Alcon Inc. (ALC) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm David Adlington, head the European Med-Tech Research Team for JPMorgan in London. It's my pleasure to introduce David Endicott, CEO of Alcon. There will be Q&A afterwards. Please wait for the microphone for questions. But David, over to you. Thank you very much.

Well, thank you, and good afternoon. We are excited to be here and start another year kicking off with JPM. It's fun to be back and talk about a lot of things that we've been working on. As most of you know, we have a broad portfolio of stuff and a broad kind of source of growth. And I think when you look at the surgical market or you look at the vision care market, you can see kind of steady mid-single-digit growth across the portfolio of markets in which we play, which is underpinned by a whole bunch of fundamental positives like aging demographics, comorbidity, the need for eye care being one of the highest interest topics for elderly folks, and obviously, the myopia epidemic running around the world. So I think, directionally, we feel like we're in some very, very positive markets and they run across a wide gamut of opportunities. Obviously, a big market, all in with about $33 billion. The thesis that we had when we spun out was really around product flow. It was really about, could we with the right amount of investment get products back in, grow in these markets, not just kind of at or below market, but rather above market rates. And I think we've demonstrated that really since the spin. We got product flow moving very quickly afterwards and through really '22, '23. And if you balance the 2 years, excluding the 2020 COVID year, you can divide that in half, if you like. But directionally, very good performance here as we kind of look forward to accelerating growth. I would say that what's been doing that has been a strategy that underpins a decision-making process that we think is unique at Alcon. We think that the basic idea has to be to focus on eye care and be really, really good at that. And we believe that folks that know these markets can anticipate which markets will develop, can anticipate where competitors will go and can apply technology in a way that others cannot. That specialty orientation, that focus will deliver superior results, better odds on the projects in which we engage. So, you do that with a disciplined capital deployment. With an efficient enabling function, you get leverage off of the top line growing significantly faster than your cost base. That has been the strategy, that's been the idea from the beginning. I want to cover a couple of ideas that kind of demonstrate that. One is, first and foremost, we put a lot of money into our contact lens manufacturing platform, into the development of a series of new products, of which many have occurred in the last couple of years, but there are several more to come. So I would point to -- in the contact lens business our Precision portfolio, our portfolio of Torics in particular. For many years we had enough capacity to support the spherical contact lenses, but not really the Toric business. So we entered the SiHy market, if you will, for Torics with a 0 share in 2021. So nothing, but upside from there, right? I mean the value of kind of getting fair share when you've got a DAILIES TOTAL product doing very well, but no Toric to complement it, was really substantial. We've been successful getting that TOTAL one out, same thing with PRECISION1 -- PRECISION1 Toric. We've got the multifocals now. We've got a new reusable where we see the opportunity, not so much as a growth -- a market -- a reusable market, pretty flat. But we have a disproportionately low share where we have a high [ 20% ] share in the contact lens market. Generally, we have a [ 16% ] share-ish kind of number in reusable. So very profitable business. Can we catch a little bit of profit and additional gain there by developing a better reusable, which one hasn't been done for a long time. So water gradient technology, use the TOTAL brand, apply it to a reusable, find our way into a more comfortable setting for that brand. It's done very well. Pataday over-the-counter, Systane Complete. Some additional Rx products that we brought to market have really benefited the Vision Care business as we've tried to build it out. Going forward, you'll see some more products coming. We've obviously got a multifocal on TOTAL30 to finish the family. We made some announcements on our dry eye product last night. We'll talk a little bit more [ of ] that in a minute. And of course, we are working on a weekly lens as a new modality, which again, we'll see in the next 12 or 24 months. So we're looking to kind of move that forward as well as an alternative to the 2-week market. I think directionally, the OTC product is something under-appreciated in this portfolio. I think, if you think about where the profit of the Vision Care business is really moving nicely for us, the Systane brand is a really exciting product around the world. This is the #1 artificial tear. Believe it, it is a terrific add to this portfolio, that along with Pataday has become a nice driver of growth, certainly this year, but also of profit in the Vision Care business. If you look at what's going on in our development program, we've got an HA add to the complete brand, which has really strong acceptance and potential going forward. We have a number of other ideas, I think, moving that way. You can see that the share is done. I mean, what we -- our thesis was put new products out there, you'll see growth. And this is exactly what we've seen. So when you go back to where we were pre-spin and what's happened since, it would basically have put new products in the market, and of course, the market has responded nicely. So directionally, we feel good about this strategy in Vision Care. It is driving our growth. And we are right in the middle of that growth right now. It is -- we're still kind of on the front end of what's going to happen here in our contact lens business. So we're excited about the potential growth going forward, both in contacts and OTC. A couple of notes on pharma to complete the Vision Care business. Rocklatan and the acquisition of Aerie has been a terrific program for us. We acquired not only capability in that process, but I think nicely growing glaucoma assets. Rocklatan has done very well. The market is generic right now. But we still are seeing an 8% TRx growth, which has been really good in a market that, I think, is adjusting right now. So we feel very positive about what's going on with Rocklatan and Rhopressa. And I think the surprise in the portfolio for us, or maybe just the upside and the thesis when we acquired it was, would we get a dry eye asset out of the program that was running at the time? And so, directionally, we're very excited about the results which we reported last night, which really have shown kind of significant change on the primary endpoint to drive a path to signs and symptoms of dry eye disease. And what we saw was not only significant difference and clinically relevant differences at day 14, which was the primary endpoint, but also at day 1, really important, and day 90, so end of the trial, so -- and improving throughout that. So I think what we're excited about is the potential of a product that works much faster, that could create a natural tear and not just a supplement for a lipid layer or a supplement for an aqueous layer or a supplement for a meibomian layer, but rather a tear that actually stimulates the trigeminal nerve, stimulates the natural production of your own tears in proper proportion. So that's a very unique mechanism, very interesting [ trip ] [indiscernible] and an exciting opportunity, I think, going forward. Directionally, we think this is a really interesting market. As we've said, there's a lot of people out there who have dry eye disease. Some of them are diagnosed, but not most of them. And obviously, those that have sought or are under treatment for prescription products is relatively small. So the U.S. market maybe $1.4 billion globally -- $3 billion. But I think directionally, this is a really interesting opportunity, and so rapid stimulation of production of natural tears, as you can see. And directionally, we see this as kind of a peak potential in the U.S. of about [ 250 ] to [ 400 ]. We have not pursued yet external U.S. registration. So we're working on that now. But