The Cooper Companies, Inc. (COO) Earnings Call Transcript & Summary

Good morning for those of you on the West Coast and good afternoon for those on the East Coast. This is Marissa Bych with Morgan Stanley medtech equity research. And I'm back again with now, Brian Andrews, the CFO and Treasurer of Cooper Companies; and Kim Duncan, the VP of Investor Relations. Brian and Kim, it's great to have you with us. I think this is the first time we've had you for a live presentation at our Morgan Stanley healthcare conference. So hopefully, the first of many and hopefully in person next year. We'll see. But great to have you here.

There are a number of dynamics, I think, we should talk about today. We can talk about kind of near-term COVID-19 recovery and then some of the new product launches. MiSight, most importantly, has been a focus. And maybe get into some of the financials as well. But let's just start with the nearer term, if that's okay and maybe kind of some of the commentary you gave for your fiscal third quarter, which I think was exciting to investors as far as the pace of recovery that you are seeing, particularly in the contact lens space. You had multiple drivers of that July to August improvement, right? So it sounds like there was optometry market recovery perhaps with kind of optometry offices reopening, consumers being more interested in wearing contacts again. You called out some restocking dynamics and then you called out contact lens market share gains. So as you think about the recent quarter and where you are today, how much relative credit would you assign to those kind of 3 factors in the improvement that you talked about in August versus June and July?

Sure. First of all, Marissa, thanks very much for having us. I'm happy to be here today. It's a pleasure. Good to meet you here for the first time. And hopefully, it is -- we're able to do this more so after this year. So thanks. Your question is a good one. I mean, certainly, we -- based on our fiscal quarters, when we talked about how COVID hit us in Q2, we talked about 3 main drivers of what led to some of the declines. And we talked about consumption, really usage, consumer usage of lenses really dropping, inventory in the channel contracting and then new fits taking a big hit. I mean as markets closed and foot traffic just came to a screeching halt, you just didn't have any new fit. So those 3 aspects, we talked quite considerably about in the Q2 call. And then more recently, just a couple of weeks ago, we were able to sort of update sort of what's happened since then. And I think what we saw over the course of the quarter and as we've seen month after month continuing to improve is consumption has improved. So what got somewhat maybe overblown around consumption really related to, okay, well, if everything is closing and everyone's going to be working from home, what does that do to consumption and usage and usage patterns? And I think a lot of people felt like, well, wow, if nobody is out and about and no one's going to the office, people are just not going to be wearing their lenses. And that really hasn't proven to be anywhere nearly as bad as it was made out to be. As we've gotten back-to-school and really what's now back-to-learning, people that have needed vision correction are back to wearing their lenses again. And for those of us, like right now, we're on a Zoom call and many of us are on now Zoom calls quite frequently, we're seeing -- I'm looking at myself on the screen, and I can see myself and if I need a vision correction and many people do, they're returning to wearing contact lenses and maybe even more so because now they can see themselves. And for the same reasons, either -- whether it was for vision correction or just vanity, you're seeing that happening. And so consumption really rebounded for us in the quarter and continues to move in the right direction. And the consumption trends that we saw also led to -- where there was inventory contraction in Q2, we saw a rebound in Q3. And so we talked about sort of $35 million being removed from the channel in Q2 and roughly half of that coming back to us in Q3. And really, inventory should be a nonissue and really be behind us as we exit Q4. So all of those things, those 2 dynamics are improving week-to-week and day by day. And really, what you're left with is new fits. And if you look at the global market, the majority of optometrists are open, all around the world. What you're left with is still new fits and foot traffic being impacted because you just can't get enough volume into those optometrists' offices. In the early goings, new fits were being -- or optometrists were seeing sort of emergency cases. They were seeing -- they were working with their existing patients on just getting them a new year supply of lenses. But new fits right now are probably about 85% of where they should be. 85% of optometrists are fitting new patients. And that's improving, but it's still a limiter on -- that the industry is dealing with it, but improving.

Okay. Great. And I just wanted to go back quickly to the destocking and the restocking dynamic because there have been a lot of questions around it. It sounds like you're saying that office inventories should be at a more stable go-forward level from here versus what you've seen. And in that case, obviously, the question is why the fiscal fourth quarter deceleration in the guide because I think maybe there was some presumption that there would be different inventory dynamics there or underlying trends that were a little bit weaker again year-over-year relative to August where you had that $35 million benefit come back or maybe close to $35 million. But just talk to us about how you got to the guide from where you are today. You did talk about it on the call, but how should we be thinking about that in light of your comments on stocking and in light of your comments on steady progression still today?

