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The scene: New York City's posh Pierre Hotel. In the main ballroom, 60 medical technology companies crisply briefed analysts on sales estimates, recent deals, and prospects for growth at the UBS Warburg Life Sciences conference on Oct. 4. The place was bustling. But a more subdued scene was unfolding in the hotel basement. There, John Klobnak, CEO of Laser Vision Centers, a leading provider of laser eye surgery, delivered his own half-hour pitch to no more than 10 investors sitting in stoney silence.
Klobnak had some explaining to do. "Pricing was the spark that started the sell-off in this industry," he told the sparse crowd, as he tried to make sense of slumping stocks in the laser eye-surgery industry. "In the old days, we were the ones in the big ballroom upstairs, drawing the big crowds," he sighed a few days later, recalling his pitch.
Indeed, not very long ago, St. Louis-based Laser Vision Centers (
LVCI
) was a top-drawer stock -- as were several other companies that sell the lasers and run the clinics for this highly successful optical procedure. But beginning in the fall of 1999, concerns over predatory pricing began to rock the industry's stocks. LVC iself, which works with more than 600 surgeons across the country, now trades at 4, down from a high of 37 in mid-1999. The reason: investor worries about declining profit margins.
PRAIRIE MONOPOLY. Actually, the procedure's popularity has been a major factor in depressing stock prices. So many people have been safely and successfully treated that, today, the procedure has become commonplace in malls and shopping centers across the country. Prices have been dropping, too. Surgery now runs anywhere from $1,000 to $2,000 per eye, compared to $2,200 to $2,500 per eye just a couple of years ago. But most insurance plans don't pay for it, and from the perspective of most consumers, prices still seem a bit steep, ophthalmologists say.
The price-cutting certainly hasn't affected doctors. Ophthalmologists still get their cut of each treatment. And doctors in some isolated markets are even charging more for the surgery than in major East Coast cities. In St. Louis, for example, one doctor dominates the region, charging more than $2,000 per eye. Nor have laser makers been hurt much. They're still commanding high profit margins on the sale of new equipment.
But in New York, discounters are now omnipresent. Subway and radio ads promising quick surgery for $999 per eye are ubiquitous. Elsewhere, some providers are offering the procedure as cheaply as $775 an eye, hoping to grab market share. Vancouver-based Lasik Vision Centers recently parted ways with its CEO after the company made a large but unsuccessful bet to gain market share in the U.S., offering steeply discounted treatments. The company's finances appear to be floundering, and the company's stock now trades at about 1/2.
NO. 1 SURGERY? If discounters such as Lasik fail, there would be more breathing room for a smaller number of profitable companies such as LVC, giving the survivors greater control over pricing at a time when the treatment seems likely to boom. The procedure, which reduces or eliminates nearsightedness or farsightedness, is likely to become the most-performed surgery in the U.S. within two years, companies predict. More than 1.5 million surgeries are expected to be performed in 2000, 2 million in 2001, and 2.3 million in 2002, according to one estimate. And if there are only two or three major players nationwide, prices could begin to creep back up.
Even in the current atmosphere of rampant discounting, profits are definitely still there -- but much less so than two years ago. LVC absorbs the cost of running training programs for doctors on new laser equipment licensed from manufacturers. But the doctor is responsible for follow-up care and, in some cases, additional office visits after the patient has paid for the surgery. All the more reason for LVC to begin rethinking its business model. The company has plans to absorb more of the insurance risk in its clinics in exchange for a greater slice of the revenues, Klobnak says.
Still, if a shakeout is in the offing, this may be the best time to have the corrective surgery. The $999 price tag is about as low as companies can afford to go, Klobnak asserts. And with fewer providers performing more specialized surgeries with more expensive lasers, the market may not sustain discount pricing. Klobnak is hoping the price will move back toward a profit-boosting $1,300 an eye.
DEEP CUT. In the meantime, "we anticipate continued turmoil" for the industry, UBS Warburg analyst Rebecca Irwin said in a recent report. Signs of trouble abound: LVC is performing more than 30,000 surgeries a quarter, but the company's net income fell the first quarter ending July 31, to $1.2 million, compared to $4 million in the same quarter a year ago.
The leading laser maker, VISX (
EYE
), also disappointed, reporting third-quarter earnings of $0.19 a share on Oct. 12, from $0.36 a share a year earlier. Earnings dropped as a result of VISX's February decision to cut its per-procedure fee 66% in response to competitive pressures. As a result, sales fell to $46 million, from $80 million the third quarter of 1999.
While patients may be getting a price break, investors are just worried. VISX, based in Santa Clara, Calif., has seen its stock slide more than 75% from its 52-week high, to about $20 a share -- roughly in tandem with LVC's sharp drop. Analysts say they're dubious of VISX's ability to repeat last year's gains any time soon.
EGO PLAY. But one upside may be an improved laser on the horizon -- the company's Star S3, which VISX expects to be more comfortable for patients, more accurate for doctors, and more lucrative. "The competitive landscape has changed," said VISX Chairman Mark Logan at his company's third-quarter conference call on Oct. 12. In the next couple of years, "there are likely to be only two or three viable competitors in addition to VISX," Logan added.
Small wonder Wall Street is so fretful. "We believe there are substantial industrywide risks to an investment in laser-correction-provider companies," says UBS's Irwin. However, "we believe LVC offers the least amount of risk," she adds. It's easy to follow her logic since LVC's stock carries a book value of $3.15 a share. The company has $40 million in cash, or $1.66 a share, on hand. At its current stock price, LVC doesn't have much downside left. If you believe in the vanity of aging baby boomers, the stock looks rather attractive. But this is no haven for the risk-averse.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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