Txomin Zaratiegui of Arlas Capital presented his investment thesis on Align Technology (US: ALGN) at Wide-Moat Investing Summit 2022.

Thesis summary:

Align is the undisputed leader in next-generation orthodontic services.

The orthodontics industry is going through a once-in-a-lifetime transformation that is likely to obsolete metal braces within a decade. 3D-printed plastic transparent braces are effective, comfortable, improve dental hygiene, and help dentists augment the return on their assets. The industry is adopting technology beyond braces, and most practitioners operate computer-aided design software as well as analyze and process each orthodontic case with a scanner (90% of Invisalign cases are submitted using a scanner in the U.S.).

Align has moved beyond 3D printing to managing a platform of aligners, software, and scanners in order to close the loop and become a one-stop shop for clients. Align is already the leader, but given that metal braces still have ~80% market share, there is significant room for growth. Transparent braces are growing at ~25% annually, as compared to ~10% for the total market.

As with most healthcare products, orthodontics demand is quite inelastic to price. It is a fragmented industry in which the low-price tier has little differentiation, and only Align achieves a significant premium (100-150% more expensive than traditional braces).

Align’s competition faces substantial entry barriers, driven by economies of scale and network effects. Developing this product took more than two decades and nine million cases, and the product continues to be improved. Align’s size and cash generation enables it to keep investing in the product and platform. The product is so dominant that many clients simply call transparent braces “Invisalign” — they are by far the most recognizable brand in the industry for both patients and clients.

Align’s strength attracts more practitioners and more clients. Clients know that their investment in time (education on the platform) and capex (scanners) will pay off in the long run because Align supports its clients. Doctors are risk-averse and afraid of trying alternative braces that often have less support and a less sophisticated product.

Quality of service and infrastructure are crucial. In various locations worldwide, Align has hundreds of employees (~60 just in CAD design in Madrid) who ensure that the aligner is correctly created for each treatment. This closeness to the clients is essential. Every dentist to whom Txomin has spoken describes Align’s service as excellent and a source of trust.

If Align succeeds at (1) continuing to make the product and platform better versus other transparent aligner manufacturers (resulting in pricing power), and (2) serving standard cases with its most expensive products while keeping a presence in the mid-segment with its basic product (growth of potential user base), then the transition from metal to transparent braces will be a tailwind that should make the company significantly more profitable in the future.

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About the instructor:

Txomin Zaratiegui Osés is the founder and portfolio manager of Arlas Advisors Sàrl. He has a passion for investing and continuous learning. He was previously an Investment Director at Gala Capital, a leading Private Equity fund management firm headquartered in Madrid focused on growth capital equity investments. He worked on dozens of acquisitions and deals sourced across different industries. He was a Senior Analyst and Investment Associate at the firm. He also worked as an Investment Advisor for the Economic Office of Spain to the United Arab Emirates and Qatar, where he advised Spanish companies to expand internationally. Txomin Zaratiegui Osés started his career working as a management consultant and as a Corporate Banker at Barclays Bank. He also served as a Board Member at Prot-On, ESM2M, and Technoactivity (Mymoid). He holds a degree in Economics from the Pompeu Fabra Univeristity in Barcelona, Spain and an MBA from London Business School and Columbia Business School, where he graduated with honors.

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