Leaving a dentist near you…

UPDATE 4/22/2010: And like that, the ridiculous program requirements that Align Technologies put into place has been removed. Fortunately I did not follow through on that short – the stock is up almost double since this program was announced.

ORIGINAL 7/9/2009:

.. Invisalign.

In what could be the dumbest business decision I’ve heard of in a long time, Align Technologies (NASDAQ: ALGN), makers of Invisalign® has decreed that all dentists offering Invisalign must start 10 cases per year and complete 10 CE credits related to Invisalign per year (copy of letter sent to one dentist here).

What this means for the consumer:

  • The consumer experience will undoubtedly improve. Those who truly want Invisalign will now have a limited set of very experienced dentists to choose from.
  • However, competitive pressure may change that – see notes on ClearCorrect below.

What this means for the dentist:

  • The national average for a case is $5,000/year(source). Convincing 10 patients per year to fork over $5,000/year for a truly elective procedure is very, very hard in the vast majority of markets out there. Only the ones that market heavily and whose business consists of a very high percentage of cosmetic dentistry will make this quota.
  • Every dentist who became certified in the past 5+ years was required to pay $1K-2K to become certified. This, combined with a mandatory reduction in services, is going to lead to a large number of very unhappy dentists at this decision (I know a few myself). And, you can be sure that unhappy dentists across the country will do whatever is in their power to keep a patient in the door. A few choice quotes from the online dental community DentalTown:
    • “Absolute idiots IMHO !!! I wonder if they will be refunding doctors certification costs as they decided to change the rules in the middle of the game?”
    • “While there are many doctors that may not submit many cases to Invisalign, I suspect these same doctors talk alot about invisalign and are a terrific advertising/referral source for high volume invisalign offices or orthodontists. I’m sure many of us won’t have very many nice things to say about Align right now.”

What this means for Align Technologies:

  • I would expect that this knocks out 50-75% of their dentists (by number), but only knocks out 10% of revenue in year 1*. They can align sales/admin costs against this expected reduction in revenue to minimize the impact to net income. This, however, does not include the general softness expected in their business due to offering an expensive, elective procedure during a severe recession, which analysts have already identified.
  • Beyond intentionally cutting revenue during the recession, their timing is poor. Between being found as violating patents by one competitor (Ormco Corporation) and seeing another upstart invade their turf (ClearCorrect), they are leaving dentists with plenty of options that are not Invisalign.

How long will they have until this newfound exclusivity takes a toll on their brand strength and share price? I don’t think their 2Q earnings will reflect the change, as the few fringe dentists are likely pushing Invisalign hard to hit their quota, but I would be surprised if they don’t have to lower guidance again in future quarters, partially as a result of this policy.

Comments? Thoughts?

*These are gut-feel numbers, not based on financial analysis.

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