Palomar Medical Technologies: Set to Dominate the Aesthetic Laser Market?

In a previous article we profiled Palomar Medical Technologies (PMTI). The company released earnings yesterday which were higher than people expected. It reported increased revenues compared to a year ago and increased revenues compared to 4Q 2006. Set this against the backdrop of disappointments from the company’s main rivals Candela (CLZR) and Cutera (CUTR), we think its performance was spectacular.

In addition, the list of competitors obtaining licenses from PMTI is growing. Recently, privately held Alma Lasers agreed to obtain a license from PMTI. Alma will pay a 9.5% royalty to Palomar for sales of its products going back to 2003 and an 8.5% royalty on sales from now through the end of 2007. That fee will drop to 7.5% for future sales, beginning next year. Companies already paying PMTI royalties include Cynosure (CYNO), Cutera (CUTR), and Iridex (IRIX) subsidiary Laserscope. The battle with the one company still holding out, Candela, promises to heat up as they do not admit to needing a license from PMTI; Candela filed its own patent infringement suit against Palomar, and both say they won't allow the other to license their technology if they prevail. This lawsuit may be one of the only dark clouds in PMTI’s future as there is some doubt it will prevail against Candela. Candela also has enough cash to prosecute this action vigorously.

Our model still looks at a stock price of over $50 by the end of the year which is a solid increase from its current level of approximately $42. We think that there may be some moderation in increase in revenues during the year. However, 2008 should begin to see revenues from the consumer product royalties which will assist in boosting revenues in late 2008 and beyond. The stock will be adversely affected by failure in the Candela suit and if the revenues begin to drop off more than we expect. PMTI is a great company with strong technology having proven itself capable of selling into an increasingly competitive yet growing market. In addition, the market for its product is poised for further growth in an increasing affluent US and global society.

PMTI 1-yr chart

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[CrossProfit]

For more on the patent issue, see healthcare.seekingalph... and biotech.seekingalpha.c....

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Syneron (ELOS) is still a formidable competitor.

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