Unless the context otherwise indicates, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "our," "
Bausch + Lomb," the "Company," and similar terms refer to Bausch + Lomb Corporationand its subsidiaries. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" has been updated through June 8, 2022and should be read in conjunction with the unaudited interim Condensed Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022(this "Form 10-Q"). The matters discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain certain forward-looking statements within the meaning of Section 27A of The Securities Act of 1933, as amended (the "Act"), and Section 21E of The Securities Exchange Act of 1934, as amended, and that may be forward-looking information within the meaning defined under applicable Canadian securities laws (collectively, "Forward-Looking Statements"). See "Forward-Looking Statements" at the end of this discussion. Our accompanying unaudited interim Condensed Consolidated Financial Statements as of March 31, 2022and for the three months ended March 31, 2022and 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America(" U.S.GAAP") and the rules and regulations of the United States Securities and Exchange Commission(the "SEC") for interim financial statements, and should be read in conjunction with our Combined Financial Statements for the year ended December 31, 2021, which are included in Bausch + Lomb'sfinal prospectus as filed with the SECon May 5, 2022pursuant to Rule 424(b)(4) under the Act relating to Bausch + Lomb'sRegistration Statement on Form S-1 and Bausch + Lomb'ssupplemented PREP prospectus filed with the Canadian Securities Administrators (the "CSA") on May 5, 2022. In our opinion, the unaudited interim Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated. Additional company information is available on SEDAR at www.sedar.com and on the SECwebsite at www.sec.gov. All currency amounts are expressed in U.S.dollars, unless otherwise noted.
Bausch + Lombis a subsidiary of Bausch Health Companies Inc. ("BHC"). Bausch + Lombis a leading global eye health company dedicated to protecting and enhancing the gift of sight for millions of people around the world-from the moment of birth through every phase of life. Our mission is simple, yet powerful: helping you see better, to live better. We develop, manufacture and market, primarily in the areas of eye health, which are marketed directly or indirectly in approximately 100 countries. As a fully integrated eye health business, Bausch + Lombhas an established line of contact lenses, intraocular lenses and other medical devices, surgical systems and devices, vitamin and mineral supplements, lens care products, prescription eye-medications and other consumer products that positions us to compete in all areas of the eye health market. Our comprehensive portfolio of over 400 products is fully integrated and built to serve our customers across the full spectrum of their eye health needs throughout their lives. Our iconic brand is built on the deep trust and loyalty of our customers established over our nearly 170-year history. We have a significant global research, development, manufacturing and commercial footprint of approximately 12,500 employees and a presence in approximately 100 countries, extending our reach to billions of potential customers across the globe. We have long been associated with many of the most significant advances in eye health, and we believe we are well positioned to continue leading the advancement of eye health in the future. Reportable Segments Our portfolio of products falls into three operating and reportable segments: (i) Vision Care, (ii) Ophthalmic Pharmaceuticalsand (iii) Surgical. We have found and continue to believe there is significant opportunity in these businesses and we believe our existing portfolio, commercial footprint and pipeline of product development projects position us to successfully compete in these markets and provide us with the greatest opportunity to build value for our shareholders. The following is a brief description of the Company's segments: The Vision Care segment-includes both our contact lens and consumer eye care businesses, and includes leading products such as our Biotrue® ONEday daily disposables and our Biotrue® multi-purpose solution. Our contact lens portfolio spans the spectrum of wearing modalities, including daily disposable and frequently replaced contact lenses, and contact lenses that are indicated for therapeutic use and that can also provide optical correction during healing if required. In particular, our vision care contact lens portfolio includes our Bausch + Lomb INFUSE® (silicone hydrogel ("SiHy")) daily disposable contact lenses, Biotrue® ONEday daily disposables, PureVision® SiHy contact lenses, SofLens® daily disposables and Bausch + Lomb ULTRA® contact lenses. Our consumer eye care business consists of contact lens care products, over the counter ("OTC") eye drops that address various conditions, including eye allergies, conjunctivitis, dry eye, and redness relief and eye vitamins and mineral supplements. Our eye vitamin products include our patented PreserVision® AREDS 2 formula which contains the exact levels of six key nutrients recommended by the National Eye Instituteto help reduce the risk of progression in patients with moderate to advanced age-related macular degeneration ("AMD") and supplements that support general eye health. Within our consumer eye care business, our lens care product portfolio includes Biotrue® and Renu® multipurpose solutions and Boston® cleaning 26 --------------------------------------------------------------------------------
and conditioning solutions, our eye drops include LUMIFY®, Soothe®, Artelac®,
Alaway® and Mioclear™ and our eye vitamins include PreserVision® and Ocuvite®.
For the year ended
December 31, 2021, our Vision Care segment had seven product franchises that generated over $100 millionin annual revenues, as follows: PreserVision®/Ocuvite®, Biotrue®, SofLens®, Renu®, Bausch + Lomb ULTRA®, Artelac® and LUMIFY®. The Ophthalmic Pharmaceuticalssegment-consists of a broad line of proprietary and generic pharmaceutical products for post-operative treatments and treatments for a number of eye conditions, such as glaucoma, eye inflammation, ocular hypertension, dry eyes and retinal diseases. Key proprietary ophthalmic pharmaceutical brands are VYZULTA®, Lotemax®, Prolensa® and BEPREVE®. The Surgical Segment-consists of medical device equipment, consumables and instrumental tools and technologies for the treatment of corneal, cataracts, and vitreous and retinal eye conditions, and includes intraocular lenses ("IOLs") and delivery systems, phacoemulsification equipment and other surgical instruments and devices necessary for cataract surgery. Key surgical brands include Akreos®, AMVISC®, Crystalens® IOLs, enVista® IOLs, Millennium®, Stellaris Elite® vision enhancement system, Storz® ophthalmic instruments, VICTUS® femtosecond laser, Teneo®, Eyefill® and Zyoptix®.
IPO and Separation of Bausch + Lomb Eye Health Business
August 6, 2020, our parent company, BHC, announced its plan to separate our eye health business into an independent publicly traded entity, from the remainder of BHC (the "Separation"). In January 2022, BHC completed the internal organizational design and structure of our new eye health entity. The registration statement related to the initial public offering of Bausch + Lomb(the "B+L IPO") was declared effective on May 5, 2022, and our common stock began trading on the New York Stock Exchangeand the Toronto Stock Exchange, in each case under the ticker symbol "BLCO" on May 6, 2022. Prior to the completion of the B+L IPO, we were an indirect wholly-owned subsidiary of BHC. On May 10, 2022, a wholly owned subsidiary of BHC (the "Selling Shareholder") sold 35,000,000 common shares of Bausch + Lomb, at an offering price of $18.00per share (less the applicable underwriting discount), pursuant to the Bausch + Lombprospectus. On May 31, 2022, the underwriters of the B+L IPO partially exercised the over-allotment option granted to them by the Selling Shareholder, and, on June 1, 2022, the Selling Shareholder sold an additional 4,550,357 common shares of Bausch + Lomb, at an offering price of $18.00per share (less the applicable underwriting discount). The Selling Shareholder received all net proceeds from the B+L IPO. Upon the closing of the B+L IPO (after giving effect to the partial exercise of the over-allotment option), BHC directly or indirectly holds 310,449,643 Bausch + Lombcommon shares, which represents approximately 88.7% of our common shares. We understand that BHC expects to complete the separation of Bausch + Lombafter the expiry of customary lockups related to the B+L IPO and achievement of targeted debt leverage ratios, subject to the receipt of applicable shareholder and other necessary approvals.
See note 19, “SUBSEQUENT EVENTS” to our unaudited interim condensed consolidated financial statements.
Financial statements for the three months ended
elsewhere in this Form 10-Q for additional information.
We believe the Separation presents
Bausch + Lombwith a unique opportunity, and will provide us operating flexibility and put us in a strong position to unlock additional value in our eye health business as a separate and dissimilar business from the remainder of BHC's product portfolios and businesses. As a separate entity, Bausch + Lomb'smanagement believes that it is positioned to focus on its core businesses to drive additional growth, more effectively allocate capital and better manage our capital needs. Further, the Separation, will allow us and the market to compare the operating results of our eye health business with other "pure play" eye health companies. Although management believes these transactions will bring out additional value, there can be no assurance that the Separation will be successful in doing so. See "Risk Factors - Risk Relating to the Separation" included in Bausch + Lomb'sfinal prospectus as filed with the SECon May 5, 2022pursuant to Rule 424(b)(4) under the Act relating to Bausch + Lomb'sRegistration Statement on Form S-1 and in Bausch + Lomb'ssupplemented PREP prospectus as filed with the CSA on May 5, 2022. Positioning for Growth Product Development
We are constantly looking for new product opportunities through
strategic development and licensing agreements, which, if successful, will enable
to leverage our commercial footprint and complement our existing product
portfolio and meet specific unmet market needs.
