When SmileDirectClub went public in September,
the company’s 30-year-old cofounders became two of the youngest billionaires in
the nation, joined by the father of one of them. A little more than a month
later, with shares cratering, all three have lost their billionaire status.
SmileDirectClub’s stock has dropped by 60%
since it went public last month, making it one of the worst-performing IPOs of
the year. Shares have plummeted as the company, which makes custom teeth
aligners, battles a short-seller waging a boisterous campaign and a third state
regulator looking to impose new restrictions on its operations.
SmileDirectClub founders Jordan Katzman and
Alex Fenkell, both 30, are now worth an estimated $770 million and $700
million, respectively. David Katzman, Jordan’s father and SmileDirectClub’s
CEO, has $970 million. All three sold over $100 million in stock in the
offering, but remain the company’s largest shareholders and have most of their
net worth tied to the business.
The latest challenge to the business comes
from California, where Governor Gavin Newsom signed a bill on
Monday that would introduce new rules for so-called teledentistry companies
like SmileDirectClub. The bill would implement certain consumer protections,
such as prohibiting companies like SmileDirectClub from requiring a patient to
sign any agreement that limited their ability to file a complaint with the
state’s dental board.
SmileDirectClub filed a lawsuit two days
later, which alleged that California’s dental board conducted “a series of
coordinated raids” at its retail locations that were “designed to intimidate,
harass and unduly burden” the company and its employees. A company spokesperson
said the suit was not in response to the passage of the bill. SmileDirectClub
has also faced challenges to its business practices by regulators in Georgia
and Alabama.
Short-seller Hindenburg Research has also
targeted the company, putting out a lengthy report several
weeks ago that accused SmileDirectClub of “carelessly cutting corners” and
putting its customers’ health and safety at risk. It has taken a short position
in the company, which means it will profit if shares lose value.
Cheaper Alternative
The company bills its clear teeth aligners as
a cheaper, better alternative to braces. It asks customers take impressions of
their teeth at home or at one of the company's 300-plus stores, which includes
locations at CVS and Walgreens. Afterward, one of the company’s 240
orthodontists and dentists reviews them from a remote location and a custom
aligner is created and mailed to the customer’s doorstep.
By going directly to the consumer,
SmileDirectClub has been able to undercut competitors on pricing, charging just
$1,895. Braces typically run around $5,000. A consumer will also pay more for
Invisalign, which carries a price tag ranging from $3,000 to $8,000, but is
often geared toward consumers with more extreme cases.
SmileDirectClub has faced intense opposition
from the nation’s dentists and orthodontists since it was founded in 2014. The
American Dental Association issued a resolution “strongly discouraging” people
from using the service and submitted complaints to the Federal Trade Commission
and the Food & Drug Administration. The American Association of
Orthodontists has also filed complaints to dental boards in 36 states.
One of the primary criticisms is that by
cutting out orthodontists and dentists, it is providing an insufficient level
of care. Industry groups have argued that the company takes shortcuts in its
initial consultations, such as not requiring a dental exam, and does not
provide the customer with direct access to a dentist or orthodontist, making it
difficult for a customer to address questions or concerns. SmileDirectClub’s
“disregard for consumer health and safety, on the one hand, and its persistent
deceptive acts to drive high volume sales, on the other, together form the
foundation of the company’s business model,” reads the complaint submitted to
the FTC.
Wall Street Support
Several states have weighed in, too. In
Georgia, the dental board passed a rule that requires a licensed dentist to be
present when 3D oral images are taken. In Alabama, the dental board has
clarified that under an existing rule, a dentist must have "direct
supervision" when digital oral images are being taken. SmileDirectClub
filed lawsuits in both states, calling the rules anticompetitive.
“I think anytime you do something disruptive,
the status quo pushes back against that. And that is exactly what we’re seeing
here,” said Kyle Wailes, the company’s chief financial officer, in September. A
company spokesperson said on Friday that the California bill increases the
customer’s cost of access to oral care and was pushed by trade groups who are
“seeking to protect the pocketbooks of dentists and orthodontists who do not
want to give up control over the prices they have been able to charge
patients.”
Despite the stock’s steep losses in recent
weeks, all ten of the Wall Street analysts covering the company have maintained
a buy rating. Many of the firms, like J.P. Morgan, Credit Suisse and Jefferies,
were involved as underwriters for the company’s initial public offering.
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