Sonendo Stock: Dental Technology for Root Canal Therapy
Plenty of people talk about how they hate going to the dentist, but apparently, dentophobia is a real thing. One study found that nearly a quarter of people feared the dentist chair, while dentophobia was the most common among 10 different phobias (defined as excessive fear or anxiety) at 3.7% – even more than fear of spiders or MBAs. So you figure there’s got to be a way for dental technology to help ease those anxieties (except for maybe those who suffer from technophobia) and make a trip to the dentist feel less like a replay of the Spanish Inquisition.
Perhaps no procedure is more dreaded than a root canal, so you figure that a company that could invent a dental device to make the procedure less painful and more efficient would make a (sugarfree) mint. That’s the value proposition behind Sonendo (SONX) stock.
What is Root Canal Therapy?
A root canal is a last-ditch effort to save a severely decayed tooth after a lifetime of eating too much sugar or shooting too much meth, among other reasons. The conventional approach to root canal therapy relies on manually scraping and removing tooth structure and opening canals inside the tooth in order to remove and irrigate infected tissue. After preparing the site, the dentist (or endodontist, a specialist in
torture root canal surgery), fills the root canal with a biocompatible material and plugs the opening with a temporary filling until a crown can be placed on the tooth.
Easy peasy, right? Well, all that scraping and shaping can further weaken an already compromised tooth. If the dentist fails to do a good job disinfecting the site, it could become reinfected, causing additional pain and more visits to drool all over the fake leather chair. Root canal therapy can cost upwards of $2,000 – a lot of money to spend for a procedure with subpar outcomes.
About Sonendo Stock
That’s what the big brains at Orange County, California-based Sonendo thought as well, so they invented the GentleWave System, a dental technology platform designed to treat tooth decay by cleaning and disinfecting the microscopic spaces within teeth without the need to scrape away most of the structure. Founded in 2006, the company raised $283.1 million over the last 15 years before deciding to hit the public markets without much fanfare about a month ago using the traditional initial public offering (IPO) process. The stock opened at $12.50 on Oct. 29 and immediately dropped more than -25%. (That’s great news if you’re a retail investor because you can now pay 25% less than institutional investors were willing to pay.) Today, SONX is hovering around $10 a share with a market cap just a little north of $250 million. That’s already well below our threshold of $1 billion, but let’s see if Sonendo is worth watching for a possible future investment.
Dental Technology for Root Canal Therapy
The GentleWave System is the first and only FDA-cleared dental technology for root canal therapy, according to the company. The system “combines procedure fluid optimization, broad-spectrum acoustic energy, and advanced fluid dynamics.” Not sure what that means? Neither do we, but the important thing to know is that the device reaches the microscopic spaces within teeth, dissolving and removing tissue and bacteria with minimal to no effect on the tooth structure.
The company also offers its own software suite, The Digital Office, which manages a practice’s workflow and also happens to seamlessly integrate with the GentleWave System. In the future, Sonendo intends to leverage the software to allow referring general dentists and patients to schedule consultations and appointments directly with GentleWave providers through its website. The system itself has wireless connectivity for real-time capture of data, which is then fed into the company’s data-warehouse where it can analyze system usage and utilization, as well as automatically push software updates and perform remote diagnostics.
Finally, Sonendo is also preparing to launch its next-generation single-use procedure instrument (PI), CleanFlow PI, which has also received clearance from the FDA. The instrument enables a clinician to clean the inside of the tooth from the outside, which the company expects will eventually allow it to extend the GentleWave System beyond root canal therapy to treating earlier stages of tooth decay.
Benefits of the GentleWave System
The end result is a root canal therapy with improved clinical outcomes, rapid recovery rates, and minimal or no postoperative pain, according to Sonendo. Its dental technology has been tested and reviewed in more than 30 peer-reviewed journals, including seven that didn’t even include its own scientists. One prospective multi-center study, for example, demonstrated a treatment success rate of 97%. The system is also more efficient, based on a survey of GentleWave early adopters, with the number of successful procedures performed in a single visit increasing from 57% to 90%.
Should You Invest in Sonendo Stock?
Less time spent in the dental chair is a win for patients, but what about investors?
Let’s start with Sonendo’s own estimates for its total addressable market (TAM), which is currently focused on the United States and Canada. The company says that about 17 million root canal procedures are performed annually in those two countries, representing about $17 billion in healthcare-related expenses. Of those 17 million procedures, around 26% are performed by 5,000 endodontists who perform around 900 procedures per year. Sonendo then goes on to talk about how the endodontists and dentists who provide 75% of all root canal procedures make up “a potential annual addressable market of approximately $1.9 billion.” Something doesn’t add up, but we can assume there’s a lot of room to grow for a company that maxed out at $34.7 million in revenues for 2019.
So far, Sonendo has sold more than 700 GentleWave Systems, which have been used to treat more than 700,000 patients. Sonendo primarily derives revenues from products – machine sales and single-use instruments – and software licensing fees. We like the fact that the company derives a portion of its revenues from recurring costs like single-use PIs, though we would like to see that broken down into more detail. As you would expect, the company was impacted hard by the pandemic.
Sonendo’s 2021 revenues fell sharply as The Rona caused many dental offices to close temporarily and the company wasn’t able to make many new sales. Revenues for the first half of 2021 are around $15.4 million, so they appear to be rebounding, but aren’t on track to surpass 2019.
A key metric to watch will be “number of machines installed” which sits at around 700 or around 14% of the 5,000 endodontists they’re trying to sell to (assuming one machine per endodontist).
Using our simple valuation ratio – dividing current market cap by annual revenues (estimated by simply doubling the first six months of 2021) – we come up with a value of about 8.5. That means the company isn’t crazy overvalued, but that alone is not a reason to invest. The company estimates that the $93 million and change raised from the IPO will help keep the lights on for at least the next 12 months before they’ll need to dilute current investors with an equity raise or add to their current debt of $30 million.
Let’s put aside the fact that this $264 million company doesn’t pass our $1 billion market cap threshold. Would this be a stock we’d invest in were it 4X the size? Without knowing just how much money they plan to make from consumables, the answer is no. Their high-margin software revenue looks promising, but we’d like to know more about the contracts being signed. For example, Sonendo offers “practice management software to enable an integrated digital office for dental practitioners.” Is the total number of licenses around the same as the number of machines they’ve sold? Selling practice management software is promising, because then it’s a channel to use for selling more things. Is the practice management software decoupled from the machine, or are the two only sold as one unit? There are many questions we have that aren’t clear from what we’ve seen in the company’s S-1 filing. For now, we’ll pass on Sonendo stock and double down on flossing more.
Investors who aren’t dentophobes have few pure-play options when it comes to dental technology, aside from a few dental supply companies. There’s SmileDirectClub (SDC), which has seen its value drop by more than -75% since it IPO’d a little more than two years ago. Then there’s Align (ALGN), a stock we like, that’s gone in an entirely different direction with a 5-year return of +651% compared to a Nasdaq return of +237% over the same time frame. Generally speaking, dental technology stocks are a bit niche for our liking, and we’re hardly hurting for options when it comes to high-growth life sciences stocks.
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