Candela Corporation

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Candela Corporation

530 Boston Post Road
Wayland, Massachusetts 01778
U.S.A.
Telephone: (508) 358-7400
Toll Free: (800) 773-8550
Fax: (508) 358-5569
Web site: http://www.clzr.com

Public Company
Incorporated: 1970
Employees: 315
Sales: $64.8 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: CLZR
NAIC: 334510 Electromedical and Electrotherapeutic Apparatus Manufacturing

Candela Corporation, located in Wayland, Massachusetts, designs, manufactures, and markets laser systems for use in a wide range of medical applications: hair removal; vascular lesion treatment, including spider veins, leg veins, rosacea, scars, warts, and port wine stains; removal of age spots, tattoos, and other benign pigmented lesions; microdermabrasion for skin exfoliation; psoriasis; and other skin treatments. The lasers are sold to both physicians and personal care practitioners. Since entering the medical market in the mid-1980s, Candela has installed over 5,000 of its systems in some 55 countries.

Candela Formed in 1970

Candela’s co-founder and first chief executive, Horace W. Furumoto, was a Japanese-American who was born and raised in Hawaii. He studied physics at the California Institute of Technology then earned a Ph.D. in the subject from Ohio State University. He moved to the Boston area with his wife, who elected to attend Harvard University to complete her doctorate in physics. Furumoto worked for both NASA’s electronic research laboratory in Cambridge and for defense contractor Avco, where in the early 1960s he became involved in the development of the world’s first high-energy dye laser. The first working laser, using a rod of ruby to emit photons of light, had been created in 1960 by T.H. Maiman. Dye lasers employed organic dyes as the lasing medium, taking advantage of the fact that different colors produced a wide range of radiating frequencies. In effect, changing colors allowed the laser to be tuned to a particular frequency, giving it much greater versatility, especially in industrial applications. When the Avco research laboratory was moved to the West Coast, Furumoto decided to stay in the Boston area. Along with physicist Harry Ceccon, a colleague from his time at NASA, he started a business in 1970 to supply the scientific community with custom lasers as well as the flashlamp components used to control the length of a pulse in dye lasers. Taking his wife’s suggestion, Furumoto named the company after the scientific term describing a unit of light: candela.

For more than decade, Candela Corporation served a narrow scientific and industrial market. It was not until 1981 that the company entered into the medical arena. Furumoto began to collaborate with Dr. John A. Parrish, the newly appointed chairman of the department of dermatology at Harvard Medical School. He was also the chief of dermatology services at Massachusetts General Hospital, where the two men worked in the photo medicine lab to develop a working dermatology laser. Furumoto was soon working on a second medical application for the tunable dye laser when a British physician named Graham Watson, a man interested in smashing kidney stones without invasive surgery, came upon one of Candela’s systems at MIT that was being used to inspect the inside of an engine. Watson tested the laser on some loose kidney stones, with no effect; nevertheless, he contacted Furumoto and encouraged him to research the possibility of using lasers for urology purposes. By the end of 1985, Candela was on the verge of perfecting both of these lasers for medical applications, which promised far more commercial potential than the company’s traditional products. To fund the necessary expansion, the company, after changing its name to Candela Laser Corporation, went public in June 1986 at $3 a share, raising almost $5 million.

While its urology laser entered the initial testing phase, Candela built up its marketing and sales operations. Since its foundation, the company had been driven by a devotion to technology, which was a suitable stance because of its specialized customers. Now that it was making lasers that were more commercial, it had to become far more sophisticated about its marketing. After gaining Food and Drug Administration clearance on its urology laser and shipping the first 12 units in June 1987, Candela turned to an advertising agency for a corporate identity makeover and a new logo. To launch its dermatology laser, the company also raised another $5 million in a private offering. Furthermore, in early 1988 it entered into a joint venture with the major Japanese international trading company, Mitsui & Co., in order to form Candela International Corporation. With nearly half of its sales expected overseas, gaining access to Mitsui offices in some 90 countries was seen as a key to future growth. With the company’s balance sheet already benefiting from the sale of its two medical lasers, Candela was well on its way to delivering a laser that could be used in breaking up gallstones. Moreover, it was already working on a product that could treat certain eye disorders, and researchers were contemplating the use of a laser in the removal of plaque from clogged coronary arteries.

