Ray Dirks Research Initiates Coverage On Labstyle Innovations

NEW YORK, NY / ACCESSWIRE / October 13, 2015 / In my view and in the view of my team of security analysts and money managers, LabStyle Innovations Corp.'s (OTCQB:DRIO) common stock is currently undervalued. We've written about DRIO in the past and at this time we are issuing coverage with a BUY rating and a near-term price target of $3.50.

Several catalysts have prompted us to initiate coverage at this point. The most important three are: 1) the US patent recently granted to DRIO that expands its IP rights and corresponding target markets far beyond blood glucose testing - a $12 billion worldwide industry in its own right; 2) the anticipated upcoming FDA response to DRIO's 510(k) filing which, if positive, will mean DRIO will enter the U.S. market, the largest in the world; and 3) market traction and corresponding revenue growth in the countries in which DRIO has received approval and launched the Dario(TM) Diabetes Management System.

Company Profile - Bringing the Future to Diabetes Management

DRIO makes and sells patented technology providing consumers with blood glucose testing capabilities using the owner's smart mobile devices. DRIO's flagship product is Dario(TM), is a platform that combines an all-in-one, blood glucose meter, smart phone application (iOS & Android), website application and treatment tools to help diabetics become more proactive in their disease. Through the Internet cloud, data can be quickly viewed by doctors, parents and other care-givers for proactive treatment and better-informed decision making. In this way, Dario(TM) offers millions of diabetics a way to self-manage their condition anywhere, anytime by monitoring daily activities with input not only on blood sugar, but also tracking of carbohydrates and insulin. Care-givers are provided both real-time and historic data. Patient compliance is enhanced, resulting in a renewed quality of life.

In August 2014 DRIO was granted a US patent covering core functions of the Dario(TM) Blood Glucose Monitoring System and in September 2015, it received an additional patent extending its coverage into markets beyond diabetes, areas covering specific processes related to blood glucose measurement as well as more general methods of rapid tests of body fluids using mobile devices and cloud-based services. DRIO is pursuing these patent applications in other countries outside of the US.

Dario(TM) received regulatory approval in Europe and components of the device are now approved for reimbursement in the UK, New Zealand, Australia, Italy and Canada. Launch has occurred in the UK, New Zealand, Netherlands, and Canada, with others close behind. The company expects FDA approval and launch in 2015.

Savvy Management with Vast Experience

Erez Raphael, CEO/President

Mr. Raphael joined the company in 2012 and has led LabStyle Innovations through its CE Mark, territory launches, and reimbursement status. Formerly, he was an integral part of business transformation at Nokia Seimens Networks, after holding senior positions at communication software and service provider Amdocs Limited (NASDAQ:DOX), currently an $8.9 billion company.

Zvi Ben-David, CFO

Before joining LabStyle Innovations, Mr. Ben-David spent 25 years in financial accounting roles with public and private medical technology companies. These included co-founder and chief financial officer at Given Imaging Ltd. (NASDAQ:GIVN), and chief financial officer of Ultrashape Medical Ltd., where he was instrumental in its IPO on the Tel Aviv stock exchange and eventual acquisition by Syneron Medical Ltd. (NASDAQ:ELOS) in 2012.

Dror Bacher, Vice President of R&D

Offering LabStyle Innovations the benefit of over 15 years of software business experience that included management of product development in mobile and semi-conductor companies, Mr. Bacher also oversaw software development programs at Amdocs Limited. Before that, he was an executive at Tower Semiconductor (NASDAQ:TSEM) with responsibility for both high- and low-end product development.

Todd Durniak, U.S. Senior Vice President and General Manager

Mr. Durniak brings to the company over 25 years of medical device commercialization and technical leadership. Formerly, he was vice president and general manager of Neighborhood Diabetes, a division of Insulet Corp. that supplied diabetic materials through durable medical equipment and pharmacy channels. Prior to this, Mr. Durniak was with Smith & Nephew Orthopaedics serving as president, Asia Pacific, in Australia.

