Abbott Laboratories (ABT) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. Welcome to Abbott's First Quarter 2012 Earnings Conference 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 rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. John Thomas, Vice President, Investor Relations and Public Affairs.

Good morning, and thanks for joining us. Also on today's call will be Tom Freyman, Executive Vice President, Finance and Chief Financial Officer; and Larry Peepo, Divisional Vice President of Investor Relations. Tom will review the details of our financial results for the quarter, as well as our outlook for the year. Larry and I will then discuss the highlights of our major businesses. Following our comments, we'll take any questions you may have, as always. Some statements made today may be forward-looking, including the planned separation of the research-based pharmaceutical company from the diversified medical products company and the expected financial results of the 2 companies after the separation. 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. Factors that may affect Abbott's operations are discussed in Item 1a Risk Factors to our Annual Report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2011, and are incorporated by reference. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. In 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 measure in our earnings news release and regulatory filings from today, which will be available on our website at abbott.com. And with that, I'll turn the call over to Tom. Tom?

Thanks, John. As you can see from our earnings news release this morning, we had a very strong first quarter, delivering double-digit ongoing earnings per share growth and beating our original forecast. We're very pleased with our start to the year and our outlook for the remainder of 2012. As a result, today, we are raising our ongoing EPS guidance range for the full year 2012 by $0.05 on both the bottom and the top of the range, reflecting another year of top-tier performance. For the first quarter, we reported ongoing diluted earnings per share of $1.03, an increase of 13.2% over the prior year. Sales increased 5.9% on an operational basis, that is excluding an unfavorable 1.3% impact from exchange rates, which was driven by strong performance across a number of our products and businesses. Reported sales increased 4.6%. In emerging markets, broadly defined, sales increased more than 10%, excluding the negative impact of foreign exchange, with double-digit growth in key emerging markets across the businesses. We also saw meaningful improvement in the adjusted gross margin ratio, up 260 basis points from the prior year to more than 61% as a result of the many margin-improvement initiatives we're implementing company-wide. In the quarter, we drove better margin performance across our major businesses, including Proprietary Pharmaceuticals, Vascular, Nutritionals and Diagnostics. We delivered more than 13% ongoing EPS growth and a 150 basis point improvement in our adjusted operating margin while continuing to invest in the businesses. Ongoing R&D investment was 10% of sales, reflecting continued progress across our new product programs. We also accelerated SG&A investment behind many of our key products and businesses to drive future growth. In the non-operating section of the P&L in the quarter, the net foreign exchange (gain) loss line was unfavorable $58 million compared…

Thanks, Tom. I'll start with the diversified medical products businesses, and then Larry will discuss the Proprietary Pharmaceutical business. Sales for our diversified medical products businesses increased mid-single digits in the first quarter, excluding the negative impact of foreign exchange. We also continued to expand operating margins on the quarter across our diversified medical products businesses including Nutrition, Diagnostics, Vascular and Diabetes Care. Let's start with Nutrition, where global sales in the quarter increased more than 10%, driven by strong growth in both the U.S., as well as international. In the U.S., sales increased 11% as we continue to maintain our strong market positions in both the Adult and Pediatric Nutritional segments. U.S. Pediatric Nutrition sales increased more than 15%. We continued to gain share and maintain our strong leadership position in the U.S. infant formula market with Similac. We expect continued strong growth of this brand throughout the year as we launch new products to support Similac in the prenatal segment of the market. Our toddler brand, PediaSure, continues to grow at a double-digit pace. U.S. Adult Nutritional sales increased more than 7%, driven by double-digit growth of both Ensure and Glucerna. We expect Ensure and Glucerna collectively to generate roughly $2 billion in full year sales this year, globally. Earlier this week, we initiated construction at a new liquid manufacturing facility in Ohio that will primarily support the growth of our U.S. Adult business. Abbott is the worldwide leader in adult nutrition. And as the baby boomer demographic ages, we expect continuing market expansion of the Adult Nutritional segment. Outside of the U.S., sales increased approximately 10% on an operational basis in Nutritionals, including the negative impact of foreign exchange, reported sales increased more than 9%. This growth was driven by 13% growth in Pediatric Nutritionals, with double-digit…

