June 18, 2013

Baird Equity Research Health Care / Life Sciences

Medical Technology
June 2013 Dental Survey Points to Stable but Still Sluggish Markets

Maintain Outperform ratings on HSIC/XRAY, Neutral ratings on SIRO/PDCO. June dental survey suggests fairly stable domestic dental end markets, with hints of modestly improved April/May consumables trends vs. 1Q but still-sluggish equipment demand. While this month's survey leaves us comfortable with C'2Q estimates across the group, we remain somewhat cautious overall and even with HSIC and XRAY we'd be better buyers on pullbacks until more tangible evidence emerges of an uptick in end-market fundamentals. June dental survey fielded June 7-10 (n=301 dentists/dental practitioners). From high level, June survey highlights fairly stable domestic end markets, although several points suggest 2Q trends may be modestly improving relative to 1Q. Key market-wide takeaways:

INDUSTRY UPDATE
Prices as of 6/17/13 Ticker HSIC PDCO SIRO XRAY Price $97.64 $39.21 $64.14 $41.58 Mkt Cap (mil) $8,719 $3,995 $3,605 $5,983 Rating O N N O Risk A A H A

Baird covered companies

- Trailing 3-6 month patient volumes slightly improved vs. last survey

(-1.4% vs. -1.7% in May survey), although to be fair 2Q average survey findings (-1.6% average between May/June surveys) are unchanged vs. 1Q survey findings (average -1.6% between Jan/Feb/March surveys); once benefits of price (+2-2.5%) and mix (+1-2%) are taken into account, we believe these findings suggest domestic dental consumables market growth is currently trending +2-3%, in line with our current projections for HSIC, PDCO and XRAY. improvements first seen in 1Q-13 surveys holding in, especially relative to 2H-12 surveys, with demand for both low-acuity (general exams, lower-end restoratives, etc.) and higher-acuity treatment options (implants, ortho, etc.) remaining improved vs. 2H-12. equipment spending outlook remains cautious, with survey findings on both absolute dollar and percentage basis still negative; as a percentage of company-wide revenue, North American dental equipment accounts for ~30% of SIRO revenue, 23% of PDCO revenue, and 7% of HSIC revenue. is currently little to no evidence of accelerating end-user demand for CAD/CAM and/or DI systems in general expected to remain highest for SIROs CEREC and Apollo systems.

- Procedure-specific

- Dental

Key CAD/CAM conclusions :

- There

- Five-year penetration within the in-office CAD/CAM and DI segments is ultimately - But growth for other (non-SIRO) in-office CAD/CAM and DI systems is expected
to be higher (relative to CEREC growth), suggesting these other non-SIRO systems could enjoy growing acceptance over time.
s

Bottom line, June survey results leave us comfortable with C'2Q estimates across the group. Even so, we remain somewhat cautious on the group pending more tangible uptick in end-market fundamentals. For HSIC/XRAY, we'd be better buyers on pullbacks, while for PDCO/SIRO we continue to see risk to FY'14 Street estimates. To see all 12 pages of this survey , you must PDF this document.

[
Jeff D. Johnson, O.D.,CFA jdjohnson@rwbaird.com 414.298.6027 Jason Bednar, CFA jbednar@rwbaird.com 414.298.6057 Rebecca R. Schlagenhauf rschlagenhauf@rwbaird.com 414.298.7323

Please refer to Appendix - Important Disclosures and Analyst Certification

June 18, 2013 | Medical Technology

Details
Baird Monthly Dental Survey. Our proprietary monthly dental survey for June was fielded from June 7-10 and includes responses from 301 dentists/dental practitioners. Key conclusions from this months monthly survey include the following: 1. Patient volumes appear stable to slightly improved in 2Q (Question #1-2). Patient volumes on a trailing 3-6 month basis were slightly improved in this survey vs. our May survey (-1.4% in June vs. -1.7% in May survey), while qualitative feedback in this months survey regarding month-to-month trends suggests slightly better April, May and early June end market demand relative to any of the three months of 1Q. While the sequential improvements for 2Q suggested by our survey are modest, they fit with our recent channel checks and suggest to us that market growth in the 2-3% range this quarter vs. 1.8% in 1Q (weighted-average growth in North American dental consumables growth for PDCO and HSIC in C1Q) remains a reasonable assumption at this point. 2. Demand for both low- and high-acuity treatments also relatively stable, above 2H-12 levels. Appointment booking lead times and demand for general office visits from established patients, preventative procedures, and basic restorations remained fairly stable with our last several surveys and continues to track slightly ahead of 2H-12 levels. Similarly, demand across most high-acuity treatment areas remains improved relative to our 2H-12 surveys, although the improvements seem to be tracking slightly below levels seen in our March and May 2013 surveys. The one exception in the high-acuity categories was for orthodontics, where improvements remained in line with March results (above May findings) and at their second highest level dating back nearly four years. 3. Results continue to suggest cautious dental equipment spending outlook. Over the next 12 months, respondents expect to spend, on average, 1.7% less on dental equipment (vs. the trailing twelve months), including 1.7% less on basic equipment and 1.9% less on high-tech equipment. While negative y/y spending expectations remain a concern for all of our dental stocks with capital equipment exposure (SIRO, HSIC, PDCO), we note that this months survey results are modestly improved vs. two of our past three surveys and we also remind investors that SIRO is in the midst of a solid new product cycle with its CEREC Omnicam system, which we believe should in the near term (next 1-2 quarters) help at least partially offset risk they and distribution partners PDCO in North America/HSIC internationally might otherwise be facing due to this currently sluggish overall end-market demand for dental equipment. 4. In-office DI and CAD/CAM demand stable, CEREC expected to remain market leader, but uptake of other systems also expected to grow. We continue to watch our dental surveys closely for signs of accelerating penetration rates across the entire in-office CAD/CAM and DI categories and for signs of how the competitive CAD/CAM environment may play out over coming years given a growing number of competitors in the space and as CEREC pricing has recently been in flux. This month, our survey results suggest the following: There is currently little to no evidence of accelerating end-user demand for CAD/CAM and/or DI systems in general; Five-year penetration within the in-office CAD/CAM and DI segments is ultimately expected to remain highest for SIROs CEREC system. But growth for other (non-SIRO) in-office CAD/CAM and DI systems is expected to be higher (relative to CEREC growth), suggesting these other non-SIRO systems could enjoy growing acceptance over time.

