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

Good afternoon, everyone. I'm Robbie Marcus, the medtech analyst at JPMorgan. Very happy to have Bausch + Lomb as our next session. I'm going to introduce CEO, Joe Papa, for a presentation, and then, we're going to do a little bit of Q&A after. Joe?

Thank you, Robbie. It's a pleasure to be here and a pleasure to -- this is great to be here as Bausch + Lomb with the very first time presenting at the JPMorgan Conference in over a decade as a public company. So we're delighted to have the chance today to be here. As a reminder, I'm going to go through a number of slides and I'll refer you to our SEC filings for any of the risk factors. It's a pleasure for me to have a chance to review Bausch + Lomb in terms of the investment thesis of Bausch + Lomb. As a company, we are a pure play eye health company. That's how we formed ourselves as we thought forward. We participate in very large markets. Over $50 billion are the eye health markets in which we participate, so very large markets. And these markets have very what we believe, durable tailwinds or megatrends that help drive this business. So we'll talk more about that in a second though. Through the IPO and through the preparation we have had over the last 3 years, we're planning to transition the Bausch + Lomb business to a business that's going to solve unmet eye health needs and specifically looking at some of what we think are the more premium opportunities, the faster-growing segments of the eye health businesses is where we're going to focus our business. So that's what I'll talk about as I go through the company. If I start, I think the first question is maybe, give those of you who don't know us as well, maybe just -- those of you on the phone, we're just doing a little bit of audiovisual changes here, but we'll keep going here. So let me just start with a little bit about the Bausch + Lomb story, give you a little bit of history of the company. First and foremost, we are a company that is 170 years old as a company, so a leading eye health brand that's brought forth a number of innovations over 170 years. We would argue that we are the most integrated eye health company. We think we're uniquely positioned as being the most integrated eye health company. And what do I mean to that? We are clearly in the surgical business. And within surgical, we have instruments, we have consumables. We have implantables. We have the actual devices. Then, though, if you look at the prescription side of our business, I'll talk more about this. But on the prescription side of the business, we have over 100 prescription pharmaceutical products, so it clearly gives a lot of portfolio there. We also have contact lenses and we are the #1 player globally in consumer health. So a very diversified integrated approach to solving the needs of eye health is our approach. If you think about the question of are we well-known, the answer is yes. We have the highest brand awareness in eye health as measured by our ability, we surveyed a group of eye health professionals and Bausch + Lomb has outpaced all the other players in terms of recognition and awareness and we have some great players that we compete with. So we're very delighted in our presentation, if you'd like to see the data. Also, as I mentioned, we are the global leader in the consumer eye health segment of the business, outpacing both the U.S. growth rate and clearly growing it at the fastest rate. If you -- last 2 slides in the bottom here, if you think about critical mass, yes, we have critical mass. Clearly, over 80% of the world's population has access to B+L products. We do business in over 100 countries, 12,000 employees. So clearly, there's a measure there of critical mass in terms of what we do as a company. If I look at the positioning of how do we define our business, we break it into 3 core segments. Our largest segment is Vision Care. It's about 63% of our revenue is in Vision Care, also split about 63% consumer, 37% contact -- usage contact lens usage. So very big part of our business and that's our year-to-date $1.747 billion through September 30. Clearly, one of the things here we think is important is that this is a very durable business in terms of both the consumer side and the contact lens side. On the surgical side, it's about 19% of our business. That represents all the different segments in which we play, implantables, equipment, consumables, instruments, et cetera. And we are clearly going to spend more of our R&D dollars and business development dedicated to do more in the surgical part of our business. And then the final area for us is the ophthalmic pharma. As I said, the most noteworthy comment I can make there, it is we have the largest portfolio or a number of products in the Rx prescription business at approximately 100 products. About 60% of it is international and about 40% -- I'm sorry, opposite, 60% is U.S. 40% international approximately in terms of what we're planning. And importantly, we have a brand-new product launch opportunity there. I'll talk more about for the treatment of dry eye disease associated meibomian gland dysfunction. So clearly, it's an exciting part of our business as we think about it. This just gives you another view of that information. You can see we're global, 80% of the world's access -- has access to our products. And you