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

Yes. So MiSight was FDA-approved only recently. And while MiSight was outside of the U.S., in certain markets, in pockets here and there, it was sold as a lens, as a box of lenses, and there wasn't a lot of support we put around it. But when we got the FDA approval, that was the real game changer. And so in getting that FDA approval, all of a sudden now, where specialty fitters around the world who are treating myopia really just through ortho-k, where we obviously play a big role, now all of a sudden had something where that was FDA-approved, that's highly efficacious, that now started to build some momentum. And so when we launched the product in the U.S., we built that launch, and we modeled that launch after Canada. And so a lot of the numbers that we've discussed in terms of how we see the growth in MiSight were based on that Canadian launch. And what we've done in the United States is we've built a structure called Brilliant Futures, which basically puts support around MiSight. So in other words, we provide MiSight to optometrists for $750 for a year of supply. The optometrist is going to charge their patient anywhere on average from $1,500 to $2,000 to -- for the year's treatment of their child's MiSight supply. And with that comes a myopia management specialist, an app to track the progression of the child's myopia, to connect with the parents and the child and the office, to provide geo-targeted marketing, which will help drive patients to the practice and help drive awareness in social media around -- we hired a spokesperson in Sarah Michelle Gellar. So really, we're trying to build a category here. And in the last earnings call, we talked about a TAM, a total addressable market, of $5 billion for ages of 8 to 12. And so -- and the way that we came to that was fairly simple math, but it's really just for children between 8 to 12. In reality, you're going to be treating myopia through that child's teens and that 9, 10, 11, 12-year-old is going to be getting to 13, 14, 15, 16, and will still need to be treated with myopia through their teens. So that addressable market is pretty large. And what we're finding at least with COVID is, we've been able to accelerate the certification of optometrists much, much more quickly. As optometrists have been home and have had time, they've learned -- they've been trained and they're learning about the clinical benefits and the efficacy of MiSight. We've been able to ramp up that certification process and get more optometrists certified, not just the specialty fitters, but pediatric fitters as well as pediatric optometrists and even general optometrists. So that Brilliant Futures sort of moat or surrounding solution that we're now starting to really build and have a lot of learnings from that's rolling out in the Americas, we're now rolling out outside of the U.S., in Europe and in parts of Asia. So it's been a little bit of a relaunch, if you will, in parts of -- in a number of parts of the world as we've picked up these learnings. But the FDA approval was big. The efficacy is there. And the great thing is if we can start to create highly compliant wearers from a very early age and we can create -- and this can be the standard of care to reduce the progression of myopia in children, we're really creating a new market because there's no 8 to 12-year olds today, very few that wear contact lenses. So we're starting from an earlier age, and hopefully, we'll not only follow that child through their teens, but eventually when their myopia has stopped progressing and they need to continue wearing a form of vision correction, they'll move into a MyDay sphere and then eventually a MyDay toric and maybe -- and then by then a MyDay multifocal when they're even older. So that's the excitement we have around MiSight, and we're in the early, early stages of that. But growing a category is -- being first -- having first mover our advantage comes with advantages, but creating a market comes with these challenges, and we're working through those right now.

It sounds like you're targeting primarily specialty fitters. What would -- how many would you say are in the U.S. in that category? And how many have you trained and certified to date?

Well, the easy and obvious ones are the specialty fitters because those are the ones that are used to fitting children and having harder-to-fit eyes and the ones that might fit ortho-k, scleral lenses and those types of lenses. But what's been maybe more surprising or enlightening to us is the number of optometrists that have -- that fit children through their general practice that have been -- that have shown a lot of excitement and enthusiasm in fitting MiSight and getting certified in MiSight. And even -- and similarly, even just general optometrists because if you have an optometrist -- if you've got optometrists all around the Bay Area and everyone's fitting all the different lenses that you know about, but they can differentiate by having -- by getting certified and fitting MiSight, it's great for the patient. It's highly profitable for the doctor, and it's obviously great for us. I mean, it's a high gross margin product for Cooper. So at the end of the day, I think what we're finding is that there's a lot of interest out there and a lot of the certifications that people -- that optometrists are going through, we're getting those not only from specialty fitters, but from a wider variety of optometrists. And where Al was really going and where his enthusiasm even gets sky-high about some of the big numbers that have been thrown out there is if we can truly create pediatric optometry practices because before MiSight, there wasn't really the ability for optometrists to focus on children. There wasn't anything out there that you could really build an entire practice around. But if you start to get to a point where, like in dentistry, you have pediatric dentists, you have pediatric optometry practices and there's -- I don't -- you may have heard of Treehouse Eyes. They've got about a couple of dozen stores around the U.S. where they focus on children and myopia management. If you get more of that growing organically and growing around the world, you can really see that take off. And then if you add to that, if spectacles come out, if well, Essilor, who we have a great partnership with, were to come out with spectacles that treat myopia and they're raising the level of awareness and discourse around myopia management and treating myopia from early age, then that continues to grow the market. And that continues to really advance the ball in treating myopia from an early age.

