Laserscope

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Laserscope

3070 Orchard Drive
San Jose, California 95134-2011
U.S.A.
Telephone: (408) 943-0636
Toll Free: (800) 356-9630
Fax: (408) 943-9630
Web site: http://www.laserscope.com

Public Company
Incorporated: 1984
Employees: 195
Sales: $57.4 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: SCP
NAIC: 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing

Laserscope is a San Jose, California-based company that makes medical laser systems for a variety of uses. One of Laserscope's newer systems treats benign prostatic hyperplasia, a urological disorder that involves the enlargement of the prostate gland and mostly strikes men over the age of 50. Laserscope also offers systems with aesthetic applications, such as the removal of wrinkles, leg and facial veins, and unwanted hair. To a lesser degree the company's lasers find uses in such markets as ear, nose, and throat surgery; general surgery; gynecology; and photodynamic therapy. In addition, Laserscope sells products used by its systems: disposable optical fibers, side-firing devices, individual custom hand pieces required in some surgical applications, scanning devices, micromanipulators for microscopic surgery, and other accessories and procedure-specific kits. Laserscope products are sold through the company's own sales force in the United States, France, and the United Kingdom, and marketed to the rest of the world through distributors. Laserscope is a public company, trading on the NASDAQ.

Use of Medical Lasers Dating to the 1960s

The word laser is an acronym that stands for Light Amplification by the Stimulated Emission of Radiation, a concept conceived by Albert Einstein in 1917. It was not until 1954 that researchers in Bell Laboratories took the first major step in making the idea a reality, producing stimulated emissions of microwave radiation, or MASER. In 1958 the first theoretical plans for building a viable light laser were published and two years later the first laser, using a ruby rod, was built. Soon researchers began to study the effects of lasers on biologic systems in the hope of finding medical applications. The only medical application found for the ruby laser was in retinal surgery, which began in the mid-1960s. More advanced lasers were developed and by the late 1970s some researchers found uses in non-ophthalmic procedures, but it was not until the early 1980s that lasers were compact and powerful enough to appear widely in hospitals as well as some physicians' offices. These continuous wave lasers, however, were far from precise and could easily cause heat injury to normal tissue. This problem was resolved in the late 1980s with the introduction of pulsed dye lasers, which were more discriminating, allowing the devices to be selective enough, for example, to remove port wine stains on patients. The advent of scanning devices in the early 1990s brought computer control to the use of laser beams in surgery, opening a wide range of medical applications.

Laserscope was founded in a small Santa Clara office in 1982. Its founder investors included Dr. David B. Apfelberg, a plastic surgeon and the head of the Palo Alto Medical Foundation Laser Center; Dr. Rodney Perkins, a specialist in otologic surgery who became Laserscope's chairman; and Robert J. Pressley, who held a Ph.D. in physics and had headed research and development at Holobeam, which manufactured commercial lasers, and previously founded XMR, Inc., another maker of laser systems. Laserscope started out with $250,000 in the bank. Over the next four years the company raised another $20 million in seed money. Investors included venture capital funds Sierra Ventures and Technology Funding Partners. After two years of development, Laserscope's first product, the KTP/532, marketed as part of the Omniplus system, was introduced in 1984.

The Omniplus used a crystal system developed by Du Pont Co. that allowed the laser to be used in several different surgical applications, from removing birthmarks to tumors. In July 1986 Du Pont and Laserscope forged an alliance, with Du Pont buying an unspecified minority interest. According to a Du Pont spokesman, the amount invested was "more than $1 million and less than $10 million." The hope was that with the backing of a major corporation Laserscope would be able to grow more rapidly. Aside from cash, Du Pont, which also took a position on Laserscope's board of directors, provided help in research, development, manufacturing, and marketing. For Du Pont, the alliance with Laserscope was part of an effort to strengthen its position in the medical industry.

Late 1980s Enthusiasm for the Company

Although Omniplus was versatile, it was expensive, costing around $130,000, and despite Du Pont's support there were serious doubts about Laserscope's strategy, given that the industry was moving toward the development of lower-cost devices that physicians could purchase. Already there were units in the $20,000 range. Nevertheless, buyers lined up, as revenues grew from $11 million in 1988 to $20 million in 1989, and investors remained enthusiastic about the company's prospects, which were soon buoyed by the introduction of a more advanced laser system, the KTP/YAG. In late 1989 the company went public. The target price for the initial stock offering was from $6.50 to $8 per share, but demand was strong enough that the price was boosted to $9. Laserscope had carved out a leadership position in the general surgery market of the medical laser industry, with its systems used in dermatology as well as gynecology, and ear, nose, and throat surgery. Hospitals also were buying units, looking to become involved in laparoscopic gallbladder surgery, which was becoming prevalent. In 1990 revenues surged to $54 million and the price of its stock reached $31.50 a share. As a result, the company outgrew its space. Laserscope had employed just 50 people in 1986 but by the end of 1990 it had a staff of 250, necessitating a move from its Santa Clara location to a new headquarters in San Jose. Also during 1990 Du Pont decided to cash out after holding its investment in Laserscope for three years. Du Pont made a 25 percent return, but it left a lot of money on the table, selling when Laserscope was priced at $20.50 per share, well below its peak.

