When it rains, it pours, and laser manufacturer Candela (Nasdaq: CLZR) appears to be caught in a torrent of bad news.
On the heels of a disappointing earnings release earlier this month, the maker of cosmetic and aesthetic laser technologies reported that an arbitrator ruled against it in a lawsuit that the Regents of the University of California filed against the company. Already reeling from the lackluster sales of lasers that remove varicose veins, tattoos, and the like, Candela's stock plummeted another 10% this morning.
At issue is a dynamic cooling-device technology that Candela licenses from the regents and sells as a component or accessory part of its lasers. The regents contended that the laser manufacturer is required to pay royalties based on the list price of the lasers themselves and not just the price of the dynamic cooling-device component. Candela argued the opposite and maintained it had paid all the royalties it was required to pay. Unfortunately for Candela, the arbitrator sided with the regents.
The regents asserted that the company was liable for more than $3.5 million in royalty damages, together with interest, through the July 2004 quarter. Candela had set aside about $3.4 million, but it needs to await the arbitrator's final ruling on the actual damages it must pay. The company will also be on the hook for the regents' costs and fees associated with having to go to arbitration, and it will be subject to higher royalty payments in the future.
If there's a silver lining in the ruling -- and it's a tenuous one -- it's that the arbitrator said Candela had acted in good faith by pushing its position and that the regents couldn't terminate Candela's exclusive licensing agreement for the technology. Had the arbitrator seen things differently, I assume it would have meant extra fines and penalties for Candela.
The good-faith opinion provides a ray of hope for the laser maker because it gives Candela's lasers an edge on its competition. The problem, though, is that the industry is moving toward intense pulsed light technology, and here the company lags, only just entering the market with an IPL distribution agreement with Danish Dermatologic Development, a Denmark-based manufacturer. Candela has had an unfocused year and only recently saw the IPL light.
Well ahead of the competition is Palomar Medical Technologies (Nasdaq: PMTI), a contender in the aesthetic laser market but also the leader in IPL. As Fool contributor Stephen Simpson reported, Palomar has notched its 11th straight quarter of profitability and looks to be light-years ahead of competitors like Candela, Lumenis (Pink Sheets: LUME.PK), Syneron Medical (Nasdaq: ELOS), and Laserscope (Nasdaq: LSCP).
Candela has had a year of poor performance that has burned its investors. With cooling laser sales, a late start in next-gen IPL, and a reversal of fortune in the courtroom, it's looking like Candela is drowning in a sea of woe. Someone throw its investors a life vest.
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Fool contributor Rich Duprey uses "swimmies" in the pool. He owns shares of Candela but does not own any of the other stocks mentioned in the article.
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