Bausch + Lomb Corporation

Good morning and welcome to the Bausch and Lomb's second quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Art Shannon. Please go ahead.

Thank you very much. Good morning, everyone, and welcome to our second quarter 2022 Financial Results Conference Call. Participating on today's call are Chief Executive Officer, Mr. Joe Papa, and Chief Financial Officer, Mr. Sam Eldesuki. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the investor relations section. Before we begin, we'd like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures. For more information about these measures, please refer to slide two of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. Finally, the financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it is my pleasure to turn the call over to Joe.

Thank you, Art, and thank you, everyone, for joining us today for the second quarter Bausch & Lomb earnings call. I will begin some comments about Bausch & Lomb as an integrated eye care business and briefly discuss the second quarter highlights. Samuel DeSucchi, our CFO, will then review our second quarter financial results in detail and discuss our 2022 guidance. Finally, I will conclude by discussing our product pipeline and upcoming catalysts before opening the line for questions. But before we talk about the quarter, I would like to take a moment to address two recent announcements. Last month, we announced that I will be stepping down as chairman and CEO of Bausch & Lomb in the coming months. Having completed the IPO of Bausch & Lomb, it is an appropriate time to transition to new leadership. First and foremost, I want to thank all of the talented Bausch & Lomb employees who are dedicated to our mission of helping people see better to live better. I'm honored to have been a part of this incredible company's history, and I will leave knowing that Bausch & Lomb is well positioned for continued success. Second, The Zyfax and Norwich decision is a Bausch Health matter. We will not comment on it. Bausch Health will discuss the Norwich decision on its earnings call next week. Now, let's turn to slide four and talk about the Bausch & Lomb business. For an overview of the important differentiators that support Bausch & Lomb's competitive position in the marketplace, Bausch & Lomb is the most integrated eye care company operating today. Bausch & Lomb was the fastest-growing global contact supplier in 2021. Bausch & Lomb has the highest brand awareness in eye care. Bausch & Lomb is a global leader in consumer health, outpacing U.S. market growth by approximately 1.7 times since 2018. And finally, B&L products are available to over 80% of the world's population. This clearly demonstrates the Bausch & Lomb critical mass in eye health. Turning to slide five, we see a number of opportunities for standalone Bausch & Lomb as an eye health company. First, we believe the company is well-positioned for growth in large, durable markets driven by new products and favorable megatrends or tailwinds, such as the increasing prevalence of myopia and diabetes in an aging population that utilizes 10 times more eye health than those patients under the age of 65-year-olds. and a growing middle class that are expected to continue driving demand for eye health products. In addition, we have the potential margin expansion over the long term based on new product launches and supply chain efficiencies. Finally, as a publicly traded company, we expect to have balance sheet flexibility to expand investment in the business and additional strategic bolt-on product opportunities, such as our recent announcement in Sinoculus for a surgical glaucoma solution, which I will discuss in more detail later. Moving now to the second quarter highlights on slide six. Our achievements contribute to a strong second quarter organic revenue growth of 6%. First, We had continued momentum in key portfolios. We had great consumer performance in the second quarter with a Lumify, BioTrue, and Prezavision all reaching their record high market shares in the U.S. U.S. market share for iVitamin franchise increased by 410 basis points compared to the prior year quarter. The BioTrue solutions franchise grew by 39% in the second quarter and is expanding with two new launches underway. Next, the investment in fast-growing categories, Lumify reported revenue grew by 21% in the second quarter, and we're in the early stages of brand expansion. Reported revenue for the Sci-Hi daily contact lenses grew by approximately 50%, and with the global Sci-Hi daily market growing at a CAGR of approximately 11%, we continue to see significant growth potential as we launch in more countries. And finally, new product category expansion. We are launching Revive, a new family of customizable soft contact lenses designed to meet the needs of more patients. And in June, we filed an NDA for Novo3, a potential first-in-class treatment for dry eye disease associated with meibomian gland dysfunction. To summarize, our strong second quarter results demonstrate the advantage of our integrated eye care platform, the durability of our brands through challenging economic conditions, and the continued ability of our team to execute our goals and drive innovation. As we look to the future as a standalone publicly traded company, we see many attractive opportunities for an eye health company that is well positioned for growth in large, durable markets and in categories that are growing faster than the overall eye health market. And with that, I'll now turn the call over to Sam to cover the financial results in more detail.

