Santa clarau toronto_final

CFA Institute Research Challenge
Americas Regional Competition
SCU Leavey School of Business

ALIGN TECHNOLOGIES (ALGN)

TEAM Santa Clara University

Amar | Spencer | Gio | Mona | Jaden
SCU Confidential


Agenda
Executive Summary

Company Overview

Competitive Positioning

Investment Summary

Financial Analysis

Valuation

Investment Risks

SCU Confidential


Executive Summary Current Price: $33.04 (March 15th 2013)

Recommendation : Target Price: $23.70

Align
Mis-Align

Management
Concerns
Growing list of Competitors

Poor Execution Limitations of the Product

Acceleration of
Growth Concerns
Over valued based upon Intrinsic
Valuation

Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview Positioning Summary Analysis Risks

SCU Confidential


Company Overview : ALIGN TECHNOLOGIES
Business : Global Manufacturer & Supplier of Technology rich
product for treatment of Malocclusion

Sector : Healthcare
Industry : Medical Equipment and Supplies

Listing : ALGN (NASDAQ)

Inception : March 1997 IPO : Jan 2001

Core Product : Invisalign clear aligners

Ancillary Products : iTero intra-oral scanners, OrthoCAD
digital services

Market Cap : $2.62B | FY’2012 Revenues : $560M |

Valuation
Summary Overview Positioning Summary Analysis Risks

SCU Confidential


Market Share and Revenue Mix

Existing Clear Aligner Market Share: Regional Revenue Mix
Align vs. Competition

22%

85% 76%

NA net revenue
Europe net revenue
Other International net revenue

Valuation
Summary Overview positioning Summary Analysis Risks

SCU Confidential


Invisalign
Full
1999 Invisalign
SmartTrack
Express / Lite
2013
2005 / 08

Invisalign Vivera TM
G4 Retainers
2011

2007
Invisalign
Invisalign G3 2010
Teen

2009 2008
Invisalign
Invisalign 1.5
Assist

Can ALGN Endure or Defend its Market share?
Valuation

SCU Confidential


Investment Summary - Sell

M A P S
Management ASPs Poor Slowed
Shuffle Dropping Implementation Growth

Valuation

7 SCU Confidential


Management Departures

Len Hedge, Kenneth Dana
Dan Ellis,
Sr. VP Arola, CFO Cambra,
VP of Sales
Business Stepped VP of R&D,
NA, Fired
Operations, down Fired
Retired

Valuation

SCU Confidential


ASPs Dropping

2011 ASP 2012 ASP YoY

Invisalign Full $1,465 $1,441 -2%

Invisalign $964 $877 -9%
Express/Lite
Invisalign Teen $1,434 $1,390 -3%

Invisalign Assist $1,311 $1,332 2%

Valuation

SCU Confidential


Scanner Business Disappointing

 Wrote a significant goodwill Q4 Q4 Annual
impairment charge due to a Growth
2011 2012
termination of a distribution
agreement (affects NA and
Europe) Revenue $10M $10M 0%

 Questionable acquisition move

Valuation

SCU Confidential


Earnings
Margins have felt the impact of increasing operations cost, lower ASP
and ineffective marketing adoption

EBITDA Margin Trend
600.0 560 40%
480 35%
500.0 33%
388 30%
400.0 27%
314 25%
Millions

23%
300.0 21% 20%
15%
200.0
130 130 129
10%
100.0 66
5%
0.0 0%
2009 2010 2011 2012
Revenue EBITDA EBITDA margin

2009 2010 2011 2012
EPS -0.45 0.95 0.83 0.80
YoY Growth -311% -13% -4%

Valuation

SCU Confidential


Product Channel and Mix
North America International
35% 35%
30% 30%
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
-5% 2009 2010 2011 2012 2009 2010 2011 2012
vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior

Case Volume Case Revenue Case Volume Case Revenue

22%
Revenue Growth - YoY
share of
2009 2010 2011 2012 Adult
Unit Share of 4%
Invisalign Full -8% 13% 14% 12% Applicable cases
share of
Invisalign Teen 318% 249% 42% 23% Market Teen
Invisalign Assist 817% 167% 86% 5% cases

Product mix focus and international expansion growth is questionable
Valuation

SCU Confidential


Financial Metrics

Patterson
Apr 12- 5 Yr Average
ALGN Cos. Inc XRAY-US HSIC-US
1
Price/Earnings 23.96 17.28 20.09 17.33
Price/Sales 3.51 1.14 2.38 0.71  OVERpriced
Price/Book Value 3.82 2.71 3.1 2.34
Enterprise Value/EBITDA 15.44 10.07 13.13 9.35 UNDERperformed
EPS (diluted) 0.64 1.79 1.78 3.23
1
ALGN PE based on simple average

as of Feb 12 ALGN S&P 500
P/E last 4Q 45.5 16.4 ALGN possesses an encouraging
P/Sales last 4Q 4.7 1.38 and DISRUPTIVE innovative
P/Book 4.5 6.7 product BUT reflects a POOR
ROE 10.9 14.3 strategy plan execution
ROIC 10.7 12.2

