Bausch + Lomb Corp

NYSE:BLCO

Earnings Call Analysis

Robust Growth and Margin Expansion Expected in 2024

Despite distribution disruptions, the company expanded their Daily SiHy contact lens offering and saw global lens revenue growth of 9% for the quarter and 10% for the year. Surgical segment revenue increased 7% in constant currency for both Q4 and the full year, driven by sales in cataract packs and the premium IOL portfolio, despite a recall of the EyeCee One IOL. Pharma segment revenue soared by 66% in constant currency for Q4, with Xiidra generating notable revenue. The 2024 revenue guidance ranges from $4.6 to $4.7 billion, reflecting 12-14% growth, while adjusted EBITDA is projected to be $840-$890 million, indicating margin expansion of roughly 80 basis points over 2023. Xiidra is expected to bring in $400 million, and Miebo $95 million, in 2024 revenue. Gross margins should remain around 62%, R&D investment at 7-8% of revenue, and CapEx at about $250 million.

2023 Performance: A Prelude to an Ambitious 2024

Last year's financial narrative for our company was marked by revenue growth surpassing expectations, particularly in the final quarter, which promises an auspicious start to the year ahead. Our business demonstrated impressive resilience and agility, achieving 12% constant currency revenue growth while navigating a tumultuous economic landscape. The fourth quarter's revenue shot up by 19% on a constant currency basis, a commendable feat made possible by strategic acquisitions such as Miebo and Xiidra and their combined sales prowess.

Strategic Focus: Eyes on the Prize

Our vision extends towards long-term prosperity, and we are unwavering in our commitment to balance immediate success with far-reaching goals. Our investments in innovation and research aim to rekindle a pioneering spirit within the eye health domain, charting a course for sustained growth. We envision our dry eye franchise to be at the forefront of this endeavor, with strategic deal-making fortifying our pipeline, ensuring we arrest and address unmet needs.

Financial Projections: Setting Sights on Growth

Looking forward, we've placed our 2024 revenue guidance confidently between $4.6 and $4.7 billion. This reflects an anticipated constant currency growth of roughly 12% to 14%, suggesting robust demand for our differentiated offerings across all market segments. Xiidra and Miebo are expected to contribute significantly to our top-line with estimated revenues of about $400 million and $95 million, respectively. While currency fluctuations may create headwinds accounting for an estimated $40 million, we remain laser-focused on a trajectory of growth and value creation.

Supply Chain and Efficiency: Fueling the Engine of Growth

Our commitment to strengthening our supply chain emerges from a year of dedicated improvements aimed at driving sustainable margin expansion. Recognizing that operational excellence is a fundamental pillar for our success, we have undertaken initiatives to refine our processes, a strategy we believe will serve to catalyze profitability in the upcoming year.

Currency Impact and Mitigation

Currency has indeed been a recurring theme, creating headwinds that last year amounted to $68 million in revenue and $51 million in adjusted EBITDA. Nonetheless, the scale of this impact is diminishing compared to the previous year, empowering us to mitigate its effects efficiently.

Innovations and Product Launches: Eyeing the Future

The driving force behind our expectations for 2024 is what we anticipate to be one of our most active years for product launches, laying the foundation for both immediate and subsequent successes. We are fueled by our breakthroughs in the dry eye segment, where we are primed to capture significant market share and cultivate a stronghold with our multi-faceted approach spanning pharmaceuticals, medical devices, and over-the-counter solutions.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to the Bausch & Lomb's Fourth Quarter and Full Year 2023 Earnings Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. 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.

[George Gadkowski, executive]

Thank you. Good morning, everyone, and welcome to our fourth quarter and full year 2023 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Brent Saunders; and Chief Financial Officer, Mr. Sam 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.Finally, the financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter unless required by law and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Brent.

[Brenton L. Saunders, executive]

