The coronavirus threatens to lay waste to the dental economy—not just dentists but the companies, public and private, that supply them and drive innovation throughout the industry. What lies ahead? One of dentistry’s leading analysts surveys the landscape, using the Great Recession as one benchmark to get a sense of how dentists and manufacturers can escape what the pandemic has wrought.
By Jeff Johnson
THE WORLD IS A far different place today than before the Covid-19 pandemic burst upon the global stage and upended life for billions of people. As much as we all wish for a return to normalcy, it seems increasingly likely that many aspects of our modern existence will be permanently altered even once the virus has been defeated.
That sobering notion is likely to prove true even for dentistry, which in ordinary times can be said to be recession-resistant if not exactly recession-proof. In the short term, it requires no special feat of imagination to envision changes in patient demand and care delivery; longer-term, changes in purchasing behavior and the very makeup of a typical dental practice seem likely as well.
My colleagues and I—medical-device analysts covering the dental space for Robert W. Baird & Co.—have spoken with many dentists and industry leaders in recent weeks to try to understand what these propulsive changes might ultimately mean for the various publicly traded dental stocks we cover. These include Align Technology, DentsplySirona, Envista, Henry Schein and Patterson Companies, many of whose executives appear in these pages as part of this year’s 32 Most Influential package.
The immediate outlook, alas, is grim. The coronavirus outbreak will likely lead to depressed growth throughout the industry at least through the third quarter or the end of the year. This is sagging performance of a kind we’ve never imagined, much less seen, throughout nearly two decades spent covering these companies.
And Away They Go
Looking to attach some hard numbers to the overall sense of decline, we surveyed the same group of nearly 125 dentists across the U.S. a dozen times from early March through early June, and what we heard was harrowing. Respondents told us their annualized patient volumes, which were up slightly as recently as early March, fell 10 percent year-over-year by mid-March, and then 75 to 80 percent through all of April and the first half of May.
We did start to see some glimmer of hope beginning in mid-May, however, with patient volume declines moderating to 70 percent, then 65 percent and finally to 57 percent year-over-year as of our most recent survey, at the start of June. Even more encouraging, in that survey we saw patient volumes in the Mountain and Southeast states improve to levels down only 20 percent and 35 percent, respectively, versus levels from the year prior.
We’ll see what future surveys hold, but for now, our working assumption is that as additional dental offices open over the coming weeks, we could see patient volume declines across the U.S. moderate to 20 to 30 percent year-over-year. While that’s worse than we could ever have imagined at the start of 2020, it’s also better than we expected just a few short weeks ago, when more than a fifth of dental offices across the U.S. were closed completely and the rest were open only for emergency care.
That ground-level snapshot provides some raw data that we can then use to develop performance expectations for public dental companies. Indeed, we believe it’s likely that revenue declines for products such as general dental consumables likely hit their nadir in April and could start to slowly recover over coming months at a rate similar to patient volumes, while demand for dental equipment and some specialty products such as dental implants could face a more extended period of pressure as dentists pull back on their purchases of the former and consumer-spending pressures affect the latter. While they aren’t a perfect proxy, lesser declines for general dental products relative to those for specialty products is similar to what we saw in 2008 as the financial crisis ebbed into the Great Recession.
Looking back at that dismal period as a guide, we also saw that although general dental demand remained constrained by higher unemployment and lower discretionary spending through 2009 and into early 2010, demand for specialty procedures—orthodontic care in particular—seemed to rebound sooner. Align Technology is representative: While it saw its global revenue growth slow to the low single digits in late 2008 and then decline by mid-single digits in the first half of 2009, its growth rebounded to the mid-teens in the final quarter of 2009 and to above 20 percent for the entirety of 2010. That boost was driven in part by greater demand for clear aligners at the expense of standard brackets and wires. It helps that orthodontia is one of the few areas of dentistry subject to deferred demand for a while but not forever.
Some general dental visits, by contrast, are lost for good during times of macroeconomic stress and job loss, as patients simply forego a cleaning or six-month checkup but resume their typical pattern of care after finding a new job with dental benefits. That’s what we saw during the Great Recession, when revenue growth for general dental consumables through distributors such as Patterson and Schein remained near flat (a bit above or below zero percent) for nearly two years starting in late 2008 and continuing until the second half of 2010.
Demand for dental equipment was even more volatile during the Great Recession, with mid-single-digit growth pre-downturn giving way to mid-single-digit (sometimes low-double-digit) declines during much of 2009 and portions of 2010. Not surprisingly, these declines were bigger for basic equipment—chairs, cabinetry, lighting—as dentists slowed their office expansion and remodeling plans, while demand for technology held up a bit better. To that end, a company like Sirona (now part of DentsplySirona) delivered upper-single-digit growth across its global platform as soon as the second quarter of 2009, following the launch of the company’s CEREC AC scanner and related upgrade-incentive programs.
