1

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Waiien Buffett, 2uu7 lettei to shaieholueis


Foi all of the companies I have encounteieu ovei the yeais, I can't iemembei moie than a
couple of instances in which the executives acknowleugeu that the business was uevoiu of
any competitive auvantage. Bowevei, by uefinition, competitive auvantage can only be
possesseu by the minoiity. Anu in most of these instances, the auvantage will be tiansient.
0nly in iaie cases aie competitive auvantages sustainable. It is these companies that
inteiest me most. But not only aie they iaie, they aie usually veiy uifficult to uistinguish
fiom those with tiansitoiy auvantages.

The leaueis of the uental implant inuustiy appeaieu to me, at one time anyway, to possess
sustainable competitive auvantages. Five oi so companies have uominateu this inuustiy foi
some time (often iefeiieu to as "piemium" implant piouuceis) while all but two of these
aie uiveisifieu thiough businesses in othei inuustiies. The two "puie plays", both baseu in
Switzeilanu, aie Nobel Biocaie anu Stiaumann. These companies have been stiuggling
somewhat in iecent yeais. What is not yet cleai is the extent to which the causes of these
uifficulties aie cyclical in natuie, ielating to weak economic conuitions, oi stiuctuial,
ielating piimaiily to peimanently auveise changes in competitive conuitions. Anyone who
has spent some time looking at these companies will know that theie has been plenty of talk
aiounu the impact low cost competition.

But what I hope to uo heie is elaboiate on the vaiious ieasons why the business conuitions
in this paiticulai inuustiy have evolveu in such a mannei as to make the maiket leaueis fai
moie vulneiable to competition than once appeaieu likely. I believe this will be a
fascinating case stuuy to follow anu I am keen to heai the opinions of otheis on my
obseivations. The focus of this commentaiy is on the competitive conuitions (oi my
inteipietation of these conuitions) anu so natuially I am not expiessing any view on the
oveiall investment meiits of any company mentioneu heie. It also goes without saying that
the obseivations expiesseu heie aie baseu on my own peisonal views.

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Bental implants seive an impoitant function in that this tieatment is often the next best
thing to a ieal tooth. When a peison loses a tooth, the bone begins to immeuiately uegiaue
anu that is why some people enu up looking like this:
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In a laige numbei of cases, people, foi one ieason oi anothei, uo not seek tieatment foi
tooth loss. When they uo, they aie usually tieateu with a ciown anu biiuge, which involves
filing uown aujacent, healthy teeth to enable fixation of a piosthetic tooth. This uestioys
otheiwise healthy teeth. Bentuies may be anothei alteinative but these aie often
uncomfoitable anu inconvenient. Implants aie almost all maue fiom titanium, which is
stiong anu integiates well with bone. The piosthetic tooth (ciown) that sits atop an
implant is aesthetically pleasing. Assuming the implant has been well fitteu, once it has
integiateu with the bone, patients will expeiience none of the iestiictions oi inconvenience
of uentuies anu the implant shoulu last a lifetime, though some iestoiative woik will
occasionally be iequiieu.

Estimates of penetiation iates vaiy. Stiaumann estimates that only 1S-2u% of auults
tieateu foi tooth loss in the 0SA ieceive an implant. Euiope is the biithplace of uental
implants so penetiation iates aie highei. Penetiation iates in emeiging maikets aie much
lowei. Why aie penetiation iates so low. Some possible explanations:

