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1、28January2019 Americas/UnitedStates EquityResearchHealthcare Technology &DistributionDental UpdateResearchAnalystsErin WilsonWright212 538 4080 HYPERLINK mailto:erin.wright erin.wrightCharles Lederer,CPA212 538 1822 HYPERLINK mailto:charles.lederer charles.ledererKatieTryhane212 325 2713 HYPERLINK m

2、ailto:katie.tryhane katie.tryhaneGeorgeEngroff212 325 2289 HYPERLINK mailto:george.engroff george.engroffCHANNEL CHECKSurvey says: Dental demand still lacks bite4Q Dental practice volume, revenue growth on par with 3Qtrend:According to our proprietary survey of 75 US dental practitioners, 47% ofprac

3、tices experienced positive revenue growth in 4Q, rising 0.5% (weighted avg.), consistent with our initial 3Q survey. New patient traffic (+1.0%) was the most meaningful driver of practice revenues, followed by pricing (+0.9%), bridges/implants (+0.8%), and preventative care (+0.6%). An encouraging d

4、ynamic, respondents were incrementally more optimistic on NTM trends with 71% expecting improving practice volume (vs. 65% in 3Q), which bodes well for all our dental names. As a caveat, this is our second dental survey, and we expect more meaningful takeaways to our dental coverage with greater his

5、toricalcontext.EquipmentDigital dentistry drivers w/ caveats: While respondents were more optimistic on equipment purchasing over the NTM, withparticular focus on intraoral scanners and CAD/CAM, we note that practitioners remain wary of larger cash outlays in an anemic demand environment, with denti

6、sts likely less inclined to make equipment purchases in light of growing macro concerns, as well as noted reimbursement pressures. That said, we highlight positive commentary on Dentsply Sironas (XRAY, Outperform) CEREC offering, noting its convenience and ease of use, despite continuing low overall

7、 penetration. While we view XRAY as a turnaround story LT and are optimistic on innovation opportunities in an IDS year, we acknowledge execution risk associated with salesforce, R&D, and cost structure initiatives. In terms of promotional activity, several respondents highlighted more aggressive di

8、scounting for ALGNs iTero, while XRAY equipment pricing was noted as relativelyunchanged.Supply chain, Direct Dist., Amazon update: Henry Schein (HSIC, Neutral) and Patterson Companies (PDCO, Outperform) were named asprimary distributors by 40% and 17% of respondents, respectively. The majority (80%

9、) is satisfied with its primary distributor, and 86% do not work with GPOs, an unsurprising dynamic (differs from Vet). While only 6% of standard medical consumables (e.g. gloves, cotton balls) are purchased through Amazon today, respondents expect purchases through Amazon could grow to 14% in 3-5 y

10、ears. In terms of direct distribution, respondents currently purchase 22% of consumables direct from manufacturers, with12% expecting to purchase more directly over NTM.DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND

11、THE STATUS OF NON-US ANALYSTS. US Disclosure: Creditto do in As a be a of of this as a in Clear aligners remain in focus: The majority (68%) of clear aligner users expect demand to rise over the NTM, with volume likely supported by a rising base of trainedpractitioners. Align Technologys Invisalign

12、(ALGN, Outperform) remains the market leader, with 60% of our entire cohort (88% of clear aligner users) offering Invisalign. While concerns over competition, DTC, and ASPs have weighed on ALGNs shares of late, we view there is room for several players in a highly underpenetrated clear aligner marke

13、t, and we view ALGN is well ahead in terms of innovation, with several respondents highlighting its recently launched mandibular advancement offering, an underappreciated dynamic, in our view.Dental SurveyTakeawaysWe commissioned a survey of 75 practicing dentists dispersed across 21 states in the U

14、.S., with the highest number of responses in New York (13), California (9), Florida (9), Massachusetts (6), and Illinois (5). Our respondents range across a number of specialties including general dentist (48), orthodontist (15), periodontist (7), pedodontist (3), and oral and maxillofacial surgeon

15、(2), with an average tenure of 23 years. About half of our respondents work as sole practitioners (38), while most other participants work with multiple other dentists at a single practice owned by dentists (27). Of note, 3 respondents work for a DSO or dental management organization affiliated grou

16、p practice. On average, our respondents see 123 patients on a weeklybasis.4Q Snapshot: Relevant company survey highlightsDentsply Sirona (XRAY, Outperform): Overall, the survey results are mixed for Dentsply Sirona, where we are forecasting 4Q18 revenues to fall 3.1%, driven by a2.7% rise in consuma

