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

Hi, everyone. Sorry for the technical difficulties. This is Steve Lichtman, medical devices analyst at Oppenheimer. Welcome to the 31st Annual Oppenheimer Healthcare Conference. I'm very happy to have with us up next The Cooper Companies. With us today is Dan McBride, Executive Vice President, COO and President of CooperVision; and Kim Duncan, Vice President, Investor Relations and Risk Management. We're going to do this in a fireside format. If you have any questions, please key them in, and I will get them over to Dan and Kim. But with that, thank you both for joining us today.

Dan, I thought maybe we could talk a little bit to start off about the underlying contact lens market dynamics. You guys have pegged the market pretty consistently at a mid-single-digit level. There's multiple drivers. And I'm wondering if you can kind of talk about where we stand on 2 of them. Maybe first, the shift to dailies. And then second, the upshift to silicone hydrogel.

Yes. So what's nice about 2021 is, 2021 is really shaping out to be a decent baseline year, at least in terms of how we're seeing guidance, and we felt comfortable enough to put out full year guidance on there. So we've been kind of looking for how do you measure the market going forward. And when we talk about a 4% to 6% growing market, 2021 may not be perfect, but it is measuring out like a relatively normal year despite the pandemic, other than maybe the European market which has been a little bit slow. When we think about the big trends within the market, the big trends are the shift to 1 Days and 1 Day silicone hydrogels, the shift to torics, the shift to multifocals. And a distant or more out there future trend is this shift to myopia management. When we think about the 1 Day market, it's strong. You're really seeing it being the greater percentage of the revenue market. It's over 50%. When you look at 1 Day silicone hydrogel, if I were to go back, we've always been projecting that the move to 1 Day silicone hydrogel is accelerating. Three years ago, the market was around 35% 1 Day silicone hydrogel in the 1 Day market. It's now over 47% of the 1 Day market. So you're seeing that trend go there. And when we think about where that's going to, the FRP market is now around 86%, 87% silicone hydrogel. So there's this block of about $2.4 billion of 1 Day hydrogel that is going to -- that is now accelerating into a shift into 1 Day silicone hydrogel. For us, when I look at it, when we started this kind of journey of pushing back into the 1 Day space, we were at around a 14% share, and now we're around a 19% share in the 1 Day space. And that's all being driven by the push to 1 Day silicone hydrogel. So we're capturing almost 30% of all 1 Day SiHy fits and the share in that space. So it really is a transformative point for us of going from being really a small player in the 1 Day space to being a major player in that space, and it's driven by 1 Day SiHy. All of those trends are progressing. If anything, the pandemic has been a little bit helpful to the 1 Day space because consumers are more interested in the healthiest modality. They don't want to do the cleaning. So we're seeing that push. But it really is just an extension of a trend that was there prepandemic in consumers going -- as a first choice going into 1 Days as opposed to going to FRP and then shifting down into 1 Days.

Have you been surprised, Dan, by the relative performance of your 2 daily silicone hydrogels. In that, your more premium product, MyDay, more recently seems to be outpacing clariti. Of course, you have offerings at both levels. But I think the thought, maybe a few years ago, was that we really needed that lower cost to lead the way. But it sounds like the premium product is even a bigger driver.

Yes. I think what's really been -- what's really accelerated that is MyDay toric because Biofinity toric is such -- there's such a loyal following to Biofinity toric, it's the #1 toric in the market. And that's really putting a lot of acceleration behind MyDay toric. And it was capacity constrained. Now that it's unconstrained and being able to expand into markets, it's allowing that bit of acceleration. Both products are doing well, but certainly MyDay toric is driving the MyDay franchise faster, right, at this time.

And then you mentioned, Dan, toric and multifocals, where Cooper certainly has been and is a leader. What portion of the market are those segments today? And given the market dynamics and aging population, where do you think that's going to go over the next 3 to 5 years?

Yes. So currently, torics represent about 24% of the contact lens market -- soft contact lense. Really, when we look at the amount of astigmatism in the population, it's around 30%. So there is still a lot of room for torics to move up and take a greater percentage of the share of soft contact lenses, especially as you're starting to expand out the opportunities around torics, which is in twofold. One, we're doing with Biofinity XR, which is really dramatically expanding the number of toric SKUs; over 200,000 additional SKUs that we can fit. But also now, in terms of the 1 Day space, because we are pushing the outer limits of where 1 Days have been, they've always been more of a center of the bell curve toric product. And we're pushing that out to be more full service to people with astigmatism. When we look at multifocals, that's been about 10% of the market. The multifocal ceiling is it's hard to predict because you have a large population of soft contact lens wearers that are aging. Everybody is getting presbyopia. I mean there's no avoiding it, whether it's in your mid-40s or your early 50s, and people are loyal and want to stay in contact lenses. So we're seeing that grow. It's hard to predict how big does it get just because you have to kind of estimate how many of those people choose to stay within contact lenses. And also, it's a new entry point for people to come into contact lenses that previously had no vision correction, but they don't want to wear glasses and then they go into contact lenses. But that 10% is definitely a growing number, and there is no real ceiling on it -- no theoretical ceiling on it. But we -- but we're encouraged by the growth. It's all a matter of continuing to put out products into that piece of the marketplace and reducing the amount of compromise that you have to take with a multifocal lens.

