Alcon AG
SIX:ALC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
63.02
84.68
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CHF.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Alcon AG
Earnings Call Analysis
Q2-2024 Analysis
Alcon AG
Alcon reported a solid second quarter, with sales rising by 6% to $2.5 billion. Core diluted earnings per share were up 15% to $0.74, and the core operating margin stood at 19.8%. These results underscore the strength and resilience of Alcon's market positioning and innovative product portfolio. Key milestones included the FDA clearance for the next-generation Unity phaco platform, slated for broader commercial launch in the second quarter of 2025, and the completion of the BELKIN acquisition, which enhances Alcon’s glaucoma treatment portfolio.
Alcon continues to bolster its product lineup and market reach through both innovation and strategic acquisitions. The Unity platform, featuring cutting-edge technology for cataract and retina surgeries, promises to significantly improve surgical efficiency. Additionally, the BELKIN acquisition is expected to expedite the global rollout of direct selective laser trabeculoplasty (SLT), strengthening Alcon’s glaucoma offerings.
Alcon demonstrated strong growth across various segments. In the surgical division, implantable sales surged by 9% year-over-year to $464 million, driven by high-tech intraocular lenses like Vivity and PanOptix. The Vision Care segment saw a 9% increase in contact lens sales to $636 million, bolstered by innovations in toric and multifocal lenses. The ocular health division also performed well, with Systane eye drops contributing to a 2% year-over-year sales growth.
The company maintains a positive outlook for the remainder of 2024, with revenue forecasts ranging from $9.9 billion to $10.1 billion and core diluted earnings projected at $3 to $3.10 per share. Alcon expects a consistent operating margin in the range of 20.5% to 21.5%, despite some inventory-related pressures. Investments in new product launches and continued market expansions are anticipated to sustain financial momentum.
Alcon continues to expand its international footprint, with significant gains in China and other international markets. The strategic alliance with OcuMension for the commercialization of eye drops in China exemplifies Alcon's adaptive approach to market entry and expansion. Additionally, in the contact lens market, Alcon’s strategic pricing and product innovations have kept it ahead of the competition, as seen in their 9% sales growth.
Alcon is committed to enhancing operational efficiencies through technological innovations like the Unity platform, which aims to streamline surgical processes significantly. The feedback from initial trials has been extremely positive, with strong indications that the platform will set new standards in surgical precision and efficiency. Looking forward to 2025 and beyond, Alcon is gearing up for multiple significant product launches, including Precision7, PanOptix Pro, and additional eye drop formulations.
You don't have any saved screeners yet
Greetings, and welcome to the Alcon Second Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the call over to your host, Mr. Dan Cravens, Vice President, Investor Relations for Alcon. Thank you. You may begin.
Welcome to Alcon's Second Quarter 2024 Earnings Conference Call. Today, we issued a press release and interim financial report. We also posted a supplemental slide presentation on our website to enhance today's call. You can find all these documents in the Investor Relations section of our website at investor.alcon.com.
Joining me on today's call are David Endicott, our Chief Executive Officer; and Tim Stonesifer, our Chief Financial Officer. Our press release, presentation and discussion will include forward-looking statements. We expressly disclaim any obligation to update forward-looking statements as a result of new information or future developments except as required by law.
Our actual results may differ materially from those expressed or implied in our forward-looking statements and as such, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ materially from those in our forward-looking statements are included in our Form 20-F, earnings press release and interim financial report, which are all on file with the Securities and Exchange Commission and available on their website at sec.gov.
Non-IFRS financial measures used by the company may be calculated differently from and may not be comparable to similar measures used at other companies. These non-IFRS financial measures should be considered along with but not as alternatives to the operating performance measures as prescribed per IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our public filings.
For discussion purposes, our comments on growth are expressed in constant currency. In a moment, David will begin by recapping highlights from the second quarter. After his remarks, Tim will discuss our performance and outlook for the remainder of 2024. Then David will wrap up, and we will open the call for Q&A.
With that, I'd now like to turn the call over to our CEO, David Endicott.
Thanks, Dan, and thank you all for joining today's call. I'm pleased to report another solid quarter. We grew sales by 6% to $2.5 billion. We grew core diluted earnings by 15% to $0.74 per share, and we delivered a core operating margin of 19.8%. These results are a testament to the durability of our end markets, the success and breadth of our innovative portfolio of products and our geographically balanced footprint.
During the quarter, we continued our focus on preparing for product launches that will position us well for future growth, and we achieved some significant regulatory and clinical milestones towards these goals. I'll start with Surgical where we recently received clearance from the U.S. Food and Drug Administration for our next-generation Unity phaco platform, which includes the combined vit-ret cataract device and the stand-alone cataract device.
As I've said on previous calls, Unity is designed to create near physiological conditions during surgery. This should allow Unity to drive significant efficiencies over current systems in the market, including our own CENTURION and CONSTELLATION devices. By some estimates, there will be 31 million cataract surgeries in 2024, with that number rising to 37 million by 2029. Given these numbers, case efficiency is going to be crucial to allow surgeons to keep up with demand. If Unity can add even 1 additional surgery per day, that would be a meaningful improvement and an important value creator for surgeons and payers.
Additionally, Unity brings first-to-market technologies and consumables that are designed to deliver meaningful benefits for the surgeon, staff and patients. These include phaco that is twice as fast as CENTURION as well as cut speeds that are 50% faster on vit-ret than CONSTELLATION. Globally, there's approximately 28,000 CENTURION and CONSTELLATION devices in the market that we will target for upgrading over the next decade. We've begun user experience testing Unity in the U.S. with select doctors, and over the coming months, we'll continue to do this work in order to capture real-world data and feedback ahead of a broader commercial launch during the second quarter of 2025.
