DarioHealth Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 11, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the DIRTT Health First Quarter 2023 Results Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Chuck Padala. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth's Q1 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 will open the call to Q and A.

Speaker 1

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 May 11, 2023. This morning, we issued a press release announcing our financial results for the Q1 of 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 with the competitive nature of DarioHealth's industry.

Speaker 1

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 in this call are subject to other risks and uncertainties, including those discussed in the Risk Factors and elsewhere in the company's Q1 2023 Quarterly Report Form 10 Q filed this morning. 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.

Speaker 1

Management believes 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 Rai Payal, CEO of DarioHealth. Erez?

Speaker 2

Thank you, Chuck, and thanks to all of you for joining this morning call. Q1 financial results continue to demonstrate the success of the multi year strategy we implemented in the last few years. We continue to see the trend of financial profile improvement that we saw in Q3 and Q4 of 2022. We moved our business from direct to consumer to B2B and from single point solution to an integrated multi chronic condition platform. Let's re examine the strategy, the market trends against the strategy and the indications for success in the financial results we are reporting today.

Speaker 2

First, our transformation from direct to consumer to B2B. We have succeeded and continue to succeed in making significant advances in the financial profile of the company. This is because of the significant reduction in the cost per member acquisition, the ability to scale and more efficient economic model, remember on the platform. Key indicators for current financial results for the success of this strategy is evident in that 70% of revenues came from B2B. Also the continuation of the sequential improvement in our gross margins and a significant reduction in the company burn rate.

Speaker 2

2nd is the multi condition strategy In our B2B business, where we manage 5 different conditions on 1 integrated platform. This strategy is not only aligned with the market, but also ahead of the macro digital health market trends of consolidation and consumer centricity. In fact, our current model is better suited to the global financial environment we are all facing today. Market trends of customers looking for an innovative digital solution with more conditions And from smaller number of vendors and adopting solutions for partners continues. The majority of our new contracts Continued to be multi conditions.

Speaker 2

We generate more revenue per customer than a single chronic condition point solution. We believe our platform has strategic advantage because it is not only covers large number of conditions, but does so through an integrated user experience with high member engagement. We're also seeing a real world evidence in our Voice of Customer Data, which focuses on ROI, a trend to which will certainly position us as a value differentiator to benefit from. As recently demonstrated in the clinical data published by Sanofi earlier this week, Another strategy is accelerating penetration through partnership, which is an approach we have been executing on for the last few quarters to accelerate both the sales cycle and the accounts into implementation. We have collected meaningful list of partners, including Solera, Virgin Pulse, Alliant, Sanofi and Aetna that are looking to accelerate our footprint further.

Speaker 2

This quarter, we added significant new partners and secured new customers through this partners. We announced a very significant new partnership with AmWell, One of the largest telehealth companies in the country with 90,000,000 people having access to the platform. Rick will elaborate about this significant deal for us. In addition to that, we announced our first customer Through the co promotion efforts under our strategic partnership with Sanofi, this is a multi condition agreement with the pharmacy benefit manager. 3rd, we demonstrated tight collaboration on real world data and clinical evidence with Sanofi through the presentation of the first Sanofi conducted study earlier this week.

Speaker 2

We are very excited about this study and what this represents not only for Dario, but to the digital health industry as a whole. We believe our partnership Strategy including the traction we saw in the Q1 will drive accelerating revenue in the second half of twenty twenty three and even more in 2024. Let's take deep dive into the financial results. Q1 shows continued improvement of the company financial profile, a trend we demonstrated in Q3 and Q4 of 2022. We are presenting a real evidence that shows The model is working and creating a long term shareholder value.

Speaker 2

Let's start by looking into the revenues and its components. Q1 2023 revenue was $7,070,000 a sequential increase of 3.8% compared to the Q4 of 22. This is $12,300,000 decrease compared to the revenues of $8,060,000 in the Q1 of 2022. This decrease resulted mainly from lower B2C revenues in Q1 2023, which is part of our previously discussed strategy to manage the B2C business to a breakeven to a decreased investment in B2C customer acquisition costs. We believe we will see revenues acceleration as we continue to get signed accounts launched.

Speaker 2

Another important metric is the gross margins. This is where results are even more exciting as we are showing a true software driven business with a SaaS, Software as a Service oriented characteristics. Pro form a gross margins was above 60% for the Q1 of 2023, up from 58% of revenues in the Q4 of 2022. As mentioned, in the last few calls, we are targeting an average gross margins of above 60% for 2023 and above 70% for 2024. Looking at operating loss, we are seeing a poor operating leverage On the infrastructure that we have built and real economic advantage for multi condition approach, we continue to reduce the cash used In operating activities in the Q1 was only $4,760,000 used, further reduced Net loss excluding stock based compensation, acquisition related expenses and depreciation for the Q1 of 2023 to $6,800,000 compared to $10,000,000 for the Q1 of 2022 $9,600,000 in the Q4 of 2022.

