Invest in the future of dentistry

It's safe to say that dentistry is not the most glamorous branch of medical science. For a start, most of us are scared of dentists according to some surveys, up to three-quarters of the population experience at least some anxiety before they go to sit in the dreaded chair.

And it's not the most innovative sector either. Up until recently, the basic tools and techniques were the same as they were ten, 20 or even 50 years ago. While other fields of medicine promise exciting new cures, almost all of the recent improvement in dental health has come about because of improved preventative measures, such as better awareness of the causes of tooth decay.

However, beneath the unpromising exterior, several long-term trends are in place that should make dentistry attractive to investors. The tools of the trade are starting to be replaced with ones better suited to the 21st century. Modern gadgets include dental lasers, special drills, and new ways to see inside the mouth.

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Meanwhile, despite the recession, a white, even smile is increasingly seen as a necessity rather than a luxury, even on this side of the Atlantic. Demand for cosmetic dentistry has grown sharply among the middle-aged and late-middle-aged in particular.

There's an emerging-market angle to all this too. While China and India's middle classes enjoy greater wealth and a higher standard of living than they did ten years ago, the quality of dental care is still low, with privacy and hygiene in short supply. Hence there is a big untapped market out there for those who can provide Western-quality treatment at affordable prices. Even those who have already lost their teeth are potential consumers, with growing demand for dentures.

The dental technology revolution

The most visible examples of new technology are dental lasers, which can replace drills in many operations. Lasers automatically close incisions, which all but eliminates the need for stitches in the case of serious dental surgery, such as the removal of impacted wisdom teeth. As a result, the risk of infection is cut and the likely level of swelling reduced.

While early versions were made in the 1990s, they were very expensive and their uses limited. Today's lasers still cost more than the hated drill, but the gap has narrowed, and the quality has also improved. Given the advantages for patients, their use will become ever more widespread.

X-ray film is also becoming less common, with increasing numbers of practices using digital scanners. Not only does this reduce the amount of radiation a patient receives, but it also allows the image to be transmitted to the dentist instantly and stored digitally, without the need for film processing. This saves time and cuts down on the amount of office space needed. Indeed, it may soon be possible to scrap X-rays altogether.

The latest generation of ultrasound machines can produce images that are nearly as accurate as X-rays, although conventional methods may still be needed in a few cases. However, optical-coherence tomography, which uses near-infrared light, may be the best long-term solution. This is because it is able to penetrate deeper into tissue, allowing dentists to spot decay at an earlier stage.

Of course, even with better tools, the success of treatment still comes down to the skills of the dentist. Up until now, practical dental training has largely consisted of laboratory work on false teeth and mock operations on special dummies.

While this approach has worked reasonably well for generations of students, clearly there is room for improvement. The latest simulators allow students to gain practical experience more quickly, without putting anybody's teeth at risk.

For example, the Moog Simodont Dental Trainer, developed in conjunction with the Academic Centre for Dentistry in Amsterdam, uses virtual reality and haptics (equipment that provides feedback) to let students simulate all aspects of basic dentistry, from diagnosis to treatment.

Another added benefit is that the computer can log the steps taken by the student, which can then be reviewed afterwards. This enables the lecturer to pick up errors without the need for constant oversight.

As well as improving care quality, simulators can save lives. While most dental surgery is extremely safe, dentists (and their assistants) occasionally have to deal with complications arising from treatment, such as dangerous reactions to anaesthesic. If not dealt with quickly enough, such emergencies can have deadly consequences.

But because such accidents are so rare, dentists may need extra training to keep their skills sharp. One programme developed at the University of Texas Health Science Centre presents dentists with a series of scenarios. They are then forced to make rapid judgments based on a patient's behaviour and past medical history.

A brighter, whiter smile

Dentistry isn't just about what's medically necessary. Cosmetic dentistry focuses on improving the appearance, rather than the health, of teeth. And it's rapidly growing in popularity.

