Disclosure: I am long ELOS.
The first event occurred on December 6, 2013, when Lumenis filed for a $115 million IPO on NASDAQ. Lumenis is one of the main competitors of Syneron. The prospectus and the planned IPO clearly show how Syneron, the larger of the 2 companies, is trading at a heavy discount to its peers.
The second event occurred a week later on December 16, 2013, whenSolta Medical (Ticker: SLTM) announced it will be acquired by Valeant Pharmaceuticals (Ticker: VRX) for a sum of approximately $250 million in cash. Solta is another direct competitor of Syneron. The Solta acquisition further proves that Syneron is deeply undervalued compared to its peers.
Goldman Sachs to IPO competitor Lumenis at 50% higher multiple
Lumenis, is the second largest company in the aesthetic medical devices field (in annual sales, after Syneron), is planning together with its underwriters, to conduct the IPO according to a company valuation of $450-500 million after the money. Its prospectus can be found on the website of the Securities Exchange. The pricing of the IPO is expected in Q1, 2014, and the investors' road show is expected to start in January.
As we will show in this report, both companies are extremely similar and should be valued according to the same metrics. When calculating the EV/Sales ratio of both companies (EV/Sales is the valuation ratio used in this sector), we discover that Lumenis is pricing at an EV/sales ratio which is 50% higher than Syneron's, although as we will show below, the differences between the companies, for valuation and investing purposes, are quite small:
Share price ($)
|
Market cap ($, mn)
|
Debt ($, mn)
|
Cash ($, mn)
|
EV ($, mn)
|
2012 Revs ($, mn)
|
EV/Sales
| |
Syneron
|
11.30
|
407.5
|
-
|
110.0
|
286.3
|
263.6
|
1.13
|
Lumenis
|
375.00 (pre IPO)
|
70.1
|
37.8
|
407.3
|
248.6
|
1.64
|
Lumenis is being taken public by the top investment banks on Wall Street: Goldman, Sachs & Co. (TICKER: GS), Credit Suisse (TICKER:CS) & Jefferies (a wholly-owned subsidiary of Leucadia National Corporation (TICKER: LUK) will serve as joint bookrunning managers, and Wells Fargo Securities (TICKER: WFC) will serve as co-manager. we believe that such a strong group of underwriters have taken extreme care in pricing Lumenis for its IPO. If Lumenis is valued by Goldman and others at EV/Sales ratio of ~1.65, then Syneron shares should close the gap and trade at a share price of $16.5 and higher. Since Syneron is a healthier and larger company than Lumenis we believe it should command a higher multiple and trade above $18. It is important to note that Goldman Sachs was also the lead underwriter for aesthetic devices competitor Zeltiq (TICKER: ZLTQ), which is currently trading at market cap of $643 million, and an EV/Sales ratio of over 7 (nearly 6 times higher than Syneron).
Syneron & Lumenis operate in the same industry - aesthetic medical devices, but the similarities don't end there. Analyzing their financial results, we see that both companies operate with similar gross margins (ranging over the past year between 50% to 55%), and in each of the recently reported quarters the difference in gross margins has been about 2%.
In Q3 2013, Syneron's GM was 53.1% vs. Lumenis' 55%. As we will explain later in our paper, Syneron management is working diligently, and successfully, to increase the company's gross margins. We expect that Syneron's gross margins will surpass Lumenis's gross margins in 2014.
Lumenis has lower operating costs due mainly to a much lower ongoing R&D investment, which we see as a worrying sign for future products pipeline, and company profitability. Lumenis is investing in its R&D efforts only 8.3% of its sales, probably due to its weak balance sheet, which carries $32 million of net debt. In comparison, Syneron which boasts a very healthy balance sheet with $110 million net cash, invests 11.9% of its revenues in R&D efforts. This under weighted R&D investment on Lumenis' behalf throws a greater uncertainty as to the future prospects of Lumenis in this highly competitive market.
The main driver for Syneron's expected future GM increases (which we believe will exceed 60% of revenues during 2014) are the introduction of new products with lower competition and higher margins. Syneron is expected to launch more innovative products than Lumenis, and thus will surpass Lumenis in gross margins and revenues growth rate.
