Voce Capital’s Latest Public Letter To Solta Directors Demands Sale Of Company

by Scott Matusow
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Submitted by Scott Matusow as part of our contributors program.

Yesterday, Voce Capital released a letter sent to the Solta Medical (SLTM) Board of Directors (BOD) expressing its displeasure in the company’s appointment of Mark M. Sieczkarek as interim CEO of the company. Last year, Voce’s continual criticism of Obagi Medical eventually caused the Obagi board to relent and sell the company to Valeant (VRX) for a cash price of $24 a share, or $418. The deal closed in April of this year.

Prior to the Obagi deal, I successfully predicted the company would be acquired, favoring Allegan to take it. I was wrong on the company, as Valeant stepped in and acquired Obagi.

With Solta, I am predicting Valeant will acquire the company at a minimum acquisition price of $3.75 a share, or $300M.

Voce was successful in scheduling a special shareholder proxy meeting/vote for Obagi (Obagi was acquired before meeting ever took place), and it’s likely this can happen here if the Solta BOD decides to entrench itself. Shareholders have already overwhelmingly voted down a company proposal to increase the outstanding share count to $200M, and every long time shareholder I have spoken to also wants Solta sold.

The Solta BOD needs to carefully think this situation through. As we can see, the shareholders have had enough. While the company is growing and revenues up over 15% year over year, Solta cannot maximize its product line in its current position, and especially without shareholder support.

The last thing the Solta BOD should want is a nasty proxy war, and knowing Dan Plant’s Modus of Operandi, factored in with activist investor’s Dave Callan’s record, the BOD stands to lose a lot more than their jobs — they stand to lose compensation if they fight Voce and Callan.

Dave believes that Solta has great assets, and in the hands of a larger operator, especially one with strong oveseas sales force, can bring in potentially $1B in sales rather quickly. Valeant has sucessfully levered Obagi’s skin care line, and I believe they can easily do so with Solta’s products.

Solta’s products:

  • The Fraxel repair system– Designed for use in dermatological procedures requiring ablation, coagulation, and resurfacing of soft tissue, as well as for rhytides, pigmentation, dyschromia, fine lines, acne, surgical scars, deeper lines, wrinkles, and actinic keratoses. This market internationally is growing at a very fast rate.
  • The Clear + Brilliant system — this system is a treatment to improve skin texture and help prevent the signs of aging skin.
  • The Thermage CPT system — a non-invasive treatment options using radio-frequency energy for skin tightening which is also growing internationally at a very fast rate.
  • The Liposonix system– Liposonix® is a proven, unique and effective aesthetic device built on ultrasound technology to deliver Custom Contouring™ fat reduction. Liposonix ultrasound energy is focused in the subcutaneous fat layer beneath the skin, eliminating unwanted fat cells around the waist.

The above are all valuable assets that in the hands of a capable operator who has the money to properly lever these assets, could drive billions in future sales. Solta’s asset potential has outgrown its size, much like the Obagi situation.

Potential bidders for Solta:

Valeant Pharmaceuticals:

From Valeant’s Quarterly Highlights:

“Product sales at Valeant amounted to $1.06 billion during the second quarter of 2013, up 43% year over year.

Strong sales in the U.S. Promoted (previously U.S. Dermatology) and emerging markets segments contributed to the increase.

Total sales from developed markets jumped 37% year over year to $792 million fuelled by a 90% jump in U.S. Promoted sales to $487 million.

The aesthetics franchise, OraPharma, skin care, and topical acne portfolio drove growth along with the strong performances of Dysport and CeraVe.

Sales from emerging markets grew 26% year over year driven by continued strong growth in Poland, Russia, Brazil, Mexico, South East Asia and South Africa.”

We can see from above that Valeant is really doing a great job levering and growing its assets revenue and profit stream, and especially gaining a strong presence in emerging markets. Solta recently received regulatory approval in several foreign markets where Valeant has a strong presence. From Solta’s earnings call transcript we read:

The Liposonix tip production issue that affected the first quarter has been fully resolved and we did see the growth internationally in the second quarter and benefited from regulatory clearances in Singapore, Brazil and Taiwan. The pricing pressure did not affect international markets for Liposonix because sales there are primarily through distributors and we have not seen the same level of competitive presence outside of North America. Total revenue from Liposonix treatment kit in the quarter rose by 10% from the same period last year.

Large companies such as Valeant and Allegan (AGN) have focused more on international emerging markets, spurring acquisition interest in the medical device, aesthetics, skin care, and augmentation segments.

Allegan: Allegan also recently reported a very good quarter, with growth in Asia increasing:

“We’re enjoying very strong in-market growth in Russia, Japan, China and most countries in East and South Asia. In the U.S., based on survey data, it seems that the market in the first half of the year grew high-single digits, and that BOTOX, at 81% market share in April, enjoyed the same share as in April 2012.”

The global botox market is forecast to reach $2.9 billion by 2018, with the entire global market for facial aesthetics predicted to reach $4.7 billion. Solta recently announced a new product called the Thermage® Total Tip 3.0. Thermage uses radiofrequency technology to non-invasively help smooth, and contour the skin, as well as temporarily reduce the appearance of cellulite, in a single treatment with little to no downtime. The Thermage Total Tip is effective for facial treatments because it delivers uniform, volumetric bulk heating. Targeted, uniform, bulk heating could allow dermatologists to treat patients effectively while maintaining patient comfort.

We can see from above that Solta would be a good fit for Allegan as well, and I believe they are one of the three interested companies to bid for Solta as mentioned in a letter from Voce released July 19th of this year. Skin and beauty care products are quickly gaining worldwide traction, especially in Asia.

I suspect the 3rd company Voce may be referring to could be Nu Skin Enterprises Inc. (NUS).

