DarioHealth Corp. (DRIO) Earnings Call Transcript & Summary

Hello. Thanks for joining us today to learn about DarioHealth. Before we get started, a brief disclosure statement. RCA Financial Partners is not a FINRA-registered securities broker-dealer or an investment adviser or a bank. We're not regulated by the financial services authority. We're an educational forum. RCA may be retained or seek to be retained by the subject company. The following discussion is for informational purposes only. None of the information discussed today constitutes a recommendation to enter in any securities transactions. It's very important to do your own analysis before making any investment. You should take independent financial advice from a professional in connection with or independently research and verify any information that you wish to rely upon, whether for the purpose of making an investment decision or otherwise. DarioHealth's discussion may include predictions, estimates or other information that might be considered forward-looking. All these forward-looking statements represent Dario's current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You're cautioned not to place undue reliance on these forward-looking statements. Please keep in mind, DarioHealth is not obligated to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. I'm Wayne Andrews with RCA Financial Partners, and we are a boutique adviser to small public and pre-IPO data resource innovators at the critical inflection point where proven technology requires prudent financing. New data resources of innovators appear fairly regularly with brilliant concepts ready to scale into massive total addressable markets. We advise IoT, trend-setting companies delivering measurable results to early adopters. We help our clients connect with well-informed investors. We believe there's an opportunity in subscription-based platforms that generate recurring revenue streams by connecting assets to the cloud and utilizing algorithms and AI to generate quantifiable impact to the bottom line. Our clients share the investable characteristics of timing. In other words, proven acceptance by first adopters and early in the growth phase. It's scalable. They have large total addressable markets and they're capital efficient. Third, they have the resources in place, being recurring revenue, patents, sales force. And finally, and probably most importantly, experienced management teams, built companies and delivered results. Dario demonstrates all these characteristics. The company uses technology and the science of behavior to create durable improvements in chronic disease. Having built the business direct-to-consumer with over 50,000 users paying out of their own pockets, Dario is at a critical inflection point where newly fostered relationships with employers, health plans and insurance providers increases the company's ability to reach a massive underserved market of over 100 million people with some form of chronic condition in the U.S. alone. Less than 1% of the market in the U.S., that's still hard to believe, is served by any digital therapeutics. The 800-pound gorilla in the industry has changed the mindset of health care and insurance providers, paving the way for Dario's improved platform. Adoption of digital therapeutics, particularly remote patient monitoring, has accelerated during the current pandemic. Dario's technology platform is lower cost, has higher user satisfaction, has better clinically proven results and is a more open platform. So let me tell you a little bit about the CEO of DarioHealth, Erez Raphael. After 6 years of software development for the Israeli Air Force, Erez went to business school and studied finance and economics. Next, he managed customer relations and billing systems software development teams for the largest telecom service providers. He helped Amdocs grow to over $9 billion market cap. Seeing an opportunity to make an impact at an early stage company, Erez joined DarioHealth. After less than a year on the job, an upheaval and senior management resulted in Erez being appointed CEO by the Board. While well-versed in software platform development, his experience as the CEO was yet to come. Over the last 6 years, Erez proved he had the vision and perseverance to reshape and tailor the company's medical device platform. He built a direct-to-consumer business that allowed them to perform the necessary clinical trials and transform the company's business model to a subscription-based service. Welcome, Erez. Thanks for joining us today.

Could you please fill us in a little bit on what you needed to accomplish to get the company to the position it's in today?

Thank you, Wayne. Yes. So when we started, we had to take a whole concept and to turn it into reality. Our belief was that eventually, we need to create the right combination between the hardware, the medical device to a very smart application powered by very smart analytics and also integrate a level of service that can be provided on top of the platform. Our belief from day 1 was that only by integrating all the pieces together and that the company will own all the pieces of technology and service together that's the only way that we can get the best user experience for our users. And the best user experience in our thought process was a mask in order to create a better engagement and a better clinical outcome to be supported by data that we are collecting by the platform. So the fact that we were owning the medical device, the application, the analytics and the service helped us collect the data, and to iterate in the last 4 years in a way that more data was injected into our software team that improved the overall application and the analytics. And over time, we have learned how users are behaving. What is their routines? And how it can impact their lives in a way that we can create a behavioral change. And this is where we are today. We have a clear -- a platform by multiple regulation bodies. Our mindset was global from the first time we started in Europe, with Australia, Canada and ended up in the United States. And today, the U.S. market is our biggest market with more than 90% of the revenue in the users coming from the U.S. market.

So you've made a huge improvement with your platform. You've demonstrated it works. What's next? How do you scale the number of users?

