The Problem and the burden

This morning Livongo issued a press release with the following headline;

“Livongo Awarded Diabetes Contract for Eligible Population for Approximately 5.3 Million Beneficiaries Through the Federal Employees Health Benefits Program”

While that sounds very impressive the headline illustrates the problem and the burden facing the company. First and foremost that’s NOT 5.3 million patients with diabetes. That’s how many people participate in this program.

Later on in the release it states;

“Livongo signed a two-year agreement which will launch the Livongo for Diabetes program starting on January 1, 2020 and expects a nine to twelve-month deployment period to those eligible members living with diabetes. Livongo expects that this agreement will add approximately 25,000 Livongo for Diabetes Members in 2020, growing to approximately 45,000 Members in 2021. This is larger than the expectation of 20,000 to 30,000 total Members previously disclosed by Livongo. Based on this updated expected enrollment, we anticipate this agreement will account for $20-25 million in revenue in 2020 and $30-35 million in revenue for 2021, or a total of $50-60 million including both years.”

Herein lies the bigger problem and the burden facing the company. As it states the company expects a “nine to twelve-month deployment period” after which they expect will add APPROXIMATELY 25,000 members in 2020 and growing to APPROXIMATELY 45,000 IN 2021. The fact is, yes, those pesky facts, the company has no idea what the REAL enrollment numbers will be and therefore any of the revenue estimates provided are also just a wild ass guess. Keep in mind that the company really has no clue how many eligible patients will sign up and uses a rather convoluted formula to come up with revenue estimates.

But this being our wacky world where the details get glossed over and the headlines get all the attention the stock which as we all know has been sinking will likely get a boost. Listen we are not trying to be a bully picking on poor Livongo, but this problem is one every digital diabetes company will face. First, they must sign deals which to us is the easiest part of process. Note that the employer or in this case the program only pays for patients who ENROLL in the program. Quite frankly the employer/program doesn’t have much to lose by signing up.

The burden falls on Livongo to deploy the program convincing eligible patients to enroll and stay enrolled. As we have noted in the past, we could care less how many deals the company signs, but we care a great deal on how many eligible patients enroll and stay enrolled. This is what makes the company money, something that company has yet to accomplish.

Another fact also glossed over and another problem for the company is they bear all the costs during the deployment period. Simply put Livongo is betting they can get enough of the eligible patients enrolled to cover this cost and then keep them enrolled so they can turn a profit. They can guess all they want about how many of the eligible patients will actually enroll but no one ever asks what happens if they MISS their estimate. What happens if instead of 25,000 signing up in year one only 18,000 sign up.

Given the company’s limited history and current enrollment rates what we’d like to know is just how many people in this program are eligible. Is it 100,000, 200,000? Knowing the number of eligible patients is actually a more valuable piece of information as it lets us know if the company’s estimates for enrollment are realistic or not.

Now we won’t go as far and state the company is using smoke and mirrors or fuzzy math when providing revenue estimates or expected enrollment rates. Let’s just say they have everything to gain and nothing much to lose in the short term by providing aggressive estimates for both ANTICIPATED revenues and ANTICIPATED enrollment rates.

We hate to be Captain Obvious here but with the stock sinking the real goal with this announcement and the estimates is to turn things around and extend the dead cat bounce. To be fair Livongo isn’t the first nor will it be the last to try and manipulate their share price by announcing deals. Frankly this is quite common and for Livongo a tactic they used several times before they were a publicly traded company. Yet what no one seemed to care about was if any of these deals resulted in the company actually making any money.

Given what we now know about the company it turns out few if any of these deals actually resulted in making the company money. Again we aren’t necessarily picking on Livongo, but this is what happens when everyone falls in love with a concept and ignores basic business fundamentals. As Momma Kliff used to say you can’t make up in volume when you are losing money on each sale, all higher volume does is create greater loses. With a high dependency on humans we don’t see Livongo achieving economies of scale should they grow.

The reality here is that when it comes to digital diabetes no one has clue whether any of these way cool whiz bang ideas can make money. Given the dynamics of the business model with multiple burdens falling on the provider we aren’t sure if it’s even possible. To us this all seems like lots of hype but very little substance.

Companies like Livongo are using the epidemic of diabetes to create a very compelling story. Diabetes is not just a healthcare crisis but an economic crisis as well. Companies are spending millions in treatment yet not seeing a return on their investment. Livongo comes in with what looks like a solution and companies desperate for answer sign up understanding they have everything to gain and nothing much to lose since they only pay for patients who actually enroll and stay enrolled.

The Street confuses these “deals” with money. So consumed with deal flow they ignore that with Livongo deals mean nothing and enrollment and retention rates mean everything. Sure it’s great to have lots of deals which create more opportunities, but more opportunities don’t guarantee more enrollments, nor do they lower the company’s cost structure. The entire burden for producing a profit, making money falls on Livongo and so far, anyway the company hasn’t been able to do that.

The fact is everyone falls in love with shiny new objects even when they aren’t shiny nor new. As in the case of Livongo it’s an old idea reconstructed with new technology. The old idea didn’t make money and we doubt the new reconstructed idea will make any either. As Momma Kliff used to say you can use all the plastic surgery you want to change what’s on the outside but all the surgery in the world doesn’t change what’s on the inside.