Alcon Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2024

There are 18 speakers on the call.

Operator

Greetings and welcome to the Alcon Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Craven, Vice President, Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Welcome to Alcon's Q3 2024 Earnings Conference Call. Yesterday, Alcon was alerted that our Q3 earnings press release and interim financial report were inadvertently posted early to our investor website. We immediately accelerated our disclosure process. The NYSE briefly halted trading, pending the issuance of the release. Trading was resumed on the NYSE shortly after the release crossed the newswire.

Speaker 1

In addition, earlier today, we also posted a supplemental slide presentation on our website to enhance today's call. You can find all these documents in the Investor Relations section of our website at alcon.com. Joining me on today's call are David Endicott, our Chief Executive Officer and Tim Stoneseifer, our Chief Financial Officer. Our press release, presentation and discussion will include forward looking statements. Please note that we expressly disclaim any obligation to update forward looking statements as a result of new information or future developments, except as required by law.

Speaker 1

Our actual results may differ materially from those expressed or implied in our forward looking statements, and as such, you should not place undue reliance on any forward looking statements. Important factors that could cause our actual results to differ materially from those in our forward looking statements are included in our Form 20 F earnings press release and interim financial report, which are all on file with the Securities and Exchange Commission and available on their website at sec.gov. Non IFRS financial measures used by the company may be calculated differently from and may not be comparable to similar measures used at other companies. These non IFRS financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed per IFRS. Please see a reconciliation between our non IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings.

Speaker 1

For discussion purposes, our comments on growth are expressed in constant currency. In a moment, David will begin by recapping highlights from the Q3. After his remarks, Tim will discuss our performance and outlook for the remainder of 2024. Then David will wrap up and we will open the call for Q and A. With that, I will now turn the call over to our CEO, David Endicott.

Speaker 2

Thanks, Dan, and thanks everyone for joining today's call. I'm pleased to report another solid quarter with sales of $2,400,000,000 and sales growth of 6%. Core diluted earnings were $0.81 per share, which grew 25% and core operating margin was 20.6%. Additionally, we generated $1,300,000,000 of free cash flow in the 1st 9 months of this year, which is a record for this company. Now these results demonstrate our ability to continue to outpace our markets, driven by our broad geographic footprint, our innovative portfolio and our category leadership.

Speaker 2

In addition to our ongoing focus on operational excellence, this quarter we continue to prepare for a series of product launches that will drive growth. We intend to discuss many of these in detail at our upcoming Capital Markets Day this March. Today, I'll start with our recently announced launch of PRECISION 7. PRECISION 7 is a new 1 week replacement contact lens that provides 16 hours of outstanding comfort and precise vision even on day 7. Most optometrists agree that a 1 week replacement schedule is more intuitive for patients as compared with a 2 week schedule.

Speaker 2

The 2 week category is well established and represents a meaningful growth opportunity for us. PRECISION7 offers a breakthrough in comfort by leveraging our proprietary ACTIVflo system. Active Flow is a unique combination of a moisturizing agent embedded in the lens and a replenishing agent that continually releases moisture to the surface over 7 days. Select optometrists in the United States began fitting both the SPHERE and the TORIC modalities earlier this year and feedback has been extremely positive. We plan to make this lens fully available in the U.

Speaker 2

S. Beginning in January 2025 with markets outside the U. S. To follow later. At Terni Dochler Health where we have several exciting developments, I'll start with Sustain, the world's leading over the counter artificial tear.

Speaker 2

Sustain had its 5th consecutive quarter of double digit growth driven by our multi dose preservative free formulations. Now we're going to strengthen the Sustain brand with the launch of Sustain Pro Preservative Free, our newest and longest lasting formulation that hydrates, restores and protects dry eyes. Importantly, this formulation includes nano sized lipids and hyaluronic acid to both reduce tear evaporation and provide long lasting hydration. Based on market research, we're seeing very strong interest to purchase from consumers and intend to recommend from eye care professionals. We look forward to bringing this eye drop to the U.

Speaker 2

S. In the first half of next year. Moving to pharmaceutical eye drops, I'm pleased to announce that we recently finalized our strategic arrangement with Ocumension Therapeutics in China. Like Alcon, Ocumension is singularly focused on eye care. As a China based company, Ocumension has demonstrated success in identifying, developing and commercializing ophthalmic pharmaceuticals.

Speaker 2

We believe this expertise paired with Ocumension's local presence and established capabilities will help maximize the value of our dry eye products and procedural eye drops including the Systane family. Importantly, AcuMention has committed to develop and commercialize AR-fifteen thousand five hundred and twelve in China. In exchange for the divestiture of approximately $40,000,000 in annual eye drop sales, Alcon received approximately 17% of the equity in Ocumension, royalties on the existing business as well as royalties and sales milestones on 512. Now I'll discuss the anticipated U. S.

Speaker 2

Launch of 512 for which Phase 3 pivotal studies were presented at the American Academy of Ophthalmology. 512 is a novel prescription candidate for the treatment of dry eye and we estimate the U. S. Prescription dry eye market is worth about $1,400,000,000 5 12 works by stimulating receptors on corneal sensory nerves to rapidly increase natural tear production. As we mentioned in our last earnings call, we have received our PDUFA date of May 30, 2025 and look forward to bringing the medication to the U.

Speaker 2

S. Market in the second half of next year pending FDA clearance. We've already started developing our launch strategy and engaging with payers. Given the timing of a mid year launch, we do not expect meaningful revenue contribution before 2026. Now transition to surgical where I'll start with implantables.

Speaker 2

I've been particularly pleased by the international uptake of our AT IOLs where we're seeing high single digit or double digit growth in most regions. I expect the international market to remain our main growth driver in implantables as we've seen penetration in these markets drive ATIO growth in recent quarters. In particular, we continue to see positive momentum in China on both share and penetration as we work through VBP implementation. International penetration growth combined with consistent market share growth should enable us to continue to offset the slower market conditions in the U. S.

Speaker 2

I'm also excited to announce that we've completed the migration of all of our interocular lenses including PanOptix, Vivity and their Toric modalities to the Clarion material. Our lenses are now available on the Clarion platform in most markets globally. As a reminder, Clarion is a unique material formulation that provides excellent visual performance and sets a new standard for IOL clarity characteristics. It has amongst the lowest levels of surface haze and subsurface nano glistening of any IOL material. We're also excited to announce that we are continuing to expand our ATOL offering in major markets across the globe with Autonomy, the first and only automated preloaded delivery system.

