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RBJ 75: Making up for decades of 'lost innovation'

Rochester Business Journal
July 27, 2012

Out of the public eye, B&L CEO Brent Saunders is transforming the iconic firm

More than two years into his tenure as CEO of Bausch & Lomb Inc., Brent Saunders is happy with the company's momentum.
 
As the second eye-care company chief to be named since Warburg Pincus LLC acquired Bausch & Lomb and took it private in October 2007, Saunders saw his first job as refocusing the firm's corporate culture and reigniting its workers' passion for innovation.
 
In the years before the private equity firm bought Bausch & Lomb, the eye-care company saw rough patches. It faced accusations of fudged sales figures and had to restate results. After its ReNu with MoistureLoc multipurpose contact lens solution was suspected of being linked to a serious fungal eye infection, the company recalled the product, took it out of production and spent several years answering hundreds of personal injury lawsuits.
 
As part of Saunders' drive to realign Bausch & Lomb's culture, he moved most of the firm's executives out of the aerie they had occupied on the upper floors of the 20-story world headquarters Bausch & Lomb built in the early 1990s, relocating top managers to Bausch & Lomb's Goodman Street manufacturing and research complex. Management, Saunders believes, should not set itself apart from the workforce.
 
Initiatives Saunders set in motion are apparently working; 2011 sales of $2.8 billion were up 11 percent, and the company is profitable. Could an initial public offering be in the offing? Saunders dealt with that question and others a few weeks ago in an interview with Rochester Business Journal reporter Will Astor and Editor Paul Ericson. An edited transcript follows:
 
ROCHESTER BUSINESS JOURNAL: Where do you stand in Bausch & Lomb's turnaround, and what might you have left to do?
 
BRENT SAUNDERS: Bausch & Lomb was clearly in need of a transformation. We have made great progress in that transformation in the last two and a half years. But I think the thing that's important to remember when you're in an innovation business is that you can never stop transforming yourself.
 
One of the reasons we needed a transformation was that we became a bit static in our thinking, in our product development and the way we approached our customers. The good news is that our culture is a robust one and we really have made tremendous progress in focusing on our customers, building a culture in our company that puts as its highest priority rewarding innovation. That's something that never ends. It's something that will be a continuous improvement project for us.
 
RBJ: You said in a previous interview that the company's problems traced as far back as 15 or 20 years ago. Can you expand on that?
 
SAUNDERS: You have to think of Bausch & Lomb as a health care company, and one of the things you have to think about with a health care company is something that is true in other industries as well but particularly with health care: Innovation is our lifeblood.
 
When you think about what happened that caused Bausch & Lomb to need that transformation, it really was a slowdown or stop in driving meaningful innovation in the marketplace.
 
Take, for example, soft contact lenses. Bausch & Lomb was the innovator of the soft contact lens. It was back in 1971, I believe, that we launched our first (soft) contact. The normal cycle of bringing a new material to the contact lens market is generally four or five years. We have just recently brought our first new material to market after 14 1/2 years. So it seems that 20 years ago we stopped focusing on innovation in that particular line of our business.
 
Steve Jobs used to say Apple had to make up for a lost decade, and he did quite a nice job doing that. I think we are doing quite a nice job of making up for at least two and maybe three decades of lost innovation and opportunity.
 
I think the positive is that we are absolutely (growing) our pipeline across all of our businesses: pharmaceuticals, surgical and vision care.
 
RBJ: Is the balance among those divisions right at this time?
 
SAUNDERS: Today pharmaceuticals is our largest business, slightly bigger than vision care and then surgical. If you could create a utopia, a perfect scenario, we would be evenly balanced, a three-legged stool. We would be a third, a third, a third. That doesn't mean there's anything wrong with being where we are today, essentially 40, 40, 20.
 
RBJ: Do you see greater or equal opportunities in all those areas?
 
SAUNDERS: I think we're equally excited about all three. What makes us a particularly strong company is playing in all aspects of eye health. There's a certain balance in serving the eye health community from the surgical side, pharmaceuticals and vision care.
 
This gives us a unique ability to provide services and products to all of our customers in a way that not all of our competitors can. It gives us the ability to think about innovation more broadly and more deeply than our competitors can. And it gives us the ability to leverage technology and innovation across the entire spectrum of our portfolio.
 
An example: We just launched a new IOL (intraocular lens). The optics on that IOL are taken right out of our vision care business. It's a derivative of the optics that are in our PureVision 2 contact lens.
 
