Operator: The next question is from Vijay Kumar with Evercore ISI.
Vijay Kumar: I guess two sort of margin-related questions. First, maybe, Sam, on gross margins outperformance in Q1, I think the annual guidance implies a step down. Is that the — is that a function of the FX? Or what causes the gross margin step down in the back half? I think you mentioned something about $10 million of FX headwinds. Was that incremental to gross margin impact?
Sam Eldessouky: So it’s two parts. So the first part is we’re seeing an improvement in gross margin because of our product mix with the higher margins, and we’ve seen that play out in Q1. One of the elements that you have to keep in mind as you think about the rest of the year is the inventory balance that I referred to earlier, about call it $1.75 billion that’s sitting on the inventory. That number has a component of it, the same for Surgical. So if you recall in the last number of quarters, we’ve been talking about our spot buy, where we’ve been buying components to be able to ensure that we have sufficient supply on our surgical business. You’re seeing that in the growth of 8%, but also, you’re seeing that in a higher cost of the inventory and that will take time to bleed through the P&L.
So that will be an element here that will be offsetting some of the benefits that we’re seeing from a product mix. That’s why we stayed around that 62% gross margin for the full year.
Brent Saunders: Yes. And I would add, if I can Sam. We made a very intentional decision here to build inventory, specifically as it relates to product supply for Surgical. As you know, you can’t leave a surgeon hanging before surgery. And so one of the things that Sam and I decided when I arrived at is, we were going to prioritize customer relationships and supply to customers wherever possible to regain confidence in our Surgical business. That is paying off with respect to sales and relationships, but it is hurting cash and margin. And so that is something we hope to resolve over time, but it was an intentional decision to prioritize customers.
Sam Eldessouky: Yes. And Vijay, on your second part of your question in terms of the currency headwind. We’ve seen improvement in our performance in EBITDA, that was offset by an incremental $10 million of currency headwind that was down in our initial guidance. So in essence, really, we absorbed the — strengthened the performance of EBITDA with that $10 million headwind.
Vijay Kumar: That’s helpful, Sam. But Brent, one for you. I think in the past, you’ve said the spend on Miebo is well above the $95 million of revenue guidance. How much of this is sort of onetimer marketing-related — launch-related spend? And should we expect those spend levels to go down to start seeing leverage in margin contribution in fiscal ’25?
Brent Saunders: Yes. So great question. Look, I think it’s too early to figure out how we’re going to invest behind Miebo in ’25 until we see some more performance. That being said, traditionally, you do invest behind new drug launches for — 2 or 3 years. We do expect to see improving margins around Miebo and profitability around Miebo improve over time. And so 2024 is the low point, 2025, we’ll see improvement. And as we get into ’26 and ’27, you’re going to see real margin contribution. And look, we have Miebo for a long time. And so it can become a really significant margin and profitability contributor to the company over the long-term. And so that’s what we’re building towards. You only get one chance to launch a drug.
You only get one chance to set a curve. You see the struggles that we have in rehabilitating Xiidra. We don’t want to put Miebo in that position ever, right? We want a very strong curve of adoption and profitability in Miebo. And I think we’re really off to a good start, better than we had even hoped. And so sometimes in pharmaceutical launches. I always say — I’ve said this before, I’ll say it again. When you see smoke on a fire, you pour gasoline on it because that’s how you build the biggest and highest peak sale and profitability over time.
Operator: Your next question is from Matt Miksic with Barclays.
Brent Saunders: Hey, Matt.
Matt Miksic: Sorry about that. Just one on maybe strategic investment if you would. I know last year, investing in Xiidra and making the decision to kind of push out your plans for driving leverage lower post the spin? What was kind of an important strategic decision that seems to be paying off? And of course, there’s lots of other things you could be investing in across the businesses that you have strategically. Just wondering what’s the appetite at this time or in the next 12 or 18 months before that kind of activity? And then I have one follow-up if I could.
Brent Saunders: Yes. So you’re right, Matt. We did make a big bet on Xiidra. And I have to say, while we still have work to do on Xiidra, the actual investment goes beyond just the product TRxs and sales, it goes to establishing our presence in Xiidra and things like Miebo have clearly benefited from having Xiidra as we launch into more OTC options that will also benefit because of our market position because of Xiidra. We have a very loud share of voice in a category, and we want to be a driver of innovation and more solutions for patients. So strategically, a lot to like on execution with actual Xiidra, a lot of work to do. That’s how I think about it. I think as we look at investing in the business, the top priority right now is investing behind the launches really important launches continuing to support our contact lens business, as I mentioned a few times.
