Alcon Inc. (ALC) Earnings Call Transcript & Summary

Good morning. I'm James Gordon, JPMorgan European Healthcare Analyst. And today, I've got the pleasure of introducing the Alcon presentation. So you're going to hear from Alcon's CEO, David Endicott. And we're going to have a breakout after this in the Olympic room. So I hope you can join us for that. And with that said, thanks very much for joining us. I look forward to the presentation.

Thank you very much. Good morning. For 70-plus years or so, Alcon has been focused on eye care, but the last 10 months or so, we have become completely independent again. So although many of you may know us, we really are at this point in a new issue. And so what I'd like to do maybe this morning is spend a little bit of time to give you a bit of background on our market fundamentals, and then remind you of the turnaround plan we started some time ago, 2016 with the Novartis team. And then really give you a sense of what our investment thesis has been and what we're doing, I think, going forward, relative to long-term growth. So let me start just a little bit with the company itself. Most of you know, eye care is a terrific market, $24 billion and sometimes it's called advanced human health, but apparently -- there it is, here we go, thank you. The market itself is quite large, a $24 billion market, the way we define it. It's growing nicely. It has historically grown at the 4% range right now. We see a little bit better trend at about 5%. It's made up of 2 different markets, the way we perceive it, there's a surgical market that's about $10 billion, which is built around cataract surgery, vitreoretinal surgery, refractive surgery, and pretty much anything in the eye care surgical world that we are using instrumentation for, we are involved in. And so that's a really exciting market for us, and we do quite well there. Vision Care market, largely 2 different kinds of businesses. One is our contact lens business and the second one is our over-the-counter eye drops business. And so both of them together, a good market at $14 billion, both of them growing in that 4%, 5% range. So nice positive markets. The company itself is excited about the trends in this, and these markets are, if you think about it, eye care is a super important area, principally because 80% of what we perceive is through the eyes. And so when you look at what is currently the priority for governments and for individuals, eye care ranks really high on that list. Importantly, underneath these markets tends to be this notion that although we are treating a lot of eye care, we're really not treating nearly what could be treated. And so while we know most of these disorders, whether it's presbyopia, myopia, retinopathy, glaucoma, cataracts, all of these are highly prevalent disorders. But importantly, much of the world is not treated. And -- so 80% of this world actually is not treated in what is preventable. If we were to treat them, we could prevent a lot more. So we talk about a $24 billion market in concept only. It could be much, much bigger than that if we were to treat everybody. So think about the potential of this, importantly, over the long-haul as very significant. And significant because there are fundamentals underneath the trends that matter. There is an aging population in the West for sure. Age does create a significant amount of need for eye care therapies and treatments. And importantly, in the developing markets, we see an increasing amount of wealth and people prioritize eye care when we see countries develop and governments prioritize health care because the economic multiplier of getting somebody visually capable and independent is very significant. So we believe real strong trends underneath the markets that will continue. And I would say that there is this very real epidemic going on around the world, which is associated with what all you all are doing right now, which is this bit, which is myopia is being created by the use of handheld devices, lack of outdoor work, and there will be half of us in the world by 2050 who are nearsighted. So there is no shortage of demand for what we are doing. And importantly, there is a genuine epidemic going on around development of eye care. And so we're working with a lot of folks on that long-term problem. We are lucky to enjoy a historical position that is very substantial. We tend to be #1 or #2 in nearly everything we're doing right now. Importantly, in our surgical business, we have a very compelling cataract proposition. We're very involved in a kind of razor-razor blade business that has leading equipment in the world, drawing on consumables that becomes a big part of our business. So good underlying procedural growth drives the consumables. Our anchor is, of course, the equipment itself. Importantly, the Vision Care business, we are #2 in the contact lens business. We believe that we have got quite a lot to do in that business, but it is a nice positive growth business that we have significant product flow in. So that, plus the OTC business makes that very exciting for us. So I think if you think about it, we've got good growth markets, strong trends underneath it, we enjoy a nice position. What I think I'd like to do is just try to take you through a little bit of the thinking around the spin-out and the turnaround that really started back in 2016 as we became aware of -- Novartis became aware of a downward trend in the sales trajectory and made a number of changes to the investment profile. We started this business, and we talked about this at our Capital Markets Day about a year ago, I believe it's only been 10 months. It seems like a lot longer than that. But in truth, we've been just now less than a year, independent. But we started this process by reinvesting in what was the core of this business from the beginning. The first was, are we getting behind the best R&D projects that we have. And we had a long list of projects that we thought we could bring to market relatively quickly. And then some that we thought were going to be longer term, but both of which we thought drove significant value. We started that process, and we invested significantly in infrastructure, and we significantly invested into promotion. And we've been doing that really since the beginning, mid-'16-ish. What that has done is, it's allowed us to go from what was negative growth now into what was most recently reported as around 5% growth. So that significant turnaround from below market declining