Analysts expect it to post an $80 million profit, a similar cash flow, and $400 million in sales in 2001. It is the global leader in its field and one of Israel’s largest companies. “It” is Lumenis (Nasdaq: LUME), formerly ESC Medical Systems, a manufacturer of medical and aesthetic laser-based devices, managed by Yacha Sutton.
Sutton’s connection with Lumenis began when ESC acquired Laser Industries, which he ran, in November 1997. In June 1999, when ESC was in critical condition and its existence was threatened, Arie Genger carried out a hostile takeover. He had received ESC shares because of his holding in Laser Industries. Genger knew Sutton from Laser Industries, and appointed him ESC Medical Systems CEO. Sutton and ESC Medical CFO Sagi Genger (Arie’s son), turned the company around within a short time.
ESC’s turnaround put the company back into the black after a period of heavy losses, allowing it to acquire Coherent, Inc.’s (Nasdaq: COHR) medical equipment division, Coherent Medical Group (CMG), for $230 million, of which $100 million was in cash, $92 million in shares, and the rest in a bond issue and future liabilities. The acquisition made ESC Medical the world leader in its field, and the company changed its name to Lumenis, derived from the Latin word for light, “lumen ”.
ESC’s 1999 crisis was partly caused by a series of acquisitions. Sutton said that following the takeover of ESC, the company’s management would have to be transparent, and cut redundant operations. ESC learned its lesson, and announced in advance that the CMG acquisition and merger would lead to savings.
Following the merger, Lumenis shares rose sharply, breaching the $30 level. The 11 September attacks caused the shares to drop, and Lumenis traded at $22.54 on 4 January, reflecting a market value of $900 million. Lumenis has jumped 30% in the past two weeks, following its announcement that it would meet fourth quarter revenue and profit forecasts.
“The company’s announcement was important,” said Sutton. “It gave investors the sense we would meet our quarterly targets, and shortists are possibly starting to accumulate shares.”
“Globes”: Although the share has risen in the past two weeks, it's still quite far from its peak. Does this reflect investors' distrust in the company's management?
Sutton: “I don’t think there's any basis for suspicion. I think we're quite open with the financial community. We try to be as open as possible with our accounts and business, to the point where it sometimes hurts us competitively. That openness is intended to remove suspicion.”
Could the suspicions be derived from your accountancy policy, which included a major depreciation?
“We work according to the accepted US accountancy rules, and we naturally have a CPA who oversees our reports. In addition, we explained the allowances precisely during our last conference call. Considering the acquisitions, the closing of seven offices (two production facilities and five sales offices), lay-offs following the merger, and the incentives plan for retaining 100 key employees, the allowance seems reasonable. It's important to note that the share surged following the conference call.”
You revised your sales targets after the CMG acquisition. Do you foresee $1 billion in sales?
“When we held a strategic meeting a year ago, we talked about $1 billion in sales within 3-4 years. That was prior to the CMG acquisition. That now looks less arrogant, after the acquisition. But, it's still easier said than done. The company’s growth rate is good, but not as meteoric as previously, mainly because the aesthetic surgery field is exposed to the market slowdown."
“We expect 13-15% growth in sales in 2002 compared with pro forma sales in 2001, which is good considering the market climate. But that won't give us $1 billion in sales this year. Interestingly, aesthetic surgery was our leading sector until recently, to the point that we neglected the medical side. We're now seeing a new trend, in which ophthalmology and surgery are growing handsomely, while we hope to overcome the slowdown in aesthetic surgery with new products. Aesthetic surgery devices now constitute 42% of the company’s sales, which reduces its exposure to the slowdown.”
You're aware that most Israeli companies stop growing when they reach a plateau of $1 billion in sales.
“I think that our current advantages, compared with the past, is that our company's structure is based on business divisions, each of which presents its own profit and loss report. Each division manager must come up with a growth strategy for his field. This structure gives us better leverage for growth.”
In other words, you delegate broad authority to your subordinates.
“I consider myself to be a manager who delegates authority. It's very hard not to delegate in a company of this size. When I took up the post of CEO in June 1999, I followed a more centralized policy, to the point where I personally signed every check. After we became profitable again, especially after the acquisition of CMG, reality forced me to delegate authority.”
Doesn’t your extensive use of company shares to finance various payments hurt the company?
