Bausch + Lomb Corporation (BLCO) Earnings Call Transcript & Summary

Great. Good morning, and thank you all for joining us for the second day of the Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, a medical device analyst here at Morgan Stanley. It's my pleasure to have Bausch + Lomb with us, CEO, Joe Papa; CFO, Sam Eldessouky. Before we get started, I just wanted to note our research disclosures, please see morganstanley.com/researchdisclosures. With that, Joe and Sam, thank you both for joining us.

Thank you, Cecilia. Pleasure to be here.

I wanted to start just with the macro, I think, topical across everything. But for your business specifically, as you think about potential recessionary pressures, refractive, cataract, how do you think about just what transpired in prior recessions? How are you thinking about it for your business where you have essentially the most exposure today?

Sure. So as a general concept, we think we're very fortunate being in the eye health category because it's one category that -- I think we won't say recession-proof, but we'll say recession-resistant, and that people are going to continue to make sure they want to get what's best for their eyes. It is the most valued sense of all the senses that we have. We, in fact, just released a survey data this morning that really reinforces how important the eyes and the vision is to people. So we do think relatively recession-resistant, first comment. Second comment is that we do expect, based on observed in previous recessions, that consumers may trade down in terms of quantities that they're going to get. Instead of getting a year's supply of contact lenses, they may get a month at a time or 6 months at a time. They may reduce the total that they'll buy at one point, but they're still going to get their contact lenses. They're still going to get their consumer products. They're still going to get their prescription products. And if they need the cataract surgery, they're going to go after cataract surgery. So I think for all those reasons, we see this eye health as being somewhat recession-resistant. And what we have said publicly, we expect the overall eye health category to grow somewhere in that 4% to 5% CAGR growth. So nothing's changed on that in our mind.

And capital equipment, what have you seen from that standpoint? And also, just wanted to touch on kind of your current portfolio but your pipeline as well and how you think that makes you more competitive going forward, too?

Sure. Absolutely. Great question. Maybe just -- I'll go with the data that I can just talk about. In the second quarter, our consumables were up 13%, our implantables were up 10%. But to your comment, the actual equipment was down -- wasn't down, sorry. It wasn't growing as quickly, was not growing as quickly. So that is something that we've been looking at from a capital equipment point of view. Overall, we think the capital equipment market is still strong in the U.S. We still see it strong in Europe. In some of the rest of the world, the [ past ] lag behind the growth that we're seeing in the U.S. and Europe as a general comment there. But all in all, where we're looking at the business, we do think that a large part of this is going to be driven by the new products and new innovation, us coming out with a premium IOL, us coming out with the SiHy daily lenses, all that has been -- we think we tried to time it very well with our IPO that happened in May, so that we'd be prepared to go out there with new products right as we're coming out with the IPO. So we've been trying to time all this together and make it happen just around that same time. We do believe that that's going to be -- as people move from up to the INFUSE SiHy daily contact lenses, just given the order of magnitude of what that means from a mix point of view, the people that use the monthly lens, they'll pay, ballpark, $250 per year for the monthly lens. If they go to the hydrogel lens, they'll pay somewhere in the $500 fund. If they go to the SiHy daily lens, they're going to be at about $750. Now they're just general numbers, but it's just to give you some examples of how it will -- consumers are trading up to the more expensive lens that has a more premium offering.

As we think too of just inflation impact to gross margins, you've talked about -- unlike some areas of med tech, that you're able to take price. And as you think just as one point of offset this year, is that a realistic way to think about it? And looking for both second half of this year as well as into '23, how do you think about the opportunities to further take price?

