Advanced Medical Optics, Inc.

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Advanced Medical Optics, Inc.

1700 East St. Andrew Place
Santa Ana, California 92705
U.S.A.
Telephone: (714) 247-8200
Fax: (714) 247-8672
Web site: http://www.amo-inc.com

Public Company
Incorporated:
2001 as Allergan Medical Technologies, Inc.
Employees: 2,865
Sales: $920.6 million (2005)
Stock Exchanges: New York
Ticker Symbol: EYE
NAIC: 339112 Surgical and Medical Instrument Manufacturing

Advanced Medical Optics, Inc. (AMO) is a leading manufacturer and marketer of medical devices and products for the eye. AMO's business is organized along two major product lines, ophthalmic surgical equipment and eye care products. The company's ophthalmic surgical business, which accounts for two-thirds of the company's annual sales, provides medical devices for use in the cataract, implant, and refractive, or laser, vision correction markets. Cataract and implant devices include foldable intraocular lenses, implantation systems, phacoemulsification systems, and viscoelastics. The refractive surgery line includes laser systems, diagnostic devices, treatment cards, and microkeratomes for use in laser eye surgery. The company's eye care product line comprises a full range of contact lens care products, including multipurpose cleaning and disinfecting solutions, daily cleaners, enzymatic cleaners, and rewetting drops. Both of AMO's two main product lines are sold in the United States and in more than 60 countries. International sales account for more than 67 percent of the company's revenue volume.

ORIGINS

AMO's history began with the history of Allergan Inc., an Irvine, California-based company that matured from a small ophthalmic laboratory founded in 1950 to become the third largest pharmaceutical company by the beginning of the 21st century, when it stood as a leader and pioneer in the eye care and specialty pharmaceutical industry. To Allergan, AMO owed much. AMO, in fact, was half of Allergan when it first greeted investors on Wall Street, a company whose expertise and product lines came from Allergan's half-century of innovation in its industry. AMO inherited Allergan's legacy of achievements, beginning when Allergan first entered the contact lens market in 1960 with Liquifilm, a wetting solution for hard contact lenses. The company steadily built a strong presence in the contact lens market, controlling 20 percent of the hard contact lens market by 1975 and maintaining a solid presence within the soft contact lens market through Hydrocare, a cleaning solution. By 1984, Allergan held a 20 percent share of the contact lens solutions market, a position that was strengthened three years later with the introduction of Ultrazyme Enzymatic Cleaner, the first weekly cleaner that could be used during disinfection.

As Allergan entered the 1990s, the company's strategic focus began to change, subtly at first, gradually shifting toward the orientation that would necessitate the creation of AMO. A seminal event occurred in 1991 when Allergan acquired Oculinum Inc., a manufacturer of Type A botulinum toxin, a substance that would become more commonly known as BOTOX. The acquisition marked the beginning of the company's move toward specialty pharmaceuticals, but the future AMO continued to gain from Allergan's commitment to both pharmaceuticals and optical medical devices. Of particular importance to AMO was Allergan's 1994 acquisition of the intraocular lens product line from Ioptex Research. The acquisition was followed a year later by the purchase of Optical Micro Systems Inc., a manufacturer of cataract surgery equipment and Pilkington Barnes Hind's contact lens care product line. Although significant aspects of Allergan's business that later would benefit AMO continued to develop, including the introduction of a new contact lens lubricating solution, Refresh Contacts, in 2000, the seed that grew into AMO already was planted by 1998. That year, Allergan named David Pyott as president, chief executive officer, and chairman, marking the beginning of a restructuring program that eventually led to the creation of AMO.

ALLERGAN SPAWNS AMO IN 2002

"When I came here," Pyott said in a February 15, 2002 interview with Ophthalmology Times, "we were half pharmaceuticals, half medical devices. Basically, I found a jewel here. We have such a great pharmaceutical opportunity." His priorities were clear: Allergan would focus its efforts exclusively on its specialty pharmaceuticals business, a strategy that necessitated removing its ophthalmic surgical and contact lens care business. The separation, Pyott argued, would be better for both businesses. "As pharmaceuticals accelerate and lens care slows down, we have a dilemma: How to feed all the children?," he explained in his interview with Ophthalmology Times. "Pharmaceuticals tend to starve non-pharmaceuticals of resources." The decision to cut Allergan in half led to the organization of the company's ophthalmic surgical and lens care assets into a subsidiary named Allergan Medical Technologies, Inc., which was incorporated in October 2001. Next, Pyott announced in late January 2002 that Allergan would spin off Allergan Medical Technologies as a stand-alone company named Advanced Medical Optics, Inc. The spinoff, which took place in the form of a tax-free distribution to Allergan's stockholders, occurred in July 2002, "the most important event in the history of Allergan since our founding in 1950," Pyott wrote in the company's 2002 annual report.

