Follow the Money: Venture Capitalist Perspectives

W. Brett Ingersoll, MBA, is Chairman of the Private Equity Investment Committee and Senior Managing Director for Cerberus Capital Management, which acquired National Dentex Labs (NDX) in October 2020.

Inside Dental Technology (IDT): Why did you find the dental laboratory business to be a promising investment?

W. Brett Ingersoll: We have a long and successful record investing in the healthcare industry and have experience in many of the important sectors including healthcare services and pharmaceutical. As we studied the dental industry, we were attracted to improving insurance coverage, strong products and service offerings, excellent quality of care, and an aging population. Within the dental industry, DSOs are well invested, with more than 100 private equity-backed companies, so DSOs are consolidating, well capitalized, and growing. Specifically in the dental sector, we looked at where technology is having a significant impact, and where technology has yet to have an impact. Those factors led us to study the dental laboratory sector, which is surprisingly underinvested and not consolidated, yet advancing in technology and producing very high-quality, custom, one-of-a-kind products. What stood out with dental laboratories was the importance of logistics and delivery times, and the potential of technology to improve everything from sales to customer service, manufacturing, and product delivery.  Finally, we found the dental laboratory segment to be highly fragmented, with just a handful of larger companies comprising 10% of the sector, leaving 90% still owned by local and regional operators. When we studied the entire sector, we felt that our experience investing in the healthcare industry and our focus on growth, technology, and operational excellence, coupled our capital, would make a difference if we could find the right company to acquire with a strong management team. That company was NDX.

IDT: Almost a year into it, what have your impressions been?

Ingersoll: We have been pleased so far. We knew that COVID-19 would be a bit of a wild card and dental practices are just starting to get back to full utilization of our services. That said, we have worked closely with the NDX management team and have already closed NDX's acquisition of Dental Services Group and are pursuing others. We have significantly expanded NDX's sales force and customer service team while also allocating more capital to technology investments to improve manufacturing and delivery times.

IDT: Are there elements of the business that you feel could be done better?

Ingersoll: Technology is a part of every investment we make, whether it is a healthcare company or not. We assume technology will be key to our success and our job is to determine how to make that a core tenet of every investment we make. If we are not in front of the technology curve, we lose an essential competitive advantage. At NDX, we are investing significantly in technology to improve everything from customer service-people, not bots-to logistics and our manufacturing process. Customer service is at the top of the list. We had a company that makes great product, but almost all laboratories in the industry make great product, and it is a custom product. So, sales and customer service are important and are often a critical competitive differentiator. In the case of NDX, there was an orientation to service but there was not a full-time customer service organization. It was historically integrated with the sales organization, so it was highly personalized but not necessarily tracked and measured. We are implementing all of the best practices that any service organization would utilize in a situation like this. We also have an increased commitment to sales, but we are dividing those two functionalities.

IDT: Are there any areas where you see the laboratory industry is doing things particularly well or profitably?

Ingersoll: I was initially surprised at how low-margin dental laboratories are. For a custom product, the amount of volume that any good laboratory needs to produce is significant. That means dental laboratories must find additional differentiators beyond just product quality. That is where customer service comes in. The mindset needs to be that quality is more than just the product; it is the entire customer experience. Dental practices are local so dental laboratories need to have a high-functioning local presence. We are committed to local sales, local service, and local, in-person interaction with the dentists, because for dentists, that is a differentiator and that is what they demand. We want dentists to interact with NDX in their local practice and we want them to feel that if there is a problem, they have a trustworthy local point of contact upon whom they can rely.

IDT: That's interesting because we see so many smaller laboratories pursuing more national client pools as digital tools enhance their ability to do that.

Ingersoll: Local does not mean all things local. If you have great technology and great delivery/logistics, you do not need to make all the products locally; you can interact and serve the customer locally, though. The scale and the national footprint do matter, so there is truth in that. But local service gives the dentist the comfort that the whole experience will be high quality, not just the product.

IDT: How do you envision the laboratory profession evolving, and how will it look different in 5, 10, or 20 years?

Ingersoll: Dental laboratories over time will be more consolidated. Do I think we will lose the small, entrepreneurial laboratory owners? No. We still will have room in this industry for a very large percentage of them, but consolidation of smaller laboratory operators will continue. We will continue to see more innovation. Digitizing an impression saves valuable time; that is something we have emphasized since we invested, and we are seeing tangible benefits in terms of reduced remake rates and shorter manufacturing and delivery times. With that said, when I walk through one of our laboratories, the manufacturing process is remarkably custom and hands-on, so technology will advance in small, incremental steps over the next 5 to 10 years. Continued innovation and continued acceptance of technology by both the dentists and laboratories will drive innovation to improve delivery times while keeping quality high. Sales and customer service will continue to be important. The functionality of the dental laboratory is critical to the success of the local dentist, and at NDX, we are committed to improving the overall customer experience while delivering the highest quality product in the industry.

