BIOLASE's Management Presents at Lazard Capital Markets 9th Annual Healthcare Conference (Transcript)

| About: Biolase, Inc. (BIOL)


Lazard Capital Markets 9th Annual Healthcare Conference Call

November 13, 2012, 04:00 pm ET


Fred Furry - COO & CFO


Karen Koski - Lazard Capital Markets


Karen Koski - Lazard Capital Markets

Alright, I think we can get started. My name is Karen Koski, I work in the medical technology team here with Lazard Capital Markets. We are pleased to have BIOLASE with us this afternoon. Presenting on behalf of the company is, Fred Furry, CFO. He will go through his presentation and we can open it up to questions at the end. Fred, I'll turn it over to you.

Fred Furry

Good afternoon everybody and thanks very much for coming. I appreciate it, end of the day to see you folks in here. So BIOLASE welcome. BIOLASE is revolutionizing surgery in dentistry and medicine through the science of WaterLase.

What is WaterLase? WaterLase is a revolutionary way to cut human tissue and animal tissue. It’s a biological method that uses laser energy to interact with the water molecules within your own tissue and change those water molecules to vapor at the molecular level. It’s very quick; it takes 50 micro pulses per second, now that sounds like a lot, 50 pulses per second, but actually there is 10 million pulses per second possibility, so we are only using 50 of that time in microseconds. So it’s an incredibly quick pulse rate and with that there is very little trauma, very little bleeding and very little pain. I can't say no pain, because that's not FDA cleared yet, but effectively no pain with this procedure.

Company overview; BIOLASE is a biomedical company. Like I said, just perfecting a biological method that perform surgery. We also market and distribute dental imaging equipment intra-oral scanners and other products designed for procedures in dentistry and medicine.

There is some numerical information here for you, 2011 GAAP revenue of almost $49 million, up 87% from 2010; 2012 adjusted non-GAAP revenue guidance of $55 million to $58 million, the midpoint of $56.5 represents an increase of 31% from 2011. The core driver of this growth is year-over-year is our WaterLase technology, the core technology of which I am speaking. Non-GAAP net income of $96,000 in Q3 of 2012.

Key milestones, in 1998 BIOLASE received the FDA clearance for the all-tissue WaterLase technology. 2004 introduced the ezlase, that's a diode laser, a little bit different technology than the WaterLase. The WaterLase is an all-tissue laser; that means it can cut teeth and bone as well as skin and gum. The diode laser can only cut skin and gum and the diode uses heat and cuts with heat and melts the tissue; wherein WaterLase there's no heat involved. The WaterLase is a biological reaction between the laser and the water molecules within your tissue changing them water to vapor again.

In 2011, we introduced the revolutionary WaterLase iPlus which equals the speed of a high speed drill. Sales doubled in 2010 under the guidance of Federico Pignatelli. We also reinstituted a direct sales model. We will get to that a little bit in the graph.

And 2012, a lot of stuff happening here, final separation from Schein, a very distributor which unfortunately didn't work out for us very well. We introduced EPIC 10. We received the CE Mark and FDA approval for the EPIC 10 and entered into agreements to distribute Cefla’s NewTom Cone Beam and 3Shape’s TRIOS intra-oral scanners.

Again, starting financial history, I don’t want to spend a tremendous amount of time here, but the takeaway 1998 when we received FDA clearance, you can see the growth up to 2006, pretty strong revenue growth and then in 2006, when the company elected to go with an exclusive distribution arrangement with Henry Schein, you can see the sales plummet over the next four years during the term of that agreement.

In late 2010, we separated from Henry Schein in Q4 2010. We went back to our direct sales model, selling direct in the North America and through select distributors overseas, non-exclusive and we did $9.7 million in revenues in Q4 and have had pretty good growth since that point. And you can see what we did in ’11 and then you can see the projections for 2012. Again, the core driver of this is our WaterLase technology. We have added products which you will see, but the main driver, 65% of our revenues is WaterLase.

