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907D07

DR. NICHOLAS BURNS, DDS

Eleni Mitsis prepared this case under the supervision of Professor John Haywood-Farmer solely to provide material for class
discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors
might have disguised certain names and other identifying information to protect confidentiality.

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Copyright © 2007, Ivey Management Services Version: (A) 2007-03-12

One Friday afternoon in September 2005, Dr. Nicholas Burns, a sole practitioner dentist from Busby,
Ontario, was driving home from a continuing education course on gum disease. At the course, he had
overheard two dentists discussing Waterlase®, the new dental laser that allowed dentists to perform dental
treatments without anaesthesia. One of the two was purchasing this technology. Burns had seen an
increasing number of journal articles about the laser in recent years. Although he had wondered whether
he should acquire one, he had held off because his instincts told him that the laser might not be the magic
wand many made it out to be. Furthermore, Burns was particular about the type of technology he
purchased for his practice. He wanted to ensure that it would be economically profitable or would provide
him with a piece of technology that was becoming standard in dentistry.

As Burns pulled into his driveway, he decided that this weekend he would assemble all his information
about Waterlase® and finally make a concrete decision about whether or not this would be a wise
investment for his practice.

THE CANADIAN DENTAL INDUSTRY

Canada had some 17,500 dentists1 — professionals qualified to prevent, diagnose, evaluate and treat
diseases and disorders of the human mouth, gums and teeth. Becoming a dentist in Canada was a rigorous
process that included at least three years of study at the university undergraduate level, usually in natural
sciences, followed by four more years at an accredited dental school. At the end of their studies,
graduates had to pass a board examination before obtaining their doctor of dental surgery degree (DDS).

1
Ontario Dental Association Web site, www.oda.com/stats, accessed January 15, 2006.
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Dentists choosing to specialize in particular areas, such as endodontics, oral surgery or prosthodontics,
spent at least another two years in school to become specialists.2

Each province had its own governing professional body to monitor dentists’ activities. To practise,
dentists had to be members in good standing with the relevant college. In Ontario, the Royal College of
Dental Surgeons of Ontario (RCDSO) represented about 7,700 practising dentists.3

Dentists typically worked as small business owners operating dental offices. Most were sole practitioners.
Only about three per cent of dentists worked outside that environment in hospitals, research facilities and
public clinics.4

Some 63 per cent of Canadians over 12 years of age visited their dentist once per year. Over half of these
patients had dental insurance coverage. Full or partial dental insurance was a common employee benefit
through individual or family plans, which covered spouses and children. Coverage, which depended on
the plan, varied greatly from no coverage to full coverage. The remaining patients were uninsured; they
paid for dental services out of their own pockets, which affected demand for nonessential dental services,
such as regular cleanings and cosmetic procedures. Many patients, because of financial limitations or fear
of dental treatment, could be considered “pain management” cases who sought treatment only when they
experienced significant pain.

Each year, RCDSO issued a schedule of dental fees, which varied by procedure. Dentists were legally
able to charge up to 20 per cent more than the fee guide or a lower amount if they wanted. However, to
maintain a fair playing field, most dentists did not try to undercut each other on price and followed the
RCDSO fee guide with little deviation.

Patient care was critical in dentistry, as patients looked for a comfortable experience from their dental
provider. Good service included a clear diagnosis with treatment options, comfortable treatment and
recovery, and pleasant staff. Although historically, patients depended on their dentist to recommend
treatment options, in recent years, aided by the proliferation of the Internet, patients were better informed
about their health in general. As a result, dentists were spending increasing amounts of time explaining
preventative measures and using teaching aids to explain treatment options to patients. This development
placed a significant responsibility on dentists to ensure that their entire staff was adequately versed and
kept abreast of new information and technology.

HUMAN TEETH

Human teeth, the hardest, most durable organ in the body, are anchored into the bone of the upper and
lower jaws by their roots (varying from one to four, depending on the type of tooth).