Candela’s momentum was stalled, however, when in November 1988 the company’s auditor withdrew its opinion on the results for that fiscal year which had ended on June 1988. At issue, according to the company, was the point in time at which revenues on sales to distributors were recognized. Of Candela’s revenues of $15.8 million in 1988, $3.8 million came from the distributors, who did not actually pay for the units until they were in turn paid by their customers. Although the sales cycle had in some cases been longer than anticipated, the company argued that there was never any doubt that the units had been sold to the distributors, and that in fact the company had been consistently booking sales in this manner for years. Management also maintained that there were no accusations that the company was attempting to inflate its numbers, despite preparing for yet another secondary offering of stock intended to fund the launch of the gallstone laser. Nevertheless, the controversy had an adverse effect on Candela. A secondary offering was cancelled and the price of the company’s stock began to slide, although Candela was still able to raise $7 million through a private placement of stock, selling 1 million shares to Singatronics Asset Holdings Private Ltd. of Singapore. Matters would worsen, however, when the restated results were finally released in March 1989. Instead of reporting a profit of $727,830 on revenues of $15.8 million, Candela now posted a $3.7 million loss on $11.5 million in revenues. According to management, the restatement reflected not only changes in the way sales to distributors were handled but also revenues from extended warranties and the way the company carried value and classified certain assets. As a result, Candela’s stock took a hit and the company was forced to cut staff and turn its attention from expansion to improving profitability.

Furumoto Forced Out in 1990

By 1990, according to press reports, serious friction developed between Furumoto and the man he hired as his chief financial officer, Gerard Puorro. Furumoto was seen by Puorro and others on the board as an out-of-touch scientist who simply lacked the skills required to revive the business. Quoted in a 1993 Boston Globe article, Puorro maintained, “We were doing well, but we needed to be focused and instead we were doing an astronomy laser project—an esoteric project that had no relation to our main business. We had too many people, too many projects and in 1991 we were like the guy going down a fast-moving river who sees the waterfalls and tries to go back.” The two men were unable to come to terms and Furumoto told the board that one of them would have to go. In the end, the board backed Puorro and ousted Furumoto. According to the Globe, “Furumoto insists he was kicked out because he wanted to do unpopular things: lower operating costs through layoffs, slash some unpromising research and development programs, and restructure the company.” When Furumoto resigned as chief executive and chairman, he purchased the non-medical laser business for $1.3 million in Candela stock, a unit which accounted for only 4 percent of annual revenues, and agreed not to compete in the medical laser field for one year. John Pavlic took over as president of Candela, but he was soon replaced by Puorro.

The prospects for Candela actually appeared to be improving even as Furumoto departed. The company announced that it had established a European operation, headquartered in Holland. With the launch of its SPTL Vascular Lesion Laser, Candela in 1991 introduced its first marketing kits for use by private practice physicians who purchased a laser. Over the years, the program would be expanded to other laser lines, and physicians were provided with sample press releases and advertisements, broadcast quality video of laser treatments, informational videos, and patient pamphlets. Candela eventually created a Partnership Program to provide marketing services to physicians. For 1991, the company reported revenues of $36.5 million and net income of nearly $2 million. Although revenues fell to $35.4 million for 1992, profits improved, topping $3.8 million.

Company Perspectives:

We maintain our success through our visionary solutions and by utilizing the simple formula of combining efficacy and economics to help our customers succeed. In the years ahead, our industry leadership will only grow, guided by our clinical and academic collaborations, and driven, as always, by the needs of the customers we serve.

