Ocular Sciences, Inc.

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Ocular Sciences, Inc.

1855 Gateway Boulevard, Suite 700
Concord, California 94520-3200
U.S.A.
Telephone: (925) 969-7000
Fax: (925) 969-7118
Web site: http://www.ocularsciences.com

Public Company
Incorporated: 1985 as O.S.I. Corporation
Employees: 2,591
Sales: $310.6 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: OCLR
NAIC: 339115 Ophthalmic Goods Manufacturing

Ocular Sciences, Inc. manufactures a wide range of soft contact lenses and markets them under different brand names to private eyecare practitioners, retail optical chains, and mass-merchandising optical shops. Products include daily lenses, a full line of disposable lenses, toric lenses for wearers with astigmatism, and bifocal, colored, aspheric, and sports lenses. Brands are assigned according to distribution channel. Independent practitioners sell products under the Biomedics, Hydrogenics60, EdgeIII, ProActive, and SmartChoice labels. The UltraFlex brand is reserved for retail chains. National brands sold to all channels are Subsoft, Lunelle, Rythmic, and Hydron. Ocular's corporate headquarters is located in Concord, California, with manufacturing facilities found in Albuquerque, New Mexico; Juana Diaz, Puerto Rico; Eastleigh, United Kingdom; and Ligny-en-Barrios, France. In addition, the company maintains sales and distribution operations in Australia, Canada, France, Germany, Hungary, Japan, The Netherlands, Switzerland, and the United Kingdom. Ocular relies on a dry-cast molding process, which is both highly consistent and scalable, allowing the company to ramp up production levels as conditions warrant. Ocular has succeeded in carving out a niche in the contact lens industry by focusing its marketing efforts on eyecare professionals rather than consumers, and its ability to make decisions quicker than its much larger rivals.

Incorporating the Company in 1985

Ocular was founded by its chairman, John D. Fruth, in 1983 and incorporated in California two years later as O.S.I. Corporation. He brought with him considerable experience in the optical trade. He worked for Bausch & Lomb, Inc. from 1972 to 1976, serving in a variety of sales and marketing positions. He then went to work for contact lens manufacturer CooperVision, Inc., at first involved in regulatory affairs and later becoming president of the contact lens division. In 1983 Fruth struck out on his own and launched O.S.I.

In the beginning O.S.I. acted as a contact lens distributor. At the time contact lenses were designed to be replaced every one to two years and required that customers adhere to a time-consuming daily and weekly cleaning procedure. A major change in the industry took place in the late 1980s with the introduction of disposable contact lenses that eliminated much of the cleaning burden and led to a sharp increase in the global demand for soft lenses. Due to the higher volumes, and because bulk packaging for a supply of disposable lenses was cheaper, manufacturers could achieve economies of scale, lower prices, and make disposable lenses a more economical choice for consumers—which spurred even greater sales and led to greater economies of scale. A further benefit to consumers in changing lenses more frequently was the reduction in health risks associated with dirty lenses.

O.S.I. became a contact lens manufacturer in September 1992 when it traded stock to acquire its primary supplier, a U.K. company called Precision Lens Laboratories Ltd. (PLL). Of particular importance was PLL's recently developed patented lens molding technology. A month later O.S.I. completed an even larger purchase, paying $24.5 million for American Hydron, the North and South American contact lens business of Irvine, California-based Allergan, Inc. For Allergan the divestiture was part of an effort to concentrate on core businesses, such as contact lens care products, ophthalmic surgical devices, skin care products, and specialty pharmaceuticals. O.S.I., in turn, added a second manufacturing plant (located in Puerto Rico), another line of contact lens products, and a greatly expanded customer base.

