Cosmetic laser firms must tread new path to fight slump

By Niveditha Ravi - Analysis

BANGALORE (Reuters) - Aesthetic laser device makers will face tough times ahead unless they make deeper forays into new areas like liposuction and body contouring to overcome a saturated market for their flagship hair removal and wrinkle treatment products.

Shares of companies like Palomar Medical Technologies (PMTI.O), Cutera (CUTR.O) and Thermage THRM.O have taken a beating over the past year as they face a dearth of new innovative products that will help distinguish themselves from the crowd and also battle falling U.S. consumer spending.

"You not only have a slowdown in capital equipment purchases because of the economy but also growing confusion within the channel because numerous companies are offering really all of the same applications," analyst Phil Nalbone at RBC Capital Markets said.

Palomar's shares have lost more than two-thirds of their value over the past year, while Cutera's market value has eroded by more than half.

"I don't see a lot of new product innovation that is terribly exciting in these companies," analyst Isaac Ro with Leerink Swann said.

Ro expects the sluggish trends in the industry to last for the major part of 2008.

SHAPING THE FUTURE

Analysts say the scarcely tapped laser-assisted liposuction and body shaping market could help the companies give themselves a makeover as they look to diversify from traditional procedures like hair-removal and wrinkle treatments.

"I don't see the base business growing significantly during 2008... I think fat reduction and body contouring is the key," analyst Assaf Guterman at Lazard Capital Markets said.

Non-invasive laser-assisted procedures are expected to become the preferred method to remove fat, especially in smaller areas like chins, as they are less painful than traditional invasive liposuction surgeries that generally involve administering anesthesia to patients.

Cynosure Inc's (CYNO.O) recent strong financial performance, which has been bolstered by its laser-assisted fat reduction system Smartlipo, stands testimony to the growing influence of laser-assisted liposuction methods.

Analysts rate Cynosure's stock as their top pick among peers even though it has lost about 30 percent of its value over the past year, and expect the company to post strong first-quarter results driven by Smartlipo.

Other companies have taken note of Smartlipo's success and are following suit. Palomar Medical and Syneron Medical (ELOS.O) plan to launch their own versions of laser-assisted body-sculpting and fat-reduction devices in the second half of 2008.

"We now have probably at least 5 other companies that will be competitors in that segment of the aesthetic laser market during 2008. It remains to be seen how well their Smartlipo franchise holds up amid a lot of competition," RBC Capital's Nalbone said.

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