Thanks, John. Worldwide Proprietary Pharmaceutical sales increased more than 8% before the negative impact of exchange. On a reported basis, sales increased 7%, including growth of 6.6% in the U.S. and nearly 8% internationally. In immunology, global sales of HUMIRA increased more than 19% before the negative impact of exchange. Performance was driven by international sales growth of 17.4% before exchange and U.S. sales growth of 22.7%, consistent with the underlying trends we saw throughout the quarter. HUMIRA continues to hold the #1 global share position. We continue to see strong market growth both in the U.S. and internationally, with HUMIRA demand outpacing the market. We're continuing our development efforts for HUMIRA, including the study of new indications. We recently received approval from the European Commission for the treatment of ulcerative colitis, making HUMIRA the first and only self-injectable biologic therapy for this disease. The approval also marks the seventh major indication for HUMIRA in the European Union. We also have a number of other indications currently in late-stage development, many of which are unique to HUMIRA. HUMIRA's utility across a growing number of diseases is one of the many attributes that set it apart from other agents. HUMIRA is off to a strong start this year, well on track to achieve our sales growth outlook for the product in 2012. Moving on to AndroGel where U.S. sales were approximately $230 million, up more than 23%. AndroGel holds the #1 market share position in the testosterone replacement market, where growth is being driven by increasing diagnosis and treatment. AndroGel 1.62, our new low-volume formulation, has quickly become the second most-prescribed therapy in the market, second only to our older formulation AndroGel 1%. U.S. sales of CREON were nearly $70 million. CREON maintains market leadership in the pancreatic enzyme market, where…

[Operator Instructions] Our first question today is from Rick Wise from Leerink Swann.

As we think about operating margins, Tom, I mean, clearly, in particular on the Nutritional side, John laid out very thoroughly and clearly some of the drivers there. Can you talk a little bit more, just over the next -- looking ahead over the next couple of years and as the company separates, what are the bigger -- biggest margin drivers beyond this Nutritionals program? Is it diabetes? What's next? And is this going to be -- are these similar programs that you laid out for Nutritional? Or is it more about cost? Just, again, any perspective would be welcome. Where do we go from here?

Well, I think what John said in his remarks is a good representation of the way we're approaching it. And I think our experience in diagnostics really helped a lot in this regard. And we talked about this in the past. What that team did is they didn't limit their analysis of their business to just the cost area. They really looked comprehensively at their P&Ls, all the way from the top to the bottom line. They did a lot of thinking through mix, product mix, customer mix, profitability by customer segment. And they did some very good analytics and addressed some of the challenges there that really weren't evident as we looked at these businesses differently, prior to their -- to the work they did in that area. And we've really taken that approach and that template and brought it over to the other businesses and very comprehensively looked at each. So -- as John described in his Nutritional discussion there, it's a pretty broad range of things beyond just the cost area. And our other businesses have done similar exercises. In terms of what's going to drive operating margin improvement for the diversified company, certainly, the biggest opportunity over the next 2, 3 years is nutrition. I think that's where we see the highest ramp. We were -- in the 13 range, I think an operating margin couple of years ago, and we see a very good path to 20 here the next 2, 3 years, and we have a very thorough plan to get there. So that clearly is the biggest mover. But every single business is continuing to execute on their programs, again similar to what Diagnostics did. And we see steady improvement in each business, including Diagnostics. While we've gotten that business up into the upper teens, we clearly see that getting well into the 20s in the next couple of years as well, as they continue to execute. So it's a way of doing business. It's a continual process. And I think, across the businesses, it's going to contribute to a good margin expansion element of the diversified company as we move forward.

And follow-up with 2 product or division-related questions. Core Lab U.S., up 13%, an excellent performance. Maybe highlight some other pipeline products and how sustainable. And last, on ABSORB, given the EU launch later this year, maybe you could update us in terms of just some basic expectations about the penetration the product is likely to get in the first year or so post-launch?

Yes, let me take the first part. So ABSORB has been doing well in a limited clinical setting, as we've described before. And then we expect full commercialization launch later this year. The reaction has been very good from clinicians around the world. And as you know, the data results that we've showed so far are similar to what we have seen with XIENCE and XIENCE PRIME in terms of the safety profile and the efficacy. So very encouraged there. And as I mentioned, later this year, plans to start the U.S. trial remain on track there. So it's a good story there. In Core Lab, it's been -- it's interesting because it's a business, frankly, that we haven't talked a lot about, the different products and tests like we used to. But there have been a number of new products that have been launched, new assays. PRISM obviously has been important as that expands. We had good growth there with both of those systems, particularly in some emerging markets around the world where -- markets like China, we've grown in excess of 35%, grown twice the market. Brazil, we've had very good traction with our Vitamin D and Chagas test. Russia is growing, excess of 30%. It's off a smaller base. But we're really investing in some of those emerging markets, and leveraging our overall global leadership position is definitely making a big difference. And then as I mentioned in my remarks, we did win the largest private laboratory in Latin America in the first quarter this year. So those are the good things. The European market has been a little challenging, I think, for everybody. Other competitors have talked about that, but that's one of the things that you have to deal with and we plan for. We also have had some specific tests in the pipeline last year, for example, the Vitamin D test that I mentioned; launched a number of new assays this year, include diabetes and cardiac markers. And then we have other things that we've done in that business, as you know, with our acquisition of STARLIMS. That was the first -- our first entrée into informatics. And we've launched what we call OneLab, which is an offshoot of the STARLIMS system. That's gaining some good traction and giving our customers some options that they didn't have before.

