Executive Summary
H1 2024 Byte succeeded in capturing an outsized share of growth – growing at +18% and +16% in Q1’24 and Q2’24 respectively (on YoY basis) - with such stellar figures Byte™ made it to the list of insightsZ Superbrands. Fast forward to OCT 25, XRAY announced voluntarily suspending the sales & marketing of its Byte aligners. This move comes as XRAY reviews its regulatory requirements in consultation with the U.S. FDA.
insightsZ analysed all MDRs related to Byte™ within the FDA’s MAUDE database and performed quantitative analysis of the event descriptions for the observation period (Jan 1 – Sep 30, 2024) – focussed at product code of ‘NXC’ (sequential aligners) for brand name ‘Byte’. Like earlier expected, our analysis uncovered significant Quality-related problems associated with Byte aligner’s treatment.
Our verdict – there is more to it than meets the eye!
Background
In the last 36 months, North American DTC clear aligner category moved rather unpredictably – fighting off macroeconomic headwinds, higher shipping costs and rising advertising + CAC (customer acquisition cost). LTM the category witnessed major setbacks incl. SmileDirectClub’s bankruptcy and many other players exiting the DTC space completely.
DEC 31. 2020 XRAY acquired Byte in an all cash-deal for approximately $1.04 billion.
The acquisition deal was funded by the company’s cash on its balance-sheet. As of September 30, 2020, XRAY had approximately $1.27 billion of cash and cash equivalents. The deal value represented 9.4% of XRAY’s market capitalization on the day of deal closing (Dec 31, 2020) – effectively increasing the company’s Shareholder’s Value at Risk or, SVAR.
According to Moody’s, the transaction multiple was at 5 times Byte's projected FY 2021 revenue of USD 200 million (Source: Moody’s investor service: Moody's says Dentsply Sirona's acquisition of Byte has no rating impact, published on the day of JAN 04 2021).
In recent years, XRAY had undergone a series of transactions in alignment with its forward-looking strategy to be more actively present in the clear aligner space:
FY 2021 XRAY acquired Propel Orthodontics LLC in a deal valued at USD 132 million. The company manufactures and sells orthodontic devices and provides in-office and at-home orthodontic accessory devices to orthodontists and their patients primarily within the aligner market. The device was later rebranded as Hyperbyte™.
DEC 2020 XRAY acquired US based Byte™, a direct-to-consumer aligners business in an all-cash deal for USD 1.04 B.
FY 2018 XRAY acquired Orametrix (brand:SureSmile) in a deal valued at USD 120 million, with a potential earn out payment of additional USD 30 million if certain synergies were realized.
Did XRAY significantly overpay for the acquisition deal?
Contrary to Moody’s previous estimates, insightsZ found that Byte’s actual FY 2021 revenue run-rate was estimated to be around USD 110 million. In other words, the company’s growth ambitions were shattered by Byte’s lower than expected YoY growth performance. FY 2021 Byte managed to grow in the range of +5 percent, whereas the global clear aligner category grew by +45 percent during the same period (global category leader Invisalign grew by +54 percent on YoY basis during FY 2021).
Sources confirmed that XRAY’s initial expectations were to double Byte’s revenue to USD 220 million by FY 2022 – demonstrating a +100 percent YoY growth rate. Fast forward to Q4 2022, Byte was again far from realizing this growth story – effectively failing to deliver the growth for two consecutive financial years (growing +HSD at best), post the acquisition deal.
XRAY failed to scale the company to other relevant global markets outside North America, even 18 months post-acquisition deal (Byte was launched in Australia and New Zealand in early 2022 - the only markets outside North America). XRAY even failed at taking the brand Byte to markets that had non-existing entry barriers from regulatory approval (RA) and commercial standpoint.
Summary: Byte consistently failed to deliver on its growth promise during FY 2021 and FY 2022 – demonstrating at most +HSD growth on YoY basis. XRAY’s JUN 2021 acquisition of Propel Orthodontics meant that Propel VPro revenue was now being additionally recognized under Byte’s BU.
To conclude: Not only Byte significantly underperformed XRAY’s earlier growth estimates, but also the global clear aligner industry’s growth-rate.
What’s been happening recently in the North American DTC Industry?
In the last 30 months, North American DTC clear aligner industry has witnessed previously unexpected market developments:
North American DTC category leader SmileDirectClub filed for bankruptcy in Q3 2023, and eventually shut down its operations. Once valued at USD 8.9 billion, SDC succumbed to its debt after the company consistently underperformed the market, and failed to pave a clear path for any future profitability scenarios. You can find out more about SmileDirectClub’s fiasco in our research report here.
