Overview
We remain optimistic about the outlook for DarioHealth (DRIO) heading into 2Q21 earnings (expected release mid-August) and continue to see a path back to $30+. We've shuffled our Position Monitor stocks a bit recently, and DRIO, which closed yesterday at $15.79, sits in the middle of the pack on the long side of our Best Ideas list (remember, the ideas are rank-ordered, and DRIO has moved up the list). We are in the 3Q21 window for deal announcements and there have been 5 thus far, in line with our original thesis. To say the stock has been frustrating is an understatement, and it remains a higher-risk small cap idea with the factor exposure in the current Macro Quad 3 backdrop an additional headwind. However, the catalyst calendar in the form of more deal announcements should be picking up as we move through 3Q21. The implications of Dario's success or failure will be important for a number of relevant companies as well (TDOC/Livongo, Omada, and OTRK, to name a few).
Recent News & App Data
Earlier this week, CEO Erez Raphael presented a quick update heading into the quarter (an open webinar via StoryTrading) and reiterated a few key points, stressing that the pace of announcements should accelerate as they have "started to get some agreements done." Erez was limited in what he could say but reviewed the few wayForward deals (likely in the works pre-acquisition), a couple of new RPM clients, and said the business is reaching "maturity in the level of the transformation."
That's an interesting way to put it because they've been at the B2C -> B2B2C switch for about 2 years now, which should be enough time to gain some name brand recognition in the market and traction within the three end markets. If the average RPM/provider deal takes 6-12 months to close, it explains why we're seeing those first (Alabama Regional Medical Services and Coastal Family Health Center). From here, employers should follow (those take 12-18 months to close), and then a health plan win would be huge, but that can take 18-30 months (clearly longer than people hoped/wanted, including Erez).
In our model, ARPU rises from ~$37 to $41 over the course of this year and then increases to ~$44 for 2022. The Coastal Family announcement included reference to 4,500 hypertension patients, which is a good number and starting point, as many of those patients likely also have diabetes and other co-morbidities. If that's the case, then many also have mental/behavioral issues too. Said differently, we're going to find out if the flywheel works sooner than later. It's still early, but the app downloads look promising:
Other takeaways from yesterday's interview:
- DRIO has not lost any deals that management previously thought were close to closing (the context was a question about the health plan everyone is waiting to hear about)
- Dario is being aggressive, but that doesn't mean overly aggressive on pricing - 40% of clients are looking at one or more indication
- Upright should be integrated by the end of this quarter (roughly on schedule), and wayForward later this year (possibly aggressive)
- Clients are becoming more sophisticated and picky with regard to quality, parameters around engagement and retention - if Livongo doesn't adjust its model, Erez thinks they are vulnerable (i.e., will lose share)
- GGM is part of the road map, but it's a smaller piece of the diabetes market (just a few million diabetes in the US are Type 1 or insulin-dependent Type 2) - that said, DRIO continues to look for an opportunity with integration + commercial opportunity
As we've written from the start of our DRIO coverage (~$28), we don't believe a health plan is necessary for the numbers to work. A health plan win would be welcome news as a) insurers were the largest portion of the $600MM+ pipeline (~60% according to management earlier this year), b) it would validate Dr. Manejwala's comments on the positive implications of a digital solution, like DRIO, finding success in a full-risk scenario: Call Replay & Notes | Chronic Care: How AI Drives User Engagement | Dr. Omar Manejwala, CMO at DRIO, and c) it would mean that DRIO's platform and AI are differentiated.
Last stock update (5/19): DRIO | Real A.I., Real Pipeline, Real Path Back to $30+
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Thomas Tobin
Managing Director
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