Alcon Inc Q2 FY2021 Earnings Call

Hello, and welcome to Alcon's Second Quarter 2021 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. We ask you to please ask one question and one follow-up, then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Karen King, Senior Vice President, Investor Relations and Corporate Affairs. Karen, please go ahead.

Welcome to Alcon's second quarter 2021 earnings conference call. Yesterday, we issued a press release and interim financial report and posted a supplemental slide presentation on our website to enhance today's call. You can find all of these documents in the Investor Relations section of our website at investor.alcon.com. Joining me on today's call are David Endicott, our Chief Executive Officer; and Tim Stonesifer, our Chief Financial Officer. Our press release, presentation and discussion will include forward-looking statements. We expressly disclaim any obligation to update forward-looking statements as a result of new information on future developments, except as required by law. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ materially from those in our forward-looking statements are included in Alcon's Form 20-F and our earnings press release and interim financial report on file with the Securities and Exchange Commission and available on the SEC's website at sec.gov. Non-IFRS financial measures used by the company may be calculated differently from and, therefore, may not be comparable to similarly titled measures used in other companies. These non-IFRS financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed per IFRS. Please see the reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our second quarter earnings presentation, which can be found on our Investor Relations website. For discussion purposes, we are providing comparisons of 2021 versus 2019, unless otherwise noted. While you need to take into account a 2-year period, we believe the comparison versus 2019 is more operationally meaningful since our results were significantly impacted in the second quarter of 2020 by the pandemic. You will find a summary of results comparing 2021, 2020 and 2019 in our slide presentation and a comparison of 2021 versus 2020 in our press release and interim financials. As usual, our comments on growth are expressed in constant currency. With that, I will now turn the call over to David.

