Good morning, and welcome to the Bausch + Lomb's First Quarter 2024 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to George Gadkowski, Vice President of Investor Relations and Business Insights. Please go ahead.

Thank you. Good morning, everyone, and welcome to our first quarter 2024 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Brent Saunders; and Chief Financial Officer, Mr. Osama Eldessouky. 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 1 of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. 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 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 marks nearly one year since my first earnings call following my return to Bausch + Lomb. We've accomplished quite a bit in that time frame, which we'll cover as we review first quarter performance and highlight growth drivers for the remainder of the year. These areas of focus are familiar to you by now and continue to drive our strategy. Let's start with revenue. We saw 20% top-line growth on a constant currency basis for the quarter, thanks to outperformance from each of our business units. Our quality of growth isn't limited to reporting segments, as we delivered solid results across geographies. In other words, we're in an enviable position of not being reliant on one business or region as drivers of our performance. Our methodical approach to improving how we make and sell things is bearing fruit. Our renewed focus on launch excellence is reflected in early returns for Vivo and the ongoing expansion of our latest daily SiHy contact lens offerings. Operationally, we're making strides on improving service levels within our own network. And while contract manufacturing continues to present a challenge, we have plans in motion to lessen our reliance on third parties over time. Finally, our relentless focus on returning to our roots by prioritizing innovation is producing tangible results. Our enVista Aspire IOL has made a strong market entry, and we have a steady stream of premium IOL launches planned for 2026. Last quarter, I mentioned a talent infusion for our R&D team, and that hasn't let up. We continue to make prominent hires throughout 2024. The scientific community recognizes our pivot, and people want to be part of what we're building. The main takeaway from our roadmap slide is the progress indicator. While caution against assuming every Phase 1 box has been checked after an exhaustive effort to rethink how we work, the rewiring process is largely complete. That means we're gearing up for Phase 2: Innovate & Execute. I'd like to acknowledge the human aspect of an undertaking like this. Stating the obvious, roadmaps only work if people follow them. When I rejoined Bausch + Lomb, I made it very clear that in order for the company to achieve its full potential, we needed to make some tough decisions while operating at a speed some weren't accustomed to. Instead of shying away from a break with the status quo, colleagues around the world embraced it. Under the direction of a refreshed leadership team, our workforce of 13,000 has met every challenge along the way and remains focused on the opportunity in front of us. I prefer always looking forward, but sometimes it's important to look back. Last May, in the same setting, I was clear about the challenges we faced. Underutilization was holding us back. We had a robust global commercial network and supply chain, but not enough product flow. That led to inefficiencies and jeopardized some of our customer relationships we've built over decades. We needed to reinvent our company in a thoughtful but urgent way. I'm proud of what we've been able to accomplish in the 363 days since. We addressed our supply chain issues head-on, understanding that turning our manufacturing and distribution network into a competitive advantage would take years, not months. As a result, we now have a more stable supply of products. We've also augmented our supply with the introduction of new and in the case of Xiidra and Blink acquired products. These offerings address some of the most glaring needs in eye health, demonstrate our commitment to innovation, and position us for sustained growth and category leadership. Our reinvention is resonating with our most important audience: the eye care professionals who prescribe and recommend our products. On my Listening & Learning Tour one year ago, supply concerns and lack of awareness around our priorities often came to the forefront. My experience at the recent American Society of Cataract and Refractive Surgery Annual Meeting was the exact opposite. In nearly every interaction, customers shared an appreciation of our efforts to predictively deliver the products and services they've come to rely on, and recognized our increasingly important role in bringing new solutions to market. Their excitement about what the future holds for Bausch + Lomb was clear. I'll give a brief overview of the financials before Sam gets into specifics. Our 20% constant currency revenue growth is shown here, which, as previously noted, was driven by our holistic strength that's reflected in our business segment performance, with 8% constant currency revenue growth for Surgical, 11% for Vision Care, and 66% for Pharmaceuticals. As for our revenue, Pharmaceuticals still showed impressive organic revenue growth on a year-over-year basis at 18%. Our key franchises continue to outperform and drive home the holistic theme given the spread across business units. INFUSE 1-day lenses are increasingly a preferred option for optometrists and our enVista family of IOL has surgeons excited for expansion in that category. Brands that have demonstrated consistent growth in areas of ongoing opportunity, most notably, Lumify and PreserVision, are high-margin performers that bolster the top and bottom line. Now let me turn it over to Sam.

