Align Technology (ALGN) has decided to acquire privately-held Cadent Holdings, a provider of 3D digital scanning solutions for orthodontics and dentistry, for $190 million in cash. The acquisition, subject to regulatory approvals, is expected to close during the second quarter of 2011.
While the transaction will dilute fiscal 2011 EPS on a GAAP basis, it expects adjusted EPS for the year to be at 70-75 cents. The Zacks Consensus Estimate for fiscal 2011 is 80 cents. Moreover, the deal with Cadent is likely to be accretive to the adjusted EPS in fiscal 2012.
With the proposed acquisition of Cadent, Align will be better positioned to promote adoption of Invisalign as it is expected that over the next 5 years, intra-oral scanners will become widely used in dental practices. At present, doctors submit PVS impressions of the patient’s dentition to Align to start a new Invisalign case.
However, through intra-oral scanning, doctors will be able to submit fully digital intra-oral scans of the dentition instead of a physical impression, an option that is more user-friendly for the doctor as well as more comfortable for the patient. According to iData Research, the growth rate for intra-oral scanners will exceed 20% between 2010 and 2015.
Earlier, in January 2011 Align entered into an agreement with Cadent to jointly develop software applications for Cadent scanners which are to be used in Invisalign treatment. The new applications will optimize case assessment and better plan out the Invisalign treatment.
A series of applications will be developed over the next couple of years, and the first application is expected to be available by the end of 2011. The company is currently conducting final beta tests to validate the Cadent systems, and expects to announce interoperability with Cadent scanners in the second quarter of 2011.
Recommendation
We remain concerned about the economic uncertainty as it makes patients defer their dental procedures, being discretionary in nature. Despite the increase in revenues during the last reported quarter, the EPS was lower due to lower margins.
Moreover, patient visits continued to remain under pressure during the quarter, which led to lower revenue on a sequential basis. Align’s performance was also affected by lower demand from the US GP dentists and the elimination of the minimum case requirements program. Based on the near-term challenges, we have a Zacks #4 Rank (Sell).
However, Align has undertaken several strategies to further penetrate the malocclusion market. Moreover, its focus on the international market, especially China and Europe is encouraging. Based on the long-term potential of the company, we have a ‘Neutral’ recommendation on the stock.
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