27 -------------------------------------------------------------------------------- We are focused on bringing innovative products to market to serve doctors, patients, and consumers in the pursuit of helping people see better to live better all over the world. We consistently look for key trends in the eye health market to meet changing doctor, patient, and consumer needs and identify areas for investment to expand our market share and maintain our leading positions across business segments. Our leadership team actively manages our pipeline in order to identify what we believe are innovative and realizable projects that meet the unmet needs of consumers, patients and eye health professionals and are expected to provide incremental and sustainable revenues and growth into the future. We believe that our current pipeline is strong enough to meet these objectives and provide future sources of revenues, in our core businesses, sufficient enough to sustain our growth and corporate health as other products in our established portfolio face generic competition and lose momentum. We believe our unparalleled eye health knowledge and insights allow us to capitalize on market trends by differentiating our approach to product development, with a pipeline focused on prioritizing customer needs and actively seeking external innovation to design, develop and advance creative, ethical eye health products across our portfolio, to address unmet and evolving needs of eye care professionals, patients and consumers. Since 2017, we have introduced more than 260 new products in approximately 60 countries. Our team of approximately 850 dedicated research and Development ("R&D") employees is focused on advancing our pipeline and identifying new product opportunities and we believe we have a significant innovation opportunity today. We plan to develop and commercialize our global pipeline of approximately 100 projects in various stages of pre-clinical and clinical development, including new contact lenses and prescription medications for myopia, next-generation cataract equipment, premium IOL, investigational treatments for dry eye, novel formulation for eye vitamins and preservative free formulation of eye drops, next-generation cataract equipment, among others, that are designed to grow our portfolio and accelerate future growth. Our internal R&D organization focuses on the development of products through clinical trials. As of
March 31, 2022, we have approximately 100 projects in our global pipeline. Certain core internal R&D projects that have received a significant portion of our R&D investment in current and prior periods are listed below.
Vision Care Pipeline
We believe that vision care is a very innovation-sensitive market. As a result, we believe our vision care business will achieve growth through our focus on new materials and products. We have leveraged our expertise in eye health to build a vision care pipeline based on innovative next generation materials and products, and we intend to continue developing our pipeline through a combination of internal and external business development initiatives. Our range of vision care pipeline products are as follows:
Contact lens pipeline
We are developing new materials and expect to continue to introduce innovative products, like our Bausch + Lomb INFUSE® contact lens, which is a silicone hydrogel daily disposable contact lens designed with a next generation material infused with ProBalance Technology™ to help maintain ocular surface homeostasis and help reduce symptoms of contact lens dryness. Silicone hydrogel materials provide increased oxygen transmission for eye health, improved safety and increased comfort for end users, and higher profitability to the eye care providers. This combination should continue to benefit our other SiHy brands: Bausch + Lomb ULTRA®, AQUALOX™ and PureVision®. •SiHy Daily - A silicone hydrogel daily disposable contact lens designed to provide clear vision throughout the day. In
September 2018, we launched SiHy Dailyin Japanunder the branded name AQUALOX™ ONE DAY. In August 2020, we launched SiHy Dailyin the U.S.under the branded name Bausch + Lomb INFUSE® SiHy Daily Disposable contact lens. In the fourth quarter of 2020, SiHy Dailywas launched in Australia, Hong Kongand Canadaunder the branded name Bausch + Lomb Ultra® ONE DAY. SiHy Dailyhas also received regulatory approval in China, New Zealand, Japan, South Korea, Europe, Singaporeand Malaysia, where it will be branded as Bausch + Lomb Ultra® ONE DAY, and in the second quarter of 2021, we launched SiHy Dailyin South Koreaand Singaporeas Bausch + Lomb Ultra® ONE DAY. •Biotrue® ONEday for Astigmatism - A daily disposable contact lens for astigmatic patients. The Biotrue® ONEday contact lens incorporates Surface Active Technology™ to provide a dehydration barrier. The Biotrue® ONEday for Astigmatism also includes evolved peri-ballast geometry to deliver stability and comfort for the astigmatic patient. We launched this product in December 2016and launched an extended power range and further extended power ranges in each of the years 2017 through 2020. Biotrue® ONEday for Astigmatism has also received regulatory approval in China. •Bausch + Lomb ULTRA® monthly silicone hydrogel lens - Specifically designed to address the lifestyle and vision needs of patients with MoistureSeal® technology, which maintains 95% of contact lens moisture for a full 16 hours. In the second quarter of 2020, Bausch + Lomb ULTRA® received a seven day extended wear indication approval from the European Unionand received regulatory approval from the NMPA in China. •Bausch + Lomb ULTRA® Multifocal for Astigmatism contact lens - The first and only multifocal toric lens available as a standard offering in the eye care professional's fit set. The new monthly silicone hydrogel lens, which was specifically designed to address the lifestyle and vision needs of patients with both astigmatism and presbyopia, 28 -------------------------------------------------------------------------------- combines the Company's unique 3-Zone Progressive™ multifocal design with the stability of its OpticAlign® toric with MoistureSeal® technology to provide eye care professionals and their patients an advanced contact lens technology that offers the convenience of same-day fitting during the initial lens exam. Bausch + Lomb ULTRA® Multifocal for Astigmatism was launched in June 2019and received European Unionregulatory approval in the second quarter of 2020. In July 2021, we launched an extended parameter range of this product. •Zen™ Multifocal Scleral Lens for presbyopia - In January 2019, we launched this product exclusively available with Zenlens™ and Zen™ RC scleral lenses and will allow eye care professionals to fit presbyopic patients with regular and irregular corneas and those with ocular surface disease, such as dry eye. The Zen™ Multifocal Scleral Lens incorporates decentered optics, enabling the near power to be positioned over the visual axis. •Tangible® Hydra-PEG® - A high-water polymer coating that is bonded to the surface of a contact lens and designed to address contact lens discomfort and dry eye. We launched this product in March 2019. Tangible® Hydra-PEG® coating technology in combination with our Boston® materials and Zenlens™ family of scleral lenses will help eye care professionals provide a better lens wearing experience for their patients with challenging vision needs. •In October 2020, we announced that we had entered into an exclusive global licensing agreement with Brien Holden Vision Institute("BHVI" and the license, the "BHVI License") for a myopia control contact lens design developed by BHVI. We plan to pair BHVI's novel contact lens design with our leading contact lens technologies to develop potential contact lens treatments designed to slow the progression of myopia in children.
• We develop a personalized orthokeratology lens with exclusive technology
software-based fitting system for the treatment of myopia, particularly in
children, which we plan to launch in 2023, subject to FDA approval.
• We are developing some cosmetic contact lenses with enhanced color
technology, which we plan to launch in select Asian markets in 2023 and 2024.
Consumer Eye Care Pipeline
We have built and strengthened our consumer eye care product pipeline through internal development initiatives and external business development opportunities and intend to continue developing our pipeline through a combination of internal and external business development initiatives. Our consumer eye care product pipeline includes: •LUMIFY® (brimonidine tartrate ophthalmic solution, 0.025%) - An OTC eye drop developed as an ocular redness reliever. We launched this product in the
U.S.in May 2018. Currently, we have several new line formulations under development. The first Phase 3 study in support of these line extensions has initiated. Additional studies are expected to commence in the second half of 2022. •Renu® Advanced Multi-Purpose Solution ("MPS") - Contains a triple disinfectant system that kills 99.9% of germs, and has a dual surfactant system that provides up to 20 hours of moisture. Renu® Advanced MPS is FDA cleared with indications for use to condition, clean, remove protein, disinfect, rinse and store soft contact lenses including those composed of silicone hydrogels. Renu® Advanced MPS has gained regulatory approvals in Korea, India, Mexico, Indonesia, Malaysia, Singaporeand, during the second quarter of 2020, the European Union. In 2021, Renu® Advanced MPS was launched in Greeceand gained regulatory approvals in Chinaand Taiwan. We anticipate launches in China, Taiwan, Czech Republic, Israel, Poland, Slovakia, the Middle Eastand Africaregion and the Latin American region during 2022 and launches in additional regions in 2023. •Biotrue® Hydration Plus Multi-Purpose Solution - A next generation Biotrue® MPS that contains 25% more Hyaluronan, triple disinfectant system that kills 99.9% of germs tested, dual surfactant system that provides lens conditioning/cleaning and erythritol providing antioxidant properties. This formulation provides up to 20 hours moisture. Biotrue® Hydration Plus MPS was launched in the U.S.in 2022 and has gained regulatory approval from Health Canadaand China's National Medical Products Administration("NMPA").
