MarketWatch OptiStock.com provides investors with insight into the growing vision care market and information about public companies. Will Custom LASIK Boost Growth? Analysts Say Yes, But Also View Emerging Technologies and Favorable Demographics as Growth Generators What impact will the shift to custom LASIK have on procedures, and how will it compete with other refractive technologies? By Keith Croes. With commentary from SG Cowen, Harris Nesbitt Gerard and Wachovia Securities Even though refractive surgery procedures, and LASIK in particular, have declined in the past several years along with the economy, the pool of potential candidates is large. Industry consultant MarketScope estimates that approximately 50 million Americans (100 million procedures) are candidates for laser vision correction (LVC). The American Academy of Ophthalmology estimates that more than 63 million people in the U.S. are candidates for some type of refractive surgery. In 2001, only 4% of eligible patients had received laser vision correction. Today, penetration is around 5%. Analysts forecast modest growth from about 1.4 million Figure 1 Those Saying Will Definitely or Will Probably Have Refractive Surgery Have Increased Over 6 Months Ending June 2002 7.1% 6.4% 7.3% Will probably have vision correction surgery 6ME Jun 2001 (n=21,291) 6ME Jun 2002 (n=21,356) 6ME Jun 2003 (n=29,601) 2.3% 1.8% 3.0% Will definitely have vision correction surgery Source: June 2003 VisionWatch Refractive Report by Jobson Research. procedures in 2003 to 1.5 million in 2004. However, longer-term, peak annual procedures are forecasted to be approximately 2.5 million procedures. Improvements in technology, such as custom LASIK, hold the promise of re-building the sector, with MarketScope forecasting procedure growth of around 10% in the latter half of 2003. Several new technologies have begun to enter the refractive surgery market, too, bringing with them less invasive, reversible procedures and the ability to treat presbyopia (age-related loss of ability to focus close-up) and higher degrees of myopia (nearsightedness) and hyperopia (farsightedness), for which excimer laser procedures are not suitable. All of which promises to make the refractive surgery sector one of the most competitive and closely watched in the coming years, both for investors as well as for the future stock prices of competing companies. - 1 - SEPTEMBER 2003 Find out more about these leading companies in refractive surgery North America s premier eye surgery company, with an affiliated network of more than 12,500 optometrists and 1,000 ophthalmic surgeons. TLC also has nearly 60 branded centers across the U.S. and Canada, with more than 800,000 LASIK procedures using the company s equipment. A medical device company engaged in the research and development of treatments for human vision disorders that owns more than 140 domestic and international issued, published, and pending patents, the vast majority directed to methods, devices, and systems for the treatment of presbyopia, ocular hypertension, primary open angle glaucoma, macular degeneration and other eye disorders. The company operates freestanding centers in the U.S. under the name of LasikPlus, facilities in Canada, and one in Europe. As a leader in the refractive laser vision correction sector, the company provides the most advanced, state-of-the-art laser technology available and has performed well over 212,000 successful procedures.
What s Custom About Custom LASIK? In LASIK, a flap is made on the cornea, usually with a surgical instrument called a microkeratome. The flap is folded out of the way, and an excimer laser sculpts the corneal bed in a predetermined fashion to correct refractive errors. The flap is then returned to its original position, where it seals down without stitches. Traditional LASIK surgery is limited to treating loworder aberrations such as myopia, hyperopia, and astigmatism (asymmetry in the shape of the cornea). But custom LASIK surgery uses wavefront technology to Figure 2 Men and Younger Adults Are More Likely Than Their Counterparts to Express Interest in Refractive Surgery 6ME June 2003 (n=29,601) address both low-order and higher-order aberrations. Higher-order aberrations are irregularities, other than refractive errors, that can cause decreased contrast sensitivity or night vision, glare, shadows, and halos problems that have plagued LASIK in the past and drawn negative media attention. Wavefront mapping systems used in custom LASIK which are sold separately or as an adjunct to an excimer laser system project light rays into the eye and measure the reflected light. The resulting refractive map used in custom LASIK is as individual as a fingerprint. Table 1 lists the major manufacturers in the custom LASIK market and the FDA-approved indications for traditional and custom LASIK systems. Table 1 Indications for Custom and Traditional LASIK Total Male Female 