So here is a slide on traditional dentistry by a painter named Caravaggio; its 400 years old, but I get to kick out of this one because I had some teeth extracted about 10 years ago and my dentist is about 160 pound soaking wet and he had his neon (inaudible) and rocking the pliers back and forth to get the tooth out. It took him about five minutes to break the seal of my tooth so he could extract my tooth. It was, at one point I said, hey doc, you want me to do it, because he just wasn’t having any luck.

And so here is a pediatric extraction. What they are going to do is, in the red you see is not the Laser. That's actually aiming beam. But they’re going to take the Laser energy and go around the tooth. They are going to separate the tooth to open that or to release the tooth from the tissue. The WaterLase cuts in microns. So it's a very fine cut. Another takeaway here is very, very little bleeding and this can be done without anesthesia as well. So the dentist goes around the tooth, opens up, then extracts the tooth very simply and now he is going trouping around the new tooth that’s going to come in so it can come in nice and straight, all can be done with no anesthesia and again to take away very little bleeding.

So our current line of BIOLASE products, the all-tissue dental lasers, those are all water lased products. We have basically three levels, our top of the line product is the WaterLase iPlus; it’s the fastest, it’s the most intuitive to use, it has the most accessories on it, the best trunk fiber etcetera. Then we have a mid priced laser call the MDX line. Now the MDX has two different scenarios, one is the lowest to 300, now we are talking speed of mill joules and then a 450 and now at the bottom we have our older technology the WaterLase MD turbo, same WaterLase technologies, older version of it and we offer those at a very, very low costs and we have a lot of certified pre-owns. So think if it as I don’t know something similar a BMW car dealership where you have the 753, we have different levels of WaterLase and then we have our certified pre-owned models.

In the diode soft tissue dental lasers on the right hand side of the screen, the one to the far right is a handheld diode laser which can perform all of the soft tissues procedures necessary and 2.5 watts of peak power by a battery operated finger tip activated. So all you see right there, that laser is a $2,500 you can do soft tissue procedures, generally a lot of income from that, a lot of interest in that specific model from dental hygienists which actually use the diode laser energy to go around your periodontal pockets and kill bacteria. So after they scale your teeth with the metal instruments, they can take that diode energy and go right inside your periodontal pockets, kill all the bacteria in there which allows your body to recover.

So when you get your teeth clean and they go through at the probe and they go two, two, two, three, three, three and they are measuring your periodontal pocket. As we age, we get bacteria in there easier way and you can get people in the five, six, seven range when you start getting that size periodontal pocket, you can lead the periodontal disease which has lead to heart disease.

So the BIOLASE or the diode laser energy there can kill that bacteria, allow your body the time to recover and fight periodontal disease. The one next to you to the left is our brand new EPIC diode 10 watt laser, you can see the screen there are 15 presets and soft tissue, it also whitens teeth. This is incredibly useful part of this tool to generate revenue for our dentist.

It whitens teeth in about 20 minutes, and then on the far right, you can see a button that has to do with pain management. It offers temporary pain relief that is something in Dentistry you can use for TMJ for jaw pain to relive the pain temporally but it also has applications outside of Dentistry in chiropractic sports medicine.

I actually and a lot of people around the company who are still active in sports use this quite a bit, I use it on my shoulder, I feel strong a quite and have some tinnitus in my shoulder and this really helps my functionality. Individual imaging, I mentioned before that we offer full line of 3D imaging with NewTom and our own DaVinci imaging equipment, we also distribute 3Shape TRIOS intra-oral scanner.

So here is that picture of the video of the high speed cutting. Let's count little quick, one, two, three, so in a span of less than three seconds, you just saw a laser energy post into new tooth through dentin the hardest tissue in the human body, and we are in about 4 millimeters deep and 1 millimeter wide in less than three seconds. So here it is a 45,000 frames per second, you can see the pulse of the laser energy hitting the water molecules within the tissue and then the tissue ablating. There's no, we call it cutting but there's no cutting involved.

Laser energy is removing your tissue at the biological level. Where there was tissue before, now there's no longer tissue. So here is side-by-side with the drill. Now watch the right hand side, you will see a little bit of sparking that's because this is actually a dead tooth. It’s an extracted tooth, so it doesn't have the same water content. But once the water layers gets through the dentin and into the harder the tooth you can see how quickly it ablates the tissue and see how it went down the lower reach there, it’s just gone. You don't see spray, you don't see residue. It’s vaporizing the tissue at the molecular level.

