7 October 2019 Equity Research Americas | United States

SmileDirectClub SDC

Setting Things Straight: Initiate Outperform

Target price (12M, US$) 18.00 [V] Life Science Tools and Diagnostics | Initiation Outperform

■ Initiate Outperform; $18 Target Price: As a leading provider of teledentistry services Price (4 Oct 19, US$) 14.72 and manufacturer of clear aligner solutions in the direct-to-consumer (DTC) orthodontic 52-week price range 19.48 - 12.94 market, SDC is disrupting the traditional delivery of orthodontic services by improving Market cap (US$ m) 5,692.07 accessibility and affordability. SDC is highly levered to a rapidly expanding and largely Enterprise value (US$ m) 5,580.00 underserved DTC market, with further market penetration driven by its superior marketing [V] = Stock Considered Volatile (see Disclosure Appendix) efforts, an expanding SmileShop footprint, innovation, SmilePay financing, as well as geographic expansion, supporting strong top-line growth (est. +47% CAGR 2018-2023), Research Analysts ahead of traditional peers, with inherent margin leverage thereon, turning a profit in 2020. ■ Disruptive Offering in a Highly Underpenetrated Market: Despite being the largest Erin Wilson Wright exclusively DTC clear aligner provider, SDC has captured less than 1% of the total global 212 538 4080 [email protected] addressable market of 500 million patients ($945 billion). Continuing marketing efforts should drive heightened awareness, as well as other competitive advantages in relative Katie Tryhane convenience, expanded access to care, and lower cost relative to traditional providers 212 325 2713 (~60% avg. discount). Moreover, its partnerships with CVS, Walgreens, and other [email protected] international retailers allow SDC to expand and further optimize its SmileShop footprint in a Haley Christofides capital efficient manner (CS est. +100 stores/yr), while SDC's in-house financing service 212 325 3720 will address cost as a key barrier for penetration (used by 65% of customers). We also [email protected] highlight drivers in innovation and further international expansion, which represent areas of upside to our current expectations. Importantly, we forecast 2,198 bps of EBITDA margin Matthew Urbik expansion from 2018-2022 on growing scale and automation initiatives. 212 325 2152 [email protected] ■ Compelling Valuation: SDC’s shares have deteriorated 40% since its September 12 IPO (vs. S&P -3%), currently trading at a 4.5x 2020E EV/Sales multiple, below its larger standalone competitor, Align Technology (4.7x) and its broader peer group average (5.8x). Our $18 target price is based on a 2020E EV/Sales multiple of 5.6x, a premium to Align but essentially on par with its peer group, reflecting its very strong growth and positioning as a disruptor in the vastly underpenetrated clear aligner market, with line of sight to profitability by 2020. Risks include macro conditions, clinical limitations, supply issues, competition, its in-house financing program, and ownership structure.

Share price performance

Financial and valuation metrics Year 12/18A 12/19E 12/20E 12/21E EPS (CS adj.) (US$) -0.19 -1.14 -0.16 0.10 Prev. EPS (US$) - - - - Revenue (US$ m) 423.2 748.8 1,199.2 1,675.1 EBITDA (US$ m) -17.5 -71.9 57.0 192.3 P/OCF (x) -23.7 -34.2 -73.7 EV/EBITDA (current) -328.4 -80.0 100.8 29.9 Net debt (US$ m) -157 -112 172 321 On 04-Oct-2019 the S&P 500 INDEX closed at 2945.51Daily Sep12, 2019 - Oct04, 2019, 09/12/19 = US$16.67 ROIC (%) -32.44 -90.54 -4.74 5.15

Number of shares (m) 386.69 IC (current, US$ m) 141.11 Net debt (Next Qtr., US$ m) -245.0 Dividend (current, US$) - Quarterly EPS Q1 Q2 Q3 Q4 2018A -0.05 -0.04 -0.04 -0.07 Net debt/tot eq (Next Qtr.,%) -42.9 2019E -0.05 -0.09 -0.97 -0.04 Source: Company data, Refinitiv, Credit Suisse estimates 2020E -0.05 -0.04 -0.04 -0.03

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

7 October 2019

SmileDirectClub (SDC) Analyst: Erin Wright Price (04 Oct 2019): US$14.72 Target Price: 18.00 Rating: Outperform

Income Statement 12/18A 12/19E 12/20E 12/21E Company Background Revenue (US$ m) 423.2 748.8 1,199.2 1,675.1 EBITDA (US$ m) (18) (72) 57 192 SmileDirectClub is a teledentistry provider and clear aligner manufacturer, Depr. & amort. (8) (23) (33) (38) EBIT (US$) (46) (463) (26) 100 maintaining a market leading position in the direct to consumer clear Net interest exp (14) (16) (21) (24) aligner market, with 5,000 employees and over 300 SmileShop locations.

PBT (US$) (74) (508) (47) 76 Income taxes (0) 62 (15) (39) Blue/Grey Sky Scenario Profit after tax (75) (446) (62) 37 Minorities - - - - Net profit (US$) (75) (446) (62) 37 Reported net income (US$) (75) (446) (62) 37 Other NPAT adjustments 0 0 0 0 Adjusted net income (75) (446) (62) 37 Cash Flow 12/18A 12/19E 12/20E 12/21E EBIT (46) (463) (26) 100 Net interest 1 0 0 0 Change in working capital (89) (207) (189) (207) Cash flow from operations (115) (242) (168) (78) CAPEX (42) (120) (109) (71) Free cashflow to the firm (157) (362) (277) (149) Acquisitions - - - - Divestments - - - - Cash flow from investments (42) (120) (109) (71) Net share issue(/repurchase) 0 394 (7) 0 Dividends paid 0 0 0 0 Changes in Net Cash/Debt 204 (45) (284) (149) Balance Sheet (US$) 12/18A 12/19E 12/20E 12/21E Assets Cash & cash equivalents 314 329 168 159 Account receivables 114 224 401 658 Other current assets 6 6 6 6 Total current assets 442 606 649 946 Our Blue Sky Scenario (US$) 20.00 Total fixed assets 53 156 232 265 Investment securities - - - - Our $20/share blue sky scenario (6.2x EV/Sales) is predicated on faster Total assets 555 924 1,028 1,320 than expected market penetration in the US, supported by incremental Liabilities marketing and its SmilePay platform, accelerated expansion into new Total current liabilities 117 180 180 240 Total liabilities 257 364 487 687 geographies, and better than expected operating margin expansion. Shareholder equity 298 560 541 633 Total liabilities and equity 555 924 1,028 1,320 Our Grey Sky Scenario (US$) 13.00 Net debt (157) (112) 172 321 Per share 12/18A 12/19E 12/20E 12/21E Our $13/share grey sky scenarios (4.0x EV/Sales) is based on lower No. of shares (wtd avg) 390 390 390 390 than expected market penetration in the US due to emerging competition CS adj. EPS (0.19) (1.14) (0.16) 0.10 in other direct-to-consumer brands and better share capture by doctor- Prev. EPS (US$) directed offerings (e.g. ALGN’s Invisalign). Dividend (US$) 0.00 0.00 0.00 0.10 Free cash flow per share (0.40) (0.93) (0.71) (0.38) Earnings 12/18A 12/19E 12/20E 12/21E Share price performance Sales growth (%) 190.0 76.9 60.2 39.7 EBIT growth (%) (49.4) (915.6) 94.5 490.4 Net profit growth (%) (128.1) (496.0) 86.2 160.7 EPS growth (%) (128.1) (496.0) 86.2 160.7 EBITDA margin (%) (4.1) (9.6) 4.8 11.5 EBIT margin (%) (10.8) (61.8) (2.1) 6.0 Pretax margin (%) (17.6) (67.8) (3.9) 4.6 Net margin (%) (17.7) (59.5) (5.1) 2.2 Valuation 12/18A 12/19E 12/20E 12/21E EV/Sales (x) 13.08 7.45 4.89 3.59 EV/EBITDA (x) (328.4) (80.0) 100.8 29.9 EV/EBIT (x) (121.5) (12.1) (228.7) 60.1 P/E (x) (76.8) (12.9) (93.3) 153.6 Price to book (x) (63.4) (17.4) (14.4) (15.9) Asset turnover 0.8 0.8 1.2 1.3 On 04-Oct-2019 the S&P 500 INDEX closed at 2945.51 Daily Sep12, 2019 - Oct04, 2019, 09/12/19 = US$16.67 Returns 12/18A 12/19E 12/20E 12/21E ROE stated-return on (%) 122.5 214.6 17.1 (9.9) ROIC (%) (32.4) (90.5) (4.7) 5.1 Gearing 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (52.7) (20.0) 31.8 50.7 Interest coverage ratio (X) (3.3) (29.7) (1.2) 4.2 Quarterly EPS Q1 Q2 Q3 Q4 2018A -0.05 -0.04 -0.04 -0.07 2019E -0.05 -0.09 -0.97 -0.04

2020E -0.05 -0.04 -0.04 -0.03 Source: Company data, Refinitiv, Credit Suisse estimates

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Table of Contents

Key Charts 4

Executive Summary 5

SmileDirectClub Corporate Overview 7 Competitive Landscape ...... 14

Investment Positives 19 Highly Underpenetrated Global Market Opportunity ...... 19 Increasing Convenience – Leveraging its Expanding SmileShop Footprint ...... 24 Continuous Innovation – Supporting LT Growth ...... 27 International Expansion ...... 30 SmilePay Financing as a Key Differentiator ...... 32 Profit Margin Expansion...... 36

Investment Risks 38

Earnings Outlook and Financial Resources 41 Earnings Outlook ...... 41 Financial Resources ...... 42

Valuation 43 Comparable Company Analysis ...... 44 Discounted Cash Flow (DCF) Analysis ...... 45

Management Team 47

Credit Suisse PEERs 54

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Key Charts

Figure 1: Very Strong +DD Revenue Growth LT Figure 2: Path to +20% EBITDA Margin by 2023

$3,500 190.0% 200% $800 $681 55.0% $2,928 180% $700 $3,000 160% $600 45.0%

$2,500 $2,256 140% $500 $403 35.0% 120% $2,000 $400 $1,675 25.0% 100% $300 $1,500 76.9% $192 23.2% $1,199 80% $200 15.0% 17.8% $1,000 60% $100 $57 -$21 -$18 11.5% 5.0% $749 60.2% -$72 40% $0 $423 4.8% $500 39.7% -5.0% 34.7% 20% -$100 29.8% -14.5% -4.1% $0 0% -$200 -9.6% -15.0% 2018 2019E 2020E 2021E 2022E 2023E 2017 2018 2019E 2020E 2021E 2022E 2023E

Reported Revenue Growth EBITDA EBITDA Margin

Source: Company data, Credit Suisse estimates; $ in MM Source: Company data, Credit Suisse estimates; $ in MM

Figure 3: Sales Mix; Greater Other Contributions offer upside Figure 4: Anticipating +48% Case Volume CAGR

2,000 186.9% 200% 1,817 1,800 180% Other Revenue 1,600 160% 4% 1,397 1,400 140%

1,200 120% 1,035 1,000 100% 77.3% 800 739 80%

600 458 60% 61.5% 400 258 40% 40.0% 35.0% Net Clear Aligner 200 30.0% 20% Revenue - 0% 96% 2018 2019E 2020E 2021E 2022E 2023E

Case Volume Case Volume Growth

Source: Company data (2018), Credit Suisse Source: Company data, Credit Suisse estimates; Case vol. in 000

Figure 5: Superior Marketing Supporting Awareness Figure 6: Store Expansion Also Supporting Growth

$4.0 $3.7 $3.7 400% 38% 39% 350% $3.5 $3.3 35% 359% 300% 34% 32% $3.0 $2.9 $2.5 $2.5 250% 28% 28% $2.5 29% 27% 27% 27% 27% 200% 24% $2.0 150% 24% 100% 20% $1.5 117% 19% 20% 31% 18% 19% 50% 19% 22% 21% 16% 14% 16% 20% 20% $1.0 15% 15% 19% 19% 0% 18% 18% 19% 19% 19% 13% 15% 13% 17% 17% 18% $0.5 1% 14% -50% -40% -32% $0.0 -100% 2018 2019E 2020E 2021E 2022E 2023E

Aided Awareness Referral Rates Revenue per Store Revenue per Store Growth Store Growth

Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates; $ in MM Note: Aided awareness is a measure of number of people who show knowledge of a brand or product when prompted (brand recognition)

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Executive Summary

We initiate coverage of SmileDirectClub (SDC) with an Outperform rating and $18 target price. SDC is a teledentistry provider and manufacturer of clear aligner solutions supporting a relatively large and underserved direct-to-consumer orthodontic market. We forecast the company to generate $749 million in revenue in 2019 (+77% yoy), growing well ahead of its primary competitor, Align Technology, a dynamic we expect to continue over the next five years, with improving profitability thereon as it gains scale, turning a profit (on an adjusted basis) in 2020. Founded in 2014, SmileDirectClub is the largest player in the relatively new, exclusively direct- to-consumer (DTC) clear aligner market, with an aim to enhance access to orthodontic treatment, where 60% of counties domestically do not have orthodontists locally. Today, SDC offers at-home impression kits as well as in-store 3D intra-oral scanning services at its more than 300 locations throughout the US with expanding presence in certain international markets (Australia, Canada, and UK), with 85-90% of revenue captured via its store locations. With its vertically integrated model, SDC manufactures its clear aligners at its facility in Tennessee, with the expectation of soon opening another facility in Texas (achieving 100% redundancy). It also leverages a network of 240 state-licensed practitioners that can approve cases remotely, a disruptive approach to the conventional orthodontic model, contributing to an inherently lower price point, with a 60% discount to doctor-directed competitors across both traditional bracket & wires and clear aligner offerings. Despite being the largest exclusively DTC clear aligner provider, SDC has captured less than 1% of the estimated total global addressable market of 500 million patients ($945 billion), and while we acknowledge competitors are in the wings and there are likely certain clinical limitations in the DTC channel to consider, we view there is room for several players in this highly underpenetrated market. Moreover, we highlight SDC’s first-mover advantage in the DTC arena. While continued marketing efforts, which should drive heightened awareness, as well as other competitive advantages in relative convenience, expanded access to care, and lower cost relative to traditional providers, should support further market penetration, we view SDC should also benefit from the following drivers:

■ Leveraging its Expanding SmileShop Footprint: Through its expanding SmileShop footprint, SDC is increasing customer convenience and awareness, thereby supporting higher conversion and effectively driving case volume growth. Moreover, its partnerships with CVS, Walgreens, and other international retailers allow SDC to expand and further optimize its SmileShop footprint in a capital efficient manner. We estimate it will open 30 new SmileShops per month in the US in 2020, and an incremental 100 stores annually thereafter, with SDC likely shifting away from its standalone store concept toward co- located SmileShops in partner stores.

■ Continuous Innovation: Leveraging its history of disruptive innovation, further product introductions, if effective, could support growth longer term, where it aims to remain well ahead of peers with respect to providing more cost efficient and convenient offerings. We categorize SDC’s innovations into two segments: 1) innovation supporting a recurring revenue base (i.e. retainers, lip balm, teeth whitening products) and 2) innovation to support market penetration (i.e. nighttime aligners). Contributions from new product launches are not embedded in our modeling assumptions, offering potential upside to our estimates. Of note, while its research and development spend levels have not been disclosed, it currently maintains a 19 person R&D team.

■ International Expansion: Since launching in its first international market (Canada) in November 2018, SDC has since expanded into Australia (2Q19) and the United Kingdom (3Q19). With roughly 75% of the total global market opportunity outside the US, international expansion represents a meaningful opportunity, with an initial focus on countries including Mexico, Germany, Ireland, New Zealand, and Hong Kong. Of note, our estimates only incorporate contributions from current geographic exposure (Canada,

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Australia, UK), and do not include contributions from other future markets, offering potential upside.

■ SmilePay Financing as a Key Differentiator: SDC’s in-house financing service addresses cost as a key barrier for penetration, allowing patients to pay for clear aligner treatment over the course of 24 months rather than upfront. By providing in-house financing, SDC decreases the number of steps for patients to gain financing approval, thereby supporting better overall conversion. All in, 65% of customers use its SmilePay offering currently, and SDC estimates its current SmilePay program has an internal rate of return (IRR) of 73%, which could increase to >100% longer term.

■ Profit Margin Leverage—2,198 bps of EBITDA Margin Expansion from 2018-2022: We estimate SDC will achieve 2,198 bps of adjusted EBITDA margin expansion from 2018 to 2022 on growing scale and automation initiatives. More specifically, we view the compelling unit economics driven by complete end-to-end vertical integration will support continued profit growth, particularly with building operating leverage over a fixed cost base. We expect focus on automation initiatives in manufacturing and treatment design will also support margin expansion longer term. Attractive Valuation: SDC’s shares have deteriorated 40.4% since its September 12 IPO (vs. S&P -3.2%), with likely concern over quarterly volatility, regulatory factors, competition, as well as ownership structure and other technical stock dynamics with its IPO. Its shares are now trading at a 4.5x 2020E EV/Sales multiple, below its larger standalone competitor, Align Technology (4.7x). Of note, while Align Technology is SDC’s largest standalone, public most- comparable competitor in the clear aligner market, we highlight that ALGN’s focus remains on the niche doctor-directed orthodontic market (12 million case starts annually) relative to SDC’s broader DTC approach. Our Outperform rating and $18 target price is based on a 2020E EV/Sales multiple of 5.6x, a premium to Align Technology but essentially on par with its broader peer group of dental, med-tech, and telemedicine companies, reflecting its faster growth and positioning as the disruptor in the vastly underpenetrated clear aligner market. Risk Factors: Key risks to our call include a deterioration in broader economic conditions; a delay or inability to achieve profitability; lower than expected demand for clear aligner treatment; greater clinical limitations of its technology; adverse changes or interpretation of regulations; competition; reliance on or cost for significant advertising; manufacturing problems or delays; higher defaults related to its in-house SmilePay financing program; and ownership structure.

Figure 7: Recent (September 12) IPO Details Figure 8: SDC Share Price Performance Since IPO (-42.7% IPO-to-date)

Common Shares Offered in IPO: 58,537,000

PF Basic Shares Outstanding: 384,862,951 $24

Offer Price: $23 (vs. proposed range $19-$22) $22 -40.4% vs. -3.2% S&P Net IPO Proceeds: $1,271.3 million $20 - $585.5 million to purchase & cancel LLC Units from Pre-IPO Investors $18 - $28.7 million to pay incentive bonuses to certain employees - $114.8 million to fund the tax withholding and remitance $16 obligations Use of Proceeds: - $111.0 million to purchase and cancel LLC Units from non- Series A Pre-IPO investors $14

- $43.4 million to fund a distirbution to the non-Series A Pre-IPO $12 Investors

- $387.9 million for general corporate purposes $10

87.5% of Voting Power resides with David Katzman, Jordan Controlling Ownership: Katzman, Alexander Fenkell, and Steven Katzman

Source: Company data, Credit Suisse Source: Factset, Credit Suisse

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SmileDirectClub Corporate Overview

SmileDirectClub (SDC) is a teledentistry provider and clear aligner manufacturer, maintaining a market leading position in the new direct-to-consumer (DTC) clear aligner market. It has served over 700,000 patients, albeit with the market still remaining vastly underpenetrated (<1%), with 5,000 employees and over 300 SmileShop locations. We forecast SDC to generate $749 million in revenue in 2019, growing 77% yoy with double-digit growth, ahead of its primary competitor, which we expect to continue over the next five years, with improving profitability thereon as it gains scale, turning a profit in 2020. Co-Founder Alex Fenkell and Jordan Katzman (son of CEO David Katzman) first developed the idea for a direct-to-consumer (DTC) orthodontic platform in 2013, with the goal of democratizing teeth straightening treatment. SmileDirectClub was then founded in 2014 with the support of Camelot Venture Group, where David Katzman, Jordan Katzman’s father and CEO of SDC, still remains the Managing Partner. Of note, Camelot Venture Group also invested in 1-800-Contacts and Quicken Loans. Then, Align Technology invested $46.7 million in SDC in 2016, as well as an incremental $12.8 million in 2017, driving its overall ownership in SDC to 19%, with the aim of steering and controlling the entire clear aligner market. However, that relationship later soured (details on page 13), with ALGN having since divested its ownership interest. In October 2018, SDC raised $380 million in a round of funding with Clayton, Dubilier & Rice (CD&R), Kleiner Perkins, and Spark Capital, among others, essentially lifting the company’s valuation to an implied $3.2 billion. On September 12, SDC completed its Initial Public Offering, raising $1.3 billion.

