SmileDirectClub aims to change tack in 2020

Jeremy Booth, DTI

Fri. 28. February 2020

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NASHVILLE, Tenn., U.S.: As 2019 came to an end so too did the terms of a supply agreement between Align Technology and its one-time partner SmileDirectClub (SDC). The company can now supply aligners directly to dentists and orthodontists.

“With our agreement with Align Technology now expired, we are no longer obligated to stay in the direct-to-consumer channel,” Alex Fenkell, co-founder of SDC, said in a statement. “We’re excited to expand our offering,” he added.

The expiry of the pact means that SDC can now compete directly with Align, which manufactures the leading Invisalign clear aligner brand, and it signals the end of a five-year entanglement between the two companies. Align filed a lawsuit against SDC for patent infringement in 2015 before becoming a major investor in the company and a third-party supplier of clear aligners to it. The Nashville-based company has since invested in its own 3D-printing manufacturing capacities, including at its plant in Kyle, Texas, U.S., in order to meet growing consumer demand for its discounted tooth straightening treatment. Chief Clinical Officer Dr. Jeffrey Sulitzer says that, like consumers, dental practitioners will appreciate the value proposition behind SDC’s offering.

“Individual orthodontists and dentists do what is in the best interests of their practices,” Sulitzer commented in an interview. “When there is a good business opportunity, they will take advantage of it, and this will be a great business opportunity.”

In January, SDC began selling a line of branded oral care products through the retail giant Walmart and through its own website. Providing clear aligners directly to dentists would give SDC an additional revenue stream that is outside of its core business of selling prescriptions for its clear aligner cases.

According to the company, there is demand from within its network of more than 250 general dental practitioners and orthodontists to provide SDC aligners to in-office patients. “There are a lot of patients coming into these dentists’ and orthodontists’ offices saying ‘Do you have the SmileDirectClub brand?’ and so we get inbound requests” CEO and Chairman David Katzman told investors in a webcast conference call. He explained that the company is in the process of developing wholesale capabilities and anticipates that it will launch a wholesale service later this year.

Seeking stability in its core business

SmileDirectClub has over 300 retail locations in seven markets and plans to open SmileShops in Germany this year. (Image: Bblfmr/Shutterstock.com)

SDC is the largest and best-known provider of remote clear aligner therapy in the U.S. and exports its branded service to consumers in Canada, Australia, Ireland, the U.K., New Zealand and, most recently, Hong Kong. Consumers in these markets can visit SmileShop retail locations to have an intraoral scan, or they can have impression kits sent to their homes via the company’s website. SDC says that its network of dental professionals then prescribe and oversee treatment, and that more than 850,000 patients have undertaken treatment with SDC since 2014.

The company shipped 115,042 clear aligner cases in the fourth quarter of 2019, which was an increase of just over 50% on the corresponding period in 2018. For the full year, 453,053 unique case shipments were sent, compared with 258,278 for the full year in 2018. To put this into perspective, Align Technology shipped 1.5 million cases last year—just over three times as many as SDC—to its global network of general dental practitioners, orthodontists, dental service organizations and patients.

But Katzman said that he now wants to control and limit growth at SDC so that the company can focus more on improving the treatment experience of its patients, as well as invest in teen sales, new products, sales in its international markets and the company’s manufacturing capabilities.

“Our customer experience is the cornerstone of our business, and we cannot sacrifice this in order to maintain our historical growth rates” - SmileDirectClub CEO David Katzman

“2020 will be a year of significant but controlled growth,” Katzman said. “We intend to expand farther into our core demographics while also penetrating new ones such as teens. Teens represent two-thirds of industry case starts, yet approximately 5% of our business. We also intend to focus on new acquisition channels such as wholesale and retail. Our growth will also come from international markets where we have already made meaningful progress and have architected a strategic road map for continued expansion throughout 2020 and beyond. You’ll recall that we see 75% of the total market opportunity outside of North America,” he added.

Katzman, who has held a number of leadership roles in diverse companies since the late 1990s, stated in the call that the company wants to improve the customer experience. “Our customer experience is the cornerstone of our business, and we cannot sacrifice this in order to maintain our historical growth rates.”

This new emphasis comes as SDC continues to allege that the dental establishment, particularly in California, has engaged in anti-competitive practices to harm its business—since December, the company has had four class-action lawsuits or state regulatory investigations either dismissed or closed in its favor. More recently, the company says that news media outlets have misrepresented facts about its service.