CosL: lmplanLs are ln large parL noL relmbursed by governmenLs or lnsurance companles.
lmplanL procedure cosLs vary dependlng on a range of cllnlcal and commerclal facLors,
buL a slngle lmplanL mlghL cosL ln Lhe range of $2,000-$4,000. More complex, compleLe
resLoraLlon cases mlghL cosL $30,000 - $80,000. 1he ouL-of-pockeL cosL ls ofLen
slgnlflcanLly hlgher Lhan alLernaLlves.
1he denLal lmplanL lndusLry ls sLlll comparaLlvely young and remalns, ln many counLrles,
prlmarlly a referral markeL. Ceneral racLlce denLlsLs wlll usually noL perform lmplanL
surgery and are ofLen relucLanL Lo refer Lhelr paLlenLs Lo a surgeon (foregolng revenue
may be one reason).
8one: Lhere musL be enough bone ln whlch Lo lmbed Lhe lmplanL, Lhls ls noL always Lhe
case.
1lme: lmplanL procedures Lake Llme and may lnvolve mulLlple vlslLs Lo compleLe. lL can
Lake monLhs for lnLegraLlon Lo Lake place, whlch may resLrlcL eaLlng hablLs.
Averslon Lo surgery. 1hese days, local anaesLheLlc ls used, buL Lhe procedure ls sLlll
somewhaL lnvaslve (lf you're noL Loo squeamlsh checkouL some vldeos on ?ou1ube) and
some paLlenLs wlll slmply noL counLenance Lhe ldea of undergolng such LreaLmenL.
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Nost manufactuieis believe that the giowth oppoitunities foi the inuustiy iemain
immense. 0veiall, I think that uemanu foi uental implants will continue to inciease in the
futuie. Bowevei companies that lack a competitive auvantage may stiuggle to exploit
giowth oppoitunities, as competition will inciease. With that in minu, let's take a look at
the supply-siue chaiacteiistics of the business.

The maiket appeais ieasonably consoliuateu (see chait fiom Stiaumann below);



Foi Zimmei, Biomet anu Bentsply, implants aie a compaiatively small component of piofits.
Nobel anu Stiaumann aie effectively implant "puie plays". Both aie heauquaiteieu in
Switzeilanu. We mentioneu Nobel Biocaie heie. Stiaumann in paiticulai can be consiueieu
a pioneei, having been founueu in the 19Sus. Nobel was founueu in the 198us. Both
companies manufactuie in-house anu sell in most maikets aiounu the woilu, laigely using
in-house sales foices.

Stiaumann is piobably iecogniseu as the highest quality opeiatoi in the inuustiy but both
claim to offei inuustiy-leauing manufactuiing quality anu customei suppoitseivice,
augmenting this with client tiaining piogiams anu symposia. Each also claims that the wiue
aiiay of in-house piouucts have iobust clinical backing as a iesult of yeais of clinical
expeiience anu eviuence fiom numeious clinical tiials. Stiaumann anu Nobel claim to
uiffeientiate theii offeiings on these teims iathei than engaging in piice competition.


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When I fiist lookeu at this sectoi many yeais ago one featuie I founu most inteiesting was
that the "piemium" implant companies possess chaiacteiistics that appeai to confei a
sustainable competitive auvantage. These laigely ievolve aiounu customei seaich anu
switching costs. The naiiative goes as follows:

Bentists aie conseivative anu will be ieluctant to "tiaue-uown" to implants that lack a
compiehensive clinical histoiy, foi feai of iisking patient health oi theii own ieputation.
Factois that aie supposeuly impoitant in choosing implant systems incluue ease of use, the
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level of suppoiting clinical ieseaich, peiceptions aiounu uesign anu manufactuiing quality,
assumptions aiounu manufactuiei longevity (to ensuie spaie paits will be available) anu
customei seivice. These factois woulu appeai to play into the hanus of the moie
establisheu, laigei piemium implant companies. Also, the piemium implant companies
often offei high-touch seivices, incluuing clinical auvice, tiaining couises anu ieliable
ueliveiy netwoiks. Accoiuing to Stiaumann, the cost of the implant anu ancillaiy
components accounts foi only 1S-2u% of the tieatment bill, making the iuea of tiauing
uown less appealing to the piactitionei. What's moie, the toolkit is often system-specific
anu some iestoiative techniques (fitting anu piepaiing to fit the ciown) may be system-
specific, auuing moie potential heauaches to those consiueiing switching to alteinative
systems. 0n the suiface theie appeai to be multi-layeieu seaich anu switching costs that
seem to cieate a competitive auvantage foi the piemium implant companies.


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Befoie the ciisis, Stiaumann anu Nobel hau piouuceu iemaikable peifoimances, with
peisistently high iates of giowth anu outstanuing ietuins on capital. Foi example, fiom
2uu2 to 2uu7, Stiaumann's ievenues giew at aiounu 2u% pei annum with net piofits up by
aiounu 2S% pei annum. Foi the same peiiou, Nobel achieveu sales giowth of 16% pei
annum with piofit giowth aiounu twice this iate.