revenue to at market or slightly above market growth has been the kind of core idea and getting that investor profile right has been what we're trying to do going forward. So we are in the middle of our growth plan. And as we said, we've spun out with -- there's a lot of energy around that. But as we indicated last year, we are still in this investment phase, where we're trying to make sure that the basic idea is to get good product flow that we know we have and then get behind those products to try and drive sustainable top line. Along the way, we have a number of long-term ideas, and I'll highlight a few of them towards the end of this presentation on what we think is a really long-term view of what can be done in eye care. And it's really substantial, I think, very exciting. I'll just mention briefly what our financial thesis was at the time and still is. And that is to say that very straightforward, we believe we can grow top line in that mid-single digits over the long term, our plan is kind of through the 2023 frame. As we look at that, our target is to grow kind of mid-single digits top line. And if we do that, we believe we can grow bottom line, that core operating margin into the low 20s to mid-20s. That's entirely really about leverage of the top line. Now we'll get some gross margin mix, which will be positive over the long haul. But importantly, the thesis is pretty straightforward, get the sustainable top line on the back of new product flow. So clearly, we're making progress on that as we've reported thus far, but it also is important to remember that what we are really doing here is we're taking a mature business with relatively large legacy businesses, and we're adding a lot of new product for we are trying -- we have -- we're trying to kind of rejuvenate this whole portfolio. So while we've got some products that are growing really fabulously well, double digits, we still have a large business that is anchored on the market growth, anchored on procedural growth, and we are trying to kind of, in aggregate, bring those 2 businesses into shape so that the newer stuff really begins to drive the long-term growth. And that's really where we are. Now I mentioned that we were spending kind of 7% to 9%. We've guided that way around the long-term in R&D. And I would say that those -- that money has, in the near term, been very directed at what we think are exciting programs that will -- I'll show you in a second, importantly, driving near-term revenue. But we also have a number of novel ideas that over the long haul, we think, make a significant impact on eye care. So we're trying to get their balance right, but I would say in the near term, we have been refilling to the kind of near-term project load. Importantly, as you get to that, the near-term launches that we have are quite substantial. So if you look through the list, some of these are smaller than others. But what we've been able to do since 2016 is get the right amount of resource behind R&D to kind of develop and create the product flow that we think will drive the fundamental top line going forward. So PanOptix is a really exciting product for us. It's an idea that the R&D team had, when we first got here in 2016 and have now made it through most of our major markets. We'll launch full year this year for the United States. We have just received approval in China, so we're probably middle of the year to launch in China, back half of the year. And then we've also got full year of effect in Japan. It's a very exciting trifocal lens, which I'll talk more about in a minute, but importantly, gives us an opportunity to win back share in a critical part of our business, which is our implantables business for presbyopia correcting or trying to get rid of your reading glasses post cataract surgery. Vivity, I'll talk about in a minute, but it is a new lens. We've talked about this in the past, we are in the process now of launching in Europe. We'll launch in the first half of this year in Europe with this new non-diffractive platform. One of the real critical questions about intraocular lens is -- following cataract surgery has been glare and halos. It's been one of the restrictions. The problems with this is when you refract light, you also diffract light, and that -- the diffractive pattern is what we like to try and give us intermediate near vision and distanced vision, but it also creates some visual aberration, which is important to think through. This does something very unique. I'll talk a little bit about the geometric designs on these. These are very cool lenses that really don't diffract light, but do give us intermediate vision and give us some pretty good near vision in many patients. So we're excited about what that can be. And we're looking forward to seeing how it performs in Europe this year. Clareon AutonoMe is our new monofocal lens with a very exciting injector. This is probably world-class injection capability. We think, importantly, those 2 products will help our monofocal business, but we continue to roll it out around the world. We've been involved in that rollout now for several years, but this is the most pristine monofocal on lens clarity of any that we are aware of. There are 2 big programs, I think, in terms of new exciting spaces for us. I would say, ARGOS, which is our new biometer, we will begin to launch in the United States this year. ARGOS is a swept-source biometry, which will compete with the ZEISS IOLMaster 700. We're excited about that product. Again, we'll dip our toe in that water, but it is white space for us. And so we're excited about what we've been able to accomplish in a very short period of time to get into what is a really critical part of the pre-op cataract space. So we'll compete there, again, starting this year in the United States. Centurion LEGION is our defeatured Centurion for price point for markets which cannot afford or the way the market is largely a lower price or a value segment product. So we have, in this case, taken our product, and we think created a very important advance where we have a value product that is probably better than the premium products of most of our competitors. So we will launch that into India, China, a number of markets where we think the price point is appropriate and where we think we can create significant gains in the technology that is taking out cataracts. So a big part of our European effort this next year. And long term, we've been working on NGENUITY 3D for a while. The intraoperative