Speaker 2

Looking into the balance sheet, we also have a strong cash position. Pro form a cash balance as of the end of Q1 inclusive of the private placement funds And the loan refinancing was $61,000,000 which leaves us with a significant runway to execute on our strategies. With that, I want to hand over the call to Rick to elaborate on the commercial aspect. Thanks, Erez.

Speaker 3

In the Q1, we continued our revenue growth trend with increasing year over year and sequential quarterly growth. As We are maintaining our B2C revenues at levels consistent with the Q4 of last year and it remains a self funding strategic innovation platform. We expect to maintain the B2C business at these levels throughout 2023. On the other hand, we continue to see growth in our B2B revenue In the Q1 with the B2B revenue now accounting for approximately 70% of total revenue. While we continued to release The number increased the number of B2B contracts in the Q1 consistent with the normal self insured employer benefit Cycle, the number of contracts signed was less than the Q4 of 2022.

Speaker 3

More than 70% of self insured employers are on a January to December and the results of the quarter. We are currently in Early stages of the annual employer buying cycle. Our overall contract value is approximately 67,000,000 A modest increase over the end of last year. However, this does not include any value for distribution partnerships unless we have visibility to the Already in discussions with some of their downstream customers about adding Dario to their offering. The market trends of The majority of our new contracts continue to be multi condition, which generates more revenue per customer than single condition contracts.

Speaker 3

We believe our platform has a strategic advantage because it not only covers a large number of conditions that are high priorities for customers, but does so through an integrated user experience with high member engagement. We are also seeing increasing focus from customers on ROI, a trend that we believe we are well positioned to benefit from. Our solution delivers significant clinical and cost improvements for our customers on some of the most costly chronic conditions. This was validated in the first Sanofi conducted study that was released earlier this week. We are very excited about the results of this study and what it represents not only in Dario, but the digital health industry as a whole.

Speaker 3

The study was conducted by Sanofi and their 3rd party data partner, which makes it one of the only independent digital health studies and it was conducted with a much higher level of rigor than most of our competitor studies, including the use of a propensity match comparison group. And the results demonstrate that Dario does impact healthcare costs. The study showed with a high level of statistical significance that Dario members had a 9.3% reduction in healthcare utilization and a 23.5 percent decrease in hospital admissions. In this environment of increasing focus on cost and ROI With increasing demand for evidence from customers and prospective customers, we believe this study will accelerate adoption of our solutions. Distribution and strategic partners are an important part of our strategy to accelerate sales and make implementation and management as easy as possible for our customers.

Speaker 3

We had 2 significant partnership developments in the Q1. We announced our first customer through our Sanofi co promotion efforts. This multi condition agreement with the Pharmacy Benefit Manager or PBM is one of the 2 health plan type customers that we discussed last quarter And we anticipate that it has the potential to generate multiple millions of revenue once fully implemented. And implementation is underway and we expect to launch this customer in the Q2 of this year. We are very excited to see our first customers through our collaboration with Sanofi and look forward to more developments from the growing pipeline with them.

Speaker 3

2nd, we announced the partnership with Amwell, one of the largest telehealth in the country with an installed base of approximately 2,000 health plans and health systems that reach over 90,000,000 people. AmWell is integrating our cardiometabolic solution into their platform and will distribute it to their current and prospective customers. Given Amwell's past success distributing another digital health solution through their platform, we have high expectations of this partnership and believe that it could represent high tens of 1,000,000 or perhaps more in revenue as the relationship ramps up over the next several quarters. While we know that Amlo is actively selling the Dario solution, we have not yet included any contract value in our 2023 forecast or reported contract We will adjust the contract value as we gain more visibility to the initial customer size and timing. We We have one additional health plan that we continue to anticipate launching through a partner in the near term.

Speaker 3

We have seen several delays with this customer They're occurring between our partner and the health plan, but we continue to anticipate the launch in the second or early third quarter. Encouragingly, this partner has asked us to expand the number of conditions that they can distribute to their customers, which are all health plans, and we are currently in contracting on that expansion. As previously reported, we also expect Aetna will launch their new digital platform, which they are selling through to their employer customers on July 1. We earned revenue for members that are contracted to have access to the platform, form, which we expect to grow over several quarters post initial launch. Throughout 2023, we will continue to invest resources and our existing partnerships to assist with customer pull through and we will seek to expand our partner roster to a select number of additional partners that we believe can accelerate our revenue and service specific subsets of customers.

