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PhotoMedex, Inc. (NASDAQ:PHMD)

LCA Vision Acquisition Call

February 14, 2014 8:30 AM ET

Executives

Kim Golodetz – IR

Dolev Rafaeli – CEO

Dennis McGrath – President and CFO

Mike Celebrezze – CEO

Analysts

William Plovanic – Canaccord

Anthony Vendetti – Maxim Group

John Curti – Singular Research

Hamed Khorsand – BWS Financial

Operator

Good day, everyone. Welcome to the PhotoMedex Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Kim Golodetz. Please go ahead.

Kim Golodetz

Thank you, Operator. This is Kim Sutton Golodetz with LHA. Thank you all for participating in today’s call. Joining me this morning from PhotoMedex are Dr. Dolev Rafaeli, Chief Executive Officer; Dennis McGrath, President and Chief Financial Officer and from LCA-Vision, Michael Celebrezze, Chief Executive Officer.

After the close of trading yesterday PhotoMedex and LCA-Vision announced the definitive agreement for PhotoMedex to acquire LCA-Vision. If you have not received this news release or if you would like to be added to the company’s distribution list please call LHA New York at 12-838-3777 and speak with Carolyn Curran.

Before we begin I would like to caution that comments made during this conference call by management will contain forward-looking statements. particularly those describing PhotoMedex’s and LCA-Vision’s strategies, operating expense reductions and business plans within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks, uncertainties and other factors.

All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any statements of the plans, strategies and objectives of management for future operations; any statements regarding product development, product extensions, product integration or product marketing; any statements regarding continued compliance with government regulations, changing legislation or regulatory environments; any statements of expectation or belief and any statements of assumptions underlying any of the foregoing.

These risks, uncertainties and other factors, including PhotoMedex’s ability to consummate the announced acquisition of LCA-Vision, unexpected costs or unexpected liabilities that may arise from the announced acquisition, and PhotoMedex’s failure to realize the anticipated benefits of the announced acquisition, and the general risks associated with the businesses of PhotoMedex and LCA-Vision described in the reports and other documents filed with the SEC, could cause actual results to differ materially from those referred to, implied or expressed in the forward-looking statements. PhotoMedex and LCA-Vision caution participants not to rely on these forward-looking statements.

All forward-looking statements are based on information currently available to PhotoMedex and LCA-Vision and are qualified in their entirety by this cautionary statement. Each of PhotoMedex and LCA-Vision anticipates that subsequent events and developments will cause its views to change. The information contained in this conference call speaks as of the date hereof and neither PhotoMedex nor LCA-Vision has or undertakes any obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

With that, I will turn the call over to Dr. Dolev Rafaeli. Dolev?

Dolev Rafaeli

Thank you, Kim. Good morning. My name is Dolev Rafaeli. I’m the CEO of PhotoMedex. Thank you for joining us this morning.

We would like to take you through a presentation that describes the deal that was announced yesterday afternoon after the market close. The presentation is available on both companies’ IR sites. And I’ll start right now.

We are talking about a transformational transaction between PhotoMedex and LCA-Vision. PhotoMedex trades on NASDAQ and Tel Aviv Stock Exchange. PhotoMedex’s is a leading global skin health provider to both the consumer and the professional markets. LCA-Vision is a leading national provider of fixed-site laser vision correction services at the company’s LasikPlus vision centers.

The acquisition provides for the platform to launch a direct XTRAC Psoriasis and Vitiligo Centers of Excellence and for Neova clinical dispensing outlets. It provides us an opportunity to leverage the LasikPlus infrastructure and the customer centric staff which are the best in the industry. It expands the recurring and reimbursed revenues from XTRAC and Neova to underutilized LasikPlus infrastructure. The LasikPlus centers and staff who deal one-on-one with patients are ideally suited for expanding procedures beyond the Lasik to include XTRAC laser treatments as-well-as additional clinical brands.

Let me turn this over to Dennis who is going to describe the transaction summary.

Dennis McGrath

Thanks, Dolev. And you could follow along I am on slide four and five of the presentation whether it’s on Live Meeting or from either one of our websites. So as you saw from the press release the acquisition price was $5.37 a share with over 34% premium, the day before the announcement.

Total purchase price, a $106.4 million LCA has just under 20 million shares outstanding. It’s accretive to our cash EPS in 2014 excluding the transaction items. We expect approximately $5 million in cost savings and efficiencies to be achieved entering into 2015 and I’ll describe some of those synergies on another slide. The financing is through existing cash along with a committed senior debt financing vehicle I’ll go through that also on a subsequent slide. And the leverage at close is very conservative it’s 1.9 times our EBITDA.

Furthermore Dolev and myself will continue at our current roles, as well as Mike Celebrezze will continue in his role as President and CEO of LCA-Vision. LCA-Vision will become and operate as a wholly owned subsidiary of PhotoMedex’s and a six-person Board of Directors will be created with that subsidiary. Both Boards have unanimously approved this transaction. We are in the process for the Hart-Scott-Rodino approval. There is a 30-day Go Shop that begins as of yesterday at the signing of the definitive agreement to have LCA entertain any additional bids. And we expect this transaction to close in the second quarter.

The sources and uses of capital for the acquisition you can see on slide five, it’s anticipated to use $31 million of cash for the acquisition along with $75 million at a long-term senior debt vehicle. In addition we will pay the transaction cost which are approximately $7 million. As of the last reported date for both companies about $78 million in combined cash. The debt facility is an $85 million facility in total, $75 million for acquisition, $10 million line of credit. The $75 million acquisition debt – senior debt is a four year term, the Initial amortization $15 million or 20% in the first year. There are accelerated provisions related to excess cash. The initial rate is very favorable it’s the one month LIBOR plus 250 basis points to 325 basis points depending upon the total leverage that exists at that time.

