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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good day and welcome to the Alcon Third Quarter 2019 Conference Call. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Karen King, Senior Vice President of Communications and Investor Relations. Please go ahead.
Welcome to Alcon's Third Quarter 2019 Conference Call. We issued a press release and financial results yesterday and posted a supplemental slide presentation a few hours ago to our website to enhance today's call. You can find all 3 documents in the Investor Relations section of our website at www.investor.alcon.com. Joining me on today's call are David Endicott, our Chief Executive Officer; and Tim Stonesifer, our Chief Financial Officer.Our quarterly press release, slide 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 events or 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 earnings press release and Form 20-F registration statement on file with the Securities and Exchange Commission, and available on the SEC's website at www.sec.gov.Included in the press release are selected non-IFRS measures. Company management uses these measures as aids in monitoring the company's ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking purposes. Non-IFRS financial measures used by the company may be calculated differently from, and therefore, may not be comparable to, similarly titled measures used by other companies. These non-IFRS financial measures should be considered along with, but not as alternatives to, the operating performance measures prescribed per IFRS. Please review the financial tables provided in the press release and our filings that reconcile such non-IFRS measures to directly comparable financial measures presented in accordance with IFRS.In just a few moments, David and Tim will be discussing net sales results for the quarter and year-to-date. In our press release, we provide a table that shows both reported net sales growth and constant currency growth so you can see the impact of foreign currency fluctuations. For discussion purposes, our comments on net sales growth during opening remarks will be expressed in constant currency.And with that, I'll now turn the call over to David.
Good afternoon and welcome to our third quarter 2019 performance update. We're pleased to report another solid quarter, showing strong top line growth and generating core operating leverage and solid core earnings. It's been a very busy quarter for us. We continue to make good progress in standing up the organization. We refinanced $2 billion of debt, launched 2 key products in the U.S. and just announced the implementation of a multiyear transformation plan. Going to walk you through these items and provide some perspective of the sales and market dynamics. And after my comments, Tim will discuss our sales performance by business and provide you with additional color on the financials. And I'll wrap it up with some closing comments before moving on to Q&A.First, we continued to make progress in standing up new Alcon. As part of our transformation, we recently completed the implementation of SAP in all our remaining EMEA countries and now have approximately 85% of our sales running through the new system on standardized processes. We expect the SAP implementation spend to be substantially complete by the end of 2021.We're also making significant progress on the installation of our new Vision Care manufacturing lines, with our second site in Singapore ramping up this year. These lines will support our ability to open up capacity required for our global launch of PRECISION1.Second, we strengthened our capital structure by refinancing $2 billion of our shorter-term debt and extending our average maturity.Third, the PRECISION1 and PanOptix launches in the U.S. are off to a good start. We saw high customer engagement with both launches at the recent American Academy of Ophthalmology and Optometry meetings. The products were very well received with heavy booth traffic, solid scientific presence and excellent customer participation in launch events.Starting with PRECISION1, our new SiHy contact lens, which is targeted at the largest segment of the fast-growing daily disposable market, our sales force has been delivering fit-sets to targeted customers, and we're steadily expanding that distribution. Starting this month and into early next year, our distributors will be able to stock PRECISION1, and we expect unconstrained availability by the end of Q1 2020.Shifting now to PanOptix for the first trifocal advanced technology intraocular lens to enter the U.S. market. Since early September, our sales force has been placing consignment sets at key accounts. We launched the product with a comprehensive offering by introducing sphere and toric modalities, with both blue light and UV options. Although we launched late in the quarter, the reported third quarter market share data shows us gain 8 share points in the U.S. PC IOL category, so a very positive start.We are also encouraged by the progress we've made on Vivity, our new PC IOL that uses a non-diffractive mechanism of action to deliver extended vision, reducing the need for glasses. We published our European clinical data at ESCRS a couple of months ago and have begun a very limited KOL evaluation of the lens in Europe. We'll provide further updates as we get closer to launching this new and novel technology.And finally, we just announced that Alcon is embarking on a multiyear transformation journey. As we have been saying all year, our long-term financial goal of low to mid-20% core operating margin is based on growing our topline faster than our cost structure. We've always said that we had the right amount of costs, but they weren't necessarily in the right places. By allocating our expenses more efficiently, we believe we can create savings to reinvest in new product development and sales and marketing.As we look across the organization, we see many opportunities to rationalize complex processes and eliminate bureaucratic layers that were previously built when we were part of a large pharmaceutical business. So we're streamlining our international commercial model and our back office functions in order to speed up our organization and focus on the highest value activities.And this is a multiyear program that will transform Alcon into an organization that's able to concentrate its efforts even more intently on our customers and patients. As a result, we believe that we're creating long-term value for all stakeholders.In just a couple minutes, Tim will provide a few more details and discuss the financial implications of that program. But first, let me give you an overview of quarterly results.We delivered another quarter of solid performance. Overall sales were up 6% for the quarter and 5% for the first 9 months of the year. Surgical continues to grow a little bit above market with growth of 7% in the quarter and 6% year-to-date. Vision Care is growing at or slightly below the market with growth of 4% both the quarter and year-to-date.Let me provide a little color on both our end markets. For surgical, we estimate cataract procedures grew in the mid-single digits this quarter, driven by significant international volume growth. And for Vision Care, contact lens market growth in the third quarter also increased in the mid-single digits. We believe that some of the market growth this quarter was a result of buying behavior in advance of the increase in Japanese consumption tax.With that, let me turn it over to Tim, who will review our financial results.
