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

Good morning. Welcome to the first day of the Morgan Stanley Healthcare Conference. It's exciting for important disclosures, please see morganstanley.com/researchdisclosures. But I'm thrilled, obviously, to have Brenton and Osama, CEO and CFO of Bausch + Lomb, respectively. I know you guys don't actually do a lot of these conferences. So massively appreciate you taking the time to come here.

First question I have is, your lawyers must be pretty good because we have to read a whole thing.

Yes. I think we just like pointed off in that -- it's actually my home page.

I mean why don't we just like jump right in. You guys have been on quite a journey over the last few years since becoming, I guess, your own thing independent in that way. How are you feeling about where you are now, I guess, both strategically but also the cultural side of that?

Yes, it's a great question. Thanks, Patrick. So look, I guess we spun out in '22. I joined in early '23. And so my frame of reference really is '23 and beyond because '22 wasn't a full year as a public company. And when I joined, I was very clear, I think, in the first few earnings calls that we had some work to do. And I prioritized and I created what we call our road map. And I prioritize in early phases, three things, right? It was selling excellence, operational excellence and innovation. And so those have been the primary focus of our company and our team for the last 2.5 years or thereabout. And so if you kind of step back and look since '23 on selling excellence, we really did focus on building our capabilities and our sales forces across the world. And since '23, our growth has been about 24%, about 24% top line growth. So I think it gives us a pretty good check on accomplishing that. And on top of that, we launched probably the most robust launch cycle of products that this company has had in 170-plus years of existence. Operational excellence. We -- when I joined, we had a lot of back orders. We couldn't supply a lot of products. Some of our businesses, particularly Surgical was hit pretty hard by that through post-pandemic supply chain disruptions and other things like that. We brought in some really great new leadership into our supply chain. And I would say we've stabilized the supply chain and I'll talk about where we go next from here. And then on innovation, we spent a lot of time building our pipeline so that we could replicate the cycle we're going through of launches in a few years from now. And I think we've done a really nice job building that pipeline, and we have an Investor Day here in New York on November 13, and we'll take a deep dive to share with investors all the work we've done there and why we're excited about the pipeline. And so I feel like we're now ready to think about the next phase of growth and culture, right? You asked about culture too. I think one of the things we've really focused on over the last 2.5 years is creating this culture, the best way I would describe it is individual accountability and grit. And what I mean by that is reducing bureaucracy, reducing meetings, reducing committees and really getting colleagues that want to actually walk their sleeves, do the work, be accountable, make decisions, get work done and do it with grit. And a great proof point of that is very -- sometimes you have to have an unfortunate incident to see how resilient your company is or how great your company is. And so the Surgical recall that we had with the enVista platform in the first -- end of the first quarter was a pretty important situation, right? We saw some quality signals. We saw some early signs of tasks with the enVista platform across the world. We made the decision to voluntarily recall it. It was an important decision, one that I would make every time the same way to put patient safety first. But the old Bausch + Lomb would have been out of enVista for a year or more. The new Bausch + Lomb, because we work so hard together, hundreds of colleagues from all over the organization, not just Surgical, but pharma R&D, quality operations, customer service, we brought in outside KOLs, outside of tax experts, and we just scoured the universe of thousands and thousands of different potential contributions and we figured it out. Even the FDA said to us, in most cases, of tax, you never find the answer. You just never -- it's like looking for a needle on the, haystack. And the fact that we could figure it out and get back on to the market shows that resiliency, that grit culturally that's starting to really embed. Now culture doesn't change in two years. It takes longer than that, but I'm pretty proud of how we reacted. So all in all, I think we're exactly where I had hoped we'd be, but we still have some work to do.

Osama, on the finance side of things in the organization, how have you felt like the controls are? Like how has it changed? And how are you feeling about things at the moment?

I think just building on what Brent sort of went through, I think we've been really -- the financials has been reflecting the steps that Brent went through. And if you see the performance of the company since '23 and you see sort of the top line growth that we have been putting on the Board has been quite meaningful and significant reflecting the commercial excellence work and the work that we've been doing. We've also been putting in also our support behind how we can position our assets to maximize the value of those assets, right? We've seen that with our launches that we've done within our Pharma business. We're seeing it with the Lens business, Consumer business. So really putting in our effort behind how you can get the commercial aspects over. And then now it's the second phase for us in terms pulling that side through, looking in terms of the margin and margin expansion as we shift into our next phase.

