It’s an arm race and money is the weapon

It’s an arm race and money is the weapon

Everyone pretty much knew that once the Teladoc/Livongo merger was announced it would set off an arms race in digital health. With Teladoc valuing Livongo at a whopping astronomical nutty $18.5 Billion everyone in the digital health space began uncorking champagne while doing the happy dance. These companies knew two things their already inflated valuations would get more inflated and it was time to go out and raise more money. As Momma Kliff used to say the best time to raise cash is when the fools are afraid of being left out of the race.

Last week Cecelia Health closed a $13 million round and yesterday OneDrop announced a round that could bring in close to $100 million.

With all this money being thrown around one just might get the impression that besides having way cool whiz bang these digital health companies are making tons of money. That besides way cool whiz bang they have sound business models. Well one could think that, but they would be wrong. No we are not trying to be Debbie Downer here but unlike everyone else we actually care about whether a company makes money or not. Granted this may be a foolish thing to think about with all this money flying around but what the heck we’re old fashioned and actually believe making money is important.

Before Teladoc overvalued Livongo at $18.5 Billion we kept noting that Livongo was not alone in the space devoid of competitors. Quite the contrary Livongo has lots of competition. Besides OneDrop and Cecelia there is WellDoc, Onduo and UnitedHealthcare just to name a few that quickly come to mind. Do any of these companies have something unique? Nope. They may use slightly different technology but at the end of the day all of these companies do basically the same thing the same way.

Like the disease management platforms these companies are built on the goal is simple lower health care costs for patients with chronic diseases such as diabetes. That using coaching these patients will practice more effective diabetes management which will lead to better patient outcomes which in turn will lead to lower health care costs. Brain surgery this isn’t.

The conventional revenue model is a reoccurring per patient per month fee. While Livongo likes to brag about all the clients they have as we have noted clients mean nothing as clients only start paying Livongo REAL money when members sign up for the Livongo platform. Lost in all the hype is the fact that the burden and cost of getting members signed up falls on Livongo. Also lost in all the hype is the fact that Livongo does not talk about their rather high attrition rate which we peg at close to 1% per month or 12% per year.

Remember to make money Livongo must not just get the member in the program but it must keep them in the program.

In past posts we have also noted that with increased competition comes price contraction. Fee’s do not increase in a crowded commodity market which is what digital health has become. This is one reason that Livongo signs clients to three-year contracts as they want to block the competition from undercutting their price. But what happens when a competitor walks in the door and tells the self-insured employer they will give away their platform for FREE and only get paid for producing verifiable improvements in patient outcomes. Or what happens when another competitor walks in the door and says to the employer that they are spending $1 million on their employees with diabetes so give us the million bucks and we’ll only make money if we can manage them for less than the million.

This is what competition does it forces companies to get creative and offer alternatives to the per patient per month reoccurring revenue model. It also forces those who also have a per patient per month reoccurring revenue model to do one of three things, lower the monthly fee, add more services at the same price or a combination of both.

This is exactly the path followed by the mobile phone industry. While it seems unthinkable today back in the day companies like Sprint and T-Mobile sold packages of minutes rather than the unlimited packages that are common today. Once they realized this wasn’t enough to gain customers they started giving away phones for FREE or at vastly discounted rates. When that wasn’t enough they started offering customers services like Netflix or Spotify for FREE. What started out as selling packages of minutes quickly evolved into a completely different revenue model, but one thing didn’t change, in the end it’s all about scale.

Digital health is really no different as at the end of the day this is about patients and like everything else in our wacky world the company that has the most patients wins. We don’t care if a company sells insulin pumps, CGM or insulin the one that attracts and retains the most patients wins. And YES IT IS THAT SIMPLE SCALE MEANS EVERYTHING.

This is what makes Teladoc’s decision to spend $18.5 Billion for Livongo not just crazy but also a very bad decision from a practical standpoint. As we noted in a previous post they could have easily acquired LifeScan which has a global presence and MILLIONS of patients added in Cecelia and had the same thing as Livongo at a much cheaper price plus millions in FREE CASH FLOW that would have helped pay for the deal.

Folks this is not a game about way cool whiz bang. This is not about who has the coolest toy in the toy chest. This is not about artificial intelligence or algorithms. This is all about patients and whoever has the most wins the game.

All of this gets lost as per usual everyone is fascinated with way cool whiz bang the toys in the toy chest. These investments are not being made for sound business reasons they are being made because when they music stops the companies making the investments want to have a chair to sit on and chairs are being removed from the game. This is great news for the digital health companies, but it will create one heck of a hangover when the music stops, and they have to actually make money.

Don’t for a minute believe that any of these digital health companies have something unique something that cannot easily replicated. THIS IS A COMMODITY JUST AS INSULIN IS A COMMODITY. For all the hype there are only so many ways you can try and help a patient. And the pool of patients who need help isn’t increasing its decreasing also thanks to technology. Hybrid closed loop insulin delivery systems, Tyler and once-weekly GLP-1 therapies are eliminating the need for patient coaching.

In the end what everyone is fighting over is a large but least engaged patient population, patients on oral therapies alone. Patients who do NOT test their glucose levels on a regular basis, if at all. Patients who for a wide variety of reasons don’t take their pills when they are supposed to. Since we began writing over 20 years ago this problem has existed and we don’t see any of these digital platforms solving it, at least not as they are configured today. We don’t know what the current politically correct term is but when it comes to this large patient population it’s all about getting them to take their pills as they are prescribed and YES IT IS THAT SIMPLE.

This won’t change much in the digital health arms race as everyone is spending large sums, so they have a chair when the music stops. Like so many parties the real problem doesn’t come until the lights go on and the hangover sets in. We might be older but we have seen these parties before and while the players might be different today the end will be the same. Get ready for a group walk of shame.