Alcon Inc. (ALC) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Thank you for joining us. My name is Bob Hopkins, the medical device analyst for Bank of America, kicking off our virtual Las Vegas Healthcare Conference. Very excited to have the senior management team from Alcon for our first fireside chat. With us today from Alcon is the company's CEO, David Endicott; the company's CFO, Tim Stonesifer; and Mike Onuscheck, who is the President of GB&I; Karen King, who runs Communications and Overseas Investor Relations; and then Christina Cheng, who is our main point of contact on the Investor Relations side. So to the Alcon management team, thank you very much for joining us. Before we kind of get into the fireside chat portion of this, David, just did want to give you a quick opportunity to make some opening remarks. And again, we sincerely appreciate your participation in our conference. Thank you so much for being here.

Yes. Thanks, Bob. I'd be a lot more fun if we were in Vegas as opposed to in the conference room here in Fort Worth, Texas, in the rain. But glad to be with you. Let me just start by saying, look, we started the year out, I think, in the first quarter with very solid results. We're pleased with them. Our Surgical business continues to perform above market, primarily driven by the implantables in our equipment business. We had a very good quarter for implantables again, where we're gaining share with PC-IOLs, particularly in the United States, Japan and China we launched recently. That's driven on the back of really PanOptix. And now I think Vivity adding quite a little bit of positive energy to both our share and our total penetration of AT-IOL. So I think we feel good about the start with the implantables. The equipment also saw double-digit growth. It was a little bit of a surprise to us. I think what was exciting about that was the phaco business underneath it was very solid for us. But I think a lot of us expected refractive to continue to be strong, and it was. About half of our growth was from the refractive surgery business, which has been a pleasant surprise or outcome of the COVID thing. But the base equipment and our ACTIVE SENTRY hand piece, et cetera, was very solid as well, giving us kind of half of the growth that we saw there. And Vision Care, I think, performed very well. I think directionally, we had a good share of growth in the U.S. We were up 7% in the U.S. against the 5% market, and we are gaining share substantially in the United States, particularly with our toric launch, which we felt good about. The on-eye response from optometrists have been very good. And again, internationally, we were a little bit behind the market, internationally, as we have been for some time. We're in the position now of goal where we can reverse that. Again, like I said last year was our goal was to kind of get ourselves back to market growth last year and grow this year. We're doing that. Overall, we grew share. And as we get PRECISION1 out this year, just launched, I think, February in Europe for the sphere and March for toric and then Japan, we got it out in February for the sphere. So I think we're right in the right position we'd expect it to be and feel good about kind of the first quarter results that way. Last comment maybe on the sales side of it is, our ocular health products, we're up low-single digits if you exclude the big pantry load last year. As everybody will recall, the first quarter, there's a big pull forward when everybody panicked about what was going to happen with grocery store and pharmacy kinds of essentials. And so we got a big buy in late March last year, which caused a little bit of a year-on-year comparative problem. but I think directionally, as we back that out, still good growth there, driven by our Pataday product, which continues to do really well as we move in the allergy season. Maybe the news that we also put out that was different was the Simbrinza deal. I just want to remind people that this is a very tactical thing for us. It's very useful for us to think about long term, the eye drops business in the ophthalmology market. And so we did have a sales force there. We believe that there's a big market there for preservative-free multi-dose products. We're launching a new preservative-free multi-dose sustained -- or we already launched it this month. And we are in need of a sales force to kind of push that product, also push Pataday, which we used to be an Rx product, now over-the-counter. But most of those markets, half or more of those markets were driven by the ophthalmic community, the ophthalmologists who recommended them to their patients. Importantly, Simbrinza gives us a glaucoma product that again, starts the conversation for us. It's a nice little product. It's about $50 million. We launched it years ago. We make it. It's great leverage on our capital and our manufacturing. So we have no transitional issues on this at all. So as we take that back, it will be small. That's kind of $50 million-ish full year annual sales for the U.S. We'll get about half of that in the back half of the year. But I think directionally, it gives us a nice bag of products now to go into the ophthalmologists and drive a whole another area of business for us, which is the eye drops business. And long term, I think that's a really important thing for us to be doing. So good idea for us. I think we're pleased with what's come through there. Well, last comment, Bob, I'll just -- taking to you for questions. It's just -- we're also pleased with where we are with our key initiatives. If you think back to separation and where we started 2 years ago, 3 -- yes, a little bit over 2 years ago. We hit a big milestone getting completely out of our transition service agreements with Novartis, being able to turn our organization back towards innovation and customer and doing the things that we get excited about, which is trying to innovate products and get those out to customers. So separation is complete. Transformation program, which is improving the look of our P&L, is well underway. We've got another year of that, but I think we're doing a great job of standing up our global service centers, decreasing our costs as we go forward. And finally, our manufacturing platforms are on track, and I think we feel good about what's going on there. So directionally, we are expecting a market recovery this middle part of the year. We've said -- we thought last year, it was going to be end of the year. I think where we see it now is middle of this year, where we're back to kind of '19 levels globally. I suspect the U.S. will do a little better than that. I suspect international may be a little bit tracking behind. But in aggregate, I think we see the market around 2019 in the middle part of the year and then continuing to grow steadily through the end of the year, where we're back to normal growth towards the end of the year. So again, I think we have a positive outlook on that, which takes us to $7.8 billion, $8 billion as we've said in revenue and an EBIT margin of around 17%. So it's kind of pre-COVID levels for us. So that's kind of how we see the year shaping up. I do want to say that we were excited about our Capital Markets Day. I think if you saw it, you would have been encouraged by our product flow and the way we see the world kind of going forward. We do think we can get to $10 billion in revenue by 2025, we can get to approaching the mid-20s on income, and our cash flow looks really strong at kind of $1.8 billion to $2 billion as we get out towards the end of the plan. So very good progress for us just generally in the quarter towards all of those long-term goals. And we feel good about where we are. So I'll pause there and then why don't we -- where you'd like to take us on.

