Bausch & Lomb: Back on Track
A rejuvenated B&L has reason to celebrate as the company marks 150 years.
BY JERRY HELZNER, SENIOR ASSOCIATE EDITOR

Anyone seeking a prime example of the quintessential American business success story need look no further than Bausch & Lomb.

Founded by John Jacob Bausch in 1853 in Rochester, New York, as a small optical shop, the company soon gained a reputation for developing innovative, industry-leading products in such areas as eyeglass frames, microscopes and photographic lenses.

In the 20th century, Bausch & Lomb developed precision optical products that helped win two World Wars, successfully introduced the soft contact lens, and entered the Fortune 500.

Paul G. Howes, president of the Americas Region, left, and Ronald L. Zarrella, chairman and CEO PHOTOGRAPHER: TIM TOAL

But as Bausch & Lomb approached its 150th year in business, it seemed that the slumping company would have little to celebrate on this milestone anniversary. With disappointing earnings, management changes, and a falling stock price marking the first 2 years of the 21st century, Bausch & Lomb turned to its former president and chief operating officer, Ronald L. Zarrella, who had left the company in 1994 to take a top management position with General Motors. In November 2001, Zarrella, then 52, returned to Bausch & Lomb as chairman and CEO.

Just as Zarrella was beginning to put his turnaround plan into place, Bausch & Lomb was hit by a punishing dose of adverse news. In June of 2002, CIBA Vision won a patent infringement case against B&L's recently introduced PureVision 30-day-and-night silicone hydrogel contact lenses, costing Bausch & Lomb tens of millions of dollars in lost sales and costs for the transfer of PureVision production to outside the United States.

But while Bausch & Lomb was taking this big hit, the strategic plan put into place by the Zarrella team was quietly starting to produce results. By the beginning of 2003, it was clear that Bausch & Lomb was in the midst of a major resurgence, giving company managers, employees and shareholders real cause for optimism as events marking the 150th anniversary celebration stretched into the 2003-2004 period. The magnitude of the resurgence can be seen in the company's earnings. From a low point of 39 cents per share net profit in 2001 on $1.6 billion in sales, Bausch & Lomb expects to earn $2.70 to $2.75 per share this year on sales of about $2.2 billion.

In this article, I'll examine how the Zarrella team has rejuvenated Bausch & Lomb by bringing strategic planning, sound operating principles and a new focus to one of America's oldest and most respected companies.

The Turnaround Begins

Recently, Ophthalmology Management asked CEO Zarrella to explain how he and his team engineered the turnaround at Bausch & Lomb.

"When I returned to Bausch & Lomb late in 2001, there were short-term and long-term issues that I felt the company needed to address," he notes. "I brought with me the concepts that I personally believe generate value and success in business -- what I call 'cultural drivers.' They include things like having a vigilant external focus, using a fact-based, disciplined approach to decision-making, accepting personal accountability for accomplishing objectives, and having a certain 'restless discontent' that keeps you always looking to do better.

"I also believed that we needed to return to the core values of our founders that had served Bausch & Lomb well through the years. These values include persistence, a commitment to innovation, and building partnerships, especially with the eyecare professionals who are our customers."

Zarrella's three immediate priorities were to control and reduce costs, streamline B&L's business processes, and establish a more effective organizational model for the company.

"By the end of 2002, we had made significant progress against each of those objectives," he says. "We implemented a series of cost-cutting actions that will generate $90 million in annualized savings at the end of next year. And more importantly, we established a more cost-conscious culture that will allow us to grow sales without adding to infrastructure -- a key to future success. Our business processes are also much more disciplined. And we have implemented a formal organizational model with global category leaders who establish worldwide strategies for our three major businesses -- vision care, pharmaceuticals and surgical. They interface with regional leaders for the Americas, Europe and Asia, who have responsibility for commercial implementation of the global strategies."

Zarrella says his 7 years at General Motors provided him with specific insights that have helped him drive the resurgence of Bausch & Lomb.

"New products and technologies are key to success in the auto industry, and the eye health business is no different. We need constant innovation. One of the most crucial things I learned from my experience in the automotive industry is that cost is a paramount concern -- because if you can't control costs and operate profitably, you can't spend enough on the development of those new products and technologies," he says. "The key to controlling those costs at an organization the size of General Motors is having disciplined business processes embedded within every aspect of the business. I think we have successfully installed that kind of discipline at Bausch & Lomb and we will continue to see the benefits."

