1 1 ophthalmic goods manufacturing healthcare sector senior analyst: raditya purwahjo junior...
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Ophthalmic Goods Manufacturing
Healthcare Sector
Senior Analyst: Raditya Purwahjo Junior Analyst: Anne Moxie, Yimin Ding, Pablo Mercado, Ben Bivins, Tianyang Zheng, Austin Hymes, Justin Rustia
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Industry Definition – Ophthalmic Goods Manufacturing
This Industry comprises establishments primarily engaged in manufacturing ophthalmic goods. Examples of products made by these establishments are prescription eyeglasses (except manufactured in a retail setting), contact lenses, lenses for surgical use, sunglasses, eyeglass frames, and reading glasses made to standard powers, and protective eyewear.
NAICS Code: 339115 Ophthalmology is the branch of medicine that deals with the
anatomy, physiology and diseases of the eye.
Source: Bloomberg; Pardee Library NAICS Industry Book; Ophthalmology Defined, about.com
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Understanding the Industry – Ophthalmic Goods Manufacturing Aesthetics
2%Audiology
10%Anesthesia-Respi-
ratory4%
Cardiology15% Chronic Care
5%
Disinfection/Steril-ization
1%Mobility Aids2%Neurology
2%Oncology3%
Ophthalmology17%
Orthopedics20%
Robotics/Navigation1%
Surgery10%
Urologic/Gyne-cology
2%
Wound Care7%
Source: Bloomberg; Fadi Humaid, Life Science Presentation
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Understanding the Industry – Porter’s 5 Forces
Extent of Rivalry• Intense R&D• No price wars • Increased consolidation among firms for
more market-share• Life Cycle Stage: Mature
Power of Buyers• Key consumers: Hospitals, private practice
physicians & wholesalers• Buyer concentration: Low• Buyers are consolidating: Bigger bargaining
power.• Medicare to limit payments for many medical
treatments that require medical supplies causing higher price resistance.
Threat of Substitutes • High training cost• Very differentiated & specific• Produced goods cater to
specific health need
Threat of Entry • High Barriers of Entry• High Government Regulations• Patents to protect intellectual property • High training costs• High technological changePower of Suppliers
• High switching cost due to FDA approval system
• Supplier Concentration: low• Risk mitigation: Inventory
management. • Key supplier: plastic & resin
manufacturing
Source: IBISWorld Report ode 33911b; Firms 10-K Filing FY2011; BMO Capital Med Tech Outlook 2012
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Industry Revenue Generation
Ophthalmic Goods
Manufacturing Facility
Direct Sales Force
Independent Distributors
Alliance with Market Leaders
Services From Product Repair
End Consumer
Global End Consumer
Global End Consumer
Utilize Market Leader’s Channel of Distribution &
earn royalties
Source: Firms 10-K filing FY2011.
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Trends Overview
Regulatory Environmen
tIndustry
ConsolidationAging US
PopulationEmerging
Markets Gaining Traction
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Regulatory Environment (I)
From 2006 to 2010, 510(k) approvals 14% PMA approvals 52%
FDA warning letters 149% Class 1 product recall 555%
Source: BMO Capital Med Tech 2012 Outlook.
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Regulatory Environment (II)
Source: BMO Capital Med Tech 2012 Outlook.
Now that Obama is re-elected: 32 million gain access to health insurance Lead to Med Tech Utilization The Patient Protection and Affordable Care Act and Health Care and
Education Affordability Reconciliation Act (Obamacare) were enacted into law in March 2010. – 2.3% Excise Tax on domestic sales of Class I, II and III
Medical Devices starting January 2013.
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Industry Consolidation – M&A & Increased Competition • M&A Volumes expected to pick up on:
low cost of debtstruggling smaller companieslarger companies are in search of growth and scale given a more rigorous hospital
purchasing environment.
Source: BMO Capital 2012 Med Tech Outlook
2007 2008 2009 2010 2011 2012 YTD
$73.4 $78.0
$17.1 $27.8 $57.9
$21.8
262
224
125 141121
65
Total Transaction Value # of transactions
Rev. Multiple 2.7x 2.9x 1.7x 2.8x 2.8x 2.7x EBITDA Multiple 17.8x 14.3x 12.6x 16.9x 12.5x 16.2x
(Excludes deals with disclosed enterprise values that are less than $10 million)Sources: Frost & Sullivan Database, IBIS World, BMO Capital Markets
(U.S. Billions)
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Industry Consolidation – Private Practices to Hospital Employment
Source: BMO Capital 2012 Med Tech Outlook
• This trend has been slowing down. This could bode well for utilization (or at least ease the headwind).