18 to 34 35 to 44 7.3% 3.0% 8.8% 3.6% 6.0% 2.4% 12.3% 5.3% 6.6% 2.8% Alcon Bausch & Lomb VISX Custom LASIK LADARVision 4000 M: up to -7 D with or without A (0.5 D or less) Technolas 217A M: up to -7 D with or without A (-3.5 D) (pending FDA approval) Star S4 & Wavescan M: up to -6 D with or without A (up to -3 D) M= myopia H= hyperopia A= astigmatism D= diopter Traditional LASIK LADARVision M: -9 D or less with or without A (-0.5 to -3 D) H: +6 D or less with or without A (-6 D or less) Technolas 217A M: up to -12 D with or without A (-3 D or less) H: up to +4 D with or without A (up to +2 D) Star S2 M: -14 D or less with or without A (-0.5 to -5 D) H: +0.5 to +5 D with or without A (up to +3 D) 45 to 54 55 to 64 4.3% 1.3% 3.3% 1.2% Will probably Will definitely Figure 3 Those With Greater Annual Household Incomes Express Greater Interest in Refractive Surgery 6ME June 2003 (n=29,601) Total Less than $40k Female 7.3% 3.0% 6.9% 2.9% 7.7% 2.8% Female 7.4% 3.2% Total sample size for Figures 1-3: 50,000 Source: June 2003 VisionWatch Refractive Report by Jobson Research Base: Use vision correction, have not had refractive surgery and younger than 65. The lower risk and better odds for improved vision with custom LASIK offer the promise that more low and moderate myopes will opt for LASIK. To date, a far greater number of high myopes have undergone LASIK than moderate and low myopes. Because high myopes who can afford LASIK represent only 1.3 million Americans, according to Wachovia Securities, LASIK must relay on low myopes (24.5 million Americans) and mid-myopes (9.7 million Americans) to sustain and expand growth. According to industry consultant MarketScope, the average refraction of LASIK patients has declined from -4.5D to -3.5D. Companies Involved in Custom LASIK Although Alcon s (ACL) CustomCornea system received FDA approval in October 2002, the company was slow to commercialize the technology because of limited regulatory approval and supply problems. In the meantime, VISX (EYE) has stolen some of that momentum with the May 2003 FDA approval of its WaveScan Wavefront system. Bausch & Lomb s (BOL) Zyoptix wavefront system is still awaiting FDA approval, but in August 2003 reportedly received an approvable letter from the FDA. - 2 -
Lumenis (LUME) is also in the process of entering the U.S. custom LASIK market with the WaveLight Wavefront system. Each of the major U.S. players offers custom LASIK capabilities outside the country, together with a small number of other manufacturers. Analysts expect the major U.S. players to enjoy significant growth opportunities from custom LASIK. SG Cowen market analyst Peter Bye says VISX was upgraded from market perform to outperform earlier this year, based on the company s introduction of custom LASIK, its underlying fundamentals, and feedback from surgeons on the mix-shift from traditional to custom LASIK. Already, a higher-than-expected conversion to custom LASIK has occurred. In the second quarter, custom procedures represented an estimated 5% to 7% of VISX s total procedure volume. Analyst Ted Huber of Wachovia Securities estimates that VISX s stock price will rise this year in response to renewed market growth and the mix-shift to custom LASIK. Huber notes that VISX total procedures were up 20% in June after declines in April and May. He says, The mix-shift is driving volume growth by improving the risk/reward for LASIK. Already, many surgeons are performing custom LASIK in 30% to 50% of their LASIK patients, according to a Wachovia Securities report. Additionally, some published industry reports estimate a 30% to 35% mix-shift for custom LASIK for 2004 based on pent-up demand for the procedure. VISX management reports that approximately 70% of VISX s installed base is currently equipped for custom LASIK, representing more than 75% of VISX s procedure volume. Moving into 2004, analysts at SG Cowen estimate that 90% to 95% of VISX s U.S. installed base will be ready to provide even larger revenue enhancements. Refractive surgery is a small but important part of Bausch & Lomb s business, accounting for 7% of 2002 revenue. Earlier this year, its refractive surgery business received a boost when the Bausch & Lomb Technolas 217A Excimer Laser System received FDA approval for traditional LASIK treatment of hyperopia with astigmatism. Wachovia s Huber noted, If Bausch & Lomb gets [custom LASIK] approval, it doesn t necessarily mean bad news for VISX the company has almost 60% of the installed bases, which is extremely important to procedure volume. Bausch & Lomb s Robin Hughes, head of its refractive division, says that the company is preparing for FDA approval of the Zyoptix system. The hardware is in the process of being installed, and the software will be ready by the time of approval, says Hughes. Although analysts currently think a delay is not very likely, an earlier report from SG Cowen cautioned, Any significant delay in