October 2017

BUY | Align Technology (NASQ: ALGN) Updated April 2018

Price $245.23 3m Avg. Vol 737,190

Mkt Cap $19,663 EV/S 13.5x
EV $18,942 1yr Forward EV/S 10.5x
By Michael Roussel

Investment Thesis
Malocclusion (misalignment of teeth) treatment worldwide is expanding, owing to global increases in living standards and
export of esthetic standards via social media. Recent innovations in treatment planning software as well as clear aligner
technology, including vastly improved treatment quality, highly scalable` customized production, and faster treatments
poise clear aligners to transform the orthodontic profession and vastly expand the orthodontic treatment market. A) Align
Technologies possesses significant competitive advantages within the rapidly expanding clear aligner industry, namely
deeply entrenched brand recognition (Invisalign is synonymous with the entire clear aligner technology, an advantage akin
to “googling” something), vast market share, key patents, and, most importantly, the virtually irreplaceable intellectual
property on which their treatment planning processes are based. B) The company maintains a healthy balance sheet and
is governed by highly competent and proven management. C) Competition is largely sleepy-footed dental appliance
conglomerates far behind in tech and market penetration.

Variant Opinion
Underestimated Market Opportunity & Competitive Advantages: Mass customized production and advancements in
clear aligner technology prime the clear aligner market for disruption; Align’s unique and highly defensible ability to
provide a digital supply of orthodontic expertise, as well as customized mass production of aligners, offers to further
accelerate pre-existing underappreciated growth tailwinds for the malocclusion treatment market.
Why This Opportunity Exists: A) Align’s suite of products stands to massively transform the orthodontic industry, yet this
remains absent from company talking points as they are endeared to the orthodontic community. Orthodontics is known
for its “old school” mindset and resistance to change. B) The Street places this company among Medical Appliances &
Equipment. However, Align is a high growth SaaS/3-D printing company. C) Misunderstanding of current capabilities;
conflicting interests have produced conflicting research. Wikipedia’s current entry on clear aligners states: “They are not
suitable for use in complex orthodontic cases and cannot produce body movement”1. D) Current estimates of 2020 clear
aligner market imply underappreciation of expanded access from new technology and competition, predicting 2b market
by 20202. E) Misplaced view on competitive pressure and underappreciation of barriers to entry

Disproving the Bear Cases

Align will fail to capture an attractive share of the future clear aligner market: Align’s current 80% market share and
brand recognition will serve to maintain an attractive market share. Even if this market share were to decline dramatically,
increased penetration of a superior technology would serve to strengthen Align’s financials.
In-house production of clear aligners: Inferior plastics, labor-intensive, and unattractive economics if lacking scale
Align’s products will not displace traditional treatment methods
Align requires training before prescription: 14 dental schools, including NYU, Columbia, and UOP, graduate their
students Invisalign certified.
Orthodontists hold a negative view of Align: This is a classic game theory problem; as the economics for adoption
become even more attractive as others do not adopt, individuals lack sufficient incentive to band together.

Catalysts Risks
Continued earnings Highly exposed to fluctuations in global
Market realization of machine learning potential discretionary spending
Greater economies of scale through innovations Erosion of patent portfolio may lead to
in 3-D printing tech. greater-than-anticipated competition
Potentially unreceptive international markets
environment
Selected Historical Financials and Key Metrics
Income Statement
($) In Millions FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
Aligner Revenue 517 615 713 800 958 1,309
Scanners 43 45 49 45 122 164
Net Revenue 560 660 762 845 1,080 1,473
CONR 144 162 183 205 265 356
Gross Profit 416 498 578 640 815 1,117
SG&A 257 348 332 390 491 666
R&D 55 43 53 61 76 98
Operating Profit 86 94 193 189 249 354
Interest Income -1 -1 -3 -3 -6 11
Pretax Income 84 93 190 186 243 365
Taxes 26 29 45 42 51 130
Losses, net of tax 2 3
Net Income 59 64 146 144 190 231

Shares Outstanding 82 82 82 83 83 80
Net Income/Share 0.71 0.77 1.77 1.77 2.33 2.89

Gross Margin % 74% 75% 76% 76% 75% 76%

Operating Margin % 15% 14% 25% 22% 23% 24%
Net Margin % 10% 10% 19% 17% 18% 16%
Tax Rate 30% 31% 23% 23% 21% 36%

