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Syneron Medical Ltd. (NASDAQ:ELOS)

UBS Global Life Sciences Conference

September 20, 2012 1:30 p.m. ET

Executives

Louis Scafuri - Chief Executive Officer

Unidentified Speaker

All right, good afternoon, everyone. My name is [Soven Won], I will be your host for this session. The next presenting company is Syneron Medical, and the presenting presenter is Chief Executive Officer of the Company, Louis Scafuri. There is a breakout session in the Juliet Room downstairs right after the presentation. Thank you.

Louis Scafuri

Good afternoon. This presentation contains forward-looking statements. We are the global leader in a growing marketplace in the field of aesthetics. Presently we have 33% of the global market share of the publicly traded companies. We are a platform aesthetic company with distribution and service capability in over 90 countries and we also have a diversified portfolio. We have breadth and depth in our product portfolio, a very robust product pipeline, significant recurring revenue, and multiple high growth opportunities.

On a trailing 12-month basis, our revenues are $249 million, 32% which is occurring on a recurring basis. We have a very strong balance sheet, $135 million and we have our corporate headquarters in Israel which gives us significant tax advantage.

As we look at our business, we divide it into two major segments. We apply technology, infrastructure and expertise in to the professional segment of our business, as well into an emerging business unit wherein we have products that serve the consumer and the whole market and like. In the professional segment, we have established global brands and efficacy. We have a global installed base of over 25,000 customers. As I mentioned earlier, we sell in over 90 countries.

We presently have had over 8 consecutive quarters of double-digit sales growth and this is remarkable considering we are the largest company in our space. Last quarter we had 12% sales growth and 11% operating margin in this majority part of our segment. This represents 90% of our total business.

In terms of our technology, Syneron has breadth and depth second to none. We have pioneered a new field in dynamic energy for aesthetic treatments in the field of elos which is the combination of electro-optical energy that combines optical energies such as laser and light along with radio frequency on a synergistic basis. And it has the ability to treat varying depth of tissue, doing on a safe, efficacious manner as well it has an optimum use for home profile -- optimum profile for home use.

Candela, we acquired Candela in 2010. There is a very strong legacy of over 40 years as the market leader in solid-state laser and is well recognized as best in class for its laser products. In the area of ultrasound we acquired this year a company called UltraShape. We have a great domain expertise in the area of focused ultrasound for the purpose of destroying fat cells as well as other applications in the non-invasive body contouring arena.

We have additional core competencies in fractional RF, skin lightening. Skin lightening, another new field to the company as well as teeth whitening that I will talk about shortly.

We are positioned to outgrow the industry. In each category I have listed up here on this slide, the categories which represent the largest segments of the professional aesthetic market as well as the fastest growing segments. And we have unrivalled breadth and depth in our offering. We are either number one or two across each segments and we have complementary products for both dermatologists as well plastic surgeons, as well as the non-core customers.

In some of the areas, such as in the area of hair removal, our Gentle series of products remains the market leader. In other areas such as the Vbeam, again which we acquired with Candela, we have significant history as well as recognized efficacy for pigmented lesions and vascular lesions. And in some of the newer fields like fractional skin rejuvenation, our E series is well recognized throughout the global arena. And in the newer segments such as cellulite reduction as well as skin tightening, we have brands that we pioneered the initial non-invasive body contouring arena with our VelaShape product, as we as most recently UltraShape.

Our products are differentiated by their value proposition as well as their efficacy. We have a very strong intellectual property position with over a 100 plus patents granted as present time. We have over a 100 published studies across the indications and at any given time we have any number of papers, ranging this year well over 100 studies underway to prove the efficacy and to work some of the top thought leaders in the field. We have had over 700 scientific papers published and as a result we gained strong credibility with the thought leaders, the key people in the market place.

We continue to acquire innovative technologies and we believe that we are well positioned to address needs across the segments of the markets to drive procedure volume, as well as be able to support the customer with upgrades and superior customer service support. Today the market place is growing. I mentioned this in my opening comments. There is increased global awareness. It’s a global marketplace. I think, as I mentioned, with our 8 quarter consecutive growth, because we are a global company with over 65% of our revenues coming from outside the U.S., we were able to go the markets that were growing the fastest and execute in the markets.

We are seeing economic recovery. There is a growing acceptance of cosmetic procedures as well as an improved efficacy across a very broad range of treatment categories. There is a new middle class in emerging markets such as China and Brazil. We have a longer life expectancy. Five years ago people might have stood and talked about the baby boomers, well the phenomena now extends through the social media to all races, all walks of life and in all age groups. As well as the celebrity culture, it fuels what we believe today the global market place for aesthetic devices is growing at a compounded annual growth rate in double-digits.

We are uniquely positioned in some unique geographies. In market places such as Asia, it’s been documented that the aesthetic device marketplace is growing in excess of 25% year-over-year. Same in the Hispanic population with growth rates of 15%. And what's unique in our offering is the fact that our breadth and depth of technologies allow us to treat not only with laser, but with other forms of energy that are safe and effective across different skin types and skins of color.

