Nasdaq listed DarioHealth Corp. (DRIO) is pioneering the future of disease management by providing consumers with laboratory-testing capabilities using smart phones and other mobile devices.
The company’s flagship product, the Dario Smart Diabetes Management Solution, is a patented, mobile, real-time, cloud-based, diabetes management solution based on a multi-feature software application combined with Dario Smart Meter, a pocket-sized, blood glucose monitoring device.
Leveraging the razor/razor blade model, the average consumer will use $300 of strips at 75% grow margins…part of the reason why the company turned a gross profit in Q3.
In Q3 2016, sales grew 166%, the company recorded a gross profit, and management expects “market penetration and user growth to accelerate in the fourth quarter.”
DarioHealth Corp. has built a digital disease management platform that is used in 7 different countries and growing, is cost effective for consumers, is readily scalable at minimal additional cost, and which can be expanded into other disease management areas beyond diabetes.
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Shares Outstanding: 5.7 million
Insider ownership: ~40%
Float: 3.9 million
Closing Price 11/28/2016: $3.02
Market Capitalization: $17.3 million
The Diabetes Management Market
Diabetes is the 7th leading cause of death in the United States according to the Centers for Disease Control. Moreover, it greatly increases the risk for heart disease, end-stage renal disease, blindness, amputation, and complications during pregnancy.
It is a chronic medical condition that has increased in its numbers at a faster pace than most other chronic conditions. In 2015, the International Diabetes Federation estimated that more than 415 million people had been diagnosed with the disease, and that number is expected to balloon to 642 million by 2040.
The importance of carefully managing diabetes cannot be overstated. In a recent study by the National Institutes of Health, people with type 2 diabetes who intensively managed their blood sugar levels were found to have cut their risk of diabetic retinopathy in half. Multiple studies have shown that well managed blood sugar levels in diabetics dramatically reduces risk of complications including heart and blood vessel disease, nerve damage, and kidney disease as well.
Mayo Clinic puts it simply and directly:
“Controlling your blood sugar levels can help prevent these complications.”
And this is where DarioHealth Corp. comes in. With 12% of all global health expenditures spent on diabetes, having a real-time diabetes management solution that is practical and user-friendly while reducing risk of costly and life-threatening complications represents an urgently needed paradigm shift in the management of the disease.
Moving the Market from “Monitoring” to “Management”
Investors should understand that DarioHealth Corp. is not simply a diabetes monitoring device company. Dario is a pioneer in effective disease management solutions, and diabetes is the first, “low hanging fruit” the company is addressing.
The Dario App provides:
- Real-time, easy-to-access information
- Results are automatically logged and synced in the cloud for physician access (no need to write in paper log books)
- Data insights, analysis, and pattern recognition so users can easily understand why their personal blood glucose levels change and what changes them
- Actionable alerts and reminders
- Insulin dose tracking
- Log of carbs and calories
- Database showing carbohydrate counts of half a million foods
- Users can even set extreme hypoglycemic result alerts to text message family member(s) with GPS tracking
DarioHealth also intends to increase penetration in both the direct to consumer market and to other businesses by offering diabetes management coaching services in the future. The company plans to reduce medical complications of employees with diabetes (and improve clinical outcomes, reduce sick time, reduce health care costs) by using a team of nurses and other health care professionals that will provide diabetes management coaching services.
The video below gives an overview of the DarioHealth Smart Diabetes Management System in action.
The DarioHealth Smart Diabetes Management System includes a sleek, accurate, all-in-one Smart Meter combined with a robust, real-time mobile app that allows users to record their data: blood glucose measurements, carbs & insulin intake, and physical activity. Users can view, analyze, list and compare all of this valuable information and share it with family and medical staff.
DarioHealth is the only diabetes management system that includes all of the features below:
Innovative B2C Sales Model = High Margins and Rapid Sales Growth
Beyond the technological innovation in disease management, DarioHealth Corp. has an innovative approach to sales. The company is using a direct business to consumer sales approach with a strong presence on social media. With numerous ads like this (Special Offer for Diabetes Awareness Month: FREE METER), DarioHealth is creating demand directly from the consumer, skipping the middlemen, and generating high margins.
Razor/Razor Blade Business Model
In the diabetes lifestyle management revenue stream, the average user will use $300 worth of strips per year at 75% gross margin.
The model is working.
DarioHealth Corp. launched the B2C sales model in the UK in Q1 of last year, then expanded sales to Australia, Canada, and Italy within 12 months. The company entered the U.S market in March of this year.