Thank you, George, and thank you, everyone, for joining us today. We're going to follow our familiar format. I'll cover highlights from the fourth quarter and full year, and Sam will dive deeper on financials and provide 2024 guidance. I'll close by reviewing growth drivers, and then we'll take your questions.The first of our 3 key takeaways speaks for itself. Revenue growth in 2023 and in the fourth quarter, in particular, exceeded our expectations and set the tone for 2024. Double-digit growth is always impressive, but even more so when you consider how we got there. Our quality of growth is what helps set us apart from others. And that will be enhanced as we've entered one of the most active launchers in our company's history.You've heard me talk about selling and operational excellence quite a bit. It's central to any discussion I have on company strategy and will dictate our success going forward. Here's the good news. We're making solid progress in both areas. Our dry eye franchise is a perfect example. The combined Miebo and Xiidra sales force is the largest, and I would argue most sophisticated in eye health. And when it comes to operations, our mindset hasn't changed. We're taking a methodical approach to addressing the challenges we face with the expectation that our supply chain will become a competitive advantage in time."Hasty climbers have sudden falls," as the saying goes, which means we won't lose sight of our long-term goals for short-term gains. The last takeaway is focused on innovation, which has been the driving force throughout Bausch & Lomb's 170-year history. We've made no secret of our desire to put innovation at the forefront once again, and we're doing that in 2 ways. First, we're expanding our internal R&D capabilities across our entire portfolio. From prescriptions to IOLs, we can and should explore all possibilities when it comes to building on the success of existing brands.Second, we're reloading our pipeline with a focus on areas of unmet need. Our reinvigorated business development function will play a key role there as we cast a wide net for potential game changers. The road map slide has become a fixture in earnings presentations, and the road map itself continues to guide our strategic decision-making as we unlock the company's full potential in a thoughtful and phased approach. Each quarter, our progress indicator shifts steadily to the right as we move closer to Phase 2.Let's take a look at how we delivered against Phase 1 goals in 2023, a report card of sorts with an understanding that I'm a tough grader. We've already touched on top-line performance last year, but I'm happy to bring it up every chance I get. 12% constant currency revenue growth would earn the highest grade on its own. But again, I'm more impressed with how we did it. When it comes to selling excellence, we made significant strides in 2023 with a focus on high-priority areas like dry eye. But with the number of planned launches in 2024, there's even more of an urgency to build on that work with a balanced approach across all categories.Business development is a function that has matured in short order last year. The most obvious example is our acquisition of Novartis' front-of-the-eye assets, in addition to our acquisition of Blink eye drops from Johnson & Johnson. Equally as important, the growing business development team has laid a groundwork for strategic deal-making this year and beyond with an eye towards sustainable growth. I'll group the last 2 items together. While they appear to have the lowest mark, a single check mark, it's really more of an incomplete or too new to rate.Building leading digital capabilities in core areas and enhancing agility and innovation or broad organizational competencies that require discipline and time. That said, progress in those areas introducing the road map has certainly had an impact on margin expansion. We've covered revenue. My only add there would be that this is our third straight quarter of more than $1 billion in sales, our new normal. When it comes to individual segments, there is no library. In fact, I only see opportunity as both Vision Care and Surgical, in particular, felt effects of operational challenges, some self-inflicted, others out of our control, yet both delivered impressive year over year growth.Now let's address individual product performance, and I'll stick with the opportunity fee. Despite an average growth of more than 25% among the key franchises highlighted, they haven't realized their full potential, not by a long shot. Additional geographic expansion, new ways of reaching customers, including direct-to-consumer engagement, and a persistent focus on providing the best customer experience possible will propel these products and others to new heights.Before I turn things over to Sam, I'd like to thank my 13,000 colleagues for their performance in 2023. And it's not just execution I'm grateful for, it's their belief in our potential and commitment to doing what it takes to get there. Sam?

[Osama Eldessouky, executive]

