Aging baby boomers drive mergers in ophthalmic industry

Recent sales and collaborations have put several companies in a position to take advantage of opportunities presented by the aging demographic.

The baby boomer generation continues to make its mark on all aspects of society, not least the ophthalmic business market. According to industry experts, this group, the generation born after World War II, is one of the motivators behind a recent series of acquisitions, mergers and collaborations in the ophthalmic industry.

“The baby boomers have had a huge impact everywhere they go in society. As they age, this presence is going to be felt everywhere in health care, especially in the eye doctor’s office. It’s going to be big,” Shareef Mahdavi, a marketing consultant in the ophthalmic industry, told Ocular Surgery News.

According to the U.S. Census Bureau, “our global population is aging, and aging at an unprecedented rate.” The increase in the numbers and proportion of the elderly is “primarily the result of high fertility after World War II,” a 2001 Census Bureau report said.

Several companies in the ophthalmic industry appear to be preparing for this bolus of older patients through mergers and collaborations focusing on the needs of this growing niche market.

“The first of 78 million [U.S.] baby boomers will reach 60 years of age soon, and what we see is that as people age, their eye care needs increase, not decrease, and that’s across the spectrum, whether it’s cataract surgery, refractive surgery, glaucoma, age-related macular degeneration. Clearly with that as the dynamic, there is a lot of interest both within ophthalmology and from other health care companies … looking at ophthalmology and eye care as an opportunity for them to either enhance their product portfolios or grow,” Mr. Mahdavi said.

Spate of activity

The past year has seen a spate of notable mergers, sales and collaborations in the ophthalmic industry, capped off by the announcement in November of Advanced Medical Optics’ acquisition of Visx Inc. in a stock and cash transaction worth $1.27 billion. With this acquisition, AMO expanded its portfolio of refractive technologies with the addition of Visx’s Star excimer laser franchise and CustomVue system.

The purchase continued an expansion that AMO began in April when the company added the Healon line of viscoelastic products, the CeeOn and Tecnis IOLs and the Baerveldt glaucoma shunt to its portfolio through the purchase of Pfizer’s surgical ophthalmology business, which had previously been developed by Pharmacia.

Other transactions last year included two expansions by Carl Zeiss Meditec: the company’s purchase of Laser Diagnostic Technologies and its offer to buy a majority of shares of IOLTECH.

IOLTECH had earlier in the year purchased most of CIBA Vision’s ophthalmic surgical business, notably the company’s phakic presbyopic IOL. CIBA’s epikeratome device for epi-LASIK was sold shortly thereafter to Norwood Abbey of Australia.

Also in the news in late 2004 was the approval of Macugen (pegaptanib sodium injection, Eyetech Pharmaceuticals, Pfizer), a product not of a merger but of a collaboration between Eyetech and drug giant Pfizer.

All of this activity suggests that companies are positioning themselves in the market to provide for the needs of older eye care patients by diversifying to target a variety of eye problems.

A logical step

AMO’s purchase of Pfizer’s surgical business gives the company the Tecnis monofocal and multifocal IOLs. The Tecnis multifocal, together with the Array multifocal already in AMO’s portfolio and other presbyopic products the company has in development, gives AMO a number of surgical modalities for addressing presbyopia, a problem that is already affecting the youngest members of the baby boomer generation. The Pfizer purchase also brought AMO its first entry into the glaucoma surgical field with the Baerveldt device.

Doug Post, now the president of the Americas region for AMO, was president and chief operating officer of Visx before the companies joined. At the time of the purchase, he commented on the opportunities brought forward by the combination of the two companies’ laser and IOL franchises.

“Presbyopia has been attractive to many companies for a long time. We believe going forward it may be a combination of those two technologies [laser and IOL] that offers a broad presbyopia solution,” Mr. Post said in an interview last year with Ocular Surgery News.

According to Jennifer Hsui, an industry analyst with RBC Capital Markets whose coverage of the ophthalmic market is focused exclusively on AMO and Visx, the acquisition of the laser company by AMO was a logical step, even though it caught most analysts by surprise.