Balance Sheet
($) In Millions FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
Cash/CE 306 243 200 168 389 450
Marketable Securities 28 127 255 360 251 272
A/R 99 113 130 159 247 323
Inventories 15 14 16 19 27 32
Prepaids 37 19 20 27 38 81
Deferred Tax Assets 29 37
Total Current 486 545 657 732 953 1,157
MS LT 21 102 148 151 60 40
PP&E 79 76 90 136 175 349
Equity method investments 45 55
Goodwill & Intangibles 145 85 82 79 82 89
Deferred tax assets 22 16 3 51 68 50
Other 3 9 8 8 13 38
Total Assets 756 832 988 1,159 1,396 1,778

A/P 20 18 23 34 29 37
Accrued liabilities 74 80 88 108 134 194
D/R 62 77 91 130 191 267
Total Current 156 175 202 272 354 498
Income tax payable 18 30 38 45 114
Other LT liabilities 19 5 3 2 1 16
Total liabilities 175 198 235 311 401 627
Appendix I: Industry Overview & Relevant Market Contours
Malocclusion is a widely prevalent phenomenon, affecting up to 65-80% of the
Global Treatment Distribution
global population3. Roughly 10 million malocclusion treatment cases are
initiated each year. The geographic treatment distribution is heavily weighted
Europe,
toward North America, particularly the US4. Similarly, orthodontic professionals ME, Africa
North
America
are heavily concentrated within North America. US orthodontists average 226 20%
30%
new cases per year (note a SD of 83)5.

The global malocclusion market is estimated to grow at a 7% CAGR through

2023, with Asia Pacific at a 7.3% CAGR6. Meanwhile, the clear aligner market is South
estimated to grow at a 13% CAGR through 20227. However, current clear aligner America Asia
20% Pacific
volume growth indicates this figure likely underestimates penetration. 30%

75% of malocclusion patients are pre-teen/teenagers and 25% are adults. Notably, teen patients are typically more
complex as these cases incorporate dual movements of the teeth and skull.

Malocclusion treatment is a complex process which requires extensive medical knowledge and practical experience.
Treatment requires significant time investment as cases are completed over 12-24 months and are re-evaluated in-person
at regular intervals. Traditionally, treatment usually relies on the expertise of a single practitioner who plans out the
treatment process and applies metal wires and brackets to the teeth. While malocclusion is primarily treated by
orthodontists, general dentists may elect to provide orthodontic treatment. However, orthodontists spend less time on
treatments and achieve higher quality outcomes (96.7% satisfactory compared with 50%) than do general dentists8.

The orthodontic industry is increasingly trending toward adoption of digital workflows and custom clear aligners. Clear
aligners were introduced by Align Technology in 1998 and have historically faced strong opposition from the orthodontic
community over concerns about limited application and treatment quality. Several orthodontic professionals noted in our
conversations a cultural resistance to change within the profession. A 2017 Seminars in Orthodontics research paper
notes: “While research has been done in the area of clear aligners, much of the early research was focused on trying to
discredit the use of aligners as an option for orthodontic treatment except for minor crowding or spacing cases”9.
However, continued innovation by Align has lead to broader recent acceptance – see Appendix IV. Further, most graduates
of dental programs now receive Invisalign certification.

Appendix II: Align Technology Description and Investment Thesis

Align Technology was founded in 1998 and introduced Invisalign, a clear aligner alternative to traditional braces, to the
orthodontic market. Originally only offering to train orthodontists, Align opened sales to general practitioners (GPs)
following a 2000 class action lawsuit10. In 2011, Align purchased Cadent Systems for 190 million and introduced their iTero
scanner, an intra-oral scanner, as well as ClinCheck, their treatment planning software. Client orthodontic and dental
practices create digital impressions with the iTero scanner, from which Align constructs treatment plans. Clients are
provided with software to visualize and adjust treatment plans in a virtual model – forming a collaborative process.

(a) Ortho /GP Treatment planning facility

sends materials
to Align
(b) Align
treatment plan is
proposed Manufacturing facility
(c) Align and
Ortho/GP
continually modify
treatment plan
until approval Orthodontist / GP
 Practitioners use the iTero or other 3rd party scanners to create digital impressions, which are then sent to an Align
treatment planning facility where a treatment plan is constructed and proposed to the client. After continual
collaboration, the treatment plan is finalized and Align produces and ships the customized clear aligner from their
manufacturing facility in Juarez, MX, which houses the world’s largest 3-D printing operation, producing upwards of
300,000 custom aligners per day. Align 3-D prints molds and thermoforms the clear aligner on top of the mold. As each
aligner is made on an as-needed basis, Align maintains a very small amount of inventory.