Before I move to implantables, I'm pleased to announce that we recently closed our acquisition with BELKIN. With this transaction, we plan to accelerate the global expansion of direct selective laser trabeculoplasty. We see an emerging consensus among leaders in glaucoma that SLT is an effective first-line treatment to reduce intraocular pressure. It also reduces reliance on eye drops, mitigates the cost of medication and improves patient throughput. This acquisition broadens our existing glaucoma portfolio, which also includes eye drops and the Hydrus Microstent.
Now I'll discuss implantables, where I continue to be extremely impressed with our performance in international markets. In particular, we're seeing strong uptake of both PanOptix and Vivity in many regions around the globe. During the second quarter, we also saw inventory build related to China VBP. As we have articulated in the past, we continue to expect this to be a gradual ramp, implemented province by province. In the U.S., we continue to collect surgeon experience and patient outcomes with our next-generation PanOptix. We expect to make a decision on launch timing in the coming months.
Now I'll turn to contact lenses where our innovation continues to win in the market. In daily lenses, we saw another quarter of share gains across the category, driven by our product innovation, including the PRECISION1 family and the DAILIES TOTAL1 for astigmatism. PRECISION1 continues to be an important growth driver for us and even after more than 4 years in the market, the PRECISION1 family grew approximately 30% in the second quarter. This is a testament to how successful contact lens innovation drives long-term durable growth.
Now I'll discuss reusable lenses where the category remains strategically important as it drives more than half of the new fits. Our flagship reusable lenses, TOTAL30, which continues to gain traction in markets around the world is the first and only reusable lens to leverage water gradient technology. Additionally, our proprietary CELLIGENT technology creates a protective layer that mimics the eye's natural surface in order to help resist deposits in bacteria for a clean comfortable lens. The TOTAL30 family currently includes sphere, toric and multifocal modalities, I continue to be especially pleased by the uptake of TOTAL30 multifocal.
Multifocals are an important category is where dropout steps up meaningfully beyond the age of 45. For patients, TOTAL30 multifocal leverages our precision profile lens design, which delivers a smooth progress of power gradients for clear, uninterrupted vision and works with the eye's natural pupillary function. And for ECPs, this technology delivers an excellent fit success rate, reducing chair time and improving patient flow.
In addition, we will further expand our reusable portfolio with the upcoming launch of Precision7. Precision7 is a new contact lens specifically designed for a 1-week replacement schedule that's based on a unique proprietary technology. We expect Precision7 to help drive continued share gains in the reusable category, where we have historically been under indexed.
As a reminder, 1 point of share gain in the global reusables category corresponds to approximately $40 million of revenue for Alcon. We're working with a handful of eye care professionals in the U.S. who have started fitting Precision7, and early feedback has been excellent. We will continue to collect this feedback with select customers through 2024 ahead of a broader commercial launch in 2025.
Before I discuss ocular health, I want to briefly comment on the inventory provisions we referenced in our press release. In the second quarter, we booked an inventory provision related to a quality issue with a raw material supplied by a third party. This raw material was used in the production of select contact lenses in a single manufacturing site. We've initiated a limited voluntary recall with the appropriate health authorities. And to date, we've received no reports of serious adverse events.
Now moving to ocular health. Our over-the-counter portfolio of eye drops continues to perform exceptionally well. I'm particularly pleased with Systane where we had our fourth consecutive quarter of double-digit growth, driven by our multi-dose preservative-free formulations. In the coming months, we're going to refresh and simplify Systane brand around these 3 products: Systane Ultra; Systane Hydration; and Systane Complete in order to better reach the appropriate customers for each formulation.
And finally, in our pharmaceutical portfolio, total prescription growth for Rocklatan in the second quarter was in the mid-teens, well ahead of the broader glaucoma market. Lastly, I'm pleased to confirm that we submitted the new drug application for AR-15512 to the FDA during the second quarter. In addition, we received our NDA acceptance and PDUFA date, which is May 30, 2025.
Next, I'll briefly discuss market dynamics for the second quarter. In cataract, we estimate the global procedures were up approximately low single digits. Additionally, global AT-IOL penetration was up approximately 190 basis points year-over-year, mainly driven by international markets. In contact lenses, we estimate that the retail market was up approximately mid-single digits. This growth was driven by pricing and continued steady wearer trade-up.
Now I'll briefly comment on our eye drop strategy in China. Earlier this month, we entered into a long-term strategic relationship with OcuMension to commercialize and develop select eye drops in this market, including Systane Ultra and AR-15512, among others. OcuMension is an established leader in the local ophthalmic pharmaceutical industry with strong commercial, R&D and manufacturing capabilities.
And we believe this transaction will maximize the long-term potential opportunity in China. We expect the transaction to close later this year. In Surgical and in contact lenses, we remain committed to our direct presence in China, and we're excited to grow these businesses in this important market.
With that, I'll pass it to Tim, who'll take you through our financial results and provide more color on our outlook.
Thanks, David. We're pleased to report second quarter sales of $2.5 billion, up 6% versus prior year. This growth was primarily driven by strength in our innovative contact lens portfolio and implantables. Our second quarter U.S. dollar sales growth included approximately 300 basis points of pressure from foreign exchange.
In our Surgical franchise, revenue was up 6% year-over-year to $1.4 billion. Implantable sales were $464 million in the quarter, up 9% year-over-year, mainly driven by our advanced technology intraocular lenses, including Vivity, PanOptix and our monofocal torics in international markets. In consumables, our second quarter sales were up 5% to $736 million, driven by cataract and vit-ret consumables particularly in international markets as well as price. In equipment, sales of $223 million were down 1% year-over-year, in line with our expectations. We continue to expect equipment sales to be broadly in line with last year ahead of the commercial launch of Unity VCS.
Turning to Vision Care. Second quarter sales of $1.1 billion were up 6%. Contact lens sales were up 9% to $636 million in the quarter. Our innovation, including toric and multifocal modalities continues to win in the market. Additionally, we saw strong contribution from price in the quarter.
In ocular health, second quarter sales of $423 million were up 2% year-over-year. We saw strong performance in our portfolio of eye drops, including another strong quarter of Systane. This was partially offset by 4 points of headwind from contact lens care, primarily driven by a tough comparison due to the recovery of supply in the second quarter of last year.
