Q2 2020 Abbott Laboratories Earnings Call
Robert Ford, President and Chief Executive Officer, and Bob Funk, Executive Vice President Finance and Chief Financial Officer.
Robert and Bob will provide opening remarks following their comments, we'll take your questions.
Before we get started some statements made today maybe forward looking for purposes of the private Securities Litigation Reform Act of 1995, including the expected financial results for 2020.
Abbott cautions that these forward looking statements are subject to risks and uncertainties, including the impact of the cobot 19 pandemic on Abbott's operations and financial results 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 Onea risk factors to our annual report on form 10-K for the year ended December 30, Onest 2019, and an item one a risk factors in our quarterly report.
On form 10-Q for the quarter ended March 30, Onest 2020.
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.
Please note that financial information provided on the call today for sales EPS and line items of the PNM now will be for continuing operations only.
On today's conference call as in the past non-GAAP financial measures will be used to help investors understand evets ongoing business performance.
These non-GAAP financial measures are reconciled with the comparable GAAP financial measures and our earnings news release and regulatory filings from today, which are available on our website at <unk> Dot com.
Unless otherwise noted our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange with that I will now turn the call over to Robert.
Thanks Scott.
Good morning, everyone and thank you for joining us I Hope you and your families are staying healthy in state during these challenging times.
Today, we reported ongoing earnings per share of 57 cents.
Which is significantly above analyst expectations.
Based on our performance and momentum through the first six months along with our expectations for the remainder of the year. We now forecast adjusted earnings per share of at least $3.25 for the full year 2020.
As I stated on our last earnings call. We anticipated this past quarter would be our most challenging of the year.
At the start of the quarter many areas of the world. We're under shelter in place restrictions, which led to the postponement of elective medical procedures and sharp declines in routine diagnostic testing.
Encouragingly as we progressed through the quarter, we saw steady improvements in both testing and procedure volumes across our hospital based businesses.
At the same time are more consumer facing businesses, which include diabetes care nutrition and established pharmaceuticals continued to be resilient in this environment collectively growing more than 9% in the first half of the year.
Throughout this time, our supply chain has remained resilient our financial health has remained strong and we've continued to advance our pipeline and strengthen our long term growth platforms with several recent regulatory approvals, including us approval of LIBOR rate too as an ice CGM with sets a new standard.
For accuracy and performance and includes a new pediatric use indication.
CE Mark approval of try clip the world's first minimally invasive device for repairing the leaky tricuspid heart valve. This is a new market opportunity for our structural heart business that has potential to be a significant area of growth over the next several years.
And us approval of Glock, our next generation heart rhythm devices that feature Bluetooth connectivity for continuous remote monitoring which is a capability we have been integrating across our device portfolio over the past several years, including freestyle Libra, our continuous glucose monitor come from.
Our implantable cardiac monitoring device cardiomems, our leading heart failure monitoring system and several other cardiovascular and neuromodulation devices across our portfolio.
These connected care capabilities allow for better ongoing engagement between patients and their healthcare providers.
And this benefit has never been more evident than in today's pandemic, where virtual care has become necessary to safeguard against exposure between physicians and patients while continuing to manage and implement medical interventions when they needed.
I'll now I'll summarize our second quarter results in more detail before turning over to call to Bob.
And I'll start with nutrition.
Where sales increased 3% in the quarter.
Strong us and international growth of ensure our market, leading complete and balanced nutrition brand led to global adult nutrition growth of around 7.5%.
In pediatric nutrition.
Sales were led by global growth at Peter Shore, and PD light our market, leading oral rehydration brand.
Which was offset by challenging conditions in greater China.
Moving to established pharmaceuticals or Eddie.
Sales were relatively flat following strong growth in the first quarter. When we saw increased demand in late March during the early phase of the pandemic.
Over the last couple of months, we've seen the virus spread and impact market demand in certain emerging countries, such as Russia, Brazil and Colombia.
Through the first half of the year NPD achieved mid single digit sales growth and we anticipate a similar growth profile for the second half of the year.
Turning now to medical devices as I mentioned earlier over the course of the second quarter, we saw steady improvements in procedure volumes across our cardiovascular and Neuromodulation portfolio.
