Earnings Call Transcript - DRIO Q3 2022

Operator, Operator

Good day, everyone, and welcome to the DarioHealth Third Quarter 2022 Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Glenn Garmont, Investor Relations. Please go ahead.

Glenn Garmont, Investor Relations

Thank you, Joe, and good morning, everybody, and thank you for joining us today for a discussion of DarioHealth's third quarter 2022 financial results. Leading the call today will be Erez Raphael, Chief Executive Officer of DarioHealth, and 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 and recorded on November 15, 2022. Last evening, we issued a press release announcing our financial results for the third quarter 2022. A copy of the release can be found on the Investor Relations page of the DarioHealth 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 2021 annual report on Form 10-K, as well as the third quarter 2022 Form 10-Q filed last evening. 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 last evening 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 the press release regarding our quarterly and year-to-date results. With that, I'd like to turn the call over to Erez Raphael, Chief Executive Officer. Erez?

Erez Raphael, CEO

Thank you, Glenn. Thanks, everyone, for joining our call this morning. Joining me today is Rick Anderson, the President of the company. So for the last three years, we have implemented a multiyear strategy, and now we are seeing the benefits in two ways. One, we are not only aligned but ahead of the macro digital health market trends of consolidation and consumer centricity. The second way is that our current model is better suited to the financial macro environment we are facing. The consolidation of conditions into one integrated platform enables fewer vendors and more conditions, especially in a market that looks to save money and be more efficient while better managing its patients. Employers and buyers are looking for best-of-suite solutions backed by clinical evidence. Our data suggests that an integrated model is better than separated single-point solutions. The transformation from B2C to B2B has drastically improved the financial profile of the company. We have seen a significant reduction in the cost of acquisition, creating a more efficient economic model with higher gross margins and more runway to execute our strategic plan. This model has reduced capital market risk for the company as well. Over 50% of the pipeline that we have today is tied to the fully integrated best-of-suite solution we provide. A full suite creates higher and more stable revenues while establishing an incumbency that is hard to displace once dependencies have been set up; in other words, it will take multiple vendors to replace one integrated best-of-suite solution once it's installed. Let's look at the P&L of the company. This quarter, we present real evidence of improvement in our financial profile. This shows that our model is effective in creating long-term shareholder value, as we discussed in the previous quarter. The third quarter of 2022 revenues are $6.6 million, up 17.3% from $5.6 million in the third quarter of 2021, driven by growth in B2B revenues. Our B2B growth outstripped the decline in our direct-to-consumer business, in which we have shifted both capital and human resources away to focus on the B2B sector. Everything we see in the market supports this decision. We are witnessing other digital health companies replicating the B2C-first model we established years ago to validate real-world data, and only then move into B2B. The many years we operated as a B2C company and the data collection serve as a real differentiator that creates a moat against our competitors. Another essential metric is the percentage of B2B revenue that grew to 63.5% of total revenue for the quarter, up from 46% in the previous quarter. The B2B gross margin is now above 70%. We projected our B2B business could reach that level, and today we report we are delivering on that. The company-wide gross margins for the full business and for the full year are expected to be in the 50% range. This is a significant jump compared to the 39% we had last year. We believe that next year we can achieve gross margins of approximately 60%. The following year, we expect to reach 70% for the full business. Another notable metric is the 30% reduction in operating expenses for the third quarter of 2022 compared to the quarter in 2021, resulting from the slowing down of the B2C business and our newfound efficiencies in processes and scale. Altogether, we are seeing a 30% reduction in the company's net loss compared to the third quarter of 2021, alongside a 13.3% reduction compared to the previous quarter. We are utilizing our infrastructure effectively, which provides real economic advantages. The underlying reason for the economic advantage of our multi-condition model is the improvement across key parameters. We have more eligible population per account as we are managing and serving multiple conditions, which generates more revenue per month and year per user on our platform. Overall, we are generating between 4x to 8x more dollars per every account we approach with the full suite as opposed to companies that only address a single condition in digital health. Looking at our balance sheet, we ended the third quarter with a strong financial stance, holding $57 million in cash. We continue to enhance our financial profile by reducing losses and expect this trend to continue into next year. Furthermore, we have access to an additional $25 million from OrbiMed, plus the strategic relationships we're building and will continue to cultivate. On the commercial side, we signed 85 accounts and are on track to reach 100 accounts by the end of the year, as we initially guided. We're making substantial progress in developing our relationship with Sanofi and believe we can escalate this partnership within health plans. Additionally, we have secured a national health plan and recognized revenue from this partnership for the first time in this quarter. Rick will elaborate on this relationship, but we expect it to expand and significantly contribute to our revenues moving forward. We're also actively working on another strategic deal to expand our commercial outreach. Overall, our direct sales team coupled with our partner relationships, such as those with Sanofi, Virgin Pulse, Solera, and other new partnerships will enhance our reach to the market significantly as we continue to grow our business in 2023 and 2024. With that, I would like to turn the call over to Rick for more details on the commercial side.

