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Why doesn't in-house aligner manufacturing always make sense?

Clear aligner OEMs can help dental offices enhance their profitability by offering strategic partnerships. One example of this trend is Europe’s largest OEM ‘K Line Europe’ with its manufacturing HQ in Düsseldorf, Germany, shown above.


Internalizing Supplier Revenues comes at a Cost

 

FY 2017 Global clear aligner giant Invisalign™ witnessed the expiration of its numerous patents – leading industry pundits & investors to speculate about the rise of newer commercial models such as DTC (direct-to-consumer) among others. Fast-forward to Q1’24, the largest DTC category leader SmileDirectClub just went belly-up, whereas Align Technology (NASDAQ: ALGN) continues to push the envelope by building its IP in direct 3D printed clear aligner category, and strengthening its overall patent portfolio. Q1’23 Align Technology vertically integrated into the DSO business (USD 65M equity investment in Heartland Dental) and strengthened its strategic relationships with other leading DSOs incl. SmileBrands, enabling the development of IDNs (integrated delivery networks). In other words, as the global clear aligner industry growth slows down, Align Technology is attempting to integrate downstream towards the patients, trying to capture a larger segment of patient flows + revenues, and developing some countervailing power versus other fast-growing players that are eating into its market share.

 

In recent years, we have witnessed global clear aligner industry developments + trends including vertical integration, horizontal integration with DSOs, emergence of DTC brands, OEMs, and even in-office production of clear aligners. There were even speculations about the latter wherein Specialist Orthodontists (and even GPs) may be fabricating their aligners in-house & establishing a new standard of care. However, these speculations remain far from reality, except for a relatively small segment of Specialist Orthodontists who’re also AM enthusiasts and 3DP hobbyists.

 

One of the biggest claims of in-house aligner production has been internalizing supplier revenues. For dental offices that are operating as Invisalign-providers, COGS & other operational costs represented as much a 40 percent of their revenue. Whereas for dental offices relying on in-house aligner production, this figure declined to 30 percent of treatment revenue. Nevertheless, this marginal improvement in cost structures & successful internalization of supplier margins comes at a cost, which includes development of an in-house 3D printing & aligner fabrication infrastructure, in addition to other operational challenges & headwinds as well. 

 

  • Staffing - An average US based Specialist Orthodontist sees anywhere between 30-60 patients in a day, maxing out their operational burden. Additionally, staffing shortages continues to be among the top 3 challenges affecting the US dental services space, coupled with rising labor costs.

  • Operational costs - Even though the initial CapEx investment for setting up an IHA (in-house aligner) facility have declined over the years, the overall operational costs have increased.

  • Additional Workload - Beyond that, dental offices with in-office aligner fabrication need to adapt their everyday operations, working capital, and even manage newer supplier relationships.

 

To summarize: it requires dental offices far more than simply having the capital, treatment planning software, or manufacturing equipment to be successful at in-house aligner manufacturing.



Many dental offices believe that shortening the value chain may reduce their costs and even allow them to pass on a portion of the cost savings to their patients – enabling them to strengthen customer relationships. However, that’s far from reality…

-     Anonymous



The Clear Aligner Manufacturing Value Chain 


The initial segments of the value chain have become fairly standardized over the years, simplified into 3 different segments of the clear aligner value chain, which essentially cover pre-manufacturing, manufacturing and services.

 

  • IOS (intraoral scanners) are already a standard of care in North America as well as most EU countries; the top 5 IOS manufacturers hold more than 70 percent of the global market share.

  • Treatment planning & 3D printing categories have witnessed the emergence of several new players. Many players across the value chain are entering into strategic alliances, and making ecosystems that offer integrated, validated workflows.


QA/RA and CAPA: Challenges of in-office Fabrication


The purchase behavior of dentists is strongly based on their clinical preferences versus any formal cost-benefit analysis, or even budgetary constraints. Not just that, most dental offices do not have a culture of process improvement, lack a strong P&L mindset, and rely on dated legacy procurement and ordering systems.

 

Clear aligners fall under Class IIa Medical Devices category, which are considered as medium risk devices compared to Class I type of medical devices. Clear aligners require product testing, quality system implementation (ISO 13485), technical file preparation, notified body audit and many other certifications. Other dental appliances that fall under this category include dentures and artificial teeth.

 

  • Despite the ongoing consolidation-rates esp. in North America, dental services still continue to be a highly fragmented industry. In other words, high fragmentation and decentralization of provider systems are key reasons for the limited efficiency gains of in-office clear aligners manufacturing – representing another structural challenge.

  • Unlike in-office aligner fabrication, OEMs go through an extensive clinical evaluation and quality audit of the company’s production processes. In the current manufacturing environment, there are no clear standards concerning the quality and regulations of in-office aligners.

  • Full-service labs, OEMs and even leading major clear aligner manufacturers operate on the latest production technologies – leading the industry benchmarks as IHA (in-house aligner) facilities play catch-up.




Rise of OEMs and contract manufacturing


OEMs enable their clients to meet cost targets and support profitability, while even ramping up (or declining) capacity to forecasted versus real demand.

 

A case in point is the leading DSOs such as Dr. Clear Aligner from Singapore, and Aspen Dental from US and large multi-office chains that frequently engage with OEM partners with a proven track record and deep expertise, rather than relying on in-office aligner manufacturing. This enabled them to overcome a multitude of technical challenges more efficiently.

One should think of OEMs as an all-inclusive commercial provider – pricing their offerings pretty much like an ultra-bundle. In other words, OEMs price their aligner solutions for convenience + scale. As a matter of fact, this pricing approach may look very similar to that of Nespresso, a manufacturer of single-cup coffee makers and capsules. The platform approach of the Swiss coffee brand enables it to price USD 20 worth of commodity (estimated retail price for 1 Kg coffee beans) for up to USD 140 – capturing value beyond any conventional measures.

 

Many DSOs and multi-chain dental offices choose to work with OEMs because of the following reasons:

 

  • Unwilling to change status quo + gain product expertise: Dental office staff are reluctant to change existing processes; need to learn new skills or develop new ways of working.

  • CapEx Pressures: Limited appetite to invest/cost pressures as well as manage capital expenditures and inventory costs.

  • Lack of automation: Many downstream & post processing steps involved in in-office aligner manufacturing require add-on equipment + software – often coupled with other headwinds including automation challenges, quality/ compliance as well as capacity and productivity challenges for dental office staff members.

  • Predictable cost targets: OEM partners enable DSOs and multi-chain offices to better manage their profitability KPIs as they juggle between budgeted demand, forecasts and actual sales – enabling them to meet cost targets and improve margins.

 

Europe’s largest clear aligner OEM, K Line Europe partners closely with DSOs and multi-office dental chains to provide customized solutions – often entering close partnerships with its clients. K Line Europe understands the evolving industry trends and customer-specific challenges, co-creating customized solutions on a platform-by-platform basis within that landscape, while maintaining the highest standards for QA/RA, CAPA.


K Line Europe’s value proposition is based on a deep understanding of dental offices’ desired outcomes - going beyond just efficiency gains and improved margins. More recently, the OEM has been building its own IP and enhancing the breadth of customer service-delivery capabilities by offering ClearX.



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