Thanks, David. We're pleased to report a 6% top line growth in third quarter and 5% year-to-date. The quarterly results include approximately 1 percentage point of favorable impact due to higher demand ahead of the increase in consumption tax in Japan. Surgical sales were up 7% in the third quarter, driven by strong results in implantables and consumables. Excluding the impact from the consumption tax in Japan, which affected all surgical categories, surgical sales were up 6%.Implantable sales of $287 million increased by 8%, primarily due to strong double-digit gains in PanOptix outside the U.S. and other AT-IOLs as well as steady monofocal IOL growth. Consumable sales of $571 million increased by 9% in the third quarter. We saw growth in both our cataract and vitret consumables across all our regions. Asia, in particular, has been exceptionally strong due to our surgeon training and education programs, which have increased the amount of vitret surgery we're seeing in the region. We also saw strong conversions of equipment and innovation to smaller gauge instrumentation.Sales from the equipment and other subcategory were $161 million, a decrease of 2% versus the third quarter of last year, primarily due to the decline in procedural drops and refractive equipment. Equipment sales, which are capital purchases, can vary from quarter-to-quarter and we believe our year-to-date growth of 5% is more representative of our performance.Vision Care sales were up 4% in the third quarter, driven by strong results in daily contact lenses and SYSTANE. Excluding the impact from the increase in Japanese consumption tax, which primarily affected contact lenses, Vision Care sales were up 3%. Contact lens sales were $518 million, up 7% versus the third quarter of 2018. The increase was primarily driven by strong demand for our leading product, DAILIES TOTAL1, with growth in both sphere and multifocal. We're also seeing growth in our multifocal market share, which is helping to offset our decline in toric as we await our new toric entries late next year.Shifting now to ocular health. Third quarter sales were $304 million, relatively flat compared to last year. Double-digit growth in our SYSTANE family of products was offset by declines in contact lens care and the rest of our ocular health portfolio.Now moving down the income statement. Core gross margin was 63.8%, roughly in line with prior year, while absorbing the impact of the China tariffs. Core operating margin was 17.4% in the third quarter, up 40 basis points versus prior year and up 60 basis points excluding the negative impact from foreign exchange, primarily related to better expense leverage as a percentage of sales. Third quarter interest expense was $35 million, up from $7 million last year.As David mentioned in his opening remarks, we were very pleased with our recent refinancing of $2 billion of shorter-term borrowings, which allowed us to extend the average maturity of our debt from 2 years to 10 years.The core effective tax rate was 18.2% in the quarter compared to 14.4% last year. The increase in the tax rate was primarily due to the mix of pretax income from geographical tax jurisdictions.Core earnings per share was $0.46 in the third quarter, which includes approximately $0.06 of interest on financial borrowings and the write-off of unamortized debt issuance costs at the time of the refinancing.Now before I move to the guidance, I wanted to touch on a couple of cash flow related items. Free cash flow for the first 9 months was $260 million compared to $598 million last year. The decrease versus last year was primarily due to spin readiness, separation and legal costs.On a year-to-date basis, capital expenditures were $314 million, driven by the expansion of our Vision Care contact lens manufacturing platform and other supply chain investments.Regarding separation costs, prior to the spin, the company provided an initial estimate of $300 million, primarily related to the separation of IT systems. A successful separation is critically important for us to ensure the sustainability and reliability of our independent systems and functions. Since the spin, our IT organization has done a thorough review and assessment of our systems and concluded that, in some cases, replicating the legacy systems was not a sustainable choice for Alcon. For example, we made the decision to invest in a multifunctional document management solution rather than cloning several legacy end-of-life systems. We're also incurring additional costs to ramp up manufacturing for facility that was transferred to Alcon earlier this year. These strategic decisions and others have resulted in a revised estimate from $300 million to approximately $500 million. Separation costs year-to-date are $155 million and will be substantially completed over the course of the next 2 years.As David discussed earlier, we also have embarked on a multiyear transformation plan. At the end of 2023, our plan will enable us to reinvest about $200 million to $225 million of annual run rate savings on activities to accelerate innovation and fuel growth. Savings will be driven primarily by simplifying and rightsizing our infrastructure, creating a global shared services platform and driving process improvement and automation. This should result in about $300 million of costs, which will be core adjusted and reported separately starting in the fourth quarter. We expect annual improvements in free cash flow and remain confident in our 2023 goal to deliver 2.5 to 3x our 2018 free cash flow.Now turning to