PRTC - NASDAQ

Good morning, and welcome to Bausch + Lomb's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to George Gadkowski, Vice President of Investor Relations and Business Insights. Please go ahead.

Thank you. Good morning, everyone, and welcome to our third quarter 2025 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Brent Saunders; and Chief Financial Officer, Mr. Sam Eldessouky. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, I would like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures and ratios. For more information about these measures and ratios, please refer to Slide 1 of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. The financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter unless required by law and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Brent.

Thank you, George, and good morning to everyone joining us today. I'm going to provide an overview of our impressive third quarter performance and speak to how our strategy and patience is paying off. Sam will go deeper on the financials and update 2025 guidance, and I'll close with a look at products driving growth and opportunity. I'd like to thank my 13,000 colleagues around the world upfront because without their commitment and belief in what we can achieve together, we'd be stuck in neutral. Instead, we're delivering on the vision we laid out in 2023. 6% constant currency revenue growth was once again fueled by a base business engine that continues to hump and the steady introduction of innovative products across categories. Pharmaceuticals was a standout, thanks to $84 million in Miebo revenue. Miebo growth helped bolster our comprehensive dry eye portfolio, which is front and center for eye care professionals, patients and consumers. Effective selling has also meant more surgeons implanting enVista intraocular lenses, helping drive 27% constant currency revenue growth in premium IOLs. Our loaded and differentiated pipeline will be on full display in just a few weeks at Investor Day. Importantly, the pipeline products we'll highlight aren't aspirational. These are clinical stage programs with anticipated launches over the next several years. Every part of our nearly 3-year journey since I returned as CEO has been aligned to 1 or more of 3 categories you've all become familiar with: selling excellence, operational excellence and disruptive innovation. Those aren't optional. They are imperatives. While our journey is nowhere near complete, given how far we've come, we've introduced a fourth category, financial excellence. This is our opportunity to deliver sustained profitable growth that reflects our real potential. We'll show you what that looks like at Investor Day when we share our 3-year plan. We've reached a pivotal point in our journey to becoming the best eye health company. Being the best means elevating the standard of care in eye health, which is why our pipeline is filled with products that have the potential to be truly disruptive and reset expectations for eye care professionals, patients and consumers. You'll learn much more about the science behind our pipeline and market opportunity at Investor Day, but here's a sneak peek. In consumer, new formulations of LUMIFY, PreserVision and Blink Triple Care will make category leaders even more appealing and are expected to unlock significantly larger audiences. In Pharmaceuticals, next-generation lifitegrast would change the dry eye disease treatment paradigm. Our ocular surface pain medication would be the first of its kind, and our glaucoma medication would be the first to improve visual acuity. The contact lens market has been starved for innovation. There's been no material science breakthrough since 1999, which we're addressing with a first-of-its-kind bioactive lens. Our highly successful SiHy platform will expand with a cost-competitive daily disposable, a frequent replacement offering and a lens designed to slow the progression of myopia in children and young adolescents. Finally, in Surgical, we're building on a steady stream of premium products representing consumables, equipment and implantables, the holy trinity of that business. We delivered growth across all segments in the third quarter, once again demonstrating our holistic strength. I mentioned Pharmaceuticals as a standout earlier, but I would be remiss if I didn't recognize Vision Care, which captures contact lenses and consumer offerings. Several franchises in both categories are highlighted here, including Blink with 37% reported revenue growth, Artelac at 24%, Daily SiHy offerings at 22% and eye vitamins at 12%. Our overall contact lens portfolio grew a healthy 6% on a constant currency basis. We'll discuss new iterations of some of the highlighted products at Investor Day as we work to make established high performers even more popular with meaningful scientific advancements. I'll now turn it over to Sam for a closer look at the financial metrics, including significantly improved cash flow figures and an update on 2025 guidance. Sam?

