Palomar, Cutera, Cynosure & Alma: Winners & Losers

 About Palomar's current market situation:

Revenues were down 11% for the quarter year over year. The company points out that the second quarter last year contained a huge royalty payment from Cutera for a patent license agreement. Therefore, it would like investors to subtract the payment before comparing the two quarters.

Investors weren't buying it. The stock has dropped 18% since its pre-earnings release close on Wednesday last week. The problem is that royalty payments are becoming a substantial part of Palomar's business. Just last April it added Alma Lasers to the list of companies that pay it royalty payments -- the rest of the list includes Cynosure and Laserscope, a subsidiary of IRIDEX.

If you do discount the large royalty payment, the second quarter looks pretty good for Palomar. Product revenues were up 31% year over year. Its new StarLux 500 seems to be performing well with many existing customers trading up from the StarLux300. Product revenues were also driven by increased growth outside the U.S. Sales shifted from 14% foreign sales in the second quarter last year to 29% in the most recent quarter.

There is something to the company's argument that sales growth is the more important measurement. I'd rather see a company growing sales substantially than growing revenues through licensing its technology. The patents on that technology will eventually run out and then what's the company going to do?

Between the sales growth and all the royalty payments, Palomar has nearly doubled its cash and securities from a year ago and now has $121 million in the bank. The company should probably use some of that money to pick up new technologies that might complement its current lasers. It's also developing mass-market consumer products in combination with Johnson and Johnson and Gillette, a division of Procter and Gamble, so some of the money could be used for increasing research and development of home-based products.

Via the Motley Fool

According to CIBC World Markets, the cosmetic laser market is valued at about $1 billion worldwide, and sales grew 15% in 2006 over the previous year. While hair removal remains the top use of cosmetic lasers, with growing numbers of non-core markets acquiring them -- hospitals, family practitioners, OB/GYNs, and even spas and beauty salons -- additional uses will continue to climb in importance.

Investing in the future
Competition is particularly cutthroat and research and development continues to play a central role in which company remains dominant. Based on revenues, Candela (Nasdaq: CLZR), which says it created the aesthetic laser market, is top dog with $154.5 million in sales at the end of 2006, followed closely by Palomar Medical Technologies (Nasdaq: PMTI). On a market valuation basis, however, Candela is actually at the bottom of the heap, with its shares declining in value from numerous earnings misses.

The power of ideas
A company's intellectual property remains its best defense against losing superiority. Once it turned profitable, Palomar had the wherewithal to defend its patents, and it began notifying the industry of violations. It demanded -- and ultimately received -- licensing agreements and royalties from many rivals, including Cutera, Lumenis, and most recently privately-held Alma Lasers.

It's also lined up a licensing agreement with Procter & Gamble's Gillette for the manufacture of a home-use device -- as has Syneron -- and another with Johnson & Johnson, though both are still years away from being mass marketed.

Unlike its peers, Candela has chosen not to pay up, instead countersuin on charging that Palomar has infringed on Candela's patent portfolio. In a bit of jury-shopping, it's filed lawsuits in both Massachusetts (where both it and Palomar are based) and in the eastern district of Texas, which has a reputation of siding with patentholders.