Biolase: Letter Perfect?

"There were two management review meetings in 2005 (04/26/05 and 07/27/05) that should have noted the lack of an internal audit," the FDA's recent letter states. "But there was no prompt action taken by executive management."

The agency then goes on to complain about specific manufacturing procedures as well. It concludes by noting the hundreds of customer complaints that, five weeks ago at least, were still outstanding.

"This letter is not intended to be an all-inclusive list of deficiencies at your facility," the FDA says in closing. But "the specific violations noted in this letter and in the FDA 483 issued at the close of the inspection may be symptomatic of serious underlying problems in your firm's manufacturing and quality assurance systems."

Apparently, however, Biolase soon changed the agency's mind. The company announced two weeks ago that it "believes the issues have been fully resolved."

Future Pain

Still, Biolase faces plenty of challenges.

Notably, Syneron Medical (ELOS - Cramer's Take - Stockpickr) announced this week that it has won FDA approval for its new LiteTouch dental laser. The company says that the laser can be used for a "wide range" of dental applications.

"If Syneron begins to market the LiteTouch laser as a tool to cut through enamel," Arrow wrote on Tuesday, "this could hurt Biolase's much-needed recovery -- especially if Syneron prices its device below Biolase's Waterlase."

A big laser reseller has started undercutting Biolase already. National Laser Technology offers used Waterlase devices for virtually half price. Moreover, the company has started offering after-market service contracts -- reportedly a high-margin business for Biolase -- as well. It promises outstanding service without "ridiculous factory charges."

The company has apparently won some enthusiastic fans as a result.

"National Laser is professional, prompt and reasonable," one dentist claims on the company's Web site. "Finally, I can get my Waterlase serviced without breaking the bank. Thanks a million, NLT!"

Biolase cannot afford to lose much business. The company currently operates in the red and, by now, has a history of missing Wall Street expectations. Its stock has lost more than two-thirds of its value over the past few years as a result.