October 25, 2000, Lehman Bros
Sunrise Technologies (SNRS - $6 3/8) 1 - Buy
Company Update
Positive Vibes from the AAO!
Stock Overview
Investment Conclusion
We reiterate our 1-Buy rating of Sunrise Technologies due to the demonstrated high demand for the Hyperion laser units and early anecdotal evidence of high utilization that was evident at this week’s AAO meeting. We believe that Sunrise will meet our expectations of 115 unit sales by end of year with a loss of ($0.46) EPS for 00E. Going
forward we anticipate top line growth to $81.4M FY01 (+300%), with expanding margins due to favorable product mix as more procedures are performed per unit. We anticipate break even in 1Q01 with EPS $0.19 01E. Value will be realized as more units are shipped, public demand for “no touch” laser correction is demonstrated and the
stock attracts the attention of more investors.
Summary
Unmet needs remain clearly evident Capital placements, a leading indicator of procedures, remain in-line with high expectations Opinion leaders in ophthalmology successfully rebutting negative investor driven perception of LTK with data and personal experience
UNMET NEEDS REMAIN CLEARLY EVIDENT:
Hyperion LTK is approved for the reduction of up to 2.5 diopters of hyperopia in patients older than 40 years.
Approximately 38 million Americans are eligible candidates for this procedure. The “unconvinced” observe that only 5-
15% of patients undergoing LASIK are hyperopic, thus concluding that the hyperopia market will not be as robust as that for myopia. However, anecdotal evidence suggests that doctors who have purchased the Hyperion units in the
last quarter are exceeding their own estimates in demand. This despite the fact that as small businesses, the doctor-
entrepreneurs, have not yet started a marketing effort aimed away from the young myopic LASIK patient to one
targeting the older (over 40 year old) hyperopic patient.
CAPITAL PLACEMENTS, A LEADING INDICATOR OF PROCEDURES, REMAIN IN-LINE WITH HIGH EXPECTATIONS.
In 3Q00, the company sold 48 Hyperion laser units, falling slightly short of our expectations. This was probably
caused by a shortened third quarter due to FDA approval during the July 4th holiday and the finalization of the “lease per procedure” model early in the period. The company did ship additional units late in the quarter, but will only recognize revenue after completed installation (4Q00). Sunrise officers appeared satisfied with their impact at the American Academy of Ophthalmology meeting in Dallas (10/20/00-10/26/00) and their first opportunity to sell units at the largest ophthalmology meeting of the year. Doctors who already own Hyperion lasers met twice at informal scientific sessions and appeared enthusiastic about Sunrise LTK. We believe that with the opportunity of a full (fourth)quarter ahead, punctuated by the prospects of strong sales at the AAO this week, the company will meet our sales expectations of 115 units for the year. We think that the rapid ramp in laser unit sales is the best forward indicator of procedure growth and demonstrates a clear commitment on the part of the MD purchasers. We note that 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, U.S. laser vision correction grew by nearly 50% to 400k procedures.
OPINION LEADERS IN OPHTHALMOLOGY SUCCESSFULLY REBUTTING NEGATIVE INVESTOR DRIVEN PERCEPTION OF LTK WITH DATA AND PERSONAL EXPERIENCE
Interestingly, a number of ophthalmologists had formed their opinion of the Sunrise LTK procedure by reading the
financial pages which have been replete with negative investor sentiment. The face to face meeting of MD opinion
leaders with skeptical doctors at this week’s AAO has given Sunrise an opportunity to confront the doubting doctors
with data comparing the different modalities available for hyperopia with regards to visual outcomes and late
regression of effect. The Sunrise LTK compares favorably to the competition at a lower cost and lower complication
profile. This represents a powerful opportunity to convert the uninitiated to a more positive view leading to more sales and fewer nay-sayers. |
