Advanced Medical Optics Inc. is taking stock of a situation no consumer products maker wants to deal with: a recall.
The Santa Ana-based maker of contact lens solutions and eye surgery devices appears to have moved quickly on the recall of nearly 3 million tainted bottles of its Complete MoisturePlus contact lens solution.
The downside: It stands to feel fallout for the next year or so, according to analysts.
In the back of Advanced Medical’s mind: rival Bausch & Lomb Inc.’s recall of solutions earlier this year. The incident led Bausch & Lomb to scrap its ReNu with MoistureLoc solution after hundreds of cases of eye infections were linked to them.
Advanced Medical shut down a China plant because of bacteria found in three batches of solution made there. The move prompted Advanced Medical to lower its sales and profit outlook for this year and next.
“Some have circulated this as kind of going overboard,” Chief Executive James Mazzo said last week at a New York conference by US Bancorp Piper Jaffray. “The answer is yes, we did.”
It need only look to Bausch & Lomb, which faces a big price tag for its more severe recall. The company could see $1 billion in legal claims. It also lowered its sales and profit outlook because of the recall and production discontinuations.
Advanced Medical has hired four consultants, including experts in regulatory affairs, communications and recalls, to “ensure that we manage this situation at the highest of levels,” Mazzo said.
The company is working with the Food and Drug Administration and Chinese regulators to tear down and sterilize four production lines at its plant east of Shanghai, Mazzo said.
The lines could be back up by May, he said.
Advanced Medical appears to have taken a cue from what some saw as missteps by Bausch & Lomb in its recall.
The company’s recent conference call was “a frank acknowledgement of the problem and discussion of the remediation efforts under way,” said Andrew Swanson, a Citigroup analyst, in a research note. “This would contrast with initial comments from Bausch & Lomb that questioned whether its product was to blame.”
Advanced Medical isn’t getting away unscathed.
The company’s shares fell nearly 10% on news of the recall, hitting a 52-week low. Last week, its shares were off about 19% for the year with a market value of $2.1 billion.
And the company anticipates losing Asian customers, some for good, as a result of the recall, Mazzo said.
Advanced Medical gets about 14% of its eye care sales from Asia Pacific. Most of the recalled units were in Japan, the biggest market in the region.
About 183,000 of the bottles from China made it to the U.S. and were recalled. Advanced Medical normally supplies the U.S. market through a Spanish plant.
The company is hoping to offset a falloff in solution sales by picking up more eye surgery business in the U.S. and elsewhere, Mazzo said.
Advanced Medical makes replacement lenses for cataract surgery and lasers for vision correction procedures.
But the eye surgery market has slowed in the U.S. as surgeons have cut their advertising budgets, according to Mazzo. The market could stay flat until 2008, before new products are expected, he said.
Wall Street is cautious about Advanced Medical, given the recent earnings revision and two others in the months before the recall.
Citigroup’s Swanson downgraded Advanced Medical to “sell” from “buy” in a research report, calling the recall a “game changing event” that threatens profits.
“We have little confidence in management’s ability to either quickly resolve this issue or regain any lost share that accrues from the recall,” Swanson wrote.
BMO Capital Markets analyst Joanne Wuensch also downgraded Advanced Medical after the recall. Wuensch said she’s worried about another earnings warning and the potential for “collateral damage” from the recall.
The recall’s effect could linger “well beyond 2007,” wrote Lee Brown, a medical technology analyst with Merrill Lynch & Co., who also recently downgraded Advanced Medical.
