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Weekly Dental Survey - Settling in, Looking for Post-COVID Changes

By Jeff D. Johnson, O.D., CFA

Republished. Original Source: Baird Equity Research
April 14, 2020

In our fifth consecutive week of surveying dentists, patient volumes declined, on average, 80.5% y/y. While a big number, this was the smallest week-to-week change in several weeks, suggesting we may be close to a patient volume bottom after accounting for emergency dental care. A new question this week, however, suggests dentists could turn more price sensitive on the consumables front and may purchase less equipment post-COVID, representing risks we’ll need to monitor, even as we maintain our Outperform ratings on ALGN, NVST, and XRAY.

On April 9, we fielded our fifth consecutive weekly survey to the same group of U.S. dentists, with results from 92 of those dentists including:

  • Patient volumes have now contracted, on average, 80.5% y/y in recent weeks, the smallest week-to-week change in y/y declines in several weeks (-76.7% last week). Assuming at least some level of emergency care across a number of offices (63% of respondents’ offices remain available for emergency care), we believe this 80% y/y volume decline is likely at/near the bottom of what we’ll find over coming weeks.
  • The biggest sequential change in patient volume contraction happened over the past week in the Mountain region (-90% y/y vs. -71% y/y in prior week), followed by the MidAtlantic (-84% y/y vs. -76%), not surprising as stay-at-home measures increased in recent weeks in these areas after previously lagging other regions.
  • For dental equipment, y/y spending expectations have now been fairly stable for four straight surveys. To be clear, respondents suggest their spending on equipment could fall ~50% y/y over the coming year, but those spending expectations have been fairly stable in recent weeks.

We did add a new, multi-part question to our survey this past week asking about practice expectations post-COVID (page 10), with respondents telling us (in order of most likely) that they expect to spend more on PPE but less on premium consumables, basic equipment, and even high-tech equipment in their post-COVID dental practices.

While not overly surprised by the above, we believe such secular changes for both equipment and consumables could ultimately prove problematic for all of our dental companies under coverage. Even so, we continue to believe those companies with significant exposure to specialty dental areas such as clear aligners (ALGN, lesser extent NVST and XRAY), dental implants (NVST with pending N1 launch and XRAY), and even new dental technologies (XRAY with Primescan/Primemill) could buck such a trend in 2021, at least to a certain extent.

To be clear, our confidence on the above is admittedly not sky high, so this is something we will need to watch closely in future surveys and once we truly get back to a point where dental volumes might be starting to rebound and dentists might have better/stronger conviction on exactly how their longer-term behavior might change. For now, however, we reiterate our Outperform ratings on ALGN, NVST, and XRAY, and our Neutral ratings on HSIC and PDCO.

April 9 Dental/COVID-19 Survey Results

Survey Profile

 Sample Size: 92 survey participants                    

 Method:  Survey conducted via online survey tool on April 9

 Survey Sample Profile – By Practice Focus/Size:

  •   Practice Focus: 90% of respondents consider themselves general dentists and 10% are specialty dentists. In comparison, the ADA estimates roughly 80% of its members are generalists and 20% of its members are specialists, meaning our survey is slightly biased towards general dentists.
  • Practice Size: 63% of our respondents work in a single-doctor practice and 37% work in multi-doctor practices. This is generally in line with what the ADA estimates to be just over 60% of dentists operating as sole practitioners.
  • Practice Type/Ownership: ~90% of respondents work in a practice that has 1-3 offices owned by the dentist(s), with only ~5% of respondents working in non-dentist-owned corporate practices.  This ~5% of respondents working in corporate-backed settings is below the 8.8% of U.S. dentists affiliated with DSOs in 2017 per recent ADA reports (and what we assume was likely closer to 10% of U.S. dentists by the end of 2019).   

Survey Sample Profile – By Geography

  •  Geographic Distribution. Of the 92 dentists who responded to our survey, 38% were from the East Coast, 25% were from the West Coast/Mountain region, and 37% were from the Central states. Compared to BLS data, the most significant deviations were in the Mountain, which was underrepresented in our survey, and the Middle Atlantic region, which was overrepresented in our survey.   

 

Dental Volumes/Sentiment Trends

Q1. How would you characterize patient traffic flow through your office over the last few weeks relative to the same period last year?