Thanks, Karen, and good afternoon, everyone. Welcome to our second quarter earnings call. I'll begin by providing a brief update on our second quarter, overall market dynamics and recent performance. After my comments, Tim will discuss our second quarter performance and our updated outlook for the full year, then I'll wrap up with some closing remarks, and we'll open the call for Q&A. We had a very strong second quarter with the highest quarterly sales and earnings since our spin-off. This was driven primarily by demand from new product innovation and solid commercial execution, coupled with strong market recovery in the United States. Q2 sales of $2.1 billion were up 11% versus 2019, with increases across all sales categories in Surgical and Vision Care. Core operating margin improved to 18.2% and core diluted earnings per share improved to $0.56. Overall, our Surgical franchise continues to outperform the market. We're growing share with our latest advanced technology IOLs, consumables have returned to growth in line with the recovery in procedural volumes, and we continue to see strong demand for our equipment. Our Vision Care franchise also returned to growth over 2019. Our new product launches are gaining momentum and expanding our market share despite variable recovery in international markets. PRECISION1 continues to be our leading brand for new and switch fits, even though new fits are still down globally. Consumer demand for Pataday Extra Strength has been better than expected, and our SYSTANE brand family is posting strong growth, aided by our newest products, SYSTANE Ultra and Hydration Multi-Dose Preservative-Free. Moving to our end markets by franchise. In Surgical, the global cataract surgery market was down versus 2019, with the U.S. showing solid growth over 2019 and international markets below the 2019 levels. That's primarily due to suppressed markets like Japan and India. Against these market conditions, we are gaining from PC-IOL share and outperforming the market, driven by our strong U.S. performance. In Vision Care, the contact lens market was up slightly versus the second quarter of 2019. And similar to Surgical, the U.S. market has returned to growth, while the international markets have not yet returned to 2019 levels. Nonetheless, we are gaining global contact lens share and outperforming the market, driven by our strong U.S. performance. Moving to innovation and investments. In PC-IOLs, we remain the market leader, and our share continues to grow with over 55% of global share and over 80% share in the United States. The continued adoption of Vivity and PanOptix is driving AT-IOL penetration above its historical rates. Furthermore, Vivity is exceeding our expectations in launch markets and is largely incremental to PanOptix sales. The growth in AT-IOLs is driven by both existing surgeons increasing their use of advanced technology lenses and the conversion of new surgeons who traditionally preferred monofocals and torics but are now implanting Vivity. While we do expect surgeons to try new competitive lenses, we're confident that the superior performance of our products, as supported by a growing body of clinical evidence, will sustain our market leadership. At the recent ASCRS conference, both PanOptix and Vivity earned a significant share of voice at the podium, with many surgeons discussing the incredible quality of vision from both lenses. Now moving to our equipment business. We're piloting our comprehensive cloud-based digital health solutions platform, our SMART Suite, which is designed to help ophthalmology practices streamline and create efficiencies in the cataract workflow. At the center of our equipment ecosystem is our cloud-based smart cataract application. This platform seamlessly connects the clinic to the OR, enabling surgeons to improve productivity and patient outcomes. We showcased our current platform recently at ASCRS, and we'll begin to expand to additional accounts at the American Academy of Ophthalmology in November. In Vision Care, PRECISION1, our newest daily SiHy lens, continues to gain momentum. PRECISION1 sphere and toric are now available in the U.S. and Europe, and we've introduced PRECISION1 sphere in Japan. We're excited to see our share gains in sphere and toric continue to drive our global market share, which has increased for the second quarter in a row. In daily SiHy, the fastest-growing contact lens category, we estimate we've gained approximately 5 share points globally since 2019 as a result of our new product flow. Additionally, we'll begin introducing DAILIES TOTAL1 for astigmatism to select accounts in the U.S. this fall and are planning for a broader launch early '22. We expect this launch will reinforce the leadership of DAILIES TOTAL1 as the industry gold standard and bring more customers to the DAILIES family. We've also begun to introduce Total 30, which we expect to launch commercially in the U.S. and select European markets later this year. This product builds on the brand promise of DAILIES TOTAL1 by delivering premium comfort to reusable wearers who account for two-thirds of the lens-wearing population. The reusable market is approximately $4 billion, and our market share is currently in the high teens. So given our low share and the positive early feedback from our key accounts, we're confident we can expand our share position. In ocular health, we saw strong retail and consumer interest for our Pataday allergy drop portfolio, led by the successful introduction of Pataday Extra Strength during a particularly strong allergy season this year. The convenience of the prescription-strength allergy product available over the counter is very appealing to consumers, and we're excited to offer this premium patent-protected product to a wider customer base. In dry eyes, SYSTANE sales continue to grow globally, reinforcing its leadership in artificial tears. We launched SYSTANE Hydration Multi-Dose Preservative-Free during the second quarter in the United States. With our continued investment in innovation, we believe there's a significant opportunity to increase Preservative-Free penetration in the U.S. and grow our MDPF share internationally. As part of our strategy to grow our eye drops business in the ophthalmic channel, we've begun building a dedicated sales force for ophthalmology in the United States. This team will also sell Pataday and Simbrinza, a prescription glaucoma eye drop. We closed the acquisition of the U.S. commercial rights for Simbrinza in June. The product is now contributing to net sales. So overall, our second quarter performance demonstrates the strength of our businesses and focused execution of our strategic priorities. Strong commercial execution behind our new product launches drove continued share gains despite a more challenging international environment. As markets return to growth, we believe the benefit of these share gains will manifest in continued top line growth. In manufacturing, we're installing more contact lens lines to keep up with demand and deliver steady product flow as we expand our portfolio and our market reach. Finally, we continue to invest in R&D to deepen our new product pipeline with exciting eye care innovation for the coming years. Now with that, let me pass it to Tim, who will take you through our financial results and provide our updated outlook for '21.