Makes sense. The results of some of your peers have -- and generally, the economy as a whole has wondered -- of course people to wonder about the health of the consumer, I guess, what are you seeing on the consumer side, big picture? You touch the consumer in a lot of different ways. Any sort of comments currently on what you're seeing?

Yes. So I think it feels like a pretty typical consumer still at least in our -- in health care. I would say a couple of dynamics in the market. First, retailers have been reducing inventory. And so consumption and sales don't quite match up. We still see very strong consumption. We have seen large retailers, the drug chains, Walmart, Costco, others. Amazon even reduced inventory. So that does put a little damper on actual sales, but consumption remains quite strong. Brands like LUMIFY has -- second quarter hit all-time highs and continue to. Blink has been a great performer for us. And so I think it's good. When you look at the health of the consumer data across the board, there is a bit of a bifurcation and most of our brands do tend to stay in the top part of that bifurcation. But you do see it a little bit in the vitamins, where people are opting for private label. But nothing, I think, to be concerned about. And typically for us, I think next year, when we launch AREDS3, I think there's another big leg of growth for us in vitamins, which is probably the only area that's seen a little bit of an impact.

Yes, I definitely want to circle back to that. But maybe on the Pharma side of things, like MIEBO has been a massive success for you guys. I think certainly versus where everyone's expectations were. How do you felt about that asset, there was a tremendous amount of A&P that went behind it really promoting it? How do you feel about that? And what's the long-term journey here?

Yes. So MIEBO is something I'm very proud of. We launched that in the back half of '23. And when you look at that launch for an eye drop, it's probably the best launch in the history of the space. And I think we just continue to see more growth, more prescribers, more adoption. And we just published a Phase IV study that shows it works immediately and patients self-describe it as silky and smooth. And so when you have something like MIEBO, which is just great medicine for dry eye, right, that's really the only treatment for evaporative dry eye, but the risk benefit is so tilted towards benefit. It's such a well-tolerated product and instant gratification for the patient. And that's what ECPs want. They want the patient to feel good immediately and move on. They don't want to keep coming back and talking about dry eye. So it's really a nice product, and I think it's got a long runway of growth for us. In terms of investment, you asked about like most pharmaceuticals in the first two years, you're in heavy launch investment mode. That's pretty typical. I don't think it's -- I've never seen a successful drug launch that doesn't do that. My whole career, that's how we've done it. And I think year 3, as you look at 2026, we kind of start to transition from launch mode to growth mode. And so you'll see us particularly as a percentage, but as an absolute you'll start to see investment taper and then you'll see really the profitability of that drug really starts to take off at '27, '28 and then we have it for a long time, right? And that's the way you invest in a successful drug launch.

I wish anyone would call me [ if okay and smooth ].

I'm happy to.

Yes, please. Why do you think like dry-eye is a funny category? Why do you think there's been so much less cannibalization that you might expect, like XIIDRA and MIEBO did not cannibalize each other at all. You saw similar dynamics with like the space is not like -- why do you think that is?

Because it's a huge untapped market. And so right now, most people -- there's various numbers of how many people let's say -- let's just use the United States, maybe 60 million people with symptoms or types of dry eye. Some treat in the OTC market. Obviously, we like to meet them there as well with our Blink Franchise and other drops. But you only have about, what is it, 1 million, 6 million, 7 million treating with prescription therapy. And so you really have -- you haven't even reached any kind of maturity of prescription intervention. And so when new competitors launched -- when I ran Allergan and we had Restasis, people were -- I remember people sitting in your chair, used to say to me all the time, when XIIDRA launch, Restasis is done, it's over. And I used to say it's not a fight to the death between the two of us. This market will expand and cover both, it did. MIEBO launched, it expanded to cover that. You're probably going to go to trip to here from Alcon. It's going to expand to cover that. And so this is a market that still is in early stages of pharmaceutical intervention.

