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Edited Transcript of ALCC.S earnings conference call or presentation 26-Feb-20 1:00pm GMT

Q4 2019 Alcon AG Earnings Call

Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Alcon AG earnings conference call or presentation Wednesday, February 26, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Endicott

Alcon, Inc. - CEO & Director

* Karen King

Alcon, Inc. - Senior VP and Head of Global IR & Communications

* Timothy C. Stonesifer

Alcon, Inc. - Senior VP & CFO

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Conference Call Participants

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* Anthony Charles Petrone

Jefferies LLC, Research Division - Healthcare Analyst

* Christopher Thomas Pasquale

Guggenheim Securities, LLC, Research Division - Director and Senior Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Jaime Lynn Morgan

SVB Leerink LLC, Research Division - Associate

* James Daniel Gordon

JP Morgan Chase & Co, Research Division - Senior Analyst

* Jeffrey D. Johnson

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Kira Huppertz

Goldman Sachs Group Inc., Research Division - Research Analyst

* Lawrence H. Biegelsen

Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst

* Matthew Stephan Miksic

Crédit Suisse AG, Research Division - Senior Research Analyst

* Michael Healy;Berenberg;Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Director & Medical Technology Analyst

* Sebastian Walker

UBS Investment Bank, Research Division - Associate Analyst

* Stephen Barr Willoughby

Cleveland Research Company - Senior Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to Alcon's Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to your host today, Karen King. Please go ahead, ma'am.

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Karen King, Alcon, Inc. - Senior VP and Head of Global IR & Communications [2]

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Welcome to Alcon's Fourth Quarter Sales Update and Full Year 2019 Conference Call. We issued a press release at 20-F yesterday and posted a supplemental slide presentation a few hours ago to our website to enhance today's call. You can find all 3 documents in the Investor Relations section of our website at www.investor.alcon.com.

Joining me on today's call are David Endicott, our Chief Executive Officer; and Tim Stonesifer, our Chief Financial Officer. Our press release, slide presentation and discussions will include forward-looking statements. We expressly disclaim any obligation to update forward-looking statements as a result of new information or future developments, except as required by law. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results to differ materially from those in our forward-looking statements are included in Alcon's earnings press release and Form 20-F annual report on file with the Securities and Exchange Commission and available on the SEC's website at www.sec.gov. Included in the press release are selected non-IFRS measures. Company management uses these measures as aids in monitoring the company's ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking purposes. Non-IFRS financial measures used by the company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. These non-IFRS financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed per IFRS. Please review the financial tables provided in the press release and our filings and reconcile non-IFRS measures to directly comparable financial measures presented in accordance with IFRS.

In just a few moments, we will be discussing net sales results for the quarter and year-to-date. In our press release, we've provided a table that shows both reported net sales growth and constant currency growth, so you can see the impact of foreign currency fluctuations. For discussion purposes, our comments on net sales growth during opening remarks will be expressed in constant currency.

And with that, I'll now turn the call over to David.

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David J. Endicott, Alcon, Inc. - CEO & Director [3]

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Thanks, Karen, and good afternoon to you all. Welcome to today's call. As we wrapped up our first calendar year, I'm pleased to report that we've accomplished a lot, and we have ended the year and are really well positioned for the future. I'll start by recapping notable highlights from 2019 in recent months, including an update on our new launches and some perspective on market dynamics. And after my comments, Tim will discuss our sales performance by business and provide you with additional color on the financials in China. I'll wrap up with some closing comments before we move to Q&A.

Now as I reflect back on 2019, I'm really proud of what Alcon accomplished in our first 9 months of being a new public company. We delivered strong top line results, ending the year with 5% sales growth, which was at the upper end of our full year guidance range. We grew core operating income by 4% or 11% on a constant currency basis. And we generated $367 million in free cash flow despite significant spin readiness and separation costs, interest on financial debt and capital for our new Vision Care lines.

Now the strong performance was a result of some positive wins and overcoming a few challenges. We start with the headwinds. Foreign currency negatively impacted operating margins in 2019 by 60 basis points. We also had pressure from China tariffs, the uncertainty of Brexit and a new Japanese consumption tax. And we're still working to offset our flat to declining legacy products, like contact lens care, with our growth drivers.

Now as far as the tailwinds, we're particularly proud of several accomplishments in 2019, which were driven by our focused strategy and execution. We made some smart distributions around product flow, and our investments are starting to pay off with our third consecutive year of constant currency growth in top line. Our pipeline is stronger than it has been in years, paving the way for a next decade of innovation in eye care. We had 22 new product approvals and invested in our marquee products like DAILIES TOTAL1 and SYSTANE, which have driven strong results. Performance in legacy products such as consumables and reusable contact lenses were aided by strong market growth during the year. And we introduced PanOptix in the U.S. and Japan and PRECISION1 in the U.S. slightly ahead of schedule, and they're executing well in the market.

We did all of this as an organization while we balance priorities to stand up new functions, implement SAP and advance separation and transformation activities all at the same time. Since innovation is the heart of what we do, I'll spend a few minutes on some of our recent launches before moving to market dynamics.

And let me start with PanOptix. The first trifocal advanced technology that's been in the U.S. market, PanOptix is providing something that no other lens has been able to accomplish: the vast majority of PanOptix patients are now spectacle-free following cataract surgery. As is important as the PanOptix patients is after high performance, they're typically active, they want to be able to count on their near, intermediate and distance vision without a second thought or without worrying about readers. Our sales team has been placing consignment sets at key accounts since early September, and all accounts currently have access to the lens.

Fourth quarter market data shows us gaining over 20 share points in the U.S. PC IOL category in 4 months, putting our current share at around 55%. We're very excited about the strong reception from our customers and patients in the United States as well as the strong performance in the quarter. And we're also expanding our IOL portfolio with the introduction of Vivity, a complementary PC IOL lens to PanOptix. We recently began the initial introduction of Vivity in select European markets after receiving CE Mark at the end of last year.