Now moving down the income statement. Second quarter core gross margin was 62%, down year-over-year. This was due to 2 factors. First, as David mentioned, the second quarter included significantly higher inventory provisions that resulted in a negative impact of $30 million or 1.2 percentage points to margin.
Second, as we communicated previously, we saw the impact of higher cost inventory flowing through the income statement, particularly in the surgical franchise. Given the unusual items we saw this quarter, we now expect full year core gross margin to be slightly below 2023.
Core operating margin was 19.8%, up 70 basis points year-over-year, driven by operating leverage from higher sales. This was partially offset by the factors I mentioned earlier, including 120 basis points of pressure from inventory provisions. Second quarter interest expense was $50 million, broadly in line with last year.
Other financial income and expense was a net benefit of $12 million compared to a net expense of $9 million in the second quarter of last year. This improvement was primarily driven by higher interest income and lower foreign currency losses. The second quarter average core tax rate was 19%, broadly in line with last year. Looking forward, we expect the tax rate in the second half of the year to be lower than the first half due to a number of discrete benefits we expect to materialize in the second half of the year. Core diluted earnings were $0.74 per share in the quarter, up 15% from last year.
Now before I touch on our outlook for 2024, I'll discuss a few cash flow and other related items. On a year-to-date basis, free cash flow was $667 million compared to $189 million in 2023. This improvement was mainly driven from higher cash from operations. For the full year, we continue to expect a meaningful step up in free cash flow versus 2023.
Now moving to 2024 guidance. Our current outlook assumes that markets will grow in line with historical averages of mid-single digits and exchange rates as of the end of July hold through year-end. Starting with sales, we are maintaining our full year revenue guidance of $9.9 billion to $10.1 billion and our constant currency sales growth rate guidance of 7% to 9%. If FX rates at the end of July persist through the remainder of the year, we will likely trend toward the low end of our top line guidance range.
Moving to operating expenses. We continue to expect full year core R&D expense to be toward the high end of the range of 7% to 9% of sales. Turning to profitability. Although we will see some additional pressure to core operating margin given the unusual inventory provision, we expect to continue to invest behind new product launches and are maintaining our full year core operating margin outlook of 20.5% to 21.5%.
Moving down the income statement. We now expect interest and other financial expense to be between $160 million and $180 million. This improvement is primarily due to higher interest income as a relative higher cash balance and higher interest rates. We continue to expect our full year core effective tax rate to be approximately 20%.
Based on all these factors, we're maintaining our core diluted earnings guidance range of $3 to $3.10 per share which corresponds to 15% to 18% constant currency growth over 2023. And given the recent depreciation of the U.S. dollar, we are absorbing approximately $0.08 of FX headwind versus the guidance we issued in February. And finally, I'd like to thank the entire Alcon team for another great quarter.
With that, I'll turn it back to David.
Thanks, Tim. To wrap up, we're pleased with the strong results for the second quarter and first half of the year. I'd like to thank our team of more than 25,000 associates for their hard work and determination. We're a specialist company that competes and wins on the basis of our team's deep expertise in eye care, its technologies and its end markets.
While we still have a lot of work to do, our operating model, our human capital and our culture are what differentiates Alcon. As we look to the future, we will continue to focus our efforts on delivering world-class innovation to our customers and their patients and delivering value for our shareholders.
With that, let's open up the line for Q&A.
[Operator Instructions] Our first question comes from the line of Jeff Johnson with Baird.
David, I wanted to ask a question on the contact lens business. The 9% obviously seems like it's a couple of points probably above market at this point. It did come down a little bit versus last quarter. Just maybe talk about pricing dynamics in the quarter. I think you anniversaried a pretty sizable price increase that you took middle of second quarter last year, if memory serves correctly. So has pricing come down even though it was still strong in the quarter relative to maybe the last couple of quarters?
And what are you seeing just on rebate activity? Our analysis of your rebates would suggest that they've been pretty consistent here over the last number of quarters. But there's been some noise out there in the channel about maybe taking some rebate activity up here recently. Would love to get your input there.
Yes. Jeff, thanks for the question. The market in total was up 6% retail and we were at 9%, obviously. And again, we're coming around, it's a tough comp from last year at 11%. So not surprisingly, we look pretty good relative to that. Price was a part of it. It was maybe half of that one. The price/mix volume for us was really important.
So again, we're getting trade up to new products from old products. We're getting good motion on the mix element of this. So I think directionally, we felt pretty good about that particular quarter. And I would just say that the rebating, we've been very consistent. I think we continue to be consistent on rebates, which is a part of our promotion mix, but not the major part. And we have seen some increase in competitive promotion.
All right. Fair enough. And then just a follow-up question on your implantables business. Oftentimes, you provide some U.S. color on your share of the AT-IOL market or at least the PC-IOL market. Any updates on that?
And just as we think about competitive launches here upcoming from a couple of your competitors, I would assume that very high 80% PC-IOL share starts to trend lower. Just kind of your outlook for maybe share within PC-IOL as we probably start to see some sampling here of some of those other products over the next few quarters.
Yes. Most of the competitive stuff in the PC-IOL share element is really pretty consistent with what we've said in the past. There's going to be a lot of folks coming into the market, but the majority of the action is in torics. And so I think at this point, we're still holding better than 80% share of the PC-IOL market, but the torics, again, pretty competitive market, and we see continued erosion there.
I think the big thing is the penetration of AT-IOL was very positive this quarter. And so both the geographic distribution of what we have, which is important to think about because we had very good quarters in Europe and in Japan and in China. But we had -- even the U.S. penetration was up, I think, 19.2%, so back to kind of where it's been historically and again, on a trend, which we kind of think is really the historical trend, which again, I usually say it's about 50 basis points a year of improvement.
So if that keeps moving, the main discussion really is about penetration, because the share loss is nothing unusual for us pretty much as we've seen it. And actually, internationally, we gained share. So we're feeling pretty good about where we are in IOLs.