Speaker 3

We have demonstrated that we can convert contracts into revenue by expanding the number of Contracts that are multi condition, achieving an average enrollment rate of 30% or better and significant levels of engagement. Over the last year, we have more than doubled the number of records in accounts, which based on experience is the basis to accelerate Growth of customers on the platform, especially as we continue the 2023 selling season for 2024 employer launches. We believe our partnership strategy, including the traction we saw in the Q1, will drive accelerating revenue in the second half of twenty twenty three and twenty twenty four. With that, I would like to turn it back over to Erez.

Speaker 2

Thank you, Rick. So to summarize, we believe that Further into 2023 2024, we'll continue to strengthen our financial profile. The losses will continue to decline. Gross margins will improve with the target of above 60% for 2023 and above 70% for 2020 And despite macroeconomic factors and a possibility for recession, we don't see a slowdown in the digital health market. In fact, We continue to see tailwinds as payers and employers seek to better manage their patients and reduce health care costs.

Speaker 2

The market trends of customers looking for digital health solutions with more conditions from smaller number of vendors and adopting Stu partners continues. Further, our commercial capabilities matured considerably in the past few years With a larger sales team and more strategic partnerships, which we expect to accelerate not just more contract wins, but more meaningful contact wins such as Aetna and other large accounts. We are seeing a trend of big traditional healthcare players In large pharma such as Sanofi and other big medical devices companies looking to tap into digital health space By partnering with companies like Dario, so they too can extend their footprint in healthcare transformation, We expect to make more large and strategic partnerships like those. We have made and continue to make substantial progress In building our relationships with Sanofi, which we believe can take us to the next level in terms of our relationship with Sanofi as a big pharma. Our relationship with Aetna is forming and we recognized revenue this quarter in the last Few quarters and we are anticipating that revenues will accelerate throughout 2023 and beyond.

Speaker 2

We believe that we are positioned to accelerate growth in 2023 2024 As the overall foundation for client wins is improving with larger sales team and meaningful partnerships that should give us With that, I want to I'll hand over the call to the operator for a Q and A session.

Operator

We will now begin the question and answer session. Our first question comes from Alex Nowak with Craig Hallum Capital Group. Please go ahead.

Speaker 4

Hi, great. Good morning, everyone. Maybe just talking on that last point, thinking about the enterprise revenue, just how much or the B2B enterprise revenue, how much of that B2B How much of that B2B revenue in Q1 is now, call it, purely recurring versus what I would say would be more milestone like payments?

Speaker 2

Thanks, Alex, for the question. So the way that we are looking into the revenues that Coming from Sanofi and Aetna, some of it is also recurring revenue. So I would say that on high level, Around half of the revenues that we have today are kind of recurring. Some of it is coming from employers And some of it is coming from data that we are getting paid for. I wouldn't say that Everything that we are getting from Sanofi is services.

Speaker 2

So the way to think about it is that around 50% of the revenue is recurring.

Speaker 4

Okay. That is helpful. When we talk a lot about these strategic deals, but also you Signed 100 contracts now or over 100 contracts now and $67,000,000 of contract value. Where are we in ramping Through those contracts, are we half the way through that contracted value or my math would probably say we're probably 25% of the way for that contracted value if half the revenue is recurring. Just help us think about that.

Speaker 4

And when can we ultimately reach a Full $67,000,000 reach full $67,000,000 of revenue coming from those contracts, that's 100% penetration?

Speaker 2

Yes. So $67,000,000 in contract, you need to take into account that we are counting in Aetna with somewhere between $30,000,000 to $35,000,000 part of the $67,000,000 Aetna, we recognized revenue between Q3 and Q2 of Q3 of last year and Q2 of this year, but the revenues that we recognized were only services, not recurring revenue. And this is why We considered Aetna as 0 ramp up. So if you remove Aetna from the $67,000,000 you end up with around 30 call it $32,000,000 And for me, this $32,000,000 I would say that 70% is ramped up. We have like a couple of accounts that are not launched yet.

Speaker 2

So I would say that overall, It's only 35% to 40% of the 67 is launched. To your second question, I think that a lot depends on the implementation of Aetna and the fast and the velocity that Aetna is going to get in. And I think that it's going to take us 3 to 4 quarters to get to the levels of this full Recognition or deployment of this signed contracts into revenues, To Rick's point, just to reemphasize, Amway is a huge deal and we have other huge deals that we are having with partners. None of it is counted into the 67,000,000. And through AmWell, as we said, we have like access potential access to 90,000,000 users.

