Clear aligner OEMs can help dental offices enhance their profitability by offering strategic partnerships. One example of this trend is Europe’s largest OEM ‘K Line Europe’ with its manufacturing HQ in Düsseldorf, Germany, shown above.
Declining profitability at dental offices
Not so long ago, FY 2021 represented an outstanding year for the dental treatment services (focus: clear aligners) category – driving key metrics incl. revenue, profitability and even practice valuations to record high levels. However, fast forward to Q4 2023, dentists’ incomes continue to decline YoY in both absolute as well as real basis. Higher operating costs, workforce shortages, and limitations of insurance networks are leading drivers of higher office overhead (%) costs.
Let us consider a hypothetical scenario wherein a dental office is generating USD 1 million in production, with an estimated overhead of 75 percent (median overhead% based on latest ADA estimates). A single-digit percentage point, let’s say 1 percent reduction in overhead expense, may translate into USD 10,000 in additional higher operating income. Now let’s ballpark a more realistic percentage improvement of anywhere between 3-4 percent, which may translate into additional USD 30,000 – 40,000 operating incomes. This figure can be especially significant looking at the current macroenvironment where topline growth has shifted into lower gear.
Amidst the backdrop of declining profitability in dental practices, driven by factors such as inflation, increased competition, and reduced specialization, it is crucial to highlight the persistent strength of global clear aligner demand. While dental offices may be grappling with financial challenges, the demand for clear aligners remains stronger than ever. The global clear aligners market reached approximately USD 4.1 billion in 2022. Anticipating significant growth, it is expected to cross USD 46.3 billion by 2030, with a compound annual growth rate (CAGR) of approximately 30% from 2023 to 2030.
Summary: DSOs as well as small & medium-sized dental offices will now need to focus on identifying strategies to decrease costs to offset rising overhead, in addition to leveraging levers to control the existing overhead levels.
White Label clear aligner OEMs, exemplified by K Line Europe in Düsseldorf, Germany, offer significant benefits to dental practices by enhancing profitability. They achieve this through cost-effective solutions and reducing laboratory expenses, leveraging innovation and economies of scale. Additionally, K Line Europe underscores the importance of preserving aligner quality and promoting premium branding for dental practices. This approach alleviates the common technical challenges that dental offices encounter with desktop 3D printers.
The German aligner manufacturer ambitiously expanded in 2022 to a 3,000 sqm factory, raising its capacity to 6 million aligners per year in order to fulfill rising demand from Europe as well as North America and the MEA region. “Redefining orthodontics through accessible innovation” has been the company’s slogan ever since, providing end-to-end solutions with strong emphasis on clinical competence, client support, and cost-effectiveness.
Importantly, OEMs increasing their output capacity not only leverage economies of scale to reduce cost for dental offices, but also help to stabilize overall market prices.
Note: The third-party data does NOT show average or median financials at US based orthodontic offices. Instead, we are extrapolating the financials from a sample of YoY monitored dental offices to demonstrate the rising overheads.
GPs have higher overhead than specialty practices as the former is focused on offering a wide range of low-cost dental services & procedures to a relatively high volume of patient-base, necessitating higher expenses.
Specialty offices incl. Orthodontic practices rely on catering to fewer patients at a premium price per procedure, translating into lower overhead costs and higher overall margins. Based on ADA data, the average orthodontic practice reported having overhead of 57% in FY 2022, whereas median-overheads at General dental practices can be as high as 75%.
High inflation translates into even higher overheads with no signs of slowing down. FY 2022 orthodontic practice production was relatively flat, and profitability declined by a significant amount on YoY basis, versus FY 2021. FY 2023 performance was slightly better though, yet accompanied with high inflation and even higher operating expenses.
insightsZ estimates FY 2022 overhead is 3 percentage points worse than FY 2021 – representing a major driver of margin erosion. To make matters worse, we expect at least 2-3 percentage points increase in overheads based on LTM historical industry data.
Other factors leading to higher overheads include staffing challenges, inflation, supply chain issues, higher pricing by suppliers and vendors.
insightsZ Verdict: FY 2023E dental practices can expect a decrease in profit by 3% due to higher overhead, even if no other practice variables are changed.
DSOs cutting costs – achieving cost transformation
Higher interest rates, rising ASP and declining patient demand is forcing DSOs to rethink about how to outpace the industry in a relatively unpredictable macro environment – as patients demonstrate high price sensitivity and cut back on non-essentials & elective procedures. LSD growth (2-3% range) and poor tailwinds mean that focusing on the top line growth alone doesn’t suffice. Instead, there is an increased focus on managing cost productivity and improving the operating income. In other words, DSOs are now having to focus on maximizing profits, rather than just increasing revenues.