Thank you, Brent, and good morning, everyone. Before we begin, please note that all of my comments today will be focused on growth expressed on a constant currency basis unless specifically indicated otherwise. In Q3, we delivered strong performance with year-over-year revenue and adjusted EBITDA growth. We're also very pleased with our cash flow generation this quarter. Turning now to our financial results on Slide 8. Total company revenue for the quarter was $1.281 billion, which reflects year-over-year growth of 6%. The revenue growth was across all our segments. For the third quarter, currency was a tailwind of approximately $19 million to revenue. Now let's discuss the results of each of our segments in more detail. Vision Care third quarter revenue of $736 million increased by 6%, driven by growth in both consumer and contact lenses. The consumer business grew by 6% in Q3 as our key brands performed well and consumption trends remained steady. We delivered solid growth in the quarter while absorbing a destocking impact of approximately $6 million. Let me go over a few highlights. Eye vitamins, PreserVision and Ocuvite grew by 11%. LUMIFY generated $48 million of revenue, up 2%. In the quarter, we continue to see strong consumption. Year-to-date, LUMIFY revenue is up 13%. We saw strong execution in the consumer dry eye portfolio, which delivered $113 million of revenue in Q3, up 18%. Our 2 key franchises, Artelac and Blink, once again contributed to the strong performance. Artelac was up 18% and Blink was up 36%. Contact lens revenue growth was 6%. Our contact lens business has outpaced the market, and we saw strong performance once again in the quarter. The growth was led by Daily SiHy, which was up 24%. Biotrue was up 7% and Ultra was up 4%. In Q3, our contact lens business saw growth in both U.S. and international markets. The U.S. was up 9% and international was up 4%. Moving now to the Surgical segment where we continue to see steady market dynamics and procedure volume. Third quarter revenue was $215 million, an increase of 1%. Excluding the enVista recall, Q3 revenue growth was 7%. In Q3, implantables were up 2% and 14% sequentially. As Brent will discuss, we are continuing to make solid progress with the enVista return to market, and we are regaining momentum in premium IOLs. Consumables were flat on a constant currency basis and up 4% on a reported basis as we lapped last year's notably strong Q3, which saw stronger volumes driven by resupply to the market. Finally, equipment was up 4%. Revenue in the Pharma segment was $330 million in Q3, which represents an increase of 7%. Our U.S. branded Rx business was up 13% in the quarter. Miebo delivered $84 million of revenue in Q3. This represents sequential growth of 33% and a 71% increase year-over-year. It also reflects TRx growth of 110%. Xiidra delivered $87 million of revenue in the quarter, which is in line with our expectations. Xiidra TRx growth was 8%. Our international pharma business was up 12% in the quarter. We continue to make progress in our U.S. generics business. As anticipated, we are seeing sequential growth with U.S. generics up 2% this quarter compared to Q2. Now let me walk through some of the key non-GAAP line items on Slide 9. Adjusted gross margin for Q3 was 61.7%, which represents a 130 basis points decrease year-over-year. This was mainly driven by product mix and the onetime impact of the investor recall. In Q3, we invested $95 million in adjusted R&D, which represents an increase of approximately 13% over Q3 of 2024. Third quarter adjusted EBITDA, excluding acquired IP R&D was $243 million, up 7% year-over-year on a reported basis. Q3 adjusted EBITDA margin, excluding acquired IP R&D was 19%, which represents a sequential increase of 400 basis points. We are continuing to execute our margin expansion strategy as we transition from the most active product launch cycle in the history of the company to a growth phase and as we remain focused on disciplined cost management. Adjusted cash flow from operations was $161 million in the quarter, and adjusted free cash flow was $87 million. We are pleased with the continued progress of our efforts to drive cash flow optimization initiatives. Net interest expense for the quarter was $98 million. Adjusted EPS, excluding acquired IPR&D, was $0.18 for the quarter. Now turning to our 2025 guidance on Slide 12. We are maintaining our full year revenue guidance at a range of $5.05 billion to $5.15 billion. This revenue guidance represents constant currency growth of approximately 5% to 7%. Shifting to adjusted EBITDA. We are updating our adjusted EBITDA guidance to a range of $870 million to $910 million from a range of $860 million to $910 million. The raise in the lower end of the range is driven by the strength in the performance of the business. In terms of the other key assumptions underlying our guidance, we continue to expect adjusted gross margin to be approximately 61.5%. For the full year, we continue to expect investments in R&D to be approximately 7.5% of revenue and interest expense to be approximately $375 million. We continue to expect our adjusted tax rate to be approximately 15%. We now expect full year CapEx to be approximately $295 million. Consistent with our previous guidance, our current guidance excludes any potential onetime IPR&D charges that we may incur in 2025. Finally, a brief word on tariffs. The tariff policy remains fluid, and we are continuing to monitor updates. Based on where the policy stands today and the actions we're taking, our updated guidance assumes we will be able to offset the impact of tariffs in 2025. To conclude, we had a strong quarter and our business fundamentals remain solid. We are committed to our strategy to drive sustainable growth and margin expansion. I look forward to seeing you all at our Investor Day on November 13. And now I'll turn the call back to Brent.

