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

Great. Thanks, everyone. We're going to start our next session. Very happy to have the management team from Bausch + Lomb, Brent Saunders and Sam Eldessouky. We'll kick it off -- we're going to do a fireside chat for the full 40 minutes. If you have any questions -- maybe we could quiet down, if you don't mind. If there are any questions in the audience, I'll pause and ask throughout. Just raise your hand and we'll call on you. So maybe we'll kick it off. Brent, a year or so, plus or minus, in the role as the CEO. There's been a lot of activity, robust growth in the market and your business. You made a major acquisition. Maybe just sort of start off with the state of the union at the business and how things are going at Bausch + Lomb from your perspective.

Yes. Great. So first, thank you, guys, for coming. And Robbie, thanks for having us. It's a pleasure to be here. So you're right. I started, not that I'm counting, March 6, 2023, was day 1. And it's been a really terrific several months. Bausch + Lomb is a really special company to me. I've been here before, and it's like returning home. So that is always a positive. And I came in with a good understanding of both the company and the market. So I had a little bit of a running start than you typically do when you come in as a CEO into a company. And Look, we have a great opportunity here. Bausch + Lomb is a 170-year-old company. It's an integrated eye care company. It's probably got the broadest portfolio of products and services related to the eye. And that's what unites us, all right? Our mission is to see better, live better. And so the question is, how do we restore this company to a position of leadership in eye care. And for me, it really has got multiple prongs, right? It's never a simple solution. And I think I've said this quite clearly on many of our conference calls, it was about harnessing the power of the brand and of the people that were at Bausch + Lomb. We have around 13,000 colleagues all over the world. They are passionate about eye care and it's about turning that passion into excellence. And so there were 3 areas of focus for me coming in. One was operational excellence, and I talked a lot in the calls about our needed focus on our supply chain and our ability to supply products around the world. We have a very complex supply chain from making everything from contact lenses to lasers to pharmaceuticals to OTC products in over 100 markets around the world. And so we've brought in a great new executive there. We've put a real focus on operational excellence. There are no quick fixes or shortcuts in doing this in a highly regulated environment. But I'm very optimistic that in '24, you'll start to see real improvements in our operational excellence, and that will continue into '25 because most of these things are 12-, 18-, 24-month fixes, but it's a real focus for us. The second is selling excellence. And we have a really committed field force all over the world. We are learning a lot of new things about launch excellence. We have -- 2024 is probably the year of the most launches in the 170-year history. And so far, with the few launches that we focused on, we're seeing real return. That needs to continue into '24, and we have to keep a real focus on it. And the third prong is innovation. And we need to restore Bausch + Lomb as an innovator. And we -- I'm looking at some of our R&D teams sitting in front of me, but we spent a lot of time really looking at 2 things: one, our talent, and we brought in some amazing scientists. We're going to continue to build our capabilities inside of our R&D team. We've started to really support the existing R&D team, whether that be in contact lenses or in surgical and certainly in pharmaceuticals. So that, I think, is really giving us the ability to think about things that we haven't thought about in a long time about how do we look for solving unmet need, bringing innovation, novel, new products to marketplace across the entire portfolio. And so that's the focus that we have. We have a road map to accelerate growth. We've made great progress on that in the '23 time period, but I'm really excited for '24 and the progress we're going to make.

Maybe just to add on to that a little bit. You operate in really 3 different segments: contact lenses, eye care surgical and then pharmaceuticals, both prescription and over-the-counter. What ties it all together? It feels like you're not necessarily the same call point, different teams for selling and so forth. But it seems to be working for Bausch + Lomb. So how do you think about all of those? And how do they sum up to more than the individual components?

Yes, it's a great question, Robbie. Look, I mean, obviously, the common factor is the eye. But the actual most important, I think, focus is the customer. And I think great customers do one thing well is they exquisitely focus on their customer. And when you look at eye care, the ECP is the center of our universe. And no company can service an ECP the way Bausch + Lomb should, right? And so whether you're an optometrist fitting contact lenses and starting to become more of a primary care provider of eye services, particularly surface disease, dry eye and other things like that, it's very important. And that's true for MIEBO and XIIDRA, but it's also true for Blink, right, because an OTC recommendation from a professional is incredibly important. On the surgical side, the same, right? The surgeon is not just a surgeon. They want to hear about capital equipment, lasers, Phaco machines, certainly IOLs, but they also want to understand the drugs and OTC options as well. And as you look at the world and how it's converging, many of these are becoming integrated practices all over the world. And so if we do our job right and we play to our strength, it's how do we service our customer better than anybody. And by having a full portfolio and leveraging that full portfolio, I think we can be in a position in relatively short order to provide the best customer experience to the ECP, who should be the center of everything we think about.

