The other side

The other side

Before we take our walk through the wacky world today it’s worth mentioning that this mornings unemployment numbers came and another 2.9 million jobs lost bringing the total up to 36.5 jobs lost thanks to COVID. We continue to mention the numbers not as reminder of how bad things are economically rather the long road we have ahead of us. Each day that passes with each piece of economic news tells us that this V like recovery so many expected is pure fantasy.

These numbers also continue to reinforce our belief that the Livongo was overly aggressive with their revenue forecast. Yet when it comes to the many analysts who cover the company revenue and the convoluted way Livongo projects it doesn’t seem to matter. Occasionally we read the musing put out by the analysts who are bullish on the company. This is like a loyal CNN or MSNBC viewer watching Fox News, they may not agree with what the other side is saying but they want to see what they are saying.

Universally the Livongo bulls focus on remote patient monitoring, telemedicine and the diabetes epidemic. Not surprisingly they like so many others who don’t understand diabetes or what its really like to manage it fall in love with the toys in the toy chest. They love all the whiz-bang artificial intelligence falsely believing that Livongo has found the magic potion.

Not to digress but we just love it when all these people who don’t have diabetes seem to think they know what living with diabetes is like. Typically they have a friend with diabetes, more than likely a Type 2. They listen to their friend complain about all the stuff we do every day and think there must be a better way. We don’t blame them for thinking this way as they are unfortunately in the majority.

Anyway getting back to the business of diabetes and Livongo what these analysts ignore are some very simple facts. Livongo has a per member per month revenue model, the company does NOT get paid when they add a new client. They get paid after the client signs on and members sign up for the program. What Livongo does and is ignored by these analysts is estimate the value of the contract. This is NOT real money but an estimate of what they will earn should their assumptions be correct.

To help everyone understand how this works in the real world let’s walk step by step through the process.

Step one is simple Livongo finds employers and signs them to a contract. Let’s assume the employer has 1000 total employees. Now let’s stop here and note this does NOT mean they have 1000 employees with diabetes. Here Livongo plays the same game as so many others in diabetes who announce when a health plan decides to cover their toy. They state that plan XYZ covers 10 million total lives, they don’t mention only a small percentage actually have diabetes and an even a smaller percentage would use their toy.

In reality of the 10 million lives covered only 800,000 have diabetes and of that 800,000, 720,000 likely have Type 2 diabetes meaning that only 80,000 might use the toy. Yet analysts don’t focus on the 80,000 possible consumers rather they look at the 10 million total lives covered and believe this is the market opportunity.

So let’s get back to our example with employer A having 1000 total employees of which Livongo assumes 80 have diabetes and are eligible for their platform. Livongo then assumes 32 will sign up and for the sake of this example let’s say each employee who signs up is worth $50 per month or $19,200 per year. ($50 per month x 32 x 12) Livongo reports the $19,200 as revenue this contract COULD yield if their assumptions are correct. Actually they report $57,600 as revenue as the average length of a contract is three years. ($19,200 x 3) Mind you these reported numbers are ESTIMATES.

Continuing with this example let’s say Livongo is correct and all 32 sign up. COVID comes along and employer A begins laying off employees and does not add any new ones. In the beginning employer A continues to pay for the Livongo program but then decides to convert these temporary layoffs to permanent job cuts. In an effort to conserve capital employer A stops paying for the now terminated employees who were in the program.

Say of the 32 original members 6 are terminated which results in $300 per month in lost revenue. That contract which had a projected value of $57,600 is now worth $46,800 and that assumes there is no further attrition.

What Livongo wants everyone to believe is that the attrition in one plan will be offset by new employers signing up, employers who will add to the number of ELIGIBLE members. Now this is possible assuming of course eligible members become actual members. Which in normal times makes sense but these are NOT normal times. As the unemployment numbers show employers are shrinking their workforces. Companies are also beginning to institute additional cuts to conserve capital.

