Align Technology: Growth of the DSO Channel

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I've been researching clear aligner manufacturers and how they've approached the markets historically. But more recently, say in the last decade or so, there's been a lot of consolidation and many DSOs grouping up. I'm trying to understand the DSO channel from the angle of aligners, but it's also just good to understand that part of the value chain as a whole.

I'll provide a quick two-minute summary on the DSO industry as a whole. When I worked for Align Technology, it was somewhat of a one-trick pony. Align's main product is Invisalign, which is their go-to Clear Aligner within the Clear Aligner industry. Align held a patent on the Clear Aligner industry for almost 20 years. After that expired, there are now almost 3,000 competitive aligner companies out there. Despite this, Align still maintains a strong foothold in the Clear Aligner industry due to its brand recognition and superior technology, including the quality of the plastic used in Clear Aligners. Additionally, their platform and sales force are the largest in the dental industry by far.

Five years ago, Align's customer segment was predominantly the private industry, which includes private practices and dentists, with maybe 5% being the DSO market that we sold to. As of last year, Align's portfolio is 25% DSO and 75% retail, which includes private practices. This shows significant consolidation over the last five years. Currently, I work for a DSO that is funded by private equity, and we are actively acquiring practices at a rapid pace.

The goal is that by 2035, 50% of Align's customer base will be the DSO market, and retail will only account for 50%. This consolidation is happening very quickly, as seen with MB2 and Heartland. Additionally, competition within the Clear Aligners has also increased significantly. While Align was the dominant Clear Aligner provider, it now faces competition from Spark, ClearCorrect, 3M, and Angel Aligners, which is emerging as a strong competitor due to many former Align employees joining them. There are also local mom-and-pop aligners, which small dentists are very comfortable working with.

The biggest barrier to choosing Invisalign for many dentists is the price point. Align still has a very steep price point. Without any discounts, Invisalign can cost upwards of $2,000 for a single case. However, alternatives like Spark, which is offered by Ormco, may cost around $900, which is nearly 50% less. Consequently, many dentists opt for cheaper alternatives like Spark, 3M, ClearCorrect, and other similar products because they are almost 50% cheaper.

Let's take a step back. What has driven the increase from 5% to 25% in the DSO part of Align's revenue?

It is due to the consolidation within the DSO industry. Many large DSOs are acquiring a lot of individual practices. As this consolidation occurs, Align's customer base shifts from one or two dentists to needing to sell to the DSOs. Thus, as consolidation has occurred within the DSO market space, Align's customer base within the DSO space has also grown significantly.

So it's really just on their side, they're all buying each other, and that's it. Align just sees it happening. One way I like to ask this is, let's say I'm joining the team you were in at Align, and I'm a new sales representative. I understand DSOs, I know what Align does, and I know what a GP is, just the basics. But to really be effective, I want to fully understand the DSO landscape. How would you describe it? How would you segment the DSOs into different sizes?

So, you want me to explain Align's sales team structure to you quickly?

Yes, let's discuss the sales team structure for Align now, and we'll dive into DSOs a bit later.

Because then I can quickly translate that into how it works. Align has a GP sales force, and those sales representatives only sell to GPs. Align also has an ortho sales force, which only sells to orthodontists. Additionally, Align has something called a special markets segment of the business. Align refers to the DSO segment as special markets. This is because some offerings to DSOs are considered special, such as the price point and sometimes complementary education for doctors. When you package everything together, it is a pretty special offering to the DSO segment. That's why they call it special markets.

The way it works is that the DSO landscape ranges from five to 1,000 offices. You have mid-markets, which are the smaller DSOs, ranging from five to 25 practices. Then you have the larger mid-markets, called the enterprise level, ranging from 50 to 250 practices. Then you have the mammoth DSOs like Heartland, Smile Doctors, and MB2, known as national accounts, ranging from 200-300 all the way to 1,000-2,000 locations. Based on these three different segmented markets, Align operates on a very volume-based model. The more aligners you produce, the bigger discounts you get. So, if you don't produce a significant amount of aligners, even with 1,000 locations, you will not get the same discount as someone like Heartland, who does a significant number of Invisalign cases per year.

