Align Tech (ALGN) Risk Factors

We and many of our healthcare provider customers, suppliers, and distributors are subject to extensive and frequently changing regulations under numerous federal, state, local, and foreign laws, including those regulating: - the storage, transmission, processing, and disclosure of personal, financial, and medical information as well as healthcare records;- processing and use of children's personal and health data;- websites and application advertising that collect and use personal data for marketing purposes;- prohibitions against the offer, payment, or receipt of remuneration to induce referrals to entities providing healthcare services or goods or to induce the order, purchase, or recommendation of our products; and - the design, manufacture, marketing, and advertising of our products. The healthcare and technology markets are also highly regulated and subject to changing political, economic, and regulatory influences. Global regulators are expanding and changing regulations and guidance for products, which can limit the potential benefits of products and cause protracted review timelines for new products. Our critical third-party vendors and service providers are similarly subject to various regulations. Our failure or the failure of our suppliers, customers, advertisers, consultants, and influencers to strictly adhere to clearances or approvals in the labeling, marketing, and sales of our products and services could subject us to claims or litigation, including allegations of false or misleading advertising or violations of laws or regulations, which may result in costly investigations, fines, penalties, as well as material judgments, settlements or decrees. We are also subject to complex, new and changing environmental, health and safety regulations. There can be no assurance we will adequately address the business risks associated with the implementation and compliance with such laws and our internal processes and procedures to comply with such laws or that we will be able to take advantage of any resulting business opportunities. Furthermore, before we can sell a new medical device or market a new use of, or claim for, an existing product, we frequently must obtain clearance or approval to do so. For instance, in the United States, FDA regulations are wide ranging and govern, among other things, product design, product materials, development, manufacturing and testing, product labeling, and product storage. It takes significant time, effort, and expense to obtain and maintain clearances and approvals of products and services, and there is no guarantee we will timely succeed, if at all, in the countries in which we do business. In other countries, the requirements, time, effort, and expense to obtain and maintain clearances may differ materially from those of the FDA. Moreover, these laws may change, resulting in additional time, expense, or loss of market access. If requirements to market our products or services are delayed, we may be unable to offer them in markets we deem important. Additionally, failure to comply with applicable regulatory requirements could result in enforcement actions with sanctions including, among other things, fines, civil penalties, and criminal prosecution. Delays or failures to obtain or maintain regulatory approvals, clearances or to comply with regulatory requirements may materially harm our domestic or international operations, and adversely impact our business. We and certain of our third-party vendors must also comply with and adhere to facility registration and product listing requirements for Quality System regulations. The FDA enforces its Quality System regulations through periodic unannounced inspections. Failure to satisfactorily correct an adverse inspection finding or to comply with applicable manufacturing regulations can result in enforcement actions, or require us to find alternative manufacturers, which could be a long and costly process and may cause reputational harm. Enforcement actions by regulators could have a material effect on our business. We are also subject to anti-corruption and anti-bribery ("ABAC") laws such as the Foreign Corrupt Practices Act ("FCPA") and the U.K. Bribery Act of 2010, which generally prohibit payments to foreign officials for the purpose of obtaining or maintaining business, securing an advantage, and directing business to another. To comply with ABAC laws, regulators require that we maintain accurate books and records and a system of internal accounting controls. Under the FCPA, we may be held liable for corruption by directors, officers, employees, agents, or other strategic or local partners or representatives. In addition, while we have policies requiring compliance with applicable laws and regulations and we provide significant training to foster compliance, our employees, third parties acting on our behalf, and customers may not properly adhere to our policies or applicable laws or regulations, including the use of certain electronic communications and maintaining accurate books and records. If our personnel or the personnel of our agents or suppliers fail to comply with any laws, regulations, policies, or procedures, or we fail to audit and enforce compliance, our reputation may be harmed, we may lose customers or revenues, or we may face regulatory investigations, actions, and fines. In June 2024, the U.S. Supreme Court reversed its longstanding approach under the Chevron doctrine, which provided for judicial deference to regulatory agencies, including the FDA. We cannot be sure whether there will be increased challenges to existing agency regulations or how lower courts will apply the decision in the context of other regulatory schemes without more specific guidance from the U.S. Supreme Court as a result of this decision. For example, this decision may result in more companies bringing lawsuits against the FDA to challenge longstanding decisions and policies of the FDA, which could undermine the FDA's authority, lead to uncertainties in the industry, and disrupt the FDA's normal operations, which could impact the timely review of any regulatory filings or applications we submit to the FDA.

