Synergetics USA: A Growth Story Amidst An Aging Population

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It's clear to see: Ophthalmic surgical equipment is a booming business. The graying of the world's population is fueling long-term demand for the treatment of eye disorders, while technological breakthroughs are allowing ophthalmologists to perform vision-saving procedures once thought impossible.

According to the American Academy of Ophthalmology, three-quarters of eye diseases are age-related. One out of every five Americans - approximately 72 million people - will be 65 years or older by 2030, roughly double the number in 2000.

During the next 15 years in the US, these demographic trends are expected to boost the number of cataract patients by 60 percent and glaucoma patients by 50 percent. Macular degeneration already is reaching epidemic proportions around the globe, exacerbated by the rising incidence of diabetes.

According to research firm Lucintel, the global medical device industry will exceed $302 billion in annual sales in 2017, with a compound annual growth rate (OTCPK:CAGR) of 6.1 percent during the next five years.

The global ophthalmic devices sector is valued at $15.2 billion per year and is expected to register a CAGR of more than 4 percent from now until 2017. Driving this growth is the rise of new and complex ophthalmic procedures that require ever-smaller instruments. The technological leader in these sophisticated microsurgical devices is Synergetics USA (OTCQB:SURG).

Synergetics, based in O'Fallon, Missouri, was founded in 1991 in the proverbial garage, by a mechanical engineer and an instrument maker. To thwart its larger competitors, Synergetics constantly rolls out new products. Through persistent research and development, Synergetics now owns more than 40 patents worldwide for ophthalmic and neurosurgical devices.

The company specializes in making and selling miniaturized tools for vitrectomies, a surgery in which fluid is removed from the middle of the eye to eliminate friction on the retina. Without these advanced tools that made vitrectomies possible, patients with excess eye fluid often went partially or completely blind.

A vitrectomy is the third most frequently performed ophthalmic surgery in the world, amounting to a $277 million a year market. Every year, 1.1 million vitrectomies are performed globally, with 300,000 in the US alone.

Synergetics provides the surgeon with a "toolkit" of instruments used in vitreoretinal surgery, including ultra-small but intensely bright illuminators. The company's other products include its diamond dusted membrane scraper, for the peeling of eye membranes, and many types of tiny but powerful surgical lasers. It also makes specialized scissors and forceps.

Visionary Management

Synergetics in June reported fiscal third-quarter 2012 sales of $14.6 million, a decline of 0.7 percent year over year. Third-quarter earnings reached $1 million, for earnings per share (EPS) of $0.04, compared to $1.7 million, or EPS of $0.07, for the same period of fiscal 2011.

The somewhat disappointing performance in the third quarter mostly stemmed from economic woes in Europe, but the company expects sales to pick up on the Continent later this year, as both the economic and regulatory environments improve.

Synergetics also reported in June that cash flow from operations funded the complete pay-down of the company's debt, giving it the staying power that many small-capitalization technology firms lack.

Over the past five years, Synergetics has posted annual average earnings growth of 13.7 percent, largely driven by the company's aggressive targeting of emerging markets. The company's sales in China, India and Russia are expected to grow, as the expanding (and aging) middle classes in those countries clamor for higher-quality eye care.

Regardless of its slight third-quarter slump, the company has posted a relatively strong 2012 so far. Sales for the first nine months of fiscal 2012 rose to $43.2 million, an increase of 7.8 percent compared to the comparable period last year. Nine-month earnings increased 11.1 percent to $4 million, or $0.16 in EPS, versus $3.6 million or $0.14 in EPS in the first nine months last year.

Synergetics now enjoys substantial tailwinds. In June, the company announced that the US Food and Drug Administration (FDA) had approved under its stringent 510(k) medical device regulatory process the company's new VersaVIT, a novel vitrectomy system that's portable and priced competitively relative to traditional vitrectomy systems on the market. The company expects huge demand for the product. VersaVIT is currently under review by the FDA's regulatory counterparts in Europe. Synergetics expects approval within the next few months; the regulatory nod from overseas should ignite the stock.

To align itself with managed-care policies, Synergetics shifted its marketing emphasis from hospital settings to lower-cost ambulatory surgery centers. The company recently launched its Versa-PACK, which allows the surgeon to only carry the instrumentation and accessories actually needed for particular procedures. The product is ideally suited for ambulatory surgery centers and as a traveling kit for satellite medical offices.

Moreover, the Centers for Medicare and Medicaid Services has begun phasing in increases to several ophthalmology codes - among them cataract surgery and complex retinal detachment - that will help eye surgeons generate significantly more procedure-based government reimbursement by 2013, when the increases will be fully implemented.

This regulatory change will provide Synergetics' end-users in the US with more income to purchase its products. Likewise, the massive expansion of coverage under the Patient Protection and Affordable Care Act should provide another long-term boost to the company.

Despite Synergetics' inherent strengths, investors seem overly concerned with its underwhelming third-quarter performance. The stock sports an attractive valuation, with a price-to-earnings ratio of about 22, compared to the medical device industry's average of about 24.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.