our full year projections. Our strong year-to-date sales performance of 5% gives us greater confidence in our full year guidance. As a result, we're narrowing to the upper end of our previous net sales projections and now expect to be in the range of 4% to 5% growth on a constant currency basis, trending towards the high end of the range, with a negative 2% impact from foreign currency.Our year-to-date core operating margin is 17.2%, which includes 70 basis points of foreign exchange pressure. As we're trending towards the lower end of our full year guidance range, we're narrowing our full year projections to be in the range of 17% to 17.5%. Our core effective tax rate for the quarter was 18.2%, which puts our year-to-date rate at 16.2%. We now expect our core effective tax rate to be in the range of 17% to 18% and trending towards the lower end of the range.So to summarize, we've delivered solid results while making progress and standing up Alcon as an independent company. We're committed to operating with greater focus and discipline as we take steps towards becoming a stronger and more profitable company.With that, I'll turn over the call to David for some final comments.
Thanks, Tim. We're pleased to deliver solid financial results and important operational milestones this quarter. We continue to make progress in standing up Alcon. Significant progress was made this quarter as we wrap up the commercial implementation of SAP and expand our manufacturing capacity to support new contact lens innovation.We're going to execute a multiyear transformation plan to leverage our strengths and competitive differentiators and evolve Alcon into a simpler, more agile company. And we're investing in new product development and customer-facing initiatives that will improve our growth profile and create value for our doctors and their patients.As I mentioned at the outset of my comments, we plan to expand our margins by growing our top line and leveraging our infrastructure. We're already making progress as evidenced by our year-to-date sales performance of 5%. As a result, we've narrowed our full year guidance to the upper end of our previous range. Our solid performance, coupled with our new product launches and comprehensive transformation plan, fuels our confidence to achieve our goals and create long-term shareholder value.I want to thank the 20,000-plus associates we have at Alcon for their commitment, dedicated focus and passion in helping us fulfill our purpose, doing what we do best, helping millions of people see brilliantly.And with that, operator, we're ready for questions.
[Operator Instructions] Our first question today will come from James Gordon of JPMorgan.
James Gordon from JPMorgan. A question about the transformation program. So you've reiterated the same target for the margin, but that's going to be -- you're going to have increased investment. So could the increased investment actually translate into faster top line growth between now and 2023 or faster growth beyond 2023? Or how should we think about that? And maybe just a follow-up as well, which would be the transformation program costs, how should we think about the phasing of those, please?
Thanks, James. Thanks for the question. Look, on the second part of that, we're pretty level-loaded on the costs through the 2023 time frame. So I think you should think about them that way. On the impact of the program, as we indicated early on, when we separated form Novartis, we thought there was going to be an opportunity to transform Alcon into a significantly more agile company. We thought there'd be things that we carried in as a pharmaceutical company that we probably wouldn't need. And importantly, as we have spent time investing in systems and processes, I think we can make a simpler, more automated effort at many of these things.So we had planned from the very beginning to leverage our core structure by moving costs from what I would loosely describe as less effective costs to more effective costs, think R&D and think sales and marketing. And to do that, obviously, we had to get a handle on what they were going to be. And over the last really 6, 9 months, we've been steadily working away at that plan. I think today, we're just announcing really what we had described to you back at Capital Markets Day, which was this repurposing of our cost structure into the most efficient cost structure we can end up with. So we think we get very positive results from that by getting behind new product flow in terms of long-term value creation.We have obviously a range long term, and that's mid-single digits. We'd obviously prefer to be on the high end versus the middle part of that, but we'll see how we bring products to market, how well we do with them. But obviously, what we're trying to do is get money behind those ideas to try and best accomplish that.
The next question will come from Sebastian Walker of UBS.
I have got 2 as well, if I could. So just again, on the reinvestment program, I think, previously, you talked about a margin inflection point around 18 months from now. So could you confirm whether or not anything has changed on the timing of that margin turnaround? And then the second question was just on growth thinking about the remainder of this year and next year. So for 2019, what do you think gets you to the -- I'm interested in the bottom of that range. Is there anything that you're concerned about currently? And then how should we think about growth going into 2020 with the new product launches and PRECISION1 and PanOptix?
