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Align Technology, Inc. (NASDAQ:ALGN)

JPMorgan Global Healthcare Conference Call

January 7, 2012 5:00 pm ET

Executives

Thomas Prescott - President, Chief Executive Officer, Director

Kenneth Arola - Chief Financial Officer, Vice President - Finance

Analysts

Unidentified Analyst

Good afternoon and welcome to the Align Technology presentation. As a reminder, the Q&A session will be held in the Olympic Room following the presentation. Now coming to the stage is Tom Prescott, President and CEO.

Thomas Prescott

Thanks very much. Boy, what a pleasure for us to be back here again at JPMorgan. It's our favorite time of the year to get the New Year kicked off and we are here to talk about, of course, our favorite topic, Align Technology and I am excited to give you some update of sorts on the progress we are making.

But of course, before we do that, I need to remind you that we are going to make some forward-looking statements. I know it's not the first time today you have seen this but as we talk about strategy and our direction, we will make some forward-looking statements and I want to encourage you to go at our website and look up our forms 10-K, Q and other filings for a much, much more robust view of the business.

All right, back to the action. Align Technology is the clear leader in a category we pioneered 10 to 12 years ago with first commercial shipments called invisible orthodontics and along the way we have also become the market leader in terms of total revenue growth. We are now the world's largest orthodontic company on the basis of revenue. Yet, as I will tease up for you in just a minute, we still have very, very small unit market share.

Along the way, we have also, with the great help of our customers, general dentists and orthodontists, we have been fortunate to be able to generate a lot of revenue and along the way, treat around 2 million patients, all of which got a healthier, more beautiful smile without brackets and wires. In addition, about a year and half ago with the acquisition of Cadent, we are now one of the emerging technology leaders in the even more fragmented market of restorative digitally enabled and restorative dentistry.

But, for me, the right starting point is Invisalign and the best way to set this up is to start talking about the market opportunity. I will do that by way of talking about orthodontists' case starts. And again, this is ortho only, not general dentists and there is not much data available out there for dentists. So we are going to talk ortho only.

We start with a world total number of case starts. Now that’s our new patient start, patient comes in the office, goes through a consult with the doctor and he likes to go forward for treatment, of 6.8 million case starts a year. That does not include, that’s roughly the 45 or so countries we are in, 50 countries around the world we are in, that does not include even large markets like India and others where we don’t play today.

To get down to our real served market of round 2.6 million, you have got to take away young kids, 10 years old and under pediatric and child starts. You also have to take away the absolutely most complex cases, the most difficult Class II and Class III cases and even with that today, that 2.6 million cases, that's our real served market, just ortho chair, no dentist, today represents about $1.5 billion in current revenue structure.

We only have a 9% share in that base with a business that’s already headed towards $600 million in revenue. Let me break that down further. Starting with the adult market, which is where we also started as a business, as we first started shipping product about 12 years ago, this represent about a quarter of our opportunity in terms of new case starts and we have earned now a bit more than 25%, 26% share of those case starts and I will remind you again this is just orthodontists' shares.

So over the last 10, 12 years, through the use of consumer advertising and category expansion, we have both grown the size of the adult market and we have grown our share from small single digits to over a quarter now. We expect that to continue and we will lean on our consumer advertising to drive category growth, mostly in North America and core Europe but we think this can get much bigger.

I will emphasize that there is between 10 million and 20 million people just in North America, over 21 years old with the right kind of disposable income that want a better smile that know Invisalign is about $5,000 for treatment and do not want braces. So a part of our job over time is to grow that quarter of the opportunity to be roughly equal to teen and more. Its there to be had and that’s part of the long-term rationale for our consumer programs.

On the other side of this, the biggest part of our potential market, our served market, is for teenagers. We call them 11 to 19 and from virtually no position six, seven years ago, we now have displaced brackets and wires and have a 4% share of that growing very nicely if you track over time. I will come back in a bit and explain why that’s growing. It has everything to do with how the product works, how predictable and reliable and how much confidence the orthodontist has.