Current Market Metrics

DRIO's common stock price is $0.32 per share and has been trading in a range of $0.10 - $0.65 over the past 12 months. Market cap is $12.7 million. DRIO closed on a $2.5 million round of financing on August 31, 2015 with private investors, many of them returning from prior rounds to show faith in the device and its astounding prospects. Management has skin in the Dario(TM) game, too.

INVESTMENT THESIS

Selling into the $12 Billion Global Glucose Monitoring Market

The global blood glucose monitoring market is expected to reach $12 billion by 2017, driven by the sheer number of Type 2 diabetics which could be low because it's difficult to estimate how many people aren't diagnosed. More than 382 million people live with diabetes worldwide, a figure predicted to rise to an astounding 592 million by 2035, making diabetes a very dangerous epidemic in an aging population with unhealthy eating habits and sluggish lifestyles.

The worldwide diabetes management market that includes doctor visits, hospital admissions, medication, tele-medicine, insurer treatment plans, and insulin delivery devices was US$50.8 billion in 2011, projected to reach US$98.4 billion by 2018. Technologies in glucose testing and disease management have not seen much change in the past few decades, contrasted with the accelerated pace of progress in other technology-driven markets such as mobile phones and cloud-based data management. Glucose monitor makers like Sanofi (NYSE:SNY) with its IBGStar are responding to testing through wireless mobile devices, although DRIO is the only all-in-one product available with a streamlined product appealing to patients.

mHealth Market Merges the Latest in Smartphone & Cloud Technology for Disease Management

The mobile health market, dubbed mHealth and defined by disease management through smart technology like phones, iPods, tablet computers and PDAs, is exploding. DRIO has taken this concept one step further by seamlessly integrating blood sugar testing with the steadily rising use of smartphones. Grand View Research estimates the global mHealth market will reach a whopping $49.12 billion by 2020, growing at a compounded annual rate (CAGR) of nearly 50% since 2013, when figures were first gathered. Medical monitoring services will grow even faster, a CAGR of 49.7% in the same period. As we wrote last May, I believe the two key players in this market are Apple Inc. (NASDAQ:AAPL) with its Apple Watch and DRIO with its Dario(TM) Diabetes Management System.

All of the data collected on smartphones by the Dario(TM) are recorded in real-time on a cloud-based network that shares the patient's key health metrics with authorized users such as doctors and family members. This reporting greatly increases compliance, gives caregivers the ability to quickly respond to health risks, and provide better long-term care. It also means data can be monetized by DRIO because it becomes a cloud-based disease management system that can help patients and optimize costs for HMOs and other payors.

Growing Revenues Prove Market Traction in Global Rollout

The CE Mark was granted for the Dario(TM) diabetes management system in 2013, allowing for marketing in 32 countries in Europe and outside. DRIO wasted no time launching the device in the UK, New Zealand, Netherlands, Australia, and Canada. Selling is done through distributors, with exclusive contracts signed in key markets and many more to come. Soon, DRIO expects to introduce Dario(TM) in Panama and Costa Rica, and reimbursement coverage is actively pursued.

DRIO reported stunning financial results for the second quarter ended June 30, 2015. Quarterly revenues grew 161% from $67,000 in 1Q2015 to $175,000 in 2Q2015, and net loss narrowed by 34% as operational expense moderated through careful management. Our revenue and earnings projections appear below.

Soon to Enter the US Market, Largest in the World for Diabetes Management

DRIO filed a Premarket Notification Application, also known as a 510(k), with the FDA for the Dario(TM) in September 2013. Clearance to sell the device is still on track, expected by year-end. Our country is the largest market in the world for diabetes management - according to the American Diabetes Association, roughly one in four adults suffer from the condition with a total cost of $245 billion, last estimated in 2012, reflecting direct medical costs and worker absenteeism. To effectively address this vast industry, DRIO hired a diabetes market veteran, Todd Durniak as Executive VP of the US. Mr. Durniak is spearheading the anticipated US launch and with his past experience, he should ease the transition to US markets.

Multiple Recurring Revenue Streams

Sales of Dario(TM) are not DRIO's only current and future source of revenue: multiple recurring revenue streams include disposables like test strips and lancets, where reimbursement for users will be as high as 85%. There are also potential service fees from diabetes management behavioral programs and software subscriptions. Because data resides on the Internet cloud, it can be monetized through sales to insurers, tele-care providers, and clinical studies.