Figure 9: History of SDC Overview

Prior to 2013 Co-founders Alex Fenkell and Jordan Katzman first met at summer camp at age 13

Co-founders develop idea for a direct-to-consumer competitor to Invisalign, with the thought 2013 that an in-person orthodontist visit may not be necessary

2014 SDC founded with the support of Camelot Venture Group

2016 ALGN invested $46.7 million in SDC

ALGN invested an incremental $12.8 million in 2017, driving ALGN's overall ownership in SDC 2017 to be 19%

SDC raises $380 million in a round of funding with Clayton, Dubilier & Rise (CD&R), Kleiner Oct 2018 Perkins, and Spark Capital, among others, essentially lifting the company's valuation to $3.2 billion

SDC and ALGN announce arbitration decision, which requires ALGN to close Invisalign stores Mar 2019 and divest its ownership stake in SDC

Aug 2019 SDC files its initial S-1

SDC prices at $23/share, above its initial $19-$22 range, implying a $8.7 billion enterprise Sep 2019 value

Source: Company data, Credit Suisse Importantly, SDC has posted very strong revenue growth of +190% in 2018, and we expect +77% in 2019, supporting a +47% CAGR from 2018 through 2023 (Figure 10). Meanwhile, we expect its EBITDA margin to consecutively improve over time, with a path to >20% adjusted EBTIDA margins (ex. stock compensation) by 2023, with it posting positive EBITDA in 2020 (Figure 11).

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Figure 10: Robust +DD Revenue Growth LT Figure 11: Path to +20% Adjusted EBITDA Margin by 2023

$3,500 190.0% 200% $800 $681 55.0% $2,928 180% $700 $3,000 160% $600 45.0%

$2,500 $2,256 140% $500 $403 35.0% 120% $2,000 $400 $1,675 25.0% 100% $300 $1,500 76.9% $192 23.2% $1,199 80% $200 15.0% 17.8% $1,000 60% $100 $57 -$21 -$18 11.5% 5.0% $749 60.2% -$72 40% $0 $423 4.8% $500 39.7% -5.0% 34.7% 20% -$100 29.8% -14.5% -4.1% $0 0% -$200 -9.6% -15.0% 2018 2019E 2020E 2021E 2022E 2023E 2017 2018 2019E 2020E 2021E 2022E 2023E

Reported Revenue Growth EBITDA EBITDA Margin

Source: Company data, Credit Suisse estimates; $ in MM Source: Company data, Credit Suisse estimates; $ in MM Delving Deeper into SDC’s Selling Cycle and Treatment Process While traditional orthodontia offerings have often strived to create the perfect smile, SDC channels its efforts around a “better is better” mentality at a discounted cost (60% cheaper on average from traditional orthodontia). SDC currently markets its clear aligner offering at $1,895 on a single-pay basis, with also a potential financing option (SmilePay), which includes a $250 down payment and $85/month payment for 24 months. Through SDC’s sales/treatment process, it aims to drive heightened convenience for customers, with a faster treatment time (5- 10 months vs. 12-24 months with traditional orthodontia) and no in-office visits required (vs. 10-15 ortho visits with traditional offerings).

Figure 12: Broad Overview of SDC Value Proposition Traditional Orthodontic Market SmileDirect Club

Cost - $5,000-$8,000 - $1,895

Convenience - 10-15 orthodontic visits - Doctor-directed remote teledentistry - Zero in-office visits required

- 12-24 months - 5-10 months

Access - Limited access to treatment - Access across US, Canada, - (Approx 40% of US counties have Australia, & UK with impression kits orthos) and 300+ SmileShops

Financing - Barred by credit requirements - Captive financing for accessible credit. At $85 per month

Source: Company data, Credit Suisse

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In the following, we detail SDC’s sales cycle / treatment process:

Figure 13: Remote Doctor Monitoring Processes in Place Throughout the Entire Process

100% QA Review by Review Treatment Information Digitally Licensed Suitable Cases Approved Progress Remotely At Prepared for Case Review Orthodontist/Dentist in Least Every 90 Days Relevant State Reviews

Source: Company data, Credit Suisse

■ Impression: SDC accepts two forms of clear aligner case submissions, including (1) its proprietary at-home impression kits and (2) in-store intraoral scans. At-home impression kits cost $49/kit, which may be purchased through SDC’s proprietary website and through other retail outlets, including Amazon, Macy’s, and Bed Bath & Beyond as well as its partner stores (e.g. CVS, Walgreens). If SDC’s lab receives a distorted impression, it will alert the customer and suggest re-submitting a new impression. While the customer will be charged for the additional kit initially, SDC will refund the price of the retake kit at the time of aligner purchase. As it relates to an in-store intraoral scan, SDC currently has 364 SmileShops as of September 27, as well as several pop-up stores across North America where prospective patients may take a free 3D scan. These appointments typically last ~20-30 minutes, with the technician also providing relevant information about the treatment process. Of note, an appointment may be easily booked ahead of time through SDC’s online portal.

■ Treatment Planning: Once a case has been submitted, the technicians in SDC’s Costa Rica facility create a sample treatment plan for the customer. Once the treatment plan has been created, a group of orthodontists in Costa Rica will then do a front-line quality assurance (QA) review, with the ability to make necessary tweaks to the treatment design, before sending the case off to a local doctor. Of note, SDC initially decided to build its treatment planning center in Costa Rica because Align Technology, a previous partner, was already in the market. SDC also notes the significant amount of dental talent coming out of school in the market, providing healthy labor pools of experienced dentists, orthodontists, and technicians.

■ Doctor Approval: After the initial treatment plan has been designed, a licensed orthodontist/dentist in the relevant state (e.g. where the patient lives) will review the plan and other additional information (e.g. medical/dental history, scans,). The dentist/ortho will verify that the prospective patient qualified for treatment and determine whether the treatment plan requires tweaks. Once the doctor is satisfied with the treatment plan design, the doctor will approve/prescribe the case, thereby allowing the patient to view the potential treatment. Of note, the treatment planning, QA review, and final doctor approval are typically completed within 48 hours.

■ Patient Purchase/Conversion: Once a treatment plan has been approved, the prospective patient will receive a notification alerting them that they can now access the plan. At that point, the patient will be prompted to purchase the clear aligner treatment.

■ Production/Shipment: SDC manufactures all of the clear aligners for the case (typically 36 per patient, including 18 top/bottom). Of note, while SDC has historically utilized outsourced manufacturing (including ALGN), it now manufactures 100% of its clear aligners in-house. After fabricating the aligners, SDC will package the treatment set locally (e.g. in

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the patient’s respective country). The “big blurple box” shipped to patients includes all 36 aligners required throughout the treatment process, as well as some other ancillary products, including MoveMints, lip balm, and BrightOn (whitening). Of note, while SDC had previously shipped aligners throughout the treatment process to support compliance, in September 2017, SDC began to ship all aligners at one time. The clear aligner treatment generally ships within 3-4 weeks after purchase.

■ Clear Aligners: Once the patient receives the clear aligners, treatment typically lasts for 4- 14 months with most cases averaging as little as 6 months. Unlike most doctor-directed clear aligners on the market, SDC’s proprietary system does not require any buttons or attachments, which would inherently require in-person doctor visits. Instead, SDC utilizes a soft/medium/hard treatment system, whereby a patient will wear a soft plastic mold for one week, followed by medium plastic mode for one week, and then the hardest plastic mold for the next two weeks. All in, SDC typically requires 36 clear total aligner cases.

■ Review: SDC’s SmileCheck allows patients to check in with a relevant dental professional as needed, with SDC suggesting a clinical progress review by the patient’s relevant state licensed doctor every 90 days. On a daily basis, outside of the 90-day review, patients can use a chat function to discuss concerns with dental hygienists. If a dental hygienist does not or cannot provide a satisfactory answer, the question will be addressed by a dentist/ortho. While SmileCheck is only currently available through its website, SDC is working on a mobile app, which it expects to roll out longer term (timeline details unknown).

■ Refinements: After the treatment process is complete, a patient may still require some refinement (15% of patients today). Also of note, 5% of customers go back through the process of getting re-scanned because aligners do not fit, a dynamic that is typically driven by patient non-compliance. Demographics SDC’s targeted customer varies from that of traditional orthodontic constituents, which generally targets teenagers. By way of example, of the 12 million case starts traditional orthodontic providers have cited as the total addressable market, 75% of cases are for teens. Meanwhile, SDC’s customer mix is almost entirely comprised of adults, with teenagers only representing 5% of its treated customers to-date. The majority (65%) of its customers are in the 20-40 year old age range, with roughly 10% of customers older than 50 years old.

Figure 14: SDC Customer Mix by Age

40-50 Years Old, 20%

50+ Years Old, 10%

20-40 Years Old, 65% Teenagers, 5%

Source: Company data (2018), Credit Suisse We also take a closer look at SDC’s segmentation of its target population, which includes Influential Families, Content with Life Individuals, Young Pioneers, Image Conscious Singles, SmileDirectClub 10

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Free-Spirited Families, and Untapped Millennials. Its most meaningful customer segment is Influential Families (21% of US households), which represents almost one-third of its customer mix, supported by SDC’s 41% aided awareness in the category. While aided awareness remains the lowest in the Content with Life category at 22%, the group actually represents its second largest overall customer type (22% of SDC customers).

Figure 15: Incremental Details on Targeted Customer Segments

Image Influential Content with Free-Spirited Untapped Young Pioneers Conscious Families Life Families Millennials Singles

Average Category Age 35-44 55-70 25-34 25-34 35-44 25-34

% of Households with Kids 66% 15% 14% 36% 78% 61%

Home Ownership 68% 74% 55% 39% 55% 58%

Geography Suburban City Suburban Urban Suburban Rural

% of US Households 21% 42% 10% 12% 9% 6%

SDC Aided Awareness 41% 22% 45% 35% 37% 42%

% of SDC Customers 31% 22% 17% 17% 9% 4%

Source: Company data, Credit Suisse Doctor Network A key point of contention with SDC’s offering is its lack of in-person and regular check-ins with a dental professional. In light of some current and previous doctor-driven litigation efforts (details on page 13) and continued scrutiny around results, we delved deeper into its doctor network to more fully understand its teledentistry platform. SDC has built a network of 240 licensed orthodontists and dentists across all 50 states, Puerto Rico, Canada, and Australia over the past several years. Similar to other telehealth companies (e.g. Teledoc), these practitioners typically work at an established practice, whether it be a single-doctor or a group practice, with the dentist/ortho reviewing cases during their own time, such as before/after work or during lunch. While these practitioners provide a service for SDC, they are independent contractors, meaning SDC does not actually employ these individuals, is not required to provide benefits (e.g. health insurance), and is limited from a liability perspective. Of note, SDC’s network of practitioners is very stable with virtually no turnover to-date. We also highlight that all of these dentists have signed non-compete contracts with an 18 month duration whereby the practitioners are exclusive teledentistry providers for SDC, effectively increasing the network’s overall stickiness and reducing potential turnover. In terms of the process, each practitioner is alerted when a new case hits their workload in the SmileCheck system. Through SDC’s proprietary SmileCheck (patent pending), the practitioner has access to the customer’s disclosed medical history, records, photos, scans, and digital impressions, providing the doctor with sufficient information to make a clinical decision in a quick and easily assessable manner. From the point when the doctor is initially alerted about a particular case, the practitioner has roughly 24 hours to review the case before it is sent to a different doctor. Once the doctor begins to review the case, she is effectively taking ownership

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7 October 2019 of the patient throughout the process, providing some level of consistency for the patient for the duration of treatment. For example, once the patient chooses to purchase the aligners, the same practitioner who approved the original case treatment will also prescribe the clear aligners and conduct the 90-day reviews. Most importantly, SDC has developed its doctor network in such a way that the practitioners are technically paying the company. In essence, SDC provides services to the dentists and orthodontists as a Dental Support Organization (DSO), including manufacturing, supply, and brand licensing rights, among other services. Once a doctor prescribes the case, the doctor recognizes the revenue from the patient. The doctor then pays a fee to SDC for the aforementioned services, with the doctors retaining a portion of the revenue (accounted for in SDC’s Cost of Goods Sold). All in, SDC does not provide orthodontia treatment itself, but rather is a marketer and service provider, connecting practitioners with patients. Importantly, SDC also manufactures the prescribed aligners. As it relates to capacity, SDC views it has significant available capacity to fuel future growth from a dental practitioner network perspective. A practitioner on average can review a given case in 10-12 minutes, depending on the skillset of the doctor. Moreover, SDC has noted more practitioner demand to join its doctor network than required to meet patient demand currently, offering substantial opportunity to ramp its capacity longer term. Insurance Coverage Typically, patients may submit an out-of-network claim to their insurance providers and receive up to 20-50% reimbursement. However, recently SDC has made some progress in achieving in-network status with a couple of large insurers. Notably, SDC is currently in-network with UnitedHealthcare’s (UNH) dental insurance plan. UNH initially approached SDC because various corporate employers were checking to see whether the DTC clear aligner was covered. Now, SDC’s treatment will be 50% covered with UNH. Also of note, per CVS Health’s announcement in April, SDC has been added as an in-network health care option for Aetna Dental members as of early summer 2019. Going forward, we also highlight that SDC is in talks with a number of the other Top 10 insurers. All in, we view its progress in the dental insurance space as encouraging, with these large, leading insurers potentially adding credibility around the safety and efficacy of SDC’s treatment process, in addition to reducing adoption barriers related to treatment cost. Facilities / Manufacturing SDC currently maintains three facilities, including one manufacturing plant and two treatment planning facilities. The manufacturing facility is 131K square feet and is located in Antioch, Tennessee, with 1,350 team members, which includes a 24/7 maintenance crew. This facility has 510K clearance for the manufacturing of aligners from the FDA and has recently passed an inspection in 2019. Moreover, it also has obtained ISO/MDSAP certification for the US and Canada for the manufacturing of aligners and retainers. Importantly, it has obtained required clearances from Australia, UK, and the EU for the manufacturing and shipment of aligners, and is currently in the process of obtaining clearance in other countries that it may enter in 2020 and 2021. Of note, later this year, SDC expects to open another manufacturing facility in Texas, creating 100% redundancy and mitigating manufacturing disruption risks. Meanwhile, in Costa Rica, SDC maintains two treatment planning facilities in San Jose and Cartago, which employs 1,250 team members overall, including treatment plan setup technicians, ~100 dentists and orthodontists to provide 100% QA on every treatment plan, and a customer care team.

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Figure 16: Manufacturing and Treatment Planning Facilities Manufacturing Treatment Design Anitioch, Tennessee Austin, Texas San Jose / Cartago, Costa Rica Square Feet: 131K Square Feet: 151K Square Feet: 73K (incl. both) Capacity: 2M / Month Current Utilization N/A Team Members: 1,250 Current Utilization 1.5M / Month Purpose Disaster Recovery Team Members: ~1,350 Opening Date: Dec. 2019

Other Factoids Other Factoids Other Factoids - Exp. to Expand Capacity to 3M / Mo - Exp. 100% Redundancy - Treatment plan setup technicians - Exp. capacity of 3M / Mo - 100 dentists and orthos - Provide 100% QA on every plan - Customer Case Team Source: Company data, Credit Suisse While it previously had a supply agreement with ALGN that began in July 2016, whereby ALGN acted as SDC’s only third-party supplier, today SDC manufactures 100% of its own aligners utilizing 3D printing technology, with BPA-free thermoplastic polyurethane. Its Tennessee manufacturing facility represents the largest 3D printing facility in the US, with SDC also representing HP’s largest 3D printing customer globally, with 49 printers. Of note, SDC does not maintain an exclusive relationship with HP. In terms of capacity, SDC can currently produce up to two million aligner trays per month, with utilization hovering around 75% (1.5 million aligners per month). For reference, a single clear aligner case start typically includes 36 aligner trays on average for SDC. Near term, SDC expects to increase its production capacity at the Tennessee facility to three million per month. Moreover, by December, SDC expects to complete the construction of its new facility in Texas, where it will maintain 100% redundancy, implying capacity will reach 6 million by year end. All in, these manufacturing facility expansion efforts should provide sufficient capacity to fulfill expected aligner sales growth going forward, in our view. Ongoing Litigation In light of the controversy around SDC’s DTC orthodontic treatment offerings, we will detail relevant, recent/ongoing litigation with its key competitor, Align Technology, and state dental associations. As a reminder, ALGN previously maintained a minority interest in SDC (19% stake) and was a key manufacturing partner for the DTC start-up. However, that relationship later soured, resulting in a lengthy legal dispute, with the remedies illustrated below:

■ Align Technology: In March, the arbitrator ruled in favor of SDC on all counts, whereby ALGN had breached its non-compete with SDC, misused SDC’s confidential information, and violated its fiduciary duties as it relates to SDC. As a result, ALGN was required to close its Invisalign Experience stores by April 3, 2019 and is unable to open new Invisalign stores or provide services in physical retail establishments in connection with the marketing/sale of clear aligners through August 18, 2022. ALGN was also required to tender its membership units in SDC. In conjunction with the tendering, SDC will pay ALGN $54 million, pursuant to a promissory note payable over 24 months through March 2021. Of note, ALGN has filed a subsequent arbitration proceeding seeking an additional $43 million. Importantly, ALGN will be prohibited from using SDC’s confidential information in any manner going forward. Moreover, while we will continue to closely monitor new proceedings and ongoing litigation in each state, we view SDC has made meaningful steps in opposing complaints from dental associations who wish to create a broader moat around their business. While state professional complaints clearly continue to represent a risk, we view SDC is well positioned to address such complaints, particularly given its process includes a thorough QA doctor-licensed review process, whereby its structure ensures SDC is not technically engaging in the corporate practice of dentistry.

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■ State Professional Regulation – Georgia: In 2018, the Georgia Board of Dentistry implemented a new rule requiring licensed dentists to be present (e.g. on premises) to supervise the taking of a “digital scan for fabrication of orthodontic appliances and modes.” As a result of the legislation, SDC would be required to change its SmileShop business model. Therefore, on May 21, 2018, SDC filed a lawsuit against the Georgia Board of Dentistry alleging the Board and its members committed antitrust violations (e.g. violation of the Sherman Act), among other complaints. In May 2019, a federal judge ruled that the Georgia Board of Dentistry as an organization is immune from the antitrust lawsuit, but that individual members may be held liable for imposing exclusionary and unnecessary requirements on teledentistry. Currently, the Georgia Board of Dentistry has voluntarily agreed not to take any action against SDC pending a final resolution of the matter.

■ State Professional Regulation – Alabama: In August 2018, the Board of Dental Examiners of Alabama sent a cease-and-desist letter to SDC following the opening of the first SmileShop in Alabama. The premise of the letter was based around the interpretation of an existing rule, which would require “direct supervision” (doctor on premises) for the taking of a digital image. Soon thereafter, SDC filed a lawsuit in Federal court against the dental board alleging violations of the Sherman Act (similar to its proceedings in Georgia). In April 2019, the court threw out six of SDC’s counts against the board. That said, the court has upheld SDC’s ability to more forward against individual dental board members, in their official capacity, with trial set for Fall 2019. In the meantime, SDC has obtained a temporary restraining order precluding the Board of Dental Examiners from taking any action until a final disposition has occurred.

■ State Professional Regulation – New Jersey: In January, the New Jersey Dental Association filed a civil complaint alleging SDC is “engaged in the unlawful practice of dentistry in the state.” The Dental Association is requesting a permanent injunction restraining SDC’s affiliated New Jersey doctors from engaging in “unlawful and dishonest competition,” whereby these doctors’ suitability reviews are inadequate without appropriate additional information. In response, SDC filed to dismiss the complaint on the grounds that the New Jersey Dental Association does not have standing to make such a claim. While this dismissal was denied, SDC has filed a motion to reconsider that denial and is prepared to file an appeal, if necessary.

■ State Professional Regulation – Tennessee: On September 25, a group of orthodontists and a consumer filed a lawsuit in a Middle Tennessee US District Court, alleging the company propagates false advertising and illegally practices dentistry, which has damaged the doctors’ businesses. On the false advertising front, the lawsuit alleges the company has misrepresented its return policy, the time period for treatment, the medical issues the company’s aligners can treat, and the level at which customers are satisfied with SDC’s product. Competitive Landscape

Across the teeth-straightening competitive landscape, we note two overarching technologies, including traditional brackets & wires and clear aligners. As a reminder, the traditional orthodontic market consists of 12+ million case starts annually, of which teens represent 75% of new cases. In this traditional market, brackets & wires continue to dominate, with almost 90% share. That said, there are far more people globally who may benefit from teeth- straightening treatment than typically treated by the traditional orthodontic market, an underserved opportunity. As it relates to clear aligners, the competitive landscape is comprised of two primary types of constituents, including DTC offerings, which are marketed and sold directly to patients, and doctor-directed offerings, which are sold to relevant orthodontists/general practitioner dentists. The origin of the clear aligner market derives from Align Technology’s (ALGN, Outperform) efforts in the doctor-directed channel, where it still maintains ~90% market share, with the goal of further penetrating the traditional orthodontic market (12 million case starts annually),

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7 October 2019 essentially taking share from brackets & wires solutions. More recently, ALGN’s patents have come due, allowing for other doctor-directed clear aligner offerings to launch into the market. These new clear aligner products are generally offered by the more established, traditional dental peer group, including Straumann, Dentsply Sirona, 3M, and Henry Schein. Meanwhile, over the past several years, SDC has spearheaded efforts in the DTC market, which bypasses in-person doctor visits altogether in an attempt to democratize the clear aligner landscape, providing a more cost effective and convenient offering. SDC remains the market leader in the DTC market with 95% share, albeit with several start-ups in the emerging DTC space.

