Alcon AG
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Alcon AG
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Hello, and welcome to the Alcon Fourth Quarter and Full Year 2021 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Karen King, Senior Vice President, Head of Global Corporate Affairs and Investor Relations. Please go ahead, Karen.
Welcome to Alcon's Fourth Quarter and Full Year 2021 Earnings Conference Call. Yesterday, we issued a press release, interim financial report and annual report as well as 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 vary materially from those expressed or implied in our forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ materially from those in our forward-looking statements are included in Alcon's annual report and our earnings press release and interim financial report on file with the Securities and Exchange Commission and available on the SEC's website at sec.gov. Non-IFRS financial measures used by the company may be calculated differently from, and therefore, may not be comparable to similarly titled measures used in other companies. These non-IFRS financial measures should be considered along with, but not as alternatives to the operating performance measures as prescribed per IFRS. Please see a reconciliation between our non-IFRS measures with directly comparable measures presented in accordance with IFRS in our fourth quarter and full year earnings presentation which can be found on our Investor Relations website. As a reminder, for discussion purposes, we're providing comparisons of 2021 versus 2019, unless otherwise noted as we believe this is more operationally meaningful since our results were impacted by the pandemic in 2020. You will find a summary of results comparing 2021, 2020 and 2019 in our slide presentation and a comparison of 2021 versus 2020 in our press release and financial statements. This is the last quarter where we'll provide comparisons against 2019. Starting in the first quarter of 2022, we will resume year-over-year comparisons in all our earnings materials. As usual, our comments on growth are expressed in constant currency. Before I turn the call over to David, I want to introduce you to Alcon's new VP and Head of Investor Relations, Dan Cravens, who started last week and is joining us on today's call. We're very excited to have Dan on Board. He brings deep investor relations and financial experience to Alcon. He will be your day-to-day contact once he gets up to speed and will be introducing our future earnings calls, starting with the first quarter of 2022. With that, I'll now turn the call over to David.
Welcome to Alcon's Fourth Quarter and Full Year 2021 Earnings Call. Let me begin by recapping highlights from 2021 in recent months, including market dynamics and key product launches. After my comments, Tim will discuss our fourth quarter and full year performance and then give some color on 2022. Then I'll wrap up with some closing remarks, and we'll open the line for Q&A.2021 was an exceptional year for Alcon. We exited the year with fourth quarter sales of $2.1 billion and full year sales of $8.2 billion, which is at the high end of our sales guidance. This is a result of strong demand for key products and new product launches as well as solid commercial execution. Core operating margin was 16.3% for the quarter and 17.6% for the full year, right in line with our guidance. And finally, core diluted EPS for the quarter was $0.56 and $2.15 for the full year. Additionally, despite our continued investments, we generated $645 million in free cash flow for the year. So that reflect on full year of 2021, I'm extremely proud of all that we've accomplished. First, despite the ongoing pandemic and broader economic pressures, our full year '21 results demonstrate the resilience of our business, the strength of our innovation, the proficiency of our commercial teams and our long-term commitment to focus on growth. Since spin, we've aspired to grow above the market, driven by delivering great products that address key customer needs. In 2021, we did exactly that by growing share and in some cases, growing the market, our product flow and mix has resulted in double-digit revenue growth in both our Surgical and Vision Care franchises, which drove core operating leverage and margin expansion. Second, we completed our separation, which was a major milestone as a new independent company. This has allowed us to intensify our focus on innovating products that are critical to driving top line growth. Now third, we're seeing favorable returns on our investments. Our investments in transformation, manufacturing and innovation. Our transformation initiatives continue to optimize our cost structure, creating efficiencies and savings that we are reinvesting in innovation to support new product launches. Our investments in our new contact lens manufacturing platform has given us the flexibility to launch a host of new products over the past 2 years, all of which are well positioned to capture share. And our commitment to funding our innovation engine is producing a strong pipeline of new products, which we developed with our customers in mind and are addressing unmet patient needs. Now I'll spend a few minutes updating you on some of those innovations. In Surgical, we remain the market leaders in presbyopia correcting IOLs on the strength of both PanOptix and Vivity. And penetration of advanced technology lenses continues to increase. Vivity's nondefractive properties, ease of use and consistency of surgical outcomes make it particularly appealing. Existing surgeons are increasing their use of advanced technologies upgrading patients from a monofocal toric to a multifocal toric or using Vivity on patients who they would have previously excluded from an AT-IOL due to a prior pathology or concerns with halos and glare. We're also excited to add Hydrus Microstent to our portfolio of implantable devices. Hydrus represents an exciting opportunity in the large and fast-growing mild-to-moderate glaucoma market. Physicians appreciate the strong and compelling safety and efficacy data from the pivotal trial, showing that 66% of patients were medication-free at 5 years and a 61% had a reduced risk of invasive secondary surgeries compared to cataract surgery alone. Now in equipment, we continue to see strong reception for our suite of cataract equipment, including our phaco equipment, microscopes and ARGOS biometer. We're also piloting our SMARTCataract Planner, which is part of our broader digital ecosystem with select customers in the United States. Turning to Vision