Q1’22 Candid shut down its DTC business, together with all 45 retail locations (so-called Candid Studios). The management announced that they’ve shifted the commercial focus on growing its B2B arm Candid Pro, which is based on a network of +300 dentists nationwide who’re offering hybrid treatments.
Another company that decided to completely exit the DTC category is OrthoFX. Similarly to CandidPro, OrthoFX now almost exclusively focusses on its white-label OEM business and hybrid treatments.
Fledgling DTC start-up, Smilelove decided to shut-down its operations, citing bankruptcy in FY 2021. According to Better Business Bureau, they’ve fielded over 800 complaints about the company in recent months, and publicly available customer reviews reveal information about a series of denied refunds, unshipped orders, and absent customer service.
SnapCorrect is among the recent victims in the DTC category, that exited the business in AUG 2024. Based on our latest surveys, the company is not accepting any new patients in late H1 2024, suffered from a long list of unfulfilled back-orders and the customer service team was partially shut down before shutting down its operations completely.
Most common challenges for DTC Players
Please be aware that the challenges outlined below were not exclusive to Byte aligner patients; rather, they affected patients across various DTC clear aligner brands to differing degrees.
DTC companies failed to provide significant value for customers beyond the purchase transaction. The quality problems and bad customer experience set new standards in the clear aligner space – speaking sarcastically, of course. Not just that, how the DTC companies’ legal team coerced patients into signing NDAs as a perquisite to give money back only left poor taste in the consumer’s mouth, further negatively impacting the brand’s customer referral-rates, and indirectly contributing to the rising disparity between the customer acquisition cost (CAC) and lifetime value (LTV).
It’s obvious that selling cheaper aligners was not enough to build customer loyalty. In fact, pricing alone did not earn a long-term or even a strong referral affinity – clearly failing to build an intimate connection with the consumers. While the DTC companies undertook steps to improve Quality issues and the customer journey, however it all came too late and too little.
Many DTC companies failed to accompany its users throughout the patient journey as they were left pretty much on their own, without the Orthodontist or GP. Unlike other clear brands that were actively partnering with treatment monitoring service providers like Dental Monitoring or Get-Grin, DTC companies really left the patients to their whims.
While having access to patient information enabled DTC companies to have intimate conversations with customers, nevertheless poor outcomes, shoddy customer experience, missing touchpoints and Q-issues negatively impacted the DTC brands’ image.
XRAY suspends sales of Byte Aligners
OCT 25, 2024 XRAY announced that the company has suspended sales and marketing of Byte Aligners and Impression Kits — following a voluntary decision made in consultation with FDA to ensure compliance with U.S. regulations.
The company’s management said it will continue to work with the FDA and other regulatory authorities while communicating with treating dentists and their patients.
XRAY shared that changes in state regulations across the U.S. have made it more challenging for Byte to sell its treatment offering. Accordingly, the company has begun reallocating resources from Byte to other areas of its business.
The company made it clear that the suspension only applies to the Byte business, and that XRAY’s SureSmile BU is not impacted or affected in any way.
"The AAO’s annual public policy survey indicates that 77% of its members have seen new patients requiring retreatment after using mail-order orthodontic services without an in-person exam"
Evolving Regulatory Landscape
Earlier this year, ADA reaffirmed its policy opposing DTC (direct-to-consumer) aligner therapy, citing the potential for irreversible damage to patients. The existing ADA policies clearly outline Licensed Dentists as being ultimately responsible for the patient’s ongoing care and treatment outcome.
The AAO continues to address patient safety concerns by advocating for better regulation of DTC aligner treatments at both state and federal levels. JAN 2024 Several key members of the AAO met with their counterparts from FDA in Washington to discuss concerns about DTC (direct-to-consumer) clear aligners.
Here’s a brief summary about the meeting’s outcome:
Encouraging Reporting of Adverse Events: AAO members were encouraged to report DTC aligner-related issues to the MAUDE database to help inform the FDA’s actions. AAO members shared clinical stories about the risks and harms they’ve seen in patients who used DTC clear aligners. As a result, AAO encouraged members who have encountered adverse events following DTC treatment to submit at least one report to the MAUDE database.
Addressing Patient Safety: The volume of submissions to the MAUDE database will inform the FDA’s response to risks associated with mail-order orthodontic treatment models. The AAO believes that consistent reporting could prompt the FDA to issue public warnings about the potential dangers of undergoing treatment with a DTC company without an in-person exam or radiographs.