Once derided as a symbol of vanity, it is fast entering the mainstream as patients become less tolerant of imperfections', such as stained or misaligned teeth. Dentists are also more willing to recommend cosmetic treatments as follow-ups to conventional procedures, such as extractions.

One area experiencing a big surge in interest is tooth whitening, which is now the second-most popular form of dental treatment in Britain.

At the lowest end of the market, you can buy DIY tooth-whitening kits, based around bleaching agents, over the counter. Sales of these packages are thought to have risen by up to 500% last year. At the higher end of the market, increasing numbers of people are paying to have the procedure carried out professionally, or even to have expensive veneers fitted.

Another common procedure that straddles the line between cosmetic and medically necessary is tooth straightening. Braces have been a rite-of-passage for American and, increasingly, British teenagers for years. But they can be uncomfortable, inconvenient, and highly visible.

This is why invisible aligners, which apply a smaller degree of pressure and are removable, are gaining in popularity. This increased comfort and flexibility comes at a price, creating an opportunity for brands such as Invisalign, which has created a proprietary system based around 3D models.

Older, wealthier populations also mean more demand for dental implants. These allow a replacement tooth or crown to be fitted direct to the jawbone. Implants look more natural than false teeth, last longer, and are more practical. They also involve surgery and substantial recovery time, which means they are still far from being universally accepted.

But improvements in both technology and technique are driving down the length of treatment needed. Instead of the nine months that used to be commonplace, implants can be fitted, healed and fully operational within as little as six weeks.

The proliferation of computer-aided design and manufacturing technology, including 3D printing, means that crowns can be printed' at the dentists', rather than ordered from specialist suppliers, which reduces the number of patient visits. Overall, demand for implants in the US is projected to grow by more than 10% a year for the next few years.

The ultimate goal of cosmetic surgery is to regrow missing teeth using adult stem-cell technology. The structure of the human mouth, with its complex network of nerves, makes this extremely difficult. Indeed, researchers in this field have said it is comparable to creating a human heart from scratch.

However, experts in Tokyo and at Columbia University in New York have already worked out how to regrow teeth in mice in as little as nine weeks. And last year dental surgeons in India created a stir when they used stem cells to regrow bone in patients' jaws, thus enabling them to receive implants.

Growth in emerging markets

For now, most dental spending occurs in developed countries, especially Europe and North America. Dental health is not yet seen as a priority for those in less economically developed parts of the world. But with China approaching middle-income status, and the Indian middle class expanding greatly, demand for dental services is set to explode in both countries.

Professor Colman McGrath of the University of Hong Kong thinks that "China's development has changed, and will continue to change its oral health environment. People are more aware of the importance of oral health and are more willing to spend time and money on fixing their teeth."

Other industry experts agree that the Chinese dental market has gigantic potential. Stanley Bergman of dental supply and services company Henry Schein Inc thinks that, at some point, China will "obviously be the largest provider of dental services in the world".

In the shorter term, Bergman believes that total spending will double within the next five year. RnR Market Research is even more optimistic, predicting that it will grow by 20%-30% a year. Infodent International expects the Indian dental market to see double-digit growth, with technology experiencing a particularly rapid demand in growth.

One major opportunity lies in the provision of high-quality dental care. Chinese dental hospitals are usually overcrowded and impersonal, while existing private clinics lack privacy and care standards are variable. A significant number of dentists still work out of open-air market stalls, with predictably dire implications for basic hygiene.

India has similar problems, with the magazine Outlook India complaining that "malpractice abounds. Doctors overcharge, deliberately misdiagnose and practice shoddy pavement dentistry for pecuniary gain." And overall, there is a severe shortage of dentists. According to the World Health Organisation, China and India have 0.4 and 0.8 dentists for every 10,000 people. That compares with 5.3 dentists per 10,000 people in Britain.

Already private operators are emerging in both countries to try and improve the level of care and take advantage of economies of scale. In China, this trend is being dominated by companies with experience running clinics in other countries, such as the Singaporean chain Q&M Dental Group.