Yes. Maybe I'll go back to the history and what we were able to do. In the time period of January of 2022, we did take price increases on our prescription business. And we also took price increases on our consumer business and contact lens businesses where we were able to take price. For contact lens, pricing was implemented right in January. Our consumer prices, we did take them in January, but we have to give some notice, 60- to 90-day notice. So we actually didn't see the material impact of that pricing until we actually saw in the March, April time frame. So the second quarter report for April was really the quarter that we saw the real consumer price impact. And we had a very strong consumer business. Our consumer business was -- I believe, the number was we were up 11%. So we did see some pricing but also some real volume gains there. Do I think that we'll continue to look at pricing in an inflationary market for the rest of '22 and into '23? The answer is yes. There are real inflationary factors out there. Everything from logistics to raw material costs that we're going to -- energy cost in where some of the lenses are made. In Europe, energy costs are up. So we're going to continue to look at what we need to do in pricing.

The other dynamic of your business, China exposure, relatively higher, I think, than a lot of med tech companies. Can you just talk through -- 2Q, it sounded like a lot of that was concentrated in the contact lens business, but just your outlook for the balance of the year for China. And then any residual pent-up demand from the impact you had in 2Q that could potentially benefit the back half of the year?

Yes. We've seen most of the impact in China coming for us in the first quarter with the lockdown. And also in the second quarter, we've seen most of the lockdown. The good news is, as we came to the end of the Q2, the lockdown eased up, so there was no more lockdown, but what we've seen is the social restrictions still playing a big factor. So the level of, call it, turning back to normal and having everyone to the mobility and have the ability to be able to go to pre the lockdown has not been there yet. We expect that to gradually improve as we go through the second half of this year. And as you pointed, Cecilia, you're right, like it's a big part of our Vision Care business. Roughly about 15% of our lens business is in China. So it is -- have an impact there. It does have impact on other parts of our segments, but that's where most of the impact is.

The good news, just to build on what Sam said, that we grew that business, our consumer Vision Care business, very double-digits even with the China influence. So we're -- not for that, we have an upside going forward and potentially as we think about a year from now.

Okay. Before getting to some of the strategic topics, I did want to just ask update on CEO search and also just how you think about the transition and the process you'll play in that role as well.

Yes. So in July, the company announced that we will be conducting a search for a new CEO. I've been here at the company over 6 years. I've committed to stay through the search and to help with a smooth transition. We have stated the search will be an internal, external search, so we're out searching at this time. I don't have any specific timing comments, but we want to make sure it goes well. And I'm certainly willing to make sure that I stay until we get the right person in place and help with the transition, and then I'll step away.

Understood. And last question, just kind of before, again, getting to the core of the business. But obviously, with parent co-dynamics there, a big focus. There have been a few different updates from them recently, one looking at strategic alternatives and then the shift in moving a portion of Bausch + Lomb to an unrestricted sub. How does that impact Bausch + Lomb shareholders? And how do you think about too just the impact on what you're able to do as you think about M&A and other types of transactions?

Yes. It's absolutely an important question. I have to start with the end, and I'll work my way through. Right now, Bausch + Lomb has freedom to operate. I think it's basically the way that I'll say it, that we have the ability to run the business now that we have IPO-ed in May to be out and run the business and make the right decisions for Bausch + Lomb shareholders. We have that freedom to operate. Probably a couple of important points to make is that, number one, Bausch + Lomb is not a guarantor towards the debt of Bausch Health, so there's no guarantor status for Bausch + Lomb relative to Bausch Health debt. Number two, Bausch Health has historically said -- and they're going to have to make the judgment on when they actually do the full separation. But historically, they said that they saw this as being a 2023 event. And they've also said that there have been certain hurdles that they had to get through from a debt leverage point of view. They talked about that leverage targets they're seeking. At this point, they have not said anything different from that. So I'll go with those numbers at this point. Obviously, they need to get through the customary approval processes that have to happen. That's all something that's been contemplated. But at this time, we're continuing to operate. We have freedom to operate. We have a pure-play eye health business. We're excited about what this means for Bausch + Lomb. And as we look at Bausch + Lomb, we believe we have the most integrated eye care portfolio, which we think positions us well in a very rapidly growing market. So we're excited about what we see.