Yes. Let me start with the margin inflection question. I think what we said consistently has been that we would spend these first couple of years really trying to invest in this business and trying to get our top line growing as best we can. That continues to be the plan. Obviously, as we see revenue grow and as we get new product flow, we intend to see margin inflection. So I think we've always kind of indicated that the margin inflection accelerates as we go in towards the later part of the plan, but then we always get accretion year-on-year. And so we expect that this year, we would expect that next year.In terms of revenue growth, we've narrowed the range because, obviously, we had a good quarter in the third quarter, and we are off to a good start with the new products. So I think we see it at the high end of the range. I think it would be difficult to see it down at the bottom end of what we had guided towards. So we eliminated the 3 and, frankly, we're heading towards the high end of the range.Into next year, I think the -- we're not -- we're going to give guidance I think on next year, really, in the fourth quarter call. But I would just say that our general view is that our product flow is solid for next year. And assuming our underlying businesses are healthy, again, we have this transformation going on with the revenue, where we've got significant portions of our business growing at kind of slower than market rates. So obviously, to the extent that the health of the new products comes through, we feel comfortable, certainly, with what we've indicated in the past. So that's probably the direction I'd direct.
Great. And just in terms of the progress on the initials on the SAP and the manufacturing rollout, I mean is that all going according to plan, faster than plan, or perhaps a little bit slower?
Yes, manufacturing may be just slightly better than we expected. I think we've always been a little bit cautious because things happen when you start new technologies, but our team in Singapore has done a terrific job of getting the second site up. Our team in Germany has done a great job of getting to optimal capacity as fast as possible. So we see lots of progress on the manufacturing front that I'm very encouraged by.I would say that the SAP thing also is going very well. We just finished the EMEA rollout, which I think finishes all of the European commercial organization, and this last wave, I think, has gone off remarkably well. So great credit to the team and the energy behind that team that finished that. So we feel good about both of those. Obviously, there is more work to be done.
The next question will come from Larry Biegelsen of Wells Fargo.
One on PRECISION1, and one on just kind of the P&L, how to think about next year a little bit. So on PRECISION1, can you talk about how much cannibalization you're seeing from your business? Is it in line with your expectations? Any update on the launch timing for Europe and Japan? And just lastly, do you think your contact lens business can grow above market in 2020? And then I had a follow-up.
Yes. Let's start with the cannibalization question. It's pretty much what we saw. It's still early, and I think one of the things we said was we got a big enough head start that we felt comfortable to begin putting fit-sets out there. It is going to take us, Larry, probably till the end of Q1 to really get us fully distributed. Everybody's got some. There's backup in the wholesalers, the distributors and it's just kind of free range of running. Just there's a lot of customers out there to get to. So the sales force is working very hard at it, making all the right progress. But I would think that the first real indication of how much share we can gain is going to come probably second quarter next year.In the meantime, we are obviously doing a nice job, and we've got great feedback from -- on the lens and on -- and from people who put it on -- into patient's eyes, terrific response so far, pretty much as we would have expected. So feel good about what's going on with PRECISION1.In terms of growing at or above market, our objective was always to get the contact lens business back to market growth, slightly ahead of market growth, as we said with new product flow. P1, I think, should do that. It depends entirely on how fast we can get the manufacturing up and support international launches, but I think also, how fast we get the torics out. So we're looking -- I think that those ideas has been the principal drivers of how fast we get above market growth, but I would be disappointed if we weren't growing a little bit faster than market and growing share in the space.
And just a follow-up, Europe and Japan, PRECISION1, no timing there. And just for my follow-up, the Street TAM is at about $2.08 for EPS next year. You do have some headwinds there with the higher tax rate. So remind us of your commitment to pro forma double-digit EPS growth next year. Are there some levers you have to kind of help overcome the higher tax rate?
Yes. Larry, on the -- just following up on Japan and Europe, we haven't really indicated when we're going to launch yet because, again, as I -- I think, I said last time, we're going to watch the U.S. dynamic very carefully, make sure that we fully supply the U.S., make sure that we encourage that launch trajectory best we can and then we'll make a decision on when to go.
