1. CFA Institute Research Challenge
Pacific CFA Challenge – San Francisco
Santa Clara University
TEAM MEMBERS
Amarnath Pallampati (apallampati@scu.edu)
Giordani Rivas (grivas@scu.edu)
Jaden Zhao (jadenz.scu@gmail.com)
Monalisa Chati (mchati@scu.edu)
Spencer Hsu (shsu2@scu.edu)

2. ALIGN TECHNOLOGY, INC. (ALGN-NASDAQ)
Sector: Healthcare Industry: Medical Equipment and Supplies
Current price as of 2/1/13: $31.90
Estimated value currently well below current market price.
Price Target: We are initiating coverage of Align Technologies with a SELL rating and a $23.70
December 2013 price target.
Considering ALGN relative to growth names in the market, the stock already presents an EV/EBITDA
premium valuation to the sub-sector at 17x and 21.3x 2012E/2013E (vs. the group at 10x and 9.8x).
(Reference: Appendix A) Recent macroeconomic headwinds across North America, Europe and China
aren’t likely to help valuations.
The Leavey School of Business MBAs do not seek to do business with companies covered in its research report.
Investors should not consider this report only as a single factor in making their investment decision.
BUSINESS DESCRIPTION
Align Technology, Inc. is a global company that develops technology-rich orthodontic products for
treatment of simple to complex malocclusion. Since the company’s inception in March 1997, Align has
traveled the path of true innovation and change. By introducing the Invisalign® system, a first-of-its-kind
product and a game-changing approach to treatment, Align created the market we now call invisible
orthodontics or clear aligners. Invisalign® has evolved its niche products into an increasingly mainstream
treatment option, using disruptive technology over the years. In 2011, Align acquired privately-held
Cadent Holdings Inc, a leading provider of 3D digital scanning solutions for orthodontics in the hopes of
more fully integrating Invisalign® with mainstream tools and procedures in doctors' practices.
MARKET SIZE & INDUSTRY OVERVIEW
Malocclusion of teeth is known to be one of the world's most prevalent clinical conditions. There are a
total of 10 million1 individuals that start orthodontic treatment each year worldwide, with about 26% case
starts having a mild to moderate malocclusion and are applicable for Invisalign® treatment. This implies
that there are 2.6 million eligible case starts a year for Align. 2
Align had about 363,000 case starts in the past year, which is about 14% of the worldwide addressable
orthodontist market1. Based on the 2011 Annual Report by Align, its adult penetration is 24%, while teen
is 4%. There is significant room for growth because teens represent 75% of all case starts for orthodontic
treatment. By geographies, North America(NA) has 20% market share while International has 6% market
share1.There is also significant room for growth here because international cases represent just over 50%
of Align's TAM.
1
http://simpliclear.com/sites/default/files/pdfs/BioMers_ExecSummary_2012-04_new%20address.pdf
2
10K 2011 ALGN SEC Filing
2

3. COMPETITIVE POSITIONING
Early Mover Advantage
With 85% market share by cases in malocclusion treatment, Align enjoys distinct advantages such as
brand recognition, product innovation, automation in production and patent protection. Clear Aligners are
medical grade custom designed plastics unique to each patient. It provides benefits such as excellent
aesthetics, comfort, improved oral hygiene, reduced incidence of emergencies, and are easy to maintain.
But, due to its limited movement, clear aligner treatments typically require a number of alignment units as
teeth structure changes. Some of the notable product advancements by Align are3:
Year Product Name Brief Description
2005-NA Invisalign® Express(NA)
Lower-priced solution for minor crowding/ spacing cases
2008-EU Invisalign® Lite(EU)
Post-treatment retention product for Invisalign® and non-Invisalign®
2007 ViveraTM Retainers
patients
Features designed to treat teenage patients. Compliance indicators help
2008 Invisalign® Teen
parents and practitioners gauge aligners wear.
Invisalign®ClinAssist or Designed as an instructive product for newly trained, less-experienced
2009
Assist Invisalign® doctors
SmartForce features provide root and rotation force systems to achieve
2009 Invisalign® 1.5
predictable tooth movements.
