Good morning. Why don't we get started? My name is Jeff Johnson. I'm the Senior Medical Technology Analyst at Baird, and our next presentation this morning is from Alcon, a global leader in developing, manufacturing, and selling a broad portfolio of ophthalmic eye care devices and products. With us today from Alcon, we're happy to have President and CEO David Endicott and Chief Financial Officer Tim Stonesifer. David, I'm going to turn it over to you. I think you have a few slides to go through, and then we'll go into Q&A and a little fireside chat from there.
Yeah, great. Thank you. Thank you very much. I just thought it might be useful for us to talk about a couple of things we've been hearing since the call. I think it's, without a doubt, a very exciting and dynamic time for us. I think, you know, we are in the process right now of launching seven new products in multiple categories, and we've also kind of finished up a fifth acquisition in the last, I would say, 18 months or so. We've been very busy and very productive, and particularly the R&D organization has been very productive. No doubt, you know, we have a lot of interest in the transformation of our 30,000 or so kind of fleet of cataract and refractive procedure machines, our Vitrep machine.
Also, we've got a lot going on with PanOptix Pro, with, you know, with P7, with Sustain, and obviously Tripteer is our first real entry back into pharmaceuticals that we've done on our own. As we kind of get going, there's a lot to say around these. Happy to talk about them, but it's a particularly dynamic moment for us. Sorting all that out will be a big part of what we're trying to do as we get through the discussion today. There has been a good conversation, I think, about where the market is for us. I thought it might be helpful for everybody to just see what the history on this market is.
The world of milliseconds.
Okay. Felt like the Zamboni ran right over me right there. The cataract market, you know, one of the things we say a lot is that this market is very stable. I mean, this is underpinned by basically an aging population, advancing economics in the developing markets. When you look at the global cataract market, it's pretty predictable. It's been 4% for 10 years, and that includes the COVID impacts. I think, you know, directionally we believe that, you know, while we've seen some softness in the U.S. market as of late, and that's obviously had an impact on us, it is a very stable market in the main. The population you can see is, you know, trends very closely, the over 65 population trends very closely to the cataract incident population that we treat. This is the U.S. market.
I said this on the call, and I just think it's important to remember that there is natural fluctuation around, you know, the 2 or 3% that we've seen historically in the U.S. Average over the long stretch here has been about 3%, but it also has had a significant variation. Although there, you know, there's obviously a weird, you know, last couple of quarters, and we see that, you know, again, we called it a little bit soft for the rest of the year, principally because we hadn't seen that in a while. We can talk about that if you want, but I think our own point of view on this is that this is a natural change that's going on. It will revert to the mean, you know, as we kind of move forward, and we obviously saw an improvement, you know, recently.
I think we're in a good place there. The contact lens market, I just give you for balance, because most of our markets kind of look like this. They're in this kind of mid-single-digit range, kind of four to six. Cataract is certainly on the lower end of that, but contact lens on the higher end of that, ocular health kind of in the middle of that. We have a number of markets that, generally speaking, I think when you aggregate them, we can comfortably say that the markets we play in are consistently and historically, you know, in that mid-single-digit range. I think that's kind of a key point for us going forward. A little clarity on Unity. We have a 30,000 base installed base of a fleet of machines that we are intending to replace.
I think I've said in the past, you know, that 30,000 will be kind of a little bit replaced, roughly, let's call it 3,000 a year, a little bit less on the front end, a little bit more on the back end. You can see that in this year, we didn't have the machines until really the middle part of the year. We only have one of them. It's the Retina machine. That's going to move slower. It's more complicated. It takes longer to install. It's the most, you know, important machine that we make because it's the combined machine. We are going to go very deliberately with that one.
Obviously, as we move forward, you see it exactly as we've kind of portrayed it, which is kind of this notion of a little bit more on the front end, and then it kind of probably settles down into that 3,000 units a year. The mix obviously starts heavy towards our existing machines and moves almost, you know, immediately into our new machines, but a steady change over the next couple of years as we kind of move that way. Nice mix and nice movement as we kind of see this thing moving forward. It's been a really well-received piece of equipment that is going to change cataract surgery for sure. Last thing I'll just comment on, and we can move on, is just this notion of refractive surgery and getting a little bit deeper in there.
