SDC - SmileDirectClub

[writser]

Anybody familiar with this company? SDC is a teledentistry company, i.e. a digital competitor of traditional braces and alignment companies. 'Uber for braces' or whatever. Impression kits are sent to customers after which teeth molds and digital pictures are reviewed in Costa Rica. Then they fabricate retainers / aligners for you, and they sell whitener to top it off. Yesterday a short report was published yet shares were up 7% which piqued my interest. Some data points:

 

- Their September 12 IPO was the worst first-day performer since the recession, shares dropped 28% the first day of trading, and are down ~36% as of today.

- IPO raised ~$1.3b, of which ~$600m was used to cash out insider interests at the IPO price.

- Company founded by a kid and his friend. Father provided initial financing and is Chairman / CEO / largest shareholder. Uncle is CFO. Family fest.

- IPO investors get class A shares with 1 vote, pre-IPO investors get class B shares with 10 votes.

- Company purchased an airplane from the CEO before the IPO.

- They are facing a backlash from dentists (but of course they would ..)

- ~1200 BBB complaints. To be fair, I'm not from the US and am not familiar with BBB. Is that much? Seems a lot compared to a few other companies I checked.

- Valuating seems rich to me. Banks did not exercise their underwriters' option to buy shares in the IPO.

- Another ~47m class A shares (and ~279.5m convertible class B shares) are under a 180-day lockup.

 

The main issue seems to be: is this company really disrupting the orthodontics industry? Or are they basically selling cheap aligners without sufficient medical screening / knowledge and without a dentistry practice licence, while spending a shitload on marketing to pump sales to sell a 'growth story' to offload insider shares to the public in a rich IPO.

 

I thought the short report was entertaining. I'm usually not a big fan of shorting, and I probably won't do anything with SDC. By no means have I done my DD. Still, this looks like a potential train wreck to me. I'm wondering if anybody is enthusiastic at the current valuation and/or has more knowledge about the actual product they are selling. I.e. is SDC a valid alternative for braces installed by a real dentist? Or is it a fad? Is it good value? It definitely doesn't look like something I would use, but I don't live in the US. It wouldn't surprise me if a significant % of the US population cannot afford decent dental treatment so they have to settle for something like this. But again, what do I know.

 

Also, the company name itself is almost enough to make me want to short.

[JRM]

My understanding is the Invisalign patent expired a couple of years ago.  There is probably a land grab going on for less expensive clear aligners.  It's worth noting that most of SmileDirectClub's expenses are going towards advertising.  Their gross margin is actually pretty high otherwise.  Not a wonderful business, but not a terrible one either.

[Spekulatius]

It’s not a fad, imo. Consensus seems to be that their product works in straightforward cases and not so much for other cases. That’s what most BBB complaints appear to indicate. marketing looks cheesy to me and they also offer rebate coupons to pretty much everyone, which seems strange, since their product is low cost already.

 

Then there is then issue that most customer by on an installment plan, at implied interest rates that are equivalent to subprime (15-20%) . So in some way, SDC is actually a subprime lender.  However, regular dentist do the same thing to some extend. Regular braces (not clear ones) cost about 4-5k for my kid, so the price gap is real.

 

I looked at this as a long, due to being potentially disruptive, but there are just too many red flags in how the company is run.

[mcliu]

Yes, it is disruptive. The product works well in simple cases at only a fraction of the price. Much better experience than visiting the orthodontist every week. The technology is pretty straightforward (some high schooler made his own retainers with a 3D printer.) but Invisalign's patents limited competition. There will likely be other entrants.

[Read the Footnotes]

This company certainly has the potential to be entertaining.

 

I like the name Hindenburg Research. On the other hand you could question whether that name is an indication that part of their business model is to try to associate images of the worst possible outcomes, when in fact it is possible the overvaluation is overstated. I have avoided quoting Hindenburg over and over again in my comments below so as not to create a subconscious bias. If necessary I will refer to him as Nate Anderson.

 

I have only looked at the company for an hour or two this morning, but I have some experience in healthcare investing and here are some initial impressions:

 

Moving fast and breaking things did not work out well for Theranos in a highly regulated industry where people's health is at risk. SmileDirectClub may not have a Mechanical Turk (https://en.wikipedia.org/wiki/The_Turk), but a lot of other things rhyme with Theranos including the young leadership and the influence of a parent.