Robert W. Baird & Co.

June 18, 2013 | Medical Technology

June 2013 Monthly Dental Survey Results

Respondent Demographics
Practice Focus
General Practice 89% Other 11% Orthodontics 1% Pediatrics 3% Endodontics 1% Oral / Maxillofacial 1% Prosthodontics 2% Periodontics 2%

Number of Dentists in Practice

One 60%

Two 25%

Three or More 15%

Source: Dental Economics/RWB Dental Surveys

25% 20% 16% 15% 10% 5% 0% New England Middle Atlantic South Atlantic East North East South West North Central Central Central West South Central Our Survey Mountain Pacific 7% 8% 6% 19% 16%

20% 17%
16%

17%

15%

8%

9%
7%

4% 4%

6% 5%

Dentist Distribution per BLS

Source: Bureau of Lab or Statistics, Dental Economics/RWB Dental Surveys

June 2013 Monthly Survey Profile Sample Size: 301 survey participants Method: Survey conducted via online survey tool in conjunction with Dental Economics. Survey Sample Profile by Practice Focus/Size: Practice Focus: 89% of respondents consider themselves general dentists and 11% are specialty dentists. In comparison, the ADA estimates roughly 80% of its members are generalists and 20% of its members are specialists. Practice Size: 60% of our respondents work in a single-doctor practice and 40% work in multi-doctor practices. This is right in line with what the ADA estimates to be just over 60% of dentists operating as sole practitioners.

Survey Sample Profile by Geography Geographic Distribution. Of the 301 dentists who responded to our survey, 45% were from the East Coast, 22% were from the West Coast/Mountain region, and 33% were from the Central states. Compared to BLS data, the most significant deviations were Mid- and South Atlantic (both overweight in our survey) and Mountain and Pacific (both underweight in our survey).
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June 18, 2013 | Medical Technology Q1. How would you characterize patient traffic flow through your office over the last 3-6 months as compared to the same period a year ago?

PATIENT VOLUMES - TRENDS OVER LAST 3-6 MONTHS

30% Weighted Avg Patient Vols Spring 2009 -3.3% Fall 2009 -4.3% Spring 2010 -2.7% Fall 2010 -3.8% Spring 2011 -1.5% Sum m er 2011 -1.6% Fall 2011 -2.5% Spring 2012 0.5% Sum m er 2012 -1.0% Septem ber 2012 -1.3% October 2012 N/A Novem ber 2012 -2.5% Decem ebr 2012* -1.8% January 2013 -2.0% February 2013 -2.4% March 2013 -0.4% May 2013 -1.7% June 2013 -1.4% 2009 avg: -3.8% 2010 avg: -3.3%
2011 avg: -1.9%

25%

20%

15%

H1-2012 avg: -0.3%

10%

Late 2012 avg: -1.9%

5%

0%
Down Down 10- Down 5- Down 120%+ 20% 10% 5% Flat Up 1-5% Up 5-10% Up 10- Up 20%+ 20%

