Align Technology is market leading provider of clear aligner trays, listed on the NASDAQ. The business is known as the inventor of Invisalign, but also provide digital dental solutions via their intraoral scanners, iTero, and dental software, ClinCheck and Exocad. 
- Population growth and rising middle classes are driving growth in the orthodontic industry.
- Clear aligners are stealing market share from traditional metal braces.
- Invisalign holds a dominant position as the premium operator in the clear aligner market, due to their IP developed over the last 25 years in the industry.
- Align Technology’s ancillary digital products will further develop a moat around Invisalign and add another fast-growing revenue stream.
Align Technology split their portfolio into two divisions: Clear Aligners and Scanners & Services. Clear aligners make up 85% of group revenue via the Invisalign product. Invisalign trays are a premium alternative to traditional metal braces and differ from in that they can be fitted by dentists (not just orthodontists), are removable, are more aesthetic/comfortable and require less consultations/maintenance.
Clear Aligner brands vary in the complexity of malocclusion cases (misaligned teeth) that they can correct. Invisalign, as the most advanced solution, dominates the clear aligner market with 81% market share. This is because each case is overseen by a dentist or orthodontist (referred to here on out as doctors) allowing Invisalign to solve 90% of malocclusion cases. Invisalign is sold directly to doctors who pay an upfront ‘lab fee’ per patient of c.$1,200.
Align Technology generate 15% of group revenue through the scanners & services (S&S) division. 10% of group revenue is derived through the sale of iTero scanners and 5% through recurring sources such as software subscriptions, PPE disposables, device rentals and pay-per-scan contracts.
The iTero is a handheld oral scanner that creates 3D images of a patient’s mouth. Scanners are a cheaper and more efficient way of making moulds and their images are used to identify areas of decay, design templates for restorative items (such as crowns, veneers, etc) and submit clear aligner cases for Invisalign. The iTero is the most common scanner amongst dental practises in the USA, with c.40% market share, and will only submit clear aligner cases for Invisalign, not rivals.
The business provides the total number of cases (split into the Americas and RoW) and the number of active doctors (prescribed at least one case of Invisalign in the 12-month period).
Total Invisalign case numbers have increased at a 5-year CAGR of 23%, driven by international expansion. Revenue per case, or the lab fee, has declined as doctors receive discounts depending on the number of cases submitted.
The active doctor base has expanded at a 5-year CAGR of 16%, while also generating 7% more revenue per doctor. Revenue per doctor has increased due to additional cases per doctor and iTero sales/software subscriptions.
Route to Market
To prescribe Invisalign, doctors must attend a one-day course. To-date, the business has trained over 190k doctors, 102k of which were active in 2020. Doctors are ranked on the MyInvisalign App depending on the number of cases submitted in a 6-month basis. Top ranked doctors receive the highest customer traffic and discounts on lab fees/iTero machines of up to 46%.
Align Tech’s current focus is on partnering with Dental Service Organizations (DSO’s). DSO’s are large collections of dental practises that are consolidating the market. In 2018, UBS estimated that DSO’s represented 14% of all dental practises in the US but was expanding at a CAGR of 15%. DSO’s are generally more profit focused than individual practises, so Aligns ability to offer bulk discounts on an end-to-end digital platform makes for an appealing exclusive partnership. So as DSO’s expand, so does Invisalign’s monopoly.
Align Technology has partnered with LendingPoint, a digital direct lender. This gives doctors the ability to offer patients finance plans for Invisalign. These plans increase sales and TAM by bringing in users who previously were offput by the large upfront cost. It also makes Invisalign more appealing to doctors by removing the hassle of collecting payments from patients and reducing the time needed to re-coup the costs of the upfront lab fee.
The WHO list the total number of dentists worldwide as 2.5m with 900k in OECD countries. With 190k trained as of FY20, the business has trained 7.6% of their global TAM.
The clear aligner market was estimated to generate $2.6bn of revenue in 2020 and grow at a CAGR of 27.3% until 2028. Invisalign generated $2.1bn from clear aligners in 2020, suggesting a revenue market share of 81%.
Management estimate that 15m people start orthodontic work annually. 11m, or 73%, of these starts are teenagers and 4m, or 27%, are adults. Management estimate that their current market share amongst annual starts is 6% for teens and 30% for adults. The expansion into the teen market is key area of growth for the business.
Currently Invisalign can be used in 90% of malocclusion cases, suggesting a TAM of 13.5m annually. As clear aligner technology improves to handle increasingly complex cases, its TAM will expand stealing market share from traditional metal braces. With 1.65m cases achieved in 2020, Invisalign sells to 12.2% of current applicable annual starts.
60-75% of the world’s population, or c.5bn people, currently suffer from malocclusions. However, most live-in places where orthodontic work is unavailable/too expensive or they are put off by the idea of traditional metal braces. Management estimate that beyond the 15m starts annually, there is an additional pipeline of 500m potential customers in developed countries who can afford clear aligners but would not use braces. To date the business has sold trays to 10.9m patients, suggesting 2% penetration of their maximum market.
ASP has declined at a CAGR of -1%. Gross Cost per case increased in 2018-2020 due to an upgrade in material used and additional trays per patient. This is in line with the businesses plan to expand TAM by fixing more complex malocclusion cases. On average fixed costs have been 34% of revenue, though have trended downwards from 2016 due to economies of scale. The rise in 2020 is a result of lower-than-expected volume sales.
Going forward management have guided for 3-5 year growth targets of:
- Revenue Growth 20-30%
- Operating Margin 25%-30%.
- Free Cash Flow Margin 20%-25%.
The balance sheet is relatively clean with $5.4bn of total assets and $2bn of liabilities. The business has no long-term debt instruments and $1bn of cash. The business does not pay dividends but engages in share buybacks.
In our opinion, Align Technology is a high-quality business with a strong defensive edge that operates in a fast-growing, underpenetrated industry.
As the innovator of clear dental aligners, the business utilized their first mover advantage to achieve scale and, in the process, become the largest 3D printing operation and highest valued dental business in the world. This monopoly allowed investment into ancillary products, so the business is now pivoting from an orthodontic device manufacturer to an end-to-end digital dental platform that monetises patients at every stage of their restoration treatment.
While Invisalign is dominant in the clear aligner market, the majority of malocclusion cases are still handled by traditional metal brackets. Hence, there is significant room to expand both amongst the 500m potential customer pipeline and the 15m recurring annual starts.