Growing the Topline

Though cost-control was a key initial priority for Zarrella, it wasn't his only priority. He also initiated longer-term strategies designed to grow sales and profits by strengthening the company's product pipeline and leveraging the impact of the well-known Bausch & Lomb brand.

"One of our long-term objectives is to generate more predictable and more robust revenues in the future. The key to achieving that goal is increasing the scope and scale of our product pipeline. We have several strategies to do that, including internal research and development, strategic partnerships and in-licensing agreements. The effect of this increased focus on the pipeline can be seen in the number of new products we've introduced in the past couple of years, and in our short-term pipeline for the next few years."

Zarrella says B&L plans to increase R&D investment from the mid-single-digit level, where it was 3 years ago, to about 10 percent of sales, which is more consistent with industry peers.

"We've not yet reached that percentage, given increases in sales and the impact of currency on the top-line, but we've increased our absolute spending on R&D by approximately 20 percent from 2001 to 2003, and will increase it another 20% this year," he notes.

	B&L researcher Janelle Ulik shows Zarrella and Howes a sample of a next-generation IOL PHOTOGRAPHER: TIM TOAL

Launches are Planned

The increased emphasis on R&D is starting to pay off for Bausch & Lomb. Over the next 12 months, the company intends to launch several new or improved products.

On the pharmaceutical side, B&L expects to soon introduce Zylet, a proprietary pharmaceutical product combining loteprednol etabonate with tobramycin, to treat both ocular inflammation and bacterial infection. B&L is also launching two extensions of its PreserVision vitamin line. Another focus of pharmaceutical R&D is the introduction of products for treatment of dry eye. The company also expects to launch its Retisert drug delivery implant for posterior uveitis in the United States next year.

"In another aspect of our pharmaceutical business, adding generic ophthalmic products to our portfolio upon patent expiration helps to give us breadth in our overall product line, offers our customers the assurance of quality products at attractive prices, and leverages our manufacturing capacity," notes Zarrella. "Our latest approvals -- brimonidine, ofloxacin and ciprofloxacin -- demonstrate to customers and competitors that we are committed to being a leader in the generic ophthalmic drug marketplace."

In the refractive category, Bausch & Lomb is launching a newly re-engineered Zyoptix XP microkeratome and blades, expanding the treatment range of its proprietary Zyoptix platform, and broadening the geographic reach of its advanced Z100 laser system. In the cataract business, B&L will be offering an upgraded advanced-flow, peristaltic pump system for the Millennium phacoemulsification platform, and expanding the availability of the successful Akreos acrylic IOL. The company will also introduce a SofPort IOL with advanced optics. Longer term, a key development focus is in the area of accommodating IOLs.

Within the vision care category, Bausch & Lomb is launching a newly engineered ReNu with MoistureLoc, which has received FDA clearance in the United States as a multipurpose solution that may improve comfort in patients experiencing contact lens dryness. The company is building on its PureVision technology with a PureVision Toric lens to be introduced outside the United States this year, and, after a recent settlement with CIBA Vision, will be re-introducing PureVision into the U.S. market next spring.

Zarrella calls these near-term product launches "singles and doubles." He says "the home runs will take longer, but a constant stream of meaningful new product introductions will enhance our revenue growth and give ophthalmologists new options for their patients and new ways to enhance their practices."

Building the B&L Brand

The Zarrella team also wants to create a more powerful brand identity.

"The Bausch & Lomb brand is one of the most recognized and respected in the world -- and is synonymous with eye care for both consumers and professionals," says Zarrella. "But we really weren't leveraging the value of our brand because we had a proliferation of product sub-brands and different branding strategies in different market segments and geographic and locations. Now, we're beginning to implement a global master brand strategy, which includes paring down our multiple sub-brands to a strategic few that can become global brands, assuring all sub-brands are always 'locked-up' with the Bausch & Lomb name, and communicating our brand values consistently across all product lines and geographies."

The B&L brand promise is to be "the trusted leader in advancing eye health," with brand positioning focusing on the company's heritage of technological development and innovation in eye health. The branding strategy promises to bring consumers and eyecare professionals together with the goal of improving vision for people around the world.

