Excimer industry shaken after tumultuous week

After years protesting the fees they had to pay every time they used their Visx and Summit excimer lasers, refractive surgeons are finally getting a reduction – but not an elimination – of that fee. But the stock market punished the whole industry for it, and the one manufacturer that refuses to charge per-procedure fees denounced them as “ludicrous.” Here is what happened and what two major players plan for the near future.

One busy week

On Tuesday, Feb. 22, Visx (Santa Clara, CA) announced that it was cutting its per-procedure fee from $250 to $100, plus a $10 charge for each key card ordered. The next day, Summit Technology (Waltham, MA) said it would set the same fee for procedures performed with its Apex Plus/Infinity system (with an additional $25 charge for the Emphasis disk used to perform astigmatism and hyperopia correction) but would charge $150 for each use of its Autonomous LADARVision laser. Both companies will also start charging $100 for retreatments, which were previously reimbursed to the surgeon.

The following Thursday, the excimer marketplace got a little more crowded as Bausch & Lomb Surgical (Claremont, CA) announced it had received clearance from the Food and Drug Administration (FDA) to sell the Technolas 217 in the U.S. Marketing would commence immediately, the company’s press release declared, as there appeared to be no need to obtain “further rights under third-party patents.” The company would cover legal costs for any of its customers who might be sued for patent infringement, but it also plans to charge them for each Technolas 217 procedure performed. The amount? Also $100.

LaserSight follows suit

That same day, LaserSight (Winter Park, FL) had its own new fee structure to announce. Based on “recent industry developments,” the company would abandon its previous plan to collect a $260 fee per procedure, of which $130 would have been returned to the customer had LaserSight won its patent battle with Visx. Instead, users will only pay the $130 for each use of the LaserScan LSX that LaserSight planned to keep for itself as revenue.

That leaves Nidek (Fremont, CA) the only excimer manufacturer that will not tap American surgeons for additional payment after the instrument is purchased. (In no other country has there ever been a per-procedure fee.) According to senior executives of the Japanese company’s U.S. division, the refusal to charge users of the EC-5000 a per-procedure fee is a rock-hard policy written by company president and founder Hideo Ozawa. Nidek also promises to pay legal costs for the customers who have already been sued or may be sued in the future on charges of patent infringement.

Punishment on The Street

Although Visx positioned their fee reduction as “an aggressive program to help accelerate the growth of laser vision correction in the United States market” in its press release announcing the cut, investors punished the company and the whole excimer manufacturing sector.

“A price reduction of this magnitude is unusual,” the press release quoted Visx chief executive officer Mark Logan as saying. “However, Visx is in a unique position because of its large installed base, strong balance sheet and history of profitable operations. This is a market growth opportunity that does not appear very often, and we are determined to seize the moment.”

Balance sheet and profitable history notwithstanding, Wall Street sent the value of Visx shares down 24% from its Feb. 18 closing price of 23 ¼ to 17 5/8 by the end of the following week. Where 1 to 5 million Visx shares had been trading daily throughout the first part of February, 40 million were traded in the 2 days following the announcement of the fee cut. All publicly traded excimer laser manufacturers shared the pain to a greater or lesser degree.

Starting the following Monday, Primary Care Optometry News received announcements from seven different law firms that they were initiating class action shareholder lawsuits against Visx. The allegations were similar if not identical: that Visx officers had made “false and misleading statements” about the expected revenue from the installed laser base as well as the company’s ability to maintain its $250 per-procedure fee and its share of the vision correction market. Most invitations to join the suits mentioned that Visx “insiders” had sold 1.4 million shares of company stock prior to the announcement of the per-procedure fee reduction.

“This is a classic pattern that occurs as stock prices decline,” Visx chief operating officer Liz Dávila told Primary Care Optometry News in an interview. “By now there are probably 10 or 15 [shareholder suits]. It’s almost like a computer model spits out a lawsuit when the stock market posts a decline. We believe they are completely frivolous, and we will fight them aggressively.”

Despite the number of these suits, Ms. Dávila said they are not a drain on company resources.

“Legal costs have been a big line item and will continue to be,” she said, “not because of shareholder lawsuits but because of our patent enforcement strategy. It probably will always be a major cost of doing business for this company and the industry.”

Protecting property

But why spend so much money on patent disputes?

“Technological innovation, which we are really very good at in this country, has its foundation in intellectual property,” Ms. Dávila explained. “If it were not for our intellectual property system, we would not see the innovative technology that we have. We continue to believe in the strength of our patent portfolio and we intend to vigorously enforce it.”

For their part, Visx sees a more reasonable way to save the cost of going to court over patent issues.

“Visx has always said and we continue to say that we are willing to license our patents.”

But with the exception of Summit Technology, with whom Visx came to a legal armistice that has outlasted even the dissolution of their Pillar Point partnership by the Federal Trade Commission, every other excimer manufacturer is now a current or potential defendant in Visx-launched patent litigation.

