The rise and fall of Erika B-Cure Laser (TASE: BCUR) is reminiscent of many consumer health and wellness product companies before it. Companies that brought to market products which promised a home solution to a troublesome problem, such as hair removal, bad posture, varicose veins, and more. These products are usually purchased online (in the past, from catalogs), or from a store, in a moment of frustration.
But ultimately, in many cases, consumers fail to comply with the treatment regimen, or the products themselves are not effective enough, or, a combination of the two: they do something, but not enough to justify the investment of time and effort.
Marketing a "hit product" - usually accompanied by exhilarating promises - can lead to a sharp increase in sales for a short period of time, but these levels cannot be maintained, especially for a one-time purchase product.
Will Erika B-Cure Laser, which developed a pain relief product, suffer the same fate? A product that gains immense popularity for a short time, and then loses its charm? Given the current state of its business, and the collapse of its share price, it may be that it is headed in this direction.
An IPO at half the valuation sought
Erika B-Cure is a medical device company that was founded in 2007 by Michael (Miki) Schlosser, the company's chairman, who currently owns about 74% of its shares, and his wife Zipora. In the years following its establishment, the company acquired the rights to the technology and patents on which the device it offers is based. The LLLT (Low Level Laser Therapy), as its 2021 prospectus stated, is used "for the treatment of pain, orthopedic problems, wounds, inflammations and other health phenomena", and this, "in accordance with the indications approved by the Ministry of Health". The device even underwent several trials designed to confirm its effectiveness.
The company published a first draft prospectus in May of last year, at the height of a wave of technology IPOs on the Tel Aviv Stock Exchange. Initially, it aimed for an overblown value of NIS 800 million, on the basis of the rapid growth of its business, in Israel alone (along with the launch of sales in the UK). But two months later, by the time offering commenced, the IPO market in Tel Aviv had cooled down and became more selective.
The result was an initial public offering at half the valuation originally sought, in which time Erika B-Cure raised about NIS 110 million from the public, with about one-fifth of the amount going to the owners in an offer for sale.
Even the reduced valuation, however, soon turned out to be excessive, as the share price collapsed, losing about 95% to date, making this the worst IPO during that period.
In the background was the rapid deterioration of Erika B- Cure's business, and wholesale changes in senior management. Today, it is traded at a negligible market cap of only NIS 35 million, reflecting its cash reserves as of the end of the second quarter, and hardly pricing in the company’s business activity at all.
And to pour salt into the wound, Erika B-Cure this week reported that a NIS 115 million lawsuit had been against the company, its current and former managers, and the IPO underwriters, with a request for the suit to be recognized as a class action.
The claim was filed in the Haifa District Court by non-profit organization "Hatzlacha - The Movement for the Promotion of a Fair Society", over a misleading detail in the prospectus: the forecast revenue for 2021, which proved far from reality, "a huge disparity, from which it is evident that even at the time of the offering the company was not growing but was regressing," the plaintiffs claim.
The plaintiffs further add, "There was no basis for believing that in 2021, the sales target the company boasted about would be reached" - the forecast was NIS 150 million - and "each time reports were given about negative developments, they included optimistic statements" to investors, for example, "’We are a growing company and this is something you will see in 2022 as well.’"
In practice, the opposite occurred. The plaintiffs claim, "A defense of forward-looking information cannot succeed. This defense does not apply when the company and its managers know that there is a reasonable chance, if not greater than that, that it will not meet the stated targets."
Erika B-Cure notified the TASE that, "The company is examining the details of the claim. At this initial stage, it is not possible to assess the chances of its approval as a class action and its chances of success, if approved."
Widespread public recognition thanks to aggressive advertising
Before its IPO, B-Cure Laser was widely recognized by the public thanks to an aggressive advertising campaign, which included well-known spokespersons who praised its virtues for curing pain: basketball legend Mickey Berkowitz, Olympic judoka Yarden Gerbi, actress Sandra Sade, radio broadcasters Didi Harari and Ron Koffman, and others.
Erika B-Cure's financial results leading up the IPO testified to its rapid growth. Revenue reached NIS 86 million in 2020, up from NIS 51 million in 2019 and NIS 36 million in 2018.
