Laser eye surgery wars heat up
Discounts leave competitors in red
LEONARD ZEHR
BIOTECHNOLOGY REPORTER
Saturday, October 28, 2000
TORONTO -- Sandy Ainsworth and her friend Judy White are here from Georgia to get a deal: Laser eye surgery at a two-for-one bargain price of $1,500 (U.S.).
"The cost is what made it attractive," Randy Ainsworth said while his wife was having Icon Laser Eye Centers Inc. correct her nearsightedness in one eye.
A Delta Air Lines flight attendant, Ms. Ainsworth saw Icon's ad in an airline magazine. "We did a lot of research and talked to a lot of people ahead of time, but there's nothing comparable to $750 a person," he said.
Patients such as Ms. Ainsworth and Ms. White are turning a blind eye to high-cost laser clinics in the face of a vicious price war across North America that is turning this one-time money-spinning business into a free-for-all blitz to capture market share.
As a result, most laser surgery companies are bleeding red ink, stock prices have plummeted and the industry is girding for a wave of consolidations and mergers.
At least one laser surgery chain has already filed for bankruptcy protection in the United States.
Meanwhile, consumers are being bombarded by celebrities on radio, television and in newspaper ads promoting high-quality laser surgery at bargain-basement prices. But concerns are growing that some forms of laser surgery can reduce night vision.
Compounding consumer uncertainty, lawsuits against surgeons and clinics are springing up at an eye-popping rate.
"The laser surgery industry is really in complete turmoil," said Elias Vamvakas, chief executive officer of Toronto-based TLC Laser Eye Centers Inc., the premium provider of laser vision correction (LVC) in North America.
"Hyper-competition, extreme pricing, a proliferation of advertising and unrealistic expectations both financially and clinically" are punishing the industry, he added.
Ken Wightman, chief financial officer of Toronto-based Icon, agrees but adds: "Sure, there's turmoil from his perspective. But from Icon's perspective, the changes and restructuring in the industry are positive."
The stakes are huge. TLC estimates that if only 2 per cent of Americans suffering from myopia and hyperopia -- nearsightedness and farsightedness, respectively -- had LVC surgery, it would represent a $12-billion annual market.
Moreover, Primary Care Optometry News, a trade publication, predicted in a recent issue that the LVC market will expand to 2.25 million surgical procedures in 2002 from about 1.5 million this year.
To grab a slice of the burgeoning pie, many laser surgery companies are spending 10 to 13 per cent of revenue for marketing and advertising.
Golfing phenom Tiger Woods, for example, has a multiyear contract to endorse his surgery at TLC, which pioneered the popular Lasik procedure. New York shock-jock Howard Stern is hawking Toronto's Laser Eye Centre. And last week, Icon landed a contract to provide LVC services to the Phoenix Suns professional basketball team.
Lasik, which is short for laser in-situ keratomileusis, features a "flap and zap" procedure. A surgeon peels back a thin layer of cornea tissue and reshapes the eye with a laser beam in order to improve the way light reaches the retina. The flap is then folded back and heals quickly.
Still, medical costs represent the largest single difference between companies such as TLC and discounting leaders Icon and Lasik Vision Corp. of Vancouver, which initiated the price war in mid-1998.
TLC, which charges about $2,000 (Canadian or U.S.) an eye, pays optometrists for pre- and post-surgical services and ophthalmologists for the actual surgery a total of about $700 an eye under a formula as part of its "co-management" business model.
Discounters, on the other hand, who are now charging $500 to $750 an eye, pay their medical staffs just above $100 an eye. The lower cost is supposed to be made up by doing more procedures than premium providers.
Mr. Vamvakas predicts that surgical prices should begin to stabilize in about six months. "There's no way you can price below the cost of doing the surgical procedure and make it up on volume," he said, adding: "Today's prices are unrealistic."
He figures that the low end of the market should stabilize at about $1,000 an eye in both countries.
"The discounters argue that LVC is a commodity, that any doctor can do it, that the laser is foolproof and that you'd have to be incompetent to mess it up," said TLC investor relations spokesman Stephen Kilmer.
"To a certain degree, they're right about the laser," he added. "But there's a whole lot of before-and-after surgery service that determines whether the procedure is successful."
