Dentistry has come a long way since the days of painful extractions without anesthesia. Today, laser technology, porcelain and resin composite fillings, and better patient management have improved the image of the dentist, and have lessened the usual anxiety and fear most people feel facing the dreaded dental drill.
The Buy-out Frenzy
Small dental technology companies are being acquired on a regular basis as tiny pure plays are becoming harder to find.
Just recently, Bio-Lok International (BLLI), one of only two publicly traded dental implant pure plays, was acquired by a private equity firm in Miami for $35 million. The other dental implant company that investors could still buy shares of on the open market is Lifecore Biomedical (LCBM). Lifecore, with a tiny market valuation of $200 million, has been increasing its revenue and bottom line year after year, and could surely make an attractive little acquisition for a larger medical device company.
In October of 2006, Align Technology (ALGN), the maker of the famous Invisalign orthodontic system, bought-out its competitor OrthoClear, makers of the Aligner system. Invisalign is a clear mold, much like a mouth guard, that helps to align certain cases of crowding. This system is very attractive to adult patients who do not wish to wear complicated and unsightly metal braces, and its hefty price is often overlooked.
OrthoClear was founded by ex-employees of Align Technology, and immediately cut into Align Technology's revenues as the Aligner system was much cheaper. As the lawsuits filed by Align dragged on, the company finally, and wisely, paid OrthoClear to relinquish its attempts to continue selling the Aligner system. Align Technology now stands as the sole developer and provider of clear orthodontic braces in the world.
Back in January of 2006, privately held Discus Dental, whose founder Dr. Bill Dorfman was made famous by the popular television show "Extreme Makeover", acquired BriteSmile's (BSML) intellectual assets for $35 million. While Discus Dental is positioning itself to become one of the largest international dental products company, it was made famous by the ZOOM whitening system. Buying BrightSmile's in-office whitening system was more to eliminate competition than to add to Discus's arsenal.
The Dental Elite
To become a large dental products company Discus faces much competition. Companies like Dentsply (XRAY), Henry Schein (HSIC), and Patterson Companies (PDCO) all have market caps of over $4 billion. Following these three companies is the best way to track the performance of dental stocks, as they are not only product distributors, but they also provide a variety of services to dentists, including practice acquisition and management, malpractice and disability insurance, and continuing education courses.
Sirona Dental Systems (SIRO) of Germany is well on its way to joining the three elite dental companies. The company is betting its future on the CAD/CAM restoration system for in-office fabrication of crowns. The system allows dentists to side-step dental labs and makes crowns at the office while the patient waits. The cost of the system has delayed the wide spread use among dentists, but as the technology advances the cost should be less of a problem in the coming future.
The company also makes and distributes other dental products, including imaging systems, and dental drills. The company's debt of $500 million is a little too large when compared to its market valuation of $1.9 billion.
The Niche Players
There still remain a few pure-play dental companies who are involved in very specific aspects of the business.
Companies who are providing services to the dental profession include Birner Dental Management Services (BDMS) and National Dentex Corp (NADX). Birner manages and acquires dental clinics in Colorado, New Mexico and Arizona. National Dentex is an owner and operator of dental labs providing fabrication of dentures, crowns, bridges and other prosthetic products and services to dentists. Both companies have very tiny market valuations, but are proficient at growing the bottom line.
Dental lasers are becoming more popular among patients for one main reason: less pain. The dental community is promoting the new laser systems as painless alternatives to needles. Biolase Technology (BLTI) is a little company with a market of only $180 million, but a large future. The company develops dental laser systems, including the Waterlase and Diode laser systems, for a variety of procedures, including soft tissue surgery, fillings, and anesthesia. The company's sales are growing yearly but it is having a hard time controlling costs, and as such its bottom line has been disappointing.
Pro-Dex Inc (PDEX) is a very tiny company, with a market cap of only $11 million, which develops rotary motor systems to the dental and medical surgical industry. Specifically, it develops rotary dental drills under the brand name Micro Handpiece. Its erratic yearly revenue and earnings numbers make Pro-Dex a very risky investment.
The Future of Dentistry
Even though dentistry has come a long way over the last few decades, it still has much more room to grow. Medical and biological technology has found its way into dental research. While the following technological advances are many years away from the grasp of the average investor, the future looks bright for the next batch of dental IPOs.
Research into dental stem cells is growing. Scientists have been able to isolate, manipulate, and differentiate stem cells that could grow into various tissues of the oral cavity, including teeth, gum tissue, salivary glands, periodontal ligaments, and jaw bones. One day, it might be possible to grow a new tooth from a tissue sample harvested from the same patient, and implant the tooth rather than be treated by artificial implants.
It has already been suggested that saving baby teeth could be as advantageous as collecting umbilical cord blood for the use of the stem cells to treat future maladies. In 2003, stem cells were isolated from baby teeth . It was suggested that these stem cells could grow new teeth, and differentiate into other forms of tissue, including neural tissue for treating brain disorders.
Another exciting, and very important area of dental research, is the prevention of dental cavities through immunization. Scientists at the Forsyth Institute were successful in isolating key molecules that can induce immunization in animal models.
The future of dentistry looks very bright, and investors have plenty of choices to consider. But caution must be utilized when choosing the right stock, as tiny dental companies harbor the same risks as tiny companies of any other sector.
When looking at smaller companies, Align Technology and Lifecore Biomedical are two companies that BHI considers to be relatively better investments.
As for safer investments, a basket of the elite three; Patterson Companies, Henry Schein, and Denstply Intl should bring investors decent returns over the next couple of years, regardless of the changing political landscape and healthcare policy.
XRAY v. HSIC v. PDCO 1-yr chart:
Disclosure: Dr.Ayoub is a practicing dentist in West Palm Beach, Florida, and currently does not hold any position in any of the companies mentioned in this article.