Abbott Laboratories Earnings Call Nuggets: Macroeconomic Conditions and Market Competition
Larry Biegelsen – Wells Fargo: Let me start with a couple of questions for Miles. Can you hear me okay?
Miles D. White – Chairman and CEO: I hear you fine.
Larry Biegelsen – Wells Fargo: So, Miles, how do you view the broader macroeconomic conditions and dynamics both in the developed world, as well as the emerging markets, including the impact of currency and maybe some color on how this impacts Abbott and your performance in the quarter and beyond?
Miles D. White – Chairman and CEO: Well, let me take the macro environment first. I think whenever the economies of the world wherever they may be, going into some recession or phase into some kind of adversity, at least as businesses and investors look at it, I think the natural tendency is to always forecast they’re going to recover faster than they do. They recover gradually and I think that’s what we are going to see here. I mean I think if you look back over the last few years and listen to all the pundits and analysts and everybody else talk about the macro environment and the pace of recovery and so forth, it really – I think optimism and hope and so forth have driven a lot of wishful thinking that it’s going to happen at faster than it does. But frankly the problems of Europe, or even the U.S. have been more serious and deep that they don’t recover that fast. So, rolls through to markets and it obviously rolls through to emerging markets too because they are so integral to now the global economy. So, I guess I look at it and say, I think it’s all getting better. I think it’s going to bet better. But it’s going to be at a measured pace and I don’t think it’s going to just suddenly be better and sometimes the trading in the market (or the dial) everyday certainly doesn’t reflect that. We have great days of exuberance and other days that aren’t so exuberant. But overall, I think it’s pretty steady. Now, as I have said in the past, there is a pretty big difference here and we can see it in our business between, call it, emerging markets and very developed economies. You take the U.S., Europe, Japan, Canada, et cetera as the developed markets and call the rest of the world evolving or emerging growth markets. There’s a big difference here, and we can see it in our various businesses, as we look down the list of our businesses and we look at developed market growth and emerging market growth, it’s dramatic. It’s consistent. It’s consistent for us except for one business and that one business is a pretty good measure of market health and market performance and that would be our branded generic drug business, where I think, it’s frankly more our performance than anything else of our own execution. So we look at those businesses and in almost every case, the performance in emerging markets is either very high single-digits or frankly really healthy robust double-digit growth, and if you look across the developed markets, it’s at best, single-digit and in a lot of cases, flat and declining. I think we’re in a phase where those developed markets are absorbing all the austerity measures and other things that they had to absorb. So there’s a pretty dramatic barbell here between the robustness of emerging markets and the sluggishness of developed markets and we happen to be indexed in both. I think that’s a good thing, and we’re broadly represented in the emerging markets. As I said a couple of times, a bad day in emerging markets is a lot better than a good day in developed markets often. While those developed markets are very important to us and we have a lot of share, a lot of customers and frankly, make a lot of profit there, as far as growth goes, the emerging markets are more robust. They are volatile sometimes, which is why it’s good to be in a broad cross-section of them and not over indexed in a couple, and we are. We’re very broadly represented across these markets and in a broad group of businesses. So, I would tell you, every day, there is something concerning in some market, some country, somewhere but overall in kind of the market basketball of all that it’s a pretty strong overall economic picture and performance that I think has great long-term longevity. Now, having said that, it translates this volatility and currency too. It’s a lot of these countries become a bigger part of our sales or other multinational sales where we’re adjusting to less obsession about the euro and a lot more obsession about a whole basket of currencies that aren’t nearly as predictable and often aren’t as widely traded and so forth. So this year the yen has been significant driver of negative currency as I think is understood by all of our investors and shareholders and analysts and yourself and so on. And in addition, some of the more or larger emerging markets, like the BRICs, have also contributed lately to that. But I have to say this year it’s pretty much dominated by the yen. So in any given year, it’s a different currency that could impact our sales and because the Company is 70% or more international, that’s something that we have to expect to manage and navigate all the time. And I would tell you that our shareholders and investors don’t expect to ride that curve with us. They expect us to manage that for them and manage the overall global performance of the Company and we do as we are this year…
Larry Biegelsen – Wells Fargo: Just one follow-up for you, Miles. So, your performance in Nutrition continues to be strong, particularly in the emerging markets. How should we think about the dynamics taking place in China around the infant formula market and secondly, the sustainability of the extremely high growth this quarter for Adult Nutrition outside the U.S.?
