Why More Investors Are
Looking Into Vision Care
Health care, technology and fashion converge for
solid growth opportunities.
By Francy Blackwood
It's ironic that many investors are blind to an industry that is
devoted to vision.
The vision care industry may be overshadowed by high-profile
sectors like high-tech, telecommunications and financial services, but
eyecare is a multibillion-dollar business with all the hallmarks of a
promising investment opportunity: steady growth; favorable
demographic trends; strong brand penetration; new, high-margin
products; technological advancements; consolidation in manufacturing
and retailing; and emerging global markets.
"We believe that several compelling investment opportunities exist
in the optics sector today," says analyst Mark Miller at Merrill Lynch in
New York. "Most optical companies are now trading at a significant
discount to the market, their prospective growth rates and historical
levels. Investors should find several companies with solid fundamentals
whose valuations also limit downside risk."
U.S. optical companies, according to Merrill Lynch, trade at an
average P/E of 15 times 1997 earnings-per-share estimates--a
significant discount to the market. The average enterprise value is less
than eight times 1997 EBITDA. Based on growth potential and 1998
projections, the valuation gap is larger still. Stocks in the Merrill Lynch
optical index advanced 32% in the second quarter of 1997, with a 21%
year-to-date gain.
Over the past 10 years, the U.S. optical industry has grown
steadily, to more than $14 billion in 1996. Nearly 159 million
Americans need vision correction, and 99 million of them made
eyewear purchases last year. The need for vision correction is
universal. "This is definitely a play on the aging baby boomer," says
Marcia Aaron, a research analyst with Alex. Brown & Sons in San
Francisco. "As people get older, their need for vision correction
increases."
Aging Boomers Drive Sales
The 78 million baby boomers born between 1946 and 1965 are
running headlong into an inevitable vision problem known as
presbyopia, whereby the eye's lens loses elasticity, causing blurred
vision at normal reading distance. Most people begin to notice the
problem in their mid-40's. That means virtually every boomer will soon
need vision correction, creating a market that should generate 10% to
15% growth in the next two to three years. As life expectancy
increases and baby boomers become senior citizens, there will be a
growth market for the treatment of disorders such as cataracts and
macular degeneration, the most common cause of severe vision loss in
people over 65.
"Like death and taxes, deterioration of eyesight is a virtual
certainty for most of us," says Miller at Merrill Lynch. Glasses or
contact lenses become an essential purchase for most people at some
point in their life. "Usage also remains relatively constant over time,"
Miller adds, "and the aging of populations in the U.S. and other
developed countries will increase the number of visually challenged
people going forward."
Companies in the optical industry are meeting rising demand with
innovative new products. The innovations include advanced spectacle
lens materials, high-performance sunwear and eyeglass frames, contact
lenses that are more effective and easier to wear, pharmaceuticals that
improve the treatment of eye diseases, and precision laser treatments
for common vision problems, such as nearsightedness.
Pharmaceuticals
Despite fears that managed care would cast a pall on the market,
pharmaceutical sales have been growing by 7% to 9% a year, with
recent increases generated by unit growth rather than price increases.
Mergers and acquisitions have cut costs and improved the flow of new
products. Research-based pharmaceutical companies will invest a
record $18.9 billion in research and development this year. That's an
increase of more than 11% over 1996.
Pharmaceutical companies are introducing products that advance
the treatment of eye diseases, such as glaucoma, a leading cause of
blindness worldwide. A new area of research, called neuroprotection,
aims to limit damage cause by the increased intraocular pressure
associated with glaucoma by focusing treatment on the optic nerve.
There is also promising work in the development of products to treat
age-related macular degeneration, which affects about 13 million people
worldwide. It's the leading cause of blindness in developed countries
and the largest potential single-disease market in ophthalmology. Other
new pharmaceutical products improve the treatment of corneal ulcers
and dry eye, a debilitating disease that causes blurred vision and light
sensitivity in more than 10 million people.
Over the past two decades, new laws in all 50 states have
broadened the practice of optometry by allowing pharmaceutical
prescribing, creating a body of 30,000 optometrists in a position to
drive pharmaceutical sales.
In over-the-counter pharmaceuticals, the growing universe of
contact lens wearers is driving business in lens care solutions, a $900
million market that includes products for cleaning, rinsing, disinfecting,
enzyming and lubricating.
The youth market is also a major force in the promising future for lens
care solutions. Research indicates that members of this age group tend
to use lens care products more than other consumers.
Spurred by demographic and lifestyle trends, eyedrops and
decongestants are now the fastest growing segment of the
over-the-counter eyecare category. The popularity of outdoor sports
and the tremendous rise in computer use are driving sales of eyedrops
that relieve redness and irritation. And an aging population (35% of it
will be over 45 by 2000) will create steady demand for artificial tears,
which relieve dry eyes.
Lasers and Refractive Surgery
For the 60 million Americans who suffer from nearsightedness, a
new vision correction option called excimer laser photorefractive
keratectomy (PRK) uses advanced, precision lasers to reshape the
surface of the cornea. The FDA approved PRK for the treatment of
nearsightedness in late 1995 and has since given the nod to laser
treatment of astigmatism--blurriness or distorted vision caused by an
irregularly-shaped cornea, which affects about 71 million Americans.
Between 50,000 and 60,000 PRK procedures were performed last
year, and estimates peg the potential for 1997 at 200,000 to 250,000
procedures. "The market is still embryonic," says optometrist Ken
Taylor, a director at Arthur D. Little Inc. in Cambridge, Mass., "but the
future for refractive surgery is very bright."
There are two FDA-approved excimer laser manufacturers in the
United States. Their devices sell for between $400,000 and $500,000,
and they charge a royalty of about $250 per procedure. "It's unique in
the medical device industry to have per-procedure fees," Taylor notes.
These royalties will help laser manufacturers recoup their investment in
R&D, and once laser devices have fully penetrated the market, revenue
will shift from instruments to procedure fees. About 400 lasers have
already been installed at some 350 laser surgery centers nationwide.
Doctors' fees for the PRK procedure vary by region, but average
between $1,800 and $2,200 per eye.
Another new laser technology, which received conditional
approval from an FDA advisory panel earlier this year, is laser in situ
keratomileusis (LASIK). In LASIK, the surgeon uses a special
motor-controlled blade to cut and lift a flap of the cornea before
reshaping it with a laser. Among the benefits: recovery time is rapid,
and LASIK is effective for people with high degrees of
nearsightedness.
Laser thermal keratoplasty (LTK) uses infrared lasers to heat
corneal collagen and change the curvature of the cornea. An LTK
system now in clinical trials is expected to be effective for
farsightedness, which affects about 20 million American adults.
Other advances include a tiny, translucent polymer ring, now
undergoing clinical trials in the U.S. Approved for sale last year in
Europe, the corneal ring corrects vision by reshaping the clear tissue at
the very front of the eye without cutting or removing tissue from the
cornea's central optical zone. |