Speaker 2

Notably, we're finishing the inventory build for the launch of Clarion autonomy Toric in the U. S. And rounding out our Toric offering in Japan. Next, I'll turn to surgical equipment where we have several exciting launches including Unity VCS and the Voyager DSLT system. I'll start with Unity VCS, our combined FACO and Vit Rep platform.

Speaker 2

This system builds on Alcon's expertise in surgical equipment with pioneering innovations to deliver breakthrough workflow efficiencies that enable excellent outcomes for the patient and the practice. For cataract surgery, Uniti leverages a novel ultrasound modality to deliver up to 2x faster phaco removal with 40% less energy into the eye as compared to Centurion. In vitro retinal advancements, this new technology provides up to 1.5 times faster vitrectomy with cutting speeds of up to 30,000 cuts per minute, which is significantly faster than Constellation's HyperBit probe. Will continue to work with surgeons for final user experience testing ahead of the expected commercial launch in the Q2 of 2025. Additionally, we expect to receive CE Mark in the Q1 of 2025.

Speaker 2

Now I'll discuss the Voyager Direct Laser Trabeculoplasty device formerly known as the Belkin Eagle. We demonstrated this device at the recent AAO conference in Chicago and saw strong interest from our core customer base. Voyager delivers laser energy to the drabecular meshwork using proprietary robotic eye tracking technology for accurate automated treatment. This eliminates the need for a gonioscope or manual aiming, which is necessary with traditional SOT. This design is friendly for both patients and physicians.

Speaker 2

Its precision and streamlined workflow position Voyager to become a first line treatment for glaucoma. Voyager is already available in certain markets in the EU and we plan to launch this device in the U. S. In the Q1 of 2025. Finally, I'll briefly discuss market dynamics for the Q3.

Speaker 2

In cataract, we estimate that the global procedures grew approximately 4%. Additionally, global HIIO penetration was up approximately 200 basis points year over year, primarily driven by international markets. In contact lenses, we estimate the retail market was up approximately 5%. This growth was mainly driven by pricing and lens trade up. To wrap up, we have one of the most exciting product pipelines that we've had in years and we're looking forward to bringing them to market over the next 12 months to 24 months.

Speaker 2

With that, I'll pass it to Tim who will take you through our financial results and provide more color on our outlook.

Speaker 3

Thanks, David. We're pleased to report 3rd quarter sales of $2,400,000,000 up 6% versus prior year on both the reported and constant currency basis. This growth is primarily driven by strength in our innovative contact lens portfolio and consumables. In our surgical franchise, revenue was up 5% year over year to $1,300,000,000 Implantable sales were $422,000,000 in the quarter, up 5% year over year, mainly driven by our advanced technology intraocular lenses in international markets, including a benefit in China, primarily related to volume based procurement. This is partially offset by slower market conditions in the United States.

Speaker 3

In consumables, our 3rd quarter sales were up 6% to $701,000,000 driven by Vitret consumables in international markets, cataract consumables and price increases. In equipment, sales of $215,000,000 were up 1% year over year, in line with our expectations. We continue to expect equipment sales growth to be broadly flat until after the planned commercial launch of Uniti VCS. Turning to Vision Care, 3rd quarter sales of $1,100,000,000 were up 7%. Contact lens sales were up 8% to $664,000,000 in the quarter.

Speaker 3

Our innovative lenses, including toric and multifocal modalities, continue to win in the market. Additionally, we had another quarter with solid contribution from price. In Ocular Health, 3rd quarter sales of $431,000,000 were up 4% year over year. We saw strong performance in our portfolio of eye drops, including another quarter of double digit growth with Sustain. This growth was partially offset by declines in contact lens care in international markets.

Speaker 3

Now moving down the income statement. 3rd quarter core gross margin was 63.2%, broadly in line with last year. Looking to the Q4, similar to last year, we expect to see normal seasonal pressure in the gross margin as we perform annual preventative maintenance at many of our plants around the end of the year. Core operating margin was 20.6%, up 120 basis points year over year, driven by operating leverage in SG and A from higher sales, partially offset by investment in R and D, particularly in surgical. 3rd quarter interest expense was $49,000,000 broadly in line with last year.

Speaker 3

Other financial income and expense was a net benefit of $10,000,000 compared to a net expense of $8,000,000 in the Q3 of last year. This improvement was primarily driven by higher interest income and lower foreign currency losses. The 3rd quarter average core tax rate was 12.8% compared to 17.2% in the prior year period. The decrease in tax rate was primarily driven by favorable geographic mix of profit and higher discrete tax benefits in the current year. Core diluted earnings were $0.81 per share in the quarter, up 25% from last year.

Speaker 3

Turning to cash. On a year to date basis, free cash flow was a record $1,300,000,000 compared to $592,000,000 in 2023. This improvement was mainly driven by higher cash from operations. As you've seen in prior years, we expect to see a meaningful step up in CapEx in the Q4 during our plant's annual maintenance period. Now moving to 2024 guidance.

Speaker 3

Our current outlook now assumes that markets grow in line with recent quarters and exchange rates as of the end of October hold through year end. Starting with sales, we are updating our full year revenue guidance range to $9,800,000,000 to $9,900,000,000 and our constant currency sales growth rate to 6% to 7%. Moving to operating expenses, we continue to expect full year core R and D expense to be toward the high end of the range of 7% to 9% of sales. Turning to profitability, we are tightening our guidance range to 20.5% to 21% and are trending toward the low end of the range. This reflects 30 basis points of pressure from the inventory provision we recorded in the Q2 as well as our planned investment behind new product launches.

Speaker 3

Moving down the income statement, we now expect interest and other financial expense to be between $155,000,000 $165,000,000 This improvement is primarily due to higher interest income as a result of a higher cash balance and higher interest rates. Turning to tax, given the discrete benefits we've received this year, we now expect our full year core effective tax rate to be approximately 19%. Based on all these factors, we are tightening our core diluted earnings guidance range to $3 to $3.05 per share, which corresponds to 15% to 17% constant currency growth over 2023. Given recent movements in foreign currency, we are absorbing approximately $0.08 of FX headwind versus the guidance we issued in February. To wrap up, I want to thank the entire Alcon team for another great quarter.