Care. We continue to see strong demand for Precision1 and Precision1 for Astigmatism which are our newest contact lenses for the mainstream market. And simultaneously, we're also building out our total brand in the premium segment. We announced the broad commercial launch of Dailies Total1 for astigmatism in the United States, which has been eagerly anticipated by eye care professionals and completes our Dailies Total1 portfolio. We also announced the broad commercial launch of TOTAL30 Sphere in the U.S. and in some European markets. This is the first and only monthly contact lens leveraging the water gradient technology first introduced on Dailies Total1. This lens addresses the large $4 billion reusable market is the first meaningful innovation into this market in years. Now finally, in ocular health, we were pleased to announce the recent launch of SYSTANE Complete in a multi-dose preservative-free format, our third multi-dose preservative-free offering in the past 18 months. During the second half of '21, we built a U.S. sales force dedicated to delivering eye drops into the ophthalmic channel. This sales force is now in place and has a robust portfolio to sell, including Simbrinza glaucoma drops, our sustained family of dry eye products and our Pataday allergy drops. Now moving to our end markets by franchise. In Surgical, global cataract procedures in the fourth quarter were down low single digits over 2019. However, if you exclude India, which has been slower to recover from the pandemic, global procedures in the fourth quarter were up low to mid-single digits versus 2019. Growth in the U.S. market remained relatively consistent with prior quarter. Growth in international markets were still slower to recover and saw a solid sequential improvement over the third quarter. Against this backdrop, our implantables business continued to outpace the market, driven by our strong AT-IOL performance. In Vision Care, the contact lens market in the fourth quarter broadly returned to the 2019 levels and grew high single digits, led by the U.S. Growth rates in international markets are still trailing behind the U.S. due to varied paces of market recovery. However, our contact lenses significantly outpaced the market, driven by strong performance of Precision1 and Precision1 for Astigmatism. Our full year '21 performance demonstrates the durability of our markets and the resilience of our business, all of which are underpinned by favorable macro trends. Our strategy of investing behind markets with high-growth opportunities or high share opportunities is playing out nicely. And we are creating innovative products that are addressing customer needs and using the expertise of our commercial organization to successfully execute on our new product launches. As a result, we're growing faster than markets around the world even as they continue to recover. With that, let me pass it to Tim who'll take you through our financial results.
Thanks, David. In the fourth quarter, we saw sales of $2.1 billion, up 15% versus 2019, driven by 15% growth in Surgical and 13% growth in Vision Care. Full year sales were $8.2 billion, up 12% versus 2019. Implantable sales were $416 million in the fourth quarter, an increase of 27% versus 2019. As David mentioned, our PC-IOL portfolio continues to lead the market, and we saw strong AT-IOL adoption trends continue through the fourth quarter. On a full year basis, implantable sales were up 27% versus 2019. Consumable sales of $639 million in the fourth quarter, increased by 8% versus 2019, with sales growth mainly driven by market recovery. On a full year basis, consumable sales were up 3% versus 2019. Equipment and other sales were $204 million in the quarter, up 21% versus 2019. Approximately 2/3 of the growth was due to strong sales of cataract equipment, which included competitive conversions, upgrades from older to newer generation of equipment and surgeons who are expanding their ORs to accommodate patient flow. On a full year basis, equipment and other sales were up 21% versus 2019. In Vision Care, fourth quarter sales of $875 million, grew 13% versus 2019. Contact lens sales were $533 million in the quarter, up 16% versus 2019. We were very pleased with the strong interest in our daily lenses, including Precision1 and Precision1 for Astigmatism as well as continued growth from Dailies Total1. TOTAL30, our new premium SiHy reusable lens, is also starting to take foothold in the United States and Europe, where customer feedback has been very positive. On a full year basis, contact lens sales were up 7% versus 2019. Ocular health sales were $342 million in the quarter, an increase of 10% versus 2019. This is primarily attributable to our sustained family of dry eye products, which saw another quarter of double-digit growth, including our recently launched multi-dose preservative-free formats. We also saw solid contributions from Pataday allergy drops and Simbrinza glaucoma drops, which had no comparable sales in 2019. On a full year basis, Ocular health sales were up 14% versus 2019. Fourth quarter core gross margin was 62.8%, about 60 basis points ahead of 2019, mainly driven by higher sales and mix. For the full year, core gross margin was 63.4%, in line with 2019. Core operating margin was 16.3% in the quarter. In line with our comments during our last earnings call, we increased spending in marketing and sales to support new product launches and key products. For the full year, core operating margin was 17.6%, an increase of 70 basis points versus 2019. The core effective tax rate was 10.4% in the quarter. The favorable rate is primarily due to the mix of pretax income across tax jurisdictions and a recently concluded tax deduction of statutory expense in Switzerland. For the full year, the core effective tax rate was 17%. Core diluted earnings per share in the fourth quarter of 2021 was $0.56, up $0.11 versus the fourth quarter of 2019. This was driven by strong revenue growth and a favorable core tax rate. For the full year, core diluted earnings per share was $2.15, up $0.26 versus 2019. Now I'll touch on a couple of cash flow and balance sheet items. Free cash flow in 2021 was $645 million compared to $367 million for 2019. Higher core operating income and lower separation spend were partially offset by higher capital expenditures and increases in inventory, primarily to support new product launches. Capital expenditures were $700 million for the year, up from $553 million in 2019, primarily due to the timing of spend for our contact lens manufacturing expansion. Given the strong reception to our new contact