Q1-2013 avg: -1.6% Q2-2013 avg: -1.6%

Source: Dental Economics/RWB Dental Surveys

WEIGHTED AVERAGE PATIENT VOLUMES - APRIL 2009 THROUGH JUNE 2013

1.0% 0.0% -1.0%

-2.0%

-3.0% -4.0% -5.0%

Source: Dental Economics/RWB Dental Surveys

Results/RWB Take: On a weighted-average basis, respondents reported patient volumes over the last 3-6 months have declined 1.4% y/y through early June, a ~30bp improvement vs. last months survey. However, when thinking about the implications of this and our last survey with respect to 2Q dental market results, we note that the average change in patient volumes over the past two months of these surveys has now been -1.6%, in line with the -1.6% average patient volumes suggested by our 1Q dental surveys (-1.6%). As such, our surveys suggest essentially no change for end-market trends for our dental names from 1Q to 2Q-13. Our channel checks, however, suggest 2Q trends are modestly improved vs. last quarter, a point that we believe can be reconciled relative to our survey work after considering that our surveys likely dont do a good job of teasing out weather, holiday timing, and distributor inventory-related timing issues, all of which likely created modest 1Q headwinds that should resolve to a large extent in 2Q. As such, we remain comfortable believing HSIC, PDCO and XRAY will all report stable (PDCO) to slightly improved (HSIC, XRAY) domestic and/or North American dental consumables results for 2Q vs. 1Q as highlighted in the table below. That said, we also believe
Robert W. Baird & Co. 4

June 18, 2013 | Medical Technology our survey work highlights another point our channel checks have been suggesting, and that is domestic dental trends remain generally sluggish overall and that were not yet seeing a tangible inflection point in end-user dental demand. Finally, we remind investors that while our surveys have fairly consistently pointed to negative patient volume trends over the past several years (save for an early and short-lived 2012 move into positive volume territory), these negative volume trends typically translate to slightly positive end-market growth after also taking into account ~200-250bp in positive pricing dynamics (a bit higher this year than the typical ~100-150bp annual price increase given additional med-tech tax driven price increases that went into effect at the start of 2013) and ~100200bp in positive mix tailwinds across the industry. Add these factors to slightly negative patient volumes, and we arrive at an aggregated market growth rate estimate closer to +2-3% for this quarter.

NORTH AMERICAN DENTAL CONSUMABLES CC GROWTH

CQ'1-12 HSIC PDCO XRAY (2) 4.9% (1) 3.5% 7.4% CQ2-12 1.9% 1.0% 2.9% CQ3-12 2.3% 0.9% 3.0% CQ4-12 0.9% 0.6% 4.3% CQ1-13 1.3% 2.3% 1.6% CQ2-13E 2.9% 2.0% 3.6% CQ3-13E 3.1% 2.0% 3.6% CQ4-13E 3.1% 2.5% 3.6%

(1) HSIC CQ1-12 growth adjusts for selling week timing (7.1% unadjusted) (2) XRAY N.A. dental consumables cc growth excludes orthodontic revenues Source: Company Reports, RWB Estimates

Q2. On a scale of 1-10, with #1 being "the worst I've ever seen" and #10 being "great, have never been so busy," how would you rate the patient traffic flow in your office over the last several months?

PATIENT VOLUME TRENDS - MONTHLY PROGRESSION

June 2013 5.74

May 2013

5.83

April 2013

5.82

March 2013

5.62

February 2013

5.28

January 2013 4.0 4.5 5.0

5.41 5.5

2Q m onths (AprilJune) significantly stronger than 1Q m onths (Jan-Mar)

6.0

Source: Dental Economics/RWB Dental Surveys

Results/RWB Take: When looking at trends on a month-to-month basis as opposed to 3-6 month aggregated volumes that Question #1 asks about, our survey results are slightly more encouraging, as the responses to this question suggest patient volumes have picked up in 2Q-13 relative to 1Q-13, with patient volume trends in April, May, and the first week of June all scoring better than January through March monthly trends. Were encouraged by these findings and believe they fit even better with our recent channel checks, although again we caution investors that our checks and findings from Question #1 suggest sequential 2Q improvements have likely been fairly modest.

Robert W. Baird & Co.

June 18, 2013 | Medical Technology Q3. Over the PAST MONTH how would you characterize each of the following? Please Rate With: 1 = Has become significantly worse 4 = Has stayed about the same 7 = Has become significantly better.
PREVENTATIVE AND LOW ACUITY TREATMENT OPTIONS
4.6 4.4
4.2

4.0 3.8 3.6 3.4 3.2 3.0

Visits from Established Patients Visits from New Patients Appointment Booking Lead Time Fall 2011 Feb 2013 Preventative Demand Basic Restorative Demand

Fall 2010 Nov 2012

Spring 2011 Dec 2012

Summer 2011 Jan 2013

Spring 2012 March 2013

Summer 2012 May 2013

Sept 2012 June 2013

Source: Dental Economics/RWB Dental Surveys

HIGH ACUITY TREATMENT OPTIONS

4.4 4.2 4.0 3.8
3.6

3.4 3.2 3.0 Higher-end Restorative Demand Cosmetic/ Whitening Demand Fall 2010 Nov 2012 Spring 2011 Dec 2012 Summer 2011 Jan 2013 Endodontic/ Root Canal Demand Fall 2011 Feb 2013 Orthodontic Demand Spring 2012 March 2013 Dental Implant Demand Sept 2012 June 2013 Summer 2012 May 2013

