DarioHealth Corp. Q3 FY2023 Earnings Call

Greetings, and welcome to the DarioHealth Third Quarter 2023 Results Conference Call. As a reminder, this conference is being recorded. Thank you. It is now my pleasure to introduce your host, Glenn Garmont. Please go ahead.

Thank you, operator, and good morning, everybody. Thank you for joining us today for a discussion of DarioHealth's Third Quarter 2023 Financial Results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Rick Anderson, President. After the prepared remarks, we'll open the call for Q&A. An audio recording and webcast replay for today's call will also be available online as detailed in the press release invite for this call. For the benefit of those who may be listening to the replay or archived webcast, this call is being held on November 2, 2023. This morning, we issued a press release announcing our financial results for the third quarter 2023. A copy of the release can be found on the Investor Relations page of DarioHealth's website. Actual events or results may differ materially from those projected as a result of changing market trends, reduced demand or the competitive nature of DarioHealth's industry. Such forward-looking statements and their implications may involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. The forward-looking statements discussed on this call are subject to other risks and uncertainties including those discussed in the Risk Factors section and elsewhere in the company's third quarter 2023 quarterly report on Form 10-Q. Additional information concerning factors that could cause results to differ materially from our forward-looking statements are described in greater detail in the company's press release issued this morning and in the company's other filings with the SEC. In addition, certain non-GAAP financial measures may be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the company's current performance. Management believes the presentation of these non-GAAP financial measures is useful for investors' understanding and assessment of the company's ongoing core operations and prospects for the future. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in this morning's press release. With that, I'd like to introduce Erez Raphael, Chief Executive Officer of DarioHealth. Erez?

Thank you, Glenn, and thanks to all of you for joining our call this morning. Q3 financial results are a continuation of our multiyear strategy and evolution of our financial profile. We continue to look forward with added conviction in our advancements in the digital health space. As we communicated in our recent Investor Day, our revenue streams can be viewed as threefold. First is our historical direct-to-consumer or B2C business. Second is the recurring revenue from health plans and employers or commercial B2B2C and the third revenue stream, we call Commercial Strategics, which comes from partners like Sanofi and is milestone-driven. In the third quarter, our B2C business continued to pace to achieve the expected $8 million to $9 million in yearly revenue while remaining cash neutral and slightly positive. We expect this trend to continue into 2024. On the commercial strategic side, commercial and strategic revenue remains on track for an annual run rate of approximately $6.3 million a year. The current quarter resulted only in $200,000 recorded in revenues, which negatively affected our revenue compared to the previous quarter and the third quarter of 2022. We want to reiterate that test partnership revenues should be viewed on a yearly basis and not a quarterly basis. The economic value for us on a yearly basis has not changed. We expect our commercial strategic revenue to continue at an annual rate of $6 million to $8 million a year. The fundamentals of our core B2B2C commercial ARR business that comes from recurring revenue from employers and health plans continue to grow. In the third quarter, the revenue of this channel grew by 22.7% compared to the third quarter of 2022 and was up 57% for the 9 months ended compared to the same period in 2022, totaling $3.9 million in 2023 compared with $2.5 million in 2022. Our current total signed contract estimated value is over $60 million a year which will be recognized as ARR in the B2B2C channel as we continue to penetrate newer populations. We believe that our annual revenue growth target was 100% to 178% in the B2B2C business channel can be achieved and we expect to see faster revenue enter when we enter into 2024. To reach this target, we use metrics surrounding historical enrollment rates and other client data. This revenue stream shows adjusted gross margins above 70%, which will continue to drive overall gross margins higher as the B2B2C business channel becomes a larger percentage of our business. Looking forward, the growth of this B2B2C ARR channel should accelerate because of the following three building blocks. First, implementing signed contracts. We estimate that we have $60 million in ARR in contract value. Second is the level of expansion approach, which involves expanding existing clients by either adding new chronic conditions or extending to additional populations. The third is our partnership strategy that gives us potential access for 87 million members, securing just 1% of this population is about $17 million in ARR. So that's a very large potential. I would like to touch base on our strategic relationships, and I'll start with Sanofi. We continue to see significant financial and human resources dedicated to Dario by Sanofi in marketing, the solution, and conducting the same clinical studies. The results from three real-world clinical studies done by Sanofi and a third-party hired by Sanofi were published this year. The study showed impressive results on the clinical side. The most notable improved between 1 to 2.3 points and also from a cost perspective, with an average annual savings of more than $5,000 per member per year for users operating on the Dario platform. This is an impressive result and critical metrics to deliver to payers and partners. On Aetna, the highly anticipated launch of the Dario powered behavioral health platform is on track for January 2024. We have insights into five employers that will enroll on the platform starting in January 2024. We also expanded our relationship with Aetna and Rick will provide more details about it in a few minutes. We believe that the partnership is only getting stronger and the size of the opportunity is larger than what we originally anticipated. Another large opportunity for us is the GLP-1 revolution. We are happy to say that further development we made with Sanofi. We launched the product offering defined and the Dario platform and the solution for users on GLP-1 and other weight-loss drugs. According to published FDA statements, the drug needs to be supported by behavioral change. This includes onboarding and offboarding the drug as well as managing nutrition and exercises while taking it. This is exactly the path to overall management that our solution addresses. Our product is already fundamentally a complement to this new market opportunity. Another potential area that we are exploring within the GLP-1 opportunity is systems for navigating the allocation of the drug to the right patients. Given its price implications to healthcare, we've seen a need for data-driven assistance in ensuring that the drug is prescribed to the right people at the right time. Let's take a deep dive into the rest of the financial results. One important metric is the gross margins. We see our pro forma gross margins of 48.8% for the third quarter of 2023, a slight decrease from 51.5% of the revenue in the second quarter of 2022. Gross margins in the B2B2C channel have remained consistent at around 70%, which is our target rate. Margins will continue to improve towards the 70% level in the longer term as the B2B2C business continues to grow. Looking at the operating expenses and operating loss, we are seeing operating leverage from the infrastructure that we have built and the real economic advantage of the multi-condition approach. Our operating expenses on a non-GAAP basis for the nine months ended September 30, 2023, have gone down to $32.3 million from $39.3 million for the nine months ended September 30, 2022. We expect an additional 16% reduction in our operating expenses in 2024 as we continue to consolidate, automate and scale. Operating loss, excluding stock-based compensation, amortization of acquisition-related expenses, and depreciation for the third quarter of 2023 was approximately $9 million compared to $8.4 million for the third quarter of 2022 and $7.5 million in the second quarter of 2023. For the nine months ended September 2023, our non-GAAP operating losses were $23.8 million compared to approximately $30 million for the nine months ended September 2022. This was due to a decrease in operating expenses. We expect to continue the OpEx reduction, as well as the net loss reduction as our financial profile continues to improve. We expect our non-GAAP operating expenses to decrease by about 10% to 15% during 2024 and our non-GAAP operating loss to decrease between 20% to 30% in 2024. We have a strong cash position of $44 million, which provides us with significant runway into 2025. We believe that we will become cash flow positive at around $80 million in ARR, a goal that we see as very achievable as we continue to improve our financial performance. With that, I want to hand it over to Rick.