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. In the fourth quarter, we once again saw strong revenue growth across each of our segments and key product franchises. We're pleased with how we ended the year and our performance for the full year in 2023. Our business demonstrated growth in revenue and adjusted EBITDA, with revenue exceeding our full year guidance.We are excited by the momentum we have heading into 2024, which, as Brent mentioned, we expect will be one of the most active launch years in our history. Total company revenue of $1.173 billion for Q4 reflects growth of 19% on a constant currency basis. For the full year, total company revenue of $4.46 billion reflects growth of 12% on a constant currency basis. This was the first full quarter following the launch of Miebo and the closing of the Xiidra acquisition. I'll be discussing the impact of these key dry eye franchises more throughout the call. But the headline is that we are highly encouraged by what we're seeing so far.Touching briefly on supply. We have continued to make improvements to strengthen our supply chain in 2023, and we're pleased with the progress. While there is still work to be done, we feel confident about the path forward. As Brent will discuss, we expect to continue our efforts to implement efficiency measures throughout 2024, which we expect will be an important factor to drive sustainable margin expansion. While [indiscernible] currency mix moderated in the fourth quarter and did not have a material impact on the results for the quarter.For the full year, currency was a headwind of $68 million to revenue and $51 million to adjusted EBITDA. While the currency headwinds are not as sizable as we saw last year, the impact on our results continues to be driven by our geographic footprint and the currency mix. Now let's discuss the results in each of our segments. Vision Care fourth quarter revenue of $662 million increased by 8% on a constant currency basis, driven by growth in both the consumer and launch portfolios.For the full year, Vision Care revenue was $2.543 billion and increased by 10% on a constant currency basis. The consumer business, again, demonstrated strong performance, both in the U.S. and internationally, with growth of 11% on a constant currency basis in Q4. We continue to see growth across our key franchises, including eye vitamins, which grew by 7% in the quarter, and Lumify, which grew by 17% in the quarter.Our consumer dry eye portfolio delivered $88 million in revenue in the quarter, representing 12% organic revenue growth. Reported revenue from Daily SiHy lenses grew by 31% in the quarter. As we discussed in our last earnings call, we recently expanded the Daily SiHy family with the launch of the multifocal lens in the U.S. and the rollout of Daily SiHy in China. We continue to see strong demand globally in the Daily SiHy category. Revenue in the lens portfolio was negatively impacted throughout 2023 by disruptions at our Lynchburg distribution facility. Excluding the impact of these disruptions, global lens constant currency revenue growth was 9% in the quarter and 10% for the full year.Moving now to the Surgical segment. Fourth quarter revenue was $204 million, an increase of 7% on a constant currency basis. For the full year, growth was also 7% on a constant currency basis. The consumables portfolio, our largest category in the surgical business, grew in the quarter by 7% on a constant currency basis, mainly driven by cataract packs. Implantables were flat for the quarter on a constant currency basis. Our premium IOL portfolio continues to expand and was up 30% in constant currency in the quarter. As I mentioned last quarter, our standard EyeCee One IOL continues to be impacted by the product recall issued by our partner in 2023, which offset the strong growth in our premium IOL portfolio.Excluding the impact of EyeCee One, the implantables portfolio grew 12% in constant currency in Q4. Revenue from equipment was up 13% versus Q4 '22 on a constant currency basis, mainly driven by Stellaris system sales. We have recently launched a number of products in our surgical business, and we'll continue to launch new products in 2024 and beyond, including the higher-margin premium end of the market. We intend to continue to invest behind these launches as this is an important area to drive value and margin expansion.Lastly, revenue in the Pharma segment was $307 million for the quarter, which represents constant currency growth of 66%. For the full year, revenue in the Pharma segment was $836 million, which represents constant currency growth of 24%. Xiidra delivered $106 million in revenue in the fourth quarter, exceeding our previous guidance range of $80 million to $90 million. Following the relaunch of Xiidra in Q4, we saw [indiscernible] stabilized throughout the quarter.Additionally, in the quarter, we had a onetime benefit of $8 million due to lower-than-expected rebate charges for Xiidra. As I said before, Xiidra will continue to be a primary focus for us in 2024. To date, we're also very pleased with what we have seen from the Miebo launch. The early performance and feedback from eye care professionals have been incredibly positive, and we're committed to continuing to invest behind this launch. Together, Xiidra and Miebo will provide us with clear leadership in dry eye disease, and we're excited about reaching their full future potential.Now let me walk through some of the key non-GAAP line items. Adjusted gross margin for the fourth quarter was 62.5%, which was up 470 basis points compared to Q4 '22. For the full year, adjusted gross margin was 61%, which was up 130 basis points compared to last year. The gross margin improvement was mainly driven by favorable product mix, including Xiidra. This was balanced by a pressure on the gross margin driven by the higher inventory costs in our Surgical business.In the fourth quarter, we invested $79 million in adjusted R&D or approximately 7% of revenue. Fourth quarter adjusted EBITDA was $231 million, which represents 28% growth versus the fourth quarter '22. For the full year, adjusted EBITDA was $738 million. Full year 2023 adjusted EBITDA was negatively impacted by currency headwinds of $51 million and Lynchburg-related disruptions of $30 million. Excluding the impact of currency, adjusted EBITDA grew 10% compared to last year. Net interest expense for the quarter was approximately $96 million and $252 million for the full year, excluding the one-time upfront financial costs directly related to the Xiidra acquisition.The full year 2023 adjusted tax rate was 4%, which is slightly lower than our previous guidance of approximately 6%. The lower tax rate was mainly driven by the geographic mix of our earnings. Adjusted EPS for the quarter was $0.24 and $0.73 for the full year 2023. Adjusted cash flow from operations was $28 million in the fourth quarter, and CapEx was $84 million. Turning now to our 2024 guidance on Slide 15. We're seeing 2024 revenue guidance at a range of $4.6 billion to $4.7 billion. This reflects expected constant currency growth of approximately 12% to 14%. We expect the fundamentals of the eye care market to remain strong, and we expect each of our segments to deliver growth in 2024. Along with solid momentum in our base business, the recent and upcoming product launches will be an important driver.Following the relaunch of Xiidra in the fourth quarter, we expect to build on the performance throughout 2024. For the full year 2024, we expect Xiidra to generate approximately $400 million in revenue. As I noted earlier, the Miebo launch is off to a great start. Miebo has been the strongest launch in dry eye disease in recent years. We expect the positive momentum to continue in 2024, and we plan to invest to position the brand to reach its full potential. We expect Miebo to contribute approximately $95 million of revenue in 2024.We've continued to see currency headwinds moderate. Based on current exchange rates, we estimate currency headwinds to have a negative impact on revenue of approximately $40 million for the full year. Shifting to adjusted EBITDA. We are setting our adjusted EBITDA guidance for 2024 to a range of $840 million to $890 million. At the midpoint of the guidance range, this reflects margin expansion of approximately 80 basis points compared to full year 2023. The margin expansion is driven by a number of factors, including our strategy to shift 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. I told you in the past, and I will continue to remind you that there is natural seasonality in our business. We expect 2024 phasing to follow a similar trend as we saw in 2023, with the first quarter being the lowest and the fourth quarter being the highest.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 the other key assumptions underlying our guidance, we expect gross margin to be approximately 62%. We anticipate investments in R&D to be approximately 7% to 8% of revenue and interest expense to be approximately $385 million for the full year. Our adjusted tax rate is expected to be roughly 15%, which takes into consideration our tax geographic mix and the Pillar 2 minimum tax rules.Full year CapEx is expected to be approximately $250 million. We are pleased with our financial performance in 2023 and the solid momentum entering 2024. As we continue to drive growth in our current portfolio and the launch of new products, we have a clear strategy to deliver strong growth and drive sustainable margin expansion. And now I'll turn the call back to Brent.

[Brenton L. Saunders, executive]

