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Get Four
|  | AUGUST 24, 2004
 FOCUS STOCK By Cameron Lavey At Cooper, Growth Is in Sight The health-care products company has made some smart acquisitions to become well-positioned in the contact-lens market We at Standard & Poor's Equity Research Services believe that health-care products maker Cooper Cos. (COO; recent price: $59) will continue to gain market share in each of its core product segments through product-line enhancements and extensions, geographic expansion, and strategic acquisitions. We expect favorable demographic trends and improved product technologies to drive double-digit revenue and earnings growth over the next several years. Given our view of promising growth potential and attractive valuation, the stock carries S&P's highest investment recommendation of 5 STARS, or buy. Cooper develops, manufactures, and markets health-care products through two business units: CooperVision (CVI) and CooperSurgical (CSI). CVI (80% of fiscal year 2003 revenues) develops, manufactures, and markets a broad range of contact lenses for the worldwide vision-care market. It specializes in "toric" lenses that correct astigmatism, cosmetic lenses that change the appearance of the color of the eye, multifocal lenses designed to correct for presbyopia (an age-related vision defect resulting in difficulty seeing objects close up), and lenses for patients experiencing mild discomfort relating to dry eyes during lens wear. CooperVision continues to grow faster than the worldwide contact-lens market due to what we see as its superior lens technologies and product mix. Cooper believes it's the only contact lens manufacturer to use three different manufacturing processes to produce its lenses: lathing, cast molding, and "Finished Inside Polymerization System" (FIPS), Cooper's patented process that's a cost-effective combination of lathing and cast molding. SHIFTING FOCUS. During fiscal 2003 (ended October), CVI expanded its product offerings by making both Frequency Multifocal, a disposable product for patients with presbyopia, and Enhancement Colors, a disposable cosmetic product that enhances eye color, available worldwide. In addition, Rohto Pharmaceutical introduced CVI's line of frequently replaced spherical lenses in Japan. In the spring, CVI introduced its two-week disposable toric lenses in Japan and Proclear disposable multifocal in major European markets. We anticipate that the Proclear multifocals will be launched in North America by October. We believe that several ongoing shifts in the global contact-lens market will benefit CVI, namely the moves from conventional lenses that are replaced annually to disposable and frequently replaced lenses; from commodity lenses to specialty lenses, including toric, cosmetic, and multifocal; and from commodity spherical lenses to value-added spherical lenses. All of these trends favor CVI's line of specialty lenses, in our opinion. Moreover, we believe favorable demographics will help drive growth over the next several years. These trends, in our view, include the expansion of the teenage population in the U.S. (according to the 2000 Census), who are the prime wearers of contact lenses, and a higher incidence of myopia in teenagers (according to the Centers for Disease Control), resulting in increased purchases of specialty contact lenses. INTERNATIONAL EYE. Cooper recently agreed to acquire Ocular Sciences (OCLR; $44) for about $1.2 billion in cash and stock, subject to approvals. We believe that the acquisition is a good fit, as it's expected to broaden Cooper's product portfolio, geographic reach, and distribution channels. We also expect significant cost synergies from the deal in areas such as research and development, manufacturing, and distribution. With Ocular generating most of its revenue from spherical lenses and CVI generating the majority of its revenue through specialty lenses, we believe that there will be minimal cannibalization of sales. In addition, with the purchase of its Japanese distributor in April, 2002, Ocular gained a significant presence in Japan, the second largest and fastest-growing contact lens market in the world. As CVI generates less than 10% of contact lens sales in Japan, we view Ocular's presence in Japan as an important future driver of growth for CVI.
BW MALL
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