This is an updated version of the document published earlier today to incorporate takeaways from our Bull/Bear Lunch. No Need to Brace Yourself Clear Aligner Market Primer Life Science Tools & Diagnostics 21 October 2019 Equity Research Americas
Erin Wright Research Analyst (212) 538-4080 [email protected]
Katie Tryhane Haley Christofides Matthew Urbik Research Analyst Research Analyst Research Analyst (212) 325-2713 (212) 325-3720 (212) 325-2152 [email protected] [email protected] [email protected]
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. Align Technology – Bull/Bear Scenarios Controversy Bull Case Bear Case Average Selling Price . Mix Shift to Accelerate Volume Growth: As ALGN . LT ASP Pressure: ASPs expected to continue to broadens its focus to a broader customer base, volume compress in 2019, with limited visibility on longer term What do ASP pressures mean for ALGN’s LT growth should offset an inherently compressed ASP; pricing power potential, with competitors in the wings revenue growth? Opportunity for non-price discount promotions Doctor-Directed Competition . Well Ahead of Competition: It is well ahead in terms . New Competitors: Doctors with established of innovation, with the ability to address an increasingly manufacturer relationships may opt to try out or fully How much of a concern are newer doctor-directed greater portion of a vastly underpenetrated market switch to newer doctor-directed product offerings product launches in the clear aligner market? DTC Competition . Safer/Effective Alternatives will Prevail: Regulators . Customers to Seek Cheaper Option: Competitors and/or doctors will deter DTC utilization through (e.g. SDC) take share in a lower tier market given more Will consumers choose doctor-directed offerings education and/or proposals/lobbying for safer options cost-effective/convenient (e.g. no doctor visits) given DTC options in the market? Intellectual Property . Continuously Innovating: Proven ability to continue . Losing Competitive Edge: As patent protection innovation with recent product launches (mandibular expires, competitors will utilize the basis of ALGN’s Can ALGN maintain its market leading position as advancement), staying well ahead of competition technology to advance products, potentially taking share its IP goes off patent? Clear Aligner Adoption . Largely Underpenetrated Market: Over time, clear . Limited Utilization: Doctors continue to prefer more aligners will become the standard of care, displacing traditional methods, with concern over clear aligner Will clear aligners achieve meaningful adoption traditional brackets & wires, while also driving broader capabilities and safety longer term given limited adoption thus far? overall utilization China (NT Dynamics) . Strong Market Positioning: Remains the premium . Weaker Economic Growth: Slowing broader economic brand of choice in China and remains one of the Top 2 growth in China may impact ALGN’s sales opportunity Will ALGN be able to sustain the same level of major players, contributing to high barriers of entry robust growth in China going forward? Valuation . Buy the Pullback: ALGN’s shares have fallen 36% . Premium Valuation: Despite recent valuation since its most recent high on May 16, and its still robust compression, ALGN still trades well above other Dental What is the right valuation for ALGN? growth prospects continue to warrant a higher multiple and Med Tech industry constituents
Other Factors / Macro . Continued Favorable Macro Environment . Economic Downturn Reduces Demand . DSO Penetration . Increased Marketing Expense Required . Global Expansion . Global Trade Dynamics
2 SmileDirectClub – Bull/Bear Scenarios Controversy Bull Case Bear Case Teledentistry Model . Remote Monitoring is Sufficient: Doctors may . LT ASP Pressure: Without regularly scheduled in- effectively gauge a client’s suitability for clear aligner person visits, a patient is susceptible to higher risk of Is remote monitoring sufficient when providing treatment and appropriately monitor treatment remotely inappropriate malocclusion treatment orthodontic treatment? Efficacy . Efficacy Demonstrated: SDC’s clear aligners have . Safety/Efficacy Concerns: There is no public data received FDA 510(k) approval, indicating that it has demonstrating efficacy, particularly of its nighttime Do SDC’s clear aligner work properly to straighten a sufficiently demonstrated efficacy via tests/data analysis aligners, and customer complaints apparent patient’s teeth? Competition . Barriers to Entry: SDC has inherent advantages in a . Some Competitors Making Headway: Competition vertically integrated end-to-end process, supporting unit apparent in the market, potentially offering a With new DTC start-ups, will SDC be able to economics, where start-ups are likely significantly more distraction; CandidCo seems to be making strides maintain its robust growth? unprofitable SmilePay Financing . Supporting Conversion: SmilePay reduces conversion . Unproven Track Record: SmilePay is a fairly new friction, supporting growth; Moreover, implicit price offering with an unproven track record on bad debt As a captive offering, is SmilePay financing too concessions are already modeled into expectations management; 100% acceptance rate/no credit check risky? Litigation / Regulatory . Success as a Disruptor: As a disruptor, combative . Scrutiny Drives Volatility: Regardless of whether efforts from practitioners are unsurprising, and SDC has SDC squashes exclusive regulatory efforts, these Will SDC be able to effectively combat efforts by successfully fended off local/state dental boards for four dynamics will continue to drive intra-quarter volatility local/state dental boards? years Mgmt/Ownership Structure . Still Meaningful Stake: Insiders still have massive voting . Voting Power: Key management profited from power; Meaningful experience in disruptive models SDC’s IPO and have retained voting power (87% How committed is SDC’s management team? ownership stake)
Valuation . Share Deterioration Egregious: With shares down over . Still More Room for Deterioration: Valuation still 60% since IPO, it is now trading below competitor ALGN does not fully reflect investment risks What is the right valuation for SDC? despite faster growth prospects
Other Factors . Continued Favorable Macro Environment . Economic Downturn Reduces Demand . SmileShop Footprint Relationships (e.g. CVS, WBA) . Increased Marketing Expense Required . Global Expansion . Customer Complaints / Clinical Limitations
3 Clear Aligner Bull/Bear Key Metrics
ALGN Takeaways • While over half of investors are Bullish on the Doctor Directed Market, investors remained Mixed-to-Bearish on their outlook of ALGN • Most Meaningful Long Term Opportunity for ALGN: Teen Market; Global Expansion • Least Relevant Long Term Opportunity: Adult, DTC Channel • Top Risk Factors for ALGN: ASP Compression, DTC Competition • Least Relevant Risk Factors: Management, DSO Penetration • Top Potential Competitors for ALGN: DTC Competitors, 3M’s Clarity Aligners, Straumann’s Clear Correct
SDC Takeaways • While investors are fairly Mixed on the Direct to Consumer Market, investors remained Mixed-to-Bearish on their outlook of SDC • Most Meaningful Long Term Opportunity for ALGN: Underpenetrated Market; Incremental Retail Relationships • Least Relevant Long Term Opportunity: Innovation; SmilePay • Top Risk Factors for ALGN: Regulatory Environment; Concerns Around Efficacy • Least Relevant Risk Factors: International Expansion; Rapid SmileShop Footprint Expansion
View on ALGN View on Dr. Directed Market View on SDC View on DTC Market Terminal View Bearish 6% 12% Bullish Bullish Bullish 24% 24% 24% Bearish 29%
Bearish Bearish 41% 29%
Neutral 29% Bullish 59%
Neutral Neutral 35% Neutral 41% 47%
4 Source: Credit Suisse, n=20 Clear Aligner Bull/Bear Key Metrics
ALGN: What Describes Your Thoughts on the Overall, XRAY was viewed as best positioned to outperform the Evolving Clear Aligner Competitive Landscape? group, followed by ALGN, NVST, SDC, HSIC, and PDCO
(NT Negative) Will have a meaningful XRAY 2.2 Best Positioned (Neutral) Room negative impact to for several players ALGN's grow th in the market - trajectory NT ALGN 3.0 Should not derail 14% ALGN's grow th trajectory NVST 36% 3.0
SDC 3.3
(LT Negative) Will HSIC 3.8 have a meaningful negative impact to ALGN's grow th trajectory LT PDCO 5.2 50% 0.0 1.0 2.0 3.0 4.0 5.0 6.0
ALGN: What Would Make You More SDC: What Would Make You More Positive/Negative? Positive/Negative?
More Positive More Negative More Positive More Negative
International Expansion DTC Penetration Increases Positive Regulatory Dynamics Further Negative Regulatory Headlines Continued Execution Traditional Orthodontia More Aggressive Execution ALGN Performs Better than Expected Regulatory Changes Further ASP Compression Volume Growth Slows China Improves Guidance Revision Efficacy Issues Strong Q3/Q4 Positive Competitive Product Reviews Bad Reviews of Competitor
5 Source: Credit Suisse, n=20 Competitive Landscape (DTC vs. Doctor-Directed)
Doctor-Directed Ortho vs. GP Channel Focus Hybrid* vs. Standalone Available in Parent Company Product Name Announcement Date Ortho GP Hybrid* Stand-alone the US?
