DarioHealth Corp (NASDAQ: DRIO)
For investors seeking emerging growth investment opportunities, DarioHealth is worth a close look for investment selection. DarioHealth whose MyDario mobile data management platform is disrupting the multi-billion dollar diabetes monitoring industry within a unique, all-digital, patient-centric glucose monitor. Dario launched in the U.S. in March 2016 and has since ramped to close to 20,000 devices sold already. The business model is recurring revenue as approx. 80% of the users then order the strips (razor blade model at 75% gross margin) as they continue to use the MyDario. Dario’s marketing strategy is 100% digital/social media.
DRIO is gaining excellent traction with a revolutionary smart diabetes management solution that is mobile app-based and minimally invasive. Its business model encompasses“members” with a recurring revenue subscription with high margins. The Company is adequately funded for the next year of growth with $8M cash on hand.
Dario has developed a glucose monitoring suite that is centered around the smartphone. It proves to be potentially disruptive to the market as it not only uses the phone to physically take readings, but immediately sends the data to the cloud where it can be shared with medical professionals, loved ones, etc. Being referred to as the "fitbit of diabetes", the software provides the user with a completely new experience, storing the data and manipulating it through proprietary,customize-able software, which is updated every quarter based on user feedback. From here, the user can begin to better understand how what he/she eats and his/her activity affects their glucose levels in real time.
Their business model follows that of the razor/razor blade. Proprietary test strips are delivered to subscribers at a cost that is comparable or below that of an insurance copay. Each subscriber, to date, has produced an average of $350 annually in revenue to the company. With gross margins in the 70-80% range, it will not take a large share of the half billion diabetics they have to market towards in order to take this company to the next level and beyond. Recently, Dollar Shave Club was acquired for $1B or 6.5X revenue derived from its “members”.
Finding these gems can be rewarding, evident by the Unilever purchase of Dollar Shave Club for one billion dollars, as well as Under Armour's purchase of myfitnesspal for $475 million dollars.
Disruption has value, and it's becoming apparent that it may be far less costly for large players to simply acquire these fast moving, tech savvy companies like DRIO, instead of trying to keep pace with their new generation business metrics that provide the capability to change direction and strategy in a quick fashion.
These days, being disruptive to an industry can be extremely beneficial to a company's health. In decades past, product and service evolution was slow, which allowed companies time to mature and develop markets. Speed may have killed in the past ways of business, but in today's market, it is the lifeblood to survival, becoming the prime differentiating factor in identifying which companies will be the survivors in a competitive landscape that is flush with aggressive and enterprising investors.
DRIO fits the "disruptive" definition to its core, capitalizing on a diabetes related glucose monitoring market that is expected to eclipse $24 billion dollars by the year 2020. Additionally, DRIO is not only looking to advance the next generations of its existing monitoring devices, applications and platform, they are also progressing almost seamlessly to secure a leadership role in the current $10 billion mobile health application market (mHealth). Further, DarioHealth is going to be well positioned to capitalize on the growth of the mHealth market, which is expected to generate in excess of $31 billion in potential revenue to those positioned to meet the needs of the market and its customers.
Although being the disruptive kid on the block is certainly a game changer in company specific terms, the importance of having a plan in place to maintain that market edge is equally important. With DRIO developing a strategically sound plan to benefit from a recurring revenue model, as well as from the boon in mHealth applications, their market position may become increasingly solidified in the next several years.
Measuring The Benefits
DRIO is looking to exploit the potential within a huge diabetes market. Each year over 1.4 million Americans are diagnosed with diabetes, and an additional 86 million people are diagnosed with pre-diabetic conditions. In addition to these developing cases, there is an estimated 30 million adults and children that have already been diagnosed with diabetes in the United States alone, with a staggering $322 billion being spent in 2012 to diagnose, treat, and provide preemptive treatment to monitor the disease.
For those who pay attention to commercial advertisements, enormous attention and financial resources are being focused toward the treatment of diabetes, with blood and glucose monitoring devices being marketed aggressively to a diverse market of customers that have become reliant on disease management in their daily lives. At DarioHealth, the mission is to address the maintenance of diabetes for patients through a three-pronged approach by improving medical outcomes for people with diabetes, providing a personalized patient centric healthcare platform, and minimizing patient cost to monitor and control the disease.
In 2017, DRIO plans to extend their position in the mHealth application market by delivering Native Mobile, DarioHealth's smart-phone enabled complete diabetes monitoring solution. The solution benefits patients with a comprehensive method to manage diabetes by offering a highly specialized patient user app, a sync enabled blood glucose monitoring tool, and a cloud based storage program that allows patients to share information seamlessly through mobile and cloud based communication tools.
How DRIO Is Different
As stated earlier, DRIO has enough competitive ammunition to fend for themselves, making the job of an analyst relatively simple. When comparing DarioHealth's products to its competition, the differentiation factor is magnified to such an extent that it may lead investors to wonder what the hold-up is in providing DRIO with a much greater company valuation.
