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Palomar Medical Technologies Inc. (NASDAQ:PMTI)

Q1 2010 Earnings Call

April 29, 2010 11:30 a.m. ET

Executives

Kerry McAnistan - IR Assistant

Dan Valente - Chairman

Joe Caruso - President and CEO

Paul Weiner - CFO

Analysts

Gary Nachman - Leerink Swann

Anup Mehta - Canaccord Adams

Anthony Vendetti - Maxim Group

Andy Schopick - Nutmeg Securities

Dalton Chandler - Needham &Company

Operator

Welcome to the Palomar Medical Technologies first quarter 2010 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Kerry McAnistan, Investor Relations Assistant of Palomar. Ms. McAnistan, you may begin.

Kerry McAnistan

Good morning and welcome to the Palomar Medical Technologies first quarter 2010 conference call. Before we start this morning's call, there are a couple of items we'd like to cover. This conference call is on a recorded line and you may access the telephone replay of the call at 888-286-8010, passcode 71342567, or a webcast replay at Palomar's website, www.palomarmedical.com, through Thursday, May 6.

Various remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Form 10-K for the year ended December 31, 2009, and company's quarterly reports on Form 10-Q, which are on file with the SEC and available through Palomar's website.

The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statements as of the date of this call. The information in this conference call is the property of Palomar and could not be reproduced, recorded or otherwise published without the expressed prior written consent of the company.

Joining us this morning are Dan Valente, Chairman; Joe Caruso, President and Chief Executive Officer; and Paul Weiner, Chief Financial Officer. I would now like to turn the call over to Dan.

Dan Valente

We have met our financial and operating goals again for the first quarter. As you know, Palomar will be entering a new and exciting phase in achieving the company's direct-to-consumer commercialization goals. We're very excited about our plan to introduce our at-home product by the end of 2010.

Now let's hear from Joe Caruso.

Joe Caruso

Thank you, Dan. The worldwide economic downturn continues. It is affecting the aesthetic device business in the short term. However, we have seen signs of stabilization with an increase in consumer confidence and an increase in lead generation and demos.

We have yet to see any change in the availability of credit for our physician customers. Fortunately, Palomar's products are very well positioned for these challenging times. Even in this environment, our products make economic sense for our customers due their high return on investment profile and the flexibility of the platform. We continue to add technology that fits this challenging environment. Our sales forces also has the ability to configure our technology to fit not only the clinical needs of our customers, but their financial constraints as well.

We also benefit from a diversified business model that includes a significant portion of our revenues being derived from multiple sources. Specifically, 43% of our revenues during the first quarter were generated from sources other than one-time capital equipment sales. Our efforts to develop quality distribution partners and a direct presence outside North America have also yielded positive results as approximately 44% of our product and service revenues during the first quarter were from outside North America.

We continue to focus on executing our diversified strategy by addressing professional light-based aesthetic market today, working toward driving our technology directly to the consumer market and capitalizing on the value of our extensive patent portfolio. This business model has enabled us to invest more in research and development than our competitors, and we will continue to do so.

The first quarter is traditionally a weaker quarter as compared to the second and fourth quarter for our industry. We experienced a significant increase in revenue as compared to the same period last year. Quarterly revenue over the past year remained relatively constant, indicating that we have reached the stability point in this recession. Even with this lower level of revenue, we were able to achieve good gross margins during the quarter. Average selling prices also remained stable for our products.

Paul will give us more detail during his comments in just a few minutes on the financial results for the quarter. This year at the American Academy of Dermatology meeting in Miami in March, we launched a new platform called Artisan. It is positioned to penetrate the ever growing skin rejuvenation market. It combines the best of our non-ablative and ablative fractional laser technology with photofacial IPL technology. This combination of technology can be used to provide milder treatment for tone and texture up to the more aggressive fractional ablative laser treatment for wrinkles.

Physicians are able to have a multiple tool they need to get an overall best-in-class treatment protocol depending on individual age, skin condition, potential downtime and financial constraints at an even more attractive pricing. We will start shipping this out in this quarter.