Thanks, David. We're pleased to report second quarter sales of $2.1 billion, up 11% versus 2019, driven by 14% growth in the Surgical business and 8% growth in Vision Care and broad-based growth across all sales categories. Year-to-date, sales were up 9% versus the first half of 2019, with Surgical up 11% and Vision Care up 7%. Implantables continue to reach new highs, driven by momentum from our new product launches. Sales were $387 million in the second quarter, an increase of 29% versus 2019. PanOptix and Vivity continue to take share, and strong adoption is driving encouraging penetration rates. On a year-to-date basis, implantable sales were up 25% versus the first half of 2019. Consumable sales of $620 million in the second quarter increased by 4% versus 2019. We're pleased to see sales growth across cataract, vit-ret and refractive consumables. On a year-to-date basis, consumable sales were flat versus the first half of 2019. Equipment and other sales were $199 million in the quarter, up 23% versus 2019 due to several reasons. First, our phaco equipment continues to benefit from innovation and strong commercial execution. In Europe, we've been focused on actively upgrading customers from legacy INFINITI devices to our newest-generation Centurion machine. We've also seen healthy demand for innovation like the ACTIVE SENTRY handpiece. Second, given the significant backlog of procedures, we're seeing some accounts expand capacity into new operating rooms or alternate sites of care, which is driving demand for new equipment in the interim. And third, refractive has continued its trend of strong demand, which accounted for about half of the equipment growth. While we're enjoying the benefits of higher consumer discretionary income and increased focus on health and wellness, we don't expect to sustain the favorable trend in refractive over a longer period. On a year-to-date basis, equipment and other sales were up 22% versus the first half of 2019. Now turning to Vision Care. Second quarter sales of $888 million grew 8% versus 2019. Contact lens sales were $535 million in the quarter, up 6% versus 2019. Our new product launches drove double-digit growth in the U.S., which more than offset a slight decline in international markets where COVID headwinds are more pronounced. PRECISION1 continued to gain share in the daily SiHy category. And with the strong uptake of PRECISION1 for astigmatism, we're driving share gains in the fastest-growing daily SiHy toric category for the first time. With favorable share gains and account conversions, we will continue to accelerate the ramp-up of our contact lens manufacturing lines. On a year-to-date basis, contact lens sales were up 4% versus the first half of 2019. Ocular health sales of $353 million in the quarter increased by 11% versus 2019. This was driven by momentum in SYSTANE, aided by our new launches of SYSTANE ULTRA and Hydration Multi-Dose Preservative-Free and better-than-expected demand for our newest allergy eye drop, Pataday. We launched Pataday Extra Strength, which provides a full 24 hours of allergy relief this spring, and demand has exceeded our expectations. The favorable patent life of Pataday Extra Strength gives the brand significant runway for future growth. On a year-to-date basis, ocular health sales were up 13% versus the first half of 2019. Now moving down the income statement. Second quarter core gross margin was 64.4%, down slightly versus 2019. While we've seen some inflationary pressures, we've been able to mitigate the impact through cost containment. Core operating margin was 18.2% in the quarter, up 160 basis points versus 2019, primarily driven by operating leverage and reduced investments in COVID impacted markets. Second quarter interest expense was $30 million, down from $35 million in 2019. While we've taken on incremental debt, we benefited from lower variable interest rates and have refinanced some of our higher-cost local debt. The core effective tax rate was 19.2% in the quarter, compared to 13.5% in the second quarter of 2019. The difference can be explained by the impact of the Swiss tax reform in 2020, which increased the corporate tax rate for Alcon by approximately 300 basis points, along with a more favorable geographical mix in the second quarter of '19. The core effective tax rate was 19.9% for the last 6 months. Core diluted earnings per share in the second quarter of 2021 were $0.56, up $0.09 versus the second quarter of 2019, driven primarily by higher sales and better operating leverage. Now before I discuss our 2021 outlook, I'll touch on a couple of cash flow and balance sheet items. Free cash flow year-to-date was $320 million, compared to $95 million for the same period in 2019. Higher core operating income and lower separation spend were partially offset by increases in inventory to support new product launches and upcoming demand. CapEx was $222 million for the first half of the year, with the increase driven by our contact lens manufacturing expansion. We expect higher capital spending in the back half of the year due to the timing of line installations. We closed the acquisition of the U.S. commercial rights to Simbrinza for $355 million this quarter, and we paid our first dividend of $54 million in the quarter. Transformation costs were $15 million for the second quarter and $126 million life-to-date. Now moving to 2021 guidance. Given the strong performance in the first half of the year, we are raising our full year sales and earnings outlook. While the economic recovery is underway in many of our markets, we anticipate that customers in some geographies will continue to face COVID-19 challenges, including the rising cases from the Delta variant. Against this backdrop, our 2021 guidance also assumes that global markets return to 2019 levels by the end of the year, U.S. markets will continue to grow above 2019 in the second half of the year, and international markets will reach 2019 levels early next year, with countries such as India and Japan remaining subdued. Accordingly, we now expect full year net sales of $8 billion to $8.2 billion. This is an improvement from our previous guidance of $7.8 billion to $8 billion last quarter. We also improved our outlook for core operating margin from approximately 17% to approximately 17.5%, driven primarily by higher sales and operating leverage. Although we've been pleased with our margin improvement to date, we do expect to see incremental margin pressure in the second half of the year, primarily due to product mix and timing of spend. As markets continue to recover, we will increase our investment behind innovation, our new product launches and some of our commercial activities. We're also observing some challenges with suppliers and inflationary pressure in areas like raw materials and freight. We now expect core diluted earnings per share to be in the range of $2 to $2.10, as compared to our previous outlook of $1.85 to $1.95 per share. This assumes a core effective tax rate of approximately 20% for the full year. Now I'll turn it back to David for some closing remarks.

