Abbott Laboratories

NYSE:ABT

Earnings Call Transcript 2020-Q4

[Operator]

Good morning and thank you for standing by. Welcome to Abbott’s fourth quarter 2020 earnings conference call. All participants will be able to listen only until the question and answer portion of this call. During the question and answer session, you will be able to ask your question by pressing the star, one keys on your touchtone phone. Should you become disconnected throughout this conference call, please redial the number provided to you and reference the Abbott earnings call.

This call is being recorded by Abbott. With the exception of any participant 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. Scott Leinenweber, Vice President Investor Relations, Licensing and Acquisitions.

[Scott Leinenweber]

Good morning and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer, and Bob Funck, 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 may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2021. Abbott cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-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 1A, Risk Factors to our annual report on Form 10-K for the year ended December 31, 2019, and in item 1A, Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 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 P&L 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 Abbott’s ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.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.

[Robert Ford, President, Chief Executive Officer]

Thanks Scott. Good morning everyone and thank you for joining us.

Today we reported another highly successful year for Abbott during what’s been the single most disruptive healthcare event in our lifetimes. For the full year, we reported organic sales growth of nearly 10% and ongoing earnings per share of $3.65, which reflects double-digit growth and is at the upper end of our guidance range we set last January when we were expecting a normal economy.

Performance like this after the pandemic struck is a real achievement and demonstrates the strength of our diversified business model. In normal times, it maximizes our growth opportunities, and during the pandemic it’s been tested by a global crisis and proven to be highly resilient.

It should come as no surprise that our performance was led by our diagnostics business. COVID-19 dominated the year for us and the world, and our primary response came in the form of diagnostic tests to identify the virus. In total, we delivered more than 400 million COVID tests since the start of the pandemic, including more than 300 million tests in the fourth quarter alone.

But as we discussed before, the year was not all diagnostics and COVID. Our more consumer-facing businesses - nutrition, diabetes care, and established pharmaceuticals all contributed growth for the year, and we continued to launch an impressive stream of innovations across our businesses. I’ll touch on some of these new products in more detail in just a moment.

We exited 2020 with tremendous momentum, including total sales growth of more than 28% and ongoing earnings per share growth of more than 50% in the fourth quarter. Turning to 2021, we’re forecasting another year of top tier performance. As we announced this morning, we forecast ongoing earnings per share of at least $5 in 2021, reflecting growth of more than 35% compared to last year, and because we’re building on top of our strong 2020 performance, our forecasted 2021 earnings per share is more than 50% higher that our pre-pandemic EPS in 2019, which is highly unique and differentiated in this environment.

I’ll now provide more details on our 2020 results before turning over the call to Bob, and I’ll start with nutrition, where sales increased around 4.5% for both the fourth quarter and full year. Strong growth of Ensure, our market-leading complete and balanced nutrition brand, and Glucerna, our leading diabetes nutrition brand led to double-digit growth in adult nutrition for both the quarter and full year.

In pediatric nutrition, U.S. sales growth of more than 5% last year was led by increased market share of Similac, our market-leading infant formula brand. International pediatric nutrition sales continued to be impacted by challenging market conditions in Greater China. During the past year, we continued to expand our nutrition portfolio with several new product and line extensions, including the continued rollout of infant formula products across our Similac brand family that contain human oligosaccharide, or HMO, which supports a healthy immune system; global expansion of our Pediasure, Glucerna, and Ensure brands, including the continued rollout of Ensure high protein products; and the launch of four new Pedialyte rehydration products - Pedialyte Zero Sugar, Sport, Organic, and Immune Support. For 2021, we’re forecasting similar sales growth for our global nutrition business and a continued strong cadence of new product introductions.

Turning to medical devices, where sales were relatively flat in the fourth quarter, strong double-digit growth in diabetes care was offset by lower sales in our cardiovascular and neuromodulation businesses due to challenging conditions as COVID case rates surged in certain geographies towards the end of the quarter. As we saw throughout last summer and fall, we expect procedure volumes to improve in these businesses as COVID case rates subside.

In diabetes care, sales grew nearly 30% for the fourth quarter and full year, led by Freestyle Libre, our market-leading continuous glucose monitoring system. In the U.S., Libre sales grew 50% last year, and outside the U.S., Libre sales grew 40%, surpassing $2 billion of international sales for the full year 2020.

This past year was possibly our most productive ever in terms of new product approvals and launches across our medical device portfolio. Let me touch on a handful.

First, the approval of MitraClip Gen 4, the latest generation of our market-leading system to repair a leaky mitral heart valve. Just last week in the U.S., Medicare expanded reimbursement coverage for MitraClip, which significantly expands the eligible patient population that can benefit from this life-changing technology; CE Mark of Tendyne, a first of its kind minimally invasive device to replace a faulty mitral valve; and the CE Mark of TriClip, our minimally invasive clip technology to repair a leaky tricuspid heart valve. Long considered the forgotten valve, TriClip brings an important new solution to patients that have previously had very few treatment options. Abbott now offers minimally invasive device therapies for three valves in the heart - the aortic, the mitral, and the tricuspid valves.