Another area of similarity is the geographical revenue split. The geographical split of revenues of both companies clearly shows that 1/3 of their revenues are sourced in North America, half the revenues are sourced in Asia & Europe, and the remaining 15% are sourced in Japan and elsewhere.
2012 revenues by region
| ||
Syneron
|
Lumenis
| |
North America
|
35.4%
|
34.80%
|
Europe and Middle East
|
32.80%
|
17.30%
|
Asia-Pacific
|
15.70%
|
32.50%
|
Japan
|
11.70%
|
15.40%
|
Others
|
4.40%
|
0.00%
|
Both companies are based in Israel, in the same industrial park of the city of Yokneam, a few hundred yards from each other (see image below).
(click to enlarge)
(Source: Google Maps)
Both also have extensive sales operations globally, show up at the same conferences, sell to the same target audiences and have similar revenues- ($248 mn revenues for Lumenis in 2012 vs. $263mn for Syneron that year).
The key reasons for these similarities is the person behind both companies' formation, Dr. Shimon Eckhouse, who founded Lumenis in 1991, and Syneron in 2000.
Lumenis was founded in 1991 by Dr. Eckhouse. For its first decade of operation Lumenis was named ESC Medical Systems Limited. The 'ESC' in the name ESC Medical is rumored to stand for the initials of 'Eckhouse Shimon Company', after its founder's name, although Lumenis claims it stand for 'Energy Systems Corporation'. Eckhouse was the founder, CEO and inventor of many of the company's patents, but he lost control of the company's board of directors at the end of the millennium, and was forced out of the company he founded. After the change of control in the company the new management changed its name to Lumenis in 2001.
Syneron was founded in 2000 by the same Dr. Eckhouse. The CEO of Syneron was Mr. Moshe Mizrahi, one of Eckhouse's initial investors in ESC/Lumenis, while Eckhouse served as Syneron's Chairman. In 2004, when Syneron conducted its IPO, Eckhouse was the largest single shareholder, owning 23.8% of the pre IPO shares outstanding. Six months ago former CEO Mr. Louis Scafuri stepped down from CEO position, and Eckhouse stepped forward from his passive Chairman role and replaced Scafuri as the CEO of Syneron. Eckhouse currently owns over 2.7M shares of the company. Eckhouse admits that his return to the company is driven by the fact he believes the value of ELOS shares is dramatically higher than its current value, and that the main driver for taking the helm of the company is to fully maximize the company's, and his own share value.
In other words, Dr. Eckhouse returned to a leadership position in the company in order to maximize the value of his stake in the company. We see this as a major catalyst for the future rise in the company's share price.
These days, Syneron is the leading company in the aesthetics lasers market in term of $ sales in 2012.
Company
|
2012 Revs ($, Mn)
|
Ticker
|
Syneron Medical Ltd.
|
263.6
|
ELOS
|
Lumenis
|
248.6
|
Not trading yet
|
Cynosure, Inc.
|
153.5
|
CYNO
|
Solta Medical, Inc.
|
144.5
|
SLTM
|
Cutera, Inc.
|
77.2
|
CUTR
|
ZELTIQ Aesthetics, Inc.
|
76.2
|
ZLTQ
|
Syneron is the global leader in the aesthetics devices market with 28% global market share of the companies that trade in US equity markets. In this universe of companies we include Cynosure (TICKER: CYNO), Solta Medical (TICKER:SLTM), Cutera (TICKER:CUTR) & Zeltiq. Syneron is the platform aesthetic company with the largest worldwide presence, in sales, distribution and service network across 90 countries capable of addressing the largest and fastest growing segments of the market. The company has 13 direct operations in key markets including the U.S., key European countries, China, & Japan, which really gives the company a very strong global footprint. This is of key importance, as the company is developing some very promising products addressing market segments with strong global demand.