Last point, the integrated eye care. So saw one of your competitors step -- take an initial step back into the pharmaceutical space. As you think about just going back to the time of the IPO and how you're thinking strategically and incorporating the pharmaceutical segment, but from your standpoint, what are the leverage areas that you're able to pull across those different segments? Sometimes, you can think of different areas of ophthalmology as somewhat siloed. So how do you bridge those? And then as you think about just R&D or other areas across the business where you can gain greater leverage having that full comprehensive portfolio?

Yes. Great question. Let me try to start and make sure I get them all. But when we went out to the IPO, what we wanted to do, number one, is go out with an IPO when we knew we had a portfolio of R&D products that were going to be ready for us to go forward with the IPO and make sure that we have the opportunity for the new product growth. For example, the INFUSE product. But what we felt the right answer was, as we thought about the future of eye health, we said we believe that the physician that's out there treating cataract disease and trying to do the IOL replacement, they also need the pre-op and post-op meds. We have it. When you look at how are you going to approach myopia, well, myopia is a big problem. We know you need the vision correction. So we have contact lenses. But we also know that in myopia, at least as we think about the future, we have a development product underway of using a micro dose of atropine to help delay and reduce the progression of myopia in children, which -- what you really worry about myopia is when they get to the high myopia, where it's over the 6 diopters, we have a product there. That's an offering that we can provide. Now pending. We got to get that approved, of course. But if we can get it approved, we can show that we can help these patients not progress to the high myopia. High myopia is associated with everything from retinal detachment, macular degeneration, glaucoma. Those are the things that we think we can bring together. Final comment I'll make on this is that, as we talk to the customers, we see there's an effort right now by private equity and others to roll up the ophthalmic practices. So we think by having the full integrated offering, we're going to be better positioned. You're 100% right. One of our competitors has looked at that strategy and I think they've made a judgment -- or I'll say, a validation of our strategy, by reentering into the prescription pharma market. Good news for us is that we have a lead. We have about 100 products in the prescription business. I think they're at about 4 or 5 right now. So we've got the broadest portfolio of prescription products. But we do believe that this is the right long-term strategy to have an integrated portfolio offering in eye health to make sure we can help address all the needs that physicians have.

How do you think about just the balance of investment directed toward pharmaceuticals versus your surgical and consumer side, specifically contact lenses? And just the preference for partnerships versus M&A versus internal R&D, how do you balance that?

Yes. So it's a good question. What we've stated is that, right now, as we look at our portfolio, we think we're well positioned in our consumer business. We're the #1 player, and we're investing behind products like LUMIFY. LUMIFY last quarter was up something like 20%. BioTrue was up something like 36%. So we think we're well positioned on the consumer side, and we can do that all organically. As you would think through the contact lenses, we've got the newest innovation out there with our INFUSE product. So we've got that capability with our INFUSE to help the patient that had -- or wants the SiHy daily lens. But importantly, one of the biggest problems with existing SiHy daily lenses has been they cause the dryness of the eyes, especially at the end of the time period of wearing it. We put an [ osmo ] protectant as well as electrolytes into the formulation to help reduce that. And the data from patients so far has been excellent in terms of how they're looking at our INFUSE products early on. Now admittedly, it's very early. The areas that though -- to get to your question on the R&D side, we're spending more money in R&D for surgical and for the pharmaceutical prescription business. They're the 2 areas that we believe we need to spend some additional money, their allocation of our resources, and to look at the inorganic opportunity in surgical and in the prescription business. Those are the 2 areas. Good news. We've only been out as a IPO since May, and we've already announced our first licensing deal. We licensed in an opportunity to do a surgical glaucoma treatment with [ Synoculus ]. So that's one we've already done. That is a license deal to be clear right now, but it's an opportunity for us to potentially acquire the companies under the right conditions. So look to us on the inorganic side and the organic side to invest more of our capital in the area of our surgical business and our prescription business. Those are the 2 areas that we think will be very important for us in the future.