We also launched two cardiac rhythm defibrillation products under our Gallant brand that include Bluetooth capabilities to align with our strategy in remote monitoring and digitally connected care. We also saw the approval of EnSite X, our next generation 3D cardiac mapping technology, and U.S. approval of Freestyle Libre 2 and CE Mark for Libre 3, the latest generations of our market-leading continuous glucose monitoring systems, and CE Mark of Libre Sense Glucose Sport, the first product in our strategy to expand use of our wearable biosensor technology into mass market opportunities beyond diabetes.

As you can see, it was a highly productive year for our pipeline and, quite frankly, there’s even more I could highlight.

In 2021, we’re forecasting continued strong double-digit growth in our diabetes care business led by Freestyle Libre and steady improvements in our cardiovascular and neuromodulation businesses fueled by the continued business recovery as society works its way through COVID-19 and on the strength of our recent and upcoming new product launches.

Moving to established pharmaceuticals, or EPD, where sales increased 3.5% in the fourth quarter, reflecting sequential improvement versus the prior quarter. Despite COVID, EPD sales increased 2% overall in 2020, demonstrating the resilience of our business model even in this challenging environment. Growth this past year was led by sales in India, Russia, China and Brazil. During the year, EPD continued to strengthen its portfolio with more than 50 new product launches across our key emerging markets. As we’ve discussed before, new product introductions in EPD are more incremental in nature, and the steady cadence of portfolio expansion and refreshment we’re achieving is an important element of our sustainable growth strategy. We forecast demand and growth rate improvements in EPD during 2021 as well as a continued steady cadence of new product introductions that will contribute to growth.

I’ll wrap up with our diagnostic business, where sales grew nearly 110% in the quarter driven by $2.4 billion of COVID testing-related sales. We realized very early that a variety of different testing solutions would be required to tackle the pandemic. With that understanding, starting last March we developed and launched an entire portfolio of tests to target the virus. The biggest contribution in the fourth quarter came from our rapid lateral flow test to detect the virus, which includes BinaxNOW in the U.S. and Panbio internationally. These are highly portable, reliable and affordable tests and in just 15 minutes can detect if someone is infectious without the use of an instrument, which means the test can be performed in virtually any setting, such as physician offices, pharmacies, urgent care centers, workplace settings, and even at home.

As part of our pandemic response efforts, we also developed and launched a digital solution that pairs with these tests called Navica, which allows people to receive and display tests results on their mobile devices, but our efforts didn’t stop at developing these tests. We also ramped up manufacturing capacity on a massive scale and now are producing more than 100 million of these two tests combined per month.

While our COVID testing efforts have clearly received a lot of attention, we’ve also remained focused on the launch and rollout of Alinity, our suite of innovative diagnostic instruments. We continue to retain existing businesses and capture share at strong rates, and we’ve continued to build on our test menus with these instruments. Last year, we initiated the U.S. launch of Alinity M for molecular testing. This launch included a COVID test which helped jumpstart demand for this innovative, highly automated and differentiated molecular testing platform.

Earlier this month, we announced U.S. FDA clearance for the first rapid handheld blood test for concussions. This test measures certain biomarkers found in blood after a head trauma event and produces a result within 15 minutes after a plasma sample is inserted in our i-STAT Alinity handheld device. Building on this initial clearance, we’re also working on a whole blood point-of-care test under FDA breakthrough designation, and our vision is to develop a 15-minute portable test that can be used in any setting where people might experience head injuries that require quick evaluation.

In summary, despite the challenging environment we achieved the upper end of the EPS range we set last January before anyone knew the extent of the COVID pandemic, demonstrating the strength and resilience of our diversified business model and our superior execution. Our new product pipeline continues to be incredibly productive, delivering groundbreaking innovations and a steady cadence of important new products, with more on the horizon. We continue to lead in the area of diagnostic testing for COVID, which is helping to fight the virus and accelerating our long term decentralized testing strategy, and we’re forecasting more than 35% adjusted EPS growth in 2021, which is truly unique in this environment.

I’ll now turn over the call to Bob. Bob?

[Bob Funck]

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 fourth quarter increased 28.4%, which was led by strong performance in nutrition and diabetes care, along with global COVID testing-related sales of $2.4 billion in the quarter. Foreign exchange had a favorable impact of 0.3% on sales, which was somewhat favorable compared to expectations had exchange rates held steady since the time of our earnings call in October. Reported sales increased 28.7% in the quarter.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 58.5% of sales, R&D investment was 6% of sales, and SG&A expense was 23.5% of sales.

Our fourth quarter adjusted tax rate of 14.1% reflects the adjustment required to align our tax expense with our revised full-year effective tax rate of 15%. This is somewhat lower than the estimate we provided in October due to a shift in the mix of our geographic and business income.

Turning to our outlook for the full year 2021, today we issue guidance for full year adjusted earnings per share of at least $5. Based on current rates, we would expect exchange to have a favorable impact of approximately 3.5% on our reported sales, which includes an expected favorable impact of approximately 3% on our first quarter reported sales. We forecast full year net interest expense of around $515 million, non-operating income of around $230 million, and a full year adjusted tax rate of 15%.

With that, we’ll now open the call for questions.

[Operator]

[Operator instructions]

Our first question comes from Bob Hopkins from Bank of America. Your line is open.

[Bob Hopkins, Bank of America]

Great, thank you. Good morning, and congrats on all the success and progress you guys are having.

