Bausch + Lomb Corporation

Good morning and welcome to the Bausch and Lomb third quarter 2023 earnings call. All participants will be in a 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 George Katkowski, Vice President of Investor Relations and Business Insights. Please go ahead.

Thank you. Good morning, everyone, and welcome to our third quarter 2023 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer Mr. Brent Saunders and Chief Financial Officer Mr. Sam Eldosuke. 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, I would 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 legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures and ratios. For more information about these measures and ratios, please refer to slide one 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 unless required by law and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Brent.

Thank you, George, and thank you, everyone, for joining us today. I'll start by providing highlights from the quarter, and after Sam does a deeper dive on financials and updates guidance, I'll share how we'll continue to drive profitable growth for the remainder of 2023 and beyond. I'm going to start with three things that define the quarter, which we expect will be familiar themes going forward. First, we are growing revenue at or above market thanks to the strength of established and emerging brands that cover the entire spectrum of eye health. We're excited about our trajectory as we enter 2024. which we expect will be one of the most active launch years in the 170-year history of our company. Second, we're equipping our sales work with the tools, training, and the product portfolio they need to turn our market leadership potential into reality. Look no further than our powerhouse dry eye disease portfolio and the outsized opportunity in that area. Bringing MyBo to market and reinvigorating the Zydra brand comes at a crucial time as 96% of estimated U.S. population suffering from dry eye disease is not treated with a prescription product. Finally, we're focused on addressing the supply chain challenges we've faced. We're nearing the finish line on upgrades to our Lynchburg distribution facility. And our new chief supply chain and operations officer is establishing a multi-year blueprint for turning our scale and global manufacturing footprint into a competitive advantage. As made clear when I introduced the roadmap to accelerate growth on my first earnings call this May, this is a multi-year journey that will fundamentally change how we operate. Rewiring the company is no easy lift. but I'm proud of our ongoing progress in phase one. Our leadership team, which has been almost entirely remade since my arrival earlier this year, has largely completed the process of flattening the respective organization to improve efficiency. But rethinking how we work goes much deeper, from making life easier for our sales representatives to strategically investing in digital capabilities we're maximizing our potential by focusing on what matters most. And critically, we have buy-in from approximately 13,000 colleagues around the world who want to see Bausch & Lomb back on top. While early in the process, changing how we operate is already helping improve our performance. We had another quarter of solid revenue growth of 8% year-over-year on a constant currency basis. That growth is being driven across key franchises, which speaks to our holistic strength. Performance from consumer brands like Lumify continues to exceed expectations, while premium IOL offerings in surgical represent a high-growth, high-margin opportunity. Promoted pharmaceutical products like Bisulta, which saw revenue growth of 54% year-over-year on a constant currency basis, health offset issues with contract manufacturers for two mature non-promoted products. Dynamics in the fourth quarter and beyond will obviously change with the focus on Mibo and Zydra. Before turning things over to Sam, I'd like to acknowledge his team's work in securing favorable financing terms for the Zydra transaction, one of the biggest in our history. Our focus, and his in particular, now turns to deleveraging. Sam?

