Gene Gargiulo Upgrades Laserscope to Buy Rating

Business Wire, Dec 26, 1996

NEW YORK--(BUSINESS WIRE)--Dec. 26, 1996-- -0-

Date:                  Dec. 24, 1996

Earnings per share          1995A      1996E      1997E
Current                      (.51)       .15(a)     .38
Previous                      N/A        N/A        N/A
P/E -- current                N/A        38x        15x

Book value per share                   $2.38
Debt % of total capital                    0%
Shares outstanding:                     12.3 mil
Market capitalization:                $70.77 mil
December quarter estimate              $0.05 vs. ($0.25)

Price:                                 5 3/4
S&P 500:                                 751
DJIA:                                   6522

52 Week range:                         1 3/8 - 8 7/16
Avg. daily vol. (2Q96)                45,000
Annual dividend:                       $0.00
Dividend yield:                            0%

(a) Before one-time consolidation charge. -0-

Investment Summary:

Gargiulo Group is upgrading Laserscope(b)(c) from a Hold to a Buy rating. Laserscope designs, manufactures, sells and services an advanced line of medical laser systems and energy delivery devices for the hospital, outpatient surgical center and physician office markets.

Through its acquisition of Heraeus Surgical Inc., Laserscope becomes the largest medical (non-ophthalmic) laser company in the world. Heraeus Surgical is a leading manufacturer of LaserSonic Co2 and Nd:YAG lasers and an array of operating room systems with $30 million revenue in 1996.

In 1995 Laserscope experienced a decline in revenues and an operating loss due to the further slowdown in the U.S. capital equipment market. Since then Laserscope has reconfigured the company which has resulted in a strong revenue and earnings rebound. Gargiulo Group expects the company's EPS to recover from a loss of $0.51 in FY95 to a profit of $0.15 in FY96 (before one-time consolidation charge), $0.38 in FY97 and a $1.00 in FY99.

Short-Term Potential

The short-term potential for Laserscope is in the fast growing leg vein and skin resurfacing market, through its current product offering, and the fold in technology from Heraeus Surgical.

1. Aura Laser -- New product for spider veins on the leg. The Aura laser system is designed to facilitate surgical and cosmetic procedures in an office or in an outpatient surgical center. Aura features a unique adjustable pulsing mode that allows physicians to match the laser's pulse with thermal relaxation times of various vascular and pigmented lesions. This produces improved clinical results with decreased trauma to adjacent tissue. Aura systems are priced at $50,000 ($70,000 with the scanner) when compared to the other systems from ESC Medical and Candela priced at over $130,000. Since its launch in December 1995, Laserscope has already received orders for over 150 systems.

2. Paragon Laser -- For skin resurfacing. The Paragon is a new pulsed CO2 laser which competes very well with Coherent and Sharplan. Skin resurfacing is a $110 million market growing presently at 10% annually, with Coherent at 60% market share and Sharplan at 30%. The COHR laser is premium priced and enjoys the strongest reputation in the field. Laserscope strategy is to out market Coherent through the use of two marketing techniques:

--Physician seminars combining leg vein treatment and skin resurfacing;

--Innovative purchasing plans.

At present Heraeus is shipping the Paragon laser for $60,000 ($80,000 with scanner) in the U.S. versus Coherent's price of $125,000. Laserscope hopes to move into the number three position in the skin resurfacing market by leveraging its sales force and unique educational marketing techniques.

Mid-Term Opportunity

Summary on surgical support systems:

1. These systems include ceiling mounted columns support arms to improve operating room productivity and efficiency.

2. Smoke evacuation system -- A proprietary centralized vacuum system for the operating room. This system removes the plum of smoke that is created by a laser or other surgical procedure performed in the operating room. Environmental risk in the operating room is gaining much attention among hospital administrations due to liability concerns.

Long-Term Opportunity

The alliance with QLT Photo Therapeutics provides tremendous long term growth opportunity for Laserscope. Photodynamic therapy is an emerging cancer treatment which utilizes light-activated drugs in combination with laser light sources and fiber optic diffusers. This creates highly reactive forms of oxygen which cause the selective destruction of cancerous cells. Marketing clearance for the Laserscope laser system came in conjunction with the FDA approval of laser-activated drug PHOTOFRIN to treat advanced esophageal cancer. Gargiulo Group estimates that the PDT laser device market could reach over $100 million from PHOTOFRIN treatment alone by 2001 and Laserscope will be a major player in this market.

Conclusion