Gross profit also soared accordingly, and the company posted a net profit in 2020 of more than NIS 12 million, up from NIS 2.5 million in each of the preceding two years.
"Due to the coronavirus crisis, demand for home treatment with the company's devices has increased, as consumers lack the ability to receive treatment at clinics and doctor visits," Erika B-Cure stated in its financial reports.
Aside from the product’s growing popularity, the company also benefited from the fact that during the Covid-19 period the cost of marketing and advertising fell, because of lower demand from the tourism and leisure sectors, where activity had diminished. The company took advantage of this situation to advertise and market its product through online media at bargain prices.
So how did Erika B-Cure deteriorate to its current state in just one year? On the surface, it appears that the company used, as mentioned, a momentary spurt in business as a springboard for going public, but was unable to sustain it when market conditions changed - in its case, trends resulting from the Covid-19 pandemic that ended after a short time.
Asked about the sharp drop in sales, Erika B-Cure CEO Dr. Rom Eliaz claims that, "Following changes in the digital sector and privacy policies in mid-2021, the cost of 'leads' (reaching end customers) became very high.
"In addition, due to the increase in prices worldwide, disposable household income has declined. Also, following the end of Covid-19 restrictions - during which demand had increased for at-home care using the company's devices - consumer behavior changed in Israel, as it did around the world.
"The removal of the restrictions gives customers a variety of treatment options, including doctor visits and pain treatment clinics, as well as redirecting the consumer's financial means to a wide variety of uses that are not necessarily within the company's field of activity."
These trends were to the company’s detriment, but that is probably not the whole story. Erika B-Cure noted in its financial statements that, "the volume of returns is higher than expected" for the product.
First post-IPO report reveals troubles
The B-Cure device was apparently easy enough to market to consumers so plagued by pain they were willing to try anything. But the real potential of a product with a price tag of around NIS 2,000 only comes to light after the first wave of early adopters is over. Home use products marketed online are prone to the phenomenon of high initial sales that fall off afterwards.
B-Cure's troubles were already apparent with the publication of its first financial report after the IPO, for 2021. The company ended the year with sales of NIS 105 million (as mentioned, compared with a forecast of NIS 150 million) and with a loss of about NIS 10 million. At the same time, the senior management was replaced, including veteran CEO Moti Navon.
The reports for the first half of 2022 indicated continued deterioration: revenue of only NIS 28 million, a loss of NIS 25 million, and pessimistic forecasts that lack of growth would continue.
At the current burn rate, the company will run out of cash in less than a year. Erika B-Cure is therefore set to implement efficiency measures, a plan that includes reducing its workforce by 30% (it numbered 137 at the end of last year).
In Israel, the company is, at least, still making sales revenue. In the UK, a market that Erika B-Cure had hoped to break into post-IPO, things have become even more problematic, because of the difficulty of collecting payments from purchasers.
CEO Eliaz, who took up his position about two months ago, explains: "There are product returns and payment cancellations on a considerable scale in the UK. Failures were also discovered in the automatic activation of the billing and collection system, which led to a situation where customers were not charged automatically, and the company had to carry out manual collection through collection agencies, which caused increased expenses. Customer debt in the UK amounted to NIS 14.6 million at the end of June this year.
Erika B-Cure now seeks to switch to selling in the British market through a distributor, with which it will have to share revenue. Eliaz also hopes that company activity will grow on the strength of new products being marketed in Israel, such as AiGAiN, a new cosmetic medical device for home use. AiGAiN is based on a technology for firming facial skin and reducing wrinkles that Erika B-Cure is purchasing from controlling shareholder Schlosser. At present, the transaction mainly involves a commitment to purchase the new product, but it is expected that the company's sales network will create a synergy that will make possible improved profitability.
Have you considered adopting a model that includes consumables?
"Yes, absolutely. The company will update the market when it becomes relevant." Beyond that, Eliaz says, "The company will move ahead with the efficiency program and will consider entering into marketing both new products and those under development."
Published by Globes, Israel business news - en.globes.co.il - on September 12, 2022.
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