Sector

Healthcare

Background

Nick Greenfield is the CEO of Candid, an e-commerce solution to teeth aligners. We cover how Invisalign has come to dominate share in the clear aligner industry, the unit economics across the value chain of orthodontics, and the potential avenues for Invisalign to continue its growth.

Cover

Date

June 2, 2021

Episode Number

11

Invisalign Business Breakdown

Background / Overview

Align Technology, headquartered in San Jose, California, was founded in 1997 by Zia Chishti and Kelsey Wirth. The company pioneered the clear aligner market with its flagship product, Invisalign, which offers a discreet alternative to traditional wire-and-bracket braces. Initially focused on clear aligners, Align has expanded into a multi-product company, incorporating intraoral scanners (iTero) and dental CAD/CAM software (Exocad). Invisalign revolutionized orthodontics by leveraging computer-aided design (CAD) and 3D printing, marking one of the earliest applications of 3D printing in medical devices. Today, Align is the world’s largest 3D printing company by volume, producing millions of aligners annually.

The company operates globally, serving both orthodontists (60% of case starts) and general practice (GP) dentists, with a significant presence in North America, China, Brazil, and Europe. It employs a direct salesforce, bypassing traditional dental distributors like Henry Schein and Patterson, and has established manufacturing in Juarez, Mexico, and digital treatment planning operations in Costa Rica, Spain, and Germany. Align’s business model is characterized by high margins, recurring revenue, and a vertically integrated value chain, positioning it as a medical device company with software and hardware components.

Ownership / Fundraising / Recent Valuation

Align Technology is a publicly traded company with a market capitalization approaching $50 billion as of the podcast date. Historically, the company faced litigation from competitors like Danaher’s subsidiary (now Envista), which settled in 2009, granting Envista a 10% stake at a time when Align’s stock was trading at $10–$12 per share. No specific details on recent fundraising or private equity ownership are provided, but Align’s robust market cap reflects strong investor confidence. The company’s valuation is driven by its dominant position in the clear aligner market, consistent revenue growth, and high EBITDA margins, though it trades at a premium due to its growth profile and market leadership.

Key Products / Services / Value Proposition

Align Technology offers three core products:

1. Invisalign Clear Aligners:
• Description: Transparent plastic aligners that move teeth through a series of customized trays (20–50 per treatment). Invisalign uses CAD and 3D printing for precise, predictable tooth movement.
• Volume: Over 2 million annual case starts globally, approaching 3 million in 2021, up from less than 1 million five years prior.
• Price: Sold to doctors for $1,200–$2,000 per case, with consumer prices averaging $5,500–$6,000 (up to $7,000 in China).
• Revenue/EBITDA: Accounts for the majority of Align’s ~$3 billion revenue. High gross margins (73–77%) contribute to a 25–30% EBITDA margin.
• Value Proposition: Discreet, comfortable alternative to braces; reduces office visits (6–12 vs. 20–40 for braces); enables doctors to treat more patients, boosting practice profitability.
2. iTero Intraoral Scanner:
• Description: A $30,000–$50,000 digital wand that captures 3,000 images per second, creating 3D models of teeth for treatment planning.
• Volume: Sold to thousands of dental practices, with growing adoption in orthodontics and restorative dentistry.
• Price: High-ticket item, often purchased by group practices or high-volume orthodontists.
• Revenue/EBITDA: Generates hundreds of millions in annual revenue, with lower margins than aligners but improving over time.
• Value Proposition: Eliminates traditional putty impressions, integrates seamlessly with Invisalign’s system, and reduces treatment planning time to 48–72 hours.
3. Exocad Software:
• Description: A recently acquired dental CAD/CAM software for designing dental restorations and orthodontic plans.
• Volume: Limited data, but serves as a complementary tool for digital dentistry.
• Price: Not specified, likely subscription-based or bundled with scanner sales.
• Revenue/EBITDA: Smaller contributor to revenue, with margins aligning with software businesses.
• Value Proposition: Enhances digital workflow, strengthens Align’s ecosystem, and supports complex case planning.

The core value proposition is Align’s ability to make orthodontic practices more efficient and profitable while offering patients a premium, aesthetically pleasing solution. Invisalign’s integration of hardware, software, and manufacturing creates a seamless experience for doctors and patients, reinforced by a strong brand synonymous with clear aligners.

