DarioHealth Corp. (DRIO) Earnings Call Transcript & Summary

Good morning. Thank you for joining us here for our next company presentation here and pleased to have with us DarioHealth, and presenting the company here is Erez Raphael, CEO; and Rick Anderson, President and General Manager of North America. Gentlemen, thanks for joining us today.

Thanks for having us.

Great. So we're going to do a fireside chat format here. Obviously, there's -- if anyone has questions, please use the webcast box to ask, and I'll try to get those questions in along the way or you could e-mail me at [email protected].

So jumping right into it, Erez, maybe kind of give us an overview of DarioHealth, including some of the various conditions the company addresses, and let people know more about company here.

Yes, absolutely. So DarioHealth is a digital health and more specifically digital therapeutics company. We are part of the Digital Therapeutics Alliance. And we built a platform over the last 6 years -- or 7 years, where we are managing -- we started with diabetes. We expanded into hypertension. And recently, we did an acquisition in the musculoskeletal space, so we are also supporting MSK. And we created a very compelling combination between medical device to a very strong software capabilities as well as coaching that we are integrating together. And today, we are managing on our metabolic disease platform, hence, diabetes and hypertension, more than 70,000 users. And on the MSK, it's another 90,000 users that are being managed in the platform. We started as a direct-to-consumer company with a very strong capabilities in terms of user experience. And we are, in the last, I would say, 5 quarters, we started a very big transformation into business-to-business to consumer.

I see. And then maybe talk about sort of the addressable market that you think that you're approaching here. How do you size the market opportunity, both here domestically and maybe internationally?

Yes, absolutely. So our main market is the U.S. market. If we are looking on total number of people with diabetes, you have like around 34 million people in the states, and more than 100 million under hypertension and another 126 million that are suffering real from kind of MSK issues. For the metabolic part, if you are looking on the overall addressable market, it's in the ranges of $70 billion. And on the MSK, it's another $90 billion. And the way that we are looking into the market is that when you look into the digitalization of the space, you see that less than 1.5% of the market is penetrated at the moment. So definitely, we are at the very beginning of a huge, huge transformation of getting into -- transforming the market into fully digital, and we are very proud to be one of the first companies that are operating in this space without advantages, supporting multi-chronic conditions and expanding, and it's like a space that is just growing. Obviously, post this COVID pandemic, the market is moving and transforming faster, and we are looking to be a big player in this space.

So you mentioned earlier that you started as a direct-to-consumer business, and that's how sort of you really built it out initially. What led the decision to pivot towards the B2B market here? Maybe you can start there.

Yes, absolutely. So the direct-to-consumer started from a philosophy, the philosophy that we are having in mind is that the health care market is going to be extremely user-centric. It's going to be consumer-centric and user-centric. And if health care won't be able to scale up the treatment for people with chronic condition, you need to involve the user, that the best way to evolve the user is to create products that have an extremely good user experience. And the way to do that is to get product into the hands of the users and to get them satisfied. The old days of the traditional health care industry that are going into the payer and getting the payer to pay for something and then forcing a solution on the consumer, this is something that we believe, in few years from now, will not be available anymore. So we made the decision to go consumer first, and we were utilizing a lot of data and experience that we collected from the users in order to build the best user experience. And this kind of approach paid off big time because in a few years in the market, we collected billions of data points that we leverage in order to improve the experience that we have for our users. So if you're going to look into few parameters, for example, how users are looking at us and the app store, so you're going to see that we have more than 50,000 reviews with 4.9 stars. On Amazon, we are at 4.4 stars. Net Promoter Score is 77. So it's clearly -- it was clearly a good strategy, go to direct-to-consumer first, getting the users to be happy and to help us collect data in order to improve the solution and then to create one of the best products in the market. This is a good strategy that took us to a place where we have a very good experience. But when we wanted to scale up and to start to get a significant amount of users, this is where we had to approach the payers, the health plans, the self-insured employer market, Medicare in order to get someone to pay for a very good solution that we have, and this is the reason for the transformation.