Yes. And as far as 2020 goes, I mean, obviously, we are not going to guide here. We'll give you more color on the Q4 call, but just to help you think about it. To David's point, if you start at the top of the P&L, assuming the markets stay healthy, we'd expect this revenue momentum to continue. So I would start with that. And then from a margin perspective, as we have been saying, there's really 2 key components, right? If you look at surgical, we should continue to get -- have strong momentum there as well, particularly as we continue to grow PanOptix and that becomes a bigger piece of the portfolio, we'll get a natural mix lift from a gross margin perspective. So I would think about that a little bit.On the Vision Care side, a little bit similar to what we saw in Q3, that's going to continue to be pressured. We have said that we're going to be putting in new manufacturing lines that takes 18 to 24 months to get those fully optimized, and 2020 is the peak year from an installation perspective. So as you would incur start-up costs as an example, those don't get amortized. We'll continue to see those types of pressure in 2020. And then we'll also have the PRECISION1, right? Again, as that comes out of the gate, there is a little bit of margin pressure there as well.So a couple of pressure points on the Vision Care side. And then we're going to continue to invest in the business, right? We're going to continue to invest in R&D and some of these other areas. So those are the key levers that I would think about from a margin perspective. But overall, as David alluded to, we'd expect continued improvement in margins next year. But the real acceleration really comes in 2021, 2022, 2023, when you get through some of those pressure points that I just talked about.And then to your point, we talked about last time that the tax rate, with the Swiss tax reform, that should go up about 3 points from what our average rate is in 2019. We have obviously guided to the low end of that effective tax rate. Next year, you're going to carry 4 quarters of interest expense versus 3 quarters.And then the other thing I would think about that we haven't really talked a lot about is share count, right? So we do not have plans at this stage to offset dilution next year. So I would just take that into account. We'll continue to review that when we review our capital allocation methodology and strategy with the Board, but as of 2020, there is no intention to offset that dilution because we're going to continue to invest in the business. So that's how I'd frame up next year, and we'll obviously give you some clearer guidance on the Q4 call.
Our next question will come from Daniel Buchta of Vontobel.
Thank you very much for taking my 2 questions. The first one, maybe coming back on your transformation program. I mean, obviously, I share your view that you want to make the organization more agile. And that is very important coming from a big pharma company. But what I'm struggling to understand a little bit is that you want to reinvest the whole savings of $200 million to $225 million into R&D and marketing because, I mean, my understanding was with the CMD late last year, you guided an R&D run rate of $2.5 billion over 5 years. So I mean, if you reinvest now $200 million to $225 million, it's a quite significant amount. And I mean it's also a bit surprising given the fact that, I mean, under Novartis, 2 years ago, you were investing already quite significantly in marketing and R&D. Why is that incrementally necessary that you invest such an amount without saving that and improving profitability?And then the second question on the consumables business. I mean, obviously, extremely strong and nice growth in Q3. You were mentioning that you had some pull-through from the equipment business, which has grown nicely also in the past couple of quarters. I mean how sustainable is that rate? How do you think into Q4 and 2020 on that business because you guide the market to grow by roughly 3%?
Yes. Let me start with the reinvestment, kind of the logic there. Look, we have said early on and you'll remember this from the Capital Markets Day that we had an opportunity to do a lot with our leverage and that the basics of getting to 20 -- low to mid-20s in operating income was going to be leveraging our cost structure, in other words, growing revenue faster than our costs. To do that, we know -- we always knew we needed to get after the cost structure and get them moving because we felt as though there was going to be a good bit of expense that we could move around. We've come to that view. We've put in the investments now, I think, that give us a line of sight to how we would make those improvements. And that does sum to about $200 million, $225 million. So we're excited about moving it forward to get us exactly to where we had intended to be, which was moving to the market with a better looking P&L, where it's simply putting more money in the right places, behind product development for the long term and behind product launches for the revenue growth required for leverage. So the argument really is simply that we have planned this from the start and it has taken us a little bit of time to get to the costs, but I think it's consistent with where we have been for a while.Going forward, I think on the revenue side, our hope is, obviously, that this business can grow, and as we've said, on a guidance basis, in that kind of mid-single-digit basis. So the better revenue growth we get, obviously, the better leverage we're going to get long term. So I think that's the way to think about what the potential of the investment is.As we think about the near-term question you asked really on the equipment side of things, I would just think about the equipment as a bit capital-intensive, and there are going to be some quarter-to-quarter fluctuations. So refractive equipment, in particular, was a little bit soft in the third quarter, it has been a little bit this year. So I would -- we are keeping an eye on that one. But vitret equipment looks pretty solid and cataract equipment looks solid. So I think in terms of basic equipment placements, which is really what I would be thinking about in this category, is that what's really driving our consumables business, is kind of as we would expect.Additionally, in this category and stuff, our service revenue is very healthy. So I feel pretty good about that. We had some onetime stuff in the early part of this year, where we were getting good growth rates, maybe a little bit higher than normal as I've indicated because we had some competitors out on the procedural eye drops business, and they're obviously back in now. So that's come down to a more normal level. So with that, I think that's probably the answer to the near-term equipment question. So...
Our next question will come from Anthony Petrone of Jefferies.