Thank you, Brent, and good morning, everyone. Before we begin, as I noted in our last earnings call, most of my comments today will be focused on growth expressed on a constant currency basis. Turning now to our financial results on slide seven. In the third quarter, we saw strong revenue growth across our key product franchises. Thor company revenue 1.007 billion for the quarter reflects growth of 8% on a constant currency basis, and 7% on a reported basis compared to the prior year. Market demand remains strong, and our strategic focus continues to be on investing in the business to drive growth. We're committed to executing this strategy as we look forward to launching more new products in 2023 and 2024. In the quarter, we achieved two major milestones with the launch of Migo and the closing of the Zedra acquisition. It is still early, but we believe we have a significant opportunity with these products, which combined with our OTC offering give us a leading position in the dry eye disease category. While we have made solid progress in the quarter and market demand remains healthy, we fully recognize there's more work to be done. Supply remains a work in progress. As I will discuss further, we're implementing mitigating steps and have seen improvements. but it will take time to reach a point where we are fully confident we can supply products to meet our business demand on a consistent basis. Volatility in our currency mix, including the strength of the U.S. dollar, led to foreign currency headwinds of approximately 10 million to revenue and approximately 14 million to adjusted EBITDA in the third quarter. While the currency headwinds are not as sizable as we saw last year, the impact on our results continue to be driven by our geographic footprint and currency mix. Our China business was down 1% on a constant currency basis relative to strong calm in the prior year quarter. As a reminder, the market in China saw a recovery in the second half of 2022 after the shutdown in last year's second quarter. As we lap the 2022 stop-and-go progression, we remain confident that our business in China will return to stable and consistent growth over time. Notably, year-to-date constant currency growth in China has been 6%. Now let's discuss the results in each of our segments. VisionCare revenue of $648 million increased by 11% on a constant currency basis, driven by growth in both the consumer and contact lens portfolios. The consumer business grew by 14% on a constant currency basis, led by our Lumify, iVitamin, and Artelac franchises. Lumify revenue grew by 47% globally compared to the prior year and achieved a record $44 million of revenue in the third quarter. Lumify has continued its strong momentum in the U.S., where it has a leading market share of approximately 50% and has built substantial brand equity. In the quarter, we launched the Lumify Eye Illuminations to leverage the brand platform and expand into the Eye Beauty category. Revenue from our Eye Vitamin franchise, Preservation and Occupy, grew by 6% on a constant currency basis. PreservVision continues to be the market leader with 90% plus market share in the US. The launch of OcuSorb has helped expand the franchise and PreservVision continues to demonstrate the ability to drive growth in the AMD market. In our international consumer business, Artelac has continued to perform well and grew by 11% on a constant currency basis in the quarter. Artelec is one of the brands in our consumer dry eye portfolio. The dry eye portfolio is continuing to expand and reach approximately 78 million of revenue in the quarter with 9% organic growth. Finally, our lens care portfolio grew 8% on a constant currency basis. We have continued to see strong demand in our consumer business. Our strategy is to maintain focus on our key franchises and continue investing in product launches. In the lens business, we saw 5% constant currency growth in the third quarter. Reported revenue from our daily side high lenses grew by 79% in the quarter. We recently expanded the daily side high family with the launch of the multifocal in the U.S. We've also recently rolled out the daily side high in China. We continue to see strong demand in the daily side high category. As Brent discussed, revenue in the LENZ portfolio was negatively impacted by disruptions at our Lynchburg distribution facility. We have made progress in the quarter and we expect to reach an optimized level of order processing at Lynchburg in Q1 2024. Excluding the impact of the disruptions, global LENZ constant currency revenue growth was 7% in the quarter. On a constant currency basis, our value-oriented Dallius brand soft LENZ grew by 9% in the quarter. Viatru was down 3% and Altro was up 10%. Moving now to the surgical segment. Third quarter revenue was $185 million, an increase of 6% on a constant currency basis. The consumables portfolio, our largest category in the surgical business, grew by 8% on a constant currency basis, mainly driven by cataract packs. Implantables declined by 2% on a constant currency basis, our premium IOL portfolio continues to expand and was up 33% in constant currency in the quarter. As I mentioned last quarter, our standard IC1 IOL continues to be impacted by the product hold issued by our partner earlier this year, which offset the strong growth in our premium IOL portfolio in the third quarter. Excluding the impact of IC1, the implantables portfolio grew 10% in constant currency. We anticipate IC1 to impact the remainder of the year. We're focused on expanding our implantables portfolio and have recently announced the launch of our Invista Aspire lens. We expect the Invista platform to continue to expand with future launches of the Invista NV trifocal and the Invista Ease-Off lenses. Our surgical business has a number of new product launches scheduled in 2024, especially in the premium end of the market. We intend to invest behind these launches as we see this as an important area to drive future margin expansion. Revenue from equipment was up 10% versus Q3 2022 on a constant currency basis, mainly driven by Solaris system sales. We continue to see strong market demand in our surgical business, and we're taking steps to improve our ability to consistently supply products to our customers. We're implementing various mitigating measures, including strategic spot buying of components, and securing multiple supply sources. As we progress through the remainder of the year, we anticipate that supply will remain volatile and that supply constraints will continue to lead to a buildup of higher cost of inventory and pressure on margins. Lastly, revenue in the pharma segment was $174 million, which represents constant currency growth of 1%. Byzolta grew by 54% of the quarter on a constant currency basis, with TRXs in the U.S. up 19%. We also saw growth in our international pharma business, offset by supply impact on non-promoted mature brands in the U.S. We are pleased to have recently launched MyBuild. The early performance and feedback from eye care professionals have been strong, which Brent will talk about more. In the quarter, we made investments in the MyGo launch and we're committed to continuing to invest over the next 18 to 24 months to position MyGo for success. Our acquisition of Zydra closed at the end of September, and we're excited to bring Zydra and MyGo together in one portfolio. This closing date was earlier than our initial estimate for the end of the year. We expect the remainder of the year to be a transition period for Zydra as we continue our efforts to successfully integrate it into our portfolio. We believe our investment in