Thinking about the top three, close to 1,000 locations, how big are they? Do they constitute about 25%? Is it very top-heavy, or is it quite fragmented?

No, it is very top-heavy. Heartland, Smile Doctors, and MB2 are the three largest DSOs that Align works with. I would say that they handle almost 60% of the volume.

So 25%. That's a lot of volume.

Smile Doctors is entirely orthodontic, right? And Heartland is all GP.

And regarding the very large DSOs, the ones categorized as enterprise, how do they typically behave differently from the smaller ones?

They have a very centralized structure. They have a clinical director because, when Heartland acquires a practice, the doctor does not have a choice in their actions. The directive is that you must use Invisalign and nothing else. It is top-down driven. The marching orders are clear. Either you do aligners, using Invisalign, or you cannot do any aligners. There's no clinical autonomy. Smile Doctorws is the same, the discounts that are given to doctors to do Invisalign is so substantial compared a competitive aligner, as well as the support from Align. There are dedicated field reps, managers, educational specialists, and marketing specialists. The platform is so significant in terms of support that's given to these top dogs that a doctor is like, I have to do it, because if I try to do anything else, I'll literally receive no support. And if they don't do it, they'll feel ostracized for not doing something that the whole company is doing. So more likely than not, either doctors will do Invisalign, or they will not do any clear aligners.

And the smaller ones, how do they typically behave? It sounds like they might have more clinical decision-making freedom.

Yes, they have more clinical decision-making freedom. When a partnership with Align is signed, there's an expectation that Invisalign will be a major, if not the primary, focus. If doctors use competitive aligners, that's acceptable, but they won't receive the same level of support that Align provides, especially from educational and marketing perspectives. When I worked for Align, I quickly realized that without a dedicated point person and a commitment from the doctors and the clinical director to use Invisalign, regardless of whether there were 10 locations or 50, the partnership would not succeed. If they viewed Align merely as a price point, like getting a discount so they might as well use Invisalign, it wouldn't work.

However, if they recognized that using Invisalign could significantly enhance the oral health of their entire organization and all their patients, and open an additional revenue stream within the DSO, then Align would be a good partner. The biggest selling point for a good partnership was viewing it as leveraging the entire platform. Benefits from the education, the ClinCheck software for clinical efficiency, and the marketing support are crucial. If they could utilize all these aspects and accept a slightly higher lab fee, then yes, Align is the right choice. If the lab fee is the only consideration, then no, Align would not be a good partner because as you increase volume, you receive higher discounts.

Taking a step back to your special market sales teams, how is that team specifically structured? Is it by account size or by territory?

Yes.

How is it structured there?

Align has an East and a West special markets team. The East team works with all the DSOs, the mid-market DSOs, so a thousand locations and fewer on the West Coast. Conversely, the West team works with a thousand locations and fewer on the East Coast. There is also a national accounts team that handles all the big accounts. It's very much volume-sized based in terms of aligners. Align mixes up locations with volume. If you are doing significant volume, then that account will go to the national account managers. If you're not doing significant volume, like 500 aligners or fewer per quarter, then you stay with the mid-markets team, which consists of the business development specialists. The business development specialists handle lower volumes, business development managers handle higher volumes, and the national account managers handle the highest volumes that big DSOs do.

How correlated is the number of locations with case volume? I mean, I imagine it would be, but it sounds like it's not always the case. How common is it that it's not very correlated?