Our next question is from Mike Weinstein from JPMC.

So first one -- let me ask on Hep C. So what are we going to see additionally at EASL that we didn't see in the abstracts?

Most of our abstract, Mike, this is Larry, contain the information that we have at EASL. So when they posted earlier this month, that pretty much encompassed all of our data. And again, the key data there for us would be the Co-Pilot data, which showed very strong SVR12 rates of 93% and 95%. And then Pilot also was very strong. SVR rates, SVR24 actually, at 91%. But most of the abstracts that have been released back in early April will be comprehensive of what we have at EASL this weekend.

One of the questions that people have had has been bounced about on the Street post the release of the abstracts, is the difference in the response rates between the non-CC naïve patients and those that are non-CC treatment failure patients, interferon failure patients. Do you have any thoughts as to why there's such a difference in response rates between those 2 groups? Obviously the N is small, but there's a pretty strong difference there.

Well, people who are non-responders are certainly the most difficult to treat, right? And this data that we have right now is kind of our first foray into that group, and it does only include 2 of our agents, the protease inhibitor, as well as the polymerase. And so, as you know, we've got additional studies underway, CC, as I mentioned, later this year, that are inclusive of the NS5A, which we believe to be a much more potent group. But that 47% SVR rate within that non-responder group is actually better than just about anything else that's been put forth to date, including some pretty low-level response rates from the new class that we've seen here over the last 6 weeks. So I would say that 47% looks very good relative to anything else that we've seen. And I think we'll see more again later this year when we put together a more potent agent NS5A in combination with this tough-to-treat patient population.

Yes. And then, of course, Mike, the other data that we showed in the most prevalent form of the virus in developed markets, the GT1 treatment-naïve patients, that's where we saw the cure rates in excess of 90%. So those were unprecedented types of results. It's obviously, as Larry said, early data, and we expect to have more data later in the year on a broader patient population. But clearly, I think that put us in a leadership position in HCV.

Good. Let me ask one question on EPD. The performance this quarter was a bit light of our thinking. I think it was up 1.8% constant currency. At the Analyst Meeting, you guys had talked about EPD growing mid- to high-single digits going forward, and I know emerging markets are close to 60% of the revenues. So help us out there, what is going on in EPD? It's important because it's 1/3 of the profits for new Abbott, so it's going to be a key driver. So why is growth in the low-single digits right now? Why isn't it in that mid to high single-digit range you guys talked about?

Well, obviously, that mid to high was a bit of a longer-term target for this group. And the results in the first quarter were very consistent with the guidance we provided in January. And what's happening -- this organization has been in place for a little more than the year. There are a number of their geographic expansion initiatives and products expansion initiatives, which are just in the early stages. Programs such as the Zydus collaboration, which will bring new molecules to the market, and some of the payback on some of the commercial investments that have been made over the last -- over the first year or so are still a bit further out. So I think we're on track in the first quarter. We do expect the growth rates to improve later in the year. There's been -- as you know, there is a base part of this business that is the developed world that is growing a bit more slowly. And in the first quarter, we were working through a little bit of a headwind in some of the European countries there as we progressed through the year. But I think the comps will get better, particularly in the third and fourth quarter. And as we exit the year, our forecast show that we'll be much closer to that range we talked about at the Analyst Meeting as we progress into 2013. So we expect better growth. I think you'll see it. And we'll just have to keep monitoring it as we go forward.

Our next question is from Jami Rubin from Goldman Sachs.

Just a few questions, Tom. TriCor, what are your expectations for revenues going forward? Just given the settlement that you've reached with Teva, and Teva's commentary that the FDA has issues with their formulation and won't be launching this year, do you anticipate that there will be other generics on the market? And does your settlement agreement allow for other generics to reach the market? And then I have a follow-up question on HUMIRA growth, which has been quite remarkable in terms of the re-acceleration we've seen, with HUMIRA growth in the U.S., along with the entire anti-TNF class. And I'm just wondering what you think is going on. And as you know, there will be a JAK inhibitor potentially reaching the market in the second half of this year and if your guidance for the full year incorporates a competitive dynamic, and if you could just share with us what you're thinking is.