Rick Anderson, President

Thanks, Erez. In the third quarter, we continued to make substantial progress towards our strategic goal of building a robust B2B business. We increased the number of B2B contracts to 85 in the third quarter, on track for our goal of 100 by year-end, representing 100% growth this year. Our current signed contract value is estimated at approximately $61 million. We have seen growth in both of our primary markets, health plans and employers, as well as both of our primary products, the full suite and our stand-alone behavioral health products. While we have had off-cycle customers that have launched, especially in behavioral health, most of the metabolic and full suite contracts that we have recently announced are expected to launch in the first quarter of 2023. As a result, while our performance is improving each quarter, we expect to see significant growth into 2023. Importantly, these additional agreements have enabled us to generate a growing number of reference customers, which are critical for driving revenue in a phased manner in future quarters, as well as landing an increasing proportion of larger customers as we proceed. The B2B revenue represented an increasing share of total revenue, exhibiting growth of around 32% over the second quarter and nearly 14x larger than the B2B revenue in Q3 last year. As B2B has become the primary growth driver, with the better financial profile outlined by Erez, we have reduced our marketing expenditures for B2C and have seen an anticipated decrease in B2C revenue, which has more than been offset by strong B2B growth. This has allowed us to maintain the strategic benefits of our B2C business while significantly decreasing our operating expenses and cash burn on a quarterly basis. We entered a new phase of our collaboration with our national health plan customer, Aetna, in the third quarter. Under this agreement, we are partnering to embed our behavioral health technology into their behavioral health digital platform. We have recognized revenue related to this agreement in Q3, and we expect to see that revenue increase as they roll the platform out to their customers in 2023. Though we are just over two quarters into our relationship with Sanofi, we have already seen significant progress and traction. Our co-promotion has developed a robust pipeline, with some moving to late-stage development, which is encouraging, despite certain milestones still requiring finalization. We are on track to deliver our first set of development projects by year-end and have begun planning for 2023 projects. Additionally, we have collaborated strongly on evidence generation with their real-world evidence team, which has finalized early study planning and preparation, including validation of our engagement outcomes. This collaboration is vital, as evidence is expected to play an increasingly crucial role in digital health in the forthcoming years, particularly with health plans. We anticipate that this evidence generation work with Sanofi will help differentiate Dario from others as we advance. We are also pleased to have third-party validation of our outcomes. Partners are expected to be an essential part of our strategy in 2023 as customers seek simplified solutions created with streamlined data and billing. We are satisfied with the partnerships we have announced, including those with Virgin Pulse and Solera. We now have customers through Vitality, Alliant, and Virgin Pulse and expect to onboard our first customer through Solera shortly, with more partnerships in the pipeline. Our multi-condition integrated chronic condition platform is resonating in the market. We believe this is due to our integrated multi-condition platform—one journey, one coach, one experience—versus the modules our competitors have that address the same conditions we do. Having multiple conditions through a single vendor is clearly advantageous in the market. Strong clinical outcomes are demonstrated in a growing body of evidence, including over 30 studies. Excitingly, our latest studies show the benefits of managing multiple conditions together rather than in separate, isolated solutions. Our B2C roots allow us to deliver a consumer-centric product that integrates seamlessly within an ecosystem focused on the member. Overall, we believe we are strategically positioned with our product partners and building momentum to continue driving growth as we enter 2023.