So we put all these together and what we see is a business that’s $0.5 billion, headed towards $1 billion, if you take our long-term financial model, with lots of headroom for growth both category expansion for adults and taking existing share out of existing starts for brackets and wires. It’s a great story and before I go forward to talk about that I would like to frame North American market because I will talk international separately.

Today, our North American market, and if I take a snapshot from Q3, is roughly 50-50 between volume coming in from GP dentists and from orthodontists. Lot more GP dentists out there and they don’t use as many cases. On the ortho side, again we provide a lot of detail on our normal quarterly results but both of these channels are very important.

They both interact and they both are driven, progress is driven by the same things, confidence in the treatment, knowledge they are going to get great outcomes and a better fit for a patient to fit their lifestyle. So I give a snapshot of North America for a minute and then it raises the question, boy, why do we only have 4% share and how big can this get.

So we do a lot of survey work. We do a lot of market research and clinical research. We went out recently and we asked our customers, GPs and orthos in North America, very statistically significant numbers, a couple of questions. When we sat down, there are roughly 100 different clinical indications in orthodontics how a patient might present. With our clinical advisory, we reduced that to seven. We basically came back and said Class II, Class III, Class I and crowding, spacing, deep bite or open bite. Those are very defensible seven big buckets that they can sort out to say how patients present when they walk into that dentists' office or that orthodontists' office

So with that in hand, it was a little easier to start doing some research and then we asked our customers a couple of questions. How do your patients present? Kind of a map of the prevalence and incidence of malocclusion. So we already had some data in this area. But we also asked them a second question. Of your patients with those orthodontic problems, how many you treated with Invisalign?

We actually asked them for some data and some follow-up and then calibrated on what we think they really do. Well, no surprise, on the first part, pretty much what looks like the general maps for instance and prevalence of malocclusion. For crowding and Class II malocclusion, two thirds, roughly, of all the patients that present and that’s roughly what it looks like in the population as well.

Then you start coming down to more complex Class I cases, deep bites and others, all the way down to most complex cases Class II and Class III. Now, I will say before I go further and give you the answer here, which points the opportunity, this map is roughly flipped in Asia, in parts of Germany. That means the cases we see in Germany, Class II Division II, and in Europe, the cases that get treated, the cases in Asia given the skeletal structure, the different sort of malocclusion that presents are far more complex.

So as I walk through to this discussion for North America and talk to you about how important product and technology evolution is to drive our penetration in to these indications, it's more important outside the U.S. It goes to why we are gaining traction in China, Japan and other places where they deal with the most complex cases.

All right, skip back to story. So what they say. No surprise. Even with all this work we have done, guess what? We are still scratching at the surface. These are cases today that present. People that are coming in looking for orthodontic treatment and yet after 10 or 12 years of getting after crowding and Class I crowding cases, we are only getting 15% or 16%. Truly amazing.

So this is both, you can take this is as good news and bad news. We look at this as great news because it reinforces the amount of headroom we have got to drive this business forward but only if we have the confidence we are on the right path. So what's underneath progress in this area?

It's really about our continued focus on product technology and innovation and its why customers, dentists and orthodontists are more and more confident they can the great results they need because of our evolution. Going back, in 2007, in reinventing our entire set of clinical protocols, coming out the first of the series of technologies in 2009 for our first SmartForce features, technology allowed them to a lot of work more effectively to create a movement on time.

In 2010 with G3, in 2011 with G4. Evolutions that our customers saw, cases that worked more precisely and their confidence went up finally with SmartTrack and recently we have announced SmartTrack, which is a fundamentally new material five to seven years in development with a world-class leader in proprietary polymer technology. It's also a completely new extrusion and fabrication technology. Simply stated it's going to make everything else we have done to make the product work better, even get better than that.