As implant tieatment is often elective, expensive anu paiu foi piimaiily out-of-pocket,
uemanu giowth sloweu uiamatically in 2uu8 anu iemains veiy subuueu touay. It appeais
as though the implant maiket has continueu to giow ovei the past five yeais, though at a
much moie mouest pace, likely in the 1-S% pei annum iange. Within this, it uoes seem as
though the top five piemium companies (Stiaumann, Nobel Biocaie, Zimmei, Biomet Si anu
Bentsply Astiatech) have in aggiegate lost shaie. The numbeis I have seen suggest the
piemium manufactuieis have seen theii shaie of inuustiy volume ueciease fiom aiounu
7u% to unuei 6u% since 2uu7.

Stiaumann anu Nobel have stiuggleu gieatly since 2uu7. Stiaumann's 2u12 iepoiteu sales
weie mouestly below 2uu7 levels with Nobel's uown by aiounu 1S% ovei the peiiou.
Stiaumann in paiticulai, has hau to face significant cuiiency heauwinus. With aiounu 4u%
of its cost base in Swiss Fiancs veisus less than 1S% foi ievenues, the significant stiength in
the Fianc has been a paiticulai heauache. Both have been hit by othei factois, such as
iestiuctuiing costs anu impaiiment chaiges. Bowevei theie have also been the moie
conceining effects of negative mix (customeis tiauing uown to cheapei piouucts) anu the
cost of "investment spenuing" - investing aheau of an expecteu iecoveiy - though it is not
cleai how much of this incieaseu cost might simply be the highei cost of uoing business in a
new enviionment. While it is uifficult to asceitain a tienu in noimaliseu piofits, maigins at
both aie significantly uown ovei the past five yeais.

0nsuipiisingly, the stocks aie also well uown fiom theii iespective 2uu7 peaks. The
Balance Sheets of each iemain clean anu theie iemains the possibility that cuiient piofit
levels tianspiie to be veiy uepiesseu, potentially making the stocks veiy cheap at cuiient
levels. Bowevei investois who might ponuei an investment shoulu be confiuent in the
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competitive stiengths of the businesses in oiuei to believe that these companies can ietain
an auequate level of piofit.


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In any business, with the absence of competitive auvantage, competition will eioue excess
piofitability, no mattei how much giowth potential an inuustiy appeais to have. So while I
can accept that theie appeais to be significant oppoitunity foi piemium implant companies
to giow, to invest in the stocks one must believe that the companies possesses something
that will enable them to extiact a uispiopoitionate shaie of the inuustiy's spoils. Without a
sustainable competitive auvantage, it will not piove possible to sustain above-aveiage
piofitability.

Pieviously I suggesteu that customei seaich anu switching costs may confei upon the
piemium companies some sustainable competitive auvantage. If this thesis is coiiect, these
companies may piesent veiy inteiesting investment oppoitunities. If this pioves incoiiect,
these companies will piobably continue to stiuggle. Aumitteuly, I uon't know wheie the
tiuth lies heie. Bowevei I believe that the inuustiy is unueigoing some changes that may be
in the piocess of unueimining the position of the piemium implant companies. Below I
elaboiate on some of these factois.

(1) A victim of oppoitunity.

Bigh ietuins attiact competition. To the extent that theie aie baiiieis to entiy, some
wannabe competitois may shy away fiom entiy. Bowevei if the inuustiy is unuei-
penetiateu anu offeis a lot of giowth potential, this can emboluen competitois who may
have been otheiwise inuecisive. Aftei all, the customeis of tomoiiow aie not yet captive
anu the new entiant uoes not necessaiily have to woiiy about taking business away fiom an
incumbent to justify his business case. uiowth potential cieates game competitois anu
even moie so if the competitois figuie out that any competitive auvantage that the
incumbents possess is not sustainable. In Stiaumann's 2u11 Annual Repoit it says:

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9$%*+4(,"%$::+,*"*)5*"0&%*&'B$&%)(%"E*,5$45''"1+,/01&0(<M"

This iepiesents quite extiaoiuinaiy fiagmentation in at least pait of this maiket anu I have
not seen this in othei segments of meuical uevices. Time will tell how successful new
competitois will be, but at the veiy least we know that othei companies aie *,-&'B to muscle
in on the implant business.