Results:  On average, respondents to our April 9 survey reported an 80.5% contraction in patient volumes over the past few weeks compared to the same period a year ago.  This was a third straight week of modest sequential fall-off in patient volumes vs. our survey just one week prior (April 2 survey) that showed a 76.7% contraction in recent patient volumes and our March 26 survey that showed a 63.6% decline in patient volumes.  With patient volumes now off roughly 80-90% across all geographic regions other than the Pacific (where patient volumes in this survey were down 66% y/y and steady in the negative mid- to upper-60% range for the past few weeks), we wouldn’t be surprised to see these y/y declines in patient volumes stabilize roughly near current levels over the next couple weeks, especially as we continue to assume 10-20% of patient volumes in a typical office are made up of emergent cases associated with pain (root canal, trauma, etc.).

With some state governors beginning to talk about loosening stay-at-home regulations over coming weeks, it will be interesting to see if patient volumes start to rebound a bit over the next several weeks.  Our gut is that such volumes improvements are still weeks, if not a couple months, away from happening, as we believe most states will ultimately need to wait at least another 4-6 weeks to truly start loosening such regulations.  Even once such loosening begins, we expect dental demand to be slower to recover given the nature of dentistry and the aerosolization of saliva and other fluids that happens in dental offices.

Q2. On a scale of 1-10, what have you seen in your practice over the last several weeks with regards to the following? Please rate with:1 = significant decrease, 5 = no change, 10 = significant increase.

Results/Our take: This question seemed more important when we first started asking it five weeks ago as we weren’t sure at the time what might happen to patient appointments, new and established patient exams, etc.  With most offices now closed, however, it’s not surprising that those types of activities score the way they have in our last few surveys.  We keep asking this question, however, as we believe a future uptick for things like appointment bookings for future exams and even purchase demand for general dental consumables might ultimately prove to be early signals that dental demand might be a few weeks out from ramping back up.  As alluded to above, we believe such a ramp back up for dental demand remains at least a couple months out and could prove even further out depending on COVID-19 infection and mortality curves and ultimately how the general population feels about going back to a dental office.  But for now, we’ll continue to ask this question, looking for any early signal that dental demand in at least some parts of the country might be inching closer to a rebound.

Q3. In response to ongoing coronavirus/COVID-19 issues, which of the following, if any, have you done recently?

Results/Our take: We changed the answer options in this question this week after reviewing recent ADA survey data and realizing that our answer options to this question in past surveys likely hadn’t fully captured what was happening in the real world (that some offices were closed completely, while some were closed to general patient care, but were still providing emergency dental care on an as needed basis).  To be specific, we previously just asked if a dental office was closed, not if it was closed “completely for a week or more to all patient care,” or if the office was closed “completely for a week or more except for emergencies.”

By offering different options between “closed completely” and “closed for all but emergency care,” we found in this survey that 22% of all offices were closed completely, while 63% were closed for all but emergency care.  That’s an uptick from the 60-68% of all offices that told us in the prior three surveys they were closed, but again, in prior surveys, we believe some offices that remained open for emergency care likely didn’t answer that they were “completely closed” because they were technically still open for emergency cases.  As such, we don’t believe the move we saw in our April 2 survey from 60% of offices closed to 85% of offices closed in our April 9 survey represents a sizable change in what’s been happening in the real world in recent weeks, but instead is more a reflection of how we changed the answer options for this question.  We’ll have a better idea if that is true in our next survey, however, and we’ll continue to ask this question over coming surveys with the hope that at some point over coming weeks to months we’ll see fewer offices closed to “all” and “all but emergency” cases.

Q4. If you have reduced your office hours but not closed your office completely in response to coronavirus/COVID-19 concerns, what is your best guess as to when you might resume normal office hours at your practice?

Q5. If you have recently closed your office completely in response to coronavirus/COVID-19 concerns, what is your best guess as to when you might re-open your office to patient care?