We just launched WaveLight Plus, which is our newest software for our LASIK WaveLight program. It is really a fantastic piece of software. LASIK, as most of you probably know, is really a minus six and under kind of a treatment. For minus six and over, really there isn't anything in our hands that works there. ICL is a terrific platform. It has a great opportunity, I think, to do a lot in markets where it really just hasn't been yet. I think the acquisition of STAAR represents an opportunity for us to take STAAR places they haven't been able to go, won't be able to kind of finance on their own. I think we can scale that company and create a lot of synergy around it, which is really our thesis on this.
A creative year, a year two, and really a significant amount of opportunity, I think, in the refractive markets going forward. We're excited about what is going on at Alcon right now. A lot of products, a lot of action. I recognize it's a little bit busy and busier than we've been, but that's part of the benefit of generating a lot of cash flow recently. We're feeling pretty good about where we are. I'll leave it with that, and we can jump off from anywhere from there.
Yeah, thanks. That's a great overview, David. Let me just jump in with a couple of questions. I'm going to go off script here to begin with, or at least jump to the end of my script here. To begin with, just on the STAAR acquisition, since you ended there, you mentioned the minus six kind of level there of myopia, kind of below that LASIK, above that EVO. Would there be any plans longer term? Do you think we move lower than minus six in the myopia range that EVO is applicable to? That's one of the shareholders arguing that you could really expand this market if you go into minus five, minus four, and maybe that $28 per share could be higher than that. Again, this is one of the STAAR shareholders arguing that point.
The docs I talk to really don't want to go into an eye, inside an eye for minus four, minus five. To me, that minus six and above has always been the right range for an implantable like EVO. I'd just like to get your opinion on that.
I think everybody who knows the space technically believes that. I think STAAR was trying to push below that, and you can. It's not that you can't do it, but it isn't wise. I'll tell you the reason that it won't happen is because everybody who has a laser for LASIK, which is most of the refractive surgeons, is going to pull the trigger on the laser because it doesn't cost them anything. The marginal cost and the marginal gain economically is there. Today with WaveLight Plus, we're getting 80% of patients, 100% of patients are 20/20. WaveLight Plus is now generating about 80% of them at 20/17, and we got 50% of them at 20/16. EVO can't do that. You can only really do that with custom ablation below minus six because the aberration gets real high beyond that. There's a natural and obvious thing. I've read the comment you're describing. It's uninformed, really.
Okay, fair enough. You know, on that acquisition price, and I'm sure we're not going to renegotiate the deal here from the podium today, but you know, it looks like when you read some of the proxy filings that you had offered quite a bit more, maybe 9 to 12 months ago. What was it about STAAR Surgical's business that really came under pressure, you know, that created the lower acquisition price that you finally agreed on? You know, how much of those problems or how many of those problems do you feel are transient versus you could see some recovery over the next year or two?
I think, you know, when we went into the deal originally, we've been watching the company for a long time, and we were involved with them for a long time. As we got into late last year, I think somewhere around December, we were deep in diligence on an assumption that the revenue as reported was demand. It wasn't. There was a very significant amount of about six months of Chinese inventory, maybe a little bit more than that. I think, sorry, at that moment in time, there was 13 months of Chinese inventory. We pulled out at that point, but we had to rebase it. I think they were surprised as well. I think much of that change in moment was about, and the change in management was about that inventory. I think everybody was surprised that there was that much inventory.
When you rebase and you replot that, I think the market has the company correctly valued. We obviously adjusted our price to reflect a starting base point with a similar growth rate to what we've talked about. I don't think the growth rate's different, but the starting point's different. You end up with a very different set of economics.
You haven't talked about it yet, but maybe Tim, just on the synergies of the STAAR deal, I mean, you manufacture a lot of product in Switzerland. They manufacture in Switzerland. Is there a cost of goods benefit there? Is it more of leveraging the sales force? Just where are the synergies on the cost side of the STAAR deal?
Yeah, I think there's definitely going to be some synergies on the sales side, but I think that the biggest synergies we're going to see is really when you look at the G&A structure. We obviously operate in 140 different countries. We have spent a lot of time building the platform if you think about shared services and things like that. This is something that we should be able to optimize when we close the deal and execute the synergy plans.
