Abbott Labs Earnings Call Nuggets: Franchise Development, Operating Margins

On Wednesday, Abbott Laboratories (NYSE:ABT) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Franchise Development

David Lewis – Morgan Stanley: Miles, I thought maybe we should start with a strategic question. If I think about that the DMP strategy going forward I feel like investors see nutrition as a big source of leverage they see established pharma and as we’ve seen this year as source of growth. They have questions on a device franchise, I guess how do you see the development of franchise is it a growth asset is it a leverage asset and what impact do you think M&A is going to play in the development of that device franchise over time?

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Miles D. White – Chairman and CEO: Well, I’d characterize the device franchise in the following way I think we are in a transition period. We just launched a number of new products in our vascular businesses for example we are lapping our Promus arrangement with Boston Scientific. So we got a number of things that are sort of in transition there. So I look for growth out of the vascular business I say our and on a continuing basis because as you know we’ve established a very strong franchise there with our entire XIENCE franchise I think we’ve got growth potential, tremendous growth really with absorb and with MitraClip and frankly with our endovascular franchise. So I expect that to be a growth business and we simply have to lap the circumstance of Promus and we’ve got to get our new products launched, which we’re underway with. Now, I think we’ve got opportunity there, a lot of opportunity including in emerging markets. On the front of the ophthalmology business, part of that is market and economy driven, and part of that is new product launches which we have a number of coming, and then part of its expansion into emerging markets. So, it’s a similar story, but I’d say we’re in the – let’s get all the ducks lined up to achieve that and be ready to do that, that business has been somewhat disappointing over the last couple of years. As you know, the LASIK part of it and others are very dependent on economic conditions, and that’s really been a headwind for that business. So, I look for that business also to be a growth contributor in the future. Finally, diabetes care, I would characterize in two ways. One, it’s clearly a tougher more competitive market over time. There is been a lot of price pressure, reimbursement pressure and so forth, particularly from governments in Europe. On the other hand, we’ve got a particularly innovative pipeline and system of products coming that I think really changed diabetes testing for the type 1 and type 2 tester going forward. The first product in that line up InsuLinx is in the market now, and I’d said I’ve got a pretty exciting product line coming there. So, I look for that business to also improve from a growth standpoint going forward, so I am looking for growth out of all three. All three happened to be in transitional phases right now, but they’ve got a nice (indiscernible) of products coming. At the same time, we put a fair amount of emphasis on gross margin improvement in all of them, and we’re seeing – we’ve seen a lot of margin improvement over the last few years at a vascular. We’ve seen it out of our diabetes care business. I think all the prospects look good there, but in terms of the evolution of the performance of businesses, I’d say diagnostics for example is ahead of others on those tracks, also with a healthy pipeline of systems that’s in development. As I mentioned, there hasn’t been a lot new in the diagnostics or core laboratory diagnostics arena in the last many years, actually several years and the pipeline of products under development there I think are quite exciting for us and for the market. I look at that across the board, I think the evidence from our nutrition and pharmaceutical business, EPD, the expansion in the emerging markets, the number of products that have entered those markets they are all laying the foundation for growth in what are going to be growth markets anyway. So, as I look forward, my expectations are optimistic. I would say, from time to time a number of analysts including yourself have challenged us on our market assumptions and I think that market has been tougher and slower to recover or slower to pick up than I had certainly hoped and any of us had hoped, but at the same time, you have got to be prepared to grow through the market. So, I have put a lot of attention on our organic or internal capability in innovation, R&D and new products. One of the things that I am quite pleased with is we split the company, is that both companies have what I consider to be an appropriate critical mass of spending or level of spending in R&D. as you all know, over the last 10 to 12 years, we have been steadily I would say restoring or improving spending rates or investment rates in R&D. If you will note, in the AbbVie profile on the split, they will spend 14.5% on R&D. If you went back 10 or 12 years ago, we would have struggled to spend at that level in R&D. So, I am pleased that with the performance of the Company over the last 10 or 12 years and the growth, we have also improved the investment and spending rates in both R&D and SG&A to pretty healthy levels so that the Company is capable of sustaining organic innovation and sustainability going forward, which has been a focus. You asked about M&A, I would say M&A remains, from my point of view, only opportunistic. I’m putting an awful lot of our focus and emphasis right now internally and I think that’s important, particularly during the split when we’ll have transition service agreements and we’ve got to get through the separation and let the dust settle and so forth. I also never forecast M&A transactions, but I’m mindful that the foundation of the company has to be operating well and on an organic basis, otherwise I think we – well I think that’s what we need to pay attention to. So, I don’t rule anything out, but I’m not looking for anything big and we’re not particularly active as you can see over the last year, we haven’t been. There are few categories or areas where we’re particularly mindful whether or not there are opportunities to adjunctively add to the business or enhance the strategic strength of the business. We’re always watching that, we’re always tracking that, but I’d say, right now, I don’t have anything that I could forecast on the radar screen and my focus is primarily organic. I know that’s a long answer, it’s more than you asked for, but I thought it’ll cover a number of things you be curious about.