David Jones, MBA | Coppermine Capital

David Jones, MBA, is Managing Director of Coppermine Capital, which has invested recently in multiple California laboratories to form Spectrum Killian Dental Lab Alliance.

Inside Dental Technology (IDT): What did you find so promising about the dental laboratory industry that led you to invest?

David Jones: We invest across several industries, including manufacturing and healthcare services, so we were naturally attracted to dental laboratories. The sector has several characteristics that create an opportunity to build a US-based alliance of dental laboratories that deliver market-leading quality and service to dental practices and their patients. First, there has been a sustained emphasis on appearances, which COVID-19 accelerated. Second, the dental laboratory market is fragmented with significant variation in product quality, service, and operational efficiency. For example, we were surprised to learn how many laboratories, despite advances in computer-assisted design and manufacturing, continue to base their manufacturing process on analog systems-literally physical models sent through the mail. In this environment, we can partner with leading specialty laboratories to adopt digital technology and combine that with very responsive customer service to make their dentists and ultimately the patients thrilled with how they look. We can do that because small-to-medium laboratories throughout the US have not yet consolidated the way other parts of the dental space have, and we see an increased willingness among laboratory owners to consider selling.

IDT: What are some of your initial observations about the industry?

Jones: Dental laboratories are ahead of dentists in terms of digitization, but they still lag behind other industries. Financial services companies, for example, invest 10% of revenue in IT-at least twice as much as healthcare companies. As a result, business processes in healthcare are often inefficient. We see an opportunity to develop a laboratory that uses digital manufacturing to offer best-in-class quality and turnaround times at the level of adoption with which dentists are comfortable. While we encourage them to use intraoral scanners and other technologies, if that isn't a fit, we work with them using what they have. There is a tremendous opportunity to catch up with other industries in manufacturing processes, customer service, speed, customization, and digitization to improve the offering to dentists and their patients.

IDT: Has anything surprised you about the business?

Jones: Many laboratories are family operations. The number of founder-run laboratories employing second- or third-generation family members is remarkable. Experience matters with laboratories, and founders and their typically long-tenured teams have a tremendous amount of know-how. They are truly experts in the field and their understanding of the business and the clients is difficult to overstate. We try hard to retain this expertise within the business, including ensuring that key personnel have the opportunity to grow. This is crucial to the platform we are building. For a laboratory owner, joining the Spectrum Killian Dental Lab Alliance allows them to monetize their life's work, ensures their laboratory and employees will continue to thrive, and gives them the opportunity to participate in the growth of the platform. We encourage these founders to continue working with us after joining the alliance because of the incredible knowledge they possess.

Another surprise was the use of paper and physical molds in product manufacturing. Laboratories have a big opportunity to use software and communications technology to improve quality, turnaround times, and remake rates. An executive we work with from the aerospace industry observed that dental laboratory manufacturing processes are where the aerospace industry was around 30 years ago.

IDT: Are there any elements of the business that stick out to you as things that have always been done a certain way but could be done better?

Jones: Laboratories tend to be local in terms of their customer base. As you move toward digital, geographic constraints should fall. That mentality is slowly changing.

IDT: Conversely, are there any elements that you look at as being incredibly well executed and profitable?

Jones: Time will tell how quickly this will catch on, but we are starting to provide full-mouth restoration kits with stackable surgical guides to dentists. We give dental surgeons all the tools they need to execute a guided full-mouth restoration. We developed a package that any periodontist can use because there is a huge opportunity to improve both the quality and efficiency of that process compared to freehand surgery. I'm very bullish about that.

IDT: We're seeing an emphasis on personalized services in many industries, not just this one. How important is that?

Jones:We have used a consultative sales process to really understand a dentist's practice patterns and customer needs. Dental practices are so idiosyncratic that, for us to do our jobs-making dentists' lives easier and saving them time-we need to understand their practice characteristics, how we can integrate with them, and how we can improve their efficiency. That is just standard customer service, but laboratories historically have not done this consistently.

IDT: How do you envision the laboratory profession evolving over the next 5, 10, or 20 years?

Jones: Continued consolidation will lead to the dentist-laboratory relationship being less local and more results-based. Quality standards and turnaround times will continue to improve-that's a rising bar that successful laboratories must stay above. US-based manufacturing will be hard to displace for the highest quality products. Digitization is improving, but converting that last 10% or 20% of dentists will be difficult. Far down the line, AI will further automate manufacturing, but that needs time to take root.

IDT: Speaking of AI, laboratories have weathered previous challenges from offshoring and chairside CAD/CAM. Do you believe those challenges are indicators that the laboratory industry will continue to be valued by a large percentage of dentists even as AI gains traction?

Jones: I envision AI initially being a tool used by the larger laboratories, rather than chairside. But that is far in the future. As you know, most clinicians don't use chairside CAD/CAM technology, but it has proven to be a formidable tool for dental laboratories to improve accuracy, throughput and quality. Similarly, we believe AI technology for the next decade at least will be a net positive to the laboratory industry.