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October 12th, 2017

HOLD | Align Technologies | (ALGN)

Basic Data Scenario Analysis

Price 193.60 Bear Case Base Case Bull Case
3-Month Avg. Vol. 737,190 Equity Value per Share 163 205 221
Market Cap 15.45b Upside / Downside -16% 5% 13%
Enterprise Value 15.45b

Capital Structure Considerations

Align Technologies is unleveraged, operating without debt as of Q217.

Investment Thesis
Malocclusion treatment worldwide is expanding. Meanwhile, innovations in clear aligner technology, including
vastly improved treatment quality and customized mass-productions, place the clear aligner space in an
attractive position. Align Technologies possesses significant competitive advantages within the rapidly
expanding clear aligner industry, namely deeply developed brand recognition, vast market share, patented
proprietary technology, and virtually irreplaceable intellectual property. The clear aligner industry currently
controls 9% of the global orthodontics market, with Align controlling 80% of that figure.

Variant Opinion
Digital vs Analog (Addressable Market Larger than Thought): Mass customized production and Aligns
advancements in clear aligner technology prime the clear aligner market for disruption; digital supply of
orthodontic expertise, alongside pre-existing underappreciated growth tailwinds for that market in developing
economies, stands to dramatically expand the malocclusion treatment market
Underappreciated Competitive Advantages: Align has completed 4m cases, providing the company with an
extraordinarily valuable wealth of data. This data deepens their competitive advantage as Align can more
accurately construct treatment plans, thereby expanding availability of their product.
Exemplary Management Performance: Aligns leadership consistently performs attractive acquisitions while
accomplishing goals from a consistent vision. Align currently holds 670m cash and 0 in debt; positioning the
company well for future acquisitions.

Key Sensitivities
Revenue
(millions) Clear Aligner share of TM Perpetuity Growth
9% 20% 30% 40% 50% 2% 3% 4%
80% 900 2,000 3,000 4,000 5,000 6% 213 290 463
ALGN WACC
70% 788 1,750 2,625 3,500 4,375 7% 163 205 279
share of
Clear 8% 132 158 198
60% 675 1,500 2,250 3,000 3,750
Aligner
Market 50% 563 1,250 1,875 2,500 3,125
40% 450 1,000 1,500 2,000 2,500 Assumptions
No acquisitions
*Assuming market of 10m cases & rev/case of 1000 By 2020 Clear Aligner share of TM is 20% and ALGN
**market conservatively set at 10m despite increase & share of Clear Aligner market is 70%.
Re/case set at 1000 as pricing power declines
CFFO varies between 26-30% of net revenue
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Associated Risks
Failure of Orthodontic Community to adopt: Orthodontic community may pivot and create in-house custom
clear aligners, or retain use of metal braces. However, the former is far more likely.
Increased competition: Align will face decreasing market share as key patents expire; their ability to succeed,
therefore, keenly depends on the disruptive power of the clear aligner market as well as penetration of new
non-competitive international markets.
Macroeconomic headwinds: An economic decline would likely involve a corresponding decline in consumption
of malocclusion treatments. Aligns revenue may suffer from a decline in discretionary consumer spending.
Global expansion efforts may fail: Align poises themselves to expand rapidly in the next two years; their
sustained growth significantly depends on the success of those efforts.

Why does this Opportunity Exist?

Expectations of Competition: Key Align patents, which protect the process Align uses to digitally plan and
manufacture clear aligner sets for patients, are set to expire in October 2017. Expectations of competition will
deflate expectations.
Failure to appreciate true future size of addressable market: Align is consistently valuated on the basis of ability
to gain share in North Americas 2.6m case starts per year, or the worldwide 10m case starts per year. However,
case starts per year are rapidly increasing. This is driven by Align and the companys technological innovations
and increasing global standards of living.

Debunking the Bear Case

Align will fail to capture an attractive share of the future clear aligner market: Aligns current 80% market
share and brand recognition will serve to maintain an attractive market share. Additionally, even in the event of
a significant market share decline, adoption of clear aligners will serve to strengthen Aligns financials.

Cultural acceptance of product: Aligns rapid expansion across varied geographic channels is dispositive.