Thanks, Sam. Let's spend some time highlighting growth drivers in each business. There's not much I need to say here as these charts plotting TRx growth for Miebo and Xiidra speak volumes. 110% year-over-year prescription growth for Miebo is outstanding, especially considering there was a new entrant in dry eye disease treatment. Xiidra is doing what we said it would, steadily growing in volume while maintaining a sizable market share. We expect both medications will continue to benefit from ongoing category expansion as dry eye awareness and education increase. As a reminder, we're at the tip of the iceberg when it comes to treating the millions of Americans who suffer from dry eyes. We often reference a thoughtful approach to expanding our daily SiHy portfolio as was the case in the third quarter when we launched a toric model in Japan. We're now in more than 50 countries and the portfolio still shows no sign of slowing down with 24% constant currency revenue growth in Q3. We're still in early innings, but remain excited for additional expansion and anticipated introduction of new SiHy offerings under development. At a macro level, in consumer, we saw impressive consumption considering a work-down of inventory in the trade. That's a testament to brand building and confidence in our products among eye care professionals whose OTC recommendations carry significant weight. It's worth taking a moment to remember that we only acquired the Blink family of eye drops a few years ago in a deal that was largely overshadowed by our Xiidra acquisition. In that short period, we've completely revitalized the global brand and introduced new options, helping drive nearly 40% reported revenue growth in the third quarter. Earlier, I referenced Artelac, which, as a reminder, continues to be our most global dry eye option with availability in more than 40 countries and plans to expand further. Double-digit reported revenue growth is common for the brand and Q3 was no different. Eye vitamins saw a nice uptick with 12% reported revenue growth. Our new formulation of PreserVision, which we expect will be on the shelves in the first half of 2026, could significantly increase the addressable market for age-related macular degeneration. One caveat on LUMIFY performance. Our typical growth wasn't reflected in the third quarter due to the timing of a large promotional order shipped to Costco in June. Then that we saw the benefit in the second quarter with 27% reported revenue growth. LUMIFY's popularity and category dominance is clear with consumption seeing 14% growth in Q3. Two call-outs for Surgical, both related to our momentum in the high-margin premium market. While not fully recovered, progress on our return to market for the enVista IOL platform and Envy in particular has been faster than expected, thanks to the tireless work from the team and our deep relationships with ophthalmic surgeons. Total enVista sales in the third quarter reached 82% of Q1 or pre-recall levels, with Envy coming in at 91%. In September, Envy sales surpassed first quarter average monthly sales. While enVista Envy has a foothold in North America pending additional launches, our LuxSmart premium offering continues to expand in Europe with 6% constant currency revenue growth in the third quarter. I've already said as much as I can on our pipeline. The rest we'll save for Investor Day, which will take place at the New York Stock Exchange on November 13. What I can say is we put a premium on durability of growth through innovation and that these are exciting times for Bausch + Lomb. Let's now move to Q and A. Operator?

[Operator Instructions] And the first question today is coming from Patrick Wood from Morgan Stanley.

I'll keep it to one just in the interest of time. But not to steal the thunder from the Investor Day, but you added obviously that financial excellence pillar. High level, any kind of commentary you could give us on like how we should interpret that? Are we thinking about is this a cash conversion thing? Is this like a margin structure thing? What was the impetus at least behind kind of adding that? Curious what you can add at least ahead of the Investor Day in November.

Yes, of course. And thanks, Patrick. Look, under our roadmap, which we've been talking about since I joined 3 years ago, we've made really strong progress across our 3 core pillars: selling excellence, operational excellence and innovation. This fourth pillar, financial excellence, is really about sharpening how we execute really on a day-to-day basis. In essence, really ensuring every dollar we spend drives growth and/or efficiency. So look, we announced this Vision '27, which you'll see some greater detail in 2 weeks. But essentially, we're being very intentional about controlling operating expense, improving our mix and setting up for meaningful margin expansion over time. So it's not really about just cost cutting. It's really about disciplined execution and better outcome and resource allocation. But I'll turn it over to Sam; maybe you want to add some more color.

Absolutely. And what Brent said here, Patrick, is very important because it outlines our strategy. So let me give you more insights on how we see this strategy drives both the top line growth, the margin expansion and the strong cash flow generation. So when you think about the effects on the revenue, we've been driving gross all our businesses. And our team executed really well, and you see that throughout the last number of quarters, and you also see that in Q3 as we reported this morning. We expect to continue with this momentum with our guidance suggest above-market growth as we go forward. And as we look forward, again, we'll say more in a couple of weeks, but we see that momentum carrying forward with us. On the margin expansion, it has been a focus for us. And this quarter, we're seeing a margin improving sequentially 400 basis points. We're seeing the benefit of the work that have been sort of going on with the Vision '27 that Brent announced earlier in the summer. And we're seeing these benefits this quarter with a lower SG&A percentage sequentially and year-over-year, which is very important. That sets the foundation for us as we think about margin expansion for this quarter and more importantly, for the future as well. And then the last pillar of the financial metrics is the cash flow. On the cash flow, we've been working on optimizing our cash flow generation and we're seeing the results this quarter with a strong cash generation, adjusted cash flow from operation by $161 million. That's a 66% conversion to EBITDA, which is very strong. And what's important here is that sets also the foundation for us of what we were able to generate this quarter, but also as we go forward. So the point that I can't emphasize enough is what we've been doing and executing on the work that we've been doing for the last number of quarters is setting us up well for what we delivered this quarter in Q3, but more importantly, setting us up well for the rest of this year and what we will be able to do beyond 2025, which we'll talk about more on November 13.