Thanks, Sam. Let's focus on what we need to do to win in 2024. Recent and upcoming launches have us positioned for success in each of our businesses. But the only way we fully take advantage of those opportunities is by reaching more customers and consumers and separating ourselves from the pack with how we sell.As Sam outlined, we're off to a great start with Miebo. Eye care professionals are prescribing and consumers are coming back for more. Post-launch excitement hasn't waned. In fact, it continues to build. We need to harness that momentum in 2024 and ensure Miebo becomes the category-altering medication it has the potential to be, which means continuing to invest in sales and marketing.In concert with our Miebo push, we need to not only keep working to restore Xiidra to its place as a category leader but unlock its full potential. It's important to remember that Xiidra sales and marketing operation we inherited was not in the same condition when at its peak. I'm a dog lover, so I'll use an abandoned pet analogy. We took it in and are nursing it back to health, so it can thrive once again. Sam also pointed to daily SiHy success. There's grown demand for these lenses, which is why we're expanding our offerings, including the launch of a multifocal in the U.S.Demand is also a theme in dry eye, as we've made clear. And while the focus is often on prescription medications, we built a formidable stable OTC dry eye brands on a global scale, most notably Artelac. That stable expanded with the acquisition of Blink, which we expect will be a steady and growing contributor for years to come. Finally, premium IOLs continue to represent our biggest opportunity in Surgical, where sales are influenced by relationships first and foremost.As we prepared to push deeper into higher-margin offerings, including expansion of our EnVista product line, it's incumbent on our sales force to turn their deep relationships into conversions. Last quarter, we stressed a practical approach to supply chain. That hasn't changed and won't. What has changed is my comfort level and how the challenges we faced are being addressed. We brought Al Waterhouse to Bausch & Lomb with a simple yet incredibly complex remit, take a full accounting of our global manufacturing and distribution network, put a comprehensive plan in place to turn that network into a competitive advantage, and execute with the understanding that we won't cut corners ever. It's early days, but I'm very pleased with the initial returns and more importantly, the path forward.In 2024, our focus will continue to be on reducing complexity, while streamlining how we put product in the hands of customers and consumers with DTC efforts in China being the most prominent example. We'll also continue to digitize operations using lessons learned from our distribution center in Lynchburg, Virginia. Remediation is near complete, and we've turned our attention to gaining efficiency over the next few quarters. Optimizing our supply chain will take time. Incremental improvements will be reflected in margin expansion, and long-term success will be foundational for a future-proof Faustian law.Talk of R&D investment is often taken with a grain of salt and for good reason. Some companies invest because they think they have to or need to hit a self-imposed minimum. We invest because innovation has been the lifeblood of Bausch & Lomb for 170 years. In 2023, we invested more than $300 million in a new book older and better R&D department. And we've been used it with talent. In the last 2 years, we grew the team by more than 1/3, including hiring top scientists who want to be part of what we're building here. But money and talent only get you so far. We've refocused the team to better support our reloaded robust pipeline that cuts across every business.While in-house capabilities are nonnegotiable, we can't do it all ourselves. As previously mentioned, our business development team has been working hand in hand with R&D leadership to identify and vet potential products and therapies that would benefit from our scale and know-how. As long as we keep adding products, we'll keep showcasing our launch slide. There's a nod to what we accomplished in 2023 and a preview of what's to come this year. This view best represents the opportunity in front of us. Innovation provides new offerings, operational and selling excellence leads to revenue growth and margin expansion Sam highlighted. It's not a terribly complicated formula, but one that requires a relentless focus on doing the small things incredibly well.In my regular conversations with eye care professionals and visits to industry meetings, there are 2 consistent themes around Bausch & Lomb, excitement and anticipation. That's echoed within our company walls. My travels take me all over the globe and from Berlin to Bridgewater, colleagues are anxious to make 2024 a defining year in our company's history. I look forward to keeping you updated on our progress. One quick note. I'm still on the men from rotator cut surgery just a few days ago, so take it easy on me in the Q&A. Operator, let's open the line for questions.

[Operator]

Certainly. We will now begin the question-answer session. [Operator Instructions]. Your first question for today is coming from Matt Miksic with Barclays.

[Matthew Miksic, analyst]

And congrats on a really strong finish year to 2023. one question, if I could, on Xiidra. I think you did a pretty great job last year sort of framing out expectations for Xiidra and Miebo and how they would kind of interplay and ended up finishing, as you mentioned, a bit stronger out of the gate. Could you maybe talk a little bit about how the -- how we should maybe recalibrate the trajectory of what we are expecting from Xiidra, assuming you're still going to invest behind it, as you mentioned? But is that just a quarter or 2 ahead of plan here? Or is there some kind of ups and downs we should expect in the coming quarters? And I have one follow-up.

[Brenton L. Saunders, executive]

Sure. Thanks, Matt. So look, Xiidra is an incredibly important focus for us in '24. I have to give a nod to our sales team in the fourth quarter, right? We got a product that had been kind of left behind. And what's interesting, when you look at the fourth quarter, there's some seasonality there. Fourth quarter is always the best for chronic prescription demand because of deductibles and the like. But when you look at what happened was in the fourth quarter, we brought the Novartis sales team in, made them a Bausch and Lomb sales team, and they really -- we just focused on basic execution. And you saw what happens, right? We saw really good performance in the fourth quarter. I think that should give us optimism for what can be done.In early January, we actually integrated the field force. And they're actually in their sales meeting, their annual sales meeting as we speak this week in Orlando. And so I'm pretty optimistic when you look at tactics and when you look at execution on the ground and couple that now with reinvesting in marketing, right, we're back on TV as of mid-January. So we've been on TV for a couple of weeks with Xiidra. I'm pretty optimistic that this can be a growth driver. So if you think about it just in basic terms, Novartis, in the quarters they had it, they did about $250. We did $106 in the fourth quarter. So you've got a performance of $355. Sam, in his comments, guided to $400 million. That's a 13% growth if we pull that off.When we bought it and we announced the deal model, we talked about mid-single-digit growth. So we feel like we can get back on track and make this a real growth driver. Now in all dry, including Miebo, there is seasonality. The first quarter because of deductibles is always the weakest, and the fourth quarter is always the strongest. But -- so I wouldn't just divide the 400 by 4 and look for it that way. But you'll see a nice, steady build as we execute and we drive marketing and the seasonality that is a factor. I think we're going to set ourselves up for a very nice year in Xiidra.

[Matthew Miksic, analyst]

That's great. And then one other area that was -- you had a pretty strong finish important category within Surgical is around IOLs. And I know you have a pipeline of new products you've talked about planned out for this year on the [indiscernible] IOL side. But some of the sort of just underlying growth of that business was quite strong in Q4. I'm just wondering if you could comment on whether that was a market phenomenon, whether you feel like you're -- some of the products in the market currently are gaining momentum and how sustainable that is?

