Alcon Inc. (ALC) Earnings Call Transcript & Summary

Well, good morning, everyone. And thanks for joining us here for Day 3 of the Morgan Stanley Healthcare Conference 2020, and thanks for joining us here for these last 3 days, and we're excited to have our next 2.5 days ahead of us. It's my pleasure to have this year as we progress in the morning to members and management from Alcon, both David Endicott, CEO; and Tim Stonesifer, CFO; and Karen King, SVP of Investor Relations and Communications. This morning, we will do a couple of things here. The company has posted slides on the event resources page, which you should be familiar with. You can reference those slides. And David is going to give us kind of a 5-minute preamble here just to give us the state of play and what's happening with Alcon and the environment. And then we'll jump into Q&A. With that, David, thanks for being there and the floor is yours.

Thanks, David. Thanks for hosting. I want to -- just a couple of quick thoughts. And again, these slides are available on the Events Resources tab. But the thing we've been trying to remind people of as we start out in this discussion really is that the fundamentals for the markets are really going to be permanently strong. I think we believe that the growth of 3% to 5% is very reasonable. It has been that way for a long time. And I think one of the things we've been talking about is if you finish 2019 and you drew a straight line through to 2021, if you will, I don't know exactly which the -- which month things are going to fall in. And I think there's a lot made of how is this recovery going, which month is which. But I think if you take a little bit of a longer frame on this and think about this as cataracts aren't going anywhere, there are 50% of the population is going to be myopic by 2050, the retinal disorders are being driven by underlying pathology, which is not going away, the likelihood that we have a kind of consistent growth of that 3% to 5% over that frame, I think, of 2 years where COVID may do whatever it does, I think is very high. And so I think we feel confident that if you're in this for the long term, the fundamentals here are really good. And importantly, then I think what it makes us think about is we encourage people to think about the market shares and the performance of the company in the last 18, 24 months relative to what we had set out to do. And I would say that as we kind of think our way through that, our separation is on track. Our transformation is on track. Our systems implementation, whether it's SAP or Workday, ViVA, all the things that were required to stand us up which we've been working on really now for quite a little bit of time, we'll finish up really late this year, early next year. And so while we're not kind of free of Novartis and completely -- we're not at the end of the thing, we can kind of see it from here. And so I think that feels pretty good to us as we work through a lot of the cash requirements to do that, and all of the time and energy that's required to do that. That allows us then to kind of turn ourselves to the basic core value-creating idea, which is can we create products that are genuinely innovative and how do we market those products. And I think we've been very encouraged by our product flow, and I think derisking our product flow has occurred over the last really, 18, 24 months. We feel better going forward now on seeing things like PanOptix and Vivity hit the market on surgical; seeing things like the P1 performance, PRECISION1 product; and then feeling good about where we are in the manufacturing development for our new toric lines. So we've got quite a lot of product flow that we are excited about seeing, and the market share during the course of this year has moved for us. So if you take those 2 pieces together and you say, well, look, the market fundamentals are great, we're through most of the transformation and transition, and that's coming to an end shortly, and then our underlying fundamental on share is pretty good. As the market turns and comes back, we're in a very good position to perform. And I think that's really the big picture on the company as we see it. So I'll pause there, David, and let you dig into any of that you feel comfortable with.

Okay. Very helpful. Maybe I'll start top level, just given your preamble, David. I think it kind of ties in well. I mean this is the really interesting thing. You spun out of the business. You said 4% to 6% growth, the underlying market, 3% to 5%. Obviously, the first quarter of COVID, when we got a decent look, you were growing close to double digits. So you're wildly outperforming sort of that 4% to 6%. And I guess, it's that you had a year sort of post the spin. How are you feeling about that 4% to 6%, just given the very substantial performance above market and some of the share drivers here we see over the next 4 to 6 quarters? It's starting to feel like 4% to 6% is a very conservative way to think about the business.

Well, 4% to 6% is, I think, the compound number we gave for the 5-year frame. And I think that's still the right place to be. I don't think we -- again, I would argue that you've got 2 things going on that you have to manage. One is we've got great product flow coming in and those products are growing very substantially. So you're right, we came out pretty solid. We had a very good first couple of months this year before the COVID hit. But the share continued on even though the markets fell. So we've done quite a lot of share gain in, for example, surgical and HA-IOLs in particular. But most of our business has done pretty well. I think it's important to remember, though, that we have a large business that is still kind of legacy business, and I'll call that things like our contact lens care, our -- which, again, is not going to -- it's not growing, and it's relatively sizable, so it's going to be flat to declining. Our reusable lens business in AIR OPTIX is going to be roughly flat, maybe single -- low, low single digits. So when you add some of our bigger businesses up, our new stuff has to grow to be such a bigger part of our mix for us to really get up to the high end of that. So you're going to see good progress against that mid-single digits, I think, but we'll have some puts and takes where we're growing faster, slower, I suspect, over the 5 years.