Sun Dental Labs SunClear Aligners N/A X X Yes
Henry Schein Reveal Clear Aligners Feb-19 X X Yes
Ormco (Envista) Spark Jun-18 X X Pilot
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
Ormco (Envista) Simpli5 Oct-06 X X Yes
Align Technology Invisalign 2000 X X X Yes
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
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
6 Source: Company data, Credit Suisse Align Technology vs. SmileDirectClub
Clear Aligner Case Volume (2019E) Selling & Marketing Spend (2018)* In 000s $ in millions 1,600 $250 1,503
1,400 $211
$200 1,200
1,000 $150
800
$100 600 458
400 $50 $50
200 51 24 0 $0 ALGN SDC STMN Other DTC ALGN SDC
ALGN vs. SDC Case Aligner Shipments ALGN vs. SDC Gross Margin In 000s 3,500 200% 90% 186.9%
180% 2,920 85% 83.0% 83.5% 3,000 81.9% 82.0% 160% 79.2% 2,517 80% 2,500 140% 75.8% 2,170 73.6% 75% 120% 2,000 1,808 1,817 73.9% 73.9% 74.0% 69.2% 73.0% 100% 70% 72.2% 1,503 1,500 1,397 1,228 80% 77.3% 61.5% 65% 1,035 1,000 60% 739 40.0% 60% 35.0% 56.9% 30.0% 40% 458 500 258 55% 31.9% 20% 22.4% 20.3% 20.0% 16.0% 16.0% - 0% 50% 2018 2019E 2020E 2021E 2022E 2023E 2017 2018 2019E 2020E 2021E 2022E 2023E
SDC Case Volume ALGN Case Volume SDC Case Volume Growth ALGN Case Volume Growth SDC ALGN
7 Source: Company data, Straumann, Credit Suisse; Note: Est. “Other DTC,” with SDC owning ~95% of the DTC market; ALGN S&M spend estimated based on company disclosure at Ortho Summit; Case Volume in thousands Clear Aligner Comparable Company Analysis
Price Market 52-Week Avg. daily P/E EV/EBITDA EV/Sales Dental Manufacturers Ticker Rating Target 10/21 % to PT cap ($mil) High Low vol (000) 2019 2020 2019 2020 2019 2020 Yld. DENTSPLY SIRONA, Inc. XRAY Outperform $63 $55.26 14% $12,358 $59.40 - $33.93 1,614 23.1x 20.5x 15.7x 14.2x 3.4x 3.3x 1.3% Envista Holdings NVST Neutral $30 $28.74 4% $6,427 $29.74 - $25.65 1,402 17.2x 16.9x 19.6x 18.7x 2.8x 2.7x 0.0% Align Technology, Inc. ALGN Outperform $320 $214.61 49% $17,141 $334.64 - $169.84 1,170 41.2x 32.0x 26.3x 20.0x 6.9x 5.7x 0.0% SmileDirectClub SDC Outperform $18 $9.33 93% $3,638 $21.10 - $8.73 9,170 - - - 58.0x 4.4x 2.8x 0.0% Straumann Holding AG STMN-CH Outperform SFr900 $847.80 16% $13,462 $896.20 - $587.00 53 39.4x 32.7x 28.2x 23.7x 8.5x 7.4x 0.1% 3M Company MMM Outperform $178 $165.04 8% $94,941 $219.75 - $150.58 2,745 17.8x 16.6x 12.5x 11.7x 3.4x 3.3x 2.1% Zimmer Biomet Holdings, Inc. ZBH Underperform $120 $137.60 (13%) $28,251 $143.57 - $96.99 1,004 17.6x 16.6x 13.7x 13.3x 4.6x 4.5x 0.5% Average 31% 26.0x 22.6x 19.3x 17.0x 4.9x 4.2x 0.6% Dental Distributors Henry Schein HSIC Neutral $66 $62.74 5% $9,302 $91.35 - $56.58 1,017 18.1x 16.6x 11.5x 10.9x 1.0x 1.0x 0.0% Patterson Companies PDCO Outperform $25 $17.52 43% $1,674 $26.60 - $15.73 1,022 12.7x 12.0x 6.5x 6.1x 0.3x 0.3x 34.0% Average 15.4x 14.3x 9.0x 8.5x 0.7x 0.6x Medical Device Companies NuVasive, Inc. NUVA Outperform $75 $67.29 11% $3,502 $69.10 - $43.51 439 29.0x 26.3x 11.9x 11.0x 3.0x 2.9x 0.0% Cooper Companies, Inc. COO $288.70 $14,312 $344.32 - $228.65 328 23.2x 21.9x 17.1x 15.5x 5.4x 5.0x 0.0% Dexcom DXCM $156.33 $14,255 $178.45 - $105.05 764 174.7x 110.7x 106.5x 61.9x 10.4x 8.8x 0.0% ABIOMED, Inc. ABMD $176.16 $7,994 $427.70 - $155.02 578 34.1x 33.9x 28.1x 23.8x 9.3x 7.9x 0.0% Edwards Lifesciences CorporationEW Outperform $261 $228.71 14% $47,565 $230.19 - $136.44 1,063 42.8x 38.3x 34.6x 30.5x 11.2x 10.1x 0.0% Average 60.8x 46.2x 39.6x 28.6x 7.9x 7.0x Overall Average 37.8x 30.4x 25.5x 20.1x 5.3x 4.7x S&P 500 Index SPX 2999.05 3027.98 2346.58 18.0x
8 Source: Factset, Credit Suisse Malocclusion/Orthodontic Market Overview
The broader, global orthodontics market remains vastly underserved, where a majority of patients globally lack sufficient access to care due to limited providers in certain markets and affordability of treatment. Market participants have captured less than 1% of the 500 million addressable patient population, representing a $945 billion clear aligner market opportunity (including DTC and doctor-directed markets): • Key Addressable Population Assumptions: (1) Income threshold greater than $30,000 or country-specific equivalent; (2) age of 12-64 years old, and (3) prevalence of malocclusion • Treatment Cost: Gross clear aligner price of $1,895, potentially underestimating the broader opportunity, where other direct-to-consumer peers and more established doctor-directed offerings typically market a higher relative price. Average price for doctor-directed solutions vary by practitioner markup (avg. est. $2-5K)
Significant Global Market Opportunity (in Millions)
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
9 Source: Company data, Frost & Sullivan; $ in Millions Malocclusion/Orthodontic Market Overview
Of the approximately 500 million patients suffering from malocclusion, or the misalignment of teeth, globally, only 14 million patients seek professional (doctor-directed) treatment annually (75% Teens, 25% Adults) • Currently, orthodontists and dentists providing treatment for malocclusion offer traditional brackets & wires and/or newer clear aligner offerings • Conventional brackets and wires: Established solution; $2.0B market, growing +LSD. Market leaders include Envista’s Ormco, 3M’s Unitek, and Dentsply Sirona • Innovative solutions, including clear aligner and combo offerings, have been taking share and helping to expand the market, with the clear aligner market representing ~$2.5B opportunity in 2018, growing +DD
Malocclusion Market: 500M Patients Globally Brackets and Wires Market Share Other 21% Dentsply Sirona 21% Annual Orthodontist Case Starts 3%
Broader Populuation w ith Malocclusion Not Seeking Professional Danaher (Ormco) 3M Unitek Treatment 34% 97% 24%
10 Source: Straumann Investor Presentation, ALGN Investor Presentation, NVST Analyst Presentation, Credit Suisse Can Leading Dental Constituents Enter the DTC Market?
Key dental market participants continue to focus on the doctor-directed channel, targeting Orthodontists and/or GPs, rather than selling directly to consumers: • Relationship Risk: Manufacturers/distributors risk isolating the dental practitioner community with a D2C approach for certain products, such as clear aligners. • Healthy & Safety Risk: Some D2C solutions may lack appropriate supervision, potentially leading to inappropriate/unanticipated tooth movement, loss of gum tissue and/or other injuries. • Consumer Complaint Risk: While patients using a doctor-directed solution will complain to/about their given practitioner, DTC treatment (e.g. direct relationship between manufacturer and patient) opens the door for customers to file complaints against the manufacturer • Overall, we do not anticipate major manufacturers/distributors (e.g. Align Technology, Straumann, Henry Schein, Danaher, MMM, etc.) to utilize a D2C approach • ALGN utilizes B2B2C and B2C2B approaches, ultimately viewing that the dental professional should implement/monitor treatment • B2C2B Examples: Smile Concierge, SmileView – driving consumers to seek professional treatment via direct marketing (pull-through demand)
11 Source: Company data, Credit Suisse Doctor-Directed Channel Highlighting: Align Technologies (ALGN, Outperform, $320 TP) Straumann (STMN, Outperform, SFr990 TP) DENTSPLY SIRONA (XRAY, Outperform, $63 TP) Envista Holdings (NVST, Neutral, $30 TP) Henry Schein (HSIC, Neutral, $66 TP) 3M (MMM, Outperform, $178 TP)
Doctor-Directed Ortho vs. GP Channel Focus Hybrid* vs. Standalone Available in Parent Company Product Name Announcement Date Ortho GP Hybrid* Stand-alone the US?
Sun Dental Labs SunClear Aligners N/A X X Yes
Henry Schein Reveal Clear Aligners Feb-19 X X Yes
Ormco (Envista) Spark Jun-18 X X Pilot
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
Ormco (Envista) Simpli5 Oct-06 X X Yes
Align Technology Invisalign 2000 X X X Yes
October 21, 2019 12 Source: Credit Suisse; Note: STMN covered by EU Medical Supplies & Devices Team; 3M covered by US Electrical Equipment & Multi-Industry Team Doctor-Directed Clear Aligner Market – Evolving Opportunity
The Clear Aligner market is one of the fastest growing categories in dental, unchained to otherwise lackluster dental demand trends • ~$2.5B in 2018 market, with greater than 10% Y/Y growth • The market remains underpenetrated, with clear aligners representing >10% of the total addressable case starts • Innovative clear aligner offerings expand market opportunity, as individuals who are not currently seeking treatment for malocclusion (est. 486 million) begin to utilize available solutions, albeit acknowledging newer DTC concepts also compete in the broader market
Clear Aligner Market Share: 14m Case Starts
Clear Aligners 10%
Traditional Solutions (e.g. Brackets & Wires) 90%
13 Source: ALGN Investor Presentation, Credit Suisse ALGN – First Mover Advantage
ALGN has maintained a healthy +15-20% CAGR over the past 10 years in a fast growing and vastly underpenetrated market, supported by continued innovation, expanding its addressable market • Treatable Cases: ALGN can currently treat 75% of case starts, increased from 50% in 2016 with new product launches. Addressable cases should reach 80-85% with the launch of a rapid palate expander (est. 2019/20) • Target Customers: Traditionally focused on the Ortho market, with increasing focus on the broader GP segment, particularly with the launch of its Invisalign Go offering • Teeth Straightening Market Share: ALGN has ~90% share of the Served Addressable Market • Geographic Presence: In >100 countries globally, including the United States, China, and Brazil • Pricing to Consumer/Patient: $3,000-$5,000 on average, according to the Consumer Guide to Dentistry
Breakdown of Ortho Market Case Starts: ALGN Can Currently Address 75% of Total Cases Align Technology - Clear Aligner Revenues ($ bln) $4.0 Adults $3.7 19% $3.5 $3.2
$3.0 $2.8
$2.5 $2.3 $2.0 $2.0 $1.7
$1.5 $1.3 Teens 56% Non-applicable $1.0 $1.0 $0.8 cases $0.7 $0.6 25% $0.5 $0.5 $0.5 $0.3 $0.3 $0.4 $0.2 $0.3
$0.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E
14 Source: Company data, Credit Suisse ALGN: Leading Innovator with Meaningful Head Start • Innovation: Continuous innovation expanding product capabilities, e.g. launch of Invisalign First (mixed dentition) and 510(k) approval for mandibular advancement; Now addresses 75% of case starts vs. 40% ClearCorrect • Scanner Compatibility: Compatible with most market-leading scanners; Recently dropped 3Shape TRIOS amidst US patent infringement litigation • Treatment Duration: 7 day case wear time, with treatment as short as 3 months, depending on case complexity • Production: ALGN is the largest user of 3D printing globally; Proprietary Invisalign SmartTrack material Evidence of ALGN Innovation: 20-Year Head start
15 Source: ALGN, Investor Presentation, Company data, Credit Suisse ALGN: Product Suite Overview
Adults/Teens Younger Patients
Moderate to Very Mild to Mild Mild to Moderate Phase I Phase 2 Severe
Invisalign Go (GP) Ltd. Comprehensive Invisalign First Comprehensive Express 5 Express Package Express 10 Lite Package Product Movement Package Package
Stages 5 7 10 14 20 (5x5) Unlimited Unlimited Unlimited
Relapse and very Relapse and Relapse and Class I, mild Class I, no AP Class I, II, III, Phase I treatment Phase 2 minor movement minor movement, minor movement, crowding, correction, mild to moderate to for developing treatments to anterior aesthetic anterior aesthetic spacing, non- moderate severe crowding / dental arch form complete the alignment alignment extraction, pre- crowding / spacing, vertical & creating space leveling and restorative spacing, non- and AP for permanent alignment of extraction, pre- discrepancies, erupting dentition, erupted Clinical restorative extractions, Dental expansion, permanent Indications complex pre- spacing / dentition and any restorative crowding further A-P correction needed
16 Source: ALGN, Investor Presentation, Company data, Credit Suisse ALGN: Examining Case Mix & Potential Shift
ALGN has historically targeted efforts toward the ortho market, but has increasingly broadened its focus to more fully encompass the GP market as well, with the hopes of driving a larger case volume opportunity • 75% of ortho case starts are teens (10.5 million cases annually), almost all of which are comprehensive cases • Current Case Mix: Comprehensive cases represent >75% of ALGN’s current case volume, with the remainder non-comprehensive cases (GP-level treatment, minor oral movement) • Potential Mix Shift: As ALGN focuses further effort toward the GP market and the broader malocclusion market with its Invisalign Go offering, among others, we anticipate a mix shift toward non-comprehensive cases • ASP Implications: A focus shift to a broader market opportunity could drive larger case volume opportunity LT, with an expected pricing headwind NT, given an inherently lower associated non-comprehensive ASP