The focus on eyecare professionals as partners in this vision is intentional and key to delivering on the brand promise. The new Bausch & Lomb brand mark resembles the path of light through the lens of the eye, reflecting B&L's heritage in eye health. The mark also suggests moving forward on a clear path toward a defined goal, just as Bausch & Lomb plans on moving to the future through innovation.

Mohinder Merchga, O.D., Ph.D., conducts a diagnostic procedure using B&L's Orbscan corneal topographer.

Listening to Customers

In building its pipeline and enhancing its brand identity, Bausch & Lomb is also taking pains to meet the needs of its professional customers and to connect with consumers.

"Our goal is to maintain a two-way channel of dialogue with our professional customers to help us better understand, anticipate and meet their needs," says Zarrella. "We do that by seeking their participation in consultant networks, field clinical trials, VIP meetings, lectures at professional meetings, Webcasts, educational symposia, published continuing education aids, and roundtable discussions along with a host of other professional programs. When I returned to B&L, I frankly thought we'd lost a bit of that external, customer focus. We've set some aggressive objectives for getting ourselves back into the 'listening and anticipating' mode, and I think you'll see the results in our new product development process."

Paul G. Howes, senior vice president, president of the Americas Region, explains how the company now listens to consumers: "We use regular, independent focus group testing to generate qualitative feedback regarding all aspects of our marketing and customer service efforts across our full suite of products. We also engage in periodic consumer surveying and statistical regression analysis to help us capture meaningful quantitative consumer insight."

A groundbreaking direct-to-consumer TV advertising campaign featuring key B&L products has scored high in terms of viewer recall. "The U.S. advertising campaign continues as part of Bausch & Lomb's master-brand strategy to support individual products while always communicating the company's singular commitment to innovation in eye health and vision," says Howes.

"In addition to reaching consumers, the advertising message is also designed to foster relationships between eye doctors and their patients by reinforcing the importance of eye health and visiting the eyecare professional," he adds.

Finding a Singular Focus

When Paul Howes says that B&L wants to communicate a "singular commitment to innovation in eye health and vision," he underscores some of the major changes that have occurred at Bausch & Lomb, even before the current management team took the helm.

Looking at the history of Bausch & Lomb, one finds a company that at times has produced microscopes, telescopes and sunglasses, won an Oscar for developing the Cinemascope wide-screen movie camera lens, and owned hearing-aid, dental products and skin-care companies.

All of those businesses are gone now and Bausch & Lomb is a much more focused company. Zarrella believes B&L can maximize its opportunities by concentrating its energies on core eyecare businesses.

"Global eye health is a $20 billion market opportunity, and we operate in all segments except for eyeglass frames and lenses," he says. "With our heritage of innovation in eye health, the breadth of our product portfolio, and our global infrastructure, we are uniquely positioned to leverage our core competencies across our three global categories: vision care, pharmaceuticals and surgical."

Growth Opportunities Exist

An example of how Bausch & Lomb has been able to innovate within its core competencies is the success of its ocular vitamins, PreserVision and Ocuvite. Howes says B&L is currently the market leader in ocular vitamins with a 70% share of the U.S. market, which is growing at about 20% a year.

Because PreserVision is the only ocular vitamin and mineral formulation clinically proven in a scientifically controlled National Institute of Health study to significantly slow the progression of AMD, B&L intends to extend the PreserVision brand later this year by introducing two new products: a more concentrated SoftGel formula, and PreserVision with Lutein to capitalize on the positive research that links lutein to overall eye health.

The company also sees growth opportunities in contact lenses, specifically the PureVision franchise, SofLens One-Day contact lenses in Japan, and continued growth of SofLens multifocal and toric lenses around the world. In contact lens care, where ReNu is the global leader, B&L sees opportunities in underdeveloped geographic markets.

The company expects near-term year-over-year growth in pharmaceuticals in the mid-single digits, driven by growth in ocular vitamins, the upcoming U.S. launches of the Retisert drug delivery implant for posterior uveitis and Zylet anti-inflammatory, and new revenue from recently approved generic products.

The company sees worldwide market growth in the cataract segment in the mid-single digits, but believes it can grow its cataract business at a higher rate, helped by innovative products such as advanced IOLs and microsurgical equipment.