ClinCheck allows practitioners to evaluate all past and future stages throughout treatment to evaluate the biomechanical
feasibility of treatment and analyzing pathways through which the teeth move during simulated treatment11. Ex. If a
practitioner wants to see what this particular patient’s case would look like from start to finish with one operation vs
another, they could actually visualize that comparison. Additionally, treatment planning software can be used as a
consultation device to clearly demonstrate intended treatment, as a communication tool to easily share the treatment
plan with referring doctors, and verifying that the aligner is tracking.

Align owns the IP from the malocclusion treatment process – they collect, store, and analyze this data to improve the
efficacy of their products. Align owns the world’s only mass data depository on malocclusion treatment. They have
released, on average, a new iteration of their treatment planning software once every 1.5 years over the last 8 years.

Align’s treatment planning process involves cross-reference to nearly Align Completed Cases
five million previously completed cases. Like other machine-learning
processes, output quality is positively related to quantity and quality of
input data. Higher quality offerings stimulate demand which increases
the rate of inputs and ultimately creates a feedback loop. The street has
missed that Align has essentially built and continues to develop a
machine learning algorithm to increasingly automate malocclusion
treatment – further, this has massive applications in international
markets flush with GPs but lacking experienced orthodontists. Yet
owing to historical difficulties with the orthodontic community, Align is
reluctant to yet publicly stress this industry-disrupting capability they Digitally Submitted Cases
have developed. Align delicately phrases their value-add as: “We
continuously upgrade our proprietary, three-dimensional treatment 300 100%
planning software to enhance computer analysis of treatment data and 250
200
to reduce time spent on manual and judgmental tasks for each case”12. 150 50%
Align is currently completely reliant on acceptance by the orthodontic 100
50
community and orthodontic professionals are generally resistant to
0 0%
change – management essentially walks a tightrope to not perturb the Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417
orthodontic community while also heavily investing in their disruptive Digital Non Digital % Digitally Submitted
capabilities. In general, orthodontists lack faith in general dentists
ability to perform orthodontic services – Align is already guilty of orthodontic heresy for offering their products to GPs and
being complicit in low-quality cases. Thus Align must walk this tightrope wherein they stress their treatment planning
software provides ease of use yet are reluctant to stress automotive capabilities. They cannot outright say “we are making
orthodontics easier to perform for non-orthodontists”, which would be tantamount to an orthodontic existential threat.

Orthodontist Dr. Ben Burris’ “Orthodontists are like Taxi Drivers” piece on his widely read blog well describes the
professions general resistance to change13. Another orthodontist, Dr. Marc Ackerman, commented in an interview:
“Orthodontists completely dismissed clear aligners when they entered the marketplace. Although many of the leading orthodontists
are using aligners, there is still tremendous resistance to them. The crux of the issue goes back to “fixing bites” versus “fixing smiles””14.
 Further, Align’s exclusive supply agreement and 19% stake in SmileDirectClub, a DIY orthodontic treatment company,
has also been negatively received by the industry. The American Dental Association, the largest professional dental
association in North America, passed a 2017 resolution statement “strongly discouraging” such DIY treatment methods15.
The American Assoication of Orthodontics have lodged complaints in 36 states.

Adoption faces short-term obstacles due to logistical and cultural reasons – orthodontic treatment typically takes 12 –
24 months and practitioners do a small amount of cases before rapidly adopting. While most dental graduates now
graduate with Invisalign training, the majority of the professional has been more difficult to penetrate, as with any new
technology. The incumbent older generation isn’t used to this technology as they weren’t exposed in university and would
had to have individually sought additional training. Journal of Dental Education writes in 2007 “as most clinicians did not
learn about clear aligner treatment in dental school or orthodontic training, clinicians would benefit from taking
standardized, sequential levels of education before using this approach”16. A 2010 study by the Angle Society found that
over 50% of both orthodontists and GPs in a sample of Invisalign providers around Stony Brook University indicated that
were not comfortable understanding how Invisalign works17.

However, as Align continues to innovate and produce value-add that is hugely beneficial to individual practice economics,
disruption appears inevitable.

Disruption of the Traditional Malocclusion Treatment Market

Traditionally, treatment is a highly unique and personalized process whereby a professional with years of training
individually assesses a case and conducts treatment with a toolbox of metal wires and brackets. Align essentially offers a
digital supply of crowdsourced orthodontic expertise, combined with more precise and effective treatment processes that
are preferred by consumers.