lenses, we are increasing the number of lines in our new manufacturing platform to meet future demand. As a result, we expect capital expenditure this year to remain relatively consistent to full year 2021 on an absolute basis. Transformation costs were $28 million for the fourth quarter and $68 million for the full year. Life-to-date transformation costs were $169 million, and we have recognized close to $200 million of cost savings, which has been reinvested back into the business to support product launches and R&D. We expect to substantially conclude the transformation program by the end of 2023. To summarize the year, despite the headwinds we face, we feel very good about our achievements in 2021. All of our major initiatives remain on track. We completed separation, our advancing our transformation and our new manufacturing platform is delivering innovative products that are experiencing high demand. Our products are growing ahead of market, and we have a robust pipeline for future growth. Now turning to 2022 guidance. Starting next year, we will revert to a year-over-year comparison of our results aligned with our press release and interim financials. So on our next earnings call, we will compare first quarter of 2022 with first quarter of 2021. While we're monitoring the variance of COVID-19 and most recently, Omicron with the improved adoption of safety measures and the availability of vaccines, we are encouraged to see solid return of demand for surgical procedures in eye care. Our 2022 guidance further assumes that global markets grow over 2021, in line with historical averages, the impact from inflation moderates in the second half of the year and the U.S. dollar holds steady at mid-January foreign exchange rates. Accordingly, we expect 2022 net sales of $8.7 billion to $8.9 billion, which corresponds to 7% to 9% constant currency growth over 2021. We expect to see approximately 100 basis points of pressure from foreign currency. Turning now to expenses. We're going to continue to invest in innovation and expect core research and development expense to come in around the midpoint of our previous range, which was 7% to 9% of sales. Based on our sales trajectory, we expect operating leverage to drive a core operating margin of 18% to 19%. We continue to see inflationary headwinds related to raw materials, freight and labor. And while we are actively working to mitigate these challenges through selective price increases and productivity initiatives, we have built in approximately 40 basis points of incremental margin pressure in our 2022 guidance. Moving down the income statement. We expect interest and other financial expense to increase to a range of $180 million to $190 million, given the current environment on interest rates and foreign exchange. We also project our core effective tax rate to be in the range of 17% to 19%. Based on this, we project core diluted earnings per share in the range of $2.35 to $2.45, which corresponds to 13% to 18% constant currency growth over 2021. We expect to see approximately 400 basis points of pressure from foreign currency. Before turning back to David, I'm also pleased to report that our Board of Directors is proposing a dividend of CHF 0.20 per share, which is in line with our payout policy of 10% of previous year core net income, pending shareholder approval. Shareholders will vote on this proposal at our upcoming Annual General Meeting on April 27. Now I'll hand it over to David for some closing remarks.
Thanks, Tim. In closing, we're very pleased with our full year '21 results. We demonstrated the resilience of our business despite markets still recovering from COVID-19. We completed our separation on time and on budget. We progressed with our transformation program, optimizing our overall cost profile and reinvesting savings into new product launches in R&D. We continue to invest in research and development, securing a robust pipeline that will drive future growth. We installed lines aligned with demand on our new contact lens manufacturing platform. We announced 2 deals that enhance our glaucoma portfolio, one which allowed us to build a broad portfolio of eyedrops for the ophthalmic channel and the other giving us a reentry into minimally invasive glaucoma surgery. We're launching innovative products, which are gaining share and increasing adoption, driving double-digit growth across both our Surgical and our Vision Care franchises, and importantly, we're creating shareholder value. So as we enter 2022, we have a substantial momentum and believe that we can continue to outpace the market with the full year benefit of our innovative products. I want to thank our 24,000-plus associates for all their hard work and dedication to helping everyone around the world see brilliantly. With that, let's open up the line for Q&A.
[Operator Instructions]Our first question today is coming from Zach Weiner from Jefferies.
Congrats on a good quarter. Just one on the AT-IOL space. In the past, you've called out the share that you've held from the AT-IOL space. Can you give an update on that? And how PanOptix performed in the quarter?
Yes, Zach, we had a good quarter with both PanOptix and Vivity. The total share, I think, came down a point or 2 in the quarter. I can't remember exactly the number, but it's right -- it's running right around 80 in the United States. And in the international market, I think it's actually up. I'd have to go check that number and get back to you. But directionally, I'd say we're holding share from a very high position. So really faring quite well against the new product flow that's come in.
Got it. And then one on the contact lens manufacturing upgrades. How many lines were put in place during 2021? And what is the expected margin benefit as we move forward here? Can you just talk about that?
Yes. We've shied away from giving a lot of detail on the number of lines because it speaks to capacity, and we're trying to keep that a little bit to ourselves. But I think in terms of margin progression, Tim, why don't you grab that one?
Yes. I think what you'll see is we had another good year of investments in putting in lines. We will put in more lines this year. So that will continue to put on sort of near-term pressure on the Vision Care gross margins because, again, it takes roughly 18 to 24 months for those to get up to optimal capacity. So I would just think about it as over the next couple of years in the Vision Care business, we'll continue to get operating leverage as we've done in the past, and then that gross margin expansion will come in the latter part of the plan.