Vivity is a unique lens with a patented new optical design created to eliminate halos and glare, a problem some patients face with diffractive lenses. It's the first and only lens that provides PC IOL performance with the ease of monofocal patient management, so this lens delivers extended vision and reduces the needs for glasses. We're closely monitoring Vivity's performance in Europe as we await the FDA approval in the U.S.

Moving to Vision Care. PRECISION1, our new SiHy contact lens, which targets the largest segment of the fast-growing daily disposable market. We've made very good progress with our manufacturing lines and currently have unconstrained availability in the United States. As an early data point, after the first 4 months of launch, we have activated significantly more fit-sets compared to DT1 over that same launch period, with twice the average revenue per fit-set. By the end of Q2, we should have a first good feel as to whether there have been any material share shifts in the market, and we look forward to that readout.

Finally, we're excited to receive approval from the FDA to switch Pataday, the #1 prescribed allergy ingredient, to an over-the-counter product in drugstores and retail locations starting on March 2. We're going to sell 2 dosage strengths in the U.S., Pataday Once Daily and Pataday Twice Daily, which was the former Patanol product. With 66 million Americans suffering from eye allergies, the introduction of Pataday OTC will provide more consumers with rapid prescription strength relief this allergy season. This leverages our long history in ocular health OTC products and strong relationships with major retailers and eye care professionals.

Now before I turn the call over to Tim, I'll provide a little color on our end markets. We recently received the latest market share data, and I'll be focusing my comments on the fourth quarter 2019 results.

In Surgical, global cataract procedures continue to show solid mid-single-digit growth with significant contribution from sales outside the United States. We're pleased with the positive response to our launched innovations, as evidenced in the early commercial success in PanOptix in Japan and the U.S.

In Vision Care, the contact lens market is seeing a low single-digit increase. The fast-growing part of the market is the DAILIES SiHys, which are growing at 22%, where both DAILIES TOTAL1 and PRECISION1 are positioned. We're also gaining significant share in the fast-growing daily SiHy multifocal market, which is up 34%, and that's really through our successful multifocal DT1 campaign. And we're ramping up new manufacturing capacity for PRECISION1.

So with that, let me turn it over to Tim, who will review our financial results.

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [4]

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Thanks, David. We're pleased to report 6% top line growth in the fourth quarter and 5% for the full year, marking 13 consecutive quarters of revenue growth. Our U.S. business posted its strongest quarterly increase this year, thanks to new product launches.

Surgical sales were up 8% in the fourth quarter, driven by growth across all categories. For the full year, Surgical sales were up 7%. Implantable sales of $338 million increased by 17% in the fourth quarter, primarily due to strong gains in PanOptix. As David mentioned earlier, we are seeing high demand for PanOptix in our newly launched countries, Japan and the U.S., and continued strong performance in Europe and APAC countries. For the full year, implantable sales were up 9%.

Consumable sales of $594 million increased by 4% in the fourth quarter. Demand for cataract and vitret consumables is aligned with a mid-single-digit increase in procedural market growth. Also, recall that consumption tax increase in Japan pulled forward sales from fourth quarter to third quarter. For the full year, consumable sales were up 6%.

Sales from the equipment and other category were $172 million in the fourth quarter, an increase of 10% versus prior year. This was primarily due to the addition of a large attractive order in the U.S. and a good quarter for service revenue and procedural eyedrops. For the full year, equipment and other sales were up 6%.

Vision Care sales were up 3% in the fourth quarter and for the full year. Contact lens sales were $460 million, up 3% versus the fourth quarter of 2018. The increase was primarily driven by strong demand for our leading product, DAILIES TOTAL1, with growth in both sphere and multifocal. While the product contribution in 2019 was minimal, we have seen very good early reception for PRECISION1. For the full year, contact lens sales were up 4%.

Ocular health sales of $317 million increased by 3% in the fourth quarter. Since becoming independent, we have invested in direct-to-consumer advertising, which has increased the growth profile of our SYSTANE family of products. Strong growth in dry eye was offset by contact lens care, which has lost a little bit of share in a declining market. For the full year, ocular health sales were up 2%.

Now moving down the income statement. Core gross margin was 63.3% for the full year, broadly in line with prior year, with a favorable product mix and product costs absorbing the impact of the China tariffs and foreign currency. Core operating margin was 17.2% for the full year, up 20 basis points versus prior year and up 80 basis points, excluding the negative impact from foreign currency. This was primarily related to better expense leverage. Our full year results are in line with our 2019 guidance of 17% to 17.5%.

Full year interest expense was $113 million, up from $24 million last year, primarily due to higher interest expense associated with the debt related to the spin-off of Alcon and the refinanced debt to longer-term notes. The core effective tax rate was 17.4% for the full year compared to 16% last year. The increase in the tax rate was primarily due to the loss of certain tax benefits in the U.S. due to the spin-off and the mix of pretax income from geographical tax jurisdictions. This is also in line with the full year 2019 guidance of 17% to 18%.

Core earnings per share for the full year was $1.89, down $0.11 from prior year, driven by pressure of $0.14 from interest on financial debt and $0.12 from foreign currency.

Now before I move to guidance, I'll touch on a couple of cash flow and other related items. Free cash flow for the full year 2019 was $367 million, down from $616 million from the prior year. The decrease versus last year was primarily due to spin readiness and separation costs, along with interest payments on financial debt. Capital expenditures were $553 million for the full year 2019, up $29 million from the prior year, driven by the continued expansion of our Vision Care contact lens manufacturing platform and other supply chain investments. Separation costs for the full year 2019 were $237 million, which was primarily driven by IT investments. The vast majority of the remaining costs will be spent this year, with the remainder in 2021. Transformation costs for the full year 2019 were $52 million, primarily related to restructuring.

Now turning to our full year 2020 projections. We expect full year net sales to be in the range of 5% to 6% growth on a constant currency basis. We expect a 0% to negative 1% impact from foreign currency. We expect core operating margin to be accretive from full year 2019 and in the range of 17.5% to 18.5%. We're going to continue to invest in innovation and expect core research and development expense to be up 10% to 15% from last year's core R&D expense of $584 million.

