Too Cool for Its Own Good

11/20/2012 7:45 am EST


This cutting edge company has carved out a niche for itself, but it doesn't seem like its cool idea is helping heat up the stocks, notes Doug Casey in Casey Extraordinary Technology.

Zeltiq Aesthetics (ZLTQ) was founded to develop and commercialize a noninvasive product for the selective reduc­tion of fat. The company’s first product, the CoolSculpting System, does just that.

CoolSculpting targets and cools fat cells to temperatures that trigger their natural death. Because lipids crystallize faster than normal cells, there is no damage to nerves or other tissue.

Over the next few weeks and months, the fat cells shrink and begin to die as the patient’s own body metabolizes them and naturally eliminates them. The overall fat layer is reduced, which results in a noticeable and measureable reduction in the fat bulge around the targeted flank—an area commonly referred to as the “love handles.”

The procedure costs about $1,500 for the patient, only takes about an hour, and is virtually painless. It’s completely noninvasive and doesn’t even require a local anesthetic. After the treatment, there is no down­time, and patients can usually go back to work the same day.

CoolSculpting is FDA approved for the selective reduction of fat around the flanks, as well as for the treat­ment of “belly fat,” or nonsurgical reduction of fat in the abdominal area. The company has also received regulatory approval or is otherwise free to market CoolSculpting in 53 international markets, where use of the product is generally not limited to specific areas.

During the 12-month period ending June 30, the company grew its installed base by 100% to 1,257 CoolSculpting systems. Zeltiq is currently targeting a global market of 4,000 to 5,000 physician sites for the system.

Revenue has been growing nicely, up 28% year over year to $22.3 million in the second quarter of 2012. Growth is poised to remain strong over the coming years, thanks to strong demand for a noninvasive alter­native to liposuction and the company’s “razors and blades” business model.

Zeltiq generates revenue from the sale of its CoolSculpting machines as well as a recurring revenue stream from each procedure, which grows with the installed base. In the first half of 2012, procedure fees accounted for approximately 47% of total revenue, compared to just 31% in the first half of last year.

So there’s a lot to like about the technology and the business. But we’re recommending the company as a watch instead of a buy today, because there are a number of red flags too.

The company has badly missed earnings estimates for all three quarters it’s been public. Plus, the firm’s CFO resigned at the end of July, after the president and CEO had just stepped down in April.

Further­more, operating efficiency has barely improved over the past 2.5 years. While revenue increased from $25.5 million in 2010 to $76.2 million in the trailing 12 months ended June 30, net loss has in­creased from -$13.5 million to -$26.7 million.

None of these are good signs, so for them—as well as some other reasons relating to executive compensa­tion and financial reporting—we’re not recommending the company today. But we do believe you should keep an eye on it. We’ll be watching it too, and we’ll let you know if things turn around, and the stock starts to look good from a risk-reward perspective.

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