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Tears of Joy at Bausch & Lomb

Melissa Davis

Bausch & Lomb (BOL Quote) fans are shedding some tears of relief.

B&L shares jumped Monday after the company said it would permanently remove its ReNu with MoistureLoc contact lens solution from store shelves worldwide. Wall Street is now hoping the company can move past a months-long association with a rare eye infection that has hit the stock hard.

After weeks of investigation, Bausch & Lomb suggested Monday that "some aspect of the MoistureLoc formula" -- rather than problems that could threaten its entire ReNu brand -- could be tied to the rare eye infection. The disease, known as Fusarium keratitis, can lead to blindness.

"After an extensive investigation involving thousands of tests, millions of dollars and collaboration with government agencies, health authorities and independent experts, there is no evidence of product contamination, tampering, counterfeiting or sterility failure," CEO Ronald Zarrella said on Monday. "We are continuing to investigate this link (between MoistureLoc and Fusarium keratitis). But in the meantime, we're taking the most responsible action in the interests of our customers by discontinuing the MoistureLoc formula."

B&L had already halted shipments of MoistureLoc in the U.S. and certain Asian markets. The company is now seeking to remove the product from shelves in its remaining markets -- such as Africa, China, Europe and the Middle East -- as well. B&L relied on MoistureLoc for less than 5% of its total revenue last year.

The Food and Drug Administration said Monday it found some manufacturing violations at the company's Greenville, S.C., plant which made MoistureLoc, Dow Jones reported. But the agency said the violations aren't related to the cause of the disease, according to the report.

That news buoyed shares in Bausch & Lomb, which now faces a number of lawsuits linked to the disease. The B&L shares have lost a quarter of their value this spring. They rose 9.4% Monday to $48.60.

Crying Jag

Still, investors may yet have reasons to cry.

For one thing, users of B&L's popular ReNu MultiPlus solution have been coming down with the rare eye fungus, too. For another, the company's accounting problems have yet to be resolved -- making its financial statements unreliable -- and its liquidity looks risky to some.

In its latest update on Friday, the Centers for Disease Control and Prevention confirmed 122 cases of Fusarium keratitis across 33 states and territories. The vast majority of those cases involved users of ReNu with MoistureLoc. However, as law firms have started pointing out, a fair share involved other ReNu products as well.

In fact, one law firm announced last week -- even before the CDC update -- that it has been retained by more than 30 ReNu MultiPlus customers who "suffered significant eye injuries" after using the solution. Of that total, the firm said, more than 10 have undergone corneal transplants or will have to do so in the future.

As a result, the firm insists that B&L should stop selling MultiPlus altogether.

"This is a public health hazard that is escalating," Jerrold Parker, founding partner of New York-based Parker & Waichman, said last week. "Until further information is available to substantiate the safety of Bausch & Lomb's ReNu contact lens solutions, the only prudent course is to recall the products to prevent additional infections."

Instead, B&L continues to suggest that former MoistureLoc users switch to other ReNu products. On Monday, in fact, the company insisted that both ReNu MultiPlus and ReNu Multi-Purpose boast "longstanding unsurpassed records of safety and effectiveness."

Risky Statements

B&L can hardly say the same about its financial statements. Rather, the company listed a series of ongoing risks when delaying its latest quarterly report on Thursday.

B&L has identified revenue recognition problems in several foreign markets that will likely slash past sales by tens of millions of dollars at least. In addition, the company has uncovered problems in the U.S. that could further threaten past results as well. It continues to investigate a number of issues -- citing weaknesses in its internal controls -- and has warned investors against relying on its financial statements in the meantime.

JP Morgan analyst Michael Weinstein, who began questioning B&L's earnings quality a year ago, sees clear reason for concern.

"Continued uncertainty regarding the ultimate timing and results of the company's internal audits, as well as the ongoing investigation into the cause of the recent Fusarium keratitis outbreak among B&L lens-care-solution users, leads us to steer clear of the shares even at these levels," Weinstein wrote earlier this month. "We expect BOL shares to remain under pressure until the company can put these issues substantially behind it."

Weinstein has an underperform rating on B&L's stock. His firm helped manage a recent offering of B&L securities and plans to seek additional investment banking business from the company going forward.

In the meantime, Fitch downgraded B&L's credit rating to BBB-minus -- just one notch above junk status -- on Friday. The firm has maintained its negative outlook on the credit, signaling the possibility for another downgrade.

Fitch cited growing concerns about the company's ReNu franchise -- as well as liquidity risks following a recent tender offer -- when explaining its downbeat view.

"Regardless of the causative factor (of the fungus), BOL will have to invest significantly to rebuild the ReNu brand, and it will likely take time," Fitch wrote last week. And "while Fitch believes BOL has sufficient cash to finance the tender offer, the firm's liquidity will be decreased. Given the challenges BOL currently faces, access to the capital markets will likely become more expensive, should it need to do so."

Equity analysts remain nervous about the company as well. At least half a dozen of them downgraded the company's stock last month alone.