Robert, so much that I could ask about here, but I’ll go high level with my question and ask if you wouldn’t mind putting that $5 earnings, or at least $5 in earnings for 2021 guidance number in perspective for us, given that that $5 is above even what the street was modeling for 2022. Specifically, I guess the way I’d ask the question is I’m sure investors would love some perspective on how COVID testing impacts that guidance, how you’re thinking about the base business, and maybe most importantly, given how much higher $5 is compare to expectations, I’m sure investors would love to hear your early thoughts on whether or not Abbott can grow at its traditional rate off of that $5 number next year.

Sorry for the longwinded question, but I would love any perspective. Thank you.

[Robert Ford, President, Chief Executive Officer]

Sure Bob. You hit on all the points there, I guess. We’ve been looking at 2021 for several months. Right now, I think one of the things as we’re going into it is that we knew a lot of companies were going to be forecasting double-digit growth going into 2021, a lot of that probably based on comps where we saw a decrease in EPS. That’s not the case for Abbott - you know, we’re not coming out of a hole, and as I said in my remarks, the $5, the at least $5 target for 2021 is about 50% higher than where we were in 2019.

What I can say is that we are, Bob and myself as we manage the business, especially over these last couple of months and going into this year, we’ve been looking at two-year CAGRs across our businesses, and I think that’s the right way to look at it, is to kind of look at what happened in 2020. It’s easy for some of the businesses to come up and post double-digit growth for us, so we’re really looking at it on a two-year CAGR basis.

The points that you touched on are all the points that we have looked at, and we’ve been modeling several different scenarios, so I’ll touch on those because they’re all elements of how we’ve built to our at least $5. First of all, obviously COVID testing, it’s been a big driver for us and it will continue to be a big driver. I expect testing demand is still going to remain high even as the vaccines roll out. I don’t think we’ve even seen testing demand peak yet, so we’ve built a lot of capacity and we’ve talked about that over last year, the capacity that we’ve built. But we didn’t put it all in - you know, we didn’t put it all into that $5, so, but we don’t all see it going away either. But there’s enough capacity there, testing capacity, sufficient testing capacity for us to be able to meet this kind of growing demand right now.

The other part of our forecast here without a doubt is looking at our base business and the recovery of our base business, specifically the ones that were hit probably more heavily by the COVID, which was some of our device businesses and our routine testing and routine lab testing. These are important procedures, they’re life saving procedures, they’re important routine tests to do, so you can’t just keep pushing them out indefinitely. What we saw in Q3 of last year, as those hospitalization rates started to come down, we started to see the pick-up of our procedures and of our core testing, and we actually saw growth in several months in Q3 and going into Q4. Obviously that got impacted probably around Thanksgiving, so we’ve seen that these can recover and we do have that modeled into that $5, which is a recovery of these businesses at a similar rate of what we saw in Q3 in summer and the fall.

I’d say the third key element in there is our consumer businesses that probably weren’t as impacted and did pretty well during the pandemic. We expect those businesses to either continue their trajectory or get better. I think nutrition had a really great year last year. I expect them to have a very similar year this year with a lot of new product launches. EPD should get sequentially better - we saw that in Q4, early indications in January show that recovery continuing, and quite frankly Libre, I expect to do better with all the innovation and investment we’re making there. Those businesses will do well.

Then the fourth element that we’ve modeled a lot is spending and the ability to reinvest in the businesses in areas that we thought we could do with more investment, whether it’s SG&A and more specifically in R&D, and accelerate some of our programs. I think you saw some of that in our Q4 results where we beat consensus while at the same time investing more in R&D and SG&A.

We looked at these four elements here, Bob, and we modeled it in a variety of different ways, and just feel really good that this was a good floor, a good starting point at $5. Quite frankly, if anything we could have significant upside over here, and it’s just really going to depend a little bit on how we think about COVID testing going forward. I saw the $5 here as, okay, it’s a 37% increase versus 2020, which grew 13%, and we’ve got probable upside to that while at the same time an opportunity to invest in the business, invest in SG&A, more specifically in R&D. We’ve got a leading COVID test portfolio here with a variety of different tests and capacity that we haven’t dialed all in - quite frankly, if I had put all that capacity, and I think maybe you would had a little bit of time believing that, but it’s there, and I think we’ve got an exciting base business, like you mentioned here, that is poised for recovery.

We’ve got great portfolios, real strong brands, rich pipelines, strong leadership positions, so I think the $5 here was definitely a good starting point, factoring all those elements in here, and we’ll be able to kind of build from there as the year progresses.

[Bob Hopkins, Bank of America]

Thank you for that thorough overview.

Then just the one follow-up would be obviously it’s the beginning of 2021, but does that high level of earnings for this year, does that mean you might not be able to grow off of that in 2022 because there’s so much testing in 2021, or just give us some thoughts on Abbott’s ability to continue on a double-digit growth trajectory off of that $5 number, if okay.

[Robert Ford, President, Chief Executive Officer]

Sure. It’s a little premature to just skip across all the way to 2022, but we have--but listen, we didn’t do 2021 in isolation, so yes, we looked at 2022 and looked at all those different scenarios that I talked about. I can probably give you some general comments over here.