I think what we're excited about there is a 16% growth in the quarter on contact lenses. And again, I think we're seeing tremendous response to the choice of products we've decided to build on these lines. And so obviously, we're excited about that. We're going to continue to invest behind it.
Our next question is coming from Veronika Dubajova from Goldman Sachs.
I want to start kind of big picture around the guidance, obviously, and 2 part, if that's all right. One, just would love to understand, David, what you think the big variables are in terms of ending up at 7% or 9% in terms of the growth rate? And where you sort of see the biggest upside opportunity? And then maybe challenge you a little bit. I noticed that you are assuming historical market growth in 2022. Clearly, not every single market had recovered in the course of 2021. So just maybe talk through the rationale for putting that is a baseline at this stage.
Well, I think you've nailed the biggest variable, which is the market. And so I think it's hard to know exactly what's going to happen. And so perhaps we are a bit on the conservative side with mid-single digits. But I think the view that we have is that there's going to be some wraparound on some softer quarters. But that again, we're not all the way back yet either. So if you look at the market in the international markets, in particular, India and a number of other big markets, Japan, are really not back to normal. It's going to take them a little while to get there. And again, I don't know what that rate is. Now Europe bounced back nicely, I think, in the third quarter for Surgical, which was very exciting. And Vision Care, surprisingly strong in the fourth quarter, up low single digits, which again, we hadn't seen or expected. But -- so I think kind of natural growth rate, if we can get it, is a pretty good, safe place to be, and we're going to do well from there. Could it be higher than that? We'll see. But we also don't know that there isn't going to be another variant, there isn't going to be some delay in markets coming back, and I would say particularly our international side.
Understood. That's helpful. And then quickly on contact lenses, just if you can clarify any stocking or destocking that happened in the fourth quarter that we should bear in mind? And I know you've talked about hoping to put through some price increases on the CL side to help you compensate for some of the raw material increases that you're seeing. Just would love to get an update on how that's gone and whether you've been able to realize some tailwinds there?
Yes. On the stock, there was some stocking by some of our competitors, as I understand it. We didn't do any, but I would say that, that had some effect on the market. It was quite a robust fourth quarter contact lens market. I think probably a little bit of that is some competitive activity. On the pricing piece, we have put out a price increase late last year that goes into effect in February. So it's just an effect now. And we're still seeing how that takes. To be honest, we're waiting to see the consumer reaction to that, and we have a number of things that go on. As you know, we have a direct price. Of course, we have a discount to the -- to some of the chains and/or customers. And then, of course, there's always the consumer rebate piece that is in play here as well. So we're toggling all of those little EQ switches, if you will, to see if we can get the right mix to kind of maximize return here. But that's really -- we'll be doing that probably -- we'll be filling with that probably through the rest of this quarter.
Our next question today is coming from Larry Biegelsen from Wells Fargo.
Congrats to a strong end to the year. One on the sales and EPS cadence for '22 and one on the long-term operating margin. Maybe, Tim, can you talk about the cadence for sales and EPS in 2022? Q1 sales are usually down low single digits. Is that your expectation given the Omicron surge, and I'm talking quarter-over-quarter? And how does inflation and FX play into the cadence you're thinking about? And I have one follow-up.
Yes, sure. So I would just say this, I think from a -- let's start with revenue. From a revenue perspective, as you said, Q1 and Q3 tend to be a little lower for us in general. Q2 and Q4 a little bit higher. If you think about Q2 allergy season, as an example Q4, hospitals are working on their capital budgets, annual copays are being utilized by customers. So I would expect to see a similar type of profile in '22 as compared to '21. .SG&A is a little bit trickier. We had a low spend in Q1 of last year. We weren't quite sure how the markets were coming back. So we are a little bit cautious there.And then I would just keep in mind, Q2, as you know, typically, particularly on the Vision Care side, advertising, promo is a little bit higher as we get ready for back to school and whatnot. So SG&A, I think, is a little bit trickier. As far as inflation, you'll see more inflationary impact, which obviously will impact your EPS in the first half of next year. Again, our assumption is that eases in the second half, we look at indices and we look at our inventory positions and what have you to come up with that assumption. But that's the assumption that we've assumed as we talked about in the prepared remarks. And then FX, you'll see more pressure in FX in the first half of next year -- of this year as compared to the second half. And if you just go back, the dollar really moved in kind of the summer time frame in 2021. So that's why the profile looks like it does. So those are the things I think about as you're trying to phase this out.
Very helpful. And another one for you, Tim. You're guiding to about 100 basis points of operating margin improvement at the midpoint. I believe, and that's absorbing an FX headwind and an inflation headwind. How are you feeling about the low 20% operating margin goal in 2023 that you laid out at the Capital Markets Day? That's a pretty big jump from, call it, 18.5% at the midpoint of the 2022 guide.
Yes, Larry, we still feel very good about the goal in 2023. And I think it's going to be a lot of the same. I think we're going to continue -- as we continue to grow revenue, which we expect to do, we're going to continue to get operating leverage. And then I think in 2023, as compared to '22, we should get a little bit of gross margin lift. Again, we've got some inflationary pressure and other things going on this year, that should get a little bit better. So I think it's more of the same to be quite frank with you.
