Article Date: 4/1/2006

2006 Contact Lens Update
Soft Lenses: Silicone Hydrogels Still Shine. Next-generation lenses continue to stimulate industry revenue growth in a stagnant market

The 36 million contact lens wearers in the United States represent a significant portion of the ophthalmic market. Anywhere from 20% to 35% of the average practice's income comes from contact lens patients. While some segments of the market dipped this year, new materials and designs continue to fuel the industry. Sales of silicone hydrogel lenses, in particular, last year increased by 109%. This obviously contributes to the 21% drop in conventional soft lenses. Daily disposable lens sales increased by 10%, with even more growth expected next year. Sales of extended wear lenses intended for weekly or monthly replacement grew by about 13%.

Toric lenses represent about 20% of contact lens sales in the U.S., and fits are evenly divided between multifocal and monovision. But there was a 20% increase in multifocal sales last year, suggesting new designs are making their way to O.D.s offices. GP lenses represent between 10 and 13% of the U.S. contact lens market.

Close to 2.8 million patients dropped out of contact lens wear in 2005, but the number of new fits kept industry numbers steady. There were 4.2 million new contact lens fit and refits in 2005, compared with 3.3 million the previous year.

In the pages ahead, industry experts Jeffrey Johnson, O.D., and Barbara Anan Kogan, O.D., analyze these numbers and what they mean to your practice. They'll also provide a sneak peak of what may be in store for the ever-changing contact lens market in the years to come.

As an investment analyst for Robert W. Baird & Co., Inc., I frequently prepare equity research reports covering two of the largest soft lens manufacturers, Bausch & Lomb and CooperVision. Key to advising clients is to gain a thorough understanding of the impact changing technology on the overall contact lens industry in general. To do so, I am in regular contact with executives of the major soft lens manufacturers and other key opinion leaders and often have access to industry-wide sales data and proprietary research sponsored by some manufacturers.

Here, I'll provide my assessment of the soft lens industry in the intermediate future, from the perspective of the optometric practice owner.

Prior to 2001, the soft lens market experienced an anemic rate of growth, typical of a mature industry. Disposable HEMA lenses fueled strong industry growth through the mid-90s by increasing the average annual lens consumption of wearers, who had previously replaced lenses every 12 to 18 months. But by the end of the decade, most soft lens wearers had been converted to the new disposable modality, and industry growth slowed dramatically.

For the soft lens industry, 2002 was a turnaround year. Since then annual growth has averaged between 7-11%, three to four times the rate of growth of the overall optical market. The introduction of silicone hydrogel lenses has been a key growth driver.

Reported wear schedules with silicone hydrogel (Night & Day) lenses

33%                  8-30 nights continuous wear
                  6-7 nights continuous wear
21%                  Occasional overnight wear
                  Daily wear
2%                    Other

Source: syndicated industry information.

Silicone hydrogel lenses: history repeats itself

Analogous to what occurred during the '90s with traditional disposable lenses, adoption of silicone hydrogel lenses has stimulated industry revenue growth by increasing the annual purchases of the average soft lens wearer. It's estimated the soft lens wearer base is increasing just 1-1.5% annually, so most of the category growth stems from increased sales to existing wearers.

Conditions look very favorable for a continuation of high single-digit or low double-digit growth rates for the soft lens industry through 2010. During 2004 independent practitioners typically generated 15-17% of their gross revenue from sales of soft lenses. That could increase to 20-22% by 2010.

Two-week lenses fuel continued growth

Over the past two years adoption of silicone hydrogel lenses has accelerated, with the introduction of new products positioned and priced for replacement every two weeks. These new lenses fit well within the usage habits and budgets of the majority of current soft lens wearers.

During the final months of 2005, silicone hydrogel lenses generated approximately 30% of retail sales of soft lenses, more than double the share of the previous year. Within the clear sphere category, silicone hydrogels accounted for approximately 45% of retail sales by the end of 2005. With several new silicone hydrogel products still in the early phase of introduction, it is highly likely that silicone hydrogels will continue to grow into 2006, even without the new introductions that are anticipated.