I think we’re forecasting a lot of growth this year, and we’re going to be looking to build on it. Prior to the pandemic, the street consensus for 2023 EPS was just under $5, so we’re targeting that EPS level this year, so in essence we’ve pulled forward at least two full years of EPS growth. Our mindset here, Bob, is going to be that we’re going to maintain that pull forward indefinitely. We always start our process with a double digit target every year - that’s been our identity, and I have no intention of changing that identity.

Of course, there’s a couple factors here that we need to contemplate, but even looking at those factors, we feel good that we’ve got the different elements to be able to deliver on that double digit. One of those is obviously COVID and COVID testing, and even if COVID testing starts to mature a little bit in 2022, we believe there’s a significant portion that’s still very sustainable. Can we predict it perfectly today? No, I can’t, not to the level that you’re accustomed to getting from us, but I also think that the ability to do testing in a decentralized manner - you know, people talk a lot about how the pandemic has accelerated digital transformation in businesses, accelerated transformation in the business models. The pandemic has accelerated our decentralized testing strategy, and I think I talked about this in the last call, I think a lot of the testing channels that we’re building here that have emerged, I don’t see them going away.

On top of that, as I’ve said, we’ve got investment and investment spending into SG&A but more specifically into R&D. We believe R&D is the more sustainable spend. It’s the spend that allows us to sustain our top line growth rate, so I would expect that these investments that we’ve made in Q4 and definitely into 2021, that that would have an impact on our base business growth rate. We’ve always talked about our base business being sustainable at 7 to 8, and I would expect these investments to be able to accelerate on that.

I guess the third part to that question of yours about confidence on delivering double digits in 2022 is we’ve got a great balance sheet and we’ve got strong financial health and a lot of strategic flexibility there, so I lay all of these elements out here - sustained COVID testing, the investment in the business and the strong balance sheet, just gives me confidence that even with all these different models here that we’ll be able to continue to deliver that identity of double-digit growth.

[Bob Hopkins, Bank of America]

Thank you very much.

[Operator]

Thank you. Our next question comes from Matt Taylor from UBS. Your line is open.

[Matt Taylor, UBS]

Hi, thanks a lot for taking the question. Maybe I’ll just ask you to drill down a little bit on testing and the assumptions that you have for testing in the year. You came in really strong here in Q4 with a big step-up sequentially. What are you assuming in the $5 for testing throughout the year, if you could discuss some of the different product lines, and then maybe if you could provide some high level thoughts on how much of a tail of testing we might see into ’22 and beyond.

[Robert Ford, President, Chief Executive Officer]

Sure. Let me talk about numbers and ranges here then, and then I’ll spend time talking about sustainability of the testing.

As I said, I don’t see the demand just dropping off, even with the vaccine rollout. We achieved $2.4 billion in Q4, so if you annualize that, it’ll annualize around $10 billion, so I can expect probably Q1 is going to be at that range of $2.5 billion or so. If you say, okay, what does a full year range look like, I probably can’t go beyond Q1 in terms of exactly how it’s going to look like, but you could be in that 6.5 to 7 range, I would think. But we’ve got, as I said, plenty of capacity to go above that, so that’s probably what’s incorporated here, Matt, in the $5.

But I think the big point here is the sustainability of this, and to your question there, I think a good portion is sustainable. I think a substantial portion is sustainable, which is why we were a first mover and a leader here. We started with our lab-based systems - those were probably the obvious part of the strategy since we knew we had a lot of capital equipment out in the labs. We started with that strategy to take advantage of the systems out there, and you saw that rollout happen; but we also knew that in a pandemic, you were going to need to add on top of that testing infrastructure, you’d have to add faster testing and testing that could be done at a much significant scale and that was more affordable, which is why we developed those two lateral flow tests.

There’s been a lot of visibility to Binax here in the U.S. We haven’t talked a lot about Panbio, but Panbio uses the same technology, the same antibodies, and we’ve got a whole supply chain that’s been built outside of the United States that supplies all of the markets that we’re supporting with Panbio. Both those products - you know, they’ve been the bulk of our sales, we saw that in Q4. There’s a lot of capacity that we’ve built around them and that we continue to build around them, and the clinical utility of them is really strong. A lot of studies are showing their reliability here at finding people that are infectious, and I think that’s a key distinction here, is your ability to use these tests in a way for being able to find those people that are infectious, and not necessarily those that were infectious and that might have some remnants of DNA of the virus in their system.

I think it’s sustainable, and I think you need to take two views here on that - at least, this is how we’re looking at it. First of all, we need to think globally about this. Sometimes we get very focused on the U.S. and what’s going on here in the U.S., but you’ve got 8 billion-plus people around the world, you’ve got a variety of different countries that are experiencing different cycles in the disease, different cycles in their vaccination strategies, so once you really take a bigger view here, this is not going to be something that will just be done in the next couple of quarters here if you take a real global perspective.

The second thing that I think is just reframing the testing, I think we think about the sustainability of testing when we think about Q2 and Q3 of last year - you know, long lines, not enough volume, long turnaround times, $150, $200 tests. That might be not sustainable, not as sustainable, but if you position yourself into a 2021, 2022 world where you now have fast, easier, much more scalable tests, digital tests that are priced for more accessibility and affordability, I think that’s the sustained kind of business here that we see.