During the first quarter, we achieved the financial and operational goals set in our planning process for the year. Receivable and inventory turnover was better than our target and product pricing was what we expected. Operationally, we continue to execute both our short-term and long-term product development strategies.

Going forward, we will continue to monitor the environment and adjust if necessary. Our intent is to balance our short-term operating goals with our long-term opportunities as we invest in research. We have built a core competency in light-based cosmetic devices, and we intend on maintaining it as we navigate through the tough economic times.

We also plan on investing in new markets prior to the economic turnaround to be best positioned for the next growth period. Although these challenging times could be with us for a while, we firmly believe that the long-term outlook for light-based cosmetic devices remains a great opportunity.

We have made a great deal of progress over the past few years with our plans to take our technology directly to the consumer market. We have FDA over-the-counter clearances for the first at-home laser for periorbital wrinkle treatment and an at-home consumer hair removal product.

Recently, we announced that we will take the first steps towards commercializing our consumer products on our own. Though this is a challenge, we are excited about this initial launch.

With our in-house manufacturing expertise, additional manufacturing space in our new facility and FDA clearance, we are on track to launch our consumer products on a limited basis to specific channels by the end of this year.

Manufacturing scale-up is in process. Our first target is ETD specialty retail market. The specialty retail market includes potentially selling through home shopping networks, specialty retail outlets, the internet and key physicians. We're also making progress in certain financial markets.

We'll first build the base of business in those channels before expanding into the broader market. In clinical studies, hundreds of subjects used our wrinkle product and thousands of treatment, and we're very pleased with the results. The feedback was really extraordinary.

Here in the ASLMS meeting in Phoenix just a few weeks ago, the data from a large multicenter clinical trial using our home wrinkle product was presented. The results were very well received. More than 100 people treated themselves at home with our device by simply reading the written instructions provided with the device.

A panel of physicians saw a noticeable reduction in wrinkles in 92% of participants after four weeks. In 84% of participants agreed that it appears to eliminate their fine lines after 12 weeks.

As you might imagine, our technology and products are further along than our sales and marketing efforts, but we have recently focused significant resources in this area. During the process of fine-tuning our consumer message and branding strategy, having full control of the initial introduction of our consumer products will enable us to build a core expertise in the market that we do not address today. It's a great opportunity for us as we build the business and fill these new channels. Once we establish a presence in these channels, we'll be able to develop and launch a number of new products.

We understand that entering the consumer market is not going to be easy; however, we believe our efforts will be worthwhile as the consumer market can substantially increase our business over the long haul and increase the value of our technology and brands.

We will be making significant investment this year, including our manufacturing, building our brand and establishing our distribution systems. This is a new business for us, and as such, we expect many challenges along the road to the consumer market, but we are well positioned to deal with those challenges and my management team is enthusiastic and prepared to do whatever it takes to make this a success.

We continue to execute our intellectual property enforcement strategy. We have a portfolio of very broad patents in a number of areas. We have many executed licenses to our hair removal patents and are in negotiations with other companies. To date, we have received over $85 million in royalty payments from this portfolio. Last year, the U.S. patent office issued re-examination certificate for our hair removal patents, confirming the validity of the claims in those patents.

Following the successfully re-examinations, the court restarted our lawsuit against Candela and separately against Syneron. We believe we are in a stronger position now than prior to the re-examinations, and we expect the trial against Candela to begin within the next 12 to 18-month period.

In the short term, our business like many others is being affected by the downturn in the overall economy. Over the years, we have successfully built our business and accumulated the assets, meaning a continued growth. We're extending our product portfolio in the professional market. We remain focused on investment in the long term through research and development. And we'll continue to strengthen our intellectual property position. We also are working on penetrating the very large consumer products market with our first products in the near term.

The recession will be behind us at some point. When the economic prosperity returns, we will be one of the best positioned companies in our space.

Now I'll turn the call over to Paul.