As Erez mentioned, in the third quarter, our B2C business continued at pace to achieve $8 million to $9 million in revenue while remaining breakeven to slightly profitable. We continued to see growth in our core business line, recurring revenue from health plans and self-insured employers in the third quarter. Our strategic revenue was lower in the third quarter compared to the third quarter of 2022 and lower than we had originally anticipated for the quarter. The majority of this was due to the timing of the milestones delivered as a result of internal changes at Sanofi. These internal changes do not impact the annual revenue or the overall relationship with Sanofi, as Erez mentioned. As we discussed last quarter, our Aetna Behavioral Health platform has moved to their commercial division, and we are pleased to report that they are on track to have members on the platform with identified customers starting in January of 2024. As a reminder, we earn revenue from this platform on a per-employee-per-month basis for all employees who have access to the platform, which means revenue will commence in January. We expect that the population on the platform will continue to grow over several quarters post-launch as Aetna continues to sell the platform through to their self-insured employer customers. I am also pleased to report that we had a significant win with Aetna in the third quarter as we were selected to replace one of their existing vendors in providing digital cognitive behavioral therapy. This represents a separate win and additional revenue that will commence during the first quarter of 2024. In addition to the significant ARR revenue this will add starting in the first quarter of next year, we also believe this demonstrates the strength of our relationship with Aetna and fuels our belief that we will continue to have opportunities to expand this relationship. We have continued to see growth from both MedOne and the large regional Blues Plan that we recently launched. As previously discussed, we expect to see a growth of members from these two accounts throughout the remainder of 2023 and more significantly into 2024. Additionally, in the third quarter, we expanded the conditions for the regional Blues Plan from hypertension to also now include diabetes, which we expect to launch in the first quarter of 2024. The launch of diabetes, combined with the increased promotion of the program in Q4 and 2024 by the health plan and our partner, Solera, are expected to result in significant growth in this account with approximately 3 million members. Furthermore, MedOne has now made Dario offering part of their standard product for new customers launching in 2024. This should further accelerate the penetration of this account. Combined, these customers will ramp up over the next several quarters, adding to our ARR growth through 2023 and accelerating into 2024. We continue to deliver for our customers. In our recent customer satisfaction study, 96% of our customers were satisfied or very satisfied. This has translated to a steady increase in reference customers, which are important for accelerating growth. Moreover, several of our existing customers are in the process of expanding, including two of our health plans, either in terms of the size of the population with access to Dario or the lines of business. The majority of these expansions will commence in the first quarter of 2024, with the rest expected in the second quarter of 2024. In the third quarter, we saw a slowdown in self-insured employer decision-making due mainly to macroeconomic conditions, resulting in several opportunities shifting to next year. In spite of this, we are pleased to be adding at least 15 self-insured employers and health plans to the platform in the first quarter of 2024, which we anticipate will result in a significant increase in ARR in that quarter. These additions do not include several health plans and employers that we anticipate adding in 2024 through our partnerships, including at least one national health plan. We have seen a strong pipeline and activity through our partnerships, which enabled the easy button contracting, integrating, and implementation for customers. Partnerships will continue to be a significant part of our go-to-market strategy. In summary, we will continue to see growth in the key B2B health plan and self-insured employer business in the fourth quarter and substantial growth in our core business in 2024. We have created a growing base of B2B2C health plan and self-insured employer revenue that will carry into 2024 with strong retention. MedOne and the large regional Blues Plan will continue to increase revenue in 2024 as we continue to onboard those customers. Importantly, our partners are increasing the promotion of these adjacent MedOne to their members. In the case of MedOne, Dario is becoming part of their standard offering rather than an opt-in. Several of our customers are expanding, including multiple health plan customers by adding additional populations, conditions, or lines of business which will contribute to revenue in the first and second quarters of 2024. We anticipate adding at least 15 additional employer and health plan customers on the platform in the first quarter of 2024. The Aetna platform will launch in the first quarter of 2024 with several identified customers, and our newly expanded business with Aetna, which is still on a per-employee-per-month basis, will launch in the first quarter of 2024 as well. We have established several quality partnerships and those partners are starting to generate Dario customers from growing pipelines that we anticipate will contribute significantly to revenue in 2024, including 1 to 2 national health plans. With that, I would like to turn it back over to Erez.

