Medical Device Daily Contributing Writer

SAN FRANCISCO – The annual Pacific Growth Equities (San Francisco) Life Sciences Growth Conference, held here this week amidst a brutal market for biotechnology and medical device equities, enjoyed a surprisingly strong turnout from Wall Street analysts, money managers and attending companies.

A total of 170 companies made 30-minute presentations during the 2-1/2 days of the conference, giving the attendees a glimpse at their business strategies, their past results and future outlook. Medical device companies were well represented, with several smaller, micro-caps presenting.

A company that made an impressive presentation was Iridex (Mountain View, California), whose CEO, Barry Caldwell, described the company as “a leading worldwide provider of innovative laser systems, delivery devices, single use disposables and services to the ophthalmology and dermatology markets.

Within ophthalmology, which generated about $31 million of the company's total calendar and fiscal 2005 sales of $37 million, Iridex is a significant player in the approximately $550 million global market for retinal devices.

About one-third of that global market is accounted for by lasers, which is where Iridex participates. It currently is not involved in the far larger vitrectomy equipment market, but Caldwell said after his formal remarks in a breakout session that “we are interested in entering this market, but only with outstanding technology.”

In the portion of the retinal market where Iridex participates, Caldwell estimated that the company is the second-leading player, with a 23% market share. Its worldwide installed base exceeds 6,000 laser systems. Lumenis (Yokneam, Israel) is believed to be the largest player in this sector with a 39% market share.

Iridex markets two types of ophthalmic lasers, the 532 nm green laser and an 810 nm solid state infrared diode laser. These are sold to two distinct markets: the office market, which addresses the needs of the retinal and glaucoma specialists; and the general ophthalmologists and second, the operating room, which includes hospital and ambulatory surgical centers.

The company's far smaller dermatology business, which generated more than $6 million in revenue in 2005, has an installed base of more than 1,000 systems. In this market, Iridex primarily addresses two different sectors of the vascular lesion market. The 532 nm Diolite and Varilite serve the market that treats pigmented lesions, vascular lesions and skin rejuvenation. The 940 nm VariLite addresses large-diameter vascular lesions such as venous lake, telangiectasia and pyogenic granuloma.

Historically, Iridex has been viewed as a company with excellent technology and products, coupled with outstanding customer service. However, the company's sales and marketing efforts were not especially strong, with the result that the company's total revenue essentially flattened out at about $32 million between 2000 and 2004. Considering that ophthalmic laser market leader Lumenis was experiencing huge operating problems and was not sharply focused on its ophthalmic business, Iridex's performance between 2000 and 2004 was particularly dismal.

Caldwell, who had a long and successful career at the largest ophthalmic company in the world, Alcon (Fort Worth, Texas), joined Iridex in July of last year and has implemented numerous changes. Perhaps most importantly is a concerted effort to improve the company's marketing and leverage its solid product lines.

New, experienced and well-regarded personnel have been hired, creative new marketing programs have been implemented and the company is now a much more market-savvy competitor.

“The voice of the customer is now in the house,” Caldwell told investors.

One of Iridex's key opportunities and initiatives lies in ophthalmic disposable probes. Although the company commands an impressive 36% market share of lasers in the retinal operating room, it has a disappointing 17% share of the related disposables.

The ophthalmic direct sales force was expanded from six to 10 reps in 2005 and a director of sales was added to support this effort. Perhaps more importantly, major changes were implemented to the sales compensation plan, so that the ophthalmic sales force is strongly incentivized to focus on disposable probe sales.

As part of that initiative, the company has launched the Valued Iridex Program (VIP), which creates contractual agreements with its disposable probes, thereby improving its competitive place in the market.

Disposable sales already are responding to these programs. For example, in 1Q06, the company enjoyed a robust 31% surge in disposable sales, by far its best quarterly performance in this sector of the business. As a result of this torrid growth, disposables accounted for 42% of total revenue in the latest quarter, whereas just three years ago in fiscal 2003, disposable revenue was only 26% of the total.

“We set a goal last year to reach 40% disposable revenue in 2006 and we have already achieved this,” Caldwell said. “As a result, we have re-set our disposable target to 45% of worldwide revenue.”

As part of its effort to bolster its disposable business, which generates lucrative gross margins, the company has moved aggressively to defend its intellectual property. After a thorough review of its patent portfolio, Iridex filed suit last October against Synergetics (O'Fallon, Missouri) for patent infringement.It is seeking injunctive relief, monetary damages, treble damages and attorneys' fees.

The case is now in full swing and a trial date has been set for April 2007. There will be another mediation session in the next few weeks in the hopes of achieving a resolution but based on the strained discussions to date, it appears likely that this case could go to trial next year.

Caldwell, a former lawyer, said “I feel very confident and strongly about our patent portfolio and I am optimistic that we will ultimately prevail.”

He outlined three key components of the company's long-term growth strategy, with the key goal to reaching $100 million in global revenue by the 2010. Iridex reported sales of $37 million in 2005 and, as previously discussed on an analysts' conference call, expects to show “double digit” revenue gains during 2006.

These three initiatives are first, grow the core business; second, internally develop new products; and third, grow through acquisition or strategic alliances. The latter is expected to supply the lion's share of this growth, with new products and growth in existing lines supplementing external growth.

The key element in the first initiative is the emphasis on marketing, which already has begun to bear fruit as evidenced by the acceleration in revenue in recent quarters.

Caldwell spoke glowingly of recent hires in the company's Product Innovation Group, which will be key to improving the flow of new products. He also noted that six to eight new laser probes are being introduced during the year and at this fall's American Academy of Ophthalmology (San Francisco) meeting, to be held in Las Vegas Nov. 12-16. Iridex also plans to introduced two new laser consoles.

With regard to external growth, Caldwell and his team are actively evaluating a plethora of opportunities, spanning the range from bolstering its OEM business to the acquisition of a product or a company.

Iridex has an existing OEM relationship with Bausch & Lomb (Rochester, New York) and sees several other opportunities both in and out of ophthalmology to expand that business, which generates attractive gross margins.

Its acquisition efforts, led by an internal team of executives that meets weekly, is targeted primarily toward ophthalmology, especially its core retina business. Caldwell does not dismiss any deals outside of the retinal area, saying, “we will be opportunistic to good technologies outside of our core competency.”

He did note that any deal must be accretive within a year, provide some recurring revenue and enjoy gross margins in excess of 50%. A strong balance sheet, featuring over $21 million in cash at the end of the first quarter, will support the company's efforts.

Looking to the future, Caldwell said that “I am very optimistic about the company's prospects. The team is now in place to build Iridex to $100 million by 2010.”