Our next question comes from the line of Graham Doyle with UBS.
Just one, it's actually around the comments you made, David, in the press release in terms of, to phrase, the next phase of growth in 2025 and beyond. It's obviously been a pretty good year so far in 2024 on the top line despite some headwinds particularly in the equipment.
I know it's early, but if we look at the dynamics for next year, given the launches in contacts in terms of once-weekly, the equipment launch, PanOptix 2.0 dry-eye, would you be comfortable at this stage with the same dynamics and same type of growth at least being supported in 2025? And just sort of a quick follow-up on that as well.
Yes. I mean, Graham, I think the way we're thinking about the world is we have a lot of product flow coming through on an innovation basis. And so I wouldn't want to comment necessarily on growth quite yet. Give us another quarter to get to a place where we are really staring at next year.
As we finish up this year, we're really thinking about what happens with product flow next year, which we've invested a lot of time in. So Unity VCS is a big deal; Unity CS, big deal; 512, we should get approved next year; Precision7 is a big opportunity; PanOptix Pro, if we get that out next year, I think that's a great idea; BELKIN is a new product flow for us. And we've got another eye drop in the hopper here, too.
So we've got a whole lack of stuff that we'd like to invest in that we think grows this market and grows our position quite substantially in the coming years. So this year is a little thin that way. You'll notice that we made a lot out of what we've got. But next year, we get a lot of product flow behind us.
Okay, great. And maybe just a quick follow-up on PowerVision. Are you able to share any more information about potential timings of data? And is this data that you have? Is it blinded? Or have you had it in house for a while?
Yes. It's still -- we're still finishing the Phase I, the first in-human trial. We should have that data available to us shortly. In the next several months, we'll have a look at it, and we'll obviously comment on it once we have a full understanding of it.
Our next question comes from the line of Veronika Dubajova with Citi.
I forgot to unmute before I started talking. That will do the trick. Two for me, please. The first one is just looking at the full year guide, I'm thinking mostly organic sales growth. Obviously, we're very much trending towards the very bottom of the 7% to 9% on constant currency.
Just curious kind of, David, what gives you guys the confidence that there is scope for acceleration in the back half of the year? Or is there a specific region, product category that you're focused on? So if you could talk through that and kind of your degree of confidence that we're going to end up towards 7% versus towards 9%. That would be my first question. Then I have a follow-up after. Thought I'd let you answer that first.
Veronika, yes. So I think the difference between the 7% and 9% is really how the markets perform. If we get a little bit more market growth or recovery, then we have expected that would bring that number up. I think it's also how effective our pricing actions are, how does the VBP do in China. We're not quite sure how that's going to roll out. That might come in better than we have.
So listen, there's still 5 or 6, 5 months left in the year, and there are a lot of variables out there. But given what we're seeing right now, that's why we're trending towards the low end, and that's why we called that out.
That's great. And actually, that was a great segue to my second question, which is, are you able to break out for us what the contribution from stocking was to implantables from China VBP? And I guess what are you seeing on the ground in terms of as you look at July and August, how much traction are you seeing so far on that VBP front?
Yes. We're just starting, Veronika. I mean, I think it's hard to tell from a distance, how much was stocking and how much was demand. This goes province by province, which is a little bit tricky. So we sell into a variety of distributors who then supply the hospitals.
I think even if you took out China, we had a very good growth, and we read that as penetration was up because as you'll remember, we kind of focused for a long time on how does penetration move. And that's important globally. Penetration was up in Europe. Penetration was up in China. It was up in most of the countries, including the United States. So that helped us overall. So I would say the VBP contribution relatively small to the total.
Our next question comes from the line of Ryan Zimmerman with BTIG.
I want to ask one on dry eye and one on Unity VCS. I'll start with Unity VCS a little bit actually. So just as you think about the upgrade cycle at Unity VCS, I mean, how are customers -- or how are you thinking about approaching it? If customers are buying, say, 1 CONSTELLATION and 1 CENTURION, what are the economics to you guys?
And as a separate follow-up to that, what's the margin impact from new cassettes on Unity VCS? How should we think about those contributing as you launch that? And then I have a question on dry eye.
Yes. Well, I mean, I think the way to think about VCS particularly as we sell joint machines, a combo machine of a vit-ret and a cataract machine, internationally, that is a very popular setup, principally because the ORs are shared amongst the vit-ret and cataract surgeons. And so it's a particularly efficient setup, and the use is obviously more efficient.
We expect to kind of make a premium on those. So again, I would think about it as put the two together at the current ASPs and think about a premium, and that's really where we are with that particular idea because that element is part of the discussion, but I do think there's more to it than that. The packs broadly are going to get launched with new instrumentation.
So things that are -- that may not seem really important but are to the surgeons like moving from 23-gauge or 25-gauge instruments to 27-gauge instruments, this creates less trauma in the eye. We've got a new entry system that is the trocars on our retina piece. I mean there's a lot of stuff that we're bringing in that will make this procedure safer, faster, and we think that really matters a lot.
So the consumables element, again, we'll be looking for a premium on it from our current project. But remember that we have a fairly sizable share of the markets right now. So directionally, this isn't really a share play as much as it is an upgrade and replacement play. And the only way we're going to get that done is if we can generate real efficiencies that generate real economics for both payers and surgeons.
Okay. That's helpful, David. And then turning to dry eye for a second, AR-15512, congrats on the PDUFA date. As I think about that relative to other prescription pharmaceuticals in the dry market, how would you have us thinking about that product launch? I mean we've tracked Xiidra, RESTASIS, MIEBO now. We've seen how those have launched. In your mind, what closely mirrors kind of what you expect for AR-15512 as you launch that next year?
Well, it's tough right now because the market has changed quite a lot since RESTASIS or Xiidra. And probably, you're going to have to look at the more recent launches to really get a feel for the trajectory. The payer dynamics is a big part of what happens now. And of course, Medicare is probably 50% of the prescription.