Our next question today is coming from Matthew Mishan from KeyBanc Capital Markets..
I'm just trying to understand the organic component of the guidance. We're estimating about 100 basis points of acquisitions underlying the 7% to 9%, which means organic with at least 6% to 8%. First question is, is that math correct? And then just the second question is, how do you put the 6% to 8% growth in the context of your longer term 4% to 6% mid-single digit market -- 4% to 6% guidance? What are the tailwinds driving above-average growth this year? And maybe what are some of the headwinds you see moving forward that bring that back down?
Let me take the second part of that first, and then I'll let you guys take the year-over-year comparison without acquisitions. I think on the sales growth, one of the things to think about is, of course, that the markets haven't fully recovered and you're wrapping around some COVID-affected market. So you we're talking about directionally a mid-single-digit market growth for this year. That's a little bit hotter than what we would typically call the surgical procedures market, for example. We've typically said that surgical procedure markets kind of runs around 3%-ish. So we're seeing a hotter-than-expected market. That's what's driving up some of our near-term growth in this year. And so that will settle back, I suspect, over time, and we'll just have to see how and when that happens. And then additionally, you've got some unique characteristics like the wrap around on some of the products that we've put in there that are new and that didn't have comparators. So on the -- do you want to take the...
Yes. I mean the organic piece, we have it a little bit lower than the 1 point, but you're in the right zip code.
Our next question is coming from Jeff Johnson from Baird.
David, especially you talked about the cataract market or the surgical market maybe being a little hotter this year than the normalized 3%. I would love to get your opinion on what you think the contact lens market might do this year? Historically, we think of that 4% to 6%, but I know new patient starts have been compressed or depressed here for the last year or 2. So just from a market standpoint, and I understand you obviously have some product launch tailwinds. But how are you thinking about contact lens market this year?
Well, look, I mean, I think what we were excited about was to see the fourth quarter come back to 2019 levels all in. So that was -- we had said that earlier in the year, but then I think we hedged a little bit in the last call, thinking that it might take into the middle of this year even or maybe end of this quarter before we saw it. We actually did see a return to 2019 levels at the end of last year with international making a pretty big move sequentially from third quarter to fourth quarter. So I think our view kind of directionally going forward is that this is -- we see the contact lens market kind of up mid-single digits versus '21. But we'll have to see how that takes shape exactly. Our belief right now is that there is enough kind of recovery of foot traffic in optometric visits that will drive the market, but also, patients have found ways now to get existing -- existing patients have found ways to get lenses that are different than what they used to do. They used to go every 90 days in and pick them up from the dock and drive themselves over to that office to do that. People -- offices are sending them, chains have refill programs, there's the online piece. There's a lot of existing business now that is being fulfilled in other ways, and I think that's actually been very good for the market. That leaves more room for patient visits for new and switch patients. And so I think even though we see today, for example, still visits down relative to 2019, what we believe right now is that that's not holding the market back, but the mix of what docs are seeing tends to be more productive. So it's not just an annual visit where you get the same lens back. If you're not having any trouble, they're going to bounce through that pretty quickly, and I think that's giving us a little bit more room to grow this market. So I think our view is mid-single digits would be a pretty good number. That's a pretty traditional number, again, to your point, 4% to 6%. That's probably where we see it. And could it be more than that? Yes. It could be less than that? Yes. But it seems like a pretty safe number for us for right now.
That's helpful. And then just as a follow-up. On pricing, you talked about some things you're trying to do in contact lenses and fiddling around with things this quarter. How about pricing across the rest of the business on equipment, consumables, ocular health? Is there any pricing power there? And as we think just to cross kind of the blended portfolio this year, in a given year, what is normally the price tailwind to your growth rate in this year? How do you think that might vary kind of again across the whole business?
Yes. I mean I have to do that pretty qualitatively because it's a broad question. So let me directionally try and answer it. And I think, historically, our Surgical business doesn't have a lot of price benefit to it. In fact, it's the opposite. It has a bit of price erosion that we continuously work against. Most countries lower prices. Most contracts, as they come into us have, an expectation that the prices will come down a little bit. What we have done to parry that is introduce new products. And so what has hit -- typically, we would describe as price benefit is usually mix. And so we'll see a 1% or 2% price decrease every year. We'll get about a 1% or 2% mix lift from introducing new material, new injector, new something. And because of the efficiency that product creates or the outcome that product creates, patients and docs are willing to pay for it. So that's typically how the Surgical business has run. And I don't see that really changing much because most of that business is under a contract of some kind, and those contracts typically are beneficial to the customers. So price increases in certain business are more difficult in many ways. On the Vision Care side, I do think we're going to see some at the consumer level that are acceptable. There hasn't been a lot historically. I don't know -- I can't remember the last time we took price in contact lens, not since I've been here, so that's at least 5 years. And it's been a surprise in many ways at the fact that it never did because many of our input prices have gone up during that stretch. Now this obvious bump up quickly in price or on prices for us for our resins and for inputs around materials and labor, these have all been -- we've been trying to figure out how to offset it. We're not going to know until it gets to the consumer, and we're not going to really know until we see what they do about it. But we've passed through as much as we can we think is reasonable, and we'll be thoughtful about watching demand as it comes out. But that was an across the line contact lens view for us. And then again, we put a little bit of price depending on which market you're in on our eye drops business as well but not a lot. So that's kind of the landscape, if you will. And I think probably as we get further into the year, we can give a little bit better insight as to how that's taking shape relative to volumes.