 

I think society and government is becoming more aware of and less tolerant of the move fast and break things model. The regulatory environment is likely to be worse than they anticipated because the problems created by JUUL, Theranos and others is becoming more obvious.

 

I have taken a dim view of telemedicine companies for quite some time. The problem is that most all of them have no real barriers to entry. That makes me think that in the long run the best case scenario is that the consumer will benefit, but it will be hard to predict which company, if any at all will do well. My pessimism regarding the boom of telemedicine companies might have contributed to me missing an opportunity to invest, but it also helped me to avoid quite a few disasters. I've been to a bunch of healthcare conferences, roadshow's, incubators, etc. I never saw a telemedicine opportunity that interested me in the least.

 

I would be somewhat less worried about the safety of their physical locations than their mail based remote program, but I'm not sure how much of a difference you would expect.

 

I recently tried a similar remote shipping model for a mouthguard that I would only be using for a few hours a year. I would have had to use trays to create an impression and then mail that in to the company. I decided it was not worth the risk and trouble and I returned the product. A mouthguard that would only be used a few hours a year is much less of a risk than SDC's products which would be worn 10-22 hours per day.

 

Right now their product might be a low cost competitor, but how long will that last?

With health care regulation, you always have to worry about who can afford to buy the best regulation. I would worry that since they are going around the traditional dentist/orthodontist channel, they are in competition and the orthodontists can probably buy regulation and legislation.

 

The short report said:

 

Throughout the course of our research, dentists and orthodontists were unanimous in telling us that SDC was missing the most vital parts of any orthodontic treatment, which include a comprehensive pre-screening and evaluation for complex legacy dental issues, professionally performed molds and/or scans, as well as continuing personalized care from a licensed professional.

 

If you are a lazy reader, that could read as "dentists unanimously dismiss SDC", but, this morning I reached out to some people who have advised me on healthcare investments in the past. I was able to find dentists and patients I know personally who have had a different experience. Alabama and Georgia are mentioned specifically in the post. I got a report of a dentist in Alabama who was recommending Smile Direct Club, including recommending it to his own family members. I was also able to find out about a dentist in Georgia who was recommending the product. So in Alabama and George, the two states mentioned in the short report, dentists were recommending Smile Direct Club. This shows that some patients were being recommended to use SDC after an evaluation, even though it wasn't part of SDC's own care. If patients in those states were getting positive recommendations from their dentist, then that might help to explain why SDC has faced regulatory issues in those states.

 

The short report does not quantify issues such as what portion of patients HAVE been thoroughly evaluated and what portion have not. Those two pools may show markedly different litigation and reputational risk to SDC. SDC themselves likely does not have reliable data in this area, but it is something I would want to know if I were going to go long or short.

 

I suspect the incentives to close sales to customers are actually as big or bigger an issue than some of the issues that Nate Anderson put more emphasis on. Especially given the complexities of medical reimbursement, this is an area ripe for abuse of the customer. Both SDCsalespeople and orthodontists are incentivized to approve treatment.

 

To answer your question about the BBB, the BBB is paid for by the businesses and is nowhere near as independent as they try to lead people to believe. My impression is that even a few negative comments on the BBB is noteworthy.

 

In his conclusion, Nate Anderson says:

 

In reality, SDC strikes us as

(i) a low-quality consumer product company

(ii) with high customer acquisition costs

(iii) in a competitive, worsening-margin environment

(iv) extending seemingly sub-prime financing to customers

(v) who are largely making 1-time purchases.

 

My opinion would probably be closer to:

In reality, SDC strikes me as

(i) selling a consumer product that for some customers will be high quality and a tort waiting to happen for customers

(ii) with high customer acquisition costs as they try for supernormal growth (and who knows if they can scale that back or not)

(iii) in a competitive, worsening-margin environment

(iv) extending seemingly sub-prime financing to some customers (with dangerous misaligned sales incentives a risk to all customers),

(v) who are largely making 1-time purchases.

[Foreign Tuffett]

Yes, dentistry and orthodontic work is quite expensive in the US, and many people do not have dental and/or orthodontic insurance and/or the coverage that they do have is limited. My orthodontist (who was kind of a jerk) owned one of the largest houses in the town I grew up in, which I think speaks volumes about how expensive orthodontics can be in the US.

