To OTC Journal Members:

Over the last 20 years the use of lasers as medical devices has grown dramatically. Lasers are now used to correct vision, treat skin conditions, for dentistry, and in micro surgery. The use of lasers has exploded in the vision correction market.

At the forefront of the laser revolution in corrective eye surgery was Visx Inc (NYSE: EYE). This was the first company to obtain an FDA approval in 1996, and enjoyed a virtual monopoly for several years. The business model was highly profitable. Eye surgeons were able to purchase the lasers at a reasonable price, but licensing fees for every procedure generated most of the revenues and profits.

As you can see from the chart, the company's high growth phase was exciting for shareholders. Adjusted for splits, the stock was trading in the $7 range in early 1998. A mere 15 months later the stock would find its way to $104 for an enviable 1400% return. The stock lost a great deal of its luster when the company was defeated in a patent infringement suit with a Japanese company. In late 1999 their monopoly ended, but shareholders had a great ride during the company's high growth phase.

Today's profile features a company that is breaking new ground in laser based medical technology. Their business model lends itself to high profit margins. Their drug company partners absorb the huge up front costs associated with the FDA Approval process, and they partner in the benefits. They now have two FDA Approvals, one having come within the last three weeks. They generated significant sales in 2001, and expect to turn cash flow positive in 2002. Their core shareholder base reads like a Who's Who of international financiers and Wall Street legends. The company is on the verge of a major fundamental breakout, and shareholders have the potential to enjoy extraordinary gains.

The stock began trading today on the American Stock Exchange. The company went public through the RTO process described in our January 16th edition. The company completed a reverse merger into a fully reporting "Shell" company on February 19th, and traded for three days on the OTC Bulletin Board prior to making the jump to the American Stock Exchange in record time. The stock traded as high as $9 on nearly a million shares of volume the first day it opened. We intended to release our profile earlier in the week, but we chose to wait for the stock to pull back to a more favorable entry point.

There was no traditional IPO where preferred customers of the underwriters received the "cheap" stock. Every open market investor has the same opportunity to make a profit. For your consideration:
 

February Profile: Diomed Corporation (AMEX: DIO)

• Stock Listing: AMEX: DIO
• Estimated Shares Issued and Outstanding: 31.3 million
• Estimated Public Float: 9.2 Million
• AMEX Opening Price: $6.95
• Market Capitalization: $200 Million
• High and Low Since Merger: $9/$5.45
• Corporate Web Site: http://www.diomedinc.com

The company manufactures and markets lasers and fiber optics which are used in unique treatment protocols for many types of cancer and varicose vein removal. Their first FDA Approval for use of their lasers and fibers with the photo sensitive drug "Photofrin" came in August of 2000, and the company is expected to report about $8 million in revenues in 2001. Here is a review of their products and how they work:
 

EndoVenous Laser Treatment (EVLT™) - Their New, High Profile Product

On January 24, 2002, just three short weeks ago, Diomed announced it had been granted the long awaited FDA Approval for EVLT™, a new and revolutionary treatment for varicose veins which has been the subject of a feature on Good Morning America.

Diomed believes demand will immediately surface for this newly approved procedure, and as much as 68% of its 2002 revenues could be derived from EVLT™.

EndoVenous Laser Treatment is the most painless and effective way to remove varicose veins, an affliction which plagues nearly half the population over 50 years of age. EVLT™ is a quick, minimally invasive laser procedure that leaves no scar, has a short and relatively pain free post-operative recovery period and is performed under local anesthesia in the doctor's treatment room.

Varicose veins are caused by inefficient valves which allow blood to pool. Laser light is inserted in the vein through a strand of fiber. The walls of the vein shrink, eventually closing it so blood can no longer flow through. The vein disappears over a short period of time, eliminating the unsightly varicose vein.

There is so much interest and demand for this new treatment, Diomed has set up a web site which explains the entire treatment process. You can even locate a treatment facility through this site. Check out www.summerlegs.com for complete information.

The market for this treatment is enormous. Varicose veins adversely affect the appearance of the legs of 25% of women worldwide. This simple, relative painless solution has a 98% success rate and requires 45 minutes to complete the treatment. Women and men worldwide who have been plagued by unsightly varicose veins now have a reasonable solution to their problem. The potential market for this treatment runs into the hundreds of millions of dollars.