So there's a lot of different products I want to talk about. But maybe before we get to that, I want to look to the future in 2024 and realizing you haven't reported fourth quarter 2023 here. I think there were some public comments you made on the last call on how to think about '24. And I look across street numbers, and people are pretty close together in mid-single-digit organic sales growth for 2025. But it's really on the bottom line and down the P&L ICO, really wide divergence of estimates. Street is roughly flat on EPS year-over-year. We're a bit lower than that, really more on interest and below-the-line items. But just thinking about, one, how do you feel about consensus for next year? And any puts and takes on the top and bottom lines you can walk us through at this point?

Yes. So maybe I'll start, and then, Sam, you can jump in. Look, '24 is an important year for us. As I mentioned earlier, it's our year of launches across the category, right? MIEBO is the biggest investment launch that we have in 2024, the first full year of MIEBO and off to a really strong start, and we want to -- I always have the expression in the pharmaceutical business, you want to put gas on the fire, and we have a fire with MIEBO. It's really being accepted by ECP [ Zen ] patients. And so we do want to continue to invest in MIEBO. We're relaunching XIIDRA, and we saw some really good stabilization and beginning of growth in the fourth quarter and we want that momentum to carry. But we're launching contact lenses. We're launching IOLs, we're launching capital equipment. We have some consumer launches coming. So we have really a broad portfolio of investment. But we always want to do that and create leverage in the P&L on margin improvement. And so I look at your model as an example, I think you did a really thoughtful job around margins for '24. We do want to see improvement. If we didn't invest and we wanted to turn it on, we could have really put the gas on margin improvement. But I think you're going to see that as a steady improvement with '24 being a bit of an improvement and then '25 becoming bigger and bigger as we get into '26 and beyond. But Sam, please?

No, I think that's exactly right. And Rob, I echo what Brent said. I look at many of the models out there, and I think you've done a nice job with how you thought about '24 for us. And really, the key comes down to, if you start from the top line, you're starting down with how we think about the growth in the business. And we always said that we're going to be growing at or above market. So think about it, the market is around the mid-single digits. But also the key decision, and that's part of the comments we made in the last earnings call was we're early days in the MIEBO launch, and we're early days. We're just closing on our transaction with XIIDRA. And we knew that based on the early data that we've seen, that was something good with us, and we wanted to make sure that we're going to continue to invest behind it. So when you think about '24 for us, it's an investment year. That's how I think about it. There's -- I think Brent mentioned it also in the last earnings call, this is our highest number of launches we've had in BnL history. So you're going to fuel those launches with investments. And as you start thinking about the margin, it is not going to be a lift -- immediate lift from a year-to-year, but it's going to be a steady growth of margin as you go forward.

Maybe we could talk about both MIEBO and XIIDRA because both dry eye products, different, let's call it, parts of their life cycle, right? One is brand new, one is a little more mature. Maybe speak to the rationale for having both of these under the same house. And you touched on it briefly, but some of the early trends you're seeing, both on the MIEBO launch and the script progression there as well as your efforts to stabilize and improve XIIDRA?

Yes. So when you think about strategically why you want both products in your bag, it just makes a huge amount of sense. First, and probably the easiest answer, is market leadership, right? We are the market leader, and this is a really interesting market, which I know well from my previous days. It is incredibly promotionally sensitive. You're talking about 38 million sufferers of dry eye in the United States. About 18 million actually receive treatment but only about 1.5 million actually walk out with a prescription. So it is a massive market. And when you look at what happened, when XIIDRA launched into RESTASIS, the market expanded because you had 2 companies really promoting into the space. When Novartis slowed down promotion when they put the asset up for sale, you saw volume drop. When you see us pick it back up, it starts to expand again. And so the proof point is real that this is a promotionally sensitive market. Now look at the 2 assets that we have, right? We have, in my opinion, the best most both best treatment option for someone suffering from inflammatory dry eye in XIIDRA. It works quicker than the cyclosporin. It is a very good product. And then you have MIEBO, which is the only drug approved for evaporative dry eye. And so when you put those 2 together and you have a sales rep talking to a physician, you have a real therapeutic approach to the disease. It's not about a hammer looking for a nail. It's about, let's really treat the etiology of this disease with the appropriate treatment, whether it be an anti-inflammatory or an evaporative drug. And so we have that. We are the only ones who have that. And we can work with customers again, doctors in this case, in a much more meaningful disease orientation than you could when you're just a product. I think the other thing it does is it gives you the ability to invest in promotion when you have market leadership, right? For every person you move into prescription therapy, the overwhelming statistical odds is they're going to walk away with a Bausch + Lomb product. And so that really does give us confidence in the ability to invest in expanding this very nascent market of patients treating with prescription therapy.