Entering the Weekly Disposable Market in 1993

The next major step for O.S.I. came in the summer of 1993 when it entered the weekly disposable contact lens market. Prior to this time, the company derived the lion's share of its sales from annual replacement lenses and a smaller portion from monthly disposables. With the new weekly disposables leading the way, O.S.I. would now see most of its growth coming from disposables. The weekly disposables initially contained 38 percent water. In 1995, in order to better compete with Johnson & Johnson's Acuvue line of contact lenses, O.S.I. introduced 55 percent water content lenses. These new weekly replacement lenses allowed greater volumes of oxygen to be transmitted, thereby providing increased comfort for overnight wear.

O.S.I. recorded steady sales increases after becoming an integrated contact lens company. In 1993 sales totaled $38.5 million, as the company posted a $4.4 million loss. The next year revenues improved to $48.5 million and the company regained profitability, posting net income of $5 million. In 1995 O.S.I. generated sales in excess of $68 million and net income grew to 8.8 million. The following year sales reached $90.5 million and profits totaled $10.2 million. All told, during this period O.S.I. enjoyed a compound annual growth rate of 81 percent. Moreover, profits were enhanced because the company also was able to cut its per-unit product costs by approximately 64 percent, a factor that also allowed an average price reduction of 50 percent, spurring greater sales volumes.

In July 1996 O.S.I. was reincorporated in Delaware as Ocular Sciences, Inc. in preparation for becoming a publicly traded company. Ocular's initial public offering was conducted in August 1997, underwritten by a syndicate that included Morgan Stanley Dean Witter; Bear, Stearns & Co.; and Cowen & Co. The company grossed nearly $120 million and much of the proceeds were earmarked to pay down debt as well as expand and automate plant facilities.

After four full years of producing disposable weekly lenses, Ocular by 1998 enjoyed a 16 percent market share in the category. Although the U.S. contact lens market was highly competitive, leading to price cutting and thinner margins, Ocular with little debt and $40 million in cash on hand was well positioned to maintain its growth trajectory. The company's private branding strategy also was providing an edge. As explained by the Wall Street Journal in a 1999 profile, the goal was "to build customer loyalty: If the wearer likes the lens, he or she will keep going back to the place that sells it, giving the seller reason to promote it. Ocular also tries to keep its lenses out of the hands of Internet and toll-free telephone sellers, to protect the air of exclusivity and the price." Another important factor in the company's success was its second-to-market strategy. Rather than spend a great deal of money on research and development, Ocular only entered a market segment once it was established. It was then able to take advantage of its dry-cast molding manufacturing process to enter with high production volumes and stake out a low-cost position. The effectiveness of the business model was reflected on the company's balance sheet. Sales topped the $100 million mark in 1997, totaling $118.6 million, with net income exceeding $20.6 million. In 1998 the company generated nearly $152 million in sales, and net income grew by a third to $30.6 million. Ocular also had a great deal of unrealized potential in overseas business. International sales in 1998 reached $33 million, a 31 percent increase over the prior year but accounted for only a fifth of Ocular's total sales.

Ocular endured a difficult two-year stretch during 1999 and 2000. Aside from a general slowdown in the contact lens market, it had to contend with a product recall in 1999, involving a packaging-seal problem. Although there were few lenses affected and no harm done to patients, Wall Street nevertheless punished the company stock, which quickly tumbled in price by 15 percent. Next, in March 2000 Fruth attempted to sell Ocular to Wesley Jessen VisionCare Inc. as a way to take the company to the next level. It was a $413 million stock deal that would have left Fruth as nonexecutive chairman of the combined company and Wesley Jessen's chairman and CEO, Kevin Ryan, staying on as president and CEO. Wesley Jessen made its mark in the colored soft contact lens market as well as specialty lenses. But almost immediately Bausch & Lomb made an unsolicited bid of $600 million to acquire Wesley Jessen, contingent upon the scuttling of the Ocular acquisition, and made it clear that it might pursue a hostile takeover attempt. Bausch & Lomb had been courting Wesley Jessen for some weeks and its management maintained that the latter had "embraced emphatically" the idea of a sale in the days before the Ocular deal transpired. Bausch & Lomb was not alone in thinking that Wesley Jessen was better off aligned with the larger company, but the Wesley Jessen board of directors unanimously rejected the $600 million offer, or $34 per share, which it deemed far too low. Weeks later, another giant, the Swiss pharmaceutical company Novartis and its Ciba Vision eyecare unit stepped in with an offer of $38.50 per share. This bid was accepted and Wesley Jessen's acquisition of Ocular was terminated.

