Image Shown: SmileDirectClub Inc has come under tremendous regulatory fire of late, which has aggressively pressured shares of SDC.
By Callum Turcan
We covered SmileDirectClub Inc (SDC) back in September 2019 shortly after its IPO in this article here. Since going public at $23 per share (the unconventional orthodontics company’s shares fell aggressively during their first day of trading), shares of SDC have tanked with an eye towards growing regulatory concerns and related obstacles. In our conclusion we noted that:
While SmileDirectClub’s growth trajectory is quite intriguing, we prefer to wait until we get a better idea of the regulatory landscape the start-up faces and what its financial performance will look like now that it’s a public entity in the limelight.
Recent Events
It appears that our cautious take was prudent given recent information that has come to light. SmileDirectClub’s chief clinical officer, Dr. Jeffrey Sulitzer (who was billed as SmileDirectClub’s chief dentist during a Q&A posted on the firm’s website that mentions the post was last updated May 2018 as of this writing), is at risk of losing his license to practice dentistry in California following an investigation by the state’s dental board according to Reuters. That could have profound implications on SmileDirectClub’s ability to operate in the state and elsewhere going forward.
The office of California’s attorney general is accusing Dr. Jeffrey Sulitzer of fraud and that effectively he has been using his license to allow SmileDirectClub to expand aggressively in the state through dentistry practices that are effectively run by SmileDirectClub (which isn’t licensed to operate in the state). Here’s a link to the California document, reviewed by Reuters, that highlights the disciplinary accusation which could see Dr. Jeffrey Sulitzer have his license to practice dentistry in California suspended or revoked. These are serious allegations, which SmileDirectClub has denied through its external litigation counsel.
While the company has come out swinging against various legal and public relations attacks against its brand, including a critical NBC Nightly News story that aired February 13, and please note NBC is owned by Comcast Corporation (CMCSA). Here’s what SmileDirectClub had to say in a press release published February 14:
We are disappointed that though we provided NBC with the opportunity to obtain all relevant facts as to the safety and efficacy of teledentistry for the provision of clear aligner therapy, NBC failed to provide its viewers with a balanced and fair news story reflecting those facts. The piece misrepresents SmileDirectClub and the quality of care provided by the over 250 state-licensed dentists and orthodontists across the country who use our platform to treat their patients. We are surprised by the journalist’s blatant disregard for the facts and failure to include all of the accurate information we provided.
Notably, the almost five-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. In fact, though NBC conducted interviews over the last 30 days with these doctors and customers under the guise of providing a fair and balanced story, their statements were not included or referenced in this story.
At the root of all of this is SmileDirectClub’s physical store-light telemedicine-heavy business model, which allows customers to receive substantially cheaper orthodontics services. Here’s what we said back in our September 2019 article (emphasis added):
What makes SmileDirectClub different than traditional orthodontics practices is that customers don’t necessarily need to go into an office to get these types of services. The company has its SmileShops where customer’s teeth can be scanned in-store within half an hour, or offers remote impression kits that are shipped to the customer’s house and then shipped back. Another important consideration is that in-person checkups aren’t required, drastically reducing the cost to consumers, as telecommunication checkups are utilized instead…
One of the big concerns facing SmileDirectClub is whether state regulations covering the telehealth industry will change for the better or worse.If (for instance) pressure from dentistry practices and orthodontics lobbying groups were successfully in implementing rules state-by-state that said these types of orthodontics services can only be rendered in-store and require constant in-person checkups (as compared to checkups performed online via telecommunication services), that would force SmileDirectClub to fundamentally change its business model or worse. That being said, the cost of a two-year SmileDirectClub plan is $1,895, markedly lower than traditional offerings which can quickly approach five figures. State regulators would likely take the need for competition in America’s orthodontics and healthcare industry at-large into account before making any big regulatory changes. We will be monitoring this situation going forward.
Concluding Thoughts
We don’t think catching a falling knife is a wise idea and see SmileDirectClub’s problems continuing for some time. SmileDirectClub is standing its ground and has been highlighting the many customers it has served, at a much cheaper cost than traditional orthodontist offerings, but the negative press alone will likely make it much tougher to grow going on a fundamental basis given how this negatively impacts its marketing and advertising campaigns. Should SmileDirectClub lose its ability to operate in California, that would have a profound impact on its trajectory.
On February 25, SmileDirectClub will report fourth quarter and full-year earnings for 2019 after the market close, providing the market with another update on this ongoing saga. We expect management will come out swinging again, but that alone might not be enough.
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Callum Turcan does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.