Ophthalmic pharmaceutical pipeline
We intend to strengthen our innovative pharmaceuticals pipeline through internal development and external business development opportunities with a focus on life cycle management, generics and "back of the eye" diseases. Our range of ophthalmic pharmaceutical pipeline products are described below: •In
October 2019, we acquired an exclusive license from Clearside Biomedical, Inc. ("Clearside" and the license, the "Clearside License") for the commercialization and development of XIPERE® (triamcinolone acetonide suprachoroidal injectable suspension) in the U.S.and Canada. XIPERE® is a proprietary suspension of the corticosteroid triamcinolone acetonide formulated for suprachoroidal administration via Clearside's proprietary SCS Microinjector®. In October 2021, the FDA approved XIPERE® for suprachoroidal use for the treatment of macular edema associated with uveitis. We launched XIPERE® in the first quarter of 2022, and believe that it is the first and only therapy currently available in the U.S.for suprachoroidal use for the treatment of macular edema associated with uveitis. 29 -------------------------------------------------------------------------------- •In December 2019, we announced that we had acquired an exclusive license from Novaliq GmbH(the "Novaliq License") for the commercialization and development in the U.S.and Canadaof the investigational treatment NOV03 (perfluorohexyloctane), a first-in-class investigational drug that if approved by the FDA will have a novel mechanism of action to treat dry eye disease ("DED") associated with Meibomian Gland Dysfunction ("MGD"). In April 2021, we announced statistically significant topline data from the first of two Phase 3 studies, and in September 2021, we announced statistically significant topline data from the second Phase 3 study. We anticipate filing a New Drug Application in the first half of 2022 and if approved, we anticipate launching in the U.S.in 2023. If approved by the FDA, we believe the addition of this investigational treatment for DED with MGD will help build upon our strong portfolio of integrated eye health products. •Under the terms of an October 2020agreement with Eyenovia, Inc., we have acquired an exclusive license (the "Eyenovia License") in the U.S.and Canadafor the development and commercialization of an investigational microdose formulation of atropine ophthalmic solution; a potentially first-in-class investigational treatment of the reduction of pediatric myopia progression. Microdose administration is designed to result in low systemic and ocular drug exposure. We expect to complete enrollment for a Phase 3 study during the second half of 2022. If approved by the FDA, we believe this investigational product could potentially change the treatment paradigm for the reduction of myopia progression in children. •In May 2020, we entered into an exclusive license agreement (the "STADA-Xbrane License") with STADA Arzneimittel AG and its development partner, Xbrane Biopharma AB ("Xbrane"), to commercialize in the U.S.and Canadaa biosimilar candidate to Lucentis® (ranibizumab), a VEGF inhibitor used in the treatment of serious eye diseases, such as wet AMD. We expect to launch this product in 2023 (subject to the timing of the resubmission of the abbreviated Biologics License Application ("aBLA") by Xbrane).
We have built and strengthened our ophthalmic surgical pipeline through internal and external development and licensing initiatives and intend to continue developing our pipeline through a combination of internal and external business development initiatives. Our range of surgical pipeline products are developed with the goal to reinforce our position in existing segments as well as entering new segments in order to broaden the offering. •In the first quarter of 2021, we launched LuxSmartTM IOLs with extended depth of focus ("EDOF") design. We started first implantation in
December 2020, and we expanded prelaunch activities in the U.K., France, Germany, Sweden, Italy, Spain, Poland, Hong Kongand the Czech Republicin the first quarter of 2021. During the remainder of 2021, we expanded the launch of LuxSmartTM IOLs to other European countries, including Belgium, Netherlands, Norway, Portugal, Switzerland, Greece, Bulgaria, Hungary, Romaniaand Serbia. We expect to expand the launch of LuxSmartTM IOLs in select other markets later in 2022 and in 2023. •We are expanding our portfolio of premium IOLs built on the enVista® platform with Monofocal Plus, EDOF and Trifocal optical designs for presbyopia correction. We expect that they will be commercialized together with our SimplifEye® Preloaded injector with two options: non-Toric, as well as Toric for astigmatism patients. We anticipate launching Monofocal Plus, Trifocal and EDOF optical designs for presbyopia in 2023, 2024 and 2025, respectively. •We are developing a new generation Phaco and Vitroretinal combined system that we expect will be a future innovation that builds on the existing Stellaris Elite® vision enhancement system by introducing a new fluidics system, enhancing interconnectivity and networking, expanding surgical parameters and offering a wide range of new peripherals to enhance the surgeons' control throughout the surgical procedures. •We are developing two new femto lasers with advanced technology that we expect to launch in 2024. These products are designed for the cataract and refractive surgery markets.
• We are developing new innovative and personalized corneal treatments for our Teneo
Excimer laser, which we plan to launch in 2023.
•New Ophthalmic Viscosurgical Device ("OVD") product - A formulation to protect corneal endothelium during phacoemulsification process during a cataract surgery and to help chamber maintenance and lubrication during IOL delivery. In
January 2020, we commenced an FDA clinical study for the cohesive OVD product (StableVisc™), and the study report is expected in June 2022. FDA approval is expected in the fourth quarter of 2022 and launch is expected in the first quarter of 2023. In addition, in March 2021, we received Premarket Approval from the FDA for Clearvisc™ dispersive OVD, which we launched in the U.S.in June 2021.
Strategic licensing agreements
To supplement our internal R&D initiatives and to build-out and refresh our product portfolio, we also search for opportunities to augment our pipeline through arrangements that allow us to gain access to unique products and investigational treatments, by strategically aligning ourselves with other innovative product solutions. Our strategic licensing agreements include the BVHI License outlined in the discussion of our Vision Care pipeline above and the Clearside License,
license, Eyenovia license and STADA-Xbrane license each described in the
discussion of our ophthalmic pharmaceutical pipeline above.
In the normal course of business, we will enter into select licensing and collaborative agreements for the commercialization and/or development of unique products primarily in the
U.S.and Canada. These products are sometimes investigational treatments in early stage development that target unique conditions. The ultimate outcome, including whether the product will be: (i) fully developed, (ii) approved by the FDA or other regulators, (iii) covered by third-party payors or (iv) profitable for distribution, is highly uncertain. Under certain agreements, the Company may be required to make payments contingent upon the achievement of specific developmental, regulatory, or commercial milestones.
We are considering and will continue to consider other strategic licenses
opportunities to address unmet consumer, patient and eye health needs
professional, some of which might be material in size.
We selectively consider any acquisition that we believe aligns well with our current organization and strategic plan. We seek to enter into only those acquisitions that provide us with significant synergies with our existing business, thereby minimizing risks to our core businesses and providing long-term growth opportunities. Recently, we have entered into transactions that although not immediately impactful to our operating results, are expected to be accretive to our bottom line in future years and contribute to our long-term growth strategies.
We are considering other acquisition opportunities within our core business
areas, some of which could be large in size.
Expansion of the sales force
We have an established sales network that uniquely positions us to meet customers' demands across the geographies we serve, building deeply loyal and enduring relationships. Through our teams, we are engaged with various physician and patient associations across the world. These professional relationships are the foundation of our proven track record of converting innovation into trusted products with high sales and provide us additional patient insights and consumer feedback that virtuously informs the innovation effort. We look for opportunities to strategically expand our sales force in specific geographies as need and in support of new product launches, most recently in support of our launches of our Bausch + Lomb INFUSE®, Biotrue® ONEday and Bausch + Lomb ULTRA® contact lenses in order to drive growth and maximize the return on our product portfolio. e-Commerce We see an opportunity in e-Commerce for growth, which now represents more than 10% of our Vision Care revenues. We believe that the trend of using e-Commerce platforms to shop for our products will continue to affect our business due to the convenience of online ordering and subscription delivery. We believe that our products are well suited to sales through e-Commerce channels as they are shelf stable, inexpensive to ship as our products are light in weight, and easy to transport. Additionally, the recurring purchase cycles for many of our products will position them to capitalize on continued growth of subscription services. We continue to look for additional opportunities to invest in these platforms to meet consumer demand and drive growth.