Compliance with tax laws requires significant judgment concerning our worldwide provision for income taxes. Changes in tax laws or changes to how those laws are applied to our business could affect the amount of tax which we are subject to and the manner in which we operate. Specifically, in 2016, the Organization for Economic Cooperation and Development ("OECD") established the Inclusive Framework on Base Erosion and Profit Shifting ("BEPS") to among other things, allocate greater taxing rights to countries where customers are located and establish a global minimum tax rate. After years of evaluating their respective tax laws, many countries have enacted changes, or are committed to enacting changes, which may increase our tax expense in future years. For example, the EU and other countries have enacted or have committed to enact the OECD/G20 Framework's Pillar Two 15% global minimum tax. If more countries adopt these changes based on the BEPS guidance, our provision for income taxes or operations may be adversely affected. Moreover, the application of indirect taxes (such as sales and use tax ("SUT"), value-added tax ("VAT"), goods and services tax ("GST"), and other indirect taxes) to our operations is complex and evolving. U.S. states, local, and foreign taxing jurisdictions have differing rules and regulations governing differing types of taxes, and these rules and regulations are subject to varying interpretations and exemptions that may change over time. We collect and remit SUT, VAT, GST, and other taxes in many jurisdictions and we are routinely subject to audits. We are also routinely audited regarding our tax reporting and remissions by local and national governments, and may also be subject to audits in jurisdictions for which we have not accrued tax liabilities. The positions we take regarding taxes as well as the amounts we collect or remit have and may continue to be challenged and we may be liable for failing to collect or remit all taxes deemed owed or the taxes could exceed our estimates. We received a notice and initial assessment from His Majesty's Revenue and Customs in the United Kingdom for unpaid VAT related to certain clear aligner sales made during various periods between 2019 and 2023. One or more U.S. states or countries may seek to impose incremental or new sales, use, or other tax collection obligations or may determine that such taxes should have, but have not, been paid by us. If we dispute rulings or positions taken by tax authorities, we may incur significant expenses, time, and effort to defend our positions. The application of existing and new tax laws, and the results of audits could harm our business. Furthermore, there have been and will continue to be substantial ongoing costs associated with complying with the various tax requirements and defending our positions in the numerous markets in which we conduct or will conduct business.

Our success depends on our ability to quickly and profitably develop, manufacture, market, and obtain and maintain regulatory approval or clearance of new products and services along with improvements to, or refurbishing of, existing products and services. We cannot assure successful development, sales, or acceptance of our new or improved products and services. The extent and rate at which new products or services achieve market acceptance and penetration is a function of many variables, including our ability to: - successfully predict, timely innovate, develop, and launch new technologies, applications, features, and products to meet market needs and keep pace with changes in technology, customers' demands, and industry standards;- successfully, and in a timely fashion, obtain regulatory approval or clearance of new and improved products or services from government agencies such as the FDA and analogous agencies in other countries;- cost-effectively and efficiently develop, manufacture, quality test, market, dispose of, and sell new or improved products and services offerings, including localized versions for international markets;- properly forecast the amount and timing of new or improved product and services demand;- allocate our research and development funding to products and services with higher growth prospects;- ensure the compatibility of our technology, services, and systems with those of our customers;- anticipate and rapidly innovate in response to new competitive products and services offerings and technologies;- differentiate our products and services from those of our competitors as well as other products and services in our own portfolio and successfully articulate the benefits to potential customers;- manage the impact of nationalism or initiatives encouraging consumer purchases from domestic vendors;- qualify for third-party reimbursement for procedures involving our products or services;- offer attractive and competitive products and service and subscription plans;- encourage customers to adopt new technologies and provide the needed technical, sales, and marketing support to make new product and services launches successful;- manage government procurement program restrictions; and - source and receive quality raw materials or parts from our suppliers. If we fail to accurately predict the needs and preferences of customers and their patients, or fail to offer viable products or services, we may invest heavily in research and development that does not lead to significant revenues. Even if we successfully innovate and develop new products and product improvements, we may incur substantial costs doing so and our profitability may suffer. Introduction and acceptance of any products and services may take significant time and effort, particularly if they require doctor education and training to understand their benefits or doctors choose to withhold judgment on a product until patients complete their treatments. In addition, we periodically introduce new business and sales initiatives to meet customers' needs and demands. In general, our internal resources support these initiatives without clear indications they will prove successful or be without short-term execution challenges. Should these initiatives fail, our business, financial condition, and results of operations could be materially adversely impacted.