And now again, these are extracted teeth so some of the pockets that decay are quite large, so he is going to get into the decay pocket here of the cavity and he’ll be able to ablate that as well. Now, remember the WaterLase is using laser energy to interact with the water molecules within the tissue. Well, the bacteria has water molecules in it as well. So it’s vaporizing the bacteria. It’s not spreading it around your tooth like the dental drill. The dental drill creates micro fractures, it creates heat, it creates vibration. Heat and vibration are what you feel that causes pain in the dental chair. The micro fractures it creates get deposited and some of that bacteria will get deposited in those micro fractures and can lead to tooth failure later even after you have your filling put on. I'm a victim of that myself.

So moving on, I want to go back here, this is a lingual frenectomy. This is the little flap of skin underneath your tongue. Now what I would like to say and obviously nobody is ever going to do this, is go home tonight with a pair of scissors and cut the little flap of skin underneath your tongue, what do you think is going to happen? It’s going to bleed all over the place, you are not going to be able to stop the bleeding, so obviously don't do this. You would end up going to the emergency room and you would have to see somebody and they would look at you like you are crazy because you just cut the bottom of your tongue with a pair of scissors and they would have to suture it then you have to go back and get those removed. This is a video real time no anesthesia of WaterLase technology, it’s not the diode technology; this is WaterLase cutting soft tissue with no anesthesia and very little bleeding. Watch, look for the bleeding.

So there is no bleeding. No bleeding, no pain to do surgery on the human body, pretty amazing. And if you don't believe that this really can do that again go home tonight and cut the bottom of your tongue with a pair of scissors and you will see the difference.

Okay, market opportunity for WaterLase, right now we have about 1.5% penetration internationally and about 5% in the US. We estimated for every 1% international penetrations about $600 million in revenues. This has proved out from our time from 1998 through today when we began selling WaterLase. So you can prove this mathematically solution, tremendous amount of opportunity for WaterLase in dentistry alone and this technology has applications in other areas as well.

But just in our core business, there's a tremendous opportunity. So when you own a share of BIOLASE you are owning the hard tissue dental laser market. There have been some players who have come in and left. We are the dominant force in the all tissue dental laser market. We are also the main player in the soft tissue market as well. Those are the diode lasers and here's the hidden jewel in BIOLASE, this is why you came to the meeting, one of the reasons we have over 290 patents, of those 35 are in ophthalmology but the vast majority of those patents cover our WaterLase technology, mostly in dentistry but in ophthalmology and orthopedics and some other areas as well.

How WaterLase is changing dentistry? It's pain free in many cases. We can’t say no pain because I can walk up to somebody and tap their hand, and they’re going to say. Unfortunately, we can’t say no pain because everybody has a different pain threshold. So we have to say pain free in many cases.

There is less damage to the surrounding tissue. When you take a scalp or when you slice a tissue or think of a paper cut anybody has had on their hand, you get that red ring around from the infection later on. It's traumatic at the molecular level. You are cutting and tearing the tissue. With WaterLase, you are ablating tissue. So it's far less traumatic. The speed of the WaterLase now matches the high speed drill and it's a new standard of care. It reinvigorates dentists. It opens up their practice. Instead of just doing cavities, drill and fill dentistry, now they can offer pages and menu. They get greater client acceptance of procedures as well, so they can offer more procedures that have a higher return to the dentist and they have a higher percentage of client acceptance at those procedures.

Increases (inaudible) to the ROI proposition. You're not just buying this as a dentist to replace your drill. It doesn’t make sense to do that but it does make sense to buy WaterLase to expand you offerings and increase your customer acceptance of those offerings. That’s where the money is. That’s the whole trick of the WaterLase. So it also eliminates the risk of cross contamination. Upon the right hand side of the screen, you can see magnification of dental burs that has bacteria on it. Dentist generally reuse burs time and time again.

