DarioHealth: Don't Overlook This Mini Livongo
Summary
- DRIO offers a diabetes management solution that is highly rated, provides strong ROI for all parties, and simpler than main competitor Livongo.
- Seasoned executives in the digital therapeutics space have recently joined DRIO, which helps to validate the new strategy of the company.
- DRIO recently decided to pivot from B2C to B2B2C, an opportunity that has substantially better economics. It has been executing well on this strategy and has amassed a $200mil pipeline.
- A recent capital raise gives DRIO a substantial cash runway of more than 2 years and allows it to pursue its strategy.
Many technology investors have probably looked at and perhaps even bought Livongo (LVGO) in the last few months. A disruptor in the chronic disease market, LVGO generated great returns for investors, rising 7x since its IPO. LVGO isn't alone in this space, however, with competitors like Omada Health, Virta Health, Lark Health, and many other players. Looking back, it is amazing how LVGO generated such high returns with so many competitors in the field.
After LVGO got bought out, I started to look for other digital health plays, specifically competitors to LVGO. Recently, I found a tiny company called DarioHealth (NASDAQ:DRIO) that had already increased 2-3x in the past few months. Despite this increase, however, I found that DRIO has substantial potential to appreciate even further, as I will discuss in this article.
A brief description
DRIO is very similar to LVGO for diabetes, providing an integrated software and hardware solution to allow users to manage their diabetes.
Source: dlife
The only hardware required is a tiny, all-in-one device that can test your blood sugar levels just from being plugged into your phone, as shown above. After the blood sugar is measured, advanced analytics can be used to create charts, graphs, etc. to give the user feedback on what to do. Users can also contact a Dario Coach that can further advise them on how to manage their diabetes. Other interesting features include a feature that helps to measure sugar levels in food, gamification and incentives, emergency contacts, and more.
Legitimacy
Legitimacy is one of the main risks of a company like DRIO, so I did a lot of research to find out if DRIO is legitimate.
Firstly, I looked at both the iOS and Android stores, and sure enough, DRIO has received stellar reviews on both stores from over 16k consumers, showing that the platform is well-loved by users. It also helps to validate the +77 NPS that DRIO claims.
Source: Google Play
This compares well to other players like DexCom (DXCM), which only has 2-3 stars for its mobile app.
Source: Google Play
On YouTube, you can see a comparison between Livongo's and Dario's solution, and it's clear that the Dario solution is much simpler and faster to use. While the Livongo solution requires a specialized device to test blood sugar, Dario's solution can be used on a normal mobile phone, making the solutions much more integrated into the person's life.
Secondly, besides being validated by patients, DRIO's solutions have also been validated by several clinical studies that have shown that DRIO leads to improved patient outcomes and cost savings both ahead of LVGO.
Source: DRIO presentation
Third, DRIO has attracted some very talented individuals from other remote health companies, most notably Ontrak (OTRK), formerly Catasys. Why would executives from a $1bil+ company jump to DRIO? Perhaps DRIO has more potential than OTRK.
Source: DRIO presentation
In addition, DRIO has gotten some pretty accomplished board members over the last few months, like Dennis Matheis of Optima, a health plan with over 850k members, or Eric Milledge, Group Chairman of Johnson & Johnson's LifeScan division.
Lastly, DRIO's solution has been validated by customers, with management mentioning that the company has won business over Omada and Livongo, as well as other notable accomplishments.
These efforts have resulted in a number of milestones including being named a Shortlister preferred vendor, being added to the Mercer [ph] VIP platform, reaching a finalist round in RFPs for the first time and winning business over Omada and Livongo in that process.
All these signs make us believe that DRIO's solution is legitimate and has the potential to capture a substantial share of the $72bil digital therapeutics space.
Source: DRIO presentation
Investment Case
The most exciting part about DRIO is that it is shifting from a B2C business model to a much more exciting B2B2C model, selling its products to health plans, employers, and remote patient monitoring providers.
Source: DRIO presentation
The economics of B2B2C is far better than the economics of B2C. Notably, B2B2C raises revenue per customer from around $6 per month to $70 per month on average, raises gross margin to around 75%, and decreases CAC from $100 to around $20-30, according to DRIO management. I think anyone can see why DRIO is pivoting to B2B2C.
Currently, DRIO's potential pipeline is worth over $200mil in annual revenue, which by the way is twice the current market cap.
Efforts to build name recognition with health plans, employers and benefits consultants has paid off with opportunities to participate in several requests for proposals or RFPs, and the growth of our sales pipeline to over $200 million in potential revenue across the three B2B channels.
Source: DRIO Q2 2020 call
While there's no guarantee DRIO will win all this business, DRIO has accomplished some very notable achievements. This includes getting into late state discussions with a health plan, winning an employer on the Vitality platform, and winning two remote patient monitoring deals. Notably, management has mentioned that DRIO will likely surpass the $10-12mil revenue guidance for 2021, which already represents around 50% growth from 2020 levels.
At the moment, the research estimates for the full year of 2021 revenue is in the range of $10 million to $12 million for 2021. While we are not in a position to provide a specific guidance this morning, we do believe that this will prove to be conservative in light of the opportunities that lay in front of us.
Source: DRIO Q2 2020 call
Financials
Historically, DRIO has generated slightly under $2mil in revenues per quarter, mostly from its consumer solution. Revenue growth has been slow due to low revenues per customer and high CAC. As DRIO shifts to B2B2C, revenues should start growing significantly due to the much lower CAC and much higher revenue per month these customers generate.
Source: WY Capital, DRIO reported financials
In 2018, gross margins had been in the high teens or low 20s, but that has steadily improved to around 46% in the last few quarters, with the exception of Q2 2020, due to hardware sales. Gross margins should continue to improve as the company continues to move to B2B2C.
Source: WY Capital, DRIO reported financials
At the end of Q2, DRIO had just $13mil in cash, but in July, the company conducted a substantial capital raise that raised over $28mil, boosting the cash position to $38mil. At the current burn rate of $3-4mil per quarter, DRIO has 10 quarters, or over 2.5 years of runway, which should be more than enough for management to execute on their vision.
Recently, management has taken a couple of cost-saving measures like stock-based compensation or salary reductions that have helped to conserve cash over the past few years.
During the second quarter of this year, we have also implemented additional saving measures, including temporary salary reductions due to the raising uncertainty following the COVID-19 breakout. These savings were in addition to the long-term voluntary saving measures implemented by our Board members and management over the last few years to preserve cash by receiving part of our earned compensation in shares instead of cash. These volatile cash waivers contributed more than $4 million to the Company's cash flow during the last five years.
Source: DRIO Q2 2020 call
We believe these measures will be stopped due to the capital raise, leading to a short-term deterioration in margins. However, a further transition to B2B2C should lead to long-term operating margin improvement.
Valuation
Currently, DRIO is valued at just $100mil, and including the $38mil in cash, EV drops to $62mil. Considering there's over $200mil in the pipeline, this EV seems incredibly conservative. Livongo, for instance, is valued at around 27x 2021E revenue. If DRIO generates $20mil in 2021E, which seems very plausible, it should be valued at over $500mil, or 5x its current EV, considering DRIO's business model is basically identical to Livongo.
Conclusion
Overall, DRIO is a very speculative but very exciting competitor to Livongo. With a recent strategy change and capital raise, the company should do very well over the next few years.
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Disclosure: I am/we are long DRIO. 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.