can also see from this slide, we have a very geographic diverse footprint, about half our business from the North America, about 30% from Europe, Middle East, Africa and Asia-Pacific is about 20%. So clear diversity in our business and balanced geographic footprint. If I go to the next slide, you really can see one of the comments I made at the onset, I want to develop a little further, is that we believe that as you look at the eye health market, it is a market that is very large, over $50 billion. But importantly, it's a market that is going to be driven by a number of megatrends or tailwinds that will ensure continued growth into the future and being very durable. I'll start quickly with the relative magnitude. Vision Care, the largest segment for us is about a $16 billion business and it's growing we believe, about 4%, surgical, about $9 billion, growing about 5% in the ophthalmic pharma $26 billion, the largest segment growing at about 4%. The real question, though, I wanted to focus on this page is on the left-hand side of the page. And it's talking about what's going to drive this business going forward? And we clearly believe it's going to be a market that's going to have some significant growth to solve the unmet needs. What are those megatrends? First and foremost, the older you are, the more eye health you need. The data suggests that if you're over the age of 65, you're going to need about 10x more eye health than someone under the age of 65. So that's going to drive as the older population, demographic support going to drive some significant demand in eye health products going into the future. We all have heard about the rising diabetic prevalence. I won't say much about that. But the other area is the growing prevalence of myopia. I think it's been coined to be the myopia epidemic. That's something that we clearly are looking at. And the importance of myopia, there's a couple of things I'll say. If you think about where it's been, in the 1950s about 20% of the population had myopia. Today it's up at somewhere around 40% of the population. And by 2050, it's expected to be about 50% of the population having myopia or nearsightedness. Now that's important, certainly for the vision correction side. But when you get to myopia and get to the high diopter myopia, you also have to be concerned about as risk factors for everything from retinal detachment, glaucoma, macular degeneration. So there's some important other causative problems with myopia that we want to make sure that we're able to help patients through. And then, finally, one of the questions always is why is it rising by that rate? And I think it's a large part of it doing what I'm doing right now, looking at a screen, looking at a computer screen, looking at kids, especially like playing video games, looking at iPads, iPhone is all driving this incidence of myopia. So clearly, there's important reasons why we think this is going to be a continuing tailwind for the future of this business and one that we're dedicated to try to help solve the unmet needs in myopia. And that's going to lead you to driving of the growth anywhere that what we refer to as mid-single-digit growth, 4% to 5% growth rate for the overall eye health market, a big market with durable growth trends. Now clearly, one of the questions on your mind is, how are you doing in terms of the -- it's a large market. It's a growing market. How are you doing about separating this business from your parent Bausch Health? And I want to go through that just quickly, just to give you some sense of what we think are some of the progress steps that we took in 2022. First and foremost, in 2022, we launched our road show in IPO, so that's out. We're now out as a separate independent public company as of May 6, 2022. Admittedly, we launched the IPO through a very difficult time. But we did get it out and we're delighted that we're out and functioning as an independent public company. Importantly, Bausch + Lomb is not a guarantor of the debt of our parent, Bausch [ Healthcare ]. So I think that's another important comment. And then just recently, on November 29, Bausch Healthcare, our parent announced that they are unrestricting Bausch + Lomb under the Bausch Healthcare debt covenants, which gives us one more degree of separation from our parent. So we're excited that that news continues to happen. And then finally, I'll say, during the third quarter earnings call that our parent Bausch Health continued to reinforce the fact that the separation of Bausch + Lomb makes strategic sense. And they're going to thoughtfully evaluate all the factors related to this B+L separation; so there's, clearly still a separation in plan. And the other thing I'll say about our parent is they've made great progress. One of the things that was an issue was they made great progress on reducing the total quantum of debt that Bausch Health has in front of them. But also they've been able to reduce the overall leverage of their company, the debt leverage of Bausch Health. So our parents made some really good progress during 2022 to move towards the separation. The next question probably on your mind, well, what does the business look like? What did it look like in 2022? And I'm here to say the business fundamentals of Bausch + Lomb are strong. We have 5% organic growth during 2022 versus last year. And we've now had 6 consecutive