The future looks increasingly blurry for vision-care giant

Bausch & Lomb

(BOL)

.

This week, B&L halted domestic shipments of its most promising contact lens solution amid mounting government scrutiny of the product. Federal authorities are seeking to determine whether the company's ReNu with MoistureLoc cleanser, introduced to the market with much fanfare in late 2004, could be linked to increasing cases of a rare infection -- known as fungal keratitis -- that can require cornea transplants and even lead to blindness.

The moisturizing solution, once hailed as a technological breakthrough by B&L, represents a small fraction of the company's $2 billion-plus in annual sales. But it stands out as a high-margin product that was gaining in popularity until fungal keratitis cases began to arise in certain Asian markets late last year. The company voluntarily suspended sales of the cleanser in both Hong Kong and Singapore in February before taking similar actions in the U.S. this week.

For its part, B&L stresses that health-care investigators have yet to link the disease to any particular eye care product. The Centers for Disease Control plans to study 109 cases of the fungus but has so far completed only 30. Still, the vast majority of those 30 have already emerged as contact lens wearers who reported using B&L ReNu solutions or generic equivalents shortly before their dangerous infections struck.

JP Morgan analyst Michael Weinstein portrayed the situation as "a worst-case scenario of sorts, reminiscent of

Johnson & Johnson's

(JNJ) - Get Report

1982 Tylenol scare," when downgrading B&L from neutral to underweight on Monday.

"While B&L is only at this time suspending U.S. MoistureLoc sales ($45 million, or 22%, of U.S. lens care), the spillover effect to the broader ReNu brand could be significant," cautioned Weinstein, whose firm counts B&L as an investment banking client. "And as such, we expect Monday's news and the subsequent media coverage to impact sales for the entire ReNu line -- the degree to which will be dictated by the playout of upcoming events."

Now, investors await a Wednesday morning conference call with Bausch & Lomb execs that will discuss the MoistureLoc question and other issues. B&L's stock plummeted 15% to $49.03 on Tuesday -- falling below $50 for the first time in more than two years.

Fading Promise

The same stock fetched nearly $90 a share just last summer. Back then, however, MoistureLoc still looked full of promise.

"Doctors and patients love it," CFO Stephen McCluski gushed during a special health care conference last June. "And unlike most so-called new lens care solutions, ReNu with MoistureLoc doesn't simply wrap a new marketing claim around an old product. It is a real technology story -- and we believe it has the potential to be a catalyst for increased market share."

The following month, with its stock hovering near a record high, B&L reported that its lens-care division had gained market share in both the U.S. and Europe on the strength of its new MoistureLoc offering in particular. It boasted similar progress the next quarter as well.

By late 2005, however, problems had begun to surface at the company. First came accounting issues -- which have yet to be fully resolved -- and then came reports of serious eye infections among MoistureLoc users in Asia.

"There has been a jump in the number of fungal eye infections related to contact lens use, with seven cases reported last month and three this past week alone," the Singapore edition of

Today

reported in mid-February. And "three patients, aged 20 to 43, have had to undergo corneal transplants to save their sight."

Today

reported that all but one of the patients who came down with the fungus had used MoistureLoc to clean their contact lenses. B&L voluntarily suspended sales of MoistureLoc in both Singapore and Hong Kong that same month.

Still, B&L continued to argue against a full-scale recall of the product.

"If we believe there is a problem with our product, we will of course take the appropriate and responsible actions," the company said in a statement cited last month by the

Bernama Daily Malaysian News

. But "it is evident from this data to date that there must be some separate or unrelated contributor or cause of this infection."

Words of Caution

Baird analyst Suey Wong held on to similar beliefs until this week.

But then, he said, several developments -- including a recent warning by the Food and Drug Administration -- worked to change his mind. Of the 30 patients examined in the ongoing government study, he said, 26 remembered which contact solution they had been using before the fungus struck. And all 26, he stressed, mentioned either a branded or privately labeled ReNu solution.

"While initial conversations with cornea specialists last week led us to believe it was unlikely B&L's lens care solution was associated with the recent uptick of fungal infections, it now appears likely such an association exists," wrote Wong, whose firm intends to seek investment banking business from the company over the next three months.

"Given the uncertainty of when -- and potentially if -- ReNu with MoistureLoc returns to the market, the risk that this issue damages B&L's brand equity and the potential for litigation surrounding lens care-related infections, we believe ... a low multiple is warranted at present."

Despite MoistureLoc's relatively modest sales so far, Wong has gone ahead and removed $251 million from his revenue projections for the current year. Moreover, he slashed his profit estimate from $3.95 to $2.65 a share.

For starters, Wong explains, B&L could wind up removing a number of ReNu products -- besides MoistureLoc -- from the market. Moreover, he says, those product withdrawals could extend well beyond the U.S. And finally, he suspects, the company could face litigation expenses as a result of these developments.

Bear Stearns analyst Milton Hsu expressed similar caution when downgrading the company's stock from outperform to peer perform -- even before the recent sales halt -- in a research note last week.

"Although (B&L) was our favorite long idea for 2005, fundamentals have changed for BOL over the past quarter and several new issues have materialized since late December," wrote Hsu, whose firm seeks to do business with the companies it covers. "In our opinion, there are more uncertainties and overhanging issues today than there have been over the past two years."

JP Morgan's Weinstein followed up with a stronger warning following the latest development this week.

"Monday's lens-care implications serve to further complicate an already messy situation," Weinstein explained. "Recall that prior to the FDA health alert, investors were already wrestling with unreported 4Q and 2005 results, a recent restatement for tax accounting issues in Brazil, pending restatement associated with Korea revenue recognition issues, a host of additional items uncovered during the company's expanded audit and, finally, infection-driven lens care concerns in Asia. These issues, although serious, seemed manageable. ... However, with ReNu brand risk now having spread in a material way to the U.S. market, we recommend that investors steer clear of Bausch & Lomb shares."