So you mentioned though before your thought is that in -- at some time in the future that people -- that the payers -- people will be going direct. But now we're deciding that we do need to go to the payers. So what kind of -- you're saying that's kind of a scaling issue at this point. What is it about the payers that makes it -- brings them to the table here?

So I'll take that one. I think there's a few things here, and I really -- if I focus on why Dario versus others, I think there's a few things. What Erez said earlier about the fact that the company went direct-to-consumer first and that paying off in terms of the data that's available, that's just part of it. The reality is, with the number of users now north of 150,000 on the platform that are paying for the service, that just screens engagement. Nobody pays for something that they could otherwise get for, for free. And so one of the things that the payers and employers have both learned over the last several years is the fact that a solution, no matter how good it is or how good it looks, is not worth anything if you can't get people to engage in it. So we sold the hardest problem first, how do you get people to engage and how do you get them to change their behavior. So I think that is a big differentiator in terms of what happens. Also able to generate a lot of data, both from a clinical perspective as well as from a user experience. So the 4.9 out of 5 stars in the Apple App Store; NPS is 77, best in class. But also there's now north of 20 studies on what we're doing and the -- if we focus for a moment on the HbA1c, there's 2 studies that show about a 1.4% reduction in estimated HbA1c, which is about twice -- not quite but about twice what our largest competitor is showing. And the reason that's important is there's a lot of studies that have been published that show that the -- for every percent of reduction in HbA1c, there's a cost savings associated with that. So that drives a higher cost savings. So you've got high engagement, better clinical outcomes, better user satisfaction. And then the way that we've structured how we go to market in terms of the fact we don't stack fees. So we charge one base fee for access to the platform and then an additional monthly charge for additional devices versus adding each condition, diabetes, hypertension, et cetera, and that results in us being 30% to 60% less expensive right off the bat. But the other thing that's key is just that we are only billing for engage members, and that's a real differentiator versus anybody else in the market who are basically billing for people, either in big blocks of time or once they engage unless they say, "I don't want to participate anymore," and people don't do that. So you're only paying for people, and that's in response to what we're hearing in the market a lot, which is the Livongos out there, for example, that we feel like we're paying a lot for them. We feel like we're paying for people that are not engaged. So that has played really well in the market, and I think that has come to play, especially in the employer market where you can already see the evidence of that, where we've gone head-to-head, become finalists in RFP processes with Omada and Livongo and beat them. And when asked why, these are some of the key factors that are there. I think a couple of other things that are going to be important or are important is just that we're very transparent in terms of, as a company, we'll share data, we'll let people coach on our platform, we'll integrate with other companies, whereas all of our competitors are effectively siloed. They will not do that. And in this environment where there's a growing desire to have more integration, less vendors, but still access the expertise of point solutions, like what Dario has, this stands out really for people. And on the health plan side, it's a big differentiator because we can actually integrate the data with what they're doing on their side, which is pretty much one of the things they require for their fully insured business, and our competitors are unwilling to do that. And you add all that with the next-generation personalization engine that we're building, and I think that, that's going to just drive the results further.

Okay. Can you talk a little bit more about that, though? Particularly, how is it that you are delivering, call it, a 1.4% reduction, almost twice sort of your largest competitor here? What is different about that? And then secondly, you talk about the pricing model is different in terms of your tracking engagement. Like so how often are you tracking? Like when do you decide someone is not engaged such that the client doesn't have to pay for that number anymore? And how does that compare maybe to -- well, let's just start there, those 2. Sorry.