When you think about that maturing of the COVID testing market, we kind of see PCR maturing first and then we see the rapid part of the business being sustained. Listen - we’ve built a lot of capacity, as I said, probably 12, 13, $14 billion of capacity that we’ve built in there. We haven’t put it all in, but it’s there.

Then the other part that I talked about was just the sustainability of it past ’22 and into 2023 as we’ve accelerated our point-of-care testing strategy. Everything we’re doing in fighting the virus has not only a direct impact of helping reopen the economy, etc., but it’s also seeding the market and it’s building these new testing channels. We’ve got testing going on at airports, hotels, urgent care, retail, universities, etc., so we believe that’s pretty sustainable too.

[Matt Taylor, UBS]

Great, thanks for that very detailed answer. Maybe I could just ask a quick follow-up on Panbio, the big new piece of the story here, I think. You already pointed out it may take longer in some countries for things to improve, so maybe testing lasts longer there. Could you talk specifically about Panbio and what you’re able to do capacity-wise? Is there any way to frame that opportunity?

[Robert Ford, President, Chief Executive Officer]

Sure. From a technology perspective, it’s using the same kind of lateral flow technology that Binax has, it’s just in a different format, in the cassette format. We’ve got capacity to do over 50 million tests per month, and we’ve used our infectious disease emerging market organization, so the manufacturing, the regulatory, the R&D and, more importantly the commercial infrastructure to be able to look across the world and support governments, workplaces, etc. on rolling out antigen testing internationally. I think it’s done very well.

We’ve been able to leverage some of the joint development of Binax and Panbio, but the demand that we’re seeing internationally, I would characterize also as probably just starting. It hasn’t even peaked either, so I think we’ve got a lot of opportunity with Panbio internationally too. I think the teams have done a really good job there.

[Matt Taylor, UBS]

Great, thank you so much.

[Operator]

Thank you. Our next question comes from Robbie Marcus from JP Morgan. Your line is open.

[Robbie Marcus, JP Morgan]

Great. I’ll add my congratulations on the quarter. Maybe I’ll ask both my questions as one upfront. This is a significant windfall of cash you’re getting from the COVID testing in 2020 and 2021, and hopefully beyond. Maybe you could just talk about where you’re going to put all that cash to use. I know you’ve mentioned in the past some of it’s going to fund new product launches. If you could just also, as part of the answer, highlight the key product launches in 2021 and beyond to look for, thanks.

[Robert Ford, President, Chief Executive Officer]

Sure. I’ll probably say the following - a lot of it is going towards R&D, Robbie. As I said, I think that’s the more sustainable spend. It’s the one that allow us to build more sustainability in our top line and building R&D programs. Yes, there’s opportunity to accelerate SG&A and put some of that cash to use in SG&A, and there are some businesses that could definitely benefit with more SG&A and there’s a pretty strong return as we put those in there, whether it’s Libre or nutrition. But a lot of the focus of this reinvestment here is going into R&D.

Quite frankly, I think our pipeline has been highly productive and maybe a little bit underappreciated, I think. There’s a lot of focus that goes into key three products - you guys like to write about them as the big three and they get a lot of attention, and quite frankly they should, whether it’s Libre, MitraClip and Alinity. They’re large multi-billion dollar segments that are underpenetrated, and we’ve been making clear and intentional investments in those businesses.

I’m not going to spend a lot of time going through those, but you know them, right, so Libre, with Libre 3; we’ve got Libre 4 in development, we’ve been making investments in new applications for the Libre platform outside of diabetes. In MitraClip, obviously we’ve got this opportunity with the CMS reimbursement. We have a fifth generation MitraClip that’s also in development, and we’re investing in a significant amount of clinical trials here to expand the market for us, and we’ll continue to do that. Probably the one I’m more excited about here is the moderate risk for DMR that we’ve announced also.

In Alinity, you also know the story - I mean, we’ve got six new systems where we’re increasing the menu and expanding that geographically, so that has a lot of attention, continues to have a lot of attention, and we do resource those opportunities because they’re that big. But I think it’s misleading here to think that that’s the sum of our innovation strategy. It’s so much more than that.

On the EPD and the nutrition side, we’re going to continue to invest in line extensions and portfolio refreshment. This is the model that we know drives the returns we need for these businesses, and I think the team has now hit their stride in terms of how to do this and how to effectively roll this out with local portfolios. EPD has rolled out over 50 products, I expect that to continue. Nutrition has done over 20, and I expect that to continue also.

In diagnostics outside of Alinity, outside of COVID, we’ve been investing a lot in expanding our rapid testing portfolio. I’ve been talking about this, about the opportunity we have to take advantage of these new channels that we’ve built and increase the penetration with different assays, so whether it’s going beyond COVID or flu with RSV, strep, we’ve got a sexually transmitted disease platform variety now, which we’re excited about also, which we think has got a great opportunity.

Then this rapid concussion test, Robbie, I think is a great opportunity for us. Probably the biggest opportunity we have is if once we work through to have a whole blood test, I can envision here an opportunity across the 25,000 high schools in the U.S., the 5,000 colleges, all the sporting leagues, and that’s going to take us another year and a half or so to get there, but I think it’s a great opportunity.