It will deliver constant force overtime. The lower, the gray line below that was our standard line of material where literally after initial mounting force it started losing effectiveness within day one or day two. Almost all the orthodontic literature says the most effective way to move teeth is a slow, is a consistent moderate force overtime which is exactly what we set out to do with this material.

So five to seven years later we have announced it. We are going to start shipping this in Q1, a little later in Q1. We have done a pilot in about 1,000 practices with thousands of patients and literally side-by-side seeing their other patients, seeing the other material, all of our doctors reported statistically significant differences in how the product actually works. Meaning, individual tooth movements expressed more effectively, rotations, translations, extrusions and collectively for the entire treatment, the whole thing just worked better. This is what we need to do to help us gain share. Those green lines drive them up, that last slide.

So, again, we are, other than a couple of countries where we are waiting on regulatory approval, China, Japan, small markets today. They take a little longer. We should start shipping this in Q1 to all of our base. More comfortable for patients, more effective for doctors, more effective treatments. Again, one more step on the way of delivering more innovative technology that will get better treatments.

So what's underneath all this? We have a bit of a mantra and maybe 10 years ago this sounded aspirational. We had a vision, a dream, that someday we will become standard of care. With the technology evolution we have put to the market now, with what doctors are telling us, how we can see precisely solutions for each indication with the confidence we can get after that, we now say every case is an Invisalign case as a mantra but we can see over time Invisalign and Clear Aligner therapy becoming the standard of care in orthodontics and dentistry. It is just going to take us some time.

So maybe don’t, you know, just listen to me. Why don’t I give you a little amplification to that and I would like to show you a new video showing an update of some of our technology.

I will tell you, this is my 11th season as the CEO at Align Technology and I have never been more confident that our best days are ahead of us. It's because the people we have, the teams we have, the programs we are working on and the vision and the sight we have become standard of care.

Let me move forward a little bit and talk about iTero and how our scanner business puts us right in the middle of this revolution in dentistry and also supports the evolution of orthodontics. Back about a year and half ago, we acquired an Israeli company, American/Israeli company called Cadent. We believe they had the absolute best scanner in the marketplace. We absolutely still believe that.

As this, may be slow and quiet but nonetheless, effective revolution goes on in digital dentistry the winners are the company to provide tools that deliver or help their customers deliver practice growth. Just in the hallway, one of our shareholders said they have seen a local dentist advertising the use of the Cadent scanner getting rid of impressions. It is literally the worst part of the procedure for most patients.

So as the winners can bring better tools to allow better practice growth, improve patient care and better profitability for the practice, they are going to go forward. Our strategy for iTero is right at the middle of that. Our goal is to build, continue to build an install base we can leverage. We are already seeing that with the Invisalign team and the iTero team and in addition we are growing the leverage between Invisalign utilization and scanner usage.

If I look at orthodontists, we are the first to get scanners to send Invisalign cases in. they are in all of their Invisalign volumes have gone up significantly compared to all other cohorts. It just reduces friction in the office. They report better patient fits. Cases progressing better and it just makes sense, as the video said. First-generation better clinical data, better aligner fit, better cases.

There's other advantages as well that I will talk about in just a minute but it goes beyond Invisalign. There are high-value applications like implants. So we have an approved, FDA cleared, Biomet 3i, validated application for all our implants. It dramatically cuts the number of visits in time for implant to healing abutment to final restoration by months and months. In fact, I am going in for one soon. It's exactly what I am going to do. I just had a root canal, great. Don’t you love being in the dental industry.

So the upshot is, that kind of technology makes it better for patients, reduces visits and compresses the cycle time between when you had your extraction and you actually get your restorative. We are just getting started here. If we think about that, we continue to make investments on iTero.

We just announced this morning a brand-new scanner. This is more today, more about features than cost reduction. We see our way to winning in this business. It first starts with ensuring we have the absolute best scanner, which we do. Faster, continued, more powderless, more accurate, a lot of new digitized workflow options which really is a problem solution set for the general dentists.

