AMO: Focused & Feisty
The New Company's CEO Says Innovation Will Drive Growth.
BY JERRY HELZNER, ASSOCIATE EDITOR

Not so long ago, the ophthalmic surgical and contact lens care businesses that now make up Advanced Medical Optics (AMO) were part of Allergan, competing for R&D and marketing dollars with Allergan's much-ballyhooed new anti-wrinkle treatment, Botox.

Advanced Medical Optics CEO James V. Mazzo with members of the AMO team. Pictured from left to right: Mazzo; Robert Hernandez, surgical operations; Rebecca Cope, U.S. sales and marketing; Nicholas Tarantino, O.D., research and development; and Arlene Gwon, M.D., research and development. PHOTOGRAPH: ROBERT RICKS

"We had some things we wanted to do that weren't getting done," says James V. Mazzo, CEO and president of AMO, who was previously global strategic head for these two businesses as president of Allergan's Europe, Africa and Middle East region. "Botox was a big new product and Allergan wanted to grow it as fast as possible, as well as its other pharmaceutical products."

Fortunately, the ophthalmic surgical and contact lens care businesses didn't have to play second fiddle to Botox for long. Recognizing that those two segments were quite different than Allergan's specialty pharmaceuticals business, Allergan management began to make plans in late 2001 to spin them off as a totally separate entity. In this article, I'll explain how AMO made the transition to an independent company, explore the firm's plans for the future, and touch on factors that could be of interest to those considering purchase of the company's stock.

Independence Made Sense

"The spin-off was a good idea," says Mazzo. "Our businesses needed to grow and Allergan needed to grow. The spin-off was a way to unleash the energy in all of the businesses. We were already operating fairly independently, with our own sales force, separate R&D, separate marketing, and some of our own manufacturing facilities. From a regulatory standpoint, from a customer standpoint, from almost every standpoint, the spin-off made sense."

In January of last year, Allergan announced a timetable for the creation of the new company. Then, on July 1, AMO made its debut. For an infant company, it was quite powerful. AMO already possessed an array of established, brand-name ophthalmic products, had worldwide sales of more than $500 million, a global geographical presence, earned a New York Stock Exchange listing under the symbol AVO, and was able to lease a large, modern corporate headquarters building (pictured below) in Santa Ana, Calif., that had previously been home to a high-tech firm.

While AMO was successful in making the transition seamless to its customers, the switch to independent status required a great deal of internal change. Services previously provided by Allergan, such as information technology, finance and human resources, became the direct responsibility of the new company. AMO and Allergan could no longer share offices, labs or manufacturing facilities on a long-term basis. AMO was literally on its own.

"One key accomplishment is that we were able to locate almost all of our new facilities within a 10-kilometer radius of our existing facilities," notes Mazzo. "So, most of our nearly 2,000 employees weren't generally impacted. In some cases, we remained in the existing facility and Allergan moved. We now also have our own R&D centers in Santa Ana, Japan and the United Kingdom, and manufacturing plants in Puerto Rico and China."

Building a Team

To help him in the all-important task of running the new company, Mazzo brought in Richard Meier as chief financial officer. Meier had previously served as CFO at ICN Pharmaceuticals and also had extensive Wall Street experience that made him valuable as a liaison with the investment community.

AMO's Complete contact lens care solution sales grew by 17% in 2002, while the overall one-step segment grew by 12%.

Because one of AMO's key priorities is increasing spending for R&D and business development, Mazzo's choice for heading those areas was Jane Rady, who brought with her 20 years of experience in R&D and business development from Monsanto and Pharmacia. Mazzo put both R&D under a single leader to achieve synergy. He believes that when these areas are under separate leadership, as they are in many companies, they tend to compete for resources.

Russell Trenary, who had been CEO of the ill-fated refractive laser company Sunrise Technologies, was named president of AMO's Americas Region.

"We believed his long experience in the industry and his executive skills would benefit AMO. And that's the way it's turned out," asserts Mazzo.

Mazzo says one important goal that AMO achieved was getting respected individuals with medical device experience to serve on the company's board of directors. He points to entrepreneur William Link as an example of an AMO board member with a strong background in ophthalmic-related medical devices.

With its board and executive team in place, Mazzo could concentrate on shaping AMO as a highly focused, technology-driven company with a strong worldwide presence in ophthalmic surgical devices and contact lens care products.

"If you want to sum up AMO in a few words, it's that our businesses drive practitioner productivity and enhance patient outcomes."

AMO Sets High Goals

Though AMO is currently number two worldwide behind Alcon in ophthalmic surgical devices in the markets in which it competes, and number two after Bausch & Lomb in contact lens care products, Mazzo believes AMO's commitment to constant product innovation and developing sustainable technologies can eventually make the company the leader in both of these businesses.

	The Sovereign phacoemulsification system with Whitestar technology has been well received by surgeons.

To drive an expanded innovation effort, Mazzo plans on increasing R&D spending from the current 5% of sales to about 7 to 8% of sales.

"Our innovation effort has already proven itself with such advances as the Opti-Edge IOL design and improved IOL insertion devices," says Mazzo. "Now, we want to strengthen our position as best-in-class in cataract surgery, develop a strong presence in the emerging refractive segment, and also at least explore possibilities for treating glaucoma, AMD, diabetic retinopathy and back-of-the-eye diseases with medical devices."