[Brenton L. Saunders, executive]

Yes. So you're right. We did see some strong demand for IOLs in the quarter and throughout the year. I think it really is a foreshadowing of what we want this business to look like. So premium IOLs were up 30%, about 30% in the fourth quarter. I think it's off a small number, right? And what we need to transition to, if you look at surgical for the year, packs were up about 9% for the year. Equipment was up about 11% for the year. So better -- we're taking market share. We're growing faster than the market. What we need to do in '24 and really in '25 and '26 is drive that IOL mix and drive it towards the premium side of the IOL. That actually is the way you run a surgical business and has a tremendous benefit of driving margin improvement.And so when we talk about margin improvement, mix is critical. And one of our most important strategies is to drive from the lower-margin packs and equipment to pull through the higher-margin IOLs. So really good foreshadowing. I see that the new launches, we have the Aspire that we launched. We have the IC-8, which we're still launching. We have a trifocal getting approved at the back end of the year. And then we have our EDOF lens, hopefully getting approved in later '25. So the setup there is really nice for constant new product, new innovation, and higher-margin products to drive through that business. And that's my reason I get excited about Surgical is pulling that off. But it's going to take 2 years to get there.

[Matthew Miksic, analyst]

Right. Well, that's super helpful. And congrats again, Brent, and to the team on the solid results.

[Operator]

Your next question is from Patrick Wood with Morgan Stanley.

[Patrick Wood, analyst]

Amazing. I've got one and then a quick follow-up. I guess for the first one, sort of a bit more high level. Obviously, on the consumer side, and then the pharma business, you've got [indiscernible] now. And so I guess, how are you thinking about things going forward? You mentioned the BD team a bunch of times, but organically and inorganically, how are you splitting your energy between the segments? And going forward, where do you think the biggest opportunities are?You obviously talked a little bit about premium IOLs. There's other areas like custom packs, glaucoma, it's a big market, right? How do you see the direction strategically and where you feel the biggest gaps that you might like to bulk up in all?

[Brenton L. Saunders, executive]

Yes. So a great question. So a little different than how we report the way I think about the business is 4 business units, right? We have the pharmaceutical consumer Vision Care and Surgical. And when you look at a toric in really good shape, right, consumer, we are the leader in eye care. We have demonstrated great growth in the consumer business, up 11%. And what's interesting, a lot of that is volume, where in the past years, a lot of that was price. And so really healthy performance there. We have some new products coming in consumer. We have some new incremental innovations coming. We have packaging innovation coming. So pretty excited about the consumer business, combined with just a great team, right? We have a really strong team at B&L on consumer.Pharma, you know the story, right? We're really investing, particularly in the U.S. We have Miebo, we have Xiidra, we have VYZULTA. We have -- on the hunt for other things to add to the bag. But we have a lot of strength and a lot of growth for several years to come in pharma and lots of opportunities to add innovation. Vision Care, a very strong performance if you normalize for Lynchburg, and we look at Vision Care is very strategic, but still a work in progress, right? We've got to drive growth. Daily SiHy, INFUSE, as an example, was up 46% for the year. That's our fastest-growing product and a great contact lens. And so our job there is simply execution.Surgical, still a work in progress, as I mentioned. And there, it's a 2- to 3-year program to drive towards IOLs and premium IOLs becoming the largest contributor with much higher margins. And so to summarize, I'd say we have 2 of our businesses in really good shape and 2 that are focused on execution and delivery. That being said, you're right, how do you split your time between the 4? For me, it's quite simple. You've got to build great teams, and we've done that. You've got to focus on execution, and then you have to work with R&D to drive innovation. And we've organized ourselves to do that, and I think we can pull it off.

[Patrick Wood, analyst]

And then that's super handy. And then obviously, Aspire looks like it's done very well in the U.S. I think it's like almost 14,000 units just in the 4Q, right off the bat. But I think I see, I think, from memory, you guys still have some production challenges there. I think you're probably only like 1,000 units or so. That seems like a very differentiated lens. Going forward, is there an opportunity to kind of push that on the production side and get the volumes up a little bit faster?

[Brenton L. Saunders, executive]

Yes, absolutely. So you're right. And this Aspire was launched. We've brought about 100 days into the launch, give or take. We've had about 350 surgeons actually implant the Aspire or the Aspire toric. And what we're hearing anecdotally, and what we're hearing from our field force is great results by the doctors and absolutely great outcomes from the patients. Now that lens is positioned as a monofocal-plus to compete against the J&J Eyhance. And I think our team has done a great job there, and there's a really big opportunity.The IC-8 or Apthera lens, you're absolutely on the money. We -- our third-party manufacturing there is struggling. Al Waterhouse knows that well because he came Apthera before coming from J&J, the [indiscernible]. The -- the issue there is right, driving production capability, and that is in place, but it will take a few quarters to get to where we want to get to. And so again, great outcomes, great, great patient, and satisfaction. Surgeons who have implanted and love it, but we don't want to roll it out to all surgeons, A, you have to train them, and 2, you have to have supply. And so that is a work in progress without a doubt.But I think that sets us up. If you look at the team's performance on Aspire, it really gets you excited for the potential for the pipeline that's going to pull through later this year and next year.

[Patrick Wood, analyst]

Super helpful. And I hope the shoulder gets better soon.

[Brenton L. Saunders, executive]

Yes. Thank you. I'm -- it's my right shoulder, I'm right-handed. So it's even turning pages here left hand is clumsy.

[Operator]

Your next question for today is coming from Craig Bijou with Bank of America.

[Craig Bijou, analyst]

Congrats on a strong finish. I wanted to talk about the margin opportunity for you guys in '24 and maybe beyond, given the strength of Xiidra and Miebo -- excuse me -- the margins -- margin expansion that you're guiding to is in line with some of your comments from earlier in the year. So just wanted to understand, as you're in this investment mode to the extent that Xiidra and Miebo and maybe the rest of the business outperform, how should we think about you either dropping some of that benefit or outperformance to margin improvement? Or are you going to reinvest that to drive even more growth?

