Price as of 3/19/21: $19.70
Market Cap: $300M
6-12 month Price Target = $40-50 (+100-150%+ upside potential)
Team Contact: firstname.lastname@example.org
Early in 2020, our team recognized the potential for Dario Health(Nasdaq: DRIO) to become a key player in the multi-billion dollar Digital Therapeutics (DTx) market. In our initial research published in April 2020 we argue that with a validated and differentiated user-centric platform and proven leadership team DRIO could compete with the best in the B2B2C (business-to-business-to-consumer) arena, namely against Livongo and Omada Health. The latter of which was acquired by Teladoc (Nyse: TDOC) last year in a deal valued at $18.5.
Since adapting its business model from selling direct to consumers (D2C) to the higher margin software-as-a-service (SaaS) based model DRIO has delivered robust returns to shareholders (+233% YoY). Integral to this growth has been headway made by CEO Erez Raphael and industry veteran and former Catasys (Nasdaq: OTRK) executive Rick Anderson in B2B2C commercial channels.
In the 14-months since Rick joined DRIO as President and General Manager of North America, the company has won 4 remote patient monitoring (RPM) contacts, inked agreements with self-insured employers, forged strategic partnerships and recruited key new hires and board members, including several from Livongo and Omada. We believe that this latter point really speaks to DRIO’s differentiated platform which mitigates pain points for payers and employers unaddressed by its competitors.
With a strong commercial framework tailored to the B2B2C DTx opportunity and $90M on the balance sheet DRIO is positioned to continue executing on its three pillars for growth in 2021 and beyond:
- Transformation to SaaS
- Transformation to B2B2C
- Transformation into multi-chronic conditions
DRIO is Differentiated from its competitors
The bedrock of our bull stance on DRIO is its differentiated DTx SaaS multi-chronic care service offering being in the right hands, at the right time, for the right price (a better/comparable product for 30-60% less).
The DTx market is relatively young and is rapidly evolving on both the supply and demand sides. According to commentary by management at Stephen’s Best Ideas fireside chat, customers want a product that users engage with and lowers costs. What they don’t want is to pay blanket fees regardless of how many members actually utilize the DTx platform. DRIO fills these service gaps.
Thanks to its roots as a D2C company DRIO has refined its craft at a small-scale collecting billions of data points which powers AI to help the end-user better manage chronic conditions like diabetes through changing their behavior. DRIO has conducted over 20 clinical studies which consistently show a correlation with its platform and improved clinical outcomes for people with Type-2 Diabetes. Data from one study in particular shows that patients had an average reduction of -1.4% in Hemoglobin A1C (HbA1C or A1C) which is a biomarker correlated with cost savings. Moreover, this is a greater reduction than its competitors can tout.
With advantages like these in mind, we are excited about the potential for DRIO to poach customers from Livongo and Omada as their 3-year long contracts conclude. Not only this but the DTx market is so vast and young that there is ample opportunity for all participants. Positioned with a competitive product and seasoned leadership team we anticipate that DRIO should follow a similar growth trajectory as its peers, most notably Livongo (see Table 1 and 2). Of note, although we include OTRK in the list of peers it is not actually a DTx company. OTRK relies on human coaching vs. software to engage users and thus has a much lower valuation multiple due to higher costs of revenue.
DRIO has the potential for a Livongo-like growth trajectory
As DRIO continues to successfully execute its strategy and produces material results (i.e. wins contracts) the more Wall Street will treat it like they did Livongo. At the time that Livongo went public in July of 2019, it had a market cap of approximately $2.4B. By June 2020 it exceeded $7.0B. Of course, at that point, LVGO was pulling quarterly revenue north of $90-100M+.
A review of Table 1 below shows us that 5-years ago in 2016 Livongo generated $9M in sales revenue and $31M the year after that. In April 2018 Livongo was valued privately at $805M while for the full year it generated $68M in sales revenue followed by $170M in 2019.
Our growth projections for DRIO indicate a similar trajectory may be in store. Although it may seem like a daunting goal considering FY20 revenues grew only +0.2% YoY to $7.58M, we believe that by using the same playbook as LVGO with an at least comparable product at a better price point DRIO’s seasoned team should hit our targets (Table 2)
DRIO is our pick in the rapidly growing DTx market opportunity
Like any blockbuster technology, the solution must materialize at the right time in history. Over the past decade, DTx has gained traction and credibility as more and more clinical studies show that driving behavioral changes to manage chronic conditions translates to improved health outcomes and lower healthcare costs. In 2020 with the COVID-19 pandemic, this already burgeoning industry transcended to the forefront of medical care as a means of safely connecting patients with physicians.
Even before the COVID-19 pandemic big pharma and tech companies alike picked up on this trend in digital health and positioned themselves to capitalize on the paradigm shift. Two years ago Amazon (NYSE: AMZN) made its debut in the pharmaceutical game when it acquired PillPack for $753M intent on lowering U.S prescription drug costs. More recently, AMZN revealed last week that it was expanding the Amazon Care initiative into telemedicine.
U.K based pharma giant AstraZeneca (Nasdaq: AZN) went the partnership route signing a deal in March 2020 with BrightInsight to develop digital health products to improve the quality of life for patients with chronic conditions like asthma and diabetes. Months later BrightInsight forged another agreement with CSL Behring to deliver patients with rare-diseases digitally enhanced treatment experiences and enabling CSL to develop Software as a Medical Device (SaMD) based products for its own digital health portfolio.
A year after partnering with AZN the duo unveiled their AMAZE disease management platform constructed to bring patients and providers closer together. According to AZN, it decided to work with BrightInsight rather than build out its own platform in order to get to market sooner. This line of reasoning appears to be shared by other stakeholders considering that BrightInsight is also partnered with Novo Nordisk (Nyse: NVO) in diabetes and Roche (OTCMKTS: RHHBY) in developing a dosing calculator app for its hemophilia therapy.
In short, we feel that DRIO possesses the required attributes to emerge as a leader in the DTx space joining the ranks of its multibillion dollar valued peers. Considering its current market capitalization of $300M and significant expected near and long-term revenue growth we are building our position now. Moreover, as the only publicly traded company with an open-SaaS platform for chronic disease management we view DRIO as a viable take out candidate in the next 6-24 months.
For now our attention is focused on DRIO’s execution of its B2B2C commercial strategy. Specifically, we hope to see the company sign one or more contracts with insurers in the second quarter of 2021. In the meantime we continue to build our position with a price target of $40-50 in the next 6-12 months
While we are bullish on the future prospects and execution by management, it is important to consider potential risks to our thesis. Outside of general market volatility, we believe the following risks are present:
- Dilution: Dario currently has a substantial cash position. This doesn’t guarantee the absence of dilution. Many companies dilute even when in a strong cash position. Dario has warrants built into their capital structure at varying price points. When/if exercised, this will be dilutive.
- Competition & Traction: Dario is undergoing a transformation and faces substantial competition. If Dario is unable to differentiate and provide clear value to employers, providers, and payers then our thesis may be at risk.
- Execution: While we believe DRIO has the product and talent to see our investment thesis through to fruition, this all hinges on the successful execution of
- Other: The risks discussed above are the most obvious and significant ones our team has identified but it is by no means a comprehensive discussion of all known and unknown risk factors. For a more detailed review of these risk factors, we encourage you to read through the company’s latest Form 10-K.