3D Systems: Medical Success With 3D Printing

Aug. 5.13 | About: 3D Systems (DDD)

3D Systems (NYSE:DDD) is a global leader of the pioneering 3D printing industry. Some speculate that it is destined to become the IBM of the industry.

Healthcare professionals were among the first to embrace 3D Systems' additive manufacturing capabilities. 3D printing applications in healthcare range from precise dental and anatomical models and surgical guides to implantable devices, improved appliances for medicine delivery, custom hearing aids and prosthetics.

Dentistry

All we humans have the same body structure, but are very different in details. When it comes to replacing body parts, dental restoration or the like, every millimeter counts.

It could be said that replacing or modifying body parts is a custom business and most medical parts and devices are custom-made in some ways.

In conventional thinking "custom-made" is the direct opposite of "mass produced". The two cannot be mixed or interchanged.

That is not so in 3D printing. 3D printing makes it possible and economical to make one copy or a millions copies of the same product in a slightly different way.

The dental replacement business is an example.

To speed up the dentist's routine and possibly make it cheaper, all it takes is a digital scanner in the office and a 3D printer to turn out crowns, bridges, and dentures. This approach is not only less invasive and more accurate but safer too, by making unnecessary the use of physical molds in the patients' mouth.

3D Systems' good customer Align Technologies' (NASDAQ:ALGN) shows how successful this can be on an industrial scale.

Align makes the "Invisalign" brand clear braces for the alignment of teeth. These braces straighten teeth with a series of removable, virtually invisible aligners. The Invisalign Teen program has additional features that cater to the unique orthodontic needs of teenagers such as wear indicators and six free replacement aligners.

Last year Align has printed 17 million unique and distinct copies of its clear aligners. It is all done in a single factory with a space not larger than a good size meeting hall, using 65 automated printers.

The factory is capable of producing millions of units, each unit carefully planned by human technicians and then approved by the dentists who ordered it, and each is different from all the others.

Align Technology is based in San Jose, California with offices worldwide. The Invisalign system is offered in more than 45 countries and has been used to treat more than 1.5 million patients.

In 2011, Align has added the maker of dental scanning systems, Cadent Holdings, Inc. With it came the brands of the iTero and iOC scanning systems and OrthoCAD digital services.

It is now a complete circle. As a first step, the dentist uses intra-oral scanning to create a digital map of the patient's mouth. The order is digitally sent to Align's factory where hundreds of Align technicians develop dental plates in a high precision 3D image to correct defects in the teeth of patients from the United States, Europe and Asia. After correction, the file is sent back to the dentists for approval and once approved, the order is 3D printed and shipped to the dentist.

Align's worldwide market share is still small, as most dentists like to work in the traditional way with brackets and wires and breaking tradition is a slow process. But the use of digital technologies for restorative dentistry is growing rapidly and intra-oral scanning is a critical part of it.

As a separate development, in July 3D Systems has acquired the French company Phenix Systems which has dedicated medical metal printers and strong in the dental field.

Prostheses

The trouble with many prostheses is that they wear down, don't perfectly conform to the patients' limbs, and can present a stigma for patients who need them.

With the help of 3D printing, scientists at Bespoke Innovations in San Francisco have created prosthetic coverings that perfectly mirror the sculptural symmetry and function of the wearer's remaining limb and can even be customized to conform to the patient's fashion style.

In 2012, 3D Systems has acquired Bespoke Innovations and now the company is directly involved in the designer body parts business.

Bespoke revolutionized design. Bespoke Innovations produces Fairings, a 3D-printed covering that can be personalized and worn around the existing prosthetic. Typically a prosthetic will exist either as naked hardware, essentially a pipe, or covered with foam in an attempt to match skin tone and tissue density. This is the first time there's been a third option. It costs $5,000 to $6,000 to print one of these legs, and it has features that aren't even found in legs that cost $60,000 today.

Co-founder Scott Summit says:

"I wanted to create a leg that had a level of humanity. It's unfortunate that people have had a product that's such a major part of their lives that was so underdesigned."

In the future, he also said, prosthesis will be "treated more like eyewear, sold as fashion statement, than as a medical requirement."

The custom prostheses are printed using 3D Systems SLS (Selective Laser Sintering) technology.

Selective Laser Sintering uses a laser to sinter (melt) objects from powder, layer-by-layer, to form a solid model.

