Dumb they ain’t

Since the day Livongo went public achieving an astronomical valuation of over $4 Billion we wonder just what were investors thinking. We knew that digital health was hotter than Georgia asphalt and that the Livongo team had produced in the past, but this didn’t explain why the company achieved such an incredible valuation. From the start we believed, and we continue to believe that the platform offered by Livongo was not new rather it was old fashioned disease management using new technology.

Having witnessed disease management companies flourish then whither we anticipated the same fate for Livongo. After hitting a high of $44.25 on July 31 of last year the stock proceeded to wilt closing at $15.92 on October 1, 2019. While we did not feel vindicated, we did feel that investors were coming to their senses.

Since hitting that low back in October the stock recovered somewhat moving into the 20’s. Yet recently the stock seems to have moved out of this pattern closing at $35.27 yesterday. Again we weren’t really surprised with this recent move upward given the company pre-announced better than anticipated results for the first quarter. This in the midst of the coronavirus crisis.

A crisis which disproportionally impacts patients with diabetes and while the Livongo platform has nothing at all to do with preventing patients from getting the virus stories began appearing that there was a connection between the virus and Livongo. That this crisis would benefit Livongo. While we aren’t buying into this myth the company has been on a relentless promotional tour appearing on CNBC and other media outlets promoting this myth. Hey, never let the facts get in the way of the truth especially when this myth is helping drive shares higher.

Now let’s be very clear here the folks at Livongo aren’t dim. They cannot and should not be blamed for taking the ball that has been handed to them and running with it. Nor should management be condemned for cashing out their options as the stock began to rise. This is one of the perks of being in on the ground floor and quite frankly no one would pass on the opportunity to buy something for pennies and then sell it for dollars. This is America after all and to paraphrase Mark Twain the reports of the death of capitalism have been premature.

The question for us really hasn’t changed. Will a greater fool come along buy into the myth and buy Livongo or will this house of cards crumble and come crashing down? Our guess or should we say our many gray hairs and 20 plus years of covering this wacky world tells us to believe in the greater fool theory. In our 20 plus years we have witnessed far too many deals which made no sense at the time they were done. Deals done not because they made financial sense rather done because a company was in the right place at the right time.

We can’t help but think this is exactly what will happen with Livongo. It almost doesn’t matter of their platform works or not. It really doesn’t seem to matter that they have a rather strange way when it comes to calculating revenue. Nor does it seem to matter much that other than a few studies using very fuzzy math there is no hard evidence that the short-term results are sustainable over the long term. Even wackier it doesn’t seem to matter that Livongo is not alone in this space and these competitors will drive fees down.

What seems to matter is they have a really cool toy combined with a great, albeit, old story. Livongo reminds us of an old movie that has been remade with a new cast using new technology. Just as the Ten Commandments was originally a silent movie remade into that classic film, we see every Passover, Livongo is disease management remade with new technology.

Back in the day when disease management was all the rage the early entrants were gobbled up by larger players who saw disease management as the answer to their problem. The problem of course being getting patients with diabetes to achieve better control. Better control which would then translate into lower healthcare costs. If all this sounds familiar it should as Livongo is claiming the exact same thing. The only difference between what the disease management companies did and what Livongo is doing is the technology they use.

So what happened to the many disease management companies that were not fortunate enough to get acquired? Well a couple of things. First it was discovered that the savings these companies generated came from keeping insulin using patients out the emergency room not from better outcomes. Next it was discovered that the short-term improvements witnessed in non-insulin patients were not sustainable. That these patients lost interest and went back to their old behavior patterns. Or put another way behavior change didn’t work.

This is why it’s a race for Livongo. Why getting acquired before these same discoveries are made with digital health is critical. Being that digital health is still hot, that virtual health thanks to the coronavirus is taking center stage we believe that Livongo stands a very good chance of winning this race. If nothing else, they have the major advantage of being the highest profile company in the industry combined with a smart team who knows how to take advantage of the situation. As we stated earlier these people are not dim.

If nothing else Livongo is the beneficiary of being in the right place at the right time with what looks like the right thing. As Momma Kliff said, and she has been quoted by many, timing is everything.