visualization of the back of the eye is critical, and we genuinely believe the retina surgery, in particular, benefits from seeing dimensionally much deeper where you're trying to peel a membrane off the back of the retina in a heaving eye and it's moving. If you've got 3-dimensional skill there, and you can see that lens or you can see through the lens into the tissue, we do a much better surgery. If you see more, you can do a lot more. And this new technology for us, I think, is leading the way. We believe this is the long-term way to go. This is heads up surgery. You're no longer tethered to a microscope. And we think, long term, this is going to be where it is. This is going to be a slow, steady march towards independent visualization that is heads up in 3D, but we are excited about where we're going there. Similarly, I would say, in Vision Care, we've got a lot of exciting stuff going on. We obviously have a full year launch this year, and we look forward to PRECISION1 in the United States. We're committed to launch in the United States, full threshold kind of in the later part of the quarter here. It will take us kind of the end of quarter to fully distribute the product, but I would say, starting second quarter, we're pretty much unconstrained in terms of either supply for the United States or our promotional efforts. So we'll be moving hard in the rest of the year as we go forward and complete that rollout. Sustained preservative free. One of the things we struggled with around the world has been, we know that the rest of the world wants a multi dose, preservative-free product, principally with HA. We've started that product development process some years ago. We've now got a product that is preservative free and multi dose, that will be our sustained launch internationally. We begin that process this year. It will take us a while to roll that one out, but it's exciting to finally get back into a part of the market that we value quite highly. And that sustained product fundamentally is an excellent brand family for us. So we're looking forward to that. I'll speak more to Pataday OTC. We do look forward to an approval of the #1 allergy RX product to go OTC, and we believe that, that over-the-counter move could bring some exciting movement into the OTC shelf. We have a product in Pataday OTC that we will bring to market in the first half of this year, assuming FDA approval later this year for the United States. So we're excited about that one. DAILIES TOTAL1 and PRECISION1. One of the big challenges we've had and for a long time has been manufacturing capacity. We made a number of significant investments over the past several years in capacity for DT1. And in that way, we are able, I think, late this year, late in the fourth quarter, I think, to begin rolling out our toric lenses. So I think we have clearly been losing some market share in the toric business. We need to complete the family on DT1. DT1 is one of the best lenses in the world. We feel great about that lens. The biggest challenge we've had for probably the 6, 7 years has been, you don't have a toric, how do I fit the 40% of patients that are astigmatic. So we will have that product late this year and early next. So we feel really good about what we're doing in the next couple of years around the toric business, which gets us another growth driver in a big market. And lastly, we'll roll out to complete the family of the upgrade on AIR OPTIX with HydraGlyde. So I think the point to that slide, really, before we dive into some of the individual products has been to try and really get ourselves centered on what we've been doing with our money. We have been spending money on developing products that we really did have on the shelf and ready to roll. And we've got most of them moving at this point. Now we've got a whole another group of them that we're going to follow into, but we're going to try and keep this 24-month window open to you all. So you can see what we're working on and what we're going to launch and how it takes shape as we go forward. So that's where we are. A couple of quick notes on each of, what I would say, 4 or 5 kind of big things. I would say that this market that is the PanOptix market is exciting to us because PanOptix is giving something that nobody really has been able to accomplish. 96% of patients now spectacle free following cataract surgery, that is really critical. And we obviously have now, this year, the 3 largest markets, Japan, U.S. and China, really all are ready to either launching or about to launch. So we're excited about what's going on with PanOptix. We've had a terrific first quarter, the fourth quarter of last year, was a good positive movement for us as we expected. I mentioned Vivity. I would just say that what is unique about Vivity is that what we set out to do with our optical design in this product was to eliminate halos and glare, which is the problem with diffractive optics. What we've been able to do is do that and importantly, improve the visual acuity at intermediate computer distance and kind of reading distance in very substantial ways over monofocal. So the patients today who are not suitable for a PanOptix, who are concerned about this glare and halos and oncoming lights and traffic and those kinds of things at night, this is a tremendous product for near and intermediate vision versus monofocals because as you can see in the data here, our pivotal data showed that we were basically 2020, 94%-ish spectacle free, 92% spectacle free and intermediate. So you can read the computer without glasses, post cataract surgery, that is a major change from monofocal. Same thing with near vision. 