Manhattan Analysts Lose Belly Fat

Zack Ajzenman just had to take Syneron Medical Ltd. up on an offer to try its fat-reduction machine, the UltraShape.

It wasn’t so much about his weight. At 175 pounds, Ajzenman, an equity analyst at Griffin Securities Inc., considers himself a fit enough guy. His issue is that he’s got a buy recommendation on Syneron and the stock is plunging. If the fat-busting ultrasound machine is going to fuel the kind of revenue rebound that Syneron envisions, and turn around the stock, the treatment truly has to be painless as the company claims.

“When it got around the bellybutton region, I felt a slight tickle,” Ajzenman, 25, said after having his abdomen treated by a Syneron technician for 45 minutes during company-arranged investor meetings in Manhattan on Sept. 17. “But I would not describe it as painful by any means.”

That Syneron is offering free trials of UltraShape to stock analysts illustrates how the Yokneam Illit, Israel-based company is struggling to win over investors months after it gained approval in the U.S. to market the machine. The stock has slumped 19 percent this year through last week in New York trading while its rival Zeltiq Aesthetics Inc., whose technology obliterates fat cells by freezing them, surged 21 percent as it posted 79 percent revenue growth in the second quarter.

Syneron executives said at the Sept. 17 meeting that they’re moving up their full-scale sales push in the U.S. to the fourth quarter of 2014 from January 2015. They also said they’re aiming for $20 million in sales from UltraShape next year, according to Leerink Partners LLC.

Global Market

The global non-invasive fat reduction market had $150 million in sales last year, and Syneron wants 20 percent to 30 percent of the market by 2017, according to a presentation from the event.

Syneron “has appropriately focused its efforts on ramping up sales force hires in North America where the company has been struggling and losing market share,” Richard Newitter, an analyst with Leerink Partners, said by phone from New York Sept. 25. “If management can execute, the stock will move higher,” said Newitter, who has a buy rating on the shares.

Syneron fell 7.5 percent last week, erasing its gain this month. Zeltiq has jumped 9 percent this month to $22.89. The Bloomberg Israel-U.S. Equity Index slipped 0.7 percent in the five days through Sept. 26 for its second weekly retreat. Syneron added 4.4 percent to $10.46 at 11:08 a.m. in New York today while Zeltiq slipped 0.6 percent to $22.75.

Executives at Syneron weren’t available to comment when sought after business hours in Israel on Sept. 25.

Revenue Decline

Syneron, whose chairman and co-founder Shimon Eckhouse took over as chief executive officer for 10 months last year amid sagging profits, has failed to withstand a broader selloff in small-cap stocks because it has yet to prove it can sell UltraShape in the U.S., Newitter said.

The Russell 2000 Index of smaller companies has lost 4.7 percent this month and the gauge is down 7.4 percent since a peak in March.

Eckhouse returned to his role as chairman in February after he 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.

Syneron’s total sales are forecast by analysts surveyed by Bloomberg to drop about 4 percent this year to $246.3 million, following a 2.5 percent decline in 2013. Revenue slipped 6 percent in the second quarter from a year earlier to $64.6 million.

Pushing UltraShape

Zeltiq’s sales soared 47 percent in 2013 to $111.6 million, and are forecast to jump 46 percent this year to $163.4 million, according to analyst estimates compiled by Bloomberg.

“Whenever there is an entrant to the market, we at the company expect an impact, though I’m confident that we will still be able to achieve our goals,” Zeltiq’s chief executive officer Mark Foley wrote in an e-mailed response to questions about Syneron. “One benefit of competition could be overall increased awareness for the market.”

Heavy spending on sales and marketing should continue to weigh on Syneron’s profitability this year, and the UltraShape push, if successful, won’t lift operating margins until sometime in 2015, Griffin’s Ajzenman said.

While Syneron won’t be able to catch up to Zeltiq, which has become the market leader in the non-invasive fat reduction industry, the fact that UltraShape is pain-free should allow it to make some inroads, said Anthony Vendetti, a New York-based analyst at Maxim Group LLC who also rates the company a buy.

Tattoo Removal

“There’s one major advantage that Syneron has over Zeltiq, and that’s the fact that Syneron has a huge installed base of other products,” Vendetti, who also underwent a sample treatment with the UltraShape machine at the investor day, said by phone Sept. 26. “They can go to that installed base and say, ‘We now have something that’s pain-free in body shaping.’”

Syneron’s other products include an upcoming treatment for tattoo removal and a skin whitening product which it plans to market heavily in Asia, according to Ajzenman.

Zeltiq received about 80 percent of revenue from North America last year while Syneron relied on that region for just 35 percent of revenue, Bloomberg data show. Syneron has plenty of cash on hand to fund its marketing spree, which should help it gain market share, Ajzenman said.

“Zeltiq’s done a really great job, but there’s ample room for more than one device to be successful in this space,” the analyst said. “People are starting to understand that this technology works, and there’s definitely a population out there that would be interested.”

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