Fat-Destroying Machine Doubted by Stock Traders

The way Shimon Eckhouse sees it, his company’s fat-busting technology gives him a direct line into what he calls one of the holy grails of beauty treatment. Everyone, he says, is worried about being overweight.

So when Syneron Medical Ltd., the Israeli company Eckhouse co-founded in 2000, failed to rally in the stock market after the U.S. approved the ultrasound device on April 14, he was surprised.

“I expected to see much more of a jump in the stock,” Eckhouse, Syneron’s chairman, said in a May 2 phone interview. There is “huge potential” in the business, he said.

Syneron has fallen 8.4 percent to $10.24 since that regulatory approval, part of a 17 percent drop this year that’s made it the second-worst performer in the Bloomberg index of Israeli stocks in the U.S. Investors are skeptical about Eckhouse’s plan to use the device, known as UltraShape, as the centerpiece of what he says will be a more profitable business model based on sharing in the fees doctors charge for treatment.

“The company needs to prove they can generate some topline momentum, which they did not do last year,” Zack Ajzenman, an analyst with Griffin Securities Inc., said by phone from New York. Investors will bid up the shares if they see UltraShape fueling sales growth, he said. “That’s what’s really going to move the stock.”

Revenue Decline

Revenue fell 2.5 percent last year to $257 million, while sales at rival Cynosure Inc., which makes lasers for medical and cosmetic treatments, grew 47 percent to $226 million, data compiled by Bloomberg show. Zeltiq Aesthetics Inc., which makes a product that zaps fat cells by reducing their temperature, saw its stock triple in value in 2013 as sales rose 47 percent to $112 million.

Syneron, which has a market capitalization of $360 million, missed out on growth because of poor sales execution and investments in an unprofitable home beauty device unit, according to Jeremy Feffer, an analyst at Cantor Fitzgerald LP in New York. The Yokneam Illit, Israel-based company reported adjusted net income of $6.83 million in 2013, a nine percent drop from the prior year.

Eckhouse, who returned to the role of chairman in February after a 10-month stint as chief executive officer, cut costs by spinning off the home beauty device unit to a joint venture with Unilever NV in November. The move fueled a record 42 percent gain in Syneron’s stock last year. The shares are still down 15 percent from an initial public offering price of $12 in 2004. They gained 0.5 percent at 12:13 p.m. in New York today from $10.18 yesterday.

‘Holy Grail’

Now that the Food and Drug Administration has approved the device, Syneron will begin selling UltraShape machines to a limited group of doctors in the second quarter of 2014 to test its model of revenue sharing, Eckhouse said. The company plans to apply the model to Syneron’s other products, which include devices for skin whitening, wrinkle treatment, and hair-removal.

The UltraShape machine painlessly destroys fat cells by heating them with ultrasound waves that penetrate 1.5 centimeters (0.6 inch) below the skin, according to a company presentation.

“One of the holy grails of aesthetic treatment is that almost everybody believes he has too much fat,” Eckhouse said in an April 24 telephone interview from Shangri-La, China. “UltraShape is, in our mind, the best opportunity to develop this business model.”

Eckhouse’s plan to revive sales seems to have convinced analysts: four out of five rate the stock equivalent of buy, according to data compiled by Bloomberg.

‘Cheap Stock’

Syneron trades at 24.4 times its estimated earnings, compared with an historical average of 31.5 times. The average multiple among 50 global health care equipment companies is 76.2, according to data compiled by Bloomberg.

“It’s a cheap stock and the valuation is not by any stretch expensive,” Richard Newitter, an analyst with Leerink Swann, said in an April 24 phone interview from New York. “Expectations are generally low. These guys should be set up for sales growth acceleration and profit growth improvement in coming years.”

The company has almost doubled its U.S. sales force to 55 and plans to increase it to as many as 90 people by the end of the year, Eckhouse said.

Earnings won’t be affected by UltraShape sales until early 2015 because the company is still spending on investments including building up its sales force this year, he said.

Syneron is expected to report earnings-per-share of about 4 cents for the three months ended March 31, according to the average estimate by four analysts tracked by Bloomberg. That compares to 2 cents a year ago. The company will post sales of $55.5 million, a nine percent drop, the forecasts show.

Market Share

The company’s goal is to capture as much as 30 percent of the global non-invasive fat reduction market in three years, which reached $640 million in sales in 2013, according to its presentation.

If Syneron can execute on its sales plan, it should be able to catch up to rivals like Zeltiq and Cynosure, said Cantor Fitzgerald’s Feffer.

“There’s plenty of runway for a couple of players in this space,” he said. “It’s going to take a couple of quarters for these new sales representatives to get ramped up. Once they do, they’re going to be successful.”

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