ANALYSIS-Aesthetic laser firms to regain shine starting Q4

* Sector to see growth returning in Q4 -- analysts

* Sector to return to normalized growth in H2 2010

* Diversified players best placed to benefit from revival

By Esha Dey

BANGALORE, Nov 13 (Reuters) - The aesthetic laser device industry, which had lost its glow to the credit squeeze and low consumer confidence, could resume growth as early as the fourth quarter and get a full facelift late next year.

These capital equipment makers, who had seen aggressive growth and comfortable margins before the economic slowdown, were hit hard when tight credit left few physicians willing to buy big-ticket items without sufficient patient volumes.

However, analysts said the market may have touched bottom and, coupled with signs of stabilization seen in the recently reported third-quarter results, now see modest growth returning to the sector in the fourth quarter and demand reaching pre-recession levels in the second half of 2010.

"It is going to be a rather modest growth, but they should return to 5 percent to 10 percent growth in the fourth quarter," Oppenheimer and Co analyst Amit Hazan said.

The sector, whose main public players include Cynosure Inc , Palomar Medical Technologies Inc, Solta Medical Inc, Syneron Medical Ltd, Cutera Inc and Candela Corp, offers services ranging from hair, wrinkle and tattoo removal to minimally invasive liposuction and body sculpting.

But the key question for investors is: Which one of these would be the best bet in the laser aesthetic space?

"I think the companies that will end as winners are going to be the companies that are more diversified, that offer the biggest product portfolio," Leerink Swann's Gary Nachman said.

"They can bundle and be more of a one-stop shop for physicians and offer a much attractive discount across the portfolio."

BEST BETS

Palomar, Syneron and Cynosure are widely viewed by analysts as best placed to take advantage of the market revival when it comes.

"The main reason I suggest Palomar is that they are collecting a royalty stream from 10 other players in the space who are using their hair removal technology," Canaccord Adams analyst Anup Mehta said.

"So if the industry comes back, they can just sit back and collect their check," Mehta added.

Palomar, which has numerous patents in hair removal technology, currently collects royalties from a number of rivals including Cutera and Cynosure. It also has ongoing patent infringement lawsuits with Syneron and Candela.

Palomar's laser and pulsed-light devices are used in treatments like permanent hair reduction, skin tightening, removal of acne, lesions and tattoos, and lipolysis -- a non-invasive or minimally invasive alternative to liposuction.

The company also has over-the-counter U.S. approval for its light-based device to treat wrinkles around the eyes, and plans to launch the device by the end of 2010 -- potentially making it one of the first to enter the home-use laser device space.

Rival Cynosure, which has a minimally invasive laser lipolysis device called Smartlipo and is considered a bellwether for the sector, is trying to tide itself over the tough times by working with partners like Bank of America to facilitate availability of finance for clients.

Syneron -- expected to become one of the largest public players in the sector after completing its takeover of Candela -- is going the consolidation way, with at least three small deals inked over the past 12 months in the laser aesthetics space.

While reporting their third-quarter results, all the three companies cited difficulties faced by physicians in obtaining credit as the main reason for stunted growth, but added that demand for procedures and devices was gradually improving.

BACK TO BASICS

When the economy was booming and people were willing to spend thousands of dollars to polish their looks, many aesthetic laser device makers aggressively expanded into non-core markets that included general physicians and health spas.

These non-core sections were the ones that were dealt the greatest blow when credit dried up and patient volumes dropped. The core group of dermatologists and plastic surgeons, however, were slow to see a fall in demand.

"It is important to go back to the core physician base, to the dermatologists, the plastic surgeons and having very good relationships with that group because they are the ones who are going to recover faster in terms of having a procedure volume to justify making the investment," Leerink's Nachman said.

Maintaining the competitive edge in a fast-changing market that sees new technologies coming in every year means innovating constantly to come up with a product that offers something different or more than others.

"With lasers, the shelf life of the new product is about 12 months to 18 months, before something else comes up that is even cooler, and the doctors want the cool things because their patients want them more," Canaccord's Mehta said. (Reporting by Esha Dey in Bangalore; Editing by Aradhana Aravindan)