Our global footprint shows us that we have ability tin 13 countries to sell our products on a direct basis. I mentioned as well we have an extensive distribution with the ability to sell in 90 countries. We have corporate headquarters in Israel. We also maintain Candela headquarters in North America in Boston as we as Syneron North America headquarters as well in North America. We have gone through, we have extracted considerable synergies as we have gone and rolled up the industry partially. I don’t think we are completely there yet in consolidation but I think we have some major moves in terms of our size and our scale in the company and now today I think we have the infrastructure and presence across the global that’s second to none.

What product I would like to highlight is starting in 2009, we began thinking about a different value proposition in terms of acquisition and cost of ownership. We looked at the market place changing, we saw younger patients entering the market place. We saw a need for less downtime. We saw the thinking around making the capital purchase at a slightly different level. So we were thinking at targeting an area which is very unique in what we pioneered, an area of fractional skin rejuvenation called sublative rejuvenation.

This is a technology where the form factor of the device is completely different. If you have ever seen a laser or films of laser, they usually have a very large footprint, the size of a washing machine. This device is the size of a laptop and we have a razor blade model. The technology works, it delivers energy that minimally disrupts the epidermis but yet causes maximum dermal remodeling. We target in Asia specific where we have one in every four patients with acne scars. We targeted the unique ability to treat across skins of color safely with efficacy of particular treatments. And we have managed to introduce and sell a product which has a consumable tip that goes along with each treatment procedure.

In this country, in North America, we are expanding our indications across this product platform. We are adding new tips for different treatments. And in terms of the business model for the company, the business model for the physician, the value proposition for the customer, I think we have achieved a new paradigm. Physicians are capable with this procedure, it’s bundle of Botox treatments as well as a filler treatment, all during the lunch hour and have at a price point wherein they achieve a high gross margin and the company achieves a gross margin. And as we drive procedure volume, it sustains itself.

We have a major opportunity in the body shaping area. The body shaping market right now on a non-invasive basis in hyper-growth. In terms of the number of procedures that have been performed, the consumer awareness around body shaping, it probably is one of the key headlines in the aesthetics space. The projected annual growth rate is in excess of 15%. It’s pretty hard to get a true handle on the estimates because it’s divided into three segments. Cellulite reduction, tightening of the body meaning a reduction in the size, as well as a newer category which is the non-invasive disruption of fat cells.

We pioneered in 2005 the first non-invasive body contouring device with the VelaShape family of products. We have sold over 7000 units. We have performed over 3 million procedures of the VelaShape. It tightens -- it has an effect to tighten the collagen fibers around the fat cells causing a circumference reduction, allowing a patient to get a dress size smaller on after a series of three to four treatments, as well as smoothing the effect to cellulite on the skin. It has a very strong brand name and it gives us an ideal position to sell the UltraShape product which is complementary to the VelaShape.

UltraShape is a focused ultrasound technology that causes the mechanical disruption of the fat cells. This product is available outside the U.S. at present time. At present time we are underway with the 510(k) trials. Expected to gain clearance for this device sometime in 2013. It has a unique business model. From the standpoint, its pay for pulse. It’s pain free. Very rapid results. You can see the treatment results in less than one week. It’s very well tolerated by the patient. It works in a manner that you can treat different levels of the fat, both at the superficial level as well as some of the different and more visceral fat layers. It also is capable of treating the abdomen [flanks wise] in [subdental] area.

There are over 700 units installed. We acquired this company in March. We are now rolling it out in our distribution channel. We just announced in August that we began selling it direct in Canada. And we believe this technology is complementary. Again, as I mentioned just previously, there are different segments of this market we have the VelaShape. We have covered the cellulite reduction as well as the tightening. And with the UltraShape and the combination of the treatment protocols and future combinations of the technology, we can also address the total body shaping issue and provide solutions.

Our second segment of the business is the emerging business units. We have multiple billion dollar growth opportunities in some very new high growth segments. One of our groups, our largest group there is the Syneron Beauty group, which has home use products that I will describe shortly. We grew quarter-over-quarter 7% our revenues in Q2, and we had a 29% growth year-over-year. This leverages all the technology, all the expertise we have in the professional market. We get some brand name strength recognition as well as we have the core competencies in technology from our experience in our core market.

And we also have another unique category in there in skin brightening. Topical products, where last quarter for products which we introduced, just within the last year we achieved revenues of $1 million with very limited distribution.

In the emerging business unit, the high growth markets include the home use devices. Products that are used at home for the purpose of hair reduction, acne treatments as well skin rejuvenation. This market place, right now the most recent study indicated that this today is a $650 million market place with, again, double-digit compounded annual growth rate. There is an increased consumer desire for treatments, whether it be initial treatments of maintenance treatments at home. If you turn on [TVC] at any given night, open up an airline magazine or ready any beauty publication, you will see a lot of airplay around this emerging market place.