Align requires training before prescription: 14 dental schools, including NYU, Columbia, and UOP, graduate
their students Invisalign certified.

Financials
In Millions 2014A 2015A 2016A 2017E 2018P 2019P 2020P 2021P
Aligner Revenue 713 800 958 1,272 1,463 1,683 1,935 2,225
Scanner Revenue 49 45 122 113 129 149 171 197
Net Revenue 762 846 1,080 1,385 1,593 1,832 2,106 2,422
Gross Profit 578 640 815 1,053 1,211 1,392 1,601 1,841
SG&A 332 390 491 643 733 836 953 1,086
R&D 53 61 76 96 110 125 142 162
Operating Profit 194 189 249 314 368 432 506 593
Pretax Income 190 186 242 313 367 431 505 592
Taxes 45 42 51 72 87 100 115 138
Net Income 146 144 193 242 282 333 393 458
EPS 1.77 1.77 2.33 4 3.60 4.44 5.48 6.65

Gross Margin 76% 76% 75% 76% 76% 76% 76% 76%
Operating Margin 25% 22% 23% 23% 23% 24% 24% 24%
Net Margin 19% 17% 18% 18% 18% 18% 19% 19%
Taxes 23% 23% 21% 23% 24% 23% 23% 23%
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Appendix I: Description of Align

Align Technologies produces and sells clear aligner trays(Invisalign) to treat malocclusion (crooked teeth) and intra-oral
scanners(iTero). Notably, sale of clear aligners entails provision of treatment plans for client orthodontists and GPs
(general practitioner dentists). The clear aligner and scanner segments compose <90% and >10% of revenue,
respectively. Additionally, high gross margins (<75%) allow for significant investment in employee compensation,
marketing, and R&D, allowing Align to more easily entrench and preserve their competitive advantages. Owing to 3D
printing, production costs of aligner cases are very low, while production itself occurs only after a prescribing doctor has
accepted the treatment plan. Therefore, inventories are very low and Align incurs little depreciation of produced goods.

Align aims for a comprehensive product, described in process as:

Client professionals may use Aligns iTero scanner to produce a digital impression of the patient. This digital scan is sent
to an Align treatment planning where a treatment plan is developed. This treatment plan is sent to the professional for
review and modification. Upon finalization, Align produces the required trays at their manufacturing facility and ships
them to the client Orthodontist/GP.

However, client orthodontists and GPs may submit physical impressions or digital impressions from 3rd party scanners.

(3) Align prepares and sends back proposed treatment

plan
(1) Ortho/GP sends materials to Align (either a
physical impression or an iTero or other 3rd party
Ortho/GP digital scan)
ALGN treatment planning facility
(2/3) Align and Ortho/GP continually modify
the treatment plan until approved by Ortho/GP

(2) ClinCheck treatment

(4) Align manufactures plan developed through
Aligners and distributes reference to 4.5m
to customers previously completed cases

Align requires infrastructure for order acquisition, treatment planning, manufacturing, and distribution.
Locations of Aligns current infrastructure is detailed below.

As of December 31, 2016

NA San Jose, California Corporate headquarters, R&D, administrative personnel

Juarez, Mexico Manufacturing of clear aligners
San Jose, Costa Rica Treatment palnning facility, customer care
Raleigh, North Carolina Office for R&D, administrative personnel
EMEA Or Yehuda, Israel Manufacturing of iTero scanners, R&D, administrative personnel
Amsterdam, The Netherlands International headquarters, S&M, administrative personnel
Moscow, Russia Office for R&D

Opened in FY2017 / planned for FY2018

EMEA TBD Manufacturing

Cologne, Germany Treatment planning/order acquisition
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APAC TBD Manufacturing

Chengdu, China Treatment planning/order acquisition
LACA Sao Paulo, Brazil Distribution

Invisalign is regulated by the FDA as a Class II medical device. Additionally, orthodontists and GPs must complete an
Invisalign training course before providing treatment to their patients.

Invisalign uses SmartTrack, a specialized polymer to provide gentle and constant force, SmartForce, which features
attachments to the tooth to deliver predicable tooth movements, and SmartStage, programmed tooth movements
optimize the progression of tooth movements.

