Brad the Broken

While not all Game of Thrones fans were happy with the final episode we just loved the scene when they choose the new ruler of the seven kingdoms. Brad the Broken wasn’t chosen for any other reason than he came with a good story, a story that could be sold to the people he would be ruling. This really isn’t much different than what’s going on right now with Livongo. As we all know Livongo is about to go public and based on everything we’ve been reading and hearing the company will be valued at whopping $2.3 Billion.

As we have noted previously we have no doubt investors will eat up this story as digital diabetes is the hottest thing going and Livongo is taking full advantage of being the first digital diabetes company (DDC) to go public. This is great news for Livongo insiders who are about to hit the lottery and all the other digital diabetes company who will follow in Livongo’s wake. Take it to the bank this IPO will be a home run and it won’t be long before we have a host of DDC’s going public.

Yet with all the excitement, fanfare and hype we would love to know the answers to some questions that Livongo won’t face while they are on their roadshow. See the investment bankers, analysts and the rest of the investment community could care less that so far Livongo has proven just one thing, they are very adapt at losing money. Nor do they care much about that as hot as DD is this really is not a new idea but a very old idea in shinny new box.

The reality is Livongo has everything lining up in the favor and all the details or long term outlook, those pesky facts, really don’t matter all that much. Everyone including us here at Diabetic Investor believe that investors will cash out when a bigger company comes along, buys into the hype and buys Livongo as their entry into DD.

Although we have not seen the Livongo presentation we can pretty much guess what’s in it. Diabetes is a chronic disease state, growing at epidemic rates on a global basis and is not just a global healthcare crisis but also a financial crisis. There will be lots of talk about how with all the drugs in the medicine cabinet and toys in the toy chest still nearly two thirds of all patients are not under good control. Livongo will point to the studies they have done which show their platform lowers costs while improving patient outcomes, what possibly could go wrong?

Plenty actually when you start to look past the hype. Let’s start with the mundane but somewhat important notion of making money. The theory is while Livongo may be losing money today once scale is applied they will turn a profit, this of course assumes two things; first the platform will actually achieve scale and second this additional scale will drive costs lower so they can make a profit.

Achieving scale won’t be as easy as everyone seems to think it will be, especially when you consider how many DDC’s are playing in the same sandbox Livongo plays in. Competitors who also want to achieve scale and likely will undercut Livongo pricing. Just as value based contracting has taken hold in the device and drug markets there is nothing that says DDC’s won’t also follow this format. OnDuo, the Verily/Sanofi joint venture could easily offer their platform for free making money only when they produce real and verifiable results.

Even if Livongo can somehow successfully navigate the treacherous pricing waters there is nothing that says once scale is achieved costs will decrease. The issue is one of how Livongo delivers their services, coaching which is highly dependent on humans. Unlike artificial intelligence or algorithms the Livongo platform uses humans to coach their patients and humans aren’t cheap. Already we are seeing other DDC’s who are replicating the Livongo platform using AI rather than humans to do the coaching.

Another problem we have with the Livongo platform is it’s already old technology. As we have noted many times CGM is quickly becoming the standard for glucose measurement. CGM not only offers more and better data it’s becoming cheaper and more patient friendly. Think for a moment what would happen should either Dexcom or Abbott decides to enter the DD space. Yes today these platforms are mostly focused on insulin using patients but it won’t be long before the algorithms they use move from the insulin using patient but to all patients regardless of how they manage their diabetes. Why would any company pay Livongo for their platform when Dexcom or Abbott could offer a similar cheaper approach.

Also ignored is the increasing usage of GLP-1’s and the many new GLP-1’s about to hit the market. Novo Nordisk will soon have an oral GLP-1 on the market and while we are somewhat skeptical of this drug due to its complex dosing regimen the drug does work very well when dosed properly. Intarcia will soon be resubmitting their exenatide micropump to the FDA another platform which will make Livongo’s road more difficult.

What’s misunderstood here is that when all the hype is striped away Livongo’s platform is ultimately about patient adherence. Getting patients to do all the heavy lifting that is required to achieve better outcomes. There is no doubt that patient education is the most effective method for improving patient outcomes but as we have noted this path is also the most expensive. What makes the Intarcia system so intriguing is that it takes away all the heavy lifting as once inserted the system does all the work, the patient does NOTHING.

As everyone knows we’re big fans of Tyler a system which when used as designed will help millions of insulin using patients more effectively manage their diabetes. The same can said for the many hybrid closed loop insulin delivery systems. We’ve said it before and will say git again in just a few short years much of the heavy lifting experienced by insulin using patients will go away replaced by either Tyler or one of the closed loop systems. Throw in the Intarcia micropump or any of the long acting once weekly GLP-1’s currently available and the same will be true for patients on GLP-1 therapy.

This leaves patients on orals alone or orals plus insulin as the target market for Livongo. Here too life is getting easier for the patient as there are several systems which help patients using insulin plus orals more effectively dose the insulin portion of their therapy. The last hurdle and it’s a huge one is getting the patients on orals alone or orals plus insulin to take their orals as prescribed. Like it or not this is an age old problem and quite frankly we don’t see any cost effective way Livongo solves this problem.

We hate to get on our soapbox here but until the patient has a real vested interest in achieving better outcomes we don’t see any of these platforms having much success. The harsh reality here is that the majority of patients have a chronic disease they didn’t want in the first place. A chronic disease which requires lots of work to manage properly and sadly the majority of patients don’t want to put in the effort. Even if somehow Livongo found a way to incentivize patients this would only add to their cost making it more difficult to make money.

Once again this all comes down to money – who makes it – who saves it and who spends it. Payors talk a good game about better patient outcomes but in practice want to manage their patients with diabetes as cheaply as possible. They know these patients will only be with them for a short period of time and are willing to take the chance that when the costly complications associated with poorly controlled diabetes kick in this patient will either be with another payor or moved to Medicare. Employers desperate to control rising costs will also find out that the so called savings produced by Livongo’s platform may or may not ever materialize. This is the exact same reason why disease management, the old platform which Livongo is based on, faded away.

But these facts as pesky as they are really won’t matter all that much because like Brad the Broken Livongo has a great story to tell.