ALGNing the Moat

Investment Analysis Clubs Saul’s Investing Discussions
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My apologies for a repeat on the subject; I wanted to address these questions separately.

ALGN is currently one of my favorite investments. Although founded in 1997, unfortunately their products didn’t begin to become mainstream until 2016 and really took off early in 2017. At the age of 20, the company is not a rookie startup by any means. What does that mean for the investment now? (Hint: Maybe Everything.)

Align Technology, Inc. | (ALGN) | NASDAQ
https://seekingalpha.com/symbol/ALGN/chart . . . . . . Note: For a truer worldview, click the time frame “ALL”.

Questions
• Does ALGN even have a moat?
• What’s it made of?
• Will they protect it?
• What’s the life-span of the moat?

Short Answers
• Oh yeah.
• It’s made of numerous logistical and physical-property patents.
• Darn Skippy. They have and they will.
• Uh-oh Warranty runs out about now! <------------------------- <------------------------- <-------------------------

Reading only the headlines leaves little room for little doubt.
• ALGN is very aware of the importance and landscape with their patent situation.
• ALGN is defending their patents with all guns manned, taking no prisoners.
• ALGN may soon begin having serious issues with expiring patents. (See last paragraph here, or for more info, read the last-referenced article.)

So let’s be watching those patents!

Good luck all,

Dan

https://seekingalpha.com/news/3312134-align-technology-goes-…

Align Technology goes after 3Shape with six patent infringement lawsuits

https://seekingalpha.com/news/3312134-align-technology-goes-…

Align Technology goes after 3Shape with six patent infringement lawsuits

http://investor.aligntech.com/releasedetail.cfm?ReleaseID=10…

ALIGN TECHNOLOGY FILES SIX PATENT INFRINGEMENT LAWSUITS ASSERTING 26 PATENTS AGAINST 3SHAPE

http://markets.businessinsider.com/news/stocks/Align-Technol…

Align Technology Files Six Patent Infringement Lawsuits Asserting 26 Patents Against 3Shape

https://www.forbes.com/sites/michelatindera/2017/04/25/out-o…

Out Of Silicon Valley, A Billion-Dollar Orthodontics Business Built With Plastic And Patents
Starting in October, about 40 of Align’s early patents will expire, including several that protect the process that Align uses to digitally plan and manufacture clear aligner sets for patients. It’s the first group in what is expected to be an average of 23 expirations a year through at least 2028, according to estimates by Robert W. Baird analysts. As these patents enter the public domain, the company will likely have to deal with more competition.

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Oops, the second-referenced article somehow became a repeat of the first.

If you need more information, just Google “ALGN + lawsuits”. There are plenty of articles to satisfy your curiosity. :slight_smile:

Dan

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If Align Technology’s only moat are patents then it’s not worth investing in.

Denny Schlesinger

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If Align Technology’s only moat are patents then it’s not worth investing in.

Inferring that your require a moat for any investment. You own ALGN, meaning you see a moat that I’ve missed. I would appreciate it if you would share your thinking on another moat, Denny.

I think ALGN’s a great investment right now. But it’s not one of those companies I would buy and hold without regular follow-up however, for one reason: One of the things I like most about the business is the simplicity, and on the downside of the same trait, is the fact that there is IMO a very low barrier to entry.

20 years ago, you could only get teeth bleach trays from a dentist. In fact no one was allowed to sell dental bleach anywhere outside of wholesalers to dentists. Nope, not found at Walmart, Walgreens or anywhere else. (Must have quite the lobbyists.) But anyone in the market for bleach trays could see the similarity to sports mouth guards which you could buy in any sporting store and form yourself. Eventually they became available in drugstores, then online through a process very similar to the dentists’, the mouthguards, or to ALGN’s orthodontic appliances and for a fraction of the price from your dentist.

Now I don’t think we’ll be doing our own orthodontia due to the medical training required, changing the shape of your teeth and even your mouth. But the current orthodontists’ methods seem draconian by comparison to ALGN’s and are nearly invisible to boot. Good on you, ALGN.

But from the very beginning I didn’t see any reason why the same thing wouldn’t happen again with ALGN’s products but I could be wrong. Even when/if it does, it sure is paying well to be invested for the time being. If it becomes a commodity, we still might look back and be glad we were invested before that happened. I certainly should have checked the patent expiration dates earlier, I’ve been taking too many shortcuts lately, thinking I’m too busy.