we'll bring you more information as we get forward on that approach. Let me switch to the surgical piece and just give you the kind of the same story, different products, right? So when we started this journey, again, we started with this view that we had some stuff that was on the shelf that needed to be developed but was not being funded. We went ahead, funded a lot of that. Got some of the first products out that were really interesting, the PanOptix Trifocal. Again, very exciting, a new biometer, a new economically priced phaco machine. We've spent a lot of the time in the last couple of years converting from what was an older material or an AcrySof material to the newest material in the world, Clareon, the glistening-free, very clear material with new edge design, a design that we think is superior to all other materials that are in this market. We've obviously done a lot with Hydrus. We've got a new WaveLight Plus that's out now. And directionally, we see continued development in this area, and I'll talk to that. On the implantables area, I would just say that the big story for last year for us was a penetration went sideways. We started the year at [ 19 ]. We had hoped to get about 100 basis points of improvement. We did not get that. I think a lot of that is down to our view, which is staff turnover in the critical elements of moving patients into advanced technology lenses where they are cash pay, changed a lot. There was almost -- there was somebody yesterday who was talking about staff turnover in the 60% range in these critical roles where you've got to retrain people now and get them going. That's a very different world from where we saw the world several years ago. I'll also say that one of the things that was interesting was 20% of the high-volume practices in the U.S. now are in private equity, which means some of the most productive surgeons in our business have gone into an arrangement where they are now employees, not owners of that business. And the sum of the productivity questioning, I think that's going on in there, is an important question as to whether or not they're really motivated to keep doing what they've been doing. So, we see that as a temporary scenario. We believe, over time, this continues to grow. We know the headroom in penetration is somewhere around 35%. And we're sitting at about 12% globally. We're getting good penetration growth internationally, good share growth internationally. U.S. has gone sideways, and that has been the driver so far. So that's really the story from last year. Now going forward, lots of stuff coming. We've got a new PanOptix that's really working on contrast sensitivity and try to generate more energy at distance. I think these are really important ideas when you start splitting light or moving and stretching light. You will find that there are significant differences in the lenses, in contrast sensitivity and other kinds of moments where the clarity of what people see can be improved. We're on a path to improving that. Directionally, we've also got a lot going on in China right now. We have almost no share in China. I think we have less than a [ 10% ] share. We did just win the VBP process there. So we are the #1 position for all of the ATIOLs in each category. So we'll see an opportunity for the next couple of years to grow our international business on the back of China, which is the second largest ATIOL market in the world now. May not be known to people, but it is an important and exciting change. And obviously, we're working on new injectors. And we've got a number of things coming on the way that advance our autonomy project and change some of the interesting things going on in those spaces, so exciting stuff there. Probably the most interesting thing in the near term is going to be our next-generation phaco-VIT machine. This is a combination of a better, newer Centurion and a better, newer Constellation, and it will be in one machine. So it's a joint machine that will be approved somewhere this year. We submitted to both the U.S. and the EU in late December. So we expect a relatively rapid approval. We're going to spend about 1 year with this in market. So we'll probably sell 50 or 100 of them. Don't look for revenue this year, but look [ forward ] in '25, because I think what we're going to do is be in a very strong position to have tested this thing, washed it out, make sure everything is working perfectly because, obviously, we're working against 2 of the best machines in the world ever created. So we're going to make sure we got it right. As we go through that process, we are very excited about the speed of this machine, the safety of this machine and the time it takes to do additional surgery. So we believe that efficiency is the major topic to be solved [ for ]. We have lots of cataracts out there. We don't have enough cataract surgeons. The throughput that we can generate with these machines is significant. We think we can do more cataracts in a day, and that's going to obviously pay for a lot of value. We'd like to share in that value, obviously, with some kind of premium positioning of our consumables. So we'll work through that process over the next couple of years, very exciting technologies that have been advanced over the last really 5 or 6 years. Additionally, we obviously are involved in trying to change the speed at which we move cataract patients through the clinic. And in the pre-op phase, there are a lot of diagnostics that get done. And if you look down the right side here, there are about 6 tests that are often done. Most of them -- 4 of them at least are done almost all the time and a few of them are a little bit optional. But I would just say that directionally, the amount of time it takes to move people through this and the potential for error -- and this is really important. The biometer that we have now is doing really well. We've had a lot of success. Our win rate when we're head-to-head is better than 50% on Argos. We know we are a faster machine. We know we can get through hard cataracts better. And I think we feel really good about our ability to compete with the market leader, which is the ZEISS 7000 -- 700. The beauty of this machine will be that it puts all -- a bunch of machines into one, and with one click in a lot faster motion. You can collect all this data and export it then to a cataract planner and your electronic medical records. This is all going to be surrounded by the ability to move this data from the clinic to the cloud into the OR and then back postoperatively, capture the outcome and then improve the surgeon by recalculating surgeon constants. And also at the same time, beginning to introduce algorithms that we think are unique to our lenses and unique to those surgeons which will be done through a series of machine learning programming that will sit on the cloud and/or on the on-premise machine. So it's a really big opportunity, I think, to drive incremental value and incremental efficiency in the cataract system, which we think gets more throughput [ against ] -- we'd like to share in that value with the surgeons. As we look forward then, what we're really after is trying to make sure people understand the breadth of the vectors of growth that we have. And I think one of the things that we're excited about is certainly our surgical business where we enjoy significant share. But we're also very excited about our contact lens business, which has been a sleepy business for us for a lot of years, but it's really just now taking off. I think directionally, the portfolio of OTC products is underappreciated in many ways. We get a lot of benefit from both the margin and the growth in that market right now. The pharmaceutical business is small for us. But I think the AR-512 gives us an interesting opportunity to go along with a glaucoma market that's quite large. And when you look through the equipment part of our portfolio and the consumables part of our portfolio, premiumization of those consumables will drive additional value throughput on increasing the number of procedures that surgeons can do, will create economic value for the individual pieces of equipment that we create. So we feel very well positioned right now to continue to drive above-market growth in markets that genuinely are very sound and will be for some time. So with that, let me just finish that up. Thank you for listening to that. And we'll take any questions you may have.

