Cutera, Inc.

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Cutera, Inc.


3240 Bayshore Boulevard
Brisbane, California 94005
U.S.A.
Telephone: (415) 657-5500
Fax: (415) 330-2444
Web site: http://www.cutera.com

Public Company
Incorporated: 1998 as Acme Medical, Inc.
Employees: 215
Sales: $75.6 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: CUTR
NAIC: 334510 Navigational, Measuring, Electromedical, and Control Instruments Manufacturing

Listed on the NASDAQ, Cutera, Inc., is a Brisbane, California-based manufacturer of laser and other light-based systems used to permanently remove hair, treat vascular conditions such as leg and facial veins, treat pigmented lesions, and rejuvenate skin. Because Cutera equipment is easy to use, it is sold to primary care physicians and gynecologists in addition to plastic surgeons and dermatologists. One reason the company is set apart in the crowded field of medical lasers is that the systems are upgradable. Instead of buying a completely new system every few years, Cutera customers are able to add new aesthetic applications and capabilities to their base system at an incremental cost. Cutera offers three platforms. Xeo is a high-performance, multi-application platform, able to remove hair as well as perform skin rejuvenation and vascular treatments. The Solera system offers the Titan and Opus product lines. Titan uses infrared light to achieve deep dermal heating for the rejuvenation of skin in the face, neck, and abdomen. The Opus systems are compact and versatile, employing Intelligent Pulsed Light to permanently remove hair, rejuvenate skin, and treat conditions such as facial telangiectasia, pigmented lesions, and solar lentigines. The Cutera platform, CoolGlide, offers three high-performance products: CoolGlide CV to remove hair, CoolGlide Excel for vascular therapy, and CoolGlide Vantage for skin rejuvenation. Cutera products are sold in some 30 countries around the world. Director Annette Campbell-White, responsible for providing the company's original funding through MedVenture Partners, owns about a 21 percent stake in Cutera.

FOUNDING THE COMPANY IN 1998

Cutera was founded as Acme Medical, Inc.. by Chief Executive Officer Kevin P. Connors, research head David A. Gollnick, and four colleagues from Coherent Medical Group, a division of Coherent, Inc., a California maker of laser systems used in a wide variety of scientific and industrial applications. The splinter group that formed Acme wanted to develop a new generation of laser and light-based systems suitable for use on tanned skin and all skin types.

Born in Ohio in 1961, Connors came to California to earn an engineering degree at California Polytechnic State University in San Luis Obispo. After graduating in 1986 he went to work for Coherent Medical as a manufacturing engineer and began working his way up through the ranks. In 1996 he was named president and general manager of the unit. Gollnick held a degree in mechanical engineering from Fresno State University, and shortly after Connors became president at Coherent Medical he was tapped to become vice-president of research and development. Connors left Coherent in June 1998, Gollnick followed him a month later, and in August 1998 they incorporated Acme.

Even as Acme Medical was setting up shop in a Palo Alto garage, Annette Campbell-White was meeting with Connors, who was armed with little more than a PowerPoint presentation and a design concept. She boasted one of the more interesting personal stories of San Francisco Bayarea venture capitalists. Born in New Zealand in 1947, she was the child of a mining engineer whose work took him around the world and resulted in her growing up in diverse places such as Rhodesia, South Africa, Australia, England, and Canada. She earned a degree in chemical engineering from the University of Cape Town in South Africa. After working for British Oxygen in London, she came to the San Francisco area to take a position at the Stanford Research Institute. She adopted Berkeley as her home and soon launched a consulting firm. With the rise of biotechnology in the 1970s she became an analyst at Hambrecht & Quist, the first San Francisco investment firm to focus on the new field. It was also her first stab at finance, but she proved to be a quick learner and became a major player in biotechnology. She was involved in the industry's first major public stock offering, Genentech, and also scored a major success when in 1978 she emptied her savings account to buy a penny stock, a company called Diasonics, trading at five cents a share. When the company went public five years later, her investment enjoyed a 132-fold increase. She became the first female partner at Hambrecht & Quist after just two years. In the 1980s she moved to another San Francisco investment house to launch a healthcare venture fund, but the plan fizzled when the stock market crashed in 1983 and she was diagnosed with breast cancer.