Thanks, Tim. Before we open it up for Q&A, I want to thank all of our associates for a great quarter. Our results today demonstrate what we can achieve with great innovation, commercial execution and manufacturing excellence. Pleased with our ability to deliver growth and outpace the market. Our share gains are remarkable considering current conditions, and we're confident that we're well positioned to capture an outsized benefit as the global markets recover. Until then, we remain laser-focused on supporting doctors and patients while we deliver long-term value to shareholders. So with that, let me open it up for Q&A.

Thank you. We’ll now be conducting a question-and-answer session. Our first question today is coming from Michael Leuchten from UBS. Your line is now live.

Thank you very much. I have a quick question regarding your comments on capacity expansion in some of your key accounts. Should we expect some inventory fill that might mean the Surgical growth we observed in the second quarter won't necessarily carry over into the third quarter and beyond? My second question is related to the Delta variant's rise and its impact in the U.S. You provided some clarity on your outlook for international markets and Europe, but it seems like you're not particularly concerned about the U.S. at this time. Is that an accurate interpretation of your comments? Thank you very much.

Well, on the second one, Michael, I think we are comfortable that we understand where we are right now. But again, the Delta variant is moving around the U.S. quite quickly. And I think we have a trajectory on it. We kind of have a view of it. I don't know that anybody really knows what's going to happen there. So it's baked into our thinking for sure, but I would just say that there's no certainty around what's going to happen. On the capacity expansion, I'm not sure I understood your question precisely, because if it's referring to our surgical growth and are we expanding for surgical, that's not really where we're adding capacity right now. We have plenty of capacity in our surgical business right now to manage key accounts and/or expansion around the Surgical business. Capacity expansion is going on principally to kind of keep up with demand in the Vision Care. That's our principal expansion effort. And again, our expansion is related really to our interpretation of demand. Right now, demand has been better than we expected, but we're going to keep a close eye on it and evaluate capacity as we go forward.

Thank you.

Thank you. Your next question today is coming from Veronika Dubajova from Goldman Sachs. Your line is now live.

Hi, guys. Good morning, and thank you for taking my questions. I will also keep it to two. One, just would love to understand, David, kind of the type of momentum that you saw as you moved through the quarter, obviously, very strong performance. I'm kind of trying to see was it weighted more towards May and June? And how is that continuing into July? Or was that kind of growth momentum that you saw pretty steady throughout Q2? And just maybe kind of try to push you a bit more on this Delta variant, have you seen any deceleration in the U.S. since you've reported Q2? Just to give us a sense for where you are? And then a big-picture question just on Vivity and PanOptix. Where do you think we are with AT-IOL penetration? And now that we've seen continued uptake here, are you more confident in seeing a step change here in momentum as you look forward? Thanks, guys.

Thank you for your questions, Veronika. I’d like to provide some insight into the quarter. We experienced steady momentum throughout the quarter, with consistent performance in the U.S. from April to June. We have not observed any significant signs of slowdown in the U.S. due to the Delta variant. In the second quarter, we did see some improvement in Europe, though India and Japan faced significant challenges. Overall, international markets are complex, and we believe it will take longer for them to recover to 2019 levels, which we expect will happen early next year in 2022. We anticipate continued growth in the U.S. for the rest of the year, although it's difficult to predict the growth rate due to the Delta variant. We've only noted a few hospitals temporarily pausing elective procedures, but our business is primarily in Ambulatory Surgery Centers, which remain operational. Thus, we haven’t seen a notable impact on surgical procedure volumes in the U.S. The international situation varies by market, and improvements will be gradual. Regarding Vivity, it has added approximately 300 basis points over the past three years, exceeding the usual 50 basis points improvement. It’s challenging to determine if this is due to the market mix, particularly concerning public hospitals predominantly offering monofocal lenses. When we quote figures relative to 2019, we often exclude India because it has a high volume of procedures and locally manufactured lenses. Globally, the market is down significantly, and excluding India, it remains down by mid-single digits in surgical procedures. However, there is a notable shift toward AT-IOLs, with an increase of about 300 basis points over the last three years—approximately 100 basis points per year, mainly in the U.S. We're now at 17% penetration in the second quarter, up from about 14% a few years ago. While this is better than expected, it’s hard to say if it’s simply due to market mix. Nonetheless, I remain cautiously optimistic each quarter about our penetration rate. I believe we will continue to see growth in AT-IOLs, particularly with Vivity proving to be a valuable product.

Very clear. Thanks.

Thank you. Next question today is coming from Larry Biegelsen from Wells Fargo. Your line is now live.