In addition to that new scanner, we just launched our first and primary new application, right at chair side, called the Invisalign outcome simulator. We had a series of pilots with doctors. The last one was several hundred. They literally would not let us take the software of their systems because it was so useful. We had doctors that were more moderate Invisalign users. They did not do well. They were not comfortable explaining Invisalign to patients. By using this at chair side, literally minutes after I do a scan, they could show what their case would look like that patient and discuss with them the range of from comprehensive to more minor treatment choices.

Literally patient acceptance went up double, triple what they were seeing before. Meaning, the patient says, yes, let's go forward, do the rest of records and proceed. So this is a big deal. It's been very well received by both orthodontists and dentists and its available almost immediately.

If we think about moving forward in for this business, all of this technology starts to come together outside the U.S. and as I said a minute ago, that's where the most complex cases are. I will give you the same snapshot I did for North America a few minutes ago. Overall all international for us is about 25% of our volume. Amazingly our direct geographies are continuing to grow even in core Europe and that was actually paced by the U.K., hard to imagine, still very much in the austerity cycle, but the investments we made in manpower there, in leadership and the rest of changes we have made across the continent there, have driven growth.

Again four quarters in a row, while same quarter a year ago 20% growth. We see that continuing in general. The team is executing very well. The more we can bring out the right technology and product evolution, the more confidence the very discerning orthodontists and dentists over will use our business.

Our other direct geographies are very small but very important, China and Japan. Both of them, while they make up a very small percentage today, a country like Japan, which I will touch on in a moment is, we see as one of the very few markets that can be as big as the U.S. Literally as big as the U.S. over time. Won’t be in three years or five even, but if we have to think about our responsibilities to build this business the right way, we are going slowly, building the right foundation in China. I will amplify that a bit.

We have been on top of or above our expectations internally virtually every quarter since we launched a year and half ago in May. Our strategy was, from the very beginning, starting four years ago before we actually had commercial availability, was to work with the societies there and the key opinion leaders. We literally have involved with almost all the chairs and the deans of all the dental and orthodontic schools in China.

Recently at the Chinese Orthodontic Society, a major meeting. We had a whole series of presentations on finally finished cases with Invisalign. Again, these are two to two-and-half year long cases, Class II and Class III, highly complex cases, far more difficult than what we see in North America and they are showing spectacular results.

Additionally, at a summit we held in Macau in late October, spectacular results. Several hundred top doctors from around Asia, trying to knock each other off the perch for the toughest cases delivered. It's all this technology G3, G4. They don’t have SmartForce yet but they are going to, SmartTrack yet, they are going to. So all these things come together very well, for a country like China.

So in five years, China will be very meaningful for us in 10 years, who knows. It could be as big as the U.S. So again, long-term investments for us but all at the core, this is on the thread of innovation technology evolution.

So I bring this back together and I add to that what was going on with our distributors and APAC has been growing at, our Asia-Pacific area, a wide geography with a couple of bigger markets in Australia and Hong Kong has been growing even faster than rest of the international team which in turn has been growing faster than North America. 35% CAGR for APAC. We are bringing that back in-house starting May. As of May 1, those cases coming in will have, even with the offset in APAC, with the direct team there, we will have a nicely higher contribution margin for us.

So that roughly 3% to 4% of volume of distributed geography, that will substantially add to our topline starting in May 1. It's not an acquisition. It's is really reverting back to us. So it's really important for our distributor partners to continue to nurture these potential future markets and for us to work with them to grow, which we are doing in Latin America and EMEA.

So that continues and all of this gives us the confidence that with the technology and innovation and these future market opportunities, we have got the opportunity and headroom for growth. That brings me back to why I am excited to be here and why I think our best days are ahead.

