Dueling Fools
VISX Lessons
September 15, 1999
Bull Argument
By
Everything, not just beauty, is in the eyes of the beholder. But if you're one of the 157 million Americans who need corrective lenses to see clearly, there's more blur to life than beauty.
Until recently, I was such a person. When I'd awaken in the morning without my glasses, a lovely cumulus cloud was indistinguishable from the awe-inspiring Catskill Mountains outside my window; my antique armoire could very well have been my modern bookcase; but worst of all, my handsome husband could have transformed during the night into Frankenstein for all I could see.
It's bad enough that we visually challenged spend small fortunes on glasses and contact lenses in order to read and see things off in the distance. Without our visual aids, seeing clearly was impossible. Until now. Until the miracle.
For the hundreds of thousands of Americans daily celebrating the extraordinary return of crystal-clear vision, the breakthrough of laser vision surgery is like manna from heaven. The procedure uses a laser beam of cool light to gently reshape the cornea. It's painless, relatively risk-free, and takes less than a minute. What's more, positive changes usually appear before the patient leaves the doctor's office! By the way, I'm not just a bull -- I'm a satisfied customer.
The leading manufacturer in this fast-growing industry is VISX, Inc., which already has in excess of 70% of the market. More than 400,000 procedures were performed in 1998, with 900,000 expected this year. This is eye-opening growth, up from the 100,000 performed in 1996 when the Food and Drug Administration (FDA) gave the VISX System approval to correct mild to moderate nearsightedness.
There are only two things standing between the 157 million potential laser surgery candidates and the procedure: knowledge and money.
Knowledge: Many candidates don't know about the possibilities for their vision. VISX has experienced phenomenal growth largely through word of mouth from satisfied customers who spread the miraculous news to friends and family. Having just unveiled its first nationwide brand advertising campaign in USA Today with an endorsement from future Baseball Hall-of-Famer Wade Boggs, VISX's future growth could be positively mindBoggs-ling.
Money: The procedure, which costs between $2,000 and $3,000 per eye, is usually not covered by insurance companies; but some far-seeing carriers have begun paying for it. If others follow suit, greater growth will ensue. Even so, for people burdened with wearing eyeglasses since childhood, it's a small price to pay for 20/20 vision.
The company, which has enjoyed 10 consecutive quarters of profitability, has one product: the VISX STAR. The product provides three distinct revenue sources: 1) worldwide sales of laser systems, 2) service and parts sales, and 3) licensing of procedures and equipment. Total revenue increased 100% in the first six months of 1999, to $116.5 million from under $56 million in the first half of last year.
VISX has 140 existing and 70 pending U.S. and foreign patents to protect its technology, which it successfully and vigorously defends. Through such protection and patent technology, VISX's business model is highly profitable. In the recently completed second quarter, the company achieved 80% gross margins and 54% pretax operating margins. Profits of $21.5 million understate the actual cash gains during the quarter: The company has no debt and grew its cash balance by $37.1 million to a total of $189.4 million.
VISX management plans to grow earnings per share (EPS) at an annual rate of 25% to 30%, a rate many analysts consider ultraconservative. The ability to achieve these results is derived from a unique combination of technology, market position, and an intellectual property portfolio containing the aforementioned patents.
In addition, the company earns revenue for each procedure performed. A unique "VisionKey card" must be used with each procedure performed, guaranteeing the company its royalty of $250 for each operation.
The performance of VISX stock has been as miraculous as the benefits its technology brings to the eyes. In 1998, investors saw their VISX stock rise 295%. So far in 1999, the stock is already up over 300%. Eye-opening growth even to the bearest of bears.
Can this visionary company's phenomenal growth continue? I think so! After all, a future myopic is born every minute.
My esteemed colleague, Rick -- who has never worn glasses and has no idea what goes on in the eyes and minds of the visually challenged -- will probably focus his bearish argument on the competition. Considering that VISX already has a mammoth installed base of machines, none of the emerging companies appear to be a serious threat. With 4,000 certified laser surgeons in the U.S. already performing the surgery, it's unlikely they'll switch to another product and lose their extensive and expensive investments in VISX machinery.
Review these facts, then ponder the question of Chico Marx: "Who are you going to believe� me, or your own eyes." I'll give you the answer: both.
Next: The Bear Argument