In mid-January, AMO made its first move into the back-of-the-eye segment when it secured a worldwide distribution agreement to market an AMO-branded vitreoretinal system manufactured by Optikon. AMO describes the system as a full-featured, yet compact, vitreoretinal workstation. Under terms of the agreement, AMO will initially market the system in Europe, Africa and Asia.

AMO is focused on ophthalmic medical devices, an area in which it can create its own products or use its global reach and strength in R&D and business development to improve and market a partner's product. The company won't be getting into big-ticket equipment or ophthalmic drugs anytime soon. In fact, a noncompete agreement with Allergan prevents AMO from even considering entering the ophthalmic drug business for the next 2 1/2 years.

Mazzo points to recent AMO successes.

"In cataract surgery, our Sovereign system with Whitestar technology is the first cataract surgery system to use digitally modulated ultrasound. It's been very well received by eye surgeons."

In IOLs, AMO developed the Array multifocal lens, the only FDA-approved IOL that offers cataract patients a range of vision from near to far and less dependence on glasses. It's the only lens approved in Europe for presbyopia. The company is also now partnering with Ophtec USA to complete clinical trials on Ophtec's Artisan phakic IOL, which AMO intends to market under the name Verisyse. "If all goes well and we receive FDA approval, the original Verisyse could be launched in the United States in 2004 and a foldable version soon after that," says Mazzo.

"We also have another strategic alliance which has enabled us to market the Amadeus microkeratome. The Amadeus is the microkeratome that VISX recommends for use with their lasers. In a sluggish refractive surgery market, we achieved 9% market share with the Amadeus in the past year."

Contact Lens Care Revives

And while some have labeled contact lens care as a "no-growth" business, Mazzo begs to differ with that assessment.

"Actually, we see contact lens care as a 'renewed growth' business, with much of the growth now coming in the teen market."

Mazzo notes that the primary market demographic for contact lenses used to be 18- to 34-year-old females. He says that demographic has now expanded to encompass males and females from 14 to 40.

"Teenagers are a big growth market for contact lenses now," says Mazzo. "They're the primary purchasers of cosmetic lenses. But we're also seeing growth in other age groups due to new products such as improved toric lenses."

As evidence of that renewed growth, Mazzo points to AMO's performance in the so-called "one-step" contact lens care segment.

"Our Complete brand grew 17% last year while the overall one-step segment was growing by 12%," he notes.

A key to AMO's strategy in contact lens care is the company's marketing approach: It views the segment as doctor-driven rather than consumer-driven.

"About 75% of contact lens wearers will use the contact lens care product recommended by their doctor," says Mazzo. "We're able to align ourselves with physicians through a highly trained team of sales reps, and doctors' advisory panels which provide us with constant feedback concerning their needs. Our support of symposia is designed to educate and inform doctors on the latest developments in eye care."

Assessing the Future

In evaluating the outlook for AMO, one of the most striking elements is the aging of the "baby boomer" generation and this huge cohort's growing need for eye care.

"Cataract surgery is already the number one surgical procedure worldwide in terms of volume," says Mazzo. "The number of cataract surgeries performed around the world will grow 50% over the next decade as the baby boomers move into their 60s. Given that 98% of our ophthalmic surgical sales are cataract-related, the demographics for AMO's future growth are highly favorable."

Mazzo also sees excellent growth potential for both phakic and accommodative IOLs. In addition to partnering with Ophtec on the Verisyse phakic IOL, AMO is already investing in its own R&D and would probably consider a strategic alliance with the right partner to develop and market an accommodative lens.

"We are the partner of choice for smaller ophthalmic device companies," asserts Mazzo. "We know that's true, because we're literally being swamped with offers to partner. Because of our wide array of resources, we can improve smaller companies' technologies and provide their products with truly international marketing reach. If you look at our sales worldwide, we have a strong presence in the Americas, in Asia-Pacific and in Europe/Middle East."

AMO Has a Debt Burden

Though CEO Mazzo paints a bright picture, investors should be aware that AMO's independence from Allergan didn't come cheaply. Like almost all spinoffs, AMO went into debt to reimburse its former parent company. In AMO's case, the current debt burden is almost $300 million.

Advanced Medical Optics CEO and president James V. Mazzo. PHOTOGRAPH: ROBERT RICKS

"Would we prefer to be debt-free? Of course," says Mazzo. "But we're a strong, cash-driven business and we don't believe that the debt will stop us from carrying out our business initiatives."

However, investors seeking dividends should look elsewhere. AMO currently doesn't pay dividends. Major acquisitions probably won't occur anytime soon. Growth will have to be generated internally, and through the strategic partnerships the company is intent on developing.

Mazzo predicts an AMO earnings gain in the 15% range for 2003 and revenue growth of about 5% this year. This translates to earnings per share of 65 to 67 cents this year and sales of approximately $545-555 million.

"We believe AMO will continue to grow," concludes Mazzo. "We'll be expanding our presence in eastern Europe and Asia-Pacific, two areas of the world which we believe hold great potential for us. We're totally technology-driven. We're focused. Doctors believe in AMO technology. We have a large international infrastructure that we can leverage to develop and market a broader range of products. Overall, we're exactly where we want to be."