Precision Cuts designed for use with elastics for anchorage control to help
2010 Invisalign® G3
treat Class II and Class III patients.
Next generation of SmartForce for greater root tip control, improved
2011 Invisalign® G4
predictability, and better clinical outcomes.
Patents
Based on the presentation and conversations with Align's team, we are encouraged with the portfolio of
490 patents issued worldwide so far. Align continues to spend a significant percent of revenue on R&D
and new patents to protect future products. However, it will be interesting to find challenges incurred with
some of their patents expiring in 2017. Align also proactively defends its patented technology and
products to sustain its leadership. An example is the case won against OrthoClear in 2006.
Scope for Clear Aligner Market
The clear aligner segment is currently at about 15%4 share of the TAM evidencing a significant
opportunity to grow in the clear aligner space, but its adoption relies heavily on dentist acceptance.
Conventionally, dentists are slow to accept changes to traditional treatments, but with continuous
innovation in the clear aligner product line, a paradigm shift can pave the path for increased adoption of
this proven solution.
Key competitors &Alternate options for malocclusion
There are several traditional or alternate solutions that consumers can choose from for malocclusion
treatment such as Metal Braces, Ceramic Braces, Lingual Braces, and Smart Brackets. Some of the
3
10K 2011 ALGN SEC Filing
4
http://simpliclear.com/sites/default/files/pdfs/BioMers_ExecSummary_2012-04_new%20address.pdf
3

4. competitors in the braces and aligners space include 3M(incognito), Dentsply (mtm), Danaher (simpli5
insignia), and Clear Correct (clear correct). With the increasing list of competitors in the clear aligner
space and improving alternative treatment, Align should also focus on growing or maintaining current
market share. As a result, Align must continue innovating Invisalign® products and technology while
expanding in emerging markets to remain successful.
INVESTMENT SUMMARY
Portfolio Manager Summary: Short term concerns overshadow promising long term growth story
We model a 16% case CAGR from 2013 to 2015. While the fiscal cliff was averted, middle class
Americans are burdened by a 200bp higher tax for the first $113,000 earned by households. In addition,
there are several macro uncertainties as GDP growth slows around the world and Europe continues to face
macro pressures. With the recent decline in consumer confidence, it has posed a challenge in short-term
revenue growth of Align. Nevertheless, there are still signs of optimism as nonfarm payroll continues to
increase. Thus, we forecast a moderate improvement in North America, 1% market growth in Europe, and
a substantial growth ahead in the Emerging markets, especially in China.
We recommend a SELL due to weakened consumer confidence level. Taking a look at the chart below,
Align’s revenue has a modest correlation of 0.66 when compared to the consumer confidence rate for the
past 3 years5. In the latest report of consumer confidence on January 29, consumer confidence rate has
dropped for the second month in a row indicating concerns over the near-term. With macro uncertainties
and a rise in taxes, consumers will be hesitant to make optional dental procedures.
160 80
140 70
120 60
Align Revenue in Millions
100 50
Consumer Index
80 40
60 30
Align Revenue(Millions)
40 20
Consumer Index
20 10
0 0
Align Revenue and Consumer Index Correlation
Average Selling Price Pressure
Align is seeing increased competition in Invisalign® Express and Teen market segments with average
selling price(ASP) drop by 9% from the previous year. We predict moderate pricing pressures in ASP as
more competitors enter the market and take away market share.
5
http://www.tradingeconomics.com/united-states/consumer-confidence
4

5. Change of Management
There have been several organizational changes within the last few months including the heads of R&D
and North American Invisalign® Sales departing. According to the 8-K on Oct 17th, 2012, Dana Cambria,
Vice President of Research and Development department, left the Company. Interim, Align’s President
and CEO Thomas M. Prescott will oversee R&D and Information Technology. In addition, CFO Kenneth
B. Arola has stepped down after 6 years in the company. He has been replaced with the previous VP of
corporate and legal affairs and general counselor for the time being. We agree and re-affirm that Align is
known for its technology, creative idea and vision towards future dental industry. Though we cannot
quantify the impact of recent departures of C-level executives at Align, it could very well pose a
challenge to strategic growth plans of the company.
