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Syneron Medical Ltd. (NASDAQ:ELOS)

Lazard Capital Markets 8th Annual Healthcare Conference 2011

November 16, 2011 2:30 PM EST

Executives

Asaf Alperovitz – Chief Financial Officer

Analysts

Unknown Analysts

Moderator

Thanks for joining us. My name is Marie Thibault. I’m one of the medical technology associates here at Lazard Capital Markets. Up next is Syneron Medical and with us today is Asaf Alperovitz and he’s going to – he’s the Chief Financial Officer of the company and he’s going to give a presentation and right after that we’ll have some time for questions.

So Asaf, why don’t you take it away?

Asaf Alperovitz

Thank you. Hi everyone. Welcome to Syneron’s presentation. I will start some investment highlights, those of you who are not familiar with Syneron. So what we are is the global leader in aesthetic devices. We control 40% on a worldwide global basis market share and we’re actually growing significantly and outgrowing the market. In the second quarter of this year with 24.1%. In the second quarter which was just released last week we had growth of 28% and we have a strong momentum currently in the marketplace.

What we are, we relate ourselves on the platform of steady company. We have the largest worldwide sales, distribution and service network across 90 countries. We have 11 countries in which we operate directly and in the remaining countries we work with strong distributing partners that are working with us mostly for several years. We have a very comprehensive and diverse product portfolio. We have breadth and depth within our product portfolio and we have leadership position in the largest and fastest growing markets. We’re either number 1 or number 2 with each specific application around the world and I will have a slide specifically presenting that with different applications.

What we’re differentiated by is the product innovation. We invest on an average $6.5 million in R&D per quarter, or roughly $25 million per year, which is significantly higher than any other company in this domain. We have very strong customer leadership and strong clinical ladder. Syneron is all about science to resolve and trust. This is what we’re looking at.

In terms of revenue, for the 12 trading months we had $221 million in revenue. Out of this revenue, 32% of the revenues are recurring revenues. In the recurrent revenue we have both service revenue and consumable revenues as part of our razor and razorblade model which we try to implement more and more with our new products coming in. And today we have a significant portion of our revenues coming from consumables. In the third quarter we just reported, we had 63% growth year-over-year in the consumable revenue.

We have $177 million in cash that we are carrying which is the strongest balance sheet in the industry, meaning that we are open and looking to make some additional acquisitions potentially in the short term. We have no debt at all and being located in terms of headquarter out of Israel, we have significant tax advantages and incentives, meaning zero tax rate for all of the Israeli operations which would mean our effective weighted average tax rate for the next couple of years is going to be relatively low, in the 20% area.

In terms of some more highlights, we’re leading the aesthetic industry as I said by applying technology infrastructure that’s used to drive leadership in all of the aesthetic categories. On the left hand side of the slide you can see the professional aesthetic devices. This includes both the Syneron and the Candela businesses. We actually acquired Candela about two years ago. Candela is one of the strongest brands in the industry within the core position, within the dermatology and the plastic surgeons. It has 40 years of reputation, 25 years in the laser business and were leveraging their infrastructure and customer base as what we try to do with Syneron, part of a cross selling strategy.

Syneron has been around for 11 years and Syneron’s products are with relatively higher gross margin and what we try to do since the acquisition is leverage the Candela sales force and their strong direct presence across the world to sell more of Candela’s products, but also Syneron products with much higher gross margin. And this is something which is accelerating throughout or from the acquisition date until now and contributing to our accretive gross margins.

In terms of the right hand side, there you will see the Emerging Business Units that actually report of that way and in terms of segment reporting in our financials. In the Emerging Business Unit, you see products which are both for the home use devices and other products such as the skin whitening topical. This is a new and high growth market mainly targeting the Asian population, where people usually in Asia they want to appear lighter in appearance. And we have a very unique product which I’ll expand more in a couple of slides.

We are seeing increasing consumer demand in the Emerging Business Unit. It’s a very high growth market, very strong CEGA and demand will continue. What we do in the EBU, we’re leveraging the professional device technology and expertise that we have for Syneron for 11 years and for Candela for 25 years and bringing this technology, core technology and knowhow and knowledge into the home use and I will explain more about that later.