Investment in our manufacturing facilities
To support our core business, we have and continue to provide strategic solutions
investments in our infrastructures, the most important of which are within our
To meet the forecasted demand for our Biotrue® ONEday range of contact lenses, in
July 2017, we placed into service a $175 millionmulti-year strategic expansion project of the Waterfordfacility. The emphasis of the expansion project was to: (i) develop new technology to manufacture, automatically inspect and package contact lenses, (ii) bring that technology to full validation and (iii) increase the size of the Waterfordfacility. To address the expected global demand for our Bausch + Lomb ULTRA® range of contact lenses, in December 2017, we completed a multi-year, $220 millionstrategic upgrade to our Rochester facility. The upgrade increased production capacity in support of our Bausch + Lomb Ultra® and SiHy Daily AQUALOX™ product lines and better supports the production of other well-established contact lenses, such as our PureVision®, PureVision®2 (SVS, Toric, and Multifocal), SofLens® 38 and SilSoft®. To address the expected global demand for our SiHy Dailydisposable contact lenses, in November 2018, we initiated $300 millionof additional expansion projects to add multiple production lines to our Rochester and Waterfordfacilities. The first phase of the production line installation program has been completed, and in the first half of 2022, we commenced commercial production of certain of our latest contact lenses at both our Rochester and Waterfordfacilities. We expect to complete the expansion programs at our Rochester and Waterfordfacilities in the second half of 2022. 31 -------------------------------------------------------------------------------- In July 2021, we announced plans to invest an additional $90 millionto increase capacity at our Waterfordfacility to meet the expected demand for our Biotrue® ONEday range of daily disposable contact lenses. The new production lines are expected to be completed in 2023. If completed as planned, the recently announced expansion of our Waterfordfacility will be the fifth major expansion of our Bausch + Lombmanufacturing facilities in support of our efforts to increase market share in the contact lens market in the seven years ending 2023.
We believe that investments in our
further demonstrates the growth potential we see in our
Our competitive environment
We operate in a marketplace with many competitors and face competition from competitors' products and new products entering the market. We also face the threat of competition from new entrants to our markets as well as from existing competitors, including those overseas who may have lower production costs. In order to protect and grow our market share we: (i) actively manage our pricing, (ii) refresh our product portfolio with innovative new products and (iii) manage our product portfolio to address generic competition.
In addition to the actions described above, the events described below have
affected and may affect our business trends. The topics covered in this
contains forward-looking statements. Please see the “Foresight” section
Statements” for more information.
sanctions, export controls and other measures are imposed against
economies and global financial markets and exacerbating the current economic crisis
challenges, including issues such as rising inflation and the global supply chain
Our revenues attributable to
Russiafor the three months ended March 31, 2022and 2021 were $17 millionand $19 million, respectively. Our revenues attributable to Ukrainefor the three months ended March 31, 2022and 2021 were $1 millionand $2 million, respectively. Our revenues attributable to Belarusfor the three months ended March 31, 2022and 2021 were $1 millionand $2 million, respectively. As the geopolitical situation in Eastern Europecontinues to intensify, political events and sanctions are continually changing, and we continue to assess the impact of the Russia- Ukrainewar will have on our businesses. These impacts may include but are not limited to: (i) interruptions or stoppage of production, (ii) damage or loss of inventories, (iii) supply-chain and product distribution disruptions in Eastern Europe, (iv) volatility in commodity prices and currencies, (v) disruption in banking systems and capital markets, (vi) reductions in sales and earnings of business in affected areas, (vii) increased costs and (viii) cyberattacks. To date, these challenges have begun to impact our operations in the region, and we anticipate that the ongoing conflict in this region and the sanctions and other actions by the global community in response will continue to hinder our ability to conduct business with customers and vendors in this region. For example, we expect to experience further disruption and delays in the supply of our products to our customers in Russia, Belarusand Ukraine. We may also experience further decreased demand for our products in these countries as a result of the conflict. In addition, we expect to experience difficulties in collecting receivables from such customers. If we continue to be hampered in our ability to conduct business with new or existing customers and vendors in this region, our business, and operations, including our revenues, profitability and cash flows, may be adversely impacted. Furthermore, if the sanctions and other retaliatory measures imposed by the global community change, we may be required to cease or suspend our operations in the region or, should the conflict worsen, we may voluntarily elect to do so. We cannot provide assurance that current sanctions or potential future changes in these sanctions or other measures will not have a material impact on our operations in Russia, Belarusand Ukraine. The disruption to or suspension of our business and operations in Russia, Belarusand Ukrainemay have a material adverse impact on our business, financial condition, cash flows and results of operations. We will continue to monitor the impacts of the Russian-Ukraine war on macroeconomic conditions and continually assess the effect these matters may have on our businesses. For a further discussion of these and other risks relating to our international business, see "Risk Factors-Risks Relating to the International Scope of our Business" included in Bausch + Lomb'sfinal prospectus as filed with the SECon May 5, 2022pursuant to Rule 424(b)(4) under the Act relating to Bausch + Lomb'sRegistration Statement on Form S-1 and in Bausch + Lomb'ssupplemented PREP prospectus as filed with the CSA on May 5, 2022.
Impacts of the COVID-19 pandemic
The unprecedented nature of the COVID-19 pandemic has, and continues to, adversely impact the global economy. The COVID-19 pandemic and the reactions of governments, private sector participants and the public in an effort to contain the spread of the COVID-19 virus and/or address its impacts have had significant direct and indirect effects on businesses and commerce. This includes, but is not limited to, disruption to supply chains, employee base and transactional activity, facilities closures and production suspensions. Our revenues were most negatively impacted during our second quarter of 2020 by certain 32 -------------------------------------------------------------------------------- social restrictions and other precautionary measures taken in response to the COVID-19 pandemic. However, as governments began lifting social restrictions, allowing offices of certain health care providers to reopen and certain surgeries and elective medical procedures to proceed, the negative trend in the revenues of certain businesses began to level off and stabilize prior to our third quarter of 2020. After the launch of effective vaccines in
December 2020, infection rates began to decline, signaling the beginning of a recovery from the COVID-19 pandemic. Our revenues gradually returned to pre-pandemic levels for many of our businesses and geographies throughout 2021. However, in some regions, including China(as further described below), we continue to experience negative impacts of the COVID-19 pandemic on our business in those regions. The rates of recovery for each business will vary by geography and will be dependent upon, among other things, the availability and effectiveness of vaccines for the COVID-19 virus and variant and subvariant strains thereof, government responses, rates of economic recovery, precautionary measures taken by patients and customers, the rate at which remaining social restrictions are lifted and, once lifted, the presumption that social restrictions will not be materially reenacted in the event of a resurgence of the virus or variant and subvariant strains thereof and other actions taken in response to the COVID-19 pandemic. The outbreak of the omicron variant in Chinahas resulted in government enforced lockdowns and other social restrictions, which impacted our ability to conduct business as usual in certain regions in China, particularly Shanghai. The lockdowns in Chinahave impacted the demand for certain products, particularly our contact lens and consumer eye care products, as shelter in place orders limit the demand and need for the use of contact lenses and related products. Our revenues in Chinafor the three months ended March 31, 2022and 2021 were $82 millionand $89 million, respectively, a decrease of $7 millionand, in part, reflects the challenges created by the surge of the omicron variant in China. We expect the headwinds from China'sCOVID policies and lockdowns that we saw during the first quarter of 2022 to continue to make an impact during the second quarter of 2022, but we expect our revenues in Chinawill normalize into the second half of 2022. Additionally, government enforced lockdowns have caused certain businesses to suspend operations, creating distribution and other logistic issues for the distribution of our products and the sourcing for a limited number of raw materials. Through the date of this filing, we have dealt with these issues in Chinawith only a minimal impact on our manufacturing and distribution processes. However, as the impacts of global reaction to the COVID-19 pandemic remains a fluid situation, we continue to monitor the impacts on our businesses of the COVID-19 virus and variant and subvariant strains thereof in order to timely address new issues if and when they arise. For a further discussion of these and other COVID-19 related risks, see "Risk Factors- Risks Relating to COVID-19" included in Bausch + Lomb'sfinal prospectus as filed with the SECon May 5, 2022pursuant to Rule 424(b)(4) under the Act relating to Bausch + Lomb'sRegistration Statement on Form S-1 and in Bausch + Lomb'ssupplemented PREP prospectus as filed with the CSA on May 5, 2022. U.S.Tax Reform In April 2021, U.S.President Joseph Bidenproposed changes to the U.S.tax system. Since that date, both houses of Congresshave released their own proposals for changes to the U.S.tax system, which differ in a number of respects from the President's proposal. The proposals under discussion have included changes to the U.S.corporate tax system that would increase U.S.corporate tax rates, although the most recent proposals do not include any such rate increase, and changes that would raise the tax rate on and make other changes to the taxation of Global Intangible Low Tax Income earned by foreign subsidiaries. Also under consideration are modifications to the Base Erosion and Anti-Abuse Tax, which would tax certain payments, including some that are related to inventory, made to affiliates that are subject to an effective tax rate of less than specified rates. Certain proposals also include limitations on the participation exemption for foreign dividends received and interest expense. In addition, certain proposals include limitations on the deduction of interest expense and carryforwards of unused interest expense, as well as an excise tax on certain pharmaceutical products that are non-compliant with the proposed drug pricing legislation. We are unable to predict which, if any, U.S.tax reform proposals will be enacted into law, and what effects any enacted legislation might have on our liability for U.S.corporate tax. However, it is possible that the enactment of changes in the U.S.corporate tax system could have a material adverse effect on our liability for U.S.corporate tax and our consolidated effective tax rate.