Thank you, Brent, and good morning, everyone. Before we begin, please note that most of my comments today will be focused on growth expressed on a constant currency basis. Turning now to our financial results on Slide 8. We're pleased to report another quarter of solid revenue growth across each of our segments and key product franchises. Our business has continued the momentum coming out of 2023, and we're off to a strong start in 2024. Total company revenue of $1.099 billion for the quarter reflects growth of 20% on a constant currency basis. As I have previously discussed and as Brent also mentioned, we're excited about the opportunity ahead of us in 2024 with the growth of recent launches and new and upcoming products. We're continuing to make improvements in our supply chain and remain focused on executing our strategy to drive revenue growth and sustainable margin expansion. For the first quarter, currency was a headwind of $20 million to revenue. Despite the higher-than-expected currency headwinds, we delivered more than $1 billion in revenue in the quarter. Now let's discuss the results in each of our segments. Vision Care first quarter revenue of $635 million increased by 11% on a constant currency basis, driven by growth in both the consumer and contact lens portfolios. The consumer business again demonstrated strong performance, both in the U.S. and internationally, with growth of 15% on a constant currency basis in Q1. We continue to see growth across our key franchises, including eye vitamins, which grew by 7% in the quarter, and Lumify, which grew by 16% in the quarter, both expressed in constant currency. Our consumer dry eye portfolio delivered $82 million in revenue in the quarter, representing 25% organic growth. The contact lens constant currency revenue growth was 6%. The reported revenue from our Daily SiHy lenses grew by 68% in the quarter and 73% on a constant currency basis. Our Daily SiHy multifocal lens has now been launched in the U.S. and Japan, and has added to the solid performance of the Daily SiHy sphere. We're excited by the growth of this franchise as we continue the global rollout and further expand the family with the upcoming launch of the Daily SiHy toric. Moving now to the Surgical segment. First quarter revenue was $197 million, an increase of 8% on a constant currency basis. The consumables portfolio grew in the quarter by 9% on a constant currency basis. The growth was mainly driven by surgical packs, where we continue to see solid demand. Implantables grew 9% for the quarter on a constant currency basis with our premium IOL portfolio up 30% in constant currency. The IOL portfolio continues to expand with the recent U.S. launch of enVista Aspire, which has made a strong market entry along with the growth of the LuxSmart EDOF lens in Europe and the phased launch of ICH, which has been limited by supply constraints. Revenue from equipment was up 5% on a constant currency basis, mainly driven by Stellaris system sales. We continue to focus our strategy on retailing upcoming product launches and higher-margin premium categories. We expect to see a steady stream of these launches over the next number of years, which we anticipate will drive revenue growth and sustainable margin expansion. Lastly, revenue in the Pharma segment was $267 million for the quarter, which represents constant currency growth of 66%. Miebo delivered $28 million of revenue in the quarter. The launch performance remains incredibly positive, and we're committed to making the investments to drive stronger adoption. Xiidra delivered $79 million in revenue in the first quarter. We continue to make progress in executing our strategy to reestablish Xiidra as a market leader. The Xiidra field force was realigned in the quarter, and we have turned the direct-to-consumer marketing investment back on. Although not material to the company's overall results, it's worth noting that the performance of Xiidra was negatively impacted by disruptions resulting from the cyber attack at Change Healthcare. However, we saw an improvement in scripts as we exited the quarter and transitioned to other vendors. Brent will elaborate on this, but I want to stress that Xiidra and Miebo together position us as a leader in dry eye disease, and we're excited about delivering on their full potential. Beyond Miebo and Xiidra, we saw strong growth across other parts of the pharma portfolio. On a constant currency basis, the U.S. generics business grew by 10% and international pharma grew by 7%. As expected, Prolensa declined due to a generic entry into the market during the quarter. Now let me walk through some of the key non-GAAP line items. Adjusted gross margin for the first quarter was 63.2%, which was up 320 basis points compared to Q1 '23. The adjusted gross margin improvement was mainly driven by favorable product mix, including Xiidra. This was balanced by pressure driven by the higher inventory costs in our Surgical business. In the first quarter, we invested $81 million in adjusted R&D or approximately 7% of revenue. First quarter adjusted EBITDA was $180 million, which represents 28% growth versus the first quarter of 2023. Net interest expense for the quarter was approximately $96 million. Adjusted EPS for the quarter was $0.07. Adjusted cash flow from operations was $48 million in the first quarter, and CapEx was $67 million. The effective tax rate for the quarter was 15%. Turning now to our 2024 guidance on Slide 12. We are raising our full-year constant currency revenue growth guidance from a range of approximately 12% to 14% to a range of 30% to 50%. The raise reflects the broad-based strength of our business and the momentum we have seen in the first quarter. Our 2024 revenue guidance remains in the range of $4.6 billion to $4.7 billion. This range now absorbs incremental currency headwinds of approximately $50 million relative to our previous guidance. For the full year, we estimate currency headwinds to be approximately $90 million. We are maintaining our guidance for Xiidra to generate approximately $400 million in revenue. Our guidance for Miebo continues to be approximately $95 million of revenue in 2024. Shifting to adjusted EBITDA, we are maintaining our adjusted EBITDA guidance for 2024 in the range of $840 million to $890 million while absorbing approximately $10 million of currency headwinds. Our focus continues to remain on sustainable margin expansion. We expect the expansion to be mainly driven by our strategy to shift the mix to high-margin products, our efforts to continue to drive operational excellence, and our focus on maintaining cost discipline. As we continue to make investments to fully capture the value potential ahead of us, we expect to sustainably build on the margin expansion in 2024 over multiple years with the growth of our recent and upcoming launches. Our Q1 results reflect the phasing we noted during our last earnings call. And I would once again emphasize that there is natural seasonality in our business. We expect our business to build throughout the remainder of the year, with Q4 results expected to be the highest. As I mentioned during our last earnings call, as we continue to drive pipeline innovation, we may enter into collaborations with external partners. It should be noted that our adjusted EBITDA guidance does not reflect any one-time upfront payments that may be made as part of such arrangements. In terms of other key assumptions underlying our guidance, as noted in the last quarter, we expect adjusted gross margin to be approximately 62%. We anticipate investment in R&D to be approximately 7% to 8% of revenue, and interest expense to be approximately $385 million for the full year. That said, we will continue to monitor Fed actions on interest rates for the remainder of 2024. We continue to expect our adjusted tax rate to be roughly 15%, and full-year CapEx is expected to be approximately $250 million. To summarize, the business delivered solid results in the quarter, and we're off to a strong start in 2024. We remain committed to our strategy to drive growth and sustainable margin expansion.