Thanks, David. I'll just kick off here with maybe a question on the new news this week on 15512. You've presented some of the data up there. But I'm just wondering, first up, when we might expect to see the full data?

Fully -- once we get the file in and we've analyzed everything for that and we can bring it forward, we will do that. I expect that will be sometime in the fall. But we've got probably [ 8 ] very important secondary endpoints. There's some -- there's a [ SAND ] score, which is the patient-reported outcomes. There's a series of other secondary endpoints, which I think will be valuable in thinking through how the potential of this product plays out.

Maybe sort of following on from that. In terms of the -- when you approach payers with these products, what do you think is going to be the key selling point? [indiscernible]

Well, look, I mean, here's the idea, and I think it needs to play out in real terms. But I think what we believe is, if the product works on day 1, it has somewhere in the 50% response rate for significant improvement. That's very different than what you see with Xiidra and with RESTASIS. And I think what we'd like to say -- we'd like to see happen is that we can articulate that this product works quickly. And why would you put something that you have to wait 90 days to find out whether it's going to work in and most patients is not going to work. That's a lot of wasted resource to the payer when you've got a very high percentage chance and knowing of that very quickly. So if you need to come off of that product and do something else, you can do that, but you don't waste 90 days' worth of drug for 80% of the patients. That's a real immediate economic savings that we think plays. And I think it's really valuable, and that's the beauty of the [ onset ]. You're going to see a different kind of onset with this product versus others.