Syneron's business is divided into 2 main business divisions: Professional Aesthetic Devices (PAD) and Emerging Business Units (EBU) segments. The PAD segment deals with research, development marketing, and sales of aesthetic medical equipment. The EBU segment includes mainly Syneron Beauty's activities, namely its home use products. Syneron sells its products worldwide through direct subsidiaries in its main markets and via numerous distributors globally.
Syneron is an extremely healthy company, with improving margins, profitability and over $110 million in cash. Since taking the helm several months ago Dr. Eckhouse plotted a 3-pronged strategy:
1. Management focus on improving sales figures and profitability within PAD segment: Margins are heading up towards 60% gross margin. Dr. Eckhouse who recently returned to lead the company, is investing significant efforts in improving the company's sales & profitability, whilst cutting costs in R&D & G&A. Currently, about 2/3 of Syneron PAD new device sales revenues (i.e. excluding recurring revenues such as service contracts) arrive from sales of Candela line devices by its sales force. Syneron line of products in PAD segment account for remaining 1/3 of revenues. This is due to strength and focus of legacy Candela direct sales force (~35 sales reps in North America), which is more comfortable with sales of Candela products. Unfortunately, Candela line sales suffer from a low 40% gross margin, while Syneron product line sales enjoy gross margins of nearly 80%. Eckhouse is in the process of doubling the sales force by recruiting an additional 35 salespeople to focus on Syneron products in North America. In addition, sales force management is being implemented. The company targets average sales of $1mn per sales rep in North America in 2014, at a direct cost of $200,000 per sales rep. In addition, the company is looking to increase its revenues from service contracts and consumable products. Syneron's management indicated during the last quarterly call they believe that a double digit EBIT is within a 2 quarters reach.
2. Introduce new products with higher gross margins and reduced competition: Syneron has been investing in the past few years in a handful of technologies and products that are expected to deliver an extraordinary boost in the company's results starting 2014. The leading 2 products are Ultrashape body sculpting product and the Elure skin whitening creams. Ultrashape is a non-invasive abdominal circumferential reduction, and the company completed its multi site clinical study in October 2013. The study, which was required by the FDA prior to sumbitting a 510-k application, exceeded FDA-Specified margin significantly. In fact, the study showed average abdominal circumference reduction of 2.9cm compared to 0.5 of control, well above end-point set by the FDA. We expect Ultrashape to receive FDA approval in the first half of 2014, and start selling immediately across the globe. Once Ultrashape receives FDA approval, it will compete head to head with Zeltiq's CoolSculpting fat reduction device, and Cynosure's product in this line. Another promising product line is Elure. Elure is a skin lightening, or skin whitening (the Asian terminology) cream with active enzyme, which breaks down the melanin when applied to the skin. Melanin is the primary determinant of skin color in humans. Elure is patent protected until 2023 and addresses the global skin lightening market, which is expected to reach $10 Billion by 2015, and is expected to double to nearly $20 Billionby 2018.
3. Eliminate the cash burden of the aesthetics home use devices opportunity: Whilst PAD is generating cash, EBU segment has been bleeding and dragged the company down during the last two years. Syneron invested significant resources to grow EBU revenues and reach profitability. The company expects EBU to be profitable in Q4, 2013, and going forward. On 11 November 2013 Syneron announced the creation of a joint venture in the home use devices activities with Unilever Ventures. In this JV, Unilever will invest $25M and certain assets including its formidable distribution capabilities, while Syneron will contribute its home use aesthetic devices, all into a new company in which Unilever will hold 51% and Syneron will hold 49%. Unilever Ventures is part of Unilever Plc (TICKER: UL), is the world's 3rd largest consumer goods company (following Procter & Gamble (TICKER: PG and Nestle (TICKER:OTCPK:NSRGY). This is a very positive sign that proved that the company had built a solid business, and assures that Syneron will not dilute further its cash pile to invest in the Syneron Beauty. The company recently stated that "the creation of the JV will eliminate the impact to Syneron Medical financials and cash flow while retaining upside through the ownership stake in the JV." At the same time, Unilever, a leading global brand in consumer categories, will take the lead in this business, and Syneron is likely to benefit from Unilever's marketing abilities in the coming years. Unilever also has several skin lightening products, which may increase the cooperation between the 2 companies in the future.