the relaunch of Zydra is an important step in unlocking Zydra's full potential. The acquisition of Zydra has transformed our pharma business, and Zydra and MyGoTogether provide us with the leadership in dry eye disease. Now that we have covered revenues for each of the segments, let me walk through some of the key non-gap line items in slide 8. Adjusted gross margin for the core was 61.3%. which was up 80 basis points compared to Q3 2022. The gross margin improvement reflects a mix of factors. Product mix was favorable, driven by higher growth in our consumer business. This is balanced by pressure on the gross margin driven by the higher inventory costs in our surgical business. In the third quarter, we invested 81 million R&D for approximately 8% of revenue. Our spend in the third quarter reflects our investments behind key products, including the Marble launch. We're committed to investing in our product launches in the remainder of this year and in 2024. Third quarter adjusted EBITDA was $187 million. It was negatively impacted by currency headwinds of approximately $14 million and Lynchburg-related disruptions of $7 million. Excluding the impact of currency, adjusted EBITDA grew 7% compared to last year. Net interest expense run rate for the quarter was approximately $56 million, excluding a one-time upfront financing commitment cost of $16 million related to the Zyder acquisition. The adjusted tax rate in the third quarter was 6%, which is in line with our expectation for the full year 2023. Adjusted EPS for the quarter was $0.22. Adjusted cash flow from operation was $66 million in the third quarter, and CapEx was $33 million. Years to date, cash flow from operations includes a strategic inventory built of approximately $150 million, mainly related to the surgical business. It also includes an investment in working capsules to support new launches and growing sales. As part of the Zydra transaction, we raised $1.9 billion in financing at the end of the quarter. This consists of a $500 million term loan and $1.4 billion secured notes. Zydra is a highly cash-generative asset, and we believe that we have a path to delevering over the next 24 months. Turning now to our 2023 guidance on slide 11. We're raising our revenue guidance for 2023 to a range of $4.035 billion to $4.085 billion. This reflects a constant currency growth rate of approximately 9.5% to 10.5%. which represents an increase of 300 basis points from our previous guidance. Based on current exchange rates, we expect currency headwinds to have a negative impact on revenue of approximately $85 million for the full year, which is about $35 million unfavorable from our previous estimate. In the fourth quarter, we expect Zyra to generate $80 to $90 million of revenue. Our constant currency revenue guidance raised of 300 basis points takes into consideration the 225 basis points contribution from Zydra, with the remainder of the 75 basis points raised for $30 million, reflecting the strong performance in our base business. We're increasing our adjusted EBITDA guidance for 2023 to a range of $710 million to $760 million. This includes full-year currency headwinds of approximately $55 million, which is about $20 million unfavorable from our previous estimate. offset by the contribution from Zydra of approximately $30 million. While the market demand remains healthy, we're balancing our performance with the investments in launches including Maibo, the transition required to integrate and relaunch Zydra, and the work in progress in the supply chain. Also, our adjusted EVA diagnosis includes the negative impact related to Lynchburg, which has been approximately $20 million year-to-date. We expect our 2023 adjusted gross margin to increase by approximately 50 basis points to 60.5%. In terms of the other key assumptions underlying our guidance, we anticipate investments in R&D to be approximately 8% of revenue and interest expense to be approximately $270 million for the full year. The increase in the interest expense reflects the recent financing related to the Zydra acquisition. Our adjusted tax rate is expected to be roughly 6%, and full year CAPEX is approximately $175 million. As a reminder, keep in mind that the comparability between 2022 and 2023 results for the full year will be impacted by the May 2022 timing of our IPO. I recognize that many of you are currently focused on updating your models for next year. Looking forward, I want to provide some initial considerations for 2024. We expect the fundamentals of the eye care market to remain strong and the overall market growth to be about mid-single digits. We anticipate 2024 to be one of the most active launch years in our company's history. We expect to launch products across our entire portfolio, including in high margin, fast growing areas of the market. We also expect to strengthen our leadership in dry eye disease with the recent launch of MIBO and a full year contribution from Zydra. We're excited with the Zydra market opportunity under our ownership and our holistic approach to dry eye disease treatment. As we have previously mentioned, once relaunched, we believe Zydra has the potential to be a mid-single-digit growth asset. We expect to have an opportunity for margin improvement. driven by the addition of Zydra and the performance of our base business, while also recognizing the need to invest in all of our launches, including Mibo. As we invest during the Zydra relaunch period, we expect the Zydra contribution to margin to increase as we progress throughout the year. The relaunch is a key priority, and we are encouraged by the recent TRX trends in the past few weeks. but we anticipate that it will take some time for us to see the full benefit of our investments. In our base business, we believe our supply chain will continue to strengthen, but we recognize there's more work to be done. Pressure on margins related to supply challenges and the mitigation efforts I mentioned earlier, such as spot buying, will continue to be a factor in the short term. To be clear, our priority will remain to invest in our product launches. While it's still early, MiBo's off to a great start. We will monitor the MiBo performance over the coming months and evaluate the need to accelerate investment to maximize the strong performance trajectory. Based on current rates, we estimate currency headwinds to revenue of approximately $100 million in 2024. This is our current estimate, and we will continue to monitor and update it as we approach the end of this year. We expect the LV for our brand ProLenza to occur in Q4 of this year. we estimate Prolienza to be approximately 50 million in revenue. We don't expect the LOE to have a material impact on our 2023 results, but we do expect to see the full year impact in 2024. We anticipate investments in R&D will continue to be a focus as we advance our product pipeline and bring new products to market. Our tax rate is expected to be approximately 15%. As previously mentioned, This is in line with our expectation, and it takes into consideration an estimate of the impact of the OECD's Pillar 2 minimum tax rules, which are expected to be implemented in certain EU countries and Canada in 2024. We expect interest expense to increase in 2024 due to incremental debt related to the Zyder financing and a higher interest rate environment for the variable rate portion of our debt. As we continue the momentum in our current portfolio and launch new products, we have an opportunity to continue to deliver at or above market growth and leverage our platform for longer term margin expansion. And now I'll turn with a call back to Brent.