Speaker 2

So The more accounts we are getting from Amoil, Solera and others, the more we can add to the 67%. So the way to look at it is that only 40% is Kind of recognized and the rest will happen in the next 4 quarters. This is our best visibility that we have at the moment.

Speaker 4

If I remember correctly, I think the pipe or the funnel of deals out there was call it $900,000,000 or worth. This is going back several quarters now. I guess as you think about new deals that will be signed up on the platform here, It seems like you're targeting these more larger names that where like AML, for example, where they're going to bring A large group of customers to the Dario platform versus targeting more employer by employer basis. Is that the right way to think about The ramp of new deals going forward?

Speaker 5

That's correct. I think

Operator

that's the go

Speaker 6

ahead. Go

Operator

ahead, Ross.

Speaker 2

Yes, I think that the way that we are looking into the future ramp up is that number 1, We're going to have bigger employers on the platform. When we started the B2B and we had to gain recognition and we had to gain reference customers, We started with relatively small employers' accounts, and we are going now into bigger employers' accounts. 2nd trend that we're going to see is that we're going to probably get more bulk of accounts that are bigger for our partners. So eventually through AmWell, we're going to get to plans that eventually going to get us to employers. Through Aetna, we are getting into employers that are getting us in Users.

Speaker 2

So eventually, we believe that more than 50% of the employers that we're going to have on the platform will come through partners And not directly by us. That's the trend that we're going to see like 2 years from now, 3 years from now. And eventually, We believe that more than 50% of the revenues will go are going to come from these partners like Aetna, Sanofi, American Well, So, we do have our own direct sales team like 12 or more sales representatives That are working directly and are also working inside these partnerships. So we dedicated our own sales team into the relationship With American Well and others in order to leverage on these connections, and we think that eventually this is something that is Eventually reducing the cost for acquisition per single account. That's the way to view it.

Speaker 4

Okay. That is helpful. And then just last question, we talked about this in the past, but we've been seeing this big uptake in called digital health around weight loss. Just what are the company's thoughts about adding on drug prescriptions on this platform? It could be weight loss like Ozepic, Wegovy drug prescriptions.

Speaker 4

What are you thinking about that? And how does that play into the Sanofi relationship?

Speaker 3

So, obviously, those medications are having a Patients are having a significant impact in the market and we anticipate that they will actually have a significant impact on wellness vendors that are only managing weight management solutions. The market perspective on those medications, In other words, our customer perspective on that depends a little bit on who the customer is. Our approach to that at the moment is we're really targeting a digital approach And experience for our members that's been tied into what their doctors are doing and providing information and tools into that process rather than in some cases where folks are integrating that. Now that said that we are having discussions with one of our partners about how we would potentially integrate more closely on looking at that for for members. So unlike, for example, some diabetes medications where companies are looking to take members Off of those medications, we don't think that's realistic, in the longer term.

Speaker 3

And what we're looking to do is provide members with tools to help manage their overall health and weight around that, including the utilization of those medications. But We're not planning on being in the business of having providers and prescribing that, but we are looking to partner closely with with some of our existing partners around those trucks.

Speaker 4

Okay, understood. Appreciate the update. Thank you.

Speaker 1

Thanks Alex.

Operator

Our next question comes from Charles Rhyee with Cowen. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking the questions. I wanted to just jump back. I missed it a little bit at the beginning. Can you just Rick, maybe just quickly go over again the through Sanofi, what is the customer that you're getting through Sanofi?

Speaker 5

Can you Just fill me in again real quick. Apologies.

Speaker 3

Sure. It was the one we previously announced, Charles, which is the PBM For pharmacy business manager, it's a national PBM. It's actually a several $1,000,000 Revenue opportunity to have a current diabetes solution, which we're replacing and then bringing the rest of our suite into that. And actually they've We've seen some very high growth and are fairly aggressively growing as well. So we think that's a good opportunity.

Speaker 3

That was the first one. And if you think about it on a sales cycle basis, it came in a little bit faster than I would have otherwise anticipated. And I think That we will see more customers coming out of that relationship a little bit faster than we see in the past. Part of that is we're just further into the sales cycle. Think further that's also about the fact that we're further into the relationship.

Speaker 3

And I think that we've figured out how to make things work a little bit better than we did, Yes, call it last February when we started.

Speaker 5

And is that in the $67,000,000 contracted value? Is there some estimate for that in that number?

Speaker 3

There is.

