A second contact lens solution recall in the past six months by Santa Ana’s Advanced Medical Optics Inc. could dash the company’s ambitious interest in Bausch & Lomb Inc.
A big drop in Advanced Medical’s shares last week and the distraction of the recall make Advanced Medical’s run at its bigger rival challenging, according to analysts.
The recall “likely ends” Advanced Medical’s pursuit of Rochester, N.Y.-based Bausch & Lomb, said analysts Jeff Johnson and Richard Tepe of R.W. Baird & Co. in Milwaukee.
Advanced Medical, a maker of eye surgery devices as well as contact lens solutions, said on May 24 it was interested in buying Bausch & Lomb.
The company said it was willing to pay more than the $3.67 billion Bausch & Lomb has accepted from private equity firm Warburg Pincus LLC.
A day later, Advanced Medical said it was recalling its Complete MoisturePlus contact lens solution after regulators warned of a link to Acanthamoeba keratitis, a rare eye infection that can lead to blindness.
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Advanced Medical’s China plant: back at capacity after November recall |
Advanced Medical’s shares fell more than 12% last week. The company had a recent market value of $2 billion.
In November, Advanced Medical made another solution recall related to problems at its plant in China.
One analyst, Citigroup’s Andrew Swanson, seemed almost relieved that the latest recall could end Advanced Medical’s bid for Bausch & Lomb.
With the company’s stock drop, “We now view an AMO interest in Bausch & Lomb (a bid we did not view favorably), as less likely,” he wrote.
Complicating things further, Advanced Medical is just starting to digest its $808 million buy in April of IntraLase Corp. of Irvine, a maker of lasers for vision correction surgery. Advanced Medical recently did a $250 million debt offering to help fund the buy.
No Word on Bausch
As of late last week, Advanced Medical hadn’t said whether it’s giving up a bid for Bausch & Lomb. Chief Executive James Mazzo declined to comment on the subject during a conference call about the recall. He wasn’t available afterward.
The recall is “the No. 1 focus of our eye care team right now and will be until its completion,” Mazzo said on the call.
“The bottom line is we take our commitment to safety very seriously, and we therefore decided out of an abundance of caution that we would voluntarily recall the product,” Mazzo said.
Before the recall, Mazzo in an interview talked about why Advanced Medical was interested in Bausch & Lomb.
“There’s value in this company,” he said.
Bausch & Lomb plunged on Wall Street a year ago after seeing its own solution recall. The company’s shares have gained back ground in recent months with a recent market value of $3.7 billion.
“Obviously, they’ve stubbed their toes many times, but I don’t think that reflects on the overall financial opportunities,” Mazzo said.
The 50 days in which Bausch & Lomb has to explore offers other than from Warburg Pincus “allows us the ability to have a chance to look at the asset,” Mazzo said. “It’s just logical for us to explore the possibility.”
Buying Bausch & Lomb would give Advanced Medical more weight in a market where it’s No. 3 behind Alcon Inc., part of Nestl & #233; SA, and Bausch & Lomb. It also would bring Advanced Medical into contact lenses.
“I’ve always said contact lenses are an interest to us,” Mazzo said.
Solution Safe
As for the recall, Advanced Medical has portrayed its solution as safe, saying any link to infection stems from improper handling of contact lenses by users.
“It’s not a manufacturing problem or a contamination issue,” Mazzo said during the call. “All of our products, including MoisturePlus, have always met and continue to meet all FDA requirements.”
Contact lens solutions are a small part of Advanced Medical’s business. But they’ve grabbed a lot of attention in recent months.
Complete MoisturePlus generated $106 million of Advanced Medical’s $1 billion in revenue last year and $30 million, or about 12%, of its $252 million in first-quarter sales.
Eye surgery devices make up most sales.
The recall stands to “take out a pretty big chunk of their solution sales,” Mark Millikin, an analyst with Piper Jaffray & Co., told BusinessWeek magazine.
The appeal of lens solution lies in profits: “Those products (generate) high 60% to low 70% gross margin,” Millikin said.
Advanced Medical has hired Stericycle Inc., a medical waste company from Lake Forest, Ill., to help it get Complete MoisturePlus off shelves, said Richard “Randy” Meier, Advanced Medical’s chief financial officer who also heads the eye care businesses.
The company also tapped Stericycle for its November recall. Back then, Advanced pulled some 3 million Complete MoisturePlus bottles, nearly all in Asia, and destroyed another 5 million bottles it had on hand.
It did so after contamination was found in solution made in its Hangzhou, China, plant, which is back at capacity.
May’s recall “is entirely different from our recall in November,” Mazzo said.
Analysts say the latest recall could benefit Alcon, which employs some 600 people in Irvine, as well as Lake Forest-based Cooper Cos., a contact lens maker.
Alcon, which makes contact solutions, could see doctors steer patients toward its Opti-Free solution in the wake of the recall, Goldman, Sachs & Co. analyst Lawrence Keusch said.
Cooper could benefit from renewed interest in daily disposable contacts, which carry the lowest risk because no solutions are used, Keusch said.
R.W. Baird’s Johnson and Tepe contend a boost for Cooper could be limited because “doctors are more likely to change lens care recommendation patterns than contact lens prescribing trends.”