Thank you, Joe. Before we get into the details, I will remind listeners that when we talk about organic revenue growth, we mean on a constant currency basis and adjusted to remove the impact of divestitures and discontinuations. Turning now to our results on slide seven, we're pleased to report another quarter of strong organic growth. Our durable portfolio continues to drive demand across our key franchises and markets, as reflected by our total company revenue of $941 million for the second quarter. up 6% organically and up 1% on a reported basis. The business is demonstrating the benefits of Baochuan Lam's integrated and diversified platform with high brand recognition, which enabled us to overcome persisting macroeconomic challenges, including inflation, the impact of COVID in China, and approximately 46 million of currency headwinds. While we're seeing a gradual improvement in economic activity in China, COVID-related restrictions continue to limit mobility and disrupt consumer buying patterns. Overall, we're very pleased with our performance in the quarter and believe we have a resilient foundation that will allow us to accelerate growth as we build on the momentum in our current portfolio and continue to launch new products. In the near term, we expect growth to be driven by our key VisionCare franchises, expansion of our U.S. leadership position in consumer eye health, And market recovery tailwinds in our surgical business. We will continue to target cost mitigation initiatives and identify competitive pricing actions to address the impact of inflation and leverage our global footprint to navigate the stop and go nature of the COVID recovery. Over the long term, we expect to continue to strategically focus our investment to further strengthen the brand equity in our global franchises. execute on the transformation of our Optomic Pharmaceuticals portfolio by launching new differentiating products, and invest in R&D to capture future opportunities and target megatrends shaping the eye care sector. Now I will go into more detail on each of our segments. Revenue in the Vision Care segment, which includes contact lenses and consumer products, grew organically by 11% in the second quarter. Our consumer portfolio, which was up 15% organically, saw broad-based growth in the U.S. and international markets, with market share gains in iVitamin and redness relief products. The iVitamin franchise, Occupy and Preservation, grew by 7% on a reported basis. The franchise has continued to demonstrate resilience and, as the market leader, is continuing to drive growth through increasing awareness of the prevalence of AMD. Lumify reported revenue grew by 21%, driven by an increase in demand. Lumify continues to expand its market leadership position with revenue in the quarter reaching an all-time high of $35 million. The Lumify success has created a new platform for us, which we expect to build on with line extension and geographic expansion strategies. Having already launched in the U.S. and South Korea, we also recently launched Lumify in Canada. Next, our LensCare portfolio shows strong performance driven by both base business and new product launches. We expanded market share in the U.S. and recaptured market share internationally, subsequent to supply challenges resulting from the Milan recall in the prior year. We saw robust revenue growth in the BioTrue franchise. The launch of BioTrue hydration plus multipurpose solution in the U.S. is off to a strong start. Also contributing to growth is the BioTrue eye hydration boost line, which was launched in 2021. Internationally, Artelec, which is a key dry eye franchise, grew organically by 20%, mainly driven by strength in European markets. Growth in lenses was up 10% organically in the U.S. and up 3% organically in international markets. Excluding the impact of COVID in China, the international portfolio grew approximately 13%. The strong results were primarily driven by 50% growth in the DailySight High lenses and double-digit organic growth in our core brands, Ultra and BioTrue. We're continuing the global rollout of the DailySight High lenses, most recently with the launch of Aqualux UV Tint in Japan. We also launched revised custom soft lenses in the U.S., which is an important step in building out our higher-margin specialty lens portfolio. Certain products in the VisionCare portfolio have also benefited from strategic pricing actions to help mitigate the impact of inflation, with the brand equity of the portfolio continuing to drive demand. We will continue to monitor the market dynamics to ensure our products remain competitively priced. Moving on to our surgical segment. Second quarter revenue grew organically by 7% to $184 million. benefiting from the continued recovery as the market works through the COVID-related backlog of elective services. Growth was driven by demand in consumables, which saw 13% organic and 3% reported growth, and implantables, which saw 10% organic growth and 4% reported growth. Growth in implantables was mainly driven by our InVesta franchise and the contribution from our international entry into our premium IOL category through FlexSmart. Finally, in the atomic pharmaceutical segment, second quarter revenues of $168 million declined by 10% on an organic basis. In the U.S., the portfolio was impacted by the tail end of LOE products and competitive market dynamics in our generics portfolio. We'll continue to strategically focus on key promoter brands. By Zolta, TRX growth was up 36% in the quarter, and total revenue grew by 16%. Resulta now has been approved in 18 countries. We launch in Thailand in the second quarter, and we're preparing for launch in Brazil in the fourth quarter. The international ophthalmology portfolio is also impacted by COVID-related restrictions in China, which is a key market for us outside of the U.S. We're excited about the steps taken this quarter to continue the transformation of the ophthalmology portfolio. The NDA submission of NOVA III marks a critical milestone. We expect the findings to be accepted in the third quarter as we make progress towards the launch in the second half of 2023. We're also pleased with our recent launch of Zypyr, and we're seeing a positive response from the retina community. We believe that the new product launches and portfolio transformation will provide the atomic pharmaceutical segment with a strong foundation to drive growth. Turning now to slide eight, with total revenue of $941 million in the second quarter, we continue our strategy of investing behind new product launches and investing in R&D while maintaining a disciplined cost structure despite the incremental cost to stand of the company. Our adjusted EBITDA in the second quarter was $182 million. Our total adjusted gross margin for the quarter was approximately 60%. which is 100 basis points lower than Q2 2021. The change is largely driven by inflation-related headwinds, leading to higher costs in energy, shipping, transportation, and certain raw materials. We're working actively to mitigate inflation challenges through cost improvement and efficiency-enhancing initiatives, as well as strategic price increases. We continue to maintain a disciplined approach to cost management and leverage our infrastructure, Our increased SG&E spending of $10 million year-over-year can be attributed mainly to inflation and transportation costs. Our investment in R&D in the quarter increased to roughly 8% of sales as we continue to focus on high-priority projects to accelerate our ability to execute in our R&D pipeline. Finally, adjusted EPS for the quarter was $0.29. We'll go on to slide 10. Adjusted cash flow from operations was $165 million in the second quarter. Maintaining working capital efficiency continues to be a key priority, while also balancing strategic inventory management to anticipate the impact of macro headwinds. Second quarter CapEx was $34 million. B&L continues to have a strong balance sheet, which provides us with the flexibility to pursue value-enhancing investment opportunities. Now turning to guidance from slide 12. We are reaffirming revenue guidance for 2022 in the range of $3.75 billion to $3.8 billion representing between 4% and 5% in organic revenue growth. We're also maintaining our adjusted EBITDA guidance for 2022 in the range of $740 million to $780 million. We expect adjusted gross margin to be approximately 60% for the year. While we continue to implement mitigating initiatives, we expect the impact of inflationary pressures to be prolonged. We continue to expect interest expense of approximately $150 million, which includes the impact of previously anticipated interest rate increases on our variable interest rate debt. We also increased full-year R&D investments approximately 8% of revenue as we continue to accelerate high priority projects within our R&D pipeline. Lastly, As we continue to finalize our separation from BSC and take the required steps to establish BNL standalone capital structure post IPO, we're expecting our tax rate to be in the range of 6% to 8% in 2022, which is lower than our previous guidance of 12%. In summary, we're pleased with our strong Q2 results and growth momentum. We believe the results reflect the resilience of our business and provide a strong financial position from which to execute on our growth strategy. Now back to you, Joe.