Lumenis, which was founded in 1991 by Dr. Eckhouse as ESC Medical, is one of the pioneers in the aesthetic medical devices industry. Lumenis is divided into 3 main business divisions: Aesthetic lasers division, Surgical lasers, and Ophthalmic lasers (to treat retina conditions). The aesthetic & surgical divisions accounted in 2012 each for nearly 37% of the company's revenues, and most of its profit, whilst the ophthalmic division accounted for ~24% of the revenues but was marginally profitable.
Lumenis' detailed its growth strategy in the IPO prospectus it filed with the SEC. This strategy is almost identical to that of Syneron and includes:
1. Launch innovative products
2. Expand geographic footprint
3. Continue to improve profitability
4. Leverage our technology leadership to penetrate additional therapeutic areas
5. Actively pursue business development opportunities
Sounds familiar?? Almost word to word to the strategy Dr. Eckhouse is implementing in Syneron.
Looking into the operations of both companies
How is Dr. Eckhouse succeeding in implementing his strategy in Syneron so far? Quite well, actually.
Syneron has recruited several key management figures, including Mr. Hugo Goldman as its CFO in November 2012. Prior to joining Syneron, Mr. Goldman served as Chief Financial Officer of Retalix Ltd., a leading global provider of software and services to high volume, high complexity retailers. He was part of the turnaround team instated by Retalix management. This turnaround team did an excellent job in rebuildingRetalix's business, which was then successfully sold to NCR for $650 million. We believe Mr. Goldman will make a huge contribution to the Syneron management team and apply the monetary discipline he applied in Retalix, which is needed to further improve Syneron's results.
During Eckhouse's & Goldman's watch, Syneron has already increased its operating efficiencies, reduced expenses, and reduced head count of R&D marketing and G&A teams by 45 people in 2Q13. The duo plan to push much further on all these fronts. The growth in sales headcount is planned to be offset by reductions in headcount and expenses in other areas, so the company will benefit from improved top line and operational profitability, with relatively flat operational expenses change. These improvements can already be seen in the company's Q3 results, which it released in November.
Valeant Pharmaceuticals acquires competitor Solta Medical at 50% higher multiple
As stated above, on December 16, 2013, Solta Medical announced it will be acquired by Valeant Pharmaceuticals for a sum of approximately $250 million in cash. Valeant Pharmaceuticals acquired Solta according to an EV/Sales multiple of 1.87 (Solta's debt level at Q3, 2013 was $26 million, and its cash position is $7 million) bringing its acquisition Enterprise value to $250 + $26 - $7= $269 million. Solta's revenues in 2012 stood at $145 million, bringing its EV/Sales ratio for this deal to 1.87.
Solta, although profitable on an operating level, has been suffering from negative cash flow in the past 3 quarters, which led to the resignation of its CEO and its Chairman due to disappointing results and pressure from investors.
(click to enlarge)
(Source: Yahoo! Finance, Solta Medical Inc.)
In our view, Syneron, which is the leading and healthiest company in terms of balance sheet in the industry, should command a higher EV/Sales ratio than Solta. Syneron is currently trading at an EV/Sales ratio of 1.13, which is 40% lower than the ratio in which Solta Medical was acquired by. Applying VRX - SLTM valuation, Syneron should trade at $18.7 per share.
Share price ($)
|
Market cap ($, mn)
|
Debt ($, mn)
|
Cash ($, mn)
|
EV ($, mn)
|
2012 Revs ($, mn)
|
EV/Sales
| |
Syneron
|
11.30
|
407.5
|
-
|
110
|
297.5
|
263.6
|
1.13
|
SLTM
|
250
|
26
|
7
|
269.0
|
144
|
1.87
|
We strongly believe that Syneron is trading at a very deep discount to its true value. The above analysis proves, according to 2 separate transactions, that ELOS shares should be trading at least at $18 per share.
In the near future, we will share our views about the FDA 510-k of Syneron's Ultrashape body sculpting product. Stay tuned!!!
By Value Advisers
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