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A Disruptive Force in Diabetes Monitoring

- By Joshua Rodriguez

For investors seeking emerging growth investment opportunities, DarioHealth Corp. ( DRIO ) is worth a close look for investment selection. DarioHealth, whose MyDario mobile data management platform, is disrupting the multibillion-dollar diabetes monitoring industry within a unique, all-digital, patient-centric glucose monitor.

DarioHealth launched in the U.S. in March 2016 and has since ramped to close to 20,000 devices sold. The business model is recurring revenue as approximately 80% of the users then order the strips (razor blade model at 75% gross margin) as they continue to use MyDario. DarioHealth 's marketing strategy is 100% digital/social media.

DarioHealth is gaining excellent traction with a revolutionary smart diabetes management solution that is mobile app-based and minimally invasive. Its business model encompasses "members" with a recurring revenue subscription with high margins. The company is adequately funded for the next year of growth with $8 million cash on hand.

DarioHealth has developed a glucose-monitoring suite that is centered around the smartphone. It is potentially disruptive to the market as it not only uses the phone to physically take readings but immediately sends the data to the cloud where it can be shared with medical professionals, loved ones, etc. Being referred to as the "Fitbit (FIT) of diabetes," the software provides the user with a completely new experience, storing the data and manipulating it through proprietary, customizable software, which is updated every quarter based on user feedback. From here, the user can begin to better understand how what he/she eats and his/her activity affects their glucose levels in real time.

The business model follows that of the razor/razor blade. Proprietary test strips are delivered to subscribers at a cost that is comparable or below that of an insurance copay. Each subscriber, to date, has produced an average of $350 annually in revenue to the company. With gross margins in the 70% to 80% range, it will not take a large share of the half billion diabetics they have to market toward in order to take this company to the next level and beyond. Recently, Dollar Shave Club was acquired for $1 billion or 6.5X revenue derived from its "members."

Finding these gems can be rewarding, evident by the Unilever (UN) purchase of Dollar Shave Club for $1 billion as well as Under Armour's (UA)(UAA) purchase of myfitnesspal for $475 million.

Disruption has value, and it's becoming apparent that it may be far less costly for large players to simply acquire these fast-moving, tech-savvy companies like DarioHealth instead of trying to keep pace with their new-generation business metrics that provide the capability to change direction and strategy in a quick fashion.

DarioHealth Meter MyDario

Disruption wins

These days, being disruptive to an industry can be extremely beneficial to a company's health. In decades past, product and service evolution was slow, which allowed companies time to mature and develop markets. Speed may have killed in the past ways of business, but in today's market, it is the lifeblood to survival, becoming the prime differentiating factor in identifying which companies will be the survivors in a competitive landscape that is flush with aggressive and enterprising investors.

DarioHealth fits the "disruptive" definition to its core, capitalizing on a diabetes-related glucose monitoring market that is expected to eclipse $24 billion by the year 2020. Additionally, DarioHealth is not only looking to advance the next generations of its existing monitoring devices, applications and platform, it is also progressing almost seamlessly to secure a leadership role in the current $10 billion mobile health application market (mHealth). Further, DarioHealth is going to be well positioned to capitalize on the growth of the mHealth market, which is expected to generate in excess of $31 billion in potential revenue to those positioned to meet the needs of the market and its customers.

Although being the disruptive kid on the block is certainly a game changer in company-specific terms, the importance of having a plan in place to maintain that market edge is equally important. With DarioHealth developing a strategically sound plan to benefit from a recurring revenue model, as well as from the boon in mHealth applications, its market position may become increasingly solidified in the next several years.

Measuring the benefits

DarioHealth is looking to exploit the potential within a huge diabetes market. Each year over 1.4 million Americans are diagnosed with diabetes, and an additional 86 million people are diagnosed with prediabetic conditions. In addition to these developing cases, there is an estimated 30 million adults and children who have already been diagnosed with diabetes in the U.S. alone, with a staggering $322 billion being spent in 2012 to diagnose, treat and provide pre-emptive treatment to monitor the disease.