In terms of the EBU, the Emerging Business Unit, we’re talking about high margin recurrent revenue business model, again part of the razor/razorblade part of our strategy. We have stronger relationship with the customer and recurrent revenue and high margin products.

In terms of our technologies, you can see here some of the technologies that we’re using. ELOS, which is our symbol, our ticker symbol stands for Electro-Optical Synergy. This is a proprietary patented technology. This is the first and only combination of technologies of both bi-polar radio frequency, which is conducted RF electricity and optical energy in physics. They have a synergetic effect. So with that you can get safer and controllable energy with fast penetration into the skin. It’s safe for all skin types and it’s color blind. So it’s not affected by the color of the skin which is very much targeted towards the home use population and very important in that respect.

As indicated, in terms of Candela laser, as I said, 40 years of innovative leadership in the marketplace and the best class product portfolio in most aesthetic indication from hair removal to skin rejuvenation to vein treatment to vascular lesions and other. They have the gold standard in the industry and we have some additional core competitive. Some of them I will elaborate throughout the presentation, from radio frequency, IPL which is Intense Pulse Light, ultra sound, LED, Light Emitting Diodes and others that I will relate to.

What we do, we deliver and add value to the customer. The way we differentiate ourselves as I said is through strong investments in R&D and clinically proven products. We have more than 75 patents granted already, with 150 which are pending currently. We’ve performed more than 50 clinical studies and publication presentations in 2010. We have strong credibility with thought leaders. We were actually the first to establish key opinion leaders and thought leaders in Asia. And we are going to continue acquiring innovative technologies with a strong balance sheet. And that’s part of our DNA, not only to grow internally but also through acquisitions. And we’ll continue to acquire companies.

We address the customer inflation demands with the right procedural volumes. What we see now in terms of the trend in the marketplace is we see younger patients that are looking to get aesthetic treatments. They’re looking to get them throughout their lunch break. Patients are looking to get the combination treatments of skin rejuvenation, hair removal, fillers, Botox treatments that’s one time treatments, put some makeup and from the lunch break go back to work. They’re not willing to suffer much pain with that and they’re willing to repeat the treatment within a couple of weeks. And with our razor/razor-blade model and the ELOS technology which is most targeted for higher safety and efficacy with a very, very short downtime in terms of when you can go back to work. We’re very well targeting these new trends that we see in the marketplace.

We’re leveraging as I said our technologies professional emerging aesthetic in the Emerging Business Unit as well. In this slide you can actually see that we’re positioned to outgrow the industry. We are the strongest in terms of in each market segment that you see here. You see the different procedure, certainly the hair removal is still driving most of the revenues and CEGA expected at 30%. After that you have the fractional and the skin rejuvenation and cellulite reduction. And you can see to the right column all of the products which Syneron and Candela are offering and with each of this the procedural applications. We’re either number one or number two in the market and we have complementary products for dermatologists.

We have a very wide array of products that we can provide. We look at our self as a one-stop shop for all of our customer needs in that respect. What Syneron is well known for in terms of the innovation is that we’re pioneering new treatment categories. Our products are not me too products. We have new products which are actually defining and opening up new markets, new treatments and categories, all of them based on clinically proven and very high efficacy procedures. And what we do, we expand the revenue opportunity for our physicians with growth and high margin for us because of also the consumables that we provide as part of the product offering.

To the left hand side you can see one of these products. You can see that it’s intelligibly designed. It’s very unique. It’s very new. It looks like an Apple device. It’s very easy to carry it and thrust it between clinics for the physicians. And what it provides the eMatrix is Sublative rejuvenation, which is a term that we define and it’s very innovative in terms of the market. What it does is a reduction of wrinkles, acne and scars. It provides a safer and very effective fractional alternative and it’s specifically targeting all skin types. It can go from a lighter to a darker skin type. It’s color blind because the technology here is electricity conducted, RF. And in terms of the patient downtime, it’s little to none. So that’s very important especially for the younger population that we see in terms of driving the demand and the increased growth of the marketplace.

In the right hand side you see another new product that we just released a couple of quarters ago, the ePrime. This product was developed by a company that we acquired about two years ago by the name of Primaeva. What ePrime is is basically a non-surgical RF aesthetic device which is a bridge to face lifting. It’s minimally invasive. It includes five pairs of very thin needles that penetrate deep into the dermis and they heat up to 72 degrees Celsius and they build up the structure of both Collagen and Elastin. And it’s a unique solution for increasing the skin’s thickness and it creates a volumizer effect.

