. As you know healthcare spending is rapidly increasing due in part to an aging population and the desire to provide more accessible healthcare throughout the world. There is a greater emphasis on disease prevention, early detection and better decision-making. As a result the value of diagnostics is increasing. It influences 70% of healthcare decisions but it represents only a small fraction of the total healthcare costs.
Governments in emerging markets are placing a greater focus on the use of sophisticated testing platforms to improve patient care. Consolidation in developed markets is driving the need for high volume standardized systems across networks to manage increasing test volumes, and contract cycles are several years in length in this business and in some countries as long as 10 years. So it’s a very sticky business.
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, immunochemistry, 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 Abbott provides a broad range of innovative 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 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 earlier in the progression of illness and also address growing needs of our customers for process improvement, analytics, informatics and automation.
Abbott molecular develops instruments and tests to detect important changes in genes and chromosomes that aid with earlier diagnosis, selection of appropriate therapy and monitoring of disease progression. We offer the broadest and most precise testing options today for infectious disease which includes some of today's most challenging diseases such as HIV and hepatitis. In addition, we have established ourselves as the partner of choice in companion diagnostics with agreements to provide assays for several leading pharmaceutical companies.
Our point of care business provides critical handheld diagnostic 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 market and today one in three emergency departments in the U.S. use our i-STAT system to improve patient outcomes, drive down cost and improve the efficiency of their operations.
We are also seeing increased opportunities for this technology in both the physician's office lab, or physician's office, I should say, and the urgent care settings. We are now seeing adoption of point of care testing in many emerging markets as well. We anticipate increasing penetration in all market segments and fast-paced growth in emerging markets as well.
With six next-generation systems currently in development, we are targeting continued above market growth in diagnostics over the next several years. Our growth projections are based on market trends that are aligned with our offerings and our value proposition. Demand for testing is on the rise worldwide due to aging populations and the fact that more patients worldwide are gaining access to care. For labs in developed regions, consolidation, budget constraints and labor shortages are intensifying the demand for scalable and flexible diagnostic solutions.
Advances in personalized medicine are changing the way medicine is practiced in many markets around the world. In emerging markets, governments or improving the efforts to combat the increasing prevalence of infectious disease, cancer and cardiovascular disease. These developments play into our strengths, enabling healthcare providers worldwide to drive down costs while at the same time meeting the growing demand for more accurate testing.
Now I would like to take a closer look at the trends and why they represent growth opportunities for Abbott Diagnostics. By 2030, the number of people aged 65 and older is expected to top one billion globally. That’s about twice as many as there are today. In the U.S. alone, the implementation of healthcare reform is expected to bring more than 30 million newly insured people into the market.
Our automation solutions will continue to play a critical role in helping labs cost-effectively manage higher testing volumes. Labs with automation capabilities are able to process more tests, reduce errors, which is critically important and enhance productivity. Global healthcare systems face unprecedented challenges including the economic burdens associated with rising costs, chronic disease and caring for aging populations. These pressures have put tremendous strain on laboratories.
Our core laboratory in molecular platforms provide greater efficiencies and faster turnaround times which are key benefits for large lab operations in developed markets who are being constrained by declining budgets and being tasked to do a lot more with a lot less. In fact, the data shows that by partnering with Abbott, these labs can eliminate 15% of their associated operating cost and reduce the number of instruments in their laboratory by up to 50%.
The area of personalized medicine continues to gain momentum as it has great potential to enhance patient care. To this end, research efforts in this area are increasing rapidly. As I reported 6,000 clinical studies to date are utilizing biomarkers and 40% of these are in oncology alone. Abbott has been a leader in personalized medicine since 1998 when our molecular business launched its PathVysion test for breast cancer.
Our ALK test for non-small cell lung cancer introduced in 2011 is now the recommended test for patients with the disease. We are also preparing to launch our HCV genotyping test in the U.S., which will enable physicians to diagnose specific Hepatitis C genotypes and tailor therapy accordingly.