Another exciting area for the company is teeth whitening and fluorination. It’s a blockbuster marketplace, well over $5 billion with strips, trays, gels and the like. What the marketplace has been seeking has been better treatments, more effective, that lasts longer. And in this area of skin lightening, and again being North American we think about getting tanned, but as we look at other parts of the worlds actually lightening, brightening is an issue. And this marketplace is probably larger than any other market that we are presently addressing. It’s estimated to be somewhere between $10 billion including the consumer end of it, and as high as $1 billion in the professional segment. It’s widely used in Asia. And the topical products that are there today are all daily use products with significant recurring revenue opportunities.

In the Syneron Beauty group, in the home use area, we have the me home use hair removal system. It’s dual action. One can actually [apply] and shape before treating with the elos energy in the device that combines everything together in a very compact workstation device. It works across different color hairs, different color skins, all of which have been complications for some of the competitive units and other attempts at solving this problem in the home. And our product today has the fastest performance in the market. It’s currently sold in the UK and in select markets in Western Europe as well as in Canada. We are awaiting 510-k approval. We have sold this product on a direct basis in Israel via direct to consumer marketing as well as in a major chain. And we are capable of selling over 80,000 units of this device in the first year on the market.

In Q1 of this year we introduced the Tanda Pearl Teeth Whitening system. The home use system patented breakthrough ionic technology. We have done scientific work proving its efficacy. The product is also capable of fluorinating. It works fast. The customer satisfaction is significant. We are planning in Q4 a significant consumer marketing campaign which we believe will really help us scale some of the revenue opportunity in a product that offers the company high gross margin as well, again, significant acceptance by the consumer.

We also have the Tanda series products which include the Tanda Zap. It’s the home acne treatment. The price point on that product is $49. We also have a larger spot sized product available. And we have the Tanda Luxe as well. This is clinically validated therapy. We have a multipronged distribution model. We sell in some of the premium retailers that we have listed here, including Neiman Marcus and Nordstrom, Bloomingdales, Sephora. And again we have multiple SKUs to offer some of the retail chains and we are expanding our distribution continuously on our own. In addition we have a relationship with Procter and Gamble for our skin rejuvenation product which is currently under FDA evaluation. We expect and anticipate on the basis of our clinical trials and a working relationship with Procter and Gamble, very optimistic about our future with this partnership.

The elure advanced skin lightening, on Tuesday this week we sent out a press release that we are just named Best of Beauty, again for the second consecutive year for our skin lightening product. It works fast. It works within five days. Essence magazine also recognizes as the top topical products for skins of color, to work on black skin. It has superior efficacy. I mentioned how fast it works. It’s a naturally occurring enzyme, Melanozyme, which is a company isolated, manufactured into a product. We have a very strong intellectual property position. And the patent will run until 2023. We have been building out our distribution and infrastructure, doing much work demonstrating the clinical efficacy with some of the key though leaders comparing it to other products that are on the market place. And we are looking strongly towards the Asian markets and regulatory approvals that we are pursuing in some of the major markets, to exploit the opportunity that exists for this very unique product.

At present time we have $135 million in cash, no debt. Our recurring revenues are expanding. Today they are 32% of our professional aesthetic device segment. Our gross margins are improving as we note on the graph. We have ongoing efforts to reduce our OpEx and we are the clear market leader across the publicly traded companies with over one third of the market share, with some very strong plans and product plans to expand that share even further.

Second quarter highlights. Our revenues were $68.1 million, up 12 percentage points over the previous years. The international revenue was $46.2 million, up 16%, North American revenue was $22 million, just up slightly in single digits mostly because of the delay in the regulatory approval for a key product that did not come until the last several days of the quarter. We have launched a product. It is the product elos plus, we have lunched it in Asia as well as in Europe the previous month and so we have some market anticipation. And it delayed us a bit coming to Q3 that I think we are back on track there.

In terms of the consumables, consumable market remained at 32%. Our gross margins were up 55%, up year-over-year from 51.2%. The operating profit in the PAD, the professional aesthetic device segment, was $7 million. We continued to invest in our EBU. We have multibillion dollar opportunity. We have significant growth in that area and we have things that I think that are game changes in that portfolio. Our net income was $1.9 million on a non-GAAP basis, $0.05 a share versus the previous year where it was $200,000 and $0.01 a share EPS.

In summary, as the market leader we offer financially diversified revenue streams, improving profit margins, recurring revenue. Our target is to increase the recurring revenue through the consumables business model. Double-digit growth continues in the PAD. The outlook is strong to continue our double-digit year-over-year growth. And we are investing in the EBU again with some home run products in some huge multibillion dollar opportunities.

Thank you very much.

Question-and-Answer Session

[No Q&A session was conducted for this event]

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