Can you flesh out a little bit more about the program you talked about in terms of what kind of support you're providing to the prescribers of MiSight and -- both in terms of education, I guess, and marketing and knowledge about the category and the product itself.

Yes. So I mean, we have 5 years of clinical data, and we went from being -- pre-COVID, we had planned on having a lot of in-person trainings at institutions where we would have the doc travel to the institution, and we would sit with them and talk to them about the clinical data, the importance of wearing the lens 10 hours a day, 6 days -- at least 6 days a week, the differentiator between this mode of treating myopia and maybe some others that are out there off-label. But moving that to an online training has proven to be very successful. We are still leveraging the same sales force that we have today that -- our CooperVision salespeople, but where we -- what we've done is we've complemented or supplant -- we've complemented that sales force by adding myopia management specialists who will be -- who are there to help support the eye care practitioner in having these conversations and really understanding some of the benefits. So as they -- after they get certified and they're rolling this out in their practice, to the extent that they have questions or they run into any issues, they've got someone there that they can call to, to support them, to walk them through the various clinical benefits and other aspects of treating the children in MiSight. We've always -- one of the things that we did years ago is invest in technology. And one of the things that we've offered to key accounts and fitters that sell a high volume of Cooper products is technology. And whether it's reordering your lenses or getting more of a close connection with your customer, providing an app was something that we've done, and we have further enhanced that around MiSight and developed an app to track the progression of myopia, where we can really map out, if you don't take MiSight -- if your child doesn't start with MiSight now, their progression of myopia is going to advance in this pattern. But if they start with MiSight now, then they're going to go in this pattern. And so you can really track, through this app, how well they're doing and why it's important for them to start now. And then beyond that, the dollars that we will have spent in 2020 will go towards further advancements on clinical data, further advancements on R&D, future lens designs, future enhancements to MiSight. And of course, all of the geo-targeting marketing and advertising, creating awareness so that whether you are a parent who's just hearing about myopia because Essilor is talking about it and you're doing Google searches, you'll probably find yourself being pointed to MiSight, and you'll probably find yourself being pointed to the clinician, to the optometrist that's within a mile radius of you. Or -- so it's geo-targeting advertising, driving patients to the practice or just creating awareness. So that's really where the OpEx dollars are going.

How much in discrete spend do you anticipate over the next few years on MiSight, in particular? Maybe another way to answer it would be, I mean, you've laid out your goals on the revenue line over the next few years. In that sort of 3 year -- out 3 years, would it be a profitable business at that level for you guys? Or will you still be a net investor?

Yes. I mean that's a good -- it's a good question. I mean, it's accretive from a gross margin perspective. The real key there is going to be where do we get approvals over the next several years? And what kind of dollars do we want to spend to support those product launches? So when we came up with the TAM and discussed it in the last earnings call, we said the U.S. -- in the U.S., roughly 40% of people are myopic. That's a U.S. phenomenon. And part of what we're challenged with in the U.S. is, not just getting doctors to -- convincing doctors that children at the age of 8 can be wearing lenses, but convincing parents that myopia is a real problem and that they should care and that they should treat it from an early age. And they -- and that spending $1,500 is a worthwhile thing to budget for when you can't reverse it, and it's in -- and myopia is going to get worse as the child gets older. When you look at places like in China and Japan where myopia is a significant epidemic and you've got myopia rates above 90%, if we were to get an approval in a place like China or Japan, then we're going to throw some money at launching the product there because it's a massive, massive opportunity. But to your question, I mean, I think the numbers that we've publicly stated around doing revenues of $25 million in MiSight next year and $50 million in 2022, we've got a lot of confidence in. And certainly, how much we spend to support it, I don't see us spending -- we'll spend $15 million in Q4. I wouldn't really necessarily look at that as a run rate going forward. But certainly, if $50 million goes to $100 million, and we're still kind of spending -- we start to plateau in that second and third year in our spending patterns, you would see this really -- the dollar is really dropping materially to the bottom line because it's going to be a very profitable product for us.