So you need to think about the cycle of when Medicare brings formulary products on. You need to think about the cycle for which payers begin to pay. And we'll obviously manage all of that. We're still working our way through it. And so I'd be a little -- it's a little premature for me to give you a lot of detail around it for us. But I think in the next, I would say, 4 to 6 months, we'll have a pretty good read on what we're going to do and how to think about this one.
But I think it's -- look, what we're excited about with this product is in the market, there is a real need for faster-acting products that treat successfully more patients. And I think those 2 elements will be -- will feature in the way we think about this product.
Our next question comes from the line of David Adlington with JPMorgan.
First one, just in terms of your supply chain issues in contact lens care, I just wondered why you had to take a provision and why were you not able to go back and get some compensation from your supplier?
And then secondly, just on the equipment growth. I just wonder if you can give us a feel for what percentage of units you sold this quarter, actually have an upgrade option to a Unity at some point later down the line?
On the provision, we took it because obviously, we had a lot of product in hand that had been made with something that wasn't going to contribute to the final product correctly. We are obviously going to talk to our supplier about that situation, and we'll be careful to comment on that one right now. But I think directionally, we feel like that's under control, and we're pursuing all the proper avenues to get that product safely secured, and we're moving down that path.
On the equipment growth, we're not really prepared to talk about the units sold and upgrading. I think directionally, we have, as I said, something on the order of 30,000 units out there. Those are generally done on an upgrade cycle of about 10 years. So think of the world as kind of roughly 2,500 to 3,000 units every year, kind of roughly comes in and out of the market.
There'll probably be an enthusiasm in the beginning for the product. That's usually what has happened historically, and then it slows down a little bit. But we'll try and meter that carefully so that you have both an upgrade element of it, but also kind of people who really want additional units. And we are excited about the combo unit, particularly in the international market. So that's about what I can help you with now.
Our next question comes from the line of Patrick Wood with Morgan Stanley.
Just to think about all the new product launches that are coming through. I'm just curious how you're thinking about incremental investment behind them, sales and marketing. You obviously have a massive distribution network. But dry eye takes a bit of dollars to sometimes get working, but then Unity, you already have a Rolodex of customers there. So how are you thinking about the interplay between incremental investment or pushing the products as we move into next year versus that kind of top line opportunity?
Yes. I mean, look, we're really trying to struggle with that question, Patrick. It's a great question. And I think as we come into the fourth quarter and we really get our budget set for next year, we'll have an opportunity to describe that to you next quarter, I think, with some degree of detail.
I do think that we are going to want to put additional investment behind major project launches like Unity VCS, like 512. And so I think that's what's been in our plan. So I don't think there's anything new there necessarily. But it does matter how many products we've got right now and how many opportunities we have, and we want to make sure we maximize all of those to try and really drive revenue at its maximum value. So my sense of it is we'll have a better, more clear picture as we guide for next year. And certainly, we'll begin to work that process next quarter.
Brilliant. And then just as a quick follow-up, the OcuMension agreement. Excuse my ignorance, I'm just curious, like the difference that you saw in the end markets in China, the ocular health side relative to surgical and contacts and why direct makes more sense for one relative to the distributor model for the other.
Well, the simplest answer, honestly, is that we don't necessarily have the capabilities in-house today to do what they have already made. So we'd have been in a build mode for China, and we -- frankly, the portfolio was relatively small with a fairly sizable investment on AR-512. So what we were looking at was where do we want to prioritize resource more than anything else.
And I think what we saw was a very skilled partner who has good regulatory experience, good marketing experience, good manufacturing and R&D. And it really seemed to make a lot of sense for us to let them take on the eye drops business for us instead of us trying to build all of that capacity while we do all these other products, while we do as many things as we've got going on. So it was really more of a -- what's the most efficient way to maximize profit.
Our next question comes from the line of Jack Reynolds-Clark with RBC Capital Markets.
Two, please. Just on Unity VCS or even CS. I'm wondering if you could share any initial feedback you're getting from surgeons. And any kind of initial data around the potential efficiency improvements that the systems can provide and how strong that case may be?
And then the second one was just on equipment. So could you just kind of give a bit of color around kind of how much comps affected here and whether there's any kind of underlying weakness in demand or if people are kind of holding off ahead of the Unity launch or anything like that?
Yes. The second one, Jack, is pretty easy. We kind of expected as you remember from the beginning of the year that we'd see a little bit of a stall in console growth, particularly about this time. And what I'm excited about with the equipment is underlying that is actually pretty solid demand for biometry, for scopes, for other equipment, which we've done quite well with while we have kind of seen the console business kind of slow down.
So directionally, I think you should feel pretty good about equipment right now because we -- most everybody knows that we've got a bunch of products out there in the market with some key customers, making sure we get it all kind of perfect before we launch it. But directionally, I think equipment looks pretty good to us.
On the Unity piece, we are very excited from the feedback that we've gotten from surgeons on this, and we've had it with some of the best folks in the world in Japan, in the United States and Europe. And consistently, what we're hearing is very, very safe, people operating at IOPs that are considerably lower than where they have been in the past, in the 20s. There are people now operating a physiological IOP, which we think is the endgame for this product.
And when you do that, basically, everything kind of looks safer and more stable and you can move a little bit faster. And that's really the key to this thing is, to get the safety into a level where you really can speed up a little bit. The cut speeds on the machine are half -- or sorry, twice as fast as the CONSTELLATION. And our observation of the cataract machine is, again, we'll see some efficiency improvements there as well.
So we're very excited about what happens here, both in the -- everything from the setup to the tear down to the time in surgery, it just looks like it's a more efficient machine on both cataract and retina. So we're optimistic, and the feedback has been very positive.
Our next question comes from the line of David Saxon with Needham & Company.
Maybe I'll start on the glaucoma portfolio. I know Hydrus is a smaller product for you, but can you talk about how that's been trending and the attachment rate you're seeing with your IOLs? And then on BELKIN Vision, DSLT, maybe timing to launching that in the U.S.