On the [ Synoculus ] deal that you talked about, just your interest, so I believe it's just in Europe today. So just thoughts on having a MIGS presence, glaucoma presence of some sort in the U.S., is there a pathway with that product? How do you think more comprehensively about your strategy in that space specifically?

Yes. It is -- you're 100% correct in how you're positioning it initially. We do have a licensing opportunity today, but there is an opportunity to incorporate that into our business worldwide globally. There will be some need for some additional U.S. clinical trials that will be required, and we're continuing to work with them to do that. But we'll reserve that as something that we'll think about for the future. But are we interested in the surgical glaucoma treatment? Yes. It's a big growing market. Right now, I think we're going to limit our business development, M&A activity to just transactions in the hundreds of millions. But longer term, simply stated, what I've always said to our team is if we can find products where you put one more product in the bag of our sales reps and allow us to leverage the footprint we already have, which we're global in over 100 countries, those are the kind of transactions that make a lot of sense to us.

Does it make sense to continue to build out a broader mix portfolio longer term? How do you think about just the different components of that portfolio and offering options?

I think the question on the mix is one that we're still assessing. I don't want to put a foot -- a placeholder to say absolutely yes or absolutely no. I think we're continuing to assess it. We do think that there is opportunities there. There's some reimbursement changes and other things that we're contemplating as to what's the next step. The great thing about this [ Synoculus ] product is we think it can fit very well into our Stellaris Elite equipment. And at some point, it could be an offering that just even expands the flexibility of our Stellaris Elite going into the future. So we can have a platform there that does even more capabilities for the future.

Okay. Kind of sticking with investment. But R&D, time of the IPO, we were thinking about 7% of sales. Now closer to 8%, I think, as we think about this year. What is the longer-term outlook? Are you thinking more aggressively on the R&D side? What shifted from the time of the IPO until now? And your outlook for '23 and beyond there?

Yes. It's important to step back because I think R&D has been an area of focus for us, and we've been gradually increasing our investment in R&D. We started roughly about 6%. We increased it to 7%, and we were holding around 10% for a number of years. But as we start positioning the portfolio right now, and to the points that Joe mentioned, putting our efforts behind surgical, ophthalmology, and looking at what we can actually accelerate within our portfolio to bring products to get faster, we've seen our run rate in the first half to be about 8%. And that's why we updated our guidance for 2022 to be about 8% of revenue. The way I would think about it, the 7% to 8% is probably still a good range as we think about R&D. I think it's -- probably in the short term, it's probably going to be leaning more towards the higher end of that range. But that will be the range that we'll be continuing to look out.

I just think, if I can add to what Sam said, it's been great execution by our team. When we separated and became very focused on eye health, if I could use that word, the team became very focused and got the things done that -- and a faster time line than perhaps we would have done before. So to me, to Sam's comment, we've been able to move things forward faster, which is always, I think, a great opportunity, because that's still the lifeblood of any health care company, is the new product innovation.

And as we think about some of those products coming on and also think about your EBITDA margins, a lot of the compression that we've seen from '19 till now really stems from a lot of LOEs. As you think about just the path forward over the next few years, relative contributions from your pharmaceutical pipeline, you've talked about 3 key products. But how does that balance with what you could see from scaling of your Daily SiHys and then just surgical, and being able to add in, at least in the U.S., having a premium lens?

Yes. So I think it's a very good question because I think when you look at our business today, we are very well positioned for that margin expansion as we go forward because of all the investments that we have done in terms of the pipeline and when the new products are coming in. But before you even get to the product -- the new product, you would step back and you think about the fundamentals of the business today. Pretty strong fundamentals. The existing portfolio is quite strong. The market that we participate in is quite strong. So the fundamentals are very good. But then you layer in the pipeline, which if you look out in the next multiple years, as you highlighted, like we've got NOV03. We've got a couple of products coming in within our ophthalmology business. We are shifting the portfolio in our surgical to more premium IOLs, which tend to be higher margins. And we've launched the Daily SiHy, which we are scaling up. And I think that's a big factor as we think about the margin. So we're very well positioned to be able to drive that margin expansion over the next couple of years, building on the fundamentals of the business, but also adding in the product lines.