Segments and Revenue Model

Align operates in three economically separable segments:

1. Clear Aligners (Invisalign): The primary revenue driver, generating ~$2.5–$3 billion annually. Revenue comes from selling aligner kits to orthodontists and GP dentists, priced at $1,200–$2,000 per case. The model is transactional, with recurring revenue from case starts and replacement trays.
2. Intraoral Scanners (iTero): A hardware segment generating hundreds of millions in revenue. Scanners are sold as capital equipment, with potential recurring revenue from maintenance or software subscriptions.
3. CAD/CAM Software (Exocad): A smaller, software-driven segment focused on digital treatment planning and dental design, likely generating tens to low hundreds of millions in revenue.

The revenue model is B2B, targeting dental professionals rather than direct-to-consumer (DTC) sales. Align avoids DTC to maintain relationships with orthodontists, who are the “golden goose” of its business. Revenue is driven by case volume (number of case starts) and average selling price (ASP), which has remained stable despite competitive pressures.

Splits and Mix

• Channel Mix: 60% of case starts come from orthodontists, 40% from GP dentists. Orthodontists handle complex cases, while GPs focus on simpler “social six” cases (front teeth alignment).
• Geographic Mix: North America dominates, but international markets (China, Brazil, Europe) are growing faster (20–30%+ annually). China alone has 1–2 million case starts, with potential for 10–30 million in the teen market.
• Customer Mix: High-volume orthodontists (some paying $1 million annually) drive significant revenue, alongside a long tail of smaller practices. Corporate dental groups (20–25% of the market) increasingly adopt clear aligners for profitability.
• Product Mix: Aligners dominate revenue, followed by scanners and software. Aligners have the highest margins, while scanners have lower but improving margins.
• End-Market Mix: Teens (75% of case starts) and adults (25%, growing) are the primary end markets. Adult cases are more prevalent with Invisalign than traditional braces.

Revenue vs. EBITDA Split:

• Aligners: ~85–90% of revenue, ~90% of EBITDA due to high gross margins (73–77%).
• Scanners: ~10–15% of revenue, lower EBITDA contribution due to lower margins.
• Software: <5% of revenue, moderate EBITDA contribution.

Mix Shifts:

• Historical: Shift from 10–15% clear aligner market share to 20% today, driven by technological improvements and COVID-accelerated adoption.
• Forecasted: Clear aligners expected to surpass 50% market share by 2030, with share of chair rising from 20–30% to 40–50% in orthodontic practices. International growth (e.g., China, Latin America) will increase non-U.S. revenue share.

KPIs

• Case Starts: Growing from <1 million five years ago to 2–3 million in 2021, with 20–30% annual growth.
• Share of Chair: 20–30% in most practices, with top performers at 90–100%. Key driver of organic growth.
• Market Penetration: 20% of the $25 billion U.S. braces market; globally, 12 million case starts in an $800 billion dental market.
• ASP Stability: Maintained at $1,200–$2,000 per case, with consumer prices at $5,500–$7,000.
• Growth Metrics: 25–35% annual revenue growth, driven by volume (case starts) and international expansion.

The business shows acceleration in case starts and international growth, with no signs of deceleration despite competitive entrants post-2017 patent expiration.

Headline Financials

Long-Term Trends:

• Revenue: Compounded at 20–30%+ since 2017, with potential to reach $4 billion soon.
• EBITDA Margin: Stable at 25–30%, with occasional dips during promotional periods.
• FCF: Likely robust, given low variable costs and moderate capex, though NWC cycles (e.g., shipping, tariffs) may impact cash conversion.

Value Chain Position

Align operates midstream in the orthodontic value chain, between raw material suppliers (plastics, 3D printing resins) and dental practices (orthodontists and GPs). Its primary activities include:

• R&D: Software development for CAD and treatment planning, scanner innovation.
• Manufacturing: 3D printing of aligners in Juarez, Mexico, with automation reducing COGS from $10–$12 to $3 per tray.
• Digital Treatment Planning: Outsourced to Costa Rica, Spain, and Germany, leveraging low-cost labor and AI-driven design.
• Sales & Marketing: Direct salesforce visiting dental practices, supported by NFL-level consumer advertising.
• Distribution: Direct to doctors, bypassing traditional distributors, with shipping from Mexico to global markets.

