DRIO: Chronic Care Through AI App

By John Vandermosten, CFA



Initiating Coverage

We are initiating coverage of DarioHealth, Corp. (NASDAQ:DRIO) with a current valuation of $10.50 per share. This present value is based on our estimates for a successful expansion of the business-to-business-to-consumer (B2B2C) initiative and penetration into health plans, provider networks and employer sponsored care. Dario’s primary offering is a system to improve diabetes. It consists of a blood glucose meter (BGM), consumables and a smartphone application that leverages an artificial intelligence (AI) algorithm to encourage positive behavior change guided by data. The product is primarily intended for individuals with diabetes or pre-diabetes, although it can be used by anyone that wants to improve their health behaviors related to blood sugar. Dario recently added hypertension along with a blood pressure monitoring system to its plan and is in the process of expanding the product offering to include management of other chronic conditions that can be changed through behavior, such as obesity.

Dario’s foray into application-based diabetes management is part of a larger trend in digital therapeutics (DTx). The ubiquity of smartphones and wireless connectivity has provided the necessary infrastructure to monitor heath and continuously guide a subscriber. In the past, the primary methods to treat chronic disease were medication, physical interventions and behavioral therapy but the management of chronic conditions is a continuous endeavor whereas physician visits are periodic. The availability of smartphones provides an alternative that can help patients adhere to medication requirements and enact durable behavioral change. Digital therapeutics can also gather real- time diagnostic data and provide instant feedback using artificial intelligence-based best practices. Dario has employed its user data to demonstrate clinical improvements for users on its platform. Proof of efficacy is an important asset to present to healthcare providers as they allocate their resources.

According to the National Health Council, chronic diseases affect 40% of the population, which is about 131 million Americans. The Center for Disease Control finds that six in 10 adults have a chronic disease and four in 10 have two or more chronic diseases. These patients are responsible for the majority of the United States $3.5 trillion inannual health care costs. The chronic conditions include cardiovascular disease, diabetes, chronic kidney disease and many others that arise from tobacco use, poor nutrition, lack of exercise and excessive alcohol intake. One of the most prevalent chronic diseases, diabetes, now affects over 460 million individuals around the world and is projected to rise to 700 million by 2045. These human and financial impact clarify the need for proven approaches that can address both health and cost.

Dario has an international presence; however, the majority of its revenues are generated in the United States. The company serves 50,000 active users on its platform which represent a loyal customer base that rates the product highly. The majority of these individuals have been added through the consumer initiative where acquisition costs are high and revenue per user is low. To improve these critical financial metrics, management will shift its primary marketing focus towards the provider, health plan and employer markets. These prospects serve large populations, require evidence of efficacy and demand a return on their investment. The addition of several new executives with experience and relationships in the healthcare provider market is expected to catalyze the acquisition of new clientsthat should drive up both number of subscribers and revenue per user at a lower cost.

The company is transforming itself from a retail-only DTx company, generating the majority of its revenues from product sales, to a software as a service (SaaS) and platform as a service (PaaS) enterprise with a diversified revenue base.

Reasons to Own:

‣ AI-driven behavioral change platform that is personalized and scalable Immense untapped market in Digital Therapeutics

‣ High and expanding gross margins

‣ Clinically-proven patient outcomes

‣ DTx market size forecast of almost $10 billion by 2026

‣ Existing and growing partnerships with health plans, employers, providers and retailers Membership-based SaaS with recurring revenue

‣ Opportunity to address multiple chronic conditions in diabetes, hypertension & obesity Cash position of $15.8 million with no debt on balance sheet

‣ Leadership and management team with experience in healthcare and technology

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