Valuation

SCU Confidential


ALGN Price Performance vs. S&P 500

Valuation

SCU Confidential


Valuation

Compared to current
Valuation Share Price
market price

Intrinsic Valuation (DCF) $23 -30%
Comparables Valuation $25 -23%
Average Valuation $24 -28%

Target Price: $24

Valuation

SCU Confidential


Valuation
Assumptions
 Risk Free Rate: closer to 30-year US govt. Treasury yield of 3%
 Equity Risk Premium: 5.5% as per Duff & Phelps
 Tax Rate: 27% (lower than statutory 35% due to efficient tax
structure of the company)
 Terminal Growth Rate: 4%; as a result of ALGN’s presence in
international regions where growth is typically higher
 WACC: 14.5%; Discount rate (WACC) considers only cost of equity
(using CAPM) since company debt is almost negligible and equity
beta of 2.09
 Terminal Value calculated using Gordon Growth Model

Valuation

SCU Confidential


Intrinsic Valuation
(USD Mil) 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue $313.5 $387.9 $480.1 $560.0 $650.5 $753.3 $869.0 $1,010.6 $1,173.8
% YoY 24% 24% 17% 16% 16% 15% 16% 16%
EBITDA 66.1 129.5 129.6 129.3 176.2 211.6 252.8 304.1 364.9
% Margin 21% 33% 27% 23% 27% 28% 29% 30% 31%
Operating Income 38.0 99.3 92.9 89.0 133.2 161.8 195.4 237.3 287.4
Add: Amortization
PF Operating Income 133.2 161.8 195.4 237.3 287.4
Less: Cash Taxes (36.0) (43.7) (52.7) (64.1) (77.6)
Unlevered Net Income 97.3 118.1 142.6 173.2 209.8
Add: Depreciation 13.0 14.2 17.5 17.8 17.0 19.6 22.6 26.3 30.6
Add: SBC 15.1 16.1 19.2 22.4 26.0 30.1 34.8 40.4 47.0
Less: Capital Expenditures 7.0 18.0 30.0 41.0 (39.0) (45.2) (52.1) (60.6) (70.4)
Less: Change in Net Working Capital (2.7) (3.1) (3.5) (4.2) (4.9)
Unlevered Free Cash Flow 98.5 119.6 144.4 175.1 212.0
% Growth 21% 21% 21% 21%

Valuation

SCU Confidential


Comparables Valuation

Dental Peer Group Valuation
Comparative Valuation

EV/EBITDA
Company Ticker CY12E CY13E CY14E
Dentsply International Inc XRAY 11.9 10.8 9.6
Nobel Biocare Holding AG NOBN-CH 7.7 8.7 7.6
Sirona Dental Systems Inc. SIRO 11.3 9.7 8
Straumann Holding AG STMN-CH 12.5 10.6 8.8
Patterson Cos. Inc. PDCO 10.2 9.4 8.8
Group Average 10.7 9.8 8.6

Implied Valuation ($M except per share)
Relevant Align Metric (EBITDA or Sales) 129.3 176.2 211.6
Multiple 10.7 9.8 8.6
Align Tech EV/Share $17.0 $21.3 $22.3
Align Tech Cash/Share $4.11 $4.11 $4.11
Align Tech Equity Value/Share $21.1 $25.4 $26.4

Valuation

SCU Confidential


Sensitivity Analysis
Terminal Value WACC

$23.17 17.0% 16.0% 15.0% 14.5% 14.0% 13.0% 12.0%
2% $18 $19 $20 $21 $22 $23 $26
TVG 3% $18 $20 $21 $22 $23 $25 $27
4% $19 $21 $22 $23 $24 $27 $30
5% $20 $22 $24 $25 $26 $29 $33

Equity Value Per Share

Long term EBITDA Margin

24% 27% 31% 33% 35% 37%
12% $16 $18 $21 $22 $23 $25
14% $17 $19 $22 $23 $24 $26
4 year 16% $18 $20 $23 $25 $26 $28
Revenue 18% $19 $21 $25 $26 $28 $30
CAGR 20% $20 $22 $26 $28 $29 $32
'13-'17
22% $21 $24 $28 $30 $31 $34
24% $22 $25 $30 $32 $33 $36
26% $23 $27 $31 $34 $35 $38
28% $25 $28 $33 $36 $38 $41