Actually, it's not very correlated, to be honest with you. For example, Smile Brands was a partner with Align. However, Smile Brands was only looking for a cheaper line of product. They did not care whether they did volume or not. They said, 'We have a thousand locations, we want the best discount.' Align responded, 'No, we don't operate on that model. You have to earn your discount based on the volume of aligners you produce.' So, Smile Brands did maybe like 200 aligners a quarter, which is nothing compared to Heartland, who does almost 11,000 aligners a quarter. They questioned why they couldn't get the discount that Heartland receives, because their volume was significantly lower. So, they were not a good partner. Because of the volume they produced, technically based on locations, they should be with a national account manager or a business development manager. But their volume was so low, they were assigned to a business development specialist because they did not meet the volume requirements. It truly depends on the partnership.

Presumably, they would still do some aligner volume, right? I mean, there's no way that if they have 1,000 locations, they only do 200 cases a quarter. That's what they do with you. So, that means they probably do more elsewhere.

That's the catch-22. If they want to do aligners for a GP DSO, they don't have to, right, because they're not orthodontists. A GP DSO can be very successful doing your bread-and-butter dentistry, like implants.

If you have an internal periodontics program like orthodontics, they refer everything out to an orthodontist, right? Or an orthodontist is very different. You either do aligners or you do brackets and wires. Many large DSOs dabble in aligners. But let's be honest. If you're going to pay $100 for wires and brackets and have to pay $1,500 for a Clear Aligner lab fee, what are you going to do to preserve EBITDA and top-line revenue? That's also where it comes in. For instance, a company like SmileDocs, 60% of their volume is Clear Aligners. They have adopted the model where, if they operate Clear Aligners on a very efficient model, they're very profitable. However, there are other DSOs as big as SmileDocs that are even more profitable, but they do all wires and brackets; they do no Clear Aligners.

So, you have three teams in special markets: national, east, west. One for the midmarket accounts. Can we talk a bit about how that sales team would be compensated? What are the target metrics. How much is bonus-based? I'm curious about what a successful year for that sales team looks like in terms of numbers.

I can give you a ballpark of how the compensation model works. There's a base salary, right? So you get a base salary, and then you receive a commission. It's a quarterly commission based on your target goals. The goals are always based on year-over-year growth numbers and trailing six months. That's how the quota is calculated. Every quarter there's a quota. If the sales rep hits that quota, they get the bonus. If they hit 92% of the quota, then they get 92% of that goal. If they hit below 85%, they don't get anything. So, 85% is the minimum threshold.

And is that number of aligners, or is that dollar amount?

It's bucketed. So it's the number of aligners, it's revenue, and it's also iTero, which is what Align sells. It's the digital scanner. So it's 35%, 35%, and then 30% for iTero.

And looking back, were those targets usually achievable, or were they very ambitious? How do you think about it?

It's very ambitious. You will see that, after some time, representatives get very frustrated because Align is, unfortunately, viewed by Wall Street as a growth company. So, when you don't achieve significant growth accomplishments and provide strong guidance, the stock tanks. Right after Covid, Align was trading at $700. Now, Align is trading at around $200 to $270 a share. In my honest opinion, I don't think Align will ever reach $700 again, maybe $400 if they have a really good year. But until the growth goals and guidance are revised, I think Align will trade within that range.

I'm not very concerned about the stock, but that's not really what I'm asking about. I'm more interested in the morale of the sales team looking at those targets. Are they thinking, "These guys are crazy," or is it like, "Yes, we can do this"?

Oh, those guys are crazy. Yes, it's between "those guys are crazy" and "maybe we can do it." You'll have a few accounts that will absolutely achieve it. But what Align sees as growth is only based on Invisalign. For DSOs, you could grow in so many different segments of the business. It doesn't just have to be based on aligners. So they could be growing within Align within clear aligners, but not growing the way Align wants them to grow. That's where the gap usually happens between Align's sales team and the DSO.

So how does Align want them to grow?

Align wants them to grow by almost 30% to 40% year over year and sometimes even 10% quarter over quarter, which is not feasible when you start doing volume. Growing 10% to 15% quarter over quarter is not feasible.