Figure 17: Competitive Landscape: Clear Aligner Case Volume Comparison

1,600 1,503

1,400

1,200

1,000

800

600 458 400

200 51 24 0 ALGN SDC STMN Other DTC

Source: Company data, Straumman, Credit Suisse estimates; Case Volume in thousands Note: Est. “STMN” with 3% share of doctor-directed market; Est. “Other DTC,” with SDC owning ~95% of the DTC market More Established Doctor-Directed Market First, we will discuss the more traditional doctor-directed channel, where ALGN originated the clear aligner concept. In this market, ALGN remains the dominant player, benefiting from both its clear first-mover advantage, as well as continuous innovation, where it has maintained a healthy +15-20% revenue CAGR over the past 10 years. That said, over the past year, several established competitors have launched or acquired clear aligner systems in the doctor-directed market including Straumann, Henry Schein, Dentsply Sirona, and 3M. In our view, these additional launches further underscore the market opportunity and value proposition of clear aligner solutions relative to traditional brackets & wires. Moreover, additional product launches, particularly by established manufacturers and distributors, will likely drive further doctor awareness and adoption of clear aligner offerings in the traditional orthodontic market, while also potentially broadening the doctor-directed opportunity in the GP market. Of note, ALGN has historically been the sole educator of doctors on the capabilities and clinical utility of this alternative innovative solution.

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Figure 18: Doctor-Directed Market – Competitive Landscape Summary Doctor-Directed

Announcement Ortho vs. GP Channel Focus Hybrid* vs. Standlone Available in Parent Company Product Name Stand- Date Ortho GP Hybrid* the US? alone Sun Dental Labs SunClear Aligners N/A X X Yes

Henry Schein Reveal Clear Aligners Feb-19 X X Yes

3M Clarity Aligners May-18 (AAO) X X X Yes

Dentsply Sirona SureSmile May-18 (AAO) X X X Yes

Henry Schein SLX Clear Aligners May 2018 (AAO) X X Yes

Straumann ClearCorrect Acquired Aug -17 X X Yes

Align Technology Invisalign 2000 X X X Yes

Source: Company data, Credit Suisse *Hybrid offerings incorporate traditional brackets and wires

■ Straumann’s ClearCorrect: Acquired by STMN in August 2017 for $150 million, ClearCorrect is the second largest doctor-directed clear aligner system, with est. 3% market share of the doctor-directed market today (vs. est. ALGN 88%). It grew +70% in 2Q, including +60% new case starts in the US. Notably, the ClearCorrect offering can only address an est. 40% of traditional orthodontic case starts, though its applicability may soon increase to as much as 70% with a new material for its clear aligners (potentially launching in 2020), according to the company. Given its more limited relative treatment scope, the product has been marketed primarily to GPs who treat inherently less complex cases, though STMN has more recently focused some sales efforts toward the orthodontic segment. In terms of international expansion, ClearCorrect is already available in Brazil, and it also announced a partnership with Chinese clear aligner solution Smyletec in early 2019. Of note, it has delayed its full European launch until 4Q due to production constraints.

■ Dentsply Sirona’s SureSmile: Announced at AAO in May 2018, XRAY markets a hybrid treatment program to orthodontic customers, which utilizes both clear aligners and traditional brackets & wires in more complex cases where its aligners alone will not achieve the desired result. That said, XRAY has also noted a potentially meaningful opportunity in the GP market, and we await further updates on its traction, particularly following the Chicago Midwinter Dental Show in Feb 2019, where the company introduced its new SureSmile aligner software, offering a complete clinician-controlled clear aligner treatment solution dedicated to the GP market (less complex cases). Importantly, during its 2Q call, XRAY expressed its interest in expanding SureSmile overseas to Europe, with approvals in Asia potentially near term.

■ Henry Schein’s SLX Clear Aligners & Reveal Clear Aligners: HSIC initially announced its entrance into the clear aligner market at AAO in May 2018 with its SLX Clear Aligner system, which is primarily targeted toward the specialty orthodontic market segment. Importantly, HSIC recommends Class II and Class III patients be treated with its Motion 3D Appliance/Sagittal First philosophy to establish a Class I occlusion before utilizing aligners to reduce total treatment time. Of note, HSIC has since unveiled the soft launch of its proprietary Reveal Clear Aligner system at the Chicago Midwinter Dental Show in February 2019, a GP-focused alternative to its SLX offering, which targets mild-to-moderate cases (Class I malocclusion) – see note for further details. While HSIC is excited to participate in the market, it is still early days and we continue to monitor for signs of traction with the product.

■ 3M’s Clarity Aligners: Announced at AAO in May 2018, Clarity Aligners enhances 3M’s already leading traditional orthodontic portfolio, with the company targeting to maintain the

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most comprehensive orthodontic solutions. Importantly, similar to XRAY’s Suresmile system, 3M's clear aligners are a hybrid/combination therapy, providing flexibility for orthodontists to adapt treatment to the patient’s need and are inherently less GP-focused.

■ Dental Labs (E.g. Sun Dental Labs’ SunClear Aligners): Dental labs is also well- positioned to take advantage of growing clear aligner acceptance, targeting customers (e.g. GPs) who want to provide a more cost efficient option for correcting minor crowding, rotational issues, and relapse. These products will likely be inherently skewed toward simpler cases, with lab manufacturing and treatment planning likely unable to address more complex cases, where major manufacturers continue to invest meaningfully in internal R&D efforts. Emerging Direct-to-Consumer Concepts Beyond doctor-directed teeth-straightening treatment options, consumers may also access direct-to-consumer treatment (DTC) offerings, which we define as products sold either online or in certain retail stores directly to the consumer from the relevant company or a representative, rather than through a patient’s dentist or orthodontist. SDC initially originated its DTC offering with the goal of democratizing teeth-straightening treatment, providing a more cost effective and convenient option. As clear aligners become a more popular choice among consumers and expand treatment to what has historically been untreated cohorts, DTC companies have proliferated, including SmileDirectClub, SmileLove, Byte, Candid Co., and Orthly, among several others. Importantly, the DTC channel is typically focused on a different type of patient cohort than doctor-directed offerings, whereby patients typically have less complex cases and would have oftentimes remained untreated otherwise. With pricing remaining fairly consistent across the DTC market currently, representing a steep discount relative to traditional orthodontic offerings (60% cheaper), key differentiators across the DTC market include the cost of impression kits, impression access (online vs. in-store), access to doctors, financing options, and the potential inclusion of retainers. We more closely examine key differentiators:

■ Method/Manner of Impression: Many DTC companies may require customers to purchase an impression kit upfront, with some offering to reimburse customers who end up purchasing the full clear aligner solution. These impression kits are available for prospective patients to use at-home at their own convenience. Other companies, including SDC, may offer a free in-person scan at one of their retail stores, while others may require a patient to visit a doctor’s office to receive a scan.

■ Access to Doctors: Both SDC and CandidCo provide remote access to doctors, while other DTC offerings may not maintain a support network. Meanwhile, a couple of these start-ups actually connect a patient to a doctor in its network, whereby a patient will then visit the affiliated doctor in-person, essentially representing a resource for doctors to reach customers it may not see otherwise.

■ Retail Presence: While all of these DTC companies maintain online presences, only two additionally maintain retail store presences (SDC, CandidCo). SDC currently has 364 stores globally, while CandidCo has 23 store across the United States as of September 27.

■ Financing Option: DTC companies typically offer a monthly payment option, albeit with only a couple (SDC, Byte) maintaining captive offerings (vs. outsourced to Affirm or other financing partners).

■ Retainers: As for retainers, several companies include the first set of retainers free, with new/replacement retainers requiring payment thereon. Meanwhile, SDC requires patients to pay for retainers, with the option to subscribe to a replacement program (every six months).

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Figure 19: Direct-to-Consumer (DTC) Market – Competitive Landscape Summary Direct to Consumer Market

Impression Kit Cost Financing Access? Access to Company Total Cost Retainers? (if Separate) Available? Online In-Store Doctors

SmileDirectClub $1,895 $49 Captive X X X $99

SmileLove $1,895 Included Outsourced X Included

SnapCorect $1,749 $49** Outsourced X Included

Byte $1,895 $95 Captive X X* X Included

Candid Co. $1,900 $95 Outsouced X X X Included

Orthly $1,900 Scan Only Outsourced X X* X None

Source: Company data, Credit Suisse Note: Only the first set of retainers are typically “included” *Will connect patients with in-person visits to orthodontists **Impression Kit refunded if do not purchase aligners Importantly, a number of DTC companies are fairly new start-up concepts. We highlight the aligner unit economics comparison in Figure 20, which helps illustrate the difficulty of entering the space from a profit perspective. While SDC’s contribution margin is a healthy 33%, we anticipate a new entrant likely has a negative contribution margin. This is due in part to a lower potential gross margin, where most competitors do not own the entire end-to-end treatment planning/manufacturing process. New entrants also do not have the benefit of operating leverage. Moreover, selling and marketing costs are likely more meaningful as these start-ups begin to educate customers about their new offering.

Figure 20: Aligner Unit Economics Comparison

Other / New Entrant (Illustrative Example)

Aligner Price $1,895 N/A Cancellation Reserve ($100) N/A Net Aligner Price $1,795 $1,800 Gross Profit $1,525 $720-$900 % margin 85% ~50-60% Selling & Marketing Costs $893 $1,080-$1,350 % of ASP 50% ~60-75% Processing Fees $45 $36 % of ASP 3% ~2% Contribution Margin per Aligner Order $587 <$0 % of contribution margin 33% N/A

Source: Company data, Credit Suisse

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Investment Positives Highly Underpenetrated Global Market Opportunity

Despite being the largest direct-to-consumer clear aligner provider, SDC has captured less than 1% of the total global 500 million patients ($945 billion) addressable market. We view continued marketing efforts, which should drive aided awareness higher, in addition to other competitive advantages in relative convenience, expanded access to care, and lower cost relative to traditional providers, will continue to support growth longer term. All in, we expect SDC’s clear aligner annual cases shipped will increase to 1.4 billion by 2022, representing a +52% CAGR in case volume growth from 2018 to 2022. Underserved $945 Billion Clear Aligner Opportunity The global orthodontics market remains broadly underserved, where a majority of patients globally lack the ability to access care due to the dearth of providers in certain markets, affordability of treatment, or both. For reference, across the US, which is considered to be one of the most developed orthodontic markets globally, only 40% of counties have access to orthodontists. Moreover, Align Technology has estimated that the orthodontic market includes 14 million case starts annually (vs. 500 million patients who would benefit from teeth straightening treatment). Together, these two metrics help illustrate the limited scope of the traditional orthodontic market. That said, with its unique teledentistry platform, SDC is able to provide expanded access to care for patients, enabling it to address a greater part of the population. As it relates to SDC’s addressable market opportunity, according to a Frost & Sullivan study, the domestic market is projected to include 124 million individuals, while the rest of the world adds another 375 million people, implying a total addressable opportunity of roughly 500 million people. Notably, these addressable populations are defined by various attributes including: 1) an income threshold of greater than $30,000 or the country-specific equivalent level; 2) an age of 12-64 years old; and 3) the prevalence of malocclusion. Assuming a gross clear aligner price of $1,895 or the country-specific equivalent, SDC’s global addressable market opportunity is $945 billion, implying SDC currently maintains less than 1% penetration of the broader market, representing ample runway for growth longer term.

Figure 21: Total Addressable Market

United States Rest of World Total Population (2020E)* 331 Total Population (2020E)* 7,434 Income Threshold (>$30K) 58.7% Income Threshold (>$30K) 8.2% 12-64 Years Old (%) 70.0% 12-64 Years Old (%) 71.7% Malocclusion Rate (%) 90.9% Malocclusion Rate (%) 86.1% Total Addressable Population* 124 Total Addressable Population* 375 Clear Aligner Cost $1,895 Clear Aligner Cost $1,895 Total Addressable Market* $234,281 Total Addressable Market* $710,625

Global ~500 Million People Orthodontics $945 Billion Market

Source: Company data, Frost & Sullivan * Figures in MM We furthermore include our proprietary clear aligner market model below (Figure 22), where we estimate market penetration of the total market, including both doctor-directed and direct-to- consumer offerings. As it relates to the DTC market, we estimate the patient penetration is currently 272,000 cases annually, which assumes SDC currently maintains 95% market share in the DTC market (see Competitive Landscape on page 14). Importantly, we highlight our proprietary market model differs from SDC’s disclosed market opportunity on a price basis, SmileDirectClub 19

7 October 2019 where the manufacturers in the doctor-directed channel typically realize a lower clear aligner price per case, with doctors marking up the product thereon. Assuming population growth offsets treated individuals in the market, we estimate penetration of clear aligner treatment solutions to be 0.6% in 2023, driving a +47% CAGR from 2018-2023, even despite our conservative forecast of DTC price declines in line with our Align Technology model (despite ~flat price in our SDC model). All in, we view our market model illustrates the considerable underpenetration of the clear aligner market, where growth will likely stem from capturing greenfield opportunities with rising awareness rather than taking share from new or incumbent competitors, driving conviction in the continuing growth of likely most (if not all) market constituents.

Figure 22: Clear Aligner Market Model (Incl. Doctor-Directed and DTC) (in millions) 2018 2019E 2020E 2021E 2022E 2023E

Total US Population 331 331 331 331 331 331 Income Threshold 58.7% 58.7% 58.7% 58.7% 58.7% 58.7% 12-64 Years Old (%) 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% Malocclusion Rate (%) 90.9% 90.9% 90.9% 90.9% 90.9% 90.9% Addressable US Population 124 124 124 124 124 124

Total ROW Population 7434 7434 7434 7434 7434 7434 Income Threshold 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 12-64 Years Old (%) 71.7% 71.7% 71.7% 71.7% 71.7% 71.7% Malocclusion Rate (%) 86.1% 86.1% 86.1% 86.1% 86.1% 86.1% Addressable ROW Population 376 376 376 376 376 376

Total Population 7765 7765 7765 7765 7765 7765 Income Threshold 10.4% 10.4% 10.4% 10.4% 10.4% 10.4% 12-64 Years Old (%) 71.6% 71.6% 71.6% 71.6% 71.6% 71.6% Malocclusion Rate (%) 86.3% 86.3% 86.3% 86.3% 86.3% 86.3% Total Addressable Population at $1,895 500 500 500 500 500 500

Incremental Income Threshold 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Total Addressable Population at >$1,895 300 300 300 300 300 300

Summary Breakdown of Addressable Market Annual Orthodontic Case Starts 14 14 14 14 14 14 Non-Ortho Seeking Potential Case Starts (>1,895 threshold) 286 286 286 286 286 286 Non-Ortho Seeking Potential Case Starts (at 1,895 threshold) 200 200 200 200 200 200

Direct to Consumer Channel DTC Converted -- Non-Ortho Seeking Potential Case Starts 0.1% 0.1% 0.2% 0.2% 0.3% 0.4% Patients Utilizing Direct to Consumer Clear Aligners 0.3 0.5 0.8 1.1 1.5 1.9 Growth - 77.5% 61.5% 40.0% 35.0% 30.0% Est. ASP (Reflects List Price from DTC) $1,895 $1,897 $1,892 $1,888 $1,884 $1,880 Growth - 0.1% -0.2% -0.2% -0.2% -0.2% Total ($) $515 $914 $1,473 $2,057 $2,771 $3,595 Growth - 77.7% 61.1% 39.7% 34.7% 29.7%

Doctor-Directed Channel Annual Ortho Case Starts -- Bracket Utilization 90.0% 89.0% 88.0% 87.0% 86.0% 85.0%

Dr. Directed Converted -- Annual Ortho Case Starts Utilization 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% Dr. Directed Converted -- Non-Ortho Seeking Potential Case Starts 0.0% 0.1% 0.1% 0.2% 0.2% 0.3% Patients Utilizing Doctor-Directed Clear Aligners 1.4 1.7 2.0 2.3 2.6 3.0 Growth - 20.2% 16.8% 15.1% 14.4% 16.5% Est. ASP (Reflects List Price from DTC) $1,258 $1,218 $1,197 $1,197 $1,191 $1,189 Growth - -3.2% -1.6% 0.0% -0.5% -0.2% Total ($) $1,761 $2,049 $2,354 $2,710 $3,085 $3,585 Growth - 16.4% 14.9% 15.1% 13.8% 16.2%

Total Overall ($) $2,275 $2,964 $3,827 $4,767 $5,856 $7,180 Growth - 30.2% 29.1% 24.6% 22.8% 22.6%

Non-Treatment Patients with Malocclusion Utilization Converted -- Non-Ortho Potential Case Starts 0.1% 0.1% 0.2% 0.3% 0.4% 0.6% Still without Treatment 99.9% 99.9% 99.8% 99.7% 99.6% 99.4%

Source: Company data, Credit Suisse estimates; All $ in MM except ASP Note: Dr. Directed Conversion of Non-Ortho Seeking Potential Case Starts only considers patients above the $1,895 threshold given the higher price points of dr. directed treatment Increasing Demand, Conversion with Superior Marketing Efforts Accounting for the vastly underpenetrated market, our focus turns towards SDC’s ability to educate and ultimately convert potential customers into clear aligner patients, or SmileDirectClub “members.” Currently, SDC experiences five million unique visits to its site per month, where it then captures 400,000 unique emails per month, which essentially represent leads. From there, a number of customers (undisclosed) choose to either submit an impression kit or visit a SmileShop for a complementary scan, with SDC generally able to develop treatment plans for more than 90% of potential customers, on average. All in, SDC currently receives SmileDirectClub 20

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45,000 average aligner orders per month, with 2018 volume sales representing just under 1% overall conversion (vs. 0.5% in 2016).

Figure 23: Market Opportunity Conversion Cycle

~5 Million Unique ~400K Unique Treatment Plans ~45K Average ~500 Million TAM Visits to Site per Emails Captured per Completed per Number of Aligners Globally Month Month Month Orders per Month

~1% Overall Conversion Able to Develop Treatment Plans for >90% of Potential Customers

Source: Company data, Credit Suisse While the market opportunity is clearly robust, we acknowledge that clear aligners remain a highly considered purchase, with many (40%) of SDC customers only converting after seven months. While various factors may motivate customers to purchase clear aligners, including a life event (wedding, new job, job loss, birthday, dating, higher income), SDC strives to create a sense of urgency through various efforts, including marketing, with the aim of activating the conversion. SDC claims conversion has improved, albeit undisclosed, through customer relationship management (CRM) strategies, technology advancements, education efforts, and data driven insights. These related expenses flow through the Selling & Marketing expense line, which increased 232% y/y in 2018, and we expect to increase at a 54% CAGR through 2022 (Figure 24). Importantly, we forecast selling expenses are largely expected to remain flat going forward, with incremental spend stemming from increased marketing/advertising efforts. With its 100+ person marketing team, SDC manages all marketing, communications, purchasing (e.g. of TV advertisements), and execution in-house, where it views it maintains incremental efficiency and flexibility. Looking back at prior experiences, SDC noted frustration with the pace of advertisement agencies. That said, in international markets (see International Expansion on page 30), SDC acknowledges the value of advertisement agencies, which help SDC adapt its local messaging. Of note, SDC’s selling & marketing expenses are meaningfully higher than ALGN’s, the largest constituent across the clear aligner market, which disclosed at its November 2018 Ortho Summit that it spends $50 million annually (see takeaways note), albeit acknowledging that it has recently stepped up advertising efforts in 3Q19, likely to compete with new disruptive concepts.

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Figure 24: Marketing & Selling Expenses to Drive Awareness

$1,600 $1,484 80% $1,400 64.3% 70% $1,183 $1,200 57.7% 54.7% 52.4% 60% 49.9% 50.7% $1,000 $916 43.6% 50% $800 $692 40%

$600 $482 30%

$400 20% $211 $200 10% $64 $0 0% 2017 2018 2019E 2020E 2021E 2022E 2023E

Marketing & Selling Expense Marketing & Selling as a % of Revenue

Source: Company data, Credit Suisse estimates, $ in MM Over the past year and a half, these efforts have improved SDC’s aided awareness, which has also likely been supported by rising referral rates. Since February 2018, SDC’s referral rates have risen six pts to 21%. Meanwhile, SDC’s aided awareness has risen by 23 pts to 38%, indicating marketing efforts are also successfully educating prospective customers, potentially supporting market penetration longer term. For reference, aided brand awareness refers to the number of people who express some level of knowledge of a brand or product when prompted, otherwise referred to as brand recognition.