Thanks, Sam. I'd like to spend some time talking more about where we are investing to drive growth. Months ago, I described our second quarter as being defined by performance and progress. The same holds true for Q3, but I'd like to introduce a third descriptor when it comes to our supply chain, practicality. We have a significant global manufacturing and distribution network that relies on thousands and thousands of inputs. Look no further than surgical, where some equipment has more than a thousand components. With any operation of this size, if you don't have a consistent supply of those components, and dependability when it comes to pushing your products out the door, you're not going to realize your full potential. There's no quick fix when it comes to addressing supply chain issues, and it's not a question of just throwing money at a problem. We've made nearly $900 million in capital investments toward improving and expanding our facilities over just the past five years. Instead, we are taking a practical approach to supply chains. We started by bringing in a respected industry veteran who has been making complex systems run smoothly for more than 25 years. He has taken the reins on addressing our Lynchburg issues and is systematically working to improve surgical component availability. Bigger picture, he is creating a thoughtful and staged game plan for supply chain success that will keep up with demand for new and existing products. Being practical requires patience. with the understanding that we're going to do it right. Let's turn to one of the biggest events of the quarter and a serious source of pride for our employees, the launch of Mivo. We'll launch that as just one input when it comes to a product success. In the case of Mivo, early returns are truly impressive. TRX performance since our mid-September launch shows a steady rise in prescription volume. What's driving that uptake? Two things. First, our sales force. I attended the MIBO kickoff meeting in early September and was immediately impressed by the team. They believe in what they're selling and we're making it easier for them to do their jobs. They recognize the promise of MIBO, both medically and commercially. Second, excitement among eye care professionals. We brought MIBO to market because there was a real need for medicine that targets tear evaporation. Physicians believe in what they're prescribing and are thrilled to have a new and differentiated treatment option for millions of patients suffering from dry eye disease. Enthusiasm among the MIBO sales force is shared by the Zydra team that we onboarded just two weeks ago. When I met with them at orientation, it was clear that they felt reinvigorated. Most, if not all, have never been part of a company solely dedicated to eye health. Why does that matter? Because we have the existing infrastructure to hit the ground running, and it's mission critical we make Zydra central to our strategy. Recent lack of investment in Zydra sales ends now. The team we brought over went from selling a medication that wasn't deemed a priority by its former owner to representing the biggest product in our portfolio by revenue. It's time for a rebirth as we leverage Zydra's brand equity and increasing importance in the dry eye category. Meibo on its own represents a significant opportunity for Bausch & Lomb, but the acquisition of Zydra gives us a formidable one-two punch. As made clear when we first announced our acquisition of Zydra, these are complementary medications that target distinct elements of dry eye disease. Being able to offer both means we can treat the disease holistically and more fully address a staggering unmet need. How do our products become the primary option for approximately 36 million Americans suffering from dry eye disease not currently on prescription medication? It starts with raising disease awareness for consumers and physicians, for the latter will rely heavily on a combined sales force that will be the largest in the dry eye category and one of the most impressive in eye health. While we spent a fair amount of time highlighting Mibo and Zydra over the past few quarters, it's important to understand that pharmaceuticals account for roughly a quarter of our revenue. In other words, we're much more than a handful of prescription medications for a single category. Highlights from other areas include Lumify, which continues to impress with exponential revenue growth. We've built on that success through the upcoming full launch of Lumify Eye Illuminations in the U.S., a perfect example of capitalizing on a product that has quickly built a significant and loyal following. Daily Sci-Hi continues to be an emerging force in our contact lines business, with third quarter revenue growth of nearly 80% year over year. Ongoing brand extensions mean even more opportunity on a global scale. In Surgical, high margin premium IOLs continue to outperform, After debuting IC8 up there earlier this year, we soft-launched an Invista Aspire just weeks ago and expanded Invista offerings or planned for 2024 and beyond. This slide may look familiar, but that doesn't make it any less impressive. With so many launches across our businesses on the horizon, you can see why we're focused on selling excellence and improving our supply chain. Getting those right means getting more products to people who need them. It's the key to everything for us. I returned to Bausch & Lomb because I saw a company with incredible potential. Eight months in, I can tell you that I sold us short. The opportunity we have is even more transformative than I initially thought. We have the products, people, and plan to shake up an industry that continues to evolve and grow. This Friday is the official anniversary of our founding, when John Bausch and Henry Lum embrace a startup mentality to build 170-year legacy. We're rekindling that entrepreneurial spirit as we redefine the company and create lasting value in the process.

