SmileDirectClub (SDC) is aiming to disrupt the market for improving teeth. The company is growing fast and will likely be embraced by investors. In short, SDC is trying to do for braces what has been done for contact lenses by offering a direct-to-consumer solution that doesn’t require a visit to an orthodontist. The deal is scheduled for pricing after the market close on Wednesday, September 11.

This chart encapsulates the SDC value proposition – lower cost, no office visits, faster and with easy financing.

There is some controversy around SDC so let’s deal with that first:

SDC may be more of an “aesthetics play” than representing “teledentistry.”

The highest quality solution for straightening and improving teeth are braces administered under the care of a 0rthodontist. These braces can also be the same type used by SDC because dentists and orthodontists can use the Invisalign system from Align Technology (NASDAQ: ALGN). It’s interesting to note that ALGN stock dropped from $275/share to $175/share since SDC filed their IPO in Mid-July. That’s an $8B loss of market value in a month!

Here are the main concerns expressed by orthodontists:

  1. The DIY nature of making the “impression” with SDC is not as precise and uses an “off the shelf” tray and simple materials. In constrast an orthodontist has better tools like customized trays and lots of experience making more precise impressions that are used to create the aligners for your teeth. The quality of the impression is paramount to making the series of aligners that will be used to straighten your teeth.
  2. There is more quality control with the Invisalign system and more tools like “power buttons” that orthodontists use in conjunction with the Invisalign system to address specific challenges with teeth that may be more rotated or difficult to correct.
  3. Additional diagnostics are done by dentists and orthodontists that include Xrays that examine the root and underlying structure of the teeth to ensure that the process not only works but doesn’t cause other dental issues. It’s not just the smile but is their bite correct?
  4. After a course of treatment often on-going adjustments are needed and these follow-ups and ongoing care can be handled by an orthodontist with Invisalign and many claim to offer these at no additional charge.

Having said all that a fair-minded orthodontist would be “comfortable” with the use of SDC is when only minor corrections are needed are mild crowding of up to six teeth in the front of your top or bottom jaw.

The truth of it all is that SDC offers a lower-cost, more convenient but lower-quality solution for straightening teeth. As you might imagine the field of orthodontics is complex and the challenges are many. If you have a few hours to spare there is a site called Animated Teeth that provides a wealth of knowledge around most aspects of dentistry and offers great depth in terms of all the options available in treating tooth alignment. They also make it clear that different cases demand different solutions. Reference: https://animated-teeth.com/dental-braces.

But there a few aspects of the SDC model that address a few of these concerns:

The company is aggressively rolling out “SmileShops” which help not only help in qualifying and closing customers but also can help to improve the quality of the impression made. Again these are not staffed with real orthodontists or even dentists but they can have the equivalent of a low-level dental technician there to help.

SDC customers are still under the care of a licensed dentist since they must review the treatment plan and issue the prescription needed for the patient. Insurance companies also reimburse for the treatment so it’s legitimate.

SDC also learned from consumers that in cases where their system would not be adequate to treat their situation completely many were still interested in using SDC to create at least a partial improvement in their overall alignment. This is where the company shifted its stance somewhat from delivering a “perfect smile” to “better is better!”

Market Position and TAM

SDC is doing something we’ve seen before. They are exploiting a gap in the market that takes some share away from the players at the top but also expands the TAM by removing key obstacles for consumers (cost, access to an orthodontist, time). The company does provide some figures for their TAM but they are based on overly general assumptions. Before making some common-sense adjustments the company puts its TAM at $234B in the US and $710B in the RoW. Two major reasons this is just wrong are: 1) even though 85-90% of the population has some “malocclusion” it doesn’t mean they are going to do anything about it (myself included…) and 2) the income threshold of $30K is pretty low.

We don’t have the underlying data set so need to make some broader adjustments. First of all we’d double the income level to $60K which probably cuts the number of people in half – to 60M in the US and say 150M in RoW.

Some percentage of patients will need the care of an orthodontist and a more involved approach using other types of corrective technology. And a much larger percentage will simply live with minor defects in their grill. Not everyone going bald get’s hair implants, not everyone with a sagging face gets a facelift and not everyone with extra fat goes out and gets “cool sculpting” or an Inmode (INMD) treatment.

Getting at this number is difficult. Braces are fairly common in the US and as a rule of thumb about 50% of children should consider braces for functional problems (misaligned bite) and improving the shape of their jaw/face. So 50% would be the high-water mark. The adult market in 2014 was 1.4M patients and growing ~8% per year. It is becoming more common for adults to get their teeth adjusted.

There is clearly plenty of room for growth – both in the US and RoW. If we use the 50% number for the real TAM we arrive at $56B in the US and $142B in RoW. Let’s call it a $200B WW TAM and it’s not unreasonable to think that SDC could get 10% of that or $20B in revenue. 

Real Risks, Valuation and Stock Conclusion

There’s a lot to like about SDC in terms of their business and long-term model. It should also be noted that their vertical integration eliminates the “unmodeled expenses” that some companies like Wayfair (W) came public with. In this sense, the numbers are more defensible. As with any new company and IPO, there are some real risks. Here are the three risks that stand out:

  1. As a considered purchase this has a long sales cycle and requires fairly large up-front costs in terms of sales and marketing. It’s clear that in the current climate the returns here are excellent but things can change (see point 2.)
  2. We’re in a strong economy where discretionary purchasing is fairly robust. SDC is probably also tapping into some pent-up demand in the market from people who have long wanted to improve their dental situation but were unwilling or unable to do it the traditional way. This demand could easily wane in the face of a weak economy as this is a fairly easy expense to “put off until next year.” 
  3. Align Technology is a credible competitor and they are likely to get more aggressive in the market – especially after seeing their share price nearly get cut in half on the filing of the SDC IPO documents. Actions they might take include more aggressive marketing of offerings like Invisalign Express that can be used for more minor adjustments or buying/building their way into some markets using the SDC approach. There has been legal wrangling in this market but it looks like the usual routine of trying to slow down or stall a new competitor.

Align Technology (ALGN) is generating over $2B in revenue and SDC is on track to do around $800M this year (up from $423M last year.) ALGN is trading at about 7x revenue but was at 13x revenue in May of this year. At the current proposed price SDC comes in at 10x but is growing much faster. Our PFV below suggests a price of at least $40/share and given the low rates and market hype – $60/share would not surprise.

 

 

 

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