I can imagine. That's good to know. On the sales team, let's say you're back in your days at Align or when you go to a DSO now, but in a different role. But so you're looking at this typical enterprise DSO and you want to onboard them as a partner for Align, right? What are the different channels through which you reach out? Is it through a direct sales force, distributors, or an online platform? How do you get in touch with them in the first place?

Yes, what we also do involves our sales team, which includes both the GP and the ortho sales teams. Irrespective of whether it's a DSO or not, they still visit every account because they have a book of business to manage. If they enter an office and realize that this office has 10-15 different offices under the same umbrella, it is then categorized as a DSO. That lead is sent to special markets with a note that this might be a potential DSO. We then see if we can work with them, possibly offering a better discount, whether they're already using new aligners or not. Once that lead is passed on to the special markets team, the business development manager in that territory tries to contact the decision-maker within the DSO, which could be the clinical director, the CFO, or the CMO. Once contact is made, a call is set up to explain the goals of special markets. This presentation covers how special markets operate, the kind of support offered, and how the discount-based model works. We usually receive a roster from the DSO to see if they're using aligners or not. Based on the information we gather, we determine what kind of discount they qualify for. That's what's pitched to them, and then we show them what a pathway towards getting the maximum discount would look like.

You mentioned different types of personas that could be in charge of those decisions. Who would that person typically be?

It often depends on the size. If you're dealing with a smaller DSO, say with 20 locations or fewer, it's most likely the CEO of the DSO, because 20 locations is relatively small. That's the main person you would talk to. For a larger DSO, it would most likely be either the CFO, the VP of operations, or the VP of procurement, as they handle discussions about partnerships and pricing. Ultimately, the CFO or the CEO must make the final decision on whether to partner with Align and integrate it into their platform. For larger DSOs, you usually speak with an intermediary first, and then the discussion is passed on to the CFO for final approval. For smaller DSOs, you speak directly to the CEO.

When you first get in touch with them, what kind of data or business or clinical practices are you looking to understand from them before making a proposal?

We need a roster of all their offices and doctors to see who's under that umbrella and to determine if they are using any aligners. If they are using competitive aligners, we need to know the volume of competitive aligners they are using and the price point they are receiving. This information allows us to model the kind of discount they would start with. If they are not using any aligners, they start with a very entry-level discount.

I often say "we," as if I work for Align, but Align always tells them that if this partnership is purely about price, it won't be a good fit. The reason why Align's lab fee and our discount might not seem as friendly as some other competitive aligners is because of all the support we offer to help you grow. If a DSO truly sees the value of the entire platform and views the lab fee as an added benefit, and they are happy with the discount and the support, recognizing they can take advantage of various benefits, then they are a good partner.

To follow up on that, you've outlined the pitch, focusing on the discount. You mentioned the support. What kind of marketing, clinical, or other support do you offer? For example, if I were to walk into Heartland tomorrow, what support from you would I see there?

The marketing initiatives that we provide include a marketing team within the special markets team that collaborates with the DSOs marketing team. We discuss how to promote Invisalign within your practice, assist in setting up Invisalign production days, which are dedicated solely to Invisalign. We explore various marketing techniques, promotions, and help create flyers and banners for the office. We also assist in enhancing your website to effectively showcase your Invisalign offerings, from an educational perspective. Importantly, DSOs never have to pay for any CE course they take, which is highly valued since CE is expensive.

Additionally, if a DSO onboards and many doctors are not certified for Invisalign—a certification costing almost $3,000—joining the special markets and Align partnership makes this completely complimentary. We try to monetize all the things you receive for free, explaining why our lab fee is slightly higher because it includes all these offerings. Educationally, you have an educational specialist who works with the DSO to determine the doctors' interests and creates customized courses quarterly. Align also provides ongoing CE webinars and partners with the retail team for special market doctors, who can register and attend these for free using a special code.