Yes. And I would just add a little bit more color. I think it's important to know that our Vision '27, which is the project that instigated our financial excellence pillar, is very broad. Almost all 13,000 colleagues are included. There are hundreds of projects. We have a dedicated PMO that we put our -- some very high potential people in full time to manage. And so this is a really comprehensive initiative. And there's no project that's too small. And obviously, every dollar counts. And so this is a full core press to really deliver financial excellence over the next few years.

The next question will be from Joanne Wuensch from Citibank.

My favorite question is always to ask about your contact lens business and you put up growth ahead of the market growth rate from what we can calculate. I'd love to get your impression of your share and the market. And there was an article in the Wall Street Journal that talked about changes in the contact lens market, and you were quoted in it. And I was interested if you had any additional color you could add.

Yes. Thanks, Joanne. So look, I think the lens market is growing still in the mid-single digit, probably at the lower end of the mid-single digit. We'll see when a few more of our competitors report, but that's probably where it's at. We have now, I think, for several quarters, grown the fastest in the industry and growing faster than -- significantly faster than the market. And I attribute that to new product innovations and good execution. And I've said this before, but the thing that I've always been very proud about our team is that they continue to grow our new products, our Daily SiHy INFUSE or Ultra Daily while continuing to maintain growth in the older products and thereby really avoiding the leaky bucket syndrome, and that's a big contributor to our growth. With respect to, I guess, the Wall Street Journal article and the Cooper situation, I want to be very clear about one point that the matter is that they're facing is strictly between Cooper and its shareholders. We have no intention of getting involved. That being said, what I did say, which I do believe, that a more scaled competitor certainly would strengthen competition and be beneficial to consumers and patients. And so look, we continue to evaluate it, but it really is a matter for Cooper and its shareholders.

The next question will be from Young Li from Jefferies.

I guess first one is just on Miebo dry eye and the launch of TRYPTYR. So I heard your comments about Miebo's performance even with the competitive launch, went to AAO and joined some of the sessions where docs were talking about using products and combo, either TRYPTYR or Xiidra to stimulate tear production and then Miebo to sort of lock that in. Can you maybe expand on that thought a little bit where you talk about just the use of combo drugs to help expand the dry eye market opportunity?

Yes, absolutely, and thank you for the question. And Yehia Hashad, our Head of R&D and Chief Medical Officer, is here. And so maybe he can weigh in here as well. But look, when I look at the third quarter, and I've been through competitive launches. I remember when I was at Allergan when Xiidra launched, we're seeing the same pattern here when TRYPTYR is launching in the face of this market, which is the market tends to expand. And there's no better proof point than looking at TRx growth of 110% for Miebo and 8% for Xiidra in the face of a competitive launch from an established significant player in the industry. So that's a really good sign. I think when you look at -- and always difficult to do, so I wouldn't read into this precisely, but I think it's helpful to think about it directionally. If you look at TRYPTYR on a launch-aligned basis with Miebo, it's running at a very small percentage of TRx compared to where Miebo was. I think in last week's number, it was around 20% on a launch-aligned basis of the MBO launch. So clearly a different type of launch with a different type of profile and curve. That being said, we do think that there is a place for a drug that stimulates tear production. There are other drugs in the market. TRYPTYR is not the first to do it. Restasis has that in its label as well as a few of the other smaller products. And so that leads to the last point, which is this is a multifactorial disease. The 2 most prevalent conditions are evaporation and inflammation that probably makes up somewhere close to 80% of the patient population, and thereby creates a great opportunity for combination therapy to allow ECPs to really have the, what I call the easy button of not trying to -- and many of them don't even have the diagnostic capabilities to determine the etiology of the disease in the patient. And so having a product where lifitegrast and Miebo or Xiidra and Miebo are combined really is, I think, an advancement for patients and certainly an advancement in treatment. But Yehia Hashad, please jump in.