Pursuing suits

First there was Nidek, against whom a patent infringement suit is still pending. The recent ruling in favor of Nidek by the International Trade Commission (ITC), which was incorrectly described by some observers as invalidating Visx-held patents, had jurisdiction only over Nidek’s ability to import the EC-5000 into the U.S. The ITC considered the patent dispute, however, as part of the deliberations that led to its ruling against Visx. That ruling against Visx has been upheld on appeal, and at press time the possibility of a further appeal to a federal circuit court was still open to Visx.

The patent suit, on the other hand, will probably take a year or more to reach the courts. Any decision will no doubt be appealed by the loser.

After the Nidek suit came a series of four legal actions by Visx against purchasers of the EC-5000, including both physicians and corporate owners. Nidek is paying to defend them all. Visx has not brought any additional suits against its competitors’ customers, but the company will not rule out the possibility.

Visx vs. LaserSight

The next manufacturer to have an excimer approved for the U.S. market was LaserSight, which soon found itself served with papers by Visx. LaserSight first announced it would negotiate for a patent license, then said it broke off those talks not too long after the initial ITC ruling was announced. Visx has since reinstated its original suit.

Bausch & Lomb dealt with the issue of possible patent infringement action as soon as it announced the FDA premarket approval of the Technolas 217.

“Our lawyers have done the exhaustive analysis of these issues and conclude that we can market the Technolas 217 without obtaining further rights under third-party patents,” said Bausch & Lomb chief executive officer William Carpenter in a conference call with investment analysts. “We will collect a fee of $100 for each procedure performed on our laser and will indemnify our customers, should it become necessary, for any costs associated with any patent lawsuits on these issues.”

Visx will not comment on whether or not any such lawsuits are planned. On the issue of per-procedure fees, however, the company has been quite vocal.

Sparking the market

“Until now, concern over procedure safety has been the primary barrier to greater market penetration,” Mr. Logan said in the Visx press release. Those concerns diminished over the years since excimer lasers were first introduced into the U.S., he added. “We believe that millions of consumers, particularly younger individuals with lower levels of nearsightedness, are now ready to have the procedure. However, research indicates that this group is the most focused on affordability.”

Ms. Dávila described the market analysis that led Visx to this conclusion. Whereas 90% of myopes in the U.S. are –4 D or less and only roughly 10% have myopia greater than –4 D, a sample of “tens of thousands” of myopic corrections found that two out of three were done to correct more than 4 D of myopia.

“If we achieve the level of penetration in –4 D and below that we achieved above –4 D, that would be another 9,000,000 eyes,” she said. “If we could go to 10% or 15% of that market, it’s tens of millions of eyes.”

The data on patient age also suggested that there was a large untapped segment of the market.

“The median age for laser vision correction is 40,” Ms. Dávila continued. Since this group is on the brink of presbyopia. the benefits of myopia correction may well be short-lived. “One would think that the younger population, those in their 20s and 30s in particular would be the stronger candidates for this procedure. It’s pretty obvious, however, that as people get into their 40s and 50s, there’s more discretionary income that they can put into this.

“There were also probably tens of thousands of U.S. citizens in 1999 who took the trouble to get themselves up to Canada to have this procedure. And it’s not because they believe Canadian doctors would do a better job, but solely on the basis of price. There must be many, many more who are not going to Canada and are just waiting for a lower price.”

Competition lowers price

Anecdotally, Visx found some of its surgeon customers were very successful in boosting patient volume by lowering the cost of surgery.

“Our customers have been telling us… that in order to lower the prices to the consumer, they looked to Visx to do our share,” Ms. Dávila said. “Which is exactly what we feel we have accomplished in taking the per-procedure fee from $250 to $100.”

Why not eliminate the per-procedure fee altogether?

“No company makes money on capital equipment alone. That’s been known in the medical industry for a long time. The institution of a per-procedure fee by Visx has enabled us to be profitable and to reinvest heavily in research and development and service.”

And what about the similarity of per-procedure fees announced by most of the other companies?

“It’s not a surprise given Visx’s share of the market and our leadership of this market that others would follow.”

Although the per-procedure fee will now be charged for retreatments, Ms. Dávila said that the fee reduction will still have a significant affect on reducing overhead.

“Let’s say I buy 100 cards a month,” she explained. “Under the original program, the cost would have been $25,000. The cost of retreatments would have been zero, because Visx refunded the $250. The net cost of cards is $25,000.

“Under the new program, the gross cost of 100 cards is now $10,000. The national average rate of retreatment is 8%, so if you’re an average surgeon you will now have to buy eight cards and pay Visx $800. So the total net cost of cards now, paying for retreatments, is $10,800. The savings is $14,200, or 57%, even after paying for retreatment cards.”

Visx also looks forward to reducing administrative costs by eliminating the reimbursement procedure for key cards used in retreatments.