“The acquisition of Visx was a surprise to the Street, not because it doesn’t fit in with the model, but because AMO is a very young company, … and I think that because of that, people were not anticipating another big acquisition so soon [after the purchase of Pfizer’s ophthalmic surgical business]. But after thinking about it and after getting past the initial shock, most people view the acquisition as making a lot of sense and see that the two businesses really fit in well together. In this case, it was a nice combination because laser vision correction isn’t something that AMO previously participated in,” Ms. Hsui said in an interview with Ocular Surgery News.

According to some market analysts, mergers like this one exemplify a trend in market consolidation in which companies are attempting to diversify their operations in a market that is rapidly evolving.

“You’ve seen the whole sector in ophthalmology companies have such great growth opportunities the last 18 to 24 months and still have good secular growth, and you are seeing these companies combine so they more effectively tackle those market opportunities on a global scale,” said Chris Cooley, a market analyst for FTN Midwest Research, in an interview.

Market evolution

The recent activity in the ophthalmic market marks the concurrence of several events: an improvement in the global economy after a period of downturn, a resulting resurgence of interest in refractive surgery and the arrival of the first wave of baby boomers into their 60s. This demographic group is at the beginning of a period when its eye care needs will increase, starting with the onset of presbyopia and continuing with the age-related increases in cataract, glaucoma and age-related macular degeneration.

These developments also coincide with an upswing in the business cycle that hits the medical technology market every 4 to 5 years, according to industry analysts.

“Companies that have basically gone from concept to commercialization of their early stage technology are companies that are reaching the end of an existing growth period needing some new products or new markets to address, and they go out and acquire growth,” Mr. Cooley explained.

As companies develop their technologies and increase their capital reserves, it becomes increasingly plausible for these companies to acquire or to consolidate with smaller companies in order to expand their product lines, he said.

“What we are seeing right now is a consolidation in a market, which for the most part is very fragmented, and we are also seeing companies who have either a stock price or cash in their pocket to be able to make the acquisitions that they are doing,” Joanne Wuensch, an analyst for Harris Nesbitt, said.

Ms. Wuensch, who has been covering the medical technology market since 1996, explained that the market goes through a recurrent pattern of consolidation and pause.

As she described it, Pharmacia was in ascendance in 2000 when it merged with Monsanto to create a company with a reported market capitalization of more than $50 billion. Then Pfizer bought that merged company in 2003.

Similarly, Visx,before merging with AMO, was a “cult” stock in the late 1990s that enjoyed a rapid growth rate, she said. But the company fell out of favor with the market, along with other refractive-surgery-related stocks, during the economic downturn beginning in 2000.

“Visx ran into a laser vision correction market which was in transition from the earlier doctors to the higher levels of penetration, and it also ran into a consumer cycle where the [elective-surgery market] was in a recession, and individuals were not paying out of pocket for laser vision correction surgery,” Ms. Wuensch explained.

After that period of downturn came a period of market expansion in 2001 and 2002, when Alcon was spun off from Nestlé and AMO was spun off from Allergan, creating a broader group of ophthalmic companies, she said.

“AMO was an unknown, Alcon was an unknown [to the stock markets], and some of what turned the industry around was having those two stocks go public and having the consumer confidence and overall economy turn,” Ms. Wuensch said.

Research and development

The industry appears now to be reaching a stage in which developments in pharmaceuticals and technologies are arriving just in time to meet the demands of one of the largest demographic groups of consumers the industry has known.

Research and development activities are high priorities for the newly merged ophthalmic entities as they take their early post-merger steps, according to Mr. Mahdavi.

“Chronic diseases such as glaucoma and macular degeneration are going to have huge incidences in the [aging] population, so you are going to see a lot of dollars being spent on trying to come up with solutions in those areas, whether they are pharmacological, surgical or what I call consumable,” Mr. Mahdavi said.

The wave of baby boomers is large and long, with the oldest members of the generation about to turn 60 and the youngest members almost 20 years behind them. (Demographers vary slightly on their definitions of the baby boom, but many label it as beginning with babies born in 1946 and ending with those born in 1964.) Companies developing products to serve the needs of this aging generation will thus have a long window of time to recap their investments, Mr. Mahdavi noted.