Thanks, Sam. Let's highlight some 2024 growth drivers, including the upcoming launch of a new and differentiated OTC offering. As Sam mentioned, Miebo has shown significant promise with Q1 revenues of $28 million. Just last week, we learned that two of the top three Medicare providers will begin covering Miebo, one starting today, the other July 1, that's approximately two quarters sooner than anticipated, and means coverage will jump to roughly 50% by midyear for this population. While we're in early innings, excitement around this medication is real and we expect Miebo will become a cornerstone of our dry eye franchise for years to come. Sam also touched on how to interpret Xiidra performance in Q1, which I'll add some color to. There are three contributing factors to consider. First, we realized our entire field force with new territories established in early February. While most prescribers were seeing new faces, we expect the developing relationships will pay dividends going forward. Second, patients faced the highest deductibles in the first quarter, which naturally results in fewer prescriptions, a cycle you're all familiar with. Third, while the incident involved in Change Healthcare did not have a material impact on Bausch + Lomb, there was a non-quantifiable effect given patient access to Xiidra was disrupted. All that said, there are encouraging signs as we continue to rehabilitate and reenergize the brand. Our commitment to making Miebo and Xiidra the most prescribed options for evaporative and inflammatory dry eye disease has a labor. We've made a significant investment in the comprehensive sales approach that will increase in prominence as the year progresses and as more dry eye sufferers seek treatment for this chronically underdiagnosed condition. For the one million suffering from dry eyes who might not require pharmaceutical intervention, we're excited to introduce a new and different treatment option: Blink NutriTears, which is a daily nutritional supplement formulated to address the symptoms of dry eyes in as little as two to four weeks. For those who prefer eye drops or are already taking daily supplements, NutriTears could be a convenient solution. While supplements are often unproven, NutriTears is grounded in data. Last week, we announced the results of a clinical study evaluating the safety and efficacy of NutriTears. The study met both primary endpoints in addition to secondary endpoints, which shouldn't come as a surprise. We're a company that relies on science when bringing new options to consumers. NutriTears, which we anticipate will launch in the next few months, will be the latest addition to our growing nutraceutical franchise, which is anchored by PreserVision. With the addition of NutriTears, we're clearly not resting on our laurels when considering the future of our industry-leading dry eye platform; quite the opposite. Given the market potential, we are readying for something for everyone when it comes to treating a common but not commonly addressed issue. Simply put, our blend of prescription and OTC offerings separates us from the dry eye pack, and it's not even close. Keeping with the theme of new products, we're on the precipice of a meaningful entry into premium IOLs. We anticipate these high-margin offerings will strengthen our surgical portfolio, which is increasingly focused on cutting-edge technology and responsive to the evolving needs of ophthalmic surgeons. Our enVista Envy trifocal is expected to be available in the U.S. later this year, and in Europe, we plan to launch the LuxLife brand in 2025. We started enrolling a clinical study for enVista Beyond and extended depth of focus IOL, with an expected U.S. launch in 2026. Our forthcoming premium IOL offerings are reflected on our familiar launch slide, which continues to widen as our renewed commitment to innovation takes hold. Just last week, we announced FDA approval for Lumify Preservative Free, a prime example of harnessing a brand's momentum by extending its reach. The optimism around our future is warranted. We're heading in the right direction. Significant work remains, but the path forward continues to be validated by our results, stakeholder feedback, and buy-in from 13,000 colleagues around the world. Operator, let's open the line for questions.