Yes. No, that's a good question. So I think when we talked about inventory rebounding, it's -- it may have been a little bit of an oversimplification to say, hey, $17 million is coming back in Q3 and $17 million is coming back in Q4. In reality, inventory levels are definitely getting back to where they need to be in order to ensure that the customer experience is not impacted, that patients are getting their lenses in a timely fashion. But does inventory actually get back to pre-COVID levels? Probably not. So the number may actually be a little bit less than that, that actually comes back. And certainly, we're having success in doing more direct-to-patient shipments. So some of the trade-off in terms of stocking happening is now being replaced by us direct shipping. So the inventory piece is one factor. Now we talked about being up, that August was a good month for us. Now some of the August -- some of the growth that we saw in August is obviously attributable to inventory. So if you kind of net that out and say, okay, maybe August was roughly flattish. The rest of the quarter, you're looking -- we're comping, first of all, against a Q4 of last year that was up 7%. And then you also had the benefit last year of buy-in associated with a VAT increase in Japan. So we've got some tougher comps in the next 2 months of the quarter that on top of the fact that there's just still COVID uncertainty. I mean I think if you go back to our Q2 call, we thought that Asia-Pac was going to return to being flat in Q3. And so we expected that Asia-Pac was going to be $10 million higher than we saw in Q3. So there's still some markets that are slower to open. And while we're seeing progress everywhere and in some places more than others, there's still that COVID concern out there, what happens and how do things progress. And -- but we put a range out there that we think is a reasonable range and one that we're optimistic about at least meeting or beating. So that was the justification for it.

Okay. Great. That's very clear. And if we can go back to one more thing from the recent 3Q call, the recent share gains that you talked about, which I believe, and correct me if I'm wrong, were as of June end, so you gave those share gains on a traditional calendar 2Q basis. But one, how would you kind of split those gains within contact lens categories? Do you think those gains were specific to SiHys and other dailies, for example? And then secondly, have you seen signs in the channel? I presume you have, but Alcon also spoke very confidently this morning about their share position with PRECISION1 starting to gain some momentum. So what signs have you seen in the channel from Alcon on PRECISION1? And maybe from Bausch's new daily SiHy lenses if it's not too early there?