So out of the gate with LIBOR today if you assume 300 basis points interest rate is just under 3.2%. JPMorgan Securities LLC will act as the sole and exclusive Lead Arranger and Bookrunner as they syndicate the debt vehicle.

So with that I am going to turn it over to Mike Celebrezze. He is going to give you an overview of the LCAV.

Mike Celebrezze

Thanks, Dennis. And good morning everybody. So LCA-Vision is a leading provider in laser vision correction services and the leader in direct consumer marketing in our space. We operate under the LasikPlus brand. We currently have 62 vision centers across the U.S., broken down it totals 52 of the vision centers are LasikPlus company-owned vision centers – 47 are company-owned vision centers and five of which are licensed vision centers.

We also have 10 satellite centers which have pre-op and post-op centers that make our services more available to the patients – closer to the patient’s home. The surgeries are done in the fixed site centers for those other 10 centers.

Since the approval of Lasik in the U.S in 1998 our company has performed more than 1.3 million procedures, so we’ve been doing this for a long time and extremely high patient satisfaction rate over 97%. We have 9% national market share. Of course we are not in all markets we have about 20% market share in the markets that we are in, so we have formidable presence in the markets we are in.

We pride ourselves and differentiate ourselves by using the latest technology in fact we have multiple lasers in each of our laser suits which really is a point of differentiation in the marketplace. We have both the [Avcom and Adev] lasers in all of centers which means we can provide the best clinical outcomes for all of our patients.

Our model contains a high level of fixed cost, so it’s got a high amount of leverage which really adds to the benefit of this transaction. We have worked hard over the past several years to significantly lower our breakeven points. We have diligent cost control in place and we’ve lowered our infrastructure cost to match the current demand. But it’s extremely scalable and well positioned for growth.

I’ll turn it back to Dolev.

Dolev Rafaeli

So I am going to be talking about the concept of the XTRAC Centers of Excellence slides seven and eight in the presentation. Using the LCA-Vision footprint by adding XTRAC Centers of Excellence on that platform would allow us to use most of LCA-Vision’s full service centers which have physical capacity to add extra treatments into them. It will provide significant leverage on central level economics. The revenue impact is highly profitable and is recurring. There is no impact on existing partners XTRAC installations and the Neova dispensing further leverages infrastructure.

The specific impact of Centers of Excellence on the XTRAC business in the US markets would provide us an opportunity to establish Centers of Excellence in key markets using fully paid for infrastructure and established high customer service standards and culture which comes from the LasikPlus culture, company culture. It would allow us to demonstrate the best practice by establishing optimal treatment time and to nurture the recurring revisits and will allow us to optimize the customer service level using leveraging the LasikPlus ground breaking achievements.

It would capitalize on the combined advertising spending and the consumer reach of both LCV and PhotoMedex and it would leverage LCV’s core center. It would use the LCV reach through the partner networks as a further tool to drive patients into these centers. Currently there are 47 LCA-Vision owned full service centers which will likely add the XTRAC treatment.

On slide eight, you can see a map that overlays the current XTRAC customers we have in the US and in black the LCV centers, the combined footprint adds to the growth opportunities and is highly synergistic the overlay of XTRAC and Neova business which enhances PhotoMedex’s physician recurring channel, service which offers expansion and leverage infrastructure and fixed overhead and the expansion would be into these markets in post-acquisition we are going to have 47 full service company owned centers.

In addition to over 500 partner installations providing XTRAC treatment we are going to have 10 company owned satellite centers and over 2400 Neova dispensing offices. The market density will leverage expense.

Let me turn this over to Denis to speak about cost savings and efficiencies.

Dennis McGrath

Right if you are following along I am on slide nine. So overall as I mentioned the target in the first year’s $5 million of cost savings and this is pretty much the low hanging fruit. It’s really two components of the offset.

We believe there is more that we continue to as we continue to developed the companies working together but public company expense of LCA-V you are talking about just under $1.5 of costs and when you combined the total advertising spend as you can see on the slide on the third bullet the advertising spend’s around $93 million – $94 million and it gives a critical math such that the $27 million that LCA-V spends today we believe there is about 15% cost savings just purely because of price opportunity.

So the LCA-V current markets provide opportunities to place additional XTRAC services and essentially lowers, the center break even as Dolev indicated and there are opportunities to focus the PhotoMedex strategies on the advertising gaining greater control greater focus and lower cost.

On slide 10 you see the financials, the combined financials illustrated for the trailing 12 months as of September 30 which were last reported. You can see it clearly gives us critical math that revenue exceeding $300 million is accretive to PhotoMedex cash EPS in 2014 excluding the transaction cost.

We remain well capitalized with ample cash flow at service deck and fund the working capital as you can see in the fourth bullet down, adding the XTRAC opportunity into the XTRAC centers again lowers the breakeven which in reverse gives us the opportunity to expand the LasikPlus centers in targeted areas where maybe the volume at this point isn’t sufficient to justify entering that market with a fixed side center but having that additional revenue opportunity certainly lowers that threshold burden for us to consider expanding that.

As Michael explained on the next slide their business model is very similar to our XTRAC model. The next dollar in the door has very high contribution margins and that gives us tremendous leverage as we go both businesses. So incrementally the XTRAC and the over services are expected to gain about 30% operating margin due to the expansion of the center utilization and keep in mind at the center level you are talking about ASPs for both of these services and products at the retail level, not wholesale value.

So with that I am going to turn it over to Mike as he explains the Lasik operating leverage.