Our next question today is coming from Cecilia Furlong from Morgan Stanley.
I wanted to ask about Vivity. Specifically, if you could walk through what you've seen from an adoption standpoint in international markets as well as your outlook for further international market expansion in 2022?
Yes. Well, we're obviously very pleased with the uptake on Vivity. It's -- PanOptix has been a terrific run for us, and it continues to be, I think, the PC-IOL of choice. Vivity has added a lot to our discussion. And I think what's been really unique about Vivity is for physicians who really have been concerned about halos and glare or who've had problems with it in the past, this is a very monofocal-like lens. It doesn't take a lot more to put this lens in than it would a normal amount of focal lens. So surgeons are very comfortable and confident with this lens. And it gives a very, very good intermediate vision, and about half the patients are getting reading without glasses. So this is a kind of a no-risk win for a lot of people, and that's, I think, what's been appealing about it for -- maybe for surgeons who are dabbling in the PC-IOL business or have been concerned about it in the past. And so what we've seen is the first place that seems to do well is in existing PC-IOL surgeons who, for whatever reasons, have excluded patients. A lot of times, they'll exclude patients with other pathologies like a retinal disease or anything that you have to see through to the back of the eye on because the diffractive lenses make that a little bit difficult. So this is a really good choice for them. So that adds some patients back into their practice, they're used to using it. As they've come along with that, they've also begun to think about if they were excluding patients who they thought were unlikely to tolerate kind of halos and glare, they've added those patients in. So it's been expansive for our existing surgeons. And now as we move kind of out from there, we begin to add new surgeons in, and I think that's really what our intention is going forward is to try and bring more people into Vivity that haven't really been in the PC-IOL world in the past. And so -- what you're going to see, I think, going forward is us focusing on penetration of PC-IOLs and using Vivity largely as that entry point because I think it gives us a relatively safe way for people to start down this path. And then again, PanOptix in the end is a perfect complement once you get comfortable with Vivity and you want to continue to move on. But Vivity is a natural for those patients who are -- docs are comfortable putting in a monofocal toric, well, than put in Vivity toric because, of course, it's just really not any different in terms of your mechanism or process and you get a lot better reading and intermediate vision. So that's been our sweet spot for Vivity internationally. And we'll just see. I think the international market is moving nicely, similar to United States in penetration, not quite as fast, but both markets have been moving up in penetration at a higher than historical average.
Great. And I wanted to ask on TOTAL30 as well. If you could just walk through what you've seen just initial days post launch and then your expectations for share capture in that segment of the market going forward?
Yes, Early days on T30 are terrific. I mean this -- one of the things that we kind of maybe underestimated about T30 was how much good news in an old market can matter. And I think we -- when we go and you talk about reusable lenses, it's a flat market directionally, but it's also a $4 billion market. And so about every other patient that docs are starting is going into a reusable lens. So when you go in and you say, "Hey, look, we've got -- we figured out how to put our water gradient technology on to a reusable lens, docs really know that technology, and they really enjoy it from Total1. And so when we say, well, you can wear this TOTAL30 lens and feel like on day 30, it's the same as in day 1, that's pretty impressive to both patients and the docs. And so we've had a really positive response to it because the optometrists know the technology. They're surprised we can do it for 30 days. They've tried it, and I think the trials are working out quite well. And so we're optimistic about what this can do. We have a low share in this category. In our minds, it's a mid-teens share. And so the way we think about it, there is a significant upside to the share potential in a market that's really been underserved technology wise. So we feel pretty good about what the potential of this is and how it's moving so far.
Our next question today is coming from Chris Cooley from Stephens.
Congratulations again on a solid year in a tough environment. David, if I may, just for my first question, could you just help us think a little bit bigger picture here, as you talk about the margin goal, in a prior question, you guys alluded that you felt good about that low 20s hot margin goal in '23. I'm just curious, how are you thinking about new technologies in this space and specifically that required investment? How much of that is implicit and you're getting to that low 20s op margin goal? Or are you really thinking about getting to that level more so on just absorption of capacity, reduction in inflationary headwinds and stronger operating volumes? And I just got a quick follow-up.
Yes, Chris, I mean, a little bit on -- we get a little bit of benefit from the last bit of this. But really, the thesis that we have on getting really into the low 20s is entirely consistent with where we started, which was -- we're going to grow our way there. And it is mostly operating leverage. I think it's probably 80% operating leverage and maybe 20% improvement in gross margin. So I think what you're going to see is that new technologies and new products are exactly the way we get there. What we found right now is that we've got the right amount of money moving into the P&L, and our transformation has allowed us to enrich without necessarily increasing the productivity of the spend that we have. So remember that we've moved almost $200 million out of what I'd loosely call back office and less productive uses and into R&D and commercial support. So again, we're finding that our S&M spend, for example, is able to increase without necessarily increasing our total functional costs. And so -- at the same rate. So we think we can hold total functional costs below the growth of the revenue line. And that is, in essence, how we're getting the op margin goal to the largest extent. So it does lean on sales growth, and that's partly why we're positive around the forecast we're giving right now. I think as we think about 7% to 9% this year and the return of markets and our market position, we come in with a lot of momentum right now around some really good products. We probably have 5 products that are going to get a full year effect of growth this year, and we're pretty excited about that. I think that's what we had intended to do. And it is indeed what we find ourselves in the position to do now for the next 24 months is really write a lot of really great products through the next 24 months.
