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Biotech / Medical : Palomar Medical Technologies, Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Dave Peterson who wrote (658)	5/22/1998 8:10:00 AM
From: Ted Molczan	Read Replies (2) \| Respond to of 708

Dave, Losing the MEHL patent suit would have been far more relevant to PMTI than winning it. The reason being that PMTI has been able to sell its lasers unimpeded ever since the suit was filed in Mar'97, yet has lost big money on each laser sold. Losing might have meant that they would have had to pay damages and royalties, but winning simply means business as usual. Winning the suit, will not help them sell more lasers, but it will help them reduce their expenses a little. Beware of those who are touting a turn-around based on the recent Q1 results. They are betting that investors will be too lazy to look at the detailed quarterly earnings of the continuing operations over the past year. I have done so, and found them very revealing. For example, revenue is actually slightly lower than in F97Q2, and GP is as bad as ever. Expenses are not much different than they were last year. They look good in comparison against only Q4, because that quarter saw unusually high R&D due to the accelerated LightSheer roll-out, and higher sales and marketing costs related to the transition to Coherent. But expenses are not much lower than the average of the first three quarters of F97. Considering that they have already rid themselves of Tissue Technologies and slashed CTI, that is not a good sign. In my opinion, the most difficult expense cuts are yet to come, and it will be interesting to see whether or not PMTI can make them, and grow the business at the same time. One big problem is that sales and marketing expenses are too high, because of the high commission paid to Coherent - about 30 percent per laser. That means they will have to slash S,G&A and R&D, which are also FAR too high in relation to revenue. Compare them against Coherent and Candela, and you will see what I mean. In the conference call, Joe Caruso admitted that the projected profit for Q4 is based on achieving a GP significantly in excess of 50 percent. They spoke very confidently about quickly reaching the 40 to 50 percent GP range with the LightSheer, but keep in mind that last year, the same senior management team was bullish on improving Epilaser's GP to around 35 percent, but never came even close. Star Medical, manufacturer of the LightSheer, previously sold only inexpensive diode array components, so has no history of manufacturing a complex product. So it will be interesting to see whether or not they can achieve the hoped for margins. Keep in mind that relatively successful competitors like Coherent and Candela work hard to achieve about 50 percent GP, while PMTI has never done better than about 25 percent, and usually MUCH worse. So if Q4 profitability depends on achieving significantly greater than 50 percent GP, I consider it a long-shot. Perhaps Valente and company will pull off a miracle, but that remains to be seen. The Q1 results are in NO WAY indicative of a turn-around. Most of last year was taken up with divesting the many unprofitable "dogs and cats" bought by Steven Georgiev. That was relatively much easier than the task they are facing right now: ramping up production and GP, while slashing expenses. Also keep in mind that with outstanding shares now at nearly 65 million, and millions more on the horizon, they will need a whopping profit in Q4 to justify much more than the current share price. Finally, through my consumer research, I sense a reduction of interest in laser hair removal, perhaps because sufficient time has passed for consumers to learn that the results are not permanent, and do not last long enough to justify the high prices being charged. I doubt that many doctors are profiting from their hair removal lasers, so how much longer can the present fad last? In the cosmetic laser market, product life cycles are about 5 years, from introduction to market saturation. Laser hair removal is now entering its 4th year. Media coverage is down sharply from a year ago. I may post my detailed numerical analysis of PMTI, if I sense that there is much interest or need. Good luck with your investments. Ted Molczan molczan@sympatico.ca