Exclusive Interview: Livongo Health CEO on Chronic Illness, the U.S. Healthcare System, and Its Opportunity

More than 147 million Americans have at least one chronic medical condition. Unfortunately, the U.S. healthcare system is not designed to provide these patients with the continual care that they need. This forces many of them to manage their condition on their own with limited guidance.

Livongo Health (NASDAQ: LVGO) says it's on a mission "to empower people with chronic conditions to live better and healthier lives." The company created a platform that uses data science and technology to provide personalized coaching to patients in real-time. Livongo calls these interactions "health nudges," and it has the data to prove that they lead patients to make smarter health choices that drive behavior changes, improve clinical outcomes, and lower healthcare costs.

Livongo product suite

Image source: Livongo Health.

The company's revenues are growing at a triple-digit rate, and it's starting to attract the attention of growth investors. I was recently afforded the opportunity to interview Livongo's CEO Zane Burke to learn more about the company and the opportunity ahead. Below is a transcript from our conversation (which has been lightly edited for clarity).

Brian Feroldi: I think I have a pretty good understanding of the company's founding. Your founder is named Glen Tullman and his son was diagnosed with diabetes years ago. Tullman was a very successful businessman who created Livongo to make it easier for people with chronic conditions to live a healthier life. Is that the gist?

Zane Burke: The whole idea is, how do you help people live their healthiest life? How do we keep people out of the system? How do we create a platform that provides a great experience and helps our members stay healthy? And how do we create a great return on investment for our clients overall?

Feroldi: Can you talk a little bit about your business model, your go-to market strategy. Are you guys focused on employers, payers, or do you go direct to consumers?

CEO Zane Burke

CEO Zane Burke. Image source: Livongo Health.

Burke: Our go-to market strategy is focused on Fortune 500 companies, large organizations that are self-funded and take on all of the risks without any regard to quality, what the experience is going to be like, or return on investment. That's really where we started. We have a number of very large clients already, over 20% of the Fortune 500 today. That has allowed us to move into the health plan market. Four of the seven largest health plans are resellers of our solutions. The two largest pharmacy benefits managers (PBMs) in the country are resellers of our solutions. And then we also sell to labor unions, governments, and health systems. That's the lineage of how we started. Today, we're exclusively in the U.S.

Feroldi: Is your sales force focused on the employers, the payers, or the PBMs? And once they sign, how do you go get members on board? 

Burke: We sell to the client first, so whoever has the risk, and then we come back and enroll the members. Our clients only pay for members who we enroll and [who] stay engaged. So we are absolutely aligned with whoever has that financial risk, whether it's the employers or the health plan. We benefit when we get people enrolled and keep them engaged. And we do that by using data science at the core to enroll people in a personalized manner so we can learn about who they are and we can tailor our messages to them. We're pretty unique in our core solution of diabetes, where we get 34% enrollment across our book of business today. And that number continues to grow over time. And we only get paid on a per-participant/per-month model as we keep them engaged.

Feroldi: It sounds like there is no financial risk for clients to sign up since they only pay if their members enroll. And then you have the data to prove that your model leads to better health and cost savings -- is that right?

Burke: That's right. We're seeing in excess of 3x return on investment in our core diabetes solution in year one. And we've been able to validate that in multiple medical journals and third-party groups. You can really tell that the model is working because we're getting into the self-insured business. So, we've sold to big, self-insured employers. Now, the health plans are seeing the great clinical outcomes and the financial ROI, and they're putting it into their core product. That's really a huge win for us because my cost of sales goes down and my sales team could not effectively market to those members, but the health plans can.

Feroldi: Can you just walk me through the consumer experience? When a new member says "yes," do they just download an app? Do you guys send them a free blood glucose meter? Are there any fees?

Burke: We are very consumer-focused, starting with enrollment. We personalize the enrollment experience to encourage people to sign up and then once they sign up we send them a two-way cellular glucometer [and] strips for them to take their glucose readings. When they open the box, it's pre-configured; when they put the strip in, the machine automatically turns on, it already knows who they are, and they can immediately begin to utilize the solution. The consumer has no costs on their side from a device perspective or from a strip perspective, nor do they have those on an ongoing basis. Oftentimes, one of the big elements is that persons with diabetes have to pay for the strips that are necessary to manage their condition. We send the strips for free because we know when they're using the strips electronically through the two-way cellular connection. They can reorder directly off of the device. It creates a great consumer experience.