Mike Celebrezze

Okay so we are turning to page 11. So the table on the right describes the financial leverage in the Lasik cost model today. So the current centers at the time slightly compared with 58 vision centers doing 80 eyes a month which brings 56,000 procedures as the GAAP net income figure, so that’s the first comment.

The breakeven at the point in time that we disclosed are breakeven point and we are running reasonably close to that. Last year we put it as 53,200 procedures which we disclosed. The middle column it says okay those same centers what if they get to 145 procedures, 145 procedures with a significant leverage in the model that company produces 30 million of EBITDA and 29 million of GAAP net income.

But where does 145 come from? 145 procedures at the average number of procedures that the LasikPlus delivered per center per month over the last economic cycle on average so it’s not the peak, the peak was over 250, it’s the average over the last cycle which I think is meaningful because the business and the industry is somewhat volatile. It’s up and down but if you look at it over the span of a period of time you get a sense for leverage in the model.

The right column says okay obviously for cranking out 30 million of EBITDA we’ll go ahead and add more centers and what does it look like as an example at 70 procedures per month so that’s what LasikPlus looks like. Well as Dennis said the addition of the XTRAC and Neova provides additional leverage through the existing infrastructure. So then there is strong gross margin on our business, the LasikPlus business of 78% as well as on the XTRAC business.

So by leveraging the fixed cost we can generate the addition leverage by adding additional services that are portrayed on the right hand side. So it’s a good opportunity to leverage the fixed cost model. Dolev?

Dolev Rafaeli

Let me finish this presentation by going over slides 12 and 13, the strategic summary and the post-merger structure of the company. On the strategic summary I would point to four major issues. The strategic DTC platform, direct to consumer platform advantage, the managerial and operational excellence, the direct outcome deliverables and the benefits to the stakeholders. So let me turn to the strategic DTC platform advantage.

We are going to be leveraging on advertising customer based acquisition platforms. Both companies are using advertising to create customer acquisition. The customers of the both companies have same philosophy of customer intimacy which allows us to have cross marketing opportunities and allows us to have long term loyalty and it allows us to add new products into the same pipeline of customer acquisition.

The managerial and operational excellence means that we have increased margins both to PhotoMedex as a company as well as in the central level economics. It allows us to have better control of the brands and messaging in the central levels because we own the centers when we own them it leverages the experience of our existing sales and marketing teams in both companies allowing us to provide support of sales and marketing through these centers immediately leveraging their existence with existing knowledge of both sales and marketing teams in the companies and it allows us to have controlled pricing environment for our brands in the centers.

And the direct outcome deliverables would be delivery we would get consistent environment for the presentation of all brands. You will have controlled customer centric management for outstanding experience for all brands and we would optimize the economies of scale in the clinic level.

And as for the benefits for the stakeholders. Current PhotoMedex physician channel will grow through company-owned clinics, that’s for own channel. The current PhotoMedex sales channel would grow through expanded customer base and the current LCAV staff would increase offerings and would allow for clinic growth potential.

As a summary for this presentation let me take you through an overview of how the company is going to look like post closure. As you well know PhotoMedex is managed under three businesses, the consumer business which includes the no!no! brands, the NEOVA brands, the Omnilux brand and recently introduced Kryobak, brand the LTM revenue was just over $180 million and the LTM gross margin was just over 85%.

We have our professional channel which includes the Radiancy LHA brands, the Lumiere and the Omnilux brands with LTM revenue of just under $9 million and LTM gross margin of 38% and we have our physician recurring channel which includes NEOVA and XTRAC rents with LTM revenue of $26.5 million and LTM gross margin of 52.3%.

In addition to that after the transaction we’re going to have the outreach through the clinics of LCA-Vision which is going to be managed as a wholly-owned subsidiary the LCA-Vision is going to handle three brands, the LasikPlus the XTRAC and NEOVA. The LTM revenue for LCA vision is $91.8 million and the LTM gross margin is 78.1%.

Let me turn this over.

Dennis McGrath

So you can get additional information as you can see on the slide there as identified both year-end in the press release. So with that operator let’s open it up for some questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll take Bill Plovanic with Canaccord.

William Plovanic – Canaccord

Thanks good morning can you hear me okay?

Dolev Rafaeli

Yes.

William Plovanic – Canaccord

Good. Okay so a couple of questions just on the timing of the rollout post the deal close. You said you expect the deal to close in 90 days how long will this take you to rollout to all your centers.

Dolev Rafaeli

I would answer part of the question Mike will answer part of the question. The part that Mike is going to talk about is the structure of how the centers are operating today with physician administered treatments and the business structure of the clinics.

We expect immediately after closing to start implementing in test centers where we need to get the centers up and running. As you all know our field sales force, the PhotoMedex field sales force is very accustomed with launching clinics we launch anywhere between 30 and 50 new clinics a quarter and launching clinic means we need to get the clinic staff trained in the procedure we need to install the machines.

We need to get them up and running, we get them, our cycle time between the time we sign up a new clinic and LCA is going to be treated as any other new clinic we have, the cycle time from the time we signed them up to the time they perform the first procedure is between 30 and 60 days and that time is the time that takes to create the training, to install the devices and to get the first patients in the door.

We expect that to happen within 2014. I am going to refer to Mike in a second to talk about the structure and how this is going to fit into the LCA structure. Just a reminder we are providing patients to our channels through the DTC advertising today. All of these clinics are in markets where we serve. Most of these clinics are in markets where it’s – the administration of the treatment is not necessarily done by a physician. It is required only in very small number of markets.

