DRIO Qualitative analysis

This is an analysis we wrote in 2020, and it was the first one we wrote. we got the essential qualitative factors right, but today we know the company much better. We exited DRIO during Q1 of 2021 for 100% profit and repurchased it recently. 

(NASDAQ:DRIO)

Price: $12.5

Insiders Ownership: 14.3%

Market Cap: $97M

Our investing methodology is to find a market that is going through a significant change or growth period and try to identify the companies that will gain the most out of this. We think that choosing the right market is sometimes more important than the company or can even pick more than one to capture the value of a market. The opportunity that we see here is the transition to digital and personal data-driven therapeutics care. More than 100M people in the US have at least one chronic condition; only 1%, under 500K, enjoy digital therapeutics. The TAM is more than $50B in the US and $100B globally.

We believe that right now, Dario is the most affordable mousetrap for this market. They are not the market leaders by brand, size, or funding,  but we think the market ignores a few significant advantages that will support their efforts to gain a juicy market share. 

Dario is a company under a significant pivot and while turning a company around is not a simple task. Still, we think that the current management at Dario, with the addition of the senior trio they recently recruited from Ontrak (OTRK), and the changes in the go-to-market strategy and business model will help it to become a market share compounder in this new and under-penetrated lucrative E-health market. 

Dario empowers individuals to manage pre-diabetes, diabetes, obesity, and hypertension. The platform helps to adjust their lifestyle and health choices to manage their chronic conditions.  Dario captures, monitors, and communicates personalized health data and metrics to the users using precision data analytics to interpret their data and provide high quality digital and personalized coaching that help users make the best choices for their health. 

The core challenge for all the competitors in this market is to help their users adopt behavior change to improve their chronic conditions. 

We know this is super difficult to achieve. Still, we think Dario has the most competitive package of technology, engagement, research, and data to get long term health improvement to the users and, as a result, cost savings to those paying the health bills and the future revenues of the company. 

Dario's story is unique because they found a product-market fit relatively early but failed miserably in understanding the US healthcare system.   Dario was among the first companies (2011) to develop a pocket-sized glucometer with a smartphone and mobile application for self-monitoring of blood glucose. But they made some mistakes, and the main one is to choose the wrong go-to-market strategy and business model (D2C). It caused them to lose the first-to-market advantage and the leading position in the market to better-funded Silicon Valley competitors like Livongo and Omada. 

Changing to B2B2C (SaaS membership model) and targeting employers, health plans, providers, and retailers during 2019 was a pivotal decision that dramatically changed the growth trajectory, the profit margins, and the ARPU per member. 

Spending many years in a D2C model has a few benefits that are now helping Dario win new contracts and get the full potential out of them: The product had many iterations based on direct user feedback and was optimized for enrollment, engagement, and retention.  

The D2C 55K paying users also contribute many data points that help develop machine learning models and support R&D initiatives and devolvement.  

Dario's founders had roots in academia, and they have invested heavily in clinical research from the early beginning. They have long-term studies backed by data from engaged paying users, and based on that, they can forecast the improvement in members' life and financial outcomes for the health providers with more credibility. 

 Another major catalyst for change is the fact that Dario was able to recruit three key management members of Ontrak ( former Catasys- a public digital behavioral health company), the COO and president, the SVP of Sales, and the Chief Medical officer.  Those three had a significant part in building ontrack from a  $60M OTC Micro-Cap to $1B Nasdaq Cap. they can do it again in a different vertical with Dario. They have the knowledge, relationships, and experience to support better and faster results. 

Another point that the market ignores about Dario is that their platform is open and could be integrated across legacy customer solutions as a white label product or an employer's wellness marketplace as just two examples. 

The most valuable component is the Data that is not locked in silos and could be shared and integrated into other systems. This point is critical to the customers.

Add the flexible billing and the fact that they can compete on price, making them a finalist in many recent RFP's. They recently won a significant contract over Livongo and Omada that will get a public notification late this year or early 2021.

Now let's get into some numbers: They recently closed a private placement in excellent terms that yielded $28.6M. Adding that to the cash balance creates a position of $38M with no debt. It gives them great flexibility to plan the next three years well and execute it accordingly.

Regarding revenue, they have only $7.2M for the last 12 months, but they have two contracts in the final drafts that they already started to implement with access to tens of thousands of qualified members.

The management claims to have a pipeline of $200M in potential annual sales that could be realized in the next three years. 

How so?

The ARPU or ARPM is around $75. When Dario wins a contract, they get access to 50K-100K qualified members with one of the chronic conditions. They will engage on average, 20% of them. Every 10K members are contributing $9M annually on a recurring basis. 

That means that every contract can unfold another $10M in sales. There are different customer sizes, but following the logic above, you would need only 5-10 customers to get to the $200M in annual sales.

The tricky part is that we are talking about long sales cycles with the big customers and implementation that could easily skip a quarter. 

It can take between 6-12 months to see the full potential of a customer.

Considering that, We don't believe that Dario sales grew dramatically during the second half of 2020, but in early 2021 you can expect a growth of 60%-100%, which could continue to be the case for the next three years. 

With improved gross margins (goal of 70%) and a growth rate based on an average of $10M per contract,  annual sales could get to $25M for 2021,  $55M for 2022, and $100M for 2023.

If they achieve a nice portion of this potential growth, Cap value of $200M during 2022 is a sound estimation. They also could become a target for acquisition or merger with a more prominent health company as we continue to see consolidation in this market.

What could go wrong? 

Everything! But our main concern is that the management will get tempted to chase only big contracts with long sales and implementation cycles or expand to more solutions or devices before achieving the growth goals.  That could cause a cash flow problem and maybe financing using a dilution.

The stock price range is quite volatile, but we think there is significant support at $12, and creating a position between $12-$15 could pay off handsomely in the next 2-3 years.  

Thanks,

Daniel and Gilad.