On AMO's first day of business, it ranked as the second largest contact lens care company in the world and as the second largest ophthalmic surgical company in the world. The company was born a giant, boasting more than $500 million in revenue when it debuted as an independent company. Leading the company was a 22-year veteran of Allergan, James V. Mazzo, who was handed the titles of president and chief executive officer after serving as president of Allergan's Europe/Africa/Middle East region and global head of the company's ophthalmic surgical product line. AMO established its main offices in Santa Ana, California, the headquarters for more than 2,000 employees, direct sales operations in more than 20 countries, and distributors serving more than 60 countries. It marketed a broad range of lens care products under the names Complete, Oxysept, Consept One, UltraCare, and Ultrazyme, as well as medical devices such as foldable intraocular lenses for the cataract surgery market.

COMPANY PERSPECTIVES

AMO is dedicated to advancing the science of vision through continuous development of innovative technologies that enhance patient outcomes and improve practitioner productivity. To that end, we strive to constantly access the best ideas through an operating structure whereby Research & Development and Corporate Development are managed together under a single corporate function called Strategy & Technology. This unique approach promotes a technological open-mindedness that ensures proper prioritization of our internal R&D resources in concert with the pursuit of progressive innovations from outside the company. Our R&D teams represent a full breadth of ophthalmic surgical technology skill and expertise, extensive knowledge of biomaterials and proficiency in eye care formulation chemistry. We believe our success depends on our ability to foster a stimulating environment that continues to attract the highest-caliber scientists and engineers who share our passion for creating technologies that optimize vision and quality of life for patients.

Although it was a market leader with an established track record, AMO failed to captivate Wall Street at first. On its first day of trading on the New York Stock Exchange, the company's shares fell 71 cents to $10.29 per share. "It's not a growing business," an analyst said when asked about AMO in a July 2, 2002 interview with the Orange County Register. In response, Mazzo and his executive staff sought to invigorate the company's business, something they would accomplish through new product launches and by completing acquisitions. It did not take long for the company to introduce its first product as a stand-alone company, unveiling its Blink brand, which comprised Blink Contacts and Blink Revitalising drops, in the fall of 2002. A slew of new products followed, helping to refresh a stagnant sales record. The $538 million collected in revenue in 2002 represented a decline from the $543 million generated the previous year, but after a year on its own, buoyed by new product offerings, AMO recorded $601 million in revenue in 2003. From there, the company's annual sales volume swelled, as Mazzo turned to the most expedient way of achieving growth: acquiring other businesses.

MASSIVE ACQUISITIONS IN 2004 AND 2005

AMO embarked on the acquisition trail and pounced on two large targets in rapid succession, barely giving industry observers time to ponder the implications of one acquisition before completing another. The company announced the first acquisition in April 2004, when it revealed it was acquiring the surgical ophthalmology business owned by Pfizer Inc., the largest drug manufacturer in the world. The assets, which Pfizer had gained a year earlier when it merged with Pharmacia Corp., generated $150 million in sales in 2003. AMO completed the deal in June 2004, paying $450 million for a wide selection of eye treatment products, including the Healon ocular surgery brand and the CeeOn and Tecnis brands of foldable lenses used in cataract surgery and to a lesser extent in refractive surgery. The acquisition also added a new product line, the Baerveldt glaucoma shunt, which was a drainage device that paved the company's entry into the glaucoma market.

The acquisition of Pfizer's surgical ophthalmology business strengthened AMO's already strong cataract business. The cataract-related device market was deemed by analysts to be a fast-growing market, precisely the antidote for a company perceived to lack financial vitality. Analysts projected sales of cataract-related devices to collect $2.5 billion in sales in 2005, and they responded positively to AMO's purchase of the Pfizer assets, leading to a 12.6 percent increase in the company's stock to $28.05 per share the day the deal was announced. Within two years, the trading price of AMO's shares had nearly tripled, offering compelling evidence that the company was no longer viewed as an uninspiring castoff from Allergan. AMO's next deal only added to the heightening expectations for the company. "This one," AMO's chief marketing officer said of the company's next purchase in a November 11, 2004 interview with the Daily Deal, "was so big and so fast, right on the heels of the Pfizer acquisition, that it literally shocked people that we would be so bold in a manner so recent from our last deal."

The acquisition, announced in November 2004, opened up a wealth of opportunities in another fast-growing market. Unlike the Pfizer acquisition, which strengthened AMO's capabilities in a market where it already enjoyed considerable strength, the company's second massive purchase gave it strength in an area where it was relatively weak. The target was VISX, Incorporated, a designer and manufacturer of equipment systems used for laser eye surgery. The deal, hailed as joining two of the world's largest manufacturers of eye surgery equipment, married AMO, a leader in eye care surgical equipment with a focus on cataract surgery with VISX, a specialist in refractive eye surgery. AMO paid $1.27 billion for VISX, completing the transaction in May 2005. "This deal," an analyst was quoted as saying in the November 30, 2004 issue of the America's Intelligence Wire, "will put AMO on the map and give them the breadth and strength to be a big player."