In India, the main impetus is coming from domestic companies with experience of the wider healthcare sector making sideways moves into dentistry. For example, Apollo Hospitals and Trivitron, which makes medical equipment, have created Alliance Dental Care. This company, which already runs clinics in several of India's largest cities, has announced plans for a major expansion. We look at the best ways to profit from all these trends below.

The stocks to buy now

Investing in fast-growing technology in fields such as this one can be risky, particularly when the stockmarket is in bullish' mode and keen to drive prices beyond the bargain levels we prefer to buy at. However, the long-term prospects for the dental industry are so strong that we think it's worth having some exposure to the business. Here are some of the most interesting stocks in the field.

The acknowledged pioneer in the field of dental lasers is Biolase (Nasdaq: BIOL). Until now its emphasis has been on getting its products to market, and so profitability has taken a back seat. However, approval by the US regulator, the Food and Drug Administration, of Biolase's soft tissue laser (which also has huge potential in fields beyond dentistry) should see it start to reap rewards from its efforts.

Indeed, it is so confident in its future profitability that it is aiming to pay a 2% dividend this year. Biolase has also secured the US distribution rights to a series of low-radiation digital dental imaging systems. This means that it should do well from the phasing out of conventional X-rays.

Q&M Dental Group (Frankfurt: QMBN) is the largest provider of private dentistry in Singapore. Its domestic sales have nearly doubled in the last three years. However, its 7% domestic market share means there is plenty of room for more. Q&M is now focusing on China, taking over existing Chinese dental clinics and hospitals with the aim of bringing them up to Western standards.

These plans have already drawn huge interest, enabling Q&M to sell a 20% stake in its Chinese subsidiary. This will fund mainland growth without putting too much strain on the parent company's finances. Q&M trades at 21 times estimated 2013 earnings.

Another company looking towards China is Henry Schein Inc (Nasdaq: HSIC). It distributes equipment and provides services to a large number of vets, doctors and dentists (who account for 50% of revenue), and just over a year ago, it opened its first Chinese distribution centre. This means it should do well from the growth in demand for dentistry in China.

The company has a strong track record, growing sales at an average annual rate of 17% since it went public in 1995. It is expected to expand earnings per share by 21% in the next two years. It trades at 16.2 times forward earnings, only slightly above the market average.

Align Technology (Nasdaq: ALGN) is benefiting from the global growth in demand for cosmetic dentistry. Overall sales grew by 10.8% at the end of last year, thanks mainly to its removable aligners, which help to correct crowded teeth, and account for more than 90% of revenue.

A special version targeted at the teenage market has done well. If efforts to break into Russia, China and the Middle East are successful, then the growth rate should rise further. It currently trades at 21.3 forward earnings.

Sirona Dental Systems Inc (Nasdaq: SIRO) is one of the major manufacturers of high-end dental equipment. It gets 70% of itssales from digital imaging systems and technology that enables crowns and bridges to be produced quickly by the dentist, without the need to order them from an external supplier.

However, it also makes money from treatment centres and dental instruments. Since 2006 it has grown revenue at 11% a year and profits by 13%. Although it used to be extremely highly leveraged, it now has more cash than debt. It has a forward price/earnings (p/e) of 18.

None of the stocks here are plodding blue chips, but Neostem (NYSE: NBS) is the riskiest of them all. Other than a small amount of revenue from licensing its technology, most of the firm's value lies in its pipeline of adult stem-cell therapies. Chief among these is a research project focused on the use of VSELs (adult stem cells found in bone marrow) to fight gum disease.

The research is in Phase II clinical trials (Phase III is the last phase before approval), a first for this type of therapy. The firm recently sold its stake in a Chinese generic drugs manufacturer, which has enabled it to cut its debt and raise the cash on its balance sheet. It's a high-risk punt, but if it comes good, it could pay off handsomely.