Case Mix Trends ASP Trends: Comprehensive vs. Non Comprehensive
YoY Growth: +24.6% $1,500 400 QoQ Growth: +8.0% $1,400 350 $1,325
104 104 $1,300
300 97
87 87 99 99 250 78 $1,200
200 $1,100 $980
150 $1,000
273 273
252 252
247 247 224 224 100 221
$900 Cases shipped (in 000s) (inCases shipped 50 $800 - $700
4Q151Q162Q163Q164Q161Q172Q173Q174Q171Q182Q183Q184Q181Q192Q19
2Q18 4Q18 2Q19 3Q18 1Q19
Adult Cases Teen Cases Comprehensive Products - ASP Non-comprehensive Products - ASP
17 Source: Company data, Credit Suisse ALGN: Global Drivers While ALGN continues to growth +DD in the US, it has only begun to penetrate international markets, where it continues to dedicate increasingly more focus and resources • Doctor Network: ALGN has trained 11,770 doctors in 2018, implying 15.2% y/y growth • LATAM (~2% of 2017 Volume): Significant growth opportunity, particularly following 1Q18 iTero launch in Brazil • EMEA: Recent Expansion of Smile Concierge to the UK; New Treatment Planning Center in Spain (2H18) • APAC: Extensive clinical education and peer-to-peer education: Invisalign Forums (China, Hong Kong, Taiwan, Australia, New Zealand), Seoul International Dental Exhibition, Ortho 360 Staff Event • Highlighting China (8% of 2018 Sales): Meaningful growth each year since entering the market in 2013, with the hopes of driving China to be a top contributor by 2021; Sales seemingly slowed down in 1H19 (+mid-20s growth), albeit seemingly improving since July Global Case Unit Mix (2017) Facility Placement Heat Map
EMEA 21%
Americas 65% APAC 14%
18 Source: Company data, Credit Suisse STMN’s ClearCorrect
STMN’s ClearCorrect (acquired Aug 2017) is the second largest player in the clear aligner market • Treatable Cases: ClearCorrect addresses only 40% of annual ortho case starts; Applicability may expand to as much as 70% with a new plastic material (potentially launching in 2020) • Treatment Duration: Two-three weeks/case, with treatment taking from a few months to a few years • Aligner Features: Unscalloped trimline that extends past the gingival margin; Utilizes attachments • Scanner Compatibility: Compatible with almost any intraoral scanner (Sirona, 3Shape TRIOS, Carestream, 3M True Definition, Planmeca Emerald, Dental Wings, and iTero) • Targeted Customers: Primarily GPs, with some sales efforts toward the Ortho segment • Geographic Presence: Available in the US, Australia, Canada, UK, Brazil and launched in some larger Asian markets (e.g. Japan); Partnership in China with Smyletec; Exp. 4Q19 full launch in Europe • Pricing for Consumer/Patient: $2,000-$8,000, with insurance covering up to ($1,000-$3,000 after insurance) • Dental Monitoring: Partnership established April 2018; Remote dental monitoring capabilities utilizing smartphones and AI, potentially reducing the frequency of dental visits
ClearCorrect Aligner System – Available Packages per Case
Flex Package Unlimited Package Cost to Doctor: $95/Approved Setup + $30/Aligner Cost to Doctor: $1,495 Provides: Exact amount of aligners required for treatment, Provides: Flat rate unlimited aligners & retainers for five retainers provided separately years, including revisions and replacements Purpose: Simple aesthetic corrections, single-arch Purpose: Comprehensive treatment, long-term retention, treatment, and minor orthodontic relapses and minimizing unexpected expenses
19 Source: Company data, Credit Suisse XRAY’s SureSmile
Dentsply Sirona’s SureSmile Aligner launched initially in May 2018 with a primarily specialist-focused hybrid solution, with recent updates offering a more GP-targeted standalone clear aligner treatment option • Digital Treatment Planning: Previously utilizing Elemetrix for digital treatment planning, XRAY recently launched SureSmile Software in Feb 2019, a more GP-friendly system that also supports standalone clear aligner treatment • Hybrid Solution: Still provides hybrid solutions (clear aligners + brackets & wires + indirect bonding) for orthos • Treatable Cases: Its standalone offering treats simpler cases; hybrid treatment allows it to potentially treat most comprehensive cases, aiding challenging tooth movements, with clear aligners utilized thereafter • Aligner Features: Unscalloped trimline; Utilizes attachments • Scanner Compatibility: Accepts STL files from all scanning sources • Production: Combo of 3D printed models + robotic laser trimming, or In-Office Design for those with 3D printers • Geographic Presence: Principally North America; Expanding to Europe NT; Optimistic on approvals in APAC NT
SureSmile Aligner SureSmile Ortho SureSmile Advanced Software Capabilities Prescription & Data Input X X X Advanced Diagnostics X X Standard Planning Tools X X Advanced Planning Tools X
Support Services Digital Modeling X X X Treatment Planning X X X
Device Fabrication Services Clear Aligners X X X Arch Models X X Labial IDB Trays X X Custom Archwires X
20 Source: Company data, Credit Suisse NVST’s Spark Clear Aligner System
Initially launched in Australia in June 2018, where NVST has received positive feedback from doctors and patients, NVST began piloting Spark Aligner System in the US in 3Q19 • Digital Treatment Planning : Proprietary Approver Software, with dedicated treatment designers and support team • Treatable Cases: Addresses 65-70% of the annual ortho case starts, treating mild to complex malocclusions • Treatment Duration: ~1-2 weeks wear time per aligner case • Aligner Features: Polished scalloped trim-line; Utilizes attachments, Bite Ramps, Hooks, and Cutouts • Scanner Compatibility: Compatible with all major scanners • Material: TruGEN, its proprietary branded aligner material is designed to be more clear than Invisalign, with higher sustained force retention, delivering more force over time • Geographic Presence: Australia, New Zealand, Pilot in the United States
Spark Treatment Options Advanced SPARK 20 SPARK 10 Comprehensive treatment Treatment of moderate Relapse, prerestorative and Description of complex malocclusions malocclusions minor malocclusions Numebr of Aligners Unlimited Aligners Up to 20 Aligners Up to 10 Aligners
Refinements Unlimited refinements Two refinements One refinement
Arches Double/Single Double/Single Double/Single
Wear Time 1-2 week 1-2 week 1-2 week
21 Source: Company data, Credit Suisse HSIC’s Clear Aligners Following the launch of SLX Clear Aligners (ortho-focused) in May 2018, HSIC launched a GP-targeted system, Reveal Clear Aligners, in order to reach a broader patient base, where it has already produced over 50,000 cases to-date SLX Clear Aligners Reveal Clear Aligners
• Submissions: DDX SLX Approver online portal –Technicians • Submissions: DDX Aligner Portal – its technicians will do the provide treatment planning, which can be altered thereon treatment planning, which will be ready to review within 5 days
• Treatable Cases: Recommends Class II and Class III patients • Treatable Cases: Simple cases; No bite adjustments Motion 3D Appliance/Sagittal First are treated with to establish • Aligner Features: Scalloped at gingival margin, No attachments Class I occlusion before utilizing aligners (can bond self-made attachments to exude teeth as needed)
• Aligner Features: Scalloped at gingival margin, No attachments • Scanner Compatibility: Compatible with leading scanners (can bond self-made attachments to exude teeth as needed) • Targeted Customers: General Practitioners • Scanner Compatibility: Compatible with leading scanners • Material: Proprietary ClearWear material; Precision fit • Targeted Customers: Orthodontists • Geographic Presence: United States • Material: Proprietary ClearWear material; Precision-fit
• Geographic Presence: United States
Offering Step Clinical Indication
Less than 30 steps + Moderate to severe, treated with Sagittal First /Motion 3D Full Treatment* one set of retainers Appliances to establish Class I occlusion prior to aligners Offering Set of Aligners Less than 20 steps + Light Treatment Mild to moderate one set of retainers Standard <30 steps 5-year assurance plan, 1 set of retainers Less than 10 steps + Express Treatment Very mild, anterior only one set of retainers Lite <20 steps, 1 refinement (if needed), 1 set of retainers Upper and lower set of Retainers - UL Replacement retainers, based on original final occlusion retainers
One upper or lower Express <10 steps or 1 refinement (if needed), 1 set of retainers Retainer - Single Arch Replacement retainers, based on original final occlusion retainer
When new scans are required for retainers or a change in New Setup treatment plan
To replace lost or damaged aligners or for a change in treatment Individual Aligner plan
22 Source: Company data, Credit Suisse MMM’s Clarity Clear Aligners
Announced at the AAO show in May 2018, Clarity Aligners enhance 3M’s ortho portfolio, targeting the broadest set of solutions across orthodontic platforms (incl. Brackets and Wires) across the competitive landscape • Digital Treatment Planning Platform: 3M Oral Care Portal is a web-based software with impression (traditional and digital) record management functionality; Licenses exclusively from uLab Systems • Treatable Cases: 3M highlighted increasing combination therapy, providing flexibility for orthos on how they want to adapt each case to the patient’s need, with the view one application will not fit every clinical situation • Aligner Features: Unscalloped trimline; Attachments utilized • Scanner Compatibility: Compatible with market leading scanners • Targeted Customers: Focused on the orthodontists • Geographic Presence: United States; Discussing other global options
3M Marketing: Aligners Another Component of Existing Treatment Options Control Flexibility Choice Access the HIPPA-compliant 3M Oral Care portal is an open platform Choose from a variety of aesthetic Oral Care portal at any time and allowing you the flexibility to use the treatment options from 3M to from anywhere to easily refine and intraoral scanner of your choice ensure optimal care for your patient update treatment plans
23 Source: Company data, Credit Suisse Dental Lab Clear Aligners
As clear aligners have become a more widely adopted solution for teeth straightening, dental labs have begun to offer aligner treatment planning and manufacturing to compete with brand-name offerings
Example – SunClear Aligners by Sun Dental Labs • Scans: Accepts files from any digital scanner • Offerings: $499 for full aligners plan (incl. any number of revisions until approved) up to 20 aligners and $15 per aligner above 20 single aligners • Treatment Planning: Generates a ClinChek-like plan for approval, after which can use SunClear Pro 3D software to review, modify, and accept the plan
24 Source: Company data, Credit Suisse Direct to Consumer Channel
Highlighting: SmileDirectClub (SDC, Outperform, $18) Candid Co (Private) SmileLove (Private) Byte (Private) Orthly (Private)
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
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
October 21, 2019 25 Source: Credit Suisse; Note: STMN covered by EU Medical Supplies & Devices Team; 3M covered by US Electrical Equipment & Multi-Industry Team Direct to Consumer Overview
While pricing remains fairly consistent across the DTC market to-date, representing a steep discount relative to traditional orthodontic offerings (60% cheaper), key differentiators include: • Method/Manner of Impression: Impression kits (purchased upfront vs. reimbursed if purchase full treatment) and/or free in-person scans at a local retail store • Access to Doctors: SDC and CandidCo provide remote access to doctors, while other DTC concepts may not maintain a support network; Some DTC concepts connect patients to local doctors for an in-office visit • Retail Presence: While all DTC companies maintain online presences, only two additionally maintain retail store presences (SDC, >360 stores; CandidCo, >20 stores) • Financing Option: Typically offer a monthly payment option, albeit with few (e.g. SDC, Byte) maintaining captive offerings (vs. outsourced to Affirm or other financing partners) • Retainers: Many offer the first set of retainers free, while SDC requires patients to pay for retainers upfront
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
26 Source: Company data, Credit Suisse Direct to Consumer Overview
Direct to Consumer clear aligner companies are generally fairly new start-up concepts, with most companies likely experiencing a negative contribution margin, where most entrants do not own the entire end-to-end treatment planning and manufacturing process.