Global minimum corporate tax rate
October 8, 2021, the Organisation for Economic Co-operation and Development("OECD")/ G20inclusive framework on Base Erosion and Profit Shifting (the "Inclusive Framework") published a statement updating and finalizing the key components of a two-pillar plan on global tax reform originally agreed on July 1, 2021, and a timetable for implementation by 2023. The Inclusive Framework plan has now been agreed to by 141 OECDmembers, including several countries which did not agree to the initial plan. Under pillar one, a portion of the residual profits of multinational businesses with global turnover above €20 billion and a profit margin above 10% will be allocated to market countries where such allocated profits would be taxed. Under pillar two, the Inclusive Framework has agreed on a global minimum corporate tax rate of 15% for companies with revenue above €750 million, calculated on a country-by-country basis. On October 30, 2021, the G20formally endorsed the new global minimum corporate tax rate rules. The Inclusive Framework agreement must now be implemented by the OECD Members who have agreed to the plan, effective in 2024. On December 20, 2021, the OECDpublished model rules to 33 -------------------------------------------------------------------------------- implement the pillar two rules, which are generally consistent with the agreement reached by the Inclusive Framework in October 2021. Additional guidance is expected to be published in 2022. We will continue to monitor the implementation of the Inclusive Framework agreement by the countries in which we operate. While we are unable to predict when and how the Inclusive Framework agreement will be enacted into law in these countries, and it is possible that the implementation of the Inclusive Framework agreement, including the global minimum corporate tax rate could have a material effect on our liability for corporate taxes and our consolidated effective tax rate.
Health care reform
U.S.federal and state governments continue to propose and pass legislation designed to regulate the health care industry. In March 2010, the Patient Protection and Affordable Care Act (the "ACA") was enacted in the U.S.The ACA contains several provisions that impact our business, including: (i) an increase in the minimum Medicaid rebate to states participating in the Medicaid program, (ii) the extension of the Medicaid rebates to Managed Care Organizations that dispense drugs to Medicaid beneficiaries, (iii) the expansion of the 340(B) Public Health Services Act drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics and health care centers and (iv) a fee payable to the federal government based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs. In addition, in 2013 federal subsidies began to be phased in for brand-name prescription drugs filled in the Medicare Part D coverage gap. The ACA also included provisions designed to increase the number of Americans covered by health insurance. In 2014, the ACA's private health insurance exchanges began to operate. The ACA also allows states to expand Medicaid coverage with most of the expansion's cost paid for by the federal government. For 2021 and 2020, we incurred costs of $3 millionand $3 million, respectively, related to the annual fee assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specified U.S.government programs (e.g., Medicare and Medicaid). For 2021 and 2020, we also incurred costs of $24 millionand $20 million, respectively, on Medicare Part D utilization incurred by beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the "donut hole"). The financial impact of the ACA will be affected by certain additional developments over the next few years, including pending implementation guidance and certain health care reform proposals. Additionally, policy efforts designed specifically to reduce patient out-of-pocket costs for medicines could result in new mandatory rebates and discounts or other pricing restrictions. Also, it is possible, as discussed further below, that legislation will be passed by Congressrepealing the ACA in whole or in part. Adoption of legislation at the federal or state level could materially affect demand for, or pricing of, our products. Beginning in 2011, the law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. More recently, the Bipartisan Budget Act of 2018 amended the ACA, effective January 1, 2019, to close the donut hole in most Medicare drug plans. In addition, in April 2018, the Centers for Medicare & Medicaid Servicespublished a final rule that gives states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. In 2018, we faced uncertainties due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. However, we believe there is low likelihood of repeal of the ACA, given the recent failure of the Senate'smultiple attempts to repeal various combinations of ACA provisions and the recent change in administration. There is no assurance that any replacement or administrative modifications of the ACA will not adversely affect our business and financial results, particularly if the replacing legislation reduces incentives for employer-sponsored insurance coverage, and we cannot predict how future federal or state legislative or administrative changes relating to the reform will affect our business. In 2019, the U.S. Department of Health and Human Servicesannounced a preliminary plan to allow for the importation of certain lower-cost drugs from Canada. The preliminary plan excludes insulin, biological drugs, controlled substances and intravenous drugs. The preliminary plan relies on individual states to develop proposals for safe importation of those drugs from Canadaand submit those proposals to the federal government for approval. Although the preliminary plan has some support from the prior administration, at this time, studies to evaluate the related costs and benefits, evaluate the reasonableness of the logistics, and measure the public reaction of such a plan have not been performed. While we do not believe this will have a significant impact on our future cash flows, we cannot provide assurance as to the effect or impact of such a plan. In 2019, the Government of Canada( Health Canada) published in the Canada Gazettethe new pricing regulation for patented drugs. These regulations were scheduled to become effective on July 1, 2021, but have been delayed until July 1, 2022. The new regulations will, among other things, change the mechanics of establishing the pricing for products submitted for approval after August 21, 2019and the number and composition of reference countries used to determine if a drug's price is excessive. While we do not believe this will have a significant impact on our future cash flows, as additional facts materialize, we cannot provide assurance as to the ultimate content, timing, effect or impact of such regulations. 34 -------------------------------------------------------------------------------- In July 2020, former U.S.President Donald Trumpsigned four Executive Orders related to drug pricing, including orders addressing: (i) Part D rebate reform, (ii) the provision of deeply discounted insulin and/or an EpiPen to patients of Federally Qualified Health Centers, (iii) drug importation from Canadaand (iv) most favored nation pricing for Medicare. In November 2020, former U.S.President Donald Trumpannounced the Most Favored Nation Model for Medicare Part B Payment which was to be implemented by the Center for Medicare & Medicaid Services Innovationon January 1, 2021; however, it has not been implemented, as it is currently being challenged in court. It is also uncertain whether the Biden administration intends to reverse these measures or adopt similar policy initiatives. However, U.S.President Joseph Bidenand several members of the current U.S. Congresshave indicated that lowering drug prices is a legislative and political priority, and some have introduced proposals that seek to address drug pricing. In December 2020, as part of a series of drug pricing-related rules issued by the Trump Administration, the Center for Medicare & Medicaid Servicesissued a Final Rule that makes significant modifications to the Medicaid Drug Rebate Program regulations in several areas, including with respect to the definition of key terms "line extension" and "new formulation" and best price (BP) reporting relating to certain value-based purchasing (VBP) arrangements (which took effect on January 1, 2022) and the price reporting treatment of manufacturer-sponsored patient benefit programs (which take effect on January 1, 2023).
One of the provisions included in the American Rescue Plan Act of 2021
eliminated the maximum rebate amount for
Multi-source drugs under the Medicaid drug discount program. We are currently
the revision of the legislation, the impact of which is uncertain at the moment.
Other legislative efforts relating to drug pricing have been enacted and others have been proposed at the
U.S.federal and state levels. For instance, certain states have enacted legislation related to prescription drug pricing transparency. Several states have passed importation legislation and Floridais working with the U.S.government to implement an importation program from Canada. We also anticipate that Congress, state legislatures and third-party payors may continue to review and assess alternative health care delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations affecting additional fundamental changes in the health care delivery system. We continually review newly enacted and proposed U.S.federal and state legislation, as well as proposed rulemaking and guidance published by the U.S. Department of Health and Human Servicesand the FDA; however, at this time, it is unclear the effect these matters may have on our businesses.
