Mentor Corporation. Stock Price Performance. Source: Reuters All figures in US dollars, unless otherwise stated

Transcription

1 Equity Research Company Update April 30, 2007 Stock Rating: Sector Performer Sector Weighting: Market Weight mo. Price Target None MNT-NYSE (4/27/07) $40.26 Key Indices: BarraGrth, NYSE 3-5-Yr. EPS Gr. Rate (E) 15.0% 52-week Range $37.25-$53.95 Shares Outstanding 49.1M Float 40.8M Shrs Avg. Daily Trading Vol. 448,000 Market Capitalization $1,976.8M Dividend/Div Yield $0.80 / 2.0% Fiscal Year Ends March Book Value $8.42 per Shr 2007 ROE (E) 14.4% LT Debt $150.0M Preferred Nil Common Equity $413.3M Convertible Available Yes FY Earnings Per Share Prev Current 2006 $1.33A 2007 $1.21E 2008 $1.24E P/E x x x EPS estimates now include stock-based comp. CY Earnings per share 2006 $1.16E 2007 $1.25E 2008 $1.51E Medical Devices Mentor Corporation A Slight Shake-Up in the Breast Competitive Landscape May Be Approaching Our due diligence in recent weeks highlight two points of interest that may soon shake up the breast implant competitive landscape. First, Sientra (private) may have a silicone product in the U.S. market within 12 months. Second, we believe Mentor is a likely acquirer of Medicor. Our sources close to Sientra (which recently acquired private-silimed) note that two PMAs (one silicone, one saline) are on file with FDA, and silicone approval may come within 12 months. Silimed is a strong player in S. America and gaining share in Europe (we estimate $45M in 2006 sales). On Mentor, we believe it may possibly acquire Medicor (MDCR.PK), and that a transaction may be consummated in the next several months. Medicor had $37M in O-U.S. breast implant sales in 2006, selling discounted implants. The company is heavily burdened by debt. We are unclear how MNT would sell both discount and premium implants to the same customers, and await details if a deal gets done. As for Sientra, we hold new CEO Hani Zeini (formerly of Inamed) in high regard, and feel his credibility is key to Sientra. Our MNT estimates are unchanged for now. Stock Price Performance P/E x x x Company Description Mentor Corporation, headquartered in Santa Barbara, CA, makes and markets products for plastic and reconstructive surgery. Amit Hazan 1 (212) amit.hazan@us.cibc.com Jack Hu (212) Jack.Hu@us.cibc.com Source: Reuters All figures in US dollars, unless otherwise stated CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Find CIBC research on Bloomberg, Reuters, firstcall.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, BCE Place, Toronto, Canada M5J 2S8 (416) and cibcwm.com CIBC World Markets Corp., 300 Madison Avenue, New York, NY (212) (800)