Beyond Diabetes

On September 9, 2015 DRIO was granted US Patent No. 9,125,549 titled, "Fluids Testing Apparatus and Methods of Use" that greatly extends IP rights previously awarded DRIO in the US by including testing of bodily fluids other than blood through an audio jack connection. Many health-related conditions and chronic diseases are tested through blood, urine, saliva and amniotic fluid and smartphones and other wireless tools are becoming the device target of choice. With this patent, and as DRIO's research and development expand toward this initiative, DRIO will be able to tap healthcare markets far beyond diabetes. Investors should note the overall blood testing market, besides glucose, was worth $50 billion in 2013, according to BCC Research.

Heart disease is a major category monitored through blood tests to measure cholesterol, kidney and thyroid function, anemia, and B-type natriuretic peptide (BNP). Saliva is another fluid used to screen and diagnose a range of diseases and conditions from HIV, to Cushing's disease, to cancer, and parasites and allergies.

As technology and medicine are advancing, testing moves toward monitoring disease via mobile devices. The rapid rise of mHealth should grab a significant slice of the medical diagnostic market as patients, their doctors, and payors want to see more testing and monitoring done by patients themselves to get timely information that could ultimately reduce costs of office and laboratory visits, and avoid expensive hospital stays.

Financial Discussion and Projections

With initial launch, distributor arrangements and reimbursement underway in select territories, DRIO recently began posting its first product revenue. For the year 2014 (ended December 31), sales of Dario(TM) were $51,000, then showed a healthy ramp-up in the six months ended June 30, 2015 to $242,000. Year-over-year moderation of operating expenses resulted in a lower loss per share of ($0.07) in 2Q2015 from ($0.15) in the comparable period last year. There is no long-term debt and cash as of 2Q2015 stood at roughly $1.1 million. Through a series of recent private funding, including executives of the firm, that totaled $2.5 million, DRIO is in a better position financially and received Board approval to increase its share base to 160,000,000, up from 80,000,000.

To cast earnings projections, a top-down analysis was chosen, beginning with the number of diabetics in each market Dario(TM) is now sold, or soon to be as infrastructure and reimbursement is established. Although Dario(TM) plans to launch in numerous new territories, to be conservative, only eight countries were analyzed whereas Dario(TM) received the CE Mark that covers 32 countries. The US was also included - approval here should happen by year-end. Distributors are expected to rapidly add Dario(TM) to their stock of glucose meters.

Estimates vary and change often as the epidemic of diabetes rises; the World Health Organization (WHO) puts worldwide growth over 4% in coming years. Because figures vary from country to country, with Type 2 diabetes rapidly increasing (not including those not yet diagnosed) and higher income countries expected to see faster growth, a 5% climb per annum was chosen.

This was contrasted with the number of smartphone users in each country. Taking data from industry follower Research2Guidance that quotes under 2% of smartphone or tablet users manage their diabetes through apps, a figure was derived to accurately depict the market. This number is expected to grow upwards of 30% by 2018 and estimates were extrapolated accordingly. The fastest growing markets targeted by DRIO are the UK, Canada, and the US for which 510(k) FDA marketing clearance is imminent. Further, according to a recent survey by Research2Guidance, 76% of mobile health app users believe diabetes is the chronic disease with the greatest business potential for mobile health. Considering Dario(TM)'s compatibility with many devices, and with the Apple iPhone and Android enjoying a combined worldwide share of over 75%, it is reasonable to believe that DRIO can participate in the diabetes smartphone monitoring market in a significant way.

To that table of figures a market penetration rate was applied, showing growth in the years extending to 2018. This number is also conservative considering the unique nature of the Dario(TM) device with few direct competitors and may also be low when viewed in conjunction with estimates from mHealthNews that predict the number of people using diabetes apps to grow 71% per year over the next five years.

Price for Dario was gleaned from certain news items and is put into the model as $55.00, which may be low for higher-end territories like the US and UK. A distributor's discount was subtracted, yielding a final revenue projection for each period extending to 2018.