Company Perspectives:

The company focuses on selling its products to eye care professionals because soft contact lenses are prescription medical devices. As such, the company believes wearers should purchase them from an eye care professional and return for follow up care.

A $25 million termination fee Ocular received provided cold comfort. A number of key executives had left the company, including the chief financial officer, head of U.S. sales, and director of international marketing. To make matters worse, the company had to contend with a stagnant U.S. market for soft contact lenses. As a result, Ocular suffered through three consecutive quarters of year-over-year earnings reductions. Once the deal with Wesley Jessen had fallen through, Ocular moved quickly to rebuild its management infrastructure and take on the challenge of meeting internally the goals it hoped to achieve in concert with Wesley Jessen. To improve domestic sales, it added a second telemarketing operation in Phoenix. Moreover, an outside sales force was brought in to supplement efforts in both the United States and the United Kingdom. Distribution efforts also were expanded in both Europe and Asia, and the company looked to spur further growth by way of new product introduction, such as a monthly disposable toric contact lens. This product represented Ocular's first attempt to enter the higher-margin, higher-growth specialty contact lens market. A further step in realizing the company's goals was taken in February 2001 with the $48.3 million cash purchase of Paris-based contact lens manufacturer Essilor International S.A. Because the U.S. market was mature, increasing European sales was a top priority, and Essilor greatly enhanced Ocular's sales structure in the market. The new subsidiary already sold its products in Austria, Belgium, France, Germany, Italy, Scandinavia, Switzerland, The Netherlands, and the United Kingdom. Moreover, Essilor brought with it a number of specialty product lines: the SunSoft line of toric lenses and multifocals; the Lunelle line of soft toric contact lenses; and the Variations line of soft multifocals.

Appointing Stephen Fanning CEO in 2001

Another important development in 2001 occurred in August with the appointment of Stephen J. Fanning as Ocular's new president and CEO. Fruth, who had been serving as CEO on an interim basis for the previous year, continued on as the chairman of the board. Fanning came to the job with 25 years of experience at Johnson & Johnson. He joined Ocular in October 2001 and began immediately to shift the company's focus from standard contact lenses to the higher-margin specialty lenses. At the same time, Fanning made it clear that he wanted Ocular to remain nimble in the marketplace and to avoid the spread of bureaucracy, the effects of which he knew all too well from his quarter-century at giant Johnson & Johnson.

Fanning was interested in increasing Ocular's market share in Japan, especially regarding toric lenses used to correct stigmatism, a condition with a higher frequency among Asians than other ethnic groups. To bolster its position in Japan and gain a direct sales channel in the country, Ocular acquired assets from Seiko Contact Lens, a contact lens distributor, in 2002 at a cost of $21.7 million. The companies had already been working together, with Ocular products accounting for 65 percent of Seiko's sales.

Ocular experienced a revival in revenues and profits in the early years of the new century. Revenues grew from $225 million in 2001 to $310.6 million in 2003. Net income rebounded from a low of $6.5 million in 2001 to $26.6 million in 2003. The company also appeared to be well positioned to enjoy further growth. The demographics favored the business. The teenage echo boom resulted in millions of new contact lens wearers, many of whom needed vision correction because of the eyestrain they endured from heavy consumption of television, video games, and computers. Ocular also was reaping the benefits of new manufacturing technologies that once again gave Ocular a competitive edge, allowing it to shave price points and improve margins. To ensure that it had the new products necessary in the pipeline to sustain growth, the company also doubled its R&D spending in 2004.