Good morning. Thanks for taking the question and congrats on a nice quarter here. One for you, David. One for Tim. So I'll ask them both here. David, do you think Q2 benefited from catch-up procedures and you expect that to continue for a few quarters? I know you talked about potentially cataract procedures, for example, running hot, to use your words, coming out of the pandemic. And then, Tim, one thing, big picture that was interesting to me is we've seen the Surgical margin increase about 700 basis points since 2018 to 27%, but the Vision Care margin has actually decreased by 200 to 300 basis points over that time. Why has the Vision Care margin eroded? And what's the outlook for each? Thanks for taking the questions, guys.

Thank you, Larry. Regarding the second quarter for surgical procedures, our current understanding of the market indicates that it has increased in the mid-single digits. If we consider the growth since 2019 and halve it for each year, that aligns with the typical procedural growth we would have anticipated for that timeframe. Since there was minimal growth last year, there likely had to be some recovery. However, the capacity to recover significantly in the United States is quite limited. Most operating rooms are currently running at about 85% to 90% capacity, which leaves only 10% to 15% potential for additional recovery. Given that we've lost around 1 million cataract procedures over the past year, and considering we conduct approximately 4.5 million procedures annually, it would take several years to completely make up for that loss, even if everyone operated at near full capacity. Our calculations reflect this situation, although it may change. We are observing some increase in capacity as evidenced by the equipment volume in our business, which reflects some addition of operating rooms, albeit modest. Therefore, we remain cautiously optimistic. We do expect procedural growth to exceed the usual 3% over the next few years.

Yes, regarding the Vision Care lines, if we look back to the end of 2019, the Vision Care margins were approximately 18%. In Q2, we reported 16.4%, indicating some pressure. This pressure primarily stems from the Vision Care lines and the installation of those lines. Referring to our Capital Markets Day presentation, you can see that we installed several lines in 2019, even more in 2020, and we continued to add lines in 2021. We will persist in meeting demand as we move forward. It's important to note that it typically takes about 18 to 24 months to fully set up these lines, which contributes to the current pressure. As discussed at the Capital Markets Day, we anticipate that margins will start to improve, likely in the 2022 to 2023 timeframe, as we navigate this catch-up phase regarding capital expenditures.

Our next question today is coming from Scott Bardo from Berenberg.

David, I wonder if you could give us some sense of the relative share then of your presbyopia-correcting business. So can you split that roughly now between PanOptix and Vivity and other monofocals? Just give us a sense really of how Vivity is taking up. And furthermore, can you perhaps discuss a little bit then how DAILIES TOTAL1 is trending amid the PRECISION1 launch. That would be helpful. And follow-up question, please. Obviously, Michael Onuscheck has gone on to pass to his new. I just wondered if you could talk a little bit about the global business and innovation position and what your stance is in terms of filling that management capacity.

Sure. Let me start with the first question. We are continuing to gain market share globally in the PC-IOLs, especially strong in the U.S. Vivity and PanOptix have performed exceptionally well, which benefits our value, particularly when we upgrade toric or monofocal patients. As our penetration increases, our performance has improved. Our share in the United States is over 80%, and globally, it's around 50%. While we haven't disclosed the specific split between Vivity and PanOptix, you can assume that PanOptix represents the majority right now, with Vivity gaining share as it is relatively new. A lot of this share appears to be additive, indicating growth in penetration opportunities. DT1 is trending fairly well, though slightly down compared to its Q1 launch, as we anticipated some cannibalization of DAILIES Aqua Comfort Plus and DAILIES TOTAL1 due to the success of PRECISION1. Many new patients who might have initially chosen DAILIES TOTAL1 may now opt for PRECISION1 given its value at this price point. That's one reason we are excited to launch DAILIES TOTAL1 toric. With the positive experience from PRECISION1 toric, we believe it's the right time to introduce it in the fourth quarter. We'll be building inventory for a U.S. launch next year, but we expect some impact in the fourth quarter as well, providing DAILIES TOTAL1 with a highly anticipated toric option, which most optometrists have been waiting for. This will set a new standard for comfort in torics and help both of our brands. Overall, we are not seeing unexpected trends and have now found opportunities to grow total DAILIES, which is our aim. We gained about a full share point in total DAILIES globally this quarter, resulting in a solid outcome. Regarding our GBI position, it plays a significant role in our business and innovation. We are pleased that Ian Bell has taken on this role. With a strong background in ophthalmology and successful experience with products and customers, he brings valuable practical knowledge and insights from key opinion leaders worldwide due to his extensive international experience. We are really excited about this addition and look forward to successfully advancing under his leadership.

Our next question today is coming from Cecilia Furlong from Morgan Stanley.