Yes, so this is Tom. On TriCor, I mean, I've heard some of the comments you mentioned from Teva, but we can't make assumptions on what they're going to do or not going to do. And clearly, they have a right to enter the market in the second half. And so we continue to model that. I think even if there was somewhat of a delay there, over the -- even the near term or the medium term, that's not real meaningful for us because clearly, as we move into 2013 and '14, these lipid products are in their last phases, and we don't have expectations for sales for those products. So that issue may be a little more meaningful for the other company than it is for us, and we'll see how it plays out in the second half. John, you want to take -- or Larry, you want to take the HUMIRA?

Sure. This is Larry. The market growth has been very strong for biologics overall, and I think you'll see that our growth from a prescription trend basis is growing even faster than the market. I think, from an overall market, maybe we're seeing a little bit more contribution from the dermatology side, which, as you know, has very low levels of penetration currently. I think that's lifting the overall biologics market. I think unique to HUMIRA has just been some very strong commercial execution across all the categories. We continue to see very good share momentum, particularly in dermatology relative to Enbrel, as well as in the gastro space relative to the Cimzias of the world. We continue to see really nice market share gains there. And room has held in there quite nicely for us as well, despite an increased level of competition from smaller players who have garnered, I would say, pretty low levels of share overall. Now you asked about our contemplation of a potential launch of Pfizer's tofacitinib product. We pretty much as -- almost like in the TriCor situation, we have to assume that they will be successful with their ultimate approval on a PDUFA date, which I believe is in August. And so we've factored that into our outlook for the year. And certainly, we feel very good about our position, the strength of HUMIRA relative to that product's launch. But to your specific question, yes, we have factored that into our outlook for this year.

And just, Tom, very quickly on your tax rate guidance for the year of 14.5% to 15%. Does that contemplate an R&D tax credit? Is that already in that number?

No, we do not assume that at this point in time.

Our next question is from David Lewis from Morgan Stanley.

Tom, just wanted to come back to EPD for a second. So it does appear that the key emerging markets with NS7 are performing actually quite well. So I wonder, is the performance today, which I know you hope to get better, is that more a function of the BRICs not growing as fast as you want or expected? Or is it a situation with the non-BRIC markets that may be more developed in nature are being pressured for economic reasons kind of at this current time?

Yes, it's -- well, it's the non-BRIC. But all -- we, frankly -- as we look at this business not really on the long term, the medium term, we have factored into that mid to upper expectation on sales growth, the fact that this base business will not grow as fast. But as the emerging markets grow as fast as we expect, and as it becomes a higher percentage of the business, I think it's going to support growth in the range that we have targeted. I will say, as a part of the latter part of 2011 and in the first quarter of 2012, there still is some residual austerity effect coming through in the developed world element of this business. And that's a little bit of what you're seeing in the first quarter, a bit of headwind. But in the BRIC areas, very strong double-digit growth, and we're really pleased with how the business is executing in those areas.

Okay. Maybe just a quick question for Larry on Hep C. Larry, have there been any decisions made about, if you look at the regimens in Pilot and Co-Pilot, about which of those regimens, if any, are going to be brought into Phase III?

No final decisions on Phase III at this point in time. I would say, one thing that we learned from Pilot/Co-Pilot, though, is that we used ABT-072 in Pilot. That's our, again, the polymerase inhibitor, and we used 333 in Co-Pilot. As you can see, in the Phase IIb studies that we've described on clinicaltrials.gov, we are moving forward in Phase IIb with the ABT-333 polymerase. But I think, more importantly, is the data that's coming from our broader Phase II program, Aviator and Navigator, that really combine and have various arms that have, again, various combinations of these 3 compounds with and without ribavirin, that will really be the guide to what we move forward with into Phase III. And again, right now, we're talking initiation of Phase III in 2013. But as you can imagine, we're working very hard to have that occur as soon as we can. But that's our guidance today.

Okay. And then maybe just one quick -- I'm sorry, for John or Tom. You talked about nutritional opportunities, obviously, a significant driver of what -- of DMP growth. You talked about 2 different opportunities: the first, which is a cost-driven opportunity; the second is mix. I guess I'm just curious, can both of those opportunities move forward simultaneously? Or should we think of them as sort of a phase -- a phased effect?

No. I mean, all of the margin initiatives are being addressed concurrently as aggressively as the organization can do it. So it's going to -- there's no reason to phase things. And there are numerous, numerous -- literally over 100 programs that the business is executing on as we speak.

Our next question is from Glenn Novarro from RBC Capital Markets.