The scanners use patented imaging technology to produce a 3D digital file that can be used for procedures such as
crowns, implant abutments, orthodontic workflows, and Invisalign submission. Align maintains agreements with 3 rd
party scanners for submissions, including 3M.

Additionally, Align holds a 19% stake in SmileDirectClub and maintains an exclusive 3rd party supplier agreement.
SmileDirectClub ships aligner trays out to consumers, cutting out face-to-face professional contact entirely. The
agreement is such that if the case is too complex, the patient is referred to an Invisalign provider with SDC furnishing
Align with all patient into and data assets. Typically, 70% of cases are accepted and 30% are referred to Align through
Aligns Doc Locator. Market research suggests that patients of SmileDirectClub would never have gone to see a specialist
and seek treatment therefore there is minimal cannibalization.

Appendix II: Description of Market & Competitive Space

Relevant contours of the malocclusion treatment market:

Roughly 10m people worldwide receive treatment for Distribution of Global Market
malocclusion per year (3m in North America, 3m in Asia
North America
Pacific, 2m in Latin America/Caribbean, and 2m in Europe,
the Middle East, and Africa). 75% of malocclusion patients 20%
30% Asia Pacific
are pre-teen/teenagers and 25% are adults.
20% Latin
Clear aligners are used in treating about 8% of that total America/Caribbean
market and Align composes 80% of the clear aligner market, 30% Europe, Middle
or 6% of the worldwide malocclusion treatment market. East, Africa

Treatment for malocclusion is disproportionately performed

in North America (see figure), particularly the US. Clear aligners are further concentrated in NAS; 65% of shipped cases
head to the US. Annualizing from 1H17, Align provides aligners for 19% of North American malocclusion treatments.

Competition: Align faces very little competition in clear aligners, the primary segment. Aligns greatest
competitive threat comes from off-the-shelf discounted methods of teeth straightening; medical equipment
company Straumann Group (STX: STMN) acquired ClearCorrect, the largest of such competitive threats, for
150m in the summer of 2017. However, research finds that mail-order clear aligners are not typically demanded
by those who seek in-person treatment from orthodontic professionals.

Align faces far greater competition in the scanner equipment market, notably from Dentsply Sirona and 3M.
However, as Align offers seamlessly integrative products, demand for Invisalign bolsters demand for the iTero
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scanner. Additionally, the iTero scanner performs digital impressions in >60 seconds, making it the fastest
scanner on the market, without a compromise for quality.

Many analysts primary worry for Align relates to expiration of key patents and the introduction of significant
competition for example, the patent for digital treatment planning expires October 2017. However, patent
protection thus far has uniquely allowed Align to produce the wealth of data necessary for significant
competitive advantage continuing forward, even in the absence of such patents. Additionally, Align retains many
key patents the material used in producing Invisalign, SmartTrack, was awarded patent protection in early
2017.

Appendix III: Expansion on Thesis & Variant Opinions

1. Expansion of Clear Aligner Market
I argue that the expansion of Aligns capabilities in treating malocclusion will result in a greater share of the total market
and will further propel already existing tailwinds for the growth of worldwide demand.

Invisalign was initially marketed as a discrete corrective treatment for adults with mild malocclusion, owing to the
relative simplicity of such cases and the limits on Invisalign capabilities.

A. Align capabilities expanding: Due to recent technological advancements by Align Technologies, clear aligners are
currently able to perform about 50% of current malocclusion treatments. Align anticipates this figure to reach
75% by 2019, a massive expansion of Aligns potential market.

Align will be able to treat more forms of malocclusion as they harness rapidly compounding volumes of data
from customers they maintain a database of 4.5m cases and are on track to treat ~880 thousand patients this
year. This data forms the basis of quality treatment plans. Additionally, Aligns patented SmartTrack technology,
a specialized polymer that is uniquely able to retain force on key placements, is the most effective clear aligner
tray in existence. This is a particularly attractive form of competitive advantage one that self-perpetuates and
improves over time.

Evidence of this, as well as evidence of greater acceptance by the orthodontic community (a very important
driver of overall growth), can be found in the cases demanded by orthodontists, which are more complex cases.