Sales growth is in a strong uptrend as seen in the chart below:
In Q3 2016, sales increased by 166% vs. the year ago period. Other highlights from a very impressive quarter include:
- Record revenues of $728,000
- Gross profit of $76,000 in the third quarter
- 75% of quarterly revenues derived from test strips and other consumables
- More than 5,500 Dario all-in-one smart glucose meter devices were purchased directly by U.S. customers during the third quarter; globally about 8,500 were sold during the quarter
- About 70% of strips sales in the U.S. during the quarter were under the subscription plan
- Direct-to-consumer model launched in Australia and in Canada
- Ramped up inventory to $1.1 million in order to support further market penetration
DarioHealth Corp. CEO, Erez Raphael, stated:
“During the third quarter, we continued to advance our direct-to-consumer strategy in the U.S., increased device sales, delivered significant monthly user growth and established a predictable stream of high margin recurring subscription revenues from new customers. We are encouraged by the positive engagement we are achieving with new users and expect market penetration and user growth to accelerate in the fourth quarter. Our active community of users and subscribers is growing every day which is bringing positive changes to people with diabetes, and disrupting the digital, mHealth and lifestyle market.”
“We have the right product and the right strategy to succeed in these efforts and look forward to the opportunities ahead of us. The predictable nature of these subscription revenues will provide us greater visibility in 2017 and serve as the foundation for our long-term growth.”
Sound fiscal management has improved the balance sheet over the prior year, and DarioHealth now has cash of ~ $1.50/share on hand (see 10-Q).
|$ in thousands||Period Ending 9/30/16||Period Ending 12/31/15|
|Shareholders’ Equity (deficit)||$4,360||$(1,580)|
Growth in 2017 and Beyond
At present, DarioHealth has only has FDA approval for the Diabetes Management System on Apple devices in the U.S. The company has submitted the Android version of the system to the FDA and expects approval in Q1 or early Q2 of next year. There are approximately 107 million users of android devices in the U.S., so this is a noteworthy market for expansion. Additionally, DarioHealth will be offering more user applications and expanding into new geographic territories in the coming year.
Ultimately, DarioHealth intends to dramatically ramp revenue by expanding the company’s diabetes management solution beyond individual consumers to include businesses, by offering a cost effective mobile health solution for employees with diabetes. DarioHealth plans to reduce medical complications of employees with diabetes (and improve clinical outcomes, reduce sick time, reduce health care costs) by using a team of nurses and other health care professionals to provide diabetes management coaching services. This is a huge, untapped market for Dario to penetrate with an early mover advantage.
DarioHealth is a pioneer in the digital health space, addressing a global market of > 400 million diabetics with patented technology that can help them better manage their disease and reduce expensive and life-threatening complications in a cost-effective manner.
With sales just beginning to dramatically increase following last year’s launch and the enormous market the Diabetes Management System addresses, the current low market capitalization of DarioHealth ($17 million) is not likely to last. To date, the company has been focused on the successful launch of the system itself, including FDA and other regulatory hurdles, obtaining patent protections, and regularly upgrading the software based on user feedback. During my conversation with management earlier this week it was clear the company intends to begin doing much more in terms of investor awareness and investor relations, including taking steps to increase institutional awareness and participation in the company.
Given the overall market growth, the innovative, high-growth user platform, the business model, marketing capabilities, and new market opportunities, DarioHealth is likely to deliver a “hockey-stick growth” chart in the year ahead.
Rodman and Renshaw has a $12 price target on DRIO shares, using a net present value (NPV) model, and assuming just 6.6% diabetes market penetration and $400/year sales/user (includes hardware, strips, licensing, etc.)
Joseph Gunnar & Co. uses a price/sales model peer group comparison, and has an $8 price target on DRIO Shares. This is 4.5x 2018 revenue estimates and multiple is in line with the peer group average.
Relative to other digital health data solutions, both retail and institutional investors should love DRIO shares here at a $17 million market cap. Consider Fitbit (NYSE: FIT) at a $2.2 billion market cap, or 23X EPS, and MyFitnessPal, acquired by Under Armour (NYSE:UA) for $475 million.
Fundamentals matter, and we think DarioHealth (DRIO) shares will have a very strong showing in 2017 as the company rapidly expands users, revenues, and is introduced to a larger investor base.
Supplemental: DarioHealth November 2016 Investor Presentation