Certain of our products face the expiration of their patent or regulatory exclusivity in 2022 or in later years, following which we anticipate generic competition of these products. In addition, in certain cases, as a result of negotiated settlements of some of our patent infringement proceedings against generic competitors, we have granted licenses to such generic companies, which will permit them to enter the market with their generic products prior to the expiration of our applicable patent or regulatory exclusivity. Finally, for certain of our products that lost patent or regulatory exclusivity in prior years, we anticipate that generic competitors may launch in 2022 or in later years. Following a loss of exclusivity ("LOE") of and/or generic competition for a product, we would anticipate that product sales for such product would decrease significantly shortly following the LOE or entry of a generic competitor. Where we have the rights, we may elect to launch an authorized generic ("AG") of such product (either ourselves or through a third-party) prior to, upon or following generic entry, which may mitigate the anticipated decrease in product sales; however, even with launch of an authorized generic, the decline in product sales of such product would still be expected to be significant, and the effect on our future revenues could be material. Certain of our products already face generic competition. During 2021, in the
U.S., these products include, among others, Lotemax® Gel, Bepreve® and certain other products, which in aggregate accounted for less than 1% of our total revenues in 2021. Based on current patent expiration dates, settlement agreements and/or competitive information, we have also identified branded products that we believe could begin facing potential LOE and/or generic competition in the U.S.during the years 2022 through 2026, which in the aggregate accounted for approximately 1% of our total revenues in 2021. These dates may change based on, among other things, successful challenge to our patents, settlement of existing or future patent litigation and at-risk generic launches. We believe the entry into the market of generic competition generally would have an adverse impact on the volume and/or pricing of the affected products, however we are unable to predict the magnitude or timing of this impact. In addition, the PreserVision® U.S.formulation patent expired in March 2021, but a patent covering methods of using the formulation remains in force into 2026. PreserVision® products accounted for approximately 6% of our total revenues in 2021. PreserVision® is (or was) the subject of certain ongoing and past patent infringement proceedings. While the Company cannot predict the magnitude or timing of the impact from the PreserVision® patent expiry, this is an OTC product and thus, the impact is not expected to be as significant as the LOE of a branded pharmaceutical product. In addition, in connection with our Lumify®, PreserVision® and Vyzulta® products, we have commenced ongoing infringement proceedings (or anticipate commencing infringement proceedings) against potential generic competitors in the U.S.If we are not successful in these proceedings, we may face increased generic competition for these products. See Note 16, "LEGAL PROCEEDINGS" to our unaudited interim Condensed Consolidated Financial Statements for the three months ended March 31, 2022appearing elsewhere in this Form 10-Q, as well as Note 18, "LEGAL PROCEEDINGS" of our Combined Financial Statements for the year ended December 31, 2021, which are included in Bausch + Lomb'sfinal 35 -------------------------------------------------------------------------------- prospectus as filed with the SECon May 5, 2022pursuant to Rule 424(b)(4) under the Act relating to Bausch + Lomb'sRegistration Statement on Form S-1 and Bausch + Lomb'ssupplemented PREP prospectus filed with the CSA on May 5, 2022, for further details regarding certain of these infringement proceedings. The risks of generic competition are a fact of the eye health industry and are not specific to our operations or product portfolio. These risks are not avoidable, but we believe they are manageable. To manage these risks, our leadership team continually evaluates the impact that generic competition may have on future profitability and operations. In addition to aggressively defending our patents and other intellectual property, our leadership team makes operational and investment decisions regarding these products and businesses at risk, not the least of which are decisions regarding our pipeline. Our leadership team actively manages our pipeline in order to identify innovative and realizable projects that are expected to provide incremental and sustainable revenues and growth into the future. We believe that we have a well-established product portfolio that is diversified within our core businesses. We also believe that we have a robust pipeline that not only provides for the next generation of our existing products, but also brings new solutions into the market. See the section entitled "Risk Factors" included in Bausch + Lomb'sfinal prospectus as filed with the SECon May 5, 2022pursuant to Rule 424(b)(4) under the Act relating to Bausch + Lomb'sRegistration Statement on Form S-1 and in Bausch + Lomb'ssupplemented PREP prospectus as filed with the CSA on May 5, 2022, for additional information on the risks associated with our intellectual property and our competition risks.
In the normal course of business, our products, devices and facilities are the subject of ongoing oversight and review by regulatory and governmental agencies, including general, for cause and pre-approval inspections by the relevant competent authorities where we have business operations. Through the date of this filing, all of our global operations and facilities have the relevant operational good manufacturing practices certificates and all of our products and operating sites are in good compliance standing with all relevant notified bodies and global health authorities. Further, all sites under FDA jurisdiction are rated as either No Action Indicated (where there was no Form 483 observation) or Voluntary Action Indicated ("VAI") (where there was a Form 483 with one or more observations). In the case of VAI inspection outcomes, the FDA has accepted our responses to the issues cited, which will be verified when the agency makes its next inspection of those specific facilities.
FINANCIAL PERFORMANCE HIGHLIGHTS
April 28, 2022, Bausch + Lombeffected a share consolidation as a result of which it had 350,000,000 issued and outstanding common shares. These common shares are treated as issued and outstanding at January 1, 2021for purposes of calculating Basic and diluted income per share attributable to Bausch + Lomb Corporation. The following table provides selected unaudited financial information for the three months ended March 31, 2022and 2021: Three Months Ended March 31, (in millions, except per share data) 2022 2021 Change Revenues $ 889 $ 881 $ 8Operating income $ 54 $ 85 $ (31)Income before provision for income taxes $ 29 $ 77 $ (48)Net income attributable to Bausch + Lomb Corporation $ 20 $ 27 $ (7)Basic and diluted income per share attributable to Bausch + Lomb Corporation $ 0.06 $ 0.08 $ (0.02)Financial Performance
Summary of the three months ended
Revenues for the three months ended
March 31, 2022and 2021 were $889 millionand $881 million, respectively, an increase of $8 million, or 1%. The increase was attributable to increases in volumes in each of our segments. Our volumes increased $47 millionin the aggregate primarily due to: (i) increased demand for Lumify®, Biotrue® and PreserVision® within our consumer eye care business in the U.S.and (ii) increased demand of consumables and intraocular lenses within Global Surgical segment, partially offset by: (i) a decrease in volume in our international contact lens business, primarily driven by the impact of the COVID-19 pandemic in Chinaand (ii) the impact of generic competition as certain products, such as Lotemax® Gel and Bepreve®, lost exclusivity. This overall increase in volumes was partially offset by: (i) the unfavorable impact of foreign currencies of $29 million, primarily in Europeand Asia, (ii) a decrease in net realized pricing of $7 millionprimarily due to higher sales deductions in our ophthalmology business in the U.S.and (iii) the impact of divestitures and discontinuations of $3 million, related to the discontinuation of certain products.
Operating result for the three months ended
among other factors:
36 -------------------------------------------------------------------------------- •a decrease in contribution (product sales revenue less cost of goods sold, exclusive of amortization and impairments of intangible assets) of
$6 million, primarily driven by higher manufacturing variances, primarily as a result of inflationary pressures related to certain manufacturing costs, partially offset by the increase in revenues, as previously discussed; •an increase in SG&A expenses of $25 million, primarily attributable to: (i) higher selling, advertising and promotion expenses and (ii) higher compensation expenses, partially offset by the favorable impact of foreign currencies;
•an increase in R&D of
•a decrease in Amortization of intangible assets of
fully amortized intangible assets that will no longer be amortized in 2022.
Operating result for the three months ended
Amortization of intangible fixed assets of
Income before provision for income taxes for the three months ended
March 31, 2022and 2021 was $29 millionand $77 million, respectively, a decrease of $48 millionand is primarily attributable to: (i) the decrease in our operating results of $31 million, as previously discussed and (ii) an increase in interest expense of $20 millionpartially offset by a favorable net change in Foreign exchange and other of $3 million. Net income attributable to Bausch + Lombfor the three months ended March 31, 2022and 2021 was $20 millionand $27 million, respectively, a decrease in our results of $7 millionand was primarily due to the decreases in Income before provision for income taxes of $48 million, as previously discussed, partially offset by a decrease in the Provision for income taxes of $41 million.
RESULTS OF OPERATIONS
Our unaudited operating results for the three months ended
March 31, 2022and 2021 were as follows: Three Months Ended March 31, (in millions) 2022 2021 Change Revenues Product sales $ 883 $ 874 $ 9Other revenues 6 7 (1) 889 881 8 Expenses
Cost of goods sold (excluding depreciation and impairment of
346 331 15 Cost of other revenues 2 2 - Selling, general and administrative 343 318 25 Research and development 77 67 10 Amortization of intangible assets 65 76 (11) Other expense, net 2 2 - 835 796 39 Operating income 54 85 (31) Interest expense (20) - (20) Foreign exchange and other (5) (8) 3 Income before provision for income taxes 29 77 (48) Provision for income taxes (6) (47) 41 Net income 23 30 (7) Net income attributable to noncontrolling interest (3) (3) - Net income attributable to Bausch + Lomb Corporation
Three months completed
Revenues Our revenues are primarily generated from product sales in the therapeutic areas of eye health that consist of: (i) branded prescription eye-medications and pharmaceuticals, (ii) generic and branded generic prescription eye medications and pharmaceuticals, (iii) OTC vitamin and supplement products and (iv) medical devices (contact lenses, intraocular lenses and ophthalmic surgical equipment). Other revenues include alliance and service revenue from the licensing and co-promotion of products and contract service revenue. Contract service revenue is derived primarily from contract manufacturing for third parties and is not material. Our revenues were
$889 millionand $881 millionfor the three months ended March 31, 2022and 2021, respectively, an increase of $8 million, or 1%. The increase was attributable to increases in volumes in each of our segments. Volumes increased $47 millionin the aggregate primarily due to: (i) increased demand for Lumify®, Biotrue® and PreserVision® within our consumer eye care business in the U.S.and (ii) increased demand of consumables and intraocular lenses within our Global Surgical segment, partially offset by: (i) a decrease in volume in our international contact lens business, primarily driven by the impact of the COVID-19 pandemic in Chinaand (ii) the impact of generic competition as certain products, such as Lotemax® Gel and Bepreve®, lost exclusivity. This overall increase in volumes was partially offset by: (i) the unfavorable impact of foreign currencies across all our international businesses of $29 million, primarily in Europeand Asia, (ii) a decrease in net realized pricing of $7 millionprimarily due to higher sales deductions in our ophthalmology business in the U.S.and (iii) the impact of divestitures and discontinuations of $3 million, related to the discontinuation of certain products. The changes in our segment revenues and segment profits, including the impact of the COVID-19 pandemic related matters for the three months ended March 31, 2022, are discussed in further detail in the respective subsequent sections titled "-Reportable Segment Revenues and Profits."