NA Volume
350
300
250
200
150
100
50
0
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

NA Ortho NA GP
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Previously, North American GPs used a greater amount of volume than orthodontists; Invisalign became a more
effective product in treating malocclusion, resulting in increased acceptance by the orthodontic community as
Invisalign was used to treat more complex cases.

I. Particularly note impact on treating teens: Invisalign has been traditionally accepted as an adult
treatment, which are typically less complex cases. Align is now able to treat teen cases, which represent
75% of the total market. The graph below shows the relative case split between adults and teens. The
teen segment has truly tremendous opportunity for growth and, in the long run, will outsize the adult
segment several times over.

Adult/Teen Split
*Fy2017 figure annualized from 1H17
1,000
900
800
Y/Y Shipment Growth
700
600
Volume

13/14 14/15 15/16 16/17

500
400
300 Teen 16% 21% 19% 23%
200
100 Adult 12% 23% 22% 25%
0
FY2013 FY2014 FY2015 FY2016 FY2017
Total 13% 22% 21% 24%
Teen 101 117 142 169 208
Adult 321 361 442 539 672

For now, growth of adult shipments actually outpaces growth of teen shipments. This trend will
eventually reverse as well. When one reconsiders that teens compose 75% of the market, it is clear that
there is abundant opportunity for Align to continue to expand at the same, or greater, rate.

In Q117, Align launched a massive marketing campaigns explicitly directed at capturing the attention of
this segment by targeting teens and their mothers on social media channels.

Additionally, Align has recently launched Class II treatments in many international markets and is
currently pending FDA approval in the US. Class II treatments involve shifting teeth as the skull moves,
this is essentially the process that complicates teen treatment.

In short, the technology has already been developed to capture massive shares of the teen market and
the opportunity is monumental.

B. Comparing Analog and Digital: Currently, malocclusion cases are treated through physical impressions,
painstaking individualized planning (relying on the individual professionals experience), and labor as metal
braces are affixed to the teeth. Invisalign represents a digital alternative: Invisaligns iTero scanner constructs a
digital impression, which is digitally sent to a treatment planning center. The treatment planning center creates
a treatment plan by analyzing data of 4.5m completed cases and the patient receives trays which require no
affixation.
The mass customization engendered by 3-D printing allows provisions for orthodontic treatment far beyond the
capacity of the industries current suppliers.
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C. Cost/Benefit Analysis of Orthodontists and GPs Suggests Disruption: If quality is increasingly indistinguishable,
adoption and disruption is inevitable. Due to SmartTrack, Invisalign can treat cases in 50% of the typical time.
This dramatically reduces actual chairtime within practices thereby increasing patient turnover and
increasing practice profitability. Additionally, as Align continues to amass data and provide more accurate and
effective treatment plans, doctors providing Invisalign need devote far less time to each case. These benefits,
coupled with the demonstrable preference of their customers to clear aligners, (and, due to branding
advantages, particularly Invisalign), serve to heavily suggest an inevitable disruption.

We can already observe the trend taking hold; though we might expect that a rise in doctors receiving cases
would depress a statistic reporting the amount of cases used by each doctor (as new doctors would likely use
less cases), we observe the opposite effect. Even as the number of doctors receiving cases rockets, the amount
of cases used by each doctor increases as well.

Additionally, Align has experienced relatively consistent y/y growth of # of doctors shipped trays of ~13%. We
can expect this trend to continue and even decline modestly, while we argue that we will expect a continued
increase in the utilization rate (Utilization Rate = # of shipments/# of doctors receiving) as tray shipments have
increased at a y/y clip of ~18% and are expected to continue or increase from that level as Align penetrates its
core markets.

Furthermore, Invisalign marketing is atypical as the campaigns target the customers of customers success of
Align marketing can be measured in individuals who request Invisalign from their doctors. Therefore, Align aims
to shift consumer preferences and places disruptive pressure on the industry. Success of marketing techniques
will lead to greater adoption of Invisalign as individuals request the product from their doctors.