And we are going to be adding customer acquisition channels that LCA has today which is the – which Mike is going to talk about. Let me hand it over to Mike.

Mike Celebrezze

Okay so a couple of points. Both businesses are leaders in direct to consumer advertising which can drive a lot of patients for all of our services. LasikPlus in the last year and half have created a partner network where we co-manage with independent optometrists to work with them and treat their patients.

We believe that model can be implemented on the psoriasis side as well working with dermatologists and general practitioners and drive more patients in addition to our direct-to-consumer muscle.

On the operation side most of our centers, sorry all of our centers have capacity to add additional services. Our staff is outstanding. They provide great patient care and great outcomes. So I am confident that we’ll be able to implement additional services and get the benefit of the new patients. So we’ll just work through as Dolev said through test markets. We have some experience in adding services. In the last couple of years we’ve been adding some premium lens procedures in some of our centers so we’ve learned from that experience which should benefit us as we add this additional service.

William Plovanic – Canaccord

Okay. And then if I could ask just, for those of us who just aren’t as familiar with the LCA story, just what are your current business trends just looking through the Q have you – the business been stable, upward trend, downward trend I know I think you report earnings next week but just general trends in your overall business today would be helpful.

Mike Celebrezze

This is Mike. So our trends we did publish our procedure volume for 2013 so that’s all public information. And our recent trends in the last six months our procedure volume was up. We had 4% procedure volume growth in both the third and fourth quarters. The industry has been challenged over the past several years.

And as I mentioned in my prepared remarks we’ve done a nice job of modifying our cost structure so that we can be right sized at the current situation. The consumer confidence is a big driver of that we see high correlation with us as well the labor participation rates. There has been improvements in consumer confidence over time. It has not yet manifest itself into the Lasik industry.

There is a trade group that follows the industry and believes there is significant pent up demand. So we’ve built conservative models. We’re managing against conservative models but we also are prepared to drive growth and manage the growth as it comes.

William Plovanic – Canaccord

Great thank you.

Operator

And we’ll go next to [Kay MacKay] with Ascendant Capital.

Dolev Rafaeli

Good morning Kay.

Unidentified Analyst

Yes hi. Question for Delov when we think about you now using the LCA Vision centers to perform extra procedure help me understand how those economics work and how the referral are who is actually going to do the procedure. So currently you have a derm who improved performed the psoriasis treatment and they are off, so they get paid to do that. So will you have other derm who have exclusive to perform out of your new facilities or and how do the referral work and how will the reimbursement work?

Dolev Rafaeli

Let me first give you an overview of how LCA-Vision centers work today. LCA vision today operates through the company itself which runs the centers manages them and operates the customer service side of the business. And it has professional corporations that have the physicians in them to provide the clinical procedures.

This is not going to be different with us. We’re going to have either added into the same professional corporations or a separate professional corporations and physicians that prescribe and in the very small number of states where it’s required physicians that perform the procedure. As you might recall, XTRAC procedure can be prescribed by any physician, it doesn’t have to be a dermatologist and it can be performed in most stage by technician or a nurse it does have to be performed by a physician.

The XTRAC today is performed across the country in 800 centers, 500 of them are owned, the lasers are owned by us and their franchise outs we provide a significant number of the patients who are DTC efforts the doctors provide patients through their own clinic. In the LCA-Vision clinic the patients are going to be provided by us, they are going to be provided by us either through DTC efforts which we currently had, all of these centers are in markets where we already advertised and they are going to be provided through partner network which LCA-Vision has mastered and they are going to be provided through word of mouth which LCA-Vision has mastered.

The benefit that we get from providing procedures in our own clinic is going to be three fold. First of all it’s going to be done in the most optimal way because we’re going to be following our own clinical guidance and be able to control this across all the company owned centers. Secondly we benefit from having the full revenue coming in from the insurance companies versus the current average of $78 per treatment.

And thirdly we benefit the ability to drive the patients to our own center of excellence as first line of referral and then to our franchisees as second line of referral.

As you might recall, the patients that visit our centers today have to visit them between six and 12 times before they get to remission, twice a week. So that’s three to six weeks and that calls for a short distance of travel. So we think of the clinic to be efficient within a 10 to 20 mile radio it depends on the location obviously New York city is much less and outside in other places it would be longer but we think about a 10 to 20 mile radios as the capture zone.

The current LCA-Vision clinics have a much wider capture zone because people would drive to do the procedure, it happens only once or three times and pre-procedure and post procedure and in a sense of view if you think and I’ll use an example of one market in the Philadelphia area alone we have close to 20 franchise sites and LCA-Vision has two sites, one in the North side of the city and the other one at the South side of the city.

We would look at these centers with a circle of around 10 miles around them so the one north is next to King of Prussia. And if you a circle about 10 miles around it, that’s going to be capture zone for that center. Other patients that are going to come in are going to be referred to other centers. So there is no competition with the existing centers. It allows us to increase the advertisement in the area, it allows us to overflow to all the other centers. I hope I answered most of your questions.

Unidentified Analyst

I’d mean we can talk about it more I guess more specifically offline. And then just kind of back to Bill’s question, so once you acquire a site how aggressively are you going to begin to fill out these 50 or so sites? Do you have the capability with your current sales force to be able to tap all those at once or you are going to have to prioritize which one do you have the first, how you think the way you roll out XTRAC into these centers?

Dolev Rafaeli

Okay. I think we certainly have the capacity of manufacturing to build the units to do this rather rapidly. We have the sales force and the skillsets be able to roll it out at whatever speed we dictate is appropriate. But given our methodology of how we roll out new products, new services, we roll it out on a test basis, we test monitor it and we do a variety of things and just like any of our consumer products we don’t turn that faucet on full bore until we are satisfied the metrics are working to our level of satisfaction.