Think of it this way. Think of it as something that’s performing surgery. You put in your dishwasher and you are washing your dishwasher. You wouldn’t do that but you are letting dentist do that in your mouth. One in six dental burs carries pathogenic microorganism. Three quarters of endo files when you are going for root canal have pathogenic microorganisms on them. Even after autoclaving.

Autoclaving is not a full proof method. It's kind of scary. WaterLase doesn’t have the same issue, WaterLase the laser energy is what’s cutting. So pursuing opportunities to expand in dentistry, getting back to the diode laser technology, diodes (inaudible) and there are lot of interesting properties in those diode lasers in our 940 nanometers is a great laser wave link for whitening teeth, right now we are in discussions with the Procter & Gamble company for a laser toothbrush a whole new product that will lighten your teeth while you brush your teeth.

Now there are also a whole host of other things that this diode energy can do, but we are not pursuing those quite yet thinking about just whitening teeth for use of a market adoption, but you can also disinfect your teeth and gums, you can bio stimulate your teeth and gums, remember you can have temporary pain release so if you have a hot spot or cold spot it will eliminate that and also you are killing bacteria, so as you brush your teeth you are killing bacteria, you are getting rid of periodontal disease. It’s a really wonderful product.

New lasers, again we already just spoke about this the WaterLase MDX line that was introduced in February and in April when we introduced the (inaudible) which we think is a revolutionary diode laser, it is a platform for other opportunities in the future. We have new imaging products like I mentioned we have a nice line of Cone Beam 3D imaging products now and we also recently became the distributor of 3Shape TRIOS intra-oral scanner.

An intra-oral scanner is something that allows a dentist to take a digital impression of your mouth without using the [GUI] stuff they put in on a tray; they don’t have to do that anymore. They can take a digital impression in about two minutes of your mouth and then that allows them to put a crown on the best way.

Opportunities to expand beyond dentistry while we do focus on our core WaterLase technology, in dentistry there are some really wonderful opportunities outside. The one we see is, the primary is ophthalmology remember it cuts with water inside your own tissue. The eye is about 80% to 90% water, so its incredibly affective tool to cut eye. And we already had FDA clearance as a general knife for the eye. And right now we have 35 patents, almost 35 patents for procedures using Waterlase in ophthalmology. And we are in discussions with several different potential partners to fund this and help get us to market.

Orthopedics obviously you can cut teeth, you can cut bone. Esthetics, oculoplastics dermatology, pain manager really spoke about that, the pain therapy works on the user, I believe in it and it really does work and for dietary, the entire laser energy can eliminate toenail fungus, its pretty neat stuff. I know I went over that very quickly, but that is a tremendous market. It’s a very simple thing but a tremendous market.

In BIOLASE today our corporate headquarters is located in Irwin, California in Orange County. We have a 57,000 square foot facility and within that facility is our new training and education facility. We have lasers onsite for trainings, for new doctors, new owners, experienced owners, and we also have the cone beans in a special room where we can actually run them for training.

We believe that our current facility, our current manufacturing facility can accommodate growth up to $250 million; that's an important point. We can continue to grow without having to move. And in the bottom left hand corner of the screen you can see BIOLASE in Floss, Germany that's our operating facility. Right now it’s just a sales support facility, but it does have manufacturing capabilities if necessary and some investment considerations you all probably know better than us, it’s some of the high points where the ongoing growth in our core product line, our strong IP portfolio, our tremendous IP portfolio and our financial situation is much, much better than it was two years ago and our CEO Federico Pignatelli his interests are aligned with the shareholders. He is still taking $1 salary. He likes to tease me all the time that I never really pay it, but I do. I have given him $0.50 already this year with another quarter due very soon. And that will do for the presentation. So if you have questions I'm happy to answer them.

Question-and-Answer Session

Unidentified Analyst

(Question inaudible)

Fred Furry

In dental schools at one point, we are in over 50 of the dental schools. So I understand where we are going with this and this is something that the company has done in the past where you think, hey let's get this laser in the hands of the dental schools, it will drive adoption from the dentists there. And it does to some extent, but what typically seems to happen is we've put it in the dental school some of the more well-established lecturers and instructors they will take the WaterLase for their own usage, and they will start using it in their practice or for their own research and it really doesn't stay within the school. It’s something we've tried several times and its - on paper its one of those things that sounds like a really good idea, but in practice it hasn't really proved out yet.

