A client recently asked me to provide an in-depth review of the entire aesthetics-focused industry within the Healthcare sector. The companies can be broken down into several areas, including those whose products restore or enhance the face, those that augment breasts, those that reduce fat through medical procedures and those that treat skin generally. It is this latter group that includes several manufacturers of light-based treatment systems, including lasers. I had concluded that while the laser makers sure looked cheaper than ever, they didn’t really look attractive as investment candidates. It was with great interest, then, that I had the opportunity to listen to a webcast from the RBC Capital 2007 Healthcare Conference. Kudos to them for the format of their gathering, as it consisted entirely of panel discussions.
The panel discussion entitled “Investing with Wrinkles: Aesthetic Laser Leaders” featured the CEOs from Aesthera (private), Cutera (NASDAQ:CUTR) and Cynosure (NASDAQ:CYNO) and was quite informative. It has always struck me that the industry dynamics aren’t very favorable despite seemingly awesome demographic demands. After all, these machines, which are sold to dermatologists, plastic surgeons, gynecologists, and increasingly “med-spas”, do amazing things like remove hair, remove wrinkles, remove skin lesions and tattoos, remove fat, remove acne, remove cellulite and remove spider veins. I am sure I have just left off a few applications, but you get the drift. Not only do they do all of these wonderful things, but they provide compensation outside of the managed care system for doctors who are increasingly being pinched on reimbursement. So, what’s the problem?
As you can see in the chart below, the industry consists of several publicly traded companies all of relatively small size (as well as many similar private companies not included). The comments from the CEOs suggested that the industry dynamics were a prohibitive factor from getting even more customers into the offices of their customers. Why? Without an 800-lb gorilla, there is no central marketing message. Most of the marketing is by the practitioners and directed into their specific office. Were one of the manufacturers to try DTC marketing, it is very unlikely that the consumer would end up ultimately being treated with one of their machines. Therefore, the CEO was very adamant that an acquisition by a large company that would spend money advertising would help not only the acquired company, but the entire industry. I couldn’t agree more.
There are other reasons that the industry isn’t attractive, including short-term saturation of the traditional market, a lack of long-term differentiation in the capabilities of the machines (though the technologies vary), a general lack of recurring revenue (these are primarily “boxes”), and caution due to the general economic outlook that could slow demand for procedures and hence new or additional equipment. My observation, too, is that earnings estimates haven’t come down a lot. In all fairness, though, a couple of things should be mentioned. First, the companies have terrific balance sheets. Second, over the long-term, consumers will increasingly adopt these time-saving and potentially money-saving cosmetic devices. Finally, eventually one of these companies, through partnership, will get a product approved for home-based use. I would also like to mention that I found it very interesting that several companies do pay royalties to Palomar (NASDAQ:PMTI) for products that remove hair. Interestingly, upon checking Insider Scoop, it appears that there has been no insider selling there over the past several months despite some at peers.
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Disclosure: No positions in any companies mentioned in this article