Paul Weiner

Thank you, Joe. Revenues for the quarter were $16 million as compared to $14.6 million to the same quarter last year, a 9% increase. Product and service revenues for the quarter were $13.1 million as compared to $11.5 million in the same quarter last year, a 14% increase.

56% of product and service revenues were in North America and 44% were outside North America. This compares to the year-ago quarter of 58% product and service revenues in North America and 42% outside North America. Comparing first quarter 2010 to first quarter 2009, product and service revenues increased worldwide.

North America products and service revenues increased $680,000 or 10%, and international products and service revenues increased $1 million or 20%. Royalty revenues increased to $1.6 million from $1.5 million in the year-ago quarter and from $859,000 in the fourth quarter of 2009. This is a great indicator that revenues are getting stronger throughout the industry.

Other revenues include $1.25 million quarterly payment from P&G related to the non-exclusive license granted to P&G for home-use light-based hair removal for women.

Products and service growth margin was 62% this quarter as compared to 55% in the same quarter last year. Product and service gross margin was positively affected by higher product revenues, which is also getting higher overhead absorption, our cost containment initiative and product mix. Average selling prices continue to remain stable.

Research and development expense for the quarter was $4.2 million as compared to $3.7 million for the same quarter last year. Research and development as a percentage of total revenue was 26% this quarter, consistent with the same quarter last year.

Selling and marketing expense for the quarter was $4.8 million as compared to $4.7 million for the same quarter last year. Selling and marketing as a percentage of total revenue was 30% this quarter as compared to 32% for the same quarter last year.

General and administrative expense for the quarter was $4 million as compared to $2.9 million for the same quarter last year. General and administrative expense as a percentage of total revenue was 25% this quarter as compared to 20% last year.

Included in the first quarter is a one-time $1.2 million charge related to the write-off of our remaining return at our old facility, of which $500,000 is in G&A and the remaining $700,000 was allocated to other departments. Without this one-time charge, G&A expense would have been $3.5 million or 22% of total revenue this quarter as compared to 20% for the same quarter last year.

G&A expense this quarter included $624,000 in patent litigation cost as compared to only $296,000 for the same quarter last year. Now that the hair removal patents are successfully through re-examination and the patent losses in Massachusetts against Candela and Syneron and TRIA Beauty are moving forward, we estimate litigation cost of between $1 million and $1.5 million per quarter throughout 2010.

Now that we are responsible for all the costs related to commercialization of consumer products, we do expect costs to increase this year over the last year related to expansion into the consumer market. We estimate this additional spend to be between $1million and $1.5 million per quarter throughout 2010.

Loss before tax in this quarter was $2.5 million as compared to a loss before tax of $2.3 million for the same quarter last year. As I mentioned earlier, included in the first quarter is a one-time $1.2 million charge related to the write-off of the remaining lease term at our old facility. Net loss this quarter was $2.5 million or $0.14 per share as compared to a net loss of $1.4 million or $0.08 per diluted share for the same quarter last year.

The balance sheet is solid with cash, cash equivalents and short-term investments of $101 million and no borrowing. We have been successful in maintaining low accounts receivable day sales outstanding of 37.

We are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Gary Nachman representing Leerink Swann.

Gary Nachman - Leerink Swann

Paul, first question, how much investment was there in the first quarter, if any for the home-use launch? You just said $1 million to $1.5 million per quarter for the rest of 2010. Where are those costs going to hit mostly, SG&A, or I'm assuming some in the cost of goods as well for manufacturing?

Paul Weiner

Yes, the way we're looking at this is these are additional costs, about what we spent last year. So $1million to $1.5million will be additional cost going towards the consumer market in addition to what we spent in 2009. In 2010, for this first quarter, there was about $1.3 million in additional cost and over spread really amongst research and development, sales and marketing and some in G&A as well.

Gary Nachman - Leerink Swann

Are you guys actually going to have any sort of pre-launch marketing just to create a little bit of a buzz in the specialty segment before the former launch which is towards the end of this year?

Paul Weiner

Yes, we haven't gone public with our launch plans, and we intend to keep those pretty close to vest until we're ready do it, not to let any of that information out in the public.