You have said, you have seen, I have talked about before, we got a more enormous headroom. It's just execution in front of us. We have got great intellectual property, a lot of trade secrets. You saw some of that in our factories in Juarez and Costa Rica. We have this very focused execution game plan that we are knocking down to keep cycling on significant evolutions in product and technology and innovation and the internal technologies to enable all that so we can scale well.

All this comes together with international where we are just scratching the surface and finally it's woven together with a very unique consumer platform in a mostly private pay environment here in the dental industry but very unique in our set to drive category expansion and utilization growth. And with that I will say thank you much for your kind attention and we will try and fight our way over to the breakout room which as Ross, to the left, all right. Thank you very much for your time.

Question-and-Answer Session

Thomas Prescott

Good afternoon, why don’t you start us up here?

Unidentified Analyst

Okay, just raise your hand if you have any questions. But I will kick it off real quick. So in December, you announced a reorganization and then indicated that fourth-quarter revenue and EPS would be towards low end. Then coming out of the third quarter, I think there was some seasonality as usual and the market had slowed a little. But could you talk about what you saw from the third quarter to the fourth quarter?

Thomas Prescott

What I will do is not comment other than what we have spoken about. Given that we were making a number of moves in the business to organize better on customer, we have kind of outgrown some of our structure, which was pretty much a straight functional organization and organized in a way around product and customers. So that we have a better end-to-end ability to make all these changes we were working on. We announced a series of changes.

With some of those costs and given that we were later in the quarter, some of the implications, the Hurricane Sandy and everything else we felt it was important to signal that we were at the lower end of the range and I guess I wouldn’t say any more than that. We are going to be announcing our Q4 and year-end results here in a couple of weeks. I will hold the rest of our comments to provide context about the business environment then.

Other questions.

Unidentified Analyst

Hi, okay. So I hope this doesn’t get me in to trouble with what I am trying to say that. But anyway, so in the last quarter, you guys just talked about how orthodontists had measured a lot of people for the Invisalign and then people waited because they worry about the economy, et cetera. So, with the new scanner, do you think that helps eliminate a bit orthodontists growing older, trouble or pressure and then people not signing on the dotted line like this that help us get to the end game of a paying patient?

Thomas Prescott

I am going to try my best to play back for the webcast the question, if I don’t get the fidelity you are looking for the signal. Then the question I believe was while there was some deferral of case starts, orthodontists and dentists doing consults and yet patients may be taking a little longer to decide if this was the time to move forward. The question was, does the scanner help?

I don’t know if it actually helps. If it's an economically driven issue, what we understand is from patients is, they are getting the physical impressions of PVS as the absolute worst part of the process for them. It's also not as exact and accurate as we need what we seen in.

So I would separate those two factors right up. In general, the practices that have been using, say the orthodontists that have been using scanners for more than six months have significantly higher utilization rates adjusting for every other factor in the cohorts. So we do know that scanners in the practice help support utilization growth. I would put the broader issue, secular trend, patient traffic, general patient acceptance on economics, maybe as a slightly different issue but it’s a fair question.

Other questions.

Unidentified Analyst

Given what you just said about orthodontists who use scanners have much better utilization, what's your view on opening up the system and making it a bit more compatible to other manufacturers' digital equipments?

Thomas Prescott

Sure. Again, I will playback as well as I can. Given the positive implications or the positive correlation between scanner usage in office and Invisalign utilization, why wouldn’t we open it up to other scanners?

The answer is, for the right scanners, we could and will. We've said for a while that one of the value propositions for Align, including with Cadent was to have an open platform. One of the things we would want to make sure is anybody else's scanner is good enough. One of the reasons why we get to know Cadent very well, we looked at every scanner in the market in detail. Every scanner out there that was significant.

None of them could measure up to what the Cadent scanner could do. The accuracy, the full arch capability, all of that. Again, you remember, you are weaving together a lot of either video or snapshots, a lot of data. It has got to be put together very accurately. If the aligners don’t fit well and the case doesn’t work the scanner manufacturer is not going to get blamed. We are.