You’ll find that the LCA centers, Lasik Vision centers are extremely well run and we are not going to do anything to disrupt that customer experience. So we will put a few centers in, we will make sure that it’s working to the standards we expect and once we are satisfied that with that we are able to run as fast as we can.

Unidentified Analyst

Okay.

Dolev Rafaeli

I know I think [inaudible] we are going to rely upon our tried and true methodology about how to put this out.

Unidentified Analyst

And then just one short question you once again pass the go shop window what’s the breakup fee?

Dolev Rafaeli

The breakup fee it’s in the definitive agreement 3% plus expenses, up to $1 million.

Unidentified Analyst

Okay. Thanks.

Dolev Rafaeli

Expense is up to $1 million.

Operator

Okay. And we’ll go next to Anthony Vendetti with Maxim Group.

Dolev Rafaeli

Good morning Anthony.

Anthony Vendetti – Maxim Group

Good morning. Just a couple of more questions on the roll out of XTRAC. If you advertise it and you have someone with psoriasis that wants to go to the center, they are going to get a prescription from one of their own docs, or when they call your call center you’ll put him touch with the doc to get a prescription to go to the center, is that correct?

Mike Celebrezze

Yeah. So the process is we do outreach just like does Lasik, that psoriasis patient calls our call center, our operators are very trained in terms of teaching what the procedures about prequalifying their reimbursement, their insurance reimbursement and then directing them to a center and whether they are in our location or in one of our partner location we will direct them to that convenient center and they would be evaluated just like they would be at any dermatologist, yes it is psoriasis the severity of it, here’s the procedures looks like, have the prescription written and then treated by a technician as Dolev delineated most geographies a technician can deliver this service, in geographies where physician require that would be done. ‘

Anthony Vendetti – Maxim Group

Okay. So in the hat geographies where that’s required there will be – you’ll probably have to have some type of dermatologist on staff or at least accessible to get the initial evaluation and prescription and then send them to the center for the treatment, is that right?

Mike Celebrezze

Correct. And that physician even not necessarily has to be a dermatologist and he will be on staff as part of the PC of the clinic.

Anthony Vendetti – Maxim Group

And then Dolev you mentioned about you used, I guess Pennsylvania as an example. But for the sites where you have your XTRAC out there, 500 centers, are they going to be – what’s going to be their view of now sort of in certain geographies they are going to feel like maybe they are competing with the LCAV center. How would you address that as you try to roll out XTRAC into still dermatologists offices and not just the LCAV offices?

Dennis McGrath

Anthony it’s Dennis, a couple of points we made in this area. First there is very little overlap in the capture areas as Dolev pointed out. Two, the XTRAC represents a significant money maker for the physicians and bottom line is with the ability to recruit patients at an accelerated levels, everybody will benefit, our centers, our physician partners where the XTRAC exists, there are 10 million patients out there with under 20,000 currently in therapy for the XTRAC and as we have done over the last year and a half, tested monitored and rolled out some of the advertising.

It’s our intent given the predictability that we built with this marketing platform for the XTRAC to start increasing the intensity of that advertising and that means all of our physician partners will benefit and given the magnitude of money they can make with this therapy I think they would welcome this initiative.

Dolev Rafaeli

Let me end to this, this is Dolev I’ll use a different market, I’ll use the New York market as an example. So from the time that PhotoMedex emerged at the end of 2011 two years on the quarter, we’ve increased the number of extra clinics in the New York market five-fold, we went from about ten, to over 50. In that time period, the number of treatments per clinic on average in that market went 2.5 times, 250%. That drive up so we would fivefold the number of clinics and 2.5 times in number of treatments per clinics same store sales so that drives up, 2.5 times five was driven by our penetration into the market and advertising and driving the patients.

We have the capability to deliver not only enough patients to all of the partners we have but also enough patients to the additional 47 clinics we’re introducing today. As a reminder, over the last two years we’ve added 30 to 50 new clinics across the U.S. every quarter. So we have the capability of not only doing that but increasing same store sales by very rapid pay which was pertained to over last two years. We’ve done this as 30 to 50 clinics every quarter and we’ve added over 200% in the procedure counts per store in the last two years. I hope that answers your question.

Dennis McGrath

Yeah so implied in your question is the overall competitiveness drive away some of our existing partners and some other statistics that certainly point to the fact that we’re at the early stages of this rollout. There are out of the 11,000 derms which is probably four or 5,000 that are qualifying for this type of disease management and as – said we have 800 in the U.S. we’re adding 47 more sites. And given what we found in the New York the increase fivefold you think we increased the competitiveness but what we’ve demonstrate is that we can feed – and given the amount of money that can be made inside attract us with the extract treatment we don’t see that to be a competitive threat for many of our position partners.

Dolev Rafaeli

And as a reminder, there are 10 million survivors, reliable patients out there even with the gross we had over last two years we treat less than 50,000 of them. They don’t go away, we don’t check and release, we check, treat, treat, treat, release and then they come back so these 50,000 occupy the growth that we had over last two years and we need to grow into the 10 million that’s the real target and these 10 million unfortunately we can’t cure them, we can clear them, we can give them better quality of life it’s the best agronomic proposition for both the patients with the risks running in other treatments, the physician because the physician make the money and the insurance company because the cheapest solution for the insurance company.

Anthony Vendetti – Maxim Group

Just can you remind the full reimbursement right now for the XTRAC treatment is?