Gary Nachman - Leerink Swann

Okay. And then, Joe, (inaudible) can you tell us some of the anecdotal feedback on the Artisan machine and what price points are you coming out with and what sort of uptake would you expect? I mean this is a difficult environment to be launching a new product? How long do you think it'll take before you can really have some decent placement for that machine?

Joe Caruso

Well, the Artisan has a unique position era of technologies out there that are really ablative or non-ablative, the other technologies out there, these sort of facial treatments with IPL technology. Some customers have some of those technologies, but most customers don't have any of those technologies.

And what we've learned over the past year or so is that physicians are making a choice now because of economic constraints whereby they will buy either a fractional ablative technology and try to use that on a light mode or turning energy down to a non-ablative, or they'll try to go buy a non-ablative system and they'll really try to force that technology to get closer to an ablative result. And what we've found is that a lot of physicians are using one technology to try to do many different things.

So this product is a platform that puts all of those tools into one system for relatively the same price, maybe a little bit higher than they could buy one of those technologies, either ablative, fractional-ablate, non-fractional. And that was very well received, because as you might imagine, physicians would much rather have all the tools in the bag that are needed to get an optimal result versus trying to force one technology in an area that might be suited to maybe some other technology.

So it was very, very well received. The combined suite of those technologies is in a new platform that has a slightly lower-cost profile than our StarLux 500. So we're able to offer that at a at lower price point than the combined package on the 500 system.

The Artisan system will not however be able to accept hair removal, acne hand pieces and some of the other hand pieces, leg vein treatment hand pieces, things like that, but the StarLux 500 can accept.

So there's really two markets. One is a broad-based platform that can do a numbers of different things today and grow with practice tomorrow. And the other, the Artisan platform, is one that's specific to skin rejuvenation, which is a very strong and growing market.

Gary Nachman - Leerink Swann

And so what will the price points be for the Artisan?

Joe Caruso

The price point for the Artisan is somewhere between $80,000 and $120,000 depending on what's included in the unit, which is substantially below the package that you would get if you were doing the StarLux with the versatility within the StarLux.

Operator

And our next question comes from Mr. Anup Mehta representing Canaccord Adams.

Anup Mehta - Canaccord Adams

Could you first talk a little bit about the domestic market? It looks like U.S. sales are a little bit stronger this quarter. Considering credit continues to be an issue, what do you think is driving the strength in the domestic market?

Paul Weiner

Again, we don't have any strong data to support some of these shifts, but in talking to a number of physicians, it just seems like physicians have been able to absorb the information, look at where they are in this economy, maybe do some cost cutting on their own. Maybe they have some different positions and some different attitudes on how to do the business. Payback might be little bit longer, for instance, now than they would like before. But it seems like physicians are adjusting to the economy, and they are making the choices to add technology or upgrade their technology to grow their business.

It's very similar to what I think we're seeing with industry. Industry over the past year has got over the shock of where we are in the economy. They've made their adjustments and they're moving forward, and we see some good results out of a lot of sectors in industry. And I think you will see the same thing with individuals. If individuals are resistant, they are looking at how they can do the business going forward and then making their decision. That may be a part of what we're seeing right now.

Anup Mehta - Canaccord Adams

Is it safe to assume that, if you look at the number of customers that you are getting on a quarterly basis, are more of those customers shifting to maybe paying upfront cash without financing?

Paul Weiner

It's really hard to say. As far as going through third party leasing companies, certainly over the past two years has dropped to about half of what it was before. But it's hard for us to track whether consumers are paying cash out of their bank account or whether they're going to a bank for a loan. We receive cash directly through a physician in both of those instances.

Anup Mehta - Canaccord Adams

And can you comment at all on whether you're seeing more business coming from existing customers or new customers? For example someone who'd never owned any StarLux, Artisan, anything, coming in and saying I want something versus I want an upgrade?

Paul Weiner

I don't think there has been a big change in this.

