Advanced Medical Optics Inc. is showing signs of a comeback. ABR>
Shares of the Santa Ana-based eye surgery device and contact lens solution maker are up some 20% since late March. It had a market value of $1.3 billion last week.
The company is coming off a tough couple of years in which it saw two costly recalls of contact lens solutions. More recently, Advanced Medical has faced concerns about an economic slowdown hitting laser eye surgery.
Now it’s making progress on a turnaround, Chief Executive James Mazzo told investors and analysts at a recent Goldman Sachs & Co. healthcare conference at the Ritz-Carlton, Laguna Niguel in Dana Point.
“We feel very good about the businesses,” Mazzo said.
Advanced Medical earned $13.3 million in the first quarter before restructuring charges, in line with analysts’ expectations. First-quarter sales rose 21% to $304 million.
Sales of contact lens solutions, which plunged after the second recall a year ago, “are almost even” to where they were a year ago, “which demonstrates our ability to get back on the market,” Mazzo said.
Solution sales made up 19% of Advanced Medical’s first-quarter sales, down from 28% in 2006.
Replacement lenses for cataract patients, laser vision correction gear and other surgery products make up the bulk of Advanced Medical’s sales.
Products for cataract surgery, which Mazzo said “tend to not be the sexiest,” are the largest part of Advanced Medical’s three businesses.
But contact lens solutions have had a disproportionate impact on the company since late 2006, when Advanced Medical recalled 3 million bottles of its Complete MoisturePlus after contamination was found at its China plant.
Then in early 2007, the company did another recall after a government probe linked Complete MoisturePlus to a rare infection that can cause blindness.
The recalls took their toll on profits and on Advanced Medical’s shares.
The company held a 10% stake of the solution market in the first quarter, down from about 16% in 2006 before the recalls.
Advanced Medical projects to have 16% to 18% of the market by the end of the year, Mazzo said.
Cataract surgery sales grew 8% in the first quarter to $124 million. They make up 41% of Advanced Medical’s sales, followed closely by laser vision correction equipment and supplies at 40%.
Laser Concerns
Analysts have been concerned about vision correction revenue as some people put off having the elective procedure as the economy slows and everyday costs rise.
The company gets a fee for each procedure done with its machines as well as sales from a disposable kit used in each surgery.
Advanced Medical’s laser eye surgery business is “susceptible to the weakening economy,” Morningstar Research analyst Jeff Viksjo said.
Even with recent gains, Advanced Medical’s shares are down 35% from a year earlier from the recall and concerns about vision correction surgeries.
Viksjo said he belives that’s overblown: “We think AMO is being unfairly punished by the market and expect the shares to rally when consumer confidence rebounds.”
Others also are upbeat on the company.
“There are a lot of promising things happening at AMO,” said Lawrence Keusch, a Goldman Sachs analyst who hosted Mazzo’s talk at the recent healthcare conference. “The company has a renewed and vigorous focus on cost reduction.”
Advanced Medical has built up its laser surgery business through a few deals, particularly its $808 million buy of Irvine laser maker IntraLase Corp. last year.
The company also has new products, including the iFS Advanced Femtosecond laser, which uses technology developed by IntraLase.
That helped drive a 55% gain in total eye surgery sales in the first quarter to $120.5 million, Mazzo said.
“We all realize that the fluid economy in the U.S. has an impact, but as you saw, we were able to do much better than the market because of our strong custom penetration,” Mazzo said.
Custom laser eye surgery differs from traditional procedures. A wavefront analyzer,a device that provides a corneal measurement that’s 25 times more precise than standard measurements is used.
The company picked up the wavefront analyzer in its $20 million buy last year of WaveFront Sciences Inc. of Albuquerque, N.M.
A lingering question: Will Advanced Medical go beyond solutions and get into contact lenses? The company has indicated in the past it’s interested.
Contact lenses, Mazzo said, are “nice to have.” But Advanced Medical isn’t at a competitive disadvantage without them, he said.
“One does not drive the other,” Mazzo said. “The practitioner makes an independent decision. But I think by harboring two together, it gives you more ‘muscle’ in the doctor’s office.”