17、bles and -11.4% growth in Equipment to reflect ongoing distributor-level inventory shifts. We remain optimistic on XRAYs salesforce execution push, where 33% of respondents currently purchase consumables directly from the company, with 12% expecting to purchase more directly from the manufacturer ov

18、er the next twelve months. We also view XRAYs recently revised strategy, where it has foregone its longstanding approach to promote a more comprehensive chairside CAD/CAM systems (scanner + mill), shifting focus toward its standalone digital impression offering (with also a dedicated lab strategy),

19、offers incremental opportunity to capture share, particularly as only 9% of our cohort of dentists currently use its CEREC offering. Importantly, while most of our respondents view XRAYs equipment pricing as unchanged, net-net our cohort views pricing is slightly more aggressive, potentially coincid

20、ing with de-stocking/inventory shifts at the distributor level. Focus on its earnings call will be on end-market fundamentals, equipment trends, and salesforce initiatives. Danaher (DHR, Outperform)Earnings Date 1/29: Danahers dental business continued to experience the impact of a lackluster consum

21、ables and equipmentlandscape in 3Q, though we are encouraged by strengthening sellout trends, where we expect +0.8% dental growth in 4Q, supported by managements recent preannouncement that noted an improving Dental experience. Moreover, we view DHRs business will continue to experience healthier gr

22、owth in a strengthening demand environment, as indicated by our survey results (+2.2% NTM practice revenue growth) and as it invests in key business lines. As a reminder, DHR has recently announced its intention to execute a tax-free spinoff of its Dental business (est. $2.9 billion in 2018 revenue,

23、 14% of total), with the transaction expected to close in 2H19. DentalCos current President aims to replicate the DHR playbook (DBS), which should help it to drive +LSD organic growth (+MSD specialty, 50% of DentalCo revs) and 50 bps ongoing margin expansionLT. Distributors Patterson Companies (PDCO

24、, Outperform), Henry Schein (HSIC, Neutral): On balance, while expectations for distributors remain relatively low, we arecautiously optimistic on prospects for the respective dental businesses of Patterson Companies and Henry Schein based on the positive NTM outlook on dental traffic and volume tre

25、nds amongst our cohort. We also highlight positive commentary as it relates to Patterson, where respondents who utilize it as a primary distributor are more satisfied with the salesforce knowledge, on average, than competitors. Moreover, Amazons penetration remains low, only currently accounting for

26、 2% and 3% of dental- specific consumables products and equipment, respectively. As a caveat, direct purchasing from manufacturers will also be a dynamic that we will monitor going forward in our surveywork. Align Technology (ALGN, Outperform)Earnings Date 1/29: While news of several new entrants in

27、to the clear aligner space has increasingly pressured shares along withrecent pricing degradation that is expected to persist into 2019, we deemphasize the competitive threat, with the view that the highly underpenetrated clear aligner market is large enough for several players. Moreover, Aligns con

28、tinuous innovation proves just how far behind competitors are on the innovation and learning curve, with several respondents highlighting the benefits of its recently launched mandibular advancement offering. Currently, ALGN represents 90% of the clear aligner market, where our cohort of dentists ex

29、pects demand to grow +3.1% over the next twelve months, with volume growth also supported by a growing base of trained dental professionals. Also of note, several respondents highlighted iTero price discounting, which will likely support unit volume sales and scanner penetration. All in, we forecast

30、 -3.1% EPS growth fueled by +22.5% topline growth, supported by +20.9% clear aligner growthand+33.0% iTero growth, offset by 176 bps margin contraction in 4Q. Investor focus will be on 2019 commentary and guidance, with folks looking for evidence of continuing robust volume growth to offset aforemen

31、tioned ASP pressure.State of the IndustryDespite what should be favorable demographic and macro dynamics, dental consumable trends have not experienced a meaningful, sustained pick-up in demand since the 2008 recessionary timeframe, likely driven by rising out-of-pocket healthcare spend, representin

32、g a growing percentage of total discretionary income for consumers, share shifts to specialty, among other potentialfactors.While dental consumables trends were mixed across the majority of the major dental companies in 3Q, industry commentary continues to point to a healthier experience near term,

33、with seemingly stabilizing sell-out trends. That said, we remain cautious in suggesting a broader stabilization or pick-up in demand in 4Q, particularly given several company specificissues.Figure 1: Recent quarterly Dental demand trends as reported by industryconstituents1Q162Q163Q164Q161Q172Q173Q1

