Note: This article is solely intended to illustrate how data analysis can be used to aid investment research. Volmanac does not have an investment view of or position in ZLTQ.

Cool Sculpting (ZLTQ) is “an innovative way to contour your body by freezing unwanted fat away with no surgery or downtime. With over 2 million CoolSculpting treatments performed worldwide, people everywhere are getting a better view of themselves, thanks to the one-of-a-kind CoolSculpting procedure.”

ZLTQ uses a “razor / blade” model to sell cool sculpting machines (razors) and cycles (the blades) which freeze fat with no surgery. The company sells these machines to dermatologists, plastic surgeons, and spas. The latest statistic they cited showed over 2400 “centers” in the US. The company boasts “rapid payback” in a 2013 investor presentation on a $90K machine and $125 cycles, in which 30 patients/month can generate $500k in profit for a physician with “minimal hands on time required by staff”. In 2013, some doctors were claiming payback periods of under one year.

ZLTQ is an FDA approved technology originally developed at Mass. Gen.:

In May 2005, we entered into an agreement with Massachusetts General Hospital, or MGH, to obtain an exclusive license to develop and commercialize the patent and the core technology that underlies our CoolSculpting system. We are obligated to pay a 7% royalty on net sales, as defined in the agreement, of CoolSculpting systems, applicators and procedure packs.[1]

We received clearance from the Food and Drug Administration, or FDA, in September 2010 to market CoolSculpting for the selective reduction of fat around the flanks, an area commonly referred to as the “love handles.” In May 2012, CoolSculpting was cleared by the FDA for treatment of the abdomen area. In April 2014, CoolSculpting was cleared by the FDA for treatment of the thigh area, and, in January 2015, CoolSculpting was cleared by the FDA for treatment at lower temperatures which will enable shorter treatment times. In September 2015, the FDA cleared CoolSculpting for treatment of the submental area under the chin, an area that is consistently ranked as one of the top areas of concern both by consumers and physicians. Most recently, in April 2016, the FDA cleared CoolSculpting for the reduction of fat around bra straps, on the back and underneath the buttocks.[1]

While the company continues to maintain a positive outlook on growth, the market has become very saturated. Procedures which used to be only available at high end practices are now offered at thousands of spas across the country. Search for a center near you - most likely there are 5-10 within a 20 mile radius. This market saturation has led to pricing wars between centers (though officially centers have to charge a minimum price, most centers we spoke to were willing to provide a discount). A quick google search yields many Groupon deals and machines for sales, see below:

groupon machine cycles

Additionally, the procedure alters the orientation of fat cells - it does not cause weight loss. A “single CoolSculpting procedure can noticeably and measurably reduce the fat layer within a treated fat bulge without requiring diet or exercise”. Also results do not last long (if at all), resulting in many complaints:

This con artist doing business under multiple names including FATFREEZEBROWARD and SKIN CENTER. They robbed me 2000 dollars 3 months ago and my belly fat has not dissipated a bit despite my rigorous diet and excersise routine.[2]

During this center expansion, doctors do not seem involved in most procedures, leading to potential health concerns. In 90% of the centers we called to inquire about a procedure, we were told we would not need to see a doctor. Others feel the same:

I signed a contract at Ideal Image for a cool sculpting procedure. No paperwork was given to me at the meeting. It was sent to my email. Last night I printed it and started reading. No one at the office looked at the medical information I provided. There are 3 medical issues that I believe would have not made me a good candidate for the procedure.[3]

Additionally, many procedures are performed on middle class earners. With procedure prices between $2,000-$4,000, ZLTQ is extremely vulnerable to an economic downturn. ZLTQ is just breakeven - in 2015 it did $255MM in revenue resulting in $3MM in EBIT and spent $125MM on sales and marketing on an ~$1.5BN EV. ZLTQ has recently resorted to new tactics to encourage doctors/spas to purchase machines such as building websites and paying for millions for Adwords credits.

Using a tool called Builtwith which displays UUID and IP relationships between websites, you are able to see derivatives of various website names as well as Google Analytics tags. As you can see in a sample search return here, a number of the centers’ websites are mainly copies of one another and use the same Google Analytics tag. Additionally, we even see other businesses popping up to help centers invest in and optimize their SEO rankings, Adwords credits, website conversions and email and retargeting campaigns to leverage the huge marketing investment Zeltiq is making before other centers do the same! These saturation signs and increasing marketing costs make it a real possibility that ZLTQ will have to raise additional capital soon (ZLTQ currently has ~$33mm of cash) - and the company already seems to be running out of ways to fuel growth in the number of centers in the US.

ZLTQ is very levered to increased consumer adoption. The bull case is that consumer penetration is still extremely low, and with new direct to consumer marketing campaigns operating margins will expand tremendously as more people look to undergo procedures. At $750/treatment, $150 cost/treatment, $80k machine, and 165 cycles/yr the payback period to a physician is less than a year and the 5yr IRR is over 100%.

We are currently tracking new centers from the company’s public website which gives us excellent insight into the number of machines sold. We are also reaching out to centers to monitor pricing and visitor numbers. Additionally, we are tracking other public information the company provides. The center JSON output references spend_level, which we believe is an estimation of the number of cycles the center will purchase, giving us great insights into the business:

address1: "77 Van Ness Ave
address2: "#302"
address3: ""
certified: "1"
city: "San Francisco"
clinical: "0"
country: "United States of America"
distance: "1.88591721436677"
distinct: "0"
dtcI: false
dtcII: false
dtc_practice: false
email: ""
id: "a1od0000002EmbcAAC"
lat: "37.776019"
lng: "-122.4199392"
name: "Pacific Plastic Surgery Group"
phone: "(415) 937-8968"
physician1: "Edward Miranda, MD"
physician2: ""
physician_image: ""
sapID: "a1od0000002EmbcAAC"
spend_level: "25000"
state: "CA"
vipbool: false
website: ""
zipcode: "94102"

View center information on 2400 locations here. We normally would not disclose this information in the middle of our research process, but we wanted to highlight the power that these alternative data collection strategies can have time and again. Knowing where to look, how to capture and digest the data and then how to translate these data-driven insights to actionable investment ideas is the challenge, and one we believe we are uniquely positioned to do so. As in the case of ZLTQ, we now believe we can monitor the two main revenue drivers of the business very accurately - machines (new centers) and cycles (spend_level), giving us a large informational advantage over other investors and analysts looking at the company.