Erez Raphael, CEO

Thank you, Rick. Despite the macro environment anticipating a recession, we don't see a slowdown in the market just yet. In fact, we may witness a tailwind and expect to save money, create efficiencies, and leverage multi-condition platforms that will enhance health profiles, establishing Dario as a comprehensive solution. We also believe that we have all the necessary building blocks in place to continue building a true digital health company with the potential to reach profitability between $60 million to $80 million in revenue. Dario is exceptionally well positioned for success amidst digital health market consolidation and a growing focus on profitability. With that, I want to open the call for the Q&A session.

Operator, Operator

And our first question here will come from Alex Nowak with Craig-Hallum.

Chase Knickerbocker, Analyst

This is Chase on for Alex. So a nice quarter here as there have been some starts and stops in onboarding. This quarter was at a nice pace again. Help me unpack the growth in B2B in the quarter? Was it mainly the national health plan uptick in revenue? Was it the Sanofi contribution that stepped up? How do you see that on a go-forward basis for Sanofi? I guess if we could just dig into that B2B line and the growth there, that would be helpful.

Erez Raphael, CEO

Yes. Sure, Chase. Number one, the overall B2B revenue, as I mentioned, grew to 63.5% compared to 46% from the previous quarter. This is percentage-wise versus B2C. In analyzing the revenue portions within B2B, we have the Sanofi part that was relatively lower than what we saw in the first quarter. This is due to specific milestones related to data delivery, development services, and market access, and it's not always easy to predict where we will recognize specific revenue. So consider Sanofi as contributing almost every quarter, but not in a linear or consistent way. Another new addition this quarter was the revenue we generated from Aetna; we started building that relationship last year, and it has made a nice contribution to our revenue. Beyond that, all other portions of B2B have shown growth, with quarter-over-quarter increases, including this quarter.

Chase Knickerbocker, Analyst

Got it. That's helpful. And then I guess one for Rick. The $61 million in pipeline now. Can you dive in there a little bit to give an idea of the breakdown between employer or provider health plan customers that make up that pipeline? A look under the hood there would be great.

Rick Anderson, President

So that contract is not pipeline. The majority of that or the largest pieces will primarily be health plans as opposed to employers. However, if we look at the overall split, it's probably in the region of 60-40 between health plans and other B2B contracts relative to employers. This percentage will fluctuate each quarter, based on contract signings, as health plans are typically more periodic, whereas employers have off-cycle and on-cycle agreements. So we will see more in the third and fourth quarters on cycle, but throughout the year, we are continually signing contracts, so it tends to vary over time; that's just an estimate.

Chase Knickerbocker, Analyst

Got it. And then maybe again for Erez, you had a nice 13% decline in OpEx sequentially. What does that look like heading into Q4, and how are you internally expecting that B2C revenue to wind down now that you're cutting that spend?

Erez Raphael, CEO

Yes. We are continually enhancing the company's efficiencies. This applies to multiple areas; it is not just the B2C. You must remember we have integrated four companies together; we had three acquisitions in 2021. There were numerous elements tied to operations and architecture. When selling an integrated suite, all elements need to be coordinated. We've invested significantly in integrating the pieces. Moving forward into next year, we anticipate seeing a slight continued reduction in OpEx. With higher revenue and gross margins, we expect a notable impact on our ability to minimize losses. This trend will continue slightly for OpEx, but overall, we aim to improve both our top-line and bottom-line financial profile—significantly reducing losses into next year. Specifically, in Q4, we expect the OpEx spend to stabilize at Q3 levels, with additional reductions commencing early next year, following the trend of improvement.

