Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's 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 expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions.

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 Finance 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 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.

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 health care 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. The 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've discussed before, the year was not all Diagnostics and COVID. Our more consumer-facing businesses, Nutrition, Diabetes Care and Established Pharmaceuticals all contribute growth for the year, and we continue to launch an impressive stream of innovations across our businesses. And 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…

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 issued 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, nonoperating 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 Instructions] Our first question comes from Bob Hopkins from Bank of America.

Congrats on all the success and progress you guys are having. So 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, a guidance number in perspective for us given that, that $5 is above even what The Street was modeling for 2022. And 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 compared to expectations, I'm sure investors would love to hear your early thoughts on whether or not Abbott can grow at its sort of traditional rates off of that $5 number next year. So sorry for the long-winded question, but would love any perspective.

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, I mean, 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. And that was -- that's not the case for Abbott. 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. And 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 2-year CAGRs across our businesses. And then -- I think that's the right way to look at it, is to kind of look at what happened in 2020. And it's easy for some of the businesses to come up and post double-digit kind of growth for us. So we're really looking on a 2-year CAGR basis. The points that you touched on are all the points that we've looked at, and we've been modeling several different scenarios. So I'll touch on those because they're all elements of how we 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 built a lot of capacity, and we've talked about that over…

That's thorough overview. And 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.

Sure. It's a little premature to just skip across all the way to 2022. But we have -- but listen, when -- we didn't do 2021 in isolation. So yes, we looked at 2022 and looked at all those different scenarios that I talked about. So I can probably give you some general comments over here. I mean 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, this level this year. So in essence, we've pulled forward at least 2 full years of EPS growth. And 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 of factors here that we need to contemplate. But even looking at those factors, we feel good that we've got the different elements here 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 get from us. But I also think that the ability to do testing in a decentralized manner, 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 the -- I think I talked about this in…

Our next question comes from Matt Taylor from UBS.

So 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?

Sure. So let me talk about kind of numbers and ranges here then, and then I'll spend time talking a little bit about sustainability of the testing. As I said, I don't see the demand just kind of dropping off even with the vaccine rollout. We achieved $2.4 billion in Q4. So if you annualize that, it'll go -- it will annualize for around $10 billion. So I can expect probably Q1 is going to be at that range of about $2.5 billion or so. And if you'd say, "Okay. What does the 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 can be in that $6.5 billion to $7 billion 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 the probably the obvious part in 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're going to 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 2 lateral flow tests. There's…

Great. Maybe I'll just ask a quick follow-up on Panbio. That's a big new piece of the story here. I think you rightly pointed out, 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? Or any way to frame that opportunity?

Sure. So from a technology perspective, it's the -- it's using the same kind of lateral flow technology that Binax has. It's just in a different format, in a 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, et cetera, on rolling out antigen testing internationally. So I think it's done very well. We've been able to kind of leverage some of the kind of 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. And I think the teams have done a really good job there.

Our next question comes from Robbie Marcus from JPMorgan.

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. So 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.

Sure. I'll probably say the following. A lot of it's going towards R&D, Robbie. And as I said, I think that's the more sustainable spend. It's the one that allows 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. And 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 kind of key 3 products that you guys like to write about them as the big 3, and they get a lot of attention. And quite frankly, they should, whether it's Libre, MitraClip and Alinity. They're large multibillion-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 kind of 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. And 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. And then Alinity, you also know the story. I mean we've got…

Our next question comes from David Lewis from Morgan Stanley.

Robert, just want to follow back up on investment. And I just -- I'm just sort of 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 kind of 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 kind of 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. Then I had a quick follow-up.

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'll not be announcing or doing something, we're still studying, we're still looking. As I said in the previous question, though, David, I mean we've got a lot of organic opportunities to invest in. And I like those organic opportunities. So 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 mean 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. So there's a lot of activity. There's a lot of, I'd say, high valuations right now so. 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. So that's probably the better way to put it to you.