Dennis McGrath

Its roughly a $175 there is more granularity to that, there is – codes that range from 150 to 250 the reimbursements incremented up over the last couple of years on the affordable care act which there is a lot of downward pressure on prices we don’t believe we’ll suffer through that because the heart of the affordable care act is the most effective, least expensive therapy, we’ve checked both of those boxes so on average when we model we average approximately $175 but understand why that’s an average given the three CPT codes.

Dennis McGrath

And the three CPT codes are for the business covered by psoriasis so there is a smaller medium and larger body area coverage. The coverage is by practically all insurance companies including Medicare and Medicaid and obviously the ObamaCare Coverage and this is where the growth has come from.

Anthony Vendetti – Maxim Group

Okay last question is other than the administration staff at LCA centers are you intending to bring in your own nurses or technicians to have them trained to do this procedure?

Dolev Rafaeli

We’re pretty early into this, but I intend is to leverage some of our existing staff to the extent that they have capacity and interest of course and bring on new staff as we get busier. The beauty in the model is we’re growing our cost structure such that we’re running our labor very efficiently but all the other fixed costs already exist. So I would hope that there’ll be enough journey enough revenues that we’ll be adding some staff and but some of the nurses can certainly handle it that exist today no question to be trained.

Anthony Vendetti – Maxim Group

Okay great. Thanks guys.

Dolev Rafaeli

Thanks.

Operator

And we’ll go next to [Jim Sidoti] with Sidoti & Company.

Dolev Rafaeli

Good morning Jim.

Unidentified Analyst

Good morning. Can you hear me?

Dolev Rafaeli

Yes we can.

Unidentified Analyst

Great, just a couple of questions on the transaction the price you paid $106 million is that net of the cash and the balance sheet at LCA?

Dennis McGrath

That’s the gross number.

Unidentified Analyst

That’s the gross number. So your cash will be more of $75 million?

Dennis McGrath

Yeah so $106 million LCA cash about $28 million on its balance sheet and I think according to the 9/30 number and so the net number is lower than $106 million.

Unidentified Analyst

Okay all right. And then are there any NOLs that come along with the DL that would help you on tax?

Dennis McGrath

There is and we expect our tax rate to take – just where the PhotoMedex tax rate is today on an effective rate around 25% on a global basis and there are substantial NOLs that can be utilized obviously with limits given the change in control.

Unidentified Analyst

Okay and then we talked about adding the expected new centers. Can you just give us a rough idea on the cost per center to train and to add the equipment?

Dennis McGrath

Yeah so the equipment cost we manufacture the equipment, there are some people on this call are new to PhotoMedex, for those who are familiar with it, I apologize to repeating but we manufacture the XTRAC laser – at California facility and costs us approximately $25,000 to build them. We have looked at the centers and there is a small amount modest amount of re-branding that needs to get done, generally no construction that needs to occur $50,000 center certainly would cover any of the re-branding as well as the laser itself and we think that that will cover the initiatives.

Obviously there is some training to be done, we’ve got six resources to do that, we’ve got trainers on staff and they will be implemented they are in the market already so we view that as kind of a fix component hopefully that address your question.

Unidentified Analyst

Okay.

Dolev Rafaeli

Sorry Jim, we are current coverage of the market includes both training as well as account management we start the accounts help them up on the clinical side, on the procedure side. We have a call center in California that not only takes in-bound calls for patients but also supports the center with the insurance company so we help them treat the patients with the insurance free qualification and then if there is any reimbursement issues we have all that every one of our account managers today covers between 20 and 40 clinics in the market.

Not every one of them is going to have a laser plus, or an LCA clinic added to them, that’s going to be a small marginal addition to them. They are growing every one of our market coverage people covers between 20 and 40 clinic and we’re very confident that they can cover the additional clinics.

Mike Celebrezze

We also have our own service group so the installation is not an incremental cost, it’s not a variable cost, it’s fixed cost also we have anti-folded service to country. We think we have the capacity and the resources to roll the staff in a very cost efficient and effective manner.

Unidentified Analyst

So the bio margin now can be expect millions and millions of dollars to our – centers?

Dennis McGrath

That’s correct.

Unidentified Analyst

Okay and then the target centers are typically leased or are they owned?

Dolev Rafaeli

They’re leased, generally leased all of the centers are leased normally a five year term with renewals we don’t own center, we own our corporate office here in Cincinnati and has a center at first floor.

Unidentified Analyst

Okay and I know you in the past may be looking to give guidance just asking a general question if you look at the company three or four year from now after the integration is complete and the centers are running the extract what do you think the mix would be relative to the consumer sales?

Dolev Rafaeli

Jim you probably have heard from us we’ve generally talked about so what is the macro plan for PhotoMedex what it looks like in years to come. And you are right we have in our forward-looking guidance. And this is not intended to be guidance but to give you kind of a big picture of how the management and the Board of PhotoMedex thinks about this business over the long-term.

And today 85% of our revenues in the consumer space today is the beginning of changing that diversification to a larger degree of physician returning component of our business although 10% today we are very optimistic about those prospects. As you look forward to the mindset of the board and management to get a $1 billion sustainable revenue and I understand that’s fairly bulk stake when you are at just around 250 million today.

We see that split being to 60-40 split and part of that master plan that today is representative of executing against including includes expanding the extract service in both owned and partnered clinics. So the consumer business at 60% several years out certainly has to grow substantially and we’re optimistic about that.

But it gives you a perspective of how we view the medical side physician side in this services that can be rendered in a clinic as we’re evolving today.

Unidentified Analyst

So when we think about this is of cash going forward and it sounds like you are going to have some pretty significant cash flow over the next couple of years should we think that would be more towards adding new businesses to the model or is it paying down the debt from this one?

