After a hearty initial recommendation, Individual Investor hedges its position in light of the Barron's article.
iionline.com
UPDATE: Barron's Elbows BriteSmile -- Teeth Fly
Craig Schneider (6/30/99)
BriteSmile (AMEX: BWT - Quotes, News, Boards) shareholders have little to smile about these days.
The June 26th edition of Barron's, a weekly financial magazine, questioned BriteSmile's secrecy over its proprietary tooth whitening gel technology, the procedure itself, competition, and profitability, among other things.
On Monday, BriteSmile closed down 25% to $9.56 and on Tuesday fell an additional 11% to $8.50.
A Whiter Shade of 'Ridiculous'
BriteSmile has developed a $500 teeth-whitening procedure that uses a blue heat light-activated gel and claims to whiten teeth 'by an average of nine shades' in about 90 minutes. Barron's argues that BriteSmile's 'nine shades' is 'ridiculous' and the article quotes dentists describing how patients' teeth can respond differently to chemicals used in the procedure, making results highly subjective. What's more, the company is putting patients at risk by not disclosing the exact ingredients in all agents, these sources say.
While BriteSmile believes that its product is safe and won't soften enamel, a Ph.D at Cornell University notes in Barron's that a known stabilizer for the active hydrogen peroxide ingredient in BriteSmile's gel is known for removing calcium.
BriteSmile CEO John Reed told IIOnline said the company's secrecy is a consequence of being in a competitive market and having a patent still pending. He expects the patent by this fall, after which time the specific contents can be made public he said.
The gel just came to market in February, and BriteSmile spent most of last year discontinuing its take home/in-office tray and laser-based whitening businesses in favor of this new technology. But dentists have been slow to swap the older, equally-expensive, at-home 'tray' bleaching system that has patients use a mouthpiece of whitening cream and repeat a messy procedure over several weeks to be effective.
As we pointed out in our initial recommendation of BriteSmile, the laser vision corrective industry didn't take off immediately either. BriteSmile Chairman Anthony Pilaro, who was a founder of laser manufacturer Visx Inc. (NASDAQ: VISX - Quotes, News, Boards), says BriteSmile is built on a similar business retail model to Visx, being one that licenses out its products for a per procedure fee.
Since our original recommendation, BriteSmile shares are down 44%. nice return
However, unlike the profitable Visx, BriteSmile is showing widening losses amid, what Barron's calls, 'heady expansion and the company's plan to give its machines away for free under arrangements that would let it split the profits on whitening procedures done by dentists.' The company provides advertising and equipment while the dentist provides labor and the facility.
Barron's reports that about 15 teeth-whitening procedures per year, or only 1.25 per month, are performed in the 80,000 dental offices that now offer such services. In the article, Pilaro says that for a center to be profitable it must do about 30 procedures per day, but Reed says that figure is incorrect and that on average it's more like 10-12 procedures a day, depending on the location.
The company does not get specific on current procedure volume but indicates that it could be profitable by its next fiscal year, ending March 31, 2001. Reed also says that while it would be premature now in this start-up phase, BriteSmile could start releasing procedure numbers sometime next year.
Opening the wholly owned (non-revenue sharing) centers and associated centers is a costly endeavor. On June 7th, the company said it would obtain at least $15 million in financing from private investors and members of senior management. Barron's argues that in the 'dilutive transactions… no shareholder votes were taken, and no fairness opinions were given to ensure that what was happening was fair to public shareholders.'
The company plans to open 50 centers this year, about 13 wholly-owned, 30 affiliated with independent dentists in the U.S. and Europe, and the rest in Japan. Reed says it's set for the rest of this year, but may need to raise a bit more in the first and second quarter next calendar year. BriteSmile expects to open 180 more centers in 2000.
Helping the Pennsylvania company's expansion is a major deal that was announced earlier this month with Orthodontic Centers of America (NYSE: OCA - Quotes, News, Boards) that starts putting BriteSmile's service into selected OCA locations, which currently number about 491 in the U.S., Mexico and Japan.
The plan, says Reed, is for the companies starting in September to take a model, medium-sized city to bring BriteSmile into, tweak the operations over three months, and then if successful, roll out services in another 15-20 cities over a period of a year and a half. At that point, there's a chance the company would need additional funding to accelerate expansion with OCA. We're still at the 'what if' stage, Reed added.
Already, BriteSmile has in place four stand-alone teeth whitening centers in California, as well as associated centers in dentist offices in Denver, Colorado and Louisville, Kentucky. The company is looking to tackle a 1.2 million U.S. market of teeth whiteners. In under a year, shares have rocketed from $0.69 to as high as $17.25.
Bottom Line:
Given the soaring share price, the pullback is not unwarranted. If you're still interested in buying into BriteSmile, keep in mind that if it can prove successful in its business, it will without question need more funding to reach its optimistic expansion goals.
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