And I'll ask both upfront. But just on the recent capital equipment strength, could you provide some more color around your outlook for the second half following the recent strength? And then just on Total 30, the outlook for 2021? Or is this really more of a 2022 dynamic in terms of contributing to contact sales?

Sure. Let me begin with the equipment business. We had a strong quarter, achieving a 23% increase compared to 2019, which is notably better than what we typically anticipate. Historically, we've mentioned that growing in the mid-single digits would be excellent, so this performance exceeded our expectations. About half of that growth came from our refractive equipment, which saw a 90% increase from 2019. There is a continued surge in demand for LASIK, which remains the most popular procedure globally, and our WaveLight platform is still the leading equipment in this area. We are satisfied with the refractive performance; however, we are cautious about labeling it as a long-term trend since we learned from previous downturns such as in 2009. There are many economic factors and patient dynamics at play, and while I hope for sustainable growth, I won't necessarily plan for it due to past experiences. The other half of the growth is primarily from our core cataract business, which has benefitted from the Centurion platform, renowned for its advanced fluidics, along with ACTIVE SENTRY, which simplifies upgrade decisions for customers with older machines. No matter the competition, we’re receiving a great response to both Centurion and its ACTIVE SENTRY feature. Additionally, new products like ARGOS and Rivoli are performing well. The ARGOS biometer has been particularly effective, being faster and easier to use for dense cataracts. We're also excited about introducing our new Smart cataract suite. As we look ahead, we feel positive about our current position, but expect some challenges as the capital equipment market returns to a more typical growth pattern, likely closer to the mid-single-digit growth we've seen historically, correlating more closely with procedural volumes. Regarding the T30 piece, we haven’t speculated much about its outlook. There's a minor amount of sales occurring right now, but it’s more relevant to our expectations for 2022 rather than 2021. The T30 represents a significant advancement in reusable contact lenses after many years. With two-thirds of contact wearers using reusable products and our share being in the high teens, we’re enthusiastic about the opportunities in this market. The innovation here is a material designed to last 30 days while ensuring comfort throughout, even at day 30. This is an appealing idea for consumers, as it combines durable materials with our unique water gradient technology, meeting the comfort expectations of reusables that many wearers have found lacking. Thus, we are excited about Total 30 primarily as part of our 2022 outlook.

Next question today is coming from Rich Newitter from SVB Leerink.

Just maybe a little bit on the comments you made in the back half margin outlook implied by your guidance. I think you bucketed a couple of things that would weigh on the margin, including product mix, spend timing and inflationary pressures. Can you maybe just calibrate us a little bit on how much in each of those buckets will weigh and which dominates? And then how do we think about those items as we look ahead into 2022?

Yes, in the first half, we are around 18% in margin rate, which suggests a 17% rate in the second half to reach approximately 17.5%. The three factors influencing this are investments, inflationary pressure, and mix. I would estimate that investments account for about half of the pressure, mainly because we are continuing to support our new product launches. This includes T30 sphere and toric in the U.S., DT1 toric in both the U.S. and Europe, and PRECISION1 in Europe and Japan. We still have several launches that we will be investing in during the second half. The other half is split between inflation and mix. We did encounter some inflation, particularly in the second quarter, but we managed to offset some of it. We anticipate ongoing inflation in the second half across raw materials, wages, and freight, and while we plan to mitigate some of that impact, we may not be able to offset it fully. The mix issue involves both geographic and product mix factors. As for 2022, we expect to see continued margin improvement and will provide more details later, but we are still on course for a low 20s margin in 2023, as mentioned during the Capital Markets Day.

Our next question today is coming from David Adlington from JPMorgan.

The first one, just be interested to get your thoughts on the impact of J&J's larger synergy in the U.S. and how that's impacted the dynamics, the competitive dynamics there? And then secondly, just to follow up on that second half margin question. Just wondered how much of that cost base you can flex in response to either the sales coming in better or slightly worse than expected. In particular, if they come in better, will you be able to spend enough to keep the margins down as low 17%?

Let me address the first question regarding the J&J Synergy launch. We anticipated this move, as we are quite familiar with this product from its performance in Europe. It features a diffractive lens, which combines diffractive technology with EDOF. However, it doesn't significantly reduce issues like halos and glare, which have historically deterred patients from using AT-IOLs. We believe that Vivity serves as an excellent alternative to complement PanOptix, offering a profile with minimal disturbances alongside clear focal points at near, intermediate, and distance vision. Essentially, we are combining the best aspects: sharp near vision, well-defined intermediate vision, and, of course, distance clarity with the PanOptix lens, which remains unmatched in that regard. For patients concerned about visual disturbances, Vivity is a necessary option, as competitor diffractive lenses may not provide the desired relief. We are confident that people will adopt these lenses. In the second quarter, we gained market share in the U.S. following the launch, with our share increasing over 80%. We are prepared for competitive entry and do not anticipate any surprises in that area.

