Shares of SmileDirectClub (SDC) are sliding on Monday after the Governor of California signed Assembly Bill 1519, which extends the Dental Board’s authority to oversee/regulate dental services until January 1, 2024. In a statement, SmileDirectClub said that while the bill creates "unnecessary hurdles," nothing in AB1519 requires ceasing or modifying the company's operations.
CALIFORNIA ASSEMBLY BILL 1519: On Sunday, the Governor of California signed AB-1519, extending the Dental Board’s authority to oversee and regulate dental services until January 1, 2024. According to the bill that is expected to go into effect on January 1, 2020, dentists must review diagnostic digital or conventional radiographs for orthodontia prior to moving teeth; any entity providing dental services through telehealth need to make available the contact information of the dentist treating the patient; and providers of dental services cannot require a patient to sign an agreement limiting patient's ability to file a complaint with the Board.
'UNNECESSARY HURDLES': SmileDirectClub issued a statement on California Assembly Bill 1519, stating in part that, "We are pleased with the Governor's signing statement for AB1519. While the authorizing nature of AB1519 made it difficult to veto the bill, the Governor clearly indicated that he expects all stakeholders to come to together to find a better way to create policy around teledentistry. While this bill does not preclude SmileDirectClub's continued operations in California, it will create unnecessary hurdles and costs to Californians that need care but struggle to afford it. The undebated, clinically unsupported, and ill-advised policy changes that are included in this bill - a bill that was intended to reauthorize the Dental Board of California until last-minute policy additions were added - have created arbitrary barriers to technological innovation...Simply put, this bill represents the dental lobby's thinly-veiled attempt to protect traditional dentistry at the expense of Californians, and Governor Newsom made the correct choice in issuing his strongly-worded rebuke of the tactics and policy that this bill represents."
"Nothing in AB1519 requires SmileDirectClub to cease or modify its operations, and nothing regarding teledentistry in this legislation can take effect until the Board has given all stakeholders the opportunity to submit public comment and debate the merits of any proposed rules with clinically-based data - as the Governor has requested in his signing statement. To that effect, SmileDirectClub will be reaching out to our partners in the field to coordinate efforts so that a positive outcome for the industry - and for the California consumers - can be reached...To be clear, SmileDirectClub will continue to legally operate in California, we will be an active participant in the administration-directed public debates surrounding teledentistry, and we will continue to provide affordable orthodontic care to thousands of smiling Californians. Moving forward, SmileDirectClub welcomes transparent policy debates that include all stakeholders."
IMPLICATIONS REMAIN UNKNOWN: Commenting on the bill, Stifel analyst Jonathan Block told investors that while the headwinds it may or may not cause for SmileDirectClub's business are difficult to decipher, uncertainty is seemingly causing multiple compression in the near-term. Block noted that the bill is supposed to take hold to start 2020, but the appeals process may push out the timing. His conversations with SmileDirectClub management suggest they strongly believe the intraoral scan that they are capturing for the case constitutes what the bill refers to as "diagnostic digital." For the remaining 10%-15% that is captured via a physical impression, the company believes that those may still fit the bill’s requirement as digital, as physical impressions are then digitized for the provider to design the treatment plan, he added.
The analyst also argued that if it is only physical impressions that are no longer allowed under a teledentistry model, SmileDirectClub's competitors would be under more duress than the company, as they do not have an extensive SmileShop footprint and as a result rely much more on physical impressions. Block reiterated a Buy rating and a $19 price target on SmileDirectClub shares.
Meanwhile, UBS analyst Kevin Caliendo told investors in a research note of his own that he thinks SmileDirectClub may need to place dentists inside its Smile Shops. What is less clear, he noted, is whether the AB-1519 bill clearly defines a "radiograph" and "whether an iTero scan is sufficient or if patients will need to get x-rays as well as scans." Caliendo thinks this might eventually be determined in court. The analyst has a Buy rating and a $24 price target on the shares.
PRICE ACTION: In late morning trading, shares of SmileDirectClub have dropped over 9% to $10.11.
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