IntraLase: Changing the LASIK Landscape
The company aims to make its laser-created flaps the new standard of care.
BY JERRY HELZNER, SENIOR EDITOR

IntraLase president and CEO Robert J. Palmisano PHOTOGRAPHER: TIM RUE

When IntraLase offered shares of its stock to the public in October, investors were quick to show their confidence in the future of the California-based company whose advanced technology enables refractive surgeons to cut the LASIK flap with a specialized femtosecond laser instead of a microkeratome. Priced at $13 a share, IntraLase stock ended its first day of trading at $16.25, and continued to move up steadily to reach a high of almost $24 in January before profit-taking trimmed gains.

The warm welcome accorded to IntraLase represented investor recognition of the company's classic business model, a model first used successfully a century ago when Gillette was able to get tens of millions of men to use its razors, thus assuring decades of highly profitable sales of Gillette razor blades to these same consumers.

Though the IntraLase technology is far more sophisticated than Gillette's, the basic principle remains the same. The more IntraLase FS lasers the company can place with high- and medium-volume refractive surgeons around the world, the greater the share of LASIK procedures that will be performed using the laser. And because each eye treated requires a sterile, disposable patient-interface unit provided by IntraLase, the company eventually expects to derive the majority of its revenues from the sale of the high-margin disposables to surgeons. The patient-interface unit fits between the patient's eye and the laser, providing the depth-reference plane for the beam of laser light.

"By deriving income from each procedure performed with the IntraLase FS laser worldwide, we are creating an annuity for the company," says Robert J. Palmisano, president and CEO of IntraLase. "The IntraLase FS laser has now moved into the mainstream of refractive surgery and is rapidly becoming a new standard of care for LASIK procedures."

In this article, in addition to discussing the IntraLase technology, I'll assess how much success IntraLase is having in aggressively implementing its business plan, while also looking at some of the obstacles that the company still faces in making the IntraLase FS a new standard of care in performing LASIK.

Placements Before Profits

Some on Wall Street had expected IntraLase to turn its first profit in the last 3 months of 2004. Instead, the company, flush with more than $86 million in cash from its sale of stock to the public, decided to postpone profitability for a few months and drive for more laser placements worldwide by accelerating spending on technical and clinical support services, marketing and laser production.

"As of now, we have no competition in the creation of bladeless flaps," notes Palmisano. "We're in a unique position to alter the way LASIK is performed. We first established our business by selling our lasers to the highest-volume surgeons. Now, we're focusing more on international markets and moderate-volume surgeons. We're beginning to penetrate the moderate-volume practices, and that's a good thing because there are more of them."

By focusing on laser placements, IntraLase management is thinking longer term. Though an IntraLase FS laser costs a practice about $375,000, the profit margins on laser sales are less than half of the margins on disposables. Clearly, the plan is to grow the current installed base of 217 lasers worldwide by capturing a good portion of the 85% of LASIK procedures that are still being performed using microkeratomes.

Palmisano is optimistic that this goal can be achieved.

"We have been consistently growing the IntraLase share of the U.S. corneal flap market," asserts Palmisano. "Our share grew to 16% at the end of 2004, compared to approximately 10% at year-end 2003. And I'm confident we can exit this year with about a 25% share of the U.S. market."

If IntraLase achieves Palmisano's goal for U.S. procedures, and international use of the FS laser grows apace, sales of the per-procedure disposable units alone, at an average of about $140 a unit, could in the not-too-distant future be bringing in about $70 million of high-margin revenue a year. (Note: though the per-procedure disposable unit is priced at $160, high-volume practices receive a discount.)

IntraLase Eliminates Fear

Whether IntraLase actually becomes a new standard of care for the LASIK procedure will largely depend on its acceptance by refractive surgeons and their patients. The opportunity to eliminate the microkeratome blade from the procedure has strong appeal to both groups.

Surgeons have produced consistently good outcomes using microkeratomes, but they note that cutting the flap with a microkeratome is the part of the procedure that presents the greatest potential for serious complications. Though the danger is small, it is real, and surgeons who've been attached to heart monitors during the surgery have shown increased heart rates during the cutting of the flap, along with PVCs, PAT and short runs of ventricular tachycardia. Some surgeons have even abandoned LASIK in favor of surface ablation procedures because of their concerns about flap complications.

Refractive surgeons report that patients embrace the idea of a bladeless procedure, and in some cases the elimination of the blade can be the key factor in making the decision to have LASIK.

"A blade is the last thing most people want near their eye, which is why many of the 55 million Americans estimated to be eligible for LASIK still wear glasses or contacts," says Michael Gordon, M.D., assistant clinical professor of ophthalmology at the University of California, San Diego.

	Gordon Binder, M.D., of the Gordon Binder Institiute, LaJolla, Calif., cutting a flap with the IntraLase FS laser.