Typically, humans develop primary teeth when they are a few months old. These teeth usually fall out
between the ages of six to 12 and are replaced by permanent teeth. Humans generally have 32 permanent
teeth; moving from front to back, each quadrant contains two incisors, one canine tooth, two premolars,
and three molars, the back one of which is known as the wisdom tooth. Exhibit 1 shows a labeled
diagram of a human tooth. Teeth are similar to icebergs in that they have a visible whitish portion above
2
The American Dental Association recognizes nine dental specialties. Endodontists deal with tooth pulp or dentine; root canals are
their most common procedure. Prosthodontists specialize in the restoration of oral function by creating prostheses or restorations.
See: en.wikipedia.org/wiki, accessed March 10, 2006.
3
Ontario Dental Association website, www.oda.com/stats, accessed January 22, 2006.
4
Royal College of Dental Surgeons of Ontario Newsletter, October 2005.
Page 3 9B07D007

the gumline and a deep invisible portion (the root) that lies beneath the gumline. Although teeth are
rounded, dentists recognize five surfaces on the portion above the gumline.5 Human teeth comprise four
distinct types of tissue. The outermost layer above the gumline is called enamel, a thin layer about 1.5
millimetres thick made of mineralized material, which gives the tooth its hard structure and protects the
inner layers from harmful bacteria and sensitivity to changes in temperature. The second layer, called
dentin, makes up the largest portion of the tooth and surrounds and protects the pulp or core of the tooth.
The pulp, which extends to the base of the roots (the root canal), contains the blood vessels, which carry
oxygen and nutrients to the tooth, and the nerves. Below the gumline, the tooth is covered by cementum,
a bone-like substance that anchors the tooth into the alveoli (sockets) in the jaw. Enamel, dentin and
cementum are hard tissues; pulp is known as a soft tissue.

The two most common dental diseases are decay of the tooth (caries) and gum (periodontal) disease.
Caries is caused by sugars in the mouth interacting with bacteria to form acids that eventually corrode the
enamel of the tooth. When the corrosion penetrates the enamel of the tooth, a cavity is detected by x-ray
or an examination by the dentist. Cavities can occur on any tooth at any point in a person’s life. If the
cavity is detected early enough it can be reversed by the patient maintaining proper oral hygiene (brushing
and flossing regularly). If however, the cavity has progressed to a point were treatment is required, the
dentist must remove the decayed tissue and fill the area with an inert material.

Dental work also includes gum-related diseases, such as receding of the gumline around the tooth or the
development of pockets between the tooth and the gum. The most common treatment involves scaling
below the gum line to remove buildup such as plaque and tartar.

Needless to say, teeth are sensitive to the pressure and vibration associated with dental procedures, as
nerve tissue is often in direct contact with drills and hand tools. Thus, dental work is usually carried out
only after the patient’s mouth has been numbed (frozen) by the injection of a local anaesthetic into the
gum tissue.

TOOTH RESTORATIONS

The term “restoration” is a broad term encompassing many varied procedures. The most common use of
the term is applied to treating caries. Cavities vary by their depth and the number of tooth surfaces they
involve. Fillings are usually made of either amalgam (an alloy of mercury and some other metal) or
composite (a white acrylic-like substance). Some patients request fillings made from a gold alloy.

Amalgam fillings, which have existed for at least 100 years, are silver in colour and evolve to a dull grey
with time as the surface of the material oxidizes. In recent years, the use of mercury as a filling agent has
become quite controversial. Many believe that over time, mercury, well known to be toxic, might leak
from fillings and harm the patient. Although many studies have explored the safety of amalgam fillings,
little evidence has been found to link amalgam with human diseases. The Food and Drug Administration
in the United States, Health Canada, and the Royal Colleges still accept amalgam as an ideal and safe
filling agent. As a result, amalgam is still widely used and often the default substance for many dentists.
It is also the most cost-effective filling agent currently on the market.

5
The five surfaces are called the mesial (the surface nearest the front of the mouth), the bucal (the surface nearest the cheek), the
distal (the surface nearest the back of the mouth), the lingual (the surface nearest the tongue) and the occlusal or incisal (the biting
surface).
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Patients concerned with aesthetics or the potential health risks of amalgam usually opt for composite
(white) fillings at somewhat of a price premium. Exhibit 2 gives a sample from the RCDSO fee guide.
Different shades of composite exist; dentists usually try to match the filling with the precise shade of the
tooth. Composites have been used for only about 20 years.

Some time after treatment, many patients experience additional decay near existing fillings, requiring
removal of the current filling and additional tooth tissue and the hole refilled. When decay reaches the
tooth’s nerve, it might be necessary to perform a root canal, which involves drilling right to the end of the
root to remove the nerve, and then filling the drilled area.