The white label clear aligner OEMs are increasingly focusing on communicating their customer value proposition, while eliminating complexity in offerings, structures, and processes. This even helps DSOs and dental offices to de-risk their core business and improve financial performance. Many DSOs are considering diversifying their clear aligner procurement to emerging white label OEMs, enabling to limit inflation risk, counter cost increases, and manage cash flow more efficiently – reinventing the overall supply chain and contain overhead costs.
The connection between improvements in cost productivity and strong equity performance is especially true when the category is experiencing slower growth than usual, even forcing larger DSOs to revisit their cost structure and see how that aligns with their strategy.
As one may expect, it is incredibly hard to build new infrastructure capabilities let alone operate them, as compared to looking to OEMs as strategic partners. Rising cost of capital, ESM commitments and material shortages are among other reasons acting as headwinds.
In conclusion, the dental services industry is undergoing a significant shift towards prioritizing profit margins as they look at technology and data analytics to optimize their pricing and inventory strategies.
Importantly, the major white label & OEMs emerge as valuable ally for DSOs by introducing and executing cost-effective strategies, coupled with systematic lab expense reduction. Through its end-to-end solutions, OEMs aid DSOs in mitigating inflation risks, countering cost increases, and managing cash flow effectively, thereby reshaping the dental industry's supply chain dynamics.
Additional table of comparison between in-house manufacturing vs. outsourcing to an OEM Partner
How OEMs are reinventing their commercial promise?
Unlike large clear aligner manufacturers, white label & OEMs are much better equipped to treat clients more individually — identifying customer segments that are most price sensitive as well as those, which focus more on other parts of their value proposition.
Contrary to Invisalign’s blanket ASP increases, white-label OEMs are able to fully customize their offering, depending on various factors like cost to serve, volume discounts, historical performance, and value of an individual customer or segment – developing pricing playbooks and leading the category. This not only enabled them to capture additional business from existing customers, who may be disappointed with other large clear aligner providers in wake of recent ASP increases, but even allowed them to acquire new DSO accounts.
Not to forget that increased ASPs have translated into higher working capital requirements for dental offices. DSO Management are increasingly focused on creating high resolution visibility on spending and managing liquidity – adding another incentive to strengthen their procurement and supply chain operations.
Market share is inherently backward looking. This is where a forward-looking share of growth and LTM performance are far more valuable. The below graphic provides an overview about the LTM performance and how the market has evolved in FY 2023, versus a historical perspective about the market.
A case in point is K Line Europe's stunning entry in the North American market, where it has been FDA approved and operational since early 2022, adding its first regional branch and fulfillment center in Florida shortly after.
This strategic expansion showcases the company’s commitment to understanding and meeting the diverse regional needs of the market, and solidifies its position as a reliable partner for dental professionals across the continent.
Ultimately, quality, reliability, and clinical competence are paramount in the dental field. The ability of OEMs to customize their solutions ensures greater customer satisfaction and sets them apart in the industry as reliable and competent partners.
How to achieve lower Overheads?
Based on recent ADA data, dentists are running at 100 percent capacity in terms of work hours, with little or almost no possibility for increasing work hours to drive top line growth.
White Label clear aligners offer a more affordable option for patients than many of the long-standing systems, without compromising the quality and efficiency of treatment. This means that dental offices can offer their patients a lower price point, which can improve treatment acceptance among existing patients as well as attract more new patients to their practices.
Leading white label OEMs offer as good, if not better, support service as leading clear aligner brands. Not just that, several OEMs even provide marketing & sales support to help dental offices promote their treatment services offering.
Many OEMs have built up capabilities in recent years to improve treatment planning (TP) software. At the forefront of this development is K Line Europe, which offers both standard and advanced TP software, while keeping the unique promise that every TP is created by their in-house team of expert orthodontists.
When considering a partnership with an OEM, it's essential to prioritize quality and support services. One should look for manufacturers that not only offer cost-effective solutions but also ensure reliable support. Assess their commitment to marketing and sales support, as well as advancements in treatment planning software. A key consideration should be the integration with leading remote monitoring systems for optimal treatment outcomes and patient adherence.
Choosing an OEM that excels in these aspects will not only contribute to lower overheads but also position a dental office for financial resilience and clinical excellence in the evolving landscape of the dental industry.
In conclusion, the dental industry is adapting to the challenges of changing consumer behavior and market developments. White label & OEMs, understanding these changes, offer a promising path for dental offices to enhance profitability by reshaping supply chain dynamics. We can expect to see more of these partnerships in 2024, enabling both financial resilience and clinical excellence of dental offices.