One question, 57 parts. Somebody will remember that maybe quick. The -- so in terms of why do we think that the results are better, I think it boils back down to the engagement question, in the fact that Dario really was built to change member behavior and engage members versus change buyer behavior. So we -- like I said, we solved the hardest problem first, which was how do you engage with those members. Why is the engagement higher? We believe the engagement is higher because of the fact that we're developing a personalized journey for those members that is not based on just a static few member profiles upfront, i.e., how do you match somebody to somebody who looks the same or some group. And if you have 5 or 6 of those, it delivers some level of personalization. If you give nudges over time and those messages are personalized, that gives some level of personalization. Let's call that first-generation personalization. But one of the things that you realize is that interpersonal differences are actually a large part of how you engage people, meaning people change over time, and their disease changes over time. So a type 2 diabetic, for example, that was diagnosed last week is a lot different than one that's been living with the disease for 20 years versus in terms of what happens day in and day out. What I'm willing to do today, I might not be willing to do tomorrow and vice versa. So if you change the program and you customize it and personalize it based on tone, tenor, method of communication, frequency of communication and message, that tends to get people to see value in it more readily. So if I'm getting value in something, I stay engaged in it. If I stay engaged it, I'm going to give better clinical results. And those clinical results then translate obviously into the studies that we've seen. So that's why we think that we're getting the better results as it relates to that. In terms of how do we measure that, well, specifically, what we did was we created, depends on the condition, but, let's call it, 15 to 17 activities that are things that show that a member is actually doing something with the platform, whether that be measuring, talking to the coach, adjusting their goals, consuming content and reacting to that content, things of that nature. So we evaluate that in 60-day blocks and understand are they engaging in those kinds of activities. If they're no longer engaging in those kinds of activities, we don't bill for them.

Okay. That's helpful. Maybe talk about then sort of as you've made this move into B2B, talk about the pipeline in terms of health plans. I think you've communicated in the past your expectations to sign some health plans soon. Maybe just give us an update on where you kind of stand there.

Yes. So we're approaching the market on the B2B side through 3 market segments. One is self-insured employers. Two is fully insured health plan business. That's where they're at risk for the members themselves. And then also through what we call remote patient monitoring, which is focused on large providers and integrated health systems. As we've talked about in the past, we've grown the pipeline. It currently sits -- I think the last number we disclosed was it's currently north of $500 million, and that is composed -- there's a significant amount of health plan in that as well as RPM, and our employer numbers are starting to grow again this quarter because we are now full swing into the RFP season for employer sales that are on the January to December cycle. So from a health plan perspective, I've been very pleased with the level of traction that we've gotten there. Usually, sales cycles there are 18 months to 24 months. We really only started selling the health plans in the middle of last year as we got the product in place to be able to do so. We have a handful of contracts that are in the vendor management and contract negotiation phase, and we do expect to be able to generate revenue from some of those contracts in the second half of 2021.

Would that be for 2022 start? Or would that be...

No, that would be revenue in 2021. So employers tend to function on cycles. So their -- the vast majority are on a January to December cycle. Second most popular cycle is a July 1 to June 30 cycle, so there's opportunities there. And then on top of that, there's what we call off-cycle sales, which we have several of working as well, which means they sort of happen when they happen in terms of being launched into the population. They're not tied to a benefit cycle. Health plans, on the other hand, are everything is off-cycle, so to speak, because they launch when they're ready to launch. And we anticipate we'll be seeing those contracts in the first half of this year and generating revenue in the second half of this year with something like a 60-day implementation.

Can you remind us sort of what you provided to the market in terms of revenue expectations for the end of this year? I know you guys haven't reported fourth quarter yet, but just remind people what sort of metrics you've given the market.

Yes. So next week on Tuesday, we're going to report Q4. Actually, we already disclosed the number when we announced on the fundraising and the acquisition deal that we just had a few weeks ago. At the moment, the company is not providing guidance, but we can talk about some analysts that are covering the company from different banks. They are providing some guidance that is in between $23 million to $25 million. This is what the analysts are expecting. Obviously, if we are looking on the overall transformation that we did, in 2020, we put the foundation, we were growing the team from like 6 employees that are doing sales and marketing into 30, and we did a lot of activities in order to put the foundation. As as a followup to what Rick just said, we found -- we signed a few agreements, and we won a few RFIs over the competition. So we do expect that the transformation that we started will start to bear fruits in 2021. And therefore, we do see a significant growth in our sales that will happen in 2021. This is what we can say at the moment. And moving forward, we'll share with the market more and more metrics that are related to our ability to implement these accounts and also the growth of the pipeline that will help analysts and investors to try to project what's going to be in the revenues. At that point, it's too early to provide a formal guidance.

