2023-10-03 04:39:09 ET
Summary
- DarioHealth has experienced a disappointing year with stalled revenue growth and a decline in new customer wins.
- However, H2/23 and FY24 are expected to bring improved financials, including revenue growth, expanded gross margins, and declining operating expenses.
- The company's competitive advantages include a customer-friendly platform, a multi-condition platform, and partnerships with important industry players.
It has been a very disappointing year so far for DarioHealth ( DRIO ). We covered the stock in June and were quite optimistic back then.
However, in the meantime, Q2 results came in that show that revenue growth has stalled (even if the most important part, ARR from their B2B segment keeps on growing) as a result of customer delays and the pace of new customer wins has declined.
While obviously disappointing, we're not in despair just yet as we think that there are reasons to assume that H2/23 and especially FY24 should be much better.
So we're not giving up on the company just yet apart from renewed revenue growth, gross margin will expand and OpEx is on a mildly declining path so considerable operating leverage and improving company financials are in store.
The company is also very well placed with numerous important partners giving it access to a host of potential additional customers and its multi-condition platform is a competitive advantage that has been clinically proven out.
Competitive position
The company's digital health platform started as a B2C platform, which explains the customer-friendly nature, which is a bit of an advantage. The company made a successful shift to B2B where there is less competition and much higher margins can be obtained.
Apart from its customer-friendly platform, another competitive advantage is providing for multiple conditions, enabling a holistic patient view and producing better economics. It offers clinically validated solutions and grows mainly through partnerships.
Customers are health plans and self-insured employers, producing recurring revenues ((ARR)) on top of milestone payments from partners. They still have their B2C platform which they're not actively marketing hence revenues are flat.
Multi-condition platform
- Hypertension
- Diabetes
- Behavioral Health
- Musculoskeletal
- Weight Management
- Behavior change support for individuals using GLP-1s
- Medication Cabinet (developed with Sanofi), tracking medication adherence
Growth drivers
- Secular tailwinds; digital healthcare, value-based care,
- Big pharma and medical device makers moving into digital healthcare
- New partnerships
- New logos (health plans, self-insured employers)
- Customer growth (health plans and employers growth)
- Additional conditions and populations (especially in health plans) for existing customers
- Cross-selling
- Data and AI, helped by their B2C origin
Validation
Partnerships
- Sanofi
- Aetna
- Solera
- Vitality
- Alliant
- Virgin Pulse
- Amwell
- Dario Partners to Integrate Dexcom CGM Data (Continuous Glucose Monitors)
Sanofi
The companies signed a $30M cooperation contract for three areas, data, promotion of Dario's platform with Sanofi's customers, and development of new solutions. This contract was enhanced just two weeks ago, accelerating funds to speed up their program.
Sanofi executed independent studies ( here and here ) show clinical benefits, and reduced cost (Q2/23CC, our emphasis):
This additional cost data showed that Dario's user’s costs were reduced by approximately $5,000 more per year than a match group that did not use Dario [ph] given that the full suite solution costs less than $1,100 a year
There was a milestone payment delay due to internal reorganization but this will come in Q3. The first customer, MEDI, was launched in Q2/23.
Solera
In July/23 launched a regional Blues plan as a customer, the first one through Solera partnership with Diet as an expansion of the contract.
Aetna
Some 90M people have access to the Aetna platform on which DRIO is integrated. The company delivered its behavioral health platform in Q2/23 and received the milestone payment.
However, Aetna will not start to enroll members before Q1/24 but the population will be 30M rather than the 10M expected initially as it will be sold into more populations. There are other opportunities with Aetna materializing in H2/23.
Amwell
Amwell is integrating Dario's cardiometabolic solution into its platform for its customers. They expect customers from Amwell in Q4/23 or Q1/24. From the Q2CC (our emphasis):
We remain especially excited about our AML relationship where we are the only cardiometabolic solution integrated into their platform. With an installed base of approximately 2,000 customers , including 55 health plans, we believe this represents an extremely large opportunity. Their health plan customers include several Blues plans, including the largest Blues plan in the country.
Recent wins
- August 15 : A new agreement with PlanSource.
- August 8 : Expansion of a contract with a regional health plan to include diabetes (on top of hypertension, which would add another 20% of revenue as its 8% of the population while hypertension is 30-35%).
- July 24 : Large regional health plan (160K members): hypertension.
- July 6 : New employer contract (educational organization in the mid-west) for the full suite of solutions.
- Jun 7 : Two new employer contracts both for the full suite.