Strategy Adjustment for International market of Scanner and CAD/CAM Services
On October 17th, 2012, Align terminated the agreement with Straumann Group, the company’s exclusive
distributor of Scanner segment in Europe. At the same time, Align also had execution issues with Scanner
and CAD/CAM services in Europe region leading to near-term growth concerns in this market space. In
the future, Align plans to promote international scanner sales in a more opportunity based strategy.
VALUATION
Based on reasonable and conservative estimates for Align’s Intrinsic Valuation, the share price is $23.17.
Further, Comparables Valuation indicated the share price is $25.42.Our Final Valuation involves 75%
weightage to Intrinsic Valuation and 25% to Comparables Valuation, resulting in Align’s stock price
valuation of $23.7. This is 26% below the current market price of $31.90 (as on 02/01/2013). Our model
uses following assumptions as stated:
Basic Model Assumptions
 Risk Free Rate: closer to 30-year US govt. Treasury yield of 3%
 Equity Risk Premium: 5.5% as per Duff & Phelps
 Tax Rate: 27% (lower than statutory 35%due to efficient tax structure of the company)
 Working Capital Growth rate: 3%
 Terminal Growth Rate: 4%, as a result of ALGN’s presence in international regions where
growth is typically higher.
 WACC: 14.5%; Discount rate (WACC) considers only cost of equity (using CAPM) since
company debt is almost negligible and equity beta of 2.09
Revenue Build
Invisalign® Full: We expect a slight drop YoY in number of cases sold in 2013 due to management
changes, and near term macroeconomic uncertainties. Near-term slowdown is also due to higher tax rates
in the US. But things can improve as management stabilizes and near term macro environment gets better.
Invisalign Express/Lite: We expect the growth pattern to continue, but at a slower pace, due to increased
competition at the lower end. This will expand the total available market, but will affect the ASP.
5

6. Invisalign Teen: There is lot of growth potential in the Teen market, but recent results have indicated not
so optimistic YoY growth. Based on the recent performance, we expect to see stable growth in the near to
long term of 27% YoY although there is huge potential in this market space.
Invisalign Assist: Due to the product’s uniqueness in the market, the ASP should not take a hit and sales
will continue to grow steadily as new doctors use this product to start out with. We see a growth in
international sales initiated] by Assist due to its easier learning curve.
Scanner and CAD/CAM services: For the international market, we expect a drop in YoY revenue growth
due to Align’s strategy adjustment towards Europe market. For the NA market, we expect slight growth
YoY in revenue due to more focus moved from international market. However, we do not expect the total
revenue of scanner and CAD/CAM to be greater than 10% of the total revenue, as scanner and
CAD/CAM is just a segment which helps integrate Invisalign® with mainstream tools and procedures in
doctors' practices.