Thanks, Rick. As we look back at the strategic changes we have made in the company over the last few years, such as moving from single to multi-chronic conditions and from direct-to-consumer to B2B2C. We see how immensely impactful these changes have been to our goals and the enhancement of our business across the channel. From a product perspective, as we explained in our Investor Day a couple of weeks ago, our platform is best in class with clinical efficacy validated by leading data as well as our partners. Our core business is functioning very well, and the financial profile of the company is continuing to improve. We are very happy with the development of our partnerships with Aetna and Sanofi and continue to see solid progress. We remain dedicated to keeping the investing public educated on the progress of the business across the multiple channels we have defined. Our commercial strategic revenue will be measured on an annual basis, as it is milestone-driven. We expect to see this in line with our estimates of $6 million to $8 million a year. Scalability with employers and health plans is recurrent and should grow as we continue to implement our signed accounts. We expect to see this revenue channel grow between 100% and 170% annually. On the B2C side, we aim to remain stable with breakeven cash flow or cash flow positive with $8 million to $9 million per year. In 2024, we expect to see OpEx reduced by an additional 10% to 15% non-GAAP. Net loss reduced by an additional 20% to 30% non-GAAP. All this serves as evidence of continued improvement of our financial profile on a consistent basis moving forward. Thanks, everyone, and I would like to open it now for Q&A.

Your first question comes from Charles Rhyee, TD Cowen. Charles?

Erez and Rick, maybe just give us a sense on how the strategic partnerships are going. And obviously, we didn't get as much contribution this quarter, maybe a little bit more about the Sanofi relationship and how that's progressing? And then secondly, in light of this and the pace that we're expecting with Aetna next year, and your expectations on some of the new customers that could come on board, how should we be thinking about next year's revenues?

I'll start with Sanofi and Rick can talk about Aetna, I can also comment on Aetna. When we think about the relationship with Sanofi, we are looking into a few types of revenues. We have development services, elements related to clinical publication and data. One of the things that we were showing and reiterating in our Investor Day is all the achievements that we had in the last year with this kind of relationships. We had three different clinical publications that were done based on the data we collected over the year, and one of the top clinical experts from Sanofi spoke about it. That's to say the relationships are very good. We are making progress in terms of achieving objectives from the clinical aspects to development services. Just a reminder, we developed behavioral change capabilities related to the GLP-1, which was developed together with Sanofi. We are also doing well on the commercial side, working together to get clients. MedOne is one of the clients we work with Sanofi to achieve, and we believe we will get a few more clients, including some health plans from that relationship with Sanofi. Looking back, we signed this agreement on March 1 of last year. Looking back on all three streams, the clinical development services and the commercial, there is satisfaction from both sides. The challenge is how we anticipate how this $30 million deal is recognized and delivered because it's very milestone-based. It is hard for us to communicate with the market about when we will recognize what part of the revenue, and I think this has created some challenges. One thing I tried to clarify in the script of the earnings call is that the relationships are moving in the right direction. We believe we can also take it to the next level beyond the $30 million. This is something we've mentioned before, and we think the relationships are stronger than ever. Rick, do you want to say something about Aetna and the launch?