Figure 25: Aided Awareness and Referral Rates on the Rise

38% 39% 35%

34% 32%

28% 28% 29% 27% 27% 27% 27% 24% 24% 20% 19% 20% 18% 19% 22% 21% 16% 20% 20% 15% 19% 19% 15% 18% 19% 19% 19% 17% 17% 18% 18% 14%

Aided Awareness Referral Rates

Source: Company data, Credit Suisse We also highlight SDC’s impressive net promotor score (NPS) of 64, which compares favorably to several well-known brands across various industries (Figure 26). Most importantly, SDC’s NPS remains well ahead of Invisalign’s (37), with SDC noting its consistent messaging and pricing may be a key component in driving the meaningful gap. For reference, NPS is utilized by consumer brands to measure consumer loyalty to a given company, a metric first developed by Bain and Company in 2003, which is now considered the gold standard customer experience metric.

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Figure 26: Highlighting SDC’s Impressive Net Promoter Score

NPS: 64

Apple (72)

Align Tech (37)

Costco (45) AmEx (52)

Amazon (62) Netflix (68)

Nike (32) Target (28) Zappos (57) Microsoft (32)

Source: Company data, Credit Suisse All in, we expect SDC will experience a +47% case shipment CAGR from 2018-2023, where we view continued marketing efforts, which should drive aided awareness higher, in addition to other competitive advantages in relative convenience, expanded access to care, and lower cost relative to traditional providers, will continue to support growth longer term. That said, even with this impressive case shipment growth forecast, we note overall DTC’s estimated 2023 clear aligner market penetration will still only reach 0.4%, indicating further opportunity thereon, particularly as it further expands its SmileShop footprint (detailed on page 24), leverages continuing disruptive innovation to further accelerate growth (page 27), expands internationally, a dynamic which is only marginally reflected in expectations today (page 30), and increases access to care further with its in-house SmilePay financing option (page 32).

Figure 27: SDC Case Aligner Shipments (est. +47% CAGR from 2018-2023)

3,500 200% 186.9% 2,920 180% 3,000 160% 2,517 2,500 140% 2,170 120% 2,000 1,808 1,817 1,503 100% 1,500 1,397 1,228 80% 77.3% 61.5% 1,035 1,000 60% 739 40.0% 35.0% 458 30.0% 40% 500 258 31.9% 20% 22.4% 20.3% 20.0% 16.0% 16.0% - 0% 2018 2019E 2020E 2021E 2022E 2023E

SDC Case Volume ALGN Case Volume SDC Case Volume Growth ALGN Case Volume Growth

Source: Company data, Credit Suisse estimates; Case Volumes in 000s

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Increasing Convenience – Leveraging its Expanding SmileShop Footprint

Through its expanding SmileShop footprint, SDC is increasing customer convenience and credibility, which should drive conversion higher and support case volume growth. Moreover, its partnerships with CVS, Walgreens, and other international retailers allow SDC to expand and further optimize its SmileShop footprint in a capital efficient manner, while also increasing brand credibility. Of note, we expect the company to open ~30 new SmileShops per month in the US in 2020, and an incremental 100 stores annually thereafter, with SDC likely shifting away from its standalone store concept toward co-located SmileShops in partner stores. Current SmileShop Footprint According to our proprietary web-scraper, SDC’s SmileShop footprint currently consists of 364 stores worldwide, with 85% located in the US, as of September 27. SDC broadly considers its SmileShops to be “low commitment, high value fulfillment centers,” with SDC acknowledging clear aligners as a highly considered purchase. These stores are typically 900 square feet, on average, providing employees sufficient room to educate patients more broadly about SDC’s proprietary clear aligner treatment process, as well as to conduct free intraoral scans. Importantly, as explained previously, SDC requires either the completion of an impression kit ($49/kit; at-home) or an intraoral scan (free; in-store) in order to create a treatment plan and ultimately treat the patient’s malocclusion. By utilizing free scans in-stores (“low commitment”), SDC may increase a patient’s willingness to “show up” and learn more about the process, potentially driving increased and/or accelerated conversion (“high value fulfillment centers”).

Figure 28: Global SmileShop Footprint Mix by Geography

US, 308 Stores, 85%

Canada, 22 Stores, 6%

Australia, 14 Stores, 4%

New Zealand, 3 Stores, 1% UK, 17 Stores, 5%

Source: Company data (364 locations), As of 9/27/19 In the US, SDC utilizes various types of SmileShops to further advance its strategy of improving convenience and access to care. Currently, it maintains two flagship stores (1% of stores), shared retail stores (68%), retail storefront locations (5%), co-located shops in partner stores (24%), and Smile Buses (2%). The vast majority of stores are currently “Shared Retail” locations, which include SmileShops located in co-working office space, which we acknowledge may not appear impressive to customers. That said, we expect SmileShops co-located in partner stores, like CVS and Walgreens, which are known as trusted pharmacies, to offer more credibility to the brand. These co-located stores are expected to grow at an accelerated pace (and potentially replacing some current stores), skewing the mix away from “Shared Retail” concepts longer term. Note: We were also impressed with SDC’s Smile Bus concept, with which it utilizes the mobile stores to create pop up SmileShop locations at events, corporations, and schools, as well as in

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7 October 2019 more rural areas that may not support a permanent SmileShop. Today, the Smile Busses currently create more demand than all of Canada (22 stores).

Figure 29: US SmileShop Mix by Store Type

Smile Bus 2%

CVS & Walgreens 24%

Retail Storefront 5%

Flagships Shared Retail 1% 68%

Source: Company data (294 locations), As of July 19, 2019 Store Footprint Strategy–Conservative Ramp Embedded in Expectations Starting in 2017, SDC began to focus on building a store footprint, rather than solely relying upon its online presence. From 2017 to 2019E, we expect SDC will grow its store footprint at a 215% CAGR, which has largely already been achieved. Importantly, SDC targets the top 200 metropolitan areas domestically, with its location decision methodology generally taking into account market level population density and neighborhood demographics, including income and age. Of note, currently SDC maintains SmileShops in 93 of the top 100 designated market areas in the US. While we expect SDC will continue to grow its footprint in 2020 and beyond, SDC emphasized it expects to take a more measured and thoughtful approach to expansion, where it aims to expand and optimize its footprint simultaneously, while also ensuring it maintains sufficient capacity to meet the demand and conversion driven by its SmileShops. That said, we view SDC’s forecasted SmileShop expansion as conservative, where we highlight SDC currently has 94 co-located SmileShops in CVS as of September 27, with the optionality to open as many as 1,500 co-located SmileShops in CVS locations over the next several years, potentially offering upside to our estimates longer term.

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Figure 30: Forecasted SmileShop Store Count Ramp

900

800 100

700 100

600 100 500 125 400 50 733 307 51 300 633 222 533 200 188 408 141 358 104 307 100 41 66 10 15 27 0

SmileShops at Beginning of Period Net Additions

Source: Company data, Credit Suisse estimates Going forward, we view most newly opened stores will likely be co-located with partners domestically, including CVS and Walgreens. Expanding further upon its partnership strategy, we reiterate that SDC’s partnering with highly well-known, national pharmacy and health store brands should continue to drive credibility for its clear aligner solutions, with these partners’ “stamp of approval” mitigating potential skepticism about the product’s safety and efficacy. In April, SDC disclosed an agreement with CVS health, with SDC now maintaining the option to open SmileShops in as many as 1,500 stores across the US (as mentioned previously), with the exact locations and timeline within SDC’s control. That same month, SDC also began a pilot program with Walgreens in the US, with details around a potential expansion yet to be disclosed. Of note, according to our web-scraper analysis as of September 27, SDC has 94 and 4 SmileShops in CVS and Walgreens pharmacies, respectively. Since SDC first opened these co-located SmileShops, it has noted that 30-35% of people visiting these SmileShops in partner stores have never been to that store previously, illustrating the mutually beneficial nature of the program, where both national pharmacies have seen heightened front-store pressures as of late. In terms of the economics of these relationships, SDC notes that the rent is only slightly more cost-effective relative to what it currently pays in shared-retail locations, with SDC also paying a variable fee per scan completed in the given store. That said, while these co-located stores may be essentially on par with shared retail locations on an economic basis, SDC may better expand access to care and convenience for its customers, where we note that 70% of the population lives within three miles of a CVS location. Importantly, it currently has 6-9 month lease commitments per store with CVS and Walgreens, enabling it to maintain a more flexible SmileShop footprint as it better understands the performance of co-located stores. Outside of the US, SDC also plans to utilize a similar co-location strategy. Currently, it has opened five co-located SmileShops in Gordons Chemists in Australia. SDC has also disclosed relationships with Shoppers Drug Mart in Canada, as well as Tesco and Well Pharmacy in the United Kingdom, albeit with no stores currently co-located at this point, according to our analysis.

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Figure 31: Highlighting SDC’s SmileShop Store Front Partnerships

94 Stores 4 Stores

Domestic

International (United Kingdom) (Canada) (Australia)

Source: Company data, Credit Suisse All in, SDC’s aforementioned SmileShop footprint expansion strategy should support top-line growth over time. While Figure 32 illustrates negative revenue per store growth through 2019, we highlight that this dynamic is driven by the rapidly expanding store footprint. As expansion efforts normalize, we expect revenue per store to grow essentially in lockstep with store growth through 2023, a metric we will closely monitor to understand the success of its footprint strategy going forward. Of note, in 2019, we expect 85-90% of revenue to be generated by SmileShops, demonstrating the importance of this strategy and its success in supporting demand and/or accelerating conversion. Recently, SDC disclosed it has experienced +75% same market growth with its current store footprint, with also improvement in its “show rates” (+31% y/y). For reference, show rates measure the percentage of the time customers who sign up for an appointment actually show up. That said, while we expect SDC’s SmileShop footprint expansion will support higher conversion longer term, as co-location partnerships continue to add legitimacy to its brand while also driving increased convenience, we highlight that our current forecasts assume conversion levels remain flat, a key source of conservatism to our current forecasts.

Figure 32: Revenue per Store Should See Meaningful Growth as Store Count Growth Normalizes Longer Term

$4.0 $3.7 $3.7 400% 350% $3.5 $3.3 359% 300% $3.0 $2.9 $2.5 $2.5 250% $2.5 200%

$2.0 150%

100% $1.5 117% 31% 19% 16% 14% 50% $1.0 0% 13% 15% 13% $0.5 1% -50% -40% -32% $0.0 -100% 2018 2019E 2020E 2021E 2022E 2023E

Revenue per Store Revenue per Store Growth Store Growth

Source: Company data, Credit Suisse estimates; $ in MM Continuous Innovation – Supporting LT Growth

Leveraging its history of successful disruptive innovation, further product introductions should support growth longer term, where it aims to remain well ahead of peers with respect to

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7 October 2019 providing more cost efficient and convenient offerings. We categorize SDC’s innovations into two segments: 1) innovation supporting a recurring revenue base and 2) innovation to support market penetration. The first category includes numerous ancillary products, which are currently recognized in “Other Revenue,” while the latter includes further innovation to extend its core offering, such as the recent launch of Nighttime Clear Aligners. These products continue to support SDC’s differentiated position in the marketplace while also satisfying potentially unmet needs. Of note, while its research and development spend levels have not been disclosed, it currently maintains an 19 person R&D team, in addition to a Vice President of R&D. Innovation Supporting a Recurring Revenue Base SDC has already launched numerous ancillary products, which should strengthen its relationships with customers, while also enhancing SDC’s recurring revenue stream, supporting both its brand and revenue visibility longer term. Currently marketed ancillary products include whitening pens (BrightOn), an LED accelerator light, mints (MoveMints), lip balm, and retainers (Figure 33), each of which support SDC’s “better is better” smile improvement proposition. A number of these products may be used in conjunction with its clear aligner offerings as well as by customers who do not currently (or do not plan to in the future) utilize SDC’s clear aligner treatment. Also of note, various products, including BrightOn, MoveMints, and the lip balm, are included in the SDC’s “big, blurple box,” introducing current patients to its ancillary products at an early stage of its customer relationship. In terms of retainers, SDC only offers this product to customers who have utilized its clear aligner treatment solution. These custom-fit, discreet retainers are only worn at night, and should be worn throughout a member’s life in order to ensure her teeth do not move out of alignment in the future. Importantly, SDC currently offers a convenient retainer subscription service that ships new retainers every six months, potentially offering a growing source of recurring revenues longer term as it expands its treated customer base over time.

Figure 33: Currently Marketed Ancillary Products Product Price Product Description

BrightOn Premium $49.00 - 8 BrightOn same enamel-safe whitening pens Whitening

- Enhance BrightOn with LED light technology

LED Accelerator Light $49.00 - Cool blue LED light activates Bright Boost formula faster

- Hands-free, smartphone-powered LED

- Safe product to seat aligners and freshen breath

MoveMints $5.00 - Sugar-free, gluten-free, and vegan

- 20 per pack

- Shea butter and beeswax; Soothing vanilla scent

Lip Balm $5.00 - Two lip balms included

- Retainers to help maintain smile

Retainers $99.00 - Only available to clear aligner treatment customers

Source: Company data, Credit Suisse Over time, we conservatively expect “Other Revenue,” which includes this recurring revenue stream, to grow essentially in lockstep with net sales growth, with revenue contributions as a percentage of net sales remaining flat at 2.5% in 2020 and beyond. As a key caveat, Other Revenue also includes interest income (another recurring revenue stream source), partially offset by aligner refunds and adjustments. SmileDirectClub 28

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As it relates to revenue contributions from ancillary products, “Other Revenue” only takes into account products already launched. Longer term, we expect SDC’s R&D team will continue to launch new ancillary products, which may provide potential upside to our current estimates. Moreover, we await further commentary around the success of its subscription retainer program, as well as retainer order rates more broadly, where only 65% of treated customers currently purchase retainers. While our estimates do not take into account an improving retainer attachment rate going forward, SDC has noted it expects attachment rates should be able to go as high as 90-95% over time, as it further educates and prompts its customers about the benefits of the offering, another source of conservatism in our model.

Figure 34: Other Revenue Should Grow in Lockstep with Net Sales Long Term

$80 7% $74

$70 6%

$60 4.9% $56 5% $50 4.1% $42 4% $40 3.0% $30 3% $30 $23 2.5% 2.5% 2.5% 2.5% 2% $20 $17

$10 $7 1%

$0 0% 2017 2018 2019E 2020E 2021E 2022E 2023E

Other Revenue ($) Other Revenue as % of Net Sales

Source: Company data, Credit Suisse estimates; $ in MM Disruptive Innovation Supporting Market Penetration We expect SDC will continue its trend of disruptive innovation in the orthodontic market, with new product introductions supporting growth in its core clear aligner segment. Importantly, in the third quarter of 2019, SDC launched its Nighttime Clear Aligner product offering in the US market, with the intention of rolling the product out to its other current markets (Canada, UK, Australia) over the balance of the year. Given this product only requires 10 hours of continuous nighttime wear, SDC should be able to accelerate its penetration of the market, capturing customers who were unwilling or unable to wear aligners for the 22-hour daily wear cycle required with its traditional clear aligner therapy. While we are encouraged by continuing disruptive innovation, we have not meaningfully incorporated Nighttime-related growth in our market model, as we await commentary around Nighttime traction and customer feedback.

Figure 35: Night vs. Traditional Clear Aligner Comparison Average Treatment Product Wear Time per Day Price Duration

Traditional Braces 18 months 24/7 $3,000-$8,000

SDC's Clear Aligners 6 months 22 hours / day $1895 or $85/month

10 hours continuous SDC's Nighttime Clear Aligners 10 months $1895 or $85/month nighttime wear

Source: Company data, Credit Suisse

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International Expansion

Since launching in its first international market (Canada) in November 2018, SDC has since expanded into Australia (2Q19) and the United Kingdom (3Q19). With roughly 75% of the total global market opportunity outside the US, international expansion represents a meaningful opportunity, with focus on countries including Mexico, Germany, Ireland, New Zealand, and Hong Kong. Of note, our estimates only incorporate contributions from current geographic exposure (Canada, Australia, UK), and does not include contributions from other potential markets. Still Early Days in Current International Markets While SDC was founded in 2014, it only initiated international expansion efforts in 2018, with its launch in the Canadian direct-to-consumer orthodontic market, where it currently maintains 22 SmileShops. Meanwhile, as mentioned previously, it recently entered into the Australian and UK markets with 14 and 17 SmileShops, respectively. Overall, these current international markets represent 28 million potential cases, which implies a $53 billion total international addressable opportunity, representing meaningful runway to grow, where we estimate SDC has achieved <0.1% penetration to-date. Of note, while fabrication of a patient’s clear aligners will remain in the US for the foreseeable future, at its aforementioned facilities in Tennessee and Texas, final assembly of its “big blurple box” will be completed locally. Moreover, marketing efforts will also be conducted on a local level, where SDC aims to adapt its messaging to each market appropriately in order to enhance its market penetration, an effort likely supported by market agencies with know-how in the region. Most importantly, SDC expects to develop local doctor networks, which should be able to meet relevant requirements or certifications, with also the ability to communicate effectively with a patient in their local language.

Figure 36: Current International Markets – Still Early Days Canada Australia United Kingdom

Population 38M 24M 67M

Potential Cases 10M 6M 12M

Market TAM $19B $11B $23B

Launch Date November 2018 May 2019 July 2019

# of Stores 0 5 0

Local Partnerships

Source: Company data, Credit Suisse; As of 9/27/19 While SDC is clearly exerting greater focus and investing more meaningfully of late in its international strategy, its overall exposure remains low (<10% of revenues). As revenue contributions grow (>10% of revenues), we expect SDC will begin to break out domestic and international metrics, albeit likely a longer term dynamic, with the US expected to achieve rapid growth on a much larger base over the next five years. That said, its international SmileShops currently represent roughly 15.4% of global SmileShops, and we are encouraged by its continuing investment in infrastructure abroad, particularly as it expands its seemingly successful partnership approach abroad with Shoppers Drug Mart (Canada), Gordons Chemists (Australia; five SmileShops), Tesco (UK), and Well Pharmacy (UK).

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Figure 37: International Exposure Still Relatively Low – With A Seemingly Thoughtful Ramp In Place 15% 60 16% 14%14% 3 14% 50 12%12% 3 3 11%11%11% 11%11% 10% 17 12% 10% 40 10% 12 12 9% 9% 9% 8% 9 10 10% 8% 8% 8 9 9 7% 7% 7% 6 30 7% 4 14 8% 11 11 14 14 6 6 6 6 6 7 9 9 9 9 4 5 6% 20 1 3 4% 10 19 19 20 20 20 20 20 21 21 21 21 21 21 21 21 21 21 21 21 21 21 22 17 2%

0 0%

Canada Australia UK New Zealand % of Total

Source: Company data, Credit Suisse; As of 9/27/19 Expansion into Other Attractive Markets While we acknowledge growth opportunities from SDC’s current international markets, we also note potential upside to our current estimates with further international expansion. Notably, when SDC considers a new market, it looks at various characteristics, including:

■ Market Size: How large is the population? What is the malocclusion rate? How many of these people who suffer from malocclusion earn SDC’s requisite income level (equivalent of $34,000)? Age distribution?

■ Regulatory: What are the direct-to-consumer dentistry and teledentisty regulations? What types of advertising restrictions are imposed? Any regulation restricting the established SmileShop platform? Financing regulations (e.g. SmilePay)?

■ Competition: Which companies currently compete in the direct-to-consumer and/or doctor-directed clear aligner market? To what extent does the product and messaging need to be tailored to the market? Will SDC have market leadership?

■ Ease of Entry: Political and currency stability? Insurance coverage? Retail partnerships? With these characteristics in mind, SDC has identified Mexico, Germany, Ireland, New Zealand, and Hong Kong as attractive markets (Figure 38) for its proprietary clear aligner treatment system. Importantly, SDC is currently utilizing its Australia and UK teams to lead the launch into New Zealand and Ireland, respectively. Overall, these additional international markets represent 25 million additional potential cases, which implies a $47 billion incremental international addressable opportunity.

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Figure 38: International Expansion Opportunity – Potential Attractive Markets Population Potential Cases Market TAM

Mexico 134M 3M $6B

Germany 83M 18M $34B

Ireland 5M 1M $2B

New Zealand 5M 1M $2B

Hong Kong 7M 2M $4B

Source: Company data, Credit Suisse SmilePay Financing as a Key Differentiator

SDC’s in-house financing service addresses cost as a key barrier to penetration, allowing patients to pay for clear aligner treatment over 24 months rather than upfront. By providing in- house financing, SDC decreases the numbers of steps for patients to gain financing approval, thereby supporting better overall conversion. All in, SDC estimates its current SmilePay program has an internal rate of return (IRR) of 73%, which could increase to >100% longer term. SmilePay Mechanics While vastly more cost effective than traditional teeth straightening options, including doctor- directed clear aligners as well as brackets and wires, the purchase of SDC’s clear aligner treatment still remains a highly considered purchase, with the almost $1,895 price tag still high relative to typical day-to-day purchases. Moreover, some patients may still be unable to afford the treatment more broadly. In order to ease some of this friction in demand-purchase conversion, SDC opted to implement a financing option, SmilePay. In 2018, 65% of its customers utilized its SmilePay financing payment option, illustrating the value it adds for customers who are unable or unwilling to pay the full amount upfront. Of note, with its financing, a patient may choose to pay a $250 down payment and an incremental $85 per month over the next 24 months rather than pay the full $1,895 upfront, with SDC applying a 17% APR on average, albeit acknowledging that some states enforce ceilings on APRs (Figure 39).