Speaker 3

And with that, I'll turn it back to David.

Speaker 2

Thanks, Tim. And to wrap up, our investments in R and D have created one of the most productive periods since our spin and I want to thank the teams working on innovation and manufacturing excellence for their dedication and efforts to making these projects successful. These projects will drive meaningful long term growth across both our franchise and we look forward to solving some of the most complex challenges in eye care. And with that, let's open up the line for Q and A.

Operator

Thank you. At this time, we will be conducting a question and answer session. Our first question comes from Graham Doyle with UBS. Please proceed with your question.

Speaker 4

Hi, guys. Thanks for taking my question. Just as we look into next year, and obviously the stock is weak today, I suspect, given people are slightly worried about the slower growth in Q4. So when we think about the exit rates in terms of top line for Q4, would you be comfortable talking about the incremental growth we can get next year when we think about VBP and product launches? Just to give us a sense as to whether a 7, 8, 9 sort of growth rate next year is doable?

Speaker 4

And maybe just a quick one on the margins. Could you contextualize again how we think about investments next year versus margin expansion? Thank you.

Speaker 2

Yes, Graham, thanks for the question. And look, I mean, I think when we get to next year, we'll certainly guide next year. I think what we would start with is just saying that look, the slower quarter in the third in the U. S. Specifically was probably a consequence of a couple of things, but certainly competitive sampling into the market will obviously dampen revenue reported units and our audited data does that.

Speaker 2

So you see a 1.5% growth in the U. S. It's probably dampened by whatever was going on in that sense. And I think that should stabilize. Our sense of the market, particularly cataracts is, it's very stable over the long term.

Speaker 2

And I think very good international growth for us. The market internationally was up I think 5%. And so I expect that over the long haul these are very stable, very normal markets. But obviously it was a weird one for us in the Q3 and in the U. S.

Speaker 2

In specific. But after that, I mean, I think what we would say about new product flow is we're excited about it. I do think that you need to be careful about how you cadence it because a lot of these products are coming out 2nd, Q3 and so you won't get a full year impact. The 1st full year impact is going to be 26, but obviously it contributes to the back half growth of next year. So perhaps think about the front half as a little bit more in line with where we've been in the back half, a little bit more aggressive as we kind of get products into play.

Speaker 3

And then on the margin front, we'd expect to continue to get operating leverage next year. I mean, if you look at the last couple of years, we've expanded margins by, call it, 100 and 50 basis points a year in constant currency. I do think next year will be a little bit less than that given the investments we want to make. So think about 512, think about Unity, VCS, Precision 7. But we're committed to making the appropriate investments to drive the long term revenue growth.

Speaker 3

But overall, we'd expect to see nice operating leverage next year and we continue to be comfortable with the long term margin goals we discussed at our last Capital Markets Day.

Speaker 4

That's really helpful. Thanks a lot guys.

Operator

Our next question comes from Jack Reynolds Clarke with RBC Capital Markets. Please proceed with your question.

Speaker 5

Hi, there. Thanks for taking the questions. Just 2 for me, please. So firstly on consumables. Could you kind of talk about what drove specifically the demand for sort of bit rec consumables here?

Speaker 5

Is there something out the order going on there? Then just on Voyager, how well recognized are the potential benefits of DSLT in your customer base? And what's the plan to roll out here from a kind of geographic perspective? And what kind of launch curve are you expecting next year? Thank you.

Speaker 2

Yes, Jack. Thanks for the question. I think on consumables, we had a nice quarter with bitret and I think that was positive. Obviously, we had a solid quarter for the global consumables in cataract as well. Retina sorry, refractive was soft.

Speaker 2

So a little bit of an offset there, but I think directionally very good consumables number for us given where the market was, again growing faster than the market in consumables. On Voyager, I think SLT is very well accepted as an idea. And I think if you ask glaucoma folks and really general ophthalmologists whether the data is there to believe that SLT is the right place to start. Almost everyone agrees. I think it is really good.

Speaker 2

What has not been agreed is how it's not an easy thing to do and a lot of people don't do it. And I think that's really what the DSLT has an opportunity to fix, which is this is a product that fundamentally has an eye tracking robotics that gives an accurate and automated delivery of laser light into the trabecular meshwork, whereas opposed to what you have to do now with this manually hold a gonioscope, anesthetize the eye. It's a bit of an exercise to really get it done right now. And I think what we believe is, we can make this a good bit more acceptable for patients and for physicians. So over time, we think this is a positive change and I think directionally that adds to our glaucoma portfolio where we see an algorithm that is very widely accepted, I think which will be SLT drops, into Hydrus.

Speaker 2

I mean really that is what we're trying to create is a new and recognized algorithm that drives real benefits to patients.

Speaker 5

That's great. Thanks. And Sanjay, just on the geographic launch or launch in kind of geographic

Speaker 2

Yes, yes. Sorry, Jack. Yes, indeed, we'll start with the U. S. And we'll have there is some product available in the European markets now.

Speaker 2

So it's CE marked already. But I think directionally, we're going to put most of the inventory we have at the U. S. Market in the beginning and then we will as we lift the ability to in our capacity to make the product, we'll move market to market, but largely Europe after the U. S.

Speaker 5

Great. Thanks very much.

Operator

Our next question comes from David Saxon with Needham. Please proceed with your question.

Speaker 6

Great. Good morning, David and Tim. Thanks for taking my questions. I just have 2 kind of product pipeline related questions. The first is on AR-five twelve, just thoughts about the adverse events, the stinging and burning, how much does that impact the opportunity?

Speaker 6

And then it sounds like you're expecting immaterial revenue contribution next year when it launches kind of mid year. How should we think about the level of investments needed to support kind of the second half launch? And then I'll have one follow-up.

Speaker 2

Yes. So burning and singing is very common with eye drops as you probably know. I think it was about 50% in the trial. So but 97% of that was mild and I don't think anybody maybe 1 patient or something got knocked out of the trial. So I think we believe it to be very, very manageable and obviously what really matters is how well it works.