I think, Brent, you addressed really the critical points just to reemphasize that dry eye disease is a multifactorial disease. Naturally, it could actually be triggered by either aqueous deficiency or much more common by evaporation of the tear film. Miebo is the only product that's been approved for the evaporative component of the dry eye. Regardless it's an aqueous deficient or evaporative, if the osmolarity and with the chronicity of the disease if the osmolarities changed, this could trigger a visual circle of inflammation. And actually it's a very good reason to start to think about combining 2 mechanism of actions in order to address the disease. It has the potential of more efficacy and also it has the potential of more compliance for the patients, and it has also the potential for maybe less adverse events due to much better innovative formulations. So I think this is where we are targeting our new programs as well with the combination between Miebo and Xiidra. And we still are actually very confident about our profile of products as the only evaporative -- the only treatment for evaporative dry eye, which is Miebo.

The next question will be from David Roman from Goldman Sachs.

I was hoping, Brent, you could spend a little bit more time on the surgical business. And I appreciate you sharing the metrics around the evolution of the franchise, both in third quarter and how you exited relative to where you had started pre-recall. But maybe you could just contextualize a little bit the enVista launch with where it's going, what feedback you're getting, how the recall may have impacted the overall trajectory and how to just think about the business as we head into Q4 and then just next year maybe directionally?

Sure. And David, welcome. So look, progress on the enVista platform, I think, has been impressive and certainly faster than we expected. This was an all-out effort on everyone in our Surgical team, but in particular to our frontline sales colleagues who worked so hard to work with surgeons and ASCs to make sure that they manage through the recall and came out with trust in us and our products. I would say the other unintended super big benefit of this is the way we handled the recall. I think really even at this AAO, where the recall is something that was really not discussed at all, but the trust that we developed in how we handled it, I think, was on full display and many, many surgeons always commending us for doing the right thing and handling it with such transparency. When you look at all the metrics though, you can really see that the recovery is strong, showing both a year-over-year basis and sequentially. And we are, as we had planned quickly approaching Q1 pre-recall revenue levels. In fact, Envy slightly surpassed that in the month of September. So third Q '25 revenue relative to Q1 '25 pre-recall, total enVista sales in Q3 reached 82% of Q1 pre-recall levels. Envy sales in Q3 reached 91% of Q1 pre-recall levels. And as I mentioned September, Envy sales surpassed Q1 on a monthly basis. Revenue growth year-over-year in the total implantable portfolio was 2% sequentially and total premium IOLs was 27% sequentially. When you look at Q3 '25 versus Q2, so on a sequential basis, the implantable portfolio was up 14% sequentially and the premium IOL was up 67% sequentially. I think to just answer the last point of your question, there is still some impact, right, which is many of our sales colleagues, particularly in North America, really spent the last several -- well, 3 or 4 months managing the recall, right? We had to go and get the inventory back. Our reps had to help establish new consignments and the like. And so that did probably shift some focus from some of their other responsibilities to focusing on managing this situation. I think that's nearly behind us now, and we're back out on our front foot and moving quickly. I think with respect to consignment, we have most of our brands in full consignment with Envy getting there and probably before Investor Day, we should be back at full consignment in the market. So we're at the very tail end of hopefully having to talk about recalls anymore and just focusing on growth.

Super helpful perspective. And maybe just a follow-up on the P&L here. Clearly you're starting to see a lot of SG&A leverage as a reflection of the focus you've put on financial excellence. But maybe just can you help us think about the sustainability of that trend and how you balance reinvesting in the business for growth given the plethora of opportunities you have in front of you versus driving financial leverage? And I know you'll get into more of that at the analyst meeting, but just maybe help us think about Q3 in context here.

Yes. So maybe I'll start and then Sam could add some color. Look, our goal is that it is sustainable, and we've been saying this for some time. I think now we're trying to put some points on the board to show you that we can deliver. And really, the emphasis of the Investor Day is to walk you through our 3-year plan to show you what we believe we can deliver and how sustainable it really is. And I would say that under Vision 27, some key factors here, not just about cost and OpEx discipline, but some of our launch products are moving more to growth mode, right? So where we overinvested, now we can come back to just growing some of these products that are no longer in launch mode, but just growth mode. So that's a piece of it. Product mix continues to be a large portion of how we can improve margins. And then lastly, I would say some of our manufacturing efficiencies are probably towards the tail end or the back end of the 3-year cycle just because of the timelines, and regulatory burdens and whatnot of improving manufacturing capabilities. But all those things are in motion, and you'll get much more color when you see the 3-year plan in 2 weeks. But Sam, anything you'd add?