Yes. So we're having our success in a variety of different areas. I think where you saw our success in Q3, came from a few different places. Number one, we've been investing strategically in things like key accounts, key accounts where we have strength with the fitters and developing relationships with those key accounts, creating stickiness for their customers and their patients, developing customized solutions with those key accounts. That's been a major focus area, where we've been talking about for several years now, just really kind of advancing the ball. You may have seen last week that we launched in 1,000 Lenscrafters stores the Ray-Ban lens. So that's just another one of those kind of advancements. We're under-indexed with key accounts in dailies. We've always had a strong key account presence with our FRPs, with Biofinity and Avaira and so forth. But with dailies, we're about 19% of the dailies market, in the low 30s, around 33% of the FRP market and towards the multifocals. That's always -- that's been an area where we've taken share and we continue to take share is just the strength of our daily portfolio, clariti with the sphere or toric and multifocal. The largest range of torics among all daily silicones was the clariti torics. And then our MyDay sphere and toric. So we've got great products that we're happy to sell as a brand and also do a customized solution for. And so we're having successes there. The other investments that we've made strategically around distribution also allow us to have those conversations about direct shipping and making it easier for ECPs, eye care practitioners, to work with their patients. And we provide them technology to communicate with their patients and to resell prescriptions for those patients. And then, of course, all the product launches that we've been talking about, having done recently around Biofinity Multifocal, Toric and relaunching the MyDay sphere and getting the extended toric range out there for clariti. So all of those -- the culmination of the strategic investments we've made are continuing to drive some of our successes. The other piece to our third quarter was kind of the unique and differentiated products that we have. For example, Biofinity Energys, we launched Energys several years ago. And when we did that, it was -- that's an extension of our Biofinity line that helps to treat digital eye fatigue. It helps for digital eye strain. So we came out of that product and everyone kind of was like, well, how do I sell this, how do I use this. And it had successes, and it was kind of -- it was a way for us to continue talking about Biofinity, which is an important part of our franchise. But in light of everything that's going on right now with everyone on computers and on Zoom calls, that's advanced the balls in a much greater fashion. And it grew 4% in the quarter, and it grew like 13% in July. So I would be surprised if we don't see continued momentum in something like that in Energys, where we're going to -- where I would expect to see that continue to do well. And then of course, we've been building up our myopia management products for the last couple of years, acquiring different companies around ortho-k and scleral and so forth. And that myopia management area around MiSight and ortho-k grew 15% in the quarter, while the market was down. And so when you've got products in the portfolio that are growing in the face of markets declining and we're taking more than our fair share of new fits despite the fact that new fits are down, we're continuing to have the same success and probably more so now because of those differentiated products and those strategic investments we've had, which gives us a lot of confidence about the prospects going forward. We're really optimistic about where we're positioned. And I talked about it on the last call about the capital investments that we've put into the business and really just 2020 being a peak year. So we've got all of that activity more or less behind us, and we're really poised to put up some good numbers. So if not for COVID and not for what's going on right now with COVID, man, we would be in a -- we would just be roaring. So -- but it does give us confidence in the guidance we've given, and it gives us confidence against what our competitors are doing because new product launches have been happening and has been a thing that always happens. And you mentioned Alcon and PRECISION1 and Bausch, I mean they've got larger bases of daily wearers and they've got hydrogel daily wearers that are repeat customers. So anything that they can do to trade up their own existing wearers or bite at the heels of each other from going brand against brand is going to be incrementally positive because of the revenue per patient you get from daily silicones. But we're still going to continue to keep our heads down and have the broadest, most robust range of dailies in the market and continue to focus on what's been allowing us to take share month after month, quarter-after-quarter, and we think we're really poised to continue to do that.

Okay. That's a very confident message. We look forward to seeing it. And I think we're all feeling the digital eye strain right now. So that's a great point. Let's talk about MiSight. I think it was either you or maybe it was Al who recently said you believe this can be a $500 million product over time, which has drawn a lot of questions. Talk to me a little bit more about that goal or even in the nearer term, right? You said, I think, $25 million and then $50 million in the next year and the following. What kind of account penetration do you need to reach that level? Is that achievable with your current base and higher penetration? But let's talk about maybe the accounts you have for CooperVision today and where you see those trending over time, especially if this does follow that trajectory toward $500 million.