Then the device portfolio is going to continue to get a lot of investment the way we have. Obviously Tendyne and Cefia [ph], we want to be a leader in mitral. We’ve launched Tendyne in Europe, we are funding our Cefia program so that we can have a transfemoral, transseptal program for the replacement of the mitral valve. I’m very pleased with the progress we’ve seen on Tendyne. TriClip, I talked about the opportunity with TriClip - it’s not going to be as large as mitral, but it will be 30, 35% the size of the mitral market and we’re still in the early innings here of development of clinical evidence, development--and we’re going to be leading there.

We’ve made investments in increasing the competiveness of our CRM portfolio. We’ve just started to roll out now on more a global basis our two new defibrillator products under the Gallant, and we’ve been working hard at our leadless program and making the investments in the leadless program so that not only can we come out with a single chamber product and then be able to upgrade it to a dual chamber product. I like the program, I like what we’ve done with it. I think we have a value proposition, a differentiated value proposition versus the competition.

CardioMEMS is another study that we’ve been funding, and there’s probably going to be required some build-out of the commercial infrastructure to be able to support the rollout of that product. If you think about the opportunity we have with CardioMEMS, even at a 10% to 15% penetration on that population, you’re looking at a billion dollar opportunity for us. That is obviously getting a lot of attention.

Then I’m very excited to come into the U.S. with the LAA and the Taber [ph] product sometime this year. I think these are great opportunities. I like the product that we have, especially on the LAA side with Amulet. It does very well in Europe and we’ll be funding those programs too.

So it’s more than the big three. There’s a lot here, and quite frankly Bob and I are already going to the businesses and saying, okay, what was below the line that you didn’t show us in the planning process, and can we get going on those too. That’s where a lot of the investment goes, into R&D.

[Robbie Marcus, JP Morgan]

That’s really helpful. Thanks so much.

[Operator]

Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is open.

[David Lewis, Morgan Stanley]

Good morning and thanks for taking the questions. Robert, just wanted to follow back on investment, and I’m just thinking about your balance sheet here relative to peers. You’re already more than a turn better than all your large cap peers, and frankly I can see a scenario by 2024 this is a net cash business and a $200 billion market cap company, so you have unprecedented levels of financial leverage on the balance sheet. In recent weeks, we’ve actually seen some of your competitors get more aggressive on growth-oriented M&A, and we haven’t heard much of that conversation this morning, so what are your thoughts on growth-oriented M&A this year to supplement that pipeline, and should investors be thinking about tuck-in growth-oriented M&A because you certainly have the capacity to do something more transformative? And then I have a quick follow-up.

[Robert Ford, President, Chief Executive Officer]

Sure. On the M&A side, listen - we’re always looking, as I’ve always said. We’re always looking, we’re always studying, so while we may not be announcing or doing something, we’re still studying, we’re still looking.

As I said in the previous question though, David, I think we’ve got a lot of organic opportunities to invest in, and I like those organic opportunities. They obviously do get a lot of our attention right now, but if you think about M&A, yes, it’s got to be a good fit strategically and it’s got to align with our growth orientation here. I’m not going to look at something that’s going to dilute our top line growth rate and obviously is able to generate a return for our shareholders. There’s a lot of activity, there’s a lot of, I’d say, high valuations right now also, but to the extent that we do something this year, it would be more like tuck-in in nature to be able to kind of augment some of these portfolios.

That’s probably the better way to put it to you.

[David Lewis, Morgan Stanley]

Okay, very helpful. Then you know, what a difference a year makes - we’re deep into the call and we haven’t talked about Libre yet. But I’m kind of curious on two fronts on Libre - one, the full commercial rollout of Libre 3 in Europe, when can we be thinking about the right quarter to think about stepping on the gas with Libre 3, is it this quarter, is it next quarter? Then just more broadly, Robert, given the investment spending this year on direct-to-consumer and where that platform could go over time, maybe help us understand what investors may not be appreciating about where that platform can go over a multi-year basis.

So when’s the push in Europe, and where can that platform go with investment? Thanks so much.

[Robert Ford, President, Chief Executive Officer]

Sure, sure - so Libre gets pushed down to fourth or fifth question, but it’s still top of our priorities here because it’s such a huge opportunity for us. We had a real strong quarter in Q4. We exited with a lot of momentum going into this year, especially in the U.S. I think global sales were three quarters of a billion dollars, up 35%, and I expect the absolute dollar amount to get bigger. Usually when that happens, we think, well gee, law of big numbers, right - the percentages are going to go down, and I don’t think so. I think that we’re going to see continuing growth rate expansion on our Libre business here, so I kind of look at Libre as a 2021 growth that should start at 40% and go from there.

A lot of focus on the U.S., on the rollout, on Libre 2 rollout. We’re seeing a lot of the trend shifts, whether it’s revenue, whether it’s new users. I think the superior accuracy messaging here is definitely coming through and it’s got all the other advantages of our value proposition.

I think one of the good things about the pharmacy channel is that there’s a lot of available data. There’s a lot of available third party-audited data, and when I do the reviews with the team, we spend a lot of time looking at them. I tell them, you can’t hide behind these--you know, we’re in the pharmacy, all this data is available. I think it’s done really well in the U.S.