Operator, Operator

Our next question will come from Charles Rhyee with Cowen.

Charles Rhyee, Analyst

Thank you for the question. You mentioned the $61 million in contracted revenue. It seems that most of this will begin in 2023 and then increase. Is it reasonable to think that as we end 2023, we will reach a run rate of $60 million? In fact, we may exceed $60 million in 2024?

Rick Anderson, President

Based on the timing of some of those contracts regarding their growth over that period, I would expect us to be close to that run rate at the end of 2023. We generally consider it as 12 months out from the date we secure those contracts. In some cases, launches will occur somewhat later, but we should be at that type of run rate by the end of 2023. Yes, we would expect it to be larger in 2024.

Charles Rhyee, Analyst

Great. Can you provide any update on the timing for the launch of the larger platform you mentioned? Do you have any insights on when this might occur?

Rick Anderson, President

I think you've highlighted the most critical part, which is we are not necessarily in control of some pieces. However, we expect to likely see some growth in the first half of the year, with that growth accelerating in the latter half of the year based on what we currently understand. Some aspects could accelerate that even more, depending on the order they are rolled onto the platform. So there is typically an emphasis on larger customers over smaller ones.

Charles Rhyee, Analyst

Larger customers of Aetna, as you mean?

Rick Anderson, President

Of theirs, correct. Yes, as that pertains to the digital platforms for their ASO business. So those are the employers they are targeting.

Charles Rhyee, Analyst

Okay. And is that sort of like they're going to offer this new platform, and if a financial client picks the platform, they get everything, including Dario, or they can pick and choose within the platform?

Rick Anderson, President

Dario is being integrated as a technology into the platform, so we receive payment for every individual using the platform; however, there also exist opportunities for clients to access additional services through Dario on that platform overall.

Charles Rhyee, Analyst

That's helpful. Lastly for me, the sales and marketing expenses came down significantly in the quarter. Is this the right run rate? Or do we expect to see more savings in this line, particularly as we head into next year?

Erez Raphael, CEO

Yes. This reduction is primarily due to B2C efforts. We guided the market in the last quarter regarding this decline. I believe this will continue to be our run rate going forward. We forecast that towards mid-next year, we'll resume growth in this area as we penetrate deeper into the market and invest more in B2B sales and marketing.

Charles Rhyee, Analyst

Got it. I'm sorry, one last question regarding Sanofi. They are obviously a great partner. But when looking at the diabetes market, the bigger players are Lilly and Novo Nordisk. Have you established an exclusivity with the Sanofi deal? Are you allowed to speak to other manufacturers within the diabetes space? I am curious if your platform would fit well with some of these newer medications entering the market.

Rick Anderson, President

I think there are a couple of points to clarify here. Our Sanofi relationship extends beyond just diabetes; it's primarily in general medicines, although there are discussions with other parts of their organization as well. The co-promotion pertains to our full platform, underscoring the overall relationship we have. There are elements of exclusivity, but they wouldn't restrict us from forming relationships with other companies operating in the space, contingent upon how we structure those agreements. We don't see much value in establishing app partnerships with a specific drug without a broader relationship. This was a motivation behind our collaboration with Sanofi—they are interested in the digital health market more broadly, beyond simply serving as a companion app to a medication. That said, it doesn’t mean we would never utilize it as a companion app; it indicates we value a broader relationship.

Charles Rhyee, Analyst

That's great clarification. Many people presume that it is much more tied to diabetes. So when you share your data, what are they currently doing with it, and how are they planning to integrate the broader Dario platform into their ecosystem? How are they moving this toward their patients, I suppose?

Rick Anderson, President

Yes. This is an evolving strategy regarding our data integration. Initially, they validated our data through due diligence and have since completed deep-dive assessments. Their real-world evidence team is focused on verifying and demonstrating the benefits of the Dario platform to patients holistically. Although diabetes accounts for much of our data, they are also quickly extending the analysis to the full suite because they align with our view—those who provide the best evidence will thrive, mirroring their approach to medications. The ultimate goal is to approach those using their medications and devices more closely and realize the significant prospects digital health presents as a multi-billion-dollar opportunity for their organization.