Great. Congratulations on a strong quarter. Maybe a couple on PanOptix and a little bit on the restructuring program as well. In terms of the initial reception, just in terms of the placements, how broad in the U.S. market in terms of physicians is the initial rollout? And then what is the cadence sort of going to look like as we head into 2020? So that'll be the first question. And on the restructuring front, how should we think about timing from now through the end of the LRP on how that would roll in?
Yes, Anthony. Thanks for the questions. First, on PanOptix, we're pretty much there. It's -- obviously with -- these are very different looking launches between P1 and -- PRECISION1 product and PanOptix. PanOptix, we've gotten on most of the surgeons by now. So, again, you're trying to reach in the United States probably 2,000-or-so surgeons that make up the vast majority of the surgery. So when you look at advanced technology lenses, it's a much more efficient target.So we're really -- we are there. I think we're going to see pretty solid effects going forward from that launch. And I do think that it's really just a matter of what the ultimate share is. The market itself, I think, as we've said in the past -- I don't know that there's going to be a big market movement on this one. I think what we are really doing is taking the share back that we once had. And I think that was anticipated by many and I think we've seen that in many of the markets around the world. So I think that's probably right on top of what we had expected and maybe just a little bit better in terms of timing. And it seems to be coming along a little faster. On the restructuring, the cadence on that one, Tim, why don't you comment on that?
Yes, so I would just say on the $300 million, I mean, those costs will ramp over time. But we'd expect to spend about 75% of that by the end of 2021, which will be the peak year. And then given that profile, a vast majority of the rest will be incurred by the end of 2022.
And savings are relatively similar in terms of the spend, in terms of the cadence. So I think you should think about the savings the same way.
Our next question today will come from Richard Newitter of SVB Leerink.
This is Jaime Morgan on for Rich. Just quickly, I wanted to circle back on PanOptix. I thought I heard you guys say that reported market share data suggested high single-digit market share gain in the U.S. PC IOL market. So I just wanted to make sure I heard that correctly. And if you could provide any additional color on that, that would be great.
Yes, Jaime, thanks. Yes, you heard that correctly. We were encouraged by the initial uptake. And so with -- we launched in early September. And we probably had 3 weeks' worth of data. So I think we saw, plus or minus, a little bit on 8. We're in that kind of 35 to 40 range right now. And I would just say that, that gives us some room and some enthusiasm for what we had originally said, which was that we'd like to -- we'd love to see a performance a little bit like our Canadian performance, which was get up over 50 share relatively quickly. So I think we're on that path, and the product is doing quite well. And most importantly, what we're seeing right now is that patients are really enthusiastic about what they're getting on the back end. Day 1 results surgeons are reporting to us are very encouraging.
Got it. And then can you just remind me, I know you guys mentioned the Vivity PC IOL, what specifically is that lens?
Yes. Vivity is a new and novel technology. It's -- we're using a non-diffractive optical design. And Vivity is important because, in some cases, all of the diffractive designs, which are basically the current multifocal lenses, they're all basically going to create some visual disturbance, halos and glare and things like that, that can cause patients to be discomforted by their visual experience, and so they're upset by that. And so surgeons, in many cases, don't want to use those lenses because of that reason. This particular lens will not have those same halos and glares to that effect. It has a very similar profile to a monofocal, that's what the data said. And we had our data published at ESCRS. So as we said earlier in the year, we put some information out later this year. We've got the clinical trials done as we began to work more towards getting this to market.This particular lens, we think, has some unique characteristics. It looks like very good distance vision, very good intermediate vision, and about 50% of people are getting spectacle free even for reading. So we're feeling very good about what the data says. We need to find out, I think, what the patient needs are and how we then take that forward into European market. So we're working right now very carefully with some key surgeons in Europe to begin to understand exactly how we'll position this. But we're excited about it, and we'll see this take shape next year.
Our next question will come from Ryan Zimmerman of BTIG.
So I just wanted to -- David, you commented a little bit on the health of the refractive market, particularly in light of the performance this quarter. We've seen J&J also speak to that. I'd love to get your sense of kind of what you think the health of the refractive market is or where the consumer demand is for LASIK, particularly, given the performance. And then my follow-up question is around PanOptix. A lot of questions have been asked about the U.S. launch, but we did see a launch from J&J on a TECNIS Synergy side in Europe. And I'd love to see your thoughts around how PanOptix is holding up in the European markets in light of that launch.