You obviously have a long history on the therapeutic side. Should we expect, over time, Bausch + Lomb, Move a little bit increasingly more on the therapeutic direction? Are there any areas of assets that you think are interesting when the company doesn't play in today. This wasn't applied by our M&A bankers.

No. I mean I think that the strength of Bausch + Lomb for 170 years has been to be a comprehensive eye care company. And I think when you come to Investor Day in November, you'll see, this isn't about doubling or tripling down on Pharmaceuticals. It's about building all of our businesses. And they really do support one another, an example. We built the largest dry eye field force in the United States for MIEBO and XIIDRA. But they also sample Blink NutriTears for consumer, right? And the optometry, the contact lens for us also does. So they all work together. That's the unique strength of a company like Bausch + Lomb, to really make sure that we have surround sound in the ECP office, whether it's an optometrist, ophthalmologist, a retina surgeon, cataract surgeon to really make sure that we can bring them a comprehensive suite of solutions regardless of they're doing surgery, recommending an OTC or writing a prescription.

You also -- you guys are working on a dual action product on that side of things. Is it too early to talk about that? Or do we have to wait for November?

I think it's probably best to wait for November. We hope to have it in clinical studies this year so soon. But super excited about that. I think when you look at the etiology of the disease, the vast majority of the people who suffer from dry eye have first evaporative and then, of course, they have inflammatory disease. And as I was mentioning earlier, ECPs really do want the easy button. They want one -- they want to write one script that is well tolerated and solves the symptoms of dry eye for the patient, right? Because patients feel symptoms, right? They don't see signs, they feel symptoms. And a combo of the best of evaporative with the best anti-inflammatory is the easy button for ECP. And as you think about life cycle strategy for us, XIIDRA has a mid-20 32 patent to get us a new innovation this decade, right, that really can satisfy patients and ECPs in the way they want to treat their patients with hopefully a drug that's incredibly well tolerated and very effective is really the right path for us. Think about asthma, there's so many other conditions that treat with combination therapy, dry eye and multifactorial disease should have combination therapy.

Could that be something that eventually opens up the EMEA market because coverage there has always been difficult to come by?

Yes. It could potentially could, and that's our current plan, although we have to look at pricing and pricing is getting more complicated in the OCD nations, right? And so we just have to be thoughtful in how we do that.

Good point. I'd love to quickly pivot into the contact side of things. I mean there's a lot going on. One that's like initially topical and sort of top of mind is, there's really been one player, I would argue on the private label side, predominantly on the contact side, but you guys actually had a fairly decent win -- fairly recently on the private label side. Is that something you're looking to explore more? Anything you can give us on that?

Yes. I mean. For us, and our success if you think about it, right, since last year, since '24 and then in the first half of this year, we are the fastest-growing contact lens company in this space. 10% growth last year, 7% growth second quarter. And what I'm most proud about that growth is, it's obviously being driven by the daily Daily SiHy, right, with exceptional growth, what, 75% last year -- growth last year. 36% this second quarter. So really nice growth there. But more important to me in the second quarter was ULTRA 12%, BioTrue 2%. And so what you see is no leaky bucket, right? We're continuing to grow by not cannibalizing our own products. And that's really, I think, it was a mandate to the team and our leadership there and Yang, who runs that group, I'm very impressed with how her team responded because being able to grow your new products, it's hard, but it's the easier thing. But to keep your older products growing while you grow your new products is a real sales excellence, and that's what we're looking for. So yes, private label will always play a role, but it's more of a niche role for us. It's not where we -- we want to lead with innovation and the best products and the premium price products, but sure, with our older technology, absolutely, you want to keep those growing.

The other topic that you guys have hinted that, over the last year or two is the biomimetic side of things. If you're in our shoes, is that something you think is -- loaded question, iterative or something that could really change the competition?