Now given the feedback we received last year concerning interest expense, we've decided to provide a range for this year. In 2020, we expect interest expense and other financial income expense to be in the range of $145 million to $155 million. And despite an extra quarter of interest expense, the range is comparable to 2019 as we'll continue to pay down some of our local debt where our interest expense is high. We project our core effective tax rate for the full year to be in the range of 19.5% to 21.5%. The midpoint is aligned with the 300 basis point increase from Swiss tax reform we discussed this past year. The broader range reflects sensitivities around discrete items as well as geographic and product mix. We project core earnings per share in the range of $1.95 to $2.05. We expect a nominal impact from FX and believe our core earnings will continue to grow nicely in spite of the higher tax rate and higher R&D investments.

Although we will not be guiding the quarters, there are a few factors to consider as you think about the first quarter of 2020. First, as we discussed last year, we will have a higher tax rate as a result of the Swiss tax reform and incremental interest expense as we didn't have the additional debt related to spin on our balance sheet this time last year.

Second, we will have incremental SG&A from stand-up and IT costs, along with additional marketing support for new launches like Pataday, and we'll also continue to invest in R&D.

And third, we are seeing pressure in China related to the coronavirus global health issue. And to help give you a better perspective around the size and impact of China with regards to the total Alcon business, I'd like to share with you a few data points.

China revenue in 2019 was approximately $377 million, which is 5% of our total sales, growing 15% on a constant currency basis versus prior year. On a segment basis, close to 80% of the country sales come from Surgical, with the remaining 20% from Vision Care. From a supply side, we don't have any manufacturing facilities in China, but we do have a few critical suppliers who serve our equipment business. We currently have 3 to 4 months of inventory on the ground and have continuity plans in place for the short term.

From the demand side, January sales were in line with internal expectations, but we have seen a significant slowdown in February sales, which are currently tracking to only 10% of our internal expectations. We believe this is due to the coronavirus as patients are postponing noncritical surgeries and ophthalmologists are canceling nonemergency procedures. If the February trend continues through the end of the first quarter, we could see a negative impact of approximately 3 percentage points of growth on the top line and up to $0.04 of earnings in the first quarter. Our guidance can accommodate the $0.04 of pressure from Q1, but it would push us to the lower end of the range. This assumes that business activities normalize in China at the beginning of the second quarter. It also assumes that canceled procedures from the first quarter are not rescheduled during the year, and as a consequence, we won't regain the sales lost in the first quarter. This is obviously a fluid situation, and there are many things that remain unclear. We will continue to monitor the situation and provide an update as we learn more. Because of all these items, we currently expect the first quarter to be our softest earnings quarter of the year.

Now let me briefly discuss our capital allocation priorities. While we're not providing a hard guidance range for free cash flow, we anticipate improvements in our core results to deliver a significant increase in free cash flow this year despite separation, transformation and capital spend. We are investing to support our innovative pipeline and new product launches. With the encouraging start-up of our new contact lens manufacturing, we will be installing a greater number of line this year which will not only support launch of PRECISION1, but also support a variety of new contact lens platform. With this continued capacity expansion, capital spending this year will be relatively comparable to last year.

I'm pleased to report that our Board of Directors is proposing an annual dividend of CHF 0.19 per share, our first as an independent company, as we committed during our Capital Markets Day in 2018. Shareholders will vote on this proposal at our upcoming AGM on May 6.

So to summarize, we feel very good about our 2019 financial results. We delivered strong sales at the top of our guidance range and accretive margins, while making progress in many operational areas. We remain committed to operating with greater focus and discipline as we move towards becoming a stronger and more profitable company.

With that, I'll turn the call over to David for some final comments.

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David J. Endicott, Alcon, Inc. - CEO & Director [5]

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Thanks, Tim. In 2019, we did what we said we'd do. We delivered solid financial results and achieved several important operational milestones, which Tim and I have touched on today. We're harnessing the energy created by the spin-off and building even greater momentum through our transformation, all to unlock Alcon's full potential and to deliver value to all our stakeholders.

I spent a lot of time with customers. It's actually one of the things I'd like to do most. And something I consistently hear from customers is that Alcon is back. And indeed, we are back to our sole focus for nearly 75 years, and that's eye care. We've gotten really good at understanding the markets we participate in and applying our technical expertise to develop the right solutions. Over the past few years, we've focused on building a solid foundation and robust pipeline, with success as evidenced by our 13 quarters of positive top line growth. We look forward to new and exciting decade of bringing innovative products and solutions that will drive the best patient outcomes and advance the eye care industry, and that's a great place to be.

So with that, operator, we're ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Anthony Petrone with Jefferies.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Healthcare Analyst [2]

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Congratulations on the first quarter. Maybe a couple on IOLs, PanOptix and then maybe just to clean a little bit up on the numbers you gave there on coronavirus. But the U.S. PanOptix launch, just trying to get a sense. Dave mentioned 55% share in the quarter. Just wondering where that can go in the U.S. and how pricing specifically is holding up for PanOptix. The follow-up on IOL would be, to what extent does Vivity, the launch in Europe, baked into guidance? And then I'll have one follow-up on the coronavirus.

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David J. Endicott, Alcon, Inc. - CEO & Director [3]

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Yes. Thanks, Anthony. Let me just cover PanOptix. We're pleased with the performance and the uptake right now. It's been well received, I think, by surgeons. We've had a good 4 months of launch through kind of the end of the year. And we did accomplish, I think, the share position that we'd hope to. And so on the quarter, as I said, it was a 55% share, which had an exit rate, obviously, that would have been a little bit higher than that. So we expect that to do well. And we have not really had a lot of pricing pressure on it per se. The price remains, I think, premium to restore, and I think really it's a product that I think is kind of speaking for itself. The outcomes are terrific so far, and we're kind of excited to keep moving with it.

