In my last article, following the 38th Annual JP Morgan Healthcare Conference, I presented my investment thesis for DarioHealth (Nasdaq: DRIO) as a growth play in the nascent Digital Therapeutics (DTx) market.
Like its peer Livongo (Nasdaq: LVGO), Dario is committed to helping people with chronic conditions live healthier lives through its convenient ‘My Dario’ platform powered by data science and software technology.
As previously discussed, Dario’s platform offers distinct competitive advantages for consumers over Livongo and Omada Health such as its open platform, user-friendly qualities (thumbnail-sized glucose monitoring device that plugs into smartphones), cost-effective and scalable blueprint, global reach, and lower price point [$30 PMPM vs. $75 PMPM (PMPM= per member per month)] for a product of equal or greater value.
In a nutshell, Dario offers the digital healthcare market an effective solution that overcomes the shortcomings of its competitors at a better price. Of special importance is its open-platform design architecture.
Being an open-platform enables the integration of other platforms/services by potential partners, collaborators, and businesses (i.e. providers, insurers, and employers). This capability is unique to Dario and is one example of a competitive edge that has helped it win contracts over Livongo and Omada.
In digital therapeutics, data is king, and Dario has lots of it. From its roots as a business to consumer (B2C) company Dario has accumulated billions of data points from tens of thousands of users. Using artificial intelligence (AI), Dario harnesses its data to provide an increasingly seamless user experience driving behavioral changes that translate to improved clinical outcomes as evident by 11 clinical studies. In other words, Dario is data-differentiated.
As of June 30th, 2020 Livongo had 1,300 clients (businesses) and 410K enrolled diabetes members totaling an estimated agreement value of $1.1B. On August 5th, 2020 Livongo announced that it was being acquired by Teladoc Health creating a premier global virtual healthcare company in a deal valued at $18.5B. We view this merger/acquisition as validation that virtual healthcare is here to stay and of its immense untapped potential in the wake of COVID-19.
On the day that Livongo announced its acquisition it closed with a market capitalization of $12.7B (99M shares outstanding * $128/share). This means that Livongo was awarded $30M in market capitalization for every enrolled diabetes member. If we do this same calculation for Dario it comes out to $2.4K ($155M market cap/65K active users). In other words, Livongo is awarded 1,249,000% more in market cap per user.
To be fair, Livongo pulled $92M in revenue from its memberships during 2Q20 compared to $1.8M for Dario over the same period. However, in our view, with an elite C-suite team of industry veterans from Ontrak Inc. (Nasdaq: OTLK) ((formally Catasys Inc. (Nasdaq: CATS)), an efficacious and convenient software as a service (SaaS) DTx product executed under the company’s new B2B2C commercial strategy Dario is headed towards 8-figures in quarterly revenue.
Until recently the market has overlooked Dario’s potential, keeping its market capitalization around $60M ($6-8/share). Meanwhile, Livongo surged over 500% in 4-months peaking at $150/share before its merger with Teladoc. Ontrak, an AI and Telehealth company surged nearly 200% in 2 months from $22 on 7/21/20 to a high of $79 by 8/20/20.
In the private sector this week DTx company OneDrop, which like Dario deploys its data centered platform to help people with diabetes and other chronic conditions, closed a $98.7M deal with Bayer to advance its DTx solution. In our view, it’s only a matter of time before Dario experiences similar growth.
On the heels of a $28M financing deal with quality healthcare investors, adding to their existing cash balance, $13M, end of Q2, Dario has already gained +200% in just a few weeks. This response to the private placement validates the value proposition which we outlined for our community members earlier this year.
In our view, the best is yet to come for Dario in 2020 and beyond. Due to the COVID-19 pandemic, the DTx market is experiencing accelerated growth. For reasons discussed in the rest of this article, we feel that Dario is well-positioned to participate in this growth potentially generating $200M in annual revenue by 2023. Evidence of said potential can be seen in its second quarter earnings results which beat the street’s consensus for revenue and earnings per share estimates.