the Zyoptix approval process would undercut an anticipated 18% contribution to revenue growth from refractive surgery in 2004 and 2005. Refractive surgery accounts for a small segment of Alcon s business, which is third in the laser vision correction (LVC) category behind VISX and Bausch & Lomb. After declining throughout 2001, Alcon s refractive business has continued to stabilize: revenues were only $300,000 below forecasts by SG Cowen. Continued improvement is expected through the end of 2003 in response to an expected accelerated rollout of the CustomCornea system. Laser Vision Correction Centers Ride the Tide In August 2003, LCA-Vision (LCAV), which operates LASIKPlus centers, reported that custom LASIK is expected to be offered in all its U.S. markets by early September. In July, the company announced that it had raised its full-year 2003 diluted earnings-per-share guidance from $0.45 to $0.50 in response to procedure growth and the anticipated addition of custom LASIK. Total revenues rose 15% to $40.2 million for the sixmonth period ending June 30. Facilities are equipped with custom LASIK equipment from Alcon and VISX. For the six-month period ending June 30, TLC Vision (TLCV) reported paid laser procedure volumes of more than 98,000, compared with about 62,000 procedures for the same period in 2002. Revenues for the six-month period rose from $80.1 million in 2002 to $101.1 million for the same period in 2003. TLC Vision reported that custom LASIK had a 25% share of total LASIK procedures in the first month following full commercial availability Table 2 Stock Fundamentals and Analyst Recommendations for Major Players in Custom LASIK Surgery Price/Earnings Ratio* Price/Book Ratio* Price/Cash Flow Ratio* 200-Day Moving Average* YTD Change Stock Price** SG Cowen Recommendation Wachovia Securities Harris Nesbitt Gerard EYE 81.6 9.68 52.4 13.99 +97.3% Buy Outperform Under Perform BOL 26.7 2.13 10.6 35.95 +18.4% Outperform Neutral TLCV N/A 3.59 (15.7) 2.79 +448.2% LCAV 278.2 4.97 25.2 6.45 +537.0% ACL 32.5 13.53 23.1 42.86 +46.7% Strong Buy Market Perform *Source: Thomson Investor September 8, 2003 **Percentages as of September 8, 2003 (Yahoo! Finance) - 3 -
and was anticipating that mix-shift growing to 40% by October. This could be significant news as well for VISX: TLC, the largest provider in North America, is VISX s largest single customer. Table 3 Number of Laser Vision Correction Procedures in Sample of 100,000 People Requiring Vision Correction Custom LASIK: The International Market Number of refractive procedures June 2001 179.1 September 2001 138.3 December 2001 146.9 March 2002 145.5 June 2002 124.4 September 2002 145.7 December 2002 145.7 March 2003 184.5 June 2003 156.8 YTD 2003 324.7 Source: Jobson VisionWatch Refractive Report, June 2003 While VISX remains the global leader in refractive surgery, the international market is far less important in terms of revenue. This is due to the absence of procedure fee revenues for traditional LASIK in the international market. Unlike their colleagues overseas, U.S. surgeons pay VISX a $100 per eye fee for each traditional LASIK procedure. Each of the major LVC players is trying to establish a similar business model overseas, with a procedure fee of around $100 per eye for custom LASIK procedures. According to Wachovia s Huber, It s really too early to know how the business model ($100/eye) for custom LASIK will do. He also says that the international market is relatively mature, and unit placements appear to be on the decline. International revenues for VISX are expected to remain at approximately 17% of total sales for 2003 and 2004. Outside the United States, Hughes says, Bausch & Lomb has greater experience and customer acceptance of custom LASIK than any other company. We ve performed 100,000 procedures of the total 120,000 procedures performed globally, he notes. According to Huber, Bausch and Lomb seems to be number one in custom LASIK and leads global presence with 217 base units. However, it s not likely to unseat VISX, since investors mostly focus on the U.S. market. Though still awaiting FDA approval in the United States, Bausch & Lomb has been selling its Zyoptix in Europe for more than two years. Outside the United States, Bausch & Lomb charges a $50 to $100 premium for its custom LASIK technology. Harris Nesbitt Gerard reports that increased sales of Zyoptix customized ablation cards reflect building momentum and interest in the technology. International revenues are expected to continue increasing in 2004. How Will Custom LASIK Drive Growth? While a number of factors may ultimately drive growth, industry experts and analysts agree that four factors above all will prevail: 1. Renewed consumer interest in LASIK surgery 2. Increased marketing by surgeons to consumers about the advantages of custom LASIK 3. Greater anticipated shift in the mix to custom from traditional LASIK 4. More profitable for surgeons