Is Bausch & Lomb Oversold?

By Dr. Duru written for One-Twenty

May 8, 2006

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As many of you faithful readers know, I have spent more time this year looking for opportunity when the rest of the market falls into despair. Bausch & Lomb (BOL) has been mired in despair for months; in fact, BOL could be the poster child of 2006 for despair. The shares have fallen as much as 50% since word first surfaced last fall or winter about a rare eye fungal infection called Fusarium keratitis that might have links to BOL products. I believe the first concrete news came from Singapore in February of this year. BOL's stock went into a talispin soon thereafter as news of new infections appeared in more and more countries, including now the United States. The FDA now has a page providing advice to people who wear soft contact lenses. It also discusses the prevalence, causes, and risks associated with Fusarium keratitis.

So, it is clear that there are real health risks involved here, and BOL has even gone so far as to voluntarily recall products. To date, no health agency has made a conclusion that BOL products are indeed a direct cause of this unfortunate infection. Of course, this does not mean that eventually BOL will be cleared of guilt. The opportunity then is not in betting these kinds of cloudy odds. Instead, what caught my attention was recent reports that BOL is not the only company implicated. A Reuters article dated May 5, 2006 called "CDC confirms more cases of rare eye infection" stated the following: "On Tuesday, the CDC reported that of 56 cases of the infection confirmed among contact lens wearers, 32 used ReNu with MoistureLoc, 15 used ReNu MultiPlus and 7 used an unspecified Bausch product. It also said three patients used Alcon Inc. products and three used products made by Advanced Medical Optics Inc." What?!? It seems to me that if the CDC concludes that the infection can occur even in people who never used BOL products, we have a much more serious and broad health problem on our hands. And then, either there is something inherent in the use of soft contact lenses which will impact the entire industry, or we might find that the fungus that causes Fusarium keratitis is one of those oddities of nature that flares across the globe taking advantage of fortuitous conditions (like poor hygiene) only to disappear again once health officials understand the modalities of infection and develop proper prevention methods.

I am not a medical doctor or bio-statistician, but I get the feeling that there is more to this story yet. And the market's reaction to-date is very telling. The shares of Alcon (ACL) have been in steady and persistent decline since hitting all-time highs late last year, but they have not responded directly to BOL's despair except to go up whenver BOL seems to sink deeper into the morass. Until late 2005, ACL shares had gone nearly straight up for about three years. I am not as familiar with their story, but I believe they have some business issues that has put a sour taste on the market's palate. The shares of Advanced Medical Optics (EYE) on the other hand are still hitting all-time highs. Again, I am not as familiar with this company, so, maybe the soft contact business is a very small part of EYE's business. Regardless, the market seems convinced that this is mainly a BOL-specific problem. To me, the current evidence suggests that there is a good chance it is not BOL-specific. As such, I believe that BOL may now be far over-sold as the market has priced in the worst of this story and more (the pessimists amongst you may instead conclude that any and all related stocks have simply not come down far enough to the level of BOL's despair).

Why would I dare suggest that a copmany in such clear and obvious trouble may present an investment opportunity? First, it seems to me that BOL has been as diligent as possible in voluntarily addressing this fungus problem before any specific fault has been attributed to any of their products. Most negligent and unapologetic companies will fight and fight until some high court has to issue a ruling siding with a governmental finding of fault. (Note that I cannot place too much confidence in the explanatory power of findings and proclamations from class action lawsuits because of the prevalnce of ambulance chasers who are racing ahead of any conclusive proof). BOL's actions to date tell me that whatever happens, they will step up to correct the problems, make good on real damages, and go about fixing their business. Thus, we probably have a broken stock but a company that remains viable. BOL has been around since 1853, is a multi-billion dollar company and employs many thousands of people around the world. They have the longevity and the resources and no doubt the skills to to survive over the longer haul. I am reminded of the despair that hit another industry veteran earlier this year: Sherman-Williams. Back in February, I pointed out the potential opportunity in the shares partly because the company had been around for almost 150 years. Even more important was that the CEO bought stock and the company increased its dividend. The stock of Sherman-Williams has since completely recovered. If BOL steps up to these levels, you would do well to bet along with the company's confidence and not against it. Until then, we only have the current alarming headlines, and the company's mad scramble to get ahead of those same headlines. As is typical in these cases, the uncertainty and the risks appear high, so you will have to do your own homework. My own homework has told me to start buying... (click here for my disclaimer.)

As always, be careful out there!

DrDuru, 2006