Recently, we reiterated our ‘Neutral’ recommendation on Align Technology (ALGN) with a target price of $18.00. The company witnessed balanced sales growth across all its channels during the second quarter of fiscal 2011.
Align has undertaken several strategies to improve adoption of Invisalign. These include acceleration of product/technology development, extension of clinical effectiveness, expansion of Invisalign brand and driving international growth among others.
In the reported quarter, the company successfully launched its Invisalign G3 in international markets including Europe, Asia Pacific, China, and Japan. The company believes that the new features and functionality delivered with Invisalign G3 are even more effective outside North America, especially in Asia, due to the higher complexity of cases among the Asian Population. Over the long term, we expect G3 and other innovations to act as a major catalyst to sustain the continued growth momentum of Align in new as well as existing markets.
Moreover, the company intends to further expand its footprint in the malocclusion market by aggressively marketing Invisalign to both doctors and patients. In April 2011, Align acquired Cadent Holdings, a provider of 3D digital scanning solutions for orthodontics and dentistry and maker of the iTero and OrthoCAD iOC scanning systems. Align’s revenue in the second quarter includes contribution from the Cadent for two months.
Through its partnership with Cadent, the company expects to deliver a series of applications over the next couple of years, and the first application is expected to be rolled out by the end of 2011. Align expects to maintain the growth momentum in the upcoming quarters, primarily on the back of scanner sales and new opportunities in the digital dentistry and restorative markets. Align expects the Cadent acquisition to dilute fiscal 2011 GAAP EPS, while it will be accretive to the adjusted EPS in fiscal 2012.
However, we remain concerned regarding Align’s significant margin compression in the reported quarter. The company’s continuous strategic investments in the international market, portfolio development and costs associated with the recent Cadent acquisition resulted in higher operating cost.
We remain apprehensive based on the economic uncertainty as it makes patient defer dental procedures, being elective in nature. Widespread austerity measures in both public and private sectors led to softer performance in the UK. Although Align has experienced an upside in patient traffic since the second half of the fourth quarter, any hiccup in the recovery process will have a negative impact on the top line. Align currently retains a Zacks #3 Rank (short-term Hold rating), matching our long-term Neutral view. With respect to competition, Align ranks at par with its peer Danaher Corporation (DHR), which also holds a Zacks #3 rank (short-term Hold).
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