SmileDirectClub soldiers on

Jeremy Booth, Dental Tribune International

Fri. 8. November 2019

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NASHVILLE, Tenn., U.S.: Eight weeks is a long time for SmileDirectClub (SDC). Dental Tribune International last reported on the teleorthodontics startup in September, just days before it offered tens of millions of shares to investors. SDC is due to report its first earnings as a public company on Nov. 12 and investors already have a lot to consider, such as growing regulatory restrictions, a new production facility and international expansion.

SDC’s initial public offering (IPO) could have gone better. The company priced its shares at $23 for its inaugural trading day on Sept. 12, but the price of its stock dropped 28% to close at $16.67. At-home orthodontics made headlines in the weeks that followed and the fortunes of SDC were best plotted by the contractions in net worth of its three largest shareholders.

The company’s 30-year-old founders became two of the youngest billionaires in the U.S. on the evening of the IPO. Even after the initial drop in share price, SDC had a market capitalization of over $6 billion. Founders Jordan Katzman and Alex Fenkell had reportedly each retained approximately a quarter of the company’s Class B shares and this pushed their net worth into ten figures. By mid-October, the situation looked a little different. The company’s stock traded at a low of $9.44, meaning it had shed nearly 60% of its value since the IPO. Forbes estimated that Katzman and Fenkell were then worth $700 million and $770 million, respectively. Jordan’s father, David Katzman—the largest shareholder in the company and also its CEO—had retained around one-third of the Class B shares and was estimated to be worth $970 million.

“Financial analysts are still bullish about SDC, despite its shaky debut.”

However, according to information from Bloomberg and Business Insider, financial analysts are still bullish about SDC, despite its shaky debut. All ten Wall Street analysts that are covering SDC have given the company a buy rating or higher. Price targets given by the analysts have ranged from $18 to $31. J.P. Morgan, which led the underwriting of the IPO, gave the highest price target of $31 and said it saw “a clear path to sustained top-line growth at an almost 50% [compound annual growth rate for 2018–2023].” Credit Suisse gave a price target of $18 and noted that SDC’s partnerships with retailers, such as CVS Health and Walgreens, gave it a path to expansion. Kevin Caliendo of UBS pointed out that falls in SDC stock value were related to investor concerns about its third quarter performance and new regulatory risks in California.

Trouble in the Golden State

SDC’s short life as a publicly listed company has seen it dogged by negative press that has spooked shareholders.

News of a lawsuit that SDC filed against California’s dental board caused the share price to slide on Oct. 17. The company is alleging harassment and intimidation in connection with the May 2018 raids of its SmileShop locations in Oakland, San Francisco and Hollywood. Even if SDC was the victim of unjust actions, none of this sounds good to shareholders. However, the biggest blow for the company since its IPO came earlier in that week, on Oct. 14, when California passed Assembly Bill 1519.

The bill, which comes into effect in the new year, establishes new protection for consumers using teledentistry services and specifies that a dentist must be involved in treatment planning, even if the treatment is undertaken at home. SDC stock slid 13% to trade at a low of $9.44 after the bill’s signing.

The danger of the bill to SDC comes not only from the fact that California is an economic powerhouse—last year, the state’s $3 trillion economy was bigger than that of India. Other U.S. states could follow the lead of California, which joined Georgia and Alabama in adopting or expanding existing rules to cement the involvement of dentists in the planning of teleorthodontic treatment. In a public statement on the California bill, SDC said that “there are no clinical studies or guidelines that affirm the mandatory radiography or other equivalent bone imaging requirement included in AB 1519. Simply put, this bill represents the dental lobby’s thinly veiled attempt to protect traditional dentistry at the expense of Californians.”

The ADA addressed consumers directly with its October New York Times and USA Today advertisements. (Image: ADA)

But tighter regulation on a federal level could be even more serious. The American Dental Association (ADA) ran advertisements on the websites of the New York Times and USA Today in late October, reminding readers that its April petition to the U.S. Food and Drug Administration (FDA) was not dead in the water. SDC had stated that the petition had been shut down, but Dr. Chad Gehani, ADA president, said in a statement that “all substantive issues raised by the petition remain fully before the FDA at this time.”

The ADA petition charges that SDC is skirting the “by prescription only” labelling of its product that applies to clear aligners. The association has asked the FDA to remove the company’s “misbranded” products from interstate commerce and to levy heavy fines against the company. If the regulator agrees with ADA, it could spell trouble for SDC.

Outside of the U.S., SDC’s marketing practices are being investigated by The Australian Health Practitioner Regulation Agency. Dental industry insiders alerted the agency in early October to undisclosed promotion of clear aligners on social media, which would be a breach of the law. Fellow teleorthodontics providers EZ Smile and WonderSmile, and clear aligner market leader Invisalign Australia are also being investigated, according to the Sydney Morning Herald.

Expanding production and entering new markets

Despite all of this, SDC is pressing on with its business objectives. So far, in October, the company announced expansion into the New Zealand and Irish orthodontic markets with its SmileShop retail locations and the entry of SmileShops into Shoppers Drug Mart stores in Canada. SDC says it can offer orthodontic treatment to New Zealanders at less than half the average price of NZ$8,750 ($5,600) that patients pay for fixed appliances in the country. A flat rate of NZ$3,250 for the company’s clear aligner therapy can also be spread over 24 months using an installment payment option. In Ireland, SmileShops in Dublin and Cork are offering “affordable” and “convenient” smiles for a flat rate of €1,750 ($1,940).

Earlier in the month, the Office of the Texas Governor, Gregg Abbott, announced that Access Dental Lab TX would build a new manufacturing facility in the Texan city of Kyle. The company is a subsidiary of SDC’s manufacturing and distribution affiliate and it received a $2.2 million grant from the state to build the new facility. A total of 850 jobs will be created at the ISO-certified “high-tech” dental manufacturing site, which will cost $36 million to build.

SDC will be popular with the people of central Texas: The mayor of Kyle said it was the biggest job creation announcement in the history of the town.

The weight of public opinion

SDC will report its third quarter earnings on Nov. 12—its first as a public company—and this may help to shift the focus of investors back to the company’s core performance indicators: cases shipped and profits made. An investor call on the day will also give the company’s management a chance to explain the potential impact of its regulatory issues. In a statement in early October, the company said, “We remain focused on long-term shareholder value—the next 12, 24, 36 months and beyond,” hinting that the stumbling blocks it has come across early on are less of a focus for the company than is its long-term success.

“SDC is a disruptor and its success relies on stripping sales from the traditional tooth alignment business.”

To be clear, SDC is a disruptor and its success relies on stripping sales from the traditional tooth alignment business. According to the company, the hurdles in the road to its success are surfacing because of lobbying from within the dental industry aimed at protecting its traditional business model. In a statement on what it says are organized anti-competitive legal actions from within the dental industry, SDC said: “These actions are viewed by SmileDirectClub as nothing more than the latest in a stream of unevidenced and misleading attempts by dental trade organizations, certain of their members and others motivated to thwart legitimate competition.”

In the end, SDC is offering a consumer product and the opinion of the public may be the one that counts most.