[Brenton L. Saunders, executive]

Yes. No, it's a great question. So margin expansion is a critical part of our long-term strategy, right? We want to deliver sustained margin improvement for the next several years. And I think we're set up to do just exactly that. But as you mentioned, right, product mix is a big part of improving margins. The operational excellence we've been talking about for the last few quarters critical and obviously, cost discipline. When you think about '24, 2024, remember, it is our largest launch year in the history of the company. And so let's just take the example you mentioned, Miebo, right? Sam guided for around $95 million in sales of Miebo. Our investment is significantly higher than the $95 million, significant. And so, as that pharmaceutical, you tend to invest around 2 to 3 years, and then they become vastly profitable.So we have a direct line of sight of extensive margin improvement over the next few years, but you got to set up these products to realize their potential. Now directly to your question, Craig, if we have upside, would we drop it through? I think we would like to do that. The only hesitation I have there is if we believe we can change the trajectory of the curve on a product like Miebo, you'd probably want to do that as an investor. You probably want to set that up for higher peak sales because we have it for a long time, and it can drive massive growth and profitability with the right investment.That being said, I think we've made a massive investment. We have a great plan. We're tracking KPIs on a daily, weekly, monthly, and quarterly basis. We make the investment decisions based on performance. We don't just turn over that investment, and say, "Good luck." It's gated, and it's done with stage gates based on hitting KPIs. So we're going to watch that carefully. But yes, I think all things being equal, we would try to drop a greater performance all the way through the P&L.

[Craig Bijou, analyst]

Great. And maybe a follow-up on some of your comments on the contact lenses in that business. Just wanted to get your perspective on what seems like a pretty strong underlying market. And maybe comments on how pricing looks there in '24 and your position within that market, and just any other trends that you're seeing there?

[Brenton L. Saunders, executive]

Yes. So you're right. The contact lens market globally is very healthy, growing around 7%, 8%. So really good trends, good demographics, a lot of tailwinds in that business, and a lot of reason to like contact lens as a category. I think if you look at our performance and you try to normalize for Lynchburg, we're growing slightly faster than market. And I already gave you the great performance on INFUSE or Ultra Daily or Daily SiHy. And there's a lot to be excited about in that category.Now the trends there remain the same, a big shift to daily silicone hydrogels. As we complete the rollout of the full line of INFUSE, we have the multifocal in several key markets. We got to continue launching that around the world. We have the toric coming, and then we have the multifocal toric coming. So a lot of work, a lot of new launches within that brand over the next, let's say, 12, 18 months. So feel pretty good about it.Pricing. Look, I think there are pricing opportunities in that market. When you look at the fourth quarter, there was a lot of rebating by our competitors. We did not participate in that, given our Lynchburg situation and the launch mode of INFUSE. But we look at it very closely. We look at all the trends, and we do make strategic pricing decisions, particularly on perhaps some of the older products. But the new products right now is about building share, pricing appropriately, and building share. And I think we have a very strong strategy there. So we're thoughtful about it, in other words.

[Operator]

The next question is from Larry Biegelsen with Wells Fargo.

[Larry Biegelsen, analyst]

Congratulations on a strong finish to the year here. Brent and Sam, love to start with Miebo. Brent, could you talk about the adoption so far? What's going well? Where do you see opportunities to improve, such as payer coverage? And how are you feeling about the peak sales of $350 million that you laid out recently? Could you exceed that? Then I have one follow-up.

[Brenton L. Saunders, executive]

Sure. So I think when you look at Miebo, what you like is the initial target, as you would in any launch, was against high prescribing dry eye ECPs, right, eye care professionals? And I think the team did a really good job, and the excitement among that community was strong and remains strong, and their experience with Miebo with patients has been excellent, right? And the reason you know that is you look at refill rates, which are trending way above dry eye category refill rates. So that means early KPIs are the experience dry eye ECPs love the product, and their patients love it even more in refill. So that's part of the thesis of why you're going to make such a massive investment in Miebo in '24 is because there's a lot to like there.I think when you think about what has to happen in '24, there's 2 probably key activities that our team has to execute against. One is to drive adoption more broadly by ECPs. We have order of magnitude, tens of thousands of new targets that the team has to reach this year and drive adoption of Miebo. And that's the theme of what they're talking about in Orlando. The whole field force has been there this week, and that's one of the key themes.And the second, Larry, you hit it right on the nail on the head, is to drive managed care adoption. That is a big priority for 2024. Just the normal cycle, remember, this is a new drug, and new drugs take some time. But given the demand we've seen in the market, managed care is much more open to working with us than they were just a quarter ago. So really positive momentum there. I suspect by the back half of '24, commercial coverage will be really, really strong. There will be more work to do in '25, but '24 will be ahead of our expectations on commercial coverage.Now Medicare is -- has the longest lead time or lag time to drive coverage. But I'm optimistic we'll do a strong performance in '24, but '25, it will catch up to commercial coverage. And so I think those 2 areas are really important for execution. And when I look at that, the 350 peak number, I'm actually pretty optimistic we can exceed that. I think given the investment we're making in the early KPIs, I think we do better than that.

[Larry Biegelsen, analyst]

That's awesome. Hey, just a quick one for Sam. The margin cadence, any help on the phasing of margins in 2024?

