Economic slowdown and inflation dog dental sales

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Economic slowdown and inflation dog dental sales

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The SARS-CoV-2 pandemic and the war in Ukraine have resulted in rising inflation and shrinking consumer confidence, both of which significantly affected the performance of dental companies during the second quarter of this year. (Image: Noska Photo/Shutterstock)

LEIPZIG, Germany: The ongoing SARS-CoV-2 pandemic and the war in Ukraine are affecting dental markets, and inflation and recession are two words that are currently weighing heavily on the minds of dentists and their patients. Results for the second financial quarter of this year show that some dental companies, particularly those who mainly sell clear aligners, are feeling the pinch of a looming economic slowdown.

The second financial quarter of this year was not without its ups and downs. Leading dental laser manufacturer BIOLASE reported a 70% increase in laser sales in the US and growing momentum in the uptake of dental lasers among dental specialists. For fellow US company, Dentsply Sirona, it was the lack of a quarterly report that was most significant. The Nasdaq-listed North Carolina company is now two quarterly reports in arrears and has been non-compliant with Nasdaq listing rules since 18 May. Dentsply Sirona warned in August that it would not file its second quarter Form 10-Q, owing to “an internal investigation regarding certain financial reporting matters”. It was also reviewing previous accounting practices and evaluating whether its 2021 financial results need adjustments. The beleaguered company said in a business update that it expects to report second quarter net earnings of US$1.005 billion (€1.006 billion) and that supply chain difficulties and a drop in sales in China had affected its performance.

Henry Schein CEO Stanley Bergman told analysts that SARS-CoV-2 infection rates had risen in June in some regions, leading to a decline in dental patient traffic. He said that price inflation for brand manufacturer dental merchandise sold by Henry Schein had reached approximately 3% during the quarter, but that the impact of inflation on dental equipment sales had been relatively insignificant. In July, annual inflation rates in the eurozone, the US and the UK reached 8.9%, 8.5% and 10.1%, respectively.

Henry Schein’s global dental sales in the second quarter totalled US$1.9 billion, representing a drop of 3.1%. The multinational’s dental sales were driven by strong equipment sales owing to continued investment by dentists in their dental clinics, Bergman said.

Clear aligner manufacturers cite unprecedented headwinds

SmileDirectClub (SDC) sounded the alarm for the direct-to-consumer (D2C) space in late 2020, and Align Technology has now confirmed it for the dentist-led segment: clear aligner sales are not immune to macroeconomic pressures.

Align’s run of six quarters of sequential growth ended in the first quarter of this year, and its total revenues for the second quarter reached US$969.6 million, a 0.4% sequential decline and a 4.1% year-over-year dip. Invisalign case shipments of 598,990 were flat compared with the first quarter and down 10% year over year. Clear aligner revenues of US$798.4 million were down 5.1%, and those from imaging systems and CAD/CAM services rose slightly to reach US$171.2 million.

“The decisions we make this year will have lasting strategic implications for the future of our industry and the competitive landscape” – Joe Hogan, CEO, Align Technology

CEO Joe Hogan said in a conference call that the quarter had been tougher than expected. He cited ongoing effects resulting from the SARS-CoV-2 pandemic—in particular, broad lockdowns in Chinese cities—but also rising inflation and a worsening consumer outlook as significant headwinds faced during the period. Hogan told analysts: “As we continue to navigate macroeconomic uncertainty and weaker consumer confidence and impacts related to COVID-19 variance, we cannot lose sight of the strong fundamentals of our business and the enormous market opportunity for digital orthodontics and restorative dentistry. The decisions we make this year will have lasting strategic implications for the future of our industry and the competitive landscape.”

Indeed, D2C giant SDC finished the second quarter by revealing more details about its move into the premium, dentist-led clear aligner segment. As SDC’s core demographic continues to struggle financially and steer its spending away from products, the company is broadening its focus to target the higher-income households that may typically opt for Invisalign or other premium clear aligner treatments. SDC’s total revenue for the period was US$126 million—down 17.0% sequentially and 27.8% year over year. It shipped 62,705 unique sets of clear aligners in the quarter, which was 17.8% fewer than during the first quarter.

Similar to other major dental companies, SDC is banking on cost savings and new innovations to help it through.

