Dental Implant Sector Set to Surge

ZURICH—Executives of large dental-implant makers say their business will take a bigger bite of overall consumer spending next year, despite continued weakness in the global economy and stiff price competition from new entrants.

Expansion rates of 5% are realistic for 2011, they say, while double-digit growth is possible in two years once consumers regain confidence, reversing a more than 6% drop that hurt the $18 billion dental industry in the downturn.

During that time consumers have opted for cheaper replacements, such as bridges, because costs for implants can run between $500 to more than $10,000 depending on the size and material.

But even though implants require surgery and offer risks of infection, they have gained in popularity because such artificial teeth are fixed more securely and look more natural.

As penetration rates are still very low in the U.S. and Asia, "I am optimistic the market will get back to double-digit growth," said Beat Spalinger, the chief executive of Switzerland-based Straumann Holding AG.

Demand will be driven forward because "people are getting older, the technology has advanced and the education has increased," said the chief financial officer of Swiss rival Nobel Biocare Holding AG, Dirk Kirsten. "The fundamentals are intact."

Their views are backed by a research report published by consultant MarketsandMarkets, which expects the global dental equipment market to reach a size of $27.6 billion by 2015. The implants segment is set to grow by 10.5% per year as "aging baby boomers can afford expensive dental procedures", according to the report.

Such budding, high-level optimism comes amid accelerated consolidation within the sector, and reflects renewed interest in it. U.K.-based AstraZeneca PLC has put its dental implant and medical devices unit Astra Tech on the block. U.S.-based Sybron Dental Specialities Inc, a unit of Danaher Corp., took over Implant Direct International Inc. in November. And Birmingham, Ala. startup BioHorizons wants to list its shares on Nasdaq.

Dental-implant technology was invented around four decades ago. The market took a long time to build, but eventually reached staggering growth rates of 15% to 20% in the years 2003 to 2007, when consumers in the U.S. and Europe started to switch to implants from conventional bridges and tooth-replacement techniques.

The boom attracted a flurry of low-cost manufacturers. This sapped off growth from established players and led to a general margin erosion, which accelerated during the downturn, and is expected to keep margins off historical highs and may also keep a lid on stocks, analysts say.

"We can achieve a profit margin of about 20% to 25%," said Nobel Biocare's Mr. Kirsten. "But a pre-crisis margin of 34% isn't realistic," as the company's recent revamp—amid which it broadened its offering to include less expensive treatments—incurs higher costs.

The threat from the low-cost manufacturers, coupled with the weak economy, has prompted revamps and cost cuts across the industry that includes players such as Dentsply International, Zimmer Holdings Inc's Zimmer Dental and Biomet's 3i, which is owned by private equity companies such as Blackstone Group and Kohlberg Kravis Roberts & Co. As a consequence, investors shunned the sector this year.

Shares of Nobel, partly due to its protracted restructuring, has lost more than 50% in value this year as investors such as UBS AG and FMR LLC, a unit of asset manager Fidelity, reduced their stake. Straumann's stock shed nearly 30% of its value even as investment firm Mannin & Napier Advisers built a 3% holding.

"The question of course is when the market is turning around," said Daniel Jelovcan, analyst at brokerage Helvea. "Because many people postpone complicated dental interventions, the market is expected to recover later in the cycle because people tend to first spend on cars or vacation once the economy stars to take off."

Those who have embraced the high-end technology see huge potential there. "Quality is a key factor of our past success," said Dr. Haleh Abivardi, co-founder and CEO of Swiss Smile Holding AG, one of Europe's fastest growing dental centers with outlets in Zurich, St. Moritz, London and Bangalore.

"Even during the economic crisis, demand for quality implants [from Straumann and Nobel] has been growing by about 20% and will remain high in the future, especially in countries such as India," she said.

A major test of the market's health will come with the planned sale of Astra Tech, which some market observers have suggested could fetch as much as $2 billion.

While companies such as Straumann and Nobel Biocare are considered potential acquirers, analysts believe that a consortium surrounding Blackstone is more likely to go for a takeover of the Swedish-based unit, allowing them to merge Biomet with Astra Tech.

Straumann and Nobel Biocare declined to comment on Astra Tech. Blackstone and Astra Tech couldn't be immediately reached for comment.

Depending on what multiples a potential bidder is prepared to offer for Astra Tech, dental implant makers could get a lift from an eventual transaction and move closer towards historic valuations.

The sector's price to earnings ratio—an industry figure reflecting market profit projections—currently stands at about 12 to 15, a steep discount to the 40-level before the crisis erupted. A level of around 25, analysts say, could be fair provided the current consolidation round attracts enough capital.

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