“I think you are looking at a 20- to 30-year tailwind,” he said.

Presbyopia developments

Dan McWard is vice president of the relatively new company Visiogen, but he has been in the ophthalmic industry for many years and has seen it from a number of perspectives. In his current position, he is keeping watch on the market from the perspective of developments in the anterior segment of the eye. Visiogen is developing the Synchrony dual-optic accommodating IOL, potentially to serve the growing population of presbyopes.

Presbyopia is becoming a major force for direction and change in the market, Mr. McWard said.

“Companies will enter into this potentially large presbyopic category, and that will expand ophthalmology for a good 20-some years. It will become another very large market in addition to cataract for them,” Mr. McWard told Ocular Surgery News.

Many have noted that ophthalmology is experiencing a melding of cataract and refractive surgery, and the development of multifocal and accommodative IOLs to address presbyopia is one element of this trend, he said.

In addition to his own company’s Synchrony IOL, Mr. McWard said, there are several other new IOL products available or in development that could be appropriate for correction of presbyopia through refractive lens exchange. The Crystalens accommodative IOL is available from eyeonics. AMO has the Tecnis and ReZoom multifocal IOLs in the pipeline, in addition to its existing Array lens. Alcon has the ReStor apodized diffractive pseudoaccommodative IOL in development.

These and other products could help to expand the surgical possibilities of the IOL beyond the correction of cataract, Mr. McWard said.

“The industry is definitely diversifying away from the cataract, as it invests in refractive IOLs,” he said.

AMD developments

Dan Myers, president of the recently formed Alimera Sciences, is another veteran of the ophthalmic industry who has worked for a number of companies in the past, including IOLab, Allergan and CIBA Vision. His current company developed Soothe over-the-counter eye drops, aimed at the increasing numbers of dry eye patients.

Mr. Myers said he sees tremendous potential for growth in the ophthalmic pharmaceutical market. Speaking with the experience of a long-time participant in the industry, he said posterior segment treatments are becoming a major catalyst for investors to devote development money to ophthalmology.

“Drug delivery and the ability to get drugs to the back of the eye has attracted a new group of investors,” Mr. Myers said in an interview with Ocular Surgery News. “You see some of the investment money flowing into ophthalmology, I think primarily because of that.”

Pfizer went in this direction last year when it sold its ophthalmic surgical operations, which mostly pertained to anterior segment disease, to AMO, and shifted its ophthalmic focus to pharmaceutical developments for the back of the eye.

In an interview with Ocular Surgery News last year regarding the sale, Pfizer’s chairman and chief executive officer, Hank McKinnel, said, “This agreement is an ideal strategic fit for AMO and allows Pfizer to enhance its focus in other areas of ophthalmology, such as glaucoma and macular degeneration.”

Pfizer’s collaboration with Eyetech in the development of Macugen recently resulted in the U.S. regulatory approval of the drug for the treatment of wet AMD, one of the leading causes of blindness in the elderly in the developed world. According to Eyetech, 200,000 new cases of wet AMD arise each year in the United States alone, making the drug not only a much-needed treatment but a good business venture.

Photodynamic therapy with Visudyne (verteporfin for injection, QLT/Novartis) has become the leading treatment for certain forms of AMD in the years since its introduction in the late 1990s. QLT reported $448 million in worldwide sales of the drug in 2004. The size of this sales figure gives an idea of why so many other companies are interested in developing treatments for AMD.

“Drug delivery is going to continue to be a key issue. I think we are going to see more and more research and work in the back of the eye as the population ages,” Mr. Myers said. “I think we still have a lot of exciting things to look forward to.”

Other drugs in the pipeline for the treatment of AMD include Photrex (rostaporfin, Miravant Medical Technologies) for photodynamic therapy, Lucentis (ranibizumab) from Genentech, Retaane (anecortave acetate) from Alcon and squalamine from Genaera.

