ALGN (Aligner Business Only)

Market Size:
The majority of aligner procedures are performed by orthodontists. Traditional braces use
brackets/wires that depend on the expertise of a dedicated professional. Some dentists also perform
procedures but these are usually less severe cases that require less specialization. To analyze the
market potential for ALGN (and clear aligners in general) its best to break out the users by two specific
groups or channels; orthodontists and GPs (dentists). Clear brackets have been gaining market share
within each of these groups, but it remains to be seen how large the market potential is for clear
aligners. To do this one must analyze the value proposition to the decision makers involved in the
transaction.
Value proposition for GPs:
1. Pros to GP
a. Clear aligners allow them to bring in incremental revenues from current patients
b. Clear aligners allow them to attract new patients (marketability)
2. Cons to GP
a. Only reason not to use is if the practice is so busy there is no unused chair-time
Value proposition for Orthodontists:
1. Pros to orthodontist
a. Can bring incremental adult patents that were hesitant to get traditional braces
b. Dont lose share to GPs/orthos that have a clear aligner program
c. If can boost cases by 20% (very unlikely) it is more economic
2. Cons to orthodontists
a. Performance is equal to or slightly worse than traditional brackets
b. Clear braces are less economical relative to traditional offerings (see below chart)
Clear

Traditional

$5,000.0

$5,500.0

Cost

$250.0

$1,350.0

Profit

$4,750.0

$4,150.0

95.0%

75.5%

Revenue

% margin

So there are economic incentives for GPs and orthodontists as far as attracting new customers,
but there is none from a conversion perspective. That part must be driven by the consumer.
Value proposition for Consumers:
1. Pros to the consumer
a. Less visible
b. More comfortable

c. Less visits
d. Better hygiene
2. Cons to the consumer
a. Cost
b. Results
Based on the list above it seems the benefits of clear aligners outweigh the costs, especially
considering results are pretty comparable for the companys target market (stage1 & 2 malocclusions).
That leaves only cost which, relative to the benefits, is not a huge obstacle. That makes the value
proposition very attractive to consumers. This is important for the teen market as consumers will need
to drive adoption considering the relative economics for doctors.
Competition:
ALGN is a leader in the market for clear braces, but there are other companies with similar
offerings. It is useful to divide the competition into two groups; partially competitive and fully
competitive
Partially Competitive
1. Ormco
a. Ormco has two clear aligner products on the market, Simpli5 and Clearguide. They are
used for mild treatments and only contain 5-10 aligners (each aligner is used for a
specified period of time). It has been gaining some share within orthodontist facilities
but is rather niche and only competes with ALGNs Express unit (less than 10% of sales).
Furthermore, ALGN recently launched a product called Express 5. This will compete
directly with the Simpli 5 offering. Im skeptical that Ormco would roll-out a full offering
to compete with the remainder of ALGNs business considering Ormco owns 10% of the
equity in ALGN. Additionally, they would need to get around the patents.
2. Dentsply
a. Dentsply has a product called MTM. Like the Ormco product it is being marketed for
minor malocclusions and has struggled to get approved in the US market. However,
Dentsply is a major player in the industry and future plans in clear aligners must be
monitored.
Fully Competitive:
1. ClearCorrect
a. ClearCorrect is the other major player in the clear aligner market with about 20% share
with GPs and 15% with orthodontists. It addresses more complex cases, like ALGN, and
is widely considered as good/worse but cheaper. Additionally, the company has better
customer service than ALGN which is more attractive to GPs as they do fewer cases
from both a volume and complexity perspective. As a result, the company has gained
meaningful share in the GP office and I believe that continues. I believe they will gain

some share in the orthodontist office but to a lesser degree. Orthodontists do more
complex cases and are more respectful of performance. ALGN and ClearCorrect are
currently in litigation with one another as ALGN claims ClearCorrect infringes on its
patents. In 2006, a company called OrthoClear, was found to infringe on ALGNs IP and
forced to cease operations. Interestingly, some of the employees from OrthoClear now
work for ClearCorrect.
From a market size perspective, I think the opportunity for clear aligners is vast. As the
technology continues to improve results will as well opening up a larger patient population. For
example, ALGN has made significant progress marketing its product for teens. Considering there is little
incentive for orthodontists to market this product it suggests adoption is being driven by the consumer.
That actually begins a positive feedback loop as other practices must adopt a clear aligner program or
risk losing market share to other orthodontists or dentists. From a clear aligner competitive standpoint,
I believe ALGN will continue to gain share in the orthodontist office as teen is the major driving force. In
the GP office, I assume ALGN loses share over time to OrthoClear and other companies. Below is an
analysis of the market for braces, clear aligners and ALGNs share by channel.
2008A