Opex Build
Sales and Marketing: Assuming 30% fixed percentage of sales
General and Administrative: Gradual decrease from 17% in 2012 to 12% in 2017 as the company
achieves efficiency in terms of scale
R&D: Assuming 8% fixed percentage of sales
EBITDA Margin: Steady growth of ~1% each year
DISCOUNTED CASH FLOW METHOD using Free Cash Flow
 Midpoint Terminal growth rate of 4% (Valuation done using 3%, 4% & 5%)
(USD Mil) 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue $313.5 $387.9 $480.1 $560.0 $650.5 $753.3 $869.0 $1,010.6 $1,173.8
% YoY 24% 24% 17% 16% 16% 15% 16% 16%
EBITDA 66.1 129.5 129.6 129.3 176.2 211.6 252.8 304.1 364.9
% Margin 21% 33% 27% 23% 27% 28% 29% 30% 31%
Operating Income 38.0 99.3 92.9 89.0 133.2 161.8 195.4 237.3 287.4
Add: Amortization
PF Operating Income 133.2 161.8 195.4 237.3 287.4
Less: Cash Taxes (36.0) (43.7) (52.7) (64.1) (77.6)
Unlevered Net Income 97.3 118.1 142.6 173.2 209.8
Add: Depreciation 13.0 14.2 17.5 17.8 17.0 19.6 22.6 26.3 30.6
Add: SBC 15.1 16.1 19.2 22.4 26.0 30.1 34.8 40.4 47.0
Less: Capital Expenditures 7.0 18.0 30.0 41.0 (39.0) (45.2) (52.1) (60.6) (70.4)
Less: Change in Net Working Capital (2.7) (3.1) (3.5) (4.2) (4.9)
Unlevered Free Cash Flow 98.5 119.6 144.4 175.1 212.0
% Growth 21% 21% 21% 21%
6

7. Discount Rate of Cash Flows ('13-'17) 14%
Discount Rate of Terminal Value 14%
Perpetuity Growth of FCFF 3% 4% 5%
PV of Cash Flows $483 $483 $483
% of Enterprise Value 33% 31% 29%
PV of Terminal Value $966 $1,068 $1,192
% of Enterprise Value 67% 69% 71%
Enterprise Value $1,449 $1,551 $1,675
Plus: Net Cash / (Debt) $335 $335 $335
Equity Value $1,784 $1,886 $2,010
Price Per Share $21.92 $23.17 $24.69
No. of Shares outstanding (M) 81.38
Sensitivity Analysis
 WACC & Terminal Growth Rate
Terminal Value WACC
$23.17 15.0% 14.5% 14.0% 13.0% 12.0% 11.0%
2% $20.13 $20.85 $21.63 $23.41 $25.55 $28.18
TVG 3% $21.09 $21.91 $22.80 $24.87 $27.39 $30.57
4% $22.22 $23.16 $24.20 $26.64 $29.69 $33.63
5% $23.57 $24.68 $25.92 $28.86 $32.65 $37.72
Equity Value Per Share
 EBITDA Margin & Revenue CAGR Rate
Long term EBITDA Margin
25% 28% 31% 31.1% 33% 34%
10% $15.57 $17.46 $19.34 $19.34 $20.60 $21.23
12% $16.46 $18.50 $20.54 $20.54 $21.90 $22.58
4 year 14% $17.41 $19.61 $21.82 $21.82 $23.28 $24.02
Revenue 16% $18.43 $20.80 $23.17 $23.17 $24.76 $25.55
CAGR 18% $19.51 $22.06 $24.62 $24.62 $26.33 $27.18
'13-'17
20% $20.65 $23.41 $26.16 $26.16 $27.99 $28.91
22% $21.87 $24.83 $27.79 $27.79 $29.77 $30.76
24% $23.17 $26.35 $29.53 $29.53 $31.65 $32.71
26% $24.54 $27.95 $31.37 $31.37 $33.65 $34.79
Equity Value Per Share
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8. Valuation Summary:
 We expect ALGN to report Revenue of $753M in FY2014.
 Similarly, we expect ALGN to report an EBITDA of $212M in FY2014.
FINANCIAL ANALYSIS
FY 2012:
2012 EPS of $0.80 (representing 4% bottom-line decline) is driven by 17% top-line growth offset by 22%
operating expense increase fueled by the Cadent acquisition impairment. By segment, our revenue
breakdown stems from Invisalign® Teen +23%, partly offset by slower growth in Invisalign®
Express/Lite +21%, Invisalign® Full +12%, and Invisalign® Assist +5%.
We expect gross margins to decline 1 bp to 74.3%, as the company continues with the Cadent integration
and the search for a distributor and distribution model in Europe and North America. However, we expect
2bps decline to the expense leverage ratio, due to impairment of goodwill associated with the acquisition.
Operating margins are expected to increase 18bps to 16%.