Got it. So I want to shift the course to myopia management, which is obviously a key focus currently for Cooper. I think we all know that the size of the myopia market and the outlook there. Maybe if you could talk to investors that don't know why MiSight? I mean maybe talk a little bit about the journey in terms of the data collection and what that shows in terms of being able to slow the progression for kids?

Yes. So -- I mean this is -- what's driven this company's growth and our above-market growth really for the past 15 years has been the growth of Biofinity in our -- in the FRP space. And in the last 3 or 4 years, we've seen another S-curve of growth, which is the 1 Day silicone hydrogel space. And what myopia management represents to us is that next third wave of growth that we bring in by expanding the category, bringing younger wearers into contact lenses and also sort of changing the mission of what it means to have vision correction at a young age. When I was growing up, it was really still the genetic lottery of what vision was. You didn't have any choice. Your vision was going to decline over a period of time, usually between ages around 5 to 17, and there was really nothing you could do about it. We started investing in this field about a little over 10 years ago because the science was becoming pretty clear that there is a lot of environmental factors that influence the growth in the progression of the eye and that those environmental factors could mechanically be stopped. So we brought in MiSight into the market. We bought into the technology about 10 years ago. And what we realized was that while the science was developing there, clinicians and opticians really hadn't bought into that. They didn't really know that, that was -- that you could look at myopia as a progressive disease. And I think that now is what we've kind of gone over that hump now where it's pretty accepted universally within the optometry community that this is a progressive disease. It is treatable. We invested in MiSight in a long-term clinical study. We've now just finished our 6-year data and we'll be wrapping up the study because the participants are now graduating out of myopia management. They are past the age where their eyes are growing. And what we found out of that, which was really super exciting and what led to the FDA approval was, we had 60% control, a reduction of 60% of the progression of myopia. What's more exciting underlying the data, though, is about 40% of the participants had very little to no progression of their myopia. So it's clinically stabilized over that full 6-year period, and that's really exciting because then you're talking about not only [Technical Difficulty] of the population, you're actually -- you're stopping the progression. It's basically almost a cure. You can't reverse the growth of the eye, but you can definitely stop it. So now the step forward really is a lot more about execution. The science is clearly there. Optometry is buying into the science. And it becomes sort of almost obvious that this is -- this should be standard of care treatment for children. Like why would you allow a child who's coming to your office is a minus 1, has progressed to a minus 1.5, why would you let them progress further if you have any ability to stop the progression of the myopia with standard tools that you're using to treat the child anyway? And that's why we're excited about it, because it's opening up a really big new category. It's a new mission for optics. It's not just about correcting vision. It's actually about reducing myopia. And what's -- we're starting to see all of the players in the category taking active steps to be involved in the market. So you have -- on the large spectacle side, you have Hoya and Essilor introducing products into the market. You have us with the only U.S. FDA approved product in the market. You have J&J actively working on programs and, they put out a paper around how we should clinically treat -- manage myopia. So it really is just at the very early stages of that build. And really, right now, the effort around ours is how quickly can we push that ramp?

And I want to get to spectacles in a second because, of course, you now have a play there as well. But just for now sticking on MiSight, you've been pretty consistent with your guidance for this fiscal year of about $25 million in revenue. What portion of that will be outside of the U.S. in your mind? And outside the U.S. where MiSight has been on the market, of course, longer, how much of the growth that we are seeing is same-store versus you go into new countries or new markets?

Yes. So it's a good story all around there. So most of that -- because MiSight has been in the market longer, and we launched it 10 years ago, it took a while to really get off the ground, largely due to the lack of clinical data and the need to really get opticians to believe that myopia management was the type of treatment you should be doing with children. But what we're seeing, in terms of the growth that we're projecting is, is that more than half is coming from outside the U.S. Of that, the existing markets are growing strong. So you saw around an 80% growth outside the U.S. in the last quarter. But that growth is kind of split between 2 things. It is the existing markets that are pushing up that growth. But we are also entering into new markets. So we're entering into Taiwan. We've talked about entering into Russia. We're going into those markets as they open up. The big market standard into will be China and Japan, when those show up, but we're not projecting either of those markets into 2021. So I would say -- if I thought about it, I would say it's probably 60-40 of that growth, 60% of it coming from the existing markets continuing to grow and penetrate more deeply and about 40% of it coming from new markets entering in for the ROW sales.

