Livongo IPO gives confidence boost to Asia's digital health scene

Singapore

THE exuberant market response to the listing of US-based startup Livongo Health could provide a shot in the arm for Asian startups similarly focused on behavioural and preventive medicine, reckon investors who spoke to The Business Times.

Livongo, which debuted on the Nasdaq on Thursday, saw its share price surge 36 per cent to US$38.10 on the first day of trading, giving it a market cap of US$3.46 billion. This is more than four times its US$800 million valuation as at April.

Started in 2014, Livongo creates personalised digital health programmes for patients with chronic conditions such as diabetes and hypertension. Its app integrates wearables such as glucose monitors. Livongo raised about US$240 million from investors including US venture firm General Catalyst and Swedish investment firm Kinnevik.

The strong market response to Livongo's listing is "not surprising given the dearth of IPOs" in the digital health space, said Chik Wai Chiew, CEO of Heritas Capital Management. "With liquidity and exits now demonstrated with the likes of Livongo, this investment category will surely gain more interest, especially from investors who also focus on ESG impact," he said.

Livongo's listing provides a good reference point for valuing the business model of similar Asian startups, noted health-tech investor Tony Estrella. It also raises investors' confidence in exit options, given healthy demand from public investors.

"Companies like Livongo can now also become bigger players that acquire in Asia. . . If you're a behavioural modification (healthtech) company in Asia, you know how to localise, which Livongo may not know. From an investor perspective, knowing that there are also M&A exit options builds confidence that your investments are liquid," he said.

For now, the digital health market in Asia is still nascent, "with players focusing on the first layer of healthcare (such as) delivery of medicine and doctors", noted Raja Hamzah, managing partner of RHL Ventures. But Livongo's successful listing indicates that there is room for more players in areas such as chronic disease management and prevention. "The market has evolved. . . where there is more awareness on how to treat issues such as diabetes, mental health and obesity. I foresee more startups focusing on this, especially as corporates and insurance companies start recognising the importance of preventive care to lower healthcare costs," said Mr Hamzah.

In Singapore, more of such startups have emerged, including Holmusk, which provides diabetics a mobile dietician coach via its GlycoLeap app, and NOVI Health, which aims to change patients' lifestyle habits through its clinic and health app. Holmusk is backed by Mr Chik's firm, Heritas.

The business model of such startups is attractive if they can build user stickiness. In its prospectus, Livongo posits that as its subscriber base matures, more recurring revenue can be drawn from renewals and upselling to existing clients, reducing the costs associated with new client acquisition.

Last year, its 2016 cohort of clients contributed US$15.7 million in revenue and US$6.2 million in costs, translating to a contribution margin of 60 per cent. This is an improvement from 2017, when the same cohort contributed US$12.8 million in revenue and US$5.4 million in costs, representing a 58 per cent contribution margin.

Of course, it also remains to be seen if Livongo can simultaneously manage costs to break even. In 2018, Livongo saw a net loss of US$33.5 million, as the rise in costs outpaced a doubling in revenue.

Asian players also face different regulatory challenges. Digital health in this region has been underfunded relative to fintech "because of the complexity of the commercial and economic relationship between actors", noted Lim Kuo-Yi, managing partner of Monk's Hill Ventures. "The payor is not always the user of care, but government or insurance companies. There are also constraints on what medical care providers can do when it comes to advertising, so there's more regulation to work through," he said.

In looking for Asia's Livongo, localisation will be key. "Investors in Asia do appreciate that the US and Asia have very different payor structures, so it is not just about deploying similar technologies or business models, but adapting to local and regional realities," noted Mr Chik.