There's a lot of thought that's gone into the design of all the pieces. We know that people will stick their finger and then wipe their blood on the neoprene. That may not be sound important, but it is super-important as it relates to a person with diabetes. Then we can help them make sure they have those strips with no co-pays. And in those moments when a member is outside the bounds, either too high or too low, we coach them every single time electronically. So every time they interact with us, we're using our data science to say "try this" to help nudge them electronically. At those moments when they need somebody on the other end, we have certified diabetes coaches monitoring what's going on.

And for the first time in healthcare, there's somebody that's there when the consumer wants them to be there. That's what is so cool about our model. When that member has decided to prick their finger, or step on a weight scale, or put the blood pressure cuff on, at the moment of that health signal when the member is actually taking their health into their own hands, there's a real live human on the other end. They're electronically coached every time. And that's just totally different than the rest of healthcare, and that's what makes us really unique from a consumer-experience [standpoint]. I like to say, we meet the member in their life flow. The members also choose if it's a call or a text from a health coach. They get to choose and opt into that. It also depends on whatever their reading is, whether it's in the high range or low range. So with all the members, it's all in their hands. If they choose, they can use our app, cause sometimes people prefer that.

Feroldi: But there is communication directly on the meter itself? The "health nudge" comes up on their glucometer screen?

Burke: Yes, it's a two-way cellular [connection]. So they're getting the nudge in that moment when they're waiting for the reading to go to the cloud and get trended data. We've found that people are the most susceptible to coaching when they want to be coached. We use those two or three seconds while they are waiting for the reading to give them a little piece of advice, a little bit of knowledge.

Feroldi: I worked for Insulet Corporation for 10 years as a field rep, so I know all about certified diabetes educators (CDEs) and I have a huge respect for them. I've also dealt with plenty of patients who have had co-pay problems with strips, so this model is intriguing. So you're saying that if I had diabetes and had a copay on my strips, if I become a Livongo member then my copay disappears because it's built into the per-member/per-month cost?

Burke: Yes. It disappears. So that's an easy sell. It's a huge satisfier right out of the gate for members. And then we automatically ship the strips to the member because we know how many they've used because we're connected to the cloud. And those are free to them. It creates a better experience overall.

Feroldi: That makes total sense. Do you have tie-in with doctors and healthcare providers to allow them to access that data?

Burke: We do. We have relationships with the big electronic medical record providers if that's what the member wants to happen. They control it for themselves. The member can send it to their endocrinologist, or they could send a fax, or use the app.

Feroldi: Got it. Making that process as simple as possible for providers is a big deal.

Burke: What's fascinating is that we have a handful of clients where the experience and the outcomes are so good that they're paying for the insulin if the member uses Livongo.

Feroldi: Wow.

Burke: Because again, the clinical outcomes are so strong and the return is so good and people just love it. So we were actually seeing a number of clients who are going that route, and we're seeing the same thing on hypertension. Hypertension is really about medicine compliance. We have companies that say if the members are doing the test, if they'll take their blood pressure reading three times a month, then the company will cover the co-pay on their hypertension medications.

Feroldi: And there's no cheating!

Burke: That's right. There's no cheating. We know how they're doing. It's been really fun to just think about how this problem in a different way. Our return on investment comes from fewer emergency room visits and fewer outpatient visits. Over time, it turns into the really big ROI from fewer surgeries and fewer complications. But there's also an immediate return on investment.

Feroldi: Can you explain your relationship with the Food and Drug Administration?

Burke: We do have a relationship with the FDA. The devices are all certified and HIPAA compliant. We do have a responsibility from an FDA perspective to abide by their rules and regulations, and we do that.

Feroldi: But as long as your CDEs are practicing within the guideline, that's alright?

Burke: They're providing advice within their licensure. What I'm not doing is changing the medication or medication orders. We do hot referrals to providers in those instances. We have relationships with the two largest PBMs in the country -- one of those is CVS Health. If a member comes into a CVS pharmacy, we're so integrated at CVS that if that person is eligible, but hasn't yet received a kit, they can automatically receive a kit. We can also do a hot transfer to the pharmacist as part of our solution set. And that's kind of what we're doing with telehealth too. We made an announcement around behavioral health where we are actually integrating with partners at the behavioral health level. So from our electronic coaching piece, we're able to hand off those patients to a telehealth visit with a doctor.

Feroldi: For outside investors, what are the metrics that we should pay attention to the most?

