Straumann: Several Years Of Growth Ahead

Summary

• The dental implants market should continue to grow over the coming years.
• Straumann is well-positioned to continue gaining market share, especially with recent product launches and geographic expansion.
• The clear aligner business is another very important growth opportunity as it is massively underpenetrated whereas the demand is strong and growing.
• The company expects an average of 10% organic growth per annum over the next decade, which seems doable and could even be exceeded.
• Few companies can grow as much and for so long with such high ROI.

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Company Overview

Straumann (SAUHF/OTCPK:SAUHY) is one of the leading providers of aesthetic and dental products. The group develops, manufactures and distributes dental implants, clear-aligner systems, biomaterials, CAD/CAM prosthetics and equipment. The group is well-known for the quality and reliability of its products, the famous Swiss quality. Straumann is headquartered in Switzerland and has a market capitalization of CHF≈ 31B (approximately USD 33B). The founding family still owns a significant stake (≈ 17%) in the company across Thomas Straumann, the founder’s grandchild and vice chairman of the board.

The company is composed of three business segments: implant solutions (54% of 2020 sales), restorative solutions (27%) and others (19%). The implant solutions unit comprises dental implants while the restorative solutions segment includes abutments (the connecting part between the dental implant fixture and the prosthesis) as well as the different prostheses such as crowns, inlays and bridges.

(Source: Dentoamerica.com)

The last segment encompasses a large variety of products such as clear aligners, biomaterials and computer-aided design (CAD) and computer-aided manufacturing (CAM) equipment. CAD/CAM solutions improve the digital workflow in dental practices and include intraoral scanning, prosthesis design and manufacturing equipment as well as implant planning software. These equipments aid dental professionals to design and manufacture prosthetic teeth, but are also useful to ensure the correct placement of implants. Biomaterials include bone augmentation materials, membranes, fleeces, sponges and soft-tissue regenerative products. Dental professionals use these products during dental procedures.

The strategy of the company consists to expand its addressable market by entering into new adjacent categories and geographies, and innovate in order to maintain its leadership position and further gain market share.

(Source: 2021 Capital market day)

The company delivered very good operational and financial results over the last decade. For instance, the 5-year average ROIC and organic growth rate have reached 20% and 13%, respectively, between 2015 and 2020 (despite an organic growth rate of -6% and an ROIC of only 11% in 2020 due to the pandemic). It is also interesting to note that the company uses the economic profit as a key performance indicator in the calculation of executives’ remuneration.

The management implements a conservative strategy as the company has (and always had) a strong balance sheet (net debt to EBITDA of 0x) despite enjoying very strong growth. The management team is also quite reactive to adjust the business to a change in business conditions. For example, during the Covid-19 crisis, Straumann downsized its operations to face the sharp decline in implant procedures.

“Entering 2020, we were geared for strong growth, having doubled our workforce over the three prior years. With revenues tumbling 70% at the pandemic’s peak, we quickly had to align our costs - most of which are personnel”

(Source: 2020 annual report)

“Thanks to rapid mitigation of near-to-mid-term financial impact, including operating cost reductions, subsidized working-hour reductions, global restructuring and postponed investments, we alleviated the heavy pressure on profitability. Our core EBITDA, EBIT and net profit margins reached 29.5%, 23.4% and 18.3% respectively”

(Source: 2020 annual report)

Dental implants and restorative solutions (≈75% of 2021e sales)

Straumann focused only on premium implants until 2012, before entering into the discount/value segment. Thanks to a complete product offering (non-premium, tapered implants…) and a strong execution (expansion in new geographies, focus on higher growth DSO distribution channels…), Straumann significantly strengthened its position and increased its market share in dental implants from 18% in 2012 to 29% in 2021. Nowadays, the company has an undisputed leading position in the premium market (45% market share) and owns 13% of the non-premium market.

