Ophthalmic industry woes reflect generally poor economic climate

Blame cannot go to Sept. 11 or Bush administration policies. Most public companies were already on a downhill path.

Issue: March 15, 2002

Stocks, revenues, research and development, even the number of press releases generated, all have been going downhill throughout the past 2 years for many publicly traded companies. While many companies have blamed their downhill slides on a weak economy under the Bush administration or on the attacks of Sept. 11, the fact is, most of those companies have been in decline for a year or more.

Not surprisingly, the ophthalmic industry reflects the general downward trend in the national economy. The accompanying chart shows quarterly stock values for the past 3 years for the members of the Ocular Surgery News Ophthalmic Stock Index. Note that all the companies’ stock values began to decline well before Sept. 11 of last year. There are no spiked drop-offs after Sept. 11.

Recently some companies in the ophthalmic industry have taken drastic steps to keep their businesses solvent while being threatened with stock market delistings, takeovers and bankruptcy. Two companies, Sunrise and LaserSight, have been undergoing particular financial difficulties. Notably, both companies’ products are centered on laser vision correction, a segment of the industry that has been hit hard by reductions in discretionary spending.

Sun setting on Sunrise

A Feb. 19 Dow Jones article reported that Sunrise Technologies (OTCBB — SNRS) has laid off nearly all its employees and may be unable to sustain operations if funding is not found soon.

At their height in July 1999, shares in the refractive surgery company sold for $19.50 on the NASDAQ exchange. Now traded on the over-the-counter Bulletin Board, shares of Sunrise closed Feb. 22 at $0.11.

The manufacturer, which developed the Hyperion LTK Ho:YAG system for laser thermal keratoplasty, described the layoffs as a way to save cash. Sunrise said that if ongoing discussions with funding sources were successful, some employees may be brought back.

The company missed a $1 million payment to Silicon Valley Bank Sept. 28 but received an extension in December after securing a $1 million loan from an individual investor. At the time, the company owed Silicon Valley Bank $3.5 million.

In October, Sunrise put 20% of its employees on unpaid furlough for 2 weeks and gave its remaining 50 active workers and managers pay cuts.

Shares of the company were delisted from the high-tech heavy NASDAQ in January after the company did not comply with the exchange’s marketplace rules. At the time, Sunrise had neither the minimum $4 million net tangible assets nor the minimum $10 million stockholders’ equity requirement for continued listing required by NASDAQ. In addition, NASDAQ informed the company that fees for the listing of additional shares had not been paid and the company did not issue a proxy statement nor hold an annual meeting of shareholders for fiscal year 2000, as required by the exchange’s marketplace rules.

Is LaserSight next?

LaserSight Inc. (NASDAQ: LASE) received notice Feb. 15 from NASDAQ that it must regain compliance with the $1 minimum-bid rule by May 15 or face delisting from the national market.

In a press release Feb. 15, LaserSight, a supplier of ophthalmic diagnostic and treatment technology, said that if it does not meet the requirement, it can appeal any NASDAQ determination or apply to the SmallCap market if certain conditions are met.

If the company does switch to the SmallCap market, it will have until at least Aug. 13 to regain compliance and could receive an additional 180 days if undisclosed conditions are met.

If the $1 bid requirement is met for 30 days by Feb. 10, 2003, LaserSight can apply for transfer back to the NASDAQ national market.

In better times, LaserSight shares sold for $17.25 in July 1999. The company’s stock closed at $0.50 on Feb. 22.

In a maneuver that seemed almost like a preemptive strike, LaserSight issued a press release Feb. 14, the day before the NASDAQ announcement, reiterating the company’s health and its determination to improve its financial footing.

Michael R. Farris, president and chief executive officer of LaserSight, said in the release that over the past year LaserSight has positioned itself with a number of market strengths and advantages.

“The company’s scanning (laser) technology platform, its FDA approvals, its patents and patent licenses, its growing installed base and its advanced position in custom ablation all make LaserSight an attractive opportunity for any company interested in partnering or entering the refractive surgery market. To fully capitalize on these strengths, the company is in discussions regarding strategic opportunities and expects to have an investment banker engaged in the very near future.”