Cash Rebates and Allowances, Chargebacks and Distribution Fees
As is customary in the health care industry, gross product sales are subject to a variety of deductions in arriving at net product sales. Provisions for these deductions are recognized concurrently with the recognition of gross product sales. These provisions include cash discounts and allowances, chargebacks, and distribution fees, which are paid or credited to direct customers, as well as rebates and returns, which can be paid or credited to direct and indirect customers. Provision balances relating to amounts payable to direct customers are netted against trade receivables and balances relating to indirect customers are included in accrued liabilities. We actively manage these offerings, focusing on the incremental costs of our patient assistance programs, the level of discounting to non-retail accounts and identifying opportunities to minimize product returns. We also concentrate on managing our relationships with our payors and wholesalers, reviewing the ranges of our offerings and being disciplined as to the amount and type of incentives we negotiate. Provisions recorded to reduce gross product sales to net product sales and revenues for the three months ended
March 31, 2022and 2021 were as follows: Three Months Ended March 31, 2022 2021 (in millions) Amount Pct. Amount Pct. Gross product sales $ 1,203100.0 % $ 1,160100.0 % Provisions to reduce gross product sales to net product sales Discounts and allowances 77 6.4 % 76 6.6 % Returns 18 1.5 % 19 1.6 % Rebates 128 10.6 % 118 10.2 % Chargebacks 92 7.7 % 69 6.0 % Distribution fees 5 0.4 % 4 0.3 % Total provisions 320 26.6 % 286 24.7 % Net product sales 883 73.4 % 874 75.3 % Other revenues 6 7 Revenues $ 889 $ 881Cash discounts and allowances, returns, rebates, chargebacks and distribution fees as a percentage of gross product sales were 26.6% and 24.7% for the three months ended March 31, 2022and 2021, respectively, an increase of 1.9 percentage points, and is primarily attributable to the increase in chargebacks as a percentage of revenues. Chargebacks were $92 millionand $6938 -------------------------------------------------------------------------------- million for the three months ended March 31, 2022and 2021, respectively, an increase of $23 million. The increase in chargebacks is primarily attributable to: (i) increases in sales of certain generic pharmaceutical products and (ii) launches of other generic pharmaceutical products.
Cost of goods sold (excluding amortization and impairment of intangible assets
Cost of goods sold primarily includes: manufacturing and packaging; the cost of products we purchase from third parties; royalty payments we make to third parties; depreciation of manufacturing facilities and equipment; and lower of cost or market adjustments to inventories. Cost of goods sold typically vary between periods as a result of product mix, volume, royalties, changes in foreign currency and inflation. Cost of goods sold excludes the amortization and impairments of intangible assets. Cost of goods sold was
$346 millionand $331 millionfor the three months ended March 31, 2022and 2021, respectively, an increase of $15 millionor 5%. The increase was primarily driven by: (i) higher volumes, as previously discussed and (ii) higher manufacturing variances, primarily as a result of inflationary pressures related to certain manufacturing costs, partially offset by the favorable impact of foreign currencies. We continue to monitor the impact of inflationary pressures on our operating results, particularly on our manufacturing costs, and we expect higher year over year manufacturing variances for the remainder of 2022 as a result of inflation. Cost of goods sold as a percentage of Product sales was 39.2% and 37.9% for the three months ended March 31, 2022and 2021, respectively, an increase of 1.3%, primarily attributable to: (i) higher manufacturing variances and (ii) year-over-year changes in product mix.
Selling, general and administrative expenses
SG&A expenses primarily include: employee compensation associated with sales and marketing, finance, legal, information technology, human resources and other administrative functions; certain outside legal fees and consultancy costs; product promotion expenses; overhead and occupancy costs; depreciation of corporate facilities and equipment; and other general and administrative costs. SG&A expenses were
$343 millionand $318 millionfor the three months ended March 31, 2022and 2021, respectively, an increase of $25 millionor 8%. The increase was primarily attributable to: (i) higher selling, advertising and promotion expenses and (ii) higher compensation expenses partially offset by the favorable impact of foreign currencies.
We expect to incur higher general and administrative expenses in the future as a stand-alone entity due to
dis-synergies that result from separation.
Research and development costs
Included in R&D are costs related to our product development and quality assurance programs. Expenses related to product development include: employee compensation costs; overhead and occupancy costs; depreciation of research and development facilities and equipment; clinical trial costs; clinical manufacturing and scale-up costs; and other third-party development costs. Quality assurance are the costs incurred to meet evolving customer and regulatory standards and include: employee compensation costs; overhead and occupancy costs; amortization of software; and other third-party costs. R&D expenses were
$77 millionand $67 millionfor the three months ended March 31, 2022and 2021, respectively, an increase of $10 million, or 15%. R&D expenses as a percentage of Product sales were approximately 9% and 8% for the three months ended March 31, 2022and 2021, respectively. In 2020, certain of our R&D activities were limited and others, including new patient enrollments in clinical trials, were temporarily paused, as most trial sites were not able to accept new patients due to government-mandated shutdowns in response to the COVID-19 pandemic. During our third quarter of 2020, many of these trial sites began to reopen and the pace of new patient enrollments increased heading into 2021. During 2021 these activities and related R&D spend gradually increased until they approached a normalized spend rate toward the end of the year. As of the date of this filing, we have not had to make material changes to our development timelines and the pause in our clinical trials has not had a material impact on our operating results; however, a resurgence of the virus could result in unanticipated delays in our ability to conduct new patient enrollments and create other delays which could have a significant adverse effect on our future operating results. While we are not currently conducting clinical trials in Russia, Belarusor Ukraine, certain planned trials in Russiaand any future trials in this region will need to be postponed and/or relocated; however, we do not anticipate that the impact of this postponement or relocation will have a material impact to any of our development programs or pipeline products.
Amortization of intangible assets
Finite life intangible assets are amortized on a straight-line basis
over their estimated useful lives, typically 1 to 17 years. Management
continuously assesses the useful lives of our long-lived assets to
reflect the most common assumptions.
39 -------------------------------------------------------------------------------- Amortization of Intangible assets was
$65 millionand $76 millionfor the three months ended March 31, 2022and 2021, respectively, a decrease of $11 millionprimarily due to fully amortized intangible assets no longer being amortized in 2022.
See Note 8, “INTANGIBLE ASSETS AND GOODWILL” to our unaudited interim summary.
Consolidated financial statements for the three months ended
appearing elsewhere in this Form 10-Q for details regarding
Amortization of intangible assets.
Interest expense primarily consists of interest payments due, amortization of debt premiums, discounts and deferred issuance costs on indebtedness under our credit facilities and interest due on a promissory note to BHC.
Interest charges were
January 1, 2022, in anticipation of the Separation, Bausch + Lombissued a $2,200 millionpromissory note to BHC (the "BHC Purchase Debt") in conjunction with a legal reorganization. Included in Interest expense for the three months ended March 31, 2022was $20 millionof interest attributed to the BHC Purchase Debt. The BHC Purchase Debt was repaid in full on May 10, 2022. See Note 19, "SUBSEQUENT EVENTS" to our unaudited interim Condensed Consolidated Financial Statements for the three months ended March 31, 2022appearing elsewhere in this Form 10-Q for further details.
Exchange and others
Foreign exchange and other primarily includes translation gains/losses on intercompany loans and third-party liabilities and the gain/loss due to the change in fair value of foreign currency exchange contracts. Foreign exchange and other was a net loss of
$5 millionand $8 millionfor the three months ended March 31, 2022and 2021, respectively.
Provision for income taxes were
$6 millionand $47 millionfor the three months ended March 31, 2022and 2021, respectively, a decrease of $41 million. The decrease in income taxes was primarily related to: (i) the decrease in Income before provision for income taxes, as previously discussed and (ii) discrete tax effects of internal restructurings in 2021 and changes in uncertain tax positions in 2022.