On the Vivity side, we have included Vivity in all of our projections going forward this year. So we do have a full European launch in it, and we hope to have a U.S. approval later this year. We'll see when and how that comes through. That is also in our current views.

You had a follow-up on something else?

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Anthony Charles Petrone, Jefferies LLC, Research Division - Healthcare Analyst [4]

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Yes. Just on the coronavirus math, Tim, just kind of running through. So 5% of total is China, 80% of that is surgical. You sort of -- if you annualize, I guess, the February impact, I'm wondering if I'm getting this right, but it comes out to maybe a [1 65] to [1 70] hit. I just want to make sure that, that's sort of accurate. And then just in terms of timing, is there an estimate at this point? I know the situation is fluid, but some other companies have sort of mentioned, we think, possibly, we're looking out to maybe April, as we're forecasting, and then we'll make an update there. So just a little bit of a clarity on the China comments. Congratulations again.

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [5]

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Yes. So just to help you out with some of the math. So you're thinking about it in the right framework. I mean I would take -- you can take the $377 million that we did last year, apply a growth rate to that, kind of divide it by 12. And as we said -- to get you a monthly rate, and as we said in February, we were about 10% of what our internal plans were. So if that were to carry through for the next 10 or 11 months, you can do that math there.

What we have assumed in our numbers because, again, we don't want to speculate, we've assumed that run rate carries through March. And then we've assumed it's sort of back to normal run rates in April. So that's the first assumption. The second assumption is really around the lost sales that we see in Q1, we are not anticipating or have not incorporated that as far as getting those sales back because we feel that the clinics will be full and procedures will not be rescheduled. They'll be rescheduled eventually, but we've assumed that they will not be rescheduled this year. So that's how we sort of came up with the $0.04 for Q1. Again, we don't want to speculate, it's a very fluid situation. We'll continue to monitor it and incorporate that as we get more information.

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Operator [6]

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And the next question comes from David Lewis of Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [7]

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Just a couple of questions from me here this morning. First off, Tim, just kind of follow-up on China. So if you're not assuming these procedures are coming back, I appreciate you're guiding the 5% to 6% constant currency, but on an underlying basis, the guidance is actually closer to 6% to 7%, correct me if I'm wrong, and that's obviously trending in excess of the LRPs. So maybe for you or David, a, is that correct? And b, what are some of those drivers? I think, we're thinking about PO and P1 as significant drivers for the business, but to what extent does Clareon, Vivity, Pataday are contributing to that sort of at the top end or slightly above the top end of the LRP from a growth perspective? Then I have a couple of follow-ups.

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David J. Endicott, Alcon, Inc. - CEO & Director [8]

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Yes, David, I think on the sales number, we've got most all of the products in there at 5% to 6% top line. So we're guiding that way with the view that we can accomplish that. And obviously, we're doing that on the back of offsetting legacy businesses that aren't super fast with new product flow that is helping us quite a little bit. The China piece you're going to need to take out of that because if we do have continued slowdown beyond the first quarter, then we'll obviously have an impact against that number. So we haven't really -- we haven't assumed higher than that per se. So we're starting with the annual guidance we think we can make in that 5% to 6% range. Obviously, we've backed out China, but only the first quarter so far.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [9]

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Okay. Very helpful. And then just two more quick ones for me. One, just, David, the Pataday opportunity. Can you just give us any sense of how we should think about it as that product transitions to OTC? How expansive it could be to the addressable market for the product? Or any thoughts about impact over the next couple of years? And then just, Tim, for margins in 2020, can you just give us any relative sense? GMs were a little softer in the fourth quarter. We're assuming that may have been vision. Just in terms of as you think about expansion or operating margins into 2020, what's that balance of GM versus middle of the income statement leverage?

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David J. Endicott, Alcon, Inc. - CEO & Director [10]

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Yes, David, just a quick comment on the size. We obviously are excited about Pataday. It's -- we think the market in total is probably approximately $600 million at its maturity. I would say that's a combination of moving about half of that market, $300 million of that is a switch from Rx status to OTC. So you took the Rx volumes and brought them into the OTC market and then charge them basically an OTC price. That would generate about $300 million.

Now the pace of that, you'd have to model on your own. There are other Rx to OTC switches that may give you some guidance on that piece of it. Our current view is that, that, combined with some share gains that we could pick up on our own -- capitalizing some of our own stuff, but also really getting after the rest of the market, gives us a sizable market opportunity, I would say.

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [11]

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And then on the margin point, you are correct. We did see some pressure in Q4 on some of the Vision Care lines that we're installing. As you think about the accretion in 2020, we're going to get some gross margin accretion. And then we're going to continue to get operating leverage. I'd say it's probably about maybe 1/3, 2/3, somewhere in that range.

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Operator [12]

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And the next question comes from Veronika Dubajova from Goldman Sachs.

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Kira Huppertz, Goldman Sachs Group Inc., Research Division - Research Analyst [13]

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It's actually Kira for Veronika, sorry about that. Just one question on the guidance. So at this point in time, other than, obviously, coronavirus, what do you see as the single biggest moving variable between the lower and the upper end of that guidance range, please?

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David J. Endicott, Alcon, Inc. - CEO & Director [14]

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Well, I think it's new product flow, Kira. Thanks for the question. I do think that we are excited about our pipeline maturing kind of as we accept. But, obviously, we have yet to see how PRECISION1 really performs. I think we'll get a good view of that near the second -- end of the second quarter once you kind of have an unconstrained run at it. I also think that Vivity performance in Europe will be an interesting opportunity for us, and we have yet to really understand exactly how high that's going to go or what will happen there. So I think we feel good about PRECISION1 -- sorry, I should say, the DAILIES TOTAL1, SYSTANE and PanOptix, all of which we have a pretty good view of from our own historical work. But I think some of the newer products, we're going to have to see how they do. And that will be -- the only other variable I would give you on a go forward is, and again, we had a pretty good assistance from the market in some of the more mature markets last year, so think reusable contacts, for example. Last year, the MAT was roughly about 1%, 2% growth for a period of time. And then in the fourth quarter, it fell off again. So I'm not 100% sure where that goes. And of course, we have the contact lens care business, which, again, tends to be an anchor for us until we see some stability there. So those are the kind of dynamics I think we're trying to work against. The variables are probably the new product flow.

