Last week's earnings PR and conference call enable me to refine my
estimates of the challenge facing PMTI in its quest for profits:
Expenses
The PR revealed Q4 Sales and Marketing expenses of $2.7 million. This
higher than average cost was attributed to the transition to the
Coherent partnership, and was expected to be reduced in coming
quarters. During the conference call, it was stated that there had been
an almost dollar for dollar replacement of sales, marketing and service
costs, in switching to Coherent. For the sake of this analysis, I will
assume that Coherent can provide this support to PMTI at the same 21
percent it achieved in its own operations in the fiscal year ended 30
Sep 97.
Q4 General and Administrative expenses were $4.1 million dollars. Based
on recent quarters, I estimate CTI accounts for $1 million of this. I
will allocate $3 million to the laser business.
Q4 R&D cost $4.2 million. This unusually high expense was attributed to
the accelerated program to roll-out the Diode Laser System (DLS). I
will assume that costs will moderate somewhat to $3 million, which is
still a little higher than normal, to allow for introduction of
additional new products.
Exclusive of Sales, Marketing and Service, these quarterly expenses add
up to a projected $7 million per quarter.
Revenue and Profit Potential
The conference call revealed that 20 Epilasers were shipped between
mid-January and mid-February. However, the gross margin was described
as very low. Assuming a GP of 20 percent, and the aforementioned
allowance of 21 percent for Sales, Marketing and Service, there is zero
operating profit on Epilasers. This confirms warnings in recent SEC
filings, that despite anticipated higher Epilaser sales by Coherent,
margins would not improve.
I was amazed to hear them justify this by seemingly implying that they
knew from the outset that Epilaser margins would be low, but that it
was necessary to introduuce the cooling hand-piece to the medical
community as early as possible. Funny thing is, I don't recall hearing
that claim before! In fact I believe I recall assurances in past
conference calls that margins were improving significantly. (I will
search my tapes for the exact quotes, if anyone is interested.)
PMTI clearly is pinning its future hopes on the Diode Laser System,
which it plans to sell for $150,000 per unit. PMTI expressed confidence
that it could be manufactured and sold at a GP between 40 and 50
percent. This provides a basis to estimate PMTI's break-even point, at
it present price and expense structure.
At 50% GP and 21 percent Sales, Marketing and Service, PMTI would keep
29 percent per laser, or about $43,500. Therefore, to breakeven on the
aforementioned $7 million in G&A and R&D expenses, PMTI/COHR would have
to sell about 161 units per quarter!
The recent record Epilaser sales are equivalent to 60 units per
quarter. I seriously doubt there is a market for 160 Diodes per
quarter, and certainly not at $150,000 each! That would be nearly $100
million per annum, or nearly 60 percent of Coherent's total medical
laser revenue last year - on its much broader and more diverse product
line.
Also, consider that Candela's GentleLase Alexandrite should have its
hair-removal FDA-clearance rubber stamped in March, which it plans to
introduce at about $60,000. Look for an industry-wide price-war to
emerge soon after. ESC Medical, with its huge gross and operating
margins seems best able to withstand prolonged price-cutting.
In the unlikely event that a big demand materializes for the Diode
Laser System, there is good reason to question Star Medical
Technologies' ability to meet demand, especially at the claimed 40 to
50 percent GP. Bear in mind that this five year old R&D company has
thus far manufactured only high power diode laser arrays, for the OEM
market, revenuing less than $1 million per annum. Clearly, this is a
tiny company, which faces a steep learning curve in ramping up
production at acceptable GP.
I notice that Coherent did not add its almost obligatory support to
PMTI's 29 Jan PR announcing the Diode Laser System. Does this indicate
a lack of enthusiasm for the product, or perhaps the timing of its
introduction?
All things considered, realistically, I expect PMTI to suffer quarterly
losses well in excess of $5 million for the forseeable future. Part of
the problem is an unrealistic G&A. I estimate Laser G&A was 55 percent
of revenue in 1997, compared with Coherent's 9 percent. Mr. Valente has
some very serious cost-cutting to do in the core business, at the same
time that he tries to grow revenues.