Invisalign products continue to rapidly realize their potential in malocclusion treatment. As most cases tend toward
greater complexity, each required a unique and personalized approach that seemed to prevent any kind of mass
production. Align’s vast data repositories enable a digital supply of orthodontic expertise, serving to massively expand the
accessibility of treatment, that consistently learns and improves. For example, 30-45% of teen cases (23-34% of all cases)
require Class II correction – Align completed development of the only clear aligner capable of treating Class II in Q117,
rolled out in international markets, and currently pending 510(k) approval in the US. Further, Align’s highly scalable 3-D
printing facility allows for mass customized production. The use of plastics rather than metal brackets is not only preferred
by consumers, but also allows for more effective control over tooth movements – in fact, Align’s SmartTrack polymer
allows for typical treatments to be completed in 50% of the time. This dramatically reduces actual “chairtime” within
practices – thereby increasing patient turnover and increasing practice profitability. Additionally, as Align continues to
amass data and provide more accurate and effective treatment plans, doctors providing Invisalign need devote less time
to each case. If quality is increasingly indistinguishable, orthodontists and GPs will inevitably choose a product their
patients prefer, automates portions of their workflow, and improves the economics of their practice.

Further, despite facing obstacles from entrenched opinion on Invisalign by older-generation orthodontists, Align is able
to apply pressure on their customers by also marketing to the customers of their customers – a somewhat unique and
advantageous marketing position.

We can already observe the trend taking hold; North American Orthodontists
Orthodontist case volume is indicative of
acceptance by the orthodontic community as In Thousands FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
well as an ability to perform increasingly Case Volume 137 160 177 215 257 303
complex cases. The utilization metric is
Doctor Count 4.6 4.9 6.4 6.8 7.0 6.5
Cases/Doctors; as newly trained orthodontists
initially take on few Invisalign cases, increases Utilization 29.6 32.3 27.7 31.8 36.6 46.6
in doctor count expectedly depresses the utilization figure. Yet we observe both statistics rising in tandem – indicating
that although we’re observing a rapid increase in doctors beginning to treat with Invisalign, incumbent orthodontists are
rapidly taking on more Invisalign cases.

International Expansion
As Align amasses data and continues to improve their automated treatment plans and user-friendly software, the
required expertise and training to perform orthodontics procedures will soften. This is an ideal product for the
international dynamics at play; malocclusion treatment demand is accelerating amid globalizing beauty standards and
increasing standards of living, yet the international professional market largely lacks the necessary supply of technical
expertise to meet and further accelerate these tailwinds.

Through international expansion Align can provide customers with service in their own language while in the same time
zone. Moreover, Align has expressed intent to develop specific algorithms for each country as there are slight nuances in
how different countries move teeth. Margins will even lift in mid-to-long term as freight costs decline. With highly scalable
and asset-light manufacturing facilities, Align will enjoy a relatively capex light international expansion. Align manufactures
the aligners with 3D Systems’ Figure 4 printer – the first scalable factory solution18.

In 2017 Align expanded beyond their sole treatment planning facility in San Jose, Costa Rica and opened additional
facilities in Chengu, China and Cologne, Germany.

Align’s long-term international expansion plan entails 6 treatment planning facilities in EMEA, 3 treatment planning
facilities in APAC, as well as an order acquisition and fabrication facilities in EMEA, APAC, and Japan.

Competition
Align Technology competes in clear aligners, intra-oral scanners, and treatment planning software. These areas often
overlap as industry participants vie to construct a value-add which incorporates all three.

Dental conglomerates Dentsply Sirona (NASQ: XRAY) and Straumann Holding AG (Swiss: STMN) are commonly cited as
major competitive threats, complete with their own suites of products across the three competitive arenas. Dentsply
Sirona operates MTM, their own clear aligner brand, and intends to pursue treatment planning software acquisitions.
Analysis of participating MTM practices finds 5,159 dental and 523 orthodontic practices, largely only US presence
excepting a small number of Canadian practices. Meanwhile, ClearCorrect had 15,000 providers in 2017 and shipped
80,000 cases since inception in 200619. ClearCorrect has only 200 employees.

A look at the practitioners offering MTM and ClearCorrect reveals penetration lightyears behind Align (see Figure 1).