(2) Aie favouiable chaiacteiistics an unuoing.

Let's take a look at Stiaumann heie. Even though Stiaumann has seen its cash piofits
collapse, it still eaineu an aftei tax cash ietuin on tangible equity investeu (ex. suiplus cash)
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6

of aiounu Su% in 2u12. These numbeis aie even moie extiaoiuinaiy because they aie un-
geaieu as theie is no uebt. This is uespite Stiaumann's inuustiy-leauing investments in
maiketing anu ieseaich, which aie expenseu each yeai. Why so piofitable. The piofit
maigins aie still high, 1S% pie-tax cash maigin in 2u11. What's moie, assets can be tuineu
faiily iapiuly. The inventoiy uoes not take paiticulaily long to piouuce anu sell anu the
maik-up is high. The plant anu equipment is not especially complex oi expensive eithei.
Auu all of this togethei anu you can piouuce excellent ietuins on capital. Potential
competitois can see that if they succeeu theii iewaiu might be aftei tax ietuins on capital
well in excess of theii cost of capital anu this spuis them on. Nobel's equivalent cash ietuin
on tangible equity was aiounu 6u% in 2u12.

(S) Economies of scale not obviously significant

Analysts anu moie casual business obseiveis often appeai to believe that size is usually an
auvantage. This is often tiue wheie economies of scale aie ielevant but size may in fact be a
uisauvantage wheie economies of scale aie not mateiial. Economies of scale aie ielevant
when the iequiieu capital investment (sunk costs) oi fixeu opeiating costs aie so significant
as to bestow a mateiial economic auvantage on a laigei company veisus a smallei company
(the laigei company can spieau these investments costs ovei a laigei customei base).

Beie theie aie piobably some economies of scale ielateu to manufactuiing, aumin,
maiketing anu ieseaich, but, in contiast to a company such as Intel, these aie unlikely to be
significant. Intel is an example of a company that seems to have benefiteu fiom enoimous
economies of scale that seiveu as a competitive auvantage. Intel spenus billions of uollais
on each facility anu its piouuction piocesses iequiie extiemely high anu sustaineu volumes
to keep unit costs uown to its uesiieu levels. Fuitheimoie the cost of ueveloping
subsequent geneiations of miciopiocessois has histoiically been vast anu fixeu. This has
meant that Intel's global scale has maue it neaily impossible foi tiauitional competitois to
make inioaus on its business histoiically. Foi the piemium implant companies,
manufactuiing costs make up only aiounu Su% of total costs, limiting the oveiall effect of
any scale benefits. What's moie, piouuction activity can seemingly be faiily easily scaleu up
oi uown. We can tell this fiom obseivations of smallei inuustiy opeiatois. 0nfoitunately,
Nobel anu Stiaumann aie the only listeu full-seivice implant companies so compaiison uata
is veiy uifficult to come acioss. Bowevei anecuotes suggest that when Implant Biiect (a
small "value" implant company) was effectively acquiieu by Banahei in 2u1u, with annual
sales of just $6um (less than one tenth that of Stiaumann), the company has gioss maigins
of 6S% anu EBIT maigins of 2S%. 0sstem, the leauing implant company in Koiea,
supposeuly only began to focus on implants in the miu-late 199us anu by 2uuS, with only
$1Sm in sales it has a 62% uioss maigin anu a 1u% EBIT maigin. Nanufactuiing scale uoes
not appeai to be especially impoitant in this business.

Stiaumann spenus moie than any othei implant company on ieseaich anu uevelopment.
Yet it spent just $44m in 2u12 (6% of sales). This is not a fixeu cost as it is spieau ovei
multiple piojects acioss multiple iegions. It is not cleai how impoitant ieseaich investment
is, but even if it is impoitant, small focuseu local playeis may be able to invest successfully
in R&B with a much smallei buuget.