2 Sientra Should Be Taken Seriously Privately-held Sientra made its way on to the scene last week with an announcement that it had closed an $85 million Series B financing, a large part of which was used to acquire Silimed, a developer of breast implants for both cosmetic and reconstructive surgery, including saline and silicone breast implants. The financing was led by OrbiMed Advisors LLC, and co-led by Clarus Ventures, Goldman Sachs and TIAA-CREF. Sientra was founded and will be headed by Hani Zeini, a veteran in the aesthetics space who led INAMED Aesthetics until the AGN acquisition It is our belief that U.S. silicone approval for Sientra may come within the next 12 months Sientra was founded and will be headed by Hani Zeini, a veteran in the aesthetics market whose most recent experience includes leading INAMED Aesthetics prior to the sale of INAMED to Allergan. Sientra also plans to use the proceeds to scale-up its commercial organization and advance product development. About the Acquired Silimed and the Two U.S. PMAs Silimed has been selling breast implants outside the U.S. since 1981, and we have had a number of conversations with the company in recent years. The company is based in Brazil, is a strong player in South America and is steadily gaining unit market share in Europe and Asia (we estimate $40-50M in O-U.S sales). We would note that the credibility of prior Silimed management was poor, in our opinion, as it did not really deliver on any promises of U.S. clinical trial progress made in recent years. On the other hand, the credibility issue reverses completely with Mr. Zeini and his team now at the helm, as our experience with him in recent years at Inamed had been excellent. This is a critical point, as the status of Silimed s U.S. PMA filings is really not easily determinable. With this background, we highlight that our sources close to Sientra (which we hold to a higher level or credibility) have disclosed that two PMAs (one silicone, one saline) are now complete and on file with the FDA. The silicone PMA is actually the further ahead, and includes both round and shaped silicone implants. We believe that U.S. silicone approval for Sientra may come within the next 12 months. Since some of the implants are shaped, it is possible that Sientra s approval process will be bundled with the pending shaped implant PMAs from Mentor and Allergan (the Allergan McGahn 410 implants and the Mentor CPG implants). We understand that progress at the FDA has been made with all these PMAs. Silimed's high-strength silicone gel implants have been used widely in Europe since 1995 and in Canada since In addition to silicone filled implants, the company also offers Lumen and Saline filled implants. The Silimed manufacturing facility in Brazil is already monitored under the FDA's Custom Good Manufacturing Process (CGMP) and holds a perfect FDA rating as well as an ISO 9001 certificate for meeting strict industry standards in the manufacturing process. We believe Sientra would be capable of capturing at least 5% market share in its first year on the U.S. market Not Changing Estimates, but Watching Closely As we mentioned above, there are really two stories we are now watching closely that may require us to review our MNT estimates. As for Sientra, we are not introducing it into our U.S. breast implant market model until we gain further visibility on its progress with FDA. That said, we believe Sientra would be capable of capturing at least 5% market share in its first year on the U.S. market (note that its implants, both silicone and saline, are supported by as much long-term clinical data as either Allergan or Mentor s). 2

3 Below we include our current WW breast implant market model. Note that a 5% U.S. market share in 2008, for example, would yield sales of about $23M. If half of this share gain came at the expense of Mentor, it would impact CY08 EPS by about $0.04-$0.05. Greater share gains by Sientra longer term would obviously have a bigger impact. Exhibit 1. WW Breast Implant Market Fiscal Year End - December ($ in millions, except per share data) 2006E 2007E 2005 Mar Jun Sep Dec 2006E MarE JunE SepE DecE 2007E 2008E Mentor U.S OUS Alleragan/Inamed U.S OUS Medicor US OUS Sientra (formerly Silimed) U.S OUS Others U.S OUS Total U.S OUS Market Share - U.S. Mentor 54.7% 59.8% 56.9% 57.2% 58.1% 58.0% 52.6% 52.1% 51.9% 50.0% 51.6% 49.6% Alleragan/Inamed 45.3% 40.2% 43.1% 42.8% 41.9% 42.0% 47.4% 47.9% 48.1% 50.0% 48.4% 50.4% Other 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Market Share - OUS Mentor 27.8% 31.0% 29.3% 27.0% 27.2% 28.6% 29.0% 29.3% 27.1% 28.6% 28.5% 29.0% Alleragan/Inamed 39.3% 35.6% 38.5% 36.0% 34.8% 36.3% 40.1% 39.4% 36.5% 35.6% 37.9% 37.2% Medicor 10.4% 11.1% 13.1% 13.6% 14.9% 13.2% 10.4% 12.8% 13.2% 13.5% 12.5% 12.4% Sientra (fka Silimed) 16.3% 16.0% 13.5% 18.0% 17.4% 16.2% 15.0% 13.4% 18.1% 17.1% 15.9% 16.4% Other 6.2% 6.3% 5.6% 5.4% 5.7% 5.7% 5.4% 5.1% 5.1% 5.1% 5.2% 5.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Market Share - WW Mentor 42.2% 46.3% 44.0% 42.6% 43.1% 44.0% 41.6% 41.9% 40.7% 40.1% 41.1% 40.9% Alleragan/Inamed 42.5% 38.0% 40.9% 39.5% 38.4% 39.3% 44.0% 44.1% 42.9% 43.4% 43.6% 44.8% Medicor 4.9% 5.2% 6.1% 6.6% 7.2% 6.3% 4.9% 5.7% 6.0% 6.2% 5.7% 5.2% Sientra (fka Silimed) 7.6% 7.5% 6.3% 8.7% 8.5% 7.7% 7.0% 6.0% 8.2% 7.9% 7.3% 6.9% Other 2.9% 2.9% 2.6% 2.6% 2.8% 2.7% 2.5% 2.3% 2.3% 2.4% 2.4% 2.1% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Y/Y Growth Mentor 7.5% 6.8% 7.1% 15.3% 19.3% 11.7% 8.1% 12.2% 12.4% 11.4% 11.1% 16.2% Alleragan/Inamed 7.0% -12.7% 0.2% 3.6% 6.4% -0.9% 39.3% 26.9% 27.5% 35.0% 31.9% 19.9% Medicor 116.0% 10.5% 12.4% 76.6% 75.0% 39.2% 12.0% 10.0% 7.0% 3.5% 7.7% 7.1% Sientra (fka Silimed) 10.4% 4.1% 17.6% 8.2% 8.4% 9.2% 12.3% 11.3% 11.0% 12.0% 11.6% 11.5% Other -11.8% 0.0% 2.5% 2.9% 2.4% 1.9% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Total 9.5% -1.8% 4.9% 11.9% 15.0% 7.2% 20.3% 17.8% 17.7% 19.8% 18.9% 16.6% Source: Company reports and CIBC World Markets Corp. The Possibility of Mentor Acquiring Medicor Lastly, we again note that Mentor could very likely acquire Medicor (MDCR.PK), and a deal could possibly be consummated in the coming months, in our view. Mentor has noted in recent months that it would be open to acquiring in the breast implant space, and Medicor s current debt issues make it the most likely target. As highlighted in our model above, Medicor had about $37 million in O- U.S. breast implant sales in 2006, selling a number of discounted brands of silicone and saline breast implants. Medicor acquired breast implant manufacturer Eurosilicone in July, 2004 and Biosil and Nagor, two related breast 3