Invisalign® case submissions continue to slow down (+17% compared to +19% in 2011). This is partly
due to lower North American case revenue, which has declined 8 percentage points since 2007and not so
successful efforts to expand international sales in Europe, Latin America and Asia. Comparing the
revenue mix of North America (NA) vs. International, we find that the share of revenue from North
America has increased by only 6% and International share of revenues increased by only 8%, which is
clearly less than the previous YoY growth rates of 29% and 28% respectively.
2010 2011 2012
Revenue in YoY Revenue in YoY Revenue in YoY
Millions Growth Millions Growth Millions Growth
NA Invisalign® Case
262.5 18% 339.3 29% 361 6%
Revenue
International Invisalign®
90.1 25% 115.6 28% 124.7 8%
Case Revenue
Recent results of Align’s performance indicate a lower YoY growth rate in the Invisalign product mix
(24% in 2011 vs. 17% in 2012) arising growth questions. After the introduction of Invisalign® Teen in
the year 2008, YoY growth rate of revenue has steadily decreased to about 23% YOY in 2012. On a
similar note, Invisalign® Assist, introduced in the year 2009, performed well initially but has succumbed
to a YoY growth rate of only 5%.
2009 2010 2011 2012
YoY Revenue YoY Revenue YoY Revenue YoY Revenue
Growth Growth Growth Growth
Invisalign® Teen 318% 249% 42% 23%
Invisalign® Assist 817% 167% 86% 5%
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9. These products are in the growth phase of the Product Life Cycle with high potential for expansion in the
adolescent market but have not grown at the pace expected or observed in the recent past. An effective
strategy to guarantee Align’s long-term growth lies the utilizing the foreseeable growth opportunity and
sustainability of the Invisalign® Teen and Full aligners.
In addition, Align faces a business dilemma between maintaining higher prices vs. offering attractive
prices to increase customer base, without sending the wrong signal to the markets (e.g. clients can
perceive discounted products as lower quality products). In this regard, we project a lower ASP across the
board for Align to be able to face the competition from firms offering alternative products.
(USD Mil) 2009 2010 2011 2012 2013 2014
Revenue $313.5 $387.9 $480.1 $560.0 $650.5 $753.3
% YoY 24% 24% 17% 16% 16%
EBITDA 66.1 129.5 129.6 129.3 176.2 211.6
% Margin 21% 33% 27% 23% 27% 28%
PF Operating Income 38.0 99.3 92.9 89.0 133.2 161.8
Unlevered Net Income 27.7 72.5 67.8 65.0 97.3 118.1
% Growth 161% -6% -4% 50% 21%
EPS 0.40 0.93 0.85 0.80 1.16 1.37
% Growth 131% -9% -5% 44% 19%
Dilusted Shares 69 78 80 81 84 86
FY 2013 Estimate
Our 2013 EPS estimate of $1.16 (representing 50% bottom-line growth) is driven by 16% top-line
growth. By segment, our revenue breakdown is generated by Invisalign® Teen +24% and Invisalign®
Express/Lite +28%, partly offset by growth in Invisalign® Full +11%, and Invisalign® Assist +7%.
We expect gross margin to be flat at 74% over mounting pressure from higher operating cost. As the
company continues to re-evaluate its strategy to strengthen Invisalign® Teen, solidify the international
sales and successfully complete the Cadent integration, Align may face mounting pressure from proven
treats, thus making it more difficult to manage a 74% gross margin.
Align may need to increase its sales and marketing from an average of 29% to at least 35% as a
percentage of revenue to drive social awareness in special Teen events where aesthetics may influence
their opinion and in events that draw big crowds. Align’s balance sheet continues to have excess capacity
to finance projects even after the Cadent acquisition as working capital is financed all in cash. Better
balance sheet management is required to expand and grow.
INVESTMENT RISKS
Downside Risks:
Limited insurance reimbursements and macro environment factors affect demand
Most insurance companies around the world offer little to no assistance when it comes to treatment. On
average, per Invisalign's website, insurance pays about $500 of treatment costs. With the treatment
ranging from $3,500 to $8,000 in the US, this is a considerable amount for consumers to pay. Dips in
consumer confidence and nonfarm payrolls are potential headwinds.
