Despite struggling economy, aesthetics companies upbeat

By Larry Haimovitch

Medical Device Daily Contributing Writer

December 13, 2011

SAN FRANCISCO — The 6th annual Canaccord Genuity (Vancouver, British Columbia) Cardiovascular, Aesthetics and Metabolic Disorders Conference, held here last week, featured a diverse and interesting group of public and private companies primarily addressing these med-tech market segments.

Several aesthetics companies appeared in the morning with the general tone of their presentations surprisingly upbeat, especially considering the dour news reports on the economy, unemployment and the banking debacle in Europe.

Syneron Medical (Yokneam, Israel) led off the proceedings and CFO Asaf Alperovitz noted that his company is the global leader in aesthetic devices with an estimated 35% market share (based on the revenue of U.S. publicly traded companies only).

Alperovitz stressed that Syneron is an innovator in this market and that R&D will continue to drive new product introductions. He pointed to a "robust and innovative new product pipeline" featuring a plethora of new products or product line extensions in both its Professional Aesthetics Devices and Emerging Technologies and Home Use Devices (HUD) areas.

In particular, he noted that its Fluorinex teeth whitening product will enter a "blockbuster" $5.5 billion market opportunity in early 2012 with distribution in the "prestige" retail channel. In addition, Alperovitz cited the elos skin rejuvenation product line, which has a strategic partnership with Procter & Gamble and the Tanda device for the treatment of wrinkles as other examples of its commitment to the HUD channel.

Syneron is a global player, serving 90 countries around the world, with a direct presence in 10 key markets. Alperovitz noted that its Asia Pacific growth has exceeded 25% annually in recent years and that it is also enjoying 15% gains in Latin America.

The company, in spite of the sluggish global economy, is showing impressive growth, with revenue for the first nine months of this year ahead nearly 24% over last year. Service and consumables represent about one-third of global revenue.

Responding to a question from the audience, he said that the aesthetics industry is "crying for consolidation" and that Syneron will continue to be an active acquirer.

"We look for synergies and accretion to our shareholders but we will not acquire me-too companies" he said.

Another company that has been acquisition-oriented is Solta Medical (Hayward, California), which has been involved in four strategic transactions in the past three years – Reliant Technologies (December 2008), Aesthera (February 2010), CLRS Technology (October 2010) and LipoSonix (November 2011).

The latter deal, which so far has involved $35 million in cash payments, also will likely include significant future milestone payments that are both revenue and gross profit-based. An example of a potential milestone payment is that an additional $30 million in cash will be required to be made by Solta following the first year in which net sales/gross profits of LipoSonix products exceed $300 million.

This acquisition will catapult Solta into the non-invasive fat reduction arena, which some market pundits believe will be the next major market opportunity in this space. To wit, according to Millennium Research Group (Toronto), this category is expected to surge 42% per year rate over the next five years.

CEO Stephen Fanning is very enthused about LipoSonix's technology, saying that "it represents the next generation in body contouring." The second generation (Gen 2) of this technology, which Fanning dubbed "One Procedure, One Hour, One Pant Size" was recently FDA-approved and triggered an additional $20 million milestone payment. Fanning expects that Gen 2 will be launched in 1Q12.

The addition of LipoSonix to the Solta product portfolio will further leverage the company's demonstrated success in cross selling its several aesthetic brands.

Solta also boasts the industry's highest percentage of recurring revenue, with more than one-half being generated from disposable treatment tips and other consumable products. The company also is well-positioned from its broad geographic diversity, serving more than 100 countries globally and generating well over half its sales occurring outside the U.S. Globally, 60% of Solta's sales are produced by its direct sales force, which is up from 50% last year.

A third significant player that presented here was Cutera (Brisbane, California), whose CEO Kevin Connors commented on the changing dynamics of the aesthetics market, i.e., the lion's share of these procedures are minimally invasive, with relatively little down time for the patient. He further noted that 9.3 million procedures were performed in 2010, with market revenue of $10.7 billion.

Connors highlighted several key attributes of Cutera, including innovative and upgradeable products with proven science based technology, superior customer support and training, a strong distribution network worldwide and a well-managed balance sheet which features more than $90 million in cash.

Given the relatively short product life cycles in the aesthetics market, Connors emphasized that "innovation is key." He added that "we are spending more on R&D than we ever have" in order to drive new product development.

Although Cutera trails some of its peers in terms of the contributions from recurring revenue, it nevertheless is seeing robust growth in this category, with this sector up 45% over last year. Like many other aesthetics players, Cutera has been very successful outside the U.S., it currently is deriving 60% of its worldwide sales from international markets, with a strong contribution from Japan.

Connors said that "we are seeing growth in our business again," as 3Q11 revenue surged 26% over last year's third quarter. The sales gain came from the domestic market and was spearheaded by the Genesis Plus YAG laser, which gained FDA approval in April 2011. Genesis has enjoyed strong demand because of its success in treating toenail fungus. He also noted that manufacturing margins are expanding and should continue to improve as the company is working dilgently to improve its manufacturing processes.

One of the private companies presenting was Ulthera (Mesa, Arizona), which uses focused ultrasound energy to contract deep connective tissue, CEO Matthew Likens asserted that Ulthera's approach ". . . is the first energy-based skin tightening and rejuvenation technology to deliver consistent efficacy."

The Ultherapy system consists of a compact sized control unit (ideal for office-based procedures), along with a disposable consisting of multi-patient transducers that deliver focused ultrasound energy. This energy is delivered into multiple layers of the skin with precise calibration, sparing intervening tissue. Over time, the formation of new collagen tightens and lifts the skin.

According to market research, the skin tightening and body shaping platforms are expected to grow at 12.4% compounded annual rate through 2015, with Asia projected to grow the fastest. An estimated five million procedures were performed in 2010.

Ulthera's technology is strongly supported by solid clinical data, with both quantitative and photo assessment validating significant improvements.

Said Likens: "there is real science behind what we do."

According to a website called Realself.com, which provides a measure of how "worth it" an aesthetic procedure is, Ulthera rates amongst the very highest procedure with an 85% score.

The Ultherapy system offers an attractive business proposition to physicians, who can attain a breakeven on their investment with just 35 procedures. Doing just 10 procedures per month can yield an additional $240K to their annual income. The company has experienced torrid growth since its outside-the-U.S. launch in 3Q08 and its U.S. launch in 1Q10. It registered global revenue of $18 million in 2010 and Likens estimated 2011 at $40 million. About 40% of its revenue is derived offshore.

Ulthera is VC-backed and has raised about $40 million to date.

2011 Canaccord Genuity Conference

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