Another significant benefit for DSO doctors includes customized reporting. Our analysts can generate customized reports for the DSO, detailing metrics like the number of iTero scans, conversion rates, and identifying which doctors are converting more effectively. We also provide customized iTero training, which is complimentary for the doctors. These are some of the standout offerings provided to our DSO partners.

Do you typically also see improvements in patient volume from this marketing support?

If it is executed properly and they are fully engaged with us from start to finish, absolutely. There is a significant increase in volume. Many times they realize that if this is a partnership and it's 50-50, it works. If the DSO expects Align to handle everything, it most likely fails.

With the competitive environment changing, how receptive have DSOs been to this approach with all the new competitors.

That's a great question. The pitch has become significantly harder, especially during these economic times, as many DSOs are seeking rock-bottom pricing. This is particularly true with the Clear Aligner commodity. I've been away from Align for six months, but I know Align is always trying to think of more competitive ways to become more lab cost-friendly. I'm not sure how much that has changed. Even though partnerships are signed with Align, DSOs are still looking. It's essentially become a two-aligner model. Many DSOs now have a partnership with Align, but they also partner with Spark or 3M.

Here's the biggest problem. Align offers only aligners. Companies like Dent Supply, 3M, Ormco, they not only do aligners, but they offer so many other dental products, right? So if a DSO has a good relationship with 3M, because they buy different dental products with 3M, then they get rock bottom pricing for aligners too. So doctors who are very loyal to another brand will stick to that other brand. The pitch has become much harder now. The hope is that if Align doesn't bend a bit in terms of lab costs and offering different products at lower lab fees, the pitch will become harder and harder.

From all your discussions with these DSOs, what do they really care about? For instance, what are the clinical directors or CFOs focusing on? What is important to them in these partnerships?

I can provide an example from the DSO I currently work for. Right now, it's based on the comfort level for the doctor. Firstly, what kind of support will they receive from the vendor, whether it's Align or another company? Secondly, if there are any issues, how quickly can the vendor resolve them? Lastly, the lab fee is extremely important. Effective cost savings within the practice are crucial. Doctors are looking for the best options. As long as there are options, it's up to them to decide. The goal for the DSO is to present the options, ensure they receive the necessary support, and negotiate the best pricing. Then, the doctors can choose who they want to go with based on their comfort level. We aim to ensure they feel comfortable, supported, and that they are growing effectively.

What does the doctor really care about? What is the clinician thinking about?

If a doctor is satisfied with the pricing, they are really looking for the best support to treat their patients. They want to know what the best product on the market is and how they can best support the patient to avoid complications. If something goes wrong, they have to take many steps back and may not be able to meet the patient's needs. Currently, many doctors are seeking the best possible support to help their practice grow. Doctors who are not progressing might become stagnant, sticking to their basic services. They are looking for new ways to introduce an incremental stream of revenue into their practice. We are seeing a lot of doctors moving towards either orthodontics or implants because there is only so much you can achieve with just hygiene, drilling, filling, and full mouth reconstruction. They are asking, what else can they do to increase production in the practice? And that's either going to be orthodontics or implants.

From the research I did beforehand, one of the major benefits communicated by Invisalign was that, although it's more expensive, the reduced chair time allows a doctor to handle two or three times the volume, which compensates for the cost through increased gross profit dollars. That's the economic part of it, and just practice efficiency. But this is like, I don't know, the second or third conversation I've had with someone, and it's never come up. So, how real is that? And why does it never come up first?

The doctor has to be incredibly clinically confident to even discuss that profitability. If a doctor lacks clinical confidence, the efficiency is compromised, as we tell everyone. To be profitable with aligners, you cannot see patients every month or every week. You have to be able to give them twelve to 16 sets of aligners at once. You see them in the beginning, in the middle to ensure they are tracking, and then at the end. This maximizes your chair time and profitability. With wires and brackets, you might have emergency visits and need frequent adjustments, so you end up seeing those patients four to six times during their treatment. With aligners, you see them maybe two or three times, which decreases chair time. However, to do this, you must be at capacity. If a doctor is not at capacity, then pitching efficiency and profitability is pointless because there is time in the office to see patients. The profitability starts to work when you're at capacity and need to fit in more patients but still want to increase revenue. Then, you do aligners because you can see more patients with fewer visits, increase production dollars, and still fit in more patients since you're at maximum capacity.