So we are very exacting set of tests and studies and we have worked to retain to try and qualify other scanners. To date, no one's made it. We believe there are some scanners coming out or out there that could and we think as a company strategy, it's in our best interest to help deliver the right Invisalign experience in that office as well.

So I think it is a reasonable strategic direction and you ought to we are scratching on the same things.

Other questions. Yes?

Unidentified Analyst

This is a question on SmartTrack. Actually, two questions. You mentioned you expect some launch during the first quarter. Just wanted to see if you can give us more color on that. Of course, today we are at the end of the quarter, and then also just curious what the gross margin will look like with the new product in the near term and then also longer term.

Thomas Prescott

So two questions. Both related to SmartTrack. The first is, is there any more commentary and exactly when we would cutover. The second is gross margin framework. Is that neutral, positive, negative? Did I get that right?

Unidentified Analyst

Yes.

Thomas Prescott

Okay, let me take the second one first. That’s simple. It’s a little more expensive and now that we are just launching it in, we are going to be at the early stages of getting cost out of that product, both for our partner as well as ourselves. I will tell you, we use less total material for an average case because there is less wastage. It's more flexible. It's easier to form. So we actually for a given, for a lack of better description or meter, we actually get more yield out of that material.

It is more expensive. It is a very complex polymer. As I said, we have been at it for a long time. So there will be a little bit of gross margin headwind but the benefits are so great that we believe utilization growth, adoption growth, case performance will be better and well worth it.

Secondly, we put though, not a huge but a meaningful price increase, both to help obviate some of the med device tax and to carry a little bit of weight here on this. That was in the back of our mind. We hadn’t done it for about five years. While we are a premium product, we felt we felt we could argue for all the investments we have made over the last 10 plus years that we could come back and make that case to our customers and we haven’t had negative feedback there.

The second part of your question, we aren’t putting any more color. We are still working on the exact cutover over date but it will be in Q1. So question. Anybody in the way back there? Oh darn. Thought we were finished. Go ahead.

Unidentified Analyst

Just going off a bit, how do you think about inventory in that transition, and particularly if you go (inaudible) that what would your (inaudible)?

Thomas Prescott

The question is, how do we think about inventory? Why don’t I let Ken talk about that?

Kenneth Arola

So, from new material inventory perspective, the cutover to the new SmartTrack's smart material alloy will be pretty minimal for us. We will have a full cutover when we do. We pretty much manufacture all products with the new material. We will have a couple of countries we will still have to get regulatory approval in. It is small in nature. So we have to manufacture off the old material.

We will have purchased a little bit of the old material just as a precautionary in case we run into issues. We don’t anticipate any. As far as APAC itself getting the business back up at full ASP. The same cost structure from a cost to sales point of view and gross margin point of view but we are getting better overall revenue and a better overall gross margin and operating margin when we take the APAC business back in midyear.

Thomas Prescott

I will pile on by saying, we have got really high turns on the Invisalign side of business. We have very little inventory dimension. In fact, kind of our capacities are kind of an inventory, if you will. So it’s a proxy. So high turns. It's not number one thing we worry about there. We are more interested in performance and making sure it flows through the factory right. So, next question. Yes?

Unidentified Analyst

Any thoughts on what the changes with flex spending in accounts might have orthodontics?

Thomas Prescott

The question is, have we thought what the changes in flex spending going now to $2,500 from $5,000 might have for orthodontics? The short answer is, we do not know yet. There have been a number of people that have posited some ideas. We think it is a marginal fact probably that we see income marginal change in December or January. Can I get to use the last of my flex spend to get this case started and use it? Or whether I am waiting till January, sometimes that’s what doctors report to us?