Anup Mehta - Canaccord Adams

And then moving to the international market, a number of your competitors have recently over time developed some direct operations for distribution in various international markets. I know that Palomar did go direct in Australia at the end of '08. Are there any other plans to go direct in any other international markets in 2010, or are you guys just sticking with the distributor model?

Paul Weiner

No, we do have some plans to continue to add subsidiaries in international markets. We haven't announced those plans yet, but we will as we set those up.

Anup Mehta - Canaccord Adams

And is that something that you're working on for this year, or is that more of an out year situation?

Paul Weiner

That's included in our current plans for 2010.

Anup Mehta - Canaccord Adams

And then just some little housekeeping things. You broke out the gross margin for the service revenues. Has that remained steady, is that changing, or is that pretty much locked at a 60% margin for that part of the business?

Paul Weiner

That part of the business has been pretty steady.

Operator

Our next question comes from the line of Anthony Vendetti representing Maxim Group.

Anthony Vendetti - Maxim Group

The core versus non-core this quarter?

Paul Weiner

Yes, core, or dermatology and plastic surgeons is at 53% with non-core is 47%. That's actually the highest percentage we've ever had in the core market. We're generally around 45% or 45% plus in the core market. This quarter it was about 53% in the core market.

Anthony Vendetti - Maxim Group

And anything that you would attribute that to specifically, or is it just, that's the market you're targeting more during this economic downturn?

Paul Weiner

I don't know if we're necessarily targeting it more. Certainly, they are able to get financing a bit easier than the other markets, so that certainly goes in our favor. And also with our Aspire, SlimLipo system laser lipolysis, that's a system that's more setup for the plastic surgeons than the high-end physician.

We do sell it across all the different levels, but that's certainly a higher percentage in that area. And that's why, since we've introduced over the past year, the percentage to the core market has steadily increased.

Joe Caruso

And one might expect that the core market, the dermatology and plastic surgery market might be the one that comes back a little bit faster than the non-cores because they are the ones that probably will be either able to come up with the money to buy technology, or ones that may be the correct ones to be able to get whatever credit is available out there. So we're not that surprised there, seeing that sort of trend.

Anthony Vendetti - Maxim Group

Okay, and the Artisan, there weren't any sales of the Artisan in the quarter because that just received FDA approval this month, is that correct?

Joe Caruso

That's correct.

Anthony Vendetti - Maxim Group

Can you talk about how initial demand is for that product at this point?

Joe Caruso

The interest is good. There are a lot of sites that have yet to add fractional ablative or non-ablative technologies to their chronicle. So there's a group of physicians out there that is looking at either buying an ablative CO2-type or non-ablative perhaps 1540, and they are going through the process in their own mind of making that choice.

And with the Artisan, the physician doesn't have to make that choice. They have a much broader palette to work from, and they also have an IPL, a good IPL technology built into that system so that they can treat really the very first application of a technology on a new patient that's never had a cosmetic treatment before, although we have to someone that's maybe had many different cosmetic-like based treatments over many years and is now looking for the most aggressive ablative technology.

So it's really a good solution for them, and especially in this economic climate.

Anthony Vendetti - Maxim Group

In terms of the international, you're going to be going direct I guess in a few more countries. But just if you can talk about how the indirect is going in the countries that you're in and why you're thinking of switching to direct in certain countries? And if you can talk about where you saw the most strength internationally this quarter?

Joe Caruso

Well, some of the distributors that we have are very good. And we've had them for a long time, and they have financial resources, and very good resources as far as local marketing and advertising, those types of things. Others have struggled over the years. And some markets are a little bit stronger economically than other markets. So we're taking all those things into consideration.

And when we see an opportunity to build our own resources in a particular market, we'll take it. You don't want to move too fast on that because if the environment is not right or the people that we can attract to manage our office isn't right, or a number of other factors is not right, then we don't want to force it because we've seen time and time again companies do that and have to take one step forward and two steps back.

So we'd rather move a little slower, a little more deliberate, gain market share, gain incremental sales and profits as we go. And in the meantime, we'll manage our international distributors.

