An Eye on Lasik

06/10/2005 12:00 am EST

Focus:

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Although his research coverage includes virtually any market sector, Ian Wyatt tends to focus on exciting "story" stocks in emerging and rapidly growing markets. Here, in his latest  Growth Report, the advisor turns his analytical eye towards a laser eye surgery play.

"IntraLase Corp. (ILSE NASDAQ) is the sole producer of a technology that increases the effectiveness and safety of laser eye surgery, or Lasik. The company has a patented procedure that is rapidly becoming essential to modern day eye surgery. Its lasers, which hit the market in 2001, are based upon femtochemistry laser technology, the basis for a Nobel Prize in chemistry. IntraLase is quickly becoming a major player in the field of laser eye correction and will likely redefine the industry along the way.

"The market for laser eye surgery is large and growing. We expect roughly 3.5 million Lasik procedures will be carried out worldwide in 2005. IntraLase has been steadily increasing its market share in this rapidly growing market, reporting 72% growth year-on-year in the first quarter of 2005, which represents market penetration growing from 5% in 2003 to 9% in 2004, or on a procedure basis, from 43,600 to 75,300 procedures per quarter. Analysts expect market share to double again by the end of 2005.

"The first step in laser eye surgery involves cutting the cornea. Traditionally this has been done with a very high-tech knife. If you've heard horror stories about Lasik, they were likely related to surgical mistakes at this level. This is where IntraLase steps in, as it replaces this manual task through a proprietary computer guided laser and software. Surgeons have been rapidly adopting IntraLase's new patent protected technology. Doctors then pay IntraLase each time they perform an operation. This gives IntraLase a revenue stream that consists of not only one-time laser sales but also recurring revenues of $163 for each and every procedure completed.

"Already, 26.5% of the 700 domestic high and medium volume laser eye centers have adopted IntraLase technology, with an additional 117 expected to place orders by the end of the year. If those expectations are met, 43% of larger domestic laser eye centers will be using IntraLase technology, each having paid $350,000 per device. This level of penetration and consumer awareness could have serious implications for the rest of the industry's ability to attract clients without upgrading to IntraLase's safer equipment, thereby driving sales even higher as IntraLase becomes the de facto standard in the Lasik business.

"Thanks to its adept management team, IntraLase also has a strong and rapidly growing international presence which we believe will be one of the cornerstones of long-term growth for the company. International market penetration is currently much lower than domestic market penetration. There are about 800 high and medium volume laser eye centers internationally. IntraLase had sold just 68 lasers internationally. It is clear that there is a lot of additional room for IntraLase growth internationally.

"While the growth story behind IntraLase appears strong, there are risks associated with every investment, and IntraLase is no exception. Lasik is an expensive and unnecessary surgery and historically, sales have been tied to the economy. Simply put, when the economy is on the skids, consumers are less likely to pay for procedures like corrective eye surgery. It is also important to note that IntraLase is in litigation with Escalon, which believes it is owed royalties in conjunction with a licensing agreement. We do not view this litigation as a large risk, and look forward to seeing this issue put to bed. In addition, we note that IntraLase is preparing to launch a new model that will reduce surgery time and reduce the swelling associated with the process. Near term, surgeons may delay purchasing a laser in the second quarter, and instead wait for the latest product release in the third quarter.

"The first three months of 2005 marked the first quarter in which IntraLase was able to turn a profit. Net income was $2 million, compared to a net loss of $2 million in the year ago quarter, and a net loss of $3 million in the fourth quarter of 2004. Earnings per share were $0.06 per share. And with cash standing at $77.3 million, or $2.50 per share, and no long-term debt, the company looks to be in great shape to continue its rapid growth. Management, which has a history of being conservative, expects 2005 annual revenues to climb to $95 million, a 58% increase. Net income is anticipated to be in the range of $0.33-$0.37 per share. The outlook for 2006 is equally bright, with analysts expecting revenues to grow by another 42%, with earnings growing by 130%. Our share price target of $27.50."

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