Equity Value Per Share

Valuation

SCU Confidential


Product Revenue Mix

2009 2010 2011 2012 2013 2014 2015 2016 2017
Product Revenue Mix
Invisalign Full 75% 68% 63% 60% 58% 55% 52% 49% 47%
Invisalign Express/Lite 9% 9% 9% 9% 10% 11% 12% 13% 15%
Invisalign Teen 8% 14% 11% 12% 13% 14% 15% 16% 17%
Invisalign Assist 3% 4% 6% 5% 5% 4% 4% 4% 4%
Invisalign Total Case Revenue 95% 95% 89% 87% 85% 84% 83% 83% 83%
Invisalign Non Case Revenue 5% 5% 5% 5% 6% 6% 6% 6% 6%
Scanners and CAD/CAM Revenue 0% 0% 3% 8% 9% 10% 11% 11% 11%
Total revenue 100% 100% 100% 100% 100% 100% 100% 100% 100%

Valuation

SCU Confidential


Investment Risks

Upside Downside

Valuation

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Investment Risks – upside

 Increased performance of
Core Aligner product
 Great performance of
Cadent holding
 New momentum by new
management
 Stable customer base
 Effective marketing strategy

Valuation

SCU Confidential


Investment Risks – downside
• Consumer confidence • Danaher
level drop • Great Lakes
• Unemployment Rate • Dentsply
• 3M
• And more

Macro Econ Competition
Environment Environment

Align
Litigation
Management
issues
& Product

• Patent expiration • No New products
• International market: pipelined in near to
weak intellectual long-term
property protection

Valuation

SCU Confidential


Investment Risks – Competition Environment

Valuation

SCU Confidential


Investment Risks – Align Management & Product Risk

Unclear
Important Unsuccessful
Product
Management Marketing
Innovation
Changes Strategy
Plan

Valuation

SCU Confidential


GOOD GOOD
COMPANIES INVESTMENT

v/s
Growth Stock Value Stock

Valuation

SCU Confidential


Summary

Valuation

SCU Confidential


SCU Confidential


APPENDIX

SCU Confidential


Consumer Confidence Level

160 80

140 70

120 60
Align Revenue in Millions

100 50

Consumer Index
80 40

60 30
Align Revenue(Millions)
40 20
Consumer Index
20 10

0 0

Align Revenue and Consumer Index Correlation

Executive Company Industry Competitive Investment Financial Investment
Valuation
Summary Overview Overview positioning Summary Analysis Risks

SCU Confidential


Lingual Traditional Invisalign
Braces Braces Aligners
Completely invisible from Outside Y

Appropriate for Most Patients Y Y

Always on and always working toward your Y Y
final result

Can eat and drink with them on Y Y

Cant be misplaced or lost Y Y Y

100% Customized Y Y
Priced Slightly higher than traditional braces Y

SCU Confidential


- Gold Standard - Elective & Expensive nature of treatment
- Patent Protection (490 till date) - Several limitations with Treatment
- Product Innovation - YOY Rev Growth decline in Aligner segment
- Production Automation - X-factor is the treating Dentist
- Early Mover Advantage - No new products in pipeline as of date
- Most Treated Patients - Management Changes
- Strong Marketing Force - Gross margins under pressure

STRENGTHS WEAKNESSES

OPPORTUNITIES THREATS

- Only 15% of worldwide addressable - Near Term Macroeconomic Uncertainties
orthodontic market has been captured - Surge of Competitors
- Under penetrated Teen Segment - Declining Average Selling Prices
- Potential for growth in emerging markets - Termination of distribution agreements
- Continuing Litigation Expenses

SCU Confidential


ALGN Price Performance vs. NASDAQ 100

SCU Confidential


Income Statement
2010 2011 2012
% Inc/(Dec) % Inc/(Dec) % Inc/(Dec)
$ in millions except per share data $ $ $
from Prior Yr from Prior Yr from Prior Yr
Revenue/Sales 387 24% 480 24% 560 17%
Cost of revenue 84 6% 118 40% 144 22%
Gross profit 303 30% 361 19% 416 15%
Operating expenses
Research and development 26 18% 37 42% 43 16%
Sales, General and administrative 192 -21% 231 20% 248 7%
Restructuring, merger and acquisition -100%
Other operating expenses (17) 2 -112% 40 NM
Total operating expenses 201 -25% 271 35% 331 22%
Operating income 103 -403% 90 -13% 86 -4%
Interest Expense
Other income (expense) (1) N/A - N/A (1) N/A
Income before taxes 102 -400% 90 -12% 84 -7%
Provision for income taxes 28 NM 23 -18% 26 13%
Net income from continuing operations 74 -339% 67 -9% 59 -12%
Net income 74 -339% 67 -9% 59 -12%
Net income available to common shareholders 74 -339% 67 -9% 59 -12%
Earnings per share
Basic 1 -318% 1 -12% 1 -15%
Diluted 1 -311% 1 -13% 1 -14%
Weighted average shares outstanding
Basic 76 10% 78 3% 81 4%
Diluted 78 13% 80 3% 83 4%