Miles D. White – Chairman and CEO: I would say there’s anomalies all the time in comparisons and so forth in any given segment of our business. But I would tell you that the demographics and the underlying market factors around our Adult Nutrition business are all good and they’re all positive. And while I would never even let myself think that some extremely robust growth rate is sustainable indefinitely, I would tell you that the growth rate of our Nutrition business internationally, I think, is very sustainable for a long time because all the underlying demographics, whether the adult and pediatric business are all pretty good right now and I think for the foreseeable future. With regard to the China, I’d say I think most investors and most observers understand what’s going on here, what’s happening here. The government is stepping in to say this market, perhaps, has become a little too robust in a number ways and one might even speculate to the disadvantage of Chinese companies and I think the government’s been clear that it wants to improve its dairy industry and improve the circumstances in that market. As you know they had some issue several years ago with the quality of dairy product and so forth, and you got to admire the fact that they make it a point to say, hey, we’re going to pay attention to this, and at the same time, they’re paying attention to how these markets are developing. I mean, they’re looking at not only nutrition, they are looking at pharmaceuticals, they are looking at packaging companies. They are looking at a number of things. I think, China is an unbelievably impressive country and I think it’s an impressive government that’s managed its economic development incredibly well. I think, this is a small piece of that. In fact in almost any way, you kind of look at it and say, off all things you think that the government would pay attention to instant formula wouldn’t make the top of most industries or businesses or lists, but in this case along with pharmaceuticals, packaging and a number of other industry segments it did. So, I think, we can manage this, I guess, is the way I’d put it. My sense of prospects for the Chinese market haven’t changed, opportunity remains strong, opportunity remains robust. I think all the companies that have been mentioned as part of this investigation have all responded very cooperatively to the Chinese government. I don’t know that from talking to anybody, but I’ve read the press reports and so forth. I know that we’ve cooperated with their investigation and this too shall pass and I think the market dynamics remain robust. Fortunately for us, China does not represent a disproportionately large portion of our Nutrition business or even our Pediatric Nutrition business. It’s a big business for us there and we are big there, but we’re so broad across so many countries that it doesn’t disproportionately impact our performance. So, our prospects and forecasts haven’t changed. Our EPS forecasts haven’t changed. We’ve obviously modeled all that in great detail to the degree that we can, and to the extent that there’s any impact on us financially, we believe it’s manageable in other ways.
David Lewis – Morgan Stanley: Miles, just a quick question on EPD. It probably was the only business this morning that is performing – that’s not a point at or above expectations and I wondered if you’d just give us a sense of whether that you think that is more a developed market pressure. Is that more just Abbott’s delays with emerging market registrations and I think over the last three to four months you have a lot of your peers saying this is not a particularly interesting business and maybe you can just comment in terms of the quarter and your views have they changed at all about the ability to drive growth in this segment?
Miles D. White – Chairman and CEO: I’d tell you, my overall views haven’t changed at all. I’m glad our peers don’t think it’s interesting, because we don’t need more peers. There’s plenty of competition in these markets today. I think these markets are developing exactly as we forecasted and I think the opportunity is what we forecasted. I think the biggest distinction here and I don’t think it’s very well understood by a lot of people is that the branded generic pharmaceutical businesses around the world are different than commodity pharmaceutical or generic pharmaceuticals and they’re very different than proprietary or research-based pharmaceuticals. I think one of the execution issues we’ve had is more of a cultural or philosophical business approach issue, because we’ve been so dominated by our research-based pharmaceutical business in the past; you have a business mindset around how you execute against that business. And I think it’s one of the reasons why few companies have succeeded in having proprietary pharmaceutical businesses and generic pharmaceutical businesses in the same company. And I’ve said in the past, I admire Dan Vasella for being one of the first pioneers of that at Novartis, but he separated them into Novartis and Sandoz and I think rightly so, because the way you operate those businesses, the marketing approach is just very different. And if I had to say there’s one particular thing that has been a shortcoming for us, I think we or our management team have approached this too much like proprietary pharmaceutical and not enough like the different kind of business that it is. This is a business that’s very consumer-facing in a lot of countries, very brand dependent, very product line dependent, meaning breadth of product line and so forth. It’s very different game. And I don’t think we’ve made that transition yet as well as we should have and I think that’s where we would diagnose ourselves as not having executed as well as we should have. Part of that’s registration timing, part of it’s the mix of product therapeutic areas and so forth available, part of it’s just our own knowledge and expertise in those areas. So we’ve separated the markets into two big segments. But the fact of the matter is the countries are all quite different. In any case, developed markets have common characteristics, emerging markets have common characteristics and we’ve got to do a much better job of making the adjustment to a branded generic pharmaceutical