to perform custom LASIK Surgeon advertising declined during 2001 and 2002 along with the number of LASIK procedures. With new premium pricing opportunities afforded by custom LASIK, that trend is expected to reverse itself in 2003 and going forward, drive incremental patients. Additionally, the negative press that accompanied LASIK in 2001 and 2002 appears to have been overcome to an extent with the generally positive reports about custom LASIK. According to a June 2003 VisionWatch Refractive Report from Jobson Research that tracked vision correction trends in 100,000 Americans who require vision correction, the number of refractive procedures was on the rise in the first two quarters of 2003. After successive quarters in 2001 and 2002 in which refractive procedures totaled fewer than 147 per 100,000 in each quarter, LVC appears to be experiencing a slight rebound, with 185 procedures in 1Q03 and 157 in 2Q03 per 100,000 respondents (Table 3). The distribution of common vision problems in the U.S. population is listed in Table 4. Table 4 Percentage of Common Vision Problems in the U.S. Population Problem % of U.S. Population Prevalence of myopia 25% Prevalence of hyperopia 16% Prevalence of astigmatism 25% Source: Vision Council of America, April 2003 Of the FDA approvals for custom LASIK (Table 1), VISX has the broadest range of indications, treating myopia up to -6 D with up to 3 D of astigmatism, followed by Alcon, which has approval for myopia up to -7 D, but with only up to 0.5 D of astigmatism. VISX s custom LASIK approval covers roughly two-thirds of the traditional LASIK population. According to Wachovia s Huber, the major players all have clinical trials in the works to expand the candidate population with broader approvals. - 4 -
Surgeons Eyeing Alternatives to LASIK In a survey published in the July issue of Review of Ophthalmology, 79% of surgeons indicated they would use LASIK to treat low myopes (up to -3 D). For high myopes (around -11 D), however, 62% would opt for clear-lens extraction (CLE) and intraocular lens (IOL) implantation. For correction of a mild hyperope (around +3 D), 75% of surgeons said they were most comfortable with LASIK. However, with greater hyperopic refractive errors (+5 D or higher), almost 70% said they would choose either CLE/IOL or a phakic lens because of the unpredictability of the LASIK procedure in this range. For treatment of presbyopia, 30% of surgeons would use bifocal spectacles and 33% of surgeons would use LASIK monovision for a 45-year-old myopic presbyope. The survey found that 19% of the ophthalmologists would use multifocal contact lenses, a decrease from 23%, and 5% would use conductive keratoplasty (CK), an increase from 2% the previous year. Leading surgeons are predicting that the increased interest in lens-based refractive surgery will ultimately lead to the fusion of cataract and refractive surgeries. Lens-based refractive surgery has several obvious advantages: the accuracy of IOLs, the reversibility of the procedure, the possibility of preserving accommodation in young patients and restoring it in presbyopes with accommodative IOLs, the preservation of the cornea and the short learning curve for experienced cataract surgeons. Many industry experts predict that refractive lensectomy will become a common procedure for patients with high myopia. Epi-LASIK. Epithelial LASIK uses a blunt keratome to shave off the epithelium only it differs from LASIK in that there is no mechanical dissection of the stroma. The formation of a flap of epithelium still bound to a basement membrane offers the promise of better survival of the epithelial cells than with LASEK, and possibly similar postoperative comfort to LASIK, without the risks incurred in cutting into the stroma. Whereas LASEK uses alcohol to loosen the epithelium and create a cleavage plane within the epithelial basement membrane, Epi- LASIK strives to create a cleavage plane beneath the epithelial basement while avoiding the toxicity of alcohol so that the flap and its underlying basement membrane will rapidly heal, thereby promoting quick visual recovery. In the unlikely event of a poor-quality epithelial flap, the surgeon simply discards the flap and converts the procedure to a standard PRK. CIBA Vision, a division of Novartis (NVS), received 501(K) approval from the FDA in September 2003 for its Centurion SES EpiEdge epikeratome for use in Epi-LASIK procedures using the CIBA Centurion SES System, which was introduced in April 2003. Initial results indicate the potential that many flap complications of LASIK will be reduced. Cutting-Edge Alternative Surgical Technologies Expand the Market Several new surgical technologies are entering the refractive surgery market. However, analysts do not perceive these as significant competition to LVC, as they believe that most consumers who choose these new technologies will be new patients whose refractive errors are