StockHawk & Thread..........Laser Eye Surgery
from MSN, Money Central....an overview......
About 1 million Americans will be living, breathing advertisements for laser vision-correction by the end of this year.
Sectors & Trends
Eye surgery sector has sure-fire focus
Investors in the corrective vision market are seeing double -- that is, prices have at least doubled for the top stocks in the sector this past year. But as competition intensifies, can those gains hold?
By Mark Thompson
Investors in the dozen or so publicly traded companies in the laser vision-correction business -- one of the highest-flying stock sectors of the last year -- didn't know it at the time, but they had a lot riding on the outcome of a July baseball game between the Atlanta Braves and the Boston Red Sox. The Braves' ace pitcher, Greg Maddux, was on the mound less than 48 hours after a surgeon resculpted his corneas with a laser device.
Laser surgery to correct nearsightedness or farsightedness has been available in the United States since 1995 and in Europe and Canada for much of the past decade. But investors in the sector still live with a nagging fear that one day someone with the high profile of a Greg Maddux could stumble out of a laser treatment center unable to see the side of a barn, much less a catcher's mitt 60.5 feet away. One front-page horror story like that could drive away tens of thousands of potential customers, poking a big hole in some eye-popping stock gains.
The share price of VISX Inc. (VISX), which makes the laser machines used in three-quarters of all U.S. procedures, has increased nearly sixfold in the past year. Even the worst performer of the seven largest vision-correction stocks in the sector, TLC Laser Center (TLCV), has more than doubled in the past year. And these are the gains still remaining after a steep correction that began in mid-July and has pulled down every stock in the group by 20% to 50%.
Great PR eases investor fears
Investors remain justifiably nervous about lofty valuations in the sector, particularly in light of the imminent arrival of new competition in both laser machines and surgical services. But anxiety about a medical mishap is subsiding by the month as tens of thousands of patients emerge from laser eye clinics awestruck with the results. Maddux, for one, who ignored his manager's wish that he wait until the off-season for the surgery, pitched eight innings July 11, allowing just one run and picking up a win. He has pitched superbly ever since, and is ecstatic about the effect of the laser treatment on his eyes. "It flat-out fixed them," the formerly bespectacled Maddux marveled a week after his surgery. "I'm seeing better than I ever saw."
Emboldened by such testimonials, increasing numbers of Americans are no longer wincing at the thought of someone cutting into their eyeballs. David Therkelsen, an analyst at Dain Rauscher Wessels, estimates that 925,000 U.S. corneas will be corrected with laser surgery this year, more than double the 420,000 procedures performed last year. That 220% rate of growth in procedures will settle down to 40% next year, when Therkelsen estimates that 1.3 million eyeballs will submit to the laser knife. In terms of numbers of patients, about 1 million Americans will be living, breathing advertisements for laser vision-correction by the end of this year.
"We haven't even scratched the surface" of the potential demand, quips Hans Luft, an analyst at McDonald Investments. More than 150 million Americans are afflicted with bad eyesight. Perhaps one-third of them could afford -- and are otherwise good candidates for -- laser treatment, Luft estimates. The 20 million Americans who have tried and given up on contact lenses are an especially inviting target market for corrective surgery, which now costs $2,000 or more per eye, but is due to get cheaper.
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Price 94 1/16
Change +3 9/16
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VISX is in a position to be the biggest beneficiary of the laser vision-correction boom.
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VISX takes the lead
VISX, based in Santa Clara, Calif., is in a position to be the biggest beneficiary of the laser vision-correction boom. The company's latest-generation laser machine has broader approval from the U.S. Food and Drug Administration than any competing machine, with regulatory clearance to fix nearsightedness, farsightedness and astigmatism. The VISX Star laser is used in the LASIK procedure, in which doctors use a diamond tip to cut a flap in the eye lens, use a laser to change the cornea's shape, then replaces the flap. LASIK is rapidly replacing the first-generation PRK technique because it is much less invasive, and patients (as Maddux demonstrated) can return to their normal activities with 20/20 vision almost immediately.
