Inside Valeant’s ambitious plan for its contact lens business

(Reuters) — Valeant Pharmaceuticals (NYSE:VRX, TSE:VRX) has pursued a plan in recent months to dominate the market for specialty contact lenses, according to 2 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 & Lomb in 2013 for $8.7 billion. At the time of the acquisition, Bausch & Lomb manufactured about 75% of the basic components of rigid gas permeable lenses, known as “buttons,” said Kurtis Brown, who worked for Bausch & 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 & Lomb further consolidated their grip on the market, gaining control of more than 80% percent of the gas permeable button market, according to 1 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 & Lomb full control of the small market for Ortho-K buttons, which are used to create 1 type of gas permeable lens, said Brown, now a marketing manager for lens manufacturer Menicon America. Sales of Ortho-K buttons and finished Ortho-K lenses comprise only about $5 million in annual sales for Valeant companies.

The FTC is investigating the Paragon purchase as part of an anti-trust probe, a source interviewed by the FTC told Reuters. Valeant disclosed this week that it had received a letter from the FTC on or about Oct. 16 seeking more information about its acquisition of Paragon. 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 & 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 4 laboratories – including Alden Optics, Art Optical and Tru-Form Optics – holding out, at least for now, against Bausch & Lomb’s purchase overtures, according to 1 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 & 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 Assn., an industry trade group.

The price increases for buttons ranged from 15% to more than 120%, a source with direct knowledge of the price hikes said.

Keith Parker, owner & president of Advanced Vision Technology, said that his lab was hit with a first price increase from Bausch & Lomb in mid-September and a 2nd on October 1, all on overnight-wear lenses.

“They were substantial,” he said of the price increases. “Some of them 100%, some of them more than 100%.”

The company also did away with volume discounts, Parker said.

In response to the price increases, some labs have begun switching to other button suppliers, such as Contamac, according to at least 3 laboratories interviewed by Reuters. Contamac has not responded to a request for comment.

Last week, Bausch & 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 & Lomb hopes to do more manufacturing and distribution of finished lenses directly to optometrists. This would enable Bausch & Lomb to bypass some of the laboratories now filling that role and thereby buttress its profits, according to 1 of the people familiar with Valeant’s operations and several laboratories.

According to the 2 sources familiar with Valeant’s contact lens operations, Bausch & 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 & 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.

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