We haven’t spoken a lot, but Surgical IOLs really important, Aspire — enVista Aspire, which is our monofocal plus, which launched at the very end of last year is really in the full launch mode right now, and something we’re investing behind. We’ve got roughly 600 surgeons trained and implanting lenses and the feedback has been tremendous. As we’re doing that, we’re getting ready to launch the Lux upgrades around Europe. We have the trifocal, which is Aspire, Envy launching in perhaps the roughly close to the fourth quarter or thereabout. And so that is going to be a great lens, and we’re investing in the studies for enVista Beyond, our extended depth of focus. So a lot to do there as well. So all of our businesses, including consumer, contact lenses, pharma, surgical all have a really robust new product cycle coming over the next few years, and we want to have launch excellence and really have these products be the future of B&L.
And by the way, across the board, they’re all higher margin products, which will continue to support our sustained margin improvement as a company for years to come. That being said, what are we investing in? We’re investing in innovation. We’re doing relatively smaller partnerships, R&D collaborations, technology, investments to continue the stream of new product launches beyond the cycle we have today. And that is how you create organizational health in a company like Bausch + Lomb is to have a steady stream of innovation and launches year after year, decade after decade. And we see the results of taking a pause for 10 years and what we’re dealing with. And we’re — we have to look at the path to make sure we never repeat it. And so that’s our key focus and priority for the short-term.
Matt Miksic: That’s super helpful.
Brent Saunders: Do you have another question, Matt?
Matt Miksic: Yes. You touched on some of the follow — some of the things I meant to follow-up on here just on the Surgical side. I know that, that is a — seems to be kind of a longer ramp to sort of get to move the needle to where you want it to be in the Surgical space competitively. And I just — you had some launches. You had some coming in the back half of this year. If you were to sort of, give us a road map for the next 12, 18 months, should we start to think of that business meaningfully lifting as you exit this year, meaningfully lifting in the next couple of quarters? Or is that a bit more of a 12 or 18 months build to sort of show the results of the investments and the new products that you’ve talked about there?
Brent Saunders: Yes. I think you’re right. It’s more of a 12, 18, 24-month build particularly as we move to the offering, the more of the premium IOLs to complete the portfolio. But look, if you look in the quarter, you saw implants up 9%. These are constant currency numbers, tax up 9% and equipment up 5%. And so really nice tactical execution by our team. But that being said, I think there’s 2 things to consider as we look at particularly margins and profitability of Surgical. One is we’re still working through expensive inventory, as Sam mentioned, and that will take some time to work through. At the same time, our supply chain team is working at improving our manufacturing and distribution capabilities to get to better margins.
And then as I mentioned, mix, as we transition and offer a full range of IOLs, including premiums, they come with a much higher margin. And so I think over the next, as you said, 18, 24 months, you’ll see a steady improvement in that business, and we’re going to become much more competitive over time. So I’m excited about it, but it’s not going to be an overnight sensation. It’s a lot of hard work and a lot of dedication. But I think we’re on the right track. We’re early, but we’re on the right track.
Operator: We have time for one last question. And your question comes from Doug Miehm with RBC.
Doug Miehm: Yes. My question has to do with Miebo. Brent, you mentioned that I think the 3 top Medicare providers are going to be covering the drug. But I’m wondering on the commercial side, how are things looking there in terms of getting on formularies and that sort of thing? And then as a follow-up, just wondering, do you have the manufacturing capability to provide for what looks like it’s going to be a very, very strong Miebo launch here given the outperformance in Q1?
Brent Saunders: Yes. So great question. So just to correct you, 2 of the other top Medicare plans will begin covering Miebo over the next month or so. And so that will give us about 50% Medicare coverage going into the second half of the year. That’s not an over — just to clarify, that doesn’t like flip a switch and change overnight. It takes some time to build a local carriers and policies get implemented, but we’re really ahead of schedule on getting Medicare coverage. The team did a great job there. And so a lot to like there. On commercial, we’re about 50% as well, and that should continue to improve throughout the year. And so — 2 quarters into a launch, that’s — I don’t want to say it’s unprecedented, but it’s really a great outcome to have that broad-based coverage.
