Rating The IPO

Note: "Before IPO" and "After IPO" measure the use of the proceedings to enhance revenue growth. A small difference between the two Xs means funds from the proceedings probably will have little effect on the index.

Rating Scale

Prediction
The Company has plenty of ways to keep its story fresh for the investor—an acquisition, an improved margin, a new device, perhaps even some income occasionally. It will grow significantly through acquisition, and there are a number of privately held competitors who probably would enthuse over the possibility of consolidating. This will put considerably more stock into play, but it also will buy market share so that the Company should be able to increase its level of capitalization accordingly.

The stock will open at $15 and has a good chance to move to the mid $20s where it could stay during its first year.

 

Material On This Page Taken From Prospectus
"Steri-Oss, Inc. is a leading developer, manufacturer and marketer of a broad line of dental implant systems, which include implants, abutments and related surgical instruments. A dental implant is a small titanium screw or cylinder that is surgically placed directly into the jaw and serves as a foundation for a replacement tooth. An abutment is a small titanium attachment that is typically screwed into or onto the implant and connects the artificial tooth to the implant. The Company believes that its dental implant systems are superior to traditional restorative treatments such as bridges and dentures because the permanent nature of dental implants permits patients to regain most of the functionality of their natural teeth. Dental implants also may reduce the progressive atrophy of the jaw often caused by the absence of teeth. The Company has demonstrated the safety and reliability of its implants at success rates of over 96% (representing full integration of the implant with the bone) in seven years of clinical studies involving more than 1,600 implant patients. 

"The Company markets its products to dental professionals involved in the implant procedure, including oral surgeons, periodontists and implantologists who typically perform the implant surgery, as well as general dentists and prosthodontists who often prepare the crown or other prosthetic device that is affixed on top of the abutment. The Company currently distributes its products in the United States and Canada through its direct sales force consisting of more than 40 persons, which the Company believes is the largest North American direct sales force for dental implant products. The Company markets its products internationally (outside the United States and Canada) in more than 35 countries through 26 independent distributors who do not sell competing implant products. "

Summary Of Financial Data
In thousands except for Net Income Per Share.

Comments
A company with a product already in the marketplace, indeed a family of products with marketshare. This fact should stir interest among investors who are usually asked to fund dreams and hopes. The products support 73% gross profit margins and can claim domestic and international distribution.

But wait, there’s more. The Company is an ISO 9001 certified manufacturer. This small fact should not be underestimated. The quality of a company’s manufacturing is a measure of its maturity.

And the coup de grace—a track record of net income.

That’s part of the reason why the Company can show a healthy opening price of $15 per share. The other part involves its potential for income growth.

So-So Revenue; Some Profit
Dental implants are a small but lucrative niche. Although the total worldwide market is a scant $380 million, the margins can be high. Annual industry growth is a respectable 6–10% among a relatively unfragmented, competitive playing field. An aggressive player, as the Company has shown itself to be, intends to grow through acquisition to become the dominant supplier. In fact, with the May ’97 acquisition of Interpore International the Company now claims to be the largest supplier in the domestic market. It should do $38 million in ’97.

From ’94 through ’96 the Company showed net income ranging between 4% and 5.3%. This low percentage would not be interesting if it were to stay constant over the years, but an early stage company having any net income at all is an increasingly rare event. Economies of scale through growth and the natural process of maturation should help bring their costs down. EBITDA is up around 17.5%. This popular parameter has hit a resonant chord among analysts who think it presents a clearer picture of company performance. Given improvements in gross margin and a reduction in G&A costs, the Company should be able to raise the EBITDA value another 8 points over the next few years putting it around 25%. Such an improvement would not go unnoticed.

Paying Down Debt With The Proceedings
The IPO will move an immediate 4.7 million shares into the market netting the Company $64.9 million. Over half the money ($34.4 million) will be used to pay down the debt of purchasing the Company from Bausch & Lomb in 1996 when it was a wholly owned subsidiary. The remaining money will cover revolving lines of credit and term loans. This will clear its books of most debt. If it resists further acquisitions for a year, the Company could show a net income of $1–3 million. Any earnings at all this soon after its IPO should have a positive effect on the stock.

There will be 10.9 million shares outstanding after the IPO for a market capitalization of $163.5 million at $15 per share. This figure is twice their claimed assets of $83 million. That won’t raise eyebrows, but capitalization is 7 times their tangible assets, which will and should. Whether investors care, however, is doubtful.

Another couple million shares could creep into the market through the exercise of warrants and options, which could inhibit the upside swing.

It’s worth noting that the Company’s assets consist of $59.3 million in goodwill. Goodwill is simply the excess of the purchase price over the net book value of net assets acquired. In other words, the purchasers of Steri-Oss claim to have paid substantially more than the fair market value of the business acquired where

Purchase Price = Tangible Assets + Goodwill

The actual purchase price appears closer to $37.5 million putting it at less than the goodwill, which clearly makes no sense. If there’s an answer to this discrepancy, it’s lost in obfuscation. But again, nobody will care, because substantial goodwill can make the balance sheet look strong, which in turn works to the Company’s advantage in justifying a high market capitalization.

The problem with goodwill is that it becomes an annual, amortized expense of $1.5 million with a direct and negative impact on net income. This expense could mean the difference between a profit and loss. Emphasizing EBITDA, which excludes amortization, lets them avoid showing this impact.

Company Maturity
The Company’s pedigree is not bad. Bausch & Lomb itself earned $83 million on $1.9 billion in sales in ’96. Most of the management is carried over from those days, so there’s continuation, and it appears to be strong.

The dental implants are FDA approved, Class III medical devices. Such a classification is neither easy nor inexpensive to get and by itself becomes a barrier to entry for other players.

It’s worth noting that most medical technology companies are going public these days to tap into the well of funds needed for the arduous process of clinical trials and FDA approval. At least in this case the investor is spared from that speculative and time consuming exercise.

It should be a comfort to the investor that the marketing plan appears clear in its goals and under implementation. Marketing has been ongoing for 11 years, manufacturing and distribution are to a degree in place, and it’s had the time to enrich and productize its line of devices.

The Company should do well.