Thank you, Sam. I will now discuss our product pipeline and the upcoming catalyst that we expect to drive business results. Beginning with Lumify in slide 14, After launching in May of 2018, Lumify became a $100 million plus brand in 2021. Today, it is the number one redness reliever in the category in the U.S. with approximately 47% market share. Building on the phenomenal success of this product and using the power of our fully integrated iCare platform, we are planning to expand the brand geographically and through line extensions. International expansion remains a priority. We've launched Lumify in Canada and where it's now available at all major pharmacy retailers and in South Korea. We are planning launches in other geographies and have regulatory approvals and submissions underway in multiple countries. We are also working on Lumify eye illuminations, a specialty eye care line for the sensitive eye area, a preservative-free formulation of Lumify, and a combination product with ketotipin for allergy symptom control. Turning now to slide 15, our BioTrue franchise is a global mega-brand platform that includes contact lens solutions, contact lenses, and dry eye products. The franchise generated $92 million of revenue in the second quarter, and importantly, reported revenue grew by 19% versus the second quarter of 2021. We have two launches underway. First, the BioTrue Hydration Boost Dry Eye Drops, which were launched in 2021, and the Second, a BioTrue Hydration Plus multi-purpose solution, which we launched earlier this year. This product builds on the success of the original BioTrue multi-purpose solution, which we launched in 2010, and is the number one multi-purpose solution in the United States. Importantly, the BioTrue Solutions family continues to grow and, more importantly, gain market share, increasing by 380 basis points compared to the first quarter of 2022. Let's take a look at the broader VisionCare portfolio on slide 16. Beginning with BioTrue one-day lenses, which launched in 2012, year-over-year sales of these lenses grew by 13% on an organic basis and generated $200 million of revenue over the trailing 12 months. Next, we have Bausch & Lomb ultra-contact lenses, launched in 2014, reported revenue from sales of these lenses grew organically by 10%. and generated $173 million of revenue over the trailing 12 months. Finally, we have the ongoing launch of our Sight High Daily lenses, up 50% on a reported basis. At a CAGR of approximately 11%, the Sight High Daily market is the fastest-growing segment of the contact lens market, and we expect our Sight High Daily lenses, which are now available in approximately 2,500, to be an important growth driver for the lens business, with global peak sales expected to exceed $250 million. On slide 17, we feature the newest addition to our specialty lens portfolio. Revive is the new family of customizable soft contact lenses that were launched with the goal of providing a more individualized vision-correcting solution to a broad range of patients, including those with high or unique prescriptions. Revive soft contact lenses are available in spherical, toric, multifocal, and multifocal toric options and can be worn daily for up to three months. These customizable lenses are also provided with a higher realizable margin structure. We are pleased to offer this new solution for patients with unmet vision needs. On slide 18, as I mentioned earlier, we submitted an NDA in June for Novo3, a potential first in-class treatment for dry eye disease associated with myeloma and gland dysfunction. If approved by the FDA, we expect to launch Novo3 in the second half of 2023. Consistent, statistically significant efficacy, safety, and tolerability have now been demonstrated in two Phase III studies. The charts on slide 18 show the efficacy endpoints for the second Phase III trial. Importantly, all primary and secondary endpoints were achieved, including statistically significant changes from baseline as early as day 15. Dry eye disease is one of the most common ocular surface disorders affecting approximately 18 million Americans, and one study found that approximately 86% of patients with dry eye disease had meibomian gland dysfunction. This is a fast-growing market with unmet patient needs. From 2016 to 2021, the U.S. prescription dry eye market grew at a CAGR of approximately 24%. Given the current market for dry eye disease treatments and the results of these two Phase III trials, we believe that NOVA III has the potential to be a major future growth driver for our business. On slide 19, we announced that we expanded our surgical portfolio by making an equity investment in Synoculus and have an option to acquire the company's assets. We also entered into an exclusive European distribution agreement with Synoculus for an innovative, minimally invasive surgical procedure for the treatment of glaucoma. MEMS is a stentless, simple, and fast glaucoma treatment that effectively lowers intraocular pressure without the need for invasive surgery. Globally, approximately 79.6 million people had glaucoma in 2020, and that population is expected to increase by 40% by 2040. Given the market landscape, we believe the transaction represents a great long-term opportunity for our surgical business and clearly fills a gap in our near-term surgical portfolio. To summarize on slide 20, Bausch & Lomb operates an eye health ecosystem where it is uniquely positioned to meet eye care needs. Bausch & Lomb has the highest brand awareness of any eye care company. Bausch & Lomb has longstanding relationships with eye health professionals as well as key retailers and e-commerce channels that reach a broad consumer base. Bausch & Lomb is a fully integrated eye health company that offers a comprehensive portfolio of more than 400 products to meet significant patient and consumer needs. Fashion Lime serves our patients and consumers throughout all phases of their lives, developing and offering new treatments to meet unmet eye health needs and help people see better to live better. Our second quarter results demonstrate the durability of our businesses. Our team remains focused on continuing to generate momentum in our key products, investing in fast-growing categories and expanding into new product categories, looking ahead to We continue to believe that Bausch & Lomb is well positioned for success as a standalone eye health company. With that, operator, let's open up the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And the first question comes from Joanne Wench from Citi. Joanne, your line is live. Please go ahead.