2009A

2010A

2011A

2012A

2013A

2014A

2015A

2016A

2017A

2018A

2019A

2020A
2,163.9

Ortho
:Industry Starts (000's)

1993

1830

1858

1884

1,902.8

1,883.8

1,921.5

1,959.9

1,999.1

2,039.1

2,079.9

2,121.5

-8.2%

1.5%

1.4%

1.0%

-1.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

119.58

128.1

148.64

169.56

197.9

216.6

242.1

268.5

295.9

324.2

353.6

384.0

415.5

6.0%

7.0%

8.0%

9.0%

10.4%

11.5%

12.6%

13.7%

14.8%

15.9%

17.0%

18.1%

19.2%

70.6

72.5

90.3

115.4

138.8

157.1

178.2

200.0

222.5

245.7

269.6

294.3

319.7

59.0%

56.6%

60.8%

68.1%

70.2%

72.5%

73.6%

74.5%

75.2%

75.8%

76.3%

76.6%

76.9%

2.7%

24.6%

27.8%

20.3%

13.2%

13.4%

12.2%

11.3%

10.4%

9.7%

9.1%

8.6%

2009A

2010A

2011A

2012A

2013A

2014A

2015A

2016A

2017A

2018A

2019A

2020A
435.2

% growth
:Clear Starts
% Clear share
:ALGN Starts
% ALGN share of clear
% ALGN growth
2008A
GP's
:Industry Starts (000's)

245.0

252.3

259.9

275.5

281.0

289.4

306.8

325.2

344.7

365.4

387.3

410.6

3.0%

3.0%

6.0%

2.0%

3.0%

6.0%

6.0%

6.0%

6.0%

6.0%

6.0%

6.0%

159.2307692

199.20

181.83

205.33

214.0

228.5

249.5

271.3

294.1

317.8

342.6

368.5

395.6

65.0%

78.9%

70.0%

74.5%

76.2%

78.9%

81.3%

83.4%

85.3%

87.0%

88.4%

89.8%

90.9%

103.5

99.6

109.1

123.2

138.8

150.7

160.6

170.7

180.9

191.3

201.9

212.7

223.6

65.0%

50.0%

60.0%

60.0%

64.8%

66.0%

64.4%

62.9%

61.5%

60.2%

58.9%

57.7%

56.5%

-3.8%

9.5%

12.9%

12.6%

8.6%

6.6%

6.3%

6.0%

5.8%

5.5%

5.3%

5.1%

2009A

2010A

2011A

2012A

2013A

2014A

2015A

2016A

2017A

2018A

2019A

2020A
4,139.4

% growth
:Clear Starts
% Clear share
:ALGN Starts
% ALGN share of clear
% ALGN growth
2008A
International
:Industry Starts (000's)

3662.0

% growth
:ALGN Starts

37.9
% share

% ALGN growth

1.0%

3377.0

3455.0

3525.0

3,640.0

3,603.6

3,675.7

3,749.2

3,824.2

3,900.7

3,978.7

4,058.2

-7.8%

2.3%

2.0%

3.3%

-1.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

47.3

61.5

70.8

86.5

104.1

121.6

140.3

160.3

181.6

204.2

228.2

253.6

1.4%

1.8%

2.0%

2.4%

2.9%

3.3%

3.7%

4.2%

4.7%

5.1%

5.6%

6.1%

24.8%

30.0%

15.1%

22.2%

20.4%

16.8%

15.4%

14.2%

13.3%

12.5%

11.7%

11.1%

It is also important to see how the above growth is achieved by channel. There are three parts to
this. Please see below
1. Number of orthodontists/GPs that have been trained
2. Percent of trained doctors that decide to use the product
3. Utilization of each doctor who is using the product