Okay. Very helpful. And then what a difference a year makes. We're deep in the call. We haven't talked about Libre yet, but I'm kind of curious on 2 fronts on Libre one. What -- the full commercial rollout of Libre 3 in Europe, when can we think about -- the right quarter to think about sort of stepping on the gas with Libre 3? Is it this quarter? Is it next quarter? And then just more broadly, Robert, I mean, given the investment spending this year on direct-to-consumer and where that platform would go over time, just maybe help us understand what investors may not be appreciating about where that platform can go over a multiyear basis. So when is the push in Europe? And where can that platform go with investment?

Sure. Sure. So Libre gets pushed down to like 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 $0.75 billion, up 35%. And I expect the absolute dollar amount to get bigger. And 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. And it tells me you can't hide behind these -- you can't hide when we're in the pharmacy, like all this data is available. And 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, et cetera. One of them…

Our next question comes from Larry Biegelsen from Wells Fargo.

Congrats on a really nice year. So 2 for me. One, just on kind of how you see the recovery playing out in 2021 and one on the P&L. So 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.

Yes, sure. So on the device side, as I said in the earlier comments here, Larry, I think we're going to -- we're looking at what we saw in Q3 and correlating those -- 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 electives, some of them are lifesaving. And we're hearing a lot of our accounts in the U.S. and international are really wanting to kind of push stronger and a sense here that with a vaccine, they feel more confident to be able to build it. So I think you'll see probably the biggest comp issue, I'd say, is probably Q2. I mean I think that's when we saw the big drop. Q1 was probably more towards the end of the quarter, the last 2 weeks of March. So I kind of see the more normalization growth rates. So that -- those kind of growth rates that you saw from our device business, excluding diabetes, to look more like that in -- starting in Q3. But we'll have a nice build, I think, to there as the year progresses.

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

Yes. Certainly. So our gross margin on our testing business is pretty similar to kind of 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 kind of steady improvement coming out of the second quarter, where we saw the impact of the decline in kind of the Medical Device area. And so third quarter, fourth quarter is getting improvement. And we would expect that to continue, to go steadily up as we see recovery in those base businesses. We see more normalization kind of coming through our manufacturing plants as well as that volume kind of normalizes. In the fourth quarter, you did also see the impact of some of the investments that we're making in that capacity that Robert talked about. And so that was a bit of an offset that you saw kind of come through in the fourth quarter.

Our next question comes from Joanne Wuensch from Citi.

I want to focus on 2 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? And then the second question is a bit of a big picture question. We're talking a lot with investors about sort of a whole new world in how health care is being delivered, and I would think you would be one of the closest to seeing how the pandemic has changed delivery.

Sure. So on EPD, yes, we did see a nice recovery. I mean when we looked at how the impact of COVID progressed geographically, we saw it, for some reason, kind of trail a little bit kind of 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 kind of shut down. And 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're 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, there's -- it's not a nice kind of linear forecast in these markets. And there's -- it does tend to bounce up around. I mean, we had a 9%, 10% growth in Q1. There was some stocking effect there in kind of February and March in some of the markets, so we'll have a comp over there. But what I -- 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 kind of get better, and I guess similar to the comment on devices, get back to that high single-digit growth rate towards second half. Oh, and then you also…

And our last question comes from Vijay Kumar from Evercore.

I'll try to ask both of mine in one question. I guess, Robert, your PCR plus antigen test, can they detect these new variants, especially the South African variant? Is there a difference one versus the other, PCR versus an 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 assumptions 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.

Yes. I guess on the modeling thing, listen, you could say there could be a drop-off, but you could say there could be an increase or it could stay. So 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 kind of explore the demand that exists both in the U.S. and globally. So yes, I'm not sure right now that you can kind of easily kind of just put that model down like that, but 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 kind of, not only test our existing products but even to develop new ones. And I'd say, right now, the mutations are happening. The ones that you've referenced, the South African one and the U.K. one, those are happening on what we would call the spike protein or what we call the S protein. The rapid antigen test 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 kind of 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, et cetera, and making sure that we're…

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 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today.

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