If we didn't have that brand-new optic design that is such a compelling, nice design in our contact lenses, we would have spent another year developing an entirely new design for our intraocular lenses. Having the design in a contact lens got us to market a lot faster and gave us an exceptionally good design for an IOL.
 
RBJ: Some of the pharmaceutical development you've done is through agreements with other drug companies and through acquisition of rights. Recently you acquired ISTA Pharmaceuticals, whose manufacturing you were doing. How does that play with your own product development?
 
SAUNDERS: One of the things that we take some pride in is that we don't have an "it must be invented here" mentality. We are equally excited about innovation regardless of where we find it. If it comes from our own labs, that's fantastic. If it comes from somebody else, that's great too.
 
We don't have a monopoly on all the greatest ideas in the world. We're pretty good at eye health, but there are other people who are as good, if not better. We need to be open-minded and willing to bring innovation wherever it might be found.

How B&L competes

RBJ: You have pretty intense competition in all of your segments. How does that shape your strategic approach?
 
SAUNDERS: We tend to compete against much larger companies in each of the categories. What we look at is that we have a fantastic brand name. The Bausch & Lomb brand is the strongest in the eye health space.
 
And two, we have fantastic front-line colleagues-our sales reps and our scientists and our people who make our products, the ones who represent us with our customers. Third, we are more nimble and open-minded in how we work with our customers than perhaps our competition.
 
We use those things to our advantage. When we do that, we find we compete very effectively.
 
RBJ: The very first interview that we did for this annual publication was with former Bausch & Lomb CEO Dan Gill in 1989. In some ways what he was talking about was very similar to what you've talked about. His vision was, due to changes in the contact lens business, to shift to an eye health company. In what ways is what you are doing now similar to that vision, and in what ways have you gone in a different direction?
 
SAUNDERS: I haven't studied the Dan Gill era in a lot of detail. We're very proud of our history. We've been in Rochester for (more than) 150 years. It's our home. It's a wonderful place for us to be. When we look at our future, it's certainly informed by the past.
 
But the world has changed so quickly and so dramatically that what we try to do today is really just be the best at everything we set our mind on to do. That includes making sure we have the most talented people in the right seats doing the right jobs; that we have a steady flow of innovative new products to bring to our customers and ultimately to our patients; and to make sure that we keep focused on what is our strategy, which is to become the best eye health company.
 
That is an aspiration and it's a journey, but it's something that we don't want to get distracted from. So we're not going to buy things that don't fit into the current structure of what Bausch & Lomb is today-a surgical, a pharmaceutical and a vision care company.
 
We'll do deals like ISTA and license new products to support our existing portfolio. We'll buy something in Argentina to expand our geographic reach, but we're going to stay very focused on the current business model.

In Rochester

RBJ: You referred to Rochester as a wonderful place to be. What reasons are there for keeping the headquarters here, or conversely might there be justification for putting it somewhere else?
 
SAUNDERS: There is no better place to go. We've been here, as I said, for 159 years. Our history is here, and our history is an important part of who we are. But the most important reason why we won't move our headquarters from Rochester is: It works.
 
We have a great talent pool in the Rochester area. We have great universities here. We have a great hospital system here. It's worked for 159 years, and I hope it continues to work for another 159 years. It's not something that needs to be changed. We're very happy to be headquartered in Rochester and we're proud of it.
 
RBJ: You have moved out of the headquarters building that Dan Gill built.
 
SAUNDERS: We did. It's funny, because when I did that, I got a lot of letters from employees and non-employees. I don't think people truly understood that the headquarters building wasn't a big part of our history. Dan Gill built the building.
 
RBJ: Even prior to that they had taken offices in what is now the Chase Tower.
 
SAUNDERS: Yes, right, but my point is that, yes, it's 1 Bausch & Lomb Place and it's a beautiful part of our downtown skyline and it's nice to see 1 Bausch & Lomb Place in the news and in reports when you see pictures of the city. But the reality is our employees have always, or for 50 years almost, have been here at Goodman Street.
 
To have our executive team sitting in a different location than the vast majority of our other employees really made very little sense to me. Culture is very important to me. It almost bifurcated our culture.
 
We had our executive team working in a tower and our global marketing, our manufacturing, our customer service, our research and development all here on Goodman Street, separate from all that. To me, that's not the kind of company we want to be.
 
We're in this together. So why shouldn't we all sit together? That doesn't mean people can't sit in different locations, but I think the executive team has to sit with the vast majority of people who actually get the work done and make things happen.
 
RBJ: You've had the headquarters building on the market. Where is that at?
 