4 implant companies, in April, The company is currently heavily burdened by debt. At the moment, we are a bit uncertain as to the strategy MNT is conceiving, as it appears to us that it would be very difficult to offer both discounted and premium implants to the same customers, so we await further details on whether a transaction is consummated and how the dynamics would play out. MNT Investment Conclusion So the bottom line for us is that we continue to have a neutral/negative stance on MNT, and suspect the stock could trade towards the mid-$30s in the coming months. Our issues for the near-term continue to be the post-approval study, which is causing great uncertainty, and now the possibility of a third entrant into the U.S. breast implant market. Further, Allergan is clearly in a position to take market share and this will continue to weigh on the stock in the coming quarters. As we think towards the time when the post-approval study concludes, we have greater confidence in silicone penetration and leverage on the P&L. This is a point that long-term investors should take note of, as EPS power becomes meaningful towards the end of CY08 and into CY09. 4

5 5 Exhibit 2. Mentor Income Statement Fiscal Year End - March ($ in millions, except per share data) FY FY 2007E FY 2008E FY FY Jun Sep Dec MarE E JunE SepE DecE MarE 2008E 2009E Sales $482.9 $503.7 $79.4 $66.9 $75.3 $79.0 $300.7 $89.6 $75.6 $83.8 $87.4 $336.4 $388.8 Cost of Operations Gross Profit SG&A R&D Operating Income Interest Inc. (Exp.) (1.6) Other (Exp.), net 1.1 (0.1) (0.3) Pretax Income Income Tax Tax Rate 31% 31% 32% 33% 29% 31% 31% 30% 30% 30% 30% 30% 30% Options Expense (tax effected) Net Income - As Reported Net Income - Continuing Ops Shares Outstanding EPS - As Reported 4 $0.33 $0.24 $0.32 $0.33 $1.21 $0.34 $0.27 $0.31 $0.32 $1.24 $1.69 EPS - Continuing Ops. $1.38 $1.33 $0.35 $0.31 $0.36 $0.36 $1.38 $0.39 $0.32 $0.36 $0.37 $1.43 $1.87 CY Sales CY06 $294.1 CY07 $328.0 CY08 $372.9 CY EPS (As Reported) 4 $1.25 $1.51 CY EPS (From Ops) CY06 $1.30 $1.43 $1.69 Margin Analysis Gross Margin 64.0% 58.6% 74.0% 72.3% 74.7% 74.7% 74.0% 73.4% 73.5% 73.8% 74.0% 73.7% 74.5% SG&A - % Revenue 36.5% 32.6% 35.1% 42.9% 43.0% 38.5% 39.7% 39.2% 39.4% 39.6% 40.0% 39.6% 38.5% R&D - % Revenue 6.8% 6.8% 9.8% 13.4% 10.3% 13.2% 11.6% 13.9% 17.1% 15.4% 15.3% 15.4% 11.8% Operating Margin 20.7% 19.2% 29.1% 15.9% 21.6% 23.0% 22.7% 20.3% 17.0% 18.8% 18.7% 18.8% 24.2% Pretax Margin 20.6% 19.6% 29.7% 25.8% 29.1% 29.4% 28.6% 26.9% 25.0% 26.0% 25.5% 25.9% 30.4% Net Margin 14.1% 13.4% 22.0% 22.1% 23.5% 22.7% 22.6% 21.4% 20.5% 20.9% 20.5% 20.8% 23.6% $ 0.04 Percentage Change (Y/Y) Revenue (Y/Y) 14.4% 4.3% -41.3% -41.5% -37.5% 9.1% -40.3% 12.8% 12.9% 11.3% 10.6% 11.9% 15.6% Operating Income (Y/Y) 26.4% -3.2% -31.8% -44.5% -34.1% -4.3% -29.5% -21.4% 20.6% -2.9% -10.5% -7.5% 49.2% Net Income (Y/Y) 22.5% -1.0% -24.9% 14.3% 4.7% 23.6% 0.4% 9.8% 4.5% -0.9% 0.1% 3.3% 31.0% EPS (Y/Y) 21.8% -3.4% -24.8% 21.2% 10.4% 28.4% 3.9% 10.5% 3.5% -0.6% 0.4% 3.1% 35.6% A Slight Shake-Up in the Breast Competitive Landscape May Be Approaching - April 30, 2007 Source: Company reports and CIBC World Markets Corp.