Q1 2009
Q1 2012

Q2 2012

Q3 2012

Q4 2012

2013A

2014A

2015A

2016A

2017A

2018A

2019A

2020A

4,460.0

4,575.0

4,660.0

4,700.0

4,850.0

4,950.0

5,050.0

5,150.0

5,250.0

5,350.0

5,450.0

5,550.0

7.2

7.7

7.7

7.5

8.1

9.0

9.9

10.8

11.7

12.6

13.5

14.4

9,715.0

9,810.0

9,935.0

10,000.0

10,000.0

10,000.0

10,000.0

10,000.0

10,000.0

10,000.0

10,000.0

10,000.0

90.0

95.0

125.0

65.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

% using

45.9%

46.6%

46.9%

47.0%

48.5%

49.5%

50.5%

51.5%

52.5%

53.5%

54.5%

55.5%

% trained of total pop

97.2%

98.1%

99.4%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

11,365.0

12,120.0

11,925.0

12,061.0

12,988.9

13,701.4

14,413.9

15,126.4

15,838.9

16,551.4

17,263.9

17,976.4

2.9

3.1

2.9

2.8

2.9

2.9

3.0

3.0

3.0

3.1

3.1

3.1

Orthos Using
Quarterly Utilization
Total Trained
Added

GP's Using
Quarterly Utilization
Total Trained

Assumptions
0.9

1.0%

0.03

40,805.0

41,800.0

42,475.0

43,075.0

45,575.0

48,075.0

50,575.0

53,075.0

55,575.0

58,075.0

60,575.0

63,075.0

Added

720.0

995.0

675.0

600.0

2,500.0

2,500.0

2,500.0

2,500.0

2,500.0

2,500.0

2,500.0

2,500.0

2,500.0

% using

27.9%

29.0%

28.1%

28.0%

28.5%

28.5%

28.5%

28.5%

28.5%

28.5%

28.5%

28.5%

0.0%

% trained of total pop

34.0%

34.8%

35.4%

35.9%

38.0%

40.1%

42.1%

44.2%

46.3%

48.4%

50.5%

52.6%

International Using

5,085.0

5,480.0

5,400.0

5,498.4

6,348.0

7,169.7

8,009.4

8,867.1

9,742.9

10,636.6

11,548.3

12,478.1

3.9

4.1

4.1

4.0

4.1

4.2

4.4

4.5

4.7

4.8

4.9

5.1

Quarterly Utilization
Total Trained

0.14

20,660.0

21,625.0

22,310.0

22,910.0

25,910.0

28,910.0

31,910.0

34,910.0

37,910.0

40,910.0

43,910.0

46,910.0

Added

715.0

965.0

685.0

600.0

3,000.0

3,000.0

3,000.0

3,000.0

3,000.0

3,000.0

3,000.0

3,000.0

3,000.0

% using

24.6%

25.3%

24.2%

24.0%

24.5%

24.8%

25.1%

25.4%

25.7%

26.0%

26.3%

26.6%

0.3%

% trained of total pop

29.5%

30.9%

31.9%

32.7%

37.0%

41.3%

45.6%

49.9%

54.2%

58.4%

62.7%

67.0%

20,910.0

22,175.0

21,985.0

22,259.4

24,186.8

25,821.1

27,473.3

29,143.5

30,831.7

32,538.0

34,262.2

36,004.4

4.1

4.3

4.2

4.1

4.3

4.5

4.6

4.8

5.0

5.2

5.4

5.5

71,180.0

73,235.0

74,720.0

75,985.0

81,485.0

86,985.0

92,485.0

97,985.0

29.4%

30.3%

29.4%

29.3%

29.7%

29.7%

29.7%

29.7%

Total Using
Quarterly Utilization
Total Trained
% using

103,485.0 108,985.0 114,485.0 119,985.0

29.8%

29.9%

29.9%

30.0%

Margins:
ALGN has historically had good gross margins in its aligner business. The majority of the recent
increase is driven by higher capacity utilization. Last year the company added capacity and faced higher
material costs. Without talking to management its hard to tell what current fixed costs are, but 20% is a
reasonable guess. Going forward fixed costs/start should continue to decline but variable cost will likely
rise. This is due to higher material & transportation costs which will be offset over time by lower
training fees (partly variable). On the pricing side, I assume mix/competition drives that down over the
years. The net-effect is a decline in aligner gross margin.
2009A