Good morning, and thank you for taking the question. Essentially, there are two of them. One, despite the particularly strong second quarter, both on revenue and EPS, you just reiterated guidance. So I'm curious, what are the takes that get you there? And then my second question is my experience or view is that ophthalmology is fairly recession resistant, but I'd be curious if you sort of take that lens and put it on your portfolio, which products do you think could hold up better than others? Thank you.

Two very good questions. So as we look to the second half of our year, we are optimistic in what we are seeing in the second half of the year with our business performance. So that part is absolutely clear. Having said that, though, there are a number of macro trends out there right now that we just want to make sure that we understand more about them as we think about our second half guidance. For example, the geopolitical issues that we see in terms of the COVID recovery in China, some of the issues that we see because of the Russia-Ukraine invasion. and how we are managing that relative to what it means for inflation, energy costs, especially energy costs in Europe. So we're thinking through that, foreign exchange, we're thinking through all those things, and we thought at this time, we are absolutely optimistic in how our business is performing, but we wanted to make sure we also considered those factors as we thought about what was happening with foreign exchange, et cetera, inflation. So that's the reason why we've reiterated our guidance but very optimistic in our business. As it would relate to the question of the portfolio through recession, I think you said it very well in terms of looking at it through our lens. We are looking at it as the eye health business as being a business that is relatively recession resistant in the sense that vision is is the most important sense for people, and what we believe is that people are going to continue to want to ensure they get the best vision, care, health that they possibly can. So we do think that that is something that is out there, and we've looked at it historically. We've looked at our overall business, and the fact that As we've gone through the business, especially as you've seen the most recent quarter, our consumer business had very, very strong 15% growth. Contacts was plus 5%. So we're seeing very strong overall growth in the business. And of course, the surgical also being plus 7%. We felt were all indicators for us as we're looking and thinking through the surgical business. The only other comment I will make is because of some of the challenges of COVID going back into 2020 and to 2021 to some degree, we still believe there is a backlog of approximately 10 million cataract surgeries that are still going to need to get caught up. And we see it happening in 22, 23 and beyond. So those are all going to be factors that we think are going to continue to drive the overall performance through the recession time period, depending on the magnitude of the recession.

Operator, next question, please.

Certainly. The next question is coming from Robbie Marcus from JPMorgan. Robbie, your line is live. Please go ahead.

Hi, this is actually Lily from Robbie's team. Thanks for taking the question. Can you talk a bit about how you're thinking about the cadence over the rest of the year? Do you expect normal seasonality in third quarter and fourth quarter? And are there any other puts and takes we should be keeping in mind for the balance of 2022?

Hi, this is Sam. It's a good question. So traditionally, our second half tends to be stronger than the first half, and maybe I'll build on what Joe has already covered in the earlier question, which is when you look at what we've seen in the momentum in the business in the first half, we've seen very nice momentum in our consumer business with growth in the eye redness category with Lumify. We also saw in the vitamin category with Ikevita and Preservation. So we're seeing that nice momentum, and we expect that we carry forward that with us On the lenses, we also have seen very good momentum with the launch of daily side high in the first half. It was up 50% in Q2. We expect that to continue with us as we go forward in the second half. And on surgical, the backlog, we continue to work through that. We're seeing the growth in the surgical and the elective surgeries, benefiting us as we go forward on the surgical front. Bouncing those couple of factors, I think, with all the macro market conditions between inflation, the supply chain, the geopolitical environment, and currency, headwinds that we've been seeing, currency has been quite volatile. So really bouncing all those factors and really working through the different scenarios, that's how we thought about it in the second half, thinking about the potential outcomes, potentially bouncing those tailwinds and headwinds. as you think about the second half. But traditionally, we've seen the second half to be better than the first half, but we have to be, I'll call it, optimistically cautious as we think about those macro headwinds as we go forward in the second half of 2022.

Operator, next question, please.

Certainly. The next question is coming from Craig Bijoux from Bank of America. Craig, your line is live. Please go ahead.

Great. Good morning, guys. Had a few on SIHI. One, I wanted to see if you guys would provide any directional color on where your daily SIHI sales are today. And then also wanted to ask if you could provide a little bit more color on where you're seeing growth. So, you know, is it growth in the U.S.? Is it growth from the international markets that you just entered? And then Do you have a sense for how much of the CIHI use or growth is cannibalization versus new users to Bausch and Long?

Sure. Great questions. Let me try to make sure I take them all one at a time. First, where it's happening on the sales of CIHI, we're very pleased with what we're seeing with our CIHI. The SightHide lenses, I'll start with the U.S., but then I'll get into the rest of the world. We've seen that we've actually been able to double the number of active infused fitters for the SightHide daily lens versus just a year ago. So the actual number of docs, optometrists, ophthalmologists that are fitting has now doubled versus just the same quarter a year ago. So clearly, that's mostly U.S. data to be clear. We're also seeing that where we have our fit sets, which is the actual sample, if we call it that, we're actually seeing about a 16.5% share of the overall side high daily market. So clearly that's important to us. I want to be absolutely clear. We do not have the fit sets everywhere we want them. They are up about 30% versus a year ago, but we still have more fit sets that we will launch. And once again, this is U.S. data. As it would relate to the international side, the international team is doing very, very well. Europe is now very early in the launch, but we've gone from at the end of 2021, we had about 10 countries launch. We're now up somewhere in that 25, 26 countries already launched. So we're seeing a very nice geographic expansion as we had planned to go out into the marketplace with the SciHiDaily team. product. Outside the U.S., the international team is referring to it as Ultra One Day. So it's building on that overall brand of Ultra for us. As it relates to the next question, it was really where the source of the product's coming from. I have the best data source here in the U.S. business. We are not seeing a significant amount of cannibalization. We're seeing it coming from the AccuView, Oasis, One Day Moist, we're seeing it from Daily Total. Pretty much across the board, we're picking up share from those players. Also, a large percentage coming from New Starts, which was something that we think is very favorable to us in terms of what we're seeing. One of the good news points I'm going to make on this is that one of the things that we're very pleased about, at least in terms of the cannibalization question, is that notwithstanding the SciHi daily launch, which is an important launch for us, we did still see the BioTrue demonstrated a 9% reported revenue growth, and our Ultra, the monthly lens, showed 5% reported growth. So clearly we're seeing the growth in the existing lenses that we've been promoting before as we're launching the infused product. And as we mentioned during the call, the infused revenue growth was about 50%. We still believe our infused product will be over $250 million opportunity over the long term for the product. But we're excited about what we're seeing in terms of the growth. I think I got all of it. Sam, anything you want to add?