out of range of conventional or custom LVC. According to SG Cowen s Bye, the core of the refractive market will remain with excimer lasers. Among these new refractive technologies are phakic IOLs (intraocular lenses), which are geared toward higher myopes for whom LVC is not suitable. One potential direct threat to LVC may be conductive keratoplasty (CK), which is indicated for moderate hyperopes, who number more than 40 million in the United States. CK can also be used for over- or under-correction following LASIK, and is used off-label by surgeons to treat presbyopia. However, since consumers know relatively little about these new technologies, they represent little threat to LVC revenues for the time being, analysts believe. Jobson s VisionWatch study found that of the 100,000 people in their survey, 74% were aware of LASIK, compared with 41% aware of radial keratotomy, 33% aware of laser thermal keratoplasty (LTK), 22% aware of Intacs, and 21% aware of photorefractive keratectomy. Even so, as more surgeons explore refractive alternatives to LVC, these alternatives will be a growth generator in the near term. Conductive keratoplasty Approvals (year) FDA (2002); CE Mark Intacs FDA (1999) IntraLasik Table 5 Approvals for Alternative Refractive Procedures Laser thermal keratoplasty Phakic intraocular lens FDA; CE Mark FDA (2000); CE Mark CE Mark; Canada Surgery for presbyopia CE Mark (2003) Source: Various industry resources. Phakic Intraocular Lenses (IOLs): New Hope for High Myopes. Phakic IOLs are conceptually similar to the IOLs used in cataract surgery, but they are implanted without removing the eye s natural lens. They could see widespread adoption, because surgeons are already surgically skilled in post-cataract lens implantation. In August, Ophtec and Advanced Medical Optics (AVO) announced that the FDA had granted expedited review for the Artisan/Verisyse phakic IOL. The premarket approval (PMA) application is for the correction of myopia between -5 D and -20 D in phakic eyes. Future indications may include farsightedness, astigmatism, and cataracts, which already have CE Mark approval in Europe. - 5 -
STAAR Surgical (STAA), maker of a type of phakic IOL called the Implantable Contact Lens (ICL), filed for FDA approval in May 2003 for treatment of myopia. Harris Nesbitt Gerard considers the ICL a potentially significant opportunity, with potential for $7.7 billion in U.S. revenue. FDA approval for the ICL could come as soon as 1Q04. Privately held Calhoun Vision has developed a laseradjustable IOL, which may have applications in refractive surgery. A laser can change the IOL s refractive strength while in the eye. Calhoun is anticipating CE Mark approval in Europe and the beginning of U.S. clinical trials by the end of 2003. CIBA Vision offers the PRL (phakic refractive lens), the Vivarte, and the Vivarte Presbyopic phakic refractive lens. Both the PRL and the Vivarte have CE Mark approval with commercial availability in Europe and are undergoing clinical trials in the United States. Other developers of phakic IOLs include C&C Vision (CrystaLens AT-45) and Human Optics (1CU). The CrystaLens recently received panel recommendation approval from the FDA s Ophthalmic Device Panel for restoring full range of vision following cataract surgery. According to Stephen Kilmer of TLC, phakic IOLs have a relatively small market potential perhaps 1% of myopes. However, he says, as part of TLC s general philosophy of being first to bring new technology to consumers, the ICL was made available in Canada as early as 1998. Bausch & Lomb s Hughes comments, Although phakic IOLs have been in the international market for a significant period, they have not gained any broad-scale acceptance. According to him, the procedure could be used for a much broader population, but for now it is reserved for less standard (higher) vision corrections. Conductive Keratoplasty: Solutions for Hyperopes. Refractec, Inc. received FDA approval in April 2002 for its CK procedure, indicated for hyperopia. The procedure uses controlled releases of radio frequency energy to shrink collagen in the periphery of the cornea, thus steeping the cornea overall. Future indications are being investigated for treating astigmatism and over- or undercorrection following LASIK. According to Refractec, each unit costs $49,000, and disposable packages are $150 each. Consumer cost is currently $1,500 for each procedure. Market potential is broad. Of the 86 million Americans who are age 40 and older, more than 40 million are estimated to have moderate hyperopia (+0.75 to + 3 D). After 45, almost everyone develops presbyopia, which also can be treated with CK, though that indication is not yet FDA-approved. The company said a Phase III clinical trial to treat presbyopia has been completed; approval could come in the first half of 2004. The privately held company closed another round of financing with an investor group in