Gryphon Investors, a mid-capitalization market private equity (PE) firm, is looking to sell one of its holdings, Smile Brands. The dental service organization (DSO) primarily consists of BrightNow! Dental, Castle Dental, Monarch Dental, A+ Dental Care, One Smile Dental, Johnson Family Dental, P3 Dental Group, DecisionOne Dental Partners, and the recently acquired Gateway Dental.
The PE firm initially acquired Smile Brands, which comprises more than 400 dental practices in 17 states, in August 2016. Previously, Gryphon Investors owned Smile Brands’ predecessor DSO BrightNow! Dental until it sold its majority interest in 2005.
Now, Gryphon Investors is seeking an initial round of bids to divest Smile Brands. Deal books have been distributed to potential buyers, and the PE firm expects first-round bids later this month. The auction is strictly limited to financial sponsors.
Smile Brands is marketing its approximately $70 million in pro forma earnings before interest, tax, depreciation, and amortization (EBITDA). Similar assets have traded in the 11x to 13x multiple range.
Those trading multiples seem exceptionally exaggerated, especially in light of the valuation collapse of DSO SmileDirectClub (SDC), which is publicly traded on NASDAQ. Unlike SDC, Smile Brands is not subject to enhanced disclosure and transparency rules under the US Security and Exchange Commission.
Hindenburg Research generated a scathing report on SDC’s activities and is advising investors to short this stock, as it anticipates a one-year price target of $2. This contrasts dramatically with the initial public offering (IPO) of $23 per share on September 12, 2019. On the morning of October 17, 2019, SDC was trading at $10.00 per share.
Hindenburg’s analysis of this publicly traded DSO detailed multiple allegedly unethical and unlawful business dealings. Serial matters are pending before the federal court system and the US Food and Drug Administration (FDA). In fairness to SDC, some of those alleged illegal activities are common within the DSO industry, even if rulings go against them.
SDC denied Hindenburg’s in-depth assertions and analysis.
“There is no factual basis nor scientific or medical justification in these allegations to substantiate the false claims made about our model and the state-licensed doctors in our affiliated network,” SDC said in a corporate statement.
However, big names in the banking community vigorously support SDC, which is not demonstrated by the overall investment community.
It’s unclear what impact the current situation with SDC may have upon the valuation of Smile Brands or on any other DSO. Questions pending in dental healthcare include what exactly constitutes lawful telemedicine, lawful patient informed consent, transparency in expected outcomes, transparency in the remediation process, beneficial ownership of a dental practice, delegation to unlicensed support personnel, unlicensed management directing decisions only licensed personnel can make under existing statutes, utilization of sham-owner doctors in dummy or shell companies, and more. SDC may be rapidly bringing these critical decisions to a head.
Relevant issues go far beyond possible healthcare malpractice. Potential fraud may be evidenced through violations of state and federal false claims acts and unfair trade practice acts. To what extent will federal courts and the FDA allow DSOs to compete as ordinary business and commerce, versus supporting safeguards for the public, which is highly disadvantaged in the doctor/patient contract? Moreover, how will that all shake out in DSO valuations and the delivery of healthcare for the public?
Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Santa Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at mwdavisdds@comcast.net or smilesofsantafe.com.
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