"Do you think relying on non-silver based filling [away from...

"Do you think relying on non-silver based filling [away from amalgam] also means one less source of volatility due to the fluctuation of silver prices?"

@zaidi675 ,

I think the silver price - unless it spikes to plus-$40/oz like it did in 2011 - is a non-issue for SDI, and is increasingly becoming so as amalgam becomes a smaller part of SDI's business.

Instead, as a long-term shareholder in SDI, the thing that exercises my mind most (even more than exchange rate movements to which SDI's short-term earnings are highly exposed [*]) is trying to define the nature of SDI's non-amaglam products.

Because the essence of the products that SDI sells is quite a difficult thing to get one's head around, I have found, in terms of the degree of differentiation and specialisation and therefore, the extent to which SDI enjoys any degree of pricing power.


While amalgam is clearly a commodity product (even though, somewhat bizarrely, it has historically not been priced that way, with +60% gross margins), SDI's ionomer and whitening products are proprietary products, reflecting a degree of R&D-driven intellectual property value.

The funny thing is that the composite material itself (i.e. the white cement paste used for dental fillings as a substitute for amalgam) is not really that different to that used by SDI's competitors. Chemically, it is basically the same stuff, I have been led to believe.

One would therefore think that this should ordinarily connote some commoditisation characteristics. Which is what I initially thought some years ago.

But it was only after attending a dental trade show myself once, and after speaking to several practicing dentists over time, that it occurred to me that the real product "smarts" lay not in the actual cementitious material used, but in the receptacle in which it comes, i.e., the cartridge or the applicator, which is what the dentist actually uses in his practice when he works with the stuff in preparation for getting it into the patient's mouth.

Almost universally, the feedback I have received from dentists is along the lines of,
"No matter which company supplies it, the stuff itself does the same job. But what's important for me is to not have a cavity staring at me waiting to be filled, while I'm stuffing around and struggling to get the right amout of cement out of the tube in the manner and the place where I need to it be."

So, it is not the chemical compound itself where the value offering resides, but in the device/dispenser/applicator.

It is from that aspect of the product that brand loyalty is derived.

And this is borne out by dentist purchasing behaviour. Following on from the posts made earlier in this thread between @lukelee , @usagi44 and @guyue999, my own "surveys" of dentists and dental assistants - as much as one can conduct cogent surveys with a numb mouth - demonstrated surprisingly little propensity to switch from one supplier to another.

Especially not purely on the basis of price.

My understanding is that amalgam and composite products form a relatively small proportion of the operating costs of a dental practice, so dentists were unwilling to switch from something that they were comfortable using, merely in order to save a few dollars.

Like most medical practitioners, dentists tend to be creatures of habit, it seems.

Evidently, scratching around in people's teeth is stressful enough, without still having to wrestle with equipment that is not behaving like you want it to.

So, to sum all that up:

1. Non-amalgam composites are largely commoditised in terms of their physical characteristics, but is the dispensers in which they are sold that is the differentiating feature.

2. Dentists/dental assistants are reluctant to switch to alternative suppliers of composites, meaning that customers are quite loyal. But this is a bit of a double-edged sword because it also means that market share gains are hard to come by, and customer acquisition costs are high.

3. Generally the cost of the products that SDI supplies is proportionally not material for a dental practice.


For these three reasons, suppliers of dental products such as SDI do enjoy a degree of pricing power, especially when it comes to the roll-out of new product ranges. (At worst, they are not susceptible to excessive price competition.)


So with that all said, the biggest risk to this business, I think, is not the silver price nor the exchange rate; rather, it is the risk that one of SDI's major competitors invent and patent a new novel way of dispensing composite material that makes SDI's technology obsolete (SDI is the minnow in the industry, so it comes up against large R&D clout in terms of its competitors). Of course, if that were to happen, it would not become manifest immediately and the outworking on SDI's business would occur only over a period of years. So there would be plenty of early warnings of it well ahead of it actually causing the company to come undone, so while I actively monitor it, I don't lose too much sleep over it.

Similarly, another risk I monitor is that of the company's management continuing to invest in new products when the law of diminishing returns are at work, i.e., continuing to spend between 4% and 5% of Sales on R&D without a commensurate return on that investment... which is why I monitor metrics such as Revenue-to-Intangible Assets for potential decay. (None is seen to date, with the metric being relatively consistent around an average of 3.0x to 3.3x over the past decade.)


So, in my view, those are the sorts of things to keep watch over when it comes to risk management when investing in SDI. Not the silver price.

The silver price is what it is, and can't be controlled by anyone in the industry, so when silver prices tend to go up, the industry generally tends to pass that cost impost onto customers for amalgam, albeit possibly with a bit of a time lag. But the point is that the industry is able to prevent having to absorb sharp silver price rises into its operating margins.