Laserscope appeared to be flying high at this stage, but a recession and other factors combined to put a halt to its growth in the early 1990s. Aside from customers cutting back during poor economic times, Laserscope was hurt by new Medicare guidelines on capital spending that made hospitals reluctant to make major capital expenditures, and the decision by many doctors to use electrocautery devices, a decades-old technology, for gallbladder surgery rather than lasers. Although initially enthusiastic about the new laser devices, doctors had come to realize that the much cheaper, already installed electrocautery devices performed as well as lasers in this particular application. Nevertheless, management remained optimistic about the future, contending that Laserscope was in better shape than its competition and that it was taking important steps to resume its prior pattern of growth. It signed agreements with distributors overseas in an effort to increase international sales from 5 percent of total revenues to about half. Laserscope hired more clinical consultants to train surgeons on how to use lasers and added more annual training seminars. It also spent heavily on research and development of new products. In 1991 the company introduced a product to perform surgery on herniated spinal discs.

As conditions worsened in 1991, however, the company was forced to take more drastic steps. In October of that year, it laid off about 15 percent of the workforce, 38 out of 260 employees. Within months, Laserscope's CEO, Herbert Taus, retired. Chairman Perkins stepped in as CEO on an interim basis while the company searched for a replacement. In the meantime, the board instituted a shareholders' rights plan to help stave off any takeover attempts. In late December 1991, Laserscope named a new president, as Perkins remained chief executive—at least in name. Taking over was Robert McCormick, the former marketing head of Acuson Corp., who was instrumental in the ultra-sound manufacturer increasing sales from $3 million to $280 million. McCormick laid out a new strategy to return the company to profitability after three straight losing quarters. As his predecessor had proposed, McCormick wanted to increase foreign sales and boost training efforts. He also wanted to explore new surgical markets in plastic surgery and dermatology, and was willing to develop non-laser surgical devices, taking the position that Laserscope, despite its name, was in essence a surgical systems company and did not have to limit itself to laser products.

Over the next few years, Laserscope made some progress in its strategy. In 1992 it won approval from the U.S. Food and Drug Administration to sell a laser device for cosmetic surgery and one for use in prostate disease, and it also developed a new laser system used in combination with a photosensitive drug to destroy cancerous cells. In 1995 Laserscope introduced SmartScan, the first laser system designed for surgical and dermatological procedures performed in an office or outpatient center. Laserscope also took steps to grow its international business, but earnings continued to languish and investors lost faith in the company. The price of its stock fell to $2 per share in 1995.

Company Perspectives:

The Laserscope mission is to improve the quality and cost effectiveness of health care by providing safe, innovative and minimally invasive surgical systems.

Prospects appeared brighter for Laserscope in 1996 when it acquired Heraeus Surgical, Inc. for $2 million in cash and some 4.6 million shares of common stock. The Milpitas, California-based company manufactured lasers used by dermatologists, a thriving segment of the laser industry. In addition, Heraeus offered some diversity because it also sold operating room products such as lighting systems, surgical tables, centralized smoke evacuation systems, and ceiling-mounted equipment management systems. Because Heraeus was a subsidiary of a German company, Heraeus MED GmbH, it also brought with it some international distribution channels. The two companies' laser technologies were compatible and by combining operations it was expected that Laserscope could trim as much as $5 million a year in operating expenses.

Late 1980s Change in Leadership

As a result of the Heraeus acquisition, Laserscope generated record revenues in 1997, totaling nearly $64 million, but the company continued to post net losses, much of it related to the company's Ascent Medical Systems group of non-laser products for operating and treatment rooms. The following year saw revenues drop 14 percent to $52.7 million, which led to a net loss of $9.7 million, a stock price hovering around $1, and the hiring of a new chief executive. In June 1999 38-year-old Eric Reuter was named Laserscope's new president and CEO. He had joined the company in September 1996 as vice-president of Research and Development. After earning degrees in mechanical engineering and materials sciences from the University of California at Davis, he completed the Stanford Executive Program in Product Development and Manufacturing Strategy. He became a mechanical engineer and program manager at Siemens Medical Systems, and later held an engineering management position at the Stanford Linear Accelerator Center at Stanford University.

With Reuter at the helm, Laserscope once again attempted to engineer a turnaround after nearly a decade of floundering. Over the next few years Laserscope raised additional funds, sold off a German subsidiary and unprofitable businesses such as Ascent Medical Systems, and began to focus its research efforts on products with long-term potential. Revenues dipped to $35 million in 2001 before the company's balance sheet began to reflect the changes made by the new management team. An important step was the 2002 launch of a new laser treatment to treat benign prostatic hyperplasia (BPH). Also of major importance was the signing of an exclusive distribution agreement with McKesson Medical, which more than doubled the sale of Laserscope products from 2001 to 2002. Laserscope saw revenues improve to $43.1 million while posting net income of $323,000. Moreover, Laserscope was on the verge of realizing even greater prosperity as demographics began to favor the company's line of medical laser systems. With baby boomers aging and willing to spend money on looking younger, demand was growing for Laserscope's laser systems for aesthetic applications. In addition, the aging population also played to the company's strength in the BPH market. In 2002 some 180,000 men in the United States alone were surgically treated for the condition, a number that was expected to double over the next five years. The upside was even greater, because 90 percent of the men suffering from BPH were using medication rather than surgery. Moreover, only about 20 percent of men sought treatment of any sort. With the number of older men increasing in the population and a larger percentage opting for surgery rather than expensive prescription drugs year after year with no guaranteed result, the potential for the BPH market to become a cash cow for Laserscope increased in probability. In 2003 Laserscope recorded revenues of $57.4 million and a $2.5 million net profit. Many doctors were still resistant to the laser treatment, which was considered the best solution for BPH, but investors were already factoring in the likelihood that the laser option would soon win out. They bid up the price of Laserscope stock just as they had 15 years earlier. But whether the company would finally realize its promise remained an unanswered question.