A Path to …

A Path to …

With the market in a tailspin this week, Teladoc/Livongo/Lilly and Dexcom reporting earnings some news from LifeScan yesterday may have been lost in the shuffle.

“LifeScan, a world leader in blood glucose monitoring, serving 20 million people with diabetes and the maker of the iconic OneTouch® brand products, and Cecelia Health, one of the nation’s most scalable clinical coaching and telehealth companies focused on diabetes and other chronic disease management, today announced a partnership to deliver best-in-class, live, personalized coaching from Cecelia Health’s Certified Diabetes Care and Education Specialists through our OneTouch Reveal app beginning November 2020.”

This is just the latest in a series of LifeScan hookups as last week it was Truepill, before that Noom and before that Sanvita. About the only thing the company doesn’t have is a Tyler – that’s coming and an insulin pump, that isn’t. Slowly and methodically since being acquired by Platinum LifeScan has been reinventing itself as they know as we do that BGM will eventually become as extinct as dinosaurs.

Hence why their very first hookup was with Sanvita who has a CGM under development as LifeScan also knows CGM will become the standard for glucose measurement. They know as we do while Dexcom and Abbott are dominating the CGM market, this market like BGM before it will eventually commoditize and there will be room for other systems. As we have stated in the past glucose monitoring technology may have changed but the dynamics of the glucose monitoring market have not.

Back before JNJ sold LifeScan to Platinum we wondered aloud why Verily who back then was just building Onduo didn’t buy the company. Even though Onduo back then had a partnership with Dexcom one thing they didn’t have was customers. Even though Onduo correctly anticipated that CGM was the future for glucose measurement one thing they did have was customers. Yet for reasons only Verily knows they decided not to buy LifeScan even though they could have easily afforded to. And we all know where Onduo is today going nowhere in a hurry.

What makes this wackier is JNJ sold LifeScan to Platinum for just over $2 Billion. A deal that practically paid for itself as Platinum leveraged the deal to the hilt and LifeScan was throwing off millions in free cash flow because they had an established business with millions of established patients, they had the most valuable asset in diabetes MILLIONS OF PATIENTS. They had scale and scale as we keep stating is critical.

Platinum did not buy LifeScan to keep it they bought it as they want to flip it hence the reason for all the hookups. Platinum correctly anticipated where diabetes management was going and reasoned once all the pieces were in place someone who come along and take LifeScan off their hands as after all LifeScan had what everyone really wanted in the first place MILLIONS OF PATIENTS, HUGE SCALE.

LifeScan does not have possible patients and they make real money. LifeScan does not estimate the value of a contract they know exactly how much real money is coming in the door. They have MILLIONS OF PATIENTS.

So naturally when Teladoc was looking to enter diabetes management they merge with Livongo valuing the company at insane $18.5 BILLION. As we noted yesterday Livongo’s accounting methods are interesting to say the least. But let’s put that aside for moment what Livongo doesn’t have and what Teladoc really wants is MILLIONS OF PATIENTS, MILLIONS OF REAL PATIENTS NOT POSSIBLE PATIENTS.

Now Teladoc will say that Livongo has all this way cool whiz-bang artificial intelligence which is very nice but hardly worth $18.5 BILLION. The fact is and yes we know facts don’t matter when you buy the sizzle the Livongo platform is hardly unique and very easy to replicate. Besides LifeScan and Onduo OneDrop My Dario and UnitedHealthcare are just a few of the companies that quickly come to mind as doing the same thing Livongo does. You can’t swing that poor dead cat without hitting a diabetes management platform.

With all this competition one would think that Teladoc would have preferred to own a diabetes management platform that made real money and had real patients. That they would have understood basic business that when additional competitors enter a market prices go DOWN not UP. Perhaps they would done some due diligence about the diabetes market and seen this scenario play out over and over. Perhaps they would have understood that the most valuable asset in diabetes is not technology, it’s not whiz bang or way cool Its PATIENTS and the company with the most patients wins.

As we move into 2021 the diabetes management market will undergo many changes, changes which will force Teladoc/Livongo into some uncomfortable choices. Already we have seen Livongo competitors going all in 100% at risk only getting paid for producing real and verifiable outcomes. A move which we believe will begin the transformation where 100% at risk is the standard not the exception. Not to pound on Onduo but with their vast resources we never understood why they haven’t gone this route. They could cleaned Livongo’s clock if they had any vision but instead they focused on way cool whiz bang. Sad but typical in this wacky world.

What hasn’t happened and is about to is that so far no one has entered this market with access to MILLIONS of patients no one that is until UnitedHealthcare. United also works with Dexcom, has the ability to go 100% at risk and has access to MILLIONS of patients. Built in access no less. They also have the financial resources to compete and they have a very cool albeit not whiz-bang diabetes management platform which targets patients with Type 2 diabetes which just happens to be the largest group of patients.

See Livongo in addition to its other issues has another issue in that they target insulin using patients. Now this fine for the short term but dangerous over the long term because of Tyler. The simple fact is and yes these pesky facts are important with Tyler these patients do not need what Livongo offers. With their acquisition of Companion Medical Medtronic will likely be the first to offer Tyler, this in turn will push Lilly and Novo Nordisk to introduce their version of Tyler. And oh by the way Lilly and Novo have millions of patients too. Tyler will produce solid patient outcomes, be easy to use, will be covered by payors and will not require employers to pay any additional fees. This basically means when it comes to the diabetes management market Type 2 patients are where it’s at and Livongo ain’t there.

By now you just might be wondering why Teladoc decided to merge with Livongo valuing the company at a crazy $18.5 Billion plus diluting their own stock. You might just be wondering why if they wanted to be in the diabetes management market so badly why they did not buy instead LifeScan who besides having MILLIONS of patients would have come at a far cheaper price, a price that would include diluting their stock. Well wonder no more as Teladoc like so many before they bought the sizzle, they feel for way cool whiz bang over sound fundamental business dynamics.

There is no question in our mind that Teladoc is going to look back and regret valuing Livongo at $18.5 Billion, unless of course they follow the Livongo example and are themselves acquired before this major error in judgement is discovered. Yes the greater fool theory is alive and well.

One also has to wonder who if anyone will come along and acquire LifeScan and use the company and their MILLIONS of patients as entry into the diabetes management market. Could it be Walgreens, CVS or perhaps a United competitor. Maybe Apple who’s sniffed around the diabetes space will make the play. Perhaps Amazon who’s also dipped their toes in the diabetes waters will go for it. Maybe and this will sound crazy but that fits here it might be Google, yes the same Google that also owns Verily.

Not to get off track but it seems that Google and Verily have a strained relationship and these once happy partners aren’t so happy anymore. Don’t be surprised if Google cashes out of Verily when they do an IPO and then begins their own move into the diabetes management market.

Getting back to what happens to LifeScan no one really knows all we do know is they own the most valuable asset in diabetes MILLIONS OF PATIENTS. Not to be repetitive but in this game the COMPANY WITH THE MOST PATIENTS WIN. Diabetes never has been, never will be about whiz bang or way cool this is all about patients. This is a BUSINESS and when it comes to the business side of diabetes the fundamentals do not disappear just because something is cool.

Listen we’re happy for the Livongo shareholders, their management team and any of their employees lucky enough to have stock options. You cannot blame Livongo for playing the game about as well as it can be played. However you can blame Teladoc for being the greatest of all fools.

Finally if you haven’t already make sure you VOTE. Have a great weekend everyone.