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LabStyle's Dario Diabetes Device Uses Smartphones To Take Disease Management To It's Peak Potential

|Includes: DarioHealth Corp. (DRIO), DXCM
  • LabStyle Innovation's created all-in-one blood glucose monitor Dario for diabetics, turning smartphones into glucose monitors
  • Device launch efforts and reimbursement have shown rapid progress outside of the US; FDA approval is sought
  • Risks include continuation and acceleration of device adoption, regulatory approvals, and non-dilutive money raises
  • Very low share price belies LabStyle's value with respect to the $35.6 billion diabetes treatment market size

Managing diabetes, for both Type 1s and Type 2s, is a formidable task where strict control is essential for good health and avoidance of hospital visits, which represents a drain of $176 billion in medical costs. Low compliance due to a bulky and painful process of measuring blood sugars, sometimes up to three times per day, plagues diabetics and reinforces an unfortunate perception of being sick. The diabetic, long-tethered to tools that underline a social and physical separation from those healthy, now have an opportunity to break these bonds with the sleek, small Dario device made by Israel-based LabStyle Innovations Corp. (DRIO:Other OTC), one of the few pure play, publicly-traded blood glucose monitor (BGM) companies with a new, technological driven approach for the treatment of chronic disease.

Dario is unprecedented in that it turns any 'smart' device - phone, laptop or iPad, into a glucose meter with embedded lancet and test strip cartridge, and no need for an outside power source. Through a mobile app, Dario works with iOS and Android where data is uploaded into a cloud-based information source. Several companies in this new space have embarked on such a mission, with less than optimal results as explained below. Unlike most others, LabStyle incorporates an element of disease management into the infrastructure of Dario, connecting patient with doctors and caregivers, and around-the-clock telehealth call centers that integrate patient data to better help the diabetic manage disease on a daily, even hourly basis. In sum, use of Dario allows complete and personalized control of health.

LabStyle's vision is one of empowerment to chronic disease sufferers; diabetes is the first condition addressed with much success so far. Future ailments to be developed by the company on a similar platform will include ongoing measures of cholesterol and triglycerides, both vital for heart health to prevent cardiac episodes. Within Dario's disease management platform, key is connecting patient not only to physician, but also to a community, via social networking, to form personal support among others who share this insidious and rampant affliction.

Dario, designed and maintained by a strong team of in-house software and hardware engineers and with solid patent backing, gives diabetics both current and past blood glucose information. Patterns in blood sugar ups and downs can be tracked, recorded, stored and shared through cloud-based data storage. LabStyle's intent is to help the diabetic take better control of behavior; in addition to graphic depictions of blood glucose trends, its database offers 220,000 items of nutritional value that relate directly to how blood sugar should be maintained, why blood sugar has changed, and how to correct it. Dario can even track carbohydrate intake. Ease of use prompts the diabetic to test more often, with a better likelihood of catching out-of-range blood sugar levels. For its capabilities, at $39.99 Dario is priced well below the average range of BGMs that sell between $15 and $75.

The world is a phone culture, a lifeline to everything needed or desired in busy lives. Roughly 80% of developed countries use smartphones with connectivity to the Internet. For diabetics, who try to avoid doctor visits through careful compliance of the disease, Dario becomes a useful tool because health decisions must often be made without physician advice. Its free, downloadable app also sends alerts for testing blood sugar and recommends insulin dosages.

Trends toward digital health or, with widespread use of smartphones, mobile healthcare (mHealth), are developing quickly. Last month, Cerner Corp. (CERN:NASDAQ), global leader in healthcare information technology, received a $9 billion contract from the US government to create upgrades to sluggish transfers of medical data between private practice physicians, specialists, and hospitals. Just last week, FDA announced development of a cloud-based platform for sharing healthcare-related information with concerned parties, including patients - a huge forward step in an otherwise overly paperbound agency. Chronic disease sufferers will ultimately benefit through empowerment to more efficiently track and manage health. Mobile devices and social networking form the core of this lifestyle changing initiative, with LabStyle and its Dario a clear frontrunner where better vigilance can only lead to better outcomes.

Blood glucose monitors, despite a $12 billion industry, have long been commodity items with few technological twists over the years, like computer connectivity, although all new, smaller devices stress rapid readings and convenience. Johnson & Johnson (JNJ:NYSE), Abbott Laboratories (ABT:NYSE), Roche Holding AG (RHHBY:Other OTC), and Bayer AG (NASDAQ:PNK) dominate the BGM market with a combined 80% share but most of their products offer only standard testing and lack connectivity to a computer or laptop, never mind a smartphone. Importantly, with the exception of Roche's Accu-Check Aviva, none feature an 'all-in-one' design meaning test strips and lancets are separate, rendering testing awkward.

Recognized as the smallest BGM on the market, UK-based Home Diagnostics' SideKick is indeed compact, about the size of a prescription pill bottle, but lacks a USB port for downloading data and memory is limited.

Through collaboration with a third party, diabetes giant Sanofi (SNY:NYSE) released iBGStar that connects with Apple Inc.'s (AAPL:NASDAQ) iPhone and iPad but requires an Apple-manufactured adapter to transmit data. This device and two other product iterations are only available in territories outside the US despite market availability of iBGStar since 2012; further, Sanofi sales representatives are not heavily motivated to sell the line, viewing it as a 'bolt-on' to the true money-makers in their bag that include Lantus, Sanofi's insulin blockbuster with sales of $6.3 billion in 2014. The adapter and separate case for strips prevent the devices from being an 'all-in-one' package.