All right, fair enough. Let's move on. I wanted to start originally just on the cataract market, and you talked about a little bit of that sluggishness here in the last couple of quarters. You know, we can all kind of postulate and come up with our own reasons why, but what are you seeing out there? What are you hearing from your docs on why that market has been a little slower? I mean, obviously the 65-year-old and above is where cataracts skew, although there's a good number of cataracts done in younger age. That population hasn't come under as much spending pressure maybe as the middle-income families. Is it macro? Is it something else? What's causing that sluggishness on the standard cataract side?
The short answer is I don't know. In truth, we think it reverts to the mean. I think it's probably, you know, it may just be a wraparound on some relatively strong quarters in prior years. Look, I think I could give you four or five different things, and I have in the past described things like, there's about 15% of the practices that have been purchased by private equity. A lot of those were the most productive practices. They brought in younger folks who weren't quite as productive. We've done the math on that. Maybe it's worth a half a point of growth. You could argue that the training and the turnover in staff is challenging, and that has happened post-COVID. There was a lot of turnover, so the productivity per hour is down. I don't know if that's real or not.
We know that, we hear that, but I give you five or six things that are potentially interesting ideas that might actually, but actually in the end, our point of view is that this is going to turn back right around and end up roughly around 3%. The natural variation on that 3%, as I just showed you in those slides, is roughly about 2%. On a global average right now, the global number on a moving annual is about 2%. I think you're still inside the band that should be the natural growth rate. International slowed down a little bit. Why? I don't know. Probably because China slowed down, and it's a big, big part of the total market. India slowed down a little bit. Japan slowed down a little bit as well. I think those are natural kind of events.
I think what you're going to really see over the long stretch, if you're worried about the next two or three quarters, we called it in the front half, it's going to be the same as the back half. That may be conservative. I hope it is, but we've been wrong twice before, so we might as well get it out there and just say, hey, look, we're not sure. I can tell you that over the next five years, it's going to be roughly 3% in the U.S. and roughly 4% globally.
All right. Your relative performance to that market, you know, if I look at the implantable side, do you think the second quarter is the trough? You've got a big competitor out there that's been doing well in the U.S., starting to pick up maybe a little bit of share in Europe. You've got PanOptix Pro out there at this point. One, is PanOptix Pro enough to kind of bring you back to positive territory in the implantables in the near to intermediate term? Two, you know, Vivity, I think, has been probably the home run product. That's not to take anything away from PanOptix, but I think Vivity has been a fantastic product for you guys, better than I would have guessed maybe three or four years ago when you were first launching that.
When does the next gen Vivity come out that could maybe more effectively compete against PureC and some of the MTF stuff they're talking about?
Yeah, I mean, I think the general view that we have is it's going to be a messy market for the next 24 months, 36 months. I don't think you're going to see implantables be a growth driver for us necessarily. I think if it grows kind of roughly at market, we'd be pretty pleased with that. I think that's probably what you're going to see. There's a lot of product coming into the U.S. market where the highest market is. On a global basis, our unit share is roughly stable. We're gaining share internationally. We're losing unit share in the U.S., but we're trading dollars from, you know, a $900 product in the U.S. to, you know, in China, you know, it's, you know, half that. It's not a good trade for us economically right now.
That's principally because historically there's all been a lot of products internationally that were available. Most of those are now moving to the U.S. I think you're going to see continued steady product flow in the U.S. from us as well. We've got probably one product every year for the next several years. We haven't really talked too much about what those are, but there is a next gen Vivity coming. There is a next gen monofocal coming. We've got a number of things happening that I think are important in terms of us competing in that space. I wouldn't think about this as where we were at one point. We were on our own in the U.S. for four years where we had Vivity and PanOptix running away with it, with the whole market. That's just not a practical thing to believe is going to happen again.
I think where we are is consumables are going to do really well because of the premium of the Unity platform. Unity equipment will do well. Vileda will do well. Glaucoma will do well with Voyager. We've got a lot of equipment and consumables benefit that I think drives the surgical business. You're going to see a really nice growth, steady growth in contact lenses and our pharma growth will be big.