The system consists of a laser, part chamber, and control system. The part chamber consists of a build platform, powder cartridge, and leveling roller. A thin layer of build material is spread across the platform where the laser traces a two-dimensional cross section of the object, sintering the material together.

The platform then descends a layer thickness and the leveling roller pushes material from the powder cartridge across the build platform, where the next cross section is sintered to the previous. This continues until the part is completed. Once the model is complete, it is removed from the part chamber and finished by removing any loose material and smoothing the visible surfaces.

Bespoke 3D scans the client's remaining leg so that the new artificial leg matches. As the 3D printing produces the shape and contour of a real leg, trousers drape naturally and can fit more easily into boots. Amputees feel more a part of the world around them.

Braces

The next mass-produced item on 3D System's agenda is the Wrist Brace.

Bespoke Wrist Brace is an application that turns computer data into a very attractive design that is custom made, ventilated, stylish, cleanable and dishwashable, and allows the wearer to continue to function without any debilitating aspects of traditional hand braces.

This application combines the use of 3D Systems' cloud printing technology, the Bespoke scanner, the Geomagic software, as well as the laser sintering technology, to create something revolutionary.

It is a huge market: about 10 million wrist braces sold annually in the U.S., a market amounting to hundreds of millions of dollars, as estimated by Frost & Sullivan.

Insurance companies are moving towards preventable care and this item fits the bill. The average reimbursable amount per brace is between $250 and $450.

The company is already working on an extension of the idea: pediatric braces. Pediatric braces are challenging to make, it sometimes takes multiple changes as the swelling shrinks and the compliance is not very good.

With 3D Systems' braces kids will be able to swim and bathe and do everything they normally do.

3D printing

3D printing is manufacturing with a mouse click instead of hammers, nails and workers. Advocates of the technology say that by doing away with manual labor, 3D printing could revamp the economics of manufacturing and revive American industry as creativity and ingenuity replace labor costs that drove manufacturing abroad in the first place. With this new industry there is nothing to be gained by going overseas except high shipping charges.

Traditional manufacturing involves a web of suppliers for parts and a closely monitored supply chain that includes delivery and warehousing. Companies must spend money to order parts in advance, to have them delivered, and to store enough of them to meet current demand. It's a profession in itself, and has created a computer software sub-industry devoted to supply chain management.

But a 3D printer can short-circuit the process. Parts can be manufactured on site exactly when needed, and only as many as needed. The only lag time is the time it takes the printers to actually do the work. And the design specifications can be entered directly via computer.

The companies that manufacture 3D printers are also manufacturers in their own right, producing custom runs of products in various materials. Manufacturing setup and breakdown times and costs are much lower with printers, allowing quick changeovers.

Depending on the type of job at hand, a typical 3D printer can cost from $10,000 to more than $100,000. If rapid manufacturing is required, along with rapid tooling, direct metal use or the level of accuracy and durability that is only possible with SLA and SLS technologies, the price of the machine can run into six figures.

3D printing was initially used by manufacturers and designers to build prototypes. It is still used for that but the new direction now is a movement toward consumer markets where mass production is needed for customizable products.

Investor's summary

3D Systems' second quarter revenue grew 45 percent from the prior year to a $120.8 million. Gross profit increased 46 percent and gross profit margin expanded 40 basis points to 51.8 percent.

In the second quarter all revenue categories contributed to growth. 3D printers and other product revenues more than doubled to $54.2 million, print materials revenue grew $3.1 million to $29.3 million and services revenue rose $6 million to $37.3 million.

Healthcare related revenue grew 55 percent for the quarter, resuming its growth trajectory and contributed some $18.9 million to the total revenue.

During the first six months of 2013 the company has generated $12.8 million of net cash from operating activities. The second quarter ended with $349.3 of cash on hand representing a $193 million increase versus the end of 2012. This includes $272 million net proceeds from the common stock offering and $86 million paid for acquisitions.

The stock price in the past 52 weeks ranged from $21.57 to $51.94. The company's market cap is $4.45 billion.

Analysts were disappointed about some aspects of the performance. For example, JP Morgan analyst Paul Coster wrote:

"The anticipated leverage from higher-margin materials sales is not being expressed in the business model, raising questions regarding utilization rates on new machines."

On the other hand revenue from sales of professional and production printers grew 78 percent in the quarter, Chief Financial Officer Damon Gregoire said on a conference call with analysts.

A great many companies on the stock market wish they had the problems of 3D Systems.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.