The recent FDA Approval for this new treatment has also sparked dramatic increased interest in the stock, and there is so much interest in this treatment that Good Morning America carried a special feature on Diomed's EVLT™ process.
 

Photo Dynamic Therapy (PDT)

Diomed manufacturers and markets the lasers used in a unique and revolutionary treatment known as Photo Dynamic Therapy, or PDT for short. The FDA has approved the use of Diomed's lasers and fiber in a "Modality", or three step treatment. Currently, a modality is approved by the FDA for certain treatments associated with throat and lung cancer.

The procedure is relatively non-invasive and highly effective. The process is as follows: The patient goes into the doctor's office or clinic and receives and injection of the completely harmless and non toxic drug Photofrin. Two days later, after the drug has had time to invade the patient's tissues, he (or she) returns to the clinic. During this 48 hour waiting period Photofrin attaches itself more aggressively to cancer and other abnormal cells.

The patient then returns to the clinic for the actual procedure. A strand of fiber optic is inserted into the targeted area through a tiny catheter. The laser then illuminates the treatment area through the fiber using a specified band width of light, which activates the Photofrin drug. An anti-oxidant type reaction occurs, which inflicts great harm and in many cases kills the cancer cells.

After treatment the patient stays out of the sun for a couple of days, awaiting the remainder of the drug to be absorbed into the tissues. The procedure is far less harmful than chemotherapy or radiation, and has virtually no negative side effects.

The laser costs upwards of $50,000 with a $9,000 installation fee, and the company enjoys about a 50% gross profit on devices. The disposables carry a much higher margin. The company stated goal is a 65% margin on the disposable fiber used in each procedure. However, the company receives $500 to $550 for the fiber used in each procedure, and their cost is approximately $150.  The "razor/razor blade" profit model has been replicated by many highly successful companies, and can yield substantial profits as more clinics purchase laser equipment.

Barriers to entry for competitors are stiff as the FDA Approval for this "Modality" requires Diomed's laser and fiber to be used in every procedure. Diomed has partnerships with four major pharmaceutical manufacturers, all of whom have new drugs in the FDA Pipeline which could use Diomed's lasers and fiber in the treatments modalities.

It is estimated the cost of completing the FDA Approval process for a new drug is approximately $150 million. Less than 40% of new drugs which begin the approval process ever receive final FDA Approval. Diomed is in the enviable position of profiting from the investments made by their four drug company partners once FDA Approvals are achieved, but doesn't finance any of the costs associated with the approval process. This minimizes the downside risk and maximizes the upside potential for investors.
 

Other Uses of PDT- The "Off Branding Market"

As mentioned above, the FDA has approved the three part "Modality" for treatment of specific types of throat and lung cancer. However, this modality is proven to be effective in treating nearly every type of cancer, and doctors are using it many ways in a practice known as "Off Branding".

FDA regulations prohibit Diomed and Axcam (manufacturer of Photofrin) from marketing the modality for any other types of cancer aside from that which has been approved by the FDA.

Doctors are not restricted in the same manner. Doctors are now routinely prescribing the use of this modality for many types of cancer. In fact, Diomed estimates that as much as 50% of its current revenues could be generated in "Off Branding" procedures.

Insurance companies and Medicare are providing full coverage benefits for all treatments. Doctors, Hospitals, and Insurance Companies are embracing this relatively new therapy as it has proven to be a very effective treatment for cancer, but is far less costly, has very few side effects, and requires far less follow-up treatment than its counterparts, chemotherapy and radiation.
 

Modalities in the FDA Pipeline

As depicted in the table, there are nearly 30 drugs in the FDA pipeline going through the approval process which could potentially impact Diomed's sales. Approximately 40% of these new drugs will eventually find their way to market. The table represents hundreds of millions in potential revenue for Diomed, with no associated up front costs.

The company has sold about 100 laser systems to its four drug company partners, and the Diomed laser and fiber is being used in clinical trials by these companies.

