Aging demographics, constant mobile connectivity, and increasingly sedentary lifestyles are boosting long-term demand for corrective lenses and other vision treatments.

Most people realize that the need for vision correction increases as an individual ages and studies show that the rates of cataracts, macular degeneration, and glaucoma are much higher for people over the age of 40. However, social factors are driving demand as well, as increased time spent in front of screens (smartphones, tablets, and personal computers) is causing people to become nearsighted earlier in their lives. The medical journal Ophthalmology forecasts that the number of people suffering from nearsightedness will grow at twice the rate of the general population, rising from 2 billion, or 28% of the world’s population in 2010, to 4.8 billion, or 50% of the population in 2050 (Figure 1).

We believe this rapid growth will largely be driven by increased mobile connectivity, but also by urbanization and increasingly sedentary lifestyles. As more people work indoors in front of a computer, rates of obesity and diabetes are increasing as well, according to the Institutional Diabetes Federation. More than 75% of diabetics will develop some form of diabetic retinopathy, which is the fourth leading cause of blindness worldwide. The need for vision correction is particularly acute in emerging markets, where the World Health Organization estimates that over 500 million of the visually impaired have not received corrective treatment. Governments are increasingly aiming to address this issue, recognizing the important role that vision plays in both education and road safety. It is estimated that 80% of what children learn comes through visual processing and the risk of a child falling a grade behind is three times greater for children with less than 20/20 vision. As it pertains to road safety, 60% of road accident costs are linked to uncorrected vision.

As international equity investors focused on finding sustainable growth opportunities supported by long-term secular trends, we are attracted to the extended horizon for the demand and growth of eye care, as well as the industry’s relative resistance to cyclical downturns. Most people with poor eyesight place a high priority on seeking treatment, which historically has supported vision-related spending even in recessions. According to Euromonitor, vision-related spending continued to grow in both France and Germany in the 2008-2009 recession, while overall GDP in both countries declined.

We have invested in select international vision correction companies over the years and will continue to look for additional opportunities. There are a number of ways to invest in the vision correction market.

Consolidation in Optical Retailing

One way of investing in this theme is through optical retailers. In most countries, optical retail is a highly fragmented market, with most optical retail stores still owned and independently operated by a single eye-care professional (Figure 2).

However, most countries have gradually loosened regulations around eye testing and have allowed corporations to own and operate stores in multiple locations. This is driving consolidation of the market and creating more efficient operators that benefit from brand recognition and economies of scale. Some of these players are also gaining share by offering more reasonably priced eyeglasses and delivering an omni-channel shopping experience where customers can book appointments, browse frames and even make purchases online. The ability to offer lower priced frames has been driven by a few of the more innovative players, who have decided to sell unbranded or own-branded eyewear designed in house and produced by low-cost manufacturers in Asia, rather than selling high priced frames carrying the names of the world’s leading fashion brands.

Surgical Equipment Makers

We have also studied the market for surgical vision correction. Companies develop equipment which doctors use to perform cataract surgery or refractive laser surgery. While we tend to shy away from investing in companies that sell expensive capital equipment, the purchase of which can be delayed in economic downturns, we appreciate that these companies operate with razor-razor blade business models, which allows them to generate recurring revenues from higher margin consumables and license fees. Additionally, we believe that well-entrenched players in this market benefit from high customer switching costs, as doctors are unlikely to want to be trained on several different surgical equipment platforms.

Specialty Pharmaceutical Companies

We have also considered investing in pharmaceutical companies which sell medicines to treat eye diseases. However, given our long-term investment approach, we are wary of companies facing patent expirations over our five year investment horizon. The loss of exclusivity on key drugs increasingly invites aggressive competition from generic players and quickly erodes the profitability of long standing franchises. In addition, our investing approach has always emphasized avoiding companies with meaningful concentration risk, a high reliance on one product, customer, or supplier. As such, we would be reluctant to invest in an early stage pharmaceutical or biotechnology company whose hopes rest on the regulatory approval and commercialization of just one product.