Speaker 5

Okay. And just to be clear, that's been Like what is your part in selling in this case? Are you brought in sort of as a technical consultant towards the end of the sale or are they handling all the selling on your behalf. And can you just tell a little bit more how that works? And is there any population where it's automatically rolled out to?

Speaker 3

Yes. So the existing I'll start it with the end and go backwards. But the existing population will be transferred over to Dario as we launch this solution over the 1st month or 2 months. So there is an immediate revenue opportunity once that Turned on, which as I said, we anticipate here fairly shortly. And then in terms of for the rest of the customer base And as they go forward, yes, we are investing resources in that partnership as well as others to help Sell it through.

Speaker 3

In that particular case, it is more of like what I would what you just call the technical consultant, where we're We're assisting with the switchover of the existing members and then we're providing marketing materials as well as The consultation on the sales and working as they ask it. In other cases, in our partnerships, we're more involved in the sales. So attending the sales meetings, etcetera. So it sort of depends partner to partner. That one is a little bit more on the lighter lift side.

Speaker 5

Okay. So then when we think about the revenue ramp for the rest of the year, it sounds like what you're saying is expect The B2B sorry, the B2C revenue kind of in this low $2,000,000 a quarter range. This is sort of a breakeven part for your business. Obviously, a good quarter in B2B, but it sounds like we would think of sequential improvements in revenue for B2B and 1 coming sooner from this arrangement, but then if we think about Aetna rolling on, Correct me if I'm wrong, I think that's still slated for a Q3 start. And then we should have that $35,000,000 ramping up over the course of a year, is that the right way to think of it on top of the existing B2B base?

Speaker 2

Yes, that's what we think we're going to see. I mean, as we said, Aetna planning to launch the platform July 1, And we think that it's going to take few quarters to ramp up for this full revenue. This is from the visibility that we have at the moment for the Aetna relationship. And on this baseline, we're going to see we're supposed to see a more significant ramp up into the second half of this year. I did also for Alex the calculation of the $67,000,000 how much is coming from Aetna,

Speaker 7

so we

Speaker 2

have visibility to that as well.

Speaker 5

Okay. And I guess last question for me then. If we think about any kind of incremental spend as we think about particularly the OpEx line, Obviously, you guys have been doing a good job bringing adjusted EBITDA loss down. Should we expect continued sequential improvements in that line as well, even with having Spend related to some of these new partnerships or is this a function where it's more driven by leverage on revenue and margin gross margin?

Speaker 2

Yes. So I think that we did amazing job taking the burn rate down to only $4,700,000 in this quarter. This is a transformation that was done over 3 to 4 quarters along 2022. And just to remind Investors, we slowed down B2C. We did a lot of activities of offshoring and we've seen a lot of digital health companies out there In the U.

Speaker 2

S. That have a very, very high OpEx, we are very offshore driven and we also consolidated all the acquisitions that we did in a very efficient way. So I think that we're going to see stabilization of our OpEx on this kind of run rate. It might be Few 100 of 1,000 of dollars every quarter moving to here or there, but that's going to be the baseline. And on this baseline, we're going to grow gross margins.

Speaker 2

And on this baseline, we're going to grow the revenues up and this is something that is going to take us to the cash Slow profitability and that's the OpEx that is kind of baseline to how we want

Speaker 8

to move forward.

Speaker 5

Great. Last question for me. As we think about then gross margins expanding, can you remind us where you think sort of Your target gross margins are at a like where do you think that it can get to?

Speaker 2

Yes. So we were clear that this year we should stabilize on 60% plus. I think it's going to be 62% this year and we're already showing this quarter that we are above 60%. I'm talking about non GAAP. We think that for a single account, we see numbers that are closer to 75%.

Speaker 2

We think that moving forward, and we want to see it already next year, 2024, that we're going to exceed the 70%. So that's how we look Into the business, I think we can do higher, but conservatively, I think that investors should think about it as a 70% Gross Margins. Looking purely on the B2B, if you take out the B2C, We are already in this number for the last three quarters, including this quarter. So it's not something that we are dreaming about. It's something that we are already doing.

Speaker 2

The B2C is in the ranges of 45%, 49%, and this is why the full business is still Not on the 70%, but this is something that will arrive once the merge is going to be in the higher favor of B2B.

Speaker 5

Great. Thanks a lot guys. Congrats.

Speaker 1

Thank you, John.

Operator

Our next question comes from Raul Rafi with Life Science Capital. Please go ahead.