Burke: We're a subscription model, so growth in our members is a really important metric. We just announced our revenues were up 148% year over year, and we're over 207,000 members, which was up 118% year over year. And our number of clients is up 121%. I'm really pleased with the short-term results. But more important is the long-term progress we're making. It's really about becoming a true platform for chronic condition management. That's the long-term piece for investors to watch. Our strategic march into other marketplaces such as government, and other conditions like hypertension and weight management. Those are just a handful of things that I think are really important future growth drivers for us.

Feroldi: Your net loss was just $0.05 per share, or about $3 million, so peanuts in the grand scheme of things.

Burke: Peanuts. Yup. We've been on a march to profitability. We've made a huge leap if you go from last year to this year. Our EBITDA margins were negative 40% last year and our guidance would take you to kind of the negative high teens this year. Even if you just even rounded to 20%, you're talking about a 20 [percentage] point increase in our march to profitability. I feel really good about that.

Feroldi: I'm a fan of fast revenue growth and high margins, and you guys have both.

Burke: Me too! That's what I love about healthcare. You can really root for companies, because if they're successful, they're usually doing something great.

Feroldi: Can you talk briefly about the international opportunity? It doesn't exist right now, but is it on the horizon?

Burke: Chronic conditions are not just a U.S.-specific challenge. We do not have any announced or definitive plans on going outside the U.S., but we'll continue to evaluate the timing for that. We're certainly not opportunity constrained. If you look at the rest of the executive team, it's a really deep team, kind of beyond the size of our company at this point. And that's on purpose since it will allow us to be more aggressive as we tackle additional conditions and additional geographies. That's something we're actively thinking about. Nothing to formally announce at this point in time.

Feroldi: We are big believers in looking at corporate cultures since we believe that great places to work attract great employees. What makes you guys special?

Burke: I'll tell you what makes us special: It's the mission. It's about our members. Almost every corporate interaction that we have is with one of our members. It reminds us why we're doing what we do. We're also reflective of the rest of the U.S. population, where one out of two adults has a chronic condition. Our associate base is very much a mirror of our membership. Two-thirds of our associate base will identify that they either personally have a chronic condition or that they have a loved one who has one of those conditions. It is really about that mission and vision.

On the recruiting side, people will talk about how hard it is to recruit in Silicon Valley and other places, and yet we have not used any external hiring agencies. None. So we've grown over 50% on headcount, and we use zero outside agencies. And the reason for that is because the mission and the culture are so strong, and its a very accountable and self-policing culture. So people don't hire other people who are not going to be dedicated to the mission. It's incredibly diverse and inclusive. And I'll just say that I've never been associated with or known a company that's been like this. I'd love to say this was all made by me, but it's not. The culture was here before I got here. I certainly applaud it and love it. It just allows people to be who they are and bring their best self to work every day. It creates a really fun and energetic environment.

Feroldi: Well, you guys get good ratings on, so it seems to be working.

Burke: It's funny, I read negative reviews on Glassdoor because there's a kernel of truth in all those. I actually do read the comment box.

Feroldi: I personally never invest in a company without checking out I realize that it's not a perfect metric by any means and that it's a biased sample size, but it's usually directionally accurate.

Burke: I agree. You've got to look at the good and the bad. Just like when you're checking out something on Amazon. You throw away the good, you throw away the bad, you kind of take the average.

Feroldi: Is continuous glucose monitoring (CGM) a threat to you guys? I know that Dexcom and Abbott Laboratories are just crushing it right now.

Burke: We love CGM because we love the data. What we do differently is we aggregate that data and use it to coach. And in fact, we have a relationship with Abbott, which makes the Freestyle Libre, and then informally, we take that data. We're big believers in the value of that data. Our president is a person with type 1 diabetes. She actually wears both devices. So she's a self-described nerdy doc who loves data. She would tell you that it's the coaching, it's the data science, and the fact that sometimes the darn thing falls off, or she just has an issue if she wants to wear a dress that night and she doesn't want something sticking out. She'll take a night off. She can use her glucometer instead. And when she's not using her Libre, she's using the Livongo app and still getting the coaching. So we love CGM. We think it's great. It's probably going to continue to be used by just a portion of people with diabetes who are able to utilize that technology. So even though they're doing really well and we want them to do better, the vast majority of people with diabetes will never be CGM users. 87% of people with diabetes are type 2 and 13% type 1.

Feroldi: Can you comment on your customer concentration? Two of your partners accounted for 51% of revenue in Q2 2019.