[Osama Eldessouky, executive]

It's a good question. [indiscernible] is a very important part of our business, and that's why I highlighted in my prepared remarks. So if you think about '24 for us, we'll follow a similar trend as we saw in 2023 with our first quarter being the lowest in terms of contribution and fourth quarter is the highest.So I just used that as an example, last year, in Q1, last year, 2022, in Q1 for revenue, we contributed roughly about 22% of the full year results. And for EBITDA, was contribution roughly about 19% of the full year EBITDA numbers that we had for '23. So if you follow a similar trend and use the midpoint of our guidance that we provided this morning, that should give you a pretty good sense of our phasing as we think about it in '24. And it builds on from Q1 onwards as you go through to Q4.

[Operator]

Your next question for today is coming from Robbie Marcus with JPMorgan.

[Robbie Marcus, analyst]

Great. Congrats on a good quarter. Maybe to follow up on Larry's question, Xiidra, I wanted to spend a minute here. You talked about $400 million for the year. That's basically -- if you back out the onetime and fourth quarter, it's basically just roughly $100 million a quarter, and I realize there's seasonality. So maybe just speak to why $400 million given such a strong fourth quarter here? And how we think about what Xiidra is adding down the P&L in terms of adjusted EBITDA.

[Brenton L. Saunders, executive]

Yes. So great question, Robbie. Unfortunately, you can't just take the 400 and divide by 4, as I said earlier, there's a lot of seasonality in prescription coverage, right, and particularly in this category. I think putting up about 13% growth on Xiidra in 2024, which is what we're guiding towards would be a very impressive performance by our team, particularly when we announced the deal, we said it was going to be a mid-single-digit grower. So this is more than doubling our expected growth.Now some of that is just returning Xiidra back to where it belongs through tactical execution. And keep in mind, I've said this multiple times, dry eye is a very promotionally sensitive category, right? And so in fairness, in '24, we're investing a little bit more in Xiidra than we would have if it had it been given to us in a bit of a kind of left behind or neglected state from Novartis. But we're very confident that Xiidra, once we get it back on path, can be a very strong contributor of margin via product mix. And so we're making a stronger investment, but I think it's -- the data from Q4 proves that it's a smart investment for us. We're tracking the KPIs on this one very closely as well and investing only when we hit certain stage gates of performance.But right now, there's a lot of reasons to believe our team can execute against it. And keep in mind, having Xiidra with Miebo, right? We've integrated the field force is a win-win. It is absolutely 1 plus 1 equals something greater than 3. Having our field force be able to promote 2 differentiated mechanistically different drugs for dry therapy really positions us as the company in dry eye and our representatives with the greatest portfolio of the best products. And so I'm really optimistic on Xiidra, but perhaps, we can do better than 400. We'll have to see, it's February, mid-February. And the team's at their sales meeting right now. I think there'll be a lot of momentum coming out of this week and throughout the year as seasonality builds, as the investment in marketing builds, and the focus on execution in the field.

[Robbie Marcus, analyst]

Great. I appreciate that. And maybe just as a follow-up on free cash flow generation in 2024. I realize you have a lot of integration activities here. But how should we think about free cash flow in '24 and any phasing through the year we should consider?

[Osama Eldessouky, executive]

Sure. Robbie, it's a good question. When you think about cash -- listen, cash is very important element for us. It's part of our DNA. We call it cash is cultural, right? So it's something we spend a lot of time talking about it, we're focused on it. So when you think about that, and maybe before I talk to '24, I want to step back and just talk '23 because it's just the base for how we think about '24. So when you think about '23, cash paid out exactly as we anticipated. The first half of the year, we were in a growth mode with our top line and gaining market share, and that was a use on working capital, and we see that in the first half of the year, expecting that will turn positive in the second half of the year.So if you think of a second half cash flow for us in the year was generated roughly about $95 million in Q3 and Q4. Keep in mind that was all happening as we were building up inventories. So we built roughly about $250 million of inventory throughout '23 that helped us as we were working through our supply chain challenges that we've talked about. So that's a very important background for us to set the stage on for '23. Now when you reflect to '24, we expect cash to -- we don't expect the level of inventory buildup that we've seen in '23 does not repeat again into '24 at that same level. So we expect that to be more of a short-term element. We'll stay probably at a higher elevated level, but we don't expect that step-up in inventory again.So with that, I expect our cash for '24 to be roughly about conversion rate from EBITDA to midpoint of guidance structure about anywhere between 30% to 35% conversion rate for our cash flow. The phasing will follow a similar phasing as we think about the P&L to the phasing I highlighted to Larry, that will probably will be something you will have to keep in mind as well as you think about from our cash flow generation throughout the year. We'll start low, and we'll build up high as we get into Q4.

[Operator]

Your next question is from Vijay Kumar with Evercore ISI.

[Vijay Kumar, analyst]

Congrats on a nice print here. I guess my first one here, Brent, I just want to clarify. Did you say the investments in Miebo are well above the $95 million? So how much of a drag is Miebo in margins right now? I'm curious when do you think those margins will be accretive to corporate?

[Brenton L. Saunders, executive]

Yes. So I did say it is significant, and I chose the word significant on purpose, more than the $95 million, right? And that is very typical of the first year of a very promising pharmaceutical launch. In fact, when you look at the history of pharmaceutical launches, you tend to see the first 2 to 3 years in investment mode. And so I see this being a margin contributor in a more meaningful way in 2016 and becoming a significant contributor in '27 and for years to come. And so that's the right way to launch a drug.And as I said earlier to Larry, I do think we can exceed our targets on peak sales. I'm not ready to set a number on it. We need more experience. But I'm very optimistic. This is a great drug, and the acceptance is great. We need to execute, we need to expand the prescribers, we need to get the managed care coverage. So a lot of work to do. But we are -- our team is killing it, and we are set up for what could become a very promising product and margin contributor on a significant basis over the mid-to long term. Sam, any commentary?