All right. I wanted to front-end load some of the tougher questions there just on that part of your business that's been under a little pressure. The rest of the portfolio, obviously, some really strong growth, it seems like coming. You did mention on consumables, you know, if we can get back to that 2% or 3% or 3% or 4% market growth somewhere in there, you know, how much above market do you see the consumables business being able to grow? Primarily, you know, I don't think you've quantified, but is it fair to think that VCS and CS consumables are going to have a premium to older gen consumables? Is that the main path towards relative outperformance in that category?
Generally, yes. Sometimes, you know, it depends on where you are in the world and whether we're selling the box more expensively or less expensively, whether they want the consumables more or less. The package and the per procedure price is going to be premium to where we are right now. The reason we can get a premium is because with this machine, you can do more surgeries in a day. What we're basically arguing is, look, you know, if you can do 20 surgeries, 20 cataracts today, and tomorrow you buy our machine and you can do 21, you know, that pays for that machine pretty quickly. We'd like to share in some of that. That's the negotiation we're having.
Whether that shows up in the equipment upfront price or whether that shows up in the consumable premium, we're generally trying to get it in the consumable premium, but not everybody wants that because it depends on where you are in the world and what the capital budgeting versus operating budgeting piece looks like. We're pretty happy with the reception right now. We've got, I think, you know, over the first 90 or 120 days, we've got 1,000, you know, qualified or under contract, you know, consoles. We're moving exactly kind of as we expected, and we're, you know, pleased with what we see. I think the long-term, you know, view here is that Retina probably is almost a bigger idea.
That's partly why we've been so careful with it up front, because, you know, Retina, if you can do one more procedure, the value to an ASC or an outpatient hospital group is much higher. They're longer procedures. We're shaving a lot more out of it, almost a third out of the duration of that procedure. The safety of this product is extraordinary. I think we are likely to realize it in consumables, I think, as in the main. Again, that will mix over the next several years. Remember, we didn't stop selling Constellation. We didn't stop selling Centurion. We will, you know, slide that mix, you know, gently towards, or relatively quickly over the next three years, until we basically end of life the other machinery that'll be for sale as well. We'll work our way through that mix over the next year.
I think you'll see a natural pickup in equipment that really started mid-year. You'll see that kind of pickup as we kind of said, you know, the fleet replaces about every 10 years.
Yeah, fair enough. The slide you showed on Unity VCS and CS, I guess a couple of things. The 2,500 some odd units you were talking about for this year, that's all, well, the incremental on that is all Unity VCS, right? Still no CS until next year?
That's pretty much right. We have some CS out there now. We'll actually launch it probably late this year or early next year. We're just kind of waiting to see how long it takes us to get through the really core Retina folks around the world. As we get through that process, we'll take CS in.
Okay. The 2,500 gone to 3,500 to 4,000 or whatever the chart was there on the stack. I don't think I've seen you show that before. Is there a reason? Is there something we need to sharpen our pencils on how the sell side is modeling equipment? Is there a reason for putting that slide out there?
Yeah, we think there's been some confusion around what people thought the total mix. I don't think people either assumed it was 100% Unity VCS, and it's not, obviously. I think you got to get the mix right. There's a mix from existing equipment that's going to new equipment that moves in a natural form. It's not like we stop selling one machine and we start selling the other one. We're going to continue to sell all of our Centurion and Constellation for several years, and there'll be a natural mix. What we've always said was you'll see more of the fleet replace up front because people are interested in the new machine. That'll land on top of what's historically a pretty robust sale process for us within our existing legacy equipment. That's just, it's really a cue to watch your ASP mix on this one.
You probably have the units right. You may not have the ASPs right.
All right. Fair enough. That 2,500 some odd units in 2025 that you had in that bar chart, how does that compare to last year total units?
It's down from last year.
Okay. I'm going to look at Tim and David here. I mean, we talked on some numbers for the back half of the year in callbacks that equipment could kind of get into maybe that, you know, double digit and kind of comfortably into the double digit. Is that, if I do the math on those bar charts, which I'm not smart enough to do in my head here, is that still on the table? Tim, maybe, or David, sorry.
Yeah, you.
Yeah, we feel very good about the growth in the equipment segment.
