Dental Industry Summary

MARCH 2023

The Dental Market at a Glance

Dentistry is a non-cyclical industry, driven by resilient fundamentals that continue to drive strong expansion.

$162B
U.S. dental spending
6.2%
Projected annual industry growth (2021 to 2027)
61
Dentists per 100k U.S. population
201,927
Actively practicing dentists in the U.S.
25.0%
YoY increase in government dental spending (2020-2021)
77M
U.S. dental spending

Dental Specialties

Dentistry is comprised of several different types of dental specialties, each playing an important role in maintaining the oral health of the patient.

2021 Market Share by Specialty

26.2% General Dentistry
Variety of factors from oral health and function to aesthetics (includes several specialties)

23.9% Endodontics
Prioritizes saving teeth by repairing tissues inside the tooth, commonly through a root canal

11.8% Orthodontics
Diagnosis, prevention, management and correction of misaligned/mispositioned teeth and jaw

11.9% Oral and Maxillofacial Surgery
Surgery on teeth, jaws or surrounding facial structures

6.6% Pediatric Dentistry
Infant to teenage dental care and education

Dentistry has numerous specialties, each playing an important role in maintaining the oral health of the patient

State of the Dental Market Today
Prevailing Themes and Key Considerations

Continued
Consolidation
  • Consolidation of dental practices has waxed and waned over the years, but Dental Support Organizations (“DSO”) today remain highly active
  • The sector is expected to grow to ~$196bn by 2027. Greater than 90% of the sector remains privately held and highly fragmented
Comprehensive
Dentistry
  • Complete oral care is the focal point of most dental operators and DSOs today – offering more specialties under one brand
  • Enhanced offerings leads to greater patient stickiness and increases the value proposition to payors, patients and systems
Patient-Centric
Technology
  • Greater availability and increasing affordability of technologies has enabled operators to see organic growth as productivity is improved
  • Technology investments tend to encircle the patient – enhancing their experience, improving outcomes and, ultimately, creating clinical efficiencies
Emerging
Partnership Models
  • DSOs and independent operators alike are pursuing new, creative ways to attract and retain talent
  • Various avenues exist, but the common denominator is a package offering accelerated student loan paydown and access to equity
Mounting
Recognition of
Importance
  • Oral disease’s prevalence is increasing, and these diseases pose a major health burden. Broader shifts from volume-to-value across the healthcare continuum see more emphasis placed on oral care
  • Americans have become increasingly aware of oral care’s importance and downstream benefits to overall health and well-being

Dental expenditures in 2021 surpassed pre-pandemic years driven by patients returning to their dentists once again seeking regularly scheduled care, and federal government relief funding.

U.S. Dental Care Expenditures1

The dental market will be supported by increased expenditures driven by a combination of demographic and investor trends

Dental expenditures in 2021 surpassed pre-pandemic periods, and this trend is poised to continue as the shift from pandemic to endemic occurs

Increasing dental expenditures over the next decade necessitate continued growth and innovation in the sector

1) ADA, Publicly available information

Investor Activity & Appetite

Large, fragmented sector provides ample growth avenues through M&A, de novos and other initiatives

Patient stickiness and ability to provide / expand ancillary service offerings

Favorable reimbursements – more self-pay than most healthcare specialties

Greater recession resistance in the post-COVID environment

Aging population creates an embedded growth opportunity

Together, they drive two common investor themes:

Consolidation of geographically dispersed practices under a regional brand through smaller roll-up and tuck-in acquisitions,

Evolving partnership models between private practice dentists and DSOs...

...which lead to increased dealmaking.

2022 Dental Market Fragmentation1

Although there are over 100 private equity backed DSOs, nearly 94% of practices remain unconsoldated.

PE Activity Across Dentistry1

1) Pitchbook

Value Creation Drivers

Investors across the dental sector are prioritizing a number of key factors when underwriting EBITDA and their overall valuation paradigms.

1

Multi-Specialty – provide a comprehensive service offering

2

Growth Profile – ability to grow via acquisition and de novo

3

Payor Attributes – commercial vs. governmental, self-pay mix, etc.

4

Brand Recognition – NPS, patient satisfaction, marketing, etc.