So the hope is that it really changes. That being said, it goes into its full clinical in October, so in a few weeks, and we have to see the results of the study, right? The intention is, it is a breakthrough material. We will provide a lot of details on November 13 around the material. But you really don't know, it's like anything else. You need the data, but I'm super excited about it, the team is super excited. And most importantly, just for history, when I joined the company, actually it was my second or third day, I was up in Rochester with our R&D group. And we did a bunch of presentations and they set up like a science there. And they had the team, small teams, junior people with posters, and I walked around and I spent 5, 10 minutes, and I got to the Biomimetic material group, right? And they had the poster of what it was. And I just -- I stayed there for 30 minutes. I was so excited by reading what they had. And I called the head of R&D, and I said, "Do you think this is real. And he said, "Well, they're pretty smart. I think it's probably real. I said, how about this? There were two of them that I like. I said, let's get the two groups together. I'll meet with them every Friday and that's how them compete, but one requirement, whatever they come up that has to be made on existing capital equipment. We are not going to spend another $1 billion on capital requirements, right? We're just doing that. We're at the end of that cycle for the daily. We don't want to do that again. And he said, "Well, now you're making it really hard", I said, "Well, that's the game, right? We're going to only do this if we can make it on existing equipment" and to be fair, both of them are going to work. Well, the biomimetic for sure, they also had a low-cost SiHy. And I just had the Friday update and it looks pretty promising. It's not quite as mature as the biomimetic. But I think both of these teams are going to win. It's really, really rewarding to watch that.

Given the investment cycle that happens on the CapEx side and then contacts, to your point, are you -- do you have some of the -- do you have some spare capacity? I know it's very difficult to work out like if the demand comes through, how are you going to deal with that?

On the new?

Yes.

So on the new on the Biomimetic we do have the capacity. And even if we had to add the capacity, those lines aren't nearly the cost of the lines. So if it's super, super, super successful, maybe we'd have to invest a little bit but not magnitude wise, it's not even close, right?

A little bit on Surgical as well, because I have an unhealthy obsession with IOLs. But the -- like [ NV ] was doing unbelievably well. The recall is dealt with, I think, faster than like you or anybody expected, but it seems to be coming back. How are you finding that product's reintroduction to the market?

Yes. So I'm actually quite pleased with the reintroduction to the market. Clearly, it was a step backwards, not something you ever want to go through and probably took a few years off of my life along the way. But that being said, I think you see KOLs really coming back to it. You see really good results from outcomes from patients that get DMD. And so our biggest challenge right now is just building up the supply to do full consignment. So there's still many surgery centers that won't implant the lens unless they have a full consignment. We are very close to being able to do that, but we had to build a lot. Remember, we had -- but all the other ones is a side and then start over again. And so the manufacturing team has been working seven days a week, three shifts a day and we're very close to getting to full consignment. So net-net, I would say our goal is by Q1 to be back where we were in Q1, and I think we're on track for that.

What do you think is going on in the U.S. IOL market? Because that's just been a massive divergence of performance between different players and a lot of confusing data -- like is this just noise? Is it a consumer thing? Is there anything you would add?

Yes. I mean I think in fairness, the market has become more competitive. And some of the newer technologies are showing better outcomes than the older technologies, which is what you would expect to happen. So I don't think that's too hard to understand. And so I think that's really -- I think that the market seems fairly stable. Demand feels fairly stable. It's been -- there was obviously a boom after COVID, but if you normalize for that, it really hasn't changed in a long time, good or bad, right? And so it feels very typical to me.

One of the -- within the Surgical market, I guess, I could go broader than that, but it's been really evident private equity is basically even hoovering up, massive amounts of clinics kind of everywhere. Have you noticed any change in the discussions with the customer base in terms of like equipment budgets or like anything that will -- any implications from that move?

Really. I mean I think most surgeons were always looking for the best deals. Private equity is like-minded that way. And so I don't see it too different. Obviously, when you see more scale to a customer, obviously, winning that customer becomes increasingly more important. But if you can -- there's not many organizations with the full service infrastructure that perhaps the bigger guys have. And so sometimes having a full service infrastructure is critical to winning those accounts.

To your point like there's only really two of you that have quite a lot of breadth in terms of category areas or kind of you and Alcon really. Do you think that helps in that customer grouping?

Absolutely, it does. Yes. I mean if the capital equipment did it support the IOLs, you could argue why would you be in the capital equipment.

I mean that is another part of the business that doesn't get a lot of questions all the time, but how are you feeling about the equipment side of things? It's a control to one of your peers, but for you guys less so.