Aligner Unit Economic 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
27 Source: Company data, Credit Suisse SmileDirectClub – Treatment Overview
SmileDirectClub is a teledentistry provider and manufacturer of clear aligner solutions supporting a large and underserved global orthodontic market with its proprietary teeth straightening treatment. Leveraging its disruptive direct-to-consumer approach and vertically integrated model, SDC expands access to care, while also enhancing convenience and addressing critical problems around treatment cost. All in, SDC’s solution may potentially address 500 million people globally, implying a $945 billion total addressable market opportunity.
Company Highlights:
• Ramping Case Volume: 767,000 members treated to date, with 457,900 cases (+77% y/y) in 2019 alone (vs. competitor Align Technology 2019E 1.5M) • Compelling Treatment Cost: SDC ~60% cheaper than traditional doctor-directed teeth straightening treatment at $1,895 with financing options available • Treatable Cases: Estimated 50-60% of total addressable cases • Unique Teledentistry Approach: SDC has 240 licensed orthodontists in the US who prescribe clear aligner treatment after appropriate due diligence • In-House Manufacturing Capacity: 2 million aligner trays per month, with current utilization ~1.5 million; Currently expanding capacity to 100% redundancy • SmileShops: SDC offers at-home impression kits as well as in-store 3D intraoral scanning of the teeth at its 347 stores, predominately in the US, where the vast majority (80-90%) of patients are captured. (~100 co-located in CVS and Walgreens stores) • Other Ancillary Products: SDC also markets various ancillary products, including teeth whitening treatment, an LED accelerator light, MoveMints, retainers
Annual Revenue ($M) and Revenue Growth – Revenue Mix (2018) Annual EBITDA ($M) and EBITDA Margin Growing +DD $800 $3,500 190.0% 200% Other Revenue $681 55.0% $2,928 180% $700 $3,000 4% 160% $600 45.0%
$2,500 $2,256 140% $500 $403 35.0% 120% $400 $2,000 $1,675 25.0% 100% $300 $1,500 76.9% $192 23.2% 80% $200 15.0% $1,199 17.8% $57 $1,000 60% $100 11.5% -$21 -$18 -$72 5.0% $749 60.2% 40% $0 $423 4.8% $500 39.7% -5.0% 34.7% 20% Net Clear -$100 29.8% Aligner -14.5% -4.1% $0 0% Revenue -$200 -9.6% -15.0% 2018 2019E 2020E 2021E 2022E 2023E 96% 2017 2018 2019E 2020E 2021E 2022E 2023E
Reported Revenue Growth EBITDA EBITDA Margin
28 Source: Company data, Credit Suisse SmileDirectClub – Company Overview
SmileDirectClub’s demographic differs vastly from the traditional orthodontic market, which generally sees two- thirds of cases focused on 12-17 year olds. For SDC, that age group only accounts for 6% of customers.
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%
29 Source: Company data, Credit Suisse SmileDirectClub Treatment Overview
SDC is slated to generate $749 million in revenue in SDC Case Volume Growth (in Thousands) 2019 (+77%), driven by case volume of 457.9 thousand 2,000 186.9% 200% (+77%) vs. competitor Align Technology (est. volume 1,817 1,800 180% 1.5 million, +22%). 1,600 160% 1,397 1,400 140%
SDC’s Proprietary Treatment Process: 1,200 120% 1,035 1,000 100% 77.3% • Impression Kit / Scan: A customer must first either submit an at- 800 739 80%
home impression kit or visit a SmileShop for a free scan (347 Stores 600 458 60% 61.5% currently) 400 258 40% 40.0% 35.0% • Treatment Planning: SDC’s technicians in its Costa Rica facility will 200 30.0% 20% - 0% create a treatment plan 2018 2019E 2020E 2021E 2022E 2023E • QA Review: An orthodontist or dentist in the relevant state will then Case Volume Case Volume Growth review the treatment plan and other relevant patient information. Both Treatment planning and the QA review process are typically completed within 48 hours Treatment Process Recap • Purchase/Prescription: If the patient is satisfied with the treatment plan, they may decide to purchase the clear aligner treatment. At that point, the same doctor who reviewed the case initially will prescribe the clear aligners • Production/Shipment: SDC will then manufacture the clear aligners 100% QA Review by Review Treatment in-house, with the trays typically shipped out within 3-4 weeks from Information Digitally Licensed Suitable Cases Approved Progress Remotely At Prepared for Case Review Orthodontist/Dentist in Least Every 90 Days purchase Relevant State Reviews • Review: Orthodontists/Dentists and patients may then keep in contact through SDC’s SmileCheck, with SDC suggesting a remote treatment review at least every 90 days • Average Patient Treatment Duration: 6 months
30 Source: Company data, Credit Suisse SmileDirectClub – Marketing Strategy
SDC has demonstrated its prowess in the marketing Net Promotor Score arena, illustrated by building aided awareness, which
should support penetration of the $945B market longer NPS: 64 term • With its 100+ person market team, SDC manages all marketing, communications, purchasing, and execution in-house, where it views Apple (72) it maintains incremental efficiency and flexibility Align Tech (37) Costco (45) AmEx (52) • Notably, SDC’s NPS (64) remains well ahead of Invisalign’s (37), Amazon (62) with consistent messaging, customer service, and pricing as Netflix (68)
differentiators Nike (32) Target (28) Zappos (57) Microsoft (32)
Sales & Marketing Expenses to Drive Awareness Aided Awareness and Referral Rates on the Rise ($Millions)
$1,600 $1,484 80% 38% $1,400 39% 64.3% 70% 35% $1,183 $1,200 57.7% 54.7% 34% 32% 52.4% 60% 49.9% 50.7% $1,000 $916 50% 28% 28% 43.6% 29% 27% 27% 27% 27% $800 $692 40% 24% $600 24% $482 30% 20% 19% 20% 18% $400 20% 19% 22% 21% 16% 20% 20% $211 15% 19% 19% 15% 18% 19% 19% 19% $200 10% 17% 17% 18% 18% $64 14% $0 0% 2017 2018 2019E 2020E 2021E 2022E 2023E
Marketing & Selling Expense Marketing & Selling as a % of Revenue Aided Awareness Referral Rates
31 Source: Company data, Credit Suisse SmileDirectClub – Expanding SmileShop Footprint
Through an expanding SmileShop footprint, SDC will enhance US SmileShop Mix (2Q19) Smile Bus customer convenience and awareness, thereby driving 2% conversion higher and supporting case volume growth CVS & Walgreens 24% • SmileShops are “low commitment, high-value fulfillment centers,” acknowledging that clear aligners are a highly considered purchase
Retail Storefront • SDC will take a measured and thoughtful approach to expansion, where it 5% aims to expand and optimize its footprint simultaneously, while also Flagships Shared Retail ensuring sufficient production capacity to meet demand 1% 68% • SmileShop mix should skew meaningfully toward co-locations (partnership model – 1,500 potential stores with CVS LT ) Highlighting Key SmileShop Partnerships • Co-located SmileShops should offer further credibility
94 Stores 4 Stores Domestic
Leveraging an Expanding SmileShop Footprint
900 International (United Kingdom) (Canada) (Australia)
800 100 700 100 Revenue per SmileShop 600 100 $4.0 $3.7 $3.7 400% 500 $3.5 $3.3 350% 125 359% $2.9 300% 400 $3.0 50 733 $2.5 $2.5 250% 307 51 300 633 $2.5 200% 222 533 200 188 408 $2.0 150% 141 358 104 307 100% $1.5 31% 100 41 66 117% 15 27 19% 16% 50% 10 $1.0 14% 0 15% 0% 1% 13% 13% $0.5 -50% -40% -32% $0.0 -100% 2018 2019E 2020E 2021E 2022E 2023E SmileShops at Beginning of Period Net Additions Revenue per Store Revenue per Store Growth Store Growth
32 Source: Company data, Credit Suisse SmileDirectClub – Continuous Innovation
Leveraging its history of disruptive innovation, further Other Revenue Should Grow in Lockstep with Net product introductions should support growth longer term Sales Long Term ($M)
$80 7% • In the 3Q19, SDC launched its Nighttime Clear Aligner product $74 offering in the US market, with a broader global launch (Canada, UK, $70 6% $60 4.9% $56 Australia) over the balance of the year. Material contributions have 5% not been incorporated into estimates, offering upside $50 4.1% $42 4% $40 3.0% • SDC has launched multiple ancillary products (i.e. retainers, teeth $30 3% $30 whitening), enhancing SDC’s recurring revenue streams $23 2.5% 2.5% 2.5% 2.5% 2% $20 $17
• In Other Revenue, we conservatively estimate most ancillary $10 $7 1%
products to grow ~in-line with topline growth and a maintained $0 0% retainer attachment rate of 65% (vs. LT target to 90-95%) 2017 2018 2019E 2020E 2021E 2022E 2023E Other Revenue ($) Other Revenue as % of Net Sales
Disruptive Innovation to Support Greater Market Penetration
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
33 Source: Company data, Credit Suisse SmileDirectClub – International Expansion
With roughly 75% of the total global market opportunity Current International Markets outside the US, international expansion represents a Canada Australia United Kingdom meaningful opportunity Population 38M 24M 67M Potential Cases 10M 6M 12M SDC’s current OUS exposure remains low (<10% of revenues) • Market TAM $19B $11B $23B
• As International grows (>10% of revenues), we expect SDC will Launch Date November 2018 May 2019 July 2019
begin to break international contributions, albeit likely a LT dynamic # of Stores 0 5 0 • SDC has identified Mexico, Germany, Ireland, New Zealand, and Hong Kong as attractive markets near term, with potential expansion Local efforts into these markets not fully embedded in our estimates Partnerships
International SmileShops Expansion Potential International Markets
15% Population Potential Cases Market TAM 60 16% 14%14% 3 14% Mexico 134M 3M $6B 50 12%12% 3 3 11%11%11% 10% 17 12% 40 10% 12 12 9% 9% 8% 9% 9% 8% 9 10 10% 8% 8% 8 9 9 Germany 83M 18M $34B 7% 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 Ireland 5M 1M $2B 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% New Zealand 5M 1M $2B