The first question comes from Patrick Wood with Morgan Stanley.

Amazing. I just got a couple. So I guess the thing that sort of has jumped out over the last certainly a few quarters has been the breadth of the growth across all the different divisions rather than just one. I guess is that a composition that you expect going forward, i.e., share gains kind of across the bulk of the different sublines and geographies. That sounds like the message. Am I right on that?

Yes. So Patrick, it's Brent. Thank you. Yes, I think you hit on a theme. I think when I joined over a year ago and had our first earnings call about a year ago, I talked about reenergizing and refocusing the organization while we also invested in innovation and got ready for probably the most robust new product launch cycle. And so let me just give you some numbers; if you look at the performance this quarter: Consumer, these are all constant currency; Consumer plus 15, contact lenses plus 6, Surgical plus 8, Pharma plus 66, excluding Xiidra plus 18, geographies, Asia plus 7%; Europe, plus 9%; Latin America plus 17; and the U.S. plus 33. So I think that's pretty broad, high-quality growth across the world, right, across all our businesses. And the way you do that is you make the most of everything. You figure out how to reinvest in product and promotion, how to put the customer at the center of our universe, how to make your sales forces the most important people in the company, and really focus on execution. And so that's what we're doing in our reenergized company, and we expect that to continue.

Amazing. And then just a second one. Miebo, I mean, really strong start of the year. I'm just curious, there's a lot of noise when you first launch a product between refill rates and things like that. But I'm thinking at the start of the year relative to the guide, is there a little bit of conservatism? Or is there any reason that we shouldn't see a continued pickup in sequential growth as you move through the quarters of this year for Miebo?

Yes, Patrick, you're right. I want to remind you that while you didn't phrase it this way, I’ll try to address it. We are still in the early stages with Miebo and Xiidra, having both products in the market for about two quarters. It's really early, and we’re just starting the first quarter of the year. I'm confident we're off to a great start with Miebo, while Xiidra is still developing. Based on our focus on execution and the numbers I've mentioned, I believe we can succeed and deliver results. There may be some conservatism in our outlook, but it's too soon to make definitive calls at this point. We have a new field force, new technology, and representatives with different call patterns engaging with new physicians. There's a lot to be optimistic about, but we must focus on executing effectively before becoming too enthusiastic.

Love it. This show the feels better.

The next question is from Larry Biegelsen with Wells Fargo.

It's Lei calling in for Larry. Congrats on a good start to the year. Just two questions. One on Xiidra, and Brent touched on this just briefly. You kept your guidance of $400 million and talked about kind of the pieces that affect Q1 sales. What gives you the confidence that you get to $400 million? How do you get there? And what should we look for in prescription trends? I think previously, you talked about maybe stabilizing those prescription volumes in the first half and returning that to growth in the second half. How do we see that play out?