An NBC report in February cited customer complaints made to the Better Business Bureau, a nonprofit organization involved in consumer protection and industry self-regulation, about the company’s clear aligner treatment having led to “painful problems for some people,” such as broken teeth and nerve damage. Dr. Chung Kau, chairman and professor of orthodontics at the University of Alabama at Birmingham, U.S., told NBC in its written coverage that a lack of in-person supervision in the movement of teeth can result in permanent harm to the patient. He explained that instances such as those in which a patient’s occlusion had been affected go beyond esthetics. “If you can’t get a proper bite, that affects the entire function of your jaw,” Kau explained. “You could get migraines, jaw joint problems, disintegration of your joints.” But Colorado- and Nevada-licensed dentist Dr. Gary Moore, who contracts with SDC as part of its network of practitioners, commented in the same report that he believes that the company has “a viable platform to treat patients and talk to patients without the patient having to leave their home.” With SDC, “access to care is huge,” Moore pointed out.

SDC responded to the piece by the news organization in a statement, saying that “Notably, the almost 5-minute report and online story does not include one interview or statement from the more than 750,000 satisfied customers who have used our products to improve their lives, nor does it include a single interview with any of the hundreds of dentists who have publicly supported our technology.”

“As entrepreneurs and disruptors, we fight every day against the backdrop of this information, industry backlash and continued attempts on the part of Big Dental to engage in anti-competitive behavior,” Katzman reiterated in the conference call. He said that the company is in favor of further legislation to protect teledentistry patients and that it will become less reactionary and more proactive in combating what it sees as anti-competitive strategies.

It was also announced in the conference call that SDC plans to assemble an independent clinical advisory board of expert dentists, including orthodontists, that will report directly to SDC’s board of directors. “We expect this advisory board to help set industry standards for teledentistry quality measures, advise on ensuring quality data and help with strategies for continuous quality improvement, among other things,” Katzman said.

The company’s lobbying expenses increased by 18% in the fourth quarter of last year and are likely to keep increasing.

A tale of stock prices and public opinion

The ups and downs of SDC’s stock price since it went public on the New York Stock Exchange last September have been the result of a number of setbacks for the company that have alternately boosted and depleted the faith of investors. When SDC’s performance has appeared shaky, so too have the future prospects of the remote clear aligner business, but the opposite has also proved to be true.

SDC offered tens of millions of shares to investors in September through an initial public offering (IPO), which could have gone better. The company priced its shares at $23.00 before the IPO, but the price of its stock dropped by 28% on the day to close at $16.67.

The greatest blow to the company so far has been California’s passing of Assembly Bill 1519, which came into effect in January to establish new protection for consumers using teledentistry services. According to the state’s new rules, a dentist must be involved in the planning of orthodontic treatment even if the treatment is undertaken at home. The company’s stock slid by 13% to trade at a low of $9.44 after the bill’s signing, meaning that it had shed nearly 60% of its value since the IPO.

But 2020 has started off better than 2019 ended for SDC. Data from S&P Global Market Intelligence show that the company’s stock price climbed by more than 52% in January after news of the expiration of its agreement with Align and the announcement of its partnership with Walmart. Each of these developments caused the stock price to jump by around 17%.

Emphasizing the importance of orthodontists

There is a consensus among orthodontists that the movement of teeth should in all cases be personally supervised by a trained professional, and a growing number of clear aligner manufacturers are backing practice visits.

The German clear aligner manufacturer PlusDental announced in October that it would realign its operations in order to put orthodontists back at the center of the former remote therapy provider’s treatment plans. Dr. Peter Baumgart, executive director of the company, told Handelsblatt at the time that “dental and orthodontic expertise is indispensable for esthetic tooth correction.”

The U.S. dental chain Western Dental & Orthodontics is the latest manufacturer to enter the clear aligner market, and the company says that treatment with its new ClearArc aligner, which will be offered in its 324 dental offices across the states of California, Texas, Nevada and Alabama, will be planned and led by trained orthodontists and will still cost 40% less than treatment with the leading brand.

A Western Dental spokesperson told Dental Tribune International that ClearArc had not been designed to strip sales from teledentistry providers, but rather to emphasize the importance of safe oral care. “Our message is more about educating consumers regarding aligners. Our goal is to make sure that patients understand that it is best to have a professional review their case, take radiographs, evaluate to make sure they’re appropriate candidates for aligners and monitor their treatment with in-person visits during the treatment period,” the spokesperson explained.

In the case of SDC, it remains to be seen whether, and to what degree, the company will support further regulation of remote aligner therapy in the U.S. and abroad, and whether improving its customer experience will result in an increase in the involvement of general dental practitioners and orthodontists in its treatment plan.