IPO Preview: Zeltiq Aesthetics

Oct.13.11 | About: ZELTIQ Aesthetics, (ZLTQ)

Based in Pleasanton, California, Zeltiq Aesthetics – proposed symbol (NASDAQ:ZLTQ) – scheduled a $105 million IPO with a market capitalization of $492 at a price range mid-point of $15 for Wednesday, October 19, 2011.


Even though ZLTQ has always been unprofitable, the current growth trajectory suggests ZLTQ is close to breakeven, and will be profitable in the near future. High multiple recurring revenue was 32% of total revenue for the six months ended June 2011.

At the price range mid-point of $15, ZLTQ looks like an interesting speculation based on continued sequential quarter gains in top line revenue and expected bottom line profits.


From December 21, 2010, to June 30, 2011, ZLTQ increased its worldwide installed base of CoolSculpting Systems by 82%, from 346 units to 629 units. The worldwide potential is 4,000 to 5,000 according to ZLTQ. ZLTQ’s systems were FDA approved in September 2010.

The system is designed to get rid of "love handles" non-invasively and painlessly, says ZLTQ. ZLTQ’s CoolSculpting is based on the scientific principle that fat cells are more sensitive to cold than the overlying skin and surrounding tissues.

The average retail price for the 60 minute procedure for one area is $1,600. Also, 80% to 90% of patients report seeing aesthetic benefits.

Patients who are obese are not typically good candidates for CoolSculpting. Obese individuals may not have specific fat bulges but typically have body areas that require significant fat reduction.

The intellectual property (IP) itself is owned by Massachusetts General Hospital.


Significant internal sales growth:

For the six months ended June 30, 1011, ZLTQ sales increased 379% to $32 million from $7 million. Losses decreased 84% to -$1.4 million from -$8.5 million, comparing 2011 six months versus 2010 six months results.

Recurring revenue procedure sales are up:

Procedure fees are paid to ZLTQ by physician customers for each CoolSculpting procedure they perform. Recurring procedure fees are worth a higher multiple than systems sales.

Procedure sales skyrocketed 10 times for the June 2011 six months compared with the June 2010 six months - to $10 million from $1 million.

Same period system sales were up 267% to $22 million from $6 million.

ZLTQ was almost breakeven for the June 2011 quarter:

Sales for the June 2011 quarter were up 22% to $17.4 million from March quarter’s sales of $14.3 million. Losses declined respectively to 3% of sales from 6% of sales.


ZLTQ Quarterly Results

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March, '11

June '11

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Valuation Ratios

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Zeltiq Aesthetics(ZLTQ)






Solta Medical (OTCPK:STLM)







Palomar Medical Tech(NASDAQ:PMTI)







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More ZLTQ Valuation Metrics

The growth path for ZLTQ is more visible than for STLM and/or PMTI. ZLTQ currently has 629 installed systems, and believes its market potential world wide is 4,000 to 5,000 physician practice sites.

Market Capitalization / Sales comparisons:

ZLTQ is at a premium, at the price range mid-point of $15.

Annualizing June 2011 quarter sales, ZLTQ is valued at 7.1 times sales, Solta Medical (NASDAQ:SLTM) at .9 times sales and Palomar Medical Tech (PMTI) at 2.4 times sales.

Market Capitalization / Loss comparisons:

ZLTQ has a more healthy ratio of market capitalization/loss than others in the space. A lower absolute number indicates a higher cash burn rate.

Annualizing June 2011 losses, ZLTQ is valued at -154 times losses, Solta Medical (SLTM) is at -133 times losses and Palomar Medical Tech (PMTI) at -9 times losses. A -154 Market Capitalization/Loss ratio is far better than the -9 Price/Loss ratio, because it indicates a lower cash burn rate relative to market capitalization.

Market Capitalization / Book Value comparisons:

ZLTQ is valued at 5 times book, a significant premium to other companies in the "vanity" sculpting space, including Solta Medical (SLTM) at .9 times book value and Palomar Medical Tech (PMTI) at 1.1 times book. Lower is better.


ZLTQ’s CoolSculpting was developed to safely, noticeably and measurably reduce the fat layer within a treated fat bulge without requiring the patient to diet or exercise.

The proprietary controlled-cooling technology platform addresses the aesthetic concerns of individuals who have stubborn fat bulges that may not respond to diet or exercise.

Patients who are obese and who do not have specific fat bulges but require significant fat reduction to achieve aesthetic results are candidates for invasive and minimally-invasive procedures, such as liposuction and laser-assisted liposuction, but not necessarily for CoolSculpting.

ZLTQ’s standard terms do not allow for trial or evaluation periods, rights of return, or refund payments contingent upon the customer obtaining financing or other terms that could impact the customer’s obligation.

ZLTQ increased its worldwide installed base of CoolSculpting Systems from 346 units as of December 31, 2010, to 629 units as of June 30, 2011, up 82%.

As of June 30, 2011, it had sold over 134,000 CoolSculpting procedures to its physician customers.


Revenues from markets outside of North America comprised 34% and 26% of total revenues for the year ended December 31, 2010 and the six months ended June 30, 2011.

Asia-Pacific represented 17.5% and 8.6%; Europe, the Middle East and Africa represented 13.3% and 10.7%, and South America represented 2.9% and 6.6% of total revenues for these same periods, respectively.


ZLTQ selectively markets CoolSculpting to dermatologists, plastic surgeons and aesthetic specialists. Aesthetic specialists are physicians who elect to offer aesthetic procedures as a significant part of their practices but are not board certified dermatologists or plastic surgeons.