Yes. Let me start with the refractive market. The refractive market has been kind of up and down. I think for stretch, we thought it was down for a long stretch, and then we thought it was bouncing back. There were probably some data errors in some of what was being reported by our data source. I think it was, in truth, kind of more flat to slightly growing.What's been encouraging for us is we've been gaining share. So I think we popped up over 50 share to our best calculation. And so we've been growing our consumables business kind of okay. So we see procedures, in aggregate, growing a little bit for us, but I think that's more share than it is anything else. And I think the bigger challenge is the equipment. So there just isn't a demand for new equipment at this moment in time because people are pretty satisfied with the number of installed base equipment, with the exception, I think, of Asia and some of the international markets, where there's still significant opportunity to place machines. But again, geographically, we're seeing kind of not a lot of equipment placed in the U.S. Most of the equipment placements outside the U.S., generally speaking, a relatively modest growth in total procedures for us. And I can only say that because I think we're gaining share. I suspect the market is relatively flat. But we'll get market scope later this month, and I think if you -- I think they're the best source -- probably the only source of what the market is really doing. So we'll have the data shortly.On the PanOptix piece, I think the question for us is, how do we continue to grow this in lots of different markets? The EMEA was up a couple of share points. So I think we feel good broadly about our ongoing mobility to move that product. Almost everywhere we've launched it in the world, we do pretty well, even when we have come from fourth or fifth, which was a couple of the European markets. So we continue to do well, and we feel very good about PanOptix as a trifocal versus the other diffractive lenses. I think most of the other products that are out there are, in fact, diffractive products. So in that event, I think we're doing quite well, particularly against other trifocals.And the newer versions -- and I know that Johnson & Johnson folks have put out a couple of lenses. I think that's positive for the market, in general, because I do think there will be -- there needs to be some non-diffractive lenses. I'm not sure they've mastered that yet, but that's basically the same premise that we have with Vivity, and we'll just have to see how those products do. So early read is it's not really having a big effect on us. We are continuing to grow share, but I wouldn't say that's the end of the story because I think there is going to be more lenses and more stuff to come there.
Our next question will come from David Lewis of Morgan Stanley.
This is Marissa on for David. We have a couple of quick questions. The first one that we wanted to ask is just next year, what impacts do you expect to see driven by the reduced monofocal procedural reimbursement in the U.S. that just came out? Do you think that this could lead to a softening capital environment or a catalyst for greater AT-IOL and PanOptix adoption? Or how should we be thinking about that?
Yes. Marissa, let me try a shot at that. Just to be clear on -- for those who may not know, what's going on with CMS in the United States is that they are decreasing the physician reimbursement for the surgery by a fairly significant amount. I think it's somewhere between 10% and 15%, I think it might be 15%. The -- but on the other hand, they're actually increasing the fees for the surgical facilities. So the ASCs, the surgery center, or the hospitals, both are going up. And I think -- remember that in general, the lenses are paid for by the hospital in the United States or the ambulatory surgery center under that one global fee. So in terms of price pressure, there's always price pressure on monofocals every year, and we experience it. I don't think there's going to be anything different this year from the buyers than there were yet others.So when you go to the other side of this, you say, well, what are surgeons going to do if they get paid to do -- paid less to do the same procedure? Look, there is some optimism amongst those of us in the AT-IOL business that should encourage people to want to do more advanced technology lenses because for a little bit more time in the work up and a little bit more time in surgery, which I recognize is not everybody's interest, there's a possibility to get these patients better outcomes. And we're -- we would encourage that, and we -- that, obviously, is more attractive from a reimbursement perspective for the surgeon because there is a collect from the patient in that process.If that takes shape, that'd be great. We're not counting on that, but I doubt it does anything other than, in real terms, trying to get people interested in what else they can do, either other procedures or better procedures or -- it's unfortunate that cataract has gotten very -- it's the most common procedure in the United States, and it's obviously a cost target for CMS. So that's just the current circumstance.
Okay. And then as a quick follow-up, I know there has been a lot of attention on P&L transformation this morning. But how have your thoughts changed? Or have they changed around balance sheet deployment? I know we've talked about M&A in the future potentially to drive growth. Do you think we should expect increased activity? Or are tuck-ins still more likely?
No, there's no real change there, not in our capacity or our interest. I think we're -- this is pretty much as we expected it to be. And I feel like, consistently, we've said we like ideas that are technology oriented. We like tuck-in ideas. We're not looking to transform the company right now. We've got plenty of work to do. And I do think that the BD&L activity will be consistent with what we've done in the past in that kind of $50 million to $300 million range. Could we do more than that? Yes, but it isn't going to be something really large and unless something really radically changes, it's not our intention.
Our next question will come from Ed Ridley-Day of Redburn.
Firstly, it's a follow-up on equipment. Obviously, you have given some color. Is there any -- if you talk about to the extent which potentially -- the competitive environment, and particularly, one of your competitors has clearly done much better in refractive recently, that would be my first question. And just -- thank you for the detail on free cash flow and the guidance around that. If we look into 2020, with where the manufacturing is peaking, can you give us some a bit more color around the how -- which is the CapEx in 2020 before we see it start to improve?