Superior growth is expected in the refractive surgical category, where the company expects that increased surgical volume and further market penetration of the Zyoptix system should drive year-over-year growth of close to 20% in the near term.

One example of how far Bausch & Lomb has come since 2001 is that the company is now ready to think about making complementary acquisitions, a strategy Zarrella wouldn't even consider until he was sure the company could effectively run the businesses it already had.

"Anything we'd consider would have to be a good strategic fit with our existing portfolio," he says. "It would have to leverage or complement our core competencies and meet our financial metrics."

Looking Ahead

Ask Zarrella how B&L's product offerings will change in the next 5 years, and he can supply specific answers.

"The most significant change will be the planned expansion of our proprietary, generic and OTC pharmaceutical lines. We see a lot of growth potential within that segment of the eye health field, and we will continue to invest resources in that category," he asserts. "We also intend to leverage our drug-delivery development programs to offer a host of treatments for back-of-the-eye diseases. I think you could also see the commercialization of a truly accommodating IOL, next-generation cataract-removal technologies, line extensions for continuous-wear contact lenses, as well as continuing innovations in ocular nutritional products."

Having been able to correct the problems that he faced when he returned to Bausch & Lomb in late 2001, Zarrella appears to have a confident vision of where he and his team can take the company over the next 5 years.

Bausch & Lomb at a Glance

History: The company was founded in 1853 by John Jacob Bausch in Rochester, N.Y., as a small shop selling imported spectacles and opera glasses. With the help of a loan from his friend Henry Lomb, Bausch kept the struggling business going until he achieved success by offering a new type of eyeglass frame made of vulcanized rubber. Bausch & Lomb later expanded into the manufacture of microscopes, photographic lenses, telescopes and binoculars. In both World Wars, Bausch & Lomb made major contributions to the U.S. military effort by supplying such critical items as high-quality optical glass, range finders, periscopes, gunsights, binoculars, Ray-Ban aviator goggles and mirrors for searchlights and signal lights. After World War II, Bausch & Lomb also became known for producing sophisticated ophthalmic and scientific instruments. And in 1971, the company introduced the revolutionary Soflens soft contact lens to consumers. The huge popularity of Soflens led to significant sales of lens-cleaning and soaking solutions, enabling Bausch & Lomb to enter the Fortune 500 in 1975. In the 1980s, Bausch & Lomb diversified into healthcare products such as hearing aids, dental products and skin care, but by the late1990s had returned to its core competencies in eye health, encompassing contact lenses and lens care products, prescription and OTC pharmaceuticals, and a wide array of ophthalmic surgical products. Today, B&L products are available in more than 100 countries. Core businesses: Vision Care, Pharmaceuticals, Surgical. Vision Care accounted for 54% of B&L's $2.02 billion in worldwide revenue in 2003. Pharmaceuticals and Surgical each accounted for 23% of overall sales. Geographic segments. The Americas unit accounted for 45% of company sales in 2003. Europe accounted for 36% and Asia for 19%. Business philosophy: The company, celebrating 150 years in business, attributes its longevity and success to holding firm to its heritage of technological leadership, innovation and quality. Bausch & Lomb describes itself as "the eye health company dedicated to perfecting vision and enhancing life for consumers around the world." Key products: Soflens66 Toric, SofLens Multi-Focal, PureVision and Boston contact lenses; Boston and ReNu lens care products; Zyoptix excimer laser vision system for personalized vision correction and Zyoptix diagnostic workstation; Hansatome and Zyoptix XP microkeratomes; Orbscan corneal topographer; Storz surgical instruments; Millennium microsurgical system; SoFlex and Akreos IOLs; AMVISC viscoelastics; Alrex anti-allergy drops; Lotemax anti-inflammatory drops; Ocuvite and PreserVision ocular vitamins; and Moisture Eyes artificial tears. Sales: Expected to be approximately $2.2 billion worldwide in 2004, with reported earnings estimated at $2.70 to $2.75 per share. Headquarters: Rochester, N.Y. Employees: About 11,500 in more than 50 countries. CEO: Ronald L. Zarrella Outlook: The company is looking to increase its R&D spending in order to accelerate its topline sales growth into the upper single digits with leverage at the bottom line. Stock listed: New York Stock Exchange (symbol BOL) Recent stock price range: $60-$66