D. Digital service dramatically shifts supply of orthodontic services: The shift from analog is the only way to serve
the massive developing markets that lack a significant enough number of orthodontic professionals. Mass
production of customized trays is the only way to serve these markets, and Align uniquely possess the
combination of IP and infrastructure to efficiently and correctly produce quality treatments. Aligns advantages
allow the company to be positioned to bring orthodontic care to markets never previously served.

I. This has huge implications on international treatment: The key point to understand is that the
worldwide market for treatment consistently expands as economies become wealthier. For example,
India is estimated to have 500,000 orthodontic case starts each year, with that figuring expected to
double by 2019.

Shifting to a digital model of providing orthodontic care serves to provide even greater tailwinds to
expansion of the market as market demand is partially a function of availability.
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Case Volume
1,000

800

600

400

200

0
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

International North America Total Volume

Like the expected inversion between adults and teens, we can expect international volumes to meet or
exceed North American volumes in the next decade.

As an aside, it is relevant to discuss Aligns efforts in international expansion.

First, it is important to note that there is currently no other company expanding in the global
clear aligner market. As professionals become reliant on the treatment plans produced by Align,
they will be unlikely to switch over to competitors. Thus, consumption from new consumers can
be considered durable as switching costs are high.

Align clearly states the need of establishing both order acquisition and treatment planning
facilities close to international markets to provide clients with a positive experience. To this end,
Align opened new treatment planning facilities in Chengdu, China in Q217 and Colonge,
Germany in Q217. Additionally, Align entered into an agreement to purchase a new updated
treatment planning facility in San Jose, Costa Rica(currently the location of the main treatment
planning facility).

Align expects to spend ~170-190m in capital expenditures in FY2017, primarily related to

international expansion. Notably, Align began FY2017 with cash/cash equivalents (including
short-term marketable securities), of 640m and no debt. This is a massive expansion effort;
though it is well-financed and administered by a highly qualified team.

There are 1.4m case starts per year in Brazil, the worlds second largest cosmetic market. Invisalign is
just beginning to tap into this market, opening the first distribution center in Sao Paulo in Q217.

The market for malocclusion treatment is not static nor growing at the same rate as population, as assumed by many
analysts. On the contrary, some of the worlds largest markets are experiencing the fastest growth, such as India and
China.

Many international markets have dentists but lack orthodontists in the same proportions as the US. The US will be able
to penetrate these international markets as they continue to innovate high quality products; dentists in international
markets lacking orthodontists will provide Invisalign to their patients. Aligns data advantage effectively allow for an
outsourcing of expertise.

Therefore, the future market for malocclusion treatment is not correctly assessed; dentists around the world will offer
this service to their patients, whom often desire the service, and demand will expand.
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With new innovations and expectations about future innovations, we can now imagine clear aligners as the future of
malocclusion treatment, as dictated by consumer preferences and cost-benefit analysis by practices and the success of
early adopters.

Even assuming Align declines in its share of the clear aligner market (down from 80%), due to increased competition, yet
the clear aligner market expands in its share of the total malocclusion market (up from 8%), it is easy to see Align stands
to massively gain, even assuming conservative estimates.

If, for examples, clear aligners gain 30% market share and Align maintains a 60% share of that market, Align reaps
revenues of 1.8 billion for the clear aligner segment.

2. Significance of Competitive Advantages

A. Branding: Invisalign is synonymous with clear aligners. In fact, Invisalign may be the de-facto word among
consumers for clear aligners. This is a function of Invisaligns aggressive branding strategy as well as their
pioneering efforts in the field.

Consumer preference will be of great benefit if the clear aligner market becomes more competitive.

In May of 2017, Invisalign launched a renewed brand initiative aimed explicitly at teens and their mothers. In
other words, Invisalign will leverage their brand recognition to gain market share in the new arena.

B. Data: Invisalign has com pleted 4.5m cases since inception, providing Invisalign with vast amounts of massively
valuable data. Invisalign produces treatment plans for client professionals, which are often subjected to
modifications by professionals. Herein lay the beauty of this advantage: as Align completes more cases, they
become more adept at developing treatment plans. As they become more adept at producing treatment plans,
less is required of the professional. It is foreseeable that dentists will take on far more orthodontic cases than
before as Align provides the requisite professional expertise and supplies the non-fixated applications(trays).
Invisalign will be able to provide orthodontic treatment far beyond the capacity of the current market suppliers
of orthodontic treatment.

