Abbott Laboratories CEO Discusses Q4 2010 Earnings Call Transcript

Abbott Laboratories (ABT)

Q4 2010 Earnings Call

January 26, 2011 9:00 am ET


Thomas Freyman - Chief Financial Officer and Executive Vice President of Finance

Miles White - Chairman, Chief Executive Officer and Chairman of Executive Committee

John Thomas - Vice President of Investor Relations & Public Affairs

Larry Peepo - Divisional VP, IR


Jami Rubin - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Glenn Novarro - RBC Capital Markets, LLC

David Lewis - Morgan Stanley

Frederick Wise - Leerink Swann LLC

Bruce Nudell - UBS Investment Bank



Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] 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.

John Thomas

Good morning, and thanks for joining us. Also on today's call will be Miles White, Chairman of the Board and Chief Executive Officer; Tom Freyman, Executive Vice President and Chief Financial Officer; and Larry Peepo, Divisonal Vice President of Investor Relations. Miles will provide his opening remarks and Tom will review the details of our fourth quarter results and our outlook for 2011. I'll then discuss the highlights of our major businesses. Following our comments Miles, Tom, Larry and I will take your questions.

Some statements made today may be forward-looking. 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 or discussed in Item 1A, Risk Factors to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2009, and in Item 1A, Risk Factors to our quarterly reports on Securities and Exchange Commission Form 10-Q for the quarters ended March 31, 2010, and September 30, 2010, 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 we do in the past, non-GAAP financial measures will be used to help our investors understand abbots 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 And so that, it's my pleasure to introduce Miles White. Miles?

Miles White

Thanks, John. Good morning. This morning, I will review our 2010 performance as well as our outlook for 2011. Tom and John will walk you through the details of our fourth quarter and full year results, as well as our 2011 output and then will take your questions.

As you can see from our earnings news release, Abbott reported another year of industry-leading performance in 2010. Despite the strength of this performance, it was a challenging year for Abbott as it was for the entire health healthcare industry and for the global economy.

In 2010, the healthcare industry, as a whole, faced a number of significant headwinds. These pressures have been well documented and include the slow recovery of the global economy, the cost associated with U.S. healthcare reform, European pricing pressures and austerity measures in a regulatory environment in which it's frankly more difficult to get products approved. Each of these factors is considerable in and off itself. Combined, they added up to a significant impact on our business. Despite this, we delivered. We managed through the challenges, as we've always done, and delivered double-digit EPS growth.

However, this is the environment we're operating in, and so we have to continue to respond in ways that protect our shareholders and strengthen the long-term sustainability of our business.

This morning, we took actions in our Pharmaceutical business to reduce commercial and manufacturing operating costs primarily in the U.S. You'll recall that we took similar actions outside the U.S. last year in conjunction with Solvay integration. At the same time in 2010, we built for our future by expanding our emerging markets infrastructure and investing in and expanding our pipeline. As we announced this morning, Abbott achieved full year ongoing EPS growth of 12%. We also drove a 200 basis point improvement in gross margin to more than 60% of sales and delivered another record year of operating cash flow of more than $8 billion, well exceeding our 2009 level of $7.3 billion.

And we returned $2.7 billion to shareholders in the form of dividends. Our payout ratio is strong at more than 40%. We've increased our dividend for 38 consecutive years making Abbott one of only a handful of U.S. companies to deliver with such consistency.

Our results, again, underscore why we've remained a broad-based healthcare company with a diverse mix of businesses and geographic operations as well as numerous sources of earnings and cash flow. Out of that diversity, we can achieve strong, reliable performance. That's our identity and that's what you expect from us. As we announced this morning, we expect to deliver double-digit earnings growth, again, in 2011. I'll talk more about the year ahead in just a moment.

In 2010, our sales and earnings growth came in many different forms from our existing products, from new product launches, from geographic expansions and from acquisitions. We maintained commercial leadership positions in a wide range of attractive growth markets and importantly we not only grew our sales, but we improved the profitability of our operating businesses. So let me highlight a few examples.

In our Vascular business, which includes more than 100 brands across more than a dozen segments, our XIENCE family of drug eluting stents captured the number one global position with its successful launch in Japan early last year. We also hold the number one position in the metallic stents and guide wires and expect the forthcoming U.S. launch of our Trek balloon to help us capture the number one market position in that category as well.

As a result of our success, Abbott Vascular has quadrupled its operating margin from 2008 to 2010 to more than $900 million.

In Pharmaceutical, we successfully completed the acquisitions of both Solvay Pharmaceuticals and Piramal Healthcare Solutions, which added significant commercial infrastructure in emerging markets, hundreds of new branded generics as well as two market-leading products, CREON and AndroGel. HUMIRA, our biologic for the treatment of autoimmune diseases, delivered growth of nearly 20% for 2010. We are well positioned with this product over the long term including continued double-digit growth in 2011.

In Vision care, we hold the number one position in LASIK and the number two position in cataract lens technology, launching several new intraocular lenses last year and a new contact lens solution.

Our Nutrition business is one of the strongest globally. It generates high return on invested capital and significant cash flow. Outside the United States, we expect to maintain double-digit growth with stronger growth in emerging markets.

In the U.S., our underlying performance is strong. However, as you know last year, we had a recall of some our infant formula products. We've addressed it, and our recovery is tracking slightly ahead of our expectations as we work hard to recapture our share.

Within Core Laboratory Diagnostics, Abbott holds the number one position globally in blood screening and immunoassay diagnostics, where we launched a number of key assays last year and expect to launch a dozen more this year.

Our Molecular and Point of Care Diagnostics businesses are smaller in size but are going on a strong double-digit pace. And over the last several years, we've significantly improved cash flow generation and expanded operating margins in our Diagnostics businesses. We expect steady improvement going forward.

In 2010, we also took a number of important strategic steps to continue to position Abbott for long-term sustainable growth in an increasingly difficult environment and rapidly-changing world. We focused on building our infrastructure in emerging markets as well as our pipeline. I'll start with emerging markets which will play a critical role in the success of the healthcare industry going forward.

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