Why it happens

Vernon Law a professional baseball player once said; “Experience is a hard teacher because she gives the test first, the lesson afterward.”

We thought about this quote when we read the earnings released today from DarioHealth. Just in case anyone isn’t familiar with the company and not sure how anyone couldn’t be as they issue press releases almost every day. Dario makes the My Dario BGM yet in an attempt to remain relevant is transitioning to become another Livongo or OneDrop.

Per the earnings release;

“In the first quarter of 2020, Dario executed in line with its multi-year strategic operating plan of creating a best in class digital health solution with a strong economic profile, including recurring revenues and high margins. With additional clinical data, an expansion of our platform and new interest from both clients and partners, we believe we have set the foundation for penetration into multiple Business-to-Business-to-Consumer (B2B2C) channels in the second half of this year. Irrespective of the global pandemic, we successfully expanded our remote care offering by partnering with MediOrbis to provide our 50,000 users additional ways to engage using a full-service telemedicine network of physicians,” said Erez Raphael, DarioHealth’s Chief Executive Officer.

Before we continue, we’d like to commend Mr. Raphael or whoever wrote that quote on getting in almost every hot button phrase they could find. Digital health, recurring revenues, high margins and telemedicine all made it into that paragraph. As we said earlier this company has a panache for issuing press releases so we really shouldn’t be surprised.

So how is Dario doing again per the release;

“Revenues for the first quarter ended March 31, 2020 were $1.67 million, a 7.3% sequential decrease from fourth quarter ended December 31, 2019, and a 25.6% decrease from the $2.24 million in the first quarter ended March 31, 2019.

Revenues generated during the first quarter ended March 31, 2020 were derived mainly from the sales of DarioHealth’s components and from the offering of our membership plans to our customers in the U.S. Revenue declines are attributed to lower spending in the Direct-to-Consumer (DTC) channel and shifting efforts to the larger B2B2C channels which we anticipate will drive growth later this year.”

Wow a whopping $1.67 million in revenue incredible. Not exactly the revenue they anticipated way back in March of 2016 when the company went public. Back their S-1 stated;

“The DarioTM Smart Diabetes Management Solution is targeted at the mHealth app market currently estimated at $10 billion with expected growth of 15% to $31 billion by 2020 according to Research2Guidance. In addition, we are also focusing on the global diabetes care devices market for diabetic blood glucose self-monitoring, known as BGMS, that is expected to reach approximately $24.6 billion by 2020 according to researchandmarkets.com.”

To fully appreciate how much the glucose monitoring market has changed since then consider that back in March 2016 Dexcom was trading in the mid-60’s, Libre wasn’t even here, OneDrop was starting up and Livongo had just raised $44.5 million. LifeScan the then leader in BGM was still part of JNJ.

Still Dario was able to go public closing at $3.51 on March 14, 2106. A few weeks later the stock was trading slightly above $5 per share only to go on an extended slide bottoming out at 20 CENTS a share in November 2019. On the brink of collapse Dario did what every desperate company does initiating a 1 for 20 reverse stock split on November 18, 2019 overnight shares went from 20 CENTS to $4.30.

Fast forward to today and shares are trading in the $7 range, the company has a market cap of around $23 million and they continue to issue press releases with reckless abandon. Yet what’s really amazing and that’s saying something with their history is that people continue to invest. Now if this does not conclusively prove that the greater fool theory lives on, we don’t know what does. But even more astonishing is the how investors fail to learn from companies like Dario.

Since we have written extensively on the BGM market and its many failures there is no need to bring up old news. Just as the insulin pump graveyard is filled with failures so too is the BGM graveyard. BGM has the double whammy as unlike insulin pumps which are still here and getting better, BGM is a dying technology being replaced by CGM. It’s not surprising that the BGM companies in a desperate attempt to remain relevant are reinventing themselves. Besides Livongo and OneDrop every BGM company is moving towards becoming a diabetes management platform with a recurring revenue model.

Every one of these companies now offers a cloud enabled meter that sends readings to a way cool whiz bang app. Each offers coaching and offering additional platforms that supplement their efforts in diabetes. Never mind that none of the investors seem to care that all this competition will drive fees DOWN or that CGM can do the same thing only better. Nope Livongo is now worth nearly $6 BILLION, OneDrop will likely go public and Onduo, a unit of Verily has the resources to go 100% at risk a move which would wreak havoc throughout the sector.

Before we continue, we should note that of all the players OnDuo is about the only one that has embraced CGM and is targeting the largest patient population patients with Type 2 diabetes. Why they haven’t gone 100% at risk yet remains a mystery to us but given the vast resources of Verily, a unit of Google, they could easily do so.

So why then has the street fallen in love, perhaps it’s only lust, with companies like Livongo. Why do they continue to ignore the many hurdles the company must overcome to remain relevant. Even without the creative accounting employed by Livongo there are numerous obstacles. And not to pick on Livongo, but it is fun to pick on them, every BGM company which is in this sector faces issues.

The answer is simple as you guessed it, it’s all about money. Digital health remains hotter than Georgia asphalt. Gas has been thrown on this raging fire thanks to COVID which has pushed telemedicine and remote patient monitoring to the forefront. Hence the reason all of these companies use these terms every chance they get. Never mind the harsh realities of actually having a commercially viable platform, one that actually makes REAL money. Nope it’s easier to buy into the promise of tomorrow than to face the realities of today.

What everyone the companies and their stakeholders are banking on is the greater fool theory. That another company will come along with a boatload of bucks and buy them before this house of cards collapses. But what happens if a fool doesn’t come along, what happens if instead of getting acquired they have to run the company. That they have to deliver on the promises they have made.

The answer is like others before them they will join the BGM graveyard. Share prices will sink faster than the Titanic. Again since we have covered the history of this sector there is no need to mention the many who have tried and failed. Each failure sharing a common well-traveled path. First comes a great idea, in comes venture money, followed by more venture money, followed by an IPO. Shares begin to trade moving upward with each piece of news that seems to validate the original concept.

Some escape death and are acquired. However an equal, more like a greater number, fail to find a buyer forcing them to run the company and deliver on promises made. Unable to do so one of two things happen, either they find religion, rid themselves of the management team that created the mess and become a real company. (This is exactly what happened at Insulet.) Or they struggle to remain alive using every possible tactic they can find until finally they run out of options. (This is playing out right now with Senseonics.)

We offer this perspective and history lesson for as Laurence J Peter once said; “History teaches us the mistakes we are going to make.”