UK DENTAL LABORATORY INDUSTRY SURVEY REPORT 2002/2003

February 16, 2003

UK DENTAL LABORATORY INDUSTRY SURVEY REPORT 2002/2003

EXECUTIVE SUMMARY

The 2002/03 UK Dental Laboratories annual industry survey report was carried out by healthcare specialists LCS International Consulting Ltd (LCS) in December – February 2003. Responses to the full survey were received from 8% of the membership of the UK Dental Laboratories Association (DLA) and fully reflect the underlying geographic split and NHS/private mix.

Total turnover in the latest financial periods of firms responding to the survey was just over £30 million.

As at March 2003, LCS's estimate of annualised turnover for the UK dentistry market is in the order of £3.2–3.25 billion. This represents an annual spend of only £65 per capita, less than 35% of the comparable level in the United States . The UK figures include NHS and private provision plus services delivered to the Ministry of Defence .

The largest element is the general dental practice sector, which LCS estimates at around £2.85-2.95 billion . The latter sector has been growing at around 5.5-6% per annum over the last five years, reflecting in the main that dentists and patients have successfully transferred from the NHS to higher quality private dental care. The size of the private sector at end 2002 on an annualised basis is approximately £1 billion.

UK dentistry employs in excess of 77,000 people in the UK , including close to 10,000 qualified and unqualified laboratory technicians. The number of dentists in the UK who are professionally active equates to approximately 1 dentist for every 2,000 heads of population, very similar to the USA but much less than comparative numbers in many countries in W Europe.

In France , Germany and Italy the ratios are 1 per 1505, 1 per 1305 and 1 per 1185 respectively. The ratio of dentists to laboratory technicians in the UK (3.2:1) and the US are also similar (circa 3.5:1). However, both again are out of line with ratios in France , Germany and Austria which are 2.3:1, 1.2:1 and 1.2:1 respectively.

The number of dental laboratory premises in the UK is around 2700 . Around one third, a little over 900 dental laboratories are affiliated to the DLA. Overall, the UK dental laboratory sector remains very fragmented. The average size of laboratories is less than 4 technicians, which is significantly smaller than the average size of laboratories in the US .

Estimated total size of the UK dental laboratory sector at the end of 2002 is approximately £290-300 million. Around £80-85 million is predominantly private work. The most significant event that has impacted the sector in recent times was the overhaul of NHS prices in 1992, which not only reduced NHS fee rates to dentists, but also cut the level of fees paid to those laboratories whose work is predominately NHS related. In 2002/2003 lower NHS prices continue to have the effect of pushing more dentists and laboratories into the private market.

At end 2002, the survey noted a consensus view in the UK that education (just as in the US ) has largely failed the industry, with inadequate numbers going through under-funded colleges. Concerns also exist that the industry is too lightly regulated. It is understood that recognition of this has in part influenced the DLA's policy to promote the new voluntary Dental Appliances Manufacturers Audit Scheme (DAMAS).

Additional significant findings from the 2002/03 DLA Survey are:-

•  In part reflecting demographic trends, volume growth in the last year in this country (mirroring trends in Europe, North America and Pacific Rim countries) has derived in the main from new products such as Implants and Bleaching trays, Implant volumes in the UK last year were around 45,000 reflecting 25% compound growth in the last 2 years. Dental lab implant work now exceeds £10 million per annum.

•  Fee inflation for NHS laboratories continues to be limited by the annual rises granted by the ‘Doctors and Dentists Annual Review Body' recommendations. NHS laboratories often only distinguish their product on a price basis with very low weighting given to quality and reliability. There is however evidence that larger firms are winning market share.

•  In line with previous years, dental laboratories undertaking predominantly private work have benefited from rising fee rates charged by private dentists. They have also gained this period from the patient trend away from capitation schemes to a ‘fee per item' basis.

•  Different trends in private and NHS laboratory fees are not set to change. Currently, private dentists' fees/dental laboratory costs are around 4.5-5.0 : 1, similar to ratios in Europe and North America . These relatively high margins for private dentists' fees enable them to absorb higher laboratory charges for better quality work and still increase their own returns . In comparison, the ratio for dentists' fees/dental laboratory costs re. NHS work is much lower - no higher in many instances than 2.0-2.5 : 1. Inevitably, the margin pressures on NHS dentists mean that medium term there is rather more limited scope for UK laboratories to benefit from any increase in NHS reimbursement rates. Over time more NHS lab work will be sourced from overseas.

•  The relative small size of firms in the sector means that in the longer term fewer will likely provide a full range of services and there will be an inevitable increase in specialisation leading to growth in Lab 2 Lab work. There is more evidence this year that larger firms were winning market share from smaller firms. Improving logistics will in future accelerate the trend to relocate laboratories away from the more expensive parts of the country such as London and the South East.

•  Previous fears in some quarters that private labs' fees would come under pressure from dental corporates have reduced. Change of dentists' status at practices owned by Boots has also impacted the sector. Improvement in labs' relative bargaining power is evidenced by new private equity activity in the sector and one company's new AIM listing.

•  Average turnover per technician in NHS laboratories in the last year is circa £52,500 per annum. The comparative figure for laboratories with predominantly private work is £65,000 per annum. As a result:-

•  Average wage rates for technicians in predominantly private laboratories is on average 12% higher than those in NHS laboratories

•  NHS laboratories are experiencing increasing difficulties in hiring and retaining fully trained and/or experienced staff

•  In most instances NHS laboratories cannot afford to take on trainees and educate them, nor invest in courses to train their technicians to work with new products and new materials

•  NHS laboratories do not have access to capital (nor in many instances the inclination) to invest in new equipment that might improve the level of turnover per employee over the longer term

•  There is increasing risk that NHS work in future will have to be undertaken by lesser skilled/inexperienced technicians in the UK or sourced from overseas

•  The greatest problem for all laboratories, NHS and private, is finding competent staff. Consequently wage pressures for trained and experienced technicians are increasing. Mirroring trends in the US , highest premium rates are paid to crown and bridge specialists and ceramists. These trends are set to continue because there are insufficient numbers of trained technicians able to support the increasing volumes of private work. Medium term therefore, more importing is an inevitable consequence. Part of the solution for private labs will be new CAD-CAM technologies.

•  The greatest technical challenge faced by laboratories in the UK (cited by more than 60%) was time related. The two main challenges were the meeting of production deadlines and ‘rush jobs'. Other issues included maintaining consistent quality, incorporating new techniques and difficulties caused by dentists' vague prescriptions and inadequate preparatory work - (The latter two points were cited by more than 40% of laboratories). Only a smaller number of problems are experienced with materials and equipment. Laboratories serving the private market have fewer problems managing their workload and spend more time bedding in new techniques.

•  One of the most surprising findings of the survey is that there is little difference in productivity in the UK , between private and NHS laboratories despite different levels of capital investment. Their productivity rates are also similar to those exhibited in other parts of the world. Analysis indicates that the majority of laboratories innalysis indicates that the majority of laboratories innalysis indicates that the majority of laboratories in the UK which carry out predominantly private work and many larger laboratories in Europe and North America accept the premise that in part lower productivity levels are a reasonable trade-off for higher quality product.

In summary, LCS confirms last year's conclusions that any new investment in the sector is likely to be limited to laboratories that provide predominantly private work. Concerns over the quality of NHS product may well in due course undermine the confidence of the consumer/patient. The relatively ‘light' level of regulation today is another important issue.