Razing Hair, Raising Shares: A Look at 'Aesthetic Technology' Stocks

Willow: What if Mr. Right has a hairy back?

Buffy: Don't worry. Mr. Right won't have a hairy back.

--"Buffy the Vampire Slayer," 1999

As any fan of classic TV knows, Buffy and Willow are generally open-minded when it comes to men. Still, as an, um, hirsute guy, hearing talk like this stings a little. But it also gets me to thinking: Almost everyone is self-conscious about something, whether it's varicose veins or wrinkles or that tattoo that seemed like a good idea when you were sure Rocco would be the only guy who'd ever see it.

Other than the tattoo thing, there's nothing new about this. People have always obsessed over their physical imperfections, often resorting to wild -- and mostly ineffective -- treatments for what, basically, is just the human condition.

What is new is that, thanks to a new generation of "aesthetic technologies," the treatments are no longer ineffective. The most interesting, by far, are lasers that zap unwanted hair, wrinkles and such, if not permanently, at least for a beach season or two.

As you might have guessed from the above, the killer app is hair removal. New lasers are quicker and less painful than old-style electrolysis (which involves sticking an electrified needle in each individual hair follicle). As a result, the potential market is huge. "Everybody's got hair, right?" says Scott Baily, analyst with Bluestone Capital Partners. "Women have multiple areas -- armpits, bikini hair, facial." But men, mostly of the furry-backed variety, make up about 25% of laser hair-removal patients.

A potentially even bigger market awaits soon-to-be-introduced lasers that promise a quick, simple treatment for wrinkles. Right now, the only way to smooth out an aging face with a laser is via "facial resurfacing," where the top layer of skin is burned off, exposing the smoother, younger-looking layers below. Recovery can take weeks, while the patient suffers through the mother of all sunburns.

But new lasers slated to hit the market within a year will be "nonablative," meaning that instead of burning skin, they'll penetrate the epidermis and stimulate changes in collagen production, filling in wrinkles and tightening skin. "It'll be a lunchtime procedure, where an hour later you look better," says Baily.

Doctors, by the way, love these procedures because they're not covered by insurance. Patients pay on the spot, eliminating the hassle of dealing with Medicare and HMOs.

Add it all up -- technologies that really do make you look better, doctors eager for new income streams and baby boomers desperate to stave off old age -- and you get a bright future for the leading laser makers. Baily rates two of them, Coherent (COHR) and Candela (CLZR), as strong buys.

Coherent is bigger, with a broad, higher-priced line of lasers that it sells to medical and scientific markets. Revenue is growing at a 20% annual rate, margins are widening, and as this was written on Wednesday, the stock was up more than 8 points (or 10%), implying that something might be cooking here.

Candela has a solid niche in the lower end of the market. Its GentleLASE, at $69,500 (vs. as much as $135,000 for a top-of-the line Coherent laser), has been undercutting the competition for years. In June, it got Food and Drug Administration clearance to be marketed as a "permanent" hair-removal system. Sales and earnings were up big in the latest quarter, while Candela's stock is down about a third from its recent high.

Other companies to watch include: ESC Medical (ESCM), a laser maker that's recovering from a year of financial and management turmoil. In the March quarter, it turned a modest profit, vs. a $43 million year-earlier loss. "They have a competitive advantage by being based in Israel" in the form of a research-and-development tax credit that cuts its effective tax rate to less than 10%, says Baily.

BriteSmile (BSML), an operator of laser teeth-whitening centers, where, for $500 or so, you can zap those tea stains and generally lighten your teeth by two to seven shades. With 20 centers up and running and sales exceeding $8 million in the last quarter, this is a real company -- though one with a still very speculative stock. "It's a question of whether the business model works," says Baily.

Plastic Surgery Co. (PSU) is -- sort of -- a practice management company specializing in plastic surgery. It also operates plastic surgery Web portals idealme.com (for potential patients) and ThePlasticSurgeryCo.com, for surgeons. Sales shot from zero a year ago to nearly $8 million in the March quarter. But as a development-stage dot-com, it's got a tough near-term road to hoe.

In a year or two, several companies will introduce lasers that, they tout, will be able to cure acne. And improved versions of current designs will do an even better job with hair and wrinkles. As prices fall, the market for aesthetic lasers will broaden dramatically worldwide. All things considered, it's a very pretty picture.

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