Karen Koski - Lazard Capital Markets

Can you talk about the current spending environment within the dental market.

Fred Furry

The current spending environment, we expect to see a pretty strong Q4 with the Obama Care coming through, there's a 2.3% tax on medical devices and we expect a lot of dentists to be aware of that and pass through the potential pass through from companies and we expect to see a good enthusiasm for our product. There's also some other tax issues coming up, section 179 which allows dentists to expense the vast majority of this purchase may go away effective January 1, we will have significantly lower thresholds. So they will have to depreciate the product instead of being able to write it off. The joy of writing it off now is they are going to increase the revenues with ROI investment and they are going to reduce their taxes and pay their taxes over time. So you defer taxes and you increase your current revenue. So we expect to see a lot of incentive to buy in the next few months.

Karen Koski - Lazard Capital Markets

I guess another question, the toothbrush you mentioned that you are working with about (inaudible) Procter & Gamble. What kind of FDA approval would that need?

Fred Furry

There's three things we are working on. I don't want to get into too many specifics here, but there are three basic categories we are working, one is the safety, the other is the efficacy and the third is the right to operate. Within those three areas we have done a tremendous amount of work in the last two years and we are very comfortable with the safety and the efficacy and our right to operate. I really don't want to, I can't expand too much more on that.

Unidentified Analyst

(Question Inaudible)

Fred Furry

Well, we are the only company with a real all tissue laser that works at the level. Now there's a couple of others out there that have erbium (inaudible) lasers or CL2 lasers and they are large cumbersome, slow. Our laser is with the Erbium, Chromium: YSGG laser energy that we have is a real game changer. It’s a revolutionary way to perform surgery on a human body. We offer that.

Now as for our cone beam and [intraoral] scanner, there are lots of people that offer cone beam and intra-oral scanners. But it’s a way for us to leverage our sales force. Now every dentist wants a WaterLase, some want intra-oral scanners, some want cone beam, so it allows us to develop a BIOLASE relationship with those dentists. But we are the only company out there that offers WaterLase. That's the difference.

Karen Koski - Lazard Capital Markets

We have time for one more question.

Fred Furry

That's it, after all those new videos, now you want to ask one.

Unidentified Analyst

(Question Inaudible)

Fred Furry

I can’t comment specifically. I am repeating your question for the folks listening online that asked about any of the products we're working outside of the dentistry and will any hit in 2013. Some of these are a little bit of longer-term in nature and I really can’t comment because it really depends on finding the right joint venture partner for ophthalmology, and then how quickly we can perform the clinical studies and which one you select. Presbyopia is the Holy Grail in ophthalmology, but along the way, you can hit dry eye and you can hit some things with glaucoma. So it really depends what they want to choose to go after and how much money we put in to it. Now with respect to the toothbrush, again we're in collaboration with P&G on that. I really can’t elaborate too much.

Unidentified Analyst

(Question Inaudible)

Fred Furry

That is the million dollar question right there. The question is with the patent portfolio, how long you incubate it before you either start selling your patents or sell the right to them or do you take it all the way to market yourself. To-date, we have done most of this research on our own, but with ophthalmology, we're looking for a joint venture partner for that, where we would share in the growth of the company and for the laser toothbrush with P&G, obviously I think that’s more of a royalty type of arrangement, more of an annuity for us.

Unidentified Analyst

(Question Inaudible)

Fred Furry

Well, there are tremendous number of applications obviously, but we do have periodontists who do buy our WaterLase, absolutely, but if you're looking for root canals, we're just about there. We have some really unique technology if you’ve seen some of our press releases recently. You’ve seen about radio firing tips. Those are specifically geared for, what, they work on a lot of different procedures, but one of the real true benefits is getting into that root canal pocket or the root canal and sterilizing the root canal. Anything else?

Karen Koski - Lazard Capital Markets

Okay, I think we are out of time. But thank you very much for coming.

Fred Furry

Well thank you everybody for coming.

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