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Figure 39: SmileDirectClub Payment Options Single Pay SmilePay Financing

Cost: $1,895 Cost: $1,895 $250 down payment $85/mo. X 24 mo.

- Easy one-time payment - 17% APR on average - Costs up to 60% less than other brands - Costs up to 60% less than other brands - Accept credit & debt cards, HSAs, or FSAs - Accept credit & debt cards, HSAs, or FSAs - No credit check required - Funded by J.P. Morgan ABS facility

35% of SDC Customers 65% of SDC Customers

Source: Company data, Credit Suisse SDC brought its financing option in-house, now maintaining a captive offering, with a 100% acceptance rate (no denials) and no required credit check. Today, J.P. Morgan supports the program with a two year $500 million asset backed facility (LIBOR+3.2%; collateralized by retail installment contracts), which includes an accordion feature up to $750 million, offering sufficient runway to grow the offering. Of note, in an effort to support cash flow dynamics over time, SDC aims to securitize SmilePay-related receivables, albeit a dynamic that is likely still at least 12 months away as it continues to build a collection track record. With a captive offering, where it requires no credit checks and limited additional information, SDC reduces demand-purchase conversion friction, making the product more accessible to patients, driving higher overall conversion, and providing a better overall experience. Previously, SDC had utilized outsourced financing, with its analysis of the offering indicating that conversion decreased with each additional website page and step. All in, we view its captive financing offering is a key competitive differentiator, as accessing sufficient capital may provide a barrier to entry for other startups in the DTC market. Of note, according to our analysis (Figure 40), only one other DTC company offers a captive platform, with all the other competitors utilizing Affirm, an alternative financing company. Meanwhile, Align Technology’s Invisalign, and likely other doctor-directed offerings, including those from Henry Schein, Dentsply Sirona, and Straumann, do not dictate financing efforts, with individual doctors and practices maintaining control over payment options.

Figure 40: Comparing Financing Options Across the Industry

Doctor-Directed vs. Outsourced vs. Company Financing Supplier DTC Captive

Invisalign Doctor-Directed Outsourced Doctor Dependent CandidCo DTC Outsourced Affirm Orthly DTC Outsourced Affirm SmileLove DTC Outsourced Affirm SnapCorrect DTC Outsourced Affirm Byte DTC Captive BytePay

SmileDirectClub DTC Captive SmilePay

Source: Company data, Credit Suisse Digging Deeper into SmilePay Economics

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While we highlight SmilePay as an important growth driver and competitive advantage for SDC over the next several years, we also acknowledge inherent risks related with in-house financing offerings. We look at a number of factors to measure the health of the broader economy, including consumer sentiment, US unemployment data, US PCE growth and US GDP growth. Consumer sentiment continues to remain at healthy levels, while the US unemployment rate remains near an 18-year low. Moreover, PCE and GDP growth also remain fairly in line.

Figure 41: University of Michigan Consumer Sentiment Figure 42: U.S. Unemployment Rate

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Figure 43: U.S PCE Growth Figure 44: US GDP Growth

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9/1/13

7/1/14

5/1/15

3/1/16

1/1/17

9/1/18

11/1/02

11/1/07

11/1/12

11/1/17

11/1/02

11/1/07

11/1/12 11/1/17

Source: Factset, Credit Suisse Source: Factset, Credit Suisse Despite the aforementioned risk, we highlight that SDC constructed its SmilePay program insofar that its APR (currently 17% on average) offsets bad debt associated with the program. Moreover, we highlight that SDC recovers the average cost of goods sold per aligner following the second monthly payment, with the total cost (including cost of goods sold and all other operating costs) recovered following the 14th payment (Figure 45).

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7 October 2019

Figure 45: SmilePay Payback (2019E)

$2,500 Cover COGS and All Other Operating Cover Cost of Costs After Mo. 14 Goods Sold Payment $2,000 After Mo. 2 Payment

$1,500

$1,000

$500

$0

Prior Aggregate Payments Incremental Payment Cost of Goods Sold per Aligner COGS and Other Operating Expenses per Aligner

Source: Company data, Credit Suisse estimates Currently, we expect SmilePay will generate a contribution margin of 33%, supporting SDC’s overall growth aspirations. That said, we would expect this dynamic could be impacted by the broader macroeconomic environment over time. To provide perspective on the potential downside scenario, we highlight that delinquency rates on credit card loans peaked at a roughly 50% higher level relative to pre-recession levels in 2009, according to the Federal Reserve. With this scenario in mind, applying a 50% higher delinquency rate to SDC’s current SmilePay program, we expect the contribution margin will decline to 29%, a 400 bps delta from the base case. While also representing a potential risk factor, we view, even with the lower contribution margin, SmilePay will remain a key growth driver, where a 29% margin still remains well above current and longer term adj. EBITDA margin estimates. Moreover, we highlight SDC likely could raise its APR above its current 17% average, potentially providing some offset. As a reminder, SDC set its current APR to offset current levels of bad debt, where it views SmilePay as a driver of its base business penetration and growth, rather than a revenue driver as a standalone platform.

Figure 46: Delinquency Rate Trend on Credit Card Loans (1991 – 2018)

9% Delinquency Rates Increased 50% During the Recession 8% 7% 6% 5% 4% 3% 2% 1%

0%

1991Q1

1991Q4

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1993Q2

1994Q1

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All commercial banks Banks ranked 1st to 100th largest in size (by assets)

Source: Company data, Credit Suisse Over the next five years, we expect implicit price concessions related to the SmilePay program to remain relatively stable (Figure 47). That said, SDC remains focused on implementing and executing on initiatives to drive improvements on collections, where it is currently applying data

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7 October 2019 science to optimize its efforts in this category. Some examples include being more proactive in following up with customers that have invalid, lost, or cancelled credit cards, as well as providing incentives to shorten the plan to 12-18 months.

Figure 47: Implicit Price Concessions

$350 10.6% $304 $300 10.4%

10.3% 10.2% $250 $234 10.0% $200 $174 9.9% 9.8% $150 $124 9.6% $100 $77 9.4% $47 9.4% 9.4% 9.4% 9.4% $50 9.3% $17 9.2%

$0 9.0% 2017 2018 2019E 2020E 2021E 2022E 2023E

Implicit Price Concessions ($) % of Revenue

Source: Company data, Credit Suisse estimates; $ in MM Profit Margin Expansion

We expect SDC will achieve 2,198 bps of adjusted EBITDA margin expansion from 2018 to 2022 on growing scale and automation initiatives. As a reminder, SDC previously outsourced the manufacture of clear aligner trays to an outsourcing partner and then to Align Technology, who previously held a minority interest in the DTC constituent (until 1H19), a dynamic that partially drove a -14.5% adjusted EBITDA margin in 2017. In 2018, SDC experienced meaningful margin improvement year-over-year following the decision to insource its manufacturing, effectively becoming vertically integrated across the supply chain, with it now conducting 100% of its manufacturing efforts in-house. Going forward, we view the compelling unit economics driven by complete end to end vertical integration will support continued margin expansion, particularly with building operating leverage over a fixed cost base. Of note, SDC is onboarding meaningful excess capacity ahead of growth, including the expansion of its current Tennessee manufacturing facility (2 million tray capacity today; expecting to expand to 3 million) and as it creates 100% redundancy in a new Texas facility, with efforts expected to be completed in December 2019. We also expect focus on automation initiatives will also support margin expansion. While SDC has noted that the plastic utilized in aligner trays are a relatively cheap component of cost of goods sold, with long term contracts already in place, it acknowledged that labor remains the most expensive contribution. We view SDC can limit headcount growth despite fast growing revenue as it automates certain processes in manufacturing and treatment design longer term.

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7 October 2019

Figure 48: Gross Margin Comparison: SDC vs. ALGN

90%

83.0% 83.5% 85% 81.9% 82.0% 79.2% 80% 75.8% 75% 73.6%

69.2% 73.9% 73.9% 74.0% 70% 72.2% 73.0%

65%

60% 56.9%

55%

50% 2017 2018 2019E 2020E 2021E 2022E 2023E

SDC ALGN

Source: Company data, Credit Suisse estimates That said, we highlight a deterioration in SDC’s EBITDA margin in 2019 following a service disruption related to acquiring its iTero scans from Align Technology’s cloud, as well as a marketing misstep, involving one-click advertising across social medial platforms, which drove lower conversion than expected in 2Q/3Q. In order to prevent a similar service disruption in the future, SDC is focused on developing a method to download the scans directly from the scanner, with dedicated employees manually downloading the scans in the meantime. In terms of the marketing misstep, SDC has already reverted to its previous strategy, with conversion moving back to expected levels. All in, we expect SDC will turn profitable in 2020 in light of continuing profit drivers. Through 2022, we expect SDC will achieve 2,198 bps of margin expansion, with peak margins potentially in the 25%-30% range longer term.

Figure 49: 2,198 bps of EBITDA Margin Expansion from 2018-2022

$800 $681 55.0% $700

$600 45.0%

$500 $403 35.0% $400 25.0% $300 $192 23.2% $200 15.0% 17.8% $57 $100 11.5% -$21 -$18 -$72 5.0% $0 4.8% -5.0% -$100 -14.5% -4.1% -$200 -9.6% -15.0% 2017 2018 2019E 2020E 2021E 2022E 2023E

EBITDA EBITDA Margin

Source: Company data, Credit Suisse estimates; $ in MM

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Investment Risks

Deterioration in Broader Economic Conditions: Current and prospective customers could be directly affected by prevailing economic conditions, levels of employment, salaries, wage rates, consumer confidence, and consumer perception of economic conditions. Of note, dental and orthodontic reimbursement in many markets is largely out of pocket, which further accentuates its exposure to these macro dynamics. A deterioration in broader economic conditions could adversely affect consumer spending habits, reducing the number of orthodontic case starts, consumer spending on elective or higher value procedures, or demand for dental and orthodontic services generally. Of note, more onerous broader macroeconomic pressures could deter prospective patients entirely or defer desired treatment to a more stable or healthier period in the future. Ability to Achieve Profitability: SDC has yet to achieve profitability since it was founded in 2014, and while we expect it to experience positive net income in 2021 on a GAAP basis, we acknowledge risks around SDC’s ability to achieve or maintain profitability in the future. It has spent significant funds in organizational and start-up activities to-date in order to recruit key managers and employees, develop clear aligners, develop manufacturing and member support resources, and for other research and development efforts. Such efforts, if continued, may continue to drive losses over time. Demand for Clear Aligners: With a vast majority of net revenues derived from the sale of clear aligners, growth expectations may be hindered by lower than expected demand for the teeth-straightening offering, where prospective customers may be reluctant to accept teledentistry (vs. traditional in-person orthodontic treatment). Negative reviews from previous customers, as well as outspoken orthodontists and dentists, may also drive continued hesitancy around the acceptance of teledentistry. Also, SDC’s direct marketing campaigns may be unsuccessful in reaching its target audience or may not resonate as desired in the marketplace. For example, in 2Q19, SDC implemented a new marketing campaign featuring one-click advertising across various social media platforms that did not perform as intended, resulting in lower than expected conversion. Of note, SDC has re-implemented its previously successful campaigns and its conversion is recovering. Reliance on and Cost of Significant Advertising: SDC relies heavily on advertising and other marketing campaigns to acquire new members, a trend we expect will continue going forward as SDC continues to raise awareness about its products. Of note, SDC utilizes an omni-channel approach, including media mix modeling and multitouch attribution modeling. While SDC has had much success over the past few years structuring its marketing campaigns, it may fail to achieve anticipated returns on marketing spend going forward. As noted previously, in 2Q19, SDC implemented a new marketing campaign across various social media platforms that did not perform as intended, resulting in lower than expected conversion. Moreover, any future advertising and marketing missteps may have similar consequences going forward, as well. Partnership Relationships May Not Drive Growth: SDC’s growth strategy relies in part on its partnership with key retailers, including CVS, whereby it plans to optimize its retail footprint through partners’ more favorable and economical store locations. That said, these partnerships may not drive expected growth if its retail partners do not devote sufficient resources or space within the stores. These agreements may also be at risk of premature termination due to potential future disagreements. SDC may also be unable to renew existing retail partner agreements on acceptable terms, which would require SDC to relocate a substantial number of its SmileShops. Also, an agreement with a particular retail partner may preclude it from entering into additional future arrangements. Competition: SDC will continue to face competition from a handful of smaller companies in the direct-to-consumer clear aligner industry, including Candid Co, SmileLove, SnapCorrect, Byte, among others, particularly as new and/or emerging constituents better understand the potential market opportunity, which may be further illustrated by SDC’s IPO. SDC will also face competition from more well-established competitors in the doctor-directed market, including SmileDirectClub 38

7 October 2019

Align Technology, Henry Schein, Straumann, Dentsply Sirona, and 3M. Some of the competitors may have greater resources for marketing and/or manufacturing efforts, while others may be able to leverage existing channels in the dental market to compete with SDC. As SDC expands internationally, it may face additional competition in markets outside the US. All in, competition across both the direct-to-consumer and doctor-directed marketplaces may hinder SDC’s ability to grow in line with current expectations. Lack of Clinical Data Supporting Efficacy: While SDC’s clear aligners have received FDA 510(K) approval, we acknowledge the lack of clinical data or evidence supporting SDC’s claims around the safety and efficacy of its clear aligners treatment offering. If SDC’s solutions received negative reviews or data claiming the treatment does not work as advertised, it could deter further market penetration and materially impact growth expectations longer term. Moreover, according to our proprietary dental survey (see Dental Update: Survey Says: Dental Demand Builds), regardless of whether dentists view the DTC offerings as having a positive, neutral, or negative impact on their business, most seem to agree that the treatment is not appropriate and is targeting an uniformed part of the market. As a key caveat, we acknowledge that typical dentists who are not part of SDC’s doctor network are inherently biased against DTC companies , which aim to bypass traditional modes of care.

Figure 50: CS Proprietary Survey: Do you view Direct-to-Consumer offerings have an impact on your clear aligner business? Direct to Consumer Brands Positive Neutral Negative It has brough a lot of questions from existing patients No (x12) Yes, they have a negative and positive impact; Mostly negative Negligible; If anything, it increases awareness for ortho treatment Not sure Yes, they take away a lot of potential patients (x2) Positive Maybe Yes, negative (x8) Positive - When they mess up cases, patients come to see us No impact; Different demographic Would be negative, but haven't seen much impact yet Positive - More consumer awareness around oral health Takes away patients, but also raises awareness -- Net neutral Negative, cutting price Positive because more people are going to come in and get it done right No, I think patients who seek direct to consumer offerings tend to be price I do not agree with it and think it is abuse if overall dental management is not with an actual specialist conscious and our pricing for Invisalign is on the higher end provided. However patients may still opt to do it It's a positive effect driving patients to us after the home products don't No impact, except for those patients who have tried and now come to use to Negative initially, but patients that have followed up had horrendous results so produce the desired result correct their problems LT think it will have little impact Positive-Once treatment plan does not work, they will actively seek No - Cannibalizes the very low end of the market; The complex cases DTC Negative for orthos as patients try to use SDC rather than see a doctor for orthodontic treatment from a reputable source cannot complete come to dentists after to complete the it appropriate care Positive-Limited treatments often lead to comprehensive treatment; SDC I think they should be outlawed, but as I don't offer any clear alingers in my DTC is an affront to dentistry; If a doctor fails due to inappropriate treatment caters to lower income levels practice, I'm ambivalent planning, would lose our license Positive-Seeing more second opinions of patients thinking about DTC or DTC is reaching out to an uninformed, uneducated part of the public. Our Negative because people now THINK that ortho is commodity vs. specialty; have already been treated; As ortho, see more complex cases anyhow; patients are given education which helps them understand the dangers of do- Patients will realize that harmful affects can happen when treatment goes Potential new patients from word of mouth it-yourself dentistry. unsupervised and it will be too late for them. Positive - More people talking about clear aligner therapy No impact currently (x2) Not a good thing; Too many problems for patients potentially Patients are more aware Neutral-More awareness, but also more retreats for unfinished ortho Increased interest in ortho, but gives ortho a bad name Net positive - When don't get results they wanted the patients will come to a Neutral-Remain unchanged due to the fact that patients tend to prefer working Negative, pepole can do DIY ortho for cheap and mess up their bites real dentist with a clinician or a provider in terms of aesthetic cases Will negatively effect pricing, but will drive more patients to my office Negative, unsupervised treatment No, however I only do a small amount of clear aligner work Negative, DIY dentistry is directing care on the wrong track No Impact - my patients follow through with my recommendations; The population going to DTC are young/rarely see dentists regularly No impact, my patients are educated Source: Credit Suisse, n=75 Adverse Changes or Interpretation of Laws, Rules, Regulations Governing Remote Healthcare and the Practice of Dentistry: As discussed on page 13, SDC is currently facing litigation in many states around the practice of remote healthcare and the practice of dentistry. If adverse changes or interpretations of laws, rules, or regulations do occur, SDC may be required to adapt its business model accordingly, which could materially affect its business, financial condition, and result of operations. Heightened Delinquency Rates Related to SmilePay Financing: In 2018, 65% of its members utilized SDC’s SmilePay financing offering, with SmilePay accounting for $174 million in net receivable with a 10% delinquency rate. While its delinquency rate has been improving, primarily on improved internal collection processes, the increase in the number of members utilizing the offering has driven a corresponding revenue reduction (implied price concessions). An increase in payment defaults and uncollectible amounts may increase the implied price concessions, thereby reducing revenue and adversely affecting net income. Also of note, extended payment terms decrease SDC’s cash flow from operations. Moreover, SDC’s SmilePay program subjects the company to additional regulation and compliance, including but not limited to those governing consumer retail installment finance transactions. Manufacturing Problems or Delays: SDC now manufactures 100% of its clear aligners and retainers in-house. As it continues to scale-up and automate its production, it may experience

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7 October 2019 manufacturing and/or quality control problems, as well as delays. Pursuant to these problems, SDC may not be capable of satisfying market demand, which would adversely affect its business and reputation in the marketplace. Also of note, SDC’s manufacturing facilities are subject to periodic regulatory inspections by the FDA and regulatory agencies. If SDC fails to maintain facilities in accordance with applicable Quality System Regulations, its manufacturing processes could be suspended or terminated. Ownership Structure: All in, David Katzman, Jordan Katzman, Alexander Fenkell, and Steven Katzman retain 31%, 25%, 23%, and 12% of Class B Common Stock, respectively, implying a combined ownership of 90.8%. Of note, the four aforementioned insiders also maintain a combined voting power of 87.2%. Moreover, CEO David Katzman will retain other business interests outside of SmileDirectClub, namely his position as Managing Director of Camelot Venture Group. While currently SDC views Katzman as having adequate time to focus on the business currently, demands from his other business obligations could increase, potentially reducing the time he is able to devote to SDC. Moreover, there is a conflict of interest between SDC and other entities for which Katzman provides services, a dynamic that is monitored by the board.