Figure 1 2017 Providers

20
MTM ClearCorrect21 Invisalign
Ortho 436 8%
GP 4,566 80%
US 5,002 88%
Ortho 87 2%
GP 593 10%
Canadian 680 12%
N. America 5,682 15,000 35,923 56%
International 27,918 44%
Total 5,682 100% 15,000 100% 63,841 100%

Note: While we do not know if all 5,680 doctors received MTM cases, we nonetheless compare the figures to
Align’s receiving doctors (rather than total trained).
 Both Dentsply Sirona and Straumann Group mainly focus on GP customers. While this segment is more accessible,
especially given their pre-existing networks, and allows for short-term penetration, advancements on treatment speed
and efficacy as well as development and roll-out of treatment planning software are integral components to cultivating a
convincing value-proposition which competes with incumbents and results in some staying power in the clear aligner
market. It is important to remember that most cases tend toward greater complexity. These customers don’t lend
themselves to quality inputs that allow for the R&D required for such treatment planning software – no matter how many
cases are completed, if they are poorly done these companies will not be able to develop the same automotive functions
as within Align’s ClinCheck. These significant differences in the use of Invisalign by orthodontists and GPs are well
documented – “general dentists were more willing to treat more complex malocclusions with Invisalign, spend less time
on the patient’s digital treatment plan, and use fewer auxiliaries during treatment, perhaps demonstrating a difference in
treatment goals”22. Further, competitors simply cannot produce clear aligners that can match the speed and precision of
Align’s patented SmartTrack without massive R&D spend paired with a wealth of treatment data.

There is considerable overlap on practices listed on both MTM and ClearCorrect referral systems yet most practice
webpages only list Invisalign under their clear aligner services. Cheap aligners compete against one another – this is the
truly fiercely competitive arena. Any patient seeking “clear aligners” and looking to their providers webpage will only be
greeted with the same ubiquitous clear aligner product Invisalign.

The remaining competitive edge is price, which will continue with greater aggression as Align’s patent portfolio erodes
over the coming years. Practitioners induced to begin clear aligner treatment from price alone, while ignoring the strong
advantages of the Invisalign product, will not lend themselves to the quality inputs that underlay Align’s competitive
advantage. In short, competitors must access a stream of quality cases to develop competitive assistive products. Yet they
must first stimulate demand to induce such a stream – here lay the problem. As the market matures these inferior products
will legitimize the market while also continue to be understood as cheaper alternatives in an arena wherein consumers
are regularly make significant personal investment and have lower price sensitivity due to insurance.

Align contributes to this competitive arena through their investment (a 19% equity stake) and exclusive supply agreement
with SmileDirectClub, one such cheap aligner competitor (note: cases which are too complex for SDC are referred to
Invisalign providers). This investment is hardly cannibalistic as most SDC customers were unlikely to seek traditional
treatment methods. SDC competes directly with US-based Candid Co23.

Additionally, competitors must also gain acceptance by the orthodontic community; Align’s products remain the only
clear aligner product widely used by orthodontists. Align makes significant investment in university research and graduates
from most top dental schools receive Invisalign certification.

Some orthodontists push towards in-house production of clear aligners and 3-D printer product offerings have surfaced,
notably from Stratasys24 (NASQ: SYSS) and Align’s printer supplier 3D Systems (NASQ: DDD). Yet this demonstrates a
fundamental misunderstanding of the manufacturing process as well as current technological limitations. Not only cost-
prohibitive absent adequate scale, manufacture of clear aligners requires manual labor-intensive finishing of aligners as
well as use of less-efficient plastics. In-house aligners cannot compete with Align’s massive materials science R&D spend,
which recently yielded patented SmartTrack – by far the most advanced plastic available on the market, nor the cost-
effectiveness of a largely automated manufacturing process.

Predictable movements rely on relatively elastic plastics which also apply constant force over time. Single layer plastics
are of far greater stiffness and exhibit quicker and more significant stress decay25 than multi-layer plastics such as
SmartTrack.
 Other product offerings include 3M and 3Shape’s clear aligner/bracket hybrid solutions. These represent efforts to
remain aesthetic and offer high quality treatment outcomes – however, these efforts sacrifice focus on the true endpoint
for sake of focusing on a technological midpoint. The products indicate a lack of technological advancement while also
failing to focus on the preferences of the end consumer for sake of the intermediary consumer (practitioners).

Align is uniquely positioned to enjoy durable demand from practitioners as their value-add cannot be matched without
replicating their data depository, a process which takes years and would far more difficult for competitors than Align, a
rare true first-mover advantage. Align’s technological advantages serves to continue to competitively isolate them – now
in the largest segment: teens, as 40% of this cohort (affected by Class II) is near-exclusively open to Align. Moreover,
orthodontists are most likely to offer clear aligners as they are bombarded with requests from their patients; Invisalign is
near-synonymous with the entire clear aligner technology, an advantage akin to “googling” something.

Conclusion
While I anticipate there will be few losers in the clear aligner market in the coming years, Align Technologies continues
to uniquely possess the technological development to be wholly accepted by the orthodontic community as well as the
distinguished value-add, made up of practice economics and automotive features, to present a highly compelling and
defensible product and investment opportunity.