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Operator [15]

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And the next question comes from Sebastian Walker with UBS.

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Sebastian Walker, UBS Investment Bank, Research Division - Associate Analyst [16]

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I've got three, please, if I could. So first, on PanOptix. The 55% market share over the 4 months, could you just help us with how that's being defined? And then is there anything in the 17% growth that you want to flag off -- flag as being kind of one-off in nature in terms of stocking patterns, for example?

The second question is on the contact lens market, overall. Some of your competitors are talking about a very healthy market, driven by the structural shift towards daily wear. Is that something that you expect to continue happening for the next kind of 3 to 5 years? The higher level of growth than what we've seen recently?

And then just lastly, a technical one on -- in the ocular health business. Could you just comment on what proportion of your sales are kind of the declining business? And what proportion is the growing business? And where you expect those both to go?

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David J. Endicott, Alcon, Inc. - CEO & Director [17]

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Sure. Let me start with the PC IOL's definition. So we are obviously thinking about market share in the very specific element of the category of eye walls. So we're looking at it relative to multifocal lenses within the foldable lens category. So that's a relatively fine cut. So hence, the fairly rapid movement in share. But I think it's the most accurate way to think about it because it really is a swapping of lenses that's going on inside of that particular market.

Maybe one other piece of information we get a lot, and that is that the category itself is -- really isn't moving a ton on a yearly basis. So we're still seeing kind of that normal 0.5 share point movement in penetration on PC IOLs, in particular, presbyopia correcting. That's kind of what we had expected. And so the share gain is what we are looking at, and it is inside of that particular element.

On the -- and there wasn't anything particular in stocking. I don't think there was anything other than our normal course of business. So we don't really stock because they're used directly into the IOLs, and we can sign the inventory into the -- to the ORs. So it's generally not an issue relative to our output.

And then the last one was market grow structurally. No, I think you're right about the market growth, and I think everybody is kind of talking about the same thing, which is daily disposals are increasing the value growth of the market, and they are doing that by trading people from reusable lenses to DAILIES. I would say the fourth quarter was a little soft, in general, because the total lens market, I think, grew probably around 2%. That has a lot to do with the Japanese pull forward. So if you look at Japan itself, it was off in the quarter almost 10%. So I think you see a little bit of artifact between Q3 and Q4.

And if you're thinking about it more in terms of the long run, the long-range plan, I think you're going to see consistent growth in the market close to where the MAT is, moving annual runs right around 5%. DAILIES have been running somewhere in that 8% to 9%. Those are value numbers. So I would think that is kind of the way to think about it.

The last one was the ocular health split. And I think the best way that we could give you that information is to say we typically have said that the Tear business is about 60% of our revenue there and 40% of the contact lens care. So if you think about what contact lens care is probably the more challenged part of our business, that's probably the best way to think about it.

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Operator [18]

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And the next question comes from Chris Pasquale with Guggenheim.

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Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [19]

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Did I hear you correctly, you had an unusually large order in the U.S. equipment business this quarter? Could you just quantify that and kind of frame how you would think about growth in that segment going forward? It's pretty lumpy this year.

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David J. Endicott, Alcon, Inc. - CEO & Director [20]

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Yes, we did have a very good order from a large customer in refractive. We continue to be the market leader in the refractive space in terms of procedure growth. And I think we feel good about our shares there. I would say that the refractive market is still relatively -- internationally, it's pretty good. I mean, the Asian markets have historically been growing nicely. U.S. has been pretty flattish. But I guess, I think in general, we've gained a little share along the way. So we've been kind of, I would say, low single digits in the way which we've been thinking about refractive but that's really all there is to it. And again, refractive for us is a -- it's a good business, but it isn't -- it's a small part of our kind of equipment business, I would say.

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Operator [21]

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And the next question comes from Matt Miksic with Crédit Suisse.

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Matthew Stephan Miksic, Crédit Suisse AG, Research Division - Senior Research Analyst [22]

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So just one on margins and then I have couple of quick follow-ups on the products, comments that you've made. So just looking at the margin goals for this year, I guess, last year, ex currency, I guess, you were up maybe 70, 80 bps year-over-year, something like that. Is there an element of acceleration that we should look at this year? Is it that 50 to 100 basis points if we were to look at it on a constant currency basis? Any kind of color on just trends of leverage? And then kind of quick questions on products.

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [23]

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Yes. I would just say this, with regards to FX, when you look at '20 as compared to '19, there's really nominal pressure from an FX perspective. Now again, that assumes that the rates, as we took average rate in January, that assumes that those rates hold throughout the course of the year. So as far as deceleration, margins will improve over the course of the year. Q1 will have some pressures, as we talked about, as you think about some of those stand-up costs, some of the marketing spend that I talked about for the new launches. So you should see -- or we would expect a natural progression over the course of the year with regards to margins and end up in that 17.5% to 18.5% range.

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Matthew Stephan Miksic, Crédit Suisse AG, Research Division - Senior Research Analyst [24]

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And then on the products, just in Surgical, impressive start for PanOptix for sure and strong surgical equipment, but I just wanted to make sure we're looking at Q1, and maybe the sequential trends, correctly. So on PanOptix, is there an element of folks trying it, seeing what kind of results they'd get, and then do you expect maybe some settling, at least in the near term, before it continues to go? Or -- and then on equipment, you mentioned this order, just want to make sure we're thinking about that right. If you could quantify that or give us some sense of how the sequential numbers or year-over-year numbers should look.