Compared against current market heavyweights supported by Roche and other large pharmaceutical names, they each fall short in side-by-side comparison to DRIO. While each of the five largest suppliers of diabetic monitoring equipment can each check off several boxes of capability in a comparison, only DRIO is able to check off every box in a list of important attributes reflecting the capabilities most desired by patients. While five of the company's largest competitors may be able to meet the needs of 2-3 features in the list below, DRIO is the only company that offers every item listed, making their device and application a superior choice in the market. DarioHealth offers an all-inclusive platform which includes:
- An all-in-one meter, lancet and test strip solution
- Pocket sized device
- Powerless functionality
- iOS smart-phone compatible
- Records entire diabetes history
- Ability to share information
- Provides insulin recommendations
- Offers a member and community platform
- Offers patients actionable insights
Keeping in mind that diabetes is a disease that does limit certain activity, it does not need to be the defining characteristic for that person. For that reason, DRIO understands the importance to implement additional features into its monitoring, such as the ability to measure and record carb and insulin intake and physical activity. These measurements are comparable to a historical data set and can be easily shared with the patients support community, family, and medical staff. The Dario Smart is easy to use - a patient simply plugs in the device through an available auxiliary port on a phone or smart device, and then follows the easy to use platform to monitor and control daily results.
With the groundwork laid to make the case as to why DRIO may emerge as a leader in the mHealth diabetes management space, it is also important that investors understand the multiple revenue streams that the company is addressing.
First, DRIO can generate the initial stages of revenue development through the sale of its MyDario device, which provides a Diabetes Lifestyle Management system for its users. Additional premium features that support the My Dario include specialized test strips, a subscription based product fulfillment service, and the sale of personalized service and value added features.
Next, the Dario Care platform offers a scalable disease management platform which provides meta-analysis for Payer's and HMO's, with additional information being made available to insurers. These revenue-generating services allow providers to obtain efficient data and management of its diabetic patient population, lowering cost of service for them and reinforcing the benefit of maintaining the relationship with the Dario Care platform.
Their business model follows that of the razor/razor blade. Proprietary test strips are delivered to subscribers at a cost that is comparable or below that of an insurance copay. Each subscriber, to date, has produced an average of $350 annually in revenue to the company. With gross margins in the 70-80% range, it will not take a large share of the half billion diabetics they have to market towards in order to take this company to the next level and beyond.
While each of these products and services add additional revenue streams, these should be viewed as value added components in addition to its products that are quickly penetrating the modern diabetic treatment landscape.
From core business, DRIO sold more than 18,500 Dario All-in-One Smart Glucose Meter devices in 2016. More than 8,500 were sold in the fourth quarter alone, increasing its market presence by 85% compared to the end of the third quarter. Complimenting those sales and proving the viability of the subscription based revenue models, nearly 95% of U.S. users have ordered test strips, driving fourth quarter consumable sales up by more than 65% quarter-over-quarter.
For all intents and purposes, DRIO is driving on all cylinders, delivering measurable results and building a strong portfolio of products and services designed to maintain the momentum.
DRIO By The Numbers
Ahead of the U.S. product launch, DarioHealth has been establishing a strong track record of revenue growth since Q1 of 2015. Since that time, DRIO has increased revenue by over 986%, with each quarter being sequentially higher in terms of revenue since Q1 of 2015. In 2016, DRIO has increased revenue by over 28% since Q1 and the forecast is strong going into the Q4 period, which may further bolster the sequential growth record.
DRIO is well funded and the capital structure is fundamentally sound. For the period ending on 9/30/2106, DRIO had roughly $3MM in cash and over $6.6MM in total assets, and has since raised an additional $5.1MM Liability to warrants is low at only $295K dollars, and the company has no short or long term debt. Shareholder equity has increased significantly to $4.3MM dollars in 9/30/2016, up from ($1.5MM) at year-end 2015.
Management is strong, led by Chairman and CEO Erez Raphael, who brings almost two decades of industry experience, also serving as Head of Business Operations for Nokia Siemens. Mr. Raphael is surrounded by equally capable and experienced management professionals, bringing a combined 60 years of business experience related to market development and product integration strategies.
CFO Zvi Ben-David has over 25 years of experience in corporate and international financial management and previously served as CFO of multiple public and private companies, including Given Imaging, which was acquired by Covidien for $860 million in 2014
Currently, DRIO holds a market cap of approximately $25 million based on its most recent closing price of $3.25 a share. The capital structure is attractive for new investors, with DRIO having only 7.5 million shares outstanding and no dilutive financing covenants weighing in the background. As mentioned, DRIO has approximately $8MM in cash and no debt. DRIO recently secured an investment from OurCrowd Qure, an Israeli digital health specialized fund, of $2.5MM dollars in exchange for a 12% equity stake in the company.
Revenue ramp thru Q3 2016:
Finding Their Niche
DRIO has found a niche, allowing them to expediently take advantage of a market that is subject to rapid and intense technological change. For DRIO, they have remained a leader in the movement to offer services to a new generation of patients, while at the same time maintaining the right product and service mix to not alienate those that may be less tech savvy and reluctant to electronically generated results.
Banking on a diversified strategy to increase revenue streams from multiple channels, DRIO is building the foundation to benefit in both near and long-term growth of the diabetes treatment market. Buffed by a strong balance sheet and an honest and clean capital structure, DRIO is a company that investors may find attractive on several levels.
Certainly, when looking at recent acquisitions that provided strong multiples for acquisition purposes, DRIO may benefit from the precedent being set in the market. Although shareholders should hope that management continues to build out the platforms well before considering either a partnership or acquisition, shareholders may be comforted by the fact that DRIO, even during its relative infancy in the U.S., does offer significant value to companies that do not have the focus or managerial ability to quickly change strategy or corporate direction.
For investors that are mining for disruptive emerging growth, DRIO may become a discovered gem. But for now, investors may have a short window to vet the company and decide if the future for DRIO aligns with their investment style. In my view, DRIO offers a sensible investment into a company that addresses a significant and targeted market, has a well balanced strategic plan, and has the funds and professional relationships in place to advance the company to the next level, a level which could very well increase both shareholder and company valuation significantly.
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