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Earnings Outlook and Financial Resources

2018 Review: SDC’s revenues increased 190.0% to $423.2 million in 2018, primarily driven by unique clear aligner case order growth of 186.9% to 258,300 (21% of competitor ALGN’s global case volume). Growth in aligner orders was largely driven by an increase in conversion from website visitors to aligner sales (conversion undisclosed), with only minimal growth driven by an increase in its gross average selling price (+1.4%) to $1,752. Importantly, gross ASP excludes the impact of cancellations, refunds, adjustments, and implicit price concessions. Meanwhile, implicit price concessions improved to 9.9% of gross revenue in 2018 (vs. 10.3% in 2017) as SDC improved its internal collections capabilities, driving net clear aligner revenue to grow +192.5%. In 2018, we also note other non-clear aligner revenue growth of +140.9% to $17.2 million. Of note, other non-clear aligner revenue includes interest income from its SmilePay financing program, as well as revenue attributable to impression kits, retainers, and other ancillary products, offset by aligner refunds and adjustments. Its gross margin increased 1,220 bps to 68.3% as a result of producing more aligners internally (now 100% manufactured by SDC), where its previous practice of outsourcing to a contract manufacturer was far less cost effective. Meanwhile, Marketing & Selling expenses rose 633 bps to 50.3% of sales due to increased digital and media advertising and branding efforts. The expansion of its SmileShop locations to prepare for growth in 2019 and beyond also drove marketing & selling expenses higher. Meanwhile, general & administrative expenses fell 426 bps to 28.8% on improved leveraging of its fixed costs. All in, excluding stock-based compensation of $19.8 million in 2018, adjusted EBITDA was -$17.5 million, representing a - 4.1% adjusted EBITDA margin (+1,034 bps). Earnings Outlook

2019 Forecast: In 2019, we estimate revenues to expand 76.9% to $748.8 million, largely predicated on clear aligner case order growth of 77.3% to 457.9 million and essentially flat gross ASP (+0.1%). We also expect implicit price concessions as a percentage of revenue to fall to 9.3% (vs. 9.9% in 2018), driving net clear aligner revenue to grow +78.9% to $726.2 million. We also anticipate other non-clear aligner revenue will rise 31.1% to $22.5 million (representing 3% of net revenue). While we continue to expect robust revenue growth in 2019, we acknowledge the quarterly cadence is disappointing following two distinct dynamics: (1) a marketing misstep and (2) an iTero scan download issue. In terms of marketing, SDC launched a new campaign in 2Q, whereby it created a one-click appointment sign-up advertisement on social media platforms, bypassing its previous strategy of first driving prospective patients to its website to augment their understanding of the offering. While the one-click advertisement drove SmileShop appointments higher, the campaign also increased its corresponding no-show rate and reduced overall conversion. Concurrently, SDC experienced a technical issue with its iTeros, where it was unable to automatically download patient scans, delaying the delivery of patient information to its treatment design team and effectively elongating the selling cycle to patients. As a reminder, the longer it takes a patient to get their treatment plan, the less likely the patient is to convert. In terms of its margins, we expect gross margin to increase 1,001 bps to 79.2% on continuing operating leverage and a one-time royalty fee in 2Q (+117 bps in FY19). However, we also expect marketing and selling expenses to rise 1,445 bps to 64.3% of sales, which includes meaningful incremental spend aimed at resolving its aforementioned 2Q marketing misstep. We also expect general and administrative expenses to rise +4,551 bps to 73.6% of sales, which includes $368 million in stock-based compensation. Excluding stock-based compensation, we expect adjusted EBITDA to fall 546 bps to -9.6% in FY19. Longer-Term Outlook: On a longer-term basis, we expect SDC to achieve a 40.6% revenue CAGR from 2019-2023, on continuing robust net clear aligners revenue growth (+40.8% CAGR) and stable non-clear aligner revenue as a percentage of sales (2.5% of sales; +34.5% CAGR). By YE23, we expect SDC will achieve a gross margin of 83.5%, on further operating SmileDirectClub 41

7 October 2019 leverage and automation initiatives, with peak margins longer term potentially reaching 85%. We also expect Marketing and Selling expenses will fall to 50.7% of sales by YE23 as it gains scale, with these efforts potentially only representing 40-45% of sales longer term. All in, we expect SDC will achieve adjusted EBITDA of $680.6 million in 2023, with a 23.2% EBITDA margin. Longer term, we expect peak adjusted EBITDA margins of 25-30%.

Figure 51: Forecasted Revenue Growth Trend Figure 52: Forecasted EBITDA Margin Trajectory

$3,500 190.0% 200% $800 $681 55.0% $2,928 180% $700 $3,000 160% $600 45.0%

$2,500 $2,256 140% $500 $403 35.0% 120% $2,000 $400 $1,675 25.0% 100% $300 $1,500 76.9% $192 23.2% $1,199 80% $200 15.0% 17.8% $1,000 60% $100 $57 -$21 -$18 11.5% 5.0% $749 60.2% -$72 40% $0 $423 4.8% $500 39.7% -5.0% 34.7% 20% -$100 29.8% -14.5% -4.1% $0 0% -$200 -9.6% -15.0% 2018 2019E 2020E 2021E 2022E 2023E 2017 2018 2019E 2020E 2021E 2022E 2023E

Reported Revenue Growth EBITDA EBITDA Margin

Source: Company data, Credit Suisse estimates; $ in MM Source: Company data, Credit Suisse estimates; $ in MM Financial Resources

SDC has $537.0 million in cash reserves and $205.0 in debt, with capital deployment efforts focused on organic growth initiatives near term. We estimate SDC will burn $241.9 million and $168.0 million in cash flow from operations in 2019 and 2020, respectively. Cash burn is largely attributable to its expanding accounts receivable balance, as its SmilePay program continues to support top-line growth. Importantly, we expect it to generate positive cash flow from operations by 2021. Its cash conversion cycle of -84.1 days as of June 30, 2019 declined from -35.5 days on average as of March 31, 2019. As of June 30, Days Sales Outstanding was 84.7 days (vs. 75.5 as of March 31), Days Inventory was 62.0 (vs. 25.1 in March), and Days Payable Outstanding was 230.8 days (vs. 136.1 in March), demonstrating meaningfully better days payable, partially offset by a deterioration in inventory days and days sales outstanding.

Figure 53: SDC Cash Conversion Cycle Trailing Twelve Months Date Revenues COGS Inventory Receivables Payables Current DIO Current DSO Current DPO Current CCC

31-Mar-20E $255.8 $46.8 $68.20 $309.03 $50.62 132.9 110.2 98.7 144.5 31-Dec-19E $208.7 $40.3 $47.26 $317.22 $87.83 107.0 138.7 198.8 46.9 30-Sep-19E $166.6 $36.2 $44.45 $264.21 $71.77 112.0 144.7 180.8 75.9 30-Jun-19 $195.8 $32.2 $21.91 $181.81 $81.58 62.0 84.7 230.8 (84.1) 31-Mar-19 $177.7 $46.7 $12.84 $147.08 $69.69 25.1 75.5 136.1 (35.5) 31-Dec-18 $128.5 $36.2 $8.78 $174.15 $40.94 22.1 123.7 103.2 42.6 31-Dec-17 $146.0 $62.9 $2.7 $45.3 $21.9 15.8 113.4 127.1 2.1

Source: Company data, Credit Suisse estimates; $ in MM

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Valuation

SDC’s IPO priced at $23 per share on September 11, 7.2x our 2020 EV/Sales, above its $19- $22 range, based on 384.9 million diluted common shares. On its first day of trading, SDC’s share price fell 24.9%, closing the day at $17.28 per share. To-date, SDC’s shares have declined 40.4% since its first day of trading on September 12 (vs. S&P -3.2%). Importantly, SDC currently trades at 2020E EV/Sales and EV/EBITDA multiples of 4.5x and 95.4x, respectively, which is a discount to its broader peer group on a more comparable EV/Sales basis, which includes various dental constituents, med-tech companies, and consumer-oriented subscription services. Our Outperform rating and $18 target price is based on 5.6x 2020E EV/sales multiple, a premium to Align Technology and essentially on par with its broader peer group, reflecting its position as the disruptor in the vastly underpenetrated clear aligner market, with line of sight to profitability by 2020. Of note, while Align Technology is SDC’s largest standalone, public comparable company in the clear aligner market, we highlight that ALGN’s focus remains on the niche orthodontic market (12 million case starts annually) relative to SDC’s broader DTC approach. Our $20/share blue sky scenario, implying 6.2x 2020E EV/Sales, is predicated on faster than expected market penetration in the US, supported by incremental marketing and its SmilePay platform, accelerated expansion into new geographies, and better than expected operating margin expansion. Our $13/share grey sky scenario, implying 4.0x 2020E EV/Sales, is based on lower than expected market penetration in the US due to emerging competition in other direct-to-consumer brands and better share capture by doctor-directed offerings (e.g. ALGN’s Invisalign).

Figure 54: SDC Stock Price Performance Following IPO: -40.4%

$24

$22 -40.4% vs. -3.2% S&P $20

$18

$16

$14

$12

$10

Source: Factset, Credit Suisse; Priced as of 10/4 at 3PM ET For perspective, dental valuations have historically traded at a 5.0x premium to the SPX, with dental companies consistently outperforming, supported by ALGN’s, STMN’s, and DHR’s (through September 12, 2019) robust valuations. Importantly, dental valuations are currently trading at 21.0x, 1.3x above their historical average, a trend we expect to continue as robust growth continues across certain industry constituents, including ALGN and STMN. Of note, excluding ALGN, STMN, and DHR, the dental group is currently trading at 16.5x, a slight discount to the current SPX (16.9x).

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Figure 55: FY+2 P/E – Dental Index vs. S&P 500

30x Current Dental Average: 20.6x Dental Historical Average: 19.6x 25x

20x

15x

10x Current SPX: 16.4x SPX historical average: 14.7x 5x

0x

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Dental Index P/E FY+2 SPX P/E FY+2 SPX Avg. Dental Index Avg.

Source: Factset; Priced as of 10/4 at 3PM ET Note: Dental Index includes ALGN, XRAY, HSIC, PDCO, STMN, CLTN, DHR (through 9/12), SIRO Comparable Company Analysis

When looking at comparable companies, we consider three primary peer groups, including traditional dental constituents, relevant med-tech companies, and consumer oriented subscription services.

■ Traditional Dental Constituents: For our traditional dental peer group, we include Align Technology (ALGN), the leader in the doctor-directed clear aligner market with an est. 88% share. While targeting a slightly different market (traditional orthodontic cases vs. broader population of people with malocclusion who typically do not seek care) with a different model, as described in the competitive landscape overview on page 14, we view ALGN as SDC’s closest publicly traded competitor, with both companies maintaining their own manufacturing and treatment planning processes on a relatively large scale. Also within this comp group, we include Denstply Sirona, Straumann, 3M, and Zimmer Biomet, each of which manufactures dental equipment and consumables. While these manufacturers each have a highly different product portfolio and end-customer, we still view these constituents are relevant, particularly as a number of these constituents already compete in the brackets & wires market, with recent entry also into the clear aligner arena. While we acknowledge the dental distributors, we view these companies as far less relevant.

■ Med-Tech Companies: We include several leading medical device companies that maintain sustained, robust top-line growth and meaningfully underpenetrated market opportunities. Moreover, as a reminder, similar to other medical device companies, SDC has relevant regulatory approvals (e.g. FDA 510(K) approval) for its primary offering. We view these companies as relevant in order to incorporate the aforementioned dynamics in our comparable company analysis.

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■ Telemedicine and Consumer Subscription Services Providers: We also look at telemedicine companies. Within this group, we view Teledoc (TDOC) as the most relevant company given its telehealth platform, a similar concept to SDC’s teledentistry solution, whereby each company connects patients to relevant practitioners remotely. In our broader comp sheet, we also include consumer subscription service companies, through which consumers pay on a periodic basis (typically monthly) for a given discretionary service, albeit acknowledging they are somewhat less relevant.

Figure 56: Comparable Company Analysis Price Market 52-Week Avg. daily CY EPS 5-Yr EPS CY Sales 5-Yr Sales EV/EBITDA EV/Sales Dental Manufacturers Ticker Rating Target 10/4 % to PT cap ($mil) High Low vol (000) 2019 2020 CAGR 2019 2020 CAGR 2019 2020 2019 2020 Yld. DENTSPLY SIRONA, Inc. XRAY Outperform $63 $53.37 18% $11,964 $59.40 - $33.93 1,657 $2.39 $2.69 -5.4% $3,998 $4,133 8% 15.2x 13.8x 3.3x 3.2x 1.4% Align Technology, Inc. ALGN Outperform $320 $180.26 78% $14,398 $364.79 - $169.84 1,218 $5.21 $6.71 29% $2,394 $2,884 27% 21.9x 16.7x 5.7x 4.7x 0.0% Straumann Holding AG STMN-CH $808.60 $12,840 $896.20 - $587.00 59 $21.54 $25.85 14% $1,588 $1,820 18% 26.8x 22.6x 8.1x 7.1x 0.1% 3M Company MMM $155.44 $89,421 $219.75 - $150.81 2,565 $9.33 $10.05 7% $32,357 $33,347 1% 11.9x 11.1x 3.2x 3.1x 2.4% Zimmer Biomet Holdings, Inc. ZBH $134.56 $27,627 $143.57 - $96.99 1,002 $7.82 $8.30 16% $7,955 $8,161 14% 13.5x 13.2x 4.5x 4.4x 0.5% Average 48% 17.9x 15.5x 5.0x 4.5x 0.9% Dental Distributors Henry Schein HSIC Neutral $66 $62.55 $9,274 $91.35 - $56.58 1,042 $3.47 $3.78 11% $10,002 $10,382 6% 11.4x 10.8x 1.0x 1.0x 0.0% Patterson Companies PDCO Outperform $25 $16.95 $1,619 $26.60 - $15.73 1,122 $1.38 $1.46 -9% $5,627 $5,796 9% 6.3x 5.9x 0.3x 0.3x 36.1% Average 8.8x 8.4x 0.7x 0.6x Medical Device Companies NuVasive, Inc. NUVA $64.47 $3,355 $70.35 - $43.51 467 $2.32 $2.56 - $1,155 $1,218 10% 11.4x 10.5x 2.9x 2.8x 0.0% Cooper Companies, Inc. COO $295.76 $14,662 $344.32 - $228.65 359 $12.45 $13.19 20% $2,674 $2,852 10% 17.3x 15.6x 5.5x 5.1x 0.0% Dexcom DXCM $160.65 $14,649 $178.45 - $105.05 808 $0.92 $1.40 - $1,366 $1,615 41% 108.1x 62.2x 10.7x 9.1x 0.0% ABIOMED, Inc. ABMD $169.49 $7,691 $430.93 - $159.40 518 $5.18 $5.21 21% $863 $1,013 35% 26.8x 22.8x 8.9x 7.6x 0.0% Edwards Lifesciences CorporationEW $229.65 $47,760 $229.97 - $136.44 1,044 $5.34 $5.99 6% $4,237 $4,697 13% 34.7x 30.6x 11.3x 10.2x 0.0% Average 39.7x 28.4x 7.9x 6.9x Telemedicine / Consumer Subscription Services Teledoc TDOC $66.41 $4,784 $79.38 - $42.08 1,405 -$1.56 -$1.17 28% $543 $678 76% 162.4x 75.4x 8.8x 7.1x 0.0% ETSY ETSY $56.43 $6,798 $73.35 - $38.02 3,924 $0.71 $0.96 - $806 $1,005 33% 36.0x 27.0x 8.4x 6.8x 0.0% Wayfair W $106.36 $6,895 $173.72 - $76.60 1,967 -$6.58 -$5.94 8% $9,232 $11,997 51% -17.5x -20.8x 0.7x 0.6x 0.0% Chewy CHWY $25.71 $1,375 $41.34 - $22.28 2,555 -$0.47 -$0.23 - $4,690 $5,893 - -12.4x -89.9x 0.3x 0.2x 0.0% Weight Watchers WW $36.52 $2,458 $70.21 - $16.71 1,774 $1.69 $2.02 14% $1,414 $1,469 1% 7.0x 6.4x 1.7x 1.7x 0.0% Stitch Fix SFIX $19.75 $1,087 $37.72 - $16.05 3,317 $0.22 $0.03 - $1,717 $2,073 - 34.3x 32.5x 0.6x 0.5x 0.0% HelloFresh SE HFG-DE $13.96 $2,298 $14.30 - $5.83 651 -$0.35 $0.08 1% $1,682 $2,029 107% - 32.3x 1.4x 1.1x 0.0% Blue Apron APRN $9.13 $61 $24.60 - $6.10 302 -$4.36 -$3.32 41% $473 $498 71% -17.8x 4.5x 0.1x 0.1x 0.0% Average 27.4x 8.4x 2.8x 2.3x S&P 500 Index SPX $2,944.00 $3,027.98 $2,346.58 $166.50 Source: Credit Suisse estimates, Factset; For our peer group analysis we exclude Dental Distribution companies (HSIC, PDCO) and Consumer Subscription Services (ETSY, W, CHWY, WW, SFIX, HFG-DE, APRN); Priced as of 10/4 at 3PM ET Discounted Cash Flow (DCF) Analysis

Our discounted cash flow model is predicated on SDC’s top line growing at a 35.9% 10-year CAGR with 329 bps profit margin expansion on average annually over the same time period. We project capital expenditures of $109 million in 2019, $71 million in 2020, with expenditures growing +7.5% through 2023 and +5.0% thereon. The 11% WACC we use reflects $205 million outstanding debt balance and an equity risk premium of 5.04%. All in, our $18 target price is supported by our DCF-driven valuation shown in Figure 57. Better-than-expected clear aligner penetration supporting higher top-line growth and likely further driving operating leverage across its fixed cost base could offer upside.

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Figure 57: Discounted Cash Flow (DCF) Analysis Present(P) Estimated Year 1 EY 2 EY 3 EY 4 EY 5 EY 6 EY 7 EY 8 EY 9 EY 10 CASH FLOWS 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E

Net sales 423 749 1,199 1,675 2,256 2,928 3,660 4,392 5,051 5,808 6,680 Segment 2 Revenue ------Other Operating Revenues ------Reported Revenues 423.2 749 1,199 1,675 2,256 2,928 3,660 4,392 5,051 5,808 6,680 Year-over-year change 190.0% 76.9% 60.2% 39.7% 34.7% 29.8% 25.0% 20.0% 15.0% 15.0% 15.0%

NOPAT (45) (347) (19) 75 229 422 585 771 967 1,203 1,489 Year-over-year change 46.8% 675.0% -94.5% -490.4% 205.5% 83.9% 38.7% 31.8% 25.3% 24.5% 23.7%

EBITDA (37) (440) 8 138 355 622 840 1,088 1,348 1,663 2,044

Investment in future growth Chg in working capital 42 24 22 19 20 21 27 25 24 27 31 Chg in fixed assets $41 $38 -$4 $8 6 8 (5) 6 22 17 11 Chg in other assets - 47 53 49 56 60 70 67 56 63 71 Incremental Investment 83 109 71 76 82 88 93 97 102 107 113

Free Cash Flow (128) (456) (90) (1) 147 334 493 674 864 1,096 1,376

Discounted cash flow PV of FCF (128) (410) (73) (1) 97 197 261 322 371 423 478 Cumulative PV of FCF (128) (410) (483) (484) (388) (191) 70 392 763 1,186 1,664

Residual Value (7,643) (172) 673 2,057 3,783 5,245 6,914 8,665 10,784 13,345 15,807 PV of Residual Value (7,643) (155) 545 1,497 2,478 3,091 3,666 4,133 4,627 5,151 5,490

Corporate Value (7,771) (565) 62 1,013 2,090 2,900 3,736 4,524 5,390 6,337 7,153 Excess Cash 310 310 310 310 310 310 310 310 310 310 310 Value of Unconsol. Subs 0 0 0 0 0 0 0 0 0 0 0 Total Debt and Preferred Stock 175 175 175 175 175 175 175 175 175 175 175 Shareholder value (7,636) (430) 197 1,148 2,225 3,035 3,871 4,659 5,525 6,472 7,288 Shares outstanding 390 390 390 390 390 390 390 390 390 390 390

Value per share -$19.58 -$1.10 $0.50 $2.94 $5.71 $7.78 $9.93 $11.95 $14.17 $16.60 $18.69

Years into future 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Source: Company data, Credit Suisse estimates; $ in MM

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Management Team

SDC’s management team is comprised of a diverse array of talent, which should support its vision to disrupt the traditional orthodontic market. CEO David Katzman and COO Steve Katzman both have extensive experience investing in and working with disruptive companies that utilize online platforms to create better access for customers, including Quicken Loans and 1- 800-Contacts, among others, particularly relevant as SmileDirectClub creates the new direct-to- consumer orthodontic market. Meanwhile, CFO Kyle Wailes has relevant financial experience from his time as CFO of Intermedix and from his time as an investment banker focused on Healthcare Services at Citigroup. We also note SDC’s diverse board with backgrounds from healthcare, consumer packaged goods, and multinational conglomerates, including Senator William Frist (heart/lung transplat surgeon, former US Senator from Tennessee), Carol Hamilton (Group President of Acquisitions for L’Oreal USA), and Richard Wallman (former Senior Vice President and Chief Financial Officer of Honeywell International).

Figure 58: SDC Management Team

Name Position Age Biography

Mr. Katzman has served as CEO of SmileDirectClub since 2014. Mr. Katzman is the founder and Managing Partner of Camelot Venture Group, a private investment group that invests primarily in direct-to-consumer online companies. Mr. Katzman has served on multiple online direct-to-consumer David Katzman Chairman & CEO 59 boards including, Sharper Image Online, Simplex Healthcare, ePrize, CleanRest, and Quicken Loans. Mr. Katzman has also served as Vice Chairman of the Cleveland Cavaliers and as a Managing Partner of the sports graphics company Fathead.

Mr. Katzman has served as COO since May 2018 and has been a member of the board since 2017. Prior to his role with SmileDirectClub, Mr. Katzman spent 10 years serving as an advisor to Camelot, where he provided strategic overview across all portfolio companies. Mr. Katzman also co-founded Steve Katzman COO & Director 56 and serves as CEO of Steve's Blinds and Wallpaper, a family owned direct-to-consumer e-commerce business selling custom blinds and wallpaper. Prior to these positions, Mr. Katzman served as CEO and President of American Blind and Wallpaper Factory and its related Direct-to-Consumer companies.

