Aesthetics market earns its close-up at Canaccord conference

By Larry Haimovitch

Medical Device Daily Contributing Writer

August 22, 2012

BOSTON — The Canaccord Genuity (Vancouver, British Columbia) 32nd Annual Growth Conference, which was held here last week, featured a diverse group of public medical device companies. These participants address a broad range of medical device markets, including cardiovascular, diabetes, orthopedic, oncology, ophthalmology and aesthetics.

The latter group of companies are currently enjoying robust revenue growth, fueled by an upswing in consumer confidence and the introduction of new product offerings that are meeting with excellent physician and consumer acceptance.

Steve Fanning, CEO of Solta Medical (Hayward, California) stated that the key to the long term success of his company and indeed the industry is that "we are about making people feel better about themselves." The company has been performing well of late with a positive non-GAAP EBITDA for the last eleven quarters, including with 2Q12, which reached $4.2 million.

Fanning noted that Solta's success in the global aesthetics market, which he pegged at $5 billion, is due to the several "competitive advantages" his company enjoys. These include:

The most recognized brands in leading, high-end procedure segments, with a dominant share of voice and the innovative use of public relations and social media

An industry leading recurring revenue business model, with about 50% of its worldwide sales derived from treatment tips and other consumables

A worldwide distribution system with a unique, multi-layer sales force focused on systems, tip sales and clinical training

A demonstrated track record in cross selling brands

Strong top line top line growth derived from internal gains as well as successful acquisitions and strategic alliances.

The star in Solta's current offerings is its Liposonix ultrasonic, minimally invasive fat reduction device. Solta acquired this company in late-2011 from Medicis Pharmaceutical (Scottsdale, Arizona) for $35 million in cash and future milestone payments based on performance in year over year sales and gross margins. In part to prepare for a February 2013 milestone payment to Medicis, Solta recently completed a public equity offering, raising just over $16 million.

Liposonix has quickly established itself as a potent competitor in the rapidly emerging fat reduction category, shipping 98 systems in 2Q12 and racking up over $9 million of revenue. This represented nearly 25% of total Solta's 2Q12 global sales. The outlook for Lipsonix, despite competition expected beginning in Q3 expected from Cutera's (Brisbane, California) truSculpt, is very positive. Fanning predicted that Liposonix will lead the way to a very impressive 22%-24% total revenue gain for 2012.

Interim president and CEO Mark Foley of Zeltiq Aesthetics (ZLTQ; Pleasanton, California) discussed his company's success in the fat reduction segment of the market, noting that it is the unsurpassed market leader, with approximately 1,300 devices placed to date. In its 2Q12, ZLTQ placed 160 devices, compared to 98 for the runner-up Solta. The total number of installed units has approximately doubled from 2Q11.

"The second quarter was a great one for our company," noted Foley who added that its 28% revenue gain over 1Q12 was one of the strongest in the industry.

Whereas the Solti and Cutera devices use heat to create fat reduction, Zloty's unique cryoablation technology relies on extreme cold to create apoptosis or cell death. Foley pointed out that heat might cause pain while the Zeltiq CoolSculpting system is virtually pain-free.

One of the keys to ZLTQ's success since entering the U.S. market in late 2010 has been an aggressive PR and social media campaign to drive patient awareness and jumpstart procedure and product uptake. Importantly, a key aspect of the campaign has been to brand CoolSculpting as the premier treatment option for those patients seeking non-invasive fat reduction. Clearly, this has been a huge success as Foley noted that its technology has been used in about 400,000 treatments to date.

Foley noted that there are several others applications for cryo technology and that the company hopes to introduce at least one new application in the next few months.

Another aesthetics company currently riding a strong wave of success is Palomar Medical Technologies (Burlington, Massachusetts), which also recently reported solid growth in Q2 2012, with global sales increasing 22%. Within its Professional Products group, revenue surged 30%, marking the eleventh consecutive quarter of year-over-year-growth.

CEO Joseph Caruso detailed a three-pronged strategy to drive its long term growth, including:

  1. Exploit the explosive trend in aesthetics procedures with innovative professional products

  2. Maintain a strong technology and intellectual property leadership position

  3. Leverage advanced research into direct to consumer market

Patent enforcement has been a "key strategic initiative for many years" said Caruso and clearly it has been a highly successful one. To wit, the company has collected over $130 million in royalties to date from two sources — hair removal and fractional technologies — from a variety of industry players. In the former market, it currently is in the midst of litigation against Tria Beauty (Dublin, California) and has sent "notifications letters" to several other remaining competitors in both hair removal and fractional lasers.

The fledgling Consumer segment, which is now 18 months into the launch of PaloVia, a home product for laser-based treatment of periorbital wrinkles, generated $0.9 million in revenue in 2Q12. This product is the first ever FDA cleared, at-home laser clinically proven to reduce fine lines and wrinkles around the eyes.

Caruso indicated that management that has taken "a deliberately slow approach" for broad commercialization of PaloVia and he reiterated that management would like to find a partner for this product either globally or at least outside the U.S.

He concluded his comments on Palomar's longer term prospects using a baseball analogy: "we are in the warm-up phase in terms of product cycles and the industry's maturity."

Amongst its peer group, Cynosure (Westford, Massachusetts) racked up the most impressive gain in 2Q12, with revenue soaring 51% over last year's comparable quarter. Domestic revenue mushroomed 92%, buoyed by the introduction of the Cellulaze, the world's first minimally invasive surgical solution for longer lasting cellulite reduction.

This proprietary product, which garnered FDA approval in 1Q12 after a two year review process, targets cellulite in three unique ways. First, it disrupts trapped pockets of fat, second it releases fibrous bonds that pull down on the skin and finally, it stimulates collagen growth to thicken skin and increase elasticity.

It has enjoyed enormous consumer visibility in recent months and according to some physicians, the results on patients are "remarkable."

CEO Mike Davin also expressed tremendous enthusiasm for its PicoSure laser technology platform, which initially will be targeted for tattoo removal and pigmented lesions. When FDA-approved sometime in the next several months, PicoSure will become the first pico laser on the market. Its ultrafast laser speed, firing at one trillionth of a second or 100 shorter than current technology, will enable it to remove tattoos in far fewer treatments than what is available today.

"We estimate that about 9 million people in the U. S. alone would like to get rid of their tattoos," he said, adding that "this is a major market opportunity for us."

Cynosure will make its initial foray into the home use, over the counter market in 2013, in collaboration with its global marketing partner Unilever (London), with the launch of a device to treat facial wrinkles.

CEO Lou Scafuri presented on behalf of Syneron Medical (Yokneam, Israel), the industry's largest company, with 2012 global sales estimated by the investment community at about $265-$270 million. He noted that his company has a comprehensive product portfolio that is either number or number two in every major aesthetics market and that his company has a "global distribution footprint" with direct sales forces in 13 key countries.

An important new product that is expected to drive domestic growth is Ultrashape, a body-contouring device that is currently in clinical trials in the U.S. and Israel. FDA approval could come in about 18 months.

This technology features focused ultrasound and causes selective non-thermal destruction of fat cells. It relies on cavitation, not heat to destroy fat cells. Scafuri said this approach should lead to "shorter treatment times and faster results."

In a question and answer period after his prepared remarks, Scafuri commented on the attractive nature of the global aesthetics industry. Paraphrasing an industry pundit's comments, he said that "our industry's future is bright. After all is said and done, doctors are greedy and patients are vain."


2012 Canaccord Genuity Conference

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