The IntraLase Technology

Instead of a blade, the IntraLase FS laser uses femtosecond laser technology. Much of this technology was originally patented by a team of scientists and ophthalmologists at the Center for Ultrafast Optical Science at the University of Michigan and licensed to IntraLase when the company was founded in 1997 by Ronald Kurtz, M.D., and Tibor Juhasz, Ph.D. Commercial development of the IntraLase FS laser was funded by venture capital. The laser received FDA clearance as a 501k device in 1999 and was introduced to the U.S. marketplace in 2001.

IntraLase technology employs an infrared beam of light to precisely separate tissue through a process called photodisruption. The process, which takes about 45 seconds, is directed by proprietary software and uses highly focused, ultra short-duration laser pulses to divide material at the molecular level without the transfer of heat or impact to the surrounding tissue.

The beam of laser light is focused to a precise point within the stroma, where each pulse emits a tiny 2- to 3-micron spot of energy, creating a microscopic bubble of carbon dioxide and water vapor. Thousands of these bubbles are precisely positioned to define the flap's dimensions, as well as the location of the hinge. More bubbles are then stacked along the edge of the flap up to the corneal surface to complete the flap. The surgeon can then lift the flap to permit treatment by the excimer laser. When treatment is complete, the flap can be accurately repositioned, thanks to its beveled edge.

Technology Improves Technique

For the less experienced surgeon, the IntraLase FS laser offers the promise of a technology that can overcome deficiencies in technique, consistently creating corneal flaps of exact diameter and depth with computer-controlled accuracy. That translates to better outcomes and lower retreatment rates for even those surgeons who don't have years of experience in performing the LASIK procedure.

Practices that purchase the IntraLase FS laser receive extensive training for surgeons and staff. In addition to conducting a wet lab, an IntraLase Clinical Applications Specialist remains with the surgeon for approximately the first 10 cases and for post-op examinations. Further training is available, if needed.

How is IntraLase being accepted in the marketplace, where the consumer ultimately rules?

At Lingua Vision Surgical Group in Fullerton, Calif., refractive development coordinator Carole Bartholomew reports that marketing IntraLase as "a less invasive approach" has helped boost per-month LASIK volume by about 10%.

"Our key message for marketing IntraLase on our Web site, in brochures and through educational seminars is that our highly skilled surgeons use a computer-controlled laser in the first step of the procedure rather than a blade," says Bartholomew. "We emphasize that the IntraLase FS laser is more accurate, causes fewer complications and increases patient comfort."

Bartholomew says Lingua Vision is now an all-IntraLase practice averaging about 150 eyes per month.

Like Lingua Vision, many refractive surgery practices are now combining wavefront measurements and the IntraLase FS laser to offer patients a premium-priced, custom LASIK procedure that is both profitable to the practice and attractive to potential patients.

Assessing IntraLase Outcomes

While the primary appeal of the IntraLase FS laser is its ability to consistently cut a safe and predictable flap, IntraLase also cites studies which indicate that procedures performed with the FS laser provide significantly better visual acuity and contrast sensitivity than procedures performed with a microkeratome.

For example, a study by Daniel S. Durrie, M.D., of Overland Park, Kan., involving 51 LASIK patients who had a microkeratome-created flap in one eye and an IntraLase FS laser-created flap in the other found that eyes treated with the IntraLase laser achieved better visual outcomes and superior predictability.

Though another study by Trevor Woodhams, M.D., indicates that better visual outcomes were achieved with microkeratome-created flaps, Palmisano says he believes study results released thus far have been primarily favorable for the IntraLase procedure.

"We think these studies are driving some of our laser placements," he says.

One complication that has been reported in about 1% of patients whose flaps have been cut by the FS laser is a syndrome called Delayed Acute Photophobia (DAP), or as IntraLase prefers to call it, Transient Light Sensitivity (TLS). This condition manifests itself as an extreme sensitivity to light, but with no loss of visual acuity. The onset of TLS usually occurs 2 to 6 weeks post-LASIK and can last from 2 to 6 months if not treated promptly with a short, aggressive course of steroids (Pred Forte) and sometimes cyclosporines (Restasis). Some surgeons are now recommending steroid treatment in the days immediately following surgery as a way to prevent the occurrence of TLS.

Though the exact cause of TLS is still uncertain, some surgeons believe that the inflammation is caused by necrotic cellular debris, a byproduct of the gas bubbles that are formed to create the flap. Others speculate that the cause may be inflammatory cykotines migrating from the flap interface and sidewall to the perilimbal sclera and iris base.

"It was scary when we didn't know what it was -- frightening to the surgeon and the patient," says Dr. Durrie. "Now, that it's been identified, I can put a name to it and say, 'Oh, you have TLS. This is a known condition. It responds to steroids and then goes away for good.' "

Threats from Refractive Alternatives

TLS appears to be the only significant clinical complication directly associated with the FS laser, but IntraLase does face other obstacles that could limit the company's success.