Venture capital growth

The changes in the ophthalmic industry do not stop with mergers and acquisitions. The variety of opportunities for research and development, coupled with the consolidations of larger companies and an improving economy, present room for small startup companies such as Alimera Sciences, Mr. Myers said.

“While big pharma may have huge opportunities in the back of the eye, … there are still a lot of opportunities to bring better drugs to patients in the anterior segment, better ways to bring delivery of compounds to the eye. So the fact that you are seeing a few new companies in the industry as well as new structures speaks to the fact that there are still a lot of places to focus on,” Mr. Myers said.

As the global economy has begun to emerge from recession, an increase in venture capital has fueled not only the research ventures of existing companies but also the creation of new companies. According to Venture One, a unit of Dow Jones Newswires, worldwide venture-capital financing in 2004 increased by 13% over the same period in 2003. All told, almost $19 billion was invested in more than2,300 transactions in the United States, Europe and Israel.

“This year was one of rebuilding in the venture-capital industry, as investors worldwide put substantial sums into early-stage investments and increased their fund-raising activities,” said Gil Forer, global leader of the Venture Capital Advisory Group at Ernst & Young.

According to a press release from Venture One, health care companies dominated initial public offerings in 2004, accounting for 39 of 68 completed venture-backed IPOs.

What makes this notable is that, according to Mr. Mahdavi, venture capital seemed to disappear up from 2000 until 2003.

“I read recently that more was put out in the fourth quarter last year than in the entire four previous quarters combined,” he said.

Mr. McWard noted that the ophthalmic industry is experiencing such growth at the moment that companies not previously associated with the industry are beginning to invest in ophthalmic research and development.

“Boston Scientific and Medtronic are very large cardiology companies. Both of them recently have invested heavily in the ophthalmology area,” Mr. McWard said.

In January, Boston Scientific invested $20 million in VisionCare Ophthalmic Technologies, a company that has been developing a telescopic IOL for the treatment of AMD.

“Ophthalmology is an incredibly hot area right now,” Mr. McWard said.

Although ophthalmology is now in the phase of research and development after the merger completions and the influx of capital, it remains to be seen when further mergers and acquisitions will arise. Ms. Wuensch said she believes the industry is not ready for the cyclical period of pause after the recent spate of activity.

“Whether or not there is another one or two acquisitions before it pauses and it turns again is still to be seen,” she said.

For Your Information:

• Jennifer Hsui can be reached at RBC Capital Markets, 2 Embarcadero Center, 12th Floor, San Francisco, CA 94111; 415-633-8572; fax: 415-633-8585; e-mail: jennifer.hsui@rbccm.com. Chris Cooley can be reached at FTN Midwest Research Securities, 1301 East 9th St., Suite 3232, Cleveland, OH 44114-1824; 216-592-1965; e-mail: chris.cooley@ftnmidwest.com. Joanne Wuensch can be reached at Harris Nesbitt, 3 Times Square, 28th Floor, New York, NY 10036; 212-883-5115; e-mail: Joanne.Wuensch@harrisnesbitt.com. Dan Myers, president of Alimera Sciences Inc., can be reached at 6120 Windward Parkway, Suite 290, Alpharetta, GA 30005; 678-527-1321; e-mail: dmyers@alimerasciences.com. Shareef Mahdavi can be reached at SM2 Consulting, P.O. Box 5505, Pleasanton, CA 94566; 925-425-9963; fax: 925-425-9900; e-mail: shareef@sm2consulting.com. Dan McWard, vice president of Visiogen Inc., can be reached at 4 Jenner St., Suite 180, Irvine, CA 92618; 949-341-0700; e-mail: dmcward@visiogeninc.com. Doug Post, president of the Americas region for AMO, can be reached at 3400 Central Expressway, Santa Clara, CA 95051; fax: 408-773-7278.

Reference:

• U.S. Census Bureau. An aging world: 2001. Available at: http://www.census.gov/prod/2001pubs/p95-01-1.pdf.

• Jared Shultz is an OSN Staff Writer who covers all aspects of ophthalmology. He focuses geographically on Europe and the Asia-Pacific region.