Surgery appeared to be successful and Campbell-White founded the one-person $12 million MedVenture fund in 1986. By the end of the decade, she was again diagnosed with breast cancer and once again had to juggle her health concerns and career trajectory. In 1995 she established the $33 million MedVenture II fund, and soon began raising money for MedVenture III. Campbell-White had difficulty finding compatible partners for her latest fund, which she hoped would have $150 million at its disposal. Even at that level it would have been a small healthcare fund, but as potential partners failed to pan out the fund dipped below the $100 million level. As a result she adopted a strategy of becoming the sole investor of start-up companies. While risky, it was an approach that, in the words of the San Francisco Chronicle, allowed MedVenture III "to buy a good chunk of stock cheaply and enjoy the clout of a big investor." Acme Medical would be an example of such an investment.

Campbell-White was willing to serve as the only founding investor of Acme Medical, taking a $2 million position in the company in October 1998, which subsequently swelled to a 43 percent stake at a cost of $3.75 million because she recognized the commercial potential of the approach the company was taking with laser technology. Acme was looking to develop longer wavelength lasers, which had been neglected after short-wavelength lasers proved to be more effective in removing hair. The longer wavelength lasers offered some overlooked advantages, however. They did not cause as much epidermal heating that could cause skin damage, something that was especially important for darkerskinned people or those with a sun tan. Moreover, Acme attracted the interest of Campbell-White because of its clever approach to selling aesthetic medicine laser systems. In essence, it wanted to sell customers the big box first and later offer them plug-ins. In this way, laser systems became more affordable and opened up the range of customers Acme could attract beyond the narrow pool of plastic surgeons and dermatologists.

COMPANY PERSPECTIVES


With our easy-to-use products, dermatologists, plastic surgeons, gynecologists, primary care physicians and other qualified practitioners can offer safe, effective and non-invasive aesthetic treatments to their patients.

MARKETING THE FIRST PRODUCT IN 1999

Clinical evaluation commenced in December 1998. In June 1999 the company received permission from the U.S. Food and Drug Administration (FDA) to market a laser system for the treatment of vascular lesions, including leg and facial veins. A month later Acme changed its name to Altus Medical, Inc., and later in the year began selling its first product, CoolGlide. In the short year, the company, situated in an 8,000-square-foot facility in Burlingame, California, generated about $100,000 in net revenues.

In June 2000, Altus received permission from the FDA to market CoolGlide's ability to remove hair, and in January 2001 the FDA allowed the company to market the CoolGlide CV as a way to permanently reduce hair on all skin types, the first long-pulse 1064nm laser to receive such clearance. With more approved uses for CoolGlide, Altus enjoyed strong sales in 2000. Revenues totaled more than $9.5 million and the company posted its first profit, topping the $1 million mark in earnings.

Altus introduced CoolGlide Excel in March 2001, the first 1064nm laser available for the treatment of leg veins. In addition to increased features, the new model was also easier to use than earlier units. Later in the year, in August, Altus added to its product offerings by acquiring the North American rights to distribute Medlite C, a laser system for the removal of tattoos and pigment lesions. Medlite, manufactured by Santa Clara, California-based Continuum Electro Optics, also could be used to treat leg and facial veins. Revenues continued to increase rapidly for Altus, more than doubling to $19.3 million while net income kept pace, totaling $2.3 million.

The prospects for the company appeared bright because of the growing demand for light-based hair removal. In 2001 more than five million treatments were performed, generating $1.3 million in fees. With that amount estimated to grow 300 percent from 2000 to 2004, according to Investor's Business Daily, Altus looked to take advantage of the trend and its strong growth track by filing for a $60 million initial public offering (IPO) of stock in early 2002, led by UBS Investment Bank and Lehman Brothers holdings Inc. Casting a pall over the offering was a patent infringement suit filed by Palomar Medical Technologies Inc. and Massachusetts General Hospital. There was also some concern that the company was not yet firmly established and might be vulnerable should a price war break out in the highly competitive medical laser field. In the end, however, deteriorating conditions in the stock market were the key to Altus postponing the IPO in the summer of 2002.