Q6. Regarding the timelines for the above two questions, on a scale of 1-10, what do you believe your overall visibility is when it comes to re-opening your office and/or normalizing your patient care hours? Please rate with: 1 = no visibility whatsoever, not at all confident on timing, 10 = high visibility, very confident on timing

Results/Our take: We just added these three questions a few weeks ago, and while we doubt dentists have much better insight than the rest of us regarding when the world – and dental care – might return to normal, we also thought the “expected time” to office re-openings or office hour normalization that we are now tracking with this question could be another way to look for an early signal about potential for recovery in the dental end markets once that number starts to fall. In comparing our April 9 survey to our April 2 survey, however, it’s clear that dentists expect their offices to be closed for quite a while still, as the average time expected until normal business hours resume and until closed offices re-open remained a ways out, at 5.25 and 4.91 weeks, respectively.  To be fair, these timelines were a bit improved vs. our April 2 survey (5.98 and 5.54 weeks, respectively), meaning this could be an early signal that dentists in at least some parts of the country are feeling a bit more optimistic about the timing of a potential office re-opening.  But with patient appointment numbers in survey questions above and dentist sentiment in questions below unchanged this survey vs. our past couple, we’re not going to over-read the modest change to this survey answer this week.  

Q7. Have you been notified of any shortage of product availability in regard to infection control/hygiene products in recent weeks? If so, what kind of products, and is there any specific color you can provide?

Results/Our take: Similar to a few of earlier questions, we’ve now asked this question for five surveys in a row, and while we began to see a modest fall-off in the percentage of respondents seeing constraints for PPE in our March 26 survey, the percentage of respondents pointing to PPE shortages has remained fairly consistent in our recent surveys.  As we’ve discussed the last few weeks, however, we believe it is difficult to try and read too much into week-to-week changes for responses to this question as some respondents might not actually know if there are specific product shortages right now because their offices are currently closed, while other respondents may be feeling fewer shortages right now simply because they have recently reduced their office hours and as such are ordering fewer supplies

Q8. Considering both the current state of your business (patient volumes and practice revenues) and your expectations for the next 3-6 months (again, focusing on both patient volumes and practice revenues), please rate your sentiment for each. Please rate with 1 = awful, 10 = great, never been better.

Results/Baird Take: Sentiment regarding the current environment slipped again in this survey, something that we believe is likely the result of a bit of broadening of the number of offices across the country that have likely closed in the past week or two as several state governors seemed slower than others to institute stay-at-home regulations.  Feedback regarding the next 3-6 months, however, remains better (more optimistic) and has now been fairly stable for three straight surveys.  How much investors should read into that is tough to know, but we are at least encouraged that dentists still expect the state of their business to rebound off current levels to some level of “better” 3-6 months from now.

Q9. On a scale of 1-10, to what extent do you agree or disagree with each of the following statements? Please rate with: 1 = Strongly Disagree and 10 = Strongly Agree

Results/Baird Take: This is a new question to our COVID-19 dental surveys this week, as we are starting to probe how dentists’ practice and personal behavior might change in a post-COVID-19 world.  Not surprisingly, respondents expect to spend more on PPE once they return to patient care at some point in the future.  The next highest response rates (highest on a scale of 1-10 with 10 being “Strongly Agree”) included less spending on technology and basic equipment, as well as potential for spending less on consumable dental supplies by either turning more towards private label and/or lower-priced products or looking for alternate low-priced sources of supplies (through on-line discounters, etc.).  While we’re not overly surprised by any of these responses and we believe a secular move in such directions for both equipment and consumables would be problematic for all of our dental companies under coverage, we continue to believe those companies with significant exposure to specialty dental areas such as clear aligners (ALGN, lesser extent NVST and XRAY), dental implants (NVST with pending N1 launch and XRAY), and even new dental technologies (XRAY with Primescan/Primemill) could buck such a trend in 2021, at least to a certain extent.  Our confidence on that point, however, is admittedly not sky high, so this is something we will need to watch closely in future surveys and once we truly get back to a point where dental volumes might be starting to rebound and dentists might have better/stronger conviction on exactly how their longer-term behavior might change.

Dental Equipment Spending Outlook

Q10. On a scale of 1-10 and given recent patient volume and practice revenue trends, what best describes your expectations for dental equipment spending over the next 6-12 months? Relative to the past 6-12 months, I expect equipment spending to be...

Q11. Regarding dental equipment, how much did you spend over the past 12 months and how much do you expect to spend over the next 12 months on dental equipment purchases?

Q12. Along the same lines but asking in percentage terms, how much more or less do you plan to spend on dental equipment over the next 12 months relative to what you spent over the past 12 months for each of the categories below?

