A Beaten-Up, Hated $20
Billion Market
By Rob Fannon, editor, Phase 1 Investor
February 15 , 2008
The fight began with one careless comment...
"Hey honey, you're starting to develop that 'cellulose stuff' on the back of your legs, huh?"
About 15 years ago, my wife's uncle Brad pointed out the dimpling on his wife's thighs. Jill retorted that if he was going to be a jerk, he should at least use the right word.
Brad claims not to remember the "cellulite incident." Jill, on the other hand, recalls it with such detail, her face reddened as she told story at a recent family gathering...
My wife's aunt, just so you know, is in spectacular shape. But cellulite doesn't only affect couch potatoes. Jill, like 90% of all women, carries some of the notorious cellulite... and isn't happy about it.
Her despair hasn't gone unnoticed by late-night hucksters and the multibillion-dollar cosmetics industry, which have been shilling lotions and potions to smooth, shape, tone, and tan since time immemorial. The newcomer – promising even more glorious results – is the medical aesthetics (aka cosmeceutical) industry.
Almost as long as weight-loss snake oil has been sold, investors have been hosed by technologies that over-promise and under-deliver. But as I took a closer look at the medical aesthetics industry, I was surprised at the depth and breadth of the clinical data.
The best procedures and equipment are all FDA-approved... And the world's biggest consumer health care companies are taking notice (and large financial interests). In 2006, the cosmeceutical market approached $20 billion. Perhaps more interesting, this budding industry's growth rates (at about 20% a year) are nearly double the broader medical market.
This sector includes skin care, hair removal, and vascular therapy (spider vein reduction, tattoo removal, scar repair, etc.), which have all been around for decades. Other treatments, including cellulite reduction and overall body shaping, are newer, smaller markets and growing rapidly.
The weapon of choice in cosmeceuticals is the laser. In short, lasers use light to manipulate the skin and underlying tissue. Thanks to lasers, today more than 80% of medical-aesthetic procedures are noninvasive surgeries.
There were more than 35 million laser-based procedures worldwide in 2006, 42 million in 2007, and we should see another 20% increase into 2008.
The cosmeceutical industry is highly competitive. Dozens of companies offer a full range of laser and light-based procedures. Here's a sampling of the top names:
Company |
Symbol |
EV/FCF* |
Operating Margins |
Syneron Medical |
ELOS |
12x |
22% |
Cynosure |
CYNO |
14x |
15% |
Cutera |
CUTR |
5x |
9% |
Candela |
CLZR |
n/a |
-3% |
Palomar |
PMTI |
8x |
23% |
| *enterprise value/free cash flow projections |
|
Nearly every publicly traded name in the business has been dumped on in recent months. The leading stocks are trading near single-digit price-to-earnings ratios.
But if the industry has such promise, why the firesale? Investors think our economy is heading into a recession. And with money tight, many believe it's unlikely that limited "discretionary resources" will be spent on facelifts and liposuction.
Here's why I think the market's way off: First, medical aesthetics have moved well beyond traditional plastic surgeries. The newest developments are more versatile, less costly, and offer much more impressive results. Second, general practitioners are warming up to the private-pay cosmeceutical industry, offering more supply.
And finally, the emotions that surround cosmetic imperfections – think of Jill's red face 15 years after her husband spotted cellulite – are so high that most eligible patients would be more than happy to pay the right price to improve such flaws.
The onslaught of aging baby boomers with money to spend, a growing provider base, and the well-established safety, efficacy, and declining costs of these procedures point to a bright future in the medical-aesthetics industry.
Right now, we have a rare opportunity to invest in a huge emerging health care trend on the cheap. I believe this could be one of the biggest opportunities of the decade.
Good investing,
Rob Fannon