And if you've been very consistent on this dynamic. You've got tailwind businesses and some businesses that are drags. A lot of CEOs at this meeting have talked about growth and weighted average market growth rate. There are 2 ways of medical devices to grow faster, right? Be in faster-growing markets or just take share, and you're doing a combination. You were asked this question pre-IPO. It's hard to get out of the reusable lens business, but you asked that question about solutions. I mean are there any parts of this portfolio that don't make sense or you're inclined to move?

Not at this time. I mean we've looked at that. We looked at it pre-spin as well. And I think our view right now is we have a unique position in the OTC shelf, in particular. So if you look -- you walk into Walgreens, you walk into Boots and you see the eye care shelf, you'll see a presence there that we have great value with. And although I would say we aren't real optimistic about any growth around contact lens care, for example, we're really excited about Pataday. And Pataday now taking Rx to over-the-counter gives consumer access to now the most prolific pharmaceutical product that's now available in prescription strength at a price point that is really accessible to everybody. That part of our business, we think, can grow nicely. And there's real value in having shelf presence in there because we really are kind of "category captain" for that piece of the business. So in the eye care shelf, Alcon has nice leverage and good real estate. So we are able to put products on a little quicker. We can use some of our other space to flex for new product flow. And we get good retail support in all of that business. So I think there's ongoing value to all of those businesses. And in the reusable, it's kind of the same synergy. I mean reusable lenses are still a $6 billion market. I mean I'd like to -- you'd like to say, well, gee, it's not growing, except that maybe there's a share opportunity in there one day that if we can come up with a better reusable lens. But reusables, as a category, it's not really where the action is, really, it's daily silicone hydrogel. That's the precise area where that's really driving the market.

Okay. And then Tim, for you. When you have said the last couple of quarters, you still feel comfortable in sort of the LRP targets that the company has sort of laid out. No one's questioning growth. They may question the recovery of COVID, but no one's questioning the growth profile or the top line of Alcon. But there are these concerns on the bottom line for Alcon. I think they stem from some of the early struggles right post the spin, with the reinvestment and getting the business rightsized. So when you say, we still feel comfortable in the LRP targets around margins at sort of 21% to 25%. Are you still comfortable those are the right absolute targets or are you still comfortable it's the right absolute targets and under the time frame that you prescribed earlier?

Yes. I think they're the right absolute targets. I mean if you look at the fundamentals, you mentioned the revenue. So to your point, I don't think anybody is debating that, assuming that we can execute and deliver the innovation, similar to what we do with PanOptix. That leverage is really coming from 2 areas that we've talked about, 2/3 of it is just operating leverage. So assuming that we can control that cost envelope and grow that sort of in line with inflation, that's very achievable. Now the caveat is, again, we're taking money out of G&A and reinvesting it back into marketing and sales and R&D. So I sort of view it as we're going to -- it's the same size from a cost envelope perspective, but where it's going to be much healthier, much more in areas where we can drive and sustain that growth. And then 1/3 of it is going to come from gross margin expansion. And a big piece of that is going to be mix. So again, I'll go back to PanOptix. And as given that margin profile, assuming we can deliver products like that, just given the margin profile, it becomes a bigger piece of the overall portfolio, you get a natural mix lift. So those are the 2 underlying assumptions. And then the third one that I would add, you get that revenue growth, you get that margin expansion, that obviously all drops down to free cash flow, which is important, obviously, when you think about capital allocation perspective. So we still feel good about it.

Okay. And the time frame at which you can get there, has that changed materially because of COVID?

Not really. We may have a year here or there, depending on the recovery and what have you. But when you look at the guidance that we gave, we still -- the thesis we think still holds.

Okay. And the people who say that if PanOptix has been such a significant driver this year, Tim, we should have seen more margin expansion. I kind of hear what they're saying that I say to myself, "Given all the other noise of COVID, I'm not as sure we're getting a perfect picture of margin drop-through." But any concerns that we should have seen sort of more underlying margin here for Alcon this year given the strength of PanOptix, and that's going to become a problem for next year?