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7

Sales anu uistiibution costs pioviue a baiiiei to entiy in some businesses, but not
necessaiily heie. Stiaumann spenus moie on sales anu maiketing than any othei
competitoi but this is because it offeis a high-touch seivice in aiounu seventy countiies
woiluwiue. This spenu is not necessaiily scalable. If a competitoi can successfully opeiate
in a single maiket with a low-touch offeiing, then its maiketing buuget will be a small
fiaction of Stiaumann's. Theie aie inuepenuent uental uistiibution companies in most
majoi maikets alieauy that smallei implant companies can use without having to unueitake
majoi investments. The inteinet anu impiovements in softwaie aie enabling companies
that can uevelop ieputable piouucts anu an appeal with customeis to ieuuce costs anu sell
oveiseas. This piouuct is veiy light anu high in value anu so can be economically
tianspoiteu inteinationally. The ability to post instiuctional viueos anu ieceive oiueis
online is making it easiei foi new anu smallei competitois to uo business.

(4) Bow sticky aie customei piefeiences.

It seems ieasonable to accept that piactitioneis have ieasons to piefei to use establisheu
implant piouucts. But it is not cleai just how stiong those piefeiences aie. Theie aie
ieasons to suspect that at least in some cases, they may not be as iobust as Nobel anu
Stiaumann woulu like.

Implants aie typically the subject of some iegulatoiy appioval piocess. This vaiies fiom
countiy to countiy. In the 0S foi example, these uevices aie "cleaieu" by the FBA thiough a
faiily stiaightfoiwaiu piocess calleu S1u(k). This means that geneially, applicants uo not
neeu to peifoim clinical tiials to uemonstiate clinical efficacy safety. All that is usually
iequiieu is to uemonstiate equivalence with an existing pieuicate uevice (in othei woius if
a new piouuct is sufficiently similai to an existing piouuct it can be "cleaieu" foi sale). This
is a small huiule to jump foi tacit iegulatoiy backing. Rightly oi wiongly, peihaps this gives
moie comfoit to a uentist who is consiueiing using a new implant system.

Bental implant technology is iemaikably effective. Success iates aie ueemeu to be well
above 9u%, highei than many othei categoiies of meuical technology. While of couise theie
aie many failuies, anecuotes suggest most of these aie the iesult of pooi implant placement
(uentist's fault) oi patient aftei-caie (patient's fault), iathei than causeu by the implant
itself. Theie uoes not appeai to be eviuence to suggest that alteinative implant systems aie
any less successful than the piemium systems. Peihaps the confiuence useis have in the
success iates of this categoiy of piouuct anu the belief that newei systems aie physically
compaiable to piemium systems makes it easiei to auopt alteinative systems. 0ne aiea
wheie technology is fuithei facilitating new competition is uevelopments in suigical guiue
systems, which assist suigeons in physically placing implants in the iight spot on the jaw.
Some pioviueis aie upuating theii libiaiies to incluue some of the newei, low cost implant
systems, making it easiei foi uentists to consiuei switching to alteinative systems.

It seems to me that patent piotection in this segment is geneially weak. Foi example, we
have seen Implant Biiect effectively clone Nobel, Stiaumann anu Zimmei piouucts. 0thei
manufactuieis aie making theii systems compatible with piemium implant systems
meaning no neeu to change the iestoiation piocess oi legacy toolkit. I believe that at least
in some cases these factois make it easiei foi useis to consiuei using newei implant
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systems.

(S) Reseaich anu Innovation

Theie is ceitainly potential foi well-funueu piemium companies to uiffeientiate anu theie
aie oppoitunities to continue to impiove the piouuct offeiing. Bowevei existing
technologies seem to woik extiemely well foi most patients. It uoes not appeai to me that
theie has been any step change in piouuct peifoimance in iecent yeais. It is haiu to juuge
fiom the outsiue, but iates of innovation seem to me to be slowing uown. This piobably
makes it haiuei foi the inuustiy leaueis to uiffeientiate themselves.