Hong Kong 7M 2M $4B Canada Australia UK New Zealand % of Total
34 Source: Company data, Credit Suisse SmileDirectClub – SmilePay as a Key Differentiator
SDC’s in-house financing addresses cost as a key barrier Comparing Financing Options Across the Industry
Doctor-Directed vs. Outsourced vs. for penetration, allowing patients to pay for clear aligner Company Financing Supplier treatment over 24 months ($250 upfront payment) DTC Captive Invisalign Doctor-Directed Outsourced Doctor Dependent • Reduces conversion friction, making the product more accessible to CandidCo DTC Outsourced Affirm Orthly DTC Outsourced Affirm patients, driving higher conversion, and providing a better experience SmileLove DTC Outsourced Affirm 100% acceptance rate (no denials) and no required credit check SnapCorrect DTC Outsourced Affirm • Byte DTC Captive BytePay • J.P. Morgan supports the program with a two year $500 million asset SmileDirectClub DTC Captive SmilePay backed facility (LIBOR+3.2%) • Macro Risk: While also representing a risk factor, analysis estimates a recession scenario would decrease SmilePay’s contribution margin by 400 bps to 29%, with potential offsets in a higher applied APR
SmilePay Payback (2019E) Implicit Price Concessions ($M)
$2,500 Cover COGS and All $350 10.6% Other Operating Cover Cost of Costs After Mo. 14 $304 10.4% Goods Sold Payment $300 $2,000 After Mo. 2 Payment 10.3% 10.2% $250 $234 $1,500 10.0% $200 $174 $1,000 9.9% 9.8% $150 $124 9.6% $500 $100 $77 9.4% $47 9.4% 9.4% 9.4% 9.4% $0 $50 9.3% $17 9.2%
$0 9.0% 2017 2018 2019E 2020E 2021E 2022E 2023E Prior Aggregate Payments Incremental Payment Cost of Goods Sold per Aligner COGS and Other Operating Expenses per Aligner Implicit Price Concessions ($) % of Revenue
35 Source: Company data, Credit Suisse SmileDirectClub – Margin Expansion
We expect SDC will achieve 2,738 bps adjusted EBITDA margin expansion from 2018 to 2023 on growing scale and automation initiatives • 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 • 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 meaningful expense. Headcount growth may be contained with automation of certain processes in manufacturing and treatment design longer term • Peak margins potentially in the 25%-30% range longer term • Note: SDC gross margin of est. 79.2% in 2019 compares to ALGN gross margin of est. 72.2%
2,738 bps of Margin Expansion from 2018-2023 ($M)
$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
36 Source: Company data, Credit Suisse SmileDirectClub – Relevant Litigation
Align Technology – Final Arbitration Award Issued in March 2019
• Ruling: Arbitrator ruled that ALGN had breached both the non-competition and confidentiality provisions of operating agreement • Result: ALGN was required to close its Invisalign Stores, return all of SDC’s confidential information, and sell its membership units to SDC or non-Series A unitholders for an amount equal to ALGN’s capital account as of November 2017. Non-competition period was also extended through August 2022. Prohibits ALGN from using SDC’s confidential information in any manner going forward • SDC Payment to ALGN: In conjunction with the ruling, SDC will pay ALGN $54 million, pursuant a promissory note payable over 24 months through March 2021, in full redemption of ALGN’s pre-IPO units. That said, ALGN has filed a subsequent arbitration proceeding seeking an additional $43 million
State Professional Regulation – Georgia • Georgia Board of Dentistry: New rule requiring a licensed dentists to be present when 3D oral images are taken by a dental assistant • Resolutions / Current Standing: SDC filed a lawsuit in Federal court against the dental board alleging violations of the Sherman Act, interfering with the business model. 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 • Board of Dental Examiners of Alabama: Interpreting existing rules to require “direct supervision” for the taking of a digital image • Resolutions / Current Standing: SDC filed a lawsuit in Federal court against the dental board alleging violations of the Sherman Act, interfering with the business model. SDC has obtained a Temporary Restraining Order precluding the Board of Dental Examiners from taking any action until a final disposition has occurred. Trial is set for Fall 2019
State Professional Regulation – New Jersey • Dental Association: Filed a lawsuit against SDC alleging that SDC is engaging in illegal corporate practice of dentistry • Resolutions / Current Standing: SDC has filed to dismiss on the grounds that the New Jersey Dental Association does not have standing to make such a claim, which was denied. SDC has filed a motion to reconsider that denial and will file an appeal if necessary
State Professional Regulation – Tennessee • Group of Orthodontists + One Consumer: Filed a lawsuit against SDC alleging that SDC is engaging in false advertising and the illegal practice of dentistry • Resolutions / Current Standing: Awaiting further details (initial lawsuit filed September 25)
State Professional Regulation – California • Dental Board of California: Governor signed AB 1519 into law authorizing the State Dental Board. This legislation also included last minute additions mandating radiographs or other bone-level scans and the disclosure of pertinent licensure information of practitioners who work on a given patient • Resolutions / Current Standing: Awaiting comment period to discuss draft of promulgated regulations
37 Source: Company data, Credit Suisse DTC Landscape – Candid Co
While pricing remains fairly consistent across the DTC market to-date, representing a steep discount relative to traditional orthodontic offerings (60% cheaper), key differentiators include: • Method/Manner of Impression: Impression kit and photos at home (full refund if not a candidate) OR visit Candid Studio for a 30 minute appointment • Access to Doctors: Only works with orthodontists to approve cases • Its doctors have 20 years of experience on average • Retail Presence: Maintains 23 retail stores across the 13 states • Price: One-time all-inclusive price of $1,900 or $88/month for 24 months • Financing Option: Offers outsource financing via Affirm • Retainers: $99 per set • App: Free app that guides patients through treatment, with care specialists on call to answer questions; Support available 7 days a week, 9AM-7PM EST
38 Source: Company data, Credit Suisse Intraoral Scanner Market
October 21, 2019 39 Intraoral Scanner Market
The CAD/CAM market (~$1B, growing >20% y/y) comprises of full chairside solutions, as well as standalone digital impression offerings, providing an alternative to more traditional analog impressions • Precision: More traditional impressions increase the possibility of human-related impression-taking errors, as well as expansion/contraction risk of impression materials • Efficiency: Traditional impressions require meaningfully more time (material set up, drying time, potential delays from a gagging patient, and clean up), as compared to digital impressions, which take ~5 minutes, according to 3Shape. Dental Product News reports that the iTero can save restorative dentists 28-38 minutes per case. • Lab Transfer: Digital scans can be sent directly to a lab, improving communication and likely reducing turnaround time (e.g. less time associated with shipping impression to the lab) • Patient Experience: Improves patient comfort and reduces appointment duration Orthodontists: Digital Impression Market Share GPs: Digital Impression Market Share Trios Trios 5% Ormco/ 10% Carestream Ormco/ 5% Carestream 20%
iTero 40%
Sirona Sirona 20% 2% 3M Tru Def 3%
iTero 70%
3M Tru Def 25%
40 Source: Straumann Investor Presentation, ALGN Investor Presentation, Dental Product News, Credit Suisse ALGN’s iTero – Market Leading Technology ALGN’s iTero segment has growth at +30% CAGR over the past 5 years in the digital imaging scanner market with its comprehensive iTero suite, with ample opportunity for future growth with only 20% penetration into its Invisalign installed base • Capabilities: Restorative work (crowns, bridges, implants, veneers, inlays, onlays) with over 2.7 million restorative scans and >7k restorative scanners in installed base; Teeth straightening treatment (clear aligners). • Speed: Full arch scan in as little as 60 seconds • Doctor-Directed Marketing Play: iTero TimeLapse visualizes oral changes for patients in need of treatment (restorative, teeth straightening), potentially spurring increased treatment conversion • Support: 5x overall iTero sales specialists in 2018 vs. 2015, with 1.5x direct Invisalign reps over the same period • Geographic Expansion: Recently launched offering in Japan (Jul ‘17), Brazil (Jan ‘18), and China (Apr ‘18) ALGN Scanner Sales Installed Base Breakdown 168% $600 $553 180% 160% $500 140% $425 120% GP $400 100% 48% 80% 55% $300 $275 60% 68% 55% 40% 13% $200 0% $16435% 30% 20% -8% $122 0% Ortho $100 -20% 52% $43 $44 $49 $45 -40% $- -60% 2012 2013 2014 2015 2016 2017 2018 2019E 2020E
Scanner Sales Growth
41 Source: Straumann Investor Presentation, ALGN Investor Presentation, Credit Suisse ALGN’s iTero – Continuously Innovating
In April, ALGN introduced two new iTero upgrades – The iTero Element 2 is a higher performance scanner with 2x faster start-up time and 25% faster scan processing (vs. iTero Element), while the iTero Element Flex is a wand-only device that transforms compatible laptops into a portable scanner.