Yes, I appreciate your question. As I mentioned to Patrick, we are very excited about Miebo's performance in the first quarter. Xiidra is still developing, and as I noted earlier, it is the only product affected by the transition services agreements with Novartis, which require us to use Change Healthcare for copay card management and pharmacy administration. As you know, Change experienced an outage, and this had a noticeable effect on script trends for Xiidra. Miebo, on the other hand, does not rely on Change; we utilize Blink instead. We acted quickly, and our team worked diligently to transition away from Change, but that process took several weeks. This caused frustration among doctors when patients went to pharmacies and had to pay the full list price. It created administrative challenges for both patients and physicians. Coupled with a new field force set up in new territories and new call patterns, Xiidra faced difficulties in the first quarter. We anticipate improvement in the second quarter. While the $400 million guidance might seem aggressive at this point, we're not revising it downwards. Our team is committed to meeting this target, and we will continue to invest in our efforts. We have many initiatives planned for Xiidra in the second quarter, and we expect to see sequential improvement moving into the third and fourth quarters. I understand why there might be concerns, but for now, we are not increasing Miebo's forecasts, nor are we lowering Xiidra's. We remain focused on execution and will provide further updates in the next quarter once we have clearer performance metrics following the changes in sales force alignment.

Okay. That's super helpful. My second question is on the guidance. Our math implies that in Q1, your organic sales growth was somewhere in the low double digits. Your guidance seems to imply that organic growth would slow a bit for the rest of the year, maybe closer to mid- to high single digits. So one, can you just confirm that math? And two, what flows from Q1 to the rest of the year?

This is Sam. I want to focus on Xiidra regarding organic growth. Xiidra generated about $79 million. Brent already mentioned it in relation to our pharmaceutical business. When considering constant currency growth of 66%, this translates to approximately 18%. For our overall performance this quarter, we achieved 20% constant currency growth, with Xiidra contributing around 800 basis points. Excluding Xiidra, that leaves us with roughly 12%. Looking ahead with our updated guidance for the full year of 13% to 15%, taking the midpoint of 14% and calculating for Xiidra, indicates about 8% organic growth for the year. We're experiencing strong momentum that we plan to carry forward, despite typical fluctuations throughout the year, and we're optimistic about maintaining this momentum in the upcoming three quarters.

Okay. So it sounds like there's perhaps some conservatism going from 12% organic growth in Q1 to 8% for the full year.

Well, as Brent said, Lei, we're very excited about what we're seeing in the Miebo, we're excited about what we're seeing in our base business, just Brent went through how we're seeing the performance across all four businesses and the regions. But again, we're just really balanced here in terms of how we think about the rest of the year, given the fact we're still early in the year.

Yes. I think we should wait and see where we are in the second quarter, and then we might make adjustments. But for now, let's focus on executing.

Your next question for today is from Young Li with Jefferies.

All right. Great. Maybe one more on Pharma. Good to see the early outperformance from Miebo and I heard the Xiidra comment has changed. But you have an integrated sales force now between the two, the largest for dry eye. I wanted to hear a little bit about the potential cross-selling impacts in '24. How much of that $495 million combined revenue number is coming from the benefits of the integrated sales force?

Yes, it's a great question, Young. I think the integrated field force and as you mentioned, the largest field force in the dry eye category by a long shot is a key component of our strategy to win in the market. And when you look at how this market has evolved, it's really evaporative dry, where Miebo is the only option, and inflammatory dry eye where it's Xiidra versus a sea of cyclosporines, including RESTASIS and some branded reformulated. The goal for us is to win. We have the best option for both types of patients for either type of dry eye. And so Xiidra really has to compete in winning in the inflammatory space, and the competition there is the cyclosporin sea of products. And I think we have the best product there. And then we're the only game in town for inflammatory. And so our field reps were trained in late February. They've been in the field for just a few weeks. But early results are anecdotal; some data are very promising. So I think we have to see it play out in the second, third, and fourth quarter of the year. But I'm very encouraged. I think we have a great strategy, and the team is executing.

All right. Great. That's very helpful. Maybe turning to contact. Are there still any lingering Lynchburg distribution impact on contact lens growth in the first quarter? Any more impact for the rest of the year? And if you can make some general comments on pricing and supply dynamics and contact lenses for the industry, when does supply catch up relative to demand, especially for Daily SiHy?

