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EYE Analysis April 13, 2006

Recent events

On April 10, 2006, BOL announced that it was voluntarily suspending shipments of its Renu lens care solution pending an investigation. EYE could benefit from picking up most of the $45m of Renu sales plus sales of other BOL eye care products that the consumer may switch away from. EYE was up 6% on the day and could see more volatility as this issues sorts itself out.

EYE reports 1Q earnings on 4/27/06 before the open.

Business

EYE was formed after Allegan spun off its contact lens care and surgical business unit to become a “pure play specialty pharmaceutical company” in mid 2002. Allegan had been enjoying exceptional growth in its core Botox and high-margin ophthalmologic pharmaceuticals business, seeking to remove the slower growth EYE business. After the spin-off, EYE acquired Pfizer Surgical for $450M in mid-2004 and VISX for $1.3B in mid 2005.

EYE’s current product breakdown is

Ophthalmic surgical (Cataract, Refractive) – 52% of sales, 8% growth

This segment can be broken down into Intraocular (IOL), Viscoelastics, and Phacoemulsification produts. EYE is second with a 30% market share. Alcon is first with  50% share,

Laser Vision Correction – 21% of sales, 6% growth

The FDA approved laser eye surgery in 1995. The number of procedures peaked in 2000 and then began to fall off with the economy soon after. The procedure is economically sensitive since most patients pay out of pocket not through a third party insurer.

EYE’s Star system is the market leader with a 60% share in theUS. Alcon is second with 20%, followed by Bausch & Lomb at 10% and Nidek at 8%.

Eye Care – 26% of sales, 3% growth

This is a mature segment

Credit

EYE is rated B+ by S&P which implies a credit spread of 250 to 300 over libor.

EYE has $40M in cash and $560M in debt. The debt consists of $27M of 3.5% converts with a 4/08 put, $350M of 2.5% converts with a 1/2010 put and $150M of 1.375% converts with a 7/2011 put.