Bottom of the Barrel: Endocare Playing It Cool

Endocare's (ENDO Quote) business is running cold -- cryogenically speaking.

The medical technology company manufactures and markets a series of temperature-based, minimally invasive surgical devices to treat prostate disease. And, if growth projections are correct, the stock could be a nice addition to an investor's portfolio.

Endocare's most established product -- the Cryocare system -- is an alternative to traditional radiation treatment for prostate cancer and can be used when radiation treatment fails.

The process, called targeted ablation, uses Argon-gas based technology to destroy malignant cells through freezing. This cryogenic process works. According to the California-based company, in a recent study of 120 prostate cancer patients treated with Endocare's Cryocare system, early biopsy results demonstrated that 99% of the patients were disease-free at six months, 97% at 12 months.

At a Glance Endocare, Inc (ENDO:Nasdaq)
Current Price	$18.40
52-week Range	$23.94 - $5.00
Price-Earnings Ratio	NE
Market Cap	$316.9 million
Avg. Daily Volume	503
Inst. Ownership	86%
Dividend Yield	Nil
Beta	0.50
Company Web site	www.ecare.org
NE=No Earnings Source: Market Guide, Zacks, Company Reports

For treatment of benign prostate hyperplasia, or BPH, the excessive growth of prostate tissue that can obstruct urinary flow, Endocare has developed a stent that provides temporary relief from bladder obstruction. In addition, the company is developing a thermal stent that should provide longer-term relief from BPH.

The markets for both technologies appear significant. According to data from the American Cancer Society, every day more than 100 men die of prostate cancer in the U.S., while more than 180,000 new cases are diagnosed each year. Annual treatment costs exceed $5 billion. Add to that the fact BPH affects 50% of all men over 50 and 80% of men over 80 and you see the potential for companies with successful treatment technologies.

While there are a number of treatment options for prostate disease, recent physician partnerships suggest Endocare can establish a significant market presence. The company is actively signing agreements to distribute its treatment technology to physician practice groups.

Most recently the company sealed a partnership with Prostate Treatment Centers, providing access to nearly 400 urologists in the U.S. and Canada. According to a report from SunTrust Robinson Humphrey analyst Robin Swanberg (the same analyst who brought SurModics (SRDX Quote) to our attention) this agreement is likely to make Endocare profitable early in 2002.

"We believe the agreement with PRCI is likely to lend some upside to earnings expectations through margin improvement," Swanberg recently told clients. "Increased procedural volume at a higher price per procedure will likely yield its impact on the bottom line through corporate gross margin improvement." She rates the stock buy and her firm has not provided banking services to the company.

The company continues to pursue the application of its ablation therapy platform and related treatments for a variety of illnesses. Related Cryoprobe technology could be used in gynecological applications as well as in the treatment of liver, kidney and breast cancer.

Warm Results

If Endocare is able to keep its growth plan on track, the company should post its first profit in the second quarter of next year. Although Endocare likely will post a 41 cent-per-share loss for 2001, it should earn about 32 cents a share this year and about 92 cents in 2003. With a respectable balance sheet, that prospective growth appears to be reasonably priced today.

Healthy Growth Endocare Looking for Profits
Year	Revenues (in millions)	EPS
1999	$3.46	$(0.85)
2000	6.67	(0.99)
2001*	15.30	(0.41)
2002*	40.40	0.32
2003*	81.20	0.92
*Estimates Source: MarketGuide, First Call, Company Reports, TSC Research

Endocare, however, has risks. While the core technology is solid, future growth depends on new applications of technology as well as enhancements to keep pace with competitors in a viciously competitive industry. And, acceptance of new applications and technology by both regulators and physicians is always a wild card.

Furthermore, some criticize Endocare for being long on research and short on marketing, suggesting the company has had a difficult time gaining acceptance of its products in the medical profession. Althought it's a fair criticism, a recent trio of physician partnerships suggests the company is improving its marketing.

The stock is fairly valued given current market conditions, and patient investors will profit if the company can meet growth targets. The stock would be tempting below $17. That said, Endocare's long-term potential is attractive, and it gets two barrels.

(For an explanation of our barrel rating system, see our recent description. )

A Sure Thing for SurModics

Good news for medical technology company SurModics. Johnson and Johnson (JNJ Quote), SurModics' partner in the coated stent business, announced plans to launch the "Cypher" coated stent in Europe in the second quarter of this year. The move should give SurModics an entire quarter of royalties on the stent in 2002. Robinson Humphrey's Swanberg reiterated her buy and $55 price target on the stock.

A Stent With SurModics Good News from Europe
Barrels	Company/Ticker	Date of Mention	Mention Price*	Current Price	% Change
	Empire District Electric (EDE:NYSE)	1/16/2002	$21.23	$21.15	-0.38%
	Quanta Systems (PWR:NYSE)	1/9/2002	16.05	14.27	-11.09
	Integra Bancorp (IBNK:Nasdaq)	1/2/2002	20.75	19.87	-4.24
	SurModics (SRDX:Nasdaq)	12/19/2001	34.60	37.47	8.29
	Coastal Bancorp (CBSA:Nasdaq)	12/12/2001	27.84	29.62	6.39
	Goody's Family Clothing (GDYS:Nasdaq)	11/28/2001	4.50	3.85	-14.44
	VitalWorks (VWKS:Nasdaq)	11/21/2001	4.30	5.40	25.58
	FPIC Insurance (FPIC:Nasdaq)	11/14/2001	12.83	15.10	17.69
	Coinstar (CSTR:Nasdaq)	11/7/2001	19.96	29.24	46.49
	Witness Systems (WITS:Nasdaq)	10/31/2001	8.06	12.69	57.44
	Hibbett Sports (HIBB:Nasdaq)	10/24/2001	30.33	32.41	6.86
	Met-Pro (MPR:NYSE)	10/17/2001	11.16	13.35	19.62
	Bridgford Foods (BRID:Nasdaq)	10/10/2001	13.18	12.25	-7.06
	Quixote (QUIX:Nasdaq)	10/3/2001	21.44	19.07	-11.05
*Average price on date of mention. **Date of release or quarterly results. Dates in italic are estimates. Source: TSC Research

Our pick of Quanta Systems (PWR Quote) may have been a bit ahead of itself. The company -- a provider of contract services to electric utilities, telecommunications companies and cable systems -- has lost more than 11% since our profile earlier this month. We still like the story but concerns over the economic recovery, decreased spending by electric utilities and a lack of growth in telephony continue to weigh on the stock.

Still, the possibility of an economic rebound provides good upside for Quanta, and further weakness could prompt Quanta to reconsider its relationship with Utilicorp (UCU Quote), a large shareholder and possible suitor. With Utilicorp's pending common stock offering, the company has the capacity and apparent interest to make an acquisition. Given Utilicorp's purchase patterns of Quanta stock, a merger would provide Quanta shareholders around $17.50 per share.

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