“I'd differentiate between the instances in which we use company shares. In the CMG acquisition, we bought a company larger than ourselves, for which we lacked sufficient cash. We therefore structured the deal as we did. Without the use of shares, it would have been very hard for us to close the deal. I think the deal was a milestone for Lumenis, and considering the deal’s potential, it was the best thing that could have happened to the company."
“As for the employees’ options incentives, we have an incentive philosophy, which means we want to see every employee become a shareholder; indeed, every employee is a shareholder. The options are a part of the employees' incentives package, and we intend to continue this policy, despite the dilution of the company's shares. The options are given without a discount, by the way. Undoubtedly, that was the most effective way of recruiting workers during the high-tech boom."
“Lately, we've also used shares in the settlement we reached following the lawsuit against us. We tried to bridge the gap between the over $100 million claim and the settlement amount. The shares definitely are a tool we could use, that can be viewed as having greater than face value, in the event we have to pay cash."
“The cumulative effect of the realization of the shares and options is that the number of shares is increased, but I still believe it's within the limits of reason.”
Will the improvement in Lumenis’s balance sheet continue in 2002?
“I have no doubt the improvement in the company’s balance sheet will continue. The reasons will be the improved positive cash flow in 2002 and because there's room to improve the company’s working capital structure. These two differences will certainly bring about an improvement in the balance sheet structure and lower the company’s leverage.”
Do you believe there will be a dividend in the future?
“High-tech companies generally don't pay dividends, because they're expected to create value for the shareholders through growth, which is expressed through the shares themselves. I think our shareholders would prefer us to invest the dividends in R&D and marketing.”
Is it better to do business in Israel than in the rest of the world?
“Israel’s red tape was been significantly reduced in recent years. I remember a time when the bureaucracy was insufferable, and the situation has greatly improved. Our advantages in Israel mostly lie in R&D and production. Obviously, it's cheaper to manufacture in China or Mexico, but to produce products like ours, you need quality manpower that cannot be found in those countries. As for marketing, our edge in is the US. At the moment, our policy is to be close to our customers and markets. We therefore established sales centers in Amsterdam, China, and Japan. Sales, which used to be handled from Israel, are now handled in the field.”
Will the revival of the TASE lead you to consider dual-listing?
“We're considering the matter. It's not a priority, but we're thinking about it seriously in light of the revival of the TASE.”
Lumenis has several quite promising products. The most promising may be the Selecta 7000 laser, for treating glaucoma. The product has already received US Food and Drug Administration (FDA) approval. An estimated 50 million people worldwide suffer from glaucoma, which ultimately causes blindness. Another new Lumenis product, which has not yet received FDA approval, is GyneLase Diode Laser System for the treatment of excessive menstrual bleeding (menorrhagia). This innovative device also has enormous potential. The two products constitute only part of Lumenis’s potential.
Nevertheless, Lumenis is traded at a market value of only $900 million, while Given Imaging (Nasdaq: GIVN), which also has innovative products, but few sales, is traded at a market value of $435 million.
“Given Imaging is traded on the basis of its potential,” says Sutton, “while Lumenis is traded on the basis of profit per share.”
When do you expect to receive FDA approval for GyneLase, and do you expect further approvals soon?
“We're always in contact with the FDA. I expect to receive several approvals in 2002. As for GyneLase, the original plan was to receive the approval toward the end of 2002, so we're not yet relying on this product in the US market. But the FDA isn't the only important authority. We're seeking approval for our products in countries like Japan, where the approval process can take 3-4 years."
How much does each Selectra 7000 cost, and what are your sales forecast for 2002?
“Each Selectra 7000 costs $55,000. Sales potential largely depends on whether it will become a standard glaucoma treatment. “
Will you maintain your market leadership in the years ahead?
“I think so. We combined the leading ophthalmic, aesthetic, and dental companies into Lumenis. We united the best companies and are far ahead of the competition, so I have no doubt we'll maintain our lead. However, I have no doubt we'll see consolidation among our smaller competitors.”
Will Lumenis profit from the end of the global economic crisis?
“I have no doubt that Lumenis will benefit from the end of the crisis. We achieved our results despite the current crisis, so we'll definitely benefit from an improved economic climate.”
Are you planning a shares issue?
“We're definitely examining a possible issue. An issue at the current share price isn't on the agenda. We'll issue at a higher price that will dilute the shareholders less, in order to improve the balance sheet structure.”
Published by Israel's Business Arena on 7 January 2002