Finally, in many emerging markets, the incidence of infectious disease, cancer and cardiovascular disease is growing at an alarming rate. Russia, for example, has a disproportionate number of deaths caused by heart disease, while in China both cardiovascular disease and cancer are widely prevalent. Efforts to stem the tide of these diseases are driving demand for hospitals and better diagnostic testing. Hospitals, government and NGOs in these emerging markets are partnering with Abbott because of our broad portfolio, because of our four years of experience and our continuing commitment to invest in the future in this area.
These partnerships are also driven by the increasing demand for sophisticated molecular test and instruments which require companies like Abbott to develop the right product portfolio and commercial strategies. We develop products specifically tailored to emerging markets, such as a dried blood spot protocol for molecular-based tests in remote geographic areas. As a result, we have won large tenders including the largest HIV viral load tender in the world, underscoring our leadership in infectious disease testing. Approximately 35% of diagnostics sales in 2013 will be from the fast-growing emerging markets increasing to nearly 40% of our sales over the next several years.
Now that I have spent some time detailing the drivers of market growth, I would like to touch on the growth drivers within each of our three business segments. While our three businesses are complementary to one another, each is uniquely positioned to capitalize on different growth opportunities. I will start with the core laboratory business.
Abbott's growth in the core lab will continue to be driven by our ability to provide our partners with a full suite of best in class solutions to help them improve efficiencies. Our strength in this segment is supported by the quality of our systems and the performance of our highly sensitive tests. We will be expanding this portfolio with new platforms currently in development for immunochemistry, blood screening and hematology. These platforms will be faster, smaller and more efficient and will drive growth by meeting customer needs for flexible and cost-effective solutions.
80% of our core lab sales occur outside the United States with nearly 40% of sales in emerging markets. Our emerging market sales increased more than 15% in the first quarter. In fact, our core laboratory business is growing faster than the market in every region of the world. In emerging markets, we are focused on China, Brazil and Russia which, combined, grew at nearly 30% in the first quarter. China represents our largest growth opportunity. It’s nearly $2 billion market for us that has been growing at about 20% per year. The outlook is promising for our business as China and Russia both continue to invest in improving their healthcare systems significantly.
Molecular diagnostics is one of the most promising new areas of medicine and today our products help detect genetic disorders, guide the treatment of breast and lung cancers, monitor people with HIV and even help identify the best donors for bone marrow transplants. We expect to deliver double-digit operational sales growth this year as we leverage our strong position in the infectious disease market. This is a market that it is expected to grow by nearly 8% annually to more than $3 billion by 2016.
We expect significant growth in Hepatitis C and HIV testing as new pharmaceutical treatments come online and as new testing guidelines are implemented. We are also investing in the development of a next-generation platform in this space that will deliver greater capability and efficiencies in the molecular workflow and testing, which is highly manual today.
The point of care market is growing at a double-digit rate with Abbott growing in the mid teens. This is driven mainly by the widespread adoption of bedside testing in emergency departments to meet the need for rapid test results. This trend affords opportunities for our i-STAT system to increase and leverage its presence at 6,000 locations around the world. Nurses who use our i-STAT analyzer can now complete a patient assessment within 15 minutes of a patient arriving at the ER.
Our next-generation i-STAT analyzer, now in development, will present even more opportunities to capture market share and drive growth. It will also expand our footprint in key markets as we further broaden our menu.
For Abbott Diagnostics, sales growth and profitability are equally important to our long-term strategy. Over the last five years our disciplined focus on improving gross margins has produced impressive results. Globally, we expect mid to high single-digit revenue growth for the full year of 2013, at the same time achieving gross margins of more than 20% of sales by 2015 is well within our reach.
Expanding our gross margins has enabled us to continue significant R&D investments in the business which, as you know, is the engine for technology innovations that will further strengthen our leadership position. We are well prepared for the opportunities that lie ahead. As I mentioned six next generation systems are now in development and designed from the ground up and based on customer needs and extensive market analysis. These platforms will offer added efficiencies, improve laboratory operations, enhance informatics capabilities and provide additional assays as well.