Speaker 8

Hey guys. Thanks for taking the questions. Rick, on the last call, I think you had mentioned that the platform's high customer satisfaction Rates have led to some customers discussing the potential of expanding conditions or to the broader platform beyond the current scope of their contracts. I apologize if I missed this earlier, but I was just wondering if you could provide any update on, 1, how those conversations are progressing? And 2, if you could give us a sense of how many of those existing customers are exploring this option?

Speaker 3

Thanks for the question. So we have 2 types of customers, Probably more than that, but 2 big portions of customers on the platform. 1 are the behavioral health that came in as behavioral health only. We have several of those that are, I would say, on the larger side of our behavioral health Customers that are now looking at expanding into the overall solution. And we have a number of our early Customers say they came on in 2021 and 2022 with single conditions that are now looking at Expanding to additional conditions or in some cases the full suite of those.

Speaker 3

Those conversations are continuing as part of this 'twenty three sales cycle for launch in 2024. We're pleased with where we are in terms of those expansions. I guess the positive and the negative to some extent is the customers that we signed in 20 22, especially in the back half of twenty twenty Actually in the back half of twenty twenty two, a lot of those were already full suite or multi condition deals. So there is less ability to And in those as it relates to that, but I would say of those that would be good targets for what we're doing, we're seeing 70%, 80% of those are looking at for their expansion, and we'll see how that concludes throughout the rest of the year. But I think we're pleased in terms of where those are in the conversations.

Speaker 8

Got it. That's helpful. And then just one more for me. Of the contracts that were added in Q1, Could you just help us understand what percentage were full platform versus multi condition versus single condition? And maybe if you can just Provide those percentages for the broader customer base as well.

Speaker 8

Thanks for taking questions.

Speaker 3

In terms of added in the Q1, I don't have the exact numbers in front of me, but I would say that it's probably about 10% We're single condition, most of those being behavioral health versus multi condition. I don't believe on the non behavioral side, we added a Single one that was a single condition, so like diabetes only.

Operator

Our next question comes from Benjamin Haynor with Alliance Global Partners. Please go ahead.

Speaker 7

Good day, guys. Just had a couple of quick questions. It looks like some nice data on the healthcare Utilization rate study, I was curious on the reaction that you've gotten from folks out there, whether it's current customers, potential customers, Anyone, what the response has been there?

Speaker 3

So we just released the data obviously on yesterday. Tuesday's old. Yes. So, it's a little early for me to give you a full response to that. I mean, I think that people the feedback I will give you the anecdotal feedback that I've got in the Day, which has been extremely positive.

Speaker 3

And the feedback that we're getting from the more sophisticated Customers, especially what we're seeing in the marketplace is health plans, especially are looking for better and better data that's out there. And I think that it's hard to understate the significance actually of the overall design and size of study. There's close to 10,000 people in total that were in it. If you take the Dario group and the comparison group, The way that propensity matched comparison group was done, I mean, Sanofi really brought their entire evidence They control the study. They did it.

Speaker 3

There's not many, if any, independent studies that are out there. So I think all of those things are very positive. I would say that it gets more reception in the health plan market than the employer market, mostly because the health plans are looking for that. But if you think about the fact that health plans are also providers of ASO services to downstream customers and the fact that customers are really On the employer side are looking for partner based solutions. I think that this also supports that on The plus percent reduction in hospitalizations, which is obviously one of the largest cost drivers that's out there is very Significant.

Speaker 3

So it's both the actual results that we saw in the study, which are quite good alongside of the study design itself.

Speaker 7

Okay. And then if you had to put excuse me, if you had to Got to put a savings dollar figure on it. I mean, would there be A somewhat ballpark way of doing that, just saying like the average inpatient cost For admission is x and multiplying it by the differential between the two groups and come up with a savings thing or isn't it Quite that straightforward.

Speaker 3

So we think relative Yes. No, I mean directionally that's right. I mean if you obviously hospitalization costs depend on geography as as anything else in terms of how much hospitalization is. But if you think about a hospitalization is probably going to be somewhere in the range of $15,000 On average, maybe in some cases you could argue a bit more associated with that. I think That gives you a generalized idea.

Speaker 3

I mean,

Speaker 7

we also

Speaker 3

saw almost a 10% reduction in overall utilization. That one's a little harder to translate In the cost exactly in terms of the way that you were doing it, but that's overall healthcare utilization. So Given the fact that we're talking about members that have chronic conditions, the cost reductions there are significant In terms of dollars. And I think that one of the things that we've definitely seen this accelerate in the last quarter Is there is more and more focus on cost reduction and ROI across the board. That's always true in health plans, I would say, But we're seeing it more and more in the employer side of the business as well.