For example at the end of June our procedure volumes had rebounded to approximately 90% of pre co bid levels on average in the us which represents a significant recovery compared to procedure activity at the beginning of the second quarter.
In diabetes care sales grew nearly 30% in the quarter led by freestyle libre growth of 40%.
As I mentioned earlier, we obtained us FDA approval for Liberty to during the quarter.
Now approved for both kids and adults Libra two sets a new standard for accuracy, including when glucose levels are in the lowest range, which is critically important in order to avoid going into hypoglycemia.
This leading accuracy profile results and superior along performance with fewer false alarms than other systems, which can be frustrating, but more importantly significantly fewer missed alarms, which can be critical to avoiding dangerous glucose levels.
Libra two maintains all the market leading features that Lee brand is known for its smaller easier to use and longer lasting than other glucose monitors and its value proposition is unparalleled with a cost profile that is not a burden to healthcare systems.
We will launch freestyle Libre a two in the next few weeks at the same price as the current available freestyle Libre, a 14 day system.
Continuing our commitment to make libra affordable and accessible to as many people as possible.
I'll wrap up with died with our diagnostic business, where sales grew 7% in the quarter.
Similar to what we saw in medical device procedures testing volumes in our underlying diagnostic business, which excludes cobot 19 tests rebounded to approximately 90% of pre cobot levels by the end of the second quarter.
Over the first half of the year, we've developed and launched several cobot 19 tests across our testing platform for both laboratory and rapid point of care settings.
To date, we've sold about 40 million tests across all our platforms and countries around the globe.
As we think about the continuum of diagnostic testing for Kobin 19 going forward, we see the environment unfolding across a few phases.
To date, we've largely experienced the pandemic face we're testing has been prioritize brick central professional such as healthcare workers as well as symptomatic patients.
Molecular testing, which detects if someone currently has the virus has been in high demand during this period.
With the phase easing of shelter in place restrictions were entering a new phase.
We're continue testing of symptomatic patients will start to overlap with broader surveillance testing of asymptomatic patients in order to better track understand and contain the spread the virus until we have broad vaccine availability.
So in addition to molecular testing during this period, we would anticipate increased demand for other types of tests, including both antigen and antibody.
As vaccines become available we would anticipate continued surveillance testing to monitor and assess for both natural and vaccine related immune response, which would be followed by a steady state of ongoing monitoring and tracking of vaccine protection.
So looking across the spectrum.
It's clear that the need for testing is large and it isn't going away.
Im incredibly proud of the work of our scientists as well of our manufacturing supply chain and business teams are doing to lead in this area as we fight this pandemic.
So in summary.
Wall as we had expected this quarter was a challenging from a growth perspective, we significantly exceeded expectations and more importantly exited the quarter in a much stronger position than we entered.
We continue to advance our pipeline and achieved several important new product approvals during the quarter.
And we've continued to lead in the area of diagnostic testing for coated 19, which is significant and expected to carry forward beyond this year.
I'll now tone turn the call over to Bob Bob.
Thanks Robert.
As Scott mentioned earlier. Please note that all references to sales growth rates unless otherwise noted are on an organic basis.
Turning to our results.
Sales for the second quarter declined 5.4%.
Our adjusted gross margin ratio was 56% of sales.
R&D investment was 7.3% of sales.
And adjusted SGN, a expense was 30.7% of sales.
Exchange had an unfavorable year over year impact of 2.8% on second quarter sales.
During the quarter, we saw the US dollar weakened versus several major currencies, which resulted in a favorable impact on sales compared to expectations and exchange rates held steady since the time of our earnings call in April.
Based on current rates, we now expect exchange to have a negative impact of approximately 2% on our full year sales.
Our second quarter adjusted tax rate a 17.7%.
Reflects the aggregate adjustment.
To align our tax rate for the first half of 2020.
With our revised full year effective tax rate forecast a 15.6%.
This is higher than the estimated range. We provided in January due to a shift in our geographic and business income mix caused by cobot 19.
Before we open the call for questions.
I'd like to briefly discuss a couple of items related to our capital allocation strategy.
We ended the second quarter with approximately $5 billion of cash and short term investments.
Which represents an increase of more than $1 billion compared to the end of the first quarter.
The increase includes the impact of a bond offering we executed in June.
