Cutera, Inc. (NASDAQ:CUTR) is a medical device company focusing on aesthetics as non-surgical solutions for skin revitalization and body sculpting. These are high-end equipment including radio frequency micro-needling systems utilized by plastic surgeons, dermatologists, and other specialized clinicians.
The attraction here is a recent FDA clearance for the company’s “AviClear” device as the first and only energy-based acne treatment that represents a significant growth runway. While the stock initially surged to an all-time high on the announcement, CUTR has since given up the gains amid the extreme market volatility. Indeed, we believe this recent pullback can represent a new buying opportunity in a market leader that maintains a positive long-term outlook.
CUTR Financials Recap
The company last reported its Q1 earnings on May 10th with a GAAP EPS loss of -$0.84 per share, compared to a net loss of -$0.02 in the period last year. The story here has been a jump in spending as the company prepares to launch the Acne business. Total operating expenses climbed 69% y/y to $44.9 million which also included AviClear spending and investments toward a new internal ERP software system. The adjusted EBITDA loss of -$3.8 million compared to a positive $4.6 million result in Q1 2021.
Nevertheless, the revenue of $58.0 million was a Q1 quarter company record, up 17% year-over-year driven by strength in systems sales out of North America up 35% y/y. This balanced a flat trend from Europe, in part impacted by the Ukraine crisis. For context, the business is nearly equally split between North America as the core market and internationally. Australia and Japan are also important regions that have been strong for the company.
Again, the major development last quarter was the U.S. Food and Drug Administration granting a 510k clearance for Cutera’s AviClear on March 25th. By this measure, the Q1 results did not include any AviClear contribution with an expectation for a full-scale commercial launch later this year. The key insight is that compared to existing topical ointments or even alternative device treatments, AviClear is recognized as being long-lasting and effective. From the press release:
AviClear is a laser treatment that offers a safe, prescription-free solution for acne. In addition to reducing existing acne, clinical trials show that future breakout episodes are shorter, less intense, and more infrequent following the AviClear procedure. Further, acne clearance results continue to improve over time, demonstrating the long-term efficacy of this novel treatment.
Cutera sees a market opportunity of over 226 million people worldwide and specifically 8.5 million patients in the U.S. alone that are described as having moderate to severe acne. Nearly 7,800 dermatology practices in the U.S. alone represent potential customers. The company sees its “first mover” advantage with this line of treatment as providing a rapid market penetration over the next few years.
For near-term guidance, management is reiterating the 2022 revenue forecast between $255 million and $260 million, representing an approximate constant currency growth rate of 13% to 15% from 2021. This target specifically does not include any contribution from AviClear which, in our view, opens the door for some stronger than expected trends into Q4 from early sales and into 2023 as the commercial rollout gains traction.
Finally, we note that Cutera ended the quarter with $132 million in cash and marketable securities against $134 million in long-term debt as convertible notes. Management expects a continued cash burn over the next few quarters as it builds up its AviClear inventory but believes its liquidity position is sufficient to fund the growth opportunity for the foreseeable future.
CUTR Stock Price Forecast
What makes AviClear interesting in our opinion is that it represents a viable alternative to prescription-strength Isotretinoin “retinoids” class of chemicals based on vitamin-A which have traditionally been used to treat severe cystic acne, but are recognized as carrying side effects. The bullish case for Cutera is that AviClear becomes the new industry standard as a safer and more effective alternative.
If there is a scenario where AviClear is as good as the clinical study data suggest, the product should sell itself, benefiting from word of mouth and getting consumers to ask for it. Furthermore, it’s encouraging to see that the existing product portfolio from Cutera is performing well based on the latest sales trends from Q1.
The setup here is for a good long-term investment in our opinion in a company that is still in the early stages of realizing its potential. From a high level, these types of aesthetic treatments covered by Cutera products benefit from consumers seeking more cosmetics procedures with a focus on health and beauty as a worldwide trend.
According to consensus estimates, the market forecast is for 2022 CUTR revenue of $261 million, slightly above the current management guidance. The market then expects sales to accelerate by 27% in 2023 and 33% in 2024 as AviClear gains momentum. From there, the expectation is that the company can reach profitability by 2024. We see an upside to these estimates with a more optimistic view of the strength of the market opportunity which can support better-than-expected earnings.
As it relates to valuation, the metric we’re focusing on is a 1-year forward price-to-sales multiple of 2.5x into the consensus 2023 revenue forecast of $331 million. In our view, as we get into 2023, updated management guidance incorporating new AviClear targets would make the stock appear particularly cheap in an environment where sales are climbing above 25% annually with a roadmap to profitability.
Taking a look at the stock price trading action, CUTR rallied from around $45.00 per share in mid-March to as high as $74.00 following the FDA clearance headlines through mid-April. Shares have since reversed the entire move to currently trade under $40.00 in the context of the extreme market selloff over the last several weeks. Our take Cutera simply got caught up in the volatility, and shares are now undervalued.
We rate CUTR with a price target of $55.00 representing a 3.5x multiple on the current 2023 consensus revenue. This is a level the stock traded at as recently as mid-May implies a 40% upside potential over the next year. Longer-term, clearer visibility on the market traction of AviClear including a trend of firming margins and earnings can send shares higher. Updated guidance from management with long-term financial targets could work as a positive catalyst for the stock.
The main risk to consider would be a failure to successfully execute the go-to-market strategy for AviClear on the management’s part. The next few quarters will be critical in laying the foundation for marketing and sales for accelerating growth starting next year. Disappointing sales momentum or any unknown bad publicity could open the door for a leg lower in the stock. Cash flow levels and the gross margin trends will be key monitoring points going forward.