Our success depends in part on our ability to maintain existing IP rights and obtain, maintain and enforce further IP protections for our products. Our inability to do so could harm our competitive position. We rely on our portfolio of issued and pending patent applications in the United States. and other countries to protect a large part of our IP and our competitive position; however, these patents may not prevent third parties from producing competing products similar in design to ours if they are invalidated, held unenforceable, circumvented, or otherwise limited in scope. Furthermore, our foreign patent protections may be more limited in geographic scope than those under U.S. patent and IP laws. Additionally, any of our patent applications may not result in an issued patent or the scope of the patent ultimately issued may be narrower than initially sought. We may not be afforded the protection of a patent if our currently pending or future patent filings do not result in the issuance of patents or we fail to timely apply for patent protection. We may not apply for a patent if our personnel fail to disclose or recognize new patentable ideas or innovations. We may choose not to file a foreign patent application if the limited protections provided by a foreign patent do not outweigh the costs to obtain it. Further, third parties may file patents or develop IP strategies that prevent or limit the effectiveness of our patents. We also protect our IP through copyrights, trademarks, trade secrets, and confidentiality obligations. We generally enter into confidentiality agreements with our employees, consultants, and collaborative partners upon commencement of a relationship with us. However, despite the existence of these protections, we have experienced incidents in which our proprietary information has been misappropriated and believe it will be misappropriated again in the future. If these agreements do not provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information, adequate remedies may not exist to prevent unauthorized uses or disclosures. Enforcement of our IP rights is time-consuming and costly, and could ultimately prove to be unsuccessful. In certain jurisdictions, enforcement of IP rights is more difficult due to legislation and geopolitical circumstances. As we launch our products in different regions at different times, our products may be acquired and reverse engineered by potential competitors in regions where infringement is more difficult to pursue. Our inability to maintain the proprietary nature of our technology through patents, copyrights, or trade secrets would impair our competitive advantages and could have a material effect on our operating results, financial condition, and future growth prospects. In particular, a failure to protect our IP rights might allow competitors to copy our technology or create counterfeit or pirated versions of our products, which could adversely affect our reputation, pricing, and market share.

Our net revenues are largely dependent on sales of our Invisalign treatment plans with clear aligners and iTero intraoral scanners. Of the two, we expect the Invisalign treatment plans will continue to account for the majority of our net revenues, making the widespread acceptance of the Invisalign system by orthodontists, GPs, and consumers critical to our success. The average selling prices of our products, particularly the Invisalign treatment plans, are influenced by numerous factors, including the mix of product treatment packages and timing of products sold (particularly the timing of orders for additional clear aligners for certain Invisalign products) and foreign currency exchange rates. In addition, we sell different products at different list prices which may differ by country. Our average selling prices for our Invisalign treatment plans and iTero scanners have been impacted in the past and may be adversely affected in the future if: - we introduce new promotions, change existing promotions, or offer general or volume-based discount programs, product or services bundles, large account sales, or consumer rebate programs;- participation in promotions or programs unexpectedly increases, decreases, or changes demand in material ways;- our geographic, channel, or product mix shifts to lower priced products or to products with a higher percentage of deferred revenue;- we decrease prices on one or more products or services in response to increasing competitive pricing pressures;- we introduce new or change existing products or services, or modify how we market or sell any of our new or existing products or services;- governments impose pricing regulations such as volume-based procurement regulations in China; or - our critical accounting estimates materially differ from actual results. To stimulate product and services demand, we have a history of offering volume discounts, price reductions, and other promotions to targeted customers and consumers and releasing lower priced products. These promotional campaigns and lower priced products have had, and may in the future have, unexpected and unintended consequences, including reduced net revenues, gross margins, operating margin, net income, average selling prices, and volume.

Natural disasters can impact our operations and those of our customers and suppliers. Natural disasters such as earthquakes, tsunamis, floods, droughts, hurricanes, wildfires, and extreme weather conditions can cause deaths, injuries, and critical health crises, power outages, property damage, restrictions and shortages of food, water, shelter, and medical supplies, telecommunications failures, materials scarcity, price volatility, and other adverse consequences. Climate change is likely to increase the frequency and severity of natural disasters and, consequently, the risks to our business, operating results, and financial condition. Our digital dental modeling and certain of our customer facing operations are primarily processed in our facilities in Costa Rica; our iTero scanners are primarily manufactured in China and Israel; our aligner molds and finished aligners are fabricated in China, Mexico and Poland; and we have other treatment planning operations and customer facing support in Poland, China, Spain, Germany, France, and Japan. These regions are susceptible to natural disasters. If a natural disaster occurs in a region where one of these facilities or those of our customers or suppliers are located, our employees could be impacted, we could lose valuable research, and our ability to create treatment plans, respond to customer inquiries, or manufacture and ship our aligners or intraoral scanners could be compromised, causing significant product and services delays and reputational harm. The effects of climate change could change the supply, demand or availability of sources of energy or other resources material to our products and operations and affect the availability or cost of natural resources and goods and services on which we and our suppliers rely.