Sure. So yes, we're really, really excited about MiSight and Brilliant Futures. It's the only FDA-approved product to reduce the progression of myopia in children. Al did talk about -- and we've been public about talking about our confidence in our ability to grow MiSight from what will be around $7 million this year to $25 million next year to $50 million and even $100 million the year after. The $500 million that you mentioned that Al had said recently was really in response to a question that he got around if all things kind of -- if things start to really move in your favor and what would be considered kind of a home run and what would have to happen and what could you do if things were really kind of really launching. And Al's response is, hey, I could see this being a $500 million product in 5 years. And so that's absolutely attainable and not outside the realm of possibilities. What we need is really to -- number one, we need to get more docs certified in fitting MiSight. And what COVID has been affording us right now is while docs have been home and they've had some spare time, we've been able to shift what was going to be in-person trainings to now online trainings. And the excitement and the activity and the awareness around MiSight and the importance around MiSight has been huge. And we've seen an enormous amount of interest in learning about MiSight, including the clinical benefits of MiSight not only from specialist fitters that are used to fitting myopia management products like ortho-k, but you're also seeing a lot of interest in pediatric optometrists and even general optometrists. And so when we talked about MiSight a couple of quarters ago, when we had kind of a goal of getting to maybe 1,000 certified optometrists in the U.S. exiting this year, we're already ahead of that. We're outpacing that number. We're probably somewhere in the neighborhood of 1,200 certified optometrists in the U.S. And that's giving us greater confidence in our ability to get to that $25 million number next year and to hit some of those numbers that we've put out there. Now we talked about the total addressable market being around $5 billion, with $1.5 billion coming from the U.S. or from the Americas. And that's pretty simple math. It's easy to get to that number, but that's kids that are aged -- that are from ages 8 to 12. But as that 12-year old goes -- moves to 13 and a 7-year old moves to 8 years old, you're continuing to expand that market because as you start treating myopia -- while you can't reverse myopia, you can certainly slow the progression, and MiSight has proven that. But you're still going to need to treat those children through their teens and probably into 20 years old. So that market continues to expand. And what you do -- because we don't have -- of that 8- to 12-year-old age group, those kids are not really wearing contact lenses today. That's a whole new grouping of children that gets added to the existing market. So if pediatric optometry can really take off and now that you've got a lens that is clinically proven to treat myopia, the only FDA-approved product to do so, and you have places like TreeHouse Eyes that's opening up myopia management, optometry offices around the United States and you start to see momentum there where pediatric optometry really takes hold in the way that pediatric dentistry is a -- dentists can actually have a pediatric focused office, you could really see this take off. And it's great for the patient, it's great for the doc. It's obviously great for Cooper. We're selling it for $750, the whole package and solution to the optometrists, which includes a myopia management specialist, it includes the app, which tracks the progression and connects the parents and the family to the doctor's office. And then we're doing geo-targeting and marketing to help drive -- to support the optometrists that are certified in MiSight and also helping to drive patients to those practices of optometrists that are certified in MiSight. So the inflection point for the first 2 patients that are fit from an optometrist, those 2 patients are free, the doc is going to make the money in those patients, but we really want to start getting some traction here. We want the doc to realize, hey, it's easy to get an 8-year-old to wear contact lens. And contrary to maybe why -- belief it's going to be hard to get an 8-year-old into a lens, it's really, really easy. It's surprisingly easy. In fact, easier than even getting a teenager or 20-something year old into a lens. So the getting the 8-year old into that lens isn't a problem. Convincing the parents takes a little bit of time sometimes, especially if -- it's easier if both parents are high myopes, and their kids already a minus 2 at the age of 8. That's an easier conversation, but getting the parent comfortable with putting a lens in their child's eye and treating myopia in that way and then getting the doctors comfortable. And doctors quickly are seeing, hey, this isn't too bad. This is pretty easy. And I can make more money, and this is great for my patient. And really, it should be standard of care. So we're really, really excited about it. And I think that's probably getting -- that's getting conveyed by the words that Al is saying and that I'm saying. And we really believe in the strength of that product and really the growth of that product and where that can go and the potential of that product.

Okay. So you're really taking the reins on market development here. How should we think about those dynamics changing if a competitor like Alcon or Johnson & Johnson wanted to invest aggressively in being, let's just say, a fast follower into this space. Do you think it's even possible for someone else to come into this space and have the kind of early traction that you're having? And given the investments that you've made, I mean, prior to launching, do you think it's even feasible for someone to come into this space in the next couple of years? And if so, how should we think about that changing the dynamic? Is it more competitive? Or is it more TAM expansive?

Yes, that's a good question. I mean I think any competition or any new entrants into the myopia management market that raises the level of awareness of the epidemics that we're dealing with -- I mean 1/3 of the world's population is myopic. And it's said that by 2050, 50% of the world's population is going to be myopic. And you've got certain countries like in China and Japan where myopia is over 90%. So any way that you can have people coming into the market, raising the level of awareness, talking about myopia, talking about treating myopia from an early age, creating that highly compliant wearer from an early age that's going to be wearing a mode or method of visual correction from early on in their lives through their early adult years is all positive for the industry. But how quickly can a contact lens company come out with a myopia management product? Well, they're going to have to have clinical data to support it. They're going to have to prove it out. They're going to have to go through the process like we did, which is a PMA with the FDA. So what we're trying to do right now in the spend that we're spending, and we'll spend upwards of $25 million this year, $15 million just in the fourth quarter alone, really building a category so that we can stay ahead of the curve. And we can build the category and get that momentum. And a perfect situation is if a big company like a Luxe, Essilor comes out with spectacles, and now you've got a massive company like Luxottica, Essilor, talking about myopia management, fitting kids in spectacles. You've got a part of the market where contact lens has an important element of it. And it continues to raise the awareness, and you get more and more people kind of realizing that it's important to treat myopia from early age. So I think it's all incrementally positive. And I'd rather it be a Luxe, Essilor coming out with spectacles than the contact lens company, but it's going to be inevitable at some point. We just want to make sure we stay ahead of the curve.