Features iTero Element iTero Element 2 iTero Element Flex Accuracy
Rapid Scan
Color Scan
Autocalibration
Comprehensive resotrative & implant workflows
Chairside CAD and milling collaborations
Expansive global laboratory network
TimeLapse Visualization
Optimized Invisalign Integration
Direct manufacturer technical and clinical support
Plug & play serviceability
1:1 instructuor led virtual classroom training
Comprehensive orthodontic workflows
OrthoCAD software integration
Open STL export
Next generation computing power
Expanded 21.5'' touch widescreen
Integrated battery for uninterrupted scanning
Laptop connectivity
Custom-designed carrying case
42 Source: Company data, Credit Suisse Dental Market, Valuation, and Upcoming Catalysts
October 21, 2019 43 Dental Coverage / Investment Thesis
Dental Distributors Dental Products Companies Patterson Companies (PDCO, Outperform, $25 TP) DENTSPLY SIRONA (XRAY, Outperform, $63 TP) Henry Schein (HSIC, Neutral, $66 TP) Envista Holdings (NVST, Neutral, $30 TP) Align Technologies (ALGN, Outperform, $320 TP) SmileDirectClub (SDC, Outperform, $18 TP)
• Our bias is cautiously optimistic on the dental market in light of favorable LT demographics and less exposure to US policy uncertainty, compounded by greater technology adoption as utilization rises gradually over time. • While both XRAY and NVST represent turnaround stories, where each company has lagged on innovation and commercial efforts, we view both are poised to accelerate growth longer term, albeit with XRAY potentially further along, with near term catalysts in traction with its Primescan/upgrade program. • On HSIC, in a tough utilization backdrop, we remain on the sidelines, particularly ahead of new DSO contracting, and we view improving execution at PDCO will likely only be at the expense of HSIC, which as been benefiting from PDCO’s challenges for years. • On ALGN, while key concerns remain around doctor-directed and newer direct-to-consumer competition, we view there is room for several players in a highly underpenetrated market. Meanwhile, SDC is well positioned as a disruptor in the broader market, representing the fastest growing company across our coverage universe, with line of sight to profitability in 2020.
44 Dental Industry Overview
Global Dental Market Size: ~$23 billion Relevant Dental Industry Constituents (2018 Revenues in $M) $7,000 • 80% Consumables; 20% Equipment/Technology/Other* $6,349
$6,000 • Industry Growth: +LSD - MSD over the past three years; ~1-2x GDP $5,000
• Top 8 competitors represent ~50% of the products market $3,986 $4,000
$2,845 $3,000 $2,274 $1,966 $2,000 $1,353 $1,344
$1,000 $411
$0 Henry Dentsply Envista Patterson Align 3M* Straumann Zimmer Schein Sirona Companies Technology Biomet
Global Dental Products Market (~$23B) Global Dental Manufacturer Market N.A. Dental Distribution Market
Endodontics, Dentsply Orthodontics, 5% Sirona, 17% 6% Preventive , 22% Envista, 12%
Prosthetics, HSIC 13% 35%-40% 3M, 4% Other ~40%
Align, 6%
Implants, 15% Straumann, 5% Restorative, 22% Smaller Planmeca, 4% Manufacturers, 47% Ivoclar Vivadent, 3% Large Carestream, Equipment, 2% PDCO 17% ~23%
45 Source: Company data, Credit Suisse, XRAY Investor Presentation; 3M’s Oral Care Segment; Zimmer Biomet’s Dental Segment Dental Industry Overview
Factors Impacting the Dental Industry Favorable Demographics – Aging Population • Favorable Demographics 25% 21.0% 20.9% 20.3% 20% • Emphasis on Preventative Care and Disease 16.8% 15% Control 12.6% 12.4% 13.0% 11.3%
9.9% 9.2% 10% 8.1% Exposure to Consumer Spending Patterns 6.8% • 5.4% 4.7% 4.1% 4.3% 4.5% 5% 3.7% 2.5% 1.8% 2.0% 1.0% 1.2% 1.5% • Limited Reimbursement Risk 0.2% 0.1% 0.2% 0.2% 0.3% 0.4% 0.5% 0.7% 0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020E 2030E 2040E 2050E 65 and over 85 and over
Disease/Condition Links to Oral Health
Endocarditis is an infection on the inner lining of heart chamber of valves (endocardium), typically Endocarditis occuring when bacteria or other germs from another part of the body spread through the bloodstream and attach to certain areas of the heart Active Dentists per 1,000 People in the US
Some research suggests that heart disease, clogged arterires, and stroke may be linked to Cardiovascular Disease inflammation and infections that oral bacteria can cause 68
Pregnancy and Birth Complications Periodontitis has been linked to premature birth and low birth weight 66 64 Certain bacteria pulled into the mouth may be subsequently pulled into the lungs, causing Pneumonia pneumonia and other respiratory diseases 62 60 Gum disease appears to be more frequent and severe among people who have diabetes. Diabetes Research shows people who have gum disease have a harder time controlling their blood sugar 58 levels 56 HIV/AIDS Oral problems are common in people who have HIV/AIDS 54
Osteoporosis, which causes bones to become weak and brittle, might be linked with periodontal 52 Osteoporosis bone loss and tooth loss 50 2002 2005 2007 2010 2012 2015 2017 2020 2022 2025 2027 2030 2032 2035 2037 Alzheimer's Disease Tooth loss before age 35 might be a risk factor for Alzheimer's disease Supply of Dentists Other conditions that might be linked to oral health include eating disorders, rheumatoid arthritis, Other Conditions certain cancers, and an immune system disorder tha tcauses dry mouth (Sjogren's Syndrome) Unadjusted Adjusted for hours worked Adjusted for patient visits
46 Source: US Census Bureau, Mayo Clinic, American Dental Association, Credit Suisse Dental Industry Overview
While still subdued, Dental utilization trends have experienced pockets of stabilization • Consumables utilization trends in 2Q were somewhat lackluster following a strengthening trend in 1Q. We look for further evidence that consumables are recovering • Consumables trends diverging from historically stronger correlation to global macro indicators • Why? ACA, Millennials, Specialty spend share shift Dental Quarterly Revenue Growth Trends 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Consumables +LSD -- Negative Negative -MSD -L-MSD -LDD + Slightly -MSD +LSD +LSD -LSD Envista Equipment +MSD -- Positive +LSD +LSD -MSD -HSD + Slightly -MSD ~Flat +LSD/+MSD -LSD Consumables -2.5% -2.8% -4.3% -3.6% -4.4% -7.4% -6.7% -5.2% -2.2% -1.9% -0.9% -0.4% Patterson Equipment 4.2% -1.0% -16.9% -15.1% -17.7% -10.6% -20.2% 5.4% -0.9% 5.6% 13.1% -6.6% Consumables 1.8% 1.9% 2.5% 0.8% 1.3% 1.9% 2.7% 4.7% 4.3% 2.5% 2.5% 1.3% HSIC N.A. Equipment 13.3% 2.7% -5.5% 14.8% -0.7% 18.1% 4.4% 6.2% 5.9% -4.3% 3.3% -2.9% Consumables 2.7% 2.5% 8.0% 1.4% 3.4% -2.6% 2.4% 3.0% 3.5% 3.4% 5.5% 2.3% HSIC Int'l Equipment 4.2% -3.9% 3.1% 3.6% 2.6% 7.7% 3.1% 4.7% -4.2% 1.3% -1.2% -2.0% Consumables -0.3% 3.5% 2.4% 2.0% 4.3% 3.9% -1.3% 3.3% -3.0% 5.4% -0.6% -4.1% Dentsply Sirona Technologies 0.2% 0.0% -12.7% -10.0% -1.1% 5.9% -1.6% -1.1% -9.3% -4.2% 7.9% 9.3%
3M Oral Care 0.0% -1.0% 5.0% 0.0% 3.0% 3.0% 0.0% 3.0% 2.0% 4.0% +LSD +LSD Coltene Consumables 3.3% 1.8% 2.8% 4.2% 2.7% 2.0% University of Michigan Consumer Sentiment U.S. Unemployment Rate U.S. ISM Manufacturing PMI
120 10 65
110 9 60
100 8 55
90 7 50
80 6 45
70 5 40
60 4 35
50 3 30
1/1/2003 7/1/2016 7/1/2001 4/1/2002 7/1/2004 4/1/2005 1/1/2006 7/1/2007 4/1/2008 1/1/2009 7/1/2010 4/1/2011 1/1/2012 7/1/2013 4/1/2014 1/1/2015 4/1/2017 1/1/2018 7/1/2019
1/1/2003 1/1/2009 7/1/2001 4/1/2002 7/1/2004 4/1/2005 1/1/2006 7/1/2007 4/1/2008 7/1/2010 4/1/2011 1/1/2012 7/1/2013 4/1/2014 1/1/2015 7/1/2016 4/1/2017 1/1/2018 7/1/2019
4/1/2005 7/1/2010 7/1/2016 7/1/2001 4/1/2002 1/1/2003 7/1/2004 1/1/2006 7/1/2007 4/1/2008 1/1/2009 4/1/2011 1/1/2012 7/1/2013 4/1/2014 1/1/2015 4/1/2017 1/1/2018 7/1/2019
10/1/2009 10/1/2003 10/1/2006 10/1/2012 10/1/2015 10/1/2018
10/1/2003 10/1/2006 10/1/2009 10/1/2012 10/1/2015 10/1/2018
10/1/2003 10/1/2006 10/1/2009 10/1/2012 10/1/2015 10/1/2018
47 Source: Bloomberg, Factset, Company data, Credit Suisse Emerging Trend: Practice Consolidation Dental Service Organizations (DSOs) emerging – seeking profitable, scalable offerings
• With nearly 1 of 4 dental school graduates joining a DSO today1, and as older dentists prefer to practice dentistry over managing an office, DSOs are becoming a larger, more important aspect of the N. American dental market.
• DSOs support dental care demand by utilizing more sophisticated ways to attract patients and are largely more willing to invest in new technology and solutions to support practicing dentists and drive topline growth.
• That said, DSOs are still largely in the consolidation phase, a potential NT barrier to increased capital deployment for new technology, though some are further examining certain cost-saving / profit driving offerings (e.g. CAD/CAM).
