September 4, 2019

Breakingviews: Upstart dental unicorn’s IPO is a risky bite

by Breakingviews.

SmileDirectClub is going public. But this upstart dental unicorn, which on Tuesday revealed it is targeting a nearly $8 billion valuation, is a risky bite. Though the online tooth-alignment service is growing quickly, profitability looks as distant as it does for ride-hailing outfit Lyft, which floated in March, or office-sharing giant The We Company, whose initial public offering is due within weeks. SmileDirectClub has an extra risk factor, too: It’s trying to disrupt part of the highly regulated medical industry.

The Nashville, Tennessee-based company reported a $53 million net loss for the first half of the year, on revenue of $374 million. To be fair, though, sales grew 113% from a year earlier, led by its teeth-straightening kits. SmileDirectClub’s main product goes for $1,895, which the company says is up to 60% less than the cost of traditional hands-on treatment.

Rapid growth helps explain why SmileDirectClub is seeking a valuation more than double the $3.2 billion attached to its latest funding round in October 2018. But at 13 times revenue for the year ended June 2019, it’s more expensive than listed Invisalign-maker Align Technology which trades at 6 times sales.

That price looks ambitious, especially given the risks. Because the upstart’s process allows users to skip the orthodontist visit in favor of online checkups and direct sales, SmileDirectClub is under more scrutiny from regulators and the industry than the likes of Align. That means it can’t afford to put a foot wrong.

Watchdogs could matter in other ways, too. In Georgia and Alabama, for example, dental boards have set new rules that require a dentist to be present when dental images are made. That goes against SmileDirectClub’s tele-dentistry model. The company is suing in federal court on antitrust grounds. Lobbying and rules that hamper upstarts are nothing new, but in the medical arena it’s a particular concern.

Then there’s leadership. Boss David Katzman will have control through supervoting shares and a voting agreement with other insiders. It’s a governance quirk that potential buyers of stock ought to dislike. As an effort to make dental care more affordable, SmileDirectClub is tempting. But investors may feel a toothache coming on.


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