Source: Dental Economics/RWB Dental Surveys

Results/RWB Take: Across most preventative and low-acuity procedure categories, results from our June survey were relatively in line with our previous few surveys, with visits from new patients the one exception (June results below both March and May surveys, but still in line to a bit improved vs. December-February results). As for higher-acuity procedures, June results were mixed relative to our last few surveys, with higher-end restorative procedures, endodontics, and dental implants all trending below our March and May surveys, but cosmetic/whitening procedures and orthodontics essentially trending in line with what were March and May multisurvey highs. Regarding dental implants specifically, while softer trends in this survey vs. our past two are a bit disappointing, this months findings are still slightly improved vs. any of the findings from our 2H -12 surveys. Further, we remind investors that the N.A. dental implant market enjoyed a nice sequential improvement in 1Q (market growth likely closer to ~3-5% on a selling-day adjusted basis vs. ~3% in 4Q-12) and note that our channel checks over the past two months suggest domestic implant market dynamics have been stable to slightly improved in 2Q vs. 1Q (similar to general dental consumables channel feedback). As such, we continue to believe the premium segment of the domestic dental implant market is currently growing mid-single digits and believe that type of growth should at least prove sustainable (if not a bit conservative) over coming quarters as slowly improving consumer confidence and domestic jobs trends (especially in higher income levels) help offset growing demand from valuepriced implant players.

Robert W. Baird & Co.

June 18, 2013 | Medical Technology Q4. Considering both the current state of your business (patient volumes and practice revenues) and your expectations for the next 3-6 months (again, focusing on both patient volumes and practice revenues), please rate your sentiment for each. Please rate with 1 = awful, 10 = great, never been better.

RWB DENTAL SENTIMENT INDICATOR

Current Environment
7.0 6.8 6.6 6.4 6.2 6.0 5.8 5.6 5.4 5.2 5.0

3-6 Month Outlook

6.5 6.3 6.1 6.4 6.2 6.3

5.9 5.7 5.7 5.7 5.6 5.8

December January 2012 2013

February 2013

March 2013

May 2013

June 2013

December 2012

January 2013

February 2013

March 2013

May 2013

June 2013

*RWB Sentiment Indicator is weighted-average of survey respondents from each monthly survey Source: Dental Economics/RWB Dental Surveys

Results/RWB Take: Weve only started asking this question in December, so its hard thus far to try and read too much into our Dental Sentiment Indicator findings. However, as we accumulate a full year of data associated with this question, we believe this will be a good single-point indicator of the general health of dental practices. For now, were encouraged that both respondents current sentiment and 3-6 month outlook were relatively stable with that of prior surveys, and that respondents continue to expect improvements over the next 3-6 months (6.3 weighted average rating for 3-6 month outlook) vs. the current environment (5.8 weighted-average rating for current environment). Q5. On a scale of 1-10 and given recent patient volume and practice revenue trends, what best describes your expectations for dental equipment spending over the next 6-12 months? Relative to the past 6-12 months, I expect equipment spending to be...
DENTAL EQUIPMENT SPENDING OUTLOOK
140
120

100 80 60 40 20 0 1Significantly Lower 2

Wtd avg response of 4.9 sugge sts denti sts currently expect to spend slightly less on dental equipment over the next 6-12 months
Weighted Avg Responses Septem ber 2012 October 2012 Decem ber 2012 January 2013 February 2013 3 4 - Slightly Lower 5 6 7 - Slightly Higher 8 9 10 Significantly Higher March 2013 May 2013 June 2013 5.027 4.466 4.589 4.763 4.711 5.092 4.690 4.913

1 - Significantly Lower Source: Dental Economics/RWB Dental Surveys

10 - Significantly Higher

Results/RWB Take: On average, respondents expect to spend slightly less on dental equipment over the next 612 months relative to the past 6-12 months (midpoint of range, or 5.5, would be no change in expected spending). We quantify these findings in the next two questions, and as we discuss then, these results remain a bit underwhelming and no doubt represent an issue that we believe bears watching with regards to the dental equipment market. However, were also encouraged that the weighted-average result for this question improved this month vs. last and to its second highest rating this year and third highest rating in our past eight surveys (as

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June 18, 2013 | Medical Technology far back as this question goes as we changed the format of some of our dental equipment questions late last year). Q6. Regarding dental equipment, how much did you spend over the past 12 months and how much do you expect to spend over the next 12 months on dental equipment purchases? Please respond for overall equipment, as well as basic dental equipment (chairs, lights, stands, cabinetry, etc.) and high tech dental equipment (digital imaging, CAD/CAM, intra-oral scanners, etc.).
DENTAL EQUIPMENT SPENDING - TTM & NTM
TTM Dental Equipment Spending
$100,000 $200,000 $50,000 5% $100,000 8% $40,000 $50,000 3% $200,000+ 3%

NTM Dental Equipment Spending

$50,000 $40,000 - $100,000 $50,000 6% 2% $30,000 $40,000 4% $100,000 $200,000 $200,000+ 1% 2%