Speaker 2

And I think what we're after is something that works much more quickly than the alternatives that are out there. That is the data that we seem to have right at this point. So instead of waiting a month to figure out or even 2 or 3 to find out whether something's working or not, I think you could find this out quite quickly, which is good for payers, good for patients. I think we'll see some very positive response to that. The revenue contribution, obviously, we get it out mid year.

Speaker 2

By the time we get it out and get start working with payers in earnest, you're really not going to see much in the back half of next year. What we have said is we're going to be thoughtful about our promotion as we kind of move forward. We'll put certainly more folks on the ground behind this and there'll be more advertising promotion. But we're going to be thoughtful about the timing of all that and we'll work our way through next year. And I think think about this as a full speed idea in really in 'twenty six.

Speaker 6

Okay, great. That's helpful. And then my second question is just on PanOptix Pro. When will we hear which of the 2 lenses that are currently approved will be the one you ultimately go through with commercializing? And then kind of thoughts around launching that in the U.

Speaker 6

S. While it seems like the U. S. Market is kind of softer? Thanks so much for taking my questions.

Speaker 2

Yes. Look, I mean, I think we have a lot of market share in the U. S. So we're obviously very interested in getting it here first. We'll certainly take it around the world as we get approvals and CE marks for it.

Speaker 2

But in this case, we should have a decision made in the Q1. We'll certainly manufacture it as quickly as we can and get it out quickly. So my hope is that we've got it out the end of the Q1, early second, something in that zone. We should be ready to go. But we're excited about what we've got.

Speaker 2

We've got 2 very good ideas and it is very difficult. I mean, I think one of the cool things about PanOptix has been it's a very, very good lens. I mean if you want a true multifocal, this is the lens out there that provides tremendously positive near term mid range and distance vision without a lot of visual disturbance and that's something everybody else has got to come to. We're going to improve on it. I don't think people have gotten there yet.

Speaker 6

Great. Thank you.

Operator

Barry Biegelsen with with the Wells Fargo. Please proceed with your question.

Speaker 7

Good morning. Thanks for taking the question. Maybe, Tim, could you give a little bit more color on the factors that led to the top line guidance reduction? The reported range came down by about $150,000,000 at the midpoint, constant currency range maybe 50 bps. Just a little bit more granularity on the guidance change, just bridge from the old to the new.

Speaker 7

And I had one follow-up.

Speaker 3

Yes, sure. Thanks, Larry. If you look at the beginning of the year, markets were pretty good. Our performance was very good. And that's why we increased the guide after the Q1 call.

Speaker 3

When you get into Q2, we started to see a little softness in the U. S. Surgical market, probably in the June timeframe. That softness continued in Q3. So that's really what drove the adjustment to the revenue guide.

Speaker 2

And that $40,000,000

Speaker 7

in the divestiture of the eye drop sales, Tim, is that where does that show up? And just for my follow-up, David, maybe just give us an update on the Unity Versus soft launch and feedback so far. And if we should expect above average growth next year for your equipment and surgical businesses given that launch, understanding that that will probably accelerate through the year, David, as you said it's a Q2 launch? Thank you.

Speaker 3

The $40,000,000 is an annualized number that will show up in the ocular health segment.

Speaker 2

Yes. And then on the Unity VCS stuff, SoftWatch has been great. I mean, we've really we've been patient with this because we've got 2 really terrific products out there in Constellation and Centurion. And as I said in the prepared remarks, this product is doing really amazing things. And I think we've had a very positive set of feedback and a lot of good input too on just the way it's set up in the software and how it looks to the surgeons.

Speaker 2

So we're making some small changes as we go through this, but all things that I think are, I would just call them cosmetic or smallish, which is exactly what we wanted to find out. So where we are right now is feeling very good about this launch. And I would say that you expect in a 10 year cycle to see, especially when you get the new thing out, a little bit more accelerated growth in the 1st couple of years, last couple a little soft. As you see right now, this year is going to be a little soft for us in equipment, all kind of expected as you normally cycle through equipment like this. So I do think that the growth will certainly accelerate in the back half of next year as opposed to the front half because it will take us a while to kind of get things moving and get everything going.

Speaker 2

So but yes, equipment should pick up next year from this year for sure.

Speaker 7

Thank you.

Operator

Our next question comes from Patrick Wood with Morgan Stanley. Please proceed with your question.

Speaker 8

Beautiful. Thank you. I'd love on the OUS and ex China ACIOL business. I mean, it's been strong for a little while now and definitely above trend. Could you unpack that for us a little bit?

Speaker 8

I mean, Vivity and PanOptix have been in the market a while. There's not been a huge change in structure. We're not really seeing that increased adoption in other areas of MedTech. So what do you think is driving that strength and how sustainable

Speaker 6

is it ex China or U. S?

Speaker 2

Well, look, I mean, if you take apart the international businesses in surgical, the ATI well penetration is probably what's driving the over performance. So there's some share movement in here positive for us for sure. And I would call that we start with a much lower share historically. We were later to market in Europe and in Japan and in Eastern Europe and the rest of Asia. So all those markets, I think, are still on the rise and they continue to grow nicely.

Speaker 2

And remember too, we didn't really get Vivity out there in every market everywhere. So we're still for example, we got Japan autonomy to go with Viviti. So we're there's a bit of a sequencing that goes on as we kind of put capacity out there in all of the markets. So that's part of it. So the share growth, I think internationally was very solid.

Speaker 2

But penetration in Europe, for example, was up 70 basis points. It was up 30 basis points in Japan. It was up a lot in China. It's really been a positive everywhere on penetration. General APAC was up 120, that would include Korea.

Speaker 2

So I think there is a general movement from a lower base into a more aware market that is very interested in these cash paying products that do more than what the government is going to pay for. And so I think you see kind of a they start from a low base in the kind of low teens and then depending on which market you're in, they're moving up towards where the U. S. Is. Obviously, U.

Speaker 2

S. Is more like 'nineteen, but I think it's I think that's mostly penetration. And then there's a fair bit of share on our benefit because we're putting products out there and we start again from a lower starting point.

Speaker 8

Got you. And then maybe just as a quick follow-up, like what's the holistic appetite internally around slightly more therapeutic assets? I mean, I know you've got your stake in Orion on the cell therapy side. Like is that generally a direction of travel that you want to take the business in totality? Or is it more of a sort of, I don't want to say side venture, but how is the appetite for more pharma like assets?