Yes. So the idea of going direct-to-consumer was in order to get as much users and data, I suppose. And our thought process was that if we're going to put the application, the device and the platform into the hands of the users, we're going to get a real feedback. Because those that are paying out-of-pocket and those that are very selective will give us the right feedback. And by getting the right feedback and the data, we'll be able to develop one of the best applications and platform in the world. But in order to scale up and in order to reduce the cost per acquisition, direct-to-consumer is not the way to move forward. And at that stage, we made a decision like 9 months ago that we are transforming the business into B2B2C, which means selling to self-insured employers, brokers and also payers in order to scale up our ability to grow the business and to get access to big pools of users where we can make much bigger impact on the industry. And we felt that the asset that we developed over the years, it's not just the technology and it's not just the regulation factors that we had to grow through the FDA and other places in the world, it was also the huge asset of data that we collected and the multiple clinical studies and clinical papers that we showed that our platform is not just performing for a few users, it's performing for tens of thousands of users. And in fact, the biggest clinical paper that we did was for almost 40,000 users. So we were showing that we are performing, we are performing on scale.

Well, that's -- so you've made progress on the B2B already. It might be a good time at this point to introduce Richard Anderson. Richard is the former President and COO of Catasys. Rick built and led the team that was successful in implementing full performance-based pricing with health plans in the U.S. So Rick, tell us a little bit what you saw in Dario? And why you joined the company?

Thanks, Wayne. So prior to joining Dario in January, as you said, I was the co-founder of health care services company that focused on the intersection of behavioral health and chronic disease. In that company, we used artificial intelligence to identify who and how to intervene to improve member health and lower the cost to the payers. The results allowed us to contract with many of the national and several regional health plans built a company from $0 million to about $325 million market cap prior to me leaving. And that experience really taught me a lot about selling to and working with payers, how critical member engagement is to the overall process on achieving those outcomes and the need to customize really to the individual participant or member needs in order to achieve those outcomes as well. So really working with the payers led me to an increasing interest in digital health care as a way to extend access and really personalize that member experience for the members. But in order to build a successful digital health company, you have to have 4 things. One, you have to have a good technology. At its core, Dario is a software company and has developed a phenomenal application on top of an open architecture AI platform that can provide personalized journeys at scale. Two, you have to have good outcomes data, and Erez just mentioned some of this. Dario currently has 13 clinical studies, demonstrating the effectiveness of the solution in more than 42,000 users in some cases, and outcomes spanning more than 2 years. So very robust outcomes that people can see and proven over and over again in multiple different studies. And you have to have the ability to engage members, as I said. Dario has a net promoter score of 77, which is best-in-class. A 4.9 out of 5 stars on the Apple App store, over 11,000 reviews. But really most importantly, you have more than 50,000 people that are paying for this solution every month out of their own pocket. And I don't know what its engagement like people paying every month for a solution. So really, the last thing, the fourth thing you have to have is an understanding of the health care industry. This was the only area that I saw when I looked at Dario that it needed to supplement. And I knew that my experience and the team that I could build and bring to the company could fill this need and truly put Dario on an accelerated path to its success. So that was really my decision-making process.

Rick, so you saw 3 of the 4 keys to success and had the confidence that you could bring the fourth. That's putting your money where your mouth is. I hope you have a performance-based compensation with significant equity component. So what's the next step in the B2B development strategy? Where do you go from here?

So we're building our B2B offering off of the B2B experience, the data and the existing products. This gives us a huge head start because we already have the experience with this population as Erez mentioned, several years of data to feed the personalization engine and understand what really works for these members. With this, we're pursuing 4 market segments. The first is retail. We have an opportunity to bring the SaaS model to consumers through known retail brands. To date, most of our activity has been in the online portion of these retailers, but we are currently working on 2 very large deals with retailers that would expand our in-store and strategic footprint. And we anticipate that these efforts will expand our revenue in the second half of 2020. Secondly, we're focusing on the remote patient monitoring solutions to large provider groups and integrated health plans. This gives us the ability to leverage the core Dario technology in a new market. And I think it really demonstrates the power of the underlying platform because we were able to adapt the technology and sell to a new market in a matter of months, rather than years. So that speaks to the flexibility and the underlying power of the platform. Importantly, with the new CMS codes for Medicare, we can sell our RPM solution as a top line opportunity providers. Providers can make up to an additional $1,500 per patient per year by using remote patient monitoring, and they can outsource most of that solution. We recently announced our first 2 agreements in this space, and we have many more in the works, which we expect to contribute significantly to revenue in the second half of 2020. And one of the silver linings, I suppose, of the current COVID situation has accelerated the interest in RPM as it reduces the risk to both patients and providers. So we've seen an accelerated level of interest in that. Third and one of our most exciting segments for us is employers. We're selling directly to employers and through partners like Vitality. Vitality has a number of employers and approximately 700,000 employees already on their platform. We are now actively selling in partnership with Vitality, and we expect great things out of that relationship. We've seen some early traction, both in our direct efforts and through Vitality. And I'm pleased that we already have multiple employers in contract negotiation and in late-stage RFPs. And then lastly, health plans. Over the last few months, we've added people to the team, including Omar Manejwala that have experienced selling to health plans. We've recently started actually selling to health plans, and we are very pleased with the results that we're getting so far. As a matter of fact, it's been much greater than I would have expected, and we substantially increased our pipeline in a short period of time and have a large health plan in late-stage contract negotiations right now. Based on where we are today, I would expect that both employers and health plans would both contribute meaningful revenue in late 2020, significantly ahead of what we would expect, given the sales cycles for these markets.