RWB Surveys Spring 2009 (Q1-09): Spring 2010 (Q1-10): Fall 2010 (Q3-10): Spring 2011 (Q1-11): Fall 2011 (Q3-11): Spring 2012 (1Q-12): Summer 2012 (2Q-12): September 2012 October 2012 November 2012 December 2012 January 2013 February 2013 March 2013 May 2013 June 2013

Wtd Avg Equip Spending (NTM-LTM) -$685 -$714 +$1,367 +$4,871 +$4,115 -$184 +$1,599 -$4,775 -$5,798 -$1,149 -$11,654 -$7,031 -$15,681 -$9,164 -$12,285 -$10,093

$30,000 $40,000 5%

$0 - $10,000 47%

$20,000 $30,000 9% $0 - $10,000 55%

$20,000 $30,000 10%

$10,000 $20,000 21% $10,000 $20,000 19%

$30,526 WTD AVG Source: Dental Economics & Robert W. Baird Monthly Dental Survey

$20,433 WTD AVG

BASIC DENTAL EQUIPMENT SPENDING - TTM & NTM

TTM Dental Equipment Spending
$100,000 - $200,000+ $50,000 - $200,000 1% $100,000 1% 3% $40,000 $50,000 2% $30,000 $40,000 5% $20,000 $30,000 6% $10,000 $20,000 16%
$0 - $10,000 66%

NTM Dental Equipment Spending

$50,000 - $100,000 - $200,000+ $100,000 $200,000 1% 1% $40,000 - 3% $50,000 2% $30,000 $40,000 2%
$20,000 $30,000 6%

RWB Surveys September 2012 October 2012 November 2012 December 2012 January 2013 February 2013 March 2013 May 2013 June 2013

$0 - $10,000 68%

$10,000 $20,000 17%

Wtd Avg Equip Spending (NTM-LTM) $514 -$593 -$3,755 -$3,543 -$892 -$2,779 -$1,176 -$2,531 -$1,664

$14,820 WTD AVG Source: Dental Economics & Robert W. Baird Monthly Dental Survey

$13,156 WTD AVG

HIGH-TECH DENTAL EQUIPMENT SPENDING - TTM & NTM

TTM Dental Equipment Spending
$50,000 $100,000 7% $100,000 - $200,000+ $200,000 0% 3%

NTM Dental Equipment Spending

$50,000 $100,000 4% $40,000 $50,000 3% $30,000 $40,000 2% $20,000 $30,000 $10,000 $20,000 4% 12% $100,000 - $200,000+ $200,000 0% 1%

RWB Surveys September 2012 October 2012 November 2012 December 2012 January 2013 February 2013 March 2013 May 2013 June 2013

$40,000 $50,000 3% $30,000 $40,000 3% $20,000 $30,000 9% $10,000 $20,000 10%

$0 - $10,000 65%

$0 - $10,000 74%

Wtd Avg Equip Spending (NTM-LTM) -$4,435 -$3,686 -$7,726 -$7,336 -$5,255 -$10,778 -$5,266 -$9,392 -$5,950

$19,807 WTD AVG Source: Dental Economics & Robert W. Baird Monthly Dental Survey

$13,857 WTD AVG

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June 18, 2013 | Medical Technology

DENTAL EQUIPMENT WEIGHTED AVERAGE SPENDING (NTM-LTM) - HISTORICAL SURVEY RESULTS
$10,000

$5,000 $0 -$5,000 -$10,000 -$15,000 -$20,000

Spring Spring Fall 2010 Spring Fall 2011 Spring Summer September October November December January 2009 (Q1- 2010 (Q1- (Q3-10) 2011 (Q1- (Q3-11) 2012 (1Q- 2012 (2Q2012 2012 2012 2012 2013 09) 10) 11) 12) 12) February 2013 March 2013 May 2013 June 2013

Total Dental Equipment

Basic Dental Equipment

High-tech Dental Equipment

Source: Dental Economics & Robert W. Baird Monthly Dental Survey

Q7. Along the same lines but asking in percentage terms, how much more or less do you plan to spend on dental equipment during 2013 relative to what you spent in 2012 for total dental equipment, basic dental equipment, and high-tech dental equipment?

NTM DENTAL EQUIPMENT SPENDING PLANS

0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% Total Equipment February 2013 Basic Equipment March 2013 May 2013 -2.1% -2.4% -2.7% -3.1% High-Tech Equipment June 2013 -2.4% -1.4% -1.7% -1.9% -1.5% -1.7% -1.9% -1.3%

Bars indicate the percentage more or less dentists expect to spend NTM vs. TTM Source: Dental Economics & Robert W. Baird Monthly Dental Survey