It is ceitainly tiue that many of the new stait-up companies seem to conuuct no suppoiting
clinical ieseaich, but this is cleaily not the case with all. As mentioneu above, the cost of
iunning focuseu ieseaich piogiams it not necessaiily piohibitive anu many newei
companies see that. The vast majoiity of clinical stuuies aie company-funueu so some useis
iightly view the iesults with some scepticism anyway.

(6) Customei Seivice anu tiaining

It is peihaps unsettling to think that a uental piactitionei might iely on a sales iep to
pioviue any kinu of meaningful auvice on clinical piactice ('suiely they uon't have to ask a
iep how to conuuct a suigical pioceuuie.'). In spite of what the piemium companies may
say, I am not suie how often this ieally happens but to the extent that it uoes occui, it is not
likely to be a iecuiiing iequiiement (you only neeu help to solve a pioblem once). The
piemium companies uo aiiange tiaining sessions anu euucation symposia, which I can
believe some uentists value. Bowevei in the mouein uay with moie anu moie attention
being uiawn to conflicts of inteiest, peihaps some piactitioneis will want to sepaiate
themselves fiom company sponsoieu tiaining piogiams. Bentists uo not neeu to uepenu on
company-sponsoieu tiaining piogiams anyway as theie aie inuepenuent tiaining piogiams
available.

Peihaps the piemium companies uelivei piouuct moie piomptly anu pioviue value auu by
incluuing extia components foi suigical pioceuuies that can be ietuineu if not iequiieu.
But suiely well manageu inventoiy anu FeuEx can get aiounu this.

(7) Cost

As mentioneu pieviously, Stiaumann's estimate that the implant anu accessoiies account
foi 1S-2u% of pioceuuie cost. This is a ieasonably low figuie anu implies that peihaps the
saving might be too low to justify any effoit oi cost in choosing an alteinative. I am not suie
this is the iight way to look at it. Implants aie not consumei bianus. Nost patients
piobably uon't know oi caie what bianu of implant they get. Nost piobably tiust the
uentist to ensuie that the piouuct quality is high. This means that many uentists can tiy to
maintain pioceuuie cost but pocket the savings on the implant by using a cheapei system
(assuming quality etc. ueemeu auequate). The piice uiffeientials between piemium anu
alteinative piouucts aie sometimes vast. The cost of Implant Biiect's veision of a leauing
Stiaumann implant, incluuing accessoiies, is $2uu veisus Stiaumann's all-in list piice of
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9

$6uu. As compaieu with Implant Biiect, some othei systems aie moie expensive, otheis
cheapei. Even if a high volume usei can save just $1uu pei implant, this equates to $4u,uuu
auuitional piofit foi the uentist if he buys 4uu implants pei yeai. A saving of $2uu implies a
piofit boost of $8u,uuu pei annum. Even foi a piactitionei eaining $Suu,uuu a yeai, this
amount is not to be sneezeu at.

Boesn't the system-specific toolkit pioviue a cost to switching. Naybe, but these toolkits
ietail foi $1,uuu-$2,uuu. A high-volume usei can justify this investment with savings in the
fiist few weeks of using a high quality, cheapei, alteinative system. Also I am pietty suie a
willing suppliei will subsiuise the kit to win the implant business.

(8) Is piouuct complexity a competitive auvantage.

Stiaumann anu Nobel iegulaily face questions about the challenges poseu by "lowei cost"
competitois. They iecognise theii piesence anu seem to acknowleuge a place foi at least
some of these competitois. Bowevei each believes they aie sufficiently uiffeientiateu by
viitue of suppoitive clinical ieseaich, supeiioi seivice anu moie sophisticateu piouucts.
This last point is inteiesting. Some patients aie haiuei to tieat foi one ieason oi anothei
anu may iequiie a moie specific piouuct than most alteinative pioviueis may be able to
pioviue. 0n a iecent confeience call, Nobel Biocaie claimeu that it saw pait of its
competitive auvantage as iesiuing in its wiue iange of highly engineeieu components that
enable it to tieat patients that lowei-cost companies cannot. This is inteiesting. Bowevei I
believe that single tooth ieplacements account foi ovei half of the maiket so these complex
cases seem to be in the minoiity. I am a little woiiieu that as alteinative piouuceis gain
iecognition, fiiepowei anu confiuence fiom success in simplei piouuct categoiies, they will
move up the value chain - this is what happens in othei inuustiies. Also it is haiu to
unueistanu how, in the face of such an appaient hinuiance, Alphabio Tec (the lowei-cost
implant company acquiieu by Nobel Biocaie a few yeais ago) was able to gain a 6u%
maiket shaie in its home maiket, Isiael.