In short, Align will be able to supplant orthodontic expertise and allow dentists and other otherwise unqualified
professionals to take on a far greater amount of cases.

Digitally submitted Invisalign cases have consistently grown, cementing the flow of data into Invisalign servers.
Currently, 59% of North American cases are submitted digitally.

This has huge implications for international expansion, as there are, even relative to the US, far more GPs than
orthodontists abroad. For example, as Align expands into Brazil, which maintains the worlds largest dentistry
base and the second largest cosmetic market, the company will be well positioned as they are able to provide
dentists with the tools to provide more complex cases than ever previously possible.

Additionally, Aligns exclusive agreement with SmileDirectClub allows for even more access to cases.

C. Innovation: Align has consistently led the clear aligner market in development of new products. They sit on
decades of experience in failures and successes. SmartTrack is the most advanced clear aligner material in
existence, enabling both significantly shorter and higher quality treatment. Align states that SmartTrack
material is clinically proven to achieve greater than 75 percent improvement in overall tooth movement
predictability compared to clear aligners made with off-the-shelf single layer material commonly used by other
clear aligner manufacturers1.

1 http://investor.aligntech.com/releasedetail.cfm?ReleaseID=1027809
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Aligns treatment planning applications have massively improved, providing practitioners with far more control
with each new iteration, commonly released every 1.5 years. Align has gone from dealing only in very mild
crowding cases to complex cases involving simultaneous movements of teeth and skull.

Product Innovation

2010 Invisalign G3 G3 allows for treatment of compound tooth movements

2011 Invisalign G4 G4 includes grouping innovations for compound tooth movements
Cadent (iTero
scanner) acquisition
2012 Invisalign Express 5 An effective treatment for very minor crowding, spacing.
2013 SmartTrack material SmartTrack made available. More precisely conforms to tooth, providing greater
control of tooth movement.
New iTero scanner
2014 Invisalign G5 Engineered to dramatically improve clinical outcomes in deep bite treatment, the most
common form of malocclusion in children and adults.

ClinCheck Pro 3D Controls allowing professionals to adjust directly on 3D model.

2015 Invisalign G6 Malocclusion solutions premolar extractions. Widespread use in Asia. 50% of patients
in Asia, 20% in Europe, and 12% in NA require premolar tooth extraction before
malocclusion treatment. 60% of doctors using G6 are from APAC.
New iTero scanner Smaller and enhanced wand with display features, faster scan speed, includes outcome
simulator. Also cheaper production costs.
2016 Invisalign G7 Further ability to fine-tune outcomes, particularly with teenage patient cases. Better
upper lateral control and improved root control
ClinCheck Pro 5.0 New configurable toolbar, more realistic models, and viewing side-by-side treatment
plans.
iTero Element 1.4
2017 iTero Element Includes timelapse, providing enhanced visualization, and one minute scans.
updates
Invisalign Treatment First clear aligner solution for Class II correction that advances the mandibular while
with Mandibular moving teeth at the same time. This is a critical development. Currently pending FDA
Advancement approval, expecting in Q417.

D. Patents: As of Q217, Align maintains 446 UIS patents, 433 foreign issued patients, and 388 pending global patent
applications. Align is consistently committed to both protecting their intellectual property as well as pursing
infringements on that intellectual property. Of particular note, Align was granted patent protection for
SmartTrack in early 2017, guaranteeing protection of an integral component of their continued success.

Align is a maturing company that can vigorously counter perceived infringements by competitors. They have a
history of success in combating patent infringements as well as ample funding for pursuing such claims.

The International Trade Commission has found Aligns US patents to be infringed by ClearCorrect.

3. Exemplary Management Performance

Align benefits from a very qualified executive team.

Particular highlights:

Align operates with no debt and maintains a significant margin of safety over short-term liabilities (quick ratio
averages ~3x for last seven years).
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Align well-position themselves to become a global company; in 2016 Align implemented a new international
corporate structure to benefit from tax structures in international markets. Align expects a resulting lower
worldwide corporate tax rate.