Anthony Vendetti - Maxim Group

And lastly on the legal, it was a little bit lighter this quarter; I guess there really wasn't a lot going on than kind of the guidance of $1 million to $1.5 million a quarter. Are you expecting that to pick up, or do we have to kind of wait until there is a court date before this picks up towards the higher end of that range? And then on the court dates, have you heard anything back or does this look like more of a 2011 situation than a 2010 situation?

Paul Weiner

As far as where the outside legal costs come in, we're still expecting as I said $1 million to $1.5 million per quarter. This quarter happened to be a little bit light, but it just depends on where the (work) falls with the outside attorneys. So I would still look for $1 million to $1.5 million per quarter.

The second part of the question, as far as when we expect the court date, we've said this over the past few months that we're looking at 2011 court date. We're still, as Joe had said, somewhere between 12 and 18 months out before we're in court, and we still haven't gotten the court date as of yet.

Anthony Vendetti - Maxim Group

Any color on the home based product? If you could just talk a little bit more about your confidence in the end of the year launch and why you're confident about it at this point?

Joe Caruso

We're right on plan, and we're still on our initial target for the end of this year. We have got a lot done as far as setting up our manufacturing process, tooling in order to get low cost manufacturing out of this facility. All of the orders are substantially all of the orders for the component parts with all of our qualified vendors. So those will be starting to come in.

I have a lot of confidence in meeting our target dates. The only thing that can really mess us up I think is if one of our suppliers or vendors runs into a problem on our component parts.

That could always happen. It happens sometimes in our professional business. It could happen in any new product line, and we don't have the inventory cushion in-house to absorb that. So that's really the only thing that I worry about right now as far as getting the product to market.

We're making a lot of progress on our marketing, branding, positioning side. We're working with people in-house, working with some very specialized consultants for some of their activity. And we're really happy with that effort so far.

We're learning a lot, and we'll be very well-positioned in what really is a brand new market for not only us but this whole industry. If we can take what we learn and what we've learned over a long period of time in the professional and take different pieces of that and execute in the consumer market, the whole market will increase a lot, not only the consumer market but also professional market as well. So we're really excited about it.

Operator

Our next question comes from the line of Andy Schopick from Nutmeg Securities.

Andy Schopick - Nutmeg Securities

Follow up here. What did you say the actual legal charges were in 1Q?

Paul Weiner

It was around 650,000 in the first quarter.

Andy Schopick - Nutmeg Securities

Now, on the in-home use product, at this time, can you provide us with any type of general guidance as to what you think the margins will look like once you're fully ramped up, of course, whether these will be comparable corporate margins to your laser product sales?

Joe Caruso

Yes, we haven't given any guidance yet on the margin on that product yet. The first production run will be at lower margins than we would like obviously because we're still ramping up and we need more volumes. So if we go to the volumes that we would like to get to at sort of full scale production and penetration into multiple channels, then the margins should be good.

It's a little too early to know how close they'll get to the professional lines. The professional lines are rather good. On an incremental basis, we have been looking at the contribution. Because of the way we are approaching our channel strategy and our channel management, there's not a lot of expenses below the gross margin line as compared to the professional market.

It's kind of similar to what we're doing on our international distribution model. We have a certain transfer price which is lower than end user price, and we have some marketing support cost, but not all of the marketing support costs.

And our strategy in using the channel that we've set is for that reason. So even though gross margins may be less, we surely have less sales, marketing, G&A management type of expenses, and the incremental margin should be good.

Andy Schopick - Nutmeg Securities

Well, it's going to take a little time for us to see it all happen. Paul, a question for you about taxes. I noticed that the actual loss is very close to what you incurred last year, but yet the benefit provision or per benefit from taxes is at a much smaller rate than was the case last year. Could you just talk to that and give us a sense, assuming you are profitable, what type of protected tax rate we would see?

Paul Weiner

Last year we were booking a fully effective tax rate, which is obviously much different from what we're doing this year. So you cannot compare last year to this year. Going forward though, we do expect that in the year-end call that our taxes should be in the single digits as far as what we are booking.