Thank you for the question. To start with Lynchburg, that situation has been resolved, and we are now fulfilling all orders. We have made an investment in new technology there and are aiming to improve efficiency, which we hope will show results throughout the remainder of the year. Currently, Lynchburg is not affecting our supply, which is positive news. Regarding our performance on a constant currency basis, our dailies experienced a 73% increase in the quarter, which is truly impressive, and we are seeing this success broadly wherever we launch. We are still in the process of launching new products, including multifocal lenses worldwide, and preparing for the toric launch in both the U.S. and other markets. There's a lot to be excited about with strong performance and many forthcoming launches in this product category. Additionally, I believe we have the best lens in the market, especially the multifocal variety, as we are receiving excellent feedback from both consumers and the optometry community, indicating we have a standout product. In terms of pricing, we are attempting to maintain stability with only modest price increases globally, influenced by our previous supply constraints. Our focus is not on raising prices for customers but on gaining accounts and increasing market share. While we have seen some discounting from competitors due to their surplus inventory, our limited inventory situation means that we can sell everything we produce. I'm optimistic about our position and look forward to seeing our growth and market share expansion in this segment.

Your next question is from Robbie Marcus with JPMorgan.

Two financial ones for me. Maybe first, I was hoping if you could give us the inside look at how the Xiidra integration is going. How did that compare versus your plan? And any way you could tease out what underlying versus reported margins were?

Yes. I'll address the first part, and then Sam can cover the second. The integration is complete. As I mentioned earlier, we fully integrated and realigned the field forces at the end of February. This happened just a few weeks ago and went incredibly well. The team is energized and excited. I've spoken with many team members, and they are very pleased to be part of a dedicated eye care company with multiple treatment options for physicians to help patients. We are now focused on enhancing our call points and technologies. The DTC is back online and progressing. We have numerous speaker programs underway, creating a lot of energy and excitement from both the sales force and our customers. I hear positive feedback regularly. We need to see how it performs since it has only been a few weeks since these changes took effect, but that's promising. It's important to note that we were in transition service agreements with Novartis, which constrained our ability to act quickly. Now that those agreements are behind us, we control our own path and can concentrate on execution.

Regarding your second question about Xiidra, it has been a key part of our strategy to shift our product mix toward higher margins. This is reflected in our financials this quarter with a gross margin of 63%, which exceeded expectations by 220 basis points, nearly half of which is due to the Xiidra mix. We anticipate that this will positively impact gross margin over the year. As for the overall margins on Xiidra, I have previously mentioned that they are approximately in the mid-30s range, and I believe this will likely increase to the high 30s as we progress through the year.

Great. And just one more on free cash flow. It came in negative in the quarter. How do we think about free cash flow generation throughout '24? And then any guidance on full-year free cash flow?

Yes. For the quarter, cash was approximately $48 million, which reflects adjusted cash from operations, indicating a positive outcome. It's important to consider the timing of capital expenditures, which can be a bit complicated. Generally, you should think about it on an annual basis. We incurred around $67 million in CapEx during the quarter, which is slightly higher than our typical run rate for Q1. That said, we began with positive adjusted cash flow from operations in Q1. We are actively managing working capital, particularly in relation to inventory, which currently stands at just over $1 billion, specifically about $1.7 billion. There are two key factors to remember. First, we are strategically building up inventory in our Surgical business, and we expect that to decrease as we transition from '24 into '25. Secondly, our inventory levels have also increased due to the acquisition of Xiidra.

Your next question is from Joanne Wuensch with Citi.

Can you please provide your insights on the contact lens market? How do you see Bausch + Lomb's market share evolving? Additionally, could you give us an update on the silicone ONEday lens market and your related products?

Yes. As we assess our market performance, we are in a strong position with 73% constant currency growth in our Daily SiHy franchise. There's significant momentum as we've launched the sphere globally, and we are preparing for the multifocal and toric launches in the U.S. While the market is experiencing mid-single-digit growth, I believe we can outperform that and increase our market share. We still have room to grow given our current positioning, but we have an excellent product assortment, strong relationships with eye care professionals globally, and a well-established brand in Bausch + Lomb. Our focus is on executing well, particularly in launching additional modalities for our Daily SiHy and INFUSE in the U.S., as well as Ultra and Daily products internationally. I’m proud to report that in the first quarter, the team achieved 73% growth. Let’s hope they remain focused on their customers and execution to maintain this momentum.