Nu Skin develops and distributes anti-aging personal care products and nutritional supplements under the Nu Skin and Pharmanex brands worldwide. It offers a wide range of skin-care systems and treatment products, including Spa Systems, Body Spas, Body Shaping Gels, Dermatic Effects Body Contouring Lotion, and Transformation anti-aging skin care systems.

Nu Skin also had a very good quarter, which has been a common theme among companies in the beauty and skin care segment. Nu Skin is also seeing accelerated growth in Asia as the conference call comments confirm:

“Turning our attention to a few geographic markets, greater China’s growth obviously continues to be very strong. Sales in the second quarter in Mainland China were $198 million. And as we announced a few weeks ago, we’re pleased that China recently approved 5 additional direct-selling licenses, which will become increasingly important as our business develops throughout China. We continue to invest to sustain growth in this market and are committed to working to ensure our long-term success there. From what we’re seeing, we believe that the market continues to have significant upside potential. Our north Asia region also had a very strong quarter. South Korea generated an impressive 54% quarterly gain in local currency and continues its long run as a stellar market for us. And Japan had another solid quarter with 5% revenue growth. The weakness of the yen against the dollar is obviously hurting our reported results, but we feel good about the direction of our business in Japan and we believe that North Asia can be $1 billion market for us in the next few years.”

Solta’s current market cap is $172.28M, which is under 1x price to sales. With its product line, anyone of the three companies above would literally be stealing the company for anything under $350M, in my strongest opinion.

There remains at least one other possible bidder for Solta that could get involved.

Herbalife Ltd. (HLF): Herbal life’s main revenue stream comes from weight management, targeted nutrition, energy, sports, fitness, and outer nutrition. However, the company does offer products that include skin cleansers, toners, moisturizers, facial masks, shampoos and conditioners, body-wash items, a selection of fragrances for men and women, as well as anti-aging products.

From Herbalife’s recent strong quarter’s transcript, we also find the company is experiencing strong growth in Asia:

“The strong performance in the second quarter was an acceleration over the record results achieved in the first quarter. Volume points grew 14% year over year with growth in each of our six regions. South and Central America grew 33%, Asia Pacific grew 1%, China grew 49%, EMEA grew 16% and Mexico grew 8%.”

Herbalife might consider putting in a bid for Solta to better take advantage of its strong and growing presence in Asia, and as mentioned, to establish a stronger position in the anti-aging segment. Adding more diversity in its product line while leveraging its resources in Asia would produce a strong revenue stream from Solta’s assets.

Conclusion:

Solta’s former CEO, Stephen J. Fanning was basically ousted, and his BOD position relinquished. Under his watch, Solta shareholders have experienced serious shareholder equity losses. The company engaged in several acquisitions to acquire their very valuable asset line. However, the company is too small and not equipped to lever these assets correctly at this time. Under correct management combined with time to develop, the acquirer could grow into a significant player in its space. Shareholders are disgruntled, which is evident by their strong support in rejecting a proposal to increase the outstanding share count by 100M, with a vote tally of 39.1M against dominating the 31.5M in favor of. In addition, many shareholders do not know what they are voting for and many times casually approve all measures. So, to have a rejection like this is not typical and takes a large number of knowledgeable shareholders.

It was likely that if shareholders approved the additional 100M shares, Fanning would have likely gone on another spending spree, buying good assets, but with a weak mechanism in place to correctly monetize them.

BOD members, especially the new interim CEO Mark M. Sieczkarek, have been acquiring shares, and have actually been shelling out their own cash for some of these shares:

Insider Transactions Reported – Last Few Months

Date Insider Shares Type Transaction Value*
Jul 23, 2013 KU MINGO Officer 13,212 Direct Statement of Ownership N/A
Jul 22, 2013 HEIGEL DOUGLAS W Officer 17,167 Direct Option Exercise at $0.70 per share. 12,016
Jun 5, 2013 COVERT HAROLD L Director 31,627 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jun 5, 2013 GRAEBNER LINDA Director 31,627 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jun 5, 2013 STANG ERIC B Director 31,627 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jun 5, 2013 SIECZKAREK MARK M Director 31,627 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jun 5, 2013 MCCARTHY CATHY L Director 31,627 Direct Acquisition (Non Open Market) at $0 per share. N/A
May 30, 2013 GRAEBNER LINDA Director 10,000 Direct Purchase at $2.20 – $2.23 per share. 22,0002
May 17, 2013 MCCARTHY CATHY L Director 10,000 Direct Purchase at $2.13 per share. 21,300
May 10, 2013 GRAEBNER LINDA Director 5,000 Direct Purchase at $1.97 per share. 9,850
May 6, 2013 SIECZKAREK MARK M Director 150,000 Direct Purchase at $1.74 per share. 261,000
Feb 26, 2013 HOLTHE DAVID Director 96,501 Direct Acquisition (Non Open Market) at $0 per share. N/A
Feb 26, 2013 HOLTHE DAVID Director 5,435,993 Indirect Acquisition (Non Open Market) N/A

It’s interesting to note that these acquisitions and buys came at the same time Voce started publically revealing its letters written to Solta. Either way, it’s bullish that these directors, especially CEO Sieczkarek, are willing to both buy and hold shares. At the very least, they appear to believe in the longer term potential fundamentals of the company, which I do as well if the company is able to properly lever its assets and penetrate Asian markets correctly, but I think ultimately everyone would be better off with an acquisitioin, and with Voce and David Callan leading the way, this is the most likely outcome.

My favorite to acquire Solta is Valeant, so that is my prediction — Valeant will acquire Solta for a price somewhere between $3.75 and $4.50 a share, or roughly $300 to $360M, in a time period of 4 to 12 weeks.

Disclosure: I am long SLTM.

Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky — always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.

 

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