Align Technology, Inc. (ALGN) Earnings Call Transcript & Summary

Great guys. Thanks, and good afternoon. I'm going to take off the animal health hat until tomorrow afternoon and shift to dental. So we're fortunate to have Align Technology, the leader in clear aligners, joining us today to shift to the Dental segment. We have Joe Hogan, CEO; John Morici, CFO.

I'm just going to get right at it, guys, we'll see what we can get done in 25 minutes. And Joe, I'm going to start with the lower acuity opportunity in the company's initiative. So when we think about lower acuity, 500 million people out there from an adult malocclusion perspective, please talk to Align's efforts to tap into that market. We've seen offerings like iGo, Invisalign Moderate, maybe help us out with the uptake around these initiatives. And if it's still early -- in the early days, if you would, when we think about what's in front of you guys.

Jon, the iGo product is geared almost solely toward general practitioner or general dentistry that we have out there. And I think what people miss at times, they might think, well, it's fewer liners or it's a simple system, and it is. But this is a platform. You scan with iTero, and iTero basically communicates to the doctor that this is an iGo kind of a case, it makes it simple in that sense. And then we're willing to -- we can move through that ClinCheck ID pretty quickly. And so workflow in the general dentistry area, we have learned over 20 years, is just critical. That there's confidence there, that the product is simple, but actually -- and it works well. And [Audio Gap] I think everything else we put together and the best plastic liners in the world really make that work, Jon. So that's the 500 million patients that are out there, primarily they'll be served through general dentistry. Most of these are adults. Many of them had braces at one point in time and need to touch up for something like that. And really, the answer to that part of your question is I feel good about our progress, but we're just starting in this thing, Jon, really. I mean we see great growth, meaningful growth, material growth. But I -- and we're putting a lot of money into it, but there's just so many areas to go. I honestly think orthodontics becomes just everyday dentistry when you go forward. And we can talk more about that during this session.

And I look forward to doing that. And so maybe help us out with what else the company is looking to introduce. And where I'm going with that, Joe, is it less from the product perspective and maybe the actual offering? And let me be a little bit more direct. In other words, the Swift initiative pre COVID, right? Let's go back to that. Just what were the learnings there? I've always talked about this market being enormous, but maybe the need to put it into some sort of a monthly payment for the consumer. So maybe just talk to us on what you did or didn't learn at Swift about that $3,000 price point or the monthly initiative that were part of that program.

Well, obviously, financing is take care -- or directly from a doctor standpoint, and we can give them directions. To answer the first part of your question, though, Jon, is that Swift was interrupted by COVID and all the shutdowns. So I don't think we're in the market even more than 4 days, 5 days, and we had to shut down and move forward with it. But we did a lot of prep work with our product Swift and then also with doctors. And as you mentioned, there's never been a mystery in this business for 25 years that patients, the first question they'll ask after clinical efficacy is how much does it cost. And so yes, there are certain price points for certain kinds of clinical opportunities to have with customers that aren't too complex. And -- but to say that we learned something from that trial, Jon, on the Swift, it's premature. And we haven't planned to really go back to it. We've been very effective with iGo, with the other 100,000 doctors we're working with out there. But payment systems at all, and John can join in, we know it's important. We're helping our doctors on that piece. But in the [Audio Gap] I think you might have missed the last part of my feed. In the end, I'd say, we're helping doctors. But John will have some input in a sense of how we work on the financing side to help our doctors.

Yes, John, and I wanted to pivot to you on that. I think earlier on, you talked about some of the initiatives on financing. Where are the doctors? And are they a bit more proactive in trying to get this treatment into the hands of the consumer, maybe helping it be more bite size, if you would, over a monthly perspective?

I think that's right, Jon. I think what you find is doctors -- and just like we're realizing, you want to sell the way your customers want to buy. And so when we sell to our customers, there's a lot of things that we can do from a financing standpoint so that they can help to scale up, whether it's on the iTero side or the Invisalign side to scale up. And I think then those doctors can get some of those cash savings to them and be able to apply that so that they're more aware. I think doctors are more aware of their consumers coming in. Maybe they want to pay monthly, want to pay sub $100, want to kind of pay over time, and that's a concern to them, and they want to be able to make sure that, that's priced accordingly. So I think everybody is just much more aware of that. And we've done a lot of things through the crisis and recovery to help our doctors, and I think they've helped consumers in the same way.

