Israeli Fat Zapper Is a Bust as Management Flubs Annoy Investors

  • Syneron cut 2015 revenue forecast for its UltraShape system
  • Shares are down 19% this year while rival Zeltiq gained 12%

In the race to achieve the perfect body, Syneron Medical Ltd. keeps shooting itself in the foot.

A combination of management missteps and disappointing sales of its new cellulite-zapping machine have turned investors off of the medical-device company based in Yokneam Illit, a high-tech hub in Israel.

The UltraShape, which promises to destroy fat cells by heating them with ultrasound waves, launched more than a year ago amid much fanfare with executives proclaiming that the fat zapper would make $20 million in revenue in 2015. Then, on a Nov. 11 earnings call, they scaled that back to as low as $16 million, citing “internal management challenges.” The stock plummeted 20 percent to $6 that day, the lowest since 2009.

Shareholders are also peeved about its leadership flubs.

“The Syneron story over the last few years has generally been a story of disappointment with management,” Zack Ajzenman, an analyst with Griffin Securities Inc., said by phone from New York. “We’ve seen a couple CEO changes and we’ve seen sales force restructuring -- so there’s been a lot of skepticism.”

Management Shakeup

Syneron named a new chief executive in early 2014, when Chairman and founder Shimon Eckhouse stepped down as CEO after filling in for a 10-month stint to set a new strategy for the company. On its most recent earnings call, Syneron said it was promoting a recent outside hire, Jeff Nardoci, to oversee all aspects of sales, marketing, and training for doctors in how to use the UltraShape machine.

The goal is to get more doctors to buy the machines. Nardoci says Syneron’s sales force needs to simplify its message to focus on what’s best for patients, and stop trying to compare itself to competitor Zeltiq Aesthetics Inc

Sales at Zeltiq, whose CoolSculpting technology freezes fat cells, are forecast to climb 44 percent to $252 million this year, while profit will more than triple to $5.4 million, according to the average estimate of 10 analysts. Syneron’s revenue is forecast to grow seven percent to $274 million while profit will slip 18 percent to $6.5 million, according to the average of analyst estimates.

Growing Pains

“You have these changes all the time when you’re first starting up business units and getting them running,” Nardoci said by phone from Irvine, California. “We’ve got a great product, it’s just how do you get everything to work in harmony.”

The market for shrinking fat cells is expanding. Sales for so-called body contouring devices could reach $2 billion by 2017, according to a 2014 report by Maxim Group. Syneron Chairman Shimon Eckhouse has dubbed it the "Holy Grail" of aesthetic medicine.

Syneron shares have recovered since the Nov. 11 wake-up call. They rose 6.9 percent last week to $7.58, around where they were before the company reported third-quarter earnings. At $6 a share, the stock was too cheap, said Richard Newitter, an analyst with Leerink Partners in New York who recommends buying the shares.

Syneron now trades at about 20 times 12-month future earnings, compared with Zeltiq’s valuation of 125 times. Analysts expect the shares to rally 60 percent in the next 12 months, to $12.10.

“The amount of the selloff was greater than what the actual bad news was,” Newitter said. “That doesn’t mean that the company still doesn’t have a lot of investor credibility to regain.”

After the UltraShape, what’s next in the pipeline? Newitter highlighted a “vaginal rejuvenation” laser geared for post-menopausal women.

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