That's fair. Maybe talking about the capital structure. You're talking about the fundraising. Can you remind people like sort of what the cap structure looks like right now in terms of cash on hand? What was the cash burn maybe 9 months -- through 9 months of last year? Or just give -- or frame it for people, and then I would love to talk about sort of M&A after that.

Yes, absolutely. So we did complete the fundraising of like $70 million by the end of January, that we did it with Cowen and with Stifel. We got a very solid investors, I mean, investors like Nantahala Partners, Perceptive, [ Maven ], Farallon and others in a very good deal. It was at market. No warrants, no discount. It was a pipe. In conjunction with this fundraise, we also acquired the Upright Technologies on the MSK side. The acquisition was done for $31 million as an equity only kind of deal. We cleaned the $3 million debt that the company had with SVB. So at the moment, we have a clean cap table and no debt. And if you're looking into how much money we burned in Q3, it was $4.4 million. We do anticipate that with the integration with Upright, the company is going to burn more money. But at the moment, we have more than $90 million of cash as of January 26, which is the day that we announced the deal, which is something that gives us a run rate into 2023, at least. So we feel very confident with our cash position and also with the structure of the cap table. We have $50 million common shares, and we have another around $4 million pre-funded warrants and repurchase on our cap table.

So that's really helpful. So Upright was a very interesting acquisition, right, helps you get into MSK, and that's an area, I think; a lot of people have been talking about opportunities for digital. What other areas are you looking at? What are you seeing interest from clients and demand for that you don't necessarily provide today that would make for good sort of ancillary moves?

Yes, absolutely. So when we are looking out there, we're seeing a greater demand for everything that's related to behavioral health. So in between the metabolic diseases that we are already supporting diabetes and hypertension, MSK is ranked at the top 5, I would say. The other one is behavioral health. We do provide some kind of support in terms of behavioral health, but we will have to figure out how we're going to expand our ability to support in a more specific way, everything that related to this chronic condition. So we expect expansion to that area. And as we move forward, the overall concept of providing one integrated personalized kind of treatment is something that is guiding us. And we are looking to get into additional conditions already this year. So I think that -- that's something that we will pursue in a very active way.

You're not alone in trying to have this sort of multiple condition kind of platform. It seems like a strategy that a lot of companies are pursuing, particularly on the digital side. Is that because employers or the purchasers of this want a single suite to deal with, they only want to deal with one vendor? Or is it really more driven from users, users because not necessarily, even though there's a lot of crossover in terms of comorbidities, but it's not like 100% overlap? So from the user experience, is it that they are looking for a single site to help them manage all their conditions? And is the experience nuance enough to allow it, so that if I don't necessarily suffer from all of them, I don't feel like I'm having a cluttered kind of experience with that?

Yes. So the approach that we're taking, there's a few things in there that are happening on both sides of that equation, as you mentioned. So users definitely want to have a consistent approach if they're utilizing multiple applications. But we're all used to managing different things in different applications. So the approach that we're taking is really to put best-in-class point solutions in, and I'll come back to why we think that's important in a minute, but to have a consistent user experience across this. So not everything will be in the same application to reduce that clutter that you just made reference to, but the ease of switching back and forth between them and having a continuous user experience is part of that, that looks consistent, feels consistent, et cetera, is part of the way that we're putting the product together. So we don't anticipate one single application, but sort of an integrated experience, if you will. On the buyer side, yes, there definitely is sort of competing interest in the buyer. On one hand, they want to have less vendors to manage because, obviously, that makes their life easier. The flip side of that, though, is just they want the expertise at the point solution. So when you talk to the folks that are selling broad-based, what I would call kind of peanut butter solutions, they talk about the fact that they have a hard time competing with the point solutions. And when you talk about an individual point solution, they're competing for attention with buyers, with lots of different things. So would it be better to be part of a group, so to speak. So the approach that we've taken is twofold with that. One is we're looking to integrate the front end and the back end for the customer, so they have less people to deal with as it relates to our individual point solutions, but also we will integrate with other parties. So if you have a hypertension solution that your solution that you love, even though we have a hypertension solution, we'll integrate with that. And then that gives that sort of unified experience, but still delivers a point solution experience for the members that is not available in sort of this broad-based solution. So we think it's kind of the sweet spot in between the 2, but that's the way that we're approaching it.