SAUNDERS: We're in no rush to sell it. It's essentially fully rented. We do have some employees who are still there. If we get an attractive offer, we would certainly entertain. But there is no burning platform to sell it either. We don't lose money on the building. We're not in the business of real estate; we're in the business of eye health, so if somebody wanted to make an attractive offer, we'd be willing to entertain it. (But) we're not going to sell it just for the sake of selling it.
 
RBJ: In a recent interview, you said that sales at $2.8 billion were up 11 percent in 2011. Do you have projections for this year?
 
SAUNDERS: We don't give projections. I will tell you that with a half a year under our belt we are feeling very confident about our ability to continue a very strong growth trend. We had a very nice first half. The company is doing very well, but we don't want to get complacent again. We're going to keep our foot on the pedal and continue to work hard to make sure that we deliver even greater sales than we did last year.
 
RBJ: Is the profitability trajectory similar?
 
SAUNDERS: It's better. We have a very leveraged P&L. While sales were up under a GAAP measure of 11 percent, our EBITDA was up almost double that.

An IPO in the future?

RBJ: Which brings us to the question everyone asks: the possibility of an initial public offering. Is an IPO Warburg's preferred exit, and what factors would mitigate for an IPO and deciding on the timing?
 
SAUNDERS: Our current focus is on building the strongest company possible. I think we've made great progress in doing that and there is a lot more work to do. So we don't spend a great deal of time thinking about an IPO or when that might happen. We spend the vast majority of our time focused on building a vibrant, strong business.
 
We do think about returning to the public market at some point. We were a public company for 60-some years. We have a lot of people here who were employees during that period. We've maintained all the governance and formalities of a public company.
 
RBJ: Without the reporting.
 
SAUNDERS: Yes, without the reporting. But we maintain the corporate governance. We maintain the audits. We maintain the Sarbanes-Oxley compliance. We do all those things so that if the time were right and we felt that we were on a good path to do that, we could move quickly.
 
RBJ: The determining factor would be market conditions?
 
SAUNDERS: Clearly, one of the conditions would be market conditions. I think our board has to feel that our growth was consistent. We've had about 10 quarters of successive growth, and one of the things that makes an IPO viable is a track record. We need to just put just a little bit more record onto the track.
 
RBJ: Have you thought about whether you would be interested in staying on after an IPO?
 
SAUNDERS: As long as our board of directors would have me, I will stay on. Absolutely. I love my job, and I love this company.
 
RBJ: The second part of the IPO question was whether an IPO is Warburg's preferred exit. Would you entertain takeover offers?
 
SAUNDERS: I think what you're alluding to is: Would we do an M&A? You clearly don't plan for an M&A. That's something that happens to you. Our aspiration is to go public; it's not to go through an M&A. Like any other business, if compelling offers were put forward, our board would have to consider them.
 
RBJ: What is the outlook for the local operation? Is there a chance that you will grow substantially in Rochester?
 
SAUNDERS: We have been growing in Rochester over the last year in particular, but not substantially. We have been looking at some new contact lens material that would add in the short term to our manufacturing base here in Rochester.
 
We're exploring putting the first line here. We'll make a decision on where we put the second or third line. But we are committing to put the first line of our new contact lens material in Rochester.
 
We continue to grow in our vision care business, which is headquartered here as well. We don't have any plans to get smaller, and I think we'll add incrementally.

B&L and Kodak

RBJ: You stated in a recent interview that B&L could have gone the way of our neighbors in Rochester ...
 
SAUNDERS: It was a quote that was taken out of context.
 
RBJ: OK, put it in context. (Laughter)
 
SAUNDERS: It was a quote from the Wall Street Journal online. They had asked me about American private equity. I said that clearly in Bausch & Lomb's situation Warburg Pincus coming in and leading the (leveraged buyout) and taking us private, I think, did a great service to Bausch & Lomb.
 
We had to go private to fix our problem. We would not have been able to fix our problem under the scrutiny of quarterly results and Wall Street disclosures. We needed to come out of the public eye a little bit to fix ourselves and heal.
 
I said in that context that if we hadn't gone private, we could have gone the route of our neighbor and friend, Kodak, which had to go bankrupt. That's a horrible situation. Perhaps if someone had taken them private five years ago and allowed them to fix their problems in a much more focused way without having to worry about quarterly earnings and reporting to shareholders on a quarterly basis, they could have (avoided bankruptcy).
 
I think that most people don't realize that private equity actually is a longer-term shareholder than today's (public) shareholders. If you're public, shareholders tend to have a much shorter view than private equity, which comes in for five or seven years. Today, most shareholders of public companies turn over in a year.
 