June. IntraLase FS Laser and IntraLASIK: Safety and Precision. IntraLASIK is a variation of LASIK using the IntraLase FS femtosecond laser instead of a microkeratome blade to cut the corneal flap. As in regular LASIK, an excimer laser then shapes the underlying corneal tissue. IntraLase announced the placement of 22 systems during 2Q03, bringing total placement to 64. No severe complications have been recorded in 69,000 IntraLASIK procedures in the U.S., an improvement over traditional microkeratome procedures, which have a 1% to 3% incidence of complications. LASIK surgery sometimes requires a patient to undergo retreatment. With the IntraLase system, fewer retreatments are required about 4% compared with 10% by the microkeratome method. In addition, patients whose LASIK procedure employed the IntraLase system have had a greater likelihood of achieving 20/20 vision or better. Privately held IntraLase, which gained FDA approval in 2002, expects the system to be used for more than 90,000 procedures in 2003, with 96 sited systems by the end of the year. Each system sells for approximately $400,000. IntraLase claims that the laser system is a revenue-enhancer for surgeons: typically, surgeons charge a premium of $250 to $500 per eye for an Intralase procedure, averaging $286. The company has obtained its first international distribution agreements, with placement in Japan and shipments to Korea anticipated for September. A European launch is expected for early 2004. Presbyopia: The Next Frontier of Refractive Surgery? Presbyopia is the inability of the aging lens of the eye to accommodate for close vision. Presbyopia is a main target of Refocus Group (RFCG), which makes the PresVIEW Scleral Incision System and related PresVIEW Scleral Spacing Procedure (SSP) surgical devices. In July, Refocus received CE Mark approval for treating presbyopia and open-angle glaucoma using the PresVIEW SSP. To treat presbyopia, surgeons embed small plastic implants into the sclera of the eye, which is meant to restore the focus muscles so that close objects can once again be seen clearly. Because the surgery is in the periphery and gently stretches tissue, rather than removes it as LASIK does, the company believes its Surgical Spacing Procedure will prove in upcoming clinical trials to be both very safe and effective and if necessary, reversible. Presbyopia is a large, growing market: The baby-boomer generation, aged 35 to 54, currently makes up more than 30% of the U.S. population more than 80 million Americans, according to the Census Bureau. Compared with LASIK, if we assume similar patient procedural fees - 6 -
paid to physicians and a similar number of procedures as a percent of the relevant target population, we can envision a $2.5 billion retail market in patient fees paid to doctors for presbyopia annually in the U.S., explains Terence A. Walts, Refocus Group s president and CEO. Refocus has formed a strategic alliance with CIBA Vision, which plans a commercial launch of the PresVIEW SSP in targeted European markets by the end of 2003. The company has also recently announced that the procedure for presbyopia is targeted for U.S. Phase II clinical trials by the end of 2003, subject to FDA approval. The company has 68 patents worldwide, specifically on its PresVIEW implant device and Surgical Spacing Procedure. Presbyopia also offers another potential market for refractive lensectomy. Industry observers believe that the baby boomers who had LASIK in the 1990s will soon want something for their poor accommodation from distance to near. With a large segment of the population entering presbyopia in the next 10 years, some surgeons predict that refractive lensectomy will boom and, eventually, replace cataract surgery. In fact, refractive lensectomy may supersede all other refractive procedures. There is a financial incentive as well: Reimbursement for refractive lensectomy is several times what Medicare pays for cataract surgery and what patients pay for LASIK, so refractive lensectomy will become very attractive to surgeons. Established Technologies Define Their Niche Several technologies continue to exist within the ophthalmic market that have defined niches but have not achieved the broad-market successes of other refractive procedures, primarily to some degree due to their limited approval ranges. Intacs Corneal Rings Focus on Keratoconus. Intacs are implants that alter the shape of the cornea without disturbing the central optical zone or removing corneal tissue. Intacs are also reversible in that they can be removed with minimal lasting effect to the cornea. More than 20 million U.S. adults have myopic error within the approved indication: -1 to -3 D and astigmatism of 1 diopter or less. On the market since 1999, Intacs have never seriously challenged LASIK. Recently, however, the product has gained momentum as a treatment for keratoconus, a gradual thinning and bulging of the cornea, which