No, just on the BioTrue and Ultra, Craig, if you look at it also organically, because currency have a big impact on those products. So if you look at organically, those two products, BioTrue and Ultra, both grew double digits. So BioTrue is up 13% in the quarter overall. And Ultro is up 10%, both of them organically.

Yeah, good point. Thank you. Next question, please.

Certainly. The next question is coming from Larry Bagelson from Wells Fargo. Larry, your line is live. Please go ahead.

Hi, this is Charles. I'm for Larry. First, congrats on a nice quarter. I wonder if you might be able to give some preliminary thoughts on 2023. I know it might be premature to talk absolute numbers, but I wonder if you might be able to talk through some of the different puts and takes that might, or headwinds and tailwinds you might be thinking about in terms of maybe effects, inflation, LOEs, or new product launches to consider?

Sure. Great question, and I'll start, and Sam may want to put some additional comments on it. So I think really the important comment as we think about the future, we're obviously not going to guide through 2023 yet, but our important comment is that our plan is very straightforward, very simple. We think we can continue the momentum in the current portfolio, all the things that we're doing this quarter as an example. We've invested in categories that we think are going to grow faster than Then the overall eye health market, things like the daily sight lenses I talked about, the premium IOLs, the advanced digital microscope. And then, importantly, go into new product categories, things like dry eye disease. So those are going to be the factors for us in terms of how we're looking at the growth strategy for this business. Continued momentum. Investing categories growing faster in the market and then expanding to new categories is what we're looking at. What 2023 is going to be all about for us, it's going to be continuing to look at new products. It's going to be the Lumify product, looking at the new formulations for Lumify plus the geographic expansion on the consumer side, continuing to look at the BioTrue franchise, which many people have questions of us. Could you continue to grow the BioTrue multipurpose solution in a marketplace that where dailies are taking over. And I think we're answering the question, yes, we're seeing that kind of growth with the new innovation we're bringing out. And then clearly on the contact lens side for 23, the story is going to be the continued introduction of the infused product. And then now that we've launched the spherical, we're going to transform then to the multifocal in 23, and then ultimately the torque and multifocal torque lenses, all that designed to help us One innovation that we haven't talked much about but we're really excited about is we've come forward with Revive. Revive is a product category that allows us to customize lenses for patients to give them vision, help them with their vision unmet needs where they haven't been able to get that in the past. We're going to be able to give them customizable lenses. We think that's going to be great for patients with their unmet vision needs, but importantly, will also generate good margins for us as we go forward with our revived portfolio. And then clearly on the other comment I was talking about on the surgical side, new products, it's going to be the Invista, rolling out the LuxSmart Eat Off in 2022, and then the Advanced Digital Microscope, I think are some of the highlights. Final comment is ophthalmology, which is one of the challenges we've had to be clear in 2022. But the good news is we've got the largest portfolio of ophthalmic prescription products in the world at 100 products. And we're launching Zypure now. Visalta continues to do well. And importantly, we've filed the Novo 3 product at the end of June, which we are very optimistic about for the future. So those are kind of the key tailwinds that I see. But Sam, anything else you want to add?

No, I think that's from the business fundamentals and how we see it from the tailwinds as you go forward, tech can happen into next year. When you think about the other elements here, which also could impact into future impact in 2023 is Really, currency is a big factor. We've seen, we guided full year currency impact for us is about 160 million. We've already seen roughly about 75 of that come through in the first half of 2022. So there's still volatility in the currency and we expect that to continue. I think we also look at the inflation. We guided, in our guidance, we factored in roughly about 100 basis points of an impact on inflation. And we're seeing the signs, although we're taking steps to mitigate many of the actions from inflation, and it's manageable, but we've seen the impact of inflation is probably a little bit more prolonged as you go through into 2022 and beyond. So those are key factors here that we are going to continue to watch very closely, and we'll factor into our thinking as we think about 2023.

So new product launches are going to be important, and those are the things that we'll continue to talk about as we think about what's going to happen in 2023. I will point out there is one loss of exclusivity, which is good, that that's only one. We've worked our way through the loss of exclusivity of Lodomax or ProLenza products sometime late 2023. So we feel that there's a lot of – The tailwinds that are in front of us, we dealt with many of the headwinds, so we're excited about what we see for the future as we share it with all of you as we went out and did the IPO. Operator, next question, please.

The next question is coming from Imran Zafar with Deutsche Bank. Imran, your line is live. Please go ahead.

Thank you very much for taking my question. First question is on the surgical business. Can you just talk about the capital spending environment in terms of what the order book looks like and then maybe to what extent you're experiencing any supply constraints within that business? Thanks.