Overall, the implant market should continue to grow at an MSD growth rate, as the current penetration rate is relatively low. The increase in penetration rate will be driven by 1) an ageing population (elderlies are more prone to teeth replacement), 2) an increasing middle class, 3) better access to dental care (especially in EM), 4) a growing awareness among the population, 5) better education among dental professionals, 6) an increasing focus on dental hygiene and dental aesthetics (cosmetic treatments).

(Source: 2020 annual report)

The company estimates the total addressable market at 2B units whereas 32M units were sold in 2021. In fact, the 32M units sold in 2021 have most likely been boosted by the postponement of procedures during 2020 due to the pandemic. Regardless, it clearly shows that the market is still significantly underpenetrated.

Premium market

In the premium segment (≈ 80% of implant revenue), the group should continue to gain market share because of the strength and reputation of its main brand. Within that segment, Straumann is under-indexed to tapered implants as the company only launched its first apically tapered (BLT) and fully tapered implants (BLX) in 2014 and 2019, respectively. As a result, the market share in these categories is significantly lower than for its legacy parallel walled implant business.

(Source: Author & 2021 CMD presentation)

Given that roughly 75% of premium implants sold belong to the tapered category, the company has a huge business opportunity to grow its premium implant business. Indeed, we estimate that Straumann has 81% market share in parallel walled implants (its legacy business) while the group owns roughly 32% market share in the tapered market (accounting for both fully and apically tapered categories). Moreover, our discussion with industry experts suggests that tapered implants are roughly 50% more expensive than parallel walled implants.

Assuming a 49% market share for Straumann within the tapered implants categories (still materially below its 81% market share in parallel walled implants); it would increase the size of its premium implant business by roughly a third. Indeed, premium implants revenue could increase from CHF 1.08B to 1.44B just because of market share gains (without taking into account dental implants market growth).

Non-premium market

The non-premium segment also represents an important growth opportunity for Straumann as this segment accounts for almost 50% of the implant market in value but only 20% of Straumann’s implant revenue. Historically Straumann focused on the premium implant but has started to provide discount/value implant from 2012 in order to strengthen its product offering, target new markets and eventually reduce its business risk (during economic downturn, patients may trade down due to the lack of reimbursement in most countries). As of today, Straumann estimates its market share to be close to 13% in the non-premium segment despite enjoying 45% in the premium segment.

(Source: 2021 CMD presentation & Straumann presentation)

If Straumann is able to increase its market share from 13% to 25% (still below its 45% market share in the premium segment), the group could increase its revenue by CHF 312M.

Therefore, we believe that market share gains represent a potential business opportunity of CHF 0.67B (VS 2021 revenue expectation of CHF 2,01B). If our estimates are correct, market share gains should add 6% revenue growth over the medium term.

In addition, the business will benefit from the growth in the implant market that we consider to be close to [4%-5%]. As a result, the core implant business (75% of the group’s revenue) should grow at least at a high-single-digit/low-double-digit CAGR over the coming years.

Other (≈ 25% of sales)

According to our analysis, revenues are distributed as follows:

Clear aligners

Clear aligners represent a large and still untapped market opportunity. Indeed, this market is worth CHF 5.3B and should continue to grow north of 20% per year. Clear aligners offer the advantages of being more convenient and aesthetic than conventional wires and brackets. Nowadays, dental professionals across the world treat most cases with conventional wires and brackets. However, there is a growing awareness of clear aligners’ benefits among dentists and patients, which leads to an increasing penetration rate.

The prevalence of malocclusion is elevated: indeed, at least one out of two individuals have misaligned teeth globally. Not all teeth misalignments require a treatment and not all individuals can afford a treatment either. Back in 2017, Straumann estimated that 1.35B people worldwide suffered malocclusion and could afford an orthodontic treatment. Among patients starting an orthodontic treatment, only 20% of them use clear aligners. At the same time, according to Straumann, less than 5% of dentists offer clear aligners outside of the US, which clearly shows the growth opportunity. As a result, Straumann focuses on increasing product awareness among professionals and customers as well as expanding its geographical presence. Clear aligners are currently available in 46 countries but the group plans to launch in eight new countries in 2022.