Charles Rhyee, Analyst

Got it. Sorry, just for clarification regarding the $61 million; is that just in the B2B business, so we would layer on any remaining B2C revenue?

Rick Anderson, President

Correct.

Operator, Operator

Our next question will come from Rahul Rakhit with LifeSci Capital.

Rahul Rakhit, Analyst

I really appreciate all the color so far. I was wondering if you could expand on what percentage of the account growth is coming from internal sources versus your strategic partners. How do you anticipate that partner contribution will influence your growth count in Q4 and beyond into 2023?

Rick Anderson, President

Current account growth is largely internal. We experienced strong activity from partners in Q3 and expect some additional progress in Q4. However, the extent of that impact remains uncertain. That said, we are investing more in sales through our partners, which allows for greater market reach than our standalone sales force. As Erez mentioned, this expansion will boost our sales in the longer term. But for now, the majority of growth is internal.

Rahul Rakhit, Analyst

Understood. It's great; you’re on track to double the number of accounts from last year. Is it reasonable to expect you might potentially look to double accounts again next year, going from 100 to 200? And in that, are you factoring in contributions from partners driving you in that direction?

Rick Anderson, President

That's generally our mentality.

Erez Raphael, CEO

Yes. We went from 50 to 100 accounts, with nearly everything being a direct result. With our partners engaged, it’s a reasonable assumption that we can double again. We're planning to discuss this at the start of next year, but yes, that’s the direction we're heading.

Rahul Rakhit, Analyst

Got it. I appreciate it. One more thing—earlier, you mentioned anticipating additional strategic partnerships closing before year-end. Is that still an achievable target? If so, could you elaborate on the type of partnerships you're aiming for?

Rick Anderson, President

Yes, we are still pursuing partnerships and expect some to close before year-end. We believe these will be substantial in bolstering our overall client base over time. More details will follow.

Operator, Operator

Our next question will come from David Grossman with Stifel.

David Grossman, Analyst

I just wanted to follow up on a couple of questions that were asked. I think first on the ARR, the $61 million, is it fair to say that given the calendar year, most large employers and self-insured plans would have made their decisions by now, and any incremental growth from here would primarily come from health plans, likely impacting next year in terms of increments above the $61 million?

Rick Anderson, President

Yes. We expect incremental contributions from health plans and off-cycle employers in terms of revenue moving forward. There are additional opportunities, but yes, generally speaking, that's correct.

David Grossman, Analyst

Great. Could you provide insight into how pricing trends are developing for you in the marketplace, particularly for the full bundle? Perhaps you can't disclose specific figures, but on a year-over-year basis, how's that trending as you sell the full suite?

Rick Anderson, President

We have taken a deliberate pricing strategy that I prefer not to elaborate on in specific terms. However, generally speaking, we've either maintained our pricing or raised it slightly.

Erez Raphael, CEO

Perhaps I can provide further detail, David. As I mentioned earlier, the way to look at it, we presented the average revenue from a full suite account, which is roughly 50% higher than a single condition. So when we sell the full suite, we've observed that approximately 30% to 40% of the enrolled population is eligible for one or more conditions. Conversely, we know that competitors focusing solely on diabetes or hypertension typically see eligibility around 6% to 8%. So by addressing multiple conditions together—like MSK, weight loss, hypertension, and diabetes—we can encompass 30% to 40% of an account’s eligible population. Our average indicates that about 35% of eligible individuals will eventually enroll in the program, with each individual typically seeking help for about 2.2 conditions. This explains why I mentioned earlier that revenue per account is 4x to 8x greater compared to companies that only offer single-condition solutions. These numbers reflect current observations.

David Grossman, Analyst

Got it. Just to clarify, you stated that 30% to 40% of the total eligible population is utilizing your services, and on average, the patients enrolled engage with 2.2 different conditions. Is that correct?