Results/RWB Take for both Question #6 and Question #7: The average change in what respondents expect to spend on dental equipment over the next twelve months vs. the last twelve months (calculated as last twelve months average spending less next twelve months expected spending) remained in negative territory on an absolute dollar basis for the ninth consecutive survey, while expected equipment spending on a percentage basis over the next twelve months was negative for a fourth consecutive survey (we just started asking Question #7 in February of this year). As we noted above in Question #5, this trend is no doubt concerning and speaks to still fairly sluggish dental equipment spending trends on the part of U.S. dentists in general. That said, we note that responses to both Question #6 and Question #7 were modestly improved relative to results from two of our past three surveys, suggesting that at worst, domestic dental equipment demand is likely fairly stable at this point relative to 1Q-13 (a point that fits well with our ongoing channel checks). Also, we remind investors that SIRO is in the midst of a new CAD/CAM product cycle with Omnicam that should help it continue to grow overall dental equipment results at a fairly healthy clip (we model C2Q dental equipment growth of 15.9% ww for SIRO). For North American distribution partner PDCO, however, were modeling only 1.8% dental

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June 18, 2013 | Medical Technology equipment growth this quarter against a challenging ~20% comp, while for HSIC were modeling North American dental equipment growth of 4% but slightly better international equipment growth of 5% cc as IDS tailwinds and a recently initiated CEREC upgrade program in Germany should both help drive sequential improvement in 2Q vs. last quarters 4.3% international dental equipment revenue decline.

Q8. For each of the following dental equipment technologies below, please indicate if you already own or if/when you plan to invest in that technology.
CURRENT AND IMPLIED FUTURE HIGH TECH EQUIPMENT PENETRATION
80% 70% 60% 50% 40% 30% 27% 18% 14% 13% 3% 4% CEREC by Sirona 20% 14% 7% 4%4% 9% 1%3% 4% 9% 3% 16% 6% 7% 20% 10% 5% 6% 13% 7% 8% 55% 43% 41% 69%

26%

26%

20%
10% 0%

12% 6% 6%

E4D by D4D/Henry Schein

iTero by Align/Cadent

Current Penetration

TS 150 Chairside True Definition Other In-office 2-in-1 (2D/3D) or 3D CBCT Dental Laser Mill by Glidewell by 3M/ESPE CADCAM System 3-in-1 Imaging System (Soft or Hard (2D/3D/Ceph) Tissue) Imaging System Implied 12 Month Penetration Implied 3 Year Penetration Implied 5 Year Penetration

Source: Dental Economics & Robert W. Baird Monthly Dental Survey

IMPLIED 3-YEAR PENETRATION

25% 20% 15%
10% 5%

0% CEREC by Sirona E4D by D4D/Henry Schein Sep-12 iTero by Align/Cadent Oct-12 Jan-13 TS 150 Chairside Mill by Glidewell Feb-13 Mar-13 True Definition by Other In-office 3M/ESPE CADCAM System Jun-13

IMPLIED 5-YEAR PENETRATION

35% 30% 25% 20% 15% 10% 5% 0% CEREC by Sirona E4D by D4D/Henry Schein Sep-12 iTero by Align/Cadent Oct-12 Jan-13 TS 150 Chairside Mill by Glidewell Feb-13 Mar-13 True Definition by Other In-office 3M/ESPE CADCAM System Jun-13

Source: Dental Economics & Robert W. Baird Monthly Dental Survey

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June 18, 2013 | Medical Technology

12-MONTH AND 5-YEAR IMPLIED CHANGE IN PENETRATION*
12-MONTH
Dental Laser (Soft or Hard Tissue) 3D CBCT Imaging System 2-in-1 (2D/3D) or 3-in-1 (2D/3D/Ceph) Imaging System Other In-office CADCAM System True Definition by 3M/ESPE TS 150 Chairside Mill by Glidewell iTero by Align/Cadent E4D by D4D/Henry Schein CEREC by Sirona 0% 0.0% 1.1% 0.7% 1% 2% 3% 4%
0% 5% 10% 10.8% 13.3% 15% 20% 25% 30%

5-YEAR
2.0%
28.0% 19.8%

0.4% 1.1% 1.1% 2.9% 1.8% CAD/CAM Systems

7.9% 15.4% 14.8% 12.7%

19.3%

CAD/CAM Systems

*Calculated as expected ownership percentage 12-months from now (or five years from now depending on chart) less current ownership percentage Source: Dental Economics & Robert W. Baird Monthly Dental Survey

