Why is invisible orthodontics, like "Hermes" for your teeth, so expensive? | 36kr Holdings · Major Health

Spending tens of thousands easily does not stop the pursuit of a set of neat teeth by the new 'middle class' in China.

According to a Zhaoshi Consulting report, the number of orthodontic cases in China has increased from 1.6 million in 2015 to 3.1 million in 2020, with a compound annual growth rate of 13.4%, expected to reach 9.5 million cases by 2030.

Under the huge market demand, orthodontics has become a track highly concerned by capital in recent years.Since 2021, orthodontic brands including YaYa Dental, ToothLeader Technology, etc., have been receiving financing; in June 2021, 'the first stock of invisible orthodontics' Era Angel was listed in Hong Kong with a market cap reaching over 70 billion Hong Kong dollars at one point.

However, this kind of glamour has not reappeared in the downstream dental medical institutions of the industry chain.

At the end of April, China Dental Medical Group once again submitted documents to the Hong Kong Stock Exchange. This has been the fourth time of submission, all resulting in failures. In March, "the first stock of dental chain" Ruier Group$ARRAIL GROUP (06639.HK)$After bleeding in the market for 3 years, the net loss of Yabo Doctor exceeded 1.2 billion yuan, with a first-day drop in stock price; while making a second attempt to list on the Hong Kong Stock Exchange,$Dental Doctor Medical (810120.HK)$Due to heavy marketing discussions and repeated violations of advertising laws, it has been punished.

If in the downstream market, Era Angel can still compete with the "imported" Invisalign, but in the upstream of the industry chain, domestic invisible orthodontic enterprises have not yet formed a substantial presence.

01. Why is orthodontics so expensive?

In orthodontics, it refers to continuously exerting gentle external forces on the teeth in a specific direction to move the teeth to the optimal position. By the time it reaches the consumer, the braces have already gone through two rounds of markups by manufacturers and hospitals.

With Era Angel$ANGELALIGN (06699.HK)$For example, in 2020, the factory prices of the four types of invisible braces were 7600 yuan, 9600 yuan, 8700 yuan, and 5500 yuan respectively. However, the suggested retail prices of the four types of invisible braces reached 0.032 million yuan, 0.04 million yuan, 0.026 million yuan, and 24,000 yuan.

As for specific pricing, there is no unified standard. According to the Era Angel prospectus, the general guidance sales prices provided to distributors (including independent distributors) of invisible orthodontic products take into account estimated gross margins for the relevant year products and services, as well as estimated market demand for the relevant year. At the same time, sales prices are adjusted based on the distributor's (including independent distributors) coverage area, types of end customers, market positioning, sales volume, and historical performance.

With the increase in sales volume, Era Angel's gross margin has also been soaring. In 2020, Era Angel's invisible orthodontic solution gross margin reached 71.3%.High unit prices and high margins for invisible orthodontics have also been labeled as "excessive profits" and a "money-printing machine."

However, industry insiders believe that the profitability of orthodontics needs to be viewed rationally. Yao Junfeng, the founder of Zhengya Dental, stated that although the gross margin of invisible orthodontic braces production is high, the impact of R&D, sales, training, and other expenses on net margin is significant.

In other words, many companies in the invisible orthodontics industry are facing the malpractice of being "sales-heavy and R&D-light," and the high premiums are often paid by consumers in the end.

From Era Angel's data, it can also be seen that from 2018 to 2021, Era Angel's gross margin has been above 60%; during the same period, Era Angel's net margin has not exceeded 25%. There is a significant difference between its net margin and the extremely high gross margin.

Taking sales and marketing expenses as an example, from 2018 to 2021, Era Angel's sales and marketing expenses respectively accounted for 46.07%, 53.61%, 61.63%, and 53.15% of the costs. In 2021, Era Angel's sales and marketing expenses increased by 58.9% year-on-year to 0.237 billion yuan. It stated that this was mainly due to increased employee welfare expenses and advertising and promotional expenses.

Dr. Ya's prospectus also shows that one of the top five suppliers responsible for search engine promotion and bidding from 2019 to 2021 has been Baidu Online Network Technology (Beijing) Co., Ltd. Shanghai Software Technology Branch.

Apart from marketing expenses, under the shortage of orthodontists, salaries and other labor costs are also a major expense.

The time cost of obtaining the orthodontist qualification is extremely high, proportional to the high expectation of income.According to a report from Head Leopard Research Institute, it takes 7-8 years to cultivate an orthodontic specialist in China, and additional training in aesthetics and orthodontic appliance adjustment is required. After training, a qualified professional orthodontist also needs to accumulate years of clinical practice.

Rayer Group's financial report data shows that it has been in a deficit for three consecutive years from 2019 to 2021, with a cumulative loss of 1.228 billion yuan. However, during the same period, its employee welfare expenses accumulated to 1.55 billion. Rayer Group has stated that it plans to continue offering competitive compensation to retain and attract qualified and experienced dentists. Therefore, the operational performance and financial condition are significantly affected by the ability to manage costs and expenses related to management and dental staff.