Mr. Farris pointed out that industry analysts have reported that last summer the laser vision correction (LVC) industry experienced a slowdown in growth. At the same time LaserSight was continuing to encounter delays in securing FDA approval for its LASIK treatment of myopic astigmatism. He said he believed that these factors significantly hampered the company’s ability to sell its products.

In August, LaserSight began a campaign to reduce spending and control costs while simultaneously reading itself to commercialize its products upon receipt of FDA approval. Before the cost-containment campaign began, the company’s disbursements were running at about $4 million per month. Actions were taken to reduce this rate to $2.5 million through reduction in staff and an across-the-board reduction in spending, along with accounts payable management.

Mr. Farris said these reductions were made with the expectation that FDA approval would be forthcoming, “albeit the precise timing of that approval was not certain. The company believed that upon approval, sales would ramp up generating an increase in revenue, and the reductions were made in a manner that would not impede the company’s ability to execute its plan upon FDA approval.”

Mr. Farris added that the events of Sept. 11 further adversely impacted the LVC industry and the already slowing economy. He said as a result, procedure volumes have declined and many laser purchases have been delayed.

“LaserSight received its awaited FDA approval on September 28th during this negative economic downturn,” Mr. Farris said. “Since the annual meeting of the American Academy of Ophthalmology was held in November, the company believes that in addition to the economic downturn many potential customers chose to postpone purchasing decisions until after the meeting.”

LaserSight management believed that the economic climate called for further steps to maintain the company’s financial viability.

“During this time LaserSight had been negotiating a license to its ‘504 scanning patent with Bausch & Lomb, and had agreed with Bausch & Lomb to explore the possibility of a strategic alliance. The patent license transaction was completed in a two-step structure with the final payment occurring in late December,” Mr. Farris said.

However, prior to the final payment, Bausch & Lomb made a change at its chief executive officer level, placing the LaserSight strategic alliance on hold until the new management could be made current with the discussions.

Mr. Farris said LaserSight was further handicapped by the late timing of the AAO meeting. The company demonstrated its LSX and AstraScan precision microspot scanning systems at the meeting.

“The time available for sales activities between the AAO meeting and the end of the fourth quarter was substantially limited by the holidays. Nevertheless, the company succeeded in selling 15 of its LSX systems during the relatively short time period of approximately 30 business days that remained in the fourth quarter following the AAO meeting. Since sales historically occur towards the end of each calendar quarter, it is too early to predict the sales for the first quarter of 2002,” Mr. Farris said.

LaserSight asked its investors to consider positive events that occurred during 2001. These included the receipt of FDA approval for LASIK treatment of myopia and myopia with astigmatism, a renewed U.S. sales effort for its LSX system following FDA approval, the international launch of the AstraScan system and CustomEyes CIPTA for planning custom ablations (neither yet available in the United States), receipt of the reissued scanning patent, the license with Bausch & Lomb and the refiling of the premarket approval supplement for hyperopic astigmatism and mixed astigmatism. Nevertheless, at year end the company continued to face challenges.

Mr. Farris said some senior management positions left empty by resignations would not be refilled. He said LaserSight intends to take other steps to continue to reduce its negative cash flow, including further decreases in spending. The company will continue to sell lasers on favorable terms in both the U.S. and international markets.

According to LaserSight, the company currently has approximately $14 million in accounts receivable and $12 million in inventory. There are 25 laser systems in finished goods inventory.

“With respect to revenue, the company believes that if it successfully manages its expenses and disbursements, the sales volume needed to bring success to the operation is correspondingly reduced. Laser systems represent the largest near term source of revenue. LaserSight believes that an installed base that generates recurring per procedure fee income will be a basis for optimizing the value of the company,” Mr. Farris said.

For Your Information:

Michael R. Farris is president and chief executive officer of LaserSight Inc.

Sunrise Technologies International can be reached at 3400 W. Warren Ave., Fremont, CA 94538; (510) 771-2389; fax: (510) 771-2292; Web site: www.sunrise.md.

LaserSight Inc. can be reached at 3300 University Blvd., Suite 140, Winter Park, FL 32792; (407) 678-9900; fax: (407) 678-9981; Web site: www.lase.com.