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David J. Endicott, Alcon, Inc. - CEO & Director [25]

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Yes. Let me start with the PanOptix piece. I mean, I think the experience we've had with intraocular lenses is that there'll be a steady trial phase. It will begin to kind of settle in and then the growth will kind of continue on in a way that's relatively organized. I think I wouldn't say linear, but I don't think it's where you go up and you have some kind of over-the-top arc shape curve before you start growing again. So I do think it's a little bit more steady as she goes. And I would think that's what we see right now. So I don't anticipate any leveling off necessarily other than you get to the upper limits of what you could do with the product relative to competition. And I think, as we've seen in most cases, that happens in that kind of 18- to 24-month frame. So I think that's probably where I'd leave that piece.

On the equipment piece and on the equipment other bucket, because I think the growth was solid this quarter, I would point to two other point -- pieces of it that you should keep in mind. The service revenue was relatively strong as was procedural eye drops. And so I wouldn't read too much into the refractive order that we got. It was reasonably good, but the -- for the full year, I think you should think about equipment as growing roughly around procedures are relatively flat to -- probably, we had a very good equipment year last year. And frankly, it should be a low single-digit number on a year-on-year basis. So I read the remainder of that as largely service revenue and procedural eye drops because I think that's really where it is.

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Operator [26]

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And the next question comes from Scott Bardo with Berenberg.

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Michael Healy;Berenberg;Analyst, [27]

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It's Michael Healy today in for Scott. Just a couple on PRECISION1, really. If you can give us a bit of color really on how many machines you've installed at the moment, and how many you expect to install by the end of the year.

And then maybe just some of the specialty lenses. Is it still the plan to launch the toric version of PRECISION1 by the end of 2020 and the toric in DAILIES TOTAL1? And I appreciate this, so it might be early, but is there any feeling of what sort of cannibalization in DT1 you might see from the launch of PRECISION1?

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David J. Endicott, Alcon, Inc. - CEO & Director [28]

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Yes, Michael. I think with -- on P1, I presume you meant consignments and -- or fit-sets, I should say. And I do think that we've had a pretty good run on fit-sets. We've got quite a lot of them out there. We should have the vast majority of the market covered by the end of the quarter with fit-sets. It will be -- it will inch up over the next quarter beyond that. But I would say the 80-20 rule is pretty much covered by the end of this quarter, which is what we said in the past. So I think that's the way to think about distribution of fit-sets.

If anybody wants the lens today, they can order it. So we're basically -- we've opened it up to any retailer, any practice with or without consignments, so we feel good about where we are relative to supply. But obviously, consignments or, I should say, fit-sets are an expensive venture, so we try and put them in where we have definitive commitments. And so we'll work our way through that process in the next 90 days or so.

On the toric lens, we are excited about the toric business. We are continuing to build toric inventory on both DAILIES TOTAL1 and PRECISION1. Those are likely late this year with a real full effect next year, but we would like to get it out, obviously, as soon as possible to complete the family. I do think there's a lot of opportunity in that over the long haul. Because DT1 is a very popular product. Patients prefer it. And I think we are -- if you really look at where we're getting hurt in the market, it's the lack of having a toric. And if we can shore that up, I think that helps our business quite a little bit.

Lastly, on the cannibalization piece. I'd just say that we are really early in the process, and I'd be careful about assuming too much around this one. But our early read would be that we don't really see a lot of cannibalization. There's a little bit, not a lot, on DT1. I think more likely, we're seeing a little bit more cannibalization of our DAILIES AquaComfort Plus product, which, again, I think, is what we would have expected given the positioning of those two products relative to the value of patient.

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [29]

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And then on the capacity front, we tend to be very sensitive around the capacity communication. So I would just say this, we're putting in more lines this year than we did last year. This will be sort of our peak year. So again, that will drive some near-term gross margin pressure, as it takes some time to get those lines fully optimized and up and running.

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Operator [30]

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And the next question comes from Larry Biegelsen with Wells Fargo.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [31]

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Can you hear me okay?

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David J. Endicott, Alcon, Inc. - CEO & Director [32]

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Yes.

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [33]

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Yes.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [34]

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Good. One clarification on the guidance, one on Pataday. So the 3% negative impact in Q1 from coronavirus, Tim, that's included in the 5% to 6% guidance. So if that, by my math, $55 million or so came back, it would represent upside. Is that the right way to think about it?

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [35]

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Yes, that would be a quarter's worth of revenue growth. So yes. So that would -- we'd still be within our range of 5% to 6%. And again, your math is directionally correct.

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David J. Endicott, Alcon, Inc. - CEO & Director [36]

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Just be careful, Larry, though, that we are assuming, at this point, it's not going to come back. So in the watch out right now with the China piece is that the hospital system there, most patients are not going in right now. And almost all the ophthalmology guys have canceled their surgeries while we're going on with this. So the public hospitals run pretty close to capacity most of the year. We have a good private business, which is where we might see some pickup, but I would just be careful in assuming much is going to come back later in the year.

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Operator [37]

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(Operator Instructions) And the next question from James Gordon with JPMorgan.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [38]

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James Gordon from JPMorgan. One on implantables and one on contact lenses. So on implantables and PanOptix, I noted the comment about it being a 55% market share after 4 months. I think you said that's up about 20 percentage points from where you were before you launched the product. So the question is, are you hoping or planning to be able to expand the market faster for AT-IOLs any quicker now? Or is it a finite market, and you're already sort of more than halfway there after 4 months? But the ceiling on where you can get to is any twice where you are currently? So that's the first question.

And then just contact lenses, so quite a deceleration in Q4. So I think you went from 7% last quarter to 3% this quarter. I think in Q3, Japan stock up was only seen as about a percentage point delta. And for other contact lens piece, it's not been a big impact from Japan. It's maybe 1 or 2 percentage points. So is there a reason that there was a bigger deceleration of your business in Q4? Or anything we can just extrapolate forward there?