But with ePrime what we’ve done is created a new market for people that either cannot afford facelifts, they don’t want to go to a very long downtime of almost 80 days and for a much younger population at a very reasonable pricing point. This treatment will cost around $3,000 versus a full-blown facelift which costs anywhere between $10,000 to $25,000 or even $30,000. So it’s a new product category and since the launch we see great traction of these products and treatments.

Two new products we just released, we actually had the first release about a week ago about both of these products. On the left side you see the E2 which actually is the eMatrix I just mentioned which runs straight to a platform basis. We added a new applicator, a skin tightening applicator. So now we have a lightweight compact and multi applicator system with minimal epidermal disruption and a very maximum general impact. So you have the downtime effect that we were just discussing. And we also featured what we refer to as the new Sublative IV kits and they can be actually maximized for treatments options and result and reused for patients.

We just launched it as I say and on the right hand side we have the eLase. What Syneron is trying always to do is to listen to the customer and both the distributors that we’re selling to and the end customer and we got a lot of – many requests for no pain treatment and for hair removal. And we introduced to the market the eLase which is the next generation of laser hair removal system with the Motif LHR applicator. What it enables this high frequency, very high frequency low energy mode for none-pain mode and laser hair removal. We also reduced the treatment time significantly with that and we just launched it and we expect to have significant sales of this product already in the quarter of the launch.

In the left hand side in this slide you see our Vela product. The Vela is the leader on a global basis in non-invasive body shaping and cellulite treatment. We have an install base of more than 7,000 units. We’ve sold it for the last seven years, which means on average we’re selling 1,000 units per year. We have in terms of the procedures, performed more than 3.5 million already performed. It includes also a consumable component, the covers and we just indicated in our Q3 press release that next year we’re going to launch in the second half of the year new products for body contouring that is going to target specifically the core physicians, being the dermatologists and the plastic surgeon.

On the right hand side you see the new product that was delivered by Candela two quarters ago for hair removal, the GentleLASE which is the new gold standard for hair removal. It is faster, most effective hair removal for all skin types. It includes the patented DCD, Dynamic Cooling Device for cooling. So you can use high level of energy to get the clinical effect you want to without the heating effect and multiple cool duration.

This is just to present you the map global footprint and distribution. We are very well distributed across the world. We have a chance to market in 90 countries and we’re clearly the leader in the international market. We grew 29% year-over-year in Q3 versus the comparable quarter of last year. And we have the flexibility and the ability to deploy resources to high growth markets such as China, Japan, Brazil, Argentina, Mexico, Chile, Russia and these are all very high growth markets. In China for instance we have a joint venture for two years now with Evercare which is the biggest hospital network for aesthetic procedures all over China and the growth rate there is very high and we expect it to continue.

One more important thing from our perspective is the direct presence in 11 countries that we have, where we have direct service and revenues and relationship with the customer, both for increasing profitability and learning the customers’ demands and requests.

In terms of high growth market, I said we’re very well positioned in Asia-Pacific. We’re growing more than 25%, strong care support. Latin America, more than 50% growth and we are driving growth with safer and easier to use technology for all ages and skin types because the ELOS technology is color blind, which is most fit for both the Asian and darker skin types and it’s very useful also for the home use arena.

In terms of our pipeline, you have here in blue the professional aesthetic device and green the emerging technology, two technologies and you see that in terms of product introduction we distinguish our self with new products, and this year we have only five products for the professional and many more for the home use versus our competitive companies that present one or maximum two I would say products per year. And you can see that we have significant or many introduction plans for 2012 and beyond.

Talking a little bit about the high growth emerging technologies, what is the home use device market plan growth? So we’re talking about $350 million market with a CEGA of 27% expected for the next couple of years. We see increased consumer desire and demand for in-home treatments. We have the right economic proposition to the customer and we have very effective products for the home use market. We have the teeth whitening rejuvenation product which is a blockbuster potential product. We have a very unique product that presented priority on everything out there. We had the 120 feasible clinical studies presented to priority in terms of the effect, in terms of the numbers of treatments. We’re going to launch this product earlier next year.

