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Ophthalmic Goods Manufacturing

Healthcare Sector

Senior Analyst: Raditya Purwahjo Junior Analyst: Anne Moxie, Yimin Ding, Pablo Mercado, Ben Bivins, Tianyang Zheng, Austin Hymes, Justin Rustia

 

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Industry Definition – Ophthalmic Goods Manufacturing

This Industry comprises establishments primarily engaged in manufacturing ophthalmic goods. Examples of products made by these establishments are prescription eyeglasses (except manufactured in a retail setting), contact lenses, lenses for surgical use, sunglasses, eyeglass frames, and reading glasses made to standard powers, and protective eyewear.

NAICS Code: 339115 Ophthalmology is the branch of medicine that deals with the

anatomy, physiology and diseases of the eye.

Source: Bloomberg; Pardee Library NAICS Industry Book; Ophthalmology Defined, about.com

 

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Understanding the Industry – Ophthalmic Goods Manufacturing Aesthetics

2%Audiology

10%Anesthesia-Respi-

ratory4%

Cardiology15% Chronic Care

5%

Disinfection/Steril-ization

1%Mobility Aids2%Neurology

2%Oncology3%

Ophthalmology17%

Orthopedics20%

Robotics/Navigation1%

Surgery10%

Urologic/Gyne-cology

2%

Wound Care7%

Source: Bloomberg; Fadi Humaid, Life Science Presentation

 

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Understanding the Industry – Porter’s 5 Forces

Extent of Rivalry• Intense R&D• No price wars • Increased consolidation among firms for

more market-share• Life Cycle Stage: Mature

Power of Buyers• Key consumers: Hospitals, private practice

physicians & wholesalers• Buyer concentration: Low• Buyers are consolidating: Bigger bargaining

power.• Medicare to limit payments for many medical

treatments that require medical supplies causing higher price resistance.

Threat of Substitutes • High training cost• Very differentiated & specific• Produced goods cater to

specific health need

Threat of Entry • High Barriers of Entry• High Government Regulations• Patents to protect intellectual property • High training costs• High technological changePower of Suppliers

• High switching cost due to FDA approval system

• Supplier Concentration: low• Risk mitigation: Inventory

management. • Key supplier: plastic & resin

manufacturing

Source: IBISWorld Report ode 33911b; Firms 10-K Filing FY2011; BMO Capital Med Tech Outlook 2012

 

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Industry Revenue Generation

Ophthalmic Goods

Manufacturing Facility

Direct Sales Force

Independent Distributors

Alliance with Market Leaders

Services From Product Repair

End Consumer

Global End Consumer

Global End Consumer

Utilize Market Leader’s Channel of Distribution &

earn royalties

Source: Firms 10-K filing FY2011.

 

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Trends Overview

Regulatory Environmen

tIndustry

ConsolidationAging US

PopulationEmerging

Markets Gaining Traction

 

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Regulatory Environment (I)

From 2006 to 2010, 510(k) approvals 14% PMA approvals 52%

FDA warning letters 149% Class 1 product recall 555%

Source: BMO Capital Med Tech 2012 Outlook.

 

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Regulatory Environment (II)

Source: BMO Capital Med Tech 2012 Outlook.

Now that Obama is re-elected: 32 million gain access to health insurance Lead to Med Tech Utilization The Patient Protection and Affordable Care Act and Health Care and

Education Affordability Reconciliation Act (Obamacare) were enacted into law in March 2010. – 2.3% Excise Tax on domestic sales of Class I, II and III

Medical Devices starting January 2013.

 

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Industry Consolidation – M&A & Increased Competition • M&A Volumes expected to pick up on:

low cost of debtstruggling smaller companieslarger companies are in search of growth and scale given a more rigorous hospital

purchasing environment.

Source: BMO Capital 2012 Med Tech Outlook

2007 2008 2009 2010 2011 2012 YTD

$73.4 $78.0

$17.1 $27.8 $57.9

$21.8

262

224

125 141121

65

Total Transaction Value # of transactions

Rev. Multiple 2.7x 2.9x 1.7x 2.8x 2.8x 2.7x EBITDA Multiple 17.8x 14.3x 12.6x 16.9x 12.5x 16.2x

(Excludes deals with disclosed enterprise values that are less than $10 million)Sources: Frost & Sullivan Database, IBIS World, BMO Capital Markets

(U.S. Billions)

 

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Industry Consolidation – Private Practices to Hospital Employment

Source: BMO Capital 2012 Med Tech Outlook

• This trend has been slowing down. This could bode well for utilization (or at least ease the headwind).