No. I'm not worried about the PanOptix margin levels and the overall margin profile. Again, to your point, in 2020, whether it's the absorption challenges that we talked about on the 2Q call, whether it's some of these reserves you've been setting up due to COVID and the receivables and what have you, those are sort of one-off type items that they're flowing through our margin in 2020, but we should be through most of that when we get through COVID.

Okay. Very helpful. And David, you've talked about the 2 core components in business during COVID: the surgical piece and then the lens piece. And you pretty consistently said that we would think that contact lenses are a little more durable. Surgical is going to recover faster. And you've been right. I mean it is based on what you suggested in the last 6 months. How are you feeling now about surgical recovery? We've heard most medical device companies in the conference talk about sort of month-over-month recovery. Any reason to believe that surgical IOLs would follow a different trajectory even towards in the back half of the year?

No, we're probably more convinced that we've been kind of on track, to your point. We weren't 100% sure as nobody was, but I think we feel good about what we call the April and May as the bottom. And June was a big step up, and July was incrementally better from there. And our August results, I think, are encouraging. So I think as we see it right now, the assumption we have really holds, which is we should see kind of back to normal-ish markets towards the end of the year in surgical. So I think the surgical business looks pretty predictable to us.

Okay. And the big driver there obviously has been PanOptix. You had seen a very, very substantial share. What's the ceiling you think on share for PanOptix globally or in the U.S.?

Well, it's all over the board, globally. So it's a little bit of a mix, and I probably wouldn't want to comment on that one, but I'll give you the pieces where I think you can kind of discern what you're grabbing for. The U.S. business, we've said, was about -- it was over 70 share in the PC-IOL category in the second quarter. I think there's still a little bit of room in that, but it doesn't get much higher than that. Typically, when we've been in these markets, we've seen shares of any competitor, us or J&J, kind of peak in that mid-70s range, kind of upper 70s. Maybe you get higher for a while. But ultimately, there will be more competitors come in, some of them will compete on price. There's always a market for value and for price in these spaces. And there will surely be new products that we think will take some share. So it settles, I think, in the historical ranges that we've expected, somewhere plus or minus a bit on 70s for a while, until something meaningful comes that either could change that dynamic. And I hope that, that's us doing that to us. I don't see at this point any new competitors coming in that have a technology that we're not aware of that poses a significant threat to us on the share basis.

Okay. And then your slide deck has some interesting updates this morning in terms of other technology drivers here, but PanOptix, just thinking about that. I thought China was more of a '21 driver. I think you entered China based on the slides, and maybe that's just a pre-commercial launch. But is that a pull forward or just sort of precommercial? I think Vivity looks like that's still on track for this year in the fourth quarter.

Yes. I mean, we were prepared to launch Vivity -- well, we did launch Vivity. We began in February right into the teeth of COVID. So we withdrew that, we kind of stopped because there was nobody who was doing surgery. And so Europe, I think, is moving now with appropriate launch techniques to go out and get going on Vivity, which we're excited about. I think we've learned a lot in the meantime around Vivity. I think there is a place for this product that we think could add some patients to existing surgeons' practices. We know that surgeons, when they look at patients, they are excluding some patients from AT-IOLs as candidates because they have retinal disorder because they have -- they're directionally concerned about halos and glare. And that looks to be kind of 2 or 3 in 10 that they kind of exclude. We think those are patients that can benefit from Vivity, and that would add some patients into the surgeons' practices that are currently excluding them. I would say that that's not an expansion of number of surgeons, that's just number of patients in existing surgeons. So I'd be modest about the way we think about market expansion there because it's not really expanding the number of people doing it, it's expanding the throughput in the existing practices. But I think equally, we've seen some other good things with PanOptix because we got the early -- we got an early approval in China. We just had to make the product because it was unique packaging for China. We got it out a little bit earlier, you're right, than we had probably anticipated. We got it out in the July frame. And so we are moving forward with PanOptix in China. I don't know that that's as much of a signal of -- there's not as big a financial signal from that, as you might think because it's a relatively small market for AT-IOLs relative to Japan or U.S., for example. But I think what it tells you is that operationally, we're improving, and particularly, we're improving in getting our international registrations lined up. So we've got quite a nice portfolio coming in China, we've got a good portfolio in Japan. And those have typically been challenging for us historically to find the resources for it, to put the specific files and file requirements together and clinical data that was required to do this. So we're excited about kind of the operational progress that China represents to us. Ultimately, that we think that's a big market. But again, right now, it's not a big financial thing.