 

Billie Eilish constantly talks about having an Invisalign. She has provided SDC with millions of dollars worth of free advertising. I guarantee that a high % of high school students know what Invisalign is.

 

 

My Mom wore an Invisalign for several years and was happy with the results and overall experience. I think the product does works, but it almost certainly does not work for every customer. Many people also have bad experiences with traditional orthodontic work.

 

I personally probably wouldn't short this unless I thought it was structurally incapable of being profitable. I think it has the potential to be a long term disruptor if regulators don't clip its wings.

[writser]

Thanks for the comments all. Based on this thread it seems like the product / service has more merit than I initially gave it credit for. Even more interesting is that I had never heard of Billie Eilish. That video has 500m views so I must be living under a rock. Thanks for making me feel like a dinosaur ..

[ArminvanBuyout]

 

 

Billie Eilish constantly talks about having an Invisalign. She has provided SDC with millions of dollars worth of free advertising. I guarantee that a high % of high school students know what Invisalign is.

 

 

 

SDC is actually not associated with Invisalign. Invisalign is created by Align Technology, and they focus on much more difficult to treat problems.

[UNF2007]

I had a conversation with an OMFS friend of mine recently about these products. His opinion for what it's worth is that if done right it can get you 90% the way there when compared to traditional braces, however it requires accurate impressions of the teeth. The problem is that most consumers are not capable of doing this, it's a several months long process to learn how to do it correctly in dental school. Starting with the wrong impression gives bad results, and paradoxically there is more business coming into orthodontists to correct the misalignment caused by these products. I asked if you partnered with a dentist to get the impression would the result be acceptable and he said yes, but the society organizations are against this. Also asked if it could be used with orthognathic procedures, as tooth alignment is needed as a first step, and this was a hard no, that still requires traditional braces.

[Liberty]

The short thesis:

 

https://hindenburgresearch.com/smiledirectclub:-moving-fast-and-breaking-things-in-peoples-mouths/

[writser]

Thanks for posting that Liberty. It's smart to share that link again in a separate reply in case people are interested in SDC but too lazy to read the first paragraph of the topic start.

[Liberty]

Thanks for posting that Liberty. It's smart to share that link again in a separate reply in case people are interested in SDC but too lazy to read the first paragraph of the topic start.

 

My bad, I CMD-F'ed the thread for the link and it didn't show. You're too fancy with your linked words.

 

Nobody has the time to read everything... Was planning to come back at some point to this thread, but wanted to include this for others who might find it interesting in the meantime.

[Saluki]

I used to own invisalign and sold out too early. It was a 2 bagger in about a year but it kept going up and up after I sold it (If I held it, i'm sure it would've gone down). 

 

Invisalign has a few big advantages over SDC.  Their 3d scanner allows orhtodontists to just pass the toothbrush looking laser device over your teeth and get a 3d impression.  It's pretty difficult to get a good imprint with the goo and molds for a trained person, i can't imagine how hard it would be for a layperson.  I believe the 3d scanner can be used to make bridges too, so it's a seperate line of profit for invisalign. 

 

Invisalign donates equipment and software to dental schools so the new dentists are trained on it and have no incentive to switch to cheaper alternates like orthoclear or 3M. (switch to a new system and buy new equipment and learn new procedures so you can charge less money?)

 

Yes, the true low price option is SDC, even cheaper than traditional braces, but given how hard it is to set up the molds, how it can only be used for mild cases and you don't know if it's working or not until the end, I think most people will pay a few grand more because of what's at stake if they mess up.  After all, most people still use a realtor to sell their home or a plumber to install a toilet.

 

ALGN's business model is amazing, and it's gotten cheaper again (35 PE vs 90 before), but still too rich for my blood. The scanners are the only game in town, and the aligners are a few dollars worth of plastic that the dentist sells to the patient for $5k.  I don't know what the split is between the two, but that's a lot of money to share.  Also, the equipment, office and staff are all paid for by the dentist, so the cost to grow is minimal.  The only problem is that once you have a customer use your product, they are done for life and you have to find a new customer.  (the opposite of DaVita where once you get a customer, you make money from them until the day the die).

[Foreign Tuffett]

 

 

Billie Eilish constantly talks about having an Invisalign. She has provided SDC with millions of dollars worth of free advertising. I guarantee that a high % of high school students know what Invisalign is.