(Source: Company presentation and 2021 CMD)

Biomaterials

As biomaterials are used during dental implant procedures, the growth of implant procedures is the key growth driver. To the best of our knowledge, Straumann has a strong market share in tissue regeneration, the smallest segment (5% of biomaterials) while it is significantly under-exposed to graft materials, the largest segment (60% of biomaterials). As a result, the company has a large opportunity to grow by gaining market share. Besides, the group expanded its product offerings (following the acquisition of botiss) as it also provides membranes now. Finally, geographical expansion is also an important growth driver. For instance, the group only introduced biomaterials in China for the first time in October 2021.

(Source: 2015 annual report & company website)

Assuming that the CADCAM equipment and prosthetics business will grow slightly faster than the market, we believe that the overall segment is poised to grow >25% over the coming years.

Financials

Straumann’s total addressable market was valued at CHF 18B in 2021. We expect that the market will grow at 11% CAGR over the next few years. As previously explained, Straumann should outgrow the market because of market share gain and geographic expansion. As a result, we expect that revenue could grow around 16%, above the 10% organic growth target mentioned by the company during its 2021 capital market day. Even though elevated, this growth rate is not far from what Straumann delivered between 2016 and 2019 (a 4-year average organic growth of 17.6%). Note also that if we are correct, sales should grow by only 3.8% CAGR over the period 2026/2030 in order to reach its long-term target of CHF 5B revenue by 2030.

The company expects an operating margin comprised between 25% and 30% depending on growth investments. The average EBIT margin was close to 25% between 2016 and 2019 while the company was clearly in growth mode (average organic growth of almost 18%). We believe that the company should at least be able to meet the bottom range of its guidance.

Valuation

Valuation multiples look expensive: FCF yield is 1.6%. However, high-quality companies with such profitable growth pathway should definitely trade at a premium. Thus, if the premium is justified, the stock price should compound around 15% per annum over the coming years. Margin expansion could add a couple of percentage points.

Even though over a long period, EPS/FCF growth explains 80/90% of a stock performance, the valuation multiple compression can significantly affect the short-term stock performance. We estimate that if Straumann trades at a 3% FCF yield within five years (almost a 50% multiple compression), it would detract the performance by 11% per annum. Even though quite significant, such compression is not our main scenario. Besides, the longer the time horizon, the lower the impact: over a ten-year time frame, the impact from multiple compression would be 6% per year, which results in a total return close to 10% if we are right about the growth prospects.

To sum up, few companies can grow as much and for so long with such high ROI. We are happy shareholders at the current valuation. We will most likely add to our existing position when valuations become less demanding.

Risks

Economic slowdown: Dental implants are generally not reimbursed by health care systems (they are out-of-pocket costs for patients). As a result, patients tend to postpone implant procedures during challenging economic periods. Besides, Straumann is highly exposed to the premium implant market, which adds an additional level of risk.

Margin pressure: Margins could deteriorate due to an increasing exposure to the non-premium market and a stronger focus on Dental Services Organizations (DSO). DSO has a more important bargaining power than independent practices because of their size. However, serving DSO requires fewer resources (sales force, marketing…) which can mitigate the impact at the EBIT level.

Pricing competition: Leading implants manufacturers have been price disciplined but one player could eventually aggressively cut implant prices to gain market share.

Appendix:

Difference between implants:

A parallel walled implant has an equal diameter along the entire implant body while a tapered implant has a decreasing one (similar to a tooth root). The latter offers higher primary stability (useful for sites with poorer bone quality or inadequate bone volume) and is more desirable for immediate placement while the former has a long history of data. As a result, tapered implants tend to be the preferred solution while implant procedures take place the same day as tooth extraction.

(Source: Straumann)

FX exposure

(Source: Straumann 2020 annual report)

Financial performance

(Source: Straumann 2020 annual report)

(Source: Straumann 2020 annual report)

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SAUHF either through stock ownership, options, or other derivatives. 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.