Align’s go-to-market (GTM) strategy is B2B, focusing on orthodontists and GPs. It trains thousands of doctors annually (e.g., in China) to use its system, ensuring adoption and loyalty. The company’s value-add lies in its integrated ecosystem (scanners, software, aligners), low-cost manufacturing, and clinical data from millions of cases, which enhance treatment predictability and practice efficiency.

Customers and Suppliers

• Customers:
• Orthodontists: 60% of case starts, handling complex cases. High-volume practices spend up to $1 million annually.
• GP Dentists: 40% of case starts, focusing on simpler cases. Limited by training and case complexity.
• Corporate Dental Groups: 20–25% of the market, adopting clear aligners for profitability.
• End Consumers: Teens (75%) and adults (25%), paying $5,500–$7,000 per treatment.
• Suppliers:
• Raw Materials: Plastics and resins for 3D printing, likely low-cost and commoditized.
• Technology: Scanner components and software development, with some in-house and third-party sourcing.
• Labor: Digital treatment planners in Costa Rica and other low-cost regions.

Align’s supplier power is low due to commoditized inputs, while buyer power (doctors) is moderate, tempered by Invisalign’s brand and clinical superiority.

Pricing

• Contract Structure: Transactional, per-case pricing ($1,200–$2,000 to doctors). No long-term contracts mentioned, but a loyalty program incentivizes higher volumes with better pricing.
• Consumer Pricing: $5,500–$6,000 in the U.S., $7,000 in China, reflecting premium positioning.
• Pricing Drivers:
• Branding & Reputation: Invisalign is the “Kleenex” of clear aligners, commanding premium prices.
• Mission-Criticality: Essential for practice profitability, reducing price sensitivity.
• Differentiated Product: Superior clinical outcomes and integration (e.g., iTero) justify higher ASPs.
• Market Dynamics: Limited pricing competition post-2017, with Align maintaining ASP stability.

Bottoms-Up Drivers

Revenue Model & Drivers

Align generates revenue through three streams:

1. Clear Aligners:
• Model: Sell aligner kits to doctors at $1,200–$2,000 per case, with consumer prices at $5,500–$7,000.
• Volume: 2–3 million case starts annually, growing 20–30%. Driven by:
• End-Market Growth: $25 billion U.S. braces market, doubling in 10–15 years due to supply expansion, lower prices, and international penetration.
• Share of Chair: 20–30% in most practices, with potential to reach 40–50%.
• International Expansion: China (1–2 million case starts, potential for 10–30 million), Brazil, and Latin America.
• Switching Costs: High due to doctor training and system integration, reducing churn.
• Price: Stable ASPs, with promotions occasionally lowering prices to drive volume.
• Mix:
• Geo: U.S. dominates, but international growing faster.
• Customer: Orthodontists (60%), GPs (40%).
• End-Market: Teens (75%), adults (25%, growing).
2. Intraoral Scanners:
• Model: Sell $30,000–$50,000 scanners to practices, with recurring revenue from software/services.
• Volume: Growing adoption, especially among corporate groups.
• Price: High-ticket, with group purchasing reducing effective ASP.
• Mix: Smaller but strategic segment, enhancing aligner adoption.
3. CAD/CAM Software:
• Model: Likely subscription-based, supporting digital dentistry.
• Volume: Limited but growing with Exocad acquisition.
• Price: Not specified, likely moderate.
• Mix: Smallest segment, complementary to aligners and scanners.

Organic vs. Inorganic Growth:

• Organic: Driven by case starts, share of chair, and international expansion.
• Inorganic: Acquisitions like Cadent (iTero) and Exocad bolster the ecosystem.

