DRIO: Upright Acquisition Expands into MSK Population. Target Up.
NASDAQ:DRIO
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Upright Technologies Valuation Update
DarioHealth Corp. (NASDAQ:DRIO) announced its acquisition of Upright Technologies in a January 27th press release, which was followed by an analyst call discussing the transaction in further detail. In conjunction with the largely share based acquisition, Dario raised $70 million in a private placement to support continued growth initiatives. In this follow up report, we update our valuation to reflect these two events. The additional capital combined with the opportunities presented by Upright’s musculoskeletal (MSK) offering supports a target price increase to $24 per share.
Upright Technologies’ Upright Go posture correction device provides an alluring new option to both existing and prospective end users. The MSK offering will allow Dario to target a broader set of providers, employers and health plans that desire a solution for their beneficiaries and augment the existing portfolio of chronic disease digital therapeutics (DTx). It complements Dario’s existing set of offerings as back pain, obesity, diabetes and hypertension are all chronic disorders that mostly affect the same age group of patients. MSK is not only a differentiating service compared to peers such as Livongo, but chronic and acute MSK conditions that can be treated by Upright’s therapeutic have a higher prevalence compared with diabetes and hypertension.
Exhibit I – Association of MSK With Other Chronic Conditions (1)
Upright Technologies is a leader in the MSK space with over 90,000 users on its platform and almost $13 million in revenues in 2020. The company has been historically focused on the consumer market with almost all of its current members falling into this category. Upright’s device is a small, approximately 2” long by 1” wide sensor that adheres to the patient’s upper back. When the user slouches, the device sends a signal that can modify behavior to improve posture. Users can also purchase accessories such as a lanyard and adhesive patches to hold the unit in place. An application is available to download on the user’s phone and a coaching service and membership are available.
Exhibit II – Upright Go 2 Attached to Patient (2)
Deal Details
Dario paid $31 million in consideration to acquire Upright Technologies based on the closing price as of the transaction agreement date. $1.5 million was denominated in cash and was prepaid to guarantee the deal and $29.5 million was be tendered in ~1.7 million equity shares. The transaction closed on February 1, 2021.
Upright is complementary to Dario’s current offerings in diabetes, hypertension and obesity. The acquisition adds to Dario’s product offering and addresses demand from employers and health plans that desire MSK solutions. It expands the company’s offering into the MSK market that is an estimated $213 billion (3) annually. Upright has conducted several studies at San Francisco University, Texas Tech University and Oregon Health and Science University demonstrating the benefits of postural intervention and related positive health outcomes, in line with Dario’s philosophy to generate clinically supportive data for its DTx. We see a number of synergies from this combination that can leverage existing sales infrastructure, coaching, management and other operational shared services. Dario reported high gross margins in excess of 60% for Upright and sees a path to exceeding 70% in a few years.
Looking Forward
Upright is largely focused on the US consumer market, but is a solution recommended by physicians at more than 500 clinics around the globe for use pre- and post-surgery. Dario plans to expand the offering into the business to business to consumer (B2B2C) market by leveraging its existing sales force infrastructure which should reduce acquisition cost and increase overall per member per month (PMPM) revenues. The acquisition helps Dario achieve several of its key objectives by expanding into multiple chronic conditions and realizing holistic and integrated AI-driven personalized medicine.
Fourth Quarter Update
Along with the announcement, Dario also provided details on fourth quarter 2020 revenues and average subscribers. Revenues of $2.12 million are up 18% over the prior year and slightly behind our estimates. Backing out of the rough numbers given as pro forma subscribers of the combined company suggests a slight increase in both average subscribers for Dario and a small rise in PMPM amounts. Following third quarter results, Dario announced two Fortune 500 employee plan wins and new remote patient monitoring (RPM) contracts which are expected to produce revenues in the near term. Dario was able to win these contracts in head to head competition with Livongo and Omada Health. The company also announced a pipeline in excess of $500 million, increasing across all segments of business.
Capital Raise
Along with the merger, Dario announced a $70 million capital raise with proceeds to be used for general corporate purposes. 3,278,688 shares of common stock were sold at $21.35 per share. Investors in the deal included Nantahala Capital Management, LLC Perceptive Advisors, Driehaus Capital Management, Farallon Capital Management, Pura Vida Investments, Phoenix Insurance Ltd., More Provident Funds, and others. Cowen served as financial and capital markets advisor to Dario for the acquisition transaction and private placement. Cowen, Stifel and SternAegis Ventures served as placement agents for the financing. Combined with amounts on the balance sheet, cash is expected to be over $90 million following the deal close.
