When is a screw not a screw? When it is worth more than gold. Surprising as it may seem, this is the case for the dental implants produced by Straumann, a Swiss company held in the Comgest Growth Europe ex UK fund. 
At the face of it, a dental implant looks decidedly like a screw. But scratch under the surface a little and you begin to understand why a common screw sells for 9 pence while Straumann’s goes for £250, a price tag that makes it, per ounce, substantially more expensive than gold.
First, let’s consider the material it is made from. Straumann’s so-called “Roxolid” implants are made from a high-performance alloy composed of 15 per cent zirconium and 85 per cent titanium, specifically designed for use in implant dentistry, whereas a standard screw is made from low quality steel.
Then there is the route to market. Screws are retailed quite easily, be it online or in-store, and customer loyalty is limited (most people do not particularly mind which brand of screw they’re using, so long as the shelf holds up). That makes barriers to entry low, depressing returns.
Dentists, on the other hand, are particularly brand loyal, not least because they tend to have trained using that brand, but also because, like the iconic Apple, each brand comes with a set of non-compatible accessories. The barriers to switching for a dentist are therefore high, as changing one component of the implant would mean changing others too.
Furthermore, as stated on the company’s website, Straumann is supported by intensive R&D efforts over many years leading to a reputation of innovation, clinical studies demonstrating high product performance, and a long track record of support and service for dental practices all over the world.
The ultimate demonstration of this alchemy is to look at the difference between how much it costs to make the screw, and how much it sells for. In other words, the gross margin. In the case of Straumann, it enjoys an 80 per cent gross margin, meaning it can apply a mark-up of over four times on the cost of production. A common screw maker, by contrast, enjoys a significantly lower mark up. There are no listed pure-play standard screw producers, but the closest equivalent could be Bossard, a Swiss specialist in high-quality screws and fasteners that, despite being far from commoditised, is still only able to generate less than half the gross margin enjoyed by Straumann.
Another word for this type of alchemy is pricing power, which is an important component of the quality we look for in a company. It is what differentiates a Primark t-shirt which retails at £3, from that of luxury brand Hermes which retails for £440. To be clear, this doesn’t mean that Primark is a poor business or a less valuable one. On the contrary, Primark is a successful business, but it generates returns differently than a company such as Hermes, by adapting its cost base to the low margin nature of its products.
Pricing power not only generates high returns, but it can also afford the companies who enjoy its protection. This is because it can allow them to raise prices to offset potential headwinds, whether it be Chinese import tariffs or emerging market currency devaluations. Indeed, in some extreme cases, such as for a Hermes handbag, demand can increase as prices increase – a rare example of negative price elasticity. Armed with such a powerful weapon, Hermes was one of a very narrow elite able to raise prices during the financial crisis without harming demand.
As quality growth portfolio managers we are constantly on the lookout for companies that are able to generate alchemy thanks to the uniqueness of their products, the complexity of the route to market or the strength of their brand. Like in ancient Egypt, not many succeed, and even fewer on a sustainable basis. This is why, when we find one, we tend not to let it go.
Alistair Wittet is a portfolio manager of the Europe equity strategy at Comgest. The views expressed above are his own and should not be taken as investment advice.