Tom Werner/DigitalVision via Getty Images
While the market opportunities for dental products and equipment appear to be enormous, macroeconomic factors such as high interest rates and fluctuations in consumer spending will likely limit growth in the near term, according to a note from Needham.
Needham said The current dental market size is around $30 billion and is expected to grow at a mid-digit rate, largely driven by demand from emerging categories such as intraoral scanners, computer-aided design and manufacturing, dental implants. value and clear aligners.
Meanwhile, growth in core dental categories has generally seen low single-digit growth. Major categories include endodontic/restorative products, traditional 2D/3D imaging equipment, procedural consumables, implants and orthodontic brackets and wires.
Future growth could accelerate with greater penetration, as only a small fraction of potential patients currently seek care. As an example, Needham noted that about 4 billion people worldwide are missing a tooth, but less than 1% get a tooth replacement. Similarly, about 5 billion have malocclusions, and more than 500 million can afford treatment, but only about 20 million begin treatment annually.
Other potential growth drivers include an aging population, improved access to care, increased interest in cosmetic dentistry, and customer consolidation through dental service organizations.
Despite this, Needham noted that the sector has seen an overall slowdown in recent months, due in part to patients delaying or canceling procedures. While those delays will likely create a backlog in demand, chronic staffing shortages could limit the recovery.
High interest rates have also helped discourage dentists from purchasing new equipment. According to Needham, an American Dental Association survey conducted in May showed that about two-thirds of dentists said they were not likely to make a major purchase in the next six months.
Citing Google search trends, Needham said demand for dental implants appears to have softened in the past 90 days, but remains stable for endodontic procedures such as root canals. During the week of November 5-11, searches for dental implants were at 81% of pre-COVID levels, while searches for root canals were at 103%.
Needham believes that Dentsply Sirona (NASDAQ: X-RAY) is best positioned to weather this trend, as implants only account for about 10% of its total revenue, compared to 32% for ZimVie (NASDAQ:ZIMV) and 40% for Envista (New York Stock Exchange: NVST). Meanwhile, endodontics and restoration, which includes root canals, account for about 30% of Dentsply’s revenue and 13% of Envista’s.
Needham has a buy rating on Dentsply, but maintains ratings on Envista and ZimVie. Other key competitors in the space include 3M (MMM), Align (ALGN), SmileDirectClub (OTC:SDCCQ), Sonendo (SONX), and Straumann, none of which are rated by Needham.
Needham noted that while dental sector valuations appear “attractive,” macroeconomic factors will likely limit relative multiple expansion in the near term.
“As the recovery takes shape, we believe dental group multiples could see significant relative expansion,” Needham added.