Dennis McGrath

Our first priority will be to pay down the debt. And we have built in vehicles to make that happen. We generate a lot cash and being debt free on an accelerated basis certainly is a high priority for us. As I think – consistently said growing this business to the levels that I’ve just outlined M&A as a tool in that endeavor to accelerate that opportunity and this is a first step in accelerating that progress.

So as we look at opportunities in many are presented to us both on the consumer side and the medical side because of our significant growth profile and our significant profitability. We evaluated a lot over the last 18 months. This is an ideal one that fits the sweet spot of our strategic growth plan. And when look at others that may accelerate whether it’s the consumer side of physician recurring or the ophthalmology side of our business there.

Unidentified Analyst

Right thank you.

Dennis McGrath

Thanks Jim.

Operator

And we’ll go next to John Curti with Singular Research.

Dolev Rafaeli

John good morning.

John Curti – Singular Research

Good morning a couple of questions. First of in the events that new Lasik center is constructed or you are expanding that part of the business what would it cause to open up a new center with everything Lasik as well as the XTRAC and NEOVA products all in?

Mike Celebrezze

This is Mike again. The cost at the center would be somewhere in the 1 million to 1.5 million range some of which could be vendor financed most of our while both our large vendors – lasers if we want to take advantage of that. So it won’t be full cash outlet but – this center.

John Curti – Singular Research

Right. And looking at the map it looks like you have not too many Lasik centers in the west and didn’t seem to be a lot of XTRAC customers around them but there is a lot of XTRAC customers on the West Coast and there are no centers. What’s kind of the thinking there in terms of may ceding some of those markets with the center?

Mike Celebrezze

So the general expansion plan is LCAV has reduced its footprint over the years as the economy takes. And focused on reducing its overall burden. It’s running highly efficient today they have a much wider market as I mentioned earlier the opportunity to expand in some of these areas becomes – probably the long-term but the burden to overcome to justify the fixed cost is less with adding the XTRAC opportunity as prior the equation.

So obviously we haven’t spoken about what the plans are for it and other markets we’re not in. But that went fold as we continue to develop the business.

John Curti – Singular Research

And then lastly as a result of the transaction do you anticipate adding a lot more depreciation and amortization of intangibles?

Dennis McGrath

Yeah it’s a good question John so I’ll give you some perspective in the model. When you take the purchase price back up the net book value and they allocate the deltas between goodwill and tangible say 25% to intangibles which amortize an effective EPS.

Looking at about $3 million on a model now that’s just a generalization why because in the process that on fold year. We’ll do the normal process account process of putting appraisal in place and assigning values to the book value the hard assets as well the intangibles and that will dictate amortization schedule.

But from our modeling standpoint it was roughly around 3 million in our model that is the amortization.

John Curti – Singular Research

Okay thanks very much that’s all I have.

Dolev Rafaeli

Thanks John.

Operator

And we’ll go next to Hamed Khorsand with BWS Financial.

Hamed Khorsand – BWS Financial

Hamed good morning. How are you?

Dolev Rafaeli

Very good, good morning thank you. Just a couple of questions for you guys first off different marketing spend what do you guys see like going because obviously if you want to bring your centers and also your partners when that number have to go up.

Dolev Rafaeli

This is Dolev good morning Hamed the marketing spend of PhotoMedex and LCA combined it’s in one of the slides to combined marketing spend is about $96 million. But let me give you a little bit more granular split of that. LCA is making spend in the last year was about $23 million. Our XTRAC spend on a run rate we reported this in the last quarter is between $30,000 and $40,000 per week so it’s about $2 million.

The addition and that $2 million drove the growth that we had which is about 250% same-store sales growth and the addition of about 200 clinics over the last two years so about 50 per quarter. The additional 50 more clinics if you want to drive the most out of that is very minimal in that number.

That $2 million number is going to grow substantially because we are planning to grow same-store sales in everyone one of the clinics not only the 47 but every one of the over 500 clinics that we have currently. And we’re generally keeping growing that in a similar pace to what we have done over the last two years. That calls for two things one it calls for extended media or extended customer acquisition which come not only for media but also from where the – people visiting the clinic.

So if you think this way people coming into an LCA clinic and they there is something else advertised they will have what it is and they might have the – who has this so that’s you can’t really assign value to that directly to assign where they heard the rumor but then they drive in the car and they heard a radio advertisement and they tied two things and they know where this can be found.

Growth in media spend took us from roughly $100,000 in the first quarter back in 2012 to roughly $1 million in quarter if you do 50,000 – 750,000. This is going to continue to grow. We have been reporting in our earnings call on our cost for acquisition how much cost us to have 1 lead that has been reported repeatedly we have over the last earnings call I don’t have the numbers right now. If you want we can talk separately but it has been reported in every earnings call that cost for acquisition has been driven down over the last few years so it cost us less and less and less to get a patient in the door.

And the second most important thing is what is the conservation length once they get in the door we have their name, we have their phone number, they have shown interest, they have Psoriasis. They do have insurance coverage and they do qualify what does it take for us to – them into treatment. And there is – and I have discussed this in the earnings talk there is a huge discrepancy between the good clinics and the best clinics.

The good clinics are those that understand that a patient through the door is a patient that needs treatment and has to be treated the right way and through great customer service. And the other clinics are those that look at this as another thing that was given to them for free and they don’t need to work for it. This is why we qualify the clinics as VAPs those that know well to treat the patients and give them good service and regular customers.