Speaker 2

I think it's appropriately sized. I think we have a desire to get back into biopharma. I think we are capable of it in quite a significant way. Arianne has given us a real beachhead there with our glaucoma drops and I think if you kind of think through what we're doing now, we're doing we're very patient around this, but I think we are very interested what's the front edge of what happens next. And we certainly like things like cell therapy.

Speaker 2

We do like small molecules still, but formulation is probably where we've always had our strength. So think about drug delivery as a primary idea, think about other kinds of ideas that we would patiently develop over time. So I would think long term absolutely interested and would like to build a business there, not in a hurry to do it. We got a great plan right now.

Speaker 6

Love it. Thanks guys.

Operator

Our next question comes from Ryan Zimmerman with BTIG. Please proceed with your question.

Speaker 7

Good morning. Thanks for taking the questions. Sorry to be a little myopic here, David and Tim. I want to ask about the 4th quarter. If you look last year in terms of 3Q to 4Q, there's been a less pronounced step up from 3Q to 4Q, about 1.3%.

Speaker 7

This year, your pace ended up maybe a little over 3%, which based on my model is evident in equipment and ocular health. But I'm wondering if you can kind of talk about kind of how you see and what's underlying your assumptions for the Q4 maybe from a segment perspective?

Speaker 2

Well, let me try and kind of give you a broad sense, Ryan. And myopic is always the right word for us. We spent a lot of time on that topic. We when you look at implantables and our consumables business, it is dependent on the procedural growth. And so based on what we've seen in the kind of end of the Q2 and Q3, we're just being appropriate, I think, in the way we're thinking about the Q4 volumes.

Speaker 2

I mean, that drives obviously those 2 categories. They run very close. We're going to grow faster than the market, but we're we lose one point on the market and all of a sudden that affects us. It's a difference between 6% and 7%. So I think that's one element.

Speaker 2

I think the when you get to equipment, I think there's a natural tendency right now to wait for a lot of things that we've got going on. So I think you just got to chuck that one up to, if we hold at stable, which has been our goal this year and we've done a little better than that, that's really what's going on in that market. It's not a market phenomenon. It's not really a capital thing. It is really we've got some awesome technology coming and I think people are waiting for it.

Speaker 2

And we kind of knew that was technology coming and I think people are waiting for it. And we kind of knew that was what was going to happen. It's happened in prior launches. And then when you move to VisionCare, contact lens was pretty solid actually. So I think we look at contact lens, we had a little less price in the Q3 and the Q4 should be pretty solid.

Speaker 2

So I don't really anticipate a lot of change there. And I think ocular health has been beset a little bit by some one offs, right. So you've got a contact lens care problem that we had with some inventory in China last year that we're wrapping around as a comp and then we had of course a bit of a mistake with a vendor in the Q3 on the gross margin with the product that we had to spoil. So I think in the Q4 we should be kind of relatively stable and those markets look fine to us and our performance has been really even despite that quite good in the sustained product for example, which has been double digits. So I think segment to segment, if you cut it all there, it should be pretty close to what we're describing.

Speaker 2

We have a pretty good read on it. So again, I think it's good. We'll grow faster than the market. We hope the market grows well.

Speaker 9

Okay. And then

Speaker 7

I got a lot of questions. I'm going to actually ask about P7 just because it is such a paradigm shift in contact lens adoption. And so, you can spend a minute kind of is the target to switch the 2 week wears, is the target to go the initial target on the monthlies? How are you thinking about kind of segmenting the market? I mean, in order to drive what is essentially a new category in contact lenses?

Speaker 2

Yes, it's interesting question and it's a really good one. That's why we've been a little bit careful with this product. We've talked about it really for maybe 18, 24 months because we had the idea some time ago, but we wanted to test it. We've had it in the market now for about 6 months with maybe 30 to 50 KOLs that we really think a lot of. And I think what we believe is that everybody believes that dailies should be the product people should use because it's they're healthier, they're easy to use, all of those things.

Speaker 2

But not everybody can afford it. And today, still about half the market goes into a reusable lens, which is usually a monthly lens, sometimes a 2 week lens. As a consequence of that, what we have asked ourselves is, well, is that is there something in between there? And the answer is, we believe so. And it is basically this 2 week market or the monthly market that we're thinking about because a 1 week lens is certainly more intuitive.

Speaker 2

Every Monday, every Sunday, whatever you want to do, you take it out, you toss it, and then you use it reusably all week and you get rid of it. But that's a much more intuitive replacement profile. It's healthier. It's a lot more comfortable than a monthly lens, especially as you get to the end of the month or you get to the end of the 2 weeks. What we believe is that putting this lens in every week gives you a fresh lens every day and at day 7.

Speaker 2

So at the core of that is, we think there's a price point and a comfort benefit, a wearability benefit that is very meaningful to the 2 week wearer and the monthly wearer. So that's roughly how we see it. It's a for everybody who can't afford DAILIES, this is going to be the best lens for them.

Speaker 7

Thanks for taking the question.

Operator

Our next question comes from Jeff Johnson with Baird. Please proceed with your question.

Speaker 10

Thank you. Good morning, guys. Wondering if I could ask maybe 2 clarifying on the model and then just a contact lens question. On the model itself, 4Q implied guidance seems to be kind of a broad range in 5% to 9% at the organic growth level. Tim, can you kind of narrow us into that 5% to 9%?

Speaker 10

What would it take to be at the bottom end of the range or the top end of the range? Is that the right range doing the math? And I guess I'll there and then ask one other question. Thanks.

Speaker 3

Yes. I mean, as far as the ranges go, to David's point, I think he laid out sort of the sequential growth that we're expecting. I think what moves that market would be one of them. Again, we've assumed the market will be consistent with what we saw in Q3. So if that's a little bit softer than we thought that would bring you down, if it's a little bit better than we thought that would bring you up.

Speaker 3

And then again performance, I mean again we have a lot of momentum in terms of contact lenses to David's point, internationally a lot of momentum there gaining a lot of share. Ocular Health, we have a favorable comp. So those would be the movers.

