Align Technology Facing Emboldened Established Competitors and New Venture Backed Competition; Will it Maintain its Market Dominance in Clear Orthodontics?
Competition in the clear aligner market is poised to heat up even further. Established competitors are growing rapidly and a number of new venture capital backed entrants are adding to competitive headwinds. Align Technology, the far and away leader in the invisible orthodontics market with approximately $3B in revenue and a 60%+ share of the global market has maintained its dominance for years with pricing and case volumes holding up exceptionally well since over 40 key patents expired at the end of 2017. However, there are signs of cracks in the foundation as established competitors are upping their games in the $5 billion global clear aligner market that has more than tripled in size since Align’s patent expiration and is expected to continue to grow at a health double digit rate. Worldwide there are an estimated 500 million individuals with misaligned teeth, and 21 million started an orthodontic treatment in 2022 of which approximately 4 million used clear aligners. Consequently, despite strong growth, there is still a lot of runway remaining in this attractive growth segment.
Large Competitors Growing Above Market/Upping Game:
Major competitors in the clear aligner space include Envista Holdings, Dentsply Sirona, Straumann, 3M, an Smile Direct. The general trend among these companies has been to increase their investment in their orthodontic offerings by improving their digital solutions and customer service, and those that publicly report have shown growth rates significantly above those at Align Technology. The investments required to be a significant player in clear aligners are substantial, including significant investments in software, information technology, sales & marketing and customer support. Align, even when it held a market monopoly, did not reach profitability until it achieved a revenue run rate of approximately $200 million. Many of Align’s competitors are well established dental companies that can leverage existing infrastructure and given the size of their clear aligner businesses, many are beginning to achieve the scale where these franchises are now generating significant profits supporting further investment.
For example, Straumann in its 2022 annual report provided information showing it’s ClearCorrect aligner franchise is likely between $200 and $250 million. The company has highlighted significant recent investments in its digital offerings to customers. The company has publicly states that, “We believe that clear aligners may become a significant revenue contributor for the Group. By widening the offering to additional customer segments and health consumers, exploring new business models as well as expanding the geographic footprint, the ClearCorrect business is well positioned for future growth.”
Dentsply Sirona who manufactures SureSmile system which has been used by over 750,000 patients which it markets to orthodontists and dentists and its Byte offering which is more consumer oriented and uses at home impression kits. Dentsply Sirona indicated orthodontics, which primarily comprise these offerings comprised 8% of global revenue in 2022 indicating a revenue base of approximately $300 million.
Envista Holdings indicated that its Spark offering is now greater than $100 million in annual sales and they doubled the number of ordering physicians in 2022 leading to greater than 15% market growth.
3M also offers its Clarity aligners. They are one of the premium priced offerings in the market and we estimate are on a similar scale to other major competitors in the space.
The exception to this rule is Smile Direct Club who has been struggling significantly of late. After peaking at over $700 million in sales in 2019, the company’s current revenue run rate is less than $400 million. The Company has announced a recent restructuring but given depleted cash balances, significant debt, and continuing operating losses it is unclear whether the company will remain financially viable.
Align Has Weathered the Storm Well but Cracks Showing in the Foundations:
Despite the onset of significant competition in the last several years, Align has weathered the storm exceptionally well. Given its relative monopoly for almost two decades, its strong brand awareness, and its existing infrastructure this is not surprising. Additionally, the exceptionally strong market backdrop with 20%+ sustained growth has helped their cause. Pricing per shipment, has held up exceptionally well and based on Align’s financial reports is only down about 3% since the start of 2018, and has actually rebounded in recent quarters. Additionally, case volumes while below the 2021 peak have recently rebounded and grown on a sequential basis despite higher case pricing. Align’s current ASP per shipment is a little below $1,400 and the end market pricing to the consumer is around $5,000 on average.
Source: ALGN Financial Filings
Despite maintaining market growth there are signs of increased market pressure on Align. Since the start of 2018, the company has had negative operating leverage demonstrating higher customer acquisition costs. Additionally, margins at both the gross margin and operating margin level have been on the decline.
Source: ALGN Financial Filings
Despite, relatively stable pricing, inflation adjusted costs are likely weighing on the company. Pressures where Align must choose between pricing/investment in marketing versus volume could become more significant ahead given the increased focus of established competitors including lower priced consumer offerings.
New Entrants Could Exacerbate Competitive Dynamics:
Given the attractiveness of the market, competition in the clear aligner market is only increasing with new technology offerings and venture backed competitors entering the fray. These include companies such as inBrace, which has raise $218 million in venture capital to market its InBrace system, a wire based, behind the teeth, orthodontic solution that allows normal eating/drinking and is typically 20% faster than clear braces. Their system is priced as low as $165 a month and is offered by a large number of providers across the country.
Another emerging competitor is Impress which offers more traditional clear aligners. The company has raised $180 million to date and is currently in 160 clinics in eight countries. Treatment options with Impress range from $75 to $149 a month based upon severity/duration.
Offering a more standard bracket and wires approach is Lightforce which manufactures clear ceramic brackets along with clear wires. They market their technology based upon the ability to offer shorter treatment times (45%) and fewer office visits (41%) which is based upon a paper published in the Journal of Clinical Orthodontics. The company has raised $150 million to date and has a number of clinics offering the technology across the U.S.
There are also lower cost options focused more on emerging markets and more value conscious consumers such as Toothsi which has raised $87 million to date. The company offers at home solutions using impression kits and sells for less than $1,000 even for more severe orthodontic cases.
As typically seen in patent expiration, it can take time for competitors to garner a foothold, especially in markets that require significant upfront investment, information technology solutions, and meaningful commercial capabilities. While Align Technology has demonstrated resilience in the face of growing competition, its position is not impervious to challenges. Established competitors are rapidly enhancing their offerings, and new entrants are introducing innovative solutions at competitive prices. Time will tell if Align will weather the storm or if further declines in profitability and market share are on the horizon.