STRONG MARKET

Brian Scullion MD

In early September 2015, Valeant Pharmaceuticals, Quebec, Canada, through its Bausch + Lomb subsidiary, bought Synergetics USA, which manufactures vitreoretinal and neurological microsurgical instruments, for US$198million – a premium of nearly 50 per cent over the firm’s closing stock price the day before.

What drove Valeant, one of the world’s most aggressive players in medical business acquisitions, to such an offer? Steady growth in ophthalmic procedure volume worldwide along with higher prices per procedure, as patients pay more out-of-pocket for premium services, Brian Scullion MD told the Ophthalmology Futures Forums, Barcelona 2015.

ATTRACTIVE MARKET

Ophthalmology is currently a $12billion global market, growing four to five per cent annually, with about three per cent of that increased procedure volume, said Dr Scullion, Managing Director and Partner at investment bank William Blair & Company, Chicago, USA. Blair, which advised Synergetics in the Valeant transaction, is one of the most active investment banks in ophthalmology.

Rising income outside Europe and the USA is also driving growth. “As more people get access to the resources necessary to purchase advanced medical services, one of the things they tend to spend it on is ophthalmology,” Dr Scullion said.

Proliferation of advanced technology is also increasing volume, as procedures such as LASIK and premium intraocular lenses (IOLs) become common. Refractive error correction and vitrectomy are currently the fastest growing segments.

Pricing also makes ophthalmology more attractive to investors, Dr Scullion said. “Ophthalmology is somewhat unique in that we see patients going out-of-pocket for premium care.” In most other healthcare segments governments cap prices for advanced services.

“It’s a trend that shows no sign of abating and it leads to sufficient profits to generate continued innovation, which for the foreseeable future makes this an area of high interest for investors,” Dr Scullion added.

The consolidated nature of the ophthalmic community also makes it attractive, Dr Scullion said. Where selling to primary care physicians requires marketing to hundreds of thousands of individuals, and hospital-based specialists face purchasing committee hurdles, the smaller number of ophthalmologists making their own buying decisions makes it easier to market ophthalmic products.

RISING INVESTMENT

Ophthalmology’s growth potential has produced a surge in venture capital investment, Dr Scullion said. From 2007 to 2013, investments in ophthalmic companies ranged from $500million to $800million with an average deal between $10million and $16million. In 2014, that jumped to a total of $1.3billion with an average of more than $28million.

Venture capital investments drive innovation that makes smaller firms attractive acquisition targets, Dr Scullion said. The three large firms currently dominating the global ophthalmic device market, Novartis/Alcon, Abbott Medical Optics and Valeant/Bausch + Lomb, and Allergan, which remains a big ophthalmic pharmaceutical player, acquired 15 firms in the last five years, including Optimedica, LenSx and Technolas.

But the big players are highly selective in their acquisitions, leaving initial public offerings (IPOs) as another route to cashing in on innovation, Dr Scullion said. In 2014, 10 US medical device companies went public, finally exceeding the 2007 level of eight, after six years with no more than two new offerings. Another seven went public so far this year.

However, the IPO market is also highly selective, with companies at a commercial stage and sales of $20million or more annually doing best, Dr Scullion noted. With 2014 sales of $40million, Glaukos, whose June 2015 IPO Blair underwrote, is a good example. At the end of October, the firm had a market capitalisation of about $700million, providing a good return to investors. But it took 10 years and $200million in investment to get there.

Overall the future looks very bright, Dr Scullion concluded. “I would encourage everyone to continue developing these
new products, because there very clearly is a market for
innovative products.”

Brian Scullion: bscullion@williamblair.com