DR. BURNS’ DENTAL PRACTICE

Dr. Burns graduated at the top of his class from an Ontario dental school in 2001 and purchased a
dwindling practice from a nearly retired dentist in Busby, Ontario, a town some 30 kilometres from
Ottawa. Busby had a population of some 3,000 people and served an additional 7,000 people in the
surrounding area. In addition to Burns, Busby had one other dentist, who had been practising about five
years longer than Burns.

Burns employed two part-time receptionists,6 two full-time hygienists,7 one full-time assistant8 and one
part-time assistant. The office was open approximately 46 hours per week (4.5 days) and 48 weeks per
year. Burns worked hard to build the practice and was proud of its financial performance. Exhibit 3
shows an income statement for the practice. Growth had been steady with an average of 40 to 50 new
patients per month, mostly through word-of-mouth referrals. By way of reference, the average Ontario
practice grew by eight to 11 new patients per month.9

Burns took pride in attending many continuous learning courses and, as a result, performed more services
than the average general dentist, including periodontal services, some orthodontics, endodontics and oral
surgery. Patients found this range attractive because they could avoid travelling to Ottawa to see a
specialist.

Burns’ vision for his practice was to have the greatest market share and be the most comprehensive dental
centre in the Busby area. At this point, Burns believed that he had a market share of about 40 per cent,
largely because his competitor had entered the market first.

Burns, who was extremely aggressive in pursuing his professional vision, was in the process of
constructing a new facility to house his dental office on a major street in the town. He knew that this
move would provide him greater visibility to the public and more space in which to operate and acquire
more advanced technologies. Burns’ staff worked well as a team. The receptionists had little trouble
filling open spots for the hygienists and the dentist. As a result, Burns was very focused on using his time
with patients efficiently and realized that in the coming months, he would have to increase his hours to
accommodate growing demand. He targeted a revenue of $250 per hour for himself and $350 per hour for

6
The receptionist’s tasks included answering the phone, booking patients, billing patients and making daily deposits at the bank.
7
The responsibility of the hygienists was to promote proper oral hygiene (brushing and flossing). Hygienists held a professional
license that allowed them to scale human teeth to remove buildup such as plaque and tartar. They were not allowed to drill teeth or
diagnose dental conditions.
8
The role of the assistant was to help the dentist during treatments, hand the dentist materials and sterilize all instruments following
procedures.
9
Source: Ontario Dental Association Statistics Package, 2005.
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the whole practice. He did his best to focus his time on high-margin items such as crowns, bridges and
extractions.

All appointments were booked in 10-minute increments called a unit. For instance, if an appointment was
projected to take 25 minutes, it would be scheduled for 30 minutes (three units of time). This would allow
for any potential delays in the appointment, such as the patient arriving late, patient questions or
procedure-related delays. Burns typically allowed three units of time per filling, to give himself a breather
between appointments.

One of Burns’ hobbies was to invest his earnings in the capital markets. He earned an average return of
15 per cent on his investments and joked with his accountant that that was his internal hurdle rate for
investment decisions.

THE WATERLASE® DENTAL LASER

Waterlase® was a patented technology developed by Biolase Technology and approved for use on all oral
tissues by the Federal Drug Administration in the United States and by Health Canada since 1998. It was
a stand alone machine that could be wheeled into the dental operatory and sit next to the dentist (see
Exhibit 4 for a picture). Although there were other laser brands, the Waterlase® held the greatest market
share at about 80 per cent.10 It used a focused beam of light that heated water molecules at a certain
wavelength. The effect was similar to sand blasting. The heated water molecules acted like small stones
being thrown at the tooth surface, slowly chipping away at the enamel and dentin layers. On soft tissue,
such as the gums, the laser used heat and air to cut, enabling better clotting and healing for patients
following treatment. This energized combination of heat, water and air allowed the laser to remove small
to medium sized cavities, cut bone tissue, remove canker sores and lesions and sterilize root canals.
Because the laser also had an analgesic effect on the tooth, it usually eliminated the need for the
traditional anaesthetic administered by a needle. Although some dental laser salespeople claimed that
dental lasers totally eliminated the need for anaesthesia, Biolase claimed that its product only reduced the
likelihood of needing anaesthetic or the amount administered.

Although dental lasers eliminated the vibrations and haunting noise of the traditional drill, they made a
rapid popping noise as they worked. In effect, patients and dentists were trading one sound for another.