Obviously I want it to do better, but I can’t look at it and not be objective that there’s obviously been a trend shift here, whether it’s NBRXs, TRxs, refill rates, etc. One of them that I’m extremely happy to see if the Rx fulfillment rate, so when a consumer goes to the pharmacy with a prescription, swipes the card, do they get that prescription filled, right, and there’s factors that drive somebody to not get it filled - it’s usually a co-pay. What we’ve seen with the Libre Rx fulfilment rate is about nine out of 10 get filled, and you compare that to our competitor at six out of 10, I think the value proposition here is really strong, meaning that we can invest in D2C advertising, we can invest more in this platform, and we’re seeing the value proposition come through as it relates to Rx fulfillment rates, so I’d say the focus on U.S. is L2.

Your question on L3 - you know, we’re already here. We’ve been working through, I’d say, the reimbursement contracting process. It probably got delayed a little bit in Q4 in terms of our expectations, given some of the focus of a lot of the international countries focusing on COVID, but we’re all ready. Manufacturing is ready - in fact, between Libre 2 and Libre 3, we’ve got hundreds of millions of sensors here of capacity, and I think that ties a little bit to the expectation that we have for this segment, which is you’ve got close to 80 million people that could benefit from this target, which is why we took a very different approach in our strategy, a much mass market approach that--you know, develop a product that’s consumer-friendly, intuitive, make sure that it can provide measurable benefit and price it for mass adoption, and that’s working out very well.

We should see a Libre 3 launch international in Q1, and then in the U.S. we’ll issue a release when we get approval.

[David Lewis, Morgan Stanley]

Thank you so much.

[Operator]

Thank you. Our next question comes from Larry Biegelsen from Wells Fargo. Your line is open.

[Larry Biegelsen, Wells Fargo]

Good morning. Thanks for taking the question, and congrats on a really nice year. Two for me, one just on how you see the recovery playing out in 2021, and one on the P&L.

Robert, how do you see the year playing out for devices ex-Libre and diagnostics, ex-COVID testing in terms of the recovery? Q1 starts to be an easier comp because we started to see the COVID impact last year in the first quarter, and do you see the second half of this year as more normalized? Then I have one follow-up.

[Robert Ford, President, Chief Executive Officer]

Yes, sure. On the device side, as I said in the earlier comments here, Larry, I think we’re looking at what we saw in Q3 and correlating that drop in rates, not an absolute drop so not trying to mirror the absolute number of hospitalizations, but at least the rate of decline of hospitalizations and tying it into the increase in the procedures. A lot of these procedures are lifesaving. Some of them are elective, some of them are lifesaving, and we’re hearing a lot of our accounts in the U.S. and international really wanting to push stronger, and a sense here that with the vaccine they feel more confident to be able to build it.

I think you’ll see--probably the biggest comp issue, I would say, is probably Q2. I think that’s when we saw the big drop. Q1 was probably more towards the end of the quarter, the last two weeks of March, so I kind of see the more normalization growth rates, those kind of growth rates that you saw from our device business excluding diabetes, to look more like that starting in Q3. But we’ll have a nice build, I think, to there as the year progresses.

[Larry Biegelsen, Wells Fargo]

Then on the P&L, Bob, you gave some helpful color on some of the below-the-line items, but the testing revenue comes at a pretty high margin, I believe. How should we be thinking about gross margin and operating margin in ’21 relative to 2020?

Thanks for taking the questions.

[Bob Funck]

Yes, certainly. Our gross margin on our testing business is pretty similar to the base business, maybe a touch higher than that. We saw steady improvement in the fourth quarter on gross margin from the prior quarter - it was up about 100 basis points, and we saw that steady improvement coming out of the second quarter where we saw the impact of the decline in the medical device area, so third quarter, fourth quarter, steady improvement. We would expect that to continue to go steadily up as we see recovery in those base businesses. We see more normalization coming through our manufacturing plants as well as that volume normalizes.

In the fourth quarter, you did also see the impact of some of the investments that we were making in that capacity that Robert talked about, so that was a bit of an offset that you saw come through in the fourth quarter.

[Larry Biegelsen, Wells Fargo]

Thank you very much.

[Operator]

Thank you. Our next question comes from Joanne Wuensch from Citi. Your line is open.

[Joanne Wuensch, Citibank]

Good morning everybody and thank you for taking the question. I want to focus on two things. EPD saw a really nice recovery in the fourth quarter but not as strong as it’s been the last couple of years. How do you think about that recovering over time?

Then the second question is a bit of a big picture question. We’re talking a lot with investors about a whole new world in how healthcare is being delivered, and I would think you would be one of the closest to seeing how the pandemic has changed delivery. Thank you.

[Robert Ford, President, Chief Executive Officer]

Sure, so on EPD, yes, we did see a nice recovery. When we looked at how the impact of COVID progressed geographically, we saw it for some reason kind of trail a little bit the developed markets, whether it was Europe and the U.S. We really started to feel the impact on our EPD business, which is as you know, mostly emerging markets, started to see it coming out of Q2 and then big in Q3 as a lot of those countries shut down. The way the model works is you still need a prescription and you need your physician, or you need to go to your hospital to get that prescription, so when we looked at Q4, we were actually not surprised, but it was good to see that it came in a little bit higher than what we had expected, because we were trying to model it very similar to what we saw in some of the other businesses and it came back faster.

