Medical Device Daily Washington Editor

The laser vision correction (LVC) market has been the source of rumblings for some time, due in part to the fact that two of the leading firms in this segment, Advanced Medical Optics (AMO; Santa Ana, California) and Intralase (Irvine, California), each have a substantial market segment in their respective spheres and their products would seem nicely complementary.

Supporting that thinking, AMO yesterday reported that it is acquiring Intralase for $808 million in cash, or $25 a share, and in a conference call explained the underlying dynamics.

Intralase leads the market in short-pulse lasers that are seen as the standard of care for creating a corneal flap during LASIK procedures, a substantial surgical improvement over blade-induced flap creation. In this medical application, the so-called femtosecond (an interim of a quadrillionth of a second) laser emits as many as 60,000 per second, fine enough to allow atom-by-atom surgical resection of tissue and presenting a huge advantage over the surgeon’s microkeratome.

For its part, AMO is a leader in wavefront LASIK technology, with its Wavescan machines providing much of the drive for its recent growth. However, the firm said it intends to continue servicing and selling its Amadeus line of mechanical, computer-driven microkeratomes.

Jim Mazzo, who took the title of chairman of the board of directors of AMO last May 25, in addition to his duties as the firm’s president/CEO, said that the move “uniquely positions AMO as the complete refractive solution and further establishes AMO as the global refractive leader and definitive source for refractive innovation and expertise.”

He noted that practitioners would benefit because the new company will be able to “optimize our installed base and offer surgeons a comprehensive system for providing custom all-laser LASIK that delivers superior outcomes and breaks down consumer fear barriers.”

He also pitched the merger as boosting the company’s efforts to grow by promoting the “adoption of a per-procedure model” of revenue generation.

“Our model is driven by high-margin revenue streams, and we’ve proved ourselves at collecting” fees in a number of countries, Mazzo said.

He said the new company will offer surgeons a key benefit that will translate into greater sales volume, that of “a reduction in re-treatment rates” afforded by the convergence of both technologies in offices that do not currently employ both firms’ offerings.

Part of Mazzo’s confidence is based on overseas sales of AMO’s products. He said that non-U.S. revenues jumped from $2.5 million in 1Q06 of the company’s fiscal year to $3.7 million in the third quarter.

Mazzo also pointed out that “providers spend $100 million a year” to draw patients to their clinics. “We intend to take a leading role in crafting a coherent marketing message,” he said, that emphasizes the safety and efficacy of the procedure rather than the provider.

The potential synergies are also obvious.

Mazzo estimated that 40% of Interlase’s customers are also AMO customers, and 20% of offices with AMO products also purchase Interlase offerings.

Randy Meier, executive VP of operations at AMO, said he expects the transaction to close by 2Q of ‘07, pending regulatory approval and shareholder consent. He noted that the new firm will “provide superior, differentiated technologies that serve premium markets and deliver high margins,” adding that it will devote its R&D efforts to “new innovations with market-changing potential” and will seek to use the existing distribution networks of both companies to further boost overseas sales.

The effort is underwritten by “committed, all-bank financing provided by UBS (Zurich), Bank of America (Charlotte, North Carolina) and Goldman Sachs (New York),” Meier said. The financing package is in the form of a combination revolver and term loan that the firm can pre-pay. The new company will incur no financing fees until the transaction closes.

In the time between signing the deal and closing, AMO will amend and restate its revolver loan, raise $200 to $300 million in the syndicated bank market and issue $200 to $300 million in high-yield notes. According to the agreement, any such high-yield transaction will have to close simultaneously with the IntraLase transaction.

As for the competition, Mazzo said, “You have to assume that others will come into this marketplace, but we feel that they’re not comparable” in terms of the quality of the offerings that the two companies currently have in their portfolios.

He said that AMO’s technology “has always moved ahead of what others thought they would be seeing” and that by the time other firms get in “we will have placed a lot of lasers around the world.” Mazzo insisted: “We have a fundamental IP and it’s hard to see how other firms can get around that.”

He added that for the new firm, pricing “continues to be premium” but that “the $100 million of marketing has not been well spent. It has not grown the market.”

The goal of the new firm is to make LASIK the standard of care and to make sure that consumers get that message, he said. And although the domestic market may end up staying flat, the new firm may still be able to grow.

“Our penetration of that market is what we expect to grow,” Mazzo said.

The market liked the merger move. At 4 p.m. EST yesterday, AMO stock was up $1.44 at $35.43 on the big board. Also at 4 p.m., Intralase stock on the NASDAQ was up $2.28 to $24.51.