We expect the Centers of Excellence – the LCA vision centers to be VAPs or above because they will operate under the same SOP, they have amazing customer service today and they have the ability to treat them. So the growth in media spend is going to – the need to feed the centers, we need to feed in combination with the existing 500. Once this deal closes we will need to feed in excess of 550 centers, so that’s a growth about 10%. By the time we close we expect to have more than 500 because we have been growing at 30 to 50 net centers before and we expect that growth continue. I hope I answered the question.

Hamed Khorsand – BWS Financial

Yes. One of the questions LCA has always been more towards the high end as far as Lasik procedures, it’s been mostly a cash process as far as payments come. So my question is really on a fear of isolating that customer who likes that level of service. I mean if you have more people going to the centers does that change up the experience of that customer from coming and actually doing the procedure?

Mike Celebrezze

Yes, it’s Michael

Hamed Khorsand – BWS Financial

On the Lasik side?

Dolev Rafaeli

All right. I’ll take that question. So you are correct that we do provide a very outstanding patient experience when our patients come and we have no intention of changing the patient experience with our new patients. We do have some experience with third-party billing and Medicare. We recently in last year and a half added cataract and premium intraocular lens procedures to our service offerings in nine of our clinics. We have electronic medical records in those clinics, we have a billing company, we have signed up insurance companies. So we do have some experience in that space which will benefit as we add this billable service.

Hamed Khorsand – BWS Financial

Okay. Thank you.

Dolev Rafaeli

Thanks, Hamed.

Operator

And we will take our next question from Thomas [Vundak with Graeme] Partners.

Unidentified Analyst

Hi, I just had a question regarding the cataract procedures. What are your expectations for growing that in the near to mid-term.

Dolev Rafaeli

Our intentions are to continue to pursue the expansion into the comprehensive refractive solution space. And we have brought on a Project Manager a Director that is an expert in that space, who is helping us to grow that business. And we will do the same with the Psoriasis space. We’ve got an expert to help us who knows that space and help us to implement our growth strategies there too. We will probably be careful not to try to add both services to the same center at the same time. We will pick different test centers, make sure that we are successful in both endeavors

Unidentified Analyst

Okay.

Operator

Bill Plovanic with Canaccord.

William Plovanic – Canaccord

Great. Just a couple of clarifying questions. Does LCA do you own your own call-centers or is that outsourced?

Mike Celebrezze

We own our call-center. We have about 35 people in the call-center, they handle the all the calls. It all happens here in our building that we own here in Cincinnati. So we’ve got a great Director there, got great experience, extremely little turnover, high conversion rates, very well trained staff. They really provide a great fantastic service for our patients. We have also got our mind scheduling about a third of our patients’ book their appointments online. So assuming we will implement a similar strategy with the expanded services.

William Plovanic – Canaccord

Okay. And then for Dennis. What’s your average revenue per patient or per non-owned center today like annual monthly whatever or is it number of treatments per year. I am just trying to figure out if we took the average of what you are pulling off in existing center today and we are able to get just that in minimum your procedures converted it for – on the reimbursement because you are not sharing it. What would that look like to you today?

Dennis McGrath

Yeah. So our only answer I am not sure I am going to answer directly to your question but let me give you a few facts that are relevant for everybody purpose. And then we haven’t released our fourth quarter earnings which we will in March. But that case of Psoriasis for getting patient in the door requires 20 treatments in a year. Six to 12 treatments first go around twice a week, you will go into remission, you will be asymptomatic typically after the first treatment will start to see results after the first couple of treatments. Remission we should think about six months.

So you are treated for a couple of weeks very simple – treatments, remission follows the disease will come back same place, same intensity that needs to be retreated. We get the – the insurance companies are billed roughly a $175, we get today in a physician partner practice roughly $78. So in our own clinics we will get a $175 per treatment on average. 20 treatments a year is a good number. So you can see that – that patient represents $3,500 to $4,000 a year for us. And our goal – and one of the reasons we are retracted to the Lasik vision centers is the strong customer service and with regard to Psoriasis patients our goal is to have lifelong loyal patients that bill to our pool of patients and stay with us through their lifetime. So it’s a significant increase in the ASP, the variable cost as you recall is treat the next patient – it consumes – on the laser. So the contribution margin is extremely high. So I

William Plovanic – Canaccord

The question though Dennis is how many. So thinking about that, so today you have 500 company-owned lasers out there. How many patients per year do those 500 lasers service, so that I can get. Okay, so I am doing 50 patients per clinic and multiply that by the four that’s at least $200 incremental per clinic or just a math like that is what I am trying to do.

Dolev Rafaeli

Let me help you out, Bill. This is Dolev. In our last quarter, so the numbers we reported last quarter our average PhotoMedex’s revenue for laser on average was about $10,000 per quarter, so $40,000 per year. That’s 78 out of the 175. So if you multiply this by 2.5 times that’s the average clinic revenue. The numbers have grown substantially over the last year. We haven’t reported the fourth quarter. And I think last – the third quarter which we did report year-on-year was a 93% growth. So we are going to continue to drive that and we are still spending just a small amount of money on the DTC which will be changing here obviously as we move through the year.

William Plovanic – Canaccord

Got you. Thank you. So if I do the math you are running roughly today around close to $300,000 per – I am sorry it would be 40 times the 2.24, so it’s like 90 per year basically would be the incremental add as we just think about it. But that’s everybody and not just the premium customers.

Dolev Rafaeli

Yeah, that’s correct.

William Plovanic – Canaccord

Great. Thank you.

Dolev Rafaeli

That appears to be the last question. Thank you all for joining our call today. We look forward to having you join our earnings call in March, earnings releases for both companies will be forthcoming in the coming weeks. Thank you very much and have a great day.

Operator

Thank you. That does conclude today’s conference. We appreciate your participation.

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