business. I would tell you that while a lot of our peers don’t view it as attractive, there are some of our peers who do and I think we know who our longer term competitors are and who they will be. We think the opportunity is robust. We think we’re underperforming and by any measure whether we look at competitor performance, our performance, market performance, share, et cetera, we’re underperforming. It pains me to say it but we are. The good news in that is, I think we can change that and we’re taking the steps to change that. So, I think our development of this business is going slower than I might like and it sticks out like a sore thumb relative to everything else but nevertheless, my expectations of the business and what I think it could do for us remain the same. It’s a very profitable business. Gross margins in the close 60% range. So, it’s a very attractive business, I think, executed right. There hasn’t been a long historic track record in these markets in this kind of a business as these developed. So there is a lot of pioneering going on here and it is pioneering by us and Sanofi and some other great companies that I think understand these markets and are all trying to position themselves properly for the growth of these healthcare systems. So, I remain pretty enthusiastic about it. You asked me about developed markets and I’d tell you, that part of this business is declining and it is experiencing all the same pressures that other businesses in Europe are. Europe, in particular, is tougher with generic products, whether branded or commodity or otherwise and so we’re certainly experiencing that too. If there is any part this I’m most disappointed about, it’s our performance in the emerging side. I expect what’s happening in the developed side to keep being that way for a while, and I think we can mitigate that to some degree too, but the bigger issues here for us is how we’re doing in the emerging markets…
David Lewis – Morgan Stanley: Just maybe a quick follow-up. A persistent investor, question or debate since the spin has been, in order for Abbott to sort of transform their growth, there seems to be a view that you need transformational acquisitions and I guess, and you’re guiding the mid to upper single-digit growth in the back half of the year, which is ahead of your peers, and you did two small incremental deals. So, can you sort of talk to us about the deals that you’ve done, these last two, in the recent days, is that more indicative of the kind of deals we should see and does Abbott need, frankly larger multibillion dollar transactions to transform their growth rate?
Miles D. White – Chairman and CEO: I love the question. If you watched me or us over the last 10 to 15 years, one thing I think you can consistently say is I’ve never forecasted to anybody what we’re doing or what we’re looking at or where you can expect us to be interested in M&A activity. So, I’m going to waffle here and not give you a clue. I wouldn’t want to indicate that there is a trend here of what we’re interested in any way, shape or form. I would tell you that, I always remain vigilant and watchful about what opportunities may exist for us from a lot of perspectives, both conventional and unconventional and you’ve seen that over 10 to 12 years. There are times when smaller, what you call bolt-on or whatever supplemental acquisitions fit, and they enhance a given business, then there’s other times you make a bigger move. Whatever it is, the timing of those moves tends to be driven by opportunity, valuation, circumstances in the markets and so forth, and one of the things that I think has been a hallmark of our success, at least on the M&A side, it has been that we’ve done a lot of study, we’ve followed businesses, we’ve followed markets, we’ve followed various things we’re interested in the targets for a long time, done a lot of due diligence and so forth. And by the time the opportunity drifts into the radar screen in the right way, with right stars aligned and circumstances, we generally are pretty ready with a fairly well-developed point of view on valuation and so on and we will act on the opportunity. The problem is, you can’t always predict when that’s going to be. And we can’t predict it any better than you can, so we certainly can’t forecast it to you. But if you ask me is there a set of opportunities that we’re always watching or always looking for, that might be enhancing to the business? The answer is, yes. And as I’ve said many times in the past, I am mindful that investors are not looking for things that dilute the current performance or in some way stifle current performance of the Company. And it’s also a hurdle for us that we have to know what we’re going to do with the business and do better with it if we own it and earn an incremental positive return for the investor over and above what it might do standalone. I will tell you there’s a number of things we’ve looked at out there where I think valuations are just out of this world stratospheric and unrealistic and that we’ve walked away from a lot of things because we thought valuations were unrealistically high or expectations were unrealistically high. And I don’t think there’s a particularly robust, should we say, opportunity set out there in a number of fields today. There might be a lot of things for sale, but they may not be for sale at a reasonable valuation. And I think investors who are interested in that sort of part of us should know that we’re careful buyers. We buy when it makes sense and when it adds to our business and when we can meet our criteria and when we can do it right for you. And if valuations are too high or we can’t make a strategic argument of why it’s worth, whatever it may be, then we don’t make the move. And that doesn’t mean we’re only going to do little deals like you just saw. The fact that they both got announced the same day was pure coincidence and we respond opportunistically when the opportunity presents itself, but it’s not reactive. We’ve usually been pretty well prepared. So, I don’t know if that gives you some context. But we always remain vigilant and looking. And for those who think we need something transformative, my email is public, you can send me those ideas.
A Closer Look: Abbott Laboratories Earnings Cheat Sheet>>