California’s Assembly Teledentistry Bill – a Landmark in Regulatory Reforms
DEC 2021 AAO’s Legal & Advocacy team helped secure a letter from 21 bipartisan Members of Congress to the Government Accountability Office (GAO), requesting an investigation into DTC advertising practices for prescription medical products. Fast forward to SEP 2023, GAO study found that FDA and FTC consistently overlooked DTC advertising and its claims – often compromising with patient’s health.
The FDA recommended a new course of action – enabling it to better focus on areas to be investigated – by zeroing-in on complaints submitted by individuals reported in the MAUDE database.
OCT 2019 DTC aligner players received a massive blow with the announcement of California’s assembly teledentistry Bill No. 1519. This legislation gave the Dental Board of California regulatory control through JAN 2024, allowing consumers who’re undergoing DTC clear aligner treatment to be able to file complaints with the board, despite agreeing to the somewhat manipulative and even misleading terms of the “mail-ordered aligner” companies.
As one may expect, such regulatory actions slowed down the tsunami of clear aligner treatment by “mystery” orthodontists/dentists via the “mail-order” or DTC model. In addition to this, ADA as well as AAO have also led the effort to educate the public with online presentations and resources to address complaints and concerns for patients that have had unfavourable experiences with unsupervised aligner services.
Some of the changes within the above legislation included:
Requiring an electronic notice for patients receiving dental services through telehealth including a provision that the California Dental Board is the entity that regulates dentists and dental assistants and provides the telephone number and internet website of the California Dental Board.
Defining “[u]nprofessional conduct” to include a treating dentist’s failure, prior to the initial use of orthodontic appliances, to review the patient’s most recent radiographs or equivalent bone imaging.
Requiring individuals and entities providing dental services through telehealth to make available the name, telephone number, practice address, and California state license number of any dentist who will be involved in providing services to a patient prior to the rendering of services and when requested by a patient.
What did Byte get right?
Post its bankruptcy, SmileDirectClub shutdown left behind almost a USD 450 million-dollar business on the table, adjusted for full year basis. More than 80 percent of this business value was open to be captured in North America alone.
Earlier this year, insightsZ predicted that North American at-home aligner brand Byte™ was particularly expected to benefit from this windfall.
Post the recent PR announcing voluntary discontinuation, the internet is filled with posts & opinions about how Byte has left its patients midway their treatment journeys, and how the DTC company was predestined for failure. Global markets seem forgetting to acknowledge that Byte treated more than 460,000 patients worldwide on cumulative basis.
Despite a challenging macroeconomic environment LTM, Byte succeeded in capturing an outsized share of growth - of all leading North American clear aligner brands. Byte’s market revenue in the North American market is estimated to be at USD 160 million – reaching market share of almost 9 percent.
H1 2024 insightsZ found out the brand’s revenue grew +17% versus H 2023 - ensuring that the eCommerce giant continued to maintain its #1 position in the North American DTC market until recently.
To fight-off the changes in the regulatory landscape, XRAY launched new dentist-directed hybrid model launch, Byte+ earlier this year. Like expected, Byte+ succeeded in expanding its network of partner dentists in US and Canada.
Launch of Dentist-directed Hybrid Model Byte+
The recent dentist-directed hybrid model, Byte+ was launched in April 2024 in North America. Unlike Byte’s traditional commercial approach, the brand’s go-to market model included partnerships with both General Dentists and Specialist Orthodontists. Unlike its purely DTC arm, Byte+ targeted a growing demographic of older teens and adults who’re looking for clear aligner treatment at a lower price point, together in active consultation with a dental office.
Since its launch, Byte+ had expanded its network to more than 100 dentists until August. As a matter of fact, in the month of June alone, Byte+ added more than 50 dentists to its network. Of course, those commercial plans may have now been shelved and any marketing playbooks may have been made obsolete.
What’s new with Byte+?
Unlike SmileDirectClub that relied on a relatively asset-heavy model of SmileShops retail format, Byte didn’t have any physical stores or locations to assist intraoral scans or even sales assistance. Byte’s patient journeys were 100% virtual – leveraging digitization and remote patient monitoring services. However, with the launch of dentist-directed hybrid model Byte+, the status quo was set to undergo significant change. That is, Byte+ experience began with a seamless integration into the dental office’s existing CRM, enabling prospective patients to schedule their initial appointment with the Byte+ Partner office. This go-to market approach enabled Byte+ to remain asset-light, yet drive +HDD revenue growth.
Byte+ offered competitive pricing & accessible financing for all patients, irrespective of their credit score. Byte+ treatment services had a sticker price of $2,999 in US. On the basis of the existing pricing structure, Byte+ was expected be sold at a considerably premium versus the Byte’s DTC business. Unlike Invisalign or other dentist-directed clear aligner brands that don’t offer such financial products or services, conventional dental office’s payment plan options are very limited and depend on the dental office’s commercial offering.