We intend to use the proceeds from then offering to pay off debt that matures in September.
Following that we have no other debt payments due until mid 2022.
Which only further enhances our financial flexibility.
In June we also announced our 386 consecutive quarterly dividend payment.
An impressive track record that dates back to 1924.
This year also marks the 48 straight year that avid has increased its dividend payment.
Making abbott a long tenured member of the S&P 500 dividend aristocrats index.
Which tracks companies that have increased dividends annually for at least 25 consecutive years.
Our consistency and commitment to paying a dividend is a hallmark of abbott's identity and our strong financial position allows us to continue that track records, even during challenging economic times.
With that we'll now open the call for questions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then that number one on your Touchstone telephone.
If your question has been answered or you Miss your move yourself from the Gill. Please press the pound team.
Our optimal sound quality, we kindly ask that you. Please use your hands, but instead of your speaker phone when asking your question Dennis.
And gentlemen that Star then one last quick question.
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And our first question comes from Robbie market from Jpmorgan. Your line is open.
Thank you and congrats on a much better than expected corridor.
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Maybe we could start at the top on Twoq coming in better, but still a decent amount of uncertainty about the balance of the year and the recovery trajectory. What gives you the confidence in providing EPS floor here of at least 325.
Sure Robbie thanks.
I'd say, it's not one it's not one single factor.
It's really more of a collection of factors here I think that speaks to really the power of our of our diversified model at the diverse strength of all of our different businesses. So.
Without a doubt the Q2, EPS beat which was pretty significant factors into that I think some of that.
Really was driven by end of there's some impact there of the challenges of forecasting that I think we all had in April but a good portion of that beat really comes from strong performance across across the businesses. I mean, if you look at our four businesses three at three three out of three of them three out of four of them are actually.
Posting mid single digit growth the first six months of the year.
But as you look at the base business and think about base businesses as ultimately Abbott without cobot testing I think we saw a nice recovery in the second quarter, yet theres, probably still some some uncertainty, but I think we saw rolled nice recovery across our base business. If you look at the diagnostic and.
Device businesses that were probably more impacted.
We as I described we exited June with about 90% pre coated at pre coated levels. So.
And now was that was on average I can tell you there was some markets or some segments of our portfolio that we actually saw growth in the month of June so and that happen I'd say, both in the us and internationally and that's important because obviously, there's there's maybe some concerns a resurgence here in the U.S., but large portion of our.
Sales of these businesses are are concentrated internationally too and we're not seeing those those same concerns in those markets and nutrition was interesting too I would say is as I look at that base kind of recovery or that base trend in Q2, and we thought that there could that could be some impact of a pantry stocking.
In Q1 that drove nutrition performance, we actually did better than that and I think part of that was some stocking, but what we've now seen through some of the share charge. So Rob is that we picked up share in both a pediatric and adult nutrition. So so again nice recovery nice performance of the base business in in Q2, and I see that momentum.
Carrying forward to the second half when we've got a lot of product launches.
Label and reimbursement expansions.
I can go through some of them, we'll probably talk about them, but if you think about library to I've got high expectations about that launch in the us.
Try clip and 10 Diamond these are product launches that we've started a rollout in Europe.
We've got great feedback in the first step months of launch and we expect kind of good momentum for those products in that geography.
The NCD certainty I think now in terms of lease timelines for Mitraclip is a real big plus for us and the Alinity expansion that we continue to roll out I'd say, a nice launch now ability and in the us.
We are using covert here to jumpstart that long so I'd say the combination of nice recovery in Q2 and that momentum being.
Being powered through all of these launches and all these products that we've historically been talking about is a big factor there and then I'd say finally, the cobot testing and my prepared remarks, I talked a bit about kind of the phases were going to be going but ultimately the demand here and the need will be with us for the foreseeable future. So.
We've got a comprehensive portfolio, whether it's a point of care, whether it's our core lab, whether its lateral flow.
Different types of test whether its molecular PCR antibody. So I think we really had a competitive portfolio and as we look at going into the second half of the year. The the competitive position combined with the with the demand thats going to be there, we're going to be adding in the second half we'll be adding in terms of.