Yes. No, thanks the overview. It's helpful to put all that in context. I appreciate that. In our limited time here this morning, I wanted to just touch on a couple of topics that I know are of interest for investors. And I wanted to start with the deal that you mentioned for Simbrinza. I just -- it sounds like the -- that acquisition is as much about gaining strength in the channel as it is about that individual product. And so I just wanted to make sure that I understood the strategic rationale there at a very detailed level. Is that the right way to think about it?

Yes, it is. So I think the way to think about this is, we have a lot of capability in the eye drops business. We manufacture most of the old Alcon products still that are -- there are millions of units around the world for the Novartis folks. We have that contract manufacturing relationship for a long period of time, but we believe that, that's an opportunity for us to leverage that capital, build new products in the eye drops area and then sell those into the ophthalmology channel. In the very near term, we are putting out some new products, which we think have real opportunity. So think about the eye drops market in the United States, just the dry eye products are about $700 million in market, half of which we couldn't really reach because we didn't have a sales force going in there. You can do some of it with consumer outreach because about half of that market is driven by the consumer. But in the preservative-free product, what really is going on is the -- it's the more chronic users who are seeing ophthalmologists that are the patients we want to go get. And we think there's probably -- in the international markets, 60% -- 50%, 60% of that market is preservative-free multidose. That hasn't happened yet in the U.S. So we think there's a real opportunity to be first to try and move that market to preservative-free, and that would take over at the long end of that $350 million-ish of new revenue market that we could go chase. So we feel good about that. Pataday, also important eye drop for us. It's doing very well. We see that as a $250 million market. That again is kind of half driven by consumer, half by the ophthalmologists who used to prescribe this for allergy and still do. So we'll go in there and deal with that. And then of course, we have Simbrinza, which we think benefits from promotion. It's got a long tail of profit, which is out to 2030. So we think there's room to move that product. But it gives us a core base of revenue for us to use in order to support that P&L. So for this year, for example, it's a net neutral to the P&L this year on the bottom line. But next year, it's accretive. So just modestly so, but I think at the same time, we think putting these products together, getting them out there make a ton of sense.

Yes. No, I appreciate trying to get a bit of a better understanding of that. As a sell-side analyst, part of our job is to overthink things. So I've been doing a little bit of that with this transaction. I've always been curious about the potential for Alcon to kind of quietly get back into the pharma side of the ophthalmology space. And it sounds like this is a very specific, targeted kind of acquisition of a product for very strategic reasons that makes sense within your franchise. But can we read a little bit more into it than that? I mean could we see more pharma assets come into the portfolio over time?