34、74Q171Q182Q183Q18DanaherConsumablesEquipment+LSD-LSD+LSD+MSD+LSD+MSD-NegativePositiveNegative+LSD-MSD+LSD-L-MSD-MSD-LDD-HSD+ Slightly+ Slightly-MSD-MSDPattersonConsumablesEquipment3.3%-6.9%0.9%5.4%-2.5%4.2%-2.8%-1.0%-4.3%-16.9%-3.6%-15.1%-4.4%-17.7%-7.4%-10.6%-6.7%-20.2%-5.2%5.4%-2.2%-0.9%HSIC N.A.C

35、onsumablesEquipment4.6%13.5%1.8%2.7%1.8%13.3%1.9%2.7%2.5%-5.5%0.8%14.8%1.3%-0.7%1.9%18.1%2.7%4.4%4.7%6.2%4.3%5.9%HSIC IntlConsumablesEquipment1.6%4.3%4.5%3.1%2.7%4.2%2.5%-3.9%8.0%3.1%1.4%3.6%3.4%2.6%-2.6%7.7%2.4%3.1%3.0%4.7%3.5%-4.2%Dentsply SironaConsumablesTechnologies4.5%6.8%3.8%0.8%-0.3%0.2%3.5%

36、0.0%2.4%-12.7%2.0%-10.0%4.3%-1.1%3.9%5.9%-1.3%-1.6%3.3%-1.1%-3.0%-9.3%3MOral Care5.0%3.0%0.0%-1.0%5.0%0.0%3.0%3.0%0.0%3.0%2.0%Source: Company data, Credit SuissePatient volume & practice revenuesAccording to our survey, 47% of respondents experienced 0% to +5%+ growth in patient visits in 4Q18, with

37、 total traffic increasing 0.5% on a weighted average basis (vs. + 0.2% in 3Q). Nearly a third of respondents (31%) reported flat patient volume growth over the past three months. Notably, only 23% of respondents reported declines in patient visits during 4Q (vs. 31% in3Q).Figure 2: Dental practice v

38、isits (Y/Y growth) Respondent distribution (+0.5% weighted average vs. +0.2% in3Q)47% of respondents have experienced +1% to 5%+ in patient visits during 4Q1831%47% of respondents have experienced +1% to 5%+ in patient visits during 4Q1831%32%27%19%13%13%13%10%8%9% 9%5%4%5%35%30%25%20%15%10%5%0% +5%

39、 ormore3Q184Q18Source: Credit Suisse, n=75Practice revenues increased 0.5% on a weighted average basis in 4Q18, a stable, though admittedly lackluster trend (in line with 3Q). Practice revenues were driven by new patient traffic (+0.9%), pricing (+1.0%), bridges and implants (+0.8%), and preventativ

40、e (+0.6%).As a caveat, this is our second dental survey, and we expect more meaningful takeaways to our dental coverage with greater historical context in future surveys.Figure 3: Dental practice revenues (Y/Y) Respondent distribution (+0.5% weighted avg., in line with3Q)29%47% of respondents have e

41、xperienced +1% to 5%+ practice revenues during 4Q1829%47% of respondents have experienced +1% to 5%+ practice revenues during 4Q1825%25%21%17%12%12%8% 8%9% 9%9%9%7%30%25%20%15%10%5%0% +5% ormore3Q184Q18Source: Credit Suisse, n=750.8%0.8%0.4%0.3%Figure 4: Factors impacting practice revenues New patie

42、nt traffic, acute care remain prominentdriversNew Patient TrafficFigure 4: Factors impacting practice revenues New patient traffic, acute care remain prominentdriversNew Patient Traffic1.0%Pricing0.9% 1.0%Bridges and Implants0.6%0.8%Preventative0.6%Routine Visits0.4%0.6%Existing Patient Traffic0.3%O

43、rthodontic0.3%3%Endodontic0.3%Acute Visits0.3%Cosmetic0.1%0.0%0.2%0.4%0.6%0.8%1.0%1.2%Source: Credit Suisse, n=75NTM Outlook: Strengthening fundamentalsSentiment from respondents was optimistic for the next 12 months with 71% of dentists expecting stronger results in patient traffic in the coming mo

44、nths. On a weighted average basis, respondents expect patient visits to rise 1.9% over the next 12 months, compared to 1.6% in our 3Q survey. Only 8% of dentists in our survey expect declines in patient visits (vs. 12% in our 3Q survey).Figure 5: Clinic traffic outlook NTM Respondent distribution (+

45、1.9% weighted avg. vs. +1.6% in3Q)71% of respondents have experienced +1% to45%40%35%30%25%20%23%21% 5%+ in patient visits during4Q1836%34%19% 20%15%10%5%0%4%1% 1%1%6% 5%12%15% +5% ormore3Q184Q18Source: Credit Suisse, n=75Dentists also remain optimistic regarding practice revenues, expecting a weigh

