Since 2004, Santa Ana-based Advanced Medical Optics Inc. has made a $2 billion-plus bet on laser eye surgery.
Company executives and analysts stand by the big push into equipment for surgeries to correct vision, even if the business is slumping now.
“It’s not a bad business to be in,” said Matt Miksic, a New York-based analyst with Piper Jaffray & Co.
At the heart of Advanced Medical’s push were the acquisitions of Santa Clara’s Visx Inc., Irvine’s IntraLase Corp. and New Mexico’s WaveFront Sciences Inc.
The deals helped transform Advanced Medical from a company with some $500 million in sales in 2002 to one with $1.1 billion in revenue last year.
“We recognized that we would need to be a broader-based company,” said Randy Meier, Advanced Medical’s president and chief operating officer.
But Advanced Medical’s laser vision correction push is being put to the test by an economic downturn that has people putting off spending on medical procedures they pay themselves.
A decline in the business has brought a 70% drop this year in Advanced Medical’s shares, which had a market value of $420 million last week.
“Like a lot of businesses that have exposure to consumer discretionary income and the cycles around that, (the business) is under pressure and is going to remain under pressure for at least a year,” analyst Miksic said.
The company has said it expects laser procedures to be down 25% for the year. In the third quarter, Advanced Medical’s laser vision correction surgery sales fell 14% from a year earlier to $96 million.
The company sees revenue from equipment sales as well as from fees paid by doctors every time they use Advanced Medical’s gear. It also sells kits used during laser vision correction surgeries.
The challenge now for the company is to continue paying down debt incurred from acquisitions while waiting for the laser vision correction business to recover, analysts say.
“Timing of the world economic recovery will be especially crucial for Advanced Medical Optics,” said Joanne Wuensch, an analyst with BMO Capital Markets in New York.
A long, deep recession will mean a prolonged downturn for the business and could spell problems for Advanced Medical as the company manages a considerable debt load, Wuensch said in a report.
The company had $1.55 billion worth of long-term debt as of Sept. 30, down by about $60 million from the end of 2007, Chief Financial Officer Michael Lambert said on a third-quarter earnings call.
Advanced Medical got a boost late last month with its third-quarter results, which met Wall Street expectations. The company also held its outlook for the rest of the year.
The other parts of Advanced Medical’s business,cataract surgery products and contact lens solutions,offset the ongoing slide in the laser vision correction.
Advanced Medical doesn’t plan to cut procedure fees it charges doctors, Chief Executive James Mazzo said during the company’s quarterly conference call.
A cut could allow doctors to lower what they charge patients for the procedure, also known as Lasik.
“Candidly, if someone is going to have Lasik and they are motivated to go to Lasik, they are paying,” Mazzo said. “This is actually not the time you do any type of (fee cuts).”
Like others, Advanced Medical has slumped on Wall Street because its laser vision correction business relies on out-of-pocket spending by patients. Irvine-based Allergan Inc., which spun off Advanced Medical in 2002 and gets about half of its business from cosmetic procedures not covered by insurance, also has seen its shares fall this year.
Other healthcare companies whose products are used in procedures paid for by insurance have held up better this year.
Long term, Mazzo has said he sees a move away from “a reimbursement type of product line” as good for Advanced Medical.
“Practitioners will gravitate to companies that have technology and are not curtailed by a reimbursed environment,” he said.
Advanced Medical’s laser vision correction push started four years ago when the company paid $1.3 billion in cash and stock for Visx, a maker of laser vision correction devices.
In 2007, the company spent $808 million to buy IntraLase, which made lasers and software to create a flap in the eye’s cornea during laser vision correction surgery.
That same year, Advanced Medical paid $20 million for WaveFront Sciences, which made diagnostic systems used in vision correction surgeries and medical research.
Advanced Medical came out of Allergan with cataract surgery devices and contact lens solutions, “but it needed to be broadened,” Meier said.
Besides the laser deals, the company paid $450 million for Pfizer Inc.’s eye surgery business in 2004.
The company’s mix should help it weather the economic downturn, Meier said, as was the case in the third quarter.
For now, Advanced Medical is in a waiting game with laser vision correction, said Larry Biegelsen, an analyst with Wachovia Capital Markets LLC.
“While we believe the IntraLase acquisition was a smart move,” he said. “We do not expect valuations to change meaningfully until we see signs of improved confidence from U.S. consumers.”