Speaker 10

All right. Fair enough. And David, I think I heard you say, correct me if I'm wrong, kind of whatever the second half is, where 4th quarter shakes out and what the 3rd quarter, you'd be somewhat comfortable with that being kind of the stepping off point for the first half of next year and then maybe some acceleration on top of that. Is that correct, number 1? And number 2, just on the contact lens market, the 5% growth you cited for the market this quarter seemed maybe a point softer than the first half.

Speaker 10

Anything to read into that? Our recent survey picked up maybe a point of softening as well. So just wondering if anything's changed in the market or if that's just kind of normal variability by quarter? Thanks.

Speaker 2

Jeff, I think that's for the second part. I mean, we've always said the contact lens market runs between 4% 6%. It's right in the middle of that right now. So I would call that normal. I think the first part of your question, front half versus back half, what I was really trying to imply was we really have a lot of stuff coming in, in the front half, but it doesn't really generate full speed revenue until you start getting into the back half.

Speaker 2

So I would think about back half a little bit stronger than the front half next year. And that's really all we can guide you at this point until we get really into next year and have our all our thoughts together on the market and how these things are going to actually roll out.

Speaker 10

Fair enough. Thanks.

Operator

Our next question comes from Anthony Petrone with Mizuho Group. Please proceed with your question.

Speaker 11

Thanks. Maybe one on IOLs and one just a broader new product question. You mentioned a couple of times, David, on competitive dynamics, but also the market is a little bit soft in the U. S. Maybe if you segment between those, how long do you expect trialing of competitive lenses?

Speaker 11

I think in the PC IOL side, will that bleed into the first half of next year? And then does it subside? So a little bit on those dynamics. And just that underlying market in the U. S.

Speaker 11

Has been, I think, a little bit soft. So is there any update on the state of the consumer? And then just sneak in the one on new products. You have 3 new products coming next year that are pretty substantial. When you think about contribution of new product growth, is that something that we should be thinking 200 to 300 basis points or perhaps more as this gets going?

Speaker 11

Thanks.

Speaker 2

Yes. Let me take on the first one. Look, there is two dynamics, you're right. I mean, there is one that won't last that long, but certainly it's hard to know how big it is and that is competitive sampling. I mean, sampling takes out revenue units that should depress the market.

Speaker 2

So some of that is in there for sure, because there were 2 relatively new products into the market, with competition in the Q3. So it started kind of in a second, but and that could explain some of it. There's also a lot of other views on this, which is, you know, we can see that some of our largest accounts have been a little bit less productive this year than they have been in the past. But the thing I'd tell you is there is no shortage of cataracts. There's plenty of cataracts to go.

Speaker 2

We could they could do as many as they want to do. The limiting factor is how long they're in the OR and how many they schedule. And so really, I expect all this stuff to kind of naturalize into what has historically been the global growth rate. We've kind of called that 4% to 5% range globally is the right answer. So we're on the low end of that because the U.

Speaker 2

S. Was a little bit of soft, the international was solid. They were right in the middle of where they should be. They were 5%, I think. So I think we were pleased with I think what happened in international, continue to see strong growth out there.

Speaker 2

It's been the U. S. Dynamic that we're just trying to figure out. How long does it last? I don't know.

Speaker 2

I mean, but I wouldn't really worry about it over the long haul. I think if you're in this for the long haul like we are cataracts come back. This is a 3% growth market in the U. S. Has been for a long time.

Speaker 2

So I would expect it to be different than that over the genuine long term horizon. On the other piece, you mentioned on the consumer, I would really take the consumer out of this. The consumer is really not part of the cataract surgery discussion really. I think we know there's a lot of headroom for H. I.

Speaker 2

Wells. We know there's a line of right now I think the wait times even in the U. S. Have gotten to be 4 5 months. So there's a significant amount of wait time out there, plenty of consumers who will come and pay for their surgery.

Speaker 2

On the last bit on product growth for new products, give us a little bit of time to think that through. We need to position that a little bit better. But I think what we're trying to figure out as we get into next year will be how much we're going to put into that, when they launch and how to think about that. But as I said before, what I give you right now is back half is probably stronger than the front half. Thank you.

Operator

Our next question comes from Tom Stefan with Stifel. Please proceed with your question.

Speaker 12

Great. Hey, guys. Thanks for taking the questions. 2 on the consumables opportunity for Unity, I'll ask both upfront. I think it's understood price is a potential growth driver for Unity consumables, but what about the share gain opportunity?

Speaker 12

David, can you talk about that a bit? And I guess if and how that can also drive consumables growth? And then second, my tack on, is there any sort of tail or lag on the consumables revenue from Unity compared to system placements that we should be thinking about as we try to model out the impact from Unity consumables? Thanks.

Speaker 2

Yes, the last one is pretty easy. There isn't really a lag different than what you'd see on our normal sales and we do but you do see when you bring a new machine in, there is a cutover period. So you start a little bit slower and then it accelerates up. So just you're going to have to put in a lag of growth to full speed, But that's not different than what we would sell now. So I would think about it that way.

Speaker 2

We've been very fortunate last couple of years. We've gained share in our platforms. So I think we've gained 1 or 2 share points of platform around the world, largely international, I would say and a little bit in the U. S. But I think there is some share in the U.

Speaker 2

S. To be had. I would not say there's a lot. I would really think about it as a replacement cycle for our current machines with a premium to that replacement both on the consumables and the consoles. Internationally, I do think there's a share opportunity.

Speaker 2

But again, you have to divide the world up into the kind of world that can afford this machine and the world that is using very kind of inexpensive what they can afford machines where we really don't compete. And that's a significant part of the international share as you would look at it. So you think about India, you think about developing markets where frankly there would be some of our machines in there, but only in very large centers, in very large metro areas. So we tend to have a very low share in some of those developing markets. But those are opportunities for us.

Speaker 2

They're probably opportunities for others of our products. So say our legacy brands and or our Legion product. And I think that was probably what it was. But I think directionally the growth is going to be positive in consumables because of course we're looking to get a premium on the packs as we go forward.

Speaker 4

Thanks.

Operator

Our next question comes from Brett Fishman with KeyBanc Capital Markets. Please proceed with your question.

Speaker 13

Hey guys, thank you very much for taking the questions. Just had a brief one on the contact lens business trend. So I think you annualized 1 of 2 pricing increases that you took last year and still grew approximately 8% constant currency in the sub segment. So just curious how much of that performance was tied to volume and mix versus pricing growth this quarter?