quarters of organic revenue growth. You can see some of the key drivers of our business, the larger products. I won't go through all of them. But you can see nice growth in these products, whether it'd be Ocuvite, PreserVision; plus 9%. You can see the Daily SiHy up 32%. You can see VYZULTA, the prescription growth there at 32%. So very nice growth in what we think are some of the more important segments of our overall business in terms of momentum in the existing franchises. Importantly, though, we are investing in our R&D pipeline. And you can see with the commentary there that we did receive filing acceptance for NOVO3, our product for dry eye disease associated meibomian gland dysfunction. I'll talk about a little bit more in just a second. Beyond that, though, one of the things we've done since the IPO is we have done some additional investment in R&D. R&D is up 14% versus a year ago. And then importantly, we've done now 5 acquisitions or licensing deals to strengthen our pipeline since the IPO in May. Albeit these are small transactions, I want to be clear on, it is another step that we believe we can take to try to fill in some of the gaps that we see in our pipeline and opportunities for the future. And then importantly, as we think about the new products, we did launch a number of new products in 2022 that's going to help us. But probably if I try to summarize this page and the preceding pages, what would I say? Bausch + Lomb, the most integrated eye health Company. Bausch + Lomb, a company that is the global leader in consumer eye health and Bausch + Lomb is the #3 overall eye health Company. So against a number of great competitors, we're delighted to say we're #3. One of the -- I think the next thing that you may ask is, well, understanding what you've done, how have you done versus pre-IPO versus post-IPO? And we put up a couple of slides just to show some of the progress we've made on market share. You can see whether you look at our PreserVision eye health product, we gained 120 basis points of market share. Our LUMIFY product for redness relief gained a remarkable 480 basis points in a year. Our Multi-Purpose Solution up 410 basis points and then Ocuvite U.S. market share up 590 basis points. So one of the things I'll suggest to you is that since we've been able to go out as a new public company, we'd be able to bring increased focus to our eye health business and allowed us to take some [ excisional ] market share as we think about the future. So that's what I wanted to talk about maybe historically. I do want to focus now on the future for our company in terms of looking ahead for 2023. And we believe that, once again, I'll start with the overall market. There are strong business fundamentals, whether I talk about the large and growing end markets that I mentioned before, we think those will continue. We think we've got momentum from strong brand names and the recognition of the momentum we saw in '22 that will continue in '23. We've got 15 launches that we planned for 2023. So that obviously gives us the momentum for further growth in '23 and beyond. And we have a strategic ability to mitigate inflation with pricing. We did take pricing in 2022. We also have the opportunity to do that again in 2023. So clearly, those are all what I would view as some of the real positive business fundamentals. We are also to be clear, though, monitoring the macro market conditions. We're not immune from that. We think eye health as a business is recession-resistant, but not recession-proof. But we do think it's resistant from the recession, mostly because of how consumers prioritize the eye health of their business and how it's so important. And also, I mean, one of the questions that many have asked me over the past day now is, well, what's going to happen if we really go into recession, will your cataract surgeries fall off a cliff? And we've looked at that data, and there's 2 things I'd say on that. While we are aware of the recession, one of the things we know about cataract surgery, at least we went back to the data in 2007, '08 and '09 when we had the Great Recession. And we saw that cataract surgeries during that recession continued to increase. So it gives us confidence that in 2023, and if there is a recession, we certainly will continue to see growth. In fact, we are projecting double-digit growth for cataract surgeries in 2023, mostly behind the fact there's been a backlog that has to get made up from COVID in the 2020-2021 timeframe. So clearly strong business fundamentals driven by the overall business. What about the question of our R&D team? Well, they are continuing to deliver on the R&D team for B+L. We've increased our investment by 14%, as I mentioned, versus last year. But it's giving us a chance because we increased our investment, because we moved R&D from about 7% of sales in 2022 up to 8% in 2022 because we sell -- we had the ability to move things forward, expedite them. It gives us a chance in 2023 to launch 15 new products. We're delighted with that. Everything from the Vision Care portfolio, we'll launch some line extensions of LUMIFY. We'll also have a chance to do geographic expansion of LUMIFY into other countries around the world. We also have the chance to launch our multifocal of our Daily SiHy. I'll talk more about that in a second. Also in the pharmaceutical side, the investment in R&D is