KEY DATES:

2002:
Advanced Medical Optics (AMO) is spun off as a stand-alone company by Allergan, Inc.
2004:
AMO acquires Pfizer Inc.'s surgical ophthalmology business for $450 million.
2005:
AMO pays $1.27 billion for VISX, Incorporated, an acquisition that strengthens the company's position in the laser eye surgery market.

AMO's sales neared $1 billion in 2005, confirming in the minds of many observers that the Allergan that entered the 21st century contained two powerhouse businesses. As the two companies prepared for the second half of the decade, the lines separating their market orientations were becoming blurred. AMO's entry into the glaucoma market, a field where Allergan liked to think of itself as major global competitor, was one example. The expiration of a non-compete agreement between AMO and Allergan represented another. When Allergan spun off AMO, AMO agreed that it would not launch any assault in the pharmaceutical eye care market until mid-2005, signing a contract that barred it from entering the fast-growing market for treating dry eye, a disease involving abnormalities and deficiencies in the tear film. The dry-eye treatment market was estimated to be worth between $500 and $700 million in sales, offering a promising avenue to pursue for growth in the future. An AMO spokesperson, quoted in the August 1, 2005 issue of the America's Intelligence Wire, was asked about the pending termination of the non-compete agreement, saying it would free his company "to explore such things as the dry eye market because it's considered more of a pharmaceutical venue. Until that time," the spokesperson added, "We're not able to do anything. We can't even get started until the non-compete ends."

The expiration of AMO's non-compete agreement with Allergan opened up an entirely new and vast business arena for the company to explore, fueling hopes for a profitable future. Although its net earnings suffered substantially from its aggressive approach to expansion, amounting to a loss of $129 million in 2004 and $453 million in 2005, AMO had opportunities and possessed the capabilities to leave behind a success story as impressive as Allergan's, setting the stage for a spinoff to usurp its parent company and thoroughly dominate the eye care sector.

PRINCIPAL SUBSIDIARIES

AMO Holdings, Inc.; AMO Nominee Holdings, LLC; AMO Spain Holdings, LLC; AMO U.K. Holdings, LLC; AMO USA, Inc.; Quest Vision Technology, Inc.; VISX, Incorporated; Advanced Medical Optics Australia Pty Ltd.; AMO Belgium BVBA; AMO Brasil Ltda. (Brazil); AMO Canada Company; AMO Global Holdings (Cayman Islands); AMO Ireland (Cayman Islands); AMO Puerto Rico Manufacturing, Inc.; VISX (Cayman Islands); AMO (Hangzhou) Co. Ltd. (China); AMO Denmark ApS; AMO France SAS; AMO Germany GmbH; AMO Asia Limited (Hong Kong); Advanced Medical Optics India Private Limited; Allergan Trading International Limited; AMO Ireland Export Ltd.; AMO International Holdings (Ireland); AMO Ireland Finance; AMO Regional Holdings (Ireland); AMO Italy SrL; AMO Japan KK; AMO Malta Limited; AMO Netherlands B.V.; AMO Groningen B.V. (Netherlands); Advanced Medical Optics Norway ASA; AMO Singapore Pte. Ltd.; Advanced Medical Optics Spain, S.L.; Advanced Medical Optics Norden AB (Sweden); Advanced Medical Optics Uppsala AB (Sweden); AMO United Kingdom, Ltd.

PRINCIPAL COMPETITORS

Alcon, Inc.; Bausch & Lomb Incorporated; CIBA Vision Incorporated.

FURTHER READING

"Advanced Medical Optics Wins $214M in Damages," America's Intelligence Wire, December 19, 2005.

"AMO Introduces Blink Contacts," Asia Africa Intelligence Wire, June 24, 2004.

Benesh, Peter, "Acquisition Gives Lens Maker New Identity," Investor's Business Daily, June 1, 2004, p. A9.

"Branding: AMO Enters Eye-Care Market with Blink," Marketing, October 31, 2002, p. 10.

Cohen, Judy Radler, "AMO Nears End of Allergan Non-Compete," America's Intelligence Wire, August 1, 2005.

Croft, Tara, "Advanced Medical Buys VISX," Daily Deal, November 11, 2004.

Galvin, Andrew, "Advanced Medical Optics' Stock Falls on Its First Day as Stand-Alone Company," Orange County Register, July 2, 2002.

Hahn, Avital Louria, "Mergers & Acquisitions: Eye-Care M&A Is on a Tear Thanks to Aging Peeps of Boomers," America's Intelligence Wire, November 30, 2004.

Klinec, Joe, "Allergan Spin-Off Places Focus on Pharmaceuticals," Ophthalmology Times, February 15, 2002, p. 1.

Morse, Andrew, "AMO Gets Pfizer Unit for $450M," Daily Deal, April 23, 2004.

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