We've had a very stable shareholder that is not looking at it quarter by quarter or even year over year. They're looking at what the business will look like in seven or 10 years. That's given us a great advantage in fixing ourselves.
 
RBJ: So going private has been extremely beneficial for Bausch & Lomb.
 
SAUNDERS: Right. We couldn't have done a lot of what we did if we also had to worry about making quarterly reports and watching the stock price. There could have been activist investors and others who likely would have come into the situation.
 
Having the peace of mind of knowing that we had our shareholder standing behind us on a long-term plan and focused on building strength for the future is really a key ingredient to being able to be as successful as we have been.
 
RBJ: You know Antonio Perez from your Schering-Plough days.
 
SAUNDERS: I do.
 
RBJ: Do you still talk with him and compare notes?
 
SAUNDERS: We get together from time to time, but it's more social than business. He's a wonderful man. I always have tremendous respect for Antonio.

A global company

RBJ: You mentioned Argentina. What strategies do you have for the company outside of the United States?
 
SAUNDERS: I think it's not a well-known fact that Bausch & Lomb is bigger outside the United States than it is in the U.S. We are a very global company. We have sales in over 105 countries now, and we have undertaken in the last two years to expand into new markets under a two-prong strategy.
 
Wherever we have one of our businesses, we want to have the other two. In India, for example, we've had a longstanding vision care presence and we've had a reasonably strong surgical business. We've never had a pharmaceutical business in India. About a year and half ago we acquired an ophthalmic prescription medicine. We hired and trained a sales force, and now we have a thriving, growing pharmaceutical business in India. So we have a surgical business, a pharma business and a vision care business in India.
 
We want to do that everywhere. That is adding a lot of growth, just going into existing countries where we already have a presence, where our brand is strong and we have some infrastructure. We're doing that in places even like Japan, where we had a very strong vision care business but our pharma and surgical businesses have lagged. We just cut a deal with Topcon (Medical Systems Inc.) in Japan to bring our surgical business' capital equipment into Japan.
 
The other thing we're doing is going into new markets direct. We used to just have distributor sales in places like Russia where we now have a full subsidiary. We're doing it in Turkey. We're doing it in the Philippines. We're doing it in Vietnam.
 
We're also driving geographic expansion de novo, if you will, by buying back our distributor rights and going direct in some of these key markets. What we're seeing in places like Russia is just fantastic. It's growing incredibly well, north of 20 percent.
 
In big markets like China, Bausch & Lomb had been in China for a very long time. Bausch & Lomb was one of the first multinational companies to go into China in the late '70s; I think we entered China in '78 or '79. We have just incredible depth in China. What makes it unique is a lot of our competitors are very strong in the tier-1 cities. Our strength emanates from tier-2 cities, and our new focus is on tier-1.
 
We're running a lot of direct, consumer advertising in TV commercials for our dry-eye drops called Mioclear in China. It's very early. We've only been at it for four or five weeks, but it's a very large campaign. We're seeing preliminary results that show it's having a huge impact in tier-1 cities-the Beijings, the Shanghais.

Looking ahead

RBJ: Where do you see the company going over the next five to seven years?
 
SAUNDERS: I can answer that question because we just spent the last three days going over our (strategic action plan). We just finished about an hour ago.
 
Our STRAT planning is a process by which we get a lot of feedback from our colleagues from around the world and then that folds up into a STRAT plan the senior leaders review and put together as one cohesive plan. What's amazing to me is how exciting the STRAT plan has become when you look out over the planning horizon. We do three years. A lot of companies do five years, but I think the fourth and fifth years are a waste of time; you get educated guesses when you get out that far. So we really try to think about three years and spend more time making it more accurate.
 
Over the next three years our future is so bright. We have so many opportunities making more of products we already have. Over the last two years we have developed just an incredible ability to take old products and make more out of them. A lot of companies forget about their old products. We have a steroid that's almost 14 years old, loteprednol, which is (sold as) Lotemax in the United States. We're seeing global growth of loteprednol this year, six months year-to-date, of over 80 percent.
 
RBJ: Is that not something you face generic competition on?
 
SAUNDERS: We will in the U.S. for the suspension in 2014, but not in other parts of the world. That growth is just not in the U.S; it's worldwide.
 
PureVision, the contact lens, has been out for several years. We've made some changes to the lens itself. We put some new edges on it. We put some new optic designs on it. We thinned it out a bit. And we introduced it as PureVision 2, and it's doing fantastic around the world.
 