I appreciate that color. And then just as a quick follow-on to that, you obviously have a strong pipeline, but there's a tremendous amount of innovation in the ophthalmic space right now as well. And I noted in your press release this last night, you called out $1 billion in capacity. So if we think about future M&A, you had some Simbrinza as a product. You've had Ivantis with Hydrus, all above corporate gross margin-type products with good growth profiles. Should we continue to think about maybe more of an ophthalmic -- I'm sorry, a pharmaceutical bent, again, higher-type margin profile business that drives better cash? Or are you looking for more kind of emerging technologies as you go forward that you can leverage the existing sales and marketing infrastructure?
Yes. Well, a little bit of both, Chris. And let me just say it this way. I think that as we reflect on where we are, we feel very comfortable that we have the right investment organically in R&D and the right product flow and pipeline to get us to our goals without doing anything externally. I would say, though, that we do have capacity, and we have every intention of using the -- that capacity to continue to build our business. And so to the extent that we see opportunities, we're going to do them. The thing I would mention though is that we've been pretty disciplined really since we came out about what we looked at and what we chose to do. And I do think that you should consider that we're likely to stay pretty close. We're going to be in eye care, we're going to look for white spaces, we're going to look for opportunities like Hydrus or other technologies that could enhance our long-term picture. And we will look at pharma, but it's not a high need thing. We're going to do it as we see fit and as we can do a good job of bringing in value. We have the capacity at this point to take on more pharma. So if you're asking part of that question, I think, was is it going to cost us more to put people on the ground to kind of support higher growth? And I think the answer to my way of thinking is in the United States, we've already done that by getting this ophthalmic eyedrops group out there, selling Simbrinza, selling our Systane multi-dose preservative-free products and selling Pataday. Like any force, we can then rotate those products as they mature. There won't be incremental costs in the way at which you'd be starting up something. So I feel good about our platform right now, having already established it. If we were to bring something into the pharma space, I think that group could handle it. And then going forward, we obviously have a lot of capacity to bring on devices in either Vision Care or Surgical. So I don't see a need to necessarily add a bunch there.
Our next question today is coming from Chris Pasquale from Guggenheim.
A couple of model detailed questions for Tim. At the Capital Markets Day last year, you talked about a 20% tax rate through the planning period came in lower in '21. Now we're looking at a high-teens number for '22. Can you go into more detail on why it's moving lower and whether this new range is sustainable? .
Yes. So during the Capital Markets Day, to your point, we were at 20%. The biggest change there are really 2 things. One is this tax agreement that we just settled in Q4 in Switzerland. That drives a favorable rate benefit, and that does carry forward to next year. And then we had a geographical -- a favorable geographical mix of our profits in 2021. So going forward, I would think of it as 18 -- I take the midpoint of our range. I'm a big fan of the midpoint. So we guided 17% to 19%. And the reason it goes up are really twofold. One is, we had some benefits related to inventory buildups in our affiliates in 2021. We haven't anticipated that, that carries forward. And then there may be a potential one-off negative impact linked to a tax agreement that we're working with between the U.S. and Switzerland. So that would be a onetime item, but it would occur in 2022. We assume that happens. So again, I think the short story is, I take the midpoint of that 17% to 19%.
Okay. And then the $180 million to $190 million in interest and other expense, does that include the above-the-line other expense? Or is that all below the line? Just trying to figure out whether the comparable in '21 is 162 or 194?
It'd be comparable to your 162. And there's two things that are in there. We've baked in some rate increases given the environment. And then our hedging costs are in that line as well. And we've anticipated some higher hedging costs as we grow in some of the markets that are a little bit more challenging if you think about Russia, if you think about Argentina and places like that.
Our next question today is coming from Daniel Buchta from ZKB.
The first one maybe on Ivantis, which is closed now since early this year. I mean, now since you have detailed insights, I mean, can you share a little bit more light on how you see this acquisition? I mean I assume because you know that business from the former CyPass product you had, quite meaningful sales synergies. And with that, say, for example, until 2025, I mean, how meaningful could that business become? And then the second question maybe on consumer openness or willingness to consider switching contact lenses from one to another and pay maybe more for innovation like for Precision1. How do you see this developing now into 2022 and maybe also the years beyond since we hopefully left COVID-19 behind?