And then in terms of the sales force you're required for that, can you do that with the current sales force?

We may -- we would probably expand the current sales force if we do that. But we may also think about if -- what the portfolio looks like at that moment in time. We're probably still more than 1 year away -- 1 year, 1.5 years away from really having to deal with that idea. I do think that we have enough products in the portfolio now where we could create a glaucoma sales force. We could create an external disease portfolio with Pataday and it's sustained in it, and 512. We'll look at the potential of this to see whether it's better to expand the existing one or separate into 2. But we'll probably make that decision in 1 year or so.

And then just moving on to IOLs. You mentioned in the presentation how staff turnover [ been ] maybe a factor in not seeing the uplift of the 100 basis points in ATIOL shift. What's been causing that staff turnover?

There's a very interesting phenomenon right now I think where a lot of these skilled positions are moving amongst the cash pay people. And I think they're -- I don't know whether it's the moment in time coming off of COVID or whether it is just the demand for people who have these skills. But aesthetics has them, dentistry has them, plastics. There's a series of other specialists who have a lot of cash pay products. And they are a valuable commodity and they're moving around, I think, right now to opportunities if they see particularly the relationship between them and their practices change in some meaningful way. So it's an interesting phenomenon that we've at least observed in the last year or so.

And [ any ] thoughts in terms of whether we get to return to ATIOLs taking more share through '24?

I'm sorry? Say it again?

Are we going to see a return to ATIOLs increasing their share through '24?

Well, we hope so. I mean, I think -- we'll talk a lot more about '24 in February. But I would say that our general thesis on ATIOL share is that a lot of these markets have moved just very impatiently over long stretches. So ATIOLs have been basically a 50 basis point shift per year on average for about 15 years. It's a little bit -- and we expect that to continue on for another 10 years. So the beauty of that is that you get nice, stable market growth. And we should be able to participate in that. That's the same thing that's going on with contact lenses. It's been shifting from reusables to dailies for 15 years. It's got another 10 years to go, at least. So I think what's nice about that is it creates a nice, steady, stable market to participate in, and obviously, we share very nicely in that.

And then, you also mentioned Chinese VBP, which is a market historically you've had -- sort of underpenetrated certainly well relative to the rest of the world. How should we be thinking about scaling that opportunity for you this year in terms of the tailwind?

Well, it's going to be a tailwind for us in China for sure. We have a very low share in China relative to everywhere else in the world. And we did not participate in the first go around believing that we could help. I think -- participating in the private sector of China I think what we learned was that the private sector is very overlapped with the public sector. And we've made a change to that. We participated this year. Obviously, we've made some positive strides there. I do think it also coincides nicely with the launch of Vivity, Vivity Toric, PanOptix and PanOptix Toric on the Clareon platform. So I think we are in a very good position to have the products we need at a moment where we are going to win the largest tender in the world, and we'll see how that plays out.

And then just on the equipment side, with the new launch coming, you're going to be quite conservative this year. Do you see any potential for clients to postpone the purchase of machine into '25 when the ramp comes through, and how will you manage that?

Yes. I mean, that's a natural phenomenon. And we'll see a little bit of the market freeze that you see normally when this happens. I do think we'll obviously -- if someone needs a new machine, we will offer them an upgrade path, so buy their Constellation or buy their Centurion now. When -- we get you on the list when we get the product, we'll get it to you, we'll trade in your existing machine, we'll work that out. So there'll be a little bit of that, but I do think we can manage it.

And then, just quickly on the contact lens side. This time last year you were pretty cautious on the outlook for the contact lens market and you're, I think, pleasantly surprised. Thoughts about [indiscernible]

I've been wrong twice. I don't know if it should be wrong the third time. But we were -- we, like a lot of folks thought there would be a recession this year -- last year. There wasn't -- we did model it like the '09 recession and that was wrong. It didn't happen. I think what is -- we'll be wrong again this year, probably I hope not. But we've said we think this will be a normal year. It will be returned to kind of a normal growth rates, read that as mid-single-digits. And I do think that, that's historically where it's been. There's about 16 things that could go wrong with that assumption, but that's where we are right now.