Editor's Note: This article covers a micro cap stock. Please be aware of the added risks associated with these types of stocks
Who is LabStyle?
LabStyle (OTCQB:DRIO) creates cutting edge technology for smartphones that transforms them into an "easy to use" laboratory testing platform.
The first application it created is called "Darío." This mobile app uses secure cloud computing and a pocket-sized glucometer as part of a diabetes management system. This new technology replaces cumbersome data collection and bulky glucometers. This first app will be marketed in Europe sometime this year and later in North America following applicable regulatory approvals.
Jason Napodano, wrote a very informative article in May of this year on the company and did a really good job describing the device and why it will have an advantage over older traditional glucose measuring devices. This is how he described it:
- Lancing Device: Dario uses an ultra-thin lancet for comfortable blood sampling of only 0.3 ml.
- Strip Cartridge: Each strip cartridge holds 25 strips. It's easy to pull out one strip at a time (using the built in roller that dispenses one strip at a time), and to replace the cartridge with a new one.
- Meter: The meter pulls out of the Dario device and easily connects to a smartphone headphone socket. Once connected to the smartphone, the meter automatically syncs with the Dario application.
Dario aims to replace stand alone, self-powered glucose meters and kits, which often include three separate components as I described above. The compact, easy-to-use Dario is a small all-encompassing tool for the management of diabetes.
This will certainly generate revenue, but there is another source just as important with this device. The seamless integration into a smartphone will allow patients to track and analyze personal blood glucose information. Using a cloud-based computing system that sends the information to a datacenter, the data can be exported to patients, doctors, insurance companies, or other caregivers by email.
So we have a company with an innovative product that wishes to tap into a multibillion-dollar global market. If the company can grab a piece of this market it could generate revenues that have the potential of good long-term growth for an investor.
What needs to happen for this company to succeed and generate revenues that would make investors profitable?
The company intends to first market in Europe and is well organized through distribution channels to do this. "Dutch Trader" recently wrote an article on LabStyle Innovations and explained the distribution alliances that the company made with European distributors. Let me give you a brief summary of what he wrote:
- LabStyle signed a three-year agreement with Farla to distribute throughout the U.K. and Belgium.
- Mikael Salo, has been appointed as LabStyle's Managing Director of Sales for Scandinavia, overseeing a distribution network to be assembled in Sweden, Norway, Iceland, Finland and Denmark.
- Harmonium Pharma has been named as the exclusive distributor for Dario in Italy. It also has affiliates in France.
This supports the argument that the company is well-organized and I am sure these distribution alliances really know what they're doing. But when I think of a diabetic patient seeing his/her doctor, I picture the patient asking the doctor to recommend products that are needed like the glucometer, test strips and insulin pens that are covered by insurance. Patients want insurance companies to pay for these products; they don't want to pay for them themselves. For this reason I believe one of the most important steps the company needs to take is building the alliances with the insurance companies.
Falling in Favor with Insurance Companies
One of the advantages that the Darío has that interests insurance companies, is the ability to provide them with "real time" substantial information to assist them in helping their clients. They can receive a combination of diet, activity, glucose readings and insulin use-in real time. This puts the Darío at the forefront as a pioneer in working with insurance companies to determine the best way to help their diabetic clientele.
Insurance companies will be able to tie a direct correlation between physical activity, food consumption and glucose levels. This proactive type of care is what insurance companies are interested in because they are looking to assist their patients with the best lifestyle possible to help reduce their costs.
10% of all diabetic healthcare costs in the United States are attributed to complications that could have been avoided if early treatment or proper measurements were taken. This is why insurance companies are interested in real time aggregate information that they can use to help their clients.
Insurance companies have a hard job. As the cost of medical care continues to go up, so do insurance premiums and companies are trying to figure out how to avoid these premium increases to have a competitive advantage. Diabetes is one of the most expensive diseases where much of the cost attributed to this disease is preventable. UnitedHealth Group (UNH) is one example of a company working on helping its diabetic patients live a better lifestyle, here's what they are doing:
UnitedHealth is paying the Y.M.C.A. and pharmacists to keep people healthier. The result, they hope, will be lower costs and lower premiums for everyone. The insurer will work with Y "lifestyle coaches" in seven cities to help people who are at risk for diabetes lower their odds of developing the disease by losing just a modest amount of weight.
As I stated earlier, this is a trend the insurance companies are going with in an attempt to lower premium costs. Does LabStyle have a chance to turn the heads of insurance companies their way with the Darío? Yes they do! The company has a team dedicated to working with the insurance companies. In each country they will market in, on the European continent, they are positioning themselves to systematically be added to the insurance company's preferred user list based upon diabetic reimbursement codes.
How the Company will Make Money
There are three ways that the company can make money to begin with: through sales of the Darío, test strips, and data generated by Dario users.