For IntraLase to reach its lofty goals, LASIK must maintain its dominant position as the refractive procedure of choice. Recently, some leading surgeons have been extolling the virtues of epi-LASIK, a surface ablation procedure that promises less pain and faster healing than more traditional surface procedures such as PRK and LASEK.

"We believe epi-LASIK will emerge more as a substitute for PRK than as a threat to LASIK," says Palmisano. "But we're not dismissing it. We're keeping an eye on it."

Lens-based approaches such as phakic IOLs and refractive lens exchange are also beginning to find favor, with the support of such respected thought leaders as I. Howard Fine, M.D., of Eugene, Ore.

Gaining Acceptance

The battle between these competing technologies will play out over time. Right now, IntraLase has built up a great deal of momentum in the marketplace.

"The IntraLase FS laser is now part of the mainstream," says Palmisano. "A dozen leading teaching hospitals have already incorporated it into their curriculum. Many of the early adopters who initially leased the laser to minimize their financial risk have seen the results they can achieve with it and have now bought it."

The FS laser has also been cleared to be used therapeutically in surgical approaches for the treatment of diseased corneas and to create the channels for intracorneal rings.

IntraLase says its installed base of FS lasers currently average about 100 procedures (eyes) per-month per-laser, a number that can vary slightly due to seasonal factors and the ramp-up period that occurs when a number of new lasers are placed within a short period of time.

For example, Palmisano says the average number of procedures per-month per-laser dropped to 88 in the fourth quarter of 2004 because three high-volume practices had extended holiday closings and a number of newly placed lasers were still in the ramp-up phase.

Wall Street is keeping a close watch on the "average procedures per-month" number because laser utilization is the key to IntraLase being able to successfully execute on its business model.

"We believe we'll be at around the 100 procedures per month number in the first quarter, as all reports indicate that volume has been very strong in the New Year," says Palmisano. "With the overall LASIK market expected to grow by 6 to 8% this year, we're looking forward to more than 50% year-over-year growth in IntraLase revenues to more than $95 million. This level of sales should lead to net earnings in a range of from $10 to $12 million, or 33 to 37 cents per common share."

Palmisano says that IntraLase has gained widespread acceptance now and will drive hard to capitalize on its first-to-market momentum.

Given what IntraLase has accomplished in the less than 8 years that the company has existed, it would be hard to fault the aggressive strategy that Palmisano has embraced.

IntraLase at a Glance

History: The use of the femtosecond laser in ophthalmology originated with physicists, biomedical engineers and ophthalmologists at the Center for Ultrafast Optical Sciences and the Kellogg Eye Center of the University of Michigan, and at the University of California at Irvine, with early research funded by the National Science Foundation. This research revealed the suitability of femtosecond lasers in delicate corneal surgery, and led to a patent application from the University of Michigan, and the later licensing of key patents to the founders of IntraLase. IntraLase Corp. was incorporated in 1997, with the first 4 years of the company's existence funded by venture capital and essentially devoted to developing and testing an ultra-fast laser, as well as related software and a patient interface. In 2001, IntraLase began developing manufacturing capabilities, and the IntraLase product was introduced commercially in the United States in the same year. The device obtained the CE Mark permitting sales in the European Union in March 2004. Core business: IntraLase designs, develops and manufactures the ultra-fast IntraLase FS laser, related software and disposable devices used to create the corneal flap in LASIK procedures. IntraLase generates revenues through the sale and lease of the FS laser, and also through per-procedure disposable patient-interface packs that the company sells to refractive surgeons for $160 per eye (with discounts to higher-volume practices), thereby creating a continuous revenue stream. The IntraLase FS can also be used therapeutically in surgical approaches to the treatment of diseased corneas and in the implantation of corneal rings for treating keratoconus. Business philosophy: IntraLase is targeting the 1,400 most active LASIK practices in the United States, plus key international markets in Europe and the Asia-Pacific region in which higher-volume surgeons perform more than 50 LASIK procedures per month. Currently, IntraLase customers who own or lease the IntraLase FS laser represent less than 15% of this potential marketplace. The FS laser is currently installed in 18 countries, with recent approvals in Canada and Australia. A South American launch is planned for early next year.. Sales: IntraLase recently reported revenues of $60 million for all of 2004, and projects that the top line will grow to more than $95 million for full-year 2005. Outlook: IntraLase ended the year with an installed base of 217 IntraLase FS lasers, accounting for an estimated 16% of the U.S. corneal flap market, compared to 10% of the market at the end of 2003. The company expects to turn profitable in the first quarter of 2005 after sustaining a $10.2 million loss last year. For all of 2005, IntraLase projects profits of $10 to $12 million, which equates to 33 to 37 cents per share of common stock. Headquarters: Irvine, Calif. Employees: Approximately 200 CEO: Robert J. Palmisano Stock listed: NASDAQ National Market (symbol ILSE) Recent stock price range: $18-24