INSIGHT-Valeant's ambitious plan for its contact lens business

By Carl O'Donnell
NEW YORK, Oct 29 (Reuters) - Valeant Pharmaceuticals
International VRX has pursued a plan in recent months to
dominate the market for specialty contact lenses, according to
two people familiar with the company's approach and some of the
company's communications with its customers.
The Canadian drugmaker's goal, spelled out to key employees
and demonstrated through its actions, has been to acquire other
manufacturers, take on competitors and raise prices for
unfinished lens components.
Valeant entered the contact lens business with its purchase
of Bausch and Lomb in 2013 for $8.7 billion. At the time of the
acquisition, Bausch and Lomb manufactured about 75% of the basic
components of rigid gas permeable lenses, known as "buttons,"
said Kurtis Brown, who worked for Bausch and Lomb prior to
Valeant's purchase. After manufacture, buttons are customized
for individual patients, typically by laboratories specializing
in that process.
With the acquisition of Paragon Vision Sciences in May for
an undisclosed sum, Valeant and Bausch and Lomb further
consolidated their grip on the market, gaining control of more
than 80% percent of the gas permeable button market, according
to one of the sources familiar with Valeant's operations and the
representative of an industry group.
Rigid lenses comprise only about 10% of the contact lens
market, and are popular among people who cannot wear soft
lenses.
The acquisition of Paragon also gave Valeant and Bausch and
Lomb full control of the small market for Ortho-K buttons, which
are used to create one type of gas permeable lens, said Brown,
now a marketing manager for lens manufacturer Menicon America
Inc. Sales of Ortho-K buttons and finished Ortho-K lenses
comprise only about $5 million in annual sales for Valeant
companies.
The U.S. Federal Trade Commission is investigating the
Paragon purchase as part of an anti-trust probe, a source
interviewed by the FTC told Reuters. Valeant disclosed on Monday
that it had received a letter from the FTC on or about Oct. 16
seeking more information about its acquisition of Paragon.
On Tuesday, Valeant declined to comment on specifics of its
strategy in the specialty contact lens market but defended its
purchase of Paragon.
"Our acquisition of Paragon Holdings supports our mission to
improve consumers' lives by bringing to market innovative,
specialty eye care solutions, and we are cooperating with the
FTC on its inquiry," the company said in a statement emailed to
Reuters.
Bausch & Lomb is now operated as a division of Valeant, and
Paragon has been rolled into Bausch & Lomb.
In recent months, Bausch and Lomb also has moved to acquire
laboratories that turn the raw components - buttons - into
finished lenses.
The plan has encountered challenges, however, with at least
four laboratories - including Alden Optics, Art Optical and
Tru-Form Optics - holding out, at least for now, against Bausch
and Lomb's purchase overtures, according to one of the sources
familiar with Valeant's contact lens operations and some of the
labs themselves.
In the months after it began trying to acquire
laboratories, Bausch and Lomb increased button prices for its
customers, which included more than 30 laboratories that
customize lenses, according to Jan Svochak, president of the
contact lens manufacturers association, an industry trade group.
The price increases for buttons ranged from 15 percent to
more than 120 percent, a source with direct knowledge of the
price hikes said.
Keith Parker, owner and president of Advanced Vision
Technology, said that his lab was hit with a first price
increase from Bausch and Lomb in mid-September and a second one
on October 1, all on overnight-wear lenses.
"They were substantial," he said of the price increases.
"Some of them 100 percent, some of them more than 100 percent."
The company also did away with volume discounts, he said.
In response to the price increases, some labs have begun
switching to other button suppliers, such as Contamac, according
to at least three laboratories interviewed by Reuters. Contamac
has not responded to a request for comment.
Last week, Bausch and Lomb sent a letter to the optometrist
community promising to "adjust down" some of the increased
prices after complaints from laboratories.
In the long run, Bausch and Lomb hopes to do more
manufacturing and distribution of finished lenses directly to
optometrists. This would enable Bausch and Lomb to bypass some
of the laboratories now filling that role and thereby buttress
its profits, according to one of the people familiar with
Valeant's operations and several laboratories.
According to the two sources familiar with Valeant's contact
lens operations, Bausch and Lomb hopes a newly created division,
to be called Advanced Vision Products, will bring in more than
$100 million in revenue by the end of 2016 from sales of
specialty contact lens products, including customized gas
permeable contact lenses.
Bausch and Lomb currently earns about $30 million annually
from manufacturing gas permeable lenses and their basic
components, the sources said.
Valeant was already the subject of a U.S. probe into price
increases for its heart medications, and its stock price was
battered last week after short-seller Andrew Left accused it of
using mail-order pharmacies to fraudulently book revenues.
Valeant denied Left's assertions and laid out a detailed
defense on Monday of its relationship with specialty pharmacy
Philidor, the firm at the center of Left's accusations.