Results:  Question No. 10 above asks qualitatively about dental equipment spending plans over the next 6-12 months (“on a scale of 1-10, will you be spending more or less over the coming year”), while Questions No. 11-12 are more quantitative in nature (“how much did you spend over the past year and how much do you plan on spending over the coming year?”).  For this question, respondents average spending expectation on a scale of 1-10 was 2.52 in this survey, translating to expected spending over the next year being somewhere between “modestly” and “much” lower.  This 2.52 average finding was a bit worse than last week’s 2.57 as spending inched closer to “much” lower rather than “modestly” lower, although findings for this question have averaged between 2 and 3 for four straight surveys now, suggesting to us that we’re starting to see at least some level of stability when it comes to dentists’ expected equipment spending outlook in a post-COVID-19 world.

For Question No. 11, respondents once again expect to spend just under $16,000 on dental equipment over the coming year, down ~$15,000 vs. average spending on equipment of $31,000 on a trailing twelve-month basis.  That $15,000 in lower spending on equipment over the coming year vs. the prior year is slightly less bad than the $16,000 in lower year/year spending on equipment we found in our April 2 survey, although y/y spending trends have now been down in a fairly tight range between -$14,000 to -$19,000 over our past four surveys.  As we discussed in last week’s survey, our view is that this modest variability in expected y/y change in equipment spending over our past four surveys likely suggests dentists’ viewpoints on this topic are starting to stabilize.  With our respondent base largely consistent over our past five surveys, however, we don’t believe that’s totally shocking, although it is at least good to see that as COVID19 closures continue, dentists spending outlook on equipment, at least when it comes to this qualitative question, is continuing to worsen.

Price Target Justification and Risks

ALGN. Our $225 price target assumes 28x our 2021 EBITDA estimate of $740M, roughly in line with the company’s five-year average NTM EBITDA multiple of 27x. We continue to view ALGN as one of the better growth names across all of medtech (we believe the company can continue to deliver 20-25% revenue and slightly faster earnings growth over the next 3-5 years on a normalized/ex-COVID-19 basis), and while competition from at-home aligner companies such as SDC and on the premium end of the market (3M, NVST, XRAY) has grown in recent years, we believe continued share gains for clear aligners vs. standard braces and ALGN’s strong competitive positioning in the clear aligner market more than offset and create less risk to ALGN’s long-term growth than many investors seem to believe, warranting the in-line multiple we’re using to value the company. Risks to achieving our price target objective include: (1) highly competitive industry, (2) growing new market entrants in the comprehensive part of the market, including from 3M, NVST, XRAY, and others, (3) risk of shifting consumer purchasing behavior for clear aligners as DTC providers such as SDC, Candid, and others continue to spend aggressively, (4) risk that shifting mix to lower acuity cases in DSOs and other offices and/or growing doctor retention costs continue to pressure ASPs and drive revenue/earnings growth below case shipment growth over the longer term, (5) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions, and (6) risk that the coronavirus headwinds that are expected to impact ALGN significantly in 2020 may not resolve as quickly as we currently expect heading into 2021.

 HSIC. Our $56 price target applies  a 15.5x multiple to our 2021 EPS projection of $3.59 (14x 2021 EPS when excluding deal-related amortization to put HSIC’s EPS on an apples-to-apples basis with how other dental peers report EPS). This 15.5x multiple we’re using to value HSIC is ~5 points below the company’s five-year average, with the discount warranted, in our view, by constrained medtech multiples relative to the past few years and increasing secular pressures on dental dealers from heightened DSO channel power and a growing number of on-line dental discounters. Risks to achieving our price target objective include: (1) highly competitive industry, (2) risk of shifting dental (and to a lesser extent medical) purchasing behavior to on-line or other discount dealers that provide less service and support to dental (and medical) offices relative to HSIC (3) risk that growing demand for product from DSOs could continue to pressure ASPs as DSOs grow in size and leverage their greater channel power; (4) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions, and (6) risk that the coronavirus headwinds that are expected to impact HSIC significantly in 2020 may not resolve as quickly as we currently expect heading into 2021.

