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Ron Baron on Advanced Medical Optics (EYE)

April 25, 2006 | About:

Americans are aging - the number of people over age 65 is estimated to increase from over 35 million in 2000 to over 54 million in 2020. About 50% of people aged 65-74 and 70% of those 75 or older have a visually significant cataract, a condition characterized by the clouding of the lens of the eye. We believe Advanced Medical Optics (''AMO''), which manufactures and markets medical devices for the eye, is well positioned to benefit from this powerful demographic trend. AMO has a strong position in the cataract surgery market (a $3 billion global market growing 9% per annum) and a dominant position in the laser vision correction market. We believe a recent decision by the Center for Medicare and Medicaid Services creates a large new market opportunity for AMO. That decision allows Medicare beneficiaries to pay outof- pocket to receive presbyopiacorrecting intraocular lenses (''IOLs'') as part of cataract surgery. This new technology is designed to allow patients to become spectacle-independent after cataract surgery. AMO is one of only three manufacturers with a presbyopiacorrecting IOL available on the market. In the U.S., these IOLs are priced at approximately 6x the price of a standard IOL, which should allow AMO to generate attractive margins on these lenses.

The U.S. market for presbyopiacorrecting IOLs is estimated by Wall Street to reach $600M by 2010. We believe that AMO is well positioned to capture ample market share with its current product offering, and we expect AMO to launch compelling new products over time. In its laser vision correction business, AMO is replicating its profitable domestic per-procedure revenue model in its overseas markets through the rollout of Custom LASIK, a more advanced and precise procedure. If successful, we believe that this action should add high margin recurring revenue. AMO is also moving to a direct sales model from a distributor model in selected international markets, which we think should improve margins. In its eye care products business, AMO is developing an over-the-counter (''OTC'') dry eye product to participate in this $500 million market. Since the expiration of a non-compete agreement with Allergan, AMO has been free to develop and market its own OTC dryeye product, which it expects to launch in 2007. In our view, this is an attractive market opportunity because AMO can target its existing customer base of ophthalmologists and optometrists (who recommend or sometimes even prescribe OTC dry eye products), brand loyalty among consumers is high (and AMO has a recognizable brand in contact lens solutions), the condition is widely prevalent but market penetration is low, and we believe that consumers are willing to pay for the technology. While AMO is launching these new growth initiatives, AMO is also discontinuing a variety of low-margin, older-generation products through an aggressive restructuring program. In the near term, this restructuring program is negatively impacting AMO's sales growth and profitability. However, we believe that over time, AMO's earnings power will meaningfully accelerate. (Neal Kaufman)

Rating: 3.5/5 (2 votes)

Comments

vooch
Vooch - 8 years ago
Earnings -8.28 -3.89 0.35 0.89 1.12

'nuff said.

- Vooch

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