[Osama Eldessouky, executive]

Yes. And Vijay, it's a similar sort of comments that we've made before, when you think about the launches and especially Miebo being one of the most important launches for us, we're playing the long game here in terms of the investment. And when I think about it from a margin contribution, I would probably step back and look at everything we put on the table from a sort of a P&L, full P&L. So when you think about our guidance for 2024, we expect margin to expand anywhere between 50 basis points to up to 110 basis points. If you take the midpoint of our guidance, that's about 80 basis points of expansion while we're still investing for the long-term benefit by investing behind Miebo and other launches as well.Just keep in mind that next year is one of our highest launches -- number of launches that we're seeing,

[Brenton L. Saunders, executive]

This year, 2024.

[Osama Eldessouky, executive]

Yes, '24.

[Brenton L. Saunders, executive]

Yes. I mean, look, I think, we have been -- and I said this at JPMorgan when I was interviewed by Robbie, I think that we've been very deliberate, right? We want to drive margin expansion, but we want it to be sustainable margin expansion. And we have said countless amount of times, 2024 was a massive investment year in the launches. Despite that and despite the fact that we are investing heavily in Miebo and pretty heavily in Xiidra as well as several other launches like INFUSE globally and Aspire, we are still going to drive margin improvement in '24.We hope it's towards the top end of that range, as we talked about upside earlier. But in '25, we're going to have margin improvement. '26, we're going to have nice margin improvement, '27 is going to be even greater. We are really committed to driving long-term margin improvement. And if you look at it over the next 3 to 5 years, it will be meaningful. But it's going to take time because the way to get there is to do the right thing and investing in these very important launches.

[Vijay Kumar, analyst]

That's helpful, Brent. And if I may, one follow-up. So Miebo in $95 million, you know, that contributes 200 basis points to organic. Just given your comments, your bullishness on this product, is that a sustainable number that contributes to growth when you look at '25, '26, could Miebo continue to add in the $50 million to $100 million range? And what is the guidance assuming for Prolensa loss of exclusivity in fiscal '24?

[Brenton L. Saunders, executive]

Yes. So yes, I mean, I think you could see Miebo continuing to be a very nice contributor. We had mentioned $350 million peak sales. You tend to hit your peak sales in year 4 or 5 on a product like this. And so if you model that out. And then I did put in some optimism that we could do better than that. Not ready to call the number yet, but I did put it into optimism. So that's where we're going to watch very carefully this year. As we see execution, we'll guide appropriately based on performance, which is a responsible way to do it.But again, a lot of optimism there. Prolensa did go generic, the generics entered in January. The impact is around $40 million to $50 million this year. That's a very high-margin product, end-of-life product are very high-margin. And so when you think about -- you didn't ask this question, but I'll just use the opportunity. When you think about our guidance for '24, we're covering a significant amount of headwind. And despite that, still having really nice guidance. You're covering $50-ish million in Prolensa, you're covering currency. And I think I mentioned this at the JPMorgan conference on the webcast, we're covering another $40 million, $50 million of SKU reduction that we did and are doing this year to focus on the higher-margin products.So there's a lot of headwind there that's meaningful to us, and we're jumping right over that and still growing very nicely. So that's why I have a lot of optimism for the business in '24, but start to get really excited in the coming years as we finish the hard work that we're doing here to reorganize the company, to simplify the company, and to invest in strategic areas that will drive growth.

[Operator]

Your final question for today is from Joanne Wuensch with Citibank.

[Joanne Wuensch, analyst]

I'll say upfront, I hope your shoulder heals quickly. Two quick questions. What percentage of your contact lenses are silicon hydrogel today versus a year ago? And I'll toss my second one in now. Where are you feeling or how are you feeling about M&A at this stage?

[Brenton L. Saunders, executive]

Yes. So let me take the second part first, and then Sam will give you some guidance on the first part. When I think about M&A, I've said this when we did the Xiidra, our priority is to digest and delever the Novartis assets, namely Xiidra. That is our plan for '24. That being said, I mentioned in the prepared remarks, investing in R&D capabilities and BD capabilities. We are actively involved in numerous discussions around smaller products, R&D assets, and the like.And I expect us to use '24 to build our pipeline in pharma and surgical, in consumer, and the like. And there's some really exciting science, and there's some really exciting early-stage products that could be meaningful contributors to us if we make the investment. So long-winded way to say, nothing significant in '24 for us, but look for us to be very strategic, adding smaller products or mid-to-late-stage R&D products for all of our businesses. Sam, do you want to take that?

[Osama Eldessouky, executive]

And Joanne, in terms of the SiHy, it seem right now, as we think about '22, it's roughly about 10%, but it is growing faster. We've seen it growing really fast between '22 into '23. And as we -- Brent mentioned, is growing into high single -- growing into double digits, we saw Q4 is about 31% growth just on SiHy.

[Brenton L. Saunders, executive]

Thanks, Joanne, and thanks for asking about the shoulder. So Holly, let me just conclude with some remarks, if that's okay?

[Operator]

Sure.

[Brenton L. Saunders, executive]

Great. So thank you all for joining the call. Reflecting on 2023 for just 30 seconds, I just hit my 1-year mark here. It was a very busy year. I think the team accomplished a lot. We did a lot of activities. We remade the executive management team. We did a complete reorganization of our organization. We invested in big capabilities around selling excellence and digital. We started our strategic planning on supply chain, and I'm really proud of the team and what they accomplished in '23. And I think our performance was very strong.What gets me really excited as I think about '24 and beyond, and I hope as we continue to interact with all of you in 2024, you'll see a strong focus on execution and driving this company to reach its potential in the years to come. So very excited outlook, and I look forward to keeping you all updated. Thank you so much.

[Operator]

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