What are some of the benchmarks that you would look to on XIIDRA that would make you think, wow, we really got this right and this was worthwhile? What would we be looking for in 2024 and beyond?

Yes. I mean I think you want to see TRx growth. And we saw that in the fourth quarter. Our team, our field force in the U.S., our management team, I think did an excellent job of integrating very quickly a new field force. About 97% of the field reps from Novartis came over. They came over with great enthusiasm versus being a small player in an asset held for sale to being in a focused eye care company that really cares about it, right? So that was very meaningful. And we're now integrating or the team just integrated the MIEBO and XIIDRA field force, and that just happened. And so I think we want to see -- we saw a stabilization. And now in '24, we want to see real meaningful growth.

Shifting gears a little bit. Maybe if I look at the margins for the different businesses, the surgical, the contacts and the pharma, pharma is the best margins. Surgical has the lowest margins, and fairly well below other peers in the eye care surgical category. What can you do -- or what have you been doing? And what can you do from this point on to improve the margins? And what are some of the different steps where we could start to see that move up even more meaningfully?

Yes, at a high level, and then, Sam, you should jump in. Surgical, I think, software is from 2 things. One is mix, and second was supply. And so during the COVID and coming out of COVID, we had to really scramble for componentry for capital equipment. And so we had to buy very high-priced componentry to maintain supply and maintain customer relations. And even that was a struggle. And that will continue. Working through that inventory will continue in '24. The other is mix. The reason you're in the equipment business is to get to the premium IOL business. And our premium IOL business is rather small, particularly it's mostly outside the United States. Grew pretty good, over 30%, but on a small number. We are launching our, really, first premium IOL at the end of this year. We've launched 2 monofocal pluses in Aspire and IC-8 or Apthera. And so we're building that portfolio to really service patients and physicians with a higher-margin portfolio. So it's a combination of operational issues and a combination of mix, and we are going to solve that over the next 12, 18 months. But Sam, any...

Yes. And just -- and Robbie, to just go in a little bit more detail. When you think about the disruption that took place with COVID, with the supply chain, was something that we haven't seen before. And for you to be able to shift and pivot with multiple suppliers, especially in the surgical part, it does take time because you have to qualify the suppliers. It takes time to be able to do that. And that's the runway that Brent is referring to is you're going to see in this year, you're going see it in 2024. The way I would think about it is we've been taking the steps and mainly using our balance sheet. We've been building up inventory. I think I referenced that in the last earnings call. We built up inventory roughly about $700 million or so to be able to mitigate some of those risks and what we're seeing in supply chain. But also, we've had I'll call the trough or the main point on the gross margin, when you think about gross margin in '22 where we've seen the most of this heading, we were running around 59.7%. Our guidance for '23 is roughly about 60%, 60.5% in terms of gross margin. So we're starting to see the steps pay back, but we still need time to be able to actually get to where we want to be. And obviously, the mix and the premium is always going to be a big factor as we go into the new launches into '24 and to '25.

When you were part of Bausch Health, I feel like surgical is probably a bit underinvested in. You're now in the middle of and about to launch a more competitive pipeline of family of products. At what point do you think, a, you can catch up to your peers in terms of competitive product portfolio? And then, b, when can you start to go on the offensive and put out first-in-class and best-in-class surgical IOLs?

Yes, I think that's a great question. I think you're right. I think that, that business was under invested in. Going back to my -- one of my main criteria is innovation. And I think as you look at the products we're launching, it's to become competitive, right? And that's the '24, '25 cycle. The question is, can we jump ahead to being leading. And I think we can. There is a lot of innovation in surgical, particularly in IOLs. There is a whole, I think, future of adjustable accommodating IOLs that are in development. And we are looking at investing and/or doing it with external parties and collaborating. And I do think in the next 2, 3 years, you'll see us meaningfully participating in that part of the market and leading.

Your first big acquisition as the CEO here was on the pharma side. Do you -- it sounds like fair to say that it's not just pharma, you're looking at that surgical and potentially, I guess, contact lens. There's less available, but surgical and the med tech side might be open for inorganic as well.