Love to drill down a little bit into MIBO given the launch. I'm just curious how you're getting the feedback, how it's coming through from the docs a little bit, prescription trends rather than the numbers, but the kinds of patients that you think are typically being treated at this stage and how you feel about, I think it was the 350 million opportunity longer term. I know it's very early days, but really curious to see how you're feeling about that longer term given the launch. Thanks.

Yeah, great. Thanks, Patrick. Great question. Obviously, MIBO is a big focus of mine and of our teams. You know, as you said, early days and so early feedback, I don't want to overstate the meaning of a few weeks of data. But that being said, I feel really, really good about where we are. The market reaction is the market being physicians or ECPs, is incredibly strong. And in fact, when you look at the data in IQVIA, it's significantly underreported. IQVIA will be doing an update, I think, November 17th, and then you'll get to see the real data. So there were some reporting issues in IQVIA, but suffice it to say, it's doing much better than perhaps you guys even think, or the outside world thinks, given the reporting issues. You know, what we're hearing from, what I'm hearing from ECPs, I'm actually going to the American Academy of Ophthalmology this weekend in San Francisco. We're going to be doing a lot of Mibo and Zydra events and programming there as well, but it is incredible enthusiasm. They're seeing great patient response. We're starting to see refills already, so Everything, you know, knock on wood, everything is going better than expectations, and expectations, at least for me, were pretty high, and they're doing better than that. But, again, I want to caution us, early days, early data. I'll feel much more confident when we have several months of data, but the team's doing a great job. Love it.

Thanks for taking the question.

Yep.

Thank you very much. Your next question is coming from Larry Beagleson of Wells Fargo. Larry, your line is live.

Good morning. Thanks for taking the question. Congrats on a nice print here. I'll try to get two in here. One for Sam on margins next year. If you sum all this up, I think at our conference, Bren talked about 200 basis point margin benefit from Zydra plus some underlying margin expansion. Does that still hold? And I had one follow-up.

Sure. Good morning, Larry. And when you step back and you look at sort of what we've done in 23 and how we're thinking about 24, we do expect to see margin improvements coming from our base business and also the addition of Zydra. But you also have to balance this with a couple of factors here. One is the level of investments that we would need to make in Zydra. Brent talked about Zydra and sort of our expectation, especially now that it's in our hands. And we've previously talked about that this brand, and not only this brand, but the dry eye market in general, is very responsive to promotional investment. So we need to be able to allow and allocate the right level of investment to get Zyder to the level of expectation that we would like it to be and really recognize the value of that. So there will be an element of Investment going behind Zydra, starting from Q4 and going into the early part of next year and carrying forward into 2024. The other part which I would want to also talk about would be the early read that we're seeing from Maibo. We're very positive. We're excited about it, and we're very encouraged. But it's still early, and I think we will need to see a couple more data points. to be able to make that trend solid for us. And based on that, I think we will be thinking about a decision in terms of do you accelerate investment behind MIBO to be able and put incremental investment to be able to accelerate growth into the future years. So, again, MIBO for us is not just a one-year brand. We're thinking about this is a long process. game here. So we're thinking about not only 24, but 24, 25 and beyond. So that's going to be a very critical decision, but we will need to see a little bit more data points to be able to see that positive trend that we've seen in the last couple of weeks continue with us for a little bit longer.

That's helpful. Just one follow-up on Zydra and Maiba's sales next year. Zydra, you know, the guidance, it declined 40% in Q3 revenue. You know, the guidance here that you gave implies another 40% decline. So 335 for the year at the midpoint. What's your expectation for 24? And on my boat, the prescription data you gave us today implies it's annualizing at over $100 million in sales already. Do you think it could be the $100 million product in 24? Thank you.

Yeah, so maybe I'll just start and then Sam can jump in. Look, I think the sales number for Novartis in Q3 is not an accurate picture of performance of the brand. There were some accounting charges that Novartis took. took there um and so i think that's distorted and probably not a true picture clearly you know it was under invested in in their hands and and and we saw that you know we've had it for for essentially two weeks and i actually was with the the novartis team 97 of the team sales team came over um and joined us we're super excited to have them i spent some time with them two weeks ago here in new jersey uh and they are super motivated and Again, very early data, but we're starting to see stabilization in the script trends, which is really important. I do think the fourth quarter here is clearly about stabilizing. And then, as Sam mentioned in his remarks, the first quarter and going into the second quarter is going to be about recharging that brand and re-energizing that brand, given that we have roughly nine, ten years of exclusivity here. to stand behind that brand. So super excited about that. You know, I think when you look at sales for, you know, next for 24, we're not giving guidance for 24. We're just trying to give you some direction. We'll certainly provide that in due course. But Sam, anything else you want to add to this?

Yeah, no, and I think, As we think about Zydra, based on the remarks we've made thus far, we want to make sure we invest behind the brand. I think the comment I made in my prepared remarks was, as we think about Zydra, once it balances out, it probably will be still a five-hour call for mid-single-digit growth asset.

And that's been our thinking around Zydra. Thank you.

Thank you very much. Your next question is coming from Jung Lee of Jefferies. Jung, your line of life.

All right, great. Thanks so much for taking our questions. Maybe pivoting a little bit to contact lenses, wanted to hear a little bit on the health of the U.S. consumer. You know, is there still a lot more demand than capacity for the industry? You know, some of the daily sci-fi adoption trends seem very favorable and very strong growth. But, you know, are you seeing any signs of consumers trading down or extending their wear? And, you know, any high-level thoughts on that might happen in 2024?

