Dental product suppliers defy gravity

Halfway through 2008, the U.S. dental equipment business is surprisingly robust.

In fact, despite concerns over the past several months that higher prices and consumer cutbacks were certain to impact the dental business, two of the biggest suppliers -- Henry Schein and Dentsply International -- reported record sales and earnings for the second quarter of 2008 (end-June 30). And they are not alone.

Henry Schein reported record overall sales of $1.6 billion for the quarter, with the Dental Group contributing $660 million, up 10% over the second quarter of 2007. This includes an 11% increase in dental equipment sales, according to the company.

"Our Dental Group continues to gain market share in consumable merchandise and in equipment," stated Stanley Bergman, chair and CEO, in a company press release. "We recorded another quarter of double-digit growth in equipment sales and service revenues, highlighted by gains in high-tech products, including acceleration in sales of the E4D CAD/CAM product."

However, the economy did have a negative impact on certain cosmetic and high-end procedures and products, as well as those that are not covered by insurance, company chief financial officer Steven Paladino told Reuters.

Dentsply also reported record sales and earnings for the quarter. Net sales increased 17% to $595 million, up from $507 million for the same quarter in 2007. Net income for the quarter was $79 million, up from $68 million a year ago. The company credits revenue increases in its implant and endodontic businesses for much of this growth; each of these segments saw a 20% increase in quarterly sales year over year

"Our businesses are growing rapidly in many international markets, allowing us to make expanded investments in research and development, as well as in sales force expansion in markets with high growth potential," stated Bret Wise, chairman and CEO of Dentsply, in a press release.

Given its access to the European market, it's not surprising that Swiss supplier Straumann is also experiencing strong growth these days. Straumann reported revenues of $380 million for the quarter, up more than 20% over the previous year's quarter ($324 million). Net profits also rose, from $87 million in the second quarter of 2007 to $93 million in the second quarter of 2008. According to a press release, Europe accounts for nearly two-thirds of Straumann's revenues, and the company is currently experiencing double-digit growth in all key European countries.

Sirona Dental Systems also reported double-digit growth and expects this trend to continue for the rest of the year. The company recorded revenues of $187 million for the quarter, a 19% increase over the same quarter a year ago, with double-digit increases in all of its business segments (treatment centers, CAD/CAM systems, and imaging systems). Net income for the quarter was $6.7 million, compared to $2 million for the same quarter in 2007.

"Growth outside the U.S. is stronger for some of these companies," Jeffrey Johnson, an analyst with Robert W. Baird who specializes in medical and dental technology companies, told DrBicuspid.com in an e-mail. "This trend is partially driven by the faster economic growth seen outside the U.S. and the greater growth opportunities that developing dental markets provide, plus the fact that the U.S. consumer trends have been more sluggish than non-U.S. consumer trends over the past couple of quarters."

As a result, Johnson has revised his position of three months ago, when he lowered the projected stock prices on three major suppliers: Dentsply, Henry Schein, and Patterson Dental (read more). Then, Dentsply stock was valued at around $40; now Johnson has bumped the price target to $44. Similarly, Henry Schein stock was valued at just below $55; today, Johnson has set the price target at $66. Even Sirona has a healthy $32 per share target, according to Johnson.

Not every dental equipment provider is faring quite so well, however. While Biolase Technology appears to be turning things around -- net revenues for the quarter were up slightly from the same quarter a year ago, $18.7 million versus $18.2 million, and net income is back in the black at $648,000 for the quarter (compared to a loss of $2.6 million in the second quarter of 2007) -- the company said Waterlase sales declined 7% due to "weaker international performance," according to a press release.

And although Align Technology, producers of Invisalign, reported record revenues of $80 million for the quarter (up from $77 million in the same quarter a year ago), net profit was just $4 million, compared to a net profit of $13.6 million in the second quarter of 2007.

"As consumer spending has continued to soften, so has our outlook for revenue growth," stated Thomas Prescott, president and CEO, in a press release. As a result, the company is initiating cost-saving measures, he added -- including a workforce reduction of approximately 40 people.