Advanced Medical Optics (EYE)

Eye Care Overview

After successfully rationalizing and repositioning the eye care business, expanding market share and preparing to launch two new products in 2007, further progress was delayed by the recall late in 2006.

Last November, the company commenced a recall of approximately 2.9 million units of its eye care products from the Asia Pacific, Japan and U.S. markets due to a production-line issue at its China manufacturing facility.  To resolve the recall, the company also announced a 10-12 week plant closure to clean and sanitize the facility and conduct an already-planned expansion, which is now nearing completion.  Production has resumed on two of the four manufacturing lines and the company expects to begin shipping to its distribution centers in Japan this week.  The third line is expected to commence operation this month, with shipping to Asia Pacific planned to commence prior to the end of the first quarter of 2007.  The fourth line, which provides enhanced packaging capabilities, is expected to resume production in the second quarter of 2007, consistent with the original timeline.  Production for the U.S. and European markets was uninterrupted during the recall as these markets are supplied by the company’s facility in Spain, which was not affected by the production-line issue.

As a result of the recall, the company estimated an impact to fourth-quarter and 2006 eye care sales of approximately $25 million, which was slightly higher than originally estimated due to higher returns.  The $25 million impact included approximately $10 million in returns and an estimate of $15 million in lost sales. The company anticipates that it will lose an additional $20 million to $25 million in sales in 2007.  In addition, the company incurred approximately $15 million in costs associated with the recall, which were recognized in cost of goods sold and SG&A expense in the fourth quarter and full year.  The company anticipates that it will incur an additional $20 million to $25 million in recall-related costs in 2007.

For 2006, eye care sales declined 13.1 percent versus 2005 to $261.6 million, reflecting the impact of the recall, declines in hydrogen peroxide solution sales and lost sales associated with planned product rationalizations.  These same factors caused fourth-quarter eye care sales to decline 20.2 percent to $53.0 million versus the same period last year. The impact of foreign currency caused a 0.5 percent decline for the year and a 2.8 percent increase for the fourth quarter.  Below are eye care sales highlights.  Growth rates reflect comparisons to the same period in 2005 and include the impacts of foreign currency.

·                  Multipurpose solution sales declined 4.7 percent to $147.2 million as growth in the first nine months of the year was offset by the recall.  Fourth-quarter multipurpose solutions sales declined 26.4 percent.

·                  U.S. sales of COMPLETE® MoisturePlus™ rose 48.1 percent for the year and 25.7 percent in the fourth quarter.  According to IRI, an independent market research firm, COMPLETE® MoisturePlus™ dollar share of the U.S. branded multipurpose solution market was 12.8 percent for the four weeks ended January 28, 2007, representing an approximate 11 percent increase since the beginning of 2006.

·                  Sales of hydrogen peroxide solutions declined 19.4 percent to $62.3 million.  Fourth- quarter hydrogen peroxide solution sales declined 23.6 percent to $13.9 million.  The declines reflect this market’s contraction in Japan and Europe, and the impact of the planned product rationalization.

·                  Sales of other eye care products declined 24.7 percent to $52.1 million in 2006.  Fourth-quarter sales for this category declined 3.2 percent to $15.2 million.  The declines reflect the planned rationalization of older-generation products.