Okay. Great. Very helpful. Maybe 1 or 2 more down the adult lower acuity initiative. Joe, when I think about the storefront restriction with SDC, that arguably expires, I think, it's August of 2022. And [ I think you ] want to start treatment in these stores. But it seem to still do a very effective job of increasing awareness and sort of the digital experience from a consumer perspective. I actually think you still pursue that in some international markets. So is this something that we could see back on the table in the U.S. exiting next year?

I don't anticipate it, Jon. We look at our return on investment, those stores are expensive. The help that you have to hire, the real estate that you need to put in front of people in order to have a convenience to enter it. And so we feel -- John and I feel, we have so many other places we know we can get a strong return with those dollars and be able to direct patients. So it was a useful exercise. We learned a lot. We were closer to customers. It was always a doctor-based model. You know that, Jon. We were [ taking ] those customers, we're setting the doctors, we won't deviate from that. But right now when we look around the world and on our investments, we think there's so many other places we can invest from a consumer standpoint and get a good demand piece.

And I think, Jon, just to further that, we sell to tens of thousands of doctors across the world, and in essence, their stores. They're interacting with patients that are in their chair. And if it goes to what Joe was describing, where they're scanning every patient, they're talking to them about potential treatment, how your teeth have changed, and then can provide some visualization of what your teeth would look like with treatment. And if the pricing is right and the convenience is right, they're getting conversion right there in the chair. And that's not something we had to invest in the store location. It was part of the 80,000 doctors that we already sell to.

I think it's a great point, John. I mean I guess, a lot of those doc offices, right, aren't necessarily the 1972 analog outlook anymore. They've come a long way. So they're digital and they're consumer-facing. And so why not leverage those sort of cutting-edge practices rather than pay a ton for [ it and do it on your own ].

That's it. Yes. [ That's what we're doing ].

Joe, one other one that I want to ask is the opportunity with patients. Like you look at the feedback on Invisalign, it's through the roof, right, in terms of the consumer experience. So you got 10 million patients plus that have now completed an Invisalign treatment. They're very pleased with the outcomes. It took you so long to get to 1 million, now you're at 10 million, and you're adding a ton every month. Is there something that you can do for a lifetime value of the customer? And I'm not talking about necessarily low end like whitening. But people had this great experience, you've got a phenomenal brand, is there a way to further monetize that when we think about that individual?

Yes, Jon. One part of it, and I think it's exactly what you mean. But as you go through that, it's the referral programs because you have a great -- like you said, we have patients that love the product line, great experience. They're high promoters. And we're formalizing that on our app as the patients can -- that had a successful [ think ] and actually receive remuneration for suggesting Invisalign to their friends. The other part of this, Jon, is touch-ups and retentions. It's -- not everyone wears our retainers all the time. And we're -- I'm not just saying it. If you ask any doctor in the country -- or in fact the world, you look at Vivera, which is our Invisalign retainer, it's the best retainer in the world. It's because we know how to make these things, right? We get the exact dimensions, the exact [ tolerances ] that you need. And there's touch-ups. Sometimes you have to move 2 or 3 teeth that floated on you over a couple of month period because you didn't wear your retainer. So I think -- I didn't know this before I came into the role. [Audio Gap] So unless you put a retainer on those teeth in some way, those people are going to be coming back to the doctor and looking to be addressed in some way. So I think that's one of the best ways that we can really leverage the brand that we have and the experience of customers and patients we've had out there.

Okay. Joe, you broke up a little bit at the end, but I think to just bring it home, it's wide. It's the referral process, if you would, and then you're going to get some natural repeat customers not adhering to the retainers...

And you check out our app, we'll have that on shortly. If we don't have them on already in doing that, too. At least that's just natural in the world that we function in today that we'd be doing something like this, Jon.