Speaker 7

Okay, got it. That's helpful. Then lastly for me, maybe this is a silly question. On the index date for the 2 groups of users versus non users for Dario users, it was the registration date. But then for the other users, I think it was The first medical encounter in the I presume in the same month or quarter time period based on the matching.

Speaker 7

But let's just say that First Medical encounter was a hospitalization And that got included in the look back period rather than the go forward period. Wouldn't that tend to make the comparison of The non users versus Dario look better than otherwise.

Speaker 3

Yes, I understand your question and I have to I would defer and I'm happy to get you more information in terms of with the clinical staff that did the study to give you an exact answer to that. I can tell you That members were matched on a 3 to 1 basis. So when you look at that across the population, I believe that they controlled for But I'd be happy to get you somebody more knowledgeable in the exact details.

Speaker 7

Okay. I would be curious on that. I don't know if it's meaningful and I presume that given the folks that did it, that it was well considered.

Speaker 8

I was just curious on that. Okay, great. Well, thanks for

Speaker 7

the color guys. That's all I have.

Speaker 1

Thank you, Ben. Thank you.

Operator

Our next question comes from David Grossman with Stifel Financial. Please go ahead.

Speaker 6

Thank you. Good morning. I'm wondering if we could just go back Ted Sanofi for a minute. I think you laid out a couple of important milestones for this year, including getting ADNAP and running in the Q2 or in the Q3 and Sanofi about transferring some of the activity from the PBM customer onto your platform. Are there any other milestones that we should be aware of or focused on for those 2 partners this year?

Speaker 2

Yes, let's start by Sanofi. Just in terms of clients, I mean, Pipeline is going and the teams are out there selling. So this PBM that we have signed on It's not the last one. So we see a trend and we see a very healthy pipeline. So I think that we should expect Additional deals that will come from this partner that this month, I think it's the 13 or 14 months since we Started the strategic partnership.

Speaker 2

So this is number 1. Number 2 that I mentioned on the on my summary is that overall if you look into the Sanofi and Barrio relationship, both Besides consider the relationships as successful from multiple aspects. From a development service aspect, We continue together share the vision for where digital health is going and the teams are collaborating on expanding the platform. From a data perspective, I think that the DarioHealth platform that collected users for many years and we have A lot of data. This is something that is very meaningful and valuable for Sanofi and the results that we published Earlier this week is something that was super important for them and we think that We're going to see more of those coming.

Speaker 2

And in terms of commercialization, we had the first PBM and we think that we're going to have Few more clients this year. So we see success in all three categories and we see A very good relationship and collaboration and the two parties are exploring together how this relationship Potentially can be expanded in some ways. So it might be another milestone. We don't have a complete decision yet, but we do look into More ways to collaborate and expand relationship, because we are sharing the same vision and we believe that Both of us have the right assets in hand in order to dominate digital health in the future. With regards to Aetna, at the moment we have the planned launch date.

Speaker 2

This is something that was postponed. If you would ask me a year ago, I would think that it would be already launched at the beginning of this year. It didn't happen. Now there is a commitment to launch it by the beginning of July and that's something that will drive higher revenue. We need to remember that behind Aetna, there are also employers that they are selling into and that's something that dictate The velocity of the ramp up and at the moment we have a certain expectation that we need to see that it's working in the velocity that we think it's going to work, But we're also confident there that we're going to see the revenues.

Speaker 6

Got it. And then the As we think about Aetna, just to start, is a July 1 kind of go live date or early July go live date, Is that early enough in their selling cycle for next year given most employers are on a calendar year benefit cycle?

Speaker 3

Yes, it is early enough and from what they've communicated, I believe they are also out In the market currently even though in advance of the launch date. So yes, I would say that for 2024, They are actually sort of in the thick of it at the moment.

Speaker 6

Okay. And then for the Sanofi TBM that you're transferring, do you have any visibility right now since that revenue is just being transferred over to your it sounded at least to me that it was just being transferred over your platform, do you have any visibility on how large that is in terms of revenue to Dario?

Speaker 3

Yes, we have some visibility to it because we know how many members that they have on the other solution, let's And we know what the overall rest of the population looks like. As I mentioned before, we believe that that opportunity is kind of in the mid In the lower end of the single digit 1,000,000 of dollars, on an overall basis. And, there is significant revenue that would be attached. Now The absolute dollar value that that will represent is also dependent on what portion of the current membership transfers over. So internally we've taken a bit of a haircut to that.