How do you think about the timing associated with scaling Daily SiHys, specifically? You're still rolling out multifocal toric geographically as well. But when do we get to kind of peak margins?

Sure. Well, maybe a couple of comments on it. Number one, in 2021, we were in 5 countries with a spherical. Today, we're in about 26 countries with a spherical. Multifocal will come at the end of this year or early next year, and then toric follow that. So we still have a lot to do in terms of the geographic expansion and then coming out with the multifocal and toric. So a lot of opportunities. Probably the other thing that I would say too from a peak sales, peak margin comment, is one of the things that I've said publicly that I'll repeat is that when you bring out a new line of equipment, if the capacity of that line is -- just to use a round number, $100 million, in the first year, you're only going to get about a $60 million yield. By the second year, third year, you're going to get like $70 million to $80 million yield. And then later, you'll be $90-plus million yield. It's just your yield gets better as you go up the learning curve. That's something that, obviously, will have a very beneficial ability for us to help meet customer demand but then also, of course, improve margins. So I think it's absolutely correlated with what we're expecting for the future in terms of the margin opportunity for expansion.

Where do you think you are right now from a baseball analogy in terms of kind of scaling your contact lens plan?

Just specifically to INFUSE?

Daily SiHy.

Daily SiHy. Probably in the third or fourth inning, something like that. In other words, we've already brought in all the -- we have the infrastructure built. The buildings are all there. We've brought in the equipment. We're in the process of validating a couple of the lines. The rest of them are done. But I do think, to the comment I made before, that the yield will continue to get better from each of those lines as we go forward.

Okay. Understood. As we think about the pharmaceutical component of your business and contribution margins and specifically looking at the LOEs that you've worked through, you have one upcoming back half of '23, I believe. With your new products, XIPERE, NOV03, the biosimilar, can you get back to where you were previously? Are there other products needed? How do you think about just time line as well?

Yes. Maybe just to put some facts around it. The -- we experienced a loss of exclusivity for LOTEMAX in 2020 and '21, and to some degree, in '22. But -- because it had -- there's a LOTEMAX gel, there's a LOTEMAX suspension and a LOTEMAX SM. The SM is not genericized, so -- but we did have to work through the gel and the suspension. It was a $140 million product, so it was a big impact on our business. Having said that, that is behind us. . We do have one that's a much smaller product, PROLENSA, at the end of '23. But the good news is we've got the NOV03 product. We now have an acceptance for filing. We have a PDUFA date. So we're excited about what that means for next 2023 and beyond. And that product by itself could be really a game changer for us. The total U.S. dry eye disease market, it's like 17 million Americans. It's about a $3 billion gross, $2 billion net sale opportunity. And importantly, what we have seen in our clinical trials is that we have shown the relief of the signs and symptoms of dry eye disease associated with meibomian gland dysfunction. Meibomian gland dysfunction is the evaporative side of dry eye disease. It's about 86% of the population of dry eye disease patients. So there's nothing at this time that's effective for that. If we get that in our label, it will give us a significant opportunity, and importantly, give us a much stronger contracting position as we go forward with the managed care market access team. So we're excited about what it means. The biggest products out there, a drug like RESTASIS, over $1 billion. And they often -- ZYGO has also done very well. They often though take multiple months to work. We've shown ours has efficacy as early as day 15. We think that's a real important advantage for patients. And one could hypothesize that even for those patients who are controlled with RESTASIS, if they're still having symptom problems, you may want to take and put in an evaporative product like our NOV03 with the care stimulation of the RESTASIS. So there may be a combination of supplemental use there, especially in the more serious patients.