But it's more of a marginal factor because when people decide to go do a treatment like Invisalign, say it's $5000, their dental insurance from their employer may pay for $2,000, their flex spending may have some balance in there but they are generally coming out of their for a while. Typically the orthodontist or dentist pays for that credit card or check as they come in each time.

So much of that are out-of-pocket. To start the case, may be a small down payment is with the insurance, the starting point. So what I would step back and what I have heard from some of the ophthalmology companies, (inaudible) players is, they expect to feel a little more of that. But I think their penetration is orders of magnitude higher than ours. They expect to feel a little more in January, February, maybe it’s a net-net negative.

So we do not know yet. We still haven’t talked about Q1 and we don’t think we saw anything, I guess we can say, in Q4 that had to do with it expiring. Frankly I don’t think most people understood it was going to until they got their new benefit statement for January. But our customers and others in the dental industry are saying, if anything, it will be a marginal effect. Yet to be known. We had another question over here somewhere just before that one. Yes? Hi, Tom.

Unidentified Analyst

What is presumably, the new product designed to gain share? How much share do you think of the customers you can take? What is the marketing pitch to the dentist? (inaudible).

Thomas Prescott

Sure. SmartTrack, the new evolution. So what's our marketing pitch? How much more utilization can we take? The chart I showed during the presentation, now that’s not mathematically. It just shows the progression. You can track utilization growth over time with the evolutions in our product.

Especially if you look at ortho where there is little less noise, given the long tail of (inaudible). Secondly, if you really were to isolate, we don’t make this easy for you, because we don’t break it out, but if were to isolate the practices that do a lot more Invisalign, there is a very direct relationship between product evolution and their confidence and we see this literally doing more complex cases.

We can actually score complex and incoming case. So what SmartTrack will do, this new material will make all of the other innovations we have made work better and allow them to be more comfortable.

The second thing is, the initial insertion force is so much less. So if you have done Invisalign and you have snapped the first one in, you kind of go, ah. It's not without some discomfort. They are far more comfortable for patients who are aged to get on and off and yet they do the job better.

So what we found in the pilot was very statistically significant difference both individual tooth movements after six aligners, 12 weeks, I would see this rotation happen right on schedule. The old material lagged a little bit. Again because the aligner material is losing its ability to deliver force consistently. So we expect this to be one more progression in that drive to continue to take share and displace brackets and wires.

But it is a bit of a multiplier, as one of our customers told us, that will make the other innovations we have made work better. So another question. Yes?

Unidentified Analyst

Your distribution agreements in Europe and Latin America allow you to buy those distributor's (inaudible). When should we expect that?

Thomas Prescott

The question is, do our distributor agreement with the EMEA and Latin America also allow us to buy those back over time. The short answer is, we aren’t really buying it back. We set up these relationships back in 2003 knowing that we couldn’t go do everything them. We wanted people to go nurture some of these early markets and invest in building them out because we couldn’t afford to be directing all those geographies.

The idea was, we would come up towards that end-point and need negotiating extensions or a reversion, but not really an acquisition, per se. Certainly, if we wanted to acquire them in the middle of a period, we would have to give them fair value and that would feel more like an acquisition.

In the case of this Asia-Pacific, as of April 30, that ten-year agreement is up and starting about a year, a year-and-half ago, we have started having discussions with the principle that it was probably our intention to bring that back for us. We do not want that individual to start coasting, in other words stop investing in the business. So we worked a deal where we could help support some of the APAC's investment to bridge so that individual can continue taking their profit out in the same kind of way, while we were ensuring that continued expansion was going on in business.

So if we saw an opportunity like that with our great partners in Latin America or EMEA or subsets of those geographies, we might think to do the same thing. But our first goal is to have them be very, very successful which our Asia-Pacific partner has certainly done. Next question. Yes? Well, back over here.

Unidentified Analyst

Becoming an all, ITC's court decision and if it affects the (inaudible).