A. Acquisitions: Align Technologies has consistently demonstrated exemplary management performance. In 2012,
Align acquired Cadent Systems for 190m, forming the basis of their scanner segment. Invisalign built on the
technology developed by Cadent to produce a product integral to the success of their core business. In 2016
Align purchased a 17% stake in SmileDirectClub, a direct-to-consumer clear aligner company.

The Cadent Systems acquisitions birthed orthodontic big data, perhaps Aligns greatest competitive advantage,
as well as rounding out Align as a comprehensive care company with integrative products that are attractive to
dental and orthodontic professionals.

SmileDirectClub, as acknowledged by CEO Joe Hogan, represents the likely future of malocclusion treatment. In
the future, patients will likely submit scans and be sent clear aligners this disruption will occur when consumer
preferences adjust for the new technological reality; mass produced customized clear aligners provide an
identical service without the professional premium. However, consumers of this service seek care for their
children and consumers may be unlikely to view such a process as adequate, especially given the lack of
precedence.

Even so, Align purchased a 19% stake in SDC to nimbly adjust themselves for a changing future.

B. Incentive Alignment: Executive officer compensation was passed by margin of 92% at annual shareholder
meeting. This compensation program emphasizes cash incentive bonus awards and long-term equity
compensation compose the most significant portion of total compensation.

I. Ownership: Executives (excluding CEO) must own 2x annual salary (1x pre 2016). CEO must own 5.0x annual
salary.
II. Compensation: Annual cash incentive compensation = base salary x target bonus % x individual multiplier x
company multiplier = bonus payout.

Target bonus 60% (non-CEO), 150% (CEO)

Individual multipliers Determined by Compensation Committee. Either 1 or 0.
Company Multiplier Same for all executives. Based on revenue and operating income. Multiplier = 0 if
growth is below 90% of target.

All bonus payouts are tied to long-term performance metrics and capped at 240% target to discourage excessive
risk taking.

Average individual bonuses are equal to average outperformance of broad company goals. Executives receive
equity compensation based on performance and time, both aimed at accumulating interest as shareholders.

C. Consistency in Strategy: Invisalign consistently expresses the mission in clear terms: to drive the industry
forward by transforming away from an outdated analog process to a fully digital system.

Furthermore, Align has maintained the same strategy for several years focusing on: International expansion,
orthodontist utilization, GP dentist treat & refer, and patient demand and conversion.

Align recognizes the importance of acceptance by the orthodontic community; Align is a significant funder of
university research on clear aligners.

Invisalign is currently taught at 19 dental schools, including NYU, Columbia, and UOP. Over time, Invisalign
training and education will occur in schools rather than through Align.
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Appendix IV: SmileDirectClub

SmileDirectClub (SDC) sells discount clear aligners. It is significant to note that these are currently distinct markets; such
discount clear aligners lack the technological sophistication to surmount the concerns of typical consumers of
malocclusion treatment. However, the opportunity lay in non-typical consumers in fact, most customers are
individuals who would otherwise not seek in-person professional treatment. This segment is massive, as 60-75% of the
US population suffers from malocclusion yet only 15% receive treatment. According to Align, there are approximately
100m people worldwide in the doctor-directed at home market.

Such companies do not currently represent a threat to Align, which sells products to orthodontic professionals.
However, Joe Hogan, Aligns CEO, has expressed that such a direct-to-consumer system is the potential future of
malocclusion treatment. Interestingly enough, Aligns wealth of data on malocclusion treatment is exactly the type of
information necessary to improve direct-to-consumer (i.e. lacking face-to-face contact with a professional) to the
satisfaction of many consumers.

In Q216, Align purchased a 17% equity stake in SDC for 46.7m. The equity stake allows an appointment of a board
member, access to case information from SDC, and right to participate in future equity offerings. Additionally, Align
maintains an exclusive 3rd party supplier agreement wherein Align manufactures 1/3rd of SDCs clear aligners. In Q217,
Align purchased an additional 2% of SDC for 12.8m, bringing total ownership to 19%. Align also extended SDCs line of
credit to 15m from 30m.

The orthodontic community places a heavy premium on quality treatment. Aligns significant competitive advantages
engender a clear aligner unrivaled in quality. Therefore, most eager-to-compete companies are forced to compete in the
direct-to-consumer space, which contains far more consumers anyway.

