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Among publicly traded stocks, the aesthetic laser light industry is relatively new. The technology used varies between companies, but the primary indications are for skin rejuvenation and weight loss. A couple of companies, including Palomar Technologies (PMTI) and Irididex Corporation (IRIX), have been public since the 1990s, however, the majority of the group went public between 2004-2006. In the process of going public, most of the companies raised a significant amount of cash, much of which remains on their balance sheets. In addition, prior to the 2008 recession, most of the group had a few years of profitability, which built their cash stockpiles further. Since then, the sector has struggled as doctors have been more reluctant to purchase heavy equipment while patient volumes are down. Additionally, while some doctors purchase service contracts, there is little else in the way of recurring revenue for the industry.

Company Name

SG&A

R&D

Cutera (CUTR)

$34

$9

Cynosure (CYNO)

$50

$9

Iridex (IRIX)

$14.5

$3.5

Palomar Medical Technologies (PMTI)

$36.5

$15

Solta Medical (SLTM)

$60

$15

Syneron Medical (ELOS)

$89

$28

Total

$284

$79.5

*All Number Shown On A Trailing 12 Month Basis & Represented In Millions

While these companies spend more than $350 million in operating expenses, they are collectively unprofitable. This is likely because they all have to utilize significant resources to convince doctors to purchase their equipment. Additionally, a significant amount of the R&D spent in the industry is overlapping and geared toward similar indications. If more companies in the industry were to merge, they could eliminate overlapping managements, public company costs, facilities, back-office support and cancel research projects with overlapping missions. Now, more than ever, having more cash than needed for operations on the balance sheet makes no sense. The interest income that companies receive has declined sharply from pre-recession levels and interest rates are likely to stay excessively low for the next three years. Additionally, if there are fewer competitors in the market, pricing may firm up, which would benefit the entire industry.

Company Name

Net Cash

(3Q:11)

Enterprise Value

Sales

(TTM)

Enterprise Value/Sales

Cutera (CUTR)

$91

$15

$57

0.26x

Cynosure (CYNO)

$63

$90

$98.5

0.91x

Iridex (IRIX)

$8.8

$22.5

$45

0.50x

Palomar Medical Technologies (PMTI)

$110.5

$52.8

$66.4

0.80x

Solta Medical (SLTM)

$25

$119

$113

1.05x

Syneron Medical (ELOS)

$177

$245

$208

1.18x

* All Numbers Except “Enterprise Value/Sales” Are Quoted In Millions

*Enterprise Value = Market Capitalization – Net Cash

Collectively, the industry is sitting on nearly half of a billion dollars in cash. At the same time, of the companies listed in the table above, only Iridex has been consistently profitable, largely because a portion of the business is geared toward the non-aesthetic market. There have been some strategic moves in the sector since the recession started. For example, Cynosure has made several tuck-in acquisitions. Additionally, Solta Medical recently purchased the Liposonix weight loss system from Medicis (MRX). The largest deal in the space was Syneron’s purchase of Candela in 2010. While the Solta purchase is too recent to analyze, we can look at the other transactions to judge whether or not consolidation makes sense. In the case of Cynosure, on its current trajectory, the company will be profitable next year for the first time since 2008. I think the key to Cynosure’s success is that it has mostly purchased complimentary products. This typically enables a great deal of cost synergies as well as being able to introduce new products to a combined sales force. The Syneron and Candela merger was significantly more complicated due to the larger scale of the companies involved. At the time of the merger, Candela was the largest company in the industry, however, it struggled to survive on its own, which led to the eventual merger with Syneron. Over the course of the past eighteen months, the combined company has worked to increase margins and has reached profitability in the past two quarters by driving leverage on operating expenses while growing sales.

I won’t speculate on which companies might be involved in strategic transactions. I’m simply pointing out that with a significant amount of cash on the balance sheet for most of the companies in the industry, there is a compelling case to be made that it may be the right time for strategic mergers in the aesthetic laser light industry.

Disclosure: I am long PMTI, CYNO, CUTR.

Source: Is The Aesthetic Laser Light Industry Ready For Consolidation?