57%, almost 60%, 6 in 10, are spectacle free at near vision, which means they are completely spectacle free. All right? So if you -- if that's the case, we've done something quite magical, I think, with this optical design that we're excited about. Again, this will be -- PanOptix, if you want reading for sure, that's going to be the product, and we expect that to be kind of the lead horse here. But this gives physicians who want to do presbyopia correcting lens as an opportunity to kind of select patients, take patients with higher order aberrations already in their cornea or difficult patients. We can bring some new patients into treatment here. So interesting lens, and we'll see how that does in Europe. PRECISION1, we've talked quite a little bit about, I would just say that the daily SiHy market is a high-growth market. It's the portion of the contact lens market growing fastest. We're very excited about this product. This genuinely is a merging of technology where we've taken what we know about water surface technology in DT1, we've applied it to a manufacturing platform that we think is very valuable, gives us a cost structure that allows us to position this product for a middle part of the market, which needs to have a lens kind of in that 400 to 600 annual supply value place. And that's really what we're doing with this. This is -- if you think about what's been used in that space, the leading lens in that space. We've compared PRECISION1 to -- patients prefer our lens 5 to 1, and it is exciting because that's a multibillion-dollar segment of this piece. And we get excited about that particular product. On the torics I mentioned, I'll just say that the toric market itself is still a really important idea because about 40% of people actually have some astigmatism and yet, very little of it's actually treated. So we -- one of the reasons the high-growth exists in the toric market is because optometry is beginning to get much more efficient at diagnosing astigmatism and also treating it with these lenses. So getting both of our lenses now into a toric version will be a big help to us, both in terms of completing the family and offering a complete package to the optometrist, but also just in terms of riding a trend, which we think is very positive. And lastly, I want to make mention of an interesting product for us. I think one of the things that we know about the OTC market is that most -- about half of the patients are self medicating. They're walking into Walgreens or CVS, and they're picking off something off the shelf, and they're using it, whether it's the right thing or the wrong thing. They're not necessarily sure, but they are doing that effort. And so as we kind of think through this particular market, the allergy market, one of the things we've talked about is when we could get some of the big RX price, olopatadine has been the #1 molecule for allergy treatment in the RX business. It will go OTC, assuming approval later this year in the United States, and we will take that to market as an OTC. And so we're excited about the potential of bringing new patients into a therapeutic treatment that they might not otherwise have had access to. They might not want to go to the optometrist, the ophthalmologist to get it. They'll be able to get prescription strength olopatadine now over-the-counter at their local pharmacy. And we think that's an exciting opportunity for us. So important stuff as we go forward on all of that. I would say, as we kind of wrap this up, one of the things that we're excited about, it's not just the near-term where we're investing, but importantly, the long term. And I've given you kind of a directionally why we're excited about the next 2 years of product flow. But equally, over the long haul, one of the questions we get often is, isn't cataract surgery or IOLs, aren't they really kind of tapped out? Isn't this a mature market at this point? I would say absolutely not. The 2 biggest things that are going to happen in the next 10 years are going to be a change from predictive IOL powers to put into the eye to treating the IOL once it's already in the eye. And I think we all know that that's a direction that's going. It's important to think about those IOL advances, but importantly, also, there is immense amounts of power in still data driving outcomes. And we are in the process now of working through new diagnostics that simplify the diagnostics. Today, it takes about an hour to work up a patient. Tomorrow, it should take about 2 or 3 minutes. We should be able to take all those measurements in one click as opposed to 4 or 5 machines, sometimes 6 or 8. That work up will move to the cloud. The cloud will drive the OR experience. It will be heads up, cockpit driven. All of our equipment will be instructed by algorithms from the cloud that are planned well in advance of the surgery. This isn't science fiction. This is happening now. It's a question of whether or not and how we scale this over time. And so we are working very diligently on integrating all of this, and that's, hence, the reason for our biometry entry. Hence, the reason for our heads-up display on visualization. We will create over time, a singular view of how we bring patients into cataract surgery pre-op, get them to the surgical center, and then run them back through, and then how do we learn from that and really begin to build our experiences. And that will be a terrific outcome. And I will also say that I get the same question on contact lenses. Isn't contact lenses just a commodity. They've been around for a long time. It's a price game. Isn't that the case? Well, it is, in some cases, they're a small part of this market that is, without a doubt, price-sensitive, shops hard. There will always be a value proposition there. But in fact, we are working very diligently on surface chemistries that have driven products like PRECISION1 at a much lower price where we can get people into a healthier, more comfortable lens that they want at a price point that they can afford and those technologies are real. And similarly, multi focality, in other words, presbyopia, it's easier to keep a patient in lenses than it is to get them into lenses. So if you're 40, and thinking about getting out of your lenses because you keep having to reach into your pocket like I do and grab your glasses, stay in your lenses, go find your doc who will give you DT1 multifocal because these new multifocal technologies will keep you from having to wear your reading glasses. And we think that keeps a lot of patients in this market for a long time. It's a heck of a lot easier to keep them, than it is to go get them. So that, plus a variety of other things we've got in the eye drops business and a lot of other things going on to Vision Care, get us very excited about the long-term future of this. So short answer for where we are is this is a company at Alcon that has terrific markets, has really strong trends underneath them, and we have an enviable position for what we're doing. We are excited about what's going on with our near-term investment of product flow and importantly, we're excited about the long-term against which we have a tremendous amount of technology, which will keep us at the front of this market we hope forever. So we're very excited about where we are. And thank you all for your attention here. [Break]

