Zeltiq Aesthetics Prices IPO Below Range At $13.00 - Still Too Expensive?

| About: ZELTIQ Aesthetics, (ZLTQ)
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Zeltiq Aesthetics, Inc. (NASDAQ:ZLTQ) priced its 7.0 million share IPO at $13.00, below the indicated range of $14.00-16.00. The company is selling 6.693 million shares, while shareholders are selling the remaining 307,000 shares. The company says it plans to use the proceeds to pay up to $7 million of remaining milestone obligations to General Hospital Corporation (owner of Massachusetts General Hospital), and the remainder for general corporate purposes. Based on the $13.00 pricing, the company will have a market capitalization of approximately $426 million. JP Morgan and Goldman Sachs are leading the offering.

Zeltiq is a medical technology company that utilizes a proprietary technology that utilizes cryolipolysis, the cooling of fat cells to trigger their natural death via apoptosis. Their first commercial product is called the CoolSculpting System, which was designed to address the fat bulges that may not respond to diet and exercise. The CoolSculpting procedure is non-invasive, non-surgical, and with no downtime for the patient.

The company has experienced rapid growth since the FDA approval of their CoolSculpting system in 2010. As of Q2 2011, the company had a worldwide installed base of 629 systems, and over 134,000 CoolSculpting procedures have been sold to physician customers in over 50 countries. The company has derived a selected marketing strategy in which they plan to market the CoolSculpting system to a limited number of dermatologists, plastic surgeons, and aesthetic specialists. Of the 70,000 physicians performing aesthetic procedures through approximately 30,000 sites worldwide, the company plans to sell systems to only 4000-5000 of these sites worldwide.

The company receives revenue from two sources: the CoolSculpting system sales, and from procedure fees paid by the physicians for each procedure performed. The estimated payback period for the physicians from the initial investment is approximately 2 to 5 months, based on average patient volume and pricing. Currently revenue is about 70% system sales and 30% procedure fees, but the company expects the mix to reverse over the next few years as more systems are placed. As with the typical razor-razorblade model, the procedure fees represent a higher gross margin for the company, so they believe they will continue to see increasing gross margins as the sales mix adjusts to a greater percentage of procedure fee revenue.

Revenue itself has grown from just $1.5 million in 2009 to $25.5M in 2010. For the first three quarters 2011, revenue is approx double that of the whole year 2010 to approximately $50M (though 3Q 2011 audited results have yet to be finalized the company does state in the prospectus that they estimate revenue for the quarter to be in the $17.5-17.7 million range). Gross margin for 2Q 2011 was 61%, up from approx 52% for all of 2010.

Zeltiq looks to follow in the footsteps of last week’s successful offering of Ubiquiti Networks (NASDAQ:UBNT). Though UBNT also priced below the indicated range at $15.00 (versus an original range of $20-22), the company receive solid demand at the lowered price range and rewarded investors with a first day opening gain of 16.6%. Zeltiq does not appear, however, to be poised to accomplish the same kind of day one success. First of all, unlike UBNT, ZLTQ is not currently profitable on a net income basis; and with additional marketing and public company expenses expected through 2013, does not look to be profitable for at least a couple of years (possibly for the full year of 2013).

Additionally, even at the lowered price, ZLTQ looks expensive as compared to the peer group. For the full year 2011, we expect ZLTQ price to sales to be approximately 6.1x, where the peers, including such names as Solta Medical (NASDAQ:SLTM), Palomar Medical (NASDAQ:PMTI), Syneron Medical (NASDAQ:ELOS), and Cutera (NASDAQ:CUTR), are currently trading between 1.08x and 2.05x 2011 estimated sales. Though the growth rate of ZLTQ may be greater than that of the peer group, the company is still in its infancy, and competes in a highly competitive ever-changing aesthetic technology market. Thus, the valuation discrepancy appears too large to sustain a successful IPO performance at least in the near term. Not to mention the fact that this offering is coming at a time where the overall IPO market is not very healthy and the comp group is trading near the low end of their 52-week range.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.