So, in summary, our diagnostics business is very much aligned with Abbott's investment identity that Tom outlined earlier. It is a durable growth business that holds leadership positions across large and growing markets that are supported by favorable healthcare and emerging market trends. Over the next years, we are driving growth through launch of new systems, developing new tests that will bring valuable solutions to our customers, investing in key emerging markets and continuing our absolutely relentless focus on profitability with the goal for operating margin to be well above 20% of sales.
So as you can see, Abbott Diagnostics is well-positioned for sustainable and profitable growth over the next several years. So I appreciate the opportunity to speak with you today and thank you for your interest in our business. Thanks.
Rajeev Jashnani - UBS
We still have a few minutes left. So I will start a question or two. Maybe we will start on the margins, Brian or Tom, whoever would like to respond. You have the 20% target for diagnostics. It does not seem like that aggressive of a target at this point given where the margins are in that business. It looked like there was some strong growth in the margins in that business on your 10-Q. Maybe talk about what happened in the first quarter and what are the drivers in margin going forward in this particular business?
This is Tom Freyman. I will answer the first part and Brian can talk about the future. Obviously the first quarter was very strong for diagnostics. As I said on the earnings call, it really was the same story in our nutrition business. It is really important to look at the full year margin progress and not extrapolate the very, very good performance for the remaining quarters of the year.
But in each business, and in Brian's we expect a nice improvement in year-over-year margin. In the nutrition business, we expect a roughly 300 basis point improvement in year-over-year margin. There were some timing effects in the first quarter that were a little more favorable and it even out a little bit over the year but net net, year-over-year, we expect very, very good performance and progress.
As Brian said in his remarks, this 20% margin target is really the floor and clearly he is shooting for a number quite in excess of that. Maybe he could talk a little bit about how he hopes to achieve that over time.
Yes, I would add that, to a certain extent, our 20% target right now is strained a little bit by the significant investments that we are making in our new product platforms. So we are investing several hundred millions of dollars a year right now in developing these new platforms. They, in and of themselves, will enable as we launch them, this business to expand margins because they are being designed at a much lower cost profile along with the reagents that we sell with them and that will allow for a continued margin expansion over the longer term.
In the short-term, we continue to have just an absolutely relentless focus on driving value based pricing in our commercial model. So, as you know, we are a fairly asset intensive business. We tend to hold a lot of our analyzers on our books for our customers. We have to make sure that every analyzer that we place is profitable. We have a keen attention to economic profit on every placement. We try to drive utilization, menu expansion and value in our pricing as we approach every customer.
In addition, we historically, here over the last five years, have done a lot with our manufacturing network and supply chain network and we are continuing that focus as we move forward. So we expect continued improvement in productivity as we move forward to help fuel our margin expansion.
Rajeev Jashnani - UBS
Great. I am going to ask one more question. Maybe you could talk about the point of care business specifically. There has been really solid growth in that business that we have seen recently. Maybe talk about what's going on there and a little bit more detail and maybe how sustainable that is?
That we are experiencing a nice growth in that business right now. We have a lot of momentum particularly in our cardiac and blood gas franchises there. We continue to be underpenetrated in the U.S., specially in emergency rooms and we see a tremendous room for growth there. So I do see this as a sustainable pathway for us moving forward. We are very optimistic about this business.
We have two new platforms in development in the business as well that I think provide great opportunities for long-term growth, both a replacement or the follow-on product for the i-STAT handheld and we have a digital hematology benchtop unit that we are going to be introducing to the market which is going to provide some upside for us as well.
Tom mentioned, we have a focus in this business as well. Our business in point of care is roughly 80% in the U.S. and we have very limited penetration outside the U.S. So, similar to the core laboratory and molecular businesses, we are looking at China, Brazil and Russia. But we are also looking at more developed markets there like the U.K. and Germany where their healthcare systems are more sophisticated and they are more conducive to utilizing this technology which is a bit more advanced. It is targeted more at highly developed healthcare systems.
Rajeev Jashnani - UBS
Great. It looks like we are just about out of time. Thanks again, Tom. Thanks, Brian. We will follow up at the breakout session. Thanks, everyone.
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