Every Byte and Byte+ patient got a personal customer service person, Byte Advisor. A typical Byte Advisor is a sales-rep who supports their patients during their entire treatment journey incl. pre-sales, financing and other areas. insightsZ doesn’t have any information about how Byte Advisors were compensated as traditionally they’ve earned commission on DTC sales. However, in case of Byte+, the dental office occupied the centerstage in terms of how patient pipelines were filled and effectively managed.
HyperByte continued to be included in all Byte+ treatments. The company’s high-frequency vibration device, HyperByte is intended to help provide a more comfortable aligner fit and even encourage faster dental shifts. Byte included this device in the cost of all their DTC aligner bundles offering. FY 2021 Dentsply Sirona acquired HyperByte manufacturer Propel Orthodontics in a deal valued at USD 130 million.
Just like all Byte treatments, Byte+ treatments were reported to be backed by Byte-for-Life Guarantee - a coverage plan that guarantees patient’s smile for a lifetime. In other words, even if a patient’s teeth shift years down in the future, the company was expected to create new aligners to readjust them, as long as the patients purchase their retainers every six months and wear them as instructed. There may be additional fee that the dental office may charge the patient for relapse case-treatment.
Analyzing Byte’s MDRs in MAUDE Database
Adverse events are an expected part of a medical device’s lifecycle. To prevent the recurrence of such events, various vigilance systems have been established worldwide incl. FDA’s MAUDE database (The Manufacturer and User facility Device Experience), which is a publicly accessible database that contains data of medical device reports (MDRs) submitted to FDA.
insightsZ analyzed all MDRs related to Byte™ within the MAUDE database and performed quantitative analysis of the event descriptions and XRAY’s narrative reports, for the observation period (Jan 1, 2024 – Sep 30, 2024) – focussed at product code of ‘NXC’ (sequential aligners) for brand name ‘Byte’.
Summary of our findings:
insightsZ found 1,619 medical device reports (MDRs) related to XRAY’s Byte in the MAUDE database, filed for above-mentioned observation period. Our analysis concluded that the use of Byte sequential aligners without dentist’s supervision led to a multitude of oral health problems, as documented in the MAUDE database.
The vast majority of adverse events were designated as serious, even though none were life-threatening in nature. Many adverse events were irreversible.
Lacerations were the most frequently reported event, with 486 occurrences. This was followed by other adverse events, including tooth fractures and tissue breakdown (325), pain (167), and hypersensitivity or allergic reactions (97).
A total of 56 events were linked to TMJ issues, while necrosis affected more than 39 events.
insightsZ speculates that the FDA issued a pre-warning letter to XRAY based on the ongoing investigation, after the sudden unprecedented spike in Adverse Events Reports that have been submitted YTD 2024 (Note: More than 700 event reports were submitted in the months of September alone).
The MAUDE database houses medical device reports (MDRs) submitted to the FDA by mandatory reporters (manufacturers, importers and device user facilities) and voluntary reporters such as health care professionals, patients and consumers.
Each year, the FDA receives several hundred thousand medical device reports (MDRs) of suspected device-associated deaths, serious injuries and malfunctions. The FDA uses MDRs to monitor device performance, detect potential device-related safety issues, and contribute to benefit-risk assessments of these products. The MAUDE database houses MDRs submitted to the FDA by mandatory reporters (manufacturers, importers and device user facilities) and voluntary reporters such as health care professionals, patients and consumers.
insightsZ Verdict:
Post its exit, SmileDirectClub left behind $450 million-dollar business on the table, adjusted for full year basis. More than 80 percent of this business value was open to be captured in North America alone and insightsZ predicted that homebrewed DTC brand Byte™ was particularly expected to benefit from this windfall. And despite a challenging macroeconomic environment LTM, Byte succeeded in capturing an outsized share of growth – growing +18% and +16% in Q1’24 and Q2’24 respectively (on YoY basis).
However, like SDC, Byte too suffered from ongoing Quality issues – as became evident by the sheer volume as well as seriousness of the patient injuries (Reportable Per 21 CFR Part 803), and adverse events reported in the FDA MAUDE database.
This also raises concerns regarding the compensation structure for 'Byte Advisors' in relation to their use of aggressive sales tactics or high-pressure promotions. Furthermore, the new status quo underscores that the launch of Byte+ represents insufficient and delayed damage control efforts.
insightsZ is further analyzing the available MDR data and plans to share its findings in the upcoming future version of this report.
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