For those who pay attention to commercial advertisements, enormous attention and financial resources are being focused toward the treatment of diabetes with blood- and glucose-monitoring devices being marketed aggressively to a diverse market of customers who have become reliant on disease management in their daily lives. At DarioHealth, the mission is to address the maintenance of diabetes for patients through a three-pronged approach by improving medical outcomes for people with diabetes, providing a personalized patient centric health care platform and minimizing patient cost to monitor and control the disease.

In 2017, DarioHealth plans to extend its position in the mHealth application market by delivering Native Mobile, DarioHealth's smartphone-enabled complete diabetes monitoring solution. The solution benefits patients with a comprehensive method to manage diabetes by offering a highly specialized patient user app, a sync-enabled blood glucose monitoring tool and a cloud-based storage program that allows patients to share information seamlessly through mobile and cloud-based communication tools.

How DarioHealth i s different

As stated earlier, DarioHealth has enough competitive ammunition to fend for itself, making the job of an analyst relatively simple. When comparing DarioHealth's products to its competition, the differentiation factor is magnified to such an extent that it may lead investors to wonder what the holdup is in providing DarioHealth with a much greater company valuation.

Compared against current market heavyweights supported by Roche (RO) and other large pharmaceutical names, they each fall short in side-by-side comparison to DarioHealth . While each of the five largest suppliers of diabetic monitoring equipment can each check off several boxes of capability in a comparison, only DarioHealth is able to check off every box in a list of important attributes reflecting the capabilities most desired by patients. While five of the company's largest competitors may be able to meet the needs of two to three features in the list below, DarioHealth is the only company that offers every item listed, making its device and application a superior choice in the market. DarioHealth offers an all-inclusive platform which includes:

  • An all-in-one meter, lancet and test strip solution.
  • Pocket-sized device.
  • Powerless functionality.
  • Compatible with iOS smartphone.
  • Records entire diabetes history.
  • Ability to share information.
  • Provides insulin recommendations.
  • Offers a member and community platform.
  • Offers patients actionable insights.

Certainly, these enhancements not only serve to manage patient disease, but the DarioHealth platform is a useful tool to educate and connect patient and medical professionals into a user dialogue. The platform, beyond offering an enormous benefit package for its users, also delivers security, easy connectivity, education and a consistent and well-organized method to track current and historical data.

Keeping in mind that diabetes is a disease that does limit certain activity, it does not need to be the defining characteristic for that person. For that reason, DarioHealth understands the importance of implementing additional features into its monitoring, such as the ability to measure and record carb and insulin intake and physical activity. These measurements are comparable to a historical data set and can be easily shared with the patient's support community, family and medical staff. The Dario Smart is easy to use. A patient simply plugs in the device through an available auxiliary port on a phone or smart device and then follows the easy-to-use platform to monitor and control daily results.

Revenue model

With the groundwork laid to make the case as to why DarioHealth may emerge as a leader in the mHealth diabetes management space, it is also important that investors understand the multiple revenue streams that the company is addressing.

First, DarioHealth can generate the initial stages of revenue development through the sale of its MyDario device, which provides a Diabetes Lifestyle Management system for its users. Additional premium features that support MyDario include specialized test strips, a subscription based product fulfillment service, and the sale of personalized service and value added features.

Next, the Dario Care platform offers a scalable disease management platform which provides meta-analysis for payers and HMOs with additional information being made available to insurers. These revenue-generating services allow providers to obtain efficient data and management of its diabetic patient population, lowering cost of service for them and reinforcing the benefit of maintaining the relationship with the Dario Care platform.

Their business model follows that of the razor/razor blade. Proprietary test strips are delivered to subscribers at a cost that is comparable or below that of an insurance copay. Each subscriber, to date, has produced an average of $350 annually in revenue to the company. With gross margins in the 70% to 80% range, it will not take a large share of the half billion diabetics they have to market toward in order to take this company to the next level and beyond.

While each of these products and services add additional revenue streams, they should be viewed as value-added components in addition to its products that are quickly penetrating the modern diabetic treatment landscape.

