New Lehman Report on SNRS.
August 10, 2000
Sunrise Technologies (SNRS - $7.34) 1 - Buy
Company Update
Hyperion laser launch exceeds expectations
Investment Conclusion:
- The launch of the Hyperion has exceeded estimates. We expect a rapid ramp 2H00E, break even 4Q00, with over 300% top line growth in 2001E to $80.7m and EPS of $0.18. Value will be realized as units are shipped and public demand for "no touch" laser correction is demonstrated over the next 2 quarters.
Summary
- Hyperion laser launch exceeds estimates! 31 units sold; 2000E units raised by 10 to 115 units.
- 2Q loss of $0.25 EPS, higher than forecast due to non-cash charges and regating shipments.
- Maintaining EPS progression over the next 6
quarters
- Hyperopic market opportunity for Hyperion laser
large; rapid penetration expected.
Rating Target
New: 1 - Buy New: $19
Old: 1 - Buy Old: $19
HYPERION LASER LAUNCH EXCEEDS ESTIMATES! 31 UNITS SOLD; 2000E UNITS RAISED BY 10 TO 115 UNITS.
Today the company announced the completed contracts for the sale of 31 units, installed at a rate of 1 unit per day, slightly exceeding our early ramp estimate. Lehman had predicted the manufacture and sale of 105 Hyperion units at approximately $200k per unit for CY 00 based on a June launch (delayed to mid-July due to a late June FDA approval) which management believes is conservative. We agree that unit sales will be slightly greater than anticipated (115 units) in 2H00E. Although increased costs will not yield incremental earnings for 3Q and 4Q this year, the greater placement of units will act as a forward indicator of greater procedure royalty growth for 2001E. To contrast this to early LASIK days, in 1997 the demand for excimer lasers was such that only 87 excimer units (VISX & Summit combined) were placed in the U.S. The following year, laser vision correction grew by nearly 50% to 400k procedures.
2Q LOSS OF $0.25 EPS, HIGHER THAN FORECAST DUE TO NON-CASH CHARGES AND REGATING SHIPMENTS.
For the quarter, the Company generated a loss of $0.25 per share, which was $0.15 higher than our original forecast. The variance stems from the actual versus estimated number of HYPERION systems shipped and non-cash charges.
SNRS only shipped 2 units 2Q, 8 units less than our original projection, with attendant revenue shortfall. Assuming a $200k ASP and 50% COGS combined with slightly higher manufacturing overhead, the deficit accounts for $0.04 of the $0.15 per share disparity mentioned above. The remainder of the $0.15 per share differential is attributable to higher than expected non-cash charges. For the quarter, the Company recorded a $4.3m non-cash charge ($0.11 per share) associated with the prior issuance of warrants and stock options. Approximately $3.0m (or $0.06 per share) of this charge was attributable to a one-time accounting for changes made to an earlier stock option plan. Essentially, when this plan was issued in 1997 beneficiaries could not exercise their stock options when they became vested. The Company received the necessary legal and accounting approvals and corrected this error in the quarter. Despite the fact that there was no change in strike prices and no change in compensation, Sunrise was required to treat this revision as if they were issuing a new stock option plan, and expensed the difference between the existing strike prices and the current value of the stock. The remainder of the $4.3m charge relates to the quarterly amortization of the value associated with warrants issued to outside consultants in prior quarters. Going forward, management estimates that the amount of non-cash expense associated with those warrants will decline to approximately $300 – 400k per quarter.
MAINTAINING EPS PROGRESSION OVER THE NEXT 6 QUARTERS
We are increasing our HYPERION unit shipment estimate for 2000 to 115 (even though orders are currently coming in at a rate that would suggest some upside to this number) and maintaining our 250 unit estimate for 2001. Consequently, our 2000 revenue estimate has increased from $24.3m to $26.3m. We are offsetting the gross margin from these additional units by increasing our SG&A assumption to reflect the additional marketing and training the Company is providing to support the HYPERION rollout. After adjusting Q2 results for the one-time $3.0m non-cash charge, we are taking our 2000 estimate from a loss of $0.29 per share to a loss of $0.38 per share. Our 2001 estimate remains unchanged at a $0.18 per share profit.
HYPEROPIC MARKET OPPORTUNITY FOR HYPERION LASER LARGE; RAPID PENETRATION EXPECTED.
Former Harvard Medical School Cornea Service Director, Dr. Roger Steinert, stated that the number of hyperopic patients who are candidates for this procedure equal the number of myopic individuals seeking LASIK, and that the hyperopes are more highly motivated to obtain laser vision correction. Dr. Steinert estimated that within two years 33% of U.S. laser vision correction would be performed on hyperopes (estimates for U.S. 2001 LVC market = 1.9m procedures). He said that the Hyperion LTK procedure has great appeal because it involves “no cutting of the eye,” “no instruments coming in contact with the eye,” it is fast (3 seconds) and it is safe (the safest refractive laser profile ever to come before the FDA).
Dr. Steinert stated that LASIK, a procedure designed for myopia, and not yet FDA approved for hyperopia is inferior to Hyperion LTK for hyperopia. To date, all of the 31 Hyperion lasers have been sold to excimer laser LASIK surgeons. This will put the machines in the hands of busy refractive surgeons and proves that LTK is adjunctive to a LASIK refractive practice, not a competitive alternative. Dr. Steinert believes that within a two years almost all of the U.S. excimer laser placements (~ 700 locations) would need to purchase a Sunrise Hyperion in order to offer a complete menu of vision correction options to their customers. Further, he acknowledged that there is increased interest among non-LASIK ophthalmologists (outnumbering LASIK surgeons 6:1) who will also be potential purchasers of the Hyperion. The company is in negotiations with corporate LASIK centers regarding multiple purchases of the Hyperion.
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Company Description : Sunrise Technologies International, Inc. develops, manufactures and markets laser systems for applications in ophthalmology.
Related Tickers:
BOL - ; 2 - Outperform VISX - ; 3 - Neutral
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company." |