In 2002 Altus introduced CoolGlide Vantage, which the company billed as the first microsecond 1064nm laser capable of reducing pore size and fine wrinkles and improving overall skin texture. Again the new product was compatible with previous generations of the CoolGlide platform, helping to drive continued improvement in sales to $28.3 million in 2002. Although net income dipped to $660,000, earnings staged a strong rebound in 2003 to more than $3.1 million on sales of $39 million. The year 2003 also saw the introduction of a second upgradable product platform, Xeo, which combined laser and Intelligent Pulsed Light technologies.

ADOPTING THE CUTERA NAME IN 2004

At the start of 2004 Altus changed its name to Cutera, Inc., and moved to a larger site in Brisbane, California. The company also prepared to conduct its long-delayed IPO of stock. With Piper Jaffray serving as the lead underwriter, supported by the participation of SG Cowen and RBC Capital Markets, the IPO was completed in March 2004. With shares selling at the low end of the proposed $14 to $16 price range, Cutera raised $46.3 million, this despite a lingering patent infringement suit. The stock then began trading on the NASDAQ.

In 2004 Xeo SA was brought onto the market, an Intelligent Pulsed Light system designed for skin rejuvenation. Furthermore, in 2004 Cutera introduced its third platform, Solera, a compact tabletop unit, weighing about 45 pounds (compared to the 120 pounds of the other Cutera products). The company also offered Titan, a tissue-tightening infrared light system compatible with both the Xeo and Solera platforms. In addition to tightening skin in areas such as the abdomen, thighs, and underarms, Titan also was used to tone and tighten the neck and face. Because of their size, versatility, and price, Solera product lines allowed Cutera to target a new range of customers, which included health spas. As a result, sales continued to soar, spurred in large measure by the willingness of aging baby boomers with disposable income to spend money on remaining youthful in appearance. Revenues reached $52.6 million in 2004 and net income increased to $3.8 million. Much of this growth came from increased international sales, a focus for the company in 2004 when it beefed up its Asian sales operation and built up its distributor network around the world.

KEY DATES


1998:
The company is founded.
1999:
The first product is introduced.
2000:
The company enjoys its first year of generating revenue and profit.
2003:
The multi-application flagship product Xeo is introduced.
2004:
An initial public offering of stock is completed.
2006:
A patent infringement suit is settled.

Cutera continued to expand its global operations in 2005, highlighted by the opening of European headquarters in Zurich, Switzerland. In addition, the company expanded its domestic marketing effort, increasing the number of North American sales territories from 32 at the start of the year to 47 by the close. Another product was introduced in 2005 to drive sales, Solera Opus, which used pulsed light technology to remove hair and rejuvenate skin. Cutera also offered a pair of flashlamp handpieces, ProWave 770 and AcuTip 500, used to remove hair and discrete lesions. Sales for the year totaled $75.6 million and net income soared to $13.8 million.

Cutera maintained its strong growth in 2006, again aided by a product introduction. In October, LimeLight was launched, a programmable wavelength three-in-one device, suitable for use in skin rejuvenation and the treatment of pigmented lesions and facial telangiectasia lesions. Cutera also benefited in 2006 when the cloud of the Palomar patent infringement suit was finally lifted. Cutera agreed to pay $22 million to settle the matter, an amount that covered past royalties, interest, penalties, and Palomar's legal costs. The parties also agreed on continuing royalties for the use of Palomar technology in hair removal handpieces.

Ed Dinger

PRINCIPAL COMPETITORS

Candela Corporation; Laserscope; Palomar Medical Technologies Inc.; Lumenis; Syneron Medical Ltd.

FURTHER READING

Emert, Carol, "Annette Campbell-White; Trail-Blazing Venture Capitalist Does It Her Way," San Francisco Chronicle, May 12, 2002, p. G1.

Hennessey, Raymond, "Made It by a Hair: Cutera's IPO Hits the Market," Wall Street Journal, April 1, 2004, p. C5.

Much, Marilyn, "Beauty May Be Only Skin Deep, but if Your Skin Needs Improving ," Investor's Business Daily, April 7, 2005, p. A06.

Saito-Chung, David, "Its Growth Isn't Nip-and-Tuck," Investor's Business Daily, September 26, 2005, p. B02.

Shinkle, Kirk, "These Guys See the Beauty of an IPO," Investor's Business Daily, January 23, 2002, p. A08.

Watkins, Steve, "You're So Vain, You Probably Think This Company Is About You," Investor's Business Daily, October 21, 2005, p. A10.

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Cutera, Inc.

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