Okay. Okay. That wasn't signaling anything there. It's more sharpen your pencils maybe on.
It's really more the mix and the ASP.
Yeah, it's really about mix.
All right. Let's maybe, we've got 10 minutes left here, switch over to the contact lens and overall vision care business. The first two quarters of this year, the market has come in around 4%. That's down a few points from last year, at least that's if we take the manufacturer data from the four companies. Where do you think we've lost a couple of points relative to the last year or two? Is it all on price? Is there a little bit of macro? I don't think of this as volume. I think volume's more as patients, but patients buying a few less lenses at one time, just where's a couple of points of growth kind of slipped away here?
I'd be careful about using manufacturer as the proxy for market because I think the audited data is probably, in our view, at least a better accurate measure of market itself. What's happening, I think, is you're seeing some of the manufacturers in particular come under price pressure from major chains and particularly the private label business. If you own that business, you know, every few years when you recontract, you end up with a slightly lower price. I would also say that depending on how aggressive you're being with consumer rebates, those come off net price, not necessarily sell out. We look at the sell out price from the office in particular, and we see that in the quarter as fairly robust. The second quarter was a little soft in the U.S., but globally it was fine. Actually, that's not true.
It was a little bit soft globally, and it was pretty robust in the U.S. I think it was 6% or 7% for the U.S. From that point of view, you'd say that this is pretty steady 7%. That said, there is less price in this year than there was from last year. We just took a price increase, but I think you're going to see some easing of price coming out of this rebound from COVID. There was a couple of years where we took a fair bit of price, and a lot of people did because input costs went up. A lot of things happened in that process that we needed to kind of catch up to. I think most people feel like we've got it priced about right right now.
Everybody's kind of stable, and I think people have moved off to kind of respond to more of a consumer rebate approach now with some of the newer products trying to get traction with new patients.
Yeah. If I think back to your history, you know, you guys spent 10 years, probably a little more than that under the wings of Novartis, and you know, they weren't necessarily investing in a lot of CapEx on the manufacturing side. You guys have on contact lenses now. You start to do that, then you get hit by COVID, and then it's a little bit longer to put some of these lines in. I mean, you guys are there fully now with P1, P7, some line extensions in DAILIES TOTAL1. How comfortable are you feeling about your relative positioning today versus maybe even a couple of years ago?
On capex?
Sorry, no, just on the contact lens market, your relative positioning.
We're in a great place right now. We can fill out any line we want. We've got the technology that we built, which was particularly valuable because it can produce any kind of material, any kind of surface on the material, and any kind of modality. We can do sphere, we can do toric, we can do multifocal, we can do silicone, or we can do HEMA lenses as well. I think there's a little bit of everything that we can do, so the utility of that is different than I think a lot of other people have. We had a fairly low risk when we were putting in capital, other than we needed to make sure we put it in at pace.
We're really through that cycle now where we've got a relatively mature, relatively productive, and I would say, when we look at OEE, we're getting very high numbers now right out the gate, which is helping from a gross margin perspective. We're really pleased with that investment and the flexibility it gives us to make whatever we want. I think the P7 is made on the same line that P1 is made on; it's the same line that DAILIES TOTAL1 gets made on. We're in a pretty good place, and P7 has been a really kind of exciting offer. I think half of that business now is coming from the two-week market.
Yep. All right. Fair enough. More so than the monthly market?
Yeah. Yes. It's kind of squeezing, you know, in the middle, as you might expect, right? It takes a little bit from the low end of DAILIES, and it takes a little bit from monthly, but it takes a lot from two-week.
Yeah. All right. That makes sense. All right. Just on ocular health, I mean, you know, we've tried to do some checks with docs. It seems like the anecdotal feedback on Tripteer is pretty good. Going to be an expensive product out of the gate until you get reimbursement. You know, how do you accelerate that 18-month? Is there any way to accelerate kind of that 18-month path to reimbursement, number one? Number two, can it still contribute in these first six to 12 months or so without reimbursement on a self-pay basis?
