Dueling Fools
VISX Lessons
September 15, 1999
Bear Argument
By
From what I have been told, laser surgery is a simple procedure. You stare into a light, a green light it seems, and keep looking as the computer-guided laser does a number on your cornea. The testimonials, Barbara's included, have been generally positive.
However, for VISX shareholders who see nothing but green ahead, I have a bit of advice: Turn away from the light. Carol Ann, don't look into the light!
"We Make Things Clear" goes the VISX battlecry. Let me try to make things even clearer. The stock market was valuing VISX at a whopping $5.8 billion last week. To put this into perspective, I give you eyecare juggernaut Bausch & Lomb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOL)") else Response.Write("(NYSE: BOL)") end if %>, selling for $2 billion less than VISX, yet sporting annual revenues ten times higher.
Bringing up Bausch & Lomb is intentional since the company plans on rolling out its own laser procedure in the next few months. Think about it: A company with the eyecare muscle of Bausch & Lomb gunning for a piece of the action won't be a pretty sight. Competition from companies already entrenched in the niche like Summit Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEAM)") else Response.Write("(Nasdaq: BEAM)") end if %>, KeraVision <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KERA)") else Response.Write("(Nasdaq: KERA)") end if %>, and global powerhouse Nidek will grow more and more fierce.
Is that a pricing war I see? VISX-trained ophthalmologists have performed over a million operations. That's it, they're done. The early adopters like Barbara, who didn't flinch at the margin-rich prices, are cured, ideally. They paid more than a dozen years worth of contacts, glasses, and maintenance costs to rid themselves of those expenses forever. They're not coming back. Ever. Who's next? The folks sold on the process but waiting for the prices to fall? Those who aren't sold and will need even lower prices than the second wave of corneal shape-shifters?
The growing list of alternatives and the end of the free-spending customer base pretty much assures that lower prices are coming. What does that mean for VISX? Lower royalty checks of course. That will smash profit margins like a satisfied VISX customer will smash her specs. When analysts -- who have been generally bullish on VISX -- expect earnings to grow just 30% next year, I suggest that the hypergrowth story is over and it's time to sell.
VISX insiders seem cured of any impaired vision since they seem to be seeing the same thing: They are selling in droves. The stock has risen plenty over the past year, and maybe they too feel that the stock -- like a VISX patient -- has a correction in store.
When the vision visionaries are cashing out, who would cash in? Well, countless new shareholders seem to be marching on in. The competitors too are storming the castle. This year KeraVision's Intacs became the first non-laser procedure to receive FDA head-nodding. Will Intacs kill VISX? Nope. While KeraVision claims the process is more effective than the excimer laser, and is reversible, it only works on the mildest cases of nearsightedness. Still, that's a piece of business that VISX will lose. With computer users glued to their terminals, it is also the fastest growing piece of the business. On another front, Nidek is suing VISX over licensing rights. If Nidek wins the antitrust battle, VISX will have to wring out its once-pristine balance sheet in payments, and the playing field will get even more competitive.
And what about Summit? Its excimer lasers seem as efficient as VISX's. However, Summit has shown a flair for marketing -- like last year when the company offered NFL referees free corrective surgeries. By the end of the year we will know more about the role Bausch & Lomb will play in this revolution.
I am not suggesting that VISX will disappear. However, in the big picture, its role will blur as more and more companies slice up the pie into thinner pieces. As consumers, it's natural to get excited over excimer laser surgery. However, try to separate that optimism from an investor's perspective.
Let's consider Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>. What if the shavemeister came up with a treatment that would leave male faces smooth forever. The company would charge a hefty premium for the process so the initial windfall would be huge. I imagine the stock's knee-jerk reaction would be a juicy pop (like VISX has seen this year). But then the rivals would strike with similar procedures. Prices would fall. In the process, Gillette would suffer from the loss of revenues from the razor business it made obsolete.
Now, you might argue, VISX never made bifocals or contact lenses. That's true, but that is what has made the industry so lucrative -- the perpetual royalties of maintenance. Unwittingly, VISX is pioneering the end of its own industry. Soon it will be a commoditized one-shot convenience -- like a flu inoculation. We'll be a happier society tomorrow at the expense of today's shareholders. "We Make Things Clear" we will remember VISX saying. Our reply? Boy, did they.
Next: The Bull Responds