Abbott Laboratories is making a big bet on aging eyes and blurry vision and is willing to look past Advanced Medical Optics Inc.’s current troubles to do so.
Last week, Abbott of suburban Chicago offered $2.8 billion to buy Santa Ana-based Advanced Medical, a maker of surgery devices for vision correction and cataracts as well as contact lens solutions.
Abbott’s offer values Advanced Medical at 150% more than the company was worth before the deal, following a two-year, 60% drop in Advanced Medical’s stock.
“These are unusual times and we know what the value of this company is,” Thomas Freyman, Abbott’s chief financial officer said in a conference call last week.
Abbott is paying $1.4 billion for Advanced Medical and taking on $1.4 billion of its debt. The deal is expected to close at the end of the quarter.
The acquisition marks Abbott’s entry into the $22 billion yearly eye products market, which is seen as having long-term potential as baby boomers age.
“We’ve been looking at the ophthalmology market for several years,” said John Capek, Abbott’s executive vice president of medical devices. “It’s a large market. The long-term growth potential is significant.”
For now, Advanced Medical isn’t growing. Analysts on average expect fourth-quarter sales to come in down 8% from a year earlier at $281 million.
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The company has been hit by a drop in laser vision correction surgeries known as Lasik, which patients pay for themselves and are putting off during the recession.
The company sees revenue from laser surgery device sales as well as from fees paid by doctors every time they use Advanced Medical’s gear. It also sells kits used during laser vision correction surgeries.
Abbott is unfazed by the downturn.
“There is more to AMO than just the Lasik procedure,” Capek said.
Replacement lenses and devices for cataract surgery were Advanced Medical’s biggest business in the third quarter at $130 million, or 47%. Laser vision was next at $96 million, or 35%. Contact lens solutions were $50 million, or 18%.
Business as Usual
Since Abbott is just now getting into eye products with the deal, Advanced Medical is expected to keep some independence.
“Orange County will continue to be the home of AMO now and in the future,” said Advanced Medical Chief Executive Jim Mazzo, one of the county’s most prominent executives.
Executives from both companies said in an interview last week that it will be business as usual in the near term.
Mazzo is staying on to run the business as an Abbott senior vice president.
The deal creates some overlapping positions but the companies don’t expect major job cuts.
“The vision care expertise that AMO employees bring is new to Abbott, so we don’t anticipate any specific reductions in force as a result of this transaction,” Abbott said in a filing with the Securities and Exchange Commission.
Once the deal is done, Abbott plans to put together a team of its own employees and those from Advanced Medical to integrate the business.
Abbott wants to keep the Advanced Medical name for the business.
“That name resonates more with our customers than any other name in the industry,” Mazzo said. “Why would you ever kill a brand where doctors recognize it?”
Advanced Medical is set to become part of Abbott’s medical and surgical devices unit, run by Capek.
Abbott has $30 billion in yearly sales from drugs, devices, diagnostic testing products and baby formulas and other nutritional products.
It will go from a small presence in OC to one of the county’s top device makers. Abbott now runs a small Irvine office for its nutritional products unit.
Advanced Medical has 525 local workers and 3,710 overall.
The deal is the largest locally since late 2007, when Italy’s Luxottica Group SPA paid $2.1 billion for Foothill Ranch-based sunglasses and clothing maker Oakley Inc.
The last sizable acquisition here was November’s buy of Lake Forest-based home healthcare provider Apria Healthcare Group Inc. by Blackstone Group LP for $1.7 billion.
Abbott didn’t vie with other potential acquirers of Advanced Medical, according to Capek.
“Given that we’ve been following AMO for some time, we made the phone call to see if we could entertain the discussion,” he said.
Advanced Medical’s two key rivals,Rochester, N.Y.-based Bausch & Lomb Inc., which Advanced Medical tried to buy in 2007, and Texas’ Alcon Inc.,weren’t likely suitors, according to analyst Louise Chen of Collins Stewart LLC in New York.
“I’m not surprised that it’s not one of the ophthalmology companies because it would not work,” she said, citing potential Federal Trade Commission issues.
New Jersey’s Johnson & Johnson would have been the only other possible buyer, said Christopher Cooley of FTN Midwest Research in Cleveland.
Critics’ Take
Reviews of the proposed deal are likely to be mixed given recent negative sentiment on Advanced Medical shares and laser vision correction’s economic sensitivity, said Sara Michelmore of Cowen & Co. in New York.
Stephen O’Neil of Hilliard Lyons & Co., a Louisville, Ky.-based brokerage, takes a more favorable view.
“Despite the high price, (Abbott) is buying the company when conditions are depressed, so there is significant room for improvement,” he said.
Matthew Dodds of Citigroup Investment Research in New York was a bit skeptical.
“They could have spent the money somewhere else with better long-term potential,” he said in a Fortune article.
Abbott needs to pay attention to other matters, including building its drug pipeline, Dodds said.
The deal is part of a trend, Collins Stewart’s Chen said.
“Obviously these large-cap pharma companies think ophthalmology is an interesting space,” she said.
Alcon, which has about 750 workers in Irvine, is in the process of being acquired by Novartis AG from Nestl & #233; SA.
This will be Advanced Medical’s third stint as part of a larger company. It got its start as part of American Hospital Supply Corp., which sold the business to Allergan Inc. in 1986. It was spun off from Allergan in 2002.
Soon after, Advanced Medical made a series of big deals to build its eye surgery device business.
The company spent $450 million in 2004 for the eye surgery business of Pfizer Inc., and later bought Visx Inc. of Santa Clara for $1.3 billion, which marked its first entry into eye lasers.
Advanced Medical dipped deeper into lasers in 2007, when it bought IntraLase Corp., an Irvine maker of lasers for vision correction, for $808 million.