How much of the dental practices or DSOs do you think are close to capacity? Or, I guess, how much capacity is there left on average?

Yes, there is capacity. Joe Hogan, the CEO of Align, often discusses the need to reach a tipping point to see profitability in aligners based on your share of chair. Do you understand what 'share of chair' means?

Yes, I'm familiar with the concept.

Okay, so 'share of chair' refers to how much Invisalign or how many clear aligners, or wires and brackets you're using. You need to have over 65% share of chair to reach your tipping point for profitability. This means that 65% of your volume for an orthodontist should be clear aligners. Then you start to see profitability. If you're going to use 30% Invisalign and still use wires and brackets, it's not going to make sense in terms of efficiency or profitability. It's a very complex model. Either you go all in with aligners, or you just use them when your patients request them if you truly want to be profitable.

But for dentists, it's very different. A dentist can start maybe three new cases a month that they weren't doing before, and they can generate $5,000 in production per case. That's incremental production. Selling ortho to a dentist is much more valuable and lucrative than selling clear aligners to an orthodontist.

One of my thoughts, considering the consolidation, is how individual dentists are primarily focused on serving their patients and achieving the best results. Now, they must shift to a corporate mindset where it's more about the numbers. They're doing the math and realizing that with aligners, they can potentially triple their volume, which makes sense in terms of gross profit dollars.

What do you think the DSO consolidation means for aligners in general? Let's keep Align just in that category. How do you think consolidation towards DSOs will affect aligners?

Yes, that's a tough question because it's about which DSO will adopt aligners. How does a DSO perceive aligners as the next step to see incremental production in DSOs that aren't doing many aligners? That's where they can see incredible profitability by doing more aligners. And then, what aligners do you choose? Do you pick a company that offers the best support and product, albeit with a higher lab fee, or do you choose a cheaper product, receive less support, and potentially ruin the customer experience? Our DSO has a great partnership with Align. We get a really good discount with Align, and the business development manager who works with us is the best in the business. The support we receive from this person is unbelievable, and the doctor experience has been fantastic.

We also have an ortho manager within our DSO who focuses on the Invisalign experience for those doctors. You package all that together, and it's a great experience for our doctors. Now, some other DSOs, if they just give this to doctors as an option and they're like, do it, don't do it, we don't care. We just want you to have an option. I don't know how feasible and sustainable that'll be.

Most DSOs actually just contract with Align to have an Align option, but it's not really strategically important to them, correct?

Yes, exactly. We have seen a lot. It's a very strategic play to just show that, hey, doctor, if you join us, look at the options we have available to you and look at the price we have negotiated. So we want you to feel special. But the really good ones are like, here's a pathway towards what the onboarding is going to look like for you to do Invisalign. Here's a playbook. Here's the support you're going to see. So it's all based on the good DSOs. They really have a very good playbook for the doctors. We have the best support, we have the best product, and yes, we're going to hold your hand to do this, if you're interested. The bad DSOs are like, oh, we have a partnership, but have at it.

That gets back to the clinical autonomy that you were discussing. It seems that the ones who are the best fit for Align are actually the ones who are super centralized.

They fully commit to Align and basically tell their doctors what to do. Whereas the smaller DSOs, where you're relying on the clinical autonomy of the doctors, probably have less of a commitment and therefore less of a fruitful partnership.