5

COVID-19 Resilience – quick and sustained recovery (V-shaped)

6

Personnel Retention – minimal turnover, long tenure

7

Compliance – credentialing, payor requirements, etc.

8

Efficient Operating Model – favorable operational and financial metrics

Strayegic Add-on Valuation Drivers

  • Scale – Size Matters: Single center valuation multiples range from 4-5x, which grow into >10x for 10+ center portfolios
  • Density / Defensibility – Competitive Moats: Scarcity premiums exist for operators that have density and defensibility within their markets
  • Geography – Location, Location, Location: Valuation is favorably impacted when operators are in markets with favorable demographics that can absorb additional “sell thru” services (e.g. rural vs. metropolitan)

Dental Care Regulatory Environment

Despite a large portion of Americans being plagued with oral health issues, barriers prevent many people from receiving the care they need. Laws and policies are instrumental to promoting access and reducing barriers to dental care.

Affordability Dictates Access to Dental Care

  • As of 2022, over 89 million Americans were enrolled in their state's Medicaid and CHIP programs, up 7.3% YoY
  • States are required to cover oral health services for children under 21 who are eligible for Medicaid, and certain government programs cover oral health care for eligible children, but adult coverage is more limited

Federal and State Government are Instrumental

  • States grant licenses to oral health care providers, define the scope of services for providers, decide on supervision practices and create parameters for practices
  • The federal government influences dental profession training, while federally supported programs can improve access to care for specific populations

Scope of Adult Dental Benefits Covered by Medicaid2

1) Institute of Medicine Board on Health Care Services, Publicly available information

Recent Legislation and Programs

Action for Dental Health Act
2018

Allows organizations to qualify for oral health grants to support activities that improve oral health education and dental disease prevention. It will also enable groups to develop and expand outreach programs that facilitate establishing dental homes for children and adults

Affordable Care Act (“ACA”)
2010

Under the ACA, states expanded Medicaid to certain adults, resulting in coverage for nearly 10 million adults by 2017. The ACA also created health insurance exchanges or marketplaces where people could purchase plans, including dental coverage

Government Programs

Children’s Health Insurance Program – coverage for children under 19 ineligible for Medicaid

Indian Health Service – developed oral health care programs for American Indian and Alaska Native children

Dental Care Cost & Reimbursement

Dental care coverage varies considerably by age, but particularly among adults, the method of payment and scope of covered services is vastly different amongst private and public benefits programs.

How Does Coverage Work?

  • Monthly premium
  • Requires primary in-network dentist
  • Out-of-pocket deductible
  • Annual maximum allowance
  • Copay for dentist visits

What Does it Cover?

  • Routine & Preventative – often 100% covered, cleanings/check-ups twice per year, annual X-rays
  • Basic Services – often 80% coverage, includes fillings and simple extractions
  • Major Services – often 50% coverage, includes root canals, bridges, etc., cosmetic not covered

How Does Coverage Work?

  • Dental Preferred Provider
    Organizations (“DPPO”)     – network of dental providers to provide care for an agreed-upon fee
  • Dental Health Maintenance
    Organizations (“DHMO”)     – lower-cost coverage with a network of dental providers
  • Fee-for-service plans – no provider networks, you can see any dentist

Dental Procedure Code Categories1

Code Description Examples
D0100-D0999 Diagnostic Oral cancer examination and screening, evaluation of gum tissue, checking biting, chewing and swallowing patterns, X-rays, examination of tooth decay.
D1000-D1999 Preventive Teeth cleanings, oral examinations, dental sealants, oral cancer screenings, sports mouth guards
D2000-D2999 Restorative Dental crowns, dentures, dental bridges, dental implants, root canals
D3000-D3999 Endodontics Root canals, endodontic retreatment, endodontic surgery, dental implants
D4000-D4999 Periodontics Scaling and root planning, gum graft, laser treatment, regenerative procedure, dental crown lengthening, pocket reduction
D5000-D6999 Implant services and prosthodontics Dental crowns, implants, bridges, dentures, Veneers
D7000-D7999 Oral and maxillofacial surgery Wisdom teeth extraction, facial injury and trauma surgery, corrective jaw surgery, cleft lip and palate surgery
D8000-D8999 Orthodontics Straightening of the teeth (braces, aligners, retainers, headgear), palate expansion
D9000-D9999 Adjunctive general services Additional procedure that may be required before, during, or after treatment such as palliative (emergency) treatment, anesthesia, professional consultations, drugs or miscellaneous services such as bleaching.

