The Motley Fool: Is There Opportunity in the Eye-Care Sector?

Imperfect vision is a common problem around the world. It's the basis for large businesses at Essilor (NASDAQOTH: ESLOY  ) , Hoya, and Luxottica (NYSE: LUX  ) , as well as contact-lens manufacturers like Johnson & Johnson (NYSE: JNJ  ) , Novartis, Cooper (NYSE: COO  ) , and Valeant (NYSE: VRX  ) . Not only is providing vision care products a profitable business in its own right, which often supports double-digit returns on capital, it is a business where customers typically have to buy the product over and over again throughout their life. Add in above-average growth prospects from emerging markets and it is not too difficult to see why these businesses generally carry robust valuations.

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Is There Opportunity in the Eye-Care Sector?

Seeking Alpha: The Incredible Shrinking Eye Care Sector

Tuesday's announcement from Merck (NYSE: MRK) that is acquiring Inspire Pharmaceuticals (Nasdaq: ISPH) is interesting on a couple of fronts. It's interesting for the multiple that Merck is paying and it is a good exit for Inspire shareholders. It is also interesting because it leaves so few publicly traded stocks in the eye care sector.

A Fair Deal For A Troubled Company
Merck is offering $5 in cash for each share of Inspire Pharmaceuticals, for a total deal value of $430 million. Although this price was a 26% premium to Monday's closing price, it was only half of where the stock was trading as recently as December, and that's a big part of why the company is taking the deal.

Inspire's shares got crushed when the company's drug candidate for cystic fibrosis (denufosol tetrasodium) failed in a Phase 3 study and the company abandoned the program. Add that failure to the prior Phase 3 failure of Prolacria in dry eye and the company was left with a very thin pipeline – a low-potential follow-on indication for AzaSite in blepharitis and some early-stage glaucoma compounds (likely at least six or seven years from marketability).

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The Incredible Shrinking Eye Care Sector

Cooper: A Growing Play On Eye Care

For investors who want to play any trends in eye health, pure plays are few and far between. Most are either small divisions of huge companies (Novartis' (NYSE:NVS) Ciba Vision), private (Bausch & Lomb), very small (ISTA Pharmaceuticals (Nasdaq:ISTA)), or not really involved in the medical side (Luxottica (NYSE:LUX)). That makes Cooper Companies (NYSE:COO) a pretty rare company, and the fact that it grows is a cherry on top of the sundae. 

A Strong End to the Year
Cooper posted a solid finish to its 2010 fiscal year. Revenue rose 11% to $313 million, surpassing the high end of what was a surprisingly tight range of estimates. The company's vision business (which is about 85% of the total) saw revenue growth of 10%, fueled at least in part by 88% growth in silicon hydrogel lenses. Its other business, surgical tools for the ob/gyn market, saw 14% reported growth.

Cooper also did a fine job with respect to generating profits. Gross margin improved nearly four full points, while operating profits jumped 56% from the year-ago period. Profitability was definitely helped by the surgical business, where segment gross profits jumped about 12 points from the year-ago period and the operating margin was well above the corporate average (28% vs. 21.4%). 


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