• Recent private equity investors (e.g. KKR)
• GPOs essentially nonexistent
Percentage of Dentists in Solo Practices Percentage of Dentists in DSOs by Specialty 70% 8.7% 8.3% 8.5% 65% 7.9% 7.8% 7.4% 7.3% 6.6% 60%
5.3% 5.1% 55%
50%
50.6% 45%
40%
Percentage of Dentists in Solo Practice
48 Source: Company data, Health Policy Institute, American Dental Association, Credit Suisse Life Science Diagnostics & Tools Coverage Universe
Price Upside / 10/20/19 Market 52 Week Avg Daily Revenue (CY) Avg (5yr) EPS (CY) Avg (5yr) EV/Sales (CY) P/E (CY) EV/EBITDA (CY) Dividend Ticker Rating Target Downside Price Cap High Low Vol (000's) 2019 2020 Rev Gr. 2019 2020 EPS Gr. 2019 2020 2019 2020 2019 2020 Yield
Dental Dentsply Sirona XRAY Outperform $63 15% $54.90 $12,278 $59 $34 1,665 $3,955 $4,088 7% $2.39 $2.69 -2% 3.4x 3.3x 23.0x 20.4x 15.6x 14.1x 0.6% Envista NVST Neutral $30 4% $28.77 $4,564 $30 $26 1,463 $2,794 $2,836 - $1.67 $1.70 - 2.1x 2.1x 17.2x 16.9x 14.4x 14.2x - Align Technology ALGN Outperform $320 50% $213.88 $17,233 $335 $170 1,207 $2,394 $2,884 25% $5.21 $6.71 28% 6.9x 5.7x 41.1x 31.9x 26.5x 20.1x - SmileDirectClub SDC Outperform $18 90% $9.46 $3,689 $21 $9 9,502 $749 $1,199 - -$1.14 -$0.16 - 4.5x 2.8x - - - 58.9x - Patterson Companies PDCO Outperform $25 43% $17.45 $0 $27 $16 1,054 $5,627 $5,796 8% $1.36 $1.46 -7% 0.0x 0.0x 12.8x 11.9x 0.0x 0.0x 6.0% Henry Schein HSIC Neutral $66 5% $62.81 $9,374 $91 $57 1,050 $10,002 $10,382 7% $3.47 $3.78 11% 1.1x 1.0x 18.1x 16.6x 11.5x 11.0x - Average 12% 7% 2.8x 2.5x 23.8x 20.2x 13.4x 11.3x Animal Health Zoetis ZTS Outperform $138 8% $128.12 $61,449 $130 $79 1,984 $6,235 $6,651 5% $3.58 $3.98 18% 10.6x 9.9x 35.8x 32.2x 26.6x 24.4x 0.5% IDEXX Laboratories IDXX Outperform $293 4% $282.83 $25,016 $292 $176 364 $2,394 $2,626 10% $4.89 $5.56 20% 10.8x 9.9x 57.8x 50.8x 40.0x 36.3x - Elanco Animal Health (1) ELAN Restricted $26.23 $9,620 $35 $26 3,990 $3,096 $3,166 2% $1.07 $1.24 28% 3.7x 3.6x 24.4x 21.1x 15.8x 14.2x - Covetrus CVET Neutral $11 8% $10.14 $1,145 $50 $10 1,639 $0 $0 - $0.45 $0.61 - 22.5x 16.7x 3.9x 3.5x - Phibro Animal Health PAHC Neutral $25 19% $21.09 $855 $45 $20 232 $827 $862 5% $1.31 $1.57 29% 1.3x 1.3x 16.1x 13.4x 10.3x 10.1x 2.3% Petmed Express PETSUnderperform $13 -33% $19.44 $395 $33 $15 600 $286 $290 4% $0.94 $0.99 19% 1.1x 1.1x 20.8x 19.6x 13.0x 12.3x 5.6% Average 5% 23% 5.5x 5.2x 29.6x 25.6x 18.3x 16.8x Contract Research Organizations IQVIA Holdings IQV Outperform $170 18% $143.49 $28,549 $164 $105 1,500 $9,485 $10,217 7% $6.38 $7.29 15% 4.1x 3.8x 22.5x 19.7x 16.1x 14.7x - ICON PLC ICLR Outperform $160 13% $141.99 $7,636 $165 $118 234 $2,817 $3,025 7% $6.87 $7.61 29% 2.7x 2.5x 20.7x 18.7x 15.4x 14.2x - PRA Health Sciences PRAH Outperform $118 20% $98.49 $6,422 $122 $82 414 $3,065 $3,284 23% $5.05 $5.64 52% 2.4x 2.3x 19.5x 17.4x 14.0x 12.6x - Syneos Health SYNH Outperform $58 5% $55.03 $5,785 $56 $36 390 $4,683 $4,907 59% $3.14 $3.54 62% 1.7x 1.6x 17.5x 15.5x 12.5x 11.4x - Medpace MEDP Outperform $77 0% $77.26 $2,898 $87 $46 364 $860 $943 26% $2.91 $3.24 11% 3.3x 3.1x 26.5x 23.8x 19.2x 17.4x - Charles River Laboratories CRL Neutral $138 3% $134.28 $6,539 $149 $103 354 $2,642 $2,901 14% $6.51 $7.28 16% 3.2x 2.9x 20.6x 18.4x 14.0x 12.7x - Average 19% 26% 2.7x 2.5x 21.2x 18.9x 15.2x 13.8x
Life Sciences & Diagnostics Danaher DHR Outperform $151 9% $138.01 $101,731 $147 $95 2,205 $20,524 $24,734 10% $4.76 $5.55 14% 5.2x 4.3x 29.0x 24.9x 21.4x 19.2x 0.5% Avantor AVTR Outperform $20 40% $14.33 $9,236 $20 $13 3,264 $6,113 $6,430 - $0.55 $0.75 - 2.3x 2.2x 25.9x 19.0x 13.7x 12.0x - LabCorp of America LH Outperform $182 9% $167.46 $16,371 $178 $119 542 $11,491 $11,962 15% $11.26 $12.23 10% 2.0x 1.9x 14.9x 13.7x 11.2x 10.8x - Quest Diagnostics DGX Neutral $105 2% $102.66 $13,779 $108 $79 881 $7,733 $7,908 1% $6.54 $6.84 8% 2.3x 2.3x 15.7x 15.0x 11.6x 11.5x 2.1% Fulgent Genetics FLGT Neutral $9 -26% $11.51 $217 $13 $3 93 $32 $48 189% $0.06 $0.28 - 5.6x 3.7x - 40.7x 74.9x 21.9x - Lantheus Holdings LNTH Neutral $25 33% $18.86 $760 $30 $13 480 $350 $406 4% $1.11 $0.93 - 2.6x 2.2x 17.0x 20.3x 8.7x 9.8x - Average 44% 11% 4.1x 2.9x 20.5x 22.3x 23.6x 14.2x
Pharmaceutical & Medical Supply Chain AmerisourceBergen ABC Outperform $98 9% $89.64 $18,766 $95 $69 1,255 $180,696 $190,167 13% $7.36 $7.79 15% 0.1x 0.1x 12.2x 11.5x 8.2x 7.8x 1.8% Cardinal Health CAH Outperform $53 3% $51.54 $0 $58 $41 2,716 $148,297 $153,651 8% $5.12 $5.20 3% 0.0x 0.0x 10.1x 9.9x 0.0x 0.0x 3.7% McKesson MCK Neutral $143 -6% $152.26 $0 $153 $106 1,746 $220,577 $228,010 6% $14.00 $15.01 12% 0.0x 0.0x 10.9x 10.1x 0.0x 0.0x 1.0% Owens & Minor OMIUnderperform $3 -57% $7.14 $428 $15 $2 1,925 $9,965 $10,130 2% $0.65 $0.71 -8% 0.2x 0.2x 10.9x 10.0x 6.9x 6.8x 0.1% Average 7% 6% 0.1x 0.1x 11.0x 10.4x 3.8x 3.7x Indices S&P 500 Index SP50 2,986 3,028 2,347 $198.43
49 Source: Factset, Credit Suisse Valuation – Manufacturers
XRAY – FY+2 EV/EBITDA ALGN – 2019 EV/EBITDA
18x 50x
17x XRAY: 11.0x 45x
16x 40x ALGN: 23.9x
15x 35x
14x 30x
13x 25x
12x 20x
11x 15x
10x 10x
Jul-15 Jul-17 Jul-18 Jul-15 Jul-17 Jul-18 Jul-16 Jul-19 Jul-16 Jul-19
Apr-15 Oct-16 Oct-17 Apr-18 Apr-19 Oct-19 Apr-15 Oct-16 Oct-17 Apr-18 Apr-19 Oct-19 Oct-14 Oct-15 Apr-16 Apr-17 Oct-18 Oct-14 Oct-15 Apr-16 Apr-17 Oct-18
Jan-15 Jan-16 Jan-19 Jan-15 Jan-16 Jan-19 Jan-17 Jan-18 Jan-17 Jan-18
XRAY EV/EBITDA FY+2 XRAY Historical Average ALGN EV/EBITDA FY+2 ALGN EV/EBITDA Historical Average
50 Source: Company data, Factset, Credit Suisse Dental vs. S&P 500 Forward P/E
35x Current Dental Average: 21.9x Dental Historical Average: 19.7x 30x
25x
20x
15x
10x Current SPX: 16.8x SPX historical average: 14.7x 5x
0x
Apr-10 Oct-10 Oct-11 Apr-14 Apr-15 Oct-16 Oct-17 Oct-18 Oct-09 Apr-11 Apr-12 Oct-12 Apr-13 Oct-13 Oct-14 Oct-15 Apr-16 Apr-17 Apr-18 Apr-19 Oct-19
Dental Index P/E FY+2 SPX P/E FY+2 SPX Avg. Dental Index Avg.
