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Biolase Technology, Inc.
Biolase the Investment

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By zfc
December 23, 2003

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I've been meaning to put my understanding of Biolase as an investment down in writing and post it here for weeks now. So rather than delay any longer, I'm just going to put up what I can and hope to fill in the rest in the future--other posters will fill in details too, no doubt. In recent posts we've already brought up a few issues, like competitors, insider holdings and recent events--BGobbins wrote a very encouraging post.
I've really increased my confidence in it since it first came to my attention, so it's time to do this--as I set it as a prerequisite to buying more.

Overview:
Biolase develops and markets medical and dental laser products. Their most prominent product today is the Waterlase, a dental laser replacement for the traditional drill. The Waterlase uses a patented technology that distinguishes it from competing dental lasers. Biolase sells other laser products based on a variety of technologies.

The Waterlase related patent is based on an interaction between water and laser called YSGG Laser Hydrokinetics. Water droplets absorb the laser energy and become "laser-energized water particles" directed at the tooth. So the laser isn't doing the cutting, which is why there isn't the usual heat problem�giving Biolase their edge. Some of the other technologies you'll hear about in this space are Nd:YAG, Er:YAG, CO2 and diode lasers. The LaserSmile is a Biolase tooth-whitening (among other uses) product that uses a diode laser.

The superior performance of the Waterlase over other lasers appears to be born out by my reading of the DentalTown.com forum (and by a look at their revenue growth). This is building a nice brand for them. The patent provides a degree of mote that warrants a separate write-up. In brief, they've been successfully creating, acquiring and defending their intellectual property. There's at least a small switching cost mote around how to use the device, as lasers based on different technologies may not be used in the same manner.

There is an element of "New Paradigm Investing" to Biolase, in that as dentists find they can attract customers and improve profits by offering near painless dentistry, adoption will be sparked at other dentists to maintain competitive advantage.

Since there is no heat or vibration from the Waterlase, there is often no need for anesthetic, which leads to their "No Pain" dentist marketing.

Market:
There are over 160,000 dentists in the US and 700,000 worldwide. While Biolase is the leader in this market, they've still only sold about 2,000 lasers worldwide and so have a clearly large market to grow into. Each Waterlase runs about $50,000.

Characteristics yet to be determined (by me anyway) are how frequently the units will be replaced, and for how large a client base the current price will hold.

Biolase has more than just growth in dentistry to work towards if they do find themselves running out of room to grow. While they've received FDA approval for many dental procedures already, they also have their eyes on non-dental medical procedure approvals. This list of procedures is worth collecting in future posts�as well as which technologies excel at which procedures.

Statistics (at a price of 15.72 as of close Dec 22):
Market Cap: 338.72M
Revenue: 27.26M
Enterprise Value: 308.17M
PE (Trailing, Forward): 61.41, 27.76
PEG: 0.34 (with growth rates so high and cash flow only recently positive, can't pin PEG down yet).
Profit Margin: 13.72%
Debt/Equity: 0.194
ROA: 13.72%
Percent float short: a lot! (if everyone agreed on the price, where'd the appreciation potential be?)
Cash flow has gone positive recently (at 1.21 trailing FCF) on a greater than 50% revenue growth rate and decreasing expenses and cost of sales.

Competitors:
HOYA ConBio with the DELight and DioDent lasers.
OpusDent Ltd, subsidiary of Lumenis Ltd (LUME--LUMEE right now actually) with the Opus line in dentistry.
and KaVo, Deka Dental Corporation and Fotona d.d.
Some that aren't mentioned in the S-3, and so may not be much threat:
Ivoclar Vivadent, Inc with the Odyssey Diode Laser
Millennium Dental Technologies, Inc. with the PerioLase
Lares Research with the PowerLase

Risks:
Dentists are traditionally conservative and may move slowly (though lasers themselves are getting a bit long in the tooth, I'd say). The product is significantly more expensive than older mechanical technologies. They've got to execute on the patent front, maintaining a mote beyond brand recognition.

What had been holding me back primarily was the SEC involvement, a European subsidiary, an impending offering and confusion at their last conference call. From the press releases and filings I see the SEC query as a done deal with no detriment (and some added value) to the average investor. The subsidiary is consolidated into the parent's financials in the filings so this isn't a concern. The offering is likely to go through smoothly now that the SEC question is over and the market price is above the targeted offering price. All these issues deserve discussions of their own, but I think the offering just caused a chain reaction of clarifying the company's business leading to both the revenue recognition question and then, implicitly, the confusion on the call. The subsidiary was just a nerves thing by me--seeing all these other issues going on at the same time. All this, it would seem to me, has caused the attractive price available now (or in the recent past anyway).


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