See Note 15, “INCOME TAXES” to our unaudited Interim Consolidated Summary.
Financial statements for the three months ended
elsewhere in this Form 10-Q for details.
Reportable segment revenue and profit
Here is a brief description of
•The Vision Care segment consists of: (i) sales of contact lenses that span the spectrum of wearing modalities, including daily disposable and frequently replaced contact lenses and (ii) sales of contact lens care products and OTC eye drops, eye vitamins and mineral supplements that address various conditions including eye allergies, conjunctivitis and dry eye. •The Ophthalmic Pharmaceuticals segment consists of sales of a broad line of proprietary and generic pharmaceutical products for post-operative treatments and the treatment of a number of eye conditions such as glaucoma, ocular hypertension and retinal diseases and contact lenses that are indicated for therapeutic use and can also provide optical correction during healing if required. •The Surgical segment consists of sales of tools and technologies for the treatment of cataracts, and vitreous and retinal eye conditions and includes intraocular lenses and delivery systems, phacoemulsification equipment and other surgical instruments and devices. Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as Amortization of intangible assets and Other (income) expense, net, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance. See Note 17, "SEGMENT INFORMATION" to our unaudited interim Condensed Consolidated Financial Statements for the three months ended
March 31, 2022appearing elsewhere in this Form 10-Q for a reconciliation of segment profit to Income before provision for income taxes. 40 -------------------------------------------------------------------------------- The following table presents segment revenues, segment revenues as a percentage of total revenues and the period-over-period changes in segment revenues for three months ended 2022 and 2021. The following table also presents segment profits, segment profits as a percentage of segment revenues and the period-over-period changes in segment profits for three months ended 2022 and 2021. Three Months Ended March 31, 2022 2021 Change (in millions) Amount Pct. Amount Pct. Amount Pct. Segment Revenues Vision Care $ 56063 % $ 55663 % $ 41 % Ophthalmic Pharmaceuticals 155 17 % 163 19 % (8) (5) % Surgical 174 20 % 162 18 % 12 7 % Total revenues $ 889100 % $ 881100 % $ 81 % Segment Profits / Segment Profit Margins Vision Care $ 15928 % $ 16530 % $ (6)(4) % Ophthalmic Pharmaceuticals 40 26 % 56 34 % (16) (29) % Surgical 15 9 % 16 10 % (1) (6) % Total segment profits $ 21424 % $ 23727 % $ (23)(10) %
Organic revenue and organic growth rate (non-GAAP)
Organic growth, a non-GAAP measure, is defined as a change on a period-over-period basis in revenues on a constant currency basis (if applicable) excluding the impact of recent acquisitions, divestitures and discontinuations. Organic revenue growth (non-GAAP) is growth in Revenue (its most directly comparable GAAP financial measure), adjusted for certain items, of businesses that have been owned for one or more years. Organic revenue (non-GAAP) is impacted by changes in product volumes and price. The price component is made up of two key drivers: (i) changes in product gross selling price and (ii) changes in sales deductions. The Company uses organic revenue (non-GAAP) and organic revenue growth (non-GAAP) to assess performance of its reportable segments, and the Company in total, without the impact of foreign currency exchange fluctuations and recent acquisitions, divestitures and product discontinuations. The Company believes that such measures are useful to investors as they provide a supplemental period-to-period comparison. Organic revenue growth (non-GAAP) reflects adjustments for: (i) the impact of period-over-period changes in foreign currency exchange rates on revenues and (ii) the revenues associated with acquisitions, divestitures and discontinuations of businesses divested and/or discontinued. These adjustments are determined as follows: Foreign currency exchange rates: Although changes in foreign currency exchange rates are part of our business, they are not within management's control. Changes in foreign currency exchange rates, however, can mask positive or negative trends in the underlying business performance. The impact for changes in foreign currency exchange rates is determined as the difference in the current period reported revenues at their current period currency exchange rates and the current period reported revenues revalued using the monthly average currency exchange rates during the comparable prior period. Acquisitions, divestitures and discontinuations: In order to present period-over-period organic revenues (non-GAAP) on a comparable basis, revenues associated with acquisitions, divestitures and discontinuations are adjusted to include only revenues from those businesses and assets owned during both periods. Accordingly, organic revenue growth (non-GAAP) excludes from the current period all revenues attributable to each acquisition for the twelve months subsequent to the day of acquisition, as there are no revenues from those businesses and assets included in the comparable prior period. Organic revenue growth (non-GAAP) excludes from the prior period (but not the current period), all revenues attributable to each divestiture and discontinuance during the twelve months prior to the day of divestiture or discontinuance, as there are no revenues from those businesses and assets included in the comparable current period. Non-GAAP financial measures and non-GAAP ratios are not prepared in accordance with GAAP nor do they have any standardized meaning under GAAP. In addition, other companies may use similarly titled non-GAAP financial measures and ratios that are calculated differently from the way we calculate such measures and ratios. Accordingly, the Company's non-GAAP financial measures and ratios may not be comparable to such similarly titled non-GAAP financial measures and ratios used by other companies. 41 -------------------------------------------------------------------------------- The following table presents a reconciliation of Revenues to organic revenues (non-GAAP) and the period-over-period changes in organic revenue (non-GAAP) for 2022 and 2021. Three Months Ended March 31, 2022 Three Months Ended March 31, 2021 Change in Revenue Revenue Organic Revenue (Non-GAAP) as Changes in Organic Revenue as Divestitures and Organic Revenue (in millions) Reported Exchange Rates (Non-GAAP) Reported Discontinuations (Non-GAAP) Amount Pct. Vision Care $ 560 $ 19 $ 579 $ 556 $ - $ 556 $ 23 4 %
Ophthalmic Pharmaceuticals155 4 159 163 - 163 (4) (3) % Surgical 174 6 180 162 (3) 159 21 13 % Total $ 889 $ 29 $ 918 $ 881 $ (3) $ 878 $ 40 5 % Vision Care Segment: Vision Care Segment Revenue The Vision Care segment revenue was $560 millionand $556 millionfor the three months ended March 31, 2022and 2021, respectively, an increase of $4 million, or 1%. The increase was driven by: (i) an increase in volumes of $17 million, primarily due to increased demand for Lumify®, Biotrue® and PreserVision® within our consumer eye care business in the U.S., partially offset by a decrease in volume in our international contact lens business, primarily driven by the impact of the COVID-19 pandemic in Chinaand (ii) an increase in net pricing of $6 million. The increases were partially offset by the unfavorable impact of foreign currencies of $19 million, primarily in Europeand Asia.
Vision Care Segment Profit
The Vision Care segment profit was
$159 millionand $165 millionfor the three months ended March 31, 2022and 2021, respectively, a decrease of $6 million, or 4%. The decrease was primarily driven by: (i) higher SG&A expenses, (ii) the unfavorable impact of foreign currencies and (iii) higher manufacturing variances, primarily as a result of inflationary pressures related to certain manufacturing costs. These decreases were partially offset by the increase in volumes, as previously discussed.
Ophthalmic Pharmaceuticals Segment:
Ophthalmic Pharmaceuticals Segment Revenue
The Ophthalmic Pharmaceuticalssegment revenue was $155 millionand $163 millionfor the three months ended March 31, 2022and 2021, respectively, a decrease of $8 million, or 5%. The decrease was driven by: (i) a decrease in net realized pricing of $15 milliondue to higher sales deductions in the U.S.and (ii) the unfavorable impact of foreign currencies of $4 million, partially offset by an increase in volume of $11 million, primarily internationally.
Earnings of Ophthalmic Pharmaceuticals Segment
The Ophthalmic Pharmaceuticalssegment profit was $40 millionand $56 millionfor the three months ended March 31, 2022and 2021, respectively, a decrease of $16 million, or 29%. The decrease was primarily driven by the decrease in net realized pricing, as previously discussed.
Surgical Segment Revenue
The Surgical segment revenue was
$174 millionand $162 millionfor the three months ended March 31, 2022and 2021, respectively, an increase of $12 million, or 7%. The increase was driven by: (i) an increase in volume of $19 million, primarily due to increased demand of consumables and intraocular lenses and (ii) an increase in net realized pricing of $2 million, partially offset by: (i) the unfavorable effect of foreign currencies of $6 millionand (ii) the impact of divestitures and discontinuations of $3 million, related to the discontinuation of certain products. Surgical Segment Profit The Surgical segment profit was $15 millionand $16 millionfor the three months ended March 31, 2022and 2021, respectively, a decrease of $1 million, or 6%. The decrease was primarily driven by: (i) higher SG&A expenses and (ii) the unfavorable impact of foreign currencies. These decreases were partially offset by the increase in volumes, as previously discussed. 42