More dental insurance coverage and moves by dentists to hand off administrative duties are behind a planned initial public offering by Santa Ana-based Smile Brands Group Inc.
The provider of support services to dentists is looking to raise up to $130 million after expenses in an upcoming stock offering, the date for which hasn’t yet been set.
The offering stands to be the biggest here since 2007.
Smile, which operates Bright Now Dental and other brands, has seen growing sales and profits as dental insurance expands to more people.
Last year, 85% of Smile’s $456 million in revenue came from dental insurance providers, up from 80% two years earlier.
“The dental services industry has experienced an increase in insurance payment arrangements as more employers are adding dental insurance to the benefits packages offered to their employees,” the company said in a filing this month with the Securities and Exchange Commission.
More insured patients bring an increase in “the number of preventive care visits” and “greater utilization of general and specialty dentistry services,” the company said.
As in other parts of healthcare, dealing with insurers also brings a constant push for lower prices and limits on how much care is covered. That has the potential to impact Smile’s revenue, according to the company.
But with the number of Americans with dental benefits relatively low compared to regular healthcare coverage—about 60% for dental versus some 85% for healthcare—the expansion of insurers into dental coverage is seen as a plus by Smile.
“As opposed to other healthcare services subsectors where insurance pricing pressures and other limitations affect the profitability of the medical providers, we view the increase in plans for dental services as a positive development,” it said.
About 175 million Americans have dental benefits, up 15% from 1999, according to the National Association of Dental Plans, a Dallas-based trade group.
Another driver for Smile is the changing makeup of dentists, according to Jeff Johnson, an analyst with Milwaukee-based investment bank Robert W. Baird & Co. who follows Wakefield, Mass.-based competitor American Dental Partners Inc.
“There are more dentists retiring than are coming out of school,” he said. “Obviously, the population in the U.S. is growing, so you have fewer dentists and more patients. These dentists are very busy.”
That creates more demand for companies such as Smile, which provides accounting and billing, human resources, insurance contracting, marketing, call centers and other services for dentists.
Dentists typically generate $400,000 to $500,000 a year in revenue, according to Johnson.
“Their time can be spent much more wisely seeing patients, billing for chair time (rather) than worrying about the back office,” he said.
Dentists have been impacted by the economic downturn, according to Johnson. Before the recession, the industry was growing by 4% to 6% a year, driven largely by pricier procedures patients paid for themselves, including teeth whitening and dental implants.
The trend is reflected in Smile’s revenue, which was up 3% last year from 2009 but slowed from 2008’s 4% growth and 8% in 2007.
The company has remained solidly profitable. Its earnings before taxes, interest, amortization and deprecation was $56.7 million last year, up 29% from a year earlier.
Pitch to Dentists
Dentists who sign on with Smile continue to own their practices and have them marketed under various Smile brands, including Bright Now Dental, Castle Dental and Monarch Dental.
Smile has what it calls a “retail oriented” business model that uses marketing to get patients to its dental offices, some in neighborhood shopping centers.
The company serves more than 1,100 dentists and hygienists at more than 300 offices, according to its filing.
The market is fragmented with about 85% of dentists practicing alone or with one other dentist, according to Smile.
Its pitch to dentists: The average cost of operating a dental office as a sole practitioner is 10% to 25% higher than one that contracts with a management company.
Smile’s publicly traded rivals are doing well on Wall Street.
Shares of American Dental Partners have doubled in the past 12 months with a recent market value of about $220 million.
Denver-based Birner Dental Management Services Inc. is up 50% in the past 12 months with a market value of about $30 million.
Smile could see a market value of about $330 million based on its current price range and projected shares outstanding after its offering.
Smile plans to trade its stock on the New York Stock Exchange under the ticker symbol “GRIN.” The company first filed to go public at the end of December and updated its plans earlier this month.
Los Angeles-based private equity firm Freeman Spogli & Co. owns 73% of Smile Brands, a stake that’s set to fall to about 45% after the offering. In 2005, Freeman Spogli acquired a majority share of the company from San Francisco-based Gryphon Investors, which still holds a small stake.
Proceeds from Smile’s offering are slated for redeeming preferred stock owned by Freeman Spogli and repaying debt.
The offering stands to be the first major stock debut in Orange County since late 2007, when Mission Viejo-based nursing home operator Ensign Group Inc. went public and raised $64 million.