Yes, but there's a caveat to that, too. My DSO, I work for Dentive. We maintain complete clinical autonomy for doctors, providing them with 100% freedom, yet we have an exclusive partnership with Align. We've negotiated the best discounts with Align due to my relationships with their team. Within Dentive, we have a dedicated person who focuses solely on Invisalign and no other clear aligner. This top-down support is crucial when we discuss orthodontic opportunities with doctors, presenting Align as our strategic partner. We understand the playbook and the support they will receive. Often, doctors appreciate this as it feels like we are guiding them through the process. Additionally, we are able to convert doctors who have used competitive aligners to Invisalign because they recognize the superior support they receive from us.

To keep advancing in the sales process, you would typically engage with the clinical director and discuss with the Chief Medical Officer, Clinical Director, VP of Operations, or CEO, depending on the organization's size. You pitch the discounts, marketing support, clinical education, and overall support infrastructure. Ultimately, who makes the decision to enter into the partnership with Align?

We've observed various titles involved in signing the contract. Although the Clinical Director never signs it, as their role is primarily to ensure clinical support for the doctors in this initiative. Typically, the VP of Operations, CFO, or CEO are the ones who sign the contract on behalf of the DSOs. The VP of Operations, VP of Procurement, CFO, and CEO are the four titles that usually sign the contract.

Regarding typical contracts, you mentioned they usually involve partnerships with two different companies, like Align and Spark, or Align and ClearCorrect. Are exclusive contracts common?

No, Align legally cannot force a doctor to sign an exclusive contract with them. They can request exclusivity in marketing terms, asking not to market competitive aligners and to focus solely on Invisalign. However, Align cannot dictate clinical decisions. Therefore, our contracts are never exclusive; they are based on the terms Align expects from the partnership, such as contract duration, discounts, goals for additional discounts, and other legal aspects that I'm not fully familiar with.

Do they provide any volume guarantees?

Yes, it's usually based on growth volume. Align has moved away from that, but it's based on year-over-year growth. If you grow by 20%, you'll move to the next discount level, and if you grow by another 20%, you'll advance to another discount. It's always based on a typical contract term of 30%, 35%, 40% over three years, and within those three years, you can progress from one percentage to another. From a discount perspective, we've always left it open. Align always leaves room for negotiations; it's not ironclad. For instance, if the DSO significantly exceeds expectations in a year and a half and achieves phenomenal volume, they can always come back to the table and request to advance to the next tier without waiting for a three-year contract to expire. Align, more often than not, wants to ensure that the partner is satisfied and that an additional discount is provided much earlier.

Could you describe how the dentists are typically compensated? Some have a partnership model, some don't. From your perspective, what have you seen more often in terms of their incentives?

For dentists within the DSO?

Yes.

The most popular compensation models we've seen involve the DSO paying the lab fee. The doctor then receives 30% of the production, while the DSO retains 70%. It's essentially like free money, although the doctor still works, of course. They receive 30% of the production, and the lab fee is covered, so the doctor incurs no expenses there. Sometimes, there are also bonuses, such as an additional $5,000 if they complete a certain number of cases. But most commonly, it's a 70%-30% production split after the lab fee is paid by the DSO.

Okay, so a typical Align case customer pays about $5,000. The lab fee, which is, let's say, $1,400 to $1,500. The DSO pays that and then retains 70% of the $3,500.

Yes. We've also seen cases where the DSO does not pay the lab fee, and the doctor and the DSO split the lab fee 50-50. Then, the split in production is normalized, where the doctor keeps about 60% of the production, and the DSO takes 40%.

Does that depend on the type of relationship with the DSO? Some DSOs outright own practices, while others function more like a back-office contractor. Right? Kind of a back-office function.

Yes, I don't think we've ever really been able to differentiate whether this is based on the type of DSO. There are just so many different models out there, right? Some are fully owned, some are 80%, 60% owned, and then there's 20% on top core equity and doctor equity. But to be honest with you, I really don't know how a company like Heartland is compensated. However, I'm pretty sure that if you're 100% owned, then you can pretty much do whatever you want and the doctor has no say. But for doctors that have around 51% or 49% ownership, I'm sure there are different negotiations that happen within the DSO.