Dario's closest competitor is a standalone device wirelessly connected to a cell phone, made by privately-held Livongo Health that features cloud-based storage of insulin readings shared with caregivers, but strips and lancets are separate and entails hauling a bulky kit, much like traditional BGMs. Telcare offers a similar tool with cellular connectivity and transmits data to a diabetes management center that provides a link to doctors. Key disadvantages of the Telcare monitor are 1) data is captive, making the switch to a different monitor cumbersome; 2) under contract, users are required to buy test strips from the company or pay a 50% premium on an already overpriced device; and 3) doctors must learn to use Telcare's proprietary software to track and communicate with patients, which would mean an intense, expensive one-on-one marketing effort.

It should be noted that in the hands of the wrong manufacturer, adding technology to a BGM can be dangerous: In 2013, the FDA recalled Johnson & Johnson's OneTouch Verio - whose screen displays a color coded dot to indicate blood sugar range - as the device tended to shut down before displaying a reading of extremely high blood glucose. All monitors sold between December 2011 to March 2013, upwards of two million in the US, Canada and overseas, were withdrawn..mydario.com

In a watershed moment for LabStyle, regulatory body Health Canada gave approval to sell Dario in that country in May 2015, its first shot at marketing in North America. Chosen as an exclusive distributor was Auto Control Medical whose specialty lies in medical devices for home use, particularly BGMs. With roughly two million Canadian diabetics, Dario acquired a valuable platform for launch. Quickly following this, reimbursement for test strips was granted in more than 75% of Canadian health plans with efforts to capture the remaining plans an ongoing goal. Rapid adoption of Dario in Canada is greatly aided with this development.

Alongside Canadian approval, Dario was launched in Israel in accordance with Maccabi Healthcare Services, a large HMO serving that nation which will integrate the device with a dedicated call center designed to manage chronic disease, coming under the heading of MOMA. Israel, known for innovative, technology-driven solutions in many fields, adopts Dario and its disease management approach as the first of its kind there. MOMA, with two million members, can offer diabetics access to their doctors and other caregivers with day-to-day information, enhancing management of the disease. Revenues to LabStyle are made on sales of the device, test strips, and by subscription to its software on a licensing basis, all recurring streams and strong benefits to margins.

Beginning the company's efficient advance in new territories, late last year Australia, progressive in adoption of new technologies and suffering under the burden of 2.3% of healthcare expenditures spent on diabetes, allowed reimbursement for Dario through its Pharmaceutical Benefits Scheme where test strips will be subsidized for the country's 1.6 million diabetics in virtually every pharmacy there. Distribution is done by uHealth Australia Pty which focuses on digital mHealth.

These accomplishments are outstanding given LabStyle's size and recent founding as a company. While impressive, US-based investors predictably look for local regulatory consent as validation of a drug or device's merit and profitability. Dario, recognizing this, filed with FDA a 510(k) application based on 'predicate devices' status meaning comparability to existing products. Application to the agency was submitted March 2015, supported with a study of 368 Type 1 and Type 2 diabetic patients in Ohio that tested Dario's accuracy and performance. Results measured in tiny glucose concentrations exceeded the International Organization for Standardization (ISO) requirements, a stamp of approval for many countries around the world, in addition to FDA's strict guidance for self-monitoring BGMs. Presentation at the most recent American Diabetic Association showed Dario superior to its competitor BGMs. An approval under a 510(k) can occur anywhere from eight to 18 months from application; good news could be soon.

LabStyle's revenue, already generating through countries listed above and soft launches in the UK and New Zealand with upcoming targets in India and China, can come not only from sales of the device and test strips, and subscription or licensing service, but also from monetizing data that may be useful to insurers. For the year ended December 2014, shipments to distribution partners amounted to $145,000; as of the first quarter, annual revenue run rate would represent a year-over-year gain of 85%. Well managed, operating expense declined in 2014 regardless of a strategic shift from research and development to sales and marketing. There is no debt. The company is in a loss-making position as of current and breakeven is difficult to determine but with product volume contributing to margin improvements, in addition to various revenue streams, profitability may not be far off.

Endeavoring to keep its capitalization table clean, LabStyle has bootstrapped itself through friends and family funding, including management's own skin in the game. As a testament to outside validation of its device and vision, the company recently raised $1.5 million with institutions and retail investors, following a February 2015 raise of $1.6 million in a private placement with accredited investors. If all goes on plan, LabStyle would uplist in the near future.

As with any new device, particularly one considered by doctors as a commodity like BGMs, adoption of Dario may take time. Endocrinologists, like most physicians who stake their business on referrals, are hesitant to suggest a switch to something new. Fortunately, LabStyle plans a direct-to-consumer (DTC) approach as one its marketing avenues. The company trades at a price under $1.00 per share with a valuation of under $13 million and an average three-month volume of 104,000. News flow, contrary to many micro-capitalization stocks, has been rich and should continue as LabStyle moves Dario into more countries to sell the device and seek reimbursement, generating revenue. With roughly $3 million in cash, LabStyle must continue to raise money, possibly dilutive to existing investors although the company has been successful thus far to avoid that.

An estimated 387 million people worldwide have diabetes, a figure expected to grow. Many are undiagnosed which will hike numbers up considerably. Dario, which turns a smart device into a glucose monitor in 100% real-time connectivity, goes far beyond testing blood sugar to become a cohesive management of the disease through caregivers and supporters, and, most importantly, the patient. As a pure-play, the only other being DexCom, Inc. (DXCM:NASDAQ) with a market capitalization of $7.6 billion and only a foot in the door of diabetes mHealth, LabStyle shows plenty of upside with demographics, sleek technology, and a good management team on its side.

Disclosure: I am/we are long DRIO.