Straumann performs well despite uncertainties

Lockdowns in China had a heavy impact on the Straumann Group’s performance in the Asia Pacific region, but CEO Guillaume Daniellot said that macroeconomic challenges had yet to affect the group. “In the first half of the year, we didn’t see a heavy impact by the ongoing economic challenges yet. Despite the current macroeconomic uncertainties, we feel confident to confirm our full-year guidance,” Daniellot commented in an earnings media release.

In fact, Straumann performed notably well. Second quarter revenue of CHF589.4 million (€613.9 million) represented a year-over-year increase of 14.3% and brought total earnings for the first half of a financial year to more than CHF1 billion for the first time.

On a year-over-year basis, Straumann’s sales increased by 12.9% in the Europe, Middle East and Africa region, by 13.0% in North America, by 8.5% in the Asia Pacific region and by 49.5% in Latin America.

Inflation had some impact on patient volumes in the US towards the end of the second quarter, but patient flow in Europe remained steady, the company said. However, it did cite inflation and COVID-19 lockdowns as increasing uncertainties.

Envista warns on energy supply in Europe

Sales at Envista increased moderately during the period, despite challenges that affected the company and the dentists and dental support organisations that it serves. Having recently met with more than 100 Envista customers during a road trip across the US, CEO Amir Aghdaei shared some of the insights that he gained during the tour with investors. He said: “While there is no doubt that talk of inflation and potential for an economic slowdown is weighing heavily on clinicians’ minds as they look out over the next six to 12 months, it is also clear that quality patient traffic remains robust, and dental professionals remain confident in the long-term prospects of the industry and their businesses.”

Aghdaei explained that the performance of dental clinics had been limited during the period mainly as a result of supply chain constraints and difficulties finding staff, but that strong patient volumes had been reported by specialists.

Envista’s sales of US$645.8 million for the quarter represented an increase of 1.3%, and core sales growth for the period was 4.0%. A significant contributor was the Ormco clear aligner product Spark, sales of which increased by 27.8% sequentially. Chief Financial Officer Howard Yu pointed out that it had taken Envista three years to achieve the milestone of 100,000 Spark case starts and that 50,000 patients began treatment with the clear aligner system in the first half of this year.

“We think the European economy and risk associated with the energy supply is going to weigh heavily [on] this industry” – Amir Aghdaei, CEO, Envista

Yu and Aghdaei pointed to supply chain disruptions, accelerating inflation and a severe COVID-19-related lockdown in China as having significantly affected Envista’s performance. Yu said that inflation was having a major impact on the industry and leading to a drop in investment in capital equipment and to inventory reductions.

Speaking about effects resulting from the war in Ukraine, Aghdaei said: “We think the European economy and risk associated with the energy supply is going to weigh heavily [on] this industry. Right now, as expected, Europeans are on vacation, and the forecast for what we will see after September is just not as clear as what we have seen in the past. We are waiting for the dust to settle to see where this ends up.”

Yu said that core sales growth in Western Europe during the period was 11.0%, significantly ahead of North America, where an increase of 0.5% was recorded. Around 14–15% of Envista’s business is located in Russia and China. Envista’s core sales growth in Russia declined by mid-single digits during the quarter, and core sales growth in China was down 0.3%. Apart from Russia and China, emerging markets continued to rebound from pandemic lows and showed sales growth of approximately 20% year over year.

Dentistry well placed to weather the storm?

Speaking about the looming economic slowdown, Bergman hinted that dentists do have cause for optimism. “The market Henry Schein serves has weathered past slowdowns quite well. During the challenging economic times, consumers continue to need services from office-based healthcare practitioners,” he said.

And whereas it will be a challenge to operate in the current financial environment as the pandemic continues, dental companies may be able to use some of the strategies that they developed after the outbreak of SARS-CoV-2 in order to shore up their businesses.

When asked how Align would respond to a scenario in which consumer confidence continued to sink and in which inflation and unemployment continued to climb, Hogan said that the company would adjust its business to lower demand, as it had done at the start of the pandemic. “If it gets worse, and it could get worse […] [Chief Financial Officer John Morici] and I come from businesses where we’ve been through these cycles. We know how to operate in a down cycle,” Hogan commented.

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