Got it. So in the U.S., you've updated us on the calls on the number of fitters who have been -- who have gone through the training on MiSight. Wondering if you could talk a little bit about post training and what's happening on the field after the fitters are getting MiSight in their hands and what kind of reorder rates you're seeing? Anything you can talk about in terms of the initial receptivity in the launch?

Yes. So like, if anything, we did a lot of targeting at the beginning. So we're having a pretty good uptake with the initial fitters that we've brought in. But really what it is, is pushing them first to adopt which, in our mind, is getting 2 people fit into the lens so that we know that they're comfortable having had that conversation with the parent, having got a child in there, and they're starting to get some experience with it. And then it's pushing beyond that to becoming a regular part of their practice. And we're seeing the typical spread that we would see where you have people that are -- have adopted, but they haven't yet fully adopted it into their practice. And then we have, what we call, myopia management specialists to work with them [Technical Difficulty] and are regularly fitting children every month. And then for them, it's more around support around how do we accelerate that? How do we get more children into their practices? What are those -- what are the tools that they need? And then there's those ones that are sort of like, "Hey, I'm in the middle of the pandemic. I do plan to bring this in. But right now, I'm really more focused on my limited chair time servicing the patients that I have." So we're seeing all of that. The biggest limitation that we're really seeing right now tends to be pandemic-oriented, which is either time to get staff training done or staffing shortages within their just chair time available. So it's sort of like the momentum is there, the energy is there, but it really is -- for us, it's about figuring out which ones are ready to go now and can get active quickly and which ones -- and then what are the barriers for those that have gone through the training and are just saying, "You know what, yes, I want to do this, but I'm not yet ready to do it." And mostly what we're hearing on that tends to be pandemic-related reasons, which is that it's just not a great time when they're trying to get their practice fully up and get the revenue streams back in play. So we had -- we saw an 80% growth in the U.S. as well -- a little bit north of 80% growth in the U.S. as well, which is great, but it's all -- this is all early days. So for us, it's all about -- none of the numbers are terribly meaningful because it's all about the ramp, and it's about getting those power users in place and solving the problems of those that are going through. So we expect to see pretty high-growth rates all the way through. But what we're more concerned about is figuring out, making sure we're breaking down the barriers of those practices to be able to get into the field.

So given sort of where you're at with MiSight in the ramp, interestingly, you did do this deal with Essilor with the -- an acquisition and sort of collaboration on myopia management spectacle. So can you talk a little bit about, I guess, why now? And then secondly, where you think spectacles fit in the armamentarium versus MiSight?

Yes. So the why now, we've been talking about spectacles for a long period of time. And we obviously did an investment in SightGlass a few years back because we saw that as a really exciting technology. The reason why we get excited about spectacles in the space is that it's just how the progression of myopia occurs. You have many children starting at ages 4, 5 and 6 years old. These are not children that are going to be put into contact lenses. And once they lose a certain amount of vision, you don't ever get that back. So the eye grows and the eye doesn't shrink back. And so really, when you -- if you can capture that child at the very earliest age, the amount of progression of myopia you can reduce, it's almost double what you can do if you're capturing the child at age 10 or 11 or 12. So the level of benefit is tremendous by getting a child at a much lower cohort. And we've always viewed spectacles as being the solution to that problem. It wasn't going to be convincing practitioners and parents that they're going to put contact lenses on a 5-year old, that wasn't going to be the solution. So that's what's exciting to us because once you get somebody into a treatment regimen, then you're -- now you've got them captured into a journey there for 10 to 12 years that's massively beneficial to them, but it's also very beneficial to the practice as well. And we know that contact lenses are highly desirable to children at a certain point in time that they want them. Right now, that tends to be between 14 to 16 years old. But we also know that they're not easy to defeat in terms of the treatment. So if you're a minus 1 as a child, you can just take your spectacles off and you probably can spend almost your whole day without any need whatsoever. It's only going to be the blackboard or a few other things that you can't accommodate with your eyes. But if you're not wearing the spectacles 10 hours a day, 6 days a week, you're not getting any treatment. So that's why contact lenses will still be the superior solution because they're not easy to defeat. But the idea of getting people on a myopia management journey as early as possible is really what excited us. As to Essilor, they are our partner in China. So when we bought into Paragon with Ortho K, and China is a massive myopia management market -- with Ortho K, the distributor for that product is Essilor. So we are in conversations with Essilor about MiSight going into China. Certainly, when we acquired SightGlass, about that, and Essilor because they are a spectacle manufacturer. They were excited about the opportunity, and they wanted to have a piece of the opportunity as opposed to just be a supplier of the product. And given that, that is more their space than our space, it seemed like a great collaboration. And Essilor, on top of all of that, they have a track record around myopia management that's even longer than ours. So they're very committed to it. It's been a top priority there. So the idea of getting 2 companies in the space that are major players in their respective fields, both who are very, very committed to myopia management, both committed to pushing and creating the field, it just seemed like a great opportunity.