Mr. Wailes has serves as CFO since May 2018. Prior to joining SmileDirectClub, Mr. Wailes worked with Intermedix, a leading provider of technology-enabled revenue cycle and practice management Kyle Wailes CFO 35 solutions for healthcare providers. Prior to joining Intermedix, Mr. Wailes was a member in the Healthcare Investment Banking Division at Citigroup, where he focused on Healthcare Services and Healthcare IT companies.

Mr. Katzman is a co-founder and has served as a board member of SmileDirectClub since its Jordan Katzman Co-Founder & Director 29 inception. Mr. Katzman first gained e-commerce experience co-founding two technology companies, Illinoisrenewal.org and Want.

Mr. Fenkell is a co-founder and has served on the board of SmileDirectClub since its inception. Mr. Alexander Fenkell Co-Founder & Director 30 Fenkell first gained e-commerce experience co-founding two technology companies, Illinoisrenewal.org and Want.

Ms. Greenspon has served as General Counsel since April 2018. Prior to joining SmileDirectClub, Ms. Greenspon was a corporate law partner at Foley & Lardner LLP since 2017, where she represented Susan Greenspon Rammelt General Counsel and Secretary 54 domestic and international enterprises. Prior to that, Ms. Greenspon was a partner at Dentons US LLP. Ms. Greenspon has over 30 years of experience as a corporate attorney, focusing on mergers and acquisitions, financings, restructurings, corporate governance, and general corporate counsel.

Mr. Schnall has been a member of the board since August 2018. Mr. Schnall has been with the private equity firm Clayton, Dublilier & Rice for over 22 years, where he has been a financial partner Rick Schnall Director 49 since 2001 and serves on the Investment and Management Committees. Mr. Schnall also serves on the boards of several health-related companies including, Agilon Health, Carestream Dental, Drive DeVilbliss Healthcare, Healogics, and naviHealth.

Source: Company data, Credit Suisse

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SmileDirectClub Figure 59: Quarterly EPS ($ in Millions, Except per Share Amounts) Historical Projections 2018 2019E 2020E 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total

Net sales $68.4 $106.6 $119.7 $128.5 $423.2 $177.7 $195.8 $166.6 $208.7 $748.8 $255.8 $291.0 $302.9 $349.4 $1,199.2

Cost of sales $27.0 $32.1 $34.9 $36.2 $130.3 $46.7 $32.2 $36.2 $40.3 $155.5 $46.8 $52.3 $55.3 $63.1 $217.5 Gross profit $41.4 $74.5 $84.7 $92.3 $293.0 $131.0 $163.5 $130.4 $168.3 $593.3 $209.0 $238.7 $247.7 $286.3 $981.7 Marketing and Selling Expenses $38.2 $47.6 $56.7 $68.7 $211.2 $94.6 $112.2 $132.2 $142.8 $481.8 $150.3 $167.5 $176.8 $197.2 $691.8 General and Administrative Expenses $19.4 $27.0 $29.5 $43.2 $119.1 $46.6 $47.1 $397.6 $60.2 $551.5 $62.0 $69.7 $70.2 $80.3 $282.2 Adj. EBITDA ($12.9) $4.4 $4.3 ($13.3) ($17.5) ($2.4) $4.7 ($49.5) ($24.7) ($71.9) $9.1 $13.9 $12.9 $21.1 $57.0 Depreciation and amortization $1.3 $1.5 $2.2 $3.2 $8.2 $4.8 $5.4 $5.9 $6.6 $22.6 $7.3 $8.1 $8.5 $9.6 $33.4 Operating income ($17.4) ($1.6) ($3.7) ($22.8) ($45.6) ($15.1) ($1.1) ($405.3) ($41.2) ($462.7) ($10.5) ($6.5) ($7.9) ($0.8) ($25.6) Interest Expense $2.3 $3.5 $4.6 $3.2 $13.7 $3.8 $3.1 $4.2 $4.4 $15.6 $4.7 $5.1 $5.5 $5.7 $21.1 Other losses (gain) $0.0 $8.6 $6.5 $0.0 $15.1 $0.1 $29.6 $0.0 $0.0 $29.7 $0.0 $0.0 $0.0 $0.0 $0.0 Pretax income ($19.8) ($13.8) ($14.9) ($25.9) ($74.4) ($19.0) ($33.8) ($409.6) ($45.6) ($507.9) ($15.2) ($11.6) ($13.4) ($6.5) ($46.7) Income taxes $0.1 $0.1 $0.1 $0.1 $0.4 $0.02 $0.1 ($31.6) ($30.9) ($62.3) $3.33 $4.11 $3.72 $3.65 $14.8 Net income ($19.8) ($13.9) ($15.0) ($26.1) ($74.8) ($19.0) ($33.9) ($378.0) ($14.7) ($445.6) ($18.6) ($15.7) ($17.1) ($10.1) ($61.5)

Average common shares (000) Basic 384.9 384.9 384.9 384.9 384.9 384.9 384.9 384.9 384.9 384.9 384.9 384.9 384.9 384.9 384.9 Diluted 389.9 389.9 389.9 389.9 389.9 389.9 389.9 389.9 389.9 389.9 389.9 389.9 389.9 389.9 389.9

E.P.S. Basic ($0.05) ($0.04) ($0.04) ($0.07) ($0.19) ($0.05) ($0.09) ($0.98) ($0.04) ($1.16) ($0.05) ($0.04) ($0.04) ($0.03) ($0.16) Diluted ($0.05) ($0.04) ($0.04) ($0.07) ($0.19) ($0.05) ($0.09) ($0.97) ($0.04) ($1.14) ($0.05) ($0.04) ($0.04) ($0.03) ($0.16)

Tax rate (0.3%) (0.7%) (0.6%) (0.5%) (0.5%) (0.1%) (0.4%) 7.7% 67.7% 12.3% (21.8%) (35.4%) (27.8%) (56.2%) (31.7%)

Margin analysis Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 39.5% 30.1% 29.2% 28.2% 30.8% 26.3% 16.5% 21.7% 19.3% 20.8% 18.3% 18.0% 18.2% 18.1% 18.1% Gross profit 60.5% 69.9% 70.8% 71.8% 69.2% 73.7% 83.5% 78.3% 80.7% 79.2% 81.7% 82.0% 81.8% 81.9% 81.9% Marketing and Selling Expenses 55.8% 44.7% 47.4% 53.4% 49.9% 53.2% 57.3% 79.4% 68.4% 64.3% 58.7% 57.5% 58.4% 56.4% 57.7% General and Administrative Expenses 28.3% 25.4% 24.7% 33.6% 28.1% 26.2% 24.0% 238.7% 28.8% 73.6% 24.2% 23.9% 23.2% 23.0% 23.5% Adj EBITDA (18.8%) 4.2% 3.6% (10.3%) (4.1%) (1.4%) 2.4% (29.7%) (11.8%) (9.6%) 3.5% 4.8% 4.3% 6.0% 4.8% Operating income (25.5%) (1.5%) (3.1%) (17.7%) (10.8%) (8.5%) (0.5%) (243.3%) (19.7%) (61.8%) (4.1%) (2.2%) (2.6%) (0.2%) (2.1%) Pretax income (28.9%) (13.0%) (12.4%) (20.2%) (17.6%) (10.7%) (17.3%) (245.9%) (21.9%) (67.8%) (6.0%) (4.0%) (4.4%) (1.9%) (3.9%) Income taxes 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.1% (19.0%) (14.8%) (8.3%) 1.3% 1.4% 1.2% 1.0% 1.2% Net income (29.0%) (13.1%) (12.5%) (20.3%) (17.7%) (10.7%) (17.3%) (226.9%) (7.1%) (59.5%) (7.3%) (5.4%) (5.6%) (2.9%) (5.1%)

Growth analysis Net sales 300.5% 412.1% 120.3% 139.2% 190.0% 159.8% 83.6% 39.2% 62.4% 76.9% 43.9% 48.6% 81.9% 67.5% 60.2% Cost of sales 279.2% 175.3% 61.4% 61.3% 107.2% 73.1% 0.3% 3.7% 11.4% 19.4% 0.2% 62.2% 52.6% 56.6% 39.9% Gross profit 315.7% 714.4% 159.3% 195.1% 252.7% 216.3% 119.5% 53.9% 82.4% 102.5% 59.6% 46.0% 90.0% 70.1% 65.5% Marketing and Selling Expenses 353.1% 221.7% 209.3% 210.8% 231.7% 147.8% 135.4% 133.2% 108.0% 128.1% 58.8% 49.3% 33.7% 38.1% 43.6% General and Administrative Expenses 162.1% 147.6% 144.8% 153.6% 151.3% 140.6% 74.1% 1246.2% 39.4% 363.0% 33.0% 48.0% (82.3%) 33.5% (48.8%) Adj EBITDA 120.1% (132.1%) 3.1% 137.7% (17.2%) (81.2%) 6.7% (1261.9%) 85.8% 310.5% (473.5%) 194.1% (126.1%) (185.5%) (179.3%) Operating income 173.6% (90.4%) (337.9%) 166.0% 49.4% (13.4%) (34.7%) 10772.6% 80.9% 915.6% (30.3%) 504.0% (98.1%) (98.1%) (94.5%) Pretax income 195.9% (21.4%) (1601.6%) 177.1% 127.9% (3.9%) 144.3% 2655.0% 75.7% 582.6% (19.8%) (65.7%) (96.7%) (85.8%) (90.8%) Income taxes 223.8% 157.1% 107.3% 280.6% 182.0% (71.1%) 45.1% (37274.7%) (26262.9%) (17363.3%) 16819.6% 3049.3% (111.8%) (111.8%) (123.8%) Net income 196.0% (21.0%) (1675.4%) 177.4% 128.1% (4.1%) 143.7% 2428.0% (43.5%) 496.0% (2.4%) (53.7%) (95.5%) (31.0%) (86.2%) E.P.S. 196.0% (21.0%) (1675.4%) 177.4% 128.1% (4.1%) 143.7% 2428.0% (43.5%) 496.0% (2.4%) (53.7%) (95.5%) (31.0%) (86.2%)

Source: Company data, Credit Suisse estimates

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SmileDirectClub Figure 60: Quarterly Revenue ($ in Millions) Historicals Projections 2018 2019E 2020E 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total

Clear Aligners

Total Cases Shipped 42.8 66.7 72.4 76.4 258.3 109.9 122.0 98.8 127.2 457.9 157.7 179.4 186.7 215.5 739.4 Total Case Growth 317.7% 235.4% 132.9% 165.2% 186.9% 156.6% 83.0% 36.5% 66.5% 77.3% 43.5% 47.0% 89.0% 69.5% 61.5%

Gross Average Selling Price (ASP) Worldwide $1,722.6 $1,726.8 $1,759.8 $1,784.2 $1,752.3 $1,755.2 $1,753.8 $1,761.7 $1,748.6 $1,754.4 $1,750.0 $1,750.3 $1,750.2 $1,749.7 $1,750.0 Worldwide ASP Growth 40.2% 86.5% (14.5%) (15.3%) 1.4% 2.0% 1.6% 0.1% (2.0%) 0.1% (0.3%) (0.2%) (0.6%) 0.1% (0.2%)

Gross Clear Aligner Revenue Clear Aligner Revenue $73.8 $115.2 $127.4 $136.3 $452.6 $192.9 $214.0 $174.1 $222.3 $803.3 $276.0 $314.0 $326.8 $377.1 $1,294.0 Clear Aligner Revenue Growth 485.6% 525.6% 99.1% 124.6% 190.8% 161.5% 85.9% 36.6% 63.2% 77.5% 43.1% 46.7% 87.8% 69.6% 61.1%

Implicit Price Concession Implicit Price Concession ($7.5) ($11.9) ($13.3) ($13.8) ($46.5) ($18.4) ($20.7) ($16.9) ($21.1) ($77.1) ($26.5) ($30.2) ($31.4) ($36.3) ($124.4) Implicit Price Concession Growth 2174.3% 940.7% 66.3% 87.7% 176.6% 144.6% 73.7% 26.6% 53.5% 65.7% 44.5% 45.7% 86.2% 71.5% 61.3% Price Concession as % of Gross Revenue 9.9% 10.1% 10.0% 9.7% 9.9% 9.4% 9.6% 9.2% 9.2% 9.3% 9.4% 9.4% 9.4% 9.4% 9.4%

Net Clear Aligner Revenue Clear Aligner Revenue $66.3 $103.2 $114.1 $122.5 $406.1 $174.5 $193.3 $157.2 $201.2 $726.2 $249.4 $283.8 $295.4 $340.9 $1,169.5 Clear Aligner Revenue Growth 440.2% 498.0% 103.8% 129.7% 192.5% 163.4% 87.3% 37.8% 64.3% 78.9% 42.9% 46.8% 87.9% 69.4% 61.0%

Net Average Selling Price (ASP) Worldwide $1,547.3 $1,547.9 $1,575.7 $1,604.0 $1,572.1 $1,588.1 $1,583.9 $1,590.8 $1,582.3 $1,586.0 $1,581.7 $1,582.0 $1,581.9 $1,581.5 $1,581.7 Worldwide ASP Growth 29.3% 78.3% (12.5%) (13.4%) 2.0% 2.6% 2.3% 1.0% (1.3%) 0.9% (0.4%) (0.1%) (0.6%) (0.1%) (0.3%)

Other Non-Clear Aligner Revenue Non-Clear Aligner Revenue $2.1 $3.4 $5.6 $6.0 $17.2 $3.2 $2.5 $9.4 $7.4 $22.5 $6.4 $7.2 $7.5 $8.6 $29.7 Non-Clear Aligner Revenue Growth 49.4% (27.5%) 67.5% 24.0% 31.1% 100.0% 190.0% (20.0%) 15.0% 31.8% Non-Clear Aligner Revenue as % of Net Revenue 3.1% 3.2% 4.7% 4.7% 4.1% 1.8% 1.3% 5.6% 3.6% 3.0% 2.5% 2.5% 2.5% 2.5% 2.5%

Total Revenue $68.4 $106.6 $119.7 $128.5 $423.2 $177.7 $195.8 $166.6 $208.7 $748.8 $255.8 $291.0 $302.9 $349.4 $1,199.2 Total Revenue Growth 300.5% 412.1% 120.3% 139.2% 190.0% 159.8% 83.6% 39.2% 62.4% 76.9% 43.9% 48.6% 81.9% 67.5% 60.2%

Number of Stores Stores at Beginning of Period 41 66 104 141 41 188 222 307 358 188 408 440 471 502 408 Net Change in Stores 25 38 37 47 147 34 85 51 50 220 32 31 31 31 125 Stores at End of Period 66 104 141 188 188 222 307 358 408 408 440 471 502 533 533 Store Count Growth 560.0% 593.3% 422.2% 358.5% 358.5% 236.4% 195.2% 153.9% 117.0% 117.0% 98.2% 53.4% 40.2% 30.6% 30.6%

Revenue per Store ($MM) TTM Revenue per Store $1.3 $1.3 $1.0 $0.8 $3.7 $2.6 $2.4 $2.0 $2.0 $2.5 $2.0 $2.0 $2.2 $2.3 $2.5 Revenue per Store Growth (40.1%) (24.7%) (62.2%) (50.6%) (40.5%) 103.1% 87.3% 105.8% 150.3% (32.0%) (24.9%) (13.9%) 8.2% 18.5% 1.4%

Cost per Aligner Order (Not Adj. for D&A) Cost per Aligner Order $643.8 $491.9 $496.4 $493.1 $518.7 $445.1 $284.0 $393.2 $340.2 $361.9 $317.6 $311.7 $316.3 $312.9 $314.5 Cost per Aligner Growth (10.2%) (18.0%) (29.8%) (37.6%) (27.1%) (30.9%) (42.3%) (20.8%) (31.0%) (30.2%) (28.6%) 9.8% (19.6%) (8.0%) (13.1%) Cost as % of Gross ASP 37.4% 28.5% 28.2% 27.6% 29.6% 25.4% 16.2% 22.3% 19.5% 20.6% 18.1% 17.8% 18.1% 17.9% 18.0% Cost as % of Net ASP 41.6% 31.8% 31.5% 30.7% 33.0% 28.0% 17.9% 24.7% 21.5% 22.8% 20.1% 19.7% 20.0% 19.8% 19.9%

Source: Company data, Credit Suisse estimates

49

7October 2019

SmileDirectClub Figure 61: Annual EPS ($ in Millions, Except per Share Amounts) Historical Projections 2017 2018 2019E 2020E 2021E 2022E 2023E Net sales $146.0 $423.2 $748.8 $1,199.2 $1,675.1 $2,256.5 $2,928.0

Cost of sales $62.9 $130.3 $155.5 $217.5 $302.1 $384.4 $484.2

Gross profit $83.1 $293.0 $593.3 $981.7 $1,372.9 $1,872.0 $2,443.8 Marketing and Selling Expenses $63.7 $211.2 $481.8 $691.8 $916.0 $1,183.2 $1,432.9 General and Administrative Expenses $47.4 $119.1 $551.5 $282.2 $318.8 $333.6 $388.9 Adj EBITDA ($21.1) ($17.5) ($71.9) $57.0 $192.3 $402.7 $680.6 Depreciation and amortization $2.5 $8.2 $22.6 $33.4 $38.0 $49.4 $59.4 Operating income ($30.5) ($45.6) ($462.7) ($25.6) $100.1 $305.9 $562.7 Interest Expenses $2.1 $13.7 $15.6 $21.1 $23.9 $31.9 $39.9 Other losses (gain) $0.0 $15.1 $29.7 $0.0 $0.0 $0.0 $0.0 Pretax income ($32.7) ($74.4) ($507.9) ($46.7) $76.2 $274.0 $522.8 Income taxes $0.1 $0.4 ($62.3) $14.8 $38.9 ($22.8) $130.7 Net income ($32.8) ($74.8) ($445.6) ($61.5) $37.4 $296.8 $392.1

Average common shares (000) Basic 384.9 384.9 384.9 384.9 384.9 384.9 384.9 Diluted 389.9 389.9 389.9 389.9 389.9 389.9 389.9

E.P.S. Basic ($0.09) ($0.19) ($1.16) ($0.16) $0.10 $0.77 $1.02 Diluted ($0.08) ($0.19) ($1.14) ($0.16) $0.10 $0.76 $1.01

Tax rate -0.4% -0.5% 12.3% -31.7% 51.0% -8.3% 25.0%

Margin analysis Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 43.1% 30.8% 20.8% 18.1% 18.0% 17.0% 16.5% Gross profit 56.9% 69.2% 79.2% 81.9% 82.0% 83.0% 83.5% Marketing and Selling Expenses 43.6% 49.9% 64.3% 57.7% 54.7% 52.4% 48.9% General and Administrative Expenses 32.5% 28.1% 73.6% 23.5% 19.0% 14.8% 13.3% Adj EBITDA (14.5%) (4.1%) (9.6%) 4.8% 11.5% 17.8% 23.2% Operating income (20.9%) (10.8%) (61.8%) (2.1%) 6.0% 13.6% 19.2% Pretax income (22.4%) (17.6%) (67.8%) (3.9%) 4.6% 12.1% 17.9% Income taxes 0.1% 0.1% (8.3%) 1.2% 2.3% (1.0%) 4.5% Net income (22.5%) (17.7%) (59.5%) (5.1%) 2.2% 13.2% 13.4%

Growth analysis Net sales 190.0% 76.9% 60.2% 39.7% 34.7% 29.8% Cost of sales 107.2% 19.4% 39.9% 38.9% 27.2% 26.0% Gross profit 252.7% 102.5% 65.5% 39.8% 36.4% 30.5% Marketing and Selling Expenses 231.7% 128.1% 43.6% 32.4% 29.2% 21.1% General and Administrative Expenses 151.3% 363.0% (48.8%) 13.0% 4.6% 16.6% Adj EBITDA (17.2%) 310.5% (179.3%) 237.2% 109.4% 69.0% Operating income 49.4% 915.6% (94.5%) (490.4%) 205.5% 83.9% Pretax income 127.9% 582.6% (90.8%) (263.1%) 259.4% 90.8% Income taxes 182.0% (17363.3%) (123.8%) 162.4% (158.5%) (674.1%) Net income 128.1% 496.0% (86.2%) (160.7%) 694.3% 32.1% E.P.S. 128.1% 496.0% -86.2% -160.7% 694.3% 32.1%

Source: Company data, Credit Suisse estimates

50

7October 2019

SmileDirectClub Figure 62: Annual Revenues ($ in Millions) Historicals Projections 2017 2018 2019E 2020E 2021E 2022E 2023E Clear Aligners