Operating Margins

Jami Rubin – Goldman Sachs: Sort of a similar question to both Bill and Rick. I appreciate the granularity that you provided today on AbbVie going forward, but I’m wondering if you could – you gave us good sense for operating margins in 2013, but since again this business is going through so much transition with base business not changing much, but facing competition in the lipid business and then new products likely to come to the market 2015 and beyond, can you give us a sense for where, you see opportunities for operating margin leverage the gross margin level you said was 76.5% where can that go realistically driven by continued growth of HUMIRA plus new product contributions and then how should we think about SG&A and R&D going forward. Then lastly just on HUMIRA, obviously this franchise has done extremely well, when we think about HUMIRA 2013 and beyond just wondering what you are thinking internally about tofacitinib are you assuming as I think the market is restricted third line label. If it’s a second line label how would that affect your thoughts on HUMIRA going forward thanks.

Richard A. Gonzalez – EVP, Pharmaceutical Products Group; President, Abbott Ventures, Inc.: I think if you look at our business over the next three or four years, you are perspective wise correct. We are going to go through a transition period where we are going to have relatively flat to slightly down top line for the next couple of years driven by the loss of exclusivity primarily in our dyslipidemia franchise and then the underlying emerging growth that we continue to see out of HUMIRA offsets the majority of that going forward we anticipate that HUMIRA will continue to drive growth those markets are still areas where we can continue to drive penetration as you know the penetration rates really across all three segments are relatively low and we continue to see uptick of these kinds of products going forward as we expand in more and more patients and we expand geographically. Starting in roughly 2015 you’ll start to see the emergence of our pipeline going forward and you’ll see top line start to accelerate particularly in the second half of ’15 from a margin standpoint we still have opportunity to be able to improve margins between now and then an gross margins and we continue to work on operational improvements there’ll be some mix improvement over time although some of that will be offset by the loss of exclusivity of some products they also have relatively high margins, so there’ll be a little bit of a mix bag there. I think generally speaking, we’re focused on operational improvements in those areas. From an SG&A and an R&D standpoint, as I said in my comments, we have a strong late stage pipeline and we have a number of assets that are in our mid-stage pipeline that we believe have compelling enough data that they will likely be able to advance into Phase 3. This is an innovation driven business. We’re certainly going to drive everything that we have that we think could be successful going forward. So, we have a commitment to be able to support R&D at a level that’s appropriate based on those programs that advanced. As I indicated, I think for 2013, you should be assuming in the range of about 14%. On the SG&A front, I’d tell you that in general both R&D and SG&A based on what we know about the industry, we’re one of the most efficient operating models, and I think we operate very efficiently. In the SG&A area, we’re always careful about how we build infrastructure and make sure that we are lean as possible, but yet effective. So, that’s an area that we always focus on sort of an Abbott tradition, and we plan on continuing that as part of AbbVie. On the Tofa front, I think our read in the U.S. is consistent with what you described based on the label that we would anticipate on the data that we’ve seen publicly. We would expect it to be third line. We’ve anticipated both in our planning process, essentially I think I believe that ultimately if it comes up behind TNFs based on the profile, we feel very, very comfortable with how HUMIRA will perform against it, even if it came out with second line, I think we feel very comfortable with how HUMIRA will perform against Tofa. So, we are obviously doing a lot of work in that area. We’ve done a tremendous amount of market research to understand the positioning of that product and how HUMIRA stacks up against it, and we feel confident with how HUMIRA will perform going forward. I think that was everything.

A Closer Look: Abbott Earnings Cheat Sheet>>