Thomas Prescott

The question was, can we comment any more on the press release this morning, the ITC decision. Gosh, I think we put about everything we could in to that press release because we are not really be talking to our owners again for three weeks or so. Simply stated, it’s a small part of very protracted process. We believe the commission, in their infinite wisdom, made a decision we don’t agree with.

So we are a little disappointed but it has nothing to do with the rest the case about infringement. It has to do with whether or not the original enforcement order from 2006 against the principles that are involved in doing what we described could be enforced now and because of the specificity of that contractual language, the commission decided against what the Administrative Law Judge and the staff had determined they could. So we will live with that.

But there is a primary trial for the infringement, that action is coming up in just a few weeks in February. So we fully expect to be able to successfully assert our IP. Our IP is not at issue in that finding. It was only about enforcement from the 2006 action. Yes?

Unidentified Analyst

Given there are few more months of (inaudible) contact, do you any better understanding of what caused the slowdown to (inaudible) in 3Q?

Thomas Prescott

The question was, given some more rearview mirror and data what any more perspective on what caused the slowdown in Q3. Three or four things. We have talked about all them before.

One, the most important is the broad secular trend of slowing patient visits. It was across dentistry. I think when you go back and reconstruct it was actually starting to decelerate in Q2, when you listen to the Dentsplys and Henry Scheins. Those players, they really see the whole market.

What certainly wasn’t visible to us yet, we had a terrific first half and some of that was probably masked by normal season, what looked like normal seasonality during the summer. What we didn’t get was a balance and when you go back and reconstruct it, patient traffic is down, a whole lot of other things happened.

Some have posited that the election had an impact both on consumer spending and some other things. We don’t know. From our small view, patient traffic is probably the number-one factor. Again, I will remind you, even if orthodontists work harder when things slow down, it takes a while to fill their pipe again, GP dentists tend to get more conservative and don’t try to upsell in a time when things slow down and that’s kind of the primary effect for us. So no other insights. Next question. Yes?

Unidentified Analyst

Can you just remind us how many of your cases you have involved some form of insurance coverage? What percentage of it is covered typically and then how much percent covers (inaudible)?

Thomas Prescott

The question was, coverage for some form of dental insurance. What's going on with the trends? Simple statement is, most dental procedures and implants are probably one exception where it is either small or in some cases no reimbursement and you are comparing that crown and bridge, most dental procedures have at least, it’s a direct prepaid. It's not indemnity type insurance like you do with healthcare and for most of the people who go to the dentist regularly, they are all insured.

So now the only question is, is it a bare-bones insurance policy that covers routine care or is it a loaded with some other stuff? The average insurance plan whether it is Delta or Aetna or Cigna or others, has lifetime benefit. Again the employer gets to choose how rich it is.

At the low-end, call it a $1,500 for a lifetime benefit for covered life, for orthodontic treatment, everything else in that is out of your pocket. At the high-end, maybe $2,500. Most of the people that go to dentist office regularly have some form of that coverage usually sponsored through employer or group. That number is pretty static. So it hasn’t changed much. It roughly is in sync with the normal patient population in dentists' office.

Unidentified Analyst

So you took it out of your pocket (inaudible).

Thomas Prescott

The average out-of-pocket, if we take the national average for orthodontic treatment is about $4,500. It you take an average of, say $1,500 at the low-end or $2,000 called for the simplicity, as covered benefit for a dependent or the individual, then $3,000 is out-of-pocket. At that point they can come back and say the doctor may want $500, $750, $1,000 upfront.

They bill the insurance for the other $2,000 and then they would pay the other $1,500, $2,000 over time with each visit. It might go year, year-and-half. They might pay $200 each time or something like that. That is pretty much and the doctor of course says, we won't charge you interest but they typically collect the rest of that out-of-pocket overtime.

That’s where flex spending could come in potentially or a flex spending account could come in at the upfront, part of the upfront payment. But that’s pretty much the case whether it is GPs or orthos.

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