Negative analyst reports

Despite arguments by Visx to the contrary, stock market analysts saw the fee cut simply as a reduction in revenues for all the manufacturers, and some went further in their critical evaluations of the future of Visx. Preferred Capital Markets, Inc., for example, issued a statement that said “Visx’ move to drastically cut its $250 royalty fee to $100 is a product of market share loss and the reality of its largest customers seeking next-generation technology that offers a more amenable pricing model.”

Ms. Dávila rebutted each point.

“Have we lost some market share to Nidek lasers?” she asked. “Yes. But our reduction in the per-procedure fee was not meant to cure a market-share issue. It was fundamentally meant to do our fair share in sparking growth in this market. At $5,000 for bilateral surgery, our old per-procedure fee was 10% of the total cost. At $2,000 bilateral, it would have been 25%. That wasn’t going to motivate our customers to make the procedure more affordable.

“On the technology front, there is a lot of talk about the small-spot scanning systems. But there is no clinical data that I have seen that demonstrates that any of those systems delivers better clinical results compared with what doctors are doing with our system as it exists today.”

As for the future, Ms. Dávila emphasizes that the Visx Star excimer laser is a suitable platform for further development.

“The buzzword today is ‘customized ablation.’ The analysts don’t understand the technology. They are buying the story that you can’t do a customized ablation with a laser like the Visx Star, and they are wrong.”

Nidek standing firm

“Drastic changes have occurred in the excimer market, but Nidek’s position has not changed since day one,” said Hiroshi Okada, vice president and general manager, Nidek U.S.A., in an interview with Primary Care Optometry News. “We decided not to charge a per-procedure fee to physicians because we do not believe in it.”

Kuntal Joshi, national director of marketing for Nidek, explained.

“It is a personal philosophy of Mr. Ozawa that he doesn’t believe in charging that kind of fee. He makes a high-quality, innovative product and then sells it. How you use it is not Nidek’s business. Whether you do 10 eyes, 100 eyes or 1,000 eyes, we give you the best product and the best service. Nidek has stood steadfast by that philosophy for 30 years and we will continue to do that.”

The Nidek marketing and sales team dismissed the argument that no excimer manufacturer can be successful without a continuing revenue stream after the sale of the equipment.

“We’re following the traditional route where you build all the development and patent costs into the purchase price,” said David Yeh, national director of sales. “This is the way the medical equipment industry has operated for years. It’s Visx who decided to take a new approach, and now that’s falling apart. The issue is that we now have a more competitive free market. Visx and Summit no longer have an oligopoly. Why would doctors want to pay a ‘rental’ charge on a device that they own? It’s ludicrous! Why even pay $100?”

“And as the price [of surgery] continues to drop, that $100 will make more of a difference,” Mr. Joshi added. “You have to spend $150 per patient to get them to walk in the door – that’s the average marketing cost – and essentially, you’re throwing that away on the fee. You’re not investing it back to get more patients to come and see you.”

One point on which everyone can agree is that the price of surgery must come down before more eligible patients will even consider having the procedure done.

“What Visx and the other companies have done is to open up another market segment,” Mr. Joshi said. “We were already there, and we will continue to grow as that market opens up.”

Burden of overhead

The downward pressure on surgery fees, however, also means that doctors will be more sensitive to overhead costs.

“With the early adopters, sure you could charge the $250,” Mr. Joshi continued. “But the doctors have been screaming ever since Pillar Point was broken up. Visx and Summit have realized it, and the other companies had to fall into line. What’s interesting is that they are not licensing a patent and paying Visx or Summit for it. They are putting that $100 to their bottom line and saying, thank you, that’s our royalty for using our equipment.”

Not only is Nidek forgoing that source of income, they are continuing to bear the cost of defending itself and its customers against Visx patent-infringement suits.

“In terms of physician lawsuits, they’re being consolidated in California so we will have just one lawsuit,” Mr. Yeh said. “We continue to indemnify all our customers. The bottom line is that Nidek is there for the physician. Why continue to support companies who aren’t? Visx has sued the same people that they’re trying to expand the market with. Our contention is that they should just drop all this and go compete on technology. You should always be competing on technology.”

“The doctor’s goal is to provide quality vision care,” Mr. Joshi said. “That takes a quality product. You can buy an old technology for cheaper, but it doesn’t give you the flexibility and results that you want. Maybe you can do 10 eyes that turn out great, but then that one eye comes along that’s not so good and you’re shot.”

“We produce a quality product and we make a profit by selling it to physicians,” Mr. Okada reiterated. “Visx is trying to force us to collect money on their behalf, but we will not engage in that kind of practice at all.”

For Your Information:

• Liz Dávila is chief operating officer of Visx, 3400 Central Expressway, Sanata Clara, CA 95051; (408) 773-7009.
• Hiroshi Okada is vice president and general manager, Kuntal Joshi is national director of marketing and David Yeh is national director of sales for Nidek U.S.A., 47651 Westinghouse Drive, Fremont, CA 94539; (800) 223-9044.