I got braces (don’t know why, my teeth were fine) when I was 49. She warned me there would be pain. “I’m tough, no prob” I say. Well, as you probably know, the hardest human bone is the male jaw bone, and in particular the older male jaw bone. So I endured 30 months of truly painful treatment with complications including a s.s. wire through my cheek (on a weekend, orthodontists don’t have emergency hours ever) and a device snapped giving me a marble sized hole through my thick tongue (on a weekend again, see above.) I paced my garage floor for 3 days after getting them installed. It got better from then on - except for the complications - but only to the point where I could talk, eat and otherwise function but always in pain.

So I know as well as anyone the value of ALGN’s product and procedures, and all that before considering the aesthetics of railroad tracks across your smile. But I will be thrilled if it lasts more than another year, two at the most, before they have half a dozen competitors. I doubt it would take more than $150k and a fair-sized credit line plus 45 days prep to become a direct competitor. I hope I am wrong; guess I’ll know when I learn their real moat from you. :slight_smile:

Dan

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Inferring that your require a moat for any investment. You own ALGN, meaning you see a moat that I’ve missed. I would appreciate it if you would share your thinking on another moat, Denny.

Thanks for asking. No offense but I don’t think you understand the business in sufficient depth. Comparing Invisalign trays with bleaching trays is superficial (pun not intended).

The kind of moat I envision is not the physical kind such as the ones that surrounded castles or patents but the result of market forces best described by the Science of Complexity, stuff too new for Ben Graham to have included in his Security Analysis bible. When I was working at IBM the conventional wisdom was that you could not lose your job by hiring IBM. It worked for me at IBM and against me later at NCR. The network effect.

Orthodontia seems to be a two level procedure, at present about 20% can be done “at home” while the rest needs the active participation of an orthodontist. The ratio may (will) shift as the direct to consumer product improves. At this time trays are disrupting wire braces and middle classes that can afford orthodontic treatment are growing. In other words there are huge markets to conquer and moats are not yet of great importance. The race is on to conquer as much territory as possible before the market stabilizes. Consumer direct does not truly compete with the orthodontist required segment, they are parallel markets. The moat has to exist in the orthodontist required segment. Here the network effect is created not by the buying public (as in consumer direct) but by orthodontists. Here path dependence (first to market) is of great importance. That is the moat I’m counting on.

Invisalign is not a simple business, it requires market penetration at both consumer and orthodontist levels, it requires digital impressions of the teeth and mouth, it requires mass production of custom designed trays. Latecomers to the business have a huge task ahead of them to catch up with Align Technology.

Lastly, Align Technology has it’s foot in the consumer direct segment via Smile Direct Club.

No high tech investment is buy and forget, technology evolves too rapidly for that. But to write off Align Technology for lack of moat is waaay too early in the technology adoption life cycle (TALC). I do not see any real competitor for them at this time considering “consumer direct” and “orthodontist required” to be parallel markets.

I hope that answers your question.

Denny Schlesinger

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I am a recently retired orthodontist (tooth straightener).

I have treated thousands of orthodontic cases over the past 30 years. In my experience, the cases that can be successfully treated with Align Technology must be fairly limited in scope. For example, an orthodontic case requiring extractions can rarely be completely and successfully treated with Align Technology. However, AT is best when employed in limited treatment cases that involve much less tooth movement…such as limited straightening of front teeth in adults who are much more compliant and motivated than young teens. Patient compliance is an absolute must since the Aligners are removable. Conventional brackets and bands, on the other hand, are “fixed” and require less compliance of the patient for successful treatment.

There is certainly a place for Align Technology in today’s modern orthodontic office, but it will never replace conventional ortho treatment for the great majority of straightening procedures. That does not mean AT will not prove to be a great investment. I’m only presenting the simple fact of the limited use of such a procedure in most cases.

Jim

PS Happy Thanksgiving to Saul and all those who contribute and make this board a delight to read each day.

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Dan,
Nice write ups. I like the information hear and on the AlGN board. I am long ALGN too.

Denny,
There is a LOT of confusion over patents. I’d agree that design patents (e.g. the shape of a Coke bottle) tend to be no big deal.

On the other hand, MANY other patents ARE a big deal. I have filed for 2-3 patents a year around chemistry and processes for 25 years. For example, P&G attacked Clorox’s hard surface cleaner business with some bleach products of their own. I filed for a patent that created fragrance, highly thickened, rinsable bleach gels to defend and expand Clorox’s businesses. That patent has protected Clorox’s business for 17 years for the toilet bowl cleaners and hard surface cleaners. As a result, P&G threw in the towel for those businesses, no one else challenged either, and those products are still strong in the market today. Go to Walmart and you can buy Clorox Toilet Bowl Cleaner, Clorox Stain Removing Pen (a different technology I worked on), Clorox CleanUp Gel, etc. Those businesses are long lasting and protected by my initial patents.