Yes, I think that's right. Look, even with the acquisition of XIIDRA, pharma is about 25% of our business. So we didn't tilt the company into one direction or the other. That being said, it was a great opportunity. Novartis had it for sale, and it was the perfect asset for us. And so like I tend to do when I see something that strategically and financially makes sense, you play to win. That being said, when you look at our ability to innovate, one area where we have deep ability to do it ourselves is in contact lenses. And we have a very strong team that can do that, and we are. We have some really interesting early contact lens innovations. They're too early to get excited and talk about just yet. But I think over the course of this year, we'll know a lot more. And then you'll hear us start talking about that innovation. Surgical, you're right. I think we can -- we are investing in our Phaco platform. We're going to invest in our IOLs. We have a steady stream of launches coming on the premium category, but we're going to supplement that with external science and innovation. Pharma, the same. And so it's about keeping innovation in all of our franchises moving forward as an important ingredient to success. That is the business we're in when we're in health care is bringing innovation to patients. And so when you forget about that, in fairness, I think Bausch + Lomb has forgotten about that for several years, in large part, not -- there are exceptions, but we got to get back to it. That's how you lead, that's how you win.

Sam, maybe remind us where we stand now on debt levels, debt payback promises and when you could start to go on the offensive again with M&A?

Sure. And I think what we -- right before our XIIDRA transaction, we're seeing roughly about 3, 3.5x levered company. Obviously, we added a couple of billion dollars with XIIDRA transaction, and that -- sort of we've seen that leverage go up. Our commitment and how we thought about it is that we're -- it takes about, call it, 24 months, 18 to 24 months to start seeing the benefit of the acquisition and the XIIDRA sort of benefit in terms of the debt leverage. So our view is always towards the end of 2025, we'll start getting to the leverage back to the 3.5x.

Okay. So -- and that's probably the time -- would you have capacity to do more tuck-in deals before then? Or is that sort of the time frame to think about more external?

Well, the way I think about it is when you think about from tuck-in transactions, you always have capacity to do tuck-in transactions, right? I think we're going to default back to the points that Brent says, if it strategically makes sense, financially makes sense, I think we'll be able to go after it. I don't think you're going to see us doing anything significant in terms of the billions.

If we shift gears. Surgical, you're just now launching your competitive products in contact lenses. You have been launching the competitive portfolio, particularly on the daily SiHy side. Maybe speak to the trends you're seeing in your contact lens business. You've had some really good growth there. You've had -- and we'll talk about some of the speed bumps recently. But in terms of the overall trends and the demand for your products, it's been really healthy and robust. So maybe speak to that business.

Yes. So well, contact lines is a heritage business. When you look at what's happened with the R&D development of daily SiHy for us, INFUSE or ULTRA daily, depending on what market you're in. We have a great product. It is a great lens. We're launching the multifocal. We're going to launch the toric and then the multifocal toric, and we have to launch them globally in all the markets. That is in process. . The team has done a great job. You mentioned -- my first week here, we had an issue with being able to distribute. Our distribution facility had an upgrade that didn't work, and we were -- shot ourselves in both feet, I would say, is the best way to think about it. We won't do that again. That's not acceptable. But that did stymy growth for us in '23. That issue is almost completely resolved. It will get resolved completely this quarter. And so '24 becomes a very important year to show that those are great products. We have a great portfolio, and we have a great team, and we've got to show it with execution in '24. But Sam, any...

No, that's exactly right.

Maybe sort of same flavor of question. Do you feel like you have the right portfolio now in the contact lens business, and anything you'd be looking to at or potentially anything you'd be looking to exit?

Yes. Look, I think we have a -- today, we have a competitive portfolio. I can say that. I could not have said that perhaps 2 years ago. Today, we have a competitive portfolio, but we also deserve to lead, right, not follow. And that's where R&D really steps in. And again, we have a few programs that we're starting to get excited about. A bit early, but our R&D team in contact lenses is excellent. And I'm excited to see what we can develop this year and hopefully start to talk to you guys.

Maybe if I shift a little bit to the balance sheet and cash flow. And you did the XIIDRA deal, brought leverage up. How should we be thinking about cash and Bausch + Lomb's utilization of cash, your conversion, both right now and in the future, what you aspire to move to?

Yes. And when you think about the components of the business and also with the XIIDRA deal, we can't forget that. XIIDRA is also high cash generation asset. So that was one of the key attractive things for the transaction. But when you step back and just look at it, I think about just the cash deployment in general and capital allocation. I think one of the things that we've been focused on from capital allocation is investing in the business. I think we just talked about the lens business. I think that business have received roughly about $1 billion of investments over the last number of years to be able to build up capacity. That's an area we continue to invest in the business as we go forward with the Vision Care in terms of CapEx. But we're also investing in many of the product launches that we're talking to, the MIEBO and other launches that we have in 2024. So the #1 priority from a cash deployment right now for us is really investing in the business, and putting cash back in the business. That being said, the leverage and the strength of the balance sheet is very important for us. And that's really -- we're not losing sight of that target for end of 2025 of how we can actually get the balance sheet to where it should be.

Just pause, see if there are any questions in the room.