SCU Confidential


Balance Sheet
2010 2011 2012
% Inc/(Dec) % Inc/(Dec) % Inc/(Dec)
$ in millions except per share data $ $ $
from Prior Yr from Prior Yr from Prior Yr

Assets
Current assets
Cash
Cash and cash equivalents 295 178% 241 82% 306 127%
Short-term investments 9 45% 7 78% 28 400%
Total cash 303 163% 248 82% 335 135%
Receivables 65 118% 92 142% 99 108%
Inventories 3 150% 9 300% 15 167%
Prepaid expenses 17 94% 32 188% 35 109%
Other current assets 4 2
Total current assets 389 149% 385 99% 486 126%
Non-current assets
Gross property, plant and equipment 98 103% 129 132% 165 128%
Accumulated Depreciation -68 97% -75 110% -86 115%
Net property, plant and equipment 31 124% 54 174% 79 146%
Equity and other investments 9 21
Goodwill 0 135 99
Intangible assets 2 40% 50 2500% 46 92%
Deferred income taxes 42 68% 22 52% 22 100%
Other long-term assets 3 150% 3 100% 3 100%
Total non-current assets 88 94% 264 300% 271 103%
Total assets 477 134% 649 136% 756 116%
Liabilities and stockholders' equity
Liabilities
Current liabilities
Accounts payable 8 133% 22 275% 22 100%
Taxes payable 5 7 140% 6 86%
Accrued liabilities 46 107% 62 135% 66 106%
Deferred revenues 34 106% 52 153% 62 119%
Total current liabilities 93 115% 148 159% 156 105%
Non-current liabilities
Other long-term liabilities 6 600% 10 167% 19 190%
Total non-current liabilities 6 600% 10 167% 19 190%
Total liabilities 99 121% 158 160% 175 111%
Total stockholders' equity 378 138% 491 130% 581 118%
Total liabilities and stockholders' equity 477 134% 649 136% 756 116%

SCU Confidential


Cash Flow
Period Ending
in thousands 12/30/12 12/30/11 12/30/10

Net Income 58,691 66,716 74,253

Operating Activities, Cash Flows Provided By or
Depreciation 17,811 17,477 15,013
Adjustments To Net Income 60,659 13,734 29,670
Changes In Accounts Receivables (9,138) (21,693) (12,184)
Changes In Liabilities 15,326 60,974 24,497
Changes In Inventories (5,718) (4,058) (508)
Changes In Other Operating Activities (3,853) (2,681) (1,212)
Total Cash Flow From Operating Activities 133,778 130,469 129,529

Investing Activities, Cash Flows Provided By or
Capital Expenditures (38,333) (30,404) (18,031)
Investments (42,313) 10,317 2,256
Other Cash flows from Investing Activities 2,346 (191,519) (145)
Total Cash Flows From Investing Activities (78,300) (211,606) (15,920)

Financing Activities, Cash Flows Provided By or
Dividends Paid - - -
Sale Purchase of Stock (4,876) 17,747 11,822
Net Borrowings - - -
Other Cash Flows from Financing Activities (2,106) (1,897) (1,080)
Total Cash Flows From Financing Activities 10,205 27,241 14,707
Effect Of Exchange Rate Changes 28 (93) (139)
Change In Cash and Cash Equivalents 65,711 (53,989) 128,177

SCU Confidential


Financial Trend

Revenue Case Shipments
$600 400

$500 350
300
$400

in thousands
250
in millios

$300 200
150
$200
100
$100
50
$- -
2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012

Gross Margin Operating Margin
79% 30%
78% 25%
77% 20%
76% 15%
75% 10%
74% 5%
73% 0%
-5% 2007 2008 2009 2010 2011 2012
72%
71% -10%
2007 2008 2009 2010 2011 2012 -15%

SCU Confidential


Goodwill Impairment Preliminary Analysis
Disclosed in Q312 Form 10Q

• In Q312 we determined that there were sufficient indicators of a potential
impairment to the goodwill attributed to the Scanner and CAD/CAM Services
reporting unit (SCCS), therefore conducted step 1 of the goodwill impairment
analysis and determined the goodwill was impaired.

• These indicators included the termination of an exclusive distribution
arrangement with Straumann for iTero intra-oral scanners in Europe, as well as
the termination of their non-exclusive distribution arrangement for iTero intra-
oral scanners in North America, together with market conditions and business
trends within SCCS.

• Based on our preliminary analysis we recorded an estimate of $24.7 million for
the SCCS goodwill impairment charge.

• Expect to finalize step 2 of the goodwill impairment analysis and record any
change from our estimate, if necessary, in Q412.

SCU Confidential


ALIGN Patents

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