[Operator Instructions]

Great. So this is the Alcon breakout following the presentation that's just taken place. We have a CEO and CFO, and we have 25 minutes. So would anyone like to start us off with any questions.

Can you talk a little bit about the PanOptix launch. How is it tracking relative to say Canada for better or worse? And why?

So the question was on the PanOptix launch and how it's tracking relative to Canada. We view Canada as a benchmark because it had done -- we -- again, it was one of the first markets that we had not a lot of competition, and we were third or fourth in Europe, usually when we came in, and I think it was the first market we'd done an early launch in. It did really well, and we are a little bit ahead of that, I would say, we are on track kind of to do what we had hoped to do, which is move a significant amount of share. And I do believe that we are seeing that, at least at this point. We saw quite a lot of movement early on. Again, everybody tries things at the beginning. So I'd be a little cautious about how we think about it, but all of the indicators that we've seen have been very positive relative to share. We were lucky on the launch in some ways in that we made some very good decisions around inventory management. We brought the UV product, we brought the blue light filtering product, we brought the toric and the sphere all at the same time. And that, I think, helped create circumstances where almost any patient could have tried it. So we've had very, very good trial, very, very good uptake. And I would say just a little bit ahead of where we were in Canada at this time.

Maybe for both PanOptix and PRECISION1, could you talk about the extent to which you're actually growing Alcon's overall share versus actually cannibalizing your products?

Yes. Well, on the PC IOLs, I mean, the presbyopia-correcting lenses are -- we are growing share, but we are also cannibalizing the ReSTOR business. So I think you should expect us to see the ReSTOR will be a product that over time has a place, probably more for monovision surgery than anything else, but PanOptix is probably the superior product by most assessments. And I think in most markets, where we've got both, you kind of see that one is used a good bit less than the other. The net positive on this is pretty substantial, though, I would say, in -- generally, in the market. And our experience in Europe has been that we came in third or fourth, usually, and we've mostly gotten to be the #1 in most markets around the world. And where we've been in first, like United States, I suspect that we will have quite a significant advantage in terms of share. We've seen that. I think what we've said on the third quarter call was we had an 8-share-point movement in 1 month of launch in the third quarter, which was, if you do the math and back calculate, it's a lot. So we had a lot of early interest, and I think that's pretty encouraging.

A question on two of the bits that are meant to be slower growth of the business. So consumables and equipment. I think when you did the spin, the -- it was a market growth expectation, but you respectively said they were going to grow at 3% and 2%. But if I look at what you're tracking for 2019, you're growing quite a bit quicker than that. So are there one-off factors that should be brought in mind when looking at 2019 performance? Or could it be that you are going to grow more quickly than the market for a while? Or is the market growth estimate wrong? What's going on there?

Well, I think it's a very good question, and I am cautious about it because I think we had some one-off things that we did that were very productive for us this year. Taking them one at a time, I'll start with consumables. Our consumables business benefited from 2 things. One is we are upgrading our consumables consistently to smaller and improved intervention equipment or instrumentation, and that gives us price lift. And so we've gotten quite a little bit of price lift this year. I would also say that our mix from cataract to retina, the retina packs are a good bit more expensive per pack, and our margins are better. So you get a little bit of lift there on -- in terms of value growth year-on-year. So we're getting that. And again, I don't know that, that's necessarily reproducible. I do think that the procedural growth has been a little bit hotter last year than we expected. So I think we were talking about a 4% procedural growth, and that's usually how we have seen the consumables run, which is -- runs really plus or minus a little bit on procedural growth pretty predictably. It did run hotter, and I think some of that is, I would just say it's mix, it's price and to a certain degree, it's a little bit better-than-expected procedural growth. I don't -- so all 3 of those, we'd have to ask a question, are these repeatable, and I don't know. We kind of anticipate and think about the world as almost always running around 4% procedural growth, maybe 5%. So that's probably how we're thinking about it. On the other hand, there is a big part of this business that is just importantly, this equipment business. And that business is maturing. And so on the equipment side of this equation, we are late in the life cycle on Centurion, we're late in the life cycle on CONSTELLATION. And you are going to see, I think, some attenuation of growth there because pretty much those -- a lot of the equipment has been bought. So we are looking forward to a new platform, but it's going to take us a couple of years to get there. What's happened, I think, in the front half on equipment in last year was that we had some -- in the equipment bucket, we have 2 other things other than equipment, which I think, if you're following us, you'll note that we came down on equipment in the back half of the year, kind of equipment other. Well, the other was really what was driving the positive and the slowdown. That was our service revenue, which, again, I would be careful about assuming it's going to continue like this. We had a significant effort at attachment rates. We did a really good job this last year of selling warranty. The warranty, we also took price on for the first time. We hadn't done that in a while. And again, I'm not sure that's repeatable. So I'd watch for the service revenues to be a little bit more attenuated in the go forward, and I'd also be careful with the other business because we sell about -- we saw a good bit of money on surgical diagnostics or Atropine, Cyclogyl, a variety of things that go into the cataract surgery that are just little pharmaceuticals that we sell. One of our competitors went out of business where they backordered and so they -- we had a big windfall in the front half, which was, I don't know $10 million or $20 million.

