Is this a sustainable business?

Rarely has an IPO sparked so much interest and speculation as the upcoming IPO for Livongo. Yet with all this speculation there seems to be a general agreement that the Livongo business model is not sustainable over the long haul. This is not just because there is an intense amount of competition in the digital diabetes space which will create pricing pressure. Rather over just what is Livongo selling.

Before we throw in our two cents let’s review just what Livongo and the others in digital diabetes say they do. The concept of digital diabetes as we have noted is really no different than what was disease management back in the day. Using patient coaching the goal is to help the patient achieve better overall outcomes which in turn should lower healthcare costs as these patients avoid the costly complications associated with poorly controlled diabetes.

Again as we note far too often with all the way cool whiz bang toys in the toy chest and drugs in the medicine cabinet one indisputable fact remains as almost two thirds of all patients are not under good control. This fact unfortunately is the one thing that has not changed since we began writing Diabetic Investor over twenty years ago.

Now if you ask most physicians or Certified Diabetes Educators (CDE’s) they will say the reason for this dismal fact has nothing to do with the toys the patients has to play with or the drugs they take. The reason is patients don’t play with the toys nor do they take their drugs as they are prescribed. Whether you want to it call adherence or compliance the harsh reality is most patients aren’t living their lives for their diabetes it’s just one more thing they must deal with something they’d rather not deal with.

The theory behind disease management and now digital diabetes is with a little help some coaching the patient will do the heavy lifting that is required and therefore obtain better outcomes. In the old days this was done with coaches calling the patient today this done with a smartphone or in Livongo’s case text messages sent to the patient’s glucose meter. In the old days the coaches were somewhat handicapped as they were reliant on the patient providing data either verbally or by uploading data from their computer. Thanks to device connectivity getting the data is now pretty simple, again assuming the patient actually checks their glucose levels.

In this respect digital diabetes does add something new that disease management didn’t have, digital diabetes is collecting tons of patient’s data. Data that can then be resold. Although we do find it somewhat ironic that in the S-1 Livongo states;

“Our business is based on a recurring revenue model. This results in a highly predictable revenue stream, which helps us plan for growth and scale. Our clients are employers, health plans, government entities, and labor unions, which understand the importance of offering an effective platform for consistent management of chronic conditions. We have developed a go-to-market approach that allows us to roll out our platform to thousands of members in a short time and to launch multiple clients quickly. Our new client subscriptions typically have a term of one to three years, and we have aligned our incentives with those of our clients by only charging on a per participant per month basis. We have also aligned the incentives of each stakeholder in the member’s health journey by designing our solutions with a clear path for clinical and financial outcomes.”

Looking further through the S-1 we did not see any mention of monetizing the data the company collects nor did we see any mention if Livongo actually owns the data they collect. Perhaps this was by design given the recent concerns over patient privacy. However just as Google collects data they can and do monetize, Livongo has the same opportunity. Herein lies the conundrum, given the intense competition for the patient with diabetes combined with the fact that the cost savings from better outcomes is not immediate how will Livongo stay in business without additional revenue streams.

Ok before we go on a word of warning as we are about to enter that murky world of numbers. See our belief is the savings from better patient outcomes really don’t kick in until much later in the patient’s life cycle when they are off private insurance and on Medicare. Yes there is some savings from keeping patients out of the emergency room, but this is not Livongo’s target market or stated purpose. Livongo goes to great lengths stating how they save employers money NOW not ten years from now.

The S-1 states;

“Unlike many healthcare solutions, we enable upfront savings and a strong return on investment across many clients. For example, with Livongo for Diabetes, we have been able to demonstrate average client savings of $88 per participant per month, or PPPM, in the first year of use based on a difference-in-difference cohort analysis, and among qualifying clients who make data available to us, we have been able to demonstrate an average client savings of $129 PPPM.”

We see two problems with what Livongo is saying;

1. First and we are not saying that Livongo is playing with the numbers but when it comes to demonstrating savings to employers our statistical friends keep saying it all depends on how you do the math. Simply put the “savings” can be manipulated based on how the calculations are done.

2. Even if the savings are real Livongo is fighting a losing and costly battle as their competitors will do one of two things;

a. Offer their services at a cheaper price which will increase the employer savings or

b. Offer their services for FREE only getting paid for producing actual improvements in outcomes

Put another way Livongo is NOT the only provider of digital diabetes they are just the first one to go public. The fact is some of Livongo’s competitors have greater financial resources and/or sell other things besides employer savings. OnDuo, the partnership between Verily and Sanofi, does basically the same thing as Livongo but has much deeper pockets than Livongo and has been known to offer value-based contracting only getting paid for outcomes. CVS and Walgreens on the flip side can offer the same thing making money not from coaching or improvements in outcomes but from patients filling their scripts at their pharmacy and/or buying other items when they pick up these scripts.

Therefore it would stand to reason that Livongo like the others here as well would want to monetize all the data they collect, which in itself is a problem as OnDuo being part of Google knows a thing or two about data collection as does CVS and Walgreens both of whom having customer loyalty programs.

We mention this coming pricing pressure because digital diabetes is NOT 100% digital and does involve humans and humans cost big bucks. As we anticipated and as was confirmed by the S-1 Livongo is losing lots of money and expects to continue losing money as they “grow”. Now we may not be the brightest firework in the sky but even we know that you cannot make up in volume what you are selling below your cost. You just produce bigger loses.

The biggest fallacy with digital diabetes is that humans can be eliminated with artificial intelligence. Yes AI can help lower costs, but the fact is humans are needed and patients like dealing with humans. This is even truer with Livongo’s target market which consistent more broadly of Type 2 patients and not intensively managed insulin using patients who are more adept at using technology.

The reality here is Livongo is riding the digital diabetes wave and is basically getting a pass from the investment community when it comes to the details or long-term outlook. This is somewhat understandable and quite frankly no one really cares all that much whether the business model is sustainable or not as no one thinks Livongo will stay independent for long. This is another constant in our wacky world the greater fool theory is alive and well.

Have a great Fourth of July everyone.