Your next question is from Vijay Kumar with Evercore ISI.

I have two questions related to margins. First, Sam, regarding the strong gross margins in Q1, I believe the annual guidance suggests a decline. Is this due to foreign exchange, or what factors are contributing to the decrease in gross margin for the second half? I recall you mentioning about $10 million in foreign exchange headwinds. Does that figure add to the gross margin impact?

So it's two parts. So the first part is we're seeing an improvement in gross margin because of our product mix with the higher margins, and we've seen that play out in Q1. One of the elements that you have to keep in mind as you think about the rest of the year is the inventory balance that I referred to earlier, about call it $1.75 billion that's sitting on the inventory. That number has a component of it, the same for Surgical. So if you recall in the last number of quarters, we've been talking about our spot buy, where we've been buying components to be able to ensure that we have sufficient supply on our surgical business. You're seeing that in the growth of 8%, but also, you're seeing that in a higher cost of the inventory, and that will take time to bleed through the P&L. So that will be an element here that will be offsetting some of the benefits that we're seeing from a product mix. That's why we stayed around that 62% gross margin for the full year.

Yes. And I would add, if I can, Sam. We made a very intentional decision here to build inventory, specifically as it relates to product supply for Surgical. As you know, you can't leave a surgeon hanging before surgery. And so one of the things that Sam and I decided when I arrived atBausch + Lomb is we were going to prioritize customer relationships and supply to customers wherever possible to regain confidence in our Surgical business. That is paying off with respect to sales and relationships, but it is hurting cash and margin. And so that is something we hope to resolve over time, but it was an intentional decision to prioritize customers.

Yes. In response to your second question regarding the currency headwind, we have observed an improvement in our EBITDA performance; however, this was countered by an additional $10 million in currency headwind that was not reflected in our initial guidance. Essentially, we managed to enhance EBITDA's performance despite facing that $10 million headwind.

That's helpful, Sam. But Brent, I have a question for you. In the past, you mentioned that the spending on Miebo exceeds the $95 million revenue guidance. How much of this is related to one-time marketing or launch expenses? Should we anticipate these spending levels to decrease in order to achieve margin leverage in fiscal '25?

It's still early to determine how we'll invest in Miebo in 2025 until we see more performance. Typically, investments in new drug launches last for two or three years. We anticipate improving margins and profitability for Miebo over time. We expect 2024 to be the low point, with improvements in 2025, and by 2026 and 2027, you'll see significant margin contributions. We have Miebo for the long term, and it has the potential to be a major contributor to our margins and profitability. It's crucial to launch a drug effectively and establish a strong adoption curve to avoid the challenges we faced with Xiidra. We want Miebo to have a solid adoption and profitability trajectory, and so far, we're off to a better start than expected. In pharmaceutical launches, when you see potential for success, it's important to invest heavily to maximize peak sales and profitability over time.

Your next question is from Matt Miksic with Barclays.

Sorry about that. Just one on maybe strategic investment if you would. I know last year, investing in Xiidra and making the decision to kind of push out your plans for driving leverage lower post the spin? What was kind of an important strategic decision that seems to be paying off? And of course, there's lots of other things you could be investing in across the businesses that you have strategically. Just wondering what's the appetite at this time or in the next 12 or 18 months for that kind of activity? And then I have one follow-up if I could.