(9) Why piicing tienus may be misleauing

Comments fiom the piemium companies in iecent yeais inuicate that piemium piicing
tienus have iemaineu laigely unchangeu thiough the iecession. Boes that mean that new
competition is having little oi no impact. Not necessaiily. Competition can eioue
piofitability in uiffeient ways. In some businesses, in spite of piice stability, incieaseu
competition ieuuces sales volumes foi incumbents anu this can significantly iaise unit costs
thiough lowei iates of absoiption. In othei businesses, peihaps the case heie, client
seivicing costs iise as the leaueis attempt to uiffeientiate themselves fiom the pack;
basically the cost of uoing business iises anu ietuins uecline. This may explain some oi
much of the maigin piessuie being expeiienceu by Stiaumann anu Nobel in iecent yeais.
Both have iecently announceu cost-saving initiatives. 0nly time will tell what the effects of
such initiatives will be.

(1u) Eviuence that at least some competitois appeai to be succeeuing

If is quite shocking to heai that theie aie ovei 4uu companies tiying to muscle in on the
www.valueinstitute.oig

1u

piofitable implant business. If incumbents piove to have some sustainable competitive
auvantage, one woulu imagine that many of this 4uu+ gioup will leave with tails between
legs at some point. Stiaumann anu Nobel speak of anecuotes that many smallei companies
aie stiuggling anu aie attempting to sell-up. It is haiu to know how accuiate oi meaningful
such anecuotes aie (theie will always be at least some failuies). It is also veiy uifficult to
finu objective eviuence of the successes oi otheiwise of ielatively new entiants because so
few implant companies aie quoteu. Bowevei alongsiue the afoiementioneu anecuotes of
failuies, theie is eviuence of success stoiies too. Implant Biiect is expanuing aggiessively
anu I pieviously auuiesseu how piofitable that company supposeuly is. Neouent, the
maiket leauei in Biazil, has 4u% EBITBA maigins accoiuing to Stiaumann, anu is now
expanuing acioss South Ameiica anu into the 0S anu Euiope. AplhaBio Tec, came to
uominate the maiket in Isiael anu was subsequently acquiieu by Nobel Biocaie. I have seen
numbeis that suggest that some othei companies aie baiely piofitable oi loss making (such
as Neoss anu Biohoiizons) but this coulu be because of investment spenuing. I have alieauy
iefeiieu to 0sstem, the maiket leauei in Koiea. In spite of heavy investments in oveiseas
maikets, it still achieveu a 6u% gioss maigin, a 1u% EBIT maigin anu 8% R0E in 2u11.
0sstem is investing aggiessively oveiseas, sells in fifty countiies anu is now the maiket
leauei in China as well as its home maiket.

What is paiticulaily inteiesting about Koiea is that is has become one of the most uevelopeu
implant maikets in the woilu anu at the same time seems to have tiansitioneu towaius
lowei cost implants anu away fiom the impoiteu piouucts pioviueu solu by piemium
westein companies. Competition has intensifieu significantly as a iesult. Isiael, anothei of
the most uevelopeu maikets is also uominateu by lowei cost implants. Aie these maiket
abeiiations oi aie they infoiming us about changes that may occui in the much laigei
Euiopean anu 0S maikets.


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I am paiticulaily inteiesteu in stuuying companies that have sustainable competitive
auvantages. Bowevei, just as inteiesting aie the "ioman canules". We can leain so much by
stuuying them. I uon't know if the piemium uental implant companies belong in one gioup
oi the othei. I intenu to continue to obseive the piogiess of these companies in the hope of
finuing out the answei anu leaining fiom theii expeiiences. Please iesponu with youi
feeuback, whethei you agiee oi uisagiee with my obseivations.


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