And the skin lightening, I think in terms of mega block buster potential, skin lightening includes the entire Asian population pretty much. The market opportunity is huge, around $40 billion in terms of retail, $1 billion in terms of the professional market. And we have a very unique product for the skin lightening. In terms of it’s naturally produced from an enzyme that is produced from a fungus, natural fungus and it’s actually breaking up the melanin, which the more melanin we have the darker the skin type. Effective after a couple of weeks and it’s competing with other products out there, mainly with hydroquinone product of 2% or 4% that are known for having some irritation issues and some toxicity effect. So I think we have a huge opportunity there. We just launched this product a couple of quarters ago and we’re going to launch it in the main Asian countries subject to regulatory approvals in the short time.

Here you have some more of our home use devices. We have the Proctor & Gamble initiative which is advancing and we are expected to present to the marketplace in 2013, skin rejuvenation products for the home use. We are working very closely for Proctor & Gamble for a couple of years and we feel that with their partnership we can establish a strong market presence in 2013 with a very, very efficient technological product. Below you see again a recent acquisition we had, Tanda. They have LED, Light Emitting Diode technology, again for the home use device market. They sell it through leading retail channels being Sephora, Nordstrom, Bloomingdales, Shoppers in Canada and other. And the indications are for acne treatments, for skin rejuvenation and for pain management. And we just released a couple of these products such as the Luxe and the Clear+ in the last several weeks as you can see in our press releases.

One of the leading products in this category you see to the rest of these slides is the Mē, the hair removal system for the home use which is implementing our ELOS technology. Again color blind, very, very efficient and verified safety profile. This is five times faster than any other treatment out there with an indication to permanently reduce hair after four treatments. On the right hand side you have the Fluorinex teeth whitening product that we are going to release to the market next year. Again low quality potential and very unique proposition.

This is the Elure, the skin whitening I was talking about. I’m just going to say that we won recently the Elure best of beauty in the Allure magazine, which is a significant breakthrough from our perspective. We have a very strong patent and IP protection until 2023 and this is a clean product. So it’s consumable by nature, very high gross margin and growth potential from our perspective.

In terms of financial strength, we have $177 million in the bank, no debt, expanding the recurrent revenue. 32% of our revenues are recurring and we have a target to significantly increase that. We have an ongoing operating expense reduction and the clear market leader as I said with 40% of market share.

Third quarter highlights, we had revenue of $57 million, 28% decrease. Recurring revenue grew 22% year-over-year. Gross margin slightly increased year-over-year. We were at net income for the last couple of quarters. We had operations profit in the Pearl, the professional aesthetic device segment of $4.8 million. And the Emerging Business Unit revenues were almost 9% of revenues and they were up almost 500% year-over-year and the growth there is very strong.

We just settled a settlement agreement with Palomar for a lawsuit. We paid $31 million which is a great achievement from our perspective and we’re not going to take future royalties for either Syneron or Candela. We are only going to pay future royalties on the Mē product in the US starting next year, but the patent expires early in 2014 and once we have an immediate release of around $2 million of legal expenses from our P&L that we currently we used to pay for our lawyers.

So just to summarize before questions, we’re the global leader. We are a platform company with a very strong presence in the marketplace, very comprehensive innovative product portfolio. We differentiate ourselves with strong R&D, innovation, new products coming in, several growth drivers and a strong cash balance which will allow us to make additional acquisitions.

Questions please?

Question-and-Answer Session

Unknown Analyst

Can you talk about (inaudible) by a customer who buys a product and finds a (inaudible). What’s your strategy (inaudible).

Asaf Alperovitz

So our customer is a part of the Emerging Business Unit or the home use business, are the physicians, the dermatologists, plastic surgeons, general physicians and medical plan. So we are targeting mostly towards them. We do also have some bit to see for business to consumer marketing oriented. But what we try to see and learn and listen is to the demand in the marketplace. The younger population are not willing to suffer much pain. They want to see effective results on a short term basis. They’re willing to do multiple treatments and they have to have the right pricing. So we are trying to find the right solutions to our customers, the ePrime that I mentioned which is a bridge to facelift, with lower pricing points with consumable, with very short downtime, no pain in the treatment and so forth. So we are trying to meet these requirements and the recent trends with our new product offerings.

Moderator

Looks like we’re out of time. Thank you so much, Asaf.

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