The news that cosmetic laser maker Candela (NASDAQ:CLZR) was the target of a patent infringement lawsuit caught shareholders by surprise the other day, particularly since they had been assured by management for months that the company did not infringe on the patents in question. Management, it seems, was well-prepared for the possibility; it fired off its own countersuit within hours of the announcement.
Palomar Medical Technologies (NASDAQ:PMTI) has been very aggressive in protecting its patents. Over the years, it has brought suit against rival laser manufacturers Laserscope, Cutera (NASDAQ:CUTR), and Lumenis, and more importantly, it's succeeded. It has settled claims with all three, leaving them paying royalties to Palomar. In its press release announcing the lawsuit against Candela, the company said, "For over 7 years, Palomar has sent Candela letters notifying Candela that its products need a license to the '844 Patent and offering to grant Candela such a license" (emphasis added).
That has to be news to most Candela shareholders. During conference calls where CEO Gerard Puorro has been directly asked about Candela infringing on Palomar's patents, he has assured analysts that not only did the company not infringe on the patents, but that Palomar hadn't notified Candela that it did.
Just this past January, for example, Puorro said in response to a question, "We have not received any formal notification from them." In May, he said that the company received merely a "Palomar flyer" like other players in the industry, but reiterated that Candela does not infringe on the patents. Apparently, investors need to parse this executive's statements a little more closely.
It's not the first time Puorro has head-faked investors. Previously, he claimed laser sales were "white hot," only to fail to produce them. He has also claimed that Candela was gaining market share at a time when its sales growth rates were slowing, even as competitors' rates were climbing. And he assured investors that Candela would prevail in its royalty dispute with the Regents of California, only to end up losing.
I'm not saying Puorro is lying about being notified by Palomar -- just that investors need to pay closer attention to what he's saying. He definitely created the impression that Palomar had not contacted Candela, but when you study his words a little more, you see he says there was no "formal notification," and that they had received a "flyer." Perhaps there's cover from liability for Puorro in such linguistic gymnastics, but it's not the kind of disclosure Fools like to see from management.
Instead, look at the disclosure that another laser maker, Cynosure, made to investors in its registration statement with the SEC last August. The company notes that it has received numerous letters from Palomar that Cynosure infringes on its patents, and that it's willing to negotiate. Sounds just like the letters Palomar says it was sending to Candela. But Cynosure goes on to say that Palomar may sue them, too, and lawsuits being what they are, "If Palomar takes legal action against us, and if we do not prevail, we may be ordered to pay substantial damages for past sales and an ongoing royalty for future sales of products found to infringe Palomar's patents, or we could be ordered to stop selling any products that are found to infringe Palomar's patents."
That is disclosure. That's letting investors who are considering parting with their money know the full risks involved in such an investment. It doesn't require parsing to understand. Sure, there's some difference in a registration filing; companies have to let investors know about every conceivable risk they face. Yet, in light of Palomar's success in defending its patents, it seems to this Fool that Candela had an obligation to be more forthcoming.
With Candela releasing its earnings report next week, this lawsuit business is sure to be a "white hot" topic on the conference call. For my money, whatever answer management gives, I'll be going over its words in laser-fine detail, looking for clues to the next investor surprise.
Hone in on the laser market with these related Foolish articles:
Whatever your investing style the Fool has a newsletter for you, and a 30-day free trial to go with it.
Fool contributor Rich Duprey owns shares of Candela, but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