Not a lot. I mean, it'll have some marginal benefit. We'll sell some for sure. I think that will be largely commercial plans that pick it up early and largely it'll be a reimbursed product mostly. We are running a program that is kind of first fill free, which I think a number of people have done. That helps us get people. It's basically a way of sampling without sampling. It's a different way of getting people started on the medication and then assuming that they're happy with it and it buys us a little bit of time with the payers to keep them on it. It also creates a prior authorization process that's needed to try and get payers' attention and try and work your way through that. We understand the mechanism, I think, well enough.
The biggest challenge for reimbursement will be Medicare, traditional Medicare, which has a cycle time that we miss the entry point on. That doesn't really hit, it doesn't really step into it until we get it reviewed next year. It will be the following year, 2027, that would be, a big chunk of Medicare will be covered. Half of Medicare's in Medicare Advantage and those plans will pick up along the way. I think you'll see a steady reimbursement climb over the next 18 months. We're doing everything we can to accelerate that, but I don't see anything that's been left on the table, if you will, that we could do in addition. I think we're in a pretty good place. Good product. This is a unique, what I will say about it is that the mechanism is very different than whatever else is out there.
If you think about mostly what's been done, it's either treating the effect of dry eye, which is the anti-inflammatories and the cyclosporins of the world. Then there's the others that are supplements, which are supplementing the lipid layer, or some other mechanism. This is actually stimulating the production of natural tears in the natural configuration that it does. It's actually working with the body to do the right thing. That's a very different idea, and it's very appealing, I think, to the ophthalmology community.
What's your view? Do you think that'll be mainly used for chronic dry eye then? A few of the docs I talked to are really excited about using this as kind of an immediate action, onset of action, as you're talking about there on the agonist side, ahead of LASIK and things like that, where some of these patients might come in with borderline dry eye and you just don't want to treat them, but now you have something that you can immediately do.
I don't know. I don't know. We'll see how that goes. I think the dry eye following LASIK is transient and, generally speaking, you can do it with something a lot less expensive than this. My sense is that SYSTANE PRO would be a really great choice there if you're trying to do something there. We'll probably redirect them.
All right. Tim, I'm going to hit you in the last two minutes with two questions here. Just on tariffs, you know, second half impact about $100 million. Call it $50 million a quarter or so. This year, currency is helping offset a lot of that. How do you mitigate some of those costs next year as some of those currency tailwinds start to abate and you have to do it more kind of fundamentally?
Yeah, I mean, we're doing a couple of things. We're working with suppliers and looking at our contracts. We'll be adjusting those where appropriate. We're looking at price where we think we can get additional price where we're impacted by the tariffs. The third thing, like many other companies, we're looking at the manufacturing footprint. Right now we're doing what we would call no regret moves, things that we either had in our long-term plan that we're pulling forward and accelerating or new ideas that we found. It is a little bit difficult given the fact that we don't have a stable trade policy. If you were to tell me that these things were going to stay in place for the next 10 years, we may be doing some things a little bit differently because it's very expensive.
It's time-consuming to move manufacturing, but we are taking advantage of the levers that we do have, and we'd expect that to have some impact next year.
All right, fair enough. Street is modeling 100 bps of margin expansion next year. You talked on the call last quarter about 150 to 200 bps kind of being the core. Obviously, we have to adjust for some of those tariff headwinds. Where the Street is sitting right now on that 100 bps, pre-STAAR, which is probably going to dilute it a little bit, comfortable there, or how do we think about 2026 just from that standpoint?
Yeah, you know, listen, we're going to get probably 150 basis points this year of what I'd call natural operating leverage, and that's on a revenue growth of 4% to 5%. We will have, I'd expect to be able to get that next year. I'd also expect to grow faster than 4% to 5% next year. That would obviously drive some incremental operating leverage there. On top of that, you have the tariff pressure that you talked about. I think I mentioned 50 basis points on the earnings call. We're going to have a full year of investment in Orion, and that's going to cause a little bit of pressure on a rate perspective. I would expect us to continue to get nice operating leverage and margin expansion next year.
All right, fair enough. I think we'll leave it at that. Please join me in thanking David and Tim for a great overview here of Alcon. The next presentation is set to begin at 10:50 A.M. Eastern Time, including Twist Biosciences in this room, Miriam Pharmaceuticals in the Empire Ballroom, and EcoHealth in the Morgan Suite. Thank you.