Baird 1
Baird 1
Baird 1
Baird 1
Baird 1

State of the Industry

Oct. 1, 2013
There are two major ties between the wider economic picture and specific dental trends: consumer confidence and jobs.

There are two major ties between the wider economic picture and specific dental trends: consumer confidence and jobs.

"The first correlation happens in real time: as consumers feel better, dental trends get better," said Jeff Johnson, OD, CFA, and a senior analyst of medical technology at Baird. "Jobs impact on a lagging basis — good or bad. If you lose your job, it might not be another six or 12 months before you miss an appointment. Once you get a job, it might not be another six or 12 months until you go to the dentist."

From recession to growth

In the last six months, Johnson told me, consumer confidence has hit multiyear highs, and though job recovery isn't what analysts at Baird had hoped, 150,000 to 170,000 new jobs are added monthly. This number has been consistent for the last three years. While the market growth rate is typically 5% to 7%, dental growth was only 4% to 6%, becoming flat or even negative during the recession.

"Dentists felt a little more pain during the recession from 2008 to 2011 than the stocks that I follow: those stocks not only get impacted by patient volume, but by pricing," said Johnson. "For the most part, manufacturers continue to raise prices every year, so the distributor and manufacturer are getting one to two points from revenue growth that dentists weren't seeing." In fact, he added, "dentists will tell you that for those few years, their profits were declining."

But as jobs and consumer confidence increase, so does the dental market. "Today we're seeing 3% to 3.5% industry growth — that's just in the last few months. Earlier this year it was closer to 2.5% to 3%." And with that growth, the North American dental consumables market for manufacturers and distributors grows as well. "Not by much," Johnson said, "but we're at 3.5%. If we continue to see improvement in the U.S., if consumer confidence stays high and we continue to add as many jobs as we have for the next few months, then we can get to 4% or 4.5% sometime over the next six to 12 months."

But consumer confidence is wary of foreign affairs: particularly the darkness on the horizon that is the Syrian civil war and potential U.S. involvement.

"It's a slim chance that we'll get worse from here, but I'm not convinced that we'll see significant improvements from here either. I'm hoping that we'll stay at the 3% to 3.5% growth rate."

So we'll see through the next few months whether there will be some improvement, or whether we'll stay where we are as far as growth is concerned. The good news is that we won't likely be going back to that 2.5% we saw earlier in the year.

Spending

Despite dentists using the recession-proof money-doubling tactic of folding dollar bills and stuffing them in a sock, spending was consistent in one area.

"The old CEO of Sirona used to say, ‘Technology can bust the cycle,' and I think he was right," Johnson told me with a laugh. When the economy is slow, dentists, understandably, are less inclined to make renovations to their offices or expand, even though they need the space — but they will look for other revenue sources, especially when they're suffering in certain areas. "CAD/CAM can be that extra profit source. They'll look to using that, rather than giving profits to labs." It's also a lot easier to use digital imaging in the office rather than developing images onsite in a makeshift darkroom that doubles as a utility closet. "Tech continues to sell well, regardless of the market. It didn't sell as well during the recession as it could have, but well."

Now that we're out of the recession and analysts are seeing growth, many have made claims that the penetration rate of CAD/CAM in dental offices will be up to 50% within the next five years. "They're currently around 15%, and with the typical growth at one or two points a year, that puts us at 20% to 25% by 2018." To assume that we'll see a 50% rate in just five years, he adds, is to assume a significant penetration rate. Johnson isn't convinced it's likely — especially because of the hurdles dentists have to cross to get there.

"It's difficult to get a dentist to change how they practice dentistry, and to get them to spend $100,000 on a piece of equipment is nearly impossible," Johnson told me. These two things are the impediments to that rapid growth possible claimed by some industry experts. "Let's say the 15% rate that exists now is because of the low-hanging fruit. The rest of the dentists will be those who are a bit more hesitant to change the way they practice."

Let's talk CAD/CAM

With CAD/CAM gaining a bigger presence in dentistry every day and in-office milling becoming the norm for many offices, where does that leave labs? Somewhere in the middle.

"Labs are benefiting from CAD/CAM right now," Johnson told me. "It's easier for them to do restorative cases when they're working off a digital file." They may not like dentists to have the option of in-office milling, but for the dentists who are using the CAD side, they're still benefiting. "Dentists just buy the scanner, send the file to the lab, and have them design the restoration."

Because labs can't compete with the convenience of in-office milling, especially for single-unit restorations, we're seeing changes already. "Closures and consolidations will continue, and CAD/CAM will change the way labs work and exist," said Johnson. But that doesn't mean it's all over — in fact, though there will be some "downward pressure" on labs from in-office milling (particularly of single-unit restorations and similar products), labs are still the best option for dentists who need multiunit restorations. Still, Johnson says, CAD/CAM means struggle and consolidation for many labs.

MDT

Finally, there's the medical device tax, which won a lot of press coverage at the end of last year, as many labs pondered what it would mean for them and how they would cover the cost of something that was implemented to support the Affordable Care Act, which, as many dentists and lab technicians proclaimed, had little to do with dentistry.

"It's interesting to compare and contrast the effect of this tax on the health and dental industries," Johnson said. "In orthopedics, spine, radiation, ophthalmic — where you have products sold into hospitals and have bigger buying groups — none of the manufacturers have been able to pass their price on down the line." The buying group, Johnson says, will refuse the increase. "They'll say, ‘No, you as the manufacturer need to absorb the tax.' Sure enough, on the companies I cover, their earnings growth has gone down by two or three points this year solely because of the tax."

But dentistry, as was suspected, faces the tax differently. For dentists who often run single-dentist offices, purchasing power is limited. "If you tell your distributor, ‘I don't want to pay,' you'll hit a wall." Because the price increase comes from the manufacturer, all of the distributors will have higher prices. This year, the cost was pushed down all the way to the dentist. It may have even been pushed onto the consumer, which was predicted late last year.

The good news is that it's just part of the yearly price increase. "We usually see a 1% price increase, but this year we saw a 2% price increase. Next year we'll go back to the 1% price increase. Going forward," he continued, "the price is now in the number."

The one sector this hasn't impacted, Johnson told me, is implants. "You have higher competition there, plus generic options and all that. Where there's more price competition in dentistry, you've not seen the price pushed through; the manufacturers had to absorb the tax themselves." It's the general consumables, the day-to-day products, where the tax has trickled down. But it doesn't seem to be a lasting problem when the annual price increase is taken into consideration.

A Glance At The August 2013 Baird Survey