And then lastly on glaucoma, David, I think you mentioned a new drop in the pipeline. Is that in glaucoma? Or is that in a different part of the portfolio?
Yes. Let me start with Hydrus. The Hydrus business is going well. I mean it's double-digit growth, which is ahead of the market kind of as we expected. So we're doing well with that product. And we really don't think about attachment rate very much with the IOLs. That's really kind of indifferent to us. It's really specific about how we handle the glaucoma patients' needs.
So relative to Hydrus, we think adding BELKIN makes a ton of sense because if you start with SLT, and we think this is a much faster, easier way to do SLT that's going to make a ton of sense. And then you'll move into whatever is next, whether that's drops or Hydrus or whatever, depending on the patient need. But I think the launch timing on BELKIN will be likely first quarter next year, and I think we're working through some of the final details of that launch, but we've got manufacturing to take care of, and we're building inventory on that product now.
On the new drop, I'm not 100% sure which -- on pharmaceutical, which one you're talking about. We have a number of things going on in the pharmaceutical space, but in glaucoma, I think one of the things that was mentioned earlier was a follow-on to Rocklatan, which again, we have put in a clinical trial. That is a reformulation to try and improve the efficacy or the safety of that brand. So there's one of those out there, but there's also several other things that we're working on in the pharmaceutical space.
Okay. Great. That's super helpful. And then just on the cataract procedure volumes, low single digits this quarter, I think it was like 2% last quarter. So I think that's a slowdown from what we've seen in the past. So what's driving that? Anything specific to -- from a geographical perspective? Or is it kind of global?
Yes. The cataract weakness in the second quarter was real in the U.S., and it was pretty stable, I would say, solid in the international market. So if you think about the difference, it really has been in the U.S., that's been a little bit slower recently.
I can't tell you why exactly I could give you 9 thesis on what it might be, but I don't think we know. I do think that over time, these things tend to be idiosyncratic. You'll have one quarter that will do really well, you'll have a slowdown and then you'll have another quarter that does really well.
So our view is that the normal rate of cataract growth around the world is in the mid-single digits, kind of the low end of mid-single digits, call that 4%, 4.5%, higher in international, lower in the U.S. But directionally, we've got a lot more surgeons coming into the international markets, think China, think Asia in general.
And then we've got a lot of efficiency gains coming through in the United States, which is driving basically the volumes up over time. So I think that's the best I can give you in terms of dynamics. I generally think this thing evens out over time, and we expect to see solid quarters coming up.
Our next question comes from the line of Anthony Petrone with Mizuho Group.
Maybe one on margins and one on capital allocation. Tim, just on margin, you called out the supplier quality issue was 120 basis points. You back it out, you're at 21%. You're leaving the guidance unchanged, but if I heard you correctly, there'll still be a margin impact from the quality supplier quality issue at least in some portion of the second half. So it suggests the underlying margin is actually a little bit better.
Are we thinking about that correctly? And if there is underlying momentum, what are the sources there? And then I'll have one quick follow-up.
Yes. Great question, Anthony. Listen, the way we're thinking about it is, obviously, we weren't expecting the impact of the inventory provision and $30 million is, call it, 30 or 40 basis points. But the other thing to think about is that at the same time, we have quite a few investments in the second half related to new product launches that we're committed to making because, obviously, revenue growth is key to the financial thesis. So that's really why we give a range. So given the assumptions we've laid out, we're comfortable that we can hit that range.
And the other thing to think about is if you look at our R&D spend in the first half of the year, we're coming in at about 8.2%. Again, we'd like to be at the high end of that because we think innovation is super important. And given the pipeline that we have right now, I'd expect the R&D spend to be a little bit heavier in the back half as well.
That's helpful. And just capital allocation, there was speculation out there during the quarter that perhaps Alcon was looking at a larger transaction than we've historically seen it pursue. So maybe just your latest thoughts on the M&A market, is the priority still for some of the therapeutic assets that are out there? What are you looking at in med tech these days? And maybe just some high-level thoughts there.
Anthony, we're always looking at stuff in ophthalmology. If it's in eye care, you could count on us being somehow involved in looking at it. And so directionally, we still like to kind of technology-oriented bolt-on ideas that kind of range in that 50 to 500. Obviously, with the strength of our balance sheet, we can do any number of things.
But I think really, what we're trying to do is fill out white spaces. And so think glaucoma, think refractive, think contact lens technology, think pharmaceuticals. Those are areas where we have big growth opportunities and relatively low shares. So that's kind of the -- generally speaking, that's what we're looking at in that zone. Tim, do you want to add?
No. That's right.
Our next question comes from the line of Larry Biegelsen with Wells Fargo.
Just one quick one on timing, and I had one follow-up. So the AR-155 data and publication, when will we see that? And how far behind is the CS -- Unity CS from ACS?
Yes, Larry, thanks for the question. 512 data will likely be available at the American Academy of Ophthalmology coming up in, I think, October or November, it's somewhere in that zone. I think it's late October.
And then on the Unity VCS and CS, the CS will come pretty close, I think probably 6 months behind VCS, but plus or minus a bit on that, let's just say, because I'm not 100% sure.
David, just one follow-up. Just what have you guys said publicly on just phaco IOLs in general? I know Alcon had an internal program about 20 years ago that never -- I don't think it ever -- obviously wasn't launched, but what is your high-level view of just the phaco IOL market in general?
I think directionally, we think it's a good idea. I think the projects that have been out there before we were in it historically with cachet and we had some challenges with that. But I think directionally, we like the progress that's being made there. Again, LASIK is really a very, very good procedure. And I think directionally, we still sell a lot of -- sorry, a lot of lasers for that procedure.
So I think for high myopes, this is a really an appropriate kind of project. And I think for anybody who's kind of minus 6 and under, I think you'd be hard-pressed to go away from LASIK. So our view is that, that market doesn't really impact our refractive market. So our LASIK business is still really solid.