 

 

 

SDC is actually not associated with Invisalign. Invisalign is created by Align Technology, and they focus on much more difficult to treat problems.

 

Yes, you are right. It appears they used to work together, but had a falling out.

 

https://www.massdevice.com/align-tech-to-close-invisalign-stores-as-result-of-arbitration-with-smile-direct-club/

 

The stock has been absolutely destroyed over the past few trading sessions

 

https://www.cnbc.com/2019/10/14/smiledirectclub-tanks-on-california-bill-bringing-loss-since-september-ipo-to-nearly-60percent.html

[nspo]

I've used SDC aligners over the last 8 months or so for some crowding issues. Obviously, the "bang for buck" factor is there! I'm quite pleased with the results, and only had to dish out $1.7k compared to $5k for Invisalign. When I went in for my semi-annual cleaning two days ago my dentist had a fit when I showed her I was using SDC. In my mind, of course she doesn't like the product, it's not in her best interest to like it! Every dentist I've spoken to has given me the stink eye when mentioning the name, for obvious reasons. It's a product that can be great for consumers but takes share from the dentists bottom line.

 

We spoke about the ongoing lawsuit filed by the American Dental Association. The lawsuit contains both marketing and direct to consumer issues. After doing more detective work, the marketing issues seem controllable. However, it looks to me that the real risk here comes from SDC evading the rules set in place by the FDA. Going "direct to consumer" counters the FDA's requirements for all "teeth aligning materials" to be "by prescription only". It seems to me that, as it stands, SDC could be a ticking time bomb. As I don't see how they get past this issue with the FDA. I'm not a fan of shorting, but this seems like an obvious case of pumping via large marketing campaigns to make a buck before an eventual demise.

 

Let's just hope they stick around for another two months! I have to finish my next set of refiners ;)

 

https://www.ada.org/en/publications/ada-news/2019-archive/july/association-files-complaint-with-ftc-fda-against-smiledirect-club

[writser]

Shares are down ~35% since opening this topic. A short-side write-up has just been released to the general public on VIC: https://www.valueinvestorsclub.com/idea/SMILEDIRECTCLUB_INC/4642173798

[Liberty]

Shares are down ~35% since opening this topic. A short-side write-up has just been released to the general public on VIC: https://www.valueinvestorsclub.com/idea/SMILEDIRECTCLUB_INC/4642173798

 

Interesting. I didn't know they had trouble with the manufacturing transition (if this writeup is true.. doesn't seem to cite much evidence for the claim).

[writser]

Borrow now 100%. Shares up 50% YTD. Shorting is hard ..

[Liberty]

 

SmileDirectClub, the largest at-home dental alignment company, promises to leave patients smiling.

 

But an @NBCNews investigation found that some customers have reported painful problems, which the company says are caused by misuse.

[Liberty]

More bad news for SDC:

 

https://nationalpost.com/pmn/health-pmn/smiledirectclubs-top-dentist-risks-losing-license-in-california-crackdown

 

The California disciplinary process underway against dentist Jeffrey A. Sulitzer, SmileDirectClub’s chief clinical officer, is the latest threat facing the high-flying tele-dentistry firm, which promises to straighten Americans’ teeth without a visit to an orthodontist’s office for costly treatment.

 

SmileDirectClub sells clear plastic dental aligners prescribed by doctors who review digital images of customers’ teeth online and oversee treatment from afar. According to the company’s website, “Dr. Sulitzer leads all SmileDirectClub’s licensed dentists and orthodontists,” a network it says includes 250 medical professionals.

 

In a formal 24-page complaint filed by the office of California’s Attorney General and prepared by the state dental board’s executive officer, Sulitzer is accused of violating state law, defrauding state dental regulators and acting with gross negligence toward patients while helping SmileDirectClub grow its business.

 

https://graphics.reuters.com/USA-SMILE-DENTIST/0100B5EB3L7/AccusationDocument.pdf

 

h/t Javier Acción

[Liberty]

Down 18% after hours..

 

https://investors.smiledirectclub.com/news-releases/news-release-details/smile-direct-club-reports-fourth-quarter-and-full-year-2019

[writser]

Extremely long but in-depth overview of all the litigation SDC is involved in: https://advocatingvalue.com/public-company-litigation-series-smiledirectclub/ .