allowing us to launch our NOVO3 in 2023 and I'll talk about that in a second. And then in the surgical side, one of the things we recognized and we've been working at this now for the past 2 to 3 years, is that we needed to spend money to develop the premium IOLs on the surgical side of our business and we've been doing that. And I'll show you what we plan to launch and how we will grow that portfolio of premium IOLs in the next several years. And then finally, as I mentioned, we also invested in R&D. But we also filled some of the gaps we had through business development by bolting on 5 acquisitions, licensing transactions, 3 of them in the surgical side, 1 in pharma, 1 in consumer to continue to build out our portfolio for the future. Let me spend a few minutes remaining on some of these important key products before I open it up for questions. One is LUMIFY. LUMIFY is a great story in terms of what we are able to do with LUMIFY as we've been able to successfully launch LUMIFY. For those of you who are not familiar with our story, we launched this product in 2018 as the redness reliever product. And that product has moved from a business that was started at 0 to us having a 50% market share in a category taking over business from products like Visine, Clear Eyes, others that have been around for decades, mostly behind, number one, great consumer promotion. But number 2, and I think an important part, we utilized our total B&L footprint and used our sales force that's out calling on optometrists, ophthalmologists to also make sure that we can get the message to the doctors. And you can see from this slide, we became not only the 50% market share leader, but the #1 physician-recommended product really within the first year. So it's really this integrated approach we take to the business that allows us to do everything you would do for their any consumer product, but also make sure that we get to the physicians and get the physicians' endorsement for the product. So we'll do more of that. We'll launch it in now 6 countries, successful Canadian launch behind us. And then most recently, just really a week ago, we acquired the rights for LUMIFY for 18 additional countries that will allow us to leverage the LUMIFY brand to more geography. And then as you can see in the bottom, on the right-hand side here, we'll launch some additional line extensions of LUMIFY for LUMIFY eye cleanser, LUMIFY eye cream, LUMIFY lash and brow, all designed to continue to enhance that LUMIFY brand name and allow us to expand the portfolio. As it would relate to the next area, one of the important growth drivers for us is the silicone hydrogel daily lenses. It's a global market today, about $3 billion today. We expect it to be ballpark $6 billion by 2030. And we're really excited about our position and where we play there. And I'll tell you, I'll probably talk about why first and foremost. First and foremost, why we think our product is a great product, because instead of just developing the current SiHy Daily product like others, we infused our product, therefore, calling it infused with osmoprotectants, electrolytes and moisturizers to make the product more comfortable. And you can see the data from patients. The data from patients say 94% of patients agree that Bausch + Lomb INFUSE contact lenses do not feel dry. 94% also say allow -- you can wear them comfortably all day. And then 97% said they still provide crisp, clear vision throughout the entire day. So people who are wearing our contacts don't have to sacrifice. So that's what given us an ability to actually grow this business in 2022 by 32%. And importantly, as we think about the future, we've launched the spherical in 25 countries. But now we have the chance to launch in more countries with spherical, then launch multifocal and toric. So we're really excited about what that means for future growth of our overall contact lens business and importantly, our silicone hydrogel. The other mention, I said earlier that I want to talk about a big opportunity for us in the prescription ophthalmic market is NOVO3. NOVO3 is going to enter a very large market in the United States. Dry eye disease is a $3 billion gross sale, about $2 billion net sale business. About 18 million Americans have dry eye disease. And we have a chance to come out based on the studies that we've done to potentially if the FDA approves our product to be the first product that has the treatment of the signs and symptoms of dry eye disease associated with meibomian gland dysfunction. At this time, there's no other product that has that capability. If approved by the FDA, we think that's a really big opportunity to help improve the lives of patients that have dry eye disease, so associated meibomian gland dysfunction. The data is very outstanding data. If you look at what we've shown is that we have helped these patients as early as day 15. Some of our competitive products that are out there that are $1 billion products can take up to 3 to 6 months to work. They work through a different mechanism. They work through more of the tear stimulation. We work through the evaporator side. But what we know is that meibomian gland dysfunction represents ballpark about 90% of the patients have some degree of meibomian gland dysfunction. So we do think it's a big market opportunity. And we do think we have a product that works as early as day 