CTI and Columbia
I did not include CTI in the preceding analysis (accept for its G&A
expense), because its revenues have been almost non-existent. Last year
at this time, CTI was promoted as the soon-to-be primary core business,
but thus far it looks like a bad joke. Frankly, it had company: MEHL,
TLZ and CLZR all suffered from puny revenue and high operating expenses
in their various revenue-sharing and wholly-owned laser clinics.
In the conference call, as in recent PR's, the name CTI was not uttered
by PMTI. CTI CEO Tom O'Brien was not in attendance at the conference
call. PMTI did express support for the Columbia/HCA partnership, but
admitted that the roll-out would be much slower than suggested in the
past. It referred to the existing centres as "beta-sites".
A Multi-Billion Dollar Market?
Unless PMTI can demonstrate that it is serious about selling
treatments, then it should cease and desist making reference to the
"multi-billion dollar" hair removal market. I say this, because laser
hair removal device sales are nowhere close to a $billion market.
Industry analyst and consultant Irving Arons, was quoted in the 15 Dec
97 Mass High Tech, predicting worldwide sales of hair removal lasers of
1,500 units in 1998. Assuming a mean unit price of $120,000, I estimate
only a $180 million market. And considering that 1,000 units may
already have been sold or placed in various revenue-sharing agreements,
and poor treatment cost:benefit, can market saturation be far away?
Arons was bullish about the treatment market, reportedly expressing the
belief that treatments would reach 5 million in the near term, creating
a market worth $2.5 to $3 billion. I strongly disagree. I sense a
drop-off in consumer interest, due no doubt to the extremely high cost
of treatment, and the gradual spreading of word about poor treatment
outcomes, and false and misleading promotion of treatment outcomes.
Local laser clinics are desperately canvassing electrologists, offering
cut-rate laser training, in exchange for fee-splitting deals. Clearly
they are failing to attract and keep sufficient clients on their own,
so they are turning to electrologists in order to survive. What a
contrast to one year ago, when some physicians boasted that they would
put electrologists out of business in 5 years. Now electrologists are
laughing as many of their erstwhile competitors drown in a sea of a red
ink.
In any event, the corporate laser treatment providers have come nowhere
close to seeing $billions. The following are almost exclusively
treatment related: CTI revenued $900,000 in 1997, but probably lost in
excess of $4 million. MEHL revenued perhaps $600,000 with operating
losses of $19 million. CLZR revenued $2.2 million, with operating
losses of $3.4 million. TLZ revenued $19 million in treatments, with an
operating LOSS of about $19 million ($26 million without the one-time
foreign licensing fees). TLZ's has suffered back-to-back declining
quarterly treatment revenue, of 19 percent and 9 percent, respectively.
Overall, these corporate ventures revenued a mere $22.7 million selling
laser treatments, mostly hair removal, and lost $45.4 million, or 200
percent - hardly a propitious start, and not much basis for hope for
the future.
Balance Sheet
PMTI's balance sheet is a disaster. Working capital is minus $9
million, and the current ratio is down to 0.60, suggesting potential
problems paying their bills. Shareholder equity is MINUS $6.2 million.
Cash and equivalents are down to $4.5 million. Even more alarming has
been the precipitous decline over the past two quarters. And despite
the restructuring fire-sale, huge losses continue, which can only
worsen the balance sheet.
There was optimistic talk during the conference call of obtaining
access to conventional lending sources, but I suspect that convertible
instruments will remain their only option.
There was also talk of equity restructuring, and a reverse-split was
not ruled-out. Touts on the Yahoo PMTI board have promoted a
reverse-split as a means for PMTI to raise its price above the $5
minimum required to qualify for the NASDAQ national market; however,
that is nonsense, because there are other criteria, which PMTI is
nowhere close to meeting. The only reason for a reverse-split would be
to stave-off delisting from the Small Cap market, should the stock
again sink below $1.
Takeover Prospects
Ever since the Coherent LOI, there have been rumours that it would buy
out PMTI. I suspect that may eventually happen, but only after PMTI has
bled nearly dry. I see it fetching no more than $5 million to $10
million, max!
Ted Molczan
molczan@fox.nstn.ca |
