“Good companies make difficult decisions when things are going good.”
James Mazzo, chief executive of Santa Ana-based Advanced Medical Optics Inc., doesn’t take credit for the line, which comes from a management book called “Good to Great: Why Some Companies Make the Leap … and Others Don’t.”
But Mazzo has made the adage his own as he looks to cut older products and focus on more profitable ones at Advanced Medical, a maker of contact lens care and eye surgical products.
“It’s easy to make difficult decisions when things are bad, because everybody understands,” Mazzo said.
Things aren’t dire at Advanced Medical, which spun off from Irvine-based Allergan Inc. in 2002.
Since then, Mazzo has grown the company from a bunch of unwanted products into a formidable eye products player.
Advanced Medical’s quarterly sales growth is about twice that of bigger rivals Alcon Inc., a Nestl & #233; SA unit with operations in Irvine, and Bausch & Lomb Inc.
And Advanced Medical is making money, before charges.
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The company earned $23.2 million in operating profits in the third quarter, beating Wall Street expectations. Revenue was up 25% to $248.2 million, driven by a 50% surge in eye surgical sales to $170.6 million.
But there’s at least one concern.
Advanced Medical’s shares were flat for the year as of last week, while Alcon’s were up 75%. Bausch & Lomb is up about 20%.
Mazzo’s strategy: quitting older cataract surgery and contact lens care products, and cutting about 6% of Advanced Medical’s global workforce of more than 3,580 people by year’s end.
He also plans to focus on more profitable products with “longer-term growth potential,” Mazzo said.
“Like anything, if you focus, you win,” he said.
Advanced Medical makes contact lens solutions and surgical devices such as intraocular lenses used in cataract surgery and lasers for fixing vision correction procedures.
Acquisitions
The company has made two big buys in the past year. In May, it bought Visx Inc., a Santa Clara-based maker of lasers used in vision correction surgery, for $1.3 billion.
Last year, Advanced Medical paid $450 million for Pfizer Inc.’s cataract surgery business.
The eye surgery business from Visx is one Mazzo plans to focus on. Others include implant eye lenses and Complete, a “one-bottle” contact lens care line.
The decision to quit some products in favor of others “is not a new initiation,” Mazzo said.
“In fact, this was a plan that we’d identified a little earlier,” he said. “We’ve just decided to accelerate it.”
Analysts like the move.
“We are encouraged by management’s commitment to expedite the process of capitalizing on the refractive growth opportunities by reallocating resources from the non-strategic eye care/cataract products,” said Lawrence Keusch, an analyst for Goldman Sachs & Co., in a report issued after Advanced Medical’s quarterly results.
“Overall, we believe management’s elaboration upon the details of its rationalization and restructuring initiatives on the conference call will give investors more confidence in the achievability of its ’06 (earnings per share) targets,” wrote Jennifer Hsui and Phil Nalbone of RBC Capital Markets Corp.
Advanced Medical projects profit of $145 million to $152 million next year on sales of $1.02 billion to $1.04 billion.
The restructuring means walking away from some sales, Mazzo said.
“It takes a bold move to walk away from $30 million to $40 million in revenue, when revenue is king these days,” he said. “But again it also takes a bold move to say, ‘We can’t afford to continue supporting this many product lines when it’s not providing the benefit to the operating income or to the overall resources of the company.'”
The move also stands to bring more charges against net income, which Advanced Medical has seen plenty of, first with its break from Allergan and then with acquisitions.
Analyst Keusch said he’s looking past that.
“However, considering AMO’s attractive long-term fundamentals and solid 50% earnings growth on tap for 2006, we are increasingly constructive on (its) shares.”
An expanded product line stemming from Advanced Medical’s two big acquisitions helped trigger the restructuring, according to Mazzo.
“We were able to add some very key technologies, especially from the Pfizer acquisition,” he said. “The Pfizer products in some cases antiquated some of our existing designs.”
As for contact lens care products, Mazzo said, “We were noticing that we were basically trying to keep alive various products. We realized that we should start to rationalize and put to bed some of these older product lines.”
“Why are we waiting? Why are we postponing the inevitable?” Mazzo asked rhetorically, mentioning that Advanced Medical was just going to let the other products “die a slow death.”
Carrying a lot of products, Mazzo said, is pricey because of “hidden costs” such as sales support, research, regulatory issues and manufacturing.
“So there’s a lot of what we call hidden cost that most people don’t identify, but are a drain and a drag on the organization,” Mazzo said.
Advanced Medical isn’t going to get out of the contact lens care market altogether, Mazzo said.
“Our main focus is Complete, as well as a couple of other product lines,” he said.
Competing with Allergan
Advanced Medical is working on a dry eye product, thanks to the expiration of “my non-compete with my friends down at Allergan,” Mazzo said.
The company plans to have a product for the $500 million yearly dry-eye market by 2007, he said. That will put Advanced Medical in competition with Allergan’s Restasis product.
Mazzo characterized it as a one-off venture into eye drugs.
“We have no desire to get into prescription ophthalmics,” he said. “Allergan is a tremendous company. They’re the leaders,let them focus on that. We’ll focus on medical devices.”
The majority of job cuts at Advanced Medical are set to come outside the U.S. because the device maker doesn’t make products domestically. Advanced Medical has more than 430 workers in Orange County.