Align addresses three market pain points: 1) lack of international orthodontists stunting growth of global malocclusion
treatment market 2) general dentists provide consistently slower and inferior treatment 3) treatment becomes more
accurate as practitioners no longer mentally envision the treatment process nor personally apply metal wires and
brackets but rather adjust plans on 3-D visualization software and utilize highly accurate clear aligners.

Align’s long-term value is a standardization of malocclusion treatment. In the long-term bear scenario, in-house
production of aligners becomes feasible and widely adopted as 3D printing and material capabilities increases, yet
practitioners still rely on Align’s vast data depository of orthodontic expertise to aid in automating their workflow.

Other reasons to like Align:

Management
In 2016 CEO Joe Hogan said of company focus: “we want to sell clear aligners. I don't want to be a general
dentistry company. They can hire another CEO if they want to build a general dentistry company here. When
you're 7% penetrated with these kind of margins in this kind of a marketplace, it would be crazy for us to move
into other items … that's why we have iTero. Not to be in the scanner business, but to use it to help us to sell
more aligners”26
Joe Hogan was just previously CEO of ABB, a 50b mkt cap Swiss power and automation company
Zelko Relic, CTO and VP of R&D, was just previously VP of Engineering at Datalogic Automation.

Appropriate incentive structure with payouts tied to profitability (revenue and operating income) and long-term
performance metrics (product adoption). CEO must own 5x annual salary and other execs must own 2x annual
salary. Bonuses are capped at 240% base. Mix of RSU and MSUs.

Align Technology is the only clear aligner pure-play.

Appendix III. Model and Valuation
Revenue Model
Historical Forecasted
In Millions FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023
Total Market Size 9 9 10 10 11 11 12 12 13 14
% Total Applicable 45% 45% 50% 59% 67% 75% 80% 82% 84% 86%

Available Market 4 4 5 6 7 8 9 10 11 12
Align Cases 0.48 0.58 0.71 0.98 1.27 1.62 2.02 2.53 3.03 3.64
% of AM cases 12% 14% 15% 16% 18% 20% 22% 25% 28% 30%

% of TM cases 5% 6% 6% 10% 12% 15% 17% 21% 23% 26%

ALGN Share of CA 80% 80% 80% 80% 80% 78% 75% 73% 70% 67%
CA Cases 0.60 0.73 0.89 1.22 1.59 2.06 2.68 3.49 4.36 5.45
% of AM cases 15% 17% 18% 21% 22% 25% 29% 35% 40% 45%

% of TM cases 7% 8% 9% 12% 15% 19% 23% 28% 33% 39%

Aligner Revenue 666 749 896 1,227 1,599 2,039 2,488 3,110 3,641 4,370
Non-case 46 51 63 82 112 143 174 218 255 306
Total Aligners 712 801 959 1,309 1,711 2,182 2,662 3,328 3,896 4,676
Scanner Revenue 49 45 122 164 205 262 319 399 468 561
Total Revenue 762 846 1,081 1,473 1,917 2,444 2,982 3,727 4,364 5,237
CAGR 26%

Model Drivers

Rev/Case 1,394 1,285 1,264 1,257 1,260 1,260 1,230 1,230 1,200 1,200

Market Growth 4% 4% 4% 4% 5% 5% 6% 6% 7%
Aligner Volume Growth 22% 22% 38% 30% 28% 25% 25% 20% 20%
CA Volume Growth 22% 22% 38% 30% 30% 30% 30% 25% 25%

% of Aligner Revenue
Scanners 7% 6% 13% 12% 12% 12% 12% 12% 12% 12%
Non-case 6% 6% 7% 7% 7% 7% 7% 7% 7% 7%
 ALGN FY 2020 Revenue
Market Size 12 Clear Aligner share of TM
Rev/case 1,230 20% 23% 25% 28% 30%
68% 2,371 2,780 2,964 3,260 3,557
Mkt Share 70% 2,459 2,766 3,074 3,381 3,689
of Clear 73% 2,397 2,865 3,184 3,502 3,820
Aligners 75% 2,480 2,964 3,293 3,623 3,952
78% 2,562 3,063 3,403 3,743 4,084

Shares Out 80m

Implied ALGN per-share value
Multiple 8x Forward Price-to-Sales 8x
237 278 296 326 356
246 277 307 338 369
240 287 318 350 382
248 296 329 362 395
256 306 340 374 408