SiHy market benefits from promotions and technology

By the middle of 2006, all four of the major manufacturers are likely to be heavily promoting silicone hydrogel lenses. Some already have active programs to convert their existing HEMA lens patient bases to the new materials, so that they are able to discontinue the obsolete technology and simplify their product offering and their supply chain logistics.

We also believe that most of these companies' contact lens-related R&D investments are currently devoted to upgrading their silicone hydrogel portfolios. These spending priorities will maintain a high rate of growth for silicone hydrogels and produce a rapidly declining share for traditional product lines. The huge success of silicone hydrogel lenses has created an urgent need for manufacturers to accomplish the transition in materials.

Torics enter the market

An important competitive battleground in 2006 will be silicone hydrogel torics. By 2007, all of the major contact lens manufacturers will have an entry in this market.

The new toric options incorporate the latest design technology and may expand the number of astigmats wearing soft lenses. By the end of 2005, silicone hydrogel torics made up close to 20% of disposable toric retail sales.

A practitioner survey conducted by Robert W. Baird in November-December 2005 revealed 80% of fitters had "significant" interest in silicone hydro- gel torics, and suggested that conversion to new toric lenses may be quite rapid. When asked about current soft toric patients, 58% of practitioners believe they would covert 25% or more into the new modality over the next twelve months, in spite of traditional reluctance to tamper with a successful toric fit or change established product loyalties.

Monthly continuous wear lenses have enjoyed annual growth exceeding 30%. A combination of favorable safety, wearer satisfaction and new competitive entrants into the market, could continue rapid growth of monthly replacement lenses. Continuous wear provides a meaningful breakthrough in convenience, all but eliminating one of the traditional obstacles to lens wear.

Multifocal and color lenses to expand lens offerings

U.S. Manufacturer Soft Lens Retail Prices
+ 3% + 3% - 1% + 8% + 7% + 11% + 9%
1999 2000 2001 2002 2003 2004 2005

Source: Robert W. Baird Estimates

Over the next three years we can expect that companies will extend their silicone hydrogel technology to the multifocal and color segments. And each of the companies appears to be in a race to introduce new generations of materials that address deficiencies in early products or offer new features such as anti-microbial agents. With the spate of new products expected, the market will continue to be in rapid flux. Manufacturers that will benefit most from the silicone hydrogel revolution are likely to be those with the strongest research and development portfolios.

Practitioner Interest in Soft Silicone Hydrogel Torics

  Mild interest 4%
Significant interest 16%
Moderate interest 80%
Source: Robert W. Baird 2005 silicone hydrogel contact lens survey

HEMA lenses confined to specialty niche

We forecast retail sales of all silicone hydrogel lenses could surpass sales of traditional HEMA lenses sometime during 2007. Within the clear sphere segment, sales of silicone hydrogels will likely surpass HEMA lenses this year. By the end of 2007, new materials could dominate the clear spherical market and silicone hydrogel penetration of the soft toric market could reach 25% or higher.

By the year 2010, HEMA lenses may be confined to a small segment of the market among wearers who are price conscious or who cannot be fit into new lenses will continue to use the HEMA lenses.

The next four years promise to bring practitioners superior soft lens products that better satisfy patient needs and generate higher revenue. It's an exciting time again to be in the business of dispensing soft lenses.

Dr. Johnson is a graduate of the Illinois College of Optometry and the Kellogg School of Management, Northwestern University. Prior to business school, Dr. Johnson served as the Director of Optometric Services at the Massachusetts Eye and Ear Infirmary in Boston and was an instructor of Ophthalmology at Harvard Medical School. He now works as an equity research analyst for Robert W. Baird Inc., covering companies in the eye care, dental and orthopedic fields.

Optometric Management, Issue: April 2006