VISX shipped 61 new laser machines in the quarter ending in June, compared with 22 for its closest competitor, Summit Technology (BEAM). Wade King, an analyst at BancBoston Robertson Stephens, expects VISX to sell 80 lasers in each of the next two quarters. The biggest stream of revenue begins to flow to VISX after the machines are in place. Users of the lasers have to pay VISX for a card key at $250 per eye to operate the machines. These license fees accounted for $40.7 million of the $62.5 million in revenue earned by VISX in the quarter that ended in June. For this calendar year, analysts expect VISX to report earnings per share of $1.29, representing a 118% increase over last year.
Earnings-per-share growth will slow next year to 32%, according to the average analyst estimate. By then, VISX could have some tough new competition. Summit Technology's laser, for one, is on the verge of winning FDA approval to treat a wider array of vision problems, which would make it more competitive with the VISX laser. An FDA panel's July 23 vote in favor of Summit's application for broader use sent the stock up 25% in a day, though it has since given up all of those gains. By the end of this year, both VISX and Summit most likely will be joined in the laser market by Bausch & Lomb (BOL), which has the market-leading laser in Europe. FDA clearance of Bausch & Lomb's laser for use in the United States is expected before the end of the year.
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Price 71 5/16
Change +7/16
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Therkelsen foresees better gains in Bausch & Lomb stock, which he expects to reach $90 a share
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King downplays the competitive threat faced by VISX. "It's going to be a tall task for anybody to come in and replicate the combination of superior technology, superior management, dominant market share and the comprehensive sales and support network dedicated to one product area that VISX has," says King. "I certainly agree that the multiple will capture your eye," adds King, referring to the price-earnings ratio for VISX, which after the recent correction was still hovering just below 70 times 1999 earnings. "But you have to recall that the bottom line is growing 100% this year," says King, who has a $125 target price on the stock. Luft has the same target in mind and an "aggressive buy" rating on the stock.
Competition heats up
Therkelsen also has a "strong buy" rating on VISX. But his target price of $98 is below the stock's recent high. Therkelsen foresees better gains in Bausch & Lomb stock, which he expects to reach $90 a share from its recent dip into the $60s. The Rochester, N.Y.-based company, best known as the leading contact-lens company, sports a price-earnings ratio of 19 times 1999 earnings, a relatively lowly multiple befitting its mature core product.
But Therkelsen believes the company quickly can slice off a respectable chunk of the more-exciting laser market. Bausch & Lomb already has a U.S. beachhead with its fast-selling diamond-bladed device used in conjunction with a laser in the LASIK procedure. If the company unveils a credible plan for winning U.S. market share for its laser, its P/E multiple should get a nice boost.
The specter of more competition is a greater threat to the surgical-services providers than to the laser makers. That is why the largest service provider, TLC Laser Centers, based in Ontario, Canada, has tumbled further than others in the recent correction. The bad news for TLC is that cut-rate laser-surgery providers in Canada now are offering the procedure for as little as $499 per eye, compared with TLC's $2,400 per-eye price.
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The No. 2 surgical-services provider is in a better position to withstand a price war, says Greg Simpson, an analyst at A.G. Edwards. Laser Vision Centers (LVCI), doesn't own surgical offices. Rather, it owns 46 mobile laser units, which a technician hauls from one medical office to the next. The company also installs lasers in medical offices with enough business to purchase their own, and trains doctors in use of the machines.
"Their business model worked well when business was sluggish. They were able to become profitable more quickly," says Simpson. "Now that the business has exploded, they're more flexible. They're also the lowest-cost provider. That will be important when the industry begins to get pricing pressure," says Simpson. He has a $41 price target on the stock, which was recently trading at around $27 a share. Laser Vision Centers already has enjoyed a spectacular run, up more than fivefold in the past year.
The biggest winners in a price war among surgical-service providers would be the laser makers. As the price of the procedure approaches the cost of contact lenses and lens-cleaning fluids, demand could soar. |