Current
Premium to Current Valuation
Price $193.60
24% 46% 55% 71% 86%
29% 45% 61% 77% 93%
25% 50% 67% 83% 100%
30% 55% 72% 90% 107%
34% 60% 78% 96% 114%
 Income Statement
Historical Projected
In Millions FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023
Net Revenue 762 845 1,080 1,473 1,917 2,444 2,982 3,727 4,364 5,237
CONR 183 205 265 356 460 586 716 895 1,047 1,257
Gross Profit 578 640 815 1,117 1,457 1,857 2,266 2,833 3,316 3,980
SG&A 332 390 491 666 862 1,100 1,342 1,677 1,964 2,356
R&D 53 61 76 98 134 171 209 261 305 367
EBITDA 193 189 249 354 460 586 716 895 1,047 1,257
D&A 18 18 24 38 57 73 89 75 87 105
EBIT 176 171 225 316 402 513 626 820 960 1,152
Interest (expense) income -3 -3 -6 11 19 24 30 37 44 52
Pretax/equity losses income 190 186 243 365 479 611 745 932 1,091 1,309
Taxes 45 42 51 130 144 183 224 280 327 393
Equity (losses) Income -2 3
Net Income 146 144 193 231 335 428 522 652 764 916

Capital expenditures -24 -53 -71 -196 -192 -244 -298 -298 -305 -367

Key Metrics and Drivers

COGS / sales 24% 24% 25% 24% 24% 24% 24% 24% 24% 24%
SG&A / sales 44% 46% 45% 45% 45% 45% 45% 45% 45% 45%
R&D / sales 7% 7% 7% 7% 7% 7% 7% 7% 7% 7%
D&A / sales 2% 2% 2% 3% 3% 3% 3% 2% 2% 2%
Interest / sales 0% 0% -1% 1% 1% 1% 1% 1% 1% 1%
Capex / sales -3% -6% -7% -13% -10% -10% -10% -8% -7% -7%

GM 76% 76% 75% 76% 76% 76% 76% 76% 76% 76%
EBITDA margin 25% 22% 23% 24% 24% 24% 24% 24% 24% 24%
EBIT margin 23% 20% 21% 21% 21% 21% 21% 22% 22% 22%
GAAP net margin 19% 17% 18% 16% 18% 18% 18% 18% 18% 18%

Tax rate 23% 23% 21% 36% 30% 30% 30% 30% 30% 30%
Appendix IV: Key Historical Metrics
Case Volume
In Thousands FY2014 Q115 Q215 Q315 Q415 FY2015 Q116 Q216 Q316 Q416 FY2016 Q117 Q217 Q317 Q417 FY2017
Ortho 177.2 49.2 53.0 55.9 56.7 214.7 60.8 63.6 66.0 68.2 258.5 77.5 85.5 87.1 89.1 339.2
GP 161.3 41.8 46.7 45.4 49.7 183.6 49.6 51.3 49.9 54.4 205.2 55.3 61.0 57.8 63.2 237.2
Teen 22.8 24.5 30.1 26.6 104.0 26.0 28.1 33.4 30.8 118.3 34.3 39.6 46.1 41.7 161.7
Adult 68.3 75.1 71.2 79.8 294.4 84.5 86.8 82.4 91.7 345.4 85.4 106.9 98.8 110.5 401.7
Total NA 338.5 91.1 99.6 101.3 106.4 398.4 110.5 114.9 115.9 122.6 463.8 132.9 146.5 144.9 152.2 576.5

APAC 69.4 22.2 24.1 23.2 26.9 96.4 29.9 34.2 33.5 36.5 134.1 43.5 49.4 52.7 59.4 205.0
EMEA, other 70.1 17.5 20.8 23.0 27.1 88.4 23.3 27.9 28.4 31.0 110.6 31.7 36.0 38.5 43.4 149.6
Teen 7.7 8.9 10.5 10.2 38.7 11.2 12.0 14.3 13.2 50.7 14.7 15.6 23.7 21.7 75.8
Adult 32.0 36.0 35.7 43.8 146.1 42.0 50.1 47.6 54.3 194.0 60.5 69.8 67.5 81.1 278.8

Total International 139.5 39.7 44.9 46.2 54.0 184.8 53.2 62.1 61.9 67.5 244.7 75.2 85.4 91.2 102.8 354.6

Total NA 338.5 91.1 99.6 101.3 106.4 398.4 110.5 114.9 115.9 122.6 463.8 132.9 146.5 144.9 152.2 576.5
Total International 139.5 39.7 44.9 46.2 54.0 184.8 53.2 62.1 61.9 67.5 244.7 75.2 85.4 91.2 102.8 354.5
Total Teen 117.3 30.5 33.4 40.6 36.8 141.4 37.2 40.1 47.7 44.0 169.0 49.0 55.2 69.8 63.5 237.5
Total Adult 360.7 100.3 111.1 106.9 123.6 441.9 126.5 136.9 130.0 146.0 539.4 145.9 176.7 166.3 191.6 693.5