So Rick, if you have a normal 12 to 24 month sales cycle, what do you think is the reason that you've had such success with early traction with these providers today? What do you think the cause for that is? What do you think they're seeing in your platform?

I think part of it is they're seeing exactly the things that I said earlier that are required to be a successful digital health company. I think they're seeing Dario's technology as an impressive application, which leverages the AI for hyper-personalization of the members. They're seeing impressive outcomes data that demonstrate that members do, in fact, get better. 13 studies provides a lot of evidence that it works. And that is tied then to the economic outcomes that they're receiving as well, which is a key factor in their decision-making process. And we have best-in-class member satisfaction and engagement. 80% of the people are staying on the platform at a year. And as I mentioned, an NPS of 77, and 50,000 users that are paying out of their pocket. That's really impressive to health plans when they're looking at solutions. This isn't something that's brand new, it's been proven that consumers actually like this solution and will pay for it. And then really competitive pricing. We're often 1/3 to 60% less than our closest competitors. And that reduced pricing, along with those outcomes, really gives you an overall ROI. So in summary, I think our customers are seeing that we are offering twice the product at half the price.

Well, so what I'm hearing you say is that you have a new way to market subscription plans direct-to-consumers with the licensing in the box now, right? You have a new remote patient monitoring application with 2 contracts signed and meaningful progress and negotiations with health plans and insurers. So it sounds like you're off to a great start in just 7 months. So obviously, you probably had to build your team, your B2B team there. And it might be time to let me introduce Dr. Omar Manejwala who, prior to joining DarioHealth was the Chief Medical Officer of Catasys with you. He brings decades of experience working with patients to achieve behavior changes that result in health improvement. So Omar, please tell us a little bit about how Dario's platform promotes behavior change?

Sure. Thanks, Wayne. Yes, Dario was highly appealing to me for all the reasons mentioned, which is exactly why I joined Rick, Erez and the team. All the ingredients were in place for rapid commercial adoption. It's really exciting. So Dario exists for one reason, which is to drive durable behavior change in chronic disease, durable behavior change in chronic disease. And chronic diseases really drive the majority of morbidity, mortality and cost. And they do that both directly through medical costs, but also indirectly through absenteeism, presenteeism and disability. In fact, $3 out of every $4 in health care is spent on chronic disease. And that's a conservative estimate. And it turns out that with all of that, behavior -- behaviors play an outsized role in driving the outcomes in chronic disease more than genetics, more than any other factor. For example, genetics will double your risk of getting diabetes, right? So behaviors will increase your risk of diabetes 6-fold. And that's -- those sorts of numbers are true across chronic diseases. And that's why Dario has really focused on fast and durable behavior change in chronic disease. So we started with the behaviors that drive diabetes, but we've moved on to other metabolic conditions as well. And that results in changed behavior and improved trajectories in chronic disease. So with enough personalization and support, the majority of behavior change can occur driving outcomes in chronic disease, but the problem ends up being that the support you need is not available either in traditional health care or outside the health care system. It's either too costly or not accessible to most people. And so that means that behavior change in chronic disease can't be both scaled and personalized. You can have one or the other, but you can't have both. But that's where Dario comes in, personalization, as Rick mentioned, at scale. So Dario leverages analytics, digital applications, devices and coaching to drive personalized care journeys at scale. And that allows for us to deploy a complete remote care solution that nudges people that anticipates what folks may want, that guides people and responds flexibly at scale. The platform is open. It's user coach and device agnostic. And so by leveraging the insights, as Erez has mentioned, from tens of thousands of users, we can responsibly guide these care journeys in ways that alter chronic disease outcomes. By making behavior change, the path of least resistance, we can improve health and reduce costs in ways that are really highly appealing to health plans, to employers, to providers and to the users themselves, the people that are using the platform.