I think the short answer is yes. We've been in the pharma business the whole time. I think, as I said, back at Capital Markets Day, the long-term view for us is that we first wanted to fix the Surgical business, which I think is going really well right now. Second job was get our manufacturing capacity in a position where we could launch the new products we knew we could make and have an impact on Vision Care. We're in the process of that. We're doing well with it. But again, more work to be done. Our eye drops business is next, and that's coming along nicely now. And I think as you look at where we want to go next, the most obvious adjacency that everybody is not going to be surprised we're interested in is, there's a $20 million -- or sorry, $20 billion pharmaceutical business sitting right next to us in the eye care area. We've been in it for 70 years. So -- and we've got the manufacturing capability and the knowledge and relationships on how to work it. So yes, we do it. I'll just say that it's not our top priority. But -- because our top priority right now is we continue to work on and finish the things that we started as we spun out that will drive this business forward, and that is our base plan. But the adjunctive element of this is, is there pharmaceutical stuff we could do? Yes. Do we have the capability for it? Yes. Should we go do it long term? Probably. And we'll just be smart about how we approach that. So we're not afraid of it. We look to it as an opportunity, but we're also not in a hurry.

Got it. Got it. And then on that same sort of thread there. I mean at the Analyst Day, you talked about glaucoma as an area of interest. You've got a fair number of questions about it at the Analyst Day. Was this the glaucoma asset you were referring to when you said you're interested in the space? Or are you referring more on the medical -- the pure medical device side of glaucoma?

Yes. I think I was really -- in that context, I was really thinking about the mix, but I think -- I mean, you can't think about ophthalmology and not discuss glaucoma. So broadly speaking, there are, what, 3 big disorders here in ophthalmology: there's retinal disorders, of which there are many; there's glaucoma; and then there's the dry eye out of that. Those are the kind of big pharmaceutical categories, if you will. And then there's cataract, retinal disease for surgery, and then there's vision care, myopia, presbyopia on the other side. So we kind of think about the world in those big buckets and then you just kind of work your way through them. So -- but in that context, Robert, I was thinking about the -- really the mix.

Okay. That's helpful. And just again, remind us of how you're thinking about the mix market in terms of internal development. How much do you have going on internally in that area right now versus the potential for overtime to look externally?

Well, we're doing both. We -- obviously, we have XprESS that's still out there. We pulled back CyPass. We've been working with the FDA to try and understand what would be required and whether that's economically viable to bring back or not. And obviously, there's a lot going on out there, but we believe the market has real potential for a more effective product. And I think one that's equally safe, but frankly, gives a little bit more efficacy than what's currently available. So we're excited about some of the things that are going on in development. We have some of our own ideas, but we watch it very carefully and have been interested in it for a while. Look, I think it's -- long term, it's a $0.5 billion to $1 billion market. I don't know whether it's -- which of those it is, really depends on how it develops internationally. Right now, the United States is a good market, but it's probably the only market. And I think we may have some potential to help develop that market internationally.

Okay. That's helpful context. One other thing I want to follow up on from the Q1 call that generated a few questions, but just getting a little bit of a better understanding of the kind of the growth rates we saw in the first quarter outside the United States in Vision Care. And I realize you've got a lot of technology launching currently or in the near term. So maybe you just talk about the Q1 result in terms of Vision Care outside the United States. And when do you expect those products to have an impact on your growth rate in that sector, in that geography?

Yes. So the international markets, I think, we're off in aggregate in the contact lens business by 5%. And we saw, again, a slower recovery in the international markets than we would hope for, particularly Japan, as most people know, a shutdown again in several major metro areas. Europe has been very slow to come back. And so again, we're over-indexed in both those markets. China bounced back nicely. But again, we're underindexed in China, relatively speaking. So from our perspective, international, we think we were minus 7% and the market was minus 5%. So we kind of grew with the market more or less. We just got out the -- our new products into Europe, really February-ish. So we're feeling pretty good about the response. Recall that really, we didn't get a real lift last year until the back half of -- the second 6 months of last year in the United States. So I would give this 6 months because I really do think that it will be -- people got to try the lens, we've got to get in there and get it to them. But everything we see is the same kind of positive response that we would have expected. So we're -- again, I just -- I think people are overanxious about how fast we're moving internationally. We're doing exactly what we said we were going to do, which was get those products out this quarter. They aren't going to have a big impact on this quarter, but they'll continue to grow and add a lot nicely going forward, particularly toric. And I'll just say that -- one add I'll give you is, the toric has been a real pleasant surprise in the United States. It's had a very positive impact in the near term.

Okay. Okay. That's -- so maybe by fourth quarter, we'll start to see the impact of some of those products. I just want to follow up just in terms of what you're seeing out there in the face of the recovery. You mentioned Japan and Europe. How optimistic are you or pessimistic are you in terms of kind of timelines for recovery in Europe and Japan?