Burke: I talked about how we've co-opted the rest of the health ecosystem to become a force multiplier for Livongo. These partners and health plans that are resellers of our solutions have helped us grow in the marketplace significantly. We create relationships with each one of those clients, but it's not as if we're subject to being exclusive through any one channel. And what's really important is that even with that 51% with those two very large partners, there are multiple ways we could go to market if we had to, because we have relationships with almost all of the employee benefit planning consultants and many of the health plans as well.

So there are multiple ways we can go to market if we had to, and we have a very good direct sales force. The two biggest partners we have are with the pharmacy benefit managers like CVS Health, where we are expanding our relationship. So if I look at it as the breadth of what we're doing, we're more and more of a strategic partner for them all the time. If you listen to their conference calls, they talked a lot about chronic condition management, and we're at the core of what they're doing in that space today. So I feel really good about the strategic value of that. But we do think about the case of having multiple entry points to a client such that we're not beholden to any one partner.

Feroldi: Do you guys have any direct competition? Is there anybody that's doing what you're doing?

Burke: Well, the biggest competitor we have today is inertia. When you think about it from a competitive standpoint, it's not as if hypertension or diabetes management or behavioral health are new challenges. But the problem is that disease management programs just haven't been effective enough. What we do is really bridge a gap between the healthcare system and the me-as-a-person programs. Today I have not seen anybody that has taken a whole-person approach to the problem. What we do have are a number of niche players in each market space, but on a platform basis, we don't have a direct competitor.

Feroldi: One of the things that attracted me to you guys is that your ROI for new clients is very strong. You're also unique in the space with the idea of the real-time intervention. I know that diabetes is the main focus, but can you talk a little bit about hypertension, behavioral health, and...what's the third one?

Burke: Weight management and prediabetes. If you think about it, diabetes is at the core, because if you have type 2 diabetes, you're 70% likely to have hypertension. You're also highly likely to have weight management challenges. If you have more than one of those conditions, the percentage odds that you actually have behavioral health [issues], anxiety, or depression goes up dramatically. Strategically, we're continuing to build our condition set for the whole person, but really starting with that diabetes at the core. You can almost pick the next couple of things that we'll go do because there are places where persons with diabetes have higher preponderance rates to those chronic conditions.

The cool part is that it's architected to be at the person level, so we don't think about it as disease states. We were very purposeful about that in our language. If you hear me say the term "diabetic," it is a slip of my tongue. Because it's a person with diabetes, a person with hypertension, a person who has weight management challenges, or behavioral health challenges. We don't want to identify people as their disease. That is dehumanizing. And so we really do fundamentally believe in that whole-person strategy. So we're continuing to build out.

We've had great success. We built hypertension from the ground up because there wasn't anything else that made sense. We built that into our platform stack. We do Amazon Alexa integration. So we're using the whole ecosystem to engage patients. We said in our recent investor call that 20% of our bookings in the third quarter of 2019 came from solutions outside of diabetes management. That was 500% growth year over year. So we've really built up a lot of trust from our existing clients because we've delivered great results. We're going to continue to build out those on a single platform that we call "AI AI" -- we call it our artificial intelligence engine. And that helps clients who want to buy. The marketplace doesn't want to have all these contracts that manage sleep deprivation, anxiety, and depression. I mean, behavioral health alone is in the teens and twenties of conditions, let alone diabetes management and hypertension and weight management. So our clients want one place to go. We want to offer that and our members want a single experience. And that's really the strategy and logic that we're using as we move forward. But we're seeing really good success, especially for the age of those solutions.

Feroldi: I saw that your average prediabetes and weight management user sheds 7% of their body weight in the first year. That's impressive.

Burke: It's pretty cool. I'm having so much fun. I was previously the president at Cerner, the big EMR (electronic medical record) company, and I had gotten to know Livongo early in the company's history. In 2014, I brought Livongo into Cerner so we could resell it to our clients and use it for our own associate population, mostly because I could just see this was the right mousetrap if you will. It's where I always thought the healthcare system would go, but it never did. I couldn't be having any more fun in terms of thinking about how to make this a very large-scale business with a huge addressable market. So we're talking billions upon billions of dollars market for our solution set.

Burke: Makes complete sense. This has been incredibly informative. You have a very interesting business here. I'll probably be buying shares myself soon, even though you're trading at 19 times sales. That's pricing in a heck of a lot of growth!

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Livongo Health Inc. The Motley Fool recommends Cerner, CVS Health, and Insulet. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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