At the same time, it’s not a nice--it’s kind of a linear forecast in these markets and it does tend to bounce up around. I mean, we had 9%, 10% growth in Q1, then there was some stocking effect there in February and March in some of the markets, so you’ll have a comp over there. But what we look at is we’re looking at the IMS demand market progression in all these markets that we’re competing in, and we’re seeing a nice recovery, so I expect that just to sequentially get better and, I guess similar to the comment on devices, get back to that high single digit growth rate towards the second half.

Then you also had a question on change of care. I think a lot has happened, right, and we’ve tried to focus on the areas that we feel that we can contribute and benefit. One of them I’ve talked about is this decentralization of testing and how the pandemic has accelerated that decentralization for us. We believed in it, we believed that we could drive it and create a whole new testing channel when we did the Alere acquisition, and this has kind of brought it forward about--probably about two years in terms of where we are today versus where we thought we were going to be, so that’s an important part for us.

Being able to have access to fast, affordable and digitally connected testing is something that I think is going to be here, and here to say, whether it’s a COVID test or other tests. I think that is a change in the delivery, at least in the diagnostic side.

Then the other side that I’d say is one that we’ve been working on for quite some time is the connectivity of our devices and the intersection of digital and healthcare, and how those devices are being connected. You’ve seen what we’ve done across all of our portfolio on devices, and we’ll continue to position our products in such a way where we can develop them and take advantage of that. For neuromodulation, we’ve just announced here a very interesting platform which I think is going to have a significant impact on how that business and business model works with a much more connected care platform, where patients get to report their outcomes and eventually get to remote programming, which is a huge change in that business model.

I’d say the COVID testing accelerating decentralization of testing and connected care are probably the two pandemic-driven changes that we’re focusing on advantage of.

[Joanne Wuensch, Citibank]

Thank you.

[Scott Leinenweber]

We’ll take one more question, Operator.

[Operator]

Thank you. Our last question comes from Vijay Kumar from Evercore. Your line is open.

[Vijay Kumar, Evercore]

Hey guys, thanks for taking my question here. I’ll try to ask both of mine in one question.

I guess Robert, your PCR versus antigen tests, can they detect these new variants, especially the South African variant? Is there a difference one versus the other, PCR versus antigen, and when you look at the total revenue contribution, my follow-up was the $6.5 billion to $7 billion-ish of COVID revenues in fiscal ’21, what would be a reasonable baseline modeling assumption for when I look at fiscal ’22, is that a 50% drop-off, 75% drop-off? I’m curious how you guys are thinking about it. Thank you.

[Robert Ford, President, Chief Executive Officer]

Yes, I guess on the modeling thing, listen - you could say there could be a drop, but you could say there could be an increase or it could stay. I think the modeling piece here is a little bit difficult. I think we’re going to have a lot more understanding as we get towards the summer, but I think at least for the first half, you’ve got--we’ve got sufficient capacity here to explore the demand that exists, both in the U.S. and globally. Yes, I’m not sure right not that you can easily put that model down like that - it’s just too soon.

Regarding your question on mutations and the impact there, a lot of the mutations here--I don’t want to get too wonky here, but we’ve been looking at this, Vijay, since the beginning. We have a group of--we call them the virus hunters, they’re constantly looking and studying and getting their hands on samples to be able to not only test our existing products, but even develop new ones.

I’d say right now the mutations are happening, the ones that you referenced. The South African one and the U.K. one, those are happening on what we would call the spike protein, what we call the S-protein. The rapid antigen tests that we have are actually targeting the nucleocapsid protein, what we call the N-protein, so in silico analysis says no impact. The U.K. NIH did a study on Panbio and found the U.K. variant to not influence the sensitivity of the Panbio, but we’re also collecting as many samples as we can from U.K., South Africa, Brazil, etc. and making sure that we’re constantly studying that to ensure that there’s no change to the sensitivity of the test that we’ve developed.

On the molecular side, whether it’s ID NOW--you know, ID NOW looks at a different gene, the RdRp gene, it’s a different thing, and similar thing also with the PCR. I think those are right now from everything we know wouldn’t be impacted by the mutations. We’re more focused on the antigen with the mutations on those protein sequences, so I feel good about that right now but obviously we’re constantly vigilant here.

[Vijay Kumar, Evercore]

[Indiscernible]

[Robert Ford, President, Chief Executive Officer]

Let me just close here. I’d say we had a real strong 2020, very strong performance, almost 10% top line growth, 13% EPS. We’re forecasting 2021 here at least $5, and like I said, I think we’ve got opportunity to have upside to that, but still already at $5, it’s already at a 37% increase. In that $5, we’re also making a lot of investments in R&D to be able to sustain our growth going forward. We feel confident about maintaining our double-digit in 2022. A significant portion of our COVID testing, we believe is sustainable. We’ve made investments or have a plan here to lay out investments in our base business that I think will accelerate our growth rate, and some of the questions here, we’ve got a strong balance sheet here, so you combine those three elements here, I think we’ve got not only a strong ’21 forecast but a pretty good line of sight here in terms of delivering double digits for 2022.

Thanks.

[Scott Leinenweber]

Thank you Operator, and thank you for all of your questions. This now concludes Abbott’s conference call. A webcast replay of this call will be available after 11:00 am Central time today on Abbott’s Investor Relations website at abbottinvestor.com. Thank you for joining us today.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, and you may now disconnect. Everyone have a wonderful day.