As you think about the pipeline you have today, is NOV03 -- does that hold the greatest potential revenue as you look forward across your pipeline of products? And then what is leveraging -- being able to leverage an MDD label? Specifically, can you get 10%, 20% share? How do you think about just getting on -- or with patients initially and your path into the market?

Yes. So we're very bullish on the NOV03. We think it's an important opportunity. As I said, it's a $2 billion net sales opportunity market to be a net market opportunity. Do we think we can get a significant share of that based on the data? Yes. It's got the signs and symptoms. And there's nothing at this point that's approved for the evaporative side of dry eye disease. So we haven't given a specific peak sales numbers, but we sure think it's hundreds of millions of opportunity there. The only point I was going to just comment a little bit about, I don't want to suggest that we're not also very bullish on the INFUSE product. The INFUSE -- the Daily SiHy market is a very large market. It's growing very quickly. We expect it just in the United States alone to go from $1 billion to $3 billion. Globally, $5-plus billion. So we think there's a big opportunity. Where we have INFUSE today, we -- in the United States, we have the best data. We have about a 15% share where we have the fit sets or the samples. We don't have them everywhere, to be clear, but where we have them, we have about 15% share. So we're very bullish about that product as well in terms of the long-term opportunity to launch a product like that, that has, we believe, some important advantages over existing SiHy Daily lenses into a very large growing market.

And I know we're running out of time. XIPERE though, launching that, how do you think about just partnering with your partner to look at other applications of delivery into the suprachoroidal space longer term?

You said it very well. We think there are opportunities there to utilize the suprachoroidal space as a new method of delivering and getting products into the eye. Our partner has done great work on it. We started with the XIPERE product. But we clearly see other formulation opportunities and other indication opportunities, and we look forward to working with our partner on that one.

And turning back to the Daily SiHys, you talked about, I think, 50% growth that you saw in the most recent quarter. But how do we think about just the different drivers back half of this year? Other geographies? Any expansion areas as you think about just kind of further upside to what you've seen recently?

For 2022, a large part of the expansion is going to be gaining incremental share in the markets we're currently in. And then as we think about the latter half of the year, it's going to be continuing to expand the footprint from 26 countries to a lot more over the very near future at the end of this year. And then to your point, previously, it's going to be going after the multifocal and the toric lenses. So that's really just a normal rollout strategy. Peak sales for contact lenses usually take somewhere in that 5-year time frame as you roll out the different modalities and different geographic opportunities.

And lastly, the biosimilar in your portfolio as well, how do you think about just differentiating, being able to leverage, frankly, your brand awareness name as a differentiator as you think about driving sales there?

Yes. Once again, what we believe in the biosimilar market is you need 2 things. You need the capabilities to make a biosimilar product, all the CMC that's required, all the capabilities that you have to ensure the product is biosimilar. We don't have that, but we have a partner that does. The other thing that we think is missing in some of the players that are out there with biosimilars is the relationships that we have had over our time period as a company, it's almost 170 years. So it's a company we've built relationships, especially with the surgical treatments that we have. And once again, just back to our integrated platform, we've got great relationships there. We think it's having both is what's going to differentiate us in the marketplace, a good biosimilar product with the relationships and the Bausch + Lomb name. One of the things that we've talked about as we were doing the IPO is that when you ask eye health professionals what is the preferred brand or the most recognized brand in eye health? Bausch + Lomb comes up #1 in the category, outpacing some other great companies. So we do think we have a great reputation, opportunity to build on those relationships, with a company that's going to provide the biosimilar. By working together, it's going to be a partnership opportunity to help patients and help make it more affordable for them to treat their problems.

With that, I think we're out of time. But Joe and Sam, thank you both for joining us. Very much appreciated.

Thank you for your great questions.

Thanks for having us.