2014 2015 2016 2017 2018 2019 YTD (as of 10/20/19) Managed Care 42.6% Contract Services 42.0% Animal Health 24.6% Managed Care 47.5% Medical Devices 17.3% Contract Services 33.4% Biotechnology 38.8% Managed Care 19.8% Clinical Laboratories 16.5% Life Science Tools 40.5% Healthcare Technology 18.3% Clinical Laboratories 27.9% Specialty Pharma 37.3% Diagnostics 18.9% Managed Care 12.1% Diagnostics 37.9% Diagnostics 15.4% Drug Distributors 24.6% Hospitals 36.9% Dental* 14.3% Medical Devices 11.1% Animal Health 35.5% Managed Care 9.3% Life Science Tools 21.6% Drug Retailers & PBMs 29.1% Animal Health 11.4% Contract Services 10.0% Healthcare Technology 34.4% Large Cap Pharma 8.6% Medical Devices 20.4% Medical Devices 28.1% Clinical Laboratories 10.3% S&P 500 Index 9.5% Contract Services 28.7% Animal Health 2.6% S&P 500 Index 19.1% Drug Distributors 25.9% Life Science Tools 8.9% Healthcare Technology 4.6% Medical Devices 22.5% Contract Services 2.5% Dental* 19.1% Dental* 23.9% Drug Retailers & PBMs 7.9% Dental* 3.0% Biotechnology 22.3% Life Science Tools 2.3% Specialty Pharma 12.5% Diagnostics 23.2% Medical Devices 7.7% Life Science Tools 2.5% S&P 500 Index 19.4% Hospitals -6.0% Animal Health 12.4% Contract Services 22.1% Biotechnology 7.6% Large Cap Pharma -1.4% Dental* 16.9% S&P 500 Index -6.2% Diagnostics 11.8% Clinical Laboratories 21.7% Drug Distributors 6.9% Diagnostics -8.3% Clinical Laboratories 15.7% Biotechnology -8.6% Hospitals 10.5% Animal Health 19.7% Specialty Pharma 3.8% Drug Retailers & PBMs -9.6% Large Cap Pharma 10.9% Specialty Pharma -14.7% Biotechnology 4.9% Large Cap Pharma 14.0% Large Cap Pharma 2.2% Biotechnology -21.9% Drug Distributors 4.5% Clinical Laboratories -18.1% Healthcare Technology 3.9% Life Science Tools 12.0% Healthcare Technology 1.5% Drug Distributors -24.3% Hospitals -3.8% Drug Distributors -25.1% Large Cap Pharma 2.3% S&P 500 Index 11.4% S&P 500 Index -0.7% Hospitals -29.9% Specialty Pharma -12.8% Drug Retailers & PBMs -26.5% Managed Care -2.1% Healthcare Technology -6.6% Hospitals -17.9% Specialty Pharma -36.2% Drug Retailers & PBMs -22.0% Dental* -27.8% Drug Retailers & PBMs -18.4%
51 Source: Factset, Credit Suisse; Note: Index includes ALGN, XRAY, HSIC, PDCO, STMN, CLTN, DHR (through 9/17), SIRO Takeaways from Recent Healthcare Spins
Stock Relative Performance Following Spin-Off
Ticker 3 mnths 6 mnths 1 year 2 years 3 years 5 years To date ABBV 16% 19% 50% 89% 70% 186% 119% ZTS 28% 16% 17% 64% 65% 199% 393% CFN 32% 33% 13% 28% 34% 134% 195% MHS 51% 36% 31% 115% 167% 304% 518% HSP (12%) 14% 14% 34% 45% 13% 216% ZMH 11% 20% 33% 77% 145% 131% 383% ELAN 31% 37% 15% - - - - CVET (29%) (44%) - - - - - Average 16% 16% 25% 68% 88% 161% 304%
Three-Year Performance Post Spin
AbbVie (ABBV) – 12/10/2012 – 12/10/2015 Zoetis (ZTS) – 2/1/2013 – 1/29/2016 Care Fusion Corp (CFN) – 8/21/2009 – 8/20/2012
120% 120% 120% 100% 100% 100% 80% 80% 80% 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% 0% 0% -20%
-20%
Feb-10 Aug-11 Aug-10 Feb-11 Feb-12 Aug-12
-20% -40% Aug-09
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15
Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16
ABBV.K SPX Relative performance ZTS SPX Relative performance CFN SPX Relative performance
MedCo (MHS)– 8/20/2003– 8/18/2006 Hospira (HSP)– 4/20/2004 – 4/19/2007 Zimmer Holdings (ZBH)– 7/25/2001 – 7/23/2004
150% 150% 220.0% 130% 130% 110% 110% 170.0% 90% 90% 120.0% 70% 70% 50% 50% 70.0% 30% 30% 10% 10% 20.0% -10% -10% -30.0% -30% -30%
-50%
Oct-05 Oct-04 Apr-05 Apr-06 Oct-06 Apr-07
-50% Apr-04
Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06
Aug-03 -80.0%
Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
MHS SPX Relative performance HSP SPX Relative performance ZBH SPX Relative performance
52 Source: Factset, Credit Suisse Relevant Catalysts
• Earnings reports
• Product launches
• Industry conferences
• Greater New York Dental Meeting in New York, New York (November 29-December 4)
53 Source: Company data, Credit Suisse Companies Mentioned (Price as of 18-Oct-2019) 3M (MMM.N, $163.1) Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. Align Technology, Inc. (ALGN.OQ, $213.88) *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Amazon com Inc. (AMZN.OQ, $1757.51) American Express Co. (AXP.N, $116.76) AmerisourceBergen (ABC.N, $89.64) Credit Suisse's distribution of stock ratings (and banking clients) is: Apple Inc (AAPL.OQ, $236.41) Avantor (AVTR.N, $14.33) CVS Health (CVS.N, $66.16) Global Ratings Distribution Cardinal Health (CAH.N, $51.54) Charles River Laboratories International Inc. (CRL.N, $134.28) Rating Versus universe (%) Of which banking clients (%) Coltene (CLTN.S, SFr77.1) Outperform/Buy* 47% (32% banking clients) Covetrus (CVET.OQ, $10.14) DENTSPLY-SIRONA (XRAY.OQ, $54.9) Neutral/Hold* 38% (26% banking clients) Danaher Corporation (DHR.N, $138.01) Underperform/Sell* 13% (23% banking clients) Elanco Animal Health (ELAN.N, $26.23) Restricted 2% Envista Holdings Corp (NVST.N, $28.77) *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond Fulgent Genetics, Inc. (FLGT.O, $11.51) 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.) Henry Schein (HSIC.OQ, $62.81) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. ICON PLC (ICLR.OQ, $141.99) IDEXX Laboratories (IDXX.OQ, $282.83) IQVIA Holdings, Inc. (IQV.N, $143.49) Important Global Disclosures LabCorp of America (LH.N, $167.46) Lantheus Holdings, Inc. (LNTH.OQ, $18.86) Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products McKesson (MCK.N, $152.26) may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made Medpace Holdings, Inc. (MEDP.OQ, $77.26) available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the Microsoft (MSFT.OQ, $137.41) Netflix Inc. (NFLX.OQ, $275.3) frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Nike Inc. (NKE.N, $96.1) 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, Owens & Minor (OMI.N, $7.14) PRA Health Sciences, Inc. (PRAH.OQ, $98.49) please contact your sales representative or go to https://plus.credit-suisse.com . Patterson Companies (PDCO.OQ, $17.45) 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 PetMed Express (PETS.OQ, $19.44) Phibro Animal Health (PAHC.OQ, $21.09) that may have a material impact on the research views or opinions stated herein. Quest Diagnostics (DGX.N, $102.66) SmileDirectClub (SDC.OQ, $9.46) 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 Straumann (STMN.S, SFr852.0) Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers- Syneos Health (SYNH.OQ, $55.03) ib/en/managing-conflicts.html . Target Corporation (TGT.N, $112.81) Tractor Supply Company (TSCO.OQ, $93.32) 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 Walgreens Boots Alliance (WBA.OQ, $55.3) provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Zimmer Biomet Holdings, Inc (ZBH.N, $137.61) Zoetis (ZTS.N, $128.12) 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 . Disclosure Appendix The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total Analyst Certification revenues, a portion of which are generated by Credit Suisse's investment banking activities 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 See the Companies Mentioned section for full company names 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 Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): ALGN.OQ, PRAH.OQ, LNTH.OQ, ZBH.N, report. AVTR.N, ELAN.N, CVS.N, ABC.N, AMZN.OQ, AXP.N, CAH.N, DHR.N, LH.N, MMM.N, MSFT.OQ, NVST.N, SDC.OQ, SYNH.OQ As of December 10, 2012 Analysts’ stock rating are defined as follows: Credit Suisse provided investment banking services to the subject company (ALGN.OQ, PRAH.OQ, LNTH.OQ, ZBH.N, AVTR.N, ELAN.N, CVS.N, ABC.N, AMZN.OQ, AXP.N, CAH.N, DHR.N, LH.N, MMM.N, MSFT.OQ, NVST.N, SDC.OQ, SYNH.OQ) within the past 12 months. Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. PRAH.OQ, ZBH.N, ELAN.N, CVS.N, MEDP.OQ, AAPL.OQ, ABC.N, AMZN.OQ, DHR.N, LH.N, MMM.N, MSFT.OQ, PAHC.OQ, SYNH.OQ Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (AVTR.N, CVS.N, AXP.N, DHR.N, MMM.N, NVST.N, *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 SDC.OQ) within the past 12 months. 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 European ra tings are based on a stock’s total return Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): ALGN.OQ, ZBH.N, 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 AVTR.N, CVS.N, ABC.N, AMZN.OQ, AXP.N, DHR.N, LH.N, MMM.N, MSFT.OQ, NVST.N, SDC.OQ, SYNH.OQ attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia stocks (excluding Japan and Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (PRAH.OQ, LNTH.OQ, ZBH.N, Australia), ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); STMN.S, ELAN.N, CVS.N, MEDP.OQ, AAPL.OQ, ABC.N, AMZN.OQ, AXP.N, CAH.N, DHR.N, HSIC.OQ, LH.N, MMM.N, MSFT.OQ, NVST.N, prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) PAHC.OQ, SYNH.OQ, WBA.OQ) within the next 3 months. 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 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- 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 banking, securities-related: PRAH.OQ, ELAN.N, CVS.N, MEDP.OQ, AAPL.OQ, ABC.N, AMZN.OQ, DHR.N, MSFT.OQ, PAHC.OQ, SYNH.OQ 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. 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- Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, banking, non securities-related: ZBH.N, ELAN.N, AMZN.OQ, LH.N, MMM.N including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other 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, circumstances. ALGN.OQ, AMZN.OQ, AXP.N, ABC.N, AAPL.OQ, AVTR.N, CVS.N, CAH.N, CRL.N, CLTN.S, CVET.OQ, XRAY.OQ, DHR.N, ELAN.N, NVST.N, 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 FLGT.O, HSIC.OQ, ICLR.OQ, IDXX.OQ, IQV.N, LH.N, LNTH.OQ, MCK.N, MEDP.OQ, MSFT.OQ, NFLX.OQ, NKE.N, OMI.N, PRAH.OQ, PDCO.OQ, at this time. PETS.OQ, PAHC.OQ, DGX.N, SDC.OQ, STMN.S, SYNH.OQ, TGT.N, TSCO.OQ, WBA.OQ, ZBH.N, ZTS.N Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view 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 on the equity security of the company or related products. 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (ALGN.OQ, PRAH.OQ, LNTH.OQ, ZBH.N, AVTR.N, ELAN.N, CVS.N, ABC.N, AMZN.OQ, AXP.N, CAH.N, DHR.N, LH.N, MMM.N, MSFT.OQ, NVST.N, PAHC.OQ, SDC.OQ, SYNH.OQ) within the past 12 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. months or the analyst expects significant volatility going forward. 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). Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of Credit Suisse acted as Financial Advisor to Bayer (BAYGN.DE) in the sale of its Animal Health business to Elanco (ELAN.N) the sector* relative to the group’s historic fundamentals and/or valuation: Credit Suisse acted as financial advisor to 3M Co in their acquisition of Acelity, Inc. 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. This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. 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