Noteworthy MSK Players
Exhibit III - Upright Technology Peers (4)
Valuation Update
We layer on Upright’s operations to Dario’s legacy business. MSK revenues were reported as $12.8 million in 2020 and based upon our conversations with management, we think the rapidly growing business can achieve at least 30% growth in 2021 in this lightly penetrated segment. The additional revenues will come from the continued sales into the 500 clinics that already have a relationship with Upright, a roll out of the product on top of Dario’s existing offering in the employer and health plan market and from a higher proportion of MSK-eligible members as compared to diabetes and hypertension. The existing consumer business will also contribute to revenues. Consultations with management suggest that the additional costs related to Upright and the new growth initiatives will be an additional $24 million in 2021 on a pro forma basis which reflects additional employees from Upright added to the roster, R&D efforts and additional sales-related expenses. Employer demand for MSK solutions is high and the lack of this offering by the largest player in the space should provide additional opportunities for Dario. We noted the higher proportion of eligible members for the MSK offering as compared to diabetes or hypertension. Up to 40% of a given population has an MSK condition in back pain, neck pain and shoulder, whereas, in diabetes, around 8-10% and, in hypertension, from 10-15% of the population present these conditions.
We think the addition of Upright’s MSK solutions can expand into a variety of MSK domains. Wearables measuring spinal posture can be used for post-operative rehabilitation, treatment of MSK disorders, diagnosis of poor spinal posture, monitoring of progression of Parkinson’s Disease, detection of falls, workplace occupational health and safety and other areas. There is also a coaching rehabilitation aspect to Upright’s service that can be monetized. We expect further studies to be advanced.
Layering revenues and anticipated synergistic growth from the Upright merger combined with anticipated incremental costs produces revenues of $25.6 million in 2021 and net loss of ($42.1) million. Note that we only include a partial quarter of contribution from Upright in 1Q:21 as the deal closed on February 1st. Pro forma numbers are expected to be slightly higher in 1Q:21 and may be provided by the company in the first quarter report. Share count increases from 12.5 million (5) to 15.4 million, reflecting the additional shares from the capital raise and shares issued for the acquisition of Upright. We increase growth rates for the 2022 to 2024 period, capturing the underlying legacy sales increases from diabetes, hypertension and weight loss and the incremental benefits from MSK and synergies between the two that derive from a packaged portfolio offering. We continue to apply our 20x EPS multiple to 2024 earnings per share, now increasing to $3.01. This value is then discounted to present at a 25% rate generating a valuation of $24.
Exhibit IV – P/E Valuation Based on Various Multiple and Discount Rate Assumptions (6)
Summary
DarioHealth is making bold moves to execute on its priorities to transform into a software as a service (SaaS) business, expand the platform into multiple chronic conditions and evolve from a direct to consumer (D2C) to a B2B2C model. The acquisition of Upright makes progress on the latter two objectives by providing a broader product set for companies and health plans and by leveraging the existing B2B2C sales force. We see the acquisition price as very favorable at $31 million compared to the near $380 million valuation of Dario (7), especially in light of Upright’s higher level of revenues in 2020. Given the very low penetration into the MSK market and the reach of Dario’s sales force, we anticipate greater growth opportunities from the MSK offering as compared to existing products. The MSK contribution is expected to increase the attractiveness of Dario relative to other competitors in the field when bidding, including Livongo and Omada. Dario’s updated fourth quarter data indicates that the growth trajectory continued through the end of 2020 and a full pipeline suggests this trend will accelerate in 2021. With the capital raise, Dario’s balance sheet is strong with an estimated 2+ years of cash available to grow the company and layer on this new exciting offering.
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1. Source: Dario Corporate Presentation sourcing underlying data derived from Duffield, S. et al. The contribution of musculoskeletal disorders in multimorbidity: Implications for practice and policy. November 2017Bailliè re s Best Practice and Research in Clinical Rheumatology 31(2) DOI: 10.1016/j.berh.2017.09.004
2. Source: Upright Technologies Webpage. UPRIGHT GO 2™ Posture Corrector | Results in 2 weeks | Upright Pose – Upright Tech
3. According to a 2016 report by the United States Bone and Joint Initiative (USBJI). This amount represents treatment, care and lost wages.
4. Compiled by Zacks Analyst Research
5. This total includes assumed as-converted shares of the convertible preferred stock.
6. Source: Zacks’ Analyst work.
7. We assume 15.4 million shares outstanding recognizing as converted shares of the preferred stock in addition to equity shares outstanding.