Thanks, Dan. Just thinking about the broader vision business. Cooper, of course, has been a share taker on the new product cycles that you mentioned earlier. You do have competitors who seem to be picking up the pace a bit as well in terms of some new product flows. So obviously, you're confident in continuing to take share. How much of a part does MiSight play in that? How much of a part does your other ongoing products play a part in it? Talk to us about what are the key drivers in your mind to continue to grow ahead of the market.

Yes. So when I think about share taking, I view MiSight is just a plus. It's just an upside. When I think about share taking, we keep the business very, very -- we have an incredible business in Biofinity and clariti and MyDay and both the FRP SiHy space and the 1 Day SiHy space. And we try and keep the company very focused on those because those opportunities are still running, even though we're sort of at what seems to be the tail end of the Biofinity S-curve of growth, it's still growing extremely strong. I mean the FRP category as a whole is slightly declining. And Biofinity, we reported 6% growth. And it's partly because we keep on adding new features, new ranges that Biofinity can reach to. So we remain excited in that segment. But the real segment that we're focused on is 1 Day SiHy, because that's where -- when you look at our overall share of around 25% of the market, our FRP shares is closer to 30%, and our 1 Day share is down at 19%. So there's just tremendous potential right there. There's -- as I had said earlier, there's $2.4 billion in standard hydrogel product that's going to largely move into silicone hydrogel product over the next 5-plus years, and we're overindexing in how much of that we take. So when I look at what competition is doing, they're doing some smart things. I mean Biofinity -- Bausch just launched their INFUSE lens. That's fine. The difficulty there for them is the same difficulty we face, which is they don't have a big 1 Day installed base. So it's difficult to capture share when you don't have an installed base. Our advantage was we were earlier to market, and we had full families of products. So that allowed us to get that edge in there. So they have a tougher road to haul just because they can't just look at their own family and say, I'll trade that up. If you look at what Alcon is doing with PECISION1, really nice move, getting the PECISION1 toric smart thing to do as well. They have a lot of work to do. They have about $1 billion of DACP that's in play. And so that, to us, provides some share to us, but it definitely provides a lot of growth opportunity for them. So I think they're well positioned. And then the one that we're still waiting on what their solution to it is, is J&J because they have the largest family with MOIST and they haven't really introduced into market an answer to the distance between the premium 1 Day SiHy they have in the market and MOIST, which is a very fine hydrogel in the market. So that continues to be probably the -- the biggest share giver area will be -- will probably be there. And eventually, they'll correct that as well. While they're catching up to those positions though, we're advancing our portfolio. So we have 1 full family of product with clariti. We're going to be launching the MyDay multifocal later this year. So we'll have 2 full families of SiHy product. And within those families, too, when you look at the toric, the SKU range of toric that we're providing, we're providing a much bigger range of toric, and they'll eventually expand their ranges of toric as well. But we're going to continually push those boundaries out. And that gives us a lot of traction and a lot of ability to continue to sell our story into ECPs. And when I think about selling that story in, I'm not selling it into a market that's hostile to us. I'm selling it into a market where on the FRP side, we have close to above a 30% share. So these are customers that have made decisions to work with us in 1 segment of the market and have pushed more of their business to maybe Alcon and J&J in another segment of the market. So it's a pretty fluid, and if you have a competitive product range, it's a good market to be able to sell into. So we feel pretty comfortable and very focused that, that's the main purpose of what we're doing over the next 5 years, is really pushing that change because that -- I cannot be more excited about myopia management. I love talking about it, but the real mission of the company over the next 3 to 5 years is to capture a fair share of that 1 Day SiHy space because then we're talking about tens of millions, hundreds of millions of dollars. And by the time we capture that, then we can start talking about those kind of numbers really being existing on the myopia management side.

Well, we hit end of time. I -- we didn't even get to the surgical business, which had a strong F 1Q as well. But we'll save that for another day. But thank you so much, Dan and Kim, for joining us today. Thanks, everyone, for dialing in, and hope you have a great rest of the day. Thanks a lot.

Thank you. Take care.