Great question, and thank you for that. You know, across our businesses, globally, we don't see any pullback from the consumer, whether that be in lenses or in our consumer business. And in fact, some interesting data perhaps out of the consumer business, not exactly what you asked, was we're seeing strong drive of consumption in our consumer products. So another data point that shows that the consumer in the U.S. and frankly globally is still pretty pretty active. In fact, when you look at GDP data, I think we saw a consumer drive most of the GDP growth in the U.S. in the third quarter, so a healthy consumer. You know, our lens business in the U.S., the market was up around 70%. Sam can give us the exact number, but I think we're seeing really healthy trend. Daily Sci-Hi for up was up about 80% growth in the quarter. So, you know, I I think our issues there have been just distribution and being able to ship. And that is solving itself this quarter. And we're starting to move into a good spot. But overall, the market, I think, is robust. It's big. It's growing. And we finally have a good product portfolio. We just need to be able to ship to customers on a more consistent basis.

All right, great. Very helpful. And I guess for my follow-up, so I'm a China business, minus 1% due to tough comps, a year to 6%. I guess I was wondering if maybe you can comment a little bit about what you're seeing on the ground currently. It's high single-digit percent of your business. We read all the macroeconomic and consumer consumption headlines. There's also some anti-corruption campaign color that doesn't really impact contact lenses as much, but it's in the background. What's your view on the health of the Chinese consumer for the contact lens business in the near term? What indicators are you more closely tracking? Are there noticeable differences in the different tiered cities?

Yeah, it's a great question. First, I'd just take a step back and look at the opportunity in China. It's a massive market. We have a tremendous opportunity to grow into that market. Unlike perhaps one of our competitors that has more market share, I think our opportunity to take share in a growing market is pretty strong. And we're just really getting started there with the Daily Sci-Hi launch just happened a quarter ago. So we still have to bring the multifocal and other modalities into China. The other thing is our team in China was over there not that long ago. We have a really strong team. I was very impressed by the B&L colleagues in China. And in fact, this quarter, they stood up a DTC model that was quite impressive. So we'll see how that works out. But they did a lot of really good work with a strong entrepreneurial spirit. I'm excited about China. I think when we look at the consumer in China, they're resilient, perhaps a little less resilient in the tier two or three cities versus the one, but still strong. I think, you know, our opportunity is clearly in this tier one and two cities. So we're participating in the market where the consumer is strong. And, you know, again, I think we're going to be less focused on the on the macro environments versus the opportunity we have to grow within a massive market. Sam, any color you'd want to add?

Yeah, I think when you think about this year, I think when you look at the year-to-date data, it's probably more meaningful than looking at any specific quarter. usually for 6% constant currency. If you remember last year, we had the first half was pretty much shut down. So you've seen the comps are sort of not really a good proxy. So for example, last quarter, we reported 25% constant currency growth in China. So that flips down to a minus one. This quarter is just reflecting the rebound that happened last year with a stronger comp and people just sort of coming out of a shutdown. So for this year, I will encourage you to... probably look more of a year-to-date on China data. That probably will be more meaningful.

All right. Thank you very much.

Thank you. Just a reminder, if you do have any questions, please press star 1 on your phone keypad now. Your next question is coming from Craig Bijoux of Bank of America. Craig, your line is live.

Good morning, guys, and congrats on a strong quarter and closing the Zydra deal. I wanted to start with a follow-up to Larry's question on Zydra EBITDA. So if I look at your implied guidance or your guidance for the year and the EBITDA margin for Zydra is about 35%. So given your comments on investment in Zydra, what I understand is, is that 35% margin a jumping off point, right? So should we think about you can – improve upon that throughout, sequentially throughout 24? Or how else should we think about that?

Good morning, Craig. So I would think about it as 35 as a baseline. When you think about 35 for Q4, and as you start now progressing into 2024, we should expect that 35% in terms of margins to continue to expand as you go forward. So my comments really was highlighting on the fact of the investment in Zydra. We're starting Q4. We do expect that will take a couple of quarters to be able to get to the level that will meet our expectations. So that will be just a phasing as you go into 2024.

Got it. That's helpful, Sam. And then just as a follow-up, I wanted to ask on the Lynchburg facility. So it looked like the revenue impact was less in Q3 than it was in Q2. I appreciate your comments that you expect to be back to a more normalization in Q1, but wanted to understand how should we think about any revenue and EBITDA impact in Q4 and even Q1?

Yesterday, we're having roughly about $20 million impact, and that's on the EBITDA. made that comment as we were talking about showing that the guidance that we have updated to this quarter absorbs that $20 million year-to-date. We do expect to see some of that coming into Q4, or more of that coming into Q4, but that's already factored into our guidance ranges that we provided. When you think about next year, I think right now it's too early to be able to talk about any impact of Lynchburg for next year, but what I can tell you, and is we're making progress and we are actually looking as we get to Q1 of 24. We believe this will be getting to a level that's reaching a level of optimization that we will be expecting from that facility with all the upgrades that we put in.

Yeah, look, I mean, I think, yeah, go ahead. We're good. Yeah.

