Livongo IPO: An AI Stock for Managing Chronic Diseases
We’re halfway through 2019 and we’ve seen a ton of high-profile startups IPO this year. However, few of those joining the ranks of public companies represent a pure play in the sort of emerging technologies that we cover here at Nanalyze. That’s especially been the case with companies where artificial intelligence is at the core of their business product or service. Until recently, we’ve been content with pick-and-shovel stocks like Nvidia (NVDA), which provides the hardware required to support the computing needs of brainy algorithms. Or companies like Nuance (NUAN) that have suddenly made a dramatic pivot into AI and healthcare with its voice recognition and transcription platform. Meanwhile, thousands of AI startups contentedly graze on private market capital as they build technologies or scale operations. That’s why we were particularly interested in learning about Livongo Health, which is breaking away from the herd toward a reported $100 million IPO.
We’ve been watching how AI is percolating throughout a diverse range of industries, from fintech and AI-powered investment banking to smart farming technologies. But as we noted in our article on the latest trends in artificial intelligence, healthcare is where many are betting that machine learning will pave the way to a new era of better drugs and smarter healthcare management. Machines are also becoming as good as humans in their ability to interpret medical images, for example. And about 40% of healthcare providers reportedly use some form of AI-powered, computer-assisted diagnostics, which likely includes chatbots and other apps that offer personalized health advice based on patient inputs, tests, and medical reports. IBM (IBM) has devoted considerable resources in Dr. Watson, for example, even though the venerable company itself seems to be in declining health.
About Livongo Health
Now along comes Livongo Health, a Silicon Valley startup founded in 2014 that has raised $235 million, including a $105 million Series E back in April 2018. Investors include a couple of high-profile VC firms: Kleiner Perkins and Sapphire Ventures. The startup is led by a guy with plenty of experience in the healthcare industry, Glen Tullman. Once upon a time, Tullman was CEO of Allscripts (MDRX), one of the leading electronic medical record companies with a $2 billion market cap. It’s also a bit personal: Tullman’s son has type 1 diabetes.
AI for Managing Chronic Diseases
So, what exactly is Livongo doing? We’ve talked before how AI is really good at detecting and analyzing patterns in big data sets. In a healthcare setting, algorithms might provide insights into how certain factors – lifestyle, environment, diet – could affect a disease state after being fed millions or even billions of data points of clinical data. The AI platform then gets to work on specific patients by ingesting their medical data, along with other sources of information. These other data streams might include daily behaviors like exercise to things such as their socioeconomic status, because that also affects the quality of life, health, and even dietary choices. Over time, the machine learns more about the individual patient and the bigger healthcare picture it was designed to track, offering better and more precise insights and advice.
That more or less sums up Livongo’s AI + AI platform, which “Aggregates data from multiple sources, Interprets that data to separate signal from noise, Applies it at just the right time on the right surface to our members and Iterates to build improvements based on what we learn.” Livongo has its own lingo, referring to the data provided by its members as Applied Health Signals. In turn, those signals are interpreted by the platform, which sends out a Health Nudge that provides actionable guidance. For example, the company originally focused on diabetes management. Members check their blood glucose via a cellular-connected blood glucose meter. The AI + AI receives the data and sends out a personalized Health Nudge based on everything it knows about the patient and the many factors involved in diabetes care that it has learned over time. Human health coaches are brought into the loop when needed.
Diabetes is just the beginning. Livongo is going after various chronic diseases, which affect about 60% of adults in the United States. It has recently introduced solutions for hypertension, prediabetes and weight management, and behavioral health. The latter application was added through the acquisition of a Denver area startup called myStrength that had developed a machine learning platform for mental health. While Livongo provides its own wearables for tracking Health Signals, its aim is to be hardware agnostic. Last month, its users could begin receiving Health Nudges on certain wearable models of Apple Watches, Fitbits, and Samsung Gear.
Livongo Business Model
Earlier this year, Livongo published a study that showed its diabetes program saved $88 per member per month the first year of use. Livongo’s business is based on a recurring revenue model. Its clients are employers, health plans, government entities, and labor unions. Its subscriptions range from one to three years, and as of March of this year, it had 679 clients and more than 164,000 Livongo for Diabetes members. Livongo is just beginning to enroll members into the company’s hypertension, prediabetes and weight management, and behavioral health solutions.