Total Case Volume 478.0 130.8 144.5 147.5 160.4 583.3 163.7 177.0 177.7 190.0 708.4 194.9 231.9 236.1 255.1 931.0

Receiving Doctors
In Thousands FY2014 Q115 Q215 Q315 Q415 FY2015 Q116 Q216 Q316 Q416 FY2016 Q117 Q217 Q317 Q417 FY2017
Ortho 6.4 5.5 5.6 5.6 5.7 6.8 5.8 4.7 5.9 6.0 7.1 6.2 8.0 6.3 6.4 7.3
GP 23.4 14.4 15.6 15.7 16.0 24.8 16.5 15.5 16.6 17.0 27.0 17.8 19.7 18.6 19.1 28.9
NA Receive 29.8 20.2 21.3 21.2 21.8 31.6 22.4 20.2 22.6 23.0 34.1 24.0 27.7 25.0 25.5 36.2
International 13.4 9.1 9.8 10.2 10.9 16.5 11.3 12.5 12.7 13.6 20.4 15.0 16.6 17.9 19.8 27.9
Total receive 43.2 29.2 31.1 31.3 32.7 48.1 33.7 32.7 35.3 36.7 54.5 38.9 44.2 42.8 45.3 64.1

Utilization
(Volume/Doctors) FY2014 Q115 Q215 Q315 Q415 FY2015 Q116 Q216 Q316 Q416 FY2016 Q117 Q217 Q317 Q417 FY2017
Ortho 27.7 9.0 9.5 9.9 9.9 31.8 10.4 13.6 11.1 11.3 36.6 12.6 10.7 13.8 14.0 46.6
GP 6.9 2.9 3.0 2.9 3.1 7.4 3.0 3.3 3.0 3.2 7.6 3.1 3.1 3.1 3.3 8.2
NA 11.4 4.5 4.7 4.8 4.9 12.6 4.9 5.7 5.1 5.3 13.6 5.5 5.3 5.8 6.0 15.9
International 10.4 4.4 4.6 4.6 5.0 11.2 4.7 5.0 4.9 5.0 12.0 5.0 5.2 5.1 5.2 12.7
Total 11.1 4.5 4.6 4.7 4.9 12.1 4.9 5.4 5.0 5.2 13.0 5.3 5.2 5.5 5.6 14.5
Digitally Submitted Cases
In Thousands FY2014 Q115 Q215 Q315 Q415 FY2015 Q116 Q216 Q316 Q416 FY2016 Q117 Q217 Q317 Q417 FY2017
Cases 8.0 9.4 12.8 13.5 16.8 52.5 21.7 27.2 31.6 41.9 122.5
Internat'l Sub Rate 15% 18% 21% 22% 25% 21% 29% 32% 35% 41% 35%

Cases 109 34 39 41 42 157 48.5 53.4 56.6 62.9 221.4 72.3 86.9 89.7 97.6 346.4
NA Sub Rate 32% 38% 39% 41% 40% 39% 44% 47% 49% 51% 48% 54% 59% 62% 64% 60%

Total Cases 50.2 57.9 66.2 70.1 79.7 273.9 94.0 114.1 121.2 139.5 468.9
Case Sub Rate 31% 35% 37% 39% 42% 39% 48% 49% 51% 55% 50%

Simplified Annual Table

Cases, Utilization, Doctors
In Thousands FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
Ortho 137 160 177 215 257 303
GP 140 154 159 183 205 219
NA Total 277 314 339 398 465 522
International 87 109 140 185 245 355
Total Case Volume 364 422 478 583 709 876
CAGR 19%

Ortho 4.6 4.9 6.4 6.8 7.0 6.5

GP 21 22 23 25 27 27
NA Total 25.2 27.0 29.4 31.5 34.0 33.2
International 9 11 13 17 20 28
Total Doctors 34.5 37.8 42.8 48.0 54.4 61.1
CAGR 12%

Ortho 29.6 32.3 27.7 31.8 36.6 46.6

GP 6.8 7.0 6.9 7.4 7.6 8.2
NA Total 11.0 11.6 11.5 12.6 13.7 15.7
International 9.3 10.0 10.4 11.2 12.0 12.7
Total Utilization 10.5 11.2 11.2 12.1 13.0 14.3
CAGR 6%
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