Here's the article from Barron's. Note that Samberg was caught off guard and this is never a good sign. When a stock/company behaves in an unexpected manner, it means you don't know what is going on and are playing Russian Roulette. There seems to be unanimous opinion that the stock is dead for the next 3 months. So I'd leave this one alone and come back looking in early March for straws in the wind.
good luck,
Sun Tzu
Q: How about another name for us?
Samberg: I would like to talk about my clunker from your midyear story, VISX, which is down since I talked about it. I got so upset about it. We do in-depth research at Pequot Capital.
Gabelli: You haven't used the product, though, have you?
Samberg: Yes, I did. Three weeks ago I went and got my eyes lasered. If you do it at my age, you trade in farsightedness for nearsightedness.
Q: That's a fair trade.
Samberg: I'm still scratching my head wondering if I did the right thing. But I know the procedure works. I can see you clear as a bell. Actually, maybe I didn't do the right thing. Last year I needed glasses to see you. This year I need glasses to see my notes. But that is a function of age. If you are between 25, when your eyes are really fully formed, and 55, reading glasses are really not an issue. The procedure works. It is safe.
Q: Why did the stock go down?
Buchanan: The company had a bad patent decision.
Samberg: VISX's whole business model is based on getting a per-procedure fee. So the company charges about $250 per eyeball for each eyeball treated with its corrective laser procedure. They cross-license technology with Summit Technology.
Q: The procedure is not reimbursable?
Samberg: Not right now. Still, people are running out and getting this done because they really like it. Anyway, this patent situation is really a legal issue. It is being waged in three venues: the patent office, the International Trade Commission and the FTC [Federal Trade Commission]. And various decisions go for and against the company. The last decision regarded a Japanese company by the name of Nidek that produces these excimer lasers in Japan and wanted to come into the United States. Japanese companies are not always nice about respecting intellectual property, and they refused to pay the licensing fee. VISX sued them at the ITC level and lost the suit. They thought they would win it; they lost it. That happened three or four weeks ago. Actually, it happened the very day that I was getting the procedure done. I will never forget the day.
MacAllaster: Did they give you a cheaper price?
Samberg: No, they did not give me a cheaper price. The FTC wants to invalidate their ability to use the per-procedure fee approach. The staff of the FTC has put out a document saying, based on events they think the patent office will take in the next 30-60 days, that they want to drop the action against VISX. The market doesn't seem to care, because the company prepared the market very poorly for the Nidek-ITC case. I think the key in this whole thing is the validity of their patents -- especially the Trokel patent, which is the key patent. I think it's going to be upheld. Procedure volumes are very strong. They were a little slow in the third quarter. They grew only 7% sequentially. We believe volume grew 15%-18% in the fourth quarter, compared with the third. There is no price pressure yet on the procedure, which will be borne by the ophthalmologist, not by the company. I think this is a cheap stock.
Buchanan: For now, doctors are doing this for $1,000 an eye.
MacAllaster: What's the high and the low on that?
Samberg: The market is going to get segmented between people who are considered the top, top guys, for whom patients will pay up to $2,000-$2,500, and what are sort of called factories, where people pay $1,000. Then it gets down to whether the guys who charge $1,000 per procedure are going to go to Nidek and use the Nidek laser, so they don't have pay the $250, because that's money out of their pockets. There absolutely will be ophthalmologists who do that. The Nidek laser is really not as good.
Gabelli: What are some numbers on the stock?
Samberg: The company earns money. They probably did about $1.40 in '99, and will do around $2 this year. The stock is trading around 52-53. So, my goodness, that's 26 times earnings, under a market multiple. They have 54% operating margins. The numbers I've given you are fairly conservative, because I have assumed no license agreement with Bausch & Lomb or LaserSight. LaserSight just got approval of their excimer laser. Bausch & Lomb should get approval pretty soon. It is expected there will be some agreement between those companies and VISX based on the strong patent position VISX owns.
Schafer: Cataract surgery and intraocular lenses are going to be pressured by HMOs. This is where the doctors are all making money.
Gabelli: How many procedures are likely to be performed in the U.S. in 2000?
Samberg: Well over a million one-eyeball procedures. VISX did 750,000 last year, up from 450,000 the year before. Next year I'm assuming they will have about 60% of the market. It's explosive. People are very satisfied. The company has cash earnings.
[Investors were visibly dissatisfied with VISX Thursday, after the company disclosed that fourth-quarter demand for procedures using its laser technology had shown no growth from the third quarter. The stock skidded 13 1/8, or 29%, to 32 1/4, on volume of 21.2 million shares. Samberg, too, was thoroughly surprised-and distressed-by the news, and sold half his VISX position that day. "I sold because there was a fundamental shortfall," he explained in a follow-up interview with Barron's. According to Federal Filings, a division of Dow Jones, Pequot Capital held 1.6 million VISX shares as of the end of last year's third quarter.
Samberg notes that procedure volume has not yet picked up this year. He has lowered his 2000 earnings estimate for the company to $1.75 a share, and believes the stock will be "dead money" for at least the next three months. "After that we will re-evaluate the patent situation, the licensing situation, and whether, as procedure growth moves from high-end to low-end ophthalmologists, VISX can maintain its market share," he says. Then he'll decide what to do with Pequot's remaining position.] |