9

10. Increased competition could pressure ASPs and hurt margins
Align has been operating in a niche space for a very long time. Even though they currently dominate the
clear aligner space, there are new competitors trying to take Align’s market share, especially at the lower
end of their products. Aggressive price competition could greatly affect Align's ASP in turn affecting
overall profits.
Success of marketing programs from quarter to quarter
A large part of the consumer buying behavior relies on influential marketing campaigns. Brand awareness
is a huge factor for adoption of products by both dentists and patients. Align’s strategy to get a minimum
number of orders placed from each dentist was an unsuccessful marketing campaign. Many dentists,
especially at the smaller clinics, did not want to have to deal with a minimum requirement so they
switched to a competing product. Eventually Align had to relax this norm to ensure Brand loyalty.
Product changes
Over the past few years, Align has released a new Invisalign® product on a regular basis, leading to an
increase in the number of cases sold each year. However, there are no clear differentiating product
innovations lined up in the near future, except for a change in clear aligner material, which poses a
challenge for Align’s growth. Also there is no guarantee that future versions of Invisalign® products will
be accepted by consumers and will satisfy the needs of the dentists. It is also important to continue to
effectively scale manufacturing when it comes to new products and to properly market these products as
they come.
Costs and expenditures due to litigation
Align has an extensive patent library and it is imperative for them to financially defend proprietary
technology internationally. If they are unable to enforce intellectual property rights successfully, their
market share and profits will take significant hit due to substantial increase in competition.
Management changes
Several top-level executives have left the company in the last year, including the CFO and VP of Finance.
There is a possibility that additional leaders of the company will soon follow, leading to potential
challenges in managing and growing Align’s business. This can also impact their brand value and strategy
to develop new products, leading to potential loss to shareholders and the bottom line.
There are other investment risks such as unanticipated delays in production caused by insufficient
capacity, foreign operational and political risks and changing government regulation of the healthcare
industry.
Upside Potential:
Accelerated adoption in the Teen segment
Word of mouth is the best form of marketing, especially in the Teen segment. As this segment is very
underpenetrated, proper brand awareness of Invisalign® can create a preference over competing products,
offering a huge potential for a large revenue stream.
Potential for huge growth in emerging markets
The middle class of emerging markets continues to expand at a very quick rate. As disposable income
increases in those markets, there would be a large pool of potential case starts for malocclusion
treatments. This is a very large untapped stream of future revenue, if partnerships are established
effectively in these regions.
10

11. APPENDIX A
DENTAL PEER GROUP - COMPARATIVE VALUATION using EV/EBITDA
EV/EBITDA
Company Ticker CY12E CY13E CY14E
Dentsply International Inc XRAY 11.9 10.8 9.6
Nobel Biocare Holding AG NOBN-CH 7.7 8.7 7.6
Sirona Dental Systems Inc. SIRO 11.3 9.7 8
Straumann Holding AG STMN-CH 12.5 10.6 8.8
Patterson Cos. Inc. PDCO 10.2 9.4 8.8
Group Average 10.7 9.8 8.6
Implied Valuation ($M except per share)
EBITDA 129.3 176.2 211.6
Multiple 10.7 9.8 8.6
Align Tech EV/Share $17.0 $21.3 $22.3
Align Tech Cash/Share $4.11 $4.11 $4.11
Align Tech Equity Value/Share $21.1 $25.4 $26.4
11

12. DISCLOSURES:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report do not hold a financial interest in the
securities of this company.
The author(s), or a member of their household, of this report do not know of the existence of any
conflicts of interest that might bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board
member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the
public and believed by the author(s) to bereliable, but the author(s) does not make any representation
or warranty, express or implied, as to its accuracy or completeness. The information is not intended to
be used as the basis of any investment decisions by any person or entity. This information does not
constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security.
This report should not be considered to be a recommendation by any individual affiliated with CFA
Institute of San Francisco, CFA Institute or the CFA Institute Research Challenge with regard to this
company’s stock.
12