Sure. So let me start with the overall Bausch & Lomb surgical business. Importantly, during this quarter, we did see some very nice growth in our consumer business plus 13% organically. and also the implantable plus 10%. So we saw some very nice growth there. By definition, our total, though, only grew about 7%. So you can see that there is some capital spending that is lower than what we saw in the consumables and implantables are probably the best way to answer the question. As we've been working through the supply constraints, I want to first and foremost say the team on our global supply chain has done an outstanding job continuing to work through these questions. There are real supply constraints out there. I think that that is a fair comment. But our team has just done an outstanding job of working through things, everything from microprocessors and all the things that happened previously. are part of the surgical device side. Team's done a great job to help us think through it. You will see that we have made some investment in inventory to try to help us to work through that question. So we've taken some active steps here to think through this to put ourselves in the best position. But to be clear, there are supply constraints, and some parts are just like microprocessors, just more difficult to get. And on the other hand, some of the distribution is just taking longer to get from point A to point B logistically. But we are working through it. The team's done a great job. We have taken some action steps like building some inventory, strategic inventory, to ensure that we can work through this.

Okay, thank you. And then one quick product-level question on Revive. Can you just remind us what the addressable opportunity is for custom lenses and how needle-moving that launch could be in 22 and 23? Thanks.

Yeah, so I don't want to overstate this opportunity in the near term, but in the long term, we do think the ability for us to have customizable lenses that have much more flexibility in all the problems and issues that people need from a diopter's point of view. It will give a chance for patients to get custom soft lenses where they just previously have not had the ability because they have a high diopter or just a unique prescription. We're making them available in spherical, toric, multifocal, multifocal, toric, all the things that really can customize a product, make it very specific for you as an individual patient who wants a soft contact lens where previously it was just not available. So those are the things that we're excited about. I do think it's going to be slow in its uptake, but I think it's very complimentary to help us with all the other things we're doing for our RGP lenses, the Zen lenses, the Arise Ortho K, we see that, you know, it's not going to be a big 2022 or 23, but over time, we do see this as being a chance to help meet the needs of these patients who have these vision problems. Longer term, we'll see what happens because, you know, I think patients are going to spend the money to improve their vision because it's just so important to them. And many patients want these types of lenses and are going to be very happy to have access to them, we believe.

Okay, thanks so much.

Operator, next question, please.

The next question is coming from Georgie Yordano from Cowan. Georgie, your line is live.

Please go ahead. Thanks so much for taking our question, and congratulations on the quarter. So maybe just more broadly on the margins, you've spoken about some of the incremental investments you're making this year, but maybe if you could comment on how should we be thinking about margins going forward and what are some of the focuses of the R&D investments. And then secondly, can you talk about the restrictions that come from the 90% ownership BHT has on your business? What are some of the business activities that might be limited because of that, and how could this potentially impact your business, if at all?

Hi, George. So let me start with the margin. And I'm going to start with thinking, just maybe I'll work my way through the P&L here. I'm going to start with the gross margin, and then I'll just take you down to the EBITDA. And when you think about gross margin year over year, we're seeing gross margin, pressure on the gross margin of about 100 basis point. Majority of that impact is coming really from inflation. So we've seen the inflation fluctuate. With us, we offset many elements of it through strategic pricing and actions that were taken through our supply chain and the level of inventory, as Joe mentioned earlier, but you still see about 100 basis points coming in through inflation. To a lesser extent, the product mix also plays a factor here because as we launch new products, short-term tend to have pressure on the margins. But the beauty about that element of it is that it does flip as you go forward because as you scale up and as you build up your launch, it does contribute to margin improvement. So you see a short-term pressure on the margin, but you'll see more improvement as you go forward. When you think about the EBITDA on a year-to-year basis, I think a couple of factors here. Factoring inflation, also factoring the stand-up of the company. We talked about The fact that 2022 for us is the year where you actually, it's a pivoting year because you're building up the infrastructure within BNL. And as you go forward, you're not going to have to incur that same level of buildup in the infrastructure as you go forward and you'll be able to get the benefit of those products that you're launching. So you'll be able to see that margin and the margin expansion as you go forward. So we're seeing that play out exactly as we planned in the first half of 2022, and we expect it to play out exactly as our plan for the rest of the year and as we go forward. In terms of R&D investment, We increased our R&D investment this quarter. We upped our guidance to about 8%. We ran profit about 8%, 8% to 9% in Q1. We ran another 8% in Q2. And as we look to the second half of the year, we're projecting we're going to be an 8%. That's about 100 basis points higher than what we had previously communicated, which was about 7% of sales. We're excited. We have Yahya, Dr. Yahya, who's joined us. He's really taking full charge with the R&D and accelerating many of our key pipeline projects to be able to bring it to market sooner. And we're excited about that. And you're seeing that level of excitement translate into the higher expense and investment within R&D. We expect probably as you go forward, it's probably the 7% to 8% is probably a good range to think about, but for this year, we are going to be more leaning towards the 8%. And within the category you asked, which products, we focus our investment mainly focused around the surgical. We pivot the R&D investment towards surgical, followed by ophthalmology, and then our vision care segment. So that's the priority of the two of them. And then you had one last question in terms of the restriction of the 90% ownership. We are, just as a reminder, we are still a restricted sub of BHC. However, really we don't see that type of restriction having any impact on our operation on a day-to-day. So we still have the full freedom to operate and do investment as you've seen what we've done in the first half already in terms of the number of investments that we've done through either license or partnerships that we've done in the different businesses. So we're seeing the flexibility and the freedom to operate. So we're not seeing much of a restriction at all from the 9%. I don't know, Joe, anything else you want to add?