Cost Structure & Drivers

Align’s cost structure is highly favorable, with significant operating leverage:

• Variable Costs (23–27% of revenue):
• COGS: $250–$300 per case, including:
• Aligners: $3 per tray, $150 for a 40–50 tray case.
• Shipping/Tariffs: Cross-border costs from Mexico.
• Treatment Planning: Digital labor in Costa Rica, Spain, etc.
• Drivers: Low raw material costs, automation, and scale economies reduce COGS over time.
• Fixed Costs (45–50% of revenue):
• R&D: Software engineering for CAD, scanner development, and AI-driven planning.
• Sales & Marketing: Large direct salesforce, NFL-level consumer advertising.
• G&A: Facilities (Mexico, Costa Rica), corporate overhead.
• Drivers: Investments in international expansion (China, Poland, Spain) and salesforce scaling.
• Contribution Margin: High for aligners (80–85%), lower for scanners (50–60%).
• Gross Margin: 73–77%, reflecting low COGS and premium pricing.
• EBITDA Margin: 25–30%, driven by operating leverage as fixed costs are spread over growing revenue.

Cost Trends:

• COGS: Declined from $10–$12 to $3 per tray due to automation and scale.
• Opex: R&D and sales/marketing remain significant, with occasional spikes during promotional periods.
• Operating Leverage: Fixed costs (R&D, salesforce) scale slower than revenue, boosting margins.

FCF Drivers

• Net Income: High EBITDA ($750–900 million) supports strong profitability, though interest and taxes reduce net income.
• Capex: Moderate, focused on manufacturing automation and digital planning facilities. No specific figures provided.
• NWC: Potential cycles due to shipping/tariffs and inventory management. Cash conversion cycle likely short due to B2B model.
• FCF: Likely robust, given high margins and moderate capex, though not explicitly quantified.

Capital Deployment

• M&A: Acquisitions of Cadent (iTero) and Exocad enhance the ecosystem, with synergies from integration.
• Organic Investment: Manufacturing automation, international expansion, and doctor training.
• Buybacks/Dividends: Not mentioned, but likely limited given growth focus.
• Synergies: iTero and Exocad improve aligner adoption and practice efficiency, driving revenue growth.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Global Dental Market: $800 billion annually, with orthodontics at ~$25 billion in the U.S. and growing globally.
• Orthodontic Case Starts: 12 million globally, growing double digits, with potential to double in 10–15 years.
• Clear Aligner Market: ~20% of braces market ($5 billion in the U.S.), with Invisalign holding 90–95% share.
• Growth Drivers:
• Volume: Supply expansion (more aligner brands), international penetration (China, Brazil).
• Price: Lower-cost competitors (Candid, SmileDirectClub) expand access, though Invisalign maintains premium pricing.
• Industry Stack: GDP growth, rising per capita income, and consumer demand for aesthetics drive orthodontic spending.

Market Structure

• Competitors: Fragmented, with Invisalign dominating clear aligners. Key players include Envista (Spark), Straumann (ClearCorrect), Dentsply Sirona, and SmileDirectClub (DTC).
• Consolidation: Oligopolistic in clear aligners due to Invisalign’s scale and IP. Traditional braces market is more fragmented.
• MES (Minimum Efficient Scale): High for clear aligners due to manufacturing and software complexity, limiting competitors.
• Cycle: Early growth phase, with clear aligners under-penetrated (20% of braces market, 20–30% share of chair).
• Traits: Cash-pay market, low regulation, high consumer willingness to pay.

Competitive Positioning

• Matrix: Invisalign is a premium, high-quality player targeting orthodontists and complex cases. SmileDirectClub targets low-end DTC, while Candid and Envista occupy mid-tier.
• Disintermediation Risk: Low, as orthodontists remain critical for complex cases. DTC models like SmileDirectClub target a different segment.
• Market Share: 90–95% of clear aligners, 20% of total braces market. Growing faster than the market (25–35% vs. double-digit market growth).

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale: Align’s Juarez facility and automation yield $3 per tray COGS, far below competitors. High MES deters new entrants.
2. Network Effects: Limited, but doctor training and loyalty programs create stickiness.
3. Branding: Invisalign is the category leader, akin to “Kleenex,” driving consumer demand.
4. Counter-Positioning: Vertical integration (scanners, software, manufacturing) creates a superior business model that competitors struggle to replicate.
5. Cornered Resource: 20+ years of clinical data from millions of cases, enhancing treatment predictability.
6. Process Power: Automation and AI-driven planning reduce costs and improve outcomes.
7. Switching Costs: High for doctors due to training, system integration, and loyalty programs.

