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VISX Gets Hammered After ITC Ruling

The stock is down over 40% after an ITC judge ruled that a VISX competitor did not violate VISX's patent.
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Updated from 11:06 a.m. EST

VISX

(VISX)

lost more than 40% of its stock market value Tuesday after a judge for the

U.S. International Trade Commission

ruled that one of the company's competitors did not infringe on VISX's patent.

VISX, the developer of lasers to correct vision problems, said it would request a review of the initial findings on

Nidek

, a privately owned Japanese company that imports lasers into the U.S.

If the review is denied, the commission's initial ruling, which was made late Monday, will stand. If the review is granted, the commission is expected to make a final ruling by March 6.

By midafternoon Tuesday, VISX was down 38 1/8, or 43%, to 49 15/16. (VISX finished down 36 1/16, or 41%, to 52.)

"The market is saying there is a change in the probability that VISX can defend its patents," said Robert Faulkner, analyst at

Hambrecht & Quist

who rates the stock a market performer, which means he "wouldn't own it."

The preliminary ruling certainly calls into question the structure of the industry, according to Faulkner, whose firm does no underwriting for VISX.

VISX sells the laser technology to correct near- and far-sightedness and astigmatism, then charges a $250 fee each time a doctor uses one of the lasers.

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"The vast majority of the value comes from these recurring charges," Faulkner noted.

VISX sold just $20 million worth of capital equipment last year. In contrast, Faulkner expects the company to pick up $200 million this year from fees alone.

VISX currently controls 75% of the laser vision correction market, but the walls are closing in as more companies race to get their lasers approved by the

Food and Drug Administration

and undercut VISX's fees.

Nidek, however, does not plan to charge a fee for using its lasers.

"Nidek's an irrational competitor, and that's what scares them." said SG Cowen analyst Matthew Dodd, who rates the stock a strong buy. SG Cowen hasn't underwritten any VISX stock offerings.

"Nidek is undermining the market," said Dodd, "The good news for VISX is that Nidek's laser is so crummy that they can't take any market share."

VISX, which is based in Santa Clara, Calif., is also involved in a patent infringement dispute with

LaserSight

(LASE)

. This battle has been sidelined until LaserSight's equipment for correcting near-sightedness is licensed in the U.S.

"The best case is that Nidek is enjoined and VISX continues capturing fees from all its customers," Faulkner said. "Worst case that Nidek,

Bausch & Lomb

(BOL)

and LaserSight could sell these services without the fees."

Faulkner lowered his rating on VISX to market perform from a buy after the ITC's decision. "LaserSight and Bausch & Lomb would have to acknowledge the intellectual property and pay the fee to bring my rating back to a buy," Faulkner said.

Investors feared that the business model of fee for service was endangered by the ITC news.

Summit Technology

(BEAM)

, another VISX competitor, fell 27%, or 5 13/16, to 15 9/16. (Summit closed down 6 3/8, or 30%, to 15.)

But shares of Bausch & Lomb and LaserSight rose, with Bausch & Lomb up 3 1/16, or 5%, to 69 7/8 and LaserSight up 2, or 18%, to 13 1/4. (Bausch & Lomb closed up 1 15/16, or 3%, to 68 3/4 while LaserSight finished up 2 3/4, or 24%, to 14 11/16.) The ITC ruling could weaken VISX's ability to negotiate favorable terms for licensing its technology, analysts said.

Right now two of VISX's patents are being reexamined by the

Patent Trade Office

. A ruling on them is expected within two months, Dodd said. "If they rule in favor of the patents, it will carry more weight than a judge, because of their expertise on the subject.

"If you believe that VISX's patents are strong, the only way for it to get hurt is if someone comes out with a better laser, like Bausch & Lomb or LaserSight," Dodd calculated.

Accordingly, he has not changed his rating of strong buy on the stock. "As far as I look the risk has gone up but nothing else has changed. This is a setback but its there's no fundamental change in the company.