Aligns investment in SmileDirectClub can be thought of as an investment in a potential future of the industry; if nothing
else, SmileDirectClub serves to make the discount aligner market more competitive while providing Align with significant
insight into the developing industry. A more competitive clear aligner market also serves to preserve Aligns data
advantage. Furthermore, investment in SDC will likely enhance Aligns ROIC Align acquired an early stake and will make
SDC far more competitive. The investment will also enhance Aligns income as patients with more complex malocclusion
are automatically referred to a local Invisalign provider.

Appendix V: Financials
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016

Aligner Revenue 387 452 517 615 713 800 958

Scanners 28 43 45 49 45 122

Net Revenue 312 387 480 560 660 762 845 1,080

CONR 79 84 118 144 162 183 205 265

Gross Profit 233 303 361 416 498 578 640 815

SG&A 174 179 231 257 348 332 390 491

R&D 22 26 40 55 43 53 61 76

Total OE 197 205 271 331 404 385 451 566

Operating Profit 37 99 90 86 94 193 189 249

Interest Income 0 -1 0 -1 -1 -3 -3 -6

Pretax Income 37 98 90 84 93 190 186 243

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Taxes -3 28 23 26 29 45 42 51

Losses, net of tax 2

Net Income 40 70 67 59 64 146 144 190

Shares Outstanding 78 78 80 82 82 82 83 83

Net Income/Share 0.26 0.60 0.60 0.71 0.77 1.77 1.77 2.33

Gross Margin % 75% 78% 75% 74% 75% 76% 76% 75%

Operating Margin % 12% 25% 19% 15% 14% 25% 22% 23%

Net Margin % 13% 18% 14% 10% 10% 19% 17% 18%

Tax Rate -7% 28% 26% 30% 31% 23% 23% 21%

Appendix VI: Ownership Table

In Millions Market Value of
Owner Shares Inclu. options) Total Shares Holdings Percent of Total
Gordon Gund 6.62 0.00 6.62 1,238.33 8.28%
BlackRock 6.17 0.00 6.17 1,153.22 7.71%
Vanguard Group 6.13 0.00 6.13 1,145.67 7.66%
Hogan (CEO) 0.03 0.00 0.03 5.65 0.04%
Morici(CFO) 0.00 0.00 0.00 0.00 0.00%
Pascaud (CMP&B) 0.02 0.01 0.03 4.81 0.03%
Zelko Relic(VPRD) 0.02 0.00 0.02 4.44 0.03%
Joseph Lacob 0.52 0.03 0.54 101.87 0.68%
Raymond Larkin 0.08 0.04 0.11 21.29 0.14%
George Morrow 0.05 0.01 0.05 9.61 0.06%
Thomas Prescott 0.15 0.01 0.16 29.24 0.20%
Andrea Saia 0.01 0.01 0.02 3.39 0.02%
Gereg Santora 0.02 0.01 0.03 4.99 0.03%
Susan Siegel 0.00 0.00 0.15 0.00%
Warren Thaler 0.13 0.01 0.14 25.43 0.17%
Emory Write(VPO) 0.08 0.01 0.08 15.10 0.10%

Total 20.03 0.10 20.12 25.16%

Shares Outstanding 80

NEO ownership 0.16 0.02 0.18 33.40 0.22%

3 Largest Holders 18.92 0.00 18.92 3,537.22 23.64%

Appendix VII: Summation

Unfortunately, there is currently limited upside to investment in Align. Many prudent investors would find it difficult to
argue on behalf of a justifiably large margin of safety to warrant investment.

However, as Warren Buffet once famously said, It is better to buy a wonderful company at a fair price than a fair
company at a wonderful price. In conclusion, I find that the current market price is a fair price for a wonderful
company.
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It is my opinion that Align Technologies (ALGN) be watched carefully short-term overreactions may provide watchful
investors with an opportunity. Additionally, malocclusion treatment is likely vulnerable to shifts in discretionary income;
a broad market downturn may provide dovish investors with several lower-than-expected earnings reports while the
news does not significantly impact Aligns long-term business offerings.