Total Cases Shipped 90.0 258.3 457.9 739.4 1,035.1 1,397.4 1,816.7

Total Growth 186.9% 77.3% 61.5% 40.0% 35.0% 30.0%

Gross Average Selling Price (ASP) Worldwide $1,729.0 $1,752.3 $1,754.4 $1,750.0 $1,745.9 $1,742.1 $1,738.3 Worldwide Growth 1.4% 0.1% (0.2%) (0.2%) (0.2%) (0.2%)

Gross Clear Aligner Revenue Gross Clear Aligner Revenue $155.6 $452.6 $803.3 $1,294.0 $1,807.3 $2,434.5 $3,158.0 Gross Clear Aligner Revenue Growth 190.8% 77.5% 61.1% 39.7% 34.7% 29.7%

Implicit Price Concession Implicit Price Concession ($16.8) ($46.5) ($77.1) ($124.4) ($173.8) ($234.1) ($303.8) Implicit Price Concession Growth 176.6% 65.7% 61.3% 39.7% 34.7% 29.8% Price Concession as % of Gross Revenue 10.3% 9.9% 9.3% 9.4% 9.4% 9.4% 9.4%

Net Clear Aligner Revenue Gross Clear Aligner Revenue $138.8 $406.1 $726.2 $1,169.5 $1,633.5 $2,200.3 $2,854.2 Gross Clear Aligner Revenue Growth 192.5% 78.9% 61.0% 39.7% 34.7% 29.7%

Net Average Selling Price (ASP) $1,542.1 $1,572.1 $1,586.0 $1,581.7 $1,578.0 $1,574.5 $1,571.1 Worldwide 2.0% 0.9% (0.3%) (0.2%) (0.2%) (0.2%) Worldwide Growth

Non-Clear Aligner Revenue Non-Clear Aligner Revenue $7.1 $17.2 $22.5 $29.7 $41.6 $56.1 $73.8 Non-Clear Aligner Revenue Growth 140.9% 31.1% 31.8% 40.0% 35.0% 31.5% Non-Clear Aligner Revenue as % of Net Revenue 4.9% 4.1% 3.0% 2.5% 2.5% 2.5% 2.5%

Total Revenue $146.0 $423.2 $748.8 $1,199.2 $1,675.1 $2,256.5 $2,928.0 Total Revenue Growth 190.0% 76.9% 60.2% 39.7% 34.7% 29.8%

Number of Stores Stores at Beginning of Period 6 41 188 408 533 633 733 Net Change in Stores 35 147 220 125 100 100 100 Stores at End of Period 41 188 408 533 633 733 833 Store Count Growth 358.5% 117.0% 30.6% 18.8% 15.8% 13.6%

Revenue per Store Revenue per Store $6.21 $3.70 $2.51 $2.55 $2.87 $3.30 $3.74 Revenue per Store Growth (40.5%) (32.0%) 1.4% 12.7% 15.0% 13.2%

Cost per Aligner Order (Not Adj. for D&A) Cost per Aligner Order $711.1 $518.7 $361.9 $314.5 $308.4 $291.0 $281.2 Cost per Aligner Growth (27.1%) (30.2%) (13.1%) (1.9%) (5.6%) (3.4%) Cost as % of Gross ASP 41.1% 29.6% 20.6% 18.0% 17.7% 16.7% 16.2% Cost as % of Net ASP 46.1% 33.0% 22.8% 19.9% 19.5% 18.5% 17.9%

Source: Company data, Credit Suisse estimates

51

7October 2019

SmileDirectClub Figure 63: Balance Sheet ($ in Millions) Historicals Projections 2017 2018E 2019E 2020E 2021E 2022E Total Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Dec 31-Dec Balance Sheet

Cash and cash equivalents $4.1 $313.9 $241.2 $149.1 $437.9 $329.0 $329.0 $291.4 $279.1 $248.6 $168.0 $168.0 $159.1 $334.3

Accounts receivable $33.7 $113.9 $147.1 $181.8 $170.9 $223.9 $223.9 $215.7 $287.5 $341.5 $400.5 $400.5 $657.5 $924.3 Inventories $2.7 $8.8 $12.8 $21.9 $44.5 $47.3 $47.3 $68.2 $63.3 $63.1 $74.7 $74.7 $123.9 $158.8 Prepaid expenses and other $2.4 $5.8 $5.8 $5.8 $5.8 $5.8 $5.8 $5.8 $5.8 $5.8 $5.8 $5.8 $5.8 $5.8 Total current assets $42.9 $442.4 $406.9 $358.6 $659.1 $606.0 $606.0 $581.2 $635.7 $658.9 $649.0 $649.0 $946.3 $1,423.1

Accounts receivable, non-current $11.6 $60.2 $79.2 $93.3 $93.3 $93.3 $93.3 $93.3 $93.3 $93.3 $93.3 $93.3 $93.3 $93.3 Property and equipment, net $11.9 $52.6 $70.7 $86.8 $104.9 $156.3 $156.3 $167.1 $171.0 $174.5 $232.0 $232.0 $265.0 $292.6 Deffered Tax Asset $0.0 $0.0 $0.0 $31.6 $62.5 $62.5 $59.1 $55.0 $51.3 $47.7 $47.7 $8.8 $31.5 Other Long Term Assets $0.0 $6.2 $6.3 $6.3 $6.3 $6.3 $6.3 $6.3 $6.3 $6.3 $6.3 $6.3 $6.3 Total assets $66.4 $555.2 $562.9 $544.9 $895.149 $924.4 $924.4 $906.9 $961.3 $984.319 $1,028.2 $1,028.2 $1,319.6 $1,846.8

Accounts payable $21.9 $40.9 $69.7 $81.6 $71.8 $87.8 $87.8 $50.6 $78.4 $79.2 $87.9 $87.9 $147.8 $203.8 Accured liabilities $14.7 $39.6 $39.6 $39.6 $39.6 $39.6 $39.6 $39.6 $39.6 $39.6 $39.6 $39.6 $39.6 $39.6 Deferred revenue $12.4 $19.1 $19.1 $19.1 $19.1 $19.1 $19.1 $19.1 $19.1 $19.1 $19.1 $19.1 $19.1 $19.1 Current portion of long-term debt $15.3 $17.9 $6.4 $33.5 $33.5 $33.5 $33.5 $33.5 $33.5 $33.5 $33.5 $33.5 $33.5 $33.5 Total current liabilities $64.3 $117.5 $134.8 $173.7 $163.9 $179.9 $179.9 $142.7 $170.5 $171.3 $180.0 $180.0 $239.9 $295.9

Long-term debt, capital leases, contingent consideration $35.4 $138.9 $140.6 $171.5 $159.5 $183.5 $183.5 $216.5 $246.5 $273.5 $306.5 $306.5 $446.5 $609.5 Other liabilities $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 $0.6 Total liabilities $100.3 $257.0 $276.0 $345.8 $324.0 $364.0 $364.0 $359.8 $417.5 $445.4 $487.0 $487.0 $686.9 $906.0

Common Stock $0.0 $0.0 $0.0 $0.0 $400.0 $394.0 $394.0 $387.0 $387.0 $387.0 $387.0 $387.0 $387.0 $351.0 Redeemable Series A Preferred Units $0.0 $388.6 $388.6 $388.6 $388.6 $388.6 $388.6 $388.6 $388.6 $388.6 $388.6 $388.6 $388.6 $388.6 Retained Earnings ($32.8) ($89.3) ($200.8) ($327.2) ($705.2) ($719.9) ($719.9) ($738.5) ($754.2) ($771.3) ($781.4) ($781.4) ($744.1) ($447.3) Other ($1.1) ($1.1) $99.1 $137.7 $487.7 $497.6 $497.6 $510.0 $522.3 $534.6 $546.9 $546.9 $601.1 $648.5 Total equity ($33.9) $298.2 $286.9 $199.1 $571.2 $560.4 $560.4 $547.1 $543.7 $539.0 $541.1 $541.1 $632.7 $940.9

Total liabilities and equity $66.4 $555.2 $562.9 $544.9 $895.150 $924.4 $924.4 $906.9 $961.3 $984.320 $1,028.2 $1,028.2 $1,319.6 $1,846.8

Source: Company data, Credit Suisse estimates

52

7October 2019

SmileDirectClub Figure 64: Statement of Cash Flows ($ in Millions) Historicals Projections 2017 2018E 2019E 2020E 2021E 2022E Total Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Dec 31-Dec Statement of Cash Flow

Net income ($32.8) ($74.8) ($26.8) ($34.4) ($378.0) ($14.7) ($453.9) ($18.6) ($15.7) ($17.1) ($10.1) ($61.5) $37.4 $296.8

Depreciation Expense $2.5 $8.9 $4.8 $5.4 $5.9 $6.6 $22.6 $7.3 $8.1 $8.5 $9.6 $33.4 $38.0 $49.4 Deferred loan cost amortization $0.0 $4.3 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Accrued interest to related parties $1.1 $1.2 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Fair value adjustment of warrant derivative $0.0 $14.5 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Equity-based compensation $6.9 $19.8 $7.8 $0.4 $350.0 $9.9 $368.2 $12.3 $12.3 $12.3 $12.3 $49.3 $54.2 $47.4 Other non-cash operating activities $0.1 $0.6 $1.8 $17.7 $0.0 $0.0 $19.5 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Non-GAAP NI adjustments and other $0.0 ($0.0) $7.8 $0.4 $0.0 $0.0 $8.3 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Accounts receivable ($35.8) ($128.8) ($52.1) ($48.8) $10.9 ($53.0) ($143.1) $8.2 ($71.7) ($54.0) ($59.0) ($176.6) ($257.0) ($266.8) Inventories ($0.7) ($6.1) ($4.1) ($9.1) ($22.5) ($2.8) ($38.5) ($20.9) $4.9 $0.2 ($11.6) ($27.4) ($49.2) ($34.8) Prepaid and other current assets ($2.0) ($4.6) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Accounts payable $2.3 $24.4 $28.8 $11.9 ($9.8) $16.1 $46.9 ($37.2) $27.7 $0.8 $8.7 $0.0 $59.9 $56.1 Accrued liabilities $14.4 $13.5 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Due to related parties $13.9 $5.6 ($0.0) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Deferred revenue ($0.2) $6.6 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Change in Deferred Tax Asset $0.0 $0.0 ($6.8) ($2.7) ($31.6) ($30.9) ($71.9) $3.3 $4.1 $3.7 $3.7 $14.8 $38.9 ($22.8) Change in operating assets and liabilities, net of acquisitions and divestitures ($8.1) ($89.3) ($34.2) ($48.6) ($53.1) ($70.6) ($206.6) ($46.6) ($35.0) ($49.3) ($58.3) ($189.2) ($207.5) ($268.3) Net cash provided by operating activities ($30.3) ($114.8) ($38.8) ($59.1) ($75.2) ($68.9) ($241.9) ($45.6) ($30.3) ($45.6) ($46.6) ($168.0) ($77.9) $125.2

Purchases of property, plant and equipment -- Related parties ($3.4) ($15.1) ($3.8) ($3.8) ($3.8) ($3.8) ($15.1) ($3.8) ($3.8) ($3.8) ($3.8) ($15.1) ($3.8) ($3.8) Purchases of property, plant and equipment ($6.6) ($26.7) ($16.8) ($13.8) ($20.2) ($54.2) ($105.0) ($14.2) ($8.2) ($8.2) ($63.2) ($93.9) ($67.2) ($73.2) Other investing activities $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net cash provided by (used in) investing activities ($10.0) ($41.8) ($20.6) ($17.5) ($24.0) ($58.0) ($120.1) ($18.0) ($12.0) ($12.0) ($67.0) ($109.0) ($71.0) ($77.0)

Net proceeds from sale of Series A units $0.0 $388.6 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net Proceeds from sale of member units $12.8 ($0.1) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Member tax distributions $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Redemptions of member units ($1.6) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Unitholder advance ($1.4) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net borrowing activities $28.2 $78.3 $0.0 $0.0 ($12.0) $24.0 $12.0 $33.0 $30.0 $27.0 $33.0 $123.0 $140.0 $163.0 Payments on other long term liabilities $0.0 ($0.4) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Share Repurchase $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Share Issuance $0.0 $0.0 $0.0 $0.0 $400.0 ($6.0) $394.0 ($7.0) $0.0 $0.0 $0.0 ($7.0) $0.0 ($36.0) Other $0.0 $0.0 ($13.4) ($15.5) $0.0 $0.0 ($28.8) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net cash used in financing activities $38.0 $466.5 ($13.4) ($15.5) $388.0 $18.0 $377.2 $26.0 $30.0 $27.0 $33.0 $116.0 $140.0 $127.0

Exchange Rate Effect on Cash $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Increase (Decrease in Cash and Cash Equivalents ($2.3) $309.9 ($72.7) ($92.1) $288.8 ($108.9) $15.1 ($37.6) ($12.3) ($30.6) ($80.6) ($161.0) ($8.9) $175.2 Cash and Cash Equivalents at Begnning of Period $6.4 $4.1 $313.9 $241.2 $149.1 $437.9 $313.9 $329.0 $291.4 $279.1 $248.6 $329.0 $168.0 $159.1 Cash and Cash Equivalents at End of Period $4.1 $313.9 $241.2 $149.088 $437.9 $329.0 $329.0 $291.4 $279.1 $248.6 $168.0 $168.0 $159.1 $334.3

Free Cash Flow Cash flow from operations ($30.3) ($114.8) ($38.8) ($59.1) ($75.2) ($68.9) ($241.9) ($45.6) ($30.3) ($45.6) ($46.6) ($168.0) ($77.9) $125.2 CapEx ($10.0) ($41.8) ($20.6) ($17.5) ($24.0) ($58.0) ($120.1) ($18.0) ($12.0) ($12.0) ($67.0) ($109.0) ($71.0) ($77.0) Free Cash Flow ($40.3) ($156.6) ($59.4) ($76.7) ($99.2) ($126.9) ($362.1) ($63.6) ($42.3) ($57.6) ($113.6) ($277.0) ($148.9) $48.2

Source: Company data, Credit Suisse estimates

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7 October 2019

Credit Suisse PEERs

PEERS is a global database that captures unique information about companies within the Credit Suisse coverage universe based on their relationships with other companies – their customers, suppliers, and competitors. The database is built from our research analysts’ insight regarding these relationships. Credit Suisse covers over 3,000 companies globally. These companies form the core of the PEERs database, but it also includes relationships on stocks that are not under coverage. For more information, see our November 2016 PEERs report, titled, A Chain Reaction: Supply Chain Strategies.

Figure 65: SDC PEERS Map

Source: Credit Suisse

SmileDirectClub 54

7 October 2019 2019 7October

Companies Mentioned (Price as of 04-Oct-2019) 3M (MMM.N, $155.82) Abiomed (ABMD.OQ, $169.25) Align Technology, Inc. (ALGN.OQ, $181.59) Amazon com Inc. (AMZN.OQ, $1739.65) American Express Co. (AXP.N, $114.41)

Apple Inc (AAPL.OQ, $227.01) Blue Apron Hldg (APRN.N, $9.02) CVS Health (CVS.N, $62.24) Chewy (CHWY.N, $25.86) Coltene (CLTN.S, SFr76.6) Cooper Companies (COO.N, $296.87) Costco Wholesale (COST.OQ, $291.67) DENTSPLY-SIRONA (XRAY.OQ, $53.63) Danaher Corporation (DHR.N, $141.65) DexCom, Inc. (DXCM.OQ, $160.37) Edwards Lifesciences Corp. (EW.N, $229.4) Etsy (ETSY.OQ, $56.48) Hellofresh (HFGG.DE, €13.96) Henry Schein (HSIC.OQ, $62.93) Hewlett Packard Enterprise (HPE.N, $14.4) JPMorgan Chase & Co. (JPM.N, $114.62) Microsoft (MSFT.OQ, $138.12) Netflix Inc. (NFLX.OQ, $272.79) Nike Inc. (NKE.N, $93.07) NuVasive, Inc. (NUVA.OQ, $64.52) Patterson Companies (PDCO.OQ, $16.95) SmileDirectClub (SDC.OQ, $14.72, OUTPERFORM[V], TP $18.0) Stitch Fix (SFIX.OQ, $19.61) Straumann (STMN.S, SFr808.6) Target Corporation (TGT.N, $109.1) Teladoc Health (TDOC.N, $66.81) Walgreens Boots Alliance (WBA.OQ, $52.97) Wayfair Inc. (W.N, $106.77) Zimmer Biomet Holdings, Inc (ZBH.N, $134.45)

Disclosure Appendix Analyst Certification I, Erin Wilson Wright, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as Europea n ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the rel evant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the rele vant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its curren t share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Au stralian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

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7 October 2019 2019 7October *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 47% (33% banking clients) Neutral/Hold* 38% (26% banking clients) Underperform/Sell* 13% (23% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit- suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf . The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

Target Price and Rating Valuation Methodology and Risks: (12 months) for SmileDirectClub (SDC.OQ) Method: Our Outperform rating and $18 target prices is based on 5.6x 2020E sales, a premium Align Technology (4.7x) and essentially on par with its peer group (5.8x), reflects its position as the disruptor in the vastly underpenetrated clear aligner market, with line of sight to profitability by 2020. Of note, while Align Technology is SDC’s largest standalone, public comparable company in the clear aligner market, we highlight that ALGN’s focus remains on the niche orthodontic market (12 million case starts annually) relative to SDC’s broader DTC approach.

Risk: Key risks to our Outperform rating and $18 target price include a deterioration in broader economic conditions; a delay or inability to achieve profitability; lower than expected demand for clear aligner treatment; adverse changes or interpretation of laws; competition; reliance on or cost for significant advertising; manufacturing problems or delays; and higher defaults related to its in-house SmilePay financing program.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): SDC.OQ, ALGN.OQ, DHR.N, MMM.N, AAPL.OQ, AXP.N, AMZN.OQ, MSFT.OQ, CVS.N, JPM.N, ZBH.N, HPE.N Credit Suisse provided investment banking services to the subject company (SDC.OQ, ALGN.OQ, DHR.N, MMM.N, AAPL.OQ, AXP.N, AMZN.OQ, MSFT.OQ, CVS.N, JPM.N, ZBH.N, HPE.N) within the past 12 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): DHR.N, MMM.N, AAPL.OQ, AMZN.OQ, MSFT.OQ, CVS.N, JPM.N, ZBH.N, CHWY.N, HPE.N Credit Suisse has managed or co-managed a public offering of securities for the subject company (SDC.OQ, DHR.N, MMM.N, AXP.N, CVS.N, HPE.N) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): SDC.OQ, ALGN.OQ, DHR.N, MMM.N, AAPL.OQ, AXP.N, AMZN.OQ, MSFT.OQ, CVS.N, JPM.N, ZBH.N, HPE.N Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (HSIC.OQ, STMN.S, DHR.N, MMM.N, AAPL.OQ, AXP.N, AMZN.OQ, MSFT.OQ, CVS.N, WBA.OQ, JPM.N, ZBH.N, CHWY.N, HPE.N) within the next 3 months.

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7 October 2019 2019 7October Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non- investment-banking, securities-related: DHR.N, AAPL.OQ, AMZN.OQ, MSFT.OQ, CVS.N, JPM.N, CHWY.N, HPE.N Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non- investment-banking, non securities-related: MMM.N, AMZN.OQ, JPM.N, ZBH.N, HPE.N

Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): MMM.N, ALGN.OQ, AMZN.OQ, AXP.N, AAPL.OQ, CVS.N, CHWY.N, CLTN.S, COO.N, COST.OQ, XRAY.OQ, DHR.N, DXCM.OQ, EW.N, HSIC.OQ, HPE.N, JPM.N, MSFT.OQ, NFLX.OQ, NKE.N, NUVA.OQ, PDCO.OQ, SDC.OQ, STMN.S, TGT.N, TDOC.N, WBA.OQ, W.N, ZBH.N A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (SDC.OQ, ALGN.OQ, DHR.N, MMM.N, AAPL.OQ, AXP.N, AMZN.OQ, MSFT.OQ, CVS.N, JPM.N, ZBH.N, HPE.N) within the past 12 months. As of the date of this report, Credit Suisse beneficially own 1% or more of a class of common equity securities of (STMN.S, CLTN.S, DXCM.OQ, TDOC.N). Credit Suisse acted as financial advisor to 3M Co in their acquisition of Acelity, Inc.

For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit- suisse.com/disclosures/view/report?i=461163&v=58pzwn1w41ghduedtrq8mjn8a . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. This research report is authored by: Credit Suisse Securities (USA) LLC ...... Erin Wilson Wright ; Katie Tryhane ; Haley Christofides ; Matthew Urbik Important disclosures regarding companies that are the subject of this report are available by calling +1 (877) 291-2683. The same important disclosures, with the exception of valuation methodology and risk discussions, are also available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures . For valuation methodology and risks associated with any recommendation, price target, or rating referenced in this report, please refer to the disclosures section of the most recent report regarding the subject company.

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