That's helpful. Maybe getting back, you talked about -- you just mentioned it briefly. And I think, Erez, you mentioned as well. There's so many digital apps out there now for multiple conditions. Is this a period where you expect to see consolidation in the market yet? Or is it right now still lots of new entrants coming to market because the opportunity is so huge?

I'll give you my thoughts and then Erez can add to that. I think that you are still going to see a significant amount of white spaces out there. Most of the buyers in this space so far have been self-insured employers, not fully insured health plans, not the -- on the provider side, really, in terms of -- and we haven't really talked about it, but the remote patient monitoring piece, which is slightly different. So you're going to see lots of additional customers coming into the market because the market has really started to tip from, is this something we should be actually doing digital health to, who should we be doing it with, which conditions should we be trying to deal with. Obviously, there are some that are more established than others in terms of conditions that have been justified as it relates to that. So we think that there will continue to be growth, but we also think that you are going to see some level of consolidation, all what I just mentioned, which is point solution -- individual point solutions competing in a market with some very large competitors and broader product offerings. We'll either need to a partner or there's going to be consolidation around that.

And you were running out of time here. So I -- you just mentioned -- I want to make sure we touch on it. The remote patient monitoring business because that's a little bit unique. I feel like you're kind of looking at a provider market, whereas we haven't seen a lot of these digital health companies really approach, at least not in this kind of chronic care management space yet. Maybe just talk a little bit about that. Particularly, I know you have a device for recording A1c. But obviously, with the rise of CGM, that seems to be the trend towards how measurements will be taken. Just maybe touch on that opportunity in the last couple of minutes and think about the other device integration.

Yes, sure. So just in the interest of time, I will say that, yes, CGM is out there. Our platform is open. We can integrate anything into the platform and have ongoing conversations all the time about different devices that would be useful to integrate for either customer or user purposes. So that's certainly going to be on the pathway on the journey. We will be adding that when it's appropriate and there's a demand in order to be able to do that. On the RPM side, not only do we have a blood glucose monitor, but we also have a blood pressure monitor. Those are 2 very popular RPM approaches, all of which are FDA approved, which is important. So in RPM space, basically, CMS approved certain codes for Medicare to digitally monitor and coach members, and there's a cluster of these codes that providers can charge. And it's sort of sorting itself out sort of, if you will, it's -- so to speak, over last year and going into this year, and we think we're very well positioned. Again, going back at to the flexible open platform, we have a provider interface that people can just use in order to access the information. They can do the coaching. We can do the coaching on an outsource basis for them. We're seeing demand for a lot of times like in between, "Hey, we want to do some of the coaching until we hit our capacity, and we want you to do it." So we're uniquely positioned to do that. And then I think that the other thing that really drives it is you have to have 16 measures in a month in order to be able to billed for the digital monitoring. And given the level of engagement, we're well positioned against that. So getting a lot of traction and as it relates to that, we've seen some headwinds, as it relates to closing out contracts in the last few months because of the rollout of the vaccines. So a lot of the same entities, they have a strong interest in doing this and are also distracted with that. We're seeing that distraction come off, so we're anticipating that we will see nice growth of that in 2021 and then beyond. And I think strategically, it makes sense to be in the provider market as well with the brand and having people getting used to it, just making it easy for the provider side as well as for member side.

Great. Well, I think we're going to end it here because I think we're right on time. And -- but I appreciate both of you for being here, and thanks for joining us today. And thank you, everyone, for tuning in, and please stay around for your next presentation. Thanks.

Thanks, Charles.

Thanks, Charles.