Speaker 2

Yes, I think you've got it exactly right. We've got we had a lot more price last quarter than we did this quarter. And obviously, I think we grew 9% last quarter, contact lens we grew 8% this time. So I think there was a slight I think you can attribute that 1% certainly to the price that was in last quarter. And then I'm not sure we've broken down in general what the price element of the lens category was, but I would think about it as generally the category runs a third, a third, a third, which is for us a third volume of coming from share, a third of trade up and about a third of price.

Speaker 13

All right, helpful. And then just one more kind of clarifying question on operating margin. So you started the year with guidance of 20 0.5% to 21.5% and now trending toward the lower half of that range. I was just curious if you could hit on kind of like the biggest moving pieces there other than a little bit less sales leverage and then specifically the estimated FX impact versus the original guidance? Thank you very much.

Speaker 3

Yes. Well, we had roughly 30 basis points of pressure driven by the supplier issue that we had in Q2. So if you kind of take that out, then you're right in the middle of the range that we had guided before. And from an FX pressure, let me see, I can't see that far, roughly 40 basis points.

Operator

Our next question comes from David Adlington with JPMorgan. Please proceed with your question.

Speaker 14

Hey, guys. Thanks for the questions. 2, please. Firstly, on Chinese and the VVP, I just wondered if you help us try to quantify what sort of tailwind you're seeing in China and how you expect that to evolve from here? Should we see a bigger tailwind developing from here?

Speaker 14

And then secondly, on 512, just in your discussion with payers, just wondering how the early onset of action is resonating with payers and is it enough to see 512 as first line therapy? Thanks.

Speaker 2

On the China piece, I think we're exactly where we'd hope to be. Right now, we feel really good about our progress. As you know, you've got to get the products listed, you've got to get them inventoried into the hospital and then you've got to convert surgeons to a new method. Many of these surgeons have never had the opportunity to use ABIVITY, although they've obviously heard about it around the world, same thing with PanOptix. So for us this is an exciting time and we're moving nicely through our cadence of activity and I think we're kind of as I would say full year effect next year is probably the thing to think about.

Speaker 2

We're getting some effect on it this year, but largely it's distribution and the inset of inventory into and we're getting some pull through right now which has been great. But I think our share is moving nicely, but again relatively early days for us there. Look for next year to be a bigger step forward. I think on 512, the payers piece of it, I think has been pretty good. Again, we're very early in this conversation.

Speaker 2

So I would say, we have a thesis on this that we are testing. It seems to work well. I do think that first line therapy is going to be almost always given to a generic if there's one available in many of the payers and you need to be thoughtful about that because you're going to have to clear that hurdle and that's not new news. I think what's exciting about this though is that even in that circumstance the economics of knowing that something works in a week versus knowing that something might work a month from now and then having to have another visit around it, I think has a real opportunity to save money to the system and to the patients. And obviously, if you could create a substantial impact early on, that is our economic thesis right now.

Speaker 2

And I do think it certainly resonates. We're going to need to make sure that we can make that come alive for people as we go forward. I think first line will be largely driven by historically lower priced products as it is today and we'll be competing for what happens right after that or how do we compete with that.

Speaker 14

Sure. Perfect. Thank you.

Operator

Our next question comes from gang Nujian with Citi. Please proceed with your question.

Speaker 15

Hi, guys. Thank you for taking my questions. I have 2, please. So the first thing is, could you just give us a quick update on how the penetration of ATLLs in the U. S.

Speaker 15

Trended in the quarter? And if you're seeing anything different in the first half of Q4? And then the second question is on the contact lens business. Seeing that the organic growth has been trending down over the course of the last three quarters. Aside from pricing, is there anything else that you would like to call out about this business?

Speaker 15

Thank you.

Speaker 2

On the penetration in the U. S, it was up about 70 basis points. So I think nice movement up. I think it was in the 19 low 19s. So again, kind of returning back to where it was after a bit of a hiatus there.

Speaker 2

So we were pleased with the sequential growth and the year over year both of them were up. I think directionally that the contact lens organic growth trending down I think probably has more to do with price than it does anything else. I think underneath that trade ups are pretty solid. And again mix has been good for us. So again we're getting some good reusable mix in here which is good for profit.

Speaker 2

You will have seen our sector profit up. And I think directionally our contact lens business seems like it's doing quite well both on a share basis, but also on a I'll call it trade up and our prices seem to be holding nicely.

Speaker 15

Thank you. And if I could just quickly follow-up, what is your view on pricing going forward into the New Year?

Speaker 2

We take that kind of quarter by quarter. What we're looking at is obviously our input our input prices first. So what does it cost us to make this product and what's the inflation from suppliers? So we take that into account. We're also looking at very quickly every quarter we look at what the trade up looks like.

Speaker 2

So is there any hesitation as prices moved up from consumers trading from a reusable lens into a daily lens, because we don't want to price anybody out. And obviously, we're always sensitive to are we a reasonable value relative to competitors. So that's what we're trying to figure out. So we'll reserve judgment on what we're going to do forward as we collect that information in the New Year.

Speaker 15

Thank you.

Operator

Our next question comes from Izzy Kirby with Redburn Atlantic. Please proceed with your question.

Speaker 16

Hey guys, thanks for taking my question. I was just wondering if you could talk to some of the dynamics supporting the sustained growth. This has been very impressive growth for some time now. Just wondering if you could help us understand the extent to which this is share gains versus market transition into preservative free and the sustainability of that growth into next year. And then my follow-up is on the surgical margins, which were a little bit softer this quarter.

Speaker 16

Just if you could talk to some of the moving parts within that surgical contribution margin, if it is mix pressure coming through from the implantable slowdown and how we should be thinking about that division into 2025?

Speaker 2

Thanks. Yes. Well, thanks for noticing the sustained growth. It has been terrific and I think probably an underappreciated asset for us. One of the things that we have noticed obviously when we put this product out was the preservative free multi dose format is a very attractive format for people.

Speaker 2

And the unit dose preservative free products are good products and what was surprising to us is that those have really persisted pretty well. I think some people find them convenient. But what's exciting is that most of the market I think has taken to the multi dose version of the preservative free product quite well. And we have always thought that it would kind of approximate the international markets in its penetration ultimately. So I would say it's a little bit of share gain, but it's a lot of movement to preservative free multi dose on the sustained piece.