Yes. Regarding the cost flexibility, if we look at the midpoint, we believe our cost framework is well-sized for our needs, particularly concerning general and administrative expenses. As revenue increases, we gain more leverage, and conversely, if revenue decreases, leverage diminishes. We haven't detailed the flexibility yet, but consider that commissions fluctuate with revenue, advertising and promotions—especially in the contact lens sector—are crucial for driving additional growth, and don't forget samples as we introduce new products. These elements represent our flexible components.

Our next question is coming from Matthew Mishan from KeyBanc.

My first question is regarding the concentration of surgeons performing the AT-IOL procedures. I suspect a significant number of surgeons contribute to that 14% penetration rate. Are you observing an increase in the number of high-propensity surgeons participating in these procedures? Additionally, is the change in penetration from 14% to 17% or 18% due to expanding the number of surgeons performing these procedures?

It's a great question, and I can't answer it precisely because I haven't reviewed it recently. However, we often ask whether we're bringing more surgeons into the AT-IOL space. You're correct that a small portion of the surgical community performs most of the AT-IOLs. Historically, if a surgeon needed to make an adjustment at the end and didn't have access to a refractive laser, they were less likely to pursue this option. Even the best surgeons find that they may still need to make corrections, usually using a LASIK laser. It's been limited to certain surgeons, but we have noticed some new surgeons entering the field. I recently attended the American Academy of Cataract Refractive Surgeons meeting, which was excellent, and I spoke with over a dozen surgeons. However, this information is mostly anecdotal. I believe there are definitely more surgeons involved now; I just can't confirm if that number is substantial in the broader picture. What I can say is that current AT-IOL users are eager to add more patients to their practice. They tend to be cautious when it comes to patients who often drive at night or have concerns about halos or glare, and many have chosen not to proceed with some patients, typically 3 out of 10 in those situations. We believe we're bringing more of these patients into the mix, which is driving most of the current momentum. I do think we will see an increase in surgeons getting involved over time. Particularly for those currently using toric lenses, the transition to Vivity toric seems like a logical next step. It offers patients significantly improved intermediate vision and a good chance of avoiding reading glasses. So, while this might only slightly increase penetration, it's an important segment of the market. It's an interesting question, though.

And then moving to contact lenses, I think last quarter you mentioned that finding new fits was more challenging in this environment. Have you noticed any changes in the second quarter that are enabling more customers to upgrade to PRECISION1s?

Let me share a few insights before addressing your question. The short answer is that I am uncertain. Currently, we're utilizing survey data from optometrists. In the U.S., optometrists are reporting a similar number of visits compared to 2019, indicating that visits have largely returned. They're also stating that revenue has recovered, but around 25% of their services come from telehealth. This suggests that a significant number of existing users are being served through telehealth options, though I'm not certain about this. It seems directionally accurate. Moreover, outside the U.S., the international segment is experiencing higher chain penetration but a slower recovery in foot traffic, leading to throughput challenges in their offices. This might limit the number of new fittings internationally. In contrast, the U.S. market is performing well and there aren’t significant barriers to new product adoption, with contact lens growth in the U.S. at high single digits, and we achieved a 17% increase in that environment. Overall, we are pleased with our performance in the U.S. Internationally, we slightly outperformed the market, which was down in mid-single digits. That's the current situation regarding contact lenses.

Our next question is coming from Chris Cooley from Stephens.

I appreciate you taking the question. Just 2 quickly for me. If we think about the U.S. cataract market opportunity, help us kind of frame the way that you're contemplating Aetna's recent decision to require preauthorization. I realize it caused basically a temporal kind of disruption there from a scheduling perspective. But some overtones there about Clear Lens Exchange possibly getting cut down over time and some scheduling issues there. So I'm just curious if you think others will follow suit. And if that as a result, makes this a more protracted ramp back up as you recoup those lost procedures from COVID? And then I've got a quick follow-up.

