A Sharper Eye for Growth


By Michael Eidam Lasik eye surgery suffered a black eye in recent years after deep discounters flooded the market, offering the procedure at cut-rate prices -- and with lower success rates. The press jumped on cases of unhappy patients dealing with unwanted side effects. To make matters worse, the economy soured and, since the surgery is discretionary, Lasik-derived revenues tailed, dragging down the stocks of companies such as VISX (EYE) and TLC Vision (TLCV).

But in 2003, with the economy reviving and many deep discounters forced out of business by lawsuits and controversy, refractive eye surgery staged a comeback -- part of a surge in sales for the eye-care industry. The turnaround is driven in part by new, custom LASIK surgery, which has increased the number of patients eligible for treatment and raised the percentage who achieve 20/20 vision without those unpleasant side effects.

BRIGHTEST LIGHT. New technology allows doctors to create a three-dimensional map of the cornea and treat each patient's specific vision problem much more precisely than in the past. Custom LASIK -- laser-assisted in situ keratomileusis, to give it the medical name -- has "made people feel comfortable with the surgery," says Joanne Wuensch, an analyst with Harris Nesbitt.

Michael Lachman, an analyst with ThinkEquity Partners, forecasts about 10% to 12% growth in LASIK procedures in the second half of this year, and 6% to 7% next year -- perhaps more, if the economy regains steam.

With stabilized prices and greater demand, VISX (EYE) is one company getting a boost. The Santa Clara, Calif.-based manufacturer of the laser systems used in the procedure dominates the market with the largest installed base of lasers in the U.S. On July 21, VISX reported a 133% increase in net income, to $9.5 million. This came on a 34% percent increase in revenues, to $43 million, for second-quarter 2004. VISX collects a fee for each procedure performed, so its profits will rise in step with Lasik's popularity. The stock is trading at around $19 per share -- near its 52-week low of $17.

PUPILS OF PROFITS. TLC Vision (TLCV), the largest provider of LASIK surgery, is also poised to capitalize on the turnaround. On Aug. 9, the Mississauga, Ontario-based company revealed that second-quarter revenues jumped 36%, to $67.4 million. In a conference call with analysts that day, CEO Elias Vamvakas said the 16% growth in procedures performed by TLC Vision led to a quarterly revenue gain of more than 30%. The custom LASIK approach continues to evolve, with new procedures representing approximately 52% of total second-quarter volume. Its stock is currently trading in the middle of its 52-week range at $8 per share.

TLC Vision is causing a stir in the market, too, because of its joint venture with OccuLogix (formerly Vascular Sciences Corp.). The partnership is focused on developing a treatment for age-related macular degeneration (AMD), the leading cause of blindness in people over 50 and an estimated $28 billion market.

On Aug. 9, the partners announced that a spinoff of OccuLogix in an initial public offering. Their treatment called rheopheresis is currently in clinical trials. If it's approved by the FDA, analysts estimate it could boost TLC Vision's value by another $5 or $6 a share. D. Paul Cohen of Cohen Independent Research Group, who has a buy rating on TLC Vision, figures that at the stock's current price "you're buying the core business at a very reasonable multiple and the option [on rheophoresis] is virtually trading at nothing. I think the stock is extraordinarily undervalued." (Cohen doesn't own the stock or have any investment banking business with TLC Vision.)

EXPANDING MARGINS. Among large-cap stocks, a company worth a look is diversified eye-care giant Alcon (ACL), which does everything from selling contact-lens solution to developing pharmaceutical treatments and manufacturing surgical equipment.

On July 28, Alcon reported a 67.9% increase in net earnings, to $299.2 million. This was on a 12.3% gain in global sales, to $1 billion. The FDA recently approved Alcon's lasers to treat astigmatism (nearsightedness), which should halt its recent market-share losses to rival Bausch & Lomb (BOL). More importantly, Alcon's profit margins have been going up steadily, Lachman notes.

However, the really sexy story at Alcon's is its possible AMD treatment, known as Retaane. Alcon is expected to announce Retaane's Phase III data in late October. Meanwhile, expectations about the results have helped drive up the stock price.

READY TO RISE? Currently trading at $74.64 in the middle of its 52-week range Alcon is up roughly 50% in the last year. Although that puts it at a premium, vs. its peers, Alcon has been a consistently pleasant surprise to Wall Street. The company's shareprice has fallen from $87.51 on July 16 as markets generally have dropped. The dip could be a buying opportunity for investors who like Alcon's prospects.

Whether you like your companies big or small, the story's the same these days: The eye-care industry is a sector investors might want to keep an eye on. Eidam writes for BusinessWeek in the Atlanta bureau


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