How the corporate dental model is expanding

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corporate dental model expansion
Pacific Smiles founder Dr Alex Abrahams argues that “rapid and unchecked centre expansion” by the current Pacific Smiles board was illogical and has ruined the company’s margins and profitability. 

The corporate dental model is here to stay but some argue that an expansion-at-all-costs approach could be counterproductive for dentists and patients. By Cameron Cooper

The rise of corporate dental groups has been one of the evolutionary features of the Australian market in the past 15 years.

Corporatisation has clearly caught on, with major players such as Abano Healthcare (about 260 trans-Tasman practices), Bupa (about 200 practices), Pacific Smiles (almost 130 practices), and Crescent Capital’s National Dental Care (about 70 practices), providing a business structure that offers the benefits of scale, financial security and back-end support. 

The exact figures are uncertain, but corporate entities own and operate about 12 per cent of the approximately 7000 dental practices in Australia, up from about six per cent a decade ago. Despite such growth, this percentage still significantly trails the US, where corporate groups collectively control in excess of 30 per cent of the market.

Expansion worries

Corporatisation is not without controversy in Australia, however, with Pacific Smiles founder Dr Alex Abrahams having recently called for a boardroom spill in response to the ASX-listed company’s latest financial figures and a share-price fall. 

At an extraordinary general meeting (EGM) on 19 December, 2022, shareholders narrowly voted against the ousting of the board, with the exception of a vote to remove director Andrew Knott. Following the meeting, chair Zita Peach commented that while “the EGM process has been a distraction, it has been a good opportunity to engage with our shareholder base. The company remains open to ongoing dialogue with all of its shareholders”.

However, with more than 44 per cent of voters seeking to remove CEO Phil McKenzie as a director, the company remains fractured. This follows results for the full year ended 30 June, 2022, in which Pacific Smiles’ revenue dropped by 8.9 per cent to $139.5 million; total patient fees declined by six per cent to $226 million; and EBITDA fell by 65.9 per cent to $11.3 million, with the company attributing the performance to the “economic impact of COVID-19-related lockdowns and outbreaks”. In mid-December, 2022, the company’s share price was $1.58, up from $1.25 on 21 October, 2022, but still well down from $2.35 in June 2015 after the group’s listing in late 2014.

The concerns of Dr Abrahams—who is still Pacific Smiles’ biggest shareholder—highlight a clash between two corporate dentistry models. On one side is the popular ‘grow quickly and damn the costs’ model that has been popular in sections of the US market. On the other side is the ‘big version of a small business’ model which inspired pioneering corporate groups to provide sophisticated local dentistry while centralising back-office and management costs.

Dr Abrahams argues that “rapid and unchecked centre expansion” by the current Pacific Smiles board—from which he stepped down in July 2020 citing concerns over the business’s direction—was illogical and has ruined the company’s margins and profitability. He notes that revenue per dental chair has fallen from $331,000 a year to $261,000 a year since 2019, while fixed costs have, in most cases, continued to increase.

Dr Abrahams urges the board to adopt a more balanced “channel mix”, suggesting the business has become increasingly unbalanced in the past few years, with low-performing practices in shopping centres dominating the portfolio.

Practices in shopping centres now represent about 70 per cent of the business, up from 27 per cent in 2015, and Dr Abrahams says this is hampering efforts to offer more sophisticated dentistry in larger, better-equipped practices that respect patient privacy. He further says a board that lacks local dental experience has damaged the culture of the business and caused many dentists to become disenchanted.

There’s still a place for the single practitioner if you’re providing niche care such as paediatric-focused or orthodontic-focused care, or if you are a specific personality type. As for being able to graduate and hang up your shingle in the middle of suburbia, well, you’re not going to be able to compete with the corporates.

Dr Brad Moore, private and corporate dentist

 

In a reported statement to investors, Peach said: “We believe the current group strategy offers significant potential for shareholder value uplift and that the current board have the right skill sets to work with management on delivering this value creation.”

In pursuit of excellence

The US dental market arguably provides a window into what corporatisation should look like. 

The Aspen Group, headquartered in Chicago, has built its success on the back of a broad ‘house of brands’ approach that delivers services such as general and high-end full-arch rehabilitation and implants, check-ups and treatments though to emergency dental care, teeth whitening and straightening, periodontics and cosmetic dentistry. It has also focused on building a partnership mentality with dentists.

NSW dentist Dr Brad Moore understands the lure of the corporate model better than most, having worked in his Double Bay clinic in Sydney before opting to join Pacific Smiles back in 2008. 

Dr Moore says he “gets where the executive is coming from” in terms of their desire to expand and grow the brand. “I also get where super industry funds and institutional investors are going. They want to see returns for their investors.” 

However, Dr Moore is concerned that Pacific Smiles’ focus on share price growth and dividends in recent years “is not necessarily for the benefit of dental practices and patient care”. 

As he contemplates the future of Pacific Smiles, Dr Moore believes there will have to be concessions on both sides following the EGM. “There’ll be a significant period of trying to rebuild the business. You can’t venture down the way we’re going and you can’t just be purely focused on providing patient care. You’ve got to have that balance.”

A better model

Dr Abrahams believes the key to the success of dental corporatisation in Australia—at least in Pacific Smiles’ case—is to replicate the strengths of The Aspen Group and improve the Australian company’s value proposition for dentists.

His three-phase plan covers stabilising the business through a review of all centres and business units; focusing on the introduction of high-value-procedure dental centres, larger health fund-branded centres, and scoping for emergency dental centres; and consolidating and driving further growth through expansion within the dental ecosystem while pursuing a broader patient base on the east coast of Australia.

The other imperative for any corporate dental model, according to Dr Abrahams, is to have a board and executive team with a mix of dental sector expertise, strong governance credentials and ASX experience.

Suggesting that the corporate model is “here to stay and will continue to expand”, Dr Moore says many independent dental clinics will face a tough battle to survive. 

For the small practices to prosper, they will have to have a strong niche, a loyal patient base and a sustainable fee structure.

“There’s still a place for the single practitioner if you’re providing niche care such as paediatric-focused or orthodontic-focused care, or if you are a specific personality type. As for being able to graduate and hang up your shingle in the middle of suburbia, well, you’re not going to be able to compete with the corporates.” 

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