SmileDirectClub’s Threat to Align Technology
Updated: Aug 30, 2019
With SmileDirectClub planning on going public in the near future, is Align Technology in trouble?
The expiration of Align Technology’s (NASDAQ: ALGN) key patents in 2017 led to the foundation of a number of similar companies attempting to profit from the growth of Invisalign, Align Technology’s clear replacement to train-track style braces. One of the largest competitors is the Tennessee-based SmileDirectClub, a company that offers an alternative which is roughly 60% cheaper. Unlike Align Technology’s iconic ‘Invisalign’ product, which requires patients to physically visit an orthodontist, SmileDirectClub’s aligners can be fitted either at home or in their ‘SmileShops’ and are then sent off and reviewed by licensed professionals.
Although other companies such as Candid Co. and YourSmileDirect have tried to enter the clear orthodontic-aligner space, none pose as great a threat to Align Technology as SmileDirectClub, who are estimated to hold 90% of the at-home invisible aligner market share.
In August, SmileDirectClub filed its S-1 form which indicates that it will soon go public on Nasdaq with the ticker symbol ‘SDC’. While the number of shares and the price per share has not yet been determined, SmileDirectClub is looking to raise as much as $100 million from its IPO.
Growth of SmileDirectClub
Although SmileDirectClub is only 5 years old, it reached a valuation of $3.2 billion last October following another round of funding. SmileDirectClub’s revenue grew 190% to hit $423 million in 2018, while marketing and selling expenses more than tripled to $213 million in the same period.
As of 2019, SmileDirectClub has treated over 700,000 patients. However, a study by Align revealed that roughly 300 million people could benefit from teeth straightening procedures yet are unlikely to seek traditional treatment, with the global orthodontics market expected to reach $2.6 billion by 2023.
SmileDirectClub intends to capture this global market. In November 2018, SmileDirectClub was launched in Canada and then expanded to Australia and the UK in 2019, reaching over 300 ‘SmileShops’ worldwide. SmileDirectClub plans to expand further in the near future, having trademarks in countries such as Brazil, India, and Mexico. For the remainder of 2019, 20 ‘SmileShops’ are expected to be opened per month.
Align Technology’s relationship with SmileDirectClub.
Align Technology attempted to sue SmileDirectClub in its early days for patent infringement. However, it soon dropped the lawsuit and instead became a minority investor in the company. Align Technology invested $46.7 million in SmileDirectClub in 2016 and a further $12.8 million in 2017. This funding has given Align Technology a 19% stake in SmileDirectClub.
Despite Align’s investment, their relationship has not been simple. In 2017, Align Technology began opening stores similar to SmileDirectClub’s ‘SmileShops’. This, however, contradicted a non-compete clause and Align was forced to close all 12 outlets. This hurt Align’s consumer awareness as SmileDirectClub continues to open stores, having recently formed a deal with CVS. This new partnership will see hundreds of ‘SmileShop’ clinics open in CVS stores, with the first 13 having opened in April of this year.
Dentists problem with SmileDirectClub
While the future may seem bright for SmileDirectClub, dentists are concerned with their disregard for subsequent check-ups. In fact, the American Association of Orthodontists has gone as far as to claim that the lack of in-person visits and x-rays is illegal. The association has filed complaints in 36 states and, while no regulations have been passed yet, government intervention could prove to be a significant threat to their entire business model.
Even though SmileDirectClub is taking market share away from Align, it is certainly not the end of Align Technology. Align successfully diversified into orthodontic scanners after purchasing Israeli tech company Cadent for $190 million in 2011. While the revenue generated from these scanners only makes up 14% of Align’s total, there has been significant growth in this segment – scanner revenue grew 68% to $275 million in 2018. In the same period, clear aligner revenue grew 29%, down from 2017’s 37% growth.
But investors are wary. Following quarterly earnings in July, Align’s stock prices fell more than 23% due to a warning that Invisalign shipments were below expectations. This drop was driven by a falling consumer sentiment in China and a decrease in their young adults segment. While Align believe China will offer a long-term opportunity, short-term uncertainty has left investors concerned, some of whom may begin looking to companies such as SmileDirectClub. Align Technology stock is down roughly 54% from this time one year ago.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Align Technology. Read our full disclosure policy here.