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AMO Puts a New Spin on Ophthalmic Devices

Executive Summary

Once part of Allergan, Advanced Medical Optics was spun off when its parent company wanted to focus on pharmaceuticals. Executives of the new company believe that life as an independent medical device company gives it the freedom to operate and the focus it needs to thrive in the ophthalmic device market. In the spin-out, AMO got market-leading brands with an almost 40 year history, an ophthalmic sales force that has just about the longest continuity in the industry, and strong management with a track record more than two decades long. But with its new start, AMO also inherited a large debt load, a thin R&D pipeline, and products that serve markets with single-digit growth prospects. It's challenge:to create innovative new products in an industry where it can't hope to match, in terms of R&D spending and the cash it can spend on acquisitions, competitors three times its size. AMO's strategy is to become a specialty medical device company, serving largely ophthalmic surgeons, with a narrow focus on three segments; cataract surgery, refractive surgery, and eye care solutions. It argues that in ophthalmology, bigger isn't better, and that with a nimble corporate structure concentrating on a few hand-picked areas that build off of core strengths, its R&D and business development dollars will go far in helping it become an industry innovator.

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The ophthalmic industry has traditionally stood alone, with its own device and pharmaceutical companies selling products marketed to specialists. So the announcement on January 12 that diversified giant Abbott Laboratories would acquire Advanced Medical Optics was initially astonishing, as was the hefty premium that Abbott offered. Perhaps Abbott was willing to pay more than it otherwise would have because of the recent divestiture of its Abbott Spine business. In AMO, Abbott is getting a business that almost can't fail to grow by double digits (despite recent economic stresses on the laser vision correction market) because of the demographics of the ophthalmology industry and improving margins on products like intraocular lenses, which serve the burgeoning elderly cataract patient population.

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Millions of middle-aged and soon-to-be elderly people worldwide are running headlong into vision problems, and this looming patient pool is already beginning to steer the future course of physician practice and research and development dollars. The potential for huge rewards is certainly present for developers of safe, effective new therapies for disorders of the aging eye.

Bidding War for the Aesthetic Market's Only Pure Play

The aesthetic market is becoming somewhat incestuous, with all of its major players current embroiled in some sort of takeover attempt on the businesses of the others. Back in March, dermatology specialist Medicis made an offer to acquire Inamed, the only pure-play in the medical aesthetics market. Some months later, Mentor, Inamed's rival in breast implants, made an offer for Medicis. Now Allergan, "the Botox company," is vying for Inamed with what it believes is a better offer. That all four publicly traded companies are trying to merge with one another highlights just how hot the aesthetics market is today. The bidding war also highlights the unique characteristics of the medical aesthetics specialty, in terms of the blurring between devices and drugs.

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