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David J. Endicott, Alcon, Inc. - CEO & Director [39]

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Yes, James, let me take the first one. I think the -- I think you're right. You're correct in the way you're assessing the market penetration versus share growth. And I do think there is -- you have a full year of share growth to be observed. So I think, because we started this in September, we'll get a full wrap around on whatever the share entry is. It will probably have some additional accumulation of share this year, one would hope. So I think the bulk of the growth should again happen this year and slightly into the following, which, again, is kind of that 18-, 24-month time frame we've talked about to get to the peak share. I do think that you are going to see most of the market take shape for us with PanOptix on a share basis, not an expansion basis. So we haven't seen a ton of expansion. We saw a little bit in the fourth quarter, which could have been pent-up patients waiting for this. We'll see what happens going forward. But on a year-on-year basis, the moving annual penetration is pretty much as we typically expected. It's in that kind of 0.5 percentage point of penetration growth, and that's fairly consistent with what it has been over the years.

On the contact lens piece, you're also correct that it is -- there is about a percentage point of Japanese movement here. And I would say that the contact lens piece is a little bit stronger than it's reported as because of that. But it was a little bit weaker, I would say, on two fronts. One is the reusable lenses for us were particularly soft on the market, and we did lose a little bit of share in that market. So we were a little bit softer there for those reasons. So that's the right way to read it.

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Operator [40]

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And the next question comes from Jeff Johnson with Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41]

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Just one follow-up question for me, and it would be on Vivity. One, a potential launch in the U.S. or at least a potential FDA approval in the U.S. this year, it seems a little bit ahead of our -- the schedule we were thinking. Just any update you can provide there on what you're seeing with the FDA? And two, from a pricing perspective, what kind of pricing or where are you positioning pricing in the -- in Europe for Vivity? And how to think about where you might position it in the U.S. from an AT-IOL price point versus a standard monofocal, somewhere in between? Just high level, kind of how should we think about pricing.

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David J. Endicott, Alcon, Inc. - CEO & Director [42]

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Yes. Jeff, two things. One is, Vivity, we submitted last year to FDA, and we expect some kind of response from them this year. We don't have a time line that we've talked about yet on that lens. We -- in Europe, we have set a price, it is similar to the PanOptix price. So there won't be any, I think, trade-off between the two. And I think you should think about those 2 products as roughly going to be the same price, plus or minus a little bit on the market we launched in. So that's where we are with those.

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Operator [43]

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And the next question comes from Bob Hopkins with Bank of America.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [44]

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Just love you to comment on two quick things. First, just one last question on coronavirus. Just curious, are you seeing any impact outside of China? Or are you assuming any? And then the other topic I'd love you to offer a quick comment on is just the IOL growth, obviously, in the quarter was phenomenal in a very strong year. I think around 9% for the total year, but much stronger growth in the back half. Can you give us any rough directional sense, what you're assuming for IOL growth in 2020 relative to that 9%?

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [45]

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Yes. So as far as impact on the rest of Asia, we have not seen much impact if you look at February sales. So there's been a little bit of impact, but not much. We've assumed those trends continue. But again, it's too early to tell. We don't want to speculate, but certainly, it's not the impact that we talked about in China.

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David J. Endicott, Alcon, Inc. - CEO & Director [46]

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Yes, we're -- and the guidance assumes no impact beyond China as a way I think we got to think about it. So obviously, there may be some, and we haven't accommodated for yet because we haven't actually seen it yet. So there is something to think about with that.

The other piece is just on -- what was the other piece?

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Karen King, Alcon, Inc. - Senior VP and Head of Global IR & Communications [47]

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Implantables.

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David J. Endicott, Alcon, Inc. - CEO & Director [48]

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The implantables, yes. Just directionally, we had very -- obviously, we had a back half launch of -- really fourth quarter launch. We -- on a year-on-year basis, let me just give it to you this way. I think we have a half -- additional half year in Japan. We'll have a full year or almost 3/4 wraparound on the United States. And we should have approval -- well, we have approval in China. Presumably, if we get back to business there, we should be able to launch maybe second half of this year. So I think in our implantables business, that plus the Vivity piece, we should be able to kind of reproduce a pretty good year. So I would be a little -- I don't want to forecast the individual category for you, but I would say that we feel good about the implantables.

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Operator [49]

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And the next question comes from Steve Willoughby

With Cleveland Research.

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Stephen Barr Willoughby, Cleveland Research Company - Senior Research Analyst [50]

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I have two for you. First, just on the guidance, just -- and again, kind of clarifying some of the comments around China. You made -- I believe you made a comment saying that what you're assuming in February and March will impact you by 3% in the first quarter and $0.04. And if that happens, the EPS number might be closer to the low end of the guidance you gave. I just want to confirm that's what you said. And then I have a follow-up question.

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [51]

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Yes. So again, we've assumed that the February run rates for China progress through March. That causes about $0.04 of EPS pressure. That would take us down to the low end of the range. And then what we've assumed is that it's sort of business as usual from April 1 moving forward. Again, it's very fluid, so we wanted to give you guys some transparency around what we're seeing and what we have decent line of sight to. But we don't think it's prudent to speculate how long this is going to progress going forward.

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Stephen Barr Willoughby, Cleveland Research Company - Senior Research Analyst [52]

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Okay. And then secondly, just wondering if you have seen any impact to the company from any of the sterilization changes that have happened over the last 90 to 120 days in terms of availability for sterilization services.

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David J. Endicott, Alcon, Inc. - CEO & Director [53]

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Yes, it's a good question, Steve. And we have. I would say that the EtO piece has been -- the closure of the facilities in Illinois and Georgia, while they don't affect us directly, indirectly, they're putting a lot of pressure on the system. So there is, I think, very -- the demand and supply on sterilization services is a little bit difficult right now. So we have been sporadically out of custom packs off and on as we kind of went through the last several weeks in the first part of this year. So we are struggling with it. We are working very closely with our vendors on that topic. We hope to have it settled before too long. But again, it is a little bit hand-to-mouth right now.