46、ted average increase of 2.2% over the next 12 months. The majority of respondents broadly expect strengthening overall demand, consistent with our view of favorable dental fundamentals.Figure 6: Practice revenue outlook NTM Respondent distribution (+2.2% weighted avg. vs. +1.6% in3Q)72% of responden

47、ts have experienced +1% to 5%+ in patient visits during 4Q1829%72% of respondents have experienced +1% to 5%+ in patient visits during 4Q1829%23%19%20%7%1%1%35%30%25%20%15%10%5%0% +5% ormore3Q184Q18Source: Credit Suisse, n=75Dental Supply ChainBased on our survey, Henry Schein is the most commonly u

48、sed distributor, with two thirds (67%) of our respondents utilizing its services. Importantly, nearly half (49%) of respondents purchase supplies from the manufacturer directly.Figure 7: Which of the following distributors have you used in the past 12months?Henry Direct fromManufacturerAmazonPatters

49、onDarbyDentalBurkhartDentalSupplySupplyClinic1%16%15%13%41%49%47%67%0%10%20%30%40%50%60%70%4Q18Source: Company data, Credit SuisseestimatesBased on our survey, Henry Schein and Patterson Companies were the most common primary distributors, representing 40% and 17% share of the cohort, respectively.

50、Only 1% of survey participants reported Amazon as their primary distributor. Notably, in 4Q18, respondents reportedly purchased 71% of consumables and 55% of equipment through their respective primary distributor.As a reminder the $20 billion North American dental distribution market is highly conce

51、ntrated with the top three players, Henry Schein, Patterson, and Benco Dental Supply, representing 85% of the market. Henry Schein continues to dominate with 35- 40% share according to our survey, with Patterson representing 23%, based on our analysis of company results.Figure 8: Primary dental dist

52、ributormixFigure 9: Mix of purchases through primary distributor by producttypePatterson, Benco, 8%Burkhart Supply, 3%Amazon, 1%Direct from Manufacturer, 11%80%72% 71%72% 71%75%69%55%50%60%50%40%30%Henry Schein, 40%Supply Clinic, 0%Other, 11%ConsumablesEquipmentOverallPurchases3Q18Source: CreditSuis

53、se,n=75Source: Credit Suisse,n=75We asked participants how satisfied they are with their primary distributors. According to our survey, 80% of respondents are satisfied, with only 4% of respondents not satisfied with their current primary distributor. Of note, of those who use HSIC and PDCO, 83% and

54、 77% of respondents were satisfied, respectively. We were surprised by the positive response for Patterson, given its more volatile sales force efforts of late.Figure 10: How satisfied are you with your currentprimarydistributor?Figure 11: Satisfactionmix83%77%83%77%23%7%10%0%80%Satisfied, 80%70%60%

55、50%40%30%20%10%Indifferent, 16%0%SatisfiedNotsatisfiedIndifferentNot satisfied, 4%HSICPDCOSource: CreditSuisse,n=75Source: Credit Suisse, HSIC n=30, PDCOn=13According to our survey, respondents are on average most satisfied with on-time delivery and customer service, and most dissatisfied with assoc

56、iated practice management software. Of those who utilize Henry Schein as their primary distributor, respondents were satisfied with on-time delivery and customer service, with room to improve in its pricing. As it relates to PDCO, respondents ranked its salesforce knowledge as particularly satisfact

57、ory relative to the overall average, though pricing remains a key source of dissatisfaction.Figure 12: HSIC: How would you rate the following as it relates to your primary distributor? (On a scale of 1-10, with 10 being the bestresponse)Figure 13: PDCO: How would you rate the following as it relates

58、 to your primary distributor? (On a scale of 1-10, with 10 being the bestresponse)On-time delivery6.0CustomerserviceSalesforceknowledge8.68.08.57.6On-timedeliveryCustomerserviceOther ancillaryservicesPractice managementsoftware7.7Other ancillaryservicesPracticemanagement softwarePr

59、icing7.46.7Pricing-5.04Q183Q18-5.04Q183Q18Source: CreditSuisse,n=30Source: Credit Suisse,n=13Among surveyed participants, eight respondents plan to switch primary distributors over the next 12 months. Of note, four of these respondents plan to switch from Henry Schein, with two respondents highlight

60、ing pricing as a key motivating factor.Figure 14: Are you considering changing your primary distributor in the next 12months?Figure 15: Commentary from dentists that plan to switch primary distributors over theNTMPlan to switch HSICPlan to switch HSICHSIC HSIC HSICDirect Darby Darby DarbyToDhp Darby