often becomes slightly conical in shape. Manufacturer Addition Technology Inc. (ATI) is seeking a Humanitarian Device Exception from the FDA, which would allow marketing of Intacs for treatment of an estimated 272,000 Americans with this potentially blinding disease. Physician-sponsored clinical studies to investigate Intacs treatment of keratoconus have been underway in Europe since 1997, and ATI plans to apply this year for formal CE Mark approval. Laser Thermal Keratoplasty. LTK is a less invasive procedure than LASIK for the treatment of hyperopia: no microkeratome incisions, laser ablations, or removal of corneal tissue. The surgeon gently applies heat from a laser to collagen in the periphery of the cornea. The collagen shrinks, and the central curve of the cornea is steepened. Numbers for actual systems placed in the market are difficult to measure, but analysts speculate that it is very limited (the system s founder, Sunrise Technologies, declared bankruptcy in March 2002). The approval ranges represent only a fraction of the larger hyperopic market, so it s doubtful that surgeons would see the need for such a specialized application. In addition, current LASIK systems are approved for a broader range of treatment for hyperopia. Summary Though anticipated to bring significant growth to the refractive surgery market, the trend toward custom LASIK will not reach full potential until 2004 or 2005, say analysts. Slight increases have been noted in U.S. LASIK procedures, coincidental with an acceleration of availability and consumer awareness of custom LASIK. In the meantime, new technologies addressing promising markets such as presbyopia, myopia and hyperopia should provide an additional spark for overall long-term growth in the refractive surgery market and expand the universe of potential patients. Company Profiles TLC Vision (TLCV): After an unprecedented launch of custom LASIK, in which procedures climbed from 62,200 in the first six months of 2002 to 98,100 procedures in the first six months of 2003, TLC Vision is entering what has been historically its seasonally weaker second half of the year. In an August conference call with investors, management explained that if paid procedure volumes in the second half of 2003 are 5% to 10% lower than in the first half, it expects $20 million in earnings (EBITDA) for 2003. On the other hand, if paid procedure volume were equal to the number of procedures in the first half of the year, its expected EBITDA would be approximately $30 million (based on a total procedure volume of approximately 196,000). Management went on to say that they anticipate this outcome, given the continued momentum of custom LASIK. As for other new refractive surgery technologies, TLC s Stephen Kilmer said that TLC has always been the first to adopt new technologies, so instead of competing with TLC, new technological alternatives to LASIK would be added and complement their offerings. It fits into our strategy for providing whatever technologies are necessary to satisfy our patients and doctors, said Kilmer. - 7 -
Refocus Group (RCFG): Refocus Group s PresVIEW SSP represents a significant improvement over the original procedure advanced by predecessor company Presby Corp. The original procedure, a simplified and largely manual surgical procedure and protocol, was updated by Refocus to include preoperative ultrasound mapping and the use of a mechanical incision device. Because the procedure is reversible, Refocus believes it has a strong advantage regarding adoption rates among patients seeking a less invasive procedure. Additionally, PresVIEW SSP faces no direct competition, since LVC techniques are not effective for presbyopia. In fact, the PresVIEW technique can be performed on former LVC patients when these individuals develop presbyopia. Possible competitors to PresView, accommodating IOLs, appear to offer limited accommodation and represent a higher risk and less reversibility. LCA-Vision (LCAV): In a continuing drive to expand its stable of freestanding LVC centers, LCA-Vision opened its 33rd U.S. facility in the Indianapolis metropolitan area, which reflects the growing demand for custom LASIK. Several other facilities are scheduled to open later this year across the country. LCA-Vision also owns and operates two clinics in Canada, plus a joint venture in Europe. The company s team of physicians is currently in training for the launch of custom LASIK technology, expected in all home markets by early September. LCA- Vision is capitalizing on a strong financial and operating performance in 1Q03. According to Chairman and CEO Stephen Joffe, as price realization per procedure continues to rise, LCA-Vision continues to focus squarely on containing costs. Copyright 2003 by Access Media Group, LLC. OptiStock is a registered service mark of Access Media Group, LLC. For more information on the vision care market visit www.optistock.com - 8 -