Yes. I mean I think the long-term trend, I feel very good about it. I think you're going to see some variability given Alcon has a new unit. They're doing a lot of demos. When they do the demos. Even if the clinic doesn't buy it, it takes two or three weeks of consumables and other things away from us. And so it just creates a little bit of noise, but nothing I'm overly concerned about. Stellaris is still probably one of the best phaco units out there, it's incredibly stable, incredibly reliable, and that's what surgeons want.

And you haven't noticed any change in like -- people always worry about the investment rate in general because of like CapEx budgets and things like in totality, it sounds like it's pretty stable.

No, I don't see that. I mean I think you're going to see variability in the Surgical market based off of reimbursement like the U.K. just had some shifts and how the reimbursement premium category, they want it all to go through the NHS versus private clinics. So those types of things are always going to be part of a global business when you're selling in 100-plus countries. But I don't see anything on a mega trend basis that I'm concerned about.

Did not know about the U.K. I'm glad I live here now. I mean like we talk about the breadth of the business in different areas, like how do you guys like -- how do you think about like -- how to allocate capital? Because you guys have often said that you don't love any of your children more than the others, which is different to me. I massively prefer them. But like -- how do you think about the -- like do you get pitched internally with the ideas, you have to kind of rank order? Like how does it work?

Yes. There's a lot of discussions that take place internally. And it becomes even harder when you have all your business outperforming , right? So -- which is -- it's really a debate that Brent and I have with the leadership team all the time. But what we really focus on is really how can you maximize the ROI and the return on the investment that you're doing. I think we use that as our north star in terms of how we allocate this capital. And you've seen it in the parent that we've done with investments behind the daily SiHy and the growth that we're seeing, we're seeing it behind what we did with dry-eye category as a whole, not only just on the pharma, but also on the consumer side. So you'll see sort of the ROI metrics for us plays a big factor in our thinking because of our capital allocation.

To Sam's point, we wanted to create a beachhead in dry eye. So obviously, we acquired XIIDRA. We acquired Blink for -- but we also bought Trukera for Surgical. So the strategy wasn't just about building pharma. It was about the whole comprehensive business.

Because I remember the time you guys came out, there was a -- it's obviously [indiscernible] but there was a sense that there was a massive distribution network and all these things but there's not enough product going through it.

That's true.

And as the dry eye push and the ...

And remember, dry eye for us is also Europe. ARTELAC is a star performer on what was a 30 -- high 30% growth in the second quarter, which is our OTC dry-eye drug product in 40 countries outside the U.S.

I definitely want to touch on OTC. That's another part of the market that gets kind of ignored but you walk around CVS or whatever. And you can -- you see all the products, you see the competitive environment, the shelf space, the relative allocation. How is that looking? You mentioned a little bit of for the lower-end consumer down-trading in the private label, but it sounds like the higher end consumer is pretty sticky?

Yes. That's exactly right. And you see it in LUMIFY in Blink, right?

This is maybe a niche question. Are the customers in terms of the retailers coming to you guys -- like shrink for them has gone up massively. Are they coming to you, asking for more like promotional work or sort of that to help it out? Or is it fairly similar?

No, not out of the normal course. They always do want that, right, we'd say very disciplined there. But you do see them working, as I mentioned earlier. They have worked two weeks of inventory out of almost every part of the channel.

And we brought up Blink. Thank you guys, I have got some on my desk, actually back in the office. But the -- like how is that introduction gone? How are things working? Like what's the demand looking like?

Yes. So Blink has been a very strong performer since we acquired it from J&J. And I think what we really -- we did two things that I think are really important. We changed the way we promote it. I think the DTC is probably one of the best DTC pieces. We're really targeting a different demographic than typical dry eye, right? We're targeting younger gamers, people are starring at screens, and that has resonated. And I always say the best way to prove, if an ad works is, if its sales really grow, right? Sales is the best KPI. I don't care about winning awards or creative awards. It's, can you drive sales? And you see that with the Blink spot. When we run it, sales go up. It's very, very correlated.

And obviously, you guys -- into that category, you do a fair amount of DTC work, like the cost of doing the DTC work at the moment, it's at least stable and do you like...