Sure. Let me start with Ivantis. We are very excited about the Ivantis product and the acquisition we made. We think we have added something that was really well timed for us and for everybody. One of the exciting timings of this was the publication of their 5-year continuous follow-up randomized clinical trial. The reason this matters is because I think that it is very difficult sometimes to convince folks of the efficacy and safety of products, and we have been involved in this market before, and that was one of the core ideas. What this data basically says, as I said in my opening remarks, is that more than 60% of patients -- 65% of patients are medication-free at 5 years. That's a monstrously beneficial thing for patients to not have to put in eye drops. It's economically beneficial for the systems that are involved in it. And it creates the kind of health economics data that says this is a good thing for patients, it's a good thing for the systems. And people should be doing this if you have glaucoma in that kind of mild-to-moderate frame. I think what we also wanted to say was that same data coming out of there talks to the fact that these patients, if you put a stent in the eye, do not go on to have a second surgery. And if you think about what that means, the untreated patients were going on to have a surgery 60-plus percent of the time as opposed to the stent patients. And that's another surgery for the patient, it's cost of the system. Again, it's a lot of things that we had hoped to see came through this data. And I think people, as they begin to really understand that data and we'll be at the Nashville American Glaucoma Society Meeting next week, really trying to help people grab a hold of this thing and understand both the economics of it and the patient impacts of this. And so we think this is a big deal, and we think the market is -- market is $500 million right now. We start into this with a $60 million head start, and we're just getting started. So I think the opportunity here is to see this market grow nicely. It's historically grown in the low teens. I think obviously, some of the reimbursement issues that finished out late last year, will dampen that growth a little bit. But we expect to see meaningful growth on a relatively good-sized market, where we have a starting position. And so you'll have to do your own thinking about how well we can do. But I'm optimistic about the impact of that product on the -- frankly, on the well-being of patients out there with glaucoma. Secondly, on the consumer switch piece, I don't know that there's a big change coming off of COVID around switching. If you're in a lens that you like and you don't have any trouble, the fact of the matter is most optometrists are not going to switch you. They're going to write you another prescription, send you on your way and get on to doing something else. So I think that the normal course of business, which has been kind of 3 to 4 out of 10 patients that walk in the office are either a new patient or a switch potential because they're having a problem, they're in a new doc office, they want to get to DAILIES because they just -- for whatever reasons they want to do that, that's pretty much the math is kind of 3 or 4 in 10 and that means 6 or 7 in 10 are not switching. So remember, this market moves a little bit slow for this reason, but it's also very durable for this reason. And so I think what we get excited about is we're winning in the switch and new fit area, we are doing very, very well in that space. And so over time, we expect to have a very durable business in these new products. And so we're excited about where that moves.
Our next question today is coming from Julien Dormois from BNP Paribas.
The first one relates to the Surgical markets, where you described that it should be pretty strong in 2022. But I was just curious whether this market could be even stronger without some of the staff shortages that apparently some ECPs are going through in the U.S. or in Europe. But also in terms of the supply chain challenges that you guys and your competitors might be experiencing all of the previous just irrelevant to the growth in this market at the moment.And the second question is how we should think about the growth of the equipment business specifically after a very, very strong 2021? Do you think there is a comp effect here to be shared and whether this could still deliver growth in 2022?
Yes. Thanks, Julien. Let me start with the Surgical business. You're exactly right. I think one of the challenges in the Surgical business right now, there's been two. Initially, there was a lot of turnover in staff. Then I think even in the fourth quarter, though it stabilized a little bit, you saw people having to step out for a week because they got COVID or 2 weeks until they got better. And that kind of interruption of staff and staffing, to the extent it settles down, we'll improve capacity going forward. But I do think there remains a basic capacity problem internationally, which means there just isn't a lot of extra OR time given a lot of this is done in the hospital internationally, and you're having to share and work with a lot of other people who are trying to also do new procedures. And there is going to be, I think, a stabilization of staffing over time. But again, it isn't there yet. So we're still working through interruptions and depending on where you are in the world, how that looks. So I think the Surgical market does get better. And again, we forecasted it a good bit better than what I loosely call historical rates. I think it's mid-single digits would be a couple of points up from historical rates. And some of that's because you see some easier comps in the first quarter and also because you see some return of capacity that will help push it up a little bit. So I think we feel good about the market and its potential, we'll yet to see how that plays out. And obviously, we're making some assumptions around the lack of disruption as we go forward. On the equipment piece, equipment, we had a terrific year in equipment last year. I mean, we had a banner year for our phaco equipment, which, again, given the competitive set, we're very pleased how many people chose to go with the market leader. And the equipment we sell out there is still unsurpassed in its technologies. And so we're excited about that. I think the -- additionally, what's been kind of gratifying is to get a biometer out there that is really doing well head-to-head with our competitors. And so the Argos biometer, we're very excited about what it can do. It seems to be faster, it seems to be easier to use, seems to get through dense cataracts better. So we're really pleased with the uptake on those things. Now I'd just caution though that there's been a lot of a couple of years now of equipment that looks like it's over the historical average by a fair bit. Now some of that was refractive early on. And some of it now has just been an enthusiasm for getting our new ORs and returning into a more normal world. I think that given the size of the year we had last year, we have a great year if we move sideways on equipment. And so I would think about equipment this year as being likely kind of a net neutral year-on-year. If we could accomplish that, I'd be pretty excited about it. It has some chance to be -- probably there's more chance of being a headwind than a tailwind, let me say it that way. And we'll see because we just sold a ton of equipment over the last 2 years. .
We've reached end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.