Aesthetic laser maker Cutera (NASDAQ:CUTR) singed investors yesterday with an earnings report that beat analyst forecasts but left them wanting for the future. And hanging ominously over that future is a patent infringement lawsuit with rival laser manufacturer Palomar Medical Technologies (NASDAQ:PMTI).
The maker of laser hair removal and skin treatment technology notched some pretty respectable numbers: revenues up 49% for the quarter, 44% for the year. Profits jumped to $0.41 per share for the quarter and to $1.00 per share for the year, versus $0.16 and $0.31, respectively. Operating margins also improved markedly. Blah. Blah. Blah.
It's not a case of what have you done for me lately, but rather, what will you do for me in the future. This is where Cutera slips on the banana peel. First-quarter revenues and earnings are expected to come in below analyst forecasts, while the company said full-year earnings will be flat. The big bugaboo, though, is the lawsuit with Palomar, scheduled to get underway in May.
Palomar contends that Cutera's CoolGlide pulsed light laser system violates three of its 33 patents, relating to an exclusive licensing agreement it has with Massachusetts General Hospital, which is also a party to the lawsuit. It settled similar litigation with laser maker Lumenis, which now trades on the pink sheets as a shell of its former self, paying Palomar over $4 million in past royalties. A second lawsuit against Cutera was filed last year.
Cutera's liability, however, is far more severe than that of Lumenis, which was allowed to continue selling its lasers after the settlement, by paying Palomar a continuing 5% royalty. But Palomar says no such deal is in the works for Cutera. It will not license the technology to Cutera, and it's seeking treble damages, claiming Cutera's actions constitute a willful infringement of its patents. It's a bleak situation, and one court has already dismissed Cutera's attempt to have the lawsuit summarily dismissed.
Other companies also sell pulsed light laser systems. Leading aesthetic laser manufacturer Candela (NASDAQ:CLZR) was a latecomer to the party, selling its competing Ellipse system that it licensed from Danish Dermatologic Development. Candela has repeatedly said it does not infringe on Palomar's patents, nor has it been informed that it does. True enough. Palomar's lawsuits against Lumenis and Cutera stretch back almost four years, plenty of time for Palomar to weigh in with its lawyers.
While Cutera's performance to date has been admirable, it won't amount to much if Palomar is successful. Glowing sales on pirated technology don't make for a pretty future.
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Fool contributor Rich Duprey owns shares of Candela but does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a laser-sharp disclosure policy.