FDA approvals are granted for the three stage treatment or "Modality"- which is the combination of the drug, specific laser, and fiber. FDA regulations prohibit the use of any substitute lasers or fibers in the treatment, which creates a very formidable barrier to entry for other laser and fiber manufacturers. Once approval is granted, a competing company would have to replicate the clinical trials with their own equipment to achieve an FDA approval, absorbing the cost out of their own pocket. The drug manufacturers have no incentive to seek alternative suppliers of lasers and fiber as their profits come from the sale of the drug. As long as Diomed is a reliable supplier of equipment, their drug company partners will be content with their profits.

The next anticipated pending FDA Approval which represents a major commercial opportunity for the company is expected to be granted in the fall of this year. Axcan is in clinical trials for a modality to treat "Barrett's Esophagus", more commonly known as Acid Reflex Syndrome. The market is estimated to be 10 times that of Photofrin, so Diomed's growth could be explosive after this approval is granted.
 

Financial Performance

Audited 2001 financial performance will not be available for at least one month, and there are no formal published projections by the company at this time.

However, based on revenues through the end of September, it appears the company will achieve about $8 to $8.5 million in sales in 2001. We'll know for sure when the final results are disclosed in the near future.

Looking forward, discussions with management lead us to believe the company could achieve as much as $18 million in revenues in 2002, up 113% from 2001 estimates. Revenues from the newly FDA Approved EVLT™ procedure are expected to represent 68% of sales in 2002, and the company expects to turn profitable this year.

As more clinics purchase lasers from Diomed in order to offer these procedures to patients, the demand for the disposables should increase dramatically, and margins will improve.

While losses are anticipated in 2001 due to the high cost of R & D, the company expects to turn cash flow positive in 2002, and could make as much as $6 million in 2003 off current FDA approved products.

The company manufactures its own lasers, but the fiber component is manufactured by a third party. Just prior to going public, Diomed completed a $10 million private placement. The company will use part of the proceeds to purchase the fiber manufacturer, thereby increasing its profit margins on the disposable side of its business.

In short, sales should more than double this year, and increase nearly 60% the following. That equates to a 275% percent growth rate over the next two years with no additional FDA Approvals. Growth rates of this type lend themselves to high performance stocks.

This Fall should bring another FDA Approval- the PDT treatment for "Barrettes Esophagus" being developed by Axcan Pharmaceuticals. The market for this product is estimated to be 10 times the market for current PDT applications. This provides shareholders with a potential windfall event for the stock price.
 

Early Stage Investors- Several of Wall Streets Best Names

As mentioned in the introduction, there are several high profile early stage investors in Diomed who helped finance the company's growth as a private company. Many institutional funds have participated, but here are four key individual names who have invested personally through funds they control:

• Sir Richard Branson- High Profile Founder of Virgin International (Virgin Airlines and Records)
• Jack Rivkin- Former Executive Vice President at CitiGroup Investments
• Jonathan Cohen- JHC Capital Management - Formerly at Merril Lynch and Smith Barney- See our January 12 Newsletter
• Robert Lessin- Chairman of Wit SoundView Group

We view their involvement as another compelling reason to believe this could end up becoming an exciting stock to own. Clearly, if the company lives up to its potential, shareholders stand to profit right along side these high profile Wall Street names.
 

Conclusion

The profile you are reading from the OTC Journal is the very first coverage published on Diomed by any source. The power of this information allows you to make an informed investment decision before the rest of the financial community knows much about this company. The OTC Journal tries to uncover under followed situations ahead of Main Stream Wall Street. This has risk, but also can have significant rewards for investors with the courage to act in the early stages.

Today is the first day of trading for Diomed, and because they went public through an RTO you are on a level playing field with other open market investors.

We believe Diomed should be accumulated up to $7.50 for a move to $10 during 2002. Much higher levels could be attained later in the year as corporate developments unfold, and longer term investors could see doubles and triples.

Medical/Laser company investments have paid off handsomely for investors in the past, and this company is one of the few that will enjoy FDA approval profits without high upfront costs. Their razor/razor blade business model positions them for long term growth and accelerating profits as their market expands.

If you have any risk tolerance for high reward situations, you need to own Diomed today.
 

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MarketByte LLC has been paid a fee of $100,000 in cash and 250,000 options convertible into free trading shares, exercisable at $3.50, by the Mohammed Patel, an individual, for publishing information on Diomed Corp for a period of one year. Please review our policy on selling shares found in our Mission Statement on our home page.

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