Yes, you're correct, Matt. We made a significant investment in Xiidra. While we still have work to do, our investment goes beyond just product prescriptions and sales; it aims to solidify our presence in the market. Products like Miebo have clearly benefited from Xiidra as we explore additional over-the-counter options, leveraging our market position. We have a strong presence in this category and aim to drive innovation and develop more patient solutions. Overall, there's much to appreciate regarding our strategy and execution with Xiidra, although there's still more to accomplish. Currently, our top priority is to support key product launches, particularly in our contact lens business, which we've mentioned numerous times. Although we haven't focused much on Surgical IOLs, they are crucial. The enVista Aspire, our monofocal plus lens, launched late last year and is now in full launch mode, with around 600 trained surgeons successfully implanting the lenses and providing positive feedback. As we do this, we're preparing to introduce Lux upgrades across Europe. The Aspire Envy trifocal lens is expected to launch around the fourth quarter. Additionally, we are investing in studies for enVista Beyond, our extended depth of focus lens. All our businesses, including consumer, contact lenses, pharmaceuticals, and surgical, have a strong pipeline of new products ready to launch in the coming years. We aim for excellence in these launches, as they represent the future of Bausch + Lomb. Importantly, all these products have higher margins, which will help sustain our margin improvement for years. In terms of investment, we are focusing on innovation and engaged in smaller partnerships, R&D collaborations, and technology investments to ensure a continuous flow of new products beyond our current cycle. This strategy is essential for maintaining the health of a company like Bausch + Lomb, enabling a consistent stream of innovation and product launches year after year. We also understand the consequences of taking a pause for ten years, which is why we are committed to ensuring we do not repeat that. This is our main focus and priority in the short term.

That's super helpful.

Do you have another question, Matt?

You mentioned some important points I wanted to follow up on regarding the Surgical side. It seems like there is a longer timeline to make significant progress in that area competitively. I know you have some product launches planned for the second half of this year. Could you provide a timeline for the next 12 to 18 months? Should we anticipate a substantial improvement in that business as we approach the end of this year and continuing into the next few quarters, or will it take more time, around 12 to 18 months, to see the benefits from your investments and the new products you've discussed?

Yes. I think you're right. It's more of a 12, 18, 24-month build particularly as we move to the offering, the more of the premium IOLs to complete the portfolio. But look, if you look in the quarter, you saw implants up 9%. These are constant currency numbers, tax up 9%, and equipment up 5%. And so really nice tactical execution by our team. But that being said, I think there's two things to consider as we look at particularly margins and profitability of Surgical. One is we're still working through expensive inventory, as Sam mentioned, and that will take some time to work through. At the same time, our supply chain team is working at improving our manufacturing and distribution capabilities to get to better margins. And then as I mentioned, mix, as we transition and offer a full range of IOLs, including premiums that come with a much higher margin. And so I think over the next, as you said, 18, 24 months, you'll see a steady improvement in that business, and we're going to become much more competitive over time. So I'm excited about it, but it's not going to be an overnight sensation. It's a lot of hard work and a lot of dedication, but I think we're on the right track. We're early, but we're on the right track.

We have time for one last question. And your question comes from Doug Miehm with RBC.

Yes. My question has to do with Miebo. Brent, you mentioned that I think the three top Medicare providers are going to be covering the drug. But I'm wondering on the commercial side, how are things looking there in terms of getting on formularies and that sort of thing? And then as a follow-up, just wondering, do you have the manufacturing capability to provide for what looks like it's going to be a very, very strong Miebo launch here given the outperformance in Q1?

Yes, that's a great question. To clarify, two of the top Medicare plans will start covering Miebo in the next month, which will provide us with about 50% Medicare coverage in the second half of the year. This process won't happen overnight; it takes time to establish local carriers and implement policies, but we are ahead of schedule in securing Medicare coverage, and the team has done an excellent job. On the commercial side, we are also at about 50%, and we expect this to improve as the year progresses. After just two quarters since the launch, achieving this level of coverage is a significant accomplishment. However, we aim to reach 70% to 80% coverage in both categories to feel completely comfortable. There’s still some work to do, but it’s a strong start. Regarding Miebo's manufacturing capability, we are currently working with a third-party supplier to enhance coverage while transitioning to our own facilities. Packaging is already shifting to our Tampa facility, and over the next 12 to 18 months, we will increase our production capacity. This will ensure we have dual sources of supply, which is essential for an important product like Miebo. Also, I want to highlight that the team has successfully launched Miebo without a sample, which was not planned before I joined. We are making efforts to secure a sample and expect to have it in the latter half of the year. In summary, key factors contributing to our success with Miebo include the sales force mobilized in late February and the progress we've made in obtaining coverage. We have around 50% coverage in both commercial and Medicare going into the latter part of the year, which is a positive sign with more work ahead. We generated $28 million in the first quarter, signaling strong potential as we continue to invest and grow the franchise. Thanks, Doug, and I want to thank everyone for joining us. We are pleased with our first quarter performance across all businesses and geographies, and we look forward to keeping you updated as we maintain our focus on our customers, execution, and driving our business forward. Thank you.

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