Got it. Perfect. Teen and then I'm going to go into margin. So maybe, Joe, I'll stick with you on teen. 11 million teen cases a year. A pretty clean market opportunity. You guys can do about 90% or roughly $10 million with your technology and you did 500,000 cases last year, right? So call it mid-single-digit overall penetration. A little higher in the U.S., a little lower international. Is this just -- there's nothing wrong with it. But is this just a slow and steady climb? Like, hey, we're going to grow 25% to 30% in teen. Wires and brackets is going to grow, too. You do the math, and you pick up 100 to 150 bps of market share per annum. And John, that's what we're going to do over the next 5 to 10 years. Or is there something where you start to tip it because of peer to peer and parent to parent. And maybe you can talk to that, Joe.

Well, I think, Jon, you got to start with that question is we have a better process, right? It's better for patients and it's better for docs. We prove that through ADAPT, and it's better for docs. You can make more money, you can monetize your staff better, you can monetize your square footage better in digital. And secondly is, I mean, you line up patients and say, what do you want? Wires or brackets or Invisalign? There is no contest. The patients offered Invisalign, often they'll go with it. So it's inevitable this market goes our way. I don't see that, that's a linear extrapolation as people refer to it. I think at some point in time, the classic tipping point of innovator's dilemma is 30% to 40%. If the industry goes that way, the rest of it goes because patients know they have other options. They can go across the street and you grab Invisalign in some way. So no, I don't think it's [Audio Gap] Sooner or later, you gain enough momentum. I know where I am in this thing, okay? Sooner or later, you gain enough momentum that patients are going to demand this. It's just so much better than what the analog procedure is. We just have to get to that tipping point with the number of orthodontists that really offer our teens and the confidence factor the orthodontists have in the business model as well as the clinical model that we have.

Okay. And part of the portfolio, I'm going to jump forward all the way to palatal expansion. Maybe we haven't heard a little bit about that in some time. Anything to detail on the timing behind that product? And we still think about that as your first direct 3D printed product?

Yes. No, it is. And the lab has been doing a great job with it, Jon. We can make them today, okay? And we've done trials. Very successful with children, up to 10 of them. The issue is scale. We can't do 1 million of them, okay? I mean we -- it's this direct printing process that we have to use is not highly scalable. But you'll see us move into the market, Jon, fourth quarter of this year, first quarter of next year, which is [Audio Gap] and to see if we can scale this process to the term. So software is written. We understand the design, we understand the interface. Right now, it's all -- and Jon, when you think about the scale of this business, and I think it's what investors miss at times, too, is that how good do you have to be, to be able to produce 100,000 of these things in a week and do it well and get it to patients, we get to doctors, you need a process that scales. And...

And Joe, sorry, because you were breaking up a little bit, I just want to make sure. So this is something you're working on scaling right now, and we could see hit the market later '21 into '22?

Yet not at scale, not at scale. You'll see us take the marketplace to begin to trial in a broader sense with doctors than just a limited amount of process that we've done -- in projects we've done with doctors so far, Jon.

Okay. And one more that I want to hit on for teen is sort of we've had the -- we've done some work in the field, and I don't think it's well understood from investors. And let me know if I'm off base here. But I think about Invisalign First as your true first repeat product, right? So in other words, someone comes in for Invisalign First, and they're an 8 or 9 year old, and they do Phase I. And then they're coming back 3 years later for Phase II. How many first patients have you done to date? Joe or John, I don't know if you want to give us that number. But then do we think about -- that's the backlog, theoretically, for those patients that should just be first returning sort of now when you think about the timing of when this product was introduced, I think, in the back part of '18, is that fair?

Yes. Jon, that's been a very -- I think you know it's been a very successful product for us. And remember, this is mainly 6 to 9, 10 years old, is -- are the patients that we're dealing with there. And doctors get really excited about the dental expansion with Invisalign First. We're starting to see the first Phase IIs come in. Some doctors, depending on the age of the patient and the doctor's preference, this can be 2 to 4 years. And John, you probably have a better idea in the sense of what kind of numbers we're seeing on the Phase II side.