15 based on the data and we're excited about how we can help these patients. And you can see the P values were outstanding for both the sign, which is corneal staining and the symptom, ocular dryness. You can see these p-values at p equals less than 0.001. So very significant improvement for patients and we're excited about it. We have a June 2023 PDUFA date. The other area I mentioned briefly was the -- what we're doing on intraocular lenses, will be candid. We should have had more premium intraocular lenses 5 years ago. But since we've -- the new team has taken over, we've put an investment behind this premium IOL concept. We did our first deal to get the Lux premium IOLs and we launched that beginning in 2020. We'll have a trifocal in 2024. We now have a trifocal on the planning horizon for 2023 in Canada, 2024 for U.S. and EU. We've got an extended range IOL with enVista Technology for '23 for Canada and the U.S., Europe in '24. And then we got an extended depth of focus for '25 and '26. All I can say here is you can see a purposeful desire to move into the marketplace with these premium IOLs that are also at a higher price point. Average price point of a monofocal IOL is somewhere in the $150 per patient per eye, whereas the premium IOLs could be somewhere in that $800, $900 per IOL. So clearly, that's an opportunity to significantly help those patients who have the more complicated problem and need the IOLs that are the premium side. One other area I'll talk about here is the 3D Microscope. You can see that one of the plans that we've thought about is how do we help the surgeons to do everything they need to do and be more successful with their surgeries? One of the things that we're coming forth with is this 3D Microscope. But importantly, this is going to link to our STELLARIS equipment and to a system we call eyeTELLIGENCE. And the concept is that we'll create a digital world for that physician so that when the physician sees the patient in pre-op, when the physician sees the patient during the surgery, it's treating the patient or post-op, they'll have access to all their data be in a cloud, help them to make the right decisions to do the best they can do for that patient. We think the 3D Microscope is one example of how we're going to help that physician in addition to this eyeTELLIGENCE system and having it all integrated so that we can really help physicians as they help their patients through the entire process of surgery, whether it be retinal surgery or cataract surgery. So we're excited about that. Final slide I want to do and then I'll close it up and open it up for questions is how do I put this all in perspective for you in terms of the investment thesis of Bausch + Lomb? So I'll start on the left-hand side. First and foremost, integrated platform and what I mean by that is we have a platform, once again, that has surgical, it has prescription pharma, it has the contact lens, that's consumer health, have this integrated approach and have all of our sales forces all working together to try to solve problems for the physician. So if you start from the outside of the circle and work your way in, you think about it, one of the things I shared with you, we have the highest brand awareness. Bausch + Lomb has the highest brand awareness with health care, eye health care professional. So clearly, we're a well-known entity. We do business in 100 countries. And we have all the access points, whether it's the optometrist, the ophthalmologist, whether it's the key retailers, e-commerce. We have the ability to leverage that Bausch and Health -- Bausch + Lomb name with all of the key access points through 100 countries. So that's what we think is important. Then one of the comments I mentioned before. We have significant modalities to treat this patient, whether they're looking for contact lenses, whether they're looking for surgical, whether they're looking for the ophthalmic pharma, the 100 products we have in our portfolio or whether they're looking for the #1 player in consumer health, we have all of those capabilities. And then we believe that Bausch + Lomb will have the ability to help these patients through all phases of their lives. One of the very first product that any newborn baby gets is they get an erythromycin ailment in the corner of their eye to help that patient to make sure you treat potential microbial or make sure there's no microbial infection, that's a Bausch + Lomb product. And then we have -- so we can start you as a newborn. We could take you through the teens when they potentially need either anything from a anti-infective -- antihistamine for eye drops or then we can go to contact lenses. And then ultimately, we can take them to the point whether if they need cataract surgery, we've got the implants to help them. So we can help patients through every phase of their life. And that's what gives us excitement about the future of Bausch + Lomb that we can help all these patients through all phases of their lives. And we're excited, whether it's an elderly patient, whether it's newborn patients, these are the things that we're going to bring forth to the marketplace to ensure that we help patients have a healthy life. And importantly, our logo is help patients to see better to live better. Thank you very much for the opportunity to talk to you today. I'm going to open it up for questions. Robbie?