Forward sales figures include the many recurring revenue streams DRIO can pick up with the device - service fees for diabetes behavioral programs which are gaining in number, especially in the US as the disease leads to soaring hospital visits and absence from work; monetization of cloud-based data for insurers, tele-care providers and research clinicians; software licensing fees; and DRIO's eCommerce initiative for direct-to-consumer marketing. Another potent source of revenue will be use of Dario(TM) to test bodily fluids like saliva or urine to detect diseases other than diabetes, providing great leverage for the device where research and development cost is expected to be much lower now that the platform is completed.

Our sales figures do not include recurring revenue for test strips: with an average of 2.5 strips used daily per diabetic each year, at a price of around $0.22 per strip, and considering the number of users and market penetration, these figures will add a significant amount to the top-line. We may be conservative in the adoption of smartphone use for diabetic apps, particularly in the US, where the American Diabetes Association estimates that in 2012, 29.1 million US citizens, or 9.3% of the population, had diabetes.

Margins, difficult to assign given the company's early stage of manufacturing and operations, were cast in accordance with other small medical technology companies and may be low-balled as scalability is enhanced and attempts to keep costs in check prevail. If DRIO sells more shares to investors than projected, a larger share base could be dilutive. Net income is expected to turn positive in 2017. An estimated rapid and robust ramp in sales brings the company to a top-line of $23.3 million in 2018, for a staggering CAGR of 187%, and with DRIO's continued prudent use of funds, it should be able to reach earnings per share estimates.

Going forward, we predict DRIO can show sales upwards of $35 million by 2019 based on the number of diabetics adopting apps with their smartphones, and the number of people with this condition expected to be diagnosed. Not included in our estimates, DRIO expects to see more Type 1 diabetics using this revolutionary and convenient device, further pushing up future sales figures.

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Valuation and Target Price

To assign a target price for LabStyle Innovations, a discounted cash flow model was employed as the company is currently in a loss-making position and comparable companies are either privately-held or part of large multinationals. A forward P/E multiple of 38x was chosen to reflect fast growth; likewise, the discount rate - comprising a risk-free rate pegged to 3-month Treasuries and two additional risk metrics to account for the company's small size and untested marketing prowess - was kept high but appropriate for DRIO's stage of life.

Using our 2018 EPS of $0.12 and discounted to 2016, a near-term price target of $3.50 was assigned.

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Risks

As with any small cap stock, investors should be aware of risks associated with the investment. Those specific to DRIO include rejection of its 510(k), limiting a big market, or non-approval in other key markets. Patients may not like the device, although response has so far been overwhelmingly positive. Doctors may not be interested in real-time or historical data trends, preferring older tried and true methods, and may not trust the device to give accurate results. Product roll-out may be delayed as production ramps up, causing backlogs that annoy customers, including distributors. Like a lot of fast-growing companies, DRIO may not have in-house capacity to manage operational development.

Non-specific risks are dominated by the potential for dilution as the company will likely need to raise more cash in the future. News flow tends to be light with companies the size of DRIO; however, with new markets coming on board at a swift pace through launch, distribution agreements or reimbursement, this should not pose a problem.

This is my initial research report on DRIO and I suggest readers/investors do their due diligence, consult their investment advisers, and then consider taking a position in the common shares of DRIO at current prices for what I believe is the possibility of spectacular capital appreciation on their investment over the near term (six to 12 months) and the long term (one to three years).

RAY DIRKS Research suggests that readers/investors place no more than 1% of the money they devote to common stocks in any one security. It's best to diversify.

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About Ray Dirks

Ray Dirks came to Wall Street with Goldman, Sachs & Co. in 1963 where he was established as the leading insurance stock analyst dealing with institutional investors and high -net worth investors both in the U.S. and internationally.

In 1973 Ray uncovered the biggest Ponzi scheme of the 20th century, the Equity Funding fraud. Over the years Ray has expanded his stock market research to include Healthcare Stocks and Special Situations. Ray has written two books,"The Great Wall Street Scandal" and "Heads You Win, Tails You Win", published by McGraw-Hill and Bantam Books respectively. He continues to provide research to institutions and individuals, and he manages money for some individual investors.

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Jackie Rodriguez
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SOURCE: RAY DIRKS Research