Yes, we examined that issue. The best estimate indicates that it was impacting around 10,000 to 20,000 patients each month in the U.S. This has slowed down the process and has created a challenge for surgeons due to the added administrative workload. Patients with cataracts will inevitably undergo treatment, but Aetna's decision to complicate this process is not well-received by the associations, surgeons, or ourselves. If the intent was related to clear lens extraction, which I have not reviewed yet, that justification seems questionable because such procedures are not very common. If they have a standard they want to implement, such as 2,100 cataracts, they should communicate that clearly. Currently, we believe that this decision could negatively impact the re-enrollment of new patients over time, leading to supply and demand issues that will particularly affect seniors in these plans.

I appreciate that additional color. And then just as my follow-up, I wanted to stay on cataract. And just similarly ask, at ASCRS, a lot of new technology when we look at the premium lens category. Just curious how you're thinking about additional efforts to grow the category. Because if you're already a little bit north of 80% share here in the U.S. just over half of share when we think about this category globally and seeing a little bit more of an inflationary environment right now, just curious what you think you have to do to keep driving that share or that category growth over time because it's hard to accelerate growth and you already have 80% market share without growing the cataract.

We have achieved 80% market share in the U.S., but that also means there is still 20% left to capture. Moving forward, our focus is on increasing patient engagement to achieve the best outcomes. I believe that increased innovation benefits market growth, so we welcome competition in the AT-IOL space, as it fosters more discussion and expands options for patients, ultimately drawing more people in. There is significant potential to improve penetration in this category, and it's essential to bring more surgeons on board. If we had to prioritize, we would prefer to exchange a share point for a point of penetration, since a point of penetration is far more valuable, especially with our current global share of over 50%. Additionally, we still see opportunities in various markets where our share is lower. For instance, we do not have Vivity available in China or Japan, and we are missing certain products in other markets. While our share in Europe is increasing positively, there remains considerable potential for AT-IOLs in international markets, particularly with the portfolio we offer.

Our next question today is coming from Anthony Petrone from Jefferies.

I'll stick with AT-IOLs and maybe just a recap on pricing trends. Just when you consider that there is more competition in the space and some reimbursement pressures for monofocals in the U.S., how are pricing transfer AT-IOLs? And if they are stable, what is the recap on the premium relative to, say, a monofocal? And then the follow-up would be on Simbrinza. I think that was a $50 million run rate that's coming in this quarter. Maybe just remind us what is the growth profile on Simbrinza and maybe sort of the views on the glaucoma space going forward in terms of expansion. Will we see more products added in pharma devices or a combination?

Thank you for your questions, Anthony. Currently, pricing appears to be stable across the globe. Internationally, it's a bit more challenging than in the United States. Pricing for monofocals typically hovers around $100, give or take $20. On the other hand, our AT-IOLs, particularly the PC-IOLs, are priced between $800 and $1,000. We're closely monitoring this pricing. So far, we've maintained good pricing discipline in the U.S. Historically, when lenses are similar, surgeons tend to focus on pricing; however, if lenses differ significantly, their priority shifts to providing the best care for their patients. Overall, I'm confident about our position regarding AT-IOL pricing. Nonetheless, it’s a general trend that pricing in these categories will gradually decrease over time, and we anticipate some pricing pressure annually, which is factored into our planning. Regarding the glaucoma market, we view the device category as particularly interesting and believe it will surpass $1 billion. We're still strategizing entry into this space and keeping an eye on it, especially with the recent reimbursement changes. We approach pricing and market entry with patience and discipline. The Simbrinza business, on the other hand, shows relatively low growth, increasing in the low single digits. Our strategy is to use it to enhance our Preservative-Free Multi-Dose line, particularly our SYSTANE products, and to build on our Pataday products. Currently, our representatives can present a comprehensive ophthalmic portfolio of eye drops for ophthalmologists who frequently prescribe them, which we estimate as a $0.5 billion market opportunity in the U.S. The global opportunity is significant, and we need to connect with those making recommendations to be successful. With Pataday, we've made strides in optometry and consumer markets, but there's still ample potential in the ophthalmology prescriptions. As we move forward, we aim to expand our portfolio with additional eye drops. I've mentioned previously that we will carefully assess the Rx business. Presently, it represents a primary means of establishing a sales force and exploring multiple categories. Glaucoma is one potential avenue, alongside dry eye and retinal disorders, which are large areas we want to engage in. While this isn't our top priority, it will be an area of focus in the coming years. In summary, we view the potential to bring a wide range of ophthalmic products to market as extremely important. We intend to explore all opportunities because we believe we have a robust commercial platform. Many companies worldwide have innovative products but may lack the commercial expertise or leverage we possess. We are excited about identifying these opportunities and leveraging our platform in the long term. Thank you for the question.

We reach the end our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.