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How Envista Holdings’ (NVST) foray into intraoral scanner business can be a recipe for disaster?

If we look at Envista’s revenue mix based on geography, China stands out as contributing >10% of the company’s total revenue. However, this statement alone does not convey the complete story. What’s even more important is the YoY growth that NVST is witnessing in the country, especially leveraging on its portfolio of implants and orthodontics services – that spearheaded the company’s growth rate at high double-digit.

Just one glance at Mainland China’s clear aligner treatment services market, it’s hard to miss that the market is highly consolidated. US’s Align Technology (ALGN) and its Chinese archnemesis Angelalign Technology Inc’s (6699-HKSE) combined market share exceeds 82 percent - leaving little room for other players in the category who are scavenging for growth.

FY21 Angelalign Technology Inc shipped out more than 150,000 case shipments to +25,000 dentists (including both GPs and Specialist Orthodontists). This growth trajectory isn’t expected to slow down any time soon, since it is estimated that only 11 percent of all orthodontic treatments in the country were performed with clear aligners – translating into huge potential for future growth.

Now, one would rather wonder why are we talking about the Chinese clear aligner market and how is it related to Carestream Dental’s (or soon NVST's) Intraoral Scanner business unit?

During FY20 and FY21, Carestream IO scanner has managed to cement its market share in the Chinese dental services market – witnessing high double-digit growth. Contrastingly, this trend didn’t replicate elsewhere globally – even in more mature markets like US or other selected Western EU markets that have much higher penetration of intraoral scanners than in Mainland China.

FY17 Hong Kong based PE Group CareCapital Holdings acquired 25% ownership stake in Carestream Dental. The remaining 75% stake in the company, which had just spun off from Carestream Health was acquired by another PE Group - Clayton, Dubilier and Rice. In its effort to ride the wave of fast-growing clear aligner market in its home country, CareCapital group also owned (since a long time) 67% equity stake in Angelalign Technology Inc.

It’s worth noting that CareCapital’s interest is not only limited to Angelalign Technology Inc or Carestream Dental in the dental space alone. Instead, the PE group also owns both majority and minority stakes in +40 dental businesses, including large research dental hospitals and DSOs.

H121 CareCapital Holdings also entered into a strategic partnership with Korea-based Medit Corp, which further helped Medit Corp to cement its positioning in the Chinese dental market, which one may argue is the largest market globally in terms of number of treatments services offered. To further complicate the matter, FY22 may witness the launch of newer models of intraoral scanners of major dental manufacturers – including the likes of Align Technology, Dentsply Sirona and new upcoming home brewed Chinese IO scanner brands.

The estimated deal size of the transaction (USD 600 M) represents 9 percent of NVST’s market cap (2 days before the day of acquisition announcement). In other words, with this kind of SVAR (Shareholder Value at Risk), NVST should try not to make any mistakes without the fear of strong consequences. In NT, we believe that there are 3 questions that need to be answered which may strongly influence NVST's market cap:

1. How will CareCapital’s divestiture of Carestream Dental’s IO scanner business impact its future growth, especially in Mainland China?

2. How would CareCapital new found love with Medit Corp influence NVST’s IO scanner business strategy?

3. How does NVST intend to pay for USD 600 M for Carestream dental’s intraoral scanner business transaction?

Outlook – We are following the acquisition closely, and expect to bring you more updates in the upcoming weeks.

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