Yesterday was just one of those days that makes us fully appreciate why we call this the wacky world of diabetes. As everyone now knows Sanofi says they “over-invested” in digital diabetes and therefore was stepping away from any active role in their partnership with Verily, Onduo. Naturally shares of Livongo increased on this news even though insiders have decided to start selling shares in mass which under normal circumstances is not a good sign. But as we learning everyday these are not normal times.
The Livongo investment narrative was with Sanofi bailing on Onduo they would have one less competitor to worry about. The only problem being is that Onduo isn’t the only Livongo competitor. They may be one of the better-known competitors, but they are by no means Livongo’s only competitor.
Frankly you can’t swing that poor dead cat without hitting a Livongo competitor. Now we know no one likes to let a good fantasy get in the way of harsh reality but the facts, yes, those pesky facts again, tell us that investors are grasping at anything they can to justify their investment in Livongo. They have become so enamored with digital diabetes that they have become blinded to rational thought.
Now word has come that the company has priced shares at $27 for the offering from insiders which seems reasonable with shares closing at slightly above that level yesterday. Still the S-1 from this offering has provided some interesting reading and since no one bothers to read these things we thought as a public service we’d share some of the highlights. We should note that before reading the S1 we already knew the company has been outstanding at losing money, a fact that was reinforced in the S1.
We also knew the company also has a somewhat convoluted method for calculating revenue, a fact that was also reinforced in the S1. Yet what we did not know and what the company has never revealed in any public forum to our knowledge is what their attrition rate is or what it costs them to acquire a member. Well thanks to the S1 we now know, and the numbers aren’t very pretty.
Let’s start with attrition, an important number as remember Livongo only makes money when they get a patient to enroll and then keep them enrolled. As anyone in diabetes will tell you it’s a lot cheaper to keep existing patients then it is to get new ones, so once you get one best to keep them. Pay close attention to this statement from the S1,
“We also closely measure member retention, and our average monthly member churn for 2018 was approximately 2%. We calculate our monthly member churn by looking at the members who were with us at the beginning of each monthly period and then subtracting the number of those members still on our solution at the end of each monthly period and dividing that number by the starting member number for that monthly period.”
Notice the statement says, “AVERAGE MONTHLY member churn for 2018 was approximately 2%.” Now we know that sounds harmless until you remember there are 12 months in a year and 2% times 12 = 24%. The statement does not state they are losing 2% per year no 2% per month. That means nearly a quarter of their enrolled patient base is leaving, that nearly a quarter of their enrolled patient base must be replaced to make the same amount of money.
While it should be obvious this is not a good thing and shows the difficult road Livongo must travel. As we suspected and these numbers confirm, a significant number of patients aren’t responding to coaching. Frankly we aren’t surprised and suspect that this problem isn’t Livongo’s alone as all the digital diabetes companies will likely experience similarly high attrition rates. As Momma Kliff used to say misery might love company but it’s still misery.
Next is another critical number as we’ve always wondered what it actually cost to get a patient. Since way back in the days of SMBG cost of acquisition has always been a critical metric. This is one reason all the SMBG companies focused on getting insulin using patients as they used the most test strips and therefore quickly covered their COA and started turning a profit. Well it’s no different with Livongo as the cheaper it is to acquire an enrolled patient the faster it is, they start making money on that patient.
The problem however is for Livongo the costs to acquire enrolled patients is going up, while revenue per enrolled member is going down. And this assumes the Livongo numbers are accurate and the contracts actually generate the revenue anticipated. Remember Livongo is not reporting actually revenue earned but anticipated revenue based on their interesting method for calculating revenue.
Based on our calculations from the numbers found in the S1 in 2017 it cost the company a little over $38,000 to acquire a CLIENT, in 2018 that number jumped to slightly over $49,000. In 2017 it cost just over $153 to capture an enrolled member, in 2018 that number jumped to over $178. Worse revenue per enrolled member is decreasing as well, in 2017 each enrolled member generated $1,432.62 in revenue, in 2018 that number fell to $1,356.72. These trends have continued when you compare the first nine months of 2018 to the first nine months of 2019.
The problem as we see it is given how the company calculates revenue, we have no clue whether these numbers are emmis, which is Yiddish for the truth. Nor are we confident that the enrolled numbers are emmis either, as it would not surprise us if both the revenue and enrolled members are inflated. In a nutshell as Momma Kliff would say all this seems like schmegegge, which according to the Urban dictionary means – “Yiddish slang word meaning bullshit, baloney, hogwash, nonsense, crock of shit or hot air.”