Rick Anderson, President

To clarify, the average number of conditions individuals who enroll in the full suite engage with is 2.2. However, the pricing model is determined by the full suite availability regardless of how many conditions they are using. Therefore, the price for the full suite is higher than that for a single condition, as Erez indicated, but it allows us access to 4x the eligible population when you compare the full suite to a standalone diabetes offering.

David Grossman, Analyst

Understood. Regarding Sanofi and Aetna, could you remind us of the revenue milestones or requirements needed to achieve increased revenue in those partnerships?

Rick Anderson, President

For Sanofi, we have preferred partnership payments tied to milestones involving training and data delivery, among other components like access to the market. These milestones occur throughout the year alongside delivery and development plans. Additionally, revenue from these arrangements excludes co-promotion agreements, which are separate and contribute to our health plan revenue and pipeline. For the national health plan, we get paid for delivering certain platform elements and receive fees per employee or member with access to the platform. As I noted earlier, clients can also choose to access additional services through Dario.

David Grossman, Analyst

Could you share where we are in delivering those platform elements? Are there significant milestones left in terms of revenue, or have we passed those since recognizing revenue this quarter?

Rick Anderson, President

Some milestones remain. We have fulfilled a portion of them in this quarter, and I expect additional completion during the first half of next year.

Operator, Operator

Our next question will come from Ben Haynor with Alliance Global Partners.

Ben Haynor, Analyst

First off for me, just thinking about R&D expenditures. What's driving those at the moment? Are these being allocated to implementation details, internal project development, new features, functionality, etc.? What's the correct capacity to think about how you're allocating R&D dollars?

Erez Raphael, CEO

Thanks, Ben, for the question. To frame it, we have several main areas of spending. Firstly, we are focusing on advancing each of our products as stand-alone solutions. We aim to offer the best diabetes and the best MSK solutions. This is a key area of investment for us. Secondly, we are working on integrating all components into one cohesive experience, which is vital when selling an integrated suite; creating a single, integrated journey and clear use cases for managing multiple conditions is a significant advantage over competitors. Lastly, given our B2C history, we are transitioning everything to B2B, ensuring operational functionality across billing, IT, security, and what we refer to as the operational side. Investments in this area are substantial, and we will keep spending to guarantee stability and scalability as we aim to double the number of accounts next year. This trajectory is typical following mergers and acquisitions—R&D expenses typically ramp up in the initial couple of years post-acquisition and then, as the various technologies are consolidated, companies achieve greater efficiencies.

Ben Haynor, Analyst

So you anticipate that after you digest these acquisitions, we should witness a decline in R&D expenditures? Is that the appropriate way to interpret that?

Erez Raphael, CEO

Yes, absolutely.

Ben Haynor, Analyst

Okay. Great. I apologize if I missed this, but did you zero out B2C advertising now? Or do you still engage in some of that?

Rick Anderson, President

We still allocate some advertising spend. We've reduced it to a level that remains sustainable for the business. We still see strategic benefits in maintaining the B2C approach, as it serves both as a test bed and offers several advantages. We aren't aiming to completely eliminate spending in this area but are investing strategically considering market costs and associated margins.

Ben Haynor, Analyst

So some of that sales and marketing expenditure is, in essence, R&D investment as well.

Rick Anderson, President

You can think of it that way.

Erez Raphael, CEO

Yes, that’s a very good way to look at it.

Ben Haynor, Analyst

Understood. As a final question, I am curious. Last quarter, you mentioned a customer that had some revenue shifting into Q3. Was that Aetna that slipped from Q2 into Q3?

Rick Anderson, President

Yes.

Operator, Operator

With no remaining questions, we will conclude our question-and-answer session. I'd like to turn the conference back over to Erez Raphael for any closing remarks.

Erez Raphael, CEO

Thank you. Thanks, everyone, and I appreciate you joining our call today. Wish you an amazing day. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.