And what's really going on is I think the consumer is driving most of these decisions at this point. So strength of the consumer drives the strength of the refractive market, and there's a lot of up and down in that, but directionally, still an important market.
Our next question comes from the line of Michael Sarcone with Jefferies.
Just first, you talked about a broader Unity launch in the second quarter of 2025. Can you maybe just elaborate on what the goal posts or things you're looking to accomplish prior to the broader launch are?
Yes, Michael, one of the things that we have really been careful about with the Unity launch is to make sure that we really understand it, we understand all the corner cases that could come up, that we've looked at the preferences for software, the way in which it looks and feels, the way it gets set up. There's a lot of detail that is important to kind of fine-tune, I would say, once the product is approved.
And we have the good fortune of having two tremendously successful products out there with CENTURION and CONSTELLATION. And so when you go in and you say, hey, I'd like to get a premium for this product or this is a better product, it really has to be. And that's really what we're after right now, is making sure that we know how to describe that, know how -- we have the data to actually prove that. And those are the things that we're working on.
And so we're being patient with this for sure. I recognize that it was approved some time ago, but directionally, this is the way really great products get launched, I think.
Understood. That's helpful. And then just last question for me. On the next-gen PanOptix, I think you mentioned you're still deciding on launch timing over the next few months. Can you just elaborate on the factors that you're thinking about as you decide on the launch timing? And then any color on economics and if you may be able to take incremental pricing there?
Yes. I mean I think what we're trying to do right now is we have two different ideas. We're working on a product that already is kind of the gold standard in trifocal lenses that has a patented set point. Its optical design is particularly unique, and this is a really important product for us. So we're being very careful about how we work at improving it. And as we kind of get there we're looking at enhanced distance vision through improved contrast. We're looking at different ways to improve acuity at all ranges using different light distributions.
And so the optical designs we're getting feedback on now, we'll see which one really has the best chance of improving this. And when we get that information, again, as we do that through our testing work right now, we'll decide which product we want to launch and when that would be. So I would expect that in the front half of next year. But again, we'll see as we kind of go forward.
Got it. Any color on the potential economics there versus current gen?
Not yet. I mean, I think we really need to see kind of what this looks like.
Our next question comes from the line of Issie Kirby with Redburn Atlantic.
Firstly, on the Unity ramp. I guess if we look to CENTURION when it first launched, is there any reason why the Unity ramp should vary in terms of how quickly it penetrates your installed base versus CENTURION. And also any comments you have on the health of, I guess, the end purchaser for the Unity systems from a financial perspective? And then I have a follow-up on implants.
Yes. I mean I think directionally, that's not a bad way to kind of model it. I would think about CENTURION and the CONSTELLATION launches and really kind of think about the installed base. One of the reasons we gave you the installed base in the opening remarks was really to give you some sense of how big the market is.
And I think the other factor to think about is that these are generally 8 to 10 years of cycle time. So taking some division against the installed base and then some portion of additional market is probably the right way to think about it.
The rate will be probably a little bit more enthusiastic in the beginning because it usually is. And you can see that in probably the original CENTURION launch. And then again, it will slow down as you get a little bit more into a natural replacement cycle. So directionally, that's kind of the way to think about it.
And on the health of the end purchaser, again, I think there's room for these kind of capital choices, particularly if they create value. And so I think what we're really focused on is trying to establish in some of these preference testing, what is the actual duration and turnover of the ORs so that if the health authority wants to do more surgery and wants to shorten lines or wants to really benefit the time in the OR for somebody else, the utilization of that OR is much more efficient.
So that's what we're trying to figure out. And as we get to that, that will help, I think, drive real interest in moving these products forward.
That's great. And then just on the implantables business and where penetration has reached in some of your other markets like Japan and in some of these developed European markets. I guess, could you comment on where premium IOL penetration has reached and if you're seeing perhaps any of these markets reach a bit of a ceiling like perhaps we have in the U.S.
Yes. I'm unconvinced that there's a ceiling in the U.S. And then I think -- well, there's a ceiling, but it's considerably higher than where we are. I mean, I think historically, we've talked about willingness to pay. We've done every year. I think we do work with the consumer that if they really understand this choice, they're willing to pay, and it's about kind of usually in the mid-30s, plus or minus a little bit of the market that will do that. So I think there's plenty of room for the U.S. to grow from what was a 19.2% in the second quarter.
If you look around the world for AT-IOLs, the penetration globally is 15%, but obviously, that's a blend of the U.S. and the international markets. So international markets on penetration directionally are a good bit lower than that, somewhere in the 14.3% is what I've got internationally.
So I think what you'll see is continued steady growth of penetration internationally in particular, because Europe had a good quarter and moved quite a little bit. China is helping a lot as it kind of moves. Japan has been solid, Korea has been solid. So there's a lot of opportunity still out there to move penetration. And in most of those markets, we have growing share, not declining share in any way. And so if you get penetration and share moving, that helps us a lot.
Our next question comes from the line of Richard Felton with Goldman Sachs.
Great. My first question is on the deceleration in ocular health. I know you called out the impact from contact lens care in the quarter, but even adjusting for that, it seems like the rest of the business slowed a little bit in Q2. So is there any additional color you can share for that division? And specifically, were there any changes to the strong trends that you've seen for Systane?
No. Look, Systane is doing great. I mean it was another quarter of double-digit growth for Systane, Systane brand. The multi-dose preservative-free all around the world is doing quite well. And I do think that it will continue to.
I think the quarter is pretty normal. I think it was somewhere in the 5% kind of mid-single-digit range for the market. And as we kind of calculate out the CLC element of it, the kind of lens care element of it, I think that we were probably moving around 6%. So a little bit faster than the market as we saw it, but I think you should just think about it as another normal quarter.
Great. And then maybe one for Tim on free cash flow, a strong improvement in cash generation in H1. Is this sort of the new normal level of cash conversion that we should expect from Alcon moving forward?