Two questions. One on HUMIRA, the o U.S. strength. Can you comment about -- I can't imagine it's entering new markets, so it must be indications. So maybe discuss what's driving the international growth? Then my second question is on U.S. stents. Can you give us a sense of what pricing has been doing in the market sequentially and what DES penetration was in the first quarter?

Yes. Let me take the last part first, Glenn. So stent pricing actually has moderated nicely from what we've seen, as you know, last year, throughout the year. And I think the competitors saw this as well. It was declining in the high-single digits. It's moderated to mid-single digits price decline. And that is a function of a number of different things. One, on our end, is the launch of both nano and PRIME. So getting into the short lengths and the longer lengths -- small vessels and longer lengths, excuse me. And that -- those are premium products, and I think that's helped stabilize as well, and some other competitive launches in addition. So that's one thing. DES penetration has been around 80%. And with PROMUS out of the mix as you know, too, that helps our overall pricing situation now that they're no longer part of that third-party revenue line in our overall numbers. So DES penetration is good. PCI volume has been up nicely, particularly outside the U.S. and certain emerging markets, it's growing in the mid-teens. So the dynamics there are good for the underlying business, despite the noise and as I mentioned on the call. And it's really about setting up the business for much stronger growth in 2013 as we get through this transition year, with PROMUS coming out of the numbers for us.

Can I ask one follow-up, just U.S. PCI volume is -- that's been kind of tracking flat to up a little, down a little. Any indication what that was in the first quarter? And the 80% DES penetration, is that better than what we've seen in the second half of last year?

Yes, it is slightly better. We were seeing -- pushing upwards of 80%, 79%. That's the first time that we've gotten to 80% in a while. And the U.S., you're right. PCI volume there has been relatively flat and down just very slightly sequentially. But as I mentioned, up kind of in the mid-single digits worldwide. And then certain international emerging markets been up quite strongly.

And then just the international HUMIRA growth?

Sure. Yes. I think it's a combination of factors, Glenn. Certainly, HUMIRA has a leadership position and, as a leader, grows probably in excess of the marketplace most quarters. That leadership extends across, as I said, now 7 indications. So it is somewhat driven by new indications. It's also driven by some expansion in geographic presence. Japan continues to move forward nicely. We've launched in China. But I think, in general, the overall driving factor is just market growth. We continue to see, across the major markets, growth rates anywhere from 14% to 20%, just based again on the benefits that the product brings relative to the downstream cost that can be incurred for not treating the severity of these diseases. So market growth is probably your primary driver there in the international side, and we're growing a little bit faster than those markets.

And that 14% to 20%, should we assume it's closer to 14% in Europe and 20% outside of Europe? Or is it a little bit slower in Europe?

The Europes are in that range.

Our final question today is from Rajeev Jashnani from UBS.

Just a follow-up on EPD. I think you guys reported in 2011, pricing was minus 1 to 2. Is that still kind of the run rate you're seeing for that business?

Yes, that's probably about right. A little -- probably closer to 2.

Okay, fair enough. And I guess just following up on HUMIRA x U.S. I know you don't want to get too specific on this, but is it reasonable to assume a double-digit ongoing constant currency-type growth for that product, again in international markets over the next few years?

Yes, it's always hard to project out that far, Rajeev. But again, here we are in 2012, and those markets continue to grow in the range that I just indicated. That's pretty strong growth. Now certainly, our product gets bigger and bigger every year. So dollars of growth can continue to be quite strong. The percentage, just based on the way the numbers work, starts to come down a little bit, but we foresee good growth there internationally.

Yes. I mean, you'll recall from the October investor meeting, Rick Gonzalez talked about $1 billion-plus in raw dollars of HUMIRA growth over the next few years. So certainly, as a percentage, that would be double digits in '13 and probably '14. But that gives you an idea of what we think the continuing growth potential of the product is as we look out 2, 3 years.

Yes. No, that's very helpful. It just seems like the product just continues to move ahead at a -- such a brisk pace. I appreciate the color.

Well, the performance has been good, and we think the durability is very strong as well over the long term.

Yes. And don't forget all the indications that we have. And we just got another one, as you know, in Europe. So the utility of the product has been amazing, and it's a great, great, well-positioned product for the long-term. Okay? All right. And that concludes our conference call. A replay of the call will be available after 11 a.m. Central Time today on our Investor Relations website at www.abbottinvestor.com; and after 11 a.m. Central Time via telephone at (203) 369-3838, confirmation code 70437043. The audio replay will be available until 4 p.m. Central on Wednesday, May 2. We appreciate you joining us, and please call us if you have any follow-up questions. Thank you for your time.

Thank you. And this concludes today's conference. You may disconnect at this time.