The big difference between what we see and what the Livongo bulls see is that we are focused on the real world while the bulls are focused on the toys in the toy chest the way cool whiz bang. Their belief in the whiz bang is reinforced now that digital health, telemedicine and remote monitoring are the all the rage. Yet they ignore even with all this whiz bang way cool the company is in business to make money. That if a greater fool does not come along Livongo will have to deliver on the results they have promised.

That right there is the reason why these analysts ignore the real world and focus so heavily on the whiz bang way cool. They believe that making money, real money not projected money doesn’t matter all that much as long as a greater fool comes along. They look at the wacky world see all the deals that have been done in the past and figure Livongo will follow this well-traveled path. Honestly, we can’t argue with them on that point as after more than 20 years we have seen this happen over and over.

However we have also seen what happens when a greater fool does not come along or does not come along soon enough. Look at what’s happening at Senseonics right this very moment as they are the perfect example of what happens when a greater fool does not come along to save the day. The company after raising millions in private/venture money went public on December 22, 2015 closing at $3.25. The stock almost hit $5 and like Livongo many believed that a greater fool would come along.

Just as Livongo is in a hot space so too is Senseonics, next to digital health CGM is the second hottest thing going in diabetes. Just as Livongo has lots of whiz bang way cool so too does Senseonics. Just as there are many Livongo bulls today Senseonics has their believers. Just as we see holes in the Livongo business model we see holes in Senseonics model. Just as we never questioned whether the Livongo platform actually works when used as designed we did not question whether the Senseonics sensor actually worked or it. In fact it worked quite nicely.

Yet as we say often this is the BUISNESS of diabetes and to remain in business companies have to make money. Senseonics like Livongo would issue press releases whenever a plan made a positive coverage decision and like Livongo they would mention prominently how many total covered lives the plan had NOT the number of covered lives which had diabetes or how many with diabetes would actually be possible users of the Senseonics system.

Just as Livongo has serious competitors who thanks to old fashioned competition for new patients will drive prices LOWER, Senseonics faced off against Dexcom and Abbott. And not to digress but long-ago way back in the day we used to say that when it comes to diabetes whether it be devices or drugs this is a game about capturing as many patients as possible that the company with the largest patient base wins the game. It does not matter whether you sell drugs or devices without patients using the drug or device it doesn’t matter who good that drug or device is. The BUSINESS of diabetes has become all about scale and without it it’s very difficult if not impossible to make money.

To fully illustrate the importance of scale just look at Medtronic and their diabetes franchise. Yes, this franchise is struggling mightily but thanks to their huge installed user base the franchise continues to survive and make money. Without this huge scale Tandem and Insulet would be eating Medtronic for lunch. This massive scale is what keeps them number one on formulary and ever present in the minds of the physicians who recommend their system. Yes this is beginning to change but Medtronic has outlived so many threats that it would foolish to count them out. Tandem and Insulet are doing a great job but the Death Star while seriously crippled has yet to be completely destroyed.

Ok sorry for the digression but it was an important digression back to Senseonics who like Livongo was believed to be an acquisition target. Since a greater fool has not come along Senseonics is all but done trading at less than 50 cents per share with a market cap of just $2.6 million. Several possible suitors have come in taken a look and said no thank you. Without a hail Mary bankruptcy looms and Senseonics will join the growing number of companies in the CGM graveyard.

Is it possible that the Livongo bulls are correct, that a greater fool will come along – absolutely! Not to repeat ourselves but we have seen this movie before. However it is equally possible that a greater fool does not come along or does not come along soon enough. That they will actually have to deliver on the promises they have made. That they will actually have to run the company and make REAL not projected money. Should this happen it would be foolish to ignore what is going on in the real world.

To believe that Livongo is a sure thing that a greater fool will come along is like watching Casablanca believing that Ilsa won’t get on the plane. As Captain Renault said; “ I know a little about women. She went, but she knew you were lying.” Well we know a little about diabetes so here’s looking at you kid.