Despite these positive results, however, Candela began to experience some problems, the result of increased competition in the marketplace and some decisions that failed to pan out. Management was also distracted in the summer of 1992 by a takeover bid by a pair of investor brothers, Kirk Terry Dornbush and Robert Earl Dornbush, who claimed to own 7.9 percent of the company’s stock. Their offer was rejected and a poison-pill provision—designed to limit the amount of stock that could be purchased without management approval—was adopted by Candela’s board, which denied that the move was connected to the Dornbush initiative. Perhaps of more concern to the company was the emergence of Furumoto as a competitor in the medical laser field. After abiding by the one-year ban, Furumoto’s new company, Cynosure, introduced a dermatological laser that was half the price of Candela systems. One month later Candela sued Furumoto and Cynosure, claiming patent infringement. Although owned by Candela, the patent had originally been Furumoto’s, so that he was keenly aware of every feature of the laser in question. His new device, he insisted, was based on non-patentable ideas which had been circulating since 1959. While Candela’s laser relied on a continuous wave of light, the Cynosure laser employed short pulses of light. Aside from being much less expensive, it prevented damage to surrounding tissue. While the matter made its way through the courts, Candela sales were severely undercut. Moreover, the company was forced to take writedowns on an obsolete dermatological laser as well as related expenses. As a result of these factors, Candela saw its fiscal 1993 revenues fall to $33.2 million while posting a $9.2 million loss.

In December 1993, with Candela’s stock price falling below $4, the Dornbush brothers expressed their displeasure about the financial performance of the company, demanding access to a list of shareholders in order to force a merger or outright sale. They also insisted the board be expanded from four to six months and that they be given control of the extra seats. It was not until January 1995, when Candela’s stock traded below the $2 mark, that the two sides agreed to an accommodation and Robert Earl Dornbush was named to the board, a position he held until he sold his stake in the company in 1999.

Patent Suit Settled in 1994

In 1994, the patent suit against Furumoto was finally settled in favor of Candela’s founder. Revenues continued to erode, falling to $28.2 million in fiscal 1995, along with a net loss of $1.6 million, before rebounding in 1996. The company began to focus its efforts on the aging baby boom generation, developing lasers capable of removing tattoos, treating pigmented lesions (such as freckles and age and sun spots), as well as a laser system to treat leg veins. The advent of scanners, computer-driven beam delivery systems that ushered in a new generation of aesthetic and cosmetic lasers, also opened up new markets for Candela. Instead of appealing to the 15,000 dermatologists and plastic surgeons practicing in the United States, the company began to market products that appealed to a much larger pool of physicians, numbering some 110,000, involved in a variety of disciplines. Moreover, Candela decided to directly tap into the baby boom market, forming a subsidiary called Candela Skin Care Centers, Inc. to order to provide cosmetic laser procedures. To reflect this diversification strategy, in January 1996 the company changed its name from Candela Laser Corporation back to Candela Corporation. In March 1997, the subsidiary launched what it intended to be a chain of clinics called LaserSpas, the first debuting in the resort town of Scottsdale, Arizona. The company then purchased a Boston health club and beauty salon to serve as a second location. In addition to laser procedures to address wrinkles, stretch marks, spider veins, and other skin conditions, the spas also offered more traditional massages, facials, and fitness programs. Although Candela was now in competition with doctors who had purchased laser equipment from them, management believed that the market of potential baby boom customers was large enough to accommodate everyone. The venture was shortlived, however, and by the end of 1997 the Arizona facility was shuttered; a year later, the Boston unit ceased offering laser procedures, and a buyer of the spa was sought. Management announced it would now focus all of its attention on manufacture.

Adopting a philosophy designed to “drive technologies and expand markets,” Candela began to make strides at the end of the 1990s. It introduced important enhancements to existing product lines and launched a skin exfoliation system called GentlePeel. Moreover, the company enjoyed success overseas. After reporting $37 million in revenues and a loss of $4.5 million in 1998, Candela’s sales improved to $58.6 million in 1999, when the company posted net income of nearly $7.5 million. The year 2000 would bring even stronger results, with revenues growing to $75.4 million and profits improving to more than $14.5 million. With a sluggish U.S. economy in 2001, Candela’s momentum was stunted, as sales fell to $64.8 million and net income to $2.5 million. Nevertheless, management remained optimistic and was further encouraged by the April 2002 FDA clearance for its new Vbeam laser to be used in treating periorbital wrinkles. More importantly, the demographics continued to favor Candela: baby boomers were likely to spend an increasing portion of their disposable income on laser procedures that promised to reverse the effects of aging.

Principal Subsidiaries

Candela Iberica, S.A. (Spain); Candela France SARL; Candela KK (Japan); Candela Laser (Deutschland) GmbH (Germany); Candela Bangkok; Candela Skin Care Centers, Inc.