Speaker 2

Now we hope that the share gain will pick up as well next year as we launch Sustain, what we're calling Sustain Pro. Sustain Pro has hyaluronic acid in it, which is as most people know it's a really popular lubricant and does a lot of really nice hydrating qualities if you include it in a tier. And so we've been able to formulate Sustain Complete with hyaluronic acid and some other kind of clever ideas that the folks have come up with to really give us a very durable comfort, which I think gives Sustain another boost as we go forward next year on a share basis. So we're excited about that. It comes out in the Q1.

Speaker 2

And so I would look for steady growth in Sustain in through next year.

Speaker 3

And if you look at the Surgical margins, there was a little bit of pressure on gross margin, which is primarily mix. That was a piece of it, but it was really predominantly incremental R and D.

Speaker 16

Okay. That's helpful. Thank you. And if I can just squeeze in a clarification, I think at the start you mentioned 1.5% growth in the U. S.

Speaker 16

I just wanted to confirm was that an implant or broader surgical?

Speaker 2

That's surgical procedures as we define them and that's largely around implants.

Speaker 16

Okay, great. Thank you.

Operator

Our next question comes from Sanjay Asar with HSBC. Please proceed with your question.

Speaker 17

Hi, thanks for taking my questions. 1 on the tax and cash flows, tax rate was lower and cash flows were much stronger than Q3. So the question is, is there any pull forward effect? Should we expect a normalization of that? And how will there be a Phase Ib going into 2025?

Speaker 17

And the second question is, can you give us some more color about how value based procurement has evolved for you, maybe some insight into the share gains and whether that was any that's had any impact on the lower surgical margins that you've had this quarter? Thank you.

Speaker 3

Yes. On the tax front, we did settle some tax disputes, 1 in the U. S, I think 1 in Germany. So we had some discrete benefits. So that's what you're seeing in Q3.

Speaker 3

So the overall tax rate that we updated moving it from 20% to 19%, that was really driven by the fact that we had more favorable discrete than we had anticipated. And then on the free cash flow, yes, we're excited about the free cash flow performance. We've been talking about this step up. We actually saw that in Q3. And what you're basically seeing is now that we're done with separation, now that we're done with transformation, we've flowed through the higher cost inventory that we bought when inflation was a problem and supply was a problem.

Speaker 3

You're sort of seeing all that flow through right now. So we're getting to a much more normalized free cash flow and we'd expect that to continue to grow as we improve our operating performance going forward.

Speaker 2

Yes. And on the global share, I would just say, we have our global total IOL share has been relatively flat. So we are trading international share for U. S. Share and I think as a consequence there is some price erosion around that.

Speaker 2

Now we're making that gross margin up in productivity inside of the manufacturing groups. So again you don't really see a net effect in gross margin on that. But it is obviously a lower price on the European stage and on the China stage for example. Our share gains have been meaningful in China, but it's hard to tell right now whether or not what they are because the data is a little bit muddy I would just say. So So we're very pleased with our performance.

Speaker 2

It's exactly what we'd hoped for. But I would just say I wouldn't want to over read the positives we're getting.

Operator

Thanks very much. Our next question comes from Falko Friedrichs with Deutsche Bank. Please proceed with your question.

Speaker 9

Thank you. Two questions please from me. Firstly, on the U. S. Market, I think you said that you noticed that it turned a little bit softer in June.

Speaker 9

Did this turn did this get worse throughout the Q3? Or did it just stay on this slightly softer level in June? So essentially, did the U. S. Market deteriorate further in Q3?

Speaker 9

Or did it just sort of stay on a stable, softer level that you saw in June? And then my second question is, if the root cause of this lower U. S. Growth is IOL customer sampling competitive products, Isn't there a risk that some of those customers stay with a competitive product, in which case your implantable growth might be a little bit slower structurally heading into next year? Or asking it differently, what gives you confidence that you can keep your share in the IUL market in the U.

Speaker 9

S? Thank you.

Speaker 2

Well, first of all, on the Tempo, it was slightly slower in June and it pretty much stayed there. It was pretty it kind of just stable through the Q3. So nothing to really write home about. I would just say it was a low end of normal is what I would typically say. And on the I think the question ultimately is, if it's really sampling, then you're going to have to stop.

Speaker 2

People have to stop sampling at some point and try and make some money. So I suspect that when they have to pay for the lens, it will be a little bit of a different story because at some level, you've got to be better than the lens that I'm putting in and we feel very confident about the performance of PanOptix and Vivity against all of the competitive lenses. So there's going to be a market for price. There's certainly a market for free. And I think you know what we believe right now is that you know we'll do well when it comes time to really perform.

Speaker 9

Okay. Thank you. And if I can squeeze in a quick follow-up, I think you said that you expect the market growth, sort of to be closer to the growth over the recent quarters. Could you put a number on that for us? Is it 3%?

Speaker 9

Is it 2%?

Speaker 2

I'm sorry, what was the question again? Market was closer to the recent quarters.

Speaker 9

I think you said yes, you said market growth is closer to what you've seen over the recent quarters rather than what you've seen historically. Can you put a number on that? Is that do you mean 3%?

Speaker 2

No, we're in the middle of the quarter right now, but I'll give you the Q3. It was 1.5% in the U. S. And it was solid overall. It was 4% globally, 5 international.

Speaker 2

So those are the numbers that you had in the Q3. They were a little bit softer than the Q2.

Speaker 9

Okay. And that's just a little bit less than the 4% to 5% for the market you've seen historically? Yes. That's right. On average, I guess that's what you want to say, right?

Speaker 9

Okay.

Speaker 3

Yes. Thank you.

Speaker 2

You bet.

Operator

There are no further questions at this time. I would now like to turn the floor back over to Dan Cravens for closing comments.

Speaker 1

Great. Thanks everybody again for joining us. If you have any follow-up questions, certainly reach out to either Alan Trang or myself. And also just as a reminder, as David mentioned, we are planning our next Capital Markets Day for the end of March of 2025 and that will be at our Fort Worth campus in Fort Worth, Texas and we'll plan on distributing the Save the Days closer to the end of the year. Thanks again and enjoy the rest of your day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Alcon Q3 2024
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