Recently, we upgraded Align Technology (ALGN) to outperform with a target price of $24.00.
During the second quarter of fiscal 2010, Align reported revenues of $108.2 million, an increase of 41.8% compared with the year-ago period. However, the reported quarter included $14.3 million of deferred revenues associated with Invisalign Teen replacement aligners. Excluding the latter, revenue increased 23% annually to $93.9 million.
Banking on its core product, Invisalign, Align has established itself as a strong player in treating malocclusion or misalignment of teeth. The Invisalign system significantly reduces the limitations of conventional orthodontic treatment (braces) with respect to aesthetic issues and oral hygiene which should drive patient acceptance and usage.
Moreover, Align has been introducing advanced products in its portfolio to cater to a wider base of patients. The company launched Invisalign G3 in August 2010 for its class II and class III patients. Viewing the advantages associated with Invisalign and the strong untapped potential of the malocclusion market, we upgrade the stock.
We note that Align’s Invisalign Teen, targeted at the teenage population is gaining wider acceptance. Revenues from these products recorded a 52.7% growth during the last quarter, which was primarily driven by the rise in patient population. The number of teenage patients (under 19 years) increased 10% sequentially and 40% annually to reach 22% of total worldwide volume compared with 20% in 2009 and 17% in 2008. This implies continuous share gain in the teenage segment. Moreover, the average age of teenage patients is shifting toward the younger side, 11-17 years of age, which represents the bulk of teen orthodontic cases. During the quarter, the average age of teenage starts was 15.5 years, which is expected to get younger as penetration in this segment continues.
In order to increase its brand awareness, Align has adopted several marketing strategies to further expand the patient base. These include, acceleration of product/technology development, extending clinical effectiveness, extension of Invisalign brand and driving international growth among others. This is evident from the improvement in utilization rates (number of cases shipped/number of doctors to whom cases are shipped). During the last quarter, total utilization increased across the customer base to 3.7 cases per quarter compared with 3.5 in the first quarter and 3 in the year-ago period. The reported quarter also witnessed a boom in international business.
However, we remain concerned about the tough competitive landscape that resulted in a continuous decline in prices over the past few quarters. Moreover, competitive products are expected to be launched in the near future, which could further intensify competition. We also remain concerned about the economic uncertainty as these procedures, being elective in nature, often get deferred.