For the PanOptix Japan and China launch, how you're thinking about in terms of ultimate market share? And how long that takes?

Well, the question was Japan and China market share. And I think the -- I think it's similar. Most of these products tend to be kind of this 2- to 3-year curve. And so you kind of peak out in that 2 to 3 years as you're pretty R-shaped. And I think the China one is a little trickier because we haven't been active in the -- as active in the multi focal business there as I think we will be. It's -- I'm not a 100% sure how to think about that one and also, the competitive set is slightly different. But I do think we're optimistic about that market. We've had very good business in cataract in -- with a number of really big customers there. So I would just say, generally, I'm optimistic, but I don't have a good proxy for you. Japan is a little easier because that market is fairly well developed, and we understand it. And I would expect Japan to do very similar things to what the European markets have done. Again, we're late in the Japanese market. So we're not the first trifocal. So we will compete and we'll compete effectively, but I would expect that to proxy a little bit closer to what Europe does.

On contact lens growth rates, I think you'd pegged the market of being a 4% growth rate. Looks like you're on track a little bit quicker than that in 2019. And if I was being bullish, I'd say, I could layer onto that the fact that you've got a new launch in 2020, there wasn't really anything for you in 2019. So would that be a fair way to look at it? Or do we also need to be a bit cautious around some things there? And is the contact lens market accelerating for some reason?

It looks like, and I don't know why. Only slightly. We've said 6%, 7% in daily disposables, it looks like it's a little bit closer to 8% on the moving annual right now. I think the tricky bit from last year that I think you should be careful about as you think about going forward is we had pretty good stability in the reusable segment. We did not anticipate that. So the reusables were kind of -- we kind of said they were flat to declining. They actually turned out to grow 1% to 2%. That's a big number for us. So even though that sounds like a small gap, we sell a lot of reusables as do a lot of people. So the market was just a little bit better than expected. And I don't know if that's -- again, we've always assumed that as disposables grew, reusables would go the other direction. I don't think there's a whole bunch of new contact lens people coming into the market. We've generally said new users are roughly in that kind of 1%-ish growth around the world. Maybe we got a little bit more than that last year. Maybe that's the answer. I don't know that. I think the watchout and the way to think about it is, probably, the market is growing. The whole of the market is probably growing a little bit closer to 5%. That's the number we will restate this year. The data we use, and we will continue to use is audited data, they've added in the U.S. Internet and Big Box. So I think it now has gone from 4% to 5%. So I think we'll be a little bit closer to some of our competitors as we communicate that. And so we'll see where the market goes, but I'd be careful about the stability of the reusable market. That's probably the biggest put and take in it.

[indiscernible] what that implies for your view on PanOptix franchise in terms of new product development [indiscernible]?

The question is on Vivity and the outlook relative to PanOptix and what we think about Vivity. Yes, we got the approval. We had a very clever design that the guys came up with, and it's pretty neat. What it does is if you geek out on the science thing, like I do, it's really fun to talk about. But they've figured out how to bend light without necessarily using diffractive rings, and that's pretty clever. It doesn't do everything we'd like it to do. So it's always a thing about nothing -- you never get something for free. So PanOptix is better at near vision. And if you really want near, intermediate and distance, and that's your main motivation, and it is for a lot of people, PanOptix is likely going to be the choice. You have to put up with a little bit of halo and glare and some patients, not many, but some, it really bothers them. And so what I think a lot of surgeons do is if you have anything that looks like an irregular cornea or if you seem like you're kind of a fussy person, believe it or not, they kind of take a look at you and figure out whether or not you're going to be able to tolerate some of these things. They ask questions about night driving, what your activity is. They'll self-select out maybe a significant number of patients that they will not use a presbyopia-correcting lens for because of the diffractive rings. That's probably this -- the niche that we're looking at right now to see if we can bring those patients in because I think we can give them something very unique. We can give them computer. You can read your computer without your glasses, which is pretty darn good because that's where everybody is right now. And you've probably got to get out here with your cell phone. But reading -- about 60%, as I showed the data earlier, are still getting reading without glasses. So again, without any risk to this, you're getting most of or a significant amount of what PanOptix gives you. So we think, look, the PanOptix is likely to be the workhorse. And this is likely to be the one that you give when you're not sure about whether the patient is going to be perfect for or you think they might be a little bit of a high maintenance patient. So I think the way to think about it as PanOptix will still be the lead dog here and this -- but this gives us potentially some new patients into the market that will be interesting for us.