From core business, DarioHealth sold more than 18,500 Dario All-in-One Smart Glucose Meter devices in 2016. More than 8,500 were sold in the fourth quarter alone, increasing its market presence by 85% compared to the end of the third quarter. Complimenting those sales and proving the viability of the subscription-based revenue models, nearly 95% of U.S. users have ordered test strips, driving fourth-quarter consumable sales up by more than 65% quarter over quarter.

For all intents and purposes, DarioHealth is driving on all cylinders, delivering measurable results and building a strong portfolio of products and services designed to maintain the momentum.

DarioHealth by the numbers

Ahead of the U.S. product launch, DarioHealth has been establishing a strong track record of revenue growth since the first quarter of 2015. Since that time, DarioHealth has increased revenue by over 986% with each succeeding quarter being sequentially higher in terms of revenue. In 2016, DarioHealth increased revenue by over 28% after the first quarter, and the forecast is strong going into the fourth-quarter period, which may further bolster the sequential growth record.

DarioHealth is well funded, and the capital structure is fundamentally sound. For the period ending on Sept. 30, 2016, DarioHealth had roughly $3 million in cash and over $6.6 million in total assets and has since raised an additional $5.1 million. Liability to warrants is low at only $295,000, and the company has no short- or long-term debt. Shareholder equity increased significantly to $4.3 million on Sept. 30, 2016, up from ($1.5 million) at year-end 2015.

Management is strong, led by Chairman and CEO Erez Raphael, who brings almost two decades of industry experience, having served as head of Business Operations for Nokia Siemens. Raphael is surrounded by equally capable and experienced management professionals, bringing a combined 60 years of business experience related to market development and product integration strategies.

Chief Financial Officer (CFO) Zvi Ben-David has over 25 years of experience in corporate and international financial management and previously served as CFO of multiple public and private companies, including Given Imaging, which was acquired by Covidien (FRA:6COP) for $860 million in 2014.

Covidien holds a market cap of approximately $25 million based on its most recent closing price of $3.25 a share. The capital structure is attractive for new investors with DarioHealth having only 7.5 million shares outstanding and no dilutive financing covenants weighing in the background. DarioHealth has approximately $8 million in cash and no debt. It recently secured an investment from OurCrowd Qure, an Israeli digital health specialized fund, of $2.5 million in exchange for a 12% equity stake in the company.

Revenue ramp through third-quarter 2016

DarioHealth DRIO Revenue

Finding its niche

DarioHealth has found a niche, allowing it to expediently take advantage of a market that is subject to rapid and intense technological change. DarioHealth has remained a leader in the movement to offer services to a new generation of patients while at the same time maintaining the right product and service mix to not alienate those that may be less tech savvy and reluctant to electronically generated results.

Banking on a diversified strategy to increase revenue streams from multiple channels, DarioHealth is building the foundation to benefit in both near and long-term growth of the diabetes treatment market. Bolstered by a strong balance sheet and an honest and clean capital structure, DarioHealth is a company that investors may find appealing on several levels.

Certainly, when looking at recent acquisitions that provided strong multiples for acquisition purposes, DarioHealth may benefit from the precedent being set in the market. Although shareholders should hope that management continues to build out the platforms well before considering either a partnership or acquisition, shareholders may be comforted by the fact that DarioHealth , even during its relative infancy in the U.S., does offer significant value to companies that do not have the focus or managerial ability to quickly change strategy or corporate direction.

For investors that are mining for disruptive emerging growth, DarioHealth may become a discovered gem. But for now, investors may have a short window to vet the company and decide if the future for DarioHealth aligns with their investment style. DarioHealth offers a sensible investment in a company that addresses a significant and targeted market, has a well-balanced strategic plan and has the funds and professional relationships in place to advance the company to the next level, a level that could very well increase both shareholder and company valuation significantly.

(This article was originally featured on CNA Finance.)

Disclosure: The author has no positions nor plans to hold any positions in any stock mentioned herein for a minimum of 72 hours.

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