It is, but it's changing rapidly. We are now moving to the AI world of consumerism. And so we are launching very different ways of promoting products like Blink and LUMIFY using AI, using very hyper personalization of ads on social media. And in fact, now LUMIFY and I believe Blink are available on the TikTok Shop, that was a big breakthrough this summer. We've been working with that for a year. TikTok had a role against eyedrops, but we worked with them to convince them. It was safe and okay. And so now you're starting to see one click buy, your ad that you'll get will be different than what I get will be different than the one everyone else get.

I just think I've seen a chunk more like my Instagram doom school and wheels lack of stuff popping up. That's really interesting.

Yes. It's getting really -- the technology is really cool.

And then on the investment rate, how are you guys thinking about a little bit of tuck-in bolt-on M&A relative to the base business? I know you've deprioritize large external M&A, but as a concept how do you think about allocating that?

Yes. I mean, obviously, one of our top priorities is to delever. And so we're very thoughtful about spending cash. And I'll be honest. I think after November 13, you'll see that we don't need to do anything. Even if you risk adjust the pipeline, if there's enough shots on goal, I think to keep us very fresh and innovative. That being said, if we see things that make a huge strategic sense and a great financial profile for us and ROI, as Sam said, of course, we look at it. But the best position to be in is not to have to do it. And so we're not going to overpay, we're going to stay very disciplined and we'll look for things that really help us most likely intellectual property, whether it be in Surgical, Contact Lenses, Pharmaceuticals, you name it, there will be intellectual property.

And not to steal the thunder from November. But how do you think about investment in the base business relative to growth because you can delever by paying back debt, of course, so you can also grow faster.

And so both are an important part of the strategy. And just to tease out November 13 a bit. One of the things that we're going to do -- obviously, the priority is to show our investors our pipeline. But the second is to also lay out some long-term financial metrics. And so earlier this year, we started a program called -- we're calling Vision '27. It's got a couple of really important goals to Vision '27. Some of them are cultural, some of them the way we work, how we organized talent. But the ones that probably the most important for investors or financial metrics. And so we have -- Sam and I have spent a lot of time thinking about what is our financial metric entitlement. Where should a great -- if we want to be a great company, where should a great company look at gross margin, EBITDA margin, top line growth. And so we started this project in January. Obviously, it was a PowerPoint in January, now, it's turning into actions. And so we are really excited to walk you through that on November 13 to show you how that will impact long-term performance, particularly margins.

I know this is always a tricky question, but I always like to end on it, which is, you guys are public, you get a lot of questions and investors, people like me, what are you surprised to -- both of you, that you don't get asked about? Or what are you surprised there's such a focus on relative to your internal focus?

I mean obviously, we have self-inflicted, but I never thought I would spend any time talking about generics, at Bausch + Lomb. I spent a lot of time, in the first six months talking about generics self-inflicted, but it's, what, 3%, 4% of our business. It's a nice business for us to be in. We utilized our capacity in our Tampa manufacturing plant. It can be very profitable. And obviously, we had a falloff in the beginning of the year because of new competition coming in. I used to run activist. I sold it to Teva. I know the generic space quite well. And unfortunately, you can see some of that. We feel good about its recovery. You saw sequential improvement in Q1 to Q2. You'll see more improvement in Q2 to Q3 and then Q3 to Q4. But that business will always be $45 million to $50-ish million business. And could it swing $1 million or $2 million one way or another, of course. But hopefully, we don't have to talk about it too much more after this year. That's -- I keep saying to the team, we got to deliver because I don't ever want to talk about this again.

And Sam, were you surprised, you get asked about or not asked about?

Well, I think when you look at the business and the top line performance that we've seen, it's been just amazing. And I think it's really the strategy of working and I think we're getting to an inflection point. And I think we'll be more discussion on November 13 as we talk about the next phase. I think that's the excitement that we would love to share with everyone on our Investor Day.

Look we need to improve margins. It's not going to happen overnight, but it's going to happen in time. And it's just -- to really claim, I believe we're the best eye health company, but for all of you to believe it, we have to have better margins.

Looking forward to November. Thank you so much, guys.

Thank you.