There’s certainly plenty of room to grow. We already noted that more than half of U.S. adults live with a chronic disease. In 2016, the total costs in the United States for direct health care treatment for chronic health conditions totaled $1.1 trillion, according to the nonprofit Milken Institute. The Centers for Disease Control and Prevention (CDC) says chronic disease accounts for about 75% of the nation’s aggregate health care spending. In terms of public insurance, treatment of chronic disease constitutes an even larger proportion of spending – 96 cents per dollar for Medicare and 83 cents per dollar for Medicaid.
Livongo has initially focused on diabetes, which affects more than 30 million Americans. The American Diabetes Association estimated that costs associated with diabetes, including reduced productivity, were $327 billion in 2017 in the United States alone. Livongo estimates the immediately addressable market size for employees of self- and fully-insured employers with diabetes in the United States is about $12.3 billion. Over the longer term, the company estimates an additional $15.9 billion opportunity for adults with diabetes receiving healthcare coverage from Medicare or Medicaid. Its next most likely market, hypertension, likely represents an $18.5 billion opportunity.
The Bottom Line
Livongo seems pretty typical of most startups heading into the public market in terms of its finances. In other words, it’s not profitable, but revenue growth is brisk.
Revenue was $30.9 million in 2017 but jumped to $68.4 million by the end of 2018, representing a year-over-year growth rate of 122%. The first quarter of 2019 experienced a growth rate of 157%, from $12.5 million in 2018 to $32.1 million for the first three months of this year. Unfortunately, net losses are on a similar trajectory. The company lost $16.9 million in 2017 and $33.4 million last year. This year, the blood bath has been far worse, with losses adding up to $15 million in the first quarter, nearly as much as Livongo’s net losses in all of 2017. Again, that’s not entirely unusual of a company trying to scale quickly in order to get ahead of the competition – and there’s plenty of that.
Livongo rattled off more than a half-dozen competitors in the section of its S-1 form to the U.S. Securities Exchange Commission where it’s obligated to list all of the reasons why it could possibly fail and lose all of your money. Let’s take a look at one company a little more closely to understand the risk.
Founded in 2010, Glooko is another Silicon Valley company that uses AI to help patients manage diabetes using sophisticated algorithms. The startup has raised $71 million from an equally impressive cadre of investors including the Mayo Clinic, Samsung (SSUN), and Medtronic (MDT), one of our favorite healthcare stocks for dividend growth investing that acquired an Israeli robotic surgery company last year called Mazor Robotics.
Glooko used machine learning to understand how diet, exercise, and other behaviors and variables influence changes in blood glucose levels. Once it mapped those patterns, the algorithms were ready to process data from individual patients in order to provide actionable insights. Sound familiar? A 2018 clinical study showed that the program is effective: After just two months of use, people with diabetes suffered 10.7% fewer hyperglycemic events and showed a 3.5% drop in blood glucose. The company was reportedly working on a capability that would use GPS data from a smartphone (hello, Samsung) that could recognize when a patient entered a restaurant. The algorithms would automatically analyze the online menu and make its healthy recommendations, probably before you could order the first cocktail.
Glooko claims its platform serves more than 2.2 million people with diabetes and is used in 9,000 clinic locations in 23 countries. It says its system can integrate with many of the most popular electronic health record platforms, as well as sync with more than 190 of the world’s most popular wearables and medical device trackers.
Glooko is but one competitor in what is shaping up to be a highly competitive market for chronic disease management. Unfortunately, business is good for these companies, because more and more people are becoming chronically ill. Livongo’s own estimates project a $50 billion market for diabetes and hypertension alone, and not everyone is going to be able to afford a bionic or artificial pancreas. Few IPOs are going to pop like Beyond Meat (BYND) did this year, and we would certainly be surprised if Livongo was one of them. Still, we’re encouraged to see an AI company going public that appears to have a scalable product with proven ROI, with an experienced leadership team at the helm.
There are many AI healthcare stocks out there, but we're holding just one. Their software is used by all of the top 20 pharmaceutical companies, and they're also developing their own drugs. Become a Nanalyze Premium annual subscriber today and find out all five AI stocks we're holding.