Spruce Point Capital Management Releases A Strong Sell Research Opinion On Align Technology (NASDAQ: ALGN)
NEW YORK, April 9, 2020 /PRNewswire/ -- Report entitled "A Clear And Visible Short Case" outlines how Align Technology, Inc. ("Align" or "the Company") faces 40%-55% downside risk to approximately $80 - $115 per share. The full contents of the report can be reviewed at www.sprucepointcap.com. Spruce Point believes that the economics of clear aligners are on the precipice of a radical shift – and it has little to do with SmileDirectClub or other direct-to-consumer players. Once considered high-value-added "dental tech," FDA-approved aligners of similar quality to Invisalign, Align's clear aligner product, are now being printed at scale by commodity 3D printing labs, which price their aligners at less than half the cost of Align's. Meanwhile, patent expirations have ushered in under-the-radar developments in aligner design software which are removing the final barriers to the widespread adoption of 3D printers by orthodontists – many of whom are infuriated with Align's aggressive tactics, and who are actively exploring their options in a market which, for the first time, offers numerous (cheaper) alternatives to Align. On-the-ground diligence reveals that large dental players are already slashing aligner prices in response to these shifts, in some cases to as low as a third of the price of Invisalign. We believe that it is only a matter of time – perhaps accelerated by industry cost pressures brought on by the pandemic – until Align is forced to follow suit.
- Third-Party Labs Are Turning Aligners Into Commodities: For close to 20 years, Align operated as the lone major player in the clear aligner space, with other large dental equipment suppliers only recently entering the industry. Over just the past two years, however, patent expirations and developments in 3D printing have enabled dozens of third-party 3D printing labs to begin to produce FDA-approved aligners of their own, threatening to transform the clear aligner from "high-tech" dental equipment into a low-value-added, easy-to-source commodity.
What's more, the former developer and provider of Align's own polymer has developed a new plastic which can be used by third-party labs to produce aligners of comparable quality to Invisalign. Spruce Point has obtained term sheets from one such third-party lab which reveal that dental practitioners can save over 50% per case on average by sourcing from it rather than Align, and that a typical practice – depending on its volume – could increase its cash flow by close to 10% by switching from Align. We find evidence that other major dental players are already slashing prices to as low as 33% of Align's in response to this competition. We believe that Align will inevitably be forced to follow suit – or else lose significant case volume – as third-party labs grow increasingly mainstream.
- Under-The-Radar Improvements In Workflow Technology Make In-House 3D Printing A Threat: Until now, Align bulls have generally considered in-house 3D printing an inconvenient alternative to Align, as in-house printing forces orthodontists to bring entirely new workflows into their offices. Through a proprietary survey of high-volume orthodontists, together with conversations with industry experts, we find that interest in in-house printing is in fact extremely high among doctors, who are attracted to the potential efficiencies and cost savings.
We find that broader adoption of in-house printing has been constrained not by limited demand, but by the relatively limited supply of quality technological infrastructure to support this workflow – in particular, CAD/CAM aligner design software. However, with Align's patents on this technology recently having expired, major innovations are coming to this space as we speak. Notably, uLab Technologies – a company founded by former Align executives and employees who were themselves behind the most successful attempt to compete with Align during the 2000s – is in the process of rolling out CAD/CAM software which experts believe to represent a step change over existing solutions. With the final barriers to widespread in-house printing adoption set to fall in the near term, we expect interest in 3D printing – which offers even greater cost savings than third-party labs – to expand dramatically.
- Emergent Competition Already Putting Pressure On Align: Though still relatively novel, Spruce Point observes that these competitive forces are already beginning to pressure industry pricing and threaten Align's case volume. Our diligence reveals that a large dental service organization (DSO) representing up to 12% of Align's US aligner volume is actively exploring opportunities to source aligners from third-party labs. Meanwhile, we are told that 3M is offering orthodontists lab fees as low as $500-$600 per case – less than one third the price of a comprehensive Invisalign case. We believe that this is just the beginning of a longer-term trend.
- Widespread Dissatisfaction With Align Could Accelerate Customer Losses: Align bulls are quick to argue that the Company's brand and practitioner network protect it from new competition. We find that orthodontists are, almost universally, anywhere from dissatisfied to infuriated with Align, which continues to raise prices aggressively on orthodontic practices even as costs fall across the rest of the space, and which has threatened orthodontists' control over the teeth alignment industry by selling to dentists and backing direct-to-consumer players. With competitive options proliferating across the space for the first time in ~20 years, Spruce Point observes that even Align's highest-volume orthodontists are actively pursuing alternatives – and doubly so as they pause normal operations in response to the COVID-19 pandemic, which has given them a unique opportunity to explore cost-saving measures.
- Not A Post-Pandemic Bounce Back Candidate, Even As Shares Trade Down: As Align shares trade lower with the market as the pandemic grows increasingly drawn-out, bulls with faith in the long-term growth story likely see the stock as a strong "buy low" opportunity. Spruce Point strongly disagrees: not only do we believe that Align bears outsized risk to the continued prevalence of COVID-19 beyond 2020, but the proliferation of competitors and alternative aligner printing technologies will, in our opinion, prevent the Company from bouncing back with the same force as the rest of the dental/orthodontic space. Spruce Point sees 40%-55% downside in ALGN to $80-$115 per share on disappointing case volume growth in FY21 and ongoing ASP pressure amidst an expanded competitive landscape. ALGN's ~24x FY21 earnings multiple could also compress as investors increasingly understand the competitive forces facing the Company going forward, bringing the potential for even greater downside to ALGN shares.
Spruce Point Capital has a short position in Align (NASDAQ: ALGN) and stands to benefit if its share price falls.
The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