30% in Hospital Owned Practice from 2002

30% in Physician Owned Practice from 2002

 

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Emerging Markets Gaining Traction

As pressures in the US and Europe persist, companies continue to pursue opportunities in emerging markets, with most attention paid to China, followed by Brazil and India.

Obstacles to succeed in international markets are many: politics, infrastructure, demographics, intellectual property protection and high % of private healthcare expenditures.

Source: BMO Capital 2012 Med Tech Outlook

 

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Aging U.S. Population

Source: BMO Capital 2012 Med Tech Outlook; Department of Health & Human Services: Administration on Aging

2010-2020 Projected CAGR: 3.12%

2010-2020 CAGR of 3.12%, 2x faster than the previous decade. Growth will be sustained until 2020. The average elderly (age 65+) person spends 135% more on

healthcare than the U.S. population average, around $6,070 per year.

 

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Risks

• Expanding definition of “elective” procedures• Additional patient volume pressure. • Elongated economic downturn• $123 billion Medicare budget cut

Valuation Risk

• Exchange rate risk• Subject to foreign custom regulation & laws• Subject to various anti-bribery laws

International Regulatory Risks

• Entail significant risk of product liability claim• Product liability insurance is expense and may not be available

on acceptable terms in the future

Product Liability Claims

• Patent application is conducted in secrecy• Increases risks for product infringement• Litigations are very expensive and are often necessary to

enforce patents

Intellectual Property Risks

Source: BMO Capital Med Tech Outlook 2012; Firm 10-K Filling FY2011

 

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Valuation

Name Ticker EPS ttm Ttm P/E Fwd P/E P/B mrq Ttm EV/EBITDA

Dividend Yld ROIC ROA ROE

Synergetics USA Inc SURG 0.22 18.61 11.86 1.77 8.81 N/A 11.48% 6.98% 10.43%

Cooper Cos Inc COO 4.77 19.11 15.62 2.06 12.67 0.10% 9.32% 6.81% 9.73%

Precision Optics Corp PEYE 0.78 1.17 N/A 2.19 -2.81 N/A N/A 81.12% N/A

STAAR Surgical CO STAA -0.01 N/A 59.11 5.66 36.04 N/A 6.20% 3.01% 5.20%

OPKO Health Inc OPK -0.04 N/A N/A 8.97 -51.51 N/A N/A -0.83% -3.98%

3 Investment Possibilities to be derived from this table: • Synergetics USA (SURG) • Cooper Cos Inc (COO) • STAAR Surgical CO (STAA)

Source: Bloomberg Terminal Relative Value Function

 

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Synergetics USA (SURG) – Investment Thesis

Healthy Growth:– 7.2% yoy Revenue growth FY2011– Net Income and EPS doubles. – As of 2Q12, EBITDA goes up by 42.4% yoy

Bloomberg Consensus:

1Source: SURG Investor Presentation; Bloomberg Terminal SURG US Equity ANR

Company SURG

Last Px 4.31

1 Yr Target Px 7

Return Potential 62.41%

Buy 83.3%

Hold 16.7%

Sell 0.0%

 

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Cooper Cos Inc. (COO) – Investment Thesis Positive Catalysts: – 84% of its revenues come from the sale of contact lenses, essentially a renewable

revenue stream. – Company is largely immune from the medtech tax, slower patient volumes, and

Medicare pressures.– It has been introducing new products and taking share, leveraging it to the bottom line.

Downside Risks:– Recent consecutive product recalls resulted in FDA warning letter and lobbying. – Avaira Toric needs to be re-approved by FDA. (Only 4% of Revenue).

Bloomberg Consensus:

Source: BMO Capital Med Tech Outlook 2012; Bloomberg Terminal COO US Equity ANR

Company COO

Last Px 92.8

1 Yr Target Px 107.75

Return Potential 16.11%

Buy 63.6%

Hold 36.4%

Sell 0.0%

 

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STAAR Surgical (STAA) – Investment Thesis Company is on track to deliver its first profitable year in over a

decade. Pending Visian Toric FDA approval for the US market.

– Have been approved for Europe and recently, Japan as well. – Analysts (BMO Capital, Bloomberg) expects approval this year.

Bloomberg consensus:

Source: BMO Capital Med Tech Outlook 2012; Bloomberg Terminal STAA US Equity ANR

Company STAA

Last Px 5.21

1 Yr Target Px 9

Return Potential 72.74%

Buy 57.1%

Hold 28.6%

Sell 14.3%

 

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Conclusion– Investment Thesis

Ophthalmic Goods Manufacturing Industry: Favorable

•Aging U.S. Population•Increased provision of health insurance (Obamacare)•Emerging markets gaining traction

Significant Demand Upside

•Increase trading multiples

Improvement in M&A Appetite