So a lot to ask, but maybe I'll start. It's been what 8 months, 7 months since you've been a public company.

Yes.

What do you think -- where do you think you outperformed? What do you think you need to work on in 2023?

Sure. I think, number one, one of the things that we're delivering on our promises, I think is probably the first thing I'd say is when we set up the company with the IPO, we said that we would grow the business at mid-single-digit growth rate and that's exactly what we did. Organic mid-single-digit growth rate is what we promised and what we're delivering on. So I'm really pleased with that. One of the areas that -- to your question, though, that we've done some. But I'd love to do more and one of the issues is our ability to invest in R&D. We've moved that up from 7% to 8% of sales. So we're delighted to be able to do that. And with that, move forward some of the R&D programs more quickly than we expected. So we've got 15 launches this year. And the other thing we did some, but I'd like to move more aggressively on is bolt-on transactions. We did 5 bolt-on transactions since May, so that's great. However, they've all been very small predominantly because as we're still part of the parent Bausch Health, we wanted to make sure that we were measured in our first bolt-on transaction. But we did 5, 3 of them in surgical, 1 in pharma, 1 in the consumer side. I think for us to do more of those in 2023 and beyond will be an important opportunity for us to expedite the growth. One of the things we know about our competitors is they have grown organically. But they've also been very successful in bolting on additional businesses. I think there's a lot of opportunities for us to bolt on, especially in the areas of surgical opportunities and the pharma opportunities that we'll look to do more of those to 2023 and beyond, especially as we get separate from our parent company.

Great. One of the stated goals and when I look at sell-side numbers, getting spun out, there was probably limited investment dollars or they weren't all going to your primary research projects that you would like to if you had total control. So now you are a standalone company. What's the pathway for both accelerating top line growth while expanding margins at a pretty good clip over the next 4, 5 years?

Yes. I think it's going to come down to a couple of things, and Sam may want to add to this. But first and foremost, I think it is the new product pipeline and launching 15 new products in 2023 and then continuing. But importantly, one of the things in terms of growing that top line and expanding margins that we've tried to do, and we've been working very diligently and I hope you heard in my presentation, is specifically focusing our R&D projects on those products that we believe are going to be growing in the faster segments of the market in terms of eye health. We think eye health in general grows 4% to 5%. But we also know some places like the silicone hydrogels are going to grow double-digits. So make sure that we're putting investment there. We also believe that the premium IOLs are going to grow faster than the overall IOL market. So making sure that we put our investment in those areas that are going to grow faster than the overall eye health segment, that's going to help us to accelerate it and that's why we put more R&D dollars there. One of the things that specifically we've tried very much to do is ensure that the R&D dollars really go to those best opportunities to allow us to deliver on those unmet needs. Sam, anything you want to add to?

Yes. I think I will add that it's based also building up on the brands that we have. So I think if you look at key brands like Ocuvite, PreserVision, which grew 16% in Q3 for us, that's something we're excited about and we'll continue to build on. LUMIFY is another perfect example Joe touched on in his presentation, but we're roughly about 49% market share. So that's a great also brand that will continue to build on.

You got the NOVO3 data published last week, I believe it was...

Yes.

PDUFA dates in June. It looks like a really promising drug, especially if you could get the -- I can't even...

Meibomian gland -- MGD.

MGD label. But it does just compare and cross trial looks like it has fairly similar results to RESTASIS and is a 4-time a day drug. So what's the competitive positioning? How much will that specific label drive utilization and separate it versus the peers versus the 4 time-a-day dosing?

Sure. I think I'd offer 3 comments on that. The first comment is that we believe we have this different mechanism of action. We treat the evaporator side of disease, whereas the RESTASIS is going after the tear production. So probably for some of those patients that need -- have very severe dry disease, they may end up using both to be very honest. The second comment I would say is one of the things that we think truly separates us is the onset of action of our product. We've shown in the clinical trials and I've referenced it in the slides that we have efficacy, placebo-controlled efficacy where we separate from the placebo as early as day 15. The signs and symptoms data that came from RESTASIS will often show many months that take for separation. So from a patient point of view, I think once patients try it, they're going to like it and stay with it. So I think that's another important point. And I guess the final comment I'd make is that we bring to this story the Bausch + Lomb reputation, which has been around for 170 years of innovation to help solve these problems. I think it's going to help us with our overall programs that we launch going forward.