The Waterlase® technology could not cut through metal, as the metal reflected the laser beam. In
addition, constantly hitting metal with the laser beam wore it down over time, resulting in the need for an
expensive repair. Thus, lasers could not be used on teeth with amalgam fillings or porcelain on metal
crowns. This was a significant drawback, because millions of people had amalgam fillings which would
require treatment.

Also, the laser was significantly slower than the traditional drill and did not provide the tactile feedback
dentists were accustomed to while drilling. Dentists using lasers had to stop and check their work
frequently to ensure they did not remove too much tooth tissue.

Laser technology had not been widely adopted. Of about 163,000 dentists in the United States, only about
2,500 used lasers,11 and in Canada, out of 17,500 dentists, only about 200 lasers were in use.12 The laser

10
Biolase Technology Annual Report 2004
11
Biolase Technology Annual Report 2004
12
Biolase Web site: www. Biolase.com, “Find a Waterlase Dentist Near You,” accessed, March 12, 2006.
Page 6 9B07D007

could be purchased for approximately $87,000 plus 15 per cent sales taxes. The warranty lasted for one
year. It could be leased for $2,750 per month for four years, excluding maintenance.13 Maintenance
would cost about $3,000 per year. Biolase offered a training course that was mandatory for adopters.

TOOTH RESTORATIONS USING THE WATERLASE®

Restoring teeth using the Waterlase® was only slightly different from the traditional method. Instead of
applying topical anaesthetic and injecting a needle to numb a quadrant of the mouth, the Waterlase® used
a desensitization process to numb the tooth to be worked on. Once the tooth was numb, the dentist began
to remove the decayed tooth tissue. Dr. Burns and some colleagues estimated laser restorations to take
longer than the traditional method (see Exhibit 5).

Another consideration with the Waterlase® process was that if a patient complained of pain during the
procedure, the dentist had to administer anaesthetic using a needle in the middle of the procedure. This
extra step further slowed down the process, as anaesthesia took some time to take effect. If the procedure
could be performed free of anaesthetic, Burns would save approximately $1.80 per restoration on the
needle and anaesthetic cost. The fee guide charge included the anaesthetic cost; Burns would still charge
the full amount regardless of whether he administered a local anaesthetic.

Restorations consumed approximately 65 per cent of Burns’ total work time. About half of the
restorations were amalgam, some 70 per cent of which involved teeth with pre-existing amalgam fillings.
In contrast, only some 50 per cent of composite restorations involved pre-existing fillings.

DR. BURNS’ VIEWS

Dr. Burns knew he had a lot to consider, but he did not know how to sort through all the information to
make the right decision. He knew that he would have to decide soon so he could act on this opportunity
or, alternatively, focus his investment capital elsewhere. He commented:

I know that the laser is a powerful marketing tool. People hate going to the dentist
because of the needle. Getting rid of the needle would be fabulous, but I worry what
people will think if they are in the minority who still require anaesthetic. They may view
my office marketing as a gimmick. This would be very embarrassing, since reputation is
everything in this business.

Also, I initially thought that the laser was a better option for patients who avoid the
dentist because they are deathly afraid of needles, but realistically, these patients are
afraid of every aspect of the dental office. They would be better candidates for
intravenous sedation or general anaesthetic, not the Waterlase®.

I really like the benefits the laser offers on soft tissue healing and coagulation. Patients
would certainly appreciate bleeding less and healing faster. Less blood would make it
easier for me to see the treatment area more clearly and to treat patients who are on blood
thinners and experience severe bleeding. My practice concentrates mostly on hard
tissues such as tooth structure, however, so this benefit would be less evident to my
patients.
13
Dr. Burns’ estimate based on information received from the Biolase Sales Representative for Eastern Ontario.
Page 7 9B07D007

I am concerned as to whether or not the laser would pay for itself quickly and what it
would do to my scheduling, since it is slower than the drill. I’m at capacity right now,
working like a machine to maintain an efficient practice. Slowing that pace down would
have to offer a financial benefit. I think that it is realistic to assume that I could gain an
additional five patients per month as a result of the laser. Each patient is worth about
$350 per year to my practice, so that is significant.

The other issue is that the laser is not cheap and the technology is still being improved. I
would be very upset if I invested in the Waterlase®, and a couple of years down the
road, a newer and better laser is released and I’m stuck with the old model that cannot
cut through metal.