Over and over, I have heard people say you can always get past a patent. If that were true, no one would bother filing patents. There were around 600,000 patents filed in the US last year. Apparently, many companies disagree.

A good part of my job is challenging other’s technical position. Sometimes I can. Sometimes I can’t.

Best,

bulwnkl

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I APPARENTLY need more coffee. I apologies for the “hear” and “here” grammatical error (rolling my eyes).

bulwnkl

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My father was an Industrial Designer. He held several design patents. There was virtually no protective value in any of them. A slight variation in design could easily get around the patent. Besides, my father ran his own small business, he didn’t have the resources to take anyone to court for patent infringement.

For my dad the value of the patents was in his ability to capitalize on holding design patents. Holding patents was a marketing point for his business. The value of the patents was that he held patents.

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There is certainly a place for Align Technology in today’s modern orthodontic office, but it will never replace conventional ortho treatment for the great majority of straightening procedures. That does not mean AT will not prove to be a great investment. I’m only presenting the simple fact of the limited use of such a procedure in most cases.

Jim

I’m very glad you posted this. I was going to add to my previous post and your’s puts it in context.

I watched a video by a Texas orthodontist who uses Align Technology. She made it very clear that using the Invisalign aligners was the last part of any successful procedure. She said that without proper preparation the use of the aligners would not be successful.

This is the divide line between consumer direct to treat simple cases and the orthodontist required segment. Invisalign aligners do not replace the orthodontist, they are one more tool in the orthodontist’s arsenal. This is part of the moat to defend against the assault by consumer direct.

Denny Schlesinger

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On the other hand, MANY other patents ARE a big deal.

bulwnkl

I never said that patents are no big deal, I said:

“If Align Technology’s only moat are patents then it’s not worth investing in.”

That is an opinion about the business model, not about the patents per se.

Denny Schlesinger

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I am certainly not knocking your experience or knowledge but I can remember the exact same thing being said by eminent urologists about the daVinci.
The daVinci got better, that is what customers (AKA patents) wanted, that is what they got

This resistance was one of the major reasons I loaded up on on ISRG.

I see orthodontics going from something used by the few, the mostly well off in developed countries changing into something for many more people spread throughout the world. Align does not need the whole market. only a profitable slice of the market. Like Apple does not need the whole mobile phone market, iPhone is enough. I assume severity of n is aligned tooth problems are on a bell shaped curve. There is lots of money to be made moving back to the middle part of the curve, that’s where the people are.

Enjoy your retirement.
But you will probably start to miss the idea of being able to make somebody’s life better every day. Not any people can do that in their jobs.

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Jim
Thanks for your reply. I am the son of a dentist and spent what seemed like most of my childhood and adolescence with some sort of heavy metal in my mouth. Let’s just say that although I have never had a cavity (I am 47), from an alignment perspective, my mouth was a disaster. After all of that suffering, my father decided he was unhappy with the outcome and wanted me to get retreated. We can forget that.

I bring all of this up bc based on my case, I argued on this board (or NPI) that the notion of “at home, do it through the mail” orthodontics was ridiculous for the majority of cases. That only those who almost didn’t need orthodontics would be candidates. I then tried to break the market into four segments- those who didn’t really need orthodontics or barely needed orthodontics, adults who probably needed it, never had it done and were now only willing to do something that was of only minor to moderate inconvenience, teenagers or younger who need it, special cases like I was.

I then tried to argue that a home direct could only be effective in segment one and that Align had historically operated in segment 2 and was now moving into segment 3.

To me, it sounds like you are arguing that Align is basically stuck in segment two with maybe only minimal ability to penetrate easier cases in segment 3

From what you know of Invisalign, how much has the product improved over the years? The company argues that they are now able to play in segment 3. Have you seen evolution of the product sufficient to make you think that they can eventually become successful in segment 3? If not, their tam seems much smaller than I would have hoped.

Thanks

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Bulwnkl,

Excellent job on Clorox. I’ve tried the Lysol product for toilets and it is not even close to what Clorox does.

With Clorox you don’t even need a toilet brush. There is nothing as like it. Especially for a Batchelor who enjoys clean toilets.

Tinker

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I agreed with you about design patents, and mentioned Coke’s bottle as example. However, ALGN’s patents are not design patents, but utility patents. Chemistry, process, and equipment designs fall into the utility classification. Utility patents are exponentially more important and can be difficult to impossible to get around. It’s literally nothing to get around a patent of a new design of flowers on the outside of a tissue box. Design patents are usually important to protect branding, but are not relevant in this case. ALGNs patents are being used to protect their business.