2010A

2011A Q3 2012A

2013A

2014A

2015A

2016A

2017A

2018A

2019A

2020A

Aligner Sales

$312.5

$373.3

$451.6

$500.5

$566.5

$619.8

$675.5

$736.9

$800.8

$866.1

$932.8

$1,000.8

Aligner GM

$233.5

$289.4

$354.7

$390.6

$442.43

$481.30

$522.10

$567.94

$615.59

$664.09

$713.34

$763.27

% margin

74.7%

77.5%

78.5%

78.0%

78.1%

77.7%

77.3%

77.1%

76.9%

76.7%

76.5%

76.3%

Assumptions

Gross Margin

Total Starts

219.3

260.9

309.4

364.1

411.9

460.4

511.0

563.7

618.6

675.8

735.2

796.9

Avg ASP

$1.425

$1.431

$1.460

$1.375

$1.375

$1.346

$1.322

$1.307

$1.294

$1.282

$1.269

$1.256

Avg Cost/Start

$0.360

$0.322

$0.313

$0.302

$0.301

$0.301

$0.300

$0.300

$0.299

$0.299

$0.298

$0.298
$237.5

Total COGS

$79.0

$83.9

$96.9

$109.9

$124.1

$138.5

$153.4

$169.0

$185.2

$202.0

$219.4

% fixed

20.3%

20.3%

18.6%

19.1%

18.1%

17.2%

16.2%

15.2%

14.3%

13.3%

12.3%

11.3%

Fixed cost

$16.000

$17.000

$18.000

$21.000

$22.522

$23.790

$24.872

$25.748

$26.401

$26.812

$26.964

$26.835

0.073

0.065

0.058

0.058

0.055

0.052

0.049

0.046

0.043

0.040

0.037

0.034

Varaible Costs

$63.00

$66.90

$78.90

$88.91

$101.59

$114.68

$128.55

$143.24

$158.77

$175.17

$192.47

$210.70

Varaiable Cost/Start

$0.287

$0.256

$0.255

$0.244

$0.247

$0.249

$0.252

$0.254

$0.257

$0.259

$0.262

$0.264

Fixed Cost/Start

$0.003

1.0%

The majority of sales/marketing costs are due to education, trade shows, media and
compensation. The major point of leverage should be compensation as future growth is driven by more
utilization within each channel. I made the assumption that the leverage over the past few years has
come from better utilization. That would equate to about .2% leverage for each 1/10 increase in
utilization. Over time I believe there to be more leverage opportunities as consumers drive adoption.
Clear aligners are somewhat of an unmet need. This creates an almost viral environment where more
recognition/adoption drives even higher recognition/adoption (positive feedback loop). The
combination of this positive feedback loop and higher utilization in the channel is a powerful, high ROIC
sales model.
2009A

2010A

2011A Q3 2012A

2013A

2014A

2015A

2016A

2017A

2018A

2019A

2020A

Aligner Sales

$312.5

$387.3

$451.6

$500.5

$566.5

$619.8

$675.5

$736.9

$800.8

$866.1

$932.8

$1,000.8

S/M aligners

$112.5

$114.0

$127.2

$140.7

$158.77

$172.04

$185.79

$200.85

$216.32

$231.93

$247.65

$263.47

36.0%

29.4%

28.2%

28.1%

28.0%

27.8%

27.5%

27.3%

27.0%

26.8%

26.6%

26.3%

S/M exp

Utilization

3.2

% trained

3.6

4.0

4.2

4.3

4.5

4.6

4.8

5.0

5.2

5.4

5.5

29.0%

29.0%

29.6%

29.7%

29.7%

29.7%

29.7%

29.8%

29.9%

29.9%

30.0%

Utilization Leverage Assumptions

29.4%

4.2

28.1%

3.6

1.3%

0.6

0.1%

0.1

SM

$112.5

$114.0

$142.2

$150.3

$172.36

$186.90

$201.99

$218.52

$235.52

$252.70

$270.02

$287.47

% sales

36.0%

29.4%

31.5%

30.0%

30.5%

30.4%

30.2%

29.9%

29.7%

29.4%

29.2%

28.9%

0.1%

0.3%

0.3%

0.2%

0.2%

0.2%

0.2%

0.2%

30.4%

30.2%

29.9%

29.7%

29.4%

29.2%

28.9%

28.7%

leverage effect
% sales

Operating Model:
2013A

2014A

2015A

2016A

2017A

2018A

2019A

2020A

Total Revenue

$566.5

$619.8

$675.5

$736.9

$800.8

$866.1

$932.8

$1,000.8

YOY Growth

13.2%

9.4%

9.0%

9.1%

8.7%

8.2%

7.7%

7.3%

$442.4

$481.3

$522.1

$567.9

$615.6

$664.1

$713.3

$763.3

78.1%

77.7%

77.3%

77.1%

76.9%

76.7%

76.5%

76.3%

$160.0

$177.9

$197.0

$219.5

$243.2

$267.6

$292.5

$317.9

28.2%

28.7%

29.2%

29.8%

30.4%

30.9%

31.4%

31.8%

$108.2

$120.5

$133.6

$149.1

$165.5

$182.4

$199.6

$217.1

19.1%

19.4%

19.8%

20.2%

20.7%

21.1%

21.4%

21.7%

Gross Profit
% Gross Margin
EBIT (ex- SBC)
% Margin
Adj Net Income (ex- SBC)
% Margin
EPS