Yes. Let me give you more insights here and put in context for you in terms of the numbers. And when you think about the Q3 P&L and you think about what we accomplished, again this is -- we're very pleased with what we have done from an execution because it really sets the foundation, like Brent said, of what we will be able to do going forward. And we'll speak about that more as we go into the Investor Day in a couple of weeks. But just to focus on Q3 right now and the trajectory short term this year, SG&A hit its lowest point this year in Q3. We're running SG&A roughly about 40%, which is about less than what it was sequential, about 290 basis points on a sequential basis lower. When you look at it on a year-to-year basis, about 130 basis lower than compared to Q3 of last year. So, we're seeing the sequential improvement, and that's really setting the new foundation for us of what we think about. And it's all about not just the quantum of SG&A declining or going down, it is actually also the shift in the mix of what we're doing with the SG&A and repointing many of the dollars within SG&A to revenue generation. And you're seeing that in the top line growth here, David. So really, everything is pointing into the right direction for us in terms of what we've been doing and the execution that we've done is going pretty well. And that will be setting up the foundation for us as we wrap up 2025 and more importantly, as we go beyond 2025.

I would add one other thing because you asked the question, David, how do we prioritize investment? You see this nice improvement in the quarter despite a 13% increase in R&D expense. And that's because we are prioritizing this continuous stream of innovation, which Yehia and his team are going to be, I think, very proud to highlight in 2 weeks. So I think we can continue to invest in R&D and reallocate towards internal R&D development and still deliver the margin expansion we discussed. And so that's the balancing act, but I think we figured it out.

The next question is coming from Matt Miksic from Barclays.

I guess we lost Matt. We'll see if he gets back in the queue, but let's move on.

Certainly. The next question is coming from Robbie Marcus from JPMorgan.

This is Lily on for Robbie. I heard you said you expect to be able to offset tariffs in 2025. But how should we think about your ability to offset that in 2026? And with where things stand now, how big is the gross tariff impact for next year, if you're willing to share any color on how we should be thinking about the magnitude of that?

Yes. So Lily, I think we've been very transparent about tariffs and the impact and our ability to mitigate it. The problem is that the situation remains very fluid. One of the biggest impacts to us from tariffs is the reciprocal tariff from China. And as we know, the President is on a trip to Asia right now and is meeting with President Xi Friday to try to finalize trade negotiations. He did tweet or Truth Socialed yesterday that he expects a deal to be done and tariffs to be lowered. That would obviously be easier if that were to go the other way, then we'd have to continue to work hard to mitigate. The point, I guess, I'm making is I know people were upset with us after the first quarter where we just didn't add it to our guidance because of the fluidity of the situation. I think we turned out to be correct, and we managed through it. I would hesitate to guess what the President is going to tweet tomorrow. But I think the long story is we can absorb it, we can manage it. Our team is -- we've got a dedicated team that tracks it and mitigates and we've got a lot of levers we can pull to do it. Now if something came out of left field, we'll have to deal with that. But I think we feel like we're on very solid ground now with tariffs.

Great. That's helpful. And just as a follow-up, I heard you said contact lens market growth at the low end of the mid-single-digit range, which sounds like it's a little bit softer than what you had been pointing to previously. So if you could just dig into that a little bit more, that would be helpful. What's driving what sounds like a slightly softer outlook? And how big of a contributor do you think price can continue to be?

Yes, absolutely. So I always think about this as a mid-single-digit market, but that could be 6% one year and 4% another. I think we're probably more between the 4% and 5% this year. There is some softness in different parts of the world. We see a little bit more softness in Southeast Asia. China is a watchout. We do see consumer softness in the data, in the global data. We grew 10% in China, but we do have it on our watchlist. We have a very important event on November 11. Singles' Day is a very big event for us with our DTC approach in China. And so I'll know a lot more when we get to Investor Day after we see the results of Singles' Day for the Chinese market. That being said, big online players like Alibaba have seen big, big decreases. And so you just have to be thoughtful and watch. The data is mixed. There were some positive data Monday out of China on exports. So we watch it carefully. I think when you look at the market, maybe there's a little bit of a bifurcation. I think some of the lower income consumer is, I think, feeling more stress than the higher income consumer. There's a nice bifurcation there. And so some of the private label or cheaper lenses seem to be growing the market a little bit slower than the more premium part of the market. And even in the U.S., we're in this weird place where you see the stock market at all-time highs, yet consumer confidence on a relative basis quite low. And that's hard to reconcile. And so we just keep monitoring it very closely. But our outlook is positive. We'll grow faster than the market. We feel good about our business, but some of our competitors may have some different struggles.

[Operator Instructions] The next question is coming from Pito Chickering from Deutsche Bank.