Andy Schopick - Nutmeg Securities

Okay. No change. All right, thank you very much.

Operator

And our next question comes from Dalton Chandler representing Needham &Company.

Dalton Chandler - Needham &Company

I just wanted to comeback to the expenses associated with the home use product launch again. You said you expect them to be fairly constant through the year, but if you are actually going to have product revenue in the fourth quarter, why shouldn’t we expect tp see a ramp during the second half?

Paul Weiner

Because the first half we're spending money on ramping up, setting up the manufacturing line, some of that makes good sense. We are spending money with consultants in the direction as far as branding and product positioning. In the second half, we will continue to spend some money on the manufacturing process and entering into the channels and possibly some advertising and PR.

So a shift from more of a setup to execution, but there is pretty consistent spending throughout the year as far as we can say.

Dalton Chandler - Needham &Company

And then no one's brought up P&G in a long time, but I think they renegotiated their deal with you, in part to avoid a $10 million milestone payment. And I think under the new agreement they've now paid you more than $10 million and still haven't launched a product. Can you help us make some sense of what's going on there?

Paul Weiner

Well, that $10 million came in with an annual payment, Dalton, and now they are paying us $5 million annually. So they're still paying $5 million less per year in exchange for a non-exclusive versus an exclusive license.

Dalton Chandler - Needham &Company

And do you expect them to launch your product at some point?

Paul Weiner

That's really obviously up to P&G. They do continue to pay us on a quarterly basis, so we envision that they certainly have interest in our patents, and that would point in the direction that they would move forward and launch but we can't really speak to that.

Joe Caruso

It does seem like there's a lot more activity as time goes on; we've seen this year versus last year versus the year before that with entries into the consumer market with devices. So if you look at the broader picture, the price side of the cosmetic or aesthetic market, every year there are more and more entries into that market in more and more fields.

So I would guess that if companies want to participate that they'll make their investments and they'll participate. And that's actually a very good thing for us because the faster and more that trend develops using devices in cosmetics and aesthetics, the more that helps us out.

Operator

Our next question comes from the line of Anup Mehta representing Canaccord.

Anup Mehta - Canaccord Adams

Thanks, just a couple of follow ups. You mentioned the gross margin in the quarter was helped by mix. That was one of the things you call out. Could you specify, are you seeing more business coming in from plastics or we're seeing more SlimLipo machines going out the door, or is there some other type of mix shift that helped even relative to the fourth quarter?

Paul Weiner

Yes, I mean, not necessarily relative to the fourth quarter as much as the year ago. We first introduced the SlimLipo around that period of time, but now certainly we're selling more today than we were a year ago, and we are selling more to dermatologists as you had mentioned. That's kind of where that product mix has changed slightly.

Anup Mehta - Canaccord Adams

So then, relative to the fourth quarter it's probably more just volumes in top line than anything else?

Paul Weiner

Yes, well, between that also, geographical mix between sales in North America which is direct and that mix changed in the fourth quarter.

Anup Mehta - Canaccord Adams

And then the last thing I wanted to touch on, you mentioned when you were making your comments about the consumer market in your prepared remarks that you were also looking at international channels for the product. Is that going to be through a partner? Could you just kind of let us know what you're thinking about on that?

Paul Weiner

Yes, that would be through partners most likely.

Anup Mehta - Canaccord Adams

And would that include some type of upfront payment, or is it just going to be royalties? How would you set that up?

Paul Weiner

That's yet to be determined right now.

Operator

There are no more questions at this time. I'd like to turn the call over to Dan Valente for closing remarks. Please proceed.

Dan Valente

Thank you, operator. And hope we answered your questions as directly and clearly as possible. The next few months should be very interesting. And I thank you for calling in, and we look forward to our next call with you sometime in July. Have a good day.

Operator

This concludes Palomar's first quarter 2010 financial results conference call. Thank you for attending. You may now disconnect at this time.

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Source: Palomar Medical Technologies Inc. Q1 2010 Earnings Call Transcript
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