My colleagues in the United States get away with charging up to 30 per cent more for
laser procedures, but I know that I can’t get away with that in small-town Canada.
Insurance companies will not pay a mark-up, since their coverage is based on the
procedure, not on the technique used.

Lastly, I don’t know if the laser would really help me gain market share, since the other
dentist in town could easily acquire the same technology and mimic my marketing. I
don’t want to initiate a costly technology war between my competitor and me.

Despite my hesitancy, part of me says this laser is a good tool, and that’s why there are
200 of them in use across Canada. The question is whether it’s the right tool for my
practice.
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Exhibit 1

CROSS SECTION OF A HUMAN TOOTH*

Cusps

Enamel
Dentine
Gumline
Crown
Gum tissue

Cementoenamel junction
Bone

Pulp horn
Pulp, containing blood
vessels and nerves
Cementum
Root

Root canal containing nerves

and blood vessels

*This diagram is not drawn to scale

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Exhibit 2

SUGGESTED PRICES OF AMALGAM AND COMPOSITE RESTORATIONS

Bonded Amalgam Fillingsa

Anteriors Bicuspids Molars

Number of Charge Number of Charge Number of Charge

surfaces surfaces surfaces
1 $47.19 1 $47.19 1 $58.98
2 91.68 2 91.68 2 104.78
3 104.78 3 104.78 3 130.98
4 or 5 172.79 4 or 5 172.79 4 or 5 230.39

Bonded Composite Fillingsb

Anteriors Bicuspids Molars

Number of Charge Number of Charge Number of Charge

surfaces surfaces surfaces
1 $95.17 1 $95.17 1 $107.07
2 118.97 2 145.45 2 158.68
3 158.68 3 158.68 3 171.90
4 or 5 224.79 4 or 5 247.35 4 or 5 261.90

a
The average cost for an amalgam filling was $109.80 at Burns’ office.
b
The average cost for a composite filling was $151.72 at Burns’ office.

Source: The Royal College of Dental Surgeons of Ontario Fee Guide, 2006
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Exhibit 3

2005 INCOME STATEMENT OF DR. NICHOLAS BURNS, DENTISTRY PROFESSIONAL

CORPORATION

Gross revenue $759,700

Expenses:
Salaries and wages $299,700
Supplies 50,800
Depreciation 8,000
Marketing and promotion 6,100
Rent 24,000
Utilities and telephone 9,200
Insurance and licensing 15,300
Equipment repairs 7,200
Bad debt write-offs 4,500
Professional development 19,000
Interest and bank charges 5,350
Total expenses $449,150

Net income $310,550

Source: Practice files.

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Exhibit 4

THE WATERLASE®

Source: www.biolase.com, accessed March 12, 2006.

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Exhibit 5

ESTIMATED TIME FOR RESTORATIONS BY TECHNOLGY

Amalgam Fillings
Standard Dental Drill Waterlase
Step Time (mins.) Step Time (mins.)
Apply topical anaesthetic and freezing 3 Desensitize 5
Wait for anaesthetic to take effect 5-10
Drill to remove old filling(s) and decay 2 Waterlase removal of decay 16
Prepare for restoration (place band and 1 Prepare for restoration (place band and 1
cotton) cotton)
Mix the powder amalgam 0.2 Mix the powder amalgam 0.2
Pack the amalgam 4 Pack the amalgam 4
Wait for amalgam to set 3 Wait for amalgam to set 3
Verify contact 5 Verify contact 5
Total time 23.2-28.2 Total time 34.2

Composite Fillings
Standard Dental Drill Waterlase
Step Time (mins.) Step Time (mins.)
Apply topical anaesthetic and freezing 3 Desensitize 5
Wait for anaesthetic to take effect 5-10
Drill to remove old filling(s) and decay 2 Waterlase removal of decay 16
Prepare for restoration (place band and 1 Prepare for restoration (place band and 1
cotton) cotton)
Etch the cavity preparation 0.2 Etch the cavity preparation 0.2
Rinse the area 0.1 Rinse the area 0.1
Air dry the area 0.1 Air dry the area 0.1
Apply prime and bond 0.3 Apply prime and bond 0.3
Apply composite in 2 millimetre 1 Apply composite in 2 millimetre 1
increments and cure increments and cure
Remove band, polish, trim, check 10 Remove band, polish, trim, check 10
occlusion occlusion
Total time 22.7-27.7 Total time 33.7

Source: Estimates from Burns and some of his colleagues.