LabStyle is working to gain full insurance reimbursement for the test strips after approval, and this will generate a regular monthly revenue stream. The data that patients will generate using the Darío will also be monetized and sold to research organizations, pharmaceutical companies and others for market analysis.
Although I cannot project nor comment on revenue from data or the Darío itself, we can hypothesize numbers from the test strip market as an example of what the company can do.
Each cartridge in the Darío contains about 25 test strips. It is not uncommon for users to test themselves 3 to 5 times a day. The company has high quality strips and will competitively price them on the higher end of the scale. If we are looking at $.50 strip which is competitive on the high quality end, that would give us a price of $12.50 a cartridge. The numbers I am going to use will be based upon a high quality strip and competitive price, but should not be taken as the actual price of the cartridges.
Let's take a look at some numbers for this market.
Global industrial analysts released a comprehensive global report on the Blood Glucose Meters and Test strip market. This market is forecasted to reach $18 billion by 2015. Market growth comes with a growing diabetic population, but that is not the main reason for growth. Patient awareness is the driving force. Technical advances like the Darío have patients adopting self monitoring and watching their health on a daily basis. "Blood glucose self-monitoring" is becoming the regular norm for diabetic patients and test strips are becoming more affordable around the globe.
The potential for growth in this industry for new innovative products like the Darío is amazing. Take half of the forecasted market by 2015 as just test strips and we have a $9 billion industry. If LabStyle captures only 3% of the market, the residual revenue generated from this would be $270 million. That is just the test strip market; I haven't delved into sales of the Darío itself or data generated from patient use.
The European market for diabetes diagnosis, treatment and drug delivery is expected to exceed 7.7 billion by 2019 by itself and it will be driven by an increasing number of diabetics being better educated in regards to the importance of blood glucose management. LabStyle is targeting the market that is insulin-dependent, which is roughly about 30% of the diabetic market. These are the ones who usually test themselves more than one time a day to keep their blood glucose levels in balance.
Is Non-evasive Blood Glucose Monitoring a Threat?
For the last couple of years, articles on "non-evasive blood glucose monitoring" have been thought of as the wave of the future for diabetic blood sugar management. Naturally this would bring to mind concerns for an investor if it were true.
There is a device called the "GlucoTrack" developed by Integrity Applications in Israel. It uses ultrasound, electromagnetic and thermal means to check blood glucose from a device clipped on to the patient's earlobe. The company is expecting FDA approval sometime in 2014.
The device is designed so that one family can buy one and if multiple members are diabetic, they can buy separate ear clips for each user. I am not sure what type of advantage this will have except for possibly clinics. We can run into a problem with the ear clip, unless it's a throw-away piece like test strips are. I don't believe they are and the probability of mixing up your ear piece with someone else could cause errors in readings. Price is going to be a problem here and it still is not going to answer the question about being mobile and being able to take BG levels at any time. Because it is a larger bulky device, it would not compete with the Darío, and it will not be able to provide mobility and data that the Darío does.
The non-evasive blood glucose monitoring devices cannot be mobile like the Darío. They also are much more expensive. This offers a great advantage to less expensive devices like Dario. Consumers would like something competitive where they don't have to constantly stick their fingers, but it is cost prohibitive right now and many folks will stick to the low cost manual method and this is one reason Darío will continue to sell. These monitoring systems, in my humble opinion, are not a threat to sales of the Darío.
Is LabStyle a Good Investment?
Despite the company being in the exploratory stage, a risk in and of itself, the company has received positive reviews and even "Zacks" has given it a long-term stock price of $12.
From a strategic standpoint the company is doing all it needs to do to develop a sales network and focusing on the markets where it can grow the fastest. The market is large enough that even if the company gets a very small piece of the pie, its revenue from this "first" product can be in the hundreds of millions of dollars.
A handful of large companies dominate the glucose meter/test strip market: (Roche; Johnson & Johnson; Bayer Healthcare; Abbot Labs). No one company holds a major majority as each hold anywhere from 10 to 15% market share. Bionap CFA has built a sales model of the company with an estimated 5 to 10% market share and a long-term share value of $10. The stock is presently trading at $2.50 and the market share and share value estimates were restated when the stock was trading at $2.80 a share, so it's not far off.
In mid August, the company reported its financial results for the second quarter with operating expenses of $3.6 million including R&D and SG&A. Net loss for the quarter was $5.3 million with an operating burden of $2.1 million. The company had on hand $7 million in cash and equivalents and expects to pick up about $8 million in expenses over the next 12 months, which includes the launch of Darío in Europe. The initial success of the Darío in Europe will have a positive impact upon cash generation with the company also.
Author's Note: As noted earlier, companies in exploratory stages tend to come with more risk than established companies with revenue track records. For this reason it is important for an investor to know the type of risks they're getting into. I have done my own research to the best of my ability and I would encourage all investors to do their own research and due diligence before they make any investment decisions.