In terms of R&D, you mentioned 7% to 9% of sales. Just wondering if that's kind of still going to catch up off of that 2016, '17 days as now you're behind or that distribute long-term range.

Yes. Look, I think 7% to 9% is the long-term range. I would say that the question was on R&D percentage and spend. And I think that's our long-term guidance. I think what we will do is flex that as we see opportunity. In the near term, it's going to be on the higher end. And in the long term, we see it attenuating, but that may not be the case if we come up with really great ideas. I think what we want to do is try and push on the sales growth to the extent that we can. So we're trying to be -- as we rejuvenate the line and as the older products become less and less a part of who we are and the new products, which are growing faster, become bigger, that's just a much healthier place to be. So if we can accomplish that, and we are confident of it, then we'll probably push to the high end of that. And if we're feeling like we've got pretty much everything we need right now, then will probably push the lower end of that. But I think in the near term, I would expect that we're going to be -- we're not going to be outside of that range, and we feel good with that guidance.

PRECISION1 launch. [indiscernible] how are you seeing competitors respond to that?

So the question was on the PRECISION1 in competition. I think pretty much as we expected, I think you see some price -- immediate price moves by -- on rebates by some of our competitors. Again, I think that's probably the right tactical thing to do for them. I think we kind of knew that was what was going to happen. So we feel good about the value proposition that we have, the price point and the benefit. And so I don't really think that's going to affect the PRECISION1 segment. There is a value segment that if you drive the price down in and you can give us IOL lens, that's valuable. I don't know how you make money in it, exactly. But you can make some money, especially if you -- if it's dollar 1 to you. So we aren't going to do that. But I do think that it will play there with DAILIES AquaComfort Plus, which is a very good product, handles really well. It's a great starter lens, and it's inexpensive. And I think that one for us, if it becomes a price game down here, if that's what people want to do, well, we can do that. But again, I think that's not a big part of the market. It's 1/3 of the market. But the parts that we're excited about are the high end of this market, the premium segment, where we've got DT1 growing nicely. We've got tremendous growth up here, and we've got a real big market in the middle, which we think will respond to a performance characteristic like P1. Again, I've said it a lot, but I think the leading lens in that space, we're better than by a fair bit. And I think patients are telling us that and docs are telling us that. And so that's all we really need to know. And people are willing -- our price point is pretty similar.

You mentioned the toric DT1 is going to launch at the end of the year. Any view on how that can accelerate the growth of the DT1 franchise? You mentioned 40%, the patients have astigmatism.

The question was on DT1 toric and can it accelerate the franchise. I think it certainly will because it's all new. It's all new revenue to us. And I think it's been a pent-up need forever. I think I feel bad for our folks on the ground who we've told, year after year, we're bringing capacity to do toric, and then the sphere sells so much that we never converted -- we never used the lines for toric, and we always ended up making sphere because when you make toric on a line, you cut the production capacity at about half, and you only get 1/3 more, so the math doesn't work as long as you can sell sphere, you do it until you have enough capacity or -- we just -- we kept missing the capacity number by underestimating how strong DT1 would do. So I think there is incremental revenue around this, I wouldn't venture to say what it is yet. I think we're still working through that. But I think as we get closer to launch, it's a good question as we get later in the year, we'll certainly have more color on what it will add. Yes, at the back?

How are you thinking about the dry eye epidemics that we're seeing broadly? What opportunities do you see these [indiscernible] organically [indiscernible].

Look, I like the space because it's really big. I mean, what -- people misunderstand dry eye. I mean, it's really -- it's as big as glaucoma in value or an incident rate is bigger. So it's a really interesting market. And it is a real problem. It's not a fictional made up one. These are real issues for real people that struggle with just -- lubricants aren't good enough and often -- and it's often misunderstood etiology. But we are obviously working with iLux. We have a product called iLux, which is a new product for us last year. That's treating meibomian gland disorder. So you express the glands, it's a treatment that heats and then expresses the glands. It's not reimbursed. And so that is challenging for -- to try and make a market, but we're working on that. And I think beyond that, there are a number of ideas that we have in this space. So we are chasing the disorder. And I think you'll see over time that we have several things in this space, principally driven by what we think is kind of mostly unmet need. So lubricants right now are kind of a way of dealing with it, but not the only way for sure.