Sure. I think our relationship with Aetna continues to be very strong. They have identified customers on the mine companion platform, which is the private label version they are selling to their customers, and they have increased their involvement in the commercialization efforts of that. This relationship continues to deepen. Plus, as I mentioned, we won another piece of business, which was actually taken from Teladoc and will launch in January. Our understanding from Aetna is that they are looking to continue to consolidate vendors. We have benefited from that, and I believe that speaks to the strength of our relationship. There will be other opportunities over the next 12 months with Aetna to expand.

In terms of the revenue projections, I want to address how you should look into revenues next year and beyond. We think that the B2C strategy will remain as it generates the data we need and helps us create the sandbox to improve the platform. We aim to maintain cash flow neutrality or slightly positive in the range of $8 million to $9 million a year. The strategic part includes revenues from Aetna and Sanofi, which we forecast still in the range of $6 million to $8 million or possibly more. Sanofi is somewhat guaranteed, depending on how it is recognized in the quarters. We are also working on other relationships that are relevant to pharma and clinical/data partnerships, which we believe will contribute to this revenue channel we call commercial strategic. The most important component is the B2B2C ARR from employers and health plans where we anticipate a growth rate between 100% and 170%. While challenging to predict, the implementation process is clarifying this aspect.

Just to clarify, if we look at the services revenue, predominately from B2B2C, and while we know there isn't significant strategic revenue tied to Sanofi, if we annualize that number, should we be growing at the 100% to 170% rate as we think about next year?

No, not exactly. I said that the B2C would be between $8 million to $9 million, which generates positive cash flow. The strategic revenue I provided is a range of $6 million to $8 million or potentially more. This year, we achieved $6.5 million in strategic revenue, and we expect this next year to remain in the same range. On the last part, the ARR currently stands at a run rate of $5 million to $5.5 million, and we are looking at a growth range of 100% to 170% for that segment, which is our core business and revenue from employers and health plans. This will include Aetna’s revenue starting in January as we bring the platform to production. This will allow us to generate revenue on a per-member-per-month basis as those customers begin using the platform.

Your next question comes from Rahul Rakhit, Lifesci.

I know you touched on this previously, but could you provide more detail on the milestones that were delayed this quarter? What will it take to get those milestones completed and to obtain the associated revenues? Can these be seen in Q4 or might they take longer?

Overall, when we introduced this deal to the investor community, we always talked about a $30 million deal to be delivered over four to five years. In Q2, the agreement was adjusted to enable establishing this $30 million deployment in four years. The overall strength of this $30 million comes from data, clinical publication, market access, and development services. The most variable and unpredictable aspects relate to development services. This year, we developed medication management capabilities and other elements that will support GLP-1. These depend on internal operations within Sanofi and how they define requirements and timelines for delivery. The best approach is to view this on a yearly basis, looking at a $6 million to $8 million average projection yearly. Our objective is to provide consistent updates in conversation with Sanofi in order to balance recognition across quarters. The lumpiness of these revenues impacts us publicly, as investors typically prefer steady quarter-over-quarter growth, which creates challenges. We are aware of the changes occurring in Sanofi’s business model, which we believe are ultimately beneficial for our partnership. We are confident about the launch in January and our ongoing relationship with Sanofi, which we expect to expand into additional deals.

Regarding the Sanofi deal, it consists of three components: commercial, data, and development. There have been personnel changes on the development side, but the commercial and data teams have not been materially affected. The transition period has resulted in a slowdown of development activities in this quarter, which means those milestones will stretch out a bit in the timeline, but they will still occur. Coordination on that side is our priority.

Understanding the milestones and their dependencies is crucial. If certain milestones push to one quarter, does that impact everything else and push revenues into 2024 across the three aspects: commercial, data, and development? Are they dependent on one another?

The commercial and data milestones are not dependent. The commercial side involves our teams selling the Dario solution to health plans and PBMs like MedOne, which continues to make progress. The data side is functioning to finalize studies, which are currently in publication. The development milestones involve a standard cycle of defining specifications and delivery phases. We do not expect backlog or complications; it's just a matter of when they get approved and what deliveries shift in timing.

Thank you. There are no further questions at this time. Please proceed.

Thanks, everyone, for joining our call this morning. Have a good day.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.