Just sort of digging into sort of the gross profit margin that you saw this quarter, just looking at the strong constant currency growth coming from pharma and the mix tailwind that that provided, and then can you sort of walk us through sort of the other moving parts sort of within this quarter, including tariffs and/or FX changes.

Yes. Sam, why don't you take that one?

Yes. So let me put in context for the gross margin. When you look at the gross margin this quarter, we had roughly about 130 basis point year-over-year decline. And that's really, as I said in my prepared remarks, there's the element of that we're still ramping up the reintroduction of the IOLs with enVista. That's a higher margin. So you're seeing the impact in the quarter from a mix perspective. And also you see product mix playing out in some of our businesses driving some of that remainder of the 130 basis points. So it's really more of a product mix story plus the enVista recall adjustment on a year-to-year basis.

Right. Then for the guidance, I guess, implied on the fourth quarter that that ramp from 3Q to 4Q, that's primarily from enVista coming back online. Or are there any other moving parts we should think about there?

Yes, there's 2 parts here. I think the enVista, as Brent said earlier, we're seeing the ramp-up in enVista continue. So that will continue in our Q4. So that playing a big factor there. The other part of it is also our seasonality in our business, which tend to be -- Q4 tends to be a stronger quarter out of all 3 -- out of all 4 quarters. So you'll see that seasonality playing out into the gross margin.

The next question is coming from Matt Miksic from Barclays.

Sorry about earlier. Just a couple of quick follow-ups, one on surgical and one on pharma. So congrats on the great kind of comeback from the recall and momentum and interest in Envy and the rest of the portfolio. Just on the market, I know you're in a position of, I'd say, it seems like share growth, share recovery maybe from the recall. Just health of the market, volumes in the market, it was kind of a question and debate over the weekend at AAO. I'm just wondering your thoughts on that. And as I mentioned, just one quick follow-up on pharma, if I could.

Yes. I think that the health of the market is steady. I was also at AAO, and I talked to hundreds of surgeons there as well. I look at all of our data on a regular basis. And I really see a very steady market in cataract. We know that there is a growing patient population as the world ages. And so I don't see any real watchouts or anything to worry about in terms of the health of the market. I think it's pretty steady and over time should expand.

That's helpful. And then just on pharma, the Miebo momentum has been impressive. I'm not sure, but I'd love to hear if you feel like you're at a full sort of array of coverage at this point. Or is that something that's still improving? And then on Xiidra, if you could just remind us when you begin to annualize some of the investments that you made late last year, early this year as you get into next year?

Yes. So I think coverage for both products is pretty steady in the 70% range, which is for this product category is pretty much full coverage. So, I think we're -- we've made those investments. We feel good about where we're at. With Xiidra, the investments were made this year. So this year, 2025, establishes the new baseline. And so I think we're in the fourth quarter now, so we're near the end of that investment cycle.

Our next question will be from Gary Nachman from Raymond James.

So back to dry eye, Brent, just talk about the overall market growth and where you think that could go and how underpenetrated it still is. And if that factors into how you'll be investing behind Miebo going forward, if you can still taper that spending, if you want to still grow the market meaningfully since you guys are the market leader there. And then I have a follow-up.

Yes. I mean I think being the market leader with the 2 products, and we saw growth in U.S. pharma around 13% for the quarter. Most of that is driven by Miebo and Xiidra. And so I think the market is growing roughly around 10% plus. And I do think that that can sustain itself for some time for at least the next several years. I think combination therapy, when we bring that to market in a few years, would be an additional opportunity to expand the market. And so I think this has a very long runway. With respect to our spend, it is not necessarily about significant tapering. It's about surgical tapering of our spend where we get the highest ROI. We will continue to maintain the largest field force. Obviously, with the pipeline, it would be important for us to maintain the largest field force and continue to drive patients into the channel -- into the prescription channel. So it is a, again, a delicate balance, but we're very experienced in the dry eye market. A lot of us, including me, have been doing dry eye for a long time. And so I think we've got it sorted out and we'll continue to grow it while being more prudent with our investments.

Okay. That's helpful. And then just what else are you looking to do to accelerate U.S. generics? It sounds like you made some good progress there in the third quarter. And I mean, longer term, any thoughts on potentially divesting it? Or are you definitely committed to it, I guess, when you look out over the next 3 to 5 years?