Results/RWB Take: As is typically the case in our surveys, uptake for high tech dental equipment over the next five years is expected to occur to the greatest extent across dental lasers and 2-in-1/3-in-1 and 3D CBCT imaging systems, with penetration rates for various CAD/CAM systems expected to grow, but not to the same extent as lasers and/or advanced imaging systems over this period of time. From a CAD/CAM and Digital Impression (DI) perspective, we continue to watch these surveys closely for signs of accelerating penetration rates across the entire category and for signs of how the competitive CAD/CAM environment may play out over coming years given a growing number of competitors in the space and as CEREC pricing has recently been in flux (although the CAD/CAM for Everyone pricing tiers SIRO announced last week are not captured in this survey as it was fielded prior to last weeks go -live pricing for the company). Key observations from this months survey wed make with regards to these CAD/CAM and DI issues are as follows: 1. We still dont see any strong evidence of accelerating end-user demand for CAD/CAM or DI systems in general, with expected 12-month adoption rates across almost all of these systems increasing no more than two points (penetration of True Definition expected to increase 290bp over the next 12 months in this survey). This one to two points of increased 12-month penetration are very consistent if not slightly slower than what weve historically seen in asking this question over the past nine months. 2. Ultimately, five-year penetration within the in-office CAD/CAM and DI segments is expected to be highest for SIROs systems. This should not be a surprise to many investors as CEREC currently enjoys an estimated 80-90% share of the North American and ww in-office CAD/CAM market and we expect the companys leadership position in this product category to continue (although maybe n ot to the same extent due to an increasingly crowded market for these systems see our competitive CAD/CAM note HERE). 3. While we expect CEREC to remain the in-office CAD/CAM leader over time, penetration rates for ALGNs iTero DI system and other in-office CAD/CAM systems are expected to increase by a greater absolute amount over the next five years when compared to SIROs CEREC and Apollo systems, at least according to our survey results. While SIROs clear technology leadership position in these spaces and recently announced multi-tiered pricing structure for CEREC and Apollo should, in our opinion, help the company stave off growing competitive pressures, our survey results suggest interest in at least several other systems remains high (and in some cases higher than it does for CEREC). Bottom line, the in-office CAD/CAM and DI markets continue to evolve, and while we believe SIRO remains well positioned within these markets, we also cant rule out risk that a growing number of competitors find at least modest success against SIROs CEREC and Apollo systems near term and/or that the market for all such systems might not slow in the near term as dentists pause to evaluate the myriad new options facing them in this space.

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Investment Perspective/Dental Group Outlook

We continue to like the dental space overall as we believe it offers investors a low-risk way to gain healthcare exposure without the regulatory, reimbursement, and general government risks often seen in other areas of healthcare. The trade-off, however, is that much of dental is paid for out-of-pocket, meaning there is a consumer discretionary component to dental that investors must consider and that currently seems to be holding dental market growth modestly below the groups 4-6% long-term rate (market growth currently in the 2-3% range per recent results and our ongoing channel checks). Even with dental end-market growth currently trending slightly below long-term averages, valuations across the group have recently moved above five-year averages (NTM P/E basis), and as such we believe stock selection within the group has recently taken on even greater importance. To that end, we currently have Outperform ratings on two of our dental stocks, with HSICs consistency, diversity, and still-strong acquisition model representing key reasons we continue to recommend investor exposure to this name, and several factors contributing to our Outperform rating on XRAY, including a solid new product pipeline, yet-to-be-realized cost synergies from the companys mid-2011 acquisition of Astra Tech, and the lowest valuation of the group (currently ~17x NTM P/E vs. group median ~18.5x). For PDCO and SIRO, our Neutral ratings reflect several factors, including margin concerns we have for each company (PDCOs OM% flat to down for eight consecutive years and likely to fall again in FY14 per our model; SIRO facing growing CAD/CAM GM% uncertainty that could limit company-wide OM% expansion opportunities) and our belief that FY14 Street estimates for both c ompanies remain too high.

Price Target Justification & Risks

HSIC. Our $101 price target represents ~18x our NTM forward projections and is modestly above the companys 10-year average NTM EPS multiple of 17.2x. We believe this premium is justified given stable to modestly improving dental end markets, HSICs ongoing ability to grow above market and capture share across its dental, vet and medical businesses, and what we believe is a shareholder friendly capital deployment strategy in which free cash flow is expected to be allocated evenly between acquisitions (most of which are accretive within one year) and share repurchases over coming years. Risks include general dental market risk, especially if the U.S. market remains sluggish, acquisition and integration risk, and variable flu vaccine market dynamics XRAY. Our $46 price target represents just over ~17x our forward-year NTM EPS projection, with this 17x multiple just above the companys five-year average 16.3x. We continue to believe this modest premium is warranted by stable to modestly improving dental end-market conditions and what we still believe is a solid uppersingle- to low-double-digit multi-year EPS growth outlook for XRAY as Astra Tech cost synergies and deleveraging efforts likely complement mid-single-digit organic growth over coming years. Risks include general dental and dental implant market risk, risk surrounding the companys ortho market share recovery, sensitivity to dealer purchasing patterns, an outsized international exposure, and acquisition and integration risk. SIRO. Our $73 price target represents ~18x our forward-year NTM EPS. With the dental group currently trading at a median NTM P/E multiple of ~18.5x, we believe 18-19x for SIRO looks reasonable given the company's likely ability to grow EPS over the next several years in line to modestly above the group. But given near-term margin uncertainty created by lower fundamental Omnicam gross margin percentages and recent news of belowexpected CEREC Classic package pricing in North America, we believe a multiple at the lower end of this range is currently appropriate. Risks to our Neutral rating include potential Omnicam upside this year or next vs. our model, higher-than-expected demand for recently launched Apollo DI, and the possibility that management could begin more aggressively putting its solid balance sheet to work through additional share buybacks, which could support higher EPS growth than we currently model. PDCO. Our $39 price target represents ~16.5x our forward-year NTM EPS projection, which is above the companys five-year average multiple of ~14.7x. On a relative basis, this multiple is one and a half points below what we use to value HSIC, PDCO's closest competitor, a warranted discount in our opinion as we are more confident in HSICs ability to consistently deliver double-digit EPS growth near term (vs. upper single- to very low double-digit EPS growth for PDCO) and believe HSICs international expansion strategy provides higher secular growth potential and margin/return enhancing opportunities over the long r un vs. whats currently available from PDCO. Risks to our Neutral rating include a faster-than-expected recovery in high-margin dental consumables
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June 18, 2013 | Medical Technology growth, strong potential demand for SIRO's recently launched CEREC Omnicam, PDCOs strong balance sheet/cash flow dynamics, and potential strategic options for the name.

