Advanced Medical Optics Inc.’s chief executive says he doesn’t need the pending $808 million buy of laser maker IntraLase Corp. to grow out of a rough patch.
“I don’t need any deal to grow the company,” said James Mazzo, who runs the Santa Ana-based eye surgery device and contact lens care products maker.
Advanced Medical is buying IntraLase, which makes a laser device used in the first step of vision correction surgery, to become “a true refractive enterprise,” Mazzo said, referring to laser surgery to fix vision problems.
IntraLase’s laser and software are used to create a flap in the eye’s cornea during surgery known as Lasik.
The laser is designed to replace a metal blade,made by Advanced Medical and others,that’s still commonly used to create a corneal flap.
IntraLase has benefited from surgeons who use “all-laser Lasik” as their selling point.
Advanced Medical’s move to buy IntraLase, announced last week, comes after a string of difficult news. In December, the company recalled tainted contact lens solution. Earlier this month, it saw a regulatory delay for a surgical replacement lens. In the past few months, it issued a series of downward revisions of its expected sales and profits.
The origins of the deal predate Advanced Medical’s latest events, according to Mazzo and IntraLase Chief Executive Robert Palmisano.
They said they started talking about a year ago, initially about ways to boost business amid a slowdown in Lasik procedures.
Advanced Medical makes lasers used in the secondary stages of Lasik.
“Both of us had done well outside the U.S., but we noticed that the U.S. Lasik market was not really growing to the level we thought,” Mazzo said.
In September, at a European industry meeting, Mazzo and Palmisano again met “and really said the best way to really take advantage of what the market’s providing us,this ‘all-laser Lasik’ concept,would be to combine the two companies,” Mazzo said.
“Really, it moved from two companies helping to grow the market to two companies getting together on a business development deal,” he said.
Advanced Medical’s buy of IntraLase “creates a corneal refractive powerhouse, bringing together the two biggest names in refractive (eye) surgery,” said Palmisano, who oversaw IntraLase’s $86 million public offering in 2004.
IntraLase is set to be Advanced Medical’s third big buy since it spun off from Irvine’s Allergan Inc. in 2002.
In 2005, Advanced Medical paid $1.3 billion to buy Santa Clara’s Visx Inc., a maker of lasers to reshape the cornea to correct vision.
A year earlier, Advanced Medical paid $450 million to buy Pfizer Inc.’s eye surgery business.
The IntraLase buy makes “tremendous strategic sense,” said Joanne Wuensch, a BMO Capital Markets analyst, in a Forbes.com article.
Two other analysts were a bit warier:
“Although we view the deal as a solid strategic move for (Advanced Medical) and a fair price for the asset, it does not create enough of a positive impact to alter our current cautious stance on the company and its management,” Peter Bye and Brian Kennedy of Wachovia Securities wrote in a report.
The analysts questioned the deal’s timing: “It comes at a time when the secular growth of the (laser vision correction) market is in question and (Advanced Medical) is mired in challenges.”
A key hope of the deal for Advanced Medical: firing up sales of its excimer laser used to reshape the cornea. Advanced Medical now holds about 60% of the market for excimer lasers.
“We think now, because of our large presence and with IntraLase, we’ll even accelerate our (laser) share,” Mazzo said.
One analyst called that a wait-and-see game:
“While merger savings are defined and the potential to enhance international refractive growth appears greatest nearer term, it remains to see if the company will be able to re-accelerate the domestic market with the custom, bladeless Lasik message,” said Christopher Cooley of FTN Midwest Securities Corp.
Laser vision correction accounted for about $650 million in global sales last year and is projected to grow at a compound rate of 7% in the next five years to almost $900 million, according to Mazzo.
Having IntraLase gives Advanced Medical a device used in procedures that patients largely pay for themselves, without constant pressure for lower prices from insurers and government health plans.
“We’ve really been able to move our company from just a reimbursement-type of product line to a non-reimbursed product line,” Mazzo said.
“I think at the end of the day, the practitioners will gravitate to companies that have technology and are not curtailed by a reimbursed environment,” he said.
Advanced Medical expects to close the deal by this year’s second quarter, pending regulatory approval. Mazzo said he doesn’t expect much difficulty.
There’s not a lot of overlap between the two companies now, he said.
Advanced Medical estimates only about 20% of its customers use IntraLase lasers, while 40% of IntraLase’s customers are also Advanced Medical customers.
Other bidders aren’t expected to emerge, according to Andrew Swanson, a Citigroup analyst.
Key rival Alcon Inc. “is unlikely to expand its presence in the laser vision correction market,” Swanson said.
Bausch & Lomb Inc., which saw its own contact lens solution recall last year and is dealing with accounting issues, isn’t a likely suitor, Swanson said.
Analysts expect Advanced Medical to post $1 billion in 2006 revenue. Surgical products, including lasers and cataract and implant products, account for about 70% of the company’s sales. Contact lens solutions and other products make up the rest.
Advanced Medical expects to save $25 million to $30 million a year after integrating IntraLase.
Jane Rady, Advanced Medical’s corporate vice president of strategic and business development, and Bernard Haffey, executive vice president and chief commercial officer of IntraLase, are expected to oversee the integration.
Once IntraLase is folded in, Palmisano and several members of its senior management team aren’t expected to stay on at Advanced Medical, Mazzo said.