Yes. So look, I mean, we saw sequential improvement in the generics. Obviously, the first quarter was a bit of a surprise to all of us, and we'll see sequential improvement into the fourth quarter as well. But I think the way to think about that business is it's really opportunistic for us. We have a plant in the United States that makes our -- most of our U.S. pharmaceuticals, including our generics. And that plant is quite good. And so we look at generics as being very opportunistic. 1, it creates absorption in the plant; but 2, it creates opportunities for when there is a disruption in the market or another competitor goes out, that business can generate very good margins and profitability as well. So it's not about growth necessarily in sales. It's more about maintaining profitability and being opportunistic.

The next question is coming from Doug Miehm from RBC Capital Markets.

First question, just to continue on Miebo to get that out of the way. When you think about the profitability of that drug, I know you've always guided to 2026 though. But given the strength in the most recent quarter and what's likely to happen in Q4, is there a possibility that that could shift ahead to later this year or certainly into early 2026? And my second question just has to do with capital allocation. As the company becomes more successful and more profitable over the next year or 2, with that incremental cash, do you expect to be paying down debt or reinvesting it in the business at reasonable multiples? And I'll leave it there.

Yes. Maybe I'll answer the part of the capital allocation and turn it over to Sam for the remaining answer in the Miebo profitability question. Look, capital allocation is pretty always a debate, right, and something that you have to take quite seriously. Clearly, we are committed to delevering. A lot of that will come from EBITDA growth, but also from debt paydown. And with respect to M&A, we're always looking for smaller tuck-ins that we can drive profitability from quickly and/or investing in R&D or intellectual property that we can develop into successful products. But I would say managing our -- or lowering our debt ratios is a very high priority for us. Sam, do you want to add some more color?

Yes. So let me take them and I'll start with the capital allocation. I'll come back to Miebo. But when you think about capital allocation, really the framework for us is continue to strengthen the balance sheet and ensure that we're delevering. And we'll talk more about our sort of leverage as we go forward into our Investor Day. But our North Star remains unchanged, which is targeting an investment grade. So that's really where the path that we're going after from that perspective. Investment in the business is always very important. And now we've seen that in the last, I would say, 2 years, we've seen the investments that we put into the business, and they're all been paying quite high level of dividends. We're seeing that on the top line growth, and we're seeing that this quarter starting with the margin expansion as well. So it's really good to see the rewards from the investments in the business. That's something we'll continue when it makes sense to continue to invest in the business. And then the last like sort of to the stool here, which is very important, is how we can continue to increase shareholder value. And as we think about that capital allocation, where we drive the shareholder value is going to be a very important metric for us to think about and deploy that cash appropriately. So that's really -- it's a good position to be in with the cash -- strong cash generation that we had this quarter and the conversion that we had. So again, it's a good place to be in and we look forward to building that foundation. Now just going back to the Miebo profitability timing. I want to just emphasize one point that Brent made, which is very important around the investments in the business and sort of the shift in terms of how we're thinking about the SG&A because even within the dollars of SG&A, although the quantum of SG&A is coming down and as a percentage of revenue is coming down, the deployment within the SG&A dollars is very important where it's going. And we are continuing to ensure that this deployment is putting and providing a very high level of ROI for us. So it's really what we described on the Miebo as we were in the launch phase. And as we wrap up '25, we're exiting that launch phase and we're going to a growth phase, which means that we're going to continue to invest behind Miebo. But we're going to be very deliberate about that investment and where we're going to make this investment. So I think we'll see that as part of the overall leverage in the P&L story as well as the margin expansion. And again, we'll speak more about it as we go into our Investor Day for 2026.

And the last question today will be coming from Tom Stephan from Stifel.

Quick one for me. Just on Miebo ASP, a bit choppy year-to-date. I know coverage has been the focus. But Brent or Sam, maybe if you guys can talk about the moving parts there and notably why this quarter was up a lot sequentially by our math on the realized ASP. And then is this 3Q base maybe where we can work off moving forward?

Yes, Sam?

Tom, you -- probably the best point I'll highlight you or I'll point you to is it's very difficult to look at just any given quarter. It's only 90 days in terms of trying to sort of extrapolate from that point of view. The way I would encourage you to think about the ASP and the Miebo, think about it as with the gross to net is about mid-70s and you think about that more of an annual rate. So if you do it on an annual run rate, I think that probably will get your math sort of closer to what we are seeing as well.

Thank you. And this concludes our question-and-answer session. I would now like to hand the call back to Brent Saunders for closing remarks.

Great. Well, thank you, everyone, for joining us. I'd like to end where I started, which is thanking our colleagues around the world for all the hard work and dedication on delivering an impressive third quarter. We look forward to an even deeper dialogue around our 3-year plan and more specifically around our R&D pipeline on November 13 at the New York Stock Exchange. And we hope all of you will join us either in person or via webcast, and we look forward to seeing you. Thank you, guys.