No, Sam, I think you answered it very well. Maybe the only thing I'd add from a big picture point of view to what Sam answered, it was a good answer, is that what you're seeing, I believe, is that more of a focus at B&L on the eye care business now that we're separated the companies, we really put a lot more focus into what we're working on at B&L. And I think that's one of the reasons why Yahia has been able to advance the R&D projects. And with that comes incremental investment. But importantly, we're advancing the projects, which we believe will make a difference in the lives of patients. So I do think that that's really just an example of some of the focus that you get as B&L now separated out as an eye health company. The only other comment I would add to what Sam said in terms of the margin comment is that, once again, it's going to be about the new products. As we launch these new products, we do think that we're seeing an opportunity to bring forth these new products. And then importantly, as we get more experience with our Sci-Hi daily lenses, for example, I expect the yield to continue to get better from the capital equipment that we have. And as we move that yield from a you know, a 60% yield in the first year to a, you know, 70% to 80% yield in the second year, and then 80-plus percent in years three and four, that type of yield also is going to help the margin to the comments that Sam was making. But once again, I think a large part of that comes back to this focus that we have as a company now that we have separated the B&L business.

Thank you so much.

I've heard the next question, please.

Certainly. The next question is coming from Doug Mead. from RBC Capital Markets. Doug, your line is live. Please go ahead.

Yeah, thanks very much. Just a couple of housekeeping items. Number one, is our P&L now fully burdened for all standalone costs? And then maybe you could also just quickly chat about CapEx being maybe a little bit lower this quarter. It looks like you're guiding to an unchanged number. So those are two housekeeping items. And then finally, In the event the parent did need a bit more cash and recognizing that they still own, you know, 90% of the company, what is the mechanism by which that they could transfer over cash if necessary in the future? And I'll leave it there. Thanks.

Hi, Doug. Let me take them in order here. So in the first one, with the standalone costs, So we guided about 70 million standalone costs for this year as you compare to last year, full year 2021. And what we said is we are starting to ramp up into the standalone costs throughout the year. So I think when you think about it right now, you probably look at the P&L and you look at B&L. It is what you will see in terms of being able to operate as a standalone company. So that cost is already factored in terms of how we think about from our guidance for the full year 2021. In terms of CapEx, you are right, there's about 34 million of CapEx this quarter. Just a reminder, we did spend roughly about 42 million in Q1, so that gives you about 76 million. So it's still, from a run rate to the 225, it is light. But the key factor here, it's all about timing for us. I think there's a couple of factors in terms of the CapEx is tied to number of projects within our supply chain and manufacturing, and it tends to be timing. And as we see it, we see a big element of that coming into the second half, hence that we did not move or change our full-year guidance of $225 million. And then in the last part, I'll start here in terms of what mechanism of any cash transfer. There's no – it's an arm-length relationship between us and BHC, so there's no – I'll call it a relationship where we can actually just – submit or send cash to BHC. So the cash that you see on the balance sheet, which is roughly about $430 million for BNL, that's the BNL cash that's retained by cash, the cash from operation that we generate, which is about $165 million. That's the cash that stays within BNL. So there's no sort of a requirement or mechanism that we establish that we transfer cash back and forth between BNL and BHC. It's really an arm length and an independent point of view.

Thank you. Next question, please.

Certainly. The next question is coming from Yann Taneja from Guggenheim Partners. Yann, your line is live.

Please go ahead. Thank you. Congrats on a good quarter. A couple questions for me. First on the pricing, can you just talk about the level of price increase you are able to take at corporate level? Are there certain businesses where you have more leverage versus the other And then what percent, actually, are you able to realize? And whatever you've done in 2022, at least, are you able to offset the inflation impact? So that's the first question, broader on price. The second one, any update on licentious by a similar filing? Thanks.

Sure. Let me start on the pricing, the level increase in which businesses. So maybe the first question, General comment, as we reported in the quarter for the second quarter, price was 2% of the 6% organic growth and volume was 4%. So we achieved a 2% price increase. First comment. Second comment I make on pricing is relative to what we've done, I remind you that we took pricing in January. We took it for our vision products, our contact lens products. And those prices took effect. It was in the mid-single-digit level. We did not take it in every country around the world. We looked at the inflationary pressures and think of it almost as a situational leadership of where we saw the inflation and where we saw the issues. We did take pricing. So that occurred in the January time frame. We did the same thing in the consumer side of pricing, but with the consumer business, especially at some point, Some areas, what we had to do there is give advance notice to the individual customers. And although the price was taken in January, we didn't actually realize it until really the March timing. And that's why you're seeing some of the pricing stronger in this second quarter versus the first quarter. As it would relate to what we're thinking about for the rest of this year, and I think part of your question was next year as well, We are looking at additional pricing for 2022. The answer to that is yes. We are looking at not just the, I'd call it the selling price, but we're also looking at discounts, rebates, et cetera, all of which contributes to the pricing side. And we have reflected that, our comments and our beliefs on pricing in the forecast for the full year is how I would reflect that. Do I think that there's going to be some additional pricing that we will look to take in 2023, at least as we sit here today with the inflation factor somewhere in that 9% range? And certainly what we're seeing on the energy side, I do expect us to look at additional pricing in 2023. Obviously, though, the situation will depend on what happens for the remainder of this year. As it would relate to Lucentis biosimilar, we do expect to resubmit the Lucentis biosimilar by the end of 2022. To be clear, that's going to be done by our partner, but yes, we do expect that to be resubmitted by the end of 2022.

I think I got all the questions. Sam, anything you want? Thank you. Okay.

The next question is from Cecilia Furlong with Morgan Stanley. Cecilia, your line is live. Please go ahead.

Great. Good morning and thank you for taking the question. I wanted to ask on here if you could just talk a bit about your outlook for the balance of this year, where you are in the rollout, the training, and then just kind of a higher level macro question. On your surgical business side, really what are you seeing today in terms of either staffing pressures, other limitations, that are dampening down what could have been perhaps greater growth just in surgical procedures overall. And thank you.