As of June 30, 2011, ZLTQ had a 31-person North American direct sales force. To support the continued roll-out of CoolSculpting, ZLTQ anticipates that its North America direct sales force will increase to between 50 and 70 sales professionals in the next 12 months.

Ultimately, ZLTQ intends to place the CoolSculpting System with 4,000 to 5,000 physician practice sites, 15% of the global market, up from 629 currently installed systems.

According to a market research study ZLTQ commissioned through Easton Associates, there are currently over 70,000 physicians who perform aesthetic procedures at approximately 30,000 practice sites worldwide, including over 16,000 physicians and approximately 8,000 practice sites within the United States and Canada.


In a pivotal U.S. clinical trial involving 60 patients, physicians were able to accurately differentiate between pre- and post-treatment photographs in 88% of the patients, while unable to identify aesthetic benefits in the remaining 12%.

Published clinical studies conducted by ZLTQ and independent physicians involving more than 100 patients reported that between 80% and 92% of the patients achieved noticeable aesthetic benefits from a CoolSculpting procedure.

See pages 78 to 81 in the October 7 S-1 filing for the “Clinical History and Development of CoolSculpting.”


ZLTQ received clearance from the U.S. Food and Drug Administration (FDA) in September 2010 to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the “love handles."

ZLTQ received regulatory approval or is otherwise free to market CoolSculpting in 46 international markets, where use of the product is generally not limited to specific treatment areas.

Physicians in these markets commonly perform CoolSculpting procedures on the abdomen, inner thighs, back and chest, in addition to the flanks.


CoolSculpting is based on the scientific principle that fat cells are more sensitive to cold than the overlying skin and surrounding tissues. CoolSculpting utilizes precisely controlled cooling to reduce the temperature of fat cells in the treated area, which is intended to cause fat cell elimination through a natural biological process known as apoptosis, without causing scar tissue or damage to the skin, nerves or surrounding tissues.


ZLTQ has exclusively licensed certain intellectual property from the General Hospital Corporation, a not-for-profit Massachusetts Corporation, which owns and operates the Massachusetts General Hospital, or MGH. ZLTQ relies on MGH to file and prosecute patent applications and maintain patents and otherwise protect the intellectual property ZLTQ licenses.

ZLTQ’s patent portfolio is comprised of five issued U.S. patents, 44 issued foreign counterpart patents, 18 pending U.S. patent applications, 60 pending foreign counterpart patent applications, and four pending patent applications under the Patent Cooperation Treaty, or PCT, each of which we own solely or license exclusively.


Erchonia Corp.

In the United States, the FDA has cleared the marketing of a laser energy-based product for body contouring. The laser energy-based product, marketed by Erchonia Corporation, is used to perform a non-invasive procedure reported to be safe and easy to perform, without causing patient pain.

This product does not eliminate fat cells, however. In addition, the patient is required to undergo multiple treatments and is required to adopt a special diet and exercise program as part of the treatment protocol.

Solta Medical, Inc.

In September 2011, the FDA cleared the marketing of an ultrasound energy-based product for body contouring made by LipoSonix. Solta Medical, Inc. (SLTM), recently announced it was acquiring LipoSonix. The LipoSonix product utilizes heat to non-invasively eliminate fat cells in a single procedure. As of October 7, 2011 the LipoSonix product had not been launched for sale in the Unites States.

Heat Versus Cold, According To ZLTQ

Utilizing heat to eliminate fat cells, however, has a number of significant limitations compared to the elimination of fat cells through cooling as provided by CoolSculpting. The heat generated by ultrasound energy causes significant patient pain during and after the procedure.

In addition, heat cannot be used to specifically target fat cells, which makes the procedure more difficult to perform and can lead to collateral damage to the skin, nerves and surrounding tissues. Acutely injuring fat cells through heat also causes fat cell elimination through a biological process known as necrosis.

Unlike CoolSculpting’s adaptation of the apoptosis process, which is intended to cause fat cell elimination through a natural biological process known as apoptosis, the heat-based process causes necrosis which triggers the body’s wound-healing response and can result in scar tissue formation. This scar tissue can lead to stiffening of the treated area and limit the number of times a patient can undergo these types of procedures in one area or the efficacy of any repeat treatments.

International Competition

ZLTQ faces more competition internationally than in the United States.

Due to less stringent regulatory requirements, there are many more aesthetic products and procedures available for use in international markets than are approved for use in the United States.

For example, multiple ultrasound based products have been cleared for marketing outside the United States. There are also fewer limitations on the claims competitors in international markets can make about the effectiveness of their products and the manner in which they can market them.


ZLTQ is looking for $89 million from the sale of 6.7 million shares. Shareholders intend to sell 300,000 shares. Also, $7.0 million is allocated to pay the remaining milestone obligations to the General Hospital Corporation, a not-for-profit Massachusetts corporation, which owns and operates MGH (Mass General Hospital).

ZLTQ is obligated to make two milestone payments to MGH including (i) $1 million due upon achieving cumulative net sales of $70 million and (ii) $6 million due upon the earlier to occur of achieving cumulative net sales of $200 million or the completion of this offering.

In lieu of a cash payment, MGH may elect to receive up to 50% of each of the remaining milestone payments in common stock, subject to a cap of 3.5% of common stock on a fully-diluted basis.

The remainder is expected to be used for general corporate purposes. The primary purpose of the IPO is to raise funds to support the further commercialization of CoolSculpting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.