Let me take the first one and then Tim take the second one on the cash flow. On the equipment, we have actually done pretty well in most markets on refractive. I would say that we aren't as competitive as we'd like to be in China. That's probably the one location where there are competitors who are doing pretty well. I would say, in aggregate though, we're growing share in the refractive business, not losing it. So the LASIK procedure is still the most common procedure, preferred by most surgeons all over the world, and I think definitely, from a [ literature ] basis, the most predictable outcome. So I think we feel good about where we are in our long-term strategy on refractive. I do think that the growth opportunity is going to end up being in Asia. And we need to get more active over there. We're working on that as we speak. So that's probably the short answer to that one.
Yes. I think on the CapEx, we will feel a little bit of an increase next year as compared to this year because, again, we've got those Vision Care lines going in. But longer term, we still feel very good. It's going to -- CapEx should be sort of mid-single digit as a percent of revenue.And then on the free cash flow, as you think about the near term, we're going to continue to get operating improvement, so that should be helpful. If you look at next year as compared to this year, we will lapse the interest expense pressures given the debt structure. We had a legal settlement this year that doesn't repeat. But then on the pressure point side, you do have higher taxes, you do have the higher CapEx I talked about. And then the separation and restructuring charges should be relatively consistent year-on-year. So those are the levers, I think, through on the free cash flow side.
Our next question will come from Scott Bardo of Berenberg.
A technical one. I wonder if you could help dissect a little bit the implantables growth that you saw this quarter, quite healthy, 7%, 8% growth. Can you give us some flavor for how that growth is being split geographically and how much of a contribution PanOptix has been towards that growth, please? And sticking on with implantables, I just wondered if you could comment a little bit about how you perceive the window of opportunity for PanOptix in the U.S. in light of Johnson & Johnson's Synergy product and others looking to enter the North America market and whether you're comfortable and confident that you have a cadence of new innovations that can sustain healthy growth in this business given your developmental pipeline.
Yes. Thanks, Scott. Let me start with the second one first actually because I think -- look, PanOptix is going to do very well in the United States, and I feel very confident that we will -- between PanOptix and our pipeline, that we're in really good place to defend share, particularly in the PC IOL business. So we've seen the data on most of our competitor products in Europe. We understand them quite well. And we don't see a tremendous amount of impact, at least at this moment. So unless there's something new that we haven't seen, I think you'll see developments follow largely along the lines that we've articulated.I think in terms of growth dynamic, the U.S., in the quarter at least, the U.S. was a little bit slower than the international business in terms of total lenses. So I would just say that you saw kind of double-digit -- not quite double-digit in HA-IOL growth internationally. Actually, it's double-digit growth as I am looking at it. So we feel good about the international growth, but the U.S. has -- in the third quarter, was a little bit softer than it probably has been in the past.We enjoy an over-indexing in the international markets. So I think part of the difference when you're looking at competition is just kind of what -- where their mix of business sits. So I think in terms of share, we've done very well in the U.S. The market was a little bit softer. Internationally, probably less share growth but a stronger market, so a pretty good mix there.
Very good. And maybe just a quick follow-up. Encouraging to hear that you're looking to drive efficiencies and to redeploy more into R&D. Can you share with us, has there been any real triggering events of that? Has like any of your sort of more ambitious programs failed or so? Or perhaps give us some flavor as to which businesses are likely to receive most of that R&D funding. Is it more surgical? Is it more Vision Care?
Yes. I don't think there's anything new to report per se. I mean, I think what we've seen is as we've gotten ourselves organized, we've always had a very long list of ideas, and we've always had a cut line that we, historically, could afford. And so -- but we have a lot of productive R&D projects that we'd like to continue with. So we think that enhances long-term growth. We think that enhances long-term financial value, so we'd like to get after more of those, and you'll see us do that.As we bring things into a 2-year frame, we generally will try and communicate to you all about what they are and kind of where that goes. But nothing in the near term that we're going to describe now. But obviously, as we kind of get further into next year, we start guiding around next year, we'll talk a little bit more about what we think are the big ideas for next year.I think one last piece on this is just that on Vision Care, as you might know, historically, we haven't spent very much money on R&D in Vision Care, and I think that has hurt us. So you do see in the Vision Care P&L alone just a significant jump up in R&D because that has been bereft of -- they've got a long list of ideas and frankly just haven't spent much -- we haven't spent that much money there. So I think really important for the health of that business. So all good stuff for the long run.
So we're at our time limit here. But we want to thank everybody for all the great questions. And that will be it for today. Have a great today.
Thanks a lot, everybody.
The conference has now concluded. We thank you all for attending today's presentation. And you may now disconnect your lines.