Okay, thank you very much. Your next question is coming from Joanne Winch from Citi. Joanne, your line is live.

Good morning, and thank you for this question, and nice quarter. Two, and I'm going to put them both out up front. The RX portfolio grew about 1% off of a somewhat tougher comp. Obviously, this is before really layering in Zydra and Maibo. but I want to make sure that I understand if there are any one-time headwinds, et cetera, that I need to think about. And then my second question is, in the lay press, the FDA warned against certain eye drops. Bausch wasn't on that list, but I was curious if you have a view on how that might create market opportunity for you. Thank you.

Yeah, sure. So with respects to RX growth in the quarter of 1%, You know, the key metric I track there is the promoted products, which was anchored by Visalta, which was up 54%, I think, in the quarter. And so, you know, the sales team and what we focus on, you know, saw good growth in the quarter. We did have two older non-promoted products that had supply constraints in the quarter. If you took those out, you know, pharma would have been up around 4% versus the 1%. But, you know, I think the dynamics and the reporting there will change dramatically in the next quarter when we have Maibo and Zydra in there. I think as you look to next year, we have a ProLenza LOE, and we've talked about that quite a bit. But outside of that, that's the only puts and takes in there. And I think there's more puts with Zydra and Maibo going in than takeouts, Joanne. Hopefully that clarifies that for you. On the FDA recall, it doesn't in and of itself present any kind of specific opportunity for us, but I think it underscores the importance of quality control in manufacturing and supply. I think what I've seen from the ECPs is a lot of promotion on staying with the branded companies in this category, whether it be us or our competitors. being mentioned as alternatives. And I think lastly, it shows how hard it is to make these products in a sterile environment and provide high quality supply. So all in all, you know, our focus and our absolute commitment is to supply high quality products. And, you know, to the extent there is an opportunity, perhaps retailers take some of these drops off the shelf and give us more shelf space for our products, whether it be Lumify or Blink or any of the other products in the reset that will happen as a result of these SKUs coming off shelf. So small opportunity, but I think more importantly underscoring the importance of high quality supply.

Thank you. Thank you very much. Your next question is coming from Vijay Kumar from Evercore ISI. Vijay, your line is live.

Hey guys, thanks for taking my question. And I had two questions. Maybe, Brent, first one for you on revenues here. Some of the comments you made here on fiscal 24 were helpful. The Lynchburg disruption, can you quantify the revenue impact in fiscal 23? Are they lost revenues? Should they come back in fiscal 24? And I think you did touch upon consumer strength. How should we think about consumer business in a recessionary environment?

Yeah. So on Lynchburg, we've made a lot of progress in the last month or two. And Lynchburg in this quarter, the fourth quarter, I think is starting to shift, particularly domestically on time. And so we're pretty close. Clearly, we need a little bit more time to get the optimization out of Lynchburg, but we're making progress. We still have some Pickups in international orders, but all in all, it's a big improvement in the fourth quarter. You know, the revenues in 23 are roughly $20 million impact. And to be fair, that's revenue lost. You know, the patients that get fit with lenses got fit with other lenses versus the ones we couldn't provide. So, you know, it's more or less revenue lost. We will come back. There's good demand for our products. So we will see a return to our product line. And we're seeing that happening. We're seeing green shoots of that right now in the fourth quarter. But that's, you know, it's an unfortunate situation and why I continuously talk about the need for strategic and thoughtful leadership in our global supply operations, because at the end of the day, what matters most is getting your products to patients and consumers. And that's how you actually create a robust business, as practically as that sounds. You know, the consumer business in a recessionary environment, I think, you know, clearly if there was a, if we saw a consumer recession, we would, you know, have to be thoughtful about that and we would feel some impact. But at the end of the day, people, you know, don't, don't stop treating their eyes in a consumer recession. So I think we have somewhat of a protection in our business from that. Would people trade down, perhaps? But as we just talked about with Joanne, some of the lower cost providers of eye drops, as an example, have quality issues. So it's a tough thing to trade down on price for treating your eyes. Not that some won't do it, but we have, I think, some immunity from a potential consumer recession. That being said, we don't see that. We don't see that in any of our businesses anywhere in the world, and we don't see that in any of the data we track as well. I'm certain.

I'm certain. Helpful comments, friend. Sam, one for you on that margins here. I think you mentioned FX, $100 million headwind. Was it a revenue impact? What's the drop down here on EBITDA? Should that be similar to fiscal 23 rates? It sounds like there's some incremental investments to support new product launches? Should we be thinking of that as incremental versus, you know, where we were three months ago?

