Q1 2010 Earnings Call Transcript
April 21, 2010 9:00 am ET
John Thomas – VP, IR
Tom Freyman – EVP, Finance and CFO
Larry Peepo – Divisional VP, IR
Mike Weinstein – JP Morgan
Glen Novarro – RBC Capital
David Lewis – Morgan Stanley
Rick Wise – Leerink Swann
Sara Michelmore – Cowen
Jami Rubin – Goldman Sachs
Bruce Nadel – UBS
Derrick Sung – Bernstein
Catherine Arnold – Credit Suisse
Larry Biegelsen – Wells Fargo
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Good morning and thank you for standing by. Welcome to Abbott's first quarter 2010 earnings conference call. All participants will be able to listen-only until the question-and-answer portion of this call. (Operator instructions).
This call is being recorded by Abbott, and 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 express written permission.
I would now like to introduce Mr. John Thomas, Vice President, Investor Relations and Public Affairs.
Thank you and good morning and thanks everyone 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, Investor Relations. Tom will review the details of financial results for the quarter and the outlook for the year. I'll then discuss the highlights of our major businesses. Following our comments, Tom, Larry and I will take any questions that you may have.
Some statements made today may be forward-looking. Abbot 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 1-A, risk factors to our annual report on Securities and Exchange Commission Form 10-K, for the year ended December 31st, 2009, 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. In addition will include operational sales results today, which are given on a constant currency basis that is excluding foreign exchange.
With that, I will now turn the call over to Tom.
Thanks, John. As you can see from our earnings news release this morning we had a strong first quarter as our major businesses are healthy and our fundamentals remain strong, and we enhance our long-term growth outlook with the closing of the Solvay Pharmaceuticals’ acquisition and the announced acquisition of Facet Biotech, reporting our emerging market strategy, adding to our R&D spending base, and also adding to our late stage pharmaceutical pipeline.
In the quarter, we delivered double-digit sales growth across each of our fourth major global businesses, and we reported ongoing EPS of $0.81, up 11% and at the high end of our previous guidance range of $0.79 to $0.81. Included in our ongoing EPS this quarter was the negative $0.03 per share impact related to US healthcare reform, which I will discuss more in a moment. Excluding the impact of healthcare reform, ongoing earnings per share were $0.84, up 15%.
Sales growth in the quarter was 14.6%, including a favorable 4.1% impact from exchange rates. The first quarter included six weeks of Solvay sales in the US and only two weeks of Solvay international sales given our standard one-month lag in reporting of international sales.
Sales in the quarter were reduced by approximately $50 million due to the impact of higher Medicaid rebates required under recently enacted US healthcare reform legislation. Excluding this impact, sales would have increased 15.5%. The adjusted gross margin ratio was 57.4%, ahead of our forecast for the quarter driven by strong performance across several businesses, including vascular and diagnostics, and less of a negative impact from foreign exchange than originally forecast.
We also had double-digit growth in investment spending in the quarter with R&D up nearly 15%, reflecting continued progress in our broad-based pipeline. This includes programs in biologics and vascular, as well as promising Phase I and Phase II clinical programs in HCV, oncology and neuroscience.
SG&A expense increased nearly 10% as we invest in programs to drive growth in 2010 and beyond. The ongoing tax rate of 15.3% was in line with our previous forecast. As you may recall, when we provided guidance in January, the outlook for the enactment of US healthcare reform was unclear. Accordingly, we and most other companies did not include the impact of this legislation in our 2010 guidance. As you are aware, we now have a new law which will expand access to millions of patients over the coming years.
The resulting law is complex as many provisions that are important to our patients, our company, and our industry. As a healthcare company, there are commitments required of our industry to help pay for this effort. Beginning this year, the legislation includes an increase in Medicaid rebates, primarily as a result of the increase in the basic Medicaid rebate from 15.1% to 23.1%, and an extension of rebates to drugs provided through Medicaid managed care organizations.
As a result, we are forecasting a negative impact of US healthcare reform legislation on 2010 sales of approximately $230 million. This translates into a full year 2010 ongoing earnings per share impact of approximately $0.11 per share, including the $0.03 per share impact reported in the first quarter. Favorable performance in the underlying business is expected to partially offset this impact. Therefore we have adjusted our previous guidance range by $0.07. This results in our updated ongoing earnings per share guidance range for the full year 2010 of $4.13 to $4.18, which of course excludes the specified items. The midpoint of this guidance range reflects growth of nearly 12% over 2009.
As you know, healthcare reform is being phased in over several years. In 2011, additional aspects of the bill become effective, including the fee on the pharmaceutical industry and additional rebates related to the Medicare Part D donut hole, and in 2013 the Medical Device Tax [ph] becomes effective. As I indicated, these regulations are complex and are subject to further interpretation. However, based on what we know at present we are forecasting the impact of healthcare reform on 2011 sales to be a little more than $200 million on top of the 2010 impact.
Turning back to our outlook for the full year 2010, we continue to expect strong double-digit sales growth, including nearly $3 billion in sales from the Solvay Pharmaceuticals acquisition. Our 2010 sales forecast reflects an estimated favorable impact of foreign exchange of 1% to 2% based on current exchange rates. We continue to forecast an improvement in the full year gross margin ratio over 2009 with a ratio of around 59.5%. This increase reflects the favorable impact of product mix and efficiency initiatives, as well as the addition of Solvay Pharmaceuticals.