Speaking of making markets for your view of -- on myopia [indiscernible]

The question was making markets about myopia and what is my view. I'm not sure what my view was, but I would say this about myopia management, I hope it's a big market. It's a real need. A lot of these kids start -- right now are at 8 years old or are rapidly progressing, and when they're teenagers they're minus 8 or minus 9 or worse. And that progression is problematic to deal with, and it is very common, and it's getting worse. So if there are things that we could do to help them, I'm all in. I think everybody who's doing that work right now, I think, is hoping that there's going to be a market there. I hope there is, too. I really do. The technologies seem to work. Some of them do. And so we'll see, but I suspect that we will be as a fast follower in that space, and I am excited to be that because, candidly, right now, we have a bunch of high probability technologies in known markets. And that is, to us, a better bet right now than kind of known technology, unknown market. And so we're -- I'm happy to have somebody else go build a multibillion dollar market, and then we'll be late, but we'll be -- we'll happily participate.

Do you have venture investments in the event of the market is...

We have some proprietary designs of our own on peripheral defocus and all the basic ideas are covered. We have optical designs that we've licensed in all these areas. And so we're aware of it. We've worked it to the point of where we would have to start clinical trials. Those bets are heavy bets. The folks that have done this already, I think have invested a lot behind it and good for them. And I hope they succeed.

We've talked mainly about the top line. But if we shifted to profitability, can you talk a little bit about the different products how they compare it to the profitability, say it, the gross margin, what's helpful for the margin and what's not so helpful for the margin near term?

Yes. I think we haven't given a lot of color around the franchise margins. But the way I would think about it is if you look at surgical, there should be, from a gross margin perspective, there should be a natural mix, which will help gross margins, right? So as an example, as we sell more PanOptix, those had very high margins. That gives you an overall mix lift. On the Vision Care side, that in the near term, that will be pressured because we are putting on quite a bit of investment in there. We're putting out a lot of lines. We've put in double-digit lines in 2019. We'll put in more than that in 2020, and it takes time for those to run at full optimization. Now when they do, then you'll be okay. But as you ramp up and build that investment base, that will have some short-term margin pressure. So that's how I think about it. I think surgical gross margins, as an example, you continue to get a lift that sort of stabilizes in the latter part of our plan. On the Vision Care side, you get some of that near term pressure, start-up costs, that kind of stuff and then that picks up in the latter part of the plan.

And maybe just -- IOLs are our highest margin kind of products. Our lowest margins are kind of daily lenses. You had kind of -- at the kind of -- the current margins that are kind of where we are in aggregate is -- our consumables are kind of in that slightly above there. So you could kind of -- you could see where the mix goes.

Obviously, your plans for capital deployment, why don't you touch on R&D and CapEx, facilities and then touch on M&A?

Why don't you take the CapEx. Well, the question is on CapEx and M&A?

Yes. I think longer term, that CapEx number should be in the sort of mid-single-digit as a percent of revenue. So that's how I think about it longer term. Little more pressure in the near term as we're putting in those Vision Care lines.

And on M&A, I mean, our capital deployment strategy is largely to get invested internally first, to the extent that we can. And I think we've got -- we feel good about organic investment opportunities. So hence, the kind of, as we said on Capital Markets Day, this first 18 months for us, and we're only 10 months into it. I know it sounds crazy because it feels like we're a lot longer. But we are in the middle of an investment phase against a lot of organic ideas that we think are good. But we are intending to do that. And then obviously, we will look to put money into capacity where it makes economic sense. And that's been a big part of the Vision Care problem. So we're obviously doing a lot there. Long term M&A, we continue to believe that there are technologies that we can acquire and/or things that enhance the portfolio, but they're typically right in the wheelhouse. We're not going way outside of our current view of the markets to kind of do anything. And we've typically said $50 million to $300 million. We might do more than that. If we could find a small company, but it was a little bit more in that way, we'd probably do that as well. But I think that's where we've typically been and we're comfortable.

Just a follow-up on the gross margin. In terms of the relative to the extent to which the AT-IOLs give you a benefit, but higher -- the new continental production lines give you a headwind. Do they roughly offset each other? Or is it -- how to think about balancing them out?

I think that as you look at longer term, so our longer-term plan of 2023. By then, you sort of, what I'll call, equalize, if you will. But in the near term, again, you're going to see pressure on the Vision Care, and you should see a lift on the surgical side.

That is -- and then for the rest of the P&L, you've talked a bit about R&D, but in terms of SG&A, do you need to spend a lot more on these new launches? Or is a lot of that spend already in 2019 anyway?

Well, one of the things, again, one of the reasons we indicated the restructuring that we did in the last call was entirely about getting money behind these launches. So part of what you're seeing is us repurpose money inside the P&L to get behind the -- I don't know how many products we had on that slide. But what you can see is we're trying to move money inside of the P&L to get there. And that's, hence, why we didn't drop anything through on the restructuring, but rather we're taking all that money and putting it behind these new products.

Great. I think we're out of time. Thank you very much.

Thank you.