Just when it looks like Align Technology has about perfected
the tech behind its invisible braces, the company finds yet
another way to improve it.
Early this year the San Jose, Calif., maker of alternatives to
metal braces introduced a new material for its Invisalign clear
aligner system. It's SmartTrack, a highly elastic material that
better maintains its shape and a more constant force over the two
weeks a patient wears the aligners. It conforms better to tooth
morphology and attachments, and is easier to insert and
According to orthodontists or general practitioners, the old
material would hold its form very well the first four to five
days but then quickly lose its shape, says Jonathan Block,
managing director at Stifel Financial.
"So it's acting as a retainer for the last week or week and a
half. What SmartTrack holds its shape much better and therefore
has been shown to move teeth more effectively," he said. "Our due
diligence suggests it's allowing -- notably -- orthodontists to
do more complex cases and that's helping increase case
In a recent study by Stifel Financial, 80% of respondents said
they believe the new material will help them treat more complex
cases and 55% said it has already allowed them to do that. In
addition, 40% of Stifel's respondents believe SmartTrack already
shortened treatment times for their Invisalign patients.
In June, Align Technology also introduced Realine, an
entry-level, five-stage clear aligner product that helps with
very minor crowding and spacing issues that a general
practitioner can help fix. Treatments Invisalign Express and Lite
also help with minor corrections, while taking less time to
implement. And finally, Align Technology sells 3D scanners and
software to help dentists create digital molds of patients'
These new introductions certainly have helped the company's
results. After flat and then single-digit year-over-year earnings
growth the prior two quarters, earnings per share shot up 62% in
the third quarter on a 21% increase in sales, both above analyst
forecasts. The stock surged 26% on the news to near 58 on Oct. 18
and has been trading near it since.
Align Technology holds the highest Composite Rating -- 98 of a
possible 99 -- of all companies in IBD's Medical-Systems &
Equipment industry group. It is also the best in the group in EPS
Rating, with a 95.
The industry group itself ranks 28th among 197 that IBD
tracks. Align Technology is seventh largest in the 66-member
group by market cap, afterIntuitive Surgical (
),Varian Medical Systems (
) andIdexx Laboratories (IDXX).
Align Technology's new product launches are part of the
company's goal to introduce one big product per year, Block says.
Another goal the company has been pursuing is breaking down the
barriers in the teen market.
Youth Tooth Market
Teenager Invisalign cases have been steadily growing since the
end of 2012. Last quarter, the company had a total of 29,000
teenage cases, a 23% increase from the prior-year period. But the
market penetration is still relatively small.
"We have a very positive outlook on the company, even within
teenagers," said analyst J.T. Haresco of JMP Securities, noting
that the marker remains only about 10% to 15% penetrated in the
U.S., if that.
"And given that they have a monopoly on invisible braces," he
said of Align Technology, "it's easy to paint a very good
long-term picture for how they're going to do."
Growing Business Abroad
A third area of growth for Align Technology is international.
During the third quarter, the company had 22% of its worldwide
cases originate internationally. International revenue soared 31%
vs. a year earlier and represented 24% of total revenue.
"There's a lot of opportunity to pursue (internationally),"
Haresco said. "It's purely a cash-pay business -- as opposed to
the U.S., where there is some reimbursement -- and they have a
little economic sensitivity, but it hasn't softened yet. There
are not really any alternatives out there."
Japan and China provided strong volume growth. The company
repurchased its Asia-Pacific distributor in May, allowing it to
directly sell its products in that market and command end-user
pricing. This deal has quickly become accretive to earnings,
Europe also performed well, with case shipments growing 20% in
the third quarter vs. a year earlier. The growth was led by
Spain, France, Italy and Germany. The U.K. market was the only
one to post a slight decrease due to the soft economic
An advantage in pursuing international growth is that Align
Technology is able to command higher prices abroad vs. in the
"It is one of the very few medical device companies that has
arguably as high a gross margin structure internationally as it
has in the U.S.," Block said. "The unwritten law in med tech is
'you're selling products a little bit cheaper internationally
than you do in the U.S.' -- but not for them."
Normally, he says, what you have is faster growth
internationally but it comes at a lower margin.
However, for Align Technology, "arguably you can have faster
growth internationally while maintaining that very attractive
margin profile," Block said.
Align Technology's operating margins have been creeping up
slightly from one year to the next, with the most recent number
at 23.1% in the third quarter. Nevertheless, quarterly margin and
earnings numbers can be pretty volatile.
Block expects margin growth to speed up going forward. He
estimates it will reach 25.7% in 2014 and 28% in 2015. He
believes drivers for this stronger growth will be lower general,
administrative, legal, sales and marketing expenses. "Even if you
flat-line them and revenue grows, you'll get leverage out of that
Align Technology also added about 40 to 50 Invisalign reps in
2013 in North America, which will start being accretive to
revenue next year.
Risks for the company include a lethargic economy and
quarter-to-quarter variability in their results. Align holds 538
patents and another 201 pending worldwide. The first of the
patents are due to expire in 2017-18.
The company had $400 million in cash at the end of last
quarter and no debt. It's been using some of its cash to do share
"They're a disruptive technology in a very large market that,
arguably, might be in the very early innings of executing," Block