Speaker 3

I don't necessarily expect that 100% of those Currently using one solution will transfer to another. I do believe that we will get based on past experience where we've transferred over populations, we will get the vast, vast majority of those folks. What we see actually in the market, especially because this is the diabetes solution, is people really like the Dario solution. I think that comes from the direct to consumer background, the device which people like a lot to the other devices that are in the marketplace and add that to the application, we've seen good results with that. But That's my overall expectation as they go forward in terms of initial launch, probably something on the area of a third of That revenue that we've got visibility to and then the remaining 2 thirds would kind of build in over the remainder of On a run rate basis over the remainder of 2023 early 2024.

Speaker 6

Okay, got it. And then A couple of quick financials questions. If I heard you right, Erez, that you talked about The DTC margin improving. And if I heard that right, what are the dynamics that you expect to drive that up other than just volume? Because it sounded like it's going to be flat.

Speaker 2

Yes. So we the DTC in terms of gross margins Fundamentally, it's the same, okay? However, we have seen improvement mainly Because of inventory and supply chain issues, when we had Post the COVID period, we created relatively high inventories. Some of it was at Amazon. And what we have seen last year, mainly in Q3 and Q4 is that Some of it was we had to eliminate and this is something that destroyed The gross margins of the B2C is down as like 19%.

Speaker 2

I think that at some quarter we had a negative. This is something that took down The whole B2C gross margins. On a steady state, the B2C gross margins in the ranges of like 45%. That's in a steady state if we are not considering issues of supply chain and inventory. And this is why we have seen improvement, but is not a fundamental improvement in the business itself.

Speaker 2

As I stated on the B2B, we're already above 70%. So the way to calculate the future, the future gross margin for the full business will be The combination of the 2 and what is going to be the merge between B2C to B2B, we think that B2C is more or less in a kind of a Steady state, we are not losing money on the P and L of the B2C and we're going to manage it from the bottom line. We don't want to burn money on the B2C. We want to look at it As a sandbox for data collection, steering our product teams, steering our R and D team, that's the mindset behind the B2C.

Speaker 6

Okay. So just to be clear though, the direct to consumer business, that business is not quite at that 45% range Currently, is that right? It's getting there, but it's not there yet.

Speaker 2

It's in the ranges of 40 yes, it should be in the 40 to 45. At the moment, it's in the ranges of 40, I think.

Speaker 6

Okay, got it. All right. And then just If you could provide us some pro form a data given that you did the financing post quarter in terms of Pro form a share count, we should be using as well as pro form a interest Expense and interest income, if you could.

Speaker 2

Yes. So the deal that we did, Very also important to mention. So number 1, pro form a cash position as of the end of Q1 is $61,000,000 that's number 1. Number 2, we refinanced the debt in a way that we are not amortizing it. So the combination of $15,400,000 that we raised plus the refinancing, this is something that is extending our run rate by at least 4, 5 quarters or even more comparing to where we have been before.

Speaker 2

So that's number 1. Number 2, As you can see from the report itself, the burn rate was significantly lower than the previous quarter and the year before, Only $4,700,000 burn, that's point number 2. In terms of the share count, the way that we were running this deal, we created a deal that is in a preferred structure. This is something that was successful for the company in the past. We did it in 2019.

Speaker 2

And As opposed to other deals that we see for microcap companies that companies are raising money In deals that provide immediate discounts to the investors here, we did the deal at market. Hence, the deal was at $3.33 without discount. This was According to the NASDAQ rules, it was no discount. It was the average of the last 5 days. This is the definition of at market by Nasdaq rules and we were providing dividend that is given in shares As investors are holding the shares and we are providing dividends for 5 quarters, it's 5% every quarter and the 5th quarter is like 10%.

Speaker 2

So the amount of shares that we added immediately is the 15,400,000 Dollars divided by $3.33 and this is something that you should add on top of the existing share count. You're not going to see it on Yahoo Finance or other places because usually they don't show the preferred shares. Those that are going to convert the shares will be able to sell it, but they're going to lose the dividend. That's the way that the mechanism is working.

Speaker 6

Okay, got it. And so what does that do to interest expense then Compared to where you've been, does it?

Speaker 2

Yes. I wouldn't connect the The third structure, the equity deal in terms of Just being paid in shares, so we know in advance the amount of shares that are getting paid.

Speaker 6

Right. Okay. Got it. So we just need to dilute the share count As opposed to adding anything to the P and L. Sorry, got it.

Speaker 6

Okay. Very good. Thank you.

Speaker 2

Thank you so much, David.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Erez Rafael, CEO, please go ahead.

Speaker 2

Thank you. I would like to thank everyone for joining our call

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Earnings Conference Call
DarioHealth Q1 2023
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