New test new formats, and also important we'll be adding in terms of manufacturing capacity, whether it's our molecular platforms, whether it's our lateral flow platform. So we've been working.
At the manufacturing expansion during this quarter. So the notion here that we are somehow our competitive position is threatened to I think that we've been we'll be adding it's a competitive position, we'll be adding to it and.
And I see the demand I see the demand being there. So a factor all this end Ravi look at our beat our base business recovery in Q2 fueled by a lot of these kind of product launches carrying that momentum forward I look at the acceleration of our cobot testing across all of our platforms. You can then do some.
Risk adjustments to some of some of the points that you've made there about maybe some resurgence in some states.
But I felt that once you factored all that and I felt I felt confident about reinstating our guidance and I thought that a number of 325 was was a good starting point.
As we as we go into the second half.
Great Thats a lot of wonderful color, maybe if we could turn the second question net testing and the two things I wanted to focus on was the durability of the testing not just for the second half of this year, but as you think out beyond into 2021, plus how durable as the Suralco testing.
And and then second if you could just give us an update on where you stand in some of these other tests slate down the lateral flow test and anything else.
Timeline or product wise, you to comment on thanks sure. We spent some time looking at kind of what that demand curve will look like.
And obviously, our understanding now is much better informed and when it was in March.
I kinda I kind of highlight a little bit the different phases that we'll see.
We're now moving into I guess, what I would call. This more recovery phase here as as some of these shelter in place restrictions are being east not just in the us, but but globally also and.
So thats ultimately that the part of the demand curve that actually see where most of the testing is going to occur where you are really here trying to do broad surveillance beyond just symptomatic or or essential workers and.
I can see that phase lasting a quite a bit actually at least until there is a proven kind of vaccine.
And vaccine availability.
I think once that once that happens, we'll we'll probably getting into that I, what I would call like a vaccine phase here, where I still think you're going to be needing to do surveillance.
Testing of of the virus and that's probably while also think that we'll see an increase in in serology and an antibody testing.
And I see that that's going to be.
An opportunity for us and for other companies here that have the antibody test I see that as being kind of a real kind of demand driver on the surajit side, but I'd say.
As we as we look at this recovery phase that we're and probably over the next kind of 12 months here.
We're going to see broadcasting.
And I think that as I said the platforms that we built.
It is important because they're going to need to have different solutions for different environments different countries different trajectory that countries are on so I like our position and the other thing I would say is there's it's good to see a lot of.
A lot of science and a lot of approvals of new tests, and Thats and Thats really important.
But as as we all know one thing is to ultimately solve the scientific question of detecting the virus and finding the antibody, but you got to be able to have the scale and demand manufacturing footprint to be able to kind of scale up and build and I think thats, what we focused a lot on over.
Definitely over the last 90 days is looking at the.
Portfolio of tests that we have and and adding our manufacturing capacity to them and and it's not just one single.
Site or one single technology, we're really looking at.
Bolstering manufacturing capacity across all of our testing platforms.
Thanks, a lot.
Sure.
Thank you Sir our next question comes from VJ Kumar from Evercore. Your line is open.
Hey, Thanks, guys say now congrats on the solid execution.
The Robert ahead up two part question or two questions.
One of on the product side, one on the guidance maybe I'll start on the on now with the product side I think you mentioned bullish comments on Libra, there's been some confusion.
On the suite on the labeling site.
On the CGM level, the lack of any I'd.
In a compatibility if you will.
Maybe up parses out.
Explain how you see this LIBOR franchise in the back half heading into next year.
Our perspective, you think this labeling is an issue or is this more for sales I guess you.
Sure.
Well I mean, I think you saw FLIR, let me just start off then with kind of the trajectory here revenue you looked at our first quarter trajectory in terms of sales growth new user additions as measured by prescription data here in the US another data sources outside the internationally and we were on a real strong kind of trend.
As as we were going into Q1, and then obviously cobot had a little bit of an impact on our new user acquisition growth rate. I mean, we were definitely growing new users through Q2, but I think you could see in the in the data.
That we all kind of felt that a little bit of an impact in may.
And that's probably just impact of shelter in place where patients weren't weren't going to their physicians either to get their prescription or just want to go into weren't going to the physician's office, but you see now many of you look at the data you see the pickup in in.
In the.