 NVST. Our $25 price target applies a 15x multiple on our updated 2021 EPS projection of $1.67, with this 15x multiple representing a three-point discount to the 18x multiple we’re using to value XRAY but a slight premium to the 12-15x multiples we’re using to value dental dealers such as HSIC and PDCO. We continue to believe a discount for NVST vs. XRAY is warranted by the improved performance we’ve seen from XRAY in recent quarters, while the premium vs. dental dealers is driven by our view that a manufacturer like NVST remains much more in control of its own destiny in a dental industry where online discounters and rising DSO channel power seem to be putting greater pressure on dental distributors’ long-term growth profile. Risks to achieving our price target objective include: (1) highly competitive industry, (2) longer-term potential changes in relationships with dental dealers, as 50% of company-wide revenue is tied to products sold through dental distributors, (3) financial and integration risk associated with potential future M&A activity, (4) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions, and (5) risk that the coronavirus headwinds that are expected to impact NVST significantly in 2020 may not resolve as quickly as we currently expect heading into 2021.

PDCO. Our $20 price target on PDCO assumes 12.5x our calendar 2021 EPS projection of $1.60, roughly a three point discount to the multiple we’re using to value industry peer HSIC, with the discount warranted, in our view, by a combination of better performance history by HSIC in recent years and HSIC’s more appealing mix of non-dental business (we view HSIC’s medical business to be more attractive from a longer-term perspective than PDCO’s mix of companion and production animal health business). Risks to achieving our price target objective include: (1) highly competitive industries, (2) risk of shifting dental (and to a lesser extent companion animal) purchasing behavior to online or other discount dealers that provide less service and support to dental (and vet) offices relative to PDCO (3) risk that growing demand from DSOs could continue to pressure ASPs as DSOs grow in size and leverage their greater channel power; (4) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions, and (6) risk that the coronavirus headwinds that are expected to impact PDCO significantly in 2020 may not resolve as quickly as we currently expect heading into 2021.

XRAY. Our $49 price target assumes 18x our 2021 EPS projection of $2.70, three turns above what we are using to value XRAY’s closest peer in NVST and 3-6 turns above what we are using to value HSIC and PDCO. We believe this premium for XRAY vs. NVST is warranted by the recent strength XRAY has shown across much of its business relative to NVST and the greater confidence we have in XRAY’s ability to sustain this stronger core growth later this year and into early 2021 (at least until Spark and N1 start to ramp for N1). Relative to the dental distributors, we believe a premium is warranted for XRAY given our view that a manufacturer like XRAY remains much more in control of its own destiny in a dental industry where online discounters and rising DSO channel power seem to be putting greater pressure on dental distributors’ long-term growth profile. Risks to achieving our price target objective include: (1) highly competitive industry, (2) longer-term potential changes in relationships with dental dealers, as 50% of company-wide revenue is tied to products sold through dental distributors, (3) financial and integration risk associated with potential future M&A activity, (4) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions, and (5) risk that the coronavirus headwinds that are expected to impact XRAY significantly in 2020 may not resolve as quickly as we currently expect heading into 2021.

Appendix - Important Disclosures and Analyst Certification

Approved on 14 June 2020 20:42EDT/ Published on 15 June 2020 01:05EDT.

Covered Companies Mentioned
All stock prices below are the 4/9/2020 closing price.

Align Technology, Inc. (ALGN – $193.19 – Outperform)
DENTSPLY Sirona, Inc. (XRAY – $41.87 – Outperform)
Envista Holdings Corporation (NVST – $17.54 – Outperform)
Henry Schein, Inc. (HSIC – $52.25 – Neutral)
Patterson Companies, Inc. (PDCO – $15.24 – Neutral)
(See recent research reports for more information)

1 Robert W. Baird & Co. Incorporated makes a market in the securities of ALGN, HSIC, NVST, PDCO and XRAY.

10 Robert W. Baird & Co. Incorporated and/or its affiliates have been compensated by Henry Schein, Inc. and DENTSPLY Sirona, Inc. for non-investment banking-securities related services in the past 12 months.

2 Robert W. Baird & Co. Incorporated and/or its affiliates managed or co-managed a public offering of securities of Envista HoldingsCorporation in the past 12 months.

3 Robert W. Baird & Co. Incorporated and/or its affiliates have received investment banking compensation from Envista HoldingsCorporation in the past 12 months.

Appendix – Important Disclosures and Analyst Certification
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