Porter’s Five Forces:

• New Entrants: Moderate threat post-2017 patent expiration, but Align’s scale and litigation deter entry.
• Substitutes: Traditional braces (80% of market) are less profitable for doctors, reducing substitution risk.
• Supplier Power: Low, as inputs (plastics, resins) are commoditized.
• Buyer Power: Moderate, as doctors rely on Invisalign’s brand and integration, though some resent high costs.
• Rivalry: Increasing with Envista, Straumann, and DTC players, but Align’s scale and data maintain dominance.

Strategic Logic

• Capex Bets: Investments in automation (Mexico) and digital planning (Costa Rica) are offensive, enhancing cost leadership.
• Economies of Scale: Align operates at MES, with competitors struggling to match its low COGS.
• Vertical Integration: Controls scanners, software, and manufacturing, improving margins and practice efficiency.
• Horizontal Expansion: Expanding into GP dentists and international markets (China, Latin America).
• M&A: Strategic acquisitions (Cadent, Exocad) strengthen the ecosystem without overpaying.
• BCG Matrix: Invisalign is a “star” (high growth, high share), with scanners and software as “question marks” to be developed.

Valuation and Outlook

Align’s ~$50 billion market cap reflects a premium valuation, driven by 25–35% revenue growth, 25–30% EBITDA margins, and a massive addressable market. Key drivers for doubling valuation in 5–10 years include:

• International Growth: China (1% penetrated), Latin America, and India offer 10–30 million case starts.
• Share of Chair: Increasing from 20–30% to 40–50% in orthodontic practices.
• Market Expansion: $25 billion U.S. braces market doubling, with clear aligners surpassing 50% share by 2030.

Risks:

• Competition: Envista, Straumann, or a disruptive player could erode market share to 20–30% if they offer a better system at lower prices.
• Innovation: Direct 3D printing of aligners could decentralize manufacturing, reducing Align’s scale advantage.
• Perception: Align’s litigious reputation and high prices may alienate doctors, encouraging adoption of alternatives.

Valuation Metrics:

• Likely trades at 15–20x EBITDA, reflecting growth and market leadership.
• FCF yield not specified but likely attractive given high margins and moderate capex.

Key Takeaways and Unique Dynamics

1. Vertically Integrated Ecosystem: Align’s control of scanners, software, and manufacturing creates a seamless, high-margin business model. The iTero scanner and Costa Rica planning reduce doctor effort, while low COGS ($3 per tray) enable premium pricing.
2. Scale and Automation: The Juarez facility and 20+ years of 3D printing expertise yield unmatched cost advantages, deterring competitors. Align’s status as the largest 3D printing company globally underscores its manufacturing prowess.
3. Litigation as a Moat: Align’s aggressive use of 400+ patents (until 2017) and litigation (e.g., against SmileDirectClub, Envista) protected its monopoly and slowed competitors, a rare strategy in healthcare.
4. Doctor-Centric Model: By prioritizing orthodontists over DTC, Align maintains high ASPs and loyalty, though it limits accessibility. The loyalty program and training reinforce stickiness.
5. Under-Penetrated Market: With only 20% of the braces market and 20–30% share of chair, Align has significant runway. International markets (China, Brazil) and GP dentists offer further growth.
6. Clinical Data Advantage: Millions of cases provide a “cornered resource,” enabling AI-driven planning and superior outcomes, a barrier for new entrants.
7. Premium Branding: Invisalign’s NFL advertising and “Kleenex” status drive consumer demand, allowing stable ASPs despite competition.

Critical Observations:

• Align’s reliance on orthodontists risks obsolescence if competitors simplify complex cases for GPs or DTC models gain traction.
• The “evil empire” perception among doctors, due to high prices and litigation, could drive adoption of alternatives like Envista’s Spark.
• Direct 3D printing looms as a disruptive threat, potentially decentralizing production and eroding Align’s scale advantage.

Align’s business model is a masterclass in vertical integration, scale, and IP defense, but its premium positioning and doctor-centric focus expose it to disruption in a rapidly evolving market. The company’s ability to balance growth, innovation, and doctor relationships will determine its long-term success.