- May 18 : MedOne (a Pharmacy Benefit Manager won via Sanofi) as a complement to the Diabetes Care Path, their diabetes platform. There was a PR on March 27 arguing Dario's diabetes module was replacing theirs but the plans are more extensive now including additional chronic diseases. t
- March 22 : Strategic partnership with Amwell
Finances
Growth has stalled which is the reason for the retreat in the stock price:
- B2B is where the growth should come from and revenue consists of two parts, milestone payments from partners and ARR from customers (roughly 50/50 split at the moment). ARR is still growing.
- A part of the strategic B2B revenue is also recurring so some 75% of B2B revenue is recurring.
- Q2 was the 10th quarter in a row showing growth but the milestone payments are lumpy and there have been some delays with Sanofi but the payment is expected in Q3 .
- The company did recognize the milestone payment from delivering the private label behavioral health platform to Aetna in Q2, which Aetna is selling through their self-insured customers but enrollment isn't starting in Q3 but only in Q1/24, albeit with a 30M population rather than a 10M population .
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The B2C business isn't shrinking anymore at 37% of revenue
GAAP margins are still pretty ugly:
- Their B2B business generates 70%+ margins, much higher than their B2C business at 40-45%.
- OpEx is declining and will decline another 3-5% in H2 on offshoring, consolidation, and optimization of activities, and another 5-7% in FY24.
Cash flow has improved considerably until this quarter:
But whether that's enough to avoid additional financing needs remains very much to be seen as management argues that they will be cash flow positive at $80M, which is still far away.
Outlook
Management expects B2B revenue growth in H2 albeit slower as a result of the Aetna outroll delay. B2C revenue will roughly be constant. There are some near-time drivers that were launched recently:
- They have a growing pipeline of self-insured employers and health plans
- MEDI, the first customer through the Sanofi partnership
- A large regional Blues plan with 3M members in July (through Solera), which was expanded to include a diet
- Amwell Q4-Q1/24 (see above)
- Aetna Q1/24 (see above)
From the Q2CC (our emphasis):
We remain in the normal annual sales cycle for self-insured employers, the majority of which are on a January to December benefit cycle with most employer contracts signed in the late third and fourth quarters . Based on our current pipeline, we anticipate announcing a larger number of contracts towards the end of this year and realizing significant growth in our B2B2C ARR revenue starting in 2024 from new customers
Valuation
- 27.23M shares
- 10.8M preferred shares
- 1.1M exercisable options
- 2.66M restricted shares
- Or this from the 10-Q: "The total number of potential shares of common stock related to the outstanding options, warrants and preferred shares excluded from the calculations of diluted net loss per share due to their anti-dilutive effect was 12,195,745 and 7,198,771 for the six months ended June 30, 2023, and 2022, respectively."
- $52.6M in cash
- $29M long-term loan
So we arrive at 39.42M shares out at $2.7 per share gives a market cap of $126.1 and an EV of $103.1. With an estimated $24.7M in revenues this year (rising to $38.9M next year) this results in a still considerable 4.17x EV/S valuation (or 2.64x FY24 EV/S).
Needless to say, the company isn't profitable and won't be next year so earnings-based valuation is senseless at the moment. We're not terribly impressed with these preferred shares, from the PR :
The Preferred Stock provides for holders of Preferred Stock, upon conversion, to receive a 5% dividend payable in common stock each quarter for the first four quarters, followed by a 10% stock dividend in the fifth quarter, for an aggregate stock dividend of up to 30%.
Conclusion
While Q2 results were disappointing, we think that better times are ahead and the shares have already recovered most of the post-Q2 selloff. The company still has multiple things going for it like:
- Secular tailwinds from market growth in digital healthcare, and value-based care.
- A smart business strategy shift towards higher margin B2B.
- A multi-condition platform buttressed by independent studies and produces better unit economics, a much bigger TAM, underpinning the company's competitive advantage.
- A host of partners with a huge amount of potential customers (health plans, self-insured employers) for the company which has only just begun to scratch the surface of this.
- Growth has been absent lately but is set to reignite in H2 and especially in FY24.
- Gross margins are likely to expand as all the growth comes from high-margin B2B revenue.
- There will be considerable operating leverage as OpEx is on a gradual declining path.
- The company is recession-proof.
So we think the shares are still a buy here, however, we're not blind and acknowledge that a number of risks exist:
- The possibility of additional delays.
- The customer win rate has slowed considerably this year, and revenue growth has been absent so far, there is no iron-clad guarantee this will turn.
- The preferred share financing is quite onerous.
- The shares are fully valued.
- The company is likely to need additional financing before it can reach cash flow-positive territory.
For further details see:
DarioHealth Disappoints, But A Better Future Is Ahead