Well, we saw January-February go the wrong way. I mean it was -- January-February were very light. I think almost everybody is reporting the same thing. And we saw that same thing. March bounded back nicely. So that gave us a lot more confidence, I think, in putting out guidance and giving you kind of what we've given you. So we do think that this market in aggregate is kind of back to 2019 levels by the middle part of the year. The U.S. is probably going to be a little ahead of that, and I think international might be a little bit behind that. But on average, I think that's what we may see. And I feel like the markets are going to continue to recover through the summer. But I think by the end of the year, I'm hopeful that we're going to see exactly what we've suggested, which is, we're back to normal market growth and in a position where most of these new products are reading through.

Are there any geographies in the world right now where you're incrementally concerned relative to what we were talking about on the Q1 call? And I mean markets of consequence?

I don't think anything is getting worse right now, I mean, other than India. In India, as everybody understands, it's tragic right now. I think the question that we're -- but it doesn't have a big financial impact on our business because we have a relatively small business there. The markets we worry about are Japan and China. Japan looks like it's kind of working its way through this, and I suspect it will. It will just be a little slower than most people had thought.

Okay. Okay. That's helpful. And then Tim, maybe give David a break for a second here. I did want to touch on 2 topics with you. They were, frankly, trying to ask most of the large multinationals that are presenting at our conference this year. And one is, just to get your view broadly speaking on input costs and inflation and whether or not you see that as something that will kind of -- that you're thinking about from a margin perspective? Maybe we'll just kind of start there and then I'll ask a quick tax rate question.

Yes. When you think about input costs, I think from a labor perspective, we are geographically dispersed, and we'll see kind of what everybody else see as we try to absorb that through productivity or what have you where you can. From a material perspective, we've seen pockets. If you look at gowns and consumables, if you look at gowns as an example, any area that's related to sort of PPP-type things, we've seen a little bit of pressure there. But I wouldn't say it's overall, it's material. Freight costs, we've seen a little bit of pressure there. If you think about the winter storm, particularly in the U.S., as an example, that caused some short-term pressure. But I'd say longer term, we have a very similar -- from a manufacturing perspective and labor perspective, we have a global footprint, obviously, so we're somewhat exposed, but don't really see a material impact there. And from a pricing perspective, where we can, we try to pass that through so we protect our margins, but it's kind of a case-by-case basis.

Okay. So it sounds like right now, it seems fairly manageable for -- relative to the gross margin guidance and your thoughts on margins that you guys have talked about?

Correct.

Okay. Okay. Great. And then on the tax rate, kind of an unanswerable question, I realize. But would just love your perspective as we think forward based on some of the discussions going on in the United States about higher corporate tax rates. Just generally speaking, how you're thinking about that? Is there -- are there any offsets that we should be aware of as we look at Alcon's financials? Again, I know it's very hard to be specific right now, but we'll take anything that you're willing to offer in terms of trying to help us think through this over the next couple of years.

No. I think everybody is very interested in what's going to happen in the U.S. I mean the current proposal right now is to lift the rates -- corporate rates from 21% to 25%. If that were to happen for our global ETR would be about 1.5 points of impact. If they went to the full 28%, that would be roughly 2.5 points. So that kind of gives you the magnitude of the U.S. impact. Again, we're always doing tax planning, we're always trying to come up with an optimal effective tax rate and tax structure. So we would try to offset as much of that as we could. But that's 2.5 points if they were to go up to 28%. That's a significant move. So we continue to monitor it and see how it plays out from there. The other thing that I would say is that I don't have it quantified quite as tightly as that, but obviously, other countries are talking about doing things. So the U.K. is talking about doing some stuff right now and some other countries. So we try to monitor it and understand it and impact it any way we can, and we'll kind of take it from there.

Great. That's really helpful, actually. I appreciate that. One other question on margins, just really quickly. Obviously, you have kind of an odd year in terms of how margins flow through over the course of the year in terms of where you started and where you'll end up. If you guys outperform on the revenue side this year, should we be thinking about that as flowing through? Or should we be thinking about this year as a heavy spend year and more likely would use upside on revenue as an opportunity to continue to invest?

Yes, I think we're pretty comfortable with the investment profile right now. And again, we're very committed to the R&D, as you can see on a quarterly basis in our P&L. If we were to come to the north side of that $7.8 billion to $8 billion, we might see some improvement in that 17% that we talked about. So the thesis has been, we should get operating leverage as we grow revenue faster than the cost. So if that revenue does come in heavy, I would expect some of that to flow through to the bottom line.