Counters Icon's Mr. Wightman: "It's simply not true to suggest that high prices are a proxy for high quality and that low prices are . . . well, you get what you pay for."
After several years of fighting it out in Canada, the battle has now spread to the United States, where TLC is the industry leader.
In the past year, TLC has signed up nearly 70 million people, or 30 per cent of the U.S. population, under vision plans, health management organizations and its "corporate advantage" program. It has also established a network that includes 25 per cent of all practising optometrists, who refer patients to TLC's 55 U.S. clinics for a "co-management" fee.
Steep discounts have put ophthalmologists -- who perform the lion's share of surgical procedures but lack the marketing muscle of the chains -- under intense competitive pressure to drop prices and treat patients they might otherwise turn away.
One casualty is VFC Inc.'s Visual Freedom Center, a shopping mall laser eye surgery chain based in Virgina that promised patients 20/20 vision or their money back. Unable to attract additional venture capital to expand, the chain now is being reorganized under U.S. bankruptcy court protection.
To survive, some surgeons have had to cut corners. LaserVue Eye Center, which operates two clinics in California, has admitted that certain doctors routinely reused surgical blades on patients without sterilizing them. Medical protocol calls for each $50 blade to be discarded after use.
LaserVue is informing the 2,700 patients it treated last year that they could have been exposed to infectious diseases such as hepatitis B and C, and the HIV virus. It also is offering former patients $500 each for blood tests.
Roy Rubinfeld, a Chevy Chase, Md., surgeon who is a director of training for TLC, estimates that he has seen more than 100 Lasik patients with problems in the past 18 months, most of them referred to him by other doctors.
"Some of it is the result of surgeons with bad judgment, some of it's inexperienced surgeons, and some of it is patients, who haven't been educated preoperatively so they know what to expect," he said.
TLC tells potential patients that even though Lasik surgery is relatively safe, significant complications -- infection, hazy and reduced vision, and problems with the cornea flap -- occur less than 1 per cent of time. It urges them to research the background of any medical team and even seek a second opinion.
"Turning away business is better for us," TLC's Mr. Kilmer said. "We don't want to be associated with negative outcomes."
Charles Olsziewski, an analyst with PaineWebber Inc., contends that the deep discount model is not economically viable over the long term. "More than a few of these companies are encountering significant financial difficulties, or will do so in the not-too-distant future," he said.
Lasik Vision seems to fit the bill. While year-over-year revenue and procedure growth each reached 300 per cent in the second quarter this year, the company posted a loss of $7-million (Canadian), up from a loss of $1.4-million in the year-ago period.
It ended the quarter with $3.7-million of cash but had accounts payable of $42-million, including $22.2-million in patient deposits for laser surgeries it has yet to perform.
James Watson, vice-president of operations, said Lasik Vision's expansion plans are on hold for next year as it explores ways to raise cash. The company opened 15 clinics in the United States in the past six months, a move he calls a "significant drain on resources. Perhaps it wasn't the wisest approach."
Lasik Vision is currently embroiled in a bitter legal dispute with ousted chief executive officer Michael Henderson, who also alleges in a lawsuit that surgeons at the company botched his own eye surgery.
Last week, fast-growing Icon agreed to merge with Aris Vision Inc. of Los Angeles and install its "value," or discount, business model in 10 of Aris's 15 clinics.
Icon currently has 37 clinics in Canada and the United States and plans to have as many as 50 by year-end. With the addition of Aris, Icon would be neck-and-neck with TLC, which has 61 clinics.
The fight also has taken its toll on TLC, which is refusing to slash prices. "We're going to allow the discounters to fight it out because we know that once you've dropped your prices, you can only raise them marginally, if at all," Mr. Kilmer said.
"We didn't start this price war but we're managing our way through it," he said, adding that the company is focusing on maximizing its revenue base, controlling costs and providing the best clinical outcomes.
Still, TLC has now posted three consecutive money-losing quarters after six quarters of being in the black -- even though it performed fewer surgical procedures when it was making money than it does now. The reason: higher marketing expenses to build its brand.
Nevertheless, the company is moving ahead with its breakthrough "custom" Lasik technology that can treat the "individual imperfections" in each eye. TLC is performing the procedure in Canada at a $600 premium to its regular Lasik surgery and expects to obtain regulatory approval in the United States in two to three years. |