Sure. So first, we're very excited about what we're seeing with Zypyr. I had a chance to talk to a number of the key opinion leaders, I guess it was a couple weeks ago now. They had their annual meeting in New York City for retinal surgeons. And the reaction to Zypyr from the key opinion leaders was very, very strong. We have received now a J-code, which is an important part of the reimbursement side of Zypera. That is now in hand. So we're very excited. I don't want to overplay it, though, in the sense that the annual prevalence of treated UDI patients in the United States for 18-plus is somewhere around 125,000 patients, and about accurate edema effects, about 20% of these patients. So it gives you some sense of the magnitude. But the concept... of using the suprachoroidal space for the eye to deliver medications is one that has been very well received. And obviously, we're now thinking about not just what we've done with Zypure, but what additional opportunities we can use as, I'm going to call it a platform, to use the suprachoroidal space of the eye and where we can go next with this opportunity. So very excited. We're seeing reimbursement. We're seeing the key opinion leaders talk about it, and they like what they're seeing initially. and helping these patients, which unfortunately, if you can't help these patients, they could potentially go blind. So we're excited what we're seeing in terms of response to the product, but very early, obviously, in our launch. On the question of the surgical side, I go back to what I was mentioning before. There still is a backlog, we think, on the surgical cataract side of the business. There is still, we think about 10 million globally surgical procedures, specifically in the cataract world, that have been delayed because of COVID. To your point, some of this could have happened earlier, but there are some staffing issues that are part of it. That is absolutely clear. But we do see this as being a tailwind for the surgical business for the remainder part of 22, 23, and going into the future. As people still have this cataract problem, notwithstanding the issues with COVID, therefore there is going to be opportunities to help more patients in the future. And importantly, we're excited because we've got new innovation coming, certainly on our new IOLs and with the Invista, with our LuxSmart IOL portfolio and what we're launching. So exciting opportunities to help more patients as we look at it.

Operator, I think I have time for one more question here or two more questions.

Certainly. The next question is coming from Vijay Kumar from Evercore. Vijay, your line is live. Please go ahead.

Hey, guys. Congrats on the quarter here, and thanks for taking the question. Maybe I'll just limit myself to a two-part, one question. One, Sam, on the guidance, it looks like inflation worsened by 50 basis points. I'm not sure if pricing assumptions change, so that even the range of 740 to 780, should we be perhaps looking at the lower end of that range in the One for Joe. What was the China head when in the quarter, in the context when it's up low singles? I know you've been pretty excited about daily side highs, so maybe talk about some of the drivers here.

Sure. Hi, Vijay. So let me take actually the first, I'll take the two parts of the question. So on the guidance, when you think about the inflation and it's really an impact, it says like about 100 basis points, and you think about how that flows through to the EBITDA. One of the things that we are working through is really taking, I would call it a disciplined approach or cost structure. And as we're thinking, we're really refocusing in terms of all the spend that, prioritizing all the spend that feeds into the growth and making sure that's going through. Everything else, we're trying to make sure that we are taking a very structured and disciplined approach to be able to mitigate as much of what we're seeing on headwind coming in from inflation to be able to play within the ranges that we have seen of the EBITDA of 740 to 780. So that's on your first part. In terms of the China headwind in the quarter, China had an impact pretty much across all our three segments, but most pronounced in our lent business. So when we talked, and I commented on it in my preferred remarks, when you think about the growth that we've seen in the lens business internationally, that part grew 3% organically. If you would take China out, that would have been about 13% organically. So you see the magnitude on the international side in the lens business is quite significant. The impact in terms of dollar amounts, it's probably in the range of about $15 to $20 million that we've seen an impact on.

And this is Q2. That's helpful. Thanks, guys. Thank you for your question. We have time for just one last question, please.

Thank you. Our final question is coming from Jack Weiner from Jefferies. Jack, your line is live. Please go ahead.

Hey, thanks for taking the question. I just wanted to touch on the infused multifocal launch still on track for later this year. And then if you give any comments on contact lens discounts, through, I guess, the rest of this year and maybe potentially into next year as we head towards a tougher economic environment. Thanks.

Yeah. Once again, on the overall Infuse launch opportunity, we're very excited that we're going into a lot more geographies with it. And in addition to the geography part of the expansion opportunity, we're also going to launch the multifocal. Look to us to launch multifocal probably End of this year, early next year. I'd probably focus a little bit more on early next year. One of the great things that we're seeing is a lot of demand for our existing spherical lenses. So we want to make sure that when we launch the multifocal, we've got all of the amount of inventory we need to get it to the marketplace and moving forward. So look for that to happen end of this year, early next year in terms of multifocal launch timing. One of the questions I guess you asked was whether the discounts going into the recession We've actually been able to see that's been something we've been working very much to manage. As I mentioned before, we view the overall eye health as being what I would refer to as recession resistant or recession proof, I'd probably say, in terms of the characteristics. So we don't expect to see some significant increase in pricing and discounts. It is clearly a competitive market and something that we're all going to try to compete, of course. But I don't see significant incremental discounts, especially knowing that some of the input costs for contact lenses like the polymers and things that we use are going to be linked to the price of oil. So it's something that we're trying to manage our way through as we think about what's happening. Our view is we're going to stay competitive and make sure that we look at ourselves versus the market competitors out there and we think we can compete, especially with our new innovation on our Infuse. One of the things I didn't talk about, but I think it's an important comment, is that we clearly think that our Infuse product has the ability to help a number of patients where they have some problems with wearing other sci-high dailies, mostly because they still cause contact lens dryness at the end of the day. This is something by putting electrolytes, moisturizers in, we think that we found a way to help those patients to wear their lenses through the entire day, still have great optics, and still have comfort. So that's why we're excited about what we're doing with Infuse. Just a general comment on pricing. We want to stay competitive compared to our competitors, and we'll do that. But we don't see some major discounts going on in the recession at this time. That concludes the comments that we want to make for the day. Thank you very much, everyone, for joining us. Look forward to having additional conversations with you in the future. Have a great day, everyone.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.