30% in Hospital Owned Practice from 2002
30% in Physician Owned Practice from 2002
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Emerging Markets Gaining Traction
As pressures in the US and Europe persist, companies continue to pursue opportunities in emerging markets, with most attention paid to China, followed by Brazil and India.
Obstacles to succeed in international markets are many: politics, infrastructure, demographics, intellectual property protection and high % of private healthcare expenditures.
Source: BMO Capital 2012 Med Tech Outlook
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Aging U.S. Population
Source: BMO Capital 2012 Med Tech Outlook; Department of Health & Human Services: Administration on Aging
2010-2020 Projected CAGR: 3.12%
2010-2020 CAGR of 3.12%, 2x faster than the previous decade. Growth will be sustained until 2020. The average elderly (age 65+) person spends 135% more on
healthcare than the U.S. population average, around $6,070 per year.
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Risks
• Expanding definition of “elective” procedures• Additional patient volume pressure. • Elongated economic downturn• $123 billion Medicare budget cut
Valuation Risk
• Exchange rate risk• Subject to foreign custom regulation & laws• Subject to various anti-bribery laws
International Regulatory Risks
• Entail significant risk of product liability claim• Product liability insurance is expense and may not be available
on acceptable terms in the future
Product Liability Claims
• Patent application is conducted in secrecy• Increases risks for product infringement• Litigations are very expensive and are often necessary to
enforce patents
Intellectual Property Risks
Source: BMO Capital Med Tech Outlook 2012; Firm 10-K Filling FY2011
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Valuation
Name Ticker EPS ttm Ttm P/E Fwd P/E P/B mrq Ttm EV/EBITDA
Dividend Yld ROIC ROA ROE
Synergetics USA Inc SURG 0.22 18.61 11.86 1.77 8.81 N/A 11.48% 6.98% 10.43%
Cooper Cos Inc COO 4.77 19.11 15.62 2.06 12.67 0.10% 9.32% 6.81% 9.73%
Precision Optics Corp PEYE 0.78 1.17 N/A 2.19 -2.81 N/A N/A 81.12% N/A
STAAR Surgical CO STAA -0.01 N/A 59.11 5.66 36.04 N/A 6.20% 3.01% 5.20%
OPKO Health Inc OPK -0.04 N/A N/A 8.97 -51.51 N/A N/A -0.83% -3.98%
3 Investment Possibilities to be derived from this table: • Synergetics USA (SURG) • Cooper Cos Inc (COO) • STAAR Surgical CO (STAA)
Source: Bloomberg Terminal Relative Value Function
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Synergetics USA (SURG) – Investment Thesis
Healthy Growth:– 7.2% yoy Revenue growth FY2011– Net Income and EPS doubles. – As of 2Q12, EBITDA goes up by 42.4% yoy
Bloomberg Consensus:
1Source: SURG Investor Presentation; Bloomberg Terminal SURG US Equity ANR
Company SURG
Last Px 4.31
1 Yr Target Px 7
Return Potential 62.41%
Buy 83.3%
Hold 16.7%
Sell 0.0%
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Cooper Cos Inc. (COO) – Investment Thesis Positive Catalysts: – 84% of its revenues come from the sale of contact lenses, essentially a renewable
revenue stream. – Company is largely immune from the medtech tax, slower patient volumes, and
Medicare pressures.– It has been introducing new products and taking share, leveraging it to the bottom line.
Downside Risks:– Recent consecutive product recalls resulted in FDA warning letter and lobbying. – Avaira Toric needs to be re-approved by FDA. (Only 4% of Revenue).
Bloomberg Consensus:
Source: BMO Capital Med Tech Outlook 2012; Bloomberg Terminal COO US Equity ANR
Company COO
Last Px 92.8
1 Yr Target Px 107.75
Return Potential 16.11%
Buy 63.6%
Hold 36.4%
Sell 0.0%
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STAAR Surgical (STAA) – Investment Thesis Company is on track to deliver its first profitable year in over a
decade. Pending Visian Toric FDA approval for the US market.
– Have been approved for Europe and recently, Japan as well. – Analysts (BMO Capital, Bloomberg) expects approval this year.
Bloomberg consensus:
Source: BMO Capital Med Tech Outlook 2012; Bloomberg Terminal STAA US Equity ANR
Company STAA
Last Px 5.21
1 Yr Target Px 9
Return Potential 72.74%
Buy 57.1%
Hold 28.6%
Sell 14.3%
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Conclusion– Investment Thesis
Ophthalmic Goods Manufacturing Industry: Favorable
•Aging U.S. Population•Increased provision of health insurance (Obamacare)•Emerging markets gaining traction
Significant Demand Upside
•Increase trading multiples
Improvement in M&A Appetite