Now that you've switched over the fence, you still obviously have fond memories of Align, but I'm curious how you view the current environment with the competition and the consolidation in your largest customer base. How do you think about the Align product in general, and also the different companies in there and who's approaching?

Obviously, I'll always have some kind of bias and fondness towards Align, and a lot of thankfulness. But there was always that struggle, right? At what point will a big DSO tell you to go kick rocks because they've signed an incredible partnership with someone else and the price is literally 50% of the cost. So, I think it's going to be incredibly challenging. As the years go by, there will be a lot of significant competition. One of the biggest competitors that Align is seeing right now is Spark, which has always been Align's number one competitor because their product is just good enough and it's offered at a much lower cost. But I think Angel Aligners is another company that's coming up very quickly. If they can scale and create the platform and really pitch their value, we will see a lot of these smaller DSOs and a lot of retail customers moving towards them. If they do want to do a clear aligner, unless Align completely slashes their prices.

But I think Align is too proud, like any big company, they're very hungry, they're very money-driven. They have certain numbers they have to hit for growth, but I think it's going to get tougher and tougher. I don't think it's going to get easier per se. Align does have a much bigger advantage because a lot of big DSOs, a lot of big retail doctors are doing significant Invisalign volume. So for them to entirely switch, it's not going to happen. But as you see some of the new doctors coming out of residency school, some of the new DSOs being formed, some of these new competitive companies really developing and pitching the value, I can see an uphill challenge for Align.

How important is having the iTero in there and the software in the workflow? How big of an actual switching cost is that?

iTero is huge. And that's where I think doctors either hate or love Align. They hate Align because if you do Invisalign you have to have an iTero, you cannot use any other competitive scanner. If you want to do Spark, you can use different scanners. If you want to do SureSmile, you can use different scanners like the TRIOS; you can use all those scanners. The thing is people don't realize is that iTero is actually a restorative scanner. The bonus is doing Invisalign because it's owned by Align. So the switches, I mean, you invest $30,000 to $35,000 in an iTero scanner, but if you truly wanted to switch to another aligner, you could get a cheap Merit or a cheap TRIOS, right. You could keep an iTero to do your restorative work. And it can be used as a patient educational tool because it was really good to do, like patient education. So the patient, like where, you know, the malocclusion they have in their mouth, where they're hitting heavy, their fractions, all that, all those, you know, the dental mumbo jumbo, but then you could literally do any other competitive aligner with another cheaper scanner, it would still work. So, you know, I don't know if that answers your question.

People make the assumption that, yes, that you've made the investments you, you worked on the software, what a pain it is to switch. And that's true. But sometimes, you know, if Angel Align is coming into the market offering you the cheap scanner and a $700 lab fee, the math works out pretty well.

Yes. And then also you have these labs placing free scanners in these practices by saying give us x amount of production and we will place a free scanner in your practice and then you can do whatever you want. So as models evolve, that's where you can see some of these competitive threats that will affect Align.

Are there, to your knowledge, any publicly traded DSOs that you know about? Seems like the interesting thing I should definitely take a deeper look at.

I don't believe Heartland is publicly traded. If I'm correct, the way I have learned about this is you have private equity. And then the first recap is always the best because that's when you know you're taken seriously. Then you have a second recap and then you maybe have a third recap and then you're just too big to have another recap because no private equity is going to be able to purchase you. So then you become publicly traded. I think that's where MB2 is right now. MB2 is really, really big now. I don't think they can have another recap. So either you just stay there and you have just very consistent low growth or you go public.

I know that there was like a Canadian listed company that was basically a group of dental offices, but I need to look a bit more into it.

Yes, there's Dental Corp, there's 123Dentist. I'm not 100% sure if they're publicly traded.

Yes, they are in Canada. It's been a disaster since coming public in 2021. But that doesn't mean it's underpriced. Who knows?

Exactly.