LabStyle Innovations And The New Standard In Diabetes Management

| About: LabStyle Innovations (DRIO)

For the growing number of diabetics, who number about 350 million in the world today, the task of monitoring blood glucose levels is tedious and involves cumbersome kits that are bulky, unattractive and draw more attention to the unpleasant task than necessary.

The marketplace for self monitoring blood glucose (SMBG) products was estimated to be about $10 billion in 2011 and is expected to reach $27 billion by 2022, yet very little has been done to make blood glucose monitoring less of a painstaking chore. LabStyle Innovations (NASDAQ:DRIO) has developed a new system for diabetes management, Dario, that will revolutionize the industry by using a multifaceted approach to improve the user experience.

The intent of the Dario system is to make user compliance easier by using cloud-based software and a simple app. The Dario glucometer is a nifty and compact self-contained glucose monitoring device that contains a lancet, strip dispenser, strip reader and adapter that plugs into the audio jack of a smartphone. It only requires a 0.3 micro liter blood sample, takes 5-6 seconds for a reading and despite all the tools and technology it has is small enough to carry around in a pocket, purse, pants or shirt.

The Dario app is designed to read the blood glucose levels transmitted from a strip and allow data transmission to and from the cloud-based software program. It's this cloud-based software and app that gives the Dario system so much potential to patients and investors alike.

Most SMBG products are designed to generate most of the revenue from the strips alone. LabStyle's focus is on marketing the Dario system to Type I and Type II insulin-dependent diabetics who represent about 70 million of the worldwide diabetes population and also represent the majority of the strip consumers. This business model is well proven and effective with profit margins on the strips alone in the ballpark of 50-75%. Review this model of German diabetics with Type I and Type II insulin-dependent diabetes: the revenue of strip sales alone can be quite high.

TABLE 1 - German Diabetic Marketplace*

Type I

Type II

(Insulin dependent)

Type II

Strips/Day

8

4

1

Strips/Year

2,920

1,460

365

Revenue (year)

$2,616

$1,308

$326

% of Diabetics

10%

30%

60%

Market Potential

$261.6 million

$392.4 million

$195.6 million

Click to enlarge

*Based on strip reimbursement cost of $.90/strip and estimate of 1,000,000 German diabetics

When extended to a global marketplace, this potential demand is much greater. Currently, it is continually unmet due to the lack of compliance. The Dario device, app and software is aimed at getting more diabetics to use a SMBG device, test regularly and improve their condition through a personalized care approach that the Dario software can provide. LabStyle is well aware of the lucrative nature of strip sales, and has also created even more potential by taking the necessary steps to ensure compliance.

The revenue-generating model for Dario's software is essentially the same as a cellular phone with a contract. The strips might be the cellular "minutes," while the functions are much like the "data" on a subscriber's plan. A myriad of diabetic support applications are offered such as:

  • Food intake functions with carbohydrate calculator and access to over 180,000 food items
  • Personalized recommendations
  • Insulin calculator
  • Full reporting and charts to analyze results
  • An alert system for high glucose levels or reminders to aid in diabetes management
  • Messaging system for caregivers and physicians to communicate with patients
  • A rewards program to encourage user compliance

These functions all offer the capability to improve not only the lives of diabetics but also the bottom line of LabStyle as each function can generate revenue independently.

The huge potential of the Dario system has not gone unnoticed. The well respected investment analyst firm, Zacks, just initiated coverage on LabStyle's stock. Small-cap biotechnology analyst, Jason Napodano CFA, recently initiated coverage on DRIO and rated the stock a "buy."

Napodano stated, "We think that Dario is of elegant design, with outstanding usability and accessibility by integrating a pocket-sized glucometer with a smartphone and mobile application." Napodano followed that up by stating, "We see the Dario glucometer and diabetes management system as revolutionary in design and function." Napodano and Zacks established a target price of $12 a share for a stock that is currently trading at $3.00 a share (May 17th). DRIO shares have climbed 20% since May 6th exhibiting a steady upward trend.

LabStyle initially raised over $6 million in equity capital from private investors (2011) and recently closed a $10 million private financing deal through the sale of an aggregate 4 million shares of stock at a price of $2.50 a share. There are warrants to sell 2 million additional shares of stock that expire on April 4, 2016. The $10 million financing deal will add about $9 million in cash to help the company get through the approval processes in the European Union and the United States. LabStyle is already ahead of the curve having recently signed a distribution agreement with Farla Medical to distribute Dario products in the U.K. and Belgium following CE mark approval in Europe. The Dario system should be available for U.S. distribution in the later part of this year or early 2014 at the latest.

The Type I and Type II insulin dependent user is at the heart of LabStyle's marketing efforts. This smaller subset of diabetics not only use the most strips but also will be more likely to benefit from the "user experience" that Dario provides due to the testing frequency that they have to endure. Due to the severity of their condition, this subset of diabetics is more likely to respond to LabStyle's social media blitz, internet advertising, blog posts and articles that define the benefits and features of the Dario system. LabStyle will also pursue other means to market this product, but direct sales on the internet and referrals from physicians and caregivers will maintain a healthy profit margin while also reaching the target users in a more efficient manner.

It is easy to see the potential of the Dario device and system. Conversion of even 1 percent of the 70 million worldwide target subset of diabetics to Dario users could generate revenues of between $500 million to $1 billion in strip sales alone.

The software is even more promising. Consider restaurants across the world advertising options for diabetics or food manufacturers lining up to have their products listed on the Dario system. These same manufacturers might want to test their products using the rich database of Dario subscribers, acquire data that highlights the potential of their products and use the results from these studies to market their product to the same subscribers. There is also the potential income from pharmaceutical companies that will run trials using Dario subscribers and the integrity of the system to develop new products for improving the lives of diabetics.

LabStyle has a board full of highly-experienced and respected leaders and a product that appears to be second to none. There is probably less of a question of "will" this incredible potential be realized and more of a question of "when." Patients, physicians, practitioners, analysts and investors can all agree that the Dario Diabetes Management System is on the leading edge and has something for everyone.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.