Okay, so Vijay, I would think about, let me take the currency first. It's hard to predict currency, right? So I'm giving the $100 million as of today, based on the rates of today, probably the best of all direction I'll provide would be you can use the proxy of what we've seen in 23 as sort of a flow-through that will give you a directional of how we're thinking about the currency as we stand back. This is something I'll have to come back to and update it as we end this year and we give guidance for full 24 to update you on the currency and sort of truly the flow-through. In terms of the investment, the launches, I think I'll break it up into two parts. I think Brent showed a slide that shows all the launches that are coming into 2024. This is our largest number of launches that we have in a single year in the company's history, as we recall. So that's definitely going to be an investment that we will have to think about, and we will be able to make sure we dedicate the right resources behind it. I called out MIPO specifically because I think it's a large – asset for us, our large brand, when you think about the early data that we're seeing on my bill, it's very encouraging and very positive. We want to see that trend continue, and as that trend continues, I think we will have the decision to be able to say, do we want to spend and invest incremental dollars behind it and accelerate growth, again, it's a long game for us. And that decision will have to come in and we'll update more of it as we give the full year guidance for 2024.

Perhaps said another way, we have a big opportunity with Maibo and Zydra and other launches across the portfolio in 2024. Many of those launches lead us to higher margin product mix for the long term. And so being successful in those are really an investment in improving margins. That being said, making that investment, you know, impacts margins to the negative in 24. And so, you know, what we want to do is be thoughtful about that. We are committed to margin improvement. But, you know, we want to make data-driven decisions. When we look at early data on MIBO, and you'll see a clearer picture when IQVIA comes out and you'll see what we're seeing on November 17th, you'll understand why we're pausing and saying, could we do more with my vote? Could it be more than $350 million in peak sales? Could we steepen the curve and get there faster? And so we're going to make investments based on data, based on KPIs, and see what we're going to do. That being said, we're absolutely committed to margin improvement, but we want it to be sustainable and we want margin improvement for the long term. And so that's the balancing act. that we would normally make in these decisions. Helpful comments. Thanks, guys.

Thank you very much. The next question is coming from Doug Meem from RBC Capital Markets. Doug, your line is live.

Thank you. Two questions. Number one, with respect to Zydra, given the importance of the drug to the company now, How long do you believe it's going to get to that mid single-digit growth profile? And then my second question just has to do with the success of Lumify. Maybe you could delineate in a little bit greater detail, you know, we've had a number of launches, but what seems to be resonating with people and How soon can we expect the other products within that Lumafile pipeline to come to market? Thank you.

Sure. So Zydra, you know, we assumed it would happen, what happened in the prior owner's hands, but it happened a bit more severely, right? They really did neglect this drug. And, you know, as I said to the sales reps that came over two weeks ago, Zydra is finally home. It's in a company that's a dedicated eye care company. It becomes among our most, if not most important product. And they become arguably our most important field force versus an afterthought in the company they were at. And that's highly motivating to them. The other thing I would point out is the dry eye category is incredibly promotionally sensitive. And I know that. I remember when Zydra launched and I was at Allergan, we had Restasis. Many on the sell side thought that Restasis would go into decline, and it didn't. The market expanded to adapt to Zydra. Because of the increased promotion from Zydra and Restasis at the time, we saw tremendous market growth, and both brands grew through the launch and beyond. And so I think that dynamic sets up well for us. You know, we will have a very strong share of voice between Zydra and MIBO. We really do have a one-two punch to treat the disease holistically. And we have an opportunity to really work with the ECP community to drive more of the untreated, you know, roughly 38 million patients in for treatment and with a better option to treat whichever aspect of the disease they have with Zydra. with Zydra and Mibo. So huge opportunity. That being said, you know, Zydra comes in a little wounded, right? A little neglected. As I said earlier, you know, fourth quarter is about stabilization and 24 is about restoring it to growth. I can't give you the exact date that will happen, but I do expect that to happen in the back half of 24. I do think you'll see that growth start to really come through. I'm very confident. I think we have the right team, the right setup, the right market, and now we just have to execute. You know, with Lumify, you know, really great performance, 47% growth compared to prior year. Record, I think Sam said in his remarks, record revenue of $44 million in the quarter. So really exciting to see that brand continue to drive growth Right now we're in the retail launch of iIlluminations, and you'll see the consumer launch in the first quarter, another launch in 24, as we keep talking about. So you start to see the consumer campaign and advertising and promotion in the first quarter on that product. But a real opportunity for us. Interestingly, in an area I have a lot of experience in, we need to position Lumify less as an OTC drug and more as a beauty product. And when you can make your eye look beautiful, your face looks more beautiful. And I know there are trends from my days in the aesthetics world around the importance of facial aesthetics and having brands like Botox and Juvederm in the past. Lumify is a really important part of that regimen. And so we're still just breaking through that market. I don't know where the top is because we just keep putting up record growth, but We're going to keep investing behind it, and I think we have the best product to make your eye look beautiful. We're now going to surround that with other products. We have the preservative free coming next, and then we're looking at some combinations as well as improvements in the formulation. So we have a nice pipeline, and we view this as a long-term investment. Thank you. So I think that was our last question, or we have one more.

No, that appears to be the end of the question and answer session.

Yeah, thank you, operator. Well, again, thanks, everyone, for joining us this morning. We remain very committed to focusing on driving our roadmap to accelerate growth. The quarter was another great, great testament to our teams around the world focused on execution and driving growth, and we look forward to keeping you updated as we progress and certainly excited for our future. Thanks for joining us.

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