That's great. Thanks, Brian. And bringing it back to the core market. I mean one of the questions you've gotten on the last couple of calls is about some of the increased rebating, particularly from one of your competitors in the lens market. I think you and Al talked about the fact that it's not a significant impact on your business. Can you walk through why that isn't a risk to the overall revenue growth of the market?

Sure. Yes. I mean rebating is very much a U.S. phenomenon. And when consumer rebates ratchet up, it makes a lot of news. There's a lot of noise about it because it's easily seen by -- it easily makes news and hits the wires. But at the end of the day, when you've got a significant amount of demand in the market and you're having trouble meeting demand and a lot of the decisions that are being made are made by the optometrist who's writing the script and saying, "Hey, you should be in this lens." It's a puzzling thing to be doing heavy, heavy consumer rebates. It hasn't changed our approach. It hasn't changed our philosophy towards how we're going to price our products. We haven't reacted to it. We haven't really seen any impact to our business from that. And frankly, why our competitors might do it? You probably have to ask them. But their businesses -- remember, we were a follower in dailies, and they've got a very -- our competitors have a very large installed base of hydrogel daily wearers, and they're under attack. They're under pressure. And so maybe it was a defensive move to try to stave off some of that attack. But at the end of the day, we're really laser-focused on what we can control and where we're taking share and whether it's the culmination of the strategic investments we've made over the last few years to enhance our key account structure and our distribution capabilities and our manufacturing capacity and our footprints and our differentiated products around Energys and myopia and just being really close to the fitter with our product portfolio and solutions, we see that as a big competitive advantage. And that's really what's going to be a key to our success and really why we continue to take share and take a disproportionate share of new fits relative to our market share.

Is it still one competitor that's seen the increased activity? Or have you seen any follow-on from others?

We've really only seen one, the one I'm referencing and the others, really, we haven't seen much difference.

Got you. In the last couple or 3 minutes we have left, obviously, I want to hit on the Surgical business. You have sounded optimistic in terms of gradual return to normalcy on the CVI business. How was the Surgical business on that score in your view?

Well, we're really excited about the Surgical business. We've spent a number of years investing in fertility and scooping up a number of fertility companies. And now what we're -- now where we are today is we're the #1 fertility company in the world. We don't play in the pharma side and the drug side. But everything after the drug side, the hormone stimulation, stimulating egg production, we're in everything from the equipment to the consumables to the genetic testing. And that market is a mid- to high single-digit growing market, and we're the #1 market share in that market. So we are really excited about fertility. That's doing great as IVF clinics have opened. There's a little bit of a lag because you go through consultation and then the drug piece and then the extraction to the genetic testing to the transfers. So fertility should post a good number in Q4. We feel really good about where we're positioned there. PARAGARD had some inventory contraction and rebound, but we're comping off a tough quarter from PARAGARD of Q4 of last year. But PARAGARD is going to post still a solid number in Q4, and the long-term trends are good with PARAGARD growing mid-single digits. And the rest of our office and surgical business has got some interesting and exciting products in it, including INSORB and Endosee Advance, which are providing some growth attributes to that part of the business, which has historically been sort of a low single-digit grower. So all in all, I mean, I think what we saw in COVID was a deferral of procedures. And as procedures and offices and hospitals got back to doing procedures, you saw those procedures snap back. And if we can get COVID to be behind us, then the prospects of CooperSurgical are bright.

Want to sneak one last one in the last few seconds, Brian. You guys have been investing a lot in CapEx for a good reason in the last couple of years. I mean do you see that level coming down over the next couple or 3 years?

Yes. I mean we certainly have. And part of that strategy has been -- is putting our -- keeping our foot on the gas around enhancing our manufacturing capabilities, our footprint, getting our manufacturing output on daily silicones there where we could get -- we can at least start to meet the demand in the market. We've had an enormous amount of success over the last several months, putting new lines in place and completing the manufacturing expansion of the footprints of our facilities. So that's largely behind us. We'll still have more lines that go in place over the next several months and a couple of quarters. But the peak of our CapEx will be in 2020. I would expect a meaningful decline in CapEx in 2021 and another step down in 2022. So what that means is free cash flow is going to continue to tick up. Operating cash flow will continue to improve as our company continues to perform better, and CapEx going down means free cash flow going up. And I'm excited to say that the peak of our investment activity, both CapEx and really those OpEx investments that we've been talking about, are largely behind us.

That's helpful. Well, thank you so much, Brian. Kim, thank you so much for joining us today. Thank you, everyone, who's dialed in, and I hope you have a great rest of the week. Thank you.

Thank you, Steve. Take care. Thanks, everyone.

Bye.