In Yao Junfeng's view, orthodontics have a long treatment cycle, high frequency of follow-up visits, and consume a substantial amount of the physician's time. In addition, the auxiliary staff and rent of medical institutions, including orthodontic clinics, are significant costs.

Dental institutions, including Dr. Ya, have mentioned in their prospectuses that a significant increase in rental property prices could affect business and financial performance. Since all private dental hospitals are located in rented properties, Chinese dental medical groups have candidly expressed this concern in the prospectus, stating that they are particularly vulnerable to fluctuations in the property rental market.

Chinese Dental Medical Group also provided calculations in the prospectus that dental clinics typically take about one to two years to reach breakeven and recover initial investment, while dental hospitals take about four years and seven years, respectively.

02. Invisible orthodontics becomes a new trend.

The emergence of invisible orthodontics was once considered to address the issue of insufficient professional orthodontists. Compared to traditional orthodontics, invisible braces manufacturers provide comprehensive correction solutions to doctors, leading to a rapid increase in the adoption of invisible orthodontics, with general dentists starting to engage in orthodontic treatment.

From 2010 to 2019, the domestic market for invisible orthodontics experienced explosive growth, with new brands emerging constantly. However, this influx of competition resulted in many cases of invisible orthodontics not being completed or not achieving the expected results upon completion.

Yao Junfeng observed that after 2019, there was a noticeable decline in the popularity of invisible orthodontics, and the market share of surviving invisible orthodontic brands did not increase but rather decreased.

"At that time, many cases of using invisible orthodontics were left unfinished, some even lasting up to 5 years. After institutions and doctors summarized, they found that there were many 'pitfalls' in the early development of invisible orthodontics, requiring higher technical and experiential demands for doctors and manufacturers." Yao Junfeng stated.

Dental healthcare brand Saidi Sunshine founder Zhou Yanheng also told 36kr that orthodontics is a highly personalized treatment, with the price depending on various factors such as the difficulty of dental alignment, duration of correction, aesthetic needs, and more.

Zhou Yanheng further added that braces play a very small part in the correction process, and professional orthodontists with rich clinical experience are key. The more invisible the braces, the higher the dependency on orthodontists. Even experienced orthodontists transitioning from traditional orthodontics to invisible aligners may encounter issues with control.

Due to the heavy reliance of orthodontics on case accumulation, brands that enter the market first have an advantage.This is also reflected in the current market share. Data from Zhuo Shi Consultancy shows that in 2020 and 2019, the top share of China's invisible orthodontic market was held by Invisalign, with a share of 41.4% and 43.5% respectively.

In order to seize market share, some new brands attempt to disrupt the market by acquiring orders at low prices. CCTV once exposed the trap of free teeth correction in April.According to CCTV Finance, in cases of disputes, a considerable number involve luring with low prices and then charging for other fee-based services.

In the view of Zhou Yanheng, the number of invisible orthodontic manufacturers on the market far exceeds the demand for invisible orthodontic products, with many manufacturers producing low-quality duplicates. "Invisible orthodontic manufacturers need to constantly update their technology. Good orthodontic braces need to meet many conditions, such as materials, biomechanics, and the convenience of doctor software usage."

According to related research reports from Huaan Securities, invisible orthodontic research and development involve multiple disciplines such as biomechanics, intelligent manufacturing, materials science, and clinical dentistry. At the same time, due to the lack of widespread use of 3D printing and related software, producing invisible braces incurs significant costs.

In the invisible braces industry chain, domestic manufacturers focus on midstream braces production and downstream medical institutions, with few local membrane suppliers in the upstream.

Membrane suppliers provide high-molecular-weight plastic films required for the production of invisible braces by manufacturers. According to statistics from Tou Bao Research Institute, around 90% of midstream invisible braces manufacturers procured raw materials for membrane films from two German suppliers, Schott and Eiden, in 2019, and then proceeded with the manufacturing of invisible braces.

As local invisible orthodontic manufacturers expand upstream, especially after 2019, the differentiation between orthodontic brace products of top domestic brands gradually becomes evident.In the products of the leading manufacturers, the biggest weakness of the previous invisible correction—insufficient corrective force of the film is disappearing, and the accompanying problems of slow invisible orthodontic treatment, fewer indications, poor effects on complex cases, or difficult treatment endings have also been improved.

In Yao Junfeng's view, starting from Invisalign, orthodontic appliance manufacturers have played a role in promoting the development of the industry. "Initially, domestic institutions did not have many cases of invisible orthodontics in clinical practice, relying more on manufacturers to train doctors. Now, the technology of invisible orthodontics has taken a step forward."

At the same time, Zhou Yanheng, who introduced Invisalign to China, added that a large number of cases in China have promoted the continuous innovation of invisible orthodontic technology.

On invisible orthodontics, the combined effect of commercial forces and huge market demand is fully reflected. Although the complete industry's "domestic substitution" has not yet been achieved, with the active promotion of business and capital, this goal is being continuously approached.

作者 | Song Xin'ao

Edit | Pan Xinyi

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