$1.30

$1.45

$1.61

$1.80

$2.00

$2.20

$2.41

$2.62

13.4%

11.3%

10.9%

11.6%

11.0%

10.2%

9.4%

8.8%

CFF

$134.8

$156.1

$173.2

$193.2

$213.6

$234.7

$255.7

$277.2

CapEx

($36.8)

($37.2)

($40.5)

($44.2)

($40.0)

($43.3)

($37.3)

($40.0)

Main CapEx

($11.3)

($12.4)

($13.5)

($14.7)

($16.0)

($17.3)

($18.7)

($20.0)

FCFF

$98.0

$118.9

$132.7

$148.9

$173.5

$191.4

$218.4

$237.2

YOY Growth

ALGN guided to flat volumes sequentially in Q4. They commented that September/October was
slow but there has been a slight uptick recently. The weakness seems to be more pronounced in the GP
market as adults are putting off treatment. Its difficult to decipher whether Q3 weakness and Q4
guidance is disappointing due to macro or competitive issues. The latter would be more troubling. In an
effort to determine this I looked at historical market share gains within their adult market segment. If
ALGN continued to make similar share gains as they have in previous quarters then the market for adult
aligners must slowed to flat growth in Q3 and -5.7% in Q4 (see table below). While this is possible, it is
likely that ALGN is not gaining the same amount of share within the adult market. Going forward, I am
assuming slower share gains. I believe the company when they say the market was softer in Q3 for a
couple reasons. One, other companies have reported less doctor activity and more pronounced
vacations and two, DSOs continued to widen in Q3 as some customers were having difficulty providing
payments. This suggests some macro weakness.
ALGN US Adult Starts (000's)

Q1

Q2

Q3

Q4

2011A

Q1

Q2

Q3

Q4

47.3

50.6

49.5

53.2

200.6

55.4

60.8

55.3

56.2

227.7

17.5%

17.1%

20.2%

11.7%

5.7%

13.5%

382.5

98.5

104.0

92.5

91.5

386.5

5.4%

4.8%

6.1%

-0.5%

-5.7%

1.0%

52.44%

56.24%

58.46%

59.77%

61.44%

58.91%

1.40%

2.22%

1.31%

1.66%

% growth
Addressable Adult Opp (1/2 severity)

94.0

98.0

93.0

97.0

% growth
% share/penetration

50.32%

Share change/Q

51.63%

53.23%

54.85%

1.31%

1.59%

1.62%

2012A

Valuation & Timing

Valuation:
EV

Price

2012 Sales

2012 EPS

2013 Sales Growth

2013 P/E

SIRO

$3,180.0

$58.3

$975.0

$3.1

$1,050.0

3.0x

7.7%

17.1x

$3.4

9.7%

1.8x

XRAY

$7,180.0

$38.0

$2,920.0

$2.2

$3,040.0

2.4x

4.1%

15.5x

$2.5

10.9%

1.4x

EW

$9,710.0

$87.8

$1,890.0

$2.6

$2,140.0

4.5x

13.2%

27.3x

$3.2

25.8%

1.1x

ISRG

$20,400.0

$541.0

$2,150.0

$14.9

$2,500.0

8.2x

16.3%

30.9x

$17.5

18.0%

1.7x

DXCM

$840.6

$12.9

$94.0

$127.0

6.6x

35.1%

$912.0

VOLC

$1,430.0

$29.0

$386.0

$442.0

3.2x

14.5%

$0.5

ELGX

$762.0

$13.2

$105.0

$132.0

5.8x

25.7%

4.8x

16.7%

22.7x

16.1%

1.5x

$1,793.9

$26.0

$500.5

3.2x

13.4%

19.9x

16.4%

1.2x

$0.2

2013 Sales 2013 EV/Sales

Avg
ALGN

$1.1

$567.8

2013 EPS 2013 EPS Growth

$1.3

2013 PEG

ALGN trades in-line with a peer group of dental names and innovative MedTech names on a P/E
basis. The average PEG for these companies is 1.5x. I expect ALGN to have an EPS growth profile of 1114% over the next 3-5 years. This suggests a P/E in the high teens, or where it is today (especially when
one considers the $4 in cash). With a good couple quarters, however, I could see multiple expansion
that suggests a $30-$35 price or 25x (avg multiple over past two years). The company is introducing
SmartTrack at the beginning of 2013. It is a new material and could serve as a catalyst to improve
utilization among docs. A DCF suggests a value around $29. On the downside, I think 15x or a DCF with
a 14-15% discount rate makes sense. This suggests a value in the low 20s. Net-net, this is a name to
own and would buy it here and on weakness if it gets to the lower $20s. I think the Cadent business is a
free option at this point. They can always get rid of it.