Yes. Great question. Listen, we're very pleased with our free cash flow performance in the first half. And as we said, we would expect to see a significant increase year-over-year. So the one thing I would remind you of is we did have some unusual items that pressured free cash flow last year. So if you think about the legal settlement we had, if you think about the transformation costs and some of the higher level inventory that we purchased.
So I think you're going to see the step up this year. And then next year and beyond, you're going to see more of a normalized free cash flow progression that's sort of in line with our operating income. That's a good proxy for free cash flow, but we're pleased with our performance so far.
Our next question comes from the line of Tom Stephan with Stifel.
I think just one for me. David, I believe in the past, you've talked about the tunable accommodative offering potentially not requiring an incremental system for the post-op adjustments. And then maybe those could be done with the laser that, I guess, surgeons already have in their clinic. Is that still the thought or the strategy when it comes to your future tunable offering?
Yes. Interesting question, Tom. And I think we've got a lot of projects in the what I'd usually call, tunable and adjustable areas. We probably -- we have several projects, one of them I showed, I think at Capital Markets Day last time we did it, which was a laser adjustment, which we think is probably a better long-term idea than kind of adjusting material with UV light, which again, stray UV light and locking that in is still a little bit tricky.
So I think directionally, my view is that there'll be better ideas going forward for tuning and adjusting, whether that's accommodation, again, which we have a number of ideas around or tuning itself, we're working on several.
Our next question comes from the line of Steve Lichtman with Oppenheimer & Company.
David, as you gear toward Precision7 launch, any color you can provide on how you think you'll position it relative to TOTAL30 and how can help you expand your share in reusables? What does your market assessment say on the type of patient that you can target with P7?
Yes. P7 has been a really interesting product for us because we were unclear a little bit when we started down this path, how big this market might be. So I think you're asking an interesting question that we've spent some time on.
Precision7 is unique in that we've created a technology that allows water to move from the lens material to the surface for kind of 7 consecutive days. That keeps a fresh lens nearly every day, and that experience and that regimen of kind of every Sunday or every Monday or whatever day you want to choose of replacing it for the fresh lens seems to be very attractive to both patients and to the optometrists that we've talked to.
And right now, we've got a select group of key opinion leaders using this product. They've had it for, I guess, a couple of months while we were building inventory on it. And it seems to be quite pleasing to them. And so I think they like the intuitive nature of the replacement schedule, and they like the fact that they're moving down to a fresh lens a little more frequently. That just, I think, appeals to everybody.
And then again, the price point on this will fit in nicely between a DAILIES lens and a reusable lens. So what we're trying to do is squeeze a little bit of room in here. And I think there's a pretty good place for it. So we're -- we'll see how it plays. But I think directionally, the feedback early on has been very positive.
Great. And then just a follow-up. You mentioned earlier in the call, a strategic deal in China with OcuMension. It seems like an interesting new opportunity. Can you give a little more color on how you view that opportunity long term?
Well, we like the team that they've got there. I mean, they've built a business that has local manufacturing, local R&D, regulatory folks that really understand that market. For us to get in there, our assessment was it was going to take us a while to do that, and to build the capabilities that are really effective is expensive.
And we really thought through carefully how we wanted to think about China. And I think really, we decided that we had a lot of opportunity in surgical, a good bit of opportunity in Vision Care and that the eye drops business, we could find a partner for in a very efficient way. And so this is a move for efficiency for profitability, and I think capability, really, is the way to think about it.
Our final question comes from the line of Brett Fishbin with KeyBanc Capital Markets.
I think we hit on pretty much every business area, maybe except for consumables, so I'll ask about that one. Didn't really come up much on the call. Kind of like down the middle of this quarter, but a little bit lower than some of the recent high single-digit or double-digit quarters that you've put up over the past couple of years. So just curious if you're looking at this as a bit of a one-off quarter ebb and flow or if there was any type of headwinds that you could call out there?
Yes. Good question, Brett. I mean, look, I mean, I would think about it as we generally think about the market and consumables as quite correlated. So I think we always get a little bit of share and a little bit of price as we kind of trade people up into the newer consumables, newer disposables.
So think about the market overall as kind of 3% low single digits kind of number. And we grew, what, 5% in consumables. So I think that's the right way to think about it. It was just a little bit softer quarter around the world for procedural growth. And I think that's all there was to it.
Early in the year, in the first quarter, we had a really good procedural growth number. So again, I think you've got the -- you kind of got the gist of it.
All right. And then just last follow-up question on contact lenses. You guys keep calling out strength in torics and multifocals as one of the key drivers, which is great to see. Just -- I think it's interesting on the number of new launches in the DAILIES category with another one pretty recently. I'm curious just on how you're viewing competitive dynamics there and whether you expect like any change to the level of growth you've seen in some of your daily products for the rest of the year?
Yes. Good question. The specialty lenses really are where the action is right now. And I think that's -- that's good because they're -- again, I think they're underdeveloped in terms of categories. So I think people see correctly that the multifocal designs today are -- they're acceptable. They're pretty good, but they aren't perfect. There's a lot of work we're doing right now to kind of improve those multifocal designs.
Multifocal toric is very difficult to make, very expensive to make. And I think there are still some launches going on in that space, but relatively small market. We've spent a lot of time thinking about our toric design and I spoke to it in the prepared remarks, but I think directionally, we're very pleased with the uptake of our toric lenses and how the toric lenses halo the rest of the brand family.
So we've had a nice run with DAILIES, particularly with the torics. And so people with toric, DT1, from first images and buzzer are terrific lens movements for us. And I do think there'll be more competitive dynamic around it, but I think we may be in a very strong position given the design that we have for our toric, which is really unique.
Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Cravens for his final comments.
All Right. Well, thanks, everybody, again, for joining us this morning. If you have any follow-up questions for the media, reach out to our Corporate Communications department or from investors or analysts, certainly feel free to reach out to either Allen Trang or myself. Thanks again.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.