Best,

bulwnkl

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Tinker,
Thanks. I spent a year developing that. Did a lot of consumer testing evaluating toilets purposely left dirty. I often wondered how proud my parents would be if they could see the crap (LOL) I went through to produce that product.

Best,

bulwnkl

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My daughter-in-law is a relatively new orthodontist and had similar comments as Jim regarding usage and capability. She used them on herself as a resident. She now has two or three patients per month using Align Technology.

Awareness of Invisalign Aligners is very high with about 80% of new patients asking about them.

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Treepak,

In my experience, I’ve not seen much product improvement over the years. The product is basically clear plastic that must be worn 24/7 for a month followed by another “aligner” and followed by another for each month for a period of one to two years. Each new aligner slowly moves the teeth into a straighter position.

The downside is that patient compliance must be 100% of the time and each new “aligner” is expensive.

Another dirty little secret: Teeth are always moving throughout a lifetime. Retention in these limited treatment cases becomes a lifetime commitment to wearing an appliance nightly for years…or at least until the patient no longer cares if teeth inevitably begin to relapse back to their original position.

No, Trepan, Invisalign will never become predictably long term successful in “segment 3” situations in my opinion.

And yes, “at home, do it yourself through the mail” orthodontics is ridiculous.

Jim

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<<<The downside is that patient compliance must be 100% of the time and each new “aligner” is expensive.>>>

I already use a mouthguard at night, so I thought it would not be much different, but there was no way I was going to wear it 24/7.

Second, the product, and each new aligner is all bought upfront. You pay your $5k or more, I think mine was $6,500 (that I never even used) and getting a refund is considered impossible because Align prints all the molds at one time, for each month, and then ships them. I was in a good position to challenge this policy, but nevertheless, it is a fabulous business model for those less orally sensitive.

The part that threw me was that the orthodontist needs to put binders in your mouth after the first month or two to make it work, and then there was a life time of retainers necessary to maintain the work done by the aligners. I was like FLOORED! When I learned of this little tidbit that no one ever tells you about until AFTER you pay.

But most people are less orally sensitive than I (might be where my son gets it), and even if they are not, not in as good of a position to connive a refund.

I never used a retainer, even though I had braces as a child. And it took 20 years or so for my teeth to become less than perfect (they are not bad, but not Hollywood and I am a quasi-public figure sometimes, so I thought I’d go for it, and then I figured my “public” could find someone else who was perfect to gleam at).

So my experience with the company was not superb. My experience with the orthodontist was not superb. He even gave me his daughter’s resume after our first meeting (yeah like that is what I want to get from my orthodontist).

But it seems that most patients are more than willing to follow through, spend the money, and put up with it. That being the case, the cash flow business model is superb for both company and orthodontist.

Tinker

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No offense but I don’t think you understand the business in sufficient depth. Comparing Invisalign trays with bleaching trays is superficial (pun not intended).

No offense but I don’t think you understood my argument. I didn’t mean that bleach trays were in any way comparable to orthodontic appliances of any kind. (But surely even you can admit that there is a visual similarity and application target.)

My point, Denny, is how much the industry practice changed so drastically with bleach trays. When they first came out, you couldn’t get them any other way than through your dentist. Bleach? Ditto. Now you can buy everything you need in a drug store and start the process the same day at a 80-90% discount to the original price.

I doubt do-it-yourself orthodontia is ever going to be a market. :slight_smile: On the other hand, if ALGN’s profits continue to soar like in the last couple of years, it’s not hard to imagine that others are going to come in and compete, or at least try to. Will it happen? I think others are already trying, or ALGN surely wouldn’t be out filing lawsuits for the fun of it. And to intimate you can’t imagine that scenario is rather disingenuous.

The world is full of waning companies with formerly “impenetrable” moats. You mentioned IBM in another context and I think they happen to qualify as having one of the (former) biggest and best moat. Now ALGN is spending a lot of effort and resource on patent protection. Personally I’m glad they are because I think it’s very necessary. If you disagree, then you surely must wonder what they’re doing.

If/when someone comes in and drops the price by 20% compared to ALGN, the war has begun and no moat will stop it. My opinion remains; it’s a beautiful business model, well executed. But it will not last forever and possibly not even very long at all. Meanwhile we can both profit from owning it while arguing about … something, whatever you want. :slight_smile:

Dan

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