Synergetics: Visionary play

by John Persinos, contributing editor Personal Finance

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.

Driving this sector's 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 (SURG).

Synergetics, based inMissouri, 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.

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.

A somewhat disappointing performance in the third quarter mostly stemmed from economic woes in Europe, but the company expects sales to pick up later this year.

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-cap tech firms lack.

Synergetics now enjoys substantial tailwinds. In June, the company announced that the FDA had approved its new VersaVIT, a novel vitrectomy system that’s portable.

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.

The company recently launched its Versa-PACK, which is ideally suited for ambulatory surgery centers and as a traveling kit for satellite medical offices.

The stock sports an attractive valuation, with a p/e ratio of about 22. A small-cap play on powerful secular trends, Synergetics USA is a buy up to 8.

Learn more about this financial newsletter at Personal Finance.

Related articles:

• JNJ: 'For every portfolio'
• Novavax targets malaria
• Breakout in epilepsy treatment?
• PDL BioPharma: Personal pharma