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Appendix - Important Disclosures and Analyst Certification

Covered Companies Mentioned
All stock prices below are the June 17, 2013 closing price. DENTSPLY International Inc. (XRAY - $41.58 - Outperform) Henry Schein, Inc. (HSIC - $97.64 - Outperform) Patterson Companies, Inc. (PDCO - $39.21 - Neutral) Sirona Dental Systems, Inc. (SIRO - $64.14 - Neutral) (See recent research reports for more information)

Rating and Price Target History for: Henry Schein, Inc. (HSIC) as of 06-17-2013
08/03/10 O:$65 01/03/11 O:$72 02/23/11 O:$73 04/25/11 O:$81 10/19/11 O:$77 05/09/12 O:$84 11/08/12 O:$88 01/02/13 O:$92 02/14/13 O:$98 05/08/13 O:$101

105 90 75 60 45 Q1 Q2 Q3 2011 Q1 Q2 Q3 2012 Q1 Q2 Q3 2013 Q1 30 Q2

Created by BlueMatrix

Rating and Price Target History for: Patterson Companies, Inc. (PDCO) as of 06-17-2013
02/22/11 N:$35 05/23/11 N:$38 05/27/11 N:$37 08/26/11 N:$34 10/19/11 N:$33 02/24/12 N:$34 05/25/12 N:$37 08/24/12 N:$36 11/21/12 N:$35 01/02/13 N:$36 02/22/13 N:$38

45 40 35 30 25 Q1
05/24/13 N:$39

Q2

Q3 2011

Q1

Q2

Q3 2012

Q1

Q2

Q3 2013

Q1

20 Q2

Created by BlueMatrix

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Rating and Price Target History for: Sirona Dental Systems, Inc. (SIRO) as of 06-17-2013
08/04/10 O:$44 09/22/10 N:$41 01/03/11 N:$44 02/07/11 N:$54 05/09/11 N:$56 10/19/11 N:$54 11/21/11 N:$48 02/06/12 N:$51 05/07/12 N:$53 07/09/12 O:$53 08/06/12 O:$59

90 75 60 45 30 Q1
10/19/12 O:$63

Q2

Q3 2011
01/02/13 O:$70

Q1
02/11/13 O:$79

Q2
02/20/13 N:$76

Q3 2012
06/14/13 N:$73

Q1

Q2

Q3 2013

Q1

15 Q2

11/19/12 O:$68

Created by BlueMatrix

Rating and Price Target History for: DENTSPLY International Inc. (XRAY) as of 06-17-2013
07/21/10 O:$37 07/30/10 O:$35 10/29/10 O:$36 01/03/11 O:$39 02/10/11 O:$41 06/23/11 O:$45 10/19/11 O:$42 10/28/11 O:$45 05/02/12 O:$48 07/09/12 O:$47 08/01/12 O:$44

45 40 35 30 25 Q1
01/02/13 O:$46

Q2

Q3 2011

Q1

Q2

Q3 2012

Q1

Q2

Q3 2013

Q1

20 Q2

Created by BlueMatrix

1 Robert W. Baird & Co. Incorporated makes a market in the securities of HSIC, PDCO, SIRO and XRAY. 10 Robert W. Baird & Co. Incorporated and/or its affiliates have been compensated by Henry Schein, Inc. and DENTSPLY International Inc. for non-investment banking-securities related services in the past 12 months. Robert W. Baird & Co. Incorporated and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months. Robert W. Baird & Co. Incorporated may not be licensed to execute transactions in all foreign listed securities directly. Transactions in foreign listed securities may be prohibited for residents of the United States. Please contact a Baird representative for more information. Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a

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subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report. Distribution of Investment Ratings. As of May 31, 2013, Baird U.S. Equity Researchcovered 681 companies, with 52% rated Outperform/Buy, 47% rated Neutral/Holdand 1% rated Underperform/Sell. Within these rating categories, 15% ofOutperform/Buy-rated and 12% of Neutral/Hold-rated companies have compensatedBaird for investment banking services in the past 12 months and/or Bairdmanaged or co-managed a public offering of securities for these companies inthe past 12 months. 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A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx . You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202. Analyst Certification. The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. Disclaimers Baird prohibits analysts from owning stock in companies they cover. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws. Copyright 2013 Robert W. Baird & Co. 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