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Operator [54]

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And the next question is a follow-up from Larry Biegelsen with Wells Fargo.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [55]

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Just, David, on Pataday. I don't think I've heard you talk about how long Alcon has exclusivity. And also, could you talk a little bit about the ramp? It seems like a product like this should have a relatively quick ramp. And you talked -- you mentioned looking at analogs in this space. Zaditor does about $40 million in the U.S. It would seem Pataday should do better given the product profile. Is that reasonable?

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David J. Endicott, Alcon, Inc. - CEO & Director [56]

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Yes. Look, I mean, you're not wrong on a number of those parts. Let me start with the patent piece. There's no unexpired patent protection on Patanol. That one expired like in 2015. But for Pataday, there's two remaining patents in the orange book, one in '22 and one in '24. But there's a number of companies who've already filed the NDAs and which -- that have been settled for early entry, so I think we're going to see some near-term entries from folks that want to be in the OTC business. So we'll have to see whether they want that kind of a business or not, but that will be the question we'll have going forward.

The ramp itself, Larry, I don't know. I mean, I think we've modeled it after a couple of other OTC, Rx switches. So you could probably find the same data we've got and give yourself a sense of how fast people will move off of the Rx. A lot of it, often, it's the delisting from the benefit plan that actually creates the forced movement to OTC, and that doesn't happen but once a year, usually. So again, we're in the wrong part of that cycle. That should usually happen at the beginning of the year. So we'll see whether that can take shape over the next few months.

What I do think is going to happen is that we're going to see an allergy season. We -- on the good side of things, we made this in time for the allergy season. So I think you're going to see some direct advertising to consumers to make them available as they could get prescription strength for probably a little bit less than their co-pay. So I think that's the message we're going to get out there early and hope that we can bring that market in.

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Operator [57]

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And the next question comes from Ryan Zimmerman with BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [58]

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So just on the PanOptix launch. You called out Japan as being recently launched. So can you just help us frame that opportunity? How you're seeing or what you're seeing early on in that launch for PanOptix? And if you're anticipating any additional countries in the case over the course of 2020? And then I have a follow-up on capital allocation.

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David J. Endicott, Alcon, Inc. - CEO & Director [59]

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Well, on Japan, we've launched middle part of the year. It was, I think, very well received, and I'm just looking for the Japanese share, as I said. I don't think we've ever described it exactly. I would say that we've had a very good run of IOL performance in Japan, and I suspect that we will see a little bit more of that. There is a little bit of a dynamic in Japan to watch out for, which is this change in reimbursement for the consumer or for the doctor. So we're watching that carefully this year. I think that takes shape in April, and I think we're going to have to see how that lands because there's still some uncertainty around that. So I'd be careful not to predict too much around Japan other than we get a full year of effect of what we -- whatever we do in -- on sort of PanOptix.

And then, I'm sorry, on the -- what was the other one? It was...

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [60]

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Capital allocation.

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David J. Endicott, Alcon, Inc. - CEO & Director [61]

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Capital allocation

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [62]

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Yes. So I just want to ask the question. So, Tim, I mean, you talked a little bit about your capital allocation strategy. But just between the interest expense, the CapEx and separation costs, how much room do you feel like you have for M&A in FY '20 and specifically looking out beyond that?

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Timothy C. Stonesifer, Alcon, Inc. - Senior VP & CFO [63]

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Yes. I mean, as we've talked about before, there's really three components of our cap allocation, right? The organic investment where when we do that well, we do it right. It's good for customers. It's good for shareholders. It's good for us. We do look at M&A and BD&L.

What has worked well for us, and I don't think it changes in 2020, is those $50 million to $300 million type deals. Again, we realized that we can't develop everything. And if there's something out there that we can get at the right price, that accelerates our strategy, we'll certainly take a look at it. And then, obviously, the third component is returning cash to shareholders either through buybacks or dividends.

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Operator [64]

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And this morning's last question comes from Richard Newitter with SVB Leerink.

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Jaime Lynn Morgan, SVB Leerink LLC, Research Division - Associate [65]

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This is Jaime on for Rich. I guess, just to kind of piggyback off of that last question. What types of assets in the M&A space are you kind of looking at that are really picking your interest that you really potentially could see as something more needle-moving, whether it's in the Surgical space or in the contact lens and Vision Care space?

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David J. Endicott, Alcon, Inc. - CEO & Director [66]

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Yes. Jay, we look at just nearly everything that's going on in eye care. And so there's a -- I think, typically, what we're looking for are things that we're not already involved in, although we're always interested in technologies that are going to advance the category. So we've followed for some interest -- and the second of those, there are a number of technologies in what I loosely call energy sources for phacoemulsification, which we think are kind of interesting and different. And as we have a next-generation platform, we're looking to complement that with some different ideas around it.

We've looked a good bit at glaucoma for some time. We continue to see that as a super interesting space, one that we could get into fairly easily and one that we've been in and out of over the last several years. So I think we would be interested in something like that. And then we're also continuing to look for, in our OTC businesses, other ways of getting involved in expanding the OTC markets, whether that's -- particularly in the international space, where the technologies are not necessarily things that we have. Multi-dose preservative-free is one that we're just beginning to get into. And that is an important part of what's going on internationally. So we'll work at that as well.

There's a number of other things that are a bit smaller, and there are some that are kind of quite ambitious, but I would say that we're following nearly everything in the eye care space.

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Operator [67]

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Thank you. And as this does conclude the question session, I would like to return the floor to management for any closing comments.

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David J. Endicott, Alcon, Inc. - CEO & Director [68]

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Yes. Just a final remark on the coronavirus. I just want to mention that our primary interest in this one is keeping our associates safe out there and then making sure that the communities which are affected have the right support as well. So we're watching this one carefully. We are following government advice and advice from the health authorities in those countries. And obviously, this is a dynamic situation that we'll continue to follow closely. But principally, what we're interested, importantly, is make sure everybody's safe out there. So I appreciate the interest in that topic and well wishes to everybody who's affected.

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Operator [69]

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Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.