Will Past Be Prologue?
Trying to apply some of this historical knowledge to the current dental environment, it’s likely that even as job losses appear to have plateaued, demand will fall dramatically across all areas of dentistry, including for general dental visits, specialty care and equipment purchases. Those tumbles will, unfortunately, be even more dramatic than those we endured during the Great Recession, as patient care was effectively shut down across the U.S. and most of the world—an external factor even the worst of 2008 and 2009 didn’t come close to replicating.
Bad news indeed. The better news is that as we witnessed a decade ago, we believe demand for orthodontics in particular could rebound sooner than what we might see for general dental or dental-equipment demand—potentially as soon as later this year or early 2021. Uncertainty regarding consumer spending over that period represents a potential risk, to say the least, but the same demand backlog that helped orthodontics recover in 2009 and 2010 could provide a similar assist starting later this year.
There’s also the fact that although patients might be slow to return to the general practice—where drill-and-fill dentistry leads to the aerosol-ification of blood, saliva and other fluids, they might be somewhat less concerned about such things in an ortho office, possibly allowing for faster demand normalization in those settings.
Focusing even more tightly on general dental care, it looks as though demand for cleanings and restorative work, unfortunately, could face lingering pressure into 2021—at least until a Covid-19 vaccine becomes available and patients can worry less about disease transmission. To that end, increased use of personal protective equipment (PPE) in the dental office is one of those “secular changes” the current pandemic might bring about, analogous to what we saw at the height of the AIDS crisis in the 1980s, when innumerable dentists transitioned at last to wearing masks and gloves during patient care.
Increased PPE use, however, could put added cost pressure on the typical dental office, especially given our skepticism that commercial insurance rates might increase to account for these additional costs. Dentists will have options: They could simply absorb the hit and accept a slightly reduced profit margin, or potentially begin to trade down to private-label or other lower-priced products. That, in turn, could augur a longer-term revenue risk to dental manufacturers and dealers across the industry.
A Future of Constant Change
The variables are legion. There’s a potential silver lining, though: Over time, technology and other value-added services from those same dental manufacturers and dealers could be a welcome offset to consumable-revenue pressure. For example, the move to digital impression systems, which has been gaining momentum for the past few years, could accelerate nicely later this year or early next as the benefit of eliminating impression-material costs helps control practices’ overall consumables expenses. Chances are that dealers and manufacturers alike will be more than willing to offer financing and other incentives to sell such equipment given low interest rates and the ability to stimulate near-term growth for their own bottom line.
Some of the value-add dealers, too, might have an even greater story to tell their individual dental offices in a post-Covid environment: Companies such as Schein, Patterson, privately held Benco Dental (the publisher of Incisal Edge) and others have a history of partnering with their clients and helping drive better patient recall and more complete dental billings. Private practices may want to lean more heavily on these dealer services as they work to rebuild their operations coming out of the current crisis.
Finally, it will be extremely interesting to watch how the practice of dentistry will change in the coming years, as dentists in their fifties and sixties who might be approaching retirement have now seen major practice disruptions twice in the last 12 years. Even younger dentists, and current dental students, likely remember what it was like to live through the Great Recession as a teen or young adult, and are worried about how the pandemic might affect their earnings—and, crucially, their ability to pay off their student loans.
All those factors could hasten the pace at which older dentists consider selling their practice to a larger DSO, which would give them limited (or no) equity risk and enable them to earn a living solely by delivering high-quality patient care. Those same factors might also make a steady paycheck from a DSO look increasingly appealing to young dentists and dental students, many of whom are saddled with hundreds of thousands of dollars in loan debt and might not have the time, patience or risk tolerance for trying to buy their way into an established private practice over the coming decade.
Our analysis suggests that DSOs now account for nearly 30 percent of dental billings in the U.S., but the pandemic could eventually drive that north of 50 percent in the next three to five years. That raises a host of additional questions for the dental stocks we cover: How do these ever-larger DSOs gain access to their supplies and equipment over time, and which of them might push more aggressively into specialty-dental areas such as implants and orthodontics in an effort to drive incremental revenue growth?
Those are questions for the longer term, however. For now, we’ll continue to survey our dentists and speak with industry leaders in an effort to better understand when (and how) we’ll see dental practices around the globe begin to reopen—and, of great importance, when patients might finally feel comfortable enough to start booking appointments and returning at last for their much-needed, long-overdue, pandemic-halted dental care. •
JEFF JOHNSON, No. 28 on this year’s Incisal Edge list of the 32 Most Influential People in Dentistry, is a Senior Equity Research Analyst at Robert W. Baird & Co. in Milwaukee.