1) ADA

Select Dental Operators

Founded: 1997
Clinics: 1,550+
Ownership: KKR (2018)

Heartland Dental is the nation's largest DSO providing administrative support services to clinics across 38 states. In March 2018, KKR acquired a majority interest in the Company from Ontario Teachers' Pension Plan. In June 2021, the Company entered into a strategic transaction with American Dental Partners, a DPM with over 200 clinics across more than 20 states.

Founded: 1994
Clinics: 1,000+
Ownership: Leonard Green & Partners, Others (2010)

Aspen Dental Management offers general and cosmetic dentistry, oral surgery and emergency dental care across 43 states. In April 2015, the Company was recapitalized by American Securities, Ares Management and Leonard Green & Partners.

Founded: 1994
Clinics: 900+
Ownership: Independent

Pacific Dental Services has over 900 supported clinics across 25 states. The Company’s stated goal is to expand its operations by more than 80 clinics per year in existing and new markets. The Company is headquartered in Irvine, California.

Founded: 1998
Clinics: ~ 700
Ownership: Gryphon Investors (2016)

Smile Brands was founded in 1998 as a combination of three support services organizations across 30 states. Prominent acquisitions include Monarch Dental (2003) and Castle Dental (2004). Prior ownership of the firm includes Welsh Carson (2010-2016) and Freeman Spogli (2005-2010).

Founded: 2007
Clinics: 500+
Ownership: Charlesbank Capital Partners (2021)

Founded in 2007, MB2 Dental is a leading dental partnership organization (“DPO”) with affiliated practices across more than 35 states. Since its 2007 inception, MB2 has partnered with over 250 doctor owners operating 500 dental practices. Charlesbank’s Equity Fund IX invested in MB2 Dental in January 2021, taking a controlling interest.

Founded: 1975
Clinics: ~ 400
Ownership: Harvest Partners (2021)

Affordable Care was founded in 1975 as a dental practice by Dr. George Edwards, Jr., and Dr. Donald Henson. Currently, ADI supports nearly 400 practices across 42 states. In October 2015, Berkshire Partners acquired a majority of the Company from American Capital Equity, and later sold to Harvest Partners in June 2021 for roughly $2.7bn.

Founded: 1991
Clinics: 360+
Ownership: Harvest Partners (2015), Mubadala (2022)

Dental Care Alliance is one of the largest multi-branded dental support organizations in the U.S. Dental Care Alliance supports a network of over 390 practices across 22 states in the Midwest, Mid-Atlantic, Northeast and Southeast of the U.S.. As of May 2022, Harvaest Partners has agreed to sell a 50% stake in DCA to Abu Dhabi’s Mubadala, with plans to roll its remaining equity into a continuation fund.

Founded: 1903
Clinics: 560
Ownership: New Mountain Capital (2012)

Western Dental and its affiliates operate more than 350 dental offices in California, Nevada, Arizona, Texas and Alabama. The Company sees approximately 3 million patients visits per year across its more than 4,500 support staff personnel, and over 900 licensed providers. New Mountain Capital attempted to sell Western Dental in 2018, but was unsuccessful.

AMB Investment Banking Snapshot and Deal Team

AMB focuses on lower middle-market healthcare niches where consumerism and fragmentation meet to disrupt traditional healthcare channels. We typically advise companies with EBITDA of $5M to $20M and an average enterprise value of $100M, but will move up and down the spectrum. AMB’s research-oriented approach to business development has resulted in a vast network of strategic and financial sponsor relationships that yield industry leading intelligence and optimal outcomes for our clients.

Mikel Parker

Managing Director
843-501-2183 Direct
mikel.parker@ambadvisors.com

Ryan Loehr, CPA

Managing Director
843-405-1108 Direct
ryan.loehr@ambadvisors.com

Johnny Cross

Vice President
843-371-8596 Direct
johnny.cross@ambadvisors.com

Kevin Williams

Associate
843-473-7981 Direct
kevin.williams@ambadvisors.com

Sully Hagood

Analyst
843-576-4709 Direct
sully.hagood@ambadvisors.com

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