Recommendation: BUY Michael Delaney Raghu Velamati

Who is VISX? Worldwide leader in laser vision correction systems Founded in 1986; Over 300 Employees Design, Manufacture, and Market technologies 1st to be FDA approved and Japan approved Goal: Reduce or eliminate the need for corrective lenses or eyeglasses

Vision: How it works Light enters eye through cornea Properly bent cornea refracts light causing images to be sent to the retina Retina sends to brain for processing If cornea is bent improperly, image is bent and equals blurred vision

How VISX system works Changes shape of cornea so image properly focused on retina 7 beams ablate submicron layers of tissue to properly bend cornea No heat applied and never breaks surface of eye Procedure takes seconds Entire patient visit = 30 minutes

Revenue Generating Sources VISX System: VISX STAR S3 –Excimer laser and computer work station Vision Key Card (each eye) –Memory card required for operation –Stores patient data Patents on technologies and procedures New product: Wave scan –No dilation of the pupils: faster procedure

Customers/Market Share Nearsightedness, Farsightedness, Astigmatisms Over 157 million people in U.S. alone Currently have 65% of market share Little over 2 million procedures done to date = only 1 million patients

Revenue Breakdown By Location Europe 1.7% Americas 1.2% Asia & other 5.4% U.S. 91.7% By Customer The Laser Center 12% Laser Vision Centers, Inc. 13% All others < 10%

Stock Statistics Ownership 3% Insiders 45% Institutional –14% increase from last quarter 8 MM shares bought back in February

Market Participants VISX Summit Autonomous Nidek LaserSight Bausch & Lomb

5 Year Stock Chart

Ratios

SWOT Analysis Strengths 50 Countries & 30 Distributors 8,000 opthamologists 150 & 100 patents 65% market share Outpatient procedure Not capital intensive No major side effects Weaknesses Pending litigation Procedure not covered by most medical insurance cos.

SWOT Analysis Opportunities 157 million potential customers in US International market Decreasing procedure costs Threats Further litigation possibilities New technologies Lower per procedure revenues No studies beyond 10 years

Financial Statements In Excel

Valuation Using FCF

Valuation Using PE

Issues VISX has very little systematic risk Is the unique risk beneficial? What is the risk inherent in VISX? –Monthly Returns: 2% vs. 8% –Standard Deviation: 6% vs. 31%

What does the Street think? Value Line: –Annual appreciation potential of 13-23% Wall Street Analysts: –9 Buy –5 Hold –0 Sell

Summary  Have 65% of laser vision correction market  Main revenue generating sources: 1) Laser vision correction system sales and 2) $100 per eye per procedure fee  Have only penetrated 0.67% of potential US market; have just begun to aggressively enter international market  Over 50% of opthamologists have had procedure themselves  Only ~10% of revenues generated internationally  Profit margin is ~25%, with gross margins of ~70%  Sales in 50 countries worldwide

Summary  Laser eye surgery is an outpatient procedure which takes less than 30 minutes  No major side effects in 10 year history of procedure Using cash flow and P/E estimates, we valued the company at $67 per share  Our conservative estimates value VISX at $45 per share and our0 aggressive estimates value them at $100 per share  There will be a diversification benefit added to the portfolio because the correlation between “the market” and VISX is 0.02