6 Our EPS estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2006 Current $0.47A $0.25A $0.33A $0.28A $1.33A 2007 Current $0.33A $0.24A $0.32A $0.33E $1.21E 2008 Current $0.34E $0.27E $0.31E $0.32E $1.24E 6

7 IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department within the Corporate and Leveraged Finance Division. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Important Disclosure Footnotes for Mentor Corporation (MNT) 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from Mentor Corporation in the next 3 months. 7

8 Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets: Stock Prices as of 04/29/2007: Allergan Inc. (AGN-NYSE, $121.26, Sector Performer) Goldman Sachs Group, Inc. (2a, 2e, 3a, 3b) (GS-NYSE, $224.28, Sector Outperformer) Companies Mentioned in this Report that Are Not Covered by CIBC World Markets: Stock Prices as of 04/29/2007: MediCor Ltd. (MDCR-OTC, $0.06, Not Rated) Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report. 8

9 Key to Important Disclosure Footnotes: 1 CIBC World Markets Corp. makes a market in the securities of this company. 2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months. 2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. 2d CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. 3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 4a This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months. 4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. 5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company. 6a The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities. 6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company. 8 A partner, director or officer of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months. 9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries. 10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company. 11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting shares. 13 The equity securities of this company are non-voting shares. 14 The equity securities of this company are limited voting shares. 9

10 CIBC World Markets Price Chart HISTORICAL PERFORMANCE OF CIBC WORLD MARKETS' RECOMMENDATIONS FOR MENTOR CORPORATION (MNT) Date Change Type Closing Price Rating Price Target Coverage 04/13/ SO John P. Calcagnini 05/18/ SO John P. Calcagnini 07/29/ SO John P. Calcagnini 05/23/ SO John P. Calcagnini 07/05/ SO John P. Calcagnini 08/07/ SO John P. Calcagnini 10/05/ SP None Amit Hazan 10

11 CIBC World Markets' Stock Rating System Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP Sector Performer Stock is expected to perform in line with the sector during the next months. SU Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. Ratings Distribution*: CIBC World Markets' Coverage Universe (as of 29 Apr 2007) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted % Restricted % Ratings Distribution: Medical Devices Coverage Universe (as of 29 Apr 2007) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) 0 0.0% Sector Underperformer (Sell) 0 0.0% Restricted 0 0.0% Restricted 0 0.0% Medical Devices Sector includes the following tickers: CPTS, CYTC, DIGE, ELOS, IART, LMAT, MEND, MNT, MR, NMTI, OMRI, VAR. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. 11

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