Penetration into The Remote Patient Monitoring and Self-Insured Employer Markets Through Strategic Partnerships
In only a few months’ time, the key new hires consisting of former Catasys executives have produced tangible results for Dario. Under the leadership of President and General Manager of North America Rick Anderson (former President and Chief Operating Officer at Catasys) and his team, Dario has hit numerous pivotal milestones this year. Many of which were facilitated by strategic partnerships forged with Vitality Group (March 2020) and MediOrbis (April 2020)
Vitality Group is a global health and wellness company that brokers DTx technology to health plans and self-insured employers. Per the agreement Vitality will co-market Dario’s DTx solution to its existing client base. To incentivize a mutually beneficial relationship Vitality received warrants to purchase Dario’s stock contingent upon the success of the partnership over the next 4-years. As of second quarter 2020 earnings (2Q20) Dario has already scored contracts through the partnership, some of which are set to launch later this year.
Through its partnership with industry-leading Telemedicine company MediOrbis, Dario has extended its remote services offerings to its 65K active customers to include primary and acute care, chronic disease management, and specialty services. In delivering requests for proposals (RFPs) from payers and employers this feature is another competitive advantage for Dario.
Less than a week after inking the deal with MediOrbis Dario expanded its chronic care management offering to include behavioral health coaching. By June Dario secured two remote patient monitoring (RPM) contracts followed by a third agreement in July 2020.
Due to the COVID-19 pandemic, the Centers for Medicare & Medicaid Services (CMS) approved RPM codes for Medicare patients. This led to Dario securing two contracts whereby physicians can remotely monitor patients with diabetes and or hypertension (high blood pressure) through Dario’s platform and bill Medicare for its services. Shortly after, Dario nabbed another RPM contract with Williams Medical making its turn-key DTx solution available through its open-source design to Healthcare Professionals (HCPs) in the UK and Ireland.
Robust Client Base and An Expanding Pipeline
In a relatively short period of time, Rick Anderson and his team have established a strong client base consisting of health Plans, Employers, providers (RPM servicers), and retailers (Albertsons, Walmart, Amazon) (Figure 1).
Through these early adopters, Dario has access to 240K potential users through 800 employers presenting a $61M annual revenue opportunity. Per comments made by Rick Anderson during Dario’s 2Q20 earnings call, Dario’s sales pipeline has the potential to generate $200M+ over the next several years.
Considering its newly implemented commercial framework and B2B2C strategy, preliminary customer acquisition success, and additional contracts on the horizon, we find Dario’s near and long-term investment risk-reward profile attractive.
As we have said repeatedly, for a company to succeed it needs an efficacious and competitive product, a competent leadership team, capital, and a sound investor base.
After two private placements in the past 12-months at successively higher valuations, and superior terms, ($21.3M around ~$5/share in December 2019 and $28.6M at $7.94/share in August 2020) with veteran healthcare investors, a low cash burn ($2-4M/quarter), no debt, a talented C-suite team from Catasys, and a market leading DTx platform Dario is such a company.
In 2019 there were 53 Merger & Acquisition (M&A) deals covered by MobiHealthNews in digital healthcare totaling $8.16B. The suitors ranged from tech behemoths like Amazon, Alphabet, and Apple to large healthcare companies including Medtronic, Phillips, and UnitedHealth.
The common themes noted among the 2019 M&A activity boiled down to telemedicine, remote patient monitoring and medical education. As I outlined above and in my initial article, Dario embodies all these themes.
In 2020 the aforementioned $18.5B Teladoc-Livongo acquisition eclipsed all the digital healthcare M&As in 2019. The takeaway is obvious. Attention and capital paid to digital healthcare solutions in 2019 is now amplified in 2020 due to the shift in healthcare paradigm away from human-to-human contact imposed by COVID-19. The way we see it is with Livongo off the track, and Ontrak being a Digital Health analog, Dario is the only publicly traded pony in the race. We anticipate a significant uptick in revenue in 2021 and evidence of this should be observed in the second half of the year. With a market cap of only $155M compared to $12.7B for Livongo and $1.17B for Ontrak we feel Dario is a strong takeout target.
What is particularly exciting is that Google or Amazon are just as likely to acquire Dario as Novartis or Medtronic. At the end of the day Dario is a data-driven and data differentiated company. Due to our bullish outlook on near-term performance of Dario we have decided to up our 3-month price target to $30 from $25 and initiate a 12-month price target of $60.
I am/we long DRIO. I was not compensated to write this article. This article reflects the opinion of the author.