Okay. And then one other topic I wanted to hit on in the last kind of 5 minutes here is just thinking about the innovation that you guys have coming to market kind of relative to the competitive landscape as it's developing. We're kind of always getting questions on some of the new IOL competitors that are out there. And so kind of just wanted to get a sense for how you're thinking about the competitive dynamic over the course of, say, the next 12 to 18 months versus the last 12 to 18 months. I realize a lot of these products you're well aware of, but it's one thing that -- it's a question that I do get from investors is that it just feels like your competitors are talking a little bit more lately. So kind of how do you give the investment community a little bit of comfort around some of the emerging competitive product launches that are very visible right now?

Yes. I mean it's a good question, and I think it's super fair. And we get some very good competitors who aren't going to sit still while we innovate. I do think that most of what you're seeing as you're talking about is coming to the U.S., and it's things that we've seen internationally before. So I don't know that there's anything remarkable or really new on the global stage. So I think as you think forward, there are -- we don't see a Trifocal product coming into the United States, for example, for the next 12 months. So I mean there is going to be a bifocal kind of EDOF combination lens. There'll be a few other kinds of efforts at HA-IOLs. And candidly, we know the data pretty well because we've seen those products in Europe and how they perform. We expect people to try them. We expect to lose some share. There's no way we wouldn't. So again, I think that will -- we'll see a small blip, and then we'll kind of come our way back into it is the way we see it. But there'll be -- but that's all been contemplated in the way we think about this year and the way we think about going forward. So I think the long term is get the data and support the data. And I think our data right now is very good on Vivity, it's very good on PanOptix, particularly in those markets. Our phaco machine, I think, is still unmatched and will continue to be. And I think we've done something very clever in that we've created a machine that has almost as good as fluidics, but at a much different price point for our international markets. So we're becoming more and more increasingly competitive, I think, with our LEGION product, which is a very, very good machine by global standards, and it is at a price point per procedure, which is really good. What am I missing, Michael?

No. Actually, the only thing that I would say is that the designs that we have in IOLs, to the first part of your question, were purposeful designs, right? PanOptix was designed to hit the set points that patients really want, which is distance, intermediate and near. Very clear message to the clinician as to who's the right patient for that. And Vivity was designed to eliminate unwanted side effects that some patients experience in halos and glare, while still giving you great distance, intermediate and 50% of patients are likely to get near. So the messaging around what we are doing is very purposeful, and it's also the designs were very purposeful. And the clinicians have now had experience with the Trifocal. So anybody who comes in and has to compete, they've got to beat PanOptix or they've got to beat Vivity. And so we think we're in a really good position to maintain a clear position for these lenses as these new things come in. So those would be the only things.

And maybe the last point just on Vision Care. I think we're in a good place where we're really bringing steadily over the next, really, 24, 36 months, a lot of new product flow. So we benefit from our flexibility in our manufacturing capabilities so we can do dailies, we can do monthlies, we can do everything in between, we can do toric, we can do multifocal, we can do sphere. So we feel like on these new lines, it's giving us a lot of different looks at chemistry, material, geometry, et cetera. So I think we feel really good about where we're going.

That's great. And then I just want to follow up, Mike, with your comments there on the IOL side. You mentioned this at the Analyst Day a little bit on the kind of thinking longer term on the light-adjusting IOLs and some of those sort of more custom technologies. Just sort of what are your thoughts there? And what do you guys have in development? Is that stuff that's very early stage? Or just wanted to get a sense for where you were in development those types of products.

Yes. So what we were talking about is the ability to adjust the lens once it's implanted in the eye, so those who didn't see Capital Markets. And the reason you would do that is that sometimes you have to make slight adjustments so that the patient gets the best benefit. These are longer-term projects that we're working on. And we think they're incredibly important to expand the penetration, because the last thing physicians really want to do is take money from a patient out-of-pocket and then not get the exact result that the patient is expecting. So a little bit longer-term project. We've got internal projects that we're working on. We've got external things that we chronically are paying attention to in the landscape. We're pretty comfortable with what we're doing, and we're seeing really good effects in the laboratory in terms of what we are getting off of these designs. So probably a bit of a future story for us, but we're excited about those type of innovations.

That's great, Mike. And this has been a great session. I know it's kind of a quick one. I could go on for hours here, but we're at the end of the time. I just want to thank the entire team Dave, Tim, Mike, Christina, Karen. Thank you guys for your participating in our conference, and we really appreciate the discussion.

Thanks, Bob. Appreciate the interest.

Okay. Yes. Thanks so much.