In surgical, some of our IOL (products are) five, six years old. We see our old products doing fantastic. We see our new products starting to kick in. When we look at things we launched in the last year like Biotrue, our new multipurpose solution, they're growing great around the world. At the same time, ReNu, which is our old multipurpose solution, also is growing, although not as fast.
 
Usually you would think the new product would cannibalize the old product. But we've created a culture that says we love our old products as much as we love our new products. So we're not going to allow our new product to cannibalize our old product. We're going to take share. And that's how you work.
 
We have a product we launched in surgical about a year and half ago called Stellaris PC. We're seeing the number of placements there far exceed our market share, which means we're placing more than our fair share of capital equipment in surgeons' offices.
 
The third thing we're seeing in the STRAP plan is all the new innovations that we just stocked the pipeline with are starting to come through. We just launched at the BCLA meeting-the British Contact Lens Association-a new contact lens material called Biotrue Oneday. We just launched it here in the United States a week ago. In pharma, we have a new anti-inflammatory compound. In surgical, we have new IOLs; we have new equipment.
 
You take all three of those things together, it creates a very, very exciting picture of not just the next couple of years but a prolonged future.
 
RBJ: You mentioned ReNu. Are the ReNu with MoistureLoc lawsuits settled?
 
SAUNDERS: I think there may be one case out there. It's one or two. Most of our legacy issues are past.
 
RBJ: Is there anything that might trip you up going forward?
 
SAUNDERS: The one thing that gives Bausch & Lomb good risk management is the diversity of our portfolio. What makes us different than a lot of our competitors is we don't have any blockbuster products. We're not relying on one product or one franchise that can cause us to be derailed from our strategy or our mission. We have hundreds of products, all growing. If you look at the first half of this year, we saw all businesses growing in all regions. That's a result of all little products growing.
 
Clearly, what could trip us up is a failure in one of our big programs, but we have so many of them now. One of the things we did learn from the past is: In our R&D organization we used to make big bets on one thing. When that one thing didn't materialize, there was nothing. We don't do that anymore. We place our bets in all of our businesses across 10, 12 different programs. If two or three fall away, which happens in this business quite a bit, it doesn't put the whole company at risk.
 
There are things we worry about. I worry about maintaining reliability of supply. I worry about making sure that we have very high quality standards. I worry about making sure that we stay compliant and run the company like we all hope it can be. Our people are some of the best in the world, but you always worry about that one rogue employee. With close to 12,000 people around the globe, things can happen.
 
Those are the things that keep me up at night. But I also know that we have great people and great diversity of product and portfolio.
 
RBJ: One of the things that Bausch & Lomb has always been known for is social responsibility. How do you see that in our own community?
 
SAUNDERS: It's part of our responsibility to be part of the community wherever we operate. The thing we struggled with, maybe particularly two or three years ago, was that internal weakness didn't allow us to be as robust with community programs as we would have liked to have been. But you've got to fix yourself first before you can do some of those things.
 
We are much more active in our communities (now). We have a great program with the Lions Club, for example. Here in Rochester, we've done lots of things historically with the University of Rochester and the Rochester Institute of Technology. We've done scholarship programs and science awards. We've done some things with the Rochester Business Alliance. We stay active with them. We're doing things to look at how to lower some of the health problems in our community.
 
We're trying to become more actively committed to our community. I think you'll see us be more active than we have been in the recent past.
 
RBJ: Do you think about your legacy? What would you like people to say about Bausch & Lomb while you were leading it?
 
SAUNDERS: It sounds a bit corny, but if we could continue to figure out ways to solve unmet medical needs in eye health and we continue to drive innovation to help people see better, to live better, which is our mission, that's enough for me. That means we're a strong, robust company driving innovation in the marketplace, and that's our goal.
 
If I could add one final thing: Obviously we're a for-profit enterprise and we work to build a strong company and ultimately provide some return for our shareholders. They haven't had any return yet.
 
There's a big misperception that we give (Warburg Pincus) back money or we pay fees to our shareholders. We absolutely don't. Our shareholders have never taken a penny out of Bausch & Lomb. We put all the money we make every year back into our business. We've never paid a penny back to our shareholders since we've gone private.
 
So we can continually reinvest and create a strong business. We happen to run a successful for-profit business. But when you think about working at Bausch & Lomb, we also run a business where we can help people.
 
When you can wake up in the morning and do those two things, that's a pretty great job. That's why I love what I do, and I think that's why a lot of my colleagues like working here too.

7/27/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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